CA FINAL – FINANCIAL REPORTING (VOLUME I)

––– INDEX

1 to 18
ACCOUNTING FOR SHARE BASED PAYMENTS
1 IND AS 102 / IFRS 2

19 to 104
2 CONSOLIDATED FINANCIAL STATEMENTS

105 to 181
IND AS 115 REVENUE FORM CONTRACTS WITH
3 CUSTOMERS

182 to 257
FINANCIAL INSTRUMENTS
4 (IND AS 32, 107, 109)

258 to 321
5 IND AS 116 - LEASES

322 to 342
IND AS 20 –
6 ACCOUNTING FOR GOVERNMENT GRANTS

343 to 391
7 BUSINESS COMBINATIONS
 INDEX

392 to 414
8 FIRST-TIME ADOPTION OF IND AS

415 to 452
9 ANALYSIS OF FINANCIAL STATEMENTS

453 to 486
10 PRACTICE TEST PAPERS

487 to 523
11 ANNEXTURES
CA FINAL

ACCOUNTING FOR SHARE BASED

1 PAYMENTS IND AS 102 / IFRS 2

Meaning (Share Based Payment)

Transactions in which entity

Transactions in which entity

Acquires goods and services by
Receives goods and services
incurring liability from
from suppliers (including suppliers (including
employees) as consideration for OR employees) for the amount
OR
equity instruments (including based on price of shares (or
share options) change in share price)

Transaction where entity receives/acquires goods or services from suppliers (including

employees) and makes payment based on price or value of shares.

Goods consists of Inventory, Consumables, Property, Plant and Equipment (PPE)

intangible assets and other Non-financial Asset.

Objective of IND AS 102 > Recognition & Measurement of SBP.

Exclusions:
(1) Equity Instruments issued in which entity acquires goods as part of net asset in
Business Combinations (IND AS 103) or contribution for joint venture (IND AS 111).
(2) Financial Instrumental issued to Buy or Sell Non – Financial items which can be
settled “NET’ (IND AS 109).
GIST OF SBP

Employees Other than Employees

Equity Settled Cash settled Equity settled with

cash alternatives

Equity Liability Compound instruments

(Hybrid instruments)
FINANCIAL REPORTING 1
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
IMPORTANT TERMS
(1) Grant Date: It is the date on which employer and employee understand the terms
and conditions of S.B.P. (if SBP requires approval of shareholders, then grant date
of shareholders; approval).
(2) Measurement Date: For employee as a counter-party, it is grant date.
(3) Vesting Period: It is period from grant date till the time conditions are satisfied.
(4) Vesting Conditions: These are conditions which employee needs to satisfy in order
to be entitled for subscription of shares. Such conditions can be service conditions
and/or performance conditions.
(5) Vest: The date on which vesting conditions are satisfied and employee is entitled
for subscription of shares.
(6) Exercise Price: It is the price the employee has to pay for acquiring the shares.
(7) Fair Value: The most logical price of equity instrument (including options) which is
calculated using BNS Model or Binomial Model.
(8) Intrinsic Value: It is the difference between the market price and exercise price.
Intrinsic Value = Market Price – Exercise Price.

Question 1
ABC Limited granted to its employees, share options with a fair value of INR
5,00,000 on 1 April 2010, if they remain in the organization upto 31st March 2013.
On 31st March 2011, ABC limited expects only 91% of the employees to remain in
the employment. On 31st March 2012, company expects only 89% of the employees
to remain in the employment. However, only 82% of the employees remained in the
organisation at the end of March, 2013 and all of them exercised their options. Pass
the Journal entries?

Question 2
An entity issued 100 shares each to its 1,000 employees subject to service condition of
next 2 years. Grant date fair value of the share is INR 195 each. There is an
expectation 97% of the total 1,000 employees will remain in service at end of 1st year.
However, at the end of 2nd year the expected employees to remain in service would
be 91% out of the total 1,000 employees. Calculate expense for the year 1 & 2?

FINANCIAL REPORTING 2
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL

Vesting Conditions

Service Conditions Performance

(POPULAR) Conditions

e.g. to remain in
service for 3 years / Market Based (RIGID) Non-Market Based
4 years etc. Ind AS 102 is rigid

PAT Target
Estimation and Market Price to  by ….% Sales Target
Re-estimation or to be atleast ₹….. EPS Target
allowed MKT. Capitalisation to be
₹….
Estimation and Re-
estimation allowed
Estimation and
Re-estimation allowed except
re-estimation of vesting period

Question 3
Ankita Holding Inc. grants 100 shares to each of its 500 employees on 1st January
20X1. The employees should remain in service during the vesting period. The shares
will vest at the end of the first year if the company’s earnings increase by 12%;

Second year if the company’s earnings increase by more than 20% over the two-
year period; Third year if the entity’s earnings increase by more than 22% over the
three-year period.

The fair value per share at the grant date is INR 122. In 2011, earnings increased by
10%, and 29 employees left the organisation. The company expects that earnings
will continue at a similar rate in 2012 and expects that the shares will vest at the
end of the year 2012. The company also expects that additional 31 employees will
leave the organisation in the year 2012 and that 440 employees will receive their
shares at the end of the year 2012. At the end of 2012, company’s earnings
increased by 18%. Therefore, the shares did not vest. Only 29 employees left the
organization during 2012. Company believes that additional 23 employees will leave
in 2013 and earnings will further increase so that the performance target will be
achieved in 2013.

At the end of the year 2013, only 21 employees have left the organization. Assume
that the company’s earnings increased to desired level and the performance target
has been met. The face value per share ` 10, exercise price ` 20 per share and 400
employees exercise the options.
Required:
Determine the expense for each year and pass appropriate journal entries?

FINANCIAL REPORTING 3
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
Question 4
Entity X grants 10 shares each to its 1000 employees on the conditions as
mentioned below-
• To remain in service & entity’s profit after tax (PAT) shall reach to INR 100
million.
• It is expected that PAT should reach to INR 100 million by the end of 3 years.
• Fair value at grant date is INR 100.
• Employees expected for vesting right by 1st year 97%, then it revises to 95% by
2nd year and finally to 93% by 3rd year.
Calculate expenses for next 3 years in respect of share-based payment?

Question 5
ACC limited granted 10,000 share options to one of its managers. In order to get
the options, the manager has to work for next 3 years in the organization and
reduce the cost of production by 10% over the next 3 years.
Fair value of the option at grant date was INR 95
Cost reduction achieved-
Year 1 12% Achieved, expected to vest
Year 2 8%, Not expected to vest in future
Year 3 10% Achieved, vested
Calculate the amount of expenses for each year?

Question 6
An entity P issues share-based payment plan to its employees based on the below
details –
No. of employees 100
Fair value at grant date INR 25
Market condition Share price to reach at INR 30
Service condition Service condition To remain in service until
market condition
Expected completion of market is fulfilled 4 yrs.
condition
Calculate expenses related to such share-based payment plan in each year subject
to the below scenarios –
(a) Market condition if fulfilled in year 3, or
(b) Market condition is fulfilled in year 5.

FINANCIAL REPORTING 4
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
Question 7
Company P is a holding company for company B. A group share-based payment is
being Organized in which Parent issues its own equity-shares for the employees of
company B. The details are as below –
No. of employees of company B 100
Grant date fair value of share INR 87
No. of shares to each employee granted 25
Vesting conditions Immediately
Pass the journal entry in the books of company P & company B?

Question 8
A parent grants 200 share options to each of 100 employees of its subsidiary,
conditional upon the completion of two years’ service with the subsidiary. The fair
value of the share options on grant date is ` 30 each. At grant date, the subsidiary
estimates that 80 percent of the employees will complete the two-year service
period. This estimate does not change during the vesting period. At the end of the
vesting period, 81 employees complete the required two years of service. The
parent does not require the subsidiary to pay for the shares needed to settle the
grant of share options.
Pass the necessary journal entries in the books of subsidiary for giving effect to the
above arrangement?

Question 9
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 theemployees 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 ?

Question 10
Plastic manufacturing company “X” enters into an agreement with company “Y” to
purchase 100kg of fiber which will be settled in cash at an amount equal to 10
Shares of X. However, X can settle the contract at any time by paying an amount of
current share price less market value of fiber. How the transaction would be
evaluated under Ind AS 102 ?

FINANCIAL REPORTING 5
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL

CASH SETTLED PLAN: STOCK APPRECIATION RIGHTS

(SAR)
Entry for every year during vesting period:
Employees Benefit Cost A/c. Dr.
To Share Based Payment (Liability) A/c./
(Provision for SAR as per Ind AS 102)

Measurement
Based on FAIR VALUE EXISTING ON EACH BALANCE SHEET DATE

On Exercise Date:
SBP (Liability) A/c. Dr.
To Cash/Bank A/c.

Any difference on re-measurement & Settlement will be transferred to Profit & Loss A/c.
(Routed through Employee Benefit Cost A/c).

Question 11
An entity issued 50 shares each to its 170 employees subject to service condition of
next 2 years. The settlement is to be made in cash. Grant date fair value of the
share is INR 85 each, however, the fair value as at end of 1st year, 2nd year were
INR 80 & INR 90 respectively. Calculate expense for years 1 and 2 ?

Question 12
An entity issued 100 shares each to its 20 employees subject to service condition of
next 3 years. The settlement is to be made in cash. Grant date fair value of the shares
is ` 200 each. However the fair value as at end of 1st year, 2nd year & 3rd year were
` 180, ` 190, ` 220 respectively. Calculate the amount of expense for each year.

Question 13
An entity which follows its financial year as per the calendar year grants 1,000
share appreciation rights (SARs) to each of its 40 management employees as on
1st January 20X5. The SARs provide the employees with the right to receive (at the
date when the rights are exercised) cash equal to the appreciation in the entity’s
share price since the grant date. All of the rights vest on 31st December 20X6; and
they can be exercised during 20X7 and 20X8. Management estimates that, at grant
date, the fair value of each SAR is ` 11; and it estimates that overall 10% of the
employees will leave during the two-year period. The fair values of the SARs at
each year end are shown below:

FINANCIAL REPORTING 6
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
Year Fair Value at year end
31 December 20X5 12
31 December 20X6 8
31 December 20X7 13
31 December 20X8 12
10% of employees left before the end of 20X6. On 31st December 20X7 (when the
intrinsic value of each SAR was ` 10), six employees exercised their options; and
the remaining 30 employees exercised their options at the end of 20X8 (when the
intrinsic value of each SAR was equal to the fair value of ` 12).
How much expense and liability is to be recognized at the end of each year? Pass
Journal entries.

Question 14
XYZ issued 10,000 Share Appreciation Rights (SARs) that vest immediately to its
employees on 1 April 2010. The SARs will be settled in cash. At that date it is
estimated, using an option pricing model, that the fair value of a SAR is INR 95. SAR
can be exercised any time upto 31 March 2013. At the end of period on 31 March
2011 it is expected that 95% of total employees will exercise the option, 92% of
total employees will exercise the option at the end of next year and finally 89% will
be vested only at the end of the 3rd year. Fair Values at the end of each period
have been given below:
Fair value of SAR INR
31-Mar-2011 112
31-Mar-2012 109
31-Mar-2013 114
Pass the Journal entries?

EQUITY SETTLED WITH CASH ALTERNATIVES: (Option to select in hand of Employees.)

Debt Portion
Break
Compound Instrument and
Equity Portion

Total fair value on grant date, if equity settled xx

Less : Total Fair Value on grant date, if (xx)
cash settled (Debt Portion)
EQUITY PORTION xx

Either positive or Zero

FINANCIAL REPORTING 7
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
Question 15
Tata Industries issued share-based option to one of its key management personal
which can be exercised either in cash or equity and it has following features:
Option I Period
No. of cash settled shares 74,000
Service condition 3 years
Option II
No. of equity settled shares 90,000
Conditions:
Service 3 years
Restriction to sell 2 years
Fair values INR
Equity price with a restriction of sale for 2 years 115
Fair value grant date 135
Fair value 2010 138
2011 140
2012 147
Pass the Journal entries assuming KMP selects equity alternative?

Question 16
At 1 January 2010, Ambani Limited grants its CEO an option to take either cash
amount equivalent to 800 shares or 990 shares. The minimum service requirement
is 2 years. There is a condition to keep the shares for 3 years if shares are opted.
Fair values of the shares INR
Share alternative fair value (with restrictions) 212
Grant date fair value on 1 January, 2010 213
Fair value on 31 December, 2010 220
Fair value on 31 December, 2011 232
The key management exercises his cash option at the end of 2012. Pass journal
entries.

Question 17
On 1 January 2011, ABC limited gives options to its key management personnel
(employees) to take either cash equivalent to 1,000 shares or 1,500 shares. The
minimum service requirement is 2 years and shares being taken must be kept for
3 years.

FINANCIAL REPORTING 8
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
Fair values of the shares are as follows: INR
Share alternative fair value (with restrictions) 102
Grant date fair value on 1 Jan 2011 113
Fair value on 31 Dec 2011 120
Fair Value on 31 Dec 2012 132
The employees exercise their cash option at the end of 2012. Pass the journal
entries.

Question 18
Marathon Inc. issued 150 share options to each of its 1,000 employees subject to
the service condition of 3 years. Fair value of the option given was calculated at
INR 129. Below are the details and activities related to the SBP plan?
Year 1:
35 employees left and further 60 employees are expected to leave Share options
re-priced (as MV of shares has fallen).
Hence expense is expected to increase by INR 30 (i.e. incremental fair value).
Year 2:
30 employees left and further 36 employees are expected to leave
Year 3:
39 employees left
Pass Journal entries.

Question 19
QA Ltd. had on 1st April, 20X1 granted 1,000 share options each to 2,000
employees. The options are due to vest on 31st March, 20X4 provided the employee
remains in employment till 31st March, 20X4.

On 1st April, 20X1, the Directors of Company estimated that 1,800 employees
would qualify for the option on 31st March, 20X4. This estimate was amended to
1,850 employees on 31st March, 20X2 and further amended to 1,840 employees on
31st March, 20X3 the actual employees on 31st March 20X4 were 1,800.

On 1st April, 20X1, the fair value of an option was ` 1.20. The fair value increased
to ` 1.30 as on 31st March, 20X2 but due to challenging business conditions, the fair
value declined thereafter. In September, 20X2, when the fair value of an option
was ` 0.90, the Directors repriced the option and this caused the fair value to
increase to ` 1.05. Trading conditions improved in the second half of the year and
by 31st March, 20X3 the fair value of an option was ` 1.25. QA Ltd. decided that
additional cost incurred due to repricing of the options on 30th September, 20X2
should be spread over the remaining vesting period from 30th September, 20X2 to
31st March, 20X4.
The Company has requested you to Pass Journal entries.

FINANCIAL REPORTING 9
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
Question 20
Anara Fertilisers Limited issued 2000 share options to its 10 directors for an
exercise price of INR 100.The directors are required to stay with the company for
next 3 years.
Fair value of the option estimated INR 130
Expected no of Directors to vest the option 8
During the year 2, there was a crisis in the company and Management decided to
cancel the such scheme immediately. It was estimated further as below –
Fair value of option at the time of cancellation was INR 90
There was a compensation which was paid to directors and only 9 directors were
currently in employment. At the time of cancellation of such scheme, it was agreed
to pay an amount of INR 95 per option to each of 9 directors.
Pass Journal entries.

Question 21
P Ltd. granted 400 stock appreciation rights (SAR) each to 75 employees on
1st April 2017 with a fair value ` 200. The terms of the award require the employee
to provide service for four years in order to earn the award. The fair value of each
SAR at each reporting date is as follows:
31st March 2018 ` 210
31st March 2019 ` 220
31st March 2020 ` 215
31st March 2021 ` 218
What would be the difference if at the end of the second year of service (i.e. at
31st March 2019), P Ltd. modifies the terms of the award to require only three
years of service. Pass Journal entries.

FINANCIAL REPORTING 10
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL

CLASSWORK PROBLEMS
WITH SOLUTIONS
Question 22
Indian Inc. issued 995 shares in exchange for purchase of an office building. The
title was transferred in the name of Indian Inc. on Feb 2011 and shares were
issued. Fair value of the office building was INR 2,00,000 and face value of each
share of Indian Inc was INR 100. Pass the journal entries?
Solution:
1 February, 2011 INR
Office Building Dr. 2,00,000
To Share capital (995 x 100) 99,500
To Securities premium (balance) 1,00,500
(Recognition of equity option and cash settlement option)

Question 23
Reliance limited hired a maintenance company for its oil fields. The services will
be settled by issuing 1,000 shares of Reliance. Period for which the service is to
be provided is 1 April 2011 to 1 July 2011 and fair value of the service was
estimated using market value of similar contracts for INR 1,00,000. Nominal value
per share is INR 10.
Record the transactions?
Solution:
Fair value of services 1,00,000
No. of months 3
Monthly expense 33,333.33

30-Apr-2011 INR
Repair & Maintenance Dr. 33,333.33
To Share based payment reserve (equity) 33,333.33
(Recognition of Equity settled SBP using fair value of services rendered)
31-May-2011
Repair & Maintenance Dr. 33,333.33
To Share based payment reserve (equity) 33,333.33
(Recognition of Equity settled SBP using fair value of services rendered)

FINANCIAL REPORTING 11
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
30-June-2011
Repair & Maintenance Dr. 33,333.33
To Share based payment reserve (equity) 33,333.33
(Recognition of Equity settled SBP using fair value of services rendered)
1-July-2011
Share based payment reserve (equity) Dr. 1,00,000
To Equity Shares (1000 x 10) 10,000
To Securities premium (balancing figure) 90,000

FINANCIAL REPORTING 12
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL

HOMEWORK PROBLEMS
Question 1
MINDA issued 11,000 share appreciation rights (SARs) that vest immediately to its
employees on 1st April, 20X0. The SARs will be settled in cash. Using an option
pricing model, at that date it is estimated that the fair value of a SAR is ` 100. SAR
can be exercised any time until 31st March, 20X3. It is expected that out of the
total employees, 94% at the end of period on 31st March, 20X1, 91% at the end of
next year will exercise the option.
Finally, when these were vested i.e. at the end of the 3rd year, only 85% of the
total employees
exercised the option.
Fair value of SAR `
31st March, 20X1 132
31st March, 20X2 139
31st March, 20X3 141
Pass the Journal entries?
Solution:
Period Fair value To be vested Cumulative Expense
Start 100 100% 11,00,000 11,00,000
Period 1 132 94% 13,64,880 2,64,880
Period 2 139 91% 13,91,390 26,510
Period 3 141 85% 13,18,350 (73,040)
13,18,350

Journal Entries
1st April, 20X0
Employee benefits expenses Dr. 11,00,000
To Share based payment liability 11,00,000
(Fair value of the SAR recognised)
31st March, 20X1
Employee benefits expenses Dr. 2,64,880
To Share based payment liability 2,64,880
(Fair value of the SAR re-measured)

FINANCIAL REPORTING 13
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
31st March, 20X2
Employee benefits expenses Dr. 26,510
To Share based payment liability 26,510
(Fair value of the SAR re-measured)
31st March, 20X3
Share based payment liability Dr. 73,040
To Employee benefits expenses 73,040
(Fair value of the SAR reversed)
Share based payment liability Dr. 13,18,350
To Cash 13,18,350
(Settlement of SAR)

Question 2
Golden Era Limited grants 200 shares to each of its 400 employees on 1st January,
2016.The employee should remain in service during the vesting period so as to be
eligible. The shares will vest at the end of the
1st year - If the company’s earnings increase by 12%.
2nd year - If the company’s earnings increase by more than 20% over the two year
period. 3rd year - If the company’s earnings increase by more than 20% over the
three year period. The fair value per share (non-market related) at the grant date
is ` 61. In 2016, earnings increased by 10% and 22 employees left the company. The
company expects that earnings will continue at a similar rate in 2017 and expect
that the shares will vest at the end of the year 2017. The company also expects
that additional 18 employees will leave the organization in the year 2017 and that
360 employees will receive their shares at the end of the year 2017. At the end of
2017 company’s earnings increased by 18% (over the 2 years period). Therefore,
the shares did not vest. Only 16 employees left the organization during 2017.
The company believes that additional 14 employees will leave in 2020 and earnings
will further increase so that the performance target will be achieved in 2018. At
the end of the year 2018, only 9 employees have left the organization. Assume that
the company’s earnings increased to desired level and the performance target has
been met.
You are required to determine the expense as per Ind AS for each year (assumed as
financial year) and pass appropriate journal entries.
Solution:
Since the earnings of the entity is non-market related, hence it will not be
considered in fair value calculation of the shares given. However, the same will be
considered while calculating number of shares to be vested.

FINANCIAL REPORTING 14
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
Calculation of yearly expenses to be charged:
2016 2017 2018
(a) Total employees 400 400 400
(b) Employees left (Actual) (22) (38)* (47)**
(c) Employees expected to leave in the next year (18) (14) -
(d) Year end – No of employees (a-b-c) 360 348 353
(e) Shares per employee 200 200 200
(f) Fair value of a share at the grant date 61 61 61
Conditional increase in earnings 12% 20% 20%
Actual increase in earnings 10% 18% 20%
(g) Vesting period 1/2 2/3 3/3
(h) Expenses (Refer Working Notes) 21,96,000 6,34,400 14,76,200
*22 + 16 = 38
** 22 +16 + 9 = 47

Journal Entries
` `
31st March, 2016
Employee benefits expenses A/c Dr. 5,49,000
To Share based payment reserve (equity) A/c 5,49,000
(Equity settled shared based payment based on
conditional vesting period)
Profit and Loss A/c Dr. 5,49,000
To Employee benefits expenses A/c 5,49,000
(Employee benefits expenses transferred to Profit and
Loss A/c)
31st March, 2017
Employee benefits expenses Dr. 18,05,600
To Share based payment reserve (equity) 18,05,600
(Equity settled shared based payment based on
conditional expected vesting period)
Profit and Loss A/c Dr. 18,05,600
To Employee benefits expenses A/c 18,05,600
(Employee benefits expenses transferred to Profit and
Loss A/c)

FINANCIAL REPORTING 15
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
31st March, 2018
Employee benefits expenses Dr. 8,44,850
To Share based payment reserve (equity) 8,44,850
(Equity settled shared based payment based on
conditional expected vesting period)
Profit and Loss A/c Dr. 8,44,850
To Employee benefits expenses A/c 8,44,850
(Employee benefits expenses transferred to Profit and
Loss A/c)
31st March, 2019
Employee benefits expenses Dr. 11,07,150
To Share based payment reserve (equity) 11,07,150
(Equity settled shared based payment based on
conditional expected vesting period)
Profit and Loss A/c Dr. 11,07,150
To Employee benefits expenses A/c 11,07,150
(Employee benefits expenses transferred to Profit and
Loss A/c)
Share based payment reserve (equity) (353 x 200 x 61) Dr. 43,06,600
To Share Capital 43,06,600
(Share capital Issued)

Working Notes:
(1) Expense for 2016 (Jan to Dec) = No. of employees x Shares per employee x
Fair value of share x Proportionate vesting period
= 360 x 200 x 61 X 1/2
= 21,96,000
Expense recognized in the financial year 2015-2016 = 21,96,000 x 3/12 = 5,49,000

(2) Expense for 2017 (Jan to Dec) = No of employees x Shares per employee x Fair
value of share x Proportionate vesting period) – Expense recognized in year 2016
= [(348 x 200 x 61) x 2/3] – 21,96,000
= 6,34,400
Expense recognized in the financial year 2016-2017 = (21,96,000 x 9/12) +
(6,34,400 x 3/12) = 16,47,000 + 1,58,600 = 18,05,600

FINANCIAL REPORTING 16
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
(3) Expense for 2018 (Jan to Dec) = (No of employees x Shares per employee x
Fair value of share x Proportionate vesting period) – Expense recognized in
year 2016 and 2017
= [(353 x 200 x 61) x 3/3] – (21,96,000 + 6,34,400)
= 14,76,200
Expense recognized in the financial year 2017-2018 = (6,34,400 x 9/12) +
(14,76,200 x 3/12) = 4,75,800 + 3,69,050 = 8,44,850

(4) Expense recognized in the financial year 2018-2019 = (14,76,200 x 9/12)

= 11,07,150.

“Winning dosen’t always mean being first.

Winning means you’re doing better than you’ve done before”.

FINANCIAL REPORTING 17
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL
Notes


FINANCIAL REPORTING 18
ACCOUNTING FOR SHARE BASED
PAYMENTS IND AS 102 / IFRS 2
CA FINAL

CONSOLIDATED FINANCIAL
2 STATEMENTS

COVERAGE:-

Nature of Relationship Ind AS Applicable

Parent – Subsidiary Ind AS 103, Ind AS 110, Ind AS 21(Partly
(Generally* ownership more than 50%) to the extent of Foreign Subsidiary)
Investor – Associates Ind AS 28
(Generally* ownership between 20% to 50% )
Joint Arrangements (Based on Joint Control) Ind AS 111, Ind AS 28
Disclosure of above Ind AS 112
Separate Financial Statement (SFS) Ind AS 27

Separate Financial Statement (SFS)

Financial statement of entity in which it has investment in Subsidiary / Associates /Joint
venture.

Accounting for Investment in subsidiary / Associates / J.V.

(unless held for sale, where it would be accounted as per IND AS 105)

I OR III

At Cost As per Ind AS 109

(Based on fair value)

The option selected by entity should be same for entire category (e.g. for all the
subsidiaries – same, all the associates – same, etc. Subsidiary is one category, Associates
is other category)

Accounting for dividend from subsidiary / associates / J.V.

Parent should recognised dividend when right to receive is established. It should be
credited to P/L account.
(**No bifurcation for pre or post acquisition dividend is required for Accounting in
SFS of parent.)

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CA FINAL
(A) PARENT – SUBSIDIARY
Important Terms:-
(1) Consolidated financial statement: Financial Statement of group viewed as
single entry
(2) Group: Parent and all its subsidiaries.
(3) Parent: Entity which has one or more subsidiary.
(4) Subsidiary: Entity which is controlled by another entity called as parent.
(5) Control:

Control (Principle Based)

I & II & III

Investor has power Investor has Investor has ability to use

over Investee exposure / right to power so as to effect its
variable returns for return from investee
its involvement
Right to take
decisions for Investor is a
relevant activities Principal and not an
agent.

• In normal cases: Ownership more than 50%.

• In complex cases: Need to apply substance over form and use professional
judgment.
• Potential voting rights are to be considered only if substantive in nature (will
be covered in chapter Business Combination).
• Cases of de facto control requires use of professional Judgements (ownership
is less than 50% but still have control.)

Relevant activities are the activities of investee that significantly affect the
investee’s returns.

There may be range of operating and financing activities that would significantly
affect the returns of an investee. Examples of activities related to operating and
financing activities that can be relevant activities include, but not limited to:

FINANCIAL REPORTING 20
CONSOLIDATED FINANCIAL
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CA FINAL

Managing financial
Selling and purchasing Selecting, acquiring or
assets during their life
of goods and services (including upon default) disposing of assets

Establishing operating
Researching and Determining a funding
and capital decisions
developing new structure or obtaining
of the investee,
products or processes funding
including budgets

Appointing, terminating
and remunerating an
investee’s key
management personnel
or service providers

Rights that give power to an investor

Power arises from rights. To have power over an investee, an investor must have existing
rights that give the investor the current ability to direct the relevant activities.

The rights that give an investor power over an investee can differ investee by investee.
Following are some of the examples (not an exhaustive list) of various forms of rights
that, either individually or in combination with other rights, can give power to an
investor:
Form of right Illustration
Voting rights An investor holding majority of the
equity share capital of an investee.
Rights to appoint, reassign or remove An investor having right to appoint
members of an investee’s key management majority of the members of the Board of
personnel who have the ability to direct the Director who have power to take decisions
relevant activities. related to relevant activities.
Rights to appoint or remove another entity Right with an investor to appoint or
that directs the relevant activities. remove an asset manager who takes
decisions related to investments /
divestments by a venture capital fund.
Rights to direct the investee to enter into, Right with an investor to direct the
or veto any changes to, transactions for investee to sell all of its outputs to a group
the benefit of the investor. company of the investor at the price
determined by investor.
Other rights (such as decision-making Right related to relevant activities given to
rights specified in a management contract) a single investor by all other investors
that give the holder the ability to direct through a shareholders’ agreement.
the relevant activities.

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Substantive rights Protective rights
Substantive rights can give the investor Protective rights do not give investor
power over the investee. power over the investee.
Substantive rights relate to the relevant Protective rights relate to protect the
activities of the investee. interest of the party holding those rights
without giving the holder the right over
the relevant activities of the investee.

The effect of substantive and protective rights is summarised below:

Type of rights held Type of rights held Conclusion on

by investor by other parties ‘Power’?

Substantive Protective Investor has power

Other parties have

Protective Substantive
power

Further evaluation
Substantive Substantive
needed

Exemptions from consolidating subsidiary:- NO EXEMPTION.

Exemption for parent from preparing CFS:-

if the following conditions are satisfied :
(1) The parent is wholly owned subsidiary OR
Partially owned subsidiary and its other owner’s are informed and they do not
object for non preparation of CFS.
And
(2) The equity / debt securities of parent is neither listed nor is in the process of
getting listed within India or outside.
And
(3) The intermediate or ultimate parent of the parent prepares CFS as per IND AS and
makes available to public.

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CA FINAL
An investment entity shall
• not consolidate its subsidiaries or apply Ind AS 103 ‘Business Combinations’ when
it obtains control of another entity; and

• measure an investment in a subsidiary at fair value through profit or loss in

accordance with Ind AS 109.

If an investment entity has a subsidiary that is not itself an investment entity and
whose main purpose and activities are providing services related to the
investment entity’s investment activities, it shall consolidate that subsidiary and
apply the requirements of Ind AS 103 to the acquisition of any such subsidiary.

A parent of an investment entity shall consolidate all entities that it controls,

including those controlled through an investment entity subsidiary, unless the
parent itself is an investment entity. This is explained in following diagram form:

Consolidate Investment Entity

Parent of Investment
A and susidiaries controlled
Entity A
through Investment Entity A

Not to prepare consolidated

financial statements and Investment
measure its investments at fair Entity A
value through profit or loss

Investment in Investment in
X Ltd. Y Ltd.

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CONSOLIDATED FINANCIAL
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CA FINAL
CFS will consist of –
(1) Consolidated B/S.
(2) Consolidated P/L As per format provided by
(3) Consolidated Statement of changes in entity Sch.III Division II
(4) Consolidated Cash flows (Ind AS Format)
(5) Notes to above

Note: CFS will be prepared based on uniform Accounting Policies.

When control is achieved at single date

Calculation of Goodwill / Gain on bargain purchase.

(Application of IND AS 103).
Full Goodwill Partial Goodwill
I II
Consideration paid on Date of Acqn. XXX XXX
(+) Non controlling Int. at fair value XXX -
(+) Non controlling Int. at proportionate net assets - XXX
XXX XXX
(-) Fair value of identifiable net assets (XX) (XX)
Goodwill (Gain on bargain purchase) XX / (XX) XX / (XX)

Carve out
If Gain on Bargain Purchase Occurs As per IFRS 3
(can occur in rare cases) Trfd. to P/L A/c

Clear evidence is present No clear evidence

Transfer to capital reserve Directly transfer to

accounting routing through other capital reserve
comprehensive income (OCI)

Calculation of Fair Value Gain / Loss for PPE & IA on DOA

Fair Value on DOA XX
(-) Book Value on DOA XX
Fair Value Gain / (Loss) XX / (XX)

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CONSOLIDATED FINANCIAL
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CA FINAL

Gain (Pre) (Loss) (Pre)

H Ltd. NCI H Ltd. NCI

Cr. COC A/c. Cr. NCI A/c. Cr. COC A/c. Cr. NCI A/c.

Calculation of additional depreciation / savings in depreciation

Depreciation on fair value from DOA to B/S. Dat XX
(-) Actual depreciation charged from DOA to B/S. Date (XX)
Additional Depreciation / (Savings in Depreciation) XX / (XX)

Additional Depreciation POST (Savings)

Less from post P/L of S. Ltd. Addition to post P/L of S. Ltd.

Elimination of unrealised profit/(loss) of sale of Goods/Assets * after acquisition.

Downstream Upstream
H Ltd. H Ltd.

S Ltd. S Ltd.
(1) Reduce unrealised profit from
(1) Reduced unrealised profits from
inventory of H Ltd.
inventory of S Ltd.
(2) Reduce unrealised profits from
(2) Reduced unrealised profits from
post P & L of S Ltd. and then
retained earnings P/L of H Ltd.
distribute balance post P/L to H
(Consolidated P & L)
Ltd. & NCI.

Accounting in CFS when control is achieved in stages (Step acquisition)

20% + 40% = 60%

Eg: H S Ltd.

15% + 10% + 45% = 70%

Eg: H S Ltd.

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Calculation of Goodwill / Gain on bargain purchase
(Application of IND AS 103)
Full Goodwill Partial Goodwill
Consideration Paid XXX XXX
(+) NCI at fair value XX XX
(+) NCI at proportionate net assets XX XX
(+) Fair value of previous equity interest XXX XXX
(-) Fair value of identifiable net assets (XX) (XX)
Goodwill / Gain on bargain purchase XX/(XX) XX/(XX)

Entry from CFS Point of View:-

Goodwill A/c Dr.
Net Identifiable Assets A/c Dr.
Loss on Equity A/c Dr.
(Transferred to P&L A/c)

To Cash/Bank A/c
To NCI A/c
To Gain on bargain purchases A/c
To Investment in equity shares of…..A/c [At carrying value]
To Gain on Equity A/c (Transferred to P&L A/c)

Accounting in CFS for Additional shares acquired / Sale of Stake after control is achieved

Acquisition of additional stake after Sale of stake after control is achieved

control is achieved: but does not lead to loss of control.
(i.e. control is retained after sale)
NCI A/c Dr. Bank A/c Dr.
 Carrying value of NCI before  (consideration received)
 acquisition of additional stake 
 × Stake % Acquired Other Equity A/c Dr.
 NCI holding % before acquisition  (loss on sale)
 of additional stake. 
 

To NCI A/c
Other Equity A/c Dr. Carrying value of
(loss on Acquisition) subsidiary net identifiable Stake %
To Bank A/c (consideration paid) assets including goodwill × sold
in CFS before sale of
To Other Equity A/c (Gain on acquisition)
stake.
To Other Equity A/c
(Gain on sale)
FINANCIAL REPORTING 26
CONSOLIDATED FINANCIAL
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CA FINAL
Notes:
(1) Any gain/loss on other equity A/c will not be transferred to P&L A/c. It would be
presented under “Head” other equity in consolidated Balance Sheet.
(2) In consolidated cash flows such acquisition of additional stake/sale of stake
(control retained) would be presented as cash flow from financial activities.

Sale of shares leading to loss of control

Accounting entry from CFS point of view Calculation of Gain/ Loss on sale
Cash/ Bank A/c Dr. Consideration received XX
(Consideration received)
Add: Carrying Value of NCI on date of XX
Sale
NCI A/c Dr. Add: Fair value of investment XX
(carrying value in CFS before loss of retained (if any)
control)
Investment in S Ltd A/c Dr.
(At fair value, if any interest retained on
sale date) XXX
Loss on Sale A/c Dr. Less: Carrying value of net assets (XX)
of S Ltd. including goodwill
on date of sale.
* To Net Assets of S Ltd A/c
(carrying value in CFS before loss of GAIN/ (LOSS) ON SALE XX/(XX)
control)
To Goodwill A/c
(carrying value in CFS before loss of
control)
To Gain on Sale A/c *
Note: Gain/loss on sale will be transferred to consolidated P&L A/c.

Determining whether an entity is an investment entity

A parent shall determine whether it is an investment entity. An entity is an investment

entity if it fulfils all the following conditions:

Commits to its investor(s)

Obtains funds from Measures and
that its business purpose
one or more investors evaluates the
is to invest funds solely
for providing those performance of
for returns from capital
investor(s) with substantially all of
appreciation,
investment its investments on
investment income, or
management services a fair value basis
both

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In assessing whether an entity meets the definition of investment entity as above, the
entity shall consider whether it has the following typical characteristics of an investment
entity:

More than one Investment More than one investor

Typical characteristics of
an investment entity

Investors are not related parties of Entity has ownership interests in the
the entity form of equity or similar interests

One feature that differentiates an investment entity from other entities is that an
investment entity does not plan to hold its investments indefinitely; it holds them for
a limited period. Because equity investments and non-financial asset investments have
the potential to be held indefinitely, an investment entity shall have an exit strategy
documenting how the entity plans to realise capital appreciation from substantially all
of its equity investments and non-financial asset investments.

IND AS 28 Investment in Associates & Joint Ventures

Associates:- Entity over which Investor has significant influence which is neither
subsidiary nor Joint Venture.
Significant Influence:- Power to Participate in Financial and Operating Decision
Making. Significance Influence is Gained

Statute or Shareholders Ownership Directly or Indirectly

Agreement through Subsidiary of at least 20%
of Voting Rights

Evidence Significant Influence

(1) Representation on Board of Directors
(2) Participation in Policy Making Process
(3) Material Inter-Company Transactions
(4) Sharing of Technical Information, etc.

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Accounting for Investment in Associates

and Joint Ventures

Separate Financial Consolidated Financial

Statement (IND AS 27) Statements

At Cost OR (1) Equity Method to be followed

As per IND AS 109 (Refer format).
(2) Goodwill not to be recognised
separately.
(3) Intra Balances not to be eliminated.
(4) Unrealized Profits to be eliminated
to the extent of Investor Share.

Format:- Investment in Associates/ Joint Ventures

Particulars ` `
Share in Fair Value of Net Identifiable Assets on D.O.A. XXX
Add: Goodwill XX
XXX
Less: Pre Acquisition Dividends (XX)
Add: Share in Post Profits:-
Retained Earnings/ Profit & Loss. XX
O.C.I. XX
Less: Unrealized Profits (If any) (XX)
XXX
Other Important Points:
(1) In case of Capital reserve, we should directly credit to Other Equity.
(2) Investments in Associates / Joint Venture should be presented in Consolidated
Balance Sheet under the Head Non Current Assets but not under Financial Assets.
(3) Exemption of Equity Method is possible if:-
(a) Investor is Parent and is exempted from preparation of CFS under IND AS.
(b) Investment is held by or is held Indirectly through Venture Capital organisation
or Mutual Funds etc. and entity may elect to measure Investment at Fair Value
Through Profit & Loss account. If the entity makes that election, the entity
shall apply the equity method to any remaining portion of its investment in an
associate that is not held through a venture capital organisation.

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CA FINAL

IND AS 111 Joint Arrangements

Joint Arrangements (JA):- Contractual

Arrangement where in Two or more Parties
Has Joint Control.
Joint Control:- Contractual sharing of
control exist when Decision Related to
Relevant Activities requires unanimous
consent of the Parties Controlling it Jointly.

Identify whether Outside the scope

No
Joint Control Exists of IND AS

Yes

Identify the Classification of Joint Arrangements?

Joint Venture (JV)

Joint Operation (JO)
(In the absence of information if
Particulars (No Separate Legal
separate legal entity is created,
Entity, it is J.O.)
then it is J.V.)
Parties having joint Joint Operator Joint Venturer
control are called as
Main Point of Joint Operator has right Joint Venturer has right in Net
difference in assetand obligation for Assets of the J.V.
Liability of J.O.
Accounting Each Joint Operator will Joint Venturer will account in
account for its share of CFS using Equity Method provided by
Asset, Liability, Income and IND AS 28
Expenses in SFS.
No separate adjustment
for CFS.

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Even Creation of Separate Legal Entity may be treated as J.O.

Does Legal form Provides Parties Right in Asset

and Obligation for Liability relating to J.A.

No Yes

Does Legal form Provides Parties Right in Asset

and Obligation for Liability relating to J.A.

Treat it as
No Yes Joint
Operation
J.A. is Designed in such a way that its activity (J.O.)
Provide the Parties with output & so it depends
on Parties on Regular basis for Settling the
Liabilities of J.A.

No Yes

Treat as Joint Venture (J.V.)

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CA FINAL

CLASSWORK PROBLEMS

Question 1
H Ltd. acquired 3,000 shares in S Ltd. at a cost of ` 4,80,000 on 1st November,
2011. The capital of S Ltd. consisted of 5,000 shares of ` 100 each fully paid. The
Statement of Profit and Loss of this company for year ended 31st March 2012
showed an opening balance of ` 1,25,000 and profit for the year of ` 3,00,000. At
the end of the year, it declared and paid a dividend of 40%. Record the entry in the
books of H Ltd. in respect of the dividend.

Question 2
Following is the structure of a group headed by Company X:
Company X
100%
Company A

100% 100%

Company B Company C

Company X is a listed entity in India and prepares consolidated financial statements

as per the requirements of Ind AS. Company A is an unlisted entity and it is not in
the process of listing any of its instruments in public market. Company X does not
object to Company A not preparing consolidated financial statements. Whether
Company A is required to prepare consolidated financial statements as per the
requirements of Ind AS 110?

Scenario B:
Assume the same facts as per Scenario A except, Company X is a foreign entity and
is listed in stock exchange of a foreign country and it prepares its financial
statements as per the generally accepted accounting principles (GAAP) applicable
to that country. Will your answer be different in this case?

Scenario C:
Assume the same facts as per Scenario A except, 100% of the investment in
Company A is held by Mr. X (an individual) instead of Company X. Will your answer
be different in this case?

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CA FINAL
Question 3
Ram Ltd. acquires Shyam Ltd. by purchasing 60% of its equity for ` 15 lakh in cash.
The fair value of non-controlling interest is determined as `10 lakh. The net
aggregate value of identifiable assets and liabilities, as measured in accordance
with Ind AS 103 is determined as ` 5 lakh.

How much goodwill is recognized based on two measurement bases of non-

controlling interest (NCI)?

Question 4
Seeta Ltd. acquires Geeta Ltd. by purchasing 70% of its equity for ` 15 lakh in cash.
The fair value of NCI is determined as ` 6.9 lakh. Management have elected to
adopt full goodwill method and to measure NCI at fair value. The net aggregate
value of the identifiable assets and liabilities, as measured in accordance with the
standard is determined as ` 22 lakh. (Tax consequences being ignored)?

Question 5
Continuing the facts as stated in Q.5., except that Seeta Ltd. chooses to measure
NCI using a proportionate share method for this business combination. (Tax
consequences have been ignored)?

Question 6
Raja Ltd. purchased 60% shares of Ram Ltd. paying ` 525 lakh. Number of issued
capital of Ram Ltd. is 1 lakh. Fair value of identifiable assets of Ram Ltd. is ` 640
lakh and that of liabilities is ` 50 lakh. As on the date of acquisition, market price
per share of Ram Ltd. is ` 775. Find out the value of goodwill?

Question 7
Entity D has a 40% interest in entity E. The carrying value of the equity interest,
which has been accounted for as an associate in accordance with Ind AS 28 is INR
` 40 lakh. Entity D purchases the remaining 60% interest in entity E for INR 600 lakh
in cash. The fair value of the 40% previously held equity interest is determined to
be INR 400 lakh, the net aggregate value of the identifiable assets and liabilities
measured in accordance with Ind AS 103 is determined to be identifiable INR 880
lakh. The tax consequences have been ignored. How does entity D account for the
business combination?

Question 8
A Ltd. acquired 70% of equity shares of B Ltd. on 1.04.2011 at cost of ` 10,00,000
when B Ltd. had an equity share capital of ` 10,00,000 and other equity of
` 80,000. In the four consecutive years B Ltd. fared badly and suffered losses of
FINANCIAL REPORTING 33
CONSOLIDATED FINANCIAL
STATEMENTS
CA FINAL
` 2,50,000, ` 4,00,000, ` 5,00,000 and ` 1,20,000 respectively. Thereafter in 2015-
2016, B Ltd. experienced turnaround and registered an annual profit of ` 50,000. In
the next two years i.e. 2016-2017 and 2017- 2018, B Ltd. recorded annual profits of
` 1,00,000 and ` 1,50,000 respectively. Show the non-controlling interests and cost
of control at the end of each year for the purpose of consolidation under Ind AS 110.
Assume that the assets are at fair value.

Question 9
From the following data, determine in each case:
(1) Non-controlling interest at the date of acquisition and at the date of
consolidation using proportionate share method.
(2) Goodwill or Gain on bargain purchase.
(3) Amount of holding company’s profit in the consolidated Balance Sheet
assuming holding company’s own retained earnings to be ` 2,00,000 in each
case.

Date of Acquisition Consolidation date

% of 1.04.2011 31.03.2012
Subsidiary
Case shares Cost Retained Share Retained
company Share
owned earnings Capital earnings
Capital[A]
[B] [A] [B]
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 30,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 56,000

Question 10
Given below are Balance Sheet of P Ltd and Q Ltd as on 31.3.2011: (` in lakhs)

Balance Sheets P Ltd. Q Ltd.

Assets
Non-current Assets
Property Plant Equipment 1,07,000 44,000
Financial Assets:
Non-Current Investments 5,000 1,000
Loans 10,000
Current Assets

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CA FINAL
Inventories 20,000 10,000
Financial Assets:
Trade Receivables 8,000 10,000
Cash and Cash Equivalents 38,000 1,000
Total Assets 1,88,000 66,000
Equity and Liabilities
Shareholders Fund
Share Capital 20,000 10,000
Other equity 1,20,000 40,000
Non-current Liabilities
Financial liabilities: Borrowings 30,000 10,000
Deferred tax liabilities 5,000 1,000
Long term provisions 5,000 1,000
Current Liabilities
Financial liabilities:
Trade Payables 6,000 2,000
Short term Provisions 2,000 2,000
Total Equity & Liabilities 1,88,000 66,000
Notes to Financial Statements P ltd Q ltd
Reserve & Surplus
General Reserve 1,00,000 30,000
Retained earnings 20,000 10,000
1,20,000 40,000
Inventories
Raw Material 10,000 5,000
Finished Goods 10,000 5,000
20,000 10,000

On 1.4.2011, P Ltd acquired 70% of equity shares (700 lakhs out of 1000 lakhs
shares) of Q Ltd. at ` 36,000 lakhs. The company has adopted an accounting policy
to measure Non-controlling interest at fair value (quoted market price) applying
Ind AS 103. Accordingly, the company computed full goodwill on the date of
acquisition. Shares of both the companies are of face value ` 10 each. Market price
per share of Q Ltd. as on 1.4.2011 is INR 55. Entire long term borrowings of Q Ltd.
is from P Ltd. The fair value of net identifiable assets is at ` 50,000 lakhs. Prepare
consolidated balance sheet (statement of changes in equity not required).

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CA FINAL
Question 11
A Ltd., a parent company sold goods costing ` 200 lakh to its 80% subsidiary B Ltd.
at `240 lakh 50% of these goods are lying at its stock. B Ltd. has measured this
inventory at cost i.e. at ` 120 lakh Show necessary adjustment in the consolidated
financial statement (CFS). Assume 30% tax rate.

Question 12
Ram Ltd., a parent company purchased goods costing ` 100 lakh from its 80%
subsidiary Shyam Ltd. at ` 120 lakh. 50% of these goods are lying at the go down.
Ram Ltd. has measured this inventory at cost i.e. at ` 60 lakh. Show the necessary
adjustment in the consolidated financial statements (CFS). Assume 30% tax rate.

Question 13
Prepare the consolidate Balance Sheet as on March 31, 2011 of group of companies
A Ltd., B Ltd. and C Ltd. Their summarized balance sheets on that date are given
below:
A Ltd. B Ltd. C Ltd.
Equity & Liabilities
` ` `
Share Capital (share of `100 each) 1,25,000 1,00,000 60,000
Reserves 18,000 10,000 7,200
Retained Earnings 16,000 4,000 5,000
Trade payable 7,000 3,000 -
Bills payable
A Ltd. - 7,000 -
C Ltd. 3,300 - -
Total 1,69,300 1,24,000 72,200
Assets
Property Plant Equipment 28,000 55,000 37,400
Investment in shares
B Ltd. 85,000 - -
C Ltd. - 53,000 -
Inventory 22,000 6,000 -
Bills Receivables 8,000 - 3,300
Trade Receivables 26,300 10,000 31,500
Total 1,69,300 1,24,000 72,200

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Other information:
(i) A Ltd. holds 750 shares in B Ltd. and B Ltd. holds 400 shares in C Ltd. These
holdings were acquired on 30th September, 2010
(ii) On 1st April, 2010 the following balances stood in the books of B Ltd. and C Ltd.
B Ltd. ` C Ltd. `
Reserves 8,000 6,000
Retained Earnings 1,000 1,000
(iii) C Ltd. sold goods costing ` 2,500 to B Ltd. for ` 3,100. These goods still
remain unsold. The company has adopted an accounting policy to measure
Non-controlling interest at fair value (quoted market price) applying Ind AS
103. Assume market price per share of B & C limited is same as face value.

Question 14
A ltd. acquired 70% of shares of B ltd. On 1.4.2010 when fair value of net assets of
B Ltd. was ` 200 lakh. Individual and consolidated balance sheets as on 31.3.2011
are as follows:
(` in lakhs)
Assets A B Group
Goodwill 10
PPE 627 200 827
Financial Assets:
Investments 150
Cash 200 30 230
Other Current Assets 23 70 93
1,000 300 1,160
Equity and Liabilities
Share Capital 200 100 200
Other Equity 800 200 870
Non- controlling interest 90
1,000 300 1,160
Notes:
Profit for the year 2010-11 100
As on 1.4.2010
Purchase Consideration 150
30% Non – controlling Interest 60
210
Fair Value of net assets 200
Goodwill 10
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A ltd. acquired another 10% stake in B ltd on 1.4.2011 at ` 32 lakh. Show the
individual and consolidated balance sheet of the group immediately after the
change in non-controlling interest.

Question 15
Amla Ltd. purchase a 100% subsidiary for ` 10,00,000 at the end of 2011 when the
fair value of the subsidiary’s Lal Ltd. net asset was ` 8,00,000.
The parent sold 40% of its investment in the subsidiary in March 2014 to outside
investors for ` 9,00,000. The parent still maintains a 60% controlling interest in the
subsidiary. The carrying value of the subsidiary’s net assets is ` 18,00,000
(including net assets of ` 16,00,000 & goodwill of ` 2,00,000).
Calculate gain or loss on sale of interest in subsidiary as on 31st March 2014.

Question 16
In March 2011 a group had a 60% interest in subsidiary with share capital of 50,000
ordinary shares. The carrying amount of goodwill is ` 20,000 at March 2011
calculated using the partial goodwill method. On 31 March 2011, an option held by
the minority shareholders exercised the option to subscribe for a further 25,000
ordinary shares in the subsidiary at ` 12 per share, raising ` 3,00,000. The net
assets of the subsidiary in the consolidated balance sheet prior to the option’s
exercise were ` 4,50,000, excluding goodwill.
Calculate gain or loss on loss of interest in subsidiary due to option exercised by
minority shareholder.

Question 17
A parent purchased an 80% interest in a subsidiary for ` 1,60,000 on 1 April 2011
when the fair value of the subsidiary’s net assets was ` 1,75,000. Goodwill of
` 20,000 arose on consolidation under the partial goodwill method. An impairment
of goodwill of ` 8,000 was charged in the consolidated financial statements to
31 March 2013. No other impairment charges have been recorded. The parent sold
its investment in the subsidiary on 31 March 2014 for ` 2,00,000. The book value of
the subsidiary’s net assets in the consolidated financial statements on the date of
the sale was ` 2,25,000 (not including goodwill of ` 12,000). When the subsidiary
met the criteria to be classified as held for sale under Ind AS 105, no write down
was required because the expected fair value less cost to sell (of 100% of the
subsidiary) was greater than the carrying value. The parent carried the investment
in the subsidiary at cost, as permitted by Ind AS 27.
Calculate gain or loss on disposal of subsidiary in parent’s separate and
consolidated financial statements as on 31st March 2014.

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Question 18
AT Ltd. purchased a 100% subsidiary for ` 50,00,000 on 31st March 2011 when the
fair value of the BT Ltd. whose net assets was ` 40,00,000. Therefore, goodwill is
` 10,00,000. The AT Ltd. sold 60% of its investment in BT Ltd. on 31st March 2013
for ` 67,50,000, leaving the AT Ltd. with 40% and significant influence. At the date
of disposal, the carrying value of net assets of BT Ltd., excluding goodwill is
` 80,00,000. Assume the fair value of the investment in associate BT Ltd. retained
is proportionate to the fair value of the 60% sold, that is ` 45,00,000.

Calculate gain or loss on sale of proportion of BT Ltd. in AT Ltd’s separate and

consolidated financial statements as on 31st March 2013.

Question 19
The facts of this question is same as Q.19, except that the group AT Ltd. disposes
of a 90% interest for ` 85, 50,000, leaving the AT Ltd. with a 10% investment. The
fair value of the remaining interest is ` 9,50,000 (assumed for simplicity to be pro
rata to the fair value of the 90% sold).
Calculate gain or loss on sale of proportion of BT Ltd. in AT Ltd.’s separate and
consolidated financial statements as on 31st March 2011.

Question 20
Entity A sells a 30% interest in its wholly-owned subsidiary to outside investors in an
arm’s length transaction for ` 500 crore in cash and retains a 70% controlling
interest in the subsidiary. At the time of the sale, the carrying value of the
subsidiary’s net assets in the consolidated financial statements of Entity A is
` 1,300 crore, additionally, there is a goodwill of ` 200 crore that arose on the
subsidiary’s acquisition. How should Entity A account for the transaction?

Question 21
B Ltd acquired a 30% interest in D Ltd and achieved significant influence. The cost
of the investment was ` 2,50,000. The associate has net assets of ` 5,00,000 at the
date of acquisition. The fair value of those net assets is `6,00,000 as a fair value of
property, plant & equipment is `1,00,000 higher than its book value. This property,
plant & equipment has a remaining useful life of 10 years.
After acquisition D Ltd recognize profit after tax of ` 1,00,000 and paid a dividend
out of these profits of ` 9,000. D Ltd has also recognized exchange losses of
` 20,000 directly in other comprehensive income.
Calculate B Ltd’s interest in D Ltd at the end of the year.

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Question 22
DEF Ltd. acquired 100% ordinary shares of `100 each of XYZ Ltd. on 1st October
2011. On March 31, 2012 the summarised Balance Sheets of the two companies
were as given below:
DEF Ltd. XYZ Ltd.
Assets
Property Plant Equipment
Land & Buildings 15,00,000 18,00.000
Plant & Machinery 24,00,000 13,50,000
Investment in XYZ Ltd. 34,00,000 -
Inventory 12,00,000 3,64,000
Financial Assets
Trade Receivable 5,98,000 4,00,000
Cash 1,45,000 80,000
Total 92,43,000 39,94,000
Equities & Liabilities
Equity Capital (Shares of ` 100 each fully paid) 50,00,000 20,00,000
Other Equity
Other reserves(on 01.04.2011) 24,00,000 10,00,000
Retained Earnings 5,72,000 8,20,000
Financial Liabilities
Bank Overdraft 8,00,000 -
Trade Payable 4,71,000 1,74,000
Total 92,43,000 39,94,000

The retained earnings of XYZ Ltd. showed a credit balance of ` 3,00,000 on

1st April 2011 out of which a dividend of 10% was paid on 1st November; DEF Ltd.
has credited the dividend received to retained earnings account; Fair Value of P& M
as on 1st October 2011 was 20,00,000. The rate of depreciation on plant &
machinery is 10%.
Following are the changes in Fair value as per respective IND AS from Book value as
on 1st October 2011 which is to be considered while consolidating the Balance
Sheets.
Liabilities Amount Assets Amount
Trade Payables 1,00,000 Land & Buildings 10,00,000
Inventories 1,50,000
Prepare consolidated Balance Sheet as on March 31, 2012.

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Question 23
Ram Ltd. acquired 60% ordinary shares of ` 100 each of Krishan Ltd. on 1st October
2011. On March 31, 2012 the summarised Balance Sheets of the two companies
were as given below:
Ram Ltd. Krishan Ltd.
Assets
Property, Plant Equipment
Land & Buildings 3,00,000 3.60,000
Plant & Machinery 4,80,000 2,70,000
Investment in Krishan Ltd. 8,00,000 -
Inventory 2,40,000 72,800
Financial Assets
Trade Receivable 1,19,600 80.000
Cash 29,000 16,000
Total 19,68,600 7,98,800
Equities & Liabilities
Equity Capital (Shares of ` 100 each fully paid) 10,00,000 4,00,000
Other Equity
Other Reserves (on 01.04.2011) 6,00,000 2,00,000
Retained earnings 1,14,400 1,64,000
Financial Liabilities
Bank Overdraft 1,60,000 --
Trade Payable 94,200 34,800
Total 19,68,600 7,98,800

The Retained earnings of Krishan Ltd. showed a credit balance of ` 60,000 on

1st April 2011 out of which a dividend of 10% was paid on 1st November; Ram Ltd.
has credited the dividend received to its Retained earnings; Fair Value of P& M as on
1st October 2011 was ` 4,00,000; The rate of depreciation on plant & machinery is 10%.
Following are the changes in Fair value as per respective IND AS from book value as
on 1s’ October 2011 which is to be considered while consolidating the Balance
Sheets.
Liabilities Amount Assets Amount
Trade Payables 20,000 Land & Buildings 2,00,000
Inventories 30,000
Prepare consolidated Balance Sheet as on March 31, 2012.

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Question 24
On 31 March 2012, Blue Heavens Ltd. acquired 100% ordinary shares carrying voting
rights of Orange County Ltd. for ` 6,000 lakh in cash and it controlled Orange
County Ltd. from that date. The acquisition-date statements of financial position of
Blue Heavens Ltd. and Orange County Ltd. and the fair values of the assets and
liabilities recognised on Orange County Ltd. statement of financial position were:
Blue Heavens Orange County
Orange County
Ltd. Carrying Carrying
Ltd. Fair Value
Amount ` (lakh) Amount ` (lakh)
Assets Non-current assets
Building and other PPE 7,000 3,000 3,300
Investment in Orange 6,000 -- --
County Ltd.
Current assets
Inventories 700 500 600
Trade receivables 300 250 250
Cash 1,500 700 700
Total assets 15,500 4,450
Equity and liabilities
Equity
Share capital 5,000 2,000
Retained earnings 10,200 2,300
Current liabilities
Trade payables 300 150 150
Total liabilities and equity 15,500 4,450
Prepare the Consolidated Balance Sheet as on March 31, 2012 of group of entities
Blue Heavens Ltd. and Orange County Ltd.

Question 25
The facts are the same as in Question 24 above. However, Blue Heavens Ltd.
acquires only 75% of the ordinary shares, to which voting rights are attached of
Orange County Ltd. Blue Heavens Ltd. pays ` 4,500 lakhs for the shares. Prepare
the Consolidated Balance Sheet as on March 31, 2012 of group of entities Blue
Heavens Ltd. and Orange County Ltd.

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Question 26
Facts are same as in Question 24 & 25, Blue Heavens Ltd. acquires 75% of Orange
County Ltd. Blue Heavens Ltd. pays ` 4,500 lakhs for the shares. At 31 March 2013,
i.e. one year after Blue Heavens Ltd. acquired Orange County Ltd., the individual
statements of financial position and statements of comprehensive income of Blue
Heavens Ltd. and Orange County Ltd. are:
Blue HeavensLtd. Orange Carrying
Carrying Amount ` (lakh) Amount ` (lakh)
Assets
Non-current assets
Building and other PPE 6,500 2,750
Investment in Orange County Ltd. 4,500
11,000 2,750
Current assets
Inventories 800 550
Trade receivables 380 300
Cash 4,170 1,420
5,350 2,270
Total assets 16,530 5,020
Equity and liabilities
Equity
Share capital 5,000 2,000
Retained earnings 11,000 2,850
16,000 4,850
Current liabilities
Trade payables 350 170
350 170
Total liabilities and equity 16,350 5,020

Statements of comprehensive income for the year ended 31 March 2013:

Blue Heavens Ltd.
Orange Carrying
Carrying Amount
Amount ` (lakh)
` (lakh)
Revenue 3,000 1,900
Cost of sales (1,800) (1,000)
Gross profit 1,200 900
Administrative expenses (400) (9,350)
Profit for the year 800 550

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Blue Heavens Ltd. is unable to make a reliable estimate of the useful life of
goodwill and consequently, the useful life is presumed to be ten years. Blue
Heavens Ltd. uses the straight- line amortisation method for goodwill. The fair
value adjustment to buildings and other PPE is in respect of a building; all buildings
have an estimated remaining useful life of 20 years from 31 March 2012 and
estimated residual values of zero.
Blue Heavens Ltd. uses the straight-line method for depreciation of PPE. All the
inventory held by Orange County Ltd. at 31 March 2012 was sold during 2013.
Prepare the Consolidated Balance Sheet as on March 31, 2013 of group of entities
Blue Heavens Ltd. and Orange County Ltd.

Question 27
P Pvt. Ltd. has a number of wholly-owned subsidiaries including S Pvt. Ltd. at
31stMarch 2012. P Pvt. Ltd. consolidated statement of financial position and the
group carrying amount of S Pvt. Ltd. assets and liabilities (i.e. the amount included
in that consolidated statement of financial position in respect of S Pvt. Ltd. assets
and liabilities) at 31st March 2012 are as follows:
Group carrying amount
Consolidated
Particulars of S Pvt. Ltd. asset and
(`In millions)
liabilities Ltd. (` In millions)
Assets
Non-Current Assets
Goodwill 380 180
Buildings 3,240 1,340
Current Assets
Inventories 140 40
Trade Receivables 1,700 900
Cash 3,100 1,000
Total Assets 8,560 3,460
Equities & Liabilities
Equity
Share Capital 1,600
Other Equity
Retained Earnings 4,260
Current liabilities
Trade Payables 2,700 900
Total Equity & Liabilities 8,560 900
Prepare consolidated Balance Sheet after disposal as on 31st March, 2012 when P Pvt.
Ltd. group sold 100% shares of S Pvt. Ltd. to independent party for ` 3,000 millions.

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Question 28
Reliance Ltd. has a number of wholly-owned subsidiaries including Reliance Jio
Infocomm Ltd. at 31stMarch 2012.

Reliance Ltd. consolidated statement of financial position and the group carrying
amount of Reliance Jio Infocomm Ltd. assets and liabilities (i.e. the amount
included in that consolidated statement of financial position in respect of Reliance
Jio Infocomm Ltd. assets and liabilities) at 31stMarch 2012 are as follows:

Group carrying amount of

Consolidated Reliance Jio infocomm
Particulars
(`In millions) Ltd. asset and liabilitie
Ltd. (` In millions) *
Assets
Non-current Assets
Goodwill 190 90
Buildings 1,620 670
Current Assets
Inventories 70 20
Trade Receivables 850 450
Cash 1,550 500
Total Assets 4,280 1,730
Equities & Liabilities
Equity
Share Capital 800
Other Equity
Retained Earnings 2,130
Current liabilities 2,930
Trade Payables 1,350 450
Total Equity & Liabilities 4,280 450

Prepare consolidated Balance Sheet after disposal as on 31st March. 2012 when
Reliance Ltd. group sold 90% shares of Reliance Jio Infocomm Ltd. to independent
party for ` 1000 (` In millions).

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Question 29
The following are the Balance Sheets of H Ltd. and S Ltd. as on 31st March, 2012:
Liabilities H Ltd.` S Ltd.` Assets H Ltd.` S Ltd.`
Share Capital Fixed Assets 4,80,000 2,50,000
Shares of ` 100/- 10,00,000 4,00,000 Investments in 5,00,000 --
each S Ltd.
Reserve & Surplus Current Assets 7,20,000 7,50,000
General Reserve 1,00,000 2,50,000
Profit & Loss A/c 1,60,000 1,50,000
Current Liabilities 4,40,000 2,00,000
17,00,000 10,00,000 17,00,000 10,00,000
The following further information is furnished:
(1) H Limited acquired 3000 shares in S Limited on 1.7.2011. The Reserves and
Surplus position of S Limited as on 1.4.2011 was as under:
(a) General Reserve ` 2,50,000
(b) P & L A/c. Bal. ` 1,20,000
(2) On 30.9.2011, S Limited declared a dividend out of its pre-acquisition profits
of 25% on its then share capital. H Limited credited the dividend to its Profit
and Loss Account.
(3) H Limited owed S Limited ` 50,000 for purchase of stock from S Limited. The
entire stock is held by H Limited on 31.3.2012. S Limited made a profit of 25%
on cost.
(4) H Limited transferred a machinery to S Limited for ` 1,00,000. The book value
of the machinery to H Ltd. was `80,000 on transfer date 01.01.2012 &
depreciation rate @ 10% p.a.
Prepare a consolidated Balance Sheet as on 31.3.2012.

Question 30
P Ltd. owns 80% of S and 40% of J and 40% of A. J is jointly controlled entity and A
is an associate. Balance Sheet of four companies as on 31.03.2012 are:
P Ltd. S J A
(` in lakhs)
Investment in S 800 ---- ---- ----
Investment in J 600 ---- ---- ----
Investment in A 600 ---- ---- ----
Fixed assets 1,000 800 1,400 1,000
Current assets 2,200 3,300 3,250 3,650
Total 5,200 4,100 4,650 4,650
Liabilities :
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Share capital Re. 1
Equity share 1,000 400 800 800
Retained earnings 4,000 3,400 3,600 3,600
Creditors 200 300 250 250
Total 5,200 4,100 4,650 4,650

P Ltd. acquired shares in ‘S’ many years ago when ‘S’ retained earnings were ` 520
lakhs. P Ltd. acquired its shares in ‘J’ at the beginning of the year when ‘J’
retained earnings were `500 lakhs. P Ltd. acquired its shares in ‘A’ on 01.04.08
when ‘A’ retained earnings were ` 400 lakhs.
The balance of goodwill relating to S has been fully impaired.
Prepare the Consolidated Balance Sheet of P Ltd. as on 31.03.2012.

Question 31
H Ltd., is an Indian company manufacturing and selling watches. On 30.9.2011, it
acquired 60% of Equity Share Capital of S Ltd. for USD 2000/-. Also, in November
2011, it made loan of USD 1,000/- to S Ltd repayable after 5 years. Given below are
the Balance Sheets of H Ltd., and S Ltd., as at 31.3.2012.
Balance Sheet of H Ltd. as at 31.3.2012
Liabilities ` Assets `
Equity Capital 10,00,000 Fixed Assets 12,00,000
Reserve & Surplus 5,22,000 Loan to S Ltd. 42,000
Long - term debt 2,00,000 Investment in S Ltd. 80,000
Current liabilities 1,00,000 Current Assets 5,00,000
18,22,000 18,22,000

Balance Sheet of S Ltd. as at 31.3.2012

Liabilities (USD) Assets (USD)
Equity Capital 1,200 Fixed Assets 1,800
Reserve & Surplus 300 Current Assets 1,200
Current Liabilities 500
Loan from H Ltd., 1,000
3,000 3,000
S Ltd., is a limited liability company registered in the U.S.A. and is engaged in the
business of software development. Included in the fixed assets of H Ltd. is one
exercise machine for use by its executives. The machine was imported on
30.9.2011 from Italy for USD 500 by raising loan from BANCA ITALY, the same being
outstanding still and included in its long - term debt.

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The company has the policy of recording all foreign currency transactions at spot
rate on the date of transaction. No year end translation of monetary items at
closing rate were made by H Ltd. S Ltd.’s reserve and surplus balance as on
31.3.2011 was USD 100/-. The spot as on 31.3.2012 is ` 50 to 1 USD rate on
31.09.2011 is ` 40, average rate is ` 45.

You are required to prepare consolidated Balance Sheet of H Ltd. and its subsidiary
S Ltd. as at 31.3.2012.

Question 32
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.

Question 33
Functional currency of parent P is EURO while the functional currency of its
subsidiary S is USD. P sells inventory to S and a transaction for the same was made
for USD 300 during the year. At the year end, a balance of the same amount is
outstanding as receivable from S.
It has been observed that such balance amount has been continuing as receivable
from S year on year and even though the payments in respect of these balances are
expected to be received in the foreseeable future but if we look at the year-end
then we see this balance as outstanding every year.
In addition to the trading balances between P and S, P has lent an amount of USD
500 to S that is not expected to be repaid in the foreseeable future. Should the
exchange difference, if any, be recognised in the profit and loss?

Question 34
M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical
companies and non-pharmaceutical companies. It has a wholly owned subsidiary,
G Ltd, which is engaged in the business of pharmaceuticals. G Ltd purchases the
pharmaceutical bottles from its parent company. The demand of G Ltd is very high
and the operations of M Ltd are very large and hence to cater to its shortfall, G Ltd
also purchases the bottles from other companies. Purchases are made at the
competitive prices.

M Ltd sold pharmaceuticals bottles to G Ltd for Euro 12 lacs on 1st February, 20X1.
The cost of these bottles was ` 830 lacs in the books of M Ltd at the time of sale.
At the year-end i.e. 31st March, 20X1, all these bottles were lying as closing stock
with G Ltd.
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Euro is the functional currency of G Ltd. while Indian Rupee is the functional
currency of M Ltd. Following additional information is available:
Exchange rate on 1st February, 20X1 1 Euro = ` 83

Provide the accounting treatment for the above in books of M Ltd. and G Ltd. Also
show its impact on consolidated financial statements.

Question 35
The draft Balance Sheet of three companies W, H, O as at 31.3.2010 is as under:
(Rupees in Thousands)
Assets W H O
Fixed assets 697 648 349
Investments:
1,60,000 Shares in H 562 ---- ----
80,000 Shares in O 184 ---- ----
Cash at Bank 101 95 80
Trade receivables 386 321 251
Inventory 495 389 287
Total 2,425 1,453 967
Liabilities W H O
Share Capital (Nominal value Re. 1 per shares) 600 200 200
Reserves 1,050 850 478
Trade Payable 375 253 189
Debentures 400 150 100
Total 2,425 1,453 967
You are given the following information:
(a) W purchased the shares in H on 13.10.2005 when the balance in reserves was
` 500 thousands.
(b) The shares in O were purchased on 11.5.2005 when the balance in reserves
was ` 242 thousands.
(c) The following dividend have been proposed but not accounted for before the
accounting year end:
W ` 65 thousand
H ` 30 thousand
O ` 15 thousand
(d) Included in inventory figure of O is inventory valued at ` 20 thousands which
had been purchased from W at cost plus 25%.
(e) Goodwill in respect of the acquisition of H has been fully impaired
(f) Included in trader payables of W is ` 18 thousands to O, which is included in
trader receivables of O.
Prepare Consolidated Balance Sheet of was at 31.3.2010.
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Question 36
Prepare the consolidated Balance Sheet as on 31st March, 20X2 of a group of
companies comprising P Limited, S Limited and SS Limited. Their balance sheets on
that date are given below:
P Ltd. S Ltd. SS Ltd.
Assets
Non-Current Assets 320
Property, Plant and Equipment 360 300
Investment : 340
32 lakhs shares in S Ltd.
24 Lakhs shares in SS Ltd. 280
Current Assets 220
Inventories 70 50
Financial Assets 260
Trade Receivables 72 100 220
Bills Receivable 228 - 30
Cash in hand and at Bank 40 40
1,440 850 640
Equity and Liabilities
Shareholder's Equity
Share capital (` 10 per Share) 600 400 320
Other Equity
Reserves
Retained earnings 180 100 80
Current Liabilities 160 50 60
Financial Liabilities
Trade Payables 470 230 180
Bills Payable
P Ltd. 70
SS Ltd. 30
1,440 850 640
The following additional information is available:
(i) P Ltd. holds 80% shares in S Ltd. and S Ltd. holds 75% shares in SS Ltd. Their
holdings were acquired on 30th September, 20X1.

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(ii) The business activities of all the companies are not seasonal in nature and
therefore, it can be assumed that profits are earned evenly throughout the
year.
(iii) On 1st April, 20X1 the following balances stood in the books of S Limited and
SS Limited.
` in lakhs
S Limited SS Limited
Reserves 80 60
Retained earnings 20 30

(iv) ` 10 lakhs included in the inventory figure of S Limited, is inventory which has
been purchased from SS Limited at cost plus 25%.
(v) The parent company has adopted an accounting policy to measure non-
controlling interest at fair value (quoted market price) applying Ind AS 103.
Assume market prices of S Limited and SS Limited are the same as respective
face values.

Question 37
Airtel Telecommunications Ltd. owns 100% share capital of Airtel Infrastructures
Pvt. Ltd. On 1 April 2011 Airtel Telecommunications Ltd. acquired a building from
Airtel Infrastructures Pvt. Ltd., for ` 11,00,000 that the group plans to use as its
new headquarters office.
Airtel Infrastructures Pvt. Ltd. had purchased the building from a third party on
1 April 2010 for ` 10,25,000. At that time the building was assessed to have a
useful life of 21 years and a residual value of ` 5,00,000. On 1 April 20X1 the
carrying amount of the building was ` 10,00,000 in Airtel Infrastructures Pvt. Ltd.’s
individual accounting records.
The estimated remaining useful life of the building measured from 1 April 2011 is
20 years and the residual value of the building is now estimated at ` 3,50,000. The
method of depreciation is straight-line.
Pass necessary accounting entries in individual financial statement and provide
impact for consolidated financial statement.

Question 38
AB Limited and BC Limited establish a joint arrangement through a separate
vehicle PQR, but the legal form of the separate vehicle does not confer separation
between the parties and the separate vehicle itself. Thus, both the parties have
rights to the assets and obligations for the liabilities of PQR. As neither the
contractual terms nor the other facts and circumstances indicate otherwise, it is
concluded that the arrangement is a joint operation and not a joint venture.
Both the parties own 50% each of the equity interest in PQR. However, the
contractual terms of the joint arrangement state that AB Limited has the rights to
all of Building No. 1 owned by PQR and the obligation to pay all of the debt owed
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by PQR to a lender XYZ. AB Limited and BC Limited have rights to all other assets in
PQR, and obligations for all other liabilities of PQR in proportion of their equity
interests (i.e. 50% each).
PQR’s balance sheet is as follows (all amounts in INR):
Liabilities and equity Amount Assets Amount
Debt owed to XYZ 240 Cash 40
Employee benefit plan obligation 100 Building 1 240
Equity 140 Building 2 200
Total 480 Total 480
How would AB Limited present its interest in PQR in its financial statements
(extract)?

Question 39
A Ltd. acquired control of B Ltd., and C Ltd. on 31st March, 2011. The following
were the balance sheets as at 31st March, 2012.
You are required to prepare a consolidated balance sheet of A Ltd. and its
subsidiaries as at 31st March, 2012.
A Ltd. B Ltd. C Ltd.
` ` `
Plant & Machinery -- 6,00,000 3,00,000
(Less: Depreciation)
Investment at cost:
7000 shares in B Ltd. 10,50,000
2500 shares in C. Ltd. 3,70,000
Loan to B Ltd. 1,50,000
Loan to D Ltd. 1,00,000
Bank Balances 4,50,000 2,00,000 13,000
Stock-in-trade 30,000 5,00,000 1,00,000
Sundry Debtors 50,000 90,000 77,000
22,00,000 13,90,000 4,90,000
Share Capital:
Equity Shares of ` 100/- each 20,00,000 10,00,000 4,00,000
Profit & Loss A/c. 1,50,000 2,00,000 60,000
Loan from A Ltd. - 1,50,000 -
Sundry Creditors 50,000 40,000 30,000
22,00,000 13,90,000 4,90,000
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The Balances in the Profit and Loss A/c. are made up as under:
Balance on 31.3.2011 1,00,000 1,50,000 10,000
Profit for the year ending 31.3.2012 2,50,000 3,00,000 1,50,000
3,50,000 4,50,000 1,60,000
Less Dividend paid 2,00,000 2,50,000 1,00,000
Balance on 31.3.2012 1,50,000 2,00,000 60,000

Question 40
A Limited is a holding company and B Limited and C Limited are subsidiaries of A
limited. Their Balance Sheets as on 31.12.2000 are given below.
A Ltd. B Ltd. C Ltd. A Ltd. B Ltd. C Ltd.
` ` ` ` ` `
Share Capital 1,00,000 1,00,000 60,000 Fixed Assets 20,000 60,000 43,000
Reserves 48,000 10,000 9,000 Investments
Profit & Loss A/c 16,000 12,000 9,000 Shares in B Ltd. 95,000
C Ltd. Balance 3,000 Shares in C Ltd. 13,000 53,000
Sundry Creditors 7,000 5,000 Stock in Trade 12,000
A Ltd. Balance 7,000 B Ltd. Balance 8,000
Sundry Debtors 26,000 21,000 32,000
A Ltd. Balance 3,000
1,74,000 1,34,000 78,000 1,74,000 1,34,000 78,000
The following particulars are given:
(i) The Share Capital of all companies is divided into shares of 10 each.
(ii) A Ltd. held 8,000 shares of B Ltd. and 1,000 shares of C Ltd.
(iii) B Ltd. held 4,000 shares of C Ltd.
(iv) All these investments were made on 30.6.2000.
(v) On 31.12.1999, the position was as shown below:

Liabilities B Ltd. C Ltd.

Reserve 8,000 7,500
Profit & Loss A/c 4,000 3,000
Sundry Creditors 5,000 1,000
Fixed Assets 60,000 43,000
Stock in Trade 4,000 35,500
Sundry Debtors 48,000 33,000

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(vi) 10% dividend is proposed by each company.
(vii) The whole of stock in trade of B Ltd. as on 30.6.2000 (4,000) was later sold to
A Ltd. for 4,400 and remained unsold by A Ltd. as on 31.12.2000.
(viii) Cash-in-transit from B Ltd. to A Ltd. was 1,000 as at the close of business.

You are required to prepare the Consolidated Balance Sheet of the group as on
31.12.2000.

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CLASSWORK PROBLEMS WITH SOLUTIONS

Question 41
A Limited has 48% of the voting rights of B Limited. The remaining voting rights are
held by thousands of shareholders, none individually holding more than 1 per cent
of the voting rights. None of the shareholders has any arrangements to consult any
of the others or make collective decisions.
Solution:
In the above case, based on the absolute size of A Limited’s holding (48%) and the
relative size of the other shareholdings, A Limited may conclude that it has a
sufficiently dominant voting interest to meet the power criterion.

Question 42
A Limited holds 48% of the voting rights of B Limited. X Limited and Y Limited each
hold 26% of the voting rights of B Limited. There are no other arrangements that
affect decision- making. Who has power to take decisions in the present case?
Solution:
In this case, the size of A Limited, voting interest and its size relative to the
shareholdings of X Limited and Y Limited are sufficient to conclude that A Limited
does not have power.
Only two other investors would need to co-operate to be able to prevent investor A
from directing the relevant activities of the investee.

Question 43
Investor A holds 40% of the voting rights of an investee and six other investors each
hold 10% of the voting rights of the investee. A shareholder agreement grants
investor A the right to appoint, remove and set the remuneration of management
responsible for directing the relevant activities. To change the agreement, a two-
thirds majority vote of the shareholders is required. Is the absolute size of the
investor’s holding and the relative size of the other shareholdings alone is conclusive
in determining whether the investor has rights sufficient to give it power?
Solution:
No, the absolute size of investor’s holding and the relative size of other’s
shareholdings are not conclusive in determining whether investor has power.
Investor A’s contractual right to appoint, remove and set the remuneration of
management is also to be considered to conclude that it has power over the
investee. The fact that investor A might not have exercised this right or the
likelihood of investor A exercising its right to select, appoint or remove
management shall not be considered when assessing whether investor A has power.

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Question 44
Scenario A:
Following is the voting power holding pattern of B Ltd.
• 10% voting power held by A Ltd.
• 90% voting power held by 9 other investor each holding 10%
All the investors have entered into a management agreement whereby they have
granted the decision-making powers related to the relevant activities of B Ltd. to A
Ltd. for a period of 5 years.
After 2 years of the agreement, the investors holding 90% of the voting powers
have some disputes with A Ltd. and they want to take back the decision-making
rights from A Ltd. This can be done by passing a resolution with majority of the
investors voting in favour of the removal of rights from A Ltd. However, as per the
termination clause of the management agreement, B Ltd. will have to pay a huge
penalty to A Ltd. for terminating the agreement before its stated term.
Whether the rights held by investors holding 90% voting power are substantive?
Scenario B:
Assume the same facts as per Scenario A except, there is no penalty required to be
paid by B Ltd. for termination of agreement before its stated term. However, instead
of all other investors, there are only 4 investors holding total 40% voting power that
have disputes with A Ltd. and want to take back decision-making rights from A Ltd.
Whether the rights held by investors holding 40% voting power are substantive?

Solution:
Scenario A:
If the investors holding 90% of the voting power exercise their right to terminate
the management agreement, then it will result in B Ltd. having to pay huge penalty
which will affect the returns of B Ltd. This is a barrier that prevents such investors
from exercising their rights and hence such rights are not substantive.
Scenario B:
To take back the decision-making rights from A Ltd., investors holding majority of
the voting power need to vote in favour of removal of rights from A Ltd. However,
the investors having disputes with A Ltd. do not have majority voting power and
hence the rights held by them are not substantive.

Question 45
PQR Ltd. is the subsidiary company of MNC Ltd. In the individual financial
statements prepared in accordance with Ind AS, PQR Ltd. has adopted Straight-line
method (SLM) of depreciation and MNC Ltd. has adopted Written-down value
method (WDV) for depreciating its property, plant and equipment. As per Ind AS
110, Consolidated Financial Statements, a parent shall prepare consolidated
financial statements using uniform accounting policies for like transactions and
other events in similar circumstances.
How will these property, plant and equipment be depreciated in the consolidated
financial statements of MNC Ltd. prepared as per Ind AS?
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Solution:
As per Ind AS 16, ‘Property, Plant and Equipment’, a change in the method of
depreciation shall be accounted as a change in an accounting estimate.
Therefore, the selection of the method of depreciation is an accounting estimate
and not an accounting policy.
Therefore, there can be different methods of estimating depreciation for property,
plant and equipment, if their expected pattern of consumption is different. The
method once selected in the individual financial statements of the subsidiary
should not be changed while preparing the consolidated financial statements.
Accordingly, in the given case, the property, plant and equipment of PQR Ltd.
(subsidiary company) may be depreciated using straight line method and property,
plant and equipment of parent company (MNC Ltd.) may be depreciated using
written down value method, if such method closely reflects the expected pattern
of consumption of future economic benefits embodied in the respective assets.

Question 46
H Limited has a subsidiary, S Limited and an associate, A Limited. The three
companies are engaged in different lines of business.
These companies are using the following cost formulas for their valuation in
accordance with Ind AS 2, Inventories:
Name of the Company Cost Formula Used
H Limited FIFO
S Limited, A Limited Weighted average cost
Whether H Limited is required to value inventories of S Limited and A Limited also
using FIFO formula in preparing its consolidated financial statements?

Solution:
Ind AS 110 states that a parent shall prepare consolidated financial statements
using uniform accounting policies for like transactions and other events in similar
circumstances.
Ind AS 110 states that if a member of the group uses accounting policies other than
those adopted in the consolidated financial statements for like transactions and
events in similar circumstances, appropriate adjustments are made to that group
member’s financial statements in preparing the consolidated financial statements
to ensure conformity with the group’s accounting policies.

Ind AS 2 requires inventories to be measured at the lower of cost and net realisable
value. Ind AS 2 states that the cost of inventories shall be assigned by using FIFO or
weighted average cost formula. An entity shall use the same cost formula for all
inventories having a similar nature and use to the entity. For inventories with a
different nature or use, different cost formulas may be justified.

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Ind AS 2 requires disclosure of “the accounting policies adopted in measuring
inventories, including the cost formula used”. Thus, as per Ind AS 2, the cost
formula applied in valuing inventories is also an accounting policy.

As mentioned earlier, as per Ind AS 2, different cost formulas may be justified for
inventories of a different nature or use. Thus, if inventories of S Limited and A
Limited differ in nature or use from inventories of H Limited, then use of cost
formula (weighted average cost) different from that applied in respect of
inventories of H Limited (FIFO) in consolidated financial statements may be
justified. In other words, in such a case, no adjustment needs to be made to align
the cost formula applied by S Limited and A Limited to cost formula applied by H
Limited.

Question 47
Entity P sells a 20% interest in a wholly- owned subsidiary to outside investors for
`100 lakh in cash. The carrying value of the subsidiary’s net assets is ` 300 lakh,
including goodwill of ` 65 lakh from the subsidiary’s initial acquisition.
Pass journal entries to record the transaction.

Solution:
The accounting entry recorded on the disposition date for the 20% interest sold as
follows:
` in lakh ` in lakh
Cash Dr. 100
To Non-controlling interest (20% * 300 lakh) 60
To Other Equity (Gain on sale of interest in subsidiary) 40
As per para B 96 of Ind AS 110, where proportion of the equity of NCI changes, then
group shall adjust controlling and non-controlling interest and any difference between
NCI (60 lakhs) is adjusted and fair value of consideration received (100 lakhs) to be
attributed to parent in other equity i.e. 40 lakhs.

Question 48
Entity A acquired 60% of entity B two years ago for ` 6,000. At the time entity B’s
fair value was ` 10,000. It had net assets with a fair value of ` 6,000 (which for the
purposes of this example was the same as book value). Goodwill of ` 2,400 was
recorded (being` 6,000 – (60%* ` 6,000). On 1 October 20X0, entity A acquires a
further 20% interest in entity B, taking its holding to 80%. At that time the fair
value of entity B is ` 20,000 and entity A pays ` 4,000 for the 20% interest. At the
time of the purchase the fair value of entity B’s net assets is ` 12,000 and the
carrying amount of the non-controlling interest is ` 4,000.
Pass journal entries to record the transaction.

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Solution:
The accounting entry recorded for the purpose of the non-controlling interest is as
follows:
` `
Non-controlling interest Dr. 2,000
Other Equity (Loss on acquisition of interest in subsidiary) Dr. 2,000
To Cash 4,000
As per para B96 of Ind AS 110, where proportion of the equity of NCI changes, then
group shall adjust controlling and non-controlling interest and any difference
between NCI (` 2,000) is adjusted and fair value of consideration received (` 4,000)
to be attributed to parent in other equity ie.` 2,000.

Question 49
A Ltd. acquired 10% additional shares of its 70% subsidiary. The following relevant
information is available in respect of the change in non-controlling interest on the
basis of Balance sheet finalized as on 1.4. 2010:
` in thousand
Separate financial statements As on 31.3.2010
Investment in subsidiary (70% interest) – at cost 14,000
Purchase price for additional 10% interest 2,600
Consolidated financial statements
Non – controlling interest (30%) 6,600
Consolidated profit & loss account balance 2,000
Goodwill 600

Solution:
The reporting date of the subsidiary and the parent is 31 March, 2010. Prepare note
showing adjustment for change of non-controlling interest. Should goodwill be
adjusted for the change? The following accounting entries are passed:
` 000 ` 000
Other Equity (Loss on acquisition of interest in subsidiary) Dr. 400
Non-controlling interest Dr. 2,200
To Bank 2,600

As per para B96 of Ind AS 110, where proportion of the equity of NCI changes, then
group shall adjust controlling and non-controlling interest and any difference
between NCI (` 22,00,000) is adjusted and fair value of consideration received
(` 26,00,000) to be attributed to parent in other equity i.e. ` 4,00,000.
Consolidated goodwill is not adjusted.
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Question 50
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:
• 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

Both the transactions have happened within a period of one month. In accordance
with the guidance given in Ind AS 110, both the transactions have to be accounted
as a single transaction.

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 transactions).
How MN Ltd. should account the transaction?

Solution:
MN Ltd. will account for the transaction as follows
`
Recognise:
Fair value of consideration (2,50,000 + 5,50,000) 8,00,000
Derecognise:
Net assets of UV Ltd. (9,00,000)
Non-controlling interest 1,80,000 (7,20,000)
Gain to be recorded in profit or loss 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.

Question 51
A Limited ceased to be in investment entity from 1st April 20X1 on which date it
was holding 80% of B Limited. The carrying value of such investment in B Limited
(which was measured at fair value through profit or loss) was ` 4,00,000. The fair
value of non-controlling interest on the date of change in status was ` 1,00,000.
The value of subsidiary’s identifiable net assets as per Ind AS 103 was ` 4,50,000 on
the date of change in status. Determine the value of goodwill and pass the journal

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entry on the date of change in status of investment entity. (Assume that non-
controlling interest is measured at fair value method).

Solution:
Goodwill calculation: `
Deemed consideration (i.e. fair value of subsidiary on the date of 4,00,000
change in status)
Fair value of non-controlling interest 1,00,000
5,00,000
Value of subsidiary’s identifiable net assets as per Ind AS 103 (4,50,000)
Goodwill 50,000

Journal entry `
Dr Cr.
Net identifiable assets Dr. 4,50,000
Goodwill Dr. 50,000
To Investment in B Limited (on date of change in status) 4,00,000
To Non-controlling interest 1,00,000

Question 52
CD Ltd. purchased a 100% subsidiary for ` 20,00,000 on 31st March 20X1 when the
fair value of the net assets of KL Ltd. was ` 16,00,000. Therefore, goodwill was
` 4,00,000. CD Ltd. becomes an investment entity on 31st March 20X3 when the
carrying value of its investment in KL Ltd. (measured at fair value through profit or
loss) was ` 25,00,000. At the date of change in status, the carrying value of net
assets of KL Ltd. excluding goodwill was ` 19,00,000.
Calculate gain or loss with respect to investment in KL Ltd. on the date of change
in investment entity status of CD Ltd.
Solution:
The gain on the disposal will be calculated as follows:
`
Fair value of retained interest (100%) 25,00,000
Less: Net assets disposed, including goodwill (19,00,000 + 4,00,000) (23,00,000)
Gain on the date of change in investment entity status of CD Ltd. 2,00,000

Question 53
ABC Ltd. and DEF Ltd. have entered into a contractual arrangement to manufacture
a product and sell that in retail market. As per the terms of the arrangement,
decisions about the relevant activities require consent of both the parties. The
parties share the returns of the arrangement equally amongst them. Whether the
arrangement can be treated as joint arrangement?

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Solution:
The arrangement is a joint arrangement since both the parties are bound by the
contractual arrangement and the decisions about relevant activities require
unanimous consent of both the parties.

Question 54
PQR Ltd. and XYZ Ltd. established an arrangement in which each has 50% of the
voting rights and the contractual arrangement between them specifies that at least
51% of the voting rights are required to make decisions about the relevant
activities. Whether the arrangement can be treated as joint arrangement?

Solution:
In this case, the parties have implicitly agreed that they have joint control of the
arrangement because decisions about the relevant activities cannot be made
without both parties agreeing.

Question 55
A Ltd., B Ltd. and C Ltd. established an arrangement whereby A Ltd. has 50% of the
voting rights in the arrangement, B Ltd. has 30% and C has 20%. The contractual
arrangement between A Ltd., B Ltd. and C Ltd. specifies that at least 75% of the
voting rights are required to make decisions about the relevant activities of the
arrangement. Whether the arrangement can be treated as joint arrangement?

Solution:
In this case, even though A can block any decision, it does not control the
arrangement because it needs the agreement of B. The terms of their contractual
arrangement requiring at least 75% of the voting rights to make decisions about the
relevant activities imply that A Ltd. and B Ltd. Have joint control of the
arrangement because decisions about the relevant activities of the arrangement
cannot be made without both A Ltd. and B Ltd. agreeing.

Question 56
ABC Ltd. is established by two investors AB Ltd. and BC Ltd. Each investor is
holding 50% of the voting power of the investee.
As per the articles of association of ABC Ltd., AB Ltd. and BC Ltd. have right to
appoint 3 directors and 2 directors respectively on the board of ABC Ltd. The
directors appointed by each investor will act in accordance with the directions of
the investor who has appointed such director. Further, articles of association
provides that the decision about relevant activities of the entity will be taken by
board of directors through simple majority.
Determine whether ABC Ltd. is jointly controlled by both the investors.

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Solution:
The decisions about relevant activities are required to be taken by majority of
board of directors. Hence, out of the 5 directors, at least 3 directors need to agree
to pass any decision. Accordingly, the directors appointed by AB Ltd. can take the
decisions independently without the consent of any of the directors appointed by
BC Ltd. Hence, ABC Ltd. is not jointly controlled by both the investors. Equal voting
rights held by both the investors is not relevant in this case since the voting rights
do not given power over the relevant activities of the investee.

Question 57
An arrangement has three parties: X Ltd. has 50% of the voting rights in the
arrangement and Y Ltd. and Z Ltd. each have 25%. The contractual arrangement
between them specifies that at least 75% of the voting rights are required to make
decisions about the relevant activities of the arrangement. Whether the
arrangement can be treated as joint arrangement?

Solution:
In this case, even though X Ltd. can block any decision, it does not control the
arrangement because it needs the agreement of either Y Ltd. or Z Ltd. In this
question, X Ltd., Y Ltd. and Z Ltd. collectively control the arrangement. However,
there is more than one combination of parties that can agree to reach 75% of the
voting rights (i.e. either X Ltd. and Y Ltd. or X Ltd. and Z Ltd.). In such a situation,
to be a joint arrangement the contractual arrangement between the parties would
need to specify which combination of the parties is required to agree unanimously
to decisions about the relevant activities of the arrangement.

Question 58
An arrangement has A Ltd. and B Ltd. each having 35% of the voting rights in the
arrangement with the remaining 30% being widely dispersed. Decisions about the
relevant activities require approval by a majority of the voting rights. Whether the
arrangement can be treated as joint arrangement?

Solution:
A Ltd. and B Ltd. have joint control of the arrangement only if the contractual
arrangement specifies that decisions about the relevant activities of the
arrangement require both A Ltd. and B Ltd. agreeing.

