Work Book : Corporate Financial Reporting

Work Book Final

Corporate Financial
Reporting
Paper

18
The Institute of Cost Accountants of India
Statutory Body under an Act of Parliament
www.icmai.in
Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 1
 Work Book : Corporate Financial Reporting

2 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

WORK BOOK
Corporate Financial Reporting
FINAL

Paper 18

SYLLABUS 2022

The Institute of Cost Accountants of India

CMA Bhawan, 12, Sudder Street, Kolkata - 700 016

www.icmai.in

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 3
 Work Book : Corporate Financial Reporting

First Edition : March, 2025

Published by :

Directorate of Studies

The Institute of Cost Accountants of India

CMA Bhawan, 12, Sudder Street, Kolkata - 700 016

studies@icmai.in

Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission
from the Institute is necessary for reproduction of the whole or any part thereof.

Copyright © 2025 by The Institute of Cost Accountants of India

4 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Preface

T
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Building on the success of the previous editions, we are pleased to present the new edition of
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We are confident that this new edition will continue to serve as a valuable academic resource,
empowering students to achieve their professional aspirations with confidence and competence.

The Directorate of Studies

The Institute of Cost Accountants of India

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 5
 Work Book : Corporate Financial Reporting

INDEX
Sl. No. Module Description Page No.

Section A: Indian Accounting Standards

1 Specific Accounting Standards 1-23
Section B: Valuation of Shares, Accounting and Reporting of Financial
Instruments and NBFCs
Valuation of Shares (Including Determination of Goodwill, Post-
2 24-38
Valuation of Tangible and Intangible Assets)
3 Accounting of Financial Instruments 39-60
4 NBFCs – Provisioning Norms, Accounting and Reporting 61-65
Section C: Accounting for Business Combination and Restructuring
(in Compliance with Ind ASs)
5 Accounting for Business Combinations and Restructuring 66-87
Section D: Consolidated Financial Statements and Separate Financial
Statements (in Compliance with Ind ASs)
Consolidated Financial Statements and Separate Financial
6 88-115
Statements

6 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

1
Specific Accounting Standards
[Study Material - Module 1]

Illustration 1
A Ltd. prepares financial statements as of 31st March each year. On 1 April 2020, the company
acquired a machinery for ` 16 Lakhs, which is expected to have a useful life of four years. This asset
is eligible for full tax relief (100%) on its cost in the year of purchase.
For the financial year ending 31st March 2021, the draft accounts indicated a profit before tax of
`20 Lakhs. The directors expect that this level of profit will continue in the foreseeable future.
The Company is subject to a tax rate of 30%. Other than the impact of the machinery, there is
no other difference between accounting profit and taxable profit, nor between the tax base and
carrying amount of net assets.
Based on the data above calculate the profit after tax for each of the four years ending 31st March,
assuming deferred tax is recognized by the Company.
Solution:
(a)
First of all, it is necessary to compute the taxable profits of A Ltd. for each period and the current
tax payable:

Year ended 31 March

2021 2022 2023 2024 Total
`'000 `'000 `'000 `'000 `'000
Accounting profit 2,000 2,000 2,000 2,000 8,000
Add back Depreciation 400 400 400 400 1,600
Deduct Capital allowances -1,600 - - - -1,600
800 2,400 2,400 2,400 8,000
Current tax at 30% 240 720 720 720 2,400

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 1
 Work Book : Corporate Financial Reporting

The deferred tax figures that are required in the statement of financial position are given below:

Year ended 31 March

2021 2022 2023 2024
`000 `000 `000 `000
Carrying amount 1200 800 400 0
Tax base 0 0 0 0
Temporary difference at year end 1200 800 400 0
Closing deferred tax liability (30%) 360 240 120 0
Opening deferred tax liability 0 -360 -240 -120
So charge/(credit) to P/L 360 -120 -120 -120
Calculation of profit after tax for the four year period including deferred tax are shown below:

Year ended 31 March

2021 2022 2023 2024 Total
`000 `000 `000 `000
Profit before tax 2,000 2,000 2,000 2,000 8,000
Current tax -240 -720 -720 -720 -2,400
Deferred tax -360 120 120 120 -
Profit after tax 1,400 1,400 1,400 1,400 5,600

Illustration 2
An entity, ABC Ltd., provides the following information regarding its assets and liabilities as at 31
March 2024.
a) A machine was purchased for ` 2,00,000. To date, depreciation of ` 24,000 has been charged,
and tax allowances of ` 60,000 have been claimed on it.
b) Interest receivable, as shown in the statement of Balance Sheet, amounts to ` 12,000. This
interest will be taxed when it is received.
c) Trade receivables are recorded at a carrying amount of ` 28,000. The revenue related to these
receivables has already been included in taxable profit.
d) Inventory has been written down by ` 1,200 on account of slow moving/non-moving which
has resulted reduction in carrying value from ` 9,800 to ` 8,600 in the financial statement. For
tax purposes, this reduction is not considered until the inventory is sold.
e) The current liabilities section includes accrued expenses of ` 21,000, which will be deductible
for tax when the cash payment is made.

2 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

f) Accrued expenses have a carrying value of ` 7,500, and the corresponding expense has already
been deducted for tax purposes.
Based on the given data, determine the carrying amount, tax base, and temporary difference for
each of the assets and liabilities listed above.
Solution:

Carrying Tax Temp

Amount Base Differences
` ` ` `
a) Non-current asset 1,76,000 1,40,000 36,000
b) Interest receivable 12,000 - 12,000
c) Receivable 28,000 28,000 -
d) Inventory 8,600 9,800 -1,200
e) Accrual (cash basis for tax) -21,000 - -21,000
f) Accrual (already had tax relief) -7,500 -7,500 -

Illustration 3
During the year ended 31 March 2024, SUN Ltd. incurred `2 Crores in research and development
costs for a new product. The entire amount has been recognised as an intangible asset. Below is a
breakdown of the expenditure:
Description ` (Crores)
Raw Material Testing 0.4
Market research 0.3
Feasibility Study 0.2
Training to staff 0.2
Development activities 0.9
The costs related to development activities were incurred evenly throughout the year. However,
it was not until 1 August 2023 that market research indicated the product had the potential to be
profitable. By the reporting date, the development of the product was still incomplete.
You are required to show the appropriate accounting treatment for the research and development
expenditure (along with reason(s)) for the year ended 31 March 2024.
Solution:
Expenditure on Raw material testing, market research, feasibility study and training to staff cannot
be capitalised and so must be written off to profit or loss. Hence, the total that should be written
off is tabulated below:

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 3
 Work Book : Corporate Financial Reporting

Description ` (Crores)
Raw Material Testing 0.4
Market research 0.3
Feasibility Study 0.2
Training to staff 0.2
Development activities (Note1) 0.3
Total 1.4

Dr Profit or loss `1.4 Cr.

Cr Intangible assets `1.4 Cr.
Notes:
In relation to development activities, `0.3 Crores (4/12 × `0.9 Cr.) was incurred before the product
was known to be commercially viable. This amount must also be written off to profit or loss.
Illustration 4
On 31 March 2021, an entity identified that one of its plant and machinery is always idle. At this
date, the asset’s carrying amount is `5,00,000, while its fair value is `325,000. Estimated costs of
`25,000 would be incur to dispose off the asset.
If the asset is retained, the entity anticipates cash inflows of `2,00,000 at the end of each of the
next two years. The discount rate applicable to this asset, reflecting its specific risks, is 10%.
Based on above details, you are required to:
(a) Calculate the loss on impairment of the plant & machine and show how this loss is to be treated
in the books.
(b) Show how the answer to part (a) would be different if there was a balance of `1,00,000 in other
components of equity relating to the prior revaluation of this specific asset?
Solution:
(a) The value in use is calculated as the present value of the asset’s future cash inflows and
outflows

Cash flow Discount PV

Rate
Year 1 2,00,000 0.91 1,82,000
Year 2 2,00,000 0.83 1,65,000
3,47,000

4 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

The recoverable amount is the higher of the fair value less costs to sell

Fair Value `3,25,000

Costs required to dispose of the asset `25,000
`3,00,000
Value in use `3,47,000
The carrying amount of the asset of `5,00,000 exceeds the recoverable amount of `3,47,000.
Therefore, the asset is impaired and must be written down by `1,53,000 (`5,00,000 – `347,000).
This impairment loss would be charged to the statement of profit or loss and value of P&M will
be reduced.
Dr Profit or loss `1,53,000
Cr P&M (PPE) `1,53,000
b) The asset must still be written down by `1,53,000. However, `1,00,000 of this would be
recognised in other comprehensive income and the remaining `53,000 (`1,53,000 – `1,00,000)
would be charged to profit or loss.
Dr Profit or loss `53,000
Dr Other comprehensive income `1,00,000
Cr P&M (PPE) `1,53,000

Illustration 5
Factory is considered a cash-generating unit. On 01.04.2022 an explosion occurred at a factory,
and the carrying amounts of its assets are as follows:

Asset `000
Goodwill 150
Patents & Copy rights 200
Plant & Machineries 450
Computers 350
Buildings 1,600
Total 2,750

An impairment review indicates a net selling price of `15 Lakhs for the factory and a value in use
of `22.5 Lakhs. Half of the machines were destroyed in the explosion, but the remaining half can
be sold for at least their carrying amount. The patents and copy rights have been expired and are
now deemed to have no value.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 5
 Work Book : Corporate Financial Reporting

Based on the above, calculate the loss on impairment and show how this loss should be recognized
in the financial statements.
Solution:
The patents have been superseded and have a recoverable amount of ` nil. They therefore should
be written down to ` nil and an impairment loss of `2,00,000 must be charged to profit or loss.
Half of the machines have been blown to pieces. Therefore, half of the carrying amount of the
machines should be written off. An impairment loss of `2,25,000 will be charged to profit or loss.
The recoverable amount of the other assets cannot be determined so therefore they must be tested
for impairment as part of their cash generating unit.
The total carrying amount of the CGU after the impairment of the patents and machines is
`23,25,000 (see working below), whereas the recoverable amount is `22,50,000. A further
impairment of `75,000 is therefore required.
This is firstly allocated to goodwill and then to other assets on a prorata basis. No further
impairment should be allocated to the machines as these have already been written down to their
recoverable amount.
Allocation of impairment loss to CGU
Draft Impairment Revised
` 000 ` 000 ` 000
Goodwill 150 75 75
Patents & Copy rights Nil Nil Nil
Plant & Machineries 225 Nil 225
Computers 350 Nil 350
Buildings 1,600 Nil 1,600
2,325 75 2,250
The total impairment charged to profit or loss is `5,00,000 (`2,00,000 +`2,25,000 + `75,000).

Illustration 6
A Ltd. acquired a business consisting of two cash-generating units (CGUs), X and Y, along with
goodwill for the entire business. However, it is not feasible to allocate the goodwill to the individual
CGUs. After two years, the carrying amounts and recoverable amounts of the net assets within the
CGUs and the purchased goodwill are as follows:
Particulars CGU X CGU Y Goodwill Total
Carrying amount (` ‘000) 540 360 250 1150
Recoverable amount (` ‘000) 700 300 1000
From the data above calculate the impairment loss to be booked against each CGU, Goodwill and
total impairment for the business.

6 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Solution:
When corporate assets or goodwill cannot be allocated to individual CGUs, the impairment test
must be conducted at the group level, encompassing the CGUs, in a two-step process.
First, the carrying amount of each CGU is compared with its recoverable amount. It is determined
that CGU Y is impaired, resulting in a loss of ₹60,000, which reduces its carrying amount to
₹3,00,000.
Next, the carrying amount of the business as a whole, including goodwill, is compared with its
recoverable amount. The total carrying amount of the business is now ₹10,90,000 (₹11,50,000 -
₹60,000). Since the recoverable amount of the business is ₹10,00,000, an additional impairment
loss of ₹90,000 is recognized against goodwill (₹10,90,000 - ₹10,00,000).
Illustration 7
On 31 March 2023, a cash-generating unit underwent an impairment review with the following data:

Carrying Amount Impairment Carrying Amount

Asset
pre-impairment Loss post-impairment
Goodwill `1,25,000 (`1,25,000) Nil
Property, plant, and equipment `3,75,000 (`1,35,000) `2,40,000
Total `5,00,000 (`2,60,000) `2,40,000
The property, plant, and equipment was initially acquired on 1 April 2021 for `500,000 and had an
estimated useful life of 8 years. The company follow straight line of depreciation.
By 31 March 2024, the conditions that led to the impairment had reversed, and the recoverable
amount of the cash-generating unit was reassessed at `4,50,000.
Based on the data above, calculate, the effect of the impairment reversal on the financial statements
for the year ended 31 March 2024.
Solution:
The goodwill once impaired cannot be reversed.
The impairment of the PPE can be reversed. However, the reversal is limited to the carrying amount
of the asset had no impairment loss been previously recognised.
The carrying amount of the PPE as at 31 March 2024 is `2,00,000 (`2,40,000 × 5/6).
If the PPE had not been impaired, then its carrying value at 31 March 2024 would have been
`3,12,500 (`5,00,000 × 5/8).
Hence, the carrying amount of the PPE can be increased from `2,00,000 to `3,12,500. This will
reduce the total impairment as on 31.03.2024 and increase profit by `1,12,500.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 7
 Work Book : Corporate Financial Reporting

