CA FINAL FR

BY CA.SARTHAK JAIN

Chapter Number of Page

No.
Name Questions No.
1 FINANCIAL INSTRUMENTS 14 1-19
2 Ind AS 102 SHARE BASED PAYMENT 3 20 - 22
3 SCHEDULE III AND IND AS 1 - DIVISION II 4 23 - 33
4 CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS 9 34-44
5 Ind AS 103 BUSINESS COMBINATIONS 6 45-66
6 Ind AS 2 VALUATION OF INVENTORY 2 67-68
7 Ind AS 7 CASH FLOW STATEMENT 1 69-71
8 Ind AS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND
3 72-74
ERRORS
9 Ind AS 10 EVENTS AFTER THE REPORTING PERIOD 5 75-78
10 Ind AS 12 INCOME TAXES 4 79-81
11 Ind AS 16 PROPERTY, PLANT AND EQUIPMENT 3 82-84
12 Ind AS 19 EMPLOYEE BENEFITS 5 85-89
13 Ind AS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF
2 90-91
GOVERNMENT ASSISTANCE
14 Ind AS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 4 92-96
15 Ind AS 23 BORROWING COSTS 6 97-102
16 Ind AS 24 RELATED PARTY DISCLOSURES 3 103-105
17 Ind AS 33 EARNINGS PER SHARE 5 106-111
18 Ind AS 34 INTERIM FINANCIAL REPORTING 2 112
19 Ind AS 36 IMPAIRMENT OF ASSETS 5 113-120
20 Ind AS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS 2 121-122
21 Ind AS 38 INTANGIBLE ASSETS 3 123-124
22 Ind AS 40 INVESTMENT PROPERTY 3 125-126
23 Ind AS 41 AGRICULTURE 4 127-130
24 Ind AS 101 FIRST TIME ADOPTION OF INDIAN ACCOUNTING STANDARDS 5 131-141
25 Ind AS 105 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 1 142-144
26 Ind AS 108 OPERATING SEGMENTS 1 145
27 Ind AS 113 FAIR VALUE MEASUREMENT 2 146-147
28 Ind AS 115 REVENUE FROM CONTRACT WITH CUSTOMERS 8 148-158
29 Ind AS 116 LEASES 6 159-169
30 INTEGRATED REPORTING 1 170
31 CORPORATE SOCIAL RESPONSIBILITY 2 171-172
32 ANALYSIS OF FINANCIAL STATEMENTS 2 173-178
Total Questions 126
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CHAPTER
FINANCIAL INSTRUMENTS
1
Q 1. ACM : Compound FI [Compulsory Convertiable, CFI with Transaction Costs]
ABC Company issued 10,000 compulsory cumulative convertible preference shares (CCCPS) as on 1 April
20X1 @ ` 150 each. The rate of dividend is 10% mandatorily payable every year. The preference shares
are convertible into 5,000 equity shares of the company at the end of 5th year from the date of
allotment. When the CCCPS are issued, the prevailing market interest rate for similar debt without
conversion options is 15% per annum. Transaction cost on the date of issuance is 2% of the value of the
proceeds.
Key terms:
Date of Allotment 01-Apr-20X1

n
Date of Conversion 01-Apr-20X6

i
Number of Preference Shares 10,000
Face Value of Preference Shares 150

a
Total Proceeds 15,00,000
Rate Of dividend 10%

J
Market Rate for Similar Instrument 15%
Transaction Cost 30,000
Face value of equity share after conversion 10

Ans.
Number of equity shares to be issued

a k 5,000
(May 2018)

h
This is a compound financial instrument with two components ” liability representing present value of

t
future cash outflows and balance represents equity component.

r
a. Computation of Liability & Equity Component

Date

01-Apr-20X1
31-Mar-20X2
S a
Particulars

Dividend
Cash
Flow

150,000
0
Discount
Factor
1
0.869565
Net present
Value

130,434.75
0.00

A .
31-Mar-20X3
31-Mar-20X4
31-Mar-20X5
31-Mar-20X6
Dividend
Dividend
Dividend
Dividend
150,000
150,000
150,000
150,000
0.756144
0.657516
0.571753
0.497177
113,421.6
98,627.4
85,762.95
74,576.55

C
Total Liability
Component
Total Proceeds
Total Equity
Component (Bal fig)
502,823.25

1,500,000.00

997,176.75

b. Allocation of transaction costs

Particulars Amount Allocation Allocation
Liability Component 502,823 10,056 10,056
Equity Component 997,177 19,944 19,944
Total Proceeds 1,500,000 30,000 30,000

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

Assume the effective interest rate is 15.86%

Opening Financial Interest Cash Flow Closing Financial
Liability B C Liability
A A+B-C
01-Apr-20X1 492,767 - - 4,92,767
31-Mar-20X2 492,767 78,153 150,000 4,20,920

in
31-Mar-20X3 420,920 66,758 150,000 3,37,678
31-Mar-20X4 337,678 53,556 150,000 2,41,234
31-Mar-20X5 241,234 38,260 150,000 1,29,494
31-Mar-20X6

Particulars
129,494 20,506

J
d. Journal Entries to be recorded for entire term of arrangement are as follows:
Date
a
150,000

Debit
-

Credit
01-Apr-20X1 Bank A/c
To Preference Shares A/c (FL)
Dr.

a k
To Equity Component of Preference shares A/c
(Being compulsorily convertible preference shares
1,470,000
492,767
977,233

31-Mar-20X2 Preference shares A/c

To Bank A/c
t h
issued. The same are divided into equity component
and liability component as per the calculation)

r
Dr. 150,000
150,000

a
(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X2 Finance cost A/c Dr.

S
78,153
To Preference Shares A/c
78,153

.
(Being interest as per EIR method recorded)
31-Mar-20X3 Preference shares A/c Dr. 150,000
To Bank A/c 150,000

C
31-Mar-20X3

31-Mar-20X4
A (Being Dividend at the coupon rate of 10% paid to the
shareholders)
Finance cost A/c
To Preference Shares A/c
Dr.

(Being interest as per EIR method recorded)

Preference shares A/c Dr.
66,758

150,000
66,758

To Bank A/c 150,000

(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X5 Finance cost A/c Dr. 53,556
To Preference Shares A/c 53,556
(Being interest as per EIR method recorded)
31-Mar-20X5 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the
shareholders)

2 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
31-Mar-20X5 Finance cost A/c Dr. 38,260
To Preference Shares A/c 38,260
(Being interest as per EIR method recorded)
31-Mar-20X6 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X6 Finance cost A/c Dr. 20,506
To Preference Shares A/c 20,506
(Being interest as per EIR method recorded)
31-Mar-20X6 Equity Component of Preference shares A/c Dr. 77,233
To Equity Share Capital A/c 50,000

n
To Securities Premium A/c 927,233

i
(Being Preference shares converted in equity shares
and remaining equity component is recognised as

a
securities premium)

Q 2. Accounting for assets at FVOCI

J
XYZ Ltd. is a company incorporated in India. It provides INR 10,00,000 interest free loan to its wholly
owned Indian subsidiary (ABC). There are no transaction costs.

financial statements of the group?

Consider the following scenarios:

a k
How should the loan be accounted for, in the Ind AS financial statements of XYZ, ABC and consolidated

a)
b)

c)
The loan is repayable on demand.

t h
The loan is repayable after 3 years. The current market rate of interest for similar loan is 10% p.a.
for both holding and subsidiary.

r
The loan is repayable when ABC has funds to repay the loan. (MTP Nov. 2020, RTP-May 2019)
Ans.

S a
Ind AS 109 requires that a financial assets and liabilities are recognized on initial recognition at its fair
value, as adjusted for the transaction cost. In accordance with Ind AS 113 Fair Value Measurement, the
fair value of a financial liability with a demand feature (e.g., a demand deposit) is not less than the

.
amount payable on demand, discounted from the first date that the amount could be required to be
paid.

Scenario (a) A
Using the guidance, the loan will be accounted for as below in various scenarios:

C
Since the loan is repayable on demand, it has fair value equal to cash consideration given. The parent and
subsidiary recognize financial asset and liability, respectively, at the amount of loan given. Going
forward, no interest is accrued on the loan.
Upon repayment, both the parent and the subsidiary reverse the entries made at origination.

Scenario (b)
Both parent and subsidiary recognize financial asset and liability, respectively, at fair value on initial
recognition. The difference between the loan amount and its fair value is treated as an equity
contribution to the subsidiary. This represents a further investment by the parent in the subsidiary.

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 FR Super 100
Accounting in the books of XYZ Ltd (Parent)
S. No. Particulars Amount Amount
1 On the date of loan
Loan to ABC Ltd (Subsidiary) Dr. 7,51,315
Deemed Investment (Capital Contribution) in ABC Ltd Dr. 2,48,685
To Bank 10,00,000
(Being the loan is given to ABC Ltd and recognised at fair value)
2 Accrual of Interest income
Loan to ABC Ltd Dr. 75,131
To Interest income 75,131

in
(Being interest income accrued) ” Year 1
3 Loan to ABC Ltd Dr. 82,645
To Interest income 82,645

4
(Being interest income accrued) ” Year 2
Loan to ABC Ltd
To Interest income
(Being interest income accrued) ” Year 3
Dr.

J a
90,909

90,909
5 On repayment of loan
Bank
To Loan to ABC Ltd (Subsidiary)

a k Dr. 10,00,000
10,00,000

S. No.
1
Particulars
On the date of loan
t h
Accounting in the books of ABC Ltd (Subsidiary)

r
Amount Amount

Bank

S a
To Loan from XYZ Ltd (Payable)
Dr.

To Equity (Deemed Capital Contribution from ABC Ltd)

(Being the loan is given to ABC Ltd and recognised at Fair value)
10,00,000
751,315
2,48,685

A .
Accrual of Interest
Interest expense
To Loan from XYZ Ltd (Payable)
(Being interest expense recognised) ” Year I
Dr. 75,131
75,131

4
C Interest expense
To Loan from XYZ Ltd (Payable)
(Being interest expense recognised) ” Year II

Interest expense
Dr.

Dr.
82,645

90,909
82,645

To Loan from XYZ Ltd (Payable) 90,909

(Being interest expense recognised) ” Year III

5 On repayment of loan
Loan from XYZ Ltd (Payable) Dr. 10,00,000
To Bank 10,00,000

4 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Working Notes:-
1. Computation of Present value of loan
Rate 10%
10,00,000
Amount of Loan
Year 3
Present Value 7,51,315

2 Computation of interest for Year I

Present Value 7,51,315

Rate 10%

n
Period of interest - for 1 year 1

i
Closing value at the end of year 1 8,26,446
Interest for 1st year 75,131

3 Computation of interest for Year 2

Value of loan as at the beginning of Year 2

Rate
J a 8,26,446

10%
Period of interest - for 2nd year
Closing value at the end of year 2
Interest for 2nd year

a k 1
9,09,091
82,645

4 Computation of interest for Year 3

Value of loan as at the beginning of Year 3

Rate

r t h 9,09,091

10%

a
Period of interest - for 3rd year 1
Closing value at the end of year 3 10,00,000
Interest for 3rd year

Scenario (c)

. S 90,909

Generally, a loan, which is repayable when funds are available, can’t be stated to be repayable on

C
scenario (b). A
demand. Rather, the entities need to estimate repayment date and determine its measurement
accordingly. If the loan is expected to be repaid in three years, its measurement will be the same as in

In the Consolidated Financial Statements (CFS), the loan and interest income/expense will get knocked-
off as intra-group transaction in all three scenarios. Hence the above accounting will not have any impact
in the CFS. However, if the loan is in foreign currency, exchange difference will continue to impact the
statement of profit and loss in accordance with the requirements of Ind AS 21.

Q 3. MODIFICATION ACCOUNTING
On 1 January 20X0, XYZ Ltd. issues 10 year bonds for ` 1,000,000, bearing interest at 10%
(payable annually on 31st December each year). The bonds are redeemable on 31 December
20X9 for ` 1,000,000. No costs or fees are incurred. The effective interest rate is therefore 10%.
On 1 January 20X5 (i.e. after 5 years) XYZ Ltd. and the bondholders agree to a modification in
accordance with which:

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“ no further interest payments are made
“ the bonds are redeemed on the original due date (31 December 20X9) for ` 1,600,000;
“ legal and other fees of ` 50,000 are incurred.
Ans.
The repayment schedule for the original debt till the date of renegotiation is as below:
Date / year ended Opening Interest Cash flows Closing balance
balance accrual
1 January 20X0 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 20X1 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 20X2 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 20X3 10,00,000 1,00,000 (1,00,000) 10,00,000

in
31 December 20X4 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 20X5 10,00,000 1,00,000 (1,00,000) 10,00,000

financial liability is ` 10,00,000.

On this date, XYZ Ltd. will compute the present value of:
J a
On 1 January 20X5, the discounted present value of the remaining cash flows of the original

i.
ii.
k
cash flows under the new terms ” i.e. ` 16,00,000 payable on 31 December 20X9
any fees paid (net of any fees received) ” i.e. ` 50,000 using the original effective interest
rate of 10%.

a
h
The total of these amounts to ` 10,43,474. This differs from the discounted present value of the

t
remaining cash flows of the original financial liability by 4.35% i.e. by less than 10%. Hence,
modification accounting applies.

r
On this basis:
i.
a
the fees paid of ` 50,000 are netted against the existing liability of ` 10,00,000, resulting in

S
an adjusted carrying amount of ` 9,50,000;

.
ii. the effective interest rate (EIR) is recalculated. This is the rate which discounts the
future cash flows (` 16,00,000 in five years’ time) to the adjusted carrying amount of `
9,50,000. The adjusted EIR is 10.99%
iii.

C A
the adjusted EIR is used to determine the amortised cost and interest expense in future
periods.

Working Note:
For testing extinguishment -
Cash flows under new terms 16,00,000
PV as at 01 January 20X5
Revised cash flows@ original EIR 9,93,474
Fees incurred 50,000
PV of revised cash flows @ original EIR 10,43,474
PV of original cash flows @ original EIR (10,00,000)
Difference 43,474
Difference % 4%
Less than 10% - Indicates modification

6 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Accounting for revised cash flows @ original EIR
Year Opening balance Interest Payment Closing balance
0 10,00,000 - -50,000 9,50,000
1 9,50,000 1,04,405 0 10,54,405
2 10,54,405 1,15,879 0 11,70,284
3 11,70,284 1,28,614 0 12,98,898
4 12,98,898 1,42,749 0 14,41,647
5 14,41,647 1,58,353* -16,00,000 -
* Difference is due to approximation

n
Q 4. DERIVATIVE :

i
Entity A (an INR functional currency entity) enters into a USD 1,000,000 sale contract on 1 January 20X1
with Entity B (an INR functional currency entity) to sell equipment on 30 June 20X1.

Spot rate on 1 January 20X1: INR/USD

Spot rate on 31 March 20X1: INR/USD
Three month forward rate on 31 March 20X1: INR/USD
45
57
45
J a
Six month forward rate on 1 January 20X1: INR/USD
Spot rate on 30 June 20X1: INR/USD

a k 55
60

t h
Let’s assume that this contract has an embedded derivative that is not closely related and requires
separation. Please provide detailed journal entries in the books of Entity A for accounting of such
embedded derivative until sale is actually made.

r
a
Ans.
The contract should be separated using the 6 month USD/INR forward exchange rate, as at the date of

S
the contract (INR/USD = 55). The two components of the contract are therefore:
“ A sale contract for INR 55 Million
“
“
.
A six-month currency forward to purchase USD 1 Million at 55
This gives rise to a gain or loss on the derivative, and a corresponding derivative asset or

A
liability.

C
On delivery
1. Entity A records the sales at the amount of the host contract = INR 55 Million
2. The embedded derivative is considered to expire.
3. The derivative asset or liability (i.e. the cumulative gain or loss) is settled by becoming part of the
financial asset on delivery.
4. In this case the carrying value of the currency forward at 30 June 20X1 on maturity is = INR
(1,000,000*60-55*1,000,000)= ` 5,000,000 (profit/asset)

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The table summarising the computation of gain/ loss to be recorded at every period end ”
Date Transaction Sales Debtors Derivative Asset (Profit)
(Liability) Loss
1-Jan - 20X1 Embedded Derivative INR INR INR INR

31- Mar-20X1 Change in Fair Value of (10,000,000) 10,000,000

Embedded Derivatives
MTM (55-45)*1Million

30- Jun-20X1 Change in Fair Value of 15,000,000 (15,000,000)

Embedded Derivatives
(60-45)*1Million

30- Jun-20X1 Recording sales at

forward rate
(55,000,000) 55,000,000

i n
30- Jun-20X1 Embedded derivative-
settled against debtors

Journal Entries to be recorded at every period end

5,000,000

J a
(5,000,000)

a. 01 January 20X1 – No entry to be made

b. 31 March 20X1 –
Particulars

a k Dr. Amount Cr. Amount

h
(`) (`)
Profit and loss A/c Dr.
To Derivative financial liability A/c

r t
(being loss on mark to market of embedded derivative booked)
10,000,000
10,000,000

c. 30 June 20X1 –
Particulars

S a Dr. Amount Cr. Amount

.
(` ) (` )
Derivative financial asset A/c Dr. 5,000,000

A
Derivative financial liability A/c Dr. 10,000,000
To Profit and loss A/c 15,000,000

C
(being gain on embedded derivative based on spot rate at the date
of settlement booked)

d. 30 June 20X1 –
Particulars Dr. Amount Cr. Amount
(` ) (` )
Trade receivable A/c Dr. 55,000,000
To Sales A/c 55,000,000
(being sale booked at forward rate on the date of transaction)

8 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
e. 30 June 20X1 –
Particulars Dr. Amount Cr. Amount
(` ) (`)
Trade receivable A/c Dr 5,000,000
To Derivative financial asset A/c 5,000,000
(being derivative asset re-classified as a part of trade receivables,
bringing it to spot rate on the date of sale)

Q 5. Foreign currency embedded derivatives

Company A, an Indian company whose functional currency is `, enters into a contract to purchase
machinery from an unrelated local supplier, company B. The functional currency of company B is also `.

i n
However, the contract is denominated in USD, since the machinery is sourced by company B from a US
based supplier. Payment is due to company B on delivery of the machinery.

Key terms of the contract:

Contract/order date
Contractual features

J a Details
9 September 20X1
Delivery/payment date
Purchase price

a k
USD/` Forward rate on 9 September 20X1 for 31 December 20X1 maturity
31 December 20X1
USD 1,000,000
67.8

h
USD/` Spot rate on 9 September 20X1 66.4

t
USD/` Forward rates for 31 December, on:
30 September 67.5
31 December (spot rate)

a r 67.0
Company A is required to analyse if the contract for purchase of machinery (a capital asset) from
company B contains an embedded derivative and whether this should be separately accounted for on

S
the basis of the guidance in Ind AS 109. Also give necessary journal entries for accounting the same.
[SM 2021]
Ans.


A .
Based on the guidance above, the USD contract for purchase of machinery entered into by company A
includes an embedded foreign currency derivative due to the following reasons:
The host contract is a purchase contract (non-financial in nature) that is not classified as, or

C
measured at FVTPL.
 The embedded foreign currency feature (requirement to settle the contract by payment of USD at a
future date) meets the definition of a stand-alone derivative ” it is akin to a USD-` forward contract
maturing on 31 December 20X1.
 USD is not the functional currency of either of the substantial parties to the contract (i.e., neither
company A nor company B).
 Machinery is not routinely denominated in USD in commercial transactions around the world. In this
context, an item or a commodity may be considered ‘routinely denominated’ in a particular currency
only if such currency was used in a large majority of similar commercial transactions around the
world. For example, transactions in crude oil are generally considered routinely denominated in
USD. A transaction for acquiring machinery in this illustration would generally not qualify for this
exemption.

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 USD is not a commonly used currency for domestic commercial transactions in the economic
environment in which either company A or B operate. This exemption generally applies when the
business practice in a particular economic environment is to use a more stable or liquid foreign
currency (such as the USD), rather than the local currency, for a majority of internal or cross-border
transactions, or both. In the illustration above, companies A and B are companies operating in India
and the purchase contract is an internal/domestic transaction. USD is not a commonly used currency
for internal trade within this economic environment and therefore the contract would not qualify for
this exemption.

Accordingly, company A is required to separate the embedded foreign currency derivative from the host
purchase contract and recognise it separately as a derivative.

The separated embedded derivative is a forward contract entered into on 9 September 20X1, to

i
exchange USD 10,00,000 for ` at the USD/` forward rate of 67.8 on 31 December 20X1. Since the
forward exchange rate has been deemed to be the market rate on the date of the contract, the n
embedded forward contract has a fair value of zero on initial recognition.

J a
Subsequently, company A is required to measure this forward contract at its fair value, with changes in
fair value recognised in the statement of profit and loss. The following is the accounting treatment at
quarter-end and on settlement:

Accounting treatment:
Date Particulars
a k Amount Amount

09-Sep-X1

r t h
On initial recognition of the forward contract
(No accounting entry recognised since initial fair value of
the forward contract is considered to be nil)
(`)

Nil
(`)

Nil
30-Sep-X1

S a
Fair value change in forward contract
Derivative asset (company B)
[(67.8-67.5) x10,00,000]
To Profit or loss
Dr. 3,00,000

3,00,000

.
31-Dec-X1 Fair value change in forward contract
Forward contract asset (company B) Dr. 5,00,000
[{(67.8-67) x 10,00,000} - 3,00,000]

31-Dec-X1

C A To Profit or loss
Recognition of machinery acquired and on settlement
Property, plant and equipment
(at forward rate)
To Forward contract asset (company B)
Dr. 6,78,00,000
5,00,000

8,00,000
To Creditor (company B) / Bank 6,70,00,000

Q 6. Ind AS 109 & Ind AS 21

An Indian entity, whose functional currency is rupees, purchases USD dominated bond at its fair value of USD
1,000. The bond carries stated interest @ 4.7% p.a. on its face value. The said interest is received at the year
end. The bond has maturity period of 5 years and is redeemable at its face value of USD 1,250. The fair value
of the bond at the end of year 1 is USD 1,060. The exchange rate on the date of transaction and at the end of
year 1 are USD 1 = 40 and USD 1 = 45. respectively. The weighted average exchange rate for the year is 1 USD
= 42.

10 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
The entity has determined that it is holding the bond as part of an investment portfolio whose objective is
met both by holding the asset to collect contractual cash flows and selling the asset. The purchased USD
bond is to be classified under the FVTOCI category.The bond results in effective interest rate (EIR) of 10%
p.a.
Ans.
Particulars USD Exchange rate `
Cost of the bond 1,000 40 40,000
Interest accrued @ 10% p.a. 100 42 4,200
Interest received (USD 1,250 x 4.7%) (59) 45 (2,655)
Amortized cost at year-end 1,041 45 46,845
Fair value at year end 1,060 45 47,700
Interest income to be recognized in P & L 4,200

in
Exchange gain on the principal amount [1,000 x (45-40)] 5,000
Exchange gain on interest accrual [100 x (45 - 42)] 300
Total exchange gain/loss to be recognized in P&L 5,300
Fair value gain to be recognized in OCI [45 x (1,060 - 1,041)]

Journal entry to recognize gain/loss

Bond (` 47.700 „ ` 40,000) Dr.
J a7,700
855

Bank (Interest received)

To Interest Income (P & L)
To Exchange gain (P & L)
To OCI (fair value gain)
Dr.

a k 2,655
4,200
5,300
855

Q 7. Cash Flow Hedge

r t h
Besides construction activity, Buildings & Co. Limited is also engaged in the trading of Copper. On 1st
April, 20X1, it had 100 kg of copper costing ` 70 per kg - totalling ` 7000. The Company has a scheduled

S a
delivery of these 100 kgs of copper to its customer on 30 th September, 20X1 at the rate of USD 100 on
that date. To protect itself from decline in currency exchange rate (USD to Rs.), the entity hedges its
position by entering into currency futures contract for equivalent currency units at ` 76 / USD. The future
contract mature on 30th September, 20X1. The management performed an assessment of hedge

A .
effectiveness and concluded that the hedging relationship qualifies for cash flow hedge accounting. The
entity determines and documents that changes in fair value of the currency futures contract will be
highly effective in offsetting variability in cash flow of currency exchange. On 30th September, 20X1, the
entity closes out its currency futures contract. On the same day, it also sells its inventory of copper at
USD 100 when the spot rate is ` 72 / USD.

C
You are required to prepare detailed working and pass necessary journal entries for the sale of copper
and the corresponding hedge instrument taken by the company. Pass the journal entries as on the initial
date (i.e. 1st April 20X1), first quarter end reporting (i.e. 30th June 20X1) and date of sale of copper and
settlement of forward contract (i.e. 30 th September 20X1).
Assume the exchange rates as follows and yield @ 6% per annum.
Date Future price for 30th September 20X1 delivery (`/ USD)
1st April, 20X1 76
30th June, 20X1 74
30th September, 20X1 71
(MTP May 2021)

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Ans.
Calculation of discounting factor based on yield @ 6% p.a.
Forward rate for
Spot rate at Discount factor @ 6%
Date 30th September
indicated date p.a. on quarter basis
20X1
1st April, 20X1 76 0.971
30th June 20X1 74 0.985
30th September, 20X1 72 71 1
Determination of fair value change
1st April, 30th June, 30th September,
20X1 20X1 20X1

n
a Nominal value in Rs. @ Rs. 76 / USD 7,600 7,600 7,600
b
c
Nominal value in USD (100 kg for USD100)
Forward rate for 30th September, 20X1
100

76
100

74

a i 100

71

J
d Value in Rs. (b x c) 7,600 7,400 7,100
e Difference (a-d) 0 200 500

k
f Discount factor (as calculated in the above table) 0.971 0.985 1
g Fair value (e x f) 0 197 500
h Fair value change for the period

* 500 ” 197= 303

h a 0 197 303*

Date Particulars

r t Journal Entries
Dr. Cr.
1st April, 20X1
30th June, 20X1

S a
No entry as initial fair value is zero
Future Contract
To Cash Flow Hedge Reserve (Other Equity)- OCI
Dr.

(Being Change in Fair Value of Hedging Instrument recognised in

197
197

20X1

A .
30th September,
OCI accumulated in a separate component in Equity)
Future Contract
To Cash Flow Hedge Reserve (Other Equity) - OCI
Dr.

(Being change in fair value of the hedging instrument recognised

303
303

C
in OCI)
30th September, Bank/Trade Receivable Dr. 7,200
20X1 To Revenue from Contracts with Customers 7,200
(Being sale of 100 kgs. of copper for USD 100 recognised at spot
rate of ` 72 for USD 1)
30th September, Cash Flow Hedge Reserve (Other Equity) - OCI Dr. 500
20X1 To Revenue from Contracts with Customers 500
(Being fair value change in forward contract reclassified to profit
and loss and recognised in the line item affected by the hedge
item)
30th September, Bank / Cash Dr. 500
20X1 To Future Contract 500

12 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Q 8. Financial Guarantee
On 1 April 20X1, Sun Limited guarantees a ` 10,00,000 loan of Subsidiary ” Moon Limited, which Bank
STDK has provided to Moon Limited for three years at 8%.
Interest payments are made at the end of each year and the principal is repaid at the end of the loan
term.
If Sun Limited had not issued a guarantee, Bank STDK would have charged Moon Limited an interest rate
of 11%. Sun Limited does not charge Moon Limited for providing the guarantee.
On 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in the next 12
months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any amount from
Moon Limited.
On 31 March 20X3, there is 3% probability that Moon Limited may default on the loan in the next 12
months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any amount from
Moon Limited.

i n
Analyze and provide the accounting treatment of financial guarantee along with journal entries as per

a
Ind AS 109 in the books of Sun Ltd., on initial recognition and in subsequent periods till 31 March 20X3.
(MTP Dec 2021)

J
Ans.
1 April 20X1
A financial guarantee contract is initially recognised at fair value. The fair value of the guarantee will be

Particulars
a k
the present value of the difference between the net contractual cash flows required under the loan, and
the net contractual cash flows that would have been required without the guarantee.
Year 1 Year 2 Year 3 Total

h
(`) (`) (`) (`)

t
Cash flows based on interest rate of 11% (A) 1,10,000 1,10,000 1,10,000 3,30,000

r
Cash flows based on interest rate of 8% (B) 80,000 80,000 80,000 2,40,000
Interest rate differential (A-B) 30,000 30,000 30,000 90,000

a
Discount factor @ 11% 0.901 0.812 0.731
Interest rate differential discounted at 11% 27,030 24,360 21,930 73,320

Particulars
. S
Fair value of financial guaranteed contract(at inception)

Journal Entry
Debit (`)
73,320

Credit (`)

C A
Investment in subsidiary
To Financial guarantee (liability)
Dr.

(Being financial guarantee initially recorded)

31 March 20X2
73,320
73,320

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

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 FR Super 100
Opening Benefits Closing
EIR @
Year balance provided balance
11%
` ` `
1 73,320 8,065 (30,000) 51,385
2 51,385 5,652 (30,000) 27,037
3 27,037 2,963* (30,000) -

* Difference is due to approximation

The carrying amount of the financial guarantee liability after amortisation is therefore ` 51,385, which is
higher than the 12-month expected credit losses of ` 10,000. The liability is therefore adjusted to
` 51,385 (the higher of the two amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 21,935

To Profit or loss
(Being financial guarantee subsequently adjusted)

i
21,935

n
31 March 20X3

J a
At 31 March 20X3, there is 3% probability that Moon Limited will default on the loan in the next 12
months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any amount from
Moon Limited. The 12-month expected credit losses are therefore ` 30.000 (` 10,00,000 x 3%).

a k
The initial amount recognised less accumulated amortisation is ` 27,037, which is lower than the 12-
month expected credit losses (` 30,000). The liability is therefore adjusted to ` 30,000 (the higher of the
two amounts) as follows:

h
Particulars Debit (`) Credit (`)

t
Financial guarantee (liability) Dr. 21,385*

r
To Profit or loss (Note) 21,385
(Being financial guarantee subsequently adjusted)

Q 9. RWPS
S a
* The carrying amount at the end of 31 March 20X2 = ` 51,385 less 12-month expected credit losses of
` 30,000.

A .
Regular way purchase of financial asset
On 1 January 20X1, X Ltd. enters into a contract to purchase a financial asset for ` 10 lakhs, which is its
fair value on trade date. On 4 January 20X1 (settlement date), the fair value of the asset is ` 10.5 lakhs.
The amounts to be recorded for the financial asset will depend on how it is classified and whether trade
date or settlement date accounting is used. Pass necessary journal entries.
Ans.

C
Dr. / Cr.
Journal Entries in the Buyer’s Books

Particulars
Trade date accounting
Amortised
cost
Fair value
through P&L
Fair value
through OCI
1 January 20X1
Dr. Financial asset 10,00,000 10,00,000 10,00,000
Cr. Financial liability (to pay) (10,00,000) (10,00,000) (10,00,000)
4 January 20X1
Dr. Financial asset 10,00,000 50,000 50,000
Dr. Financial liability (to pay) 10, 00, 000 10,00,000

14 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Cr. Profit or loss - (50,000) -
Cr. Other comprehensive income - - (50,000)
Cr. Cash (10,00,000) (10, 00, 000) (10,00,000)

Settlement date accounting

Dr. / Cr. Particulars Amortised Fair value Fair value
cost through P&L through OCI
4 January 20X1
Dr. Financial asset 10,00,000 10,50,000 10,50,000
Cr. Profit or loss - (50,000) -

n
Cr. Other comprehensive income - - (50,000)

i
Cr. Cash 10,00,000 (10,00,000) (10,00,000)
Note:

Q 10. PARTIAL DERECOGNITION

J a
The above mentioned accounting principles apply only to financial assets and Ind AS 109 does not
contain any such principles for financial liabilities.

k
Sea Ltd. has lent a sum of ` 10 lakhs @ 18% per annum for 10 years. The loan had a Fair Value of `
12,23,960 at the effective interest rate of 13%. To mitigate prepayment risks but at the same time

a
retaining control over the loan, Sea Ltd. transferred its right to receive the Principal amount of the loan
on its maturity with interest, after retaining rights over 10% of principal and 4% interest that carries Fair

h
Value of ` 29,000 and ` 1,84,620 respectively. The consideration for the transaction was` 9,90,000. The

t
interest component retained included a 2% fee towards collection of principal and interest that has a

r
Fair Value of ` 65,160. Defaults, if any, are deductible to a maximum extent of the company’s claim on
Principal portion. You are required to show the Journal Entries to record derecognition of the Loan.

a
Ans.
(i) Calculation of securitized component of loan

S
` `
Fair Value 12,23,960

.
Less: Principal strip receivable (fair value) 29,000
Less: Interest strip receivable (fair value) 1,19,460
Less: Value of service asset (fair value) 65,160 1,84,620 2,13,620

A
10,10,340

C
(ii) Apportionment of carrying amount in the ratio of fair values
Fair value Apportionment
(`) (`)
10,10,340 × 10,00,000
Securitized component of loan 10,10,340 8,25,468
12,23,960
29,000 × 10,00,000
Principal strip receivable 29,000 23,694
12,23,960
1,19,460 × 10,00,000
Interest strip receivable 1,19,460 97,601
12,23,960
65,160 × 10,00,000
Servicing asset 65,160 53,237
12,23,960

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 FR Super 100
(iii) Entries to record the derecognition of the Loan
` `
Bank A/c Dr. 9,90,000
To Loan A/c
To Profit & Loss A/c 8,25,468
(Being entry for securitization of 90% principal with 14% interest) 1,64,532
Interest strip A/c Dr. 97,601
Servicing asset A/c Dr. 53,237
Principal strip A/c Dr. 23,694
To Loan A/c 1,74,532
(Being entry for interest, servicing asset and principal strips received)

Q 11. FL WITH PREPAYMENT OPTION

Debt instrument with prepayment option-

i n
Entity PQR borrows ` 100 crores from CFDH Bank on 1 April 20X1.

J a
Interest is payable at 12% p.a. and there is a bullet repayment of principal at the end of the term. Term
of the loan is 6 years.
The loan includes an option to prepay the loan at 1st April each year with a prepayment penalty of 3%.
There are no transaction costs.

Ans.
Analyse

a k
Without the prepayment option, the interest rate quoted by bank is 11% p.a.

h
Step 1: Identify the host contract and embedded derivative, if any In the given case,

t
“ Host is a debt instrument comprising annual interest payment at 12% p.a. and bullet principal
repayment at the end of 6 years.
“

a r
Option to prepay the debt at ` 103 crores is an embedded derivative
Step 2: Determine the amortised cost of the host debt instrument
Whether the prepayment option is likely to be exercised or not, the amortised cost of the host debt
instrument should be calculated as present value (PV) of expected cash flows using a fair market interest

crores:
Year

. S
rate for a debt without the prepayment option (11% p.a. in this case). This is calculated below as ` 104.23

Cash outflow PV @ 11% p.a. Finance cost Amortised cost

` crores
1
2

C
3
4
5
A 12.00
12.00
12.00
12.00
12.00
10.81
9.74
8.77
7.90
7.12
11.46
11.41
11.34
11.27
11.20
103.68
103.09
102.43
101.70
100.90
6 112.00 59.88 11.10 -
104.22 67.78
Step 3: Compare the exercise price of the prepayment option with the amortised cost of the host debt
Instrument
Year Amortised cost Exercise price of prepayment option Difference
` Crores
1 103.68 103.00 0.7%
2 103.09 103.00 0.1%

16 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
3 102.43 103.00 -0.6%
4 101.70 103.00 -1.3%
5 100.90 103.00 -2.1%
6 - N/A
The management of Entity PQR may formulate an appropriate accounting policy to determine what
constitutes ‚approximately equal‛. In this case, if the management determines that a difference of more
than 2% will indicate that the option's exercise price is not approximately equal to the amortised cost of
the host debt instrument, it will need to separate the embedded derivative and account for it as per
principles given in the subsequent sub-section.
It may be questioned as to why an option to repay a fixed rate loan early meets the definition of
embedded derivative. Let us revisit an important phrase from the definition of embedded derivative:

n
‚…some or all of the cash flows that otherwise would be required by the contract to be modified…‛

i
In the context of a fixed rate debt, it may be interpreted that:
“ the option affects cash flows only if exercised; and
“ the cash flows of a fixed rate debt do not vary with interest rates.

J a
However, in this context, a variation in cash flows should be interpreted as a possible change in the fair
value of expected cash flows. Accordingly, the option's expected cash flows vary according to interest
rates in a similar way as a separate option to purchase a fixed rate debt asset at a fixed price. A fixed

k
price option to prepay a fixed rate loan will increase in value as interest rates decline (and vice versa).

Q 12. DERECOGNITION : CONTINUING INVOLVEMENT IN ASSET

(a)
a
Debt factoring with recourse – continuing involvement asset Derecognition (DR)

h
Entity C agrees with factoring company D to enter into a debt factoring arrangement. Under the

r t
terms of the arrangement, the factoring company D agrees to pay ` 91.5 crores, less a servicing
charge of `1.5 crores (net proceeds of ` 90 crores), in exchange for 100% of the cash flows from
short-term receivables.

S a
The receivables have a face value of ` 100 crores and carrying amount of ` 95 crores.
The customers will be instructed to pay the amounts owed into a bank account of the factoring
company. Entity C also writes a guarantee to the factoring company under which it will reimburse
any credit losses upto ` 5 crores, over and above the expected credit losses of ` 5 crores and

(b)
A .
losses of up to ` 15 crores are considered reasonably possible. The guarantee is estimated to
have a fair value of ` 0.5 crores. Comment.

Debt factoring with recourse – associated liability

C
Continuingquestion above, the associated liability is recognised at ` 5.5 crores, as below:
i. the guarantee amount (i.e. ` 5 crores) plus
ii. the fair value of the guarantee (i.e. ` 0.5 crores). Comment

SM 115. (c) DERECOGNITION : CONTINUING INVOLVEMENT

Pass the necessary Journal Entry
Ans.
(a) In this situation, the ‚continuing involvement asset‛ will be recognised at ` 5 crores i.e. lower of:
i. the amount of the asset ” ` 95 crores
ii. the guarantee amount ” ` 5 crores

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 FR Super 100
♦ the entity also recognises an associated liability that is measured in such a way
that the net carrying amount of the transferred asset and the associated liability
is:
♦ the amortised cost of the rights and obligations retained by the entity, if the
transferred asset is measured at amortised cost, or
♦ equal to the fair value of the rights and obligations retained by the entity when
measured on a stand-alone basis, if the transferred asset is measured at fair
value.
Recognised changes in the fair value of the transferred asset and the associated
liability are accounted for consistently with each other and shall not be offset. If
the transferred asset is measured at amortised cost, the option in this Standard
to designate a financial liability as at fair value through profit or loss is not
applicable to the associated liability.

♦
associated liability is initially measured at
the guarantee amount plus
n
In case of guarantees, as per the application guidance in Ind AS 109, the

i
(b)
♦
♦
the guarantee).

J a
the fair value of the guarantee (which is normally the consideration received for

If an entity's continuing involvement is in only a part of a financial asset, the entity

a k
allocates the previous carrying amount of the financial asset between the part it
continues to recognise under continuing involvement, and the part it no longer
recognises on the basis of the relative fair values of those parts on the date of the
transfer. The difference between:
♦

♦
no longer recognised and

r t h
the carrying amount (measured at the date of derecognition) allocated to the part that is

the consideration received for the part no longer recognised shall be recognised in profit
or loss.
(c)

Loss on derecognition

S a
The journal entries passed by Entity C on the date of derecognition is as below:
Cash Dr.
Dr.
` 90 crores
` 5.5 crores

.
Continuing involvement asset Dr. ` 5 crores
To Receivables ` 95 crores

A
To Associated liability ` 5.5 crores
the entity shall continue to recognise any income arising on the transferred asset to the extent

C
of its continuing involvement and shall recognise any expense incurred on the associated liability
In the example above, the guarantee liability of ` 0.5 crores shall be amortised in profit or loss
over the underlying period.

Q 13. Debt Instrument  Fair Valuation, Impairment and Derecognition

An entity purchases a debt instrument with a fair value of ` 1,000 on 15th March, 20X1 and measures the
debt instrument at fair value through other comprehensive income. The instrument has an interest rate
of 5% over the contractual term of 10 years, and has a 5% effective interest rate. At initial recognition,
the entity determines that the asset is not a purchased or original credit -impaired asset.
On 31st March 20X1 (the reporting date), the fair value of the debt instrument has decreased to
` 950 as a result of changes in market interest rates. The entity determines that there has not been
a significant increase in credit risk since initial recognition and that ECL should be measured at an amount
equal to 12 month ECL, which amounts to ` 30.

18 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
On 1st April 20X1, the entity decides to sell the debt instrument for ` 950, which is its fair value at that
date.
Pass journal entries for recognition, impairment and sale of debt instruments as per Ind AS 109.
Entries relating to interest income are not to be provided. [RTP Nov. 2019]
Ans.
On Initial recognition
Debit Credit
(`) (`)
Financial asset-FVOCI Dr. 1,000
To Cash 1,000
On Impairment of debt instrument
Debit Credit

n
(`) (`)

i
Impairment expense (P&L) Dr. 30
Other comprehensive income Dr. 20

a
To Financial asset-FVOCI 50
The cumulative loss in other comprehensive income at the reporting date was ` 20. That amount

J
consists of the total fair value change of ` 50 (that is, ` 1,000 -` 950) offset by the change in the
accumulated impairment amount representing 12 -month ECL, that was recognized (` 30).

On Sale of debt instrument

Cash
a k Debit
(`)
950
Credit
(`)

To Financial asset ”FVOCI

Loss on sale (P&L)
To Other comprehensive income

r t h 20
950

20

Q 14.

a
Accounting treatment of processing fees belonging to undisbursed loan Amount
X Ltd. had taken 6 year term loan in April 20X0 from bank and paid processing fees at the time of
sanction of loan.

S
.
The term loan is disbursed in different tranches from April 20X0 to April 20X6. On the date of transition
to Ind AS, i.e. 1.4.20X5, it has calculated the net present value of term loan disbursed upto 31.03.20X5 by
using effective interest rate and proportionate processing fees has been adjusted in disbursed amount

Ans.

C A
while calculating net present value.
What will be the accounting treatment of processing fees belonging to undisbursed term loan amount?
[SM 2021]

Processing fee is an integral part of the effective interest rate of a financial instrument and shall be
included while calculating the effective interest rate.
(a) Accounting treatment in case future drawdown is probable
It may be noted that to the extent there is evidence that it is probable that the undisbursed
term loan will be drawn down in the future, the processing fee is accounted for as a transaction
cost under Ind AS 109, i.e., the fee is deferred and deducted from the carrying value of the
financial liabilities when the draw down occurs and considered in the effective interest rate
calculations.
(b) Accounting treatment in case future drawdown is not probable
If it is not probable that the undisbursed term loan will be drawn down in the future, then the
fees is recognised as an expense on a straight-line basis over the term of the loan.

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 FR Super 100

CHAPTER Ind AS 102

2 SHARE BASED PAYMENT
Q 1. Group: ESOPs
A parent, Company P, grants 30 shares to 100 employees each of its subsidiary, Company S, on condition
that the employees remain employed by Company S for three years. Assume that at the outset, and at
the end of Years 1 and 2, it is expected that all the employees will remain employed for all the three
years. At the end of Year 3, none of the employees has left. The fair value of the shares on grant date is `
5 per share.
Company S agrees to reimburse Company P over the term of the arrangement for 75 percent of the final
expense recognised by Company S. What would be the accounting treatment in the books of Company P
and Company S? (SM 2021)
Ans.

i n
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

J a
In each of Years 1 to 3, Company S recognises an expense in profit or loss, the cash paid to Company P,

k
and the balance of the capital contribution it has received from Company P.

a
Journal Entry `
Employee benefits expenses Dr. 5,000
To Cash/Bank
To Equity (Contribution from the parent)

r t h
(To recognise the share-based payment expense and partial reimbursement to
parent)
3,750
1,250

Accounting by Company P

S a
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 `

Cash/Bank

C
To Equity A
Investment in Company S Dr.
Dr.

(To recognise the grant of equity instruments to employees of subsidiary

less partial reimbursement from subsidiary)
1,250
3,750
5,000

Q 2. Grant Date
New Age Technology Limited has entered into following Share Based payment transactions:
(i) On 1st April, 20X1, New Age Technology Limited decided to grant share options to its
employees. The scheme was approved by the employees on 30th June, 20X1. New Age
Technology Limited determined the fair value of the share options to be the value of the equity
shares on 1st April, 20X1.
(ii) On 1st April, 20X1, New Age Technology Limited entered into a contract to purchase IT
equipment from Bombay Software Limited and agreed that the contract will be settled by

20 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
issuing equity instruments of New Age Technology Limited. New Age Technology Limited
received the IT equipment on 30th July, 20X1. The share-based payment transaction was
measured based on the fair value of 'the equity instruments as on 1st April, 20X1.
(iii) On 1st April, 20X1, New Age Technology Limited decided to grant the share options to its
employees. The scheme was approved by the employees on 30th June, 20X1. The issue of the
share options was however subject to the same being approved by the shareholders in a general
meeting. The scheme was approved in the general meeting held on 30th September, 20X1. The
fair value of the equity instruments for measuring the share- based payment transaction was
taken on 30th September, 20X1.
Identify the grant date and measurement date in all the 3 cases of Share based payment transactions
entered into by New Age Technology Limited, supported by appropriate rationale for the determination?
(MTP May 2021)
Ans.
Ind AS 102 defines grant date and measurement dates as follows:
(a)

i n
Grant date: The date at which the entity and another party (including an employee) agree to a

J a
share-based payment arrangement, being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement. At grant date the entity confers
on the counterparty the right to cash, other assets, or equity instruments of the entity, provided
the specified vesting conditions, if any, are met. If that agreement is subject to an approval
process (for example, by shareholders), grant date is the date when that approval is obtained.
(b)

a k
Measurement date: The date at which the fair value of the equity instruments granted is
measured for the purposes of this Ind AS. For transactions with employees and others providing
similar services, the measurement date is grant date. For transactions with parties other than

h
employees (and those providing similar services), the measurement date is the date the entity
obtains the goods or the counterparty renders service.

t
Applying the above definitions in the given scenarios following would be the conclusion based on

r
the assumption that the approvals have been received prospectively:
Scenario Grant date Measurement Base for grant date Base for

(i)
20X1
date
th
30 Jun,

S a th
30 June,
20X1
The date on which the
scheme was approvedby
the employees
measurement date
For employees, the
measurement date is
grant date

.
st th
(ii) 1 April, 30 July, The date when the entity The date when the
20X1 20X1 and the counterparty entity obtains the goods

A
entered a contract and from the counterparty
agreed for settlement by
equity instruments

C
th th
(iii) 30 30 The date the approval by For employees, the
September, September, shareholders was measurement date is
20X1 20X1 obtained grant date

Q 3. SAR
Ryder, a public limited company is reviewing certain events which have occurred since its year - end 31st
March, 20X4. The financial statements were authorized for issue on 12th May, 20X4. The following
events are relevant to the financial statements for the year ended 31 st March, 20X4.

The company granted share appreciation rights (SARs) to its employees on 1 st April, 20X2 based on 10
million shares. At the date the rights are exercised, the SAR’s provide employees with the right to receive
cash equal to the appreciation in the company’s share price since the grant date. The rights vested on
31st March, 20X4 and payment was made on schedule on 1st May, 20X4.

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 FR Super 100
The FV of the SAR’s per share at 31st March, 20X3 was ` 6, at 31st March, 20X4 was ` 8 and at 1st May,
20X4 was ` 9. The company has recognized a liability for the SAR’s as at 31st March, 20X2 based upon Ind
AS 102 ‘Share-based Payments’ but the liability was stated at the same amount at 31st March, 20X4.
Discuss the accounting treatment of the above events in the financial statements of the Ryder Group for
the year ending 31st March, 20X4 taking into account the implications of events occurring after the
reporting period. (MTP Dec 2021)
Ans.
Ind AS 102 ‘Share-based Payments’ requires a company to remeasure the fair value of a liability to pay
cash-settled share-based payments at each reporting date and the settlement date until the liability is
settled. Share Appreciation rights fall under this category. Hence, the company should recognize a
liability of ` 80 million (` 8 x 10 million) at 31st March, 20X4, the vesting date.

i n
The liability recognised at 31st March, 20X4 was in fact based on the share price at the previous year-end
and would have been shown at ` 6 x ½ x 10 million shares ” half the cost as the SARs vest over 2 years.
This liability at 31st March, 20X4 has not been changed since the previous year- end by the company.

J a
The SARs vest over a two-year period and hence on 31st March, 20X4 there would be a weighting of the
eventual cost by 1 year / 2 year. Therefore, an additional liability of ` 50 million (30 million + 20 million)
should be accounted for in the financial statements at 31st March, 20X4.

k
The SARs would be settled on 1st May, 20X4 at ` 90 million (` 9 x 10 million). The increase of ` 10 million
(over and above ` 80 million) in the value of the SARs is a non-adjusting event. Hence, the change in the

a
fair value of ` 10 million during the year 20X4-20X5 would be charged to profit and loss for the year
ended 31st March, 20X5 and not 31st March, 20X4.

“ r t h
NOTES

S a
A .
C

22 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER SCHEDULE III AND IND AS 1

3 DIVISION II

Q 1. XYZ Limited (the ‘Company’) is into the manufacturing of tractor parts and mainly supplying components
to the Original Equipment Manufacturers (OEMs). The Company does not have any subsidiary, joint
venture or associate company. During the preparation of financial statements for the year ended March
31, 20X1, the accounts department is not sure about the treatment/presentation of below mentioned
matters. Accounts department approached you to advice on the following matters.

S. No. Matters
There are qualifications in the audit report of the Company with reference to two Ind AS.

n
(i)

i
(ii) Is it mandatory to add the word ‚standalone‛ before each of the components of financial
statements?
(iii)

(iv)
presented in `.

J a
The Company is Indian Company and preparing and presenting its financial statements in `. Is
it necessary to write in the financial statements that the financial statements has been

The Company is having turnover of ` 180 crores. The Company wants to present the absolute

k
figures in the financial statements. Because for tax audit purpose, tax related filings and
other internal purposes, Company always need figures in absolute amounts.

a
(v) The Company had sales transactions with 10 related party parties during previous year.
However, during current year, there are no transactions with 4 related parties out of

h
aforesaid 10 related parties. Hence, Company is of the view that it need not disclose sales

t
transactions with these 4 parties in related party disclosures because with these parties there
are no transactions during current year.

