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CA FINAL COURSE (Nov 2024)

GROUP I – PAPER 1
FINANCIAL REPORTING
SUGGESTED ANSWERS
(Series 3)

PART – I (MCQs)

MCQ – 2 marks each

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
C A B D A C A B D A B C C A B

PART – II (Descriptive Answers)

1 Consolidated Balance Sheet of Professional Ltd as on 1st April, 20X2 (₹ in Lakhs)

Amount
Assets
Non-Current Assets:
Property, plant and equipment 650
Investment 500
Current assets:
Inventories 400
Financial assets:
Trade receivables 750
Cash and cash equivalents 300
Others 630
Total 3,230
Equity and Liabilities
Equity
Share capital – Equity shares of ₹ 100 each 514
Other Equity 1,128.62
NCI 154.95
Non-Current liabilities:
Financial liabilities
Long term borrowings 450
Long term provisions (50 + 70 + 28.93) 148.93

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 Deferred tax 28.5
Current Liabilities:
Financial liabilities
Short term borrowings 250
Trade payables 550
Provision for Law suit Damages 5
Total 3,230

Notes:
a. Fair value adjustment – As per Ind AS 103, the acquirer is required to record the assets
and liabilities at their respective fair value. Accordingly, the PPE will be recorded at ₹
350 lakhs.
b. The value of replacement award is allocated between consideration transferred and
post combination expense. The portion attributable to purchase consideration is
determined based on the fair value of the replacement award for the service rendered
till the date of the acquisition. Accordingly, 2.5 (5 x 2/4) is considered as a part of
purchase consideration and is credited to Professional Ltd equity as this will be settled
in its own equity. The balance of 5.5 (8 – 2.5) will be recorded as employee expense in
the books of Dynamic Ltd over the remaining life, which is 1 year in this scenario.
c. There is a difference between contingent consideration and deferred consideration. In
the given case 35 is the minimum payment to be paid after 2 years and accordingly
will be considered as deferred consideration. The other element is if company meet
certain target then they will get 25% of that or 35 whichever is higher. In the given
case since the minimum what is expected to be paid the fair value of the contingent
consideration has been considered as zero. The impact of time value on deferred
consideration has been given @ 10%.
d. The additional consideration of ₹ 20 lakhs to be paid to the founder shareholder is
contingent to him/her continuing in employment and hence this will be considered as
employee compensation and will be recorded as post combination expenses in the
income statement of Dynamic Ltd.
Working Notes:
1. Computation for Purchase consideration

Particulars Amount
Share capital of Dynamic Ltd 4,00,00,000
Number of shares 4,00,000
Shares to be issued 2:1 2,00,000
Fair value per share 40
₹ in lakhs
PC (2,00,000 x 70% x ₹ 40 per share) (A) 56.00
Deferred consideration after discounting ₹ 35 lakhs for 2
28.93
years @ 10% (B)
Replacement award Market based measure of the 2.50
acquiree award (5) x ratio of the portion of the vesting
period completed (2)/greater of the total vesting period

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 (3) or the original vesting period (4) of the acquiree
award i.e. (5 x 2/4) (C)
PC in lakhs (A + B + C) 87.43

2. Allocation of Purchase price

Particulars Book Fair value FV

value (B) adjustment
(A) (A – B)
Property, plant and equipment 500 350 (150)
Investment 100 100 –
Inventories 150 150 –
Financial assets:
Trade receivables 300 300 –
Cash and cash equivalents 100 100 –
Others 230 230 –
Less: Long term borrowings (200) (200) –
Long term provisions (70) (70) –
Deferred tax (35) (35) –
Short term borrowings (150) (150) –
Trade payables (300) (300) –
Contingent liability – (5) (5)
Net assets 625(X) 470 (155)
Deferred tax Asset on FV adjustment 46.50 155
(155 x 30%) (Y)
Net assets (X + Y) 516.5
Non-controlling interest (516.50 x 30%) 154.95
rounded off
Capital Reserve (Net assets – NCI – PC) 274.12
Purchase consideration (PC) 87.43

3. Computation of consolidated amounts of Consolidated financial statements

Professional Dynamic Ltd PPA Total

Ltd (pre-acquisition) Allocation
Assets
Non-Current Assets:
Property, plant and 300 500 (150) 650
equipment
Investment 400 100 500
Current assets:
Inventories 250 150 400
Financial assets:

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 Trade receivables 450 300 750
Cash and cash 200 100 300
equivalents
Others 400 230 630
Total 2,000 1,380 (150) 3,230
Equity and Liabilities
Equity
Share capital – 500
Equity shares of ₹
100 each
14
Shares allotted to
Dynamic Ltd.
(2,00,000 x 70% x ₹
10 per share) 514
Other Equity 810 318.62 1,128.62
Replacement 2.5 2.5
award
Security 42 42
Premium
(2,00,000 shares
x 70% x ₹ 30)
Capital Reserve 274.12 274.12
Non-controlling 0 154.95 154.95
interest
Non-Current liabilities:
Financial Liabilities
Long term 250 200 450
borrowings
Long term 50 70 28.93 148.93
provisions
Deferred tax 40 35 (46.5) 28.5
Current Liabilities:
Financial Liabilities
Short term 100 150 250
borrowings
Trade payable 250 300 550
Liability for lawsuit 5 5
damages
Total 2,000 755 475 3,230

2 (a) (a) Applying the guidance for compound instruments, the present value of the bond is
computed to identify the liability component and then difference between the present

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 value of these bonds & the issue price of ₹ 1 crore shall be allocated to the equity
component. In determining the present value, the rate of 8 per cent will be used, which
is the interest rate paid on debt of a similar nature and risk that does not provide an
option to convert the liability to ordinary shares.
Present value of bonds at the market rate of debt

Present value of principal to be received in 8 years discounted at 8% 5,403,000

(10,000,000 x 0.5403)
Present value of interest stream discounted at 8% for 8 years 3,447,960
(6,00,000 x 5.7466)
Total present value 8,850,960
Equity component 1,149,040
Total face value of convertible bonds 10,000,000

The accounting entries will be as follows:

Dr. Amount (₹) Cr. Amount (₹)

1 July 20X1
Bank Dr.
10,000,000
To Convertible bonds (liability) 8,850,960
To Convertible bonds (equity component) 1,149,040
(Being entry to record the convertible bonds
and the recognition of the liability and equity
components)
30 June 20X2
Interest expense Dr. 708,077
To Bank 600,000
To Convertible bonds (liability) 108,077
(Being entry to record the interest expense,
where the expense equals the present value of
the opening liability multiplied by the market
rate of interest).

(b) The stream of interest expense is summarised below, where interest for a given year is
calculated by multiplying the present value of the liability at the beginning of the
period by the market rate of interest, this is being 8 per cent.

Date Payment Interest Increase in Total bond

expense at 8% bond liability liability
01 July 20X1 8,850,960
30 June 20X2 600,000 708,077 108,077 8,959,037
30 June 20X3 600,000 716,723 116,723 9,075,760
30 June 20X4 600,000 726,061 126,061 9,201,821
30 June 20X5 600,000 736,146 136,146 9,337,967
30 June 20X6 600,000 747,037 147,037 9,485,004
30 June 20X7 600,000 758,800 158,800 9,643,804

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 30 June 20X8 600,000 771,504 171,504 9,815,308
30 June 20X9 600,000 784,692* 184,692 10,000,000

*difference is due to rounding off

(c) If the holders of the bonds elect to convert the bonds to ordinary shares at the end of
the third year (after receiving their interest payments), the entries in the third year
would be:

Dr. Amount (₹) Cr. Amount (₹)

30 June 20X4
Interest expense Dr. 726,061
To Bank 600,000
To Convertible bonds (liability) 126,061
(Being entry to record interest expense for the
period)
30 June 20X4
Convertible bonds (liability) Dr.
9,201,821
Convertible bonds (equity component) Dr.
1,149,040
To Ordinary share capital A/c 10,350,861
(Being entry to record the conversion of bonds
into shares of A Limited)

2 (b) Company S expects to recognise an expense totalling ₹ 15,000 (30 shares x 100 employees x
₹ 5 per share) and, therefore, expects the total reimbursement to be ₹ 11,250 (₹ 15,000 x
75%). Company S therefore reimburses Company P ₹ 3,750 (₹ 11,250 x 1/3) each year.
Accounting by Company S
In each of Years 1 to 3, Company S recognises an expense in profit or loss, the cash paid to
Company P, and the balance of the capital contribution it has received from Company P.