Question 59
Electronics Ltd. is established by two investors R Ltd. and S Ltd. The investors are
holding 60% and 40% of the voting power of the investee respectively.
As per the articles of association of Electronics Ltd., both the investors have right
to appoint 2 directors each on the board of Electronics Ltd. The directors
appointed by each investor will act in accordance with the directions of the

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investor who has appointed such director. Further, articles of association provides
that the decision about relevant activities of the entity will be taken by board of
directors through simple majority.
Determine whether Electronics Ltd. is controlled by a single investor or is jointly
controlled by both the investors.
Solution:
The decisions about relevant activities are required to be taken by majority of
board of directors. Hence, out of the 4 directors, at least 3 directors need to agree
to pass any decision. Accordingly, the directors appointed by any one investor
cannot take the decisions independently without the consent of at least one
director appointed by other investor. Hence, Electronics Ltd. is jointly controlled
by both the investors. R Ltd. holding majority of the voting rights is not relevant in
this case since the voting rights do not given power over the relevant activities of
the investee.

Question 60
CDEF limited is a strategic co-operation between investors C, D, E and F to provide
property development services. CDEF Limited is an incorporated entity, and the
investors’ share ownership is 20:30:25:25 respectively. There is a formal
contractual agreement in place that requires a voting majority on all relevant
activities. Investors C, D and E have informally agreed to vote together. This
informal agreement has been effective in practice.
Does C, D & E have control over the joint arrangement?
Solution:
To make decisions, it is sufficient to have agreement from any three out of the four
investors. In this case, a single investor cannot prevent a majority decision.
However, three of the investors have agreed to make unanimous decisions.
Investors C, D and E, therefore, have joint control over CDEF Limited, with investor
F having significant influence at best. The agreement between investors C, D and E
does not have to be formally documented as long as there is evidence of its
existence (for example, via correspondence and minutes of meetings).

Question 61
MN Software Ltd. is established by two investors M Ltd. and N Ltd. Both the
investors are holding 50% of the voting power each of the investee.
As per the articles of association of MN Software Ltd., both the investors have right
to appoint 2 directors each on the board of the company. The directors appointed
by each investor will act in accordance with the directions of the investor who has
appointed such director. The decision about relevant activities of the entity will be
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taken by board of directors through simple majority. Articles of association also
provides that M Ltd. has right to appoint the chairman of the board who will have
right of a casting vote in case of a deadlock situation. Determine whether MN
Software Ltd. is jointly controlled by both the investors.

Solution:
The decisions about relevant activities are required to be taken by majority of
board of directors. Hence, out of the 4 directors, at least 3 directors need to agree
to pass any decision. Accordingly, the directors appointed by any one investor
cannot take the decisions independently without the consent of at least one
director appointed by other investor. However, the chairman of the board has right
for a casting vote in case of a deadlock in the board. Hence, M Ltd. has the ability
to take decisions related to relevant activities through 2 votes by directors and
1 casting vote by chairman of the board. Therefore, M Ltd. individually has power
over MN Software Ltd. and there is no joint control.

Question 62
X Ltd. and Y Ltd. entered into a contractual arrangement to buy a piece of land to
construct residential units on the said land and sell to customers.
As per the arrangement, the land will be further divided into three equal parts. Out
of the three parts, both the parties will be responsible to construct residential
units on one part each by taking decision about relevant activities independently
and they will entitled for the returns generated from their own part of land. The
third part of the land will be jointing managed by both the parties requiring
unanimous consent of both the parties for all the decision making. Determine
whether the arrangement is a joint arrangement or not.
Solution:
The two parts of the land which are required to be managed by both the parties
independently on their own would not fall within the definition of a joint
arrangement. However, the third part of the land which is required to be managed
by both the parties with unanimous decision making would meet the definition of a
joint arrangement.

Question 63
Entity R and entity S established a new entity RS Ltd. to construct a national
highway and operate the same for a period of 30 years as per the contract given by
government authorities. As per the articles of association of RS Ltd, the
construction of the highway will be done by entity R and all the decisions related
to construction will be taken by entity R independently. After the construction is
over, entity S will operate the highway for the period of 30 years and all the
decisions related to operating of highway will be taken by entity S independently.

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However, decisions related to funding and capital structure of RS Ltd. will be taken
by both the parties with unanimous consent.
Determine whether RS Ltd. is a joint arrangement between entity R and entity S?

Solution:
In this case, the investors should evaluate which of the decisions about relevant
activities can most significantly affect the returns of RS Ltd. If the decisions
related to construction of highway or operating the highway can affect the returns
of the RS Ltd. most significantly then the investor directing those decision has
power over RS Ltd. and there is no joint arrangement. However, if the decisions
related to funding and capital structure can affect the returns of the RS Ltd. most
significantly then RS Ltd. is a joint arrangement between entity R and entity S.

Question 64
D Ltd., E Ltd. and F Ltd. have established a new entity DEF Ltd. As per the
arrangement, unanimous consent of all three parties is required only with respect
to decisions related to change of name of the entity, amendment to constitutional
documents of the entity to enter into a new business, change in the registered
office of the entity, etc. Decisions about other relevant activities require consent
of only D Ltd. and E Ltd. Whether F Ltd. is a party with joint control of the
arrangement?

Solution:
Consent of F Ltd. is required only with respect to the fundamental changes in DEF Ltd.
Hence these are protective rights. The decisions about relevant activities are taken by
D Ltd. and E Ltd. Hence, F Ltd. is not a party with joint control of the arrangement.

Question 65
P Ltd. and Q Ltd. are two construction entities and they have entered into a
contractual arrangement to jointly construct a metro rail project.
The construction of metro rail project involves various activities such as
construction of infrastructure (like metro station, control room, pillars at the
centre of the road, etc.) for the metro, laying of the tracks, acquiring of the
coaches of the metro, etc. The total length of the metro line to be constructed is
50 kms. As per the arrangement, both the parties are responsible to construct
25 kms each. Each party is required to incur its own cost, use its own assets, incur
the liability and has right to the revenue from their own part of the work.
Determine whether the arrangement is a joint operation or not?

Solution:
The arrangement is a joint operation since the arrangement is not structured
through a separate vehicle and each party has rights to the assets, and obligations
for the liabilities relating to their own part of work in the joint arrangement.

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Question 66
Entity X and Entity Y are engaged in the business of Engineering, Procurement and
Construction (EPC) for its customers. Both the parties have jointly won a contract
from a customer for executing an EPC contract and for that the parties have
established a new entity XY Ltd. The contract will be executed through XY Ltd.
All the assets required for the execution of the contract will be acquired and
liabilities relating to the execution will be incurred by XY Ltd. in its own name.
Entity X and entity Y will have share in the net profits of XY Ltd. in the ratio of
their shareholding i.e. 50% each. Assuming that the arrangement meets the
definition of a joint arrangement, determine whether the joint arrangement is a
joint operation or a joint venture?

Solution:
The legal form of the separate vehicle is a company. The legal form of the separate
vehicle causes the separate vehicle to be considered in its own right. Hence, it
indicates that the arrangement is a joint venture. In this case, the parties should
further evaluate the terms of contractual arrangements and other relevant facts
and circumstance to conclude whether the arrangement is a joint venture or a joint
operation.

Question 67
Two parties structure a joint arrangement in an incorporated entity. Each party has
a 50 per cent ownership interest in the incorporated entity. The incorporation
enables the separation of the entity from its owners and as a consequence the
assets and liabilities held in the entity are the assets and liabilities of the
incorporated entity.
(i) Identify the type of arrangement?
(ii) If the parties modify the features of corporation though a contractual
arrangement such that each has an interest in assets and each is liable for
liabilities what type of joint arrangement would that be?

Solution:
(i) On assessment of the rights and obligations conferred upon the parties by the
legal form of the separate vehicle indicates that the parties have rights to the
net assets of the arrangement. In this case it would be classified as joint
venture.
(ii) If the parties modify the features of the corporation through their contractual
arrangement so that each has an interest in the assets of the incorporated
entity and each is liable for the liabilities of the incorporated entity in a
specified proportion. Such contractual modifications to the features of a
corporation can cause an arrangement to be a joint operation.

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Question 68
Two parties, W and F form a limited company to build and use a pipeline to
transport gas. Each party has a 50% interest in the company. Under their
contractual terms, entities W and F must each use 50% of the pipeline capacity;
unused capacity is charged at the same price as used capacity. Entities W and F can
sell their share of the capacity to a third party without consent from both
investors. The Price entities W and F pay for the gas transport is determined in a
way that ensures all costs incurred by the company can be recovered. The Joint
arrangement is structured through a separate vehicle. Each party has a 50% interest
in the company. However, the contractual terms require a specific level of usage
by each party and, because of the pricing structure, and the entities have an
obligation for the company’s liabilities. What type of joint arrangement the
company might be?

Solution:
This entity might be a joint operation despite its legal form.

Question 69
Two parties structure a joint arrangement in an incorporated entity (entity D) in
which each party has a 50 per cent ownership interest. The purpose of the
arrangement is to manufacture materials required by the parties for their own,
individual manufacturing processes. The arrangement ensures that the parties
operate the facility that produces the materials to the quantity and quality
specifications of the parties. The legal form of entity D (an incorporated entity)
through which the activities are conducted initially indicates that the assets and
liabilities held in entity D are the assets and liabilities of entity D. The contractual
arrangement between the parties does not specify that the parties have rights to
the assets or obligations for the liabilities of entity D.
(i) What type of joint arrangement would entity D be?
(ii) Would your classification change if the parties instead of using the share of
output themselves sold to third parties?
(iii) If the parties changed the terms of contractual arrangement such that entity
D would be able to sell the output to third parties, would your answer be the
same as in part (i) above?

Solution:
(i) The legal form of entity D and the terms of the contractual arrangement
indicate that the arrangement is a joint venture.
However, the parties also consider the following aspects of the arrangement:
• The parties agreed to purchase all the output produced by entity D in a
ratio of 50:50. Entity D cannot sell any of the output to third parties,
unless this is approved by the two parties to the arrangement. Because
the purpose of the arrangement is to provide the parties with output
they require, such sales to third parties are expected to be uncommon
and not material.
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• The price of the output sold to the parties is set by both parties at a
level that is designed to cover the costs of production and administrative
expenses incurred by entity D. On the basis of this operating model, the
arrangement is intended to operate at a break-even level.

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

Question 70
AB Ltd. and CD Ltd. have entered into a framework agreement to manufacture and
distribute a new product i.e. Product X. The two activities to be performed as per
the framework agreement are i) Manufacture of Product X and ii) Distribution of
Product X. The manufacturing of the product will not be done through a separate
vehicle. The parties will purchase the necessary machinery in their joint name. For
the distribution of the product, the parties have established a new entity ABCD
Ltd. All the goods manufactured will be sold to ABCD Ltd. as per price mutually
agreed by the parties. Then ABCD Ltd. will do the marketing and distribution of the
product. Both the parties will have joint control over ABCD Ltd.
The legal form of ABCD Ltd. causes it to be considered in its own right (ie the
assets and liabilities held in ACD Ltd. are the assets and liabilities of ABC Ltd. and
not the assets and liabilities of the parties). Further, the contractual arrangement
and other relevant facts and circumstances also do not indicate otherwise.
Determine whether various arrangements under the framework agreement are joint
operation or joint venture?
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Solution:
The manufacturing of Product X is not done through a separate vehicle and the
assets used to manufacture the product are jointly owned by both the parties.
Hence, the manufacturing activity is a joint operation.

The distribution of Product X is done through a separate vehicle i.e. ABCD Ltd.
Further, AB Ltd. and CD Ltd. do not have rights to the assets, and obligations for
the liabilities, relating to ABCD Ltd. Hence ABCD Ltd. is a joint venture.

Question 71
A Ltd. is one of the parties to a joint operation holding 60% interest in a joint
operation and the balance 40% interest is held by another joint operator. A Ltd. has
contributed an asset held by it to the joint operation for the activities to be
conducted in joint operation. The carrying value of the asset sold was ` 100 and
the asset was actually sold for ` 80 i.e. at a loss of ` 20. How should A Ltd. account
for the sale of asset to joint operation in its books?

Solution:
A Ltd. should record the loss on the transaction only to the extent of other party’s
interest in the joint operation.
The total loss on the transaction is ` 20. Hence, A Ltd. shall record loss on sale of
asset to the extent of ` 8 (` 20 x 40%) which is the loss pertaining to the interest of
other party to the joint operation. The loss of ` 12 (` 20 - ` 8) shall not be
recognised as that is unrealised loss. Further, while accounting its interest in the
joint operation, A Ltd. shall record its share in that asset at value of ` 60 [A Ltd.
share of asset ` 48 (` 80 x 60%) plus unrealised loss of ` 12]. The journal entry for
the transaction would be as follows:
Bank Dr. ` 32
Loss on sale Dr. `8
To Asset ` 40

Question 72
A Ltd. is one of the parties to a joint operation holding 60% interest in the joint
operation and the balance 40% interest is held by another joint operator. A Ltd. has
purchased an asset from the joint operation. The carrying value of the asset in the
books of joint operation was ` 100 and the asset was actually purchased for ` 80
i.e. at a loss of ` 20. How should A Ltd. account for the purchase of asset from
joint operation in its books?

Solution:
A Ltd. should not record its share of the loss until the asset is resold to a third party.
The joint operation has sold the asset at ` 80 by incurring a loss of ` 20. Hence,
A Ltd. shall record the asset at ` 92 [Purchase price ` 80 + A Ltd.’s share in loss
` 12 (` 20 x 60%)].
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Further, while accounting its interest in the joint operation, A Ltd. shall not record
any share in the loss incurred in sale transaction by the joint operation.
The journal entry for the transaction would be as follows:
Asset Dr. ` 32
To Bank ` 32

Question 73
X Limited was holding 100% of the equity share capital of Y Limited and Y Limited
was treated as a subsidiary by X Limited. Now, Y Limited issues convertible
preference shares to Z Limited. As per the issue document of convertible
preference shares, Z Limited also gets the rights to participate in the relevant
activities of Y Limited whereby Z Limited’s consent is also necessary to pass any
decision by the equity shareholder of Y Limited (i.e. X Limited). Determine how
should X Limited account for its investment in Y Limited in its consolidated
financial statements after the issue of convertible preference shares by Y Limited
to Z Limited?

Solution:
As per the issue document of convertible preference shares, unanimous consent of
both X Limited and Z Limited are required to pass any decision about the relevant
activities of Y Limited. Hence, Y Limited is jointly controlled by X Limited and
Z Limited and thereby, Y Limited becomes a joint arrangement between X Limited
and Z Limited.

Y Limited is structured through a separate vehicle. The legal form of Y Limited,

terms of the contractual arrangement or other facts and circumstances do not give
X Limited and Z Limited rights to the assets, and obligations for the liabilities,
relating to Y Limited. Hence, Y Limited is a joint venture between X Limited and
Z Limited.

When the convertible preference shares are issued to Z Limited, X Limited losses
control over Y Limited. Hence X Limited should derecognise the assets and
liabilities of Y Limited from its consolidated financial statements. 100% equity
shares in Y Limited is still held by X Limited. Hence such investment would be
accounted at fair value on the date of loss of control by X Limited. The difference
between the fair value of 100% equity shares retained in Y Limited and the carrying
value of assets and liabilities of Y Limited derecognised is recognised in profit or
loss of X Limited. After the loss of control, the investment in Y Limited is
accounted as per equity method of accounting by X Limited whereby the
investment value in Y Limited will be adjusted for the change in the X Limited’s
share of the net assets Y Limited post the date of loss of control. Also, the
difference between the fair value of investment in Y Limited and fair value of net
identifiable assets of Y Limited shall be goodwill or capital reserve.
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Question 74
E Ltd. holds 25% of the voting power of an investee. The balance 75% of the voting
power is held by three other investors each holding 25%.
The decisions about the financing and operating policies of the investee are taken
by investors holding majority of the voting power. Since, the other three investors
together hold majority voting power, they generally take the decisions without
taking the consent of E Ltd. Even if E Ltd. proposes any changes to the financing
and operating policies of the investee, the other three investors do not vote in
favour of those changes. So, in effect the suggestions of E Ltd. are not considered
while taking decisions related to financing and operating policies.
Determine whether E Ltd. has significant influence over the investee?

Solution:
Since E Ltd. is holding more than 20% of the voting power of the investee, it
indicates that E Ltd. might have significant over the investee. However, the other
investors in the investee prevent E Ltd. from participating in the financing and
operating policy decisions of the investee. Hence, in this case, E Ltd. is not in a
position to have significant influence over the investee.

Question 75
Kuku Ltd. holds 12% of the voting shares in Boho Ltd. Boho Ltd.’s board comprise of
eight members and two of these members are appointed by Kuku Ltd. Each board
member has one vote at meeting is Boho Ltd an associate of Kuku Ltd?

Solution:
Boho Ltd is an associate of Kuku Ltd as significant influence is demonstrated by the
presence of directors on the board and the relative voting rights at meetings.
It is presumed that entity has significant influence where it holds 20% or more of the
voting power of the investee, but it is not necessary to have 20% representation on
the board to demonstrate significant influence, as this will depend on all the facts
and circumstances. One board member may represent significant influence even if
that board member has less than 20% of the voting power. But for significant
influence to exist it would be necessary to show based on specific facts and
circumstances that this is the case, as significant influence would not be presumed.

Question 76
M Ltd. holds 10% of the voting power an investee. The balance 90% voting power is
held by nine other investors each holding 10%.
The decisions about the relevant activities (except decision about taking
borrowings) of the investee are taken by the members holding majority of the
voting power. The decisions about taking borrowings are required to be taken by
unanimous consent of all the investors. Further, decisions about taking borrowing
are not the decisions that most significantly affect the returns of the investee.
Determine whether M Ltd. has significant influence over the investee?
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Solution:
In this case, though M Ltd. is holding less than 20% of the voting power of the
investee, M Ltd.’s consent is required to take decisions about taking borrowings
which is one of the relevant activities. Further, since the decisions about taking
borrowing are not the decisions that most significantly affect the returns of the
investee, it cannot be said that all the investors have joint control over the
investee. Hence, it can be said that M Ltd. has significant influence over the
investee.

Question 77
RS Ltd. is an entity engaged in the business of pharmaceuticals. It has invested in
the share capital of an investee XY Ltd. and is holding 15% of XY Ltd.’s total voting
power. XY Ltd. is engaged in the business of producing packing materials for
pharmaceutical entities. One of the incentives for RS Ltd. to invest in XY Ltd. was
the fact that XY Ltd. is engaged in the business of producing packing materials
which is also useful for RS Ltd. Since last many years, XY Ltd.’s almost 90% of the
output is procured by RS Ltd.
Determine whether RS Ltd. has significant influence over XY Ltd?

Solution:
Since 90% of the output of XY Ltd. is procured by RS Ltd., XY Ltd. would be
dependent on RS Ltd. for the continuation of its business. Hence, even though RS
Ltd. is holding only 15% of the voting power of XY Ltd. it has significant influence
over XY Ltd.

Question 78
Entity X and entity Y, operate in the same industry, but in different geographical
regions. Entity X acquires a 10% shareholding in entity Y as a part of a strategic
agreement. A new production process is key to serve a fundamental change in the
strategic direction of entity Y. The terms of agreement provides for entity Y to
start a new production process under the supervision of two managers from entity
X. The managers seconded from entity X, one of whom is on entity X’s board, will
oversee the selection and recruitment of new staff, the purchase of new
equipment, the training of the workforce and the negotiation of new purchase
contracts for raw materials. The two managers will report directly to entity Y’s
board as well as to entity X’s. Analyse.

Solution:
The secondment of the board member and a senior manager from entity X to entity
Y gives entity X, a range of power over a new production process and may evidence
that entity X has significant influence over entity Y. This assessment take into the
account what are the key financial and operating policies of entity Y and the
influence this gives entity X over those policies.

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Question 79
R Ltd. is a tyre manufacturing entity. The entity has entered into a technology
transfer agreement with another entity Y Ltd. which is also involved in the business
of tyre manufacturing. R Ltd. is an established entity in this business whereas
Y Ltd. is a relatively new entity.
As per the agreement, R Ltd. has granted to Y Ltd. a license to use its the technical
information and know-how which are related to the processes for the manufacture
of tyres. Y Ltd. is dependent on the technical information and know-how supplied
by R Ltd. because of its lack of expertise and experience in this business. Further,
R Ltd. has also invested in 10% of the equity share capital of Y Ltd.
Determine whether R Ltd. has significant influence over Y Ltd?

Solution:
Y Ltd. obtains essential technical information for the running of its business from
R Ltd. Hence R Ltd. has significant influence over Y Ltd. despite of holding only 10%
of the equity share capital of Y Ltd.

Question 80
MNO Ltd. holds 15% of the voting power of DEF Ltd. PQR Mutual Fund (which is a
subsidiary of MNO Ltd.) also holds 10% voting power of DEF Ltd. Hence, MNO Ltd.
holds total 25% voting power of DEF Ltd. (15% held by own and 10% held by
subsidiary) and accordingly has significant influence over DEF Ltd. How should MNO
Ltd. account for investment in DEF Ltd. in its consolidated financial statements?

Solution:
The 15% interest which is held directly by MNO Ltd. should be measured as per
equity method of accounting. However, with respect to the 10% interest which is
held through a mutual fund, MNO Ltd. can avail the exemption from applying the
equity method to that 10% interest and instead measure that investment at fair
value through profit or loss. To summarise, the total interest of 25% in DEF Ltd.
should be measured as follows:
• 15% interest held directly by MNO Ltd.: Measure as per equity method of
accounting
• 10% interest held indirectly through a mutual fund: Measure as per equity
method of accounting or at fair value thorough profit or loss as per Ind AS 109

Question 81
An entity P (parent) has two wholly-owned subsidiaries - X and Y, each of which has
an ownership interest in an ‘associate’, entity Z. Subsidiary X is a venture capital
organisation. Neither of the investments held in associate Z by subsidiaries X and Y
is held for trading. Subsidiary X and Y account for their investment in associate Z at
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fair value through profit or loss in accordance with Ind AS 109 and using the equity
method in accordance with Ind AS 28 respectively. How should P account for the
investment in associate Z in the following scenarios:

Scenario 1: Where both investments in the associate result in significant influence

on a stand-alone basis - Subsidiary X and Y ownership interest in associate Z is 25%
and 20% respectively.

Scenario 2: When neither of the investments in the associate results in significant

influence on a stand-alone basis, but do provide the parent with significant
influence on a combined basis - Subsidiary X and Y ownership interest in associate Z
is 10% each.

Scenario 3: When one of the investments in the associate results in significant

influence on a stand-alone basis and the other investment in the associate does not
result in significant influence on a stand-alone basis - Subsidiary X and Y ownership
interest in associate Z is 30% and 10% respectively.
Assume there is significant influence if the entity has 20% or more voting rights.

Solution:
Paragraph 18 of Ind AS 28 states that, “when an investment in an associate or a
joint venture is held by, or is held indirectly through, an entity that is a venture
capital organisation, or a mutual fund, unit trust and similar entities including
investment-linked insurance funds, the entity may elect to measure investments in
those associates and joint ventures at fair value through profit or loss in
accordance with Ind AS 109. An entity shall make this election separately for each
associate or joint venture, at initial recognition of the associate or joint venture.”
Paragraph 19 of Ind AS 28 provides that, “‘when an entity has an investment in an
associate, a portion of which is held indirectly through a venture capital
organisation, or a mutual fund, unit trust and similar entities including investment-
linked insurance funds, the entity may elect to measure that portion of the
investment in the associate at fair value through profit or loss in accordance with
Ind AS 109 regardless of whether the venture capital organisation has significant
influence over that portion of the investment. If the entity makes that election,
the entity shall apply the equity method to any remaining portion of its investment
in an associate that is not held through a venture capital organisation”. Therefore,
fair value exemption can be applied partially in such cases.
Where both investments in the associate result in significant influence on a stand-
alone basis.

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Parent P

100% 100%

Subsidiary X (VC) Subsidiary Y

25% 20%

Associate Z

In the present case, in accordance with paragraph 19 of Ind AS 28, P must follow
equity method of accounting for its 20% interest held by Y. Under the partial use of
fair value exemption, P may elect to measure the 25% interest held by X at fair
value through profit or loss.

Scenario 2: When neither of the investments in the associate results in significant

influence on a stand-alone basis, but do provide the parent with significant
influence on a combined basis.

Parent P

100% 100%

Subsidiary X (VC) Subsidiary Y

10% 10%

Inv Z

In the present case in accordance with the paragraph 19 of Ind AS 28, P must follow
equity method of accounting for its 10% interest held by Y, even though Y would
not have significant influence on a stand-alone basis. Under the partial use of fair
value exemption, P may elect to measure the 10% interest held by X at fair value
through profit or loss. Scenario 3: When one of the investments in the associate
results in significant influence on a stand-alone basis and the other investment in
the associate does not result in significant influence on a stand- alone basis.

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Scenario 3:
Parent P

100% 100%

Subsidiary X (VC) Subsidiary Y

30% 10%

Inv Z

In the present case, in accordance with paragraph 19 of Ind AS 28, P must follow
equity method of accounting for its 10% interest held by Y, even though Y would
not have significant influence on a stand-alone basis. Under the partial use of fair
value exemption, the P may elect to measure the 30% interest held by X at fair
value through profit or loss.

Question 82
M Limited holds 90% interest in subsidiary N Limited. N Limited holds 25% interest
in an associate O Limited. As at 31 March 20X1, the net assets of O Limited was
` 300 lakhs including profit of ` 40 lakhs for the year ended 31 March 20X1.
Calculate how the investment in O Limited will be accounted in the consolidated
financial statements of M Limited?

Solution:
Since N Limited is a subsidiary of M Limited, the consolidated financial statements
of M Limited will include 100% amounts of the consolidated financial statements of
N Limited (including investment in O Limited accounted for using equity method).
Accordingly, the investment in O Limited will be accounted as follows in the
consolidated financial statements of M Limited:
` lakh
Investment in O Limited (300 x 25%) 75
Share in profit of O Limited
Attributable to M Limited (40 x 25% x 90%) 9
Attributable to Non-controlling interest of N Limited (50 x 25% x 10%) 1 10

Question 83
Entity XYZ acquired a 10% interest in entity ABC for ₹ 1,00,000 at 1 June 2017. The
investment in entity ABC was accounted for equity investment (not hold for
trading) for which irrevocable option has been availed of routing the changes in fair
value through other comprehensive income and related FVOCI reserve.

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Entity XYZ recognized an increase in fair value of ₹ 60,000 in other comprehensive
income for the year ended 31 March 2018.
Entity XYZ acquired and additional 25% interest in equity ABC for ₹ 4,00,000 at
1 April 2018 and achieved significant influence. The fair value of entity ABC’s net
assets was ₹ 5,00,000 at June 2017 and had increased to ₹ 8,00,000 at 1 April 2018.
Entity ABC recorded profits after dividends of ₹ 2,00,000 between 1 June 2017 and
1 April 2018.
How should an entity account for an investment in an investee on account of
piecemeal acquisition when such investment provides its signification influence
over the investee?

Solution:
In the given case. An entity may account for the step acquisition of an associate or
a joint venture by applying analogy to Ind AS 103, i.e. considering the fair value as
deemed cost. Accordingly, the cost of an associate acquired in stages is measured
as the sum of fair value of the interest previously held plus the fair value of an
additional consideration transferred as of the date when the investment became as
associate. Further as per Paragraph 42 of Ind AS 10, if an entity has previously
recognized changes in the value of an equity interest in the acquire in other
comprehensive income, the amount that was recognized on the basis as would be
required if the acquirer had disposed directly of the previously held equity interest
i.e. reclassified within equity.

The following shall be the accounting treatment:

Particulars Amount
Fair value of previous 10% interest held (determined by reference to 1,60,000
the fair value of consideration given to acquire the additional 25%)
(4,00,000/25% * 10%)
Fair value of additional 25% (amount paid) 4,00,000
5,60,000
Goodwill is calculated as follows:
Cost of investment in associate 5,60,000
Fair value of identifiable net assets acquired (8,00,000*35%) 2,80,000
Goodwill 2,80,000

Particulars Dr/Cr. Amount

Investment A/c (including goodwill ₹ 2,80,0000) Dr. 5,60,000
OCI (Equity) Dr. 60,000
To Cash 4,00,000
To Investment (FVTOCI) 1,60,000
To Retained Earnings (Equity) 60,000

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Question 84
An entity X obtains significant influence over entity Y by acquiring an investment of
20% at a cost of ₹ 2,00,000. At the date of the acquisition of the investment, the
fair value of the associate’s net identifiable assets is ₹ 9,00,000. The investment is
accounted for under the equity method in the consolidated financial statement of
entity X.
Subsequently, entity X acquires an additional investment of 15% in entity Y at a
cost of ₹1,80,000, increasing its total investment in entity Y to 35%. There is no
change in the status of investee, the investment is however, still an associate and
accounted for using the equity method of accounting and the current fair value of
the associate’s net identifiable assets has increased to ₹ 10,00,000.
Assuming no directly attributable cost has been incurred and no profit/loss arose
during the period since the acquisition of first 20%.
In this case, the carrying amount of the investment immediately prior to the
additional investment is ₹ 2,00,000.
Solution:
Upon acquisition of additional 15% the equity-accounted amount for the associate
increases by ₹ 1,80,000. The notional goodwill applicable to the second tranche of
the acquisition is ₹ 30,000 [₹ 1,80,000-(15% * ₹ 10,00,000)].
The impact of the additional investment of equity A’s equity accounted amount for
Entity B is summarized as follows:
Goodwill
Carrying Shares in Net
Particulars % held included in
Amount Assets
Investment
Existing Investment 20% 2,00,000 1,90,000 10,000
Additional Investment 15% 1,80,000 1,50,000 30,000
Total Investment 35% 3,80,000 3,40,000 40,000

Question 85
AB Limited holds 30% interest in an associate which it has acquired for a cost of
` 300 lakhs. On the date of acquisition of that stake, the fair value of net assets of
the associate was ` 900 lakh. The value of goodwill on acquisition was ` 30 lakhs.
After the acquisition, AB Limited accounted for the investment in the associate as
per equity method of accounting and now the carrying value of such investment in
the consolidated financial statements of AB Limited is ` 360 lakhs. The associate
has now issued equity shares to some investors other than AB Limited for a
consideration of ` 800 lakhs. This has effectively reduced the holding of AB Limited
to 20%. Determine how AB Limited should account for such reduction in interest in
the associate?
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Solution:
Because of the issue of shares by associate to other investors, AB Limited has
effectively sold 10% (30 – 20) of its interest in the associate. The gain / loss on
reduction in interest in associate in calculated as follows:
` lakhs
AB Limited’s share in the consideration received by the associate for 160
issue of shares (800 x 20%) (1)t
Less: Carrying value of interest sold (360 x 1/3)(2) (120)
Gain on reduction in interest in associate(3) 40
Notes:
(i) The share in the consideration received by associate on issue of shares
(i.e. ` 160 lakhs) would be recorded as part of investment in associate.
(ii) The carrying amount of interest sold (i.e. ` 120 lakhs) will be derecognised,
including proportionate goodwill of ` 10 lakhs (30 * 1/3).
(iii) Gain of ` 40 lakhs will be recorded in the profit or loss.

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HOMEWORK PROBLEMS

Question 1
Blue Ltd. acquired 25% of the equity share capital of Green Ltd. on the first day of
the financial year for ` 1,25,000. As of that date, the carrying value of the net
assets of Green Ltd. was ` 3,00,000 and the fair value was ` 4,00,000. The excess
of fair value over the carrying value was attributable to one of the buildings owned
by Green Ltd. having a remaining useful life of 20 years. Green Ltd. earned profit
of ` 40,000 and other comprehensive income of ` 10,000 during the year. Calculate
the goodwill / capital reserve on the date of acquisition, Blue Ltd.’s share in the
profit and other comprehensive income for the year and closing balance of
investment at the end of the year.

Solution:
(1) Goodwill / capital reserve on the date of acquisition
The cost of the investment is higher than the net fair value of the investee’s
identifiable assets and liabilities. Hence there is goodwill. Amount of goodwill
is calculated as follows
`
Cost of acquisition of investment 1,25,000
Blue Ltd.’s share in fair value of net assets of Green Ltd. on the
date of acquisition (4,00,000 *25%) (1,00,000)
Goodwill 25,000
Above goodwill will be recorded as part of carrying amount of the investment.

(2) Share in profit and other comprehensive income of Gren Ltd.

`
Share in profit of Green Ltd. (40,000 x 25%) 10,000
Adjustment for depreciation based on fair value
(1,00,000 ÷ 20) x 25% (1,250)
Share in profit after adjustment 8,750
Share in other comprehensive income (10,000 x 25%) 2,500

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(3) Closing balance of investment at the end of the year
`
Cost of acquisition of investment (including goodwill of ` 25,000) 1,25,000
Share in profit after adjustments 8,750
Share in other comprehensive income 2,500
Closing balance of investment 1,36,250

Question 2
Entity A holds a 20% equity interest in Entity B (as associate) that in turn has a 100%
equity interest in 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) 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.
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 ` Liabilities `
Investment in B 200 Equity 200
Total 200 Total 200

B’s consolidated financial statements

Assets ` Liabilities `
Assets (from C) 1,000 Equity 1,000
Total 1,000 Total 1,000

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

After
B’s consolidated financial statements
Assets ` Liabilities `
Assets (from C) 1,000 Equity 1,000
Cash 300 Equity transaction with
non-controlling interest 100
Equity attributable to
owners 1,100
Non-controlling interest 200
Total 1,300 Total 1,300
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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?
Solution:
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 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 and also faithfully reflects the
investor’s share of the associate’s transaction as presented in the associate’s
consolidated financial statements.
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 equity as in its consolidated financial
statements.

Question 3
On 1st April 2019, Investor Ltd. acquires 35% interest in another entity, XYZ Ltd.
Investor Ltd. determines 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.
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 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.
Solution:
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
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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
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 of
[35% `12,00,000] (4,20,000)
Closing balance of Investor Ltd.’s investment in XYZ
Ltd. 46,10,000

Question 4
A company, AB Ltd. holds investments in subsidiaries and associates. In its separate
financial statements, AB Ltd. wants to elect to account its investments in
subsidiaries at cost and the investments in associates as financial assets at fair
value through profit or loss (FVTPL) in accordance with Ind AS 109, Financial
Instruments. Whether AB Limited can carry investments in subsidiaries at cost and
investments in associates in accordance with Ind AS 109 in its separate financial
statements?

Solution:
Ind AS 27, Separate Financial Statements inter-alia provides that, when an entity
prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either at cost, or in accordance with Ind
AS 109, Financial Instruments in its separate financial statements. Further, the
entity shall apply the same accounting for each category of investments.
Subsidiaries, associates and joint ventures would qualify as separate categories.
Thus, the same accounting policies are applied for each category of investments -
i.e. each of subsidiaries, associates and joint ventures.

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In the present case, investment in subsidiaries and associates are considered to be
different categories of investments. Further, Ind AS 27 requires to account for the
investment in subsidiaries, joint ventures and associates either at cost, or in
accordance with Ind AS 109 for each category of Investment. Thus, AB Limited can
carry its investments in subsidiaries at cost and its investments in associates as
financial assets in accordance with Ind AS 109 in its separate financial statements.

Question 5
Entity X had two subsidiaries at the end of its previous reporting period which it
consolidated in its consolidated financial statements prepared in accordance with
Ind AS.
During its current reporting period, Entity X disposes of its investment in both the
subsidiaries and consequently does not have any subsidiaries at the end of the
reporting period. Is Entity X exempt from the requirement to present consolidated
financial statements in view of not having any subsidiary at the end of the
reporting period?

Solution:
Ind AS 110 states:
“Consolidation of an investee shall begin from the date the investor obtains control
of the investee and cease when the investor loses control of the investee”

As per the above, where a parent disposes of the investment in subsidiary(ies)

during the reporting period, it is required to consolidate such subsidiary(ies) until
the date it loses the control of such subsidiary(ies) during the reporting period.
This requirement applies in all cases of loss of control or disposal of subsidiaries,
including cases where the disposal results in the parent not having any subsidiary at
the end of the reporting period. The requirement of presenting consolidated
financial statements would apply in those cases also where an entity does not have
any subsidiary either at the beginning or at the end of the reporting period but has
acquired and disposed of a subsidiary (that is required to be consolidated as per Ind
AS 110) during the reporting period.

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PRACTICE TEST PAPER

WITH SOLUTION
Question 1
Prepare the Consolidated Balance Sheet as on 31st March, 2018 of a group of
companies comprising Usha Limited, Nisha Limited and Sandhya Limited. Their
summarized balance sheets on that date are given below:
Amounts ` in lakh
Sandhya
Usha Ltd. Nisha Ltd.
Ltd.
Equity and Liabilities
Shareholder's Equity
Share capital (` 10 per share) 300 200 160
Reserves 90 50 40
Retained earnings 80 25 30
Current Liabilities
Trade Payables 235 115 90
Bills Payable
Usha Ltd. - 35 -
Sandhya Ltd. 15 - -
Assets 720 425 320
Non-Current Assets
Tangible assets 160 180 150
Investment:
16 lakh shares in Nisha Ltd. 170 - -
12 lakh shares in Sandhya Ltd. - 140 -
Current Assets
Cash in hand and at Bank 114 20 20
Bills Receivable 36 - 15
Trade Receivables 130 50 110
Inventories 110 35 25
720 425 320
The following additional information is available:
(i) Usha Ltd. holds 80% shares in Nisha Ltd. and Nisha Ltd. holds 75% shares in
Sandhya Ltd. Their holdings were acquired on 30th September, 2017.
(ii) The business activities of all the companies are not seasonal in nature and
therefore, it can be assumed that profits are earned evenly throughout the
year.
(iii) On 1st April, 2017, the following balances stood in the books of Nisha Limited
and Sandhya Limited.

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Nisha Limited Sandhya Limited
Reserves 40 30
Retained earnings 10 15
(iv) ` 5 Lakh included in the inventory figure of Nisha Limited, is inventory which
has been purchased from Sandhya Limited at cost plus 25%.
(v) The parent company has adopted an accounting policy to measure Non-
controlling interest at fair value (quoted market price) applying Ind AS 103.
Assume market prices of Nisha Limited and Sandhya Limited are the same as
respective face values.
(vi) The capital profit preferably is to be adjusted against cost of control.
Note: Analysis of profits and notes to accounts must be a part of your answer.

Question 2
Summarise d Balance Sheets of PN Ltd. and SR Ltd. as on 31st March, 2018 were
given as below:
(Amount in `)
Particulars PN Ltd. SR Ltd.
Assets
Land & building 4,68,000 5,61,600
Plant & Machinery 7,48,800 4,21,200
Investment in SR Ltd. 12,48,000 -
Inventories 3,74,400 1,13,600
Trade Receivables 1,86,500 1,24,800
Cash & Cash equivalents 45,200 24,900
Total Assets 30,70,900 12,46,100
Equity & Liabilities
Equity Share Capital (Shares of ` 100 each fully paid) 15,60,000 6,24,000
Other Reserves 9,36,000 3,12,000
Retained Earnings 1,78,400 2,55,800
Trade Payables 1,46,900 34,300
Short-term borrowings 2,49,600 20,000
Total Equity & Liabilities 30,70,900 12,46,100

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(i) PN Ltd. acquired 70% equity shares of ` 100 each of SR Ltd. on 1st October,
2017.
(ii) The Retained Earnings of SR Ltd. showed a credit balance of ` 93,600 on
1st April, 2017 out of which a dividend of 12% was paid on 15th December, 2017.
(iii) PN Ltd. has credited the dividend received to its Retained Earnings.
(iv) Fair value of Plant & Machinery of SR Ltd. as on 1st October, 2017 was
` 6,24,000. The rate of depreciation on Plant & Machinery was 10% p.a.
(v) Following are the increases on comparison of Fair Value as per respective Ind
AS with book value as on 1st October, 2017 of SR Ltd. which are to be
considered while consolidating the Balance Sheets:
(a) Land & Buildings ` 3,12,000
(b) Inventories ` 46,800
(c) Trade Payables ` 31,200.
(vi) The inventory is still unsold on Balance Sheet date and the Trade Payables are
not yet settled.
(vii) Other Reserves as on 31st March, 2018 are the same as was on 1st April, 2017.
(viii) The business activities of both the company are not seasonal in nature and
therefore, it can be assumed that profits are earned evenly throughout the
year.
Prepare the Consolidated Balance Sheet as on 31st March, 2018 of the group
of entities PN Ltd. and SR Ltd. as per Ind AS.

Question 3
Sumeru Limited holds 35% of total equity shares of Meru Limited, an associate
company. The value of Investments in Meru Limited on March 31, 20X1 is ` 3 crores
in the consolidated financial statements of Sumeru Limited.
Sumeru Limited sold goods worth ` 3,50,000 to Meru Limited. The cost of goods
sold is ` 3,00,000. Out of these, goods costing ` 1,00,000 to Meru Limited were in
the closing stock of Meru Limited.
During the year ended March 31, 20X2 the profit and loss statement of Meru
Limited showed a loss of ` 1 crore.
(A) What is the value of investment in Meru Limited as on March 31, 20X2 in the
consolidated financial statements of Sumeru Limited, if equity method is
adopted for valuing the investments in associates?
(B) Will your answer be different if Meru Limited had earned a profit of ` 1.50
crores and declared a dividend of ` 75 lacs to the equity shareholders of the
Company?

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Question 4
Hold Limited acquired 100% ordinary shares of ` 100 each of Sub Limited on
1st October, 2017. On 31st March, 2018 the summarized Balance Sheets of the two
companies were as given below:
Hold Limited Sub Limited
Particulars
(`) (`)
I. Assets
(1) Non-current Assets
(i) Property, Plant & Equipment
(a) Land & Building 30,00,000 36,00,000
(b) Plant & machinery 48,00,000 27,00,000
(ii) Investment in Sub Limited 68,00,000
(2) Current Assets
(i) Inventory 24,00,000 7,28,000
(ii) Financial Assets
(a) Trade Receivables 11,96,000 8,00,000
(b) Cash & Cash Equivalents 2,90,000 1,60,000
Total 1,84,86,000 79,88,000
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital
(Shares of ` 100 each fully paid) 1,00,00,000 40,00,000
(ii) Other Equity
(a) Other Reserves 48,00,000 20,00,000
(b) Retained Earnings 11,44,000 16,40,000
(2) Current Liabilities
Financial Liabilities
(a) Bank Overdraft 16,00,000 -
(b) Trade Payable 9,42,000 3,48,000
Total 1,84,86,000 79,88,000

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The retained earnings of Sub Limited showed a credit balance of ` 6,00,000 on
1st April, 2017 out of which a dividend of 10% was paid on 1st November 2017. Hold
Limited has credited the dividend received to retained earnings account. There was
no fresh addition to other reserves in case of both companies during the current
financial year. There was no opening balance in the retained earnings in the books
of Hold Limited.
Following are the changes in fair value as per respective Ind AS from the book value
as on 1stOctober, 2017 in the books of Sub Limited which is to be considered while
consolidating the Balance Sheets.
(i) Fair value of Plant and Machinery was ` 40,00,000. (Rate of depreciation on
Plant and Machinery is 10% p.a.)
(ii) Land and Building appreciated by ` 20,00,000.
(iii) Inventories increased by ` 3,00,000.
(iv) Trade payable increased by ` 2,00,000.
Prepare Consolidated Balance Sheet as on 31st March, 2018. The Balance Sheet
should comply with the relevant lnd AS and Schedule III of the Companies Act,
2013.

Question 5
Parent P acquired 90 percent of subsidiary S some years ago. P now sells its entire
investment in S for ` 1,500 lakhs. The net assets of S are 1,000 and the NCI in S is
` 100 lakhs. The cumulative exchange differences that have arisen during P’s
ownership are gains of ` 200 lakhs, resulting in P’s foreign currency translation
reserve in respect of S having a credit balance of ` 180 lakhs, while the cumulative
amount of exchange differences that have been attributed to the NCI is ` 20 lakhs.
Calculate P’s gain on disposal in its consolidated financial statements.

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SOLUTION
Solution: 1
Consolidated Balance Sheet of the Group as on 31st March, 2018
Particulars Note No. (` in lakh)
ASSETS
Non-current assets
Property, plant and equipment Current assets 1 490
(a) Inventories 2 169
(b) Financial assets
Trade 3 290
receivables 4 1
Bills 5 154
receivable
(c) Cash and cash equivalents
Total assets 1,104
EQUITY & LIABILITIES
Equity attributable to owners of the parent
Share capital 300
Other Equity
Reserves (W.N.5) 97
Retained Earnings (W.N.5) 89.9
Capital Reserve (W.N.3) 94
Non-controlling interests (W.N.4) 83.10
Total equity 664
LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
(i) Trade payables 6 440
Total liabilities 440
Total equity and liabilities 1,104

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Notes to Accounts (` in lakh)
(1) Property Plant & Equipment
Parent 160
Nisha Ltd. 180
Sandhya Ltd. 150 490
(2) Inventories
Parent 110
Nisha Ltd. (35-1) 34
Sandhya Ltd. 25 169
(3) Trade Receivables
Parent 130
Nisha Ltd. 50
Sandhya Ltd. 110 290
(4) Bills Receivable
Parent (36-35) 1
Sandhya Ltd. (15-15) --- 1
(5) Cash & Cash equivalents
Parent 114
Nisha Ltd. 20
Sandhya Ltd. 20 154
(6) Trade Payables
Parent 235
Nisha Ltd. 115
Sandhya Ltd. 90 440

Working Notes:
1. Analysis of Reserves and Surplus (` in lakh)
Nisha Ltd. Sandhya Ltd.
Reserves as on 31.3.2017 40 30
Increase during the year 2017-2018
Increase for the half year till 30.9.2017 10 5 10 5
Balance as on 30.9.2017 (A) 45 35
Total balance as on 31.3.2018 50 40
Post-acquisition balance 5 5

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Nisha Ltd. Sandhya Ltd.
Retained Earnings as on 31.3.2017 10 15
Increase during the year 2017-2018
Increase for the half year till 30.9.2017 7.5 7.5
Balance ason30.9.2017 (B) 17.5 22.5
Total balance as on 31.3.2018 25 30
Post-acquisition balance 15 7.5 15 7.5
Less: Unrealised gain on inventories (5 x 25%) - (1)
Post-acquisition balance for CFS 7.5 6.5
Total balance on the acquisition date 62.5 57.5
ie.30.9.2017 (A + B)

2. Calculation of Effective Interest of Parent company ie. Usha Ltd. in Sandhya Ltd.
Acquisition by Usha Ltd. in Nisha Ltd. = 80%
Acquisition by Nisha Ltd. in Sandhya Ltd. = 75%
Acquisition by Group in Sandhya Ltd. (80% x 75%) = 60%
Non-controlling Interest = 40%

3. Calculation of Goodwill / Capital Reserve on the acquisition date

Nisha Ltd. Sandhya Ltd.

Investment or consideration 170 (140 × 80%)112
Add: NCI at Fair value
(200 x 20%) 40
(160 x 40%) 64
210 176
Less: Identifiable net assets (Share (200 + 62.5)(262.5) (160 + 57.5) (217.5)
capital + Increase in the Reserves and
Surplus tillacquisition date)
Capital Reserve 52.5 41.5
Total Capital Reserve (52.5 + 41.5) 94

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4. Calculation of Non-Controlling Interest
Sandhya
Nisha Ltd.
Ltd.
At Fair Value (See Note 3) 40 64
Add: Post Acquisition Reserves (See Note1) (5 × 20%) 1 (5 × 40%) 2
Add: Post Acquisition Retained Earnings (See Note 1) (7.5 × 20%) (6.5 × 40%)
1.5 2.6
Less: NCI share of investment in SandhyaLtd.* (140 x 20%)
(28)*
14.5 68.6
Total (14.5 + 68.6) 83.1
Note:
The Non-controlling interest in Nisha Ltd. will take its proportion in Sandhya
Ltd. So they have to bear their proportion in the investment made by Nisha
Ltd. (as a whole) in Sandhya Ltd.

5. Calculation of Consolidated Other Equity

Reserves Retained Earnings
Usha Ltd. 90 80
Add: Share in Nisha Ltd. (5 x 80%) 4 (7.5 × 80%) 6
Add: Share in Sandhya Ltd. (5 × 60%) 3 (6.5 × 60%) 3.9
97 89.9
Solution: 2
Consolidated Balance Sheet of PN Ltd. and its subsidiary SR Ltd. as on 31st March, 2018
Particulars Note No. `
I. Assets
(1) Non-current assets
(i) Property, Plant &Equipment 1 26,83,200
(ii) Goodwill 2 89,402
(2) Current Assets
(i) Inventories 3 5,34,800
(ii) Financial Assets
(a) Trade Receivables 4 3,11,300
(b) Cash & Cash equivalents 5 70,100
Total Assets 36,88,802

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II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 6 15,60,000
(ii) Other Equity 7 11,39,502
(2) Non-controlling Interest (W.N.3) 5,07,300
(3) Current Liabilities
(i) Financial Liabilities
(a) Trade Payables 8 2,12,400
(b) Short term borrowings 9 2,69,600
Total Equity & Liabilities 36,88,802

Notes to accounts
` `
1. Property, Plant & Equipment 13,41,600
Land & Building (4,68,000 + 5,61,600 + 3,12,000) 13,41,600 26,83,200
Plant & Machinery (W.N.5) 89,402
2. Goodwill
3. Inventories
PN Ltd. 3,74,400
SR Ltd. (1,13,600 + 46,800) 1,60,400 5,34,800
4. Trade Receivables
PN Ltd. 1,86,500
SR Ltd. 1,24,800 3,11,300
5. Cash & Cash equivalents
PN Ltd. 45,200
SR Ltd. 24,900 70,100
8. Trade Payables
PN Ltd. 1,46,900
SR Ltd. (34,300 + 31,200) 65,500 2,12,400
9. Short-term borrowings
PN Ltd. 2,49,600
SR Ltd. 20,000 2,69,600

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Statement of Changes in Equity:
6. Equity share Capital
Balance at the beginning Changes in Equity share Balance at the end of
ofthe reporting period ` capital during the year ` thereporting period `
15,60,000 0 15,60,000

7. Other Equity
Reserves & Surplus
Share
Equity Capital Retained Other Total
application
component reserve Earnings Reserves `
money
` ` `
Balance at the 0 9,36,000 9,36,000
beginning
of the reporting
period
Total 0 1,78,400 1,78,400
comprehensive
income for the
year
Dividends 0 (52,416) (52,416)
Total 0 77,518 77,518
comprehensive
income
attributable to
parent
Gain on Bargain 0 0
purchase
Balance at the 2,03,502 9,36,000 11,39,502
end of reporting
period

1. Adjustments of Fair Value

The Plant & Machinery of SR Ltd. would stand in the books at ` 4,44,600 on
1st October, 2017, considering only six months’ depreciation on ` 4,68,000;
total depreciation being ` 4,68,000 × 10% × = 23,400.
The value put on the assets being ` 6,24,000 there is an appreciation to the
extent of ` 1,79,400.

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Acquisition date profits of SR Ltd.
Reserves on 1.4.2017 3,12,000
Profit& Loss Account Balance on 1.4.2017 93,600
Profit for 2017-2018: 1,18,540
Total [` 2,55,800-(93,600-74,880)]x 6/12 5,07,000*
i.e. ` 1,18,540 upto 1.10.2017
Total Appreciation Total 10,31,140
Holding Co. Share (70%) 7,21,798

*Appreciation = Land & Building ` 3,12,000 + Inventories ` 46,800 + Plant &

Machinery `1,79,400 – Trade Payables ` 31,200 = ` 5,07,000

2. Post-acquisition profits of SR Ltd.

Profit after 1.10.2017 [2,55,800 - (93,600-74,880)] x 6/12 1,18,540
Less:10% depreciation on ` 6,24,000 for 6 months less depreciation
already charged for 2nd half of 2017-2018 on `4,68,800 (ie 31,200 - 23,400) (7,800)
Total 1,10,740
Share of holding Co. (70%) 77,518
Share of NCI (30%) 33,222

3. Non-controlling Interest
Par value of 1872 shares 1,87,200
Add: 30% Acquisition date profits [(10,31,140 – 74,880) x 30%] 30% 2,86,878
Post-acquisition profits [W.N.2] 33,222
5,07,300

4. Goodwill
Amount paid for 4,368 shares 12,48,000
Less: Par value of shares 4,36,800
Acquisition date profits-share of PN Ltd. 7,21,798 (11,58,598)
Goodwill 89,402

5. Value of Plant & Machinery:

PN Ltd. SR Ltd. 7,48,800
Add: Appreciation on 1.10.2017 4,21,200
1,79,400
Add: Depreciation for 2nd half charged on pre- 6,00,600
revalued value
Less: Depreciation on ` 6,24,000 for 6 months 23,400
(31,200) 5,92,800
13,41,600

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6. Consolidated Profit & Loss account
PN Ltd. (as given) 1,78,400
Less: Dividend (52,416) 1,25,984
Share of PN Ltd. in post-acquisition profits (W.N.2) 77,518
2,03,502

Note:
Alternatively, the solution can be done on Net Assets approach on the date of
acquisition. In such a situation, answer in substance will be same. However,
presentation of working notes will be as below:

1. Net assets of SR Ltd. on the date of acquisition

Share Capital 6,24,000
Reserves on 1.4.2017 3,12,000
Profit & Loss Account Balance on 1.4.2017 93,600
Profit for 2017-2018: Total [` 2,55,800-(93,600-74,880)] x 6/12
i.e.` 1,18,540 upto 1.10.2017 1,18,540
Total Appreciation 5,07,000*
Total 16,55,140
Holding Co. Share (70%) 11,58,598
Non-controlling Interest (30) 4,96,542

Appreciation = Land and Building ` 3,12,000 + Inventories ` 46,800 + Plant &

Machinery ` 1,79,400 – Trade Payables ` 31,200 = ` 5,07,000

2. Non-controlling Interest
30% Share in net assets of SR Ltd on 1st October, 2017 30% 4,96,542
Post-acquisition profits [WN 2] 33,222
Less: Dividend received (30% x 12% x 6,24,000) (22,464)
5,07,300

3. Goodwill
Amount paid for 4,368 shares 12,48,000
Acquisition date profits share of PN Ltd. (11,58,598)
Goodwill 89,402

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Solution: 3
(a) Value of investment in Meru Ltd. as on 31st March, 20X2 as per equity method
in the consolidated financial statements of Sumeru Ltd.
`
Cost of Investment 3,00,00,000
Less: Share in Post-acquisition Loss (1,00,00,000 x 35%) (35,00,000)
Less: Unrealised gain on inventory left unsold with Meru Ltd.
[{(50,000/3,00,000) x 1,00,000} x 35%] (5,833)
Carrying value as per Equity method 2,64,94,167

(b) Value of investment in Meru Ltd. as on 31st March, 20X2 as per equity method
in the consolidated financial statements of Sumeru Ltd.
`
Cost of Investment 3,00,00,000
Add: Share in Post-Acquisition Profit (1,50,00,000 x 35%) 52,50,000
Less: Unrealised gain on inventory left unsold with Meru Ltd.
[{(50,000/3,00,000) x 1,00,000} x 35%] (5,833)
Less: Dividend (75,00,000 x 35%) (26,25,000)
Carrying value as per Equity method 3,26,19,167
Solution: 4
Consolidated Balance Sheet of Hold Ltd. and its subsidiary, Sub Ltd. as on 31st
March, 2018
Particulars Note No. `
I. Assets
(1) Non-current assets
Property, Plant & Equipment 1 1,72,00,000
(2) Current Assets
Inventories 2 34,28,000
Financial Assets
Trade Receivables 3 19,96,000
Cash & Cash equivalents 4 4,50,000
Total Assets 2,30,74,000
II. Equity and Liabilities
(1) Equity
Equity Share Capital 5 1,00,00,000
Other Equity 6 99,84,000
(2) Current Liabilities
Financial Liabilities
Short term borrowings 7 16,00,000
Trade Payables 8 14,90,000
Total Equity & Liabilities 2,30,74,000

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It may be noted that the consolidation adjustments in respect of tax effect, in
particular, deferred tax effect of temporary differences associated with fair value
adjustments, determined in accordance with Ind AS 12 ‘Income Taxes’, will affect
the above consolidated balance sheet.

Notes to accounts
`
1. Property Plant & Equipment
Land & Building 86,00,000
Plant & Machinery 86,00,000 1,72,00,000
2. Inventories
Hold Ltd. 24,00,000
Sub Ltd. 10,28,000 34,28,000
3. Trade Receivables
Hold Ltd. 11,96,000
Sub Ltd. 8,00,000 19,96,000
4. Cash & Cash equivalents
Hold Ltd. 2,90,000
Sub Ltd. 1,60,000 4,50,000
7. Short-term borrowings
Bank overdraft of Hold Ltd. 16,00,000
8. Trade Payables
Hold Ltd. 9,42,000
Sub Ltd. 5,48,000 14,90,000

Statement of changes in Equity:

5. Equity share Capital
Balance at the beginning Changes in Equity share Balance at the end of the
of the reporting period capital during the year reporting period
1,00,00,000 0 1,00,00,000

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6. Other Equity
Reserves & Surplus
Capital Other Retained Total
Reserve reserves Earnings
Balance at the beginning 48,00,000 0 48,00,000
Profit or loss for the year (W.N.4) 0 14,14,000 14,44,000
Other comprehensive income for 0 0
the year 0 14,14,000 14,14,000
Total comprehensive income for
the year 0
Dividends 0 0 0
Gain on Bargain purchase on
acquisition of a subsidiary* (W.N.5) 37,70,000 37,70,000
Balance at the end of reporting
period 37,70,000 48,00,000 14,14,000 99,84,000

* It is assumed that there exists no clear evidence for classifying the acquisition
of the subsidiary as a bargain purchase and, hence, the bargain purchase gain
has been recognised directly in capital reserve. If, however, there exists such
a clear evidence, the bargain purchase gain would be recognised in other
comprehensive income and then accumulated in capital reserve. In both the
cases, closing balance of capital reserve will be ` 37,70,000.

Working Notes:
1. Adjustments of Fair Value- Total Appreciation
`
Plant & Machinery (W.N.7) 11,50,000
Land and Building 20,00,000
Inventories 3,00,000
Less: Trade Payables (2,00,000)
32,50,000
2. Pre-acquisition reserves of Sub Ltd.
`
Other Reserves on 1.4.2017 20,00,000
Retained earnings Balance on 1.4.2017 6,00,000
Retained earnings balance as on 31.3.2018 16,40,000
Less: Retained earnings balance as on 1.4.2017 (6,00,000)
Add back: Dividend 4,00,000
Profit for the year 2017-2018 14,40,000
Profit for 6 months (14,40,000 x 6/12) 7,20,000
Share of Hold Ltd. 33,20,000
There will be no Non-controlling Interest as 100% shares of Sub Ltd. are held by Hold Ltd.
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3. Post-acquisition profits of Sub Ltd.
Profit for 6 months from 1.10.2017 to 31.3.2018 (14,40,000 x 6/12) 7,20,000
Less: Additional depreciation on account of revaluation of Plant
and Machinery for 6 months [(40,00,000 x 10% x 6/12)–
(30,00,000 x 10% x 6/12)] (50,000)
Adjusted post-acquisition profit attributable to Hold Ltd. 6,70,000

4. Consolidated profit or loss for the year

Hold Ltd.
Retained earnings on 31.3.2018 11,44,000
Less: Retained earnings as on 1.4.2017 (0)
Profits for the year 2017-2018 11,44,000
Less: Elimination of intra-group dividend (4,00,000)
Adjusted profit for the year 7,44,000
Sub Ltd.
Adjusted profit attributable to Hold Ltd. (W.N.3) 6,70,000
Consolidated profit or loss for the year 14,14,000

5. Goodwill/Gain on bargain purchase

Amount paid for 40,000 shares of Sub Ltd 68,00,000
Less: Share of Hold Ltd. in pre-acquisition equity
of Sub Ltd.
Share capital 40,00,000
Pre-acquisition reserves of Sub Ltd. (W.N.2) Fair 33,20,000
value adjustments (W.N.1) 32,50,000 (1,05,70,000)
Gain on Bargain Purchase 37,70,000

6. Value of Plant & Machinery

Hold Ltd. 48,00,000
Sub Ltd. Book value as on 31.3.2018 27,00,000
Book value as on 1.4.2017 (27,00,000/90%) 30,00,000
Less: Depreciation @ 10% for 6 months (1,50,000)
Add: Appreciation on 1.10.2017 28,50,000
(Balancing fig. i.e., 40,00,000 – 28,50,000) 11,50,000
Revalued amount (given) 40,00,000
Less: Depreciation on `40,00,000 @ 10% for 6 months (2,00,000) 38,00,000
86,00,000

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7. Consolidated retained earnings
Hold Ltd. Sub Ltd. Total
As given 11,44,000 16,40,000 27,84,000
Consolidation Adjustments:
(i) Elimination of pre-acquisition element 0 (13,20,000) (13,20,000)
[6,00,000 + 7,20,000]
(ii) Elimination of intra- group dividend (4,00,000) 4,00,000 0
(iii) Impact of fair value adjustments 0 (50,000) (50,000)
Adjusted retained earnings consolidated 7,44,000 6,70,000 14,14,000

Note:
The above solution has been drawn by making following assumptions, at
required places:
(i) Hold Ltd. measures the investment in Sub Ltd. at cost (less impairment, if
any) in its separate financial statements as permitted in Ind AS 27, Separate
Financial Statements.
(ii) Increase in land and buildings represents only land element.
(iii) Depreciation on plant and machinery is on WDV method.
(iv) Fair value adjusted trade payables continue to exist on 31.3.2018.
(v) Inventories are valued at cost, being lower than NRV and that application of
cost formula for the purposes of consolidated financial statements results in
entire fair value adjustment to be included in the carrying amount of
inventories of Sub Ltd. on 31.3.2018.
Solution: 5
P’s gain on disposal in its consolidated financial statements would be calculated in
the following manner:
(` in Lakhs)
Sale proceeds 1,500
Net assets of S (1,000)
NCI derecognised 100
Foreign currency translation reserve 180
Gain on disposal 780

“The difference between ordinary and extraordinary

is that little extra.”

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Notes


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IND AS 115 REVENUE FORM

3 CONTRACTS WITH CUSTOMERS

OBJECTIVE

The objective of the standard is to establish principles regarding revenue recognition – it

includes
• Nature, amount, timing and uncertainty of revenue recognitions; and
• Cash flows arising from a contract with a customer.

SCOPE

This Standard applies to ALL CONTRACTS with customers, except the following.
(a) Revenue from lease contracts (discussed in Ind AS 116- Leases);
(b) Revenue from Insurance contracts which are covered by Ind AS 104 – Insurance
Contracts;
(c) Financial instruments and other contractual rights or obligations within the scope
of Ind AS 109, Financial Instruments, Ind AS 110, consolidated Financial
Statements, Ind AS 111, Joint Arrangements, Ind AS 27, Separate Financial
Statement and Ind AS 28,Investments in Associated and Joint Ventures; and
(d) Non- monetary exchanges between entities in the same line of business to
facilitate sale to customers or potential customers.
For eg. this Standard would not apply to a contract between two oil companies that
agree to an exchange of oil (Exchanging same items is not called as barter) to fulfill
demand from their customers in different specified locations on a timely basis. As
the items exchanged are same, there is no commercial substance – hence it will not
treated as transaction.

Example
A Ltd. and B Ltd. both are engaged in manufacturing of homogeneous bottles. A
Ltd. operates, in northern, eastern and central parts of India. B Ltd. operators in
western and southern parts of India. A Ltd. fulfills the demands of its customers
based on western and southern India by using the bottles manufactured by B Ltd.
Similarly, B Ltd. Fulfills the demands of customer based on northern, eastern and
central parts of India by delivering bottles manufactured by A Ltd. How A Ltd. and
B Ltd. should recognise the revenue?

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In industries with homogeneous products, it is common for entities in the same line
of business to exchange products in order to sell them to customers of potential
customers other than parties to exchange.
It is to be noted that all contracts (including contract for non-monetary exchanges)
should have commercial substance before an entity can apply the other
requirements in the revenue recognition model prescribed in Ind AS 115.
In this case, the exchange of bottles qualifies as non-monetary exchange between
customers in the same line of business. Accordingly, A Ltd. and B Ltd. should not
recognise any revenue on account of exchange of goods as Ind AS 115 will not apply
to the contract.

DEFINITIONS

Contract
Contract is an agreement between two or more parties that creates ENFORMCEALBE rights
and obligations. The contract can be written, oral or as per other customary business
practices. Enforceability of the rights and obligations in a contract is matter of law.

Customer
A Party that has contracted (entered into an agreement) with an entity to obtain goods
or services for consideration These goods or services are an output of the entity’s
ordinary activities.
Management needs to identify whether the counterparty to the contract is customer,
since contract that are not with customer are outside the scope of the revenue
standard.

For eg. Dividends- counterparty is not customer (it is shareholder) (Dealt by Ind AS 109),
Contributions/ Donations and increase in far value of biological assets ( Ind AS 41),
investment property (Ind AS 40), etc. are scoped OUT of this standard.

Income
Income is increase in inflows or enhancements of assets or decreases of liabilities that
result in an increase in equity, other than those relating to contributions from equity
participants.

This definition is broad – It includes all kinds of income I.e. Profit on sale of Property,
Plant and equipment (PPE), Profit on sale on investments, revaluation gain,
extinguishment of debt, revenue from sale of goods or services etc, it includes profit
and gains. It includes realised and unrealised.

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Revenue
Revenue is an income arising in the course of an entity’s ordinary activities:
It is subset of income. It arises from sale of goods or rendering of services as part of an
entity’s ongoing major on central activities i.e. ordinary activities. Transactions that do
not arise in the course of an entity’s ordinary activities do not result in revenue. For
example, from the disposal of the entity’s PPE are not included in revenue.

EXAMPLE
A car dealer makes one of the cars as test drive car (demonstration cars’) These cars are
used for more than one year and then sold as used cars The dealership sells new and
used cars. Whether the sale of test drive car is considered as revenue or gain from sale
of PPE?
Suggested Answer
The car dealership is in the business of selling new and used cars. The sale of
demonstration cars is therefore revenue, since selling used cars is part of the
dealership’s ordinary activities.

When a car is classified as test drive car - it should be classified as PPE as its cost. It
should be depreciated as usual as per Ind AS 16. When the management intends to sell it
in the ordinary course of business, the same car should be reclassified as inventory i.e. it
should be reclassified as its carrying amount. The sale of such car should be recongised
as Revenue
i.e. sale of goods –as the Car dealer’s primary business is selling new and used cars. Say
if the entity decides to sell its used “Laptop – PPE – It cannot be treated as revenue as
sale of laptops is not its ordinary activity.

RECOGNITION & MEASUREMENT

The entire recognition process can be divided into five steps. Those are.
Step 1: Identifying the contracts with the customer; Step 2: Identify the separate
performance obligations; Step 3: Determine the transaction Price;
Step 4: Allocate the transaction price to the performance obligation;
Step 5: Recognise revenue when performance obligation is satisfied.

STEP 1: IDENTIFYING THE CONTRACTS WITH THE CUSTOMER

This Standard is applicable only when a contract meets ALL the following condition:
(1) The contract has been approved by the parties to the contract and are committed
to perform the obligations:
(2) The entity can identify each party’s rights regarding the goods or services to be
transferred;

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(3) The entity can identify the payment terms;
(4) The contract has commercial substance (i.e. the risk, timing or amount of the
entitysfuture cash flows is expected to change as a result of the contract); and
(5) It is probable that entity will collect the consideration due. For determining
collectability, consider the ability and intention of the customer when it becomes
due.

Consider if the contract meets each of the five Continue to assess the
criteria to pass step 1: contract to determine if the
step 1 criteria are met.
No
Have the parties approved the contract?
Yes Continue to assess the
contract to determine if
No the step 1 criteria are met.
Can the entity identify each party’s rights
regarding the goods/services to be transferred? Recogniseconsideration
received as a liability until
Yes each of the five criteria in
step 1 are met or one of
Can the entity identify the payment terms for No the following occurs:
the goods/services to be transferred? (1) entity has no remaining
performance obligation
Yes and substantially all
No consideration has been
Does the contract have commercial substance?
received and non-
Yes refundable.
(2) contract is terminated
Is it probable that the entity will collect and consideration is
substantially all of the consideration to which it non- refundable
will be entitled in exchange for the goods/
services that will be transferred to the customer?

Yes

Proceed step 2 and only reassess the step 1

criteria if there is an indication of a significant
in facts and circumstances.

Question 1
New way limited decides to enter a new market that is currently experiencing
economic difficulty and expects that in future economy will improve. New way
enters into an arrangement with a customer in the new region for networking
products for promised consideration of ` 1,250,000. At contract inception, New
way expects that is may be able to collect the full amount from the customer.
Determine how New way will recognise this transaction?

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Solution:
Assuming the contract meets the other criteria covered within the scope of the
model in Ind AS 115, New way need to assesses whether collectability is probable.
In making this assessment, New way considers whether the customer has the ability
and intent to pay the estimated transaction price, which may be an amount less
than the contract price.

Question 2
A company provides free trial services for two months to encourage the customers
for non- cancellable paid services for a year. Does it need to recognise revenue
during the free period?

Solution:
No. As per the conditions. parties should approve the contract and they should be
committed to perform their respective obligations. During the free trial period the
parties are not committed, hence the entity should not recognise the revenue
during this period even, if the customer signs a non-cancellable agreement for 12
months.

Question 3
Continuation to the above concept capsule.
If customer sings the agreement one month before expiring free trial. Can the
entity recognize revenue for 13 months ?

Solution:
No, Revenue will be recognized still for 12 months.

COMBINATION OF CONTRACT
An entity shall combine two or more contracts entered into at or near the same time
with the same customer (or related parties of the customer) and account for the
contracts as a single contract if one or more of the following criteria are met:

(a) The contracts are negotiated as a package with a single commercial objective;
(b) The amount of consideration to paid in one contract depends on the price or
performance of the other contract; or
(c) The goods or services promises in the contracts (or some goods or services promises
ineach of the contracts) are a single performance obligation discusses below

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Are the contracts negotiated as a package with a Yes

single commercial objective?

No
Treat as a
Whether consideration in one contract depends Yes single
on the price or performance of another contract? contract

No

Whether good or service promised in the contract Yes

are a single performance obligation?

No

Treat as a separate contracts

Question 4
Government of Andhra Pradesh invited tenders for construction of roads in five
routes. All five routes are to be awarded to one contractor as a package price.
Tender should be submitted with estimations of all routes. Rama Constructions Ltd
got the contract. Can we combine these contracts as a single contract and account
for?

Solution:
Based on the given information, it can be understood that it is negotiated as a
single package and contractor doesn’t have an option to select the routes. So the
company should select the entire contract based on overall profit margin. Hence it
is appropriate to treat all five routesas single construction contract for accounting
purposes. Submission of estimations for each route does not change the single
commercial objective.

Question 5
Mr. Bhargav is a construction contractor undertakes constructions of Villas. He
undertook a contract to construct 25 villas from a real estate company, Each villa
is different in its specifications, hence has separate proposal of each unit to be
constructed and subject to separate negotiations. He was able to identify the costs
and revenue attributable to each unit. Should he each unit as a separate contract
or consider all villas as a single contract for accounting revenue under Ind AS 115 ?

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Solution:
As per Ind AS 115, contracts shall be combined if the contracts satisfy any one more
conditions discussed above.
In the given case,-
(a) the contracts are not negotiated as a package;
(b) Consideration of one contract is no dependent on performance or price of
another;
(c) each one has a separate performance obligations.
As none of the conditions are satisfied – the entity cannot combine the contracts.

Question 6
Manufacture of airplanes for the air force negotiates a contract to design and
manufacture new fighter planes for a Kashmir air base. At the same meeting, the
manufacture enters into a separate contract to supply parts for existing planes at
other bases.
Would these contracts be combined?

Solution:
Contracts were negotiated at the same time, but they appear to have separate
commercial objectives. Manufacturing and supply contracts are not dependent on
one another, and the planes and the parts are not a single performance obligation.
Therefore, contracts for supply of fighter planes and supply of parts shall not be
combined and instead, they shall be accounted separately.

DURATION OF CONTRACT

Question 7
A gymnasium enters into a contract with a new member to provide access to its
gym for a 12-month period at ` 4,500 per month. The member can cancel his or her
membership without penalty after three months. Specify the contract term?

Solution:
The enforceable rights and obligation of this contract are for three months, and
therefore the contract term is three months.

Question 8
A party has unilateral right to terminate the entire wholly unperformed contract.
Will it be considered as contract as per Ind AS 115.

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Solution:
The standard considers that there is NO contract when the parties have the right to
terminate the unperformed contract. A contract is wholly unperformed if both of
the following criteria are met:
(a) the entity has not yet transferred any promised goods or services to the
customer; and
(b) the entity has yet received, and is not yet entitled to receive, any
consideration in exchange for promised goods or services.

Question 9
A maintenance service provider enters into a contract with a customer to provide
monthly services for a three- year period. Customer can terminate the contract at
the end of any month for any reason without compensating other party (that is,
there is no penalty for terminating the contract early.) What is the contract term
in this case?

Solution:
The contract should be treated as a month-to-month contract the three-year stated
term. It means contract period is one month. The parties do not have enforceable
rights and obligations beyond the month.

Question 10
If the above contract can be terminated only by paying penalty ? What would be
contract period?

Solution:
The answer depends on the substantive i.e. materiality of the penalty amount. If it
is a substantive amount, it automatically creates enforceable rights and obligation
for the three years of the contract. Then contract period is 3 years. If the penalty
amount is nominal – it will be treated as month on month contract as discusses in
the above question.

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STEP 2: IDENTIFYING THE PERFORMING OBLIGATION

Performance obligation
Performance obligation is promise in a contract to transfer to the customer either:
(a) A goods or service (or a bundle of goods or services) that is distinct; or
(b) A series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.

Promise Example
• Sale of manufactured goods • A manufacturing entity sells inventory
• Resale of goods purchased • A retail entity sells merchandise
purchased
• Resale of rights to goods or services • A hospitality entity that purchased a
purchased by an entity concert ticket resells the ticket, acting
as principal
• Performing tasks • A professional services entity provides
consulting services
• Providing goods or services to • A manufacturing entity provides
customers on stand-by basis i.e. as and maintenance services on machines sold
when required to a customer when the customer
decides it wants the services
performed
• Construction of an asset for the • A contract or builds a hospital
customers
• Use or access to intellectual property • An entity grants a license to use its
rights of the entity trade name
• Right to purchase additional goods or • A retailer grants a customer an option to
services to the customer in the future buy three items and to receive 60
percent off of a fourth item at a later
date
Once the contract has been identified, an entity needs to evaluate the terms and
customary business practices to identify the promised goods or services which need to
be accounted as performance obligation.

When can we say goods or services are distinct

Goods or services that are promised to a customer are distinct if both conditions are
met:
(a) the customer can benefit from the good or service either on its own or together
with other resources that are readily available to the customer; and
(b) the entity’s promise to transfer the good or service to the customer is separately
identifiable other promises in the contract
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Example: In case of IT Hardware Company sells printers and laptops that
compatible with each other and compatible with other laptops and printers
available in the market. The company would consider the printer and laptop as
separate performance obligation under the contract, as it can sell the laptop and
the printer independently.

Two-step model to identify which goods or services are distinct

Step 2 - Focus on whether

Step 1 - Focus on whether the good or service is
the good or service is distinct in the context of
capable of being distinct the contract

Customer can benefit from The good or service is not

the individual good or integrated with, highly
service on its own Or; dependent on, highly interrelated
Customer can use good or with, or significantly modifying or
service with other readily
customising other promised goods
available resources
or services in the contract
Question 11
A software developer enters into a contract with a customer to transfer a software
license, perform installation and provide software updated and technical support for
five years. He sells the license, installation, updates and technical support separately
to other customers. How many performance obligations exist in this contract?

Solution:
As understood, a contract may have one or more performance obligations. Performance
obligation is a promise to transfer a distinct goods services to the customer.
Goods or services are distinct if they are separately identifiable and customer can
get benefit from the goods or service with on its own or together with other
resources that the customer has.
In the given case, goods are separately identifiable because the developer is selling
separately to other customers. Delivery of software is different from installation,
updates and support and it works without updates and technical support. So we can
say that the customer gets the benefit from each goods or services on its own.
On this basis, we can conclude this contract has the four following performance
obligations:
• Software license;
• Installation service;
• Software updates;
• Technical support

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Question 12
What would be your answer if installation services are critical to produce
customized software required by the customer?

Solution:
In that situation, there are only performance obligations i.e. software and
installation services will be treated as one performance obligation as the
installation services significantly modify and customize the software.

Question 13
A customer approaches a contractor to design and build a house for him. For this
purpose, the contractor will have to provide different services such as designing,
site preparation, electrical, plumbing, civil work and carpentry. The contractor
also provides these services individually to other customers also. So what are the
performance obligations in the contract?

Solution:
In the given context, all the components will be treated as one single performance
obligation because the contractor provides a significant service of integrating the
various goods and services into a home. The customer has contracted to purchase
the home rather than the individual services that make up the home. Another way
of looking at this is, when goods or services are highly dependent or interrelated
with each other, they would constitute a single performance obligation.

Question 14
A construction services company enters into a contract with a customer to build a
water purification plant. The company is responsible for all aspects of the plant
including overall project management, engineering and design services, site
preparation, physical construction of the plant, procurement of pumps and
equipment for measuring and testing flow volumes and water quality, and the
integration of all components.
Determine whether the company has single or multiple performance obligations
under the contract?

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

Question 15
An entity provides broadband services to its customers along with voice call
service. Customer buys modem from the entity. However, customer can also get
the connection from the entity and modem from any other vendor. The installation
activity requires limited effort and the cost involved is almost insignificant. It has
various plans where it provides either broadband services or voice services or both.
Are the performance obligations under the contract distinct?

Solution:
Entity promises to customer to provide
• Broadband Service
• Voice Call services
• Modem

Entity’s promise to provide goods and services is distinct if

• Customer can benefit from the good or service either on its own or together
with other resources that are readily available to the customer, and
• entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract

For broadband and voice call services-

• Broadband and voice services are separately identifiable from other promises
as company has various plans to provide the two services separately. These
two services are not dependent or interrelated. Also the customer can benefit
on its own from the services received.

For sale of modem-

• Customer can either buy product from entity or third party. No significant
Customisation or modification is required for selling product.

Based on the evaluation we can say that there are three separate performance
obligation:-
• Broadband Service
• Voice Call services
• Modem
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Question 16
Entity A, a specialty construction firm, enters into a contract with Entity B to
design and construct a multi-level shopping center with a customer car parking
facility located in sub- levels underneath the shopping center. Entity B solicited
bids from multiple firms on both phases of the project- design and construction.
The design and construction of the shopping Centre and parking facility involves
multiple goods and services from architectural consultation and engineering
through procurement and installation of all of the materials. Several of these goods
and services could be considered separate performance obligation because Entity A
frequently sells the services, such as architectural consulting and engineering
services, as well as standalone construction services based on third party design,
separately. Entity A may require to continually alter the design of the shopping
Centre and parking facility during construction as well as continually assess the
propriety of the materials initially selected for the project.
Determine how many performance obligations does the entity A have?

Solution:
Entity A analyses that is will be required to continually alter the design of the
shopping center and parking facility during construction as well as continually
assess the propriety of the materials initially selected for the project. Therefore,
the design and construction phases are highly dependent on one another (i.e., the
two phases are highly interrelated). Entity A also determines that significant
Customisation and modification of the design and construction services is required
in order to fulfill the performance obligation under the contract. As such, Entity A
concludes that design and construction services will be bundled and accounted for
as one performance obligation.

MODIFICATION OF CONTRACT

A contract modification is Change in the scope or price (or both) of a contract that
is(approved) by the parties to the contract.

A modification should be approved by the parties in writing, by oral agreement or

implied by customary business practices. If the modification is not approved, the entity
should account only the existing contract as per this Ind AS.

Such modification may be accounted as a separate contract or modification to the

existing contract. This depends on the facts and circumstances of each case.
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An entity shall account for a contract modification as a separate contract, if both the
conditions are satisfied
(a) Modification leads to addition of goods or services which distinct from existing
contract; and
(b) It is priced at their stand alone selling prices;

Stand alone selling price

It is a price at which an entity would sell a promised good or service separately to a
customer. For example, an entity might provide a discount to a recurring customer that
is would not provide to new customers. The objective is to determine whether the
pricing reflects the amount that the entity would have negotiated independent of other
existing contracts.

If the goods or services are prices at a discount to the stand-alone selling price,
management will need to evaluate the reason for the discount, because this might be an
indicator the new contract is modification of the existing contract.

Accounting for the modification

Once an entity determines that a contract with a customer has been modified, it needs
to determine whether the modification should be accounted for as a separate contract
as discussed above. If the modification is not accounted for as a separate contract, it
will be accounted for in one of the following three ways:
(a) As a termination of the old contract and the creation of a new contract
(b) By making a cumulative catch-up adjustment to the original contract
(c) A combination of the two

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Are both of following true:

• The scope of the contract increase
because distinct promised good or Yes Account for the modification
services are added to the contract. as a separate contract
• The consideration increases by the
stand-alone selling price of the added
goods or services.

No Allocate the remaining

transaction price not yet
Are the remaining goods or services distinct recognized to the
from the goods or services transferred on or Yes outstanding performance
before the date of the contract obligation. In other words,
modification? treat as a termination of the
old contract and the
creation of a new contract
No

Are the reaming goods or services not Account for the contract
distinct and, therefore, form part of a single modification as if were a
Yes
performance obligation that is partially part of the existing contract-
satisfied at the date of the contract that is, the adjustment to
modification? revenue is made on a
cumulative catch-up basis
Question 17
An entity promises to sell 120 products to a customer for ` 120,000 (` 1,000 per
product). The products are transferred to the customer over a six-month period.
The entity transfers control of each product at a point in time. After the entity has
transferred control of 60 products to the customer, the contract is modified to
require the delivery of an additional 30 products (a total of 150 identical products)
to the customer at a price of ` 950 per product which is the standalone selling
price for such additional products at the time of placing this additional order. The
additional 30 products were not included in the initial contract.
It is assumed that additional products are contracted for a price that reflects the
stand- alone selling price.
Determine the accounting for the modified contract?

Solution:
When the contract is modified, the price of the contract modification for the
additional 30 products is an additional ` 28,500 or ` 950 per product. The pricing
for the additional products reflects the stand-alone selling price or the products at
the time of the contract modification and the additional products are distinct from
the original products.
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Accordingly, the contract modification for the additional 30 products is, in effect,
a new and separate contract for future products that does not affect the
accounting for the existing contract and ` 950 per product for the 30 products in
the new contract.

Question 18
On 1 April, 20X1, KLC Ltd. enters into a contract with Mr. K to provide
• A machine for ` 2.5 million
• One year of maintenance services for ` 55,000 per month
On 1 October 20X1, KLC Ltd. and Mr. K agree to modify the contract to reduce the
amount of services from ` 55,000 per month to 45,000 per month. Determine the
effect of change in the contract?

Solution:
The next six months of services are distinct from the services provided in the first
six months before modification in contract,
Therefore, KLC Ltd. will account for the contract modification as if it were a
termination of the existing contract and the creation of a new contract.
The consideration allocated to remaining performance obligation is ` 270,000,
which is the sum of
● The consideration promised by the customer (including amounts already
received from the customer) that was included in the estimate of the
transaction price and had not yet been recognized as revenue. This amount is
zero.
● The consideration promised as part of the contract modification ie ` 270,000.

Question 19
Growth Ltd enters into an arrangement with a customer for infrastructure
outsourcing deal. Based on its experience, Growth Ltd determines that customizing
the infrastructure will take approximately 200 hours in total to complete the
project and charges ` 150 per hour. After incurring 100 hours of time Growth Ltd
and the customer agree to change an aspect of the project and increases the
estimate of labour hours by 50 hours at the rate of ` 100 per hour. Determine how
contract modification will be accounted as per Ind AS 115?

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

Question 20
Anju Ltd. Provides accounting services. It enters into a 3-year service with
customer for 6,00,000 (2,00,000 per year) is the SSP for the service at inception,
At the end of the second year the parties agree to modify the contract as follows:
(1) the fees for the third year is reduced by ` 90,000 and (2) the contract is
extended for another 3 year of ` 7,50,000 per year(2,50,000 per year). The SSP of
the services at the of modification is 2,30,000. How should this modification be
accounted for?

Solution:
The modification is accounted for prospectively as if the existing arrangement is
terminated and a new contract is entered into Anju Ltd. should reallocated the
remaining services to be provided. Anju Ltd. will recognise a total of ` 8,60,000
(7,50,000 + 1,10,000) over the remaining 4 years’ service period (One year
remaining under the original contract plus three additional years), or ` 2,15,000
per year.

Question 21
Anju Ltd. provides consultancy services. It enters into a 2-year service contract
with customer for ` 6,00,000 (3,00,000 per year) is the SSP for the service at
inception AT the end first year, both the parties agree that the fees should be
3,50,000 per year for the years because the volumes were much larger than larger
than expected. How should this modification be accounted for considering that
services are not distinct?

Solution:
In the given case, services are not distinct and only transaction price is increasing –
Hence the entity should recognise ` 50,000 as cumulative catch up adjustment i.e.
recorded immediately, as soon as the modification is approved by the customer.

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STEP 3: IDENTIFYING THE TRANSACTION PRICE

“The Transaction price is the amount of consideration to which an entity expects to be

entitled in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties (for example, GST etc.)”
The transaction price may be effected by the following reasons:
(1) Variable consideration
(2) Significant finance component
(3) Non cash consideration
(4) Consideration payable to customer

Variable consideration Significant financing component

(and the constraint) For contracts with a significant
An entity estimates the amount of financing component, an entity adjusts
variable consideration to which it the promised amount of consideration
expects to be entitled, considering the to reflect the time value of money
risk of reversal of revenue in making
the estimate
Transaction
Price

Non-cash consideration Consideration payable to acustomer

Non-cash consideration is measured at As entity needs to determine whether
fair value, if that can reasonably consideration payable to a customer
estimates. represents a reduction of the
If not, then an entity uses that stand- transaction of the transaction price, a
alone selling price of the goods and payment for a distinct good or service,
services that was promised in exchange or a combination of the two.
for non-cash consideration.

The standard says estimate the variable consideration should be estimated. How to
estimate? Is there any method suggested?
Yes. There are two method suggested by the standard:

Estimation methods

The Expected Value The Most likely amount

It is a sum of probability–weighted average It is the single most likely amount in a range
amounts in rage of possible consideration of possible consideration amount (i.e. the
amounts. single most likely outcome of the contract)
When con this be used? When the contract as only two possible
Only if an entity has a large number of outcomes(e.g. entity either achieve a
contracts with similar characteristics; Performance bonus or does not)

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There is no free choice to the entity is using either method; the method selected should
be used consistently. A single contract may have more than one variable consideration –
In this case, entity can use expected value method for one variable consideration and
most likely amount method for other variable consideration.

In estimating the variable consideration, the entity should use all available information i.e.
historical, current and forecast. The information should be similar to the information which
is used at the time of bid and proposal process for establishing the prices.

Constraining estimates of variable consideration

Variable consideration is included in the transaction price ONLY IF it is highly probable that
the amount will not result in a significant revenue reversal of cumulative recognised when
the uncertainty associated with the variable e consideration is subsequently resolved (i.e. it
is highly probable that is will not be reversed). For this purpose, entity should consider both
the likelihood and magnitude of the revenue reversal.

In some contracts, penalties are specified. In such cased, penalties shall be accounted
for as per the substance of the contract. Where the penalty is inherent in determination
of transaction price, it shall form part of variable consideration For example, where an
entity agrees to transfer control of a good or service in a contract with customer at the
end of 30 days for ` 1,00,000 and if it exceeds 30 days, the entity is entitled to receive
only ` 95,000 the reduction on ` 5,000 shall be regarded as variable consideration. In
other cases, the transaction price shall be considered as fixed.
Reassessment of variable consideration
At the end of each reporting period, an entity shall update the estimate transaction price
(including updating constraints) to represent faithfully the circumstance present at the end
of the reporting period and the changes in circumstances during the reporting period.

Let us discuss few variable consideration estimation basis in the following table:

Variable
Estimation basis
consideration
Volume These are incentives to encourage additional purchases and customer
Rebates loyalty. This is generally given to a customer to purchase a specified
amount of goods or services, after which the price is either reduced
prospectively for additional goods or services purchased in the future
OR retrospectively reduced for all purchases during the specific
period. Retrospective value discounts included the variable
consideration as the transaction price for the current purchases are
not known till the uncertainty of discount is resolved Management
should use experience and other information to make a reasonable
Estimate.

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Price Price concessions are adjustment to the initial contract and provided
concessions for a variety of reasons.
For Example, a vendor might accept a lover payment than the amount
contractually due form a customer, to encourage the customer pay
for previous purchase and continue making future purchases. Price
concessions are also sometime provided where a customer has
experienced some level of dissatisfaction with that good or service
(other than items covered by warranty) Management should assess
the likelihood of offering price concession. An entity that expects to
provide a price concession or practice of doing so, should reduce the
transaction price to reflect the consideration to which is expects to
be entitled after the concession is provided.
Prompt Customer purchases frequently include a discount of early payment
payment For example, an entity might offer a 2% discount if an invoice is paid
discounts within 10 days of receipt. A portion of the Consideration is variable
(Cash inthis situation, because there is uncertainty as to whether the
discounts) customer will pay the invoice within the discount period.
Management need to make an estimate of the consideration that is
expect to be entitled to as a result of offering this incentive.
Experience with similar customers and similar transactions should be
considered in determining the number of customers that are expected
to receive the discount.
Variable Estimation basis
consideration
Price based on A contract could include variable consideration if pricing is based on a
a Formula formula or a contractual rate per unit of outputs and there is an
undefined quantity of outputs The Transaction price is variable
because is based on an unknown number of outputs. For example, a
hotel is management entity enters into an arrangement to manage
properties on behalf of a customer for a 5 - year period Contract
consideration is based on a defined percentage of daily receipts the
consideration is variable for this contract as it will be calculated
based on daily receipts. The promise to the customer is to provide
management services for the terms of the contract; therefore, the
contract contains a variable fee.
Price Price protection clauses allow a customer to obtain a refund if the
protection seller reduces the product’ price to any other customers during a
and price specified period. Say one customer bought at ` 100 per unit and
matching subsequently due any reason the product price is reduced to ` 90
during the year. In this case, if the customer has price protection he
gets back ` 10.
Price matching provisions require an entity to refund a portion of the
transaction price if a competitor lowers its price on a similar product.

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In this case, if the market price of the item. i.e. even competitor
reduces the price to ` 90, the entity should pay ` 10 to the customer.
In Addition some arrangements allow for price protection only on the
goods that remain in a customer’s inventory. It means this rule is
applicable to the unsold stock of the customer.
Both of these provisions create a possibility of subsequent
adjustments to the stated transaction price.
Management needs to estimate the number of units to which the
price protection guarantee applies in such cases, to determine the
transaction price, as the reimbursement does not apply to unit
already sold by the customer.
Non-cash • Non-cash consideration should be measured at FAIR VALUE
consideration • If the entity cannot reasonably measure – Stand alone selling
price of goods or services is the value of non- cash
consideration;
• If non- cash consideration varies for reasons other than only the
form of it apply the constraining requirements;
• If customer gives goods or services like materials’ equipment of
labour- Assess whether entity obtains controls over it -If Yes,
recognise revenue.

Time value of money/significant financing component/deferred credit period

Normally credit period in many industries is 1 to 6 months (max.) If an entity is providing a
credit period for a longer period (Say more than one year ) i.e. called as deferred period It
is apparent that invoice amount includes inters element (that means there is a financing
arrangement between the parties). That interest should be separated (deducted) from the
transactions price and recognised in the statement of P&L as expense.
• If there is a significant financing component in the contact, it should be considered
whether it is explicitly mentioned in the agreement or it is implicit;
• In determining the interest element the entity should consider the following:
 Difference between promised consideration and Cash selling price; and
 Combined effect of the deferred period & interest rates prevailing in the market.

Discounting Rate
The entity should use the rate that reflects the credit characteristics of the party and
any collateral or security provided by the customer or the entity, including assets
transferred in the contract. The rate can be determined by identifying the rate that
discounts the nominal amount of the promised consideration to Cash selling price i.e.
IRR between the promised consideration and cash price (effective rate of return).
After contract inception, an entity shall not update the discount rate for changes in
interest rates on other circumstances (such as a change in the assessment of the
customer’s credit risk).
As a practical expedient, an entity NEED NOT apply this concept if the deferred is less
than or equal to a year.

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Consideration payable to a customer/customer loyalty programs
Consideration payable to a customer includes
• Cash amount e.g. cash back offers;
• A credit or other items e.g. a coupon or voucher;
Consideration payable to a should be reduced from the transaction price unless
The entity received a distinct goods or services from the customer.
If the consideration payable to a customer include a variable amount, an entity shall
estimate the transaction price (including considering the constraints);
Payments made by an entity to its customer’s customer are assessed and accounted for
the same as those paid directly to the entity’s customer.

Accounting for consideration paid to a customer for supplying a distinct goods or

services to the entity
If it is paid for a distinct good or service from the customer account for the purchase in
the same way that is accounts for other purchases from suppliers.
If the amount of consideration payable to the customer exceeds the fair value of the
distinct good or service received from the customer, then such an excess amount should
be reduced from the transaction price.
The below diagram summarises the guidance above:

Is the consideration payable to a No

customer a payment for a distinct Account for the consideration as a
good or services from the customer? reduction of the transaction price

Yes
Account for the excess portion as a
Yes reduction of the transaction price.
Does the consideration exceed the
However, reminders is accounted
fair value of the distinct goods and
from suppliers for as a purchase
services that the entity receives
from Suppliers
from the customer?