Illustration 8
PCB Ltd. has identified an impairment loss of `48 Lakhs for one of its cash-generating units. The
carrying amount of the unit’s net assets is `160 Lakhs, while the recoverable amount is `112 Lakhs.
The carrying values of the unit’s net assets before impairment loss if any are as follows:
Asset `(Lakh)
Goodwill 16
Building 22
Plant & Machinery 48
Vehicles 36
Patents
Net monetary assets 26
Total 160
The net selling prices of the unit’s assets are insignificant except for the building, which has a
market value of `35 Lakhs. The net monetary assets are expected to be fully realized.
Based on the data above, show how the impairment loss should be allocated across the assets
within the cash-generating unit.
Solution:
As per the accounting principles, the impairment loss will be firstly allocated to the goodwill,
reducing its carrying amount to nil. Further, the impairment loss cannot be set against the Building
because its net selling price is greater than its carrying amount. Further also, impairment loss
cannot be set against the net monetary assets (receivables, cash, etc.) because they will be realised
in full.
The balance of the impairment loss of `32 Lakh (`48 – `16) Lakh is apportioned between the
remaining assets in proportion to their carrying amounts.
The allocation of the impairment:
Pre-impairment Impairment Post impairment
Value Loss Value
`(Lakh) `(Lakh) `(Lakh)
Goodwill 16 16 -
Building 22 - 22
Plant & Machinery 48 16* 32
Vehicles 36 12 24
Patents 12 4 8
Net monetary assets 26 - 26
Total 160 48 112
*((48/(48 + 36 + 12)) × 32Lakh

8 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Illustration 9
On 1 April 2021, DEN Ltd. signs a four-year lease agreement for a property with annual lease
payments of `16 lakhs, payable at the start of each year. The contract stipulates that lease payments
will increase annually based on changes in the Consumer Price Index (CPI) over the preceding 12
months. As on 01-04-2021 the CPI is 120 which has not changed for last one year.
The CPI has risen to 150 on 01-04-2022. DEN Ltd. uses its incremental borrowing rate of 8% per
year and its corresponding discounting factor is given in the below table:

Date 01-04-2022 01-04-2023 01-04-2024

Discounting factor 0.9259 0.8573 0.7938
DEN Ltd. uses straight line of depreciation on its PPE.
Based on the above details, account for the lease in the books of DEN Ltd:
a) For the financial year 2021-22. Working should be part of your answer.
b) On 01-04-2022 considering the change in the CPI.
Solution:
(a) Financial Year 2021-22
On 01-04-2021:
Dr Right-of-use asset ` 57.23 Lakh
Cr Cash/Bank ` 16 Lakh
Cr Lease liability ` 41.23 Lakh
(Being the first payment made and liability & right-of-use asset created as per lease agreement)
Working for lease liability & right of use asset value:
Date Cash flow Discount Present value
(` Lakh) rate (` Lakh)
01/04/2021 16 1 16.00
01/04/2022 16 0.9259 14.81
01/04/2023 16 0.8573 13.72
01/04/2024 16 0.7938 12.70
Total 57.23
The asset is depreciated over the lease term of four years, giving a charge of ` 14.31 Lakh
(`57.23L/4).
Dr Depreciation (P/L) ` 14.31 Lakh
Cr Right-of-use asset ` 14.31 Lakh

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 9
 Work Book : Corporate Financial Reporting

The asset has a carrying amount at the reporting date of ` 42.92 Lakh `(57.23 –14.31) Lakh.
The interest charge on the liability is ` 3.30 Lakhs (W1).
Dr Finance costs (P/L) ` 3.30 Lakh
Cr Lease liability ` 3.30 Lakh
The liability has a carrying amount at the reporting date of ` 44.53L (W1).
(W1) Lease liability table
Year-ended Opening Interest (8%) Closing
` (Lakh) ` (Lakh) ` (Lakh)
31/03/22 41.23* 3.30 44.53
*57.23L minus 16L
(b) on 01/04/2022
As per the terms of the contract (which is linked to CPI) the payment amount will be revised to `20
Lakhs (`16L × 150/120). Accordingly, the lease liability is remeasured to reflect the revised lease
payments (three payments of ` 20 Lakhs).
Date Cash flow (`/m) Discount rate Present value (`/m)
01/04/22 20 1 20.00
01/04/22 20 0.9259 18.52
01/04/22 20 0.8573 17.15
–––––
55.67
–––––
The lease liability must be increased by ` 11.14 Lakh `(55.67 L – 44.53) Lakh.
This increase in lease liability will require a corresponding increase in the Right to use asset
carrying value so the entry will be:
Dr Right-of-use asset ` 11.14 Lakh
Cr Lease liability ` 11.14 Lakh
The payment of `20 L will then reduce the lease liability:
Dr Lease liability ` 20 Lakh
Cr Cash/ Bank ` 20 Lakh
The right-of-use asset’s carrying amount of ` 54.06 Lakhs `(42.92L + 11.14) Lakh will be
depreciated over the remaining lease term of three years.

10 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Illustration 10
On 1April 2021, JET Ltd. entered into a three-year lease agreement for a machinery. The lessor is
responsible for maintaining the machinery during the lease term. The total cost of the contract is
`2,40,000, with JET Ltd. required to pay `80,000 annually, starting on 31 March 2022.
JET Ltd. separates non-lease components from lease components in its accounting. If negotiated
separately, the standalone price of the machinery lease is `2,00,000, and the standalone price of
the maintenance services is `50,000. JET Ltd.’s incremental borrowing rate is 6% per year and the
discounting factor for this is:
Date 31-03-2022 31-03-2023 31-03-2024
Discounting factor 0.9434 0.8900 0.8396
The company follow straight line method of depreciation.
Based on the above detail, pass the journal entries in the books of JET Ltd. for the year ended 31
March 2022.
Solution
The annual payments of `80,000 should be allocated betweenthe lease and non-lease components
of the contract based on their standalone selling prices:
Lease of machine: (`200/(`200 + `50)) × `80,000 = ` 64,000
Maintenance (`50/(`200 + `50)) × `80,000 = ` 16,000
The lease liability is calculated as the present value of the lease payments, as follows:
Cash flow Discounting Present value
Year ended
(`) factor (`)
31/03/22 64,000 0.9434 60,378
31/03/23 64,000 0.8900 56,960
31/03/24 64,000 0.8396 53,734
1,71,072
There are no direct costs so the right-of-use asset is recognised at the same amount:
Dr Right-of-use asset `1,71,072
Cr Lease liability `1,71,072

Interest of `10,264 (W1) is charged on the lease liability.

Dr Finance costs (P/L) ` 10,264
Cr Lease liability ` 10,264

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 11
 Work Book : Corporate Financial Reporting

The cash/bank payment reduces the liability.

Dr Lease liability ` 64,000
Cr Cash/ bank ` 64,000
The liability has a carrying amount of ` 1,17,336 at the reporting date.
The right-of-use asset is depreciated over the three years lease term. Which will be `57,024
(`1,71,072/3 years).
Dr Depreciation (P/L) ` 57,024
Cr Right-of-use asset ` 57,024
The carrying amount of the right-of-use asset will be reduced to ` 1,14,048 (`1,71,072 – ` 57,024).
(W1) Lease liability table

Year-ended Opening (`) Interest @ 6% (`) Payments (`) Closing (`)

31/03/2022 1,71,072 10,264 (64,000) 1,17,336

The cost of one year’s maintenance will be expensed to profit or loss:

Dr Maintenance expense (P/L) `16,000
Cr Cash/ Bank `16,000

Illustration 11
On 1 April 2021, P Ltd. sells a machinery to Q Ltd. for `30 Lakh. The machinery has a fair value of
`28 Lakh and a carrying amount of `12 Lakh before the sale. This sale satisfies the performance
obligation under Ind AS 115, Revenue from Contracts with Customers.
Simultaneously, P Ltd. and Q Ltd. enter into a lease agreement where P Ltd. retains the right to
use the machinery for five years. P Ltd. agrees to pay `5 Lakh annually at the end of each year. The
lease has an implicit interest rate of 10%, and the present value of the lease payments is `19 Lakh.
Based on the given details, pass the necessary journal entries in the books of P Ltd. and Q Ltd. on
1 April 2021.
Solution:
In the Books of P Ltd.:
P ltd has received excess sales proceeds as compared to its fair value hence this amount i.e. `2
Lakh `(30 – 28) Lakh is treated as additional financing to the company. Hence the present value
of lease liability will be bifurcated into liability for additional financing i.e. ` 2 Lakh and ` 17 Lakh
as lease liability.

12 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

The entry required is as follows: ` in Lakh

Dr Cash/Bank 30.00
Dr Right-of-use asset (W1) 7.30
Cr Machine 12.00
Cr Lease liability 17.00
Cr Financial liability (Loan) 2.00
Cr Profit or loss (bal. fig.) (W2) 6.30
(Being sale of machinery and lease back is booked as per the agreement.)
W1:
This right-of-use asset in the books of P ltd will be measured as the rights retained in proportion of
the previous carrying amount in that machinery i.e. `(17/28) Lakh × `12 Lakh = ` 7.3 Lakh
W2:
The gain in profit or loss is the proportion of the overall `16 Lakh gain on disposal `(28–12) Lakh
that relates to the rights transferred to Q Ltd. i.e. ((28 – 17)/28) Lakh × `16 Lakh = `6.3 Lakh
In the Books of Q Ltd. Following journal will be passed:
Dr Machine `28 Lakh
Dr Financial asset (Loan given) `2 Lakh
Cr Cash/ Bank `30 Lakh
It will then account for the lease using normal lessor accounting rules.
Note
The amount received i.e. ` 5 Lakh will be allocated between the lease and the additional finance
in proportion of the total present value of the payments that they represent. Hence be `4,47,368
((17/19) Lakh × `5 Lakh) will be against lease and `52,632 ((2/19) Lakh × `5 Lakh) will be against
additional finance (loan).

Illustration 12
On 17 January 2022, an entity, A Ltd. with a functional currency of dollars ($) sold goods to a
German entity (B Ltd.) for €50,050. On 20 April 2022, the customer settled the outstanding
balance. The company prepares financial statements as on 31st March each year.

Date Exchange rate

17 January 2022 $1 = €3.25
31 March 2022 $1 = €3.48
20 April 2022 $1 = €3.03

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 13
 Work Book : Corporate Financial Reporting

Based on the data above -

(a) Pass the necessary journal entries in the books of A Ltd. to account for the above transactions
during the FY 2021-22 & 2022-23, and
(b) Determine the exchange gain or loss arising from the settlement and explain its impact on the
profit for the year(s)
Solution:
a) Journal Entries:
During the FY 2021-22
i. Journal Entries Initial recognition of Transaction on 17 Jan. 2022:
Dr Receivables (€50,050 ÷ 3.25) $15,400
Cr Sale $15,400
ii. Journal Entry for Retranslation of Receivables (31 March 2022):
Dr Profit or loss (exchange loss) $1,018
Cr Receivables $1,018
Working note: Calculation of exchange loss
Initial recognition = $15,400
Less: Receivable is retranslated using the closing exchange rate being monetary item
$14,382 (€50,050 ÷ 3.48)
So Exchange loss = $ 1,018 ($15,400 - $14,382)
During the FY 2022-23
i. Settlement on 20 April 2022:
Dr Bank (€50,050 ÷ 3.03) $16,518
Cr Receivables $14,382
Cr Profit or loss (exchange gain) $2,136
b) Exchange Gain or Loss:
(i) The exchange loss of $1,018 is recognized in the profit or loss statement for the year ended
31.03.2022.
(ii) The exchange gain of $2,136 is recognized in the profit or loss statement for the year ended
31.03.2023.

14 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Illustration 13
A Ltd., an entity has a functional and presentation currency of the Rupees (`). On 1 April 2022,
A Ltd. purchased a plot of land in another country for $1 Lakh. The land is purchased for capital
appreciation only. The exchange rates on relevant dates are as follows:

Date Exchange rate

1 April 2022 1$= ` 90
31 March 2023 1$= ` 92
Based on the above data:
i. Determine the initial recognition of the land in the functional currency of A Ltd.
ii. Explain with reason whether the land should be retranslated at the reporting date (31 March
2023).
iii. Clarify how the land is accounted for and its impact on the financial statements.

Solution:
1. Initial Recognition: The land is initially recognized at cost, translated into the functional
currency using the exchange rate on the purchase date (1 April 2022). The land is recorded at
` 90,00,000 ($1 Lakh * 90 `/$ ).
2. Retranslation at Reporting Date: Land is classified as a non-monetary item under IND AS 16.
Non-monetary items are not retranslated at the reporting date. Therefore, the value of the land
remains at ` 90,00,000, irrespective of the change in exchange rates.
3. Accounting Treatment Under IND AS: As per Ind AS 40, Investment property only cost model
is applicable for land being an investment property hence, as per Ind AS 16, no depreciation is
charged. The land remains recorded at its initial cost of ` 90,00,000 in the financial statements.
The change in exchange rates does not affect the value of the land in the financial statements,
ensuring consistency in its measurement.