Ans.
statement
r
Evaluate the above matters with respect to preparation and presentation of general purpose financial

a
[SM 2021]

S
(i) Yes, an entity whose financial statements comply with Ind AS shall make an explicit and
unreserved statement of such compliance in the notes. An entity shall not describe financial

.
statements as complying with Ind AS unless they comply with all the requirements of Ind AS.
(Refer Para 16 of Ind AS 1)
(ii) No, but need to disclose in the financial statement that these are individual financial statement

(iii)

(iv)
C A
of the Company. (Refer Para 51(b) of Ind AS 1)
Yes, Para 51(d) of Ind AS 1 inter alia states that an entity shall display the presentation currency,
as defined in Ind AS 21 prominently, and repeat it when necessary for the information presented
to be understandable.
Yes, it is mandatory as per the requirements of Division II of Schedule III to Companies Act, 2013).
(v) No, as per Para 38 of Ind AS 1, except when Ind AS permit or require otherwise, an entity shall
present comparative information in respect of the preceding period for all amounts reported in
the current period‘s financial statements. An entity shall include comparative information for
narrative and descriptive information if it is relevant to understanding the current period‘s
financial statements.

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 FR Super 100
Q 2. Following are the Financial Statements of Abraham Ltd.:
Particulars Note No. As at 31 March, 2020
(` in lakh)
EQUITY AND LIABILITIES:
Shareholders’ funds
Share capital (shares of ` 10 each) Reserves and 1,000
surplus 1 2,400
Non-current liabilities
Long term borrowings 2 5,700
Deferred tax liabilities 3 400
Current liabilities
Trade payables 300
Short-term provisions 300
Other current liabilities 4 200
Total

ASSETS
i n 10,300

Non-current assets
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
3

J a 5,000
700

1,500

k
Trade receivables 5 1,100
Cash and bank balances 2,000

a
Total 10,300

Statement of Profit & Loss

Particulars

Revenue from operations

Expenses:

r t h Note No. Year ended 31 March 2020

(` in lakh)
6,000

a
Employee benefit expense 1,200
Operating costs 3,199
Depreciation 450
Total expenses
Profit before tax
Tax expense

.
Profit after tax S 4,849
1,151
201
950

A
Notes to Accounts:
Note 1: Reserves and surplus (` in lakh)
Capital reserve 500

C
Surplus from P & L
Opening balance 550
Additions 950 1,500
Reserve for foreseeable loss 400
Total 2,400
Note 2: Long-term borrowings
Term loan from bank 5,700
Total 5,700

Note 3: Deferred tax

Deferred tax asset 700
Deferred tax liability 400
Total 300

24 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

Note 4: Other current liabilities

Unclaimed dividends 10
Billing in advance 150
Other current liabilities 40
Total 200

Note 5: Trade Receivables

Considered good (outstanding within 6 months) 1,065
Considered doubtful (due from past 1 year) 40
Provision for doubtful debts (5)

n
Total 1,100

Additional information:
(i) Share capital comprises of 100 lakh shares of ` 10 each.

a i
(ii) Term Loan from bank for ` 5,700 lakh also includes interest accrued and due of ` 700 lakh as on
the reporting date.

J
(iii) Reserve for foreseeable loss is created against a service contract due within 6 months.
(iv) Inventory should be valued at cost ` 1,500 lakh, NRV as on date is ` 1,200 lakh.

a k
(v) A dividend of 10% was declared (proposed) by the Board of directors of the company (after year
end)
(vi) Accrued Interest income of ` 300 lakh is not booked in the books of the company.
(vii) Deferred taxes related to taxes on income are levied by the same governing tax laws.

Ans.
with explanations thereof.

r t h
Identify and report the errors and misstatements in the above extracts and prepare corrected
Balance Sheet and Statement of Profit & Loss and where required the relevant notes to the accounts
(MTP Nov. 2020)

a
Following adjustments /rectifications are required to be done
1. Reserve for foreseeable loss for ` 400 lakh, due within 6 months, should be a part of provisions.

S
Hence, it needs to be regrouped. If it was also part of previous year’s comparatives, a note
should be added in the notes to account on the regrouping done this year.

.
2. Interest accrued and due of ` 700 lakh on term loan will be a part of current liabilities. Thus, it
should be shown under the heading ‚Other Current Liabilities‛.
3. As per Ind AS 2, inventories are measured at the lower of cost and net realisable value. The

4.
C A
amount of any write down of inventories to net realisable value is recognised as an expense in
the period the write-down occurs. Hence, the inventories should be valued at ` 1,200 lakh and
write down of ` 300 lakh (` 1,500 lakh ” ` 1,200 lakh) will be added to the operating cost of the
entity.
In the absence of the declaration date of dividend in the question, it is presumed that the
dividend is declared after the reporting date. Hence, no adjustment for the same is made in the
financial year 2019-2020. However, a note will be given separately in this regard (not forming
part of item of financial statements).
5. Accrued income will be shown in the Statement of Profit and Loss as ‘Other Income’ and as
‘Other Current Asset’ in the Balance Sheet.
6. Since the deferred tax liabilities and deferred tax assets relate to taxes on income levie d by the
same governing taxation laws, these shall be set off, in accordance with Ind AS 12. The net DTA
of ` 300 lakh will be shown in the balance sheet.
7. As per Division II of Schedule III to the Companies Act, 2013, the Statement of Profit and Loss
should present the Earnings per Equity Share.

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 FR Super 100
8. The presentation of the notes to ‘Trade Receivables’ will be modified as per the
requirements of Division II of Schedule III.
Balance Sheet of Abraham Ltd. For the year ended 31 March 2020
Note No. (` in lakh)
ASSETS
Non-current assets
Property, plant and equipment 5,000
Deferred tax assets 1 300
Current assets
Inventories 1,200
Financial assets
Trade receivables 2 1,100
Cash and cash equivalents
Others financial asset (accrued interest)

i n 2,000
300

a
TOTAL 9,900
EQUITY AND LIABILITIES

J
Equity
Equity share
Non-current capital
liabilities 3 1,000
Other equity
Financial liabilities 4 2,000
Long-term borrowings
Current liabilities
Financial liabilities
Trade payables
a k 5 5,000

300

TOTAL
Others
Short-term provisions (300 + 400)
Other current liabilities

r t h 6
7
8
710
700
190
9,900

a
Statement of Profit and Loss of Abraham Ltd.

S
For the year ended 31st March, 2020
Note No. (` in lakh)

.
Revenue from operations 6,000
Other income 300
Total income 6,300

C
Expenses

A
Operating costs
Change in inventories cost
Employee benefits expense
Depreciation
9
3,199
300
1,200
450
Total expenses 5,149
Profit before tax 1,151
Tax expense (201)
Profit for the period 950
Earnings per equity share
Basic 9.5
Diluted 9.5
Number of equity shares (face value of ` 10 each) 100 lakh

26 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Statement of Changes in Equity of Abraham Ltd.
For the year ended 31 March 2020
3. Equity Share Capital (` in lakh)
Balance at the beginning of Changes in Equity share capital Balance at the end of
the reporting period during the year the reporting period

1,000 0 1,000

4. Other Equity (` in lakh)

Particulars Reserves & Surplus Total
Capital reserve Retained Earnings
Balance at the beginning of the year 500* 550 1,050

n
Total comprehensive income for the year 950 950

i
Balance at the end of the year 500 1,500 2,000

Deferred Tax Asset

Deferred Tax Liability
a
*Note: Capital reserve given in the Note 1 of the question is assumed to be brought forward from the
previous year. However, alternatively, if it may be assumed as created during the year.
1. Deferred Tax

J (` in lakh)
700
400

k
300

a
2. Trade Receivables (` in lakh)
Trade receivables considered good 1,065
Trade receivables which have significant increase in credit risk 40

5.
Less: Provision for doubtful debts
Total

Long Term Borrowings

r t h (5) 35
1,100

(` in lakh)

6.
Total

S a
Term Loan from Bank (5,700 - 700)

Other Financial Liabilities

5,000
5,000

(` in lakh)

7.
Total .
Unclaimed dividends
Interest on term loan

A
Short-term provisions
Provisions
10
700
710
(` in lakh)
300

8. C Foreseeable loss against a service contract

Total

Other Current Liabilities

Billing in Advance
Other
400
700

(` in lakh)
150
40
Total 190

9. Dividends not recognised at the end of the reporting period

At year end, the directors have recommended the payment of dividend of 10% ie` 1 per
equity share. This proposed dividend is subject to the approval of shareholders in the ensuing
annual general meeting.

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 FR Super 100
Q 3. Is offsetting permitted under the following circumstances?
(a) Expenses incurred by a holding company on behalf of subsidiary, which is reimbursed by the
subsidiary - whether in the separate books of the holding company, the expenditure and related
reimbursement of expenses can be offset?
(b) Whether profit on sale of an asset against loss on sale of another asset can be offset?
(c) When services are rendered in a transaction with an entity and services are received from the
same entity in two different arrangements, can the receivable and payable be offset?
(RTP Dec 2021)
Ans.
(a) As per paragraph 33 of Ind AS 1, offsetting is permitted only when the offsetting reflects the
substance of the transaction.

i n
In this case, the agreement/arrangement, if any, between the holding and subsidiary company

a
needs to be considered. If the arrangement is to reimburse the cost incurred by the holding
company on behalf of the subsidiary company, the same may be presented net. It should be

J
ensured that the substance of the arrangement is that the payments are actually in the nature of
reimbursement.

(b)

k
Paragraph 35 of Ind AS 1 requires an entity to present on a net basis gains and losses arising
from a group of similar transactions. Accordingly, gains or losses arising on disposal of various

a
items of property, plant and equipment shall be presented on net basis. However, gains or losses
should be presented separately if they are material.

(c)

t h
Ind AS 1 prescribes that assets and liabilities, and income and expenses should be reported

r
separately, unless offsetting reflects the substance of the transaction . In addition to this, as per
paragraph 42 of Ind AS 32, a financial asset and a financial liability should be offset if the entity

a
has legally enforceable right to set off and the entity intends either to settle on net basis or to
realise the asset and se ttle the liability simultaneously.

S
In accordance with the above, the receivable and payable should be offset against each other

.
and net amount is presented in the balance sheet if the entity has a legal right to set off and the
entity intends to do so. Otherwise, the receivable and payable should be reported separately.

A
C
Q 4. Master Creator Private Limited (a subsidiary of listed company) is an Indian company to whom Ind AS are
applicable. Following draft balance sheet is prepared by the accountant for year ending 31st March 20X2.

Balance Sheet of Master Creator Private Limited as at 31st March, 20X2

Particulars `
ASSETS
Non-current assets
Property, plant and equipment 85,37,500
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 17,33,480
Deferred tax assets 2,54,150

28 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

Current assets
Trade receivables 7,25,000
Inventories 5,98,050
Financial assets
Investments 55,000
Other financial assets 2,17,370
Cash and cash equivalents 1,16,950
TOTAL ASSETS 1,27,00,000
EQUITY AND LIABILITIES
Equity share capital 10,00,000

in
Non-current liabilities
Other Equity 25,00,150
Deferred tax liability 4,74,850
Borrowings
Long term provisions
Current liabilities
Financial liabilities
J a 64,00,000
5,24,436

Other financial liabilities

Trade payables
Current tax liabilities

a k 2,00,564
6,69,180
9,30,820
TOTAL EQUITY AND LIABILITIES
Additional Information:
1.

r t h 1,27,00,000

On 1st April 20X1, 8% convertible loan with a nominal value of ` 64,00,000 was issued by the
entity. It is redeemable on 31st March 20X5 also at par. Alternatively, it may be converted into

S a
equity shares on the basis of 100 new shares for each ` 200 worth of loan.
An equivalent loan without the conversion option would have carried interest at 10%. Interest of
` 5,12,000 has already been paid and included as a finance cost.
Present Value (PV) rates are as follows:

1
2

A .
Year End @ 8%
0.93
0.86
@ 10%
0.91
0.83

C
3 0.79 0.75
4 0.73 0.68

2. After the reporting period, the board of directors have recommended dividend of ` 50,000 for
the year ending 31st March, 20X1. However, the same has not been yet accounted by the
company in its financials.
3. ‘Other current financial liabilities’ consists of the following:
Particulars Amount (`)
Wages payable 21,890
Salary payable 61,845
TDS payable 81,265
Interest accrued on trade payables 35,564

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 FR Super 100

4. Property, Plant and Equipment consists following items:

Amount
Particulars Remarks
(`)
Building 37,50,250 It is held for administration purposes
Land 15,48,150 It is held for capital appreciation
Vehicles 12,37,500 These are used as the conveyance for employees
Factory premises 20,01,600 The construction was started on 31st March 20X2 and
consequently no depreciation has been charged on it. The
construction activities will continue to happen, and it will
take 2 years to complete and be available for use.

5. The composition of ‘other current financial assets’ is as follows:

Particulars Amount (`)

i n
a
Interest accrued on bank deposits 57,720
Prepaid expenses 90,000

6.
Royalty receivable from dealers 69,650

J
Current Investments consist of securities held for trading which are carried at fair value through

a k
profit & loss. Investments were purchased on 1st January,20X2 at ` 55,000 and accordingly are
shown at cost as at 31st March 20X2. The fair value of said investments as on 31st March 20X2 is
` 60,000.

h
7. Trade payables and Trade receivables are due within 12 months.

t
8. There has been no changes in equity share capital during the year.
9. Entity has the intention to set off a deferred tax asset against a deferred tax liability as they

10.

a r
relate to income taxes levied by the same taxation authority and the entity has a legally
enforceable right to set off taxes.
Other Equity consists retained earnings only. The opening balance of retained earnings was
` 21,25,975 as at 1st April 20X1.
11.
12.
S
No dividend has been actually paid by company during the year.

.
Assume that the deferred tax impact, if any on account of above adjustments is correctly
calculated in financials.
Being Finance & Accounts manager, you are required to identify the errors and misstatements if any in

Ans.
C A
the balance sheet of Master Creator Private Limited and prepare corrected balance sheet with details on
the face of the balance sheet i.e. no need to prepare notes to accounts, after considering the additional
information. Provide necessary explanations/workings for the treated items, wherever necessary.
(MTP May 2021)

Balance Sheet of Master Creator Private Limited as at 31st March, 20X2

Working/ Note
Particulars (`)
reference
ASSETS
Non-current assets
Property, plant and equipment 1 49,87,750
Capital work-in-progress 2 20,01,600
Investment Property 3 15,48,150
Financial assets

30 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

Other financial assets (Security deposits) 4,62,500

Other non-current assets (capital advances) 4 17,33,480
Current assets
Inventories 5,98,050
Financial assets
Investments (55,000 + 5,000) 5 60,000
Trade receivables 6 7,25,000
Cash and cash equivalents 7 1,16,950
Other financial assets 8 1,27,370
Other current assets (Prepaid expenses) 8 90,000
TOTAL ASSETS 1,24,50,850
EQUITY AND LIABILITIES
Equity

i n
a
Equity share capital A 10,00,000
Other equity B 28,44,606
Non-current liabilities
Financial liabilities
J
k
8% Convertible loan 11 60,60,544
Long term provisions 5,24,436

a
Deferred tax liability 12 2,20,700
Current liabilities

h
Financial liabilities

t
Trade payables 13 6,69,180
Other financial liabilities 14 1,19,299
Other current liabilities (TDS payable)
Current tax liabilities
TOTAL EQUITY AND LIABILITIES

a r
Statement of changes in equity
15 81,265
9,30,820
1,24,50,850

A.

.
Equity Share Capital
S For the year ended 31st March, 20X2

Balance (Rs.)

A
As at 31st March, 20X1 10,00,000
Changes in equity share capital during the year -

C
As at 31st March, 20X2 10,00,000

B. Other Equity
Equity
Retained component of
Earnings Compound Financial Total(`.)
(`) Instrument
(`)
As at 31st March, 20X1 21,25,975 - 21,25,975
Total comprehensive income for the year
(25,00,150 + 5,000 - 85,504- 21,25,975) 2,93,671 - 2,93,671
Issue of compound financial instrument
during the year - 4,24,960 4,24,960
As at 31st March, 20X2 24,19,646 4,24,960 28,44,606

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 FR Super 100
Disclosure forming part of Financial Statements:
Proposed dividend on equity shares is subject to the approval of the shareholders of the company at the
annual general meeting and not recognized as liability as at the Balance Sheet date. (Note 9)

Notes/ Workings: (for adjustments/ explanations)

1. Property, plant and equipment are tangible items that:
(a) Are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) Are expected to be used during more than one period. Therefore, the items of PPE are
Buildings (` 37,50,250) and Vehicles (` 12,37,500), since those assets are held for
administrative purposes.
2. Property, plant and equipment which are not ready for intended use as on the date of Balance

n
Sheet are disclosed as ‚Capital work-in-progress‛. It would be classified from PPE to Capital

3.
work-in-progress.

i
Investment property is property (land or a building„or part of a building„or both) held (by the

a
owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both,
rather than for:
(a)
(b) Sale in the ordinary course of business.
J
Use in the production or supply of goods or services or for administrative purposes; or

Therefore, Land held for capital appreciation should be classified as Investment property rather

4.

5.
than PPE.

a k
Assets for which the future economic benefit is the receipt of goods or services, rather than the
right to receive cash or another financial asset, are not financial assets.
Current investments here are held for the purpose of trading. Hence, it is a financial asset

6.
loss.

r t h
classified as FVTPL. Any gain in its fair value will be recognised through profit or loss. Hence,
` 5,000 (60,000 ” 55,000) increase in fair value of financial asset will be recognised in profit and

A contractual right to receive cash or another financial asset from another entity is a financial

7.
8.

S a
asset. Trade receivables is a financial asset in this case and hence should be reclassified.
Cash is a financial asset. Hence it should be reclassified.
Other current financial assets:
Particulars Amount (`)

A
Total
.
Interest accrued on bank deposits
Royalty receivable from dealers
57,720
69,650
1,27,370
Prepaid expenses does not result into receipt of any cash or financial asset. However, it results

9.
C into future goods or services. Hence, it is not a financial asset.
As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared after the reporting
period but before the financial statements are approved for issue, the dividends are not
recognized as a liability at the end of the reporting period because no obligation exists at that
time. Such dividends are disclosed in the notes in accordance with Ind AS 1 , Presentation of
Financial Statements.
10. ‘Other Equity’ cannot be shown under ‘Non-current liabilities’. Accordingly, it is reclassified under
‘Equity’.
11. There are both ‘equity’ and ‘debt’ features in the instrument. An obligation to pay cash i.e.
interest at 8% per annum and a redemption amount will be treated as ‘financial liability’ while
option to convert the loan into equity shares is the equity element in the instrument. Therefore,
convertible loan is a compound financial instrument.
Calculation of debt and equity component and amount to be recognised in the books:

32 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

S. No Year Interest amount Discounting factor @ Amount

@8% 10%
Year 1 20X2 5,12,000 0.91 4,65,920
Year 2 20X3 5,12,000 0.83 4,24,960
Year 3 20X4 5,12,000 0.75 3,84,000
Year 4 20X5 69,12,000 0.68 47,00,160
Amount to be recognised as a liability 59,75,040
Initial proceeds (64,00,000)
Amount to be recognised as equity 4,24,960
* In year 4, the loan note will be redeemed; therefore, the cash outflow would be ` 69,12,000
(` 64,00,000 + ` 5,12,000).

in
Presentation in the Financial Statements:
In Statement of Profit and Loss for the year ended on 31 March 20 X2

a
Finance cost to be recognised in the Statement of Profit and Loss ` 5,97,504
(59,75,040 x 10%)

J
Less: Already charged to the Statement of Profit and Loss (` 5,12,000)
Additional finance charge required to be recognised in the Statement of
Profit and Loss Rs. 85,504
In Balance Sheet as at 31 March 20X2
Equity and Liabilities
Equity

a k
h
Other Equity (8% convertible loan) 4,24,960

t
Non-current liability

r
Financial liability [8% convertible loan ” [(59,75,040 + 5,97,504 ” 5,12,000)] 60,60,544
12. Since entity has the intention to set off deferred tax asset against deferred tax liability and the

a
entity has a legally enforceable right to set off taxes, hence their balance on net basis should be
shown as:

S
Particulars Amount (`)
Deferred tax liability 4,74,850

13.

A .
Deferred tax asset
Deferred tax liability (net)
(2,54,150)
2,20,700
A liability that is a contractual obligation to deliver cash or another financial asset to another
entity is a financial liability. Trade payables is a financial liability in this case.

C
14. ‘Other current financial liabilities’:
Particulars Amount (`)
Wages payable 21,890
Salary payable 61,845
Interest accrued on trade payables 35,564
Total 1,19,299
15. Liabilities for which there is no contractual obligation to deliver cash or other financial asset to
another entity, are not financial liabilities. Hence, TDS payable should be reclassified from ‘Other
current financial liabilities’ to ‘Other current liabilities’ since it is not a contractual obligation.

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 FR Super 100

CHAPTER CONSOLIDATED AND SEPARATE

4 FINANCIAL STATEMENTS
Q 1. Intermediate Holding Company
Following is the structure of a group headed by PQR Limited
PQR Limited

100% 100%

AB Limited (Wholly- owned BC Limited (Wholly- owned

subsidiary of PQR Limited) subsidiary of PQR Limited)
60%
XYZ Limited
60% owned by AB Limited
40%

i n
a
40% owned by BC Limited

RST limited (Subsidiary)

J
Whether XYZ Limited can avail the exemption from the preparation and presentation of consolidated

a k
financial statements? What if the facts are the same as above except that, AB Limited and BC Limited are
both owned by an Individual (Mr. X) instead of PQR Limited?
Under both the scenarios, XYZ Limited wishes to avail the exemption provided in Ind AS 110 from the
presentation of consolidated financial statements. Assuming other conditions for such exemption are

Ans.
h
fulfilled, whether XYZ Limited is required to inform its other owner BC Limited (owning 40%) of its

t
intention to not prepare consolidated financial statements?

r
As per paragraph 4(a)(i) of Ind AS 110, a parent need not present consolidated financial statements if it is

a
a:
 wholly-owned subsidiary; or

S
 is a partially-owned subsidiary of another entity and all its other owners, including those not
otherwise entitled to vote, have been informed about, and do not object to, the parent not

.
presenting consolidated financial statements.
In Scenario I, although XYZ Limited is a partly-owned subsidiary of AB Limited, it is the wholly- owned

A
subsidiary of PQR Limited and therefore satisfies the condition 4(a)(i) of Ind AS 110 without regard to
the relationship with its immediate owners, i.e. AB Limited and BC Limited. Thus, XYZ Limited being
the wholly owned subsidiary is not required to inform its other owner BC Limited of its intention not to

C
prepare the consolidated financial statements.
Therefore, XYZ Limited may take the exemption given under Ind AS 110 from presentation of
consolidated financial statements.
In Scenario II, XYZ Limited is ultimately wholly in control of Mr. X (i.e., an individual) and hence it cannot
be considered as a wholly owned subsidiary of an entity.
This is because Ind AS 110 makes use of the term ‘entity’ and the word 'entity’ includes a company as well
as any other form of entity. Since, Mr. X is an ‘individual’ and not an ‘entity’, therefore, XYZ Limited
cannot be considered as wholly owned subsidiary of an entity.
Therefore, in the given case, XYZ Limited is a partially-owned subsidiary of another entity. Accordingly, in
order to avail the exemption, its other owner, BC Limited should be informed about and do not object to
XYZ Limited not presenting consolidated financial statements. Further, for the purpose of consolidation
of AB Limited and BC Limited, XYZ Limited will be required to provide relevant financial information as
per Ind AS.

34 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Q 2. Sale of Stake (Sale of Stake in Subsidiary)
As at the beginning of its current financial year, AB Limited holds 90% equity interest in BC Limited.
During the financial year, AB Limited sells 70% of its equity interest in BC Limited to PQR Limited for a
total consideration of ` 56 crore and consequently loses control of BC Limited. At the date of disposal,
fair value of the 20% interest retained by AB Limited is ` 16 crore and the net assets of BC Limited are
fair valued at ` 60 crore.
These net assets include the following:
(a) Debt investments classified as fair value through other comprehensive income (FVOCI) of ` 12
crore and related FVOCI reserve of ` 6 crore.
(b) Net defined benefit liability of ` 6 crore that has resulted in a reserve relating to net
measurement losses of ` 3 crore.
(c) Equity investments (considered not held for trading) of ` 10 crore for which irrevocable option of

n
recognising the changes in fair value in FVOCI has been availed and related FVOCI reserve of ` 4

(d)
crore.

i
Net assets of a foreign operation of ` 20 crore and related foreign currency translation reserve
of ` 8 crore.

a
In consolidated financial statements of AB Limited, 90% of the above reserves were included in

J
equivalent equity reserve balances, with the 10% attributable to the non-controlling interest included as
part of the carrying amount of the non-controlling interest.

Ans.
AB Limited?
k
What would be the accounting treatment on loss of control in the consolidated financial statements of

a
Paragraph 25 of Ind AS 110 states that if a parent loses control of a subsidiary, the parent:
(a)

(b)
sheet.

r h
derecognises the assets and liabilities of the former subsidiary from the consolidated balance

t
recognises any investment retained in the former subsidiary at its fair value when control is lost
and subsequently accounts for it and for any amounts owed by or to the former subsidiary in

(c)

S a
accordance with relevant Ind ASs. That fair value shall be regarded as the fair value on initial
recognition of a financial asset in accordance with Ind AS 109 or, when appropriate, the cost on
initial recognition of an investment in an associate or joint venture.
recognises the gain or loss associated with the loss of control attributable to the former

.
controlling interest.‛

Paragraph B98(c) of Ind AS 110 states that on loss of control over a subsidiary, a parent shall reclassify to

C
paragraph B99.A
profit or loss, or transfer directly to retained earnings if required by other Ind AS, the amounts
recognised in other comprehensive income in relation to the subsidiary on the basis specified in

As per paragraph B99, if a parent loses control of a subsidiary, the parent shall account for all amounts
previously recognised in other comprehensive income in relation to that subsidiary on the same basis as
would be required if the parent had directly disposed of the related assets or liabilities.

Therefore, if a gain or loss previously recognised in other comprehensive income would be reclassified to
profit or loss on the disposal of the related assets or liabilities, the parent shall reclassify the gain or loss
from equity to profit or loss (as a reclassification adjustment) when it loses control of the subsidiary. If a
revaluation surplus previously recognised in other comprehensive income would be transferred directly
to retained earnings on the disposal of the asset, the parent shall transfer the revaluation surplus
directly to retained earnings when it loses control of the subsidiary.

In view of the basis in its consolidated financial statements, AB Limited shall:

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 FR Super 100
(a) re-classify the FVOCI reserve in respect of the debt investments of ` 5.4 crore (90% of ` 6 crore)
attributable to the owners of the parent to the statement of profit or loss in accordance with
paragraph B5.7.1A of Ind AS 109, Financial Instruments which requires that the cumulative gains
or losses previously recognised in OCI shall be recycled to profit and loss upon derecognition of
the related financial asset. This is reflected in the gain on disposal. Remaining 10% (i.e., ` 0.6
crore) relating to non-controlling interest (NCI) is included as part of the carrying amount of the
non-controlling interest that is derecognized in calculating the gain or loss on loss of control of
the subsidiary;
(b) transfer the reserve relating to the net measurement losses on the defined benefit liability of `
2.7 crore (90% of ` 3 crore) attributable to the owners of the parent within equity to retained
earnings. It is not reclassified to profit or loss. The remaining 10% (i.e., ` 0.3 crore) attributable to
the NCI is included as part of the carrying amount of NCI that is derecognised in calculating the

n
gain or loss on loss of control over the subsidiary. No amount is reclassified to profit or loss, nor

i
is it transferred within equity, in respect of the 10% attributable to the non-controlling interest.
(c) reclassify the cumulative gain on fair valuation of equity investment of ` 3.6 crore (90% of ` 4

J a
crore) attributable to the owners of the same parent from OCI to retained earnings under equity
as per paragraph B5.7.1 of Ind AS 109, Financial Instruments, which provides that in case an
entity has made an irrevocable election to recognise the changes in the fair value of an
investment in an equity instrument not held for trading in OCI, it may subsequently transfer the
cumulative amount of gains or loss within equity. Remaining 10% (i.e., ` 0.4 crore) related to the

(d)
k
NCI are derecognised along with the balance of NCI and not reclassified to profit and loss.
reclassify the foreign currency translation reserve of ` 7.2 crore (90% × ` 8 crore) attributable to

a
the owners of the parent to statement of profit or loss as per paragraph 48 of Ind AS 21, The
Effects of Changes in Foreign Exchange Rates, which specifies that the cumulative amount of

h
exchange differences relating to the foreign operation, recognized in OCI, shall be reclassified

t
from equity to profit or loss on the disposal of foreign operation. This is reflected in the gain on

r
disposal. Remaining 10% (i.e., ` 0.8 crore) relating to the NCI is included as part of the carrying
amount of the NCI that is derecognised in calculating the gain or loss on the loss of control of

S a
subsidiary, but is not reclassified to profit or loss in pursuance of paragraph 48B of Ind AS 21,
which provides that the cumulative exchange differences relating to that foreign operation
attributed to NCI shall be derecognised on disposal of the foreign operation, but shall not be
reclassified to profit or loss.

.
The impact of loss of control over BC Limited on the consolidated financial statements of AB Limited is
summarised below:
(Rupees in crore)
Particular

Bank
C A
Gain / Loss on Disposal on Investments
Amount Amount
(Dr)

56
(Cr)
PL
Impact
RE
Impact

Non-controlling interest (Derecognised) 6

Investment at FV (20% Retained) 16
Gain on Disposal (PL) balancing figure 18 18
De-recognition of total net assets of subsidiary 60
Reclassification of FVTOCI reserve on debt instruments to
profit or loss
FVTOCI reserve on debt instruments (6 cr. x 90%) 5.4
To Profit and loss 5.4 5.4

36 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

Reclassification of net measurement loss reserve to profit

or loss
Reserve and Surplus 2.7 -2.7
To Net measurement loss reserve (FVTOCI) [(3 cr. x 90%)] 2.7
Reclassification of FVTOCI reserve on equity instruments to
retained earnings
FVTOCI reserve on equity instruments (4 cr.x 90%) 3.6
To Reserve and Surplus 3.6 3.6
Foreign currency translation reserve reclassified to profit or
loss
Foreign currency translation reserve (FVOCI) [8 cr. x90%] 7.2

in
To Profit and loss 7.2 7.2
Total 30.6 0.9

Q 3. Sale of Stake (Loss control of a subsidiary in two transactions)

J a
MN Ltd. was holding 80% stake in UV Ltd. Now, MN Ltd. has disposed of the entire stake in UV Ltd. in
two different transactions as follows:



a k
Transaction 1: Sale of 25% stake for a cash consideration of ` 2,50,000
Transaction 2: Sale of 55% stake for a cash consideration of ` 5,50,000

h
Both the transactions have happened within a period of one month. In accordance with the

t
guidance given in Ind AS 110, both the transactions have to be accounted as a single transaction.

r
The net assets of UV Ltd. and non-controlling interest on the date of both the transactions was `
9,00,000 and ` 1,80,000 respectively (assuming there were no earnings between the period of two

a
transactions).
How MN Ltd. should account the transaction? [SM 2021]

S
Ans.
MN Ltd. will account for the transaction as follows:

.
`
Recognise:

A
Fair value of consideration (2,50,000 + 5,50,000)
Derecognise: 8,00,000
Net assets of UV Ltd. (9,00,000)

C
Non-controlling interest
Gain to be recorded in profit or loss
1,80,000 (7,20,000)
80,000
If MN Ltd. loses control over UV Ltd. on the date of transaction 1, then the above gain is recorded on the
date of transaction 1 and MN Ltd. will stop consolidating UV Ltd. from that date. The consideration of `
5,50,000 receivable in transaction 2 will be shown as consideration receivable.
If MN Ltd. loses control over UV Ltd. on the date of transaction 2, then the above gain is recorded on the
date of transaction 2 and MN Ltd. will stop consolidating UV Ltd. from that date. The consideration of `
2,50,000 received in transaction 1 will be shown as advance consideration received.

Q 4. Comprehensive
On 1 May 20X7 K bought 60% of S paying ` 76,000 cash. The summarised Balance Sheet for the two
companies as at 30 November 20X7 are:

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 FR Super 100
K S
` `
Non-current assets
Property, plant & equipment 138,000 115,000
Investments 98,000 ”
Current assets
Inventory 15,000 17,000
Receivables 19,000 20,000
Cash 2,000 ”
272,000 152,000
Share capital 50,000 40,000

n
Retained earnings 189,000 69,000
Non-current liabilities
8% Loan notes
Current liabilities
239,000
”

a
33,000 i 109,000
20,000
23,000

J
272,000 152,000
The following information is relevant:
(i) The inventory of K includes 8,000 of goods purchased for cash from S at cost plus 25%.
(ii)

(iii)

a k
On 1 June 20X7 K transferred an item of plant to S for ` 15,000. Its carrying amount at that date
was ` 10,000. The asset had a remaining useful economic life of 5 years.
The K Group values the non-controlling interest using the fair value method. At the date of

h
acquisition the fair value of the 40% non-controlling interest was ` 50,000.

t
(iv) An impairment loss of ` 1,000 is to be charged against goodwill at the year-end.

r
(v) S earned a profit of ` 9,000 in the year ended 30 November 20X7.
(vi) The loan note in S books represents monies borrowed from K on 30 November 20X7.
(vii)

Required:
a
Included in K receivables is 5,000 relating to inventory sold to S during the year. S raised a
cheque for ` 2,500 and sent it to K on 29 November 20X7. K did not receive this cheque until 4
December 20X7.

S
Ans.

A .
Prepare the consolidated Balance Sheet as at 30 November 20X7.

Consolidated Balance Sheet as at 30 November 20X7

`

C
Non-current assets
Goodwill 21,250
PPE
(138,000 + 115,000 - 4,500) 248,500
Investments
(98,000-76,000-20,000) 2,000
Current Assets
Inventory
(15,000 + 17,000 - 1,600) 30,400
Receivables-
(19,000 + 20,000 - 2,500 (CIT) - 2,500 (intra-group)) 34,000
Cash
(2,000 + 2,500 (CIT)) 4,500

38 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
340,650
Share capital 50,000
Group retained earnings 186,090
Non-controlling Interest 51,060
287,150
Non-current liabilities
(20,000-20,000) ”
Current liabilities
(33,000 + 23,000 - 2,500 (intra-group)) 53,500
340,650

Q 5. Equity Method : Sale of Stake in Subsidiary of Associate

n
Entity A holds a 20% equity interest in Entity B (an associate) that in turn has a 100% equity interest in

i
Entity C. Entity B recognised net assets relating to Entity C of ` 1,000 in its consolidated financial
statements. Entity B sells 20% of its interest in Entity C to a third party (a non-controlling shareholder)

a
for ` 300 and recognises this transaction as an equity transaction in accordance with paragraph 23 of Ind
AS 110, resulting in a credit in Entity B’s equity of ` 100.

J
The financial statements of Entity A and Entity B are summarised as follows before and after the
transaction:
Before
A’s consolidated financial statements
Assets
Investment in B 200
`

a k
Liabilities
Equity
`
200
Total
B’s consolidated financial statements
Assets

r t h 200

`
Total

Liabilities
200

`
Assets (from C)
Total

S a 1000
1000
Equity
Total
1000
1000

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

A
B’s consolidated financial statements
Assets ` Liabilities `
Assets (from C) 1000 Equity 1000
Cash

C
Total
300

1300
Equity transaction with non-controlling interest
Equity attributable to owners
Non-controlling interest
Total
100
1100
200
1300
Although Entity A did not participate in the transaction, Entity A’s share of net assets in Entity B
increased as a result of the sale of B's 20% interest in C. Effectively, A's share in B's net assets is now `
220 (20% of ` 1,100) i.e., ` 20 in addition to its previous share.

How is an equity transaction that is recognised in the financial statements of Entity B reflected in the
consolidated financial statements of Entity A that uses the equity method to account for its investment
in Entity B? (SM 2021)

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 FR Super 100
Ans.
Ind AS 28 defines the equity method as ‚a method of accounting whereby the investment is initially
recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the
investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and
the investor’s other comprehensive income includes its share of the investee’s other comprehensive
income.‛

Paragraph 27 of Ind AS 28, states, inter alia, that when an associate or joint venture has subsidiaries,
associates or joint ventures, the profit or loss, other comprehensive income, and net assets taken into
account in applying the equity method are those recognised in the associate’s or joint venture’s financial
statements (including the associate’s or joint venture’s share of the profit or loss, other comprehensive
income and net assets of its associates and joint ventures), after any adjustments necessary to give
effect to uniform accounting policies.

i n
The change of interest in the net assets / equity of the associate as a result of the investee’s equity
transaction is reflected in the investor’s financial statements as ‘share of other changes in equity of

J a
investee’ (in the statement of changes in equity) instead of gain in Statement of profit and loss, since it
reflects the post-acquisition change in the net assets of the investee as per paragraph 3 of Ind AS 28 and
also faithfully reflects the investor’s share of the associate’s transaction as presented in the associate’s
consolidated financial statements.

k
Thus, in the given case, Entity A recognises ` 20 as change in other equity instead of in statement of
profit and loss and maintains the same classification as of its associate, Entity B, i.e., a direct credit to

Q 6.
equity as in its consolidated financial statements.

Equity Method

h a
t
Invest in Associate and Joint Venture
On 1st April 2019, Investor Ltd. acquires 35% interest in another entity, XYZ Ltd. Investor Ltd. determines

a r
that it is able to exercise significant influence over XYZ Ltd. Investor Ltd. has paid total consideration of `
47,50,000 for acquisition of its interest in XYZ Ltd. At the date of acquisition, the book value of XYZ Ltd.’s
net assets was ` 90,00,000 and their fair value was ` 1,10,00,000. Investor Ltd. has determined that the
difference of ` 20,00,000 pertains to an item of property, plant and equipment (PPE) which has remaining
useful life of 10 years.

. S
During the year, XYZ Ltd. made a profit of ` 8,00,000. XYZ Ltd. paid a dividend of ` 12,00,000 on 31st
March, 2020. XYZ Ltd. also holds a long-term investment in equity securities. Under Ind AS, investment is

C A
classified as at FVTOCI in accordance with Ind AS 109 and XYZ Ltd. recognized an increase in value of
investment by ` 2,00,000 in OCI during the year. Ignore deferred tax implications, if any.

Calculate the closing balance of Investor Ltd.’s investment in XYZ Ltd. as at 31st March, 2020 as per the
relevant Ind AS. [RTP Nov. 2020]
Ans.
Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity method:

` `
Acquisition of investment in XYZ Ltd.
Share in book value of XYZ Ltd.’s net assets (35% of ` 90,00,000) 31,50,000
Share in fair valuation of XYZ Ltd.’s net assets [35% of (` 1,10,00,000 ”
` 90,00,000)] 7,00,000
Goodwill on investment in XYZ Ltd. (balancing figure) 9,00,000
Cost of investment 47,50,000

40 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Profit during the year
Share in the profit reported by XYZ Ltd. (35% of ` 8,00,000) 2,80,000
Adjustment to reflect effect of fair valuation [35% of
(` 20,00,000/10 years)] (70,000)
Share of profit in XYZ Ltd. recognised in income by Investor Ltd. 2,10,000
Long term equity investment
FVTOCI gain recognised in OCI (35% of ` 2,00,000) 70,000
Dividend received by Investor Ltd. during the year [35% of ` 12,00,000] (4,20,000)
Closing balance of Investor Ltd.’s investment in XYZ Ltd. 46,10,000

Q 7. Associate to Subsidiary
Deepak Ltd., an automobile group acquires 25% of the voting ordinary shares of Shaun Ltd., another

i n
automobile business, by paying, ` 4,320 crore on 01.04.2019. Deepak Ltd. accounts its investment in
Shaun Ltd. using equity method as prescribed under Ind AS 28. At 31.03.2020, Deepak Ltd. recognised its
share of the net asset changes of Shaun Ltd. using equity accounting as follows:

Share of Profit or Loss

Share of Exchange difference in OCI
Share of Revaluation Reserve of PPE in OCI
(` in crore)
378
54
27
J a
a k
On 01.04.2020, Deepak Ltd. acquired remaining 75% of Shaun Ltd. for cash ` 13,500 crore. Fair value of
the 25% interest already owned was ` 4,860 crore and fair value of Shaun Ltd.'s identifiable net assets
was ` 16,200 crore as on 01.04.2020.

Ans.

r t h
How should such business combination be accounted for in accordance with the applicable Ind AS?
(MTP Nov. 2020)

Paragraph 42 of Ind AS 103 provides that in a business combination achieved in stages, the acquirer shall

S a
remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and
recognise the resulting gain or loss, if any, in profit or loss or other comprehensive income, as
appropriate. In prior reporting periods, the acquirer may have recognized changes in the value of its
equity interest in the acquiree in other comprehensive income. If so, the amount that was recognised in

A .
other comprehensive income shall be recognised on the same basis as would be required if the acquirer
had disposed of directly the previously held equity interest

Applying the above, Deepak Ltd. records the following entry in its consolidated financial
statements:

C
Identifiable net assets of Shaun Ltd.
Goodwill (W.N.1)
Foreign currency translation reserve
Dr.
Dr.
Dr.
(` in crore)
Debit
16,200
2,160
54
Credit

PPE revaluation reserve Dr. 27

To Cash 13,500
To Investment in associate (4,320 + 378 + 54 + 27) 4,779
To Retained earnings (W.N.2) 27
To Gain on previously held interest in Shaun Ltd. recognised in
Profit or loss (W.N.3) 135
(Recognition of acquisition of Shaun Ltd.)

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 FR Super 100
Working Notes:
1. Calculation of Goodwill
` in crore
Cash consideration 13,500
Add: Fair value of previously held equity interest in Shaun Ltd. Total 4,860
consideration 18,360
Less: Fair value of identifiable net assets acquired (16,200)
Goodwill 2,160

2. The credit to retained earnings represents the reversal of the unrealized gain of ` 27 crore
in Other Comprehensive Income related to the revaluation of property, plant and equipment. In

3.
accordance with Ind AS 16, this amount is not reclassified to profit or loss.

i n
The gain on the previously held equity interest in Shaun Ltd. is calculated as follows:

Fair Value of 30% interest in Shaun Ltd. at 1 st April, 2020

Carrying amount of interest in Shaun Ltd. at 1 st April, 2020

J a ` in crore
4,860
(4,779)
81

k
Unrealised gain previously recognised in OCI 54
Gain on previously held interest in Shaun Ltd. recognised in profit or loss 135

Q 8. Subsequent Measurement – Losses

Loss making associate and long-term interests

h a
r t
An entity has following three type interests in an associate:
“ Equity shares: 25% of the equity shares to which equity method of accounting is applied
“ Preference shares: Non-cumulative preference shares that form part of net investment in the

S a
associate. Such preference shares are measured at fair value as per Ind AS 109.
“ Long-term loan: The loan carrying interest of 10% p.a. The interest income is received at the end of
each year. The long-term loan is accounted as per amortised cost as per Ind AS 109. This loan also
forms part of net investment in the associate.

.
At the start of year 1, the carrying value of each of the above interests is as follows:
“ Equity shares ” ` 10,00,000
“ Preference shares ” ` 5,00,000

A
“ Long-term loan ” ` 3,00,000

C
Following table summarises the changes in the fair value of preference shares as per Ind AS 109,
impairment loss on long-term loan as per Ind AS 109 and entity’s share in profit / loss of associate for
year 1-5.
`
End of Increase / (Decrease) in fair Impairment loss / Entity’s share in profit /
Year value of preference shares (reversal) on long-term (loss) of associate
as per Ind AS 109 loan as per Ind AS 109
1 (50,000) (50,000) (16,00,000)
2 (50,000) - (2,00,000)
3 1,00,000 50,000 -
4 50,000 - 10,00,000
5 30,000 - 10,00,000

42 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Throughout year 1 to 5, there has been no objective evidence of impairment in the net investment in the
associate. The entity does not have any legal or constructive obligation to share the losses of the
associate beyond its interest in the associate.
Based on above, determine the closing balance of each of the above interests at the end of each year.
[SM 2021]
Ans.
Year 1
Below table summarises the closing balance of each of the interest at the end of year 1:
`
Type of interest Opening Adjustment Balance after Share in Closing
balance at as per Ind AS applying Ind profit / (loss) balance at
the start of 109 AS 109 of associate the end of
the year the year

n
(A) (B) I = (A+B) (D) I = (C+D)
Equity shares
Preference shares
Long-term loan
Total
10,00,000
5,00,000
3,00,000
18,00,000
NA
(50,000)
(50,000)
(1,00,000)
10,00,000
4,50,000
2,50,000
17,00,000
a i
(10,00,000)
(4,50,000)
(1,50,000)
(16,00,000)
-
-
1,00,000
1,00,000

J
The entire loss of ` 16,00,000 is recognised. Hence, there is no unrecognised loss at the end of year 1.
Year 2

Type of interest Opening Adjustment

balance at as per Ind AS
the start 109
k
Below table summarises the closing balance of each of the interest at the end of year 2:
Balance after Share in profit

a applying
Ind AS 109
/ (loss) of
associate
Closing
balance at
the end of

Equity shares
Preference shares
of the year
(A)
-
-
r t h (B)
NA
(50,000)
I = (A+B)
-
(50,000)
-
50,000 *
(D)
the year
I = (C+D)
-
-
Long-term loan
Total
a
1,00,000
1,00,000

S
-
(1,00,000)
1,00,000
17,00,000
(1,00,000)
(50,000)
* Recognition of changes in fair value as per Ind AS 109 has resulted in the carrying amount of
Preference shares being negative ` 50,000. Consequently, the entity shall reverse a portion of the
-
-

Year 3

A .
associate’s losses previously allocated to Preference shares.
Out of the total loss of ` 2,00,000 for the year, loss of only ` 50,000 is recognized. Hence, there is
recognized loss to the extent of ` 1,50,000 at the end of year 2.

Below table summarises the closing balance of each of the interest at the end of year 3:

C
Type of interest Opening
balance at
the start of
the year
(A)
Adjustment
as per Ind AS
109

(B)
Balance after
applying
Ind AS 109

I = (A+B)
Share in profit
/ (loss) of
associate

(D)
balance at
the end of
the year
`
Closing

I = (C+D)
Equity shares - NA - - -
Preference shares - 1,00,000 1,00,000 (1,00,000) -
Long-term loan - 50,000 50,000 ___(50,000) -
Total - 1,50,000 1,50,000 (1,50,000) -
The share in profit / loss for the year is nil. However, there was previously unrecognised loss of ` 1,50,000
which is allocated in current year. After recognising the above loss, there is no unrecognised loss
at the end of year 3.

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 FR Super 100
Year 4
Below table summarises the closing balance of each of the interest at the end of year 4:
Type of interest Opening Adjustment Balance after Share in profit Closing
balance at as per Ind AS applying / (loss) of balance at
the start of 109 Ind AS 109 associate the end of
the year the year
(A) (B) I = (A+B) (D) I = (C+D)
Equity shares - NA - 2,00,000 2,00,000
Preference shares - 50,000 50,000 5,00,000 5,50,000
Long-term loan - - - 3,00,000 3,00,000
Total - 50,000 50,000 10,00,000 10,50,000

n
The entity’s share in profit of associate for the year is ` 10,00,000. The entity shall allocate such profit to
each of the instruments in order of their seniority in liquidation. The entity should limit the amount of

term debt.
There is no unrecognised loss at the end of year 4.
a i
profit to be allocated to preference shares and long-term loan to the extent of losses previously
allocated to them. Hence, the entity has allocated ` 5,00,000 to preference shares and ` 3,00,000 to long-

Year 5
J
Below table summarises the closing balance of each of the interest at the end of year 5:
Type of interest Opening

the start
of the year
Adjustment
balance at as per Ind AS
109

a k
Balance after Share in profit /
applying
Ind AS 109
(loss) of
associate
Closing
balance at
the end of
the year

Equity shares
Preference shares
Long-term loan
(A)
2,00,000
5,50,000
3,00,000

r t h
(B)
NA
30,000
-
I = (A+B)
2,00,000
5,80,000
3,00,000
(D)
10,00,000
-
-
I = (C+D)
12,00,000
5,80,000
3,00,000
Total

S a
10,50,000 30,000 10,80,000 10,00,000 20,80,000

The entity’s share in profit of associate for the year is ` 10,00,000. The entire profit is allocated to equity
shares since there is no loss previously allocated to either preference shares or long-term loan.

Year 1 to 5
.
There is no recognized loss at the end of year 5.

A
The interest accrual on long-term loan would be done in each year at 10% p.a. This will be done without
taking into account any adjustment done in the carrying value of long-term loan as per Ind AS 28. Hence,

Q 9.
C
the entity will accrue interest of ` 30,000 (3,00,000 x 10%) in each year.

SFS: Investment Entity

PP Ltd., a non-investment entity, is the parent of Praja Ltd. within the meaning of Ind AS 110
‘Consolidated Financial Statements ’. The investment in Praja Ltd. was carried in the separate financial
statements of PP Ltd. at fair value with changes in fair value recognised in the other comprehensive
income. On 1st April, 20X2, PP Ltd. qualifies as one that is an investment entity. Carrying amount of the
st
investment on 1 April, 20X2 was ` 8,00,000. The fair value of its investment in Praja Ltd was ` 10,00,000
on that date. PP Ltd had recognised in OCI an amount of ` 1,00,000 as a previous fair value increase
related to the investment in Praja Ltd.

How would PP Ltd account for the investment in Praja Ltd on the date of change of its
classification/status as an investment entity, in its separate financial statements? (RTP Dec 2021)

44 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
(i) On the date of change, ie, 1st April, 20X2, PP Ltd (the parent) becoming an investment entity,
its investment in Praja Ltd (the subsidiary) shall be at fair value through profit and loss in
accordance with Ind AS 109. Accordingly, the new carrying amount will be ` 10,00,000.
(ii) The difference between the new carrying amount and the carrying amount of the investment
on the date of change will be recognised in the profit and loss. Hence, PP Ltd will recognise an
amount of ` 2,00,000 (` 10,00,000 ” ` 8,00,000) in profit and loss as gain.
(iii) Any fair value adjustments previously recognised in OCI in respect of subsidiary ie Praja Ltd.
shall be treated as if the investment entity had disposed off the subsidiary at the date of
change in status, ie, amounts shall be reclassified from OCI to the profit and loss on the date of
change of status. Therefore, ` 1,00,000 shall be reclassified from OCI to the profit and loss.