No

Account for the purchase of the

good or service in the same way
that the entity accounts for other
purchases from suppliers

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Refund liabilities

An entity shall recognise a refund liability if the entity receives consideration from a
customer and expects to refund some or all of that consideration to the customer. A
refund liability is measured at the amount of consideration received (or receivable) for
which the entity does not expect to be entitled (i.e. amounts not included in the
transaction price). The refund liability (and corresponding change in the transaction
price and, therefore, the contract liability) shall be updated at the end of each
reporting period for changes in circumstances.

While the most common form of refund liabilities may be related to sales with a right of
return, the refund liability requirements also apply when an entity expects that it will
need to refund consideration received due to poor customer satisfaction with a service
provided (i.e. there was no good delivered or returned) and/or if an entity expects to
have to provide retrospective price reductions to a customer (e.g. if a customer reaches
a certain threshold of purchases, the unit price will be retrospectively adjusted).

Question 22
XYZ Limited enters into a contract with a customer to build a sophisticated machinery.
The promise to transfer the asset is a performance obligation that is satisfied over
time. The promised consideration is 2.5 ` Crores, but that amount will be reduced or
increased depending on the timing of completion of the asset. Specifically, for each
day after 31 March 20X1 that the asset is incomplete, the promised consideration is
reduced by ` 1 lakh. For each day before 31 March 20X1 that the asset is complete,
the promised consideration increases by ` 1 lakh. In addition, upon completion of the
asset, a third party will inspect the asset and assign a rating based on metrics that are
defined in the contract. If the asset receives a specified rating, the entity will entitled
to an incentive bonus of ` 15 lakhs.
Solution:
In determining the transaction price, the entity prepares a separate estimate for
each element of variable consideration to which the entity will be entitled using
the estimation methods described in paragraph 53 of Ind AS 115.
(a) The entity decides to use the expected value method to estimate the variable
consideration associated with daily penalty or incentive (i.e. ` 2.5 cores, plus
or minus` Lakh per day). This is because it is the method that entity expects
to better predict the amount of consideration to which it will entitled.
(b) The entity decides to use the most likely amount to estimate the variable
consideration associated with the incentive bonus. This is because there are
only two possible outcomes (` 15 lakhs or ` Nil) and it is the method that the
entity expects to better predict the amount of consideration to which it will
be entitled.

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Question 23
AST Limited enters into a contract with a customer to build a manufacturing facility.
The entity determines that the contract contains one performance obligation satisfied
over time. Construction is scheduled to be completed by the end of the 36th month
for an agreed-upon price of ` 25 cores.
The entity has the opportunity to earn a performance bonus for early completion as
follows:
• 15 percent bonus of the contract price if completed by the 30th month
(25% likelihood)
• 10 percent bonus if completed by the 32nd month (40% likelihood)
• 5 percent bonus if completed by the 34th month (15% likelihood)
In addition to the potential performance bonus for early completion, AST Limited is
entitled to a quality bonus ` 2 crores if health and safety inspector assigns the facility
a gold star rating as defined by the agency in the terms of the contract. AST Limited
concludes that it is 60% likely that is will receive the quality bonus.
Determine the transaction price.

Solution:
In determining the transaction price, AST Limited separately estimates variable
consideration for each element of variability i.e. the early completion bonus and
the quality bonus.
AST 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
contract 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. AST’s best estimate of the early
completion bonus is ` 2.13 crores, calculated as shown in the following table:
Amount of bonus Probability-weighted
Bonus% Probability
(` incrores) Amount(` in crores)
15% 3.75 25% 0.9375
10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% --
2.125
AST 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 crores or ` Nil) and this method would best predict the
amount of consideration associated with the equality bonus. AST Limited believes
the most likely amount of the equality bonus is ` 2 crores.
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Question 24
HT Limited enters into a contract with a customer on 1 April 20X1 to sell product X for
` 1,000 per unit. If customer purchases more than 100 units of product A in financial
year, the contract specifies that price per unit is retrospectively reduced to ` 900 per
unit. Consequently, the consideration in the contract is variable.
For the first quarter ended 30 June 20X1, the entity sells 10 units of product A to the
customer. The entity estimates that the customer’s purchases will not exceed the 100
unit threshold required for the volume discount in the financial year. HT Limited
determines that it has significant experience with this product and with the purchasing
pattern of the customer. Thus, HT Limited concludes that it is highly probable that a
significant reversal in the cumulative amount of revenue recognised (i.e. ` 1,000 per
unit) will not occur when the uncertainty is resolved (i.e. when the total amount of
purchase is known).
Further, in May 20X1, the customer acquires another company and in the second
quarter ended 30 September 20X1 the entity sell s an additional 50 units of Product A
to the customer. In the light of the new fact, the entity estimates that the customer’s
purchases will exceed the 100 unit threshold for the financial year and therefore it
will be required to retrospectively reduce the price per unit to` 900.
Determine the amount of revenue to be recognise by HT Ltd. For the quarter ended
30 June 20X1 and 30 September 20X1.

Solution:
The entity recognises revenue of ` 10,000 (10 units x` 1,000 per unit) for the
quarter ended30 June 20X1.
HT Limited recognises revenue of ` 44,000 for the quarter ended 30 September
20X1. That amount is calculated from ` 45,000 for the sale of 500 units (50 units x
` 900 per unit) lees the change in transaction price of ` 1,000 (10 units x ` 100
price reduction) for the reduction of revenue relating to unit sold for the quarter
ended 30 June 20X1.

Question 25
An entity enters into 1,000 contracts with customers. Each contract includes the
sale of one product for `50 (1,000 total products x ` 50 = ` 50,000 total
consideration). Cash is received when control of a product transfers. The entity’s
customary business practice is to allow a customer to return any unused product
within 30 days and receive a full. The entity’s cost of each product is `30.
The entity applies the requirement in Ind AS 115 to the portfolio of 1,000 contracts
because it reasonably expects that, in accordance with paragraph 4, the effects on
the financial statements from applying these requirements to the portfolio would
not differ materially from applying the requirements to the individual contracts
within the portfolio. Since the contract allows a customer to return the products

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the consideration received from the customer is variable. To estimate the variable
consideration to which the entity will be entitled, the entity decides to use the
expected value method (see paragraph 53 (a) of Ind AS 115) because it is the
method that the entity expects to better predict the amount of consideration to
which it will be entitled. Using the expected value method, the entity estimates
that 970products will not returned.
The entity estimates that the costs of recovering the products will be immaterial
and expects that the returned products can be resold at a profit.
Determine the amount of revenue, refund liability and the asset to be recognised
by the entity for the said contracts.

Solution:
The entity also considers the requirements in paragraphs 56-58 of Ind AS 115 on
constraining estimates of variable consideration to determine whether the
estimates amount of variable consideration of ` 48,500 (` 50 x 970 products not
expected to be returned) can be included in the transaction price. The entity
considers the factors in paragraph 57 of Ind AS 115 and determines that although
the returns are outside the entity’s influence, it has significant experience in
estimating returns for this product and customer class. In addition, the uncertainty
will be resolved within a short time frame (i.e. the 30- day return period). Thus,
the entity concludes that it is highly probable that a significant reversal in the
cumulative amount of revenue recognised (i.e. ` 48,500) will not occur as the
uncertainty is resolved (i.e. over the return period).
The entity estimates that the costs of recovering the products will be immaterial
and expects that the returned products can be resold at profit.
Upon transfer of control of the 1,000 products, the entity not recognise revenue for
the 30products that it expects to be returned. Consequently, in accordance with
paragraphs 55 andB21 of Ind AS 115, the entity recognises the following:
(a) Revenue of ` 48,500 (` 50 x 970 products not expected to be returned);
(b) a refund liability of ` 1,500 (` 50 refund x 30 products expected to be
retuned); and
(c) an assets of ` 900 (` 30 x 30 products for its right to recover products from
customers on setting the refund liability).

Question 26
A commercial airplane component supplier enters into a contract with a customer
for promised consideration of ` 7,000,000. Based on an evaluation of the facts and
circumstances, the supplier concluded that ` 140,000 represented a insignificant
financing component because of an advance payment received in excess of a year
before the transfer of control of the product.
State whether company needs to make any adjustment in determining the
transaction price.
What if the advance payment was larger and received further in advance, such that
the entity concluded that ` 1,400,000 represented the financing component based
on an analysis of the facts and circumstances.
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Solution:
The entity may conclude that ` 140,000, or 2 percent of the contract price, is not
significant, and the entity may not need to adjust the consideration in determining
the transaction price.
However, when the advance payment was larger and received further in advance
such that the entity may conclude that ` 1,400,000 represents the financing
component based on an analysis of the fact and circumstances. In such a case, the
entity may conclude that `1,400,000, or 20 percent of the contract price, is
significant, and the entity should adjust the consideration promised in determining
the transaction price.
Note: In this illustration, the entity’s conclusion that 2 percent of the transaction
price was not significant and 20 percent was significant is a judgment based on the
entity’s facts and circumstances. An entity may a different conclusion on its facts
and circumstances.

Question 27
NKT Limited sells a product to a customer for ` 121,000 that is payable 24 months
after delivery. The customer obtains control of the product at contract inception.
The contract permits the customer to return the product within 90 days. The
product is new and the entity has no relevant historical evidence of product returns
or other available market evidence.
The cash selling price of the product is ` 100,000 which represents the amount that
the customer would pay upon delivery for the same product sold under otherwise
identical terms and conditions as at contract inception. The entity’s cost of the
product is ` 80,000. The contract includes an implicit interest rate of 10 per cent
(i.e. the interest rate that over24 months discounts the promised consideration of
` 121,000 to the cash selling price of `100,000). Analyse the above transaction with
respect to its financing component.

Solution:
The contract includes a significant component. This is evident from the difference
between the amount of promised consideration of ` 121,000 and the cash selling
price of ` 100,000 at the date that the goods are transferred to the customer.
The contract includes an implicit rate of 10 per cent (i.e. the interest rate that
over 24months discounts the promised consideration of ` 121,000 to the cash
selling price of `100,000). The entity evaluates the rate concludes that is
commensurate with the rate that would be reflected in a separate financing
transaction between the entity and its customer at contract inception.
Until the entity receives the cash payment from the customer, interest revenue
would be recognised in accordance with Ind AS 109. In determining the effective
interest rate in accordance with Ind AS 109, the entity would consider the
remaining contractual term.
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Question 28
VT Limited enters into a contract with a customer to sell equipment. Control of the
equipment transfers to the customer when the contract is signed. The price stated
in the contract is ` 1 crore plus a 10% contractual rate of interest, payable in 60
monthly instalments of `212,470.
Determine the discounting rate the transaction price when
Case A- Contractual discount rate reflects the rate in separate financing
transaction
Case B – Contractual discount rate does not reflect the rate in a separate financing
transaction i.e. 14%

Solution:
Case A – Contractual discount rate reflects the rate in a separate financing
transaction
In evaluating the discount rate in the contract that contains a significant financing
component, VT Limited observes that the 10% contractual rate of interest reflects
the that would be used in a separate financing transaction between the entity and
its customer at contract inception (i.e. the contractual rate of interest of 10%
reflects the credit characteristics of the customer).
The market terms of the financing mean that the cash selling price of the
equipment is `1 crore. This amount is recognised as revenue and as a loan
recevable when control of the equipment transfers to the customer. The entity
account for the receivable in accordance with Ind AS 109.

Case B- Contractual discount rate does reflect the rate in a separate financing
transaction
In evaluating the discount rate in the contract that contains a significant financing
component, the entity observes that the 10% contractual rate of interest is
significantly lower than the14% interest rate would be used in a separate financing
transaction between the entity and its customer at contract inception (i.e. the
contractual rate of interest of 10% does not reflect the credit characteristics of the
customer). This suggests that the cash selling price s less than ` 1
VT Limited determines the transaction price by adjusting the promised amount of
consideration to reflect the contractual payments using the 14% interest rate
reflects the credit characteristics of the customer. Consequently, the entity
determines that transaction price is ` 9,131,346 (60 monthly payments of ` 212,470
discounted at 14%). The entity recognises revenue and a loan receivable for that
amount. The entity accounts for the loan receivable in accordance with Ind AS 109.

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Question 29
ST Limited enters into a contract with a customer to sell an asset. Control of the
asset will transfer to the customer in two years (i.e. the performance obligation
will be satisfied at a point in time). The contract includes two alternative payment
options:
(1) Payment of ` 5,000 in two years when the customer obtains control of the
asset or
(2) Payment of ` 4,000 when the contract is signed. The customer elects to pay
` 4,000 when the contract is signed.
ST Limited concludes that the contract contains a significant financing component
because of the length of time between when the customer pays for the asset and
when the entity transfers the asset to the customer, as well as the prevailing
interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest
rate necessary to make the alternative payment options economically equivalent.
However, the entity determines that, the rate that should be used in adjusting the
promised consideration is 6% which is the entity’s incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant
financing component.

Solution:
Journal Entries showing accounting for the significant financing component:
(a) Recognise a contract liability for the ` 4,000 payment received at contract
inception:
Cash Dr. ` 4,000
To Contract liability ` 4,000

(b) During the two years from contract inception until the transfer of the asset,
the entity adjusts the promises amount of consideration and accretes the
contract liability by recognising interest on ` 4,000 at 6% for two years:
Interest expense Dr. ` 494*
To Contract liability ` 494
` 494 = ` 4,000 contract liability x (6% interest per year for two years).

(c) Recognise revenue for the transfer of the asset.

Contract liability Dr. ` 4,494
To Revenue ` 4,494

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Question 30
ABC Limited enters into a contract for the construction of a power plant that
includes scheduled milestone payments for the performance by ABC Limited
throughout the contract term of three years. The performance obligation will be
satisfied over time and the milestone payments are scheduled to coincide with the
expected performance by ABC Limited. The contract provides that a specified
percentage of each milestone payment is to be withheld as retention money by the
customer throughout the arrangement and paid the entity the building is complete.
Analyse whether the contract contains any financing Component.

Solution:
ABC Limited concludes that the contract does not include a significant financing
component since the milestone payments coincide with its performance and the
contract requires amounts to be retained for reasons other than the provision of
finance. The withholding of a specified percentage of each milestone payment is
intended to protect the customer from the contractor failing to adequately
complete its obligations under contract.

Question 31
A computer hardware vendor enters into a three- year arrangement with a
customer to provide support services. For customers with low credit ratings, the
vendor requires the customer to pay for the entire arrangement in advance of the
provision of service. Other customers pay over time.
Analyse whether there is any significant financing component in the contract or
not.

Solution:
Due to this customer’s rating, the customer pays in advance for the three-year
term. Because there is no difference between the amount of promised
consideration and the cash selling price (that is, the customer does not receive a
discount for paying in advance), the vendor requires payment in advance only to
protect against customer non-payment, and no other factors exist to suggest the
arrangement contains a financing, the vendor concludes this contract does not
provide the customer or the entity with a significant benefit of financing.

Question 32
An EPC contractor enters into a two-year contract to develop customised machine
for a customer. The contractor concludes that goods and services in this contract
constitute a single performance obligation.
Based on the terms of the contract, the contactor determines that is transfers
control over, time, and recognised revenue based on an input method best

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reflecting the transfer of control to the customer. The customer agree to provide
the contractor monthly progress payments, with the final 25 percent payment
(holdback payment) due upon contract completion. As a result of the holdback
payment, there is a gap between when control transfers and when consideration is
received, creating a financing component.

Solution:
There is no difference between the amount of promised consideration and the cash
selling price (that is, the customer did not pay a premium a portion of the
consideration in arrears). The payment terms included a holdback payment only to
ensure successful completion of the project, and no other factors exist to suggest
the arrangement contains a financing. Hence, the contractor this does not provide
the customer or the contractor with a significant benefit of financing.

Question 33
Company Z is a developer and manufacture of defence systems that is primarily a
Tier-II suppler of parts and integrated systems to original equipment manufacturers
(OEMs) in the commercial markets. Company Z enters into a contract with Company
X for the development and delivery of 5,000 highly technical, specialised missiles
for use in one Company X’s platforms.
As a part of the contract, Company X has agreed to pay Company Z for their cost
plus an award fee up to ` 100 crores. The consideration will be paid by the
customer related to costs incurred near the time Company Z incurs such cost.
However, the ` 100 crores award fee is awarded upon successful completion of the
development and test fire of a missile to occur in 16 months from the contract is
executed.
The contract specifies Company Z will earn up to ` 100 crores based on Company
X’s assessment of Company Z’s ability to develop and manufacture a missile that
achieves multiple factors, including final weight, velocity, and accuracy. Partial
award fees may be awarded based on a pre-determined scale based on their
success.
Assume Company Z has assessed the under Ind AS 115 and determined the award
fee represents variable consideration Based of their assessment, Company Z has
estimated a total of ` 80 crores in the transaction price related to the variable
consideration pursuant to guidance within Ind AS 115. Further, the entity has
concluded it should recognised revenue over time for a single performance
obligation using a cost-to cost input method.
Analyse whether there is any significant financing component in the contract or
not.

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Solution:
The intention of the parties in negotiating the award fee upon completion of the
test fire, and based on the results of that test fire, was to provide incentive to
Company Z to producer high functioning missiles that achieved successful scoring
from Company X.
Therefore, it was determined the contract does not contain a significant financing
component, and Company Z should not adjust the transaction price.

Question 34
An entity enters into a contract with a customer to provide a weekly service for
one year. The contract is signed on 1st April 20X1 and work begins immediately.
The entity concludes that the service is a single performance obligation. This is
because the entity is providing a series of distinct services that are substantially
the same and have the same pattern of transfer (the services transfer to the
customer over time and use the same method to measure progress – that is, a time-
based measure of progress).
In exchange for the service, the customer promises its 100 equity shares par week
of service a (a total of 5,200 shares for the contract). The terms in the contract
require that the shares must be paid upon the successful completion of each week
of service.

Solution:
The entity measures its progress towards complete satisfaction of the performance
obligation as each week of service is complete. To determine the transaction price
(and the amount of revenue to be recognised), the entity has to measure the fair
value of 100 shares that are received upon completion of each weekly service. The
entity shall not reflect any not reflect any subsequent changes in the fair value of
the shares received (or receivable) in revenue.

Question 35
RT Limited enters into a contract to build an office building for AT Limited over an
18- month period. AT Limited agrees to pay the construction entity ` 350 crores for
the project. RT Limited will receive a bonus of 10 lakhs equity shares of AT Limited
if is completes construction of the office building within one year. Assume a fair
value of ` 100 per share at contract inception. Determine the transaction price.

Solution:
The ultimate value of nay shares the might receive could change for two reasons:
(1) The entity earns or does not earn the shares and
(2) The fair value per share may change during the contract term.

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When determining the transaction price, the entity would reflect changes in the
number of shares to be earned. However, the entity would not reflect changes in
the fair value per share. The share price of ` 100 is used to value the potential
bonus throughout the life of the contract.
As a result, if the entity earns the bonus, its revenue would be ` 350 crores plus
10 lakhs equity shares at ` 100 per share for total consideration of ` 360 crores.

Question 36
MS Limited is a manufacture of It has supplier of steering systems – SK Limited. MS
Limited places an order of 10,000 steering systems on SK Limited. It also agrees to
pay ` 25,000 per steering system and contributes tooling to be used in SK’s
production process.
The tooling has a fair value of ` 2 crores at contract inception. SK Limited
determines that each steering system represents a single performance obligation
and that control of the steering system transfers to MS Limited upon delivery.
SK Limited may use the tooling for other projects and determines that it obtains
control of the tooling.
Determine the transaction price?

Solution:
AS a result, at contract inception, SK Limited includes the fair value of the tooling
in the transaction price at contract inception, which it determines to be ` 27 crores
(` 25 crores for the steering systems and ` 2 cores for the tooling).

Question 37
An entity that manufactures consumer goods enters into a one- year contract to
sell goods to a customer that is a large global chain of retail stores. The customer
commits to buy at least ` 15 crores of products during the year. The contract also
requires the entity to make a non-refundable payment of ` 1.5 crores to the
customer at the inception of the contract. The ` 1.5 crores payment will
compensate the customer for the changes it needs to make to its shelving to
accommodate the entity’s products. The entity does not obtain of any rights to the
customer’s shelves.
Determine the transaction price.

Solution:
The entity considers the requirements in paragraphs 70 -72 of Ind AS 115 and
concludes that the payment to the customer is not in exchange for a distinct good
or service that transfers tothe entity. This is because the entity does not obtain
control of any rights to the customer’s shelves. Consequently, the entity
determines that, in accordance with paragraph 70 of Ind AS 115, the ` 1.5 crores
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payment is a reduction of the transaction price. The entity apples the requirement
in paragraph 72 of Ind AS 115 and concludes that the consideration payable is
accounted for as a reduction in the transaction price when the entity recognises
revenue for the transfer of the goods. Consequently, as the entity transfers goods
to the customer, the entity reduces the transaction, price for each good by 10 per
cent [(` 1.5 crores ÷ ` 15crores)] Therefore in the first month in which the entity
transfers goods to the customer, the entity recognises revenue of ` 1.125 cores
(` 1.25 Crores invoiced amount less ` 0.125 crore of consideration payable to the
customer).

Question 38
A seller offers a cash discount for immediate or prompt payment (i.e. earlier than
required under the normal credit terms). A sale is made for ` 100 with the balance
due within 90 days. If the customer pays within 30 days, the customer will receive
a 10% discount on the total invoice. The seller sells a large volume of similar items
on these credit terms (i.e. this transaction is part of a portfolio of similar items).
How should the seller account for this early payment incentive- if discount is taken
by 40% of transactions.

Solution:
In the circumstances described, revenue is ` 100 if the discount is not taken and
` 90 if the discount is taken, As a result, the amount of consideration to which the
entity will entitled is variable.
Under Ind AS 115, if the consideration promised in a contract includes a variable
amount, an entity should estimate the amount of variable consideration to which it
will be entitled by(1)using either the expected value or the most likely amount
method (whichever method the entity expects would better predict the amount of
consideration to which it will be entitled), and then (2) considering the effect of
the constraint.
Therefore, the seller should recognises revenue net of the amount of cash discount
expected to be taken, measured as described in the precious paragraph. Expected
value will be calculate as follows (` 100x 60%) + (` 90 X 40) = ` 96

Question 39
What if the proportion of transactions for which the discount is taken varies
significantly which will result in the recognition of less revenue. Based on
historical, although the term average is 40% there is grate variability from month to
month and that the proportion of transactions for which the discount is taken is
frequently as high as 70% (but never higher than). How to account revenue under
these circumstances?

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Solution:
In Such a scenario, the seller might conclude that only 30% of the variable
consideration should be included, because inclusion of a higher amount might
result in significant revenue reversal. In that case, the amount of revenue
recognised would be restricted to the following (conservative)
(`100 x30) + (` 90 x70%) = ` 93

Question 40
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
18,00,000 points remained undiscounted (to be redeemed till31st 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
ona 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) 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
year2018-2019 and what will be the amount of balance deferred revenue?
(e) How much revenue will the merchant recognized in the year 2019-2020, if
3,00,000 points are redeemed in the year 2019-2020?

Solution:
(a) Points earned on ` 10,00,000 @ 10 points on every ` 500 = [(10,00,000/500) x 10]
=20,000 points.
Value of points = 20,000 points x ` 0.5 each point = ` 10,000

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Revenue recognized for sale of goods `9,90,099 [10,00,000x(10,00,000/10,10,000)]
Revenue for points deferred `9,901 [10,00,000x(10,000/10,10,000)]

Journal Entry
` `
Bank A/c Dr. 10,00,000
To Sales A/c 9,90,099
To Liability under Customer Loyalty programme 9,901

(b) Points earned on ` 50,00,00,000 @ 10 points on every ` 500

=[(50,00,00,000/500) x 10] = 1,00,00,000 points.
Value of points = 1,00,00,000 points x ` 0.5 each point = ` 50,00,000
Revenue recognized for sale of goods = ` 49,50,49,505
[50,00,00,000 x (50,00,00,000 / 50,50,00,000)]
Revenue for points = ` 49,50,495 [50,00,00,000x (50,00,000 / 50,50,00,000)]

JournalEntries intheyear2017-18
` `
Bank A/c Dr. 50,00,00,000
To Sale sA/c 49,50,49,505
To Liability under Customer Loyalty programme 49,50,495
(On sale of Goods) 42,11,002
Liability under Customer Loyalty programme 42,11,002
To Sales A/c
(On redemption of (100lakhs-18lakhs)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) = 42,11,002

(c) Revenue to be deferred with respect to undiscounted point in 2017-2018

= 49,50,495– 42,11,002 = 7,39,493

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(d) In 2018-2019, KK Ltd. would recognize revenue for discounting of 60% of
outstanding points as follows:
Outstanding points = 18,00,000 x 60% = 10,80,000 points
Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points
Revenue to be recognized in the year 2018-2019 =
{49,50,495 x (92,80,000 / 96,40,000)} - 42,11,002] = ` 5,54,620.

Journal Entry in the year 2018-2019

` `
Liability under Customer Loyalty programme Dr. 5,54,620
To Sales A/c 5,54,620
(On redemption of further 10,80,000points)

Journal Entry in the year 2019-2020

` `
Liability under Customer Loyalty programme Dr. 1,84,873
To Sales A/c 1,84,873
(On redemption of further 10,80,000 points)

Question 41
A Ltd., A telecommunication company, entered into an agreement with B Ltd. Which
is engaged in generation supply of power, the agreement provide that A Ltd. Will
provide1,00,000 minutes talk time free to employees of B Ltd. In exchange for
getting free power equivalent to 20,000 units. A of Ltd. normally charges ` 0.50 per
minute and B Ltd. Charges` 3 per unit. How to measure revenue of A Ltd. And B Ltd?

Solution:
As per Ind AS 115, when non-cash consideration is received Revenue should be
measured at Fair value of goods/services received/ adjusted by any cash
equivalents transferred;
In the given case, as power per unit rate is clearly available, sales should be
recorded at` 60,000 (i.e. 20,000 units x ` 3 per unit) in the books of A Ltd. Revenue
in the books of B Ltd. Would be ` 50,000 (i.e. 1,00,000 units x ` 0.5.per minute);

Question 42
X Ltd. A dealer of garments, got the renovation of one shop carried out by Y Ltd. In
turn, it gave 100 T – Shirts and ` 3,000 to Y Ltd. As full payment of the renovation
work. Y Ltd. would normally charge ` 15,000 for the work done. X Ltd. Usually sells
T – Shirts at ` 120each. How both X Ltd. Y Ltd. Will account for the above
transactions?
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Solution:
X Ltd. Books;
It received service (non-cash consideration) in exchange of goods, In this case, the
revenue is measured at the fair value of the goods or services received, adjust by
the amount of any cash or cash equivalents transferred.
The fair value of service received is ` 15,000 (i.e. the amount that Y Ltd. normally
charge for the same work) and also X Ltd. Has transferred cash of ` 3,000 to Y Led. So X
Ltd. Will recognise revenue from sale of goods (T-shirts) as 12,000 (` 15,000 – ` 3,000).
If assume renovation work is Capitalised-
PPE a/c Dr 15,000
To Sales a/c 12,000
To Cash a/c 3,000
Y Ltd. Books:
It will recognise revenue (from renovation activities) as ` 15,000 (` 120 x 100) + 3,000]

Question 43
X Ltd. Is engaged in manufacturing and selling of designer furniture. It sells goods
extended credit On 1st April, 2018, it sold furniture for ` 48,40,000 to a customer,
the payment against which was receivable after 24 months. He sells the same
furniture at ` 40,00,000 to other customer who pays cash on the date of sale. How
will X Ltd. Recognise revenue for the above transaction?

Solution:
In the give case, the credit period is a deferred credit period. There is significant
financing component involved and not mentioned explicitly in the contract. The
entity should account for the time value of money as interest income.
Interest element = Promised consideration – cash selling price
= ` 48,40,000 – ` 40,00,000= `8,40,000.
Internal rate of rerun between ` 48,40,000 &` 40,00,000 is 10% The interest
revenue should be accounted for using the same rate.

The following journal entry should be recoded

Date Journal entry Debit Credit
1st April 2018 Customer A/c Dr. 40,00,000
To Sales (Revenue) A/c 40,00,000
(Being revenue is recognised at fair value)

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Date Journal entry Debit Credit
31st Mar 2019 Customer A/c Dr. 40,00,000
To Interest Income A/c 40,00,000
(Being finance income is recognised at
effective Rate i.e. ` 44,00,00 x 10%)

Receivable amount as at 31st March 2020 = ` 40,00,000 + ` 4,00,000 + 4,40,000

` 48,40,000
31st Mar 2020 Customer A/c Dr. `48,40,00
To Customer `48,40,00
(Being receipt of consideration is accounted)

STEP 4: ALLOCATION OF TRANSACTION PRICE

This involves allocating transaction price to each of the separate performance obligation
identified in STEP 2, based on relative standalone selling prices. The best evidence of
stand alone selling price is the observable price of a good or service when the entity
sells that good or service separately in similar circumstances to similar customers. The 2
exceptions to the general allocation guidance are discounts & variable consideration
While allocating the transaction price, the objective of the entity should be to allocate
the transaction price to each performance obligation (or distinct good or service) in an
amount that depicts the amount of consideration to which the entity expects to be
entitled in exchange for transferring the promised goods or services to the customer
The stand-alone selling price is the price at which an entity would sell a promised good
or service separately to a customer. An entity shall determine the stand-alone selling
price at contract inception of the distinct good or service underlying each performance
obligation in the contract and allocate the transaction price in proportion to those
stand-alone selling prices, to allocate the transaction price to each performance
obligation on a relative stand-alone selling price basis. Evaluating the evidence related
to estimating a stand -alone selling price may require significant judgment
Methods for estimating the stand -alone selling price of a good or service include the
following:-
(a) Adjusted market assessment approach – an entity could evaluate the market in
which itsells goods or services and estimate the price that a customer in that
market would be willing to pay for those goods or services. That approach might
also include referring to prices from the entity’s competitors for similar goods or
services and adjusting those prices as necessary to reflect the entity’s costs and
margins.

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(b) Expected cost plus a margin approach – an entity could forecast its expected costs
of satisfying a performance obligation and then add an appropriate margin for that
good or service. When determining which costs to include in the selling price
analysis, an entity should develop and consistently apply a methodology that
considers direct and indirect costs, as well as other relevant costs considered in its
normal pricing practices, such as research and development costs. Determining the
margin to use when applying a cost – plus – a – margin approach requires significant
judgment, particularly when the entity is not planning to separately sell a product
or service. Furthermore, using an expected cost -plus-margin approach may not be
appropriate in many circumstances, such as when direct fulfillment costs are not
easily identifiable or when costs are not asignificant input in setting the price for
the goods or services.
(c) Residual approach – an entity may estimate the stand-alone selling price by
reference to (1) The total transaction price, less (2) the sum of the observable
stand -alone selling prices of other goods or services promised in the contract.
However, an entity may use a residual approach to estimate the stand -alone
selling price of a good or service only if one of the following criteria is met:
(i) The entity sells the same good or service to different customers (at or near
the same time) for a broad range of amounts (i.e. the selling price is highly
variable ecause a representative stand-alone selling price is not discernible
from past transactions or other observable evidence); OR
(ii) The entity has not yet established a price for that good or service and the
good or service has not previously been sold on a stand -alone basis (i.e. the
selling price is uncertain).

Allocation of a discount:-
A customer receives a discount for purchasing a bundle of goods or services if the sum of
the stand – alone selling prices of those promised goods or services in the contract
exceeds the promised consideration in a contract. Unless an entity has observable
evidence that the entire discount relates to only one or more, but not all, performance
obligations in a contract, the entity shall allocate a discount proportionately to all
performance obligations in the contract. The proportionate allocation of the discount in
those circumstances is a consequence of the entity allocating the transaction price to
each performance obligation on the basis of the relative stand - alone selling prices of
the underlying distinct goods or services.
Allocation of variable consideration – Variable consideration may be attributable to (1)
the entire contract or (2) a specific part of the contract, such as either of the following:
(a) One or more, but not all, performance obligations in the contract. For example, a
contract may include two performance obligations: the construction of a building

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and the provision of services related to the on – going maintenance of the property
after construction. But a bonus for early completion may relate entirely to the
construction of the building; or
(b) One or more, but not all, distinct goods or services promised in a series of distinct
goods or services that forms part of a single performance obligation (for example,
the consideration promised for the second year of a two -year cleaning service
contract will increase on the basis of movements in a specified inflation index).
An entity shall allocate a variable amount (and subsequent changes to that amount)
entirely to a performance obligation or to a distinct good or service that forms part
of a single performance obligation if both of the following criteria are met:
• The terms of a variable payment relate specifically to the entity’s efforts to
satisfy the performance obligation or transfer the distinct good or service (or
to a specific out come from satisfying the performance obligation or
transferring the distinct good or service);and
• Allocating the variable amount of consideration entirely to the performance
obligation or the distinct good or service is consistent with the allocation
objective when considering all of the performance obligations and payment
terms in the contract.

Allocate based on relative stand-alone selling price

Performance obligation 1 Performance obligation 2 Performance obligation 3

Determine stand-alone selling prices

Is observed stand-alone price available?

YES YES

Use observable price Estimate price

Adjusted market Adjusted market

assessment approach assessment approach

Residual approach

Exception to the allocation requirement:

 Discount
 Variable consideration

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Question 44
An entity enters into a contract with a customer to sell products A, B and C in
exchange for` 10,000. The entity will satisfy the performance obligations for each
of the products at different points in time. The entity regularly sells Product A
separately and therefore the stand- alone selling price is directly observable. The
stand-alone selling prices of Products of Products B and are not directly observable.
Because the stand-and selling prices for Products B and C are not directly
observable, the entity must estimate them. To estimate the stand- alone selling
prices, the entity uses the adjusted market assessment approach for Product B and
the expected cost plus a margin approach for Product C. In making those estimates,
the entity maximises the use of observable inputs.
The entity estimates the stand-alone selling prices as follows:
Product Stand–alone selling price Method
`
Product A 5,000 Directly observable
Product B 2,500 Adjusted market assessment approach
Product C 7,500 Expected cost plus a margin approach
Total 15,000
Determine the transaction price allocated to each product.

Solution:
The customer receives a discount for purchasing the bundle of goods because the
sum of the stand – alone selling prices (` 15,000) exceeds the promised
consideration (` 10,000) the entity considers that there is no observable evidence
about the performance obligation to which the entire discount belongs. The
discount is allocated proportionately across products A, B and C. The discount, and
therefore the transaction price, is allocated as follows:
Product Allocated transaction price(to nearest `100)
`
Product A 3,300 (`5,000 ÷ `15,000 × `10,000)
Product B 1,700 (`2,500 ÷ `15,000 x `10,000)
Product C 5,000 (`7,500 ÷ `15,000 x `10,000)
Total 10,000

Question 45
An entity regularly sells Products X, Y and Z individually, thereby establishing the
following stand-alone selling prices:
Product Stand-alone selling price
`
Product X 50,000
Product Y 25,000
Product Z 45,000
Total 1,20,000
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In addition, the entity regularly sells Products Y and Z together for ` 50,000.
Case A- Allocating a discount to one or more performance obligations performance
obligations. The entity enters into a contract with a customer to sell Products X, Y
and Z in exchange for ` 100,000. The entity will satisfy the performance obligations
for each of the products at different points in time; or Product Y and Z at same
point of time. Determine the allocation of transaction price to Product Y and Z.
Case B – Residual approach is appropriate

The entity enters into a contract with a customer to sell Products X, Y and Z as
described in Case A. The contract also includes a promise to transfer Product
Alpha. Total consideration in the contract is ` 130,000. The stand-alone selling
price for Product Alpha is highly variable because the entity sells Products Alpha to
different customers for a broad range of amounts(` 15,000 - ` 45,000). Determine
the stand-alone selling price of Products, X, Y, Z and Alpha using the residual
approach.

Solution:
Case A- Allocating a discount to one or more performance obligations
The contract includes a discount of ` 20,000 on the overall transaction, which
would be allocated proportionately to all three performance obligations when
allocating the transaction price using the relative stand-alone selling price method.
However, because the entity regularly sells Products Y and Z together for ` 50,000
and Product X for ` 50,000, it has evidence that the entire discount should be
allocated to the promises to transfer Products Y and Z in accordance with
paragraph 82 of Ind AS 115.
If the contract requires the entity to transfer control of Products Y and Z
together, then he allocated amount of ` 50,000 is individually allocated to the
promises to transfer Product Y (stand-alone selling price of ` 25,000) and Product Z
(stand-alone selling price of` 45,000) as follows:
Product Allocated transaction price
Product Y 17,857 (` 25,000 ÷ ` 70,000 total stand-alone selling price * ` 50,000)
Product Z 32,143 (` 45,000 ÷ ` 70,000 total stand-alone selling price × `50,000)
Total 50,000

Case B – Residual approach is appropriate

Before estimating the stand-alone selling price of Product Alpha using the residual
approach, the entity determines whether any discount should be allocated to the
other performance obligations in the contract.

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As in Case A, because the entity regularly sells Products Y and Z together for
` 50,000 and Product X for ` 50,000, it has observable evidence that ` 100,000
should be allocated to those three product and a ` 20,000 discount should be
allocated to the promises to transfer Products Y and Z in Accordance with paragraph
82 of Ind As 115.

Using the residual approach, the entity estimated the stand-alone selling price of
Product Alpha to be ` 30,000 as follows:
Product Stand-alone selling price Method
`
Product X 50,000 Directly observable
Product Y and Z 50,000 Directly observable with discount
Product Alpha 30,000 Residual approach
Total 130,000
The entity observes that the resulting ` 30,000 allocated to Product Alpha is within
the range of its observable selling price (` 15,000- ` 45,000).

Question 46
An entity enters into a contract with a customer for two intellectual property licences
(Licences A and B), which the entity determines to represent two performance
obligation each satisfied at a point in time. The stand-alone selling prices of Licences
A and B are `1,600,000 and ` 2,000,000, respectively. The entity transfers Licence B
at inception of the contract and transfers Licence A one month later.

Case A—Variable consideration allocated entirely to one performance obligation

The price stated in the contract for Licence A is a fixed amount of ` 1,600,000 and
for Licence B the consideration is three per cent of the customer’s future sales of
products that use Licence B. For purposes of allocation, the entity estimates its
sales-based royalties (ie the variable consideration) to be ` 2,000,000. Allocate the
transaction price.

Case B—Variable consideration allocated on the basis of stand-alone selling prices

The price stated in the contract for Licence A is a fixed amount of ` 600,000 and
for Licence B the consideration is five per cent of the customer’s future sales of
products that use Licence B. The entity’s estimate of the sales-based royalties
(ie the variable consideration) is `3,000,000. Here, Licence A is transferred
3 months later. The royalty due from the customer’s first month of sale is
` 4,00,000.
Allocate the transaction price and determine the revenue to be recognised for each
licence and the contract liability, if any.
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Solution:
Case A- To allocate the transaction price, the entity considers the criteria in
paragraph 85 and concludes that the variable consideration (i.e. the sales-based
royalties) should be allocated entirely to Licence B. The entity concludes that the
criteria are met for the following reasons:
(a) The variable payment related specifically to an outcome from the
performance obligation to transfer Licence B (i.e. the customer’s subsequent
sales of products that use License B).
(b) Allocating the expected royalty amounts of ` 2,000,000 entirely to Licence B
is consistent with the allocation objective in paragraph 73 of Ind AS 115. This
is because the entity’s estimate of the amount of sales-based royalties
(` 2,000,000) approximates the standalone selling price of Licence B and the
fixed amount of ` 1,600,000 approximates the stand-alone selling price of
Licence A. The entity allocated ` 1,600,000 to Licence A.
This is because, based on an assessment of the facts and circumstances
relating to both licences, allocating to Licence B some of the fixed
consideration in addition to all of the variable consideration would not meet
the allocation objective in paragraph 73 of Ind As 115.
The entity transfers Licence B at inception of the contract and transfers
Licence A one month later. Upon the transfer of Licence B, the entity does
not recognise revenue because the consideration allocated to Licence B is in
the form of a sales-based royalty.Therefore, the entity recognises revenue for
the sales-based royalty when those subsequent sales occur.
When Licence A is transferred, the entity recognises as revenue the ` 1,600,000
allocated to Licence A.

Case B—Variable consideration allocated on the basis of stand-alone selling prices

To allocate the transaction price, the entity applies the criteria in paragraph 85 of
Ind AS 115 to determine whether to allocate the variable consideration (ie the
sales-based royalties)entirely to Licence B.

In applying the criteria, the entity concludes that even though the variable
payments relate specifically to an outcome from the performance obligation to
transfer Licence B (ie the customer’s subsequent sales of products that use Licence
B), allocating the variable consideration entirely to Licence B would be inconsistent
with the principle for allocating the transaction price. Allocating ` 600,000 to
Licence A and ` 3,000,000 to Licence B does not reflect a reasonable allocation of
the transaction price on the basis of the stand-alone selling prices of Licences A
and B of `1,600,000 and ` 2,000,000, respectively. Consequently, the entity applies
the general allocation requirements of Ind AS 115.

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The entity allocates the transaction price of ` 600,000 to Licences A and B on the
basis of relative stand-alone selling prices of ` 1,600,000 and ` 2,000,000,
respectively. The entity also allocates the consideration related to the sales-based
royalty on a relative stand-alone selling price basis. However, when an entity
licenses intellectual property in which the consideration is in the form of a sales-
based royalty, the entity cannot recognise revenue until the later of the following
events: the subsequent sales occur or the performance obligation is satisfied (or
partially satisfied).

Licence B is transferred to the customer at the inception of the contract and

Licence A is transferred three months later. When Licence B is transferred, the
entity recognises as revenue ` 333,333 [(` 2,000,000 ÷ ` 3,600,000) × ` 600,000]
allocated to Licence B. When Licence A is transferred, the entity recognises as
revenue ` 266,667 [(` 1,600,000 ÷ ` 3,600,000) × `600,000] allocated to Licence A.
In the first month, the royalty due from the customer’s first month of sales is
` 400,000.Consequently, the entity recognises as revenue ` 222,222 (` 2,000,000 ÷
` 3,600,000 × ` 400,000) allocated to Licence B (which has been transferred to the
customer and is therefore a satisfied performance obligation). The entity
recognises a contract liability for the ` 177,778(` 1,600,000 ÷ ` 3,600,000 ×
` 400,000) allocated to Licence A. This is because although the subsequent sale by
the entity’s customer has occurred, the performance obligation to which the
royalty has been allocated has not been satisfied.

Question 47
On 1 April 20X0, a consultant enters into a n arrangement to provide due diligence,
valuation, and software implementation services to a customer for ` 2 crores. The
consultant can earn` 20 lakhs bonus if it completes the software implementation by
30 September 20X0 or `10lakhs bonus if it completes the software implementation
by 31 December 20X0.
The due diligence, valuation, and software implementation services are distinct
and therefore are accounted for as separate performance obligations. The
consultant allocates the transaction price, disregarding the potential bonus, on a
relative stand-alone selling price basis as follows;
• Due diligence - ` 80 lakhs
• Valuation - ` 20 lakhs
• Software implementation - ` 1 crore
At contract inception, the consultant believes it will complete the software
implementation by 30 January 20X1. After considering the factors in Ins As 115, the
consultant cannot conclude that a significant reversal in the cumulative amount of
revenue recognized would not occur when the uncertainty is resolved since the
consultant lacks experience in completing similar bonus in its estimated transaction
price at contract inception.
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On 1 July 20X0, the consultant notes that the project has progressed better than
expected and believes that implementation will be completed by 30 September
20X0 based on a revised forecast. As a result, the consultant updates its estimated
transaction price to reflect a bonus of ` 20 lakhs.
After reviewing its progress as of 1 July 20X0, the consultant determines that it is
100 percent complete in satisfying its performance obligations for due diligence
and valuation and60 per cent complete in satisfying its performance obligation for
software implementation.
Determine the transaction price.

Solution:
On 1 July 20X0, the consultant allocates the bonus of ` 20 lakhs to the software
implementation performance obligation, for total consideration of ` 1.2 crores
allocated to that performance obligation, and adjusts the cumulative revenue to
date for the software implementation services to ` 72 lakhs (60 per cent of ` 1.2
crores).

STEP 5: SATISFYING THE PERFORMANCE OBLIGATION

Control is…
The ability • The customer has a present right
to direct the use • The right enables it to:
of • deploy the asset in its activities
• allow another entity to deploy the asset in its activities
• prevent another entity from deploying the asset
and obtain the • Therightalsoenablesittoobtainpotentialcashflowsdirectlyorindirectly
remaining –e.g.through:
benefits from • use of the asset
• consumption of the asset
• sale or exchange of the asset
• pledging the asset
• holding the asset

Indicators that control has passed include a customer having

a present risks and

physical legal physical accepted
obligation rewards
possession title possession of the asset
to pay
ownership

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An entity shall recognise revenue when (or as) the entity satisfies a performance obligation
by transferring a promised good or service (i.e. an asset) to a customer. An asset is
transferred when (or as) the customer obtains control of that asset. Control of a good or
service is said to be transferred over a period of time if the following conditions are met:
(a) The customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs OR
(b) The entity’s performance creates or enhances an asset (for example, work in
progress)that the customer controls as the asset is created or enhanced OR
(c) The entity’s performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance
completed to date.
In such a case revenue should also be recognised over a period of time by
measuring progress towards complete satisfaction of that performance obligation.
An entity should determine at contract inception whether it satisfies performance
obligation over time or at a point in time. If an entity does not satisfy a
performance obligation over time, then it is satisfied at a point in time.

Does customer control the asset

as it created or enhanced? Yes
No
Does customer receive and consume
the benefits as the entity performs? Yes
No
Does entity have the
Does asset have an alternative use enforceable right to Yes
to the entity? No receive payment for
work to date?
Yes
Control is transferred at a point in No
time
Control is transferred
over time

Criterion Example
(1) The customer simultaneously receives Routine or recurring services –
and consumes the benefits provided by e.g. cleaning services, Routine
the entity‘s performance as the entity transaction processing services, Hotel
performs management services.
(2) The entity‘s performance creates or Building an asset on a customer‘s site
enhances an asset that the customer
controls as the asset is created or enhanced
(3) The entity‘s performance does not Building a specialized/highly customized
create an asset with an alternative use asset that only the customer can use or
to the entity and the entity has an building an asset according to a
enforceable right to payment for customer‘s specifications
performance completed to date

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There are 2 methods of measuring progress of a performance obligation satisfied
over time:
Out put Methods In put Methods
Recognise revenue based on direct Recognise revenue based on the entity’s
measurements of the value to the efforts or inputs to the satisfaction of a
customer of the goods or services performance obligation.
transferred to date relative to there
maining goods or services promised
under the contract.
For Example: Surveys of performance For Example: Resources consumed
completed to date, appraisals of results labour hours expended, costs incurred,
achieved time elapsed or machine hours used

Question 48
Minitek Ltd. Is a payroll processing Company? Minitek Ltd. enters into a contract to
provide monthly payroll processing services to ABC limited for one year. Determine
how entity will recognise revenue?

Solution:
Payroll processing is a single performance obligation. On a monthly basis, as
Microtek Ltdcarries out the payroll processing-
• The customer, i.e. ABC Limited simultaneously receives and consumes the
benefits of the entity’s performance in processing each payroll transaction
• Further, once the services have been performed for a particular month, in
case of termination of the agreement before maturity and contract is
transferred to another entity, then such new entity will not need to re-
perform the services for expired months.
Therefore, it satisfied the first criterion, i.e. services completed on a monthly basis
are consumed by the entity at the same time and hence, revenue shall be
recognised over the period of time.

Question 49
T&L Limited (‘T&L’) is a logistics company that provides inland and sea
transportation services. A customer – Horizon Limited (‘Horzon’) enters into a
contract with T&L for transportation of its goods from India to Srilanka through
sea. The voyage is expected to take 20 days Mumbai to Colombo. T&L is responsible
for shipping the goods from Mumbai port to Combo port.
Whether T&L’s performance obligation is met over period of time?

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Solution:
T&L has a single performance to ship the goods form one port to another. The
following factors are critical for assessing how services performed by T&L are
consumed by the customer-
• As the voyage is performed, the service undertaken by T&L is progressing such
that no other entity will need to re-perform the service till so far as the
voyage has been performed, if T&L was to deliver only part-way.
• The customer is directly benefiting from the performance of the voyage as &
when it progresses.
Therefore, such performance obligation is said to be met over a period of time.

Question 50
AFS Ltd. Is a risk advisory firm and enters into a contract with a company WBC Ltd
provide audit service that results in AFS issuing an audit opinion of the Company.
The professional opinion relates to facts and circumstances that are specific to the
company. If the Company was to terminate the consulting contract for reasons
other than the entity’s failure to perform as promised, the contract requires the
Company to compensate the risk advisory firm for its costs incurred plus a 15 per
cent margin the 15 per cent margin approximates the profitmargin that the entity
earns from similar contracts.
Whether risk advisory firm’s performance obligation is met over period of time?

Solution:
AFS has a single performance to provide an opinion on the professional audit
services proposed to be provided under the contract with the customer. Evaluating
the criterion for recognizing revenue over a period of time or at a point in time,
Ind AS 115 requires one of the followingcriterion to be met-
• Criterion (a) – whether the customer simultaneously receives and consumes
the benefits from services provided by AFS: Company shall benefit only when
the audit opinion is provided upon completion. And in case the contract was
to be terminated, and other firm engaged to perform similar services will
have to substantially re-perform.
Hence, this criterion is not met.
• Criterion (b)– An asset created that customer controls: This is service
contract and no asset created, over which customer acquires control.
• Criterion (C)- no alternate use to entity and right to seek payment:
 The services provided by AFS are specific to the company WBC and do
not have any alternate use to AFS
 Further, AFS has a right to enforce payment if contract was early
terminated, for reasons other than AFS’s failure to perform. And the
profit margin approximates what entity otherwise earns.
Therefore, criterion (c) is met such performance obligation is said to be met over a
period of time.

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Question 51
Space Ltd. enters into an arrangement with a government agency for construction
of as pace satellite. Although Space Ltd is in this business for building such
satellites for various customers across the world, however the specifications for
each satellite may vary based on technology that is incorporated in the satellite. IN
the event of termination, Company has right to enforce payment for work
completed to date.
Evaluate if contract will qualify for satisfaction of performance obligation over a
period of time.

Solution:
While evaluating the pattern of transfer of control to the customer, the Company
shall evaluate condition laid in para 35 of Ind AS 115 as follows:
• Criterion (a) whether the customer simultaneously and consumes the benefits
Customer can benefit only when the satellite is fully constructed and no
benefits are consumed as its constructed. Hence, this criterion in not met.
• Criterion (b) – An asset created that customer controls: per provided facts,
the customer does not acquire control
• Criterion (c) – no alternate use to entity and right to seek payment:
 The asset is being specifically created for the customer. The asset is
customized to customer’s requirements such that any diversion for a
different customer will require significant work. Therefore, the asset has
practical limitation in being to alternate use
 Further, Space Ltd. Has a right to enforce payment if contract was early
terminated, for reasons other than Space Ltd. s failure to perform.
Therefore, criterion (c) is met and such performance obligation is said to be met
over a period of time.

Question 52
On 01 January 20X1, an entity contracts to renovate a building including the
installation of new elevators. The entity estimates the following with respect to
the contract:
Particulars Amount(`)
Transaction price 5,000,000
Expected costs:
(a) Elevators 1,500,000
(b) Other costs 2,500,000
Total 4,000,000

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The entity purchases the elevators and they are delivered to the six months before
they will be installed. The entity uses an input method based on cost to measure
progress towards completion. The entity has incurred actual other costs of 500,000
by March 31, 20X1.
How will the Company recognise revenue, if performance obligation is met over a
period of time?

Solution:
Costs to be incurred comprise two major components – elevators and cost of
construction service.
(a) The elevators are part of the overall construction project and are not a
distinct performance obligation
(b) The cost of elevators is substantial to the overall project and are incurred
well in advance.
(c) Upon delivery at site, customer acquires control of such elevators.
(d) And there is no modification done to the elevators, which the company only
procures and delivers at site. Nevertheless, as part of materials used in
overall construction project, the company is principal in the transaction with
the customer for such elevators also.
Therefore, applying the guidance on ln put method-
The measure of progress should be made based on percentage of cots incurred
relative to the budgeted costs.
The cost of elevators should be excluded when measuring such progress and
revenue for such elevators should be recognised to the extent of costs incurred.
The revenue to be recognised is measured as follows:
Particulars Amount (`)
Transaction Price 5,000,000
Costs incurred:
(a) Cost of elevators 1,500,000
(b) Other costs 5,00,000
Measure of progress: 5,00,000/2,500,000 = 20%
Revenue to be recognised:
(a) For costs incurred (other than Total attributable revenue = 3,500,000
elevators) of work completed = 20% Revenue to
be recognised = 700,000
(b) Revenue for elevators 1,500,000 (equal to costs incurred)
Total revenue to be recognised 1,500,000 + 7,00,000 = 2,200,000
Therefore, for the year ended 31 March 20X1, the Company shall recognise revenue
of `2,200,000 on the project.

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Question 53
An entity has a fixed fee contract for ` 1 million to develop a product that meets
specified performance criteria. Estimated cost to complete the contract is ` 950,000.
The entity will transfer control of the product over five years, and the entity uses the
cost-to cost input method to measure progress on the contract. An incentive award is
available if the product meets the following weight criteria:

Weight (kg) Award % of fixed fee Incentive fee

951 or greater 0% -
701-950 10% ` 100,000
700 or less 25% ` 250,000
The entity has extensive experience creating products that meet the specific
performance criteria. Based on its experience, the entity has identified five
engineering alternative that will achieve the 10 percent incentive and two that will
achieve the 25 percent incentive. In this case, the entity determined that it has 95
percent confident that it will achieve the 10 percent incentive and 20 percent
confidence that it will achieve the 25 percent incentive.
Based on this analysis, the entity believes 10 percent to be the most likely amount
when estimating the transaction price. Therefore, the entity include only the 10
percent award in the transaction price when calculating revenue because the entity
has concluded it is probable that a significant reversal in the amount of cumulative
revenue recognised will not occur when the uncertainty associated with the variable
consideration is subsequently resolved due to its 95 percent confidence in achieving
the 10 percent award.
The entity reassesses its production status quarterly to determine whether is on track
to meet the criteria for the incentive award. At the end of the year four, it becomes
apparent that this contract will fully achieve the weight-based criterion. Therefore,
the entity revises its estimate of variable consideration to include the entire 25
percent incentive fee in I the year four because, at this point, is probable that a
significant reversal in the amount of cumulative revenue recognised will not occur
including the entire variable consideration in the transaction price.
Evaluate the impact of changes invariable consideration when cost incurred is as
follows:

Year `
1 50,000
2 1,75,000
3 4,00,000
4 2,75,000
5 50,000

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Solution:
[Note: For simplification purposes, the table calculates revenue for the year in
dependently based on costs incurred during the year divided by total expected
cost, with the assumption that expected costs do not change.]
Fixed consideration A 1,000,000
Estimated costs to B 950,000
complete*
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated C 100,000 1,00,000 100,000 250,000 250,000
Variable Consideration
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable revenue E= C x H/B 5,263 18,421 42,105 72,368 13,158
Cumulative revenue F (See below) - - - 99,370 -
adjustment
Total revenue G = D + E+ F 57,895 202,632 463,158 461,212 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 186,212 15,790
Margin J = I/G 14% 14% 14% 14% 24%
(rounded off)

• For simplicity, it is assumed three is no change to the estimated costs to complete

throughout the contract period.
• In practice, under the cost-to cost measure of progress, total revenue for each
period is determined by multiplying the total transaction price (fixed and variable)
by the ratio of cumulative cost incurred total estimated costs to complete, less
revenue recognised to date.

Calculation of cumulative catch-up adjustment:

Updated variable consideration L 250,000
Percent complete in Year 4: (rounded off) M = N/O 95%
Cumulativecoststhroughyear4 N 900,000
Estimated costs to complete 0 950,000
CumulativevariablerevenuethroughYear4: P 138,130
Cumulative catch up adjustment F= LxM – P 99,370

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OTHER IMPORTANT CONCEPTS

Repurchase Agreements
When a company determines the timing of transfer of control, it is important to take
into consideration any repurchase agreements that may have been executed by the
Company.
A repurchase agreement is a contract in which an entity sells an asset and also promises
or has the option (either in the same contract or in another contract) to repurchase the
asset. The repurchased asset may be the asset that was originally sold to the customer,
an asset that is substantially the same as that asset, or another asset of which the asset
that was originally sold is a component. Repurchase agreements generally come in the
form of forward contract (an entity’s obligation to re-purchase the asset), call option
(an entity’s right to re-purchase the asset) or put option(an entity’s obligation to re-
purchase the asset at the customer’s request)

Is the repurchase price => Original

Selling price and; Yes Account for the transaction as a
the repurchased price > expected financing arrangement
market price of the asset

No

Is the repurchase price => Original

Is the repurchase price < Original
Selling price and; No
Selling price and Significant
Repurchased price <= to expected
economic incentive to exercise?
market price
No
Yes

Does the customer have significant Account for the agreement as lease
economic incentive to exercise the under Ind AS 116 unless the
right? contract if part of a sale and lease
back transaction
No

Recognise revenue with a right to

return If contract is part of a sale and
leaseback transaction, the entity
shall continue to recognise the
asset and shall recognise a
financial liability (as per Ind AS
109) for any consideration
received from the costumer.

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Question 54
An entity enters into a contact with a customer for the sale of a tangible asset on
1January20X1 for ` 1 million. The contract includes a call option that gives the
entity the right to repurchase the asset for ` 1.1 million on or before December
31,20X1.How would the entity account for this transaction?

Solution:
In the above, where the entity has a right to call back the goods upto a certain
date-
• The customer cannot be said to have acquired control, owing to the
repurchase right with the seller entity
• Since the original selling price (` 1 million) is lower than the repurchase price
(` 1.1million,) this is construed to be a financing arrangements and accounted
as follows:
(a) Amount received shall be recognised as ‘liability’
(b) Difference between sale price and repurchase price to be recognised as
finance cost and recognised over the repurchase term.

Question 55
An entity enters into a contract with a customer for the sale of a tangible asset on
1 January20X1 for ` 1,000,000. The contract includes a put option that gives the
customer the right to sell the asset for ` 9,00,000 on or before December 31, 20X1.
The market price for such goods is expected to be ` 750,000
How would the entity account for this transaction?

Solution:
In the above case, where the entity has an obligation to buy back the goods up to
certain date-
• The entity shall evaluate if the customer has a significant economic incentive
to return the goods, Since the repurchase price is significantly higher than
market price, therefore, customer has a significant economic incentive to
return the goods, There are no other factors which entity may affect this
assessment.
• Therefore, company determines that control of goods is not transferred to the
customer till 31 December 20X1, i.e. Till the put option expires
• Against payment of ` 1,000,000 the customer only has a right to use the asset
and put It back to the entity for 900,000. Therefore, this will be accounted as
a lease transaction in which difference between original selling price
(i.e. ` 1,000,000) and repurchase price (i.e. ` 900,000) shall be recognised as
lease income over the period of lease.

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CONTRACTS WITH CUSTOMERS
CA FINAL
Question 56
An entity enters into a contract with a customer on 1 April 20X1 for the sale of a
machine and spare parts. The manufacturing lead time for the machine and spare
parts is two years. Upon completion of manufacturing, the entity demonstrates
that the machine and spareparts meet the agreed-upon specifications in the
contract. The promises to transfer the machine and spare parts are distinct and
result in two performance obligations that each will be satisfied at a point in time.
On 31 March 20X3, the customer pays for the machine and spare parts, but only
takes physical possession of the machine. Although the customer in spects and
accept the spare part, the customer requires that the spare parts be stored at the
entity’s warehouse because of its close proximity to the customer’s factory. The
customer has legal title to the spare parts and the parts can be identified as
belonging to the customer.
Furthermore, the entity stores the spare parts in a separate section of its warehouse
and the parts are ready for immediate shipment at the customer’s request. The
entity expects to hold the spare parts for two to four years and the entity does not
have the ability to use the spare parts or direct them to another customer.
How will the Company recognise revenue for sale of machine and spare parts? Is
there anyother performance obligation attached to this sale of goods?

Solution:
In the fats provided above, the entity has made sale of two goods- machine and
space parts, whose control is transferred at a point in time. Additionally, company
agrees to the spareparts for the customer for a period or 2-4 years, which is a
separate performance obligation therefore, total transaction price shall be divided
amongst 3 performance obligations-
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.
Recognition of revenue for each of the three performance obligations shall occur as
follows:
• Sale of machinery: Machine has been sold to the customer and physical
possession as well as legal – title passed to the customer on 31 March 20X3.
Accordingly, revenue for sale of machinery shall be recognised on 31 March 20X3.
• Sale of spare parts: the customer has made payment for the spare parts and
legal title has been passed to specifically identified goods, but such spares
continue to be physically held by the entity In this regard, the company shall
evaluate if revenue can be recognised on bill-n hold basis if all below criteria
are met:

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(a) The reason for the bill and – hold The customer has specifically
arrangement must be substantive requested for entity to store goods
(for example, the customer has in their warehouse, owing to close
requested the arrangement); proximity to customer’s factory
(b) The product must be identified The spare parts have been
separately as belonging to the specifically identified and inspected
customer; by the customer
(c) The entity cannot have the Spares have been segregated and
ability to use the product or to cannot be redirected to any other
direct it to another customer customer.
Therefore, all conditions of bill-and-hold are met hence, company can recognise
revenue for sale of spare parts on 31 march 20X3.
Custodial services
Such services shall be given for a period of 2 to 4 years form 31 March 20X3. Where
services are given uniformly and customer receives & consumes benefits
simultaneously, revenue for such service shall be recognised on a straight line basis
over a period of time.

Contact Cost Contract

Cost

Contract acquisition Contract fulfillment

Incremental costs to obtain a Cost to fulfil (i.e.

contract that would not be perform/deliver)contract consider
incurred if contract not deferral under Ind AS 115.95 only if
obtained (Eg. Sales commission) not covered in scope of another
slandered.

Recognise as an asset the

incremental costs to obtain a Recognise as an asset under this
contract that are
standard if costs:
expected to be recovered
All

Directly relate to a contract (or anticipated contract), such as

direct labour and materials, indirect costs of production. etc.

Generate or enhance resources that will used to

satisfy performance obligations in the future, AND

Expect to be recovered
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Capitalize or
Cost Reason
expense
Commission paid only upon Capitalize Assuming the entity expects to
successful signing of a recover the cost, the commission is
contract incremental since it would not have
been paid if the parties decided not
to enter into the arrangement just
before signing.
Travel expenses for sales Expense Because the costs are incurred
persons pitching a new client regardless of whether the new
contract contract is won or lost, the entity
expenses the costs, unless they are
expressly reimbursable.
Legal fees for drafting terms Expense If the parties walk away during
of arrangement for parties to negotiations, the costs would still be
approve and sign incurred and therefore are not
incremental costs of obtaining the
contract.
Salaries for sales people Expense The salaries are incurred regardless
working exclusively on of whether contracts are won or lost
obtaining new clients and therefore are not incremental
costs to obtain the contract.
Bonus based on quarterly Capitalize Bonuses based solely on sales are
sales target incremental costs to obtain a
contract.
Commission paid to sales Capitalize The commissions are incremental
manager based on contracts costs that would not have been
obtained by the sales incurred had the entity not obtained
manager‘s local employees the contract.
Ind AS 115 does not differentiate
costs based on the function or title of
the employee that receives the
commission.

Question 57
Customer outsources its information technology data center Term= 5 years plus two
1yrrenewal options Average customer relationship is 7 years
Entity spends ` 4,00,000. designing and building the technology platform needed to
accommodate date out- sourcing contract:

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Design services `50,000
Hardware `140,000
Software `100,000
Migration and testing of data center `110,000
Total `400,000
How should such costs be treated?

Solution:
Design services `50,000 Assess under Ind AS 115. Resulting Asset
would be amortised over 7years
(i.e. include renewals)
Hardware `140,000 Account for asset under Ind AS 16
Software `100,000 AccountforassetunderIndAS38
Migration and testing `110,000 Assess under Ind AS115. Any resulting asset
of date centre would be amortised over 7 years(i.e.include
renewals)
TOTAL `400,000

Question 58
An entity enters into a service contract with a customer and incurs incremental
cost to obtain the contact and costs to fulfil the contract. These costs are
capitalised as assets in accordance with Ind AS 115. The initial term of the contract
is five years buy it can be renewed for subsequent one- year periods up to a
maximum of 10 years. The average contract term of similar contracts entered into
entity is seven years.
Determine appropriate method of amortisation?

Solution:
The most appropriate amortisation period is likely to be seven years (i.e. the initial
term of five years plus two anticipated one year renewals) because that is the
period over which the entity expects to provide serviced under the contract to
which the capitalised costs relate.

Question 59
Manufacture M enters into a 60-day consignment contract to ship 1,000 dresses to
Retailer A’s Stores. Retailer A is obligated to pay Manufacture M ` 20 per dress
when the dress is sold to an end customer.
During the consignment period, Manufacture M has contractual right to require
Retailer A to either return the dresses or transfer them to another retailer.
Manufacture M is also required to accept the return of the inventory. State when
the control is transferred.

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Solution:
Manufacture M determines the control has been transferred to Retailer A on
delivery, for the following reasons:
(a) Retailer A does not have an unconditional obligation to pay for the dresses
until they have been sold to an end customer;
(b) Manufacturer M is able to require that the dresses be transferred to another
retailer atany time before Retailer A sells them to an end customer; and (c)
Manufacturer M is able to require the return of the dresses or transfer them to
another retailer.
Manufacturer M determines that control of the dresses transfers when they are sold
to an end customer i.e. when retailer A has an unconditional obligation to pay
Manufacturer M and can no longer return or otherwise transfer the dresses.
Manufacturer M recognizes revenue as the dressers are sold to the end customer.

Question 60
Nivaan Limited commenced work on two long-term contract during the financial
year 3 1 s t March, 2019.
The first contract with A & Co. commences on 1st June, 2018 and had a total sales
value of ` 40 lakhs. It was envisaged that the contract would run two years and that
the total expected costs would be ` 32 lakhs. On 31st March, 2019 Nivaan Limited
revised its estimate of the total expected cost ` 34 lakhs on the basis of the
additional rectification cost of ` 2 Lakhs incurred on the contract during the current
financial year. An independent surveyor has estimated at 31st March, 2019 that the
contract is 30% complete. Nivaan Limited has incurred costs up to 31st March, 2019
` 16 lakhs and has received payments on account of ` 13 lakhs. The second contract
with B & Co. commenced on 1st Sep., 2018 and was for 18 Month. The total sales
value of contract was ` 30 lakhs and the total expected costs ` 24 lakhs. Payments
on account already received were ` 9.50 lakhs and total costs incurred to date were
` 8 lakhs. Nivaan Limited had insisted on a large deposit from B & Co. because the
companies had not traded together prior to the contract. The independent surveyor
estimated that 31st March, 219 the contract was 20% complete.
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, 2019. In absence of any financial data
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, 2019.
Prepare financial statement extracts for Nivaan Limited in respect of the two
construction contracts for the year ending 31st March, 2019.
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Warranties

Customer has option to Customer does not have option to

purchased separately purchase separately

Distinct service, as the entity promise Warranty provides an assurance that

to provide service in addition to the the product complies with agreed-
product’s described functionality upon specifications

Account for the promised warranty as Account for the warranty in

a performance obligation and allocate accordance with Ind AS 37
a portion of the transaction price to
that performance obligation

Question 61
An entity manufactures and sells computers that include an assurance-type warranty
for the first 90 days. The entity offers an optional ‘extended coverage’ plan under
which it will repair or replace any defective part for three years from the expiration
of the assurance-type warranty. Since the optional ‘extended coverage’ plan is sold
separately, the entity determines that the three years of extended coverage
represent a separate performance obligation (i.e. a service-type warranty). The total
transaction price for the sale of a computer and the extended warranty is ` 36,000.
The entity determines that the stand-alone selling prices of the computer and the
extended warranty are ` 32,000 and ` 4,000, respectively. The inventory value of
the computer is ` 14,400. Furthermore, the entity estimates that, based on its
experience, it will incur ` 2,000 in costs to repair defects that arise within the
90-day coverage period for the assurance-type warranty.
Pass required journal entries.
Solution:
The entity will record the following journal entries:
` `
Cash/Trade receivables Dr 36,000
Warranty expense Dr 2,000
To Accrued warranty costs(assurance-type warranty) 2,000
To Contract liability (service-type warranty) 4,000
To Revenue 32,000
(To record revenue and contract liabilities related to warranties)
Cost of goods sold account Dr 14,400
To Inventory 14,400
(To derecognize inventory and recognize cost of goods sold)
The entity derecognises the accrued warranty liability associated with the
assurance-type warranty as actual warranty costs are incurred during the first 90
days after the customer receives the computer. The entity recognises the contract
liability associated with the service-type warranty as revenue during the contract
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warranty period and recognises the costs associated with providing the service-type
warranty as they are incurred. The entity had to determine whether the repair
costs incurred are applied against the warranty reserve already established for
claims that occur during the first 90 days or recognised as an expense as incurred.

Service Concession Arrangements –

Accounting framework for public-to-private service arrangements.

Does the grantor control or regulate what services the

operator must provide with the infrastructure, to No OUTSIDE THE
whom it must provide them, and at what price?
SCOPE OF
Yes APPENDIX SEE
INFORMATION
Does the grantor control, through ownership, No NOTE 2
beneficial entitlement or otherwise, any significant
residual interest in the infrastructure at the end of the
service arrangements? Or is the infrastructure used in
the arrangements for the entity useful life?
No
Yes
Is the infrastructure constructed or acquired by Is the infrastructure existing
the operator from a third party for the purpose No infrastructure of the grantor to
of the services arrangement? which the operator is given access
Yes Yes
WITHIN THE SCOPE OF APPENDIX operator does not recognize
infrastructure as property, plant and equipment or as a leased asset

Does the operator have a contractual Does the operator have a OUTSIDE THE
right to receive cash or other No
contractual right to No
SCOPEOF APPENDIX
financial asset from or at direction charge users of the public SEE
of the grantor as described in services as described in PARAGRAPH 27
paragraph 16 of Appendix paragraph17 of appendix? OFAPPENDIX

Yes Yes

Operator recognizes a financial asset Operator recognizes an intangible

to the extent that has a contractual asset to the extent that has a
right to receive Cash or another contractual right to receive an
financial asset as describe in intangible asset as described in
paragraph 16 of Appendix paragraph 17 in Appendix

Question 62
A Ltd. is in the business of the infrastructure and has two divisions under the same;
(I) Toll Roads and (II) Wind Power. The brief details of these business and
underlying project details are 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 crores as on 31st December, 20X1. Under IGAAP,
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The Company has recorded such expenses as Intangible Assets in the book
account. The brief details of the Concession Agreement are as follows:
• Total Expenses estimated to be incurred on the project ` 100 crores;
• Fair Value of the construction services is ` 110 crores;
• Total Cash Flow guaranteed by the Government under the concession
agreement is ` 200 crores;
• Finance revenue over the period of operation phases is ` 15 crores:
• Other income relates to the services provide during the operation phase.

II. Kolhapur- Nagpur Expressway – the Company has also entered into another
concession agreement with Government of Maharashtra in the current year.
The construction cost for the said project will ` 100 crores. The fair value of
such construction cost in approximately ` 200 crores. The said concession
agreement is Toll based project and the Company needs to collect the toll
from the users of the expressway. Under IGGAP,UK Ltd. has recorded the
expenses incurred on the said project as an Intangible Assets.

Required
(i) What would be the classification of Bhilwara – Jabalpur Toll Project as
per applicable Ind AS:? Give brief reasoning for your choice.
(ii) What would be the classification of Kolhapur- Nagpur Expressway Toll
Project as per applicable Ind AS? Give brief reasoning for your choice
(iii) Also, suggest suitable accounting treatment for preparation of financial
statements as per Ind AS for the above 2 projects.

Solution:
(i) Here the operator has a contractual right to receive cash from the grantor.
The grant or has little, if any, discretion to avoid payment, usually because
the agreement is enforceable by law. The operator has an unconditional right
to receive cash if the grantor contractually guarantees to pay the operator.
Hence, operator recognizes a financial 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. Aright 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 intangible asset to the extent it
receives aright (a licence) to charge users of the public service.
(iii) Accounting treatment for preparation of financial statements

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CA FINAL
Bhilwara-Jabalpur Toll Project Journal Entries
Dr. Cr.
Particulars
(`in crores) (`in crores)
1 During construction: Dr.
Financial asset A/c 110
To Construction revenue 110
[To recognise revenue relating to construction
services, to be settled in case]
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 15
or due to receive)
[To recognise interest income under the
financial asset model]
4 Financial asset Dr. 75
To Revenue [(200-110) – 15] 75
[To recognise revenue relating to the operation
phase]
5 Bank A/c Dr. 200
To Financial asset 200
[To recognise cash received from the grantor]

Kolhapur-Nagpur Expressway -Intangible asset Journal Entries

Dr. Cr.
Particulars
(`incrores) (`incrores)
During construction:
1 Cost of construction (profit or loss) Dr. 110
To Bank A/c(A sand when incurred) 110
[To recognize costs relating to construction
services]
2 Intangible asset Dr. 200
To Revenue 200
[To recognize revenue relating to construction
services provided for non-cash consideration]
During the operation phase:

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3 Amortisation expense 200
To Intangible asset 200
(accumulated amortisation)
[To recognize amortization expense relating
to the operation phase over the period of
operation]
4 Bank A/c Dr. Dr. ?
To Revenue ?
[To recognize revenue relating the operation
phase]
Note:
Amount in entry 4 is kept blank as no information in this regard is given in the
question.

Accounting for right to use and right to access

Access to IP (over time) Right to use the IP

(at a point in time)

(1) The entity is required (by

the contract) or • If all 3 criteria for access
reasonably expected (by (over time) are not met.
the customer) to the nature of the entity’s
undertake activities that promise is to be provide a
significantly affect the right to use the IP as the
licenced IP IP exists at the point in
(2) The licence expose the time the licence is granted
customer to any effects to the customer
of the entity’s activities • Effectively, this mean the
(3) The entity’s activities customer is able to direct
are not a performance the use of and obtain all
obligation under the remaining benefits from
contract the licenced IP when
granted (ie., the IP is
All criteria must be met static)

Question 63
Sports Team D enters into a three-year agreement to license its team name and
logo to Apparel Maker M. The licence permits M to use the team name and logo on
its products, including display products, and in its advertising or marketing
materials.

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(i) Determine the nature of license in the above case.
(ii) Modifying above facts that, Sports Team D has not played games in many
years and the licensor is Brand Collector B, an entity that acquires IP such as
old team or brand names and logos from defunct entities or those in financial
distress. B’s business model is to license the IP, or obtain settlements from
entities that use the IP without permission, without undertaking any ongoing
activities to promote or support the IP Would the answer be different in this
situation?

Solution:
(i) The nature of D‘s promise in this contract is to provide M with the right to
access the sports team‘s IP and, accordingly, revenue from the licence will be
recognised over time. In reaching this conclusion, D considers all of the
following facts:
• M reasonably expects D to continue to undertake activities that support
and maintain the value of the team name and logo by continuing to play
games and field a competitive team throughout the licence period.
These activities significantly affect the IP‘s ability to provide benefit to
M because the value of the team name and logo is substantially derived
from, or dependent on, those ongoing activities.
• The activities directly expose M to positive or negative effects (i.e.
whether D plays games and fields a competitive team will have a direct
effect on how successful M is in selling its products featuring the team‘s
name and logo).
• D‘s ongoing activities do not result in the transfer of a good or a service
to M as they occur (i.e. the team playing games does not transfer a good
or service to M).
(ii) Based on B‘s customary business practices, Apparel Maker M probably does not
reasonably expect B to undertake any activities to change the form of the IP
or to support or maintain the IP. Therefore, B would probably conclude that
the nature of its promise is to provide M with a right to use its IP as it exists at
the point in time at which the licence is granted

Question 64
Franchisor Y Ltd. licenses the right to operate a store in a specified location to
Franchisee F. The store bears Y Ltd.‘s trade name and F will have a right to sell Y
Ltd.‘s products for 10 years. F pays an up-front fixed fee. The franchise contract
also requires Y Ltd. to maintain the brand through product improvements,
marketing campaigns etc. Determine the nature of license?

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Solution:
The licence provides F access to the IP as it exists at any point in time in the
licence period.
This is because:
• Y Ltd. is required to maintain the brand, which will significantly affect the IP
by affecting F‘s ability to obtain benefit from the brand;
• any action by Y Ltd. may have a direct positive or negative effect on F; and
• these activities do not transfer a good or service to F.
Therefore, Y Ltd. recognises the up-front fee over the 10-year franchise period.

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SELF ASSESSMENT PROBLEMS

Question 1
An entity sells boats for ` 30,000 each. The entity also provides mooring facilities
for ` 5,000 per annum. The entity sells these goods and services separately. If a
purchaser of a boat contracts to buy mooring facilities for a year there is a discount
on the whole package. Thus the ‘package’ costs ` 32,500. How should revenue be
recognized?

Solution:
AS per the standard, transaction price should be allocated between the
performance obligations in the ratio of SSPs.
In the given contract, there are two performance obligations i.e. sale of boats and
mooring facility.
SSP is very clearly observable in the given question. Hence the transaction price of
` 32,500should be allocated in the ratio of `30,000 : ` 5,000 Sale value of boats =
`27,857 (` 32,500× 35,000/`35,000);
and
Sale value of mooring facility = ` 4,643 (` 32,500 × ` 5,000/`35,000).
The revenue recognized on the sale (`28,857) of the boat should, therefore, be
recognized on delivery of the boat. The revenue recognized for the mooring
facilities is ` 4,643, which will be recognized evenly over the year for which the
mooring facility is provided.

Question 2
Continuation to the above question
Assume an entity X generally sells the boats in range between ` 29,000 and
`32,500.
The entity enters into a contract to sell a boat and one year of mooring services to
a customer. The stated contract prices for the boat and the mooring services are
` 31,000 and `1,500 respectively?
How should entity X allocate the total transaction price of ` 32,500 to each
performance obligation?

Solution:
The contract price for the boat (`31,000) falls within the range entity X established
for stand-alone selling price: therefore, entity X could use the stated contract
price for the boat as the stand-alone selling price in the allocation.
Boat: `27,986 (`32,500 × (` 31,000/` 36,000))
Mooring services:` 4,514 (`32,500 × (` 5,000/` 36,000))

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Question 3
Continuation to the above question
What is the contract price of the boat did not fall within the range like ` 28,000?

Solution:
Entity X would need to determine a price within the range to use as the stand-
alone price of the boat in the allocation, such as the midpoint. Entity X should
apply a consistent method for determining the price within the range to use the
stand- alone selling price.

Question 4
A seller enters into a contract with a customer to sell products A.B and C for a total
transaction price of ` 1,00,000. The seller regularly sells product A for`25,000 and
product B for ` 45,000 on a stand-alone basis. Product C is a new product that has
not been sold previously, has no established price and is not sold by competitors in
the market. Products A and B are not regularly sold together at a discounted price.
Product C is delivered on 1st March, and products A and B are delivered on 1st April.
How should the seller determine the stand-alone selling price of product C ?

Solution:
The seller can use the residual approach to estimate to stand-alone selling price of
product C, because the seller has not previously sold or established a price for
product C.
Prior to using the residual approach, the seller should assess whether any other
observable data exists to estimate the stand-alone selling price.
For example, although product C is a new product, the seller might be able to
estimate a stand-alone selling price through other methods, such as using expected
cost plus a margin. The seller has observable evidence that products A and B sell
for ` 25,000 and ` 45,000 respectively, for a total of ` 70,000. The residual
approach results in an estimates stand- alone selling price of ` 30,000 for Product C
(` 100,000 total transaction price less `70,000).

Question 5
ABC Ltd. Sole 10,000 @ ` 1,000 limited on customary terms of right to return within
a month without any penalty. On the basis of past experience, ABC Ltd. assesses
that 10% refund is expected but it will be able to sale the returned goods at a
profit. Cost of goods is ` 700 per unit. Suppose 1,000 units are returned within the
specified time and customer gets replacement. Show necessary accounting entries.

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Solution:
As discussed above. The entity should recognise revenue to the extent it expects to
be entitled, a refund liability and an asset & corresponding adjustment to cost of
sales – this is because the entity has right to recover the product.

Dr. Dr.
Date Particulars
` `
At the time Bank a/c Dr 1,00,00,000
of sale To Sales a/c 90,00,000
To Refund liability 10,00,000
(90% of the revenue recognized on the basis
of expected value method of the amount of
variable consideration and 10% is recognised
as refund liability)
At the time Stock on sale or return a/c Dr 7,00,000
of sale To Stock of finished goods 7,00,000
(Inventories with the customer are recognised
and respect of goods expected to be refunded
at cost i.e. 1,000 units x 700)

After the Refund liabilitya/c Dr. 10,00,000

goods are To Sale of goods a/c 10,00,000
replaced by (Revenue recognised after the replacement of
entity the returned goods- 1000 units and refund
liability is extinguished)

After the Stock of finished goods a/c……. Dr 7,00,000

goods are To Stock on sale or return a/c 7,00,000
replaced by (Entries in respect of stock goods with the
entity customer reversed after return of goods by
customer)

Question 6
On 1stjan, ABC Ltd enters into a non- cancellable contract with TVC Ltd for the
sale of an excavator for ` 3.50,000. The excavator will be delivered to TVC Ltd on
1st April. The contract required TVC Ltd to pay ` 3,50,000 in advance on 1st Feb
and TVC Ltd makes the payment on 1st March. Prepare the journal entries that
would be used by ABC Ltd to account for this contract.

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Solution:

Date Particulars Debit Credit

1st Feb Receivable 3,50,000
To contracts liability 3,50,000
(Being ABC Ltd recognises receivable because it
has an unconditional rights to the consideration
(i.e. the contract is non-cancellable)
1st March Cash 3,50,000
To receivable 3,50,000
(Being TVC makes the payment ABC recognise the
cash collection)
1st April Contract liability 3,50,000
To revenue 3,50,000
(Being ABC recognises revenue when excavator is
delivered to TVC)

Question 7
(a) Entity I sells a piece of machinery to the customer for ` 2 million, payable in
90 days. Entity I is aware at contract inception that the customer might not
pay the full contract price. Entity I estimates that the customer will pay
atleast ` 1.75 million, which is sufficient to cover entity I’s cost of sales
(` 1.5 million) and which entity I is willing to accept because it wants to grow
its presence in this market. Entity I has granted similar price concessions in
comparable contracts.
Entity I concludes that it is highly probable that it will collect ` 1.75 million,
and such amount is not constrained under the variable consideration
guidance.
What is the transaction price in this arrangement?

(b) On 1 January 20x8, entity J enters into a one-year contract with a customer
to deliver water treatment chemicals. The contract stipulates that the price
per container will be adjusted retroactively once the customer reaches
certain sales volume, defined, as follows:
Price per container Cumulative sales volume
`100 1-1,000,000 containers
`90 1,000,001-3,000,000 containers
`85 3,000,001containers and above

FINANCIAL REPORTING 176

IND AS 115 REVENUE FORM
CONTRACTS WITH CUSTOMERS
CA FINAL
Volume is determined based on sales during the calendar year. There are no
minimum purchase requirements. Entity J estimates that the total sales
volume for the year will be 2.8 million containers, based on its experience
with similar contracts and forecasted sales to the customer.
Entity J sells 700,000 containers to the customer during the first quarter
ended 31 March 20X8 for a contract price of ` 100 per container.
How should entity J determine the transaction price?

(c) Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is
included inside the electric razor package that can be redeemed by the end
consumers for C 10 per unit.
Entity K estimates that 20% to 25% of eligible rebates will be redeemed based
on its experience with similar programmes and rebate redemption rates
available in the market for similar programmes. Entity K concludes that the
transaction price should incorporate an assumption of 25% rebate redemption,
as this is the amount for which it is highly probable that a significant reversal
of cumulative revenue will not occur if estimates of the rebates change.
How should entity K determine the transaction price?

(d) A manufacturer enters into a contract to sell goods to a retailer for ` 1,000.
The manufacturer also offers price protection, whereby it will reimburse the
retailer for any difference between the sale price and the lowest price
offered to any customer during the following six months. This clause is
consistent with other price protection clauses offered in the past, and the
manufacturer believes that it has experience which is predictive for this
contract.
Management expects that it will offer a price decrease of 5% during the price
protection period. Management concludes that it is highly probable that a
significant reversal of cumulative revenue will not occur if estimates change.
How should the manufacturer determine the transaction price?

Solution:
(a) Entity I is likely to provide a price concession and accept an amount less than
` 2 million in exchange for the machinery. The consideration is therefore
variable.
The transaction price in this arrangement is ` 1.75 million, as this is the
amount which entity I expects to receive after providing the concession and it
is not constrained under the variable consideration guidance. Entity I can also
conclude that the collectability threshold is met for ` 1.75 million and
therefore contract exists.

FINANCIAL REPORTING 177

IND AS 115 REVENUE FORM
CONTRACTS WITH CUSTOMERS
CA FINAL
(b) The transaction price is ` 90 per container based on entity J’s estimate of
total sales volume for the year, since the estimated cumulative sales volume
of 2.8 million containers would result in a price per container of ` 90. Entity J
concludes that based on a transaction price of ` 90 per container, it is highly
probable that a significant reversal in the amount of cumulative revenue
recognised will not occur when the uncertainty is resolved. Revenue is
therefore recognised at a selling price of ` 90 per container as each container
is sold. Entity J will recognise a liability for cash received in excess of the
transaction price for the first 1 million containers sold at ` 100 per container
(that is, ` 10 per container) until the cumulative sales volume is reached for
the next pricing tier and the price is retroactively reduced.
For the quarter ended 31st March, 20X8, entity J recognizes revenue of ` 63
million (700,000 containers x ` 90) and a liability of ` 7 million [700,000
containers x (` 100 - ` 90)].
Entity J will update its estimate of the total sales volume at each reporting
date until the uncertainty is resolved.
(c) Entity K records sales to the retailer at a transaction price of ` 47.50 (` 50
less 25% of` 10). The difference between the per unit cash selling price to the
retailers and the transaction price is recorded as a liability for cash
consideration expected to be paid to the end customer. Entity K will update
its estimate of the rebate and the transaction price at each reporting date if
estimates of redemption rates change.
(d) The transaction price is ` 950, because the expected reimbursement is ` 50.
The expected payment to the retailer is reflected in the transaction price at
contract inception, as that is the amount of consideration to which the
manufacturer expects to be entitled after the price protection. The
manufacturer will recognise a liability for the difference between the invoice
price and the transaction price, as this represents the cash that it expects to
refund to the retailer. The manufacturer will update its estimate of expected
reimbursement at each reporting date until the uncertainty is resolved.

Question 8
Card Ltd. is engaged in the business of manufacturing of car locks and nut bolts.
Car Locks: Typically, a contract is entered into for sale of car locks and
consideration is received in the event of delivery of goods to the customer place.
The cost of each car lock is ` 1,500 and the selling price is ` 1,800. The terms of
the contract entitles the customer to return any unused car locks within 30 days
and receive a full refund. The Company estimates that the costs of recovering the
car lock will be immaterial and expects that the returned car locks can be resold at
a profit. The Company has sold a total of 20,000 car locks during the month ended
31st March, 2022. From past experience, Card Ltd. expects that 4% of the car locks
will be returned in the financial year 2022 - 2023.
FINANCIAL REPORTING 178
IND AS 115 REVENUE FORM
CONTRACTS WITH CUSTOMERS
CA FINAL
Nut Bolts: On 1st April, 2021, Card Ltd. enters into a one year contract with a
customer to deliver nut bolts. The contract stipulates that the price per piece will
be adjusted retrospectively once the customer reaches certain sales volume,
defined, as follows:
Price per piece Cumulative sales volume
` 200 1 – 50,000
` 190 50,001 – 1,00,000
` 180 1,00,001 & above
Volume is determined based on sales during the financial year. There are no
minimum purchase requirements. Card Ltd. estimates that the total sales volume
for the year will be 90,000 based on its experience with similar contracts and
forecasted sales to the customer.
Card Ltd. sells 24,000 pieces to the customer during the first quarter of the
financial year 2021-2022 for a contract price of ` 200 per piece.

Solution:
Analysis:
(i) (a) Nature of consideration received:
Card Ltd. applies the requirements in Ind AS 115 to the portfolio of
20,000 car locks because it reasonably expects that the effects on the
financial statements from applying the requirements to the portfolio
would not differ materially from applying the requirements to the
individual contracts within the portfolio. Since the contract allows a
customer to return the products, the consideration received from the
customer is variable.
(b) Probability of significant reversal of cumulative revenue:
Card Ltd. considers on constraining estimates of variable consideration
to determine whether the estimated amount of variable consideration of
` 3,45,60,000 (` 1,800 x 19,200 car locks not expected to be returned)
can be included in the transaction price. Card Ltd. determines that
although the returns are outside the entity's influence, it has significant
experience in estimating returns for this product and customer class. In
addition, the uncertainty will be resolved within a short time frame ie
the 30-day return period. Thus, Card Ltd. concludes that it is highly
probable that a significant reversal in the cumulative amount of revenue
recognised (i.e. ` 3,45,60,000) will not occur as the uncertainty will be
resolved (i.e. over the return period).
Card Ltd. estimates that the costs of recovering the products will be
immaterial and expects that the returned products can be resold at a
profit.

FINANCIAL REPORTING 179

IND AS 115 REVENUE FORM
CONTRACTS WITH CUSTOMERS
CA FINAL
Upon transfer of control of the 20,000 car locks, Card Ltd. does not
recognise revenue for 800 car locks that it expects to be returned.
Consequently, it recognises the following:
(a) revenue of ` 3,45,60,000 (` 1,800 x 19,200 products not expected
to be returned);
(b) a refund liability of ` 14,40,000 (` 1,800 refund x 800 products
expected to be returned); and
(c) an asset of ` 12,00,000 (` 1,500 x 800 products for its right to
recover products from customers on settling the refund liability).
(ii) (a) Transaction Price: The transaction price will be based on Card Ltd.’s
estimate of total sales volume for the year. Since Card Ltd. estimates
cumulative sales volume of 90,000 nut bolts during the year, transaction
price per nut bolt will be ` 190. Card Ltd. will update its estimate of the
total sales volume at each reporting date until the uncertainty is
resolved.
(b) Determination of Revenue: Card Ltd. concludes that based on a
transaction price of ` 190 per nut bolt, it is highly probable that a
significant reversal in the amount of cumulative revenue recognised will
not occur when the uncertainty is resolved. Revenue is therefore
recognised at a selling price of ` 190 per nut bolt as each nut bolt is
sold. Accordingly, for the first quarter of the financial year 2021-2022,
Card Ltd. recognizes revenue of ` 45,60,000 (24,000 nut bolts x ` 190).
(c) Determination of Liability: Card Ltd. will recognise a liability for cash
received in excess of the transaction price for the first 50,000 nut bolts
sold at ` 200 per nut bolt (that is, ` 10 per nut bolt) until the cumulative
sales volume is reached for the next pricing tier and the price is
retroactively reduced. Accordingly, for the first quarter of the financial
year 2021-2022, Card Ltd. recognizes liability of ` 2,40,000 (24,000 nut
bolts x (` 200 – ` 190).

“Positive thinking will let you do everything better

than negative thinking will”.

FINANCIAL REPORTING 180

IND AS 115 REVENUE FORM
CONTRACTS WITH CUSTOMERS
CA FINAL

Notes


FINANCIAL REPORTING 181
IND AS 115 REVENUE FORM
CONTRACTS WITH CUSTOMERS
CA FINAL

FINANCIAL INSTRUMENTS
4 (IND AS 32, 107, 109)

Ind AS 32 Ind AS 109 Ind AS 107

Disclosures

Recognition & Classification of Measurement of Hedge

de-recognition financial assets financial asset accounting
of financial & financial & Financial
asset & liabilities liabilities
Financial
liabilities

Offsetting
Classification
financial asset
as Liability v/s
& financial
Equity liability

A. Basic Understanding & Scope:

Financial Instrument is any contract that gives Financial Asset for one entity and
Financial Liability or/and Equity to another entity.

Financial Asset Financial Liability Equity

Cash Payables or Loans taken Equity Instruments
Investment in Equity Debt Securities Equity Share Warrants
Instruments of another
entity
Receivables or Loan Given Redeemable Preference Share Application Money
Shares with Fixed Rate of pending Allotment
dividends
Investments in Debt Derivative Liability Portion of Compound
Securities Financial Instruments
Derivative Assets Perpetual Bonds at Market Irredeemable Preference
Rate of Interest Shares with dividend at the
discretion of issuer

FINANCIAL REPORTING 182

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
 Physical assets, leased asset and intangible assets
Physical assets (such as inventories, property, plant and equipment), leased assets
and intangible assets (such as patents and trademarks) are not financial assets.
• Prepaid expenses
 Assets (such as prepaid expenses) 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.
 Similarly, items such as deferred revenue and most warranty obligations are
not financial liabilities because the outflow of economic benefits associated
with them is the delivery of goods and services rather than a contractual
obligation to pay cash or another financial asset.

Evaluate the financial assets.

S. Whether
Particulars Remarks
No. FA or not
(1) Investment in bonds debentures FA • Contractual right to receive cash.
(2) Loans and receivables FA • Contractual right to receive cash.
(3) Deposits given FA • Contractual right to receive cash.
(4) Trade & other receivables FA • Contractual right to receive cash.
(5) Cash and cash equivalents FA • Specifically covered in the
definition.
(6) Bank balance FA • Contractual right to receive cash.
(7) Investments in equity shares FA • Equity instrument of another
entity.
(8) Perpetual debt instruments Eg. FA • Such instruments provide the
perpetual bonds, debentures contractual right to receive
and capital notes. interest for indefinite future or a
right to return of principal under
terms that make it very unlikely
or very far in the future.
(9) Physical assets No • Control of such assets does not
Eg. inventories, property, plant create a present right to receive
and equipment etc. cash or another financial asset.