Illustration 14
An entity, S Ltd., has a reporting date of 31 March and uses the Rupee '₹' as its functional currency.
S Ltd. obtained a loan in the foreign currency of dollar ($). The loan amount was $ 120,000, which
was taken on 1 April 2022. A repayment of $ 40,000 was made on 1 June 2020.
The exchange rates during the year were as follows:
• 1 April 2022: $1 = ₹ 80
• 1 June 2022: $1 = ₹ 82
• 31 March 2023: $1 = ₹ 84
You are required to explain how the above transactions should be accounted for in the books of S
Ltd. for the year ending 31 March 2023.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 15
 Work Book : Corporate Financial Reporting

Solution:
On 1 April 2022, money was borrowed in dollar. This must be translated into the functional currency
using the exchange rate on the transaction date. The transaction is recorded at ₹ 96,00,000
($120,000 × 80).
Dr Bank ₹ 96,00,000
Cr Loans ₹ 96,00,000
The repayment on 1 June 2022 must be translated into the functional currency using the exchange
rate on the settlement date. The cash settlement is recorded at ₹32,80,000 ($40,000 × 82).
Dr Loans ₹32,80,000
Cr Bank ₹32,80,000
Loans are a monetary liability. At the reporting date, the remaining loan of $80,000 ($120,000
– $40,000) must be translated at the year-end exchange rate. This gives a closing liability of
₹67,20,000 ($80,000 × 84).
$ Rate ₹
1 April 2022 120,000 80 96,00,000
1 June 2022 (40,000) 82 (32,80,000)
Exchange loss (bal. fig) 4,00,000
––––––– –––––––
31 March 2023 80,000 84 67,20,000
––––––– –––––––
The double entry to record this loss:
Dr Profit or loss ₹ 4,00,000
Cr Loans ₹ 4,00,000
Illustration 15
On 1 April 2021, Z Ltd. granted share options to each of its 200 employees, subject to a three-year
vesting period. The options will vest only if the volume of sales increases by at least 5% annually
during the vesting period. The number of options that vest depends on the average annual sales
increase over the period:
• 5% to 10% average annual increase: 100 share options per employee
• 10% to 15% average annual increase: 200 share options per employee
• Over 15% average annual increase: 300 share options per employee
At the grant date, Z Ltd. estimated the fair value of each option at `10 and projected that the average
annual sales increase would be between 10% and 15%. It also estimated that 22% of employees
would leave before the end of the vesting period.

16 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

At each reporting date, the following information was available:

Expected sales
Employees Further leaves Annual Average annual
Reporting volume increase
leaving in expected prior increase in increase in sales
date over remaining
Year to vesting date sales volume volume to date
vesting period
31-Mar-22 8 18 14% 14% 14%
31-Mar-23 6 4 18% 16% 16%
31-Mar-24 2 16% 16%
You are required to determine the remuneration expenses to be recognised in each year.
Solution:
Rep. date Calculation of equity Equity Expense Note
`000 `000
31-Mar-22 (174 × 200 × `10) × 1/3 116 116 1
31-Mar-23 (182 × 300 × `10) × 2/3 364 248 2
31-Mar-24 (184 × 300 × `10) × 3/3 552 188 3
Notes:
1. At 31-Mar-22, a total of 26 employees (8 + 18) are expected to leave by the vesting date meaning
that 174 are expected to remain. The Company estimates that average annual growth in sales
volume will be 14%. Consequently, it is estimated that eligible employees would each receive
200 share options at the vesting date.
2. At 31-Mar-23, a total of 18 employees (8 + 6 + 4) are expected to leave by the vesting date
meaning that 182 are expected to remain. The Company estimates that the average growth
in sales volume will be 16%. Consequently, it is estimated that eligible employees will each
receive 300 share options at the vesting date.
3. At 31-Mar-24, it is known that total of 16 employees (8 + 6 + 2) have left at some point during
the vesting period, leaving 184 eligible employees. As average annual growth in sales volume
over the vesting period was 16%, eligible employees are entitled to 300 share options each.
Illustration 16
An entity has a reporting date of 31 March.
On 1 April 2021, the entity grants 200 Share Appreciation Rights (SARs) to each of its 300 employees,
subject to the condition that they remain employed with the entity until 31 March 2024.
• FY 2021-22: During the year, 15 employees leave the entity. The entity estimates that an
additional 45 employees will leave over the next two financial years (FY 2022-23 and FY 2023-24).

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 17
 Work Book : Corporate Financial Reporting

• FY 2022-23: During the year, 10 employees leave the entity. The entity revises its estimate,
predicting that a further 25 employees will leave in FY 2023-24.
• FY 2023-24: During the year, 15 more employees leave the entity.
The fair value of a SAR at each reporting date is as follows:

`
31.03.2022 10
31.03.2023 12
31.03.2024 15
You are required to determine the expense for each of the three years of the scheme, and the
liability to be recognised in the balance sheet as at 31 March for each of the three years.
Solution:

Liability at year Expense for the

FY Particulars
end (` ‘000) year (` ‘000)
2021-22 ((300 – 15 – 45) × 200 × `10 × 1/3) 160 160
2022-23 ((300 – 15 – 10 – 25) × 200 × `12 × 2/3) 400 240
2023-24 ((300 – 15 – 10 – 15) × 200 × `15) 780 380

Illustration 17
The management of a company has identified its operating segments based on geographical
location. The following information is provided for these segments:
Total Revenue External Revenue Internal Revenue Profit/Loss Assets
Segment
(` 000) (` 000) (` 000) (` 000) (` 000)
India 274 150 124 103 3,350
UAE 88 43 45 (25) 395
Japan 170 170 – 48 985
North
380 225 155 122 3,810
America
UK 90 45 45 (16) 595
Canada 98 54 44 13 865
Total 1,100 687 413 245 10,000
In accordance with Ind AS 108, which operating segments must be reported in the financial
statements?

18 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Solution:
The 10% tests

10% total 10% results 10% assets Report

Segment
revenue (W1) test (W2) (W3) Requirement
India Y Y Y Y
UAE N N N N
Japan Y Y N Y
North America Y Y Y Y
UK N N N N
Canada N N N N
India, Japan and North America are reportable. However, it should be checked whether they
comprise at least 75% of the company’s external revenue.
The 75% test

External revenue (`000)

India 150
Japan 170
North America 225
Total 545

The external revenue generated by reportable segments is 79% (`5,45,000/ `6,87,000) of total
external revenue. The 75% test is met and no other segments need to be reported.
Conclusion
The reportable segments are India, Japan and North America.
(W1) 10% of total sales: 10% × `11 lakh = `1,10,000.
All segments whose total sales exceed `1,00,000 are reportable.
(W2) 10% of results in absolute figure
10% of profit making segments: 10% × (`1,03,000 + `48,000 + `1,22,000 + `13,000) = `28,600
10% of loss making segments: 10% × (`25,000 + `16,000) = `4,100
Therefore, all segments which make a profit or a loss of greater than `28,600 are reportable.
(W3) 10% of total assets: 10% × `100 Lakh = `10 Lac.
All segments whose assets exceed `10 Lakh are reportable

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 19
 Work Book : Corporate Financial Reporting

Illustration 18
X Ltd sells 1,100 units of a product to customers at a price of `150 per unit. Payment is received at
the time the control of the product is transferred to the customers. X Ltd. has a return policy that
allows customers to return any unused units within 60 days for a full refund. The cost incurred by
X Ltd. for each unit is `120. Based on the experience in selling similar products, X Ltd. estimates
that 950 units will not be returned.
How this transaction will be accounted for in the books of accounts of X Ltd. as per Ind AS 115.
Solutions:
In the Books of X Ltd.
1) Record Cash Receipt for All 1,100 Products:
Dr. Cash/Bank `1,65,000
Cr. Refund Liability `22,500
Cr. Revenue `1,42,500
2) Remove Inventory for All 1,100 Units Sold:
Dr. Cost of Sales `1,32,000
Cr. Inventory `1,32,000
Inventory is derecognized for all 1,100 units (1,100 units × `120=`1,32,000).
3) Recognize Right to Recover Returned Goods for 150 Units:
Dr. Right to Recover Returned Goods `18,000
Cr. Cost of Sales `18,000
An asset is recognized for the right to recover inventory from the expected
returns (150 units × `120 = `18,000).

Illustration 19
A Ltd. sells three products at the following stand-alone selling prices:
Product Stand-alone selling price (`)
Product A 200
Product B 140
Product C 110
A Ltd. sells one unit of each product to ASN for a total of `405.
How should A Ltd. allocate the discount in the transaction when
(a) The products are to be delivered at three separate points in time, and each delivery represents
a separate performance obligation. A Ltd. regularly sells Products B and C together for `205
and Product A for `200.

20 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

(b) When the contract required the delivery of Products B and C at the same time and A Ltd. treat
the delivery as a single performance obligation. A Ltd. regularly sells Products B and C together
for `205 and Product A for `200.
(c) A Ltd. agrees to sell one unit of each product to ASN for a total of `405, although products are
not usually sold at a discount. The products are to be delivered at three separate points in time,
and the delivery of each product represents a separate performance obligation.

Solution:
(a)

Product Stand-alone selling price (`) Allocated discount (`) Transaction price (`)
Product A 200 0 200.00
Product B 140 (140 x 45/250) = 25.20 114.80
Product C 110 (110 x 45/250) = 19.80 90.20
Total 450 45 405.00
(b)
Product Stand-alone selling price (`) Allocated discount (`) Transaction price (`)
Product A 200 0 200
Products B and C 250 45 205
Total 450 45 405
(c)
Product Stand-alone selling price (`) Allocated discount (`) Transaction price (`)
Product A 200 (200 x 45/450) = 20 180
Product B 140 (140 x 45/450) = 14 126
Product C 110 (110 x 45/450) = 11 99
Total 450 45 405

Illustration 20
A Ltd. sells a machine on 1 April 2021. The terms of sale are that the enterprise will receive `50
Lakh on 31st March 2023 (2 years later).
An appropriate discount rate is 10% and discounting factors are as below:
Discounting Factor Start of the Year End of Year 1 End of Year 2
10% 1.0000000 0.9090909 0.8264462
Pass the necessary Journal entries in the books of A Ltd.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 21
 Work Book : Corporate Financial Reporting

Solution:
Calculation of Interest income and amount for initial booking of debtor.
FY Opening Interest Closing
(i) 1st April (ii) for the Year @ 10% (iii = 10%*(ii)) 31st March (iv = ii + iii)
2021-22 41,32,231* 4,13,223 45,45,454
2022-23 45,45,454 4,54,545 50,00,000
*(50 lakh × 0.8264462)
In the Books of A Ltd.
Journal Entries
Date Particulars Debit (`) Credit (`)
01-04-2021 Sundry Debtors 41,32,231
Sales 41,32,231
(initial recognition of sales)
31-03-2022 Sundry Debtors 4,13,223
Interest Income 4,13,223
(Recognition of interest income)
31-03-2023 Sundry Debtors 4,54,545
Interest Income 4,54,545
(Recognition of interest income)
31-03-2023 Bank Account 50,00,000
Sundry Debtors 50,00,000
(Realisation of Debtor)

Illustration 21
On 1st April 2021, A Ltd. entered into a contract with ASN Ltd. to construct a building for a contract
price of ` 10 lakhs. A Ltd. identifies a single performance obligation in the contract, which is
fulfilled over time. A Ltd. uses costs incurred as a percentage of total expected costs as a measure of
progress towards complete satisfaction of the performance obligation. At the start of the contract,
the total expected cost is estimated to be ` 7 lakh. The Cost incurred till 31.03.2022 is ` 4.2 lakh.
On 15th May 2022, the contract is modified to change the kitchen cupboard specifications. ASN
Ltd. agreed to an additional payment of ` 2.5 lakh for the modification, bringing the total contract
price to ` 12.5 lakh. The estimated additional cost for the modification is ` 1 lakh, increasing the
total expected costs to ` 8 lakh.
A Ltd. evaluates the modification and concludes that the remaining goods and services to be
provided using the modified contract are not distinct from the goods and services transferred on
or before the date of contract modification.

