CONTINGENCIES AND EVENTS OCCURRING AFTER BALANCE

Accounting Standard - 4
S H E E T D AT E

Objective of AS 4

➢ Prescribe the Accounting of contingencies and

➢ Events which takes place after Balance sheet date but before it’s approval by BOD

Applicability

This standard does not apply to

▪ Liability of life assurance and general insurance
▪ Obligation under retirement benefit plans. (AS - 15)
▪ Commitments arising from long-term lease contracts (AS 19)

Events occurring after

balance sheet date
Standard Deals with
Contingencies

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 CONTINGENCIES AND EVENTS OCCURRING AFTER BALANCE
Accounting Standard - 4
S H E E T D AT E

Contingency

➢ Existing condition / situation

➢ Result of which is not known on the balance sheet date
➢ Result would be known only on happening or non-happening of certain event in future
➢ Result may be either gain or loss

• Outcome and financial effect of contingencies are determined by the management on the basis of information available up to
the date.
• Ex. Liability on account of outstanding forward exchange contracts, Guarantees, Bill discounted, Disputed claims, Warranties.

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 CONTINGENCIES AND EVENTS OCCURRING AFTER BALANCE
Accounting Standard - 4
S H E E T D AT E

Estimation of Contingencies

Existing situation or condition on Condition or situation after the balance

balance sheet date sheet date

Expected outcome No accounting treatment is

required

Contingent gain Contingent loss

AS 29
If loss is probable the If loss is reasonably possible, disclosure is If expected loss is
provision should be made made in accounts by the way of notes remote, it will be ignored

If there is no counter claim or claim against third party, If there is counter claim or claim against third party, provision should
provision in full for probable loss should be made be made after taking into account the probable recovery under the
claim

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 CONTINGENCIES AND EVENTS OCCURRING AFTER BALANCE
Accounting Standard - 4
S H E E T D AT E

Events Occurring After Balance Sheet Date

Events occurring after the balance sheet date are
➢ those significant events,
➢ both favorable and unfavorable,
➢ that occur between the balance sheet date and the date on which the financial statements are approved by approving authority

Events occurring after the Balance Sheet Date

Adjusting event Non-adjusting event

✓ Provides additional information, which materially

affects the determination of amounts relating to Events not related to circumstances existing
conditions existing at the balance sheet date.
on Balance sheet date
✓ Event affecting going concern assumption.

Loss should be accounted in accounts and assets and Disclosure by the way of notes to
liabilities to be adjusted accounts only, no adjustment in accounts.

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 CONTINGENCIES AND EVENTS OCCURRING AFTER BALANCE
Accounting Standard - 4
S H E E T D AT E

Events Occurring After Approval of Accounts

➢ Event occurring
➢ after the Balance Sheet Date and
➢ also after the approval of accounts by Board of Directors of Company,
➢ such event should be disclosed in Director’s Report, if Material.

Disclosure
• If disclosure of contingencies is required by this Standard, the following information should be provided:
(a) the nature of the contingency;
(b) the uncertainties which may affect the future outcome;
(c) an estimate of the financial effect, or a statement that such an estimate cannot be made.
• If disclosure of events occurring after the balance sheet date then the following information should be provided:
(a) the nature of the event;
(b) an estimate of the financial effect, or a statement that such an estimate cannot be made.

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 AS 4.1

AS 4
AS 4 - CONTINGENCIES & EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

Question Bank
Sr. No. Concept
Section A Section B

1 Accounting Treatment Q.1, Q.2, Q.5 Q.2, Q.5, Q.7

2 Fundamental assumption Q.6 Q.1, Q.6, Q.10

3 Classification

• Contingencies or Adjusting or
Q.7, Q.8, Q.9 Q.3, Q.12
Non-adjusting

4 Disclosure requirement Q.3, Q.4

5 Dividend Q.4

6 Miscellaneous Q.11 Q.13

7 Special Cases Q.10 Q.8, Q.9, Q.11, Q.14

 AS 4.2

AS 4 - CONTINGENCIES & EVENTS OCCURRING AFTER THE

AS 4

BALANCE SHEET DATE

SECTION A (CONCEPT QUESTIONS)
PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI ILLUSTRATION 1
2 ICAI ILLUSTRATION 3
3 ICAI ILLUSTRATION 4
4 ICAI ILLUSTRATION 5
5 ICAI ILLUSTRATION 7
(Similar to ICAI – P.Q.6)
6 QP Nov 18
INTER QP MAY 2019 /
7 ICAI PRACTICAL
QUESTION 15
8 QP JULY 21
9 QP DEC 21
10 Exam Nov 22
11 ICAI – P.Q.5
 AS 4.3

1. ICAI ILLUSTRATION 1

AS 4
In X Co. Ltd., theft of cash of ` 5 lakhs by the cashier in January, 20X1 was detected only in May,
20X1. The accounts of the company were not yet approved by the Board of Directors of the company.
Decide Whether the theft of cash has to be adjusted in the accounts of the company for the year
ended 31.3.20X1.

SOLUTION
FACTS:
X Co. Ltd has detected a theft which has occurred in January 20X1 before approval of accounts
by Board of Directors.
REFERENCE:
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an
event occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes. Assets and liabilities should be adjusted for events
occurring after the balance sheet date that provide additional evidence to assist the estimation
of amounts relating to conditions existing at the balance sheet date.
ANALYSIS:
In light of the facts above, the event of detection of theft has happened before the approval of
accounts by Board of Directors and it was a condition existing at the balance sheet date, making
the amount of theft being required to be adjusted in the accounts of the company.
CONCLUSION:
If a fraud of the accounting period is detected after the balance sheet date but before approval
of the financial statements, it is necessary to recognise the loss amounting ` 5,00,000 and adjust
the accounts of the company for the year ended 31st March, 20X1.

2. ICAI ILLUSTRATION 3
A company has filed a legal suit against the debtor from whom ` 15 lakh is recoverable as on
31.3.20X1. The chances of recovery by way of legal suit are not good as per legal opinion given by
the counsel in April, 20X1. Can the company provide for full amount of ` 15 lakhs as provision for
doubtful debts? Discuss.
 AS 4.4
AS 4

SOLUTION
FACTS:
Legal suit has been filed for recovery of ` 15 lakh from debtor for which the recovery chances are
not good as per the legal opinion received in April 20X1.
REFERENCE:
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an
event occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes. Assets and liabilities should be adjusted for events
occurring after the balance sheet date that provide additional evidence to assist the estimation
of amounts relating to conditions existing at the balance sheet date.
ANALYSIS:
As per the facts and reference above, the condition of recovery from debtors existed at the Balance
sheet date. Hence, the company should make the provision for doubtful debts, as legal suit has
been filed on 31st March, 20X1 and the chances of recovery from the suit are not good. Though,
the actual result of legal suit will be known in future yet situation of non-recovery from the
debtors exists before finalisation of financial statements.
CONCLUSION:
Provision for doubtful debts should be made for the year ended on 31st March, 20X1.

3. ICAI ILLUSTRATION 4
In preparing the financial statements of R Ltd. for the year ended 31st March, 20X1, you come across
the following information. State with reasons, how you would deal with this in the financial
statements:
The company invested 100 lakhs in April, 20X1 before approval of Financial Statements by the Board
of directors in the acquisition of another company doing similar business, the negotiations for
which had started during the year.
 AS 4.5

AS 4
SOLUTION
FACTS:
R Ltd. has invested 100 lakhs in April, 20X1 before approval of Financial Statements by the Board
of directors in the acquisition of another company.
REFERENCE:
AS 4 (Revised) defines "Events Occurring after the Balance Sheet Date" as those significant
events, both favourable and unfavourable, that occur between the balance sheet date and the
date on which the financial statements are approved by the Approving Authority in the case of
a company.
ANALYSIS:
The disclosure should be made in the report of the approving authority of those events occurring
after the balance sheet date that represent material changes and commitments affecting the
financial position of the enterprise.
The acquisition of another company is an event occurring after the balance sheet date. However,
no adjustment to assets and liabilities is required as the event does not affect the determination
and the condition of the amounts stated in the financial statements for the year ended 31st
March, 20X1. However, the disclosure should be made in the report of the approving authority.
CONCLUSION:
R Ltd. should disclose the investment of ` 100 lakhs in April, 20X1 in the acquisition of another
company in the report of the Approving Authority to enable users of financial statements to make
proper evaluations and decisions.

4. ICAI ILLUSTRATION 5
A Limited Company closed its accounting year on 30.6.20X1 and the accounts for that period were
considered and approved by the board of directors on 20th August, 20X1. The company was engaged
in laying pipe line for an oil company deep beneath the earth. While doing the boring work on 1.9.20X1
it had met a rocky surface for which it was estimated that there would be an extra cost to the
tune of ` 80 lakhs. You are required to state with reasons, how the event would be dealt with in
the financial statements for the year ended 30.6.20X1.
 AS 4.6
AS 4

SOLUTION
FACTS:
A limited has its accounts approved on 20th August 20X1. The extra cost of ` 80 lakhs during
boring work has been identified on 01.09.20X1.
REFERENCE:
AS 4 (Revised) defines "Events Occurring after the Balance Sheet Date" as those significant
events, both favourable and unfavourable, that occur between the balance sheet date and the
date on which the financial statements are approved by the Approving Authority in the case of
a company.
ANALYSIS:
In the case of A Limited, the incidence which was expected to push up cost, became evident after
the date of approval of the accounts. So it is not an 'event occurring after the balance sheet date'.
CONCLUSION:
A Limited is not required to adjust or disclose the details relating to event causing extra cost in
financial statements for the year ended 30.6.20X1.

5. ICAI ILLUSTRATION 7 (Similar to ICAI – P.Q.6)

During the year 20X1-20x2, Raj Ltd. was sued by a competitor for ` 15 lakhs for infringement of
a trademark. Based on the advice of the company's legal counsel, Raj Ltd. provided for a sum of `
10 lakhs in its financial statements for the year ended 31st March, 20X2. On 18th May, 20X2, the
Court decided in favour of the party alleging infringement of the trademark and ordered Raj Ltd.
to pay the aggrieved party a sum of ` 14 lakhs. The financial statements were prepared by the
company's management on 30th April, 20X2, and approved by the board on 30th May, 20X2.
 AS 4.7

SOLUTION

AS 4
FACTS:
Raj Ltd. has been sued for infringement of a trademark during the year 20X1-20X2. Court decision
has been received on 18th May 20X2 and Financial Statements have been approved by Board of
Directors on 30th May 20X2.
REFERENCE:
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an
event occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes. Assets and liabilities should be adjusted for events
occurring after the balance sheet date that provide additional evidence to assist the estimation
of amounts relating to conditions existing at the balance sheet date.
ANALYSIS:
In the given case, since Raj Ltd. was sued by a competitor for infringement of a trademark during
the year 20X1-X2 for which the provision was also made by it, the decision of the Court on 18th
May, 20X2, for payment of the penalty will constitute as an adjusting event because it is an
event occurred before approval of the financial statements.
CONCLUSION:
Raj Ltd. should adjust the provision upward by ` 4 lakhs to reflect the award decreed by the Court
to be paid by them to its competitor.
“Had the judgment of the court been delivered on 1 st June 20X2, it would be considered as an
event occurring after the approval of the financial statements which is not covered by AS 4
(Revised). In that case, no adjustment in the financial statements of 20X1-X2 would have been
required.

6. QP Nov 18
The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were approved on
30th April, 2018. On 15th April, 2018 a fire occurred in the factory and office premises. The loss by
fire is of such a magnitude that it was not possible to expect the enterprise Dee Limited to start
operation again.
State with reasons, whether the loss due to fire is an adjusting or non- adjusting event and how
the fact of loss is to be disclosed by the company in the context of the provisions of AS-4
(Revised).
 AS 4.8

SOLUTION
AS 4

FACTS:
The fire has occurred in the factory and office premises of Dee Ltd after 31st March, 2018 but
before approval of financial statement of 30.4.18. The loss by fire is of such a magnitude that it
is not reasonable to expect the Dee Ltd. to start operations again.
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” states
that adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet date.
However, Unusual changes affecting the existence or substratum of the enterprise after the
balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements.
ANALYSIS:
An event occurring after the balance sheet date should be an adjusting event even if it does not
reflect any condition existing on the balance sheet date, if the event is such as to indicate that
the fundamental accounting assumption of going concern is no longer appropriate.
Since the fire occurred after 31/03/18, the loss on fire is not a result of any condition existing on
31/03/18. But as per the facts stated about operations not being resumed, the going concern
assumption is not valid in case of Dee Ltd. Hence, the loss due to fire is an adjusting event.
CONCLUSION:
The entire accounts of Dee Ltd. should be prepared on a liquidation basis with adequate disclosures
by way of note in its financial statements in the following manner:
“Major fire occurred in the factory and office premises on 15th April, 2018 which has made
impossible for the enterprise to start operations again. Therefore, the financial statements have
been prepared on liquidation basis.”

7. INTER QP MAY 2019 / ICAI PRACTICAL QUESTION 15

The financial statements of Alpha Ltd. for the year 20X1-20X2 were approved by the Board of
Directors on 15th July, 20X2. The following information was provided:
i. A suit against the company’s advertisement was filed by a party on 20th April, 20X2
claiming damages of ` 25 lakhs.
ii. The terms and conditions for acquisition of business of another company had been decided
by March, 20X2. But the financial resources were arranged in April, 20X2 and amount
invested was ` 50 lakhs.
iii. Theft of cash of ` 5 lakhs by the cashier on 31st March, 20X2, was detected on 16th July,
20X2.
With reference to AS 4, state whether the above mentioned events will be treated as contingencies,
adjusting events or non-adjusting events occurring after the balance sheet date.
 AS 4.9

AS 4
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” to
decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.
Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and by the
corresponding approving authority in the case of any other entity.
Further, 'Contingencies' is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may not occur.

SOLUTION
FACTS:
Financial statements of Alpha Ltd. for the year 20X1-20X2 were approved by the Board of
Directors on 15th July, 20X2.
REFERENCE:
ANALYSIS (i):
Suit filed against the company is a contingent liability but it was not existing as on date of
balance sheet date as the suit was filed on 20th April after the balance sheet date.
CONCLUSION:
The suit will have no effect on financial statement of 20X1-20X2 and will be a non- adjusting
event.
ANALYSIS (ii):
Terms and conditions for acquisition of business were finalized before the balance sheet date and
carried out before the closure of the books of accounts but transaction for payment of financial
resources was effected in April, 20X2. Hence, necessary adjustment to assets and liabilities for
acquisition of business is necessary in the financial statements for the year ended 31st March
20X2.
CONCLUSION:
The acquisition of business will be an adjusting event.
 AS 4.10

ANALYSIS (iii):
AS 4

Events which occur between the balance sheet date and the date on which the financial
statements are approved, may indicate the need for adjustments to assets and liabilities as at
the balance sheet date or may require disclosure. In the given case, as the theft of cash was
detected on 16th July, 20X2 i.e., after approval of financial statements, it will not require
adjustment nor disclosure.
CONCLUSION:
The theft will be a non-adjusting event and no adjustment in financial statement is required.

8. QP JULY 21
Surya Limited follows the financial year from April to March. It has provided the following
information.
(i) A suit against the Company's Advertisement was filed by a party on 5th April, 2021, claiming
damages of ` 5 lakhs.
(ii) Company sends a proposal to sell an immovable property for ` 45 lakhs in March 2021. The
book value of the property is ` 30 lakhs as on year end date. However, the Deed was registered
on 15th April, 2021.
(iii) The terms and conditions for acquisition of business of another company have been decided
by the end of March 2021, but the financial resources were arranged in April 2021. The amount
invested was ` 50 lakhs.
(iv) Theft of cash amounting to ` 4 lakhs was done by the Cashier in the month of March 2021
but was detected on the next day after the Financial Statements have been approved by the
Directors.
Keeping in view the provisions of AS-4, you are required to state with reasons whether the above
events are to be treated as Contingencies, Adjusting Events or Non-Adjusting Events occurring
after Balance Sheet date.
 AS 4.11

SOLUTION

AS 4
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” to
decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.
Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and by the
corresponding approving authority in the case of any other entity.
Further, 'Contingencies' is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may not occur.
ANALYSIS (i):
As per the above reference of AS 4, Suit filed against the company is a contingent liability but it
was not existing as on date of balance sheet date as the suit was filed on 5th April after the
balance sheet date. This event does not pertain to conditions on the balance sheet date.
CONCLUSION:
The suit will have no effect on financial statements and it will be a non-adjusting event.
ANALYSIS (ii):
The proposal to sell an immovable property was made before 31st March, 2021 but the final deed
was registered on 15th April. Sale cannot be shown in the financial statements for the year ended
31st March, 2021.
CONCLUSION:
Sale of immovable property is an event occurring after the balance sheet date and is a non-
adjusting event. No adjustment to assets and liabilities is required as the event does not affect
the determination and the condition of the amounts stated in the financial statements for the
year ended 31st March, 2021.
ANALYSIS (iii):
The terms and conditions for acquisition of business were finalized before the balance sheet date
and carried out before the closure of the books of accounts but transaction for payment of
financial resources was effected in April, 2021. The finalization of terms and conditions amount
to significant event before Balance sheet date.
CONCLUSION:
Acquisition of business is an adjusting event and necessary adjustment to assets and liabilities
for acquisition of business is necessary in the financial statements for the year ended 31st March
2021.
 AS 4.12

ANALYSIS (iv):
AS 4

The theft of cash was detected after approval of financial statements. As per AS 4, only those
events which occur between the balance sheet date and the date on which the financial
statements are approved, may indicate the need for adjustments to assets and liabilities as at
the balance sheet date or may require disclosure.
CONCLUSION: No adjustment is required for the theft in F Y 2020-21. It is a non-adjusting event.

9. QP DEC 21
As per provision of AS 4, you are required to state with reason whether the following transaction
are adjusting event or non-adjusting event for the year ended 31.03.2021 in the books of NEW Ltd.
(accounts of the company were approved by board of directors on 10.07.2021):
1. Equity Dividend for year 2020-21 was declared at the rate of 7% on 15.05.2021.
2. On 05.03.2021, ` 53,000 cash was collected from a customer but not deposited by the cashier.
This fraud was detected on 22.06.2021.
3. One Building got damaged due to 0ccurrence of fire on 23.05.2021. Loss was estimated to be `
81,00,000.

SOLUTION
In the books of NEW Ltd., classification of events as per AS 4 is as follows:
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” to
decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.
Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and by the
corresponding approving authority in the case of any other entity.
Further, 'Contingencies' is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may not occur.
i) FACTS:
 AS 4.13

Equity Dividend for year 2020-21 was declared on 15.05.2021.

AS 4
ANALYSIS:
If dividends are declared after the balance sheet date but before the financial statements are
approved, the dividends are not recognized as a liability at the balance sheet date because no
obligation exists at that time unless a statute requires otherwise.
No liability for dividends should be recognized in financial statements for financial year ended
31st March, 2021. Dividends are disclosed in the notes.
CONCLUSION:
Declaration of dividend is non-adjusting event.
ii) FACTS:
Cashier has incurred a fraud by collecting the cash but not depositing it ` 53,000
ANALYSIS:
Fraud of the accounting period is detected after the balance sheet date but before approval of
the financial statements, it is necessary to recognize the loss.
CONCLUSION:
Loss amounting ` 53,000 should be adjusted in the accounts of the company for the year ended
31st March, 2021 as it is adjusting event.
iii) FACTS:
Estimated loss due to Fire is ` 81,00,000 which occurred on 23.05.2021.
ANALYSIS:
Unusual changes affecting the existence or substratum of the enterprise after the balance sheet
date may indicate a need to consider the use of fundamental accounting assumption of going
concern in the preparation of the financial statements.
The damage of one building due to fire did not exist on the balance sheet date i.e. 31.3.2021. As
per the information given in the question, the fire has caused major destruction; therefore,
fundamental accounting assumption of going concern would have to be evaluated.
CONCLUSION:
Loss occurred due to fire is not to be recognized in the financial year 2020-2021 as it is non-
adjusting event. Considering that the going concern assumption is still valid, the fact of fire
together with an estimated loss of ` 81 lakhs should be disclosed in the report of the approving
authority for financial year 2020 -21 to enable users of financial statements to make proper
evaluations and decisions.

10. Exam Nov 22

MN Limited operated its business into various segments. Its financial year ended on 31 st March,
2022 and financial statements were approved by their approving authority on 15th june,2022. The
following material events took place:
 AS 4.14

(i) On 7th April,2022, a fire completely destroyed a manufacturing plant of the entity. It was
AS 4

expected that the loss of ₹ 15 crores would be fully covered by the insurance company.
(ii) A claim for damage amounting to ₹ 12 crores for breach of patent has been received by the
entity prior to the year end. It is the director’s opinion, backed by legal advice that the claim
will ultimately prove to be baseless. But it is still estimated that it would involve a considerable
expenditure on legal fees.
(iii) A Major property was sold (it was included in the balance sheet at ₹37,50,000) for which
contracts has been exchange on 15th March, 2022. The sale was completed on 15th May,2022
at a price of 39,75,000.
You are required to state with reasons, haw each of the above items should be dealt with in the
financial statements of MN Limited for the year ended 31st March,2022 as per AS-4.

SOLUTION
FACTS:
MN Ltd. financial statements for 31st March 2022 are approved by the approving authority on
15th June 2022. It operates its business into various segments.
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” Events
occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and, by the
corresponding approving authority in the case of any other entity. Assets and liabilities should be
adjusted for events occurring after the balance sheet date that provide additional evidence to
assist the estimation of amounts relating to conditions existing at the balance sheet date or that
indicate that the fundamental accounting assumption of going concern is not appropriate.
'Contingencies' is restricted to conditions or situations at the balance sheet date, the financial
effect of which is to be determined by future events which may or may not occur. On the basis
of above principles, following will be the accounting treatment in the financial statements for the
year ended at 31 March 2022:
ANALYSIS (a): The destruction of plant by fire occurred on 7th April which is after the year-end
and does not relate to the conditions existing at the year-end. However, it is necessary to consider
the validity of the going concern assumption having regard to the extent of insurance cover.
 AS 4.15

CONCLUSION: The event of destruction of plant by fire is a non-adjusting event. Since it is said

AS 4
that the loss would be fully recovered by the insurance company, the fact should be disclosed by
way of a note to the financial statements.
ANALYSIS (b):
On the basis of legal advice and director’s opinion, the claim against the company will not
succeed. Thus, ` 12 crore should not be provided in the account.
CONCLUSION:
It should be disclosed by means of a contingent liability with full details of the facts. Provision
should be made for legal fee expected to be incurred to the extent that they are not expected to
be recovered.
ANALYSIS (c):
As the contract for sale asset has been exchanged on 15th March, 2022. It is a condition existing
on balance sheet date. Also, the sale has been completed on 15th May 2020 which is before the
approval of financial statements. Hence, the effect of the sale should be reflected in the financial
statements ended on 31.3.2022.
CONCLUSION:
The sale of property should be treated as an adjusting event and the profit on sale of property `
2,25,000 would be considered.

11. ICAI -P.Q.5

A Ltd. has sold its building for ` 50 lakhs to B Ltd. and has also given the possession to B Ltd.
The book value of the building is ` 30 lakhs. As on 31st March, 20X1, the documentation and legal
formalities are pending. The company has not recorded the sale and has shown the amount
received as advance. Do you agree with this treatment?

SOLUTION
The economic reality and substance of the transaction is that the rights and beneficial interest
in the property has been transferred although legal title has not been transferred. A Ltd.
should record the sale and recognise the gain of ` 20 lakhs in its profit and loss account. The
building should be derecognized in the financial statements.
 AS 4.1

AS 4 - CONTINGENCIES & EVENTS OCCURRING AFTER THE

AS 4

BALANCE SHEET DATE

SECTION B (EXAM ORIENTED)
PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
ICAI ILLUSTRATION 2,
1
RTP Nov 2015
ICAI ILLUSTRATION 6,
2
Nov 2018 RTP
RTP May 2018 / RTP MAY
3
20
4 INTER RTP May 2019
5 RTP NOV 18
6 RTP NOV 20
7 RTP MAY 21
8 RTP NOV 21
9 MTP OCT 21 Series 1
Mock test OCT 21 Series
10
2 / INTER RTP NOV 19
11 RTP May 22
MTP March 2022 Test
12
Series 1
13 RTP Nov 22
14 MTP Sep 22 Series 1
 AS 4.2

1. ICAI ILLUSTRATION 2, RTP Nov 2015

AS 4
An earthquake destroyed a major warehouse of ACO Ltd. on 20.5.20X2. The accounting year of the
company ended on 31.3.20X2. The accounts were approved on 30.6.20X2. The loss from earthquake
is estimated at ` 30 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or
non-adjusting event and how the fact of loss is to be disclosed by the company.

SOLUTION
FACTS:
ACO Ltd. has suffered has suffered a loss of ` 30 lakhs due to earthquake on 20.05.2022
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” states
that adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet date.
However, Unusual changes affecting the existence or substratum of the enterprise after the
balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements.
ANALYSIS:
The destruction of warehouse due to earthquake did not exist on the balance sheet date i.e.,
31.3.20X2. However, the earthquake has caused major destruction; therefore, fundamental
accounting assumption of going concern is called upon. Considering that the going concern
assumption is still valid, the fact of earthquake together with an estimated loss of ` 30 lakhs
should be disclosed for the financial year 20X1-20X2.
CONCLUSION:
The loss occurred due to earthquake is not to be recognised in financial statement. Disclosure of
estimated loss and fact about earthquake should be disclosed to enable users of financial
statements to make proper evaluation and decisions.

2. ICAI ILLUSTRATION 6, Nov 2018 RTP

While preparing its final accounts for the year ended 31st March, 20X1 a company made a provision
for bad debts @ 5% of its total trade receivables. In the last week of February, 20X1 a trade
receivable for ` 2 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by
any insurance policy. In April, 20X1 the trade receivable became a bankrupt. Can the company
 AS 4.3

provide for the full loss arising out of insolvency of the trade receivable in the final accounts for
AS 4

the year ended 31st March, 20X1?

SOLUTION
FACTS:
The Debtor of the company has suffered heavy losses due to an earthquake in February 20X1 and
they have been declared as bankrupt in April 20X1.
REFERENCE:
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an
event occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes. Assets and liabilities should be adjusted for events
occurring after the balance sheet date that provide additional evidence to assist the estimation
of amounts relating to conditions existing at the balance sheet date.
ANALYSIS:
As the Balance sheet date of the company is 31st March 20X1 which is after the date of
earthquake, the event can be considered as a condition existing at the balance sheet date. Had
the earthquake taken place after 31st March, 20X1, then mere disclosure required as per AS 4
(Revised), would have been sufficient.
CONCLUSION:
Full provision for bad debt amounting to ` 2 lakhs should be made to cover the loss arising due
to the insolvency in the Final Accounts for the year ended 31st March, 2017.

3. RTP May 2018 / RTP MAY 20

With reference to AS 4 "Contingencies and events occurring after the balance sheet date",
identify whether the following events will be treated as contingencies, adjusting events or non-
adjusting events occurring after balance sheet date in case of a company which follows April
to March as its financial year.
I. A major fire has damaged the assets in a factory on 5th April, 5 days after the year end.
However, the assets are fully insured and the books have not been approved by the Directors.
II. A suit against the company's advertisement was filed by a party on 10th April, 10 days after
the year end claiming damages of ` 20 lakhs.
 AS 4.4

AS 4
SOLUTION
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” to
decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.
Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and by the
corresponding approving authority in the case of any other entity.
Further, 'Contingencies' is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may not occur.
ANALYSIS (i):
Adjustments to assets and liabilities are required for events occurring after the balance sheet
date that provide additional information materially affecting the determination of the amounts
relating to conditions existing at the balance sheet date. However, adjustments to assets and
liabilities are not appropriate for events occurring after the balance sheet date, if such events do
not relate to conditions existing at the balance sheet date.
Fire has occurred after the balance sheet date and also the loss is totally insured. Therefore, the
event becomes immaterial.
CONCLUSION:
The event is a non-adjusting event.
ANALYSIS (ii):
The contingency is restricted to conditions existing at the balance sheet date. However, in the
given case, suit was filed against the company’s advertisement by a party on 10th April for
amount of ` 20 lakhs. Therefore, it does not fit into the definition of a contingency.
CONCLUSION:
The event is a non-adjusting event.
 AS 4.5

4. INTER RTP May 2019

AS 4

The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April, 2017, considered
and approved the Audited Financial results along with Auditors Report for the Financial Year ended
31st March, 2017 and recommended a dividend of ` 2 per equity share (on 2 crore fully paid up
equity shares of ` 10 each) for the year ended 31st March, 2017 and if approved by the members
at the forthcoming Annual General Meeting of the company on 18th June, 2017, the same will be
paid to all the eligible shareholders.
Discuss on the accounting treatment and presentation of the said proposed dividend in the annual
accounts of the company for the year ended 31st March, 2017 as per the applicable Accounting
Standard and other Statutory Requirements.

SOLUTION
FACTS:
New Graphics Ltd. has recommended a dividend of ` 2 per equity share for the year ended 31st
March, 2017. It will be paid if it is approved on 18th June, 2017 in Annual General Meeting. Financial
Statements have been approved on 18th April, 2017 in Board Meeting.
REFERENCE:
As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance Sheet
Date” vide Companies (Accounting Standards) Amendments Rules, 2016, the events which take
place after the balance sheet date, are sometimes reflected in the financial statements because
of statutory requirements or because of their special nature.
However, dividends declared after the balance sheet date but before approval of financial
statements are not recognized as a liability at the balance sheet date because no statutory
obligation exists at that time.
ANALYSIS:
The dividend of ` 4 crores recommended by New Graphics Ltd. in its Board meeting on 18th April,
2017 shall not be accounted for in the books for the year 2016-17 irrespective of the fact that it
pertains to the year 2016-17.
CONCLUSION:
No, provision for proposed dividends is not required to be made. Proposed dividends for 2016-27 is
required to be disclosed in the notes to financial statements.
 AS 4.6

5. RTP NOV 18

AS 4
While preparing its final accounts for the year ended 31st March, 2017, a company made provision
for bad debts @ 5% of its total debtors. In the last week of February, 2017 a debtor for ` 20
lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any insurance
policy. In April, 2017 the debtor became a bankrupt. Can the company provide for the full loss
arising out of insolvency of the debtor in the final accounts for the year ended 31st March, 2017?
You are required to advise the company in line with AS 4.

SOLUTION
FACTS:
The Debtor of the company has suffered heavy losses due to an earthquake in February 2017 and
they have been declared as bankrupt in April 2017.
REFERENCE:
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an
event occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes. Assets and liabilities should be adjusted for events
occurring after the balance sheet date that provide additional evidence to assist the estimation
of amounts relating to conditions existing at the balance sheet date.
ANALYSIS:
As the Balance sheet date of the company is 31st March 2017 which is after the date of
earthquake, the event can be considered as a condition existing at the balance sheet date. Had
the earthquake taken place after 31st March, 2017, then mere disclosure required as per AS 4
(Revised), would have been sufficient.
CONCLUSION:
Full provision for bad debt amounting to ` 20 lakhs should be made to cover the loss arising due
to the insolvency in the Final Accounts for the year ended 31st March, 2017.

6. RTP NOV 20
A fire, on 2nd April, 2020, completely destroyed a manufacturing plant of Omega Ltd. whose
financial year ended on 31st March, 2020, the financial statements were approved by their
approving authority on 15th June, 2020. It was expected that the loss of ` 10 million would be fully
 AS 4.7

covered by the insurance company. How will you disclose it in the financial statements of Omega
AS 4

Ltd. for the year ended 31st March, 2020.

SOLUTION
FACTS:
Omega Ltd.’s manufacturing plant has been destroyed by fire on 2nd April 2020 and the expected
loss is ` 10 million. Omega Ltd. expects that the loss of ` 10 million would be fully covered by the
insurance company.
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” states
that adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet date.
However, Unusual changes affecting the existence or substratum of the enterprise after the
balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements.
ANALYSIS:
The event occurred after the year-end and does not relate to the conditions existing at the year-
end. Since it is said that the loss would be fully recovered by the insurance company, the going
concern assumption having regard to the extent of insurance cover is valid.
CONCLUSION:
The event will be a non-adjusting event. But the fact of fire and insurance cover should be
disclosed by way of a note to the financial statements.

7. RTP MAY 21
A case is going on between ABC Ltd. and Tax department on claiming the exemption for certain
items, for the year 2019-2020. The court has issued the order on 15th April and rejected the claim
of the company. Accordingly, company is liable to pay the additional tax. The financial
statements were approved on 31st May, 2020. Shall company account for such tax in the year
2019-2020 or shall it account for in the year 2020-2021?
 AS 4.8

AS 4
SOLUTION
FACTS:
ABC Ltd.’s claim has been rejected by the court order on 15th April. The financial statements
were approved on 31st May, 2020.
REFERENCE:
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an
event occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes. Assets and liabilities should be adjusted for events
occurring after the balance sheet date that provide additional evidence to assist the estimation
of amounts relating to conditions existing at the balance sheet date.
ANALYSIS:
The Court order is conclusive evidence which has been received before approval of the financial
statements since the liability is related to earlier year. This satisfies both the conditions for
classification of the event as an adjusting event.
CONCLUSION:
The event will be considered as an adjusting event and accordingly the amount will be adjusted
in accounts of 2019-2020.

8. RTP NOV 21
XYZ Ltd. operates its business into various segments. Its financial year ended on 31st March, 2020
and the financial statements were approved by their approving authority on 15th June, 2020. The
following material events took place:
a) A major property was sold (it was included in the balance sheet at ` 25,00,000) for which
contracts had been exchanged on 15th March, 2020. The sale was completed on 15th May,
2020 at a price of ` 26,50,000.
b) On 2nd April, 2020, a fire completely destroyed a manufacturing plant of the entity. It was
expected that the loss of ` 10 million would be fully covered by the insurance company.
c) A claim for damage amounting to ` 8 million for breach of patent had been received by the
entity prior to the year-end. It is the director's opinion, backed by legal advice that the claim
will ultimately prove to be baseless. But it is still estimated that it would involve a considerable
expenditure on legal fees.
 AS 4.9

You are required to state with reasons, how each of the above items should be dealt with in the
AS 4

financial statements of XYZ Ltd. for the year ended 31st March, 2020.

SOLUTION
FACTS:
XYZ Ltd.’s financial statements for 31st March 2020 are approved by the approving authority on
15th June 2020. It operates its business into various segments.
REFERENCE:
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, Events
occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and, by the
corresponding approving authority in the case of any other entity. Assets and liabilities should be
adjusted for events occurring after the balance sheet date that provide additional evidence to
assist the estimation of amounts relating to conditions existing at the balance sheet date or that
indicate that the fundamental accounting assumption of going concern is not appropriate.
'Contingencies' is restricted to conditions or situations at the balance sheet date, the financial
effect of which is to be determined by future events which may or may not occur. However, it
may be disclosed with the nature of contingency, being a contingent liability.
On the basis of above principles, following will be the accounting treatment in the financial
statements for the year ended at 31 March 2020:
ANALYSIS (a):
As the contract for sale asset has been exchanged on 15th March, 2020 it is a condition existing
on balance sheet date. Also, the sale has been completed on 15th May 2020 which is before the
approval of financial statements. Hence, The effect of the sale should be reflected in the financial
statements ended on 31.3.2020.
CONCLUSION:
The sale of property should be treated as an adjusting event and the profit on sale of property `
1,50,000 would be considered.
 AS 4.10

ANALYSIS (b):

AS 4
The destruction of plant by fire occurred on 2nd April which is after the year-end and does not
relate to the conditions existing at the year-end. However, it is necessary to consider the validity
of the going concern assumption having regard to the extent of insurance cover.
CONCLUSION:
The event of destruction of plant by fire is a non-adjusting event. Since it is said that the loss
would be fully recovered by the insurance company, the fact should be disclosed by way of a note
to the financial statements.
ANALYSIS (c):
On the basis of legal advice and director’s opinion, the claim against the company will not
succeed. Thus, ` 8 million should not be provided in the account.
CONCLUSION:
It should be disclosed by means of a contingent liability with full details of the facts. Provision
should be made for legal fee expected to be incurred to the extent that they are not expected to
be recovered.

9. Mock test OCT 21 Series 1

Tee Ltd. closes its books of accounts every year on 31st March. The financial statements for the
year ended 31 March 2020 are to be approved by the approving authority on 30 June 2020. During
the first quarter of 2020-2021, the following events / transactions has taken place. The accountant
of the company seeks your guidance for the following:
(i) Tee Ltd. has an inventory of 50 stitching machines costing at ` 5,500 per machine as on 31
March 2020. On 31 March 2020 the company is expecting a heavy decline in the demand in
next year. The inventories are valued at cost or net realisable value, whichever is lower. During
the month of April 2020, due to fall in demand, the prices have gone down drastically. The
company has sold 5 machines during this month at a price of ` 4,000 per machine.
(ii) A fire has broken out in the company's godown on 15 April 2020. The company has estimated
a loss of ` 25 lakhs of which 75% is recoverable from the Insurance company.
(iii) The company has entered into a sale agreement on 30 March 2020 to sell a property for a
consideration of ` 7,50,000 which is being carried in the books at ` 5,50,000 at the year end.
The transfer of risk and reward and sale is complete in the month of May 2020 when
conveyance and possession get completed.
(iv) The company has received, during the year 2018-2019, a government grant of ` 15 lakhs for
purchase of a machine. The company has received a notice for refund of the said grant on
15 June, 2020 due to violation of some of the conditions of grant during the year 2019-2020.
You are required to state with reasons, how the above transactions will be dealt with in the
financial statement for the year ended 31st March 2020.
 AS 4.11
AS 4

SOLUTION
REFERENCE:
Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and by the
corresponding approving authority in the case of any other entity.
Assets and liabilities should be adjusted for events occurring after the balance sheet date that
provide additional evidence to assist the estimation of amounts relating to conditions existing at
the balance sheet date or that indicate that the fundamental accounting assumption of going
concern is not appropriate.
In the given case, financial statements are approved by the approving authority on 30 June 2020.
On the basis of above principles, following will be the accounting treatment in the financial
statements for the year ended at 31 March 2020:
ANALYSIS:
Since on 31 March 2020, Tee Ltd. was expecting a heavy decline in the demand of the stitching
machine. Therefore, decline in the value during April, 2020 will be considered as an adjusting
event. Hence, Tee Ltd. needs to adjust the amounts recognized in its financial statements w.r.t.
net realisable value at the end of the reporting period.
CONCLUSION:
Inventory should be written down to ` 4,000 per machine. Total value of inventory in the books
will be 50 machines x ` 4,000 = ` 2,00,000.
(i) A fire took place after the balance sheet date i.e. during 2020 -2021 financial year. Hence,
corresponding financials of 2019-2020 financial year should not be adjusted for loss
occurred due to fire. However, in this circumstance, the going concern assumption will be
evaluated. In case the going concern assumption is considered to be appropriate even after
the occurrence of fire, no disclosure of the same is required in the financial statements.
Otherwise, disclosure be given.
(ii) Since the transfer of risk and reward and sale was complete in the month of May, 2020
when conveyance and possession got complete, no revenue should be recognised with
 AS 4.12

respect to it in the financial statements of 2019-2020. However, a disclosure for the same

AS 4
should be given by the entity.
(iii) Since the notice has been received after 31 March but before 30 June 2020 (approval
date), the said grant shall be adjusted in the financial statements for financial year 2019
-2020 because the violation of the conditions took place in the financial year 2019 -2020
and the company must be aware of it.

10. Mock test OCT 21 Series 2 / INTER RTP NOV 19

An earthquake destroyed a major warehouse of PQR Ltd. on 30.4.2021. The accounting year of the
company ended on 31.3.2021. The accounts were approved on 30.6.2021. The loss from earthquake
is estimated at ` 25 lakhs. State with reasons, whether the loss due to earthquake is an adjusting
or non-adjusting event and how the fact of loss is to be disclosed by the company.

SOLUTION
FACTS:
PQR Ltd. has estimated a loss of `25 Lakhs due to the earthquake on 30.04.2021. The accounts
were approved on 30.06.2021.
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” states
that adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet date.
However, Unusual changes affecting the existence or substratum of the enterprise after the
balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements.
ANALYSIS:
The destruction of warehouse due to earthquake did not exist on the balance sheet date i.e.
31.3.2021. Therefore, loss occurred due to earthquake is not to be recognized in the financial year
2020-2021.
As per the information given in the question, the earthquake has caused major destruction;
therefore, fundamental accounting assumption of going concern is called upon.
 AS 4.13

CONCLUSION:
AS 4

The fact of earthquake together with an estimated loss of ` 25 lakhs should be disclosed in the
Report of the Directors for the financial year 2020-2021.

11. RTP May 22

Tee Ltd. closes its books of accounts every year on 31st March. The financial statements for the
year ended 31st March 2020 are to be approved by the approving authority on 30th June 2020.
During the first quarter of 2020-2021, the following events / transactions has taken place. The
accountant of the company seeks your guidance for the following:
i) Tee Ltd. has an inventory of 50 stitching machines costing at ` 5,500 per machine as on 31st
March 2020. The company is expecting a heavy decline in the demand in next year. The
inventories are valued at cost or net realizable value, whichever is lower. During the month of
April 2020, due to fall in demand, the prices have gone down drastically. The company has
sold 5 machines during April, 2020 at a price of 4,000 per machine.
ii) A fire has broken out in the company's godown on 15th April 2020. The company has estimated
a loss of ` 25 lakhs of which 75% is recoverable from the Insurance company.
iii) A suit against the company's advertisement was filed by a party on 10 th April, 2020 10 days
after the year end claiming damages of ` 20 lakhs.
You are required to state with reasons, how the above transactions will be dealt with in the
financial statements for the year ended 31 March 2020.

SOLUTION
FACTS:
Tee Ltd.’s financial statements for 31st March 2020 are approved by the approving authority on
30 June 2020.
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date”, Events
occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and, by the
corresponding approving authority in the case of any other entity. Assets and liabilities should be
 AS 4.14

adjusted for events occurring after the balance sheet date that provide additional evidence to

AS 4
assist the estimation of amounts relating to conditions existing at the balance sheet date or that
indicate that the fundamental accounting assumption of going concern is not appropriate.
On the basis of above principles, following will be the accounting treatment in the financial
statements for the year ended at 31 March 2020:
ANALYSIS (i):
On 31 March 2020, Tee Ltd. was expecting a heavy decline in the demand of the stitching machine.
Therefore, decline in the value during April, 2020 will be considered as an adjusting event. Hence,
Tee Ltd. needs to adjust the amounts recognized in its financial statements w.r.t. net realizable
value at the end of the reporting period.
CONCLUSION:
Inventory should be written down to ` 4,000 per machine. Total value of inventory in the books
will be 50 machines x ` 4,000 = 2,00,000.
ANALYSIS (ii):
A fire took place after the balance sheet date i.e. during 2020-2021 financial year. Hence, the
financial statements for the year 2019-2020 should not be adjusted for loss occurred due to fire.
However, in this circumstance, the going concern assumption will be evaluated. In case the going
concern assumption is considered to be appropriate even after the occurrence of fire, no disclosure
of the same is required in the financial statements.
CONCLUSION:
The event will be considered as non-adjusting event and no disclosure of the same is required in
the financial statements.
ANALYSIS (iii):
The contingency is restricted to conditions existing at the balance sheet date. However, in the
given case, suit was filed against the company’s advertisement by a party on 10th April for
amount of ` 20 lakhs. Therefore, it does not fit into the definition of a contingency.
CONCLUSION:
The event will be classified as a non-adjusting event.

12. MTP March 2022 Test Series 1

The financial statements of Alpha Ltd. for the year 2019-2020 were approved by the Board of
Directors on 15th July, 2020. The following information was provided:
i) A suit against the company’s advertisement was filed by a party on 20th April, 2020 claiming
damages of ` 25 lakhs.
ii) The terms and conditions for acquisition of business of another company had been decided by
March, 2020. But the financial resources were arranged in April, 2020 and amount invested
was ` 50 lakhs.
 AS 4.15

iii) Theft of cash of ` 5 lakhs by the cashier on 31st March, 2020, was detected on 16th July,
AS 4

2020.
iv) The company started a negotiation with a party to sell an immovable property for ` 40 lakhs
in March, 2020. The book value of the property is ` 30 lakh on 31st March, 2020. However, the
deed was registered on 15th April, 2020.
v) A major fire had damaged the assets in a factory on 5th April, 2020. However, the assets were
fully insured.
With reference to AS 4, state whether the above mentioned events will be treated as contingencies,
adjusting events or non-adjusting events occurring after the balance sheet date.

SOLUTION
i)
FACTS:
A suit has been filed by a party on 20th April, 2020 claiming damages of ` 25 lakhs
REFERENCE:
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date” to
decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.
Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a company, and by the
corresponding approving authority in the case of any other entity.
Further, 'Contingencies' is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may not occur.
ANALYSIS:
Suit filed against the company is a contingent liability but it was not existing as on date of
balance sheet date as the suit was filed on 20th April which is after the balance sheet date.
CONCLUSION:
The suit will have no effect on financial statement and will be a non-adjusting event.
ii)
 AS 4.16

FACTS:

AS 4
Alpha Ltd. has invested ` 50 lakhs in April 2020 for acquisition of another company for which
the terms and conditions had been decided by March, 2020. Financial Statements were approved
by Board of Directors on 15th July 2020.
ANALYSIS:
As the terms and conditions for acquisition of business were finalized before the balance sheet
date and carried out before the closure of the books of accounts, the event will be classified as
an Adjusting event. Even though the transaction for payment of financial resources was effected
in April, 2020.
CONCLUSION:
Adjustment should be made to assets and liabilities for acquisition of business in the financial
statements for the year ended 31st March 2020.
iii)
FACTS:
Theft of cash of ` 5 lakhs by the cashier on 31st March, 2020, was detected on 16th July, 2020.
ANALYSIS:
Events which occur between the balance sheet date and the date on which the financial
statements are approved, may indicate the need for adjustments to assets and liabilities as at
the balance sheet date or may require disclosure.
In the given case, the theft of cash was detected on 16th July, 2020 i.e., after approval of financial
statements by Board of Directors. Financial Statements were approved by Board of Directors on
15th July 2020.
CONCLUSION:
The theft will be a non-adjusting event as per AS 4.
iv)
FACTS:
Alpha Ltd.’s property sale deed was registered on 15th April, 2020.
ANALYSIS:
Adjustments to assets and liabilities are not appropriate for events occurring after the balance
sheet date, if such events do not relate to conditions existing at the balance sheet date.
Disclosure should be made in the report of the approving authority of those events occurring after
the balance sheet date that represent material changes and commitments affecting the financial
position of the enterprise.
In the given case, sale of immovable property was under proposal stage (negotiations only
started) on the balance sheet date, and was not finalized.
CONCLUSION:
The event will be classified as non-adjusting event. Therefore, adjustment to assets for sale of
immovable property is not necessary in the financial statements for the year ended 31st March,
2020. Disclosure may be given in Report of approving Authority.
 AS 4.17

v)
AS 4

FACTS:
Aplha Ltd.’s assets in the factory have been damaged by fire on 5th April, 2020. The assets were
fully insured.
REFERENCE:
As per AS4 (Revised) defines "Events Occurring after the Balance Sheet Date", adjustments to
assets and liabilities are not appropriate for events occurring after the balance sheet date, if such
events do not relate to conditions existing at the balance sheet date.
However according to the standard unusual changes affecting the existence or substratum of the
enterprise after the balance sheet date may indicate a need to consider the use of fundamental
accounting assumption of going concern in the preparation of the financial statements
ANALYSIS:
The condition of fire occurrence was not existing on the balance sheet date. Since it is said that
the loss would be fully recovered by the insurance company, the going concern assumption having
regard to the extent of insurance cover is valid.
CONCLUSION:
The event of loss by fire will be classified as a non-adjusting event. Only the disclosure regarding
fire and loss, being completely insured may be given in the report of approving authority.

13. RTP Nov 22

Explain accounting treatment of Contingent Gains as per AS 4 “Contingencies and Events
occurring after the Balance Sheet Date”.

SOLUTION
Accounting Treatment of Contingent Gains
Contingent gains are not recognised in financial statements since their recognition may result in
the recognition of revenue which may never be realised. However, when the realisation of a gain
is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate.
14. MTP Sep 22 (Series 1)
State with reasons, how the following events would be dealt with in the financial statements of
Hari Ltd. for the year ended 31st March, 2022 (accounts were approved on 25th July, 2022):
1. Negotiations with another company for acquisition of its business was started on 21st
 AS 4.18

January, 2022. Hari Ltd. invested ` 40 lakh on 22nd April, 2022.

AS 4
2. The company made a provision for bad debts @ 4% of its total debtors (as per trend followed
from the previous years). In the second week of March 2022, a debtor for ` 2,50,000 had
suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy.
In May, 2022 the debtor became bankrupt.
3. During the year 2021-22, Hari Ltd. was sued by a competitor for ` 13 lakhs for infringement
of a trademark. Based on the advice of the company's legal counsel, Hari Ltd. provided for a
sum of ` 8 lakhs in its financial statements for the year ended 31st March, 2022. On 26th
May, 2022, the Court decided in favour of the party alleging infringement of the trademark
and ordered Hari Ltd. to pay the aggrieved party a sum of ` 12 lakhs.
4. Cheques dated 31st March, 2022 collected in the month of April, 2022. All cheques are
presented to the bank in the month of April, 2022 and are also realized in the same month
in the normal course after deposit in the bank.

SOLUTION
Financial statements of Hari Ltd. for the year ended 31st March, 2022 were approved on 25th
July, 2022. As per which the below events would be dealt as follows:
1. FACTS:
Hari Ltd has invested ` 40 lakh on 22nd April, 2022 for acquisition for which negotiations were
initiated in January 2022
REFERENCE:
As per AS 4‘Contingencies and Events Occurring After the Balance Sheet Date’, disclosure should
be made in the report of the approving authority of those events occurring after the balance sheet
date that represent material changes and commitments affecting the financial position of the
enterprise.
ANALYSIS:
As the investment was made before the approval of Financial Statements and the investment
amounts to a material change and commitments that can affect the financial position, it should
be disclosed in Financial Statements dated 31st March 2022.
CONCLUSION:
 AS 4.19

The investment of ` 40 lakhs should be disclosed in the report of the Board of Directors to enable
AS 4

users of financial statements to make proper evaluations and decisions.

2. FACTS:
The Debtor of the company liable for ` 2.5Lakhs have become bankrupt in May due to an
earthquake in March. 5% provision for Bad debts was made by the company.
REFERENCE :
As per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’, adjustment to
assets and liabilities are required for events occurring after the balance sheet date that provide
additional information materially affecting the determination of the amounts relating to
conditions existing at the Balance Sheet date.
ANALYSIS:
The loss suffered by Debtor is not covered by insurance. This information with its implications
was already known to the company. The fact that he became bankrupt in May, 2022 (after the
balance sheet date) is only an additional information related to the existing condition on the
balance sheet date.
CONCLUSION:
Full provision for bad debts amounting ` 2,50,000 should be made, to cover the loss arising due to
the insolvency of a debtor, in the final accounts for the year ended 31st March 2022.
3. FACTS:
Hari Ltd. has to pay the aggrieved party a sum of ` 12 lakhs as per the court’s order on 26th May
2022.
REFERENCE :
As per AS 4, adjustments to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the determination of
the amounts relating to conditions existing at the balance sheet date.
ANALYSIS:
In the given case, since Hari Ltd. was sued by a competitor for infringement of a trademark during
the year 2021- 22 for which the provision was also made by it, the decision of the Court on 26th
May 2022, for payment of the penalty will constitute as an adjusting event because it is an event
occurred before approval of the financial statements.
CONCLUSION:
Hari Ltd. should adjust the provision upward by ` 4 lakhs to reflect the award decreed by the
Court to be paid by them to its competitor.
4. FACTS:
Hari Ltd. has collected cheques dated 31st March, 2022 in the month of April, 2022 and they are
realized in the same month in the normal course after deposit in the bank.
 AS 4.20

REFERENCE:

AS 4
As per AS 4, adjustments to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the determination of
the amounts relating to conditions existing at the balance sheet date.
ANALYSIS:
Collection of cheques after balance sheet date is not an adjusting event even if the cheques bear
the date of 31st March. Recognition of cheques in hand is therefore not consistent with
requirements of AS 4. Moreover, the collection of cheques after balance sheet date does not
represent any material change or commitments affecting financial position of the enterprise.
CONCLUSION:
No disclosure of collection of cheques is required in the Directors’ Report. It is not an adjusting
event.
 AS 4.21

MCQs
AS 4

1. Cash amounting to ` 4 lakhs, stolen by the cashier in the month of March 20X1, was detected
in April, 20X1. The financial statements for the year ended 31st March, 20X1 were approved by
the Board of Directors on 15th May, 20X1. As per Accounting Standards, this is _____ for the
financial statements year ended on 31st March, 20X1.
a) An Adjusting event. c) Contingency.
b) Non-adjusting event. d) Provision

2. As per Accounting Standards, events occurring after the balance sheet date are
a) Only favourable events that occur between the balance sheet date and the date when the
financial statements are approved by the Board of directors.
b) Only unfavourable events that occur between the balance sheet date and the date when
the financial statements are approved by the Board of directors.
c) Those significant events, both favourable and unfavourable, that occur between the balance
sheet date and the date on which the financial statements are approved by the Board of
directors.
d) Those significant events, both favourable and unfavourable, that occur between the balance
sheet date and the date on which the financial statements are not approved by the Board
of directors.

3. AS 4 does not apply to

a) Obligation under retirement benefit plans.
b) Commitments arising from long term lease contracts.
c) liabilities of life assurance and general insurance enterprises arising from policies issued
d) Both (a) & (b).

4. A Ltd. sold its building for ` 50 lakhs to B Ltd. and has also given the possession to B Ltd. The
book value of the building is ` 30 lakhs. As on 31st March, 20X1, the documentation and legal
formalities are pending. For the financial year ended 31st March, 20X1
a) The company should record the sale.
b) The company should recognise the profit of ` 20 lakhs in its profit and loss account.
c) Both (a) and (b).
d) The company should disclose the profit of ` 20 lakhs in notes to accounts.
Answers
1. (a) 2. (c) 3. (d) 4. (c)
Accounting Standard - 7 CONSTRUCTION CONTRACT

Objective of AS 7

AS 7 prescribes the principles of accounting for construction contracts in the financial statements
of contractors. The focus of the standard is on allocation of contract revenue and contract costs to
the accounting periods in which construction work is performed.

WHAT ARE CONSTRUCTION CONTRACTS?

Contracts specifically
negotiated for the construction Contracts for rendering of Contracts for
of an asset or combination services related to destruction or
construction of assets.
of assets that are closely restoration of assets.
interrelated.

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Accounting Standard - 7 CONSTRUCTION CONTRACT

Construction contracts can be classified into two categories

TYPES OF CONSTRUCTION CONTRACTS

FIXED PRICE CONTRACT COST PLUS CONTRACT

Contractor agrees to a fixed contract price or fixed rate per unit Contractor is reimbursed for allowable or otherwise
of output, which in some cases is subject to cost escalation. defined costs, plus percentage of these costs or a fixed fee.

IF THE FINAL OUTCOME OF THE CONTRACTS

Can be estimated reliably Can not be estimated reliably

Revenue and costs recognised as per percentage of Revenue should be recognised Contractor is reimbursed for
completion method considering the stage of completion of only to the extent of contract allowable or otherwise defined
contract at reporting date. costs incurred, of which costs, plus percentage of these
recovery is probable. costs or a fixed fee.

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Accounting Standard - 7 CONSTRUCTION CONTRACT

Note : Any expected loss (when contract cost > contract revenue) on the construction contract should be recognised as an expense immediately
in both the situations.

OUTCOME OF CONTRACTS CAN BE ESTIMATED RELIABLY WHEN

In fixed price contract In cost plus contract

Total contract revenue can be measured reliably. It is probable that the economic benefits
associated with the contract will flow to the
enterprise.
It is probable that the economic benefits
associated with the contract will flow to the
enterprise. Contract costs attributable to the contract, whether
or not specifically reimbursable, can be clearly
identified and measured reliably.
Both contract costs to complete the contract and
the stage of contract completion at the reporting
date can be measured reliably.

Contract costs attributable to contract can be

clearly identified and measured reliably so that
actual contract costs incurred can be compared
with prior estimates.

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Accounting Standard - 7 CONSTRUCTION CONTRACT

PERCENTAGE COMPLETION METHOD

This method of accounting is also called as the stage of completion method.
Construction contract take more than one year to complete. Hence the final Profit & loss of a construction contract can be determined only after
a number of years from the year of commencement of construction are over.
The percentage completion method may suffer from a serious drawback viz. Anticipation of profit.
According to AS 7 Percentage of completion method should not used unless it is possible to make a reasonable estimate of final outcome of the
contract.

TREATMENT OF COST RELATING TO FUTURE ACTIVITIES

The contract costs that relate to future activity on the contract are however recognized as an assets provided it is probable that they will be
recovered. such costs represent an amount due from the customer and are often classified as contract work in progress.
UNCOLLECTABLE CONTRACT REVENUE
When an uncertainty arises about the collectability of an amount already included in contract revenue and already recognized in the statement
of profit and loss the uncollectable amount or the amount in respect of which recovery has ceased to be probable is recognized as an expenses
rather than as an adjustment of the amount of contract revenue.

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Accounting Standard - 7 CONSTRUCTION CONTRACT
Methods for Determination of Stage of Completion of Contracts

This method of accounting is also called as the stage of completion method.

(Method to be chosen depending on the nature of the contract)
Proportion that contract costs incurred for work Surveys of work Completion of a physical
performed upto the reporting date bear to the performed proportion of the contract
estimated total contract costs work

As per the standard, Contract revenue and Contract costs comprise of the following:

CONTRACT REVENUE
Initial amount of revenue Variations in contract work, claims and incentive payments if
agreed in the contract. (i) it is probable that they will result in revenue.
(ii) they are capable of being reliably measured.

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Accounting Standard - 7 CONSTRUCTION CONTRACT
CONTRACT COSTS
Costs that relate directly to Costs that are attributable to contract activity in general and Costs that cannot be attributed to contract activity or
the specific contract. can be allocated to the specific contract. cannot be allocated to a contract are excluded from the
costs of a construction contract.

include: include: include:

1. site labour costs, including site supervision; 1. insurance; 1. general administration costs for which reimbursement is
2. costs of materials used in construction; 2. costs of design and technical assistance that is not directly not specified in the contract;
3. depreciation of plant and equipment used on the contract; related to a specific contract; and 2. selling costs;
4. costs of moving plant, equipment and materials to and 3. construction overheads. 3. research and development costs for which
from the contract site; The allocation of indirect cost should be based on normal level reimbursement is not specified in the contract; and
5. costs of hiring plant and equipment; of construction activity. The allocable cost may include 4. depreciation of idle plant and equipment that is not
6. costs of design and technical assistance that is directly borrowing cost as per AS 16 used on a particular contract.
related to the contract;
7. the estimated costs of rectification and guarantee work,
including expected warranty costs; and
8. claims from third parties.

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Accounting Standard - 7 CONSTRUCTION CONTRACT

Application of percentage of completion on a cumulative basis in each accounting period to the current estimates of contract
revenue and contract costs.

Effect of a change in the estimate of contract revenue or contract costs, or the effect of a change in the estimate of the outcome of
CHANGES IN ESTIMATES
a contract, is accounted for as a change in accounting estimate.

The changed estimates are used in determination of the amount of revenue and expenses recognised in the statement of profit and
loss in the period in which the change is made and in subsequent periods.

WHEN A CONTRACT COVERS A NUMBER OF ASSETS, EACH CONTRACT SHOULD BE TREATED AS SEPARATE CONTRACT IF

Each asset has been subject to separate

Separate proposals have been negotiation and contractor are able to Costs and revenues of each
submitted for each asset. accept or reject that part of the contract asset can be identified.
relating to each asset.

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Accounting Standard - 7 CONSTRUCTION CONTRACT

Group of contracts is negotiated as a single package.

A group of contracts, whether with a single customer or with several

Contracts are performed concurrently or in a continuous sequence.
customers, should be treated as a single construction contract when

Contracts are performed concurrently or in a continuous sequence.

A contract may provide for the construction of an additional asset at the option of the customer or may be amended to
include the construction of an additional asset.

CONSTRUCTION OF THE ADDITIONAL ASSET SHOULD BE TREATED AS A SEPARATE CONSTRUCTION CONTRACT WHEN

• Asset differs significantly in design, technology or function from • Price of the asset is negotiated without regard to the original
the asset or assets covered by the original contract contract price

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Accounting Standard - 7 CONSTRUCTION CONTRACT
DISCLOSURES IN FINANCIAL STATEMENTS
General Specific for contracts in progress
Amount of contract revenue recognised as Amount of advances received
revenue in the period
Methods used to determine the stage of completion of contracts in progress Amount of retentions

• Retentions: are the amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment
of such amounts or until defects have been rectified

An enterprise should present gross amount for contract work Due to customers As an asset

in the financial statements Due from customers As a liability

Particulars Amount
Cost incurred xxx
Plus : Recognized Profit xxx
Plus : Recognized Losses xxx
Less : Progress Billings xxx
Total Amount xxx

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 AS 7.1

AS 7 – CONSTRUCTION CONTRACTS

AS 7
Question Bank
Sr. No. Concept
Section A Section B

1 Provision for foreseeable loss Q.7 Q.3, Q.4, Q.19, Q.20

Computation

• Profit / Loss Q.10 Q.18

• Mix Problems Q.5, Q.12 Q.2, Q.15, Q.16,

4 Extract Profit and Loss Q.1, Q.3, Q.2 Q.9

5 Identification of Single Contract Q.4, Q.6 Q.1, Q.8, Q.10,

6 Revenue Recognition Q.7, Q.12, Q.14

7 Miscellaneous Q.14 Q.13

8 Special Case Q.8, Q.9, Q.11, Q.13, Q.15 Q.5, Q.6, Q.17, Q.21
 AS 7.2

AS 7 – CONSTRUCTION CONTRACTS
AS 7

SECTION A (CONCEPT QUESTIONS)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI EXAMPLE 1
2 ICAI EXAMPLE 2
3 ICAI EXAMPLE 3
4 ICAI EXAMPLE 4
5 ICAI ILLUSTRATION 1
6 QP MAY 19
7 QP MAY 19
8 QP NOV 20
9 JULY 21
10 ICAI P. Q. 13
11 MAY 2022 EXAM
12 MAY 2023 EXAM
13 ICAI ILLUSTRATION 2
14 ICAI ILLUSTRATION 4
15 ICAI P.Q. 11
 AS 7.3

1. ICAI EXAMPLE 1 (THE PERCENTAGE COMPLETION METHOD)

AS 7
X Ltd. commenced a construction contract on 01/04/X1. The fixed contract price agreed was `
2,00,000. The company incurred ` 81,000 in 20X1-X2 for 45% work and received ` 79,000 as
progress payment from the customer. The cost incurred in 20X2-X3 was ` 89,000 to complete the
rest of work. Show the Profit & Loss A/c and Customer A/c for the year 20X1-X2 and 20X2-X3 in
the books of X Ltd.

SOLUTION
Percentage of completion = Cost incurred till date/Estimated total cost
Profit & Loss Account
Year ` 000 Year ` 000
20X1-X2 To Construction Costs (for 81 20X1-X2 By Contract Price 90
45% work) (45% of Contract Price)
To Net profit 9
(for 45% work)
90 90
20X2-X3 To Construction costs 89 20X2-X3 By Contract Price 110
(for 55% work) (55% of Contract Price)
To Net Profit 21
(for 55% work)
110 110
Customer Account
Year ` 000 Year ` 000
20X1- X2 To Contract Price 90 20X1- X2 By Bank 79
By Balance c/d 11
90 90
20X2- X3 To Balance b/d 11 20X2- X3
To Contract Price 110 By Bank 121

121 121
 AS 7.4

2. ICAI EXAMPLE 2
AS 7

X Ltd. commenced a construction contract on 01/04/X1. The contract price agreed was reimbursable
cost plus 20%. The company incurred ` 1,00,000 in 20X1-X2, of which ` 90,000 is reimbursable. The
further non-reimbursable costs to be incurred to complete the contract are estimated at ` 5,000.
The other costs to complete the contract could not be estimated reliably.
Show the extract of Profit & Loss A/c in the books of X Ltd.

SOLUTION
Profit & Loss Account
Particulars ` 000 Particulars ` 000
To Construction Costs 100 By Contract Price 90
To Provision for loss 5 By Net loss 15
105 105

3. ICAI EXAMPLE 3
Show Profit & Loss A/c (Extract) in books of a contractor in respect of the following data.
Particulars ` 000
Contract price (Fixed) 600
Cost incurred to date 390
Estimated cost to complete 260
 AS 7.5

SOLUTION

AS 7
Particulars ` 000
A. Cost incurred to date 390
B. Estimate of cost to completion 260
C. Estimated total cost 650
D. Degree of completion (A/C) 60%
E. Revenue Recognised (60% of 600) 360
Total foreseeable loss (650 – 600) 50
Less: Loss for current year (E – A) (30)
Expected loss to be recognised immediately 20
According AS 7, when it is probable that total contract costs will exceed total contract revenue,
the expected loss should be recognised as an expense immediately.
Profit & Loss A/c
Particulars ` Particulars `
To Construction costs 390 By Contract Price 360
To Provision for loss 20 By Net Loss 50
410 410

4. ICAI EXAMPLE 4
XYZ construction Ltd, a construction company undertakes the construction of an industrial
complex. It has separate proposals raised for each unit to be constructed in the industrial
complex. Since each unit is subject to separate negotiation, he is able to identify the costs and
revenues attributable to each unit. Should XYZ Ltd, treat construction of each unit as a separate
construction contract according to AS 7?

SOLUTION
FACTS:
XYZ Construction Ltd. has separate proposals for each unit followed by each unit being subject to
separate negotiation. They are able to identify the costs and revenue for each unit.
 AS 7.6

REFERENCE:
AS 7

As per AS 7 on ‘Construction Contracts’, when a contract covers a number of assets, the construction of each
asset should be treated as a separate construction contract when:
a) Separate proposals have been submitted for each asset
b) Each asset has been subject to separate negotiation and the contractor and customer have been able
to accept or reject that part of the contract relating to each asset; and
c) The costs and revenues of each asset can be identified.
ANALYSIS:
In light of the facts and reference stated above, the conditions required to treat construction of
each asset as separate contract have been satisfied.
CONCLUSION:
XYZ Ltd. is required to treat construction of each unit as a separate construction contract.

5. ICAI ILLUSTRATION 1
A firm of contractors obtained a contract for construction of bridges across river Revathi. The
following details are available in the records kept for the year ended 31st March, 20X1.
Particulars (` in lakhs)
Total Contract Price 1,000
Work Certified for the cost incurred 500
Work yet not Certified for the cost incurred 105
Estimated further Cost to Completion 495
Progress Payment Received 400
To be Received 140
The firm seeks your advice and assistance in the presentation of accounts keeping in view the
requirements of AS 7 issued by your institute.

SOLUTION
(a) Amount of foreseeable loss (` in lakhs)
Total cost of construction (500 + 105 + 495) 1,100
Less: Total contract price (1,000)
Total foreseeable loss to be recognised as expense 100
 AS 7.7

According AS 7, when it is probable that total contract costs will exceed total contract revenue,

AS 7
the expected loss should be recognised as an expense immediately.
(b) Contract work-in-progress i.e. cost incurred to date are ` 605 lakhs (` in lakhs)

Work certified 500

Work not certified 105

605
Percentage of completion = Cost incurred till date / Estimated total cost
This is 55% (605/1,100 x 100) of total costs of construction.
(c) Proportion of total contract value recognised as revenue: 55% of ` 1,000 lakhs = ` 550 lakhs
(d) Amount due from / to customers:
Particulars Amount (in Lakhs)
Contract Costs 605
Recognised Profits / (Recognised Loss) (100)
(A) 505
Progress payments received + Progress payments to be received
(400 + 140) (B) 540
Amount due to customers (A) – (B) 35
The amount of ` 35 lakhs will be shown in the balance sheet as liability.
(e) The relevant disclosures under AS 7 are given below:
Particulars ` in lakhs
Contract revenue 550
Contract expenses 605
Recognised profits / (Recognised losses) (100)
Progress billings ` (400 + 140) 540
Retentions (billed but not received from contractee) 140
Gross amount due to customers 35

6. QP MAY 19
AP Ltd, a construction contractor, undertakes the construction of commercial complex for Kay
Ltd. AP Ltd. submitted separate proposals for each of 3 units of commercial complex. A single
agreement is entered into between the two parties. The agreement lays down the value of each of
the 3 units, i.e. ` 50 Lakh ` 60 Lakh and ` 75 Lakh respectively. Agreement also lays down the
completion time for each unit Comment, with reference to AS- 7, whether AP Ltd., should treat it
as a single contract or three separate contracts.
 AS 7.8
AS 7

SOLUTION
FACTS:
A single construction agreement has been entered between Kay Ltd. and AP Ltd. The agreement has
values specified for each unit and individual completion time.
REFERENCE:
As per AS 7 on ‘Construction Contracts’, when a contract covers a number of assets, the construction of each
asset should be treated as a separate construction contract when:
a) Separate proposals have been submitted for each asset
b) Each asset has been subject to separate negotiation and the contractor and customer have been able
to accept or reject that part of the contract relating to each asset; and
c) The costs and revenues of each asset can be identified.
ANALYSIS:
In the given case, each unit is submitted as a separate proposal, which can be separately negotiated,
and costs and revenues thereof can be separately identified. For each contract, principles of revenue and
cost recognition have to be applied separately and net income will be determined for each asset as per
AS -7.
CONCLUSION:
Mr. AP Ltd. is required to treat construction of each unit as a separate construction contract

7. QP MAY 19
On 1st December, 2017, GR Construction Co. Ltd. undertook a contract to construct a building for
` 45 lakhs. On 31st March, 2018, the company found that it had already spent ` 32.50 lakhs on
the construction. Additional cost of completion is estimated at ` 15.10 lakhs. What amount should
be charged to revenue in the final accounts for the year ended 31st March, 2018 as per provisions
of AS-7?
 AS 7.9

SOLUTION

AS 7
Particulars ` In Lakhs
Cost of construction incurred till date 32.50
Add: Estimated future cost 15.10
Total estimated cost of construction 47.60
Less: Total contract price (45.00)
Total foreseeable loss to be recognized as expense 2.60
According to of AS 7, when it is probable that total contract costs will exceed total contract
revenue, the expected loss should be recognized as an expense immediately.
Percentage of completion till date to total estimated cost of construction
= Cost incurred till date/Estimated total cost
= (32.50/47.60)x 100 = 68.28%
Proportion of total contract value recognised as revenue for the year ended 31st March, 2018
per AS 7 (Revised)
= Contract price x percentage of completion
= ` 45 lakh x 68.28% = ` 30.73 lakhs

8. QP NOV 20
Rajendra undertook a contract ` 20,00,000 on an arrangement that 80% of the value of work done,
as certified by the architect of the contractee should be paid immediately and that the remaining
20% be retained until the Contract was completed.
In Year 1, the amounts expended were ` 8,60,000, the work was certified for ` 8,00,000 and 80%
of this was paid as agreed. It was estimated that future expenditure to complete the Contract
would be ` 10,00,000.
In Year 2, the amounts expended were ` 4,75,000. Three-fourth of the work under contract was
certified as done by December 31st and 80% of this was received accordingly. It was estimated
that future expenditure to complete the Contract would be ` 4,00,000.
In Year 3, the amounts expended were ` 3,10,000 and on June 30th, the whole Contract was
completed. Show how Contract revenue would be recognized in the P & L A/c of Mr. Rajendra each
year.
 AS 7.10

SOLUTION
AS 7

No Particulars Year 1 Year 2 Year 3

1 Total contract 20,00,000 20,00,000 20,00,000
revenue
2 Cost incurred so far 8,60,000 13,35,000 16,45,000
(475000+860000) (1335000+310000)
3 Cost yet to be 10,00,000 4,00,000 0
incurred
4 Estimated total 18,60,000 17,35,000 16,45,000
cost
5 % Completion 46.24% 76.95% 100%
6 Total revenue to be 9,24,800 15,39,000 20,00,000
recognised (20,00,000x46.24%) (20,00,000x76.95%)
7 Contract revenue to 9,24,800 6,14,200 4,61,000
be recognised for (1539000-924800) (2000000-1539000)
the respected year

9. QP JULY 21
The following data is provided for M/s. Raj Construction Co.
(i) Contract Price - ` 85 lakhs
(ii) Materials issued - ` 21 Lakhs out of which Materials costing ` 4 Lakhs is still lying unused at
the end of the period.
(iii) Labour Expenses for workers engaged at site - ` 16 Lakhs (out of which ` 1 Lakh is still
unpaid)
(iv) Specific Contract Costs - ` 5 Lakhs
(v) Sub-Contract Costs for work executed - ` 7 Lakhs, Advances paid to sub-contractors - ` 4
Lakhs
Further Cost estimated to be incurred to complete the contract - ` 35 Lakhs
You are required to compute the Percentage of Completion, the Contract Revenue and Cost to be
recognized as per AS-7.
 AS 7.11

SOLUTION

AS 7
Computation of contract cost

` Lakh ` Lakh
Material cost incurred on the contract (net of closing stock) 21-4 17
Add: Labour cost incurred on the contract (including outstanding amount) 16
Specified contract cost given 5
Sub-contract cost (advances should not be considered) 7
Cost incurred (till date) 45
Add: further cost to be incurred 35
Total contract cost 80
Percentage of completion = Cost incurred till date/Estimated total cost
= ` 45,00,000/` 80,00,000
= 56.25%
Contract revenue and costs to be recognized
Contract revenue (` 85,00,000x56.25%) = ` 47,81,250
Contract costs = ` 45,00,000

10. ICAI PRCATICAL QUESTION 13

Akar Ltd. Signed on 01/04/X1, a construction contract for ` 1,50,00,000. Following particulars are
extracted in respect of contract, for the year ended 31/03/X2.
- Materials used ` 71,00,000
- Labour charges paid ` 36,00,000
- Hire charges of plant ` 10,00,000
- Other contract cost incurred ` 15,00,000
- Labour charges of ` 2,00,000 are still outstanding on 31.3.X2.
- It is estimated that by spending further ` 33,50,000 the work can be completed in all respect.
You are required to compute profit/loss for the year to be taken to Profit & Loss Account and
any provision for foreseeable loss to be recognized as per AS 7.
 AS 7.12

SOLUTION
AS 7

Statement showing the amount of profit/loss to be taken to Profit and Loss Account and additional
provision for the foreseeable loss as per AS 7
Cost of Construction ` `
Material used 71,00,000
Labour Charges paid 36,00,000
Add: Outstanding on 31.03.20X2 2,00,000 38,00,000
Hire Charges of Plant 10,00,000
Other Contract cost incurred 15,00,000
Cost incurred upto 31.03.20X2 1,34,00,000
Add: Estimated future cost 33,50,000
Total Estimated cost of construction 1,67,50,000
Degree of completion (1,34,00,000/1,67,50,000 x 100) 80%
Revenue recognized (80% of 1,50,00,000) 1,20,00,000
Total foreseeable loss WN: 1 17,50,000
Less: Loss for the current year (1,34,00,000 - 1,20,00,000) 14,00,000
Loss to be provided for 3,50,000
WN:1
Calculation of foreseeable loss `
Total cost of construction 1,67,50,000
Less: Total contract price 1,50,00,000
Total foreseeable loss to be recognised as expense 17,50,000

11. MAY 2022 EXAM

Grace Ltd., a firm of contractors provided the following information in respect of a contract for the
year ended on 31st March, 2022:
Particulars (₹ in ‘000)
Fixed contract price with an escalations clause 35,000
Work certified 17,500
Work not certified (incudes ₹ 26,25,000 for materials issue, out of which material lying 3,815
unused at the end of the period is ₹ 1,40,000)
Estimated further cost to completion 17,325
Progress payment Received 14,000
Payment to be Received 4,900
Escalations in cost is by 8% and accordingly the contract price is increased by 8%
 AS 7.13

From the above information, you are required to:

AS 7
(i) compute the contract revenue to be recognised,
(ii) Calculate profit / loss for the year ended 31st March,2022 and additional provision for the loss
to be made, if any, for the year ended 31st March, 2022.

SOLUTION
i. Computation of Contract revenue to be Recognized:
a. Calculation of total estimated cost of construction
Particulars (₹ in ‘000) (₹ in ‘000)
Cost of Contract incurred till date
Work Certified 17,500
Work not certified (3,815 – 140) 3,675 21,175
Add: Estimated future cost 17,325
Total estimated cost of construction 38,500
Contract Price (35,000 x 1.08) 37,800
b. Stage of completion
Percentage of completion till date to total estimated cost of construction
= [Cost of work completed till date / total estimated cost of the contract] x 100
= [` 21,175,000 / ` 38,500,000] x 100= 55%
c. Revenue to be recognized for the year ended 31stMarch, 2022
Proportion of total contract value recognized as revenue = Contract price x percentage of completion
= ` 37,800,000 x 55% = ` 20,790,000
ii. Loss to be recognized for the year ended 31stMarch, 2022
Particulars (` in 000)
Cost Incurred till date 21,175
Less: Revenue to be recognized (20,790)
Total foreseeable loss to be recognized as expense 385
Provision for loss to be made at the end of 31st March, 2022
Particulars (` in 000)
Total estimated cost of the contract 38,500
Less: Total revised contract price (37,800)
 AS 7.14

700
AS 7

Less: Loss recognized for the year ended 31st March, 2022 (385)
Provision for loss to be made at the end of 31st March, 2022 315

12. MAY 2023 EXAM

Fisher Constructions Co. obtained a contract for constructions of a commercial complex. The
following details are available are available in records of a company for the years ended 31 st
March, 2023:
Particulars Amount in Lakhs
Total Contract price 24000
Work certified 12500
Work not certified 2500
Estimated further cost to completion of work 17500
Progress payment received 11000
Progress payment to be received 3000
Applying the provisions of AS 7, you are required to compute:
(i) Profit/Loss for the year ended 31 March, 2023
(ii) Contract work in progress at the end of financial year 2022-2023
(iii) Revenue to be recognized out of the total contract value
(iv) Amount due from/ to customers as at the year end

SOLUTION
(` in lakhs)
i) Profit or Loss for the year ended 31.03.2023 32,500
Total cost of construction (12,500 + 2,500 + 17,500) (24,000)
Less: Total contract price 8500
Total foreseeable loss to be recognized as expense
According AS 7, when it is probable that total contract costs will exceed total contract revenue;
the expected loss should be recognized as an expense immediately.
 AS 7.15

(` in lakhs)

AS 7
ii) Contract work-in-progress i.e. cost incurred to date are ` 15,000 lakhs
Work certified 12,500
Work not certified 2500
Contract work in progress at the end of 2022-23 15,000
(` in lakhs)
iii) Proportion of total contract value recognized as revenue:
For this, cost incurred till 31.03.2023 is 46.154% (15,000/32,500 X 100) to
total costs of construction.
Therefore, Proportion of total contract value recognized as revenue is
46.154% of ` 24,000 lakhs ` 11,076.96 Lakhs
Or 46.15% (Approx.) of ` 24,000 lakhs ` 11,076 lakhs
(` in lakhs)
iv) Amount due from/ to customers
(Contract costs + Recognised profits – Recognised Losses)
– (Progress payments received + Progress payments to be received)
= (15,000 + Nil – 8,500) – (11,000 + 3,000) ` in lakhs
= [6,500 – 14,000] ` in lakhs
Amount due to customers = ` 7,500 lakhs

13. ICAI – ILLUSTRATION 2

AB contactors enters into a contract on 1st January 20X1 with XY to construct a 5- storied building.
Under the contract, AB is required to complete the construction in 3 years (i.e., by 31st December
20X3). The following information is relevant:
Fixed price (agreed) ₹5 crore
Material cost escalation (to the extent of 20% of increase in material cost) Labour cost escalation
(up to 30% of increase in minimum wages)
In case AB is able to complete the construction in less than 2 years and 10 months, it will be
entitled for an additional incentive of ₹50 lakh. However, in case the construction is delayed
beyond 3 years and 2 months, XY will charge a penalty of
₹20 lakh. At the start of the contract, AB has a reason to believe that construction will be
completed in 2 years and 8 months. Assume that the construction was actually completed in 2
years 9 months.
Labour cost was originally estimated to be ₹1.20 crore (based on initial minimum wages).
However, the costs have increased by 25% during the construction period.
 AS 7.16

Material costs have increased by 40% due to short-supply. The total increase in material cost due
AS 7

to the 40% escalation is ₹80 lakh.