Journal Entry
Employee benefits expenses Dr. 5,000
To Cash/Bank 3,750
To Equity (Contribution from the parent) 1,250
(To recognise the share-based payment expense and
partial reimbursement to parent)

Accounting by Company P
In each of Years 1 to 3, Company P recognises an increase in equity for the instruments being
granted, the cash reimbursed by Company S, and the balance as investment for the capital
contribution it has made to Company S.
Journal Entry
Investment in Company S Dr. 1,250
Cash/Bank Dr. 3,750
To Equity 5,000
(To recognise the grant of equity instruments to

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 employees of subsidiary less partial reimbursement
from subsidiary)

3 (a) The goodwill on consolidation of Mission Ltd that is recognized in the consolidated balance
sheet of Vision Ltd is ₹ 30 million (₹ 190 million – 80% x ₹ 200 million). This can only be
reviewed for impairment as part of cash generating units to which it relates. Since here the
goodwill cannot be meaningfully allocated to the units, impairment review is in two parts.
Units A and C have values in use that are more than their carrying values. However, the value
in use of Unit B is less than its carrying amount. This means that the assets of unit B are
impaired by ₹ 24 million (₹ 90 million – ₹ 66 million). This impairment loss will be charged
to the statement of profit and loss.
Assets of Unit B will be written down on a pro-rata basis as shown in the table below:
(₹ in million)

Asset Impact on carrying value

Existing Impairment Revised
Intangible assets 10 (4) 6
Property, plant and equipment 50 (20) 30
Current assets 30 Nil* 30
Total 90 (24) 66

*The current assets are not impaired because they are expected to realize at least their
carrying value when disposed of.
Following this review, the three units plus the goodwill are reviewed together i.e. treating
Mission Limited as single CGU. Impact of this is shown in following table, given that the
recoverable amount of the business as a whole is ₹ 350 million: (₹ in million)

Component Impact of impairment review on carrying value

Existing Impairment Revised
Goodwill (see note below) 37.50 (23.50) 14.00
Unit A 170.00 Nil 170.00
Unit B (revised) 66.00 Nil 66.00
Unit C 100.00 Nil 100.00
Total 373.50 (23.50) 350.00

Note: As per Appendix C of Ind AS 36, given that the subsidiary is 80% owned the goodwill
must first be grossed up to reflect a notional 100% investment. Therefore, the goodwill will
be grossed up to ₹ 37.50 million (₹ 30 million x 100/80).
The impairment loss of ₹ 23.50 million is all allocated to goodwill, leaving the carrying
values of the individual units of the business as shown in the table immediately above.
The table shows that the notional goodwill that relates to a 100% interest is written down by
₹ 23.50 million to ₹ 14.00 million. However, in the consolidated financial statements the
goodwill that is recognized is based on an 80% interest so the loss that is actually
recognized is ₹ 18.80 million (₹ 23.50 million x 80%) and the closing consolidated
goodwill figure is ₹ 11.20 million (₹ 14.00 million x 80%) or (₹ 30 million – ₹ 18.80

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 million).

3 (b) The above treatment needs to be examined in the light of the provisions given in Ind AS 16
‘Property, Plant and Equipment’ and Ind AS 105 ‘Non-current Assets Held for Sale and
Discontinued Operations’.
Para 6 of Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’ states
that “An entity shall classify a non-current asset (or disposal group) as held for sale if its
carrying amount will be recovered principally through a sale transaction rather than
through continuing use”.
Paragraph 7 of Ind AS 105 states that “For this to be the case, the asset (or disposal group)
must be available for immediate sale in its present condition subject only to terms that are
usual and customary for sales of such assets (or disposal groups) and its sale must be highly
probable. Thus, an asset (or disposal group) cannot be classified as a non-current asset (or
disposal group) held for sale, if the entity intends to sell it in a distant future”.
Further, paragraph 8 of Ind AS 105 states that “For the sale to be highly probable, the
appropriate level of management must be committed to a plan to sell the asset (or disposal
group), and an active programme to locate a buyer and complete the plan must have been
initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price
that is reasonable in relation to its current fair value. In addition, the sale should be expected
to qualify for recognition as a completed sale within one year from the date of classification
and actions required to complete the plan should indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn.”
Paragraph 13 of Ind AS 105 states that “An entity shall not classify as held for sale a non-
current asset (or disposal group) that is to be abandoned. This is because its carrying
amount will be recovered principally through continuing use.”
Paragraph 14 of Ind AS 105 states that “An entity shall not account for a non-current
asset that has been temporarily taken out of use as if it had been abandoned.”
Paragraph 55 of Ind AS 16 states that “Depreciation does not cease when the asset becomes
idle or is retired from active use unless the asset is fully depreciated.”
Going by the guidance given above, the Accountant of Pluto Ltd. has treated the plant as
held for sale and measured it at the fair value less cost to sell. Also, the depreciation has not
been charged thereon since the date of classification as held for sale which is not correct
and not in accordance with Ind AS 105 and Ind AS 16.
Accordingly, the manufacturing plant should neither be treated as abandoned asset nor as
held for sale because its carrying amount will be principally recovered through continuous
use. Pluto Ltd. shall not stop charging depreciation or treat the plant as held for sale
because its carrying amount will be recovered principally through continuing use to
the end of their economic life.
The working of the same for presenting in the balance sheet is given as below:

Calculation of carrying amount as on 31st March, 20X4 ₹

Purchase Price of Plant 6,00,000
Less: Accumulated depreciation [(6,00,000/10 years) x 3 years] (1,80,000)
4,20,000
Less: Impairment loss (70,000)

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 3,50,000

Balance Sheet extracts as on 31st March, 20X4

Assets ₹
Non-Current Assets
Property, Plant and Equipment 3,50,000

Working Note:
Fair value less cost to sell of the Plant = ₹ 3,50,000
Value in use = Nil
Recoverable amount = Higher of above i.e. ₹ 3,50,000
Impairment loss = Carrying amount – Recoverable amount
Impairment loss = ₹ 4,20,000 – ₹ 3,50,000 = ₹ 70,000

4 (a) Calculation of yearly Revenue, Operating Profit and Margin (%):

Fixed A 1,000,000
consideration
Estimated costs to B 950,000
complete
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated C 100,000 100,000 100,000 250,000 250,000
variable
consideration
Fixed revenue D=Ax 52,632 184,211 421,053 289,474 52,632
H/B
Variable revenue E=Cx 5,263 18,421 42,105 72,368 13,158
H/B
Cumulative F (see – – – 98,693 –
revenue below)
adjustment
Total revenue G=D+ 57,895 2,02,632 4,63,158 4,60,535 65,790
E+F
Costs H 50,000 1,75,000 4,00,000 2,75,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 1,85,535 15,790
Margin J = I/G 13.64% 13.64% 13.64% 40.29% 24%

Calculation of cumulative catch-up adjustment:

Updated variable consideration L 250,000

Percent complete in Year 4: M = N/O 94.74%
Cumulative costs through Year 4 N 900,000
Estimated costs to complete O 950,000
Cumulative variable revenue through Year 4: P 138,157

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 Cumulative catch-up adjustment F=LxM–P 98,693

4 (b) (i) Calculation of securitized component of loan

₹ ₹
Fair Value 30,42,000
Less: Principal strip receivable (fair value) 74,000
Less: Interest strip receivable (fair value) 3,10,100
Less: Value of service asset (fair value) 1,40,200 4,50,300 (5,24,300)
25,17,700

(ii) Apportionment of carrying amount in the ratio of fair values

Fair value (₹) Apportionment (₹)

Securitized 25,17,700 25,17,700 x 25,00,000 20,69,116
component of loan 30,42,000
Principal strip 74,000 74,000 x 25,00,000 60,815
receivable 30,42,000
Interest strip 3,10,100 3,10,100 x 25,00,000 2,54,849
receivable 30,42,000
Servicing asset 1,40,200 1,40,200 x 25,00,000 1,15,220
30,42,000

(iii) Entries to record the derecognition of the Loan

₹ ₹
Bank A/c Dr.
24,80,000
To Loan A/c 20,69,116
To Profit & Loss A/c 4,10,884
(Being entry for securitization of 85% principal
with 17% interest)
Interest strip A/c Dr.2,54,849
Servicing asset A/c Dr.1,15,220
Principal strip A/c Dr. 60,815
To Loan A/c 4,30,884
(Being entry for interest, servicing asset and
principal strips received)

5 (a) Particulars ₹
1. Interest expense on loan ₹ 2,00,00,000 at 15% 30,00,000
2 Total cost of Phases I and II (₹ 34,00,000 + ₹ 64,00,000) 98,00,000
3. Total cost of Phases III and IV (₹ 55,00,000 + ₹ 68,00,000) 1,23,00,000
4. Total cost of all 4 phases 2,21,00,000

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 5. Total loan 2,00,00,000
6. Interest on loan used for Phases I & II, based on proportionate Loan 13,30,317
amount = [(30,00,000/2,21,00,000) x 98,00,000] (approx.)
7. Interest on loan used for Phases III & IV, based on proportionate 16,69,683
Loan amount = [(30,00,000/2,21,00,000) x 1,23,00,000] (approx.)