22 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Provide the revenue to be booked till 15th May 2022 in the books of A Ltd.
Solution:
At the Year end 31.03.2022
A Ltd. has incurred costs to date of `420,000 which is 60% of the total expected costs (`700,000).
The cumulative revenue and costs recognised for the first year are as follows:
`
Revenue (60% of 10,00,000) 6,00,000
Cost of sales (60% of 7,00,000) (4,20,000)
Gross profit 1,80,000
On 15th May 2022 the contract is modified, and the company concludes that the remaining goods
and services to be provided using the modified contract are not distinct from the goods and
services transferred on or before the date of contract modification. Hence, the Company accounts
for the contract modification as if it were part of the original contract.
On 15th May 2022 the progress of the work is 52.5% (`420,000/`800,000).
A catch-up adjustment on 15th May 2022 has to be made in the accounts as follows.
`
Revenue (52.5% of 12,50,000) 6,56,250
Revenue recognised to date (6,00,000)
Catch-up adjustment 56,250

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 23
 Work Book : Corporate Financial Reporting

Valuation of Shares (Including Determination

2 of Goodwill, Post-Valuation of Tangible and

Intangible Assets)
[Study Material - Module 2]

Illustration 1
The following is the Balance Sheet of Apex Ltd, as at 31st March, 2024
Assets Amount (`)
Goodwill 75,000
Property, Plant and Equipment (Note: 1) 3,65,500
Other Investments 85,000
Inventories 1,50,000
Trade Receivables (Note: 2) 2,80,000
Cash and cash equivalents 83,500
Preliminary Expenses 24,500
10,63,500

Equity & Liabilities Amount (`)

Equity
Equity Share capital 5,00,000
Other Equity
General Reserve 1,50,000
Profit & Loss Account 1,50,000
Workmen’s Profit-Sharing Reserve 50,000
Workmen’s Compensation Reserve 30,500 3,80,500
14% Debentures 1,25,000
Trade payables 58,000
10,63,500
Note 1: Property, Plant and Equipment
Asset Name Gross Accumulated Depreciation Net
Buildings 90,000 4,500 85,500
Plant & Machinery 2,50,000 37,500 2,12,500
Furniture 75,000 7,500 67,500
3,65,500

24 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Note 2: Trade Receivables

Trade Receivable 3,00,000

Less: Impairment allowance 20,000
Secured, considered good 2,80,000
Note 3: Equity Share capital consists 50,000 Equity Shares of ` 10 each.
It is given that Buildings are now worth Rs 1,75,000 and Plant and Machinery is worth ` 1,85,000.
Future maintainable profit for the company after all the adjustment including tax is ` 1,25,600
Further, during the current year, the company has earned profit before tax ` 86,000. Tax to be
considered is 30% & depreciation to be considered as below:
Particulars Rate of Depreciation
Building 5%
Furniture 10%
Plant & Machinery 15%
You are required to calculate the Value of Goodwill which is 3 years’ purchase of super profit. The
company expects a normal return of 12% on average capital employed.
Solution:
1. Calculation of Capital Employed:
Amount (`) Amount (`)
Assets Buildings 1,75,000
Plant and Machinery 1,85,000
Furniture 67,500
Investments 85,000
Inventories 1,50,000
Trade Receivables 2,80,000
Cash in Hand 83,500
Total Assets 10,26,000
Less: Liabilities
14% Debentures 1,25,000
Trade payables 58,000
Workmen’s Profit-Sharing Reserve 50,000
Total Liabilities 2,33,000
Capital Employed 7,93,000
Less: ½ of the profit for the year [1/2 x 59,955] 29,978
Average Capital Employed 7,63,022

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 25
 Work Book : Corporate Financial Reporting

2. Profit during the year:

Particulars `
Profit before tax 86,000.00
Less: Depreciation on increase/(decrease) in fair value of:
Building (89,500 x 5/100) 4,475.00
Plant and Machinery (-27,500 x 15/100) (4,125.00)
85,650.00
Less: Tax @ 30% 25,695.00
Profit after tax 59,955.00
3. Calculation of Super Profit:
`
Future Maintainable Profit 1,25,600
Normal Profit (7,63,022 x 12%) 91,563.00
Super Profit 34,037.00
4. Calculation of Value of Goodwill:
Value of Goodwill = ` 34,037 x 3
= ` 1,02,111

Illustration 2
On March 31, 2023, the balance sheet of AK ltd disclosed the following position.
Assets `
Goodwill 70,000
Other Property, Plant and Equipment 6,00,000
Current Assets 4,40,000
11,10,000

Equity & Liabilities ` `

Equity:
Share Capital 5,00,000
Other Equity:
General Reserve 2,00,000
Profit and Loss Account: 1,20,000 3,20,000
14% Debenture 1,40,000
Current Liabilities 1,50,000
11,10,000

26 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

On the specified date, tangible Property, plant and equipment were independently assessed at
`4,50,000, and goodwill was valued at ` 80,000. The net profits for the three years were as follows:
2020-21, `1,04,500; 2021-22, `1,05,000; and 2022-23, `1,04,600. Of these profits, 20% was
allocated to the General Reserve, a proportion deemed reasonable for the industry in which the
company operates. The fair return on investment for this industry is estimated at 18%.
Calculate the value of the company’s share using
(a) the net assets method and
(b) the yield method. Ignore the impact of taxation.
Solution:
(a) Net Asset Value Method
` `
Goodwill as revalued 80,000
Tangible Fixed asset as revalued 4,50,000
Current Assets as per Balance Sheet 4,40,000
9,70,000
Less: 14% Debentures 1,40,000
Current Liabilities 1,50,000 2,90,000
Net Asset 6,80,000
No of Shares 50,000
Value Per Share = (Net Asset/No. of Shares) 13.60
(b) Yield Method:

Total Profit for the last Three year

2020-21 1,04,500
2021-22 1,05,000
2022-23 1,04,600 3,14,100
Average Profit for the last three Years 1,04,700
Less: Transfer to General Reserve @20% 20,940
Average Profit after transfer to General Reserve 83,760
Expected return on equity share capital =
16.75 (83,760/5,00,000) x 100
(Expected Profit/Paid up share capital) x 100
Value Per Share = (Expected Rate/Normal Rate x
9.31 (16.75/18 x10)
Paid up value of share)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 27
 Work Book : Corporate Financial Reporting

Illustration 3
The following is the balance sheet of SMC Ltd. as on March 31, 2023.
Assets `
Goodwill 43,000
Property, Plant and Equipment (Note 1) 5,10,000
Investment 1,10,000
Inventory 1,00,000
Trade Receivable 1,20,000
Cash and cash equivalents 40,000
9,23,000
Equity & Liabilities `
Equity
Equity Shares (Note 2) 4,30,000
Other Equity
Profit & Loss Opening Balance 43,000
Add: Profit for the year before providing for taxes 1,80,000 2,23,000
10% Debenture 1,30,000
Trade Payable 90,000
Provision for Taxation 50,000
9,23,000
Note 1: Property, Plant and Equipment
Building 2,10,000
Plant and Machinery 3,00,000
5,10,000
Note 2: There are 43,000 Equity Shares of ` 10 each
The profit figure includes ` 20,000 derived from investment income. The current market value of
the assets is as follows:
Particulars `
Building 2,60,000
Plant and Machinery 3,60,000
Investment 1,60,000

The tax rate applicable to the company is 30%. The normal return on capital employed in this
type of business is 11%. No adjustment for depreciation is necessary for the valuation of goodwill.
Calculate the value of goodwill based on three years’ purchase of the company’s super profit.

28 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Solution:
Average Trading Capital Employed
Particulars ` `
Assets:
Building 2,60,000
Plant and Machinery 3,60,000
Inventory 1,00,000
Trade Receivable 1,20,000
Cash and cash equivalents 40,000
Less: Liabilities
10% Debenture 1,30,000
Trade Payable 90,000
Provision for Taxation 50,000 (2,70,000)
Capital Employed 6,10,000
Less: Half of current year’s profit (56,000)
5,54,000
Working Notes:
The half of current year’s profit is calculated as below:
Particulars `
Profit for the year 1,80,000
Less: Non-trading income 20,000
1,60,000
Less: Income tax (assume 30%) 48,000
Current year’s profit 1,12,000
Half of Current Year’s Profit 56,000

Normal Profit = Average Capital Employed ×NRR = Average Capital Employed ×NRR ` 60,940
100
= 5,54,000 x 11
100
= ` 60,940
Super Profit = Average Profit – Normal Profit = ` 1,12,000 – ` 60,940 =` 51,060
Therefore, Goodwill = Super Profit × No. of years’ purchase
= ` 51,060 x 3 = ` 1,53,180

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 29
 Work Book : Corporate Financial Reporting

Illustration 4
Following is the Balance sheet of AK Limited as on 31st March, 2024:

Assets `
Goodwill 1,35,000
Property, Plant and Equipment (Note -1) 5,13,000
Investment (Note -2) 1,20,000
Trade Receivables (Note -3) 3,50,000
Inventories 2,10,000
Cash and Cash Equivalents 85,000
Preliminary expense 33,000
14,46,000
Equity & Liabilities `
Equity
Equity Shares (Note -4) 5,50,000
Other Equity:
Reserve Fund 1,56,000
Profit and Loss Account 1,70,000
Workmen Compensation Fund 35,000
Workmen Profit Sharing Fund 55,000 4,16,000
Trade Payables 3,30,000
Other Liabilities 1,50,000
14,46,000
Note 1: Property, Plant and Equipment
Assets Gross Value Depreciation Net Value
Building 2,80,000 56,000 2,24,000
Plant and Machinery 3,40,000 51,000 2,89,000
5,13,000
Note 2: Investment is for replacement of plant & Machinery
Note 3: Trade Receivable
Gross Reserve for Doubtful Net
3,90,000 40,000 3,50,000

Note 4: Equity share comprises 5,500 equities share of ` 100 each.

30 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Further Information:
(i) A Ltd. has been operating its business for several years and is now being taken over by another
company. For this purpose, you are required to value goodwill using the “Capitalisation of
Maintainable Profits Method.” The following additional information is provided:
(a) The profits earned by the company for the last three years were as follows:
● Year ended 31st March, 2022: ` 3,42,000
● Year ended 31st March, 2023: ` 2,97,000
● Year ended 31st March, 2024: ` 3,27,000
These figures represent profits before tax, and the tax remained consistently 30%.
(b) The new company plans to operate the business using its own board of directors, eliminating
the annual directors’ fees of ` 12,000 paid by A Ltd.
(c) A significant increase in business volume is expected, requiring an additional rent expense
of ` 18,000 per year.
(d) As of 31st March, 2025, the values of assets were:
● Buildings: ` 4,00,000
● Plant and machinery: ` 2,80,000
Provisions for doubtful debts are adequate, and there are no fluctuations in the values of
investments or stock.
(e) The liability under the Workmen Compensation Fund amounted to ` 9,000.
(f) The expected rate of return on similar businesses is 15%.
You are required to calculate goodwill based on the above information, ensuring that all
workings form part of your answer. Closing capital employed may be used for your calculations.
Solution:
Calculation of Average Profit
Simple Average = (Total profit (past year)/Total Number of years = ` 3,22,000
1. Calculation of future maintainable profit.

Particulars `
Simple Average Profit 3,22,000
Add: Directors’ fees not required in future 12,000
Less: Extra rent payable in future (18,000)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 31
 Work Book : Corporate Financial Reporting

FMP before tax 3,16,000

Less: Tax @ 30% 94,800
FMP after tax 2,21,200
2. Calculation of Capital Employed:
Particulars ` `
Tangible Trading Asset (at Average Value):
Building 4,00,000
Plant and Machinery 2,80,000
Investment 1,20,000
Trade Receivables 3,50,000
Inventories 2,10,000
Cash and Cash Equivalents 85,000 14,45,000
Less: External Liabilities:
Workmen Compensation Fund 9,000
Workmen Profit Sharing Fund 55,000
Trade Payables 3,30,000
Other Liability 1,50,000 5,44,000

Capital Employed 9,01,000

3. NRR = 15%
4. Number of years’ purchase = 3 years
5. Calculation for capitalised value of FMP:
Capitalised Value of FMP = FMP/NRR x 100 = ` 2,21,200/15 x 100 = ` 14,74,667
6. Calculation of Goodwill by capitalised of FMP Method:
Goodwill = Capitalised value of FMP – Capital Employed = ` 5,73,667

Illustration 5
From the following information supplied to you, ascertain the value of Goodwill of New SKT Ltd.
which is carrying business as retail trader under the capitalisation of profit method.
Balance sheet as on March 31, 2024
Assets `
Goodwill 53,000
Property, Plant and Equipment (Note 1) 4,60,000
Inventories 3,10,000
Trade Receivables (–) Provisions for bad debts 2,40,000
10,63,000

32 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Equity & Liabilities `

Equity:
Equity Shares 6,00,000
Other Equity:
Profit and Loss Appropriation A/c 1,15,400
Bank Overdraft 1,18,600
Provision for Taxation 45,000
Trade Payable 1,84,000
10,63,000
Note 1: Property, Plant and Equipment
Assets Net Value
Building 2,35,000
Plant and Machinery 2,25,000
4,60,000
The company began operations in 2017 with a paid-up capital of ` 6,00,000. The profits for recent
years (after taxation) are as follows:
Year ending March, 31 `
2020 Loss 45,000
2021 98,000
2022 1,25,000
2023 1,38,000
2024 1,50,000
(a) The loss in 2020 was due to a prolonged strike.
(b) The company has been paying income tax at an average rate of 25%, but the rate is expected to
increase to 30% moving forward.
(c) Dividends were distributed at a rate of 12% for the year ending March 31, 2024.
(d) The market price of shares stood at ` 135 as of March 31, 2024.
(e) Profits up to 2024 were calculated after deducting ` 45,000 as remuneration for the managing
director. From April 1, 2024, the Government has approved an increased remuneration of `
75,000.
(f) The company has secured a contract that allows for the procurement of materials at
advantageous prices, with the benefit estimated at ` 65,000 per annum for the next five years.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 33
 Work Book : Corporate Financial Reporting