You are required to suggest what should be the contract revenue in above case?
Assume that in year 20X2, XY has requested AB to increase the scope of the contract. An
additional floor is required to be constructed and there is an increase in contract fee by ₹1 crore.
AB has incurred a cost of ₹20 lakh for getting the local authority approvals which it will be
entitled to claim from XY in addition to the increase in the fixed fee.
Also measure the total contract revenue in this case.

SOLUTION
Total Revenue after considering the escalation costs, claims and incentives:
`Fixed Price: 5.00 crore
Incentive for early completion 0.50 crore
Material costs recovery (to the extent of 20%) 0.40 crore
Labour costs recovery (Actual increase is less than 30%) 0.30 crore
[1.20 crore x 25%]
Total Contract Revenue 6.20 crore
Add: Variation to the contract 1.00 crore
Add: Claims recoverable from XY 0.20 crore
Total Contract Revenue 7.40 crore

14. ICAI – ILLUSTRATION 4

PQ & Associates undertakes a construction contract the details of which are provided below:
Total Contract Value ₹40 lakh
Costs incurred to date ₹3 lakh
Estimated future costs of completion ₹30 lakh
Work completed 10%
The work has started some time ago and there is an uncertainty with respect to the outcome of
the contract due to expected changes in regulations. PQ is certain that it would be able to
recover the costs incurred to date.
 AS 7.17

AS 7
SOLUTION
In the given case, revenue and costs can only be recognised to the extent of the costs incurred
and those which are expected to be recovered. Therefore, the profit & loss statement would
appear as under:
Contract Revenue ₹3 lakh
Contract Costs ₹3 lakh
Contract Profit Nil
When the uncertainties that prevented the outcome of the contract being estimated reliably
cease to exist, revenue and expenses associated with the construction contract should be
recognised by the percentage completion method.

15. ICAI – P.Q.11

RT Enterprises has entered into a fixed price contract for construction of a tower with its customer.
Initial tender price agreed is ` 220 crore. At the start of the contract, it is estimated that total
costs to be incurred will be ` 200 crore. At the end of year 1, this estimate stands revised to ` 202
crore. Assume that the construction is expected to be completed in 3 years.
During year 2, the customer has requested for a variation in the contract. As a result of that, the
total contract value will increase by ` 5 crore and the costs will increase by ` 3 crore.
RT has decided to measure the stage of completion on the basis of the proportion of contract
costs incurred to the total estimated contract costs. Contract costs incurred at the end of each
year is:
Year 1: ` 52.52 crore
Year 2: ` 154.20 crore (including unused material of 2.5 crore)
Year 3: ` 205 crore.
You are required to calculate:
(a)Stage of completion for each year.
(b)Profit to be recognised for each year.
 AS 7.18
AS 7

SOLUTION
a) Stage of completion = Costs incurred to date / Total estimated costs
Year 1: 52.52 crore / 202 crore = 26%
Year 2: (154.20 crore – 2.50 crore) / 205 crore = 74%
Year 3: 205 crore / 205 crore = 100%
b) Profit for the year
Year 1 Year 2 Year 3
Contract Revenue 57.20 crore 109.30 crore 58.50 crore
(1)
(220 crore x 26%) (225 crore x 74% - (225 crore x 100% -
57.20 crore) 109.30 crore –
57.20 crore)
Contract Cost (2) 52.52 crore 99.18 crore 53.30 crore

(202 crore x 26%) (205 crore x 74% - (205 crore x 100% -

52.52 crore) 99.18 crore – 52.52
crore)
Contract Profit (1) 4.68 crore 10.12 crore 5.20 crore
– (2)
AS 7.19

AS 7
 AS 7.1

AS 7 – CONSTRUCTION CONTRACTS
AS 7

SECTION B (EXAM ORIENTED)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
ICAI MOCK TEST PAPER 1
1 (Q NO 1 (A)), IPCC RTP
NOV 2016 Q18B
ICAI CA INTER MAY 2018
(Q NO 1 (A)), QP MAY
2
2018, MTP MARCH 2022
TEST SERIES 1
ICAI ILLUSTRATION 2,
3
IPCC RTP NOV 2017 Q19B
4 RTP NOV 19
RTP MAY 20 / ICAI
5
PRACTICAL Q 9
6 RTP NOV 20
7 RTP MAY 21
8 RTP MAY 21
9 IPCC RTP MAY 2016 Q19B
RTP MAY 2019 Q 14, IPCC
10
RTP MAY 2019
11 IPCC RTP NOV 2015 Q19B
12 IPCC RTP MAY 2017 Q19A
13 RTP NOV 21
14 RTP NOV 21
15 MTP OCT 21 SERIES 1
16 MTP OCT 21 SERIES 2
17 RTP MAY 22
MTP APRIL 2022 TEST
18
SERIES 2
19 RTP NOV 22
20 MTP SEP 22 (SERIES 1)
21 MTP OCT 22 (SERIES 2)
 AS 7.2

1. ICAI MOCK TEST PAPER 1 (Q NO 1 (A)), IPCC RTP NOV 2016 Q18B

AS 7
X Ltd. negotiates with Bharat Petroleum Corporation Ltd (BPCL), for construction of “Franchise
Retail Petrol Outlet Stations”. Based on proposals submitted to different “Zonal offices of BPCL, the
final approval for one outlet each in Zone A, Zone B, Zone C, Zone D, is awarded to X Ltd.
Agreement (in single document) is entered into with BPCL for ` 490 lakhs. The agreement lays
down values for each of the four outlets (` 88 + 132 + 160 + 110 lakhs) in addition to individual
completion time. Examine and Decide whether X Ltd., will treat it as a single contract or four
separate contracts.

SOLUTION
FACTS:
The construction agreement of X ltd. with BPCL is a single document for 4 zones. The agreement has values
specified for each outlet and individual completion time.
REFERENCE:
As per AS 7 on ‘Construction Contracts’, when a contract covers a number of assets, the construction of each
asset should be treated as a separate construction contract when:
a) Separate proposals have been submitted for each asset
b) Each asset has been subject to separate negotiation and the contractor and customer have been able
to accept or reject that part of the contract relating to each asset; and
c) The costs and revenues of each asset can be identified.
ANALYSIS:
In the given case, each outlet is submitted as a separate proposal to different Zonal Office, which can be
separately negotiated, and costs and revenues thereof can be separately identified. Therefore, four separate
contract accounts have to be recorded and maintained in the books of X Ltd. For each contract, principles
of revenue and cost recognition have to be applied separately and net income will be determined for each
asset as per AS -7.
CONCLUSION:
Each asset will be treated as a “single contract” even if there is one document of contract.

2. ICAI CA INTER MAY 2018 (Q NO 1 (A)), QP MAY 2018, MTP MARCH 2022 TEST SERIES 1
Sarita Construction Co. obtained a contract for construction of a dam. The following details are
available in records of company for the year ended 31st March, 2018:
 AS 7.3

Particulars ` In Lakhs
AS 7

Total Contract Price 12,000

Work Certified 6,250
Work not certified 1,250
Estimated further cost to completion 8,750
Progress payment received 5,500
Progress payment to be received 1,500
Applying the provisions of Accounting Standard 7 "Accounting for Construction Contracts" you
are required to compute:
(i) Profit/Loss for the year ended 31st March, 2018.
(ii)Contract work in progress as at end of financial year 2017-18.
(iii) Revenue to be recognized out of the total contract value.
(iv) Amount due from/to customers as at the year end.

SOLUTION
(i) Loss for the year ended, 31st March, 2018 (` in lakhs)
Amount of foreseeable loss
Total cost of construction (6,250 + 1,250 + 8,750) 16,250
Less: Total contract price (12,000)
Total foreseeable loss to be recognised as expense 4,250
According to AS 7, when it is probable that total contract costs will exceed total contract revenue,
the expected loss should be recognised as an expense immediately.
Loss for the year ended, 31st March, 2018 amounting ` 4,250 will be recognized.
(ii) Contract work-in-progress as on 31.3.18 (` in lakhs)
Contract work-in-progress i.e. cost incurred to date are ` 7,500 lakhs:
Work certified 6,250
Work not certified 1,250
7,500
 AS 7.4

(iii) Proportion of total contract value recognised as revenue

AS 7
Cost incurred till 31.3.18 is 46.15% (7,500/16,250 x 100) of total costs of construction.
Proportion of total contract value recognised as revenue: 46.15% of ` 12,000 lakhs = ` 5,538 lakhs
(iv) Amount due from/to customers at year end
Particulars Amount (in Lakhs)
Contract Costs 7,500
Recognised Profits / (Recognised Loss) (4,250)
(A) 3,250
Progress payments received + Progress payments to be received 7000
(5,500 + 1,500) (B)
Amount due to customers (A) – (B) 3,750

3. ICAI ILLUSTRATION 2, IPCC RTP NOV 2017 Q19B

On 1st December, 20X1, Vishwakarma Construction Co. Ltd. undertook a contract to construct a
building for ` 85 lakhs. On 31st March, 20X2, the company found that it had already spent `
64,99,000 on the construction. Prudent estimate of additional cost for completion was ` 32,01,000.
What amount should be recognized in the statement of profit and loss for the year ended 31st
March, 20X2 as per provisions of Accounting Standard 7 (Revised)?

SOLUTION
Particulars `
Cost incurred till 31st March, 20X2 64,99,000
Prudent estimate of additional cost for completion 32,01,000
Total cost of construction 97,00,000
Less: Contract price (85,00,000)
Total foreseeable loss 12,00,000
According AS 7, when it is probable that total contract costs will exceed total contract revenue,
the expected loss should be recognised as an expense immediately.
The amount of ` 12,00,000 is required to be recognised as an expense.
Percentage of completion = Cost incurred till date/Estimated total cost
 AS 7.5

Contract work in progress = (Rs.64,99,000 x 100) / 97,000 = = 67%

AS 7

Proportion of total contract value recognised as turnover = 67% of ` 85,00,000 = ` 56,95,000.

4. RTP NOV 19
On 1st December, 2018, “Sampath” Construction Company Limited undertook a contract to
construct a building for ` 108 lakhs. On 31st March, 2019 the company found that it had already
spent ` 83.99 lakhs on the construction. A prudent estimate of additional cost for completion
was ` 36.01 lakhs.
You are required to compute the amount of provision for foreseeable loss, which must be made in
the Final Accounts for the year ended 31st March, 2019 based on AS 7 “Accounting for Construction
Contracts.”

SOLUTION
Particulars ` In Lakhs
Cost of construction incurred till date 83.99
Add: Estimated future cost 36.01
Total estimated cost of construction 120.00
Less: Total contract price (108.00)
Total foreseeable loss to be recognized as expense 12.00
According to AS 7 “Construction Contracts”, when it is probable that total contract costs will exceed
total contract revenue; the expected loss should be recognized as an expense immediately.
Therefore, amount of `12 lakhs is required to be provided for in the books of Sampath Construction
Company for the year ended 31st March, 2019.

5. RTP MAY 20 / ICAI PRACTICAL Q 9

A construction contractor has a fixed price contract for ` 9,000 lacs to build a bridge in 3 years’
time frame. A summary of some of the financial data is as under:
 AS 7.6

Particulars (Amount ` in lacs)

AS 7
Year 1 Year 2 Year 3
Initial Amount for revenue agreed in contract 9,000 9,000 9,000
Variation in Revenue (+) - 200 200
Contracts costs incurred up to the reporting date 2,093 6,168* 8,100**
Estimated profit for whole contract 950 1,000 1,000
*Includes ` 100 lacs for standard materials stored at the site to be used in year 3 to complete
the work.
**Excludes ` 100 lacs for standard material brought forward from year 2. The variation in cost
and revenue in year 2 has been approved by customer.
Compute year wise amount of revenue, expenses, contract cost to complete and profit or loss to
be recognized in the Statement of Profit and Loss as per AS-7 (revised).

SOLUTION
The amounts of revenue, expenses and profit recognized in the statement of profit and loss in
three years are computed below:
No Particulars Year 1 Year 2 Year 3
1 Total contract revenue 9,000 9,000 9,000
2 2,093 6,068 8,200
Cost incurred so far
(8,050 x 26%) (8,200 x 74%) (8,200 x 100%)
3 Estimated total cost 8,200 8,200 8,200
4 % Completion 26% 74% 100%
5 2,340 6,808 9,200
Total revenue to be recognised
(9,000 x 26%) (9,200 x 74%) (9,200 x 100%)
6 Contract revenue to be 2,340 4,468 2,392
recognised for the respected (6,808-2,340) (9,200-6,808)
year
7 2,093 3,975 2,132
Cost for the respective year
(6,068–2,093) (8,200-6068)
8 Profit to be recognised (6-7) 247 493 260
Disclosures –
 AS 7.7

Working Note:
AS 7

Year 1 Year 2 Year 3

Revenue after considering variations 9,000 9,200 9,200
Less: Estimated profit for whole contract 950 1,000 1,000
Estimated total cost of the contract (A) 8,050 8,200 8,200
Actual cost incurred upto the reporting date (B) 2,093 6,068 8,200
(6,168-100) (8,100+100)
Degree of completion (B/A) 26% 74% 100%

6. RTP NOV 20
Uday Constructions undertake to construct a bridge for the Government of Uttar Pradesh. The
construction commenced during the financial year ending 31.03.2019 and is likely to be
completed by the next financial year. The contract is for a fixed price of ` 12 crore with an
escalation clause. You are given the following information for the year ended 31.03.2019:
Cost incurred upto 31.03.2019 ` 4 crore
Further cost estimated to complete the contract ` 6 crore
Escalation in cost was by 5%. Hence, the contract price is also increased by 5%.
You are required to ascertain the stage of completion and compute the amount of revenue and
profit to be recognized for the year as per AS 7.

SOLUTION
a. Calculation of Cost and Contract price:
Particulars ` In Lakhs
Cost of construction of bridge incurred upto 31.3.2019 4.00
Add: Estimated future cost 6.00
Total estimated cost of construction 10.00
Contract Price (12 x 1.05) 12.60
b. Percentage of completion till date to total estimated cost of construction
= Cost incurred till date/Estimated total cost
= (4/10)X100 = 40%
 AS 7.8

c. Proportion of total contract value recognised as revenue for the year ended 31st March,

AS 7
2019 per AS 7 (Revised)
= Contract price x percentage of completion

= ` 12.60 crore x 40% = ` 5.04 crore

d. Profit for the year ended 31st March, 2019 = ` 5.04 crore – ` 4 crore
= 1.04 crore.

7. RTP MAY 21
Sky Limited belongs to Heavy Engineering Contractors specializing in construction of Flyovers. The
company just entered into a contract with a local municipal corporation for building a flyover. No
activity has started on this contract.
As per the terms of the contract, Sky Limited will receive an additional ` 50 lakhs if the
construction of the flyover were to be finished within a period of two years from the
commencement of the contract. The accountant of the entity wants to recognize this revenue
since in the past the company has been able to meet similar targets very easily. Give your opinion
on this treatment.

SOLUTION
FACTS:
Sky Ltd has not started any activity as per the contract. The incentive will be received only if the
construction is finished within 2years from the commencement of the contract.
REFERENCE:
According to AS 7 ‘Construction Contracts’, incentive payments are additional amounts payable
to the contractor if specified performance standards are met or exceeded. Incentive payments
are included in contract revenue when both the conditions are met:
i. The contract is sufficiently advanced that it is probable that the specified performance
standards will be met or exceeded; and
ii. The amount of the incentive payment can be measured reliably.
ANALYSIS:
In the given problem, the contract has not even begun and hence the contractor (Sky Limited)
should not recognize any revenue of this contract.
 AS 7.9

CONCLUSION:
AS 7

The accountant’s contention for recognizing ` 50 lakhs as revenue is not correct.

8. RTP MAY 21
ABC Ltd., a construction contractor, undertakes the construction of commercial complex for XYZ
Ltd. ABC Ltd. submitted separate proposals for each of 3 units of commercial complex. A single
agreement is entered into between the two parties. The agreement lays down the value of each
of the 3 units i.e. ` 50 lakh, ` 60 lakh and ` 75 lakh respectively. Agreement also lays down the
completion time for each unit.
Comment, with reference to AS 7, whether ABC Ltd., should treat it as a single contract or three
separate contracts.

SOLUTION
FACTS:
A single construction agreement has been entered between XYZ Ltd. and ABC Ltd. The agreement
has values specified for each unit and individual completion time.
REFERENCE:
As per AS 7 on ‘Construction Contracts’, when a contract covers a number of assets, the construction of each
asset should be treated as a separate construction contract when:
a) Separate proposals have been submitted for each asset
b) Each asset has been subject to separate negotiation and the contractor and customer have been able
to accept or reject that part of the contract relating to each asset; and
c) The costs and revenues of each asset can be identified.
ANALYSIS:
ABC Ltd. has submitted separate proposals for each of the 3 units of commercial complex. The
revenue and completion time has been laid down for each unit separately which implies separate
negotiation for them.
CONCLUSION:
ABC Ltd. is required to treat construction of each unit as a separate construction contract as the
above-mentioned conditions of AS 7 are fulfilled.
 AS 7.10

9. IPCC RTP MAY 2016 Q19B

AS 7
Five Star Construction Limited commenced a construction contract on 1st April, 2014. The fixed
contract price agreed was Rs.50,00,000. The company incurred Rs.21,00,000 in 2014-15 for 40%
work and received Rs.19,00,000 as progress payment from the customer. The company estimated
that a further Rs.31,50,000 would be incurred to complete it. What amount should be charged to
revenue for the year 2014-15 as per AS 7? Show the extract of Profit & Loss A/c and Customer
A/c for the year 2014-15 in the books of the company.

SOLUTION
(a) Amount of foreseeable loss `
Total cost of construction (21,00,000 + 31,50,000) 52,50,0000
Less: Total contract price (50,00,000)
Total foreseeable loss to be recognised as expense 2,50,0000

According AS 7, when it is probable that total contract costs will exceed total contract revenue, the expected
loss should be recognised as an expense immediately.
Percentage of completion = 40% (Given)
(a) Proportion of total contract value recognised as revenue: 40% of ` 50,00,0000 = ` 20,00,000
(b) Calculation for 2014-15 on 40% work:
Particulars `
Contract revenue 20,00,000
Contract expenses 21,00,000
Recognised profits / (Recognised losses) (1,00,000)
Total expected loss recognized as per AS 7 2,50,000

Further provision required in respect of Expected Loss 1,50,000

(2,50,000 -1,00,000)
 AS 7.11

In the Books of Five Star Construction Limited

AS 7

Profit & Loss A/c (Extract for the year ended 31st March 2015)
Particulars Amount Particulars Amount
To Construction Costs 21,00,000 By Contract Revenue 20,00,000
(for 40% work)
To Provision for Loss 1,50,000 By Net Loss 2,50,000
22,50,000 22,50,000
Customer A/c
Particulars Amount Particulars Amount
To Contract Revenue 20,00,000 By Bank 19,00,000
By Balance c/d 1.00.000
20,00,000 20,00,000

10. RTP MAY 2019 Q 14, IPCC RTP MAY 2019

GTI Ltd. negotiates with Bharat Oil Corporation Ltd. (BOCL), for construction of “Retail Petrol &
Diesel Outlet Stations”. Based on proposals submitted to different Regional Offices of BOCL, the
final approval for one outlet each in Region X, Region Y, Region Z is awarded to GTI Ltd. A single
agreement is entered into between two. The agreement lays down values for each of the three
outlets i.e. ` 102 lacs, ` 150 lacs, ` 130 lacs for Region X, Region Y, Region Z respectively. Agreement
also lays down completion time for each Region.
Comment whether GTI Ltd. will treat it as single contract or three separate contracts with
reference to AS-7?

SOLUTION
FACTS:
A single construction agreement has been entered between GTI Ltd. and BOCL. The agreement has
values specified for each outlets and individual completion time.
REFERENCE:
As per AS 7 on ‘Construction Contracts’, when a contract covers a number of assets, the construction of each
asset should be treated as a separate construction contract when:
 AS 7.12

a) Separate proposals have been submitted for each asset

AS 7
b) Each asset has been subject to separate negotiation and the contractor and customer have been able
to accept or reject that part of the contract relating to each asset; and
c) The costs and revenues of each asset can be identified.
ANALYSIS:
In the given case, each outlet is submitted as a separate proposal to different Zonal Offices, which
can be separately negotiated, and costs and revenues thereof can be separately identified.
CONCLUSION:
Each asset will be treated as a “single contract” even if there is one single agreement for
contracts. Therefore, three separate contract accounts must be recorded and maintained in the
books of GTI Ltd. For each contract, principles of revenue and cost recognition must be applied
separately and net income will be determined for each asset as per AS 7.

11. IPCC RTP NOV 2015 Q19B

A contractor entered into a contract for building roads for ` 2 crores. After completing 60% of
the contract he came to know that the cost of completing the contract would be ` 2.40 crores.
The accountant transferred ` 0.24 crores i.e., 60% of total loss of ` 0.40 crores to Profit and
Loss account in the current year. You are required to give your opinion in line with AS 7.

SOLUTION
FACTS:
60% of the contract is completed and cost of completion as has been revised to 2.4 crores.
Accountant has transferred ` 0.24 crores i.e., 60% of total loss of ` 0.40 crores to Profit and Loss
account.
REFERENCE:
As per AS 7, when it is probable that total contract costs will exceed total contract revenue, the
expected loss should be recognized as an expense immediately irrespective of the stage of
completion.
ANALYSIS:
In the given case the revenue that can be recognized for the contract i.e., ` 2 crore and the
expected expense on the contract is ` 2.4 cores. 60% of the contract has been completed.
 AS 7.13

CONCLUSION:
AS 7

As per AS 7 whole amount of expected loss i.e., ` 0.40 crores should be recognized as an expense
immediately irrespective of the stage of completion of the contract. Therefore, the action of
accountant of transferring only ` 0.24 crores to the profit & loss a/c is wrong. He must transfer
whole ` 0.40 crore to profit & loss a/c as an expense.

12. IPCC RTP MAY 2017 Q19A

Mr. ‘Mehta’ as a contractor has just entered into a contract with a local municipal body for
building a flyover. As per the contract terms, Mr. ‘Mehta’’ will receive an additional ` 2 crore if
the construction of the flyover were to be finished within a period of two years of the
commencement of the contract. Mr. ‘Mehta’ wants to recognize this revenue since in the past he
has been able to meet similar targets very easily. Is Mr. ‘Mehta’ correct in his proposal? Discuss.

SOLUTION
FACTS:
Mr. Mehta has not started any activity as per the contract. The incentive will be received only if
the construction is finished within 2 years from the commencement of the contract.
REFERENCE:
According to AS 7 ‘Construction Contracts’, incentive payments are additional amounts payable
to the contractor if specified performance standards are met or exceeded. Incentive payments
are included in contract revenue when both the conditions are met:
i. The contract is sufficiently advanced that it is probable that the specified performance
standards will be met or exceeded; and
ii. The amount of the incentive payment can be measured reliably.
ANALYSIS:
In the given problem, the contract has not even begun and hence the contractor (Mr. Mehta)
should not recognize any revenue of this contract.
CONCLUSION:
Mr. Mehta’s contention for recognizing the revenue is not correct.
 AS 7.14

13. RTP NOV 21

AS 7
In the case of a fixed price contract, the outcome of a construction contract can be estimated
reliably only when certain conditions prescribed under AS 7 are satisfied. You are required to
describe these conditions mentioned in the standard.

SOLUTION
In the case of a fixed price contract, the outcome of a construction contract can be estimated
reliably when all the following conditions are satisfied:
(i) total contract revenue can be measured reliably;
(ii) it is probable that the economic benefits associated with the contract will flow to the
enterprise;
(iii) both the contract costs to complete the contract and the stage of contract completion at the
reporting date can be measured reliably; and
(iv) the contract costs attributable to the contract can be clearly identified and measured reliably
so that actual contract costs incurred can be compared with prior estimates.

14. RTP NOV 21

Mr. ‘X’ as a contractor has just entered into a contract with a local municipal body for building a
flyover. As per the contract terms, ‘X’ will receive an additional ` 2 crore if the construction of the
flyover were to be finished within a period of two years of the commencement of the contract. Mr.
X wants to recognize this revenue since in the past he has been able to meet similar targets very
easily. Is X correct in his proposal? Discuss.
 AS 7.15

SOLUTION
AS 7

FACTS:
Mr. X has not started any activity as per the contract. The incentive will be received only if the
construction is finished within 2years from the commencement of the contract.
REFERENCE:
According to AS 7 ‘Construction Contracts’, incentive payments are additional amounts payable
to the contractor if specified performance standards are met or exceeded. Incentive payments
are included in contract revenue when both the conditions are met:
i. The contract is sufficiently advanced that it is probable that the specified performance
standards will be met or exceeded; and
ii. The amount of the incentive payment can be measured reliably.
ANALYSIS:
In the given problem, the contract has not even begun and hence the contractor (Mr. X) should
not recognize any revenue of this contract.
CONCLUSION:
Mr. X contention for recognizing additional ` 2 crore as revenue is not correct.

15. MOCK TEST OCT 21 SERIES 1

PRZ & Sons Ltd. are Heavy Engineering contractors specializing in construction of dams. From the
records of the company, the following data is available pertaining to year ended 31st March, 2021:
(` crore)
Total Contract Price 2,400
Work Certified 1,250
Work pending certification 250
Estimated further cost to completion 1,750
Stage wise payments received 1,100
Progress payments in pipe line 300
Using the given data and applying the relevant Accounting Standard you are required to:
(i) Compute the amount of profit/loss for the year ended 31st March, 2021.
(ii) Arrive at the contract work in progress as at the end of financial year 2020-21.
(iii) Determine the amount of revenue to be recognized out of the total contract value.
(iv) Work out the amount due from/to customers as at year end.
 AS 7.16

AS 7
SOLUTION
(i) Calculation of profit / loss for the year ended 31st March, 2021 (` in crores)
Total estimated cost of construction (1,250 + 250 + 1,750) 3,250
Less: Total contract price (2,400)
Total foreseeable loss to be recognized as expense 850
According to AS 7 (Revised 2002) “Construction Contracts”, when it is probable that total contract
costs will exceed total contract revenue, the expected loss should be recognized as an expense
immediately.
(ii) Contract work-in-progress i.e. cost incurred to date (` in crores)
Work certified 1,250
Work not certified 250
1,500
(iii) Proportion of total contract value recognised as revenue
Percentage of completion of contract to total estimated cost of construction
= (1,500 / 3,250)x100 = 46.15%
Revenue to be recognized till date = 46.15% of ` 2,400 crores = ` 1,107.60 crores.
(iv) Amount due from / to customers:
Particulars Amount (in Crores)
Contract Costs 1500
Recognised Profits / (Recognised Loss) (850)
(A) 650
Progress payments received + Progress payments to be received 1400
(1100 + 300) (B)
Amount due to customers (A) – (B) 750
The amount of ` 750 Crores will be shown in the balance sheet as liability.
 AS 7.17

16. MOCK TEST OCT 21 SERIES 2

AS 7

A contractor firm obtained a contract for construction of bridge. The following details are available
in the records kept for the year ended March 31, 2021:
(` in Crore)
Total Contract Price 500
Work Certified 250
Work not Certified 80
Estimated further Cost to Completion 220
Progress Payment Received 200
Payment to be Received 70
You are required to calculate :
(i) The amount of revenue to be recognized.
(ii) The amount of profit or loss to be recognized.
(iii) The amount due from/ to customers.
Also present relevant disclosures as per AS-7 (Revised).

SOLUTION
Proportion of total contract value recognized as revenue
Percentage of completion of contract to total estimated cost of construction
= [(250 + 80) / (250 +80 + 220)]x100 = 60%
Revenue to be recognized till date = 60% of ` 500 crore = ` 300 crore.
(ii) Calculation of profit/ loss for the year ended 31st March, 2021 (` in crore)
Total estimated cost of construction
Work certified 250
Work not certified 80
Estimated further cost to completion 220 550
Less: Total contract price (500)
Total foreseeable loss to be recognized as expense 50
According to AS 7 “Construction Contracts”, when it is probable that total contract costs will exceed
 AS 7.18

total contract revenue, the expected loss should be recognized as an expense immediately.

AS 7
(iii) Amount due from / to customers:
Particulars Amount (in Crores)
Contract Costs (250 + 80) 330
Recognised Profits / (Recognised Loss) (50)
(A) 280
Progress payments received + Progress payments to be received 270
(200 + 70) (B)
Amount due from customers (A) – (B) 10
The amount of ` 10 Crores will be shown in the balance sheet as an asset
(iv) The relevant disclosures under AS 7 (Revised) are given below:
` in crores
Contract revenue till 31st March, 2021 300
Contract expenses till 31st March, 2021 330
Recognized losses for the year 31st March, 2021 50
Progress billings ` (200+ 70) 270
Progress (billed but not received from contractee) 70
Gross amount due from customers 10

17. RTP MAY 22

B Ltd. undertook a construction contract for ` 50 crores in April, 2020. The cost of construction was
initially estimated at ` 35 crores. The contract is to be completed in 3 years. While executing the
contract, the company estimated that the cost of completion of the contract would be ` 53 crores.
Can the company provide for the expected loss in the financial Statements for the year ended 31st
March, 2021? Explain.

SOLUTION
FACTS:
The cost of completion has increased to 53 Crores and contract revenue is 50 crore.
 AS 7.19

REFERENCE:
AS 7

As per AS 7 “Construction Contracts”, when it is probable that total contract costs will exceed
total contract revenue, the expected loss should be recognized as an expense immediately.
The amount of loss is determined irrespective of
i) Whether or not work has commenced on the contract;
ii) Stage of completion of contract activity; or
iii) The amount of profits expected to arise on other contracts which are not treated as a single
construction contract in accordance provisions of AS 7.
ANALYSIS:
As the cost of execution of contract is exceeding the revenue, the foreseeable loss of ` 3 crores (`
53 crores - ` 50 crores) should be recognized as an expense immediately in the year ended 31st
March, 2021.
CONCLUSION:
B Ltd should recognise 3 crore as an expense in year ended 31st March, 2021

18. MTP APRIL 2022 TEST SERIES 2

Bricks Ltd. signed on 01/04/21, a construction contract for ` 1,50,00,000. Following particulars are
extracted in respect of contract, for the period ending 31/03/22:
• Materials issued ` 75,00,000
• Labour charges paid ` 36,00,000
• Hire charges of plant ` 10,00,000
• Other contract cost incurred ` 15,00,000
• Out of material issued, material lying unused at the end of period is ` 4,00,000
• Labour charges of ` 2,00,000 are still outstanding on 31.3.22.
• It is estimated that by spending further ` 33,50,000 (including material unused ` 4,00,000),
the work can be completed in all respect.
You are required to compute profit/loss to be taken to Profit & Loss Account and additional
provision for foreseeable loss as per AS 7.
 AS 7.20

SOLUTION

AS 7
Statement showing the amount of profit/loss to be taken to Profit and Loss Account and additional provision for
the foreseeable loss as per AS 7
Cost of Construction ` `
Material Issued 75,00,000
Less: Unused Material at the end of period 4,00,000 71,00,000
Labour Charges paid 36,00,000
Add: Outstanding on 31.03.2022 2,00,000 38,00,000
Hire Charges of Plant 10,00,000
Other Contract cost incurred 15,00,000
Cost incurred upto 31.03.2022 1,34,00,000
Add: Estimated future cost 33,50,000
Total Estimated cost of construction 1,67,50,000
Degree of completion (1,34,00,000/1,67,50,000 x 100) 80%
Revenue recognized (80% of 1,50,00,000) 1,20,00,000
Total foreseeable loss (1,67,50,000 - 1,50,00,000) 17,50,000
Less: Loss for the current year (1,34,00,000 - 1,20,00,000) 14,00,000
Loss to be provided for 3,50,000
WN:1
Calculation of foreseeable loss `
Total cost of construction 1,67,50,000
Less: Total contract price 1,50,00,000
Total foreseeable loss to be recognised as expense 17,50,000

19. RTP NOV 22

On 1st December, 2020, “Sampath” Construction Limited undertook a contract to construct a
building for ` 108 lakhs. On 31st March, 2021 the company found that it had already spent `
83.99 lakhs on the construction. A prudent estimate of additional cost for completion was ` 36.01
lakhs.
You are required to compute the amount of provision for foreseeable loss, which must be made in
the Final Accounts for the year ended 31st March, 2021 based on AS 7 “Accounting for Construction
Contracts.”
 AS 7.21
AS 7

SOLUTION
Calculation of foreseeable loss for the year ended 31st March, 2021
(as per AS 7 “Construction Contracts”)
(` in lakhs)
Cost incurred till 31st March, 2021 83.99
Prudent estimate of additional cost for completion 36.01
Total cost of construction 120.00
Less: Contract price (108.00)
Foreseeable loss 12.00

According to AS 7 (Revised 2002) “Construction Contracts”, when it is probable that total contract
costs will exceed total contract revenue; the expected loss should be recognized as an expense
immediately. Therefore, amount of `12 lakhs is required to be provided for in the books of Sampath
Construction Ltd. for the year ended 31st March, 2021.

20. MTP SEP 22 (SERIES 1)

On 1st December, 2019, Mahindra Construction Co. Ltd. undertook a contract to construct a building
for ` 170 lakhs. On 31st March, 2020, the company found that it had already spent ` 1,29,98,000
on the construction. Prudent estimate of additional cost for completion was ` 64,02,000. Calculate
total estimated loss on contract and what should be shown in statement of profit and loss account
as contract revenue and contract cost in the final accounts for the year ended 31 st March, 2020,
as per provision of Accounting Standard 7 (Revised).
 AS 7.22

SOLUTION

AS 7
a. Calculation of foreseeable loss:
Particulars `
Cost incurred till 31st March, 2020 129,98,000
Prudent estimate of additional cost for completion 64,02,000
Total cost of construction 194,00,000
Less: Contract price (170,00,000)
Total foreseeable loss 24,00,000

As per AS 7 Construction Contracts, when it is probable that total contract costs will exceed total
contract revenue, the expected loss should be recognized as an expense immediately. Hence the
foreseeable loss of ` 24,00,000 should be recognized as an expense immediately in the year ended
31st March 2020.
b. Percentage of completion = Cost incurred till date/Estimated total cost
= 129,98,000/194,00,000 X 100
= 67%
c. Contract revenue to be recognized = 67% of ` 170,00,000 = ` 113,90,000.

21. MTP OCT 22 (SERIES 2)

The following data is provided for M/s. Raj Construction Co.
1. Contract Price - ` 85 lakhs
2. Materials issued - ` 21 Lakhs out of which Materials costing ` 4 Lakhs is still lying unused.at
the end of the period.
3. Labour Expenses for workers engaged at site - ` 16 Lakhs (out of which ` 1 Lakh is still unpaid)
4. Specific Contract Costs = ` 5 Lakhs
5. Sub-Contract Costs for work executed - ` 7 Lakhs, Advances paid to Suh-Contractors - ` 4
Lakhs
6. Further Cost estimated to be incurred to complete the contract - ` 35 Lakhs
You are required to compute the Percentage of Completion, the Contract Revenue and Cost to be
recognized as per AS-7.
 AS 7.23

SOLUTION
AS 7

a. Computation of contract cost

` Lakh ` Lakh
Material cost incurred on the contract (net of closing stock) 21-4 17
Add: Labour cost incurred on the contract (including outstanding amount) 16
Specified contract cost given 5
Sub-contract cost (advances should not be considered) 7
Cost incurred (till date) 45
Add: further cost to be incurred 35
Total contract cost 80
b. Percentage of completion = Cost incurred till date/Estimated total cost
= ` 45,00,000/` 80,00,000
= 56.25%
Contract Revenue and Cost to be recognized as per AS-7:
Particulars `
Contract revenue to be recognized (` 85,00,000x56.25%) 47,81,250
Contract costs 45,00,000
 AS 7.24

MCQs

AS 7
below information relates to Questions 1 – 3:
XY Ltd. agrees to construct a building on behalf of its client GH Ltd. on 1st April 20X1. The expected
completion time is 3 years. XY Ltd. incurred a cost of ` 30 lakh up to 31st March 20X2. It is
expected that additional costs of ` 90 lakh. Total contract value is ` 112 lakh. As at 31st March
20X2, XY Ltd. has billed GH Ltd. for ` 42 lakh as per the agreement. Assume that the work is
completed to the extent of 75% by the end of Year 2.

1. Revenue to be recognized by XY Ltd. for the year ended 31st March 20X2 is
a) ` 28 lakh
b) ` 42 lakh
c) ` 30 lakh
d) ` 32 lakh

2. Total expense to be recognised in Year 1 is

a) ` 30 lakh
b) ` 120 lakh
c) ` 38 lakh
d) ` 36 lakh

3. Revenue to be recognised for year 2 is

a) ` 84 lakh
b) ` 42 lakh
c) ` 56 lakh
d) ` 28 lakh

Below information relates to Questions 4 – 5

M/s AV has presented the information for Contract No. XY123:
Total contract value ` 370 lakh
Certified work completed ` 320 lakh
Costs incurred to date ` 360 lakh
Progress Payments received ` 300 lakh
Expected future costs to be incurred ` 50 lakh
 AS 7.25

4. Revenue to be recognised by M/s AV is

AS 7

a) ` 320 lakh
b) ` 370 lakh
c) ` 360 lakh
d) ` 400 lakh

5. Total expense to be recognised by M/s AV is

a) ` 360 lakh
b) ` 400 lakh
c) ` 320 lakh
d) ` 360 lakh

6. LP Contractors undertakes a fixed price contract of ` 200 lakh. Transactions related to the
contract include:
Material purchased: ` 80 lakh
Unused material: ` 30 lakh
Labour charges: ` 60 lakh
Machine used for 3 years for the contract. Original cost of the machine is ` 100 lakh. Expected
useful life is 15 years.
Estimated future costs to be incurred to complete the contract: ` 80 lakh.
Loss on contract to be recognised is:
a) ` 40 lakh
b) ` 10 lakh
c) ` 90 lakh
d) ` 50 lakh

Answers
1. (a) 2. (d) 3. (c) 4. (a) 5. (d) 6. (b)
Accounting Standard - 9 REVENUE RECOGNITION

Objective of AS 9

• AS – 9 explain when the revenue should be recognised in profit and loss account and also state the
circumstances in which revenue recognition can be postponed.
• It lays down criteria for recognition of revenue most suited to prepare of financial statement of enterprise
engaged in varied activities.

Applicability Revenue
AS – 9 NOT Applies to Gross inflow cash, receivable or other consideration arising
in the course of ordinary activities from
• Insurance Contract (Separate statute)
• Sale of Goods
• Construction Contract (AS – 7) • Rendering of Service
• Hire - Purchase Agreement (AS – 19) • Use of the enterprise resources by others yielding
• Govt Grant and Subsidies (AS - 12) interest, royalties and dividends

www.cavidya.com AS 9.1 © Anandh Bhanggariya 96323 96323

Accounting Standard - 9 REVENUE RECOGNITION
Revenue does not Include … Revenue does not Include

Unrealised gains from Realised gains from

Realised or Unrealised gains from

❖ Changes in foreign exchange

❖Holding of non-current assets/
current assets, ❖ Disposal of Fixed assets rates and adjustments
❖Natural increases in herds and ❖ Discharge of an obligation at less than arising on translation of
carrying amount. foreign currency financial
agricultural or forest products, or
❖Restatement of carrying amount of ❖ Realised gains resulting from the statements.
an obligation. disposal of non current assets.

Revenue from Sale of Goods

When to recognise the revenue from sale…
• Transfer of ownership of goods to buyer for a price
• Seller does not retain any effective control of ownership.
• No significant uncertainty in collection of the amount of consideration

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Accounting Standard - 9 REVENUE RECOGNITION
Revenue Recognition when delivery of goods is subject to condition
Condition Revenue Recognised
Delivery of goods delayed at buyers Revenue recognised immediately
request
Installation and Inspection When the goods are installed at Buyer’s Place to his satisfaction or goods are inspected and accepted
by buyer.
Sale on approval When the buyer confirms his desire to buy such goods by communication.
Guaranteed sales As per the substance of the agreement of sale after the reasonable period has expired.

Warranty Sales Sales should be recognised immediately but the provision should be made to cover unexpired
warranty.
Consignment Sales Only when the goods are sold to the third party.
Special Order or Shipment When the goods are identified and are ready for delivery.
Subscription for publication ✓ Items delivered vary in value from period to period - On the basis of sale value of items delivered
✓ Items delivered do not vary in value from period to period - Treatment: Recognised on straight line
basis over time
Installment sale ✓ Revenue of sale price excluding interest should be recognised on the date of sale & Interest is
recognised proportionately to the unpaid balance

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Accounting Standard - 9 REVENUE RECOGNITION

Special Cases
Sale to Intermediate Parties Sale Repurchase Agreement Trade Discounts and Volume Rebates

Revenue from Sale to where seller agrees to repurchase Trade discounts and volume rebates
Intermediate Parties is the same goods at a later date, given should be deducted in
recognised if significant such transactions that are in determining revenue.
risks of ownership have substance a financing agreement,
passed the resulting cash in flow is not
revenue
Revenue Recognition from Services
Revenue from services is generally recognised as the
service is performed. 1. Recognition of revenue in the Statement of P&L only when the
rendering services under a contract is completed or substantially
When to recognise the

Completed Service contract Method completed.

revenue from Service

2. Service become chargeable.

3. Performance consists of the executive of a single act.

1.Recognition of revenue in the Statement of P&L Proportionately with

the degree of completion of services under a contract.
Proportionate completion method
2. Performance consists of the execution of more than one act.
3. Revenue is recognized proportionately as per performance of each act

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Accounting Standard - 9 REVENUE RECOGNITION
Revenue Recognition norms for Rendering of service under special condition

Condition Revenue Recognised

Installation fee On completion of installation and accepted by the clients.
Advertising commission When the advertisement appears before public.
Insurance agency commission On effective commencement/renewal of the policies

Admission Fees When event take place.

Tuition Fees Revenue should be recognised over the period of instruction.
Entrance and Membership Fees Entrance fees - capitalised and
Membership Fees - Recognised on systematic and rational basis
Financial service commission ✓ Commission charged for arranging or granting loan and other facilities should be
recognised when loan is sanctioned and accepted by borrower.
✓ Commitment facility or loan management fee which relates to continuing obligation or
services should be recognised over the life of the loan

www.cavidya.com AS 9.5 © Anandh Bhanggariya 96323 96323

Accounting Standard - 9 REVENUE RECOGNITION
Revenue from enterprise resources
Revenue from interest Revenue from royalties Revenue from divided

Revenue from Interest should On accrual basis as per the When the declaring
be recognised on time terms of the agreement. company declares the
proportion basis. dividend.

Effect of If uncertainty exist then revenue recognition is postponed to next periods when this uncertainty will be over.
Uncertainties If uncertainty arises after the initial recognition of revenue then it will not be reversed, only appropriate provision to cover
on Revenue
losses will be made.
Recognition

Disclosures
When revenue recognition is postponed, the disclosure of the circumstances necessitating the postponement should be
made.

www.cavidya.com AS 9.6 Cavidya 84218 84218, 75887 75887

 AS 9.1

AS 9 – REVENUE RECOGNITION

AS 9
Question Bank
Sr. No. Concept
Section A Section B

1 Retrospective Event Q.1 Q.5

2 Postponement of revenue Q.3 Q.3, Q.8, Q.9

3 Amount to be recognised Q.4, Q.5, Q.9, Q.10, Q.11, Q.2 Q.4, Q.6, Q.7, Q.23

4 Method of revenue recognition Q.18, Q.21

5 Discount Q.13

6 Deferred Revenue Q.14

7 Principal Agent Q.12

8 Policy for revenue recognition Q.17, Q.19,

9 Timing of revenue recognition Q.7 Q.2, Q.20, Q.22, Q.16

10 Miscellaneous Q.13, Q.15, Q.16 Q.15

11 Special Case Q.6, Q.8, Q.14, Q.17 Q.1, Q.10, Q.11, Q.12,
 AS 9.2

AS 9 – REVENUE RECOGNITION
AS 9

SECTION A (CONCEPT QUESTIONS)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI ILLUSTRATION 1
2 ICAI ILLUSTRATION 2
3 ICAI ILLUSTRATION 3
4 ICAI ILLUSTRATION 4
5 QP MAY 19
6 MAY 2015
7 QP NOV 19
8 QP DEC 21
9 RTP MAY 21
10 MTP OCT. 21 SERIES 1
11 QP MAY 2023
ICAI ILLUSTRATION 1
12
(New Syllabus)
ICAI ILLUSTRATION 2
13 (New Syllabus)
14 ICAI ILLUSTRATION 3
(New Syllabus)
15 ICAI ILLUSTRATION 4
(New Syllabus)
16 ICAI P.Q. 6
17 ICAI P.Q. 8
 AS 9.3

1. ICAI ILLUSTRATION 1

AS 9
The Board of Directors decided on 31.3.20X2 to increase the sale price of certain items
retrospectively from 1st January, 20X2. In view of this price revision with effect from 1st January
20X2, the company has to receive ` 15 lakhs from its customers in respect of sales made from
1st January, 20X2 to 31st March, 20X2. Accountant cannot make up his mind whether to include
` 15 lakhs in the sales for 20X1-20X2. Advise.

SOLUTION
FACTS:
Retrospective increase of Sales price has been made resulting in increase in sales value by ` 15
lakhs
REFERENCE:
As per AS 9 on Revenue Recognition, Revenue from sales or service transactions should be
recognised when the requirements as to performance are satisfied, provided that at the time of
performance it is not unreasonable to expect ultimate collection. If at the time of raising of any
claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.
ANALYSIS:
Price revision was effected during the current accounting period 20X1-20X2. As a result, the
company stands to receive ` 15 lakhs from its customers in respect of sales made from 1st
January, 20X2 to 31st March, 20X2. If the company is able to assess the ultimate collection with
reasonable certainty, then additional revenue arising out of the said price revision may be
recognized.
CONCLUSION:
The additional revenue arising out of the said price revision may be recognized in 20X1-20X2.

2. ICAI ILLUSTRATION 2
Y Ltd., used certain resources of X Ltd. In return X Ltd. received ` 10 lakhs and ` 15 lakhs as
interest and royalties respective from Y Ltd. during the year 20X1-X2. You are required to state
whether and on what basis these revenues can be recognized by X Ltd.
 AS 9.4
AS 9

SOLUTION
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS:
These revenues are recognized on the following bases:
i. Interest: On a time proportion basis taking into account the amount outstanding and the
rate applicable.
ii. Royalties: On an accrual basis in accordance with the terms of the relevant agreement.
CONCLUSION:
X Ltd. should recognize interest revenue of ` 10 Lakhs and royalty revenue of ` 15 Lakhs.

3. ICAI ILLUSTRATION 3
A claim lodged with the Railways in March, 20X1 for loss of goods of ` 2,00,000 had been passed
for payment in March, 20X3 for ` 1,50,000. No entry was passed in the books of the company,
when the claim was lodged. Advise P Co. Ltd. about the treatment of the following in the Final
Statement of Accounts for the year ended 31st March, 20X3.
 AS 9.5

SOLUTION

AS 9
FACTS:
Claim filed by P Co. Ltd. for loss of goods has been passed for payment for ` 1,50,000 in March
20X3.
REFERENCE:
As per AS 9 Revenue Recognition, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export
incentives, interest etc. the revenue recognition is postponed to the extent of uncertainty inverted.
In such cases, the revenue is recognized only when it is reasonably certain that the ultimate
collection will be made.
ANALYSIS:
When recognition of revenue is postponed due to the effect of uncertainties, it is considered as
revenue of the period in which it is properly recognised.
AS 5 states that when items of income and expense within profit or loss from ordinary activities
are of such size, nature, or incidence that their disclosure is relevant to explain the performance
of the enterprise for the period, the nature and amount of such items should be disclosed
separately.
In this case it may be assumed that collectability of claim was not certain in the earlier periods.
This is supposed from the fact that only ` 1,50,000 were collected against a claim of ` 2,00,000.
Hence, the transaction cannot be taken as a Prior Period Item. Further in the light of AS 5, it will
not be treated as extraordinary item.
CONCLUSION:
The nature and amount of this item should be disclosed separately.

4. ICAI ILLUSTRATION NO 4
In the year 20X1-X2, XYZ supplied goods on Consignment basis to ABC – a retail outlet worth
`10,00,000. As per the terms, ABC will only pay XYZ for the goods which are sold by them to the
third party. Rest of the goods can be returned back to XYZ and ABC will not have any further
liability for these goods.
During the year 20X1-X2, ABC has sold goods worth ` 5,50,000 only and rest of the goods are still
lying in its store which may get sold by next year. Advise XYZ, how much revenue it can recognize
in its books for period 20X1-X2.
 AS 9.6

SOLUTION
AS 9

FACTS:
XYZ supplied goods on Consignment basis to ABC worth `10,00,000, of which goods worth `5,50,000
has been sold during the year 20X1-X2.
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS:
Consignment risk and rewards are not transferred to the customer on just delivery of the goods
and no revenue should be recognized until the goods are sold to a third party.
As per the reference and facts above, the goods worth `5,50,000 have been sold and `4,50,000
worth of goods are still with ABC for sale on behalf of XYZ. For the goods worth `4,50,000, ABC
have no liability and can be returned back to XYZ as per the terms.
CONCLUSION:
XYZ can recognize revenue of ` 5,50,000.

5. QP MAY 19
Given below is the following information of B.S. Ltd.
i. Goods of ` 50,000 were sold on 18-03-2018 but at the request of the buyer these were delivered
on 15-04-2018.
ii. On 13-01-2018 goods of ` 1,25,000 are sent on consignment basis of which 20% of the goods
unsold are lying with the consignee as on 31-03-2018.
iii. ` 1,00,000 worth of goods were sold on approval basis on 01-12-2017. The period of approval was
3 months after which they were considered sold. Buyer sent approval for 75% goods up to 31-
01-2018 and no approval or disapproval received for the remaining goods till 31-03-2018.
You are required to advise the accountant of B.S. Ltd., with valid reasons, the amount to be
recognized as revenue for the year ended 31st March, 2018 in above cases in the context of AS-9.
 AS 9.7

AS 9
SOLUTION
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS (i):
The sale is complete but delivery has been postponed at buyer's request. Hence both the conditions
for recognition of revenue are satisfied.
CONCLUSION:
B.S. Ltd. should recognize the entire sale of ` 50,000 for the year ended 31st March, 2018.
ANALYSIS (ii):
In case of consignment sale revenue should not be recognized until the goods are sold to a third
party. As the risk and rewards are not transferred, it cannot be recognized.
CONCLUSION:
20% goods lying unsold with consignee should be treated as closing inventory and sales should be
recognized for ` 1,00,000 (80% of ` 1,25,000).
ANALYSIS (iii):
In case of goods sold on approval basis, revenue should not be recognized until the goods have
been formally accepted by the buyer or the buyer has done an act adopting the transaction or
the time period for rejection has elapsed or where no time has been fixed, a reasonable time has
elapsed.
CONCLUSION:
Revenue should be recognized for the total sales amounting ` 1,00,000 as the time period for
rejecting the goods had expired.
Total revenue amounting ` 2,50,000 (50,000 + 1,00,000+ 1,00,000) will be recognized for the year
ended 31st March, 2018 in the books of B.S. Ltd.
 AS 9.8

6. MAY 2015
AS 9

A company sells the goods with right to return. The following pattern has been observed:
Timeframe of return from date of purchase % of cumulative sales
Within 10 days 5%
Between 11 days and 20 days 7%
Between 21 days and 30 days 8%
Between 31 days and 45 days 9%
Company has made sale of Rs.30 lacs in the month of February 2015 and of Rs.36 lacs in the
month of March, 2015. The total sales for the financial year have been Rs.450 lacs and the cost
of sales was Rs.360 lacs.
Determine the amount of provision to be made and revenue to be recognised in accordance with
AS 9. A year may be considered of 360 days.

SOLUTION
REFERENCE:
As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets', a provision should be
created on the Balance sheet date, for sales returns after the Balance Sheet date, at the best
estimate of the loss expected, along with any estimated incremental cost that would be necessary
to resell the goods expected to be returned.
Revenue in respect of sale of goods is recognised fully at the time of sale itself assumed that the
company has complied with the conditions stated in AS 9 relating to recognition of revenue in
the case of sale of goods. AS 9 also provides that in case of retail sales offering a guarantee of
‘money back, if not completely satisfied, it may be appropriate to recognize the sale but to make
a suitable provisions for returns based on previous experiences.
ANALYSIS:
The goods are sold with a right to return. The existence of such right gives rise to a present
obligation on the company. Revenue in respect of sale of goods is recognized fully at the time of
sale itself assuming that the company has complied with the conditions stated in AS 9 relating
to recognition of revenue in the case of sale of goods.
 AS 9.9

Sales value Sales value Likely Provision @

Likely

AS 9
(Rs. in (cumulative) returns 20%
Sales during returns (%)
lacs) (Rs. in lacs) (Rs. in (Rs. in lacs)
lacs) (Refer W.N.)
Last 10 days of March 36/3 or 12 12 5% 0.600 0.120
Previous 10 days of March 36/3 or 12 24 7% 1.680 0.336
Previous 10 days of March 36/3 or 12 36 8% 2.880 0.576
Last 15 days of February 30/2 or 15 51 9% 4.590 0.918
Total 9.75 1.950
Therefore, sale of Rs.30,00,000 and 36,00,000 made in the month of February and March, 2015 will
be recognized at full value.
Working Note:
Calculation of Profit % on sales
Particulars Rs. In Lacs
Sales for the year 450
Less: Cost of sales (360)
Profit 90
Profit mark up on sales (90/450) x 100 = 20%
Alternatively, AS 9 provides that Revenue should not be recognized until the goods have formally
been accepted by the buyer or the buyer has done an act adopting the transaction or the time
period for rejection has elapsed or where no time has been fixed, a reasonable time has been
elapsed. Based on this, an alternative view can be taken whereby the revenue shall not be
recognized in full. In such a case, the revised sales will be as follows:
Particulars Rs. In Lacs
Revised Sales when estimated sales return is 9.75 lacs 450 - 9.75 440.25
Revised Cost of Sales 440.25 x 80% 352.20
Revised Gross Profit 88.05
Given Gross Profit 90
Reduction in Gross Profit 1.95
Reduction in receivables and sales 9.75
Inventory will stand increased by 7.80

7. QP NOV 19
Indicate in each case whether revenue can be recognized and when it will be recognized as per
AS 9.
(1) Trade discount and volume rebate received.
 AS 9.10

(2) Where goods are sold to distributors or others for resale.

AS 9

(3) Where seller concurrently agrees to repurchase the same goods at a later date.
(4) Insurance agency commission for rendering services.
(5) On 11-03-2019 cloths worth ` 50,000 were sold to X mart, but due to refurbishing of their
showroom being underway, on their request, clothes were delivered on 12-04-2019.

SOLUTION
As per AS 9 “Revenue Recognition”, the revenue should be recognized as follows:
1. Trade discounts and volume rebates received are not encompassed within the definition of
revenue, since they represent a reduction of cost. Trade discounts and volume rebates given
should be deducted in determining revenue.
2. When goods are sold to distributor or others, revenue from such sales can generally be
recognized if significant risks of ownership have passed; however, in some situations the
buyer may in substance be an agent and in such cases the sale should be treated as a
consignment sale.
3. For transactions, where seller concurrently agrees to repurchase the same goods at a later
date that are in substance a financing agreement, the resulting cash inflow is not revenue as
defined and should not be recognized as revenue.
4. Insurance agency commissions should be recognized on the effective commencement or
renewal dates of the related policies.
5. On 11.03.2019, if X mart takes title and accepts billing for the goods then it is implied that
the sale is complete and all risk and reward on ownership has been transferred to the buyers.
Revenue should be recognized for year ended 31st March, 2019 notwithstanding that physical
delivery has not been completed so long as there is every expectation that delivery will be
made and items were ready for delivery to the buyer at the time.

8. QP DEC 21
Given the following information of Rainbow Ltd:
i.On 15th November, goods worth ` 5,00,000 were sold on approval basis. The period of approval
was 4 months after which they were considered sold. Buyer sent approval for 75% goods sold
Upto 31st January and no approval or disapproval received for the remaining goods till 31st March.
 AS 9.11

ii.On 31st March, goods worth ` 2,40,000 were sold to bright Ltd. but due to refurnishing of their

AS 9
show-room being underway, on their request, goods were delivered on 10th April.
iii.Rainbow Ltd. supplied goods ` 6,00,000 to Shyam Ltd. and concurrently agrees to re-purchase
the same goods on 14th April.
iv.Dew Ltd. used certain assets of Rainbow Ltd. Rainbow Ltd. received ` 7.5 lakhs and ` 12 lakhs
as interest and royalties respectively from Dew Ltd. during the year 2020-21.
v.On 25th December goods of ` 4,00,000 were sent on consignment basis of which 40% of the
goods unsold are lying with the consignee at the year end on 31 st March.
In each of the above cases, you are required to advise, with valid reasons, the amount to be
recognized as revenue under the provisions of AS- 9

SOLUTION
i) As per AS 9 “Revenue Recognition”, in case of goods sold on approval basis, revenue should
not be recognized until the goods have been formally accepted by the buyer or the buyer has
done an act adopting the transaction or the time period for rejection has elapsed or where
no time has been fixed, a reasonable time has elapsed. Therefore, revenue should be
recognized for the total sales amounting ` 5,00,000 as the time period for rejecting the goods
had expired.
ii) The sale is complete but delivery has been postponed at buyer’s request. The entity should
recognize the entire sale of ` 2,40,000 for the year ended 31st March.
iii) Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same
goods at a later date, such transactions that are in substance a financing agreement, the
resulting cash inflow is not revenue as defined and should not be recognized as revenue.
Hence no revenue to be recognized in the given case.
iv)
a. Revenue arising from the use by others of enterprise resources yielding interest and
royalty should be recognized when no significant uncertainty as to measurability or
collectability exists. The interest should be recognized on time proportion basis taking
into account the amount outstanding and rate applicable.
b. The royalty should be recognized on accrual basis in accordance with the terms of
 AS 9.12

relevant agreement.
AS 9

v) 40% goods lying unsold with consignee should be treated as closing inventory and sales
should be recognized for ` 2,40,000 (60% of ` 4,00,000). In case of consignment sale revenue
should not be recognized until the goods are sold to a third party.

9. RTP MAY 21
Tonk Tanners is engaged in manufacturing of leather shoes. They provide you the following
information for the year ended 31st March,2020:
(i) On 31st December, 2019 shoes worth ` 3,20,000 were sent to Mohan Shoes for sale on
consignment basis of which 25% shoes were unsold and lying with Mohan Shoes as on
31st March, 2020.
(ii) On 10th January, 2020, Tonk Tanner supplied shoes worth ` 4,50,000 to Shani Shoes and
concurrently agrees to re-purchase the same goods on 11th April. 2020.
(iii) On 21st March, 2020 shoes worth ` 1,60,000 were sold to Shoe Shine but due to refurbishing
of their showroom being underway, on their request, shoes were delivered on 12th April,
2020.
You are required to advise the accountant of Tonk Tanners, when amount is to be recognised as
revenue in 2019 -20 in above cases in the context of AS 9.

SOLUTION
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS (i):
In case goods are sent for consignment sale, revenue is recognized when significant risks of
ownership have passed from seller to the buyer. In the given case, Mohan Shoes is the consignee
 AS 9.13

i.e., an agent of Tonk Tanners and not the buyer. Therefore, the risk and reward is considered to

AS 9
vest with Tonk Tanners only till the time the sale is made to the third party.
CONCLUSION:
In the year 2019- 2020, the sale will be recognized for the amount of goods sold by Mohan Shoes
to the third party i.e. for ` 3,20,000 x 75% = ` 2,40,000.
ANALYSIS (ii):
Sale and re-purchase of same goods are classified as transactions that are in substance a
financing agreement, for which the resulting cash inflow is not revenue and should not be
recognised as revenue in the year 2019-2020.
CONCLUSION:
Sale of ` 4,50,000 to Shani Shoes should not be recognized as revenue.
ANALYSIS (iii):
On 21st March, 2020, the sale is complete but delivery has been postponed at buyer’s request.
Hence both the conditions for recognition of revenue are satisfied.
CONCLUSION:
Revenue shall be recognized in the year 2019-2020 irrespective of the fact that the delivery is
delayed on the request of Shoe Shine.

10. MOCK TEST OCT. 21 SERIES 1 / RTP NOV 20

Fashion Limited is engaged in manufacturing of readymade garments. They provide you the
following information on 31st March, 2021:
(i) On 15th January, 2021 garments worth ` 4,00,000 were sent to Anand on consignment basis
of which 25% garments unsold were lying with Anand as on 31st March, 2021.
(ii) Garments worth ` 1,95,000 were sold to Shine boutique on 25th March, 2021 but at the request
of Shine Boutique, these were delivered on 15th April, 2021.
(iii) On 1st November, 2020 garments worth ` 2,50,000 were sold on approval basis. The period of
approval was 4 months after which they were considered sold. Buyer sent approval for 75%
goods up to 31st December, 2020 and no approval or disapproval received for the remaining
goods till 31st March, 2021.
You are required to advise the accountant of Fashion Limited, the amount to be recognised as
revenue in above cases in the context of AS 9.
 AS 9.14

SOLUTION
AS 9

REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS (i):
In case of consignment sale revenue should not be recognized until the goods are sold to a third
party. As the risk and rewards are not transferred, it cannot be recognized.
CONCLUSION:
25% goods lying unsold with consignee should be treated as closing inventory and sales should
be recognized for ` 3,00,000 (75% of Rs. 4,00,000) for the year ended on 31.3.21.
ANALYSIS (ii):
The sale is complete but delivery has been postponed at buyer’s request. Hence both the conditions
for recognition of revenue are satisfied.
CONCLUSION:
Fashion Ltd. should recognize the entire sale of Rs.1,95,000 for the year ended 31st March, 2021.
ANALYSIS (iii):
In case of goods sold on approval basis, revenue should not be recognized until the goods have
been formally accepted by the buyer or the buyer has done an act adopting the transaction or
the time period for rejection has elapsed or where no time has been fixed, a reasonable time has
elapsed.
CONCLUSION:
Revenue should be recognized for the total sales amounting Rs. 2,50,000 as the time period for
rejecting the goods had expired.
Total revenue amounting Rs. 7,45,000 (3,00,000+1,95,000+2,50,000) will be recognized for the year
ended 31st March, 2021 in the books of Fashion Ltd.

11. QP MAY 2023

Toy Ltd. is engaged in manufacturing toys. They provide you the
Following information as on 31 March, 2023:
(i) On 15th January, 2023, Toys worth ₹5,00,000 were sent to A Ltd.
on consignment basis of which 25% Toys unsold were lying with A Ltd. as on 31 March, 2023.
 AS 9.15

(ii) Toys worth ₹2,25,000 were sold to S Ltd. on 25th March, 2023 but at the request of S Ltd.,

AS 9
these were delivered on 15th April, 2023.
(iii) On 1st November, 2022, toys worth ₹3,50,000 were sold on approval basis. The period of
approval was 4 months after which they were considered sold. Buyer sent approval for 75% goods
upto 31st December, 2022 and no approval or disapproval received for the remaining goods till 31
March, 2023.
You are required to advise the accountant of Toy Ltd., the amount to be recognised as revenue in
above cases in the context of AS-9.

SOLUTION
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
Case (i) 25% toys lying unsold with consignee should be treated as closing inventory and sales should not be recognized
for ` 1,25,000 (25% of ` 5,00,000). In case of consignment sale revenue should not be recognized until the
goods are sold to a third party. Sales for ` 3,75,000 (75% of ` 5,00,000) should be recognized for the year ended
31st March, 2023.
Case (ii) The sale is complete but delivery has been postponed at buyer’s request. The entity should recognize
the entire sale of ` 2,25,000 for the year ended 31st March, 2023.
Case (iii) In case of goods sold on approval basis, revenue should not be recognized until the goods have
been formally accepted by the buyer or the buyer has done an act adopting the transaction or the time period
for rejection has elapsed or where no time has been fixed, a reasonable time has elapsed. Therefore,
revenue should be recognized for the total sales amounting ` 3,50,000 as the time period for rejecting the
goods had expired.
 AS 9.16

12. ICAI ILLUSTRATION 1 (New Syllabus)

AS 9

Zigato runs a food-delivery business. As per the arrangement, Zigato allows customers to order
food from local restaurants and is responsible the delivery of the food within stipulated time.
During a particular year, it collects the money on orders made online as under:
Total price for the food item - ` 200 lakhs
Delivery charges - ` 60 lakhs
GST - ` 40 lakhs
Total - ` 300 lakhs
Zigato has received ` 300 lakhs for the above orders from customers and the orders were delivered
to the customer in stipulated time.
How much revenue should be recognised by restaurants and how much revenue should be
recognised by Zigato for the year?

SOLUTION
The risks and rewards associated with the food item are not with Zigato. When a customer has
ordered a food item, whether the item will be prepared or not is the responsibility of the restaurant
and not Zigato. Similarly, the responsibility to deliver the food item is with Zigato and the
restaurant does not undertake responsibility for the same.
Therefore, the restaurant undertakes the principal’s responsibility to prepare the food and ensure
its quality. Zigato, on the other hand, is only responsible to deliver the food. Thus, Zigato is acting
as an agent. Hence, it can only recognize revenue relating to that activity (which it does in the
ordinary course of business). The revenue for Zigato, therefore, is ` 60 lakhs, whereas, the revenue
for restaurants will be ` 200 lakhs.
It may be noted that the GST of ` 40 lakhs is a liability payable to the Government (third party),
hence it does not form part of revenue.

13. ICAI ILLUSTRATION 2 (New Syllabus)

AB sells goods to CD on 1st March 20X1. CD is having significant cash flows issues since last few
months. However, it is trying to raise funding through bank loan to be able to run its operations
in future. On 5th of May 20X1, CD is able to seek the funding and is expected to be able to pay
for the goods in future.
 AS 9.17

At the time of sale, it is difficult for AB to ascertain whether it will be able to collect the amount

AS 9
from CD due to poor financial conditions.
Explain how the recognition of revenue be done by AB?

SOLUTION
In the above case, AB should not recognise any revenue on 1st of March and until that uncertainty
of recovery is clear. Hence, the revenue can only be recognised by AB on 5th of May 20X1. The
inventory transferred to CD until that date is required to be shown as its own inventory [inventory
lying with customers].

14. ICAI ILLUSTRATION 3 (New Syllabus)

AB sells goods to CD on 1st January 20X1 for ` 2 lakhs. After the sale was made, CD is having
significant cash flows issues. It is trying to raise funding through bank loan to be able to run its
operations in future. However, it is unable to do so and has gone under liquidation on 15th of March
20X1.
At the time of sale, there was no reason for AB to believe that it will not be able to collect the
amount from CD in future.
Explain how the recognition of revenue be done by AB for the year ended 31 st March 20X1?

SOLUTION
In the above case, at the time of sale, it was not unreasonable for AB to expect ultimate collection
from CD. Therefore, AB should recognise the revenue of ` 2 lakhs on 1st of January 20X1 and
recognise a receivable for the same amount.
Later, since CD went into liquidation, AB should write off the receivables and book a loss in his
books.
 AS 9.18

Accounting in the books of AB

AS 9

1st January 20X1

CD A/c (Receivables) Dr. ` 2 lakhs
To Revenue A/c ` 2 lakhs
(Being goods sold to CD Ltd)
15th March 20X1
Bad Debts A/c Dr. ` 2 lakhs
To CD A/c (Receivables)A/c ` 2 lakhs

(Being receivables from CD written off due to its

liquidation)

15. ICAI ILLUSTRATION 4 (New Syllabus)

During the year ended 31st March 20X1, ZX Enterprises has recognized ` 100 lakhs on accrual basis
income from dividend on units of mutual funds held by it. The dividends on mutual funds were
declared on 15th June, 20X1. The dividend was proposed on 10th April, 20X1.
Whether the above treatment is as per the relevant Accounting Standard?

SOLUTION
Dividends from investments in shares are not recognized in the statement of profit and loss until
a right to receive payment is established. In the given situation, the dividend is proposed on 10th
April, 20X1, while it is declared on 15th June, 20X1. Thus, the right to receive the payment of
dividend gets established on 15th June, 20X1.
The recognition of ` 100 lakhs on accrual basis in the financial year 20X0-20X1 is not correct as
per AS 9 'Revenue Recognition'.

16. ICAI P.Q.6

GH manufactures and sells televisions. The televisions are shipped to the customer by sea. In order
to transfer risk related to the shipment of the televisions, GH also gets an insurance coverage for
the goods while they are in transit from the factory to customer’s location.
 AS 9.19

The insurance policy will reimburse GH for the value of the goods in the event of loss or damage

AS 9
arising anytime up to these goods reaching customer’s location. The legal title passes when the
goods arrive at the customer’s premises one month later.
When should Entity GH recognize revenue in its books?

SOLUTION
GH should recognize revenue for the sale when the goods arrive at the customer’s premises. GH
has not transferred the televisions’ significant risks and rewards of ownership to the customer
when the goods depart from the factory. This is evidenced by the fact that any insurance proceeds
received from the goods’ damage or destruction will be repaid to GH. Further, the legal title does
not pass until the goods arrive at the customer’s premises.

17. ICAI P.Q.8

For the year ended 31st March 20X1, KY Enterprises has entered into the following transactions.
On 31 March 20X1, KY supplied two machines to its customer ST. Both machines were accepted
by ST on 31 March 20X1. Machine 1 was a machine that was routinely supplied by KY to many
customers and the installation process was very simple.
Machine 1 was installed on 2 April 20X1 by ST’s employees.
Machine 2 being more specialised in nature requires an installation process which is more
complicated, requiring significant assistance from KY. Machine 2 was installed between 2 and 5
April 20X1. Details of costs and sales prices are as follows:
Machine 1 Machine 2
Sale Price 3,20,000 3,00,000
Cost of production 1,60,000 1,50,000
Installation fee nil 10,000
How should above transactions be recognized by KY Enterprises for the year ended 31st March
20X1?
 AS 9.20

SOLUTION
AS 9

Machine 1: As the installation process is simple, revenue from Machine 1 will be recognized on
31 March 20X1.
Revenue (Machine 1) ` 3,20,000
Cost of Goods Sold ` 1,60,000
Profit during the period ` 1,60,000
Since the question specifies that the machine is already accepted by ST on 31 March 20X1, the
revenue arising from sale of the machine needs to be recognized for the year ending 31 March
20X1. This is because acceptance of the machine indicates that the risks and rewards pursuant
to the ownership are transferred to ST.
Machine 2: Installation process for Machine 2 is more complicated, requiring significant
assistance from KY Ltd. However, question specifies that the machine is already accepted by
ST on 31 March 20X1. Assuming that there is no further approval/acceptance required from the
buyer for the Machine sold, revenue from sale of Machine 2 can be recognized for the year
ending 31 March 20X1.
Revenue (Machine 2) ` 3,00,000
Cost of Goods Sold ` 1,50,000
Profit during the period ` 1,50,000
However, installation fee which is for rendering installation services cannot be recognized until
the installation is complete. Since the machine is pending installation, the revenue in respect
of installation charges `10,000 needs to be recognized on 5 April 20X1 once the installation process
gets completed.
AS 9.21

AS 9
 AS 9.1

AS 9 – REVENUE RECOGNITION
AS 9

SECTION B (EXAM ORIENTED)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 QP JULY 21
2 EXAM NOV 22
3 MOCK TEST 2 Q NO 1 (A)
4 RTP MAY 18 Q NO 15(B)
5 RTP NOV 19
RTP MAY 20 / ICAI P.Q.
6
10
RTP MAY 2019 Q15, IPCC
7
RTP MAY 2019
(RTP NOV 2014) (NOV.
8 2008 – FINAL NEW
COURSE)
9 RTP IPCC (GR-1) NOV, 09
10 (RTP MAY, 2011 (NEW)
11 RTP MAY 2013
12 IPCC RTP NOV 2014 Q19 B
IPCC RTP May 2016 Q20a
13
/ IPCC RTP NOV 17
14 IPCC RTP Nov 2016 Q19a
IPCC RTP May 17 / ICAI P.
15
Q. 1
16 RTP NOV 21
17 RTP NOV 21
MTP OCT. 21 SERIES 1 /
18
RTP NOV 20
19 RTP MAY 22
20 RTP May 22
21 MTP MAR 22 SERIES 1
22 RTP Nov 22
23 MTP Oct 22 (Series 2)
 AS 9.2

1. QP JULY 21

AS 9
A Limited sells goods with unlimited right of return from its customers. The following pattern has
been observed in the Return of Sales:
Time frame of Return from date of purchase % of Cumulative Sales
Between 0-1 month 6%
Between 1-2 months 7%
Between 2-3 months 8%

The Company has made Sales of ` 36 Lakhs in the month of January, ` 48 Lakhs in the month
of February and of ` 60 Lakhs in the month of March. The Total Sales for the Financial Year have
been ` 400 Lakhs and the Cost of Sales was ` 320 Lakhs. You are required to determine the
amount of Provision to be made and Revenue to be recognized for the year ended 31st March.

SOLUTION
REFERENCE: As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets', a provision
should be created on the Balance sheet date, for sales returns after the Balance Sheet date, at
the best estimate of the loss expected, along with any estimated incremental cost that would be
necessary to resell the goods expected to be returned.
According to AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions have been fulfilled:
a. the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership and
b. no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS:
The goods are sold with a right to return. The existence of such right gives rise to a present
obligation on the company. Revenue in respect of sale of goods is recognized fully at the time of
sale itself assuming that the company has complied with the conditions stated in AS 9 relating
to recognition of revenue in the case of sale of goods.
 AS 9.3

Sales during Sales value Sales value (cumulative) Likely returns Likely returns ` Provision @ 20% (` in
AS 9

(` in lacs) ` (in lacs) (%) (in lacs) lacs) (Refer W.N.)

March 60 60 6% 3.60 0.720

February 48 108 7% 7.56 1.512

January 36 144 8% 11.52 2.304

Total 22.68 4.536

Therefore, sale of ` 36 lakhs, ` 48 lakhs and ` 60 lakhs made in the months of January, February
and March will be recognized at full value. Thus, total revenue to be recognized for ` 400 lacs for
the year.
Working Note:
Calculation of Profit % on sales
(` in lacs)
Sales for the year 400
Less: Cost of sales (320)
Profit 80
Profit mark up on sales (80/400) x 100 = 20%

2. EXAM NOV 22
Indicate in each case whether revenue can be recognized and when it will be recognized as per
AS 9.
(i) Delivery is delayed at buyer’s request but buyer taken title and accepts billing.
(ii) Instalment Sales
(iii) Trade discounts and volume rebates.
(iv) Insurance agency commission for rendering services.
(v) Advertising Commission.
 AS 9.4

SOLUTION

AS 9
As per AS 9, revenue should be recognized as per below provisions:
(i) Delivery is delayed at buyer’s request and buyer take title and accepts billing: Revenue should
be recognized notwithstanding that physical delivery has not been completed so long as there
is every expectation that delivery will be made. However, the item must be on hand, identified
and ready for delivery to the buyer at the time the sale is recognized.
(ii) Instalment sales: When the consideration is receivable in instalments, revenue attributable to
the sales price should be recognised at the date of sale.
(iii) Trade discounts and volume rebates: Discounts and rebates received are not encompassed
within the definition of revenue, since they represent a reduction of cost. Trade discounts and
volume rebates given should be deducted in determining revenue.
(iv) Insurance agency commissions: Insurance agency commissions should be recognised on the
effective commencement or renewal dates of the related policies.
(v) Advertising commissions: Revenue should be recognized when the service is completed. For
advertising agencies, media commissions will normally be recognized when the related
advertisement or commercial appears before the public and the necessary intimation is
received by the agency, as opposed to production commission, which will be recognized when
the project is completed.

3. MOCK TEST 2 Q NO 1 (A)

Ruby Ltd. sold goods through its agent. As per terms of sales, consideration is payable within
one month. In the event of delay in payment, interest is chargeable @ 10% p.a. from the agent.
The company has not realized interest from the agent in the past. For the year ended 31st March,
2017 interest due from agent (because of delay in payment) amounts to `5 lakhs. The
accountant of Ruby Ltd. booked Rs. 5 lakhs as interest income in the year ended 31st March,
2017. Examine and discuss the contention of the accountant with reference to AS 9 “Revenue
Recognition”.

SOLUTION
FACTS:
As per the terms of sales, Interest of Rs. 5Lakh is receivable from an agent due to delay in
payment. Ruby Ltd. has not realized interest from the agent in the past.
 AS 9.5

REFERENCE:
AS 9

As per AS 9 Revenue Recognition, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export
incentives, interest etc. the revenue recognition is postponed to the extent of uncertainty inverted.
In such cases, the revenue is recognized only when it is reasonably certain that the ultimate
collection will be made.
ANALYSIS:
In this case, the company never realized interest for the delayed payments made by the agent.
Hence, based on the past experience, the realization of interest for the delayed payments by the
agent is very much uncertain. The interest should be recognized only if the ultimate collection is
certain.
CONCLUSION:
1. The interest income of Rs. 5 lakhs should not be recognized in the books for the year ended
31st March, 2017. The contention of accountant is incorrect.
2. However, if the agents have agreed to pay the amount of interest and there is an element
of certainty associated with these receipts, the accountant is correct regarding booking of
Rs. 5 lakhs as interest amount.

4. RTP MAY 2018 Q NO 15(B)

A manufacturing company has the following stages of production and sale in manufacturing
fine paper rolls:
Date Activity Cost to Date (`) Net Realizable Value (`)
15.1.16 Raw Material 1,00,000 80,000
20.1.16 Pulp (WIP 1) 1,20,000 1,20,000
27.1.16 Rough & thick paper (WIP 2) 1,50,000 1,80,000
15.2.16 Fine Paper Rolls 1,80,000 3,50,000
20.2.16 Ready for sale 1,80,000 3,50,000
15.3.16 Sale agreed and invoice raised 2,00,000 3,50,000
02.4.16 Delivered and paid for 2,00,000 3,50,000
Explain the stage on which you think revenue will be generated and calculate how much would be
net profit for year ending 31.3.16 on this product as per AS 9.
 AS 9.6

SOLUTION

AS 9
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS:
The conditions required for recognition of revenue are satisfied only on 15.3.2016 when sales are
agreed upon at a price and goods are allocated for delivery purpose through invoice.
CONCLUSION:
The amount of net profit ` 1,50,000 (3,50,000 – 2,00,000) should be recognized in the books for
the year ending 31st March, 2016.

5. RTP NOV 19
The Board of Directors decided on 31.3.2019 to increase the sale price of certain items
retrospectively from 1st January, 2019. In view of this price revision with effect from 1st January
2019, the company has to receive ` 15 lakhs from its customers in respect of sales made from
1st January, 2019 to 31st March, 2019. Accountant cannot make up his mind whether to include
` 15 lakhs in the sales for 2018-2019. Advise.

SOLUTION
FACTS:
Retrospective increase of Sales price has been made resulting in increase in sales value by ` 15
lakhs
REFERENCE:
As per AS 9 on Revenue Recognition, Revenue from sales or service transactions should be
recognised when the requirements as to performance are satisfied, provided that at the time of
 AS 9.7

performance it is not unreasonable to expect ultimate collection. If at the time of raising of any
AS 9

claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.

ANALYSIS:
Price revision was effected during the current accounting period 2018-2019. As a result, the
company stands to receive ` 15 lakhs from its customers in respect of sales made from 1st
January, 2018 to 31st March, 2019. If the company is able to assess the ultimate collection with
reasonable certainty, then additional revenue arising out of the said price revision may be
recognized.
CONCLUSION:
The additional revenue arising out of the said price revision may be recognized in 2018-2019.