Particulars
Carrying amount of investment in Praja Ltd [as per (i) above]

i
`

n 10,00,000
`

a
Amounts recognised in profit and loss relating to investment in
Praja Ltd
As per (ii) above
As per (iii)
J 2,00,000
1,00,000 3,00,000

“ NOTES
a k
r t h
S a
A .
C

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45
 FR Super 100

CHAPTER Ind AS 103

5 BUSINESS COMBINATIONS
Q 1. Comprehensive - Sale of Division
Enterprise Ltd. has 2 divisions Laptops and Mobiles. Division Laptops has been making constant profits
while division Mobiles has been invariably suffering losses.
On 31st March, 20X2, the division-wise draft extract of the Balance Sheet was:
(` in crores)
Laptops Mobiles Total
Fixed assets cost 250 500 750
Depreciation (225) (400) (625)
Net Assets (A) 25 100 125

in
Current assets: 200 500 700
Less: Current liabilities (25) (400) (425)

Financed by:
Loan funds
(B)
Total (A+B)

J a
175
200
-
-
100
200

300
-
275
400
-
300
Capital : Equity ` 10 each
Surplus

a k 25
175

200
(100)

200
- 25
75

400

h
Division Mobiles along with its assets and liabilities was sold for ` 25 crores to Turnaround Ltd. a new

t
company, who allotted 1 crore equity shares of ` 10 each at a premium of ` 15 per share to the members

r
of Enterprise Ltd. in full settlement of the consideration, in proportion to their shareholding in the
company. One of the members of the Enterprise ltd was holding 52% shareholding of the Company.

a
Assuming that there are no other transactions, you are asked to:
(i) Pass journal entries in the books of Enterprise Ltd.
(ii) Prepare the Balance Sheet of Enterprise Ltd. after the entries in (i).

Ans.
(iii)

. S
Prepare the Balance Sheet of Turnaround Ltd.

Journal of Enterprise Ltd.

Dr. Cr.
(1)

C A
Loan Funds
Current Liabilities
Provision for Depreciation
To Fixed Assets
To Current Assets
Dr.
Dr.
Dr.
300
400
400
500
500
To Capital Reserve 100
(Being division Mobiles along with its assets and liabilities sold to
Turnaround Ltd. for ` 25 crores)
Notes :
(1) Any other alternative set of entries, with the same net effect on various accounts, may be given
by the students.
(2) In the given scenario, this demerger will meet the definition of common control transaction.
Accordingly, the transfer of assets and liabilities will be derecognized and recognized as per
book value and the resultant loss or gain will be recorded as capital reseve in the books of
demerged entity (Enterprise Ltd).

46 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Enterprise Ltd.
Balance Sheet after reconstruction (` in crores)
ASSETS Note No. Amount
Non-current assets
Property, Plant and Equipment 25
Current assets
Other current assets 200
225
EQUITY AND LIABILITIES
Equity

n
Equity share capital (of face value of INR 10 each) 25
Other equity (Securities premium)
Liabilities
Current liabilities

a i 175

J
Current liabilities 75
225

k
Notes to Accounts
( ` in crores)
1. Reserves and Surplus
Add: Capital Reserve on reconstruction

h a 75
100

t
175

r
Notes to Accounts: Consequent on transfer of Division Mobiles to newly incorporated company
Turnaround Ltd., the members of the company have been allotted 1 crore equity shares of ` 10 each at a

a
premium of ` 15 per share of Turnaround Ltd., in full settlement of the consideration in proportion to
their shareholding in the company.
Balance Sheet of Turnaround Ltd. ( ` in crores)
ASSETS

.
Non-current assets
S
Property, Plant and Equipment
Note No. Amount

100

A
Current assets
Other current assets 500
600

C
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of INR 10 each)
Other equity (Securities premium)
Liabilities
1 10
(110)

Non-current liabilities
Financial liabilities
Borrowings 300
Current liabilities
Current liabilities 400
600
Notes to Accounts

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 FR Super 100

(` in crores)
1. Share Capital:
Issued and Paid-up capital
1 crore Equity shares of ` 10 each fully paid up 10
(All the above shares have been issued for consideration other than cash, to the
members of Enterprise Ltd. on takeover of Division Mobiles from Enterprise Ltd.)
Working Note:
In the given case, since both the entities are under common control, this will be accounted as follows:
“ All assets and liabilities will be recorded at book value
“ Identity of reserves to be maintained.
“ No goodwill will be recorded.

n
“ Securities issued will be recorded as per the nominal value.

Q 2. REVERSE ACQUISITION

a i
On 30th September, 20X1 Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All

J
of Entity B’s shareholders exchange their shares in Entity B.Therefore, Entity A issues 150 ordinary
shares in exchange for all 60 ordinary shares of Entity B.
The fair value of each ordinary share of Entity B at 30th September, 20X1 is ` 40. The quoted market

k
price of Entity A’s ordinary shares at that date is ` 16.
The fair values of Entity A’s identifiable assets and liabilities at 30th September, 20X1 are the same as

20X1 is 1,500.

h a
their carrying amounts, except that the fair value of Entity A’s non- current asset sat 30th September,

The statements of financial position of Entity A and Entity B immediately before the business
combination are:

r t Entity A (legal parent,

accounting acquiree)
Entity B (legal subsidiary,
accounting acquirer)
Current assets
Non-current assets
Total assets

S a 500
1,300
1,800
700
3,000
3,700

.
Current liabilities 300 600
Non-current liabilities 400 1,100

A
Total liabilities 700 1,700
Shareholders’ equity

C
Retained earnings 800 1,400
Issued equity
100 ordinary shares 300
60 ordinary shares 600
Total shareholders’ equity 1,100 2,000
Total liabilities and shareholders’ equity 1,800 3,700
Assume that Entity B’s earnings for the annual period ended 31st December, 20X0 were 600 and that
the consolidated earnings for the annual period ended 31 st December, 20X1 were 800. Assume also
that there was no change in the number of ordinary shares issued by Entity B during the annual period
ended 31st December, 20X0 and during the period from 1st January, 20X1 to the date of the reverse
acquisition on 30th September, 20X1.
Calculate the fair value of the consideration transferred measure goodwill and prepare consolidated
balance sheet as on September 30, 20x1. Also compute Earnings per share as on December 30, 20x1.

48 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
The quoted market price of Entity B’s share as at 31st March, .20X1 is ` 105 per share and Entity A’s
share price as at 31st March, 20X1 is ` 20 per share.
Assume the fair value of Entity A’s identifiable net assets as at 31st March, 20X1 are the same as
carrying values and ignore tax effect.
The acquisition date fair value (i.e. at 31st March, 20X1) of the accounting acquirer equity instrument is
generally used to determine the amount of consideration transferred for business combination. In this
case it is 105 per share (Entity B).
So if the business combination had taken place in the form of Entity B issuing additional shares to Entity
A’s shareholders in exchange for their shares in Entity A, Entity B would have to issue 12,000 shares
(30,000 / 2.5) for the ratio of ownership interest in the combined entity to be same. (12,000/72,000).
Therefore, the consideration for the business combination effectively transferred by Entity B is ` 12,
60,000 (12000 Shares x 105).

i n
a
Calculation of Goodwill:
Fair value of Assets less Liabilities Assumed (Entity A) - ` 11,00,000
Consideration transferred (by Entity B)
Goodwill
-
-
(` 12,60,000)
` 1,60,000
J
Q 3. Amalgmation - Common Control & Acquisition

a k
AX Ltd. and BX Ltd. amalgamated on and from 1st January, 20X2. A new Company ABX Ltd. with shares
of ` 10 each was formed to take over the businesses of the existing companies.

ASSETS t h
Summarized Balance Sheet as on 31-12-20X1

r Note No. AX Ltd

` in ‘000
BX Ltd
Non-current assets

Financial assets
Investment
S a
Property, Plant and Equipment 8,500

1,050
7,500

550

A .
Current assets
Inventory
Trade receivables
Cash and Cash equivalent
1,250
1,800
450
2,750
4,000
400

C
EQUITY AND LIABILITIES Equity
Equity share capital (of face value of ` 10 each)
Other equity
Liabilities
Non-current liabilities
13,050

6,000
3,050
15,200

7,000
2,700

Financial liabilities
3,000 4,000
Borrowings (12% Debentures) 1
Current liabilities
1,000 1,500
Trade payables
13,050 15,200

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 FR Super 100
Note:
1. Other equity AX Ltd BX Ltd
General Reserve 1,500 2,000
Profit & Loss 1,000 500
Investment Allowance Reserve 500 100
Export Profit Reserve 50 100
3,050 2,700
ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of the
transferor companies. Also the new debentures were issued in exchange of the old series of both the
companies.
Prepare a note showing purchase consideration a nd discharge thereof and draft the Balance Sheet
of ABX Ltd:
a. Assuming that both the entities are under common control

i n
a
b. Assuming BX Ltd is a larger entity and their management will take the control of the entity ABX
Ltd.

The fair value of net assets of AX and BX limited are as follows:

J
k
Assets AX Ltd. (‘000) BX Ltd. (‘000)
Property, Plant and Equipment 9,500 1,000

Ans.
Inventory
Fair value of the business

h
1,300
11,000
a 2,900
14,000

(a)
1.

r
Calculation of Purchase Consideration
t
(Assumption: Common control transaction)

a
AX Ltd. BX Ltd.
` ’000 ` ’000
Assets taken over:

Investment
Inventory S
Property, Plant and Equipment

.
85,00
10,50
12,50
75,00
5,50
27,50

A
Trade receivables 18,00 40,00
Cash & Cash equivalent 4,50 4,00
Gross Assets 130,50 152,00

C Less : Liabilities
12% Debentures
Trade payables
Net Assets taken over
Less: Other Equity:
General Reserve
30,00
10,00

15,00
(40,00)
90,50
40,00
15,00

20,00
(55,00)
97,00

P & L A/c 10,00 5,00

Investment Allowance Reserve 5,00 1,00
Export Profit Reserve 50 (30,50) 1,00 (27,00)
Purchase Consideration 60,00 70,00

Total Purchase Consideration = 130,00 (60,00 of AX Ltd. & 70,00 of BX Ltd.)

50 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
2. Discharge of Purchase Consideration
No. of shares to be issued to AX Ltd =
Net Assets taken over of AX Ltd. x Purchase Consideration
Net Assets taken over of AX Ltd. and BX Ltd.
No. of shares to be issued to BX Ltd =
Net Assets taken over of BX Ltd. x Purchase Consideration
Net Assets taken over of AX Ltd. and BX Ltd

AX Ltd. BX Ltd.
` ’000 ` ’000
62,75

in
130,00  90,50 = 6,27,500 * Equity shares of ` 10 each
187,50
130,00  97, 00 = 6,72,500 Equity shares of ` 10 each 67,25

ASSETS
187,50

Balance Sheet of ABX Ltd. as on 1.1. 20X2

J a Note No.
` in '000
Amount
Non-current assets
Property, Plant and Equipment
Financial assets

a k 16,000

h
Investments 1,600

t
Current assets

r
Inventory 4,000
Trade receivable 5,800

EQUITY AND
LIABILITIES Equity
S a
Cash and Cash equivalent 850
_28,250

.
Equity share capital (of face value of ` 10 each)
Other equity

A
Liabilities
Non-current liabilities
1
2
13,000
5,750

CFinancial liabilities
Borrowings
Current liabilities
Trade payable
3 7,000

2,500
28,250

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 FR Super 100
Notes to Accounts
(` 000) (` 000)
1. Share Capital
13,00,000 Equity Shares of ` 10 each 130,00
Other Equity
2. General Reserve (15,00 + 20,00) 35,00
Profit & Loss (10,00 + 5,00) 15,00
Investment Allowance Reserve (5,00 + 1,00) 6,00
Export Profit Reserve (50 + 1,00) 1,50 57,50
Long Term Borrowings
12% Debentures 70,00

i n
(b) Assuming BX Ltd is a larger entity and their management will take the control of the entity
ABX Ltd.

J a
In this case BX Ltd. and AX Ltd. are not under common control and hence accounting prescribed
under Ind AS 103 for business combination will be applied. A question arises here is who is the
accounting acquirer ABX Ltd which is issuing the share s or AX Ltd. or BX Ltd. As per the accounting

k
guidance provided in Ind AS 103 , sometimes the legal acquirer may not be the accounting acquirer.
In the given scenario although ABX Ltd. is issuing the shares but BX Ltd. post-merger will have

a
control and is bigger in size which is a clear indicator that BX Ltd. will be an accounting acquirer.
This can be justified by the following table:

h
(In ‘000s)

Fair Value
Value per share
r t AX Ltd.
11,000
10
BX Ltd.
14,000
10
No. of shares

a
i.e. Total No. of shares in ABX Ltd. = 2,500 thousand shares

S
Thus, % Held by each Company in Combined Entity
1,100

44%
1,400

56%

A .
Note: It is a case of Reverse Acquisition.
Accordingly, BX Ltd. assets will be recorded at historical cost in the merged financial statements.

C
(1) Calculation of Purchase Consideration (All figures are in thousands)
We need to calculate the number of shares to be issued by BX Ltd. to AX Ltd. t o maintain the
same percentage i.e. 56%:

Thus, 700 thousand shares of BX Ltd. (given in the balance sheet) represents 56%. This means
that total no. of shares would be 1,250 thousand shares ie 700 thousand shares / 56% .
This implies BX Ltd. would need to issue 550 thousand shares (1,250 less 700) to AX Ltd.
Purchase Consideration = 550 thousand shares x ` 20 per share (ie. 14,000 thousand / 700
thousand shares) = ` 11,000 thousand.

52 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Balance Sheet of ABX Ltd. as on 1.1. 20X2
ASSETS Note No. Amount
Non-current assets
Goodwill (Refer Working Note) 900
Property, Plant and Equipment (9500+7500) 17,000
Financial assets
Investment (1050+550) 1,600
Current assets
Inventory (1300+2750) 4,050
Trade receivables (1800+4000) 5,800
Cash and Cash equivalent (450+400) 850

EQUITY AND LIABILITIES

i n 30,200

Equity
Equity share capital (of face value of ` 10 each)
Other equity
Liabilities
J
1
2 a 12,500
8,200

k
Non-current liabilities
Financial liabilities
Borrowings (12% Debentures)
Current liabilities
Trade payables

h a 3 7,000

2,500

r t 30,200

Notes to Accounts

1.

S a
Share Capital
(` 000) (` 000)

A . 2.
1,250,000 Equity Shares of ` 10 each (700,000 to
BX Ltd and 550,000 as computed above to AX
LTD)
Other Equity
1,25,00

C
General reserve of BX Ltd 20,00
P&L of BX Ltd 5,00
Export Profit Reserve of BX Ltd 1,00
Investment Allowance Reserve of BX Ltd Security
1,00
Premium (550 shares x 10)
5,500 8,200
3. Long Term Borrowings
12% Debentures 70,00

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 FR Super 100
Working Note:
Goodwill Computation:
Assets: ` in 000s
Property, Plant and Equipment 9,500
Investment 1,050
Inventory 1,300
Trade Receivable 1,800
Cash & Cash Equivalent 450
Total Assets 14,100
Less : Liabilities:
Borrowings 3,000

in
Trade Payable 1,000
Net Assets 10,100

Q 4.
Purchase Consideration
Goodwill

Asset Concentration test

J a 11,000
900

Building - ` 1000 Crores

a k
Entity A holds 20% interest in Entity B. Subsequently Entity A, further acquires 50% share in Entity B by
paying ` 300 Crores.
The fair value of assets acquired and Liabilities assumed are as follows:

Cash and Cash Equivalent

Financial Liabilities
DTL
- ` 200 Crores
- ` 800 Crores

r
- ` 150 crores
t h
a
Fair value of Entity B is ` 400 Crores and Fair value of NCI is ` 120 Crores (400 x 30%)
Fair value of Entity A’s previously held interest is ` 80 Crores (400 x 20%)

i)

ii)
. S
Entity A needs to determine whether acquisition is an asset acquisition as per concentration test.
Fair value of consideration transferred (including fair value of non-controlling interest and fair
value of previously interest held) = 300 + 120 + 80 = ` 500 Crores
Fair value of liability assumed (excluding deferred tax) ” ` 800 crores
iii)

C A
Cash and cash equivalent ” ` 200 crores.
Fair value of gross assets acquired - ` 1,100 Crores
In the above scenario, substantially all fair value of gross assets acquired is concentrated in a single
identifiable asset i.e. building. Hence it should be asset acquisition. (1,000 / 1,100 = 91% of value of
gross assets is concentrated into single identifiable asset i.e. building). A Judgement is required to
conclude on the word substantially as the same is not defined in the standard.

In our view we have considered 91% of the value as substantial to conclude the above transaction as
asset acquisition.

Q 5. Company X is engaged in the business of exploration & development of Oil & Gas Blocks. Company X
currently holds participating interest (PI) in below mentioned producing Block as follows:
Block Name Company X Company Y Company Z Total
AWM/01 30% 60% 10% 100%

54 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
For the above Block, Company X, Y & Z has entered into unincorporated Joint Venture.
Company Y is the Operator of the Block AWM/01. Company X & Company Z are the Joint Operators.
Company Y incurs all the expenditure on behalf of Joint Venture and raise cash call to Company X &
Company Z at each month end in respect of their share of expenditure incurred in Joint Venture. All the
manpower and requisite facilities / machineries owned by the Joint venture and thereby owned by all the
Joint Operators.

For past few months, due to liquidity issues, Company Z defaulted in payment of cash calls to operators.
Therefore, company Y (Operator) has issued notice to company Z for withdrawal of their participating
right from on 01.04.20 X1. However, company Z has filed the appeal with arbitrator on 30.04.20 X1.

Financial performance of company Z has not been improved in subsequent months and therefore
company Z has decided to withdraw participating interest rights from Block AWM/01 and entered into

i n
sale agreement with Company X & Company Y. As per the terms of the agreement, dated 31.5.20X1,
Company X will receive 33.33% share & Company Y will receive 66.67% share of PI rights owned by

a
Company Z.

Company X is required to pay ` 1 Lacs against 33.33% share of PI rights owned by Company Z.

J
After signing of sale agreement, Operator (company Y) approach government of India for modification in
PSC (Production Sharing Contract) i.e. removal of Company Z from PSC of AWM/01 and government has

k
approved this transaction on 30.6.20 X1. Government approval for the modification in PSC is essential
given the industry in which the joint-operators operate.

Balance sheet of Company X & Company Z are as follows:

h a
Company X Company Z

t
Particulars 31.5.20X1 30.6.20X1 31.5.20X1 30.6.20X1

Assets
Non-Current Assets

a r ` ` ` `

S
Property, Plant & Equipment 5,00,000 10,00,000 1,50,000 3,00,000
Right of Use Asset 1,00,000 2,00,000 10,000 20,000
Development CWIP
Financial Assets

A .
Loan receivable
Total Non-Current Assets
50,000

25,000
6,75,000
1,00,000

50,000
13,50,000
50,000

25,000
2,35,000
1,00,000

50,000
4,70,000

C
Current assets
Inventories 1,00,000 2,00,000 15,000 30,000
Financial Assets
Trade receivables 1,50,000 3,00,000 50,000 1,00,000
Cash and cash equivalents 2,00,000 4,00,000 1,00,000 2,00,000
Other Current Assets 2,25,000 50,000 25,000 50,000
Total Current Assets 6,75,000 9,50,000 1,90,000 3,80,000
Total Assets 13,50,000 23,00,000 4,25,000 8,50,000
Equity and Liabilities
Equity
Equity share capital 3,00,000 3,00,000 1,00,000 1,00,000
Other equity 2,00,000 3,00,000 75,000 2,50,000

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 FR Super 100
Total Equity 5,00,000 6,00,000 1,75,000 3,50,000
Liabilities
Non-Current Liabilities
Provisions 4,00,000 8,00,000 1,00,000 2,00,000
Other Liabilities 1,50,000 3,00,000 50,000 1,00,000
Total Non-Current Liabilities 5,50,000 11,00,000 1,50,000 3,00,000
Current Liabilities
Financial Liabilities
Trade Payables 3,00,000 6,00,000 1,00,000 2,00,000
Total Current Liabilities 3,00,000 6,00,000 1,00,000 2,00,000

n
Total Liabilities 13,50,000 23,00,000 4,25,000 8,50,000
Additional Information:
1.

2.
approach is ` 5,00,000 & ` 2,00,000 respectively.

a i
Fair Value of PPE & Development CWIP owned by Company Z as per Market participant

Fair Value of all the other assets and liabilities acquired are assumed to be at their carrying

J
values (except cash & cash equivalents). Cash and cash equivalents of Company Z are not to be
acquired by Company X as per the terms of agreement.

k
3. Tax rate is assumed to be 30%.
4. As per Ind AS 28, all the joint operators are joint ventures whereby each parties that have joint

a
control of the arrangement have rights to the net assets of the arrangement and therefore
every operator records their share of assets and liabilities in their books.

h
You need to determine the following:
1.

2.

r t
Whether the above acquisition falls under business or asset acquisition as defined under
business combination standard Ind AS 103?
Determine the acquisition date in the above transaction.

a
3. Prepare Journal entries for the above -mentioned transaction.
4. Draft the Balance Sheet for Company X based on your analysis in Part 1 above as at acquisition
date. (RTP-Dec-2021)

Ans.
(1)

. S
Ind AS 103 defines business as an integrated set of activities and assets that is capable of being

A
conducted and managed for the purpose of providing goods or services to customers,
generating investment income (such as dividends or interest) or generating other income from
ordinary activities.

C For a transaction to meet the definition of a business combination (and for the acquisition
method of accounting to apply), the entity must gain control of an integrated set of assets and
activities that is more than a collection of assets or a combination of assets and liabilities.
To be capable of being conducted and managed for the purpose identified in the definition of a
business, an integrated set of activities and assets requires two essential elements„inputs and
processes applied to those inputs.
Therefore, an integrated set of activities and assets must include, at a minimum, an input and a
substantive process that together significantly contribute to the ability to create output.
In the aforesaid transaction, Company X acquired share of participating rights owned by
Company Z for the producing Block (AWM/01). The output exist in this transaction (Considering
AWM/01) is a producing block. Also all the manpower and requisite facilities / machineries are
owned by Joint venture and thereby all the Joint
Operators. Hence, acquiring participating rights tantamount to acquire inputs (Expertise

56 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Manpower & Machinery) and it is critical to the ability to continue producing outputs. Thus, the
said acquisition will fall under the Business Acquisition and hence standard Ind AS 103 is to be
applied for the same.

(2) As per paragraph 8 of Ind AS 103, acquisition date is the date on which the acquirer obtains
control of the acquiree. Further, paragraph 9 of Ind AS 103 clarifies that the date on which the
acquirer obtains control of the acquiree is generally the date on which the acquirer legally
transfers the consideration, acquires the assets and assumes the liabilities of the acquiree „
the closing date. However, the acquirer might obtain control on a date that is either earlier or
later than the closing date.
An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition
date. Since government of India (GOI) approval is a substantive approval for Company X to

i n
acquire control of Company Z’s operations, the date of acquisition cannot be earlier than the
date on which approval is obtained from GOI. This is pertinent given that the approval from GOI
is considered to be a substantive process and accordingly, the acquisition is considered to be

(3) Journal entry for acquisition

J a
completed only on receipt of such approval. Hence acquisition date in the above scenario is
30.6.20X1.

Particulars

Property Plant & Equipment

Right-of-use Asset
a k Dr.
Dr.
Amount
(`)
1,66,650
6,666
Amount
(`)

Development CWIP
Financial Assets - Loan Receivables
Inventories

r t h Dr.
Dr.
Dr.
66,660
16,665
9,999

a
Trade Receivables Dr. 33,330
Other Current Assets Dr. 16,665

S
To Provisions 66,660
To Other Liabilities 33,330

(Being .
To Trade Payables
To Deferred Tax Liability

A
Toassets
Cash &acquired
To Gain
gain on
Cash Equivalent
on bargain
bargain
(Purchase
and liabilities consideration)
assumed from Company Z recorded at fair value
purchase (Other Comprehensive Income)
purchase)
66,660
29,997
1,00,000
along
19,988

(4)

C
Particulars
Balance Sheet of Company X as at 30.6.20X1
(Pre & Post Acquisition of PI rights pertaining to Company Z)
Pre-
Acquisition
Adjustments Post-
Acquisition
30.6.20X1 30.6.20X1
Assets
Non - Current Assets
Property Plant & Equipment 10,00,000 1,66,650 11,66,650
Right of Use Asset 2,00,000 6,666 2,06,666

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 FR Super 100
Development CWIP 1,00,000 66,660 1,66,660
Financial Assets
Loan receivable 50,000 16,665 66,665
Total Non-Current Assets 13,50,000 16,06,641
Current assets
Inventories 2,00,000 9,999 2,09,999
Financial Assets
Trade receivables 3,00,000 33,330 3,33,330
Cash and cash equivalents 4,00,000 (1,00,000) 3,00,000
Other Current Assets 50,000 16,665 66,665
Total Current Assets
Total Assets
9,50,000
23,00,000

i n
9,09,994
25,16,635
Equity and Liabilities
Equity
Equity share capital 3,00,000
J -
-
a 3,00,000

k
Other equity 3,00,000 3,00,000
Capital Reserve (OCI) - 19,988 19,988
Total Equity
Liabilities

h a
6,00,000 6,19,988

t
Non-Current Liabilities
66,660

r
Provisions 8,00,000 8,66,660
Other Liabilities 3,00,000 33,330 3,33,330
Deferred Tax Liability

a
Total Non-Current Liabilities

Current Liabilities

S
-
11,00,000
29,997 29,997
12,29,987

A .
Financial liabilities

Trade Payables

Total Current Liabilities

6,00,000

6,00,000
66,660 6,66,660

6,66,660

CTotal Equity and Liabilities 23,00,000 25,16,635

58 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Working Notes
1. Determination of Company Z’s balance acquired by Company X on 30.6.20X1 (Acquisition
Date)
As per Company Carrying Acquisition Remarks
Z Books Value Date Value
Particulars 30.6.20X1 33.33%
Share
` ` `
Assets
Non-Current Assets
Property Plant & Equipment 3,00,000 99,990 1,66,650 Note 1

in
Right of Use Asset 20,000 6,666 6,666
Development CWIP 1,00,000 33,330 66,660 Note 2

a
Financial Assets
Loan receivable 50,000 16,665 16,665
Total Non-Current Assets
Current assets
4,70,000 1,56,651

J 2,56,641

k
Inventories 30,000 9,999 9,999
Financial Assets
Trade receivables
Cash and cash equivalents
Other Current Assets

h
1,00,000
2,00,000
50,000 a 33,330
66,660
16,665
33,330
66,660
16,665
Total Current Assets
Liabilities
Non-Current Liabilities
r t 3,80,000 1,26,654 1,26,654

Provisions
Other Liabilities

S a
Total Non-Current Liabilities
2,00,000
1,00,000
3,00,000
66,660
33,330
99,990
66,660
33,330
99,990

A .
Current Liabilities
Financial liabilities
Trade Payables
Total Current Liabilities
2,00,000
2,00,000
66,660
66,660
66,660
66,660

CNote 1: Fair Value of PPE:

Fair Value of PPE in Company Z Books
33.33% Share acquired by Company X
` 5,00,000
` 1,66,650

Note 2: Fair Value of Development CWIP:

Fair Value of PPE in Company Z Books ` 2,00,000
33.33% Share acquired by Company X ` 66,660

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 FR Super 100
2. Computation Goodwill/Bargain Purchase Gain
Particulars As at 30.6.20X1
(`)
Total Non - Current Assets 2,56,641
Total Current Assets
(Except Cash & Cash Equivalent of ` 66,660) (1,26,654 ” 66,660) 59,994
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Total Deferred Tax Liability (Refer Working note 3) (29,997)
Net Assets Acquired 1,19,988
Less: Consideration Paid (1,00,000)
Gain on Bargain Purchase (To be transferred to OCI)

i n
*In extremely rare circumstances, an acquirer will make a bargain purchase in a business
19,988

J a
combination in which the value of net assets acquired in a business combination exceeds the
purchase consideration. The acquirer shall recognise the resulting gain in other comprehensive
income on the acquisition date and accumulate the same in equity as capital reserve, if the
reason for bargain purchase gain is clear and evidence exist. If there does not exist clear
evidence of the underlying reasons for classifying the business combination as a bargain

a k
purchase, then the gain shall be recognised directly in equity as capital reserve. Since in above
scenario it is clearly evident that due to liquidity issues, Company Z has to withdraw their
participating right from AWM/01. The said bargain purchase gain should be transferred to other
comprehensive income on the acquisition date.

3.

t h
Computation of Deferred Tax Liability arising on Business Combination

r Acquisition

a
Particulars Date Value
(`)

S
Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of ` 66,660) 59,994

.
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)

A
Net Assets Acquired at Fair Value 1,49,985

Book value of Net Assets Acquired 49,995

99,990

C
Temporary Difference
DTL @ 30% on Temporary Difference 29,997
Note: As per Ind AS 103, in case an entity acquires another entity step by step through series of
purchase then the acquisition date will be the date on which the acquirer obtains control. Till the
time the control is obtained the investment will be accounted as per the requirements of other
Ind AS 109, if the investments are covered under that standard or as per Ind AS 28, if the
investments are in Associates or Joint Ventures.
If a business combination is achieved in stages, the acquirer shall remeasure its previously held
equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain
or loss, if any, in profit or loss or other comprehensive income, as appropriate.
Since in the above transaction, company X does not hold any prior interest in Company Z &
company holds only 3 0% PI rights in Block AWM/01 through unincorporated joint venture, this is
not a case of step acquisition.

60 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Q 6. Business Combination
H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as mentioned in the below
table:

Date Equity stake purchased Remarks

1st November, 20X6 15% The shares were purchased based on the quoted
1st January, 20X7 45% price on the stock exchange on the relevant dates.

Both the above-mentioned companies have Rupees as their functional currency. Consequently, H Ltd.
acquired control over S Ltd. on 1st January, 20X7. Following is the Balance Sheet of S Ltd. as on that
date:

Particulars Carrying value

(` in crore)

i n Fair value
(` in crore)
ASSETS:
Non-current assets
(a) Property, plant and equipment
(b) Intangible assets
J 40.0
20.0
a 90.0
30.0

k
(c) Financial assets
- Investments 100.0 350.0

a
Current assets
(a) Inventories

h
(b) Financial assets 20.0 20.0

t
- Trade receivables
- Cash held in functional currency 20.0 20.0
(c) Other current assets
Non-current asset held for sale
TOTAL ASSETS

a r 4.0
4.0
208
4.5
4.5

S
EQUITY AND LIABILITIES:
Equity

(b) Other equity

A .
(a) Share capital (face value ` 100)

Non-current liabilities
(a) Financial liabilities
- Borrowings
12.0
141.0

20.0
50.4
Not applicable

20.0

C
Current liabilities
(a) Financial liabilities
- Trade payables
(b) Provision for warranties
(c) Current tax liabilities
28.0
3.0
4.0
28.0
3.0
4.0
TOTAL EQUITY AND LIABILITIES 208.0

Other information:
Property, plant and equipment in the above Balance Sheet include leasehold motor vehicles having
carrying value of ` 1 crore and fair value of ` 1.2 crore. The date of inception of the lease was 1st
April, 20X0. On the inception of the lease, S Ltd. had correctly classified the lease as a finance lease.
However, if facts and circumstances as on 1st April, 20X7 are considered, the lease would be classified as
an operating lease.

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 FR Super 100
Following is the statement of contingent liabilities of S Ltd. as on 1st January, 20X7:
Particulars Fair value Remarks
(` in crore)
Law suit filed by a customer for a 0.5 It is not probable that an outflow of
claim of ` 2 crore resources embodying economic benefits
will be required to settle the claim.
Any amount which would be paid in
respect of law suit will be tax
deductible.
Income tax demand of ` 7 crore 2.0 It is not probable that an outflow of
raised by tax authorities; S Ltd. has resources embodying economic benefits
challenged the demand in the court. will be required to settle the claim.

undertaking to H Ltd. up to a maximum of ` 1 crore.

` 1 crore represents the acquisition date fair value of the indemnification undertaking.
i n
In relation to the above-mentioned contingent liabilities, S Ltd. has given an indemnification

a
Any amount which would be received in respect of the above undertaking shall not be taxable.

J
The tax bases of the assets and liabilities of S Ltd. is equal to their respective carrying values being
recognised in its Balance Sheet.
Carrying value of non-current asset held for sale of ` 4 crore represents its fair value less cost to sell in

k
accordance with the relevant Ind AS.

a
In consideration of the additional stake purchased by H Ltd. on 1st January, 20X7, it has issued to the
selling shareholders of S Ltd. 1 equity share of H Ltd. for every 2 shares held in S Ltd. Fair value of equity

h
shares of H Ltd. as on 1st January, 20X7 is ` 10,000 per share.

r t
On 1st January, 20X7, H Ltd. has paid ` 50 crore in cash to the selling shareholders of S Ltd. Additionally,
on 31st March, 20X9, H Ltd. will pay ` 30 crore to the selling shareholders of S Ltd. if return on equity of

a
S Ltd. for the year ended 31st March, 20X9 is more than 25% per annum. H Ltd. has estimated the fair
value of this obligation as on 1st January, 20X7 and 31st March, 20X7 as ` 22 crore and ` 23 crore
respectively. The change in fair value of the obligation is attributable to the change in facts and

As on November, 20X6
As on 1st January, 20X7
S
circumstances after the acquisition date.
Quoted price of equity shares of S Ltd. as on various dates is as follows:

. ` 350 per share

` 395 per share

C A
As on 31st March, 20X7 ` 420 per share

On 31st May, 20X7, H Ltd. learned that certain customer relationships existing as on 1st January, 20X7,
which met the recognition criteria of an intangible asset as on that date, were not considered during the
accounting of business combination for the year ended 31st March, 20X7. The fair value of such
customer relationships as on 1st January, 20X7 was ` 3.5 crore (assume that there are no temporary
differences associated with customer relations; consequently, there is no impact of income taxes on
customer relations).

On 31st May, 20X7 itself, H Ltd. further learned that due to additional customer relationships
being developed during the period 1st January, 20X7 to 31st March, 20X7, the fair value of such
customer relationships has increased to ` 4 crore as on 31st March, 20X7.

On 31st December, 20X7, H Ltd. has established that it has obtained all the information necessary for
the accounting of the business combination and that more information is not obtainable.

62 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
H Ltd. and S Ltd. are not related parties and follow Ind AS for financial reporting. Income tax rate
applicable is 30%.
You are required to provide your detailed responses to the following, along with reasoning and
computation notes:
(a) What should be the goodwill or bargain purchase gain to be recognised by H Ltd. in its
financial statements for the year ended 31st March, 20X7. For this purpose, measure non-
controlling interest using proportionate share of the fair value of the identifiable net assets of S
Ltd.
(b) Will the amount of non-controlling interest, goodwill, or bargain purchase gain so recognised in
(a) above change subsequent to 31st March, 20X7? If yes, provide relevant journal entries.
(c) What should be the accounting treatment of the contingent consideration as on 31st
March, 20X7? [RTP Nov. 2019, SM 2021]

n
Ans.

i
(i) As an only exception to the principle of classification or designation of assets as they exist at the
acquisition date is that for lease contract and insurance contracts classification which will be

(ii)
J
arrangements and thereby recognise the lease arrangements as finance lease.
a
based on the basis of the conditions existing at inception and not on acquisition date.
Therefore, H Ltd. would be required to retain the original lease classification of the lease

The requirements in Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, do

a k
not apply in determining which contingent liabilities to recognise as of the acquisition date as
per Ind AS 103 ‘Business Combination’. Instead, the acquirer shall recognise as of the acquisition
date a contingent liability assumed in a business combination if it is a present obligation that
arises from past events and its fair value can be measured reliably. Therefore, contrary to Ind AS

h
37, the acquirer recognises a contingent liability assumed in a business combination at the

t
acquisition date even if it is not probable that an outflow of resources embodying economic

r
benefits will be required to settle the obligation. Hence H Ltd. will recognize contingent
liability of ` 2.5 cr.

S a
Since S Ltd. has indemnified for ` 1 cr., H Ltd. shall recognise an indemnification asset at the
same time for ` 1 cr.
As per the information given in the question, this indemnified asset is not taxable. Hence, its tax
base will be equal to its carrying amount. No deferred tax will arise on it.

(iii)

.
As per Ind AS 103, non-current assets held for sale should be measured at fair value less cost to
sell in accordance with Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued

A
Operations’. Therefore, its carrying value as per balance sheet has been considered in the
calculation of net assets.

(iv)

C
Any equity interest in S Ltd. held by H Ltd. immediately before obtaining control over S Ltd. is
adjusted to acquisition-date fair value. Any resulting gain or loss is recognised in the profit or
loss of H Ltd.
Calculation of purchase consideration as per Ind AS 103
Investment in S Ltd.
` in lakh

On 1st Nov. 20X6 15% [(12/100) x 395 x 15%] 7.11

On 1st Jan. 20X7 45%
Own equity given 10,000 x 12% x 45% x 1/2 270
Cash 50
Contingent consideration 22
349.11

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 FR Super 100
(v) Calculation of deferred tax on assets and liabilities acquired as part of the business combination,
including current tax and goodwill.
` in crore
Book Fair Tax Taxable Deferred
Item value value base (deductible) tax assets
temporary (liability)
difference @ 30%
Property, plant and equipment 40 90 40 50 (15)
Intangible assets 20 30 20 10 (3)
Investments 100 350 100 250 (75)
Inventories 20 20 20 - -
Trade receivables 20 20 20 - -

n
Cash held in functional currency 4 4 4 - -

i
Non-current asset held for sale 4 4 - -
Indemnified asset 4 1 1 - -

a
Borrowings - 20 20 - -
Trade payables 20 28 28 - -
Provision for warranties
Current tax liabilities
Contingent liability
28
3
4
3
4
0.5
3
4
-
J -
- (0.5)
0.15
-
-

(vi)
Deferred tax Liability

Calculation of identifiable net assets acquired

a k ` in crore
(92.85)

` in crore
Property, plant and equipment
Intangible assets
Investments
Inventories
r t h 90
30
350
20
Trade receivables

Indemnified asset
S a
Cash held in functional currency
Non-current asset held for sale
20
4
4
1

A .
Total asset
Less: Borrowings
Trade payables
Provision for warranties
20
28
3
519

C Current tax liabilities

Contingent liability (2 + 0.5)
Deferred tax liability (W.N.2)
Net identifiable assets
92.85
4
2.50
(150.35)
368.65

(a) Calculation of NCI by proportionate share of net assets

Net identifiable assets of S Ltd. on 1.1.20X7 (Refer W.N.3) = 372.85 crore
NCI on 1.1.20X7 = 368.65 crore x 40% = 147.46 crore
Calculation of Goodwill as per Ind AS 103
Goodwill on 1.1.20X7 = Purchase consideration + NCI ” Net assets
= 349.11 + 147.46 ” 368.65
= 127.92 crore

64 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
(b) As per para 45 of Ind AS 103 ‘Business Combination’, if the initial accounting for a business
combination is incomplete by the end of the reporting period in which the combination occurs,
the acquirer shall report in its financial statements provisional amounts for the items for
which the accounting is incomplete.
During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date to reflect new information obtained about facts and
circumstances that existed as of the acquisition date and, if known, would have affected the
measurement of the amounts recognised as of that date.

During the measurement period, the acquirer shall also recognise additional assets or liabilities
if new information is obtained about facts and circumstances that existed as of the acquisition
date and, if known, would have resulted in the recognition of those assets and liabilities as of

n
that date.

a i
The measurement period ends as soon as the acquirer receives the information it was seeking
about facts and circumstances that existed as of the acquisition date or learns that more
information is not obtainable. However, the measurement period shall not exceed one year

J
from the acquisition date.

Further, as per para 46 of Ind AS 103, the measurement period is the period after the acquisition

a k
date during which the acquirer may adjust the provisional amounts recognised for a business
combination. The measurement period provides the acquirer with a reasonable time to obtain
the information necessary to identify and measure the following as of the acquisition date in
accordance with the requirements of this Ind AS:
(a)

(b)
(c)
…..
……; and

r h
the identifiable assets acquired, liabilities assumed and any non-controlling interest in
the acquiree;

t
a
(d) the resulting goodwill or gain on a bargain purchase.

Para 48 states that the acquirer recognises an increase (decrease) in the provisional amount

S
recognised for an identifiable asset (liability) by means of a decrease (increase) in goodwill.

.
Para 49 states that during the measurement period, the acquirer shall recognise adjustments to
the provisional amounts as if the accounting for the business combination had been
completed at the acquisition date.

A
Para 50 states that after the measurement period ends, the acquirer shall revise the accounting

C
for a business combination only to correct an error in accordance with Ind AS 8 ‘Accounting
Policies, Changes in Accounting Estimates and Errors’.

On 31st December, 20X7, H Ltd. has established that it has obtained all the information
necessary for the accounting of the business combination and the more information is not
obtainable. Therefore, the measurement period for acquisition of S Ltd. ends on 31st December,
20X7.

On 31st May, 20X7 (ie within the measurement period), H Ltd. learned that certain customer
relationships existing as on 1st January, 20X7 which met the recognition criteria of an
intangible asset as on that date were not considered during the accounting of business
combination for the year ended 31st March, 20X7. Therefore, H Ltd. shall account for the
acquisition date fair value of customer relations existing on 1st January, 20X7 as an identifiable
intangible asset. The corresponding adjustment shall be made in the amount of goodwill.

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 FR Super 100
Accordingly, the amount of goodwill will be changed due to identification of new asset from
retrospective date for changes in fair value of assets and liabilities earlier recognised on
provisional amount (subject to meeting the condition above for measurement period). NCI
changes would impact the consolidated retained earnings (parent’s share). Also NCI will be
increased or decreased based on the profit during the post-acquisition period.

Journal entry
Customer relationship Dr. 3.5 crore
To NCI 1.4 crore
To Goodwill 2.1 crore

However, the increase in the value of customer relations after the acquisition date shall not be

n
accounted by H Ltd., as the customer relations developed after 1st January, 20X7

i
represents internally generated intangible assets which are not eligible for recognition on the
balance sheet.

(c)

J a
Since the contingent considerations payable by H Ltd is not classified as equity and is within the
scope of Ind AS 109 ‘Financial Instruments’, the changes in the fair value shall be recognised in
profit or loss. Change in Fair value of contingent consideration (23-22) ` 1 crore will be
recognized in the Statement of Profit and Loss.

“ NOTES

h a k
r t
S a
A .
C

66 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER Ind AS 2
6 VALUATION OF INVENTORY
Q 1. NRV: Events after reporting date
On 31 March 20X1, the inventory of ABC includes spare parts which it had been supplying to a number of
different customers for some years. The cost of the spare parts was ` 10 million and based on retail
prices at 31 March 20X1, the expected selling price of the spare parts is ` 12 million. On 15 April 20X1,
due to market fluctuations, expected selling price of the spare parts in stock reduced to ` 8 million. The
estimated selling expense required to make the sales would ` 0.5 million. Financial statements were
approved by the Board of Directors on 20th April 20X1.

As at 31st March 20X2, Directors noted that such inventory is still unsold and lying in the warehouse of

i n
the company. Directors believe that inventory is in a saleable condition and active marketing would
result in an immediate sale. Since the market conditions have improved, estimated selling price of
inventory is ` 11 million and estimated selling expenses are same ` 0.5 million.

Ans.
What will be the value inventory at the following dates:
(a)
(b)
31st March 20X1
31st March 20X2

J a
[RTP May 2018, SM 2021]

k
As per Ind AS 2 ‘Inventories’, inventory is measured at lower of ‘cost’ or ‘net realisable value’. Further, as
per Ind AS 10: ‘Events after Balance Sheet Date’, decline in net realisable value below cost provides

a
additional evidence of events occurring at the balance sheet date and hence shall be considered as
‘adjusting events’.

h
(a) In the given case, for valuation of inventory as on 31 March 20X1, cost of inventory would be ` 10
million and net realisable value would be ` 7.5 million (i.e. Expected selling price ` 8 million-

r t
estimated selling expenses ` 0.5 million). Accordingly, inventory shall be measured at ` 7.5
million i.e. lower of cost and net realisable value. Therefore, inventory write down of ` 2.5
million would be recorded in income statement of that year.

(b)

S a
As per para 33 of Ind AS 2, a new assessment is made of net realizable value in each subsequent
period. It Inter alia states that if there is increase in net realizable value because of changed
economic circumstances, the amount of write down is reversed so that new carrying amount is

A .
the lower of the cost and the revised net realizable value. Accordingly, as at 31 March 20X2,
again inventory would be valued at cost or net realisable value whichever is lower. In the
present case, cost is ` 10 million and net realisable value would be ` 10.5 million (i.e. expected
selling price ` 11 million ” estimated selling expense ` 0.5 million). Accordingly, inventory would
be recorded at ` 10 million and inventory write down carried out in previous year for ` 2.5 million

Q 2. C
shall be reversed.

Conversion Cost
On 1 January 20X1 an entity accepted an order for 7,000 custom-made corporate gifts.
On 3 January 20X1 the entity purchased raw materials to be consumed in the production process for `
5,50,000, including ` 50,000 refundable purchase taxes. The purchase price was funded by raising a loan
of ` 5,55,000 (including ` 5,000 loan-raising fees). The loan is secured by the inventories.
During January 20X1 the entity designed the corporate gifts for the customer.
Design costs included:
 cost of external designer = ` 7,000; and
 labour = ` 3,000.

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During February 20X1 the entity’s production team developed the manufacturing technique and made
further modifications necessary to bring the inventories to the conditions specified in the agreement.
The following costs were incurred in the testing phase:
 materials, net of ` 3,000 recovered from the sale of the scrapped output = ` 21,000;
 labour = ` 11,000; and
 depreciation of plant used to perform the modifications = ` 5,000.
During February 20X1 the entity incurred the following additional costs in manufacturing the customised
corporate gifts:
 consumable stores = ` 55,000;
 labour = ` 65,000; and
 depreciation of plant used to manufacture the customised corporate gifts = ` 15,000.

n
The customised corporate gifts were ready for sale on 1 March 20X1. No abnormal wastage occurred in

i
the development and manufacture of the corporate gifts.
Compute the cost of the inventory? Substantiate your answer with appropriate reasons and calculations,

Ans.
wherever required.

Statement showing computation of inventory cost

Particulars
Costs of purchase
Amount (` ) Remarks
5,00,000
J a (RTP May 2021)

Purchase price of raw material [purchase price

Loan-raising fee
Costs of purchase 55,000

a k
(` 5,50,000) less refundable purchase taxes (` 50,000)]
” Included in the measurement of the liability
Purchase price of consumable stores

h
Costs of conversion 65,000 Direct costs„labour
Production overheads 15,000 Fixed costs„depreciation
Production overheads
Other costs
Borrowing costs
10,000

r
37,000
t Product design costs and labour cost for specific customer
Refer working note
” Recognised as an expense in profit or loss
Total cost of inventories
Working Note:

S a 6,82,000

Costs of testing product designed for specific customer:

` 21,000 material (ie net of the ` 3,000 recovered from the sale of the scrapped output) +

.
` 11,000 labour + ` 5,000 depreciation.

“C A NOTES

68 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN ”

 FR Super 100

CHAPTER Ind AS 7
7 CASH FLOW STATEMENT
Q 1. The relevant extracts of consolidated financial statements of A Ltd. are provided below:

Consolidated Statement of Cash Flows

For the year ended (` in Lac)
31st March 20X2 31st March 20X1
Assets
Non-Current Assets
Property, Plant and Equipment 4,750 4,650
Investment in Associate 800 -

in
Financial Assets 2,150 1,800
Current Assets
Inventories 1,550 1,900
Trade Receivables
Cash and Cash Equivalents
Liabilities
Current Liabilities
1,250
4,650

J a 1,800
3,550

k
Trade Payables 1,550 3,610

a
Extracts from Consolidated Statement of Profit and Loss
for the year ended 31st March 20X2

h
Particulars Amount (` in Lac)

t
Revenue 12,380
Cost of Goods Sold (9,860)
Gross Profit
Other Income
Operating Expenses
Other expenses
a r 2,520
300
(450)
(540)
Interest expenses
Share of Profit of Associate

.
Profit before Tax
S (110)
120
1,840

A
The below information is relevant for A Ltd Group.
1. A Ltd had spent ` 30 Lac on renovation of a building. A Ltd charged the entire renovation cost to
profit and loss account.

2.
C On 1st April 20X1, A Ltd acquired 100% shares in S Ltd, for cash of ` 300 Lac. Fair value of the
assets acquired and liabilities assumed under the acquisition are as under:
Property, Plant and Equipment
Inventories
140 Lac
60 Lac
Trade Receivables 30 Lac
Cash and Cash Equivalents 20 Lac
Total Assets 250 Lac
Less: Trade Payables (50 Lac)
Net Assets on acquisition 200 Lac

3. A Ltd.‘s property, plant and equipment comprise the following:

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Carrying amount on 1st April 20X1 4,650 Lac
Addition (at cost) including assets in S Ltd. 800 Lac
Revaluation Surplus 80 Lac
Disposal (Sale) of Assets (490 Lac)
Depreciation for the year (290 Lac)
Carrying Amount on 31st March 20X2 4,750 Lac
A Ltd constructed a machine that is a qualifying asset and incurred construction costs of ` 40 Lac
that has been charged to other expenses. Of the interest cost of ` 110 Lac charged to profit or
loss statement, ` 10 Lac includes interest cost on specific borrowings that need to be capitalized.
Property, plant and equipment was sold at 630 Lac. Gain on disposal is adjusted against
operating expenses.

n
4. A Ltd. purchased 30% interest in an Associate (G Ltd) for cash on 1st April 20X1. The associate

i
reported profit after tax of ` 400 Lac and paid a dividend of ` 100 Lac for the year.

a
5. Impairment test was conducted on 31st March 20X2. The following were impaired as under:
Goodwill impairment loss: ` 265 Lac
Intangible Assets impairment loss
The goodwill impairment relates to 100% subsidiaries.
Assume that interest cost is all paid in cash.
` 900 Lac

J
Ans.

a k
You are required to determine cash generated from operations for group reporting purposes for
the year ended 31st March 20X2.