(10) Right to use assets No • Control of such assets does not

Eg. Lease vehicle etc. create a present right to receive
cash or another financial asset.
(11) Intangibles No • Control of such assets does not
Eg. Patents, trademark etc. create a present right to receive
cash or another financial asset.

FINANCIAL REPORTING 183

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(12) Prepaid expenses No • These instruments provide future
Eg. Prepaid insurance, prepaid economic benefit in the form of
rent etc. goods or services, rather than the
right to receive cash.
(13) Advance given for goods and No • These instruments provide future
services economic benefit in the form of
goods or services, rather than the
right to receive cash.

Illustration 1:
A share broking company is dealing in sale/purchase of shares for its own account
and therefore is having inventory of shares purchased by it for trading.
How will these instruments be accounted for in the financial statements?
Solution:
Ind AS 2, Inventories, states that this Standard applies to all inventories, except
financial instruments (Ind AS 32, Financial Instruments: Presentation and Ind AS
109, Financial Instruments).

Accordingly, the principles of recognizing and measuring financial instruments are

governed by Ind AS 109, its presentation is governed by Ind AS 32 and disclosures
are in accordance with Ind AS 107, Financial Instruments: Disclosures, even if these
instruments are held as stock-in trade by a company.

Accordingly, in the given case, the relevant requirements of Ind AS 109, Ind AS 32
and Ind AS 107 shall be applied .

Illustration 2: Trade receivables

A Ltd. makes sale of goods to customers on credit of 45 days. The customers are
entitled to earn a cash discount@ 2% per annum if payment is made before 45 days
and an interest @ 10% per annum is charged for any payments made after 45 days.
Company does not have a policy of selling its debtors and holds them to collect
contractual cash flows. Evaluate the financial instrument.
Solution:
In the above case, the trade receivable recorded in books represents contractual
cash flows that are solely payments of principal (and interest if paid beyond credit
period). Further, Company’s business model is to collect contractual cash flows.
Hence, this meets the definition of financial assets carried at amortised cost.

FINANCIAL REPORTING 184

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Illustration 3: Deposits
Z Ltd. (the ‘Company’) makes sale of goods to customers on credit. Goods are
carried in large containers for delivery to the dealers’ destinations. All dealers are
required to deposit a fixed amount of ` 10,000 as security for the containers, which
is returned only when the contract with Company terminates. The deposits carry 8%
per annum which is payable only when the contract terminates. If the containers are
returned by the dealers in broken condition or any damage caused, then appropriate
adjustments shall be made from the deposits at the time of settlement. How would
such deposits be treated in books of the dealers?
Solution:
In this case, deposits are receivable in cash at the end of contract period between
the dealer and the Company. These deposits represent cash flows that are solely
payments of principal and interest. Moreover, these deposits normally cannot be
sold. Hence, they meet the definition of financial asset carried at amortised cost.

Illustration 4: Creditors for sale of goods

A Ltd. makes purchase of steel for its consumption in normal course of business.
The purchase terms provide for payment of goods at 30 days credit and interest
payable @ 12% per annum for any delays beyond the credit period. Analyse the
nature of this financial instrument.
Solution:
A Ltd. has entered into a contractual arrangement for purchase of goods at a fixed
consideration payable to the creditor. A contractual arrangement that provides for
payment in fixed amount of cash to another entity meets the definition of financial
liability.

REDEEMABLE PREFERENCE SHARES

Redemption terms Evaluation under Ind AS 32

Redemption at a specified date This contains a financial liability because
Redemption at option of Holder the issuer has an obligation to transfer
financial assets to the holder of the share.
The potential inability of an issuer to
satisfy an obligation to redeem a
preference share when contractually
required to do so, whether because of a
lack of funds, a statutory restriction or
insufficient profits or reserves, does not
negate the obligation.
Hence, classified as ‘financial liability’.

FINANCIAL REPORTING 185

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Redemption at option of Issuer An option of the issuer to redeem shares
for cash does not satisfy the definition of
a financial liability because the issuer
does not have a present obligation to
transfer financial assets to the
shareholders. Hence, classified as ‘equity
instrument’.
An obligation may arise, however, when
the issuer of the shares exercises its
option, usually by formally notifying the
shareholders of an intention to redeem
the shares, at which time this instrument
shall be reclassified from ‘equity’ to
‘financial liability’.

Illustration 5: Preference shares with non-cumulative dividend

Silver Ltd. issued irredeemable preference shares with face value of ` 10 each and
premium of ` 90. These shares carry dividend @ 8% per annum, however dividend is
paid only when Silver Ltd declares dividend on equity shares. Analyse the nature of
this instrument.
Solution:
In the above case, two main characteristics of the preference shares are:
(i) Preference shares carry dividend, which is payable only when Company
declares dividend on equity shares
(ii) Preference share are irredeemable.
Analysing the definition of equity, an instrument meets definition of equity if:
(a) It contains no contractual obligation to pay cash; and
(b) Where an instrument shall be settled in own equity instruments, it’s a non-
derivative contract that will be settled only by issue of fixed number of shares
or a derivative contract that will be settled by issue of fixed number of shares
for a fixed amount of cash.
In the above instrument, there is no contractual obligation on the Company to pay
cash since –
(i) Face value is not redeemable (except in case of liquidation); and
(ii)Dividend is payable only if Company declares dividend on equity shares. Since
dividend on equity shares is discretionary and the Company can choose not to
pay, Company has an unconditional right to avoid payment of cash on
preference shares also.
Hence, preference shares meet definition of equity instrument.

FINANCIAL REPORTING 186

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

SCOPE OF FINANCIAL INSTRUMENTS

Scope of financial instruments excludes the following:

(a) Interests in subsidiaries, associates and joint ventures that are accounted for in
accordance with Ind AS 110 Consolidated Financial Statements, Ind AS 27 Separate
Financial Statements or Ind AS 28 Investments in Associates and Joint Ventures.
(b) Rights and obligations under leases to which Ind AS 116 Leases applies. However,
(i) finance lease receivables (i.e. net investments in finance leases) and
operating lease receivables recognised by a lessor are subject to the
derecognition and impairment requirements of Ind AS 109;
(ii) lease liabilities recognised by a lessee are subject to the derecognition
requirements of Ind AS 109; and
(iii) derivatives that are embedded in leases are subject to the embedded
derivatives requirements of Ind AS 109.
(c) Employers’ rights and obligations under employee benefit plans, to which Ind AS 19
Employee Benefits applies.
(d) Rights and obligations arising under an insurance contract as defined in Ind AS 104.
(e) Any forward contract between an acquirer and a selling shareholder to buy or sell
an acquiree that will result in a business combination within the scope of Ind AS
103 Business Combinations at a future acquisition date.
(f) Financial instruments, contracts and obligations under share-based payment
transactions to which Ind AS 102Share-based Payment applies, except for contracts
to buy nonfinancial items as described below.
(g) Rights to payments to reimburse the entity for expenditure that it is required to
make to settle a liability that it recognises as a provision in accordance with Ind AS
37 Provisions, Contingent Liabilities and Contingent Assets, or for which, in an
earlier period, it recognised a provision in accordance with Ind AS 37.
(h) Rights and obligations within the scope of Ind AS 115 Revenue from Contracts with
Customers that are financial instruments, except for those that Ind AS 115 specifies
are accounted for in accordance with this Standard.

B. Classification & Measurement of Financial Assets:

Categorisation of financial assets (FA) is determined based on the business model that
determines how cash flows of the financial asset are collected and the contractual cash
flow characteristics; and can be:
(a) Measured at Amortised cost
(b) Measured at fair value through comprehensive income (FVOCI)
(c) Measured at fair value through profit or loss (FVTPL).

FINANCIAL REPORTING 187

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
• Categorisation of financial assets has been broadly laid out in the below flow chart:

Financial Asset measured at

Amortised cost Fair Value Through Other Fair Value Through

Comprehensive Income profit or loss

If below conditions are met: FA are accounted at FVTPL if:

(a) FA is held with BM whose objective is (a) Any asset which is not measured
to hold financial asset in order to at amortised coast and not
collect contractual cash flow measured at FVOCI; or
(b) Contractual Items give rise on specified (b) If on initial recognition, any
dates to cash flow that are solely asset may irrevocably be
payments of principal and interest on designated as FVTPL if specific
the principal amount outstanding. criteria met.

• FA shall measured at FVOCI if below condition are met:

(a) FA is held with BM whose objective is achieved both by collecting contractual
cash flow selling FA
(b) Contractual items give rise on specified dates to cash flows that are solely
payment of principal and interest on the principal amount outstanding
• Any equity instruments for which the entity makes an irrevocable election to carry
at fair value though OCI

FINANCIAL REPORTING 188

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Debt investments Derivative investments Equity investments

Contractual cash flows solely payments of

principal and interest
Pass Fail Fail Fail

Business model (BM) test Held for trading?

(at entity level)

1 Hold to 2 BM to Neither
collect collect 1 or 2 Yes No
contractual contractual
cash flows cash flows
and sell
asset FVOCI option elected?

Fair value option elected?

No No Yes
No Yes

Amortised FVOCI
cost (with recyclling) FVPL FVCOI (no recycling)

FINANCIAL ASSETS: MEASUREMENT

Measurement of financial assets is driven by their classification and can be broadly
explained with the help of following diagrammatic presentation:
Measurement:
Fair Value through
Amortised Fair Value through Profit &
Other Comprehensive
Cost(I) Loss (FVTPL) (III)
Income (FVTOCI) (II)
Solely Payment of (1) Does not fall under I/II
Principal & Interest (2) Designated to Category III
on Outstanding Satisfied Satisfied (3) Held for trading
Principal
(4) Derivative Asset (unless for
(SPPI Test) Hedge Accounting)
(a) Should be done on instrument to instrument basis (5) Generally investment in
(b) Interest should consist of time value of money (+) equity shares fall in this
credit risk category, but there is
option provided to show

FINANCIAL REPORTING 189

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Business Model To collect To collect contractual investments in Equity

Test contractual cash flows and sale of Shares under FVTOCI.
cash flows Financial Asset
(a) Is done on an aggregate basis & not on individual
basis.
(b) Done without considering worst / stress situations.
(c) Requires professional judgment.

Amortised Cost FVTOCI (Debt) FVTOCI (Equity) FVTPL

Initial At Transaction Value (assumed that transaction is at market terms &
Measurement therefore, transaction value = fair value)
Transaction Cost Add to Initial Measurement P&L
Subsequent At Amortised Cost
Measurement using Effective
At Fair Value
Interest Method
(EIM)
Difference on NA OCI with OCI without P&L
Subsequent recycling recycling
Measurement
Difference on P&L P&L, previous OCI P&L
Disposal or De – transfer to OCI
Recognition will be recycled
to P&L
Interest or P&L
Dividend

If the transaction is not at market terms

Record it at Fair Value: Difference between Transaction

Value & Fair Value will be accounted

If FV based on Level 1 input or If Fair Value is based on

valuation technique that uses only other than Level 1 Inputs
data from observable markets

Transfer to P&L Create an Asset, or Transfer to P&L

if possible

FINANCIAL REPORTING 190

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Important Points for Category “Amortised Cost”:-

(1) Financial Assets repayable on demand to be always shown at Value equal to the
amount to be received on repayment (eg. Telephone / Electricity Deposits, Loans
repayable on demand).

(2) Financial Assets at concessional rate of interest or no interest will be recorded at

fair value & difference between transaction value & fair value will be adjusted
(refer flowchart). Fair Value of Financial Asset = Present Value of Cash Inflows from
that Financial Asset, discounted at Market Rate of Interest. (eg. Staff Loans at
concessional rates, Security Deposit for any asset – difference being adjusted as
Prepaid Expenses / ROU Asset).

(3) Transaction between Holding Company & Subsidiary Company (Under IND AS
Ecosystem)

Benefit by H Co to S Co Benefit by S Co to H Co

H Co SFS S Co SFS H Co SFS S Co SFS

Investment in Contribution from Dividend Dividend

S Co A/c Parent A/c Income Distribution
(Equity)

(4)
FA Measured at fair value (FVOCI / FVTPL)

Interest / Dividend Gains/Iosses

FVTPL FVOCI - other than FVOCI - equity

equity instruments instruments

Realised/Unrealised Realised FV Unrealised Realised/Unrealised

FV gains/losses gains/losses FV losses FV gains/losses

Recognised in Recognised in Recognised

profit or loss profit or loss OCI

FINANCIAL REPORTING 191

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Illustration 6
Containers Ltd provides containers for use by customers for multiple purposes. The
containers are returnable at the end of the service contract period (3 years)
between Containers Ltd and its customers. In addition to the monthly charge, there
is a security deposit that each customer makes with Containers Ltd for ` 10,000 per
container and such deposit is refundable when the service contract terminates.
Deposits do not carry any interest. Analyse the fair value upon initial recognition in
books of customers leasing containers. Market rate of interest for 3 year loan is 7%
per annum.
Solution:
In the above case, lessee (ie, customers leasing the containers) make interest free
deposits, which are refundable at the end of 3 years. Now, this money if it was to
lent to a third party would fetch interest @ 7% per annum.
Hence, discounting all future cash flows (ie, ` 10,000)
Fair value on initial recognition = 10,000/ (1+0.07)3 = 8,163.
Differential on day 1 = 10,000 – 8,163 = 1,837
The differential on day 1 shall be treated as follows:
• Scenario 1 – If fair valuation is determined using level 1 inputs or other
observable inputs, difference on day 1 recognised in profit or loss
• Scenario 2 – If fair valuation is determined using other inputs, difference on
day 1 shall be recognised in profit or loss unless it meets definition of an asset
or liability.
In the above case, the fair valuation is made based on unobservable inputs
and hence applying scenario 2, difference can be recognised as an asset if it
meets the definition.
Now, since the lessee gets to use the containers in return for making an
interest free deposit plus monthly charges, the lost interest representing day
1 difference between value of deposit and its fair value is like ‘’prepaid lease
rent’ and can be recognised as such. Prepaid rent shall be charged off to
profit or loss in a straight lined manner as ‘lease rent’.

Illustration 7
Silver Ltd. has made an investment in optionally convertible preference shares
(OCPS) of a Company – Bronze Ltd. at ` 100 per share (face value ` 100 per share).
Silver Ltd. has an option to convert these OCPS into equity shares in the ratio of 1:1
and if such option not exercised till end of 9 years, then the shares shall be
redeemable at the end of 10 years at a premium of 20%.
Analyse the measurement of this investment in books of Silver Ltd.
Solution:
The classification assessment for a financial asset is done based on two
characteristics:
(i) Whether the contractual cash flows comprise cash flows that are solely
payments of principal and interest on the principal outstanding

FINANCIAL REPORTING 192

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(ii) Entity’s business model (BM) for managing financial assets – Whether the
Company’s BM is to collect cash flows; or a BM that involves realisation of
both contractual cash flows & sale of financial assets;

In all other cases, the financial assets are measured at fair value through profit or
loss.
In the above case, the Holder can realise return either through conversion or
redemption at the end of 10 years, hence it does not indicate contractual cash
flows that are solely payments of principal and interest. Therefore, such
investment shall be carried at fair value through profit or loss. Accordingly, the
investment shall be measured at fair value periodically with gain/ loss recorded in
profit or loss.

Illustration 8
A Ltd has made a security deposit whose details are described below. Make
necessary journal entries for accounting of the deposit. Assume market interest
rate for a deposit for similar period to be 12% per annum.
Particulars Details
Date of Security Deposit (Starting Date) 1-Apr-20X1
Date of Security Deposit (Finishing Date) 31-Mar-20X6
Description Lease
Total Lease Period 5 years
Discount rate 12.00%
Security deposit (A) 10,00,000
Present value factor at the 5th year 0.567427
Solution:
The above security deposit is an interest free deposit redeemable at the end of
lease term for ` 10,00,000. Hence, this involves collection of contractual cash
flows and shall be accounted at amortised cost.

Upon initial measurement –

Particulars Details
Security deposit (A) 10,00,000
Total Lease Period (Years) 5
Discount rate 12.00%
Present value annuity factor 0.56743
Present value of deposit at beginning (B) 5,67,427
Prepaid lease payment at beginning (A-B) 4,32,57

FINANCIAL REPORTING 193

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Journal Entries
Particulars Amount Amount
Security deposit a/c Dr. 5,67,427
ROU Asset a/c Dr. 4,32,573
To Bank a/c 10,00,000

Subsequently, every annual reporting year, interest income shall be accrued@ 12%
per annum and prepaid expenses shall be amortised on straight line basis over the
lease term.
For instance – year 1
Particulars Amount Amount
Security deposit a/c (5,67,427 x 12%) Dr. 68,091
To Interest income 68,091
Depreciation (4,32,573 / 5 years) Dr. 86,515
To ROU Asset 86,515

At the end of 5 years, the security deposit shall accrue to ` 10,00,000 and prepaid
expenses shall be fully amortised. Journal entry for realisation of security deposit –
Particulars Amount Amount
Bank a/c Dr. 10,00,000
To Security deposit a/c 10,00,000

Illustration 9
A Ltd. invested in equity shares of C Ltd. on 15th March for ` 10,000. Transaction
costs were ` 500 in addition to the basic cost of ` 10,000. On 31 March, the fair
value of the equity shares was ` 11,200 and market rate of interest is 10% per
annum for a 10 year loan. Pass necessary journal entries. Analyse the measurement
principle and pass necessary journal entries.
Solution:
The above investment is in equity shares of C Ltd and hence, does not involve any
contractual cash flows that are solely payments of principal and interest. Hence,
these equity shares shall be measured at fair value through profit or loss. Also, an
irrecoverable option exists to designate such investment as fair value through other
comprehensive income.
Journal Entries
Particulars Amount Amount
Upon initial recognition –
Investment in equity shares of C Ltd. Dr. 10,000
Transaction cost Dr. 500
To Bank A/c 10,500

FINANCIAL REPORTING 194

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(Being investment recognized at fair value plus
transaction costs upon initial recognition)
Profit and Loss A/c Dr. 500
To Transaction cost 500
(Being transaction cost incurred on assets measured at
FVTPL transferred to P&L A/c)
Subsequently –
Investment in equity shares of C Ltd. Dr. 1,200
To Fair value gain on financial instruments 1,200
(Being fair value gain recognized at year end in P&L)
Fair value gain on financial instruments Dr. 1,200
To Profit and Loss A/c 1,200
(Being fair value gain transferred to P&L A/c)

Illustration 10
Metallics Ltd. has made an investment in equity instrument of a company – Castor
Ltd. for 19% equity stake. Significant influence not exercised. The investment was
made for ` 5,00,000 for 10,000 equity shares on 01 April 20X1. On 30 June 20X1 the
fair value per equity share is ` 45. The Company has taken an irrevocable option to
measure such investment at fair value through other comprehensive income.
Solution:
The Company has made an irrecoverable option to carry its investment at fair value
through other comprehensive income. Accordingly, the investment shall be initially
recognised at fair value and all subsequent fair value gains/ losses shall be
recognised in other comprehensive income (OCI).
Journal Entries
Particulars Amount Amount
Upon initial recognition –
Investment in equity shares of C Ltd. Dr. 5,00,000
To Bank a/c 5,00,000
(Being investment recognized at fair value plus
transaction costs upon initial recognition)
Subsequently –
Fair value loss on financial instruments Dr. 50,000
To Investment in equity shares of C Ltd. 50,000
(Being fair value loss recognised)
Fair value reserve in OCI Dr. 50,000
To Fair value loss on financial instruments 50,000
(Being fair value loss recognized in other comprehensive
income)

FINANCIAL REPORTING 195

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

C. Classification & Measurement of Financial Liabilities:

FINANCIAL LIABILITIES: CLASSIFICATION

• Upon initial recognition, all financial liabilities are measured at fair value.
Subsequently, per Ind AS 109.4.2.1 – the classification of financial liabilities shall
be as follows:
(A) Measured at amortised cost
(B) Measured at fair value through profit or loss:
♦ Liabilities that meet the definition of “held for trading”
♦ Contingent consideration recognized by an acquirer in a business
combination
(C) Designated at fair value through profit or loss
Fair Value through P&L (FVTPL) Amortised Cost
(1) Held for trading Residual Category
(2) Designated to this category
(3) Derivate Liability (other than Hedge Accounting)
(4) Contingent Consideration in Business Combinations

FINANCIAL LIABILITIES: MEASUREMENT

• Measurement of financial liabilities is driven by their classification upon initial
recognition as follows:

Amortised Cost FTVPL

Initial Measurement At Transaction Value (assumed at market terms)
Transaction Cost Reduced from Initial P&L
Measurement
Subsequent Measurement Amortised Cost (using EIM) Fair Value
Difference on Subsequent P&L
Measurement (for financial liabilities
other than trading,
-NA -
differences due to entity’s
own credit risk will be
recorded in OCI)
Difference on De-Recognition P&L
or Disposal
In case the entity changes its business model objective, there is a possibility of re-
classification of Financial Asset (from one basket to the other), but there is no possibility
of reclassification of Financial Liability.

FINANCIAL REPORTING 196

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Illustration 11
X Ltd. had taken 6 year term loan in April 20X0 from bank and paid processing fees
at the time of sanction of loan.
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 while
calculating net present value. What will be the accounting treatment of processing
fees belonging to undisbursed term loan amount?

Solution:
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.

Illustration 12
PQR Limited had obtained term loan from Bank A in 20X1-20X2 and paid loan
processing fees and commitment charges.
In May 20X5, PQR Ltd. has availed fresh loan from Bank B as take-over of facility
i.e. the new loan is sanctioned to pay off the old loan taken from Bank A. The
company paid prepayment premium to Bank A to clear the old term loan and paid
processing fees to Bank B for the new term loan.
Whether the prepayment premium and the processing fees both will be treated as
transaction cost (as per Ind AS 109, Financial Instruments) of obtaining the new
loan, in the financial statements of PQR Ltd?

Solution:
(a) Accounting treatment of prepayment premium
Ind AS 109, provides that if an exchange of debt instruments or modification
of terms is accounted for as an extinguishment, any costs or fees incurred are
recognised as part of the gain or loss on the extinguishment in the statement
of profit and loss. Since the original loan was prepaid, the prepayment would

FINANCIAL REPORTING 197

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
result in extinguishment of the original loan. The difference between the CV
of the financial liability extinguished and the consideration paid shall be
recognised in profit or loss as per Ind AS 109.
Accordingly, the prepayment premium shall be recognised as part of the gain
or loss on extinguishment of the old loan.
(b) Accounting treatment of Unamortised processing fee of old loan
Unamortised processing fee related to the old loan will also be required to be
charged to the statement of profit and loss.
(c) Accounting treatment of Processing fee for new loan
Transaction costs are “Incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or financial liability. An
incremental cost is one that would not have been incurred if the entity had
not acquired, issued or disposed of the financial instrument.”

It is assumed that the loan processing fees solely relates to the origination of the
new loan (i.e. does not represent loan modification/renegotiation fees). Hence,
the processing fees paid to avail fresh loan from Bank B will be considered as
transaction cost in the nature of origination fees of the new loan and will be
included while calculating effective interest rate as per Ind AS 109.

Modifications of Financial Liabilities (FL):

(A) PV of Cash Flow based on modified terms (+) Expenses, if any (using Original E.I.R)
(-)
(B) PV of Balance Cash Flows based on original terms (i.e. Carrying Amount) (using
Original E.I.R)

Equal to OR More than 10% of B

Yes: Extinguishment No: Modification

Old Liability A/c DR. (Carrying Value) Adjust the expenses in existing carrying
P&L A/c DR. (Balancing Figure) value and then amortise it based on New
E.I.R. (i.e. Modified E.I.R.)
To New Liability A/c (Fair Value)
OR
To Bank A/c (expenses, if any)
Revised the amortised cost of the
To P&L A/c (Balancing Figure)
financial liability to reflect revised
future cash flows by discounting them to
their present value at the original effective
interest rate. The difference between the
carrying value and revised amortised cost is
recognized as a gain or loss in profit or loss.

FINANCIAL REPORTING 198

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Illustration 13
Original Loan Amount = ` 10,00,000 (10 years ago)
Carrying Value today on 01.01.2005 = ` 10,00,000
Original E.I.R = 10%
On 01.01.2005, terms of loan were modified.
Existing Terms Modified Terms
Repayment Date 31.12.2009 31.12.2011
Rate of Interest 10% 5%
Interest Amount p.a. ` 1,00,000 ` 50,000
Redemption Amount ` 10,00,000 ` 15,00,000
Expenses Incurred = Rs. 1,00,000
Existing ROI in Market = 11%
Scene B: Assume redemption amount to be Rs. 14,00,000.

FINANCIAL INSTRUMENTS: EQUITY AND FINANCIAL LIABILITIES

INTRODUCTION
Ind AS 32 lays down the accounting principles for classifying a financial instrument
issued by an entity as either a financial liability or equity or both (a compound
instrument). The classification of a financial instrument is governed by the substance of
a contract and not its legal form.
DEFINITIONS – FINANCIAL LIABILITY AND EQUITY
Financial liability (Ind AS 32.11) Equity (Ind AS 32.16)
A financial instrument that fulfils either of (A) A financial instrument that fulfils both (A)
or (B) below: and (B) below:
Condition (A): Condition (A):
An instrument that is a contractual obligation: An instrument that contains no contractual
i. to deliver cash or another financial asset obligation:
to another entity; or I to deliver cash or another financial asset
ii. to exchange financial assets or financial to another entity; or
liabilities with another entity under ii to exchange financial assets or financial
conditions that are potentially liabilities with another entity under
nfavourable to the entity conditions that are potentially
Condition (B): unfavourable to the entity
An instrument that will or may be settled in Condition (B):
the entity’s own equity instruments and is: An instrument that will or may be settled in the
i. a non-derivative for which the entity is or entity’s own equity instruments and is:
may be obliged to deliver a variable i a non-derivative that includes no
number of the entity’s own equity contractual obligation for the issuer to
instruments; or deliver a variable number of the entity’s own

FINANCIAL REPORTING 199

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
ii a derivative that will or may be settled equity instruments; or
other than by the exchange of a fixed ii a derivative that will or may be settled only
amount of cash or another financial asset by the exchange of a fixed amount of cash or
for a fixed number of the entity’s own another financial asset for a fixed number of
equity instruments. the entity’s own equity instruments.

Analysis of the definitions

The following points must be remembered in determination of classification of a
financial instrument as a financial liability or equity:
• Evaluation of components- it is not always that the entire instrument is either a
financial liability or equity.
• Contract is supreme - The evaluation of ‘substance’ does not override or
contravene the contractual terms.
• Contract cannot override laws

The flowchart below summarises the distinction between the definitions of a financial
liability and equity:
No
Is there a contractual obligation? Not a financial instrument, account
for under relevant standard
No

Obligation to deliver cash or another Yes

financial asset?
No

Obligation to exchange financial assets or

liabilities under potentially unfavourable Yes
Financial liability
conditions (see note below)?
No

(A) Obligation to issue own equity

instruments, AND
(B) Either of the consideration Yes
received/receivable or number of
equity instruments is VARIABLE

No, this implies

(A) Obligation to issue own equity

instruments, AND
(B) Both of the consideration received/ Hence
Equity instrument
receivable and number of equity
instruments are FIXED

Note: Potential unfavourable conditions

FINANCIAL REPORTING 200

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

OBLIGATION TO DELIVER CASH

A critical feature in differentiating a financial liability from an equity instrument is the

existence of a contractual obligation of the issuer either to deliver cash or another
financial asset to the holder or to exchange financial assets or financial liabilities with
the holder under conditions that are potentially unfavourable to the issuer.

Difference between Financial Liability & Equity:

Financial Liability Equity
A. Contractual Obligation to: A. No Contractual Obligation to:
1. Deliver cash or other financial 1. Deliver cash or other financial
assets, or assets, or
2. Exchange of financial assets or 2. Exchange of financial assets or
financial liability potentially financial liability potentially
unfavourable unfavourable
Or Or
B. Instrument settled in own equity where B. Instrument settled in own equity where
number of own equity instruments is number of own equity instruments is
variable or consideration is variable. fixed or consideration is fixed. (i.e.
satisfy fixed number of equity shares
for fixed amount of consideration in
functional currency**: (FIXED To FIXED
Criteria)
Examples: Examples:
A. Loans taken/Payables/Derivate Liabilities A. Equity Shares/Irredeemable Preference
B. i. Compulsory Convertible Debentures Shares with dividend at discretion of
at fixed interest rates, conversion the issuer.
based on MPS of Equity Shares on B. Compulsory Convertible Debentures or
conversion date. Preference Shares at interest/
ii. Compulsory Convertible Preference dividend at the discretion of the
Shares at fixed dividend rates, issuer and conversion ratio is
conversion based on MPS of Equity known at the time of issue.
Shares on conversion date.

**Carve Out: FCCB (Foreign Compulsory Convertible Bonds) under IND AS are treated
as Equity## but under IFRS are treated as Financial Liability.
##Logically, FCCB is a compound financial instrument where obligation to pay interest
is a financial liability and conversion into fixed number of shares for fixed
consideration in foreign currency is equity.

FINANCIAL REPORTING 201

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Split accounting for compound financial instruments

Compound Financial Instruments: Instruments that have colours of financial liability as

well as Equity.
a. Compulsory Convertible Debentures with Fixed Interest Conversion
b. Compulsory Convertible Preference Shares with fixed dividend Ratio fixed
c. Optionally Convertible Debentures/Preference Shares with on the date
fixed interest/dividend of issue

Accounting:
Total Fair Value of Instrument XXX
Less: Fair Value of Debt Component (XXX)
(Consider Contractual Cash Flows where entity has obligation to pay x Market Rate of
Interest)
Equity Portion XXX
(1) Once classified as Equity, there would be no re-measurement.
(2) Transaction Cost in relation to Equity are to be adjusted from Equity.
(3) Distribution of Transaction Cost for Compound Instruments:

Debt Component Equity Component

Reduce from Debt Component Reduce from Equity Component

Split in ratio of Initial Measurement Value

Illustration 14
Redeemable preference shares with mandatory dividend A Ltd. (issuer) issues
preference shares to B Ltd. (holder). Those preference shares are redeemable at
the end of 10 years from the date of issue and entitle the holder to a cumulative
dividend of 15% p.a. The rate of dividend is commensurate with the credit risk
profile of the issuer. Examine the nature of the financial instrument

Solution:
This instrument provides for mandatory fixed dividend payments and redemption
by the issuer for a fixed amount at a fixed future date. Since there is a contractual
obligation to deliver cash (for both dividends and repayment of principal) to the
preference shareholder that cannot be avoided, the instrument is a financial
liability in its entirety.

FINANCIAL REPORTING 202

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Illustration 15: Optionally convertible redeemable preference shares
D Ltd. issues preference shares to G Ltd. The holder has an option to convert these
preference shares to equity instruments of the issuer anytime up to a period of 10
years. If the option is not exercised by the holder, the preference shares are
redeemed at the end of 10 years.
Examine the nature of the financial instrument.

Solution:
This instrument has two components – (1) contractual obligation that is conditional
on holder exercising its right to redeem, and (2) conversion option with the holder.
The first component is a financial liability because the entity does not have the
unconditional right to avoid delivering cash.
In the section “Compound financial instruments”, we will also analyse the other
component – the conversion option with the holder and we will explain the nature
of the instrument in its entirety.

SETTLEMENT IN ENTITY’S OWN EQUITY INSTRUMENTS

A financial instrument is classified as a liability not just when there is an obligation to

deliver cash or another financial asset. It is sometimes so classified even when the entity’s
obligation is to settle the instrument through delivery of its own equity instruments.
Let us evaluate two alternate situations for an instrument that is convertible at the
option of the issuer:

Illustration 16
CBA Ltd. issues convertible debentures to RQP Ltd. for a subscription amount of
` 100 crores. Those debentures are convertible after 5 years into equity shares of
CBA Ltd. using a predetermined formula. The formula is:
100 crores x (1+10%) ^ 5
Examine the nature of the financial instrument.
Fair value on date of conversion
Solution:
Such a contract is a financial liability of the entity even though the entity can
settle it by delivering its own equity instruments. It is not an equity instrument
because the entity uses a variable number of its own equity instruments as a means
to settle the contract. The underlying thought behind this conclusion is that the
entity is using its own equity instruments ‘as currency’.

Illustration 17
DF Ltd. issues convertible debentures to JL Ltd. for a subscription amount of ` 100
crores. Those debentures are convertible after 5 years into 15 crore equity shares
of ` 10 each.
Examine the nature of the financial instrument.
FINANCIAL REPORTING 203
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Solution:
This contract is an equity instrument because changes in the fair value of equity
shares arising from market related factors do not affect the amount of cash or
other financial assets to be paid or received, or the number of equity instruments
to be received or delivered.
Number of own
Consideration
equity instruments
Sr.No. for financial Classification and rationale
to be issued in
instrument
settlement
1. Fixed Variable Financial liability – own equity
instruments are being used as currency to
settle an obligation for a fixed amount
2. Fixed Fixed Equity – issuer does not have an
obligation to pay cash and holder is not
exposed to any variability
3. Variable Fixed Financial liability – though issuer does not
have an obligation to pay cash, but
holder is exposed to variability
4. Variable Variable Financial liability – though issuer does not
have an obligation to pay cash, but both
parties are exposed to variability

Illustration18: Written option with multiple exercise prices

WC Ltd. writes an option in favour of GT Ltd. wherein the holder can purchase
issuer’s equity instruments at prices that fluctuate in response to the share price of
issuer.
As per the terms, if the share price of issuer is less than ` 50 per share, option can
be exercised at ` 40 per share. If the share price is equal to or more than ` 50 per
share, option can be exercised at ` 60 per share. Explain the nature of the financial
instrument.

Solution:
As the contract will be settled by delivery of fixed number of instruments for a
variable amount of cash, it is a financial liability.

Illustration 19: Non-derivative contract to be settled in own equity instruments

A Ltd. invests in compulsorily convertible preference shares (CCPS) issued by its
subsidiary – B Ltd. at ` 1,000 each (` 10 face value + ` 990 premium). Under the
terms of the instrument, each CCPS is compulsorily convertible into one equity
share of B Ltd at the end of 5 years.
Such CCPS carry dividend @ 12% per annum, payable only when declared at the
discretion of B Ltd. Evaluate this under definition of financial instrument.

FINANCIAL REPORTING 204

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Solution:
B Ltd. has issued CCPS which provide for –
(a) Conversion into fixed number of equity shares, i.e., one equity share for every
CCPS
(b) Non-cumulative dividends.
Applying the definition of ‘equity’ under Ind AS 32 –
(a) There is no contractual obligation to deliver cash or other financial asset.
Dividends are payable only when declared and hence, at the discretion of the
Issuer – B Ltd., thereby resulting in no contractual obligation over B Ltd.
(b) Conversion is into a fixed number of equity shares.
Hence, it meets definition of equity instrument and shall be classified as such in
books of B Ltd.

Illustration 20: Derivative contract to be settled in own equity instruments

A Ltd. issues warrants to all existing shareholders entitling them to purchase
additional equity shares of A Ltd. (with face value of ` 100 per share) at an issue
price of ` 150 per share.
Evaluate whether this constitutes an equity instrument or a financial liability?
Solution:
In this case, Company A Ltd. has issued warrants entitling the shareholders to
purchase equity shares of the Company at a fixed price. Hence, it constitutes a
contractual arrangement for issuance of fixed number of shares against fixed
amount of cash.
Now, evaluating this contract under definition of derivative –
(i) The value of warrant changes in response to change in value of underlying
equity shares;
(ii) This involves no initial net investment
(iii) It shall be settled at a future date.
Hence, this warrant meets the definition of derivative.

Applying definition of equity under Ind AS 32, a derivative contract that will be
settled by exchange of fixed number of equity shares for fixed amount of cash
meets definition of equity instrument. The above contract is derivative contract
that will be settled by issue of fixed number of own equity instruments by A Ltd.
for fixed amount of cash and hence, meets definition of equity instrument.

Illustration 21: Foreign currency convertible bond

Entity A issues a bond with face value of USD 100 and carrying a fixed coupon rate
of 6% p.a. Each bond is convertible into 1,000 equity shares of the issuer. Examine
the nature of the financial instrument.

FINANCIAL REPORTING 205

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Solution:
While the number of equity shares is fixed, the amount of cash is not. The
variability in cash arises on account of fluctuation in exchange rate of INR-USD.
Such a foreign currency convertible bond (FCCB) will qualify the definition of
“financial liability”.
However, Ind AS 32.11 provides, “the equity conversion option embedded in a
convertible bond denominated in foreign currency to acquire a fixed number of the
entity’s own equity instruments is an equity instrument if the exercise price is
fixed in any currency.”
Accordingly, FCCB will be treated as an “equity instrument”.

Illustration 22:
On 1 July 20X1, D Ltd. issues preference shares to G Ltd. for a consideration of ` 10
lakhs. The holder has an option to convert these preference shares to a fixed
number of equity instruments of the issuer anytime up to a period of 3 years. If the
option is not exercised by the holder, the preference shares are redeemed at the
end of 3 years. The preference shares carry a fixed coupon of 6% p.a. The
prevailing market rate for similar preference shares, without the conversion
feature, is 9% p.a.
Calculate the value of the liability and equity components.
Solution:
The values of the liability and equity components are calculated as follows:
Present value of principal payable at the end of 3 years (` 10 lakhs discounted at
9% for 3 years) = ` 772,183
Present value of interest payable in arrears for 3 years (` 60,000 discounted at 9%
for each of 3 years) = ` 151,878
Total financial liability = ` 924,061
Therefore, equity component = fair value of compound instrument, say, ` 1,000,000
less financial liability component i.e. ` 924,061 = ` 75,939.
In subsequent years, the profit and loss account is charged with interest of 9% on
the debt instrument.

Illustration 23:
Optionally convertible preference shares with issuer’s redemption option D Ltd.
issues preference shares to G Ltd. for a consideration of ` 10 lakhs. The holder has
an option to convert these preference shares to a fixed number of equity
instruments of the issuer anytime up to a period of 3 years. If the option is not
exercised by the holder, the preference shares are redeemed at the end of 3 years.
The preference shares carry a coupon of RBI base rate plus 1% p.a.
The prevailing market rate for similar preference shares, without the conversion
feature or issuer’s redemption option, is RBI base rate plus 4% p.a. On the date of
contract, RBI base rate is 9% p.a. Calculate the value of the liability and equity
components.

FINANCIAL REPORTING 206

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Solution:
The values of the liability and equity components are calculated as follows:
Present value of principal payable at the end of 3 years (` 10 lakhs discounted at
13% for 3 years) = ` 6,93,050
Present value of interest payable in arrears for 3 years (` 100,000 discounted at
13% for each of 3 years) = ` 2,36,115
The liability component = Present value of principal + Present value of Interest
= ` 6,93,050 + ` 2,36,115 = ` 9,29,165
Equity Component = ` 10,00,000 – ` 9,29,165 = ` 70,835

Conversion or early settlement of compound financial instruments

Conversion
Classification of the liability and equity components of a convertible instrument is not
revised as a result of a change in the likelihood that a conversion option will be
exercised, even when exercise of the option may appear to have become economically
advantageous to some holders. Holders may not always act in the way that might be
expected because, for example, the tax consequences resulting from conversion may
differ among holders. Furthermore, the likelihood of conversion will change from time to
time. The entity’s contractual obligation to make future payments remains outstanding
until it is extinguished through conversion, maturity of the instrument or some other
transaction. (Ind AS 32.30)
On conversion of a convertible instrument at maturity, the entity:
• derecognises the liability component and
• recognises it as equity.
• original equity component remains as equity (although it may be transferred from
one line item within equity to another).
• there is no gain or loss on conversion at maturity.

Early settlement
When an entity extinguishes a convertible instrument before maturity through an early
redemption or repurchase in which the original conversion privileges are unchanged, the
entity allocates the consideration paid and any transaction costs for the repurchase or
redemption to the liability and equity components of the instrument at the date of the
transaction.
The method used in allocating the consideration paid and transaction costs to the
separate components is consistent with that used in the original allocation to the
separate components of the proceeds received by the entity when the convertible
instrument was issued.

FINANCIAL REPORTING 207

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
In other words, the issuer:
• starts by allocating the settlement price to the remaining liability i.e. it
determines the fair value of the remaining liability using a discount rate that is
based on circumstances at the settlement date (this rate may differ from the rate
used for the original allocation), and
• allocates the residual settlement amount to the equity component.
As per Ind AS 32, once the allocation of the consideration is made, any resulting gain or
loss is treated in accordance with accounting principles applicable to the related
component, as follows:
(a) the amount of gain or loss relating to the liability component is recognised in profit
or loss; and
(b) the amount of consideration relating to the equity component is recognised in
equity.

Illustration 24:
The amortisation schedule of the instrument is set out below:
Finance cost of
Dates Cash flows Liability Equity
effective interest rate
1 July 20X1 1,00,00,000 - 9,24,061 75,939
30 June 20X2 (60,000) 83,165 9,47,226 75,939
30 June 20X3 (60,000) 85,250 9,72,476 75,939
30 June 20X4 (10,60,000) 87,524 - 75,939
Assume that D Ltd. has an early redemption option to prepay the instrument at
` 11 lakhs and on 30 June 20X3, it exercises that option. Calculate the value of the
liability and equity components.
Solution:
Ind AS 32 requires that the amount paid (of ` 11 lakhs) is split by the same method
as is used in the initial recording. However, at 30 June 20X3, the interest rate has
changed. At that time, D Ltd. could have issued a one-year (i.e. maturity 30 June
20X4) non-convertible instrument at 5%.
The split will be made as below:
Particulars Amount (`)
Present value of principal payable at 30 June 20X4 in one year’s time 9,52,381
(` 10 lakhs discounted at 5% for one year)
Present value of interest payable (` 60,000 discounted at 5% for one year) 57,142
Total liability component 10,09,523
Consideration paid 11,00,000
Residual – equity component 90,477

FINANCIAL REPORTING 208

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Accordingly, the difference between consideration allocated to liability component
(`10,09,523) less carrying amount of financial liability on date of redemption i.e.
30 June 20X3 (` 9,72,476), amounting to ` 37,047 is recognised in profit or loss.
The residual i.e. consideration allocated to equity component is debited to equity.
An entity may amend the terms of a convertible instrument to induce early
conversion, for example by offering a more favourable conversion ratio or paying
other additional consideration in the event of conversion before a specified date.

The difference, at the date the terms are amended, between:

• the fair value of the consideration the holder receives on conversion of the
instrument under the revised terms and
• the fair value of the consideration the holder would have received under the
original terms is recognised as a loss in profit or loss.

TREASURY SHARES
If an entity reacquires its own equity instruments:
• Consideration paid for those instruments (‘treasury shares’) shall be deducted from
equity. An entity’s own equity instruments are not recognised as a financial asset
regardless of the reason for which they are reacquired.
• Consideration received shall be recognised directly in equity.
• No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or
cancellation of an entity’s own equity instruments

In the consolidated financial statements, consideration for treasury shares acquired and
held by other members of the consolidated group, is deducted from equity.

It may be noted that when an entity holds its own equity on behalf of others, eg a
financial institution holding its own equity on behalf of a client, there is an agency
relationship and as a result those holdings are not included in the entity’s statement of
financial position.

• Transaction costs:
Equity transaction – accounted for as a deduction from equity to the extent they
are incremental costs directly attributable to the equity transaction that otherwise
would have been avoided. The costs of an equity transaction that is abandoned are
recognised as an expense.

• Changes in the fair value of an equity instrument are not recognised in the financial
statements.

FINANCIAL REPORTING 209

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
• Presentation:
♦ The amount of transaction costs accounted for as a deduction from equity in
the period is disclosed separately in accordance with Ind AS 1.
♦ Dividends classified as an expense may be presented in the statement of
comprehensive income either with interest on other liabilities or as a separate
item.

Impairment of Financial Asset (based on Expected Credit Loss Method – ECL)

Crude Form:
PV of Contractual Cash Flows XXX
Less: PV of Expected Cash Flows (XXX)
Impairment Loss XXX

Applicability:
1. Financial Assets at Amortised Cost
2. Financial Assets at FVOCI (Debt), Impairment Loss transferred to P&L
3. Lease Receivable
4. Trade Receivable & Contract Receivable
Non – Applicability :
1. Financial Assets at FVTPL
2. Financial Assets at FVTOCI (Equity)

Approach

General Approach: Based on stages Simplified Approach: for Trade Receivables

Either 12 Month ECL or Life Time ECL with no significant finance component, Life
Time ECL using Provision Matrix.

FINANCIAL REPORTING 210

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
General Approach:
Stage I Stage II Stage III
No significant increase
Significant increase in Credit Risk
in Credit Risk
+ Credit Impaired
Impairment Loss 12 Month ECL Life Time ECL

Interest Recognition Gross Amount Gross Amount Net Amount

{Gross (-) Impairment
Loss}

Is FA a trade receivable, Lease

Yes
receivable or contract asset?
Measure ‘life
time expected
No
credit losses’

Has the credit risk increased

Yes
singnificantly for the FA?

Measure ‘12 -
No month expected
credit losses’

• Measurement of expected credit losses:

♦ An entity shall measure expected credit losses of a financial instrument in a
way that reflects:
(a) an unbiased and probability-weighted amount that is determined by
evaluating a range of possible outcomes;
(b) the time value of money; and
(c) reasonable and supportable information that is available without undue
cost or effort at the reporting date about past events, current conditions
and forecasts of future economic conditions.
Illustration 25: 12 month expected credit loss – Probability of default approach
Entity A originates a single 10 year amortising loan for CU1 million. Taking into
consideration the expectations for instruments with similar credit risk (using
reasonable and supportable information that is available without undue cost or
effort), the credit risk of the borrower, and the economic outlook for the next 12
FINANCIAL REPORTING 211
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
months, Entity A estimates that the loan at initial recognition has a probability of
default (PoD) of 0.5 per cent over the next 12 months. Entity A also determines
that changes in the 12-month PoD are a reasonable approximation of the changes in
the lifetime PoD for determining whether there has been a significant increase in
credit risk since initial recognition. Loss given default (LGD) is estimated as 25% of
the balance outstanding. Calculate loss allowance.
Solution:
At reporting date, no change in 12-month PoD and entity assesses that there is no
significant increase in credit risk since initial recognition – therefore lifetime ECL is
not required to be recognised.
Particulars Details
Loan ` 1,000,000 (A)
LGD 25% (B)
PoD – 12 months 0.5% (C)
Loss allowance (for 12-months ECL) ` 1,250 (A*B*C)

Illustration 26: Life time expected credit losses (provision matrix for short term
receivables)
Company M, a manufacturer, has a portfolio of trade receivables of CU30 million in
20X1 and operates only in one geographical region. The customer base consists of a
large number of small clients and the trade receivables are categorised by common
risk characteristics that are representative of the customers’ abilities to pay all
amounts due in accordance with the contractual terms. The trade receivables do
not have a significant financing component in accordance with Ind AS 18. In
accordance with paragraph 5.5.15 of Ind AS 109 the loss allowance for such trade
receivables is always measured at an amount equal to lifetime expected credit
losses.
Please use the following information of debtors outstanding:
Gross carrying
amount
Current CU 15,000,000
1–30 days past due CU 7,500,000
31–60 days past due CU 4,000,000
61–90 days past due CU 2,500,000
More than 90 days past due CU 1,000,000
CU 30,000,000
Determine the expected credit losses for the portfolio
FINANCIAL REPORTING 212
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Solution:
To determine the expected credit losses for the portfolio, Company M uses a
provision matrix. The provision matrix is based on its historical observed default
rates over the expected life of the trade receivables and is adjusted for forward-
looking estimates. At every reporting date the historical observed default rates are
updated and changes in the forward-looking estimates are analysed. In this case it
is forecast that economic conditions will deteriorate over the next year.
On that basis, Company M estimates the following provision matrix:
1-30 days 31-60 days 61-90 days More than 90
Current
past due past due past due days past due
Default rate 0.3% 1.6% 3.6% 6.6% 10.6%

The trade receivables from the large number of small customers amount to CU 30
million and are measured using the provision matrix.

Lifetime expected credit loss

Gross carrying
allowance (Gross carrying amount x
amount
lifetime expected credit loss rate)
Current CU 15,000,000 CU 45,000
1–30 days past due CU 7,500,000 CU 120,000
31–60 days past due CU 4,000,000 CU 144,000
61–90 days past due CU 2,500,000 CU 165,000
More than 90 days past due CU 1,000,000 CU 106,000
CU 30,000,000 CU 580,000

Illustration 27
A Ltd issued redeemable preference shares to a Holding Company – Z Ltd. The
terms of the instrument have been summarized below. Account for this in the
books of Z Ltd.
Non-cumulative redeemable preference
Nature
shares
Repayment: Redeemable after 5 years
Date of Allotment: 1-Apr-20X1
Date of repayment: 31-Mar-20X6
Total period: 5.00 years
Value of preference shares issued: 100,000,000
Dividend rate 0.0001%
Market rate of interest 12.00% per annum
Present value factor 0.56743

FINANCIAL REPORTING 213

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Solution:
Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair
value upon initial recognition. Fair value is normally the transaction price.
However, sometimes certain type of instruments may be exchanged at off market
terms (i.e., different from market terms for a similar instrument if exchanged
between market participants).

In the above case, since A Ltd has issued preference shares to its Holding Company
– Z Ltd, the relationship between the parties indicates that the difference in
transaction price and fair value is akin to investment made by Z Ltd. in its
subsidiary.
Following is the table summarising the computations on initial recognition:
Market rate of interest 12.00%
Present value factor 0.56743
Present value 56,742,686
Loan component 56,742,686
Investment in subsidiary 43,257,314

Subsequently, such preference shares shall be carried at amortised cost at each

reporting date. The computation of amortised cost at each reporting date has been
done as follows.
Opening Closing
Year Date Days Interest @12%
Asset balance
1-Apr-20X1
1 31-Mar-20X2 56,742,686 364 6,790,467 63,533,153
2 31-Mar-20X3 63,533,153 365 7,623,978 71,157,131
3 31-Mar-20X4 71,157,131 365 8,538,856 79,695,987
4 31-Mar-20X5 79,695,987 366 9,589,720 89,285,707
5 31-Mar-20X6 89,285,707 365 10,714,285 100,000,000
Journal Entries to be done at every reporting date
Particulars Amount Amount
Date of transaction
Investment - Equity portion Dr. 43,257,314
Loan receivable Dr. 56,742,686
To Bank 100,000,000
Interest income - March 31, 20X2 Dr. 6,790,467
Loan receivable 6,790,467
To Interest income
FINANCIAL REPORTING 214
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Interest income - March 31, 20X3 Dr. 7,623,978
Loan receivable 7,623,978
To Interest income
Interest income - March 31, 20X4 Dr. 8,538,856
Loan receivable 8,538,856
To Interest income
Interest income - March 31, 20X5 Dr. 9,589,720
Loan receivable 9,589,720
To Interest income
Interest income - March 31, 20X6 Dr. 10,714,285
Loan receivable 10,714,285
To Interest income
Settlement of transaction Dr. 100,000,000
Bank 100,000,000
To Loan receivable

Illustration 28
A Limited issues INR 1 crore convertible bonds on 1 July 20X1. The bonds have a life
of eight years and a face value of INR 10 each, and they offer interest, payable at
the end of each financial year, at a rate of 6 per cent annum. The bonds are issued
at their face value and each bond can be converted into one ordinary share in A
Limited at any time in the next eight years. Companies of a similar risk profile have
recently issued debt with similar terms, without the option for conversion, at a
rate of 8 per cent per annum.
Required:
(a) Identify the present value of the bonds, and, allocating the difference
between the present value and the issue price to the equity component,
provide the appropriate accounting entries.
(b) Calculate the stream of interest expenses across the eight years of the life of
the bonds.
(c) Provide the accounting entries if the holders of the option elect to convert
the options to ordinary shares at the end of the third year.
Solution:
(a) Applying the guidance for compound instruments, the present value of the
bond is computed to identify the liability component and then difference
between the present value of these bonds & the issue price of INR 1 crore
shall be allocated to the equity component. In determining the present value,
the rate of 8 per cent will be used, which is the interest rate paid on debt of
a similar nature and risk that does not provide an option to convert the
liability to ordinary shares.
Present value of bonds at the market rate of debt
FINANCIAL REPORTING 215
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Present value of principal to be received in eight years discounted at 8%
(10,000,000 X 0.5403)
Present value of interest stream discounted
at 8% for 8 years = 5,403,000
(6,00,000 X 5.7466) = 3,447,960
Total present value = 8,850,960
Equity component = 1,149,040
Total face value of convertible bonds = 10,000,000

The accounting entries will be as follows:

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

(b) The stream of interest expense is summarised below, where interest for a
given year is calculated by multiplying the present value of the liability at the
beginning of the period by the market rate of interest, this is being 8 per
cent.
Interest Increase in Total bond
Date Payment
expense at 8% bond liability liability
01 July 20X1 - - - 8,850,960
30 June 20X2 600,000 708,077 108,077 8,959,037
30 June 20X3 600,000 716,723 116,723 9,075,760
30 June 20X4 600,000 726,061 126,061 9,201,821
30 June 20X5 600,000 736,146 136,146 9,337,967
30 June 20X6 600,000 747,037 147,037 9,485,004
FINANCIAL REPORTING 216
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
30 June 20X7 600,000 758,800 158,800 9,643,804
30 June 20X8 600,000 771,504 171,504 9,815,308
30 June 20X9 600,000 784,692* 184,692 10,000,000
*for rounding off

(c) If the holders of the options elect to convert the options to ordinary shares at
the end of the third year of the debentures (after receiving their interest
payments), the entries in the third would be:
Dr. Amount Cr. Amount
(INR) (INR)
30 June 20X4
Interest expense Dr. 726,061
To Cash 600,000
To Convertible bonds (liability) 126,061
(Being entry to record interest expense for the
period)
30 June 20X4
Convertible bonds (liability) Dr. 9,201,821
Convertible bonds (equity component) Dr. 1,149,040
To Contributed equity 10,350,861
(Being entry to record the conversion of bonds
into shares of A Limited).

Derivative Accounting
Features of Derivatives :-
1. Fair Value Changes in response to change in fair value of underlying.
2. No or Small initial investments.
3. Settled at future date.

Derivative Accounting

Other than Hedge Accounting Hedge Accounting

FTVPL Requires Documentation & Hedge Effectiveness

Fair Value Hedge

Cash Flow Hedge

FINANCIAL REPORTING 217

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Illustration 29
On 1st January 20X1, SamCo. Ltd. agreed to purchase USD ($) 20,000 from JT Bank
in future on 31st December 20X1 for a rate equal to ` 68 per USD. SamCo. Ltd. did
not pay any amount upon entering into the contract. SamCo Ltd. is a listed
company in India and prepares its financial statements on a quarterly basis.
Following the principles of recognition and measurement as laid down in Ind AS
109, you are required to record the entries for each quarter ended till the date of
actual purchase of USD.
For the purposes of accounting, please use the following information representing
marked to market fair value of forward contracts at each reporting date:
As at 31st March 20X1 - ` (25,000)
As at 30th June 20X1 - ` (15,000)
As at 30th September 20X1 - ` 12,000
Spot rate of USD on 31st December 20X1 - ` 66 per USD
Solution:
(i) Assessment of the arrangement using the definition of derivative included
under Ind AS 109.
Derivative is a financial instrument or other contract within the scope of this
Standard with all three of the following characteristics:
(a) its value changes in response to the change in a specified interest rate,
financial instrument price, commodity price, foreign exchange rate,
index of prices or rates, credit rating or credit index, or other variable,
provided in the case of a non-financial variable that the variable is not
specific to a party to the contract (sometimes called the ‘underlying’).
(b) it requires no initial net investment or an initial net investment that is
smaller than would be required for other types of contracts that would
be expected to have a similar response to changes in market factors.
(c) it is settled at a future date.

Upon evaluation of contract in question it is noted that the contract meets

the definition of a derivative as follows:
• the value of the contract to purchase USD at a fixed price changes in
response to changes in foreign exchange rate.
• the initial amount paid to enter into the contract is zero. A contract
which would give the holder a similar response to foreign exchange rate
changes would have required an investment of USD 20,000 on inception.
• the contract is settled in future
The derivative is a forward exchange contract.
As per Ind AS 109, derivatives are measured at fair value upon initial
recognition and are subsequently measured at fair value through profit and
loss.

FINANCIAL REPORTING 218

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(ii) Accounting on 1st January 20X1:
As there was no consideration paid and without evidence to the contrary the
fair value of the contract on the date of inception is considered to be zero.
Accordingly, no accounting entries shall be recorded on the date of entering
into the contract
(iii) Accounting on 31st March 20X1
Dr. Cr.
Particulars
Amount (`) Amount (`)
Profit and loss A/c Dr. 25,000
To derivative financial liability 25,000
(Being mark to market loss on forward contract
recorded)

(iv) Accounting on 30th June 20X1:

The change in value of the derivative forward contract shall be recorded as a
derivative financial liability in the books of SamCo Ltd. by recording the
following journal entry:
Dr. Cr.
Particulars
Amount (`) Amount (`)
Derivative financial liability A/c Dr. 10,000
To Profit and loss A/c 10,000
(being partial reversal of mark to market loss
on forward contract recorded)

(v) Accounting on 30th September 20X1:

The value of the derivative forward contract shall be recorded as a derivative
financial asset in the books of SamCo Ltd. by recording the following journal
entry:
Dr. Amount Cr. Amount
Particulars
(`) (`)
Derivative financial liability A/c Dr. 15,000
Derivative financial asset A/c Dr. 12,000
To Profit and loss A/c 27,000
(being gain on mark to market of forward contract
booked as derivative financial asset and reversal
of derivative financial liability)

FINANCIAL REPORTING 219

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(vi) Accounting on 31st December 20X1:
The settlement of the derivative forward contract by actual purchase of USD
20,000 shall be recorded in the books of SamCo Ltd. by recording the
following journal entry:
Dr. Amount Cr. Amount
Particulars
(`) (`)
Cash (USD Account) @ 20,000*66 Dr. 13,20,000
Profit and lossA/c Dr. 52,000
To Cash @ 20,000 x 68 13,60,000
To Derivative financial asset A/c 12,000
(being loss on settlement of forward contract
booked on actual purchase of USD)

Illustration 30
On 1st January 20X1, SamCo. Ltd. entered into a written put option for USD ($)
20,000 with JT Corp to be settled in future on 31st December 20X1 for a rate equal
to ` 68 per USD at the option of JT Corp. SamCo. Ltd. did not receive any amount
upon entering into the contract.
SamCo Ltd. is a listed company in India and prepares its financial statements on a
quarterly basis.
Following the classification principles of recognition and measurement as laid down
in Ind AS 109, you are required to record the entries for each quarter ended till the
date of actual purchase of USD.
For the purposes of accounting, please use the following information representing
marked to market fair value of put option contracts at each reporting date:
As at 31st March 20X1 - ` (25,000)
As at 30th June 20X1 - ` (15,000)
As at 30th September 20X1 - ` NIL
Spot rate of USD on 31st December 20X1 - ` 66 per USD
Solution:
(i) Assessment of the arrangement using the definition of derivative included
under Ind AS 109.
Derivative is a financial instrument or other contract within the scope of this
Standard with all three of the following characteristics:
(a) its value changes in response to the change in a specified interest rate,
financial instrument price, commodity price, foreign exchange rate,
index of prices or rates, credit rating or credit index, or other variable,
provided in the case of a non-financial variable that the variable is not
specific to a party to the contract (sometimes called the ‘underlying’).

FINANCIAL REPORTING 220

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(b) it requires no initial net investment or an initial net investment that is
smaller than would be required for other types of contracts that would
be expected to have a similar response to changes in market factors.
(c) it is settled at a future date.
Upon evaluation of contract in question it is noted that the contract meets
the definition of a derivative as follows:
(a) the value of the contract to purchase USD at a fixed price changes in
response to changes in foreign exchange rate.
(d) the initial amount received to enter into the contract is zero. A contract
which would give the holder a similar response to foreign exchange rate
changes would have required an investment of USD 20,000 on inception.
(e) the contract is settled in future
The derivative liability is a written put option contract.
As per Ind AS 109, derivatives are measured at fair value upon initial
recognition and are subsequently measured at fair value through profit and
loss.

ii. Accounting on 1st January 20X1

As there was no consideration paid and without evidence to the contrary the
fair value of the contract on the date of inception is considered to be zero.
Accordingly, no accounting entries shall be recorded on the date of entering
into the contract.

iii. Accounting on 31st March 20X1

The value of the derivative put option contract shall be recorded as a
derivative financial liability in the books of SamCo Ltd. by recording the
following journal entry:
Dr. Amount Cr. Amount
Particulars
(`) (`)
Profit and loss A/c Dr. 25,000
To derivative financial liability Dr. 25,000
(Being mark to market loss on the put option
contract recorded)

iv. Accounting on 30th June 20X1

The change in value of the derivative put option contract shall be recorded as
a derivative financial liability in the books of SamCo Ltd. by recording the
following journal entry:

FINANCIAL REPORTING 221

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Dr. Amount Cr. Amount
Particulars
(`) (`)
Derivative financial liability A/c Dr. 10,000
To Profit and loss A/c Dr. 10,000
(Being partial reversal of mark to market loss on
the put option contract recorded)

v. Accounting on 30th September 20X1

The change in value of the derivative option contract shall be recorded as a
zero in the books of SamCo Ltd. by recording the following journal entry:
Dr. Amount Cr. Amount
Particulars
(`) (`)
Derivative financial liability A/c Dr. 15,000
To Profit and loss A/c Dr. 15,000
(Being gain on mark to market of put option
contract booked to make the value the derivative
liability as zero)

vi. Accounting on 31st December 20X1

The settlement of the derivative put option contract by actual purchase of
USD 20,000 shall be recorded in the books of SamCo Ltd. upon exercise by JT
Corp. by recording the following journal entry:
Dr. Amount Cr. Amount
Particulars
(`) (`)
Cash (USD Account) @ 20,000 x 66 Dr. 13,20,000
Profit and loss A/c Dr. 40,000
To Cash @ 20,000 x 68 13,60,000
(being loss on settlement of put option contract
booked on actual purchase of USD)

• Contracts to buy or sell non-financial items are outside the scope of ‘financial
instruments’, except for the following:
(a) Contracts to buy or sell a non-financial item that can be settled net in cash or
another financial instrument, 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.

(b) Such contract are 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).
FINANCIAL REPORTING 222
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
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 ‘accounting mismatch’) that would otherwise arise from not
recognising that contract because it is excluded from the scope of this
Standard applying the scope exclusion in (a) above.

(c) A written option to buy or sell a non-financial item that can be settled net in
cash or another financial instrument, or by exchanging financial instruments,
where such a contract was not entered into for the purpose of receipt or
delivery of the non-financial item in accordance with entity’s expected
purchase, sale or usage requirements.

Scope of Financial Instruments

Contract to buy or sell Non – Financial Items is outside the scope of IND AS 109.

However, if such contracts can be settled “NET”, then they are within the scope.

Exceptions: Contract to buy or sell Non – Financial Items in accordance with entity’s
usage requirement are outside the scope, provided there is no intention or past history
to settle net (Own Usage  Exemption)

Note: The above exemption is not available to entity who is Writer of the Option

For Example
ABC Ltd. enters into a contract to buy 100 tonnes of cocoa beans at 1,000 per tonne for
delivery in 12 months. On the settlement date, the market price for cocoa beans is
1,500 per tonne. If the contract cannot be settled net in cash and this contract is
entered for delivery of cocoa beans in line with ABC Ltd.’s expected purchase/ usage
requirements, then ownuse exemption applies. In such case, the contract is considered
to be an executor contract outside the scope of Ind AS 109 and hence, shall not be
accounted as a derivative.

Illustration 31
Entity XYZ enters into a fixed price forward contract to purchase one million
kilograms of copper in accordance with its expected usage requirements. The
contract permits XYZ to take physical delivery of the copper at the end of twelve
months or to pay or receive a net settlement in cash, based on the change in fair
value of copper. Is he contract accounted for as a derivative?

FINANCIAL REPORTING 223

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Solution:
While such a contract meets the definition of a derivative, it is not necessarily
accounted for as a derivative. The contract is a derivative instrument because
there is no initial net investment, the contract is based on the price of copper, and
it is to be settled at a future date. However, if XYZ intends to settle the contract
by taking delivery and has no history for similar contracts of setting net in cash or
of taking delivery of the copper and selling it within a short period after delivery
for the purpose of generating a profit from short – term fluctuating in price, the
contract is not accounted for as a derivative.

Illustration 32
A Entity XYZ owns an office building. XYZ enters into a put option with an investor
that permits XYZ to put the building to the investor for ` 150 million. The current
value of the building is ` 175 million. The option expires in five years. The option,
if exercised, may be settled through physical delivery or net cash, at XYZ’s options.
How do both XYZ and the investor account for the option?
Solution:
XYZ’s accounting depends on XYZ’s intention and past practice for settlement.
Although the contract meets the definition of a derivative, XYZ should not account
for it as a derivate if XYZ intends to settle the contract by delivering the building if
XYZ exercises its option and there is no past practise of setting net.

The investor, however, cannot conclude that the option was entered into to meet
the investor’s expected purchase, sale or usage requirements because the investor
does not have the ability to require delivery. In addition, the option may be settled
net in cash. Therefore, the investor has to account for the contract as a derivative.
Regardless of past practices, the investor does not affect whether settlement is by
delivery or in cash. The investor has written an option, and written option in which
the holder has a choice of physical settlement or net cash settlement can never
satisfy the normal delivery requirement for the exemption from Ind AS 109 because
the option writer does not have the ability to require delivery.

RECLASSIFICATION
 Reclassification of financial assets is required if and only if the objective of the
entity’s business model for managing those financial assets changes.
 Such changes are expected to be very infrequent and are determined by the
entity’s senior management as a result of internal or external changes and must be
significant to entity’s operations and demonstrable to external parties.
 A change in the objective of an entity’s business model will occur only when an
entity either begins or ceases to carry out an activity that is significant to its
operations.

FINANCIAL REPORTING 224

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Reclassified to
Amortised Cost FVTOCI FVTPL
Amortised Recognise at fair Recognise at fair
Cost value and difference value with the
between fair value difference between
Reclassified
NA and closing fair value and closing
from
amortised cost is amortised cost is
recognised in OCI. recognised in profit or
loss.
FVTOCI Closing fair value Continue to Measure
plus/less the at fair value with
cumulative amount cumulative amount
in OCI at the in OCI reclassified
Reclassified
reclassification NA immediately to profit
from
date becomes the or loss as an Ind AS 1
new amortised cost reclassification
gross opening adjustment.
carrying amount.
FVTPL Closing fair value Continue to measure
becomes the new at fair value with a
amortised cost new EIR will be
Reclassified opening gross determined at the
NA
from carrying amount. reclassification date
At reclassification
date a new EIR will
be determined.

FINANCIAL REPORTING 225

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Embedded Derivatives

Does the hybrid contract contain a host that is an

asset within the scope of Ind AS 109?

No – separate embedded derivatives Yes – don’t separate

that fulfill certain conditions as below embedded derivatives
(Refer note 1 below)

Economic characteristics and Yes

risks of the embedded derivative are
Entire hybrid
closely related to those of the host?
instrument is measured
No at fair value through
profit or loss (Refer
A separate instrument with the same note 2 below)
No
terms as the embedded derivative would
meet the definition of a derivative?

Yes
Is the hybrid contract Yes
measured at fair value
through profit or loss?
No
Embedded derivative is separated
and accounted for separately (refer
section below)

Note 1: This implies that embedded derivatives are permitted to be separated from only
such hybrid contracts that contain a host which is either a (a) financial instrument
classified as financial liability or equity or compound; or (b) contract for purchase or
sale of a nonfinancial item.

Note 2: If both the host and embedded derivative have economic characteristics of an
equity instrument, the hybrid instrument is not carried at fair value through profit or
loss. In other words, this measurement category is applicable only for host contracts
which are financial liabilities.

FINANCIAL REPORTING 226

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

PROBLEMS AND SOLUTION

Question 1
As part of staff welfare measures, Y Co Ltd. has contracted to lend to its employees
sums of money at 5% per annum rate of interest. The amounts lent are to be repaid
along with the interest in five equal instalments. The market rate of interest is 10%
per annum for comparable loans. Y lent ` 1,600,000 to its employees on 1st January
20X1.
Following the principles of recognition and measurement as laid down in Ind AS
109, you are required to record the entries for the year ended 31 December 20X1,
for the transaction and also compute the value of loan initially to be recognised
and amortised cost for all subsequent years.
For the purpose of calculation, following discount factors at interest rate of 10%
per annum may be adopted –
At the end of year –
Year Present value factor
1 .909
2 .827
3 .751
4 .683
5 .620

Solution:
(i) Calculation of initial recognition amount of loan to its employees:
Year end Cash flow Total PV factor Present value
Principal Interest @ 5%
20X1 320,000 80,000 400,000 .909 363,600
20X2 320,000 64,000 384,000 .827 317,568
20X3 320,000 48,000 368,000 .751 276,368
20X4 320,000 32,000 352,000 .683 240,416
20X5 320,000 16,000 336,000 .620 208,320
1,406,272

FINANCIAL REPORTING 227

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(ii) Calculation of amortised cost of loan to employees
Repayment
Amortised cost Interest to be Amortised cost
Year end (including
(opening balance) recognised (closing balance)
interest)
20X1 1,406,272 140,627 400,000 1,146,899
20X2 1,146,899 114,690 384,000 877,589
20X3 877,589 87,759 368,000 597,348
20X4 597,348 59,735 352,000 305,083
20X5 305,083 30,917* 336,000 -
*305,083 * 10% = 30,508. Difference of ` 409 is due to approximation in
computation.

(iii) Journal Entries to be recorded of Y Ltd. for the year ended 31 December
20X1
Particulars Debit Credit
Staff loan A/c Dr. 16,00,000
To Bank A/c 16,00,000
(Being disbursement of loans to staff)
Prepaid staff cost A/c* Dr. 1,93,728
[(1,600,000 – 1,406,272), Refer part (ii)]
To Staff loan A/c 1,93,728
(Being the excess loan balance over present
value thereof in order to reflect the loan at its
present value booked as prepaid)
Staff loan A/c Dr. 1,40,627
To Interest Income A/c 1,40,627
(Being interest accrued on loans to staff)
Staff cost A/c Dr. 38,746
To Prepaid expense A/c 38,746
(Being prepaid expense portion transferred)

Where the difference between the amount given by the Company to its
employees and its fair value represents another asset, then such asset shall be
recognised. Accordingly, such difference is recognised as prepaid employee
cost and amortised over the period of loan.

FINANCIAL REPORTING 228

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Question 2
Wheel Co. Limited has a policy of providing subsidized loans to its employees for
the purpose of buying or building houses. Mr. X, who’s executive assistant to the
CEO of Wheel Co. Limited, took a loan from the Company on the following terms:
• Principal amount: 1,000,000
• Interest rate: 4% for the first 400,000 and 7% for the next 600,000
• Start date: 1 January 20X1
• Tenure: 5 years
• Pre-payment: Full or partial pre-payment at the option of the employee
• The principal amount of loan shall be recovered in 5 equal annual instalments
and will be first applied to 7% interest bearing principal
• The accrued interest shall be paid on an annual basis
• Mr. X must remain in service till the term of the loan ends
The market rate of a comparable loan available to Mr.X, is 12% per annum.
Following table shows the contractually expected cash flows from the loan given to
Mr. X:
(amount in `)
Inflows
Interest Interest Principal
Date Outflows Principal
Income 7% Income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 200,000 28,000 16,000 600,000
31-Dec-20X3 200,000 14,000 16,000 400,000
31-Dec-20X4 200,000 -- 16,000 200,000
31-Dec-20X5 200,000 -- 8,000 --
Mr. S, pre-pays ` 200,000 on 31 December 20X2, reducing the outstanding principal
as at that date to ` 400,000.

Following table shows the actual cash flows from the loan given to Mr. X,
considering the prepayment event on 31 December 20X2:
(amount in `)
Inflows
Interest Interest Principal
Date Outflows Principal
Income 7% Income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 400,000 28,000 16,000 400,000
31-Dec-20X3 200,000 -- 16,000 200,000
31-Dec-20X4 200,000 -- 16,000 --
31-Dec-20X5 -- -- 8,000 --
Record journal entries in the books of Wheel Co. Limited considering the
requirements of Ind AS 109.
FINANCIAL REPORTING 229
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Solution:
As per requirement of Ind AS 109, a financial instrument is initially measured and
recorded at its fair value. Therefore, considering the market rate of interest of
similar loan available to Mr. X is 12%, the fair value of the contractual cash flows
shall be as follows:
Interest Interest Discount
Date Principal PV
Income 7% Income 4% factor @12%
31-Dec-20X1 200,000 42,000 16,000 0.8929 2,30,357
31-Dec-20X2 200,000 28,000 16,000 0.7972 1,94,515
31-Dec-20X3 200,000 14,000 16,000 0.7118 1,63,709
31-Dec-20X4 200,000 - 16,000 0.6355 1,37,272
31-Dec-20X5 200,000 - 8,000 0.5674 1,18,025
Total (fair value) 8,43,878
Benefit to Mr. X, to be considered a part of employee cost for Wheel Co. ` 1,56,121
The deemed employee cost is to be amortised over the period of loan i.e. the
minimum period that Mr. X must remain in service.
The amortization schedule of the ` 843,878 loan is shown in the following table:
Loan Total cash inflows Interest @
Date
outstanding (principal repayment + interest) 12%
1-Jan-20X1 843,878
31-Dec-20X1 687,143 258,000 101,265
31-Dec-20X2 525,600 244,000 82,457
31-Dec-20X3 358,672 230,000 63,072
31-Dec-20X4 185,713 216,000 43,041
31-Dec-20X5 (0) 208,000 22,287

Journal Entries to be recorded at every period end:

a. 1 January 20X1 –
Particulars Debit Credit
Loan to employee A/c Dr. 843,879
Pre-paid employee cost A/c Dr. 156,121
To Cash A/c 1,000,000
(Being loan asset recorded at initial fair value)

FINANCIAL REPORTING 230

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
b. 31 December 20X1 –
Dr. Amount Credit
Particulars
(`) (`)
Cash A/c Dr. 258,000
To Interest income (profit and loss) @12% A/c 101,265
To loan to employee A/c 156,735
(Being first instalment of repayment of loan
accounted for using the amortised cost and
effective interest rate of 12%)

Dr. Amount Credit

Particulars
(`) (`)
Employee benefit (profit and loss) A/c Dr. 31,224
To Pre-paid employee cost A/c 31,224
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)
On 31 December 20X2, due to pre-payment of a part of loan by Mr. X, the carrying
value of the loan shall be re-computed by discounting the future remaining cash
flows by the original effective interest rate.
There shall be two sets of accounting entries on 31 December 20X2, first the
realisation of the contractual cash flow as shown in (c) below and then the
accounting for the pre- payment of ` 200,000 included in (d) below:

c. 31 December 20X2 –
Dr. Amount Credit
Particulars
(`) (`)
Cash A/c Dr. 244,000
To Interest income (profit and loss) @12% A/c 82,457
To loan to employee A/c 161,543
(Being second instalment of repayment of loan
accounted for using the amortised cost and
effective interest rate of 12%)

Dr. Amount Credit

Particulars
(`) (`)
Employee benefit (profit and loss) A/c Dr. 31,224
To Pre-paid employee cost A/c 31,224
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)

FINANCIAL REPORTING 231

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Computation of new carrying value of loan to employee:
Inflows
Interest Interest Discount
Date Principal PV
income 7% income 4% factor
31-Dec-20X3 200,000 - 16,000 @12% 192,857
31-Dec-20X4 200,000 - 8,000 0.8929 165,816
0.7972
Total (revised carrying value) 358,673
Less: Current carrying value 525,601
Adjustment required 166,928

The difference between the amount of pre-payment and adjustment to loan shall
be considered a gain, though will be recorded as an adjustment to pre-paid
employee cost, which shall be amortised over the remaining tenure of the loan.

d. 31 December 20X2 prepayment–

Dr. Amount Cr. Amount
Particulars
(`) (`)
Cash A/c Dr. 200,000
To Pre-paid employee cost A/c 33,072
To loan to employee A/c 166,928
(Being gain to Wheel Co. Limited recorded as an
adjustment to pre-paid employee cost)

The amortisation schedule of the new carrying amount of loan shall be as follows:
Total cash inflows
Date Loan outstanding (principal repayment Interest @ 12%
+ interest
31-Dec-20X2 358,673
31-Dec-20X3 185,714 216,000 43,041
31-Dec-20X4 - 208,000 22,286

Amortisation of employee benefit cost shall be as follows:

Date Balance Amortised to P&L Adjustment
1-Jan-20X1 156,121
31-Dec-20X1 124,897 31,224
31-Dec-20X2 60,601 31,224 33,072
31-Dec-20X3 30,300 30,300
31-Dec-20X4 - 30,300
FINANCIAL REPORTING 232
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
e. 31 December 20X3 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
Cash A/c Dr. 216,000
To Interest income (profit and loss) @12% A/c 43,041
To loan to employee A/c 172,959
(Being third instalment of repayment of loan
accounted for using the amortised cost and
effective interest rate of 12%)
Dr. Amount Cr. Amount
Particulars
(`) (`)
Employee benefit (profit and loss) A/c Dr. 30,300
To Pre-paid employee cost A/c 30,300
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit
cost)

f. 31 December 20X4 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
Cash A/c Dr. 208,000
To Interest income (profit and loss) @12% A/c 22,286
To loan to employee A/c 185,714
(Being last instalment of repayment of loan
accounted for using the amortised cost and
effective interest rate of 12%)
Dr. Amount Cr. Amount
Particulars
(`) (`)
Employee benefit (profit and loss) A/c Dr. 30,300
To Pre-paid employee cost A/c 30,300
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit
cost)

FINANCIAL REPORTING 233

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Question 3
K ltd. issued 500,000, 6% convertible debentures@ ` 10 each on 01 April 20X1. The
debentures are due for redemption on 31 March 20X5 at a premium of 10%,
convertible into equity shares to the extent of 50% and balance to be settled in
cash to the debenture holders. The interest rate on equivalent debentures without
conversion rights was 10%.
You are required to separate the debt and equity components at the time of issue
and show the accounting entries in Company’s books at initial recognition. The
following present values of Re 1 at 6% and at 10% are provided:
Interest rate Year 1 Year 2 Year 3 Year 4
6% 0.94 0.89 0.84 0.79
10% 0.91 0.83 0.75 0.68
Solution:
Computation of debt component of convertible debentures on 01 April 20X1
Particulars Amount
Present value of principal amount repayable after 4 years
(A) 5,000,000 * 50% * 1.10 * 0.68 (10% discount factor) 1,870,000
(B) Present value of interest [300,000 * 3.17] (4 years cumulative 951,000
10% discount factor)
Total present value of debt component (A) + (B) 2,821,000
Issue proceeds from convertible debentures 5,000,000
Value of equity component 2,179,000

Journal entry at initial recognition

Dr. Amount Cr. Amount
Particulars
(`) (`)
Bank A/c Dr. 5,000,000
To 6% debenture A/c (liability component) 2,821,000
To 6% debenture A/c (equity component) 2,179,000
(Being disbursement recorded at fair value)

Question 4
On 1 April 20X1, an 8% convertible loan with a nominal value of ` 6,00,000 was
issued at par. It is redeemable on 31 March 20X5 also at par. Alternatively, it may
be converted into 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 ` 48,000 has already been paid and included as a finance cost.

FINANCIAL REPORTING 234

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Present value rates are as follows:
Year End @ 8% @ 10%
1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
4 0.73 0.68
How will the Company present the above loan notes in the financial statements for
the year ended 31 March 20X2.
Solution:
Step 1: Calculation of the debt element of the loan note as follows:
8% Interest discounted at a rate of 10% Present Value (6,00,000 x 8%)
S.No Year Interest amount PVF Amount
Year 1 20X2 48,000 0.91
Year 2 20X3 48,000 0.83 1,19,583
Year 3 20X4 48,000 0.75
Year 4 20X5 648,000 0.68 4,40,640
Amount to be recognised
as a liability 5,60,223
Amount to be recognised as equity(6,00,000 - 5,60,223) 39,777

Step 2: The next step is to recognise the interest component equivalent to the loan
that would carry if there was no option to cover. Therefore, the interest should be
recognised at 10%.
As on date ` 48,000 has been recognised in the statement of profit and loss i.e.
6,00,000 x 8% but we have discounted the present value of future interest
payments and redemption amount using discount factors of 10%, so the finance
charge in the statement of profit and loss must also be recognised at the same rate
i.e. for the purpose of consistency.
The additional charge to be recognised in the income statement is calculated as:
Debt component of the financial instrument ` 5,60,000
Interest charge (5,60,000 x 10%) ` 56,000
Already charged to the income statement (` 48,000)
Additional charge required ` 8,000

FINANCIAL REPORTING 235

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Journal Entries for recording additional finance cost for year ended 31 March 20X2
Dr. Amount Cr. Amount
Particulars
(`) (`)
Finance cost A/c Dr. 8,000
To Debt component A/c 8,000
(Being interest recorded for difference between
amount recorded earlier and that to be recorded per
Ind AS 32)

Question 5
NAV Limited granted a loan of ` 120 lakhs to OLD Limited for 5 years @10% p.a.
which is Treasury bond yield of equivalent maturity. But the incremental borrowing
rate of OLD Limited is 12%. In this case, the loan is granted to OLD Limited at
below market rate of interest. Ind AS 109 requires that a financial asset or financial
liability is to be measured at fair value at the initial recognition. Should the
transaction price be treated as fair value? If not, find out the fair value. What is
the accounting treatment of the difference between the transaction price and the
fair value on initial recognition in the book of NAV Ltd ? (Assume 12% is based on
level 1 input)
Present value factors at 12%:
Year 1 2 3 4 5
PVF 0.892 0.797 0.712 0.636 0.567
Solution:
Since the loan is granted to OLD Ltd at 10% i.e below market rate of 12%. It will be
considered as loan given at off market terms. Hence the Fair value of the
transaction will be lower from its transaction price & not the transaction price.
Calculation of fair value
Future cash flow Discounting factor Present value
Year
(in lakh) @ 12% (in lakh)
1 12 0.892 10.704
2 12 0.797 9.564
3 12 0.712 8.544
4 12 0.636 7.632
5 120 +12 = 132 0.567 74.844
111.288
The fair value of the transaction be ` 111.288 lakh.
Since fair value is based on level 1 input or valuation technique that uses only data
from observable markets, difference between fair value and transaction price will
be recognized in Profit and Loss as fair value loss i.e ` 120 lakh– ` 111.288 lakh
= `8.712 lakh.
Note: One may also calculate the above fair value by the way of annuity on
interest amount rather than separate calculation.
FINANCIAL REPORTING 236
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Question 6
On 1st April, 20X4, Shelter Ltd. issued 5,000, 8% convertible debentures with a face
value of ` 100 each maturing on 31st March, 20X9. The debentures are convertible
into equity shares of Shelter Ltd. at a conversion price of ` 105 per share. Interest
is payable annually in cash. At the date of issue, Shelter Ltd. could have issued
non-convertible debt with a 5 year term bearing a coupon interest rate of 12%. On
1st April, 20X7, the convertible debentures have a fair value of ` 5,25,000. Shelter
Ltd. makes a tender offer to debenture holders to repurchase the debentures for
` 5,25,000, which the holders accepted. At the date of repurchase, Shelter Ltd.
could have issued non-convertible debt with a 2 year term bearing a coupon
interest rate of 9%.
(i) At the time of initial recognition and
(ii) At the time of repurchase of the convertible debentures.
The following present values of ` 1 at 8%, 9% & 12% are supplied to you:
Show accounting entries in the books of Shelter Ltd. for recording of equity and
liability component:
Interest Rate Year 1 Year 2 Year 3 Year 4 Year 5
8% 0.926 0.857 0.794 0.735 0.681
9% 0.917 0.842 0.772 0.708 0.650
12% 0.893 0.797 0.712 0.636 0.567
Solution:
(i) At the time of initial recognition
`
Liability component
Present value of 5 yearly interest payments of ` 40,000, discounted at
12% annuity (40,000 x 3.605) 1,44,200
Present value of ` 5,00,000 due at the end of 5 years, discounted at
12%, compounded yearly (5,00,000 x 0.567) 2,83,500
4,27,700
Equity component
(` 5,00,000 – ` 4,27,700) 72,300
Total proceeds 5,00,000
Note: Since ` 105 is the conversion price of debentures into equity shares and not
the redemption price, the liability component is calculated @ ` 100 each only.

FINANCIAL REPORTING 237

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Journal Entry
` `
Bank Dr. 5,00,000
To 8% Debentures (Liability component) 4,27,700
To 8% Debentures (Equity component) 72,300
(Being Debentures are initially recorded a fair value)

(ii) At the time of repurchase of convertible debentures The repurchase price is

allocated as follows:
Carrying Fair Value Difference
Value 12% @ 9%
` ` `
Liability component
Present value of 2 remaining yearly interest
payments of ` 40,000, discounted at 12% and
9%, respectively 67,600 70,360
Present value of ` 5,00,000 due in 2 years,
discounted at 12% and 9%, compounded
yearly, respectively 3,98,500 4,21,000
Liability component 4,66,100 4,91,360 (25,260)
Equity component
(5,25,000 - 4,91,360) 72,300 33,640* 38,660
Total 5,38,400 5,25,000 13,400
*(5,25,000 – 4,91,360) = 33,640

Journal Entries
` `
8% Debentures (Liability component) Dr. 4,66,100
Profit and loss A/c (Debt settlement expense) Dr. 25,260
To Bank A/c 4,91,360
(Being the repurchase of the liability component recognised)
8% Debentures (Equity component) 72,300
To Bank A/c 33,640
To Reserves and Surplus A/c 38,660
(Being the cash paid for the equity component recognised)

FINANCIAL REPORTING 238

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Question 7
On 1st April 2017, A Ltd. lent ` 2 crores to a supplier in order to assist them with
their expansion plans. The arrangement of the loan cost the company ` 10 lakhs.
The company has agreed not to charge interest on this loan to help the supplier’s
short -term cash flow but expected the supplier to repay ` 2.40 crores on
31st March 2019. As calculated by the finance team of the company, the effective
annual rate of interest on this loan is 6.9% On 28th February 2018, the company
received the information that poor economic climate has caused the supplier
significant problems and in order to help them, the company agreed to reduce the
amount repayable by them on 31st March 2019 to ` 2.20 crores. Suggest the
accounting impact as per applicable Ind AS including impact for impairment?
Solution:
The loan to the supplier would be regarded as a financial asset. The relevant
accounting standard Ind AS 109 provides that financial assets are normally measured
at fair value.
If the financial asset in which the only expected future cash inflows are the
receipts of principal and interest and the investor intends to collect these inflows
rather than dispose of the asset to a third party, then Ind AS 109 allows the asset
to be measured at amortised cost using the effective interest method.
If this method is adopted, the costs of issuing the loan are included in its initial
carrying value rather than being taken to profit or loss as an immediate expense.
This makes the initial carrying value ` 2,10,00,000.
Under the effective interest method, part of the finance income is recognised in
the current period rather than all in the following period when repayment is due.
The income recognised in the current period is ` 14,49,000 (` 2,10,00,000 x 6.9%)
evidence that the financial asset suffered impairment at 31st March 2018.
The asset is re-measured at the present value of the revised estimated future cash
inflows, using the original effective interest rate. Under the revised estimates the
closing carrying amount of the asset would be ` 2,05,79,981 (` 2,20,00,000 /
1.069). The reduction in carrying value of `18,69,019 (` 2,24,49,000 – 2,05,79,981)
would be charged to profit or loss in the current period as an impairment of a
financial asset.

Therefore, the net charge to profit or loss in respect of the current period would
be ` 4,20,019 (18,69,019 – 14,49, 000).

Question 8
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.
How should the loan be accounted for, in the Ind AS financial statements of XYZ,
ABC and consolidated financial statements of the group?

FINANCIAL REPORTING 239

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Consider the following scenarios:
(a) The loan is repayable on demand.
(b) 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.
(c) The loan is repayable when ABC has funds to repay the loan.
Solution:
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.
Using the guidance, the loan will be accounted for as below in various scenarios:
Scenario (a)
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.

Accounting in the books of XYZ Ltd (Parent)

Sr.No. Particulars Amount Amount
On the date of loan
1 Loan to ABC Ltd (Subsidiary) Dr. 7,51,315
Deemed Investment (Capital Contribution) in ABC Dr. 2,48,685
Ltd
To Bank 10,00,000
(Being the loan is given to ABC Ltd and recognised
at fair value)
Accrual of Interest income
2 Loan to ABC Ltd Dr. 75,131
To Interest income 75,131
(Being interest income accrued) – Year 1

FINANCIAL REPORTING 240

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
3 Loan to ABC Ltd Dr. 82,645
To Interest income 82,645
(Being interest income accrued) – Year 2
4 Loan to ABC Ltd Dr. 90,909
To Interest income
(Being interest income accrued) – Year 3 90,909
On repayment of loan
5 Bank Dr. 10,00,000
To Loan to ABC Ltd (Subsidiary) 10,00,000

Accounting in the books of ABC Ltd (Subsidiary)

Sr.No. Particulars Amount Amount
On the date of loan
1 Bank Dr.
To Loan from XYZ Ltd (Payable) 10,00,000 7,51,315
To Equity (Deemed Capital Contribution from 2,48,685
ABC Ltd)
(Being the loan is given to ABC Ltd and recognised
at Fair value)
Accrual of Interest
2 Interest expense Dr. 75,131
To Loan from XYZ Ltd (Payable) 75,131
(Being interest expense recognised) – Year I
3 Interest expense Dr. 82,645
To Loan from XYZ Ltd (Payable) 82,645
(Being interest expense recognised) – Year II
4 Interest expense Dr. 90,909
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

FINANCIAL REPORTING 241

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Working Notes:-
1 Computation of Present value of loan
Rate 10%
Amount of Loan 10,00,000
Year 3
Present Value 7,51,315
2 Computation of interest for Year I
Present Value 7,51,315
Rate 10%
Period of interest - for 1 year 1
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 8,26,446
Rate 10%
Period of interest - for 2nd year 1
Closing value at the end of year 2 9,09,091
Interest for 2nd year 82,645
4 Computation of interest for Year 3
Value of loan as at the beginning of Year 3 9,09,091
Rate 10%
Period of interest - for 3rd year 1
Closing value at the end of year 3 10,00,000
Interest for 3rd year 90,909

Scenario (c)
Generally, a loan, which is repayable when funds are available, can’t be stated to
be repayable on 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 scenario (b).
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.

FINANCIAL REPORTING 242

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Question 9
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 45
Spot rate on 31 March 20X1: INR/USD 57
Three-month forward rate on 31 March 20X1: INR/USD 45
Six-month forward rate on 1 January 20X1: INR/USD 55
Spot rate on 30 June 20X1: INR/USD 60
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.
Solution:
The contract should be separated using the 6 month USD/INR forward exchange
rate, as at the date of 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 liability.
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 x 60 – 55 x 1,000,000) = ` 5,000,000 (profit/asset)
The table summarising the computation of gain/ loss to be recorded at every
period end –
Derivative
Date Transaction Sales Debtors Asset (Profit) Loss
(Liability)
INR INR INR INR
1-Jan-20X1 Embedded Derivative Nil Value
31-Mar-20X1 Change in Fair Value of (10,000,000) 10,000,000
Embedded Derivatives
MTM (55-45) x 1 Million
30-Jun-20X1 Change in Fair Value of 15,000,000 (15,000,000)
Embedded Derivatives
(60-45) x 1 Million

FINANCIAL REPORTING 243

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
30-Jun-20X1 Recording sales at (55,000,000) 55,000,000
forward rate
30-Jun-20X1 Embedded derivative- 5,000,000 (5,000,000)
settled against debtors

Journal Entries to be recorded at every period end

a. 01 January 20X1 – No entry to be made
b. 31 March 20X1 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
Profit and loss A/c Dr. 10,000,000
To Derivative financial liability A/c 10,000,000
(being loss on mark to market of embedded derivative
booked)

c. 30 June 20X1 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
Derivative financial asset A/c Dr. 5,000,000
Derivative financial liability A/c Dr. 10,000,000
To Profit and loss A/c 15,000,000
(being gain on embedded derivative based on spot
rate at the date of settlement booked)

d. 30 June 20X1 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
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)

e. 30 June 20X1 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
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)

FINANCIAL REPORTING 244

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Question 10
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 `. 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:
Contractual features Details
Contract/order date 9 September 20X1
Delivery/payment date 31 December 20X1
Purchase price USD 1,000,000
USD/` Forward rate on 9 September 20X1 for 31 December 20X1 67.8
maturity
USD/` Spot rate on 9 September 20X1 66.4
USD/` Forward rates for 31 December, on: 30 September 67.5
31 December (spot rate) 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 the basis of the guidance in Ind AS 109. Also
give necessary journal entries for accounting the same.
Solution:
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 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.