6. RTP MAY 20 / ICAI PRACTICAL QUESTION 10

The following information of Meghna Ltd. is provided:
i. Goods of ` 60,000 were sold on 20-3-20X2 but at the request of the buyer these were
delivered on 10-4-20X2.
ii. On 15-1-20X2 goods of ` 1,50,000 were sent on consignment basis of which 20% of the
goods unsold are lying with the consignee as on 31-3-20X2.
iii. ` 1,20,000 worth of goods were sold on approval basis on 1-12-20X1. The period of approval
was 3 months after which they were considered sold. Buyer sent approval for 75% goods
up to 31-1-20X2 and no approval or disapproval received for the remaining goods till 31-
3-20X2.
iv. Apart from the above, the company has made cash sales of ` 7,80,000 (gross). Trade
discount of 5% was allowed on the cash sales.
You are required to advise the accountant of Meghna Ltd., with valid reasons, the amount to be
recognized as revenue in above cases in the context of AS 9.

SOLUTION
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
 AS 9.8

(i) The seller of goods has transferred to the buyer the property in the goods for a price or all

AS 9
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
However, the above is subject to trade discount and volume rebates received in the course of
carrying on business which shall be deducted in ascertaining revenue since they represent a
reduction of cost.
ANALYSIS (i):
The sale is complete but delivery has been postponed at buyer’s request. Hence both the
conditions for recognition of revenue are satisfied.
CONCLUSION:
The entity should recognize the entire sale of ` 60,000 for the year ended 31st March, 20X2.
ANALYSIS (ii):
In case of consignment sale revenue should not be recognized until the goods are sold to a third
party. As the risk and rewards are not transferred, it cannot be recognized.
CONCLUSION:
20% goods lying unsold with consignee should be treated as closing inventory and sales should
be recognized for ` 1,20,000 (80% of ` 1,50,000).
ANALYSIS (iii):
In case of goods sold on approval basis, revenue should not be recognized until the goods have
been formally accepted by the buyer or the buyer has done an act adopting the transaction or
the time period for rejection has elapsed or where no time has been fixed, a reasonable time has
elapsed.
CONCLUSION:
Revenue should be recognized for the total sales amounting ` 1,20,000 as the time period for
rejecting the goods had expired.
ANALYSIS (iv):
The amount of trade discounts is not receivable from the customer. The Trade discount given
should be deducted in determining revenue.
CONCLUSION:
` 39,000 should be deducted from the amount of turnover of ` 7,80,000 for the purpose of
recognition of revenue. Thus, revenue should be ` 7,41,000.

7. RTP MAY 2019 Q15, IPCC RTP MAY 2019

Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods valuing ` 5,00,000 every
month for next 6 months on receipt of entire payment. Heena Ltd. accordingly made the entire
 AS 9.9

payment of ` 30,00,000 and Raj Ltd. started dispatching the goods. In fourth month, due to fire
AS 9

in premise of Heena Ltd., Heena Ltd. requested to Raj Ltd. not to dispatch goods worth ` 15,00,000
ready for dispatch. Raj Ltd. Accounted ` 15,00,000 as sales and transferred the balance to Advance
received against Sales account.
Comment upon the above treatment by Raj Ltd. with reference to the provision of AS-9.

SOLUTION
FACTS:
Heena Ltd. requested to Raj Ltd. not to dispatch goods worth ` 15,00,000 ready for dispatch but
the payment for the goods and sales agreement have been made.
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS:
In the given case, transfer of property in goods results in or coincides with the transfer of
significant risks and rewards of ownership to the buyer. Also, the sale price has been recovered
by the seller. Hence, the sale is complete but delivery has been postponed at buyer’s request.
CONCLUSION:
Raj Ltd. should recognize the entire sale of ` 30,00,000 (` 5,00,000 x 6) and no part of the same
is to be treated as Advance Received against Sales.

8. (RTP NOV 2014) (NOV. 2008 – FINAL NEW COURSE)

SCL Ltd. sells agriculture products to dealers. One of the condition of sale is that interest is
payable at the rate of 2% p.m., for delayed payments. Percentage of interest recovery is only
 AS 9.10

10% on such overdue outstanding due to various reasons. During the year 2005-2006 the company

AS 9
wants to recognise the entire interest receivable. Do you agree.

SOLUTION
FACTS:
SCL Ltd. Has interest recoverable on delayed payments from dealers. Percentage of interest
recovery is only 10% on such overdue outstanding.
REFERENCE:
As per AS 9 Revenue Recognition, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export
incentives, interest etc. the revenue recognition is postponed to the extent of uncertainty inverted.
In such cases, the revenue is recognized only when it is reasonably certain that the ultimate
collection will be made.
ANALYSIS:
Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale
or rendering of service even though payments are made by installments.
SCL Ltd. cannot recognize the interest amount unless the company actually receives it. 10% rate
of recovery on overdue outstanding is also an estimate and is not certain.
CONCLUSION:
SCL Ltd., is advised to recognize interest receivable only on receipt basis.

9. (RTP IPCC (GR-1) NOV, 2009)

Arjun Ltd. sold farm equipment’s through its dealers. One of the conditions at the time of sale is,
payment of consideration in 14 days and in the event of delay interest is chargeable @ 15% per
annum. The Company has not realized interest from the dealers in the past. However, for the year
ended 31.3.2008, it wants to recognise interest due on the balances due from dealers. The amount
is ascertained at Rs.9 lakhs. Decide whether the income by way of interest from dealers is eligible
for recognition as per AS 9.
 AS 9.11
AS 9

SOLUTION
REFERENCE:
As per AS 9 Revenue Recognition, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export
incentives, interest etc. the revenue recognition is postponed to the extent of uncertainty inverted.
In such cases, the revenue is recognized only when it is reasonably certain that the ultimate
collection will be made.
ANALYSIS:
In this case, the company never realized interest for the delayed payments made by the dealer.
Hence, based on the past experience, the realization of interest for the delayed payments by the
dealer is very much uncertain.
CONCLUSION:
The interest income of Rs. 9 lakhs should not be recognized in the books for the year ended 31st
March, 2008. The contention of accountant is incorrect. However, if the dealers have agreed to
pay the amount of interest and there is an element of certainty associated with these receipts,
the accountant is correct regarding booking of Rs. 9 lakhs as interest amount.

10. (RTP MAY, 2011 (NEW)

On 25th January, 2010. Planet Advertising Limited obtained advertisement rights for World Cup
Hockey Tournament to be held in March/April, 2010 for Rs.520 lakhs.
They furnish the following information:
1) The company obtained the advertisements for 70% of available time for Rs.700 lakhs by 31st
January, 2010.
2) For the balance time they got bookings in February, 2010 for Rs.240 lakhs.
3) All the advertisers paid the full amount at the time of booking the advertisements.
4) 40% of the advertisements appeared before the public in March, 2010 and balance 60%
appeared in the month of April, 2010.
You are required to calculate the amount of profit/loss to be recognized in the financial year 2009-
10 as per AS 9.
 AS 9.12

AS 9
SOLUTION
REFERENCE:
As per AS 9 ‘Revenue Recognition’, in a transaction involving the rendering of services, performance
should be measured either under the completed service contract method or under the proportionate
completion method, whichever relates the revenue to the work accomplished.
ANALYSIS:
Appendix to AS 9 states that revenue from advertising should be recognized when the service is
completed. The service as regards advertisement is deemed to be completed when the related
advertisement appears before the public.
In the given problem, 40% of the advertisement appeared before the public in March, 2010 and
balance 60% in April, 2010.
Total profit will be computed as follows:
Particulars Rs. in lakhs
Advertisement for 70% of available time obtained by 31st January, 2010 700
Advertisement for 30% of available time obtained by February, 2010 240
Total 940
Less: Cost of advertisement rights (520)
Profit 420
Profit to be recognized in March, 2010 i.e., F Y 2009-10 (Rs.420 lakhs x 40%) 168
Profit to be recognized in April, 2010 i.e., F Y 2010-11 (Rs.420 lakhs x 60%) 252
The profit amounting Rs.420 lakhs should be apportioned in the ratio of 40:60 for the months of
March and April, 2010.

11. (RTP MAY 2013)

M Ltd. manufactures machinery used in Steel Plants. It quotes prices in various tenders issued by
Steel Plants. As per terms of contract, full price of machinery is not released by the steel plants,
but 10% thereof is retained and paid after one year if there is satisfactory performance of the
machinery supplied. The company accounts for only 90% of the invoice value as sales income and
the balance amount in the year of receipt to the extent of actual receipts only. Comment on the
treatment done by M Ltd.
 AS 9.13
AS 9

SOLUTION
REFERENCE:
According to AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions have been fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS:
In the present case, the goods, as well as the risks and rewards of ownership have been transferred
to the steel plants. The invoice raised by M Ltd. is for the full price. M Ltd. receives 90% as 10%
is kept as ‘Retention Money’. Thus, M Ltd. should recognise revenue at the full invoice price, i.e.,
100% of the sale price.
Depending on the past experience of recovering the balance 10% from the steel plants, M Ltd. can
make a provision for sales income which is not likely to be realised.
CONCLUSION:
The practice adopted by M Ltd. is not in consonance with AS 9.

12. IPCC RTP NOV 2014 Q19 B

Victory Ltd. purchased goods on credit from Lucky Ltd. for ` 250 crores for export. The export
order was cancelled. Victory Ltd. decided to sell the same goods in the local market with a price
discount. Lucky Ltd. was requested to offer a price discount of 15%. The Chief Accountant of
Lucky Ltd. wants to adjust the sales figure to the extent of the discount requested by Victory
Ltd. Discuss whether this treatment is justified.
 AS 9.14

AS 9
SOLUTION
REFERENCE:
According to AS 9 “Revenue Recognition”, Recognition of revenue requires that revenue is
measurable and that at the time of sale or the rendering of the service it would not be
unreasonable to expect ultimate collection.
When the uncertainty relating to collectability arises subsequent to the time of sale or the
rendering of the service, it is more appropriate to make a separate provision to reflect the
uncertainty rather than to adjust the amount of revenue originally recorded.
ANALYSIS:
Lucky Ltd. had sold goods to Victory Ltd on credit worth for ` 250 crores and the sale was
completed in all respects. Victory Ltd’s decision to sell the same in the domestic market at a
discount does not affect the amount recorded as sales by Lucky Ltd. The price discount of 15%
offered by Lucky Ltd. after request of Victory Ltd. was not in the nature of a discount given during
the ordinary course of trade because otherwise the same would have been given at the time of
sale itself. It is the special discount which is being allowed at the request of the buyer. Therefore,
it would be appropriate to make a separate provision rather than to adjust the amount of revenue
originally recorded.
CONCLUSION:
The discount of 15% provided should be written off to the profit and loss account and should not
be shown as deduction from the sales figure.

13. IPCC RTP May 2016 Q20a / IPCC RTP NOV 17

X Limited sold goods worth ` 13 Lakhs to Mr. Y. Mr. Y asked for a Trade Discount amounting to
` 1,06,000 and the same was agreed to by X Limited. Such discount was allowed in the ordinary
course of business. The sale was effected and goods were dispatched. On receipt of goods, Mr. Y
has found that goods worth ` 1,34,000 are defective. Mr. Y returned defective goods to X Limited
and made payment amount to ` 10,60,000. The Accountant of X Limited booked the sale for `
10,60,000.
Discuss the contention of the Accountant with reference to relevant Accounting Standard.
 AS 9.15
AS 9

SOLUTION
REFERENCE:
As per AS 9, "Revenue Recognition" is the inflow of cash, receivable or other consideration arising
in the course of ordinary activities of an enterprise from the sale of Goods. However, the above is
subject to trade discount and volume rebates received in the course of carrying on business which
shall be deducted in ascertaining revenue since they represent a reduction of cost.
ANALYSIS:
As per the reference above, X Limited should deduct the trade discount from ` 13,00,000 and should
recognize gross sale at (` 13,00,000 - ` 1,06,000) = ` 11,94,000. Goods returned worth ` 1,34,000
should to be recorded in the form of sales return.
CONCLUSION:
The contention of the accountant to book sale of ` 10,60,000 is not correct.

14. IPCC RTP Nov 2016 Q19a

Khetan Ltd. has received two lakh subscriptions during the current year under its new scheme
whereby customers are required to pay a sum of ` 4,500 for which they will be entitled to receive
a magazine for a period of 3 years. Khetan wants to treat the entire amount as revenue for the
current year. Comment.

SOLUTION
FACTS:
2 Lakh subscriptions have been received for ` 4,500 each against which magazine will be provided
by Ketan Ltd for 3 years.
 AS 9.16

REFERENCE:

AS 9
As per AS 9 - Revenue Recognition, Revenue received or billed from subscriptions for publications
should be deferred and recognised either on a straight line basis over time or, where the items
delivered vary in value from period to period, revenue should be based on the sales value of the
item delivered in relation to the total sales value of all items covered by the subscription.
ANALYSIS:
The revenue of ` 4,500 for 2 Lakh subscriptions should be recognized on a straight line basis over
the period of 3 years.
CONCLUSION:
The accounting treating adopted by Khetan Ltd. to treat the entire amount as revenue for the
current year is not in accordance with AS 9.

15. IPCC RTP May 2017 / ICAI Practical Q 1

K Ltd. has sold its building for ` 50 lakhs to B Ltd. and has also given the possession to B Ltd.
The book value of the building is ` 30 lakhs. As on 31st March, 2016, the documentation and
legal formalities are pending. The company has not recorded the sale and has shown the amount
received as advance. Do you agree with this treatment?

SOLUTION
The economic reality and substance of the transaction is that the rights and beneficial interest
in the property has been transferred although legal title has not been transferred. K Ltd. should
record the sale and recognize the profit of ` 20 lakhs in its profit and loss account. The building
should be eliminated from the balance sheet.

16. RTP NOV 21

How will you recognize revenue in the following cases:
1. Installation Fees
2. Advertising and insurance agency commissions
3. Subscriptions for publications.
 AS 9.17
AS 9

SOLUTION
As per AS 9, revenue should be recognized as per below provisions:
1. INSTALLATION FEES: In cases where installation fees are other than incidental to the sale of a
product, they should be recognized as revenue only when the equipment is installed and
accepted by the customer.
2. ADVERTISING AND INSURANCE AGENCY COMMISSIONS:
1) Revenue should be recognized when the service is completed. For advertising agencies,
media commissions will normally be recognized when the related advertisement or
commercial appears before the public and the necessary intimation is received by the
agency, as opposed to production commission, which will be recognized when the project
is completed.
2) Insurance agency commissions should be recognized on the effective commencement or
renewal dates of the related policies.
3. SUBSCRIPTION FOR PUBLICATIONS: Revenue received or billed should be deferred and recognized
either on a straight-line basis over time or, where the items delivered vary in value from period
to period, revenue should be based on the sales value of the item delivered in relation to the
total sales value of all items covered by the subscription.

17. RTP NOV 21

Shipra Ltd., has been successful jewellers for the past 100 years and sales are against cash only
(returns are negligible). The company also diversified into apparels. A young senior executive was
put in charge of Apparels business and sales increased 5 times. One of the conditions for sales is
that dealers can return the unsold stocks within one month of the end of season. Sales return for
the year was 25% of sales. Suggest a suitable Revenue Recognition Policy, with reference to AS
9.
 AS 9.18

SOLUTION

AS 9
REFERENCE:
AS 9 on Revenue Recognition, is mainly concerned with the timing of recognition of revenue in the
Statement of Profit and Loss of an enterprise. The amount of revenue arising on a transaction is
usually determined by agreement between the parties involved in the transaction. However, when
uncertainties exist regarding the determination of the amount, or its associated costs, these
uncertainties may influence the timing of revenue recognition.
ANALYSIS:
In the case of the jewellery business the company is selling for cash and returns are negligible. In
Apparels Industry, the dealers have a right to return the unsold goods within one month of the
end of the season. In this case, the company is bearing the risk of sales return.
CONCLUSION:
Revenue related to Jewellery business can be recognized as sales. For Apparels business, the
company should not recognize the revenue to the extent of 25% of its sales. The company may
disclose suitable revenue recognition policy in its financial statements separately for both
Jewellery and Apparels business.

18. MOCK TEST OCT. 21 SERIES 1

Old Era Publication Publishes a popular monthly magazine on 15th of every month. The publication
sells the advertising space on terms of 90% payable in advance and the balance 10% payable
within 30 days of release of the publication. The space for March 2020 issue of the magazine was
sold in the month of February, 2020. The magazine was published as per schedule on 15 th of the
month. The amount of ` 2,70,000 has been received upto 31st March, 2020 and ` 30,000 was
received on 10th April, 2020 for advertisement published in the March issue of the publication.
Please advise the accountant the amount of revenue to be recognized in the context of the
provisions of AS 9 ‘Revenue Recognition’ during the year ending on 31 st March, 2020.

SOLUTION
REFERENCE:
As per AS 9 ‘Revenue Recognition’, in a transaction involving the rendering of services, performance
should be measured either under the completed service contract method or under the proportionate
completion method, whichever relates the revenue to the work accomplished.
 AS 9.19

ANALYSIS:
AS 9

In the given case, income accrues when the related advertisement appears before public. The
advertisement service would be considered as performed on the day the advertisement is appeared
for public and hence revenue is recognized on that date. In this case, it is 15.03.2020, the date of
publication of the magazine.
ACCOUNTING TREATMENT:
` 3,00,000 (` 2,70,000 + ` 30,000) is recognized as income in March, 2020. The terms of payment
are not relevant for considering the date on which revenue is to be recognized. ` 30,000 is treated
as amount due from advertisers as on 31.03.2020 and ` 2,70,000 will be treated as payment
received against the sale.

19. RTP MAY 22

An infrastructure company has constructed a mall and entered into agreement with tenants
towards license fee (monthly rental) and variable license fee, a percentage on the turnover of the
tenant (on an annual basis). Chief Financial Officer of the company wants to account/recognize
license fee as income for 12 months during current year and variable license fee as income during
next year, since invoice is raised in the subsequent year. Comment whether the treatment desired
by the CFO is correct or not.

SOLUTION
REFERENCE:
AS 9 on Revenue Recognition, is mainly concerned with the timing of recognition of revenue in the
Statement of Profit and Loss of an enterprise. The amount of revenue arising on a transaction is
usually determined by agreement between the parties involved in the transaction. However, when
uncertainties exist regarding the determination of the amount, or its associated costs, these
uncertainties may influence the timing of revenue recognition.
ANALYSIS:
As per accrual concept, revenue should be recognized as and when it is accrued i.e. recorded in
the financial statements of the periods to which they relate.
Monthly rental towards license fee and variable license fee as a percentage on the turnover of the
tenant (though on annual basis) is the income related to common financial year. Therefore,
 AS 9.20

recognizing the fee as revenue cannot be deferred simply because the invoice is raised in

AS 9
subsequent period. Hence it should be recognized in the financial year of accrual.
CONCLUSION:
The contention of the Chief Financial Officer is not in accordance with AS 9.

20. RTP May 22

Indicate in each case whether revenue can be recognized and when it will be recognized as per
AS 9.
1) Trade discount and volume rebate received.
2) Where goods are sold to distributors or others for resale.
3) Where seller concurrently agrees to repurchase the same goods at a later date.
4) Insurance agency commission for rendering services.

SOLUTION
1) Trade discounts and volume rebates received are not encompassed within the definition of
revenue, since they represent a reduction of cost. Trade discounts and volume rebates given
should be deducted in determining revenue.
2) When goods are sold to distributor or others, revenue from such sales can be recognized if
significant risks of ownership have passed; however, in some situations the buyer may in
substance be an agent and in such cases the sale should be treated as a consignment sale.
3) For transactions, where seller concurrently agrees to repurchase the same goods at a later date
that are in substance a financing agreement, the resulting cash inflow is not revenue as
defined and should not be recognized as revenue.
4) Insurance agency commissions should be recognized on the effective commencement or
renewal dates of the related policies.

21. MTP MARCH 2022 TEST SERIES 1

New Era Publications publishes a monthly magazine on 15th of every month. It sells advertising
space in the magazine to advertisers on the terms of 80% sale value payable in advance and the
balance within 30 days of the release of the publication. The sale of space for the March 2020
issue was made in February 2020. The magazine was published on its scheduled date. It received
2,40,000 on 10.3.2020 and ` 60,000 on 10.4.2020 for the March, 2020 issue.
 AS 9.21

Discuss in the context of AS 9 the amount of revenue to be recognized and the treatment of the
AS 9

amount received from advertisers for the year ending 31.3.2020. What will be the treatment if the
publication is delayed till 2.4.2020?

SOLUTION
REFERENCE:
As per AS 9 ‘Revenue Recognition’, in a transaction involving the rendering of services, performance
should be measured either under the completed service contract method or under the proportionate
completion method, whichever relates the revenue to the work accomplished.
ANALYSIS:
Income accrues when the related advertisement appears before public. The advertisement service
would be considered as performed on the day the advertisement is published and hence revenue
is recognized on that date.
Case 1: When magazine publication is made on 15.03.2020 - ` 3,00,000 (` 2,40,000 + ` 60,000) is
recognized as income in March, 2020. The terms of payment are not relevant for considering the
date on which revenue is to be recognized. Since, the revenue of ` 3,00,000 will be recognised in
the March, 2020, ` 60,000 will be treated as amount due from advertisers as on 31.03.2020 and `
2,40,000 will be treated as payment received against the sale.
Case 2: When Publication is delayed till 02.04.2020 - Revenue recognition will also be delayed till
the advertisements get published in the magazine. In that case revenue of ` 3,00,000 will be
recognized in the year ended 31.03. 2020 after the magazine is published on 02.04.2020. The
amount received from sale of advertising space on 10.03.2020 of ` 2,40,000 will be considered as
an advance from advertisers as on 31.03.2020.

22. RTP Nov 22

When revenue will be recognized in the following situation:
(i) Where the purchaser makes a series of installment payments to the seller and the seller
deliver the goods only when the final payment is received.
(ii) Where seller concurrently agrees to repurchase the same goods at a later date.
(iii) Where goods are sold to distributors, dealers or others for resale.
(iv) Commissions on service rendered as agent on insurance business.
 AS 9.22

AS 9
SOLUTION
(i) Revenue from sales where the purchaser makes a series of instalment payments to the seller,
and the seller delivers the goods only when the final payment is received, should not be
recognised until goods are delivered. However, when experience indicates that most such sales
have been consummated, revenue may be recognised when a significant deposit is received.
(ii) For sale where seller concurrently agrees to repurchase the same goods at a later date, such
transactions are in substance a financing agreement. In such a situation, the resulting cash
inflow should not be recognised as revenue.
(iii) Revenue from sales of goods to distributors, dealers or others for resale can generally be
recognised if significant risks of ownership have passed. However, in some situations the buyer
may in substance be an agent and in such cases the sale should be treated as a consignment
sale.
(iv) Commissions on service rendered as agent on insurance business should be recognised as
revenue when the service is completed. Insurance agency commissions should be recognised
on the effective commencement or renewal dates of the related policies.

23. MTP Oct 22 (Series 2)

Given below is the following information of B.S. Ltd.
(i) Goods of ` 50,000 were sold on 18-03-2021 but at the request of the buyer these were delivered
on 15-04-2021.
(ii) On 13-01-2021 goods of ` 1,25,000 are sent on consignment basis of which 20% of the goods
unsold are lying with the consignee as on 31-03-2021.
(iii) ` 1,00,000 worth of goods were sold on approval basis on 01-12-2020. The period of approval was
3 months after which they were considered sold. Buyer sent approval for 75% goods up to 31-01-
2021 and no approval or disapproval received for the remaining goods till 31 -03- 2021.
You are required to advise the accountant of B.S. Ltd., with valid reasons, the amount to be
recognized as revenue for the year ended 31st March, 2021 in above cases in the context of AS-9.
 AS 9.23
AS 9

SOLUTION
REFERENCE:
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
ANALYSIS:
Case (i) The sale is complete but delivery has been postponed at buyer’s request. B.S. Ltd. should
recognize the entire sale of ` 50,000 for the year ended 31st March, 2021.
Case (ii) In case of consignment sale revenue should not be recognized until the goods are sold
to a third party. 20% goods lying unsold with consignee should be treated as closing inventory
and sales should be recognized for ` 1,00,000 (80% of ` 1,25,000).
Case (iii) In case of goods sold on approval basis, revenue should not be recognized until the goods
have been formally accepted by the buyer or the buyer has done an act adopting the transaction
or the time period for rejection has elapsed or where no time has been fixed, a reasonable time
has elapsed. Therefore, revenue should be recognized for the total sales amounting ` 1,00,000 as
the time period for rejecting the goods had expired.
CONCLUSION:
Total revenue amounting `2,50,000 (50,000 + 1,00,000 + 1,00,000) will be recognized for the year
ended 31st March, 2021 in the books of B.S. Ltd.
 AS 9.24

MCQs

AS 9
1. Which of the conditions mentioned below must be met to recognize revenue from the sale of
goods?
i. the entity selling does not retain any continuing influence or control over the goods;
ii. when the goods are dispatched to the buyer;
iii. revenue can be measured reliably;
iv. the supplier is paid for the goods
v. it is reasonably certain that the buyer will pay for the goods;
vi. The buyer has paid for the goods.
a) (i), (ii) and (v)
b) (ii), (iii) and (iv)
c) (i), (iii) and (v)
d) (i), (iv) and (v)

2. Consignment inventory is an arrangement whereby inventory is held by one party but owned
by another party. Which of the following indicates that the inventory in question is a
consignment inventory?
a) Manufacturer cannot require the dealer to return the inventory
b) Dealer has the right to return the inventory
c) Manufacture is responsible for the pricing of goods and any changes in the pricing can only
be approved by the manufacturer .
d) Manufacture is responsible for the holding the goods and any changes in the pricing can
only be approved by the dealer

3. Which of the following transactions qualify as revenue for M/s AB Enterprises?

a) Sales of ` 20 lakhs made under consignment sales.
b) Sale of an old machine amounting ` 5 lakhs
c) Services provided to the customer in the normal course of business. Sales recorded is `
50,000.
d) Sales of ` 25 lakhs made under consignment sales

4. The Accounting Club has 100 members who are required to pay an annual membership fee of
` 5,000 each. During the current year, all members have paid the fee. However, 5 members
have paid an amount of ` 10,000 each. Of these, 3 members paid the current year’s fee and
also the previous year’s dues. Remaining 2 members have paid next years’ fee of ` 5,000 in
advance. Revenue from membership fee for the current year to be recognised will be:
a) ` 5,25,000
 AS 9.25

b) ` 5,10,000
AS 9

c) ` 5,00,000
d) ` 5,15,000

5. FlixNet International offers a subscription fee model to allow the paid subscribers an annual
viewing of movies, sports events and other content. It allows users to register for free and have
access to limited content for one month without any charges. The customer has a right to
cancel the subscription within a month’s time but is required to p ay for 1 year subscription
fee after the free period. XY has subscribed for free viewing on 1st March 20X1. After 1 month,
he has agreed to pay the annual membership and has paid ` 1,200 on 31st March 20X1 for the
subscription that is valid up to 31st of March 20X2. Revenue that can be recognized by FlixNet
for the year ended 31st March 20X2 is
a) ` 100
b) ` 1,200
c) Nil
d) ` 1,100

Answers
1. (a) 2. (c) 3. (c) 4. (c) 5. (b)
Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Objective of AS 10

Information about

Prescribe Investment in PPE

Help the User of
OBJECTIVES OF “Accounting
Financial Statements to
AS 10 (REVISED) Treatment for
understand
PPE”
Changes in such
Investment

Scope

✓ This Standard should be applied in accounting for property, plant and equipment except when another Accounting Standard
requires or permits a different accounting treatment.

www.cavidya.com AS 10.1 © Anandh Bhanggariya 96323 96323

Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Scope of Standard

This standard does not apply to:

✓ Biological assets related to agricultural activity other than bearer plants.
✓ Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oils, natural gas and
similar non-regenerative resources.
Use in Production
Definitions or Supply of
Goods or Services

Condition 1: For rental to

Held for others

PPE For Administrative

(TANGIBLE ITEMS) purposes

Condition 2: Used for more

Expected to be than 12 month

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Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Recognition Criteria

The cost of an item of property, plant and equipment should be recognised as an asset if, and only if:
✓ it is probable that future economic benefits associated with the item will flow to the enterprise and
✓ Cost of the item can be measured reliably.

RECOGNITION OF SPARE PARTS AND STAND-BY EQUIPMENT

If the recognition criteria is met If recognition criteria is not satisfied

Accounted as per AS 10 (Revised) Accounted as per AS 2 ‘Valuation for Inventories’

www.cavidya.com AS 10.3 © Anandh Bhanggariya 96323 96323

Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Measurement at Recognition
An item of property, plant and equipment that qualifies for recognition as an asset should be measured at its cost.

The cost of PPE includes;

Initial Cost: cost incurred initially to acquire or COST OF AN ITEM OF PPE
construct the PPE
Subsequent Cost: costs incurred subsequently to
add to, replace part of, or service it. Includes Excludes

Purchase Price Any Directly Decommissioning,

Attributable Costs Restoration and 1. Cost of opening a new facility or
similar Liabilities business (Such as, Inauguration costs)
1. Costs of employee benefits (AS 15) arising directly from the construction or 2. Costs of introducing a new product or
acquisition of the item of PPE service (including coasts of
advertising and promotional
2. Costs of site preparation activities)
3. Initial delivery and handling costs
3. Costs of conducting business in a new
4. Installation and assembly costs location or with a new class of
5.Costs of testing whether the asset is functioning properly, after deducting the customer (including costs of staff
training)
net proceeds from selling any items produced while bringing the asset to that
4. Administration and other general
location and condition (such as samples produced when testing equipment) overhead costs
6. Professional fees

www.cavidya.com AS 10.4 Cavidya 84218 84218, 75887 75887

Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Self Constructed Assets

▪ Same principles as for an acquired asset.
▪ The cost of the asset is usually the same as the cost of constructing an asset for sale.
▪ Any internal profits are eliminated in arriving at such costs.
▪ The cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost
▪ Any borrowing cost which can be capitalized can be included in the cost of PPE.
▪ Bearer plants are accounted for in the same way as self-constructed items of PPE before they are in the location and condition necessary to be capable of operating in the
manner intended by management.

Measurement of cost
▪ If payment is deferred beyond normal credit terms:
Total payment minus Cash price equivalent
o is recognised as an interest expense over the period of credit
o unless such interest is capitalised in accordance with AS 16
▪ PPE acquired in Exchange for a Non-monetary Asset or Assets or A combination of Monetary and Non-monetary Assets:
Cost of such an item of PPE is measured at fair value unless:
o Exchange transaction lacks commercial substance; Or
o Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable

www.cavidya.com AS 10.5 © Anandh Bhanggariya 96323 96323

Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

MEASUREMENT AFTER RECOGNITION

Cost Model Revaluation Model

Fair value at the date of the XXX

revaluation
Less: Any subsequent accumulated (XXX)
Cost- Any Accumulated Depreciation- depreciation
Any Accumulated Impairment losses
Less: Any subsequent accumulated (XXX)
impairment losses
Carrying value XXX

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Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Revaluation

▪ If an item of PPE is revalued the entire class of PPE to which this asset belongs should be revalued.

Frequency of Revaluations
(Sufficient Regularity)

Items of PPE experience Items of PPE with only

significant and volatile changes insignificant changes in Fair

in Fair value value

Annual revaluation should be Revaluation should be done at

done. an interval of 3 or 5 years

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Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Accounting treatment Revaluation

REVALUATION

Increase Decrease

Credited Directly to Exception: When it is Charged to the Exception: When it is

owner’s interests under subsequently statement of profit subsequently
the heading of Increased (Initially and loss Decreased (Initially
Revaluation surplus Decreased) Increased)

Recognised in the statement of profit

Decrease should be debited
and loss to the extent that it reverses
directly to owner’s interests
a revaluation decrease of the same
under the heading of
asset previously recognised in the
Revaluation surplus to the
statement of profit and loss
extent of any credit balance
existing in the Revaluation
surplus in respect of that asset

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Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

DEPRECIATION
▪ Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted
for cost, less its residual value.

Component cost approach is to be followed - i.e., Each part of an item of property, plant and equipment with a cost that is significant in relation to the
total cost of the item should be depreciated separately.

Methods of Depreciation
▪ The depreciation method used should reflect the pattern in which the future economic benefits of the asset are expected to be consumed by the enterprise.

METHODS OF DEPRECIATION

Straight line Method Diminishing Balance Method Units of Production Method

Results in a constant Results in a decreasing Results in a charge based
charge over the useful charge over the useful on the excepted use or
life if the residual value life output
of the asset does not
change

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Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Review of Residual Value, Useful life & Method of Depreciation

▪ AS 10 (Revised) required that the residual value, useful life and method of depreciation used should be reviewed at least at each financial year.
▪ In case of method of depreciation, if there has been a significant change in the expected pattern of consumption of the future economic benefits
embodied in the asset, the method should be changed to reflect the changed pattern. Such a change should be accounted for as a change in an
accounting estimate in accordance with AS 5.
▪ In case of residual value and useful life, , if expectations differ from previous estimates, the change(s) should be accounted for as a change in an
accounting estimate in accordance with AS 5.
Commencement of period for charging Depreciation
▪ Depreciation of an asset begins when it is available for use

Cessesation of Depreciation
1. Depreciation ceases to be charged when asset’s residual value exceeds its carrying amount
2. Depreciation of an asset ceases at the earlier of:
• The date that the asset is retired from active use and is held for disposal,and
• The date that the asset is derecognised

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Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

IMPAIRMENT
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
To determine whether an item of property, plant and equipment is impaired, an enterprise applies AS 28, Impairment of Assets.
Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up should be included in the statement of
profit and loss when the compensation becomes receivable.

RETIREMENTS

▪ Items of PPE retired from active use and held for disposal should be stated at the lower of their carrying amount and net realisable value.
▪ Any write-down in this regard should be recognised immediately in the statement of profit and loss.

www.cavidya.com AS 10.11 © Anandh Bhanggariya 96323 96323

Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

De-Recognition
The carrying amount of an item of PPE should be derecognised:
• On disposal
o By sale
o By entering into a finance lease, or
o By donation, Or
• When no future economic benefits are expected from its use or disposal

Accounting Treatment:

▪ Gain or loss arising from de-recognition of an item of PPE should be included in the Statement of Profit and Loss.

Gain or loss arising from de-recognition of an item of PPE

= Net disposal proceeds (if any) - Carrying Amount of the item

Note: Gains should not be classified as revenue, as defined in AS 9 ‘Revenue Recognition’

www.cavidya.com AS 10.12 Cavidya 84218 84218, 75887 75887

Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

Important Disclosure Requirements

The financial statements should disclose, for each class of property, plant and equipment:
• The measurement bases (i.e., cost model or revaluation model) used for determining the gross carrying amount.
• The depreciation methods used.
• The useful lives or the depreciation rates used.
• The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period.

A reconciliation of the carrying amount at the beginning and end of the period showing:
1. additions;
2. assets retired from active use and held for disposal;
3. acquisitions through business combinations ;
4. increases or decreases resulting from revaluations and from impairment losses recognised or reversed directly in revaluation surplus in accordance with AS 28;
5. impairment losses recognised in the statement of profit and loss in accordance with AS 28;
6. impairment losses reversed in the statement of profit and loss in accordance with AS 28;
7. depreciation;
8. the net exchange differences arising on the translation of the financial statements of a non-integral foreign operation in accordance with AS 11, The Effects of Changes in
Foreign Exchange Rates; and
9. other changes.

www.cavidya.com AS 10.13 © Anandh Bhanggariya 96323 96323

Accounting Standard - 10 PROPERTY PLANT AND EQUIPMENT

The financial statements should also disclose:

the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities;
the amount of expenditure recognised in the carrying amount of an item of property, plant and equipment in the course of its construction;
the amount of contractual commitments for the acquisition of property, plant and equipment;
if it is not disclosed separately on the face of the statement of profit and loss, the amount of compensation from third parties for items of property, plant
and equipment that were impaired, lost or given up that is included in the statement of profit and loss; and
the amount of assets retired from active use and held for disposal.

If items of property, plant and equipment are stated at revalued amounts, the following should be disclosed:
the effective date of the revaluation;
whether an independent valuer was involved;
the methods and significant assumptions applied in estimating fair values of the items;
the extent to which fair values of the items were determined directly by reference to observable prices in an active market or recent market transactions
on arm’s length terms or were estimated using other valuation techniques; and
the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders.

www.cavidya.com AS 10.14 Cavidya 84218 84218, 75887 75887

 AS 10.1

AS 10
AS 10 - PROPERTY PLANT & EQUIPMENT

Question Bank
Sr. No. Concept
Section A Section B

Q.5, Q.26, Q.6, Q.4, Q.7, Q.14,

1 Measurement at initial recognition Q.18, Q.8, Q.9, Q.14, Q.10
Q.19

2 Nature of expenses & applicability Q.1, Q.3 Q.13, Q.1, Q.25, Q.18

3 Exchange of Assets Q.16, Q.15

4 Revaluation

• Cost Model Q.4 Q.10

• WDV Model Q.11 Q.12

5 Depreciation Q.12, Q.6

6 Change in Accounting Estimate Q.23, Q.17

Q.8, Q.20, Q.21, Q.22, Q.2, Q.3,

7 Miscellaneous Q.2, Q.15, Q.7, Q.13, Q.5,
Q.11, Q.9

8 Special Case Q.16, Q.17 Q.24

 AS 10.2

AS 10 - PROPERTY, PLANT AND EQUIPMENT

AS 10

SECTION A (CONCEPT QUESTIONS)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI - ILLUSTRATION 6
2 ICAI - ILLUSTRATION 7
3 INTER QP - NOV 2018
4 QUESTION
5 ICAI - ILLUSTRATION 13
6 ICAI - ILLUSTRATION 14
7 ICAI - ILLUSTRATION 10
8 QUESTION
9 QUESTION
10 QUESTION
11 QUESTION (Similar to
ICAI P.Q. 15)
12 INTER QP NOV 2020
13 ILLUSTRATION
INTER RTP MAY 2019 /
14 IPCC RTP MAY 2019)
(Similar to ICAI P.Q. 13)
15 ICAI – P.Q. 12
16 ICAI – P.Q. 16
17 ICAI – P.Q. 17
18 ICAI – P.Q. 18
 AS 10.3

1. QUESTION (ILLUSTRATION 6 – ICAI)

AS 10
Entity A, which operates a major chain of Supermarkets, has acquired a new store location. The
new location requires significant Renovation Expenditure. Management expects that the
renovations will last for 3 Months during which the Supermarket will be closed.
Management has prepared the budget for this period including expenditure related to Construction
and Re-Modelling Costs, salaries of staff who will be preparing the Store before its opening and
related Utilities Costs. What will be the treatment of such expenditures?

SOLUTION
REFERENCE:
As per the provisions of AS 10 PROPERTY, PLANT & EQUIPMENT, the cost of an item of property,
plant and equipment comprises any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner intended by management.
The cost of an item of property, plant and equipment should be recognised as an asset if, and
only if -
• It is probable that future economic benefits associated with the item will flow to the
enterprise; and
• The cost of the item can be measured reliably.
ANALYSIS:
The costs of construction and re-modelling the supermarket are necessary to bring the store to
the condition necessary for it to be capable of operating in the manner intended by management.
However, if the cost of salaries, utilities and storage of goods are in the nature of operating
expenditure that would be incurred if the supermarket was open, then these costs are not
necessary to bring the store to the condition necessary for it to be capable of operating in the
manner intended by management and should be expensed.
CONCLUSION:
Construction and re-modelling cost should be capitalized by Entity A.

2. QUESTION (ILLUSTRATION 7 - ICAI)

An amusement park has a 'soft opening to the public, to trial run its attractions. Tickets are sold
at a 50% discount during this period and the operating capacity is 80%. The official opening day
of the amusement park is three months later.
 AS 10.4

Management claim that the soft opening is a trial run necessary for the amusement park to be
AS 10

in the condition capable of operating in the intended manner. Accordingly, the net operating costs
incurred should be capitalised. Comment.

SOLUTION
FACTS:
Amusement Park management wants to capitalise the net operating costs incurred during soft
opening as it is a trial run.
REFERENCE:
As per the provisions of AS 10 PROPERTY, PLANT & EQUIPMENT, the cost of an item of property,
plant and equipment comprises any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in the manner intended by
management.
AS 10 specifically mentions inauguration costs are not part of PROPERTY, PLANT & EQUIPMENT.
ANALYSIS:
As per the reference above, inauguration costs cannot be capitalised. Also, even though park is
running at less than full operating capacity (80% of operating capacity), there is sufficient
evidence that park is capable of operating in the manner intended by management.
CONCLUSION:
Contention of management to capitalise the cost is incorrect. Net operating cost should not be
capitalised, but should be recognised as expense in the statement of profit and loss.

3. QUESTION (INTER QP - NOV 2018)

Neon Enterprise operates a major chain of restaurants located in different cities. The company
has acquired a new restaurant located at Chandigarh. The new-restaurant requires significant
renovation expenditure. Management expects that the renovations will last for 3 months during
which the restaurant will be closed.
Management has prepared the following budget for this period -
Salaries of the staff engaged in preparation of restaurant before its opening `7,50,000
Construction and remodelling cost of restaurant `30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property, Plant and
Equipment".
 AS 10.5

AS 10
SOLUTION
REFERENCE:
As per the provisions of AS 10 PROPERTY, PLANT & EQUIPMENT, the cost of an item of property,
plant and equipment comprises any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner intended by management.
The cost of an item of property, plant and equipment should be recognised as an asset if, and
only if -
• It is probable that future economic benefits associated with the item will flow to the
enterprise; and
• The cost of the item can be measured reliably.
ANALYSIS:
Management of Neon enterprise should capitalise the cost of construction and remodeling because
they are necessary to bring the restaurant to the condition necessary for it to be capable of
operating in the manner intended by management.
However, the cost of salaries of staff engaged in the preparation of restaurant ₹7,50,000 before
its opening are of operating nature as they would be incurred even when the restaurant would be
open.
CONCLUSION:
Construction and re-modelling cost of restaurant - ₹ 30,00,000 should be considered as a part of
asset.
Cost of Salary - ₹ 7,50,000 should be charged to Profit and Loss Account as expense.

4. QUESTION
An Entity decides to revalue its Building on 1st April. On the date of revaluation, the Building stand
at a cost of ₹ 100 Lakhs and Accumulated Depreciation is ₹ 40 Lakhs. The Building are now
revalued at ₹ 150 Lakhs. How should the Entity account for the Revalued Building in its books of
account?
 AS 10.6
AS 10

SOLUTION
REFERENCE:
When an item of AS 10 PROPERTY, PLANT & EQUIPMENT is revalued, the carrying amount of that
asset is adjusted to the revalued amount. At the date of revaluation, gross carrying amount and
accumulated depreciation amount changes.
Gross carrying amount is adjusted in a manner that is consistent with the revaluation of the
carrying amount of the asset.
Gross Carrying Amount —>
• May be restated by reference to observable market data. Or
• May be restated proportionately to the change in the carrying amount.
Accumulated Depreciation at the date of revaluation
• adjusted to equal the difference between the gross carrying amount of the asset after
taking into account accumulated impairment losses.
ANALYSIS / CONCLUSION:
Building is revalued to `150 lakhs i.e., 150% increase from original cost of `100 Lakhs.
So, applying that ratio of 150%, the gross carrying amount will be `100 + `150 = `250 lakhs and,
Accumulated depreciation will be `40 Lakhs + 150% = `60 Lakhs.
As given above, if item of PROPERTY, PLANT & EQUIPMENT is revalued, the carrying amount of
such item is adjusted to the revaluation account.

5. QUESTION (ILLUSTRATION 13 – ICAI)

Entity B constructs a machine for its own use. Construction is completed on 1 stNovember 20X1 but
the company does not begin using the machine until 1stMarch 20X2. Comment.
 AS 10.7

SOLUTION

AS 10
FACTS:
Machine constructed for its own use was completed on 1stNovember 2021 but was not used until
1stMarch 2022.
REFERENCE:
As per AS 10, "Property, plant and equipment,"
Depreciation of an asset begins when it is available for use, i.e., when it is in the location and
condition necessary for it to be capable of operating in the manner intended by the management.
ANALYSIS:
Depreciation should commence as soon as the asset is acquired and is available for use. The fact
that the machine was not used for a period after it was ready to be used is not relevant in
considering when to begin charging depreciation.
CONCLUSION:
The entity should begin charging depreciation from the date the machine is ready for use, i.e., 1st
November 2021.

6. QUESTION (ILLUSTRATION 14 – ICAI)

A property costing 10,00,000 was bought in 20X1. Its estimated total physical life is 50 years.
However, the company considers it likely that it will sell the property after 20 years. The estimated
residual value in 20 years' time, based on 20X1 prices, is:
Case (a) ` 10,00,000
Case (b) ` 9,00,000.
Calculate the amount of depreciation.

SOLUTION
In case (a)
REFERENCE:
As per AS 10, "Property, plant and equipment,"
The residual value of an asset may increase to an amount equal to or greater than its carrying
amount. If it does, the depreciation charge of the asset is zero unless and until its residual value
subsequently decreases to an amount below its carrying amount.
 AS 10.8

ANALYSIS:
AS 10

The company considers that the residual value, based on prices prevailing at the balance sheet
date, will equal the cost.
CONCLUSION:
Therefore, there will be no depreciation amount.
In case (b)
REFERENCE:
As per AS 10, "Property, plant and equipment,"
The residual value of an asset may increase to an amount equal to or greater than its carrying
amount. If it does, the depreciation charge of the asset is zero unless and until its residual value
subsequently decreases to an amount below its carrying amount.
ANALYSIS:
The company considers that the residual value, based on prices prevailing at the balance sheet
date, will be ` 9,00,000 i.e., less than carrying amount.
CONCLUSION:
The depreciable amount is, therefore, 1,00,000.
Annual depreciation (on a straight-line basis) will be 5,000 [{10,00,000 –9,00,000} ÷ 20].

7. QUESTION (ILLUSTRATION 10 – ICAI)

Entity A is a large manufacturing group. It owns a number of industrial buildings, such as factories
and warehouses and office buildings in several capital cities. The industrial buildings are located
in industrial zones, whereas the office buildings are in central business districts of the cities.
Entity A's management wants to apply the revaluation model as per AS 10 (Revised) to the
subsequent measurement of the office buildings but continue to apply the historical cost model
to the industrial buildings. State whether this is acceptable under AS 10 (Revised) or not with
reasons?

SOLUTION
FACTS:
Entity A's management wants to apply the revaluation model as per AS 10 to the subsequent
measurement of the office buildings but continue to apply the historical cost model to the
industrial buildings.
 AS 10.9

REFERENCE :

AS 10
As per AS 10, "Property, plant and equipment,"
1. An enterprise should choose
• Either Cost Model or
• Revaluation Model
as its accounting policy and should apply that policy to an entire class of PPE.
2. A class of PPE is a grouping of assets of a similar nature and use in operations of an enterprise.
If an item of PPE is revalued, the entire class of PPE to which that asset belongs should be
revalued.
ANALYSIS:
The office buildings can be clearly distinguished from the industrial buildings in terms of their
function, their nature and their general location. The different characteristics of the buildings
enable them to be classified as different PPE classes. The different measurement models can,
therefore, be applied to these classes for subsequent measurement.
CONCLUSION:
All properties within the class of office buildings must be carried at revalued amount.

8. QUESTION
On 1st April, an Enterprise acquired a machine under the following terms:
Particulars Rs.
List Price of Machine 80,00,000
Import Duty 5,00,000
Delivery Fees 1,00,000
Electrical Installation Costs 10,00,000
Pre-Production Testing 4,00,000
Purchase of a 5-year Maintenance Contract with the Vendor 7,00,000
The Enterprise was granted a Trade Discount of 10% on the initial List Price of the Asset and a
settlement discount of 5%, if payment for the Machine was received within 1 month of purchase.
The Enterprise paid for the Plant on 20th April. At what Cost the Asset will be recognised?
 AS 10.10

SOLUTION
AS 10

REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
Particulars Rs.
List Price 80,00,000 Less : Trade Discount [10%] 72,00,000
Import Duty [non-refundable] 5,00,000
Delivery Fees 1,00,000
Electrical Installation Costs 10,00,000
Pre-Production Testing 4,00,000
Total Capitalized Cost of Asset 92,00,000
Notes:
1) Maintenance Contract is a separate contract to get service, so, the Maintenance Contract Cost
of Rs.7,00,000 should be taken as a Prepaid Expenses and charged to the Profit or Loss over a
period of 5 years.
2) Settlement Discount Received of [Rs. 72,00,000 x 5%] = Rs.3,60,000 is to be shown as Other
Income in the Profit or Loss Statement Account.

9. QUESTION
Deenabandu Ltd. contracted with a Supplier to purchase a specific Machinery to be installed in
Department A in two months’ time. Special Foundations were required for the Plant, which were
to be prepared within this supply lead time. The cost of site preparation and laying foundations
were Rs.47,290. These activities were supervised by a Technician during the entire period, who is
employed for this purpose of Rs. 15,000 per month. The Technician’s Services were given to
Department A by Department B, which billed the services at Rs. 16,500 per month after adding
10% profit margin.
The Machine was purchased at Rs. 52,78,000 including GST. Rs. 18,590 Transportation Charges
were incurred to bring the Machine to the Factory. An Architect was engaged at a fee of Rs.
10,000 to supervise machinery installation at the Factory Premises. Also, payment under the
invoice was due in 3 months. However, the Company made the payment in the 2 nd month. The
Company operates on Bank Overdraft @11%.
Ascertain the amount at which the Asset should be recognized as PPE under AS 10.
 AS 10.11

AS 10
SOLUTION
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
Cost of PPE [i.e., Machine] is calculated as under: -
Particulars Rs.
Purchase Price Given 52,78,000
Less: GST Not adjusted since Rate & input Tax Nil
Credit availability not given.
Add: Site Preparation Cost Given 47,290
Add: Technician’s Salary Specific/Attributable Cost for 2 30,000
months, w/o Profits [Note 2]
Add: Initial Delivery Cost Transportation 18,590
Add: Professional Fees for installation Architect’s Fees 10,000
Total Cost of Asset 53,83,880
Notes:
1) If GST Rate is given and Input Tax Credit is available, it should not be included in Cost of PPE.
2) Internally Booked Profits should be eliminated in arriving at the Cost of PPE.
3) Interest on Bank Overdraft for earlier payment of Invoice is not relevant under AS-10 or AS-16.

10. QUESTION
Jivan Ltd. purchased a Machinery from Kripa Ltd. on 31.08.2017. Quoted Price was Rs.275 Lakhs.
The Vendor offers 2% Trade Discount. GST on Quoted Price is 6%. Jivan Ltd. spent Rs. 60,000 for
transportation and Rs. 45,000 for Architect’s Fees. They also spent Rs. 15,000 for Material, Rs.
10,000 for Labour and Rs. 4,000 as overheads during the trial run of the Machine. The Machine
 AS 10.12

was ready for use on 15.01.2018 but it was put to use on 15.03.2018. Find out the original cost of
AS 10

the machine.

SOLUTION
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
Particulars Rs. Lacs
Quoted Price of Machinery 275.00
Less: Trade Discount 5.50
Net Price 269.50
Transportation Cost [Cost of bringing the asset to present location] 0.60
Architect Fees [directly attributable Cost] 0.45
Pre-Operative Cost [assuming directly relatable to the Machinery] 0.29
[0.15 + 0.10 + 0.04]
Net Cost 270.84

11. QUESTION (Similar to ICAI P.Q. 15)

Digambar Ltd acquired a Machinery for ₹ 25,00,000 five years ago. Depreciation was charged at
10% on SLM basis, for a useful life of ten years. Two years after acquisition, the Company revalued
the Machinery to 30,00,000 and created a Revaluation Reserve to that extent. Depreciation was
provided on the revalued amount over the balance useful life of eight years. The Machinery was
sold in the current year for ₹ 11,25,000. Give the accounting treatment for the above in the
Company's accounts. What will be the treatment, if the Machinery fetched only 4,25,000 now?
 AS 10.13

AS 10
SOLUTION
Particular ₹
Original cost of the Asset 25,00,000
Less: Depreciation for year 1 and year 2 (₹25,00,000 x 10%X 2 years) 5,00,000
Book value in year 3 20,00,000
Add: Revaluation Surplus, to adjust / increase book value to ₹ 30,00,000 10,00,000
Revalued Amount of Asset 30,00,000
Less: Depreciations in years 3 - 5 = 30,00,000 / 8 years X 3 years 11,25,000
Book value of machinery at the end of year 5 (years of disposal) 18,75,000
The treatment of gain / Loss on disposal / Revaluations is as under -
Particular Disposal proceeds Disposal proceeds
= ₹ 11,25,000 = ₹ 4,25,000
(A) BOOK VALUE less ₹ 18,75,000 - ₹ 11,25,000 ₹ 18,75,000 - ₹ 4,25,000
disposal proceeds = Loss = ₹ 7,50,000 (Loss) = ₹ 14,50,000 (Loss)
recognized in profit or Loss
(B) Revaluation Surplus ₹ 10,00,000 ₹ 10,00,000
directly transferred to
Retained Earning

12. QUESTION (INTER QP NOV 2020)

A Ltd following assets. Calculate depreciation for the year ending 31st March,2020 for each assets
as per AS 10 (Revised)
i. Machinery purchased for ` 10 lakhs on 1st April, 2015 and residual value after useful life of 5
years, based on 2015 prices is ` 10 Lakhs
ii. Land for ` 50 lakhs
iii. A Machinery is constructed for ` 5,00,000 for its own use (Useful life is 10 years). Construction
is completed on 1st April, 2019 but the company does not begin using the machine until 31st
March, 2020
iv. Machinery purchased on 1st April, 2017 for ` 50,000 with useful life of 5 years and residual
value is nil on 1st April, 2019, management decides to use these assets for further 2 years only.
 AS 10.14
AS 10

SOLUTION (i)
REFERENCE:
As per AS 10, "Property, plant and equipment,"
The residual value of an asset may increase to an amount equal to or greater than its carrying
amount. If it does, the depreciation charge of the asset is zero unless and until its residual value
subsequently decreases to an amount below its carrying amount.
ANALYSIS:
The company considers that the residual value, based on prices prevailing at the balance sheet
date, will equal to the cost.
CONCLUSION:
Therefore, no depreciation amount and depreciation are correctly zero.
SOLUTION (ii)
Land has an unlimited useful life and therefore is not depreciated
SOLUTION (iii)
REFERENCE:
As per AS 10, "Property, plant and equipment,"
Depreciation of an asset begins when it is available for use, i.e., when it is in the location and
condition necessary for it to be capable of operating in the manner intended by the management.
ANALYSIS & CONCLUSION:
The entity should begin charging depreciation from the date the machine is ready for use. The
fact that the machine was not used for a period after it was ready to be used is not relevant in
considering when to begin charging depreciation.
SOLUTION (iv)
REFERENCE:
As per AS 10, "Property, plant and equipment,"
Depreciation is recognised even if the fair value of the asset exceeds its carrying amount.
ANALYSIS & CONCLUSION:
The entity has charged depreciation using the straight-line method at ` 10,000 per annum i.e.
(50,000/5 years). On 1st April,2019, the asset's net book value is [50000 – (10,000 x 2)] ` 30,000.
The remaining useful life is 2 years.
 AS 10.15

The company should amend the annual provision for depreciation to charge the unamortised cost

AS 10
over the revised remaining life of 2 years. Consequently, it should charge depreciation for the next
2 years at ` 15,000 per annum i.e. (30,000 / 2 years)

13. ILLUSTRATION
Entity A carried plant and machinery in its books at 2,00,000. These were destroyed in a fire. The
assets were insured 'New for old' and were replaced by the insurance company with new machines
that cost 20,00,000. The machines were acquired by the insurance company and the company did
not receive 20,00,000 as cash compensation. State, how Entity A should account for the same?

SOLUTION
FACTS:
Entity A carried plant and machinery in its book at Rs. 2,00,000 which were destroyed by fire but
the assets were insured 'new for old.' The machines were acquired by the insurance company and
the company did not receive 20,00,000 as cash compensation.
REFERENCE:
As per AS 10 Property, Plant & Equipment, Impairments or losses of items of property, plant and
equipment, related claims for or payments of compensation from third parties and any
subsequent purchase or construction of replacement assets are separate economic events and are
accounted for as below:
The cost of items of property, plant and equipment restored, purchased or constructed as
replacements is determined in accordance with AS 10
ANALYSIS / CONCLUSION:
Entity A should also separately recognise a receivable and a gain in the income statement
resulting from the insurance proceeds under AS 29 once receipt is virtually certain. The receivable
should be measured at the fair value of assets that will be provided by the insurer.
Entity A should account for a loss in the Statement of Profit and Loss on derecognition of the
carrying value of plant and machinery in accordance with AS 10.
 AS 10.16

14. QUESTION (INTER RTP MAY 2019 / IPCC RTP MAY 2019) (Similar to ICAI P.Q. 13)
AS 10

Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) 5000000
2. Initial delivery and handling costs 4,00,000
3. Cost of site preparation 12,00,000
4. Consultants used for advice on the acquisition of the plant 14,00,000
5. Interest charges paid to supplier of plant for deferred credit 4,00,000
6. Estimated dismantling costs to be incurred after 7 years 6,00,000
7. Operating losses before commercial production 8,00,000
Please advise Preet Ltd. on the costs that can be capitalized in accordance with AS 10 (Revised).

SOLUTION
FACTS:
Preet Ltd. is installing a new plant at its production facility. It has incurred various costs.
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
1. Cost of the plant 50,00,000
2. Initial delivery and handling costs 4,00,000
3. Cost of site preparation 12,00,000
4. Consultant fees 14,00,000
5. Estimated dismantling costs to be incurred after 7 years 6,00,000
Total Cost 86,00,000
 AS 10.17

CONCLUSION:

AS 10
Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying
asset) of ` 4,00,000 and operating losses before commercial production amounting to ` 8,00,000
are not regarded as directly attributable costs and thus cannot be capitalized. They should be
written off to the Statement of Profit and Loss in the period they are incurred.
Plant should be recognized at 86 Lakhs.

15. ICAI – P.Q. 12

1. With reference to AS-10 Revised, classify the items under the following heads:
HEADS
(i) Purchase Price of Property, plant and Equipment (PPE)
(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of PPE.
ITEMS
(1) Import duties and non-refundable purchase taxes.
(2) Initial delivery and handling costs.
(3) Initial operating losses, such as those incurred while demand for the output of an
item builds up.
(4) Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity.
(5) Trade discounts and rebates.
(6) Costs of relocating or reorganizing part or all of the operations of an enterprise.
(7) Installation and assembly costs.
(8) Administration and other general overhead costs.

SOLUTION
Heads
(i) Purchase price of PPE
(ii) Directly attributable cost of PPE
(iii) Cost not included in determining the carrying amount of an item of PPE
 AS 10.18

Items Classified under Head

AS 10

1 Import duties and non-refundable purchase taxes (i)

2 Initial delivery and handling costs (ii)
3 Initial operating losses, such as those incurred while demand for the (iii)
output of an item builds up
4 Costs incurred while an item capable of operating in the manner (iii)
intended by management has yet to be brought into use or is
operated at less than full capacity.
5 Trade discounts and rebates (deducted for computing purchase (i)
price)
6 Costs of relocating or reorganizing part or all of the operations (iii)
of an enterprise.
7 Installation and assembly costs (ii)
8 Administration and other general overhead costs (iii)

16. ICAI – P.Q. 16

Akshar Ltd. installed a new Plant (not a qualifying asset), at its production facility, and incurred
the following costs:
▪ Cost of the Plant (as per supplier’s invoice): ` 30,00,000
▪ Initial delivery and handling costs: ` 1,00,000
▪ Cost of site preparation: ` 2,00,000
▪ Consultant fee for advice on acquisition of Plant: ` 50,000
▪ Interest charges paid to supplier against deferred credit: ` 1,00,000
▪ Estimate of Dismantling and Site Restoration costs: ` 50,000 after 10 years (Present
Value is ` 30,000)
▪ Operating losses before commercial production: ` 40,000
The company identified motors installed in the Plant as a separate component and a cost of
` 5,00,000 (Purchase Price) and other costs were allocated to them proportionately. The company
estimates the useful life of the Plant and those of the Motors as 10 years and 6 years
respectively and SLM method of Depreciation is used.
At the end of Year 4, the company replaces the Motors installed in the Plant at a cost of `
6,00,000 and estimated the useful life of new motors to be 5 years. Also, the company revalued
its entire class of Fixed Assets at the end of Year 4. The revalued amount of Plant as a whole is
` 25,00,000. At the end of Year 8, the company decides to retire the Plant from active use and
also disposed the Plant as a whole for ` 6,00,000.
 AS 10.19

There is no change in the Dismantling and Site Restoration liability during the period of use. You

AS 10
are required to explain how the above transaction would be accounted in accordance with AS 10.

SOLUTION
1. Cost at Initial Recognition:
Particulars `
Cost of the Plant (as per Invoice) 30,00,000
Initial Delivery and Handling Costs 1,00,000
Cost of Site Preparation 2,00,000
Consultants’ Fees 50,000
Estimated Dismantling and Site Restoration Costs 30,000
Total Cost of Plant including Motors 33,80,000
Less: Cost of Motors identified as a separate component (1/6)* 5,63,333
Cost of the Plant (excluding Motors – balance 5/6) 28,16,667
* Purchase price of Motors = ` 5,00,000 out of ` 30,00,000 i.e., 1/6 of value of Plant
Note: Since the asset is not a qualifying asset, payment of interest to the supplier is not
capitalized. Further, operating losses of ` 40,000 incurred before commercial production is not a
directly attributable cost, and hence excluded from cost of asset. These costs are expensed to the
P/L as and when they are incurred.
1. Recognition of Motors Replacement
Particulars `
Cost of Motors determined above 5,63,333
Less: Depreciation for 4 years (as per SLM) 3,75,555
5,63,333 ÷ 6 years x 4 years

Carrying Amount of Motors at the end of Year 4 1,87,778

Accounting: The company should derecognize the existing Carrying Amount of Motors replaced
of ` 1,87,778. Further, the acquisition cost of new motors of ` 6,00,000 would be capitalized as
a separate component. This amount will be depreciated over the next 5 years at ` 6,00,000 ÷
5 years = ` 1,20,000 p.a.
 AS 10.20

2. Revaluation
AS 10

Particulars `
Cost of the Plant at initial recognition [from (1) above] 28,16,667
Less: SLM Depreciation for 4 years: ` 28,16,667 ÷ 10 years x 4 years 11,26,667

Carrying Amount of Plant at the end of Year 4 16,90,000

Revalued Amount of Plant (Excluding Motors, since the same is treated as 19,00,000
a separate component: ` 25,00,000 –
` 6,00,000)
Therefore, Gain on Revaluation credited to Revaluation Reserve 2,10,000

Revised Depreciation Charge p.a.: 19,00,000 ÷ 6 years 3,16,667

3. Derecognition
Particulars Motors Plant
(excluding
Motors)
Cost / Revalued Amount at end of Year 4 6,00,000 19,00,000
Less: Depreciation for Years 5-8 1,20,000 x 4 3,16,667 x 4
= 4,80,000 =12,66,668
Carrying Amount before Disposal / De- recognition 1,20,000 6,33,332

Less: Disposal Proceeds ` 6,00,000 allocated in 95,575 5,04,425

ratio of carrying amount
Loss to be written off to P/L 24,425 1,28,907
Notes:
(a) The Revaluation Surplus of ` 2,10,000 would be transferred directly to Retained Earnings.
(b) The allocation of disposal proceeds of ` 6,00,000 for the plant as whole is apportioned based
on carrying amount of motors and plant (excluding motors)
Alternatively, it may be apportioned as 1/6 towards motors and 5/6 plant (excluding motors)
based on the reasoning that the initially, motors amounted to 1/6 of the entire plant. This
approach may not be preferable because there has been a revaluation of the plant (excluding
motors) and a disposal and subsequent acquisition of the Motor, which is not in the initial
proportion of 5/6 and 1/6 respectively.

17. ICAI – P.Q. 17

Bharat Infrastructure Ltd. acquired a heavy machinery at a cost of ` 1,000 lakhs, the breakdown
of its components is not provided. The estimated useful life of the machinery is 10 years. At the
 AS 10.21

end of Year 6, the turbine, which is a major component of the machinery, needed replacement,

AS 10
as further usage and maintenance was uneconomical. The remainder of the machine is in good
condition and is expected to last for the remaining 4 years. The cost of the new turbine is ` 450
lakhs. Give the accounting treatment for the new turbine, assuming SLM Depreciation and a
discount rate of 8%.

SOLUTION
As per AS 10, Property, Plant and Equipment, the derecognition of the carrying amount of
components of an item of Property, Plant and Equipment occurs regardless of whether the cost
of the previous part / inspection was identified in the transaction in which the item was acquired
or constructed. If it is not practicable for an enterprise to determine the carrying amount of the
replaced part/ inspection, it may use the cost of the replacement or the estimated cost of a future
similar inspection as an indication of what the cost of the replaced part/ existing inspection
component was when the item was acquired or constructed.
In the given case, the new turbine will produce economic benefits to Bharat Infrastructure Ltd.
and the cost is measurable. Since the recognition criteria is fulfilled, the same should be
recognised as a separate item of Property, Plant and Equipment. However, since the initial
breakup of the components is not available, the cost of the replacement of ` 450 lakhs can
be used as an indication based on the guidance given above, discounted at 8% for the 6-year
period lapsed.
Thus, estimate of cost 6 years back = ` 450 lakhs ÷ 1.086 = ` 283.58 lakhs Current carrying
amount of turbine (to be de-recognised) = Estimated cost ` 283.58 lakhs (–) SLM
depreciation at 10% (useful life 10 years) for 6 years ` 170.15 lakhs= ` 113.43 lakhs.
Hence revised carrying amount of the machinery will be as under:
Particulars ` in lakhs
Historical Cost [` 1,000 lakhs (–) SLM Depreciation at 10% (10 year life) for 6 400.00
years]
Add: Cost of new turbine 450.00
Less: Derecognition of current carrying amount of old turbine (113.43)

New Carrying Amount of Machinery 736.57

 AS 10.22

18. ICAI – P.Q. 18

AS 10

Preet Ltd. intends to set up a steel plant, for which it has acquired a dilapidated factor having an
area of 5,000 acres at a cost of ₹ 60,000 per acre. Preet Ltd. has incurred ` 1.10 crores on
demolishing the old Factory Building thereon. A sum of ` 63,00,000 (including 5% GST thereon)
was realized from the sale of material salvaged from the site. Preet Ltd. incurred Stamp Duty and
Registration Charges of 7% of land value, paid legal and consultancy charges ` 8,00,000 for land
acquisition and incurred ` 1,25,000 on title guarantee insurance. Compute the value of the land
acquired.

SOLUTION
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
Particulars `
Purchase Price: 5,000 acres x ` 60,000 per acre 3,000.00
Stamp Duty and Registration Charges at 7% 210.00
Legal and Consultancy Fees 8.00
Title Guarantee Insurance 1.25
Demolition Expenses (Net of Salvage Income) 50.00
[` 110 lakhs (–)` 60 lakhs (` 63 lakhs x 100/105)]
Cost of Land 3,269.25
AS 10.23

AS 10
 AS 10.1

AS 10 - PROPERTY, PLANT AND EQUIPMENT

AS 10

SECTION B (EXAM ORIENTED)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 QP - JULY 21
2 ICAI - ILLUSTRATION 11
3 ICAI - ILLUSTRATION 15
4 QUESTION
5 QUESTION
6 QUESTION
7 QUESTION
8 QUESTION
9 QUESTION
10 QUESTION
11 QUESTION
QUESTION (Similar to
12
ICAI P.Q.14)
13 ICAI - ILLUSTRATION 1
14 ICAI - ILLUSTRATION 5
15 ICAI - ILLUSTRATION 8
16 ICAI - ILLUSTRATION 9
17 ICAI - ILLUSTRATION 12
18 ICAI - ILLUSTRATION 4
19 MTP - OCT 21 – SERIES 2
20 ICAI ILLUSTRATION 2
21 QUESTION
22 ICAI ILLUSTRATION 3
23 IPCC QP JAN 2021
24 QUESTION (QP MAY 22)
25 MTP - OCT 20
INTER RTP NOV 2019 /
26 IPCC RTP MAY 2019 /
IPCC QP NOV 2019
 AS 10.2

1. QUESTION (QP - JULY 21)

AS 10
B Limited, which operates a major chain of retail stores, has acquired a new store location. The
new location requires substantial renovation expenditure. Management expects that the renovation
will last for 4 months during which the store will be closed. Management has prepared the budget
for this period including expenditure related to construction and re-modelling costs, salary of staff
who shall be preparing the store before its opening and related utilities cost. How would such
expenditure be treated in the books of B Limited?

SOLUTION
REFERENCE:
As per the provisions of AS 10 PROPERTY, PLANT & EQUIPMENT, the cost of an item of property,
plant and equipment comprises any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner intended by management.
The cost of an item of property, plant and equipment should be recognised as an asset if, and
only if -
• It is probable that future economic benefits associated with the item will flow to the
enterprise; and
• The cost of the item can be measured reliably.
ANALYSIS:
The costs of construction and re-modelling the supermarket are necessary to bring the store to
the condition necessary for it to be capable of operating in the manner intended by management.
However, if the cost of salaries, utilities and storage of goods are in the nature of operating
expenditure that would be incurred if the supermarket was open, then these costs are not
necessary to bring the store to the condition necessary for it to be capable of operating in the
manner intended by management and should be expensed.
CONCLUSION:
Only Construction and re-modelling cost should be capitalized by B Ltd.
 AS 10.3

2. QUESTION (ILLUSTRATION 11 – ICAI)

AS 10

Entity A has a policy of not providing for depreciation on PPE capitalized in the year until the
following year, but provides for a full year's depreciation in the year of disposal of an asset. Is
this acceptable?

SOLUTION
FACTS:
Entity A has a policy of not providing for depreciation on PPE capitalized in the year but in the
year of disposal of an asset, it provides for a full year's depreciation.
REFERENCE:
As per AS 10, "Property, plant and equipment,"
The depreciable amount of an asset should be allocated on a systematic basis over its useful life.
Useful life means the period over which the asset is expected to be available for use by the entity.
ANALYSIS:
Depreciation should commence as soon as the asset is acquired and is available for use and not
only in the year of disposal.
CONCLUSION:
The policy of Entity A is not acceptable.

3. QUESTION (ILLUSTRATION 15 – ICAI)

Entity B manufactures industrial chemicals and uses blending machines in the production
process. The output of the blending machines is consistent from year to year and they can be
used for different products. However, maintenance costs increase from year to year and a new
generation of machines with significant improvements over existing machines is available every
5 years. Suggest the depreciation method to the management.
 AS 10.4

SOLUTION

AS 10
FACTS:
Maintenance costs of Blending Machines increases from year to year and a new generation of
machines with significant improvements are available every 5 years.
REFERENCE:
As per AS 10, "Property, plant and equipment,"
1. The straight-line depreciation method should be adopted if the production output is consistent
from year to year.
2. Depreciation method should be reviewed at least at each financial year-end. If there has been
a significant change in the expected pattern of consumption of the future economic benefits
embodied, the method should be changed to reflect the changed pattern.
ANALYSIS & CONCLUSION:
The straight-line depreciation method should be adopted, because the production output is
consistent from year to year. Factors such as maintenance costs or technical obsolescence should
be considered in determining the blending machines useful life.

4. QUESTION
ABC Ltd. is installing a New Plant at its production facility, it provides you the following
information: [P (A/c) – N 17]
Particulars Rs.
Cost of the Plant [Cost as per Supplier’s Invoice] 31,25,000
Estimated Dismantling Costs to be incurred after 5 years 2,50,000
Initial Operating Losses before commercial production 3,75,000
Interest paid to Supplier of Plant for deferred credit 2,00,000
Initial Delivery and Handling Costs 1,85,000
Cost of Site Preparation 4,50,000
Consultants used for advice on the acquisition of the Plant 6,50,000
Please advise ABC Ltd. on the costs that can be capitalized for Plant in accordance with AS-10
PPE.
 AS 10.5

SOLUTION
AS 10

REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
Particulars Rs.
Purchase Price 31,25,000
Add: Estimated Dismantling Costs 2,50,000
Initial Delivery & Handling Costs 1,85,000
Site Preparation Cost 4,50,000
Consultancy Charges 6,50,000
Total Capitalized Cost of Asset 46,60,000
Note: As per AS-10 PPE, Initial Operating Losses cannot be capitalized.

5. QUESTION
Versatile Limited purchased Machinery for Rs. 4,80,000 [inclusive of GST of Rs. 40,000]. Input Tax
Credit is available for the GST paid. The Company Incurred the following other expenses for
installation.
Particulars Rs.
Cost of Preparation of Site for Installation 21,000
Total Labour Charges [200 out of the total 600 man hours worked, were spent for 66,000
installation of the Machinery]
Spare Parts and Tools consumed in Installation. 6,000
Total Salary of Supervisor [time spent for installation was 25% of the total time 24,000
worked]
Total Administrative Expenses [1/10 relates to the Plant installation] 32,000
Test Run and Experimental Production Expenses 23,000
Consultancy Charges to Architect for Plant Setup 9,000
Depreciation on Assets used for the installation 12,000
The Machine was ready for use on 15th January but was used from 1st February. Due to this delay
further costs Rs. 19,000 was incurred. Calculate the value at which the Plant should be capitalized.
 AS 10.6

AS 10
SOLUTION
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
Cost of PPE [i.e., Machine] is calculated as under:
Particulars Rs.
Purchase Price [Rs. 4,80,000 less GST for which Credit is available 40,000] 4,40,000
Add: Site Preparation Cost 21,000

Labour Charges Rs. 66,000 x

200 22,000
600

Spares and Tools in Installation 6,000

Salary of Supervisor [24,000 x 25%] 6,000
Admin Expense attributable to Installation [Attributable Costs are included] 3,200
1/10th of 32,000
Test Run & Experimental Production [Indirect Element] 23,000
Consultancy Charges to Architect for Plant setup 9,000
Depreciation on Asset used for Installation 12,000
Expenses due to delay in use [Excluded as it is abnormal] Nil
Total Capitalized Cost of Asset 5,42,200

6. QUESTION
Chandra Towers Ltd. [CTL] purchased a Plant from M/s. Tatamaco, on 30.09.2017 with a Quoted
Price of Rs. 180 Lakhs. Tatamaco offer 3 months credit with a condition that discount of 1.25%
will be allowed if the payment were made within one month. GST is 18% on the Quoted Price.
Full Input Tax Credit is available. CTL incurred 2% on Transportation Costs and 3% on Erection
 AS 10.7

Costs of the quoted price Pre-Operative Cost amounted to Rs. 1.50 Lakhs. The Machine was ready
AS 10

for use on 30th December 2017; however, it was put to use only on 1st April 2018. Find out the
Original Cost

SOLUTION
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
Particulars Rs. Lacs
Quoted Price of Plant 180.00
GST [no adjustment is required, since full Input Tax Credit is available.] Nil
Transportation Cost [Cost of bringing the Asset to present location
[180.00 x 2%] 3.60
Erection Cost [Cost of bring the Asset to present condition]
[180.00 x 3%] 5.40
Pre-Operative Cost [assuming directly relatable to the Machinery] 1.50
Total Original Cost 190.50

7. QUESTION
Janardhan Ltd. purchased Machinery from Kusuma Ltd. on 30.9.2017. The price was Rs. 370.44
Lakhs after charging 8% GST and giving a Trade Discount of 2% on the quoted price. Transport
Charges were 0.25% on the Quoted Price and installation charges 1% on the Quoted Price.
Expenditure incurred on the Trial Run was Materials Rs. 35,000, Wages Rs. 25,000 and Overheads
Rs.15,000. The machinery was ready for use on 01.12.2017, but it was actually put to use only on
01.05.2018. Find out the cost of the machine.
 AS 10.8

AS 10
SOLUTION
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
Particulars Computation Rs. Lakhs
Quote Price 370.44 x
100
x
100 350.000
108 98

Less: Trade Discount at 2% 2% 0f 350.00 7.000

Net Price 343.000
Add: Transportation charges 0.25% on Quoted price 0.25% x 350.00 0.875
Add: Installation Charges 1.00% 0n Quoted Price 1.00% x 350.00 3.500
Add: Expenses on Trial run Materials + Wages + OH – 0.350 + 0.250 + 0.150 0.750
Total Cost of Asset 348.125

8. QUESTION
An Entity owns a considerable number of Properties, such as Factories, Warehouses and Office
Buildings in several cities. The Factories and Warehouses are located in industrial zones, whereas
the Office Buildings are in the central business districts of the cities. The Entity wants to apply
the Revaluation Model to the subsequent measurement of the Office Building but continue to apply
the Cost Model to the Factories and Warehouses. Is this permissible?
 AS 10.9
AS 10

SOLUTION
REFERENCE:
As per AS 10, If an item of Property, Plat & Equipment is revalued, the entire class of PPE to which
that asset belongs should be revalued.
1) The different characteristics of the Building enable them to be classified as different PPE
classes. Office Buildings can be clearly distinguished from the Factories & Warehouses in terms
of their function, their nature and their general location.
2) Different Measurement Models can be applied to these classes for subsequent measurement.
Hence, Office Buildings can be measured using Revaluation Model. However, all properties
within the class of Office Buildings must, be carried at Revalued Amount. Separate disclosure
of the two classes must be given.

9. QUESTION
An Entity acquires an item of PPE for Rs. 50,000, which is depreciated over 20 years. Three years
later, the asset is revalued to Rs. 60,000. Compute the amount of Revaluation Surplus.

SOLUTION
Particulars Rs.
Revaluation Amount 60,000
Less: Carrying Amount = Cost Rs. 50,000 – 3 years Depreciation Rs. 7,500 i.e. [42,500]
[Rs. 50,000 / 20] x 3 years.
Revaluation Surplus after 3rd Year 17,500
 AS 10.10

10. QUESTION

AS 10
An Entity decides to revalue its Building on 1st April. On the date of revaluation, the Budling stand
at a cost of Rs. 100 Lakhs and Accumulated Depreciation is Rs. 40 Lakhs. The Building is now
revalued at Rs. 150 Lakhs. How should the Entity account for the Revalued Building in its books
of account?

SOLUTION
REFERENCE:
When an item of PROPERTY, PLANT & EQUIPMENT is revalued, the carrying amount of that asset
is adjusted to the revalued amount. At the date of revaluation, gross carrying amount and
accumulated depreciation amount changes.
Gross carrying amount is adjusted in a manner that is consistent with the revaluation of the
carrying amount of the asset.
Gross Carrying Amount —>
• May be restated by reference to observable market data. Or
• May be restated proportionately to the change in the carrying amount.
Accumulated Depreciation at the date of revaluation
• adjusted to equal the difference between the gross carrying amount of the asset after
taking into account accumulated impairment losses.
ANALYSIS / CONCLUSION:
Building is revalued to `150 lakhs i.e., 150% increase from original cost of `100 Lakhs.
So, applying that ratio of 150%, the gross carrying amount will be `100 + `150 = `250 lakhs and,
Accumulated depreciation will be `40 Lakhs + 150% = `60 Lakhs.
As given above, if item of PROPERTY, PLANT & EQUIPMENT is revalued, the carrying amount of
such item is adjusted to the revaluation account.
 AS 10.11

11. QUESTION
AS 10

Explain the accounting treatment for Revaluations as per AS-10.

SOLUTION
As per AS 10, When an Item of Property, Plant & 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 –
Method I: Gross Carrying Amount is adjusted in a manner that is consistent with the revaluation
of the Carrying Amount of the asset.
• May be restated by reference to observable market data or
Gross Carrying Amount
• May be restated proportionately to the change in the carrying
amount.
Accumulated Depreciation Adjusted to equal the difference between the Gross carrying
at the date of revaluation Amount & Carrying Amount of the asset after taking into account
Accumulated Impairment Losses.