Solution:
1. Calculation for Average Profit:
Note: Loss in the years 2020 is to be ignored because it was due to prolonged strike which is a
abnormal event in the normal course of business. We are excluding profit of the years 2021 also
because impact of the strike was there in that year also.
2022 2023 2024
Profit After tax = 1,25,000 1,38,000 1,50,000
Income Tax Rate 25% 25% 25%
Profit before tax = 1,66,667 1,84,000 2,00,000
2. Calculation for Weighted Average Profit:
Year Profit Weights Product
2022 1,66,667 1 1,66,667
2023 1,84,000 2 3,68,000
2024 2,00,000 3 6,00,000
6 11,34,667
Weighted Average Profit = ` 1,89,111
3. Calculation for FMP:
Weighted Average Profit 1,89,111
Less: Extra director’s fees in future (30,000)
Add: Profit likely to be earned in
65,000
future
FMP before tax 2,24,111
Less: Tax at 30% 67,233
FMP after tax 1,56,878
4. Calculation for Capital Employed:
Particulars ` `
Tangible Trading Assets:
Building 2,35,000
Plant & Machinery 2,25,000
Inventories 3,10,000
Trade Receivable 2,40,000 10,10,000
Less: External Liabilities:
Bank OD 1,18,600
Provision for Tax 45,000
Trade Payable 1,84,000 3,47,600
Capital Employed 6,62,400

34 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

5. Calculation for NRR:

NRR= (Dividend Per Share/Market Price Per Share) x 100 = 9% (12/135*100)
6. Calculation of Normal Profit:
Normal Profit = Capital Employed x NRR = ` 59,616 (6,62,400*9%)
7. Calculation of Super Profit:
Super Profit = FMP – Normal Profit = ` 97,262 (` 1,56,878- ` 59,616)
8. Calculation of Goodwill by capitalisation of super profit method:
Goodwill = (Super profit/NRR) x 100 = ` 10,80,689

Illustration 6
On 31st Dec 2022, the Balance Sheet of OFC Ltd. was as follows:
Assets `
Property, Plant and Equipment (Note -1) 11,10,000
Inventory 10,50,000
Trade Receivable 4,65,000
26,25,000
Equity & Liabilities `
Equity
Equity Shares 16,00,000
Other Equity
Profit and Loss A/c 3,45,000
Trade Payable 2,41,000
Bank Overdraft 63,000
Provision for taxation 1,42,000
Dividend equalisation fund 2,34,000
26,25,000
Note 1: Property, Plant and Equipment
Building 7,25,000
Plant and Machinery 3,85,000
11,10,000
Note 2: The company have 16000 equities share of `100 each.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 35
 Work Book : Corporate Financial Reporting

The company’s net profits, after deducting all working expenses and making provisions for
depreciation and taxes, are as follows:
2018: ` 2,45,000
2019: ` 3,08,000
2020: ` 2,90,000
2021: ` 3,20,000
2022: ` 3,05,000
As of December 31, 2022, the Buildings were revalued at ` 8,15,000, and the Plant & Machinery at
` 5,35,000. Considering the nature of the company’s operations, a 12% return on capital is deemed
reasonable.
You are required to calculate the value of the company’s shares. The revised property, plant and
equipment values should be incorporated into the calculation, and goodwill should be determined
based on 5 years’ purchase of the annual super profits. Ignore the depreciation on the increase
value of property, plant and equipment.
Solution:
i) Computation of Goodwill:
Calculation of average capital employed:
Total net assets:
Buildings 8,15,000
Plant & Machinery 5,35,000
Stock 10,50,000
Sundry Debtors 4,65,000
28,65,000
Less: External Liabilities
Trade Payable
2,41,000
Bank Overdraft 63,000
Provision for taxation 4,46,000
1,42,000
Net assets or capital employed 24,19,000
Less: ½ of net profit of 2022 ( 3,05,000 x ½) 1,52,500
Average capital employed 22,66,500
ii) Normal Profit = Average capital employed x Normal rate of return =` 2,71,980 (22,66,500 x 12%)
iii) Average Profit
Total Profits = 14,68,000
Average Profit = 2,93,600

36 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

iv) Super Profit = Average profit – Normal Profit = 21,620 (2,93,600 - 2,71,980)
v) Goodwill = Super profit x No. of years purchase = 1,08,100 (21,620 x 5)
Valuation of Shares
Net assets (as above) = 24,19,000
Goodwill = 1,08,100
Net assets available for equity shareholders = 25,27,100 (24,19,000 + 1,08,100)
Intrinsic value of shares = Net asset available/No. of Share = 157.94 (25,27,000/16,000)

Illustration 7
Balance Sheet of Mr. X as on 31.12.2024 was as under:
Assets `
Property, Plant and Equipment (Note 1) 4,42,000
Inventory 18,000
Cash and cash equivalents 42,000
5,02,000
Equity & Liabilities `
Equity
Equity Shares of ` 10 each 3,50,000
Trade Payable 96,000
Bills Payable 56,000
5,02,000
Note 1: Property, Plant and Equipment

Land 2,30,000
Machinery 1,60,000
Furniture 52,000
4,42,000
The business profits for the five years ending December 31, 2024, are as follows:
Year Profit (`)
2020 48,000
2021 50,000
2022 53,000
2023 58,000
2024 61,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 37
 Work Book : Corporate Financial Reporting

The assets have been revalued as follows:

● Land: ` 2,34,000
● Machinery: ` 1,65,000
● Furniture: ` 48,000
A reasonable return on the capital invested is considered to be 12% per annum. Additionally,
assume that the normal management remuneration is `9,000. Using the Capitalization Method,
calculate the goodwill of the business.
Solution:
(A) Capitalisation of Average profit:
Average Profit = Total Profit of 5 yrs/5 = 54,000
Less: Remuneration (9,000)
45,000
Calculation of normal capital by capitalizing average Profit = ` 3,75,000 (45000/12%)
` `
Land 2,34,000
Machinery 1,65,000
Furniture 48,000
Inventory 18,000
Cash and cash equivalents 42,000
Less: Liabilities 5,07,000
Trade Payable (96,000)
Bills Payable (56,000)
(1,52,000)
Net asset (Capital
3,55,000
Employed)
Goodwill = Normal Capital - Actual Capital Employed = ` 20,000
(B) Capitalization of Super Profit:
`
Average Profit 45,000
Less Normal Profit 12% of
42,600
`355000
Super Profit 2,400
Goodwill = 2,400 x 100/12 = ` 20,000.

38 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

3 Accounting of Financial Instruments

[Study Material - Module 3]

Illustration 1
On 31st March 2022, PQR Ltd. issued the following preference shares for its new project.
i. 1 Lakh preference shares at ` 3 each. No dividends are payable. PQR Ltd. plans to redeem these
shares in three years by issuing ordinary shares worth ` 3 lakhs, with the number of ordinary
shares based on their fair value as of 31st March 2025
ii. 2 lakh preference shares at ` 2.80 each. No dividends are payable. These shares will be
redeemed in two years by issuing 3 lakh ordinary shares
iii. 4 lakh preference shares at ` 2.50 each. These shares are not mandatorily redeemable and will
only pay dividends if dividends are declared on ordinary shares
Answer these questions with reasons whether these financial instruments should be classified as
financial liabilities or equity in the books of PQR Ltd. for the year ending 31st March 2022.
Solution:
(i) As defined, a financial liability is a contract that could potentially be settled in a variable
number of the entity’s own equity instruments. Hence, a contract that requires the entity to
deliver a number of its equity instruments equivalent in value to a specified amount should be
treated as a liability.
PQR Ltd. is required to redeem the first lot of preference shares by issuing ordinary shares
worth ` 3 lakhs. Therefore, the ` 3 lakhs received from this preference share issuance should
be recognized as a liability in the Balance sheet.
(ii) A contract to be settled through the delivery of a fixed number of the entity’s own equity
instruments is considered an equity instrument.
Since PQR Ltd. will redeem the second preference share issuance with a fixed number of
ordinary shares, the ` 5.6 lakhs raised from this issuance should be classified as equity in the
Balance sheet.
(iii)A financial liability arises if there is a contractual obligation to deliver cash or another financial
asset.
Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 39
 Work Book : Corporate Financial Reporting

In this case, PQR Ltd. is not required to redeem the instrument with cash, and the payment of
dividends is conditional upon the payment of dividends on ordinary shares. Since there is no
obligation to pay dividends on ordinary shares, there is no obligation to pay dividends on these
preference shares.
Thus, this instrument does not constitute a financial liability, and the proceeds from the
preference share issue should be classified as equity in the Balance sheet.

Illustration 2
On 1 April 2020, X Ltd. issued a loan note with a nominal value of ` 50,000. The note was issued
at a discount of 16% of its nominal value, with issue costs of ` 2,000. The note carries an annual
interest rate of 5% of the nominal value, payable in arrears. The bond will be redeemed on 1 April
2025 (after 5 years) at a premium of ` 4,611. The effective interest rate is 12% per year.
How should this loan note be accounted for in the financial statements of X Ltd. Find out the total
finance cost and balance of loan which will appear in the 5 years’ Balance Sheet. Pass the necessary
journal entry for the first year.
Solution:
Calculation of Initial Liability:
(`)
Face value 50,000
Less: 16% discount (8,000)
Less: Issue costs (2,000)
Initial recognition of liability 40,000

Measurement of liability at amortised cost:

Year Opening Finance Cost Cash Closing
Balance (Liability*12%) Payments Balance
(`50,000 × 5%)
` ` ` `
1 40,000 4,800 (2,500) 42,300
2 42,300 5,076 (2,500) 44,876
3 44,876 5,385 (2,500) 47,761
4 47,761 5,731 (2,500) 50,992
5 50,992 6,119 (2,500) 54,611
–––––––– ––––––––
27,111 (12,500)
–––––––– ––––––––

40 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

As per the above calculations, the total finance cost of the loan over the five-year period amounts
to ` 27,111 which is recorded in Profit & loss statement in each year.
Journal Entries
In the books of X Ltd.
(i) Bank A/c Dr. 40,000
To Loan Note A/c 40,000
(Being liability recognised initially based on the net proceeds received)

(ii) Financial Cost A/c Dr. 4,800

To Loan Note A/c 4,800
(Being finance cost for the year booked)

(iii) Loan Note A/c Dr. 2,500

To Bank A/c 2,500
(Being payout recognised @5% is adjusted with the loan)

Illustration 3
On 1 April 2021, A Ltd. issued a financial liability with a nominal value of ` 1 crore. The liability
carries an interest rate of 5%, payable annually in arrears, and is due for repayment on 31 March
2024. A Ltd.’s business involves trading financial liabilities in the short-term market.
As of 31 March 2022, market interest rates have increased to 8%. The discounting factor for 8% is:

Year 1 0.926
Year 2 0.857
Explain how the financial liability should be accounted for as on 31 March 2022. Assuming that
there is no active market for this instrument.
Solution:
Since the financial liability is traded in the short term, it is classified as measured at fair value
through profit or loss. This requires the liability to be revalued at its fair value at the reporting
date.
Further, there is no active market for this instrument, its fair value can be estimated by discounting
the expected future cash flows using the current market interest rate of 8%. The calculations are
as follows-

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 41
 Work Book : Corporate Financial Reporting

Date Cash Flow (` lakhs) Discount Factor Present Value (` lakhs)

31/03/23 5 0.926 4.63
31/03/24 105 0.857 89.99
Total - - 94.62
The nominal value of the liability is ` 1 crore, while its fair value at the reporting date is ` 94.62
lakhs. The reduction of ` 5.38 lakhs is accounted for as follows:
Debit Financial Liability: ` 5.38 lakhs
Credit Profit or Loss: ` 5.38 lakhs

Illustration 4
B Ltd. very often acquires assets that are measured at fair value through profit or loss. To finance
these purchases, B Ltd. issues bonds. To avoid an accounting mismatch, the bonds are designated
to be measured at fair value through profit or loss.
During the reporting period, the fair value of the bonds decreased by ` 4 crore, and out of this ` 1.5
crore of the reduction attributed to changes in B Ltd.’s creditworthiness.
Explain the appropriate accounting treatment for the bonds.
Solution:
When a financial liability is designated at fair value through profit or loss to mitigate an accounting
mismatch, the fair value changes must be separated into two components:
• fair value movement due to own credit risk, will go to other comprehensive income (OCI)
• the remaining fair value movement, will go to profit or loss.
Accordingly, in the given case, value of B Ltd.’s liability will be reduced by ` 4 crore. A credit of ` 1.5
crore will go to OCI and a credit of ` 2.5 crore will go to in profit or loss.

Illustration 5
On 1 April 2021, Z Ltd. issued a three-year convertible bond with a nominal value of ` 50,000
crores at par. It does not involve any issue cost. The other key details are as follows:
• The bond has a coupon rate of 10%, with interest payable annually in arrears on 31 March.
• The bond will be redeemed at par on 1 April 2024.
• Bondholders have the option to convert the bond into equity shares. The conversion terms
allow bondholders to receive two 25 ` equity shares for every ` 100 owed on 1 April 2024.
• Similar bonds without conversion rights issued by comparable entities bear an interest rate of 12%.