FINANCIAL REPORTING 245

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
 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 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 embedded forward contract has a fair value of zero on
initial recognition.
Subsequently, company A is required to measure this forward contract at its fair
value, with changes in fair value recognised in the statement of profit and loss. The
following is the accounting treatment at quarter-end and on settlement:

Accounting treatment:
Amount Amount
Date Particulars
(`) (`)
09-Sep-X1 On initial recognition of the forward contract
(No accounting entry recognised since initial Nil Nil
fair value of the forward contract is considered
to be nil)
30-Sep-X1 Fair value change in forward contract
Derivative asset Dr. 3,00,000
[(67.8-67.5) x10,00,000]
To Profit or loss 3,00,000
31-Dec-X1 Fair value change in forward contract
Derivative asset Dr. 5,00,000
[{(67.8-67) x 10,00,000} - 3,00,000]
To Profit or loss 5,00,000

FINANCIAL REPORTING 246

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
31-Dec-X1 Recognition of machinery acquired and on
settlement
Property, plant and equipment Dr. 6,78,00,000
(at forward rate)
To Derivative asset 8,00,000
To Creditor (company B) / Bank 6,70,00,000

Question 11
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. Interest of FCY 6,00,000 is
payable annually on 31st March, starting from 31st March, 20X2. The loan is
repayable in FCY on 31st 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 31st 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.

Question 12
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.

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.

FINANCIAL REPORTING 247
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Calculate gain or loss to be recognised in Profit & Loss and Other Comprehensive
Income for year 1. Also pass journal entry to recognise gain or loss on above.
(Round off the figures to nearest rupees)

Question 13
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.

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.

Question 14
ABC Company issued 10,000 compulsory cumulative convertible preference shares
(CCCPS) as on 1 April 20X1 @ ` 150 each. The rate of dividend is 10% 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
Date of Conversion 01-Apr-20X6
Number of Preference Shares 10,000
Face Value of Preference Shares 150
Total Proceeds 15,00,000
Rate Of dividend 10%
Market Rate for Similar Instrument 15%

FINANCIAL REPORTING 248

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Transaction Cost 30,000
Face value of equity share after conversion 10
Number of equity shares to be issued 5,000
Solution:
This is a compound financial instrument with two components – liability
representing present value of future cash outflows and balance represents equity
component.

a. Computation of Liability & Equity Component

Cash Discount Net present
Date Particulars
Flow Factor Value
01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.869565 130,434.75
31-Mar-20X3 Dividend 150,000 0.756144 113,421.6
31-Mar-20X4 Dividend 150,000 0.657516 98,627.4
31-Mar-20X5 Dividend 150,000 0.571753 85,762.95
31-Mar-20X6 Dividend 150,000 0.497177 74,576.55
Total Liability Component 502,823.25
Total Proceeds 1,500,000.00
Total Equity Component (Bal fig) 997,176.75

b. Allocation of transaction costs

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

c. Accounting for liability at amortised cost:

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

FINANCIAL REPORTING 249

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Assume the effective interest rate is 15.86%
Opening Financial
Cash Flow Closing Financial
Liability Interest B
C Liability A+B-C
A
01-Apr-20X1 492,767 - - 4,92,767
31-Mar-20X2 492,767 78,153 150,000 4,20,920
31-Mar-20X3 420,920 66,758 150,000 3,37,678
31-Mar-20X4 337,678 53,556 150,000 2,41,234
31-Mar-20X5 241,234 38,260 150,000 1,29,494
31-Mar-20X6 129,494 20,506 150,000 -

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

Date Particulars Debit Credit
01-Apr-20X1 Bank A/c Dr. 1,470,000
To Preference Shares A/c 492,767
To Equity Component of Preference shares A/c 977,233
(Being compulsorily convertible preference shares
issued. The same are divided into equity component
and liability component as per the calculation)
31-Mar-20X2 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X2 Finance cost A/c Dr. Dr. 78,153
To Preference Shares A/c 78,153
(Being interest as per EIR method recorded)
31-Mar-20X3 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to
the shareholders)
31-Mar-20X3 Finance cost A/c Dr. 66,758
To Preference Shares A/c 66,758
(Being interest as per EIR method recorded)
31-Mar-20X4 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to
the shareholders)

FINANCIAL REPORTING 250

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
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)
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. 977,233
To Equity Share Capital A/c 50,000
To Securities Premium A/c 927,233
(Being Preference shares converted in equity shares
and remaining equity component is recognised as
securities premium)

Question 15
On 1st April, 2021 "Fortunate Bank" has provided a loan of ` 25,00,000 to Mohan
Limited for 4 years at 10% p.a. and the loan has been guaranteed by Surya Limited,
which is a holding company for Mohan Limited. Interest payments are made at the
end of each year and the principal is repaid at the end of the loan term. If Surya
Limited had not issued a guarantee, 'Fortunate Bank' would have charged Mohan
Limited an interest rate of 14% p.a. Surya Limited does not charge Mohan Limited
for providing the guarantee.
On 31st March 2022, there is 2% probability that Mohan Limited may default on the
loan in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited
does not expect to recover any amount from Mohan Limited.
On 31st March 2023, there is 4% probability that Mohan Limited may default on the
loan in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited
does not expect to recover any amount from Mohan Limited.

FINANCIAL REPORTING 251

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
On 31st March 2024, there is 5% probability that Mohan Limited may default on the
loan in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited
does not expect to recover any amount from Mohan Limited.
You are required to provide accounting treatment of financial guarantee as per Ind
AS 109 in the books of Surya Limited on initial recognition and in subsequent
periods till 31st March, 2024.

Solution:
1st April 2021
A financial guarantee contract is initially recognised at fair value. The fair value of
the guarantee will be the present value of the difference between the net
contractual cash flows required under the loan, and the net contractual cash flows
that would have been required without the guarantee.
Year 1 Year 2 Year 3 Year 4 Total
Particulars
(`) (`) (`) (`) (`)
Cash flows based on
interest rate of 14% (A) 3,50,000 3,50,000 3,50,000 3,50,000 14,00,000
Cash flows based on
interest rate of 10% (B) 2,50,000 2,50,000 2,50,000 2,50,000 10,00,000
Interest on differential rate
(C) = (A-B) 1,00,000 1,00,000 1,00,000 1,00,000 4,00,000
Discount factor @ 14% 0.877 0.769 0.769 0.592
Interest on differential rate
discounted @ 14% 87,700 76,900 67,500 59,200 2,91,300
Fair value of financial
guaranteed contract (at
inception) 2,91,300

Alternative manner of presentation for the calculation of fair value of financial

guaranteed contract (at inception)
(i) Interest on loan @ 10% = ` 2,50,000
Present value of cash flow of loan at concessional rate with guarantee @ 14%
= ` 2,50,000 x 2.9138 + ` 25,00,000 x 0.5921
= ` 7,28,450 + ` 14,80,250 = ` 22,08,700

(ii) Interest on loan at normal rate of 14% = ` 3,50,000

Present Value of Cash flow of loan at 14%
= ` 3,50,000 x 2.9138 + ` 25,00,000 x 0.5921
= ` 25,00,080 or ` 25,00,000
Difference (ii) – (i) = ` 25,00,000 – ` 22,08,700
Fair value of financial guaranteed contract (at inception) = ` 2,91,300

FINANCIAL REPORTING 252

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Journal Entry
Particulars Debit (`) Credit (`)
Investment in subsidiary Dr. 2,91,300
To Financial guarantee (liability) 2,91,300
(Being financial guarantee initially recorded)

31st March 2022

Subsequently at the end of the reporting period, financial guarantee is measured
at the higher of:
- the amount of loss allowance; and
- the amount initially recognised less cumulative amortization, where
appropriate.
At 31st March 2022, there is 2% probability that Mohan Limited may default on the
loan in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited
does not expect to recover any amount from Mohan Limited. The 12-month
expected credit losses are therefore ` 50,000 (` 25,00,000 x 2%).
The initial amount recognised less amortisation is ` 2,32,082 (Refer table below).
The unwound amount is recognised as income in the books of Surya Limited, being
the benefit derived by Mohan Limited not defaulting on the loan during the
period.

Closing
Benefits
Year ended Opening EIR @ 14% balance
Provided
on 31st Balance (a) (b) = (d) =
(c)
March ` (a x 14%) (a) + (b) -(c)
`
`
2022 2,91,300 40,782 (1,00,000) 2,32,082
2023 2,32,082 32,491 (1,00,000) 1,64,573
2024 1,64,573 23,040 (1,00,000) 87,613
2025 87,613 12,387* (1,00,000) -
* Difference of ` 121 (` 12,387 – ` 12,266) is due to approximation.
The carrying amount of the financial guarantee liability after amortisation is
therefore ` 2,32,082, which is higher than the 12-month expected credit losses of
` 50,000. The liability is therefore adjusted to ` 2,32,082 (the higher of the two
amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 59,218
To Profit and loss 59,218
(Being financial guarantee subsequently adjusted)

FINANCIAL REPORTING 253

FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
31st March 2023
At 31st March 2023, there is 4% probability that Mohan Limited will default on the
loan in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited
does not expect to recover any amount from Mohan Limited. The 12-month
expected credit losses are therefore ` 1,00,000 (` 25,00,000 x 4%).
The carrying amount of the financial guarantee liability after amortisation is `
1,64,573, which is higher than the 12-month expected credit losses of ` 1,00,000.
The liability is therefore adjusted to ` 1,64,573 (the higher of the two amounts) as
follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 67,509
To Profit and loss 67,509
(Being financial guarantee subsequently adjusted)

31st March 2024

At 31st March 2024, there is 5% probability that Mohan Limited will default on the
loan in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited
does not expect to recover any amount from Mohan Limited. The 12-month
expected credit losses are therefore ` 1,25,000 (` 25,00,000 x 5%).
The initial amount recognised less accumulated amortisation is ` 87,613, which is
lower than the 12-month expected credit losses (` 1,25,000). The liability is
therefore adjusted to ` 1,25,000 (the higher of the two amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 39,573*
To Profit and loss (Refer Note below) 39,573*
(Being financial guarantee subsequently adjusted)
* Note: The carrying amount at the end of 31st March 2023 will be ` 1,25,000
(i.e. ` 1,64,573 less 12-month expected credit losses of ` 39,573).

Question 16
Jackson Limited is engaged in manufacturing and trading activities. It is in the
process of preparation of consolidated financial statements of the group for the
year ended on 31st March 2022. During the year 2021-2022, the company made a
profit (after tax) of ` 2,10,00,000 of which ` 10,00,000 is attributable to Non-
Controlling Interest (NCI).
The long-term finance of the company comprises the following:
(A) 10 crore equity shares of ` 1 each at the beginning of the year and the
company has further issued 2,50,00,000 shares on 1 st October 2021 at full
market value.
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(B) 40 lakh irredeemable preference shares of ` 10 each. These shares were in
issue for the whole of the year ended 31st March 2022. The payment of
dividend on these preference shares is discretionary.
(C) ` 9 crore of 6% convertible debentures issued on 1 st April, 2020 and
repayable on 31st March, 2025 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 5 crore ordinary shares in the company. On 1
st April, 2021 the prevailing market interest rate for 5 yearly convertible
debentures which had no right of conversion was 8%. Using an annual discount
rate of 8%, the present value of ` 1 payable in five years is 0.68 and the
cumulative present value of ` 1 payable at the end of years one to five is
3.99.
In the year ended 31st March, 2022 Jackson Limited declared a dividend of
` 0.10 per share on the irredeemable preference shares.
You are required to:
(i) Compute the finance cost of convertible debentures and its closing
balance as on 31st March, 2022 to be presented in the consolidated
financial statements.
(ii) Compute the basic and diluted earnings per share for the year ended
31st March, 2022. Assume that applicable income tax rate is 30% for
Jackson Limited and its subsidiaries.

Solution:
(i) Calculation of the liability and equity components on 6% Convertible
debentures:
Present value of principal payable at the end of 5th year
(` 90,000 thousand x 0.68) = ` 61,200 thousand
Present value of interest payable annually for 5 years
(` 90,000 thousand x 6% x 3.99) = ` 21,546 thousand
Total liability component = ` 82,746 thousand
Therefore, equity component = ` 90,000 thousand – ` 82,746 thousand
= ` 7,254 thousand

Calculation of finance cost and closing balance of 6% convertible debentures

Opening balance Finance cost Interest paid Closing Balance

Year
` in ’000 @ 8% ` in ’000 @ 6% ` in ’000 ` in ’000
a b = a x 8% c d=a+b–c
31.3.2021 82,746 6,620 5,400 83,966
31.3.2022 83,966 6,717 5,400 85,283

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Finance cost of convertible debentures for the year ended 31.3.2022 is ` 6,717
thousand and closing balance as on 31.3.2022 is ` 85,283 thousand.

(ii) (a) Calculation of Basic EPS ` in ’000

Profit for the year attributable to parent company 20,000
Less: Dividend on preference shares (4,000 thousand x ` 0.10) (400)
Profit attributable to equity shareholders 19,600

Weighted average number of shares

= 10,00,00,000 + {2,50,00,000 x (6/12*)}
= 11,25,00,000 shares or 1,12,500 thousand shares
Basic EPS = ` 19,600 thousand / 1,12,500 thousand shares
= ` 0.174

(b) Calculation of Diluted EPS ` in ’000

Profit for the year 20,000
Less: Dividend on preference shares (4,000 x 0.10) (400)
19,600
Add: Finance cost (as given in the above table) 6,717.00
Less: Tax @ 30% (2,015.10) 4,701.90
24,301.90
Weighted average number of shares
= 10,00,00,000 + {2,50,00,000 x (6/12)*} + 5,00,00,000
= 16,25,00,000 shares or 1,62,500 thousand shares
Diluted EPS = ` 24,301.90 thousand / 1,62,500 thousand shares
= ` 0.150

“If you want light to come into your life, you need to
stand where it is shining.”

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Notes


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5 IND AS 116 - LEASES

Coverage

1. Basic understanding & Scope

2. Identify whether arrangement is lease or not
3. Bifurcation of components of lease arrangement
4. Important terms
5. Lessee’s Accounting
6. Lessor’s Accounting
7. Sub- Lease
8. Sale & lease Back
9. Disclosures

1. Basic understanding & scope

(Application from FY 2019-20 onwards)

LEASE

LESSEE LESSOR

Single Accounting Model

Operating lease Finance Lease

Right of use Asset

(ROU Asset) Same as provided in IND AS-17
OR AS-19

Objective
The objective of this standard is to ensure that lessees and lessors provide relevant
information in a manner that faithfully represents those transactions. This information
gives a basis for users of financial statements to assess the effect that leases have on
the financial position, financial performance and cash flows of an entity.
A leasing arrangement conveys the use of an asset from one party to another without
transferring ownership.

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Scope
Ind AS 116 shall be applied to ALL LEASES, including leases of Right-of-Use (ROU) assets
in a sub-lease, EXCEPT for:
Sr.
Particulars Reason
No.
1 Leases to explore for or use minerals, Within the scope of Ind AS 106
oil, natural gas and similar non- ‘Exploration for and Evaluation of
regenerative resources Mineral Resources’
2 Leases of biological assets held by a Within the scope of Ind AS 41
lessee ‘Agriculture’
3 Service concession arrangements Within the scope of Appendix D of Ind
AS 115‘Revenue from Contracts with
Customers’
4 Licences of intellectual property Within the scope of Ind AS 115
granted by a lessor ‘Revenue from Contracts with
Customers’
5 Rights held by a lessee under licensing Within the scope of Ind AS 38
agreements for such items as motion ‘Intangible Assets’
picture films, video recordings, plays,
manuscripts, patents and copyrights

Recognition Exemptions
In addition to above scope exclusions, a lessee can elect not to apply Ind AS 116’s
recognition requirements to:
1. Short-term leases; and
2. Leases for which the underlying asset is of low-value
If a lessee elects to apply the above recognition exemption, the lessee shall recognise the
lease payments associated with those leases as an expense on either a straight-line basis
over the lease term or another systematic basis, if that basis is more representative of the
pattern of the lessee’s benefit.

Short term leases

A short-term lease is a lease that, at the commencement date, has a lease term of 12
months or less and does not include an option to purchase the underlying asset. As the
determination is made at the commencement date, a lease cannot be classified as short-
term if the lease term is subsequently reduced to less than 12 months.
The short-term lease exemption can be made by class of underlying asset to which the right
of use relates. A class of underlying asset is a grouping of underlying assets of a similar
nature and use in an entity’s operations. For example, consider an entity which has leased
several items of office equipment - some of them for less than 12 months and some for
more than 12 months, with none containing purchase options. Assuming that the items of
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office equipment are all considered to be of the same class, if the entity wishes to use the
short term lease exemption it must apply that exemption for all of the leases with terms of
12 months or less. The leases with terms longer than 12 months will be accounted for in
accordance with the general recognition and measurement requirements for lessees.
A lessee that makes this election must make certain quantitative and qualitative
disclosures about short-term leases. Once a lessee establishes a policy for a class of
underlying assets, all future short- term leases for that class are required to be
accounted for in accordance with the lessee’s policy.

Short Term Lease

*The lease payment for above leases should be treated as expense on straight line basis
over lease term or another systematic basis (if any).

The lease term is 12 months or less and no option to purchase the underlying asset. The
exemption is to be made by class of underlying asset to which ROU relates.

Illustration 1 - Short-term lease

Scenario A:
A lessee enters into a lease with a nine-month non-cancellable term with an option
to extend the lease for four months. The lease does not have a purchase option. At
the lease commencement date, the lessee is reasonably certain to exercise the
extension option because the monthly lease payments during the extension period
are significantly below market rates. Whether the lessee can take a short-term
exemption in accordance with Ind AS 116?
Scenario B:
Assume the same facts as Scenario A except, at the lease commencement date, the
lessee is not reasonably certain to exercise the extension option because the
monthly lease payments during the optional extension period are at what the
lessee expects to be market rates and there are no other factors that would make
exercise of the renewal option reasonably certain. Will your answer be different in
this case?
Solution:
Scenario A:
As the lessee is reasonably certain to exercise the extension option (Refer section
3.2 lease term), the lease term is greater than 12 months (i.e., 13 months).
Therefore, the lessee will not account for the lease as a short-term lease.
Scenario B:
In this case, the lease term is less than 12 months, i.e., nine months. Thus, the
lessee may account for the said lease under the short-term lease exemption, i.e.,
it recognises lease payments as an expense on either a straight-line basis over the
lease term or another systematic basis.
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Leases of low-value assets:
Lessees can also make an election for leases for which the underlying asset is of
low value (i.e., low-value assets).
Though Ind AS 116 does not explicitly define the leases of low-value assets, it
provides the conditions based on which an asset can be treated as of low-value and
the said exemption can be availed accordingly for such low-value asset(s).
Following are the conditions:

An underlying asset can be of low value ONLY

IF BOTH the following conditions are satisfied :

The lessee can benefit from use of

The underlying asset is not highly
the underlying asset on its own or
dependent on, or highly interrelated
together with other resources that
with, other assets
are readily available to the lessee

The election for leases for which the underlying asset is of low value can be made on a
lease- by- lease basis. For example, an entity enters into a rental contract for a large
number of laptops. Each laptop within the contract constitutes an identified asset.
Entity has considered that the value of individual laptop would be low, even though the
contract for all the laptops is not. Consequently, each laptop qualifies as a low value
asset and the entity can elect to apply the low-value exemption to all the laptops under
the contract.
The exemption for leases of low value items intends to capture leases that are high in
volume but low in value e.g. leases of small IT equipment (laptops, mobile phones,
simple printers), leases of office furniture etc. Ind AS 116 is silent on any threshold to
determine the value for classifying any asset as low value assets.
Head leases do not qualify as low value assets:
It is very important to note that if a lessee subleases an asset, or expects to sublease an
asset, the head lease does not qualify as a lease of a low-value asset, i.e., an
intermediate lessor who subleases, or expects to sublease an asset, cannot account for
the head lease as a lease of a low-value asset.

Low Value Leases (Low value Assets):

Not defined in IND AS 116.

Conditions based on which asset is treated low value:

I & II
Lessee can benefit from use on its own or Asset is not highly dependent or inter
with other readily available resources. related with other assets.
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 Value of individual asset to be considered.
 If lessee sub leases or expect to sublease such asset, above exemption cannot be
taken.

LEASE
At the inception of a contract, an entity shall assess whether the contract is or contains
a lease. For the purpose, a lease is defined as a contract, or part of a contract that
conveys the right to control the use of an identified asset for a period of time in
exchange for consideration. Ind AS 116 requires customers and suppliers to determine
whether a contract is or contains a lease at the inception of the contract.
The inception date is defined as the earlier of the following dates:
• date of a lease agreement
• date of commitment by the parties to the principal terms and conditions of the
lease
Whether an Arrangement Contains Lease?
No
Is there an identified asset?

Yes

Does the customer have right to obtain No

substantially all of the economic benefits
from the use of asset throughout the period

Yes

Customer Does the customer, the supplier or neither Supplier

party have the right to direct how and for
what purpose the asset is used throughout

Yes

If predetermined than, Whether the

customer Operates the asset? No
OR
Designed the asset?

Yes

Contract contract does

contains a not contains a
lease lease

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Understanding important terms:
1. Identified Asset: Could be explicitly stated or implicitly
(may be physically distinct or not)
The asset is not to be considered identified asset if lessor has substantive substitution
rights.

2. Rights to obtain substantially all economic benefits

asset outputs
any by products all from using the assets
other benefits

Illustration 2 - Asset implicitly specified in a contract

Customer XYZ enters into a ten-year contract with Supplier ABC for the use of
rolling stock specifically designed for Customer XYZ.
The rolling stock is designed to transport materials used in Customer XYZ’s
production process and is not suitable for use by other customers. The rolling stock
is not explicitly specified in the contract but, Supplier ABC owns only one rolling
stock that is suitable for Customer XYZ’s use. If the rolling stock does not operate
properly, the contract requires Supplier ABC to repair or replace the rolling stock.
Whether there is an identified asset?
Solution:
Yes, the said rolling stock is an identified asset.
Though the rolling stock is not explicitly specified in the contract (e.g., by serial
number), it is implicitly specified because Supplier ABC must use it to fulfil the
contract.

Illustration 3 - (Asset implicitly specified in a contract):

Customer XYZ enters into a ten-year contract with Supplier ABC for the use of a
car. The specification of the car is specified in the contract (i.e., brand, type,
colour, options, etc.). At inception of the contract, the car is not yet built.
Whether there is an identified asset?
Solution:
Yes, the said car is an identified asset.
Though the car cannot be identified at inception of the contract, it is implicitly
specified at the time the same will be made available to Customer XYZ.

Substantive Substitution Rights:

A supplier’s right to substitute an asset is SUBSTANTIVE when BOTH of the following
conditions are met:

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The Supplier
has the PRACTICAL ABILITY to substitute
alternative asset throughout the period of use
(for e.g., the customer cannot prevent the
supplier from substituting an asset and
alternative asset are readily available to the
supplier or could be sourced by the supplier
within a reasonable period of time. the supplier
Substantive
Substitution
Right
The Supplier would Benefit economically
from the exercise of its right to substitute
the asset (i.e., the economic benefits
associated with substituting the asset are
expected to exceed the costs associated with
substituting the asset).

Further, if the supplier has a right or an obligation to substitute the asset only on
or after either a particular date, or the occurrence of a specified event, the
supplier’s substitution right is not substantive because the supplier does not have
the practical ability to substitute alternative assets throughout the period of use.
An entity’s evaluation of whether a supplier’s substitution right is substantive is
based on facts and circumstances at inception of the contract. At inception of the
contract, an entity should not consider future events that are not likely to occur.
Ind AS 116 provides the following examples of circumstances that, at inception of
the contract, are not likely to occur and, thus, are excluded from the evaluation of
whether a supplier’s substitution right is substantive throughout the period of use:
(1) An agreement by a future customer to pay an above market rate for use of
the asset
(2) The introduction of new technology that is not substantially developed at
inception of the contract.
(3) A substantial difference between the customer’s use of the asset or the
performance of the asset, and the use or performance considered likely at
inception of the contract.
(4) A substantial difference between the market price of the asset during the
period of use, and the market price considered likely at inception of the
contract.
The requirement that a substitution right must benefit the supplier
economically in order to be substantive is a new concept. In many cases, it
will be clear that the supplier will not benefit from the exercise of a
substitution right because of the costs associated with substituting an asset.
The physical location of the asset may affect the costs associated with
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substituting the asset. For e.g., if an asset is located at the customer’s
premises, the cost associated with substituting it is generally higher than the
cost of substituting a similar asset located at the supplier’s premises.
However, simply because a supplier concludes that the cost of substitution is
not significant does not automatically mean that it would economically
benefit from the right of substitution.
Ind AS 116 further clarifies that a customer should presume that a supplier’s
substitution right is not substantive when the customer cannot readily
determine whether the supplier has a substantive substitution right. This
requirement is intended to clarify that a customer is not expected to exert
undue effort to provide evidence that a substitution right is not substantive.
However, suppliers should have sufficient information to make a determination
of whether a substitution right is substantive.
Contract terms that allow or require a supplier to substitute alternative assets
only when the underlying asset is not operating properly (for e.g., a normal
warranty provision) or when a technical upgrade becomes available do not
create a substantive substitution right.

Illustration 4 - Substantive Substitution Rights

Scenario A:
An electronic data storage provider (supplier) provides services through a
centralised data centre that involve the use of a specified server (Server No. 10).
The supplier maintains many identical servers in a single accessible location and
determines, at inception of the contract, that it is permitted to and can easily
substitute another server without the customer’s consent throughout the period of
use.
Further, the supplier would benefit economically from substituting an alternative
asset, because doing this would allow the supplier to optimise the performance of
its network at only a nominal cost. In addition, the supplier has made clear that it
has negotiated this right of substitution as an important right in the arrangement,
and the substitution right affected the pricing of the arrangement.
Whether the substitution rights are substantive and whether there is an identified
asset?
Scenario B:
Assume the same facts as in Scenario A except that Server No. 10 is customised,
and the supplier does not have the practical ability to substitute the customised
asset throughout the period of use. Additionally, it is unclear whether the supplier
would benefit economically from sourcing a similar alternative asset.
Whether the substitution rights are substantive and whether there is an identified
asset?

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Solution:
Scenario A:
The customer does not have the right to use an identified asset because, at the
inception of the contract, the supplier has the practical ability to substitute the
server and would benefit economically from such a substitution. Thus, there is no
identified asset.
However, if the customer could not readily determine whether the supplier had a
substantive substitution right (for e.g., there is insufficient transparency into the
supplier’s operations), the customer would presume the substitution right is not
substantive and conclude that there is an identified asset.
Scenario B:
The substitution right is not substantive, and Server No. 10 would be an identified
asset because the supplier does not have the practical ability to substitute the asset
and there is no evidence of economic benefit to the supplier for substituting the asset.
In this case, neither of the conditions of a substitution right is met (whereas both the
conditions must be met for the supplier to have a substantive substitution right).
Therefore, Server No 10 will be considered as an identified asset.

Illustration 5 - (Identified Asset – Physically Distinct):

Customer XYZ enters into a 15-year contract with Supplier ABC for the right to use
five fibres within a fibre optic cable between Mumbai and Pune. The contract
identifies five of the cable’s 25 fibres for use by Customer XYZ. The five fibres are
dedicated solely to Customer XYZ’s data for the duration of the contract term.
Assume that Supplier ABC does not have a substantive substitution right.
Whether there is an identified asset?
Solution:
Yes, the said five fibres are identified assets because they are physically distinct
and explicitly specified in the contract.

Illustration 6 (Identified Asset – Not Physically Distinct):

Scenario A:
Customer XYZ enters into a ten-year contract with Supplier ABC for the right to
transport oil from India to Bangladesh through Supplier ABC’s pipeline. The
contract provides that Customer XYZ will have the right to use of 95% of the
pipeline’s capacity throughout the term of the arrangement.
Whether there is an identified asset?
Scenario B:
Assume the same facts as in Scenario A, except that Customer XYZ has the right to
use 65% of the pipeline’s capacity throughout the term of the arrangement.
Whether there is an identified asset?

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Solution:
Scenario A:
Yes, the capacity portion of the pipeline is an identified asset.
While 95% of the pipeline’s capacity is not physically distinct from the remaining
capacity of the pipeline, it represents substantially all of the capacity of the entire
pipeline and thereby provides Customer XYZ with the right to obtain substantially
all of the economic benefits from use of the pipeline.
Scenario B:
No, the capacity portion of the pipeline is NOT an identified asset.
Since 65% of the pipeline’s capacity is less than substantially all of the capacity of
the pipeline, Customer XYZ does not have the right to obtain substantially all of
the economic benefits from use of the pipeline.

Right to Obtain Substantially All of the Economic Benefits:

The first criterion in the control assessment is to determine whether the customer has
the right to obtain substantially all of the economic benefits from use of the asset
throughout the period of use, i.e., to control the use of an identified asset, a
customer is required to have the right to obtain substantially all of the economic
benefits from use of the identified asset throughout the period of use (for e.g., by
having exclusive use of the asset throughout that period).
A customer can obtain economic benefits either directly or indirectly (for e.g., by using,
holding or subleasing the asset). Economic benefits from use of an asset include:
• the asset’s primary outputs (i.e., goods or services)
• any by-products (for e.g., renewable energy credits that are generated
through the use of the asset), including potential cash flows derived from
these items.
• benefits from using the asset that could be realised from a commercial
transaction with a third party (for e.g., subleasing the asset).

Illustration 7 - (Right to obtain substantially all of the economic benefits):

Company MNO enters into a 15-year contract with Power Company PQR to purchase
all of the electricity produced by a new solar farm. PQR owns the solar farm and
will receive tax credits relating to the construction and ownership of the solar
farm, and MNO will receive renewable energy credits that accrue from use of the
solar farm.).
Who has the right to substantial benefits from the solar farm?
Solution:
Company MNO has the right to obtain substantially all of the economic benefits
from use of the solar farm over the 15-year period because it obtains:
• the electricity produced by the farm over the lease term — i.e. the primary
product from use of the asset; and
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• the renewable energy credits — i.e. the by-product from use of the asset.
Although PQR receives economic benefits from the solar farm in the form of tax
credits, these economic benefits relate to the ownership of the solar farm. The tax
credits do not relate to use of the solar farm and therefore are not considered in
this assessment.

Illustration 8 - Right to direct the use of an asset

Customer X enters into a contract with Supplier Y to use a vehicle for a five-year
period. The vehicle is identified in the contract. Supplier Y cannot substitute
another vehicle unless the specified vehicle is not operational (for e.g., if it breaks
down). Under the contract:
• Customer X operates the vehicle (i.e., drives the vehicle) or directs others to
operate the vehicle (for e.g., hires a driver).
• Customer X decides how to use the vehicle (within contractual limitations).
For example, throughout the period of use, Customer X decides where the
vehicle goes, as well as when or whether it is used and what it is used for.
Customer X can also change these decisions throughout the period of use.
• Supplier Y prohibits certain uses of the vehicle (for e.g., moving it overseas)
and modifications to the vehicle to protect its interest in the asset.
Whether Customer X has the right to direct the use of the vehicle throughout the
period of lease?
Solution:
Yes, Customer X has the right to direct the use of the identified vehicle throughout
the period of use because it has the right to change how the vehicle is used, when or
whether the vehicle is used, where the vehicle goes and what the vehicle is used for.
Supplier Y’s limits on certain uses for the vehicle and modifications to it are
considered protective rights that define the scope of Customer X’s use of the asset,
but do not affect the assessment of whether Customer X directs the use of the asset.

Illustration 9 - Right to direct the use of an asset

Entity A contracts with Supplier H to manufacture parts in a facility. Entity A
designed the facility and provided its specifications. Supplier H owns the facility
and the land. Entity A specifies how many parts it needs and when it needs the
parts to be available. Supplier H operates the machinery and makes all operating
decisions including how and when the parts are to be produced, as long as it meets
the contractual requirements to deliver the specified number on the specified
date. Assuming supplier H cannot substitute the facility and hence is an identified
asset.
Which party has the right to control the use of the identified asset (i.e.,
equipment) during the period of use?

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Solution:
Entity A does not direct the use of the asset that most significantly drives the
economic benefits because Supplier H determines how and when the equipment is
operated once the contract is signed. Therefore, Supplier H has the right to control
the use of the identified asset during the period of use. Although Entity A stipulates
the product to be provided and has input into the initial decisions regarding the use
of the asset through its involvement in the design of the asset, it does not have
decision making rights over how and for what purpose the asset will be used over
the asset during the period of use. This arrangement is a supply agreement, not a
lease.

Illustration 10 - Right to direct the use of an asset

Entity L enters into a five year contract with Company A, a ship owner, for the use
of an identified ship. Entity L decides whether and what cargo will be transported,
and when and to which ports the ship will sail throughout the period of use, subject
to restrictions specified in the contract. These restrictions prevent Entity L from
sailing the ship into waters at a high risk of piracy or carrying explosive materials
as
Solution:
Entity L has the right to direct the use of the ship. The contractual restrictions are
protective rights. In the scope of its right of use, Entity L determines how and for
what purpose the ship is used throughout the five year period because it decides
whether, where and when the ship sails, as well as the cargo that it will transport.
Entity L has the right to change these decisions throughout the period of use.
Therefore, the contract contains a lease.

Identifying and separating lease components of a contract

Sometimes, there are contracts that contain rights to use multiple assets (for e.g.,
a building and an equipment, multiple pieces of equipment, etc.). The right to use
each such asset is considered as a ‘separate’ lease component ONLY IF BOTH the
following conditions are satisfied:
• The lessee can benefit from the use of the asset either on its own OR together
with other resources that are readily available to the lessee (i.e., goods or
services that are sold or leased separately, by the lessor or other suppliers, or
that the lessee has already obtained from the lessor or in other transactions
or events) AND
• The underlying asset is neither highly dependent on, nor highly interrelated
with, the other underlying assets in the contract.
If one or both of these criteria are not met then, the right to use multiple assets is
considered a ‘single’ lease component, i.e., not a ‘separate’ lease component. Let
us have a look at the following illustration to have a better understanding:

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Illustration 11 - Identifying and separating lease components
Scenario A:
A lessee enters a lease of an excavator and the related accessories (for e.g.,
excavator attachments) that are used for mining purposes. The lessee is a local
mining company that intends to use the excavator at a copper mine. How many
lease and non-lease components are there?
Scenario B:
Assume the same facts as in Scenario A, except that the contract also conveys the
right to use an additional loading truck. This loading truck could be deployed by
the lessee for other uses (for e.g., to transport iron ores at another mine).
Solution:
Scenario A:
The lessee would be unable to benefit from the use of the excavator without also
using the accessories. Therefore, the excavator is dependent upon the accessories.
Thus, from the perspective of the lessee, the contract contains one lease component.
Scenario B:
The lessee can benefit from the loading truck on its own or together with other
readily available resources because the loading truck could be deployed for other
uses independent of the excavator. The lessee can also benefit from the use of the
excavator on its own or together with other readily available resources.
Thus, from the perspective of the lessee, the contract contains two lease components,
viz., a lease of the excavator (together with the accessories) and a lease of the
loading truck.

Bifurcation of component of lease Arrangements

Arrangement contains use of multiple assets. Treat each asset as separate lease
component
Treat each asset as separate lease component
If

I & II
Lessee can benefit from Underlying asset is not highly
use & on its own or with dependent or inter related
other readily available with other underlying asset in
resources the contract

Otherwise treat ROU multiple asset as single Lease

Arrangement contains lease and non-lease components

Separate lease & non-lease components



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in relation to transfer of goods or services to lessee (eg: Supply of maintenance services,
providing driver for car etc.)
Note:
• Cost of property tax, insurance do not involve transfer of goods or services and are
not to be considered as non-lease components.
• Optional exemption for not to separate non-lease component to lessee is provided
under IND AS 116. Treat everything as single lease component.

Separating lease components from non-lease components:

There may be many contracts containing a lease coupled with an agreement to purchase
or sell other goods or services (i.e., the non-lease components under Ind AS 116). For
example, a supplier may lease a truck and also operate the leased asset on behalf of a
customer (i.e., provide a driver). This service is not related to securing the use of the
truck. Only items that contribute to securing the output of the asset are lease
components. In this example, only the use of the truck is considered a lease component.
Similarly, costs incurred by a supplier to provide maintenance on an underlying asset, as
well as the materials and supplies consumed as a result of the use of the asset, are not
lease components.

Illustration 12 - Identifying different components in the contract

Entity L rents an office building from Landlord M for a term of 10 years. The rental
contract stipulates that the office is fully furnished and has a newly installed and
tailored HVAC system. It also requires Landlord M to perform all common area
maintenance (CAM) during the term of the arrangement. Entity L makes single
monthly rental payment and does not pay for the maintenance separately. The
office building has a useful life of 40 years and the HVAC system and office
furniture each has a life of 15 years. What are the units of account in the lease?
Solution:
There are three components in the arrangement the building assets (office building
and HVAC), the office furniture, and the maintenance agreement.
The office building and HVAC system are one lease component because they cannot
function independently of each other. The HVAC system was designed and tailored
specifically to be integrated into the office building and cannot be removed and
used in another building without incurring substantial costs. These building assets
are a lease component because they are identified assets for which Entity L directs
the use.
The office furniture functions independently and can be used on its own. It is also a
lease component because it is a group of distinct assets for which Entity L directs
the use.
The maintenance agreement is a non-lease component because it is a contract for
service and not for the use of a specified asset.

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Optional exemption of using Practical Expedient to not to separate non-lease
component Ind AS 116 provides a practical expedient that permits lessees to make
an accounting policy election, by CLASS OF UNDERLYING ASSET, to account for each
separate lease component of a contract and any associated non-lease components as
a SINGLE LEASE COMPONENT. It is important to note the such practical expedient is
not permissible for lessor.

KEY CONCEPTS

a. Inception Date:
Earlier of

Date of lease Date of commitment by parties

Agreement to Principal Terms & conditions

b. Commencement Date: When the asset is made available for use by lessee
c. Lease Term (Starts from commencement date)
non- cancellable (+) extended period (+) Period covered by
period under option which option to terminate
lessee is reasonably
contain to exercise
d. Lease Payment:
Aggregate of

Fixed payments Variable payment exercise price to Residual value

(Included based on index/ purchase if lessee guarantees.
in substance fixed rate (LIBOR/ is reasonably
payment) Inflation) certain
Note:
• Payment allocated to non-lease component will not form part of lease
• Payment Variable payment not based on index/ rate will not form part of
lease payments.

e. Lease Incentives
‘Lease incentives’ is defined as payments made by a lessor to a lessee associated
with a lease, or the reimbursement or assumption by a lessor of costs of a lessee.

f. Variable lease payments that depend on an index or a rate:

‘Variable lease payments’ are defined as the portion of payments made by a lessee
to a lessor for the right to use an underlying asset during the lease term that varies

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because of changes in facts or circumstances occurring after the commencement
date, other than the passage of time.
These may include, for e.g., payments linked to a consumer price index, payments
linked to a benchmark interest rate (such as LIBOR) or payments that vary to
reflect changes in market rental rates. Such payments are included in the lease

g. Initial Direct cost:

‘Initial direct costs’ are defined as the incremental costs of obtaining a lease that
would not have been incurred if the lease had not been obtained, except for such
costs incurred by a manufacturer or dealer lessor in connection with a finance lease.

Examples of costs included and excluded from initial direct costs is provided
below.
Included Excluded
Commission (including payments to Employee salaries
employees acting as selling agents)
Legal fees resulting from the execution Legal fees for services rendered before
of the lease the execution of the lease
Lease document preparation costs Negotiating lease term and conditions
incurred after the execution of the
lease
Certain payments to existing tenants to Advertising
move out
Consideration paid for a guarantee of a Depreciation and amortization
Residual asset by an unrelated third party

Discount Rates
Discount rates are used to determine the present value of the lease payments,
which are used to determine Right of Use asset and Lease liability in case of a
lessee and to measure a lessor’s net investment in the lease.
For a Lessee
As per Ind AS 116, the Discount Rate to be used should be:

THE INTEREST RATE If not, then the lessee shall

IMPLICIT IN use THE LESSEE’S
OR
THE LEASE, if that rate can INCREMENTAL BORROWING
be readily determined. RATE.

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Where,
‘Interest rate implicit in the lease’ is defined as the rate of interest that causes the
following:

The present
value of lease Any
The fair
payments The initial
value of
made by the unguaranteed direct
the
lessee for the residual costs of
underlying
right to use value the
asset
the underlying lessor
asset

For a Lessor:
Lessor to use the interest rate implicit in the lease as discussed above.
Economic Life:
Economic Life’ is defined as either
• the period over which an asset is expected to be economically usable by one
or more users or
• the number of production or similar units expected to be obtained from an
asset by one or more users.

Illustration 13 - Determining the lease term

Scenario A:
Entity ABC enters into a lease for equipment that includes a non-cancellable term
of six years and a two-year fixed-priced renewal option with future lease payments
that are intended to approximate market rates at lease inception. There are no
termination penalties or other factors indicating that Entity ABC is reasonably
certain to exercise the renewal option. What is the lease term?
Scenario B:
Entity XYZ enters into a lease for a building that includes a non-cancellable term of
eight years and a two-year, market-priced renewal option. Before it takes
possession of the building, Entity XYZ pays for leasehold improvements. The
leasehold improvements are expected to have significant value at the end of eight
years, and that value can only be realised through continued occupancy of the
leased property. What is the lease term?
Scenario C:
Entity PQR enters into a lease for an identified retail space in a shopping centre. The
retail space will be available to Entity PQR for only the months of October, November
and December during a non-cancellable term of seven years. The lessor agrees to
provide the same retail space for each of the seven years. What is the lease term?

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Solution:
Scenario A:
At the lease commencement date, the lease term is six years (being the non-
cancellable period). The renewal period of two years is not taken into
consideration since it is mentioned that Entity ABC is not reasonably certain to
exercise the option.
Scenario B:
At the lease commencement, Entity XYZ determines that it is reasonably certain to
exercise the renewal option because it would suffer a significant economic penalty
if it abandoned the leasehold improvements at the end of the initial non-
cancellable period of eight years. Thus, at the lease commencement, Entity XYZ
concludes that the lease term is ten years (being eight years of non-cancellable
period plus the renewal period of two years where the lessee is reasonably certain
to exercise the option).
Scenario C:
At the lease commencement date, the lease term is 21 months (three months per
year over the seven annual periods as specified in the contract), i.e., the period
over which Entity PQR controls the right to use the underlying asset.

Illustration 14 - In-substance fixed lease payment

Entity P enters into a five-year lease for office space with Entity Q. The initial base
rent is ` 1 lakh per month. Rents increase by the greater of 1% of Entity P’s
generated sales or 2% of the previous rental rate on each anniversary of the lease
commencement date. What are the lease payments for purposes of measuring lease
liability?
Solution:
In the given case, the lease payments for purposes of classifying the lease are the
fixed monthly payments of ` 1 lakh plus the minimum annual increase of 2% of the
previous rental rate. Entity P is required to pay no less than a 2% increase
regardless of the level of sales activity; therefore, this minimum level of increase is
in substance fixed lease payment.

Illustration 15 - In substance fixed lease payments

Company N leases a production line. The lease payments depends on the number of
operating hours of the production line – i.e., N has to pay ` 1,000 per hour of use. The
annual minimum payment is ` 10,00,000. The expected usage per year is 1,500 hours.
Solution:
The lease contains in substance fixed payments of ` 10,00,000 per year, which are
included in the initial measurement of the lease liability. The additional ` 5,00,000
that Company N expects to pay per year are variable payments that do not depend
on an index or a rate but usage.

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Illustration 16 - Variable lease payments that depend on an index or rate
An entity enters into a 10-year lease of property. The lease payment for the first
year is ` 1,000. The lease payments are linked to the consumer price index (CPI),
i.e., not a floating interest rate. The CPI at the beginning of the first year is 100.
Lease payments are updated at the end of every second year. At the end of year
one, the CPI is 105. At the end of year two, the CPI is 108. What should be included
in lease payments?
Solution:
At the lease commencement date, the lease payments are ` 1,000 per year for 10
years. The entity does not take into consideration the potential future changes in
the index. At the end of year one, the payments have not changed and hence, the
liability is not updated.
At the end of year two, when the lease payments change, the entity updates the
remaining eight lease payments to ` 1,080 per year (i.e., ` 1,000 / 100 x 108).

Variable lease payments that do not depend on an index or a rate:

Variable lease payments that do not depend on an index or rate and are not, in
substance, fixed (as discussed above – In-substance fixed lease payments).
Examples may include payments such as those based on performance (for e.g., a
percentage of sales) or usage of the underlying asset (for e.g., the number of hours
flown, the number of units produced), are not included as lease payments. Instead,
they are recognised in profit or loss in the period in which the event that triggers
the payment occurs (unless they are included in the carrying amount of another
asset in accordance with other Ind AS).

Illustration 17 - Variable lease payments that do not depend on an index or rate

Entity XYZ is a medical equipment manufacturer and a supplier of the related
consumables. Customer ABC operates a medical centre. Under the agreement
entered into by both parties, Entity XYZ grants Customer ABC the right to use a
medical laboratory machine at no cost and Customer ABC purchases consumables
for use in the equipment from Entity XYZ at ` 100 each. The consumables can only
be used for that equipment and Customer ABC cannot use other consumables as
substitutes. There is no minimum purchase amount required in the contract. Based
on its historical experience, Customer ABC estimates that it is highly likely to
purchase at least 8,000 units of consumables annually. Customer ABC has
appropriately assessed that the arrangement contains a lease of medical
equipment. There are no residual value guarantees or other forms of consideration
included in the contract. Whether these payments affect the calculation of lease
liability and ROU Asset? How does Entity XYZ and Customer ABC would allocate
these lease payments?

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Solution:
There are two components in the arrangement, viz., a lease of equipment and the
purchase of consumables.
Even though Customer ABC may believe that it is highly unlikely to purchase lesser
than 8,000 units of consumables every year, in this example, there are no lease
payments for purposes of initial measurement (for Entity XYZ and Customer ABC)
and lease classification (for Entity XYZ).
Entity XYZ and Customer ABC would allocate the payments associated with the
future payments to the lease and consumables component of the contract.

Exercise price of a purchase option

If the lessee is reasonably certain to exercise a purchase option, the exercise price
is included as a lease payment, i.e., entities consider the exercise price of asset
purchase options included in lease contracts consistently with the evaluation of
lease renewal and termination options (as discussed earlier).

Penalties for terminating a lease

If it is reasonably certain that the lessee will not terminate a lease, the lease term
is determined assuming that the termination option would not be exercised, and
any termination penalty is excluded from the lease payments. Otherwise, the lease
termination penalty is included as a lease payment. The determination of whether
to include lease termination penalties as lease payments is similar to the
evaluation of lease renewal options (as discussed earlier).

Residual value guarantees (lessees):

‘Residual value guarantee’ is defined as a guarantee made to a lessor by a party
unrelated to the lessor that the value (or part of the value) of an underlying asset
at the end of a lease will be at least a specified amount.

Residual value guarantees (lessors):

Ind AS 116 requires lessors to include in the lease payments, any residual value
guarantees provided to the lessor by the lessee, a party related to the lessee, or a
third party unrelated to the lessor that is financially capable of discharging the
obligations under the guarantee. This amount included in the lease payments is
different from that for a lessee which only includes the amount expected to be
payable by lessee only (as discussed above).

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LESSEE ACCOUNTING
Lease Accounting:

I II III
Initial & subsequent Accounting Accounting due to Accounting due to
Assuming no re-measurement modification
re-measurement/
modifications

1. Initial & subsequent accounting (recognition on commencement date)

Payments made
to lessor before
Initial commencement
Measurement of date less lease
Lease liability incentive
received from
lessor

Estimate of
costs for
Initial direct
restoration
costs incurred
/ dismantling of
by lessee
underlying
asset*

a. For recognition of ROU Asset & Lease liability:

ROU Asset A/c DR.
To Lease liability A/c

PV of NET remaining lease payment over

lease term using interest rate implicit in lease
incremental Borrowing Rate

b. For initial direct cost of lessee (if any)

ROU Asset A/c DR.
To Cash/Bank A/c

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c. For any payment made to lessor before commencement date:
ROU Asset A/c DR.
To Advance to lessor A/c

d. For any lease incentive received from lessor before commencement date:
Incentive received from lessor A/c DR.
To ROU Asset A/c

e. For cost of restoration/ dismantling of asset (if any) (ARO)

ROU Asset A/c DR.
To Provision for Restoration/ARO A/c

Subsequent Measurement
• For ROU Asset follow Cost Model unless Revaluation Model is applied.
• ROU Asset will be depreciated from commencement date
TO

If lessee exercises purchase In other cases EARLIER OF

option end of useful life of
underlying assets
end of the useful end of lease
OR
life of ROU Asset term
• FOR ROU liability Accounting will be Based on Amortised Cost of Financial
liability as par IND AS 109.

Presentation in FS:
• ROU Asset (unless it meets the definition of investment property)
either separately Along with
OR
as a PPE with
• line item
Lease liability should be bifurcated as Non- Current & Current either separately
or along with other liabilities
• Depreciation on ROU Assets in P & L under Depreciation & Amortisation
• Finance charge/Interest expense in P & L under Finance Cost

Illustration 18 - Initial measurement of lease liability

Entity L enters into a lease for 10 years, with a single lease payment payable at the
beginning of each year. The initial lease payment is ` 1,00,000. Lease payments
will increase by the rate of LIBOR each year. At the date of commencement of the
lease, LIBOR is 2 per cent.
Assume that the interest rate implicit in the lease is 5 per cent. How lease liability
is initially measured?

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Solution:
In the given case, the lease payments depend on a rate (i.e., LIBOR) and hence is
included in measuring lease liability, As per Ind AS 116, the lease payments should
initially be measured using the rate (i.e. LlBOR) as at the commencement date.
LIBOR at that date is 2 per cent; therefore, in measuring the lease liability, it is
assumed that each year the payments will increase by 2 per cent, as follows:
Year Lease Payment Discount factor @ 5% PV of lease payments
1 1,00,000 1 1,00,000
2 1,02,000 0.952 97,102
3 1,04,040 0.907 94,364
4 1,06,121 0.864 91,689
5 1,08,243 0.823 89,084
6 1,10,408 0.784 86,560
7 1,12,616 0.746 84,012
8 1,14,869 0.711 81,672
9 1,17,166 0.677 79,321
10 1,19,509 0.645 77,083
8,80,887
Therefore, the lease liability is initially measured at ` 8,80,887

Illustration 19 - Measuring right-of-use asset

Entity Y and Entity Z execute a 12-year lease of a rail car with the following terms
on January 1, 2016:
• The lease commencement date is February 1, 2016.
• Entity Y must pay Entity Z the first monthly rental payment of ` 10,000 upon
execution of the lease.
• Entity Z will pay Entity Y ` 50,000 cash incentive to enter into the lease
payable upon lease execution.
Entity Y incurred ` 1,000 of initial direct costs, which are payable on February
1, 2016. Entity Y calculated the initial lease liability as the present value of
the lease payments discounted using its incremental borrowing rate because
the rate implicit in the lease could not be readily determined; the initial lease
liability is ` 8,50,000.
How would Lessee Company measure and record this lease?
Solution:
Entity Y would calculate the right-of-use asset as follows:
Initial measurement of lease liability 8,50,000
Lease payments made to Entity Z at or before the commencement date 10,000
Lease incentives received from Entity Z (50,000)
Initial direct cost 1,000
Initial measurement of right-of-use asset 8,11,000

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Illustration 20 - Dismantling costs to be included in initial measurement of ROU Asset
Company H leases an aircraft for a period of 5 years. The aircraft must undergo a
planned check after every 1,00,000 flight hours. At the end of the lease, company
H must have a check performed (or refund the costs to the lessor), irrespective of
the actual number of flight hours. What are the lease payments for purposes of
calculating ROU asset?
Solution:
In the given case, the legal requirement to perform a check after every 1,00,000
flight hours does not directly lead to an obligation as it depends on future
circumstances. However, as the check must be carried out at the end of the lease
irrespective of the actual number of flight hours gives rise to an obligation.
As a result, company H has to recognize a provision for the costs of the final check
(“present value of the expected cost”) at the beginning of the lease term. At the
same time, these costs must be included in the cost of the right-of-use (ROU).

Illustration 21 - Lessee Accounting

Entity ABC (lessee) enters into a three-year lease of equipment. Entity ABC agrees
to make the following annual payments at the end of each year:
` 20,000 in year one
` 30,000 in year two
` 50,000 in year three.
For simplicity purposes, there are no other elements to the lease payments (like
purchase options, lease incentives from the lessor or initial direct costs). Assumed
a discount rate of 12% (which is Entity ABC’s incremental borrowing rate because
the interest rate implicit in the lease cannot be readily determined). Entity ABC
depreciates the ROU Asset on a straight- line basis over the lease term.
How would Entity ABC would account for the said lease under Ind AS 116?
Solution:
At the commencement date, Entity ABC would initially recognise ROU Asset and the
corresponding Lease Liability of ` 77,364 which is calculated as follows:
Payments Discounting Factor Discounted Cash flows /
Year
(Cash flows) @12% Present Value
1 20,000 0.8929 17,858
2 30,000 0.7972 23,916
3 50,000 0.7118 35,590
1,00,000 77,364

Then, the next step would be to prepare a schedule for Lease Liability and ROU
Asset as follows: Lease Liability
Year Opening balance Interest Expense Payments Closing balance
1 77,364 9,284 (20,000) 66,648
2 66,648 7,998 (30,000) 44,646
3 44,646 5,354* (50,000) -
* Difference of ` 4 is due to approximation.
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ROU Asset (assuming no lease incentives, no initial direct costs, etc.):
Year Opening balance Depreciation Closing balance
1 77,364 (25,788) 51,576
2 51,576 (25,788) 25,788
3 25,788 (25,788) -

At lease commencement, Entity ABC would recognise the Lease Liability and the
corresponding ROU Asset as follows:
ROU Asset Dr.77,364
To Lease Liability 77,364
To initially recognise the Lease Liability and the corresponding ROU Asset

The following journal entries would be recorded in the first year:

Interest Expense Dr. 9,284
To Lease Liability 9,284
To record interest expense and accrete the lease liability using the effective
interest method (` 77,364 x 12%)
Lease Liability Dr. 20,000
To Cash / Bank 20,000
To record lease payment

Following is the summary of the said lease contract’s accounting (assuming no

changes due to reassessment):
Particulars Initially Year 1 Year 2 Year 3
Cash lease payments 20,000 30,000 50,000

Lease Expense Recognised:

Interest Expense 9,284 7,998 5,354
Depreciation Expense 25,788 25,788 25,788
Total Periodic Expense 35,072 33,786 31,142

Balance Sheet:
ROU Asset 77,364 51,576 25,788 -
Lease Liability (77,364) (66,648) (44,646) -

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Illustration 22 - Subsequent measurement using cost model
Company EFG enters into a property lease with Entity H. The initial term of the
lease is 10 years with a 5- year renewal option. The economic life of the property is
40 years and the fair value of the leased property is ` 50 Lacs. Company EFG has an
option to purchase the property at the end of the lease term for ` 30 lacs. The first
annual payment is ` 5 lacs with an increase of 3% every year thereafter. The
implicit rate of interest is 9.04%. Entity H gives Company EFG an incentive of
` 2 lacs (payable at the beginning of year 2), which is to be used for normal tenant
improvement.
Company EFG is reasonably certain to exercise that purchase option. How would
EFG measure the right-of-use asset and lease liability over the lease term?
Solution:
As per Ind AS 116, Company EFG would first calculate the lease liability as the
present value of the annual lease payments, less the lease incentive paid in year 2,
plus the exercise price of the purchase option using the rate implicit in the lease of
approximately 9.04%.
PV of lease payments, less lease incentive (W.N. 1) ` 37,39,648
PV of purchase option at end of lease term (W.N. 2) ` 12,60,000
Total lease liability ` 49,99,648 or
` 50,00,000 (approx.)

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

Since the purchase option is reasonably certain to be exercised, EFG would amortize
the right- of- use asset over the economic life of the underlying asset (40 years).
Annual amortization expense would be ` 1,25,000 (` 50,00,000 / 40 years)
Interest expense on the lease liability would be calculated as shown in the following
table. This table includes all expected cash flows during the lease term, including the
lease incentive paid by Entity H and Company EFG’s purchase option.

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Principal paid at Lease
Interest Interest
Year Payment the beginning Liability (end
paid expense
of the year of the year
d = [(e of
c = (d of e = (e of pvs.
a b = a-c pvs. year-
pvs. Year) Year + d – a)
a) x 9.04%]
Commencement 50,00,000
Year 1 ` 5,00,000 - 4,06,800 49,06,800
Year 2 3,15,000* (91,800) 4,06,800 4,15,099 50,06,899
Year 3 5,30,450 1,15,351 4,15,099 4,04,671 48,81,120
Year 4 5,46,364 1,41,693 4,04,671 3,91,862 47,26,618
Year 5 5,62,754 1,70,892 3,91,862 3,76,413 45,40,277
Year 6 5,79,637 2,03,224 3,76,413 3,58,042 43,18,682
Year 7 5,97,026 2,38,984 3,58,042 3,36,438 40,58,094
Year 8 6,14,937 2,78,499 3,36,438 3,11,261 37,54,418
Year 9 6,33,385 3,22,124 3,11,261 2,82,141 34,03,174
Year 10 6,52,387 3,70,246 2,82,141 2,49,213* 30,00,000
Year 10 30,00,000 27,50,787 2,49,213* - -
Total 85,31,940 50,00,000 35,31,940 35,31,940
(5,00,000 + increased by 3% - lease incentive paid amounting to 2,00,000)
Although the lease was for 10 years, the asset had an economic life of 40 years.
When Company EFG exercises its purchase option at the end of the 10-year lease, it
would have fully extinguished its lease liability but continue depreciating the asset
over the remaining useful life.

Working Notes
1. Calculating PV of lease payments, less lease incentive:
Lease Payment Present value factor Present value of
Year
(A) @ 9.04% (B) lease payments (A*B=C)
Year 1 5,00,000 1 5,00,000
Year 2 3,15,000 0.92 2,89,800
Year 3 5,30,450 0.84 4,45,578
Year 4 5,46,364 0.77 4,20,700
Year 5 5,62,754 0.71 3,99,555
Year 6 5,79,637 0.65 3,76,764
Year 7 5,97,026 0.59 3,52,245
Year 8 6,14,937 0.55 3,38,215
Year 9 6,33,385 0.50 3,16,693
Year 10 6,52,387 0.46 3,00,098
Total 37,39,648

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2. Calculating PV of purchase option at end of lease term:
Present value of
Payment on Present value factor
Year purchase option
purchase option (A) @ 9.04% (B)
(A*B=C)
Year 10 30,00,000 0.42 12,60,000
Total 12,60,000
The discount rate for year 10 is different in the above calculations because in the
earlier one its beginning of year 10 and in the later one its end of the year 10.

Remeasurement
Accounting for Re-Measurement
Re-Measurement
Change in Lease Payments

I II
• Re Assessment of lease term • Change in index/rate
• Re Assessment of purchase option • Change in expected amount for
(use Revised Discount rate) residual value guarantee
(use Original Discount rate)

Accounting for Re-Measurement

Re-Measurement

Value of Lease liability Value of Lease liability

increases increases

ROU Asset A/c Dr. Lease Liability A/c Dr.

To Lease Liability A/c To ROU Asset A/c
(for value increased) To P & L A/c
(for decrease in value)

Note: to the extent to balance in

ROU Asset * balance figure

Calculation of increase/decrease in lease liability:

Particulars Amount
Revised Lease Liability xx
(–) Carrying value of lease Liability (xx)
Increase/(Decrease) in Lease Liability xx

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CA FINAL
Illustration 23- Remeasurement of a lease with variable lease payments
Entity W entered into a contract for lease of retail store with Entity J on January
01/01/2017. 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 ` 1,00,000 and
` 1,10,000 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 01/01/18 will be based on the CPI available at 31/12/17.
Entity W’s incremental borrowing rate at the lease inception date and as at
01/01/2020 is 5% and 6% respectively and the CPI at lease commencement date and
as at 01/01/2020 is 120 and 125 respectively.
At the lease commencement date, Entity W did not have a significant economic
incentive to exercise the renewal option. In the first quarter of 2020, Entity W
installed unique lease improvements into the retail 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 extend.
Is Entity W required to remeasure the lease in the first quarter of 2020?
Solution:
Since Entity W is now reasonably certain that it will exercise its renewal option, it
is required to remeasure the lease in the first quarter of 20X4.
The following table summarizes information pertinent to the lease remeasurement.
5 years; 2 years remaining
Remeasured lease term in the initial term plus 3
years in the renewal period
Entity W’s incremental borrowing rate On the 6%
remeasurement date
CPI available on the remeasurement date 125
Right-of-use asset immediately before the remeasurement ` 1,81,840 (Refer note 1)
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 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
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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
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 factor Present value of lease
beginning (A) @ 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 1,00,000 0.907 90,700
4 1,00,000 0.864 86,400
5 1,00,000 0.823 82,300
Lease liability as at commencement date 4,54,600

2. Calculation of Lease Liability and ROU asset at each year end

Lease Liability ROU asset
Deprec
Interest
Year Initial Lease Closing Initial iation Closing
expense
value payments balance Value for 5 balance
@ 5%
years
1 4,54,600 1,00,000 17,730 3,72,330 4,54,600 90,920 3,63,680
2 3,72,330 1,00,000 13,617 2,85,947 3,63,680 90,920 2,72,760
3 2,85,947 1,00,000 9,297 1,95,244 2,72,760 90,920 1,81,840
4 1,95,244 1,81,840

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Lease Modifications

Accounting for Lease Modification:


Change in scope of lease/consideration for lease, that was not a part of original terms &
conditions
eg: a lease extension leasing additional space in same building or a early termination

Modification

Separate lease Not a separate lease

CONDITIONS
Refer flow chart
Increases scope of lease Consideration for Increase
by adding ROU one or is in line With standalone
more assets price for the increase

Account as new separate lease

Modification not a separate lease (ALWAYS USE REVISED RATE)

Change in consideration, OR Decrease in lease term, OR

Increase in lease term, OR Decrease in scope

Lease liability A/c DR. Proportionate

P & L A/c DR. Decrease
To ROU Asset A/c based on fact
Increase in scope by adding To P & L A/c of question
ROU Asset but consideration AND
not in line with standalone Remeasure Lease Liability on
price date of modification by
making adjustment to ROU
Assts.
Accounting same as accounting
for Re-measurement

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The following diagram demonstrates Lessee’s analysis of a change in a lease:

LEASE MODIFICATION

Change in consideration Change in lease term Change in scope

Increase Decrease Decrease Increase

Remeasure the Derecognised the Consideration Consideration

lease liability at lease liability and not commensurat
modification date ROU Asset to reflect commensurate e to stand -
partial or full to stand - alone alone selling
Make termination of the selling price price
corresponding lease
adjustment to
ROU Asset Reconise in P&L the Remeasure the
lease liability a Increase in
gain or loss on
modification scope of the
termination of the
date lease of
lease
underlying
Make asset to be
corresponding accounted
adjustment to as a new lease
ROU Asset

Illustration 24:
Lessee enters into a 10-year lease for 5,000 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 7,
Lessee and Lessor agree to amend the original lease by extending the contractual
lease term by four years. The annual lease payments are unchanged (i.e.,
` 1,00,000 payable at the end of each year from Year 7 to Year 14). Lessee’s
incremental borrowing rate at the beginning of Year 7 is 7% p.a.
How should the said modification be accounted for?
Solution:
At the effective date of the modification (at the beginning of Year 7), Lessee
remeasures the lease liability based on:
(a) An eight-year remaining lease term

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(b) Annual payments of ` 1,00,000 and
(c) Lessee’s incremental borrowing rate of 7% p.a.
The modified lease liability equals ` 5,97,100 (W.N.1). The lease liability
immediately before the modification (including the recognition of the interest
expense until the end of Year 6) is ` 3,46,355 (W.N.3). Lessee recognises the
difference between the carrying amount of the modified lease liability and the
carrying amount of the lease liability immediately before the modification (i.e.,
` 2,50,745) (W.N. 4) as an adjustment to the ROU Asset.

Working Notes:
1. Calculation of modified lease liability:
Lease Payment Present value Present value of lease
Year
(A) factor @7% (B) payments (A*B=C)
7 100,000 0.935 93,500
8 100,000 0.873 87,300
9 100,000 0.816 81,600
10 100,000 0.763 76,300
11 100,000 0.713 71,300
12 100,000 0.666 66,600
13 100,000 0.623 62,300
14 100,000 0.582 58,200
Modified lease liability 5,97,100

2. Calculation of Lease liability as at commencement date:

Lease Payment Present value Present value of lease
Year
(A) factor @ 6% (B) payments (A  B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 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
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3. Calculation of Lease liability immediately before modification date:
Opening lease Interest @ 6% Lease payments Closing liability
Year
liability (A) (B) = [A x 6%] (C) (D) = [A+B-C]
1 7,35,900 44,154 100,000 6,80,054
2 6,80,054 40,803 100,000 6,20,857
3 6,20,857 37,251 100,000 5,58,108
4 5,58,108 33,486 100,000 4,91,594
5 4,91,594 29,496 100,000 4,21,090
6 4,21,090 25,265 100,000 3,46,355
Lease liability as at modification date 3,46,355

4. Adjustment to ROU asset:

Modified Lease liability 5,97,100
Original Lease liability as at modification date (3,46,355)
Adjustment to ROU asset 2,50,745
The ROU asset will be increased by ` 2,50,745 on the date of modification.

Illustration 25 - 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 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
2,500 square metres of the original space starting from the end of the first 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?
Solution:
In the given case, Lessee calculates the ROU asset and the lease liabilities before
modification as follows:
Lease Liability ROU asset
Interest
Initial Lease Closing Initial Depreciati Closing
Year expense
value payments balance Value on 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
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

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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.

Lease Payment Present value Present value of lease

Year
(A) Factor @5% (B) payments (A x B = C)
6 30,000 0.952 28,560
7 30,000 0.907 27,210
8 30,000 0.864 25,920
9 30,000 0.823 24,690
10 30,000 0.784 23,520
Total 1,29,900
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).
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.
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 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 change in the
consideration paid for the lease and the revised discount rate.

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Working Note:
Calculation of Initial value of ROU asset and lease liability:
Lease Present value factor Present value of lease
Year
Payment (A) @ 6% (B) payments (A x B = C)
1 50,000 0.943 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
8 50,000 0.627 31,350
9 50,000 0.592 29,600
10 50,000 0.558 27,900
3,67,950

Illustration 26 - Modification that is a change in consideration only

Lessee enters into a 10-year lease for 5,000 square metres of office space. At the
beginning of Year 6, Lessee and Lessor agree to amend the original lease for the
remaining five years to reduce the lease payments from ` 1,00,000 per year to
` 95,000 per 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. Lessee’s incremental borrowing rate at the beginning of Year 6 is 7% p.a. The
annual lease payments are payable at the end of each year.
How should the said modification be accounted for?
Solution:
In the given case, Lessee calculates the ROU asset and the lease liabilities before
modification as follows:
Opening
Interest @ 6% Lease payments Closing liability
Year lease liability
(B) = [A x 6%] (C) (D) = [A+B-C]
(A)
1 7,35,900 44,154 100,000 6,80,054
2 6,80,054 40,803 100,000 6,20,857
3 6,20,857 37,251 100,000 5,58,108
4 5,58,108 33,486 100,000 4,91,594
5 4,91,594 29,496 100,000 4,21,090
6 4,21,090

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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 ` 95,000, and
(c) Lessee’s incremental borrowing rate of 7% p.a.

Lease Payments Present Present value of lease

Year
(A) value @ 7% (B) payments (A x B = C)
1 95,000 0.935 88,825
2 95,000 0.873 82,935
3 95,000 0.816 77,520
4 95,000 0.763 72,485
5 95,000 0.713 67,735
3,89,500
Lessee recognises the difference between the carrying amount of the
modified liability (` 3,89,500) and the lease liability immediately before the
modification (` 4,21,090) of ` 31,590 as an adjustment to the ROU Asset.

Working Note:
Calculation of Initial value of ROU asset and lease liability
Lease Payments Present Present value of lease
Year
(A) value @ 6% (B) payments (A x B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 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

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Presentation:

ROU Assets and lease liabilities are subject to the same considerations as other assets
and liabilities in classifying them as current and non-current in the balance sheet. The
following table depicts how lease-related amounts and activities are presented in
lessees’ financial statements:
Balance Sheet Statement of profit or loss Statement of cash flows
ROU Assets: Depreciation and Interest: Principal portion of the
They are presented either: Depreciation on Right of use lease liability:
• Separately from other asset and interest expense • These cash payments are
assets (e.g., owned assets) accreted on lease liabilities presented within
OR are presented separately financing activities
• Together with other assets (i.e., they CANNOT be Interest portion of the
combined). lease liability:
as if they were owned,
with disclosures of the • These cash payments are
balance sheet line items This is because interest presented within
that include ROU Assets expense on the lease liability financing activities
and their amounts is a component of finance Short-term leases and
ROU Assets that meet the costs, which paragraph 82(b) leases of low-value assets:
definition of investment of Ind AS 1 Presentation of • Lease payments
property are presented as Financial Statements requires pertaining to them (i.e.,
investment property. to be presented separately in
not recognised on the
the statement of profit or loss.
balance sheet as per Ind
AS 116) are presented
within operating activities
Lease Liabilities: Variable lease payments
They are presented either: notincluded in the lease
liability:
• Separately from other • These are also
liabilities OR presented within
• Together with other operating activities
liabilities with disclosure of Non-cash activity:
the balance sheet line Such activity is disclosed as
items that includes lease a supplemental non-cash
liabilities and their item (e.g., the initial
amounts recognition of the lease at
commencement)

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Disclosure
Disclosure objective:
The objective of the disclosures is for lessees to disclose information in the notes that,
together with the information provided in the balance sheet, statement of profit and
loss and statement of cash flows, gives a basis for users of financial statements to assess
the effect that leases have on the financial position, financial performance and cash
flows of the lessee. Ind AS 116 requires lessees to present all disclosures in:
• a single note OR
• separate section in the financial statements
Quantitative Disclosure Requirement
Balance sheet Statement of Profit and Loss Statement of Cash Flows
• Additions to right-of- use • Depreciation for assets by • Total cash outflow for
assets. class. leases.
• Carrying value of right- • Interest expense on lease
of- use assets at the end liabilities.
of the reporting period • Short-term leases expensed*
by class. • Low-value leases expensed*
• Maturity analysis of • Variable lease payments
lease liabilities expensed.
separately from other
• Income from subleasing.
liabilities based on Ind
• Gains or losses arising from sale
AS107 requirements.
and lease back transactions.

LESSOR ACCOUNTING

A ‘lessor’ is defined as an entity that provides the right to use an underlying asset for a
period of time in exchange for consideration.
At inception, lessors classify all leases as FINANCE LEASE or OPERATING LEASE. Lease
classification is very important because it determines how and when a lessor recognises
lease income and what assets are recorded. Classification is based on the extent to
which the risks and rewards incidental to ownership of the underlying asset lie with the
lessor or the lessee. It depends on the substance of the transaction rather than the form
of the contract.
Where, a ‘Finance Lease’ is defined as a lease that transfers substantially all the risks
and rewards incidental to ownership of an underlying asset.
Where, an ‘Operating Lease’ is defined as a lease that does not transfer substantially all
the risks and rewards incidental to ownership of an underlying asset.
Ind AS 116 lists a number of examples that individually, or in combination, would
normally lead to a lease being classified as a FINANCE LEASE:

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 The lease transfers ownership of the asset to the lessee by the

end of the lease term
Ownership

 The lessee has the option to purchase the asset at a price that
is expected to be sufficiently lower than the fair value at the
date option becomes exercisable for yet to be reasonably
Purchase
certain, ate inception date, that the option will be exercised
option

 The lease term is for the major part of the economic life of
the asset even if title is not transferred
Lease
term

 At the inception date, the present value of the of the lease

payments amounts to at least substantially all of the fair value
PV of
Minimum of the asset*
Lease
Payments

 The asset is of such a specialised nature that only the lessee

can use it without major modifications
Specialised
Nature

*The term “substantially all” is not defined in Ind AS 116.

Additionally, Ind AS 116 lists the following indicators of situations that, individually or in
combination, could also lead to a lease being classified as a FINANCE LEASE:

Loss on • If the lessee can cancel the lease, the lessor’ associated
cancellation with the cancellation are borne by the lessee

Risk of fair • Gain or losses from the fluctuation in the fair value of
value of the residual accrue to the lessee (e.g., in the form of a rent
rebate that is equal to most of the sale proceeds at the
residual asset
end of the lease)1

• The lessee has the ability to continue the lease for a

Option to
secondary period at a rent that is substantially lower the
extend lease
market rent

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Lessor Accounting

Basic Accounting Basic Accounting

No separate guidance for remeasurement

Basic Accounting: Classification of lease on inception date

Finance Lease Finance Lease

Transfer of substantially Other than finance Lease

all risk And rewards
incidental to ownership
To identify finance lease

Refer 5 indicators on page 350

(Same as IND AS 17/AS 19)

Classification Test for land & Buildings

APPLY TEST SEPERATELY

Land Building
Indefinite life

Allocates Lease Payment between

Land & Building

(in proportion of relative fair value)

For a lease of land and buildings in which the amount for the land element is immaterial
to the lease, the lessor may treat the land and buildings as a single unit for the purpose
of lease classification and classify it as a finance lease or an operating lease. In such a
case, the lessor regards the economic life of the buildings as the economic life of the
entire underlying asset.

Accounting by Lessor for operating Lease.

Recognised Lease Payments as income on straight line basis or another systematic basis
(if any)
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Accounting by Lessor for Finance Lease:
(A) Important terms:
(1) Gross investment in Lease = Lease Payments (+) unguaranteed Residual Value
(2) Net Investment in Lease = PV of Gross Investment in Lease, discounted at
implicit interest rate
(3) Residual Value = Guaranteed Residual value (+) Unguaranteed Residual value

(B) Accounting for Finance Lease on Commencement Date

Lessor (other than mfg/dealer) Lessor (mfg/dealer) Illustration.38

Net Investment in lease A/c DR. a) Net Investment in lease A/c DR.
(Finance Lease Receivables) To Revenue / Sales A/c
To Asset A/c To Cost of Goods Sold A/c
(at carrying value) (PV of unguaranteed residual value)
Any difference, transfer to P & L
b) Cost of goods sold A/c DR.
To Inventory A/c
For carrying value of inventory

Net Investment in Lease A/c will be accounted subsequently same as Financial Asset at
Amortised cost.

Accounting for initial direct costs shall be done in the following manner
By Lessor
Finance Lease:
Ind AS 116 requires ‘lessors’ (other than manufacturer or dealer lessors) to include initial
direct costs in the initial measurement of their net investments in finance leases and
reduce the amount of income recognised over the lease term.
The interest rate implicit in the lease is defined in such a way that the initial direct
costs are included automatically in the net investment in the lease and they are not
added separately. (Initial direct costs related to finance leases incurred by manufacturer
or dealer lessors are expensed at lease commencement).

Operating Lease:
Ind AS 116 requires lessors to include initial direct costs in the carrying amount of the
underlying asset in an operating lease. These initial direct costs are recognised as an
expense over the lease term on the same basis as lease income.

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Remeasurement of the net investment in the lease:
After lease commencement, the net investment in a lease is NOT REMEASURED UNLESS
in either of the following situations:
• The lease is modified (i.e., a change in the scope of the lease, or the consideration
for the lease, that was not part of the original terms and conditions of the lease)
and the modified lease is not accounted for as a separate contract
OR
• The lease term is revised when there is a change in the non-cancellable period of
the lease.

Illustration 27 - -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:
• Lessor receives annual lease payments of ` 15,000, payable at the end of the year
• 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 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 ` 1,00,000 and a fair value of ` 1,11,000
• 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
• The interest rate implicit in the lease is 10.078%.
How should the Lessor account for the same in its books of accounts?

Solution:
Lessor shall classify the lease as a FINANCE LEASE because the sum of the present
value of lease payments amounts to substantially all of the fair value of the
underlying asset.
At lease commencement, Lessor accounts for the finance lease, as follows:
Net investment in the lease ` 1,11,000(a)
Cost of goods sold ` 92,340(b)
Revenue ` 1,03,340(c)
Property held for lease ` 1,00,000(d)
To record the net investment in the finance lease and derecognise the underlying
asset.
(a) The net investment in the lease consists of:

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(1) thepresent 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 ` 1,03,340 (i.e., the lease payment) (Refer
note 1) AND
(2) 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]
Year 1Journal 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 of interest 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:

The following table summarises the interest income from this lease and the
related amortisation of the net investment over the lease term:
Annual Rental Annual Rental Net investment at
Year
Payment Payment the end of the year
Initial net investment - - 1,11,000
1 15,000 11,187 1,07,187
2 15,000 10,802 1,02,989
3 15,000 10,379 98,368
4 15,000 9,914 93,282
5 15,000 9,401 87,683
6 15,000 8,837 81,520
7 15,000 8,216 74,736

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8 15,000 7,532 67,268
9 15,000 6,779 59,047
10 15,000 5,953 50,000(i)
(h) 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 10.078%.
(i) The estimated residual value of the equipment at the end of the lease term.

Working Notes:
1. Calculation of net investment in lease:
Present value factor Present value of lease
Year Lease Payment (A)
@ 10.078% (B) payments (A x B = C)
1 15,000 0.908 13,620
2 15,000 0.825 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
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

Lease Payment Present value factor Present value of lease
Year
(A) @ 10.078% (B) payments (A x B = C)
10 20,000 0.383 7,660

Lease Modifications
A ‘lease modification’ is a change in the scope of a lease, or the consideration for a
lease, that was not part of the original terms and conditions of the lease (for e.g.,
adding or terminating the right to use one or more underlying assets, or extending or
shortening the contractual lease term).

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Modification of Lease
(From Lessor point of view)

Existing Existing Operating

Finance lease Lease

Change in Treat it as new lease

A separate
lease existing lease on date modification

Same conditions Could be

as discussed Lease will be It is still Operating OR Finance
in modification Classified as finance lease
from lessee operating had
point of view modification Net investment
been effect at in lease is
inception date accounted as
per IND AS 109.
Asset A/c DR.
To Finance Lease Receivable A/c
(Net Investment In Lease)
[at CARRTING VALUE of NET INVST. IN LEASE]

Operating Lease Modification:

A lessor shall account for a modification to an operating lease as a new lease from
the effective date of the modification, considering any prepaid or accrued lease
payments relating to the original lease as part of the lease payments for the new
lease.

Illustration 28
Lessor M enters into a 10-year lease of office space with Lessee K, which commences
on 1 April 2015. The rental payments are 15,000 per month, payable in arrears. M
classifies the lease as an operating lease. M reimburses K’s relocation costs of K of
600,000, which M accounts for as a lease incentive. The lease incentive is recognised
as a reduction in rental income over the lease term using the same basis as for the
lease income – in this case, on a straight- line basis over 10 years.
On 1 April 2020, during the COVID-19 pandemic, M agrees to waive K’s rental
payments for May, June and July 2020.

This decrease in consideration is not included in the original terms and conditions
of the lease and is therefore a lease modification.
How this will be accounted for by lessor?
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Solution:
M accounts for this modification as a new operating lease from its effective date –
i.e. 1 April 2020. M recognises the impact of the waiver on a straight-line basis over
the five-year term of the new lease. M also takes into account the carrying amount
of the unamortised lease incentive on 1 April 2020 of ` 3,00,000. M amortises this
balance on a straight-line basis over the five-year term of the new lease.

Illustration 29
Lessor L enters into an eight-year lease of 40 lorries with Lessee M that commences
on 1 January 2018. The lease term approximates the lorries’ economic life and no
other features indicate that the lease transfer or does not transfer substantially all
of the risks and rewards incidental to ownership of the lorries. Assuming that
substantially all of the risks and rewards incidental to ownership of the lorries are
transferred, L classifies the lease as a finance lease. During the COVID-19
pandemic, M’s business has contracted. In June 2020, L and M amend the contract
so that it now terminates on 31 December 2020.

Early termination was not part of the original terms and conditions of the lease and
this is therefore a lease modification. The modification does not grant M an
additional right to use the underlying assets and therefore cannot be accounted for
as a separate lease.
How this will be accounted for by lessor?

Solution:
L determines that, had the modified terms been effective at the inception date,
the lease term would not have been for the major part of the lorries’ economic
life. Furthermore, there are no other indicators that the lease would have
transferred substantially all of the risks and rewards incidental to ownership of the
lorries. Therefore, the lease would have been classified as an operating lease.

In June 2020, L accounts for the modified lease as a new operating lease. The
lessor L:
(a) derecognises the finance lease receivable and recognises the underlying assets
in its statement of financial position according to the nature of the underlying
asset – i.e. as property, plant and equipment in this case; and
measures the aggregate carrying amount of the underlying assets as the amount of
the net investment in the lease immediately before the effective date of the lease
modification.

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Presentation
Lessors have the following presentation requirements under Ind AS 116, depending
on the classification of the leases:
Finance Leases Operating Leases
Lessors recognise assets held under a Lessors are required to present
finance lease in the balance sheet and underlying assets subject to operating
present the masa receivable at an leases according to the nature of that
amount equal to the net investment in asset in the balance sheet under Ind AS
the lease under Ind AS116. 116.

In addition, the net investment in the

lease is subject to the same
considerations as other assets in
classification as current or non- current
as sets in a classified balancesheet.

Disclosure
The objective of the disclosure requirements for lessors to disclose information in
the notes that together with the information provided in the balance sheet,
statement of profit or loss and statement of cash flows, gives a basis for users of
financial statements to assess the effect that leases have on the financial position,
financial performance and cash flows of the lessor.
The lessor disclosure requirements in Ind AS 116 are more extensive to enable users
of financial statements to better evaluate the amount, timing and uncertainty of
cash flows arising from a lessor’s leasing activities.

Following are the disclosure requirements under Ind AS 116 for lessors:
Quantitative Disclosure Requirements
Finance leases • Selling profit or loss;
• Finance income on the net investment;
• Income from variable lease payments;
• Qualitative and quantitative explanation of changes in the
net investment; and
• Maturity analysis of lease payments receivable.
Operating leases • Lease income, separately disclosing variable lease payments;
• Disclosure requirements of Ind AS 16 for leased assets,
separating leased assets from non-leased assets;
• Other applicable disclosure requirements based on the
nature of the underlying asset (eg. Ind AS 36, Ind AS 38, Ind
AS 40and Ind AS 41); and
• Maturity analysis of lease payments.
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Sub-Leases

Lessor Original Lessee/ Head Lease

Original Lessee/ Intermediate lessor

Sub - Lease Sub - Lease

Accounting for sub-Lease for original Lessee/

Intermediate lessor

Either Finance Lease OR Operating Lease

Net Investment in sub – lease A/cDR. Treat lease rentals as income

To ROU Asset A/c on sub - lease
(any difference transferred to P & L) Check for impairment testing
for ROU Assets

Illustration 30: Classification of a sublease in case of an Intermediate Lessor

Entity ABC (original lessee/intermediate lessor) leases a building for five years. The
building has an economic life of 40 years. Entity ABC subleases the building for four
years.
How should the said sublease be classified by Entity ABC?
Solution:
The sublease is classified with reference to the ‘ROU Asset’ in the head lease (and
NOT the ‘underlying building’ of the head lease). Hence, when assessing the useful
life criterion, the sublease term of four years is compared with five-year ROU Asset
in the head lease (NOT compared with 40-year economic life of the building) and
accordingly may result in the sublease being classified as a finance lease.

The intermediate lessor accounts for the sublease as follows:

If the sublease is classified as a If the sublease is classified as an
‘Finance Lease’ ‘Operating Lease’
The original lessee derecognises the The original lessee continues to account
ROU Asset on the head lease at the for the lease liability and ROU asset on
sublease commencement date and the head lease like any other lease.
continues to account for the original If the total remaining carrying amount
lease liability in accordance with the of the ROU asset on the head lease
lessee accounting model. exceeds the anticipated sublease
The original lessee (as the intermediate income, this may indicate that the ROU
asset associated with
lessor) recognises a net investment in the head lease is impaired (which is
the sublease and evaluates it for assessed for impairment under Ind AS
impairment. 36).
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In a sublease, an intermediate lessor may use the discount rate for the head lease
(adjusted for initial direct costs, if any, associated with the sublease) to measure
the net investment in the sublease, if the interest rate implicit in the lease cannot
be readily determined.

Illustration 31: Intermediate Lessor – Where the sublease is classified as a

‘Finance Lease’
Head lease:
An intermediate lessor enters into a five-year lease for 10,000 square metres of
office space (the head lease) with Entity XYZ (the head lessor).
Sublease:
At the beginning of Year 3, the intermediate lessor subleases the 10,000 square
metres of office space for the remaining lease term i.e. three years of the head
lease to a sub-lessee. How should the said sublease be classified and accounted for
by the Intermediate Lessor?
Solution:
The intermediate lessor classifies the sublease by reference to the ROU Asset arising
from the head lease (i.e., in this case, comparing the three-year sublease with the
five-year ROU Asset in the head lease). The intermediate lessor classifies the
sublease as a finance lease, having considered the requirements of Ind AS 116 (i.e.,
one of the criteria of ‘useful life’ for a lease to be classified as a finance lease).
When the intermediate lessor enters into a sublease, the intermediate lessor:
(i) derecognises the ROU asset relating to the head lease that it transfers to the
sublessee and recognises the net investment in the sublease;
(ii) recognises any difference between the ROU asset and the net investment in
the sublease in profit or loss; AND
(iii) retains the lease liability relating to the head lease in its balance sheet,
which represents the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognises both
• finance income on the sublease AND
• interest expense on the head lease.

Illustration 32: Intermediate Lessor – Where the sublease is classified as a

‘Operating Lease’
Head lease:
An intermediate lessor enters into a five-year lease for 10,000 square metres of
office space (the head lease) with Entity XYZ (the head lessor).
Sublease:
At the commencement of the head lease, the intermediate lessor subleases the
10,000 square metres of office space for two years to a sub-lessee.
How should the said sublease be classified and accounted for by the Intermediate
Lessor?
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Solution:
The intermediate lessor classifies the sublease by reference to the ROU Asset
arising from the head lease (i.e., in this case, comparing the two-year sublease
with the five-year ROU Asset in the head lease). The intermediate lessor classifies
the sublease as an operating lease, having considered the requirements of Ind AS
116 (i.e., one of the criteria of ‘useful life’ for a lease to be classified as a finance
lease and since, it is not satisfied, classified the same as an operating lease).

When the intermediate lessor enters into the sublease, the intermediate lessor
retains:
• the lease liability AND
• the ROU asset both relating to the head lease in its balance sheet.
During the term of the sublease, the intermediate lessor:
(a) recognises a depreciation charge for the ROU asset and interest on the lease
liability; AND
(b) recognises lease income from the sublease.

Sub-lessee Accounting:
A sub-lessee accounts for its lease in the same manner as any other lease (i.e., as a new
lease subject to Ind AS 116’s recognition and measurement provisions).

Sale and Leaseback Transactions

A sale and leaseback transaction involves the transfer of an asset by an entity (the
seller- lessee) to another entity (the buyer-lessor) and the leaseback of the same asset
by the seller- lessee.
Sale and leaseback transactions would no longer provide lessees with a source of off-
balance sheet financing because under Ind AS 116, lessees are required to recognise
most leases on the balance sheet (i.e., all leases except for leases of low-value assets
and short-term leases depending on the lessee’s accounting policy election).
Further, both the seller-lessee and the buyer-lessor are required to apply Ind AS 115 to
determine whether to account for a sale and leaseback transaction as a sale and
purchase of an asset.
How to determine whether the transfer of an asset is a sale:
As discussed above, when determining whether the transfer of an asset should be
accounted for as a sale or purchase, both the seller-lessee and the buyer-lessor shall
apply the requirements of Ind AS 115 on when an entity satisfies a performance
obligation by transferring ‘control’ of an asset. Thus, there are following two
possibilities in this scenario:
If Control is passed If Control is NOT passed
If the control of an underlying asset is If the control of an underlying asset is NOT
passed to the buyer-lessor, the transaction passed to the buyer-lessor, both the seller-
is accounted for as a ‘sale or purchase’ lessee and the buyer-lessor account for the
of the asset and a ‘lease’. transaction as a ‘financing transaction’.

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However, if the seller-lessee has a ‘substantive repurchase option’ for the underlying
asset (i.e., a right to repurchase the asset), ‘NO sale’ has occurred because the buyer-
lessor has NOT obtained control of the asset.

Transactions in which the transfer of an asset is a ‘SALE’:

If the transfer of an asset by the seller-lessee satisfies the requirements of Ind AS 115 to
be accounted for as a ‘sale’ of the asset:
Seller-lessee Buyer-lessor
The seller-lessee shall measure the ROU asset The buyer-lessor shall account for the
arising from the leaseback at the proportion purchase of the asset, applying applicable
of the previous carrying amount of the asset Ind Ass and for the lease, applying the
that relates to the right of use retained by the lessor accounting requirements under Ind
seller-lessee. Accordingly, the seller-lessee AS 116. Thus, a buyer-lessor accounts for
shall recognise only the amount of any gain the purchase of the asset in accordance
or loss that relates to the rights transferred with other Ind ASs based on the nature of
to the buyer-lessor. the asset (for e.g., Ind AS 16 for property,
Thus, the seller-lessee will: plant and equipment).
• Derecognise the underlying asset
• Recognise the gain or loss, if any, that
relates to the rights transferred to the
buyer-lessor (adjusted for off- market
terms)
When a sale occurs, both the seller-lessee and the buyer-lessor account for the
leaseback in the same manner as any other lease (with adjustments for any off-
market terms). Specifically, a seller-lessee recognises a lease liability and ROU asset
for the leaseback (subject to the optional exemptions for short-term leases and leases
of low-value assets).

When sale price or Present Value is

When sale price or Present Value is LESS
GREATER
Using the more readily determinable basis: Using the more readily determinable basis:
When the sale price is LESS than the When the sale price is GREATER than the
underlying asset’s fair value OR underlying asset’s fair value OR
The presentvalue of the lease payments is the present value of the lease payments is
LESS than the present value of the market GREATER than the present value of the
lease payments, market lease payments,

a seller-lessee recognises the difference as a seller-lessee recognises the difference as

an increase to the sales price and the a reduction in the sales price and an
‘additional
initial measurement of the ROU asset as a financing received’ from the buyer-lessor.
‘lease prepayment’.
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Buyer-lessors are also required to adjust the purchase price of the underlying asset for
any off-market terms. Such adjustments are recognised as:
• ‘lease prepayments’ made by the seller-lessee OR
• ‘additional financing provided’ to the seller-lessee

Sold Asset

Seller – Lessee A LTD. B LTD. Buyer - Lessor

Took same asset on lease

FOR SALE: CONTROL IS TO BE PASSED

(Applying requirement of IND AS 115 & professional Judgement)

IDENTIFY
Control not Passed (financial transaction) Control Passed
Loan

For seller – Lessee For Buyer – Lessor

Sale price is Loan Taken Sale price is Loan Given
(Financial Liability) (Financial Assets)

Lease Payments are Receipt of loan given &

Repayments of loan taken interest income
& interest expenses

For seller – Lessee For Buyer – Lessor

Bank A/c DR. Asset A/c DR.

ROU Assets A/c DR. To Bank A/c
(Consideration paid)

P & L A/c DR.

To lease Liability A/c (PV of lease
payments)
To Asset A/c (Carrying value)
To P & L A/c

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Note:
1. For Lease, buyer – Lessor will account based on classification as operating lease or
finance lease.
2. It is assumed: Sale Price = Fair Value of Asset
3. If sale price ≠ Fair value of Asset, Some adjustment to be made to the above
entries.

Illustration 33: Sale and leaseback transaction

An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of
` 30,00,000. 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. 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.
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.
How should the said transaction be accounted by the Seller-lessee and the Buyer-
lessor?

Solution:
Considering facts of the case, Seller-lessee and buyer-lessor account for the
transaction as a sale and leaseback.
Firstly, since the consideration for the sale of the building is not at fair value,
Seller-lessee and Buyer - lessor make adjustments to measure the sale proceeds at
fair value. Thus, the amount of the excess sale price of ` 3,00,000 (as calculated
below) is recognised as additional financing provided by Buyer-lessor to Seller-
lessee.
Sale Price: 30,00,000
Less: Fair Value (at the date of sale): (27,00,000)
Additional financing provided by Buyer-lessor to Seller-lessee 3,00,000
Next step would be to calculate the present value of the annual payments which
amounts to `14,94,000 (calculated considering 20 payments of ` 2,00,000 each,
discounted at 12% p.a.) of which ` 3,00,000 relates to the additional financing (as
calculated above) and balance ` 11,94,000 relates to the lease — corresponding to 20
annual payments of ` 40,164 and ` 1,59,836, respectively (refer calculations below).

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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) 15,00,000
Fair Value (at the date of sale) (B) 27,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
ROU Asset [(A / B) x C] 6,63,333

Seller-lessee recognises only the amount of the gain that relates to the rights
transferred to Buyer- lessor, calculated as follows:
Fair Value (at the date of sale) (A) 27,00,000
Carrying Amount(B) 15,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
Gain on sale of building (D) = (A - B) 12,00,000
Relating to the right to use the building retained by Seller-lessee 5,30,667
(E) = [(D / A) x C]
Relating to the rights transferred to Buyer-lessor (D - E) 6,69,333

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

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

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Buyer-Lessor:
At the commencement date, Buyer-lessor accounts for the transaction, as follows:
Building Dr. 27,00,000
Financial Asset (20 payments of ` 40,160 3,00,000
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.