12. QUESTION (Similar to ICAI P.Q.14)

Argon Ltd purchased a shop at the beginning of year 1, at a cost of 8,50,000. The useful life of the
shop is estimated as 30 years with residual value of 25,000 and depreciation is provided on a
straight line basis. The shop was revalued in the middle of year 15, for 19,50,000 and the revaluation
was incorporated in the accounts. Calculate:
(A) Surplus on Revaluation
(B) Depreciation to be changed in the Profit and Loss account for the year 15.
 AS 10.12

SOLUTION

AS 10
Particular ₹
Original cost of Asset 8,50,000
Less: Depreciations 14.50 years (8,50,000-25,000) /30 X 14.5 years (3,98,750)
Book value 4,51,250
Add: Revaluation Reserve to adjust Book value to ₹ 19,50,000 14,98,750
Revalued Amount = Revised Depreciable value, for balance 15,5 years 19,50,000
Less: Depreciations for remaining 6 months in year 15 (19,50,000- 25,000/15.5X ½ (62,097)
Carrying Amount at end of year 15 18,87,903
Depreciations for year 15 75,847
(8,50,000-25,000/30)X1/2 + (19,50,000-025,000/15.5X1/2)

13. QUESTION (ILLUSTRATION 1 – ICAI)

Entity A, a supermarket chain, is renovating one of its major stores. The store will have more
available space for in store promotion outlets after the renovation and will include a restaurant.
Management is preparing the budgets for the year after the store reopens, which include the cost
of remodelling and the expectation of a 15% increase in sales resulting from the store renovations,
which will attract new customers. State whether the remodelling cost will be capitalized or not.

SOLUTION
REFERENCE:
As per the provisions of AS 10 PROPERTY, PLANT & EQUIPMENT, the cost of an item of property,
plant and equipment comprises any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner intended by management.
The cost of an item of property, plant and equipment should be recognised as an asset if, and
only if -
• It is probable that future economic benefits associated with the item will flow to the
enterprise; and
• The cost of the item can be measured reliably.
 AS 10.13

ANALYSIS:
AS 10

The expenditure in remodeling the store will create future economic benefit (in the form of 15%
increase in sales). Moreover, the cost of remodeling can be measured reliably.
CONCLUSION:
Construction and re-modelling cost should be capitalized by Entity A

14. QUESTION (ILLUSTRATION 5 – ICAI)

Omega Ltd. contracted with a supplier to purchase machinery which is to be installed in its one
department in three months' time. Special foundations were required for the machinery which
were to be prepared within this supply lead time. The cost of the site preparation and laying
foundations were 1,40,000. These activities were supervised by a technician during the entire
period, who is employed for this purpose of ` 45,000 per month. The machine was purchased at
` 1,58,00,000 and ` 50,000 transportation charges were incurred to bring the machine to the
factory site. An Architect was appointed at a fee of ` 30,000 to supervise machinery installation
at the factory site. You are required to ascertain the amount at which the Machinery should be
capitalized.

SOLUTION
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:

Particulars Amount

Purchase Price Given 1,58,00,000

Add: Site Preparation Cost Given 1,40,000
 AS 10.14

AS 10
Specific/Attributable overheads for 3 months 1,35,000
Technical salary
(45,000×3)
Initial Delivery Cost Transportation 50,000
Professional Fees for installation Architect’s Fees 30,000
Total cost of machinery 1,61,55,000

15. QUESTION (ILLUSTRATION 8 – ICAI)

Entity A exchanges land with a book value of 10,00,000 for cash of 20,00,000 and plant and
machinery valued at 25,00,000. What will be the measurement cost of the assets received.
(Consider that the transaction has commercial substance)?

SOLUTION
FACTS:
Entity A exchanges land with a book value of 10,00,000 for cash of 20,00,000 and plant and
machinery valued at 25,00,000.
REFERENCE:
As per AS 10 "Property, Plant and Equipment, cost of an item of PPE is measured at fair value
unless:
(a) Exchange transaction lacks commercial substance; Or
(b) Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable.
ANALYSIS:
The transaction has commercial substance and therefore, the plant and machinery would be
recorded at the fair value of the land less the cash received.
CONCLUSION:
Plant and machinery would be recorded at ` 25,00,000, which is equivalent to the fair value of the
land of 45,00,000 less the cash received of 20,00,000.

16. QUESTION [(ILLUSTRATION 9 – ICAI) (EXCHANGE OF ASSETS THAT LACK COMMERCIAL

SUBSTANCE)]
Entity A exchanges car X with a book value of 13,00,000 and a fair value of 13,25,000 for cash of
15,000 and car Y which has a fair value of 13,10,000. The transaction lacks commercial substance
as the company’s cash flows are not expected to change as a result of the exchange. It is in the
 AS 10.15

same position as it was before the transaction. What will be the measurement cost of the assets
AS 10

received?

SOLUTION
FACTS:
Entity A exchanges car X with a book value of 13,00,000 and a fair value of 13,25,000 for cash of
15,000 and car Y which has a fair value of 13,10,000.
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
The cost of an item of PPE is measured at fair value unless:
(a) Exchange transaction lacks commercial substance; Or
(b) Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable.
ANALYSIS:
The transaction lacks commercial substance as the company’s cash flows are not expected to
change as a result of the exchange. It is in the same position as it was before the transaction.
CONCLUSION:
The entity recognizes the assets received at the book value of car X. Therefore, it recognizes cash
of 15,000 and car Y as PPE with a carrying value of 12,85,000.

17. QUESTION [(ILLUSTRATION 12 – ICAI) (CHANGE IN ESTIMATE OF USEFUL LIFE)]

Entity A purchased an asset on 1st January 20X1 for 1,00,000 and the asset had an estimated useful
life of 10 years and a residual value of nil. On 1 st January 20X5, the directors reviewed the
estimated life and decided that the asset will probably be useful for a further 4 years.
Calculate the amount of depreciation for each year, if the company charges depreciation on a
Straight Line basis.
 AS 10.16

SOLUTION

AS 10
FACTS:
An asset had estimated useful life of 10 years as on 1st January 20X1. On 1st January 20X5, the
directors reviewed the estimated life and decided that the asset will probably be useful for a
further 4 years.
REFERENCE:
As per AS 10, depreciable amount of an asset should be allocated on a systematic basis over its
useful life.
If expected residual value and the useful life of an asset differ from previous estimates, the change
should be accounted for as a change in an accounting estimate in accordance with AS 5.
ANALYSIS & CONCLUSION:
The entity has charged depreciation using the straight-line method at ` 10,000 per annum i.e.
(1,00,000/10 years). On 1st January 20X5, the asset's net book value was [1,00,000 – (10,000 x 4)]
` 60,000. The remaining useful life is 4 years.
The company should amend the annual provision for depreciation to charge the unmortised cost
over the revised remaining life of four years. Consequently, it should charge depreciation for the
next 4 years at ` 15,000 per annum i.e. (60,000 / 4 years)
Particulars `
Net Book value of the asset as on 1st Jan 2005 60,000
Less: Revised Residual Value Nil
Net Book Value of the asset 60,000
Depreciation per year = 60,000/4 15,000

18. QUESTION (ILLUSTRATION 4 – ICAI)

Entity A has an existing freehold factory property, which it intends to knock down and redevelop.
During the redevelopment period the company will move its production facilities to another
(temporary) site. The following incremental costs will be incurred:
1. Setup costs of 5,00,000 to install machinery in the new location.
2. Rent of 15,00,000
3. Removal costs of 3,00,000 to transport the machinery from the old location to the temporary
location. Can these costs be capitalized into the cost of the new building?
 AS 10.17

SOLUTION
AS 10

REFERENCE:
As per the provisions of AS 10 PROPERTY, PLANT & EQUIPMENT, the cost of an item of property,
plant and equipment comprises any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner intended by management.
The cost of an item of property, plant and equipment should be recognised as an asset if, and
only if -
• It is probable that future economic benefits associated with the item will flow to the
enterprise; and
• The cost of the item can be measured reliably.
Cost Of PROPERTY, PLANT & EQUIPMENT
Includes Excludes
Purchase price Cost of opening new business (e.g., inauguration cost)
Direct attributable costs Cost of introducing new product or service.
Decommission, restoration and Cost of conducting business in new location or with new class
similar liabilities of people
ANALYSIS:
The costs to be incurred by the company are in the nature of costs of relocating or reorganizing
operations of the company and do not meet the requirement of AS 10.
CONCLUSION:
The costs cannot be capitalized.

19. QUESTION (MTP - OCT 21 – SERIES 2)

Aarush Ltd. is installing a new plant in its factory. It provides you the following information:

Cost Of the Plant (cost as per supplier's invoice) 31,25,000

Estimated Dismantling Costs to Be Incurred After 5 Years 2,50,000
Cost Of Site Preparation 4,50,000
Initial Delivery and Handling Costs 1,85,000
Consultants used for advice on the acquisition of the plant 6,50,000
You are required to advise Aarush Ltd. on the costs that can be capitalized for the plant in
accordance with AS 10 ‘Property, Plant and Equipment.
 AS 10.18

SOLUTION

AS 10
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:
According to AS 10 ‘Property, Plant and Equipment’, following costs will be capitalized by Aarush
Ltd.:
Cost Of the Plant (cost as per supplier's invoice) 31,25,000
Initial Delivery and Handling Costs 1,85,000
Cost Of Site Preparation 4,50,000
Consultants used for advice on the acquisition of the plant 6,50,000
Estimated Dismantling Costs to Be Incurred After 5 Years 2,50,000
Total cost of plant 46,60,000

20. ICAI ILLUSTRATION 2

What happens if the cost of the previous part/inspection was/ was notidentified in the transaction
in which the item was acquired or constructed?

SOLUTION
As per AS 10, Derecognition of the carrying amount occurs regardless of whether the cost of the
previous part / inspection was identified in the transaction in which the item was acquired or
constructed.

21. QUESTION
What will be your answer in the above question, if it is not practicable for an enterprise to
determine the carrying amount of the replaced part/inspection?
 AS 10.19
AS 10

SOLUTION
As per AS 10, It may use the cost of the replacement or the estimated cost of a future similar
inspection as an indication of what the cost of the replaced part/existing inspection component
was when the item was acquired or constructed.

22. ICAI ILLUSTRATION 3

What will be your answer in the above question, if it is not practicable for an enterprise to
determine the carrying amount of the replaced part/inspection?

SOLUTION
As per AS 10, "Property, plant and equipment," The cost of replacement or the estimated cost of a
future similar inspection can be used if it is not practicable for an enterprise to determine the
carrying amount of the replaced part/inspection.

23. QUESTION (IPCC QP JAN 2021)

a) A Ltd purchased an assets on 1st April 2014 for ` 5,00,000 and assets had useful life of 8 years
With NIL residual value.
On 1st April 2019, directors reviewed the estimated life of the assets and decided that the assets
would probably be useful for further 2 years with residual value of 5% of the original cost.
Calculate the amount of depreciation to be charged for each year as per AS-10, if the company
charges depreciation on straight line basis
b) A company manufactures a machine for its own use. The manufacturing of machine was
completed on November 1st 2019.The machine was finally capable of operating as on December
 AS 10.20

15th 2019, however company started using the machinery from February 1st 2020. The company

AS 10
charged depreciation from February 1st 2020. Comment in context of AS-10

SOLUTION
a)
FACTS:
Asset purchased by A Ltd. has estimated useful life of 8 years as on 1st April 2014. On 1st April
2019, the directors reviewed the estimated life and decided that the asset will probably be useful
for a further 2 years.
REFERENCE:
As per AS 10, depreciable amount of an asset should be allocated on a systematic basis over its
useful life.
If expected residual value and the useful life of an asset differ from previous estimates, the change
should be accounted for as a change in an accounting estimate in accordance with AS 5.
ANALYSIS & CONCLUSION:
The entity has charged depreciation using the straight-line method at ` 62,500 per annum for
first five years, i.e (5, 00,000/8 years).
On 1st April, 2019, the asset's net book value is [5,00,000 – (62,500 x 5)] ` 1,87,500.
The revised remaining useful life is 2 years.
The company should amend the annual provision for depreciation to charge the unamortized cost
over the revised remaining life of two years considering the revised residual value. Consequently,
it should charge depreciation for the next 2 years at ` 81,250 per annum
Particulars `
Net Book value of the asset as on 1st April 2019 1,87,500
Less: Revised Residual Value – 5% of `5,00,000 (25,000)
Net Book Value of the asset 1,62,500
Depreciation per year = 1,62,500/2 81,250
b)
FACTS:
Machine constructed for its own use was completed on 15th December 2019 but was not used until
1st February 2020.
 AS 10.21

REFERENCE:
AS 10

As per AS 10, "Property, plant and equipment,"

Depreciation of an asset begins when it is available for use, i.e., when it is in the location and
condition necessary for it to be capable of operating in the manner intended by the management.
ANALYSIS:
Depreciation should commence as soon as the asset is acquired and is available for use. The fact
that the machine was not used for a period after it was ready to be used is not relevant in
considering when to begin charging depreciation.
CONCLUSION:
The entity should begin charging depreciation from the date the machine is ready for use, i.e.,
15th December 2019.

24. QUESTION (QP MAY 22)

XYZ Limited provided you the following information for the years ended 31 stMarch, 2022:-
i) The carrying amount of a property at the end of the year amounted to ₹ 2,16,000 (cost/value
₹ 2,50,000 and accumulated depreciated ₹ 34,000). On this date the property was revalued
and was deemed to have a fair value of ₹ 1,90,000. The balance on the revaluation surplus
relating to a previous revaluation gain for this property was ₹ 20,000.
You are required to calculate the revaluation loss as per AS – 10 (Revised) and give its
treatment in the books of accounts.
ii) An asset that originally cost ₹ 76,000 and had accumulated depreciation of ₹ 62,000 was
disposed of during the year for ₹ 4,000 cash. You are required to explain how the disposal
should be accounted for in the financial statements as per AS–10 (Revised).

SOLUTION
(i) REFERENCE:
As per AS 10, a decrease in the carrying amount of an asset arising on revaluation should be
charged to the statement of profit and loss. However, the decrease should be debited directly to
owners’ interests under the heading of revaluation surplus to the extent of any credit balance
existing in the revaluation surplus in respect of that asset.
 AS 10.22

ANALYSIS:

AS 10
Calculation of revaluation loss and its accounting treatment
`
Carrying value of the asset as on 31st March, 2022 a 2,16,000
Revalued amount of the asset b (1,90,000)
Total revaluation loss on asset c=a-b 26,000
Adjustment of previous revaluation reserve d (20,000)
Net revaluation loss to be charged to the Profit and loss account e=c-d 6,000
(ii) REFERENCE:
As per AS 10, the carrying amount of an item of property, plant and equipment is derecognized
on disposal of the asset. It further states that the gain or loss arising from the derecognition of
an item of property, plant and equipment should be included in the statement of profit and loss
when the item is derecognized. Gains should also not be classified as revenue.
ANALYSIS:
Calculation of loss on disposal of the asset and its accounting treatment
`
Original cost of the asset a 76,000
Accumulated depreciation till date b 62,000
Carrying value of the asset as on 31st March, 2022 c=a-b 14,000
Cash received on disposal of the asset d 4,000
Loss on disposal of asset charged to the Profit and loss account e=c-d 10,000

25. QUESTION (MTP - OCT 20)

Omega Ltd, a supermarket chain, is renovating one of its major stores. The store will have more
available space for store promotion outlets after the renovation and will include a restaurant.
Management is preparing the budgets for the year after the store reopens, which include the cost
of remodelling and the expectation of a 15% increase in sales resulting from the store renovations,
which will attract new customers.
Decide whether Omega Ltd. can capitalize the remodelling cost or not as per provisions of AS 10
"Property plant & Equipment".
 AS 10.23

SOLUTION
AS 10

REFERENCE:
As per the provisions of AS 10 PROPERTY, PLANT & EQUIPMENT, the cost of an item of property,
plant and equipment comprises any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner intended by management.
The cost of an item of property, plant and equipment should be recognised as an asset if, and
only if -
• It is probable that future economic benefits associated with the item will flow to the
enterprise; and
• The cost of the item can be measured reliably.
ANALYSIS:
The expenditure in remodeling the store will create future economic benefit (in the form of 15%
increase in sales). Moreover, the cost of remodeling can be measured reliably.
CONCLUSION:
Construction and re-modelling cost should be capitalized by Omega Ltd.

26.QUESTION (INTER RTP NOV 2019 / IPCC RTP MAY 2019 / IPCC QP NOV 2019)
Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed in its
Department A in three months' time. Special foundations were required for the machinery which
were to be prepared within this supply lead time. The cost of the site preparation and laying
foundations were ` 1,41,870. These activities were supervised by a technician during the entire
period, who is employed for this purpose of ` 45,000 per month. The technician's services were
given by Department B to Department A, which billed the services at ` 49,500 per month after
adding 10% profit margin.
The machine was purchased at ` 1,58,34,000 inclusive of IGST @ 12% for which input credit is
available to Shrishti Ltd. ` 55,770 transportation charges were incurred to bring the machine to
the factory site. An Architect was appointed at a fee of ` 30,000 to supervise machinery
installation at the factory site.
Ascertain the amount at which the Machinery should be capitalized under AS 10 considering that
IGST credit is availed by the Shristi Limited. Internally booked profits should be eliminated in
arriving at the cost of the machine.
 AS 10.24

AS 10
SOLUTION
REFERENCE:
As per AS 10 "Property, Plant and Equipment,
Directly attributable costs are those costs which are Directly attributable to bringing the asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. These costs should be considered part of the asset.
However, some operations occur in connection with the construction or development of an item of
PPE, but it is not necessary to bring the item to the location and condition. These incidental
operation costs should be recognised in the Profit and loss account.
ANALYSIS:

Particulars Reference Amount

Purchase Price Given (1,58,34,000×100/112) 1,41,37,500
Add: Site Preparation Given 1,41,870
Cost
Technical salary Specific/Attributable overheads for 3 months (45,000 ×3) 1,35,000
Initial Delivery Cost Transportation 55,770
Professional Fees for Architect’s Fees 30,000
installation
Total cost of Asset 1,45,00,140
 AS 10.25

MCQs
AS 10

1. As per AS 10 (Revised) ‘Property, plant and equipment’, which of the following costs is not
included in the carrying amount of an item of PPE
a) Costs of site preparation
b) Costs of relocating
c) Installation and assembly costs.
d) Initial delivery and handling costs

2. As per AS 10 (Revised) ‘Property, Plant and Equipment’, an enterprise holding investment

properties should value Investment property
a) as per fair value
b) under discounted cash flow model.
c) under cost model
d) under cash flow model

3. A plot of land with carrying amount of ` 1,00,000 was revalued to ` 1,50,000 at the end of Year
Subsequently, due to drop in market values, the land was determined to have a fair value of `
1,30,000 at the end of Year 4. Assuming that the entity adopts Revaluation Model, what would
be the accounting treatment of Revaluation?
a) Initial upward valuation of ` 50,000 credited to Revaluation Reserve. Subsequent downward
revaluation of ` 20,000 debited to P/L.
b) Initial upward valuation of ` 50,000 credited to P/L. Subsequent downward revaluation of `
20,000 debited to P/L.
c) Initial upward valuation of ` 50,000 credited to Revaluation Reserve. Subsequent downward
revaluation of ` 20,000 debited to Revaluation Reserve.
d) Initial upward valuation of ` 50,000 debited to P/L. Subsequent downward revaluation of `
20,000 credited to P/L.

4. A plot of land with carrying amount of ` 1,00,000 was revalued to ` 90,000 at the end of Year
2. Subsequently, due to increase in market values, the land was determined to have a fair
value of ` 1,05,000 at the end of Year 4. Assuming that the entity adopts Revaluation Model,
what would be the accounting treatment of Revaluation?
a) Initial downward valuation of ` 10,000 debited to Revaluation Reserve. Subsequent upward
revaluation of ` 15,000 credited to P/L.
 AS 10.26

b) Initial downward valuation of ` 10,000 debited to P/L. Subsequent upward revaluation of `

AS 10
15,000 credited to P/L.
c) Initial downward valuation of ` 10,000 debited to P/L. Subsequent upward revaluation of `
10,000 credited to P/L and ` 5,000 credited to Revaluation Reserve.
d) Initial downward valuation of ` 10,000 credited to P/L. Subsequent upward revaluation of `
10,000 debited to P/L and ` 5,000 debited to Revaluation Reserve.

5. On sale of an asset which was revalued upwards, what would be the treatment of Revaluation
Reserve?
a) The Revaluation Reserve is credited to P/L since the profit on sale of such asset is now
realized.
b) The Revaluation Reserve is credited to Retained Earnings as a movement in reserves without
impacting the P/L.
c) No change in Revaluation Reserve since profit on sale of such asset is already impacting
the P/L.
d) The Revaluation Reserve is reduced from the asset value to compute profit or loss.

6. A machinery was purchased having an invoice price ` 1,18,000 (including GST ` 18,000) on 1
April 20X1. The GST amount is available as input tax credit. The rate of depreciation is 10% on
SLM basis. The depreciation for 20X2-X3 would be 3
a) ` 10,000.
b) ` 11,800.
c) ` 9,000.
d) `10,500.

Answers
1. (b) 2. (c) 3. (c) 4. (c) 5. (b) 6. (a)
 AS 10.27
AS 10
Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Objective of AS 11

✓ To Prescribe the selection of exchange rate for foreign currency transaction and operations
✓ To Prescribe the treatment of effect of change in exchange rates.

Applies to…..
• In accounting for transaction in foreign currency.
• In translating the financial statement of foreign operations – Integral as well as non-integral.
• Forward exchange contracts.

Not Applies to…..

• Re- statement of enterprise financial statements from its reporting currency into another currency
• The presentation in cash flow statement
• Exchange differences arising from foreign currency borrowings to the extent of adjustment to interest cost.

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Important Definitions
Reporting Currency Reporting currency is the currency used in presenting the financial statements.
Foreign Currency Currency other than reporting Currency is called foreign currency
Exchange Rate The rate at which foreign currency is converted into reporting currency or vice versa.

Average Rate It is the mean of exchange rate in force during the period. Period may be week, fortnight, months, etc.

Forward Rate Agreed Exchange rate between two parties for exchange of two currencies at a specified future date.

Closing Rate Exchange rate at the balance sheet date.

Foreign Operations Operational activities conducted in a country other than the country of the reporting enterprises by the reporting
enterprises.
Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amount of
Monetary Items
money. For example -cash, receivable and payable.

Non-monetary items are assets and liabilities other than monetary items. For example, fixed assets, inventories, and
Non-Monetary Items investment in equity shares.
Transactions denominated in a foreign currency or require settlement in foreign currency are called as Foreign
Foreign Currency Transactions Currency Transactions

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Transactions are classified as….

Foreign Currency Transactions Foreign Operations Forward Exchange Contract

✓ Buying or selling the goods or ✓ Foreign branch ✓ For managing risk/hedging.

services. ✓ An associate ✓ For trading and speculation
✓ Lending & borrowing in foreign ✓ Joint venture
currency. ✓ Foreign subsidiary
✓ Acquisition & disposition of
asset in foreign currency.

Initial Recognition of Foreign Currency Transactions

• Alternatively average rate for a week or a month can be used if there is no significant fluctuation in the exchange rate.

• Transactions are recorded by applying an exchange rate between the reporting currency and the foreign currency at the date of transaction.

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Valuation at the Balance Sheet Date FOREIGN CURRENCY TRANSACTIONS

Monetary items Non-Monetary items

Monetary items are Debtors, Creditors, Cash, Loans etc. Items Carried at Items Carried at
Historical Cost Fair Value
These are converted at closing exchange difference rate.
i.e. exchange rates on balance sheet date. Fixed assets, long term Non-monetary items
investments for which such as inventory ,
There can be exchange fluctuation gain or loss, which is transactions are made in current investment for
the difference of the closing exchange rate and foreign currency are which transactions are
reported at the actual made in foreign
exchange rate used for initial recognition. rate used for initial currency which are
recognition. carried at fair value.

Generally fair value is determined at the balance sheet date.

Therefore conversion is made using exchange rate of balance
sheet date.

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Treatment of Exchange difference

Reasons for exchange difference

Reported at different rate from the rate at which it is initially recorded.

Transactions are settled at a rate different from the one taken for the reporting in the last financial statement

Transaction, monetary or non-monetary item being settled at a rate different from the rate at which it is initially recorded

Accounting Treatment of Contingent Liability

Contingent Liability
These liabilities are reported at the exchange rate of the balance sheet date.

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

FOREIGN CURRENCY TRANSACTIONS

Integral Foreign Operations Non- Integral Foreign Operations

The operations which are not “integral foreign operations”

A foreign operation which are
carried out as if it were extension
✓ Foreign operation activities are carried independently.
of the reporting enterprise. ✓ Transactions with the reporting enterprise are not a high proportion
of the foreign operation’s activities.
✓ The activities of the foreign operation are financed mainly from its
own operations or local borrowings.
Activities Translation of accounts
✓ Costs of labour, material and other components of the foreign
operation’s products or services are primarily paid or settled in the
Transactions of local currency.
• Dependent Branches
foreign branch are ✓ The foreign operation’s sales are mainly in currencies other than the
• Sales Depot reporting currency.
• Foreign arm which produces translated as if all
these transactions had ✓ Cash flows of the reporting enterprise are insulated from the day-
raw material and transfers it to to-day activities of the foreign operation.
head office been entered into by
✓ There is an active local sales market for the foreign operation’s
• Foreign operations only raises the reporting
products.
finance to help reporting enterprise. ✓ Sales prices for the foreign operation’s products are not responsive
enterprise to changes in exchange rates.

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Translation of Financial Statement Non Integral Foreign

• The assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation should be translated at the
closing rate;
• Income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the
transactions, and
• All resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net
investment.

Translation of accounts of Non-Integral Foreign Operations

Non-Integral Foreign operations
Balance sheet item Items of incomes Resulting Exchange Contingent Liability
and Expenses difference

For both Monetary and Actual Exchange rate At closing rate

Non-monetary items – on the date of
Apply closing rates transactions Accumulated in a “Foreign Currency
Translation Reserve” until the disposal of
“net investment in non-integral foreign
operations”

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Disposal of non-integral foreign operations

Disposal includes:
• Sales ,Liquidation
• Repayment of its share capital by non-integral foreign operation
• Abandonment of all or part of the foreign operation by reporting enterprise
• Payment of dividend by the non-integral foreign operation if it is treated as return on investment by the reporting enterprise.

Treatment of foreign currency translation reserve:

➢ On partial disposal, proportionate foreign currency translation reserve is recognized as income or expenses.
➢ On full disposal, whole foreign currency translation reserve is recognized as income or expenses.

Consolidation Procedure when non-integral foreign subsidiary is consolidated with the reporting enterprise

✓ Goodwill/capital reserve arising on the acquisition, as a result of consolidation is translated using closing rate.
✓ Intra-group transactions are eliminated as per AS-21 and AS-27.
✓ Exchange difference arising on intra-group monetary item - recognize as income or expense in consolidated financial statements. If exchange
difference arising on monetary items that in substance form part of net investment in non-integral foreign operation, it should be
accumulated in currency translation reserve.

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Change in Classification

Change in classification from….

Integral to Non-integral From non-integral to integral

✓ Translation procedure applicable to ✓ Translation procedure as applicable to integral

non-integral shall be followed from the should be applied from the date of change.
date of change. ✓ Translated amount of non-monetary items at the
✓ Exchange difference arising on the date of change is treated as historical cost.
translation of non-monetary assets at ✓ Exchange difference lying in foreign currency
the date of re-classification is translation reserve is not to be recognized as
accumulated in foreign currency income or expense till the disposal of the
translation reserve. operation even if the foreign operation becomes
integral.

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Forward Exchange Contract

A forward contract is an agreement between two parties whereby one parties agrees to buy from or sell to the other party an
asset at future date for an agreed price. In case of foreign exchange contract the assets is foreign currency.

Accounting Treatment of Forward Exchange Contract

Forward Exchange contract entered for Forward Exchange contract

Managing Risk/hedging entered for Trading/speculation

❖ The premium or discount that arises on entering into the

To earn profit by trading or speculation in foreign
contract is measured by the difference between the
exchange.
exchange rate at the date of the inception of the forward
As per the accounting standard premium or discount
❖ If forward exchange contract is cancelled/renewed the profit
on such forward contract is not to be recognized, in
or loss arising on cancellation/ renewal is recognised in P & L
other words, is to be ignored.
a/c for the period.
At each balance sheet date the value of contract is
❖ To minimize the risk due to fluctuation in exchange on the
marked, so its current market value, gains or loss on
date of the settlement of the transaction is the contract for
the contract is recognized.
managing the risk.

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Accounting Standard - 11 T H E E F F E C T O F C H A N G E S I N F O R E I G N E X C H A N G E R AT E

Disclosure
➢ An enterprise should disclose-

➢ Amount of exchange difference included in the net profit or loss.

➢ Amount accumulated in foreign exchange translation reserve.

➢ Reconciliation of opening and closing balance of foreign exchange translation reserve.

➢ If the reporting currency is different from the currency of the country in which entity is domiciled, the reason for such difference.

➢ A change in classification of signification of foreign operation needs following disclosures-

▪ Nature of change in classification

▪ The reason for the change

▪ Effect of such change on shareholders fund

▪ Impact on change in net profit or loss for each prior period presented

▪ The disclosure is also encouraged of an enterprise’s foreign currency risk management policy.

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 AS 11.1

AS 11
AS 11 – EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES

Question Bank
Sr. No. Concept
Section A Section B

1 Basic Classification Q.7 Q.15

2 Forward Contract Q.9 (ii) Q.16, Q.1, Q.8

3 Conversation of Trial balance Q.3 Q.3

Exchange difference on Monetary item Q.12, Q.2, Q.14, Q.6, Q.11,

4 Q.5, Q.4, Q.6, Q.9 (i)
transactions Q.9

5 Initial Recognition Q.5

6 Foreign Loan Journal Entries Q.1 Q.4, Q.17

7 Special Case Q.11, Q.2, Q.8, Q.10 Q.7

8 Miscellaneous Q.13, Q.10

 AS 11.2

AS 11 – THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE

AS 11

RATES
SECTION A (CONCEPT QUESTIONS)
PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI - ILLUSTRATION 3
2 ICAI - ILLUSTRATION 5
3 ICAI - ILLUSTRATION 7
4 ICAI – P.Q. 7
5 INTER QP JAN 2021
6 QP NOV 18
7 ICAI - ILLUSTRATION 1 /
INTER RPT NOV 2018
ICAI - ILLUSTRATION 6 /
8 RTP NOV 2015 / RTP
MAY 20
9 INTER RTP NOV 2019 /
INTER RTP May 2018
10 QP MAY 2023
11 ICAI – ILLUSTRATION 9
 AS 11.3

1. ILLUSTRATION 3 (ICAI)

AS 11
Kalim Ltd. borrowed US$ 4,50,000 on 01/01/2016, which will be repaid as on 31/07/2016. X Ltd. prepares
financial statement ending on 31/03/2016. Rate of exchange between reporting currency (INR) and
foreign currency (USD) on different dates are as under:

01/01/2016 1 US$ = ` 48.00

31/03/2016 1 US$ = ` 49.00
31/07/2016 1 US$ = ` 49.50

SOLUTION
REFERENCE:
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’ –
• Foreign currency transaction should be recorded, on initial recognition in the reporting
currency, by applying to the foreign currency amount, the exchange rate between the
reporting currency and the foreign currency at the date of the transaction.
• At each balance sheet date, all foreign currency monetary items should be reported using
the closing rate.
• Exchange differences arising on the settlement of monetary items or on reporting an
enterprise’s monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, should be
recognised as income or as expenses in the period in which they arise.
ANALYSIS:
Journal Entries in the Books of Kalim Ltd.
Date Particulars ` (Dr.) ` (Cr.)
Jan. 01, 2016 Bank Account (4,50,000 x 48) Dr. 216,00,000
To Foreign Loan Account 216,00,000
Mar. 31, 2016 Foreign Exchange Difference Account Dr. 4,50,000
To Foreign Loan Account 4,50,000
[4,50,000 x(49-48)]
Jul. 01, 2016 Foreign Exchange Difference Account
 AS 11.4

[4,50,000x(49.5-49)] Dr. 2,25,000

AS 11

Foreign Loan Account Dr. 220,50,000

To Bank Account 2,22,75,000

2. ILLUSTRATION 5 (ICAI)
Mr. A bought a forward contract for three months of US$ 1,00,000 on 1st December at 1 US$ = `
47.10 when exchange rate was US$ 1 = ` 47.02. On 31st December when he closed his books exchange
rate was US$ 1 = ` 47.15. On 31st January, he decided to sell the contract at ` 47.18 per dollar. Show
how the profits from contract will be recognised in the books.

SOLUTION
REFERENCE:
As per AS 11, Forward exchange contract means an agreement to exchange different currencies
at a forward rate. Forward exchange contract intended for trading or speculation purposes, the
premium or discount on the contract is ignored and at each balance sheet date, the value of the
contract is marked to its current market value and the gain or loss on the contract is recognised.
ANALYSIS:
Sale Rate ` 47.18
Less: Contract Rate (` 47.10)
Premium on Contract ` 0.08
Contract Amount US$ 1,00,000
Total Profit (1,00,000 x 0.08) ` 8,000
CONCLUSION:
Profit of Rs. 8,000 should be recognised in Profit and Loss Account.

3. ILLUSTRATION 7 (ICAI)
A business having the Head Office in Kolkata has a branch in UK. The following is the trial balance
of Branch as at 31.03.2016:
 AS 11.5

Account Name Amount in £

AS 11
Dr. Cr.
Fixed Assets (Purchased on 01.04.2013) 5,000
Debtors 1,600
Opening Stock 400
Goods received from Head Office Account 6,100
(Recorded in HO books as ` 4,02,000)
Sales 20,000
Purchases 10,000
Wages 1,000
Salaries 1,200
Cash 3,200
Remittances to Head Office (Recorded in HO books as ` 1,91,000) 2,900

Head Office Account (Recorded in HO books as ` 4,90,000) 7,400

Creditors 4,000
• Closing stock at branch is £ 700 on 31.03.2016.
• Depreciation @ 10% p.a. is to be charged on fixed assets.
• Prepare the trial balance after been converted in Indian Rupees.
• Exchange rates of Pounds on different dates are as follow:
01.04.2013– ` 61; 01.04.2015– ` 63 & 31.03.2016 – ` 67

SOLUTION
Trial Balance of the Foreign Branch converted into Indian Rupees as on March 31, 2016
Particulars £ (Dr.) £ (Cr.) Conversion Basis ` (Dr.) ` (Cr.)
Fixed Assets 5,000 Transaction Date Rate 3,05,000
Debtors 1,600 Closing Rate 1,07,200
Opening Stock 400 Opening Rate 25,200
Goods Received from HO 6,100 Actuals 4,02,000
Sales 20,000 Average Rate 13,00,000
 AS 11.6
AS 11
Purchases 10,000 Average Rate 6,50,000
Wages 1,000 Average Rate 65,000
Salaries 1,200 Average Rate 78,000
Cash 3,200 Closing Rate 2,14,400
Remittance to HO 2,900 Actuals 1,91,000
HO Account 7,400 Actuals 4,90,000
Creditors 4,000 Closing Rate 2,68,000
Exchange Rate Difference Balancing Figure 20,200
31,400 31,400 20,58,000 20,58,000
Closing Stock 700 Closing Rate 46,900
Depreciation 500 Fixed Asset Rate 30,500

4. PRACTICAL QUESTION 7 (ICAI)

Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.3.
20X1.
Trade receivables include amount receivable from Umesh ` 5,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $ 1= `58.50.
Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded at US $ 1
= ` 55.60, taking exchange rate prevailing at the date of transaction. US $ 1 = `61.20 was on 31.3.
20X1.

SOLUTION
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
However, at the option of an entity, exchange differences arising on reporting of long-term
foreign currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as they relate
 AS 11.7

to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign Currency

AS 11
Monetary Item Translation Difference Account” in the enterprise’s financial statements and
amortised over the balance period of such long-term asset/ liability, by recognition as income
or expense in each of such periods.
ANALYSIS:
Trade receivables Foreign Currency Rate `
Initial recognition US $8,547 (5,00,000/58.50) 1 US $ = ` 58.50 5,00,000
Rate on Balance sheet date 1 US $ = ` 61.20
Exchange Difference Gain US $ 8,547 X (61.20-58.50) 23,077
Long term Loan
Initial recognition US $ 1,07,913.67 (60,00,000/55.60) 1 US $ = ` 55.60 60,00,000
Rate on Balance sheet date 1 US $ = ` 61.20
Exchange Difference Loss 6,04,317
US $ 1,07,913.67 X (61.20 – 55.60)
Treatment / Journal Entry:
FCMITD A/C or Profit and Loss A/c Dr. ` 6,04,317
Credit Loan A/c ` 6,04,317
CONCLUSION:
Exchange Difference on Long term loan amounting ` 6,04,317 may either be charged to Profit
and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange
difference on debtors amounting ` 23,077 is required to be transferred to Profit and Loss A/c.

5. INTER QP JAN 2021

Explain briefly the accounting treatment needed in the following cases as per AS 11 as on
31.03.2020.
i. Debtors include amount due from Mr. S ` 9,00,000 recorded at the prevailing exchange rate
on the date of sales, transaction recorded at US $ 1 = ` 72.00
US $ 1 = ` 73.50 on 31ST March, 2020
US $ 1 = ` 72.50 on 1st April, 2019
ii. Long term loan taken on 1st April, 2019 from a U.S. company amounting to ` 75,00,000. `
5,00,000 was repaid on 31st December, 2019, recorded at US $ 1 = ` 70.50. Interest has been
paid as and when debited by the US company.
US $ 1 = `73.50 on 31st March, 2020
US $ 1 = `72.50 on 1st April, 2019
 AS 11.8
AS 11

SOLUTION
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
However, at the option of an entity, exchange differences arising on reporting of long-term
foreign currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as they relate
to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign Currency
Monetary Item Translation Difference Account” in the enterprise’s financial statements and
amortised over the balance period of such long-term asset/ liability, by recognition as income
or expense in each of such periods.
ANALYSIS:
Foreign Currency Rate `
Initial recognition US $12,500 (9,00,000/72) 1 US $ = ` 72 9,00,000
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Gain US $ 12,500 X (73.50 -72) 18,750

Treatment: Credit Profit and Loss A/c by ` 18,750

Long term Loan
Initial recognition US $ 1,03,448.28 (75,00,000/72.50) 1 US $ = ` 73.50 75,00,000
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Loss after adjustment of exchange 67,987.48
gain on repayment of ` 5,00,000
[82,171.88 [(US $ 96,356.08 X ` 73.5) - ` 70,00,000]
less 14,184.40 [US $ 7,092.2 (5,00,000/70.5) X ` 2)]
 AS 11.9

Treatment / Journal Entry:

AS 11
FCMITD A/C or Profit and Loss A/c Dr. ` 67,987.48
Credit Loan A/c 67,987.48
CONCLUSION:
Exchange Difference on Long term loan amounting ` 67,987.48 may either be charged to Profit
and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange
difference on debtors amounting ` 18,750 is required to be transferred to Profit and Loss A/c.
NOTE:
1. Exchange Difference Loss (net of adjustment of exchange gain on repayment of ` 5,00,000)
has been calculated in the above solution. Alternative considering otherwise also possible.
2. Date of sale transaction of ` 9 lakhs has not been given in the question. It has been assumed
that the transaction took place during the year ended 31 March 2020.

6. QP NOV 18
(i) ABC Ltd. a Indian Company obtained long term loan from WWW private Ltd., a U.S. company
amounting’ to ` 30,00,000. It was recorded at US $1 = ` 60.00, taking exchange rate prevailing
at the date of transaction. The exchange rate on balance sheet date (31.03.2018) was US $1
= ` 62.00.
(ii) Trade receivable includes amount receivable from Preksha Ltd., ` 10,00,000 recorded at the
prevailing exchange rate on the date of sales, transaction recorded at US $ 1 = ` 59.00. The
exchange rate on balance sheet date (31.03.2018) was US $ 1 = ` 62.00.
You are required to calculate the amount of exchange difference and also explain the accounting
treatment needed in the above two cases as per AS 11 in the books of ABC Ltd.

SOLUTION
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
 AS 11.10

However, at the option of an entity, exchange differences arising on reporting of long-term

AS 11

foreign currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as they relate
to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign Currency
Monetary Item Translation Difference Account” in the enterprise’s financial statements and
amortised over the balance period of such long-term asset/ liability, by recognition as income
or expense in each of such periods.
ANALYSIS:
Amount of Exchange difference and its Accounting Treatment
Long term Loan Foreign Currency Rate `
(i) Initial recognition ` (30,00,000/60) US $50,000 1 US $ = ` 60 30,00,000
Rate on Balance sheet date 1 US $ = ` 62
Exchange Difference Loss US $ 50,000 x ` (62 – 60) 1,00,000
Treatment: Credit Loan A/c and Debit FCMITD A/c or
Profit and Loss A/c by ` 1,00,000
Trade receivables
(ii) Initial recognition (`10,00,000/59) US $16,949.152* 1 US $ = ` 59 10,00,000
Rate on Balance sheet date 1 US $ = ` 62
Exchange Difference Gain US $ 16,949.152* x 50,847.456*
` (62-59)
Treatment: Credit Profit and Loss A/c by
` 50,847.456*
And Debit Trade Receivables
Exchange Difference on Long term loan amounting ` 1,00,000 may either be charged to Profit
and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but
exchange difference on trade receivables amounting 50,847.456 is required to be transferred to
Profit and Loss A/c.

7. ILLUSTRATION (ICAI) 1 / INTER RPT NOV 2018

Classify the following items as monetary or non-monetary item:
Inventories
Share Capital
Trade Receivables
Investment in Equity shares
Property, Plant and Equipment.
 AS 11.11

AS 11
SOLUTION
REFERENCE:
As per AS 11‘ The Effects of Changes in Foreign Exchange Rates’, Monetary items are money
held and assets and liabilities to be received or paid in fixed or determinable amounts of money.
Foreign currency monetary items should be reported using the closing rate at each balance
sheet date. However, in certain circumstances, the closing rate may not reflect with reasonable
accuracy the amount in reporting currency that is likely to be realised from, or required to
disburse, a foreign currency monetary item at the balance sheet date. In such circumstances,
the relevant monetary item should be reported in the reporting currency at the amount which
is likely to be realised from or required to disburse, such item at the balance sheet date.
Non-monetary items are assets and liabilities other than monetary items.
ANALYSIS:
Inventories Non-monetary
Share Capital Non-monetary
Trade receivables Monetary
Investment in equity shares Non-monetary
Property, Plant and Equipment Non-monetary

8. ILLUSTRATION 6 (ICAI) / RTP NOV 2015 / RTP MAY 20

Assets and liabilities and income and expenditure items in respect of foreign branches (integral
foreign operations) are translated into Indian rupees at the prevailing rate of exchange at the end
of the year. The resultant exchange differences in the case of profit, is carried to other Liabilities
Account and the Loss, if any, is charged to revenue. Comment.
 AS 11.12

SOLUTION
AS 11

• Integral foreign operation is a foreign operation, the activities of which are an integral part of
those of the reporting enterprise.
• The financial statements of an integral foreign operation (for example, dependent foreign
branches) should be translated using the principles and procedures described in AS 11.
• The individual items in the financial statements of a foreign operation are translated as if all
its transactions had been entered into by the reporting enterprise itself.
• Individual items in the financial statements of the foreign operation are translated at the
actual rate on the date of transaction. For practical reasons, a rate that approximates the
actual rate at the date of transaction is often used, for example, an average rate for a week or
a month may be used for all transactions in each foreign currency during the period.
• The foreign currency monetary items (for example cash, receivables, payables) should be
reported using the closing rate at each balance sheet date.
• Non- monetary items (for example, fixed assets, inventories, investments in equity shares)
which are carried in terms of historical cost denominated in a foreign currency should be
reported using the exchange date at the date of transaction. Thus the cost and depreciation
of the tangible fixed assets is translated using the exchange rate at the date of purchase of
the asset if asset is carried at cost.
• If the fixed asset is carried at fair value, translation should be done using the rate existed on
the date of the valuation.
• The cost of inventories is translated at the exchange rates that existed when the cost of
inventory was incurred and realisable value is translated applying exchange rate when
realisable value is determined which is generally closing rate.
• Exchange difference arising on the translation of the financial statements of integral foreign
operation should be charged to profit and loss account. Exchange difference arising on the
translation of the financial statement of foreign operation may have tax effect which should
be dealt as per AS 22 ‘Accounting for Taxes on Income’.
CONCLUSION:
The treatment by the management of translating all assets and liabilities, income and
expenditure items in respect of foreign branches at the prevailing rate at the year end and also
the treatment of resultant exchange difference is not in consonance with AS 11.

9. INTER RTP NOV 2019 / INTER RTP May 2018

i. Trade receivables as on 31.3.2019 in the books of XYZ Ltd. include an amount receivable from
Umesh ` 5,00,000 recorded at the prevailing exchange rate on the date of sales, i.e. at US $ 1=
` 58.50. US $ 1 = ` 61.20 on 31.3.2019.
 AS 11.13

Explain briefly the accounting treatment needed in this case as per AS 11 as on 31.3.2019.

AS 11
ii. Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2018 payable after 6
months. The company entered into a forward contract for 6 months @` 64.25 per Dollar. On
31st October, 2018, the exchange rate was ` 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the company
for the year ended 31st March, 2019.

SOLUTION
(i)
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
ANALYSIS:
Exchange difference on trade receivables
Particulars Foreign currency Rate Rupees
Initial recognition US $ 8,547 (5,00,000/58.50) 58.50 5,00,000
Rate on B/S date 61.20
Exchange Difference -2.70 `23,077
Gain or loss Treatment Credit to Profit & Loss A/c `23,077
(ii)
REFERENCE:
As per AS 11, Forward exchange contract means an agreement to exchange different currencies
at a forward rate. The premium or discount arising at the inception of a forward exchange
contract should be amortised as expense or income over the life of the contract.
ANALYSIS:
Calculation of profit or loss to be recognized in the books of Power Track Limited
Particulars `
Forward contract rate 64.25
 AS 11.14

Less: Spot rate (61.50)

AS 11

Loss on forward contract 2.75

Forward Contract Amount $ 50,000
Total loss on entering into forward contract = ($ 50,000 × ` 2.75) `1,37,500
Contract period 6 months
Loss for the period 1st November, 2018 to 31st March, 2019 i.e. 5 months 5 months
falling in the year 2018-2019
Hence, Loss for 5 months will be 1,37,500 x 5/6 1,37,500 x 5/6 ` 1,14,583
CONCLUSION:
The loss amounting to ` 1,14,583 for the period is to be recognized in the year ended 31st March,
2019.

10. QP MAY 2023

Trower Limited is an Indian importer. It imports goods from True View Limited situated at London.
Trower Limited has a payable of £50,000 to True View Limited as on 31 st March, 2023. True View
Limited has given Trower Limited the following two options:
(i) Pay immediately with a cash discount of 1% on the payable.
(ii) Pay after 6 months with interest @ 5% p.a. on the payable.
The borrowing rate for Trower Limited in rupees is 15% p.a.
The following are the exchange rates:
Date ₹/£
31st March, 2023 97
30th September,2023 99
You are required to give your opinion to Trower Limited on which of the above two options to be
chosen.

SOLUTION
Option (i) Pay immediately with Cash discount of 1% on the payable

Total amount payable on 31.3.2023 (49,500 x ` 97) 48,50,000

Less: Cash discount (50,000 x 1 / 100) (48,500)
 AS 11.15

48,01,500

AS 11
Add: Borrowing cost @ 15% p.a. for 6 months 3,60,112.50
If payment made immediate ` 51,61,612.50
Option (ii) Pay after 6 months with interest @ 5% p.a. on the payable
`
Total amount payable on 31.3.2023 50,000
Interest for 6 months @ 5% (50,000 x 5 / 100 x 6 / 12) 1,250
51,250
If payment made after 6 months (51,250 x 99) 50,73,750
Thus, Option (ii) is beneficial to Trower Limited as the Rupee outflow will be lower by
` (51,61,612 – 50,73,750) = ` 87,862 in option (ii).
Note: The above answer be presented in the alternative manner given as below:
Option (i) Pay immediately with Cash discount of 1% on the payable

Total amount payable on 31.3.2023 50,000

Less: Cash discount (50,000 x 1 / 100) (500)
49,500
49,500 x ` 97 48,01,500
Add: Borrowing cost @ 15% p.a. for 6 months If payment made immediate 3,60,112.50
` 51,61,612.50
Option (ii) Pay after 6 months with interest @ 5% p.a. on the payable
`
Total amount payable on 31.3.2023 50,000
Interest for 6 months @ 5% (50,000 x 5 / 100 x 6 / 12) 1,250
If payment made after 6 months (51,250 x 99) 51,250
50,73,750
Thus, Option (ii) is beneficial to Trower Limited as the Rupee outflow will be lower by
` (51,61,612 – 50,73,750) = ` 87,862 in option (ii).

11. ICAI – ILLUSTRATION 9

A Ltd. has borrowed USD 10,000 in foreign currency on April 1, 20X1 at 5% p.a. annual interest and
acquired a depreciable asset. The exchange rates are as under:
01/04/20X1 1 US$ = ` 48.00
31/03/20X2 1 US$ = ` 51.00
You are required to pass the journal entries in the following cases:
(i) Option under Para 46A is not availed.
 AS 11.16

(ii) Option under Para 46A is availed.

AS 11

(iii) The loan was taken to finance the operations of the entity (and not to procure a depreciable
asset).
In all cases, assume interest accrued on 31 March 20X2 is paid on the same date.

SOLUTION
Journal Entries in the Books of A Ltd.
(i) Option under Para 46A is not availed
Date Particulars ` (Dr.) ` (Cr.)
20X1
Apr. 01 Bank Account (10,000 x 48) Dr. 4,80,000
To Foreign Loan Account 4,80,000
Mar 31 Finance Cost (USD 10,000 x 5% x ` 51) 25,500
To Bank Account 25,500
Foreign Exchange Difference Account (P/L) Dr.
Mar 31 30,000
To Foreign Loan Account [10,000 x (51-48)]
30,000

In this case, since the option under Para 46A is NOT availed, the Exchange Loss of ` 30,000 is
recognised as an expense in the Statement of Profit and Loss for the year ending 31 March
20X2.
(ii) Option under Para 46A is availed
Date Particulars ` (Dr.) ` (Cr.)
20X1
Apr. 01 Bank Account (10,000 x 48) Dr. 4,80,000
To Foreign Loan Account 4,80,000
Finance Cost (USD 10,000 x 5% x ` 51)
Mar 31 25,500
To Bank Account
25,500
Foreign Exchange Difference Account Dr.
Mar 31 30,000
To Foreign Loan Account [10,000 x (51-48)]
Property, Plant and Equipment Dr. 30,000
Mar 31 To Foreign Exchange Difference Account 30,000
30,000
 AS 11.17

In this case, since the option under Para 46A is availed, the Exchange Loss of ` 30,000 is

AS 11
capitalized in the cost of Property, Plant and Equipment, which will indirectly get recognized
in the Profit & Loss A/c by way of increased depreciation over the remaining useful life of the
asset.
(iii) Option under Para 46A is availed
Date Particulars ` (Dr.) ` (Cr.)
20X1
Apr. 01 Bank Account (10,000 x 48) Dr. 4,80,000
To Foreign Loan Account 4,80,000
Mar 31 Finance Cost (USD 10,000 x 5% x ` 51) 25,500
To Bank Account 25,500
Foreign Exchange Difference Account Dr.
Mar 31 30,000
To Foreign Loan Account [10,000 x (51-48)]
30,000
Foreign Currency Monetary Item Translation Difference
Mar 31 30,000
A/c (FCMITDA) Dr.
To Foreign Exchange Difference Account 30,000

In this case, since the option under Para 46A is availed, the Exchange Loss of ` 30,000 is
accumulated in the FCMITD A/c, which will be subsequently spread over and debited to P&L A/c
over the tenure of the loan.
Reference: The students are advised to refer the full text of AS 11 “The Effects of Changes in
Foreign Exchange Rates”.
 AS 11.1

AS 11 – THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE

AS 11

RATES
SECTION B (EXAM ORIENTED)
PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI - ILLUSTRATION 4
2 ICAI - ILLUSTRATION 8
3 INTER QP Nov 2019
4 QP MAY 18
5 ICAI - ILLUSTRATION 2
6 QP DEC 21
ILLUSTRATION (ICAI) 2 /
7 INTER RTP NOV 2018 /
INTER RTP NOV 20
8 QP NOV 18, RTP MAY 20
9 OCT 20 MOCK TEST
10 RTP NOV 2014
11 RTP MAY 2015
12 RTP MAY 2016
13 RTP NOV 2016
14 RTP MAY 2017
15 MTP OCT 21 SERIES 2
16 RTP NOV 21
17 RTP MAY 22
 AS 11.2

1. ILLUSTRATION 4 (ICAI)

AS 11
Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2016, payable after three months.
Company entered into a forward contract for three months @ ` 49.15 per dollar. Exchange rate per
dollar on 01st Feb. was ` 48.85. How will you recognise the profit or loss on forward contract in the
books of Rau Ltd?

SOLUTION
REFERENCE:
As per AS 11, Forward exchange contract means an agreement to exchange different currencies
at a forward rate. The premium or discount arising at the inception of a forward exchange
contract should be amortised as expense or income over the life of the contract.
ANALYSIS:
Forward Rate ` 49.15
Less: Spot Rate (` 48.85)
Premium on Contract ` 0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) ` 30,000
Contract period 3 months
Loss for the period 1st February, 2016 to 31st March, 2016 i.e. 2 months falling 1 month
in the year 2015-2016
Hence, Loss for 2 months will be (30,000 X 2/3) ` 20,000
CONCLUSION:
Loss to be recognised for 2016-17 (30,000/3) x 2 = ` 20,000. Rest ` 10,000 will be recognised in the
following year.

2. ILLUSTRATION 8 (ICAI)
A Ltd. purchased fixed assets costing ` 3,000 lakhs on 1.1.2016 and the same was fully financed
by foreign currency loan (U.S. Dollars) payable in three annual equal instalments. Exchange rates
were 1 Dollar = ` 40.00 and ` 42.50 as on 1.1.2016 and 31.12.2016 respectively. First instalment was
paid on 31.12.2016. The entire difference in foreign exchange has been capitalised.
You are required to state, how these transactions would be accounted for.
 AS 11.3
AS 11

SOLUTION
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
ANALYSIS:
Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed
assets are recognised as income or expense.
Calculation of Exchange Difference:
3,000 𝑙𝑎𝑘ℎ𝑠
Foreign currency loan = = 75 lakhs US Dollars
𝑅𝑠 40

Exchange difference = 75 lakhs US Dollars × (42.50 – 40.00) = ` 187.50 lakhs

(including exchange loss on payment of first instalment)
CONCLUSION:
Entire loss due to exchange differences amounting ` 187.50 lakhs should be charged to profit and
loss account for the year.
Note: The above answer has been given on the basis that the company has not exercised the
option of capitalisation available under paragraph 46 of AS 11. However, if the company opts to
avail the benefit given in paragraph 46A, then nothing is required to be done since the company
has done the correct treatment.

3. INTER QP Nov 2019

Karan Enterprises having its Head Office in Mangalore, Karnataka has a branch in Greenville,
USA. Following is the trial balance of Branch as at 31 -3-2019:
Particulars Amount ($) Dr. Amount ($) Cr.
Fixed assets 8,000
Opening inventory 800
Cash 700
 AS 11.4

Goods received from Head Office 2,800

AS 11
Sales 24,050
Purchases 11,800
Expenses 1,800
Remittance to head office 2,450
Head office account 4,300
28,350 28,350
(i) Fixed assets were purchased on 1st April, 2015.
(ii) Depreciation at 10% p.a. is to be charged on fixed assets on straight line method.
(iii) Closing inventory at branch is $ 700 as on 31-3-2019.
(iv) Goods received from Head Office (HO) were recorded at ` 1,85,500 in HO books.

(v) Remittances to HO were recorded at ` 1,62,000 in HO books.

(vi) HO account is recorded in HO books at ` 2,84,500.
(vii) Exchange rates of US Dollar at different dates can be taken
as : 1-4-2015 ` 63
1-4-2018 ` 65
31-3-2019 ` 67
Prepare the trial balance after been converted into Indian rupees in accordance with AS-11.

SOLUTION
Trial Balance of Foreign Branch (converted into Indian Rupees) as on March 31, 2019
Particulars $ (Dr.) $ (Cr.) Conversion Basis Rate ` (Dr.) ` (Cr.)

Fixed Assets 8,000 Transaction Date 63 5,04,000

Rate
Opening Inventory 800 Opening Rate 65 52,000

Goods Received 2,800 Actuals 1,85,500

from HO
Sales 24,050 Average Rate 66 15,87,300
Purchases 11,800 Average Rate 66 7,78,800
 AS 11.5

Expenses 1,800 Average Rate 66 1,18,800

AS 11

Cash 700 Closing Rate 67 46,900

Remittance to HO 2,450 Actuals 1,62,000

HO Account 4,300 Actuals 2,84,500

Exchange Rate Balancing Figure 23,800
Difference
28,350 28,350 18,71,800 18,71,800

Closing Stock 700 Closing Rate 67 46,900

Depreciation 800 Fixed Asset Rate 63 50,400

4. QP MAY 18
ABC Ltd. borrowed US $ 5,00,000 on 01/07/2017, which was repaid as on 31/07/2017. ABC Ltd.
prepares financial statement ending on 31/03/2017. Rate of Exchange between reporting currency
(INR) and foreign currency (USD) on different dates are as under:
01/01/2017 1 US$ = ` 68.50
31/03/2017 1 US $ = ` 69.50
31/07/2017 1 US $ = ` 70.00

You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11.

SOLUTION
REFERENCE:
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’ –
• Foreign currency transaction should be recorded, on initial recognition in the reporting
currency, by applying to the foreign currency amount, the exchange rate between the
reporting currency and the foreign currency at the date of the transaction.
• At each balance sheet date, all foreign currency monetary items should be reported using
the closing rate.
 AS 11.6

• Exchange differences arising on the settlement of monetary items or on reporting an

AS 11
enterprise’s monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, should be
recognised as income or as expenses in the period in which they arise.
ANALYSIS:
Journal Entries in the Books of ABC Ltd.
Date Particulars ` (Dr.) ` (Cr.)
Jan. 01, 2017 Bank Account (5,00,000 x 68.50) Dr. 342,50,000
To Foreign Loan Account 342,50,000
Mar. 31, 2017 Foreign Exchange Difference Account Dr. 5,00,000
To Foreign Loan Account
5,00,000
[5,00,000 x (69.50-68.50)]
Foreign Exchange Difference Account
Jul. 31, 2017 Dr. 2,50,000
[5,00,000 x (70-69.5)]
Foreign Loan Account Dr. 347,50,000
To Bank Account 350,00,000

5. ILLUSTRATION 2 (ICAI)
Opportunity Ltd. purchased an equipment costing ` 24,00,000 on 1.4.2015 and the same was fully
financed by foreign currency loan (US Dollars) payable in four annual equal installments.
Exchange rates were 1 Dollar = ` 60.00 and ` 62.50 as on 1.4.2015 and 31.3.2016 respectively. First
installment was paid on 31.3.2016. The entire difference in foreign exchange has been capitalised.
You are required to state that how these transactions would be accounted for.

SOLUTION
REFERENCE:
As per AS 11 ‘The Effects of Changes in Foreign Exchange Rates’, exchange differences arising on
reporting an enterprise’s monetary items at rates different from those at which they were initially
recorded during the period, should be recognised as income or expenses in the period in which
they arise.
 AS 11.7

ANALYSIS:
AS 11

Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed
assets should be recognised as income or expense.
Calculation of Exchange Difference:
Foreign currency loan = ` 24,00,000/60 = 40,000 US Dollars
Exchange difference = 40,000 US Dollars × (62.50-60.00) = ` 1,00,000
(including exchange loss on payment of first instalment)
Therefore, entire loss due to exchange differences amounting ` 1,00,000 should be charged to profit
and loss account for the year.
Note : The above answer has been given on the basis that the company has not availed the option
for capitalisation of exchange difference as per paragraph 46/ 46A of AS 11.
However, as per paragraph 46A of the standard, the exchange differences arising on reporting of
long term foreign currency monetary items at rates different from those at which they were
initially recorded during the period, in so far as they relate to the acquisition of a depreciable
capital asset, can be added to or deducted from the cost of the asset and should be depreciated
over the balance life of the asset.
Accordingly, in case Opportunity Ltd. opts for capitalising the exchange difference, then the entire
amount of exchange difference of ` 1,00,000 will be capitalised to ‘Equipment account’. This
capitalised exchange difference will be depreciated over the useful life of the asset.
Cost of the asset on the reporting date
Initial cost of Equipment ` 24,00,000
Add: Exchange difference ` 1,00,000
Total cost on the reporting date ` 25,00,000

6. QP DEC 21
i. PP Ltd. an Indian Company acquired long term finance from WW (P) Ltd, a U.S. Company,
amounting to ` 40,88,952. The transaction was recorded at US $ 1 = 72.00, taking exchange rate
prevailing at the date of transaction. The exchange rate on balance sheet date (31.03.2021) is
US $ 1 = ` 73.60
ii. Trade receivable of PP Ltd. include amount receivable from Preksha Ltd. ` 20,00,150 recorded at
the prevailing exchange rate on the date of sales, transaction recorded at US $1 = ` 73.40. The
exchange rate on balance sheet date (31.03.2021) is US $1= ` 73.60. Exchange rate on 1st April,
2020 is US $1= ` 74.00
You are required to calculate the amount of exchange difference and also explain the accounting
treatment needed in the above two cases as per AS 11b in the books of PP Ltd.
 AS 11.8

AS 11
SOLUTION
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
However, at the option of an entity, exchange differences arising on reporting of long-term
foreign currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as they relate
to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign Currency
Monetary Item Translation Difference Account” in the enterprise’s financial statements and
amortised over the balance period of such long-term asset/ liability, by recognition as income
or expense in each of such periods.
i. Long Term Finance
ANALYSIS:
Foreign Currency Rate `
Initial recognition US $ 56,791 1 US $ = ` 72 40,88,952
(40,88,952/72)
Rate on Balance sheet date 1 US $ = ` 73.60
Exchange Difference Loss 90,866
[US $ 56,791 x (73.60 – 72)] (rounded off)
CONCLUSION:
Treatment needed in this case: PP Ltd. can either Debit Foreign Currency Monetary Item
Translation Difference (FCMITD) A/c or Debit Profit and Loss A/c by ` 90,866 and Credit Loan
A/c
ii. Trade Receivables
Foreign Currency Rate `
Initial recognition US $ 27,250 1 US $ = ` 73.40 20,00,150
(20,00,150/ 73.40)
 AS 11.9

Rate on Balance sheet date 1 US $ = ` 73.60

AS 11

Exchange Difference Gain 5,450

[US $ 27,250 X (73.60-73.40)]
CONCLUSION:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences on trade
receivables amounting ` 5,450 is required to be transferred to Profit and Loss A/c.

7. ILLUSTRATION (ICAI) 2 / INTER RTP NOV 2018 / INTER RTP NOV 20

Particulars Exchange Rate per $
Goods purchased on 1.1.2019 for US $ 15,000 ` 75
Exchange rate on 31.3.2019 ` 74
Date of actual payment 7.7.2019 ` 73
You are required to ascertain the loss/gain to be recognized for financial years 2018- 19 and 2019-
20 as per AS 11.

SOLUTION
REFERENCE:
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’ –
• Foreign currency transaction should be recorded, on initial recognition in the reporting
currency, by applying to the foreign currency amount, the exchange rate between the
reporting currency and the foreign currency at the date of the transaction.
• At each balance sheet date, all foreign currency monetary items should be reported using the
closing rate.
• Exchange differences arising on the settlement of monetary items or on reporting an
enterprise’s monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, should be recognised
as income or as expenses in the period in which they arise.
 AS 11.10

ANALYSIS:

AS 11
For the year ending 31.03.2019 –
Goods purchased on 1.1.2019 and corresponding creditors - Recorded at ` 11,25,000
exchange rate on 01.01.2019 (i.e. $15,000 × ` 75)
Creditors of US $15,000 on 31.3.2019 - Reported at closing rate ` 11,10,000
(i.e., $15,000 × ` 74)
Exchange profit (11,25,000 – 11,10,000) - Credited to Profit and Loss account ` 15,000
in the year 2018-19.
For the year ending 31.03.2020 -

On 7.7.2019, creditors of $15,000 paid at the rate of ` 73 (Actual rate on date 10,95,000
of Payment)
Profit to be credited to Profit and Loss Account for year 2019-20 ` 15,000
(11,10,000 – 10,95,000)

8. QP NOV 18, RTP MAY 20

AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company
M/s M&M Limited. The amount was payable after 6 months. The company entered into a forward
contract on 1st January 2018 for five months @ ` 62.50 per dollar. The exchange rate per dollar
was as follows:
On 1st January, 2018 ` 60.75 per dollar
On 31st March, 2018 ` 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized in the
books of AXE Limited for the year ending 2017-18, as per the provisions of AS 11.

SOLUTION
REFERENCE:
As per AS 11, Forward exchange contract means an agreement to exchange different currencies
at a forward rate. The premium or discount arising at the inception of a forward exchange
contract should be amortised as expense or income over the life of the contract.
 AS 11.11

ANALYSIS:
AS 11

Forward Rate ` 62.50

Less: Spot Rate (` 60.75)
Premium on Contract ` 1.75
Contract Amount US$ 5,00,000
Total Loss (5,00,000 x 1.75) ` 8,75,000
Contract period 6 months
Loss for the period 1st January, 2018 to 31st March, 2018 i.e. 5 months falling 3 months
in the year 2017-2018
Hence, Loss for 3 months will be (8,75,000 X 3/5) ` 5,25,000
Contract period 5 months – out of which 3 months falling in the year 2017-18
CONCLUSION:
The loss amounting to ` 5,25,000 for the period is to be recognised in the year ended 31 st March
2018. Rest ` 3,50,000 will be recognised in the following year 2018-19.

9. OCT 20 MOCK TEST

Om Ltd. purchased an item of property, plant and equipment for US $ 50 lakh on 01.04.2019 and
the same was fully financed by the foreign currency loan [US $] repayable in five equal
instalments annually. (Exchange rate at the time of purchase was 1 US $ = ` 60]. As on
31.03.2020 the first instalment was paid when 1 US $ fetched ` 62.00. The entire loss on
exchange was included in cost of goods sold. Om Ltd. normally provides depreciation on an item
of property, plant and equipment at 20% on WDV basis and exercised the option to adjust the
cost of asset for exchange difference arising out of loan restatement and payment. Calculate
the amount of exchange loss, its treatment and depreciation on this item of property, plant and
equipment.
 AS 11.12

SOLUTION

AS 11
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
However, at the option of an entity, exchange differences arising on reporting of long-term
foreign currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as they relate
to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign Currency
Monetary Item Translation Difference Account” in the enterprise’s financial statements and
amortised over the balance period of such long-term asset/ liability, by recognition as income
or expense in each of such periods.
ANALYSIS:
As Om Ltd. has exercised the option and it is long term foreign currency monetary item, Exchange
differences arising on restatement or repayment of liabilities incurred for the purpose of acquiring
an item of property, plant and equipment should be adjusted in the carrying amount of the
respective item of property, plant and equipment.
Calculation of Exchange loss:
Foreign currency loan (in `) = (50 lakh $ x ` 60) = ` 3,000 lakh
Exchange loss on outstanding loan on 31.03.2020 = ` 40 lakh US $ x (62.00 - 60.00) = ` 80 lakh.
` 80 lakh should also be added to cost of an item of property, plant and equipment with
corresponding credit to outstanding loan in addition to ` 20 lakh on account of exchange loss on
payment of instalment.
The total cost of an item of property, plant and equipment to be increased by ` 100 lakh.
Total depreciation to be provided for the year 2019 - 2020 = 20% of (` 3,000 Iakh + 100 lakh) =
` 620 lakh.
CONCLUSION:
The entire exchange loss due to variation of ` 20 lakh on 31.03.2020 on payment of US $ 10 lakh,
should be added to the carrying amount of an item of property, plant and equipment and not to
the cost of goods sold. Depreciation on the unamortized depreciable amount should be provided.

10. RTP NOV 2014

A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2014, when
the exchange rate was ` 43 per US Dollar. The company had recorded the transaction in the
books at the above mentioned rate. The payment for the import transaction was made on 5th
 AS 11.13

April, 2014 when the exchange rate was ` 47 per US Dollar. However, on 31st March, 2014, the
AS 11

rate of exchange was ` 48 per US Dollar. The company passed an entry on 31st March, 2014
adjusting the cost of raw materials consumed for the difference between ` 47 and ` 43 per US
Dollar. In the background of the relevant accounting standard, is the company’s accounting
treatment correct? Discuss.

SOLUTION
REFERENCE:
As per AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, monetary items denominated
in a foreign currency should be reported using the closing rate at each balance sheet date. The
effect of exchange difference should be taken into profit and loss account.
ANALYSIS:
Trade payables is a monetary item, hence should be valued at the closing rate i.e., ` 48 at 31st
March, 2014 irrespective of the payment for the same subsequently at lower rate in the next
financial year. The difference of ` 5 (` 48 less ` 43) per US dollar should be shown as an
exchange loss in the profit and loss account for the year ended 31st March, 2014 and is not to
be adjusted against the cost of raw materials. In the subsequent year, the company would
record an exchange gain of `1 per US dollar, i.e., the difference between ` 48 and ` 47 per
US dollar.
CONCLUSION:
The accounting treatment adopted by the company is incorrect.

11. RTP MAY 2015

Explain briefly the accounting treatment needed in the following cases as per AS 11:
(i) Trade Receivables include amount receivable from Ted of U.S., ` 5,00,000 recorded at the

prevailing exchange rate on the date of sales, transaction recorded at $1 = ` 38.70.

(ii) Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded at $1

= ` 35.60, taking exchange rate prevailing at the date of transactions.

Exchange rates at the end of the year were as under:
 AS 11.14

$1 Receivable = ` 45.80

AS 11
$ 1 Payable = ` 45.90

SOLUTION
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
ANALYSIS:
In case the option under para 46A is exercised, the exchange differences arising on long-term
foreign currency monetary items can be adjusted in the cost of the depreciable capital asset or
in other cases transferred in Foreign Currency Monetary Item Translation Difference Account
(FCMITD) and amortised.
(i) Trade Receivables
Particulars Foreign currency Rate Rupees
Initial recognition US $ 12,919.90 38.70 5,00,000
Rate on B/S date 45.80
Exchange Difference US $ 12,919.90 7.10 91,731
Gain or loss Gain
Treatment Credit to Profit & Loss A/c - ` 91,731
(ii) Long Term loan
Particulars Foreign currency Rate Rupees
Initial recognition US $ 1,68,539.33 35.60 60,00,000
Rate on B/S date 45.90
Exchange Difference US $ 1,68,539.33 10.30 17,35,955
Gain or loss Loss
Treatment Debit to Profit & Loss A/c
` 17,35,955 or transfer to FCMITD A/c and amortize.
 AS 11.15

12. RTP MAY 2016

AS 11

Trade receivables as on 31.3.2015 in the books of XYZ Ltd. include an amount receivable from
Umesh ` 5,00,000 recorded at the prevailing exchange rate on the date of sales, i.e. at US $ 1= `
58.50. US $ 1 = ` 61.20 on 31.3.2015.
Explain briefly the accounting treatment needed in this case as per AS 11 as on 31.3.2015.

SOLUTION
REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
ANALYSIS:
Exchange difference on trade receivables
Particulars Foreign currency Rate Rupees
Initial recognition US $ 8,547 (5,00,000/58.50) 58.50 5,00,000
Rate on B/S date 61.20
Exchange Difference -2.70 `23,077
Gain or loss Treatment Credit to Profit & Loss A/c `23,077

13. RTP NOV 2016

“The company had a engineering contract with a foreign government, work to be carried out in
foreign country and payments to be received in dollars. The work was completed in the year
2015, and the entire contracted amount was duly recorded in the books of the company at the
prevalent exchange rate on the date of completion of the work. However, payments to the extent
of ` 40 crores could not be released by the Foreign Government because of temporary foreign
exchange crisis in that country. This ` 40 crores unrealized at the end, if converted at the year
end rate would amount to ` 40.50 crores. The Company has adopted and follows the following
accounting policy:
 AS 11.16

“In respect of foreign currency transactions, current assets and current liabilities are revalued

AS 11
at year end rates. However, if there is a net loss, due to exchange difference, the same is charged
off to the P&L account, but if there is a net gain, the same is ignored in view of the prudent
accounting policies of not recording unrealized gains due to exchange rate fluctuations”.
Comment on the appropriateness of the above.

SOLUTION
REFERENCE:
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’ –
Foreign currency transaction should be recorded, on initial recognition in the reporting currency,
by applying to the foreign currency amount, the exchange rate between the reporting currency
and the foreign currency at the date of the transaction. Further AS-11 clearly mentions that net
difference shall be transferred to profit and loss account.
ANALYSIS / CONCLUSION:
In given case the recoverability of ` 40 Crores is not doubtful or uncertain but just deferred
temporarily hence it should be translated using exchange rates at the close of the year. Hence,
we can say that exchange difference favourable or unfavourable both shall be considered at the
year-end rather to ignore the gains and recording just losses.

14. RTP MAY 2017

Omega Ltd. purchased fixed assets costing `3,000 lakhs on 1.4.2016 and the same was fully
financed by foreign currency loan (U.S. Dollars) payable in three annual equal instalments.
Exchange rates were 1 Dollar = ` 40.00 and ` 42.50 as on 1.4.2016 and 31.3.2017 respectively.
First instalment was paid on 31.12.2016.
You are required to state, how these transactions would be accounted for.
 AS 11.17

SOLUTION
AS 11

REFERENCE:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising
on the settlement of monetary items or on reporting an enterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognised as income or as expenses in the period in which they
arise.
ANALYSIS:
Calculation of Exchange Difference:
𝑹𝒔.𝟑,𝟎𝟎𝟎 𝒍𝒂𝒌𝒉𝒔
Foreign currency loan = = 75 lakhs US Dollars
𝑹𝒔.𝟒𝟎

Exchange difference = 75 lakhs US Dollars x (42.50 – 40.00) = `187.50 lakhs

(including exchange loss on payment of first instalment)
Therefore, entire loss due to exchange differences amounting ` 187.50 lakhs should be charged
to profit and loss account for the year.
Note: The above answer has been given on the basis that the company has not exercised the
option of capitalization available under para 46 of AS 11. The answer will change if the company
exercises the option of capitalization.

15. MOCK TEST OCT 21 SERIES 2

“Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary
items to be recognized at each Balance Sheet date? Classify the following as monetary or non-
monetary item:
(i) Share Capital
(ii) Trade Receivable
(iii) Investments
(iv) Fixed Assets.

SOLUTION
REFERENCE:
As per AS 11‘ The Effects of Changes in Foreign Exchange Rates’, Monetary items are money
held and assets and liabilities to be received or paid in fixed or determinable amounts of money.
 AS 11.18

Foreign currency monetary items should be reported using the closing rate at each balance

AS 11
sheet date. However, in certain circumstances, the closing rate may not reflect with reasonable
accuracy the amount in reporting currency that is likely to be realised from, or required to
disburse, a foreign currency monetary item at the balance sheet date. In such circumstances,
the relevant monetary item should be reported in the reporting currency at the amount which
is likely to be realised from or required to disburse, such item at the balance sheet date.
Non-monetary items are assets and liabilities other than monetary items.
ANALYSIS:
Share capital Non-monetary
Trade receivables Monetary
Investments Non-monetary
Fixed assets Non-monetary

16. RTP NOV 21

Mona Ltd. purchased a plant for US$ 1,00,000 on 01 st December 2020, payable after three
months. Company entered into a forward contract for three months @ ` 49.15 per dollar.
Exchange rate per dollar on 01 st December was ` 48.85. How will you recognize the profit or
loss on forward contract in the books of Mona Ltd for the year ended 31 st March, 2021?

SOLUTION
REFERENCE:
As per AS 11, Forward exchange contract means an agreement to exchange different currencies
at a forward rate. The premium or discount arising at the inception of a forward exchange
contract should be amortised as expense or income over the life of the contract.
ANALYSIS:
Forward Rate ` 49.15
Less: Spot Rate (` 48.85)
Premium on Contract ` 0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) ` 30,000
 AS 11.19

CONCLUSION:
AS 11

Total Loss ` 30,000 to be recognized in Profit and Loss Account in year ended 31.3.2021.

17. RTP MAY 22

Kumar Ltd. borrowed US $ 3,00,000 on 31-12-2020 which will repaid as on 30-06-2021. Kumar Ltd.
prepares its financial statements ending on 31-03-2021. Rate of exchange between reporting
currency (Rupee) and foreign currency (US$) on different dates are as under:
31-12-2020 1 US $ = ` 44.00
31-03-2021 1 US $ = ` 44.50
30-06-2021 1 US $ = ` 44.75
(i) Calculate Borrowings in reporting currency to be recognized in the books on above mentioned
dates and also show journal entries for the same.
(ii) if borrowings were repaid on 28-2-2021 on which date exchange rate was 1 US $ = ` 44.20
then what entry should be passed?

SOLUTION
REFERENCE:
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’ –
• Foreign currency transaction should be recorded, on initial recognition in the reporting
currency, by applying to the foreign currency amount, the exchange rate between the
reporting currency and the foreign currency at the date of the transaction.
• At each balance sheet date, all foreign currency monetary items should be reported using
the closing rate.
• Exchange differences arising on the settlement of monetary items or on reporting an
enterprise’s monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, should be
recognised as income or as expenses in the period in which they arise.
ANALYSIS:
On 31.12.2020 borrowings will be recorded at ` 1,32,00,000 (i.e., $ 3,00,000 × ` 44.00).
On 31.3.2021 borrowings (monetary items) will be recorded at ` 1,33,50,000 (i.e., $ 3,00,000 × `
44.50).
 AS 11.20

Journal of Kumar Ltd.

AS 11
Date Particulars Dr. (`) Cr. (`)
31-12-2020 Bank A/c Dr. 1,32,00,000
To Foreign Loan Account 1,32,00,000
31-03-2021 Foreign Exchange Difference Account A/c Dr. 1,50,000
To Foreign Loan Account 1,50,000
30-06-2021 Foreign Loan Account A/c Dr. 1,33,50,000
Foreign Exchange Difference Account A/c Dr. 75,000
To Bank A/c 1,34,25,0000

(ii) In case borrowings were repaid before Balance Sheet Date, then the entry would be as follows:
Date Particulars Dr. (`) Cr. (`)
28-02-2021 Foreign Loan Account A/c Dr. 1,32,00,000
Foreign Exchange Dr. 60,000
Difference Account A/c Dr.
To Bank A/c 1,32,60,000

Working Notes:
(i) The exchange difference of ` 1,50,000 is arising because the transaction has been reported at

different rate (` 44.50 = 1 US $) from the rate initially recorded (i.e., ` 44 = 1 US $) from the
rate initially recorded (i.e., ` 44 = 1 US $)
(ii) The exchange difference of ` 75,000 is arising because the transaction has been settled at an

exchange rate (`44.75 = 1 US$) different from the rate at which reported in the last financial
statements (` 44.50 = 1 US$).
The exchange difference of ` 60,000 is arising because the transaction has been settled at a
different rate (i.e., ` 44.20 = 1 US $) than the rate at which initially recorded (1 US $ = ` 44.00)
 AS 11.21

MCQs
AS 11

1. As per AS 11 assets and liabilities of non-integral foreign operations should be converted at

__________ rate.
a) Opening
b) Average
c) Closing
d) Transaction

2. The debit or credit balance of “Foreign Currency Monetary Item Translation Difference
Account”
a) Is shown as “Miscellaneous Expenditure” in the Balance Sheet
b) Is shown under “Reserves and Surplus” as a separate line item
c) Is shown as “Other Non-current” in the Balance Sheet
d) Is shown as “Current Assets” in the Balance Sheet

3. If asset of an integral foreign operation is carried at cost, cost and depreciation of tangible
fixed asset is translated at
a) Average exchange rate
b) Closing exchange rate
c) Exchange rate at the date of purchase of asset
d) Opening exchange rate

4. Which of the following can be classified as an integral foreign operation?

a) Branch office serving as an extension of the head office in terms of operations
b) Independent subsidiary of the parent company
c) Branch office independent of the head office in terms of operational decisions
d) None of the above

5. Which of the following items should be converted to closing rate for the purposes of financial
reporting?
a) Items of Property, Plant and Equipment
b) Inventory
c) Trade Payables, Trade Receivables and Foreign Currency Borrowings
d) All of the above
Answers
1. (c) 2. (b) 3. (c) 4. (a) 5. (c)
Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS

Objective of AS 12

▪ To provide the guidelines for classification of Government Grant

▪ To prescribe the accounting treatment of Government Grant

Government Grant

✓ It is assistance by the government in the form of cash / kind to an enterprise in return for past or future compliance with
certain condition.