Extracts of Statement of Cash Flows for the year ended 31st March 20X2
[SM 2021]

Cash Flows from Operating Activities

Profit before tax (W.N.1)
Less: Profit on Sale of PPE (630 - 490)
Add back: Depreciation

r t h Amount in ` Lacs
1,920
(140)
290
Impairment of Goodwill

Add: Interest expense

S a
Impairment of Intangible Assets
Less: Share of Profits of Associate (400 x 30%)
[110 ” 10]
265
900
(120)
100

A .
Working Capital Changes (W.N.2):
Add: Decrease in Trade Receivables
Add: Decrease in Inventories
Less: Decrease in Trade Payables
580
410
(2,110)

C
Cash generated from operations 2,095

Working Notes:
1. Profit before tax Amount in ` Lacs
Reported profit as per Profit or Loss Statement 1,840
Add back: Renovation costs charged as expense 30
Construction costs charged as expense 40
Borrowing costs to be capitalized 10
Revised Profit before tax 1,920

2. Changes in Trade Receivables Amount in ` Lacs

70 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

Opening Balance 1,800

Add: Receivables of S Ltd. 30
1,830
Less: Closing Balance (1,250)
580

3. Changes in Inventories Amount in ` Lacs

Opening Balance 1,900
Add: Receivables of S Ltd. 60
1,960
Less: Closing Balance (1,550)
410

4. Changes in Trade Payables

Opening Balance

i n
Amount in ` Lacs
3,610

a
Add: Receivables of S Ltd. 50
3,660

J
Less: Closing Balance (1,550)
2,110

“ NOTES

a k
r t h
S a
A .
C

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”
71
 FR Super 100

CHAPTER Ind AS 8 - ACCOUNTING POLICIES, CHANGES IN

8 ACCOUNTING ESTIMATES AND ERRORS
Q1. 1. During 20X2, Beta Ltd. discovered that some products that had been sold during 20X1 were
incorrectly included in inventory at March 31, 20X1 at ` 6,500.
2 Beta’s accounting records for 20X2 show sales of ` 1,04,000, cost of goods sold of ` 86,500
(including ` 6,500 for the error in opening inventory), and income taxes of ` 5,250.
3. In 20X1, Beta Ltd. reported:
“ Sales of ` 73,500
“ Cost of goods sold of ` 53,500
“ Profit before income taxes of ` 20,000

n
“ Income taxes of ` 6,000

4.
5.
“ Profit of ` 14,000

i
20X1 opening retained earnings was ` 20,000 and closing retained earnings was ` 34,000.

a
Beta’s income tax rate was 30 per cent for 20X2 and 20X1. It had no other income or expenses.

J
6. Beta Ltd. had ` 5,000 of share capital throughout, and no other components of equity except for
retained earnings. Its shares are not publicly traded and it does not disclose earnings per share.
You are required to prepare relevant extract from the statement of profit and loss and statement of

Ans.
changes in equity. Also what should be disclosed in the notes.

Beta Ltd.

a k (MTP May 2021)

h
Extract from the statement of profit and loss

t
(Amount in `)

r
20 X 2 Restated 20 X 1
Sales 104,000 73,500
Cost of goods sold
Profit before income taxes
Income taxes

S a (80,000)
24,000
(7,200)
(60,000)
13,500
(4,050)

.
Profit 16,800 9,450
Beta Ltd.

A
Extract from the statement of profit and loss
(Amount in `)

C
Share capital Retained Total
Earnings
Balance as at March 31, 20 X 0 5,000 20,000 25,000
Profit for the year ended March 31 , 20 X 1, as restated ____________ 9,450 9,450
Balance as at March 31, 20X 1 5,000 29,450 34,450
Profit for the year ended March 31 X2 5,000 16,800 16,800
Balance as at March 31, 20 x2 46,250 51,250

Extract from the notes:

Some products that had been sold in 20X0-20X1 were incorrectly included in inventory at March 31, 20X1
at ` 6,500. The financial statements of March 31, 20X1 have been restated to correct this error. The
effect of the restatement on those financia7 statements is as summarised above. There is no effect in
March 31, 20X2.

72 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

Q2. X Limited was making provisions up to 31-3-2016 for non-moving inventories based on no issues for the
last 12 months. Based on a technical evaluation the company wants to make provisions during the year
31-03-2017 in the following manner:
Total value of inventory ` 3 crores.
Provision required based on 12 months ` 8 lakhs.
Provision required based on technical evaluation ` 7.50 lakhs.
Does this amount to change in accounting policy?
Can the company change the method of provision?
Ans.
As per Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, due to uncertainties

n
inherent in business activities, many financial statement items cannot be measured with precision but

i
can only be estimated. The estimation process involves judgments based on the latest information
available. An estimate may have to be revised if changes occur regarding the circumstances on which the

a
estimate was based, or as a result of new information, more experience or subsequent developments.

J
The basis of change in provisioning is a guideline and the better way of estimating the provision for non-
moving inventory on account of change. Hence, it is not a change in accounting policy. Accounting policy

k
is the valuation of inventory on cost or on net realizable value or on lower of cost or net realizable value.
Any interchange of this valuation base would have constituted change in accounting policy.

h a
Further, the company should be able to demonstrate satisfactorily that having regard to circumstances
provision made on the basis of technical evaluation provides more satisfactory results than provision

t
based on 12 months’ issue. If that is the case, then the company can change the basis of provisioning.

a r
Consequently, basis of provisioning whether on no issues or on technical evaluation is the basis of
making estimates and cannot be considered as Accounting Policy. Company can change the method of
provisioning based on new information available and as per further experience gathered. However,

S
disclosure of nature and amount (7.50 Lacs as per new basis of provisioning as against 8 Lacs as per
earlier basis) of change in estimate should be disclosed.

Q3. Latent defect

A .
In 20X3-20X4, after the entity’s 31 March 20X3 annual financial statements were approved for issue, a
latent defect in the composition of a new product manufactured by the entity was discovered (that is, a
defect that could not be discovered by reasonable or customary inspection). As a result of the latent

C
defect the entity incurred `100,000 in unanticipated costs for fulfilling its warranty obligation in respect
of sales made before 31 March 20X3. An additional `20,000 was incurred to rectify the latent defect in
products sold during 20X3-20X4 before the defect was detected and the production process rectified,
`5,000 of which relates to items of inventory at 31 March 20X3. The defective inventory was reported at
cost ` 15,000 in the 20X2-20X3 financial statements when its selling price less costs to complete and sell
was estimated at `18,000. The accounting estimates made in preparing the 31 March 20X3 financial
statements were appropriately made using all reliable information that the entity could reasonably be
expected to have been obtained and taken into account in the preparation and presentation of those
financial statements.
Analyse the above situation in accordance with relevant Ind AS. (May 2021)

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 FR Super 100
Ans.
Ind AS 8 is applied in selecting and applying accounting policies, and accounting for changes in
accounting policies, changes in accounting estimates and corrections of prior period errors.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the
amount of the periodic consumption of an asset. This change in accounting estimate is an outcome of the
assessment of the present status of, and expected future benefits and obligations associated with,
assets and liabilities. Changes in accounting estimates result from new information or new developments
and, accordingly, are not corrections of errors.
Further, the effect of change in an accounting estimate, shall be recognised prospectively by including it
in profit or loss in: (a) the period of the change, if the change affects that period only; or (b) the period of
the change and future periods, if the change affects both.

n
Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or

i
more prior periods arising from a failure to use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were approved for issue; and

a
(b) could reasonably be expected to have been obtained and taken into account in the preparation
and presentation of those financial statements.

J
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretations of facts, and fraud.

k
On the basis of above provisions, the given situation would be dealt as follows:
The defect was neither known nor reasonably possible to detect at 31 March 20X3 or before the financial

a
statements were approved for issue, so understatement of the warranty provision ` 1,00,000 and
overstatement of inventory ` 2,000 (Note 1) in the 31 March 20X3 financial statements are not a prior

h
period errors.
The effects of the latent defect that relate to the entity’s financial position at 31 March 20X3 are
changes in accounting estimates.

r t
In preparing its financial statements for 31 March 20X3, the entity made the warranty provision and

a
inventory valuation appropriately using all reliable information that the entity could reasonably be
expected to have obtained and had taken into account the same in the preparation and presentation of
those financial statements.

Working Note:

. S
Consequently, the additional costs are expensed in calculating profit or loss for 20X3-20X4.

Inventory is measured at the lower of cost (ie ` 15,000) and fair value less costs to complete and sell (ie `

“C A
18,000 originally estimated minus ` 5,000 costs to rectify latent defect) = ` 13,000.

NOTES

74 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER Ind AS 10
9 EVENTS AFTER THE REPORTING PERIOD

Q 1. 1. ABC Ltd. has announced its Interim results for Quarter 1, ending 30th June 20X2 on 5th July
20X2. However, till that time the AGM for the year 20X1-20X2 was not held. The accounts for
20X1-20X2 were approved by the board of directors on 15th July 20X2. What will be the period
after the reporting date as per the definition of Ind AS 10?
2. ABC Ltd. is in the legal suit with the excise department. Company gets a court order in its favour,
on 15th April 20X2, which resulted into reducing the excise liability as on 31st March 20X2. The
management has not considered the effect of the transaction as the event is favourable to the
company. Company’s view is favourable events after the reporting date should not be

n
considered as it would hamper the realization concept of accounting. Comment in the light of Ind

i
AS 10?
3. ABC Ltd. is trading company in Laptops. On 31st March 20X2 company has 50 laptops which were

a
purchased at ` 45,000 each. Company has considered the same price for calculation of closing
inventory. On 15th April 20X2, advanced version of same series of laptops is introduced in the
market. Therefore, the price of the current laptops crashes to ` 35,000 each. Company does not

Ans.
J
want to value the stock as ` 35,000 as the event of reduction took place after the 31st March
20X2 and the reduced prices were not applicable as on 31st March 20X2. Comment

1.

a k
As per Ind AS 10, even if partial information is published, still the reporting period will be
considered as the period between end date of reporting period and approval of accounts. In the
above case the accounts are approved on 15th July. Therefore, the period after the reporting

h
date would be 31st March to 15th July.

t
2. As per Ind AS 10, even favourable event needs to be considered. What is important is whether
the conditions exists as on the end of the reporting period and there is a conclusive evidence for

3.
the same.

a r
As per Ind AS 10, any information received after the reporting period for determining purchase
of cost or sale of asset, related to earlier financial year, should be considered as an adjusting
event.

Q 2.

. S
XY Ltd had taken a large-sized civil construction contract, for a public sector undertaking, valued at ` 200
Crores. Execution of the project started during 20X1-X2, and continued in the next financial year also.
During the course of execution of the work on May 29, 20X2, the company found while raising the

C A
foundation work that it had met a rocky surface and cost of contract would go up by an extra ` 50 crore,
which would not be recoverable from the Contractee as per the terms of the contract. The Company’s
financial year ended on 31st March, 20X2, and the financial statements were considered and approved by
the Board of Directors on 15th June, 20X2. How will you treat the above in the financial statements for
the year ended 31st March, 20X2?
Ans.
In the instant case, the execution of work started during the F.Y. 20X1-X2 and the rocky surface was
there at the end of the reporting period, though the existence of rocky surface is confirmed after the
end of the reporting period as a result of which it became evident that the cost may escalate by ` 50
Crores. In accordance with the definition of ‘Events after the Reporting Period’, since the rocky surface
was there, the condition was existing at the end of the reporting period, therefore, it is an adjusting
event. The cost of the project and profit should be accounted for accordingly.

Q 3. Discuss with reasons whether these events are in nature of adjusting or non -adjusting and the
treatment needed in light of accounting standard Ind AS 10. [Important]

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(i) Moon Ltd. won an arbitration award on 25 th April, 2019 for ` 1 crore. From the arbitration
proceeding, it was evident that the Company is most likely to win the arbitration award. The
directors approved the financial statements for the year ending 31.03.2019 on 1st May, 2019.
The management did not consider the effect of the above transaction in Financial Year 2018-
2019, as it was favourable to the Company and the award came after the end of the financial
year.
(ii) Zoom Ltd. has a trading business of Mobile telephones. The Company has purchased 1000
mobiles phones at ` 5,000 each on 15th March, 2019. The manufacturers of phone had
announced the release of the new version on 1st March, 2019 but had not announced the price.
Zoom Ltd. has valued inventory at cost of ` 5,000 each at the year ending 31st March, 2019.
Due to arrival of new advance version of Mobile Phone on 8 th April, 2019, the selling prices of
the mobile stocks remaining with Company was dropped at ` 4,000 each.

i n
The financial statements of the company valued mobile phones @ ` 5,000 each and not at the
value @ ` 4,000 less expenses on sales, as the price reduction in selling price was effected after

a
31.03.2019.

J
(iii) There as an old due from a debtor amounting to ` 15 lakh against whom insolvency proceedings
was instituted prior to the financial year ending 31 st March, 2019. The debtor was declared
insolvent on 15th April, 2019.

(iv)

k
Assume that subsequent to the year end and before the financial statements are approved,
Company’s management announces that it will restructure the operation of the company.

a
Management plans to make significant redundancies and to close a few divisions of company’s
business; however, there is no formal plan yet. Should management recognise a provision in the

Ans.
operations?

r t h
books, if the company decides subsequent to end of the accounting year to restructure its

As per Ind AS 10, the treatment of stated issues would be as under:

[Nov. 2019]

(i)

a
Adjusting event: It is an adjusting event as it is the settlement after the reporting period of a
court case that confirms that the entity had a present obligation at the end of the reporting

S
period. Even though winning of award is favorable to the company, it should be accounted in its
books as receivable since it is an adjusting event.
(ii)

(iii)
.
Adjusting event: The sale of inventories after the reporting period may give evidence about
their net realizable value at the end of the reporting period, hence it is an adjusting event as per
Ind AS 10. Zoom Limited should value its inventory at ` 40,00,000. Hence, appropriate provision

A
must be made for ` 15 lakh.
Adjusting event: As per Ind AS 10, the receipt of information after the reporting period

(iv)
C indicating that an asset was impaired at the end of the reporting period, or that the amount of a
previously recognised impairment loss for that asset needs to be adjusted.
The bankruptcy of a customer that occurs after the reporting period usually confirms that the
customer was credit-impaired at the end of the reporting period.

Non – adjusting event:

Announcing or commencing the implementation of a major restructuring after reporting period
is a non-adjusting event as per Ind AS 10. Though this is a non- adjusting event occurred after
the reporting period, yet it would result in disclosure of the event in the financial statements , if
restructuring is material.
This would not require provision since as per Ind AS 37, decision to restructure was not taken
before or on the reporting date. Hence, it does not give rise to a constructive obligation at the
end of the reporting period to create a provision.

76 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Q 4. On 5th April, 20X2, fire damaged a consignment of inventory at one of the Jupiter’s Ltd.’s warehouse.
This inventory had been manufactured prior to 31st March, 20X2 costing ` 8 lakhs. The net realisable
value of the inventory prior to the damage was estimated at ` 9.60 lakhs. Because of the damage caused
to the consignment of inventory, the company was required to spend an additional amount of ` 2 lakhs
on repairing and re-packaging of the inventory. The inventory was sold on 15th May, 20X2 for proceeds
of ` 9 lakhs.
The accountant of Jupiter Ltd treats this event as an adjusting event and adjusted this event of causing
the damage to the inventory in its financial statement and accordingly re-measures the inventories as
follows:
` lakhs
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value)

i n
Analyse whether the above accounting treatment made by the accountant in regard to financial year
7.60

Ans.
working for the same.
a
ending on 31.0.20X2 is in compliance of the Ind AS. If not, advise the correct treatment alongwith

J
(Analysis of FS)

The above treatment needs to be examined in the light of the provisions given in Ind AS 10 ‘Events after

k
the Reporting Period’ and Ind AS 2 ‘Inventories’.
Para 3 of Ind AS 10 ‘Events after the Reporting Period’ defines ‚Events after the reporting period are

a
those events, favourable and unfavourable, that occur between the end of the reporting period and the
date when the financial statements are approved by the Board of Directors in case of a company, and, by
the corresponding approving authority in case of any other entity for issue. Two types of events can be
identified:
(a)

(b)

r t h
those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).

S a
Further, paragraph 10 of Ind AS 10 states that:
‚An entity shall not adjust the amounts recognised in its financial statements to reflect non adjusting
events after the reporting period‛.

A .
Further, paragraph 6 of Ind AS 2 defines:
‚Net realisable value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale‛.

Further, paragraph 9 of Ind AS 2 states that:

C
‚Inventories shall be measured at the lower of cost and net realisable value‛.
Accountant of Jupiter Ltd. has re-measured the inventories after adjusting the event in its financial
statement which is not correct and nor in accordance with provision of Ind AS 2 and Ind AS 10.
Accordingly, the event causing the damage to the inventory occurred after the reporting date and as per
the principles laid down under Ind AS 10 ‘Events After the Reporting Date’ is a nonadjusting event as it
does not affect conditions at the reporting date. Non-adjusting events are not recognised in the financial
statements, but are disclosed where their effect is material.
Therefore, as per the provisions of Ind AS 2 and Ind AS 10, the consignment of inventories shall be
recorded in the Balance Sheet at a value of ` 8 Lakhs calculated below:
`’ lakhs
Cost 8.00
Net realisable value 9.60
Inventories (lower of cost and net realisable value) 8.00

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Q 5. Discuss with reasons whether these events are in nature of adjusting or non-adjusting and the treatment
needed in light of accounting standard Ind AS 10.
(i) Moon Ltd. won an arbitration award on 25th April, 20X1 for ` 1 crore. From the arbitration
proceeding, it was evident that the Company is most likely to win the arbitration award. The
directors approved the financial statements for the year ending 31.03.20X1 on 1st May, 20X1.
The management did not consider the effect of the above transaction in Financial Year 20X0-
20X1, as it was favourable to the Company and the award came after the end of the financial
year.
(ii) Zoom Ltd. has a trading business of Mobile telephones. The Company has purchased 1000
mobiles phones at ` 5,000 each on 15th March, 20X1. The manufacturers of phone had
announced the release of the new version on 1st March, 20X1 but had not announced the price.
Zoom Ltd. has valued inventory at cost of ` 5,000 each at the year ending 31st March, 20X1.

the mobile stocks remaining with Company was dropped at ` 4,000 each.

i n
Due to arrival of new advance version of Mobile Phone on 8th April, 20X1, the selling prices of

a
The financial statements of the company valued mobile phones @ ` 5,000 each and not at the
value @ ` 4,000 less expenses on sales, as the price reduction in selling price was effected after

J
31.03. 20X1.
(iii) There as an old due from a debtor amounting to ` 15 lakh against whom insolvency proceedings
was instituted prior to the financial year ending 31st March, 20X1. The debtor was declared

(iv)
insolvent on 15th April, 20X1.

k
Assume that subsequent to the year end and before the financial statements are approved,

a
Company’s management announces that it will restructure the operation of the company.
Management plans to make significant redundancies and to close a few divisions of company’s

Ans.
operations?

r t h
business; however, there is no formal plan yet. Should management recognise a provision in the
books, if the company decides subsequent to end of the accounting year to restructure its
(MTP Dec 2021)

a
As per Ind AS 10, the treatment of stated issues would be as under:
(i) Adjusting event: It is an adjusting event as it is the settlement after the reporting period of a

S
court case that confirms that the entity had a present obligation at the end of the reporting
period. Even though winning of award is favorable to the company, it should be accounted in its

(ii)
.
books as receivable since it is an adjusting event.
Adjusting event: The sale of inventories after the reporting period may give evidence about their

A
net realizable value at the end of the reporting period, hence it is an adjusting event as per Ind
AS 10. Zoom Limited should value its inventory at ` 40,00,000.

C
(iii) Adjusting event: As per Ind AS 10, the receipt of information after the reporting period indicating
that an asset was impaired at the end of the reporting period, or that the amount of a previously
recognised impairment loss for that asset needs to be adjusted.
The bankruptcy of a customer that occurs after the reporting period usually confirms that the
customer was credit-impaired at the end of the reporting period.
(iv) Non”adjusting event: Announcing or commencing the implementation of a major restructuring
after reporting period is a non-adjusting event as per Ind AS 10. Though this is a non-adjusting
event occurred after the reporting period, yet it would result in disclosure of the event in the
financial statements,if restructuring is material.
This would not require provision since as per Ind AS 37, decision to restructure was not taken before or
on the reporting date. Hence, it does not give rise to a constructive obligation at the end of the reporting
period to create a provision.

78 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

CHAPTER Ind AS 12
10 INCOME TAXES
Q 1. RoU Asset
On 1st April 20X1, S Ltd. leased a machine over a 5 year period. The present value of lease liability is `
120 Cr (discount rate of 8%) and is recognized as lease liability and corresponding Right of Use (RoU)
Asset on the same date. The RoU Asset is depreciated under straight line method over the 5 years. The
annual lease rentals are ` 30 Cr payable starting 31st March 20X2. The tax law permits tax deduction on
the basis of payment of rent.
Assuming tax rate of 30%, you are required to explain the deferred tax consequences for the above
transaction for the year ended 31st March 20X2. [SM 2021]
Ans.

n
A temporary difference effectively arises between the value of the machine for accounting purposes and

i
the amount of lease liability, since the rent payment is eligible for tax deduction.
Tax base of the machine is nil as the amount is not eligible for deduction for tax purposes.

Recognition of deferred tax on 31st March 20X2:

Carrying amount in balance sheet
J a
Tax base of the lease liability is nil as it is measured at carrying amount less any future tax deductible
amount

RoU Asset (120 Cr ” 24 Cr (Depreciation))

Lease Liability (120 Cr + 9.60 Cr (120 Cr x 8%) - 30 Cr)
Net Amount
Tax Base
a k ` 96.00 Dr
` 99.60 Cr
` 3.60 Cr
` 0.00 Cr

Q 2.
Temporary Difference (deductible)

t h
Deferred Tax asset to be recognized (` 3.60 Cr x 30%)

Share Based Payment

r
` 3.60 Cr
` 1.08 Cr

S a
On 1st April 20X1, P Ltd. had granted 1 Cr share options worth ` 4 Cr subject to a two-year vesting
period. The income tax law permits a tax deduction at the exercise date of the intrinsic value of the
options. The intrinsic value of the options at 31st March 20X2 was ` 1.60 Cr and at 31st March 20X3 was
` 4.60 Cr. The increase in the fair value of the options on 31st March 20X3 was not foreseeable at 31st

.
March 20X2. The options were exercised at 31st March 20X3.

A
Give the accounting for the above transaction for deferred tax for period ending 31st March, 20X2 and
31st March, 20X3. Assume that there are sufficient taxable profits available in future against any
deferred tax assets. Tax rate of 30% is applicable to P Ltd. [SM 2021]
Ans.

C
On 31st March 20X2:
The tax benefit is calculated as under:
Carrying amount of Share based payment
Tax Base of Share based payment (` 1.60 Cr x ½)
` 0.00 Cr
` 0.80 Cr
Temporary Difference (Carrying amount ” tax base) ` 0.80 Cr
Deferred Tax Asset recognized (Temporary Difference x Tax rate)
(0.80 Cr x 30%) ` 0.24 Cr

Journal Entry for above:

Deferred Tax Asset Dr. ` 0.24 Cr
To Tax Expense ` 0.24 Cr
(Being DTA recognized on equity option)

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 FR Super 100
On 31st March 20X3:
The options have been exercised and a current tax benefit will be available to the entity on the basis of
intrinsic value of ` 4.60 Cr. Initially recognized deferred tax asset will no longer be required.

The accounting entry will be done as under:

Tax Expense Dr ` 0.24 Cr
To Deferred Tax Asset ` 0.24 Cr
(Being DTA reversed on the exercise of the option)

Q 3. Business Combination
On 1 April 20X1, A Ltd. acquired 12 Cr shares (representing 80% stake) in B Ltd. by means of a cash
payment of ` 25 Cr. It is the group policy to value the non-controlling interest in subsidiaries at the date

n
of acquisition at fair value. The market value of an equity share in B Ltd. at 1 April 20X1 can be used for

i
this purpose. On 1 April 20X1, the market value of a B Ltd. share was ` 2.00
On 1 April 20X1, the individual financial statements of B Ltd. showed the net assets at ` 23 Cr.

J a
The directors of A Ltd. carried out a fair value exercise to measure the identifiable assets and liabilities of
B Ltd. at 1 April 20X1. The following matters emerged:
Property having a carrying value of ` 15 Cr at 1 April 20X1 had an estimated market value of ` 18 Cr
at that date.

k
 Plant and equipment having a carrying value of ` 1 Cr (correct it as 11 crore) at 1 April 20X1 had an
estimated market value of ` 13 Cr at that date.

acquisition date is ` 3 Cr.

h a
 Inventory in the books of B Ltd. is shown at a cost of ` 2.50 Cr. The fair value of the inventory on the

The fair value adjustments have not been reflected in the individual financial statements of B Ltd. In the

r t
consolidated financial statements, the fair value adjustments will be regarded as temporary differences
for the purposes of computing deferred tax. The rate of deferred tax to apply to temporary differences
is 20%.

a
Calculate the deferred tax impact on above and calculate the goodwill arising on acquisition of B Ltd.
[SM 2021]
Ans.
Purchase Consideration:

. S
Non-Controlling Interest [{(12 Cr x (20% / 80%)} x ` 2 per share]
Computation of Net Assets of B Ltd.
As per books
` 25 Cr
` 6 Cr

` 23.00 Cr

C A
Add: Fair value differences not recognized in books of B Ltd.:
Property (18 Cr ” 15 Cr)
Plant and Equipment (13 Cr ” 11 Cr)
Inventory (3 Cr ” 2.5 Cr)
`
`
`
`
3.00 Cr
2.00 Cr
0.50 Cr
28.5 Cr
Less: Deferred tax liability on fair value difference @ 20%
[(3 Cr + 2 Cr + 0.50 Cr) x 20%] (` 1.10 Cr)
Total Net Assets at Fair Value ` 27.40 Cr
Computation of Goodwill:
Purchase Consideration ` 25.00 Cr
Add: Non-Controlling Interest ` 6.00 Cr
` 31.00 Cr
Less: Net Assets at Fair Value (` 27.40 Cr)
Goodwill on acquisition date ` 3.60 Cr

80 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Q 4. Various
X Ltd. prepares consolidated financial statements to 31st March each year. During the year ended 31st
March 2018, the following events affected the tax position of the group:
(i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of ` 30,00,000.
Y Ltd. is unable to utilise this loss against previous tax liabilities. Income- tax Act does not allow
Y Ltd. to transfer the tax loss to other group companies. However, it allows Y Ltd. to carry the
loss forward and utilise it against company’s future taxable profits. The directors of X Ltd. do not
consider that Y Ltd. will make taxable profits in the foreseeable future.
(ii) Just before 31st March, 2018, X Ltd. committed itself to closing a division after the year end,
making a number of employees redundant. Therefore, X Ltd. recognised a provision for closure
costs of ` 20,00,000 in its statement of financial position as at 31st March, 2018. Income-tax Act
allows tax deductions for closure costs only when the closure actually takes place. In the year

n
ended 31st March 2019, X Ltd. expects to make taxable profits which are well in excess of `

i
20,00,000. On 31st March, 2018, X Ltd. had taxable temporary differences from other sources
which were greater than ` 20,00,000.

a
(iii) During the year ended 31st March, 2017, X Ltd. capitalised development costs which satisfied
the criteria in paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount capitalised was `

J
16,00,000. The development project began to generate economic benefits for X Ltd. from 1st
January, 2018. The directors of X Ltd. estimated that the project would generate economic
benefits for five years from that date. The development expenditure was fully deductible

k
against taxable profits for the year ended 31st March, 2018.
(iv) On 1st April, 2017, X Ltd. borrowed ` 1,00,00,000. The cost to X Ltd. of arranging the borrowing
was ` 2,00,000 and this cost qualified for a tax deduction on 1st April, 2017. The loan was for a

a
three-year period. No interest was payable on the loan but the amount repayable on 31st March,
2020 will be ` 1,30,43,800. This equates to an effective annual interest rate of 10%. As per the

h
Income-tax Act, a further tax deduction of ` 30,43,800 will be claimable when the loan is repaid

t
on 31st March, 2020.
Explain and show how each of these events would affect the deferred tax assets / liabilities in the

Ans.
corporate income tax is 20%.

(i)
a r
consolidated balance sheet of X Ltd. group at 31st March, 2018 as per Ind AS. Assume the rate of
[RTP Nov. 2018, SM 2021]

The tax loss creates a potential deferred tax asset for the group since its carrying value is nil and

(ii) S
its tax base is ` 30,00,000.
However, no deferred tax asset can be recognised because there is no prospect of being able to

.
reduce tax liabilities in the foreseeable future as no taxable profits are anticipated.
The provision creates a potential deferred tax asset for the group since its carrying value is `
20,00,000 and its tax base is nil.

(iii)
C A
This deferred tax asset can be recognised because X Ltd. is expected to generate taxable profits
in excess of ` 20,00,000 in the year to 31st March, 2019.
The amount of the deferred tax asset will be ` 4,00,000 (` 20,00,000 x 20%).
This asset will be presented as a deduction from the deferred tax liabilities caused by the (larger)
taxable temporary differences.
The development costs have a carrying value of ` 15,20,000 (` 16,00,000 ” (` 16,00,000 x
1/5 x 3/12)).
The tax base of the development costs is nil since the relevant tax deduction has already been
claimed.
The deferred tax liability will be ` 3,04,000 (` 15,20,000 x 20%). All deferred tax liabilities are
shown as non-current.
(iv) The carrying value of the loan at 31st March, 2018 is ` 1,07,80,000 (` 1,00,00,000 ” ` 2,00,000 + (`
98,00,000 x 10%)).
The tax base of the loan is ` 1,00,00,000.
This creates a deductible temporary difference of ` 7,80,000 (` 1,07,80,000 ” ` 1,00,00,000)
and a potential deferred tax asset of ` 1,56,000 (` 7,80,000 x 20%).
Due to the availability of taxable profits next year (see part (ii) above), this asset can be
recognised as a deduction from deferred tax liabilities.

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 FR Super 100

CHAPTER Ind AS 16
11 PROPERTY, PLANT AND EQUIPMENT
Q 1. Cost: Self Constructed Asset
On 1st April, 20X1, Sun ltd purchased some land for ` 10 million (including legal costs of ` 1 million) in
order to construct a new factory. Construction work commenced on 1st May, 20X1. Sun ltd incurred the
following costs in relation with its construction:
– Preparation and levelling of the land ” ` 3,00,000.
– Purchase of materials for the construction ” ` 6·08 million in total.
– Employment costs of the construction workers ” ` 2,00,000 per month.
– Overhead costs incurred directly on the construction of the factory ” ` 1,00,000 per month.
– Ongoing overhead costs allocated to the construction project using the company’s normal overhead

n
allocation model ” ` 50,000 per month.

i
– Income received during the temporary use of the factory premises as a car park during the
construction period ” ` 50,000.
– Costs of relocating employees to work at the new factory ” ` 300,000.
– Costs of the opening ceremony on 31st January, 20X1 ” ` 150,000.

J a
The factory was completed on 30th November, 20X1 (which is considered as substantial period of time as
per Ind AS 23) and production began on 1st February, 20X2. The overall useful life of the factory building
was estimated at 40 years from the date of completion. However, it is estimated that the roof will need

prices would be 30% of the total cost of the building.

a k
to be replaced 20 years after the date of completion and that the cost of replacing the roof at current

At the end of the 40-year period, Sun Ltd has a legally enforceable obligation to demolish the factory and

h
restore the site to its original condition. The directors estimate that the cost of demolition in 40 years’
time (based on prices prevailing at that time) will be ` 20 million. An annual risk adjusted discount rate

discount rate of 8% is ` 0.046.

r t
which is appropriate to this project is 8%. The present value of ` 1 payable in 40 years’ time at an annual

The construction of the factory was partly financed by a loan of ` 17·5 million taken out on 1st April,

Required:

S a
20X1. The loan was at an annual rate of interest of 6%. Sun Ltd received investment income of ` 100,000
on the temporary investment of the proceeds.

Compute the carrying amount of the factory in the Balance Sheet of Sun Ltd at 31st March, 20X2. You

Ans.

A .
should explain your treatment of all the amounts referred to in this part in your answer.

Computation of the cost of the factory

Description Included in
P.P.E.
Explanation

C
Purchase of land

Preparation and levelling

Materials
` ’000
10,000

300
6,080
Both the purchase of the land and the
associated legal costs are direct costs of
constructing the factory.
A direct cost of constructing the factory
A direct cost of constructing the factory
Employment costs of construction 1,400 A direct cost of constructing the factory for
workers a seven-month period
Direct overhead costs 700 A direct cost of constructing the factory for
a seven-month period
Allocated overhead costs Nil Not a direct cost of construction
Income from use as a car park Nil Not essential to the construction so
recognised directly in profit or loss
Relocation costs Nil Not a direct cost of construction
Opening ceremony Nil Not a direct cost of construction

82 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Finance costs 612.50 Capitalise the interest cost incurred in a
seven-month period (purchase of land
would not trigger off capitalisation since
land is not a qualifying asset. Infact, the
construction started from 1st May, 20X1)
Investment income on temporary (100) offset against the amount capitalised
investment of the loan proceeds
Demolition cost recognised as a 920 Where an obligation must recognise as part
provision of the initial cost
Total 19,912.50
Computation of accumulated depreciation
Total depreciable amount 9,912.50 All of the net finance cost of 512.50 (612.50
” 100) has been allocated to the
depreciable amount. Also acceptable to

n
reduce by allocating a portion to the non-

i
depreciable land element principle
Depreciation must be in two parts:

a
Depreciation of roof component 49.56 9,912.50 x 30% x 1/20 x 4/12
Depreciation of remainder 57.82 9,912.50 x 70% x 1/40 x 4/12

J
Total depreciation 107.38
Computation of carrying amount 19,805.12 19,912.50 ” 107.38

k
Q 2. Cost : Exchange
Entity X has a warehouse which is closer to factory of Entity Y and vice versa. The factories are located in

a
the same vicinity. Entity X and Entity Y agree to exchange their warehouses. The carrying value of
warehouse of Entity X is ` 1,00,000 and its fair value is ` 1,25,000. It exchanges its warehouse with that of

h
Entity Y, the fair value of which is ` 1,20,000. It also receives cash amounting to ` 5,000. How should

t
Entity X account for the exchange of warehouses? [RTP Nov. 2020]

r
Ans.
Paragraph 24 of Ind AS 16, inter alia, provides that when an item of property, plant and equipment is

a
acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-
monetary assets, the cost of such an item of property, plant and equipment is measured at fair value

S
unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset
received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value,

.
its cost is measured at the carrying amount of the asset given up.
Further as per paragraph 25 of Ind AS 16, an entity determines whether an exchange transaction has
commercial substance by considering the extent to which its future cash flows are expected to change as

(a)

(b)
C A
a result of the transaction. An exchange transaction has commercial substance if:
the configuration (risk, timing and amount) of the cash flows of the asset received differs from
the configuration of the cash flows of the asset transferred; or
the entity-specific value of the portion of the entity’s operations affected by the transaction
changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
In the given case, the transaction lacks commercial substance as the company’s cash flows are not
expected to significantly change as a result of the exchange because the factories are located in the
same vicinity i.e. it is in the same position as it was before the transaction. Hence, Entity X will have to
recognise the assets received at the carrying amou nt of asset given up, i.e., ` 1,00,000 being carrying
amount of existing warehouse of Entity X and ` 5,000 received will be deducted from the cost of
property, plant and equipment.
Therefore, the warehouse of Entity Y is recognised as property, plant and equipment with a carrying
value of ` 95,000 in the books of Entity X.

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 FR Super 100
Q 3. An entity has the following items of property, plant and equipment:
 Property A „ a vacant plot of land on which it intends to construct its new administration
headquarters;
 Property B „ a plot of land that it operates as a landfill site;
 Property C „ a plot of land on which its existing administration headquarters are built;
 Property D „ a plot of land on which its direct sales office is built;
 Properties E1”E10 „ ten separate retail outlets and the land on which they are built;
 Equipment A „ computer systems at its headquarters and direct sales office that are integrated
with the point of sale computer systems in the retail outlets;
 Equipment B „ point of sale computer systems in each of its retail outlets;
 Furniture and fittings in its administrative headquarters and its sales office;
 Shop fixtures and fittings in its retail outlets.

n
How many classes of property, plant and equipment must the entity disclose (RTP May 2021)

i
Ans.
To answer this question one must make a materiality judgement.

a
A class of assets is defined as a grouping of assets of a similar nature and use in an entity’s operations.

J
The nature of land without a building is different to the nature of land with a building.
Consequently, land without a building is a separate class of asset from land and buildings. Furthermore,
the nature and use of land operated as a landfill site is different from vacant land. Hence, the entity

k
should disclose Property A separately. The entity must apply judgement to determine whether the
entity’s retail outlets are sufficiently different in nature and use from its office buildings, and thus
constitute a separate class of land and buildings.

a
single separate class of asset.

r h
The computer equipment is integrated across the organisation and would probably be classified as a

t
Furniture and fittings used for administrative purposes could be sufficiently different to shop fixtures

“ a
and fittings in retail outlets. Hence, they should be classified in two separate classes of assets.

S NOTES

A .
C

84 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER Ind AS 19
12 EMPLOYEE BENEFITS
Q 1. DBS : Comprehensive
SA Pvt Ltd is engaged in the business of retail having 100 retail outlets across Northern and Southern
India. The company’’s head office is located at Chennai. SA Pvt Ltd is a subsidiary of SAG Ltd. SAG Ltd is
listed on the National Stock Exchange in India.
Following information is available for SA Pvt Ltd:
Plan Assets
At 1st April, 20X1, the fair value of plan assets was ` 10,000.
Contribution to the plan assets done on 31st March, 20X2 ” ` 3,000

n
Amount paid on 31st March, 20X2 ” ` 300

i
At 31st March, 20X2, the fair value of plan assets was ` 14,700
Actual return on plan assets ” ` 2,000

Defined Benefit Obligation

J
At 1st April, 20X1, present value of the defined benefit obligation was ` 12,000.
At 31st March, 20X2, present value of the defined benefit obligation was ` 15,500.
Actuarial losses on the obligation for the year ended 31st March, 20X2 were ` 100.
a
Current Service Cost ” ` 2,500
Benefit paid ” ` 300

a k
h
Discount rate used to calculate defined benefit liability - 10%.
As per Ind AS 19, please suggest if there is any amount based on the above mentioned information that

Ans.
defined benefit liability (asset).

r t
would be taken to other comprehensive income (with workings). Also compute net interest on the net

S
= Remeasurement ” Actuarial loss a
As per Ind AS 19, net remeasurement of ` 900 would be recognized in other comprehensive income.
Computation of Net remeasurement

= ` 1000 (Refer WN - 1) ” ` 100 (Given in the question)

= ` 900.

Particulars

A .
Computation of net interest expense

Amount in `

C
Defined benefit liability as at 1 April 20X1 (A)(Given in the question)
Fair value of plan asset as at 1 April 20X1 (B) (Given in the question)
Net defined benefit liability (A - B)
Net interest expense (as it is net liability) (Refer note given below)
Note:
12,000
(10,000)
2,000
200

Net interest expense would be computed on net defined benefit liability using discount rate of
10% given in the question-
= Net defined benefit liability x Discount rate
= 2,000 x 10%
= ` 200.

Working Note:

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 FR Super 100
Computation of amount of remeasurement
Particulars Amount in `

Actual return on plan asset for the year ended 31 March 20X2 (C) 2,000
(Given in the question)

Less: Interest income on ` 10,000 held for 12 months at 10% (D) (1,000)

Remeasurement (E = C - D) 1,000

Q 2. Presentation : Asset Ceiling

How will the following information be presented in the Balance Sheet of Udyog Ltd.?

n
Particulars ₹ in lakhs

PV of Defined Benefit Obligations

Fair Value of Plan Assets

a i 2,750

2,975

J
Asset Ceiling 175

[SM 2021]
Ans.
Particulars

PV of Defined Benefit Obligations

Less: Fair Value of Plan Assets

a k ₹ in lakhs

2,750

(2,975)

Asset Ceiling as per Ind AS 19

r t h
Surplus, to be treated as Net Defined Benefit Asset, 225

175

a
Least of above is Surplus to be treated as Net Defined Benefit Asset under Balance Sheet 175

Q 3. STEB : Leave Encashment

S
Acer Ltd. has 350 employees (same as a year ago). The average staff attrition rates observed during past

.
10 years represents 6% per annum. Acer Ltd. provides the following benefits to all its employees:
Paid vacation - 10 days per year regardless of date of hiring. Compensation for paid vacation is 100% of

A
employee's salary and unused vacation can be carried forward for 1 year. As of 31st March, 20X1,
unused vacation carried forward was 3 days per employee, average salary was ₹ 15,000 per day and
accrued expense for unused vacation in 20X0-20X1 was ₹ 65,00,000. During 20X1-20X2, employees

Ans.
C
took 9 days of vacation in average. Salary increase in 20X1-20X2 was 10%.

How would Acer Ltd. recognize liabilities and expenses for these benefits as of 31st March, 20X2?. Pass
the journal entry to show the accounting treatment. (Assume FIFO) [SM 2021]

Paid Vacation:
Step 1: Calculation of Unused Vacation in man-days as on 31st March, 20X2:

A. No. of Employees in service for the whole year (94%):

Particulars Man-days
Unused vacation as on 31st March, 20X1 3 days per employee
Entitlement to vacation for 20X1-20X2 10 days per employee

86 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

Average vacation availed in 20X1-20X2 (9) days per employee

Unused vacation as on 31st March, 20X2 4 days per employee
(being unused leaves of 20X1-20X2 on FIFO basis)
Total Unused vacation as on 31st March, 20X2 - (A) 1,316 man-days
(350 employees x 94% x 4 days per employee)

B. Newcomers (6%):
Particulars Man-days
Entitlement to vacation for 20X1-20X2 10 days per employee
Average vacation availed in 20X1-20X2 (9) days per employee
Unused vacation as on 31st March, 20X2
(being unused leaves of 20X1-20X2 on FIFO basis)
n
1 day per employee

i
a
Total Unused vacation as on 31st March, 20X2 - (B) 21 man-days
(350 employees x 6% x 1 day per employee)

Total unused vacation as on 31st March, 20X2 (A + B)

J 1,337 man-days

Step 2: Calculation of average salary per day:

Particulars
Average salary per day as on 31st March, 20X1

a k Amount (₹)
15,000

h
Salary increase in 20X1-20X2 10%

t
Average salary per day as on 31st March, 20X2 16,500

Particulars
r
Step 3: Calculation of provision for unused paid vacation:

a
Calculation of provision for unused paid vacation 20X1-20X2:
Amount (₹)
2,20,60,500

S
(1,337 man-days x ₹ 16,500)
Provision for unused paid vacation 20X0-20X1 65,00,000

.
Step 4: Accounting treatment

A
Provision for 20X1-20X2
Employee Benefits Expenses A/c Dr. 2,20,60,500

C
To Provision for Leave Encashment 2,20,60,500

Settlement of Liability of 20X0-20X1

Provision for Leave Encashment A/c Dr. 65,00,000
To Cash / Bank 65,00,000

Q 4. DBS : Comprehensive
A Ltd. prepares its financial statements to 31st March each year. It operates a defined benefit
retirement benefits plan on behalf of current and former employees. A Ltd. receives advice from
actuaries regarding contribution levels and overall liabilities of the plan to pay benefits. On 1st April,
20X1, the actuaries advised that the present value of the defined benefit obligation was ₹ 6,00,00,000.
On the same date, the fair value of the assets of the defined benefit plan was ₹ 5,20,00,000. On 1st
April, 20X1, the annual market yield on government bonds was 5%. During the year ended 31st March,

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 FR Super 100
20X2, A Ltd. made contributions of ₹ 70,00,000 into the plan and the plan paid out benefits of ₹
42,00,000 to retired members. Both these payments were made on 31st March, 20X2.

The actuaries advised that the current service cost for the year ended 31st March, 20X2 was ₹
62,00,000. On 28th February, 20X2, the rules of the plan were amended with retrospective effect.
These amendments meant that the present value of the defined benefit obligation was increased by ₹
15,00,000 from that date.

During the year ended 31st March, 20X2, A Ltd. was in negotiation with employee representatives
regarding planned redundancies. The negotiations were completed shortly before the year end and
redundancy packages were agreed. The impact of these redundancies was to reduce the present value
of the defined benefit obligation by ₹ 80,00,000. Before 31st March, 20X2, A Ltd. made payments of ₹

n
75,00,000 to the employees affected by the redundancies in compensation for the curtailment of their

i
benefits. These payments were made out of the assets of the retirement benefits plan.
On 31st March, 20X2, the actuaries advised that the present value of the defined benefit obligation was

a
₹ 6,80,00,000. On the same date, the fair value of the assets of the defined benefit plan were ₹
5,60,00,000.

J
Examine and present how the above event would be reported in the financial statements of A Ltd. for
the year ended 31st March, 20X2 as per Ind AS. (Assume PSC given as of 31 Mar 20X2)
[RTP Nov. 2019, SM 2021]
Ans.
All figures are ₹ in ’000.

a k
On 31st March, 20X2, A Ltd. will report a net pension liability in the statement of financial position. The
amount of the liability will be 12,000 (68,000 ” 56,000).

h
For the year ended 31st March, 20X2, A Ltd. will report the current service cost as an operating cost in

t
the statement of profit or loss. The amount reported will be 6,200. The same treatment applies to the
past service cost of 1,500.

r
For the year ended 31st March, 20X2, A Ltd. will report a finance cost in profit or loss based on the net

a
pension liability at the start of the year of 8,000 (60,000 ” 52,000). The amount of the finance cost will
be 400 (8,000 x 5%).
The redundancy programme represents the partial settlement of the curtailment of a defined benefit

loss.
S
obligation. The gain on settlement of 500 (8,000 ” 7,500) will be reported in the statement of profit or

.
Other movements in the net pension liability will be reported as remeasurement gains or losses in other
comprehensive income.

Working Note:
A
For the year ended 31st March, 20X2, the remeasurement loss will be 3,400 (Refer W. N.).

C
Remeasurement of gain or loss
₹ in ’000
Liability at the start of the year (60,000 ” 52,000) 8,000
Current service cost 6,200
Past service cost 1,500
Net finance cost 400
Gain on settlement (500)
Contributions to plan (7,000)
Remeasurement loss (balancing figure) 3,400
Liability at the end of the year (68,000 ” 56,000) 12,000

88 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Q 5. Entity A has undertaken various transactions in the financial year ended 31st March, 20X1. Identify and
present the transactions in the financial statements as per Ind AS 1.
`
Remeasurement of defined benefit plans 2,57,000
Current service cost 1,75,000
Changes in revaluation surplus 1,25,000
Gains and losses arising from translating the monetary assets in foreign currency 75,000
Gains and losses arising from translating the financial statements of a foreign 65,000
operation
Gains and losses from investments in equity instruments designated at fair value 1,00,000
through other comprehensive income
Income tax expense 35,000

n
Share based payments cost 3,35,000

i
(MTP May 2021)
Ans.

Current service cost

Gains and losses arising from translating the monetary assets in foreign
J a
Items impacting the Statement of Profit and Loss for the year ended 31 st March, 20X1
(`)
1,75,000
75,000

k
currency
Income tax expense 35,000

a
Share based payments cost 3,35,000
Items impacting the other comprehensive income for the year ended 31st March, 20X1

Remeasurement of defined benefit plans

Changes in revaluation surplus

r t h (`)
2,57,000
1,25,000

a
Gains and losses arising from translating the financial statements of a 65,000
foreign operation
Gains and losses from investments in equity instruments designated at 1,00,000

“ A. S
fair value through other comprehensive income

NOTES

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”89
 FR Super 100

CHAPTER Ind AS 20: ACCOUNTING FOR GOVERNMENT GRANTS

13 AND DISCLOSURE OF GOVERNMENT ASSISTANCE
Q 1. Recognition : Various Grants
How will you recognize and present the grants received from the Government in the following cases as
per Ind AS 20?
(i) A Ltd. received one acre of land to setup a plant in backward area (fair value of land ` 12 lakh and
acquired value by Government is ` 8 Iakhs).
(ii) B Ltd. received an amount of loan for setting up a plant at concessional rate of interest from the
Government.
(iii) D Ltd. received an amount of ` 25 lakh for immediate start-up of a business without any

n
condition.
(iv)

(v)

a i
S Ltd. received ` 10 lakh for purchase of machinery costing ` 80 lakh. Useful life of machinery is
10 years. Depreciation on this machinery is to be charged on straight line basis.
Government gives a grant of ` 25 lakh to U Limited for research and development of medicine for
breast cancer, even though similar medicines are available in the market but are expensive. The

the cost comes down at least to 50%.

J
company is to ensure by developing a manufacturing process over a period of two years so that
[Nov. 2018] [Also asked in MTP Nov. 2020]

k
Ans.
(i) The land and government grant should be recognized by A Ltd. at fair value of ` 12,00,000 and

(ii)
a
this government grant should be presented in the books as deferred income. (Refer footnote 1)
As per para 10A of Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government

h
Assistance’, loan at concessional rates of interest is to be measured at fair value and recognised

r t
as per Ind AS 109. Value of concession is the difference between the initial carrying value of the
loan determined in accordance with Ind AS 109, and the proceeds received. The benefit is
accounted for as Government grant.
(iii)

a
` 25 lakh has been received by D Ltd. for immediate start-up of business. Since this grant is given
to provide immediate financial support to an entity, it should be recognised in the Statement of

S
Profit and Loss immediately with disclosure to ensure that its effect is clearly understood, as per
para 21 of Ind AS 20.
(iv)

(v)

A .
` 10 lakh should be recognized by S Ltd. as deferred income and will be transferred to profit and
loss over the useful life of the asset. In this case, ` 1,00,000 [` 10 lakh / 10 years] should be
credited to profit and loss each year over period of 10 years. (Refer footnote 2)
As per para 12 of Ind AS 20, the entire grant of ` 25 lakh should be recognized immediately as

C
deferred income and charged to profit and loss over a period of two years based on the related
costs for which the grants are intended to compensate provided that there is reasonable
assurance that U Ltd. will comply with the conditions attached to the grant.

st
As per the amenement made by MCA in Ind AS 20 on 21 Sepetember, 2018 alternatively if the company
is following the policy of recognizing non-monetary grants at nominal alue, the company will not
recognise any government grant. Land will be shown in the financial statements at ` 1.

Q 2. Concessional Interest Rate Loan

A Limited received from the government a loan of ` 50,00,000 @ 5% payable after 5 years in a bulleted
payment. The prevailing market rate of interest is 12%. Interest is payable regularly at the end of each
year. Calculate the amount of government grant and Pass necessary journal entry. Also examine how the
Government grant be realized.

90 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
The fair value of the loan is calculated at ` 37,38,328.