42 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Explain how Z Ltd. should account for this transaction, assuming that all bondholders choose to
convert the bond into equity share.
Solution:
1. Allocating the Proceeds
On initial recognition, the proceeds from the convertible bond must be divided into liability and
equity components.
Calculation of the Liability Component:

Date Cash Flow (` Cr) Discount Factor (12%) Present Value (` Cr)
31-March-22 5,000 1/1.12 4,464.29
31-March-23 5,000 1/1.12² 3,985.97
31-March-24 5,000 1/1.12³ 3,558.90
1-April-24 50,000 1/1.12³ 35,589.01
Total - - 47,598.17
• Liability Component (A): ` 47,598.17 Cr
• Proceeds of Issue (B): ` 50,000.00 Cr
• Equity Component (B - A): ` 2,401.83 Cr
2. Measuring the Liability at Amortized Cost
Financial Opening Balance Finance Cost (12%) Payment Closing Balance
Year (` Cr) (` Cr) (` Cr) (` Cr)
2021-22 47,598.17 5,711.78 (5,000) 48,309.95
2022-23 48,309.95 5,797.19 (5,000) 49,107.14
2023-24 49,107.14 5,892.86 (5,000) 50,000.00
3. Conversion of the Bond
On 1 April 2024, all bondholders opt for conversion. The carrying amounts of the bond components
are as follows:
Component Amount (` Cr)
Equity 2,401.83
Liability – Bond 50,000.00
Total 52,401.83

Conversion Terms:
Bondholders receive two 25 ` equity shares for every `100 owned. For `50,000 Cr, 1,000 Cr
shares are issued:

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 43
 Work Book : Corporate Financial Reporting

• Share Capital: ` 25,000 crore (1,000 Cr shares × ` 25/share)

• Share Premium: ` 27,401.83 crore (` 52,401.83 Cr - ` 25,000.00 Cr)
Journal Entry:
Account Debit (` Cr) Credit (` Cr)
Dr Other Components of Equity 2,401.83
Dr Liability 50,000.00
Cr Share Capital 25,000.00
Cr Share Premium 27,401.83

(Being the liability fully extinguished, and the entire amount is classified as equity after its
conversion)

Illustration 6
On 1 April 2020, XYZ Ltd. issues a three-year convertible loan with a nominal value of ` 100,000
at a coupon rate of 7%. The market interest rate for a comparable loan without conversion rights
is 10%. The conversion terms allow bondholders to receive one equity share (nominal value ` 1)
for every ` 10 of debt. Bondholders may choose to convert their loan into equity or have the loan
redeemed at par on 31 March 2023.
Explain the accounting treatment for the loan in the following scenarios:
(a) All bondholders opt for conversion.
(b) All of the bondholders opt for redemption.
Solution:
Up to 31 March 2023, the accounting treatment remains identical until the conversion or
redemption date.
1. Allocating the Proceeds
Since loan is convertible, it need to be split between the liability and equity components:
Calculation of the Liability Component:
Year ended Cash Flow (`) Discount Factor (10%) Present Value (`)
31/03/21 7,000 1/1.10 6,363.64
31/03/22 7,000 1/1.10² 5,785.12
31/03/23 7,000 1/1.10³ 5,259.20
31/03/23 100,000 1/1.10³ 75,131.48
Total - - 92,539.44

44 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

• Liability Component (A): ` 92,539.44

• Proceeds of Issue (B): ` 100,000
• Equity Component (B - A): ` 7,460.56
2. Annual Finance Costs and Carrying Amounts
The liability component is measured at amortized cost. The finance costs and carrying amounts
are as follows:
Opening Balance Finance Cost Cash Paid Closing Balance
Year
(`) (10%) (`) (`) (`)
2020-21 92,539.44 9,253.94 (7,000) 94,793.39
2021-22 94,793.39 9,479.34 (7,000) 97,272.73
2022-23 97,272.73 9,727.27 (7,000) 100,000
3. Conversion or Redemption
(a) Conversion
At 31 March 2023, the carrying amounts are:
Component Amount (`)
Equity 7,460.56
Liability – Bond 100,000
Total 107,460.56

If bondholders opt for conversion, 10,000 equity shares (` 100,000 ÷ 10) with a nominal value of
` 1 each are issued. The remaining ` 97,460.56 is recorded as share premium.
(b) Redemption
If all bondholders choose redemption, the carrying amounts at 31 March 2023 remain unchanged:
Component Amount (`)
Equity 7,460.56
Liability – Bond 1,00,000

The ` 100,000 liability is settled through a cash payment and the equity component of ` 7460.56
remains in equity.

Illustration 7
On 1 April 2021, ABC Ltd. purchased a `1,00,000 6% bond for `95,000, incurring `3,000 as
transaction costs. The bond pays interest annually in arrears and will be redeemed at a premium
of `3,973 over its nominal value on 31 March 2024. The effective interest rate is 8%.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 45
 Work Book : Corporate Financial Reporting

The fair value of the bond at the end of each year is as follows:
• 31/03/22: ` 1,10,000
• 31/03/23: ` 1,04,000
How the bond would be accounted for in the following scenarios give the calculation long with its
Presentation in Financial Statements.
(a) ABC Ltd.’s business model is to hold the bond until it matures.
(b) ABC Ltd.’s business model is to hold the bond until maturity but with the flexibility to sell it if
more attractive investment opportunities arise.
(c) ABC Ltd.’s business model is to trade bonds in the short term. Assume that ABC Ltd. sold the
bond at its fair value on 1 April 2022.
Solution:
(a) Business Model: Hold the Asset Until Redemption- to be classified as measured at amortized
cost
Initially the bond is recognized at its fair value plus transaction costs, totaling ` 98,000 (` 95,000
+ ` 3,000). Interest income is recognized using the effective interest rate of 8%.
The amortization schedule is as follows:
Year Closing
Opening Balance Interest (8%) Receipt
ended Balance
31/03/22 ` 98,000 ` 7,840 ` 6,000 ` 99,840
31/03/23 ` 99,840 ` 7,987 ` 6,000 ` 101,827
31/03/24 ` 101,827 ` 8,146 ` 6,000
NIL
Plus ` 1,03,973*
*Redemption amounts along with premium.
Presentation in Financial Statement
FY Interest for the year (`) Bond value on Balance Sheet date (`)
2021-22 7,840 99,840
2022-23 7,987 101,827
2023-24 8,146 Nil
(b) Business Model: Hold Until Redemption, but may sell if Higher Returns Are Available
For this model, the bond is classified as measured at fair value through other comprehensive
income (FVOCI). The bond is initially recognized at its fair value plus transaction costs, which
totals ` 98,000 (` 95,000 + ` 3,000).

46 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Interest income is recognized in profit or loss using the effective interest rate of 8%, and the bond
is revalued to its fair value at year-end, with any gain or loss recognized in other comprehensive
income as per the below table:
Year Opening Interest# Receipt (`) Total Gain/ Closing
ended Balance (`) (`) (`) (Loss) (`) Balance (`)
31/03/22 98,000 7,840 6,000 99,840 10,160 110,000
31/03/23 110,000 7,987 6,000 111,987 (7,987) 104,000
31/03/24 104,000 8,146 6,000 2,173 (2,173) NIL
Plus 1,03,973*
# Interest as per amortization table [Refer part (a)]
* Redemption amounts along with premium
Presentation in Financial Statement
FY Interest for Gain/ (Loss) on revaluation Bond value on Balance
the year (`) recognized to OCI for the year (`) Sheet date (`)
2021-22 7,840 10,160 1,10,000
2022-23 7,987 (7,987) 1,04,000
2023-24 8,146 (2,173) Nil
(c) Business Model: Trade Bonds in the Short-Term
For this model, the bond is classified as measured at fair value through profit or loss (FVTPL). The
bond is initially recognized at its fair value of ` 95,000, and the transaction costs of ` 3,000 are
expensed in profit or loss.
In the year ending 31 March 2022, interest income of ` 6,000 (` 100,000 × 6%) is recognized in
profit or loss. The bond is revalued to ` 110,000, with a gain of ` 15,000 (` 110,000 – ` 95,000)
recognized in profit or loss.
On 1 April 2022, the bond is sold for its fair value of ` 110,000, and the financial asset is derecognized.

Illustration 8
X Ltd.’s trade receivables are short-term and do not have a significant financial component. Based
on historical default rates, adjusted for any changes in forward-looking estimates, X Ltd. has
estimated the following default rates for its trade receivables as on 31st March 2023:
Category Not Overdue within Overdue within Overdue for more
Overdue 1-30 days 31-60 days than 60 days
Default Rate 0.6% 1.4% 6.2% 15.8%
The gross carrying amounts of X Ltd.’s trade receivables as on 31 March 2023, the reporting date,
are as follows:

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 47
 Work Book : Corporate Financial Reporting

Category Gross Carrying Amount (` Lakh)

Not Overdue 101
Overdue within 1-30 days 43
Overdue within 31-60 days 16
Overdue for more than 60 days 10
As on 1/4/2022, the loss allowance for trade receivable is ` 2 Lakhs.
Calculate the allowance on trade receivable that the Co., X ltd. should account for in its financial
statements for the year ending 31st March 2023.
Solution:
The lifetime expected credit losses on the trade receivables are:
Lifetime expected Credit looses
Not overdue (`101 lakhs x 0.6%) 0.61
Overdue within 1-30 days (` 43 lakhs x 1.4%) 0.60
Overdue within 31-60 days (`16 lakhs x 6.2%) 0.99
Overdue for more than 60 days (`10 lakhs x 15.8%) 1.58
3.78
The total lifetime expected credit losses amount to ` 3.78 Lakhs.
` (in Lakhs)
Allowance as on 31/03/2023 3.78
Less: Opening Balance as on 1/04/2022 2
Additional Allowance required for the year ended 31/03/23 1.78

Illustration 9
On 1 April 2021, N Ltd. acquired a bond for ` 1 lakh, which is classified as a financial asset measured
at amortised cost. The bond pays an interest of 12%, which is settled in arrears, and the repayment
of the principal is due on 31 March 2023. The effective interest rate is 12%.
On 31 March 2022, N Ltd. received an interest payment of ` 12,000. N Ltd. estimated that there
is a 5.5% probability of default on the bond over the next 12 months. In the event of a default
within the next 12 months, N Ltd. expects that no further interest will be received, and only 60%
of the principal amount will be received back on 31 March 2023. On 31 March 2022, the credit risk
associated with the asset is considered low.
Calculate the following:

48 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

 the impairment loss, if any, for financial year 2021-22.

 The carrying value of financial asset as on 31/03/2022.
 The interest income to be recognised for the financial year 2021-22.
Solution:
Since the credit risk associated with the financial asset has not increased significantly, the loss
allowance should be based on the 12-month expected credit losses. This calculation must take into
account a range of potential outcomes, as well as the time value of money.
The calculated credit loss for the asset = ` 52,169.20 (W1)
The expected credit loss = ` 52,169.20 (present value of expected cash shortfall) * 5.5%
(probability of default)
= ` 2,869
Hence, loss allowance = ` 2,869 (to be charged to P/L for the year ended 31/03/2022)
The financial asset’s net carrying amount = ` 97,131 (` 100,000 - ` 2,869).
Interest in subsequent periods will continue to be charged on the gross carrying amount of
`100,000 i.e. ` 1,00,000 x 12/100 = ` 12,000
W1: Calculation of Present Value of Expected Shortfall:
Year ended Expected Cash Shortfall (`) Discount Rate Present Value (`)
31/03/22 12,000 0.8929 10,714.80
31/03/23 12,000 0.7972 9,566.40
31/03/23 40,000 0.7972 31,888.00
Total 52,169.20

Illustration 10
On 1 June 2019, XYZ Ltd. provided a loan of ` 12,000 to ABC Ltd., which has a four-year term. The
coupon rate on the loan is 6%, and the effective interest rate is also 6%. Interest payments are
made annually at the end of each year.
On 1 June 2022, ABC Ltd. informs XYZ Ltd. that it is facing significant financial difficulties. At this
point, the current market interest rate has increased to 8%.
On 01/06/2022 the company XYZ Ltd. has estimated the following in respect of this loan.
About Interest It will not be received
About Loan Only ` 6,000 will be received
At this time, XYZ Ltd. has already recognized a loss allowance of ` 1,500 for the loan to ABC Ltd..
How should the loan be accounted for at this point?

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 49
 Work Book : Corporate Financial Reporting

Solution:
Based on the information about loan of ABC Ltd., it indicates that the asset has become credit
impaired as ABC Ltd. is facing financial difficulties.
Calculation of Impairment Loss:
Particulars Amount (`)
Carrying Amount (Working Note 1) 12,000
Less: Present value of expected future cash flows (Working Note 2) 5,660
Expected Loss 6,340
Less: Loss Allowance already recognized 1,500
Additional loss allowance required 4,840
Working Notes:
1. Since, the coupon rate and the effective interest rate are identical, the asset’s carrying amount
remains fixed at ` 12,000.
2. The present value of the expected future cash inflows, discounted using the original effective
interest rate, amounts to ` 5,660 (` 6,000 × 1/1.06).
Given that the asset is credit impaired, interest income will now be calculated based on the net
carrying amount of ` 5,660 (gross carrying amount of ` 12,000 less the loss allowance of `6,340).
Consequently, in the final year of the loan, interest income of ` 340 (5,660 × 6%) will be recognized
in profit or loss.

Illustration 11
On 1st April 2018, V Limited issues convertible bonds worth ₹50,00,000. These bonds have a
tenure of five years with a face value of ₹20 each and carry an annual interest rate of 5%, payable
at the end of each financial year. The bonds are issued at face value, and each bondholder has the
option to convert their bond into one ordinary share of V Limited at any time within the five-year
period. Comparable companies with a similar risk profile have recently issued non-convertible
debt at 7% per annum under similar terms.
Based on the above information,
1. Pass the journal entries for the initial recognition of the bonds.
2. Determine the interest expense for each of the five years during the bond’s tenure.
3. Provide the accounting treatment if the bondholders choose to convert their bonds into
ordinary shares at the end of the fourth year.