AS – 12 does not apply to

Government assistance Government participation

Which cannot be measured reasonably Investment by Government as

i.e. Tax holiday, Tax exemption. equity in the enterprise

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Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS

Analysis Nature of Incentive

Capital Approach Income Approach sales-tax exemption available

to the unit is not an assistance
in cash or kind and is therefore
If incentive is in nature of not a government grant
If related to revenue
promoter’s contribution

Capital Subsidy Credited to P&L

Recognition of Government grant recognised only when…

Government Grant
Only receipt of grant is not
The enterprise will comply The grants will be received conclusive evidence that
with the condition attached
condition attaching to the
to them
grant have been or will be
fulfilled.

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Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS
Approaches

Capital Approach Income Approach

Grant is treated as part of Grant is taken as income for one

shareholder fund or more period

➢ They are given with reference to the total ➢ Grant are given subject to compliance of condition
investment in an undertaking, or and cost is incurred to fulfill such condition hence
➢ By way of contribution towards its total grant is credited to income statement along with
capital outlay and associated cost.
➢ No repayment is ordinarily expected in the ➢ In case grants are credited to shareholders’ funds,
case of such grants. no correlation is done between the accounting
➢ Since they are not earned but represent an treatment of the grant and the accounting
incentive provided by government without treatment of the expenditure to which the grant
related costs. relates.

Accounting of grant should be on the basis of nature of relevant grant.

Grant having characteristic of promoter should be transferred to shareholder fund.
Other grants are transferred to income statement.

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Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS

Monetary and Non Monetary Grant

Accounting treatment of
government grants

Monetary Grant Non-Monetary Grant

Capital approach Income approach Concessional Rate Free of cost

Grant treated as part Treated as income over Assets are Assets are
of share holders fund one or more years accounted for at recorded at
Grant is credited to i.e. treated as deferred their acquisition nominal value
capital reserve income, cost
Credited to P & L a/c or
deducted from related
expenses

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Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS

Grant related to Specific Fixed Assets Grant related to Specific Fixed Assets

Primary Conditions Other Conditions

❖ Purchase ❖ Type of Asset

❖ Construct or ❖ Location of Assets
❖ Otherwise acquire such assets. ❖ Period during which they are acquired

Presentations in Financial Statements

Deductive Approach Deferred Income Approach

✓ When the grant is lower than the cost of assets, then

it is shown at reduction from the cost of such assets.
✓ When grant is equal to the value of assets then it is
shown at Nominal Value.

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Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS

Grants related to specific fixed assets

Accounting Treatment

Non-depreciable fixed assets Depreciable fixed assets

On fulfilment of If condition is yet to be fulfilled Alternative 1 Alternative 2

Conditions - ❖ Grants are credited to
Credited to Capital income over the same ❖ Grant credited to ❖ Grant treated as
asset a/c and reduce deferred income.
Reserve a/c period over which the cost net book value ❖ Provide depreciation on
of meeting such condition ❖ Provide depreciation carrying amount of fixed
on net book value assets
is charged to income. ❖ If grant equals the ❖ Transfer deferred
❖ Un-apportioned deferred whole or virtually income to P & L a/c at
the whole of the the same proportion as
income is disclosed on the assets, record the depreciable bears to
balance sheet as “Deferred assets at its nominal depreciation amount.
value.
Government Grant”

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Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS

Presentation of Grant Related to Revenue

Grant Related to Revenue

Presented as a credit in the Grant is deducted in reporting

profit and loss statement the related expenses

Separately Under General Heading like Other Income

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Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS

Refund of Government Grants Refund of government grant

❖ Government grant become
refundable due to non-fulfilment
of condition attached to the Related to revenue Related to specific fixed asset
grant.
❖ A government grant that become ✓ The amount of refund be When the grant was received
refundable is treated as an adjusted against any
extraordinary item under AS 5. unamortised “deferred
government grant”, It is deducted from It is treated as It is credited to
✓ Remaining balance gross value of assets deferred income capital reserve
amount of refund should
be charged to P & L a/c as
extraordinary item. Refundable Refundable
amount should amount
be adjusted with should be
✓ Refund should be recorded by increasing unamortised adjusted with
the book value of the asset deferred income. the capital
✓ Depreciation on the revised book value reserve.
should be provided prospectively over the
residual useful life of asset

www.cavidya.com AS 12.8 Cavidya 84218 84218, 75887 75887

Accounting Standard - 12 ACCOUNTING FOR GOVERNMENT GRANTS

Disclosures

➢ The accounting policy adopted for government grants including the method of presentation in the financial

statement.

➢ The nature and extent of government grant recognised in the financial statement including grants of non-

monetary assets given at a concessional rate or free of cost.

www.cavidya.com AS 12.9 © Anandh Bhanggariya 96323 96323

 AS 12.1

AS 12
AS 12 – ACCOUNTING FOR GOVERNMENT GRANTS

Question Bank
Sr.
Concept
No.
Section A Section B

Government Grant in the nature of

1 Q.6 (i), Q.7 Q.2, Q.7 (ii) (iii), Q.11 (ii)
promotor’s Contributions

2 Grant related to depreciable asset Q.6, Q.18

3 Refund of grant

• Asset at net of grant Q.5 Q12, Q13, Q.9 (ii), Q17

• Deferred Income Q.9 (i), Q.10

4 Journal Entries

• Deferred Income Q.1

• Assets at net of grant Q.1, Q.3 Q.15, Q.19,

• Refund Q.10 Q.20

Q.16, Q.5, Q.4, Q.14, Q.3, Q.11

5 Miscellaneous Q.2
(i), Q.11 (iii)

6 Special Case Q.4, Q.8, Q.9 Q.8

 AS 12.2

AS 12 – ACCOUNTING FOR GOVERNMENT GRANTS

AS 12

SECTION A (CONCEPT QUESTIONS)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI - ILLUSTRATION 1
2 ICAI - ILLUSTRATION 3
3 ICAI - ILLUSTRATION 7
4 ICAI - ILLUSTRATION 9
5 INTER QP NOV 20
6 QP JULY 21
INTER RTP MAY 2016 /
7
INTER RTP NOV 2019
8 QP MAY 23
9 ICAI - ILLUSTRATION 4
10 ICAI - ILLUSTRATION 11
 AS 12.3

1. ILLUSTRATION 1 (ICAI)

AS 12
Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with
the salvage value of Rs. 5,00,000. On purchase of the asset, government granted it a grant for Rs.
10 lakhs. Pass the necessary journal entries in the books of the company for first two years if the
grant amount is deducted from the value of fixed asset.

SOLUTION
REFERENCE:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of
a grant related to a specific fixed asset should be recorded by increasing the book value of the
asset or by reducing deferred income balance, as appropriate, by the amount refundable. Where
the book value is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset.
Journal in the books of Z Ltd.
Year Particulars Rs. (Dr.) Rs. (Cr.)
1st Fixed Assets Account Dr. 50,00,000
To Bank Account 50,00,000
(Being Fixed Assets purchased)
Bank Account Dr. 10,00,000
To Fixed Assets Account 10,00,000
(Being grant received from the government)
Depreciation Account Dr. 7,00,000
To Fixed Assets Account 7,00,000
(Being Depreciation charged on SLM)
Profit & Loss Account Dr. 7,00,000
To Depreciation Account 7,00,000
(Being Depreciation transferred to P/L Account)
2nd Depreciation Account Dr. 7,00,000
To Fixed Assets Account 7,00,000
(Being Depreciation charged on SLM)
 AS 12.4

Profit & Loss Account Dr. 7,00,000

AS 12

To Depreciation Account 7,00,000

(Being Depreciation transferred to P/L Account)

2. ILLUSTRATION 3 (ICAI)
Santosh Ltd. has received a grant of Rs. 8 crores from the Government for setting up a factory
in a backward area. Out of this grant, the company distributed Rs. 2 crores as dividend. Also,
Santosh Ltd. received land free of cost from the State Government but it has not recorded it
at all in the books as no money has been spent. In the light of AS 12 examine, whether the
treatment of both the grants is correct.

SOLUTION
REFERENCE:
As per AS 12 ‘Accounting for Government Grants’, Government grants are assistance by
government in cash or kind to an enterprise for past or future compliance with certain
conditions. They exclude those forms of government assistance which cannot reasonably have
a value placed upon them and transactions with government which cannot be distinguished
from the normal trading transactions of the enterprise.
When government grant is received for a specific purpose, it should be utilised for the same.
Non-monetary assets given free of cost are recorded at a nominal value.
ANALYSIS:
As per the above reference,
1. The grant received for setting up a factory is not available for distribution of dividend. It
should be utilised only for the condition specified with the grant.
2. Even if the company has not spent money for the acquisition of land, land should be recorded
in the books of accounts at a nominal value.
CONCLUSION:
The treatment of both the elements of the grant is incorrect as per AS 12.
 AS 12.5

3. ILLUSTRATION 7 (ICAI)

AS 12
A fixed asset is purchased for Rs. 20 lakhs. Government grant received towards it is Rs. 8 lakhs.
Residual Value is Rs. 4 lakhs and useful life is 4 years. Assume depreciation on the basis of Straight
Line method. Asset is shown in the balance sheet net of grant. After 1 year, grant becomes
refundable to the extent of Rs. 5 lakhs due to non-compliance with certain conditions. Pass journal
entries for first two years.

SOLUTION
REFERENCE:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of
a grant related to a specific fixed asset should be recorded by increasing the book value of the
asset or by reducing deferred income balance, as appropriate, by the amount refundable. Where
the book value is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset.
Journal Entries
Year Particulars Rs. in lakhs Rs. in lakhs

1 Fixed Asset Account Dr. 20

To Bank Account 20
(Being fixed asset purchased)
Bank Account Dr. 8
To Fixed Asset Account 8
(Being grant received from the government
reduced the cost of fixed asset)
Depreciation Account (W.N.1) Dr. 2
To Fixed Asset Account 2
(Being depreciation charged on Straight Line
method (SLM))
Profit & Loss Account Dr. 2
To Depreciation Account 2
 AS 12.6

(Being depreciation transferred to Profit and

AS 12

Loss Account at the end of year 1)

2 Fixed Asset Account Dr. 5
To Bank Account 5
(Being government grant on asset partly
refunded which increased the cost of fixed
asset)
Depreciation Account (W.N.2) Dr. 3.67
To Fixed Asset Account 3.67
(Being depreciation charged on SLM on revised
value of fixed asset prospectively)
Profit & Loss Account Dr. 3.67
To Depreciation Account 3.67
(Being depreciation transferred to Profit and
Loss Account at the end of year 2)
WORKING NOTES :
1. Depreciation of Year 1
Particulars Rs. in lakhs
Cost of the Asset 20
Less : Government grant received (8)
12
Depreciation (12-4)/4 2
2. Depreciation for Year 2
Particulars Rs. in lakhs
Cost of the Asset 20
Less : Government grant received (8)
12
Less : Depreciation for the firs year (12-4)/4 2
10
Add : Government grant refundable 5
15
Depreciation for the second year (15-4)/3 3.67

4. ILLUSTRATION 9 (ICAI)
A Ltd. purchased a machinery for Rs. 40 lakhs. (Useful life 4 years and residual value Rs. 8
lakhs) Government grant received is Rs. 16 lakhs.
 AS 12.7

Show the Journal Entry to be passed at the time of refund of grant in the third year and the value

AS 12
of the fixed assets, if :
(1) the grant is credited to Fixed Assets A/c.
(2) the grant is credited to Deferred Grant A/c.

SOLUTION
In the books of A Ltd.
Journal Entries (at the time of refund of grant)
(1) If the grant is credited to Fixed Assets Account :
REFERENCE:
As per AS 12, In regards to Grants Related to Specific Fixed Assets, under first method the grant
is shown as a deduction from the gross value of the asset concerned in arriving at its book value.
The grant is thus recognised in the profit and loss statement over the useful life of a depreciable
asset by way of a reduced depreciation charge.
ANALYSIS:
Particulars Rs. Rs.
I Fixed Assets A/c Dr. 16 lakhs
To Bank A/c 16 lakhs
(Being grant refunded)

Particulars Rs
Fixed assets initially recorded in the books Rs. 24 lakhs
Rs. 40 lakhs – Rs. 16 lakhs
Depreciation p.a. = (Rs. 24 lakhs – Rs. 8 lakhs)/4 years Rs. 4 lakhs per year
Value of fixed assets after two years but before refund of grant [Rs. Rs. 16 lakhs
24 lakhs – (Rs. 4 lakhs x 2 years)]
Refund of Grant Rs. 16 lakhs
Value of Fixed Asset post refund of Grant Rs. 32 lakhs
Revised value of Depreciation for remaining 2 years 12 Lakhs per annum
(32 Lakh – 8 Lakh) / 2 years
 AS 12.8

(2) If the grant is credited to Deferred Grant Account:

AS 12

REFERENCE: As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant
Account is allocated to Profit and Loss account usually over the periods and in the proportions
in which depreciation on related assets is charged.
ANALYSIS: In the first two years (Rs. 16 lakhs/4 years) = Rs. 4 lakhs p.a. x 2 years = Rs. 8
lakhs were credited to Profit and Loss Account and Rs. 8 lakhs was the balance of Deferred Grant
Account after two years. Therefore, on refund in the 3rd year, following entry will be passed:
Particulars Rs. Rs.
I Deferred Grant A/c Dr. 8 lakhs
Profit and Loss Account Dr. 8 lakhs
To Bank A/c 16 lakhs
(Being government grant refunded)
Deferred grant account will become Nil. The fixed assets will continue to be shown in the books
at Rs. 24 lakhs and depreciation will continue to be charged at Rs. 8 lakhs per annum for the
remaining two years.
Working Note:
Balance of Fixed Assets after two years but before refund (under second alternative)
Fixed assets initially recorded in the books = Rs. 40 lakhs
Depreciation p.a. = (Rs. 40 lakhs – Rs. 8 lakhs)/4 years = Rs. 8 lakhs per year
Book value of fixed assets after two years = Rs. 40 lakhs – (Rs. 8 lakhs x 2 years) = Rs. 24
lakhs

5. INTER QP NOV 20
On 1st April 2016, Mac Ltd. Received a government grant of ` 60 Lakhs for acquisition of machinery
costing ` 300 lakhs. The grant was credited to the cost of the asset. The estimated useful life of
the machinery is 10 years. The machinery is depreciated @ 10% on WDV basis. The company had
to refund the grant in June 2019 due to non-compliance of certain conditions.
How the refund of the grant is dealt with in the books of Mac Ltd. Assuming that the company
did not charge any depreciation for the year 2019-20
Pass necessary Journal Entries for the year 2019-20.
SOLUTION
REFERENCE:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of a
grant related to a specific fixed asset (if the grant had been credited to the cost of fixed asset
at the time of receipt of grant) should be recorded by increasing the book value of the asset, by
the amount refundable. Where the book value is increased, depreciation on the revised book value
should be provided prospectively over the residual useful life of the asset.
 AS 12.9

1st April, 2016 Acquisition cost of machinery 300.00

AS 12
Less: Government Grant 60.00
240.00
31st March, 2017 Less: Depreciation @ 10% (24.00)
1st April, 2017 Book value 216.00
31st March, 2018 Less: Depreciation @ 10% (21.60)
1st April, 2018 Book value 194.40
31st March, 2019 Less: Depreciation @ 10% (19.44)
1st April, 2019 Book value 174.96
1st June, 2019 Less: Depreciation @10% for 2 months (2.916)
Book value 172.044
June 2019 Add: Refund of grant* 60.00
Revised book value 232.044
Depreciation @10% on the revised book value amounting to ` 232.044 lakhs is to be provided
prospectively over the residual useful life of the machinery.
*considered refund of grant at beginning of June month and depreciation for two months already
charged.
Journal Entries
Machinery Account Dr. 60
To Bank Account 60
Being government grant on asset partly refunded which increased the
cost of fixed asset)
Depreciation Account Dr. 19.337
To Machinery Account 19.337
Being depreciation charged on revised value of fixed asset prospectively
for 10 months)
Profit & Loss Account Dr. 22.253
To Depreciation Account 22.253
(Being depreciation transferred to Profit and Loss Account
amounting to ` (2.916 + 19.337= 22.253)

6. QP JULY 21
Alps Limited has received the following Grants from the Government during the year ended 31st
March, 2021:
(i) ` 120 Lacs received as Subsidy from the Central Government for setting up an Industrial
undertaking in Medak, a notified backward area.
 AS 12.10

(ii) ` 15 Lacs Grant received from the Central Government on installation of Effluent Treatment
AS 12

Plant.
(iii) ` 25 Lacs received from State Government for providing Medical facilities to its workmen
during the pandemic.
Advise Alps Limited on the treatment of the above Grants in its books of Account in accordance
with AS-12 "Government Grants".

SOLUTION
(i) REFERENCE: As per AS 12 ‘Accounting for Government Grants’, where the government grants
are in the nature of promoters’ contribution i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards its total capital outlay and
no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve
which can be neither distributed as dividend nor considered as deferred income.
ANALYSIS: In the given case, the subsidy received from the Central Government for setting up an
industrial undertaking in Medak is neither in relation to specific fixed asset nor in relation in
revenue.
CONCLUSION: The amount of ` 120 Lacs should be credited to capital reserve which can be neither
distributed as dividend nor considered as deferred income.
(Note: Subsidy for setting up an industrial undertaking is considered to be in the nature of
promoter’s contribution)
(ii) REFERENCE: As per AS 12 ‘Accounting for Government Grants’, two methods of presentation
in financial statements of grants related to specific fixed assets are regarded as acceptable
alternatives –
(a) The grant is shown as a deduction from the gross value of the asset concerned in arriving
at its book value. The grant is thus recognised in the profit and loss statement over the
useful life of a depreciable asset by way of a reduced depreciation charge. Where the
grant equals the whole, or virtually the whole, of the cost of the asset, the asset is
shown in the balance sheet at a nominal value.
(b) Grants related to depreciable asset are treated as deferred income which is recognised
in the profit and loss statement on a systematic and rational basis over the useful life
of the asset.
 AS 12.11

ANALYSIS / CONCLUSION: In the given case, ` 15 Lacs was received as grant from the

AS 12
Central Government for installation of Effluent Treatment Plant. Since the grant was
received for a fixed asset, either of the above methods can be adopted.
(iii) REFERENCE: Grants related to revenue are presented as a credit in the profit and loss
statement, either separately or under a general heading such as ‘Other Income’. Alternatively,
they are deducted in reporting the related expense.
ANALYSIS / CONCLUSION: ` 25 lacs received from State Government for providing medical
facilities to its workmen during the pandemic is a grant received in nature of revenue grant.
Alternatively, ` 25 lacs may be deducted in reporting the related expense i.e., employee benefit
expense.

7. INTER RTP MAY 2016 / INTER RTP NOV 2019

Samrat Limited has set up its business in a designated backward area which entitles the
company for subsidy of 25% of the total investment from Government of India. The company
has invested ` 80 crores in the eligible investments. The company is eligible for the subsidy and
has received ` 20 crores from the government in February 2014. The company wants to recognize
the said subsidy as its income to improve the bottom line of the company.
Do you approve the action of the company in accordance with the Accounting Standard?

SOLUTION
REFERENCE:
As per AS 12 ‘Accounting for Government Grants’, where the government grants are in the nature
of promoters’ contribution i.e., they are given with reference to the total investment in an
undertaking or by way of contribution towards its total capital outlay and no repayment is
ordinarily expected in respect thereof, the grants are treated as capital reserve which can be
neither distributed as dividend nor considered as deferred income.
ANALYSIS:
The subsidy received by Samrat Ltd. for setting up its business in a designated backward area
will be treated as grant by the government in the nature of promoter’s contribution as the grant
is given with reference to the total investment in an undertaking i.e., subsidy is 25% of the
eligible investment and also no repayment is apparently expected in respect thereof.
 AS 12.12

Since the subsidy received is neither in relation to specific fixed assets nor in relation to revenue.
AS 12

Thus, the company cannot recognize the said subsidy as income in its financial statements in
the given case.
CONCLUSION: It should be recognized as capital reserve which can be neither distributed as
dividend nor considered as deferred income.

8. QP MAY 2023
On 1st April 2021, Eleanor Limited purchased a manufacturing Plant for 60 lakhs, which has an
estimated useful life of 10 years with a salvage value of ₹ 10 lakhs. On purchase of the Plant, a
grant of ₹20 lakhs was received from the government.
You are required to calculate the amount of depreciation as per AS-12 for the financial year 2022-
23 in the following cases:
(i) If the grant amount is deducted from the value of Plant.
(ii) If the grant is treated as deferred income.
(iii) If the grant amount is deducted from the value of Plans, but at the end of the year 2022-
2023 grant is refunded to the extent of ₹ 4 lakhs, due to non-compliance of certain conditions
(iv) If the grant is treated as the promoter's contribution
(Assume depreciation on the basis of Straight-Line Method)

SOLUTION
Calculation of depreciation as per AS 12 for the financial year 2022-23:
(i) If the grant amount is deducted from the value of Plant, then the amount of deprecation will
be ` 3,00,000 p.a. (` 60,00,000 - ` 10,00,000 - ` 20,00,000) / 10 year.
(ii) If the grant is treated as deferred income, then amount of depreciation will be ` 5,00,000 p.a.
(` 60,00,000 - ` 10,00,000) / 10 year.
(iii) If the grant amount is deducted from the value of plant, but at the end of the year 2022-23
grant is refunded to the extent of ` 4 lakh then the amount of depreciation will be ` 3,00,000 p.a.
(` 60,00,000 - ` 10,00,000 - ` 20,00,000) /10 year for year 2021-22 and for the year 2022-23
Depreciation will be ` 3,00,000 calculated as follows, (`60,00,000 - ` 10,00,000 - ` 20,00,000– `
3,00,000) / 10 years.
 AS 12.13

Note: It is assumed that the depreciation for the year has been charged on the book value on the

AS 12
plant before making adjustment for grant. Alternatively, if it is considered otherwise then the
depreciation will be charged after making adjustment for grant. In that case depreciation for the
year 2022-23 will be as ` 3,44,444 calculated as follows, (` 60,00,000 - `10,00,000 - ` 20,00,000
+ 4,00,000– ` 3,00,000 / 9 years
(iv) If the grant is treated as promoter’s contribution, then the amount of depreciation will be `
5,00,000 p.a. (` 60,00,000 -10,00,000) /10 year.
NOTE: The answer can be presented in the following alternative manner:
(i) (ii) (iii) (iv)
Date Particulars Grant Value Grant Grant Grant is
deducted from treated as Refunded treated as
Plant Deferred Promoter’s
Income Contribution
01.04.2021 Cost of Plant 60,00,000 60,00,000 60,00,000 60,00,000
Less: Salvage 10,00,000 10,00,000 10,00,000 10,00,000
50,00,000 50,00,000 50,00,000 50,00,000
01.04.2021 Less: Grant 20,00,000 - 20,00,000 -
30,00,000 50,00,000 30,00,000 50,00,000
Useful Life (years) 10 10 10 10
31.03.2022 Depreciation FY 2021-22 3,00,000 5,00,000 3,00,000 5,00,000
1.4.2022 Cost of Plant 60,00,000
Less: Salvage 10,00,000
50,00,000
Less: Grant 20,00,000
30,00,000
Less: Depreciation FY 3,00,000
2022-23
27,00,000
Book value at the time
of refund of grant i.e.
at the end of Period
Add: Grant Refundable at 4,00,000
end of 22-23 Book value
available for remaining 8
years.
31,00,000
Note:
It is assumed that the depreciation for the year has been charged on the book value on the plant
before making adjustment for grant. Alternatively, if it is considered otherwise then the
 AS 12.14

depreciation will be charged after making adjustment for grant. In that case depreciation for the
AS 12

year 2022-23 will be as:

Cost of Plant 60,00,000
Less: Salvage 10,00,000
50,00,000
Less: Grant 20,00,000
30,00,000
Add: Grant Refundable 4,00,000
34,00,000
Less: Depreciation for 2021-22 3,00,000
31,00,000
Useful Life (years) 9
Depreciation for 2022-23 3,44,444

9. ICAI – ILLUSTRATION 4
Co X runs a charitable hospital. It incurs salary of doctors, staff etc to the extent of ` 30 lakhs
per annum. As a support, the local govt grants a lumpsum payment of `90 lakhs to meet the
salary expense for a period of next 5 years.
You are required to pass the necessary journal entries in the books of the company for first
year if the grant is:
(a) Shown separately as Other Income; and
(b) Deducted against the Salary costs.

SOLUTION
a)
Particulars ` (Dr.) ` (Cr.)
Bank Account Dr. 90,00,000
To Deferred Income Account 90,00,000

(Being receipt of grant from government)

 AS 12.15

Salary Expense Account Dr. 30,00,000

AS 12
To Bank Account 30,00,000
(Being Salary expense paid for the year)
Deferred Income Account Dr. 18,00,000
To Other Income Account 18,00,000

(Being Year 1 Grant income recognised in Profit & Loss)

Note: The grant has been spread on a straight-line basis over a period of 5 years [`90,00,000/5
years = ` 18,00,000].
b)
Particulars ` (Dr.) ` (Cr.)
Bank Account Dr. 90,00,000
To Deferred Income Account 90,00,000
(Being receipt of grant from government)
Salary Expense Account Dr. 12,00,000
To Bank Account 12,00,000
(Being Salary expense paid (net of grant income) for the year)
Deferred Income Account Dr. 18,00,000
To Salary Expense Account 18,00,000
(Being Year 1 grant adjusted against Salary expense for the year)

10. ICAI – ILLUSTRATION 11 (New Syllabus)

Co X runs a charitable hospital. It incurs salary of doctors, staff etc to the extent of ` 30 lakhs
per annum. As a support, the local govt grants a lumpsum payment of `90 lakhs to meet the
salary expense for a period of next 5 years.
At the start of Year 4, Co X is unable to meet the conditions attached to the grant and is required
to refund the entire grant of 90 lakhs.
You are required to pass the necessary journal entries in the books of the company for refund of
the grant if the grant was shown separately as Other Income.
 AS 12.16

SOLUTION
AS 12

` `
Deferred Grant A/c Dr. 36 lakhs
Profit & Loss A/c Dr. 54 lakhs 90 lakhs
To Bank A/c
(Being Government grant refunded)
Workings:
Total grant received: ` 90 Lakhs
Grant recognised as income for first 3 years: ` 18 lakhs × 3
= ` 54 lakhs
Remaining Deferred Income = ` 90 Lakhs – 54 lakhs
= ` 36 lakhs
Reference: The students are advised to refer the full text of AS 12 “Accounting for Government
Grants”.
AS 12.17

AS 12
 AS 12.1

AS 12 – ACCOUNTING FOR GOVERNMENT GRANTS

AS 12

SECTION B (EXAM ORIENTED)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI - ILLUSTRATION 2
2 ICAI - ILLUSTRATION 4
3 ICAI - ILLUSTRATION 6
4 ICAI P. Q. 8
5 INTER QP MAY 19
6 INTER QP JAN 21
7 QP MAY 2022
INTER RTP NOV 2016 /
8
INTER RTP MAY 2018
9 INTER RTP NOV 2018
10 INTER RTP MAY 2019
INTER RTP MAY 20,
11 INTER RTP NOV 20, ICAI
- ILLUSTRATION 5
INTER QP MAY 18 / OCT
12 20 MOCK TEST/ MTP
MARCH 2022
ICAI - ILLUSTRATION 8,
13
RTP MAY 2015
14 RTP NOV 14, RTP NOV 17
15 RTP NOV 2015
16 RTP MAY 2017
17 MTP OCT 21 SERIES 2
18 MTP OCT 21 SERIES 1
19 RTP MAY 2022
20 MTP APRIL 2022
 AS 12.2

1. ILLUSTRATION 2 (ICAI)

AS 12
Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with
the salvage value of Rs. 5,00,000. On purchase of the assets, government granted it a grant for Rs.
10 lakhs. Pass the necessary journal entries in the books of the company for first two years if the
grant is treated as deferred income.

SOLUTION
JOURNAL IN THE BOOKS OF Z LTD.
Year Particulars Rs. Dr.) Rs. (Cr.)
1st Fixed Assets Account Dr. 50,00,000
To Bank Account 50,00,000
(Being fixed assets purchased)
Bank Account Dr. 10,00,000
To Deferred Government Grant Account (Being 10,00,000
grant receive d from the government)
Depreciation Account Dr. 9,00,000
To Fixed Assets Account 9,00,000
(Being depreciation charged on SLM)
Profit & Loss Account Dr. 9,00,000
To Depreciation Account 9,00,000
(Being depreciation transferred to P/L Account)
Deferred Government Grants Account Dr. 2,00,000
To Profit & Loss Account 2,00,000
(Being proportionate government grant taken to
P/L Account)
2nd Depreciation Account Dr. 9,00,000
To Fixed Assets Account 9,00,000
(Being depreciation charged on SLM)
Profit & Loss Account Dr. 9,00,000
To Depreciation Account 9,00,000
(Being depreciation transferred to P/L Account)
 AS 12.3
AS 12
Deferred Government Grants Account Dr. 2,00,000
To Profit & Loss Account 2,00,000
(Being proportionate government grant taken to
P/L Account)

2. ILLUSTRATION 4 (ICAI)
Top & Top Limited has set up its business in a designated backward area which entitles the
company to receive from the Government of India a subsidy of 20% of the cost of investment.
Having fulfilled all the conditions under the scheme, the company on its investment of Rs.
50 crore in capital assets received Rs. 10 crore from the Government in January, 2017
(accounting period being 2016-2017). The company wants to treat this receipt as an item of
revenue and thereby reduce the losses on profit and loss account for the year ended 31st
March, 2017. Keeping in view the relevant Accounting Standard, discuss whether this action is
justified or not.

SOLUTION
REFERENCE:
As per AS 12 ‘Accounting for Government Grants’, where the government grants are in the nature
of promoters’ contribution i.e., they are given with reference to the total investment in an
undertaking or by way of contribution towards its total capital outlay and no repayment is
ordinarily expected in respect thereof, the grants are treated as capital reserve which can be
neither distributed as dividend nor considered as deferred income.
ANALYSIS:
In the given case, the subsidy received is neither in relation to specific fixed asset nor in relation
to revenue. Thus, it is inappropriate to recognise government grants in the profit and loss
statement, since they are not earned but represent an incentive provided by government without
related costs.
CONCLUSION:
The accounting treatment desired by the company is not proper. The correct treatment is to credit
the subsidy to capital reserve.
 AS 12.4

3. ILLUSTRATION 6 (ICAI)

AS 12
Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with
the salvage value of Rs. 5,00,000. On purchase of the assets, government granted it a grant for Rs.
10 lakhs (This amount was reduced from the cost of fixed asset). Grant was considered as
refundable in the end of 2nd year to the extent of Rs. 7,00,000. Pass the journal entry for refund
of the grant as per the first method.

SOLUTION
Particulars LF Amt Amt
Fixed Assets Account Dr. 7,00,000
To Bank Account 7,00,000
(Being government grant on asset refunded)

4. ICAI Practical Question 8

Supriya Ltd. received a grant of ` 2,500 lakhs during the accounting year 20X1-20X2 from
government for welfare activities to be carried on by the company for its employees. The grant
prescribed conditions for its utilization. However, during the year 20X2-20X3, it was found that
the conditions of grants were not complied with and the grant had to be refunded to the
government in full. Elucidate the current accounting treatment, with reference to the provisions
of AS-12
 AS 12.5

SOLUTION
AS 12

REFERENCE:
As per AS 12 ‘Accounting for Government Grants’, Government grants sometimes become
refundable because certain conditions are not fulfilled. A government grant that becomes
refundable is treated as an extraordinary item as per AS 5.
The amount refundable in respect of a government grant related to revenue is applied first against
any unamortized deferred credit remaining in respect of the grant. To the extent that the amount
refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is
charged immediately to profit and loss statement.
ANALYSIS / CONCLUSION:
In the present case, the amount of refund of government grant should be shown in the profit &
loss account of the company as an extraordinary item during the year.

5. INTER QP MAY 19
State whether the following statements are 'True' or 'False'. Also give reason for your answer.
As per the provisions of AS-12 government grants in the nature of promoter’s contribution which
become refundable should be reduced from the capital reserve.

SOLUTION
True: When grants in the nature of promoters’ contribution becomes refundable, in part or in full
to the government on non-fulfilment of some specified conditions, the relevant amount refundable
to the government is reduced from the capital reserve.

6. INTER QP JAN 21
Darshan Ltd. Purchased a Machinery on 1st April, 2016 for ` 130 lakhs (Useful life is 4 years).
Government Grant received is ` 40 lakhs for the purchase of above Machinery.
Salvage value at the end of useful life is estimated at ` 60 lakhs.
Darshan Ltd. Decides to treat the grant as deferred income.
You are required to calculate the amount of depreciation and grant to be recognised in profit &
loss account for the year ending 31st March, 2017, 31st March, 2018, 31st March,2019 & 31st March,
2020.
Darshan Ltd. Follows straight line method for charging depreciation.
 AS 12.6

AS 12
SOLUTION
REFERENCE:
As per AS 12 “Accounting for government grants”, grants related to depreciable assets, if treated
as deferred income are recognized in the profit and loss statement on a systematic and rational
basis over the useful life of the asset.
ANALYSIS:
Amount of depreciation and grant to be recognized in the profit and loss account each year
Depreciation per year: `in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year(70lakhs/4) 17.50
` 17.50 Lakhs depreciation will be recognized for the year ending 31st March, 2017, 31st March,
2018, 31st March, 2019 and 31st March, 2020.
Amount of grant recognized in Profit and Loss account each year:
40 lakhs /4 years = ` 10 Lakhs for the year ending 31st March, 2017, 31st March, 2018, 31st March,
2019 and 31st March, 2020.

7. QP MAY 2022
Suraj Limited provides you the following information:
i) It received a Government Grant @40% towards the acquisitions of Machinery Worth ₹ 25
Crores.
ii) It received a Capital Subsidy of ₹ 150 Lakhs form Government for setting up a Plant costing
₹ 300 Lakhs in a notified backward region.
iii) It received ₹ 50 Lakhs form Government for setting up a project for supply of arsenic free
water in a notified area.
iv) It received ₹ 5 Lakhs form the Local Authority for providing Corona Vaccine free of charges
to its employees and their families.
v) It also received a performance award of ₹ 500 Lakhs form Government with a conditions
of major renovations in the power plant within 3 years. Suraj Limited incurred 90% of
amount towards Capital expenditure and balance for Revenue Expenditure.
State, how you will treat the above in the books of Suraj Limited.
 AS 12.7
AS 12

SOLUTION
(i) REFERENCE: As per AS 12 ‘Accounting for Government Grants’, two methods of presentation
in financial statements of grants related to specific fixed assets are regarded as acceptable
alternatives –
(a) The grant is shown as a deduction from the gross value of the asset concerned in arriving
at its book value. The grant is thus recognised in the profit and loss statement over the
useful life of a depreciable asset by way of a reduced depreciation charge. Where the
grant equals the whole, or virtually the whole, of the cost of the asset, the asset is
shown in the balance sheet at a nominal value.
(b) Grants related to depreciable asset are treated as deferred income which is recognised
in the profit and loss statement on a systematic and rational basis over the useful life
of the asset.
ANALYSIS: Under the first alternative, the grant of ` 10 crores (40% of 25 crores) is shown as a
deduction from the gross value of the asset concerned in arriving at its book value. The grant is
thus recognized the profit and loss statement over the useful life of a depreciable asset by way
of a reduced depreciation charge.
Under second alternative method, grant amounting ` 10 crores is treated as deferred income which
is recognized in the profit and loss statement on a systematic and rational basis over the useful
life of the asset.
(ii) REFERENCE: As per AS 12 ‘Accounting for Government Grants’, where the government grants
are in the nature of promoters’ contribution i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards its total capital outlay and no
repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve
which can be neither distributed as dividend nor considered as deferred income.
ANALYSIS: In the given case, the grant amounting ` 150 lakhs received from the Central
Government for setting up a plant in notified backward area may be considered as in the nature
of promoters’ contribution.
CONCLUSION: Amount of ` 150 lakhs should be credited to capital reserve and the plant will be
shown at ` 300 lakhs.
 AS 12.8

(iii) REFERENCE: As per AS 12 ‘Accounting for Government Grants’, where the government grants

AS 12
are in the nature of promoters’ contribution i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards its total capital outlay and no
repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve
which can be neither distributed as dividend nor considered as deferred income.
ANALYSIS: ` 50 lakhs received from Govt. for setting up a project for supply of arsenic free water
in notified area should be credited to capital reserve.
Alternatively, if it is assumed that the project consists of capital asset only, then the amount of
` 50 lakhs received from Govt. for setting up a project for supply of arsenic free water should
either be deducted from cost of asset of the project concerned in the balance sheet or treated as
deferred income which is recognized in the profit and loss statement on a systematic and rational
basis over the useful life of the asset.
(iv) REFERENCE: As per AS 12, Grants related to revenue are presented as a credit in the profit
and loss statement, either separately or under a general heading such as ‘Other Income’.
Alternatively, they are deducted in reporting the related expense.
ANALYSIS: ` 5 lakhs received from the local authority for providing corona vaccine to the
employees is a grant received in nature of revenue grant. Such grants are generally presented as
a credit in the profit and loss account, either separately or under a general heading ‘Other Income’.
Alternatively, ` 5 lakhs may be deducted in reporting the related expense i.e. employee benefit
expenses.
(v) ` 500 Lakhs will be reduced from the renovation cost of power plant or will be treated as
deferred income irrespective of the expenditure done by the entity out of it as it was specifically
received for the purpose major renovation of power plant. However, it may be, later on, decided by
the Govt. whether the grant will have to be refunded or not due to non-compliance of conditions
attached to the grant.

8. INTER RTP NOV 2016 / INTER RTP MAY 2018

D Ltd. acquired a machine on 01-04-2012 for ` 20,00,000. The useful life is 5 years. The company
had applied on 01-04-2012, for a subsidy to the tune of 80% of the cost. The sanction letter for
subsidy was received in November 2015. The Company’s Fixed Assets Account for the financial
year 2015-16 shows a credit balance as under:
Particulars `
Machine (Original Cost) 20,00,000
Less: Accumulated Depreciation (from 2012-13- to 2014-15 on Straight Line 12,00,000
Method)
8,00,000
Less: Grant received (16,00,000)
 AS 12.9
AS 12
Balance (8,00,000)

How should the company deal with this asset in its accounts for 2015-16? Can it charge
depreciation or negative depreciation for 2015-16? Can it credit ` 8,00,000 to Capital Reserve?

SOLUTION
REFERENCE:
As per AS 12 ‘Accounting for Government Grants’, for grants related to specific fixed assets, it is
shown as a deduction from the gross value of the asset concerned in arriving at its book value.
The grant is thus recognised in the profit and loss statement over the useful life of a depreciable
asset by way of a reduced depreciation charge. Where the grant equals the whole, or virtually the
whole, of the cost of the asset, the asset is shown in the balance sheet at a nominal value.
ANALYSIS:
From the above account, it is inferred that the Company follows Reduction Method for accounting
of Government Grants. Accordingly, out of the ` 16,00,000 that has been received, ` 8,00,000
(being the balance in Machinery A/c) should be credited to the machinery A/c.
The balance ` 8,00,000 may be credited to P&L A/c, since already the cost of the asset to the
tune of ` 12,00,000 had been debited to P&L A/c in the earlier years by way of depreciation charge,
and ` 8,00,000 transferred to P&L A/c now would be partial recovery of that cost.
There is no need to provide depreciation for 2015-16 or 2016-17 as the depreciable amount is now
Nil.
In respect of Depreciable Assets, AS-12 does not permit the crediting of the grant or any part
thereof to Capital Reserve A/c.

9. INTER RTP NOV 2018

A specific government grant of ` 15 lakhs was received by USB Ltd. for acquiring the Hi-Tech
Diary plant of ` 95 lakhs during the year 2014-15. Plant has useful life of 10 years. The grant
received was credited to deferred income in the balance sheet. During 2017-18, due to non-
compliance of conditions laid down for the grant, the company had to refund the whole grant to
 AS 12.10

the Government. Balance in the deferred income on that date was ` 10.50 lakhs and written down

AS 12
value of plant was ` 66.50 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of plant and
the amount of depreciation to be charged during the year 2017 -18 in profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the
plant during 2014-15 assuming plant account showed the balance of ` 56 lakhs as on
1.4.2017?
You are required to explain in the line with provisions of AS 12 .

SOLUTION
(i) REFERENCE: As per AS 12, ‘Accounting for Government Grants’, “the amount refundable in
respect of a grant related to specific fixed asset should be recorded by reducing the deferred
income balance. To the extent the amount refundable exceeds any such deferred credit, the
amount should be charged to profit and loss statement.
ANALYSIS: In this case the grant refunded is ` 15 lakhs and balance in deferred income is
` 10.50 lakhs, ` 4.50 lakhs shall be charged to the profit and loss account for the year 2017-
18. There will be no effect on the cost of the fixed asset and depreciation charged will be on
the same basis as charged in the earlier years.
(ii) REFERENCE: According to AS 12 on Accounting for Government Grants, the amount refundable
in respect of a grant related to a specific fixed asset (if the grant had been credited to the
cost of fixed asset at the time of receipt of grant) should be recorded by increasing the
book value of the asset, by the amount refundable. Where the book value is increased,
depreciation on the revised book value should be provided prospectively over the residual useful
life of the asset.
ANALYSIS:
Date Particulars (` in lakhs)
1/4/2017 Book Value of Asset 56
Add: Refund of grant 15
Revise book value 71
Depreciation charged during the year 2017-18 shall be (56+15)/7 years = ` 10.14 lakhs presuming
the depreciation is charged on SLM.
 AS 12.11

10. INTER RTP MAY 2019

AS 12

Viva Ltd. received a specific grant of ` 30 lakhs for acquiring the plant of ` 150 lakhs during 2014-
15 having useful life of 10 years. The grant received was credited to deferred income in the balance
sheet and was not deducted from the cost of plant. During 2017-18, due to non-compliance of
conditions laid down for the grant, the company had to refund the whole grant to the Government.
Balance in the deferred income on that date was ` 21 lakhs and written down value of plant was
` 105 lakhs. What should be the treatment of the refund of the grant and the effect on cost of
the fixed asset and the amount of depreciation to be charged during the year 2017-18 in profit
and loss account?

SOLUTION
REFERENCE:
As per AS 12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant
related to specific fixed asset should be recorded by reducing the deferred income balance. To
the extent the amount refundable exceeds any such deferred credit, the amount should be
charged to profit and loss statement.
ANALYSIS:
In this case the grant refunded is ` 30 lakhs and balance in deferred income is ` 21 lakhs, ` 9
lakhs shall be charged to the profit and loss account for the year 2017-18. There will be no effect
on the cost of the fixed asset and depreciation charged will be on the same basis as charged in
the earlier years.

11. INTER RTP MAY 20, INTER RTP NOV 20, ICAI ILLUSTRATION 5
How would you treat the following in the accounts in accordance with AS 12 'Government
Grants'?
(i) ` 35 Lakhs received from the Local Authority for providing Medical facilities to the
employees.
(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up a unit in a
notified backward area.
(iii) ` 10 Lakhs Grant received from the Central Government on installation of anti- pollution
equipment.
 AS 12.12

AS 12
SOLUTION
(i) REFERENCE: As per AS 12, Grants related to revenue are presented as a credit in the profit and
loss statement, either separately or under a general heading such as ‘Other Income’.
Alternatively, they are deducted in reporting the related expense.
ANALYSIS: ` 35 lakhs received from the local authority for providing medical facilities to the
employees is a grant received in the nature of revenue grant. It should be presented as a
credit in the profit and loss statement, either separately or under a general heading such as
‘Other Income’. Alternatively, ` 35 lakhs may be deducted in reporting the related expense
i.e. employee benefit expenses.
(ii) REFERENCE: As per AS 12 ‘Accounting for Government Grants’, where the government grants
are in the nature of promoters’ contribution i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards its total capital outlay and
no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve
which can be neither distributed as dividend nor considered as deferred income.
ANALYSIS: In the given case, the subsidy received from the Central Government for setting
up a unit in notified backward area is neither in relation to specific fixed asset nor in relation
to revenue.
CONCLUSION: Amount of ` 100 lakhs should be credited to capital reserve.
(iii) REFERENCE: As per AS 12 ‘Accounting for Government Grants’, two methods of presentation
in financial statements of grants related to specific fixed assets are regarded as acceptable
alternatives –
(a) The grant is shown as a deduction from the gross value of the asset concerned in arriving
at its book value. The grant is thus recognised in the profit and loss statement over the
useful life of a depreciable asset by way of a reduced depreciation charge. Where the
grant equals the whole, or virtually the whole, of the cost of the asset, the asset is shown
in the balance sheet at a nominal value.
(b) Grants related to depreciable asset are treated as deferred income which is recognised
in the profit and loss statement on a systematic and rational basis over the useful life
of the asset.

ANALYSIS: ` 10 lakhs grant received for installation anti-pollution equipment is a grant

 AS 12.13

related to specific fixed asset. ` 10 lakhs may either be deducted from the cost of equipment
AS 12

or treated as deferred income to be recognized on a systematic basis in profit & Loss A/c
over the useful life of equipment.

12. INTER QP MAY 18 / OCT 20 MOCK TEST/ MTP MARCH 2022

On 01.04.2014, XYZ Ltd. received Government grant of ` 100 Lakhs for an acquisition of new
machinery costing ` 500 lakhs. The grant was received and credited to the cost of the assets.
The life span of the machinery is 5 years. The machinery is depreciated at 20% on WDV method.
nd
The company had to refund the entire grant in 2 April, 2017 due to non-fulfilment of certain
conditions which was imposed by the government at the time of approval of grant.
How do you deal with the refund of grant to the Government in the books of XYZ Ltd., as per AS
12?

SOLUTION
REFERENCE:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of a
grant related to a specific fixed asset (if the grant had been credited to the cost of fixed asset
at the time of receipt of grant) should be recorded by increasing the book value of the asset, by
the amount refundable. Where the book value is increased, depreciation on the revised book value
should be provided prospectively over the residual useful life of the asset.
ANALYSIS:
Date Particulars (` in lakhs)
1st April, 2014 Acquisition cost of machinery (` 500 – ` 100) 400.00

31st March, 2015 Less: Depreciation @ 20% (80)

1st April, 2015 Book value 320.00

31st March, 2016 Less: Depreciation @ 20% (64)

1st April, 2016 Book value 256.00

31st March, 2017 Less: Depreciation @ 20% (51.20)

1st April, 2017 Book value 204.80

 AS 12.14

nd
2 April, 2017 Add: Refund of grant 100.00

AS 12
Revised book value 304.80
Depreciation @ 20% on the revised book value amounting ` 304.80 lakhs is to be provided
prospectively over the residual useful life of the asset.

13. ILLUSTRATION 8 (ICAI) , RTP MAY 2015

On 1.4.2014, ABC Ltd. received Government grant of Rs. 300 lakhs for acquisition of machinery
costing Rs. 1,500 lakhs. The grant was credited to the cost of the asset. The life of the machinery
is 5 years. The machinery is depreciated at 20% on WDV basis. The Company had to refund the
grant in May 2017 due to non-fulfilment of certain conditions. How you would deal with the refund
of grant in the books of ABC Ltd.?

SOLUTION
REFERENCE:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of a
grant related to a specific fixed asset (if the grant had been credited to the cost of fixed asset
at the time of receipt of grant) should be recorded by increasing the book value of the asset, by
the amount refundable. Where the book value is increased, depreciation on the revised book value
should be provided prospectively over the residual useful life of the asset.
ANALYSIS:
Date Particulars Rs. in
lakhs
1st April, 2014 Acquisition cost of machinery (Rs. 1,500 – Rs. 300) 1,200.00
31st March, 2015 Less: Depreciation @ 20% (240.00)
31st March, 2016 Book value 960.00
31st March, 2017 Less: Depreciation @ 20% (192.00)
1st April, 2017 Book value 768.00
May, 2017 Less: Depreciation @ 20% (153.60)
Book value 614.40
Add: Refund of grant 300.00
Revised book value 914.40
 AS 12.15

CONCLUSION:
AS 12

Depreciation @ 20% on the revised book value amounting Rs. 914.40 lakhs is to be provided
prospectively over the residual useful life of the asset.

14. RTP NOV 2014, RTP NOV 2017

S Ltd. received a grant of ` 5,000 lakhs during the last accounting year (2012-13) from
government for welfare activities to be carried on by the company for its employees. The grant
prescribed conditions for its utilization. However, during the year 2013-14, it was found that the
conditions of grants were not complied with and the grant had to be refunded to the government
in full. Elucidate the correct accounting treatment, with reference to the provisions of AS 12.

SOLUTION
REFERENCE:
As per AS 12 ‘Accounting for Government Grants’, Government grants sometimes become
refundable because certain conditions are not fulfilled. A government grant that becomes
refundable is treated as an extraordinary item as per AS 5.
The amount refundable in respect of a government grant related to revenue is applied first
against any unamortised deferred credit remaining in respect of the grant. To the extent that
the amount refundable exceeds any such deferred credit, or where no deferred credit exists,
the amount is charged immediately to profit and loss statement.
ANALYSIS / CONCLUSION:
In the present case, the amount of refund of government grant should be shown in the profit and
loss account of the company as an extraordinary item during the year 2013-14.

15. RTP NOV 2015

White Ltd. A fixed asset is purchased for ` 25 lakhs. Government grant received towards it
is ` 10 lakhs. Residual Value is ` 5 lakhs and useful life is 5 years. Assume depreciation on
the basis of Straight Line method. Asset is shown in the balance sheet net of grant. After 1
year, grant becomes refundable to the extent of ` 6 lakhs due to non-compliance with certain
conditions. Pass journal entries for first two years.
 AS 12.16

AS 12
SOLUTION
REFERENCE:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of
a grant related to a specific fixed asset should be recorded by increasing the book value of the
asset or by reducing deferred income balance, as appropriate, by the amount refundable. Where
the book value is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset.
Journal Entries
Year Particulars ` in lakhs ` in lakhs
(Dr.) (Cr.)
1 Fixed Asset Account Dr. 25
To Bank Account 25
(Being fixed asset purchased)
Bank Account Dr. 10
To Fixed Asset Account
10
(Being grant received from the government
reduced the cost of fixed asset)
Depreciation Account (W.N.1) Dr. 2
To Fixed Asset Account
2
(Being depreciation charged on Straight Line
method (SLM))
Profit & Loss Account Dr. 2
To Depreciation Account
2
(Being depreciation transferred to Profit and Loss
Account at the end of year 1)
2 Fixed Asset Account Dr. 6
To Bank Account
6
(Being government grant on asset partly refunded
which increased the cost of fixed asset)
 AS 12.17
AS 12
Depreciation Account (W.N.2) Dr. 3.5
To Fixed Asset Account 3.5
(Being depreciation charged on SLM on revised
value of fixed asset prospectively)
Profit & Loss Account Dr. 3.5
To Depreciation Account 3.5
(Being depreciation transferred to Profit and Loss
Account at the end of year 2)
Working Notes:
1. Depreciation for Year 1
Particulars ` in lakhs
Cost of the Asset 25
Less: Government grant received (10)
15
Depreciation [15-5]/5 2
2. Depreciation for Year 2
Particulars ` in lakhs
Cost of the Asset 25
Less: Government grant received (10)
15
Less: Depreciation for the first year [15-5]/5 2
13
Add: Government grant refundable 6
19
Depreciation for the second year [19-5]/4 3.5

16.RTP MAY 2017

P Limited belongs to the engineering industry. The Chief Accountant has prepared the draft
accounts for the year ended 31.03.2016. You are required to advise the company on the following
item from the viewpoint of finalisation of accounts, taking note of the mandatory accounting
standards:
The company purchased on 01.04.2015 special purpose machinery for `25 lakhs. It received a
Central Government Grant for 20% of the price. The machine has an effective life of 10 years.
 AS 12.18

AS 12
SOLUTION
REFERENCE:
As per AS 12 ‘Accounting for Government Grants’, two methods of presentation in financial
statements of grants related to specific fixed assets are regarded as acceptable alternatives –
(a) The grant is shown as a deduction from the gross value of the asset concerned in arriving
at its book value. The grant is thus recognised in the profit and loss statement over the
useful life of a depreciable asset by way of a reduced depreciation charge. Where the grant
equals the whole, or virtually the whole, of the cost of the asset, the asset is shown in the
balance sheet at a nominal value.
(b) Grants related to depreciable asset are treated as deferred income which is recognised in
the profit and loss statement on a systematic and rational basis over the useful life of the
asset.
ANALYSIS:
Under the first method, the grant of ` 5,00,000 can be shown as a deduction from the gross book
value of the machinery in arriving at its book value. The grant is thus recognised in the profit
and loss statement over the useful life of a depreciable asset by way of a reduced depreciation
charge.
Under the second method, it can be treated as deferred income which should be recognised in
the profit and loss statement over the useful life of 10 years in the proportions in which
depreciation on machinery will be charged. The deferred income pending its apportionment to
profit and loss account should be disclosed in the balance sheet with a suitable description e.g.,
‘Deferred government grants' to be shown after 'Reserves and Surplus' but before 'Secured
Loans'.
The following should also be disclosed:
i. the accounting policy adopted for government grants, including the methods of
presentation in the financial statements;
ii. the nature and extent of government grants recognised in the financial statement of ` 5
lakhs is required to be credited to the profit and loss statement of the current year.
 AS 12.19

17. MOCK TEST OCT 21 SERIES 2

AS 12

Caseworker Limited received a specific grant of ` 6 crore for acquiring the plant of ` 30 crore
during financial year 2015-2016 having useful life of 10 years. During the financial year 2020-
2021, due to non-compliance of conditions laid down for the grant of ` 6 crore, the company had
to refund the grant to the Government. What should be the treatment of the refund if grant was
deducted from the cost of the plant during financial year 2015-2016? Assume depreciation is
charged on fixed assets as per Straight Line Method.

SOLUTION
REFERENCE:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of a
grant related to a specific fixed asset (if the grant had been credited to the cost of fixed asset
at the time of receipt of grant) should be recorded by increasing the book value of the asset, by
the amount refundable. Where the book value is increased, depreciation on the revised book value
should be provided prospectively over the residual useful life of the asset.
ANALYSIS:
Period Particulars (` in Crore)
2015-16 Acquisition cost of plant (30 – 6) 24
Depreciation as per SLM for 5 Years [(24/10) X 5] 12
Book Value 12
Add: Refund of grant 6
Revise book value 18
The increased cost of ` 18 crore of the plant should be amortised prospectively over remaining 5
years of useful residual life. Depreciation charge in the year 2020-2021 would be ` 18 crore / 5
years = ` 3.6 crore instead of earlier ` 2.4 crore.
 AS 12.20

18. MOCK TEST OCT 21 SERIES 1

AS 12
Darshan Ltd. purchased a Machinery on 1st April, 2016 for ` 130 lakhs (Useful life is 4 years).
Government grant received is ` 40 lakhs for the purchase of above Machinery.
Salvage value at the end of useful life is estimated at ` 60 lakhs. Darshan Ltd. decides to treat
the grant as deferred income.
You’re are required to calculate the amount of depreciation and grant to be recognized in profit &
loss account for the year ending 31st March, 2017,31st March, 2018, 31st March, 2019 & 31st March,
2020.
Darshan Ltd. follows straight line method for charging depreciation.

SOLUTION:
REFERENCE:
As per AS 12 “Accounting for government grants”, grants related to depreciable assets, if treated
as deferred income are recognized in the profit and loss statement on a systematic and rational
basis over the useful life of the asset.
ANALYSIS:
Amount of depreciation to be recognized in the profit and loss account each year
` in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year (70 lakhs / 4) 17.50
` 17.50 Lakhs depreciation will be recognized for the year ending 31 st March, 2017 to 31st March,
2020.
Amount of grant recognized in Profit and Loss account each year:
40 lakhs / 4 years = ` 10 Lakhs for the year ending 31st March, 2017 to 31st March, 2020.
 AS 12.21

19. RTP MAY 2022

AS 12

A fixed asset is purchased for ` 30 lakhs. Government grant received towards it is ` 12 lakhs.
Residual Value is ` 6 lakhs and useful life is 4 years. The company charges depreciation based
on Straight-Line method. Asset is shown in the balance sheet net of grant. After 1 year, grant
becomes refundable to the extent of ` 7.5 lakhs due to non-compliance with certain conditions.
You are required to give necessary journal entries for second year.

SOLUTION
REFERENCE:
According to AS 12 on Accounting for Government Grants, the amount refundable in respect of
a grant related to a specific fixed asset should be recorded by increasing the book value of the
asset or by reducing deferred income balance, as appropriate, by the amount refundable. Where
the book value is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset.
Journal Entries
Year Particulars in lakhs (Dr.) in lakhs
(Cr.)
2nd Fixed Asset Account Dr. 7.5
To Bank Account 7.5
(Being government grant on asset partly refunded which
increased the cost of fixed asset)
Depreciation Account (W.N.) Dr. 5.5
To Fixed Asset Account 5.5
(Being depreciation charged on SLM on revised value of fixed
asset prospectively)
Profit & Loss Account Dr. 5.5
To Depreciation Account 5.5
(Being depreciation transferred to Profit and Loss Account at
the end of year 2)
 AS 12.22

Working Note:

AS 12
Depreciation for Year 2
` in lakhs
Cost of the Asset 30
Less: Government grant received (12)
18
Less Depreciation for the first year (18-6)/4 3

15
Add: Government grant refundable 7.5
22.5
Depreciation for the second year (22.5-6)/3 5.5

20. MTP APRIL 2022

Ram Ltd. purchased machinery for ` 80 lakhs (useful life 4 years and residual value ` 8 lakhs).
Government grant received was ` 32 lakhs. The grant had to be refunded at the beginning of
third year. Show the Journal Entry to be passed at the time of refund of grant and the value of
the fixed assets in the third year and the amount of depreciation for remaining two years, if
the g rant had been credited to Deferred Grant A/c.

SOLUTION
REFERENCE:
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated
to Profit and Loss account usually over the periods and in the proportions in which depreciation
on related assets is charged.
Accordingly, in the first two years (` 32 lakhs /4 years) = ` 8 lakhs x 2 years= ` 16 lakhs will
be credited to Profit and Loss Account and ` 16 lakhs will be the balance of Deferred Grant Account
after two years. Therefore, on refund of grant, following entry will be passed:
` lakhs ` lakhs
Deferred Grant A/c Dr. 16
Profit & Loss A/c Dr. 16
 AS 12.23
AS 12
To Bank A/c 32
(Being Government grant refunded)
1. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = ` 80 lakhs
Depreciation for each year = (` 80 lakhs – `8 lakhs)/4 years = ` 18 lakhs per year
Book value of fixed assets after two years = ` 80 lakhs – (` 18 lakhs x 2 years) = ` 44 lakhs
2. Value of Fixed Assets after refund of grant
On refund of grant the balance of deferred grant account will become nil. The fixed assets will
continue to be shown in the books at ` 44 lakhs.
3. Amount of depreciation for remaining two years
Depreciation will continue to be charged at ` 18 lakhs per annum for the remaining two years.
 AS 12.24

MCQs

AS 12
1. To encourage industrial promotion, IDCI offers subsidy worth ` 50 lakhs to all new industries
set up in the specified industrial areas. This grant is in the nature of promoter’s contribution.
How such subsidy should be accounted in the books?
a) Credit it to capital reserve
b) Credit it as ‘other income’ in the profit and loss account in the year of commencement of
commercial operations
c) Both (a) and (b) are permitted
d) Credit it to general reserve

2. Government grants that are receivable as compensation for expenses or losses incurred in a
previous accounting period or for the purpose of giving immediate financial support to the
enterprise with no further related costs, should be
a) recognised and disclosed in the Statement of Profit and Loss of the period in which they
are receivable as an ordinary item.
b) recognised and disclosed in the Statement of Profit and Loss of the period in which the
losses or expenses were incurred.
c) recognised and disclosed in the Statement of Profit and Loss of the period in which they
are receivable, as an extraordinary item if appropriate as per AS 5.
d) disclosed in the Statement of Profit and Loss of the period in which they are receivable, as
an extraordinary item

3. Which of the following is an acceptable method of accounting presentation for a government

grant relating to an asset?
a) Credit the grant immediately to Income statement
b) Show the grant as part of Capital Reserve
c) Reduce the grant from the cost of the asset or show it separately as a deferred income on
the Liability side of the Balance Sheet.
d) Show the grant as part of general Reserve

4. X Ltd. has received a grant of ` 20 crore for purchase of a qualified machine costing ` 80
crore. X Ltd has a policy to recognise the grant as a deduction from the cost of the asset. The
expected remaining useful life of the machine is 10 years. Assume that there is no salvage
value and the depreciation method is straight-line. The amount of annual depreciation to be
charged as an expense in Profit and Loss Statement will be:
a) ` 10 crore
b) ` 6 crore
c) ` 2 crore
 AS 12.25

d) ` 8 crore
AS 12

5. X Ltd has received a grant of ` 20 crore for purchase of a qualified machine costing ` 80 crore.
X Ltd. has a policy to recognise the grant as deferred income. The expected remaining useful
life of the machine is 10 years. Assume that there is no salvage value and the depreciation
method is straight-line. The amount of other income to be to be recognised in Profit and Loss
Statement will be:
a) ` 10 crore
b) ` 6 crore
c) ` 2 crore
d) ` 8 crore

Answers
1. (a) 2. (c) 3. (c) 4. (b) 5. (c)
Accounting Standard - 16 BORROWING COST

Objective of AS 16

▪ Appreciate the basis for recognising borrowing costs

▪ Identify the nature of specific and general borrowings, & treatment of related borrowing costs
▪ Ensure when to Commence capitalisation, Suspend capitalisation, Cease capitalisation

Applicability

Not Applicable to
▪ Actual cost of owners' equity - including preference share capital and
▪ Imputed cost of such equity
▪ And such other items forming part of equity and not classified as a liability

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Accounting Standard - 16 BORROWING COST

Borrowing cost Money borrowed by enterprise for

Purchasing fixed asset Acquiring land Working capital Constructing Building

These assets take time to make them useable or saleable.

Enterprise incur cost on borrowing i.e. interest and other cost
Standard deals with accounting of borrowing cost.

Interest + Other cost = Borrowing cost

Other cost include –

✓ Commitment charges on borrowing.
✓ Amortization of discounts or provision relating to borrowing.
✓ Amortization of ancillary costs incurred in connection with arrangement of borrower.
✓ Finance charges when the asset acquired under finance leases.
✓ Exchange difference arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest costs.
✓ Amortisation means dividation of total ancillary expenses in the ratio of usage amount.

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Accounting Standard - 16 BORROWING COST

Qualifying Asset QA is an asset which takes substantial period of time to get ready for its
✓ intended use (Fixed assets or investment properties) or
✓ sale (Inventory)

Examples

Any tangible fixed assets, Any intangible assets, Investment Inventories that require
which are in construction which are in property. a substantial period to
process or acquired development phase or bring them to a
tangible fixed assets, acquired but not ready saleable value.
which are not ready for for use such as patent.
use, such as plant and
machinery.
Following is not a QA
• Inventories routinely
✓ Substantial Period of Time is the period of 12 month. manufactured
• Inventories produced in large
quantities on repetitive basis
Longer or shorter period may also be justified based on the • Assets ready for intended use
circumstances of the case at the time of acquisition

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Accounting Standard - 16 BORROWING COST

Accounting treatment of Borrowing cost

As per AS – 16, borrowing cost, which is directly related to the acquisition, construction or production of qualifying asset should be capitalized.

Capitalization of borrowing cost

Borrowing cost directly Borrowing cost would Qualifying asset Cost to be

attributable to the have been avoided if will give future capitalised can be
acquisition, the expenditure on benefit to measured reliably.
construction/Productio qualifying asset had enterprise.
n of qualifying asset not been made

• If any of the above conditions does not satisfy then it is charged to P & L A/c
• If all the conditions are satisfied, Capitalise the Borrowing cost.

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Accounting Standard - 16 BORROWING COST

Types of Borrowing
Types of Borrowing

Specific Borrowing General Borrowing

Borrowed specifically for Borrowing is wholly or partly for

expenditure on qualifying asset. expenditure incurred on qualifying asset

Amount of borrowing cost to be capitalised = Actual

Borrowing cost to be capitalised = Apply
borrowing cost – income on temporary investment
capitalisation rate to the expenditure on
that asset
Borrowing cost capitalised should not exceed actual cost incurred
during the period. Capitalisation rate = Weighted average of
borrowing cost

When the carrying amount of qualifying assets exceeds its

recoverable amount of NRV, the carrying amount is written down
in accordance with requirement of other AS

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Accounting Standard - 16 BORROWING COST

Difference between Specific Borrowing and General Borrowing :

Specific Borrowing General Borrowing
Money borrowed specifically for the purpose of obtaining a A range of debt instruments are used to borrow funds at varying rate of
particular QA interest and such borrowing are not readily identifiable with a specific QA.
BC on QA can be readily identified BC on QA requires exercise of judgement.
Actual borrowing Cost xxx • Calculate a weighted average borrowing rate.
(-) Income on temporary investment (xxx) • Calculate the amount to be capitalized
Amount to be capitalized xxx • Amount of BC capitalized during the period should not be more than
actual BC.

Stages of Capitalization
➢ Commencement
➢ Suspension
➢ Cessation

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Accounting Standard - 16 BORROWING COST

Commencement of Capitalization Conditions

Activity Borrowing Expenditure for acquisition, construction

should be in cost is or production of a qualifying asset is
Progress incurred being incurred

Suspension of Capitalisation Expenditure on a qualifying

asset includes:
Capitalization is suspended during extended • Expenditure that has
resulted in payment of cash
period in which active development is interrupted • Transfers of other assets or
the assumption of interest
Delay bearing liabilities.

Expenditure is reduced by:

• Any progress payments
Temporary or Normal Not Temporary or Abnormal received and
• Grants received in
No suspension should be done. Suspension should be made connection with the asset.

Example : The extended period during which higher water levels delay construction of a bridge.

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Accounting Standard - 16 BORROWING COST

Exception
Capitalization of borrowing cost is not suspended
• During a period when substantial technical and administrative work is being carried out
• When a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.
Example: Capitalization should continue during the extended period needed for inventories to mature, or the extended period during which
high water levels delay the construction of a bridge.

Cessation of capitalization

✓ Capitalization of borrowing cost should cease when substantially all the activities necessary to prepare the qualifying assets for its intended
use or sale are completed.
✓ Items of administrative work or finishing touches to be completed happen to be minor in nature
✓ Construction of the qualifying asset is carried out in parts / phase and each part / phase can be used independently, required activities are
completed for such phase and it is ready for intended use or sale, capitalization of borrowing cost for such phase / part will cease.

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Accounting Standard - 16 BORROWING COST

Divisible and Indivisible Indivisible Projects : These situations are analysed below :
Particulars Asset completed in parts (i.e. Divisible Projects) Assets completed in full (i.e. Indivisible Projects)

(a)Description When construction of a Qualifying Asset is completed in parts and a When the Qualifying Assets consists of a number of parts which
completed part is capable of being used while construction continues for the can be used only in total, i.e. a completed part cannot be used
other parts. until construction of all parts is complete.

(b)Example A Business Park comprising several buildings, each of which can be used An Industrial Plant involving several processes which are carried
individually, is a Qualifying Asset for which each part is capable of being used out in sequence at different parts of the plant within the same
while construction continues for the other parts. site, such as a Steel Mill, is a Qualifying Asset that needs to be
complete in all respects before any part can be used.
(c)Cessation of Capitalisation of Borrowing Costs in relation to a part should cease when Capitalisation of Borrowing Costs should cease only when
Capitalisation substantially all the activities necessary to prepare that part of the asset for substantially all the activities necessary to complete the whole of
its intended use or sale are complete. the assets for its intended use or sale, is complete.

Disclosures
➢ The accounting policy adopted for borrowing cost.
➢ The amount of borrowing cost capitalised during the period.

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 AS 16.1

AS 16
AS 16 – BORROWING COST

Question Bank
Sr. No. Concept
Section A Section B

1 Interest Treatment Q.3, Q.1 Q.2, Q.3, Q.6, Q.7, Q.12

2 General & Specific Borrowing Q.2, Q.4 Q.4

3 Foreign Currency Q.5 Q.11

4 Income from Specific Borrowings Q.8, Q.10

5 Cessation of Capitalisation Q.9, Q.14, Q.5, Q.13

6 Identification of Qualifying Asset Q.6 Q.1

7 Special Case Q.7, Q.8, Q.9

 AS 16.2

AS 16 – BORROWING COSTS
AS 16

SECTION A (CONCEPT QUESTIONS)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ILLUSTRATION 1 (ICAI)
2 ILLUSTRATION 2 (ICAI)
3 ILLUSTRATION 3 (ICAI)
4 INTER QP MAY 19
5 IPCC QP MAY 18
INTER RTP NOV 2018,
6 MTP APRIL 2022
ILLU. 5 RTP MAY 13
SIMILAR Q. – MAY 16 –
7
5 MARKS & ICAI – P.Q.
11
MOCK TEST OCT 21
8
SERIES 2
9 QP MAY 2023
 AS 16.3

1. ILLUSTRATION 1 (ICAI)

AS 16
PRM Ltd. obtained a loan from a bank for ` 50 lakhs on 30-04-2016. It was utilised as follows:
Particulars Amount (` in lakhs)
Construction of a shed 50
Purchase of a machinery 40
Working Capital 20
Advance for purchase of truck 10
Construction of shed was completed in March 2017. The machinery was installed on the date of
acquisition. Delivery of truck was not received. Total interest charged by the bank for the year ending
31-03-2017 was ` 18 lakhs. Show the treatment of interest.

SOLUTION
REFERENCE:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized
as an expense in the period in which they are incurred. Capitalization of borrowing costs is also
not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
ANALYSIS:
Purpose Qualifying Interest to be Capitalised Interest to be charged
Assets ` in lakhs to profit and loss
account
` in lakhs
Construction of a shed Yes 18 X 50 / 120 = 7.5
Purchase of a Machinery No 18 X 40 / 120 = 6
Working Capital No 18 X 20 / 120 = 3
Advance for truck No 18 X 10 / 120 = 1.5
TOTAL 7.5 10.5
 AS 16.4

2. ILLUSTRATION 2 (ICAI)
AS 16

X Ltd. began construction of a new building on 1st January, 2016. It obtained ` 1 lakh special loan
to finance the construction of the building on 1st January, 2016 at an interest rate of 10%. The
company’s other outstanding two non-specific loans were:
Amount Rate of Interest
` 5,00,000 11%
` 9,00,000 13%

The expenditures that were made on the building project were as follows:

Particulars `
January 2016 2,00,000
April 2016 2,50,000
July 2016 4,50,000
December 2016 1,20,000
Building was completed by 31st December, 2016. Following the principles prescribed in AS 16
‘Borrowing Cost,’ calculate the amount of interest to be capitalised and pass one Journal Entry for
capitalising the cost and borrowing cost in respect of the building.

SOLUTION
(i) Computation of average accumulated expenses
Particulars `
` 2,00,000 x 12 / 12 2,00,000

` 2,50,000 x 9 / 12 1,87,500

` 4,50,000 x 6 / 12 2,25,000

` 1,20,000 x 1 / 12 10,000
6,22,500
 AS 16.5

(ii) Calculation of average interest rate other than for specific borrowings

AS 16
Amount of loan (` ) Rate of Amount of interest
interest (` )
5,00,000 11% 55,000
9,00,000 13% 1,17,000
14,00,000 1,72,000
Weighted average rate of Interest 12.285% (approx)
(1,72,000 / 14,00,000) X 100
Interest on average accumulated expenses
Particulars `
Specific borrowings (` 1,00,000 x 10%) 10,000
Non-specific borrowings ([` 6,22,500 – ` 1,00,000] x 12.285%) 64,189

Amount of interest to be capitalised 74,189

(iii) Total expenses to be capitalised for building

Particulars `
Cost of building ` (2,00,000 + 2,50,000 + 4,50,000 + 1,20,000) 10,20,000
Add: Amount of interest to be capitalised 74,189
10,94,189
(iv) Journal Entry
Date Particulars Dr. (`) Cr. (`)
31.12.2016 Building account Dr. 10,94,189
To Bank account 10,94,189
(Being amount of cost of building and
borrowing cost thereon capitalised)

3. ILLUSTRATION 3 (ICAI)
The company has obtained Institutional Term Loan of ` 580 lakhs for modernisation and renovation
of its Plant & Machinery. Plant & Machinery acquired under the modernisation scheme and
installation completed on 31st March, 2017 amounted to ` 406 lakhs, ` 58 lakhs has been advanced
to suppliers for additional assets and the balance loan of ` 116 lakhs has been utilised for working
capital purpose. The Accountant is on a dilemma as to how to account for the total interest of `
52.20 lakhs incurred during 2016-2017 on the entire Institutional Term Loan of ` 580 lakhs.
 AS 16.6
AS 16

SOLUTION
REFERENCE:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized
as an expense in the period in which they are incurred. Capitalization of borrowing costs is also
not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
ANALYSIS:
The treatment for total interest amount of ` 52.20 lakhs can be given as:
Purpose Qualifying Interest to be Capitalised Interest to be charged
Assets ` in lakhs to profit and loss
account
` in lakhs
Modernisation and Yes **52.20×
406
=36.54
580
renovation of plant and
machinery
Advance to supplies for Yes **52.20×
58
=5.22
580
additional assets
Working Capital No 52.20×
116
=10.44
580

TOTAL 41.76 10.44

* A substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a
period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified
on the basis of the facts and circumstances of the case.
** It is assumed in the above solution that the modernisation and renovation of plant and machinery will take
substantial period of time (i.e. more than twelve months). Regarding purchase of additional assets, the nature of
additional assets has also been considered as qualifying assets. Alternatively, the plant and machinery and additional
assets may be assumed to be non-qualifying assets on the basis that the renovation and installation of additional
assets will not take substantial period of time. In that case, the entire amount of interest, ` 52.20 lakhs will be
recognised as expense in the profit and loss account for year ended 31st March, 2017.
 AS 16.7

4. INTER QP MAY 19

AS 16
First Ltd. began construction of a new factory building on 1st April, 2017. It obtained ` 2,00,000
as a special loan to finance the construction of the factory building on 1st April, 2017
at an interest rate of 8% per annum. Further, expenditure on construction of the factory building
was financed through other non-specific loans. Details of other outstanding non-specific loans
were:
Amount (`) Rate of Interest per annum
4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
Date Amount (`)
1st April, 2017 3,00,000

31st May, 2017 2,40,000

1st August, 2017 4,00,000

31st December, 2017 3,60,000

The construction of factory building was completed by 31st March, 2018. As per the provisions
of AS 16, you are required to:
(1) Calculate the amount of interest to be capitalized.
(2) Pass Journal entry for capitalizing the cost and borrowing cost in respect of the factory
building.

SOLUTION
(i) Computation of average accumulated expenses
`
` 3,00,000 x 12 / 12 3,00,000

` 2,40,000 x 10 / 12 2,00,000

` 4,00,000 x 8 / 12 2,66,667
 AS 16.8

` 3,60,000 x 3 / 12 90,000
AS 16

8,56,667
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of interest (`)
4,00,000 9% 36,000
5,00,000 12% 60,000
3,00,000 14% 42,000
1,38,000
Weighted Average rate of Interest 11.5%
(1,38,000/12,00,000) X 100
(iii) Amount of interest to be capitalized
`
Interest on average accumulated expenses:
Specific borrowings (` 2,00,000 x 8%) 16,000
Non-specific borrowings [ 8 , 5 6 , 6 6 7 – 2 , 0 0 , 0 0 0 ] X 1 1 . 5 % 75,517
Amount of interest to be capitalised 91,517
(iv) T o t al expenses to be capitalised for building
`
Cost of building ` (3,00,000 + 2,40,000 + 4,00,000 + 3,60,000) 13,00,000

Add: Amount of interest to be capitalized 91,517

13,91,517
(v) Journal Entry
Date Particulars Dr. (`) Cr. (`)
31.3.2018 Building A/c Dr. 13,91,517
To Building WIP A/c 13,00,000
To Borrowing costs A/c 91,517
(Being amount of cost of building and borrowing cost
thereon capitalised)
Note: Considering ` 13 Lakh was debited to Building WIP Account earlier.)

5. IPCC QP MAY 18
Rutu Builders Limited has borrowed a sum of US$ 20,00,000 at the beginning of Financial year
2017-18 for its residential project at LIBOR +3%. The interest is payable at the end of the
financial year.
At the time of availment exchange rate was 61 per US $ and the rate as on 31st March, 2018
 AS 16.9

was 65 per US $. If Rutu Builders Limited had borrowed the loan in India in Indian Rupee

AS 16
equivalent, the pricing of loan would have been @ 10.50%.

SOLUTION
REFERENCE:
As per AS 16, Exchange differences arising from foreign currency borrowing and considered as
borrowing costs are those exchange differences which arise on the amount of principal of the
foreign currency borrowings to the extent of the difference between interest on local currency
borrowings and interest on foreign currency borrowings. The remaining exchange difference, if
any, is accounted for under AS 11, The Effect of Changes in Foreign Exchange Rates. For this
purpose, the interest rate for the local currency borrowings is considered as that rate at which
the enterprise would have raised the borrowings locally had the enterprise not decided to raise
the foreign currency borrowings.
ANALYSIS:
i. Interest for the period 2017-18
= US $ 20 lakhs x 4% × ` 65 per US $ = ` 52 lakhs
ii. Increase in the liability towards the principal amount
= US $ 20 lakhs × ` (65 - 61) = ` 80 lakhs.
iii. Interest that would have resulted if the loan was taken in Indian currency
= US $ 20 lakhs × ` 61 x 10.5% = ` 128.1 lakhs
iv. Difference between interest on local currency borrowing and foreign currency borrowing=
` 128.1 lakhs - ` 52 lakhs = ` 76.1 lakhs.
Therefore, out of ` 80 lakhs increase in the liability towards principal amount, only ` 76.1 lakhs
will be considered as the borrowing cost.
Interest on Foreign Borrowings ` 52 lakhs
The exchange difference to the extent of difference between interest on ` 76.1 lakhs
local currency borrowing and interest on foreign currency borrowing
Total Borrowing Cost `128.1 lakhs
CONCLUSION:
` 128.1 lakhs would be considered as the borrowing cost to be accounted for as per AS 16
“Borrowing Costs” and the remaining ` 3.9 lakhs (` 80 lakhs– ` 76.1 lakhs) would be considered
 AS 16.10

as the exchange difference to be accounted for as per AS 11 “The Effects of Changes in Foreign
AS 16

Exchange Rates”.

6. INTER RTP NOV 2018, MTP APRIL 2022

A company incorporated in June 2017, has setup a factory within a period of 8 months with
borrowed funds. The construction period of the assets had reduced drastically due to usage of
technical innovations by the company. Whether interest on borrowings for the period prior to the
date of setting up the factory should be capitalized although it has taken less than 12 months
for the assets to get ready for use. You are required to comment on the necessary treatment with
reference to AS 16.