Year Opening Interest paid @ 12% Interest paid @ 5% calculated @

Balance on ` 50,00,000 +
Interest principal paid
(a) (b) (c) = (b) x 12% (d) (e) =(b) + (c) – (d)
1 37,38,328 4,48,600 2,50,000 39,36,928
2 39,36,928 4,72,431 2,50,000 41,59,359
3 41,59,359 4,99,123 2,50,000 44,08,482

n
4 44,08,482 5,29,018 2,50,000 46,87,500

i
5 46,87,500 5,62,500 52,50,000 Nil
A Limited will recognise ` 12,61,672 ( ` 50,00,000 ” ` 37,38,328) as the government grant and will make
the following entry on receipt of loan:
Bank Account Dr. 50,00,000
To Deferred Income 12,61,672
To Loan Account 37,38,328
J a
k
` 12,61,672 is to be recognised in profit or loss on a systematic basis over the periods in which A Limited
recognised as expenses the related costs for which the grant is intended to compensate. (see questions

a
“
5 in this regard)

r t h
NOTES

S a
A .
C

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 FR Super 100

CHAPTER Ind AS 21 : THE EFFECTS OF CHANGES IN FOREIGN

14 EXCHANGE RATES
Q 1. Advance Payment
Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to deliver goods in
exchange for total consideration of USD 50 million and receives an upfront payment of USD 20 million on
this date. The functional currency of the supplier is INR. The goods are delivered and revenue is
recognised on 31st March, 2018. USD 30 million is received on 1st April, 2018 in full and final settlement
of the purchase consideration.
State the date of transaction for advance consideration and recognition of revenue. Also state the
amount of revenue in INR to be recognized on the date of recognition of revenue. The exchange rates on

n
1st January, 2018 and 31st March, 2018 are ` 72 per USD and ` 75 per USD respectively.

i
[RTP May 2019, SM 2021]
Ans.

a
This is the case of Revenue recognised at a single point in time with multiple payments.
As per the guidance given in Appendix B to Ind AS 21:

J
A Ltd. will recognise a non-monetary contract liability amounting ` 1,440 million, by translating USD
20 million at the exchange rate on 1st January, 2018 ie ` 72 per USD.

customer).

a k
A Ltd. will recognise revenue at 31st March, 2018 (that is, the date on which it transfers the goods to the

A Ltd. determines that the date of the transaction for the revenue relating to the advance consideration

h
of USD 20 million is 1st January, 2018. Applying paragraph 22 of Ind AS 21, A Ltd. determines that the
date of the transaction for the remainder of the revenue as 31st March, 2018.

On 31st March, 2018, A Ltd. will:



r t
derecognise the non-monetary contract liability of USD 20 million and recognise USD 20 million

a
of revenue using the exchange rate as at 1st January, 2018 ie ` 72 per USD; and
 recognise revenue and a receivable for the remaining USD 30 million, using the exchange rate

S
on 31st March, 2018 ie ` 75 per USD.
 the receivable of USD 30 million is a monetary item, so it should be translated using the closing rate

Q 2. FC Loan and ACM

.
until the receivable is settled.

A
On 1st April, 20X1, Makers Ltd. raised a long term loan from foreign investors. The investors subscribed
for 6 million Foreign Currency (FCY) loan notes at par. It incurred incremental issue costs of FCY 2,00,000.

C
Interest of FCY 6,00,000 is payable annually on 31st March, starting from 31st March, 20X2. The loan is
repayable in FCY on 31 st March, 20X7 at a premium and the effective annual interest rate implicit in the
loan is 12%. The appropriate measurement basis for this loan is amortised cost. Relevant exchange rates
are as follows:
- 1st April, 20X1 - FCY 1 = ` 2.50.
- 31st March, 20X2 ” FCY 1 = ` 2.75.
- Average rate for the year ended 31 st Match, 20X2 ” FCY 1 = ` 2.42. The functional currency of
the group is Indian Rupee.
What would be the appropriate accounting treatment for the foreign currency loan in the books of
Makers Ltd. for the FY 20X1 -20X2?
Calculate the initial measurement amount for the loan, finance cost for the year, closing balance and
exchange gain / loss. [May 2020]

92 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
Initial carrying amount of loan in books
Loan amount received = 60,00,000
FCY Less: Incremental issue costs = 2,00,000 FCY
58,00,000 FCY
Ind AS 21, ‚The Effect of Changes in Foreign Exchange Rates ‛ states that foreign currency transactions
are initially recorded at the rate of exchange in force when the transaction was first recognized.
Loan to be converted in INR = 58,00,000 FCY x ` 2.50/FCY
= ` 1,45,00,000
Therefore, the loan would initially be recorded at ` 1,45,00,000.

Calculation of amortized cost of loan (in FCY) at the year end:

Period Opening Financial Interest @ Cash Flow

i n
Closing Financial

a
Liability (FCY) 12% (FCY) (FCY) Liability (FCY)
A B C A+B-C
20X1-20X2 58,00,000 6,96,000

J
6,00,000 58,96,000
The finance cost in FCY is 6,96,000 The finance cost would be recorded at an average rate for the period
since it accrues over a period of time.

a k
Hence, the finance cost for FY 20X1 -20X2 in INR is ` 16,84,320 (6,96,000 FCY x ` 2.42 / FCY)
The actual payment of interest would be recorded at 6,00,000 x 2.75 = INR 16,50,000
The loan balance is a monetary item so it is translated at the rate of exchange at the reporting date.

h
So the closing loan balance in INR is 58,96,000 FCY x INR 2.75 / FCY = ` 1,62,14,000

t
The exchange differences that are created by this treatment are recognized in profit and loss.
In this case, the exchange difference is

Q 3.
a
FC Transaction: Business Combination
r
` [1,62,14,000 - (1,45,00,000 + 16,84,320 ” 16,50,000)] = ` 16,79,680.
This exchange difference is taken to profit and loss.

(i)
. S
Global Limited, an Indian company acquired on 30th September, 20X1 70% of the share capital of Mark
Limited, an entity registered as company in Germany. The functional currency of Global Limited is Rupees
and its financial year end is 31st March, 20X2.
The fair value of the net assets of Mark Limited was 23 million EURO and the purchase

C A
consideration paid is 17.5 million EURO on 30th September, 20X1.
The exchange rates as at 30th September, 20X1 was ` 82 / EURO and at 31st March, 20X2 was `
84 / EURO.
What is the value at which the goodwill has to be recognised in the financial statements of Global
Limited as on 31st March, 20X2? [Assume NCI @ PSNA]
(ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million EURO during
the year ended 31st March, 20X2. The exchange rate on the date of purchase by Global Limited
was ` 83 / EURO and on 31st March, 20X2 was ` 84 / EURO. The entire goods purchased from
Mark Limited are unsold as on 31st March, 20X2. Determine the unrealised profit to be
eliminated in the preparation of consolidated financial statements. [Important] [Nov. 2019]
Ans.
(i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be expressed in
the functional currency of the foreign operation and shall be translated at the closing rate in
accordance with paragraphs 39 and 42. In this case the amount of goodwill will be as follows:
Net identifiable asset Dr. 23 million

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Goodwill(bal. fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 x 30%) 6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x ` 84
= ` 117.6 million
(ii)
Particulars EURO in million
Sale price of Inventory 4.20
Unrealised Profit [a] 1.80
Exchange rate as on date of purchase of Inventory [b] ` 83 / Euro
Unrealized profit to be eliminated [a x b] ` 149.40 million

i n
a
As per para 39 of Ind AS 21 ‚income and expenses for each statement of profit and loss presented (ie
including comparatives) shall be translated at exchange rates at the dates of the transactions‛.

J
In the given case, purchase of inventory is an expense item shown in the statement profit and loss
account. Hence, the exchange rate on the date of purchase of inventory is taken for calculation of
unrealized profit which is to be eliminated on the event of consolidation.

Q 4.

a k
PQR Holdings Limited is based in London and has Pound sterling ("GBP") as its functional and
presentation currency. On 1st April, 20X1, PQR Holdings Limited incorporated PQR India Limited as its

h
wholly owned subsidiary in India. PQR India will be engaged in trading of items purchased from PQR
Holdings. The shares of PQR India, having a face value of ` 10 each amounting to total of ` 500 crore,

r t
were issued to PQR Holdings in GBP on 1st April, 20X1.
PQR India has adopted Ind AS with effect from its incorporation. In accordance with Ind AS, management
of PQR India has concluded that its functional currency is Indian Rupee ("INR"). Following is the

PQR Holdings:

S a
summarized trial balance of PQR India as on 31st March, 20X2, being the reporting date of PQR India and

(Note: All amounts in the below mentioned trial balance are ` in crore)

S. No.

1.
2.
A .
Particulars

Share capital
Securities premium reserve on issue of equity shares
Debit
Balances
-
-
Credit
Balances
500.0
150.0
3.
4.
5.
6.
CRetained earnings
Long-term borrowings
Deferred tax liability
Income tax payable
-
-
-
-
110.0
30.0
10.0
25.0
7. Import duty payable - 5.0
8. Employee benefits payable 7.5
9. Sundry trade payables - 2.5
10. Property, plant and equipment (net of depreciation) 550.0 -
11. Computer software (net of amortisation) 70.0 -
12. Inventories purchased on 15th March, 20X2 200.0

94 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

(there is no indicator of impairment)

13. Cash and bank balance 5.0 -
14. Sundry trade receivables 17.0 -
15. Allowance for doubtful trade receivables - 2.0
Total 842.0 842.0

Additional information relating to property, plant and equipment, and computer software:

Line item Date of acquisition

Property, plant and equipment 30th April, 20X1
Computer software 5th May, 20X1

i n
PQR India has adopted the following accounting policy in relation to shareholders' funds to translate
equity:

Share capital
Securities premium
Retained earnings J a
To be translated using historical exchange rate
To be translated using historical exchange rate
To be translated using average exchange rate

a k
Since the presentation currency of PQR Holdings is GBP, PQR India is required to translate its trial
balance from INR to GBP. Following table provides relevant foreign exchange rates:

h
Closing spot rate as on 1st April, 20X1 1 INR = 0.0123 GBP

t
Closing spot rate as on 30th April, 20X1 1 INR = 0.0120 GBP

r
Closing spot rate as on 5th May, 20X1 1 INR = 0.0119 GBP
Closing spot rate on 15th March, 20X2 1 INR = 0.0108 GBP

S a
Closing spot rate as on 31st March, 20X2
Average exchange rate for the year ended 31st March, 20X2
1 INR = 0.0109 GBP
1 INR = 0.0116 GBP
As the accountant of PQR India, you are required to do the following for its separate financial
statements:
(a)

(b)

A .
Explain the principle of monetary and non-monetary items. Based on this principle, bifurcate the
line items of the trial balance into monetary and non-monetary items.
Translate the trial balance of PQR India from INR to GBP. (MTP Dec 2021)

C
Ans.
Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or
determinable number of units of currency. Para 15 of Ind AS 21 states that the essential feature of a
monetary item is a right to receive (or an obligation to deliver) a fixed or determinable number of units
of currency. Similarly, a contract to receive (or deliver) a variable number of the entity’s own equity
instruments or a variable amount of assets in which the fair value to be received (or delivered) equals a
fixed or determinable number of units of currency is a monetary item.
Conversely, the essential feature of a non‑monetary item is the absence of a right to receive (or an
obligation to deliver) a fixed or determinable number of units of currency.

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 FR Super 100
On the basis of above principles, the line items of trial balance should be bifurcated as follows
Particulars Monetary item / Non-
monetary item
Share Capital Non-monetary item
Securities Premium reserve on issue of equity shares Non-monetary item
Retained earnings Non-monetary item
Long-term borrowings Monetary item
Deferred tax liability Non-monetary item
Income tax payable Monetary item
Import duty payable Monetary item
Employee benefits payable Monetary item
Sundry trade payables
Property, plant and equipment (net of depreciation)

i n Monetary item
Non-monetary item

a
Computer software (net of amortization) Non-monetary item
Inventories purchased (there is no indicator of impairment) Non-monetary item
Cash and bank balance
Sundry trade receivables
J Monetary item
Monetary item

k
Allowance for doubtful trade receivables Monetary item
As per para 38 of Ind AS 21, an entity may present its financial statements in any currency (or currencies).

a
If the presentation currency differs from the entity’s functional currency, it translates its results and
financial position into the presentation currency. For example, when a group contains individual entities

h
with different functional currencies, the results and financial position of each entity are expressed in a

t
common currency so that consolidated financial statements may be presented.

Particulars
r
Translation of the balances for the purpose of consolidation

a
Property, plant and equipment (net of depreciation)
INR in crore

550.0
Rate
(GBP)
0.0109
Amount in
GBP
5.995

Inventories

.
Cash and bank balance S
Computer software (net of amortization) 70.0
200.0
5.0
0.0109
0.0109
0.0109
0.763
2.18
0.0545

A
Sundry trade receivables net of allowance for doubtful
trade receivables (17.0-2.0) 15.0 0.0109 0.1635
Total Assets 840.0 9.156

C
Share Capital
Securities Premium reserve
Retained earnings
Long-term borrowings
Deferred tax liability
500.0
150.0
110.0
30.0
10.0
0.0123
0.0123
0.0116
0.0109
0.0109
6.15
1.845
1.276
0.327
0.109
Income tax payable 25.0 0.0109 0.2725
Import duty payable 5.0 0.0109 0.0545
Employee benefits payable 7.5 0.0109 0.08175
Sundry trade payables 2.5 0.0109 0.02725
Foreign Currency Translation reserve recognised in
OCI (balancing figure) (0.987)
Total Equity and liabilities 840.0 9.156

96 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

CHAPTER Ind AS 23
15 BORROWING COSTS
Q 1. Borrowing Costs : Foreign Currency Loans
ABC Ltd. has taken a loan of USD 20,000 on April 1, 20X1 for constructing a plant at an interest rate of
5% per annum payable on annual basis.
On April 1, 20X1, the exchange rate between the currencies i.e USD Vs INR was ` 45 per USD. The
exchange rate on the reporting date i.e March 31, 20X2 is ` 48 per USD.
The corresponding amount could have been borrowed by ABC Ltd from State bank of India in local
currency at an interest rate of 11% per annum as on April 1, 20X1.
Compute the borrowing cost to be capitalized for the construction of plant by ABC Ltd. (Assume B. Cost
incurred is fully to be capitalized. + Avg. Rate = Cl. Spot Rate)
Ans.

i n
In the above situation, the Borrowing cost needs to determine for interest cost on such foreign currency

a
loan and eligible exchange loss difference if any.
(a) Interest on Foreign currency loan for the period : USD 20,000 x 5% = USD 1,000

J
Converted in ` : USD 1,000 x ` 48/USD = ` 48,000
Increase in liability due to change in exchange difference : USD 20,000 x (48 - 45) = ` 60,000
(b) Interest that would have resulted if the loan was taken in Indian Currency:

k
USD 20,000 x ` 45/USD x 11% = ` 99,000
(c) Difference between Interest on Foreign Currency borrowing and local Currency borrowing :
` 99,000 (-) 48,000 = ` 51,000

h a
Hence, out of Exchange loss of ` 60,000 on principal amount of foreign currency loan, only exchange loss

t
to the extent of ` 51,000 is considered as borrowing costs.

r
Total borrowing cost to be capitalized is as under :
(a) Interest cost on borrowing ` 48,000

a
(b) Exchange difference to the extent considered to be
an adjustment to Interest cost ` 51,000

S
` 99,000
The exchange difference of ` 50,000 has been capitalized as borrowing cost and the remaining ` 9,000

.
will be expensed off in Statement of Profit and loss.

Q 2. Capitalisation : Generic & Specific Borrowings

C A
X Limited began construction of a new plant on 1st April 2016 and obtained a special loan of ` 8 lakhs to
finance the construction of the plant. The rate of interest on loan was 10 per cent per annum.

The expenditure that was made on the project of plant construction was as follows:
`
1-4-2016 10,00,000
1-8-2016 24,00,000
1-1-2017 4,00,000

The Company’s other outstanding non-specific loan was ` 46,00,000 at an interest of 12 percent per
annum.
The construction of the plant was completed on 31-3-2017. You are required to calculate the amount of
interest to be capitalized as per the provision of Ind AS 23 of the borrowing cost (including cost).

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 FR Super 100
Ans.
(i) Computation of average accumulated expenses
`
` 10,00,000 x 12 / 12 = 10,00,000
` 24,00,000 x 8 / 12 = 16,00,000
` 4,00,000 x 3 / 12 = 1,00,000
27,00,000
(ii) Non-specific Borrowings
Non-specific Borrowings= Average accumulated capital expenses ” Specific borrowings
= ` 27,00,000 ” ` 8,00,000 = ` 19,00,000

(iii) Interest on average accumulated expenses

`

i n
(iv)
Specific borrowings ( ` 8,00,000  10%)
Non-specific borrowings ( ` 19,00,000  12%)
Amount of interest to be capitalized

Total expenses to be capitalized for Plant

=
=
=
80,000
2,28,000

J
3,08,000
a
Cost of plant ` (10,00,000 + 24,00,000 + 4,00,000)
Add: Amount of interest to be capitalised

a k 38,00,000
3,08,000
`

Q 3.
Total cost of plant

Capitalisation : Generic & Specific Borrowings

r t h 41,08,000

K Ltd. began construction of a new building at an estimated cost of ` 7 lakh on 1st April, 20X1. To

an interest rate of 9% per annum.

S a
finance construction of the building it obtained a specific loan of ` 2 lakh from a financial institution at

The company’s other outstanding loans were:

Amount

A .
` 7,00,000
` 9,00,000
Rate of Interest per annum
12%
11%

C
The expenditure incurred on the construction was:
April, 20X1 ` 1,50,000
August, 20X1 ` 2,00,000
October, 20X1 ` 3,50,000
January, 20X2 ` 1,00,000

The construction of building was completed by 31st January, 20X2. Following the provisions of Ind AS 23
‘Borrowing Costs’, calculate the amount of interest to be capitalized and pass necessary journal entry
for capitalizing the cost and borrowing cost in respect of the building as on 31st January, 20X2.
(Assume asset in a QA and specific borrowings were paid off on 31 Jan 20X2 when QA was RTU)
[RTP Nov. 2018, SM 2021]

98 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
(i) Calculation of capitalization rate on borrowings other than specific borrowings
Amount of loan (`) Rate of Amount of interest (`)
interest

7,00,000 12% = 84,000

9,00,000 11% = 99,000
16,00,000 1,83,000
Weighted average rate of interest = 11.4375%
(1,83,000/16,00,000) x 100

(ii)

i n
Computation of borrowing cost to be capitalized for specific borrowings and general
borrowings based on weighted average accumulated expenses
Date of incurrence Amount Financed
of expenditure
1st April, 20X1
1st August, 20X1
spent through
Calculation

2,00,000 Specific borrowing 50,000 x 9% x 10/12

J
1,50,000 Specific borrowing 1,50,000 x 9% x 10/12 a `

11,250
3,750

1st October, 20X1

1st January, 20X2

a k
General borrowing 1,50,000 x 11.4375% x 6/12 8,578.125
3,50,000 General borrowing 3,50,000 x 11.4375% x 4/12 13,343.75
1,00,000 General borrowing 1,00,000 x 11.4375% x 1/12 953.125

t h 37,875
Note: Since construction of building started on 1st April, 20X1, it is presumed that all the later

r
expenditures on construction of building had been incurred at the beginning of the respective
month

(iii)

S a
Total expenses to be capitalized for building

Cost of building ` (1,50,000 + 2,00,000 + 3,50,000 + 1,00,000) 8,00,000

`

(iv)
A .
Add: Amount of interest to be capitalized

Journal Entry
37,875
8,37,875

CDate
31.1.20X2
Particulars
Building account
To Bank account
To Interest payable (borrowing cost)
Dr.
`
8,37,875
8,00,0000
37,875
`

(Being expenditure incurred on construction of

building and borrowing cost thereon capitalized)

Note: In the above journal entry, it is assumed that interest amount will be paid at the year end.
Hence, entry for interest payable has been passed on 31.1.20X2.

Alternatively, following journal entry may be passed if interest is paid on the date of
capitalization:

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 FR Super 100

Date Particulars ` `
31.1.20X2 Building account Dr. 8,37,875
To Bank account 8,37,875
(Being expenditure incurred on
construction of building and borrowing
cost thereon capitalized)

Q 4. Capitalisation : Monthly Capitalisation

Growth Ltd. has undertaken a project for expansion of capacity as per the following details:
Plan (`) Actual (`)
October, 2015
November, 2015
5,00,000
6,50,000
4,00,000

i
7,95,000
n
December, 2015
January, 2016
February, 2016
March, 2016
20,00,000
2,00,000
9,00,000
10,00,000
J a
50,000
2,00,000
12,00,000
-

a k
The company pays to its bank interest at a rate of 15% p.a., which is debited on a monthly basis.
During the half year, company had ` 20 lakhs overdraft up to 31stDecember, surplus cash in January
and again overdraft of ` 14 lakhs from 1.2.2016 and ` 30 lakhs from 1.3.2016. The company had a

h
strike during December and hence could not continue the work during said period. However, the

t
substantial administrative work related to the project was continued. Onsite work was again
st st
commencedon 1 January and all the work were completed on 31 March. Assume that expenditure

Ans.
was incurred on 1stday of each month.

a r
Calculate interest to be capitalized giving reason wherever necessary. Assume overdraft will be less, if
there is no capital expenditure.

Growth Ltd.
Month

. S
Solution assuming no substantial work carried during strike. Correct solution - refer board notes.

Actual Expenditure
(`)
Interest capitalized
(`)
Cumulative amount
(`)
October, 2015
Nov., 2015

C
Dec., 2015
January, 2016
A 4,00,000
7,95,000

50,000
-
5,000
15,000
-
-
4,05,000
12,15,000
12,15,000
12,65,000
February,2016 2,00,000 17,500 14,82,500
March, 2016 12,00,000 33,531 27,16,031
26,45,000 71,031
Note:
1. As per Ind AS 23, ‘Borrowing Cost’, An entity shall suspend capitalisation of borrowing costs
during extended periods in which it suspends active development of a qualifying asset.
Assuming that strike would lead to suspension of active development of work in the month of
December the interest for that period i.e. for the month of December has not beencapitalized.
2. During January, the company did not incur any interest as there was surplus cash in January.
Therefore, no amount should be capitalized during January.

100 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
3. During February, actual overdraft (borrowings) was 14 lakhs only. Hence, interest of 17,500 on
14,00,000 has been calculated even though actual expenditure on project exceed 14 lakhs.

Q 5. Capitalisation : Group Companies

In a group with Parent Company ‚P‛ there are 3 subsidiaries with following business:
‚A‛ ” Real Estate Company
‚B‛ ” Construction Company
‚C‛ ” Finance Company
 Parent Company has no operating activities of its own but performs management functions for its
subsidiaries.
 Financing activities and cash management in the group are coordinated centrally.
 Finance Company is a vehicle used by the group solely for raising finance.

n
 All entities in the group prepare Ind AS financial statements.

i
The following information is relevant for the current reporting period 20X1-20X2:

a
Real Estate Company
 Borrowings of ` 10,00,000 with an interest rate of 7% p.a.

J
 Expenditures on qualifying assets during the period amounted to ` 15,40,000.
 All construction works were performed by Construction Company. Amounts invoiced to Real Estate
Company included 10% profit margin.

Construction Company
 No borrowings during the period.

a k
 Financed ` 10,00,000 of expenditures on qualifying assets using its own cash resources.

Finance Company

r t h
 Raised ` 20,00,000 at 7% p.a. externally and issued a loan to Parent Company for general corporate
purposes at the rate of 8%.
Parent Company

S a
 Used loan from Finance Company to acquire a new subsidiary.
No qualifying assets apart from those in Real Estate Company and Construction Company.
 Parent Company did not issue any loans to other entities during the period.

Ans.

A .
What is the amount of borrowing costs eligible for capitalisation in the financial statements of each of
the four entities for the current reporting period 20X1-20X2?

Following is the treatment as per Ind AS 23:

Finance Company
[SM 2021]

C
No expenditure on qualifying assets have been incurred, so Finance Company cannot capitalise
anything.

Real Estate Company

Total interest costs in the financial statements of Real Estate Company is ` 70,000. Expenditures
on qualifying assets exceed total borrowings, so the total amount of interest can be capitalised.

Construction Company
No interest expense has been incurred, so Construction Company cannot capitalise anything.

Consolidated financial statements of Parent Company:

Total general borrowings of the group: ` 10,00,000 + ` 20,00,000 = ` 30,00,000

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 FR Super 100
Although Parent Company used proceeds from loan to acquire a subsidiary, this loan cannot be excluded
from the pool of general borrowings.
Total interest expenditures for the group = ` 30,00,000 x 7% = ` 2,10,000
Total expenditures on qualifying assets for the group are added up. Profit margin charged by
Construction Company to Real Estate Company is eliminated:
Real Estate Company ” ` 15,40,000/1.1 = ` 14,00,000
Construction Co ” ` 10,00,000
Total consolidated expenditures on qualifying assets:
` (14,00,000 + 10,00,000) = ` 24,00,000
Capitalisation rate = 7%
Borrowing costs eligible for capitalisation = ` 24,00,000 x 7% = ` 1,68,000
Total interest expenditures of the group are higher than borrowing costs eligible for capitalisation

n
calculated based on the actual expenditures incurred on the qualifying assets. Therefore, only ` 1,68,000

i
can be capitalised.

Q 6. Capitalisation : Construction Contract

Particulars
Expenditure incurred till 31-03-2020
Interest cost capitalized for the financial year 2019-20 @ 13%
J a
Amount ( ` )
5,00,000
26,000
Amount borrowed till 31-03-20 is

a k
Assets transferred to construction during 2020-2021 (Note 1)
Cash payment during 2020-2021 (Note 1)
2,00,000
1,00,000
75,000

h
Progress payment received (Note 1) 3,50,000

t
New borrowing during 2020-2021 @ 13% (Note 1) 2,00,000

r
Calculate the amount of borrowing cost to be capitalised.
Note 1: Assuming in mid of the year.

“ S a NOTES

A .
C

102 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER Ind AS 24
16 RELATED PARTY DISCLOSURES
Q 1. Associates and subsidiaries
Entity P Limited has a controlling interest in subsidiaries SA Limited and SB Limited and SC Limited.
SC Limited is a subsidiary of SB Limited. P Limited also has significant influence over associates A1
Limited and A2 Limited. Subsidiary SC Limited has significant influence over associate A3 Limited
Examine related party relationships of various entities. [SM 2021]
Ans.
P

Subsidiary Associates

i n
SA SB A1 A2

Ja
k
Associate
SC A3
 In Separate Financial Statements of P Limited, SA Limited, SB Limited, SC Limited, A1 Limited,


A2 Limited and A3 Limited are all related parties.

a
In the Individual Financial Statements of SA Limited, P Limited, SB Limited, SC Limited, A1 Limited, A2

h
Limited and A3 Limited are all related parties.


r t
In the Individual Financial Statements of SB Limited, P Limited, SA Limited, SC Limited, A1 Limited, A2
Limited and A3 Limited are all related parties.
In the Individual Financial Statements of SC Limited, P Limited, SA Limited, SB Limited, A1 Limited, A2



a
Limited and A3 Limited are all related parties.
In the Individual Financial Statements of associates A1 Limited, A2 Limited and A3 Limited; P Limited,

S
SA Limited, SB Limited and SC Limited are related parties.
A1 Limited, A2 Limited and A3 Limited are not related to each other.
For Parent’s consolidated financial statements, A1 Limited, A2 Limited and A3 Limited are related to

Q 2.
the Group

A .
An Indian company has a parent company out side India. Parent company negotiates software licenses
with end vendor and based on number of licences, parent company get its reimbursement from Indian

C
company. Say, license cost of ` 12 Lac is charged for calendar year of 2018. Parent company generates is
invoice in February'18. Indian company accounts full invoice in February'18 and then for Indian financial
year, accounts Reimbursement expense of ` 3. 00 Lac during FY 1718 (for licencing cost relating to
period January'18 to March'18) and Prepaid expenses of ` 9 Lac for licensing cost reimbursement
relating to April'18 to December'18. Prepaid expense is subsequently reversed and expense of ` 9 Lac is
accounted for in FY 18-19.
What amount should be disclosed at Related party transaction?
[May 2019] [Also asked in MTP Nov. 2020]
Ans.
Paragraph 9 of Ind AS 24 Related Party Disclosures defines Related Party Transactions as under:
‚A related party transaction is a transfer of resources, services or obligations between a reporting entity
and a related party, regardless of whether a price is charged.‛

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 FR Super 100
Paragraph 6 of Ind AS 24 states as under:
‚6 A related party relationship could have an effect on the profit or loss and financial position of an
entity…‛
In the given case, there is a transfer of resources to the extent of ` 12 lac from the company to the
parent towards software license. Of this transfer of resources, the company has consumed the benefits
relating to ` 3 lac of software license cost which is recognise in profit or loss. The benefits relating to ` 9
lac of software license cost will be consumed in the next reporting period and therefore is recognised in
balance sheet as prepaid expenses.

Paragraph 18 of Ind AS 24 states as under:

‚18 If an entity has had related party transactions during the periods covered by the financial
statements, it shall disclose the nature of the related party relationship as well as information about

n
those transactions and outstanding balances, including commitments necessary for users to understand

i
the potential effect of the relationship of the financial statements. At a minimum, disclosures shall
include:

a
a. The amount of the transactions;
b. The amount of outstanding balances, including commitments, and;

J
(i) Their terms and conditions, including whether they are secured, and the nature of the
consideration to be provided in settlement; and
(ii) Details of any guarantees given or received;
c.
d.
k
Provisions for doubtful debts related to the amount of outstanding balances; and
The expense recognised during the period in respect of bad and doubtful debts due from related
parties.‛

a
Therefore, the company has to disclose:
1.
2.

t h
The amount of transaction with the parent of ` 12 lac towards software license;

r
Outstanding balance of ` 9 lac presented as prepaid expense along with the terms and
conditions and state that the same will be settled in the next reporting period by receipt of

a
software licensing services.
3. The amount of ` 3 lac recognised as software license expense in profit or loss for the benefits

S
consumed during the period to make it understandable to users.

Paragraph 113 of Ind AS 1 Presentation of Financial Statements states as under:

A .
‚113 An entity shall present notes in a systematic manner. An entity shall cross-reference each line items
in the balance sheet and in the statement of profit and loss, and in the statement of changes in equity
and of cash flows to any related information in the notes.‛
Therefore, the company shall cross-reference the software license expense recognised in profit or loss
and prepaid expenses recognised in balance sheet to the notes disclosing related party transactions.

Q 3.
C
Mr. X, is the financial controller of ABC Ltd., a listed entity which prepares consolidated financial
statements in accordance with Ind AS. Mr. X has recently produced the final draft of the financial
statements of ABC Ltd. for the year ended 31st March, 20X2 to the managing director Mr. Y for
approval. Mr. Y, who is not an accountant, had raised following query from Mr. X after going
through the draft financial statements:
One of the notes to the financial statements gives details of purchases made by ABC Ltd. from
PQR Ltd. during the period 20X1-20X2. Mr. Y owns 100% of the shares in PQR Ltd. However, he feels
that there is no requirement for any disclosure to be made in ABC Ltd.’s financial statements since the
transaction is carried out on normal commercial terms and is totally insignificant to ABC Ltd., as it
represents less than 1% of ABC Ltd.’s purchases.
Provide answers to the query raised by the Managing Director Mr. Y as per Ind AS.
[Nov. 2018, MTP Nov. 2020, SM 2021]

104 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
Ongoing through the queries raised by the Managing Director Mr. Y, the financial controller Mr. X
explained the notes and reasons for their disclosures as follows:
Related parties are generally characterised by the presence of control or influence between the two
parties.

Ind AS 24 ‘Related Party Disclosures’ identifies related parties as, inter alia, key management
personnel and companies controlled by key management personnel. On this basis, PQR Ltd. is a related
party of ABC Ltd.

The transaction is required to be disclosed in the financial statements of ABC Ltd. since Mr. Y is Key
Management personnel of ABC Ltd. Also at the same time, it owns 100% shares of PQR Ltd. ie. he

n
controls PQR Ltd. This implies that PQR Ltd. is a related party of ABC Ltd.

a i
Where transactions occur with related parties, Ind AS 24 requires that details of the transactions are
disclosed in Notes to the financial statements. This is required even if the transactions are carried out on
an arm’s length basis.

J
Transactions with related parties are material by their nature, so the fact that the transaction may be
numerically insignificant to ABC Ltd. does not affect the need for disclosure.

“ NOTES
a k
r t h
S a
A .
C

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105
 FR Super 100

CHAPTER Ind AS 33
17 EARNINGS PER SHARE
Q 1. DEPS : Contingently Issuable Shares (Calendar year is accounting year)
Ordinary shares outstanding during 20X1 1,000,000 (there were no options, warrants or
convertible instruments outstanding during the
period)
An agreement related to a recent business combination provides for the issue of additional ordinary
shares based on the following conditions:
5,000 additional ordinary shares for each new retail
site opened during 20X1

i n
1,000 additional ordinary shares for each ` 1,000 of
consolidated profit in excess of ` 2,000,000 for the

Retail sites opened during the year:

year ended 31 December 20X1
one on 1 May 20X1
one on 1 September 20X1

J a
k
Consolidated year-to-date profit attributable ` 1,100,000 as of 31 March 20X1
to ordinary equity holders of the parent ` 2,300,000 as of 30 June 20X1

a
entity: ` 1,900,000 as of 30 September 20X1 (including a
` 450,000 loss from a discontinued operation)

Ans.
t h ` 2,900,000 as of 31 December 20X1
Calculate basic and diluted EPS, for quarterly FS and annual FS

r
a
Basic earnings per share
First Second Third Fourth Full year

S
quarter quarter quarter quarter
Numerator (`) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000
Denominator:

A .
Ordinary shares outstanding
Retail site contingency
Earnings contingency
9
1,000,000 1,000,000 1,000,000 1,000,000
”
”
3,333
”
6
6,66
”
7
10,000
”
1,000,000
5,000
”
8

6
7
8
C
Total shares
Basic earnings per share (`)
5,000 shares × 2/3
5,000 shares + (5,000 shares × 1 /3)
1,000,000 1,003,333 1,006,667 1,010,000
1.10

(5,000 shares × 8 /12) + (5,000 shares × 4 /12)

1.20 (0.40) 0.99
1,005,000
2.89

9 The earnings contingency has no effect on basic earnings per share because it is not certain that the
condition is satisfied until the end of the contingency period. The effect is negligible for the fourth-
quarter and full-year calculations because it is not certain that the condition is met until the last day
of the period.

106 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Diluted earnings per share
First quarter Second Third Fourth Full year
quarter quarter quarter
Numerator (`) 1,100,000 1,200,000 (400,000 1,000,000 2,900,000
Denominator: )

Ordinary shares outstanding 1,000,000 1,000,000 1,000,00 1,000,000 1,000,000

Retail site contingency ” 5,000 0
10,000 10,000 10,000
10 11 12 13
Earnings contingency ” 300,000 ” 900,000 900,000
Total shares 1,000,000 1,305,000 1,010,00 1,910,000 1,910,000
(0.40) 0
14
Diluted earnings per share (`) 1.10 0.92 0.52 1.52

i n
10 Company A does not have year-to-date profit exceeding ` 2,000,000 at 31 March 20X1. The Standard
does not permit projecting future earnings levels and including the related contingent shares.
11 [(` 2,300,000 ” ` 2,000,000) ÷ 1,000] × 1,000 shares = 300,000 shares.
12 Year-to-date profit is less than ` 2,000,000.
13 [(` 2,900,000 ” ` 2,000,000) ÷ 1,000] × 1,000 shares = 900,000 shares.

J a
14 Because the loss during the third quarter is attributable to a loss from a discontinued operation, the
antidilution rules do not apply. The control number (ie profit or loss from, continuing operations

k
attributable to the equity holders of the parent entity) is positive. Accordingly, the effect of
potential ordinary shares is included in the calculation of diluted earnings per share.

a
[Solution has not disclosed BEPS & DEPS from (continuing Ops. and Discontinued Ops. additionally]

h
Q 2. DEPS : Group Companies
Calculate Subsidiary’s and Group’s Basic EPS and Diluted EPS, when
Parent:
Profit attributable to ordinary

r t
` 12,000 (excluding any earnings of, or dividends paid by, the

a
equity holders of the parent entity subsidiary)
Ordinary shares outstanding 10,000

S
Instruments of subsidiary owned by 800 ordinary shares
the parent 30 warrants exercisable to purchase ordinary shares of subsidiary

Subsidiary:
Profit

A .
Ordinary shares outstanding
300 convertible preference shares

` 5,400
1,000

C
Warrants
Exercise price
Average market price of one
ordinary share
Convertible preference shares
150, exercisable to purchase ordinary shares of the subsidiary
` 10
` 20

400, each convertible into one ordinary share

Dividends on preference shares Re 1 per share
No inter-company eliminations or adjustments were necessary except for dividends.
Ignore income taxes. Also, ignore classification of the components of convertible financial instruments
as liabilities and equity or the classification of related interest and dividends as expenses and equity as
required by Ind AS 32.
[May 2019]

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 FR Super 100
Ans.
Subsidiary’s earnings per share
Basic EPS ` 5.00 calculated: ` 5,400 (a) ” ` 400 (b) 1,000 (c)
Diluted EPS ` 3.66 calculated: ` 5,400 (d) (1,000 + 75 (e) + 400(f))
Notes:
(a) Subsidiary's profit attributable to ordinary equity holders.
(b) Dividends paid by subsidiary on convertible preference shares.
(c) Subsidiary's ordinary shares outstanding.
(d) Subsidiary's profit attributable to ordinary equity holders (` 5,000) increased by ` 400
preference dividends for the purpose of calculating diluted earnings per share.
(e) Incremental shares from warrants, calculated: [(` 20 ” ` 10) ÷ ` 20] × 150.
(f) Subsidiary's ordinary shares assumed outstanding from conversion of convertible preference
shares, calculated: 400 convertible preference shares × conversion factor of 1.
Consolidated earnings per share
Basic EPS ` 1.63 calculated: ` 12,000(a) + ` 4,300(b)
10,000(c)
i n
Diluted EPS

(a)
(b)
` 1.61 calculated:

J
Parent's profit attributable to ordinary equity holders of the parent entity. a
` 12,000 + ` 2,928(d) + ` 55(e) + ` 1,098(f)
10,000

Portion of subsidiary's profit to be included in consolidated basic earnings per share, calculated:

k
(800 × ` 5.00) + (300 × Re 1.00).
(c) Parent's ordinary shares outstanding.

a
(d) Parent's proportionate interest in subsidiary's earnings attributable to ordinary shares,
calculated: (800 ÷ 1,000) × (1,000 shares × ` 3.66 per share).

h
(e) Parent's proportionate interest in subsidiary's earnings attributable to warrants, calculated:

t
(30 ÷ 150) × (75 incremental shares × ` 3.66 per share).
(f) Parent's proportionate interest in subsidiary's earnings attributable to convertible preference

Q 3. DEPS : Comprehensive r
shares, calculated: (300 ÷ 400) × (400 shares from conversion × ` 3.66 per share).

a
CAB Limited is in the process of preparation of the consolidated financial statements of the group for

Particulars

. S
the year ending 31st March, 20X3 and the extract of the same is as follows:
Attributable to
CAB Limited
Non-controlling
interest
Total
(` in ‘000)

A
Profit for the year 39,000 3,000 42,000
Other Comprehensive Income 5,000 Nil 5,000

C
Total Comprehensive Income 44,000 3,000 47,000

The long-term finance of the company comprises of the following:

(i) 20,00,00,000 equity shares at the beginning of the year and the company has issued 5,00,00,000
shares on 1st July, 20X2 at full market value.
(ii) 8,00,00,000 irredeemable preference shares. These shares were in issue for the whole of the
year ended 31st March, 20X3. The dividend on these preference shares is discretionary.
(iii) ` 18 crores of 6% convertible debentures issued on 1st April, 20X1 and repayable on 31st March,
20X5 at par. Interest is payable annually. As an alternative to repayment at par, the holder on
maturity can elect to exchange their convertible debentures for 10 crores ordinary shares in the
company. On 1st April, 20X1, the prevailing market interest rate for four-year convertible
debentures which had no right of conversion was 8%. Using an annual discount rate of 8%, the
present value of ` 1 payable in four years is 0.74 and the cumulative present value of ` 1 payable
at the end of years one to four is 3.31.

108 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
In the year ended 31st March, 20X3, CAB Limited declared an ordinary dividend of 0.10 paise per share
and a dividend of 0.05 paise per share on the irredeemable preference shares.

Compute the following:

 the finance cost of convertible debentures and its closing balance as on 31st March, 20X3 to be
presented in the consolidated financial statements.
 the basic and diluted earnings per share for the year ended 31st March, 20X3. Assume that
income tax is applicable to CAB Limited and its subsidiaries at 25%. [May 2020]
Ans.
Calculation of the liability and equity components on 6% Convertible debentures:
Present value of principal payable at the end of 4 th year (` 1,80,000 thousand x 0.74)
= ` 1,33,200 thousand
Present value of interest payable annually for 4 years ( ` 1,80,000 thousand x 6% x 3.31)
= ` 35,748 thousand

i n
Total liability component = ` 1,68,948 thousand

Year Opening balance Finance cost Interest paid

a
Therefore, equity component = ` 1,80,000 thousand ” ` 1,68,948 thousand = ` 11,052 thousand

Calculation of finance cost and closing balance of 6% convertible debentures

J Closing balance
` in ’000

a
@ 8%

a
` in ’000
b = a x 8% k @ 6%
` in ’000
c
` in ’000

d=a+b-c
31.3.20X2
31.3.20X3
1,68,948
1,71,663.84

r t h 13,515.84
13,733.11
10,800
10,800

Finance cost of convertible debentures for the year ended 31.3. 20X3 is ` 13,733.11 thousand and
closing balance as on 31.3. 20X3 is ` 1,74,596.95 thousand.
1,71,663.84
1,74,596.95

Calculation of Basic EPS

Profit for the year

S a
Less: Dividend on preference shares (80,000 thousand x ` 0.05)
` in ’000
39,000
(4,000)

Basic EPS

A .
Profit attributable to equity shareholders
Weighted average number of shares = 20,00,00,000 + {5,00,00,000 x (9/12)}
= 23,75,00,000 shares or 2,37,500 thousand shares
= ` 35,000 thousand / 2,37,500 thousand shares
= ` 0.147
35,000

C
Calculation of Diluted EPS
Profit for the year
Less: Dividend on preference shares (80,000 x 0.05)

Add: Finance cost (as given in the above table) 13,733.11

` in ’000
39,000
(4,000)
35,000

Less: Tax @ 25% (3,433.28) 10,299.83

45,299.83
Weighted average number of shares = 20,00,00,000 + {5,00,00,000 x (9/12)} + 10,00,00,000
= 33,75,00,000 shares or 3,37,500 thousand shares
Diluted EPS = ` 45,299.83 thousand / 3,37,500 thousand shares
= ` 0.134

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 FR Super 100
Q 4. DEPS : Preference Shares
An entity has following preference shares in issue at the end of 20X4:
 5% redeemable, non-cumulative preference shares: These shares are classified as liabilities. During
the year, a dividend was paid on the 5% preference shares ” ` 100,000.
 Increasing-rate, cumulative, non-redeemable preference shares issued at a discount in 20X0, with a
cumulative dividend rate from 20X5 of 10%: The shares were issued at a discount to compensate the
holders, because dividend payments will not commence until 20X5. The accrual for the discount in
the current year, calculated using the effective interest method amounted to, say, ` 18,000. These
shares are classified as equity ” ` 200,000.
 8% non-redeemable, non-cumulative preference shares: At the beginning of the year, the entity had
` 100,000 8% preference shares outstanding but, at 30 June 20X4, it repurchased ` 50,000 of these
at a discount of ` 1,000 ” ` 50,000.

n
 7% cumulative, convertible preference shares (converted in the year): These shares were classified as

a i
equity, until their conversion into ordinary shares at the beginning of the year. No dividend was
accrued in respect of the year, although the previous year’s dividend was paid immediately prior to
conversion. To induce conversion, the terms of conversion of the 7% convertible preference shares
were also amended, and the revised terms entitled the preference shareholders to an additional 100
ordinary shares on conversion with a fair value of ` 300 ” Nil.

J
k
The PAT profit attributable to ordinary equity holders for the year 20X4 is ` 150,000.
Determine the adjustments for the purpose of calculating EPS.

a
Ans.
Adjustments for the purpose of calculating EPS are made as follows:

h
Particulars Amount Amount (`)
(`)

shares (Refer Note 1)

r t
Profit for the year attributable to the ordinary equity holders PAT
Amortisation of discount on issue of increasing-rate preference (18,000)
150,000

a
Discount on repurchase of 8% preference shares (Refer Note 2)
Profit attributable to ordinary equity holders for basic EPS (Refer
Note 3-5)

S
1,000 (17,000)
1,33,000

Notes:
1.

A .
The original discount on issue of the increasing-rate preference shares is treated as amortised to
retained earnings, and treated as preference dividends for EPS purposes and adjusted against
profit attributable to the ordinary equity holders. There is no adjustment in respect of dividend,
because these do not commence until 20X5. Instead, the finance cost is represented by the

2.

3.
Camortisation of the discount in the dividend-free period. In future years, the accrual for the
dividend of ` 20,000 will be deducted from profits.
The discount on repurchase of the 8% preference shares has been credited to equity so should
be added to profit.
The dividend on the 5% preference shares has been charged to the income statement, because
the preference shares are treated as liabilities, so no adjustment is required for it from the
profit.
4. No accrual for the dividend on the 8% preference shares is required, because they are non-
cumulative. If a dividend had been declared for the year, it would have been deducted from
profit for the purpose of calculating basic EPS, because the shares are treated as equity and the
dividend would have been charged to equity in the financial statements.
5. The 7% preference shares were converted at the beginning of the year, so there is no
adjustment in respect of the 7% preference shares, because no dividend accrued in respect of

110 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
the year. The payment of the previous year’s cumulative dividend is ignored for EPS purposes,
because it will have been adjusted for in the prior year. Similarly, the excess of the fair value of
additional ordinary shares issued on conversion of the convertible preference shares over the
fair value of the ordinary shares to which the shareholders would have been entitled under the
original conversion terms would already have been deducted from profit attributable to the
ordinary shareholders, and no further adjustment is required.
It may be noted that as per Section 55 of the Companies Act, 2013, a company cannot issue any
irredeemable preference shares or shares at discount. However, the above illustration has been given
only to explain the concept given in Ind AS.

Q 5. Special Cases : Participating Preference Shares

(This illustration does not illustrate the classification of the components of convertible financial

in
instruments as liabilities and equity or the classification of related interest and dividends as expenses
and equity as required by Ind AS 32).
Profit attributable to equity holders of the parent entity ` 100,000
Ordinary shares outstanding
Non-convertible preference shares

J
Non-cumulative annual dividend on preference shares (before any dividend is
paid on ordinary shares)
a 10,000
6,000
` 5.50 per share

a k
After ordinary shares have been paid a dividend of ` 2.10 per share, the preference shares
participate in any additional dividends on a 20:80 ratio with ordinary shares.
Compute the allocation of earnings for the purpose of calculation of Basic EPS when an entity has

h
ordinary shares & participating equity instruments that are not convertible into ordinary shares.

t
Ans.

r
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

Less: Dividend paid:

S a
Basic earnings per share is calculated as follows:
Profit attributable to equity holders of the parent entity
`
100,000
`

.
Preference 33,000
Ordinary 21,000 (54,000)

A
Undistributed earnings 46,000
Allocation of undistributed earnings:

C
Allocation per ordinary share = A
Allocation per preference share = B; 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 = Re. 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

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 FR Super 100

CHAPTER Ind AS 34
18 INTERIM FINANCIAL REPORTING
Q 1. Income Taxes - Carried Forward Losses
To comply with listing requirements and other statutory obligations Quaker Ltd. prepares interim
financial reports at the end of each quarter. The company has brought forward losses of ` 700 lakhs
under Income Tax Law, of which 90% is eligible for set off as per the recent verdict of the Court, that has
attained finality. No Deferred Tax Asset has been recognized on such losses in view of the uncertainty
over its eligibility for set off. The company has reported quarterly earnings of ` 700 lakhs and ` 300
lakhs respectively for the first two quarters of Financial year 2013-14 and anticipates a net earning of `
800 lakhs in the coming half year ended March 2014 of which ` 100 lakhs will be the loss in the quarter

n
ended Dec. 2013. The tax rate for the company is 30% with a 10% surcharge. You are required to

i
calculate the amount of Tax Expense to be reported for each quarter of financial year 2013-14.

a
Q 2. ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of ` 20,00,000 for the
third quarter of 20X1.

J
Following adjustments are made while computing the net profit:
(i) Bad debts of ` 1,00,000 incurred during the quarter. 50% of the bad debts have been deferred to
the next quarter.
(ii)
(iii)

a k
Additional depreciation of ` 4,50,000 resulting from the change in the method of depreciation.
Exceptional loss of ` 28,000 incurred during the third quarter. 50% of exceptional loss have been
deferred to next quarter.

h
(iv) ` 5,00,000 expenditure on account of administrative expenses pertaining to the third quarter is

t
deferred on the argument that the fourth quarter will have more sales; therefore fourth quarter
should be debited by higher expenditure. The expenditures are uniform throughout all quarters.

Ans.
to be presented to the Board of Directors.
r
Analyze and ascertain the correct net profit to be shown in the Interim Financial Report of third quarter

a
(MTP May 2021)

S
In the instant case, the quarterly net profit has not been correctly stated. As per Ind AS 34, Interim
Financial Reporting, the quarterly net profit should be adjusted and restated as follows:

.
(iv) The treatment of bad debts is not correct as the expenses incurred during an interim reporting
period should be recognised in the same period. Accordingly, ` 50,000 should be deducted from

A
` 20,00,000.
(v) Recognising additional depreciation of ` 4,50,000 in the same quarter is correct and is in tune
with Ind AS 34.
(vi)

(vii)
C Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire amount of
` 28,000 incurred during the third quarter should be recognized in the same quarter. Hence
` 14,000 which was deferred should be deducted from the profits of third quarter only.
As per Ind AS 34 the income and expense should be recognised when they are earned and
incurred respectively. As per para 39 of Ind AS 34, the costs should be anticipated or deferred
only when:
(i) It is appropriate to anticipate or defer that type of cost at the end of the financial year,
and
(ii) Costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of ` 5,00,000 is not correct as
expenditures are uniform throughout all quarters.
Thus, considering the above, the correct net profits to be shown in Interim Financial Report of
the third quarter shall be ` 14,36,000 (` 20,00,000 - ` 50,000 - ` 14,000 - ` 5,00,000).