Accounting treatment:
1. For Phase I and Phase II
Since Phase I and Phase II have become operational at mid of the year, half of the
interest amount of ₹ 6,65,158.50 (i.e. ₹ 13,30,317/2) relating to Phase I and Phase
II should be capitalized (in the ratio of asset costs 34:64) and added to respective
assets in Phase I and Phase II and remaining half of the interest amount of ₹
6,65,158.50 (i.e. ₹ 13,30,317/2) relating to Phase I and Phase II should be expensed off
during the year.
2. For Phase III and Phase IV
Interest of ₹ 16,69,683 relating to Phase III and Phase IV should be held in Capital
Work-in-Progress till assets construction work is completed, and thereafter
capitalized in the ratio of cost of assets. No part of this interest amount should be
charged/expensed off during the year since the work on these phases has not been
completed yet.

5 (b) Considering facts of the case, Seller-lessee and buyer-lessor account for the transaction as a
sale and leaseback.
Firstly, since the consideration for the sale of the building is not at fair value, Seller-lessee
and Buyer-lessor make adjustments to measure the sale proceeds at fair value. Thus, the
amount of the excess sale price of ₹ 3,00,000 (as calculated below) is recognised as
additional financing provided by Buyer-lessor to Seller-lessee.

Sale Price 30,00,000

Less: Fair Value (at the date of sale) (27,00,000)
Additional financing provided by Buyer-lessor to Seller-lessee 3,00,000

Next step would be to calculate the present value of the annual payments which amounts to
₹ 14,94,000 (calculated considering 20 payments of ₹ 2,00,000 each, discounted at 12% p.a.)
of which ₹ 3,00,000 relates to the additional financing (as calculated above) and balance ₹
11,94,000 relates to the lease – corresponding to 20 annual payments of ₹ 40,164 and ₹
1,59,836, respectively (refer calculations below).
Proportion of annual lease payments:

Present value of lease payments (as calculated above) (A) 14,94,000

Additional financing provided (as calculated above) (B) 3,00,000
Relating to the Additional financing provided (C) = (E x B/A) 40,160
Relating to the Lease (D) = (E – C) 1,59,840
Annual payments (at the end of each year) (E) 2,00,000

Seller-Lessee:

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 At the commencement date, Seller-lessee measures the ROU asset arising from the leaseback
of the building at the proportion of the previous carrying amount of the building that relates
to the right-of-use retained by Seller-lessee, calculated as follows:

Carrying Amount (A) 15,00,000

Fair Value (at the date of sale) (B) 27,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
ROU Asset [(A/B) x C] 6,63,333

Seller-lessee recognises only the amount of the gain that relates to the rights transferred to
Buyer- lessor, calculated as follows:

Fair Value (at the date of sale) (A) 27,00,000

Carrying Amount (B) 15,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
Gain on sale of building (D) = (A – B) 12,00,000
Relating to ROU building retained by Seller-lessee (E) = [(D/A) x C] 5,30,667
Relating to the rights transferred to Buyer-lessor (D – E) 6,69,333

At the commencement date, Seller-lessee accounts for the transaction, as follows:

Cash Dr.
30,00,000
ROU Asset Dr.6,63,333
To Building 15,00,000
To Financial Liability 14,94,000
To Gain on rights transferred 6,69,333

5 (c) Accounting Treatment:

Trade Receivables fall within the ambit of financial assets under Ind AS 109, Financial
Instruments. Thus, the issue in question is whether the factoring arrangement entered into
with Samantha Ltd. requires Natasha Ltd. to derecognize the trade receivables from its
financial statements.
As per Para 3.2.3, 3.2.4, 3.2.5 and 3.2.6 of Ind AS 109, Financial Instruments, an entity shall
derecognise a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire, or
(b) it transfers the financial asset or substantially all the risks and rewards of ownership
of the financial asset to another party.
In the given case, since the trade receivables are appearing in the Balance Sheet of Natasha
Ltd. as at 31st March 20X2 and are expected to be collected, the contractual rights to the cash
flows have not expired.
As far as the transfer of the risks and rewards of ownership is concerned, the factoring
arrangement needs to be viewed in its substance, rather than its legal form. Natasha Ltd. has
transferred the receivables to Samantha Ltd. for cash of ₹ 250 crores, and yet, it remains
liable for making good any shortfall between ₹ 250 crores and the amount collected by
Samantha Ltd. Thus, in substance, Natasha Ltd. is effectively liable for the entire ₹ 250
crores, although the shortfall would not be such an amount. Accordingly, Natasha Ltd.

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 retains the credit risk despite the factoring arrangement entered.
It is also explicitly stated in the agreement that Samantha Ltd. would be liable to pay to
Natasha Ltd. any amount collected more than ₹ 250 crores, after retaining an amount
towards interest. Thus, Natasha Ltd. retains the potential rewards of full settlement.
A perusal of the above clearly shows that substantially all the risks and rewards continue
to remain with Natasha Ltd., and hence, the trade receivables should continue to
appear in the Balance Sheet of Natasha Ltd. The immediate payment (i.e. consideration as
per the factoring agreement) of ₹ 250 crores by Samantha Ltd. to Natasha Ltd. should be
regarded as a financial liability, and be shown as such by Natasha Ltd. in its Balance Sheet.
According to the Conceptual Framework, an asset should be derecognized when
control of all, or part of an asset is lost. In some cases, an entity might appear to transfer
an asset or liability, but derecognition of that asset or liability is not appropriate. For
example, if an entity has apparently transferred an asset but retains exposure to
significant positive or negative variations in the amount of economic benefits that may be
produced by the asset, then this sometimes indicates that the entity might continue to
control that asset, which appears to be the case in the current scenario.
The accounting requirements for derecognition aim to faithfully represent both:
(a) any assets and liabilities retained after the transaction or other event that led to the
derecognition (including any asset or liability acquired, incurred or created as part of
the transaction or other event); and
(b) the change in the entity’s assets and liabilities as a result of that transaction or other
event.
Meeting both the above requirements becomes difficult if there is only a part disposal of an
asset, or there is a retention of some exposure to that asset. It is difficult to faithfully
represent the legal form (which is, in this scenario, a decrease in trade receivables under the
factoring arrangement) with the substance of retaining the corresponding risks and rewards.
In view of the difficulties in practical scenarios in meeting the two aims, the Conceptual
Framework does not advocate the use of a control approach or a risk-and-rewards approach
to derecognition in every circumstance.
As such, the treatment as per Ind AS 109, as well as the principles laid down in the
Conceptual Framework do not appear to be in conflict with each other in this case.

6 (a) Dividends on preference shares paid (6000 x ₹ 5.50 per share) = ₹ 33,000
Dividends on ordinary shares paid (10,000 x ₹ 2.10 per share) = ₹ 21,000

Basic earnings per share is calculated as follows: ₹ ₹

Profit for the year 1,00,000
Less: Dividend paid:
Preference 33,000
Ordinary 21,000 (54,000)
Undistributed earnings 46,000

Allocation of undistributed earnings:

Allocation per ordinary share = A
Allocation per preference share = B;

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 B = 1/4 A
(A x 10,000) + (1/4 x A x 6,000) = ₹ 46,000
A = ₹ 46,000 ÷ (10,000 + 1,500)
A = ₹ 4.00
B = 1/4 A
B = ₹ 1.00

Dividend per share: Preference shares Ordinary shares

Distributed earnings ₹ 5.50 ₹ 2.10
Undistributed earnings ₹ 1.00 ₹ 4.00
Totals ₹ 6.50 ₹ 6.10

6 (b) Cheery Limited

Extract from the Statement of profit and loss

20X4-X5 20X3-X4 (Restated)

₹ ₹
Sales 1,04,000 73,500
Cost of goods sold (80,000) (60,000)
Profit before income taxes 24,000 13,500
Income taxes (7,200) (4,050)
Profit 16,800 9,450
Basic and diluted EPS 3.36 1.89