SOLUTION:
REFERENCE:
As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. Further AS 16 states that what constitutes
a substantial period of time primarily depends on the facts and circumstances of each case.
However, ordinarily, a period of twelve months is considered as substantial period of time unless
a shorter or longer period can be justified on the basis of facts and circumstances of the case. In
estimating the period, time which an asset takes, technologically and commercially, to get it
ready for its intended use or sale is considered.
ANALYSIS:
It may be implied that there is a rebuttable presumption that a 12 months period constitutes
substantial period of time. Under present circumstances where construction period has reduced
drastically due to technical innovation, the 12 months period should at best be looked at as a
benchmark and not as a conclusive yardstick. It may so happen that an asset under normal
circumstances may take more than 12 months to complete. However, an enterprise that completes
the asset in 8 months should not be penalized for its efficiency by denying it interest
capitalization and vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and effort
capturing immaterial interest cost for purposes of capitalization.
CONCLUSION: If the factory is constructed in 8 months then it shall be considered as a qualifying
asset. The interest on borrowings for the same shall be capitalised although it has taken less than
12 months for the asset to get ready to use.
 AS 16.11

7. ILLUSTRATION 5 RTP MAY 2013 SIMILAR QUESTION – MAY 2016 – 5 MARKS & ICAI – P.Q. 11

AS 16
Vidya Ltd. is establishing an integrated steel plant consisting of four phases. It is expected that
the full plant will be established over several years, but pending that, Phase I and Phase II would
be started as soon as they are completed. Following is the detail of the work done on the different
phases of the plant during the current year.
Particulars Phase I Phase II Phase III Phase IV
Cash expenditure Rs. 20,00,000 Rs. 35,00,000 Rs. 25,00,000 Rs. 40,00,000
Plants Purchased 28,00,000 40,00,000 30,00,000 48,00,000
Total expenditure 48,00,000 75,00,000 55,00,000 88,00,000
Total expenditure 2,66,00,000
Loan taken @16% 2,40,00,000
During current year, Phase I and II have become operational. Find out the amount to be capitalized
and to be expensed during the year.

SOLUTION
Option I – The loan amount is apportioned in the ratio of expenditure:
Particulars Phase I Phase II Phase III Phase IV
Total expenditure
Apportionment of loan amount in the
ratio of expenditure
Interest @ 16%
Charge to P&L A/c. Capitalised
Option II – Loan amount apportioned at the discretion of the management.
Particulars Phase I Phase II Phase III Phase IV
Total Expenditure 48,00,000 75,00,000 55,00,000 88,00,000
Apportion at the discretion of 22,00,000 75,00,000 55,00,000 88,00,000
mgt. 2,40,00,000 (Bal. figure)
Interest @ 16% 3,52,000 12,00,000 8,80,000 14,08,000

Charge to P&L A/c. Capitalised

15,52,000 22,88,000
Note: It is assumed that phase I & Phase II became operational at the beginning of the year.
 AS 16.12

8. MOCK TEST OCT 21 SERIES 2

AS 16

ABC limited has started construction of an asset on 1st December, 2020, which continues till 31st
march, 2021 (and is expected to go beyond a year). the entity has not taken any specific
borrowings to finance the Construction of the asset but has incurred finance costs on its general
borrowings during the construction period. the directly attributable expenditure at the beginning
of the month on this asset was ` 10 lakh in December 2020 and ` 4 lakh in each of the months
of January to march 2021. at the beginning of the year, the entity had taken inter corporate
deposits of ` 20 lakh at 9% rate of interest and had an overdraft of ` 4 lakh, which increased to
` 8 lakh on 1st march, 2021. Interest was paid on the overdraft at 10% until 1st January, 2021
and then the rate was increased to 12%. you are required to calculate the annual capitalization
rate for computation of borrowing cost in accordance with as 16 'borrowing costs'.

SOLUTION
Calculation of capitalization rate on borrowings other than specific borrowings
nature of general period of outstanding amount of loan Rate of interest weighted average amount of
borrowings balance (`) p.a. interest
(`)
a b c d = [(b x c) x (a/12)]
9% debentures 12 months 20,00,000 9% 1,80,000
bank overdraft 9 months 4,00,000 10% 30,000
2 months 4,00,000 12% 8,000
1 month 8,00,000 12% 8,000
36,00,000 2,26,000
weighted average cost of borrowings
= {20,00,000 x(12/12)} + {4,00,000 x (11/12)} + {8,00,000 x (1/12)} = 24,33,334
capitalization rate = [(weighted average amount of interest / weighted average of general
borrowings) x 100] = [(2,26,000 / 24,33,334) x 100] = 9.29% p.a.

9. QP MAY 2023
On 1 April, 2022 Workhouse Limited took a loan from a Financial Institution for ₹25,00,000 for the
construction of Building. The rate of interest is 12%.
 AS 16.13

In addition to above loan, the company has taken multiple borrowings as follows:

AS 16
(i) 8% Debentures ₹ 15,00,000
(ii) 15% Term Lone ₹ 30,00,000
(iii) 10% Other Loans ₹ 18,00,000
The Company has utilised the above funds in constructions / purchases of the following assets:
(i) Building ₹ 70,00,000
(ii) Furniture ₹ 22,00,000
(iii) Plant and Machinery ₹ 90,00,000
(iv) Factory Shed ₹ 43,00,000
The construction of Building, Plant & Machinery and Factory Shed was completed on 31 st March
2023. Readymade Furniture was purchased directly from the market. The factory was ready for
production on 1st April 2023.
You are required to calculate the borrowing cost for both qualifying and non-qualifying assets.

SOLUTION
(i) Weighted Average interest rate for non-specific borrowings
Particulars Amount of loan Rate of interest Amount of interest
(a) (b) (c) = (a) x (b)
Debentures 15,00,000 8% 1,20,000
Term loan 30,00,000 15% 4,50,000
Other loans 18,00,000 10% 1,80,000
63,00,000 7,50,000
# Weighted Average Rate of Interest
= 7,50,000 / 63,00,000 x 100 = 11.9048%
(ii)
Particulars Qualifying Expenses Share in Interest- Interest-
asset Incurred borrowings Capitalized charged
` ` ` to P&L
A/c `
i. Building Yes 45,00,000 7,50,000 x 1,68,750 -
 AS 16.14

45/200
AS 16

ii. Furniture No 22,00,000 7,50,000 x - 82,500

22/200
iii. Plant & Yes 90,00,000 7,50,000 x 90 3,37,500 -
Machinery /200
iv. Factory shed Yes 43,00,000 7,50,000 x 43 / 1,61,250 -
200
Total 2,00,00,000 6,67,500 82,500
(iii) Interest to be Capitalized (on qualifying asset)
Particulars Computation `
a On specific Borrowings 25,00,000x12% 3,00,000
b On non-specific borrowings (ii) 6,67,500
c Amount of interest to be Capitalised (a+b) 9,67,500
(iv) Interest transferred to P&L (on non-qualifying asset)
Particulars Computation `
i. On non-specific Borrowings (ii) 82,500
AS 16.15

AS 16
 AS 16.1

AS 16 – BORROWING COSTS
AS 16

SECTION B (EXAM ORIENTED)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI - ILLUSTRATION 4
2 ICAI P. Q. 11
3 INTER QP NOV 20
4 QP MAY 22
INTER RTP MAY 2018 /
5 INTER RTP NOV 2019 /
RTP NOV 21
6 INTER RTP MAY 2019
7 INTER RTP MAY 20
INTER RTP NOV 20 ,
8 MOCK TEST 1 & 2
(SIMILAR)
9 INTER RTP NOV 20
10 RTP MAY 2017, RTP NOV
19
ICAI - ILLUSTRATION 14
11 /RTP MAY 2016
12 MOCK TEST OCT 21
SERIES 1
13 RTP MAY 22
14 RTP MAY 22
 AS 16.2

1. ILLUSTRATION 4 (ICAI)

AS 16
Take Ltd. has borrowed ` 30 lakhs from State Bank of India during the financial year 2016- 2017. The
borrowings are used to invest in shares of Give Ltd., a subsidiary company of Take Ltd., which is
implementing a new project, estimated to cost ` 50 lakhs. As on 31st March, 2017, since the said
project was not complete, the directors of Take Ltd. resolved to capitalise the interest accruing on
borrowings amounting to `4 lakhs and add it to the cost of investments. Comment.

SOLUTION
REFERENCE:
As per AS 13 "Accounting for Investments", the cost of investment includes acquisition charges such as
brokerage, fees and duties.
Further, as per AS 16 "Borrowing Costs", a qualifying asset is an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale.
ANALYSIS:
In the present case, Take Ltd. has used borrowed funds for purchasing shares of its subsidiary company
Give Ltd. ` 4 lakhs interest payable by Take Ltd. to State Bank of India cannot be called as acquisition
charges, therefore, cannot be constituted as cost of investment.
Shares are ready for its intended use at the time of sale, it cannot be considered as qualifying asset
that can enable a company to add the borrowing cost to investments.
CONCLUSION:
The directors of Take Ltd. cannot capitalise the borrowing cost as part of cost of investment. Rather,
it has to be charged to the Statement of Profit and Loss for the year ended 31st March, 2017.

2. ICAI Practical Question 11

On 1st April, 20X1, Amazing Construction Ltd. obtained a loan of ` 32 crores to be utilised as
under:
1 Construction of sealink across two cities: ` 25 crores
(work was held up totally for a month during the year due to high water levels)
2 Purchase of equipment’s and machineries ` 3 crores

3 Working capital ` 2 crores

 AS 16.3

4 Purchase of vehicles ` 50,00,000

AS 16

5 Advance for tools/cranes etc. ` 50,00,000

6 Purchase of technical know-how ` 1 crores
7 Total interest charged by the bank for the year ending 31st March, 20X2 ` 80,00,000
Show the treatment of interest by Amazing Construction Ltd.

SOLUTION
REFERENCE:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized
as an expense in the period in which they are incurred. Capitalization of borrowing costs is also
not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
ANALYSIS:
The treatment of interest by Amazing Construction Ltd. can be shown as:
Purpose Qualifying Interest to be Interest to be charged to
Asset capitalised ` Profit & Loss A/c `
Construction of sea-link Yes 62,50,000
[80,00,000x(25/32)]
Purchase of equipment’s No 7,50,000
and machineries [80,00,000x(3/32)]
Working capital No 5,00,000
[80,00,000x(2/32)]
Purchase of vehicles No 1,25,000
[80,00,000x(0.5/32)]
Advance for tools, cranes etc. No 1,25,000
[80,00,000x(0.5/32)]
 AS 16.4

Purchase of technical know- No 2,50,000

AS 16
how [80,00,000x(1/32)]

Total 17,50,000

3. INTER QP NOV 20
On 15th April 2019 RBM Ltd. Obtained a Term Loan from the Bank for ` 320 lakhs to be utilised as
under
Particulars ` (in lakhs)
Construction for factory shed 240
Purchase of Machinery 30
Working Capital 24
Purchase of Vehicles 12
Advance for tools/cranes etc. 8
Purchase of technical know how 6
In March 2020 construction of shed was completed and machinery was installed. Total interest
charged by the bank for the year ending 31st March 2020 was ` 40 lakhs.
In the context of provisions of AS 16 ‘Borrowing Cost’, show the treatment of interest and also
explain the nature of assets.

SOLUTION
REFERENCE:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized
as an expense in the period in which they are incurred. Capitalization of borrowing costs is also
not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
 AS 16.5

ANALYSIS:
AS 16

Purpose Qualifying Interest to be Capitalised Interest to be charged

Assets ` in lakhs to profit and loss
account
` in lakhs
Construction for factory Yes 40 X 240 / 320 = 30
shed
Machinery No 40 X 30 / 320 = 3.75
Working Capital No 40 X 24 / 320 = 3
Vehicle No 40 X 12 / 320 = 1.5
Advances for tools/ cranes No 40 X 8 / 320 = 1
Know how No 40 X 6 / 320 = .75
TOTAL 30 10
Note: Assumed that construction of factory shed completed on 31st March, 2020.

4. QP MAY 22
Zebra Limited began construction of a new plant on 1st April, 2021 and obtained a special loan of
₹ 20,00,000 to finance the construction of the plant. The rate of interest on loan was 10%. The
expenditure that was incurred on the constructions of plant was as follows:
₹
1st April, 2021 10,00,000
1st August, 2021 24,00,000
1st January,2022 4,00,000
The company’s other outstanding non-specific loan was ₹ 46,00,000 at an interest rate of 12%
The construction of the plant completed on 31st March, 2022.
You are required to:
(a)Calculate the amount of interest to be capitalized as per the provisions of AS 16 “Borrowing
Cost”.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant.
 AS 16.6

SOLUTION

AS 16
(i) Computation of Average Accumulated Expenses:
1st April, 2021 10,00,000 x 12/12 10,00,000
1st August, 2021 10,00,000 x 12/12 10,00,000
14,00,000 x 8/12 9,33,333
1st January, 2022 4,00,000 x 3/12 1,00,000
30,33,333
(ii) Interest on average accumulated expenses
Particulars Rs.
Specific Borrowings (20,00,000 X 10%) 2,00,000
Non Specific Borrowings (30,33,333 – 20,00,000) X 12% 1,24,000
Amount of Interest to be Capitalised 3,24,000
NOTE: Since specific borrowings are earmarked for construction of a particular qualifying asset, it
cannot be used for construction of any other qualifying asset except for temporary investment.
Therefore, once the commencement of capitalization of borrowing cost criteria are met, actual
borrowing cost incurred on specific borrowing shall be capitalized irrespective of the fact that
amount had been utilized in parts.
(iii) Total expenses to be capitalized for borrowings as per AS 16 “Borrowing Costs”: `
Cost of Plant (10,00,000 + 24,00,000 + 4,00,000) 38,00,000
Add: Amount of interest to be capitalized (W.N.) 3,24,000
41,24,000
(iv) Journal Entry
Date Particulars Dr. (`) Cr. (`)
31.03.2022 Plant account Dr. 41,24,000
To Bank account 41,24,000
(Being amount of cost of plant and borrowing
cost thereon capitalised)

5. INTER RTP MAY 2018 / INTER RTP NOV 2019 / RTP NOV 21
In May, 2016, Capacity Ltd. took a bank loan to be used specifically for the construction of a
new factory building. The construction was completed in January, 2017 and the building was put
to its use immediately thereafter. Interest on the actual amount used for construction of the
building till its completion was ` 18 lakhs, whereas the total interest payable to the bank on
the loan for the period till 31st March, 2017 amounted to ` 25 lakhs. Can ` 25 lakhs be treated
as part of the cost of factory building and thus be capitalized on the plea that the loan was
specifically taken for the construction of factory building?
 AS 16.7
AS 16

SOLUTION
REFERENCE:
As per AS 16, Capitalisation of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete
ANALYSIS:
The construction was completed in January, 2017 and the building was put to its use immediately
thereafter. Interest payable upto January 2017 was ` 18 lakhs so it can be capitalized. It cannot
be extended to ` 25 lakhs.
CONCLUSION:
Interest to be capitalized as per AS 16 – 18 Lakhs.

6. INTER RTP MAY 2019

Zen Bridge Construction Limited obtained a loan of ` 64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath ` 50 crores
(ii) Purchase of Equipment and Machineries ` 6 crores
(iii) Working Capital ` 4 crores
(iv) Purchase of Vehicles ` 1 crore
(v) Advances for tools/cranes etc. ` 1 crore
(vi) Purchase of Technical Know how ` 2 crores
(vii) Total Interest charged by the Bank for the year ending 31st March, 2018 ` 1.6 crores

Show the treatment of Interest according to Accounting Standard by Zen Bridge Construction
Limited.
 AS 16.8

SOLUTION

AS 16
REFERENCE:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized
as an expense in the period in which they are incurred. Capitalization of borrowing costs is also
not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
ANALYSIS:
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Purpose Qualifying Interest to be Interest to be charged to
Asset capitalized Profit & Loss A/c
` in crores ` in crores
Construction of hill road* Yes 1.25
1.6/64 x 50
Purchase of equipment and 0.15
machineries No 1.6/64 x 6
Working capital No 0.10
1.6/64 x 4
Purchase of vehicles No 0.025
1.6/64 x 1
Advance for tools, cranes etc. No 0.025
1.6/64 x 1
Purchase of technical know- how No 0.05
1.6/64 x 2
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year
(substantial period of time), hence considered as qualifying asset.

7. INTER RTP MAY 20

Govind Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.04.2018, to be utilized as under:
Particulars Amount (` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery was installed
and ready for its intended use. Total interest on debentures for the financial year ended 31.03.2019
 AS 16.9

was ` 12,00,000. During the year 2018-19, the company had invested idle fund out of money raised
AS 16

from debentures in banks' fixed deposit and had earned an interest of ` 3,00,000.
You are required to show the treatment of interest under Accounting Standard 16 and also explain
nature of assets.

SOLUTION
REFERENCE:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized
as an expense in the period in which they are incurred. Capitalization of borrowing costs is also
not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
ANALYSIS:
Eligible borrowing cost = ` 12,00,000 – ` 3,00,000 = ` 9,00,000
Sr. Particulars Qualifying Interest to be Interest to be
No. assets capitalized (`) charged to Profit &
Loss Account (`)
i Construction of factory Yes 9,00,000x40/100 NIL
building = ` 3,60,000
ii Purchase of Machinery No NIL 9,00,000x35/100
= ` 3,15,000
iii Working Capital No NIL 9,00,000x25/100
= ` 2,25,000
Total ` 3,60,000 ` 5,40,000
 AS 16.10

8. INTER RTP NOV 20 , MOCK TEST 1 & 2 (SIMILAR)

AS 16
Vital Limited borrowed an amount of `150 crores on 1.4.2019 for construction of boiler plant @
10% p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of
capital is 13% p.a., the accountant of Vital Ltd. Capitalized ` 19.50 crores for the accounting
period ending on 31.3.2020. Due to surplus fund out of `150 crores, an income of ` 1.50 crores
was earned and credited to profit and loss account. Comment on the above treatment of
accountant with reference to relevant accounting standard.

SOLUTION
REFERENCE:
AS 16 ‘Borrowing Costs’ states that to the extent the funds are borrowed specifically for the
purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization
on that asset should be determined as the actual borrowing costs incurred on that borrowing
during the period less any income on the temporary investment of those borrowings. The
capitalization rate should be the weighted average of the borrowing costs applicable to the
borrowings of the enterprise that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset.
ANALYSIS:
Treatment of accountant of Vital Ltd. is incorrect. The amount of borrowing costs capitalized
for the financial year 2019-20 should be calculated as follows:
Actual interest for 2019-20 (10% of ` 150 crores) ` 15.00 crores
Less: Income on temporary investment from specific borrowings (` 1.50 crores)
Borrowing costs to be capitalized during year 2019-2020 ` 13.50 crores
 AS 16.11

9. INTER RTP NOV 20

AS 16

When capitalization of borrowing cost should cease as per Accounting Standard 16? Explain in
brief.

SOLUTION
1. Capitalization of borrowing costs should cease when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.
2. An asset is normally ready for its intended use or sale when its physical construction or
production is complete even though routine administrative work might still continue.
3. If minor modifications such as the decoration of a property to the user’s specification, are
all that are outstanding, this indicates that substantially all the activities are complete.
4. When the construction of a qualifying asset is completed in parts and a completed part is
capable of being used while construction continues for the other parts, capitalization of
borrowing costs in relation to a part should cease when substantially all the activities
necessary to prepare that part for its intended use or sale are complete.

10. RTP MAY 2017, RTP NOV 19

Rainbow Limited borrowed an amount of ` 150 crores on 1.4.2016 for construction of boiler plant
@ 11% p.a. The plant is expected to be completed in 4 years. Since the weighted average cost
of capital is 13% p.a., the accountant of Rainbow Ltd. capitalized ` 19.50 crores for the
accounting period ending on 31.3.2017. Due to surplus fund out of ` 150 crores, income of ` 3.50
crores was earned and credited to profit and loss account. Comment on the above treatment of
accountant with reference to relevant accounting standard.
 AS 16.12

SOLUTION

AS 16
REFERENCE:
AS 16 ‘Borrowing Costs’ states that to the extent the funds are borrowed specifically for the
purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization
on that asset should be determined as the actual borrowing costs incurred on that borrowing
during the period less any income on the temporary investment of those borrowings. The
capitalization rate should be the weighted average of the borrowing costs applicable to the
borrowings of the enterprise that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset.
ANALYSIS:
Treatment of accountant of Rainbow Ltd. is incorrect. The amount of borrowing costs capitalized
for the financial year 2016-2017 should be calculated as follows:
Particulars ` in crores
Actual interest for 2016-2017 (11% of ` 150 crores) 16.50
Less: Income on temporary investment from specific borrowings (3.50)
Borrowing costs to be capitalized during year 2016-2017 13.00

11. ILLUSTRATION 14 RTP MAY 2016

Tip top Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2014-
15 for its residential project at 4 %. The interest is payable at the end of the Financial Year.
At the time of availment exchange rate was ` 56 per US $ and the rate as on 31st March, 2015
was ` 62 per US $. If Tip top Builders Limited borrowed the loan in India in Indian Rupee
equivalent, the pricing of loan would have been 10.50%. Compute Borrowing Cost and exchange
difference for the year ending 31st March, 2015 as per applicable Accounting Standards

SOLUTION
REFERENCE:
As per AS 16, Exchange differences arising from foreign currency borrowing and considered as
borrowing costs are those exchange differences which arise on the amount of principal of the
foreign currency borrowings to the extent of the difference between interest on local currency
borrowings and interest on foreign currency borrowings. The remaining exchange difference, if
any, is accounted for under AS 11, The Effect of Changes in Foreign Exchange Rates. For this
 AS 16.13

purpose, the interest rate for the local currency borrowings is considered as that rate at which
AS 16

the enterprise would have raised the borrowings locally had the enterprise not decided to raise
the foreign currency borrowings.
ANALYSIS:
a. Interest for the period 2014-15
= US $ 10 lakhs x 4% × ` 62 per US$ = ` 24.80 lakhs
b. Increase in the liability towards the principal amount
US $ 10 lakhs × `(62 - 56) = ` 60 lakhs
c. Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
d. Difference between interest on local currency borrowing and foreign currency borrowing
= ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only ` 34
lakhs will be considered as the borrowing cost.
Interest on Foreign Borrowings ` 24.80 lakhs
The exchange difference to the extent of difference between interest ` 34 lakhs
on local currency borrowing and interest on foreign currency borrowing
Total Borrowing Cost `58.8 lakhs
CONCLUSION:
` 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16
and the remaining ` 26 lakhs (60 - 34) would be considered as the exchange difference
to be accounted for as per AS 11.

12. MOCK TEST OCT 21 SERIES 1

U Limited has obtained a term loan of ` 620 lacs for a complete renovation and modernization
of its Factory on 1st April, 2020. Plant and Machinery was acquired under the modernization
scheme and installation was completed on 30th April, 2021. An expenditure of ` 564 lacs was
incurred on this Plant and Machinery and the balance loan of ` 56 lacs has been used for working
capital purposes. The company has paid total interest of ` 68.20 lacs during financial year 2020-
2021 on the above loan. The accountant seeks your advice how to account for the interest paid in
the books of accounts. Will your answer be different, if the whole process of renovation and
modernization gets completed by 28th February, 2021?
 AS 16.14

AS 16
SOLUTION
REFERENCE:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized
as an expense in the period in which they are incurred. Capitalization of borrowing costs is also
not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
(i) When construction of asset completed on 30th April, 2021
The treatment for total borrowing cost of ` 68.20 lakhs will be as follows:
Purpose Qualifying Interest to be capitalized Interest to be charged to
asset ` in lakhs profit and loss account
` in lakhs
Plant and machinery Yes [68.20 x (564/620)]
under Modernization = 62.04
and renovation
Scheme
Working Capital No [68.20 x (56/620)]
= 6.16
62.04 6.16
(ii) When construction of assets is completed by 28th February, 2019
In this scenario, when the process of renovation gets completed in less than 12 months, the plant
and machinery will not be considered as qualifying assets (until and unless the entity specifically
considers that the asset took substantial period of time for completing their construction) and
the whole of interest will be required to be charged off / expensed off to Profit and loss account.

13. RTP MAY 22

An enterprise has constructed a complex piece of equipment (qualifying asset) that is to be
installed on the production line of a manufacturing plant. The equipment has been constructed
over a period of 15 months. However, on installation, certain calibrations are required to achieve
 AS 16.15

the desired level of production before it is finally commissioned. This process is expected to take
AS 16

approximately 2 months during which test runs will be made. Should the borrowing costs
attributable to borrowings pertaining to the 2 months test run period be capitalized?

SOLUTION
REFERENCE:
As per AS 16, Capitalisation of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete
ANALYSIS:
On installation of the equipment, an evaluation has to be made to conclude whether substantially
all the activities necessary to prepare the asset are complete. After an equipment has been
installed it is usually tested and adjusted for commercial production before it is finally
commissioned. The calibrations and adjustments required during this period are performed in order
to bring the equipment up to the stage at which it is ready to commence commercial production.
Until the asset reaches the stage when it is ready to support commercial levels of production, it
is not appropriate to conclude that substantially all the activities necessary to prepare the asset
are complete.
CONCLUSION:
The borrowing cost incurred during the normal period of test runs (after the installation) are
required to be capitalized.

14. RTP MAY 22

Should capitalization of borrowing costs be continued when the qualifying asset has been
constructed but marketing activities to sell the asset are still in progress?
 AS 16.16

SOLUTION

AS 16
REFERENCE:
As per provisions of AS 16, capitalization of borrowing costs should cease when substantially all
the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
Further, the standard also explains that “An asset is normally ready for its intended use or sale
when its physical construction or production is complete even though routine administrative work
might sill continue. If minor modifications, such as the decoration of a property to the user’s
specification, are all that are outstanding, this indicates that substantially all the activities are
complete”.
ANALYSIS:
The emphasis in the Standard is on “to prepare the qualifying asset for its intended use or sale”
and not the actual activity of sale. Therefore, where the physical construction of the asset is
complete, substantially all the activities necessary to prepare the qualifying asset for its intended
use or sale are complete.
CONCLUSION:
The borrowing costs pertaining to the period during which the marketing activities to sell the
asset are still in progress should not be capitalized as part of the cost of the asset.
 AS 16.17

MCQs
AS 16

1. As per AS 16, all the following are qualifying assets except

a) Manufacturing plants and Power generation facilities
b) Inventories that require substantial period of time
c) Assets those are ready for sale.
d) None of the above

2. Which of the following statement is correct:

a) Entire exchange gain is reduced from the cost of the Qualifying asset.
b) Entire exchange loss is added to the cost of a Qualifying asset.
c) No adjustment is done for the exchange loss while computing cost of Qualifying asset.
d) None of the above

3. Capitalisation rate considers:

a) Borrowing costs on general borrowings only.
b) Borrowing costs on general and specific borrowings both.
c) Borrowing costs on specific borrowings only
d) None of the above

4. If the amount eligible for capitalisation in case of inventory as per AS 16 is ` 12,000 and cost
of inventory is ` 40,000 and its net realizable value is ` 45,000; What amount can be capitalised
as a part of inventory cost.
a) ` 12,000. c) ` 7,000.
b) ` 5,000. d) ` 10,000.

5. X Ltd is commencing a new construction project, which is to be financed by borrowing. The

key dates are as follows:
i. 15th May, 20X1: Loan interest relating to the project starts to be incurred
ii. 2nd June, 20X1: Technical site planning commences
iii. 19th June, 20X1: Expenditure on the project started to be incurred
iv. 18th July, 20X1: Construction work commences
Identify the commencement date for capitalisation under AS 16.
a) 15th May, 20X1. c) 18th July, 20X1.
b) 19th June, 20X1. d) 2nd June, 20X1
Answers
1. (c) 2. (c) 3. (a) 4. (b) 5. (b)
Accounting Standard - 19 ACCOUNTING FOR LEASES
Leases

• Define the essential characteristics of a lease

• Describe and apply the method of determining a lease type (i.e. an operating or finance lease)
• Account for operating leases in financial statements
• Account for finance leases in the financial statements of the lessor and lessee
Elementary concepts
Lease financing is based on the observation made by Donald B. Grant:
“Why own a cow when the milk is so cheap? All you really need is milk and not the cow.”

What is a lease?
A lease is an agreement
• between the owner of the asset (the lessor) and its user (the lessee)
• for the right to use the asset during a specified period
• in return for a mutually agreed payment or series of payments (lease rental)
www.cavidya.com AS 19.1 © Anandh Bhanggariya 96323 96323
Accounting Standard - 19 ACCOUNTING FOR LEASES
Scope of the standard

• Licensing agreements for items such as option picture films, video recordings, plays, patents and copyrights.
• Lease agreements to use lands.
• Agreements that are contracts for services, that do not transfer right to use assets from one contracting party to the other.
• Lease agreements to explore for or use of natural resources such as oil, gas, timber metals
• and other mineral rights.
Key Terms
Non-cancellable lease is a lease that is cancellable.
Upon the occurrence of With the permission of the The lease term is the non-cancellable period for which the lessee has agreed to take
some remote contingency; or Lessor; or
on lease the asset together with any further periods for which the lessee has the

If the lessee enters into a Upon payment by the lessee of option to continue the lease of the asset, with or without further payment, which
new lease for the same or an additional amount such that,
an equivalent asset with the at inception, continuation of option at the inception of the lease it is reasonably certain that the lessee will
same lessor; or the lease is reasonably certain.
exercise.

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Some important concepts...
• Fair Value: Is the amount for which an asset could be exchanged or a liability settled Between knowledgeable, willing parties in an arm’s
length transaction.

• Useful Life: Useful life of a leased asset is either Period over which the leased asset is expected to be used by the OR Number of production
or similar units expected to be obtained from the use of the asset by the lessee.

• Residual Value: Residual value is the estimated fair value at the end of the lease term.

• Guaranteed Residual Value :

• Guaranteed residual value is: In the case of the lessee that part of the residual value
• which is guaranteed by the lessee or by a party on behalf of the lessee (the amount of the guarantee being the maximum amount that could,
in any event, become payable).
• in the case of the lessor: that part of the residual value which is guaranteed by or on behalf of the lessee, or by an independent third party
who is financially capable of discharging the obligations under the guarantee.

• Unguaranteed Residual Value: Amount by which the residual value of the Asset Exceeds Its guaranteed residual value.

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Some important concepts...
1. The economic life of an asset.
Economic life is either:
• the period over which an asset is expected to be economically usable by one or more users; or
• the number of production or similar units expected to be obtained from the asset by one or more users.

2. The degree / extent of transfer of risks and rewards which are incidental to the ownership of leased asset by the lessor to
the lessee Risk incidental to ownership

possibilities of losses from idle capacity or variations in return because of

technological obsolescence changing economic conditions

Rewards incidental to ownership

Expectation of profitable Realisation of a residual Gain from appreciation

operation over the assets economic life value in value

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Realisation of a residual value
Example
• A tractor has an estimated life of 10 years and an estimated residual value of Rs999. Peter pays rent to William and uses the tractor for 10
years. However, William will realise the residual value of the tractor.
Hence William is the person who enjoys the rewards incidental to ownership of the tractor

Some more important terms

1.The lease term

The lease term is the non-cancellable period for which the lessee has contracted to lease the asset, together with any further terms for which the
lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain
that the lessee will exercise the option.
2. Lease payments
Instalments which the lessee pays to the lessor in return for the right to use an asset.

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Minimum lease payments
Minimum lease payments are the payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for
services and taxes to be paid by and reimbursed to the lessor, together with:
a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or
b) for a lessor, any residual value guaranteed to the lessor by
i. the lessee;
ii. a party related to the lessee; or
iii. a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.

Finance lease - definition

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not
eventually be transferred

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Substantial risks and rewards transferred From lessor to lessee
lessor
The person who transfers the right to use an asset for anagreed period of time

lessee

The person who acquires the right to use an asset for an agreed period of time

An operating lease is a lease other than a finance lease.

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Finance lease in the books of the lessee
Finance lease

Asset acquired Lease rentals paid

Reflect in balance
sheet Interest portion Capital
repayment

Amount due to Charge to income statement

Capitalise assets
lessor

Depreciation
Reduce from amount due to
lessor Reduce balance of
asset
Revised balance of lessor

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Accounting Standard - 19 ACCOUNTING FOR LEASES
A lease is classified as a finance lease when any one or all of the following conditions are fulfilled:

1. The lease transfers ownership of the asset to the lessee by the end of the lease term
2. the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value of the asset, at the
date the option becomes exercisable.
3. the lease term is for the major part of the economic life of the asset, even if the title is not transferred;
4. at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the
leased asset;
5. the leased assets are of such a specialised nature that only the lessee can use them without major modifications.
6. if the lessee can cancel the lease, then the lessor’s losses associated with the cancellation are borne by the lessee.
7. gains or losses from the fluctuation in the fair value of the residual accrue to the lessee
8. the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Disclosures made by the Lessee in case of Finance Lease:
(a) Assets acquired under finance lease as segregated from the assets owned;
(b) For each class of assets, the net carrying amount at the balance sheet date;
(c) Reconciliation between the total of minimum lease payments at the balance sheet date and their present value. In addition, an enterprise
should disclose the total of minimum lease payments at the balance sheet date, and their present value, for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(d) Contingent rents recognized as expense in the statement of profit and loss for the period;
(e) Total of future minimum sublease payments expected to be received under non-cancelable subleases at the balance sheet date; and
(f) General description of the lessee’s significant leasing arrangements including, but not limited to, the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing.

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Accounting for Finance Leases (Books of Lessor)
The lessor should recognize assets given under a finance lease in its balance sheet as a receivable at an amount equal to the net investment in
the lease. In a finance lease, the lessor recognizes the net investment in lease which is usually equal to fair value as receivable by debiting the
Lessee A/c.

Disclosure:
The lessor should make the following disclosures for finance leases:
(a) Reconciliation between the total gross investment in the lease at the balance sheet date, and the present value of minimum lease payments
receivable at the balance sheet date. In addition, an enterprise should disclose the total gross investment in the lease and the present value
of minimum lease payments receivable at the balance sheet date, for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) Unearned finance income;
(c) Unguaranteed residual values accruing to the benefit of the lessor;
(d) Accumulated provision for uncollectible minimum lease payments receivable;
(e) Contingent rents recognized in the statement of profit and loss for the period;
(f) General description of the significant leasing arrangements of the lessor;
(g) Accounting policy adopted in respect of initial direct costs

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Accounting Standard - 19 ACCOUNTING FOR LEASES

Method of determining a lease type

gives to
Lessor Asset on lease Lessee

Transfers the risks and Retains risks and rewards

rewards incidental to Operating lease
incidental to ownership
ownership to lessee

Transfers title of Does not transfer title of

ownership to lessee ownership to lessee

Finance lease Follow principle of substance over form

Operating lease - In the books of the lessee

The lease rentals which the lessee pays periodically, when he acquires an asset under an operating lease, are debited to the income statement as
an expense.

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Accounting Standard - 19 ACCOUNTING FOR LEASES

Operating lease - Accounting treatment in books of lessee

Operating lease

Asset used Lease rentals paid

Not shown as a non-current

Charged to income statement
asset in BS

Disclosures by Lessees:
Lessees are required to make following disclosures for operating Leases:
(a) Total of future minimum lease payments under non-cancelable operating leases for each of the following periods:(i) not later than one year; (ii) later than one year and not
later than five years; (iii) later than five years;
(b) Total of future minimum sublease payments expected to be received under non-cancelable subleases at the balance sheet date;
(c) Lease payments recognised in the statement of profit and loss for the period, with separate amounts for minimum lease payments and contingent rents;
(d) Sub-lease payments received (or receivable) recognised in the statement of profit and loss for the period;
(e) General description of the lessee’s significant leasing arrangements including, but not limited to, the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Disclosures by Lessors
As per AS 19, the lessor should, in addition to the requirements of AS 10 (Revised)* and the governing statute, make the following disclosures for
operating leases:
(a) For each class of assets, the gross carrying amount, the accumulated depreciation and accumulated impairment (i) the depreciation
recognised in the statement of profit and losses at the balance sheet date; and loss for the period;
(ii) impairment losses recognised in the statement of profit and loss for the period;
(iii) impairment losses reversed in the statement of profit and loss for the period;
(b) Future minimum lease payments under non-cancelable operating leases in the aggregate and for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(c) Total contingent rents recognised as income in the statement of profit and loss for the period;
(d) General description of the lessor’s significant leasing arrangements; and
(e) Accounting policy adopted in respect of initial direct costs.

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Accounting Standard - 19 ACCOUNTING FOR LEASES
Finance lease in the books of the lessee

1) Capitalise the asset

The journal entry to capitalise the asset is:
Dr Asset
Cr Lessor
Being asset acquired by a finance lease
The amount to be recorded is the lower of the fair value of the asset and the present value of the minimum lease payments.

The depreciation policy for depreciable leased assets should be consistent with the normal depreciation policy of the lessee for similar assets (as
per the requirements of IAS 16 and IAS 38) and should be calculated over the shorter of:

❖ The life of the lease; and

❖ The useful life of the asset.

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Accounting Standard - 19 ACCOUNTING FOR LEASES

2) Split the lease rental into interest portion and the capital portion

Methods to split lease rental

Actuarial method Sum-of-digits method

Interest rate used spreads income derived from lease over the period of the lease

The sum–of–digits method

1. A digit is assigned to each instalment.
2. The last instalment is assigned the digit 1, the second last one 2, and so on.
3. Add all the digits, using the formula:

Sum of digits = n (n+1) / 2,

where n is the number assigned to the interest bearing instalments.
4. Calculate the interest portion included in each instalment by using the formula:

Interest portion = digit applicable to the instalment / sum of digits

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Accounting Standard - 19 ACCOUNTING FOR LEASES

The journal entries to record the lease rental payment are for the lease rental repayment (inclusive of both the interest and capital
repayment portion):

Particulars Amount Amount

Lessor Dr. XXX
To Cash / bank XXX
(Being the total rental payment paid to the lessor.)

For recording the interest

Particulars Amount Amount

Lease interest Dr. XXX
To Lessor XXX
(Being the interest accrued on the total lease amount outstanding.)

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 AS 19.1

AS 19
AS 19 – ACCOUNTING FOR LEASES

Question Bank
Sr. No. Concept
Section A Section B

1 Classification Q.5, Q.9 Q.9, Q.22

2 Lease Liability Calculation Q.2 Q.7, Q.12, Q.18, Q.19, Q.21

3 Lease Back Q.6 Q.2, Q.3, Q.6, Q.20, Q.23

4 Finance Lease

Q.11, Q.13, Q.17, Q.24,

• Unearned Finance Q.3
Q.25

• Finance Charges Calculation Q.8

5 Operating Lease

• Journal Entries Q.4 Q.1

• Computation of annual lease rent Q.10 Q.4

6 Notes to accounts Q.7

7 Miscellaneous Q.5

8 Special Case Q.1, Q.8, Q.11, Q.12 Q.10, Q.14, Q.15, Q.16
 AS 19.2

AS 19 – ACCOUNTING FOR LEASES

AS 19

SECTION A (CONCEPT QUESTIONS)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI Example 1, 2, 3, 4
2 ICAI Illustration 1
3 ICAI ILLUSTRATION 2
4 ICAI Example
5 QP NOV 19
QP JAN 21 (Similar to
6 ICAI ILLU.3) / ICAI PQ14
7 QP Nov,2011
8 MAY 2013
ICAI PRACTICAL Q 4
9
(Similar to ICAI P.Q.10)
10 ICAI P. Q. 16 (Similar to
ICAI P.Q.11)
MTP 2 (Q No 1 d), IPCC
11 RTP Nov 2018 Q19a
(Similar to ICAI P.Q.12)
12 RTP Nov 2015/ (Nov
2004) Nov 2012
 AS 19.3

1. ICAI Example 1, 2, 3, 4

AS 19
Annual lease rents ` 50,000 at the end of each year.
Lease period 5 years;
Guaranteed residual value ` 25,000
Unguaranteed residual value (UGR) ` 15,000
Fair Value at the inception (beginning) of lease ` 2,00,000
Calculate
1. Interest rate implicit on lease
2. Present value of minimum lease payment. Write down entry at the inception of lease to record
the asset taken on finance lease in books of lessee.
3. Assuming zero residual value, allocate finance charge over lease period. Pass accounting entries
in year 1 to recognise the finance charge in books of lessee
4. suppose unguaranteed residual value is not determinable and lessee’s incremental borrowing
rate is 10%, calculate
• Present value of minimum lease payment. Write down entry at the inception of lease to
record the asset taken on finance lease in books of lessee.
• Assuming zero residual value, allocate finance charge over lease period. Pass accounting
entries in year 1 to recognise the finance charge in books of lessee

SOLUTION
1. Interest rate implicit on lease is a discounting rate at which present value of minimum lease
payments and unguaranteed residual value is ` 2 lakhs.
PV of minimum lease payments and unguaranteed residual value at guessed rate 10%
Year MLP + UGR ` DF (10%) PV `
1 50,000 0.909 45,450
2 50,000 0.826 41,300
3 50,000 0.751 37,550
4 50,000 0.683 34,150
5 50,000 0.621 31,050
 AS 19.4

5 25,000 0.621 15,525

AS 19

5 15,000 0.621 9,315

Total 2,90,000 2,14,340
PV of minimum lease payments and unguaranteed residual value at guessed rate 14%
Year MLP + UGR ` DF (14%) PV `
1 50,000 0.877 43,850
2 50,000 0.769 38,450
3 50,000 0.675 33,750
4 50,000 0.592 29,600
5 50,000 0.519 25,950
5 25,000 0.519 12,975
5 15,000 0.519 7,785
Total 2,90,000 1,92,360
Interest rate implicit on lease is computed below by interpolation:
14%−10%
Interest rate implicit on lease = 10% + × (2,14,340 − 2,00,000) = 𝟏𝟐. 𝟔%
2,14,340−1,92,360

2. Present value of minimum lease payment is computed below:

Year MLP ` DF (12.6%) PV `
1 50,000 0.890 44,500
2 50,000 0.790 39,500
3 50,000 0.700 35,000
4 50,000 0.622 31,100
5 50,000 0.552 27,600
5 25,000 0.552 13,800
Total 2,75,000 1,91,500
Present value of minimum lease payment = ` 1,91,500
Fair value of leased asset = ` 2,00,000
On the date of inception of Lease, Lessee should show it as an asset and corresponding liability
at lower of:
• Fair value of leased asset at the inception of the lease
• Present value of minimum lease payments from the standpoint of the lessee
The accounting entry at the inception of lease to record the asset taken on finance lease in books
of lessee is suggested below:
 AS 19.5

Particulars ` `

AS 19
Asset A/c Dr. 1,91,500
To Lessor A/c 1,91,500
(Being recognition of finance lease as asset and liability)
3. Allocation of finance charge over lease period is shown below:
Year Amount o/s Interest Gross Amount Lease Payment Amount o/s @
@beginning @ 12.6% end
0 1,91,500 -- 1,91,500 -- 1,91,500
1 1,91,500 24,129 2,15,629 50,000 1,65,629
2 1,65,629 20,869 1,86,498 50,000 1,36,498
3 1,36,498 17,199 1,53,697 50,000 1,03,697
4 1,03,697 13,066 1,16763 50,000 66,7632
5 66,7632 8,237* 75,000 75,000 -
83,500 2,75,000
The difference between this figure and finance charge [66,763×12.6%=8412] is due to
approximation in computation.
Accounting entries in year 1 to recognise the finance charge in books of lessee are suggested
below:
Particulars ` `
Finance Charge A/c Dr. 24,129
To Lessor 24,129
(Being finance charge due for the year)
Lessor Dr. 50,000
To Bank A/c 50,000
(Being payment of lease rent for the year)
P & L A/c Dr. 24,129
To Finance Charge A/c 24,129
(Being recognition of finance charge as expense for the year)
4. Since interest rate implicit on lease is discounting rate at which present value of minimum
lease payment and present value of unguaranteed residual value equals the fair value, interest
rate implicit on lease cannot be determined unless unguaranteed residual value is known. If
interest rate implicit on lease is not determinable, the present value of minimum lease
payments should be determined using lessee’s incremental borrowing rate.
Present value of minimum lease payment using lessee’s incremental borrowing rate 10% is
computed below:
 AS 19.6

Year MLP ` DF (10%) PV `

AS 19

1 50,000 0.909 45,450

2 50,000 0.826 41,300
3 50,000 0.751 37,550
4 50,000 0.683 34,150
5 50,000 0.621 31,050
5 25,000 0.621 15,525
Total 2,75,000 2,05,025
On the date of inception of Lease, Lessee should show it as an asset and corresponding liability
at lower of:
• Fair value of leased asset at the inception of the lease i.e. ` 2,00,000
• Present value of minimum lease payments from the standpoint of the Lessee i.e. ` 2,05,025
The accounting entry at the inception of lease to record the asset taken on finance lease in books
of lessee is suggested below:
Particulars ` `
AssetA/c Dr. 2,00,000
To Lessor 2,00,000
(Being recognition of finance lease as asset and liability)
Since the liability is recognised at fair value ` 2 lakh (total principal), we need to ascertain a
discounting rate at which present value minimum lease payments equals ` 2 lakh. The discounting
rate can then be used for allocation of finance charge over lease period.
PV of minimum lease payments at guessed rate 12%
Year Minimum Lease Payments ` DF (12%) PV `
1 50,000 0.893 44,650
2 50,000 0.797 39,850
3 50,000 0.712 35,600
4 50,000 0.636 31,800
5 50,000 0.567 28,350
5 25,000 0.567 14,175
Total 1,94,425
12%−10%
Required discounting rate = 10% + × (2,05,025 − 1,94,425) = 12.6%
2,05,025−1,94,425

Allocation of finance charge over lease period is shown below:

 AS 19.7

Year Amount o/s Finance Charge Gross Amount Lease Payment Amount o/s @

AS 19
@beginning end
0 2,00,000 -- 2,00,000 -- 2,00,000
1 2,00,000 21,900 2,21,900 50,000 1,71,900
2 1,71,900 18,823 1,90,723 50,000 1,40,723
3 1,40,723 15,409 1,56,132 50,000 1,06,132
4 1,06,132 11,621 1,17,753 50,000 67,753
5 67,753 7,247* 75,000 75,000 0
75,000 2,75,000
* The difference between this figure & finance charge [67,753×10.95% = 7418] is due to
approximation in computation.
Accounting entries in year 1 to recognise the finance charge in books of lessee are suggested
below:
Particulars ` `
Finance Charge A/c Dr. 21,900
To Lessor 21,900
(Being finance charge due for the year)
Lessor Dr. 50,000
To Bank A/c 50,000
(Being payment of lease rent for the year)
P & L A/c Dr. 21,900
To Finance Charge 21,900
(Being recognition of finance charge as expense for the year)

2. ICAI Illustration No 1
S. Square Private Limited has taken machinery on finance lease from S.K. Ltd. The information is
as under:
Lease term = 4 years
Fair value at inception of lease = ` 20,00,000
Lease rent = ` 6,25,000 p.a. at the end of year
Guaranteed residual value = ` 1,25,000
Expected residual value = ` 3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and
0.5718 respectively.
 AS 19.8

Calculate the value of the lease liability as per AS-19. And disclose impact of this on Balance
AS 19

sheet and profit & Loss Account at the end of 1 year.

SOLUTION
REFERENCE:
As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an
amount lower of:
a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
ANALYSIS: Present value of minimum lease payments will be calculated as follows:
Year Minimum Lease Internal rate of return Present value
Payment ` (Discount rate @15%) `
1 6,25,000 0.8696 5,43,500
2 6,25,000 0.7561 4,72,563
3 6,25,000 0.6575 4,10,937
4 7,50,000 [6,25,000 + 1,25,000] 0.5718 4,28,850
Total 26,25,000 18,55,850
CONCLUSION:
Present value of minimum lease payments ` 18,55,850 is less than fair value at the inception
of lease i.e., ` 20,00,000, therefore, the lease liability should be recognised at ` 18,55,850 as per
AS 19.

3. ICAI ILLUSTRATION NO 2
Prakash Limited leased a machine to Badal Limited on the following terms:
(` In lakhs)
(i) Fair value of the machine 48.00
(ii) Lease term 5 years
(iii) Lease rental per annum 8.00
 AS 19.9

(iv) Guaranteed residual value 1.60

AS 19
(v) Expected residual value 3.00
(vi) Internal rate of return 15%
st th
Discounted rates for 1 year to 5 year are 0.8696, 0.7561, 0.6575, 0.5718, and 0.4972 respectively.
Ascertain Unearned Finance Income.

SOLUTION
REFERENCE:
As per AS 19 - Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance
lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the
lessor, at the interest rate implicit in the lease.
Where:
Gross investment in the lease is the aggregate of
(i) minimum lease payments from the stand point of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Formula of GIL = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed residual value (URV)
ANALYSIS:
(a) Calculation of Gross Investment of Lease:
Particulars Amount Amount
Minimum Lease Payments 41,60,000
Total Lease rent [(` 8,00,000 x 5 years) 40,00,000
Guaranteed Residual Value (GRV) 1,60,000
Add: Unguaranteed residual value (URV) 1,40,000
Gross Investment 43,00,000
 AS 19.10

(b) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed
AS 19

residual value (URV).

Internal rate of return (Discount Present Value
Year MLP inclusive of URV `
factor @15%) `
1 8,00,000 0.8696 6,95,680
2 8,00,000 0.7561 6,04,880
3 8,00,000 0.6575 5,26,000
4 8,00,000 0.5718 4,57,440
5 8,00,000 0.4972 3,97,760
1,60,000 (GRV) 0.4972 79,552
41,60,000 27,61,312 (i)
1,40,000 (URV) 0.4972 69,608 (ii)
43,00,000 (i)+ (ii) 28,30,920(b)

Unearned Finance Income (a) - (b) = ` 43,00,000 – ` 28,30,920= ` 14,69,080.

4. ICAI Example on Page No 1.90

Outputs from a machine of economic life of 6 years are estimated as 10,000 units in year 1, 20,000
units in year 2 and 30,000 units in year 3, 40,000 units in year 4, 20,000 units in year 5 and 5,000
units in year 6. The machine was given on 3-year operating lease by a dealer of the machine for
equal annual lease rentals to yield 20% profit margin on cost ` 5,00,000. How will you recognise
the lease rent in books.

SOLUTION
REFERENCE:
As per AS 19, operating lease should be recognized as an expense in the statement of Profit and
Loss on Straight line basis over the lease term unless another systematic basis is more
representative of the time pattern of the user’s benefit.
ANALYSIS:
As per the above reference, Straight-line depreciation in proportion of output is considered
appropriate.
 AS 19.11

𝑂𝑢𝑡𝑝𝑢𝑡 𝐷𝑢𝑟𝑖𝑛𝑔 𝑙𝑒𝑎𝑠𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

Total lease rent = 120% 𝑜𝑓 𝑅𝑠. 5 𝐿𝑎𝑘ℎ𝑠 ×

AS 19
𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
60,000 𝑈𝑛𝑖𝑡𝑠
6 𝐿𝑎𝑘ℎ𝑠 × = 𝑅𝑠. 2.88 𝐿𝑎𝑘ℎ𝑠
1,25,000 𝑈𝑛𝑖𝑡𝑠

Annual lease rent = ` 2,88,000 / 3 = ` 96,000

Total lease rent should be recognised as income in proportion of output during lease period, i.e. in
the proportion of 10 : 20 : 30. Hence income recognised in years 1, 2 and 3 are ` 48,000, ` 96,000
and ` 1,44,000 respectively.
Since depreciation in proportion of output is considered appropriate, the depreciable amount `
5 lakh should be allocated over useful life 6 years in proportion of output, i.e. in proportion of 10
: 20 : 30 : 40 : 20 : 5.
Depreciation for year 1 = ` 5,00,000 X 10/125 = ` 40,000.
The accounting entries for year 1 in books of lessor are suggested below:
Particulars ` `
Machine given on Operating Lease Dr. 5,00,000
To Bank / Cash A/c 5,00,000
(Being machine given on operating lease brought into books)
Lessee Dr. 96,000
To Lease Rent 96,000
(Being lease rent for the year due)
Bank Dr. 96,000
To Lessee 96,000
(Being receipt of lease rent for the year)
Lease Rent Dr. 96,000
To P & L A/c 48,000
To Lease Equalisation A/c 48,000
(Being recognition of lease rent as income for the year)
Depreciation Dr. 40,000
To Machine given on Operating Lease 40,000
(Being depreciation for the year)
P & L A/c Dr. 40,000
To Depreciation 40,000
(Being depreciation for the year transferred to P & L A/c)
Since total lease rent due and recognised must be same, the Lease Equalisation A/c will close in
the terminal year. Till then, the balance of Lease Equalisation A/c can be shown in the balance
sheet under "Current Assets" or Current Liabilities" depending on the nature of balance.
 AS 19.12

5. QP NOV 19
AS 19

Classify the following into either operating lease or finance lease with reason:
(1) Economic life of asset is 10 years, lease term is 9 years, but asset is not acquired at the end
of lease term.
(2) Lessee has option to purchase the asset at lower than fair value at the end of lease term.
(3) Lease payments should be recognized as an expense in the statement of Profit & Loss of a
lessee.
(4) Present Value (PV) of Minimum Lease Payment (MLP) = "X". Fair value of the asset is "Y".
And X = Y.
(5) Economic life of the asset is 5 years, lease term is 2 years, but the asset is of special nature
and has been procured only for use of the lessee.

SOLUTION:
REFERENCE:
As per AS 19 “Leases”, a lease will be classified as finance lease if:
• At the inception of the lease, the present value of minimum lease payment amounts to at
least substantially all of the fair value of leased asset.
• In a finance lease, lease term should be for the major part of the economic life of the asset
even if title is not transferred.
• The lessee has the option to purchase the asset at a price which is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable.
• The leased asset is of a specialized nature such that only the lessee can use it without major
modifications being made.
As per the above reference, cases will be classified as follows:
ANALYSIS (i):
A substantial portion of the life of the asset (10years) is covered by the lease term (9years).
CONCLUSION:
The lease will be classified as Finance lease.
ANALYSIS (ii):
If it becomes certain at the inception of lease itself that the option will be exercised by the lessee,
it will be classified as a Finance Lease.
 AS 19.13

CONCLUSION:

AS 19
The lease will be classified as Finance lease.
ANALYSIS (iii):
As lease payments are recognized as expense in the profit and loss account of lessee to have
better matching between cost and revenue, it does not specify any condition for finance lease.
CONCLUSION:
The lease will be classified as Operating lease.
ANALYSIS (iv):
As Present value (PV) of Minimum lease payment (MLP) = Fair value of the asset, the definition
of finance lease is satisfied.
CONCLUSION:
The lease will be classified as a finance lease.
ANALYSIS (v):
As the asset is of special nature and has been procured only for use of the lessee, it has no other
usage even if it’s economic life is more than lease period.
CONCLUSION:
The lease will be classified as a finance lease.

6. QP JAN 21 (Similar to ICAI ILLU.3) / ICAI PQ14

X Ltd. sold machinery having WDV of ` 300 lakhs to Y Ltd. for ` 400 lakhs and the same machinery
was leased back by Y Ltd. to X Ltd. The lease back arrangement is operating lease. Give your
comments in the following situations:
(i) Sale price of ` 400 lakhs is equal to fair value.
(ii) Fair value is ` 450 lakhs.
(iii) Fair value is ` 350 lakhs and the sale price is ` 250 lakhs.
(iv) Fair value is ` 300 lakhs and sale price is ` 400 lakhs.
(v) Fair value is ` 250 lakhs and sale price is ` 290 lakhs.
 AS 19.14

SOLUTION
AS 19

Following will be the treatment in the given cases as per AS 19:

(i) When sale price of ` 400 lakhs is equal to fair value, X Ltd. should immediately recognise the
profit of `100 lakhs (i.e. 400 – 300) in its books.
(ii) When fair value is ` 450 lakhs then also profit of `100 lakhs should be immediately recognised
by X Ltd.
(iii) When fair value of leased machinery is ` 350 lakhs & sales price is ` 250 lakhs, then loss
of ` 50 lakhs (300 – 250) to be immediately recognised by X Ltd. in its books provided loss
is not compensated by future lease payment.
(iv) When fair value is ` 300 lakhs & sales price is ` 400 lakhs then, profit of ` 100 lakhs is to be
deferred and amortised over the lease period.
(v) When fair value is ` 250 lakhs & sales price is ` 290 lakhs, then the loss of ` 50 lakhs (300-
250) to be immediately recognised by X Ltd. in its books and profit of ` 40 lakhs (290-250)
should be amortised/deferred over lease period.

7. (Suggested Nov,2011)(5 Marks)

The following balances are extracted from the books of Ram Ltd. a real estate company on 31st
March, 2011:

Dr. (` in 000) Cr. (` in ‘000)

Lease hold premises 42

Equipment, fixtures and fittings at cost on 1.4.2010 264

Deprecation on equipment’s, fixtures and fittings on

164
1.4.2010

The following additional information’s are also provided.

1. Depreciation on equipment, fittings and fixtures is provided @ 15% on written down value.
2. On 1st October 2010, the company moved to a new premises. The premise is on a 12 year lease
and the lease premium paid amounted to `` 42,000. The company used sub-contract labour
of ` 40,000 and materials at cost of `38,000 in the refurbishment of the premises. These are
to be considered as part of the cost of lease hold premises
You are required to prepare the ‘Notes to accounts’ including significant accounting policies
forming part of the financial statements, for disclosure of above facts and information provided.
 AS 19.15

AS 19
SOLUTION
Since the implicit rate of interest is not mention in the question it is assumed that value of lease
premium paid along with the refurbishment cost is the fair value of the leased asset. Accordingly,
question has been solved assuming the lease as finance lease.
Notes on Accounts for the year ended 31st March, 2011:
The cost of lease hold premises includes the cost of refurbishment to the extent of ` 78,000
(Materials ` 38,000 + Labour `40,000).
Working Notes:
(a) Fixed Assets: (` in 000)
Equipment, fixture & fittings 264
* Lease hold premises (42+40+38) 120
384
(b) Depreciation
Equipment, fixtures * fittings as on 1.4.2010 164
For the year 2010-11 15 179
* Cost of leasehold premises written off
[(42+40+38) x 1/12 x ½ ] __5
184
Significant Accounting Policies
1. Depreciation has been charged on equipment, fixtures & fittings on the basis of written down
value method year after year. Equipment fixtures & fittings are shown at cost in the balance
sheet & depreciation accumulated, thereon is shown on the liability side of the balance sheet.
2. According to AS-19 leases, the lease has been classified as finance lease assuming that lessor
has transferred substantially all the risks and rewards incident to ownership to Ram Ltd. At
the inception of lease, asset under finance lease is capitalized in the books of the lessee with
the corresponding liability wherein lease payments are recognized as an expense in the profit
and loss account on a systematic basis (i.e straight line) over the lease term. The person
(lessor/lessee) presenting the leased asset in his balance sheet should also consider the
additional requirements of AS 6 and AS 10.
 AS 19.16

8. (MAY 2013, 5 MARKS)

AS 19

On 1st January, 2011 Santa Ltd sold equipment for `6,14,460. The carrying amount of the
equipment on the date was `1,00,000. The sale was part of the package under which Banta Ltd.
leased the asset to Santa Ltd. for 10 year term. The economic life of the asset is estimated at 10
years. The Minimum Lease Rents payable by the Lessee has been fixed at `1,00,000 payable
annually beginning 31st December, 2011. The incremental borrowing Interest Rate of Santa Ltd is
estimated at 10% p.a. Calculate the net effect on the Profit and Loss in the books of Santa Ltd.

SOLUTION
A. In the books of the Lessee:
1. It is assumed that the asset is depreciated on SLM Basis. Since the lease period covers the
balance useful life of the asset, it is a Finance Lease.
2. PV of MLP = 6.1446 × 1,00,000 = `6,14,460.
3. The Asset is sold at PV of MLP (` 6,14,460). Hence the same is capitalized in Lessor’s Books.
4. Depreciation to be charged for the next 10 years = 6,14,460 ÷ 10 = ` 61,446 p.a.
5. Profit on Sale & Lease Back = Revised Book Value – Old Book Value = ` 6,14,460 – ` 1,00,000 =
` 5,14,460
This Profit will be credited to P&L A/c in the next 10 years, in proportion to the depreciation charge.
In this case, `51,446 p.a. will be credited to the P & L A/c over the next 10 year (Since Depreciation
is constant on SLM basis)
1. Interest Charge to be debited in P&L A/c is determined as under –
Year Opening Interest at 10% on Lease Balance Principal Closing
Balance Opening Balance Payment Repaid Balance
1 6,14,460 61,446 1,00,000 38,554 5,75,906
2 5,75,906 57,591 1,00,000 42,409 5,33,497
3 5,33,497 53,350 1,00,000 46,650 4,86,847
4 4,86,847 48,685 1,00,000 51,315 4,35,532
5 4,35,532 43,553 1,00,000 56,447 3,79,085
6 3,79,085 37,909 1,00,000 62,091 3,16,994
 AS 19.17

7 3,16,994 31,699 1,00,000 68,301 2,48,693

AS 19
8 2,48,693 24,869 1,00,000 75,131 1,73,562
9 1,73,562 17,356 1,00,000 82,644 90,918
10 90,918 9,082 1,00,000 90,918 -
Note: In the 10th year, the Balance Principal to be repaid is taken as 90,918 and the balancing
figure is treated as towards Interest.

9. ICAI PRACTICAL Q 4 (Similar to ICAI P.Q.10)

Classify the following into either operating or finance lease:
(i) Lessee has option to purchase the asset at lower than fair value, at the end of lease term;
(ii) Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired at the
end of the lease term;
(iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature
and has been procured only for use of the lessee;
(iv) Present value (PV) of Minimum lease payment (MLP) = "X". Fair value of the asset is "Y".

SOLUTION
REFERENCE:
As per AS 19 “Leases”, a lease will be classified as finance lease if:
• At the inception of the lease, the present value of minimum lease payment amounts to at
least substantially all of the fair value of leased asset.
• In a finance lease, lease term should be for the major part of the economic life of the asset
even if title is not transferred.
• The lessee has the option to purchase the asset at a price which is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable.
• The leased asset is of a specialized nature such that only the lessee can use it without major
modifications being made.
As per the above reference, cases will be classified as follows:
ANALYSIS (i):
As per the above reference, cases will be classified as follows:
 AS 19.18

As per AS 19, If it becomes certain at the inception of lease itself that the option will be exercised
AS 19

by the lessee, then it is a Finance Lease.

CONCLUSION:
The lease will be classified as a finance lease
ANALYSIS (ii):
Economic life of asset (7years) is substantially covered by the lease term (6years).
CONCLUSION:
The lease will be classified as a finance lease.
ANALYSIS (iii):
As the asset is of special nature and has been procured only for use of the lessee, it has no other
usage even if it’s economic life is more than lease period.
CONCLUSION:
The lease will be classified as a finance lease.
ANALYSIS (iv):
As Present value (PV) of Minimum lease payment (MLP) = Fair value of the asset, the definition
of finance lease is satisfied.
CONCLUSION:
The lease will be classified as a finance lease.

10. ICAI PRACTICAL QUESTION 16 (Similar to ICAI P.Q.11)

A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease
rentals to yield 30% profit margin on cost ` 1,50,000. Economic life of the machine is 5 years and
output from the machine are estimated as 40,000 units, 50,000 units, 60,000 units, 80,000 units
and 70,000 units consecutively for 5 years. Straight line depreciation in proportion of output is
considered appropriate. Compute the following:
(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years of lease.

SOLUTION
(i) Annual lease rent
Total lease rent
 AS 19.19

= 130% of ` 1,50,000 x (Output during lease period / Total output)

AS 19
= 130% of ` 1,50,000 x (40,000 +50,000+ 60,000)/(40,000 + 50,000 + 60,000 + 80,000 + 70,000)
= 1,95,000 x 1,50,000 units/3,00,000 units = ` 97,500
Annual lease rent = ` 97,500 / 3 = ` 32,500
(ii) Lease rent Income to be recognized in each operating year
Total lease rent should be recognised as income in proportion of output during lease period, i.e. in
the proportion of 40 : 50 : 60.
Hence income recognised in years 1, 2 and 3 will be as:
Year 1 ` 26,000,
Year 2 ` 32,500 and
Year 3 ` 39,000.
(iii) Depreciation for three years of lease
Since depreciation in proportion of output is considered appropriate, the depreciable amount `
1,50,000 should be allocated over useful life 5 years in proportion of output, i.e. in proportion of 40
: 50 : 60 : 80 : 70 .
Depreciation for year 1 is ` 20,000, year 2 = 25,000 and year 3 = 30,000.

11. Mock Test Paper 2 (Q No 1 d), IPCC RTP Nov 2018 Q19a (Similar to ICAI P.Q.12)
ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being ` 10,00,000. The economic
life of the machine as well as the lease term is 4 yea` At the end of each year, ABC Ltd. pays
` 3,50,000. The lessee has guaranteed a residual value of ` 50,000 on expiry of the lease to the
lessor. However, XYZ Ltd. estimates that the residential value of the machinery will be ` 35,000
only. The implicit rate of return is 16% and PV factors at 16% for year 1, year 2, year 3 and year
4 are 0.8621, 0.7432, 0.6407 and 0.5523 respectively.
You are required to calculate the value of machinery to be considered by ABC Ltd. and the
finance charges for each year.

SOLUTION
REFERENCE:
As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an
 AS 19.20

amount lower of:

AS 19

a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
ANALYSIS:
Value Of Machinery: In the given case, fair value of the machinery is ` 10, 00,000 and the net
present value of minimum lease payments is ` 10, 07,020 (refer working note). As the present
value of the machine is more than the fair value of the machine, the machine and the
corresponding liability will be recorded at value of `10,00,000.
Since Fair Value of Leased Asset is less than the present value of minimum lease payment we
need to re-compute the Implicit Rate of Interest for computing Finance Charges.
Year Minimum Lease Payment DF @ 18 % PV
1 3,50,000.00 0.85 2,96,625.00
2 3,50,000.00 0.72 2,51,370.00
3 3,50,000.00 0.61 2,13,010.00
4 4,00,000.00 0.52 2,06,320.00
14,50,000.00 9,67,325.00
Re-computation of Implicit Rate of Interest
Computation of PV of minimum lease payments at guessed rate 18%
Interest rate implicit on lease is computed below by interpolation:
Interest rate implicit on lease = 16% + 7020/39695 x (18-16)= 16.35%
Calculation Of Finance Charges For Each Year

Amount o/s Finance Charges Lease Amount o/s

Gross Amount
@beginning @ 16.35% Payment @ End
Year
0 10,00,000
1 10,00,000 1,63,500 11,63,500 3,50,000 8,13,500
2 8,13,500 1,33,007 9,46,507 3,50,000 5,96,507
3 5,96,507 97,529 6,94,036 3,50,000 3,44,036
4 3,44,036 55,964* 4,00,000 4,00,000 0
*The difference between this figure and finance charge [5,96,507×16.35%=56,249.88] is due to
approximation in computation.
 AS 19.21

Working Note:

AS 19
Present value of minimum lease payments
Year Minimum Lease Payment PVAF 16 % PV
1 3,50,000.00 0.86 3,01,735.00
2 3,50,000.00 0.74 2,60,120.00
3 3,50,000.00 0.64 2,24,245.00
4 4,00,000.00 0.55 2,20,920.00
14,50,000.00 10,07,020.00

12. (RTP Nov 2015) (Nov 2004) (Nov 2012(5 marks))

A Ltd. Leased a machinery to B Ltd. On the following terms:
(` in Lakhs)
Fair value of the machinery 20.00
Lease term 5 years
Lease Rental per annum 5.00
Guaranteed Residual value 1.00
Expected Residual value 2.00
Internal Rate of Return 15%
Depreciation is provided on straight line method @ 10% per annum. Ascertain unearned financial
income and necessary entries may be passed in the books of the Lessee in the First year.

SOLUTION
REFERENCE:
Computation of Unearned Finance Income
As per AS 19 on Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance
lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the
lessor, at the interest rate implicit in the lease.
Unearned finance income (UFI) = GIL – (PV of MLP + PV of UGR)
Where:
 AS 19.22

a. Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand
AS 19

point of the lessor and (ii) any unguaranteed residual value accruing to the lessor.
Gross investment in Lease (GIL)
= Minimum Lease Payments (MLP) + Unguaranteed Residual value (UGR)
Particulars Amount Amount
Minimum Lease Payments 26,00,000
Total Lease rent [(` 5,00,000 x 5 years) 25,00,000
Guaranteed Residual Value (GRV) 1,00,000
Add: Unguaranteed residual value (URV) 1,00,000
Gross Investment 27,00,000
b. Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed
residual value (URV).
Year MLP inclusive of URV Internal rate of Return Present Value
` (Discount factor 15%) `
1 5,00,000 .8696 4,34,800
2 5,00,000 .7561 3,78,050
3 5,00,000 .6575 3,28,750
4 5,00,000 .5718 2,85,900
5 5,00,000 .4972 2,48,600
5 1,00,000 .4972 49,720
Total 26,00,000 17,25,280
=PV of MLP + PV of UGR
=17,25,280 + (1,00,000*0.4972)
=17,25,280+49,720
=17,75,540
Unearned finance income (UFI)
= GIL – (PV of MLP + PV of UGR)
=27,00,000 – 17,75,540
=9,24,460
REFERENCE:
As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a liability at an
amount lower of:
a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
 AS 19.23

As the fair value of ` 20,00,000 is more than the present value amounting ` 17,25,820, the

AS 19
machinery has been recorded at ` 17,25,820 in the books of B Ltd. (the lessee) at the inception
of the lease.
Journal Entries in the books of B Ltd.
Particulars Dr Cr
At the inception of lease
Machinery account Dr. 17,25,820*
To A Ltd.’s account 17,25,820*
(Being lease of machinery recorded at present value of MLP)
At the end of the first year of lease
Finance charges account (Refer Working Note) Dr. 2,58,873
To A Ltd.’s account 2,58,873
(Being the finance charges for first year due)
A Ltd.’s account Dr. 5,00,000
To Bank account 5,00,000
(Being the lease rent paid to the lessor which includes
outstanding liability of ` 2,41,127 and finance charge of `
2,58,873)
Depreciation account Dr. 1,72,582
To Machinery account 1,72,582
(Being the depreciation provided @ 10% p.a. on straight line
method)
Profit and loss account Dr 4,31,455
To Depreciation account 1,72582
To Finance charges account 2,58,873
(Being the depreciation and finance charges transferred to
profit and loss account)
Working Note:
Table showing apportionment of lease payments by B Ltd. between the finance charges and the
reduction of outstanding liability.
Year Amount o/s Finance Charge Gross Amount Lease Payment Amount o/s @
@beginning end
1 17,25,820 2,58,873 19,84,693 5,00,000 14,84,693
2 14,84,693 2,22,704 17,07,397 5,00,000 12,07,397
3 12,07,397 1,81,110 13,88,507 5,00,000 8,88,507
4 8,88,507 1,33,276 10,21,783 5,00,000 5,21,783
 AS 19.24

5 5,21,783 78,217 6,00,050 6,00,000 -

AS 19

8,74,230 25,00,000
The difference between this figure and finance charge [5,21,783×15%=78,267] is due to
approximation in computation
AS 19.25

AS 19
 AS 19.1

AS 19 – ACCOUNTING FOR LEASES

AS 19

SECTION B (EXAM ORIENTED)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI Example
2 QP May 2018
Q Paper May 2018 Old
3
Syllabus Group 2
4 QP DEC 21
5 May 2022 Exam
ICAI Illustration No 3,
6
Mock Test Paper 1
QP May 19, MTP OCT 22
7
SERIES 2
8 RTP MAY 20
9 RTP NOV 20
10 RTP MAY 21
11 (RTP Nov, 2012)
12 (RTP MAY 2013)
13 (RTP May 2015)
(Similar to ICAI PQ 13)
RTP May 2019 Q17, IPCC
14 RTP May 2019 Q19a
(Similar to ICAI PQ 13)
15 RTP Nov 2018 Q16 b
16 IPCC RTP Nov 2014 Q19b
IPCC RTP May 2015
17
Q17b
18 IPCC RTP Nov 2015 Q19b
19 IPCC RTP Nov 2016
20 MTP OCT 21 Series 1
21 MTP OCT 21 Series 1
22 May 22 RTP
23 May 22 RTP
24 RTP Nov 22
25 MTP SEP 22 Series 1
 AS 19.2

1. ICAI Example

AS 19
Outputs from a machine taken on a 3 year operating lease are estimated as 10,000 units in year
1, 20,000 units in year 2 and 50,000 units in year 3. The agreed annual lease payments are `
25,000, ` 45,000 and ` 50,000 respectively.
How will you recognise the lease payment in the statement of profit and loss account.

SOLUTION
REFERENCE:
As per AS 19, operating lease should be recognized as an expense in the statement of Profit and
Loss on Straight line basis over the lease term unless another systematic basis is more
representative of the time pattern of the user’s benefit.
ANALYSIS:
The total lease payment ` 1,20,000 should be recognised in proportion of output as ` 15,000 in year
1, ` 30,000 in year 2 and ` 75,000 in year 3.
The difference between lease rent due and lease rent recognised can be debited / credited to
Lease Equalisation A/c.
The accounting entries for year 1 in books of lessee are suggested below:
Particulars ` `
Lease Rent A/c Dr. 25,000
To Lessor 25,000
(Being lease rent for the year due)
Lessor Dr. 25,000
To Bank A/c 25,000
(Being payment of lease rent for the year)
Lease Equalisation A/c Dr. 10,000
P & L A/c Dr. 15,000
To Lease Rent A/c 25,000
(Being recognition of lease rent as expense for the year)
Since total lease rent due and recognised must be same, the Lease Equalisation A/c will close in
the terminal year. Till then, the balance of Lease Equalisation A/c can be shown in the balance
sheet under "Current Assets" or Current Liabilities" depending on the nature of balance.
 AS 19.3

2. QP May 2018
AS 19

A Ltd. sold JCB having WDV of ` 20 lakhs to B Ltd. for ` 24 lakhs and the same JCB was leased
back by B Ltd. to A Ltd. The lease is operating lease. In context of Accounting Standard 19
“Leases” explain the accounting treatment of profit or loss in the books of A Ltd. if
(i) Sale price of ` 24 lakhs is equal to fair value.
(ii) Fair value is ` 20 lakhs and sale price is ` 24 lakhs.
(iii) Fair value is ` 22 lakhs and sale price is ` 25 lakhs.
(iv) Fair value is ` 25 lakhs and sale price is ` 18 lakhs.
(v) Fair value is ` 18 lakhs and sale price is ` 19 lakhs.

SOLUTION
Following will be the treatment in the given cases as per AS 19:
i) When sale price of ` 24 Iakhs is equal to fair value, A Ltd. should immediately
recognise the profit of ` 4 Iakhs (i.e., 24 - 20) in its books.
ii) When fair value is ` 20 Iakhs & sale price is ` 24 Iakhs then profit of ` 4 Iakhs is to
be deferred and amortised over the lease period.
iii) When fair value is ` 22 Iakhs & sale price is ` 25 Iakhs, profit of ` 2 Iakhs
(22 -20) to be immediately recognised in its books and balance profit of ` 3 Iakhs (25-22)
is to be amortised/deferred over lease period.
iv) When fair value of leased machinery is ` 25 Iakhs & sale price is ` 18 Iakhs, then loss of ` 2
Iakhs (20 - 18) to be immediately recognised by A Ltd. in its books provided
loss is not compensated by future lease payment.
v) When fair value is ` 18 Iakhs & sale price is ` 19 Iakhs, then the loss of ` 2 Iakhs (20-18) to
be immediately recognised by A Ltd. in its books and profit of ` 1 Iakhs
(19-18) should be amortised/deferred over lease period.

3. Q Paper May 2018 Old Syllabus Group 2

Ram Ltd. sold a machine having WDV of ` 125 lakhs to Shyam Ltd. for ` 150 lakhs and the same
machine was leased back by Shyam Ltd. to Ram Ltd. under Operating lease system: Comment
 AS 19.4

according to relevant Accounting Standard if:

AS 19
(i) Sale price of ` 150 lakhs. is equal to fair value.

(ii) Fair value is ` 125 lakhs and Sale price is ` 112.50 lakhs.

(iii) Fair value is ` 137.50 lakhs and Sale price is ` 155 lakhs.

(iv) Fair value is ` 112.50 lakhs and Sale price is ` 120 lakhs.

SOLUTION
According to AS 19, following will be the treatment in the given situations as per AS 19:
(i) When sales price of ` 150 lakhs is equal to fair value, Ram Ltd. should immediately recognize

the profit of `25 lakhs (i.e. 150 – 125) lakhs in its books.
(ii) When fair value of leased machine is ` 125 lakhs & sales price is ` 112.50 lakhs, then loss of

` 12.5 lakhs (125 – 112.50) lakhs to be immediately recognized by Ram Ltd. in its books
provided loss is not compensated by future lease payments.
(iii) When fair value is ` 137.5 lakhs & sales price is ` 155 lakhs, profit of ` 12.5 lakhs (137.5-

125) lakhs to be immediately recognized by Ram Ltd. in its books and balance profit of `
17.5 lakhs (155-137.50) lakhs is to be amortised/deferred over lease period.
(iv) When fair value is ` 112.5 lakhs & sales price is ` 120 lakhs, then the loss of ` 12.5 lakhs

(125-112.5) lakhs to be immediately recognized by Ram Ltd. in its books and profit of ` 7.5
lakhs (120-112.5) lakhs should be amortised/deferred over lease period.

4. QP DEC 21
A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease
rentals to yield 30% profit margin on cost of ` 2,25,000. Economic life of the machine is 5 years
and output from the machine is estimated as 60,000 units, 75,000 units, 90,000 units, 1,20,000
units and 1.05.000 units consecutively for 5 years. Straight line depreciation in proportion of output
is considered appropriate. You are required to compute the following as per AS- 19
i. Annual Lease rent
ii. Lease Rent income to be recognised in each operating year and
iii. Depreciation for 3 years of lease
 AS 19.5
AS 19

SOLUTION
(i) Annual lease rent
Total lease rent
= 130% of ` 2,25,000 x Output during lease period/ Total output
= 130% of ` 2,25,000 x (60,000 +75,000+ 90,000)/(60,000 + 75,000 + 90,000 + 1,20,000 + 1,05,000)
= 2,92,500 x 2,25,000 units/4,50,000 units = ` 1,46,250
Annual lease rent = ` 1,46,250 / 3 = ` 48,750
(ii) Lease rent Income to be recognized in each operating year
Total lease rent should be recognized as income in proportion of output during lease period, i.e. in
the proportion of 60,000 : 75,000 : 90,000 or 4:5:6
Hence income recognized in years 1, 2 and 3 will be as:
Year 1 ` 39,000,
Year 2 ` 48,750 and
Year 3 ` 58,500.
(iii) Depreciation for three years of lease
Since depreciation in proportion of output is considered appropriate, the depreciable amount `
2,25,000 should be allocated over useful life 5 years in proportion of output, i.e. in proportion of
60 :75: 90 : 120 : 105 .
Depreciation for year 1 is ` 30,000, year 2 = 37,500 and year 3 = 45,000.