112 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

CHAPTER Ind AS 36
19 IMPAIRMENT OF ASSETS
Q 1. Goodwill : Business Combination
Sun Ltd is an entity with various subsidiaries. The entity closes its books of account at every year ended
on 31st March. On 1st July, 20X1 Sun ltd acquired an 80% interest in Pluto Ltd. Details of the acquisition
were as follows:
a. Sun ltd acquired 800,000 shares in Pluto Ltd by issuing two equity shares for every five acquired. The
fair value of Sun Ltd’s share on 1st July, 20X1 was ` 4 per share and the fair value of a Pluto’s share
was ` 1.40 per share. The costs of issue were 5% per share.
b. Sun Ltd incurred further legal and professional costs of ` 100,000 that directly related to the
acquisition.

n
c. The fair values of the identifiable net assets of Pluto Ltd at 1st July, 20X1 were measured at ` 1.3

i
million. Sun Ltd initially measured the non-controlling interest in Pluto Ltd at fair value. They used
the market value of a Pluto Ltd share for this purpose. No impairment of goodwill arising on the

a
acquisition of Pluto Ltd was required at 31st March, 20X2 or 20X3.
Pluto Ltd comprises three cash generating units A, B and C. When Pluto Ltd was acquired the directors of

J
Sun Ltd estimated that the goodwill arising on acquisition could reasonably be allocated to units A:B:C
on a 2:2:1 basis. The carrying values of the assets in these cash generating units and their recoverable
amounts are as follows:

Unit Carrying value (before goodwill allocation)

` ’000

a k Recoverable amount
` ’000

h
A 600 740
B 550 650
C
Required:
(i)
450

r t 400

Compute the carrying value of the goodwill arising on acquisition of Pluto Ltd in the

Ans.
(ii)
a
consolidated Balance Sheet of Sun ltd at 31st March, 20X4 following the impairment review.
Compute the total impairment loss arising as a result of the impairment review, identifying how

S
much of this loss would be allocated to the non-controlling interests in Pluto ltd.

1.

A .
Computation of goodwill on acquisition
Particular
Cost of investment (8,00,000 x 2/5 x ` 4)
Fair value of non-controlling interest (2,00,000 x ` 1·4)
Amount (` ‘000)
1,280
280

C
Fair value of identifiable net assets at date of acquisition (1,300)
So goodwill equals 260
Acquisition costs are not included as part of the fair value of the consideration given under Ind
AS 103, Business Combination.

2. Calculation of impairment loss

Unit Carrying value Recoverable Impairment
Before Allocation of After Amount Loss
Allocation goodwill (2:2:1) Allocation
A 600 104 704 740 Nil
B 550 104 654 650 4
C 400* 52 452 400 52
* After writing down assets in the individual CGU to recoverable amount.

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3. Calculation of closing goodwill
Goodwill arising on acquisition (W1) 260
Impairment loss (W2) (56)
So closing goodwill equals 204
4. Calculation of overall impairment loss
on goodwill (W3) 56
on assets in unit C (450 ” 400) 50
So total loss equals 106
` 21.2 (20%) of the above is allocated to the NCI with the balance allocated to the shareholders
of Sun ltd.

Q 2. Goodwill : Business Combination

NCI measurement and Goodwill impairment

i n
A Ltd acquires 80% shares of a subsidiary B Ltd. for ` 3,200 thousand. At the date of acquisition, B Ltd.’s
identifiable net assets is ` 3,000 thousand. A elects to measure NCI at proportionate share of net
identifiable assets. It recognizes

Purchase Consideration
NCI (3,000 x 20%)
J a` in thousand
3,200
600

Less: Net Assets

Goodwill
a k 3,800
(3,000)
800

goodwill).
Recoverable amount of B Ltd.’s assets is

r t h
At the end of next financial year, B Ltd.’s carrying amount is reduced to ` 2,700 thousand (excluding

a
Case (i) ` 2,000 thousand, Case (ii) ` 2,800 thousand
Calculate impairment loss allocable to Parent and NCI in both the cases. [SM 2021]

S
Ans.
Case (i) ` in thousand

.
Particulars Goodwill Other Asset Total
Carrying amount 800 2,700 3,500

A
Unrecognised NCI (notional) [(800 / 80%) x 20%]
Notional Total

C
Recoverable amount
Total Impairment loss
Impairment loss recognised in CFS
200
1,000
-
-
(800)
-
2,700
-
-
200
3,700
2,000
(1,700)
(700) (1,500)
Carrying amount after impairment - 2,000 2,000
Impairment loss on: Parent NCI
Goodwill (800) -
Other assets (560) (140)
Total (1,360) (140)

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 FR Super 100
Case (ii)
Particulars Goodwill Other Asset Total
Carrying amount 800 2,700 3,500
Unrecognised NCI (notional) (800 / 80% x 20%) 200 - 200
Notional Total 1,000 2,700 3,700
Recoverable amount - - 2,800
Total Impairment loss - - (900)
Impairment loss recognised in CFS (900 x 80%) (720) - (720)
Carrying amount after impairment (800 ” 720) 80 2,700 2,780

Impairment loss on:

Goodwill
Parent

i
(720)
n NCI
-

a
Other assets - -
Total (720) -

J
It is to be noted that since an entity measures NCI at its proportionate interest in the net identifiable

k
assets of a subsidiary at the acquisition date, rather than at fair value, goodwill attributable to NCI is not
recognised in the parent’s consolidated financial statements and so the impairment loss on such

a
goodwill not recognised

h
Q 3. IL, Allocation of IL & Reversal of IL in a CG a having goodwill

t
Elia limited is a manufacturing company which deals in to manufacturing of cold drinks and beverages. It
is having various plants across India. There is a Machinery A in the Baroda plant which is used for the

r
purpose of bottling. There is one more machinery which is Machinery B clubbed with Machinery A.

a
Machinery A can individually have an output and also sold independently in the open market. Machinery
B cannot be sold in isolation and without clubbing with Machine A it cannot produce output as well. The
Company considers this group of assets as a Cash Generating Unit and an Inventory amounting to ` 2

. S
Lakh and Goodwill amounting to ` 1.50 Lakhs is included in such CGU.

Machinery A was purchased on 1st April 2013 for ` 10 Lakhs and residual value is ` 50 thousands.
Machinery B was purchased on 1st April, 2015 for ` 5 Lakhs with no residual value. The useful life of both

Year
1
A
Machine A and B is 10 years. The Company expects following cash flows in the next 5 years pertaining to
Machinery A. The incremental borrowing rate of the company is 10%.

C Cash Flows from Machinery A

1,50,000
2 1,00,000
3 1,00,000
4 1,50,000
5 1,00,000 (excluding Residual Value)
Total 6,00,000
On 31st March, 2018, the professional valuers have estimated that the current market value of
Machinery A is ` 7 lakhs. The valuation fee was ` 1 lakh. There is a need to dismantle the machinery
before delivering it to the buyer. Dismantling cost is ` 1.50 lakhs. Specialised packaging cost would be `
25 thousand and legal fees would be ` 75 thousand.

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The Inventory has been valued in accordance with Ind AS 2. The recoverable value of CGU is ` 10 Lakh as
on 31st March, 2018. In the next year, the company has done the assessment of recoverability of the CGU
and found that the value of such CGU is ` 11 Lakhs ie on 31st March, 2019. The Recoverable value of
Machine A is ` 4,50,000 and combined Machine A and B is ` 7,60,000 as on 31st March, 2019.

Required:
a) Compute the impairment loss on CGU and carrying value of each asset after charging impairment
loss for the year ending 31st March, 2018 by providing all the relevant working notes to arrive at
such calculation.
b) Compute the prospective depreciation for the year 2018-2019 on the above assets.
c) Compute the carrying value of CGU as at 31st March, 2019. [May 2019]
Ans.
(a)

i n
Computation of impairment loss and carrying value of each of the asset in CGU after impairment
loss

a
(i) Calculation of carrying value of Machinery A and B before impairment
Machinery A
Cost
Residual Value
(A)

J
` 10,00,000
` 50,000

k
Useful life 10 years
Useful life already elapsed 5 years
Yearly depreciation
WDV as at 31st March, 2018 [A- (B x 5)]

h a (B) ` 95,000
` 5,25,000

t
Machinery B

r
Cost (C) ` 5,00,000
Residual Value -
Useful life

S a
Useful life already elapsed
Yearly depreciation (D)
10 years
3 years
` 50,000

(ii) .
WDV as at 31st March, 2018 [C- (D x 3)]

A
Calculation of Value-in-use of Machinery A
Period Cash Flows (`) PVF
` 3,50,000

PV

C 1
2
3
4
1,50,000
1,00,000
1,00,000
1,50,000
0.909
0.826
0.751
0.683
1,36,350
82,600
75,100
1,02,450
5 1,00,000 0.621 62,100
5 50,000 0.621 31,050
Value in use 4,89,650

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 FR Super 100
(iii) Calculation of Fair Value less cost of disposal of Machinery A
`
Fair Value 7,00,000
Less: Dismantling cost (1,50,000)
Packaging cost (25,000)
Legal Fees (75,000)
Fair value less cost of disposal 4,50,000

(iv) Calculation of Impairment loss on Machinery A

`
Carrying Value 5,25,000
Less: Recoverable Value ie higher of Value-in-use and
Fair value less cost of disposal
Impairment Loss
4,89,650
35,350
i n
(v) Calculation of Impairment loss of CGU

J a
1. First goodwill will be impaired fully and then the remaining impairment loss of ` 75,000 will
be allocated to Machinery A and B.

k
2. If we allocate remaining impairment loss to Machinery A and B on pro- rata basis, it would
come to ` 45,000 on Machinery A. However, the impairment loss of Machinery A cannot

a
exceed ` 35,350. Hence, impairment to CGU will be as follows:
Carrying value before Impairment Carrying value after

Machinery A
Machinery B

r t h
impairment loss
`
5,25,000
3,50,000
loss
`
35,350
39,650*
impairment loss
`
4,89,650
3,10,350

a
Inventory 2,00,000 - 2,00,000
Goodwill 1,50,000 1,50,000 -

S
Total 12,25,000 2,25,000 10,00,000
* Balancing figure.

(b)

A .
Carrying value after adjustment of depreciation

Machinery A [4,89,650 ” {(4,89,650-50,000)/5}] 4,01,720

`

C
Machinery B [3,10,350 ” (3,10,350/7)] 2,66,014
Inventory 2,00,000
Goodwill -
Total 8,67,734

(c) Calculation of carrying value of CGU as on 31st March, 2019

The revised value of CGU is ` 11 Lakh. However, impaired goodwill cannot be reversed. Further,
the individual assets cannot be increased by lower of recoverable value or Carrying Value as if
the assets were never impaired.
Accordingly, the carrying value as on 31st March, 2019 assuming that the impairment loss had
never incurred, will be:

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Carrying Recoverable Final CA as at

Value Value 31st Mar 2019
Machinery A 4,30,000 4,50,000 4,30,000
Machinery B 3,00,000 (7,60,000 ” 4,50,000) 3,10,000 3,00,000
Inventory 2,00,000 2,00,000 2,00,000
Goodwill -
Total 9,30,000 9,60,000 9,30,000
Hence the impairment loss to be reversed will be limited to ` 62,266 only (` 9,30,000 ” `
8,67,734).

n
Q 4. Reversal of IL : Computation

i
On 1st April 20X1, Venus ltd acquired 100% of Saturn ltd for ` 4,00,000. The fair value of the net
identifiable assets of Saturn ltd was ` 3,20,000 and goodwill was ` 80,000. Saturn ltd is in coal mining

a
business. On 31st March, 20X3 the government has cancelled licenses given to it in few states.

J
As a result Saturn’s ltd revenue is estimated to get reduce by 30%. The adverse change in market place
and regulatory conditions is an indicator of impairment. As a result, Venus ltd has to estimate the
recoverable amount of goodwill and net assets of Saturn ltd on 31st March, 20X3.

a k
Venus ltd uses straight line depreciation. The useful life of Saturn’s ltd assets is estimated to be 20 years
with no residual value. No independent cash inflows can be identified to any individual assets. So the
entire operation of Saturn ltd is to be treated as a CGU. Due to the regulatory entangle it is not possible

h
to determine the selling price of Saturn ltd as a CGU. Its value in use is estimated by the management at

t
` 2,12,000.

a r
Suppose by 31st March, 20X5 the government reinstates the licenses of Saturn Ltd. The management
expects a favourable change in net cash flows. This is an indicator that an impairment loss may have
reversed. The recoverable amount of Saturn’s ltd net asset is re-estimated. The value in use is expected
to be ` 3,04,000 and net selling price is expected to be ` 2,90,000.
Ans.

. S
Since the fair value less costs of disposal is not determinable the recoverable amount of the CGU is its
value in use. The carrying amount of the assets of the CGU on 31st March, 20X3 is as follows:
Calculation of Impairment loss

A
Goodwill Other assets Total
` ` `
Historical Cost 80,000 3,20,000 4,00,000

C
Accumulated Depreciation (3,20,000/20) x 2
Carrying Amount
Impairment Loss

Revised Carrying Amount

80,000
(80,000)
- (32,000)
2,88,000
(76,000)
(32,000)
3,68,000
(1,56,000)

 Impairment Loss = Carrying Amount ” Recoverable Amount (` 3,68,000 - ` 2,12,000) = ` 1,56,000 is

charged in statement of profit and loss for the period ending 31st March, 20X3 as impairment loss.
 Impairment loss is allocated first to goodwill ` 80,000 and remaining loss of ` 76,000 (` 1,56,000 ” `
80,000) is allocated to the other assets.

Reversal of Impairment loss

Reversal of impairment loss is recognised subject to:-

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 FR Super 100
 The impairment loss on goodwill cannot be reversed.
 The increased carrying amount of an asset after reversal of an impairment loss not to exceed the
carrying amount that would have been determined had no impairment loss been recognised in prior
years.

Calculation of carrying amount of identifiable assets had no impairment loss is recognised

`
Historical Cost 3,20,000
Accumulated Depreciation for 4 years (3,20,000/20) x 4 (64,000)
Carrying amount had no impairment loss is recognised on 31st March, 20X5 2,56,000

n
Carrying amount of other assets after recognition of impairment loss

Carrying amount on 31st March, 20X3

for ease of calculation]

a i
Accumulated Depreciation for 2 years (2,12,000/18) x 2 [rounded off to nearest thousand
`
2,12,000
(24,000)

Carrying amount on 31st March, 20X5

J 1,88,000

k
 The impairment loss recognised previously can be reversed only to the extent of lower of re-
estimated recoverable amount is ` 2,56,000 (higher of fair value less costs of disposal ` 2,90,000 and

a
value in use ` 3,04,000)
 Impairment loss reversal will be ` 68,000 i.e. (` 2,56,000 ” ` 1,88,000). This amount is recognised as

h
income in the statement of profit and loss for the year ended 31st March, 20X5.

t
 The carrying amount of other assets at 31st March, 20X5 after reversal of impairment loss will be `
2,56,000.

Q 5.


a r
From 1st April, 20X5 the depreciation charge will be ` 16,000 i.e. (` 2,56,000/16)

On 31 March 20X1, Vision Ltd acquired 80% of the equity shares of Mission Ltd for ` 190 million. The fair

S
values of the net assets of Mission Ltd that were included in the consolidated statement of financial
position of Vision Ltd at 31 March 20X1 were ` 200 million. It is the Group’s policy to value the non-

.
controlling interest in subsidiaries at the date of acquisition at its proportionate share of the fair value of
the subsidiaries’ identifiable net assets.
On 31 March 20X4, Vision Ltd carried out its annual review of the goodwill on consolidation of Mission

A
Ltd and found evidence of impairment. No impairment had been evident when the reviews were carried
out at 31 March 20X2 and 31 March 20X3. The review involved allocating the assets of Mission Ltd into

C
three cash-generating units and computing the value in use of each unit. The carrying values of the
individual units before any impairment adjustments are given below:
Unit A Unit B Unit C
` in million ` in million ` in million
Intangible assets 30 10 -
Property, Plant and Equipment 80 50 60
Current Assets 60 30 40
Total 170 90 100
Value in use of unit 180 66 104
It was not possible to meaningfully allocate the goodwill on consolidation to the individual cash
generating units but all the other net assets of Mission Ltd are allocated in the table shown above.
The intangible assets of Mission Ltd have no ascertainable market value but all the current assets have a

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market value that is at least equal to their carrying value. The value in use of Mission Ltd as a single cash-
generating unit on 31 March 20X4 is ` 350 million.
Discuss and compute the accounting treatment of impairment of goodwill as per Ind AS 36?
(RTP May 2021)
Ans.
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 the cash generating units to which it relates. Since here the goodwill cannot be meaningfully
allocated to the units, the 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)

in
Asset Impact on carrying value
Existing Impairment Revised
Intangible assets
Property, plant and equipment
Current assets
Total
10
50
30
90
J a (4)
(20)
Nil*
(24)
6
30
30
66

k
* The current assets are not impaired because they are expected to realize at least their carrying value
when disposed of.

a
Following this review, the three units plus the goodwill are reviewed together i.e. treating Mission
Limited as single cash generating Unit. The impact of this is shown in the following table, given

h
that the recoverable amount of the business as a whole is ` 350 million:

t
(` in million)
Component Impact of impairment review on carrying

Goodwill (see note below)

a r Existing
37.50
value
Impairment
(23.50)
Revised
14.00
Unit A
Unit B (revised)
Unit C
Total
. S 170.00
66.00
100.00
373.50
Nil
Nil
Nil
(23.50)
170.00
66.00
100.00
350.00

C A
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 million).

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 FR Super 100

CHAPTER Ind AS 37 : PROVISIONS, CONTINGENT LIABILITIES

20 AND CONTINGENT ASSETS
Q 1. Restructuring : Discontinued Subsidiary Operations
U Ltd. is a large conglomerate with a number of subsidiaries. It is preparing consolidated financial
statements as on 31st March 20X2 as per the notified Ind AS. The financial statements are due to be
approved for issue on 15th May 20X2. Following are a few transactions that have taken place in some of
its subsidiaries during the year:

G Ltd. is a wholly owned subsidiary of U Ltd. engaged in management consultancy services. On 31st
January 20X2, the board of directors of U Ltd. decided to discontinue the business of G Ltd. from 30th

n
April 20X2. They made a public announcement of their decision on 15th February 20X2.

a i
G Ltd. does not have many assets or liabilities and it is estimated that the outstanding trade receivables
and payables would be settled by 31st May 20X2. U Ltd. would collect any amounts still owed by G
Ltd.’s customers after 31st May 20X2. They have offered the employees of G Ltd. termination payments

J
or alternative employment opportunities.

Following are some of the details relating to G Ltd.:

a k
 On the date of public announcement, it is estimated by G Ltd. that it would have to pay ` 540 lakhs
as termination payments to employees and the costs for relocation of employees who would
remain with the Group would be ` 60 lakhs. The actual termination payments totalling to ` 520 lakhs
were made in full on 15th May 20X2. As per latest estimates made on 15th May 20X2, the total
relocation cost is ` 63 lakhs.

t h
 G Ltd. had taken a property on operating lease, which was expiring on 31st March 20X6. The present

r
value of the future lease rentals (using an appropriate discount rate) is ` 430 lakhs. On 15th May
20X2, G Ltd. made a payment to the lessor of ` 410 lakhs in return for early termination of the lease.

S a
The loss after tax of G Ltd. for the year ended 31st March 20X2 was ` 400 lakhs. G Ltd. made further
operating losses totalling ` 60 lakhs till 30th April 20X2.
What are the provisions that the Company is required to make as per lnd AS 37?
[RTP Nov. 2018, SM 2021]

.
Ans.
A discontinued operation is one that is discontinued in the period or classified as held for sale at the
year end. The operations of G Ltd were discontinued on 30th April 20X2 and therefore, would be

C A
treated as discontinued operation for the year ending 31st March 20X3. It does not meet the criteria for
held for sale since the company is terminating its business and does not hold these for sale.

As per para 72 of Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, restructuring
includes sale or termination of a line of business. A constructive obligation to restructure arises when:
(a) an entity has a detailed formal plan for the restructuring
(b) has raised a valid expectation in those affected that it will carry out the restructuring by starting
to implement that plan or announcing its main features to those affected by it.

The Board of directors of U Ltd have decided to terminate the operations of G Ltd. from 30th April
20X2. They have made a formal announcement on 15th February 20X2, thus creating a valid
expectation that the termination will be implemented. This creates a constructive obligation on the
company and requires provisions for restructuring.
A restructuring provision includes only the direct expenditures arising from the restructuring that are
necessarily entailed by the restructuring and are not associated with the ongoing activities of the entity.

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The termination payments fulfil the above condition. As per Ind AS 10 ‘Events after Reporting Date’,
events that provide additional evidence of conditions existing at the reporting date should be reflected
in the financial statements. Therefore, the company should make a provision for ` 520 lakhs in this
respect.

The relocation costs relate to the future conduct of the business and are not liabilities for restructuring
at the end of the reporting period. Hence, these would be recognised on the same basis as if they arose
independently of a restructuring.

The operating lease would be regarded as an onerous contract. A provision would be made at the lower
of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. Hence, a
provision shall be made for ` 410 lakhs.

n
Further operating losses relate to future events and do not form a part of the closure provision.

i
Therefore, the total provision required = ` 520 lakhs + ` 410 lakhs = ` 930 lakhs

Q 2. Contingent Asset : Duty Drawback

J a
A company manufacturing and supplying process control equipment is entitled to duty draw back if it
exceeds its turnover above a specified limit. To claim duty drawback, the company needs to file
application within 15 days of meeting the specified turnover. If application is not filed within stipulated
time, the Department has discretionary power of giving duty draw back credit. For the year 20X1-20X2

a k
the company has exceeded the specified limit of turnover by the end of the reporting period. However,
duty drawback can be claimed on filing of application within the stipulated time or on discretion of
the Department if filing of application is late. The application for duty drawback is filed on April 20,
20X2, which is after the stipulated time of 15 days of meeting the turnover condition. Duty drawback

Ans.
drawback credit as per the given information?

r t h
has been credited by the Department on June 28, 20X2 and financial statements have been approved by
the Board of Directors of the company on July 26, 20X2. What would be the treatment of duty
[RTP May 2020, SM 2021]

S a
In the instant case, the condition of exceeding the specified turnover was met at the end of the
reporting period and the company was entitled for the duty drawback. However, the application for the
same has been filed after the stipulated time. Therefore, credit of duty drawback was discretionary in
the hands of the Department. Since the claim was to be accrued only after filing of application, its

.
accrual will be considered in the year 20X2-20X3 only.
Accordingly, the duty drawback credit is a contingent asset as at the end of the reporting period 20X1-

A
20X2, which will be realised when the Department credits the same.
As per para 35 of Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, contingent

C
assets are assessed continually to ensure that developments are appropriately reflected in the financial
statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset
and the related income are recognised in the financial statements of the period in which the change
occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent asset.
In accordance with the above, the duty drawback credit which was contingent asset for the F.Y. 20X1-
20X2 should be recognised as asset and related income should be recognized in the reporting period in
which the change occurs. i.e., in the period in which realisation becomes virtually certain, i.e., F.Y. 20X2-
20X3.

122 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

CHAPTER Ind AS 38
21 INTANGIBLE ASSETS
Q 1. Costs: Exchange of Asset
Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license. The
telecommunication license is carried at ` 5,00,000 in the books of Sun Ltd. The Software is carried at `
10,000 in the books of the Earth Ltd which is not the fair value.
Advise journal entries in the following situations in the books of Sun Ltd and Earth Ltd:-
1) Fair value of software is ` 5,20,000 and fair value of telecommunication license is ` 5,00,000.
2) Fair Value of Software is not measureable. However similar Telecommunication license is
transacted by another company at ` 4,90,000.

Ans.
3)

i n
Neither Fair Value of Software nor Telecommunication license could be reliably measured.

a
INR in ‘000
Situa- Sun Ltd. Earth Ltd.
tion
1 Software Dr. 500
J
Telecommunication license Dr. 520

2 Software
To Telecommunication license 500

Dr. 490

a k To Software
To Profit on Exchange
Telecommunication license Dr. 490
10
510

h
Loss on Exchange Dr. 10 To Software 10

t
To Telecommunication license 500 To Profit on Exchange 480

r
Note: The company may first recognise
Impairment loss and then pass an entry. The

a
effect is the same as impairment loss will
also be charged to Income Statement.

S
3 Software Dr. 500 Telecommunication license Dr. 10
To Telecommunication license 500 To Software 10

Q 2.

A .
Costs : Self Generated Asset
X Ltd. is engaged is developing computer software. The expenditures incurred by X Ltd. in pursuance of
its development of software is given below:

C
(a) Paid ` 2,00,000 towards salaries of the program designers.
(b) Incurred ` 5,00,000 towards other cost of completion of program design.
(c) Incurred ` 2,00,000 towards cost of coding and establishing technical feasibility.
(d) Paid ` 7,00,000 for other direct cost after establishment of technical feasibility.
(e) Incurred ` 2,00,000 towards other testing costs.
(f) Cost of producing product masters for training material is ` 3,00,000.
(g) A focus group of other software developers was invited to a conference for the introduction
of this new software. Cost of the conference aggregated to ` 70,000.
(h) On March 15, 20X0, the development phase was completed and a cash flow budget was
prepared.
Net profit for the year was estimated to be equal ` 40,00,000. How X Ltd. should account for the above
mentioned cost? (Assume Cost incurred given in chronological order)

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Ans.
Costs incurred in creating computer software, should be charged to research & development expenses
when incurred until technical feasibility/asset recognition criteria have been established for the product.
Here, technical feasibility is established after completion of detailed program design.
In this case, ` 9,00,000 (salary cost of ` 2,00,000, program design cost of ` 5,00,000 and coding and
technical feasibility cost of ` 2,00,000) would be recorded as expense.
Cost incurred from the point of technical feasibility are capitalised as software costs. But the conference
cost of ` 70,000 would be expensed off.
In this situation, direct cost after establishment of technical feasibility of ` 7,00,000, testing cost of `
2,00,000 and cost of producing product masters for training material of ` 3,00,000 will be capitalised.
The cost of software capitalised is = ` (7,00,000 + 2,00,000 + 3,00,000) = ` 12,00,000.

Q 3. Amortisation: Method

i n
X Limited engaged in the business of manufacturing fertilisers entered into a technical collabaration

J a
agreement with a foreign company Y Limited. As a result, Y Limited would provide the technical know-
how enabling X Limited to manufacture fertiliser in a more efficient way. X Limited paid ` 10,00,00,000
for the use of know-how for a period of 5 years. X Limted estimates the production of fertiliser as
follows:

k
Year (in metric tons)
1 50,000
2
3

h a
70,000
1,00,000

t
4 1,20,000

r
5 1,10,000
At the end of the 1st year, it achieved its targeted production. At the end of 2nd year, 65,000 metric tons

a
of fertiliser was being manufactured, and X Limited considered to revise the estimates for the next 3
years. The revised figures are 85,000, 1,05,000 and 1,15,000 metric tons for year 3, 4 & 5 respectively.

S
How will X Limited amorise the technical know-how fees as per Ind AS 38?

.
Ans.
Based on the above data, it may be suitable for X Ltd. to use unit of production method for amortisation
of techinical know-how.

C A
The total estimated unit to be produced 4,50,00 MT. The technical know-how will be amortised on the
basis of the ratio of yearly production to total production.
The first year charge should be a proportion of 50,000/4,50,000 on ` 10,00,00,000 = ` 1,11,11,111.
At the end of 2nd year, as per revised estimate the total number of units to be produced are 4,20,000
MT.
The amortisation for second year will be 65,000/3,70,000, and so on for remaining years unless the
estimates are again revised on 8.89 crores.

124 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

CHAPTER Ind AS 40
22 INVESTMENT PROPERTY
Q 1. Lease : Reclassification : IP to Inventory
X Ltd. is engaged in the construction industry and prepares its financial statements up to 31st March
each year. On 1st April, 20X1, X Ltd. purchased a large property (consisting of land) for ₹ 2,00,00,000 and
immediately began to lease the property to Y Ltd. on an operating lease. Annual rentals were ₹
20,00,000. On 31st March, 20X5, the fair value of the property was ₹ 2,60,00,000. Under the terms of the
lease, Y Ltd. was able to cancel the lease by giving six months’ notice in writing to X Ltd. Y Ltd. gave this
notice on 31st March, 20X5 and vacated the property on 30th September, 20X5. On 30th September,
20X5, the fair value of the property was ₹ 2,90,00,000. On 1st October, 20X5, X Ltd. immediately began

n
to convert the property into ten separate flats of equal size which X Ltd. intended to sell in the ordinary

i
course of its business. X Ltd. spent a total of ₹ 60,00,000 on this conversion project between 30th
September, 20X5 to 31st March, 20X6. The project was incomplete at 31st March, 20X6 and the directors

a
of X Ltd. estimate that they need to spend a further ₹ 40,00,000 to complete the project, after which
each flat could be sold for ₹ 50,00,000.

year ended 31st March, 20X6 as per Ind AS.

J
Examine and show how the three events would be reported in the financial statements of X Ltd. for the
[RTP Nov. 2018, SM 2021]
Ans.

a k
From 1st April, 20X1, the property would be regarded as an investment property since it is being held for
its investment potential rather than being owner occupied or developed for sale.
The property would be measured under the cost model. This means it will be measured at ₹ 2,00,00,000
at each year end.

t h
On 30th September, 20X5, the property ceases to be an investment property. X Ltd. begins to develop it
for sale as flats.

r
a
As per para 59 of Ind AS 40, transfers between investment property, owner-occupied property and
inventories do not change the carrying amount of the property transferred and they do not change the

S
cost of that property for measurement or disclosure purposes. Hence, the carrying value of the
reclassified property will be ₹ 2,00,00,000.

A .
Since the lease of the property is an operating lease, rental income of ₹ 10,00,000 (₹ 20,00,000 x
6/12) would be recognised in P/L for the year ended 31st March, 20X6.

The additional costs of ₹ 60,00,000 for developing the flats which were incurred up to and including 31st
March, 20X6 would be added to the ‘cost’ of inventory to give a closing cost of ₹ 2,60,00,000.

C
The total selling price of the flats is expected to be ₹ 5,00,00,000 (10 x ₹ 50,00,000). Since the further
costs to develop the flats total ₹ 40,00,000, their net realisable value is ₹ 4,60,00,000 (₹ 5,00,00,000
” ₹ 40,00,000), so the flats will be measured at a cost of ₹ 2,60,00,000.
The flats will be shown in inventory as a current asset.

Q 2. Reclassification
Moon Ltd has purchased a building on 1st April 20X1 at a cost of ` 10 million. The building was used as a
factory by the Moon Ltd and was measured under cost model. The expected useful life of the building is
estimated to be 10 years. Due to decline in demand of the product, the Company does not need the
factory anymore and has rented out the building to a third party from 1st April 20X5. On this date the
fair value of the building is ` 8 million. Moon ltd uses cost model for accounting of its investment
property.

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 FR Super 100
Ans.
(` Million)
Carrying amount of the building after depreciation of 4 years 6
(10-10/10*4).
The company has applied cost model under Ind AS 16 till now.
There is no impairment as the fair value is greater than the carrying amount of building.
Revaluation Surplus credited to Other Comprehensive Income ---
(not applicable since cost model is used under Ind AS 16)
Building initially recognised as Investment Property
(Cost model Ind AS 40) 6

Q 3.

i n
X Ltd owned a land property whose future use was not determined as at 31 March 20X1. How should the
property be classified in the books of X Ltd as at 31 March 20X1?

a
During June 20X1, X Ltd commenced construction of office building on it for own use. Presuming that

J
the construction of the office building will still be in progress as at 31 March 20X2
(a) How should the land property be classified by X Ltd in its financial statements as at 31 March
20X2?

k
(b) Will there be a change in the carrying amount of the property resulting from any change in use
of the investment property?
(c)

a
Whether the change in classification to, or from, investment properties is a change in
accounting policy to be accounted for in accordance with Ind AS 8, Accounting Policies, Changes
in Accounting Estimates and Errors?

h
t
(d) Would your answer to (a) above be different if there were to be a management intention to
commence construction of an office building for own use; however, no construction activity

Ans.
was planned by 31 March 20X2?

a r (RTP May 2021)

As per paragraph 8(b) of Ind AS 40, any land held for currently undetermined future use, should be
classified as an investment property. Hence, in this case, the land would be regarded as held for capital

. S
appreciation. Hence the land property should be classified by X Ltd as investment property in the
financial statements as at 31 March 20X1.
As per Para 57 of the Standard, an entity can change the classification of any property to, and from, an
investment property when and only when evidenced by a change in use. A change occurs when the

A
property meets or ceases to meet the definition of investment property and there is evidence of the
change in use. Mere management’s intention for use of the property does not provide evidence of a
change in use.
(a)

(b)

(c)
C Since X Ltd has commenced construction of office building on it for own use, the property
should be reclassified from investment property to owner occupied as at 31 March 20X2.
As per Para 59, transfers between investment property, owner occupied and inventories do not
change the carrying amount of the property transferred and they do not change the cost of the
property for measurement or disclosure purposes.
No. The change in classification to, or from, investment properties is due to change in use of
the property. No retrospective application is required and prior period’s financial statements
need not be re-stated.
(d) Mere management intentions for use of the property do not evidence change in use. Since X
Ltd has no plans to commence construction of the office building during 20X1-20X2, the
property should continue to be classified as an investment property by X Ltd in its financial
statements as at 31 March 20X2.

126 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

CHAPTER Ind AS 41
23 AGRICULTURE
Q 1. Comprehensive
Company X purchased 100 beef cattle at an auction for ` 1,00,000 on 30 September 20X1. Subsequent
transportation costs were ` 1,000 that is similar to the cost X would have to incur to sell the cattle at the
auction. Additionally, there would be a 2% selling fee on the market price of the cattle to be incurred by
the seller.

On 31 March 20X2, the market value of the cattle in the most relevant market increases to ` 1,10,000.
Transportation costs of ` 1,000 would have to be incurred by the seller to get the cattle to the relevant
market. An auctioneer’s fee of 2% on the market price of the cattle would be payable by the seller.

i n
On 1 June 20X2, X sold 18 cattle for ` 20,000 and incurred transportation charges of ` 150. In
addition, there was a 2% auctioneer’s fee on the market price of the cattle paid by the seller.

a
On 15 September 20X2, the fair value of the remaining cattle was ` 82,820. 42 cattle were slaughtered

J
on that day, with a total slaughter cost of ` 4,200. The total market price of the carcasses on that day
was ` 48,300, and the expected transportation cost to sell the carcasses is ` 420. No other costs are
expected.

a k
On 30 September 20X2, the market price of the remaining 40 cattle was ` 44,800. The expected
transportation cost is ` 400. Also, there would be a 2% auctioneer’s fee on the market price of the cattle
payable by the seller.

on these dates for reporting.

r t h
Pass Journal entries so as to provide the initial and subsequent measurement for all above transactions.
Interim reporting periods are of 30 September and 31 March and the company determines the fair values
[SM 2021]
Ans.

Biological asset (cattle)

Loss on initial recognition
a
Value of cattle at initial recognition (30 September 20X1)

S
Dr.
Dr.
(All figures are in `)
97,000*
4,000

A .
To Bank (Purchase and cost of transportation)
(Initial recognition of cattle at fair value less costs to sell)
*Fair value of cattle = 1,00,000 ” 1,000 ” 2,000 (2% of 1,00,000) = 97,000

Subsequent measurement at 31 March 20X2

1,01,000

(All figures are in `)

C
Biological Assets (Cattle)
To Gain on Sale (Profit & Loss)
(Subsequent measurement of Cattle at fair value less costs to sell
(1,06,800** ” 97,000))
** Fair value of cattle = 1,10,0000 ” 1,000 ” 2,200 (2% of 1,10,000) = 1,06,800
Dr. 9,800
9,800

Sale of cattle on 1 June 20X2 (All figures are in ` )

Biological Assets (Cattle) Dr. 226
To Gain on Sale (Profit & Loss)
(Subsequent re-measurement of 18 Cattle at fair value less costs to 226
sell just prior to the point at which they are sold [19,450 -
{(1,06,800/100) x 18}]

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Cost to Sales Dr. 19,450
To Biological Assets (Cattle) 19,450
(Recording a cost of sales figure separately with a corresponding
reduction in the value of the biological assets)
Bank Dr. 19,450
Selling expenses (150 + 400) Dr. 550
To Revenue 20,000
(Recognition of revenue from sale of cattle)

Transfer of Cattle to Inventory on 15 September 20X2 (All figures are in ` )

Inventory (48,300 - 420) Dr. 47,880

Loss on remeasurement
To Biological Asset (Cattle)
To Bank (Slaughtering cost)
Dr.

i n
1,176
44,856#
4,200
(Transfer of cattle to inventory)

J a
#Note: 44,856 is calculated as the proportion of cattle sold using the fair value (1,06,800+ 226 ” 19,450) x
42/82)

k
Subsequent measurement of cattle at 30 September 20X2 (All figures are in ` )

Loss on remeasurement
To Biological Asset (Cattle)

h
(Subsequent measurement of Cattle at fair value less costs toa Dr. 18,440
18,440

r t
sell [43,504## ” {(1,06,800 + 226 ” 19,450)” 44,856}]
Fair value of cattle = 44,800 ” 400 ” 896 (2% of 44,800) = 43,504

Q 2.



Fishing in the ocean
Fish farming
S a
Analyse whether the following activities fall within the scope of Ind AS 41 with proper reasoning:
 Managing animal-related recreational activities like Zoo

Ans.




A .
Development of living organisms such as cells, bacteria and viruses
Growing of plants to be used in the production of drugs
Purchase of 25 dogs for security purpose of the company’s premises. (May 2021)

C
Activity Whether in the Remarks
scope of Ind AS
41?
Managing animal- No Since the primary purpose is to show the animals to public for
related recreational purposes, there is no management of biological
recreational transformation but simply control of the number of animals.
activities like Zoo Hence it will not fall in the purview of considered in the
definition of agricultural activity.
Fishing in the No Fishing in ocean is harvesting biological assets from
ocean unmanaged sources. There is no management of biological
transformation since fish grow naturally in the ocean. Hence,
it will not fall in the scope of the definition of agricultural
activity.
Fish farming Yes Managing the growth of fish and then harvest for sale is

128 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

agricultural activity within the scope of Ind AS 41 since there

is management of biological transformation of biological
assets for sale or additional biological assets.
Development of Analysis The development of living organisms for research purposes
living organisms required does not qualify as agricultural activity, as those organisms
such as cells, are not being developed for sale, or for conversion into
bacteria viruses agricultural produce or into additional biological assets.
Hence, development of such organisms for the said purposes
does not fall under the scope of Ind AS 41.
However, if the organisms are being developed for sale or use
in dairy products, the activity will be considered as
agricultural activity under the scope of Ind AS 41.

n
Growing of plants Yes If an entity grows plants for using it in production of drugs,

i
to be used in the the activity will be agricultural activity. Hence it will come
production of under the scope of Ind AS 41.

a
drugs
Purchase of 25 No Ind AS 41 is applied to account for the biological assets when
dogs for security
purposes of the
company’s
J
they relate to agricultural activity.
Guard dogs for security purposes do not qualify as agricultural
activity, since they are not being kept for sale, or for
premises

k
conversion into agricultural produce or into additional
biological assets. Hence, they are outside the scope of Ind AS
41.

a
Q 3.

r t h
Mercury Ltd. is an entity engaged in plantation and farming on a large scale diversified across India. On
1st April, 20X1, the company has received a government grant for ` 10 lakhs subject to a condition that it
will continue to engage in plantation of eucalyptus tree for a coming period of five years.

S a
The management has a reasonable assurance that the entity will comply with condition of engaging in
the plantation of eucalyptus tree for specified period of five years and accordingly it recognises
proportionate grant for ` 2 lakhs in Statement of Profit and Loss as income following the principles laid
down under Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance.

Ans.

A .
Analyse whether the above accounting treatment made by the management is in compliance of the Ind
AS. If not, advise the correct treatment alongwith working for the same.

As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41 Agriculture shall
be applicable to this company.

C
The above facts need to be examined in the light of the provisions given in Ind AS 20 ‘Accounting for
Government Grants and Disclosure of Government Assistance’ and Ind AS 41 ‘Agriculture’.
Para 2(d) of Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’
states:
‚This Standard does not deal with government grants covered by Ind AS 41, Agriculture‛.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:

‚This Standard shall be applied to account for the government grants covered by paragraphs 34 and 35
when they relate to agricultural activity‛.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:

‚If a government grant related to a biological asset measured at its fair value less costs to sell is
conditional, including when a government grant requires an entity not to engage in specified agricultural

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 FR Super 100
activity, an entity shall recognise the government grant in profit or loss when, and only when, the
conditions attaching to the government grant are met‛.
Understanding of the given facts, The Company has recognised the proportionate grant for ` 2 lakhs in
Statement of Profit and Loss before the conditions attaching to government grant are met which is not
correct and nor in accordance with provision of Ind AS 41 ‘Agriculture’.

Accordingly, the accounting treatment of government grant received by the Mercury Ltd. is governed by
the provision of Ind AS 41 ‘Agriculture’ rather Ind AS 20 ‘Accounting for Government Grants and
Disclosure of Government Assistance’.

Government grant for ` 10 lakhs shall be recognised in profit or loss when, and only when, the conditions
attaching to the government grant are met i.e. after the expiry of specified period of five years of

n
continuing engagement in the plantation of eucalyptus tree.

Liabilities
Non-Current liabilities
i
Balance Sheet extracts showing the presentation of Government Grant as on 31st March, 20X2 `

a `

Other Non-Current Liabilities

Government Grants
J 10,00,000

Q 4. Either
Entity A purchased cattle at an auction on 30th June 20X1

a k ` 1,00,000

h
Purchase price at 30th June 20X1

t
Costs of transporting the cattle back to the entity’s farm ` 1,000

r
Sales price of the cattle at 31st March, 20X2 ` 1,10,000

a
The company would have to incur similar transportation costs if it were to sell the cattle at auction, in
addition to an auctioneer’s fee of 2% of sales price. The auctioneer charges 2% of the selling price, from
both, the buyer as well as the seller.

Ans.
31st March, 20X2.
S
Calculate the amount at which cattle is to be recognised in books on initial recognition and at year end

.
(MTP Dec 2021)

A
Either
Initial recognition of cattle

C
`

Fair value less costs to sell (`1,00,000 ” `1,000 - `2,000) 97,000

Cash outflow (`1,00,000 + `1,000 + `2,000) 1,03,000

Loss on initial recognition 6,000

Cattle Measurement at year end

Fair value less costs to sell (`1,10,000 ” 1,000 ” (2% x 1,10,000)) 1,06,800

At 31st March, 20X2, the cattle is measured at fair value of ` 1,09,000 less the estimated auctioneer’s fee
of ` 2,200). The estimated transportation costs of getting the cattle to the auction of ` 1,000 are
deducted from the sales price in determining fair value.

130 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

CHAPTER Ind AS 101: FIRST TIME ADOPTION OF INDIAN

24 ACCOUNTING STANDARDS
Q 1. Comprehensive
Shaurya Limited is the company having its registered and corporate office at New Delhi. 60% of Shaurya
Limited’s shares are held by the Government of India and rest by other investors.

This is the first time that Shaurya limited would be applying Ind AS fo r the preparation of its financials
for the current financial year 2019 -2020. Following balance sheet is prepared as per earlier GAAP as at
the beginning of the preceding period along with the additional information:

n
Balance Sheet as at 31 March 2018

i
(All figures are in ’000, unless otherwise specified)
Particulars Amount
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital
(b) Reserves & Surplus
(2) Non-Current Liabilities
J a 10,00,000
25,00,000

(a) Long Term Borrowings

(b) Long Term Provisions
(c) Deferred tax liabilities
(3) Current Liabilities
a k 4,50,000
3,50,000
3,50,000

TOTAL
(a) Trade Payables
(b) Other Current Liabilities
(c) Short Term Provisions

r t h 22,00,000
4,50,000
12,00,000
85,00,000

ASSETS
(1) Non-Current Assets

S a
(a) Property, Plant & Equipment (net) 20,00,000

.
(b) Intangible assets 2,00,000
(c) Goodwill 1,00,000
(d) Non-current Investments 5,00,000

C A
(e) Long Term Loans and Advances
(f) Other Non-Current Assets
(2) Current Assets
(a) Current Investments
(b) Inventories
1,50,000
2,00,000

18,00,000
12,50,000
(c) Trade Receivables 9,00,000
(d) Cash and Bank Balances 10,00,000
(e) Other Current Assets 4,00,000
TOTAL 85,00,000

Additional Information (All figures are in ’000) :

1. Other current liabilities include ` 3,90,000 liabilities to be paid in cash such as expense
payable, salary payable etc. and ` 60,000 are statutory government dues.
2. Long term loans and advances include ` 40,000 loan and the remaining amount consists
Advance to staff of ` 1,10,000.

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 FR Super 100
3. Other non-current assets of ` 2,00,000 consists Capital advances to suppliers.
4. Other current assets include ` 3,50,000 current assets receivable in cash and Prepaid expenses of
` 50,000.
5. Short term provisions include Dividend pay able of ` 2,00,000. The dividend payable had been as
a result of board meeting wherein the declaration of dividend for financial year 2017-2018 was
made. However, it is subject to approval of shareholders in the annual general meeting.

Chief financial officer of Shaurya Limited has also presented the following information against
corresponding relevant items in the balance sheet:
a) Property, Plant & Equipment consists a class of assets as office buildings whose carrying
amount is ` 10,00,000. However, the fair value of said office building as on the date of
transition is estimated to be ` 15,00,000. Company wants to follow revaluation model as

n
its accounting policy in respect of its property, plant and equipment for the first annual Ind

i
AS financial statem ents.
b) The fair value of Intangible assets as on the date of transition is estimated to be ` 2,50,000.

c)
account.

J a
However, the management is reluctant to incorporate the fair value changes in books of

Shaurya Ltd. had acquired 80% shares in a company, Excel private limited few years ago thereby
acquiring the control upon it at that time. Shaurya Ltd. recognised goodwill as per
erstwhile accounting standards by accounting the excess of consideration paid over the net

d)
acquisition.

a k
assets acquired at the date of acquisition. Fair value exercise was not done at the time of

Trade receivables include an amount of ` 20,000 as provision for doubtful debts measured
in accordance with previous GAAP. Now as per latest estimates using hindsights, the

e)

t h
provision needs to be revised to ` 25,000.
Company had given a loan of ` 1,00,000 to an entity for the term of 10 years six years ago.

r
Transaction costs were incurred separately for this loan. The loan carries an interest rate of 7%.
The principal amount is to be repaid in equal installments over the period of ten years at the year

S a
end. Interest is also payable at each year end. The fair value of loan as on the date of
transition is ` 50,000 as against the carrying amount of loan which at present amounts to `
40,000. However, Ind AS 109 mandates to recognise the interest income as per effective
interest method after the adjustment of transaction costs. Management says it is tedious task in

.
the given case to apply the effective interest rate changes with retrospective effect and hence is
reluctant to apply the same retrospectively in its first time adoption.
f) In the long-term borrowings, ` 4,50,000 of component is due towards the State

g)
C A
Government. Interest is payable on the government loan at 4%, however the prevailing
rate in the market at present is 8%. The fair market value of loan stands at ` 4,20,000 as on the
relevant date.
Under Previous GAAP, the mutual funds were measured at cost or market value, whichever
is lower. Under Ind AS, the Company has designated these investments at fair value through
profit or loss. The value of mutual funds as per previous GAAP is ` 2,00,000 as included in
‘current investment’. However, the fair value of mutual funds as on the date of transition is `
2,30,000.
h) Ignore separate calculation of deferred tax on above adjustments. Assume the net deferred tax
income to be ` 50,000 on account of Ind AS transition adjustments.
Requirements:
 Prepare transition date balance sheet of Shaurya Limited as per Indian Accounting Standards
 Show necessary explanation for each of the items presented by chief financial officer in the form of
notes, which may or may not require the adjustment as on the date of transition.
[ MTP Nov. 2020, SM 2021]

132 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
Transition date (opening) IND -AS BALANCE SHEET of SHAURYA LIMITED As at 1 April 2018
(All figures are in ‟000, unless otherwise specified)
Particulars Previous Transitional Opening Ind
GAAP Ind AS AS Balance
adjustments Sheet
ASSETS
Non-current assets
Property, plant and equipment (Note 1) 20,00,000 5,00,000 25,00,000
Goodwill (Note 2) 1,00,000 - 1,00,000
Other Intangible assets (Note 3) 2,00,000 - 2,00,000
Financial assets:

n
Investment 5,00,000 - 5,00,000

i
Loans (Note 4) 40,000 10,000 50,000
Other financial assets 1,10,000 - 1,10,000
Other non-current assets
Current assets
Inventories
Financial assets
Investment (Note 5)
2,00,000

12,50,000

18,00,000 J
-

30,000
a
-
2,00,000

12,50,000

18,30,000
Trade receivables (Note 6)
Cash and cash equivalents/Bank
Other financial assets
Other current assets
a k
9,00,000
10,00,000
3,50,000
50,000
-
-
-
-
9,00,000
10,00,000
3,50,000
50,000
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Equity share capital
r t h 85,00,000

10,00,000
5,40,000

-
90,40,000

10,00,000
Other equity
Non-current liabilities
Financial liabilities
Borrowings (Note-7)

S a 25,00,000

4,50,000
7,90,000

-
32,90,000

4,50,000
Provisions

A .
Deferred tax liabilities (Net)
Current liabilities
Financial liabilities
Trade payables
3,50,000
3,50,000

22,00,000
-
(50,000)

-
3,50,000
3,00,000

22,00,000

C Other financial liabilities

Other current liabilities
Provisions (Note-8)
TOTAL EQUITY AND LIABILITIES
3,90,000
60,000
12,00,000
85,00,000
-
-
(2,00,000)
5,40,000
3,90,000
60,000
10,00,000
90,40,000

OTHER EQUITY
Retained Earnings (`) Fair value reserve Total

As at 31 March, 2018 27,90,000 (W.N.1) 5,00,000 32,90,000

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 FR Super 100
Working Note 1:
Retained earnings balance:
Balance as per Earlier GAAP 25,00,000
Transitional adjustment due to loans fair value 10,000
Transitional adjustment due to increase in mutual funds fair value 30,000
Transitional adjustment due to decrease in deferred tax liability 50,000
Transitional adjustment due to decrease in provisions (dividend) 2,00,000
Total 27,90,000

Disclosure forming part of financial statements:

Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and should not recognized as liability as at the Balance Sheet
date.

Note 1: Property, plant & Equipment:

i n
J a
As per para D5 of Ind AS 101, an entity may elect to measure an item of property, plant and equipment at
the date of transition to Ind AS at its fair value and use that fair value as its deemed cost at that date.

Para D7AA has to be applied for all items of property, plant and equipment. So, if D5 exemp tion is taken
for buildings, Ind AS will have to be applied retrospectively for other assets as well. Since, an entity

a k
elect to measure an item of property, plant and equipment at the date of transition to Ind AS at its
fair value and use that fair value as its deemed cost at that date , it is assumed that the carrying amount
of other assets based on retrospective application of Ind AS is equal to their fair value of ` 10 lakhs.

Note 2: Goodwill:

t h
Ind AS 103 mandatorily requires measuring the assets and liabilities of the acquiree at its fair value as on

r
the date of acquisition. However, a first time adopter may elect to not apply the provisions of Ind AS
103 with retrospective effect that occurred prior to the date of transition to Ind AS.