MAJOR CHANGES UNDER IND AS 116 FROM IFRS 16

Sr.
Particulars IFRS 16 Ind AS 116
No.
1 Subsequent measurement Paragraph 34 of IFRS 16 Paragraph34 has been deleted
of investment property provides that if lessee under Ind AS 116 since Ind AS
applies fair value model in 40 Investment Property does
IAS 40 to its investment NOT allow the use of fair
property, it shall apply that value model. Consequently,
fair value model to the reference of the same
ROU assets that meet the appearing anywhere under
definition of investment Ind AS 116 has also been
property. deleted.
2 Interest portion of lease Paragraph 50(b) of IFRS 16 Ind AS 7 requires interest paid
liability–classification in requires to classify cash to be treated as financing
cash flow statement payments for interest Activity only. Accordingly,
portion of lease liability Paragraph 50(b) has been
applying requirements of modified under Ind AS 116 to
IAS 7 Statement of Cash specify that cash payments
Flows. IAS7 Provides option for interest portion of lease
of treating interest paid as liability will be classified as
operating or financing financing activities applying
activity. Ind AS 7.

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PROBLMES AND SOLUTIONS

Question 1
A lessee enters into a ten-year contract with a lessor (freight carrier) to transport a
specified quantity of goods. Lessor uses rail wagons of a particular specification,
and has a large pool of similar rail wagons that can be used to fulfil the
requirements of the contract. The rail wagons and engines are stored at lessor’s
premises when they are not being used to transport goods. Costs associated with
substituting the rail wagons are minimal for lessor.

Whether the lessor has substantive substitutions rights and whether the arrangement
contains a lease?
Solution:
In this case, the rail wagons are stored at lessor’s premises and it has a large pool
of similar rail wagons and substitution costs to be incurred are minimal. Thus, the
lessor has the practical ability to substitute the asset. If at any point, the same
become economically beneficial for the lessor to substitute the wagons, he can do
so and hence, the lessor’s substitution rights are substantive and the arrangement
does not contain a lease.

Question 2
Customer M enters into a 20-year contract with Energy Supplier S to install, operate
and maintain a solar plant for M’s energy supply. M designed the solar plant before it
was constructed – M hired experts in solar energy to assist in determining the
location of the plant and the engineering of the equipment to be used. M has the
exclusive right to receive and the obligation to take any energy produced. Whether it
can be established that M is having the right to control the use of identified asset?
Solution:
In this case, the nature of the solar plant is such that all of the decisions about how
and for what purpose the asset is used are predetermined because:
• the type of output (i.e. energy) and the production location are predetermined
in the agreement; and
• when, whether and how much energy is produced is influenced by the sunlight
and the design of the solar plant.
Because M designed the solar plant and thereby predetermined any decisions about
how and for what purpose it is used, M is considered to have the right to direct the
use. Although regular maintenance of the solar plant may increase the efficiency of
the solar panels, it does not give the supplier the right to direct how and for what
purpose the solar plant is used. Hence, M is having a right to control the use of
asset.

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Question 3
A Customer enters into a ten-year contract with a Company (a ship owner) for the
use of an identified ship. Customer decides whether and what cargo will be
transported, and when and to which ports the ship will sail throughout the period
of use, subject to restrictions specified in the contract. These restrictions prevent
the company from sailing the ship into waters at a high risk of piracy or carrying
explosive materials. The company operates and maintains the ship, and is
responsible for safe passage.

Does the customer has the right to direct how and for what purpose the ship is to
be used throughout the period of use and whether the arrangement contains a
lease?
Solution:
The customer has the right to direct the use of the ship because the contractual
restrictions are merely protective rights that protect the company’s investment in
the ship and its personnel. In the scope of its right of use, the customer determines
how and for what purpose the ship is used throughout the ten-year period because
it decides whether, where and when the ship sails, as well as the cargo that it will
transport.

The customer has the right to change these decisions throughout the period of use
and hence, the contract contains a lease.

Question 4
A Lessee enters into a ten-year lease contract with a Lessor to use an equipment.
The contract includes maintenance services (as provided by lessor). The Lessor
obtains its own insurance for the equipment. Annual payments are ` 10,000
(` 1,000 relate to maintenance services and ` 500 to insurance costs).

The Lessee is able to determine that similar maintenance services and insurance
costs are offered by third parties for ` 2,000 and ` 500 a year, respectively. The
Lessee is unable to find an observable stand-alone rental amount for a similar
equipment because none is leased without related maintenance services provided
by the lessor.
How would the Lessee allocate the consideration to the lease component?
Solution:
The observable stand-alone price for maintenance services is ` 2,000. There is no
observable stand-alone price for the lease. Further, the insurance cost does not
transfer a good or service to the lessee and therefore, it is not a separate lease
component.
Thus, the Lessee allocates ` 8,000 (` 10,000 – ` 2,000) to the lease component.

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Question 5
A Lessee enters into a non-cancellable lease contract with a Lessor to lease a
building. Initially, the lease is for five years, and the lessee has the option to
extend the lease by another five years at the same rental.
To determine the lease term, the lessee considers the following factors:
• Market rentals for a comparable building in the same area are expected to
increase by 10% over the ten-year period covered by the lease. At inception of
the lease, lease rentals are in accordance with current market rents.
• The lessee intends to stay in business in the same area for at least 20 years.
• The location of the building is ideal for relationships with suppliers and
customers. What should be the lease term for lease accounting under Ind AS
116?
Solution:
After considering all the stated factors, the lessee concludes that it has a
significant economic incentive to extend the lease.

Thus, for the purpose of lease accounting under Ind AS 116, the lessee uses a lease
term of ten years.

Question 6
A Company leases a manufacturing facility. The lease payments depend on the
number of operating hours of the manufacturing facility, i.e., the lessee has to pay
` 2,000 per hour of use. The annual minimum payment is ` 2,00,00,000. The
expected usage per year is 20,000 hours.
Whether the said payments be included in the calculation of lease liability under
Ind AS 116?

Solution:
The said lease contains in-substance fixed payments of ` 2,00,00,000 per year,
which are included in the initial measurement of the lease liability under Ind AS
116.
However, the additional ` 2,00,00,000 that the company expects to pay per year
are variable payments that do not depend on an index or rate and, thus, are not
included in the initial measurement of the lease liability but, are expensed when
the over-use occurs.

Question 7
A Lessee enters into a lease of a five-year-old machine. The non-cancellable lease
term is 15 years. The lessee has the option to extend the lease after the initial 15-
year period for optional periods of 12 months each at market rents.
To determine the lease term, the lessee considers the following factors:
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• The machine is to be used in manufacturing parts for a type of plane that the
lessee expects will remain popular with customers until development and
testing of an improved model are completed in approximately 15 years.
• The cost to install the machine in lessee’s manufacturing facility is
significant.
• The non-cancellable term of lessee’s manufacturing facility lease ends in 19
years, and the lessee has an option to renew that lease for another twelve
years.
• Lessee does not expect to be able to use the machine in its manufacturing
process for other types of planes without significant modifications.
• The total remaining life of the machine is 30 years.
What should be the lease term for lease accounting under Ind AS 116?

Solution:
The lessee notes that the terms for the optional renewal provide no economic
incentive and the cost to install is significant. The lessee has no incentive to make
significant modifications to the machine after the initial 15-year period. Therefore,
the lessee does not expect to have a business purpose for using the machine after
the non-cancellable lease term of 15 years. Thus, the lessee concludes that the
lease term consists of the 15-year non-cancellable period only.

Question 8
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
annual lease rent of ` 70,000 is payable at year end. 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 annual 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 year and stand-alone price of the ‘facilities agreement’ is ` 80,000 per year.
Entity X has not elected to apply the practical expedient in paragraph 15 of Ind AS
116 of not to separate non-lease component(s) from lease 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?

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Solution:
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 provided 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:
Stand-alone % of total Standalone Allocation of
Particulars
Prices Price Consideration
` `
Building rent 1,20,000 60% 1,02,000
Service charge 80,000 40% 68,000
Total 2,00,000 100% 1,70,000
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:
Lease Present value of
Present value
Year Payment lease payments
factor @ 10% (B)
(A) (A x B = C)
Year 1 1,02,000 0.909 92,718
Year 2 1,02,000 0.826 84,252
Year 3 1,02,000 0.751 76,602
Year 4 1,02,000 0.683 69,666
Year 5 1,02,000 0.621 63,342
Year 6 1,02,000 0.564 57,528
Year 7 1,02,000 0.513 52,326
Year 8 1,02,000 0.467 47,634
Year 9 1,02,000 0.424 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.

Question 9
Entity X is an Indian entity whose functional currency is Indian Rupee. It has taken
a plant on lease from Entity Y for 5 years to use in its manufacturing process for
which it has to pay annual rentals in arrears of USD 10,000 every year. On the
commencement date, exchange rate was USD = ` 68. The average rate for Year 1
was ` 69 and at the end of year 1, the exchange rate was ` 70. The incremental
borrowing rate of Entity X on commencement of the lease for a USD borrowing was
5% p.a. How will entity X measure the right of use (ROU) asset and lease liability
initially and at the end of Year 1?

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Solution:
On initial measurement, Entity X will measure the lease liability and ROU asset as
under:
Present
Lease Present Conversion
Value INR
Year Payments Value factor rate (spot
of Lease value
(USD) @ 5% rate)
Payment
1 10,000 0.952 9,520 68 6,47,360
2 10,000 0.907 9,070 68 6,16,760
3 10,000 0.864 8,640 68 5,87,520
4 10,000 0.823 8,230 68 5,59,640
5 10,000 0.784 7,840 68 5,33,120
Total 43,300 29,44,400
As per Ind AS 21 The Effects of Changes in Foreign Exchange Rates, monetary assets
and liabilities are restated at each reporting date at the closing rate and the
difference due to foreign exchange movement is recognised in profit and loss
whereas non-monetary assets and liabilities carried measured in terms of historical
cost in foreign currency are not restated.
Accordingly, the ROU asset in the given case being a non-monetary asset measured
in terms of historical cost in foreign currency will not be restated but the lease
liability being a monetary liability will be restated at each reporting date with the
resultant difference being taken to profit and loss.
At the end of Year 1, the lease liability will be measured in terms of USD as under:
Lease Liability:
Initial Value Closing Value
Lease Payment Interest @ 5%
Year (USD) (USD)
(b) (c) = (a x 5%)
(a) (d = a + c - b)
1 43,300 10,000 2,165 35,465
Interest at the rate of 5% will be accounted for in profit and loss at average rate of
` 69 (i.e., USD 2,165 x 69) = ` 1,49,385.
Particulars Dr. (`) Cr. (`)
Interest Expense Dr. 1,49,385
To Lease liability 1,49,385
Lease payment would be accounted for at the reporting date exchange rate, i.e.
` 70 at the end of year 1

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Particulars Dr. (`) Cr. (`)

Lease liability Dr. 7,00,000
To Cash 7,00,000
As per the guidance above under Ind AS 21, the lease liability will be restated using
the reporting date exchange rate i.e., ` 70 at the end of Year 1. Accordingly, the
lease liability will be measured at ` 24,82,550 (35,465 x ` 70) with the
corresponding impact due to exchange rate movement of ` 88,765 (24,82,550 –
(29,44,400 + 1,49,385 – 700,000) taken to profit and loss.
At the end of year 1, the ROU asset will be measured as under:

Opening Balance Depreciation Closing Balance

Year
(`) (`) (`)
1 29,44,400 5,88,880 23,55,520

“Challenges are what make life interesting and

overcoming them is what makes life meaningful.”

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Notes


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IND AS 20 - ACCOUNTING FOR

6 GOVERNMENT GRANTS

Applicability

Ind AS 20 should be applied for:

(a) Accounting and disclosure of government grants; and
(b) Disclosure of other forms of government assistance.

Scope / Exclusions
Ind AS 20 does not deal with:
(a) government assistance that is provided for an entity in the form of benefits that
are available in determining taxable profit or tax loss, or are determined or limited
on the basis of income tax liability;
Examples of such benefits are income tax holidays, investment tax credits,
accelerated depreciation.
(b) government participation in the ownership of the entity;
(c) government grants that will be covered by Ind AS 41, Agriculture.

DEFINITIONS

(1) Government refers to government, government agencies and similar bodies

whether local, national or international.
(2) Government assistance is action by government designed to provide an economic
benefit specific to an entity or range of entities qualifying under certain criteria.
(3) Government grants are assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain
conditions relating to the operating activities of the entity.

RECOGNITION OF GOVERNMENT GRANTS

A government grant is not recognised until there is reasonable assurance that the entity
will comply with the conditions attaching to it, and that the grant will be received.
Receipt of a grant does not of itself provide conclusive evidence that the conditions
attaching to the grant have been or will be fulfilled.

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Illustration 1
Government gives a grant of ` 10,00,000 for research and development of H1N1
vaccine to A Pharmaceuticals Limited. There is no condition attached to the grant.
Examine how the Government grant be realized.

Solution:
The entire grant should be recognised immediately in profit or loss.

Illustration 2
Government gives a grant of ` 10,00,000 for research and development of H1N1
vaccine to A Pharmaceuticals Limited even though similar vaccines are available in
the market but are expensive. The entity has to ensure by developing a
manufacturing process over a period of 2 years that the costs come down by at
least 40%. Examine how the Government grant be realized.

Solution:
The entire grant should be recognised immediately as deferred income and charged
to profit or loss over a period of two years.

Illustration 3
A village of artisans in a district got devastated because of an earthquake. A
Limited was operating in that district and was providing employment to the
artisans. The government gave a grant of ` 10,00,000 to A Limited so that 100
artisans are rehabilitated over a period of 3 years. Government releases
` 2,00,000. Examine how the Government grant be realized.

Solution:
A Limited will recognise ` 10,00,000 as government grant and set it up as a
deferred income and will recognise it in its profit or loss over the period of three
years as per the principles enunciated in Ind AS 20.

Forgivable loan
A forgivable loan from government is treated as a government grant when there is
reasonable assurance that the entity will meet the terms for forgiveness of the loan.

Loans at less than market rate of interest

The benefit of a government loan at a below-market rate of interest is treated as a
government grant. The loan should be recognised and measured in accordance with
Ind AS 109, Financial Instruments. The benefit of the below-market rate of interest
should be measured as the difference between the initial carrying value of the loan
determined in accordance with Ind AS 109 and the proceeds received. The benefit
is accounted for in accordance with Ind AS 20.
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Illustration 4
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.

Solution:
The fair value of the loan is calculated at ` 37,38,328.
Interest paid @ 5%
Interest
Year Opening Balance on ` 50,00,000 + Closing Balance
calculated @ 12%
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
4 44,08,482 5,29,018 2,50,000 46,87,500
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
` 12,61,672 is to be recognised in profit or loss on a systematic basis over the
periods in which A Limited recognise as expenses the related costs for which the
grant is intended to compensate. (see Illustration 5 in this regard).

Illustration 5
Continuing with the facts given in the Illustration 4, state how the grant will be
recognized in the statement of profit or loss assuming:
(a) the loan is an immediate relief measure to rescue the enterprise
(b) the loan is a subsidy for staff training expenses, incurred equally, for a period
of 4 years
(c) the loan is to finance a depreciable asset.

Solution:
` 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.
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Assuming (a), the loan is an immediate relief measure to rescue the enterprise.
` 12,61,672 will be recognised in profit or loss immediately.
Assuming (b), the loan is a subsidy for staff training expenses, incurred equally, for
a period of 4 years. ` 12,61,672 will be recognised in profit or loss over a period of
4 years.
Assuming (c), the loan is to finance a depreciable asset. ` 12,61,672 will be
recognised in profit or loss on the same basis as depreciation.
Grants related to non-depreciable assets
Grants related to non-depreciable assets may also require the fulfilment of certain
obligations and would then be recognised in profit or loss over the periods that
bear the cost of meeting the obligations.
Eg.
A grant of land may be conditional upon the erection of a building on the site and it
may be appropriate to recognise the grant in profit or loss over the life of the
building once the building is constructed and put to use.
Conditional Grants received as part of a package of financial or fiscal aids
In such cases, care is needed in identifying the conditions giving rise to costs and
expenses which determine the periods over which the grant will be earned.
Grant for expenses or losses already incurred and grant as an immediate
financial support
A government grant that becomes receivable as compensation for expenses or
losses already incurred or for the purpose of giving immediate financial support to
the entity with no future related costs should be recognised in profit or loss of the
period in which it becomes receivable.
A government grant may become receivable by an entity as compensation for
expenses or losses incurred in a previous period. Such a grant is recognised in profit
or loss of the period in which it becomes receivable, with disclosure to ensure that
its effect is clearly understood. Non-monetary government grants.
A government grant may take the form of a transfer of a non-monetary asset, such
as land or other resources, for the use of the entity. In these circumstances the fair
value of the non-monetary asset is assessed and both grant and asset are accounted
for at that fair value. Alternatively, an entity may measure these grants at nominal
value.
Illustration 6
A Limited wants to establish a manufacturing unit in a backward area and requires
5 acres of land. The government provides the land on a leasehold basis at a
nominal value of ` 10,000 per acre. The fair value of the land is ` 1,00,000 per
acre. Calculate the amount of the Government grant to be recognized by an entity.

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Solution:
A limited will recognise the land at fair value of ` 5,00,000 and ` 450,000
[(` 100,000 – ` 10,000) x 5)] as government grant. This government grant should be
presented in the balance sheet by setting up the grant as deferred income.
Alternatively, the land may be recognised by A Ltd. at nominal value of ` 50,000
(` 10,000 x 5).

PRESENTATION OF GRANTS RELATED TO ASSETS

Presentation in the Balance Sheet

Government grants related to assets should be presented in the balance sheet by setting
up the grant as deferred income. The non-monetary grants at fair value should be
presented in a similar manner.
The grant set up as deferred income is recognised in profit or loss on a systematic basis
over the useful life of the asset.
Illustration 7
A Limited establishes solar panels to supply solar electricity to its manufacturing
plant. The cost of solar panels is ` 1,00,00,000 with a useful life of 10 years. The
depreciation is provided on straight line method basis. The government gives
` 50,00,000 as a subsidy. Examine how the Government grant be realized.
Solution:
A Limited will set up ` 50,00,000 as deferred income and will credit ` 5,00,000
equally to its statement of profit and loss over next 10 years.
Alternatively, A Ltd. may deduct ` 50,00,000 from the cost of solar panel of
` 1,00,00,000.
Disclosure in the statement of cash flows
The purchase of assets and the receipt of related grants can cause major
movements in the cash flow of an entity. For this reason and in order to show the
gross investment in assets, such movements are disclosed as separate items in the
statement of cash flows.
A Limited will show ` 1,00,00,000 being acquisition of solar panels as outflow in
investing activities. The receipt of ` 50,00,000 from government will be shown as
inflow under financing activities.

PRESENTATION OF GRANTS RELATED TO INCOME

Two methods are prescribed for presentation of grants related to income. The grant
could be

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(a) (first method) presented as a credit in the statement of profit and loss, either
separately or under a general heading such as ‘Other income’; or
(b) (second method) deducted in reporting the related expense.

Ether presented in balance

sheet by setting up grant as
Related to deferred income
assets
Or deducted from the cost of
the asset
Presentation
of government
grant
Presented as part of profit
or loss, either separately or
Related to under ‘other income’
income
Alternatively, deducted in
reporting related expense

Illustration 8
A Ltd. received a government grant of ` 10,00,000 to defray expenses for
environmental protection. Expected environmental costs to be incurred is
` 3,00,000 per annum for the next 5 years. How should A Ltd. present such grant
related to income in its financial statements?

Solution:
As per paragraph 29 of Ind AS 20, Grants related to income are presented as part of
profit or loss, either separately or under a general heading such as “Other income”;
alternatively, they are deducted in reporting the related expense.
In accordance with the above, presentation of grants related to income under both
the methods are as follows:

Method 1: Credit in the statement of profit and loss

The entity can recognise the grant as income on a straight line basis i.e.,
` 2,00,000 per year in the statement of profit and loss either separately or under
the head “Other Income”.

The supporters of this method consider it inappropriate to present income and

expense items on a net basis and that „separation of the grant from the expense
facilitates comparison with other expenses not affected by a grant”.

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Method 2: As a deduction in reporting the related expense
Since the grant relates to environmental expenses incurred/to be incurred by the
entity, it can present the grant by reducing the grant amount every year from the
related expense i.e., environmental expense of ` 1,00,000 (i.e., net expense
` 3,00,000 – ` 2,00,000).
The Standard regards both the methods as acceptable for the presentation of
grants related to income. However, method 2 may be more appropriate when the
company can relate the grant to a specific expenditure.

REPAYMENT OF GOVERNMENT GRANTS

An entity may have to repay the government grant including in cases where conditions
related to the grant are not fulfilled by it.

A government grant that becomes repayable should be accounted for as a change in

accounting estimate and be treated in accordance with Ind AS 8, Accounting Policies,
Changes in Accounting Estimates and Errors.

The following steps should be followed in repayment of a grant related to income:

(a) The repayment should be applied first against any unamortised deferred credit
recognized in respect of the grant.
(b) To the extent that the repayment exceeds any such deferred credit, or when no
deferred credit exists, the repayment should be recognised immediately in profit or
loss.
The repayment of a grant related to an asset should be recognised by reducing the
deferred income balance by the amount repayable.

Repayment of government grant

Related to income Related to assets

First applied towards any Either recognised Or recognised by

unapplied deferred credit by increasing the reducing the
and then charged to profit carrying amount deferred income
and loss account immediately of asset balance by the
amount payable

*The cumulative additional depreciation that would have

been recognised in profit or loss to date in the absence
of the grant shall be recognised immediately in profit or
loss. * Check the possible impairment of the new
carrying amount of the asset.

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Illustration 9
A Ltd. has received a grant of ` 10,00,00,000 in the year 20X1-20X2 from local
government in the form of subsidy for selling goods at lower price to lower income
group population in a particular area for two years. A Ltd. had accounted for the
grant as income in the year 20X1- 20X2. While accounting for the grant in the year
20X1-20X2, A Ltd. was reasonably assured that all the conditions attached to the
grant will be complied with. However, in the year 20X5-20X6, it was found that A
Ltd. has not complied with the above condition and therefore notice of refund of
grant has been served to it. A Ltd. has contested but lost in court in 20X5-20X6 and
now grant is fully repayable. How should A Ltd. reflect repayable grant in its
financial statements ending 20X5-20X6?
Solution:
Note: It is being assumed that the accounting done in previous years was not
incorrect and was not in error as per Ind AS 8.
Ind AS 20, states that a Government grant that becomes repayable shall be
accounted for as a change in accounting estimate (see Ind AS 8, Accounting
Policies, Changes in Accounting Estimates and Errors).
Repayment of a grant related to income shall be applied first against any
unamortised deferred credit recognised in respect of the grant. To the extent that
the repayment exceeds any such deferred credit, or when no deferred credit
exists, the repayment shall be recognised immediately in profit or loss.
Repayment of a grant related to an asset shall be recognised by increasing the
carrying amount of the asset or reducing the deferred income balance by the
amount repayable. The cumulative additional depreciation that would have been
recognised in profit or loss to date in the absence of the grant shall be recognised
immediately in profit or loss.

The following journal entries should be passed:

Sr. Dr./ Amount
Particulars Nature of Account
No. Cr. (` in crores)
(i) Repayment of Government Grant Expense (P/L) Dr. 10
To Grant repayable Balance sheet 10
(Being recognition of repayment (Liability)
of grant in statement of profit
or loss)
(ii) Grant repayable Balance sheet Dr. 10
To Bank (Liability) 10
(Being grant refunded) Balance sheet (Asset)
Assuming that no deferred credit balance exists in the year 20 X5-20X6, therefore
repayment recognised in P&L.

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DISCLOSURE
The following should be disclosed:
(a) the accounting policy adopted for government grants;
(b) the methods of presentation adopted for government grants in the financial
statements;
(c) the nature and extent of government grants recognised in the financial statements;
(d) unfulfilled conditions and other contingencies attaching to government assistance
that has been recognised.

Treatment of various types of grant

Sr.
Type Treatment
No.
1. Grant received in cash or as a Manner of accounting does not change
reduction of a liability to the
government
2. Forgivable loan from government Treated as a government grant when there
is reasonable assurance that the entity will
meet the terms for forgiveness of the loan
3. Government loan at a below- market • Benefit is treated as a government
rate of interest grant
• Recognised and measured in
accordance with Ind AS 109.
Benefit = Initial carrying value of the
loan determined as per Ind AS 109 -
the proceeds received
4. Grants received as part of a package • Identify the conditions giving rise to
of financial or fiscal aids with costs and expenses which determine
conditions attached. the periods over which the grant will
be earned.
• It may be appropriate to allocate part
of a grant on one basis and part on
another.
5. Grant receivable as compensation for • Shall be recognised in profit or loss of
expenses or losses already incurred or the period in which it becomes
for immediate financial support with receivable
no future related costs • Provide disclosure to ensure that its
effect is clearly understood.
6. Government Assistance – No Specific • Government assistance to entities
relation to Operating Activities meets the definition of government
grants in Ind AS 20

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• Such grants should not be credited
directly to shareholders” interests and
be recognised in profit or loss on a
systematic basis.
7. Government assistance Excluded from the definition of
government grants which cannot
reasonably have a value placed upon them
and transactions with government which
cannot be distinguished from the normal
trading transactions of the entity.

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PROBLEMS AND SOLUTIONS

Question1
ABC Ltd. has received the following grants from the Government of Delhi for its
newly started pharmaceutical business:
• ` 20 lakhs received for immediate start-up of business without any condition.
• ` 50 lakhs received for research and development of drugs required for the
treatment of cardiovascular diseases with following conditions:
• that drugs should be available to the public at 20% cheaper from current
market price: and
• the drugs should be in accordance with quality prescribed by the World Health
Organisation [WHO].
• Two acres of land (fair Value: ` 10 Lakhs) received for set up plant.
• ` 2 lakhs received for purchase of machinery of ` 10 lakhs. Useful life of
machinery is 5 years. Depreciation on this machinery is to be charged on
straight-line basis.
How should ABC Ltd. recognise the government grants in its books of
accounts?

Solution:
ABC Ltd. should recognise the grants in the following manner:
• ` 20 lakhs has been received for immediate start-up of business. This should
be recognised in Statement of Profit and Loss immediately as there are no
conditions attached to the grant.
• ` 50 lakhs should be recognised in profit or loss on a systematic basis over the
periods which the entity recognises as expense the related costs for which the
grants are intended to compensate provided that there is reasonable
assurance that ABC Ltd. will comply with the conditions attached to the
grant.
• Land should be recognised at fair value of ` 10 lakhs and government grants
should be presented in the balance sheet by setting up the grant as deferred
income.
• ` 2 lakhs should be recognised as deferred income and will be transferred to
profit and loss over the useful life of the asset. In this cases, ` 40,000
[` 2 lakhs/5] should be credited to profit and loss each year over period of
5 years.

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Question 2
MNC Ltd. has received grant in the nature of exemption of custom duty on capital
goods with certain conditions related to export of goods under Export Promotion
Capital Goods (EPCG) scheme of Government of India. Whether the same is a
government grant under Ind AS 20, Government Grants and Disclosure of
Government Assistance? If yes, then how the same is to be accounted for if it is
(a) A Grant related to asset or
(b) A Grant related to income?

Solution:
Paragraph 3 of Ind AS 20 states that Government grants are assistance by
government in the form of transfers of resources to an entity in return for past or
future compliance with certain conditions relating to the operating activities of the
entity. They exclude those forms of government assistance which cannot
reasonably have a value placed upon them and transactions with government which
cannot be distinguished from the normal trading transactions of the entity.

In accordance with the above, in the given case exemption of custom duty under
EPCG scheme is a government grant and should be accounted for as per the
provisions of Ind AS 20.

Ind AS 20 defines grant related to assets and grants related to income as follows:
“Grants related to asset are government grants whose primary condition is that an
entity qualifying for them should purchase, construct or otherwise acquire long-
term assets. Subsidiary conditions may also be attached restricting the type or
location of the assets or the periods during which they are to be acquired or held.
Grants related to income are government grants other than those related to
assets.”

Presentation of grants related to assets

Government grants related to assets, including non-monetary grants at fair value,
shall be presented in the balance sheet by setting up the grant as deferred income.
The grant set up as deferred income is recognised in profit or loss on a systematic
basis over the useful life of the asset. Alternatively, the amount of grant will be
deducted from the cost of the asset and depreciation will be charged on the
reduced value of the asset.
Presentation of grants related to income
Grants related to income are presented as part of profit or loss, either separately
or under a general heading such as “Other income”; alternatively, they are
deducted in reporting the related expense.
FINANCIAL REPORTING 333
IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
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Presentation
In the given case, based on the terms and conditions of the scheme, the grant
received is to compensate the import cost of assets subject to an export obligation
as prescribed in the EPCG Scheme and does not relate to purchase, construction or
acquisition of a long term asset. Hence it is a grant related to income.
Accounting of such grant
It may be further noted that as per paragraph 12 of Ind AS 20, government grants
shall be recognised in profit or loss on a systematic basis over the periods in which
the entity recognises as expenses the related costs for which the grants are
intended to compensate Grants related to income are presented as part of profit or
loss, over a period of six years, either separately or under a general heading such
as „Other income”. Alternatively, they are deducted in reporting the related
expense.

Question 3
Rainbow Limited is carrying out various projects for which the company has either
received government financial assistance or is in the process of receiving the same.
The company has received two grants of ` 1,00,000 each, relating to the following
ongoing research and development projects:
(i) The first grant relates to the “Clean river project” which involves research
into the effect of various chemicals waste from the industrial area in Madhya
Pradesh. However, no major steps have been completed by Rainbow limited
to commence this research as at 31st march, 20X2
(ii) The second grant relates to the commercial development of a new equipment
that can be used to manufacture eco-friendly substitutes for existing plastic
products. Rainbow Limited is confident about the technical feasibility and
financial viability of this new technology which will be available for sale in the
market by April 20X3.
In September 20X1, due to the floods near one of its factories, the entire
production was lost and Rainbow Limited had to shut down the factory for a period
of 3 months. The State Government announced a compensation package for all the
manufacturing entities affected due to the floods. As per the scheme, Rainbow
Limited is entitled to a compensation based on the average of previous three
months’ sales figure prior to the floods, for which the company is required to
submit an application form on or before 30th June, 20X2 with necessary figures.
The financial statements of Rainbow Limited are to be adopted on 31st May, 20X2,
by which date the claim form would not have been filed with the State
Government.
Suggest the accounting treatment of, if any, for the two grants received and the
floodrelated compensation in the books of accounts of Rainbow Limited as on
31st March, 20X2.
FINANCIAL REPORTING 334
IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
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Solution:
Accounting treatment for:
1. First Grant
The first grant for ‘Clear River Project’ involving research into effects of
various chemicals waste from the industrial area in Madhya Pradesh, seems to
be unconditional as no details regarding its refund has been mentioned. Even
though the research has not been started nor any major steps have been
completed by Rainbow Limited to commence the research, yet the grant will be
recognised immediately in profit or loss for the year ended 31st March, 20X2.
Alternatively, in case, the grant is conditional as to expenditure on research,
the grant will be recognised in the books of Rainbow Limited over the year the
expenditure is being incurred.

2. Second Grant
The second grant related to commercial development of a new equipment is a
grant related to depreciable asset. As per the information given in the
question, the equipment will be available for sale in the market from April,
20X3. Hence, by that time, grant relates to the construction of an asset and
should be initially recognised as deferred income.
The deferred income should be recognised as income on a systematic and
rational basis over the asset’s useful life.
The entity should recognise a liability on the balance sheet for the years
ending 31st March, 20X2 and 31st March, 20X3. Once the equipment starts
being used in the manufacturing process, the deferred grant income of
` 1,00,000 should be recognised over the asset’s useful life to compensate for
depreciation costs.
Alternatively, as per Ind AS 20, Rainbow Limited would also be permitted to
offset the deferred income of ` 1,00,000 against the cost of the equipment as
on 1st April, 20X3.

3. For flood related compensation

Rainbow Limited will be able to submit an application form only after
31st May, 20X2 i.e. in the year 20X2-20X3. Although flood happened in
September, 20X1 and loss was incurred due to flood related to the year 20X1-
20X2, the entity should recognise the income from the government grant in
the year when the application form related to it is submitted and approved by
the government for compensation.
Since, in the year 20X1-20X2, the application form could not be submitted due
to adoption of financials with respect to sales figure before flood occurred,
Rainbow Limited should not recognise the grant income as it has not become
receivable as on 31st March, 20X2.
FINANCIAL REPORTING 335
IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
CA FINAL
Question 4
An entity opens a new factory and receives a government grant of ` 15,000 in
respect of capital equipment costing ` 1,00,000. It depreciates all plant and
machinery at 20% per annum on straight-line basis. Show the statement of profit
and loss and balance sheet extracts in respect of the grant for first year under both
the methods as per Ind AS 20.

Solution:
1. (a) When grant is treated as deferred income
Statement of profit and loss – An extract
`
Depreciation (` 1,00,000 x 20%) (20,000)
Government grant credit (W.N.1) 3,000

Balance Sheet - An extract

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

Less: Accumulated depreciation (1,00,000 x 20%) (20,000) 80,000

????
Non-current liabilities
Government grant [12,000 – 3,000 (current liability)] 9,000
Current liabilities
Government grant (15,000 x 20%) 3,000
????

1. Government grant deferred income account

` `
To Profit or loss 3,000 By Grant cash received 15,000
(15,000 × 20%)
To Balance c/f 12,000
15,000 15,000

FINANCIAL REPORTING 336

IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
CA FINAL
(b) When grant is deducted from cost of the asset
Statement of profit and loss – An extract
`
Depreciation [(` 1,00,000 – 15,000) x 20%] (17,000)

Balance Sheet - An extract

`
Non-current assets
Property, plant and equipment (1,00,000-15,000) 85,000
Less: Accumulated depreciation (17,000) 68,000

Question 5
A company receives a cash grant of ` 30,000 on 31 March 20X1. The grant is
towards the cost of training young apprentices. Training programme is expected to
last for 18 months starting from 1 April 20X1. Actual costs of the training incurred
in 20X1-20X2 was ` 50,000 and in 20X2-20X3 ` 25,000. State, how this grant should
be accounted for?

Solution:
1. At 31st March 20X1 the grant would be recognised as a liability and presented
in the balance sheet as a split between current and non-current amounts.
` 20,000 [(12 months / 18 months) x 30,000] is current and would be
recognised in profit and loss for the year ended 31st March, 20X1. The balance
amount of ` 10,000 will be shown as non-current.
At the end of year 20X1-20X2, there would be a current balance of 10,000
(being the non- current balance at the end of year 20X1-20X1 reclassified as
current) in the balance sheet. This would be recognised in profit in the year
20X2-20X3.

Extracts from the financial statements are as follows:

Balance Sheet (extracts)
31 March 31 March 31 March
20X1 20X2 20X3
Current liabilities
Deferred income 20,000 10,000 -
Non-current liabilities
Deferred income 10,000 - -

FINANCIAL REPORTING 337

IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
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Statement of profit and loss (extracts)
31 March 31 March
20X2 20X3
Method 1
Other Income - Government grant received 20,000 10,000
Training costs (50,000) (25,000)
Method 2
Training costs (50,000 – 20,000) 30,000
Training costs (25,000 – 10,000) 15,000

FINANCIAL REPORTING 338

IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
CA FINAL

SELF ASSESSMENT PROBLEMS

Question 1
A Limited received from the government a loan of ` 1,00,00,000 @ 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. Also state how the grant will be recognized in the
statement of profit or loss assuming that the loan is to finance a depreciable asset.

Solution:
The fair value of the loan is calculated at ` 74,76,656.
Interest paid @ 5%
Interest calculated
Year Opening Balance on ` 1,00,00,000 + Closing Balance
@ 12%
principal paid
(a) (b) (c) = (b) x 12% (d) (e) =(b) + (c) – (d)
1 74,76,656 8,97,200 5,00,000 78,73,856
2 78,73,856 9,44,862 5,00,000 83,18,718
3 83,18,718 9,98,246 5,00,000 88,16,964
4 88,16,964 10,58,036 5,00,000 93,75,000
5 93,75,000 11,25,000 1,05,00,000 Nil

A Limited will recognise ` 25,23,344 (` 1,00,00,000 – ` 74,76,656) as the

government grant and will make the following entry on receipt of loan:
Bank Account Dr. 1,00,00,000
To Deferred Income 25,23,344
To Loan Account 74,76,656
` 25,23,344 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.

If the loan is to finance a depreciable asset. ` 25,23,344 will be recognised in profit

or loss on the same basis as depreciation.

FINANCIAL REPORTING 339

IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
CA FINAL
Question 2
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 lakhs and acquired value by Government is ` 8 lakhs).
(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 lakhs for immediate start-up of a business
without any condition.
(iv) S Ltd. received ` 10 lakhs for purchase of machinery costing ` 80 lakhs. Useful
life of machinery is 10 years. Depreciation on this machinery is to be charged
on straight line basis.
(v) Government gives a grant of ` 25 lakhs 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 company is to ensure by
developing a manufacturing process over a period of two years so that the
cost comes down at least to 50%.

Solution:
(i) The land and government grant should be recognized by A Ltd. at fair value of
` 12,00,000 and this government grant should be presented in the books as
deferred income. (Refer footnote 1)
(ii) As per para 10A of Ind AS 20 ‘Accounting for Government Grants and
Disclosure of Government Assistance’, loan at concessional rates of interest is
to be measured at fair value and recognised as per Ind AS 109. Value of
concession is the difference between the initial carrying value of the loan
determined in accordance with Ind AS 109, and the proceeds received. The
benefit is accounted for as Government grant.
(iii) ` 25 lakh has been received by D Ltd. for immediate start-up of business. Since
this grant is given to provide immediate financial support to an entity, it should
be recognised in the Statement of Profit and Loss immediately with disclosure
to ensure that its effect is clearly understood, as per para 21 of Ind AS 20.
(iv) ` 10 lakh should be recognized by S Ltd. as deferred income and will be
transferred to profit and loss over the useful life of the asset. In this case,
` 1,00,000 [` 10 lakh / 10 years] should be credited to profit and loss each
year over period of 10 years. (Refer footnote 2)
(v) As per para 12 of Ind AS 20, the entire grant of ` 25 lakh should be recognized
immediately as deferred income and credited 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.

FINANCIAL REPORTING 340

IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
CA FINAL
Question 3
Entity A is awarded a government grant of ` 60,000 receivable over three years
(` 40,000 in year 1 and ` 10,000 in each of years 2 and 3), contingent on creating
10 new jobs and maintaining them for three years. The employees are recruited at
a total cost of ` 30,000, and the wage bill for the first year is ` 1,00,000, rising by
` 10,000 in each of the subsequent years. Calculate the grant income and deferred
income to be accounted for in the books for year 1, 2 and 3.

Solution:
The income of ` 60,000 should be recognised over the three year period to
compensate for the related costs.

Calculation of Grant Income and Deferred Income:

Labour Grant Deferred
Year
Cost Income Income
` ` `
1 1,30,000 21,667 60,000 x 38,333 (60,000 – 21,667)
(130/360)
2 1,10,000 18,333 60,000 x 20,000 (60,000 – 21,667 –18,333)
(110/360)
3 1,20,000 20,000 60,000 x - (60,000 – 21,667 –18,333 –
(120/360) 20,000)
3,60,000 60,000
Therefore, Grant income to be recognised in Profit & Loss for years 1, 2 and 3 are
` 21,667, ` 18,333 and ` 20,000 respectively.

Amount of grant that has not yet been credited to profit & loss i.e; deferred
income is to be reflected in the balance sheet. Hence, deferred income balance as
at year end 1, 2 and 3 are ` 18,333, ` 10,000 and Nil respectively.

“Reading is to the mind, as excercise is to the body.”

FINANCIAL REPORTING 341

IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
CA FINAL
Notes


FINANCIAL REPORTING 342
IND AS 20 - ACCOUNTING FOR
GOVERNMENT GRANTS
CA FINAL

7 BUSINESS COMBINATIONS

CLASSWORK PROBLEMS

Question 1
The following is the draft Balance Sheet of Diverse Ltd. having an authorised
capital of ` 1,000 crores as on 31st March, 2011:
ASSETS Amount
Non-current assets (` in crores)
Property, plant and equipment (Gross Block 800) 600
Financial assets
Investments carried at fair value 1,000
Current assets 3,000
4,600
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of INR 10 each) 250
Other equity (Retained earnings 450, Revenue reserve 900) 1,350
Liabilities
Non-current liabilities
Financial liabilities
Borrowings (Secured 400 and Unsecured 600) 1,000
Current liabilities
Current liabilities 2,000
4,600
Capital commitments: ` 700 crores.
The company consists of 2 divisions:
(i) Established division whose gross block was ` 200 crores and net block was
` 30 crores; current assets were ` 1,500 crores and working capital was
` 1,200 crores; the entire amount being financed by shareholders’ funds.
(ii) New project division to which the remaining fixed assets, current assets and
current liabilities related.

FINANCIAL REPORTING 343

BUSINESS COMBINATIONS
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The following scheme of reconstruction was agreed upon:
(a) Two new companies Sunrise Ltd. and Khajana Ltd. are to be formed. The
authorised capital of Sunrise Ltd. is to be ` 1,000 crore. The authorised
capital of Khajana Ltd. is to be ` 500 crore.
(b) Khajana Ltd. is to take over investments and unsecured loans.It is to allot 40
crores equity shares of ` 10 each at par to the members of Diverse Ltd. in
satisfaction of the amount due under the arrangement. The fair value of
unsecured loan approximate to book value.
(c) Sunrise Ltd. is to take over the PPE and net working capital of the new
project division along with the secured loans and obligation for capital
commitments for which Diverse Ltd. is to continue to stand guarantee at book
values. It is to allot one crore equity shares of ` 10 each as consideration to
Diverse Ltd. Sunrise Ltd. made an issue of unsecured convertible debentures
of ` 500 crore carrying interest at 15% per annum and having a right to
convert into equity shares of ` 10 each at par on 31.3.20X3. This issue was
made to the members of Sunrise Ltd. as a right who grabbed the opportunity
and subscribed in full.
(d) Diverse Ltd. is to guarantee all liabilities transferred to the 2 companies.
(e) Diverse Ltd. is to make a bonus issue of equity shares in the ratio of one
equity share for every equity share held by making use of the revenue
reserves.
(f) None of the shareholders hold more than 50% and are not related to each other.
Assume that the above scheme was duly approved by the Honourable High Court
and that there are no other transactions. Ignore taxation and Ind AS 109.
You are asked to:
(i) Pass journal entries in the books of Diverse Ltd., and
(ii) Prepare the balance sheets of the three companies after the scheme of
arrangement.

Question 2
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, 2012, the division-wise draft extract of the Balance Sheet was:
Laptops Mobiles Total
Fixed assets cost 250 500 750
Depreciation (225) (400) (625)
Net Assets (A) 25 100 125
Current assets: 200 500 700
Less: Current liabilities (25) (400) (425)
(B) 175 100 275
Total (A+B) 200 200 400

FINANCIAL REPORTING 344

BUSINESS COMBINATIONS
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Financed by:
Loan funds ---- 300 300
Capital: Equity ` 10 each ? ? 25
Surplus ? ? 75
200 200 400
Division Mobiles along with its assets and liabilities was sold for ` 25 crores to
Turnaround Ltd. a new company, who allotted 1 crore equity shares of ` 10 each at
a premium of ` 15 per share to the members 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.
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).
(iii) Prepare the Balance Sheet of Turnaround Ltd.

Question 3
Maxi Mini Ltd. has 2 divisions - Maxi and Mini. The draft information of assets and
liabilities as at 31st October, 20X2 was as under:
Maxi Mini Total
division division (in crores)
Fixed assets:
Cost 600 300 900
Depreciation (500) (100) (600)
W.D.V. (A) 100 200 300
Net current assets:
Current assets 400 300 700
Less: Current liabilities (100) (100) (200)
(B) 300 200 500
Total (A+B) 400 400 800
Financed by:
Loan funds (A) – 100 100
(secured by a charge on fixed assets)
Own funds:
Equity capital 50
(fully paid up ` 10 per share)
Reserves and surplus 650
(B) ? ? 700
Total (A+B) 400 400 800
It is decided to form a new company Mini Ltd. to take over the assets and liabilities
of Mini division.
FINANCIAL REPORTING 345
BUSINESS COMBINATIONS
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Accordingly, Mini Ltd. was incorporated to take over at Balance Sheet figures, the
assets and liabilities of that division. Mini Ltd. is to allot 5 crore equity shares of
` 10 each in the company to the members of Maxi Mini Ltd. in full settlement of
the consideration. The members of Maxi Mini Ltd. are therefore to become
members of Mini Ltd. as well without having to make any further investment.

You are asked to pass journal entries in relation to the above in the books of Maxi
Mini Ltd. and Mini Ltd. Also show the Balance Sheets of the 2 companies as on the
morning of 1st November, 2012, showing corresponding previous year’s figures.

Question 4
AX Ltd. and BX Ltd. amalgamated on and from 1st January 2013. A new Company
ABX Ltd. was formed to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-2012
INR in ‘000
ASSETS Note No. AX Ltd BX Ltd
Non-current assets
Property, Plant and Equipment 8,500 7,500
Financial assets
Investments 1,050 550
Current assets
Inventory 1,250 2,750
Trade receivable 1,800 4,000
Cash and Cash equivalent 450 400
13,050 15,200
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of INR 10 each) 6,000 7,000
Other equity 3,050 2,700
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 3,000 4,000
Current liabilities
Trade payable 1,000 1,500
13,050 15,200
ABX Ltd. issued requisite number of shares to discharge the claims of the equity
shareholders of the transferor companies.

FINANCIAL REPORTING 346

BUSINESS COMBINATIONS
CA FINAL
Prepare a note showing purchase consideration and discharge thereof and draft the
Balance Sheet of ABX Ltd:
(a) Assuming that both the entities are under common control
(b) Assuming BX ltd is a larger entity and their management will take the control
of the entity. The fair value of net assets of AX and BX limited are as follows:
AX Ltd BX Ltd
Assets
(‘000) (‘000)
Fixed assets 9,500 1,000
Inventory 1300 2900
Fair value of the business 11,000 1,4000

Question 5
The balance sheet of Professional Ltd. and Dynamic Ltd. as of 31 March 2012 is
given below:
Professional
Assets Dynamic Ltd
Ltd
Non-Current Assets:
Property plant and equipment 300 500
Investments 400 100
Current assets:
Inventories 250 150
Financial assets
Trade receivable 450 300
Cash and cash equivalents 200 100
Others 400 230
Total 2,000 1,380
Equity and Liabilities
Equity
Share capital- Equity shares of ` 100 each for D Ltd. 500 400
and ` 10 each for P Ltd.
Reserve and surplus 810 225
Non-Current liabilities:
Long term borrowings 250 200
Long term provision0073 50 70
Deferred tax 40 35
Current Liabilities:
Short term borrowings 100 150
Trade payable 250 300
Total 2,000 1,380
FINANCIAL REPORTING 347
BUSINESS COMBINATIONS
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Other information
(a) Professional Ltd. Acquires 70% of Dynamic Ltd on 1 April 2012 by issuing its
own shares in the ratio of 1 share of Professional Ltd for every 2 shares of
Dynamic Ltd. The fair value of the share of Professional Ltd was ` 40 per
share.
(b) The fair value exercise resulted in the following:(all nos in Lakh)
(a) PPE fair value on 1 April 20X2 was ` 350 lakhs.
(b) Professional Ltd also agreed to pay an additional payment that is higher
of 35 lakh and 25% of any excess of Dynamic Ltd in the first year after
acquisition over its profits in the preceding 12 months. This additional
amount will be due after 2 years. Dynamic Ltd has earned ` 10 lakh
profit in the preceding year and expects to earn ` 20 Lakh.
(c) In addition to above, Professional Ltd also had agreed to pay one of the
founder shareholder a payment of ` 20 lakh provided he stays with the
Company for two year after the acquisition.
(d) Dynamic Ltd had certain equity settled share based payment award
(original award) which got replaced by the new awards issued by
Professional Ltd. As per the original term the vesting period was 4 years
and as of the acquisition date the employees of Dynamic Ltd have
already served 2 years of service. As per the replaced awards the vesting
period has been reduced to one year (one year from the acquisition
date). The fair value of the award on the acquisition date was as follows:
(i) Original award- ` 5 lakh
(ii) Replacement award- ` 8 lakh.
(e) Dynamic Ltd had a lawsuit pending with a customer who had made a
claim of ` 50 lakh. Management reliably estimated the fair value of the
liability to be ` 5 lakh and their exist present obligation.
(f) The applicable tax rate for both entities is 30%.

You are required to prepare consolidated balance sheet of Professional Ltd as

on 1 April 2012.
Assume 10% discount rate.

Question 6
Company A and Company B are in power business. Company A holds 25% of equity
shares of Company B. On November 1, Company A obtains control of Company B
when it acquires a further 65% of Company B’s shares, thereby resulting in a total
holding of 90%. The acquisition had the following features:
• Consideration: Company A transfers cash of ` 59,00,000 and issues 1,00,000
shares on November 1. The market price of Company A’s shares on the date of
issue is ` 10 per share. The equity shares issued as per this transaction will
comprise 5% of the post acquisition equity capital of Company A.
FINANCIAL REPORTING 348
BUSINESS COMBINATIONS
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• Contingent consideration: Company A agrees to pay additional consideration
of ` 7,00,000 if the cumulative profits of Company B exceed ` 70,00,000 over
the next two years. At the acquisition date, it is not considered probable that
the extra consideration will be paid. The fair value of the contingent
consideration is determined to be ` 3,00,000 at the acquisition date.
• Transaction costs: Company A pays acquisition-related costs of ` 1,00,000.
• Non-controlling interests (NCI): The fair value of the NCI is determined to be
`7,50,000 at the acquisition date based on market prices. Company A elects
to measure non-controlling interest at fair value for this transaction.
• Previously held non-controlling equity interest: Company A has owned 25% of
the shares in Company B for several years. At November 1, the investment is
included in Company A’s consolidated statement of financial position at
`6,00,000, accounted for using the equity method; the fair value is
` 20,00,000.
The fair value of Company B’s net identifiable assets at November 1 is
` 60,00,000, determined in accordance with Ind AS 103.

Required
Determine the accounting under acquisition method for the business combination
by Company A.

Question 7
On September 30, 2011 Entity A issues 2.5 shares in exchange for each ordinary
share of Entity B. All 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 September 30, 2011 is 40. The
quoted market price of Entity A’s ordinary shares at that date is 16.
The fair values of Entity A’s identifiable assets and liabilities at September 30,
2011 are the same as their carrying amounts, except that the fair value of Entity
A’s non- current assets at September 30, 2011 is 1,500.
The statements of financial position of Entity A and Entity B immediately before
the business combination are:
Entity A Entity B
(legal parent, (legalsubsidiary,
accounting accounting
acquiree) acquirer)
Current assets 500 700
Non-current assets 1,300 3,000
Total assets 1,800 3,700
Current liabilities 300 600

FINANCIAL REPORTING 349

BUSINESS COMBINATIONS
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Non-current liabilities 400 1,100
Total liabilities 700 1,700
Shareholders’ equity
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
Prepare Balance sheet after Merger.

Question 8
Scenario 1: New information on the fair value of an acquired loan Bank F acquires
Bank E in a business combination in October 20X1. The loan by Bank E to Borrower
B is recognised at its provisionally determined fair value. In December 20X1, F
receives Borrower B’s financial statements for the year ended September 30, 20X1,
which indicate significant decrease in Borrower B’s income from operations. Basis
this, the fair value of the loan to B at the acquisition date is determined to be less
than the amount recognised earlier on a provisional basis.
Scenario 2: Decrease in fair value of acquired loan resulting from an event
occurring during the measurement period Bank F acquires Bank E in a business
combination in October 20X1. The loan by Bank E to Borrower B is recognised at its
provisionally determined fair value. In December 20X1, F receives information that
Borrower B has lost its major customer earlier that month and this is expected to
have a significant negative effect on B’s operations.
Required:
Comment on the treatment done by Bank F.

Question 9
Company A acquired 90% equity interest in Company B on April 1, 2010 for a
consideration of ` 85 crores in a distress sale. Company B did not have any
instrument recognised in equity.
The Company appointed a registered valuer with whose assistance, the Company
valued the fair value of NCI and the fair value identifiable net assets at ` 15 crores
and ` 100 crores respectively.
Required
Find the value of goodwill under both the methods.

FINANCIAL REPORTING 350

BUSINESS COMBINATIONS
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Question 10
Company A acquires 70 percent of Company S on January 1, 20X1 for consideration
transferred of ` 5 million. Company A intends to recognise the NCI at proportionate
share of fair value of identifiable net assets. With the assistance of a suitably
qualified valuation professional, A measures the identifiable net assets of B at
` 10 million. A performs a review and determines that the business combination did
not include any transactions that should be accounted for separately from the
business combination.
Required
Calculate the bargain purchase gain in the process.

Question 11
How should contingent consideration payable in relation to a business combination
be accounted for on initial recognition and at the subsequent measurement as per
Ind AS in the following cases:
(i) On 1 April 2016, A Ltd. acquires 100% interest in B Ltd. As per the terms of
agreement the purchase consideration is payable in the following 2 tranches:
• an immediate issuance of 10 lakhs shares of A Ltd. having face value of
INR 10 per share;
• a further issuance of 2 lakhs shares after one year if the profit before
interest and tax of B Ltd. for the first year following acquisition exceeds
INR 1 crore.
The fair value of the shares of A Ltd. on the date of acquisition is INR 20 per
share.
Further, the management has estimated that on the date of acquisition, the
fair value of contingent consideration is ` 25 lakhs.
During the year ended 31 March 2017, the profit before interest and tax of B
Ltd. exceeded ` 1 crore. As on 31 March 2017, the fair value of shares of A
Ltd. is ` 25 per share.

(ii) Continuing with the fact pattern in (a) above except for:
• The number of shares to be issued after one year is not fixed.
• Rather, A Ltd. agreed to issue variable number of shares having a fair
value equal to Rs. 40 lakhs after one year, if the profit before interest
and tax for the first year following acquisition exceeds ` 1 crore. A Ltd.
issued shares with ` 40 lakhs after an year.

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Question 12
ABC Ltd. prepares consolidated financial statements upto 31st March each year. On
1st July 2017, ABC Ltd. acquired 75% of the equity shares of JKL Ltd. and gained
control of JKL Ltd. the issued shares of JKL Ltd. is 1,20,00,000 equity shares.
Details of the purchase consideration are as follows:
• On 1st July, 2017, ABC Ltd. issued two shares for every three shares acquired
in JKL Ltd.
On 1st July, 2017, the market value of an equity share in ABC Ltd. was ` 6.50
and the market value of an equity share in JKL Ltd. was ` 6.
• On 30th June, 2018, ABC Ltd. will make a cash payment of ` 71,50,000 to the
former shareholders of JKL Ltd. who sold their shares to ABC Ltd. on 1st July,
2017. On 1st July, 2017, ABC Ltd. would have to pay interest at an annual rate
of 10% on borrowings.
• On 30th June, 2019, ABC Ltd. may make a cash payment of ` 3,00,00,000 to
the former shareholders of JKL Ltd. who sold their shares to ABC Ltd. on
1st July, 2017. This payment is contingent upon the revenues of ABC Ltd.
growing by 15% over the two-year period from 1st July, 2017 to 30th June,
2019. On 1st July, 2017, the fair value of this contingent consideration was
` 2,50,00,000. On 31st March, 2018, the fair value of the contingent
consideration was ` 2,20,00,000.

On 1st July, 2017, the carrying values of the identifiable net assets of JKL Ltd.
in the books of that company was ` 6,00,00,000. On 1st July, 2017, the fair
values of these net assets was ` 7,00,00,000. The rate of deferred tax to
apply to temporary differences is 20%.
During the nine months ended on 31st March, 2018, JKL Ltd. had a poorer
than expected operating performance. Therefore, on 31st March, 2018 it was
necessary for ABC Ltd. to recognise an impairment of the goodwill arising on
acquisition of JKL Ltd., amounting to 10% of its total computed value.
Compute the impairment of goodwill in the consolidated financial statements
of ABC Ltd. under both the methods permitted by Ind AS 103 for the initial
computation of the non-controlling interest in JKL Ltd. at the acquisition
date.

Question 13
Smart Technologies Inc. is a Company incorporated in India in 1998 having business
in the field of development and installation of softwares, trading of computer
peripherals and other IT related equipment and provision of cloud computing
services along with other services incidental thereto. It is one of the leading brands
in India.

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After witnessing immense popularity and support in its niche market, Smart
Technologies further grew by bringing its subsidiaries namely:
Company Name Principle Activity
Cloudustries India Private Limited Provision of cloud computing services.
MicroFly India Private Limited Trading of computer peripherals like mouse,
keyboard, printer etc.
Smart Technologies started preparing its financial statements based on Ind AS from
1st April, 2015 on voluntary basis. The Microfly India Pvt. Ltd. is planning to merge
the business of Cloudstries India Pvt. Ltd. with its own for which it presented
before the members in the meeting the below extract of latest audited Balance
Sheet of Cloudustries (prepared on the basis of Ind AS) for the year ended
31st March, 2017:
Balance Sheet as at March 31, 2017 (` in Crores)
Assets
Non-current assets
Property, plant and Equipment 15.00
15.00
Current Assets
(a) Financial assets
Trade Receivables 10.00
Cash and cash equivalents 10.00
Other current assets 8.00
28.00
Total 43.00
Equity and Liabilities
Equity
Equity Share Capital 45.00
Other Equity
Reserves and Surplus (Accumulated Losses)* (24.80)
20.20
Liabilities
Non-current Liabilities
Financial liabilities
Borrowings 2.80
Current Liabilities 20.00
22.80
Total 43.00

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The purchase consideration payable by MicroFly to Cloudustries was fixed at
` 18.00 crores payable in cash and that MicroFly take over all the assets and
liabilities of Cloudustries. Present the statement showing the calculation of assets
/ liabilities taken over as per Ind AS. Also mention the accounting of difference
between consideration and assets / liabilities taken over.

Question 14
On 1 April 20X1, Alpha Ltd. acquires 80 percent of the equity interest of Beta Pvt.
Ltd. in exchange for cash of ` 300. Due to legal compulsion, Beta Pvt. Ltd. had to
dispose of their investments by a specified date. Therefore, they did not have
sufficient time to market Beta Pvt. Ltd. to multiple potential buyers. The
management of Alpha Ltd. initially measures the separately recognizable
identifiable assets acquired and the liabilities assumed as of the acquisition date in
accordance with the requirement of Ind AS 103. The identifiable assets are
measured at ` 500 and the liabilities assumed are measured at ` 100. Alpha Ltd.
engages on independent consultant, who determined that the fair value of 20 per
cent non-controlling interest in Beta Pvt. Ltd. is ` 84.

Alpha Ltd. reviewed the procedures it used to identify and measure the assets
acquired and liabilities assumed and to measure the fair value of both the non
controlling interest in Beta Pvt. Ltd. and the consideration transferred. After the
review, it decided that the procedures and resulting measures were appropriate.

Calculate the gain or loss on acquisition of Beta Pvt. Ltd. and also show the journal
entries for accounting of its acquisition. Also calculate the value of the non-
controlling interest in Beta Pvt. Ltd. on the basis of proportionate interest method,
if alternatively applied?

Question 15
In March 2018, Pharma Ltd. acquires Dorman Ltd. in a business combination for a
total cost of ` 12,000 lakhs. At that time Dorman Ltd.’s assets and liabilities are as
follows:
Item ` in lakhs
Assets
Cash 780
Receivables (net) 5,200
Plant and equipment 7,000
Deferred tax asset 360

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Liabilities
Payables 1,050
Borrowings 4,900
Employee entitlement liabilities 900
Deferred tax liability 300
The plant and equipment has a fair value of ` 8,000 lakhs and a tax written down
value of ` 6,000 lakhs. The receivables are short-term trade receivables net of a
doubtful debts allowance of ` 300 lakhs.
Bad debts are deductible for tax purposes when written off against the allowance
account by Dorman Ltd. Employee benefit liabilities are deductible for tax when
paid.
Dorman Ltd. owns a popular brand name that meets the recognition criteria for
intangible assets under Ind AS 103 ‘Business Combinations’. Independent valuers
have attributed a fair value of Rs. 4.300 lakhs for the brand. However, the brand
does not have any cost for tax purposes and no tax deductions are available for the
same.
The tax rate of 30% can be considered for all items. Assume that unless otherwise
stated, all items have a fair value and tax base equal to their carrying amounts at
the acquisition date.
You are required to:
(i) Calculate deferred tax assets and liabilities arising from the business
combination (do not offset deferred tax assets and liabilities)
(ii) Calculate the goodwill that should be accounted on consolidation.

Question 16
On 1st April, 20X1, PQR Ltd. acquired 30% of the voting ordinary shares of XYZ Ltd.
for ` 8,000 crore. PQR Ltd. accounts its investment in XYZ Ltd. using equity method
as prescribed under Ind AS 28. At 31st March, 20X2, PQR Ltd. recognised its share
of the net asset changes of XYZ Ltd. using equity accounting as follows:
(` in crore)
Share of profit or loss 700
Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50

The carrying amount of the investment in the associate on 31st March, 20X2 was
therefore ` 8,850 crore (8,000 + 700 + 100 + 50). On 1st April, 20X2, PQR Ltd.
acquired the remaining 70% of XYZ Ltd. for cash ` 25,000 crore. The following
additional information is relevant at that date:

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(` in crore)
Fair value of the 30% interest already owned 9,000
Fair value of XYZ's identifiable net assets 30,000
How should such business combination be accounted for?

Question 17
Entity X acquired entity Y in a business combination as per Ind AS 103. There is an
existing share-based plan in entity Y with a vesting condition for 3 years in which
2 years have already lapsed at the date of such business acquisition. Entity X agrees
to replace the existing award for the employees of combined entity. The details
are as below –
Acquisition date fair value of share-based payment plan INR 300
No. of years to vest after acquisition 1 Year
Fair Value of award which replaces existing plan INR 400
Calculate the share-based payment values as per Ind AS 102?

Question 18
H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as
mentioned in the below table:
Equity stake
Date Remarks
purchased
1st November, 20X6 15% The shares were purchased based on the quoted
price on the stock exchange on the relevant dates.
1st January, 20X7 45%

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:

Carrying value Fair value

Particulars
(` in crore) (` in crore)
ASSETS:
Non-current assets
(a) Property, plant and equipment 40.0 90.0
(b) Intangible assets 20.0 30.0
(c) Financial assets
- Investments 100.0 350.0
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Current assets
(a) Inventories
(b) Financial assets 20.0 20.0
- Trade receivables
- Cash held in functional 20.0 20.0
currency 4.0 4.0
(c) Other current assets
Non-current asset held for sale 4.0 4.5
TOTAL ASSETS 208
EQUITY AND LIABILITIES:
Equity
(a) Share capital (face value `100) 12 50.4
(b) Other equity 141 Not
applicable
Non-current liabilities
(a) Financial liabilities
- Borrowings 20 20
Current liabilities
(a) Financial liabilities
- Trade payables 28 28
(b) Provision for warranties 3 3
(c) Current tax liabilities 4 4
TOTAL EQUITY AND LIABILITIES 208

Other information:
Following is the statement of contingent liabilities of S Ltd. as on 1st January,
20X7:
Fair value
Particulars Remarks
(` in crore)
Law suit filed by a customer 0.5 It is not probable that an outflow of
for a 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.

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Income tax demand of 2.0 It is not probable that an outflow of
` 7 crore raised by tax resources embodying economic benefits
authorities; S Ltd. has will be required to settle the claim.
challenged the demand in
the court.
In relation to the above-mentioned contingent liabilities, S Ltd. has given an
indemnification undertaking to H Ltd. up to a maximum of ` 1 crore.
` 1 crore represents the acquisition date fair value of the indemnification
undertaking.

Any amount which would be received in respect of the above undertaking shall not
be taxable.
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 accordance with the relevant Ind AS.
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 shares of H Ltd. as on 1st January, 20X7
is ` 10,000 per share.
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 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 circumstances after the acquisition date.

Quoted price of equity shares of S Ltd. as on various dates is as follows:

As on November, 20X6 ` 350 per share
As on 1st January, 20X7 ` 395 per share
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).

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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.

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?

Question 19
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 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 recognising the changes in fair value in FVOCI has been
availed and related FVOCI reserve of ` 4 crore.

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(d) Net assets of a foreign operation of ` 20 crore and related foreign currency
translation reserve of ` 8 crore.
In consolidated financial statements of AB Limited, 90% of the above reserves
were included in equivalent equity reserve balances, with the 10%
attributable to the noncontrolling interest included as part of the carrying
amount of the non-controlling interest.
What would be the accounting treatment on loss of control in the
consolidated financial statements of AB Limited?

Question 20
MNC Ltd. is in process of setting up a medicine manufacturing business which is at
very initial stage. For this purpose, MNC Ltd. as part of its business expansion
strategy acquired on 1st April, 2019, 100% shares of Akash Ltd., a company that
manufactures pharmacy products.
The purchase consideration for the same was by way of a share exchange valued at
` 38 crore. The fair value of Akash Ltd.’s assets and liabilities were ` 68 crore and
` 50 crore respectively, but the same does not include the following:
(i) A patent owned by Akash Ltd. for an established successful new drug that has
a remaining life of 6 years. A consultant has estimated the value of this
patent to be ` 8 crore. However, the outcome of clinical trails for the same
are awaited. If the trails are successful, the value of the drug would fetch the
estimated ` 12 crore.

(ii) Akash Ltd. has developed and patented another new drug which has been
approved for clinical use. The cost of developing the drug was ` 13 crore.
Based on early assessment of its sales success, a reputed valuer has estimated
its market value at ` 19 crore.
However, there is no active market for the patent.

(iii) Akash Ltd.’s manufacturing facilities have received a favourable inspection by

a government department. As a result of this, the company has been granted
an exclusive five-year license on 1st April, 2018 to manufacture and distribute
a new vaccine. Although the license has no direct cost to the Company, its
directors believe that obtaining the license is valuable asset which assures
guaranteed sales and the cost to acquire the license is estimated at ` 7 crore
of remaining period of life. It is expected to generate at least equivalent
revenue.

Suggest the accounting treatment of the above transactions with reasoning under
applicable Ind AS in the books of MNC Ltd.
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Question 21
Company A is a pharmaceutical company. Since inception, the Company had been
conducting in-house research and development activities through its skilled
workforce and recently obtained an intellectual property right (IPR) in the form of
patents over certain drugs. The Company’s has a production plant that has recently
obtained regulatory approvals. However, the Company has not earned any revenue
so far and does not have any customer contracts for sale of goods. Company B
acquires Company A.
Required:
Does Company A constitute a business in accordance with Ind AS 103?
Solution:
The definition of business requires existence of inputs and processes. In this case,
the skilled workforce, manufacturing plant and IPR, along with strategic and
operational processes constitutes the inputs and processes in line with the
requirements of Ind AS 103. When the said inputs and processes are applied as an
integrated set, the Company A will be capable of producing outputs; the fact that
the Company A currently does not have revenue is not relevant to the analysis of
the definition of business under Ind AS 103. Basis this and presuming that Company
A would have been able to obtain access to customers that will purchase the
outputs, the present case can be said to constitute a business as per Ind AS 103.

Question 22
Modifying the above Q.21., if Company A had revenue contracts and a sales force,
such that Company B acquires all the inputs and processes other than the sales force,
then whether the definition of the business is met in accordance with Ind AS 103?
Solution:
Though the sales force has not been taken over, however, if the missing inputs
(i.e., sales force) can be easily replicated or obtained by the market participant to
generate output, it may be concluded that Company A has acquired business.
Further, if Company B is also into similar line of business, then the existing sales
force of Company B may also be relevant to mitigate the missing input. As such,
the definition of business is met in accordance with Ind AS 103.

Question 23
Company P Ltd., a manufacturer of textile products, acquires 40,000 of the equity
shares of Company X (a manufacturer of complementary products) out of 1,00,000
shares in issue. As part of the same agreement, Company P purchases an option to
acquire an additional 25,000 shares. The option is exercisable at any time in the

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next 12 months. The exercise price includes a small premium to the market price
at the transaction date.
Apart from the above transaction, the shareholdings of Company X two other
original shareholders are 35,000 and 25,000. Each of these shareholders also has
currently exercisable options to acquire 2,000 additional shares. Determine
whether Co. P has control over Co. X.
Solution:
In assessing whether it has obtained control over Company X, Company P should
consider not only the 40,000 shares it owns but also its option to acquire another
25,000 shares (a so-called potential voting right). In this assessment, the specific
terms and conditions of the option agreement and other factors are considered:
• The options are currently exercisable and there are no other required
conditions before such options can be exercised
• If exercised, these options would increase Company P’s ownership to a
controlling interest of over 50% before considering other shareholders’
potential voting rights (65,000 shares out of a total of 1,25,000 shares)
• Although other shareholders also have potential voting rights, if all options
are exercised Company P will still own a majority (65,000 shares out of
1,29,000 shares)
• The premium included in the exercise price makes the options out-of-the-
money.
However, the fact that the premium is small and the options could confer
majority ownership indicates that the potential voting rights have economic
substance.
By considering all the above factors, Company P concludes that with the acquisition
of the 40,000 shares together with the potential voting rights, it has obtained
control of Company X.

Question 24
Entity P Ltd. develops pharmaceutical products. It has acquired 47% of entity S Ltd.
with an option to purchase remaining 53%. Entity S is a specialist entity that develops
latest technology and does research in pharmaceuticals. Entity P has acquired stake in
S Ltd. to complement its own technological research. The remaining 53% is held by key
management of P Ltd. who are key to running a major project that will market a
medicine with features completely new to the industry. However, if P Ltd. exercises
the option the management personnel are likely to leave. They have unique
technological knowledge in relation to the specific medicine. Option strike price is
5 times the value of entity’s share price. Is the option substantive?
Solution:
The option may not be substantive if entity P would derive no economic benefit
from exercising it. High strike price and likely loss of key management indicate that
the option may not be substantive.

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Question 25
AB Ltd holds 40% in BC Ltd. CD Ltd holds 60% in BC Ltd. BC Ltd. is controlled
through voting rights. AB Ltd. has call option exercisable in next 3 years for further
40% of investee. The option is deeply out of money and is expected to be the same
over the life of the option. Further, investor would not gain any non-financial
benefits from the exercise of option. Investor CD has been exercising its votes and
is actively directing the relevant activities of the investee. Is right of AB Ltd
substantive?
Solution:
The option of AB Ltd. is not substantive. This is because although AB Ltd. has
current ability to exercise his right to purchase additional voting rights (that, if
exercised, would give it a majority of the voting rights in the investee) but option
is deeply out of money and is likely to remain so during option period and there are
no other benefits gained from the exercise.

Question 26
Investor A and two other investors each hold one third of the voting rights of an
investee. The investee’s business activity is closely related to investor A. In
addition to its equity instruments, investor A also holds debt instruments that are
convertible into ordinary shares of the investee at any time for a fixed price that is
out of the money (but not deeply out of the money). If the debt were converted,
investor A would hold 60% of the voting rights of the investee. Investor A would
benefit from realizing synergies if the debt instruments were converted into
ordinary shares. Does investor A have power over investee?
Solution:
Investor A has power over the investee because it holds voting rights of the
investee together with substantive potential voting rights that give it the current
ability to direct the relevant activities.

Question 27
On April 1 Company X agrees to acquire the share of Company B in an all equity
deal. As per the binding agreement Company X will get the effective control on 1
April however the consideration will be paid only when the shareholders’ approval
is received. The shareholders meeting is scheduled to happen on 30 April. If the
shareholder approval is not received for issue of new shares, then the consideration
will be settled in cash. What is the acquisition date?
Solution:
The acquisition date in the above example is 1 April. In the above scenario even if
the shareholder don’t approve the shares consideration can be settled through
payment of cash.

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Question 28
Entity X acquired 100% shareholding of Entity Y on 1 April 20X1 and had complete
the preliminary purchase price allocation and accordingly recorded net assets of
INR 100 million against the purchase consideration of 150 million. Entity Y had
significant carry forward losses on which deferred tax asset was not recorded due
to lack of convincing evidence on the acquisition date. However, on 31 March 2012,
Entity Y won a significant contract which is expected to generate enough taxable
income to recoup the losses. Accordingly, the deferred tax asset was recorded on
the carry forward losses on 31 March 2012. Whether the aforesaid losses can be
adjusted with the Goodwill recorded based on the preliminary purchase price
allocation?

Solution:
No, as per the requirement of Ind AS 103, changes to the net assets are allowed
which results from the discovery of a fact which existed on the acquisition date.
However, change of facts resulting in recognition and de-recognition of assets and
liabilities after the acquisition date will be accounted in accordance with other Ind
AS. In the above scenario deferred tax asset was not eligible for recognition on the
acquisition date and accordingly the new contract on 31 March 2012 will
tantamount to change of estimate and accordingly will not impact the Goodwill
amount.

Question 29
KKV Ltd acquires a 100% interest in VIVA Ltd, a company owned by a single
shareholder who is also the KMP in the Company, for a cash payment of USD 20
million and a contingent payment of USD 2 million. The terms of the agreement
provide for payment 2 years after the acquisition if the following conditions are
met:
• The EBIDTA margins of the Company after 2 years after the acquisition is 21%.
• The former shareholder continues to be employed with VIVA Ltd for at least
2 years after the acquisition. No part of the contingent payment will be paid
if the former shareholder does not complete the 2 year employment period.
Solution:
In the above scenario the former shareholder is required to continue in
employment and the contingent consideration will be forfeited if the employment
is terminated or if he resigns.
Accordingly, only USD 20 million is considered as purchase consideration and the
contingent consideration is accounted as employee cost and will be accounted as
per the other Ind AS standards.

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Question 30
Green Ltd acquired Pollution Ltd. as a part of the arrangement Green Ltd had to
replace the Pollution Ltd.’s existing equity-settled award. The original awards
specify a vesting period of five years. At the acquisition date, Pollution Ltd
employees have already rendered two years of service.
As required, Green Ltd replaced the original awards with its own share-based
payment awards (replacement award). Under the replacement awards, the vesting
period is reduced to 2 year (from the acquisition date).
The value (market-based measure) of the awards at the acquisition date are as
follows:
• Original awards: INR 500
• Replacement awards: INR 600.
As of the acquisition date, all awards are expected to vest.

Solution:
Pre-combination period
The value of the replacement awards will have to be allocated between the pre-
combination and post combination period. As of the acquisition date, the fair value
of the original award (INR 500) will be multiplied by the service rendered up to
acquisition date (2 years) multiplied by greater of original vesting period (5 years)
or new vesting period (4 years). Accordingly, 500 x 2/5= 200 will be considered as
pre-combination service and will be included in the purchase consideration.

Post- Combination period

The fair value of the award on the acquisition date is 600 which means the
difference between the replacement award which is 600 and the amount allocated
to pre-combination period (200) is 400 which will be now recorded over the
remaining vesting period which is 2 years as an employee compensation cost.

Question 31
On 9 April 2012, Shyam Ltd. a listed company started to negotiate with Ram Ltd,
which is an unlisted company about the possibility of merger. On 10 May 2012, the
board of directors of Shyam authorized their management to pursue the merger
with Ram Ltd. On 15 May 2012, management of Shyam Ltd offered management of
Ram Ltd 12,000 shares of Shyam Ltd against their total share outstanding. On 31
May 2012, the board of directors of Ram Ltd accepted the offer subject to
shareholder vote. On 2 June 2012 both the companies jointly made a press release
about the proposed merger.

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On 10 June 2012, the shareholders of Ram Ltd approved the terms of the merger.
On 15 June, the shares were allotted to the shareholders of Ram Ltd.
The market price of the shares of Shyam Ltd was as follows:
Date Price
9 April 70
10 May 75
15 May 60
31 May 70
2 June 80
10 June 85
15 June 90
What is the acquisition date and what is purchase consideration in the above
scenario?
Solution:
As per Ind AS 103, the acquirer shall identify the acquisition date, which is the date
on which it obtains control of the acquire. In the above scenario, the acquisition
date will the date on which the shares were allotted to the shareholders of Ram
Ltd. Although the shareholder approval was obtained on 10 June but the shares
were issued only on 15 June and accordingly the 90 will be considered as the
market price.

Question 32
ABC Ltd. and XYZ Ltd. are manufacturers of rubber components for a particular
type of equipment. ABC Ltd. makes a bid for XYZ Ltd.’s business and the
Competition Commission of India (CCI) announces that the proposed transaction is
to be scrutinised to ensure that competition laws are not breached. Even though
the contracts are made subject to the approval of the CCI, ABC Ltd. and XYZ Ltd.
mutually agree the terms of the acquisition and the purchase price before
competition authority clearance is obtained. Can the acquisition date in this
situation be the date on which ABC Ltd. and XYZ Ltd. agree the terms even though
the approval of CCI is awaited (Assume that the approval of CCI is substantive)?
Solution:
Ind AS 103 provides that acquisition date is the date on which the acquirer obtains
control of the acquiree. Further, 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 acquire the closing date. However, the acquirer might obtain control on a
date that is either earlier or later than the closing date.

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For example, the acquisition date precedes the closing date if a written agreement
provides that the acquirer obtains control of the acquiree on a date before the
closing date. An acquirer shall consider all pertinent facts and circumstances in
identifying the acquisition date.
Since CCI approval is a substantive approval for ABC Ltd. to acquire control of XYZ
Ltd.’s operations, the date of acquisition cannot be earlier than the date on which
approval is obtained from CCI. This is pertinent given that the approval from CCI is
considered to be a substantive process and accordingly, the acquisition is
considered to be completed only on receipt of such approval.

Question 33
ABC Ltd. acquired a beverage company PQR Ltd. from XYZ Ltd. At the time of the
acquisition, PQR Ltd. is the defendant in a court case whereby certain customers of
PQR Ltd. have alleged that its products contain pesticides in excess of the
permissible levels that have caused them health damage. PQR Ltd. is being sued for
damages of ` 2 crore. XYZ Ltd. has indemnified ABC Ltd. for the losses, if any, due
to the case for amount up to ` 1 crore. The fair value of the contingent liability for
the court case is ` 70 lakh. How should ABC Ltd. account for the contingent liability
and the indemnification asset? What if the fair value of the liability is ` 1.2 crore
instead of ` 70 lakh.
Solution:
In the current scenario, ABC Ltd. measures the identifiable liability of entity PQR
Ltd. at ` 70 lakh and also recognises a corresponding indemnification asset of
` 70 lakhs on its consolidated balance sheet. The net impact on goodwill from the
recognition of the contingent liability and associated indemnification asset is nil.
However, in the case where the liability’s fair value is more than ` 1 crore i.e.
` 1.2 crore, the indemnification asset will be limited to ` 1 crore only.

Question 34
ABC Ltd. acquires XYZ Ltd. in a business combination on 15th January, 20X1. Few
days before the date of acquisition, one of XYZ Ltd.’s customers had claimed that
certain amounts were due by XYZ Ltd. under penalty clauses for completion delays
included in the contract. ABC Ltd. evaluates the dispute based on the information
available at the date of acquisition and concludes that XYZ Ltd. was responsible for
at least some of the delays in completing the contract. Based on the evaluation,
ABC Ltd. recognises ` 1 crore towards this liability which is its best estimate of the
fair value of the liability to the customer based on the information available at the
date of acquisition. In October, 20X1 (within the measurement period), the
customer presents additional information as per which ABC Ltd. concludes the fair
value of liability on the date of acquisition to be ` 2 crore. ABC Ltd. continues to

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receive and evaluate information related to the claim after October, 20X1. Its
evaluation doesn’t change till February, 20X2 (i.e. after the measurement period),
when it concludes that the fair value of the liability for the claim at the date of
acquisition is ` 1.9 crore. ABC Ltd. determines that the amount that would be
recognised with respect to the claim under Ind AS 37, Provisions, Contingent
Liabilities and Contingent Assets as at February, 20X2 is ` 2.2 crore. How should
the adjustment to the provisional amounts be made in the financial statements
during and after the measurement period?

Solution:
The consolidated financial statements of ABC Ltd. for the year ended 31st March,
20X1 should include ` 1 crore towards the contingent liability in relation to the
customer claim.
When the customer presents additional information in support of its claim, the
incremental liability of ` 1 crore (` 2 crore – ` 1 crore) will be adjusted as a part of
acquisition accounting as it is within the measurement period. In its financial
statements for the year ending on 31st March, 20X2, ABC Ltd. will disclose the
amounts and explanations of the adjustments to the provisional values recognized
during the current reporting period. Therefore, it will disclose that the
comparative information for the year ending on 31st March, 20X1 is adjusted
retrospectively to increase the fair value of the item of liability at the acquisition
date by ` 1 crore, resulting in a corresponding increase in goodwill.
The information resulting in the decrease in the estimated fair value of the liability
for the claim in February, 20X2 was obtained after the measurement period.
Accordingly, the decrease is not recognised as an adjustment to the acquisition
accounting. If the amount determined in accordance with Ind AS 37 subsequently
exceeds the previous estimate of the fair value of the liability, then ABC Ltd.
recognises an increase in the liability. As the change has occurred after the end of
the measurement period, the increase in the liability amounting to ` 20 lakh
(` 2.2 crore – ` 2 crore) is recognised in profit or loss.

Question 35
P a real estate company acquires Q another construction company which has an
existing equity settled share based payment scheme. The awards vest after 5 years
of employee service. At the acquisition date, Company Q’s employees have
rendered 2 years of service.
None of the awards are vested at the acquisition date. P did not replace the
existing sharebased payment scheme but reduced the remaining vesting period
from 3 years to 2 year. Company P determines that the market-based measure of
the award at the acquisition date is ` 500 (based on measurement principles and
conditions at the acquisition date as per Ind AS 102).
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Solution:
The market based measure or the fair value of the award on the acquisition date of
500 is allocated NCI and post combination employee compensation expense. The
portion allocable to pre-combination period is 500 x 2/5 = 200 which will be
included in pre-combination period and is allocated to NCI on the acquisition date.
The amount is computed based on original vesting period.
The remaining expense which is 500 – 200 = 300 is accounted over the remaining
vesting period of 2 years as compensation expenses.

Question 36
Can an acquiring entity account for a business combination based on a signed non-
binding letter of intent where the exchange of consideration and other conditions
are expected to be completed with 2 months?
Solution:
No. as per the requirement of the standard a non- binding Letter of Intent (LOI)
does not effectively transfer control and hence this cannot be considered as the
basis for determining the acquisition date.

Question 37
ABC Ltd. acquired all the shares of XYZ Ltd. The negotiations had commenced on
1st January, 20X1 and the agreement was finalised on 1st March, 20X1. While ABC
Ltd. obtains the power to control XYZ Ltd.’s operations on 1st March, 20X1, the
agreement states that the acquisition is effective from 1st January, 20X1 and that
ABC Ltd. is entitled to all profits after that date.
In addition, the purchase price is based on XYZ Ltd.’s net asset position as at
1st January, 20X1. What is the date of acquisition?
Solution:
Ind AS 103 provides that acquisition date is the date on which the acquirer obtains
control of the acquiree.
Ind AS 110, Consolidated Financial Statements, inter alia, state that an investor
controls an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through
its power over the investee. Thus, an investor controls an investee if and only if the
investor has all the following:
(a) Power over the investee;
(b) Exposure, or rights, to variable returns from its involvement with the
investee; and
(c) The ability to use its power over the investee to affect the amount of the
investor’s returns.

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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 acquire the
closing date. However, the acquirer might obtain control on a date that is either
earlier or later than the closing date.
Therefore, in this case, notwithstanding that the price is based on the net assets at
1st January, 20X1 and that XYZ Ltd.’s shareholders do not receive any dividends
after that date, the date of acquisition for accounting purposes will be 1st March,
20X1. It is only on 1st March, 20X1 and not 1st January, 20X1, that ABC Ltd. has the
power to direct the relevant activities of XYZ Ltd. so as to affect its returns from its
involvement with XYZ Ltd. Accordingly, the date of acquisition is 1st March, 20X1.

Question 38
Should stamp duty paid on acquisition of land pursuant to a business combination
be capitalised to the cost of the asset or should it be treated as an acquisition
related cost and accordingly be expensed off?
Solution:
As per Ind AS 103, the acquisition-related costs incurred by an acquirer to effect a
business combination are not part of the consideration transferred.
Ind AS 103 states that, acquisition-related costs are costs the acquirer incurs to
effect a business combination. Those costs include finder’s fees; advisory, legal,
accounting, valuation and other professional or consulting fees; general
administrative costs, including the costs of maintaining an internal acquisitions
department; and costs of registering and issuing debt and equity securities. The
acquirer shall account for acquisition related costs as expenses in the periods in
which the costs are incurred and the services are received, with one exception.
Note: The costs to issue debt or equity securities shall be recognised in accordance
with Ind AS 32 and Ind AS 109.

The stamp duty payable for transfer of assets in connection with the business
combination is an acquisition-related cost as described under Ind AS 103. Stamp
duty is a cost incurred by the acquirer in order to effect the business combination
and it is not part of the fair value exchange between the buyer and seller for the
business. In such cases, the stamp duty is incurred to acquire the ownership rights
in land in order to complete the process of transfer of assets as part of the overall
business combination transaction but it does not represent consideration paid to
gain control over business from the sellers.

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It may be noted that the accounting treatment of stamp duty incurred for separate
acquisition of an item of property, plant and equipment (i.e. not as part of
business combination) differs under Ind AS 16, Property, Plant and Equipment.
Unlike Ind AS 16, the acquisition accounting as per Ind AS 103 requires assets and
liabilities acquired in a business combination to be measured at fair value. While
incurred in connection with a business combination, stamp duty does not increase
the future economic benefits from the net assets comprising the business (which
would be recognised at fair value) and hence cannot be capitalised. The examples
of costs given in paragraph 53 is only an inclusive list; they are only indicative and
do not preclude any other cost to be considered as acquisition-related cost. In the
given case, the transfer of land and the related stamp duty is required to be
accounted as part of the business combination transaction as per requirements of
Ind AS 103 and not as a separate transaction under Ind AS.

Accordingly, stamp duty incurred in relation to land acquired as part of a business

combination transaction are required to be recognised as an expense in the period
in which the acquisition is completed and given effect to in the financial
statements of the acquirer.

Question 39
ABC Ltd. acquires PQR Ltd. on 30th June, 20X1. The assets acquired from PQR Ltd.
include an intangible asset that comprises wireless spectrum license. For this
intangible asset, ABC Ltd. is required to make an additional one-time payment to
the regulator in PQR’s jurisdiction in order for the rights to be transferred for its
use. Whether such additional payment to the regulator is an acquisition-related
cost?
Solution:
As per Ind AS 103, the acquisition-related costs incurred by an acquirer to effect a
business combination are not part of the consideration transferred.
Ind AS 103 states that, acquisition-related costs are costs the acquirer incurs to
effect a business combination. Those costs include finder’s fees; advisory, legal,
accounting, valuation and other professional or consulting fees; general
administrative costs, including the costs of maintaining an internal acquisitions
department; and costs of registering and issuing debt and equity securities. The
acquirer shall account for acquisition-related costs as expenses in the periods in
which the costs are incurred and the services are received, with one exception.
The costs to issue debt or equity securities shall be recognised in accordance with
Ind AS 32 and Ind AS 109.
The payment to the regulator represents a transaction cost and will be regarded as
acquisition related cost incurred to effect the business combination. Applying the
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requirements of Ind AS 103, it should be expensed as it is incurred. Transfer of
rights in the instant case cannot be construed to be separate from the business
combination because the transfer of the rights to ABC Ltd. is an integral part of the
business combination itself.
It may be noted that had the right been acquired separately (i.e. not as part of
business combination), the transaction cost is required to be capitalised as part of
the intangible asset as per the requirements of Ind AS 38, Intangible Assets.

Question 40
ABC Ltd. pays ` 50 crore to acquire PQR Ltd. from XYZ Ltd. PQR Ltd. manufactured
products containing fiber glass and has been named in 10 class actions concerning
the effects of these fiber glass. XYZ Ltd. agrees to indemnify ABC Ltd. for the
adverse results of any court cases up to an amount of ` 10 crore. The class actions
have not specified amounts of damages and past experience suggests that claims
may be up to ` 1 crore each, but that they are often settled for small amounts.
ABC Ltd. makes an assessment of the court cases and decides that due to the
potential variance in outcomes, the contingent liability cannot be measured
reliably and accordingly no amount is recognised in respect of the court cases. How
should indemnification asset be accounted for?

Solution:
Since no liability is recognised in the given case, ABC Ltd. will also not recognise an
indemnification asset as part of the business combination accounting.

Question 41
Progressive Ltd is being sued by Regressive Ltd for an infringement of its Patent. At
31st March, 20X2, Progressive Ltd recognised a ` 10 million liability related to this
litigation.
On 30th July, 20X2, Progressive Ltd acquired the entire equity of Regressive Ltd for
` 500 million. On that date, the estimated fair value of the expected settlement of
the litigation is ` 20 million.

Solution:
In the above scenario the litigation is in substance settled with the business
combination transaction and accordingly the ` 20 million being the fair value of the
litigation liability will be considered as paid for settling the litigation claim and will
be not included in the business combination. Accordingly, the purchase price will
reduce by 20 million and the difference between 20 and 10 will be recorded in
income statement of the Progressive limited as loss on settlement of the litigation.

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Question 42
Company X, the ultimate parent of a large number of subsidiaries, reorganises the
retail segment of its business to consolidate all of its retail businesses in a single
entity. Under the reorganisation, Company Z (a subsidiary and the biggest retail
company in the group) acquires Company X’s shareholdings in its one operating
subsidiary, Company Y by issuing its own shares to Company X. After the
transaction, Company X will directly control the operating and financial policies of
Companies Y.
After-Reorganisation

Company X

Other Sub Company Z

Company Y
Before-Reorganisation

Company X

Company Y Company Z Company M Other

subsidiaries
Solution:
In this situation, Company Z pays consideration to Company X to obtain control of
Company Y. The transaction meets the definition of a business combination. Prior
to the reorganisation, each of the parties are controlled by Company X. After the
reorganisation, although Company Y are now owned by Company Z, all two
companies are still ultimately owned and controlled by Company X. From the
perspective of Company X, there has been no change as a result of the
reorganisation. This transaction therefore meets the definition of a common
control combination and is within the scope of Ind AS 103.
Question 43
ABC Ltd. and XYZ Ltd. are owned by four shareholders B, C, D and E, each of whom
holds 25% of the shares in each company. Shareholders B, C and D have entered
into a shareholders’ agreement in terms of governance of ABC Ltd. and XYZ Ltd.
due to which they exercise joint control.
Whether ABC Ltd. and XYZ Ltd. are under common control?

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B C D E B C D E

75% 25% 75% 25%

ABC LTD
XYZ LTD

Solution:
Appendix C to Ind AS 103 defines common control business combination as a
business combination involving entities or businesses in which all the combining
entities or businesses are ultimately controlled by the same party or parties both
before and after the business combination, and that control is not transitory.
As per paragraphs 6 and 7 of Appendix C to Ind AS 103, an entity can be controlled
by an individual, or by a group of individuals acting together under a contractual
arrangement, and that individual or group of individuals may not be subject to the
financial reporting requirements of Ind AS. Therefore, it is not necessary for
combining entities to be included as part of the same consolidated financial
statements for a business combination to be regarded as one having entities under
common control. Also, a group of individuals are regarded as controlling an entity
when, as a result of contractual arrangements, they collectively have the power to
govern its financial and operating policies so as to obtain benefits from its
activities, and that ultimate collective power is not transitory.
In the instant case, both ABC Ltd. and XYZ Ltd. are jointly controlled by group of
individuals (B, C and D) as a result of contractual arrangement. Therefore, in the
current scenario, ABC Ltd. and XYZ Ltd. are considered to be under common control.

Question 44
ABC Ltd. and XYZ Ltd. are owned by four shareholders B, C, D and E, each of whom
holds 25% of the shares in each company. However, there are no agreements
between any of the shareholders that they will exercise their voting power jointly.
Whether ABC Ltd. and XYZ Ltd. are under common control?
Solution:
Appendix C to Ind AS 103 defines ‘Common control business combination’ as
business combination involving entities or businesses in which all the combining
entities or businesses are ultimately controlled by the same party or parties both
before and after the business combination, and that control is not transitory.

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Further as per paragraphs 6 and 7 of Appendix C to Ind AS 103, an entity can be
controlled by an individual, or by a group of individuals acting together under a
contractual arrangement, and that individual or group of individuals may not be
subject to the financial reporting requirements of Ind AS. Therefore, it is not
necessary for combining entities to be included as part of the same consolidated
financial statements for a control. Also a group of individuals are regarded as
controlling an entity when, as a result of contractual arrangements, they collectively
have the power to govern its financial and operating policies so as to obtain benefits
from its activities, and that ultimate collective power is not transitory.
In the present case, there is no contractual arrangement between the shareholders
who exercise control collectively over either company. Thus, ABC Ltd. and XYZ Ltd.
are not considered to be under common control even if there is an established
pattern of voting together.

Question 45
ABC Ltd. had a subsidiary, namely, X Ltd. which was acquired on 1st April, 2XX0. ABC
Ltd. acquires all of the shares of Y Ltd. on 1st April, 2X17. ABC Ltd. transfers the
shares in Y Ltd. to X Ltd. on 2nd April, 2X17. How should the above transfer of Y Ltd.
into X Ltd. be accounted for in the consolidated financial statements of X Ltd.?
Before
ABC Ltd.

X Ltd.

Intermediate ABC Ltd.

X Y

Solution:
Ind AS 103 defines common control business combination as business combination
involving entities or businesses in which all the combining entities or businesses are
ultimately controlled by the same party or parties both before and after the
business combination, and that control is not transitory.
As per Ind AS 103, a group of individuals are regarded as controlling an entity
when, as a result of contractual arrangements, they collectively have the power to
govern its financial and operating policies so as to obtain benefits from its
activities, and that ultimate collective power is not transitory.

The term ‘transitory’ has been included as part of Ind AS 103.

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The word ‘transitory’ has been included in the common control definition to ensure
that acquisition accounting applies to those transactions that look as though they
are combinations involving entities under common control, but which in fact
represent genuine substantive business combinations with unrelated parties.