5. May 2022 Exam

What are the disclosures requirements for operating leases by the lessee as per AS-19?
 AS 19.6

SOLUTION

AS 19
As per AS 19, lessees are required to make following disclosures for operating leases:
(a) the total of future minimum lease payments under non-cancellable operating leases for each
of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to be received under non-
cancellable subleases at the balance sheet date;
(c) lease payments recognised in the statement of profit and loss for the period, with separate
amounts for minimum lease payments and contingent rents;
(d) sub-lease payments received (or receivable) recognised in the statement of profit and loss
for the period;
(e) a general description of the lessee's significant leasing arrangements including, but not
limited to, the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and escalation clauses; and (iii)
restrictions imposed by lease arrangements, such as those concerning dividends, additional debt,
and further leasing.
Note: The Level II and Level III non-corporate entities (and SMCs) need not make disclosures
required by (a), (b) and (e) above

6. ICAI Illustration No 3, Mock Test Paper 1

A Ltd. sold machinery having WDV of ` 40 lakhs to B Ltd. for ` 50 lakhs and the same machinery
was leased back by B Ltd. to A Ltd. The lease back is operating lease. Comment if:
(a) Sale price of ` 50 lakhs is equal to fair value.
(b) Fair value is ` 60 lakhs.
(c) Fair value is ` 45 lakhs and sale price is ` 38 lakhs.
(d) Fair value is ` 40 lakhs and sale price is `50 lakhs.
(e) Fair value is ` 46 lakhs and sale price is ` 50 lakhs
(f) Fair value is ` 35 lakhs and sale price is `39 lakhs.
 AS 19.7

SOLUTION
AS 19

Following will be the treatment in the situations given in the question as per AS 19:
(a) When sales price of ` 50 lakhs is equal to fair value, A Ltd. should immediately recognise the
profit of `10 lakhs (i.e. 50 – 40) in its books.
(b) When fair value is ` 60 lakhs then also profit of `10 lakhs should be immediately recognised
by A Ltd.
(c) When fair value of leased machinery is ` 45 lakhs & sales price is ` 38 lakhs, then loss of `
2 lakhs (40 – 38) to be immediately recognised by A Ltd. in its books provided loss is not
compensated by future lease payment.
(d) When fair value is ` 40 lakhs & sales price is ` 50 lakhs then, profit of ` 10 lakhs is to be
deferred and amortised over the lease period.
(e) When fair value is ` 46 lakhs & sales price is ` 50 lakhs, profit of ` 6 lakhs (46 - 40) to be
immediately recognised in its books and balance profit of `4 lakhs (50-46) is to be
amortised/deferred over lease period.
(f) When fair value is ` 35 lakhs & sales price is `39 lakhs, then the loss of ` 5 lakhs (40-35)
to be immediately recognised by A Ltd. in its books and profit of ` 4 lakhs (39-35) should
be amortised/deferred over lease period

7. QP May 19, MTP OCT 22 SERIES 2

Jaya Ltd. took a machine on lease from Deluxe Ltd., the fair value being ` 11,50,000. Economic life
of the machine as well as lease term is 4 years. At the end of each year, lessee pays ` 3,50,000
to lessor. Jaya Ltd. has guaranteed a residual value of ` 70,000 on expiry of the lease to Deluxe
Ltd., however Deluxe Ltd. estimates that residual value will be only ` 25,000. The implicit rate of
return is 10% p.a. and present value factors at 10% are: 0.909, 0.826, 0.751 and 0.683 at the end
of 1st, 2nd, 3rd and 4th year respectively.
Calculate the value of machinery to be considered by Jaya Ltd. and the value of the lease liability
as per AS-19.
 AS 19.8

SOLUTION

AS 19
REFERENCE:
As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an
amount lower of:
a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
ANALYSIS:
Present value of minimum lease payments will be calculated as follows:
Year Minimum Lease Payment ` Internal rate of return Present value `
(Discount rate @10%)
1 3,50,000 0.909 3,18,150
2 3,50,000 0.826 2,89,100
3 3,50,000 0.751 2,62,850
4 4,20,000* 0.683 2,86,860

Total 14,70,000 - 11,56,960

CONCLUSION:
Present value of minimum lease payments ` 11,56,960 is more than fair value at the inception of
lease i.e. ` 11,50,000, therefore, the lease liability and machinery should be recognized in the books
at ` 11,50,000 as per AS 19.
Note: Minimum Lease Payment of 4 th year includes guaranteed residual value amounting i.e.
3,50,000 + 70,000= 4,20,000.

8. RTP MAY 20
ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being ` 10,00,000. The economic
life of the machine as well as the lease term is 4 years. At the end of each year, ABC Ltd. pays `
3,50,000. The lessee has guaranteed a residual value of ` 50,000 on expiry of the lease to the lessor.
However, XYZ Ltd. estimates that the salvage value of the machine will be only `35,000 only. It
was not practicable for the lessee to determine the interest rate implicit in the lease, However the
incremental borrowing rate of ABC Ltd. is determined at 16.4%. PV factors at 16.4% for year 1,
year 2, year 3 and year 4 are 0.8591, 0.7381, 0.6341 and 0.5447 respectively. You are required to
calculate the value of machinery to be considered by ABC Ltd. and the finance charges for each
year.
 AS 19.9
AS 19

SOLUTION:
REFERENCE:
As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a liability at the
inception of a finance lease at an amount equal to the fair value of the leased asset at the
inception of lease. However, if the fair value of the leased asset exceeds the present value of
minimum lease payment from the standpoint of the lessee, the amount recorded as an asset
and liability should be the present value of minimum lease payments from the standpoint of
the lessee.
ANALYSIS:
Value of machinery: In the given case, fair value of the machinery is ` 10,00,000 which is more
than net present value of minimum lease payments of ` 9,98,835 (Refer working Note). Hence,
the machine and the corresponding liability will be recorded at value of ` 9,98,835 in the books
of ABC Ltd.
Calculation of finance charges for each year
Year Amount o/s Finance Gross Amount Lease Amount o/s
@beginning Charges Payment @ end
1st Year
- - - - 9,98,835
Beginning
End of 1st
9,98,835 1,63,809 11,62,644 3,50,000 8,12,644
Year
End of 2nd
8,12,644 1,33,274 9,45,918 3,50,000 5,95,918
Year
End of 3rd
5,95,918 97,731 6,93,649 3,50,000 3,43,649
Year
End of 4th
3,43,649 56,358 4,00,007 4,00,000* 7**
Year
4,51,172
 AS 19.10

Working Note:

AS 19
Present value of minimum lease payments
Annual lease rental x PV factor
3,50,000 x (0.8591+ 0.7381+ 0.6341+ 0.5447) ` 9,71,600
Present value of guaranteed residual value 50,000 x (0.5447) ` 27,235
` 9,98,835
* Includes guaranteed residual value of ` 50,000 (considered to be paid).
** It should be nil, difference of Rs. 7 due to approximations.

9. RTP NOV 20
a) Classify the following into either operating or finance lease:
(i) If Present value (PV) of Minimum lease payment (MLP) = "X"; Fair value of the asset is "Y"
and X=Y.
(ii) Economic life of the asset is 7 years, lease term is 6.5 years, but asset is not acquired at
the end of the lease term;
(iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature
and has been procured only for use of the lessee.

SOLUTION
REFERENCE:
As per AS 19 “Leases”, a lease will be classified as finance lease if:
• At the inception of the lease, the present value of minimum lease payment amounts to at
least substantially all of the fair value of leased asset.
• In a finance lease, lease term should be for the major part of the economic life of the asset
even if title is not transferred.
• The lessee has the option to purchase the asset at a price which is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable.
• The leased asset is of a specialized nature such that only the lessee can use it without major
modifications being made.
As per the above reference, cases will be classified as follows:
ANALYSIS (i):
 AS 19.11

As per the above reference, cases will be classified as follows:

AS 19

As Present value (PV) of Minimum lease payment (MLP) = Fair value of the asset, the
definition of finance lease is satisfied.
CONCLUSION:
The lease will be classified as a finance lease.
ANALYSIS (ii):
Economic life of asset (7years) is substantially covered by the lease term (6.5years).
CONCLUSION:
The lease will be classified as a finance lease.
ANALYSIS (iii):
As the asset is of special nature and has been procured only for use of the lessee, it has no
other usage even if it’s economic life is more than lease period.
CONCLUSION:
The lease will be classified as a finance lease.

b) Viral Ltd. sold machinery having WDV of ` 40 lakhs to Saral Ltd. for ` 50 lakhs and the same
machinery was leased back by Saral Ltd. to Viral Ltd. The lease back is in nature of operating
lease. You are required to explain the treatment in the given cases–
(i) Fair value is ` 45 lakhs and sale price is ` 38 lakhs.
(ii) Fair value is ` 40 lakhs and sale price is ` 50 lakhs.
(iii) Fair value is ` 46 lakhs and sale price is ` 50 lakhs

SOLUTION
Following will be the treatment in the situations given in the question as per AS 19:
(i) When fair value of leased machinery is ` 45 lakhs & sales price is ` 38 lakhs, then loss of `
2 lakhs (40 – 38) to be immediately recognized by Viral Ltd. in its books provided loss is
not compensated by future lease payment.
(ii) When fair value is ` 40 lakhs & sales price is ` 50 lakhs then, profit of ` 10 lakhs is to be
deferred and amortized over the lease period.
(iii) When fair value is ` 46 lakhs & sales price is ` 50 lakhs, profit of ` 6 lakhs (46 less 40)
 AS 19.12

to be immediately recognized in its books and balance profit of `4 lakhs (50-46) is to be

AS 19
amortized/deferred over lease period.

10. RTP MAY 21

Sooraj Limited wishes to obtain a machine costing ` 30 lakhs by way of lease. The effective life
of the machine is 14 years, but the company requires it only for the first 3 years. It enters into
an agreement with Star Ltd., for a lease rental for ` 3 lakhs p.a. payable in arrears and the
implicit rate of interest is 15%. The chief accountant of Sooraj Limited is not sure about the
treatment of these lease rentals and seeks your advice. (use annuity factor at @ 15% for 3 years
as 3.36)

SOLUTION
REFERENCE:
As per AS 19 ‘leases’, a lease will be classified as finance lease if at the inception of the lease,
the present value of minimum lease payment• amounts to at least substantially all of the fair
value of leased asset.
ANALYSIS:
In the given case, the implicit rate of interest is given at 15%. The present value of minimum
lease payments at 15% using PV- Annuity Factor can be computed as:
Annuity Factor (Year 1 to Year 3) 3.36
Present Value of minimum lease payments ` 10.08 lakhs
(`3 lakhs each year x 3.36 Annuity Factor)
Thus present value of minimum lease payments is `10.08 lakhs and the fair value of the machine
is ` 30 lakhs. In a finance lease, lease term should be for the major part of the economic life of
the asset even if title is not transferred. However, in the given case, the effective useful life of
the machine is 14 years while the lease is only for three years.
CONCLUSION:
In light of above analysis, the lease agreement is an operating lease. Lease payments under an
operating lease should be recognized as an expense in the statement of profit and loss on a
straight line basis over the lease term unless another systematic basis is more representative of
the time pattern of the user’s benefit.
 AS 19.13

11. (RTP Nov, 2012)

AS 19

An equipment is leased for 3 years and its useful life is 5 years Both the cost and the fair value
of the equipment are ` 3,00,000. The amount will be paid in 3 instalments and at the termination
of lease lessor will get back the equipment. The unguaranteed residual value at the end of 3 years
is ` 40,000. The (internal rate of return) IRR of the investment is 10%. The present value of annuity
factor of Re. 1 due at the end of 3rd year at 10% IRR is 2.4868. The present value of Re. 1 due at
the end of 3rd year at 10% rate of interest is 0.7513.
(i) State with reason whether the lease constitutes finance lease.
(ii) Calculate unearned finance income.

SOLUTION
REFERENCE:
As per AS 19 - Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance
lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the
lessor, at the interest rate implicit in the lease.
Where:
Gross investment in the lease is the aggregate of
(i) minimum lease payments from the stand point of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Formula of GIL = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed residual value (URV)
ANALYSIS:
As per AS 19 ‘leases’, a lease will be classified as finance lease if at the inception of the lease,
the present value of minimum lease payment amounts to at least substantially all of the fair
value of leased asset. In a finance lease, lease term should be for the major part of the economic
life of the asset even if title is not transferred.
(i) Present value of residual value = `40,000 x 0.7513 = ` 30,052
Present value of lease payments = ` 3,00,000 – `30,052 = ` 2,69,948.
 AS 19.14

2,69,948

AS 19
The present value of lease payments being 89.98% ( 𝑥 ⥂ 100)of the fair value, i.e. being
3,00,000

a substantial portion thereof, the lease constitutes a finance lease.

(ii) Calculation of unearned finance income
Particulars `
Gross investment in the lease [(`1,08,552* x 3) + `40,000] 3,65,656
Less: Cost of the equipment 3,00,000
Unearned finance income 65,656
Note: - In the above solution, annual lease payment has been determined on the basis that the
present value of lease payments plus residual value is equal to the fair value (cost) of the asset.
𝑅𝑠.2,69,948
* Annual lease payments = = `1,08,552 (approx.)
2,4868

12. (RTP MAY 2013)

Annual lease rent = `40,000 at the end of each year
Lease period = 5 years
Guaranteed residual value = `14,000
Fair value at the inception (beginning) of lease = `1,50,000
Interest rate implicit on lease is 12.6%. The present value factors at 12.6% are 0.89, 0.79, 0.7,
0.622, 0.552 at the end of first, second, third, fourth and fifth year respectively.
Show the Journal entry to record the asset taken on finance lease in the books of the lessee.

SOLUTION
REFERENCE:
As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an
amount lower of:
c. The fair value of the leased asset at the inception of the finance lease
d. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
ANALYSIS:
Present value of minimum lease payments will be calculated as follows:
 AS 19.15
AS 19
Year Lease Payments ` DF (12.6%) PV `
1 40,000 0.89 35,600
2 40,000 0.79 31,600
3 40,000 0.70 28,000
4 40,000 0.622 24,880
5 40,000 0.552 22,080
5 14,000 0.552 7,728
1,49,888
CONCLUSION:
Present value of minimum lease payments 1,49,888 is less than fair value at the inception of
lease i.e. 1,50,000 therefore, the lease liability and machinery should be recognized in the books
at 1,49,888 as per AS 19.
In books of Lessee
Journal Entry
Particulars Dr. Cr.
Asset A/c Dr. 1,49,888
To Lessor 1,49,888
(Being recognition of finance lease as asset and liability)

13. (RTP May 2015) (Similar to ICAI PQ 13)

A machine having expected useful life of 6 years, is leased for 4 years. Both the cost and the fair
value of the machinery are `7,00,000. The amount will be paid in 4 equal instalments and at the
termination of lease, lessor will get back the machinery. The unguaranteed residual value at the
end of the 4th year is `70,000. The IRR of the investment is 10%. The present value of annuity
factor of `1 due at the end of 4th year at 10% IRR is 3.169. The present value of `1 due at the
end of 4th year at 10% rate of interest is 0.683.
State with reasons whether the lease constitutes finance lease and also compute the unearned
finance income.
 AS 19.16

SOLUTION

AS 19
REFERENCE:
As per AS 19 - Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance
lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the
lessor, at the interest rate implicit in the lease.
Where:
Gross investment in the lease is the aggregate of
(i) minimum lease payments from the stand point of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Formula of GIL = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed residual value (URV)
ANALYSIS:
As per AS 19 ‘leases’, a lease will be classified as finance lease if at the inception of the lease,
the present value of minimum lease payment amounts to at least substantially all of the fair
value of leased asset. In a finance lease, lease term should be for the major part of the economic
life of the asset even if title is not transferred.
(i) Determination of nature of lease
Fair value of asset = `7,00,000
Unguaranteed residual value = `70,000
Present value of residual value at the end of 4th year = `70,000 x 0.683
= `47,810
Present value of lease payment recoverable = `7,00,000 - `47,810
= `6,52,190
The percentage of present value of lease payment to fair value of the asset is
= (`6 ,52,190/`7,00,000)x100
= 93.17%
CONCLUSION:
As percentage of present value of lease payment to fair value of the asset is substantial and it
also covers the life of the asset, the lease constitutes a finance lease.

(ii) Calculation of Unearned Finance Income

Annual lease payment = `6,52,190 / 3.169
= `2,05,803 (approx.)
Gross investment in the lease = Total minimum lease payment + unguaranteed residual value
= (`2,05,803 x 4) + `70,000
= `8,23,212 + `70,000
 AS 19.17

= `8,93 ,212
AS 19

Unearned finance income = Gross investment – Present value of minimum lease payment and
unguaranteed residual value.
= `8,93,212 – `7,00,000 (`6,52,190 + `47,810)
= `1,93,212.

14. RTP May 2019 Q17, IPCC RTP May 2019 Q19a (Similar to ICAI PQ 13)
Aksat International Limited has given a machinery on lease for 36 months, and its useful life is
60 months. Cost & fair market value of the machinery is ` 5,00,000. The amount will be paid in
3 equal annual installments and the lessee will return the machinery to lessor at termination of
lease. The unguaranteed residual value at the end of 3 years is ` 50,000. IRR of investment is 10%
and present value of annuity factor of ` 1 due at the end of 3 years at 10% IRR is 2.4868 and
present value of ` 1 due at the end of 3rd year at 10% IRR is 0.7513.
You are required to comment with reason whether the lease constitute finance lease or operating
lease. If it is finance lease, calculate unearned finance income.

SOLUTION
REFERENCE:
As per AS 19 ‘leases’, a lease will be classified as finance lease if at the inception of the lease,
the present value of minimum lease payment amounts to at least substantially all of the fair
value of leased asset. In a finance lease, lease term should be for the major part of the economic
life of the asset even if title is not transferred.
ANALYSIS:
Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3rd year
= ` 50,000 x 0.7513
= ` 37,565
Present value of lease payments = ` 5,00,000 – ` 37,565
= ` 4,62,435
 AS 19.18

The percentage of present value of lease payments to fair value of the equipment is (` 4,62,435/

AS 19
` 5,00,000) x 100 = 92.487%.
CONCLUSION:
As lease payments substantially covers the major portion of the fair value, the lease constitutes
a finance lease.
Calculation of Unearned Finance Income
Annual lease payment = ` 4,62,435/ 2.4868 =` 1,85,956 (approx.)
Gross investment in the lease = Total minimum lease payments + unguaranteed
residual value
= (` 1,85,956 × 3) + ` 50,000
= ` 5,57,868 + ` 50,000 = ` 6,07,868
Unearned finance income= Gross investment - Present value of minimum lease
payments and unguaranteed residual value
= ` 6,07,868 – ` 5,00,000 = ` 1,07,868

15. RTP Nov 2018 Q16 b

ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being ` 10,00,000. The economic
life of the machine as well as the lease term is 4 years at the end of each year, ABC Ltd. pays
` 3,50,000. The lessee has guaranteed a residual value of ` 40,000 on expiry of the lease to the
lessor. However, XYZ Ltd. estimates that the residential value of the machinery will be ` 35,000
only. The implicit rate of return is 16% and PV factors at 16% for year 1, year 2, year 3 and year
4 are 0.8621, 0.7432, 0.6407 and 0.5523 respectively. You are required to calculate the value of
machinery to be considered by ABC Ltd. and the finance charges for each year.

SOLUTION
REFERENCE:
As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an
amount lower of:
a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
 AS 19.19

ANALYSIS:
AS 19

Value of machinery - Fair value of the machinery is ` 10, 00,000 and the net present value of
minimum lease payments is ` 10,01,497 (Refer working Note). As the present value of the
machine is more than the fair value of the machine, the machine and the corresponding liability
will be recorded at fair value of ` 10,00,000 as per AS 19.
Since Fair Value of Leased Asset is less than the present value of minimum lease payment we
need to re-compute the Implicit Rate of Interest for computing Finance Charges.
Re-computation of Implicit Rate of Interest
Computation of PV of minimum lease payments at guessed rate 18%

Year Minimum Lease Payment DF @ 18 % PV

1 3,50,000.00 0.8475 2,96,625.00
2 3,50,000.00 0.7182 2,51,370.00
3 3,50,000.00 0.6086 2,13,010.00
4 3,90,000.00 0.5158 2,01,162.00
14,40,000.00 9,62,167.00
Interest rate implicit on lease is computed below by interpolation:
Interest rate implicit on lease = 16% + 1497/37833 x (18-16) = 16.079%
Calculation of finance charges for each year

Amount o/s Finance Charges Lease Amount o/s

Gross Amount
@beginning @ 16.079% Payment @ End
Year
0 10,00,000
1 10,00,000 1,60,790 11,60,790 3,50,000 8,10,790
2 8,10,790 1,30,367 9,41,157 3,50,000 5,91,157
3 5,91,157 95,052 6,86,209 3,50,000 3,36,209
4 3,36,209 53,791 3,90,268 3,90,000 0
*The difference between this figure and finance charge
[3,36,209×16.079%=54,059] is due to approximation in computation.
Working Note: Present value of minimum lease payments
Year Minimum Lease Payment ` Internal rate of return Present value `
1 3,50,000 0.8621 3,017,35
2 3,50,000 0.7432 2,60,120
3 3,50,000 0.6407 2,24,245
4 3,90,000* 0.5523 2,15,397
Total 14,40,000 10,01,497
 AS 19.20

*Minimum Lease Payment of 4th year includes guaranteed residual value amounting i.e. 3,50,000

AS 19
+ 40,000 = 3,90,000.

16. IPCC RTP Nov 2014 Q19b

Jet Carriers Ltd. has initiated a lease for four years in respect of a vehicle costing ` 20,00,000
with expected useful life of 5 years. The asset would revert to the company under the lease
agreement. The other information available in respect of lease agreement is:
(1) The unguaranteed residual value of the equipment after the expiry of the lease term is
estimated at ` 2,50,000.
(2) The implicit rate of interest is 10%.
(3) The annual payments have been determined in such a way that the present value of the
lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hand of Jet Carriers Ltd.
(1) The annual lease payment.
(2) The unearned finance income.
(3) The segregation of finance income.

Note: (a)PV Residual value for 4 years @ 10% is 0.683.

(b) P V Factor for 4 years @ 10% is 3.16987.

SOLUTION
(1) Calculation of annual lease payment
Particulars `
Cost of the equipment 20,00,000
Unguaranteed residual value 2,50,000
PV residual value for 4 years @ 10% (2,50,000 x 0.683) 1,70,750
Fair value to be recovered from lease payment (` 20,00,000-1,70,750) 18,29,250
PV Factor for 4 years @ 10% 3.16987
Annual lease payment (`18,29,250/PV Factor for 4 years @ 10% 577074
i.e. 3.16987
 AS 19.21

(2) Unearned Finance Income

AS 19

Unearned finance income (UFI) = GIL – (PV of MLP + PV of UGR)

Gross investment in Lease (GIL)
= Minimum Lease Payments (MLP) + Unguaranteed Residual value (UGR)
Total lease payments (` 5,77,074 x 4) 23,08,296
Add: Unguaranteed Residual value 2,50,000
Gross investments 25,58,296
Less: Present value of investments (` 18,29,250 +1,70,750) 20,00,000
Unearned Finance Income 5,58,296
(3) Segregation of Finance Income
Year Amount o/s Finance Charge @ Gross Amount Lease Payment Amount o/s @
@beginning 10 % end
0 - - - - 20,00,000
1 20,00,000 2,00,000 22,00,000 5,77,074 16,22,926
2 16,22,926 1,62,293 17,85,219 5,77,074 12,08,145
3 12,08,145 1,20,814 13,28,959 5,77,074 7,51,885
4 7,51,885 75,189 8,27,074 8,27,074 -
Total 5,58,296 25,58,296

17. IPCC RTP May 2015 Q17b

X Ltd. has leased equipment over its useful life that costs ` 7,46,55,100 for a three year lease
period. After the lease term the asset would revert to the Lessor. You are informed that:
(i) The estimated unguaranteed residual value would be ` 1 lakh only.
(ii) The annual lease payments have been structured in such a way that the sum of their
present values together with that of the residual value of the asset will equal the cost
thereof.
(iii) Implicit interest rate is 10%.
You are required to ascertain the annual lease payment and the unearned finance income. Annual
lease payments are made at the end of each accounting year. P.V. factor @ 10% for years 1
to 3 are 0.909, 0.826 and 0.751 respectively.
 AS 19.22

SOLUTION

AS 19
REFERENCE:
As per AS 19 - Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance
lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the
lessor, at the interest rate implicit in the lease.
Where:
Gross investment in the lease is the aggregate of
(i) minimum lease payments from the stand point of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Formula of GIL = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed residual value (URV)
ANALYSIS:
Calculation of Annual Lease Payment
Particulars `
Cost of the equipment 7,46,55,100
Unguaranteed Residual Value 1,00,000
PV of unguaranteed residual value for 3 years @ 10% 75,100
(` 1,00,000 x 0.751)
Fair value to be recovered from Lease Payment
(` 7,46,55,100 – ` 75,100) 7,45,80,000

PV Factor for 3 years @ 10% 2.486

Annual Lease Payment
(` 7,45,80,000 / PV Factor for 3 years @ 10% i.e. 2.486) 3,00,00,000

(ii)Unearned Finance Income

Unearned finance income (UFI) = GIL – (PV of MLP + PV of UGR)
Where,
Gross investment in Lease (GIL)
= Minimum Lease Payments (MLP) + Unguaranteed Residual value (UGR)
Total lease payments [` 3,00,00,000 x 3] 9,00,00,000
Add: Unguaranteed Residual value 1,00,000
Gross Investments 9,01,00,000
Less: Present value of Investments
(` 7,45,80,000+ ` 75,100) (7,46,55,100)
Unearned Finance Income 1,54,44,900
 AS 19.23

18. IPCC RTP Nov 2015 Q19b

AS 19

L Private Limited has taken machinery on lease from P Ltd. The information is as under:
Lease term = 4 years
Fair value at inception of lease = ` 20,00,000 Lease rent = ` 6,25,000 p.a.
at the end of year Guaranteed residual value = ` 1,25,000
Expected residual value = ` 3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and
0.5718 respectively.
Calculate the value of the lease liability as per AS19.

SOLUTION
REFERENCE:
As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an
amount lower of:
a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
ANALYSIS:
Present value of minimum lease payments will be calculated as follows:
Year Minimum Lease Payment ` Internal rate of return Present value `
1 6,25,000 0.8696 5,43,500
2 6,25,000 0.7561 4,72,563
3 6,25,000 0.6575 4,10,937
4 7,50,000* 0.5718 4,28,850
Total 26,25,000 18,55,850
 AS 19.24

CONCLUSION:

AS 19
Present value of minimum lease payments ` 18,55,850 is less than fair value at the inception of
lease i.e. ` 20,00,000, therefore, the lease liability should be recognized at ` 18,55,850 as per AS
19.
*Minimum Lease Payment of 4th year includes guaranteed residual value amounting ` 1,25,000.

19. IPCC RTP Nov 2016

Annual lease rent = ` 80,000 at the end of each year Lease period = 5
years Guaranteed residual value = ` 28,000
Fair value at the inception (beginning) of lease = ` 3,00,000
Interest rate implicit on lease is 12.6%. The present value factors at 12.6% are 0.89, 0.79, 0.7,
0.622, 0.552 at the end of first, second, third, fourth and fifth year respectively.
Show the Journal entry to record the asset taken on finance lease in the books of the lessee.

SOLUTION
REFERENCE: As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a
liability at an amount lower of:
a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
ANALYSIS: Present value of minimum lease payments will be calculated as follows:
Year Lease Payments ` Discounting Factor (12.6%) Present Value `
1 80,000 0.89 71,200
2 80,000 0.79 63,200
3 80,000 0.70 56,000
4 80,000 0.622 49,760
5 80,000 0.552 44,160
5 28,000 (GRV) 0.552 15,456
Total 4,28,000 2,99,776
 AS 19.25

CONCLUSION:
AS 19

Present value of minimum lease payments 2,99,776 is less than fair value at the inception of
lease i.e. 3,00,000 therefore, the lease liability and machinery should be recognized in the books
at 2,99,776 as per AS 19.
Journal entry in the books of Lessee
` `
Asset A/c Dr. 2,99,776
To Lessor 2,99,776
(Being recognition of finance lease as an asset and a liability)

20. Mock test OCT 21 Series 1

Monu Ltd. sold machinery having WDV of ` 400 lakhs to Sonu Ltd. for ` 500 lakhs and the same
machinery was leased back by Sonu Ltd. to Monu Ltd. The lease back was in nature of operating
lease.
Explain the accounting treatment as per AS 19 in the following cases:
(i) Sale price of ` 500 lakhs is equal to fair value.
(ii) Fair value is ` 450 lakhs and sale price is ` 380 lakhs.
(iii) Fair value is ` 400 lakhs and sale price is ` 500 lakhs.
(iv) Fair value is ` 460 lakhs and sale price is ` 500 lakhs

SOLUTION
Following will be the treatment in the given cases as per AS 19:
(i) When sales price of ` 500 lakhs is equal to fair value, Monu Ltd. should immediately recognise
the profit of ` 100 lakhs (i.e. 500 – 400) in its books.
(ii) When fair value of leased machinery is ` 450 lakhs & sales price is ` 380 lakhs, then loss of
` 20 lakhs (400 – 380) to be immediately recognised by Monu Ltd. in its books provided loss
is not compensated by future lease payment.
(iii) When fair value is ` 400 lakhs & sales price is ` 500 lakhs then, profit of ` 100 lakhs is to be
deferred and amortised over the lease period.
 AS 19.26

(iv) When fair value is ` 460 lakhs & sales price is ` 500 lakhs, profit of ` 60 lakhs (460-400)

AS 19
to be immediately recognised in its books and balance profit of ` 40 lakhs (500-460) is to
be amortised/deferred over lease period.

21. Mock test OCT 21 Series 1

S. Square Private Limited has taken machinery on finance lease from S.K. Ltd. The information is
as under:
Lease term = 4 years
Fair value at inception of lease = ` 20,00,000
Lease rent = ` 6,25,000 p.a. at the end of year
Guaranteed residual value = ` 1,25,000
Expected residual value = ` 3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and
0.5718 respectively.
You are required to calculate the value of the lease liability as per AS-19 and also disclose impact
of this on Balance sheet and Profit & loss account at the end of year 1.

SOLUTION
REFERENCE:
As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an
amount lower of:
a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease.
 AS 19.27

ANALYSIS:
AS 19

Present value of minimum lease payments will be calculated as follows:

Year Minimum Lease Payment Implicit interest rate Present value
(Discount rate @15%) `
1 6,25,000 0.8696 5,43,500
2 6,25,000 0.7561 4,72,563
3 6,25,000 0.6575 4,10,937
4 7,50,000* 0.5718 4,28,850

Total 26,25,000 18,55,850

* Minimum Lease Payment of 4th year includes guaranteed residual value amounting i.e. 6,25,000
+ 1,25,000 = 7,50,000
CONCLUSION:
Present value of minimum lease payments ` 18,55,850 is less than fair value at the inception of
lease i.e. ` 20,00,000, therefore, the asset and corresponding lease liability should be recognised
at ` 18,55,850 as per AS 19.

22. May 22 RTP

Classify the following into either operating or finance lease:
i) If Present value (PV) of Minimum lease payment (MLP) = "X"; Fair value of the asset is "Y"
and X=Y.
ii) Economic life of the asset is 7 years, lease term is 6.5 years, but asset is not acquired at the
end of the lease term;
iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature
and has been procured only for use of the lessee.

SOLUTION
REFERENCE:
As per AS 19 “Leases”, a lease will be classified as finance lease if:
 AS 19.28

• At the inception of the lease, the present value of minimum lease payment amounts to at

AS 19
least substantially all of the fair value of leased asset.
• In a finance lease, lease term should be for the major part of the economic life of the asset
even if title is not transferred.
• The lessee has the option to purchase the asset at a price which is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable.
• The leased asset is of a specialized nature such that only the lessee can use it without major
modifications being made.
As per the above reference, cases will be classified as follows:
ANALYSIS (i):
As per the above reference, cases will be classified as follows:
As Present value (PV) of Minimum lease payment (MLP) = Fair value of the asset, the definition
of finance lease is satisfied.
CONCLUSION:
The lease will be classified as a finance lease.
ANALYSIS (ii):
Economic life of asset (7years) is substantially covered by the lease term (6.5years).
CONCLUSION:
The lease will be classified as a finance lease.
ANALYSIS (iii):
As the asset is of special nature and has been procured only for use of the lessee, it has no other
usage even if it’s economic life is more than lease period.
CONCLUSION:
The lease will be classified as a finance lease.

23. May 22 RTP

Viral Ltd. sold machinery having WDV of ` 40 lakhs to Saral Ltd. for ` 50 lakhs and the same
machinery was leased back by Saral Ltd. to Viral Ltd. The lease back is in nature of operating
lease. You are required to explain the treatment in the given cases –
(i) Fair value is ` 45 lakhs and sale price is ` 39 lakhs.

(ii) Fair value is ` 40 lakhs and sale price is ` 49 lakhs.

(iii) Fair value is ` 46 lakhs and sale price is ` 50 lakhs

 AS 19.29
AS 19

SOLUTION
Following will be the treatment in the situations given in the question as per AS 19:
i) When fair value of leased machinery is ` 45 lakhs & sale price is ` 39 lakhs, then loss of ` 1
lakh (40 – 39) to be immediately recognized by Viral Ltd. in its books provided loss is not
compensated by future lease payment.
ii) When fair value is ` 40 lakhs & sale price is ` 49 lakhs then, profit of ` 9 lakhs is to be
deferred and amortized over the lease period.
iii) When fair value is ` 46 lakhs & sale price is ` 50 lakhs, profit of ` 6 lakhs (46-40) to be

immediately recognized in its books and balance profit of `4 lakhs (50-46) is to be

amortized/deferred over lease period.

24. RTP Nov 22

WIN Ltd. has entered into a three year lease arrangement with Tanya sports club in respect of
Fitness Equipment’s costing ` 16,99,999.50. The annual lease payments to be made at the end of
each year are structured in such a way that the sum of the Present Values of the lease payments
and that of the residual value together equal the cost of the equipments leased out. The
unguaranteed residual value of the equipment at the expiry of the lease is estimated to be `
1,33,500. The assets would revert to the lessor at the end of the lease. Given that the implicit rate
of interest is 10%. You are required to compute the amount of the annual lease payment and the
unearned finance income. Discounting Factor at 10% for years 1, 2 and 3 are 0.909, 0.826 and
0.751 respectively.
 AS 19.30

SOLUTION

AS 19
REFERENCE:
As per AS 19 - Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance
lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the
lessor, at the interest rate implicit in the lease.
Where:
Gross investment in the lease is the aggregate of
(i) minimum lease payments from the stand point of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Formula of GIL = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed residual value (URV)
ANALYSIS:
(i) Computation of annual lease payment to the lessor
`
Cost of equipment 16,99,999.50
Unguaranteed residual value 1,33,500.00
Present value of residual value after third year
@ 10% (1,33,500 × 0.751) 1,00,258.50
Fair value to be recovered from lease payments
(16,99,999.5– 1,00,258.5) 15,99,741.00
Present value of annuity for three years is 2.486
Annual lease payment = 15,99,741/ 2.486 6,43,500.00
(ii) Computation of Unearned Finance Income
`
Total lease payments (6,43,500 x 3) 19,30,500
Add: Unguaranteed residual value 1,33,500
Gross investment in the lease 20,64,000.00
Less: Present value of investment (lease payments and residual value)
(1,00,258.5+ 15,99,741) (16,99,999.50)
Unearned finance income 3,64,000.50

25. MTP SEP 22 Series 1

Sun Limited leased a machine to Moon Limited on the following terms:
Particulars (Amount in `)
Fair value at inception of lease 50,00,000
Lease Term 4 Years
 AS 19.31
AS 19
Lease Rental per annum 16,00,000
Guaranteed residual value 3,00,000
Expected residual value 4,50,000
Implicit Interest rate 15%

Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and
0.5718 respectively.
Calculate the value of Lease Liability and ascertain Unearned Finance Income as per AS-19.

SOLUTION
REFERENCE:
As per AS 19 - Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance
lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the
lessor, at the interest rate implicit in the lease.
Where:
Gross investment in the lease is the aggregate of
(i) minimum lease payments from the stand point of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Formula of GIL = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed residual value (URV)
ANALYSIS:
As per AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at
an amount lower of:
a. The fair value of the leased asset at the inception of the finance lease
b. The present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments, the discount rate is th e
interest rate implicit in the lease.
 AS 19.32

Present value of minimum lease payments will be calculated as follows:

AS 19
Internal rate of return Present value
Year Minimum Lease Payment `
(Discount rate @15%) `
1 16,00,000 0.8696 13,91,360
2 16,00,000 0.7561 12,09,760
3 16,00,000 0.6575 10,52,000
19,00,000*
4 0.5718 10,86,420
[16,00,000 + 3,00,000]
Total 67,00,000 47,39,540
*Minimum Lease Payment of 4th year includes guaranteed residual value amounting i.e 16,00,000
+ 3,00,000 =19,00,000.
Present value of minimum lease payments i.e., ` 47,39,540 is less than fair value at the inception
of lease i.e., ` 50,00,000, therefore, the value of lease is ` 47,39,540 and lease liability should be
recognized in the books at ` 47,39,540 as per AS 19.
Calculation of Unearned Finance Income
ANALYSIS:
Particulars Amount Amount
Minimum Lease Payments 67,00,000
Total Lease rent [(` 16,00,000 x 4 years) 64,00,000
Guaranteed Residual Value (GRV) 3,00,000
Add: Unguaranteed residual value (URV) 1,50,000
Gross Investment (a) 68,50,000
Present value of minimum lease payment from Lessor’s view point
Lease liability 47,39,540
present value of (URV) unguaranteed residual value 85,770
(` 1,50,000 x 0.5718)
(b) 48,25,310
Unearned Finance Income (a) – (b) 20,24,690
 AS 19.33

MCQs
AS 19

1. A Ltd. sold machinery having WDV of ` 40 lakhs to B Ltd. for ` 50 lakhs (Fair value ` 50
lakhs) and same machinery was leased back by B Ltd. to A Ltd. The lease back is in nature
of operating lease. The treatment will be
a) A Ltd. should amortise the profit of ` 10 lakhs over lease term.
b) A Ltd. should recognise the profit of ` 10 lakhs immediately.
c) A Ltd. should defer the profit of ` 10 lakhs.
d) B Ltd. should recognise the profit of ` 10 lakhs immediately.

2. In case of an operating lease – identify which statement is correct:

a) The lessor continues to show the leased asset in its books of accounts.
b) The lessor de-recognises the asset from its Balance Sheet.
c) The lessor discontinues to claim depreciation in its books.
d) The lessee recognises the asset in its Balance Sheet.

3. In case of finance lease, if the asset is returned back to the lessor at the end of the lease term
- the lessee always claims depreciation based on which of the following:
a) Useful life.
b) Lease term.
c) Useful life or lease term whichever is less.
d) Useful life or lease term whichever is higher.

4. AS 19 lays down 5 deterministic conditions to classify the lease as a finance lease. To classify
the lease as an operating lease – which statement is correct?
a) Any 1 condition fails.
b) Majority of the 5 conditions fail.
c) All 5 conditions fail.
d) Any 2 conditions fails.

5. The basis of classification of a lease is:

a) Control Test.
b) Risk and reward Test.
c) Both control test and risk and reward test.
d) Only reward Test
Answers
1. (b) 2. (a) 3. (c) 4. (c) 5. (b)
Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E

Objective of AS 22

• Income tax liability is determined in accordance with the prevailing tax laws
• A business entity may recognise various items of income or expense in an accounting period
• But for tax purposes, they may be considered in a different period
• Results in a tax expense/liability not matching with the items of income/expense recognized in that period.

Profit and Loss A/c Profit and Loss A/c

To Opening Stock To Opening Stock By Sales
By Sales
To Purchases To Purchases By Closing stock
By Closing stock
To Interest To Salaries
Add : O/s Interest. Add : O/s salary
To Net profit To Net profit

www.cavidya.com AS 22.1 © Anandh Bhanggariya 96323 96323

Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E

Differences between Accounting income and

taxable income for a period

Permanent Difference Timing Difference

Differences which originate in one Period Differences which originate in one Period
and do not reverse subsequently and are capable of reversal in one or more
subsequent periods

• Ex. Permanent difference include

expenses disallowed u/s 40A. Items Amounts
• No accounting treatment is required
for such permanent differences. 43B item Depreciation
• Excluded from consideration in (bonus) (SLM/WDV)
determining tax expense.
Impact of Timing Differences
➢ Tax of initial years being higher & subsequent years
being lower.
➢ Tax of initial years being lower & subsequent years
being higher

www.cavidya.com AS 22.2 Cavidya 84218 84218, 75887 75887

Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E

Amount not deductible in respect of unpaid liabilities. [Sec. 43B]

Section 43B is applicable only if the taxpayer maintains books of account on the basis of mercantile system of accounting.

Expenses deductible on payment basis :-

Any sum payable by way of tax, duty, cess or fee (by whatever name called under any law for the time being in force);
Any sum payable by an employer by way of contribution to provident fund or superannuation fund or any other fund for the welfare of
employee.
Any sum payable as bonus or commission to employees for service rendered;
Any sum payable as interest on any loan or borrowing from a public financial institution (i.e. ICICI, IFCI, IDBI, LIC and UTI) or a state financial
corporation or a state industrial investment corporation.
Interest on any loan or advance taken from a scheduled bank including a co-operative bank and
Any sum payable by an employer in lieu of leave at the credit of his employee.
Expenses are deductible only in
the year in which payment is Scope
actually made. Standard prescribes the accounting treatment for taxes on income, with a focus on the
need to adhere to the fundamental principle of MATCHING CONCEPT
Taxes on income include all domestic and foreign taxes, which are based on taxable income.
The standard does not deal with Corporate Dividend tax or Wealth Tax payable by reporting
entities.

www.cavidya.com AS 22.3 © Anandh Bhanggariya 96323 96323

Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E

Accounting Income (Loss) Taxable Income (Tax Loss)

✓ The net profit or loss for a period, ✓ Taxable Income (Tax Loss) is
✓ As reported in the statement of profit and ✓ The amount of income (loss) for a period,
loss, ✓ Determined in accordance with the tax laws,
✓ Before deducting income tax expense or ✓ Based upon which income tax payable
adding income tax saving. (PBT) (recoverable) is determined.
✓ Schedule III of Companies Act. ✓ Computation as per Income Tax Return.

Tax Expense (Tax Saving) Current Tax

✓ Tax Expense (tax savings) is ✓ Current Tax is
✓ the aggregate of current tax and deferred tax ✓ the amount of income tax determined to be
✓ charged or credited to the statement of profit payable (recoverable)
and loss for the period. ✓ in respect of the taxable income (tax loss)
✓ for a period as per tax laws.
Deferred tax
The tax effect of timing differences. i.e. Temporary difference.

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Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E
Recognition Recognition Tax Expenses = Current Tax + Deferred Tax.

1. Permanent differences do not result in

Current Tax Deferred Tax deferred tax assets or deferred tax liabilities.
2. Tax Expenses should be included in
Amount of income-tax Deferred tax is the tax effect of timing determination of net profit or loss for the
determined to be payable difference. period.
(recoverable) in respect of the Tax expenses (on accrual basis) - 3. The tax effects of timing differences are
taxable income (tax loss) for a current tax liability (as per income-tax included in the tax expense in the statement of
period. act) = Deferred tax (assets / liability). profit and loss and as deferred tax assets or as
deferred tax liabilities, in the balance sheet.
Measurement
Measurement Measurement

Current Tax Deferred Tax

Deferred Tax Deferred Tax
Liabilities Assets
Measured at the amount Deferred tax should be measured
expected to be paid to (recovered using the rates and tax laws that
from) taxation authorities using have been enacted or substantially Is recognized for timing
applicable tax rates and tax laws. enacted by the balance sheet date. differences that will result in
taxable amounts in future
years.
Deferred Tax Assets and Liabilities should not be discounted to present value.

www.cavidya.com AS 22.5 © Anandh Bhanggariya 96323 96323

Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E
Deferred Tax Asset Recognised for timing differences that will result in
deductible amounts in future year and for carry forward.

General Items Unabsorbed depreciation and

e.g. falling u/s 43B of IT Act Carry forward losses can be
can be recognised subject to recognised subject to

Reasonable Certainty Virtual Certainty

Reasonable certainty can be deemed to Virtual certainty can be taken to exist only when the
exist if the probability of future taxable evidence gathered establish beyond doubt that the
income is greater than say 50%. enterprise will be able to generate adequate future
taxable income.

Virtual Certainty ✓ Is a matter of judgment

✓ Will have to be evaluated on case to case basis
✓ Should be supported by convincing evidence
✓ Cannot be based on forecasts
✓ Is not matter of perception

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Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E
Recognition of Deferred Tax Assets & Liabilities
➢ Tax expenses for the period, includes both current tax as well as deferred tax for the determination of net profit or loss for the period.
➢ Deferred tax should be recognised for all the timing differences, subject to consideration of prudence in respect of deferred tax assets.

Situation Status

❖ Create Deferred Tax Liability

(i) Accounting Income > Taxable Income Profit & Loss Account Dr.
To Deferred Tax Liability A/c

❖ Create Deferred Tax Assets

(ii) Accounting Income < Taxable Income Deferred Tax Assets A/c Dr.
To Profit & Loss A/c

❖ Create Deferred Tax Assets for disallowance of expenses

(iii) Accounting Loss and Taxable Income Deferred Tax Assets A/c Dr.
To Profit & Loss A/c

❖ Create Deferred tax Liability for surplus allowance of expenses.

(iv) Accounting Income and Taxable Loss Profit & Loss Account Dr.
To Deferred Tax Liability A/c

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Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E
Situation Status

❖ Create Deferred Tax Assets for Tax Loss subject to Prudence.

(iv) Accounting Income and
Deferred Tax Assets A/c Dr.
Taxable Loss
To Profit & Loss A/c

❖ Create Deferred Tax Assets for disallowance of expense and taxable loss subject to prudence.
(v) Accounting loss >
Deferred Tax Assets A/c Dr.
Taxable Loss
To Profit & Loss A/c

❖ Create Deferred Tax Liability surplus allowane of expense

Profit & Loss Account Dr.
To Deferred Tax Liability A/c
(vi) Accounting Loss <
Taxable Loss
❖ Create deferred tax assets for taxable loss subject to prudence
Deferred Tax Assets A/c Dr.
To Profit & Loss A/c

❖ Create Deferred Tax Assets for Taxable Loss subject to prudence.

(vii) Accounting Loss =
Deferred Tax Assets A/c Dr.
Taxable Loss
To Profit & Loss A/c

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Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E
Reassessment of Deferred Tax Asset
Deferred Tax Assets

Previously Recognized Not Previously Recognized (Find out

the category under which it falls)

Conditions underlying reasonable

certainty or virtual certainty are
reviewed and found to be

Reasonable Certainty Virtual Certainty

Valid Invalid

carried write down the DTA to the extent

forward of reversing timing differences If Exists – Recognise DTA
If Doesn’t Exists – Don’t Recosgnise DTA

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Accounting Standard - 22 A C C O U N T I N G F O R TA X E S O N I N C O M E

Tax Holiday
➢ The deferred tax in respect of timing differences which reverse during the tax holiday period, should not be recognized to the extent the gross
total income of the enterprise is subject to such deductions.
➢ The deferred tax in respect of timing difference which reverse after the tax holiday period should be recognized in the year in which the
timing differences originate, subject to consideration of prudence.
➢ Timing differences which originate first should be considered as reversing first.

Disclosure

➢ The break-up of deferred tax asset / liability should be disclosed.

➢ In case of deferred tax asset arises out of unabsorbed depreciation or loss, evidence supporting recognition should be disclosed.

➢ Deferred tax asset / liability should be disclosed separately from current asset / liabilities.

➢ Deferred tax asset and liability should be set off if permissible under the tax laws but to be shown separately if not permissible.

www.cavidya.com AS 22.10 Cavidya 84218 84218, 75887 75887

 AS 22.1

AS 22
AS 22 – ACCOUNTING FOR TAXES ON INCOME

Question Bank
Sr. No. Concept
Section A Section B

1 Deferred Tax Computation

• MAT adjustment Q.1, Q.4, Q.5 Q.6, Q.14

• Preliminary Expenses Q.3 Q.10, Q.11

• Impact Q.2, Q.15, Q.20

• Reversal of timing difference Q.7, Q.8 Q.8, Q.9, Q.12, Q.18

• Basic Calculation Q.2, Q.6, Q.13 Q1, Q.3, Q.4, Q.5, Q.7

2 Profit and Loss Extract Q.12 Q.16

3 Miscellaneous Q.9 Q.13, Q.17, Q.19, Q.21

4 Special Case Q.10, Q.11, Q.14

 AS 22.2

AS 22 – ACCOUNTING FOR TAXES ON INCOME

AS 22

SECTION A (CONCEPT QUESTIONS)

PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI ILLUSTRATION 2
2 ICAI ILLUSTRATION 3
3 QP MAY 18 (GROUP 1)
4 QP NOV 2019 (Group 1)
5 QP NOV 20
6 MAY 2011 EXAM
7 QUESTION
8 QUESTION
9 ICAI
10 ICAI PRACTICAL Q 8
11 QP JULY 21
12 EXAM NOV 22
13 ICAI – P.Q.8
14 ICAI – P.Q.9
 AS 22.3

1. ICAI ILLUSTRATION 2

AS 22
From the following details of A Ltd. for the year ended 31-03-20x1, calculate the deferred tax asset/
liability as per AS 22 and amount of tax to be debited to the Profit and Loss Account for the year.
Particulars `
Accounting Profit 6,00,000
Book Profit as per MAT 3,50,000
Profit as per Income Tax Act 60,000
Tax rate 20%
MAT rate 7.50%

SOLUTION
Tax as per accounting profit 6,00,000x20% = ` 1,20,000
Tax as per Income-tax Profit 60,000x20% = ` 12,000
Tax as per MAT 3,50,000x7.50% = ` 26,250
Excess of MAT over current tax = 26,250 – 12,000 = 14,250
Tax expense = Current Tax +Deferred Tax
` 1,20,000 = ` 12,000+ Deferred tax
Therefore, Deferred Tax liability as on 31-03-20X1= ` 1,20,000 – ` 12,000 = ` 1,08,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-2017
=Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ` 12,000 + ` 1,08,000 + ` 14,250 = ` 1,34,250
Particulars Amt Amt
Profit and Loss A/c Dr. 12,000
To Provision for Income Tax 12,000
(Being provision made for Tax payable)
Profit and Loss A/c Dr. 1,08,000
To Deferred Tax Liability 1,08,000
(Being Deferred Tax liability recorded)
Profit and Loss A/c (MAT) Dr. 14,250
To MAT Credit (Asset) 14,250
(Being excess of current tax paid in form of MAT recorded)
 AS 22.4

2. ICAI ILLUSTRATION 3
AS 22

PQR Ltd.'s accounting year ends on 31st March. The company made a loss of ` 2,00,000 for the
year ending 31.3.20X1. For the years ending 31.3.20X2 and 31.3.20X3, it made profits of ` 1,00,000
and ` 1,20,000 respectively. It is assumed that the loss of a year can be carried forward for eight
years and tax rate is 40%. By the end of 31.3.20X1, the company feels that there will be sufficient
taxable income in the future years against which carry forward loss can be set off. There is no
difference between taxable income and accounting income except that the carry forward loss is
allowed in the years ending 20X2 and 20X3 for tax purposes. Prepare a statement of Profit and
Loss for the years ending 20X1, 20X2 and 20X3.

SOLUTION
Statement of Profit and Loss
Particulars 31.3.20X1 31.3.20X2 31.3.20X3
Profit (Loss) (2,00,000) 1,00,000 1,20,000
Less: Current Tax (20,000X40%) (8,000)
Deferred Tax:
Tax effect of timing differences originating during the 80,000
year (2,00,000 × 40%)
Tax effect of timing differences reversed/ adjusted (40,000) (40,000)
during the year (1,00,000 × 40%)
Profit (Loss) After Tax Effect (1,20,000) 60,000 72,000

3. QP MAY 18 (GROUP 1)
Rohit Ltd. has provided the following information
Particulars `
Depreciation as per accounting records 2,50,000
Depreciation as per tax records 5,50,000
Unamortized preliminary expenses as per tax record 40,000

There is adequate evidence of future profit sufficiency. How much deferred tax assets/liability
should be recognized as transition adjustment when the tax rate is 50%?
 AS 22.5

AS 22
SOLUTION
Table showing calculation of deferred tax asset / liability
Particulars Amount ` Timing Deferred tax Amount @
difference 50% `
Excess depreciation as per tax 3,00,000 Timing Deferred tax 1,50,000
records (` 5,50,000 – ` 2,50,000) liability
Unamortised preliminary 40,000 Timing Deferred tax
expenses as per tax records asset (20,000)
Net deferred tax liability 1,30,000
Net deferred tax liability amounting ` 1,30,000 should be recognized as transition adjustment.

4. QP NOV 2019 (Group 1)

Sheetal Ltd. has provided the following information for the year ended 31st March, 2019
Particulars Amount (`)
Accounting profit 9,00,000
Book profit as per MAT 5,25,000
Profit as per Income Tax Act 95,000
Tax rate 30%
MAT rate 7.5%
You are required to calculate the deferred tax asset/liability as per AS-22 and amount of tax to
be debited to the profit and loss account for the year.

SOLUTION:
Tax as per accounting profit 9,00,000X30%= ` 2,70,000
Tax as per Income-tax Profit 95,000x30% =` 28,500
 AS 22.6

Tax as per MAT 5,25,000 x 7.50%= ` 39,375

AS 22

Excess of MAT over current tax = 39,375 – 28,500 = 10,875

Tax expense= Current Tax +Deferred Tax
` 2,70,000 = ` 28,500+ Deferred tax
Deferred Tax liability as on 31-03-2019
= ` 2,70,000 – ` 28,500 = ` 2,41,500
Amount of tax to be debited in Profit and Loss account for the year 31-03-2019
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ` 28,500 + ` 2,41,500+ ` 10,875 (39,375 – 28,500)
= ` 2,80,875

5. QP NOV 20
From the following details of Aditya Limited for accounting year ended on 31st March, 2020:
Particulars `
Accounting profit 15,00,000
Book profit as per MAT 7,50,000
Profit as per Income tax Act 2,50,000
Tax Rate 20%
MAT Rate 7.5%
Calculate the deferred tax asset/liability as per AS 22 and amount of tax to be debited to the
profit and loss account for the year.

SOLUTION:
Tax as per accounting profit 15,00,000x20%= ` 3,00,000
Tax as per Income-tax Profit 2,50,000x20% =` 50,000
Tax as per MAT 7,50,000x7.50%= ` 56,250
Excess of MAT over current tax = 56,250 – 50,000 = 6,250
Tax expense= Current Tax +Deferred Tax
` 3,00,000 = ` 50,000+ Deferred tax
Therefore, Deferred Tax liability as on 31-03-2020
 AS 22.7

= ` 3,00,000 – ` 50,000 = ` 2,50,000

AS 22
Amount of tax to be debited in Profit and Loss account for the year 31-03-2020 Current Tax +
Deferred Tax liability + Excess of MAT over current tax
= ` 50,000 + ` 2,50,000 + ` 6,250 (56,250 – 50,000) = ` 3,06,250

6. SIMILAR QUESTION IN MAY 2011 EXAM

The WDV of fixed assets of ABC Ltd. as per accounting records is Rs. 15,00,000 and as per tax
records is Rs. 11,00,000. The reason being higher depreciation has been claimed for tax purposes.
There is also a deferred revenue expenditure of Rs. 30,000 which is charged to Profit & Loss A/c in
earlier years, but is yet to be written off for tax purposes.
Find out the amount of deferred tax asset / liability to be recognized given that:
a. Rate of tax is 35%.
b. This is the first year when AS-22 is applied.

SOLUTION:
Calculation of DTA / DTL
S.N. Particulars Financial Tax Permanent Timing Tax DTA DTL Net
Balance Balance difference difference rate
sheet Sheet
1 Plant and
Machinery
2 Expenditure
Total

7. QUESTION
XYZ Ltd. shows accounting profit of Rs. 6,00,000 and taxable income of Rs. 8,50,000 for the Year
1. The difference between the two has been caused by a timing difference. This would be allowed
as deductible expense during year 2, Year 3 and year 4 to the extent of Rs. 1,00,000, Rs. 1,00,000
and Rs. 50,000. Find out the deferred tax asset / liability for different years given that the tax
rate for Year 1 and 2 is 35% and for year 3 and 4 is 30%.
 AS 22.8
AS 22

SOLUTION:
Calculation of DTA / DTL
S.no Particulars Year
1 2 3 4
A Opening Timing Difference
B Originating Timing Difference
C (OTD)Timing Difference (A+ B)
Total
D Timing Difference Reversed (RTD)
E Timing Difference c/f (C – D)
F Tax rate applicable
G DTA / DTL to be c/f (E x F)
H Deferred tax to be recognized in P&L
Note: It A/c.
is assumed that tax rates for subsequent year has been substantively enacted.

8. QUESTION
PQR Ltd. purchased a machine for Rs.3,00,000 on Year 1. The expected salvage value was nil after
life of 3 years. It adopted straight line method of depreciation for accounting purpose whereas
the machine was eligible for 100% depreciation in the year of purchase. The profit before
depreciation of the company for the years Year 1, Year 2 and Year 3 are Rs.4,00,000 p.a. Find out
the deferred tax asset / liability for different years, given that the tax rate is 35% for all the 3
years. Also show the presentation in the Profit and Loss A/c.
 AS 22.9

SOLUTION:

AS 22
1. Current Tax (Figures in Rs.)
S.N. Year 1 Year 2 Year 3
A Profit before depreciation and tax
B Less: Depreciation
C Taxable income (A – B)
D  Current Tax @ 35%
2. Deferred Tax
S.no Particulars Year
1 2 3
A Opening Timing Difference
B Originating Timing Difference (OTD)
C Total Timing Difference (A+ B)
D Timing Difference Reversed (RTD)
E Timing Difference c/f (C- D)
F Tax rate applicable
G DTA / DTL to be c/f
H Deferred tax to be recognized in P&L A/c.
1. Profit and loss statement
Year 1 Year 2 Year 3
Profit before depreciation and tax
Less: Depreciation
PBT
(-) Tax Expense
(a) Current Tax (W.N. 1)
(b) Deferred Tax (W.N. 2)
Sub -Total
Profit After Tax

9. (ICAI)
XYZ is an export oriented unit and was enjoying tax holiday upto 31.3.2016. No provision for
deferred tax liability was made in accounts for the year ended 31.3.2016. While finalising the
accounts for the year ended 31.3.2017, the Accountant says that the entire deferred tax liability
upto 31.3.2016 and current year deferred tax liability should be routed through Profit and Loss
 AS 22.10

Account as the relevant Accounting Standard has already become mandatory from 1.4.2001. Do
AS 22

you agree?

SOLUTION
FACTS:
XYZ is an export oriented unit and has no provision for deferred tax liability was made in accounts
for the year ended 31.3.2016
REFERENCE:
AS 22 on “Accounting for Taxes on Income” relates to the transitional provisions. It says, “On the
first occasion that the taxes on income are accounted for in accordance with this statement, the
enterprise should recognise, in the financial statements, the deferred tax balance that has
accumulated prior to the adoption of this statement as deferred tax asset/liability with a
corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in
case of deferred tax assets.”
Further AS 22 lays down, “For the purpose of determining accumulated deferred tax in the period
in which this statement is applied for the first time, the opening balances of assets and liabilities
for accounting purposes and for tax purposes are compared and the differences, if any, are
determined. The tax effects of these differences, if any, should be recognised as deferred tax
assets or liabilities, if these differences are timing differences.”
ANALYSIS:
In the case of XYZ, even though AS 22 has come into effect from 1.4.2001, the transitional
provisions permit adjustment of deferred tax liability/asset upto the previous year to be adjusted
from opening reserve. In other words, the deferred taxes not provided for alone can be adjusted
against opening reserves.
CONCLUSION:
Provision for deferred tax asset/liability for the current year should be routed through profit and
loss account like normal provision.

10. ICAI PRACTICAL Q 8

Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year
of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is ` 200
 AS 22.11

lakhs and ` 400 lakhs respectively. From the third year it is expected that the timing difference

AS 22
would reverse each year by ` 10 lakhs. Assuming tax rate of 40%, find out the deferred tax liability
at the end of the second year and any charge to the Profit and Loss account.

SOLUTION:
REFERENCE:
As per AS 22, ‘Accounting for Taxes on Income’, deferred tax in respect of timing differences which
originate during the tax holiday period and reverse during the tax holiday period, should not be recognised
to the extent deduction from the total income of an enterprise is allowed during the tax holiday period
as per the provisions of sections 10A and 10B of the Income-tax Act. Deferred tax in respect of timing
differences which originate during the tax holiday period but reverse after the tax holiday period should be
recognised in the year in which the timing differences originate. However, recognition of deferred tax
assets should be subject to the consideration of prudence. For this purpose, the timing differences which
originate first should be considered to reverse first.
ANALYSIS:
1. First Year: Out of ` 200 lakhs timing difference due to depreciation, difference amounting ` 80 lakhs
(` 10 lakhs x 8 years) will reverse in the tax holiday period and therefore, should not be recognised.
For ` 120 lakhs (` 200 lakhs – ` 80 lakhs), deferred tax liability will be recognised.
Deferred Liability to be recognised = 120 Lakhs x 40% = ` 48 lakhs.
2. In Second year: The entire amount of timing difference of ` 400 lakhs will reverse only after tax
holiday period and hence, will be recognised in full.
Deferred tax liability to be recognised = 400 Lakhs x 40% = ` 160 lakhs.
Deferred Tax Liability will be created by charging it to profit and loss account and the total balance of
deferred tax liability account at the end of second year will be ` 208 lakhs (48 lakhs + 160 lakhs).

11. QP JULY 21
The following particulars are stated in the Balance Sheet of Deep Limited as on 31st March, 2020:

(` In Lakhs)
Deferred Tax Liability (Cr.) 28.00
Deferred Tax Assets (Dr.) 14.00
 AS 22.12

The following transactions were reported during the year 2020 -2021:
AS 22

(i) Depreciation as per books was ` 70 Lakhs whereas Depreciation for Tax purposes was ` 42
Lakhs. There were no additions to Fixed Assets during the year.
(ii) Expenses disallowed in 2019-20 and allowed for tax purposes in 2020-21 were ` 14 Lakhs.
(iii) Share issue expenses allowed under section 35(D) of the Income Tax Act, 1961 for the year
2020-21 (1/10th of ` 70.00 lakhs incurred in 2019-20).
(iv) Repairs to Plant and Machinery were made during the year for ` 140.00 Lakhs and was spread
over the period 2020-21 and 2021-22 equally in the books. However, the entire expenditure
was allowed for income-tax purposes in the year 2020-21.
(v) Tax Rate to be taken at 40%.
You are required to show the impact of above items on Deferred Tax Assets and Deferred Tax
Liability as on 31st March, 2021.

SOLUTION:
Impact of various items in terms of deferred tax liability/deferred tax asset on 31.3.21
Transactions Analysis Nature of Effect Amount (`)
difference
Difference in Generally, written down Responding Reversal of 28 lakhs x 40%
depreciation value method of timing DTL = ` 11.20 lakhs
depreciation is adopted difference
under IT Act which leads
to higher depreciation in
earlier years of useful life
of the asset in
comparison to later
years.
Disallowances, as Tax payable for the Responding Reversal of 14 lakhs x 40%
per IT Act, of earlier earlier year was higher timing DTA = 5.6 lakhs
years on this account. difference
 AS 22.13

Share issue Due to disallowance of Responding Reversal of 7 lakhs x 40%

AS 22
expenses full expenditure under IT timing DTA = ` 2.8 lakhs
Act, tax payable in the difference
earlier years was higher.
Repairs to plant Due to allowance of full Originating Increase in 70 lakhs x 40%
and machinery expenditure under IT Act, timing DTL =28 lakhs
tax payable of the difference
current year will be less.

12. EXAM NOV 22

The following information is furnished in respect of Mohit Limited for the year ended 31 st March,
2022.
(i) Depreciations as per accounting records ₹56,000
Depreciations for income tax records ₹ 38,000
The above depreciations does not include depreciations on new addition.
(ii) A new machinery purchased on 1st April,2021 costing ₹ 24,000 on which 100% depreciation
is allowed in the 1st Year for income tax purpose, whereas straight line method of depreciations is
considered appropriate for accounting purpose with a life estimation of 4years.
(iii) The company has made a profit of ₹ 1,28,000 before depreciations and taxes.
(iv)Donations to private trust during the year is ₹ 15,000 (not allowed under tax laws.)
(v) corporate tax is 40%.
Prepare relevant extract of statement of profit and Loss for the year ending 31st March,2022. Also
show the effect of the above item on Deferred Tax Liability / Assets as per AS-22.

SOLUTION:
Statement of Profit and Loss for the year ended 31st March, 2022 (Extract)
`
Profit before depreciation and taxes 1,28,000
Less: Depreciation for accounting purposes (56,000 + 6,000) (62,000)
Profit before taxes (A) 66,000
 AS 22.14

Less: Tax expense (B)

AS 22

Current tax (W.N.1) 32,400

Deferred tax (W.N.2) NIL (32,400)
Profit after tax (A-B) 33,600
Working Notes:
WN 1: Computation of taxable income
Amount (`)
Profit before depreciation and tax 1,28,000
Less: Depreciation for tax purpose (38,000 +24,000) (62,000)
Add: Donation to Private Trust 15,000
Taxable income 81,000
Tax on taxable income @ 40% 32,400
WN 2: Impact of various items in terms of deferred tax liability / deferred tax asset
Analysis Nature of Effect Amount (`)
difference
Difference in depreciation
Generally, written down value method of Reversing timing Reversal of (38,000 - 56,000)
depreciation is adopted under IT Act which difference DTL x40% = (7,200)
leads to higher depreciation in earlier years
of useful life of the asset in comparison to
later years
Depreciation on new Machinery
Due to allowance of full amount as Timing difference Creation of (24,000 – 6,000) x
expenditure under IT Act, tax payable in the DTL 40% = 7,200
earlier years is less.
Net Impact NIL

13. ICAI – P.Q.8

Saras Ltd. closes its books as on 31st March 20X2. They have accrued ` 5,00,000 towards GST
Liability for the month of March 20X2 by debiting their Profit and loss statement which is
expected to be paid off by 21st April 20X2 . As per the provisions of Section 43B of the Income
Tax Act, 1961 – Any expenditure of the nature mentioned in section 43B (e.g. taxes, duty, cess,
fees, etc.) accrued in the statement of profit and loss on mercantile basis will be allowed for tax
purposes in subsequent years on payment basis only. Assuming a Tax rate of 30% determine the
Deferred Tax Asset/Liability as at 31st March 20X2.
 AS 22.15

AS 22
SOLUTION:
Calculation of difference between taxable income and accounting income
Particulars Amount (`)
GST Liability debited in books 5,00,000

Less: GST Liability allowed under Income Tax Act (Section 43B) Nil

Timing difference
5,00,000
Tax expense is less than the current tax due to timing difference. Therefore, deferred tax Asset =
30% x 5,00,000 = 1,50,000

14. ICAI – P.Q.9

ABC Company limited had an investment in Venture Capital amounting ` 10 Crores. Venture
capital in turn had invested in the below portfolio companies (New Start- ups) on behalf of
ABC Limited:
Portfolio Companies Amount of investment (` in Crores)
Oscar Limited 2
Zee Limited 3
Star Limited 4
Sony Limited 1
Total 10
During the FY 2019-2020, Venture Capital had sold their investment in Star Limited and realised
an amount of ` 8 Crores on sale of shares of star Limited and entire proceeds of ` 8 Crores have
been transferred by Venture Capital to ABC Company Limited.
The accounts manager has received the following additional information from venture capital on
31.03.2020:
(1) 8 Crores has been deducted from the cost of investment and carrying amount of investment
as at year end is 2 Crores.
(2) Company had to pay a capital gain tax @ 20% on the net sale consideration of ` 4 Crores.
(3) Due to COVID-19, the remaining start- ups (i.e. Oscar Limited, Zee Limited, and Sony
 AS 22.16

Limited) are not performing well and will soon wind up their operations. Venture capital is
AS 22

monitoring the situation and if required they will provide an impairment loss in June 2020
Quarter.
You need to suggest the accounts manager what should be the correct accounting
treatment as per AS 22 “Accounting for Taxes on Income”.

SOLUTION:
As company had to pay capital gain tax @ 20% on the net sale consideration as per income
tax laws, the company has to recognise a current tax liability of 0.8 Crores computed as
under:
Particulars Amount (` in Crores)
Sales Consideration 8
Cost of Investment 4
Net gain on Sale 4
Tax @ 20% 0.8
As per AS 22, Timing differences are those differences between taxable income and accounting
income for a period that originate in one period and are capable of reversal in one or more
subsequent periods.
Particulars Amount (` in Crores) Rationale
Taxable Income 4 As per income tax laws
Accounting Income Nil As the same is deducted from the cost of
investment
Timing Difference 4
As per AS 22, deferred tax assets should be recognised and carried forward only to the extent
that there is a reasonable certainty that sufficient future taxable income will be available
against which such deferred tax assets can be realised.
Since in current scenario, due to Covid 19 the portfolio companies are not performing well, thus
the company may not have sufficient future taxable income which will reverse deferred tax
assets. Therefore, the company should not recognise DTA of ` 0.8 Crores and company should
recognise only current tax liability of ` 0.8 Crores.
AS 22.17

AS 22
 AS 22.1
AS 22
AS 22 – ACCOUNTING FOR TAXES ON INCOME
SECTION B (EXAM ORIENTED)
PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI ILLUSTRATION 4
2 QP JAN 21
3 QUESTION
4 QUESTION
5 QUESTION
6 QUESTION
7 QUESTION
8 QUESTION
9 QUESTION
10 ICAI PRACTICAL Q 11
11 ICAI ILLUSTRATION 1,
RTP MAY 2018
12 RTP NOV 2018
13 RTP MAY 19
14 RTP NOV 2019
15 RTP MAY 20
16 RTP MAY 21
17 QP MAY 2019 (Group 1),
RTP NOV 20
RTP MAY2013, RTP MAY
18
2014
19 RTP NOV 21
20 RTP May 22
21 RTP Nov 22
 AS 22.2

1. ICAI ILLUSTRATION 4

AS 22
Omega Limited is working on different projects which are likely to be completed within 3 years
period. It recognises revenue from these contracts on percentage of completion method for
financial statements during 20X0-20X1, 20X1-20X2 and 20X2-20X3 for ` 11,00,000, ` 16,00,000
and ` 21,00,000 respectively. However, for Income-tax purpose, it has adopted the completed
contract method under which it has recognised revenue of ` 7,00,000, ` 18,00,000 and ` 23,00,000
for the years 20X0-20X1, 20X1-20X2 and 20X2-20X3 respectively. Income-tax rate is 35%.
Compute the amount of deferred tax asset/liability for the years 20X0-20X1, 20X1- 20X2 and
20X2-20X3.

SOLUTION:
Calculation of Deferred Tax Asset/Liability in Omega Limited.
(Figures in Rs.)
Particulars 2014-15 2015-16 2016-17
Income as per Books 11,00,000 16,00,000 21,00,000
Taxable income as per Income tax 7,00,000 18,00,000 23,00,000
Timing Difference (Balance) 4,00,000 2,00,000 Nil
Current tax @ 35% 3,85,000 5,60,000 7,35,000
Deferred Tax Liability 1,40,000 70,000 Nil

2. QP JAN 21
The following particulars are stated in the Balance Sheet of HS Ltd. as on 31 -3-2019 :
Particulars (` in lakhs)
Deferred Tax Liability (Cr.) 60.00
Deferred Tax Assets (Dr.) 30.00
The following transactions were reported during the year 2019-20 :
Depreciation as per accounting records 160.00
Depreciation as per income tax records 140.00
Items disallowed for tax purposes in 2018-19 but allowed in 2019-20 20.00
Donation to Private Trust 20.00
Tax rate 30%
 AS 22.3
AS 22
There were no additions to fixed assets during the year. You are required to show the impact of
various items on Deferred Tax Assets and Deferred Tax Liability as on 31-3-2020 as per AS-22.

SOLUTION:
Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset
Analysis Nature of Effect Amount
difference (in Lakhs)
i. Difference in Depreciation:
Generally, written down value method of Reversing timing Reversal of (160-140)X30%
depreciation is adopted under IT Act which difference DTL =`6
leads to higher depreciation in earlier years
of useful life of the asset in comparison to
later years.
ii. Disallowances, as per IT Act, of earlier years
Tax payable for the earlier year was higher on Reversing timing Reversal of ` 20 X30%
this account. difference DTA =`6
iii. Donation to Private Trusts
Not an allowable expenditure under IT Act. Permanent Not Not
difference applicable Applicable

3. QUESTION
ABC Ltd. has shown profit before tax of Rs.5,00,000. However, the taxable income has been
calculated as Rs. 4,50,000. The tax rate is 35%. Find out the amount of current tax and deferred
tax asset / liability of the company. Would it make any difference of the taxable income is
calculated as Rs.6,00,000?
 AS 22.4

AS 22
SOLUTION:
Current Tax
Case taxable income tax rate current tax
1 4,50,000 35%
2 6,00,000 35%
Deferred Tax
Case Particulars Financial Tax Permanent Timing Tax DTA DTL
Balance Balance difference difference rate
sheet Sheet
1 Profit
2 Profit

4. QUESTION
XYZ Ltd. charges depreciation at different rates for financial statements and tax purpose.
Consequently, the WDV of some of the assets are different for two records as follows:
Balance Sheet Tax Record
Plant &Machinery Rs.5,00,000 Rs.3,00,000
Furniture & Fixture Rs.1,00,000 Nil
There is a liability for Rs.60,000 which is provided for in accounting record. This is allowable
deduction for tax purpose. Find out the amount of Deferred Tax Asset / liability, given that the
tax rate is 35%.
 AS 22.5
AS 22
SOLUTION:
Calculation of DTA / DTL
S.N Particulars Financial Tax Permanent Timing Tax DTA DTL Net
Balance Balance difference difference rate
sheet Sheet
1 Plant and
Machinery
2 Furniture &
Fixture
3 Expenditure
Total

5. QUESTION
RST Ltd. has reported a profit before tax of Rs. 200,000 for the current year. Following additional
information is provided:
Additional depreciation allowable for tax purpose Rs. 30,000
Advance rent received: (in respect of next year) 15,000
Interest income from Tax-free Government Bonds 18,000
Tax rate 35%
Find out the current tax and deferred tax asset / liability.

SOLUTION:
Calculation of Current Tax
Particulars Rs.
Profit before Tax 2,00,000
Less: Additional depreciation under tax laws (30,000)
Interest income from Tax free Govt. Bonds (18,000)
152,000
Current Tax @ 35% (1,52,000 x 35%) 53,200
 AS 22.6

Calculation of Deferred Tax liability

AS 22
Timing difference on depreciation (DTL) 30,000
Deferred Tax liability (35% x 30,000) 10,500

6. QUESTION
The profit before tax of an enterprise is Rs. 3,00,000. However, its taxable income has been
calculated as Rs. 50,000. This difference has been identified as timing difference as per AS-22.
The rate of income tax is 35%, whereas the rate of MAT is 7.5%. Find out the amount of deferred
tax asset / liability.

SOLUTION:
Current Tax
Tax as per accounting profit 35% x 3,00,000 = ` 1,05,000
Tax as per Income-tax Profit 35% x 50,000 = ` 17,500
Tax as per MAT 3,00,000 x 7.50% = ` 22,500
Excess of MAT over current tax = 22,500 – 17,500 = 5,000
Tax expense = Current Tax +Deferred Tax
` 1,05,000 = ` 17,500+ Deferred tax
Therefore, Deferred Tax liability = ` 1,05,000 – ` 17,500 = ` 87,500
Note: As per the clarification issued by ICAI regarding MAT the following points should be noted.
1. The payment of tax under MAT is the current tax for the period.
2. In a period in which a company pays tax as per MAT (Sec. 115 JB) of Income Tax Act the DTA
/ DTL in respect of timing difference should be measured using the normal tax rate.

7. QUESTION
PQR Ltd. pays a premium of Rs. 2,50,000 on an insurance policy for one year with effect from
Oct. 1. It prepares its final accounts on March 31 next. The entire premium is a deductible expense
in the year in which it is paid. Find out the amount of deferred tax asset / liability to be recognized
on March 31 given the tax rate of 35%.
 AS 22.7
AS 22

SOLUTION:
S.N Particulars Books of Tax Permanent Timing Tax rate DTA DTL
accounts record difference difference
1 Insurance 1,25,000 2,50,000 35%
Premium

8. QUESTION
BST Ltd. is working on different projects which are likely to be completed within 3 years period.
It recognises revenue from these contracts on % of completion method for financial statements.
During three years period, it has recognised revenue of Rs.10,00,000, Rs.15,00,000 and Rs.20,00,000
in the Profit and Loss A/c.
However, for income tax purpose, it has adopted the completed contract method under which it
has recognized revenues of Rs.6,00,000, Rs.17,00,000 and Rs.22,00,000 over 3 years.
Find out the amount of deferred tax asset / liability for different years, given that the tax rate is
35%.

SOLUTION:
Calculation of DTA / DTL
S.no Particulars Year
1 2 3
A Opening Timing Difference
B Originating Timing Difference (OTD)
C Total Timing Difference (A+ B)
 AS 22.8

D Timing Difference Reversed (RTD)

AS 22
E Timing Difference c/f
F Tax rate applicable
G DTA / DTL to be c/f (E x F)
H Deferred tax to be recognized in P&L
A/c.
9. QUESTION
Continue with above Illustration and find out the amount of deferred tax liability if the tax rates
for the three years are 35%, 30% and 32% respectively.

SOLUTION:
Deferred Tax (Figures in Rs.)
S.no Particulars Year
1 2 3
A Opening Timing Difference
B Originating Timing Difference (OTD)
C Total Timing Difference (A+ B)
D Timing Difference Reversed (RTD)
E Timing Difference c/f (C- D)
F Tax rate applicable
G DTA / DTL to be c/f
H Deferred tax to be recognized in P&L A/c.
ASSUMPTION:
It is assumed that the tax rate for the subsequent year has been either enacted on substantively
enacted. Hence the tax rate applicable to the next year is used for calculating the deferred tax.

10. ICAI PRACTICAL Q 11

Ultra Ltd. has provided the following information.
Depreciation as per accounting records = ` 4,00,000
Depreciation as per tax records =` 10,00,000
 AS 22.9
AS 22
Unamortised preliminary expenses as per tax record = ` 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/ liability should
be recognised as transition adjustment when the tax rate is 50%?

SOLUTION
Table showing calculation of deferred tax asset / liability
Particulars Amount ` Timing Deferred tax Amount
difference @ 50% `
Excess depreciation as per tax records 6,00,000 Timing Deferred tax 3,00,000
(`10,00,000 – ` 4,00,000) liability
Unamortised preliminary expenses 30,000 Timing Deferred tax
as per tax records asset (15,000)
Net deferred tax liability 2,85,000
Tax expense is more than the current tax due to timing difference. Net deferred tax liability
amounting ` 2,85,000 should be recognized.

11. ICAI ILLUSTRATION 1, RTP MAY 2018

Rama Ltd., has provided the following information:
Particulars `
Depreciation as per accounting records 2,00,000
Depreciation as per tax income records 5,00,000
Unamortised preliminary expenses as per tax record 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/ liability
should be recognised as transition adjustment? Tax rate 50%.
 AS 22.10

SOLUTION

AS 22
Table showing calculation of deferred tax asset / liability
Particulars Amount Timing Deferred tax Amount @
` differences 50% `
Excess depreciation as per tax records 3,00,000 Timing Deferred tax 1,50,000
(` 5,00,000 – `2,00,000) liability
Unamortised preliminary 30,000 Timing Deferred tax (15,000)
expenses as per tax records asset
Net deferred tax liability 1,35,000

12. RTP NOV 2018

Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second
year of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is
` 1,000 lakhs and ` 2,000 lakhs respectively. From the third year it is expected that the timing
difference would reverse each year by ` 50 lakhs. Assuming tax rate of 40%, you are required to
compute to the deferred tax liability at the end of the second year and any charge to the Profit
and Loss account.

SOLUTION
( ` in Lakhs)
Originating Timing Timing Difference
Year Difference Reversing Timing Difference (Balance)
1 1000 - 1000
2 2000 - 3000
3 50 2950
4 50 2900
5 50 2850
6 50 2800
7 50 2750
8 50 2700
 AS 22.11
AS 22
9 50 2650
10 50 2600
REFERENCE:
As per AS 22 - Accounting for Taxes on Income, deferred tax in respect of timing differences which
originate during the tax holiday period and reverse during the tax holiday period, should not be
recognized to the extent deduction from the total income of an enterprise is allowed during the tax
holiday period as per the provisions of sections 10A and 10B of the Income-tax Act. Deferred tax in
respect of timing differences which originate during the tax holiday period but reverse after the tax
holiday period should be recognized in the year in which the timing differences originate. However,
recognition of deferred tax assets should be subject to the consideration of prudence. For this
purpose, the timing differences which originate first should be considered to reverse first.

COMPUTATION OF DEFERRED TAX LIABILITY:

Out of ` 1,000 lakhs depreciation, timing difference amounting ` 400 lakhs (` 50 lakhs x 8 years)
will reverse in the tax holiday period and therefore, should not be recognized. However, for ` 600
lakhs (` 1,000 lakhs – ` 400 lakhs), deferred tax liability will be recognized for ` 240 lakhs (40%
of ` 600 lakhs) in first year. In the second year, the entire amount of timing difference of ` 2,000
lakhs will reverse only after tax holiday period and hence, will be recognized in full. Deferred tax
liability amounting ` 800 lakhs (40% of ` 2,000 lakhs) will be created by charging it to profit and
loss account and the total balance of deferred tax liability account at the end of second year will
be ` 1,040 lakhs (240 lakhs + 800 lakhs).