Note 3: Intangible assets:

S a
Hence company can continue to carry the goodwill in its books of account as per the previous GAAP.

.
Para D7 read with D6 of Ind AS 101 states that a first -time adopter may elect to use a previous GAAP
revaluation at, or before, th e date of transition to Ind AS as deemed cost at the date of the revaluation,

A
if the revaluation was, at the date of the revaluation, broadly comparable to:
(a)
(b)
Fair value; or
Cost or depreciated cost in accordance with Ind AS, adjusted to reflect, f or example,

C changes in a general or specific price index.

However, there is a requirement that Intangible assets must meet the definition and recognition criteria
as per Ind AS 38.

Hence, company can avail the exemption given in Ind AS 101 as on the date of transition to use the
carrying value as per previous GAAP.

Note 4: Loan:
Para B8C of Ind AS 101 states that if it is impracticable (as defined in Ind AS 8) for an entity to apply
retrospectively the effective interest method in Ind AS 109, the fair value of the financial asset or the
financial liability at the date of transition to Ind ASs shall be the new gross carrying amount of that
financial asset or the new amortised cost of that financial liability at the date of transition to Ind AS.

134 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

Accordingly, ` 50,000 would be the gross carrying amount of loan and difference of ` 10,000 (` 50,000 ” `
40,000) would be adjusted to retained earnings.

Note 5: Mutual Funds:

Para 29 of Ind AS 101 states that an entity is permitted to designate a previously recognised financial
asset as a financial asset measured at fair value through profit or loss in accordance with paragraph
D19A. The entity shall disclose the fair value of financial assets so designated at the date of designation
and their classification and carrying amount in the previous financial statements.

D19A states that an entity may designate a financial asset as measured at fair value through profit or
loss in accordance with Ind AS 109 on the basis of the facts and circumstances that exist at the date of

n
transition to Ind AS.

Note 6: Trade receivables:

a i
Para 14 of Ind AS 101 states that an entity‟s estimates in accordance with Ind AS at the date of transition
to Ind AS shall be consistent with estimates made for the same date in accordance with previous GAAP

J
(after adjustments to reflect any difference in accounting policies), unless there is objective evidence
that those estimates were in error.

a k
Para 15 of Ind AS 101 further states that an entity may receive information after the date of transition to
Ind AS about estimates that it had made under previous GAAP. In accordance with paragraph 14, an
entity shall treat the receipt of that information in the same way as non - adjusting events after
the reporting period in accordance with Ind AS 10, Events after the Reporting Period.

r t h
The entity shall not reflect that new information in its opening Ind AS Balance Sheet (unless the
estimates need adjustment for any differences in accounting policies or there is objective evidence
that the estimates we re in error). Instead, the entity shall reflect that new information in profit or loss

a
(or, if appropriate, other comprehensive income) for the year ended 31 March 2019.

Note 7: Government Grant:

S
Para 10A of Ind AS 20 states that the benefit of a government loan at a below-market rate of interest is

.
treated as a government grant. The loan shall be recognised and measured in accordance with Ind AS
109, Financial Instruments. The benefit of the below -market rate of interest shall be measured as the
difference between the initial carrying value of the loan determined in accordance with Ind AS

A
109, and the proceeds received. The benefit is accounted for in accordance with this Standard.

C
However, Para B10 of Ind AS 101 states, a first -time adopter shall classify all government loans received
as a financial liability or an equity instrument in accordance with Ind AS 32, Financial Instruments:
Presentation. Except as permitted by paragraph B11, a first -time adopter shall apply the requirements
in Ind AS 109, inancial Instruments, and Ind AS 20, Accounting for Government Grants and Disclosure
of Government Assistance , prospectively to government loans existing at the date of transition to Ind
ASs and shall not recognise the corresponding benefit of the government loan at a below-market rate of
interest as a government grant. Consequently, if a first-time adopter did not, under its previous GAAP,
recognise and measure a government loan at a below-market rate of interest on a basis consistent
with Ind AS requirements, it shall use its previous GAAP carrying amount of the loan at the date of
transition to Ind AS as the carrying amount of the loan in the opening Ind AS Balance Sheet. An entity
shall apply Ind AS 109 to the measurement of such loans after the date of transition to Ind AS.

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 FR Super 100
Note 8: Dividend
Dividend should be deducted from retained earnings during the year when it has been declared and
approved. Accordingly, the provision declared for preceding year should be reversed (to rectify the
wrong entry). Retained earnings would increase proportionately due to such adjustment.

Q 2. Compound FI
On April 1, 20X1, Sigma Ltd. issued 30,000 6% convertible debentures of face value of ` 100 per
debenture at par. The debentures are redeemable at a premium of 10% on 31 March 20X5 or these
may be converted into ordinary shares at the option of the holder. The interest rate for equivalent
debentures without conversion rights would have been 10%. The date of transition to Ind AS is 1 April
20X3. Suggest how should Sigma Ltd. account for this compound financial instrument on the date of
transition. The present value of ` 1 receivable at the end of each year based on discount rates of 6%

n
and 10% can be taken as:

i
End of year 6% 10%
1 0.94 0.91
2
3
4
0.89
0.84
0.79
0.83
0.75
0.68
J a
k
[RTP May 2020, SM 2021]
Ans.

a
The carrying amount of the debenture on the date of transition under previous GAAP, assuming that all
interest accrued other than premium on redemption have been paid, will be ` 31,20,000 [(30,000 x 100) +

h
(30,000 x 100 x 10/100 x 2/5)]. The premium payable on redemption is being recognised as borrowing

t
costs as per para 4(b) of AS 16 ie under previous GAAP on straight-line basis.

r
As per para D18 of Ind AS 101, Ind AS 32, Financial Instruments: Presentation, requires an entity to split a
compound financial instrument at inception into separate liability and equity components. If the liability

S a
component is no longer outstanding, retrospective application of Ind AS 32 would involve separating
two portions of equity. The first portion is recognised in retained earnings and represents the
cumulative interest accreted on the liability component. The other portion represents the original
equity component. However, in accordance with this Ind AS, a first -time adopter need not separate

.
these two portions if the liability component is no longer outstanding at the date of transition t o Ind AS.

In the present case, since the liability is outstanding on the date of transition, Sigma Ltd. will need to

C A
split the convertible debentures into debt and equity portion on the date of transition. Accordingly, we
will first measure the liability component by discounting the contractually determined stream of
future cash flows (interest and principal) to present value by using the discount rate of 10% p.a.
(being the market interest rate for similar debentures with no conversion option).
(`)
Interest payments p.a. on each debenture 6
Present Value (PV) of interest payment for years 1 to 4 (6 3.17) (Note 1) 19.02
PV of principal repayment (including premium) 110 0.68 (Note 2) 74.80
Total liability component per debenture 93.82
Equity component per debenture (Balancing figure) 6.18
Face value of debentures 100.00
Total equity component for 30,000 debentures 1,85,400
Total debt amount (30,000 x 93.82) 28,14,600

136 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Thus, on the date of initial recognition, the amount of ` 30,00,000 being the amount of debentures will
be split as under:

Debt ` 28,14,600
Equity ` 1,85,400

However, on the date of transition, unwinding of ` 28,14,600 will be done for two years as follows:
Year Opening Finance cost Interest paid Closing
balance @ 10% balance
1 28,14,600 2,81,460 1,80,000 29,16,060
2 29,16,060 2,91,606 1,80,000 30,27,666

Therefore, on transition date, Sigma Ltd. shall ”

a. recognise the carrying amount of convertible debentures at ` 30,27,666;

i n
a
b. recognise equity component of compound financial instrument of ` 1,85,400;
c. debit ` 93,066 to retained earnings being the difference between the previous GAAP amount of

d.
` 1,85,400; and
derecognise the debenture liability in previous GAAP of ` 31,20,000.
J
` 31,20,000 and ` 30,27,666 and the equity component of compound financial instrument of

Notes:

a k
1. 3.17 is present value of annuity factor of ` 1 at a discount rate of 10% for 4 years.
2. On maturity, ` 110 will be paid (` 100 as principal payment + ` 10 as premium)

Q 3. Consolidation

r t h
XYZ Pvt. Ltd. is a company registered under the Companies Act, 2013 following Accounting Standards
notified under Companies (Accounting Standards) Rules, 2006. The Company has decided to voluntarily

S a
adopt Ind AS w.e.f 1st April, 20X2 with a transition date of 1st April, 20X1.

The Company has one Wholly Owned Subsidiary and one Joint Venture which are into manufacturing of
automobile spare parts.

Particulars
A .
The consolidated financial statements of the Company under Indian GAAP are as under:
Consolidated Financial Statements

31.03.20X2
(` in Lakhs)
31.03.20X1

C
Shareholder's Funds
Share Capital
Reserves & Surplus
Non-Current Liabilities
Long Term Borrowings
7,953
16,547

1,000
7,953
16,597

1,000
Long Term Provisions 1,101 691
Other Long-Term Liabilities 5,202 5,904
Current Liabilities
Trade Payables 9,905 8,455
Short Term Provisions 500 475
Total 42,208 41,075

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 FR Super 100
Non-Current Assets
Property Plant & Equipment 21,488 22,288
Goodwill on Consolidation of subsidiary and JV 1,507 1,507
Investment Property 5,245 5,245
Long Term Loans & Advances 6,350 6,350
Current Assets
Trade Receivables 4,801 1,818
Investments · 1,263 3,763
Other Current Assets 1,554 104
Total 42,208 41,075

Additional Information:

n
The Company has entered into a joint arrangement by acquiring 50% of the equity shares of ABC Pvt.

i
Ltd. Presently, the same has been accounted as per the proportionate consolidated method. The
proportionate share of assets and liabilities of ABC Pvt. Ltd. included in the consolidated financial

a
statement of XYZ Pvt. Ltd. is as under:

Particulars ` in Lakhs

Property, Plant & Equipment

Long Term Loans & Advances
J 1,200
405
Trade Receivables
Other Current Assets
Trade Payables
Short Term Provisions
a k 280
50
75
35

r t h
The Investment is in the nature of Joint Venture as per Ind AS 111.
The Company has approached you to advice and suggest the accounting adjustments which are
required to be made in the opening Balance Sheet as on 1st April, 20 X1. [RTP May 2019, SM 2021]

a
Ans.
As per paras D31AA and D31AB of Ind AS 101, when changing from proportionate consolidation

S
to the equity method, an entity shall recognise its investment in the joint venture at transition date to
Ind AS.

.
That initial investment shall be measured as the aggregate of the carrying amounts of the assets and
liabilities that the entity had previously proportionately consolidated, including any goodwill arising from
acquisition. If the goodwill previously belong ed to a larger cash- generating unit, or to a group of cash -

C A
generating units, the entity shall allocate goodwill to the joint venture on the basis of the relative
carrying amounts of the joint venture and the cash-generating unit or group of cash -generating units to
which it belonged. The balance of the investment in joint venture at the date of transition to Ind
AS, determined in accordance with paragraph D31AA above is regarded as the deemed cost of
the investment at initial recognition.

Accordingly, the deemed cost of the investment will be

Property, Plant & Equipment 1,200
Goodwill (Refer Note below) 119
Long Term Loans & Advances 405
Trade Receivables 280
Other Current Assets 50
Total Assets 2,054
Less: Trade Payables 75
Short Term Provisions 35
Deemed cost of the investment in JV 1,944

138 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Calculation of proportionate goodwill share of Joint Venture ie ABC Pvt. Ltd.
Property, Plant & Equipment 22,288
Goodwill 1,507
Long Term Loans & Advances 6,350
Trade Receivables 1,818
Other Current Assets 104
Total Assets 32,067
Less: Trade Payables 8,455
Short Term Provisions 475
23,137

i n
Note: Only those assets and liabilities have been taken into account for calculation of proportionate
goodwill share of Joint Venture, which were given in the question as proportionate share of assts
and liabilities of ABC Ltd. added to XYZ Ltd.
Proportionate Goodwill of Joint Venture

J a
= [(Goodwill on consolidation of subsidiary and JV/Total relative net asset) x Net asset of JV]
= (1507 / 23,137) x 1825 = 119 (approx.)

a k
Accordingly, the proportional share of assets and liabilities of Joint Venture will be removed from the
respective values assets and liabilities appearing in the balance sheet on 31.3.20X1 and Investment
in JV will appear under non -current asset in the transition date balance sheet as on 1.4.20 X1.

t h
Adjustments made in previous GAAP balance sheet to arrive at Transition date Ind AS Balance Sheet

r
Transition Date Ind AS Balance Sheet of XYZ Pvt. Ltd. as at 1st April, 20X1

Particulars

Non-Current Assets
Property, Plant & Equipment
S a Previous
GAAP

22,288
Ind AS
Adjustment

(1,200)
Ind AS
GAAP

21,088

Financial Assets

A .
Investment Property
Intangible assets - Goodwill on Consolidation

Long Term Loans & Advances

Non- current investment in JV
5,245
1,507

6,350
-
(405)
1,944
-
(119)
5,245
1,388

5,945
1,944

C
Current Assets
Financial Assets
Investments
Trade Receivables
Other Current Assets
3,763
1,818
104
-
(280)
(50)
3,763
1,538
54
Total 41,075 (110) 40,965
Equity and liabilities
Equity
Share Capital 7,953 - 7,953
Other equity 16,597 - 16,597
Non-Current Liabilities
Financial Liabilities
Borrowings 1,000 1,000

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 FR Super 100
Long Term Provisions 691 691
Other Long-Term Liabilities 5,904 5,904
Current Liabilities
Financial Liabilities
Trade Payables 8,455 (75) 8,380
Short Term Provisions 475 (35) 440
Total 41,075 (110) 40,965

Q 4. Stock Options
X Ltd. is a first time adopter of Ind AS. The date of transition is April 1, 20X1. It has given 200 stock
options to its employees. Out of these, 75 options have vested on November 30, 20X0 and the remaining
125 will vest on November 30, 20X1. What are the options available to X Ltd. at the date of transition?
Ans.

i n
Ind AS 101 provides that a first-time adopter is encouraged, but not required, to apply Ind AS 102 on
‘Share-based Payment’ to equity instruments that vested before the date of transition to Ind-AS.

a
However, if a first time adopter elects to apply Ind AS 102 to such equity instruments, it may do so only
if the entity has disclosed publicly the fair value of those equity instruments, determined at the
measurement date, as defined in Ind AS 102.

J
k
Having regard to the above, X Ltd. has the following options:
 For 75 options that vested before the date of transition:
(a)

a
To apply Ind AS 102 and account for the same accordingly, provided it has disclosed
publicly the fair value of those equity instruments, determined at the measurement
date, as defined in Ind AS 102.

h
(b) Not to apply Ind AS 102.

r t
However, for all grants of equity instruments to which Ind AS 102 has not been applied, i.e.,
equity instruments vested but not settled before date of transition to Ind AS, X Ltd. would still

a
need to disclose the information.
 For 125 options that will vest after the date of transition: X Ltd. will need to account for the
same as per Ind AS 102.

S
Q 5. Comprehensive
1.
.
Company A intends to restate its past business combinations with effect from 30 June 2010

A
(being a date prior to the transition date). If business combinations are restated, whether certain
other exemptions, such as the deemed cost exemption for property, plant and equipment (PPE),
can be adopted?
2.

C Y Ltd. is a first time adopter of Ind AS. The date of transition is April 1, 2015. On April 1, 2010, it
obtained a 7 year US $ 1,00,000 loan. It has been exercising the option provided in Paragraph
46/46A of AS 11 and has been amortising the exchange differences in respect of this loan over
the balance period of such loan. On the date of transition to Ind AS, Y Ltd. wants to discontinue
the accounting policy as per the previous GAAP and follow the requirements of Ind AS 21, The
Effects of Changes in Foreign Exchange Rates with respect to recognition of foreign exchange
differences. Whether the Company is permitted to do so?
3. A company has chosen to elect the deemed cost exemption in accordance with Ind AS 101.
However, it does not wish to continue with its existing policy of capitalising exchange fluctuation
on long term foreign currency monetary items to fixed assets i.e. it does not want to elect the
exemption available as per Ind AS 101. In such a case, how would the company be required to
adjust the foreign exchange fluctuation already capitalised to the cost of property, plant and
equipment under previous GAAP?

140 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
1. Ind-AS 101 prescribes that an entity may elect to use one or more of the exemptions of the
Standard. As such, an entity may choose to adopt a combination of optional exemptions in
relation to the underlying account balances.
When the past business combinations after a particular date (30 June 2010 in the given case) are
restated, it requires retrospective adjustments to the carrying amounts of acquiree’s assets and
liabilities on account of initial acquisition accounting of the acquiree’s net assets, the effects of
subsequent measurement of those net assets (including amortisation of non- current assets that
were recognised at its fair value), goodwill on consolidation and the consolidation adjustments.
Therefore, the goodwill and equity (including non-controlling interest (NCI)) cannot be computed
by considering the deemed cost exemption for PPE. However, the entity may adopt the deemed
cost exemption for its property, plant and equipment other than those acquired through

n
business combinations.

2.

a i
Ind AS 101 provides that a first-time adopter may continue the policy adopted for accounting for
exchange differences arising from translation of long-term foreign currency monetary items
recognised in the financial statements for the period ending immediately before the beginning

J
of the first Ind AS financial reporting period as per the previous GAAP. Ind AS 101 gives an option
to continue the existing accounting policy. Hence, Y Ltd. may opt for discontinuation of

k
accounting policy as per previous GAAP and follow the requirements of Ind AS 21. The
cumulative amount lying in the FCMITDA should be derecognised by an adjustment against

a
retained earnings on the date of transition.

3.

h
Ind AS 101 permits to continue with the carrying value for all of its property, plant and

t
equipment as per the previous GAAP and use that as deemed cost for the purposes of first time

r
adoption of Ind AS. Accordingly, the carrying value of property, plant and equipment as per
previous GAAP as at the date of transition need not be adjusted for the exchange fluctuations

a
capitalized to property, plant and equipment. Separately, it allows a company to continue with
its existing policy for accounting for exchange differences arising from translation of long term
foreign currency monetary items recognised in the financial statements for the period ending

. S
immediately before the beginning of the first Ind AS financial reporting period as per the
previous GAAP. Accordingly, given that Ind AS 101 provides these two choices independent of
each other, it may be possible for an entity to choose the deemed cost exemption for all of
its property, plant and equipment and not elect the exemption of continuing the previous

A
GAAP policy of capitalising exchange fluctuation to property, plant and equipment. In such
a case, in the given case, a harmonious interpretation of the two exemptions would require

C
the company to recognise the property, plant and equipment at the transition date at the
previous GAAP carrying value (without any adjustment for the exchanges differences
capitalized under previous GAAP) but for the purposes of the first (and all subsequent) Ind
AS financial statements, foreign exchange fluctuation on all long term foreign currency
borrowings would be recognised in the statement of profit and loss.

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 FR Super 100

CHAPTER Ind AS 105: NON-CURRENT ASSETS HELD FOR SALE

25 AND DISCONTINUED OPERATIONS
Q 1. Following is the extract of the consolidated financial statements of A Ltd. for the year ended on:
Asset/ (liability) Carrying amount as
on 31st March, 20X1
(In ` ‘000)
Attributed goodwill 200
Intangible assets 950
Financial asset measured at fair value through other comprehensive income 300
Property, plant & equipment
Deferred tax asset

i n 1100
250

a
Current assets ” inventory, receivables and cash balances 600
Current liabilities (850)
Non-current liabilities ” provisions
Total
J (300)
2,250

a k
On 15th September 20X1, Entity A decided to sell the business. It noted that the business meets the
condition of disposal group classified as held for sale on that date in accordance with Ind AS 105.
However, it does not meet the conditions to be classified as discontinued operations in accordance with
that standard.

t h
The disposal group is stated at the following amounts immediately prior to reclassification as held for
sale.

r
a
Asset/ (liability) Carry amount as on
15th September
20X1 (In ` ‘000)
Attributed goodwill

.
Intangible assets
S
Financial asset measured at fair value through other comprehensive
200
930
360

A
income
Property, plant & equipment 1,020

C
Deferred tax asset 250
Current assets ” inventory, receivables and cash balances 520
Current liabilities (870)
Non-current liabilities ” provisions (250)
Total 2,160
Entity A proposed to sell the disposal group at ` 19,00,000. It estimates that the costs to sell will be `
70,000. This cost consists of professional fee to be paid to external lawyers and accountants.

As at 31st March 20X2, there has been no change to the plan to sell the disposal group and entity A still
expects to sell it within one year of initial classification. Mr. X, an accountant of Entity A remeasured the
following assets/ liabilities in accordance with respective standards as on 31st March 20X2:

142 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Available for sale: (In ` ‘000)
Financial assets 410
Deferred tax assets 230
Current assets- Inventory, receivables and cash balances 400
Current liabilities 900
Non- current liabilities- provisions 250

The disposal group has not been trading well and its fair value less costs to sell has fallen to ` 16,50,000.
Required:
What would be the value of all assets/ labilities within the disposal group as on the following dates in
accordance with Ind AS 105?
(a)
(b)
15 September, 20X1 and
31st March, 20X2
i n
[RTP May 2018, SM 2021]
Ans.
(a) As at 15 September, 20X1

J a
The disposal group should be measured at ` 18,30,000 (19,00,000-70,000). The impairment
write down of ` 3,30,000 (` 21,60,000 ” ` 18,30,000) should be recorded within profit from

k
continuing operations.

a
The impairment of ` 3,30,000 should be allocated to the carrying values of the appropriate non-
current assets.

Asset/ (liability)

r t h Carrying Impairment
value as at 15
September,
20X1
Revised
carrying value
as per IND AS
105
Attributed goodwill
Intangible assets

S a
Financial asset measured at fair value
200
930
360
(200)
(62)
-
868
360
-

.
through other comprehensive income
Property, plant & equipment 1,020 (68) 952

A
Deferred tax asset 250 - 250
Current assets ” inventory, receivables 520 - 520

C
and cash balances
Current liabilities (870) - (870)
Non-current liabilities ” provisions (250) - (250)
Total 2,160 (330) 1,830
The impairment loss is allocated first to goodwill and then pro rata to the other assets of the
disposal group within Ind AS 105 measurement scope. Following assets are not in the
measurement scope of the standard- financial asset measured at other comprehensive
income, the deferred tax asset or the current assets. In addition, the impairment allocation can
only be made against assets and is not allocated to liabilities.
(b) As on 31 March, 20X2:
All of the assets and liabilities, outside the scope of measurement under Ind AS 105, are
remeasured in accordance with the relevant standards. The assets that are remeasured in this
case under the relevant standards are the Financial asset measured at fair value through other

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 FR Super 100
comprehensive income (Ind AS 109), the deferred tax asset (Ind AS 12), the current assets and
liabilities (various standards) and the non-current liabilities (Ind AS 37).

Asset/ (liability) Carrying amount Change in value Impairment Revised carrying

as on 15 to 31st March value as per Ind
September, 20X1 20X2 AS 105
Attributed goodwill - - - -
Intangible assets 868 - (29) 839
Financial asset
measured at fair value
through other 360 50 - 410
Property, plant &
comprehensive
equipment
income
Deferred tax asset
952
250
-
(20)
(31)

i
-
n 921
230

a
Current assets ”
inventory, receivables

J
and cash balances 520 (120) - 400
Current liabilities (870) (30) - (900)
Non-current liabilities
” provisions
Total
(250)
1,830

a k -
(120)
-
(60)
(250)
1,650

“ r t h
NOTES

S a
A .
C

144 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER Ind AS 108

26 OPERATING SEGMENTS
Q 1. Reportable Segment Identification (
John Limited has identified four segments for which revenue data is given as per below:
External Sale Internal Sale Total
(`) (`) (`)
Segment A 4,00,000 Nil 4,00,000
Segment B 80,000 Nil 80,000
Segment C 90,000 20,000 1,10,000

n
Segment D 70,000 6,20,000 6,90,000
Total Sales 6,40,000 6,40,000
The following additional information is available with respect to John Limited :

a i 12,80,000

Segment C is a high growing business and management expects that this segment to make a significant

J
contribution to external revenue in coming years.
Discuss, which of the segments would be reportable under the threshold criteria identified in Ind AS 108
and why (Nov. 2020)
Ans.

a k
Threshold amount of 10% of total revenue is ` 1,28,000 (` 12,80,000 × 10%).
Segment A exceeds the quantitative threshold (` 4,00,000 > ` 1,28,000) and hence is a reportable
segment.

segment.

r h
Segment D exceeds the quantitative threshold (` 6,90,000 > ` 1,28,000) and hence is a reportable

t
Segment B & C do not meet the quantitative threshold amount and may not be classified as reportable
segment.

S a
However, the total external revenue generated by these two segments A & D represent only 73.44% (`
4,70,000 / 6,40,000 x 100) of the entity’s total external revenue. If the total external revenue reported by
operating segments constitutes less than 75% of the entity’s total external revenue, additional

A .
operating segments should be identified as reportable segments until at least 75% of the revenue is
included in reportable segments.

In case of John Limited, it is given that Segment C is a high growing business and management expects
this segment to make a significant contribution to external revenue in coming years. In accordance with

C
the requirement of Ind AS 108, John Limited may designate segment C as a reportable segment, making
the total external revenue attributable to reportable segments be 87.5% (` 5,60,000/ 6,40,000 x 100) of
total entity’s external revenue.
In this situation, Segments A, C and D will be reportable segments and Segment B will be shown as other
segment.

Alternatively, Segment B may be considered as a reportable segment instead of Segment C, based on

the choice of John Ltd. ‘s management, if it meets the definition of operating segment. If Segment B is
considered as reportable segment, external revenue reported will be ` 4,00,000 + ` 80,000 + ` 70,000 = `
5,50,000 % of Total External Revenue = ` 5,50,000 / ` 6,40,000 = 85.94% Segments A, B and D will be
reportable segments and Segment C will be shown as other segment.

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 FR Super 100

CHAPTER Ind AS 113

27 FAIR VALUE MEASUREMENT
Q 1. Fair Valuation : Method
UK Ltd. is in the process of acquisition of shares of PT Ltd. as part of business reorganization plan. The
projected free cash flow of PT Ltd. for the next 5 years are as follows:
(` in crore)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965
The weightage average cost of capital of PT Ltd. is 11%. The total debt as on measurement date is `

i n
1,465 crore and the surplus cash & cash equivalent is ` 106.14 crore. The total numbers of shares of PT
Ltd. as on the measurement date is 8,52,84,223 shares. Determine value per share of PT Ltd. as per
Income Approach.
Ans.
Determination of equity value of PT Ltd.

Particulars Year 1 Year 2 Year 3

J a
Year 4
(` in crore)
Year 5
Cash flows
Terminal Value
Discount rate
187.1

0.9009
187.6

0.8116

a k 121.8

0.7312
269

0.6587
278.8
3,965
0.5935
Free Cash Flow available to the firm
Total of all years
Less: Debt
168.56

r t h 152.26 89.06 177.19 2,518.69

3,105.76
(1,465)

a
Add: Cash & Cash equivalent 106.14
Equity Value of PT Ltd. 1,746.90
No. of Shares
Per Share Value

. S 85,284,223.0
204.83

A
Q 2. On 1st January, 20X1, A Ltd assumes a decommissioning liability in a business combination. The
reporting entity is legally required to dismantle and remove an offshore oil platform at the end of its
useful life, which is estimated to be 10 years. The following information is relevant:

C
If A Ltd was contractually allowed to transfer its decommissioning liability to a market participant, it
concludes that a market participant would use all of the following inputs, probability weighted as
appropriate, when estimating the price it would expect to receive:
a. Labour costs
Labour costs are developed based on current marketplace wages, adjusted for expectations of
future wage increases, required to hire contractors to dismantle and remove offshore oil
platforms. A Ltd. assigns probability to arrange of cash flow estimates as follows:

Cash Flow Estimates: 100 Cr 125 Cr 175 Cr

Probability: 25% 50% 25%
b. Allocation of overhead costs:
Assigned at 80% of labour cost

146 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

c. The compensation that a market participant would require for undertaking the activity and for
assuming the risk associated with the obligation to dismantle and remove the asset. Such
compensation includes both of the following:
i. Profit on labour and overhead costs:
A profit mark-up of 20% is consistent with the rate that a market participant would require
as compensation for undertaking the activity
ii. The risk that the actual cash outflows might differ from those expected, excluding
inflation:
A Ltd. estimates the amount of that premium to be 5% of the expected cash flows. The
expected cash flows are ‘real cash flows’ / ‘cash flows in terms of monetary value today’.

d. Effect of inflation on estimated costs and profits

i n
A Ltd. assumes a rate of inflation of 4 percent over the 10 -year period based on available market

a
data.

J
e. Time value of money, represented by the risk -free rate: 5%

f. Non-performance risk relating to the risk that Entity A will not fulfill the obligation, including A

k
Ltd.’s own credit risk: 3.5%
A Ltd, concludes that its assumptions would be used by market participants. In addition, A Ltd.

a
does not adjust its fair value measurement for the existence of a restriction preventing it from
transferring the liability.

h
You are required to calculate the fair value of the asset retirement obligation.

t
Ans.

r
Particulars Workings Amount
(In Cr)
Expected Labour Cost (Refer W.N.)
Allocated Overheads
Profit markup on Cost

S a (80% x 131.25 Cr)

(131.25 + 105) x 20%
131.25
105.00
47.25

.
Total Expected Cash Flows before inflation 283.50
10
Inflation factor for next 10 years (4%) (1.04) =1.4802

C A
Expected cash flows adjusted for inflation
Risk adjustment - uncertainty relating to cash flows
Total Expected Cash Flows
Discount rate to be considered = risk -free rate +
entity’s non-performance risk
283.50 x 1.4802
(5% x 419.65)
(419.65+20.98)

5% + 3.5%
419.65
20.98
440.63

8.5%
10
Expected present value at 8.5% for 10 years (440.63 / (1.085 )) 194.88
Working Note:
Expected labour cost:
Cash Flows Estimates Probability Expected Cash Flows
100 Cr 25% 25.00 Cr
125 Cr 50% 62.50 Cr
175 Cr 25% 43.75 Cr
Total 131.25 Cr

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 FR Super 100

CHAPTER Ind AS 115

28 REVENUE FROM CONTRACT WITH CUSTOMERS
Q 1. A Ltd. is in the business ofthe infrastructure and hastwo divisions under thesame;
(I) Toll Roads and (II) Wind Power. Thebrief details of these business and underlying project detailsare
as follows:
I. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the project in the
current year and has incurred total expenses aggregating to ` 50 croresas on 31st December, 20X1.
Under IGAAP, the Company has 'recorded such expenses as Intangible Assets in the books of
account. Thebrief details ofthe Concession Agreementare as follows:
“ Total Expenses estimated to be incurred on the project ` 100 crores;

n
“ Fair Value of the construction services is ` 110 crores;

i
“ Total Cash Flow guaranteed by the Government under the concession agreement is ` 200 crores;
“ Finance revenue over the period of operation phase is ` 15 crores:
“ Other income relates to the services provided during the operation phase.

J a
II. Kolhapur- Nagpur Expressway - The Company has also entered into another concession agreement
with Government of Maharashtra in thecurrent year. The construction cost for the said project will
be ` 110 crores. The fair value of such construction costis approximately ` 200 crores. The said
concession agreement is Toll based project and the Company needs to collect the toll from the users

an Intangible Asset.
Required

a k
of the expressway. Under IGAAP, UK Ltd. has recorded the expenses incurred on the said project as

h
(i) What would be the classification of Bhilwara-Jabalpur Toll Project as per applicable Ind AS? Give
brief reasoning for your choice.
(ii)

(iii)
r t
What would be the classification of Kolhapur-Nagpur Expressway Toll Project as per applicable
Ind AS? Give brief reasoning for your choice.
Also, suggest suitable accounting treatment for preparation of financial statements as per Ind AS

Ans.

S a
for the above 2 projects.

(i) Here the operator has a contractual right to receive cash from the grantor. The grantor has little, if
any, discretion to avoid payment, usually because the agreement is enforceable by law. The operator

A .
has an unconditional right to receive cash if the grantor contractually guarantees to paythe operator.
Hence, operator recognizes afinancial asset to the extent it has a contractual right to receive cash.
(ii) Here the operator has a contractual right to charge users of the public services. A right to charge
users of the public service is not an unconditional right to receive cash because the amounts are
contingent on the extent that the public uses the service. Therefore,the operator shall recognise an

C
intangible asset to the extent it receives a right (a licence) to charge users of the public service
(iii) Accounting treatment for preparation of financial statements

Particulars
Bhilwara-Jabalpur Toll Project
Journal Entries
Dr. Cr.
(` in crores) (` in crores)
During construction:
1 Financial asset A/c Dr. 110
To Construction revenue 110
[To recognise revenue relating to construction services, to be
settled in case]

148 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

2 Cost of construction (profit or loss) Dr. 100

To Bank A/c (As and when incurred) 100
[To recognise costs relating to construction services]
During the operation phase:
3 Financial asset Dr. 15
To Finance revenue (As and when received or due to receive) 15
[To recognise interest income under the financial asset model]
4 Financial asset Dr. 75
To Revenue [(200-110) ” 15] 75

n
[To recognise revenue relating to the operation phase]
5 Bank A/c
To Financial asset
[To recognise cash received from the grantor]
Dr.

a i
200
200

Kolhapur-Nagpur Expressway -Intangible asset

J
k
Journal Entries
Particulars Dr. Cr.

1
During construction:
Cost of construction (profit or loss)

h a Dr.
(` in crores)

110
(` in crores)

To Bank A/c (As and when incurred)

r t
[To recognise costs relating to construction services]
110

2 Intangible asset
To Revenue

S a
[To recognise revenue relating to construction services
Dr. 200
200

.
provided for non-cash consideration]
During the operation phase:

A
3 Amortisation expense Dr. 200
To Intangible asset (accumulated amortisation) 200

C
[To recognise amortisation expense relating to the operation
phase over the period of operation]
4 Bank A/c Dr. ?
To Revenue ?
[To recognise revenue relating to the operation phase]
Note: Amount in entry 4 is kept blank as no information in this regard is given in the question.

Q 2. KK Ltd. runs a departmental store which awards 10 points for every purchase of ` 500 which can be
discounted by the customers for further shopping with the same merchant. Each point is redeemable on
any future purchases of KK Ltd.’s products within 3 years . Value of each point is ` 0.50. During the
accounting period 2017-2018, the entity awarded 1,00,00,000 points to various customers of which

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 FR Super 100
18,00,000 points remained undiscounted (to be redeemed till 31st March, 2020). The management
expects only 80% of the remaining will be discounted in future.

The Company has approached your firm with the following queries and has asked you to suggest the
accounting treatment (Journal Entries) under the applicable Ind AS for these award points:
(a) How should the recognition be done for the sale of goods worth ` 10,00,000 on a particular day?
(b) How should the redemption transaction be recorded in the year 2017-2018? The Company has
requested you to present the sale of goods and redemption as independent transaction. Total
sales of the entity is ` 5,000 lakhs.
(c) How much of the deferred revenue should be recognised at the year-end (2017- 2018) because of
the estimation that only 80% of the outstanding points will be redeemed?
(d)

i n
In the next year 2018-2019, 60% of the outstanding points were discounted Balance 40% of the
outstanding points of 2017-2018 still remained outstanding. How much of the deferred revenue
should the merchant recognize in the year 2018-2019 and what will be the amount of balance

(e)
deferred revenue?

J a
How much revenue will the merchant recognized in the year 2019-2020, if 3,00,000 points are
redeemed in the year 2019-2020?
[May 2019][Also asked in MTP Nov. 2020]
Ans.
(a)

a k
Points earned on ` 10,00,000 @ 10 points on every ` 500 = [(10,00,000/500) x 10] = 20,000 points.
Value of points = 20,000 points x ` 0.5 each point = ` 10,000
Revenue recognized for
sale of goods
Revenue for points
deferred
` 9,90,099

r
` 9,901
t h [10,00,000 x
(10,00,000/10,10,000)]
[10,00,000 x
(10,000/10,10,000)]

S a Journal Entry
` `

.
Bank A/c
To Sales A/c

A
To Liability under Customer Loyalty programme
Dr. 10,00,000
9,90,099
9,901

(b)

C Points earned on ` 50,00,00,000 @ 10 points on every ` 500 = [(50,00,00,000/500 ) x 10] =

1,00,00,000 points.
Value of points = 1,00,00,000 points x ` 0.5 each point = ` 50,00,000
Revenue recognized for sale of goods = ` 49,50,49,505 [50,00,00,000 x (50,00,00,000 /
50,50,00,000)]
Revenue for points = ` 49,50,495 [50,00,00,000x (50,00,000 / 50,50,00,000)]
Journal Entries in the year 2017-18
` `
Bank A/c Dr. 50,00,00,000
To Sales A/c 49,50,49,505
To Liability under Customer Loyalty programme 49,50,495

150 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

(On sale of Goods)

Liability under Customer Loyalty programme Dr. 42,11,002
To Sales A/c 42,11,002
(On redemption of (100 lakhs -18 lakhs) points)

Revenue for points to be recognized

Undiscounted points estimated to be recognized next year 18,00,000 x 80% = 14,40,000 points
Total expected points to be redeemed in 2018-2019 and 2019-2020 = [(1,00,00,000 - 18,00,000) +
14,40,000] = 96,40,000
Revenue to be recognised with respect to discounted point = 49,50,495 x (82,00,000/96,40,000)

n
= 42,11,002

i
(a) Revenue to be deferred with respect to undiscounted point in 2017-2018= 49,50,495 ” 42,11,002
= 7,39,493
(b)
follows:
Outstanding points = 18,00,000 x 60% = 10,80,000 points

J a
In 2018-2019, KK Ltd. would recognize revenue for discounting of 60% of outstanding points as

Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points

k
Revenue to be recognized in the year 2018-2019 = [{49,50,495 x (92,80,000 / 96,40,000)} -
42,11,002] = ` 5,54,620.

a
Journal Entry in the year 2018-2019
` `

To Sales A/c

r t h
Liability under Customer Loyalty programme

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

Dr. 5,54,620
5,54,620

(c)

S a
The Liability under Customer Loyalty programme at the end of the year 2018 -2019 will be `
7,39,493 ” 5,54,620 = 1,84,873.
In the year 2019-2020, the merchant will recognized the balance revenue of ` 1,84,873
irrespective of the points redeemed as this is the last year for redeeming the points. Journal

A .
entry will be as follows:
Journal Entry in the year 2019-2020

Liability under Customer Loyalty programme Dr.

`
1,84,873
`

Q 3.
C To Sales A/c
(On redemption of further 10,80,000 points)
1,84,873

An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for ` 20,00,000.
P Ltd. intends to use the said machinery to start a food processing unit. The food processing industry is
highly competitive and P Ltd. has very little experience in the said industry.

P Ltd. pays a non-refundable deposit of `1,00,000 at inception of the contract and enters into a long-
term financing agreement with G Ltd. for the remaining 95 per cent of the agreed consideration which it
intends to pay primarily from income derived from its food processing unit as it lacks any other major
source of income. The financing arrangement is provided on a non-recourse basis, which means that if P
Ltd. defaults then G Ltd. can repossess the machinery but cannot seek further compensation from P Ltd.,

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 FR Super 100
even if the full value of the amount owed is not recovered from the machinery. The cost of the
machinery for G Ltd. is ` 12,00,000. P Ltd. obtains control of the machinery at contract inception.

When should G Ltd. recognise revenue from sale of machinery to P Ltd. in accordance with Ind AS 115?
[SM 2021, RTP Nov. 2019]

Ans.
As per paragraph 9 of Ind AS 115, ―An entity shall account for a contract with a customer that is within
the scope of this Standard only when all of the following criteria are met:

(a) the parties to the contract have approved the contract (in writing, orally or in accordance with
other customary business practices) and are committed to perform their respective obligations;

n
(b) the entity can identify each party‘s rights regarding the goods or services to be

i
transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;

a
(d) the contract has commercial substance (ie the risk, timing or amount of the entity‘s future
cash flows is expected to change as a result of the contract); and

J
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange
for the goods or services that will be transferred to the customer. In evaluating whether
collectability of an amount of consideration is probable, an entity shall consider only the

a k
customer‘s ability and intention to pay that amount of consideration when it is due. The amount
of consideration to which the entity will be entitled may be less than the price stated in the
contract if the consideration is variable because the entity may offer the customer a price
concession‖.

h
Paragraph 9(e) above, requires that for revenue to be recognised, it should be probable that the entity

t
will collect the consideration to which it will be entitled in exchange for the goods or services that will be

r
transferred to the customer. In the given case, it is not probable that G Ltd. will collect the consideration
to which it is entitled in exchange for the transfer of the machinery. P Ltd.‘s ability to pay may be

a
uncertain due to the following reasons:
(a) P Ltd. intends to pay the remaining consideration ( which has a significant balance) primarily
from income derived from its food processing unit (which is a business involving significant

(b)

(c)
. S
risk because of high competition in the said industry and P Ltd.'s little experience);
P Ltd. lacks sources of other income or assets that could be used to repay the balance
consideration; and
P Ltd.'s liability is limited because the financing arrangement is provided on a non - recourse

C
basis.

A
In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.
Further, para 15 states that when a contract with a customer does not meet the criteria in paragraph 9
and an entity receives consideration from the customer, the entity shall recognise the consideration
received as revenue only when either of the following events has occurred:

(a) the entity has no remaining obligations to transfer goods or services to the customer and all, or
substantially all, of the consideration promised by the customer has been received by the entity
and is non-refundable; or
(b) the contract has been terminated and the consideration received from the customer is non-
refundable.

Para 16 states that an entity shall recognise the consideration received from a customer as a liability
until one of the events in paragraph 15 o ccurs or until the criteria in paragraph 9 are subsequently met.
Depending on the facts and circumstances relating to the contract, the liability recognised represents

152 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
the entity‘s obligation to either transfer goods or services in the future or refund the consideration
received. In either case, the liability shall be measured at the amount of consideration received from the
customer.
In accordance with the above, in the given case G Ltd. should account for the non -refundable deposit of
` 1,00,000 payment as a deposit liability as none of the events described in paragraph 15 have
occurred„that is, neither the entity has received substantially all of the consideration nor it has
terminated the contract. Consequently, in accordance with paragraph 16, G Ltd. will continue to account
for the initial deposit as well as any future payments of principal and interest as a deposit liability until
the criteria in paragraph 9 are met (i.e. the entity is able to conclude that it is probable that the entity
will collect the consideration) or one of the events in paragraph 15 has occurred. Further, G Ltd. will
continue to assess the contract in accordance with paragraph 14 to determine whether the criteria in
paragraph 9 are subsequently met or whether the events in parag raph 15 of Ind AS 115 have occurred.

Q 4. Performance Obligations
A property sale contract includes the following:

i n
(a) Common areas
(b) Construction services and building material
(c) Property management services
(d) Golf membership
(e) Car park
J a
Ans.
(f) Land entitlement

requirements of Ind AS 115?

a k
Analyse whether the above items can be considered as separate performance obligations as per the
(May 2021)

h
Paragraph 22 of Ind AS 115 provides that at contract inception, an entity evaluates the promised goods

t
or services to determine which goods or services (or bundle of goods or services) are distinct and

r
therefore constitute a performance obligation.
A performance obligation is a promise in a contract to transfer to the customer either:


a
a good or service (or a bundle of goods or services) that is distinct; and
series of distinct goods or services that are substantially the same and that have the same pattern of
transfer to the customer.

S
As per paragraph 27 of Ind AS 115, a good or service that is promised to a customer is distinct if both of

(a)

(b)
A .
the following criteria are met:
the customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (i.e. the good or service is capable of being
distinct); and
the entity’s promise to transfer the good or service to the customer is separately identifiable

C from other promises in the contract (i.e. the promise to transfer the good or service is distinct
within the context of the contract).
Each performance obligation is required to be accounted for separately.
Based on the above guidance, the following table discusses whether the common goods and services in
property sale contract should be considered as separate performance obligation or not:
Goods/Service Whether a Reason
separate
Performance
obligation (PO)
or not
Common areas Unlikely to Common areas are unlikely to be a separate
be separate PO performance obligation because the interests received in
common areas are typically undivided interests that are
not separable from the property itself.

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 FR Super 100
However, if the common areas were sold separately
by the developer, then they could be considered as a
separate performance obligation provided that it is
distinct in the context of the contract.
Construction Unlikely to Construction services and building materials can
services and building be separate PO meet the first criterion as they are items that can
material be used in conjunction with other readily available
goods or services.

However, the developer would be considered to be

providing a significant integration service as it is
bringing together all the separate elements to deliver a

n
complete building.

i
Property Likely to be Property management services and golf membership
management services separate are likely to be separate performance obligations as

a
and Golf membership PO they may be used in isolation or with the property
already acquired, i.e., management services can be used

J
with the property. These types of services are not
significantly customised, integrated with, or dependent
on the property. This is because there is no change in

Car park and Land Analysis required

third party.
k
their function with or without the property. Also, a
property management service could be undertaken by a

a
Items such as car parks and land entitlements
entitlement

r t h
generally meet the first criterion ” i.e., capable of being
distinct ” as the buyer benefits from them on their own.

Whether the second criterion is met depends on the

a
facts and circumstances. For example, if the land
entitlement can be sold separately or pledged as

S
security as a separate item, it may indicate that it is
not highly dependent on, or integrated with, other

.
rights received in the contract. In an apartment scenario,
the customer can receive an undivided interest in the
land on which the apartment block sits. This type of

C A right is generally considered as highly inter-related

with the apartment itself.*
* However, if title to the land is transferred to the buyer separately ” for example in a single party
development ” then the separately identifiable criterion may be met.
PS: Other facts and circumstances of each contract should also be carefully examined to determine
performance obligations.

Q 5. Entity AB Ltd. enters into a three-year service contract with a customer CD Ltd. for ` 4,50,000 (`1,50,000
per year). The standalone selling price for one year of service at inception of the contract is `1,50,000 per
year. AB Ltd. accounts for the contract as a series of distinct services.
At the beginning of the third year, the parties agree to modify the contract as follows:
(i) the fee for the third year is reduced to `1,20,000; and
(ii) CD Ltd. agrees to extend the contract for another three years for `3,00,000 (`1,00,000 per year).
The standalone selling price for one year of service at the time of modification is ` 1,20,000. How should
AB Ltd. account for the modification? Analyze.

154 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Ans.
Paragraph 20 of Ind AS 115, inter alia, states that, ‚An entity shall account for a contract modification as
a separate contract if both of the following conditions are present:
(a) the scope of the contract increases because of the addition of promised goods or services that
are distinct (in accordance with paragraphs 26”30); and
(b) the price of the contract increases by an amount of consideration that reflects the entity’s stand-
alone selling prices of the additional promised goods or services and any appropriate
adjustments to that price to reflect the circumstances of the particular contract.

In accordance with the above, it may be noted that a contract modification should be accounted for
prospectively if the additional promised goods or services are distinct and the pricing for those goods or
services reflects their stand-alone selling price.

i n
In the given case, even though the remaining services to be provided are distinct, the modification
should not be accounted for as a separate contract because the price of the contract did not increase by

a
an amount of consideration that reflects the standalone selling price of the additional services. The
modification would be accounted for, from the date of the modification, as if the existing arrangement

J
was terminated and a new contract created (i.e. on a prospective basis) because the remaining services
to be provided are distinct.

a k
AB Ltd. should reallocate the remaining consideration to all of the remaining services to be provided (i.e.
the obligations remaining from the original contract and the new obligations ). AB Ltd. will recognise a
total of `4,20,000 (`1,20,000 + `3,00,000) over the remaining four-year service period (one year
remaining under the original contract plus three additional years) or `1,05,000 per year.

Q 6.

t h
Buildings Limited with a financial year end of 31st March, entered into a contract with its customer,

r
Radar Limited, to build a manufacturing facility. Buildings Limited determines that the contract contains
one performance obligation satisfied over time. Construction is scheduled to be completed by the end of



a
the 36th month for an agreed upon price of ` 25 crores. Buildings Limited has the opportunity to earn a
performance bonus for early completion as follows:

S
15% bonus of the contract price if completed by the 30th months (25% likelihood).
10% bonus of the contract price if completed by the 32 nd months (40% likelihood).


.
5% bonus of the contract price if completed by the 34th months (15% likelihood).
In addition to the potential performance bonus for early completion, Buildings Limited is entitled to a

A
quality bonus of ` 2 crores if a health and safety inspector assigns the facility a gold star rating as defined
by Radar Limited in terms of the contract. Buildings Limited concludes that it is 60% likely that it will

C
receive the quality bonus.
Analyze and determine the amount of variable consideration Building Limited should recognize in its
contract with Radar Company Limited to build a manufacturing facility . (MTP May 2021)
Ans.
In determining the transaction price, Buildings Limited separately estimates variable consideration for
each element of variability ie the early completion bonus and the quality bonus.
Buildings Limited decides to use the expected value method to estimate the variable consideration
associated with the early completion bonus because there is a range of possible outcomes and the entity
has experience with a large number of similar contracts that provide a reasonable basis to predict future
outcomes. Therefore, the entity expects this method to best predict the amount of variable
consideration associated with the early completion bonus. Buildings Ltd.’s best estimate of the early
completion bonus is ` 2.125 crore, calculated as shown in the following table:

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 FR Super 100
Amount of bonus Probability-weighted
Bonus % Probability
(` incrore) amount (` in crore)
15% 3.75 25% 0.9375
10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% ______-
100% 2.125

Buildings Limited decides to use the most likely amount to estimate the variable consideration
associated with the potential quality bonus because there are only two possible outcomes (` 2 crore or
` Nil) and this method would best predict the amount of consideration associated with the quality bonus.
Buildings Limited believes the most likely amount of the quality bonus is ` 2 crore.
Total variable consideration = 4.125 crore (2.125 crore + 2 crore).

i n
Q 7.

year. AB Ltd. accounts for the contract as a series of distinct services.