Based on above, if the intermediate step had been omitted and instead X Ltd. had
been the ABC group’s vehicle for the acquisition of Y Ltd. - i.e. going straight to
the ‘after’ position - then X Ltd. would have been identified as the acquirer.

Considering X Ltd. and Y Ltd. are under common control (with common parent), it
might seem that acquisition accounting is not required because of the specific
requirement for common control business combination. However, X Ltd. should be
identified as the acquirer and should account for its combination with Y Ltd. using
acquisition accounting. This is because X Ltd. would have applied acquisition
accounting for Y Ltd. if X Ltd. had acquired Y Ltd directly rather than through ABC
Ltd. Acquisition accounting cannot be avoided in the financial statements of X Ltd.
simply by placing X Ltd. and Y Ltd. under the common control ABC Ltd shortly
before the transaction.

Question 46
ABC Ltd. a pharmaceutical group acquires XYZ Ltd. another pharmaceutical
business. XYZ Ltd. has incurred significant research costs in connection with two
new drugs that have been undergoing clinical trials. Out of the two drugs, one drug
has not been granted necessary regulatory approvals. However, ABC Ltd. expects
that approval will be given within two years. The other drug has recently received
regulatory approval. The drugs’ revenue-earning potential was one of the principal
reasons why entity ABC Ltd. decided to acquire entity XYZ Ltd. Whether the
research and development on either of the drugs be recognised as an intangible
asset in the books of ABC Ltd?

Solution:
In accordance with this Standard and Ind AS 103, an acquirer recognises at the
acquisition date, separately from goodwill, an intangible asset of the acquiree,
irrespective of whether the asset had been recognised by the acquiree before the
business combination.

This means that the acquirer recognises as an asset separately from goodwill an in-
process research and development project of the acquiree if the project meets the
definition of an intangible asset. An acquiree’s in-process research and
development project meets the definition of an intangible asset when it:
(a) meets the definition of an asset; and
(b) is identifiable, i.e. is separable or arises from contractual or other legal rights.

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In accordance with above,
(i) The fair value of the first drug reflects the probability and the timing of
the regulatory approval being obtained. As per the standard, the
recognition criterion of probable future economic benefits is considered
to be satisfied in respect of the asset acquired accordingly an asset is
recognised. Subsequent expenditure on an in-process research or
development project acquired separately is to be dealt with in
accordance with paragraph 43 of Ind AS 38.
(ii) The rights to the second drug also meet the recognition criteria in Ind AS
8 and are recognised. The approval means it is probable that future
economic benefits will flow to ABC Ltd. This will be reflected in the fair
value assigned to the intangible asset.
Thus, recognising in-process research and development as an asset on
acquisition applies different criteria to those that are required for
internal projects. The research costs of internal R&D projects may under
no circumstances be capitalised as an intangible asset. It may be
pertinent to note that entities will be required to recognise on
acquisition some research and development expenditure that they would
not have been able to recognise if it had been an internal project.
Although the amount attributed to the project is accounted for as an
asset, Ind AS 38 requires that any subsequent expenditure incurred after
the acquisition of the project is to be accounted for in accordance with
Ind AS 38.

Question 47
Sita Ltd and Beta Ltd decides to combine together for forming a Dual Listed
Corporation (DLC). As per their shareholder’s agreement, both the parties will retain
original listing and Board of DLC will be comprised of 10 members out of which
6 members will be of Sita Ltd and remaining 4 board members will be of Beta Ltd.
The fair value of Sita Ltd is ` 100 crores and fair value of Beta Ltd is ` 80 crores.
The fair value of net identifiable assets of Beta Limited is ` 70 crores. Assume non-
controlling Interest (NCI) to be measured at fair value.
You are required to determine the goodwill to be recognised on acquisition.
Solution:
Sita Ltd has more Board members and thereby have majority control in DLC.
Therefore, Sita Ltd is identified as acquirer and Beta Ltd as acquiree.
Since no consideration has been transferred, the goodwill needs to be calculated as
the difference of Part A and Part B:

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Part A:
(1) Consideration paid by Acquirer. - Nil
(2) Controlling Interest in Acquiree – ` 80 crores
(3) Acquirer’s previously held interest – Nil
Part B:
Fair value of net identifiable asset – ` 70 crores
Goodwill is recognised as ` 10 crores (80 – 70 crores) in business combination
achieved through contract alone when NCI is measured at fair value.

Question 48
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:
Building - ` 1000 Crores
Cash and Cash Equivalent - ` 200 Crores
Financial Liabilities - ` 800 Crores
DTL - ` 150 crores
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%)

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

Question 49
Scenario A:
An investor is holding 30% of the voting power in ABC Ltd. The investor has been
granted an option to purchase 30% more voting power from other investors.

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However, the exercise price of the option is too high compared to the current
market price of ABC Ltd. because ABC Ltd. is incurring losses since last 2 years and
it is expected to continue to incur losses in future period as well. Whether the right
held by the investor to exercise purchase option is substantive?
Scenario B:
Assume the same facts as per Scenario A except, the option price is in line with the
current market price of ABC Ltd. and ABC Ltd. is making profits. However, the
option can be exercised in next 1 month only and the investor is not in a position to
arrange for the require amount in 1 month’s time to exercise the option. Whether
the right held by the investor to exercise purchase option is substantive?

Scenario C:
Assume the same facts as per Scenario A except, ABC Ltd. is making profits.
However, the current market price of ABC Ltd. is not known since the ABC Ltd. is a
relatively new company, business of the company is unique and there are no other
companies in the market doing similar business. Hence the investor is not sure
whether to exercise the purchase option.
Whether the right held by the investor to exercise purchase option is substantive?

Solution:
Scenario A:
The right to exercise purchase option is not substantive since the option exercise
price is too high as compared to current market price of ABC Ltd.

Scenario B:
The right to exercise purchase option is not substantive since the time period for
the investor to arrange for the requisite amount for exercising the option is too
narrow.

Scenario C:
The right to exercise purchase option is not substantive. This is because the
investor is not able to obtain information about the market value of ABC Ltd. which
is necessary in order to compare the option exercise price with market price so
that it can decide whether the exercise of purchase option would be beneficial or
not.

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HOME WORK QUESTIONS WITH SOLUTIONS

Question 1
On 1st January, 20X1, A Ltd. acquires 80 per cent of the equity interests of B Ltd.
in exchange for cash of ` 15 crore. The former owners of B Ltd. were required to
dispose of their investments in B Ltd. by a specified date, and accordingly they did
not have sufficient time to find potential buyers. A qualified valuation professional
hired by the management of A Ltd. measures the identifiable net assets acquired,
in accordance with the requirements of Ind AS 103, at ` 20 crore and the fair value
of the 20 per cent non-controlling interest in B Ltd. at ` 4.2 crore. How should A
Ltd. recognise the above bargain purchase?

Solution:
The amount of B Ltd.’s identifiable net assets i.e., ` 20 crore exceeds the fair
value of the consideration transferred plus the fair value of the non-controlling
interest in B Ltd. i.e. ` 19.2 crore. Therefore, A Ltd. should review the procedures
it used to identify and measure the net assets acquired and the fair value of non-
controlling interest in B Ltd. and the consideration transferred. After the review, A
Ltd. decides that the procedures and resulting measures were appropriate. A Ltd.
measures the gain on its purchase of the 80 per cent interest at ` 80 lakh, as the
difference between the amount of the identifiable net assets which is ` 20 crore
and the sum of purchase consideration and fair value of non-controlling interest,
which is ` 19.2 crore (cash consideration of ` 15 crore and fair value of non-
controlling interest of ` 4.2 crore).
Assuming there exists clear evidence of the underlying reasons for classifying the
business combination as a bargain purchase, the gain on bargain purchase of 80 per
cent interest calculated at ` 80 lakh, which will be recognised in other
comprehensive income on the acquisition date and accumulated the same in equity
as capital reserve.
If the acquirer chose to measure the non-controlling interest in B Ltd. on the basis of
its proportionate share of identifiable net assets of the acquiree, the recognised
amount of the non-controlling interest would be ` 4 crore (` 20 crore × 0.20). The gain
on the bargain purchase then would be ` 1 crore (` 20 crore – (` 15 crore + ` 4 crore)).

Question 2
Vadapav Ltd. is a successful company has number of own stores across India and
also offers franchisee to other companies. Efficient Ltd. is one of the franchisee of
Vadapav Ltd. and is and operates number of store in south India. Vadapav Ltd.
decided to acquire Efficient Ltd due to its huge distribution network and
accordingly purchased the outstanding shares on 1st April, 20X2. On the acquisition
date, Vadapav Ltd. determines that the license agreement reflects current market
terms.

FINANCIAL REPORTING 380

BUSINESS COMBINATIONS
CA FINAL
Solution:
Vadapav will record the franchisee right as an intangible asset (reacquired right)
while doing purchase price allocation and since it is at market terms no gain or loss
will be recorded on settlement.

Question 3
Contingent consideration - Payments to employees who are former owners of
acquire ABC Ltd. acquires all of the outstanding shares of XYZ Ltd. in a business
combination. XYZ Ltd. had three shareholders with equal shareholdings, two of
whom were also senior-level employees of XYZ Ltd. and would continue as
employee post acquisition of shares by ABC Ltd.
• The employee shareholders each will receive ` 60,00,000 plus an additional
payment of ` 1,50,00,000 to 2,00,00,000 based on a multiple of earnings over
the next two years.
• The non-employee shareholders each receive ` 1,00,00,000.
The additional payment of each of these employee shareholders will be
forfeited if they leave the employment of XYZ Ltd. at any time during the two
years following its acquisition by ABC Ltd. The salary received by them is
considered reasonable remuneration for their services.
How much amount is attributable to post combination services?

Solution:
Paragraph B55 (a) of Ind AS 103 provides an indication that a contingent
consideration arrangement In which the payments are automatically forfeited if
employment terminates is remuneration for post-combination services.
Arrangements in which the contingent payments are not affected by employment
termination may indicate that the contingent payments are additional
consideration rather than remuneration.
In accordance with the above, in the instant case, the additional consideration of
` 1,50,00,000 to ` 2,00,00,000 represents compensation for post-combination
services, as the same represents that part of the payment which is forfeited if the
former shareholder does not remain in the employment of XYZ Ltd. for two years
following the acquisition - i.e., only ` 60,00,000 is attributed to consideration in
exchange for the acquired business.

Question 4
Classic Ltd. acquires 60% of the ordinary shares of Natural Ltd. a private entity, for
` 97.5 crore. The fair value of its identifiable net assets is ` 150 crore. The fair
value of the 40% of the ordinary shares owned by non-controlling shareholders is
` 65 crore. Carrying amount of Natural Ltd.’s net assets is ` 120 crore.
How will the non-controlling interest be measured?

FINANCIAL REPORTING 381

BUSINESS COMBINATIONS
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Solution:
Paragraph 19 of Ind AS 103 states that for each business combination, the acquirer
shall measure at the acquisition date components of non-controlling interest in the
acquiree that are present ownership interests and entitle their holders to a
proportionate share of the entity’s net assets in the event of liquidation at either:
(a) Fair value; or
(b) The present ownership instruments’ proportionate share in the recognised
amounts of the acquiree’s identifiable net assets.
All other components of non-controlling interests shall be measured at their
acquisition date fair values, unless another measurement basis is required by
Ind AS.
In accordance with above, non-controlling interests will be measured in either of
the following manner:
(a) Non-controlling interests are measured at fair value
Under this method, goodwill represents the difference between the fair value
of Natural Ltd. and the fair value of its identifiable net assets.
Thus, Classic Ltd. will recognise the business combination as follows:
(` in crores)
Identifiable net assets at fair value Dr 150
Goodwill* Dr 12.5
To Non-controlling interest 65
To Investment in Natural Ltd. 97.5
Note: Goodwill is calculated as 97.5+65-150 = 12.5 or 162.5-150 = 12.5

(b) Non-controlling interests are measured at proportionate share of identifiable

net assets
Under this method, goodwill represents the difference between the total of
the consideration transferred less the fair value of the acquirer’s share of net
assets acquired and liabilities assumed. The non-controlling interests that are
present ownership interests and entitle their holders to a proportionate share
of the Natural Ltd.’s net assets in the event of liquidation (i.e. the ordinary
shares) are measured at the non controlling interest’s proportionate share of
the identifiable net assets of Natural Ltd.
Thus, Classic will recognise the business combination as follows:
(` in crores)
Identifiable net assets at fair value Dr 150
Goodwill* Dr 7.5
To Non-controlling interest (40% x 150) Cr 60
To Investment in Natural Ltd. Cr 97.5
Note: Goodwill is calculated as 97.5 + 60 – 150 = 7.5 or 97.5 – (150 x 60%) = 7.5

FINANCIAL REPORTING 382

BUSINESS COMBINATIONS
CA FINAL
Question 5
On 1 January 2020, entity H acquired 100% share capital of entity S for ` 15,00,000.
The book values and the fair values of the identifiable assets and liabilities of
entity S at the date of acquisition are set out below, together with their tax bases
in entity S’s tax jurisdictions. Any goodwill arising on the acquisition is not
deductible for tax purposes. The tax rates in entity H’s and entity S’s jurisdictions
are 30% and 40% respectively.
Book values Tax base Fair values
Acquisitions
`’000 `’000 `’000
Land and buildings 600 500 700
Property, plant and equipment 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash equivalents 130 130 130
Accounts payable (160) (160) (160)
Retirement benefit obligations (100) - (100)

You are required to calculate the deferred tax arising on acquisition of Entity S.
Also calculate the Goodwill arising on acquisition.

Solution:
Calculation of Net assets acquired (excluding the effect of deferred tax
liability):
Tax base Fair values
Net assets acquired
`’000 `’000
Land and buildings 500 700
Property, plant and equipment 200 270
Inventory 100 80
Accounts receivable 150 150
Cash and cash equivalents 130 130
Total assets 1,080 1,330
Accounts payable (160) (160)
Retirement benefit obligations – (100)
Net assets before deferred tax liability 920 1,070

FINANCIAL REPORTING 383

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Deferred tax arising on acquisition of entity S and goodwill
`’000 `’000
Fair values of S’s identifiable assets and liabilities 1,070
(excluding deferred tax) (920)
Less: Tax base 150
Temporary difference arising on acquisition 60
Net deferred tax liability arising on acquisition of entity S 1,500
(` 150,000@ 40%)
Purchase consideration
Less: Fair values of entity S’s identifiable assets and
liabilities (excluding deferred tax) 1,070
Deferred tax liability (60) (1,010)
Goodwill arising on acquisition 490
Note: Since, the tax base of the goodwill is nil, taxable temporary difference of
` 4,90,000 arises on goodwill. However, no deferred tax is recognised on the
goodwill. The deferred tax on other temporary differences arising on acquisition is
provided at 40% and not 30%, because taxes will be payable or recoverable in entity
S’s tax jurisdictions when the temporary differences will be reversed.

Question 6
Veera Limited and Zeera Limited are both in the business of manufacturing and
selling of Lubricant. Veera Limited and Zeera Limited shareholders agree to join
forces to benefit from lower delivery and distribution costs. The business
combination is carried out by setting up a new entity called Meera Limited that
issues 100 shares to Veera Limited’s shareholders and 50 shares to Zeera Limited’s
shareholders in exchange for the transfer of the shares in those entities. The
number of shares reflects the relative fair values of the entities before the
combination. Also respective company’s shareholders gets the voting rights in
Meera Limited based on their respective shareholding.
Determine the acquirer by applying the principles of Ind AS 103 ‘Business
Combinations’.
Solution:
The relative voting rights in the combined entity after the business combination
– The acquirer is usually the combining entity whose owners as a group retain or
receive the largest portion of the voting rights in the combined entity.
Based on above mentioned para, acquirer shall be either of the combining entities
(i.e. Veera Limited or Zeera Limited), whose owners as a Group retain or receive
the largest portion of the voting rights in the combined entity.
Hence, in the above scenario Veera Limited’s shareholder gets 66.67% share (100 /
150 x 100) and Zeera Limited’s shareholder gets 33.33% share in Meera Limited.
Hence, Veera Limited is acquirer as per the principles of Ind AS 103.
FINANCIAL REPORTING 384
BUSINESS COMBINATIONS
CA FINAL

PRACTICE TEST PAPER WITH SOLUTION

Question 1
Notorola Limited has two divisions A and B. division A has been making constant
profits while Division B has been invariably suffering losses.
On 31st March 2018, the division – wise draft extract of the Balance Sheet was as
follows:
(` in crores)
A B Total
Fixed Assets Cost 500 1,000 1,500
Depreciation (450) (800) (1,250)
Net Fixed Assets (A) 50 200 250
Current Assets 400 1,000 1,400
Less: Current Liabilities (50) (800) (850)
Net Current Assets (B) 350 200 550
Total (A) + (B) 400 400 800
Financed by:
Loan Funds - 600 600
Capital: Equity ` 10 each 50 - 50
Surplus 350 (200) 150
Total 400 400 800

Division B along with its assets and liabilities was sold for ` 50 crores to Senovo
Limities a new company, who allotted 2 crore equity shares of ` 10 each at a
premium of ` 15 per share to the members of Notorola Limited in full settlement of
the consideration, in proportion to their shareholding in the company. One of the
members the Notorola Limited was holding 52% shares of the company. Assuming
that, there are no other transactions, you are required to:
(i) Pass journal entries in the books of Notorola Limited. (ii) Prepare the Balance
Sheet of Notorola Limited after the entries in (i). (iii) Prepare the Balance Sheet of
Senovo Limited. Balance Sheet prepared for (ii) and (iii) above should comply with
the relevant Ind AS and Schedule III of the Companies Act, 2013. Provide Notes to
Accounts, for ‘Other Equity’ in case of (ii) and ‘Share Capital’ in case of (iii), only.

FINANCIAL REPORTING 385

BUSINESS COMBINATIONS
CA FINAL
Question 2
Deepak Ltd., an automobile group acquires 25% of the voting ordinary shares of
Shaun Ltd., another automobile business, by paying ` 4,320 crore on 01.04.2017.
Deepak Ltd. accounts its investment in Shaun Ltd. Using equity method as
prescribed under Ind AS 28. At 31.03.2018, Deepak Ltd. recognised its share of the
net asset changes of Shaun Ltd. using equity accounting as follows:
(` In crore)
Share of Profit or Loss 378
Share of Exchange difference in OCI 54
Share of Revaluation Reserve of PPE in OCI 27
The carrying amount of the investment in the associate on 31.03.2018 was
therefore? 4,779 crore (4,320 + 378 + 54 + 27).
On 01.04.2018, 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 01.04.2018. How
should such business combination be accounted for in accordance with the
applicable Ind AS?

FINANCIAL REPORTING 386

BUSINESS COMBINATIONS
CA FINAL

SOLUTIONS

Solution:
(1) Journal of Notorola Ltd.
(` in crore)
Dr. Cr.
Loan Funds Dr. 600
Current Liabilities Dr. 800
Provision for Depreciation Dr. 800
To Fixed Assets 1,000
To Current Assets 1,000
To Capital Reserve 200
(Being division B along with its assets and liabilities sold
to Senovo Ltd. for ` 50 crore)
In the given scenario, this demerger will meet the definition of common control
transaction. Accordingly, the transfer of assets and liabilities will be
derecognized and recognized as per book value and the resultant loss or gain will
be recorded as capital reserve in the books of demerged entity (Notorola Ltd).
Notes:
Any other alternative set of entries, with the same net effect on various
accounts, may also be given.
(ii) Notorola Ltd. Balance Sheet after demerger
(` in crore)
ASSETS Note No. Amount
Non-current assets 50
Property, Plant and Equipment 400
Current assets 450
EQUITY AND LIABILITIES
Equity 50
Equity share capital (of face value of `10 each) 1 350
Other equity 2
Liabilities
Current liabilities 50
Current liabilities 450

FINANCIAL REPORTING 387

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Notes to Accounts
(` in crore)
1. Equity Share Capital 50
5 crore equity shares of face value of ` 10 each Consequent
to transfer of Division B to newly incorporated company
Senovo Ltd., the members of the company have been
allotted 2 crore equity shares of ` 10 each at a premium of
` 15 per share of Senovo Ltd., in full settlement of the
consideration in proportion to their shareholding in the
company
2. Other Equity 150
Surplus (350 - 200) 200
Add: Capital Reserve on reconstruction 350

(iii) Balance Sheet of Senovo Ltd.

(` In crore)
Note No. Amount
ASSETS
Non-current assets
Property, Plant and Equipment 200
Current assets 1,000
EQUITY AND LIABILITIES 1,200
Equity
Equity share capital (of face value of INR 10 each) 1 20
Other equity 2 (220)
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 600
Current liabilities
Current liabilities 800
1,200

FINANCIAL REPORTING 388

BUSINESS COMBINATIONS
CA FINAL
Notes of Accounts
(` in crore)
(1) Share Capital
Issued and Paid-up capital
2 crore Equity shares of ` 10 each fully paid up 20
(All the above shares have been allotted to the members of
Notorola Ltd. on takeover of Division B from Notorola Ltd. as
fully paid-up pursuant to contract without payment being
received in cash)
(2) Other Equity
Securities Premium 30
Capital reserve [50 - (1,200 – 1,400)] (250)
(220)

Solution: (2)
Ind AS 103 provides that in a business combination achieved in stages, the acquirer
shall remeasure its previously held equity interest in the acquiree at its acquisition-
date fair value and recognise the resulting gain or loss, if any, in profit or loss or
other comprehensive income, as appropriate. In prior reporting periods, the
acquirer may have recognized changes in the value of its equity interest in the
acquiree in other comprehensive income. If so, the amount that was recognised in
other comprehensive income shall be recognised on the same basis as would be
required if the acquirer had disposed of directly the previously held equity
interest.
Applying the above, Deepak Ltd. records the following entry in its consolidated
financial statements:
(` in crore)
Debit Credit
Identifiable net assets of Shaun Ltd. Dr. 16,200
Goodwill (W.N.1) Dr. 2,160
Foreign currency translation reserve Dr. 54
PPE revaluation reserve Dr. 27
To Cash 13,500
To Investment in associate -Shaun Ltd. 4,779
To Retained earnings (W.N.2) 27
To Gain on previously held interest in Shaun Ltd. 135
recognised in Profit or loss (W.N.3)
(Recognition of acquisition of Shaun Ltd.)

FINANCIAL REPORTING 389

BUSINESS COMBINATIONS
CA FINAL
Working Notes: -
(1) Calculation of Goodwill
` in crore
Cash consideration 13,500
Add: Fair value of previously held equity interest in Shaun Ltd. 4,860
Total consideration 18,360
Less: Fair value of identifiable net assets acquired (16,200)
Goodwill 2,160
(2) The credit to retained earnings represents the reversal of the unrealized gain
of ` 27 crore in Other Comprehensive Income related to the revaluation of
property, plant and equipment. In accordance with Ind AS 16, this amount is
not reclassified to profit or loss.
(3) The gain on the previously held equity interest in Shaun Ltd. is calculated as
follows:
Fair Value of 30% interest in Shaun Ltd. at 1st April, 2018 4,860
Carrying amount of interest in Shaun Ltd. at 1st April, 2018 (4,779)
81
Unrealised gain previously recognised in OCI 54
Gain on previously held interest in Shaun Ltd. recognised in profit or loss 135

“it all ways seems imposible

until it is done”.

FINANCIAL REPORTING 390

BUSINESS COMBINATIONS
CA FINAL

Notes


FINANCIAL REPORTING 391
BUSINESS COMBINATIONS
CA FINAL

8 FIRST-TIME ADOPTION OF IND AS

OBJECTIVE

The objective of this Ind AS is to ensure that an entity’s first Ind-AS financial
statements, and its interim financial reports for part of the period covered by those
financial statements, contain high quality information that:
• Is transparent for users and comparable;
• Provides a suitable starting point; and
• At a cost that does not exceed the benefits.

DEFINITIONS

(1) First Ind AS Financial Statements

• The first annual financial statements in which an entity adopts IND AS, by an
explicit and unreserved statement of compliance with IND AS.
• This means compliance with ALL IND-AS, partial compliance is not enough to
make entity IND AS compliant.

(2) First –time adopter

• An entity that presents its first Ind AS financial statements, that entity is
known as first time adopter.

(3) Opening Ind AS Balance sheet

• An entity’s balance sheet at the date of transition to Ind AS

(4) Date of Transition to Ind AS

• The beginning of the earliest period for which an entity presents full
comparative information under Ind ASs in first Ind AS Financial statements.

(5) First Ind AS reporting period

• The latest reporting period covered by an entity’s first Ind AS financial
statements

FINANCIAL REPORTING 392

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Example
XYZ Ltd. is a BSE listed company having net worth of ` 100 cr. So XYZ Ltd. has to
prepare financial statements as per Ind AS from 1st April 20X1.
In this example, First Ind AS Financial Statements would be the statement for
period ending as on 31.03.20X2
First –time adopter - “XYZ Ltd” with effect from 01.04.20X1
Opening Ind AS Balance sheet – 01.04.20X0
Date of Transition to Ind ASs - 01.04.20X0
First Ind AS reporting period - 01.04.20X1 to 31.03.20X2

(6) Deemed cost

An amount used as a surrogate for cost or depreciated cost at a given date.
Subsequent depreciation or amortisation assumes that the entity had initially
recognised the asset or liability at the given date and that its cost was equal to the
deemed cost.

(7) Previous GAAP

The basis of accounting that a first-time adopter used for its statutory reporting
requirements in India immediately before adopting Ind AS. For instance, companies
required to prepare their financial statements in accordance with Section 133 of
the Companies Act, 2013, shall consider those financial statements as previous
GAAP financial statements.

Illustration 1
Company B is a foreign subsidiary of Company A and has adopted IFRS as issued by
IASB as its primary GAAP for its local financial reporting purposes. Company B
prepares its financial statements as per Accounting Standards specified under
Section 133 of the Companies Act, 2013 read with Rule 7 of the Companies
(Accounts) Rules, 2014 for the purpose of consolidation with Company A. On
transition of Company A to Ind-AS, what would be the previous GAAP of the foreign
subsidiary Company B for its financial statements prepared for consolidation with
Company A?
Solution:
Ind AS 101 defines previous GAAP as the basis of accounting that a first -time
adopter used for its statutory reporting requirements in India (emphasis added)
immediately before adopting Ind AS. For instance, companies preparing their
financial statements in accordance with the Accounting Standards specified under
Section 133 of the Companies Act, 2013 read with Rule 7 of the Companies
(Accounts) Rules, 2014 shall consider those financial statements as previous GAAP
financial statements.

FINANCIAL REPORTING 393

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Accordingly, the previous GAAP of the foreign subsidiary for the purpose of
consolidation under Ind-AS with the parent company would be accounting standards
specified under Section 133 of the Companies Act, 2013 read with Rule 7 of the
Companies (Accounts Rules, 2014 and not the IFRS as issued by the IASB since the
first time adoption has to be considered in the context of India only.

SCOPE

Ind AS 101 Applies to:

• First Ind AS financial statements
• Each interim financial report for part of the period covered by its first Ind AS
financial statements.
However, it does not apply to:
• Changes in accounting policies made by an entity that already applied Ind AS.

Illustration 2
E Ltd. is required to first time adopt Indian Accounting Standards (Ind AS) from
April 1, 20X1. The management of E Ltd. has prepared its financial statements in
accordance with Ind AS and an explicit and unreserved statement of compliance
with Ind AS has been given. However, the there is a disagreement on application of
one Ind AS. Can such financial statements of E Ltd. be treated as first Ind AS
financial statements?
Solution:
Ind AS 101 defines first Ind AS financial statements as “The first annual financial
statements in which an entity adopts Indian Accounting Standards (Ind AS), by an
explicit and unreserved statement of compliance with Ind AS.” In accordance with
the above definition, if an explicit and unreserved statement of compliance with
Ind AS has been given in the financial statements, even if the auditor’s report
contains a qualification because of disagreement on application of Indian
Accounting Standard(s), it would be considered that E Ltd. has done the first time
adoption of Ind AS. In such a case, exemptions given under Ind AS 101 cannot be
availed again. If, however, the unreserved statement of compliance with Ind AS is
not given in the financial statements, such financial statements would not be
considered to be first Ind AS financial statements.

RECOGNITION AND MEASUREMENT

Opening Ind AS Balance Sheet

An entity shall prepare and present an opening Ind AS balance sheet at the date of
transition to Ind AS. This is the starting point for its accounting in accordance with Ind AS.

FINANCIAL REPORTING 394

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Accounting policies
Entity uses the same accounting policies in its opening Ind AS Balance Sheet and through
all periods presented in its first Ind AS financial statements. Those accounting policies
shall comply with each Ind AS effective at the end of its first Ind AS reporting period,
subject to:
• Mandatory exceptions and
• Optional exemptions
An entity shall, in its opening Ind AS Balance sheet:
• Recognise all assets and liabilities whose recognition is required by Ind AS;
• Not recognise items as assets or liabilities if Ind AS do not permit such recognition;
• Reclassify items that it recognised in accordance with previous GAAP as one type of
asset, liability or component of equity, but are a different type of asset, liability or
component of equity in accordance with Ind AS; and
• Apply Ind AS in measuring all recognised assets and liabilities.

Illustration 3
X Ltd. is required to adopt Ind AS from April 1, 20X1, with comparatives for one
year, i.e., for 20X0-20X1. What will be its date of transition?

Solution:
The date of transition for X Ltd. will be April 1, 20X0 being the beginning of the
earliest comparative period presented. To explain it further, X Ltd. is required to
adopt an Ind AS from April 1, 20X1, and it will give comparatives as per Ind AS for
20X0-20X1. Accordingly, the beginning of the comparative period will be April 1,
20X0 which will be considered as date of transition.

Illustration 4
X Ltd. was using cost model for its property, plant and equipment (tangible fixed
assets) till March 31, 20X1 under previous GAAP. On April 1, 20X0, i.e., the date of
its transition to Ind AS, it used fair values as the deemed cost in respect of its fixed
assets. Whether it will amount to a change in accounting policy?

Solution:
Use of fair values on the date of transition will not tantamount to a change in
accounting policy. The fair values of the property, plant and equipment on the
date on transition will be considered as deemed cost without this being considered
as a change in accounting policy.

FINANCIAL REPORTING 395

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Example:- Consistent application of latest version of Ind AS
The end of entity As first Ind AS reporting period is 31 March 20 X2. Entity A
decides to present comparative information in those financial statements for one
year only. Therefore, its date of transition to Ind AS is the beginning of business on
1 April 20X0 (or, equivalently, close of business on 31 March 20X0).
Entity A presented financial statements in accordance with its previous GAAP
annually to 31 March each year up to, and including, 31 March 20X1.
Application of requirements:
Entity A is required to apply the Ind AS effective for periods ending on 31 March
20X2 in:
(a) preparing and presenting its opening Ind AS balance sheet at 1 April 20X0; and
(b) preparing and presenting its balance sheet for 31 March 20X2 (including
comparative amounts for the year ended 31 March 20X1), statement of profit
and loss, statement of changes in equity and statement of cash flows for the
year to 31 March 20X2 (including comparative amounts for the year ended 31
March 20X1) and disclosures (including comparative information for the year
ended 31 March.

EXCEPTIONS / EXEMPTIONS
There are two kinds of exceptions / exemptions in this Ind AS
(1) Mandatory (Exceptions to the retrospective application of other Ind AS)
(2) Optional (exemptions from application of other Ind AS)

Mandatory (Exceptions to the retrospective application of other Ind AS)

(1) Estimates
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 (after adjustments to reflect any difference in accounting policies),
unless there is objective evidence that those estimates were in error.

Illustration 5
A Ltd. acquired B Ltd. in a business combination transaction. A Ltd. agreed to pay
certain contingent consideration (liability classified) to B Ltd. As part of its
investment in its separate Non-Controlling interests financial statements, A Ltd. did
not recognise the said contingent consideration (since it was not considered
probable) A Ltd. considered the previous GAAP carrying amounts of investment as
its deemed cost on first-time adoption. In that case, does the carrying amount of
investment required to be adjusted for this transaction?

FINANCIAL REPORTING 396

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Solution:
In accordance with Ind AS 101, an entity has an option to treat the previous GAAP
carrying values, as at the date of transition, of investments in subsidiaries, associates
and joint ventures as its deemed cost on transition to Ind AS. If such an exemption is
adopted, then the carrying values of such investments are not adjusted. Accordingly,
any adjustments in relation to recognition of contingent consideration on first time
adoption shall be made in the statement of profit and loss.

(2) De Recognition of financial assets and liabilities

A first-time adopter shall apply the de recognition requirements in Ind AS 109
prospectively for transactions occurring on or after the date of transition to Ind AS.

(3) Non-Controlling interests

A first-time adopter shall apply the following requirements of Ind AS 110
prospectively from the date of transition to Ind AS:
However, if a first-time adopter elects to apply Ind AS 103 retrospectively to past
business combinations, it shall also apply Ind AS 110 from that date.

(4) Classification and Measurement of Financial Assets and Financial Liabilities

Ind AS 109 contains principles for classification of a financial asset as at (a)
amortised cost or (b) fair value through other comprehensive income or (c) fair
value through profit or loss. Such classification depends on assessment of features
of the financial asset on the date of its initial recognition.
Ind AS 101 provides an exception to this general principle by requiring that such
assessment should be done on the date of transition to Ind AS.
Ind AS 109 requires the measurement of amortised cost of a financial asset or a
financial liability using effective interest method. As an exception to this general
measurement principle, Ind AS 101 provides 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 AS 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.

(5) Impairment of financial assets

An entity shall apply the impairment requirements of Ind AS 109 retrospectively
subject to the below:
• At the date of transition to Ind AS, an entity shall use reasonable and
supportable information that is available without undue cost or effort to
determine the credit risk at the date that financial instruments were initially
recognised.

FINANCIAL REPORTING 397

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
• An entity is not required to undertake an exhaustive search for information
when determining, at the date of transition to Ind AS, whether there have
been significant increases in credit risk since initial recognition.
• If, at the date of transition to Ind ASs, determining whether there has been a
significant increase in credit risk since the initial recognition of a financial
instrument would require undue cost or effort, an entity shall recognise a loss
allowance at an amount equal to lifetime expected credit losses at each
reporting date until that financial instrument is derecognised, unless that
financial instrument is low credit risk at a reporting date.

(6) Government loans

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. A first-time adopter shall apply the requirements in Ind
AS 109, Financial Instruments, and Ind AS 20, Accounting for Government Grants
and Disclosure of Government Assistance, prospectively to government loans
existing at the date of transition to Ind AS and shall not recognise the
corresponding benefit of the government loan at a below-market rate of interest as
a government grant.

An entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively
to any government loan originated before the date of transition to Ind AS,
provided that the information needed to do so had been obtained at the time of
initially accounting for that loan.

Optional Exemptions (from application of other Ind AS)

(1) Business Combination

Ind AS 103 need not be applied to combinations before date of transition. But, if
one combination is restated, all subsequent combinations are restated. When the
exemption is used
• There won’t be any change in classification
• Assets and liabilities of past combination measured at carrying amount
(deemed cost)
• Assets and liabilities measured at fair value restated at date of transition-
adjusted retained earnings.

FINANCIAL REPORTING 398

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Illustration 6
For the purpose of deemed cost on the date of transition, an entity has the option
of using the carrying value as the deemed cost. In this context, suggest which
carrying value is to be considered as deemed cost: original cost or net book value?
Also examine whether this would have any impact on future depreciation charge?

Solution:
For the purpose of deemed cost on the date of transition, if an entity uses the
carrying value as the deemed cost, then it should consider the net book value on
the date of transition as the deemed cost and not the original cost because
carrying value here means net book value. The future depreciation charge will be
based on the net book value and the remaining useful life on the date of transition.
Further, as per Ind AS 16, the depreciation method, residual value and useful life
need to be reviewed atleast annually. As a result of this, the depreciation charge
may or may not be the same as the depreciation charge under the previous GAAP.

Illustration 7
Is it possible for an entity to allocate cost as per the previous GAAP to a component
based on its fair value on the date of transition even when it does not have the
component-wise historical cost?

Solution:
Yes, an entity can allocate cost to a component based on its fair value on the date
of transition. This is permissible even when the entity does not have component-
wise historical cost.

Illustration 8
Y Ltd. is a first time adopter of Ind AS. The date of transition is April 1, 20X1. On
the date of transition, there is a long- term foreign currency monetary liability of
` 60 crores (US $ 10 million converted at an exchange rate of US $ 1 = ` 21 60). The
accumulated exchange difference on the date of transition is nil since Y Ltd. was
following AS 11 notified under the Companies (Accounting Standards) Rules, 2006
and has not exercised the option provided in paragraph 46/46A of AS 11. The
Company wants to avail the option under paragraph 46A of AS 11 prospectively or
retrospectively on the date of transition to Ind AS. How should it account for the
translation differences in respect of this item under Ind AS 101?

Solution:
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 of the first Ind AS financial reporting
period as per the previous GAAP.
FINANCIAL REPORTING 399
FIRST-TIME ADOPTION OF
IND AS
CA FINAL
If the Company wants to avail the option prospectively
The Company cannot avail the exemption given in Ind AS 101 and cannot exercise
option under paragraph 46/46A of AS 11, prospectively, on the date of transition to
Ind AS in respect of Long term foreign currency monetary liability existing on the
date of transition as the company has not availed the option under paragraph
46/46A earlier. Therefore, the Company need to recognise the exchange
differences in accordance with the requirements of Ind AS 21, The Effects of
Changes in Foreign Exchange Rates.

If the Company wants to avail the option retrospectively

The Company cannot avail the exemption given in Ind AS 101 and cannot exercise
the option under paragraph 46/46A of AS 11 retrospectively on the date of
transition to Ind AS in respect of long term foreign currency monetary liability that
existed on the date of transition since the option is available only if it is in
continuation of the accounting policy followed in accordance with the previous
GAAP. Y Ltd. has not been using the option provided in Para 46/ 46A of AS 11,
hence, it will not be permitted to use the option given in Ind AS 101
retrospectively.

Illustration 9
Y Ltd. is a first time adopter of Ind AS. The date of transition is April 1, 20X5. On
April 1, 20X1, 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, the company wants to continue the same accounting
policy with regard to amortising of exchange differences. Whether the Company is
permitted to do so?

Solution:
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 of the first Ind AS financial reporting
period as per the previous GAAP. In view of the above, the Company can continue
to follow the existing accounting policy of amortising the exchange differences in
respect of this loan over the balance period of such long term liability.

Illustration 10
X Ltd. is the holding company of Y Ltd. X Ltd. is required to adopt Ind AS from April
1, 20X1. X Ltd. wants to avail the optional exemption of using the previous GAAP
carrying values in respect of its property, plant and equipment whereas Y Ltd.
wants to use fair value of its property, plant and equipment as its deemed cost on
FINANCIAL REPORTING 400
FIRST-TIME ADOPTION OF
IND AS
CA FINAL
the date of transition. Examine whether X Ltd. can do so for its consolidated
financial statements. Also, examine whether different entities in a group can use
different basis for arriving at deemed cost for property, plant and equipment in
their respective standalone financial statements?

Solution:
Where there is no change in its functional currency on the date of transition to Ind
AS, a first- time adopter to Ind AS may elect to continue with the carrying value of
all of its property, plant and equipment as at the date of transition measured as per
the previous GAAP and use that as its deemed cost at the date of transition after
making necessary adjustments. If a first time adopter chooses this option then the
option of applying this on selective basis to some of the items of property, plant and
equipment and using fair value for others is not available. Nothing prevents different
entities within a group to choose different basis for arriving at deemed cost for the
standalone financial statements. However, in Consolidated Financial Statements, the
entire group should be treated as one reporting entity. Accordingly, it will not be
permissible to use different basis for arriving at the deemed cost of property, plant
and equipment on the date of transition by different entities of the group for the
purpose of preparing Consolidated Financial Statements.

(5) Investment in subsidiaries, joint ventures and associates It is measured at cost,

the cost may be:
• Cost determined in accordance with Ind AS 27 or
• Deemed cost (which may be fair value or previous GAAP carrying amount)

(6) Decommissioning liabilities included in Property Plant Equipment

An entity need not comply with the requirement for changes in such liabilities that
accounted before the date of transition.
However, entity may measure liability as at the transition date as per Ind AS 37 and
recognise its effect.

(7) Non-current assets held for sale and discounted operations

A first time adopter can:
• Measure noncurrent assets held for sale or discontinued operation at the
lower carrying value and fair value less cost to sell at the date of transition to
Ind AS in accordance with Ind AS 105; and
• Recognize directly in retain earnings any difference between that amount and
the carrying amount of those assets at the date of transition to Ind AS
determined under the entity’s previous GAAP

FINANCIAL REPORTING 401

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
(8) Compound financial instruments
A first time adopter need not split the compound financial instruments into
separate liability and equity component, if liability component is not outstanding
as at transition date.

Illustration 11
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% and 10% can be taken as
End of year 6% 10%
1 0.94 0.91
2 0.89 0.83
3 0.84 0.75
4 0.79 0.68
Solution:
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) + (30,000 x 100 x 10/100 x 2/5)].
The premium payable on redemption is being recognised as borrowing costs as per
para 4(b) of AS 16 ie under previous GAAP on straight-line basis.
As per para D18 of Ind AS 101, Ind AS 32, Financial Instruments: Presentation,
requires an entity to split a compound financial instrument at inception into
separate liability and equity components. If the liability component is no longer
outstanding, retrospective application of Ind AS 32 would involve separating two
portions of equity. The first portion is recognised in retained earnings and
represents the cumulative interest accreted on the liability component. The other
portion represents the original equity component. However, in accordance with
this Ind AS, a first-time adopter need not separate these two portions if the
liability component is no longer outstanding at the date of transition to Ind AS.
In the present case, since the liability is outstanding on the date of transition,
Sigma Ltd. will need to split the convertible debentures into debt and equity
portion on the date of transition. Accordingly, we will first measure the liability
component by discounting the contractually determined stream of future cash
flows (interest and principal) to present value by using the discount rate of 10%

FINANCIAL REPORTING 402

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
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 x 3.17) 19.02
(Note 1)
PV of principal repayment (including premium) 110 x 0.68 (Note 2) 74.80
Total liability component per debenture 93.82
Equity component per debenture (Balancing figure) 6.18
Face value of debentures 100.00
Total equity component for 30,000 debentures 1,85,400
Total debt amount (30,000 x 93.82) 28,14,600

Thus, on the date of initial recognition, the amount of ` 30,00,000 being the
amount of debentures will be split as under:
Debt ` 28,14,600
Equity ` 1,85,400

However, on the date of transition, unwinding of ` 28,14,600 will be done for two
years as follows:
Year Opening balance Finance cost@ 10% Interest paid Closing 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;
(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 ` 31,20,000 and ` 30,27,666 and the equity component of
compound financial instrument of ` 1,85,400; and
(d) derecognise the debenture liability in previous GAAP of ` 31,20,000.

Notes:
(1) 3.17 is present value of annuity factor of ` 1 at a discount rate of 10% for
4 years.
(2) On maturity, ` 110 will be paid (` 100 as principal payment + ` 10 as
premium)

FINANCIAL REPORTING 403

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
(9) Leases
A first time adopter may determine whether an arrangement existing at the date of
transition to Ind AS contain a lease (including classification by a lessor of each land
and building element as finance or an operating lease) on the basis of facts and
circumstances existing on the date of transition.
A lessee which is a first-time adopter of Ind AS shall recognise lease liabilities and
right- of- use assets, by applying the following approach to all of its leases at the
date of transition to Ind AS:
(a) measure a lease liability at the present value of the remaining lease payments
discounted using the lessee’s incremental borrowing rate at the date of
transition of Ind AS;
(b) measure a right-of-use asset on a lease-by-lease basis either at:
(i) its carrying amount as if Ind AS 116 had been applied since the
commencement date of the lease, but discounted using the lessee’s
incremental borrowing rate at the date of transition to Ind AS; or
(ii) an amount equal to the lease liability, adjusted by the amount of any
prepaid or accrued lease payments relating to that lease recognised in
the Balance Sheet immediately before the date of transition to Ind AS.

(c) apply Ind AS 36 to right-of-use assets.

A first-time adopter that is a lessee may do one or more of the following at
the date of transition to Ind AS, applied on a lease-by lease basis:
(i) apply a single discount rate to a portfolio of leases with reasonably
similar characteristics.
(ii) elect not to apply the above requirements given in (a) to (c) to leases for
which the lease term ends within 12 months of the date of transition to
Ind AS. Instead, the entity shall account for (including disclosure of
information about) these leases as if they were short-term leases
accounted as per Ind AS 116.
(iii) elect not to apply the above requirements given in (a) to (c) to leases for
which the underlying asset is of low value. Instead, the entity shall
account for (including disclosure of information about) these leases as
per Ind AS 116.
(iv) exclude initial direct costs from the measurement of the right-of-use
asset at the date of transition to Ind AS.
(v) use hindsight, such as in determining the lease term if the contract
contains options to extend or terminate the lease

FINANCIAL REPORTING 404

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Illustration 12
H Ltd. has the following assets and liabilities as at March 31, 20 X1, prepared in
accordance with previous GAAP:
Particulars Notes Amount (`)
Fixed assets 1 1,34,50,000
Investments in S. Ltd. 2 48,00,000
Debtors 2,00,000
Advances for purchase of inventory 50,00,000
Inventory 8,00,000
Cash 49,000
Total assets 2,42,99,000
VAT deferral loan 3 60,00,000
Creditors 30,00,000
Short term borrowing 8,00,000
Provisions 12,00,000
Total liabilities 1,10,00,000
Share capital 1,30,00,000
Reserves: 2,99,000
Cumulative translation difference 4 1,00,000
ESOP reserve 4 20,000
Retained earnings 1,79,000
Total equity 1,32,99,000
Total equity and liabilities 2,42,99,000
The following GAAP differences were identified by the Company on first - time
adoption of Ind AS with effect from April 1, 20X1:
(1) In relation to tangible fixed assets (property, plant and equipment), the
following adjustments were identified:
• Fixed assets comprise land held for capital appreciation purposes costing
` 4,50,000 and was classified as investment property as per Ind AS 40.
• Exchange differences of ` 1,00,000 were capitalised to depreciable fixed
assets on which accumulated depreciation of ` 40,000 was recognised.
• There were no asset retirement obligations.
• The management intends to adopt deemed cost exemption for using the
previous GAAP carrying values as deemed cost as at the date of
transition for PPE and investment property.’

(2) The Company had made an investment in S Ltd. (subsidiary of H Ltd.) f or

` 48,00,000 that carried a fair value of ` 68,00,000 as at the transition date.
The Company intends to recognise the investment at its fair value as at the
date of transition.

FINANCIAL REPORTING 405

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
(3) Financial instruments:
• VAT deferral loan ` 60,00,000:
The VAT deferral loan of ` 60,00,000 was obtained on March 31, 20X1,
for setting up a business in a backward region with a condition to create
certain defined targets for employment of local population of that
region. The loan does not carry any interest and is repayable in full at
the end of 5 years. In accordance with Ind AS 109, the discount factor on
the loan is to be taken as 10%, being the incremental borrowing rate.
Accordingly, the fair value of the loan as at March 31, 20X1, is
` 37,25,528. The entity chooses to exercise the option given in Ind AS
101, i.e., the entity chooses to apply the requirements of Ind AS 109,
Financial Instruments and Ind AS 20, Accounting for Government Grants
and Disclosure of Government Assistance, retrospectively as required
information had been obtained at the time of initially accounting for VAT
deferral loan.

(4) The retained earnings of the Company contained the following:

• ESOP reserve of ` 20,000:
The Company had granted 1,000 options to employees out of which 800
have already vested. The Company followed an intrinsic value method
for recognition of ESOP charge and recognised ` 12,000 towards the
vested options and ` 8,000 over a period of time as ESOP charge and a
corresponding reserve. If fair value method had been followed in
accordance with Ind AS 102, the corresponding charge would have been
` 15,000 and ` 9,000 for the vested and unvested shares respectively.
The Company intends to avail the Ind AS 101 exemption for share-based
payments for not restating the ESOP charge as per previous GAAP for
vested options.
• Cumulative translation difference:
` 1,00,000 The Company had a non-integral foreign branch in accordance
with AS 11 and had recognised a balance of ` 1,00,000 as part of
reserves. On first-time adoption of Ind AS, the Company intends to avail
Ind AS 101 exemption of resetting the cumulative translation difference
to zero.

Solution:
Adjustments for opening balance sheet as per Ind AS 101
(1) Fixed assets: As the land held for capital appreciation purposes qualifies as
investment property, such investment property should be reclassified from
property, plant and equipment (PPE) to investment property and presented
separately; As the Company has adopted the previous GAAP carrying values as
deemed cost, all items of PPE and investment property should be carried at
its previous GAAP carrying values. As such, the past capitalised exchange
differences require no adjustment in this case.
FINANCIAL REPORTING 406
FIRST-TIME ADOPTION OF
IND AS
CA FINAL
(2) Investment in subsidiary: On first time adoption of Ind AS, a parent company
has an option to carry its investment in subsidiary at fair value as at the date
of transition in its separate financial statements. As such, the Company can
recognise such investment at a value of ` 68,00,000.

(3) Financial instruments: As the VAT deferral loan is a financial liability under
Ind AS 109, that liability should be recognised at its present value discounted
at an appropriate discounting factor. Consequently, the VAT deferral loan
should be recognised at ` 37,25,528 and the remaining ` 22,74,472 would be
recognised as deferred government grant.

(4) ESOPs: Ind AS 101 provides an exemption of not restating the accounting as
per the previous GAAP in accordance with Ind AS 102 for all options that have
vested by the transition date. Accordingly, out of 1000 ESOPs granted, the
first -time adoption exemption is available on 800 options that have already
vested. As such, its accounting need not be restated. However, the 200
options that are not vested as at the transition date, need to be restated in
accordance with Ind AS 102. As such, the additional impact of ` 1,000
(i.e., 9,000 less 8,000) would be recognised in the opening Ind AS balance
sheet.
(5) Cumulative translation difference: As per paragraph D 12 of Ind AS 101, the
first-time adopter can avail an exemption regarding requirements of Ind AS 21
in context of cumulative translation differences. If a first-time adopter uses
this exemption the cumulative translation differences for all foreign operation
are deemed to be zero as at the transition date. In that case, the balance is
transferred to retained earnings. As such, the balance of ` 1,00,000 should be
transferred to retained earnings.

(6) Retained earnings should be increased by ` 20,99,000 on account of the

following:
`
Increase in fair value of investment in subsidiary (note 2) 20,00,000
Additional ESOP charge on unvested options (note 4) (1,000)
Transfer of cumulative translation difference balance earnings to
retained (note 5) 10,00,000

After the above adjustments, the carrying values of assets and liabilities for the
purpose of opening Ind AS balance sheet of Company H should be as under:
Particular Notes Previous Adjustments Ind AS GAAP
Non-Current Assets 1,34,50,000
Fixed assets 1 0 (4,50,000) 1,30,00,000
FINANCIAL REPORTING 407
FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Investment property 1 48,00,000 4,50,000 4,50,000
Investment in S Ltd. 2 50,00,000 20,00,000 68,00,000
Advances for purchase of
inventory 50,00,000
Current Assets
Debtors 2,00,000 2,00,000
Inventory 8,00,000 8,00,000
Cash 49,000 49,000
Total assets 2,42,99,000 20,00,000 2,62,99,000
Non-current Liabilities
Sales tax deferral loan 3 60,00,000 (22,74,472) 37,25,528
Deferred government grant 3 0 22,74,472 22,74,472
Current Liabilities
Creditors 30,00,000 30,00,000
Short term borrowing 8,00,000 8,00,000
Provisions 12,00,000 12,00,000
Total liabilities 1,10,00,000 1,10,00,000
Share capital 1,30,00,000 1,30,00,000
Reserves:
Cumulative translation
difference 5 1,00,000 (1,00,000) 0
ESOP reserve 4 20,000 1,000 21,000
Other reserves 6 1,79,000 20,99,000 22,78,000
Total equity 1,32,99,000 20,00,000 1,52,99,000
Total equity and liabilities 2,42,99,000 20,00,000 2,62,99,000

FINANCIAL REPORTING 408

FIRST-TIME ADOPTION OF
IND AS
CA FINAL

PROBLEMS AND SOLUTIONS

Question 1
Company A intends to restate its past business combinations with effect from
30 June 20 X0 (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?

Solution:
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 20X0 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 business combinations.

Question 2
X Ltd. was using cost model for its property, plant and equipment till March 31, 20
X2 under previous GAAP. The Ind AS become applicable to the company for
financial year beginning April 1, 20X2. On April 1, 20X1, i.e., the date of its
transition to Ind AS, it used fair value as the deemed cost in respect of its
property, plant and equipment. X Ltd. wants to follow revaluation model as its
accounting policy in respect of its property, plant and equipment for the first
annual Ind AS financial statements. Whether use of fair values as deemed cost on
the date of transition and use of revaluation model in the first annual Ind AS
financial statements would amount to a change in accounting policy?

Solution:
In the instant case, X Ltd. is using revaluation model for property, plant and
equipment for the first annual Ind AS financial statements and using fair value of
property, plant and equipment on the date of the transition, as deemed cost. Since
the entity is using fair value at the transition date as well as in the first Ind AS
financial statements, there is no change in accounting policy and mere use of the
term ‘deemed cost’ would not mean that there is a change in accounting policy.

FINANCIAL REPORTING 409

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Question 3
Y Ltd. is a first time adopter of Ind AS. The date of transition is April 1, 20X5. On
April 1, 20X0, 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?

Solution:
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 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 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
retained earnings on the date of transition.

Question 4
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 property,
plant and equipment 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?

Solution:
Ind AS 101 permits to continue with the carrying value for all of its property, plant
and equipment as per the previous GAAP and use that as deemed cost for the
purposes of first time 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 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 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
FINANCIAL REPORTING 410
FIRST-TIME ADOPTION OF
IND AS
CA FINAL
entity to choose the deemed cost exemption for all of its property, plant and
equipment and not elect the exemption of continuing the previous 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 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.

Question 5
ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the
previous GAAP, the contributions received by ABC Ltd. from the government (which
holds 100% shareholding in ABC Ltd.) which is in the nature of promoter’s
contribution have been recognised in capital reserve and treated as part of
shareholder’s funds in accordance with the provisions of AS 12, Accounting for
Government Grants.
State whether the accounting treatment of the grants in the nature of promoter’s
contribution as per AS 12 is also permitted under Ind AS 20 Accounting for
Government Grants and Disclosure of Government Assistance. If not, then what will
be the accounting treatment of such grants recognised in capital reserve as per
previous GAAP on the date of transition to Ind AS.

Solution:
Paragraph 2 of Ind AS 20, “Accounting for Government Grants and Disclosure of
Government Assistance” inter alia states that the Standard does not deal with
government participation in the ownership of the entity.
Since ABC Ltd. is a Government company, it implies that government has 100%
shareholding in the entity. Accordingly, the entity needs to determine whether the
payment is provided as a shareholder contribution or as a government. Equity
contributions will be recorded in equity while grants will be shown in the
Statement of Profit and Loss.
Where it is concluded that the contributions are in the nature of government grant, the
entity shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101.
“First Time Adoption of Ind AS”. Ind AS 20 requires all grants to be recognised as
income on a systematic basis over the periods in which the entity recognises as
expenses the related costs for which the grants are intended to compensate. Unlike
AS 12, Ind AS 20 requires the grant to be classified as either a capital or an income
grant and does not permit recognition of government grants in the nature of
promoter’s contribution directly to shareholder’s funds.

FINANCIAL REPORTING 411

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Where it is concluded that the contributions are in the nature of shareholder
contributions and are recognised in capital reserve under previous GAAP, the
provisions of paragraph 10 of Ind AS 101 would be applied which states that except
in certain cases, an entity shall in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind AS;
(b) not recognise items as assets or liabilities if Ind AS do not permit such
recognition;
(c) reclassify items that it recognised in accordance with previous GAAP as one
type of asset, liability or component of equity, but are a different type of
asset, liability or component of equity in accordance with Ind AS; and
(d) apply Ind AS in measuring all recognised assets and liabilities.
Accordingly, as per the above requirements of paragraph 10(c) in the given
case, contributions recognised in the Capital Reserve should be transferred to
appropriate category under Other Equity at the date of transition to Ind AS.

Question 6
Mathur India Private Limited has to present its first financials under Ind AS for the
year ended 31st March, 20X3. The transition date is 1st April, 20X1.
The following adjustments were made upon transition to Ind AS:
(a) The Company opted to fair value its land as on the date on transition.
The fair value of the land as on 1st April, 20X1 was 10 crores. The carrying
amount as on 1st April, 20X1 under the existing GAAP was 4.5 crores.
(b) The Company has recognised a provision for proposed dividend of 60 lacs and
related dividend distribution tax of 18 lacs during the year ended 31st March,
20X1.
It was written back as on opening balance sheet date.
(c) The Company fair values its investments in equity shares on the date of
transition.
The increase on account of fair valuation of shares is 75 lacs.
(d) The Company has an Equity Share Capital of 80 crores and Redeemable
Preference Share Capital of 25 crores.
(e) The reserves and surplus as on 1st April, 20X1 before transition to Ind AS was
95 crores representing 40 crores of general reserve and 5 crores of capital
reserve acquired out of business combination and balance is surplus in the
Retained Earnings.
(f) The company identified that the preference shares were in nature of financial
liabilities.
What is the balance of total equity (Equity and other equity) as on 1st April,
20X1 after transition to Ind AS? Show reconciliation between total equity as
per AS (Accounting Standards) and as per Ind AS to be presented in the
opening balance sheet as on 1st April, 20X1.
Ignore deferred tax impact.

FINANCIAL REPORTING 412

FIRST-TIME ADOPTION OF
IND AS
CA FINAL
Solution:
Computation of balance total equity as on 1st April, 20X1 after transition to Ind AS
in
crore
Share capital- Equity share Capital 80
Other Equity
General Reserve 40
Capital Reserve 5
Retained Earnings (95-5-40) 50
Retained Earnings (95-5-40) 5.5
Add: De recognition of proposed dividend (0.6 + 0.18) 0.78
Add: Increase in value of Investment 0.75 57.03 102.03
Balance total equity as on 1st April, 20X1 after transition
to Ind AS 182.03
Reconciliation between Total Equity as per AS and Ind AS to be presented in the
opening balance sheet as on 1st April, 20X1
in
crore
Equity share capital 80
Redeemable Preference share capital 25
105
Reserves and Surplus 95
Total Equity as per AS 200
Adjustment due to reclassification
Preference share capital classified as financial liability (25)
Adjustment due to derecognition
Proposed Dividend not considered as liability as on 1st April 20X1 0.78
Adjustment due to remeasurement
Increase in the value of Land due to remeasurement at fair value 5.5
Increase in the value of investment due to remeasurement at fair
Value 0.75 6.25
Equity as on 1st April, 20X1 after transition to Ind AS 182.03

“The Only time you fail is when

you fall down and stay down”.

FINANCIAL REPORTING 413

FIRST-TIME ADOPTION OF
IND AS
CA FINAL

Notes


FINANCIAL REPORTING 414
FIRST-TIME ADOPTION OF
IND AS
CA FINAL

ANALYSIS OF FINANCIAL
9 STATEMENTS

Case Study 1
On 1st April, 20X1, Pluto Ltd. has advance a loan for ` 10 lakhs to one of its
employees for an interest rate at 4% per annum (market rate 10%) which is
repayable in 5 equal annual instalments along with interest at each year end.
Employee is not required to give any specific performance against this benefit.
The accountant of the company has recognised the staff loan in the balance sheet
equivalent to the amount disbursed i.e. ` 10 lakhs. The interest income for the
period is recognised at the contracted rate in the Statement of Profit and Loss by
the company i.e. ` 40,000 (` 10 lakhs x 4%).
Analyse whether the above accounting treatment made by the accountant is in
compliance with the Ind AS. If not, advise the correct treatment along with working
for the same.

Solution:
The above treatment needs to be examined in the light of the provisions given in
Ind AS 32 and Ind AS 109 on Financial In struments’ and Ind AS 19 ‘Employee
Benefits’.

Para 11 (c) (i) of Ind AS 32 ‘Financial Instruments: Presentation’ states that:

“A financial asset is any asset that is:
(c) a contractual right:
(i) to receive cash or…..”

Further, paragraph 5.1.1 of Ind AS 109 states that:

“at initial recognition, an entity shall measure a financial asset or financial liability
at its fair value”.

Further, paragraph 5.1.1 of Appendix B to Ind AS 109 states that:

“The fair value of a financial instrument at initial recognition is normally the
transaction price (i.e. the fair value of the consideration given or received.
However, if part of the consideration given or received is for something other than
the financial instrument, an entity shall measure the fair value of the financial
instrument. For example, the fair value of a long term loan or receivable that
carries no interest can be measured as the present value of all future cash receipts
discounted using the prevailing market(s) of interest rate of similar instrument with
a similar credit rating. Any additional amount lent is an expense or reduction of
income unless it qualifies for recognition as some other type of asset”.

FINANCIAL REPORTING 415

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Further, paragraph 5.2.1 of Ind AS 109 states that:
“After initial recognition, an entity shall measure a financial asset at:
(a) amortised cost;
(b) fair value through other comprehensive income; or
(c) fair value through profit or loss.

Further, paragraph 5.4.1 of Ind AS 109 states that:

“Interest revenue shall be calculated by using the effective interest method. This
shall be calculated by applying the effective interest rate to the gross carrying
amount of a financial asset”

Paragraph 8 of Ind AS 19 states that:

“Employee Benefits are all forms of consideration given by an entity in exchange
for service rendered by employees or for the termination of employment”.
The Accountant of Pluto Ltd. has recognised the staff loan in the balance sheet at
` 10 lakhs being the amount disbursed and ` 40,000 as interest income for the period
is recognised at the contracted rate in the statement of profit and loss which is not
correct and not in accordance with Ind AS 19, Ind AS 32 and Ind AS 109.
Accordingly, the staff advance being a financial asset shall be initially measured at
the fair value and subsequently at the amortised cost. The interest income is
calculated by using the effective interest method. The difference between the
amount lent and fair value is charged as Employee benefit expense in statement of
profit and loss.

(a) Calculation of Fair Value of the Loan

Year Cash Inflow Discounting Factor (10%) Present Value
1 2,40,000 0.909 2,18,160
2 2,32,000 0.826 1,91,632
3 2,24,000 0.751 1,68,224
4 2,16,000 0.683 1,47,528
5 2,08,000 0.621 1,29,168
Total 8,54,712
Staff loan should be initially recorded at ` 8,54,712.

(b) Employee Benefit Expense

Loan Amount – Fair Value of the loan = ` 10,00,000 – ` 8,54,712 = ` 1,45,288
` 1,45,288 shall be charged as Employee Benefit expense in Statement of
Profit and Loss for the year ended 31.03.20X2.

FINANCIAL REPORTING 416

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Amortisation table:
Closing balance of
Opening balance of Interest (10%)
Year Repayment (c) Staff Advance
Staff Advance (a) (b) = (a x 10%)
(d) = a + b – c
1 8,54,712 85,471 2,40,000 7,00,183
2 7,00,183 70,018 2,32,000 5,38,201
3 5,38,201 53,820 2,24,000 3,68,021
4 3,68,021 36,802 2,16,000 1,88,823
5 1,88,823 19,177 (b.f.) 2,08,000 Nil

Balance Sheet extracts showing the presentation of staff loan as at 31st March, 20X2
Ind AS compliant Division II of Sch III needs to be referred for presentation
requirement in Balance Sheet on Ind AS.
Assets
Non-Current Assets
Financial Assets
(i) Loan 5,38,201
Current Assets
Financial Assets
(i) Loans (7,00,183 - 5,38,201) 1,61,982

Case Study 2
Pluto Ltd. has purchased a manufacturing plant for ` 6 lakhs on 1st April, 20X1. The
useful life of the plant is 10 years. On 30th September, 20X3, Pluto temporarily
stops using the manufacturing plant because demand has declined. However, the
plant is maintained in a workable condition and it will be used in future when
demand picks up.
The accountant of Pluto ltd. decided to treat the plant as held for sale until the
demands picks up and accordingly measures the plant at lower of carrying amount
and fair value less cost to sell.
Also, the accountant has also stopped charging the depreciation for the rest of
period considering the plant as held for sale. The fair value less cost to sell on 30th
September, 20X3 and 31st March, 20X4 was ` 4 lakhs and ` 3.5 lakhs respectively.
The accountant has performed the following working:
Carrying amount on initial classification as held for sale
Purchase Price of Plant 6,00,000
Less: Accumulated dep (6,00,000/ 10 Years) x 2.5 years (1,50,000) 4,50,000
Fair Value less cost to sell as on 31st March, 20X4 4,00,000
The value will be lower of the above two 4,00,000
FINANCIAL REPORTING 417
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Balance Sheet extracts as on 31st March, 20X4
Assets Current Assets
Other Current Assets
Assets classified as held for sale 3,50,000
Analyse whether the above accounting treatment made by the accountant is in
compliance with the Ind AS. If not, advise the correct treatment along with the
necessary workings.

Solution:
The above treatment needs to be examined in the light of the provisions given in
Ind AS 16 ‘Property, Plant and Equipment’ and Ind AS 105 ‘Non-current Assets Held
for Sale and Discontinued Operations’.

Para 6 of Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’
states that:
“An entity shall classify a non-current asset (or disposal group) as held for sale if its
carrying amount will be recovered principally through a sale transaction rather
than through continuing use”.

Paragraph 7 of Ind AS 105 states that:

“For this to be the case, the asset (or disposal group) must be available for
immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets (or disposal groups) and its sale must be highly
probable. Thus, an asset (or disposal group) cannot be classified as a non-current
asset (or disposal group) held for sale, if the entity intends to sell it in a distant
future”.

Further, paragraph 8 of Ind AS 105 states that:

“For the sale to be highly probable, the appropriate level of management must be
committed to a plan to sell the asset (or disposal group), and an active programme
to locate a buyer and complete the plan must have been initiated. Further, the
asset (or disposal group) must be actively marketed for sale at a price that is
reasonable in relation to its current fair value. In addition, the sale should be
expected to qualify for recognition as a completed sale within one year from the
date of classification and actions required to complete the plan should indicate
that it is unlikely that significant changes to the plan will be made or that the plan
will be withdrawn.”

Paragraph 13 of Ind AS 105 states that:

“An entity shall not classify as held for sale a non-current asset (or disposal group)
that is to be abandoned. This is because its carrying amount will be recovered
principally through continuing use.”

FINANCIAL REPORTING 418

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Paragraph 14 of Ind AS 105 states that:
“An entity shall not account for a non-current asset that has been temporarily
taken out of use as if it had been abandoned.”

Paragraph 55 of Ind AS 16 states that:

“Depreciation does not cease when the asset becomes idle or is retired from active
use unless the asset is fully depreciated.”
Going by the guidance given above.

The Accountant of Pluto Ltd. has treated the plant as held for sale and measured it
at the fair value less cost to sell. Also, the depreciation has not been charged
thereon since the date of classification as held for sale which is not correct and not
in accordance with Ind AS 105 and Ind AS 16.

Accordingly, the manufacturing plant neither should neither be treated as

abandoned asset nor as held for sale because its carrying amount will be principally
recovered through continuous use. Pluto Ltd. shall not stop charging depreciation
or treat the plant as held for sale because its carrying amount will be recovered
principally through continuing use to the end of their economic life.

The working of the same for presenting in the balance sheet is given as below:
Calculation of carrying amount as on 31st March, 20X4
Purchase Price of Plant 6,00,000
Less: Accumulated depreciation (6,00,000/10 Years) x 3 Years (1,80,000)
4,20,000
Less: Impairment loss (70,000)
3,50,000

Balance Sheet extracts as on 31st March, 20X4

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

Working Note:
Fair value less cost to sell of the Plant = ` 3,50,000
Value in Use (not given) or = Nil (since plant has temporarily not been
used for manufacturing due to decline
in demand)
Recoverable amount = higher of above i.e. ` 3,50,000
Impairment loss = Carrying amount – Recoverable amount
Impairment loss = ` 4,20,000 - ` 3,50,000 = ` 70,000.
FINANCIAL REPORTING 419
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Case Study 3
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:
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value) 7.60
Analyse whether the above accounting treatment made by the accountant in regard
to financial year ending on 31.0.20X2 is in compliance of the Ind AS. If not, advise
the correct treatment along with working for the same.

Solution:
The above treatment needs to be examined in the light of the provisions given in
Ind AS 10 ‘Events after 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 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) those that provide evidence of conditions that existed at the end of the
reporting period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period
(non- adjusting events after the reporting period).

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”.

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”.
FINANCIAL REPORTING 420
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Further, paragraph 9 of Ind AS 2 states that:
“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 non- adjusting 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:
Cost 8.00
Net realisable value 9.60
Inventories (lower of cost and net realisable value) 8.00

Case Study 4
On 1st April, 20X1, Sun Ltd. has acquired 100% shares of Earth Ltd. for ` 30 lakhs.
Sun Ltd. has 3 cash-generating units A, B and C with fair value of ` 12 lakhs, ` 8 lakhs
and ` 4 lakhs respectively. The company recognizes goodwill of ` 6 lakhs that relates
to CGU ‘C’ only.
During the financial year 20X2-20X3, the CFO of the company has a view that there
is no requirement of any impairment testing for any CGU since their recoverable
amount is comparatively higher than the carrying amount and believes there is no
indicator of impairment.
Analyse whether the view adopted by the CFO of Sun Ltd is in compliance of the
Ind AS. If not, advise the correct treatment in accordance with relevant Ind AS.

Solution:
The above treatment needs to be examined in the light of the provisions given in
Ind AS 36: Impairment of Assets.
Para 9 of Ind AS 36 ‘Impairment of Assets’ states that “An entity shall assess at the
end of each reporting period whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall estimate the recoverable
amount of the asset.” Further, paragraph 10(b) of Ind AS 36 states that:
“Irrespective of whether there is any indication of impairment, an entity shall also
test goodwill acquired in a business combination for impairment annually.”

FINANCIAL REPORTING 421

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Sun Ltd has not tested any CGU on account of not having any indication of
impairment is partially correct i.e. in respect of CGU A and B but not for CGU C.
Hence, the treatment made by the Company is not in accordance with Ind AS 36.
Accordingly, impairment testing in respect of CGU A and B are not required since
there are no indications of impairment. However, Sun Ltd shall test CGU C
irrespective of any indication of impairment annually as the goodwill acquired on
business combination is fully allocated to CGU ‘C’.

Case Study 5
Venus Ltd. is a multinational entity that owns three properties. All three properties
were purchased on 1st April, 20X1. The details of purchase price and market values
of the properties are given as follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out
Purchase price 15,000 10,000 12,000
Market value 31.03.20X2 16,000 11,000 13,500
Life 10 Years 10 Years 10 Years
Subsequent Measurement Cost Model Revaluation Model Revaluation Model
Property 1 and 2 are used by Venus Ltd. as factory building whilst property 3 is let-
out to a non- related party at a market rent. The management presents all three
properties in balance sheet as ‘property, plant and equipment’.
The Company does not depreciate any of the properties on the basis that the fair
values are exceeding their carrying amount and recognise the difference between
purchase price and fair value in Statement of Profit and Loss.
Required:
Analyse whether the accounting policies adopted by the Venus Ltd. in relation to
these properties is in accordance with Ind AS. If not, advise the correct treatment
along with working for the same.

Solution:
The above issue needs to be examined in the umbrella of the provisions given in Ind
AS 1 ‘Presentation of Financial Statements’, Ind AS 16 ‘Property, Plant and
Equipment’ in relation to property ‘1’ and ‘2’ and Ind AS 40 ‘Investment Property’
in relation to property ‘3’.
Property ‘1’ and ‘2’
Para 6 of Ind AS 16 ‘Property, Plant and Equipment’ defines:
“Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
(b) are expected to be used during more than one period.”

FINANCIAL REPORTING 422

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Paragraph 29 of Ind AS 16 states that:
“An entity shall choose either the cost model or the revaluation model as its
accounting policy and shall apply that policy to an entire class of property, plant
and equipment”.

Further, paragraph 36 of Ind AS 16 states that:

“If an item of property, plant and equipment is revalued, the entire class of
property, plant and equipment to which that asset belongs shall be revalued”.

Further, paragraph 39 of Ind AS 16 states that:

“If an asset’s carrying amount is increased as a result of a revaluation, the increase
shall be recognised in other comprehensive income and accumulated in equity
under the heading of revaluation surplus. However, the increase shall be
recognised in profit or loss to the extent that it reverses a revaluation decrease of
the same asset previously recognised in profit or loss”.

Further, paragraph 52 of Ind AS 16 states that:

“Depreciation is recognised even if the fair value of the asset exceeds its carrying
amount, as long as the asset’s residual value does not exceed its carrying amount”.

Property ‘3’
Para 6 of Ind AS 40 ‘Investment property’ defines:
“Investment property is property (land or a building or part of a building or both)
held (by the owner or by the lessee under a finance lease) to earn rentals or for
capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative
purposes; or
(b) sale in the ordinary course of business”.

Further, paragraph 30 of Ind AS 40 states that:

“An entity shall adopt as its accounting policy the cost model to all of its
investment property”. Further, paragraph 79 (e) of Ind AS 40 requires that:
“An entity shall disclose the fair value of investment property”.
Further, paragraph 54 (2) of Ind AS 1 ‘Presentation of Financial Statements’
requires that: “As a minimum, the balance sheet shall include line items that
present the following amounts:
(a) property, plant and equipment;
(b) investment property;

FINANCIAL REPORTING 423

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
As per the facts given in the question, Venus Ltd. has
(a) presented all three properties in balance sheet as ‘property, plant and
equipment’;
(b) applied different accounting policies to Property ‘1’ and ‘2’;
(c) revaluation is charged in statement of profit and loss as profit; and
(d) applied revaluation model to Property ‘3’ being classified as Investment
Property. These accounting treatment is neither correct nor in accordance
with provision of Ind AS 1, Ind AS 16 and Ind AS 40.

Accordingly, Venus Ltd. shall apply the same accounting policy (i.e. either
revaluation or cost model) to entire class of property being property ‘1’ and ‘2”. It
also required to depreciate these properties irrespective of that, their fair value
exceeds the carrying amount. The revaluation gain shall be recognised in other
comprehensive income and accumulated in equity under the heading of revaluation
surplus.

There is no alternative of revaluation model in respect to property ‘3’ being

classified as Investment Property and only cost model is permitted for subsequent
measurement. However, Venus ltd. is required to disclose the fair value of the
property in the Notes to Accounts. Also the property ‘3’ shall be presented as
separate line item as Investment Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the
presentation of these three properties in the balance sheet is as follows:

Case 1: Venus Ltd. has applied the Cost Model to an entire class of property, plant
and equipment.

Balance Sheet extracts as at 31st March, 20X2

`
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment Properties
Property ‘3’ 10,800

FINANCIAL REPORTING 424

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Case 2: Venus Ltd. has applied the Revaluation Model to an entire class of
property, plant and equipment.
Balance Sheet extracts as at 31st March, 20X2
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 16,000
Property ‘2’ 11,000 27,000
Investment Properties
Property ‘3’ 10,800
Equity and Liabilities
Other Equity
Revaluation Reserve
Property ‘1’ 2,500
Property ‘2’ 2,000 4,500
The revaluation reserve should be routed through Other Comprehensive Income
(subsequently not reclassified to Profit and Loss) in Statement of Profit and Loss
and Shown as a separate column in Statement of Changes in Equity.

Case Study 6
On 1st January, 20X2, Sun Ltd. was notified that a customer was taking legal action
against the company in respect of a financial losses incurred by the customer.
Customer alleged that the financial losses were caused due to supply of faulty
products on 30th September, 20X1 by the Company. Sun Ltd. defended the case but
considered, based on the progress of the case up to 31st March, 20X2, that there
was a 75% probability they would have to pay damages of ` 10 lakhs to the
customer.
However, the accountant of Sun Ltd. has not recorded this transaction in its
financial statement as the case is not yet finally settled. The case was ultimately
settled against the company resulting in to payment of damages of ` 12 lakhs to
the customer on 15th May, 20X2. The financials have been authorized by the Board
of Directors in its meeting held on 18th May, 20X2.
Analyse whether the above accounting treatment made by the accountant is in
compliance of the Ind AS. If not, advise the correct treatment along with working
for the same.

Solution:
The above treatment needs to be examined in the light of the provisions given in
Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and Ind AS 10
‘Events after the Reporting Period’.

FINANCIAL REPORTING 425

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Para 10 of Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’
defines:
“Provision is a liability of uncertain timing or amount.
Liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits”.

Further, paragraph 14 of Ind AS 37, states:

“A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past
event;
(b) it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation”.

Further, paragraph 36 of Ind AS 37, states:

“The amount recognised as a provision shall be the best estimate of the
expenditure required to settle the present obligation at the end of the reporting
period”.

Further, paragraph 3 of Ind AS 10 ‘Events after the Reporting Period’ defines:

“Events after the reporting period are 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) those that provide evidence of conditions that existed at the end of the
reporting period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period
(non- adjusting events after the reporting period).

Further, paragraph 8 of Ind AS 10 states that:

“An entity shall adjust the amounts recognised in its financial statements to reflect
adjusting events after the reporting period.”

The Accountant of Sun Ltd. has not recognised the provision and accordingly not
adjusted the amounts recognised in its financial statements to reflect adjusting
events after the reporting period is not correct and nor in accordance with
provision of Ind AS 37 and Ind AS 10.

FINANCIAL REPORTING 426

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
As per given facts, the potential payment of damages to the customer is an
obligation arising out of a past event which can be reliably estimated. Therefore,
following the provision of Ind AS 37 ‘Provisions, Contingent Liabilities and
Contingent Assets’ – a provision is required. The provision should be for the best
estimate of the expenditure required to settle the obligation at 31st March, 20X2
which comes to ` 7.5 lakhs (` 10 lakhs x 75%).
Further, following the principles of Ind AS 10 ‘Events after the Reporting Period’
evidence of the settlement amount is an adjusting event. Therefore, the amount of
provision created shall be increased to ` 12 lakhs and accordingly be recognised as
a current liability.

Case Study 7
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.
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.
Analyse whether the above accounting treatment made by the management is in
compliance of the Ind AS. If not, advise the correct treatment along with working
for the same.

Solution:
As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41
Agriculture shall be applicable to this company.
The above facts need to be examined in the light of the provisions given in Ind AS 20
‘Accounting for Government Grants and is closure 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 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”.
FINANCIAL REPORTING 427
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
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 continuing engagement in the plantation
of eucalyptus tree.

Balance Sheet extracts showing the presentation of Government Grant

as on 31st March, 20X2
`
Liabilities
Non-Current liabilities
Other Non-Current Liabilities
Government Grants 10,00,000

Case Study 8
Mercury Ltd. has sold goods to Mars Ltd. at a consideration of ` 10 lakhs, the receipt
of which receivable in three equal installments of ` 3,33,333 over a two year period
(receipts on 1st April, 20X1, 31st March, 20X2 and 31st March, 20X3).
The company is offering a discount of 5 % (i.e. ` 50,000) if payment is made in full at
the time of sale. The sale agreement reflects an implicit interest rate of 5.36% p.a.
The total consideration to be received from such sale is at ` 10 Lakhs and hence,
the management has recognised the revenue from sale of goods for ` 10 lakhs.
Further, the management is of the view that there is no difference in this aspect
between Indian GAAP and Ind AS.
Analyse whether the above accounting treatment made by the accountant is in
compliance of the Ind AS. If not, advise the correct treatment along with working
for the same.

Solution:
The revenue from sale of goods shall be recognised at the fair value of the
consideration received or receivable. The fair value of the consideration is
determined by discounting all future receipts using an imputed rate of interest
where the receipt is deferred beyond normal credit terms. The difference between
the fair value and the nominal amount of the consideration is recognised as
interest revenue.

FINANCIAL REPORTING 428

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
The fair value of consideration (cash price equivalent) of the sale of goods is
calculated as follows:
Consideration Present value Present value of
Year
(Installment) factor consideration
Time of sale 3,33,333 - 3,33,333
End of 1st year 3,33,333 0.949 3,16,333
End of 2nd year 3,33,334 0.901 3,00,334
10,00,000 9,50,000

The Company that agrees for deferring the cash inflow from sale of goods will
recognise the revenue from sale of goods and finance income as follows:
` `
Initial recognition of sale of goods
Cash Dr. 3,33,333
Trade Receivable Dr. 6,16,667
To Sale 9,50,000
Recognition of interest expense and receipt of second
installment
Cash Dr. 3,33,333
To Interest Income 33,053
To Trade Receivable 3,00,280
Recognition of interest expense and payment of final
installment
Cash Dr. 3,33,334
To Interest Income (Balancing figure) 16,947
To Trade Receivable 3,16,387

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

As at 31st As at 31st
March, 20X2 March, 20X3
Income
Sale of Goods 9,50,000 -
Other Income (Finance income) 33,0532,999 16,947

FINANCIAL REPORTING 429

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Statement of Profit and Loss (extracts)
for the year ended 31st March, 20X2 and 31st March, 20X3
As at 31st As at 31st
March, 20X2 March, 20X3
Assets
Current Assets
Financial Assets
Trade Receivables 3,16,387 XXX

Case Study 9
Following are the Financial Statements of Abraham Ltd.:
Balance Sheet
As at 31st
Particulars Note No. March, 2019
(` in lakh)
EQUITY AND LIABILITIES:
Shareholders’ funds
Share capital (shares of ` 10 each) 1,000
Reserves and surplus 1 2,400
Non-current liabilities
Long term borrowings 2 5,700
Deferred tax liabilities 400
Current liabilities
Trade payables 300
Short-term provisions 300
Other current liabilities 3 200
Total 10,300
ASSETS
Non-current assets
Fixed assets 5,000
Deferred tax assets 3 700
Current assets
Inventories 1,500
Trade receivables 5 1,100
Cash and bank balances 2,000
Total 10,300

FINANCIAL REPORTING 430

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Statement of Profit & Loss for the year ended 31st March, 2019.

Particular Note No. ` (in lakh)

Revenue from operations 6,000
Expenses:
Employee benefit expense 1,200
Operating costs 3,199
Depreciation 450
Total expenses 4,849
Profit before tax 1,151
Tax expense 201
Profit after tax 950

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

Note 4: Other current liabilities

Unclaimed dividends 10
Billing in advance 150
Other current liabilities 40
Total 200
FINANCIAL REPORTING 431
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
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)
Total 1,100
Additional information:
(i) Share capital comprises of 100 lakh shares of ` 10 each.
(ii) Term Loan from bank for ` 5,700 lakh also includes interest accrued and due
of ` 700 lakh as on the reporting date.
(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.
(v) A dividend of 10 % was declared by the Board of directors of the company.
(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. 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 with explanations
thereof.

Solution:
Following adjustments / rectifications are required to be done
(1) Reserve for foreseeable loss for ` 400 lakh, due within 6 months, should be a
part of provisions. Hence it needs to be regrouped. If it was also part of
previous year’s comparatives, a note should be added in the notes to account
on the regrouping done this year.
(2) Interest accrued and due of ` 700 lakh on term loan will be a part of current
liabilities.
Thus, it should be shown under the heading “Other Current Liabilities”.
(3) As per Ind AS 2, inventories are measured at the lower of cost and net real
isable value. The amount of any write down of inventories to net realisable
value is recognised as an expense in the period the write-down occurs. Hence,
the inventories should be valued at ` 1,200 lakh and write down of ` 300 lakh
(` 1,500 lakh – ` 1,200 lakh) will be added to the operating cost of the entity.
(4) In the absence of the declaration date of dividend in the question, it is
presumed that the dividend is declared after the reporting date. Hence, no
adjustment for the same is made in the financial year 2018-2019. However, a
note will be given separately in this regard (not forming part of item of
financial statements).
FINANCIAL REPORTING 432
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
(5) Accrued income will be shown in the Statement of Profit and Loss as ‘Other
Income’ and as ‘Other Current Asset’ in the Balance Sheet.
(6) Since the deferred tax liabilities and deferred tax assets relate to taxes on
income levied by the same governing taxation laws, these shall be set off, in
accordance with Ind AS 12. The net DTA of ` 300 lakh will be shown in the
balance sheet.
(7) As per Division II of Schedule III to the Companies Act, 2013, the Statement of
Profit and Loss should present the Earnings per Equity Share.
(8) In Ind AS, Assets are not presented in the Balance sheet as ‘Fixed Asset’,
rather they are classified under various categories of Non-current assets.
Here, it is assumed as ‘Property, Plant and Equipment’.
(9) 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 31st March, 2019
Note No. (` in lakh)
ASSETS
Non-current assets
Property, plant and equipment 5,000
Deferred tax assets 1 300
Current assets
Inventories 1,200
Financial assets
Trade receivables 2 1,100
Cash and cash equivalents 2,000
Others financial asset (accrued interest) 300
TOTAL 9,900
EQUITY AND LIABILITIES
Equity
Equity share capital 3 1,000
Other equity 4 2,000
Non-current liabilities
Financial liabilities
Long-term borrowings 5 5,000
Current liabilities
Financial liabilities
Trade payables 300
Others 6 710
Short-term provisions (300 + 400) 7 700
Other current liabilities 8 190
TOTAL 9,900
FINANCIAL REPORTING 433
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Statement of Profit and Loss of Abraham Ltd.
For the year ended 31st March, 2019
Note No. (` in lakh)
Revenue from operations 6,000
Other income 300
Total income 6,300
Expenses
Operating costs 3,199
Change in inventories cost 9 300
Employee benefits expense 1,200
Depreciation 450
Total expenses 5,149
Profit before tax 1,151
Tax expense (201)
Profit for the period 950
Earnings per equity share
Basic 9.5
Diluted 9.5
Number of equity shares (face value of ` 10 each) 100 lakh

Statement of Changes in Equity of Abraham Ltd.

For the year ended 31st March, 2019
(3) Equity Share Capital (` in lakh)
Balance at the beginning Changes in Equity share Balance at the end of
of the reporting period capital during the year the
reporting period
1,000 0 1,000

(4) Other Equity (` in lakh)

Reserves & Surplus
Particulars Capital Retained Total
reserve Earnings
Balance at the beginning of the year 500* 550 1,050
Total comprehensive income for the year 950 950
Balance at the end of the year 500 1,500 2,000

FINANCIAL REPORTING 434

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Note:
Capital reserve given in the Note 1 of the question is assumed to be brought
forward from the previous year. However, alternatively, if it may be assumed as
created during the year.

(1) Deferred Tax (` in lakh)

Deferred Tax Asset 700
Deferred Tax Liability 400
300

(2) Trade Receivables (` in lakh)

Trade receivables considered good 1,065
Trade receivables which have significant increase in credit risk 40
Less: Provision for doubtful debts (5) 35
Total 1,100

(5) Long Term Borrowings (` in lakh)

Term Loan from Bank (5,700 - 700) 5,000
Total 5,000

(6) Other Financial Liabilities (` in lakh)

Unclaimed dividends 10
Interest on term loan 700
Total 710

(7) Short-term provisions (` in lakh)

Provisions 300
Foreseeable loss against a service contract 400
Total 700

(8) Other Current Liabilities (` in lakh)

Billing in Advance 150
Other 40
Total 190

(9) Dividends not recognised at the end of the reporting period

At year end, the directors have recommended the payment of dividend of 10% i.e.
` 1 per equity share. This proposed dividend is subject to the approval of
shareholders in the ensuing annual general meeting.
FINANCIAL REPORTING 435
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Case Study 10
Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein
investment of 55% is done by Iktara Ltd. and rest by Deepak. Voting powers are to
be given as per the proportionate share of capital contribution. The new company
formed was the subsidiary of Iktara Ltd. with two directors, and Deepak eventually
becomes one of the directors of company. A consultant was hired and he charged
` 30,000 for the incorporation of company and to do other necessary statuary
registrations. ` 30,000 is to be charged as an expense in the books after
incorporation of company. The company, Softbharti Pvt. Ltd. was incorporated on
1st April 20X1.

The financials of Iktara Ltd. are prepared as per Ind AS.

An accountant who was hired at the time of company’s incorporation, has prepared
the draft financials of Softbharti Pvt. Ltd. for the year ending 31st March, 20X2 as
follows:

Statement of Profit and Loss

Particulars Amount (`)

Revenue from operations 10,00,000
Other Income 1,00,000
Total Revenue (a) 11,00,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase)/Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 7,45,000
Profit before tax (c) = (a)-(b) 3,55,000
Current tax 1,06,500
Deferred tax 6,000
Total tax expense (d) 1,12,500
Profit for the year (e) = (c) – (d) 2,42,500

FINANCIAL REPORTING 436

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Balance Sheet
Particulars Amount (`)
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1,00,000
(b) Reserves & Surplus 2,27,500
(2) Non-Current Liabilities
(a) Long Term Provisions 25,000
(b) Deferred tax liabilities 6,000
(3) Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000
(c) Short Term Provisions 1,06,500
TOTAL 5,21,000
ASSETS
(1) Non Current Assets
(a) Property, plant and equipment (net) 1,00,000
(b) Long-term Loans and Advances 40,000
(c) Other Non Current Assets 50,000
(2) Current Assets
(a) Current Investment 30,000
(b) Inventories 80,000
(c) Trade Receivables 55,000
(d) Cash and Bank Balances 1,15,000
(e) Other Current Assets 51,000
TOTAL 5,21,000

Additional information of Softbharti Pvt Ltd.:

(i) Deferred tax liability of ` 6,000 is created due to following temporary
difference:
Difference in depreciation amount as per Income tax and Accounting profit
(ii) There is only one property, plant and equipment in the company, whose
closing balance as at 31st March, 20X2 is as follows:
As per Books As per Income Tax
Property Plant & Equipment 1,00,000 80,000

FINANCIAL REPORTING 437

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
(iii) Pre incorporation expenses are deductible on straight line basis over the
period of five years as per Income tax. However, the same are immediately
expensed off in the books.
(iv) Current tax is calculated at 30% on PBT - ` 3,55,000 without doing any
adjustments related to Income tax. The correct current tax after doing
necessary adjustments of allowances / disallowances related to Income tax
comes to ` 1,25,700.
(v) After the reporting period, the directors have recommended dividend of
` 15,000 for the year ending 31st March, 20X2 which has been deducted from
reserves and surplus. Dividend payable of ` 15,000 has been grouped under
‘other current liabilities’ alongwith other financial liabilities.
(vi) There are ‘Government statuary dues’ amounting to ` 15,000 which are
grouped under ‘other current liabilities’.
(vii) The capital advances amounting to ` 50,000 are grouped under ‘Other non-
current assets’.
(viii) Other current assets of ` 51,000 comprise Interest receivable from trade
receivables.
(ix) Current investment of ` 30,000 is in shares of a company which was done with
the purpose of trading; current investment has been carried at cost in the
financial statements. The fair value of current investment in this case is
` 50,000 as at 31st March, 20X2.
(x) Actuarial gain on employee benefit measurements of ` 1,000 has been
omitted in the financials of Softbharti private limited for the year ending
31st March, 20X2.
The financial statements for financial year 20X1-20X2 have not been yet
approved. You are required to ascertain that whether the financial statements
of Softbharti Pvt. Ltd. are correctly presented as per the applicable financial
reporting framework. If not, prepare the revised financial statements of
Softbharti Pvt. Ltd. after the careful analysis of mentioned facts and
information.