13. RTP MAY 19

Is it permissible not to recognize deferred tax liability on the ground that the Company expects
that there will be losses both for accounting and tax purposes in near future? You are required to
give advise to the company.
 AS 22.12

SOLUTION

AS 22
REFERENCE:
As per AS 22 - Accounting for Taxes on Income, Deferred tax in respect of timing differences
which originate during the tax holiday period but reverse after the tax holiday period should be
recognized in the year in which the timing differences originate.
ANALYSIS:
Company expects that there will be losses both for accounting and tax purposes in near future.
CONCLUSION:
The Company should provide for deferred tax liability on the timing differences irrespective for
the fact that these timing differences will reverse in the period in which the Company expects to
be in loss both from the accounting as well as tax point of view. It may, however, be added that
the deferred tax liability recognized at the balance sheet date will give rise to future taxable
income at the time of reversal thereof.

14. RTP NOV 2019

The Accountant of Sohna Ltd. provides the following information for the year ended 31-03-2019:
Particulars `
Accounting Profit 7,50,000
Book Profit as per MAT 4,37,500
Profit as per Income Tax Act 90,000
Tax rate 20%
MAT rate 7.50%
You are required to calculate the deferred tax asset/ liability as per AS 22 and amount of tax to
be debited to the Profit and Loss Account for the year.

SOLUTION:
Tax as per accounting profit 7,50,000 x 20% = ` 1,50,000
Tax as per Income-tax Profit 90,000 x 20% = ` 18,000
Tax as per MAT 4,37,500 x 7.50% = ` 32,812.50
Excess of MAT over current tax = 32,812.50 – 18,000 = 14,812.50
Tax expense= Current Tax + Deferred Tax
` 1,50,000 = ` 18,000+ Deferred tax
 AS 22.13
AS 22
Therefore, Deferred Tax liability as on 31-03-2019
= ` 1,50,000 – ` 18,000 = ` 1,32,000
Amount of tax to be debited in Profit and Loss account for the year 31 -03-2019
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ` 18,000 + ` 1,32,000 + ` 14,812.50 (32,812.50 – 18,000) = ` 1,64,812.50

15. RTP MAY 20

The following particulars are stated in the Balance Sheet of PQR Ltd. as on 31.03.2018:
Particulars (` in lakh)
Deferred Tax Liability (Cr.) 30.00
Deferred Tax Assets (Dr.) 15.00
The following transactions were reported during the year 2018-2019:
Tax Rate 30%
(` in lakh)
i. Depreciation as per books 80.00
Depreciation for tax purposes 70.00
ii. Items disallowed in 2017-2018 and allowed for tax purposes in 2018-2019. 10.00
iii. Donations to Private Trust made in 2018-2019. 10.00
There were no additions to Fixed Assets during the year.
You are required to show the impact of various items on Deferred Tax Assets and Deferred Tax
Liability as on 31.03.2019.

SOLUTION:
Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset
Analysis Nature of Effect Amount
difference (in Lakhs)
i. Difference in Depreciation:
 AS 22.14

Generally, written down value method of Reversing timing Reversal of (80-70)X30%

AS 22
depreciation is adopted under IT Act which difference DTL = ` 3 lakh
leads to higher depreciation in earlier years
of useful life of the asset in comparison to
later years.
ii. Disallowances, as per IT Act, of earlier years
Tax payable for the earlier year was higher on Reversing timing Reversal of ` 10 X30%
this account. difference DTA = ` 3 lakh
iii. Donation to Private Trusts
Not an allowable expenditure under IT Act. Permanent Not Not
difference applicable Applicable

16. RTP MAY 21

a) The following information is furnished in respect of Slate Ltd. for the year ending 31-3-2019:
(i) Depreciation as per books ` 2,80,000
Depreciation for tax purpose ` 1,90,000
The above depreciation does not include depreciation on new additions.
(ii) A new machinery purchased on 1.4.18 costing ` 1,20,000 on which 100% depreciation is
allowed in the 1st year for tax purpose whereas Straight-line method is considered appropriate for
accounting purpose with a life estimation of 4 years.
(iii) The company has made a profit of ` 6,40,000 before depreciation and taxes.
(iv) Corporate tax rate of 40%.
Prepare relevant extract of statement of Profit and Loss for the year ending 31-3-2019 and also
show the effect of above items on deferred tax liability/asset as per AS 22.

SOLUTION
Statement of Profit and Loss for the year ended 31st March, 2019 (Extract)
Particulars `
Profit before depreciation and taxes 6,40,000
Less: Depreciation for accounting purposes (2,80,000+30,000) (3,10,000)
 AS 22.15
AS 22
Profit before taxes (A) 3,30,000
Less: Tax expense (B)
Current tax (W.N.1) (3,30,000 x 40%) Deferred tax (W.N.2)
1,32,000
(1,32,000)
NIL
Profit after tax (A-B) 1,98,000
Working Notes:
1. Computation of taxable income
Amount (`)
Profit before depreciation and tax 6,40,000
Less: Depreciation for tax purpose (1,90,000 + 1,20,000) (3,10,000)
Taxable income 3,30,000
Tax on taxable income @ 40% 1,32,000
2. Impact of various items in terms of deferred tax liability / deferred tax asset
Analysis Nature of Effect Amount (`)
difference
i. Difference in depreciation

Generally, written down value method Reversing Reversal of (2,80,000 - 1,90,000) x40%
of depreciation is adopted under IT timing DTL = (36,000)
Act which leads to higher depreciation difference
in earlier years of useful life of the
asset in comparison to later years
ii. Depreciation on new Machinery
Due to allowance of full amount as Timing Creation of (1,20,000 – 30,000) x 40%
expenditure under IT Act, tax payable difference DTL = 36,000
in the earlier years is less.
Net Impact NIL
b) What are the disclosure requirements for deferred tax assets and deferred tax liabilities in the
balance sheet as per AS 22?
 AS 22.16

SOLUTION:

AS 22
1. The break-up of deferred tax assets and deferred tax liabilities into major components of the
respective balance should be disclosed in the notes to accounts.
2. Deferred tax assets and liabilities should be distinguished from assets and liabilities
representing current tax for the period.
3. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance
sheet of the enterprise, separately from current assets and current liabilities.
4. The nature of the evidence supporting the recognition of deferred tax assets should be
disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax
laws.

17. QP MAY 2019 (Group 1), RTP NOV 20

Write short note on Timing difference and Permanent Difference as per AS 22.

SOLUTION:
Matching of taxes against revenue for a period poses special problems arising from the fact that
in number of cases, taxable income may be different from the accounting income. The divergence
between taxable income may be different from the accounting income arises due to two main
reasons:
1. Permanent differences are the differences between taxable income and accounting income
which arise in one accounting period and do not reverse subsequently. For example, an income
exempt from tax or an expense that is not allowable as a deduction for tax purposes.
2. Timing differences are those differences between taxable income and accounting income
which arise in one accounting period and are capable of reversal in one or more subsequent
periods. For e.g., Depreciation, Bonus, etc.

18. RTP MAY2013, RTP MAY 2014

PQR Ltd. incurs a loss of Rs.2,00,000 in Year 1 and makes profit of Rs.1,00,000 and Rs.1,20,000 in
Year 2 and year 3 respectively. The tax rate is 40% and the loss can be carried forward for 5
years under the tax laws. At the end of year 1, it was certain that the company would have
sufficient taxable income in future years against which unabsorbed depreciation and carry
forward of losses can be set off. Show the reversal of timing difference and the consequent effect
on tax liability.
 AS 22.17
AS 22

SOLUTION:
Step – 1: Current Tax (Figures in Rs.)
S.N. Particulars Year
1 2 3
A Profit / Loss
B Less: brought forward loss adjusted
C Taxable income
D Current tax @ 40%
Step – 2: Deferred Tax
S.no Particulars Year
1 2 3
A Opening Timing Difference
B Originating Timing Difference (OTD)
C Total Timing Difference (A+ B)
D Timing Difference Reversed (RTD)
E Timing Difference c/f (C- D)
F Tax rate applicable
G DTA / DTL to be c/f (E x F)
H Deferred tax to be recognized in P&L
A/c.
Step – 3: Profit & Loss Statement
S.No. Particulars Year
1 2 3
A Profit / Loss
B (-) Tax expense
(a) Current Tax (WN – 1)
(b) Deferred Tax (WN – 2)
Sub –Total
D Profit / Loss after tax
 AS 22.18

19. RTP NOV 21

AS 22
Can an enterprise offset deferred tax assets and deferred tax liabilities? If yes, prescribe the
conditions required for such offset as per provisions of AS 22.

SOLUTION:
Yes. It can offset deferred tax assets and deferred tax liabilities.
As per AS 22, an enterprise should offset deferred tax assets and deferred tax liabilities if:
(i) the enterprise has a legally enforceable right to set off assets against liabilities representing
current tax; and
(ii) the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the
same governing taxation laws.

20. RTP May 22

The following transactions were reported by PQR Ltd. during the year 2020-2021:
i. Tax Rate 30%
(` in lakh)
ii. Items disallowed in 2019-2020 and allowed for tax purposes in 2020-2021. 20.00
iii. Interest to Financial Institutions accounted in the books on accrual basis,
but actual payment was made before the due date of filing return and 20.00
allowed for tax purpose also.
iv. Donations to Private Trust made in 2020-2021 (not allowed under Income 10.00
Tax Laws).
You are required to show impact of the above items in terms of Deferred Tax Assets/Deferred
Tax Liability for the year ended 31.03.2021.
 AS 22.19
AS 22
SOLUTION:
Impact of various items in terms of deferred tax liability/deferred tax asset as per AS 22
Transactions Analysis Nature of Effect Amount
difference
Disallowances, as Tax payable for the Timing Reversal of ` 20 lakh x 30% = `
per IT Act, of earlier earlier year was higher difference DTA 6 lakh
Years on this account.
Interest to financial It is allowed as deduction No timing Not Not applicable
institutions under IT Act, if the difference applicable
payment is made before
the due date of filing the
return of income
Donation to private Not an allowable Permanent Not Not applicable
trusts expenditure under IT Act. difference applicable

21. RTP Nov 22

Define following as per AS 22:
1. Accounting income (loss)
2. Taxable income (tax loss)
3. Tax expense (tax saving)

SOLUTION
1. Accounting income (loss) is the net profit or loss for a period, as reported in the statement of
profit and loss, before deducting income-tax expense or adding income tax saving.
2. Taxable income (tax loss) is the amount of the income (loss) for a period, determined in
accordance with the tax laws, based upon which income-tax payable (recoverable) is determined.
3. Tax expenses is the aggregate of current tax and deferred tax charged or credited to the
statement of profit and loss for the period.
 AS 22.
20

MCQs

AS 22
1. As per AS 22 on ‘Accounting for Taxes on Income’, tax expense is:
a) Current tax + deferred tax charged to profit and loss account
b) Current tax-deferred tax credited to profit and loss account
c) Either (a) or (b)
d) Deferred tax charged to profit and loss account

2. G Ltd. has provided the following information:

Depreciation as per accounting records = ` 2,00,000
Depreciation as per tax records = ` 5,00,000
There is adequate evidence of future profit sufficiency.
How much deferred tax asset/liability should be recognized as transition adjustment when the
tax rate is 50%?
a) Deferred Tax asset = ` 2,70,000.
b) Deferred Tax asset = ` 1,35,000.
c) Deferred Tax Liability = ` 2,70,000
d) Deferred Tax Liability = ` 1,35,000.

3. State which of the followings statements are correct:

(1) There are no pre-conditions required to recognize deferred tax liability,
(2) Deferred tax asset under all circumstances can only be created if and only if there is
reasonable certainty that future taxable income will arise.
a) Both are correct.
b) Only (1) is correct.
c) Only (2) is correct.
d) None of the statements are correct.

4. Which of the following statement are incorrect:

a) Only timing differences result in creation of deferred tax.
b) Permanent differences do not result in recognition of deferred tax.
c) The tax rate used for measurement of deferred tax is substantively enacted tax rate.
d) The entity has to recognize deferred tax liability/asset arising out of timing difference.
There are no conditions which are required to evaluated for their recognition.
 AS 22.21
AS 22
Answers
1. (c) 2. (d) 3. (a) 4. (d)
Accounting Standard - 26 I N TA N G I B L E A S S E T
Applicability
Item not covered Explanation
Financial assets like – Cash, ownership interest in another In so far as these are investments, will be covered by AS -13.
enterprise.
Intangible asset that are covered by another standard. ✓ Computer software can be an inventory item for an enterprise. This will be
covered by AS 2,
✓ Deferred tax asset will be covered by AS 22,
✓ Goodwill on consolidation will be covered by
AS 21, and
✓ Goodwill on amalgamation will be covered by AS 14.
Mineral rights and expenditure for exploration of oil, natural However, a computer software used in exercise of such rights, or start up
gas etc. and intangible assets arising in insurance costs, would be covered under AS 26.
enterprises from contracts with policy holders.
Voluntary separation costs, termination benefits paid to To be dealt with in AS 15 which is presently under revision.
employees on retirement
Share issue expenses, discount allowed on the issue of
shares.

In the case of a finance lease, the underlying asset may be either tangible or intangible. After initial recognition, a lessee
deals with an intangible asset held under finance lease under this standard.

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Scope
AS 26 should be applied by all enterprises in accounting for intangible assets Except:
• • Intangible assets that are covered by another Accounting Standard.
• • Financial assets.
• • Mineral rights and expenditure on the exploration for, or development and extraction
• of, minerals, oil, natural gas and similar non regenerative resources.
• • Intangible assets arising in insurance enterprises from contracts with policyholders.

AS 26 applies to:
• Other intangible assets used (such as computer software), and other expenditure (such as start-up costs), in extractive industries or by insurance
enterprises.
• Goodwill.
• Expenditure on advertising, training, start – up cost
• Research and development activities
• Trademarks & Patents , copyrights
• Right under licensing agreements for items such as motion Picture films , video recording

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Type of Assets

Tangible Asset Intangible Asset

Assets having physical An intangible asset is defined as an

substance and can be seen identifiable non-monetary asset, without
and touched. E.g. Building, physical substance, held for use in
plant and Machinery etc. production or supply of goods or
services, rental to others, or for
administrative purpose.

Conditions

Identifiable non-monetary Control over a resource Expectation of future

asset without physical economic benefit flowing
substance. to the entity
When there is control over
future economic benefit
from intangible asset

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Identifiable
Asset is said to be identifiable if it is separable from other assets and if enterprise could rent, sell, exchange or distribute the specific future benefits of
this assets used in revenue earning activity.

Issue Explanation
Separability is not “a necessary” condition Intangible asset is acquired along with a group of assets (Goodwill under
AS 14)
An internal project may provide certain “legal rights” and the nature Intangible asset arising from research and development projects.
of these rights may help identify underlying Intangible asset
An asset may be identifiable only along with another asset. Yet, if the entity is able to identify the future economic benefits from
that “specific” asset, it falls under Intangible asset.

Non-monetary Asset Physical substance

Non-monetary assets means the value to be received against the Intangible Assets has no physical substance, however some intangible
assets is not fixed by contract or otherwise.
Examples of monetary assets:- Debtors, Bills-receivable, and asset assets may have physical substance like compact disk containing
advances etc. software but the cost of physical substance is insignificant as compared to
Examples of non-monetary assets:- Goodwill, patent and
trademark intangible.

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Recognition criteria of Intangible asset

Probable future economic benefit must flow to the enterprise Cost of intangible asset can be measured reliably.

Management should make estimate of future benefit on

reasonable and supportive assumption.

Initial measurement of Intangible asset

Measurement should be done if…

Definition Criteria Recognition criteria

Once all these
criteria are fulfilled.
✓ Non-monetary ✓ Probable future economic As per standard,
✓ Identifiable benefit flows to enterprise. intangible asset
✓ Without physical substance ✓ Cost can be measured should be shown at
✓ Controlled by enterprise reliably. COST.
✓ For future economic benefit

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Cost of Intangible assets - Separate Acquisition, Exchange of Asset, By Issue of Shares or Securities
Separate acquisition:
❖When intangible asset acquired separately, its cost can be measured separately.
❖Its cost consist of purchase price, any import duties and non-refundable purchase taxes and directly attributable expenses.
Exchange of assets:
The cost of intangible asset shall be fair value of asset given up.
By issue of share or securities:
The asset should be recorded at fair value of intangible acquired or fair value of share or securities issued, whichever is more clearly evident.

Cost of Intangible assets Acquisition in amalgamation

Goodwill Other than goodwill

Purchase consideration (Less) fair ✓ Recognised only if it meets criteria of intangible asset
value of assets acquired. recognition. (Even if that asset is not recognised in books of
transferor company)
✓ Cost of intangible asset can not be measured reliably, same
shall be included in the value of goodwill.

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Cost of Intangible assets - Acquisition through Government Grants
Enterprise acquires an intangible asset in the form of license to operate radio or T.V. station, telecom operation right, airport landing right, access
to resource etc. free of cost or at nominal value.

Initial Recognition Recognised at cost of acquisition

Recognised at
nominal value + attributable cash cost
As per AS 12, “Accounting for Government Grant”
✓ Non-monetary asset acquired free of cost
✓ Non-monetary asset acquired at nominal cost

Recorded at nominal cost only

Cost of Intangible assets - Internally generated goodwill
Goodwill generated in the process of doing business in called Internally Internally generated goodwill does not meet recognition
Generated Goodwill. criteria (cost can not be measured reliably).
Goodwill may be generated because of factors like good business So internally generated goodwill should not be recognised.
practices, good and trained employee, advertisement, continuous Certain other asset should not be recognised.
training to employees etc. e.g. Brands, Mastheads, Publishing titles, Customers list, &
To generate goodwill internally involves cost. items of similar nature.

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Cost Of Intangible Assets - Other Internally Generated Intangible Asset
Assets Generation Process

Research phase Development phase

It is the activity that aimed at inventing or It is the activity that convert the results of research
creating a new product, method or system to a marketable product

Research Cost Development Cost

Treated as expense If development phase generate the intangible asset, then such asset should be capitalised. If,
Charged to P & L a/c ✓ It meets intangible asset recognition criteria, and
✓ Other criteria
▪ Technical feasibility of product
▪ Availability of product for use or sale
▪ Identification of cost incurred
▪ Probability of external market
▪ The realistic expectation that there will be sufficient future revenue to cover cost

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Subsequent Expenditure on Intangibles
Subsequent expenditure

Increases future economic Separate asset can be recognised

benefit of intangibles and measured reliably

Included in cost Expense should

of intangibles be capitalised

If expenses made do not fall in any of the above condition then it is charged to P & L a/c

Carrying Amount of Intangibles

Carrying Amount Any Accumulated Any Accumulated

of Intangibles = Cost - -
Amortisation Impairment Losses

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Amortization
It is the process of allocating an amount to expenses over the period of beneficial life. (same as depreciation of fixed asset.)
Accounting standard states that depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimates of its
useful life.
Amortisation should starts when the asset is available for use.

Depreciable Amount

Depreciable Cost of
amount = intangible asset
- Residual value

Residual value generally taken as zero, unless it is evident that at the end of useful life, it can sold and market value can
reasonably estimated.

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Amortisation Period
Amortisation period:
❖ The depreciable amount of intangible asset should be amortised on systematic basis over the best estimate of its useful life
which is generally shall not exceed 10 years from the date when assets is available for use.
❖ When best estimated useful life over 10 years is considered for amortisation then estimate the recoverable amount at least
annually and provide for impairment loss if any and disclose the reason why life exceeding 10 years is justified and factors
considered for determining the useful life.

Amortisation method
Intangible assets amortised by applying matching concept which requires that the benefit derived (consumed) from the
intangible in the form of increased profitability should be matched with the cost.
If the pattern of benefit and cost can be determined reliably then the enterprise should amortize the intangible as per the
pattern.
Otherwise straight line method is followed.
Amortisation is generally recorded as an expense in financial statement.
However sometimes economic benefit consumed out of intangible asset is used to produce other asset, in this case the
amortisation expenses is added in the cost of other asset rather than showing it as an expenses AS 2 ‘valuation of inventory’

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Review Of Amortisation Method
Amortisation method is reviewed at the end of each financial year and if

✓The amortisation period and the amortisation method should be reviewed at least at each financial year end.

✓If the expected useful life of the asset is significantly different from previous estimates, the amortisation period should be changed accordingly.

✓If there has been a significant change in the expected pattern of economic benefits from the asset, the amortisation method should be changed to
reflect the changed pattern. Such changes should be accounted for in accordance with AS 5

Impairment losses
✓ Impairment losses is the amount by which the carrying amount of an asset exceeds its recoverable amount.
✓ Such exceed is to be treated as loss and is to be provided for.
✓ Recoverable amount as per the standard on impairment of asset means higher of the:
➢ Value in use and net selling price,
➢ Value in use is the present value of future cash inflow to be derived from the asset.
✓ Mandatory Impairment Assets: Mandatory impairment test is required in following cases
➢ When useful life is more than 10 year
➢ When subsequent expenditure extend the life of intangible assets.

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Retirements and Disposal
An intangible asset should be derecognised (eliminated from the balance sheet) if
•disposal or
•when no future economic benefits are expected from its use and subsequent disposal.
Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal
proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss.

Intangible asset should be recognised/ eliminated from balance sheet if –

An intangible asset is disposed (disposal).
No future economic benefit are expected from the use of intangible asset. (retirement).

Treatment

Disposal Retirement

Profit or loss Carried In balance sheet

recognised in P & L at its carrying cost subject
A/c. to impairment.

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Accounting Standard - 26 I N TA N G I B L E A S S E T
Disclosure
The financial statements should disclose the following for each class of intangible assets, distinguishing between internally generated
intangible assets and other intangible assets:
1. the useful lives or the amortisation rates used;
2. the amortisation methods used;
3. the gross carrying amount and the accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of
the period;
4. a reconciliation of the carrying amount at the beginning and end of the period showing:
a. additions, indicating separately those from internal development and through amalgamation;
b. retirements and disposals;
c. impairment losses recognised in the statement of profit and loss during the period (if any);
d. impairment losses reversed in the statement of profit and loss during the period (if any);
e. amortisation recognised during the period; and
f. other changes in the carrying amount during the period.

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 AS 26.1

AS 26
AS 26 – INTANGIBLE ASSETS

Question Bank
Sr. No. Concept
Section A Section B

1 Cost of assets Q.6 Q.13, Q.17

Q.2, Q.3, Q.6, Q.11, Q.12, Q.14,

2 Publicity and Research
Q.16, Q.22

3 Recognition Q.4, Q.10, Q.19

4 Amortisation

• Net Cash Flow Q.3, Q.4, Q.5 Q.5, Q.7, Q.8, Q.9, Q.20,

• Useful Life Q.10 Q.1, Q.21

5 Impairment of loss Q.7, Q.8 Q.23

6 Balance Sheet Extract Q.9 Q.24

7 Miscellaneous Q.1, Q.2 Q.15, Q.18

 AS 26.2

AS 26 – INTANGIBLE ASSETS
AS 26

SECTION A (CONCEPT)
PAGE
No. QUESTION DATE R1 R2 R3 REMARK
NO.
1 ICAI Example 1
2 ICAI Example 1
3 PRACTICAL QUESTION 3
4 Q Paper May 2018 Group
2 Old Q No 1 d
5 QP May 2018 Q No 1 c
6 QP JAN 21
7 QP NOV 20
8 QP DEC 21
9 RTP MAY 21
10 RTP NOV 21
 AS 26.3

1. ICAI Example 1

AS 26
An enterprise is developing a new production process. During the year 20X1, expenditure incurred
was Rs. 10 lacs, of which Rs. 9 lacs was incurred before 1 December 20X1 and 1 lac was incurred
between 1 December 20X1 and 31 December 20X1. The enterprise is able to demonstrate that, at 1
December 20X1, the production process met the criteria for recognition as an intangible asset. The
recoverable amount of the know-how embodied in the process (including future cash outflows to
complete the process before it is available for use) is estimated to be Rs. 5 lacs.
At the end of 20X1, the production process is recognised as an intangible asset at a cost of Rs. 1
lac (expenditure incurred since the date when the recognition criteria were met, that is, 1
December 20X1). The Rs. 9 lacs expenditure incurred before 1 December 20X1 is recognised as an
expense because the recognition criteria were not met until 1 December 20X1. This expenditure will
never form part of the cost of the production process recognised in the balance sheet.
During the year 20X2, expenditure incurred is Rs. 20 lacs. At the end of 20X2, the recoverable
amount of the know-how embodied in the process (including future cash outflows to complete
the process before it is available for use) is estimated to be Rs. 19 lacs.
At the end of the year 20X2, the cost of the production process is Rs. 21 lacs (Rs. 1 lac expenditure
recognised at the end of 20X1 plus Rs. 20 lacs expenditure recognised in 20X2). The enterprise
recognises an impairment loss of Rs. 2 lacs to adjust the carrying amount of the process before
impairment loss (Rs. 21 lacs) to its recoverable amount (Rs. 19 lacs). This impairment loss will
be reversed in a subsequent period if the requirements for the reversal of an impairment loss in
AS 28, are met.

2. ICAI EXAMPLE 2
A. An enterprise has purchased an exclusive right to generate hydroelectric power for 60 years.
The costs of generating hydro-electric power are much lower than the costs of obtaining power
from alternative sources. It is expected that the geographical area surrounding the power station
will demand a significant amount of power from the power station for at least 60 years.
The enterprise amortises the right to generate power over 60 years, unless there is evidence that
its useful life is shorter.
B. An enterprise has purchased an exclusive right to operate a toll motorway for 30 years. There
is no plan to construct alternative routes in the area served by the motorway. It is expected that
 AS 26.4

this motorway will be in use for at least 30 years.

AS 26

The enterprise amortises the right to operate the motorway over 30 years, unless there is evidence
that its useful life is shorter.
If control over the future economic benefits from an intangible asset is achieved through legal
rights that have been granted for a finite period, the useful life of the intangible asset should not
exceed the period of the legal rights unless the legal rights are renewable and renewal is virtually
certain.
There may be both economic and legal factors influencing the useful life of an intangible asset:
economic factors determine the period over which future economic benefits will be generated;
legal factors may restrict the period over which the enterprise controls access to these benefits.
The useful life is the shorter of the periods determined by these factors.

3. PRACTICAL QUESTION 3
Swift Ltd. acquired a patent at a cost of Rs. 80,00,000 for a period of 5 years and the product life-cycle is also
5 years. The company capitalised the cost and started amortising the asset at Rs. 10,00,000 per annum. After
two years it was found that the product life-cycle may continue for another 5 years from then. The net cash
flows from the product during these 5 years were expected to be Rs. 36,00,000, Rs. 46,00,000, Rs. 44,00,000, Rs.
40,00,000 and Rs. 34,00,000. Find out the amortisation cost of the patent for each of the years.

SOLUTION
REFERENCE:
As per AS 26 - Intangible Assets, the depreciable amount of an intangible asset should be
allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable
presumption that the useful life of an intangible asset will not exceed ten years from the date
when the asset is available for use. Amortisation should commence when the asset is available
for use.
ANALYSIS:
Swift Limited amortised Rs. 10,00,000 per annum for the first two years i.e., Rs. 20,00,000. The
remaining carrying cost can be amortised during next 5 years on the basis of net cash flows
arising from the sale of the product. The amortisation may be found as follows:
 AS 26.5

Year Net cash flows Amortization Ratio Amortization Amount

AS 26
I - 0.125 (10L/80L) 10,00,000 (0.125 x 80L)
II - 0.125 (10L/80L) 10,00,000 (0.125 x 80L)
III 36,00,000 0.180 (36L/200L) 10,80,000 (0.180 X 60L)
IV 46,00,000 0.230 (46L/200L) 13,80,000 (0.230 X 60L)
V 44,00,000 0.220 (44L/200L) 13,20,000 (0.220 X 60L)
VI 40,00,000 0.200 (40L/200L) 12,00,000 (0.200 X 60L)
VII 34,00,000 0.170 (34L /200L) 10,20,000 (0.170 X 60L)
Total 2,00,00,000 80,00,000
It has been assumed that the company had amortized the patent at Rs. 10,00,000 per annum in the first two
years on the basis of economic benefits derived from the product manufactured under the patent.
It may be seen from above that from third year onwards, the balance of carrying amount i.e., Rs. 60,00,000
has been amortised in the ratio of net cash flows arising from the product of Swift Ltd.
Note: The answer has been given on the basis that the patent is renewable and Swift Ltd. got it renewed
after expiry of five years.

4. Q Paper May 2018 Group 2 Old Q No 1 d

A Company acquired a patent right for Rs. 1200 Lakhs. The product life cycle has been estimated
to be 5 years and the amortization was decided in the ratio of estimated future cash flows which
are as under
Year 1 2 3 4 5
Estimated future cash flows (Rs. in Lakhs) 600 600 600 300 300

After 3rd year it was ascertained that the patent would have an estimated balance future life of
3 years and the estimated cash flow after 5th year is expected to be Rs. 150Lakhs. Determine the
amortization under Accounting Standard 26
 AS 26.6

SOLUTION
AS 26

REFERENCE:
As per AS 26 - Intangible Assets, the depreciable amount of an intangible asset should be
allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable
presumption that the useful life of an intangible asset will not exceed ten years from the date
when the asset is available for use. Amortisation should commence when the asset is available
for use.
ANALYSIS:
The amortization method used should reflect the pattern in which economic benefits are consumed by the
enterprise. If pattern cannot be determined reliably, then straight-line method should be used.
In the first three years, the patent cost will be amortized in the ratio of estimated future cash
flow i.e., (600:600:600:300:300). The unamortized amount of the patent after 3rd year will be Rs.
300 Lakh (1200-900) which will be amortized in the ratio of revised estimated future cash flows
(300:300:150) in the fourth, fifth and sixth year.
Year Estimated future cash flow Amortization Amortized Amount (Rs. in Lakhs)
(Rs. in Lakhs) Ratio
1 600 25 300 (1200 x 600/2400)
2 600 25 300 (1200 x 600/2400)
3 600 25 300 (1200 x 600/2400)
4 300 40 (Revised) 120 (300 x 300/750)
5 300 40 (Revised) 120 (300 x 300/750)
6 150 20 (Revised) 60 (300 x 150/750)
1200

5. QP May 2018 Q No 1 c
A Company acquired a patent at a cost of Rs. 160 Lakhs for a period of 5 years and the product
life cycle is also 5 years. The company capitalized the cost and started amortising the asset at
Rs. 16 lakhs per year based on the economic benefits derived from the product manufactured
under the patent. After 2 years it was found that the product life cycle may continue for another
5 years from then (the patent is renewable and the company can get it renewed after 5 years).
The net cash flows from the product during these 5 years were expected to be Rs. 50 lakhs, Rs.
30 lakhs, Rs. 60 lakhs, Rs. 70 lakhs and Rs. 40 lakhs. Find out the amortization cost of the patent
for each of the years.
 AS 26.7

AS 26
SOLUTION
REFERENCE:
As per AS 26 - Intangible Assets, the depreciable amount of an intangible asset should be
allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable
presumption that the useful life of an intangible asset will not exceed ten years from the date
when the asset is available for use. Amortisation should commence when the asset is available
for use.
ANALYSIS:
The amortization method used should reflect the pattern in which economic benefits are
consumed by the enterprise. If pattern cannot be determined reliably, then straight-line method
should be used.
Company amortized Rs. 16,00,000 per annum for the first two years.
Amortization for the first two years (Rs. 16,00,000 X 2) = Rs. 32,00,000.
Remaining carrying cost after two years =Rs. 1,60,00,000 – Rs. 32,00,000
= Rs. 1,28,00,000
Since after two years it was found that the product life cycle may continue for another 5 years,
hence the remaining carrying cost Rs.128 lakhs will be amortized during next 5 years in the ratio
of net cash arising from the sale of the products of Fast Limited.
The amortization cost of the patents may be computed as follows:
Year Net cash flows (Rs.) Amortization Ratio Amortization Amount (Rs.)
I - 0.1 (160L/16L) 16,00,000 (Given)
II - 0.1 (160L/16L) 16,00,000 (Given)
III 50,00,000 0.2 (50L/250L) 25,60,000 (128L X 0.2)
IV 30,00,000 0.12 (30L/250L) 15,36,000 (128L X 0.12)
V 60,00,000 0.24 (60L/250L) 30,72,000 (128L X 0.24)
VI 70,00,000 0.28 (70L/250L) 35,84,000 (128L X 0.28)
VII 40,00,000 0.16 (40L/250L) 20,48,000 (128L X 0.16)
Total 250,00,000 160,00,000
 AS 26.8

6. QP JAN 21
AS 26

A Company acquired for its internal use a software on 01.03.2020 from U.K. for £ 1,50,000. The
exchange rate on the date was as ` 100 per £. The seller allowed trade discount @ 2.5%. The
other expenditures were:
(i) Import Duty 10%
(ii) Additional Import Duty 5%
(iii) Entry Tax 2% (Recoverable later from tax department).
(iv) Installation expenses ` 1,50,000.
(v) Professional fees for clearance from customs ` 50,000. Compute the cost of software to be
Capitalized as per relevant AS.

SOLUTION
Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software £ 1,50,000
Less: Trade discount @ 2.5% £ ( 3,750)
£1,46,250
Cost in ` (UK £1,46,250 x ` 100) 146,25,000

Add: Import duty on cost @ 10% (`) 14,62,500

160,87,500
Add: Additional import duty @ 5% (`) 8,04,375
168,91,875
Add: Installation expenses (`) 1,50,000

Add: Professional fee for clearance from customs (`) 50,000

Cost of the software to be capitalized (`) 170,91,875
Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as
part of the cost of the asset.
 AS 26.9

7. QP NOV 20

AS 26
M/s. Pasa Ltd. is developing a new production process. During the financial year ended 31st March,
2019, the total expenditure incurred on the process was ` 80 lakhs. The production process met
the criteria for recognition as an intangible asset on 1st November, 2018. Expenditure incurred till
this date was ` 42 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March, 2020 was `
90 lakhs. As on 31.03.2020, the recoverable amount of know how embodied in the process is
estimated to be ` 82 lakhs. This includes estimates of future cash outflows and inflows.
You are required to work out :
1. What is the expenditure to be charged to Profit and Loss Account for the year ended 31 st
March, 2019?
2. What is the carrying amount of the intangible asset as on 31st March, 2019?
3. What amount of expenditure to be charged to Profit and Loss Account for the year ended
31st March, 2020?
What is the carrying amount of the intangible asset as on 31st March, 2020?

SOLUTION
REFERENCE:
As per AS 26 “Intangible Assets”, The cost of an internally generated intangible asset is the
sum of expenditure incurred from the time when the intangible asset first meets the recognition
criteria. AS 26 prohibits reinstatement of expenditure recognised as an expense in previous
annual financial statements or interim financial reports.
Carrying amount is the amount at which an asset is recognised in the balance sheet, net of
any accumulated amortisation and accumulated impairment losses thereon.
ANALYSIS:
i. Expenditure to be charged to Profit and Loss account for the year ending 31.03.2019
` 42 lakhs is recognized as an expense because the recognition criteria were not met until 1st
November, 2018. This expenditure will not form part of the cost of the production process
recognized as an intangible asset in the balance sheet.
ii. Carrying value of intangible asset as on 31.03.2019
 AS 26.10

At the end of financial year, on 31st March 2019, the production process will be recognized (i.e.,
AS 26

carrying amount) as an intangible asset at a cost of ` 38 (80-42) lakhs (expenditure incurred

since the date the recognition criteria were met, i.e., from 1st November 2018)
iii. Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020
(` in lacs)
Carrying Amount as on 31.03.2019 38
Expenditure during 2019 – 2020 90
Book Value 128
Recoverable Amount (82)
Impairment loss to be charged to Profit and loss account 46
` 46 lakhs to be charged to Profit and loss account for the year ending 31.03.2020.
iv. Carrying value of intangible asset as on 31.03.2020
(` in lacs)
Book Value 128
Less: Impairment loss (46)
Carrying amount as on 31.03.2020 82

8. QP DEC 21
Surgical Ltd. is developing a new production process of surgical equipment. During the financial
year ended 31st March, 2020 the total expenditure incurred on the process was ` 67 lakhs. The
production process met the criteria for recognition as an intangible assets on 1st January, 2020.
Expenditure incurred till this date was ` 35 lakhs.
Further expenditure incurred on the process for the financial year ending 31 st march, 2021 was `
105 lakhs. As on 31st March,2021, the recoverable amount of technique embodied in the process is
estimated to be ` 89 lakhs. This includes estimates of future cash outflows and inflows.
Under the Provisions of AS 26, you are required to ascertain:
i. The expenditure to be charged to profit and Loss Account for the year ended 31st March,2020;
ii. Carrying amount of the intangible assets as on 31st March,2020;
iii. Expenditure to be charged to profit and Loss Account for the year ended 31 st March,2021;
iv. Carrying amount of the intangible assets as on 31st March,2021.
 AS 26.11

AS 26
SOLUTION
REFERENCE:
As per AS 26 “Intangible Assets”, The cost of an internally generated intangible asset is the
sum of expenditure incurred from the time when the intangible asset first meets the recognition
criteria. AS 26 prohibits reinstatement of expenditure recognised as an expense in previous
annual financial statements or interim financial reports.
Carrying amount is the amount at which an asset is recognised in the balance sheet, net of
any accumulated amortisation and accumulated impairment losses thereon.
ANALYSIS:
a) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020
35 lakhs is recognized as an expense because the recognition criteria were not met until
1stJanuary 2020. This expenditure will not form part of the cost of the production process
recognized as an intangible asset in the balance sheet.
b) Carrying value of intangible asset as on 31.03.2020
At the end of financial year, on 31st March 2020, the production process will be recognized (i.e.,
carrying amount) as an intangible asset at a cost of ` 32 (67-35) lacs (expenditure incurred
since the date the recognition criteria were met, i.e., from 1stJanuary 2020).
c) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2021

(` in lacs)
Carrying Amount as on 31.03.2020 32
Expenditure during 2020 – 2021 105
Book Value 137
Recoverable Amount (89)
Impairment loss 48
` 48 lakhs to be charged to Profit and loss account for the year ending 31.03.2021.
d) Carrying value of intangible asset as on 31.03.2021

(` in lacs)
Book Value 137
Less: Impairment loss (48)
Carrying amount as on 31.03.2021 89
 AS 26.12

9. RTP MAY 21
AS 26

Naresh Ltd. had the following transactions during the financial year 2019 -2020:
(i) Naresh Ltd. acquired running business of Sunil Ltd. for ` 10,80,000 on 15th May, 2019. The
fair value of Sunil Ltd.'s net assets was ` 5,16,000. Naresh Ltd. is of the view that due to
popularity of Sunil Ltd.’s product in the market, its goodwill exists.
(ii) Naresh Ltd. had taken a franchise on July 2019 to operate a restaurant from Sankalp Ltd.
for ` 1,80,000 and at an annual fee of 10% of net revenues (after deducting expenditure).
The franchise expires after 6 years. Net revenues were ` 60,000 during the financial year
2019-2020.
(iii) On 20th August, 2019, Naresh Ltd, incurred costs of ` 2,40,000 to register the patent for its
product. Naresh Ltd. expects the patent’s economic life to be 8 years.
Naresh Ltd. follows an accounting policy to amortize all intangibles on straight line basis over the
maximum period permitted by accounting standards taking a full year amortization in the year
of acquisition. Goodwill on acquisition of business to be amortized over 5 years (SLM) as per AS
14. Prepare a schedule showing the intangible assets section in Naresh Ltd. Balance Sheet at 31st
March, 2020.

SOLUTION
Naresh Ltd.
Balance Sheet (Extract relating to intangible asset) as on 31 st March 2020
Note No. `
Assets
(1) Non-current assets
Intangible assets 1 8,11,200
Notes to Accounts (Extract)
` `
1. Intangible assets
Goodwill (Refer to note 1) 4,51,200
Franchise (Refer to Note 2) 1,50,000
Patents (Refer to Note 3) 2,10,000 8,11,200
 AS 26.13

Working Notes:

AS 26
`
(1) Goodwill on acquisition of business
Cash paid for acquiring the business (purchase consideration) 10,80,000
Less: Fair value of net assets acquired (5,16,000)
Goodwill 5,64,000
Less: Amortisation as per AS 14 ie. over 5 years (as per SLM) (1,12,800)
Balance to be shown in the balance sheet 4,51,200
(2) Franchise 1,80,000
Less: Amortisation (over 6 years) (30,000)
Balance to be shown in the balance sheet 1,50,000
(3) Patent 2,40,000
Less: Amortisation (over 8 years as per SLM) (30,000)
Balance to be shown in the balance sheet 2,10,000

10. RTP NOV 21

A company is showing an intangible asset at ` 88 lakhs as on 01.04.2021. This asset was acquired
for ` 120 lakhs on 01.04.2017 and the same was available for use from that date. The company
has been following the policy of amortization of the intangible assets over a period of 15 years on
straight line basis. Comment on the accounting treatment of the above with reference to the
relevant Accounting Standard.

SOLUTION
REFERENCE: As per AS 26 - Intangible Assets, the depreciable amount of an intangible asset
should be allocated on a systematic basis over the best estimate of its useful life. There is a
rebuttable presumption that the useful life of an intangible asset will not exceed ten years from
the date when the asset is available for use. Amortisation should commence when the asset is
available for use.
ANALYSIS:
Company has been following the policy of amortization of the intangible asset over a period of 15
years on straight line basis. The period of 15 years is more than the maximum period of 10 years
specified as per AS 26. Accordingly, the company would be required to restate the carrying amount
 AS 26.14

of intangible asset as on 01.04.2021 at ` 72 lakhs i.e. ` 120 lakhs less ` 48 lakhs [(` 120 Lakhs /
AS 26

10 years) × 4 years = 48 Lakhs] .

The difference of ` 16 Lakhs (` 88 lakhs – ` 72 lakhs) will be required to be adjusted against
the opening balance of revenue reserve. The carrying amount of ` 72 lakhs will be required to be
amortized over remaining 6 years by amortizing ` 12 lakhs per year.
CONCLUSION:
The policy of amortization followed by company for intangible assets over a period of 15 years is
incorrect.
Journal Entry
Rs. Rs.
Revenue Reserve A/c Dr. 16,00,000
To Intangible Assets A/c 16,00,000
[Adjustment to reserves due to restatement of the carrying amount of
intangible asset]
AS 26.15

AS 26
 AS 26.1
AS 26
AS 26 – INTANGIBLE ASSETS
SECTION B (EXAM ORIENTED)
PAGE DATE
No. QUESTION R1 R2 R3 REMARK
NO.
1 ICAI ILLUSTRATION NO 1
2 ICAI ILLUSTRATION NO 2
3 ICAI ILLUSTRATION NO 3
4 QP NOV 19
5 QP NOV 20
RTP May 18, IPCC RTP
6 May 18 / RTP nov 19, P Q
5
RTP Nov 18 Q19, IPCC RTP
7
Nov 18 20a
8 MTP 2 (Q No 1 C)
9 RTP MAY 20
10 RTP NOV 20
RTP May 2019, IPCC RTP
11
May 2019
12 IPCC RTP Nov 2014
IPCC RTP May 2015, IPCC
13
RTP Nov 2017
14 IPCC RTP Nov 2015
15 IPCC RTP May 2016
16 IPCC RTP May 2017
MTP Oct 21 Series 1 / P Q
17
18
18 RTP May 2022
19 RTP May 2022
20 MTP Mar 22 Test Series 1
MTP April 2022 Series 2,
21
QP Nov 18(Group 2 OLD]
22 RTP Nov 22
23 MTP SEP 22 (Series 1)
24 MTP OCT 22 (Series 2)
 AS 26.2

1. ICAI ILLUSTRATION NO 1

AS 26
ABC Ltd. developed know-how by incurring expenditure of ` 20 lakhs, The know-how was used by
the company from 1.4.20X1. The useful life of the asset is 10 years from the year of
commencement of its use. The company has not amortised the asset till 31.3.20X8. Pass Journal
entry to give effect to the value of know-how as per Accounting Standard-26 for the year ended
31.3.20X8.

SOLUTION
REFERENCE:
As per AS 26 - Intangible Assets, the depreciable amount of an intangible asset should be
allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable
presumption that the useful life of an intangible asset will not exceed ten years from the date
when the asset is available for use. Amortisation should commence when the asset is available
for use.
ANALYSIS:
Journal Entry
Rs. Rs.
Profit and Loss A/c (Prior period item) Dr. 12,00,000
Amortization A/c Dr. 2,00,000
To Know-how A/c 14,00,000
[Being depreciation of 7 years (out of which depreciation of 6 years charged
as prior period item)]

2. ICAI ILLUSTRATION NO 2
The company had spent ` 45 lakhs for publicity and research expenses on one of its new consumer
Product, which was marketed in the accounting year 20X1-20X2, but proved to be a failure. State,
how you will deal with the following matters in the accounts of U Ltd. for the year ended 31st March,
20X2.
 AS 26.3
AS 26

SOLUTION
FACTS:
The company had spent ` 45 lakhs for publicity and research expenses and proved to be a
failure.
REFERENCE:
According to AS 26 Intangible Assets, Expenditure on an intangible item should be recognised
as an expense when it is incurred unless it forms part of the cost of an intangible asset. Further
AS 26 mentions that expenditure on Publicity and Research activities should be recognised as
an expense when incurred.
ANALYSIS:
In the given case, the company spent ` 45 lakhs for publicity and research of a new product
which was marketed but proved to be a failure. It is clear that in future there will be no related
further revenue/benefit because of the failure of the product.
CONCLUSION:
The company should charge the total amount of ` 45 lakhs as an expense in the profit and
loss account.

3. ICAI ILLUSTRATION NO 3
A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crores had
taken up the marketing of a new product. It was estimated that the company would have a
turnover of Rs. 25 crores from the new product. The company had debited to its Profit and Loss
account the total expenditure of Rs. 2 crore incurred on extensive special initial advertisement
campaign for the new product. Is the procedure adopted by the company correct?
 AS 26.4

SOLUTION

AS 26
FACTS:
Company has incurred expenditure of Rs. 2 crore and had debited it to Profit and Loss Account.
REFERENCE:
According to AS 26 Intangible Assets, Expenditure on an intangible item should be recognised
as an expense when it is incurred unless it forms part of the cost of an intangible asset. Further
AS 26 mentions that expenditure on advertising and promotional activities should be recognised
as an expense when incurred.
ANALYSIS:
In the given case, advertisement expenditure of Rs. 2 crores had been taken up for the
marketing of a new product which may provide future economic benefits to an enterprise by
having a turnover of Rs. 25 crores. Here, no intangible asset or other asset is acquired or created
that can be recognised.
CONCLUSION:
The accounting treatment by the company of debiting the entire advertising expenditure of Rs.
2 crores to the Profit and Loss account of the year is correct.

4. QP NOV 19
As per provisions of AS-26, how would you deal to the following situations:
(1) ` 23,00,000 paid by a manufacturing company to the legal advisor for defending the patent
of a product is treated as a capital expenditure.
(2) During the year 2018-19, a company spent ` 7,00,000 for publicity and research expenses on
one of its new consumer product which was marketed in the same accounting year but proved to
be a failure.
(3) A company spent ` 25,00,000 in the past three years to develop a product, these expenses
were charged to profit and loss account since they did not meet AS-26 criteria for capitalization.
In the current year approval of the concerned authority has been received. The company wishes
to capitalize ` 25,00,000 by disclosing it as a prior period item.
(4) A company with a turnover of ` 200 crores and an annual advertising budget of ` 50,00,000
had taken up for the marketing of a new product by a company. It was estimated that the
company would have a turnover of ` 20 crore from the new product.
The company had debited to its Profit & Loss Account the total expenditure of ` 50,00,000 incurred
on extensive special initial advertisement campaign for the new product.
 AS 26.5
AS 26

SOLUTION
REFERENCE:
As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after its purchase
or its completion should be recognized as an expense when it is incurred unless
(a) it is probable that the expenditure will enable the asset to generate future economic benefits
in excess of its originally assessed standard of performance; and
(b) expenditure can be measured and attributed to the asset reliably. If these conditions are met,
the subsequent expenditure should be added to the cost of the intangible asset.
ANALYSIS:
(i) In the given case, the legal expenses to defend the patent of a product amounting ` 23,00,000
should not be capitalized and be charged to Profit and Loss Statement.
(ii) The company is required to expense the entire amount of ` 7,00,000 in the Profit and Loss
account for the year ended 31st March, 2019 because no benefit will arise in the future.
(iii) As per AS 26, expenditure on an intangible item that was initially recognized as an expense
by a reporting enterprise in previous annual financial statements should not be recognized as part
of the cost of an intangible asset at a later date. Thus the company cannot capitalize the amount
of ` 25,00,000 and it should be recognized as expense
(iv) Expenditure of ` 50,00,000 on advertising and promotional activities should always be
charged to Profit and Loss Statement. Hence, the company has done the correct treatment by
debiting the sum of 50 lakhs to Profit and Loss Account.

5. QP NOV 20
Swift Limited acquired patent rights to manufacture Solar Roof Top Panels at a cost of ` 600 lacs.
The product life cycle has been estimated to be 5 years and the amortization was decided in the
ratio of future cash flows which are estimated as under:
Year 1 2 3 4 5
Cash Flows (` in lacs) 300 300 300 150 150
After 3rd year, it was estimated that the patents would have an estimated balance future life of
3 years and Swift Ltd. expected the estimated cash flow after 5th year to be ` 75 Lacs. Determine
the amortization cost of the patent for each of the above years as per Accounting Standard 26.
 AS 26.6

AS 26
SOLUTION:
REFERENCE:
As per AS 26 - Intangible Assets, the amortization method used should reflect the pattern in
which economic benefits are consumed by the enterprise. If pattern cannot be determined
reliably, then straight-line method should be used.
ANALYSIS:
In the first three years, the patent cost will be amortized in the ratio of estimated future cash
flows i.e. (300: 300: 300: 150: 150).
The unamortized amount of the patent after third year will be ` 150 lakh (600-450) which will
be amortized in the ratio of revised estimated future e cash flows (150:150:75) in the fourth, fifth
and sixth year.
Amortization of cost of patent as per AS 26
Year Estimated future cash flow (` Amortization Ratio Amortized Amount
in lakhs) (` in lakhs)
1 300 0.25 (300/1200) 150 (600 X 0.25)
2 300 0.25 (300/1200) 150 (600 X 0.25)
3 300 0.25 (300/1200) 150 (600 X 0.25)
4 150 0.40 (150/375) 60 (0.40 X 150)
5 150 0.40 (150/375) 60 (0.40 X 150)
6 75 0.20 (75/375) 30 (0.20 X 150)
600

6. (RTP May 2018, IPCC RTP May 2018) / rtp nov 19, Practical Question 5
K Ltd. launched a project for producing product X in October, 2016. The Company incurred Rs. 40
lakhs towards Research and Development expenses upto 31st March, 2017. Due to prevailing market
conditions, the Management came to conclusion that the product cannot be manufactured and
sold in the market for the next 10 years. The Management hence wants to defer the expenditure
write off to future years.
You are required to advise the Company as per the applicable Accounting Standard.
 AS 26.7
AS 26

SOLUTION
FACTS:
K Ltd. had incurred ` 40 lakhs for research and management came to conclusion that the
product cannot be manufactured and sold in the market for the next 10 years. The Management
wants to defer the expenditure write off to future years.
REFERENCE:
According to AS 26 Intangible Assets, No intangible asset arising from research or from the
research phase of an internal project should be recognised. Expenditure on research or on the
research phase of an internal project should be recognised as an expense when it is incurred.
ANALYSIS:
In the given case, K Ltd. spent ` 40 lakhs for research of a new product. It is clear that the
product cannot be manufactured and sold in the market for the next 10 years. The expenses
amounting Rs.40 lakhs incurred on the research has to be written off in the current year ending
31st March, 2017.
CONCLUSION:
The contention of the management to defer the expenditure write off to future years is
incorrect.

7. RTP Nov 2018 Q19, IPCC RTP Nov 2018 20a

Desire Ltd. acquired a patent at a cost of Rs. 1,00,00,000 for a period of 5 years and the product
life-cycle is also 5 years. The company capitalized the cost and started amortizing the asset
on SLM. After two years it was found that the product life-cycle may continue for another 5
years from then. The net cash flows from the product during these 5 years were expected to be
Rs. 45,00,000, Rs. 42,00,000, Rs. 40,00,000, Rs. 38,00,000 and Rs. 35,00,000. Patent is renewable
and company changed amortization method from 3rd year (i.e., from SLM to ratio of expected
new cash flows).
You are required to compute the amortization cost of the patent for each of the years (1st year
to 7th year).
 AS 26.8

AS 26
SOLUTION
REFERENCE:
As per AS 26 - Intangible Assets, the amortization method used should reflect the pattern in
which economic benefits are consumed by the enterprise. If pattern cannot be determined
reliably, then straight-line method should be used.
ANALYSIS:
The depreciable amount of an intangible asset should be allocated on a systematic basis over the
best estimate of its useful life. There is a rebuttable presumption that the useful life of an
intangible asset will not exceed ten years from the date when the asset is available for use.
Amortisation should commence when the asset is available for use.
Desire ltd. Amortised Rs. 20,00,000 per annum for the first two years i.e., Rs. 40,00,000. The
remaining carrying cost can be amortized cost can be amortized during next 5 years on the basis
of net cash flows arising from the sale of the product. The amortisation may be found as follows.
Year Net cash flows Rs. Amortization Ratio Amortization Amount Rs.
I - 0.200 20,00,000 (100L / 5yrs)
II - 0.200 20,00,000 (100L / 5yrs)
III 45,00,000 0.225 (45L/200L) 13,50,000 (0.225 X 60L)
IV 42,00,000 0.21 (42L/200L) 12,60,000 (0.21 X 60L)
V 40,00,000 0.20 (40L/200L) 12,00,000 (0.20 X 60L)
VI 38,00,000 0.19 (38L/200L) 11,40,000 (0.19 X 60L)
VII 35,00,000 0.175 (35L/200L) 10,50,000 (0.175 X 60L)
Total 2,00,00,000 1,00,00,000

It may be seen from above that from third year onwards, the balance of carrying amount i.e., Rs.
60,00,000 has been amortized in the ratio of net cash flows arising from the product of Desire Ltd.

8. Mock Test Paper 2 (Q No 1 C)

A Ltd. has got the license to manufacture particular medicines for 10 years at a license fee of
Rs. 200 lakhs. Given below is the pattern of expected production and expected operating cash
inflow:
 AS 26.9
AS 26
Year Production in bottles (in lakhs) Net operating cash flow (Rs. in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
8 800 3,200
9 800 3,200
10 800 3,200

Net operating cash flow has increased for third year because of better inventory management
and handling method.
You are required to determine the amortization method in line with AS 26.

SOLUTION
REFERENCE:
As per AS 26 - Intangible Assets, the amortization method used should reflect the pattern in
which economic benefits are consumed by the enterprise. If pattern cannot be determined
reliably, then straight-line method should be used.
ANALYSIS:
In the instant case, the pattern of economic benefit in the form of net operating cash flow vis -
à-vis production is determined reliably. A Ltd. should amortize the license fee of Rs. 200 lakhs as
under:
Year Net operating Cash in flow (Rs.) Amortize amount (Rs. in lakhs)
1 900 6 (200 x 900/27,400)
2 1,800 12 (200 x 1,800/27,400)
3 2,300 16 (200 x 2,300/27,400)
4 3,200 24 (200 x 3,200/27,400)
 AS 26.10

5 3,200 24 (200 x 3,200/27,400)

AS 26
6 3,200 24 (200 x 3,200/27,400)
7 3,200 24 (200 x 3,200/27,400)
8 3,200 24 (200 x 3,200/27,400)
9 3,200 24 (200 x 3,200/27,400)
10 3,200 22 (Bal. figure)
27,400 200

9. RTP MAY 20
A company acquired patent right for ` 1200 lakhs. The product life cycle has been estimated to
be 5 years and the amortization was decided in the ratio of estimated future cash flows which
are as under:
Year 1 2 3 4 5
Estimated future cash flows (` in lakhs) 600 600 600 300 300

After 3rd year, it was ascertained that the patent would have an estimated balance future life
of 3 years and the estimated cash flow after 5th year is expected to be ` 150 lakhs. You are
required to determine the amortization pattern under Accounting Standard 26.

SOLUTION
REFERENCE:
As per AS 26 - Intangible Assets, the amortization method used should reflect the pattern in
which economic benefits are consumed by the enterprise. If pattern cannot be determined
reliably, then straight-line method should be used.
ANALYSIS:
In the first three years, the patent cost will be amortized in the ratio of estimated future cash
flows i.e. (600: 600: 600: 300: 300).
The unamortized amount of the patent after third year will be ` 300 lakh (1,200-900) which will
be amortized in the ratio of revised estimated future e cash flows (300:300:150) in the fourth,
fifth and sixth year.
 AS 26.11
AS 26
Amortization of cost of patent as per AS 26
Year Estimated future cash flow Amortization Ratio Amortized Amount
(` in lakhs) (` in lakhs)
1 600 0.25 (600/2400) 300 (1200 X 0.25)
2 600 0.25 (600/2400) 300 (1200 X 0.25)
3 600 0.25 (600/2400) 300 (1200 X 0.25)
4 300 0.40 (300/750) 120 (0.40 X 300)
5 300 0.40 (300/750) 120 (0.40 X 300)
6 150 0.20 (150/750) 60 (0.20 X 300)
1,200

10. RTP NOV 20

X Ltd. carried on business of manufacturing of Bakery products. The company has two
trademarks "Sun" and "Surya''. One month before, the company comes to know through one of
the marketing managers that both trademarks have allegedly been infringed by other
competitors engaged in the same field. After investigation, legal department of the company
informed that it had weak case on trademark “Sun” and strong case in regard to trademark
“Surya”'. X Ltd. incurred additional legal fees to stop infringement on both trademarks. Both
trademarks have a remaining legal life of 10 years. How should X Ltd. account for these legal
costs incurred relating to the two trademarks?

SOLUTION
FACTS:
X Ltd. 2 trademarks and they have been infringed. X Ltd. has incurred additional legal fees to
stop infringement on both trademarks.
REFERENCE:
As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after its purchase
or its completion should be recognized as an expense when it is incurred unless
(a) it is probable that the expenditure will enable the asset to generate future economic benefits
in excess of its originally assessed standard of performance; and
 AS 26.12

(b) expenditure can be measured and attributed to the asset reliably. If these conditions are met,

AS 26
the subsequent expenditure should be added to the cost of the intangible asset.
ANALYSIS:
The legal costs incurred for both the trademarks do not enable them to generate future economic
benefits in excess of its originally assessed standard of performance. They only ensure to maintain
them if the case is decided in favour of the company.
CONCLUSION:
Legal costs incurred for both trademarks must be recognized as an expense.

11. RTP May 2019, IPCC RTP May 2019

A Company with a turnover of ` 375 crores and an annual advertising budget of ` 3 crores had
taken up the marketing of a new product. It was estimated that the company would have a
turnover of ` 37.5 crores from the new product. The company had debited to its Profit and Loss
account the total expenditure of ` 3 crores incurred on extensive special initial advertisement
campaign for the new product. Is the procedure adopted by the company correct?

SOLUTION
REFERENCE:
According to AS 26 Intangible Assets, Expenditure on an intangible item should be recognised
as an expense when it is incurred unless it forms part of the cost of an intangible asset. Further
AS 26 mentions that expenditure on advertising and promotional activities should be recognised
as an expense when incurred.
ANALYSIS:
In the given case, advertisement expenditure of ` 3 crores had been taken up for the marketing
of a new product which may provide future economic benefits to an enterprise by having a
turnover of `37.5 crores. Here, no intangible asset or another asset is acquired or created that
can be recognized.
CONCLUSION:
The accounting treatment by the company of debiting the entire advertising expenditure of `3
crores to the Profit and Loss account of the year is correct.
 AS 26.13
AS 26
12. IPCC RTP Nov 2014
A company with a turnover of ` 500 crores and an annual advertising budget of ` 4 crores had
taken up the marketing of a new product. It was estimated that the company would have a
turnover of ` 50 crores from the new product. The company had debited to its Profit and Loss
account the total expenditure of ` 4 crore incurred on extensive special initial advertisement
campaign for the new product. Is the procedure adopted by the company correct?

SOLUTION
FACTS:
Company had an annual advertising budget of ` 4 crores and had debited it to Profit and Loss
Account as expenditure.
REFERENCE:
According to AS 26 Intangible Assets, Expenditure on an intangible item should be recognised
as an expense when it is incurred unless it forms part of the cost of an intangible asset. Further
AS 26 mentions that expenditure on advertising and promotional activities should be recognised
as an expense when incurred.
ANALYSIS:
In the given case, advertisement expenditure of ` 4 crores had been taken up for the marketing of
a new product which may provide future economic benefits to an enterprise by having a turnover
of ` 50 crores. Here, no intangible asset or other asset is acquired or created that can be recognised.
CONCLUSION:
The accounting treatment by the company of debiting the entire advertising expenditure of ` 4
crores to the Profit and Loss account of the year is correct.

13. IPCC RTP May 2015, IPCC RTP Nov 2017

During 2014-15, an enterprise incurred costs to develop and produce a routine, low risk
computer software product, as follows:
 AS 26.14

AS 26
Amount (`)
Completion of detailed programme and design 25,000
Coding and Testing 20,000
Other coding costs 42,000
Testing costs 12,000
Product masters for training materials 13,000
Packing the product (1,000 units) 11,000

What amount should be capitalized as software costs in the books of the company, on Balance
Sheet date?

SOLUTION
REFERENCE:
As per AS 26 “Intangible Assets” costs incurred in creating a computer software product should
be charged to research and development expense when incurred until technological
feasibility/asset recognition criteria has been established for the product. Technological
feasibility/asset recognition criteria have been established upon completion of detailed program
design or working model.
ANALYSIS:
Particulars `
Completion of detailed program and design 25,000
Coding and Testing 20,000
Cost to be recognized as expense to establish technological feasibility/asset recognition 45,000
criteria
Other coding costs 42,000
Testing costs 12,000
Product masters for training materials 13,000
Cost incurred from the point of technological feasibility/asset recognition criteria 67,000
until the time when products costs are incurred are capitalized as software cost
Packing the products (1,000 units) 11,000
It should be recognized as expenses and charged to P & L A/c
 AS 26.15
AS 26
14. IPCC RTP Nov 2015
AB Ltd. launched a project for producing product X in October, 2013. The Company incurred
` 20 lakhs towards Research and Development expenses upto 31 st March, 2015. Due to
prevailing market conditions, the Management came to conclusion that the product cannot
be manufactured and sold in the market for the next 10 years. The Management hence
wants to defer the expenditure write off to future years. Advise the Company as per the
applicable Accounting Standard.

SOLUTION
FACTS:
AB Ltd. had incurred ` 20 lakhs for research and management came to conclusion that the
product cannot be manufactured and sold in the market for the next 10 years. The Management
wants to defer the expenditure write off to future years.
REFERENCE:
According to AS 26 Intangible Assets, No intangible asset arising from research or from the
research phase of an internal project should be recognised. Expenditure on research or on the
research phase of an internal project should be recognised as an expense when it is incurred.
ANALYSIS:
In the given case, the company spent ` 20 lakhs for research of a new product. It is clear that
the product cannot be manufactured and sold in the market for the next 10 years. The expenses
amounting Rs.20 lakhs incurred on the research has to be written off in the current year ending
31st March, 2015.
CONCLUSION:
The contention of the management to defer the expenditure write off to future years is
incorrect.

15. IPCC RTP May 2016

On 31-03-2015, the Balance Sheet of Alpha Ltd. shows an item of Intangible assets at ` 30 Lakhs.
The asset was acquired on 1-4-2010 for ` 80 lakhs and was available for use on that date. The
company has been following a policy of amortizing intangible assets over a period of 8 years on
 AS 26.16

straight line basis. How you will deal in the books of accounts if the company determines by

AS 26
applying the best estimate of its useful life on 1-4-2015, and the amortization period to be 10
years, being the best estimate of its useful life from the date, it was available for use.

SOLUTION
REFERENCE:
As per AS 26 Intangible Assets, the depreciable amount of an intangible asset should be allocated
on a systematic basis over its useful life. There is a rebuttable presumption that the useful life of
an intangible asset will not exceed 10 years from the date it is available for use. The amortization
should commence when the asset is available for use. If there has been a significant change in
the expected pattern of economic benefits from the asset, the amortisation method should be
changed to reflect the changed pattern.
ANALYSIS:
The company has been following a policy of amortization over a period of 8 years. As on 01-4-
2015, 5 years have passed and the carrying amount stands at ` 30 lakhs. If the same treatment
were to be continued, this would have been amortized over the next 3 years. But the revised
estimate of remaining useful life would extend the period by another 5 years to amortize the
carrying amount, the Company would be advised to amortise the carrying value over the next 5
years.
CONCLUSION:
After revision in estimated useful life, the amount of ` 30 lacs would be amortised over next 5
years.

16. IPCC RTP May 2017

A Pharma Company spent `33 lakhs during the accounting year ended 31st March, 2016 on a
research project to develop a drug to treat “AIDS”. Experts are of the view that it may take four
years to establish whether the drug will be effective or not and even if found effective it may
take two to three more years to produce the medicine, which can be marketed. The company
wants to treat the expenditure as deferred revenue expenditure. Comment.
 AS 26.17
AS 26

SOLUTION
FACTS:
Pharma Company had incurred ` 33 lakhs for research and are of the view that it may take
four years to establish whether the drug will be effective or not. The Management wants to treat
the expenditure as deferred revenue expenditure.
REFERENCE:
According to AS 26 Intangible Assets, No intangible asset arising from research or from the
research phase of an internal project should be recognised. Expenditure on research or on the
research phase of an internal project should be recognised as an expense when it is incurred.
ANALYSIS:
As per the reference above, the company cannot treat the expenditure as deferred revenue
expenditure. The entire amount of `33 lakhs spent on research project should be charged as an
expense in the year ended 31st March, 2016.
CONCLUSION:
The contention of the management to treat the expenditure as deferred revenue expenditure is
incorrect.

17. Mock test Oct 21 Series 1 / icai PRACTICAL QUESTION 18

During 20X1-X2, an enterprise incurred costs to develop and produce a routine low risk computer
software product, as follows:
Particular `
Completion of detailed program and design (Phase 1) 50,000
Coding and Testing (Phase 2) 40,000
Other coding costs (Phase 3 & 4) 63,000
Testing costs (Phase 3 & 4) 18,000
Product masters for training materials (Phase 5) 19,500
Packing the products (1,500 units) (Phase 6) 16,500
 AS 26.18

After completion of phase 2, it was established that the product is technically feasible for the

AS 26
market. You are required to state how the above cost to be recognized in the books of accounts
as per AS 26.

SOLUTION
REFERENCE:
As per AS 26 “Intangible Assets” costs incurred in creating a computer software product should
be charged to research and development expense when incurred until technological
feasibility/asset recognition criteria has been established for the product. Technological
feasibility/asset recognition criteria have been established upon completion of detailed program
design or working model.
ANALYSIS:
Particular `
Completion of detailed program and design (Phase 1) 50,000
Coding and Testing (Phase 2) 40,000
Cost to be recognized as expense to establish technological feasibility/asset 90,000
recognition criteria
Other coding costs (Phase 3 & 4) 63,000
Testing costs (Phase 3 & 4) 18,000
Product masters for training materials (Phase 5) 19,500
Cost incurred from the point of technological feasibility/asset recognition 1,00,500
criteria until the time when products costs are incurred are capitalized as
software cost
Packing the products (1,500 units) (Phase 6) – 16,500
It should be recognized as expenses and charged to P & L A/c
 AS 26.19
AS 26
18. RTP May 2022
PQR Ltd. has acquired a Brand from another company for ` 100 lakhs. PQR Ltd. contends that
since the said brand is a very popular and famous brand, no amortization needs to be provided.
Comment on this in line with the Accounting Standards.

SOLUTION
REFERENCE:
AS 26 - Intangible Assets provides that an intangible asset should be measured initially at cost.
After initial recognition, an intangible asset should be carried at cost less any accumulated
amortization and any accumulated impairment losses. The amount of an intangible asset should
be allocated on a systematic basis over the best estimate of its useful life for computing
amortization. There is a rebuttable presumption that the useful life of an intangible asset will not
exceed 10 years from the date when the asset is available for use.
ANALYSIS:
There is no persuasive evidence that the useful life of the intangible asset will exceed 10 years.
Hence, PQR Ltd. should amortise Brand cost over it’s Useful life.
CONCLUSION:
The contention of PQR Ltd. that no amortization needs to be provided is not correct.

19. RTP May 2022

X Ltd. is engaged in the business of newspaper and radio broadcasting. It operates through
different brand names. During the year ended 31st March, 2021, it incurred substantial amount
on business communication and branding expenses by participation in various corporate social
responsibility initiatives. The company expects to benefit by this expenditure by attracting new
customers over a period of time and accordingly it has capitalized the same under brand
development expenses and intends to amortize the same over the period in which it expects the
benefits to flow. As the accountant of the company do you concur with these views? You are
required to explain in line with provisions of Accounting Standards
 AS 26.
20

AS 26
SOLUTION
FACTS:
X Ltd. has incurred expense on business communication and branding. It wants to amortize the
entire expenditure over the period in which it expects the benefits to flow.
REFERENCE:
As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after its purchase
or its completion should be recognized as an expense when it is incurred unless
(a) it is probable that the expenditure will enable the asset to generate future economic benefits
in excess of its originally assessed standard of performance; and
(b) expenditure can be measured and attributed to the asset reliably. If these conditions are met,
the subsequent expenditure should be added to the cost of the intangible asset.
ANALYSIS:
In the given case, no intangible assets or other asset is acquired or created that can be recognized.
X Ltd. should debit the cost to the profit and loss statement during the year ended 31st March,
2021.
CONCLUSION:
The accounting treatment given by X Ltd. is not correct.

20.MTP March 2022 Test Series 1

Sudesh Ltd. acquired a patent at a cost of ` 2,40,00,000 for a period of 5 years and the product
life-cycle was also 5 years. The company capitalized the cost and started amortizing the asset
at 48,00,000 per annum. After two years it was found that the product life-cycle may continue
for another 5 years from then. The net cash flows from the product during these 5 years were
expected to be ` 36,00,000, ` 46,00,000, ` 44,00,000, ` 40,00,000 and ` 34,00,000. Find out the
amortization cost of the patent for each of the years if the patent was renewable and Sudesh
Ltd. got it renewed after expiry of five years.
 AS 26.21
AS 26

SOLUTION
REFERENCE:
As per AS 26 - Intangible Assets, the amortization method used should reflect the pattern in
which economic benefits are consumed by the enterprise. If pattern cannot be determined
reliably, then straight-line method should be used.
ANALYSIS:
The entity amortised ` 48,00,000 per annum for the first two years i.e. ` 96,00,000. The remaining
carrying cost can be amortized during next 5 years on the basis of net cash flows arising from the
sale of the product. The amortisation may be found as follows:
Year Net cash flows (`) Amortization Ratio Amortization Amount (`)
I - 0.20 (48L/240L) 48,00,000 (Given)
II - 0.20 (48L/240L) 48,00,000 (Given)
III 36,00,000 0.180 (36L/200L) 25,92,000 (144L X 0.180)
IV 46,00,000 0.230 (46L/200L) 33,12,000 (144L X 0.230)
V 44,00,000 0.220 (44L/200L) 31,68,000 (144L X 0.220)
VI 40,00,000 0.200 (40L/200L) 28,80,000 (144L X 0.200)
VII 34,00,000 0.170 (34L/200L) 24,48,000 (144L X 0.170)
Total 2,00,00,000 2,40,00,000
It may be seen from above that from third year onwards, the balance of carrying amount `
1,44,00,000 has been amortized in the ratio of net cash flows arising from the product.

21. MTP April 2022 Series 2, QP Nov 18(Group 2 OLD]

PIL Ltd. is showing an intangible asset at ` 72 lakhs as on 31-3-2022. This asset was acquired
for ` 120 lakhs as on 01-04-2016 and the same was used from that date. The company has been
following the policy of amortization of the intangible assets over a period of 15 years, on straight
line basis.
You are required to comment on the accounting treatment of asset with reference to AS 26
“Intangible Assets” and also give the necessary rectification journal entry in the books.
 AS 26.
22

AS 26
SOLUTION
FACTS:
The Company has been following the policy of amortization of the intangible asset over a period
of 15 years on straight line basis.
REFERENCE:
As per AS 26 - Intangible Assets, the depreciable amount of an intangible asset should be
allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable
presumption that the useful life of an intangible asset will not exceed ten years from the date
when the asset is available for use. Amortisation should commence when the asset is available
for use.
ANALYSIS:
The period of 15 years is more than the maximum period of 10 years specified as per AS 26. The
company would be required to restate the carrying amount of intangible asset as on 31.3.2022 at
` 48 lakhs i.e., ` 120 lakhs less ` 72 lakhs (` 120 Lakhs / 10 years x 6 years = 72 Lakhs). The
difference of ` 24 Lakhs (` 72 lakhs – ` 48 lakhs) will be adjusted against the opening balance
of revenue reserve. The carrying amount of ` 48 lakhs will be amortized over remaining 4 years
by amortizing ` 12 lakhs per year.
The necessary journal entry (for rectification) will be
Particulars Amount Amount
Revenue Reserves Dr. ` 24 Lakhs
To Intangible Assets ` 24 Lakhs
(Adjustment to reserves due to restatement of the carrying
amount of intangible asset)

22. RTP Nov 22

K Ltd. launched a project for producing product X in October, 2021. The Company incurred ` 40
lakhs towards Research and Development expenses upto 31st March, 2022. Due to prevailing
market conditions, the Management came to conclusion that the product cannot be manufactured
and sold in the market for the next 10 years. The Management hence wants to defer the
expenditure write off to future years.
Advise the Company as per the applicable Accounting Standard.
 AS 26.23
AS 26

SOLUTION
FACTS:
K Ltd. had incurred ` 40 lakhs for research and development came to conclusion that the
product cannot be manufactured and sold in the market for the next 10 years. The Management
wants to defer the expenditure write off to future years.
REFERENCE:
According to AS 26 Intangible Assets, No intangible asset arising from research or from the
research phase of an internal project should be recognised. Expenditure on research or on the
research phase of an internal project should be recognised as an expense when it is incurred.
ANALYSIS:
In the given case, the company spent ` 40 lakhs for research of a new product. It is clear that
the product cannot be manufactured and sold in the market for the next 10 years. The expenses
amounting Rs. 40 lakhs incurred on the research has to be written off in the current year ending
31st March, 2022.
CONCLUSION:
The contention of the management to defer the expenditure write off to future years is
incorrect.

23. MTP SEP 22 (Series 1)

Honey Ltd. is in the process of developing a new production method. During the financial year
ended 31st March, 2021, total expenditure incurred on development of this production method was
` 98,00,000. On 1st Jan, 2021, the production method met the criteria as an intangible asset and
expenditure incurred till this date was ` 68,00,000. Further expenditure incurred on the new method
was ` 72,00,000 for the year ended 31st March, 2022 and recoverable amount of the know how
embodied in the new method for this financial year is ` 52,00,000.
You are required to calculate:
1. The carrying amount of the Intangible asset on 31st March, 2021.
2. The expenditure to be shown in Statement of Profit and Loss for the year ended 31st March,
2022.
3. The carrying amount of the Intangible asset on 31st March, 2022.
 AS 26.
24

AS 26
SOLUTION
REFERENCE:
As per AS 26 “Intangible Assets”, The cost of an internally generated intangible asset is the
sum of expenditure incurred from the time when the intangible asset first meets the recognition
criteria. AS 26 prohibits reinstatement of expenditure recognised as an expense in previous
annual financial statements or interim financial reports.
Carrying amount is the amount at which an asset is recognised in the balance sheet, net of
any accumulated amortisation and accumulated impairment losses thereon.
ANALYSIS:
(i) Carrying value of intangible asset as on 31.03.2021
At the end of financial year, on 31st March 2021, the production process will be recognized (i.e.,
carrying amount) as an intangible asset at a cost of ` 30 (98-68) lacs (expenditure incurred
since the date the recognition criteria were met, i.e., from 1st January, 2021).
(ii) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2022
(` in lacs)
Carrying Amount as on 31.03.2021 30
Expenditure during 2021–2022 72
Book Value 102
Recoverable Amount (52)
Impairment loss 50

50 lakhs to be charged to Profit and loss account for the year ending 31.03.2022.
(iii) Carrying value of intangible asset as on 31.03.2022
(` in lacs)
Book Value 102
Less: Impairment loss (50)
Carrying amount as on 31.03.2022 52
 AS 26.25
AS 26
24. MTP OCT 22 (Series 2)
Surya Ltd. had the following transactions during the year ended 31 st March, 2021.
(i) It acquired the business of Gomati Limited on a going concern basis for ` 25,00,000 on 1st
June,2020. The fair value of the Net Assets of Gomati Limited was ` 18,75,000. Surya Ltd. believes
that due to popularity of the products of Gomati Limited in the market, its goodwill exists.
(ii) On 20th August, 2020, Surya Ltd. incurred cost of ` 6,00,000 to register the patent for its
product. Surya Ltd. expects the Patent’s economic life to be 8 years.
(iii) On 1st October, 2020, Surya Ltd. has taken a franchise to operate an ice cream parlour from
Volga Ltd. for ` 4,50,000 and at an Annual Fee of 10 % of Net Revenues (after deducting
expenditure). The franchise expires after six years. Net Revenue for the year ended 31st March,
2021 amounted to ` 1,50,000.
Surya Ltd. follows an accounting policy to amortize all Intangibles on Straight Line basis (SLM)
over the maximum period permitted by the Accounting Standards taking a full year amortization
in the year of acquisition. Goodwill on acquisition of business is to be amortized over 5 years (SLM).
Prepare an extract showing the Intangible Assets section in the Balance Sheet of Surya Ltd. as at
31st March, 2021.

SOLUTION
Surya Ltd.
Balance Sheet (Extract relating to intangible asset) as on 31 st March 2021
Note No. `
Assets
(1) Non-current assets
Intangible assets 1 14,00,000
Notes to Accounts (Extract)
` `
1. Intangible assets
Goodwill (Refer to note 1) 5,00,000
 AS 26.
26

Patents (Refer to Note 2) 5,25,000

AS 26
Franchise (Refer to Note 3) 3,75,000 14,00,000
Working Notes:
`
(1) Goodwill on acquisition of business
Cash paid for acquiring the business (purchase consideration) 25,00,000
Less: Fair value of net assets acquired (18,75,000)
Goodwill 6,25,000
Less: Amortization. over 5 years (as per SLM) (1,25,000)
Balance to be shown in the balance sheet 5,00,000
(2) Patent 6,00,000
Less: Amortization (over 8 years as per SLM) (75,000)
Balance to be shown in the balance sheet 5,25,000
(3) Franchise 4,50,000
Less: Amortization (over 6 years) (75,000)
Balance to be shown in the balance sheet 3,75,000
 AS 26.27
AS 26
MCQs
1. Which of the following is not covered within the scope of AS 26?
a) Intangible assets held-for-sale in the ordinary course of business
b) Assets arising from employee benefits
c) (a) & (b) both
d) Research and development activities

2. Intangible asset is recognised if it:

a) meets the definition of an intangible asset
b) is probable that future economic benefits will flow
c) the cost can be measured reliably
d) meets all of the above parameters

3. Sun Limited has purchased a computer with various additional software. These are integral
part of the computer. Which of the following are true in the context of AS 26:
a) Recognise Computer and software as tangible asset
b) Recognise tangible and intangible separately
c) Recognise computer and software as intangible asset
d) Does not recognize the software as an asset.

4. Hexa Ltd developed a technology to enhance the battery life of mobile devices. Hexa has
capitalised development expenditure of ` 5,00,000. Hexa estimates the life of the technology
developed to be 3 years but the company has forecasted that 50% of sales will be in year 1,
35% in year 2 and 15% in year 3. What should be the amortisation charge in the second year
of the product’s life?
a) ` 2,50,000
b) ` 1,75,000
c) ` 1,66,667
d) `1,85,000

Answers
1. (c) 2. (d) 3. (a) 4. (b)