50 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Solution:
(i) Computation of liability and equity components:

Year Cash Flow (`) Discounting factor @ 7% (`) Present Value (`)
1 2,50,000 1/(1.07)1 2,33,645
2 2,50,000 1/(1.07)2 2,18,360
3 2,50,000 1/(1.07)3 2,04,074
4 2,50,000 1/(1.07)4 1,90,724
5 2,50,000 1/(1.07)5 1,78,247
5 50,00,000 1/(1.07)5 35,64,931
Total 45,89,981
• Liability Component (A): ` 45,89,981
• Proceeds of Issue (B): ` 50,00,000
• Equity Component (B - A): ` 4,10,019
Journal Entries:
Date Particulars Debit Credit
Amount (₹) Amount (₹)
1st Cash/ Bank A/c 50,00,000
April, To Convertible bonds (liability) A/c 45,89,981
2018 To Convertible bonds (equity component) A/c 4,10,019
(Being entry to record the convertible bonds and the
recognition of the liability and equity components)

31st Interest expense A/c 3,21,299

March, To Cash/ Bank A/c 2,50,000
2019 To Convertible bonds (liability) A/c 71,299
(Being entry to record the interest expense)
(ii) Computation of stream of interest expense:
Year Opening Balance (`) Interest expense @ 7% (`) Payments (`) Closing Balance (`)
1 45,89,981 3,21,299 (2,50,000) 46,61,280
2 46,61,280 3,26,290 (2,50,000) 47,37,570
3 47,37,570 3,31,630 (2,50,000) 48,19,200
4 48,19,200 3,37,344 (2,50,00 0) 49,06,544
5 49,06,544 3,43,456# (2,50,000) 50,00,000
Total 16,60,021 (12,50,000)

# Balancing figure to make maturity amount = ` 50 Lakh

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 51
 Work Book : Corporate Financial Reporting

(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:
Date Particulars Debit Credit
Amount (₹) Amount (₹)
31st March, Interest expense A/c 3,37,344
2022
To Cash/ Bank A/c 2,50,000
To Convertible bonds (liability) A/c 87,344
(Being entry to record interest expense for the period)

31st March, Convertible bonds (liability) A/c 49,06,544

2022
Convertible bonds (equity component) A/c 4,10,019
To Ordinary share capital A/c 53,16,563
(Being entry to record the conversion of bonds into
ordinary shares of V Limited).

Illustration 12
On 1st April 2018, X Ltd. issues convertible bonds amounting to ₹1.2 crore. These bonds have a
maturity period of 8 years, a face value of ₹10 each, and an annual interest rate of 5.5%, payable
at the end of each financial year.
The bonds are issued at face value, and each bondholder has the option to convert their bond into
one ordinary share of X Ltd. at any time during the 8-year period.
Debt instruments with similar terms but without the conversion option have recently been issued
by companies with a comparable risk profile at an annual interest rate of 8%.
The company incurred `10 Lakh in issue costs, increasing the effective interest rate to 9.45%.
Based on the data above,
(i) Pass the journal entries in the books of X Ltd. from Financial Year 2018-19 to Financial Year
2021-22.
(ii) Compute the interest expense for each of the 8 years of the bond’s tenure.
(iii) Prepare the accounting entries if bondholders opt to convert their bonds into ordinary shares
at the end of the fourth year, after receiving the interest payment for that year.

52 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Solution:
(i) Computation of Equity and Liability component of Convertible Bonds:

Cash Flow Discounting factor 8% Present Value

Year
` ` `
1 6,60,000 1/1.08 1
6,11,111
2 6,60,000 1/1.08 2
5,65,844
3 6,60,000 1/1.08 3
5,23,929
4 6,60,000 1/1.084 4,85,120
5 6,60,000 1/1.085 4,49,185
6 6,60,000 1/1.08 6
4,15,912
7 6,60,000 1/1.08 7
3,85,104
8 6,60,000 1/1.08 8
3,56,577
8 1,20,00,000 1/1.08 8
64,83,227
Total 1,02,76,008
Liability Component= ` 1,02,76,008
Proceeds of issue= ` 1,20,00,000
Equity Component= ` 17,23,992
The issue cost will have to be allocated between the liability and equity in proportion to their
balances as per the initial recognition.
After allocating the issue cost, the liability and equity will have carrying amounts as follows:

Liability (`) Equity (`)

Proceeds 1,02,76,008 17,23,992
Issue cost (8,56,334) (1,43,666)
Total 94,19,674 15,80,326
Journal Entries
Date Particulars Dr. Cr
1st April, Bank A/c 1,20,00,000
2018
To Convertible bonds A/c (Liability) 1,02,76,008
To Convertible bonds A/c (Equity) 17,23,992
(Being recognition of convertible bonds at the date of
issuance into liability and equity components)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 53
 Work Book : Corporate Financial Reporting

1st April, Convertible Bond (Liability) 8,56,334

2018
Convertible Bond (Equity) 1,43,666
To Bank A/c 10,00,000
(Being allocation of issue cost)

31st March, Interest expense A/c 8,90,182

2019
To Bank A/c 6,60,000
To Convertible bonds A/c (Liability) 2,30,182
(Being interest expense recorded at effective interest
rate of 9.45% and actual interest paid @ 5.5%)

31st March, Interest expense A/c 9,11,935

2020
To Bank A/c 6,60,000
To Convertible bonds A/c (Liability) 2,51,935
(Being interest expense recorded at effective interest
rate of 9.45% and actual interest paid @ 5.5%)

31st March, Interest expense A/c 9,35,743

2021
To Bank A/c 6,60,000
To Convertible bonds A/c (Liability) 2,75,743
(Being interest expense recorded at effective interest
rate of 9.45% and actual interest paid @ 5.5%)

31st March, Interest expense A/c 9,61,801

2022
To Bank A/c 6,60,000
To Convertible bonds A/c (Liability) 3,01,801
(Being interest expense recorded at effective interest
rate of 9.45% and actual interest paid @ 5.5%)

(ii) Table showing computation of interest expense using amortised cost:

Interest Expenses @
Opening Balance
Year 9.45% Cash Payments Closing Balance
` ` ` `
1 94,19,674 8,90,182 (6,60,000) 96,49,856
2 96,49,856 9,11,935 (6,60,000) 99,01,791
3 99,01,791 9,35,743 (6,60,000) 1,01,77,534
4 1,01,77,534 9,61,801 (6,60,000) 1,04,79,335

54 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

5 1,04,79,335 9,90,322 (6,60,000) 1,08,09,657

6 1,08,09,657 10,21,538 (6,60,000) 1,11,71,195
7 1,11,71,195 10,55,705 (6,60,000) 1,15,66,900
8 1,15,66,900 10,93,100 (6,60,000) 1,20,00,000
Total 78,60,326 (52,80,000)
(iii) When holders of the bonds elect to convert the bonds to ordinary shares at the end of the 4th
year (after receiving their interest payments ), the entries would be:
Journal Entries:

Date Particulars Dr. Cr

31st Convertible bonds A/c (liability) 1,04,79,335
March, Convertible bonds A/c (equity) 15,80,326
2022
To Ordinary share capital A/c 1,20,59,661
(Being bonds converted into ordinary shares of X Ltd.)

Illustration 13
ASN Ltd. held a 3% stake in S Ltd., a public limited company. This investment was designated as fair
value through other comprehensive income (FVOCI) and was measured at a fair value of `50 Lakh
as on 31 March 2024, with a cumulative gain of `400,000 reported in equity. On 31 March 2024, G
Ltd., another public limited company, acquired all of S Ltd.’s share capital. ASN Ltd. received shares
in G Ltd. valued at `55 Lakh in exchange for its investment in S Ltd..
Discuss the accounting treatment of the share exchange in the financial statements for the year
ended 31 March 2024 assuming that the shares in G Ltd. Is not held for trading.
Solution:
In this case, the transfer of shares in S Ltd. qualifies for derecognition as ASN Ltd. no longer retains
any risks and rewards of ownership. ASN Ltd. has obtained a new financial asset which is the
shares in G Ltd. Financial assets are initially recognised at fair value. The shares in G Ltd. should
therefore be initially recognised at `55 Lakh. Since, it is not held for trading, a designation could
be made upon initial recognition to account for this new financial asset at fair value through other
comprehensive income.
A profit on disposal of `5 Lakh will be recorded in the statement of profit or loss. This is the
difference between the initial carrying amount of the Shares in G Ltd. and the carrying amount of
the shares in S Ltd. that have been derecognised.
The entries required are:

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 55
 Work Book : Corporate Financial Reporting

Particulars Debit Amount (₹ Lakh) Credit Amount (₹ Lakh)

Financial asset (shares in G Ltd.) 55
Financial asset (shares in S Ltd.) 50
Profit on disposal 5
The cumulative gain of `400,000 reported in equity through OCI will remain in equity being in the
nature of non re-classifiable item.

Illustration 14
N Limited has extended a loan of ₹20 lakh to O Ltd. for a tenure of 5 years at an interest rate of
5% per annum, which matches the Treasury bond yield for equivalent maturity. However, O Ltd.
incremental borrowing rate is 11%.
Since the loan is provided at a below-market interest rate, Ind AS 109 mandates that financial
assets or liabilities must be initially recognized at their fair value.
You are required to:
1. Determine whether the transaction price (₹20 lakh) can be treated as the fair value. If not,
calculate the fair value of the loan.
2. Explain the accounting treatment of the difference between the transaction price and the fair
value on initial recognition in the books of N Limited.
Present Value Factors at 11%:
Year 1 2 3 4 5
PVF 0.9009 0.8116 0.7312 0.6587 0.5935
Solution:
Since the loan is granted to O Ltd. at 5% i.e., below market rate of 11%. It will be considered as loan
given at off market terms.
The Fair value of the transaction will be lower from its transaction price.
Year Loan Principal Interest Total Discounting Present Value
outstanding @5% inflows factor 11%
` ` ` ` ` `
1 20,00,000 4,00,000 1,00,000 5,00,000 0.9009 4,50,450
2 16,00,000 4,00,000 80,000 4,80,000 0.8116 3,89,568
3 12,00,000 4,00,000 60,000 4,60,000 0.7312 3,36,352
4 8,00,000 4,00,000 40,000 4,40,000 0.6587 2,89,828
5 4,00,000 4,00,000 20,000 4,20,000 0.5935 2,49,270
17,15,468
Thus, fair value of the transaction be ` 17,15,468.

56 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Amortisation table

Opening Balance Finance Income 11% Repayments Closing Balance

Year
` ` ` `
1 17,15,468 1,88,701 -5,00,000 14,04,169
2 14,04,169 1,54,459 -4,80,000 10,78,628
3 10,78,628 1,18,649 -4,60,000 7,37,277
4 7,37,277 81,100 -4,40,000 3,78,377
5 3,78,377 41,623# -4,20,0000 0.00
Total 5,84,532 -23,00,000
# Balancing figure to make the closing balance NIL.
Treatment of Transaction in the books of N Ltd.
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
i.e., ` 20,00,000 – ` 17,15,468 =`2,84,532.
Journal Entries - Initial Recognition
Particulars Debit (`) Credit (`)
Loan to O Ltd. 17,15,468
P & L (Fair value adjustment) (bal. figure) 2,84,532
To Bank 20,00,000
Illustration 15
On 1 April 2020, S Limited provided a housing loan of ₹15 lakhs to an employee at an interest
rate of 6% per annum. The loan is repayable in five equal annual instalments, plus interest. The
employee is not required to provide any specific performance in exchange for this benefit. The
market rate for similar housing loans offered by banks is 10% per annum.
Provide the accounting treatment for the housing loan, interest income, and other related expenses
in the financial statements of S Limited for the financial year 2020-2021.
Solution:
Computation of fair value of the loan shall be as follows:
Out- standing Interest Total PVF Present
Year ended Principal
loan income @6% inflow @10% Value
31 March,2021 15,00,000 3,00,000 90,000 3,90,000 0.909 3,54,510
31 March,2022 12,00,000 3,00,000 72,000 3,72,000 0.826 3,07,272
31 March,2023 9,00,000 3,00,000 54,000 3,54,000 0.751 2,65,854
31 March,2024 6,00,000 3,00,000 36,000 3,36,000 0.683 2,29,488

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 57
 Work Book : Corporate Financial Reporting

31 March,2025 3,00,000 3,00,000 18,000 3,18,000 0.621 1,97,478

Fair value of the loan 13,54,602
Computation of amortized cost of loan to employees
Financial year Amortised
Interest to be Repayment Amortised cost
ending on 31st cost (opening
recognized @ 10% (including interest) (closing balance)
March balance)
2021 13,54,602 1,35,460 3,90,000 11,00,062
2022 11,00,062 1,10,006 3,72,000 8,38,068
2023 8,38,068 83,807 3,54,000 5,67,875
2024 5,67,875 56,788 3,36,000 2,88,663
2025 2,88,663 29,337 318000 bal. fig. Nil
Journal Entries to be recorded at every period end
1. On 1st April 2020