Solution:
If Ind AS is applicable to any company, then Ind AS shall automatically be made
applicable to all the subsidiaries, holding companies, associated companies, and
joint ventures of that company, irrespective of individual qualification of set of
standards on such companies.
In the given case it has been mentioned that the financials of Iktara Ltd. are
prepared as per Ind AS. Accordingly, the results of its subsidiary Softbharti Pvt. Ltd.
should also have been prepared as per Ind AS. However, the financials of Softbharti
Pvt. Ltd. have been presented as per accounting standards (AS).
FINANCIAL REPORTING 438
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
Hence, it is necessary to revise the financial statements of Softbharti Pvt. Ltd. as
per Ind AS after the incorporation of necessary adjustments mentioned in the
question.
The revised financial statements of Softbharti Pvt. Ltd. as per Ind AS and Division II
to Schedule III of the Companies Act, 2013 are as follows:

STATEMENT OF PROFIT AND LOSS

for the year ended 31st March, 20X2

Particulars Amount (`)

Revenue from operations 10,00,000
Other Income (1,00,000 + 20,000) (refer note -1) 1,20,000
Total Revenue 11,20,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase) / Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses 7,45,000
Profit before tax 3,75,000
Current tax 1,25,700
Deferred tax (W.N.1) 4,800
Total tax expense 1,30,500
Profit for the year (A) 2,44,500
OTHER COMPREHENSIVE INCOME
Items that will not be reclassified to Profit or Loss:
Remeasurements of net defined benefit plans 1,000
Tax liabilities relating to items that will not be reclassified to Profit or Loss
Remeasurements of net defined benefit plans (tax) [1000 x 30%] (300)
Other Comprehensive Income for the period (B) 700
Total Comprehensive Income for the period (A+B) 2,45,200

FINANCIAL REPORTING 439

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
BALANCE SHEET
as at 31st March, 20X2

Particulars Amount (`)

ASSETS
Non-current assets
Property, plant and equipment 1,00,000
Financial assets
Other financial assets (Long-term loans and advances) 40,000
Other non-current assets (capital advances) (refer note-2) 50,000
Current assets
Inventories 80,000
Financial assets
Investments (30,000 + 20,000) (refer note -1) 50,000
Trade receivables 55,000
Cash and cash equivalents/Bank 1,15,000
Other financial assets (Interest receivable from trade receivables) 51,000
TOTAL ASSETS 5,41,000
EQUITY AND LIABILITIES
Equity
Equity share capital 1,00,000
Other equity 2,45,200
Non-current liabilities
Provision (25,000 – 1,000) 24,000
Deferred tax liabilities (4800 + 300) 5,100
Current liabilities
Financial liabilities
Trade payables 11,000
Other financial liabilities (Refer note 5) 15,000
Other current liabilities (Govt. statuary dues) (Refer note 3) 15,000
Current tax liabilities 1,25,700
TOTAL EQUITY AND LIABILITIES 5,41,000

FINANCIAL REPORTING 440

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
STATEMENT OF CHANGES IN EQUITY
For the year ended 31st March, 20X2
(A) EQUITY SHARE CAPITAL
Balance (`)
As at 31st March, 20X1 -
Changes in equity share capital during the year 1,00,000
As at 31st March, 20X2 1,00,000

(B) OTHER EQUITY

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

DISCLOSURE FORMING PART OF FINANCIAL STATEMENTS:

Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance
Sheet date. (refer note 4)

Notes:
(1) Current investment are held for the purpose of trading. Hence, it is a financial
asset classified as FVTPL. Any gain in its fair value will be recognised through profit
or loss. Hence, ` 20,000 (` 50,000 – ` 30,000) increase in fair value of financial
asset will be recognised in profit and loss. However, it will attract deferred tax
liability on increased value (Refer W.N).
(2) Assets for which the future economic benefit is the receipt of goods or services,
rather than the right to receive cash or another financial asset, are not financial
assets.
(3) Liabilities for which there is no contractual obligation to deliver cash or other
financial asset to another entity, are not financial liabilities.
(4) As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared
after the reporting period but before the financial statements are approved for
issue, the dividends are not recognized as a liability at the end of the reporting
period because no obligation exists at that time. Such dividends are disclosed in
the notes in accordance with Ind AS 1, Presentation of Financial Statements.
FINANCIAL REPORTING 441
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
(5) Other current financial liabilities:
(`)
Balance of other current liabilities as per financial statements 45,000
Less: Dividend declared for FY 20X1 – 20X2 (Note – 4) (15,000)
Reclassification of government statuary dues payable to ‘other
current liabilities’ (15,000)
Closing balance 15,000

Working Note:
Calculation of deferred tax on temporary differences as per Ind AS 12 for
financial year 20X1 – 20X2
Carrying Tax base Difference DTA / DTL@
Item
amount (`) (`) (`) 30% (`)
Property, Plant and Equipment 1,00,000 80,000 20,000 6,000-DTL
Pre-incorporation expenses Nil 24,000 24,000 7,200-DTA
Current Investment 50,000 30,000 20,000 6,000-DTL
Net DTL 4,800-DTL

Case Study 11
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 month until the end of the financial year. The company has not
taken any specific borrowings 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 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.

The company seeks advice on the treatment of borrowing costs in its financial
statements for the year ending 31 March 20X2.

FINANCIAL REPORTING 442

ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
(b) 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 player registrations are
contractual obligations between the player and the company. The costs of
acquiring player registrations include transfer fees, league levy fees, and
player agents’ fees incurred by the club.

At the end of each season, which happens to also be the reporting period end
for Mumbai 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 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.

Mumbai Challengers Ltd. seeks your advice on the treatment of the

acquisition, extension, review and sale of players’ registrations in the
circumstances outlined above.

(c) 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.

Solution:
(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.
FINANCIAL REPORTING 443
ANALYSIS OF FINANCIAL
STATEMENTS
CA FINAL
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 outstanding during the
period.
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 capitalization rate,
which is as under:
Particulars ₹ in crores
Costs incurred in December 20X1: (₹ 140 crores x 15% x 4/12) 7.000
Costs incurred in January 20X2: (₹ 350 crores x 15% x 3/12) 13.125
Costs incurred in February 20X2: (₹ 350 crores x 15% x 2/12) 8.750
Costs incurred in March 20X2: (₹ 350 crores x 15% x 1/12) 4.375
Borrowing Costs to be capitalized in 20X1-X2 33.250
OR
Weighted average carrying amount of the stadium during 20X1-X2 is:
₹ (140 + 490 + 840 + 1,190) crores/4 = ₹ 665 crores
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) 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.
FINANCIAL REPORTING 444
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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. 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 application of Ind AS 105,
subjected to impairment, if any. 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 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.
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 accordance with Ind AS 10 Events after the Reporting
Period.

Impairment review
Ind AS 36 Impairment of Assets requires companies to annually test their
assets for 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 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 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

FINANCIAL REPORTING 445

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CA FINAL
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 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
reflects any loss arising.

(c) 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.

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.

Case Study 12
HIM Limited having net worth of 250 crores is required to adopt Ind AS from 1st
April, 20X2 in accordance with the Companies (Indian Accounting Standard) Rules
2015.

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Rahul, the senior manager, of HIM Ltd. has identified following issues which need
specific attention of CFO so that opening Ind AS balance sheet as on the date of
transition can be prepared:
Issue 1: As part of Property, Plant and Equipment, Company has elected to
measure land at its fair value and want to use this fair value as deemed cost on the
date of transition.
The carrying value of land as on the date of transition was 5,00,000. The land was
acquired for a consideration of 5,00,000. However, the fair value of land as on the
date of transition was 8,00,000.
Issue 2: Under Ind AS, the Company has designated mutual funds as investments at
fair value through profit or loss. The value of mutual funds as per previous GAAP
was 4,00,000 (at cost). However, the fair value of mutual funds as on the date of
transition was 5,00,000.
Issue 3: Company had taken a loan from another entity. The loan carries an
interest rate of 7% and it had incurred certain transaction costs while obtaining the
same. It was carried at cost on its initial recognition. The principal amount is to be
repaid in equal instalments over the period of loan. Interest is also payable at each
year end. The fair value of loan as on the date of transition is 1,80,000 as against
the carrying amount of loan which at present equals 2,00,000.
Issue 4: The company has declared dividend of 30,000 for last financial year. On
the date of transition, the declared dividend has already been deducted by the
accountant from the company’s ‘Reserves & Surplus’ and the dividend payable has
been grouped under ‘Provisions’. The dividend was only declared by board of
directors at that time and it was not approved in the annual general meeting of
shareholders. However, subsequently when the meeting was held it was ratified by
the shareholders.
Issue 5: The company had acquired intangible assets as trademarks amounting to
2,50,000. The company assumes to have indefinite life of these assets. The fair
value of the intangible assets as on the date of transition was 3,00,000. However,
the company wants to carry the intangible assets at 2,50,000 only.
Issue 6: After consideration of possible effects as per Ind AS, the deferred tax
impact is computed as 25,000. This amount will further increase the portion of
deferred tax liability. There is no requirement to carry out the separate calculation
of deferred tax on account of Ind AS adjustments.
Management wants to know the impact of Ind AS in the financial statements of
company for its general understanding.
Prepare Ind AS Impact Analysis Report (Extract) for HIM Limited for presentation to
the management wherein you are required to discuss the corresponding differences
between Earlier IGAAP (AS) and Ind AS against each identified issue for preparation
of transition date balance sheet. Also pass journal entry for each issue.
FINANCIAL REPORTING 447
ANALYSIS OF FINANCIAL
STATEMENTS
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Solution:
Assessment of Preliminary Impact Assessment of Transition to Ind AS on Him
Limited’s Financial Statements
Issue 1: Fair value as deemed cost for property plant and equipment:
Accounting Standards Impact on Company’s
Ind AS
(Erstwhile IGAAP) financial Statements
As per AS 10, Property, Ind AS 101 allows entity to The company has decided
Plant and Equipment is elect to measure to adopt fair value as
recognised at cost less Property, Plant and deemed cost in this case.
depreciation. Equipment on the Since fair value exceeds
transition date at its fair book value, so the book
value or previous GAAP value should be brought
carrying value (book up to fair value. The
value) as deemed cost. resulting impact of fair
valuation of land 3,00,000
should be adjusted in
other equity.

Journal Entry on the date of transition

Particulars Debit (`) Credit (`)
Property Plant and Equipment Dr. 3,00,000
To Revaluation Surplus (OCI- Other Equity) 3,00,000

Issue 2: Fair valuation of Financial Assets:

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

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

Issue 3: Borrowings - Processing fees/transaction cost:

Accounting
Impact on Company’s
Standards Ind AS
financial statements
(Erstwhile IGAAP)
As per AS, such As per Ind AS, such Fair value as on the date of
expenditure is expenditure is amortised transition is 1,80,000 as against
charged to Profit over the period of the its book value of 2,00,000.
and loss account or loan. Accordingly, the difference of
capitalized as the Ind AS 101 states that if it 20,000 is adjusted through
case may be is impracticable for an retained earnings.
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 AS shall
be the new gross carrying
amount of that financial
asset or the new
amortised cost of that
financial liability.

Journal Entry on the date of transition

Particulars Debit (`) Credit (`)
Borrowings / Loan payable Dr. 20,000
To Retained earnings 20,000

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Issue 4: Borrowings - Proposed dividend:
Accounting
Impact on Company’s financial
Standards Ind AS
Statements
(Erstwhile IGAAP)
As per AS, provision As per Ind AS, liability for Since dividend should be
for proposed proposed dividend is deducted from retained
divided is made in recognised in the year in earnings during the year when
the year when it which it has been it has been declared and
has been declared declared and approved. approved. Therefore, the
and approved. provision declared for
preceding year should be
reversed (to rectify the wrong
entry).
Retained earnings would
increase proportionately due to
such adjustment

Journal Entry on the date of transition

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

Issue 5: Intangible assets:

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

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ANALYSIS OF FINANCIAL
STATEMENTS
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Issue 6: Deferred tax:
Accounting
Impact on Company’s
Standards Ind AS
financial statements
(Erstwhile IGAAP)
As per AS, deferred As per Ind AS, deferred On date of transition to Ind AS,
taxes are taxes are accounted as deferred tax liability would be
accounted as per per balance sheet increased by 25,000.
income statement approach.
approach.

Journal Entry on the date of transition

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

“If opportunity doesn’t knock, build a door”.

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ANALYSIS OF FINANCIAL
STATEMENTS
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Notes


FINANCIAL REPORTING 452
ANALYSIS OF FINANCIAL
STATEMENTS
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10 PRACTICE TEST PAPERS

PAPER - A
Question 1
Veer Limited issues convertible bonds of ` 75,00,000 on 1st April, 2018. The bonds
have a life of five years and a face value of ` 20 each, and they offer interest
payable at the end of each financial year at a rate of 4.5 per cent annum. The
bonds are issued at their face value and each bond can be converted into one
ordinary share in Veer Ltd at any time in the next five years. Companies of a
similar risk profile have recently issued debt at 6 per cent per annum with similar
terms but without the option for conversion. You are required to:
(i) Provide the appropriate accounting entries for initial recognition as per the
relevant Ind AS in the books of the company.
(ii) Calculate the stream of interest expenses across the five years of the life of
the bonds.
(iii) Provide the accounting entries if the holders of the bonds elect to convert the
bonds to ordinary shares at the end of the fourth year.

Question 2
Perfect Ltd. issued 50,000 Compulsory Cumulative Convertible Preference Shares
(CCCPS) as on 1st April, 2017 @ ` 180 each. The rate of dividend is 10% payable at
the end of every year. The preference shares are convertible into 12,500 equity
shares (Face value ` 10 each) 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 option is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the proceeds.
Effective Interest Rate is 15.86%. (Round off the figures to the nearest multiple of
Rupee) Discounting Factor @ 15%.
Year 1 2 3 4 5
Discount Factor 0.8696 0.7561 0.6575 0.5718 0.4971

You are required to compute Liability and Equity Component and Pass Journal Entries
for entire term of arrangement i.e. from the issue of Preference Shares till their
conversion into Equity Shares. Keeping in view the provisions of relevant Ind AS.

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Question 3
S Limited issued redeemable preference shares to its Holding Company -H Limited.
The terms of the instrument have been summarized below. Analyse the given
situation, applying the guidance in Ind AS 109 ‘Financial Instruments’, and account
for this in the books of H Limited.

Non-cumulative redeemable
Nature
preference shares
Repayment Redeemable after 3 years
Date of Allotment 1st April 2015
Date of Repayment 31st March 2018
Total Period 3 Years
Value of Preference Shares issued 5,00,00,000
Dividend Rate 0.0001% Per Annum
Market rate of interest 12% Per Annum
Present value factor 0.7118

Question 4
On 1st January 2017, Expo Limited agreed to purchase USD ($) 40,000 from E&I
Bank in future on 31st December 2017 for a rate equal to ` 65 per USD. Expo
Limited did not pay any amount upon entering into the contract. Expo Limited is a
listed company in India and prepares its financial statements on a quarterly basis.
Using the definition of derivative included in Ind AS 109 and following the
principles of recognition and measurement as laid down in Ind AS 109, you are
required to record the entries for each quarter ended till the date of actual
purchases of USD.
For the purpose of accounting, use the following information representing marked
to market fair value of forward contracts at each reporting date:

As at 31st March, 2017 ` (50,000)

As at 30th June, 2017 ` (30,000)

As at 30th September, 2017 ` 24,000

Spot rate of USD on 31st December, 2017 ` 62 per USD

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Question 5
An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have
a three- year term, and are issued at par with a face value of ` 1,000 per bond,
giving total proceeds of ` 2,000,000. Interest is payable annually in arrears at a
nominal annual interest rate of 6 per cent. Each bond is convertible at any time up
to maturity into 250 ordinary shares. The entity has an option to settle the
principal amount of the convertible bonds in ordinary shares or in cash.
When the bonds are issued, the prevailing market interest rate for similar debt
without a conversion option is 9 per cent. At the issue date, the market price of
one ordinary share is ` 3. Income tax is ignored.

Calculate basic and diluted EPS when

Profit attributable to ordinary equity holders of the parent entity Year 1 ` 1,000,000
Ordinary shares outstanding 1,200,000
Convertible bonds outstanding 2,000

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PAPER – A - (SOLUTIONS)
Solution: 1
Present value of bonds at the market rate of debt
Present value of principal to be received in 5 years discounted at 6%
(75,00,000 x 0.747) = 56,02,500
Present value of interest stream discounted at 6% for 5 years
(3,37,500 x 4.212) = 14,21,550
Total present value = 70,24,050
Equity component = 4,75,950
Total face value of convertible bonds = 75,00,000

(i) Journal Entries

Dr. Amount Cr. Amount
(`) (`)
1st April, 2018
Cash Dr. 75,00,000
To Convertible bonds (liability) 70,24,050
To Convertible bonds (equity component) 4,75,950
(Being entry to record the convertible bonds and the
recognition of the liability and equity components)
31st March, 2019
Interest expense Dr. 4,21,443 3,37,500
To Cash 3,37,500
To Convertible bonds (liability)
(Being entry to record the interest expense)

(ii) The stream of interest expense is summarised below, where interest for a given
year is calculated by multiplying the present value of the liability at the
beginning of the period by the market rate of interest, this is being 6 per cent.
Increase in Total bond
Interest expense
bond liability
Date Payment at 6% (e of previous
liability (e of previous
year x 6%)
(c - b) year + d)
(a) (b) (c) (d) (e)
1st April, 2018 70,24,050
31st March, 2019 3,37,500 4,21,443 83,943 71,07,993

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31st March, 2020 3,37,500 4,26,480 88,980 71,96,973
31st March, 2021 3,37,500 4,31,818 94,318 72,91,291
31st March, 2022 3,37,500 4,37,477 99,977 73,91,268
31st March, 2023 3,37,500 4,46,232* 1,08,732 75,00,000
Difference is due to rounding off.

(iii) If the holders of the bond elect to convert the bonds to ordinary shares at the
end of the fourth year (after receiving their interest payments), the entries in
the fourth year would be:
Dr. Amount Cr. Amount
(`) (`)
31st March, 2022
Interest expense A/c Dr. 4,37,477
To Cash A/c 3,37,500
To Convertible bonds (liability) A/c 99,977
(Being entry to record interest expense for the period)
31st March, 2022
Convertible bonds (liability) A/c Dr. 73,91,268
Convertible bonds (equity component) A/c Dr. 4,75,950
To Ordinary share capital A/c 78,67,218
(Being entry to record the conversion of bonds into
ordinary shares of Veer Limited).

Solution: 2
This is a compound financial instrument with two components – liability
representing present value of future cash outflows and balance represents equity
component.
Total proceeds = 50,000 Shares x ` 180 each = ` 90,00,000
Dividend @ 10% = ` 9,00,000

(a) Computation of Liability & Equity Component

Date Particulars Cash Flow Discount Factor Net present Value
01-Apr-2017 0 1 0.00
31-Mar-2018 Dividend 9,00,000 0.8696 7,82,640
31-Mar-2019 Dividend 9,00,000 0.7561 6,80,490
31-Mar-2020 Dividend 9,00,000 0.6575 5,91,750
31-Mar-2021 Dividend 9,00,000 0.5718 5,14,620
31-Mar-2022 Dividend 9,00,000 0.4971 4,47,390
Total Liability Component 30,16,890
Total Proceeds 90,00,000
Total Equity Component
(Bal fig) 59,83,110

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(b) Allocation of transaction costs
Particulars Amount Allocation Net Amount
a b a-b
Liability Component 30,16,890 60,338 29,56,552
Equity Component 59,83,110 1,19,662 58,63,448
Total Proceeds 90,00,000 1,80,000 88,20,000

(c) Accounting for liability at amortised cost

• Initial accounting = Present value of cash outflows less transaction costs
• Subsequent accounting = At amortised cost, ie initial fair value adjusted
for interest and repayments of the liability.
Opening Cash Flow Closing
Interest @
Financial (Dividend\ Financial
15.86% B
Liability A payment) C Liability A+B-C
01-Apr-2017 29,56,552 29,56,552
31-Mar-2018 29,56,552 4,68,909 9,00,000 25,25,461
31-Mar-2019 25,25,461 4,00,538 9,00,000 20,25,999
31-Mar-2020 20,25,999 3,21,323 9,00,000 14,47,322
31-Mar-2021 14,47,322 2,29,545 9,00,000 7,76,867
31-Mar-2022 7,76,867 1,23,133* 9,00,000 -

Difference of ` 78 (adjusted in the interest value of 31st March, 2022) is due

to approximation of figures in the earlier years.

(c) Journal Entries to be recorded for entire term of arrangement are as follows:
Date Particulars Debit ` Credit `
01-Apr-2017 Bank A/c Dr. 88,20,000
To Preference Shares A/c 29,56,552
To Equity Component of Preference shares A/c 58,63,448
(Being compulsorily convertible preference shares
issued. The same are divided into equity component
and liability component as per the calculation)
31-Mar-2018 Preference shares A/c Dr. 9,00,000
To Bank A/c 9,00,000
(Being dividend at the coupon rate of 10% paid to
the shareholders)

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31-Mar-2018 Finance cost A/c Dr. 4,68,909
To Preference Shares A/c 4,68,909
(Being interest as per EIR method recorded)
31-Mar-2019 Preference shares A/c Dr. 9,00,000
To Bank A/c 9,00,000
(Being dividend at the coupon rate of 10% paid to
the shareholders)
31-Mar-2019 Finance cost A/c Dr. 4,00,538
To Preference Shares A/c 4,00,538
(Being interest as per EIR method recorded)
31-Mar-2020 Preference shares A/c Dr. 9,00,000
To Bank A/c 9,00,000
(Being dividend at the coupon rate of 10% paid to
the shareholders)
31-Mar-2020 Finance cost A/c Dr. 3,21,323
To Preference Shares A/c 3,21,323
(Being interest as per EIR method recorded)
31-Mar-2021 Preference shares A/c Dr. 9,00,000
To Bank A/c 9,00,000
(Being dividend at the coupon rate of 10% paid to
the shareholders)
31-Mar-2021 Finance cost A/c Dr. 2,29,545
To Preference Shares A/c 2,29,545
(Being interest as per EIR method recorded)
31-Mar-2022 Preference shares A/c Dr. 9,00,000
To Bank A/c 9,00,000
(Being dividend at the coupon rate of 10% paid to
the shareholders)
31-Mar-2022 Finance cost A/c Dr. 1,23,133 1,23,133
To Preference Shares A/c
(Being interest as per EIR method recorded)
31-Mar-2022 Equity Component of Preference shares A/c Dr. 58,63,448
To Equity Share Capital A/c 1,25,000
To Securities Premium A/c 57,38,448
(Being preference shares converted in equity shares
and remaining equity component is recognised as
securities premium)

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Solution: 3
(1) Analysis of the financial instrument issued by S Ltd. to its holding company H
Ltd. Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded
at its fair value upon initial recognition. Fair value is normally the transaction
price. However, sometimes certain type of instruments may be exchanged at
off market terms (ie, different from market terms for a similar instrument if
exchanged between market participants).

For example, a long-term loan or receivable that carries no interest while

similar instruments if exchanged between market participants carry interest,
then fair value for such loan receivable will be lower from its transaction
price owing to the loss of interest that the holder bears. In such cases where
part of the consideration given or received is for something other than the
financial instrument, an entity shall measure the fair value of the financial
instrument.

In the above case, since S Ltd has issued preference shares to its Holding
Company– H Ltd, the relationship between the parties indicates that the
difference in transaction price and fair value is akin to investment made by H
Ltd. in its subsidiary. This can further be substantiated by the nominal rate of
dividend i.e . 0.0001% mentioned in the terms of the instrument issued.

Computations on initial recognition:

Transaction value of the Redeemable preference shares 5,00,00,000
Less: Present value of loan component @ 12% (3,55,90,000)
(5,00,00,000 x .7118)
Investment in subsidiary 1,44,10,000

` 4,46,44,096 x 12% = ` 53,57,292. The difference of ` 1,388

(` 53,57,292 – ` 53,55,904) is due to approximation in present value factor

(2) In the books of H Ltd.

Journal Entries to be done at every reporting date
Date Particulars Amount Amount
1st April, 2015 Investment (Equity portion) Dr. 1,44,10,000
Redeemable Preference Shares Dr. 3,55,90,000
To Bank 5,00,00,000
(Being initial recognition of transaction
recorded)

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31st March, 2016 Redeemable Preference Shares Dr. 42,70,800
To Interest income 42,70,800
(Being interest income on loan
component recognized)
31st March, 2017 Redeemable Preference Shares Dr. 47,83,296
To Interest income 47,83,296
(Being interest income on loan
component recognized)
31st March, 2018 Redeemable Preference Shares Dr. 53,55,904
To Interest income 53,55,904
(Being interest income on loan component
recognized)
31st March, 2018 Bank Dr. 5,00,00,000
To Redeemable Preference Shares 5,00,00,000
(Being settlement of transaction done at the
end of the third year)

Solution: 4
Assessment of the arrangement using the definition of derivative included under
Ind AS 109.
Derivative is a financial instrument or other contract within the scope of this
Standard with all three of the following characteristics:
(a) its value changes in response to the change in foreign exchange rate
(emphasis laid)
(b) it requires no initial net investment or an initial net investment is smaller
than would be required for other types of contracts with similar response to
changes in market factors.
(c) it is settled at a future date.
Upon evaluation of contract in question, on the basis of the definition of
derivative, it is noted that the contract meets the definition of a derivative as
follows:
(a) the value of the contract to purchase USD at a fixed price changes in
response to changes in foreign exchange rate.
(b) the initial amount paid to enter into the contract is zero. A contract
which would give the holder a similar response to foreign exchange rate
changes would have required an investment of USD 40,000 on inception.
(c) the contract is settled in future
The derivative is a forward exchange contract.
As per Ind AS 109, derivative s are measured at fair value upon initial
recognition and are subsequently measured at fair value through profit and
loss.

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Accounting in each Quarter
(i) Accounting on 1st January 2017
As there was no consideration paid and without evidence to the contrary the
fair value of the contract on the date of inception is considered to be zero.
Accordingly, no accounting entries shall be recorded on the date of entering
into the contract.

(ii) Accounting on 31st March 2017

Particulars Dr. (`) Cr. (`)
Profit and loss A/c Dr. 50,000
To Derivative financial liability
(Being mark to market loss on forward contract recorded) 50,000

(iii) Accounting on 30th June 2017

Particulars Dr. (`) Cr. (`)
Derivative financial liability A/c Dr. 20,000
To Profit and Loss A/c 20,000
(Being partial reversal of mark to market loss on forward
contract recorded)

(iv) Accounting on 30th September 2017

Particulars Dr. (`) Cr. (`)
Derivative financial liability A/c Dr. 30,000
Derivative financial asset A/c Dr. 24,000
To Profit and Loss A/c 54,000
(Being gain on mark to market of forward contract
booked as derivative financial asset and reversal of
derivative financial liability)

(v) Accounting on 31st December 2017

The settlement of the derivative forward contract by actual purchase of USD 40,000
Particulars Dr. (`) Cr. (`)
Cash (USD Account) (USD 40,000 x ` 62) Dr. 24,80,000
Profit and loss A/c Dr. 1,44,000
To Cash (USD 40,000 x ` 65) 26,00,000
To Derivative financial asset A/c 24,000
(Being loss on settlement of forward contract booked on
actual purchase of USD)

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Solution: 5
Allocation of proceeds of the bond issue:
Liability component (Refer Note 1) ` 1,848,122
Equity component ` 151,878
` 2,000,000

These amounts are recognised as the initial carrying amounts of the liability and
equity components. The amount assigned to the issuer conversion option equity
element is an addition to equity and is not adjusted.
Basic earnings per share Year 1:
` 1,000,000
= ` 0.83 per ordinary share
1,200,000

Diluted earnings per share Year 1:

It is presumed that the issuer will settle the contract by the issue of ordinary
shares. The dilutive effect is therefore calculated in accordance with the Standard.

Basic earnings per share Year 1:

`1,000,000 + `166,331
= ` 0.69 per ordinary share
1,200,000 + 500,000
Notes:
(1) This represents the present value of the principal and interest discounted at
9% – ` 2,000,000 payable at the end of three years; ` 1,20,000 payable
annually in arrears for three years.
(2) Profit is adjusted for the accretion of ` 166,331 (` 1,848,122 × 9%) of the
liability because of the passage of time.
(3) 5,00,000 ordinary shares = 250 ordinary shares x 2,000 convertible bonds.

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PAPER - B
Question 1
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 voluntary adopt Ind AS w.e.f 1st April, 2018
with a transition date of 1st April, 2017.

The Company has one Wholly Owned Subsidiary and one Joint Venture which are
into manufacturing of automobile spare parts.
The -consolidated financial statements of the Company under Indian GAAP are as
under:
Consolidated Financial Statements
(` in Lakhs)
Particulars 31.03.2018 31.03.2017
Shareholder’s Funds
Share Capital 7,953 7,953
Reserves & Surplus 16,547 16,597
Non-Current Liabilities
Long Term Borrowings 1,000 1,000
Long Term Provisions Other 1,101 691
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
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

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Additional Information:
The Company has entered into a joint arrangement by acquiring 50% of the equity
shares of ABC Pvt. 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 statement of XYZ
Pvt. Ltd. is as under:
Particulars ` in Lakhs
Property, Plant & Equipment 1,200
Long Term Loans & Advances 405
Trade Receivables 280
Other Current Assets 50
Trade Payables 75
Short Term Provisions 35
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, 2017.

Question 2
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, 2018 to the managing director for approval. Mr. Y, who is not an
accountant, had raised following queries from Mr. X after going through the draft
financial statements:
(a) One of the notes to the financial statements gives details of purchases made
by ABC Ltd. from PQR Ltd. during the period. Mr. Y own 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.
(b) The notes to the financial statements say that plant and equipment is held
under the ‘cost model’. However, property which is owner occupied is
revalued annually to fair value. Changes in fair value are sometimes reported
in profit or loss but usually in their comprehensive income’. Also, the amount
of depreciation charged on plant and equipment as a percentage of its
carrying amount is much higher than for owner occupied property. Another
note states that property owned by ABC Ltd. but rent out to others is
depreciated annually and not fair valued. Mr. Y is of the opinion that there is
no consistent treatment of PPE items in the accounts. Elucidate how all these
treatments comply with the relevant Ind AS.
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(c) In the year to March, 2018, ABC Ltd. spent considerable amount on designing
a new product. ABC Ltd. spent the six months from April, 2017 to September,
2017 researching into the feasibility of the product. Mr. X charged these
research costs to profit or loss. From October, 2017, A Ltd. was confident that
the product would be commercially successful and A Ltd. is fully committed to
finance its future development. A Ltd. spent remaining part of the year in
developing the product, which is expected to start from selling in the next
few months. These development costs have been recognised as intangible
assets in the Balance Sheet. State whether the treatment done by Mr. X is
correct when all these research and development costs are design costs.
Justify your answer with reference to relevant Ind AS.
Provide answers to the queries raised by the managing director Mr. Y as per Ind AS.

Question 3
A Ltd. purchased some Property, Plant and Equipment on 1st April, 20X1, and
estimated their useful lives for the purpose of financial statements prepared on the
basis of Ind AS: Following were the original cost, and useful life of the various
components of property, plant, and equipment assessed on 1st April, 20X1:
Property, Plant and Equipment Original Cost Estimated useful life
Buildings ` 15,000,000 15 years
Plant and machinery ` 10,000,000 10 years
Furniture and fixtures ` 3,500,000 7 years

A Ltd. uses the straight-line method of depreciation. On 1st April, 20X4, the entity
reviewed the following useful lives of the property, plant, and equipment through
an external valuation expert:
Buildings 10 years
Plant and machinery 7 years
Furniture and fixtures 5 years
There were no salvage values for the three components of the property, plant, and
equipment either initially or at the time the useful lives were revised.
Compute the impact of revaluation of useful life on the Statement of Profit and
Loss for the year ending 31st March, 20X4.

Question 4
Croton Limited is engaged in the business of trading commodities. The company’s
main assets are investments in equity shares, preference shares, bonds, non-
convertible debenture (NCD) and mutual funds.
The Company collects the periodical income (i.e. interest, dividend, etc.) from the
investments and regularly sells the investment in case of favouable market
conditions. Such investments have been classified as non-current investments in
the financial statements.

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Also, the company buys and sells equity shares of companies for earning short term
profits from the stock market.
The CFO of company classified all the non-current investments as Fair Value
Through Other Comprehensive Income (FVTOCI) and all the current investment as
Fair value Through Profit and Loss (FVTPL).
Croton Limited raised the following queries:
(a) Can the Company classify the equity shares previously held under current
investment as FVTOCI if the company decides to hold them for more than one-
year (i.e. classify it as non-current)?
(b) The Company had classified NCDs with a maturity period of less than twelve
months from the reporting period as current. This has been classified as
FVTPL by the CFO of the company. The Company wants to know whether
these NCDs can be recognized as FVTOCI?

Question 5
Balance sheet of a trader on 31st March, 20X1 is given below:
Particulars `
Assets
Non-current assets
Property, Plant and Equipment 65,000
Current assets
Inventories 30,000
Financial assets
Trade receivables 20,000
Other asset 10,000
Cash and cash equivalents 5,000
1,30,000
Equity and Liabilities
Equity
Share capital 60,000
Other Equity - Profit and Loss Account 25,000
Non-current liabilities
10% Loan 35,000
Current liabilities
Financial liabilities
Trade payables 10,000
1,30,000
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Additional information:
(a) The remaining life of Property, Plant and Equipment is 5 years. The pattern of
use of the asset is even. The net realisable value of Property, Plant and
Equipment on 31.03.20X2 was ` 60,000.
(b) The trader’s purchases and sales in 20X1-20X2 amounted to ` 4 lakh and
` 4.5 lakh respectively.
(c) The cost and net realisable value of inventories on 31.03.20X2 were ` 32,000
and ` 40,000 respectively.
(d) Employee benefit expenses for the year amounted to ` 14,900.
(e) Other asset is written off equally over 4 years.
(f) Trade receivables on 31.03.20X2 is ` 25,000, of which ` 2,000 is doubtful.
Collection of another ` 4,000 depends on successful re-installation of certain
product supplied to the customer.
(g) Cash balance on 31.03.20X2 is ` 37,100 before deduction of interest paid on
loan.
(h) There is an early repayment penalty for the loan ` 2,500.
The Profit and Loss Accounts and Balance Sheets of the trader are shown
below in two cases
(i) assuming going concern (ii) not assuming going concern.

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PAPER – B - (SOLUTIONS)
Solution: 1
As per paras D31AA and D31AB of Ind AS 101, when changing from proportionate
consolidation 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 belonged to a larger cash- generating unit, or to a group of cash-
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 1944

Calculation of proportionate goodwill share of Joint Venture i.e. 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

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Proportionate Goodwill of Joint Venture
= [(Goodwill on consolidation of subsidiary and JV/Total relative net asset) x Net
asset of JV]
= (1507 / 23,137) x 1825 = 119 (approx.)
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 31.3.2017 and Investment in JV will appear under non-current asset in the
transition date balance sheet as on 1.4.2017.
Adjustments made in I GAAP balance sheet to arrive at Transition date Ind AS
Balance Sheet
Ind AS Bal. Sheet as
Particulars 31.3.2017
Adjustment per Ind AS
Non-Current Assets
Property Plant & Equipment 22,288 (1,200) 21,088
Intangible assets - Goodwill on 1,507 (119) 1,388
Consolidation Investment Property 5,245 - 5,245
Long Term Loans & Advances 6,350 (405) 5,945
Non- current investment in JV - 1,944 1,944
Current Assets -
Trade Receivables 1,818 (280) 1,538
Investments 3,763 - 3,763
Other Current Assets 104 (50) 54
Total 41,075 (110) 40,965
Shareholder’s Funds
Share Capital 7,953 - 7,953
Reserves & Surplus 16,597 - 16,597
Non-Current Liabilities
Long Term Borrowings 1,000 1,000
Long Term Provisions 691 691
Other Long-Term Liabilities 5,904 5,904
Current Liabilities
Trade Payables 8,455 (75) 8,380
Short Term Provisions 475 (35) 440
Total 41,075 (110) 40,965

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Solution: 2
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:
(a) 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 controls PQR Ltd. This implies
that PQR Ltd. is a related party of ABC Ltd.
Where transactions occur with related parties, Ind AS 24 requires that details
of the transactions are disclosed in a note to the financial statements. This is
required even if the transactions are carried out on an arm’s length basis.
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.
(b) The accounting treatment of the majority of tangible non-current assets is
governed by Ind AS 16 ‘Property, Plant and Equipment’. Ind AS 16 states that
the accounting treatment of PPE is determined on a class by class basis. For
this purpose, property and plant would be regarded as separate classes. Ind
AS 16 requires that PPE is measured using either the cost model or the
revaluation model. This model is applied on a class by class basis and must be
applied consistently within a class. Ind AS 16 states that when the revaluation
model applies, surpluses are recorded in other comprehensive income, unless
they are cancelling out a deficit which has previously been reported in profit
or loss, in which case it is reported in profit or loss. Where the revaluation
results in a deficit, then such deficits are reported in profit or loss, unless
they are cancelling out a surplus which has previously been reported in other
comprehensive income, in which case they are reported in other
comprehensive income.
According to Ind AS 16, all assets having a finite useful life should be
depreciated over that life. Where property is concerned, the only depreciable
element of the property is the buildings element, since land normally has an
indefinite life. The estimated useful life of a building tends to be much longer
than for plant. These two reasons together explain why the depreciation
charge of a property as a percentage of its carrying amount tends to be much
lower than for plant.

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Properties which are held for investment purposes are not accounted for
under Ind AS 16, but under Ind AS 40 ‘Investment Property’. As per Ind AS 40,
investment properties should be accounted for under a cost model. ABC Ltd.
had applied the cost model and thus our investment properties are treated
differently from the owner occupied property which is annually to fair value.
(c) As per Ind AS 38 ‘Intangible Assets’, the treatment of expenditure on
intangible items depends on how it arose. Internal expenditure on intangible
items incurred during research phase cannot be recognised as an asset. Once
it can be demonstrated that a development project is likely to be technically
feasible, commercially viable, overall profitable and can be adequately
resourced, then future expenditure on the project can be recognised as an
intangible asset. The difference in the treatment of expenditure upto
30th September, 2017 and expenditure after that date is due to the
recognition phase ie. research or development phase.

Solution: 3
The annual depreciation charges prior to the change in useful life were
Buildings ` 1,50,00,000/15 = ` 10,00,000
Plant and machinery ` 1,00,00,000/10 = ` 10,00,000
Furniture and fixtures ` 35,00,000/7 = ` 5,00,000
Total = ` 25,00,000 (A)

The revised annual depreciation for the year ending 31st March, 20X4, would be
Buildings [`1,50,00,000 – (` 10,00,000 × 3)] / 10 ` 12,00,000
Plant and machinery [` 1,00,00,000 – (` 10,00,000 × 3)] / 7 ` 10,00,000
Furniture and fixtures [` 35,00,000 – (` 5,00,000 × 3)] / 5 ` 4,00,000
Total ` 26,00,000 (B)

The impact on Statement of Profit and Loss for the year ending 31st March, 20X4 =
` 26,00,000 – ` 25,00,000 = ` 1,00,000

This is a change in accounting estimate which is adjusted prospectively in the

period in which the estimate is amended and, if relevant, to future periods if they
are also affected. Accordingly, from 20X4-20X5 onward, excess of ` 1,00,000 will
be charged in the Statement of Profit and Loss every year till the time there is any
further revision.

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Solution: 4
(a) It seems that the equity shares are acquired for the purpose of selling it in the
near term and therefore are held for trading. Such investments have been
appropriately classified as subsequently measured at fair value through profit
or loss. Such investments in equity shares cannot be classified as subsequently
measured at fair value through other comprehensive income. The option to
measure investment in equity shares at fair value through other
comprehensive income has to be made at initial recognition. Therefore,
equity shares that were held for trading previously cannot be reclassified to
fair value through other comprehensive income due to change in business
model to not held for trading.

(b) In absence of contractual terms of NCDs, it is assumed that the contractual

terms give rise on specified dates to cash flows that are solely payment of
principal and interest on the principal outstanding. The business model also
includes sales of these instruments on a regular basis. Hence, these
instruments will be classified as FVTOCI. Therefore, such NCD investments
shall be classified as subsequently measured at Fair Value through Other
Comprehensive Income. The classification does not change based on whether
the investment is current or non-current as the end of the reporting period. It
seems the company has previously classified these investments at fair value
through profit or loss. The company must rectify this by reclassifying as
FVTOCI.

Solution: 5
Profit and Loss Account for the year ended 31st March, 20X2

Case (i) ` Case (ii) `

Revenue from operations – Sales (A) 4,50,000 4,50,000
Expenses
Purchases 4,00,000 4,00,000
Changes in inventories (2,000) (10,000)
Employee benefit expenses 14,900 14,900
Finance cost 3,500 6,000
Depreciation and amortisation expenses 15,500 15,000
Other expenses - Provision for doubtful debts 2,000 6,000
Total Expenses (B) 4,33,900 4,31,900
Profit for the period (A-B) 16,100 18,100

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Balance Sheet as at 31st March, 20X2
Liabilities Case (i) ` Case (ii) `
Assets
Non-current assets
Property, Plant and Equipment 52,000 60,000
Current Asset
Inventories 32,000 40,000
Financial assets
Trade receivables (less provision) 23,000 19,000
Other asset 7,500 Nil
Cash and cash equivalents (after interest paid on loan) 33,600 33,600
1,48,100 1,52,600
Equity and Liabilities
Equity 60,000 60,000
Share Capital 41,100 43,100
Other Equity - Profit & Loss A/c
Non-current liabilities 35,000 37,500
10% Loan
Current liabilities 12,000 12,000
Trade payables 1,48,100 1,52,600

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PAPER - C
Question 1
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.
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.

Question 2
On 1st April, 20X1, entity A contracted for the construction of a building for
` 22,00,000. The land under the building is regarded as a separate asset and is not
part of the qualifying assets. The building was completed at the end of March,
20X2, and during the period the following payments were made to the contractor:
Payment Amount (` 000)
1st April 20X1 200
30th June 20X1 600
31st December 20X1 1,200
31st March 20X1 200
Total 2,200
Entity A’s borrowings at its year end of 31 st March, 20X2 were as follows:

(a) 10%, 4-year note with simple interest payable annually, which relates
specifically to the project; debt outstanding on 31st March, 20X2 amounted to
` 7,00,000. Interest of ` 65,000 was incurred on these borrowings during the
year, and interest income of ` 20,000 was earned on these funds while they
were held in anticipation of payments.
(b) 12.5% 10-year note with simple interest payable annually; debt outstanding at
1st April, 20X1 amounted to ` 1,000,000 and remained unchanged during the
year; and
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(c) 10% 10-year note with simple interest payable annually; debt outstanding at
1st April, 20X1 amounted to ` 1,500,000 and remained unchanged during the
year. What amount of the borrowing costs can be capitalized at year end as
per relevant Ind AS?

Question 3
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., 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?

Question 4
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.
(i) The fair value of the net assets of Mark Limited was 23 million EURO and the
purchase consideration paid is 17.5 million EURO on 30th September, 20X1.
The exchange rates as at 30th September, 20X1 was ` 82 / EURO and at
31stMarch, 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?
(ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2
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.

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Question 5
Mathur India Private Limited has to present its first financials under Ind AS for the
year ended 31st March, 20X3. The transition date is 1st April, 20X1.

The following adjustments were made upon transition to Ind AS:

(a) The Company opted to fair value its land as on the date on transition. The fair
value of the land as on 1st April, 20X1 was ` 10 crores. The carrying amount
as on 1st April, 20X1 under the existing GAAP was ` 4.5 crores.
(b) The Company has recognised a provision for proposed dividend of ` 60 lacs
and related dividend distribution tax of ` 18 lacs during the year ended 31st
March, 20X1. It was written back as on opening balance sheet date.
(c) The Company fair values its investments in equity shares on the date of
transition. The increase on account of fair valuation of shares is ` 75 lacs.
(d) The Company has an Equity Share Capital of ` 80 crores and Redeemable
Preference Share Capital of ` 25 crores.
(e) The reserves and surplus as on 1 st April, 20X1 before transition to Ind AS was
` 95 crores representing ` 40 crores of general reserve and ` 5 crores of
capital reserve acquired out of business combination and balance is surplus in
the Retained Earnings.
(f) The company identified that the preference shares were in nature of financial
liabilities.
What is the balance of total equity (Equity and other equity) as on 1st April,
20X1 after transition to Ind AS?
Show reconciliation between total equity as per AS (Accounting Standards) and as
per Ind AS to be presented in the opening balance sheet as on 1st April, 20X1.
Ignore deferred tax impact

Question 6
(a) A manufacturer gives warranties at the time of sale to purchasers of its
product. Under the terms of the contract for sale, the manufacturer
undertakes to remedy, by repair or replacement, manufacturing defects that
become apparent within three years from the date of sale. As this is the first
year that the warranty has been available, there is no data from the firm to
indicate whether there will be claim under the warranties. However, industry
research suggests that it is likely that such claims will be forthcoming.
Should the manufacturer recognize a provision in accordance with the
requirements of Ind AS 37. Why or why not?
(b) Assume that the firm has not been operating its warranty for five years, and
reliable data exists to suggest the following:
• If minor defects occur in all products sold, repair costs of ` 20,00,000
would result.
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• If major defects are detected in all products, costs of ` 50,00,000 would
result.
• The manufacturer’s past experience and future expectations indicate
that each year 80% of the goods sold will have no defects. 15% of the
goods sold will have minor defects, and 5% of the goods sold will have
major defects.
Calculate the expected value of the cost of repairs in accordance with
the requirements of Ind AS 37, if any. Ignore both income tax and the
effect of discounting.

Question 7
An entity is finalising its financial statements for the year ended 31st March, 20X2.
Before 31 st March, 20X2, the government announced that the tax rate was to be
amended from 40 per cent to 45 per cent of taxable profit from 30th June, 20X2.

The legislation to amend the tax rate has not yet been approved by the legislature.
However, the government has a significant majority and it is usual, in the tax
jurisdiction concerned, to regard an announcement of a change in the tax rate as
having the substantive effect of actual enactment (i.e. it is substantively enacted).

After performing the income tax calculations at the rate of 40 per cent, the entity
has the following deferred tax asset and deferred tax liability balances:
Deferred tax asset ` 80,000
Deferred tax liability ` 60,000

Of the deferred tax asset balance, ` 28,000 related to a temporary difference. This
deferred tax asset had previously been recognised in OCI and accumulated in equity
as a revaluation surplus.
The entity reviewed the carrying amount of the asset in accordance with para 56 of
Ind AS 12 and determined that it was probable that sufficient taxable profit to
allow utilisation of the deferred tax asset would be available in the future.
Show the revised amount of Deferred tax asset & Deferred tax liability and present
the necessary journal entries.

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PAPER – C - (SOLUTIONS)
Solution: 1
On Initial recognition
Debit (`) Credit (`)
Financial asset-FVOCI Dr. 1,000
To Cash 1,000

On Impairment of debt instrument

Debit (`) Credit (`)
Impairment expense (P&L) Dr. 30
Other comprehensive income Dr. 20
To Financial asset-FVOCI 50

The cumulative loss in other comprehensive income at the reporting date was ` 20.
That amount 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
Debit (`) Credit (`)
Cash 950
To Financial asset –FVOCI 950
Loss on sale (P&L) 20
To Other comprehensive income 20

Solution: 2
As per Ind AS 23, when an entity borrows funds specifically for the purpose of
obtaining a qualifying asset, the entity should determine the amount of borrowing
costs eligible for capitalisation as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the temporary
investment of those borrowings.

The amount of borrowing costs eligible for capitalization, in cases where the funds
are borrowed generally, should be determined based on the expenditure incurred
in obtaining a qualifying asset. The costs incurred should first be allocated to the
specific borrowings.

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Analysis of expenditure:

Expenditure Amount allocated Weighted for period

Date (`’000) in general
outstanding (`’000)
borrowings (`’000)
1st April 20X1 200 0 0
30th June 20X1 600 100* 100 × 9/12 = 75
31st Dec 20X1 1,200 1,200 1,200 × 3/12 = 300
31st March 20X2 200 200 200 × 0/12 = 0
Total 2,200 375

Specific borrowings of ` 7,00,000 fully utilized on 1st April & on 30th June to the
extent of `5,00,000 hence remaining expenditure of ` 1,00,000 allocated to
general borrowings.

The expenditure rate relating to general borrowings should be the weighted

average of the borrowing costs applicable to the entity’s borrowings that are
outstanding during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset.

(10,00,000 x 12.5% ) + (15,00,000 x 10% )

Capitalisation rate = = 11%
10,00,000 +15,00,000
Borrowing cost to be capitalized: Amount (`)
On specific loan 65,000
On General borrowing (3,75,000 × 11%) 41,250
Total 1,06,250
Less interest income on specific borrowings (20,000)
Amount eligible for capitalization 86,250
Therefore, the borrowing costs to be capitalized are ` 86,250.

Solution: 3
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;
(b) the entity can identify each party’s rights regarding the goods or services to
be transferred;
(c) the entity can identify the payment terms for the goods or services to be
transferred;

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(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
(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 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”.
Paragraph 9(e) above, requires that for revenue to be recognised, it should be
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 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 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 risk because of high competition in the said
industry and P Ltd.’s little experience);
(b) P Ltd. lacks sources of other income or assets that could be used to repay the
balance consideration; and
(c) P Ltd.’s liability is limited because the financing arrangement is provided on a
non-recourse basis.
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 occurs or until the
criteria in paragraph 9 are subsequently met. Depending on the facts and
circumstances relating to the contract, the liability recognised represents 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.

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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 paragraph 15 of Ind AS
115 have occurred.

Solution: 4
(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
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
As per para 39 of Ind AS 21 “income and expenses for each statement of profit
and loss presented (i.e. including comparatives) shall be translated at
exchange rates at the dates of the transactions”.
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.

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Solution: 5
Computation of balance total equity as on 1st April, 20X1 after transition to Ind AS
` in crore
Share capital- Equity share Capital 80
Other Equity
General Reserve 40
Capital Reserve 5
Retained Earnings (95-5-40) 50
Add: Increase in value of land (10-4.5) 5.5
Add: De recognition of proposed dividend (0.6 + 0.18) 0.78
Add: Increase in value of Investment 0.75 57.03 102.03
Balance total equity as on 1st April, 20X1 after
transition to Ind AS 182.03

Reconciliation between Total Equity as per AS and Ind AS to be presented in the

opening balance sheet as on 1st April, 20X1
` in crore
Equity share capital 80
Redeemable Preference share capital 25
105
Reserves and Surplus 95
Total Equity as per AS 200
Adjustment due to reclassification
Preference share capital classified as financial liability (25)
Adjustment due to derecognition
Proposed Dividend not considered as liability as on 1st April 20X1 0.78
Adjustment due to remeasurement
Increase in the value of Land due to remeasurement at fair value 5.5
Increase in the value of investment due to remeasurement at fair value 0.75 6.25
Equity as on 1st April, 20X1 after transition to Ind AS 182.03

Solution: 6
(a) For a provision to be recognized, Para 14 of Ind AS 37 requires that:
(a) an entity has a present obligation (legal or constructive) as a result of a
past event;
(b) it is probable that an outflow of resources embodying economic benefits
will required to settle the obligation, and
(c) a reliable estimate can be made of the amount of the obligation.
Here, the manufacturer has a present legal obligation. The obligation
event is the sale of the product with a warranty.
Ind AS 37 outlines that the future sacrifice of economic benefits is probable
when it is more likely than less likely that the future sacrifice of economic
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benefits will required. The probability that settlement will be required will be
determined by considering the class of obligation (warranties) as a whole. In
accordance with para 24 of Ind AS 37, it is more likely than less likely that a
future sacrifice of economic benefits will be required to settle the class of
obligations as a whole.
If a reliable estimate can be made the provision can be measured reliably.
Past data can provide reliable measures, even if the data is not firm specific
but rather industry based.
Ind AS 37 notes that only in extremely rare cases, a reliable measure of a
provision cannot be obtained. Difficulty in estimating the amount of a
provision under conditions of significant uncertainty does not justify non-
recognition of the provision.
Here, the manufacturer should recognize a provision based on the best
estimate of the consideration required to settle the present obligation as at
the reporting date.
(b) The expected value of cost of repairs in accordance with Ind AS 37 is:
(80% x nil) + (15% x ` 20,00,000) + (5% x ` 50,00,000) = 3,00,000 + 2,50,000
= 5,50,000

Solution: 7
Calculation of Deductible temporary differences
Deferred tax asset = ` 80,000
Existing tax rate = 40%
Deductible temporary differences = 80,000/40%
` 2,00,000

Calculation of Taxable temporary differences:

Deferred tax liability = ` 60,000
Existing tax rate = 40%
Deductible temporary differences = 60,000 / 40%
` 1,50,000

Of the total deferred tax asset balance of ` 80,000, ` 28,000 is recognized in OCI
Hence, Deferred tax asset balance of Profit & Loss is ` 80,000 - ` 28,000 = ` 52,000
Deductible temporary difference recognized in Profit & Loss is ` 1,30,000 (52,000 /
40%) Deductible temporary difference recognized in OCI is ` 70,000 (28,000 / 40%)
The adjusted balances of the deferred tax accounts under the new tax rate are:
Deferred tax asset `
Previously credited to OCI-equity ` 70,000 x 0.45 31,500a
Previously recognised as Income ` 1,30,000 x 0.45 58,500
90,000
Deferred tax liability ` 1,50,000 x 0.45
Previously recognized as expense 67,500
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The net adjustment to deferred tax expense is a reduction of ` 2,500. Of this
amount, ` 3,500 is recognised in OCl and ` 1,000 is charged to P&L.
The amounts are calculated as follows:
Carrying Carrying (`) in deferred
amount at 45% amount at 40% tax expense
Deferred tax assets
Previously credited to OCI-equity 31,500 28,000 (3,500)
Previously recognised as Income 58,500 52,000 (6,500)
90,000 80,000 (10,000)
Deferred tax liability
Previously recognized as expense 67,500 60,000 7,500
Net adjustment (2,500)

An alternative method of calculation is: `

DTA shown in OCI ` 70,000 x (0.45 - 0.40) 3,500
DTA shown in Profit or Loss ` 1,30,000 x (0.45-0.40) 6,500
DTL shown in Profit or Loss ` 1,50,000 x (0.45 -0.40) 7,500

Journal Entries
` `
Deferred tax asset 3,500
OCI –revaluation surplus 3,500
Deferred tax asset 6,500
Deferred tax expense 6,500
Deferred tax expense 7,500
Deferred tax liability 7,500

Alternatively, a combined journal entry may be passed as follows:

` `
Deferred tax asset Dr. 10,000
Deferred tax expense Dr. 1,000
To OCI –revaluation surplus 3,500
To Deferred tax liability 7,500

“Nothing is imposible.
The word itself says ‘I’ M possible”.

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Notes


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11 ANNEXTURES

DIVISION II OF SCHEDULE III TO THE COMPANIES ACT, 2013

Division II

Financial Statements for a company whose financial statements are drawn up in

compliance of the Companies (Indian Accounting Standards) Rules, 2015.

GENERAL INSTRUCTIONS FOR PREPARATION OF FINANCIAL STATMENT OF A COMPANY

REQUIRED TO COMPLY WITH IND AS

1. Every company to which Indian Accounting Standards apply, shall prepare its
financial statements in accordance with this Schedule or with such modification as
may be required under certain circumstances.

2. Where compliance with the requirements of the Act including Indian Accounting
Standards (except the option of presenting assets and liabilities in the order of
liquidity as provided by the relevant Ind AS) as applicable to the companies require
any change in treatment or disclosure including addition, amendment substitution
or deletion in the head or sub-head or any changes inter se, in the financial
statements or statements forming part thereof, the same shall be made and the
requirements under this Schedule shall stand modified accordingly.

3. The disclosure requirements specified in this Schedule are in addition to and not in
substitution of the disclosure requirements specified in the Indian Accounting
Standards. Additional disclosures specified in the Indian Accounting Standards shall
be made in the Notes or by way of additional statement or statements unless
required to be disclosed on the face of the Financial Statements. Similarly, all
other disclosures as required by the Companies Act, 2013 shall be made in the
Notes in addition to the requirements set out in this Schedule.

4. (i) Notes shall contain information in addition to that presented in the Financial
Statements and shall provide where required-
(a) narrative description or disaggregation of items recognised in those
statements; and
(b) information about items that do not qualify for recognition in those
statements.

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(ii) Each item on the face of the Balance Sheet, Statement of Changes in Equity
and Statement of Profit and Loss shall be cross-referenced to any related
information in the Notes. In preparing the Financial Statements including the
Notes, a balance shall be maintained between providing excessive detail that
may not assist users of Financial Statements and not providing important
information as a result of too much aggregation.

5. Depending upon the Total Income of the company, the figures appearing in the
Financial Statements shall be rounded off as below:
Total Income Rounding off
(i) less than one hundred crore To the nearest hundreds, thousands,
rupees lakhs or millions, or decimals thereof
(ii) one hundred crore rupees or more To the nearest, lakhs, millions or
crores, or decimals thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial
Statements.

6. Financial Statements shall contain the corresponding amounts (comparatives) for

the immediately preceding reporting period for all items shown in the Financial
Statement including Notes except in the case of first Financial Statements laid
before the company after incorporation.

7. Financial Statements shall disclose all 'material' items, i,e, the items if they could.
Individually or collectively, influence the economic decisions that users make on
the basis of the financial statements. Materiality depends on the size or nature of
the item or a combination of both, to be judged in the particular circumstances.
8. For the purpose of this Schedule, the terms used herein shall have the same
meanings assigned to them in Indian Accounting Standards.

9. Where any Act or Regulation requires specific disclosure to be made in the

standalone financial statement of a company, the said disclosure shall be made in
addition to those required under this Schedule.

Note: This Schedule sets out the minimum requirements for disclosure on the face
of the Financial Statements, i.e, Balance Sheet, Statement of Changes in Equity for
the period, the Statement of profit and Loss for the period (The term 'Statement of
Profit and Loss' has the same meaning as Profit and Loss Account) and Notes. Cash
flow statement shall be prepared, where applicable, in accordance with the
requirement of the relevant Indian Accounting Standard.

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Line items, sub-line items and sub-totals shall be presented as an addition or
substitution on the face of the Financial Statements when such presentation is
relevant to an understanding of the company's financial position or performance to
cater to industry or sector-specific disclosure requirements or when required for
compliance with the amendments to the Companies Act, 2013 or under the Indian
Accounting Standards.

PART I - BALANCE SHEET

Name of the Company....................

Balance Sheet as at ......................
(Rupees in. )
Figures as Figures as at
at the end the end of
Note
Particulars of current the previous
No.
reporting reporting
period period
1 2 3 4
(1) ASSETS
Non-current assets
(a) Property, Plant and Equipment
(b) Capital work-in-progress
(c) investment Property
(d) Goodwill
(e) Other Intangible assets
(f) Intangible assets under development
(g) Biological Assets other than bearer plants
(h) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Loans
(iv) Others
(i) Deferred tax assets (net)
(j) Other non-current assets
(2) Current assets
(a) Inventories
(b) Financial Assets
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(i) Investments
(ii) Trade receivables
(iii) Cash and cash equivalents
(iv) Bank balances other than (iii) above
(v) Loans
(vi) Others (to be specified)
(c) Current Tax Assets (Net)
(d) Other current assets
Total Assets
EQUITY AND LIABILITIES
Equity
(a) Equity Share capital
(b) Other Equity
(1) LIABILITIES
Non-current liabilities
(a) Financial Liabilities
(i) Borrowings

(ii) Trade Payables:

(A) total outstanding dues of micro enterprises
and small enterprises; and
(B) total outstanding dues of creditors other than
micro enterprises and small enterprises.
(iii) Other financial liabilities (other than
those specified in item (b), to be
specified)
(b) Provisions
(c) Deferred tax liabilities (Net)
(d) Other non-current liabilities
(2) Current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade payables:
(A) total outstanding dues of micro enterprises
and small enterprises; and

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(B) total outstanding dues of creditors other than
micro enterprises and small enterprises
(iii) Other financial liabilities (other than
those specified in item (c)
(b) Other current liabilities
(c) Provisions
(d) Current Tax Liabilities (Net)
Total Equity and Liabilities
see accompanying notes to the financial statements

STATEMENT OF CHANGES IN EQUITY

Name of the Company..............

Statement of Changes in Equity for the period ended............

(A) Equity Share Capital

(1) Current reporting period
Balance at the Changes in Restated Changes in Balance at the
beginning of equity share balance at the equity share end of the
the current capital during beginning of the capital during current
reporting the year current the current reporting
period reporting year period
period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at the
The beginning Equity Share balance at the equity share end of the
of the previous Capital due to beginning of the capital during previous
reporting previous the previous
prior period reporting
period reporting year
errors period
period

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(B) Other Equity:
(1) Current Reporting Period
Equity Reserves and Surplus Exchange Other items
Share Debt Equity differences on Money
component Effective of Other
application Instruments Instruments translating the
of
Other portion of Revaluation Comprehen received
on money through other financial
compound
Capital Securities Reserves Retained through Other
Cash Flow Surplus sive Income against Total
pending Reserve Premium (specify Earnings Comprehensive Comprehensive statements share
allotment financial Hedges (specify capital
nature) Income Income of a foreign
instruments operation nature)
Balance at the
beginning of
the current
reporting
period
Changes in
accounting
policy or prior
period errors
Restated
balance at the
beginning of
the current
reporting
period
Total
Comprehensiv
e Income for
the current
year
Dividends
Transfer to
retained
earnings
Any other
change (to be
specified)
Balance at the
end of the
current
reporting
period

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(2) Previous Reporting Periode
Reserves and Surplus Exchange
Share Equity Other items
Debt Equity differences on Money
applicatio component Effective of Other
Other Instruments Instruments translating the received
n on of portion of Revaluation Comprehen
Capital Securities Reserves Retained through other through Other financial against Total
money compound Cash Flow Surplus sive Income
Reserve Premium (specify Earnings Comprehensive Comprehensive statements share
pending financial Hedges (specify
nature) Income Income of a foreign capital
allotment instruments nature)
operation
Balance at the
beginning of
the current
reporting
period
Changes in
Accounting
policy or prior
period errors
Restated
balance at the
beginning of
the current
reporting
period
Total
Comprehensive
Income for the
current year
Dividends
Transfer to
retained
earnings
Any other
change (to be
specified)
Balance at the
end of the
current
reporting
period

Note: Re-measurement of defined benefit plans and fair value changes relating to own credit risk of financial liabilities designated at fair
value through profit or loss shall be recognised as a part of retained earnings with separate disclosure of such items alongwith the relevant
amounts in the Notes or shall be shown as a separate column under Reserves and Surplus.

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GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE

SHEET
1. An entity shall classify an asset as current when-
(a) it expects to realise the asset, or intends to sell or consume it, in its normal
operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the reporting
period; or
(d) the asset is cash or a cash equivalent unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the
reporting period.
An entity shall classify all other assets as non-current.

2. The operating cycle of an entity is the time between the acquisition of assets for
processing and their realisation in cash or cash equivalents, When the entity's normal
operating cycle is not clearly identifiable, it is assumed to be twelve months.

3. An entity shall classify a liability as current when-

(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting
period; or
(d) it does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period. Terms of a liability that
could, at the option of the counterparty, result in it settlement by the issue
of equity instruments do not affect its classification.
An entity shall classify all other liabilities as non-current.

4. A receivable shall be classified as a 'trade receivable' if it is in respect of the

amount due on account of goods sold or services rendered in the normal course of
business.

5. A payable shall be classified as a 'trade payable' if it is in respect of the amount due

on account of goods purchased or services received in the normal course of business.

6. A company shall disclose the following in the Notes:

A Non-Current Assets
l. Property, Plant and Equipment
(i) Classification shall be given as:
(a) Land
(b) Buildings

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(c) Plant and Equipment
(d) Furniture and Fixtures
(e) Vehicles
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of
assets
(iii) A reconciliation of the gross and net carrying amounts of each class
of assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more
in the aggregate of the net carrying value of each class of
Property, Plant and Equipment) and other adjustments and the
related depreciation and impairment losses or reversals shall be
disclosed separately.

ll. Investment Property

A reconciliation of the gross and net carrying amounts of each class of
property at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations and
other adjustments and the related depreciation and impairment losses or
reversals shall be disclosed separately.

III. Goodwill
A reconciliation of the gross and net carrying amount of goodwill at the
beginning and end of the reporting period showing additions,
impairments, disposals and other adjustments.

IV. Other Intangible assets

(i) Classification shall be given as:
(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services
and operating rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
(h) Others (specify nature)

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(ii) A reconciliation of the gross and net carrying amounts of each class
of assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more
in the aggregate of the net carrying value of each class of
intangible assets) and other adjustments and the related
amortization and impairment losses or reversals shall be disclosed
separately.

V. Biological Assets other than bearer plants

A reconciliation of the carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals,
acquisitions through business combinations and other adjustments shall
be disclosed separately.

VI. Investment
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms; or
(g) Other investments (specify nature)
Under each classification, details shall be given of names of the
bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature and extent of
the investment so made in each such body corporate (showing
separately investments which are partly-paid). investment in
partnership firms along with names of the firms, their partners,
total capital and the shares of each partner shall be disclosed
separately.
(ii) The following shall also be disclosed:
(a) Aggregate amount of quoted investment and market value
thereof:
(b) Aggregate amount of unquoted investment: and
(c) Aggregate amount of impairment in value of investment.

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VII. Trade Receivables
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit
Risk; and
(d) Trade Receivables - credit impaired
(ii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.
(iii) Debts due by directors or other officers of the company or any of
them either severally or jointly with any other person or debts due
by firms or private companies respectively in which any director is
a partner or a director or a member should be separately stated.
(iv) For trade receivables outstanding, following ageing schedule shall
be given:

Trade Receivables ageing schedule (Amount in Rs.)

Outstanding for following periods from due date of
payment*
Particulars 6 More
Less than 1-2 2-3
Months than Total
6 months years years
- 1 year 3 years
(i) Undisputed
Trade
receivables –
considered
good
(ii) Undisputed
Trade
Receivables –
which have
significant
increase in
credit risk
(iii) Undisputed
Trade
Receivables –
credit
Impaired
(iv) Disputed
Trade
Receivables–
considered
good

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(v) Disputed
Trade
Receivables –
which have
significant
increase in
credit risk
(vi) Disputed
Trade
Receivables –
credit
impaired
* similar information shall be given where no due date of payment is
specified in that case disclosure shall be from the date of the
transaction.

Unbilled dues shall be disclosed separately

VIII. Loans
(i) Loans shall be classified as-
(a) Loans to related parties (giving details thereof); and
(b) Other loans (specify nature).

(ii) Loans Receivables shall be sub-classified as:

(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit
Risk; and
(d) Loans Receivables - credit impaired;
The above shall also be separately sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful.

(iii) Allowance for bad and doubtful loans shall be disclosed under the
relevant heads separately.
(iv) Loans due by directors or other officers of the company or any of
them either severally or jointly with any other persons or amounts
due by firms or private companies respectively in which any
director is a partner or a director or a member should be separately
stated.

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IX. Other financial assets
(i) Security Deposits
(ii) Bank deposits with more than 12 months maturity
(iii) Others (to be specified)

X. Other non-current asset:

Other non-current assets shall be classified as
(i) Capital Advances; and
(ii) Advances other than capital advances;
(1) Advances other than capital advances shall be classified as:
(a) Security deposits;
(b) Advances to related parties (giving details thereof; and
(c) Other advances (specify nature).
(2) Advances to directors or other officers of the company or any
of them either severally or jointly with any other persons or
advances to firms or private companies respectively in which
any director is a partner or a director or a member should be
separately stated, ln case advances are of the nature of a
financial asset as per relevant Ind AS, these are to be
disclosed under other financial assets separately.
(iii) Others (specify nature).

B. Current Assets
I. Inventories
(i) Inventories shall be classified as-
(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) Stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of
inventories.
(iii) Mode of valuation shall be stated.
II. Investment
(i) Investments shall be classified as-
(a) Investments in Equity lnstruments;
(b) lnvestment in Preference Shares;
(c) lnvestment in government or trust securities;
(d) Investments in debentures or bonds;

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(e) Investments in Mutual Funds;
(f) lnvestment in partnership firms; and
(g) Other investments (specify nature).
Under each classification, details shall be given of names of
the bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature
and extent of the investment so made in each such body
corporate (showing separately investments which are
partly-paid)

(ii) The following shall also be disclosed

(a) Aggregate amount of quoted investments and market value
thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate amount of impairment in value of investments,

III. Trade Receivables

(i) Trade receivables shall be sub-classified as:
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit
Risk; and
(d) Trade Receivables - credit impaired.

(ii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.

(iii) Debts due by directors or other officers of the company or any of

them either severally or jointly with any other person or debts due
by firms or. private companies respectively in which any director is
a partner or a director or a member should be separately stated.

(iv) For trade receivables outstanding, following ageing schedule shall

be given:

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Trade Receivables ageing schedule (Amount in Rs.)
Outstanding for following periods from due date of
payment*
Particulars 6 More
Less than 1-2 2-3
Months than Total
6 months years years
- 1 year 3 years
(i) Undisputed
Trade
receivables –
considered
good
(ii) Undisputed
Trade
Receivables –
which have
significant
increase in
credit risk
(iii) Undisputed
Trade
Receivables –
credit
Impaired
(iv) Disputed
Trade
Receivables–
considered
good
(v) Disputed
Trade
Receivables –
which have
significant
increase in
credit risk
(vi) Disputed
Trade
Receivables –
credit
impaired
* similar information shall be given where no due date of payment is
specified in that case disclosure shall be from the date of the
transaction.

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Unbilled dues shall be disclosed separately.
IV. Cash and cash equivalents
Cash and cash equivalents shall be classified as-
(a) Balances with Banks (of the nature of cash and cash equivalents);
(b) Cheques, drafts on hand;
(c) Cash on hand; and
(d) Others (specify nature).

V. Loans
(i) Loans shall be classified as:
(a) Loans to related parties (giving details thereof); and
(b) others (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit
Risk; and
(d) Loans Receivables - credit impaired.
(iii) Allowance for bad and doubtful loans shall be disclosed under the
relevant heads separately.
(iv) Loans due by directors or other officers of the company or any of
them either severally or jointly with any other person or amounts due
by firms or private companies respectively in which any director is a
partner or a director or a member shall be separately stated.

VA. Other Financial Assets: This is an all-inclusive heading, which

incorporates financial assets that do not fit into any other financial asset
categories, such as, Security Deposits.

VI. Other current assets (specify nature)

This is an all-inclusive heading, which incorporates current assets that do
not fit into any other asset categories.
Other current assets shall be classified as-
(i) Advances other than capital advances
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);
(c) Other advances (specify nature)

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(2) Advances to directors or other officers of the company or any
of them either severally or jointly with any other persons or
advances to firms or private companies respectively in which
any director is a partner or a director or a member should be
separately stated.
(a) Earmarked balances with banks (for example for unpaid
dividend) shall be separately stated.
(b) Balances with banks to the extent held as margin money
or security against the borrowings, guarantees, other
commitments shall be disclosed separately.
(c) Repatriation restrictions, if any, in respect of cash and
bank balances shall be separately stated.

D. Equity
I. Equity Share Capital
For each class of equity share capital:
(a) the number and amount of shares authorised;
(b) the number of shares issued, subscribed and fully paid, and
subscribed but not fully paid;
(c) par value per Share;
(d) a reconciliation of the number of shares outstanding at the
beginning and at the end of the period;
(e) the rights, preferences and restrictions attaching to each class of
shares including restrictions on the distribution of dividends and the
repayment of capital;
(f) shares in respect of each class in the company held by its holding
company or its ultimate holding company including shares held by
subsidiaries or associates of the holding company or the ultimate
holding company in aggregate;
(g) shares in the company held by each shareholder holding more than
five per cent. shares specifying the number of shares held;
(h) shares reserved for issue under options and contracts or
commitments for the sale of shares or disinvestment, including the
terms and amounts;
(i) for the period of five years immediately preceding the date at
which the Balance Sheet is prepared
• aggregate number and class of shares allotted as fully paid up
pursuant to contract without payment being received in cash;
• aggregate number and class of shares allotted as fully paid up
by way of bonus shares; and
• aggregate number and class of shares bought back;
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(j) terms of any securities convertible into equity shares issued along
with the earliest date of conversion in descending order starting
from the farthest such date;
(k) calls unpaid (showing aggregate value of calls unpaid by directors
and officers);
(l) forfeited shares (amount originally paid up).
(m) A company shall disclose Shareholding of Promoters* as under:
Shares held by promoters at the end of the % Change during
year the year***
S. Promoter No. of % of total
No name Shares** shares
Total
*Promoter here means promoter as defined in the Companies Act,
2013.
**Details shall be given separately for each class of shares
***Percentage change shall be computed with respect to the
number at the beginning of the year or if issued during the year for
the first time then with respect to the date of issue.

II. Other Equity

(i) ‘Other Reserves’ shall be classified in the notes as-
(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
(d) Others- (specify the nature and purpose of each reserve and
the amount in respect thereof);
(Additions and deductions since last balance sheet to be
shown under each of the specified heads)
(ii) Retained Earnings represents surplus i.e. balance of the relevant
column in the Statement of Changes in Equity;
(iii) A reserve specifically represented by earmarked investments shall
disclose the fact that it is so represented;
(iv) Debit balance of Statement of Profit and Loss shall be shown as a
negative figure under the head 'retained earnings'. Similarly, the
balance of 'Other Equity', after adjusting negative balance of
retained earnings, if any, shall be shown under the head 'Other
Equity' even if the resulting figure is in the negative; and
(v) Under the sub-head 'Other Equity', disclosure shall be made for the
nature and amount of each item.

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E. Non-Current Liabilities
I. Borrowings
(i) borrowings shall be classified as-
(a) Bonds or debentures
(b) Term loans
(I) from banks
(II) from other Parties
(c) Deferred payment liabilities
(d) Deposits
(e) Loans from related parties
(f) Liability component of compound financial instruments
(g) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case.
(iii) where loans have been guaranteed by directors or others, the
aggregate amount of such loans under each head shall be disclosed;
(iv) bonds or debentures (along with the rate of interest, and
particulars of redemption or conversion, as the case may be) shall
be stated in descending order of maturity
or conversion, starting from farthest redemption or conversion
date, as the case may be, where bonds/debentures are redeemable
by installments, the date of maturity for this purpose must be
reckoned as the date on which the first installment becomes due;
(v) particulars of any redeemed bonds or debentures which the
company has power to reissue shall be disclosed;
(vi) terms of repayment of term loans and other loans shall be stated;
and
(vii) period and amount of default as on the balance sheet date in
repayment of borrowings and interest shall be specified separately
in each case.

III. Provisions
The amounts shall be classified as-
(a) Provision for employee benefits; and
(b) Others (specify nature).

IV. Other non-current liabilities

(a) Advances; and
(b) Others (specify nature).

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F. Current Liabilities
I. Borrowings
(i) Borrowings shall be classified as-
(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case;
(iii) where loans have been guaranteed by directors or others, the
aggregate amount of such loans under each head shall be disclosed;
(iv) period and amount of default as on the balance sheet date in
repayment of borrowings and interest, shall be specified separately
in each case;
(v) Current maturities of long-term borrowings shall be disclosed
separately.

II. Other Financial Liabilities

Other Financial liabilities shall be classified as-
(a) Interest accrued;
(b) Unpaid dividends;
(c) Application money received for allotment of securities to the
extent refundable and interest accrued thereon;
(d) Unpaid matured deposits and interest accrued thereon;
(e) Unpaid matured debentures and interest accrued thereon; and
(f) Others (specify nature).
‘Long term debt’ is a borrowing having a period of more than
twelve months at the time of origination.

III. Other current liabilities

The amounts shall be classified as-
(a) revenue received in advance;
(b) other advances (specify nature); and
(c) others (specify nature);

IV. Provisions
The amounts shall be classified as-
(i) provision for employee benefits; and
(ii) others (specify nature)

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FA. Trade Payables
The following details relating to micro, small and medium enterprises shall be
disclosed in the notes:
(a) the principal amount and the interest due thereon (to be shown
separately) remaining unpaid to any supplier at the end of each
accounting year;
(b) the amount of interest paid by the buyer in terms of section 16 of the
Micro, Small and Medium Enterprises Development Act, 2006 (27 of
2006), along with the amount of the payment made to the supplier
beyond the appointed day during each accounting year;
(c) the amount of interest due and payable for the period of delay in making
payment (which has been paid but beyond the appointed day during the
year) but without adding the interest specified under the Micro, Small
and Medium Enterprises Development Act, 2006;
(d) the amount of interest accrued and remaining unpaid at the end of each
accounting year; and
(e) the amount of further interest remaining due and payable even in the
succeeding years, until such date when the interest dues above are
actually paid to the small enterprise, for the purpose of disallowance of
a deductible expenditure under section 23 of the Micro, Small and
Medium Enterprises Development Act, 2006.

Explanation.- The terms ‘appointed day’, ‘buyer’, ‘enterprise’, ‘micro

enterprise’, ‘small enterprise’ and ‘supplier’, shall have the same
meaning as assigned to them under clauses (b), (d), (e), (h), (m) and (n)
respectively of section 2 of the Micro, Small and Medium Enterprises
Development Act, 2006.

FB. For trade payables due for payment, following ageing schedule shall be
given:

Trade Receivables ageing schedule (Amount in Rs.)

Outstanding for following periods from due date
of payment*
Particulars Less More
1-2 2-3
than than Total
years years
1 year 3 years
(i) MSME
(ii) Others
(iii) Disputed dues – MSME
(iv) Disputed dues - Others
*Similar information shall be given where no due date of payment is specified
in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.

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G. The presentation of liabilities associated with group of assets classified as
held for sale and non-current assets classified as held for sale shall be in
accordance with the relevant Indian Accounting Standards (Ind ASs)
H. Contingent Liabilities and Commitments (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
(ii) Commitments shall be classified as-
(a) estimated amount of contracts remaining to be executed on capital
account and not provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).

I. The amount of dividends proposed to be distributed to equity and preference

shareholders for the period and title related amount per share shall be
disclosed separately. Arrears of fixed cumulative dividends on irredeemable
preference shares shall also be disclosed separately.

J. Where in respect of an issue of securities made for a specific purpose the

whole or part of amount has not been used for the specific purpose at the
Balance sheet date, there shall be indicated by way of note how such
unutilised amounts have been used or invested.

JA. Where the company has not used the borrowings from banks and financial
institutions for the specific purpose for which it was taken at the balance
sheet date, the company shall disclose the details of where they have been
used.

L. Additional Regulatory Information

(i) Title deeds of Immovable Properties not held in name of the Company
The company shall provide the details of all the immovable properties
(other than properties where the Company is the lessee and the lease
agreements are duly executed in favour of the lessee) whose title deeds
are not held in the name of the company in following format and where
such immovable property is jointly held with others, details are required
to be given to the extent of the company‘s share.

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Relevant Description Gross Title Whether title Property Reason for
line item of item of carrying deeds deed holder is held since not being
in the property value held a promoter, which held in the
Balance in the director or date name of the
sheet name relative# of company**
of promoter*/
director or
employee of
promoter/
director
PPE Land - - - - **also
indicate if
- Building in dispute
Investment Land
property
- Building
PPE Land
retired Building
from
active use
and held
for
disposal
Others
#Relative here means relative as defined in the Companies Act, 2013.
*Promoter here means promoter as defined in the Companies Act, 2013.
(ii) The Company shall disclose as to whether the fair value of investment
property (as measured for disclosure purposes in the financial
statements) is based on the valuation by a registered valuer as defined
under rule 2 of Companies (Registered Valuers and Valuation) Rules,
2017.

(iii) Where the Company has revalued its Property, Plant and Equipment
(including Right-of- Use Assets), the company shall disclose as to
whether the revaluation is based on the valuation by a registered valuer
as defined under rule 2 of Companies (Registered Valuers and Valuation)
Rules, 2017.

(iv) Where the company has revalued its intangible assets, the company shall
disclose as to whether the revaluation is based on the valuation by a
registered valuer as defined under rule 2 of Companies (Registered
Valuers and Valuation) Rules, 2017.
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(v) The following disclosures shall be made where Loans or Advances in the
nature of loans are granted to promoters, directors, KMPs and the
related parties (as defined under Companies Act, 2013), either severally
or jointly with any other person, that are:
(a) repayable on demand; or
(b) without specifying any terms or period of repayment,

Amount of loan or Percentage to the

advance in the total Loans and
Type of Borrower
nature of loan Advances in the
outstanding nature of loans
Promoters
Directors
KMPs
Related Parties

(vi) Capital-Work-in Progress (CWIP)

(a) For Capital-work-in progress, following ageing schedule shall be given:
Amount in CWIP for a period of Total*
CWIP Less than 1-2 2-3 More than
1 year years years 3 years
Project in progress
Projects temporarily
suspended
*Total shall tally with CWIP amount in the balance sheet.

(b) For capital-work-in progress, whose completion is overdue or has

exceeded its cost compared to its original plan, following CWIP
completion schedule shall be given**:
(Amount in `)
Amount in CWIP for a period of
CWIP Less than 1 1-2 2-3 More than 3
year years years years
Project 1
Project 2
**Details of projects where activity has been suspended shall be given
separately.

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(vii) Intangible assets under development:
(a) For Intangible assets under development, following ageing schedule
shall be given:
Intangible assets under development aging schedule
(Amount in `)
Amount in CWIP for a period of Total*
Intangible assets under
Less than 1-2 2-3 More than
development
1 year years years 3 years
Project in progress
Projects temporarily
suspended
* Total shall tally with the amount of Intangible assets under
development in the balance sheet.
(b) For Intangible assets under development, whose completion is
overdue or has exceeded its cost compared to its original plan, the
following Intangible assets under development completion schedule
shall be given**:
(Amount in `)
To be completed in
CWIP Less than 1 1-2 2-3 More than 3
year years years years
Project 1
Project 2
**Details of projects where activity has been suspended shall be given
separately.

(viii) Details of Benami Property held

Where any proceeding has been initiated or pending against the company
for holding any benami property under the Benami Transactions
(Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, the
company shall disclose the following:
(a) Details of such property,
(b) Amount thereof,
(c) Details of Beneficiaries,
(d) If property is in the books, then reference to the item in the
Balance Sheet,
(e) If property is not in the books, then the fact shall be stated with
reasons,

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(f) Where there are proceedings against the company under this law as
an abetter of the transaction or as the transferor then the details
shall be provided,
(g) Nature of proceedings, status of same and company’s view on
same.

(ix) where the Company has borrowings from banks or financial institutions
on the basis of security of current assets, it shall disclose the following:
(a) whether quarterly returns or statements of current assets filed by
the Company with banks or financial institutions are in agreement
with the books of accounts;
(b) if not, summary of reconciliation and reasons of material
discrepancies, if any to be adequately disclosed.

(x) Wilful Defaulter*

Where a company is a declared wilful defaulter by any bank or financial
Institution or other lender, following details shall be given:
(a) Date of declaration as wilful defaulter,
(b) Details of defaults (amount and nature of defaults)
* wilful defaulter" here means a person or an issuer who or which is
categorized as a wilful defaulter by any bank or financial institution
(as defined under the Companies Act, 2013) or consortium thereof,
in accordance with the guidelines on wilful defaulters issued by the
Reserve Bank of India.

(xi) Relationship with Struck off Companies

Where the company has any transactions with companies struck off
under section 248 of the Companies Act, 2013 or section 560 of
Companies Act, 1956, the Company shall disclose the following details,
namely:
Name of Relationship with the
Nature of transactions Balance
Struck off Struck off company, if
with struck off Company Outstanding
Company any, to be disclosed
Investments in securities
Receivables
Payables
Shares held by stuck off
company
Other outstanding
balances (to be specified)
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(xii) Registration of charges or satisfaction with Registrar of Companies
(ROC)
Where any charges or satisfaction yet to be registered with ROC beyond
the statutory period, details and reasons thereof shall be disclosed.

(xiii) Compliance with number of layers of companies

Where the company has not complied with the number of layers
prescribed under clause (87) of section 2 of the Act read with the
Companies (Restriction on number of Layers) Rules, 2017, the name and
CIN of the companies beyond the specified layers and the relationship or
extent of holding of the company in such downstream companies shall be
disclosed.

(xiv) Following Ratios to be disclosed:

(a) Current Ratio,
(b) Debt-Equity Ratio,
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,
(i) Net profit ratio,
(j) Return on Capital employed,
(k) Return on investment.
The company shall explain the items included in numerator and
denominator for computing the above ratios. Further explanation
shall be provided for any change in the ratio by more than 25% as
compared to the preceding year.

(xv) Compliance with approved Scheme(s) of Arrangements

Where the Scheme of Arrangements has been approved by the
Competent Authority in terms of sections 230 to 237 of the Companies
Act, 2013, the company shall disclose that the effect of such Scheme of
Arrangements have been accounted for in the books of account of the
Company in accordance with the Scheme and in accordance with
accounting standards‘ and any deviation in this regard shall be
explained.

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(xvi) Utilisation of Borrowed funds and share premium:
(A) Where company has advanced or loaned or invested funds (either
borrowed funds or share premium or any other sources or kind of
funds) to any other person(s) or entity(ies), including foreign
entities (Intermediaries) with the understanding (whether recorded
in writing or otherwise) that the Intermediary shall
(i) directly or indirectly lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of the
company (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of
the Ultimate Beneficiaries; the company shall disclose the
following:
(I) date and amount of fund advanced or loaned or invested in
Intermediaries with complete details of each Intermediary.
(II) date and amount of fund further advanced or loaned or
invested by such Intermediaries to other intermediaries or
Ultimate Beneficiaries along with complete details of the
ultimate beneficiaries.
(III) date and amount of guarantee, security or the like provided to
or on behalf of the Ultimate Beneficiaries
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has
been complied with for such transactions and the transactions
are not violative of the Prevention of Money- Laundering act,
2002 (15 of 2003).

(B) Where a company has received any fund from any person(s) or
entity(ies), including foreign entities (Funding Party) with the
understanding (whether recorded in writing or otherwise) that
the company shall
(i) directly or indirectly lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of the
Funding Party (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like on behalf of the
Ultimate Beneficiaries, the company shall disclose the
following:
(I) date and amount of fund received from Funding parties
with complete details of each Funding party.
(II) date and amount of fund further advanced or loaned or
invested other intermediaries or Ultimate Beneficiaries
alongwith complete details of the other intermediaries or
ultimate beneficiaries.

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(III) date and amount of guarantee, security or the like
provided to or on behalf of the Ultimate Beneficiaries
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has
been complied with for such transactions and the
transactions are not violative of the Prevention of Money -
Laundering act, 2002 (15 of 2003).]

7. When a company applies an accounting policy retrospectively or makes a

restatement of items in the financial statements or when it reclassifies items in its
financial statements, the company shall attach to the Balance Sheet, a "Balance
Sheet" as at the beginning of the earliest comparative period presented.

8. Share application money pending allotment shall be classified into equity or

liability in accordance with relevant Indian Accounting Standards. share application
money to the extent not refundable shall be shown under the head Equity and
share application money to the extent refundable shall be separately shown under
'Other financial liabilities'.

9. Preference shares including premium received on issue, shall be classified and

presented as 'Equity' or 'Liability' in accordance with the requirements of the
relevant Indian Accounting Standards. Accordingly, the disclosure and presentation
requirements in that regard applicable to the relevant class of equity or liability
shall be applicable mutatis mutandis to the preference shares. For instance, plain
vanilla redeemable preference shares shall be classified and presented under 'non-
current liabilities' as 'borrowings' and the disclosure requirements in this regard
applicable to such borrowings shall be applicable mutatis mutandis to redeemable
preference shares.

10. Compound financial instruments such as convertible debentures, where split into
equity and liability components, as per the requirements of the relevant Indian
Accounting Standards, shall be classified and presented under the relevant heads in
'Equity' and 'Liabilities'

11. Regulatory Deferral Account Balances shall be presented in the Balance Sheet in
accordance with the relevant Indian Accounting Standards.

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PART II - STATEMENT OF PROFIT AND LOSS

Name of the Company.........................

Statement of Profit and Loss for the period ended................
Figures as
Figures as at the end
at the end of the
previous
Particulars Note No. of current
reporting reporting
period period
I Revenue from operations
II Other Income
III Total Income (I + II)
IV EXPENSES
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished goods, Stock- in
-Trade and work-in- progress
Employee benefits expense
Finance costs
Depreciation and amortization expenses
Other expenses
Total expenses (IV)
V Profit/(loss) before exceptional items and tax
(I-IV)
VI Exceptional Items
VII Profit/ (loss) before exceptions items and
tax(V-VI)
VIII Tax expense:
(1) Current tax
(2) Deferred tax
IX Profit (Loss) for the period from continuing
operations (VII - VIII)
X Profit/(loss) from discontinued operations
XI Tax expenses of discontinued operations
XII Profit/(loss) from Discontinued operations

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(after tax) (X-XI)
XIII Profit/(loss) for the period (IX + XII)
XIV Other Comprehensive Income
A. (i) Items that will not be reclassified to profit
or loss
(ii) Income tax relating to items that will not
be reclassified to profit or loss
B. (i) Items that will be reclassified to profit or
loss
(ii) Income tax relating to items that will be
reclassified to profit or loss
XV Total Comprehensive Income for the period
(XIII+XIV) Comprising Profit (Loss) and Other
comprehensive Income for the period)
XVI Earnings per equity share (for continuing
operation):
(1) Basic
(2) Diluted
XVII Earnings per equity share (for discontinued
operation):
(1) Basic
(2) Diluted
XVIII Earning per equity share (for discontinued &
continuing operation)
(1) Basic
(2) Diluted
see accompanying notes to the financial statements

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GENERAL INSTRUCTIONS FOR PREPARING OF STATEMENT OF PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure account, in
like manner as they apply to a Statement of Profit and Loss,

2. The Statement of Profit and Loss shall include:

(1) Profit of loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is “Total Comprehensive Income"

3. Revenue from operations shall disclose separately in the notes

(a) sale of products (including Excise Duty);
(b) sale of services;
(ba) Grants or donations received (relevant in case of section 8 companies only);
and
(c) other operating revenues.

4. Finance Costs: Finance costs shall be classified as-

(a) interest;
(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment to borrowing costs; and
(d) other borrowing costs (specify nature).

5. Other income: other income shall be classified as-

(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such
income)

6. Other Comprehensive Income shall be classified into-

(A) Items that will not be reclassified to profit or loss
(i) Changes in revaluation surplus;
(ii) Re-measurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive Income;
(iv) Fair value changes relating to own credit risk of financial liabilities
designated at fair value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and Joint Ventures,
to the extent not to be classified into profit or loss; and
(v) Share of Other Comprehensive Income in Associates and Joint Ventures,
to the extent not to be classified into profit or loss; and
(vi) Others (specify nature).

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(B) Items that will be reclassified to profit or loss;
(i) Exchange differences in translating the financial statements of a foreign
operation;
(ii) Debt instruments through Other Comprehensive Income;
(iii) The effective portion of gains and loss on hedging instruments in a cash
flow hedge;
(iv) Share of other comprehensive income in Associates and Joint Ventures,
to the extent to be classified into profit or loss; and
(v) Others (specify nature)

7. Additional Information: A Company shall disclose by way of notes, additional

information regarding aggregate expenditure and income on the following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii)
contribution to provident and other funds, (iii) share based payments to
employees, (iv) staff welfare expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds one per cent of the revenue
from operations or 10,00,000, whichever is higher, in addition to the
consideration of 'materiality ‘as specified in clause 7 of the General
Instructions for Preparation of Financial Statements of a Company;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation (other than
considered as finance cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for
company law matters, (d) for other services, (e) for reimbursement of
expenses;
(j) in case of companies covered under section 135, amount of expenditure
incurred on corporate social responsibility activities; and
(k) details of items of exceptional nature;
(l) Undisclosed income
The Company shall give details of any transaction not recorded in the books of
accounts that has been surrendered or disclosed as income during the year in
the tax assessments under the Income Tax Act, 1961 (such as, search or
survey or any other relevant provisions of the Income Tax Act, 1961), unless
there is immunity for disclosure under any scheme and shall also state
whether the previously unrecorded income and related assets have been
properly recorded in the books of account during the year.

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(m) Corporate Social Responsibility (CSR)
Where the company covered under section 135 of the Companies Act, the
following shall be disclosed with regard to CSR activities:-
(i) amount required to be spent by the company during the year,
(ii) amount of expenditure incurred,
(iii) shortfall at the end of the year,
(iv) of previous years shortfall,
(v) reason for shortfall,
(vi) nature of CSR activities,
(vii) details of related party transactions, e.g., contribution to a trust
controlled by the company in relation to CSR expenditure as per relevant
Accounting Standard,
(viii) where a provision is made with respect to a liability incurred by entering
into a contractual obligation, the movements in the provision during the
year shall be shown separately.

(n) Details of Crypto Currency or Virtual Currency

Where the Company has traded or invested in Crypto currency or Virtual
Currency during the financial year, the following shall be disclosed:-
(i) profit or loss on transactions involving Crypto currency or Virtual
Currency,
(ii) amount of currency held as at the reporting date,
(iii) deposits or advances from any person for the purpose of trading or
investing in Crypto Currency or virtual currency.

8. Changes in Regulatory Deferral Account Balances shall be presented in the

Statement of Profit and Loss in accordance with the relevant Indian Accounting
Standards

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PART III - GENERAL INSRUCTIONS FOR THE PREPARATION OF CONSOLIDATED

FINANCIAL STATEMENTS

1. Where a company is required to prepare Consolidated Financial Statements, i.e,,

consolidated balance sheet, consolidated statement of changes in equity and
consolidated statement of profit and loss, the company shall mutatis mutandis
follow the requirements of this Schedule as applicable to a company in the
preparation of balance sheet, statement of changes in equity and statement of
profit and loss .ln addition, the consolidated financial statements shall disclose the
information as per the requirements specified in the applicable Indian Accounting
Standards notified under the Companies (lndian Accounting Standards) Rules 2015,
including the following, namely:
(i) Profit or loss attributable to 'non-controlling interest ‘and to ‘owners of the
parent' in the statement of profit and loss shall be presented as allocation for
the period Further, 'total comprehensive income for the period attributable to
'non-controlling interest' and to 'owners of the parent shall be presented in
the statement of profit and loss as allocation for the period. The aforesaid
disclosures for 'total comprehensive income shall also be made in the
statement of changes in equity. In addition to the disclosure requirements in
the Indian Accounting Standards, the aforesaid disclosures shall also be made
in respect of 'other comprehensive Income
(ii) 'Non-controlling interests' in the Balance Sheet and in the Statement of
Changes in Equity, within equity, shall be presented separately from the
equity of the 'owners of the parent'.
(iii) Investments accounted for using the equity method.

2. In Consolidated Financial Statement, the following shall be disclosed by the way of

additional information
Name of
Net Asset i.e. Share in other Share in total
the entity Share in profit
total assets minus comprehensive comprehensive
in the Or loss
total liabilities income income
Group
As % of Amount As % of Amount As % of Amo As % of Amount
Consolidate Consolidated Consolidated unt total
d net assets profit or other comprehen
loss comprehensive sive income
income
Parent
Subsidiaries
Indian
(1)
(2)
(3)

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Foreign
(1)
(2)
(3)
Non-
Controlling
Interest in
all
subsidiaries
Associates
(Investment
as per the
equity
method)
Indian
(1)
(2)
(3)
Foreign
(1)
(2)
(3)
Joint
Venture
(Investment
as per the
equity
method)
Indian
(1)
(2)
(3)
Foreign
(1)
(2)
(3)
Total

3. All subsidiaries, associates and joint venture (whether Indian or Foreign) will be
covered under consolidated financial statement.
4. An entity shall disclose the list of subsidiaries or associates or joint venture which
have been consolidated in the consolidated financial statement along with the
reason of not consolidating.

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Notes
Notes

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