J a
Entity AB Ltd. enters into a three-year service contract with a customer CD Ltd. for ` 4,50,000 (` 1,50,000
per year). The standalone selling price for one year of service at inception of the contract is `1,50,000 per

At the beginning of the third year, the parties agree to modify the contract as follows:
(viii)
(ix)
The fee for the third year is reduced to ` 1,20,000; and

a k
CD Ltd. agrees to extend the contract for another three years for ` 3,00,000 (`1,00,000 per year).
The standalone selling price for one year of service at the time of modification is ` 1,20,000. How should

h
AB Ltd. account for the modification? Analyze. (MTP May 2021)

t
Ans.

r
Paragraph 20 of Ind AS 115, inter alia, states that, ‚An entity shall account for a contract modification as
a separate contract if both of the following conditions are present:

a
(a) the scope of the contract increases because of the addition of promised goods or services that
are distinct (in accordance with paragraphs 26”30); and

S
(b) the price of the contract increases by an amount of consideration that reflects the entity’s stand-
alone selling prices of the additional promised goods or services and any appropriate

.
adjustments to that price to reflect the circumstances of the particular contract.
In accordance with the above, it may be noted that a contract modification should be accounted for

A
prospectively if the additional promised goods or services are distinct and the pricing for those goods or
services reflects their stand-alone selling price.
In the given case, even though the remaining services to be provided are distinct, the modification should

C
not be accounted for as a separate contract because the price of the contract did not increase by an
amount of consideration that reflects the standalone selling price of the additional services. The
modification would be accounted for, from the date of the modification, as if the existing arrangement
was terminated and a new contract created (i.e. on a prospective basis) because the remaining services
to be provided are distinct.
AB Ltd. should reallocate the remaining consideration to all of the remaining services to be provided (i.e.
the obligations remaining from the original contract and the new obligations ). AB Ltd. will recognise a
total of `4,20,000 (`1,20,000 + `3,00,000) over the remaining four-year service period (one year
remaining under the original contract plus three additional years) or `1,05,000 per year.

156 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Q 8. Nivaan Limited commenced work on two long-term contracts during the financial year ended on 31st
March, 20X2.
The first contract with A & Co. commences on 1st June, 20X1 and had a total sales value of ` 40 lakh. It
was envisaged that the contract would run for two years and that the total expected costs would be ` 32
lakh. On 31st March, 20X2, Nivaan Limited revised its estimate of the total expected cost to ` 34 lakh on
the basis of the additional rectification cost of ` 2 lakh incurred on the contract during the current
financial year. An independent surveyor has estimated at 31st March, 20X2 that the contract is 30%
complete. Nivaan Limited has incurred costs up to 31st March, 20X2 of ` 16 lakh and has received
payments on account of ` 13 lakh.
The second contract with B & Co. commenced on 1st September, 20X1 and was for 18 months. The total
sales value of contract was ` 30 lakh and the total expected cost is ` 24 lakh. Payments on account
already received were ` 9.50 lakh and total costs incurred to date were ` 8 lakh. Nivaan Limited has

i n
insisted on a large deposit from B & Co. because the companies had not traded together prior to the
contract. The independent surveyor estimated that on 31st March, 20X2 the contract was 20% complete.

J a
The two contracts meet the requirement of Ind AS 115 ‘Revenue from Contracts with Customers’ to
recognize revenue over time as the performance obligations are satisfied over time.
The company also has several other contracts of between twelve and eighteen months in duration. Some
of these contracts fall into two accounting periods and were not completed as at 31st March, 20X2. In

k
absence of any financial date relating to the other contracts, you are advised to ignore these other
contracts while preparing the financial statements of the company for the year ended 31st March, 20X2.

the year ending 31st March, 20X2.

h a
Prepare financial statement extracts for Nivaan Limited in respect of the two construction contracts for
(MTP Dec 2021)

t
Ans.
Extracts of Balance Sheet of Nivaan Ltd. as on 31st March, 20X2

Current Assets

a r
Contract Assets- Work-in-progress (Refer W.N. 3)
` in lakh

9.0

Current Liabilities

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

A
Extracts of Statement of Profit and Loss of Nivaan Ltd. as on 31st March, 20X2
` in lakh

C
Revenue from contracts (Refer W.N. 1) 18
Cost of Revenue (Refer W.N. 1) (15)
Net Profit on Contracts (Refer W.N. 1) 3

Working Notes:
1. Table showing calculation of total revenue, expenses and profit or loss on contract for the
year ` in Lakh
A & Co. B & Co. Total

Revenue from contracts (40 x 30%) = 12 (30 x 20%) = 6 18

Expenses due for the year (34* x 30%) = 10.2 (24 x 20%) = 4.8 15
Profit or loss on contract 1.8 1.2 3

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 FR Super 100

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

n
3. Work in Progress recognised as part of contract asset at the end of the year

i
` in lakh
A & Co. B & Co. Total

Total actual cost incurred during the year

Less: Cost recognised in the books for the year
31.3.20X2
Work-in-progress recognised at the end of the year
16
(10.2)

5.8
J a
(4.8)

3.2
8 24
(15)

9.0

k
“ t
NOTES
h a
a r
. S
C A

158 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER Ind AS 116

29 LEASES
Q 1. Remeasurement of a lease with variable lease payments (Answer Updated)
Entity W entered into a contract for lease of retail store with Entity J on January 01/01/20X1. The initial
term of the lease is 5 years with a renewal option of further 3 years. The annual payments for initial term
and renewal term is ` 100,000 and ` 110,000 respectively. The annual lease payment will increase based
on the annual increase in the CPI at the end of the preceding year. For example, the payment due on
01/01/20X2 will be based on the CPI available at 31/12/20X1.

Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/20X4 is 5% and 6%
respectively and the CPI at lease commencement date and as at 01/01/20X4 is 120 and 125 respectively.

i n
At the lease commencement date, Entity W did not have a significant economic incentive to exercise the
renewal option. In the first quarter of 20X4, Entity W installed unique lease improvements into the retail

Ans.
extend.
Is Entity W required to remeasure the lease in the first quarter of 20X4? a
store with an estimated five-year economic life. Entity W determined that it would only recover the cost
of the improvements if it exercises the renewal option, creating a significant economic incentive to

J [SM 2021]

remeasure the lease in the first quarter of 20X4.

a k
Since Entity W is now reasonably certain that it will exercise its renewal option, it is required to

The following table summarizes information pertinent to the lease remeasurement.

Remeasured lease term

r t h 5 years; 2 years remaining in

the initial term plus 3
years in the renewal period

a
Entity W’s incremental borrowing rate
6%
On the remeasurement date

S
CPI available on the remeasurement date 125
Right-of-use asset immediately before the remeasurement ` 1,81,840 (Refer note 1)

A .
Lease liability immediately before the remeasurement ` 1,95,244 (Refer note 1)

To remeasure the lease liability, Entity W would first calculate the present value of the future lease
payments for the new lease term (using the updated discount rate of 6%). The following table shows the

C
present value of the future lease payments based on an updated CPI of 125. Since the initial lease
payments were based on a CPI of 120, the CPI has increased by 4.167% approx. As a result, Entity W
would increase the future lease payments by 4%. As shown in the table, the revised lease liability is `
4,91,376.
Year 4 5 6 7 8 Total
Lease payment 1,04,167 1,04,167 1,14,583 1,14,583 1,14,583 5,52,083
Discount 1 0.943 0.890 0.840 0.792
Present value 1,04,000 98,230 1,01,979 96,250 90,750 4,91,376
To calculate the adjustment to the lease liability, Entity W would compare the recalculated and original
lease liability balances on the remeasurement date.
Revised lease liability 4,91,376

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 FR Super 100

Original lease liability (1,95,244)

2,96,132

Entity W would record the following journal entry to adjust the lease liability.
ROU Asset Dr. 2,96,132
To Lease liability 2,96,132
Being lease liability and ROU asset adjusted on account of remeasurement.

Working Notes:
1 Calculation of ROU asset before the date of remeasurement
Year Lease Payment Present value Present value of lease

in
beginning (A) factor @ 5% (B) payments (A x B=C)
1 1,00,000 1.000 1,00,000
2 1,00,000 0.952 95,200
3
4
5
1,00,000
1,00,000
1,00,000
Lease liability as at commencement date
0.907
0.864
0.823

J a 90,700
86,400
82,300
4,54,600
2
Year
Initial Lease
Lease Liability
Interest

a k
Calculation of Lease Liability and ROU asset at each year end

Closing Initial
ROU asset
Depreciation Closing

h
value payments expense balance Value for 5 years balance

t
@ 5%
1 4,54,60 1,00,000 17,730 3,72,330 4,54,600 90,920 3,63,680
2
3
4
0
3,72,33
0
2,85,94
7
1,95,24
4
1,00,000

a
1,00,000
r 13,617
9,297
2,85,947
1,95,244
3,63,680
2,72,760
1,81,840
90,920
90,920
2,72,760
1,81,840

Q 2.

. S
Modification that decreases the scope of the lease
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments
are ` 50,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily

A
determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a. At the
beginning of Year 6, Lessee and Lessor agree to amend the original lease to reduce the space to only

C
2,500 square metres of the original space starting from the end of thefirst quarter of Year 6. The annual
fixed lease payments (from Year 6 to Year 10) are ` 30,000. Lessee’s incremental borrowing rate at the
beginning of Year 6 is 5% p.a.
How should the said modification be accounted for?
Ans.
In the given case, Lessee calculates the ROU asset and the lease liabilities before modification as
follows:
Lease Liability ROU asset
Year Initial Lease Interest Closing Initial Depreciation Closing
value payments expense balance Value balance
@ 6%
a b c = a x 6% d = a-b + c e f g
1 3,67,950* 50,000 22,077 3,40,027 3,67,950 36,795 3,31,155

160 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

2 3,40,027 50,000 20,402 3,10,429 3,31,155 36,795 2,94,360

3 3,10,429 50,000 18,626 2,79,055 2,94,360 36,795 2,57,565
4 2,79,055 50,000 16,743 2,45,798 2,57,565 36,795 2,20,770
5 2,45,798 50,000 14,748 2,10,546 2,20,770 36,795 1,83,975
6 2,10,546 1,83,975
*(refer note 1)
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease
liability based on:
(a) a five-year remaining lease term,
(b) annual payments of ` 30,000 and
(c) Lessee’s incremental borrowing rate of 5% p.a.

n
Year Lease Payment(A) Present value Present value of lease

i
factor @ 5% (B) payments (A x B = C)
6 30,000 0.952 28,560
7
8
9
30,000
30,000
30,000
0.907
0.864
0.823
J a
27,210
25,920
24,690

k
10 30,000 0.784 23,520
Total 1,29,900

h a
Lessee determines the proportionate decrease in the carrying amount of the ROU Asset on the basis of
the remaining ROU Asset (i.e., 2,500 square metres corresponding to 50% of the original ROU Asset).

r t
50% of the pre-modification ROU Asset (` 1,83,975) is ` 91,987.50.
50% of the pre-modification lease liability (` 2,10,546) is ` 1,05,273.

a
Consequently, Lessee reduces the carrying amount of the ROU Asset by ` 91,987.50 and the carrying
amount of the lease liability by ` 1,05,273. Lessee recognises the difference between the decrease in

S
the lease liability and the decrease in the ROU Asset (` 1,05,273 ” ` 91,987.50 = ` 13,285.50) as a gain in
profit or loss at the effective date of the modification (at the beginning of Year 6).

.
Lessee recognises the difference between the remaining lease liability of ` 1,05,273 and the modified
lease liability of ` 1,29,900 (which equals ` 24,627) as an adjustment to the ROU Asset reflecting the

A
change in the consideration paid for the lease and the revised discount rate.

C
Working Note:
Calculation of Initial value of ROU asset and lease liability:
Year

1
Lease
Payment(A)
50,000
Present value
factor @ 6% (B)
0.943
Present value of lease
payments (A x B = C)
47,150
2 50,000 0.890 44,500
3 50,000 0.840 42,000
4 50,000 0.792 39,600
5 50,000 0.747 37,350
6 50,000 0.705 35,250
7 50,000 0.665 33,250

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 FR Super 100
8 50,000 0.627 31,350
9 50,000 0.592 29,600
10 50,000 0.558 27,900
3,67,950

Q 3. Modification that both increases and decreases the scope of the lease (Answer Updated)
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments
are ` 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a.
At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:
(a) include an additional 1,500 square metres of space in the same building starting from the

(b)
beginning of Year 6 and

i n
reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500
square metres is ` 1,50,000 payable at the end of each year (from Year 6 to Year 8). Lessee’s
incremental borrowing rate at the beginning of Year 6 is 7% p.a.

J a
The consideration for the increase in scope of 1,500 square metres of space is not commensurate with
the stand-alone price for that increase adjusted to reflect the circumstances of the contract.

k
Consequently, Lessee does not account for the increase in scope that adds the right to use an additional
1,500 square metres of space as a separate lease.

a
How should the said modification be accounted for? [SM 2021]
Ans.

h
The pre-modification ROU Asset and the pre-modification lease liability in relation to the lease are as

t
follows:
Lease liability ROU Asset

Year

1
Opening
balance
7,35,900*
Interest

a
expense @
6%44,154 r
Lease
payment
(1,00,000)
Closing
balance
6,80,054
Opening
balance
7,35,900
Depreciati
on charge
(73,590)
Closing
balance
6,62,310

S
2 6,80,054 40,803 (1,00,000) 6,20,857 6,62,310 (73,590) 5,88,720
(1,00,000) (73,590)
3 6,20,857 37,251 5,58,108 5,88,720 5,15,130

.
(1,00,000) (73,590)
4 5,58,108 33,486 (1,00,000) 4,91,594 5,15,130 (73,590) 4,41,540

A
5 4,91,594 29,496 4,21,090 4,41,540 3,67,950
6 4,21,090 3,67,950

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

Year Lease Payments Present value @ 7% Present value of lease

(A) (B) payments (A x B = C)
1 1,50,000 0.935 1,40,250
2 1,50,000 0.873 1,30,950
3 1,50,000 0.816 1,22,400
Modified lease liability 3,93,600

162 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
The modified liability equals ` 3,93,600, of which (a) ` 1,31,200 relates to the increase of ` 50,000 in the
annual lease payments from Year 6 to Year 8 and (refer note 1) (b) ` 2,62,400 relates to the remaining
three annual lease payments of ` 1,00,000 from Year 6 to Year 8 with reduction of lease term (Refer
Note 3)
Decrease in the lease term:
At the effective date of the modification (at the beginning of Year 6), the pre-modification ROU Asset is
` 3,67,950. Lessee determines the proportionate decrease in the carrying amount of the ROU Asset
based on the remaining ROU Asset for the original 2,000 square metres of office space (i.e., a remaining
three-year lease term rather than the original five-year lease term). The remaining ROU Asset for
the original 2,000 square metres of office space is ` 2,20,770 [i.e., ` (3,67,950 / 5) x 3 years].
At the effective date of the modification (at the beginning of Year 6), the pre-modification lease liability
is ` 4,21,090. The remaining lease liability for the original 2,000 square metres of office space is `

discount rate of 6% p.a.) (refer note 2).

i n
2,67,300 (i.e., present value of three annual lease payments of ` 1,00,000, discounted at the original

Consequently, Lessee reduces the carrying amount of the ROU Asset by ` 1,47,180 (` 3,67,950 ” `
2,20,770), and the carrying amount of the lease liability by ` 1,53,790 (` 4,21,090

J a
” ` 2,67,300). Lessee recognises the difference between the decrease in the lease liability and the
decrease in the ROU Asset (` 1,53,790 ” ` 1,47,180 = ` 6,610) as a gain in profit or loss at the effective
date of the modification (at the beginning of Year 6).

Lease Liability
To ROU Asset
Dr.

a k 1,53,790
1,47,180

h
To Gain 6,610

t
At the effective date of the modification (at the beginning of Year 6), Lessee recognises the effect of the
remeasurement of the remaining lease liability reflecting the revised discount rate of 7% p.a., which is `

*(Refer note 3)
Lease Liability
r
4,900 (` 2,67,300 ” ` 2,62,400*), as an adjustment to the ROU Asset.

a Dr. 4,900
To ROU Asset

.
Increase in the leased space:
S
At the commencement date of the lease for the additional 1,500 square metres of space (at the
4,900

beginning of Year 6), Lessee recognises the increase in the lease liability related to the increase in leased

A
space of ` 1,31,200 (i.e., present value of three annual lease payments of ` 50,000, discounted at the
revised interest rate of 7% p.a.) as an adjustment to the ROU Asset.

C
ROU Asset
To Lease Liability
Dr. 1,31,200
1,31,200
The modified ROU Asset and the modified lease liability in relation to the modified lease are as follows:
Lease liability ROU Asset
Interest
Opening Lease Depreciation
expense @ Closing Opening Closing
Year balance payment charge
7% balance balance balance

6 3,93,600 27,552 (1,50,000) 2,71,152 3,47,070** (1,15,690) 2,31,380

7 2,71,152 18,981 (1,50,000) 1,40,133 2,31,380 (1,15,690) 1,15,690

8 1,40,133 9,867* (1,50,000) - 1,15,690 (1,15,690) -

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 FR Super 100
*Difference is due to approximation.
**Refer Note 5
Working Notes:
1 Calculation of lease liability on increased consideration:

Year Lease Payments (A) Present value @7% (B) Present value of lease
payments (A x B = C)
1 50,000 0.935 46,750
2 50,000 0.873 43,650
3 50,000 0.816 40,800
Modified lease liability 1,31,200

n
Calculation of remaining lease liability for the original contract of 2000 square meters at
Original discount rate:

i
1
2
Year Lease Payments

1,00,000
1,00,000
(A)
Present value factor @

0.943
0.890
6% (B)
94,300
89,000
J a
Present value of lease
payments (A x B = C)

3 1,00,000
Remaining lease liability
0.840

a k 84,000
2,67,300

h
3 Calculation of remaining lease liability for the original contract of 2000 square meters at
revised discount rate:
Year Lease Payments

(A)
r t
Present value factor @
7% (B)
Present value of lease
payments
(A x B = C)
1
2
3

S a 1,00,000
1,00,000
1,00,000
0.935
0.873
0.816
93,500
87,300
81,600

.
Remaining lease liability 2,62,400
4 Calculation of Initial value of ROU asset and lease liability:

A
Year Lease Payment Present value factor @ Present value of lease
(A) 6% (B) payments
(A x B = C)

C 1
2
3
4
5
100,000
100,000
100,000
100,000
100,000
0.943
0.890
0.840
0.792
0.747
94,300
89,000
84,000
79,200
74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
Lease liability as at modification date 7,35,900

164 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
5 Calculation of opening balance of Modified ROU Asset at the beginning of 6th year:
The remaining ROU Asset for the original 2,000 square metres of office 2,20,770
space after decrease in term
Less: Adjustment for increase in interest rate from 6% to 7% (4,900)
Add: Adjustment for increase in leased space 1,31,200
3,47,070

Q 4. Lessor accounting for a finance lease  dealer-lessor case

A Lessor enters into a 10-year lease of equipment with Lessee. The equipment is not specialised in
nature and is expected to have alternative use to Lessor at the end of the 10-year lease term. Under the
lease:

n
 Lessor receives annual lease payments of ` 15,000, payable at the end of the year

i
 Lessor expects the residual value of the equipment to be ` 50,000 at the end of the 10-year lease
term
 Lessee provides a residual value guarantee that protects Lessor from the first ` 30,000 of loss for a

1,00,000 and a fair value of ` 1,11,000

J a
sale at a price below the estimated residual value at the end of the lease term (i.e.,` 50,000)
 The equipment has an estimated remaining economic life of 15 years, a carrying amount of`

 The lease does not transfer ownership of the underlying asset to Lessee at the end of the lease term
or contain an option to purchase the underlying asset

Ans.
 The interest rate implicit in the lease is 10.078%.

a k
How should the Lessor account for the same in its books of accounts?

Lessor shall classify the lease as a FINANCE LEASE because the sum of the present value of lease

Net investment in the lease

Cost of goods sold t h
payments amounts to substantially all of the fair value of the underlying asset.
At lease commencement, Lessor accounts for the finance lease, as follows:

r
` 1,11,000
` 92,340
(a)

(b)

a
(c)
Revenue ` 1,03,340
(d)
Property held for lease ` 1,00,000

(a)

. S
To record the net investment in the finance lease and derecognise the underlying asset.
The net investment in the lease consists of:
(1) the present value of 10 annual payments of ` 15,000 plus the guaranteed residual value
of ` 30,000, both discounted at the interest rate implicit in the lease, which equals `

C
(2)
A 1,03,340 (i.e., the lease payment) (Refer note 1) AND
the present value of unguaranteed residual asset of ` 20,000, which equals ` 7,660
(Refer note 2).
Note that the net investment in the lease is subject to the same considerations as other assets
in classification as current or non-current assets in a classified balance sheet.
(b) Cost of goods sold is the carrying amount of the equipment of ` 1,00,000 (less) the present
value of the unguaranteed residual asset of ` 7,660.
(c) Revenue equals the lease receivable.
(d) The carrying amount of the underlying asset.
At lease commencement, Lessor recognises selling profit of ` 11,000 which is calculated as =
lease payment of ` 1,03,340 ” [carrying amount of the asset (` 1,00,000) ” net of any
unguaranteed residual asset (` 7,660) ie which equals ` 92,340]

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 FR Super 100

Year 1 Journal entry for a finance lease

Cash ` 15,000(e)
Net investment in the lease ` 3,813(f)
Interest income ` 11,187(g)
(e) Receipt of annual lease payments at the end of the year.
(f) Reduction of the net investment in the lease for lease payments received of ` 15,000, net
ofinterest income of` 11,187
(g) Interest income is the amount that produces a constant periodic discount rate on the remaining
balance of the net investment in the lease. Please refer the computation below:

n
The following table summarises the interest income from this lease and the related

i
amortisation of the net investment over the lease term:
Year Annual Rental Annual Interest Income Net investment at the end

a
Payment (h) of the year
Initial net - - 1,11,000
investment
1
2
15,000
15,000
11,187
10,802
J
1,07,187
1,02,989
3
4
5
15,000
15,000
15,000
10,379

a
9,914
9,401k 98,368
93,282
87,683
6
7
8
9
15,000
15,000
15,000
15,000

r t h 8,837
8,216
7,532
6,779
81,520
74,736
67,268
59,047

(h)
10

S a 15,000 5,953 50,000

Interest income equals 10.078% of the net investment in the lease at the beginning of each
year. For e.g., Year 1 annual interest income is calculated as ` 1,11,000 (initial net investment) x

(i)
10.078%.

.
The estimated residual value of the equipment at the end of the lease term.

Working Notes:
A
1
Year

1
2
C
Calculation of net investment in lease:
Lease Payment
(A)
15,000
15,000
Present value factor @ 10.078%
(B)
0.908
0.825
Present value of lease payments
(A x B = C)
13,620
12,375
3 15,000 0.750 11,250
4 15,000 0.681 10,215
5 15,000 0.619 9,285
6 15,000 0.562 8,430
7 15,000 0.511 7,665

166 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100

8 15,000 0.464 6,960

9 15,000 0.421 6,315
10 15,000 0.383 5,745
10 30,000 0.383 11,480*
1,03,340
* Figure has been rounded off for equalization of journal entry.

2 Calculation of present value of unguaranteed residual asset

Year Lease Payment Present value factor @ Present value of lease
(A) 10.078% (B) payments (A x B = C)

n
10 20,000 0.383 7,660

Q 5. Sale and leaseback transaction

a i
An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of ` 30,00,000.

J
Immediately before the transaction, the building is carried at a cost of ` 15,00,000. At the same time,
Seller-lessee enters into a contract with Buyer-lessor for the right to use the building for 20 years, with
annual payments of ` 2,00,000 payable at the end of each year.

a k
The terms and conditions of the transaction are such that the transfer of the building by Seller- lessee
satisfies the requirements for determining when a performance obligation is satisfied in Ind AS 115
Revenue from Contracts with Customers.

r t h
The fair value of the building at the date of sale is ` 27,00,000. Initial direct costs, if any, are to be
ignored. The interest rate implicit in the lease is 12% p.a., which is readily determinable by Seller-lessee.
Buyer-lessor classifies the lease of the building as an operating lease.

Ans.

S a
How should the said transaction be accounted by the Seller-lessee and the Buyer-lessor?

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-

Sale Price: A
lessor to Seller-lessee.

C
Less: Fair Value (at the date of sale):
30,00,000
(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).

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 FR Super 100
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:
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)

i n15,00,000

a
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]

J 6,63,333

k
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)

Carrying Amount

h a (A)
(B)
27,00,000
15,00,000

Gain on sale of building

r t
Discounted lease payments for the 20-year ROU asset (C)
(D) = (A - B)
11,94,000
12,00,000

a
Relating to the right to use the 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

Cash
ROU Asset
. S
At the commencement date, Seller-lessee accounts for the transaction, as follows:
Dr.
Dr.
30,00,000
6,63,333

A
To Building 15,00,000
To Financial Liability 14,94,000

C
Building
To Gain on rights transferred

Buyer-Lessor:
At the commencement date, Buyer-lessor accounts for the transaction, as follows:

Financial Asset (20 payments of ` 40,160

Dr. 27,00,000
3,00,000
6,69,333

discounted @ 12% p.a.) (approx.) Dr.

To Cash 30,00,000
After the commencement date, Buyer-lessor accounts for the lease by treating ` 1,59,840 of the annual
payments of ` 2,00,000 as lease payments. The remaining ` 40,160 of annual payments received from
Seller-lessee are accounted for as:
(a) payments received to settle the financial asset of ` 3,00,000 AND
(b) interest revenue.

168 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
Q 6. Entity X (lessee) entered into a lease agreement (‘lease agreement’) with Entity Y (lessor) to lease an
entire floor of a shopping mall for a period of 9 years. The monthly lease rent is ` 70,000. To carry out its
operations smoothly, Entity X simultaneously entered into another agreement (‘facilities agreement’)
with Entity Y for using certain other facilities owned by Entity Y such as passenger lifts, DG sets, power
supply infrastructure, parking space etc., which are specifically mentioned in the agreement, for monthly
service charges amounting to ` 1,00,000. As per the agreement, the ownership of the facilities shall
remain with Entity Y. Lessee's incremental borrowing rate is 10%.
The facilities agreement clearly specifies that it shall be co-existent and coterminous with ‘lease
agreement’. The facility agreement shall stand terminated automatically on termination or expiry of
‘lease agreement’.
Entity X has assessed that the stand-alone price of ‘lease agreement’ is ` 1,20,000 per month and stand-
alone price of the ‘facilities agreement’ is ` 80,000 per month. Entity X has not elected to apply the

n
practical expedient in paragraph 15 of Ind AS 116 of not to separate non-lease component (s) from lease

i
component(s) and accordingly it separates non-lease components from lease components.
How will Entity X account for lease liability as at the commencement date? [RTP Nov. 2020]
Ans.

J a
Entity X identifies that the contract contains lease of premises and non -lease component of facilities
availed. As Entity X has not elected to apply the practical expedient as prov ided in paragraph 15, it will
separate the lease and non-lease components and allocate the total consideration of ` 1,70,000 to the
lease and non-lease components in the ratio of their relative stand-alone selling prices as follows:
Particulars Stand-alone
Prices
`

a k
% of total Stand-
alone Price
Allocation of
consideration
`

h
Building rent 1,20,000 60% 1,02,000
Service charge 80,000 40% 68,000
Total

r t
2,00,000 100% 1,70,000

a
As Entity X's incremental borrowing rate is 10%, it discounts lease payments using this rate and
the lease liability at the commencement date is calculated as follows:
Year Lease Payment Present value Present value of lease

Year 1
Year 2
Year 3
. S (A)
1,02,000
1,02,000
1,02,000
factor @ 10% (B)
.909
.826
.751
payments (A X B = C)
92,718
84,252
76,602
Year 4
Year 5

C
Year 6
Year 7
Year 8
A 1,02,000
1,02,000
1,02,000
1,02,000
1,02,000
.683
.621
.564
.513
.467
69,666
63,342
57,528
52,326
47,634
Year 9 1,02,000 .424 43,248
Lease Liability at commencement date 5,87,316
Further, ` 68,000 allocated to the non-lease component of facility used will be recognised in profit or
loss as and when incurred.

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CHAPTER
INTEGRATED REPORTING
30
Q 1. What is the organisational structure and role of IIRC in relation to integrated reporting. What
considerations are kept in mind by IIRC while developing the framework. (MTP Dec 2021)
Ans.
In 2010, the International Integrated Reporting Council (IIRC) was set up which aims to cre ate the
globally accepted integrated reporting framework.
The International Integrated Reporting Council (IIRC) is a global coalition of:
 Regulators



Investors
Companies
Standard setters

i n
 The accounting profession and NGOs

Ja
Together, this coalition shares the view that communication about value creation should be the next
step in the evolution of corporate reporting. With this purpose, they issued the International Integrated
Reporting (IR) Framework.

k
The framework has been developed keeping in mind the greater flexibility to be given to the entity and
the management in the reporting but at the same time should target to report the value created by the

“
organisation through various capital.

h a
r t
NOTES

S a
A .
C

170 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER
CORPORATE SOCIAL RESPONSIBILITY
31
Q 1. ABC Ltd. is a company which has a net worth of INR 200 crores, it manufactures rubber parts for
automobiles. The sales of the company are affected due to low demand of its products.
The previous year’s financials state:
(INR in Crores)
March 31, 20X4 March 31, March 31, March 31,
(Current year) 20X3 20X2 20X1
Net Profit 3.00 8.50 4.00 3.00
Sales (turnover) 850 950 900 800

n
Required

Ans.

a i
Does the Company have an obligation to form a CSR committee since the applicability criteria is not
satisfied in the current financial year?

It has been clarified that ‘any financial year’ referred to under sub-section (1) of section 135 of the Act

J
read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’.
A company which meets the net worth, turnover or net profits criteria in any of the preceding three
financial years, but which does not meet the criteria in the relevant financial year, will still need to

As per the criteria to constitute CSR committee -

1)
a k
constitute a CSR Committee and comply with provisions of sections 135 (2) to (5) read with the CSR
Rules.

Net worth greater than or equal to INR 500 Crores: This criterion is not satisfied.
2)
3)
h
Sales greater than or equal to INR 1000 Crores: This criterion is not satisfied.

t
Net Profit greater than or equal to INR 5 Crores: This criterion is satisfied in financial year
ended March 31, 20X3.

r
Hence, the Company will be required to incurs CSR spend, however may not make a CSR committee as

Q 2. Either a
CSR obligation < 50 lacs (as per companies (Amendment) Act, 2020)

S
Royal Ltd. is a company which has a net worth of ` 200 crore engaged in the manufacturing of rubber

20X4.

Particulars

A .
products. The sales of the company are badly affected due to pandemic during the financial year 20X3-

Relevant financial details of the following financial years are as follows:

31st March 20X4 31st March 31st March
(` in crore)
31st March

C
(Current year) 20X3 20X2 20X1
estimated
Net Profit 3.00 8.50 4.00 3.00
Sales (turnover) 850 950 900 800

During the pandemic period (till 31st March 20X4) various commercial activities were undertaken with
considerable concessions/discounts, along the related affected areas. The management intends to
highlight the expenditure incurred on such activities as expenditure incurred, on activities undertaken to
discharge corporate social responsibility, while publishing its financial statements for the year 20X3-
20X4.
You are requested to advise CFO of Royal Ltd on the below points along with reasons for your advise:
(i) Whether the Company has an obligation to form a CSR committee since the applicability criteria
are not satisfied in the current financial year?

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 FR Super 100
(ii) Whether the accounting of expenditure during the pandemic period be treated as expenditure
on CSR in the financial statements according to the view of the accountant of the company?
(MTP Dec 2021)
Ans.
Either
(i) A company which meets the net worth, turnover or net profits criteria in immediately preceding
financial year will need to constitute a CSR Committee and comply with provisions of sections
135(2) to (5) read with the CSR Rules.
As per the criteria to constitute CSR committee -
(1) Net worth should be greater than or equal to ` 500 Crore: This criterion is not satisfied
as per the facts given in the question.

n
(2) Sales should be greater than or equal to ` 1,000 Crore: This criterion is not satisfied as

i
per the facts given in the question.
(3) Net profit should be greater than or equal to ` 5 Crore: as per the facts given in the

(ii)
Hence, the Company will be required to form a CSR committee.

J a
question, this criterion is satisfied in financial year ended 31 st March, 20X3 i.e.
immediate preceding financial year.

The Companies Act, 2013 mandated the corporate entities that the expenditure incurred for

k
Corporate Social Responsibility (CSR) should not be the expenditure incurred for the activities in
the ordinary course of business. If expenditure incurred is for the activities in the ordinary course

a
of business, then it will not be qualified as expenditure incurred on CSR activities.
Further, it is presumed that the commercial activities performed at concessional rates are the

h
activities done in the ordinary course of business of the company other than the activities

t
defined in Schedule VII of the Companies Act, 2013. Therefore, the treatment done by the
Management by showing the expenditure incurred on such commercial activities in its financial

“ r
statements as the expenditure incurred on activities undertaken to discharge CSR, is not correct.

a NOTES

. S
C A

172 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

”
 FR Super 100

CHAPTER
ANALYSIS OF FINANCIAL STATEMENTS
32
Q 1. Mumbai Challengers Ltd., a listed entity, is a sports organization owning several cricket and hockey
teams. The issues below pertain to the reporting period ending 31 March 20X2.
(a) Owing to the proposed schedules of Indian Hockey League as well as Cricket Premier
Tournament, Mumbai Challengers Ltd. needs a new stadium to host the sporting events. This
stadium will form a part of the Property, Plant and Equipment of the company. Mumbai
Challengers Ltd. began the construction of the stadium on 1 December, 20X1. The construction
of the stadium was completed in 20X2-20X3. Costs directly related to the construction
amounted to ₹ 140 crores in December 20X1. Thereafter, ₹ 350 crores have been incurred per

n
month until the end of the financial year. The company has not taken any specific borrowings

i
to finance the construction of the stadium, although it has incurred finance costs on its
regular overdraft during the period, which were avoidable had the stadium not been

a
constructed. Mumbai Challengers Ltd. has calculated that the weighted average cost of the
borrowings for the period 1 December 20X1 to 31 March 20X2 amounted to 15% per annum on
an annualized basis.

J
The company seeks advice on the treatment of borrowing costs in its financial statements for

(b)
the year ending 31 March 20X2.

a k
Mumbai Challengers Ltd. acquires and sells players’ registrations on a regular basis. For a player
to play for its team, Mumbai Challengers Ltd. must purchase registrations for that player. These

h
player registrations are contractual obligations between the player and the company. The costs

t
of acquiring player registrations include transfer fees, league levy fees, and player agents’ fees
incurred by the club.

r
At the end of each season, which happens to also be the reporting period end for Mumbai

S a
Challengers Ltd., the club reviews its contracts with the players and makes decisions as to
whether they wish to sell/transfer any players’ registrations. The company actively markets
these registrations by circulating with other clubs a list of players’ registrations and their
estimated selling price. Players’ registrations are also sold during the season, often with

.
performance conditions attached. In some cases, it becomes clear that a player will not play for
the club again because of, for example, a player sustaining a career threatening injury or being

A
permanently removed from the playing squad for any other reason. The playing
registrations of certain players were sold after the year end, for total proceeds, net of
associated costs, of ₹ 175 crores. These registrations had a net book value of ₹ 49 crores.

(c) CMumbai Challengers Ltd. seeks your advice on the treatment of the acquisition, extension,
review and sale of players’ registrations in the circumstances outlined above.
Mumbai Challengers Ltd. measures its stadiums in accordance with the revaluation model.
An airline company has approached the directors offering ₹ 700 crores for the property naming
rights of all the stadiums for five years. Three directors are on the management boards of both
Mumbai Challengers Ltd. and the airline. Additionally, statutory legislations regulate the
financing of both the cricket and hockey clubs. These regulations prevent contributions to the
capital from a related party which ‘increases equity without repayment in return’. Failure to
adhere to these legislations could lead to imposition of fines and withholding of prize
money.
Mumbai Challengers Ltd. wants to know how to take account of the naming rights in the
valuations of the stadium and the potential implications of the financial regulations imposed by
the legislations. [SM 2021]

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 FR Super 100
Ans.
(a) Borrowing Costs
As per Ind AS 23 Borrowing Costs, an entity shall capitalize borrowing costs that are directly
attributable to the acquisition, construction or production of a qualifying asset (i.e. an asset that
necessarily takes a substantial period of time to get ready for its intended use or sale) as part of
the cost of that asset. The borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset are those borrowing costs that would have been
avoided if the expenditure on the qualifying asset had not been made. To the extent that an
entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset,
the entity shall determine the amount of borrowing costs eligible for capitalization by applying
a capitalization rate to the expenditures on that asset. The capitalization rate shall be the
weighted average of the borrowing costs applicable to all borrowings of the entity that are

n
outstanding during the period.

a i
The capitalization rate of the borrowings of Mumbai Challengers Ltd. during the period of
construction is 15% per annum (as given in the question), and therefore, the total amount of
borrowing costs to be capitalized is the expenditures incurred on the asset multiplied by the

J
capitalization rate, which is as under:

Particulars ₹ in crores

a k
Costs incurred in December 20X1: (₹ 140 crores x 15% x 4/12)
Costs incurred in January 20X2: (₹ 350 crores x 15% x 3/12)
Costs incurred in February 20X2: (₹ 350 crores x 15% x 2/12)
Costs incurred in March 20X2: (₹ 350 crores x 15% x 1/12)
7.000
13.125
8.750
4.375

t h
Borrowing Costs to be capitalized in 20X1-X2

r OR
33.250

a
Weighted average carrying amount of the stadium during 20X1-X2 is:
₹ (140 + 490 + 840 + 1,190) crores/4 = ₹ 665 crores

. S
Applying the weighted average rate of borrowings of 15% per annum, the borrowing cost to be
capitalized is computed as:
₹ 665 crores x (15% x 4/12) = ₹ 33.25 crores

(b)

C A
Players’ Registrations
Acquisition
As per Ind AS 38 Intangible Assets, an entity should recognize an intangible asset where it is
probable that the expected future economic benefits that are attributable to the asset will flow
to the entity and the cost of the asset can be measured reliably. Accordingly, the costs
associated with the acquisition of players’ registrations would need to be capitalized which
would be the amount of cash or cash equivalent paid or the fair value of other
consideration given to acquire such registrations. In line with Ind AS 38 Intangible Assets,
costs would include transfer fees, league levy fees, and player agents’ fees incurred by the club,
along with other directly attributable costs, if any. Amounts capitalized would be fully amortized
over the period covered by the player’s contract.

Sale of registrations
Player registrations would be classified as assets held for sale under Ind AS 105 Non- Current
Assets Held for Sale and Discontinued Operations when their carrying amount is expected to be
recovered principally through a sale transaction and a sale is considered to be highly probable.

174 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
To consider a sale to be ‘highly probable’, the assets (in this case, player registrations) should be
actively marketed for sale at a price that is reasonable in relation to its current fair value. In the
given case, it would appear that the management is committed to a plan to sell the registration,
that the asset is available for immediate sale and that an active plan to locate a buyer is already
in place by circulating clubs. Ind AS 105 stipulates that it should be unlikely that the plan to sell
the registrations would be significantly changed or withdrawn. To fulfil this requirement, it
would be prudent if only those registrations are classified as held for sale where unconditional
offers have been received prior to the reporting date.

Once the conditions for classifying assets as held for sale in accordance with Ind AS 105 have
been fulfilled, the player registrations would be stated at lower of carrying amount and fair
value less costs to sell, with the carrying amount stated in accordance with Ind AS 38 prior to

n
application of Ind AS 105, subjected to impairment, if any.

a i
Profits and losses on sale of players’ registrations would be computed by deducting the carrying
amount of the players’ registrations from the fair value of the consideration receivable,
net of transactions costs. In case a portion of the consideration is receivable on the occurrence

J
of a future performance condition (i.e. contingent consideration), this amount would be
recognized in the Statement of Profit and Loss only when the conditions are met.

k
The players registrations disposed of, subsequent to the year end, for ₹ 175 crores, having a
corresponding book value of ₹ 49 crores would be disclosed as a non-adjusting event in

a
accordance with Ind AS 10 Events after the Reporting Period.

Impairment review

t h
Ind AS 36 Impairment of Assets requires companies to annually test their assets for

r
impairment. An asset is said to be impaired if the carrying amount of the asset exceeds its
recoverable amount. The recoverable amount is higher of the asset’s fair value less costs to sell

a
and its value in use (which is the present value of future cash flows expected to arise from the
use of the asset). In the given scenario, it is not easy to determine the value in use of any player
in isolation as that player cannot generate cash flows on his/her own unless via a sale

S
transaction or an insurance recovery. Whilst any individual player cannot really be separated

.
from the single cash-generating unit (CGU), being a cricket team or a hockey team in the instant
case, there may be certain instances where a player is taken out of the CGU when it becomes
clear that he/she will not play for the club again. If such circumstances arise, the carrying

(c)
A
amount of the player should be assessed against the best estimate of the player’s fair value less
any costs to sell and an impairment charge should be recognized in the profit or loss, which

C
reflects any loss arising.

Valuation of stadiums
In terms of Ind AS 113 Fair Value Measurement, stadiums would be valued at the price which
would be received to sell the asset in an orderly transaction between market participants at the
measurement date (i.e. exit price). The price would be the one which maximizes the value of the
asset or the group of assets using the principle of the highest and best use. The price would
essentially use Level 2 inputs which are inputs other than quoted market prices included within
Level 1 which are observable for the asset or liability, either directly or indirectly. Property
naming rights present complications when valuing property. The status of the property indicates
its suitability for inviting sponsorship attached to its name. It has nothing to do with the
property itself but this can be worth a significant amount. Therefore, Mumbai Challengers Ltd.
could include the property naming rights in the valuation of the stadium and write it off over
three years.

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 FR Super 100

Ind AS 24 Related Party Disclosures lists the criteria for two entities to be treated as related
parties. Such criteria include being members of the same group or where a person or a close
member of that person’s family is related to a reporting entity if that person has control or joint
control over the reporting entity. Ind AS 24 deems that parties are not related simply because
they have a director or a key manager in common. In this case, there are three directors in
common and in the absence of any information to the contrary, it appears as though the entities
are not related. However, the regulator will need to establish whether the sponsorship deal is a
related party transaction for the purpose of the financial control provisions. There would need
to be demonstrated that the airline may be expected to influence, or be influenced by, the club
or a related party of the club. If the deal is deemed to be a related party transaction, the
regulator will evaluate whether the sponsorship is at fair value or not.

Q 2. (a)

i n
Neelanchal Gas Refinery Ltd. (hereinafter referred to as Neelanchal), a listed company, is
involved in the production and trading of natural gas and oil. Neelanchal jointly owns an

a
underground storage facility with another entity, Seemanchal Refineries Ltd. (hereinafter
referred to as Seemanchal). Both the companies are engaged in extraction of gas from offshore

J
gas fields, which they own and operate independently of each other. Neelanchal owns 60% of
the underground facility and Seemanchal owns 40%. Both the companies have agreed to share
services and costs accordingly, with decisions relating to the storage facility requiring unanimous

a k
agreement of the parties. The underground facility is pressurised so that the gas is pushed out
when extracted. When the gas pressure is reduced to a certain level, the remaining gas is
irrecoverable and remains in the underground storage facility until it is decommissioned. As per
the laws in force, the storage facility should be decommissioned at the end of its useful life.

(b)

r
accounting for the irrecoverable gas.
t h
Neelanchal seeks your advice on the treatment of the agreement with Seemanchal as well as the

Neelanchal has entered into a ten-year contract with Uttaranchal Refineries Pvt. Ltd.

S a
(hereinafter referred to as Uttaranchal) for purchase of natural gas. Neelanchal has paid an
advance to Uttaranchal equivalent to the total quantity of gas contracted for ten years based on
the forecasted price of gas. This advanced amount carries interest at the rate of 12.5% per
annum, which is settled by Uttaranchal way of supply of extra gas. The contract requires fixed

.
quantities of gas to be supplied each month. Additionally, there is a price adjustment
mechanism in the contract whereby the difference between the forecasted price of gas and the
prevailing market price is settled in cash on a quarterly basis. If Uttaranchal does not deliver the

C A
gas as agreed, Neelanchal has the right to claim compensation computed at the current market
price of the gas.

Neelanchal wants to account for the contract with Uttaranchal in accordance with Ind AS 109
Financial Instruments and seeks your inputs in this regard. [SM 2021]
Ans.
(a) Joint Arrangement
As per Ind AS 111 Joint Arrangements, a joint arrangement is an arrangement of which two or
more parties have joint control. Joint control is the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant activities require the
unanimous consent of the parties sharing control. The structure and form of the arrangement
determines the nature of the relationship. However, irrespective of the purpose, structure or
form of the arrangement, the classification of joint arrangements depends upon the parties’
rights and obligations arising from the arrangement. Accordingly, a joint arrangement could be
classified as a joint operation or as a joint venture. A joint arrangement which is NOT structured
through a separate vehicle is a joint operation. In such cases, the contractual arrangement

176 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

 FR Super 100
establishes the parties’ rights and obligations. A joint operator accounts for the assets,
liabilities, revenues and expenses relating to its involvement in a joint operation in accordance
with the relevant Ind AS. Based on the information provided, the arrangement with Seemanchal
Refineries Ltd. is a joint operation as no separate vehicle is formed and the companies have
agreed to share services and costs with decisions regarding the storage facility requiring
unanimous agreement of the parties. Neelanchal Gas Refinery Ltd. should recognize its share of
the asset as Property, Plant and Equipment.

As per Para 16 of Ind AS 16 Property, Plant and Equipment, the cost of an item of property, plant
and equipment comprises the initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located. Ind AS 37 Provisions, Contingent Liabilities and
Contingent Assets provides guidance on measuring decommissioning, restoration and similar

n
liabilities. Para 45 of Ind AS 37 provides that where the effect of the time value of money is

i
material, the amount of a provision shall be the present value of the expenditures expected to
be required to settle the obligation. Thus, costs incurred by an entity in respect of obligations

a
for dismantling, removing and restoring the site on which an item of property, plant and
equipment is situated are recognized and measured in accordance with Ind AS 16 and Ind AS 37,

J
with the journal entry being as under:

Property, Plant and Equipment Dr. xxx

k
To Provision for Dismantling, Removal and Restoration xxx
Neelanchal Gas Refinery Ltd. should recognize 60% of the cost of decommissioning of the

a
underground storage facility. However, in line Para 29 of Ind AS 37 where an entity is jointly and
severally liable for an obligation, the part of the obligation that is expected to be met by other

h
parties is treated as a contingent liability. Accordingly, Neelanchal Gas Refinery Ltd. should also

t
disclose 40% of the cost of decommissioning of the underground facility as a contingent

r
liability, should there arise future events that prevent Seemanchal Refineries Ltd. from fulfilling
its obligations under the arrangement.

a
As per Ind AS 16, Property, Plant and Equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or

S
for administrative purposes; and

.
(b) are expected to be used during more than one period.

Thus, Neelanchal Gas Refinery Ltd. should classify and account for its share of irrecoverable gas

A
as property, plant and equipment, as the irrecoverable gas is necessary for the storage facility to
perform its function. Therefore, the irrecoverable gas, being a part of the storage facility, should

C
be capitalized as a component of the storage facility asset, and should be depreciated to its
residual value over the life of the storage facility. However, if the gas is recoverable in full upon
decommissioning of the storage facility, then depreciation against the irrecoverable gas
component will be recorded only if the estimated residual value of the gas decreases below cost
during the life of the facility. Upon decommissioning of the storage facility, when the cushion
gas is extracted and sold, the sale of irrecoverable gas is accounted as a disposal of an item of
property, plant and equipment in accordance with Ind AS 16 and the resulting gain or loss is
recognized in the Statement of Profit and Loss. The natural gas in excess of the irrecoverable
gas which is injected into the facility would be treated as inventory in accordance with Ind AS 2
Inventories.

(b) Contract with Uttaranchal Refineries Pvt. Ltd.

As per para 2.4 of Ind AS 109 Financial Instruments, this standard applies to those contracts to
buy or sell a non-financial item that can be settled net in cash or another financial instrument, or

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 FR Super 100
by exchanging financial instruments, as if the contracts were financial instruments, with the
exception of contracts that were entered into and continue to be held for the purpose of the
receipt or delivery of a non-financial item in accordance with the entity’s expected purchase,
sale or usage requirements (i.e. own use contracts). This contract will result in physical delivery
of the commodity i.e. extra gas.
Para 2.5 of Ind AS 109 further provides that a contract to buy or sell a non-financial item that can
be settled net in cash or another financial instrument, or by exchanging financial instruments, as
if the contract was a financial instrument, may be irrevocably designated as measured at fair
value through profit or loss even if it was entered into for the purpose of the receipt or delivery
of a non-financial item in accordance with the entity’s expected purchase, sale or usage
requirements. This designation is available only at inception of the contract and only if it
eliminates or significantly reduces a recognition inconsistency (sometimes referred to as an

n
‘accounting mismatch’) that would otherwise arise from not recognising that contract because it

i
is excluded from the scope of this Standard.
There are various ways in which a contract to buy or sell a non-financial item can be settled net

a
in cash or another financial instrument or by exchanging financial instruments. These include:
(a) when the terms of the contract permit either party to settle it net in cash or another

J
financial instrument or by exchanging financial instruments;

(b) when the ability to settle net in cash or another financial instrument, or by exchanging

a k
financial instruments, is not explicit in the terms of the contract, but the entity has a
practice of settling similar contracts net in cash or another financial instrument or by
exchanging financial instruments (whether with the counterparty, by entering into
offsetting contracts or by selling the contract before its exercise or lapse);
(c)

(d)
h
when, for similar contracts, the entity has a practice of taking delivery of the underlying

t
and selling it within a short period after delivery for the purpose of generating a profit

r
from short-term fluctuations in price or dealer’s margin; and
when the non-financial item that is the subject of the contract is readily convertible to

a
cash.
A written option to buy or sell a non-financial item, such as a commodity, that can be settled net
in cash or another financial instrument, or by exchanging financial instruments, is within the

S
scope of Ind AS 109. Such a contract is accounted as a derivative. Such a contract cannot be

.
entered into for the purpose of the receipt or delivery of the non-financial item in accordance
with the entity’s expected purchase, sale or usage requirements. Judgment would be
required in this area as net settlements caused by unique events beyond management’s control

C A
may not necessarily prevent the entity from applying the ‘own use’ exemption to all similar
contracts.
In the given case, the contract with Uttaranchal Refineries Pvt. Ltd. will result in physical delivery
of extra gas (which is a commodity and not cash, or a financial instrument) for the use of
Neelanchal Gas Refinery Ltd. Accordingly, it appears that this contract would be an own use
contract falling outside the scope of Ind AS 109 and therefore, would be treated as an executory
contract. However, arguments could be placed that the contract is net settled due to the
penalty mechanism requiring Uttaranchal Refineries Pvt. Ltd. to compensate Neelanchal Gas
Refinery Ltd. at the current prevailing market price. Further, if natural gas is readily convertible
into cash at the location of delivery, the contract could be considered net settled. Additionally, if
there is volume flexibility, the contract could be regarded as a written option which falls within
the scope of Ind AS 109.
However, the contract will probably continue to be regarded as ‘own use’ as long as it has been
entered into and continues to be held for expected counterparties’ sale / usage requirements.
Additionally, the entity has not irrevocably designated the contract as measured at fair
value through profit or loss, thus emphasizing the ‘own use’ designation

178 Get the Best of Ind AS By CA. SARTHAK NIRAJ JAIN

Audit