Statement of Changes in Equity

Share capital Retained earnings Total

Balance at 31st March, 20X3 50,000 20,000 70,000
Profit for the year ended 31st
March, 20X4 as restated – 9,450 9,450
Balance at 31st March, 20X4 50,000 29,450 79,450
Profit for the year ended 31st – 16,800 16,800
March, 20X5
Balance at 31st March, 20X5 50,000 46,250 96,250

Extract from the Notes

Some products that had been sold in 20X3-X4 were incorrectly included in inventory at 31 st
March, 20X4 at ₹ 6,500. The financial statements of 20X3-X4 have been restated to correct
this error. The effect of the restatement on those financial statements is summarized below:

Effect on 20X3-X4
(Increase) in cost of goods sold (6,500)
Decrease in income tax expenses 1,950

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 (Decrease) in profit (4,550)
(Decrease) in basic and diluted EPS (0.91)
(Decrease) in inventory (6,500)
Decrease in income tax payable 1,950
(Decrease) in equity (4,550)

There is no effect on the balance sheet at the beginning of the preceding period i.e. 1 st April,
20X3.

6 (c) The given scenario presents a twofold conflict of interest:

(i) Pressure to obtain finance and chartered accountant’s personal circumstances
The chartered accountant is under pressure to provide the bank with a projected cash
flow statement that will meet the bank’s criteria when in fact the actual projections do
not meet the criteria. The chartered accountant’s financial circumstances mean that he
cannot lose his job, thus the ethical and professional standards required of the
accountant are at odds with the pressures of his personal circumstances.
(ii) Duty to shareholders, employees and bank
The directors have a duty to act in the best interests of the company’s shareholders
and employees, and a duty to present fairly any information the bank may rely on. The
injection of capital to modernise plant and equipment appears to be for capacity
expansion which will lead to greater profits, thus being in the interests of the
shareholders and the employees. However, if such finance is obtained based on
misleading information, it could actually be detrimental to the going concern status of
the company.
It could be argued that there is a conflict between the short-term and medium-term
interests of the company (the need to modernise the company) and its long-term
interests (the detriment to the company’s reputation if its directors do not conform to
ethics).
Ethical principles guiding the chartered accountant’s response
The chartered accountant’s financial circumstances coupled with the pressure from the
directors could end up in him knowingly disclosing incorrect information to the bank,
thereby compromising the fundamental principles of objectivity, integrity and
professional competence.
By exhibiting bias due to the risk of losing his job through reporting favourable cash flows to
the bank, objectivity is compromised. Further, integrity is also compromised as by not acting
in a straightforward and honest manner, incorrect information is knowingly disclosed.
Forecasts, unlike financial statements, do not specify that they have been prepared in
accordance with Ind AS. However, the principle of professional competence requires the
accountant to prepare the cash flow projections to the best of his professional judgment
which would not be the case if the projections showed a more positive position than what is
actually anticipated.
Appropriate action
The chartered accountant faces an immediate ethical dilemma and must apply his moral
and ethical judgment. As a professional, he is responsible for presenting the truth, and not to
indulge in ‘creative accounting’ owing to pressure.

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Thus, the chartered accountant should put the interests of the company and professional
ethics first and insist that the report to the bank be an honest reflection of the company’s
current financial position. Being an advisor to the directors, he must prevent deliberate
misrepresentation to the bank, no matter what the consequences to him are personally. The
accountant should not allow any undue influence from the directors to override his
professional judgment or integrity. This is in the long-term interests of the company and its
survival.
It is suggested that the chartered accountant should communicate to the directors to
submit the projected statement of cash flows to the bank, which reflects the current position
of the company.
Knowingly providing incorrect information is considered as professional misconduct. To
prevent such misconduct, a chartered accountant should not provide incorrect projected
cash flows to the bank and colour the financial position of the entity. By adhering to the
ethical principles, the chartered accountant will maintain his professional integrity and
contribute to the trust and reliability placed in the work expected from him.
However, if he submits the incorrect projected statement of cash flows, he would be
subject to professional misconduct under Clause 1 of Part II of Second Schedule of the
Chartered Accountants Act, 1949. The Clause 1 states that a member of the Institute,
whether in practice or not, shall be deemed to be guilty of professional misconduct, if he
contravenes any of the provisions of this Act or the regulations made thereunder or any
guidelines issued by the Council. As per the Guidelines issued by the Council, a member of
the Institute who is an employee shall exercise due diligence and shall not be grossly
negligent in the conduct of his duties.

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