Particulars Dr. Amount Cr. Amount

Loan to employee (FA) A/c 13,54,602
Prepaid employee cost A/c 1,45,398
To Bank A/c 15,00,000
(Being loan asset recorded at initial fair value)
2. On 31st March 2021
Particulars Dr. Amount Cr. Amount
Bank A/c 3,90,000
To Finance income A/c (Profit and loss) @10% 1,35,460
To Loan to employee A/c 2,54,540
(Being first instalment of repayment of loan accounted for using
the amortised cost and effective interest rate @ 10%)
Employee benefit cost (profit and loss) A/c 29,080
To Prepaid employee cost A/c (1,45,398/5) 29,080
(Being amortization of prepaid employee cost charged to profit and
loss as employee benefit cost)
Extracts of Balance sheet of Star Ltd. as on 31st March 2021

Non-current asset
Financial asset
Loan to employee (11,00,062 – 3,72,000 + 1,10,006) 8,38,068
Other non-current asset
Prepaid employee cost 87,238

58 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Current asset
Financial asset
Loan to employee (3,72,000 - 1,10,006) 2,61,994
Other current asset
Prepaid employee cost 29,080

Illustration 16
On 1 April, 2021, H Ltd. provided a financial guarantee for a loan of ₹1,00,00,000 granted by Bank
to its subsidiary, S Ltd. The loan has a term of three years, with interest payable annually at a rate
of 7%, and the principal amount repayable at the end of the loan term.
Had H Ltd. not issued the guarantee, Bank would have charged S Ltd. an interest rate of 10%. H
Ltd. did not charge H Ltd. any fee for the guarantee. There is NIL probability that S Ltd. will default
the loan.
Pass the necessary journal entries and working should be part of your answer.
Solution:
1st April, 2021:
Computation of Fair Value of Financial Guarantee:

Particulars Year 1 (₹) Year 2 (₹) Year 3 (₹) Total (₹)

Cash flows based on interest rate of 10% (A) 10,00,000 10,00,000 10,00,000 30,00,000
Cash flows based on interest rate of 7% (B) 7,00,000 7,00,000 7,00,000 21,00,000
Interest rate differential (A - B) 3,00,000 3,00,000 3,00,000 9,00,000
Discount factor @ 10% 0.909 0.826 0.751
Interest rate differential discounted at 10% 2,72,727 2,47,934 2,25,394
7,46,055
Fair value of financial guarantee contract
(at inception)
Journal Entry

Particulars Debit Credit

Investment in subsidiary 7,46,055
To Financial guarantee (liability) 7,46,055
(Being financial guarantee initially recorded)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 59
 Work Book : Corporate Financial Reporting

Amortisation table for the financial guarantee by H Ltd. (Holding company to its subsidiary):

Year Opening balance (₹) EIR @ 10% Benefits provided (₹) Closing balance (₹)
1 7,46,055 74,606 (3,00,000) 5,20,661
2 5,20,661 52,066 (3,00,000) 2,72,727
3 2,72,727 27,273 (3,00,000) 0
31st March 2022:
The liability is therefore adjusted to as follows: The benefit net of unwinding interest is credited
to Profit / loss account.

Particulars Debit Credit

Financial guarantee (liability) 2,25,394*
To Profit or loss 2,25,394
(Being financial guarantee amortised)
*(` 3,00,000-74,606)
The liability is therefore adjusted to as follows: The benefit net of unwinding interest is credited
to Profit / loss account.
Particulars Debit Credit
Financial guarantee (liability) 2,25,394*
To Profit or loss 2,25,394
(Being financial guarantee amortised)
*(` 3,00,000-74,606)
31st March, 2023:
Particulars Debit Credit
Financial guarantee (liability) 2,47,934
To Profit or loss 2,47,934
(Being financial guarantee amortised)
31st March, 2024:
Particulars Debit Credit
Financial guarantee (liability) 2,72,727
To Profit or loss 2,72,727
(Being financial guarantee amortised)

60 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

4
NBFCs – Provisioning Norms, Accounting
and Reporting
[Study Material - Module 4]

Illustration 1
As of 31st March, when closing books of accounts, a Non-Banking Finance Company has classified
its Loans and Advances as follows:
₹ in lakhs
Standard assets 9,480
Sub-standard assets 830
Secured portions of doubtful debts:
- upto one year 110
- one year to three years 85
- more than three years 54
Unsecured portions of doubtful debts 200
Loss assets 100

Determine the amount of provision that should be made against the Loans and Advances when
NBFC is Non- Systemically Important Non-Deposit Taking Company having asset size less than
₹500 crore.
NBFC is a Deposit Taking Company (NBFC- D)
Solution:
i) Calculation of provision required on Loans and Advances as on 31st March, when Non-Banking
Financial Company is Non- Systemically Important Non - Deposit taking Company having asset
size less than ₹ 500 Cr

Category Amount Percentage Provision

(in lakhs) of provision (in lakhs)
Standard assets 9,480 0.25 23.7
Sub-standard assets 830 10 83
Secured portions of doubtful debts - upto one year 110 20 22

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 61
 Work Book : Corporate Financial Reporting

Secured portions of doubtful debts - one year to three

years 85 30 25.5
Secured portions of doubtful debts - more than three
years 54 50 27
Unsecured portions of doubtful debts 200 100 200
Loss assets 100 100 100
481.20

i) Calculation of provision required on Loans and Advances as on 31st March, when Non-
Banking Financial Company is Deposit taking Company.

Category Amount Percentage Provision

(in lakhs) of provision (in lakhs)
Standard assets 9480 0.4 37.92
Sub-standard assets 830 10 83
Secured portions of doubtful debts – upto one year 110 20 22
Secured portions of doubtful debts – one year to three
years 85 30 25.5
Secured portions of doubtful debts – more than three
years 54 50 27
Unsecured portions of doubtful debts 200 100 200
Loss assets 100 100 100
Total 495.42

Illustration 2
Tubelight Financiers Ltd., a Non-Banking Financial Company (NBFC), offering Hire Purchase
solutions for the acquisition of consumer durables. The following details are extracted from its
books for the year ending 31st March, 2024:
Assets Funded Interest Overdue but recognized in Net Book Value of
Profit & Loss Assets Outstanding
Period Overdue Interest Amount
(₹ In crore) (₹ In crore)
LCD Televisions Up to 8 Months 700.00 28,000
Washing Machines For 32 Months 200.00 4,000
Refrigerators For 44 Months 100.00 2,500
Air Conditioners For 71 Months 48.00 500
Mobile Phones For 22 Months 50.00 1,200
You are required to calculate the amount of provision to be made.

62 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Solution:
Based on the information, in respect of hire purchase and leased assets, provision shall be made as under:
Provision Provision
Condition Calculation
Requirement (in lakhs)
(a) Where hire charges are overdue upto 12 months Nil - -
(b) Where hire charges are overdue for more than 10% of the net
10% x 1200 120
12 months but upto 24 months book value
(c) Where hire charges are overdue for more than 40% of the net 40% x
1600
24 months but upto 36 months book value 4,000
(d) Where hire charges or lease rentals are overdue 70% of the net
70% x 2500 1750
for more than 36 months but upto 48 months book value
(e) Where hire charges or lease rentals are 100% of net
100% x 500 500
overdue for more than 48 months book value
Total 3970
Illustration 3
Using the following information, prepare the Profit and Loss Account for Daisy Ltd. for the year
ended on 31.03.2024:
(₹ in ‘000)
Interest and Discount (includes interest accrued on investments) 8,400
Other Income 415
Employee benefit cost 2,350
Interest expended 1,900
Interest accrued on investments 25
Rebate on bills discounted to be provided for 39
Additional information:
The advances of the Daisy Ltd. are classified as below:
  Assets (₹ in ‘000)
Standard assets 5,100
Doubtful assets (Unsecured) 520
Sub-standard assets (Fully Secured) 2,200
Doubtful assets - covered by security
Upto 1 Year 130
more than 1 year and upto 3 years 710
More than 3 years 650
Loss assets 354
Total 9,664

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 63
 Work Book : Corporate Financial Reporting

25% of the current year’s profit has to be transferred to Statutory Reserve.

Provide 30% of the profit towards provision for taxation.
Solution:
Daisy Ltd.
Profit and Loss Account for the year ended 31-03-2024
(₹ in ‘000)
Particulars Note No. Year ended on 31-3-2024
I Revenue from Operations
Interest Income 1 8,361.00
II Other income 415.00
III Total income (I+II) 8,776.00
IV Expenses
Finance costs 1,900.00
Employee benefit cost 2,350.00
Provisions and Contingencies 2 1,678.40
Total Expenses (IV) 5,928.40
V Profit / (Loss) before Tax (III-IV) 2,847.60

VI Tax expense 3 854.28

VII Profit / (Loss) after Tax 1,993.32

Appropriations
Transfer to Statutory Reserve @ 25% 498.33
Balance carried over to Balance Sheet 1,494.99
1,993.32
Working Notes:
1. Interest Income
(₹ in ‘000)
(i) Interest and discount 8,400
Less: Rebate on bills discounted not provided (39)
Less: Interest accrued on investments (25) 8,336
(ii) Interest accrued on investments 25
8,361
Interest accrued on investments needs to be shown separately

64 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

2. Calculation of provisions and contingencies

Assets Amount % of Provision
(₹ in ‘000) Provision (₹ in ‘000)
Standard assets 5,100 0.4 20.40
Sub-standard assets (Fully Secured) 2,200 10 220.00
Doubtful assets (Unsecured) 520 100 520.00
Doubtful assets - covered by security
Upto 1 Year 130 20 26.00
More than 1 year and upto 3 years 710 30 213.00
More than 3 years 650 50 325.00
Loss assets 354 100 354.00
Total Provision 9,664 1,678.40
3. Calculation of provision on tax = 30% on [Total Income - Total Expenditure]
= 30% of ₹ [(8776 - (1900 + 2350 + 1678.4)]
= 854.28

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 65
 Work Book : Corporate Financial Reporting

5
Accounting for Business Combinations and
Restructuring
[Study Material - Module 5]

Illustration 1
On 1 June, 2021, AK Ltd. acquired a 65% stake in BK Ltd., a company engaged in manufacturing
machinery components. BK Ltd. has 1,05,000 equity shares of ₹10 each, and the quoted market
price of its shares was ₹14 per share on the acquisition date. The fair value of BK Ltd.’s identifiable
net assets on 1 June, 2021, was ₹90,00,000.
As part of the purchase consideration, AK Ltd.:
1. Paid ₹52,00,000 in cash.
2. Issued 55,000 equity shares at a market price of ₹27 per share (nominal value ₹10 each).
3. Agreed to an additional consideration of ₹15,00,000, payable if BK Ltd.’s cumulative profit for
the next three years exceeds ₹1,15,00,000. On the acquisition date, it was deemed probable
that the extra consideration would be paid, and its fair value was assessed at ₹10,80,000.
BK Ltd. incurred ₹1,53,000 as acquisition-related costs. The Non-controlling Interest (NCI) is
measured at fair value.
How will AK Ltd. account for the acquisition of BK Ltd. under Ind AS 103? Provide detailed workings
and pass the necessary journal entries.
Solution:
Computation of Goodwill/Capital reserve on consolidation as per Ind AS 103:
Particulars ₹
Cost of investment:
Share exchange (55,000 x 27) 14,85,000
Cash consideration 52,00,000
Contingent consideration 10,80,000
Consideration transferred at date of acquisition [A] 77,65,000
Fair value of non-controlling interest at date of acquisition [B] 5,14,500
(1,05,000 × 35% × 14)

66 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Total [C] = [A] + [B] 82,79,500

Net assets acquired at date of acquisition [D] (90,00,000)
Capital Reserve [D] - [C] 7,20,500
Journal entry at the date of acquisition: (by AK Limited as per Ind AS 103)

Particulars Dr. ₹ Cr. ₹

Identifiable net assets 90,00,000
To Equity share capital (55,000 × 10) 5,50,000
To Securities Premium (55,000 × 17) 9,35,000
To Cash 52,00,000
To Provision for contingent consideration to BK Ltd. 10,80,000
To Non-controlling Interest 5,14,500
To Capital Reserve 7,20,500
Note:
In a business combination, acquisition-related costs (including stamp duty) are expensed in the
period in which such costs are incurred and are not included as part of the consideration transferred.
Therefore, ₹1,53,000 incurred by BK Ltd. in relation to acquisition, will be ignored by AK Ltd.

Illustration 2
In March 2023, ASN Ltd. acquired 100% control in SMC Ltd. through a business combination for a
total consideration of ₹12,250 lakhs. At the acquisition date, the assets and liabilities of SMC Ltd.
are as follows:

Items ₹ In lakhs
Assets
Cash & cash equivalents 890
Trade receivables (net) 5,300
Property, plant and equipment 8,250
Deferred tax asset 405
Liabilities
Trade payables 1,250
Borrowings 5,100
Employee entitlement liabilities 950
Deferred tax liability 375

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 Work Book : Corporate Financial Reporting

The property, plant and equipment owned by SMC Ltd. have a fair value of ₹9,000 lakhs, while their
tax written-down value is ₹7,000 lakhs. The trade receivables are net of a doubtful debts allowance
of ₹400 lakhs.
For tax purposes:
• Bad debts are deductible only when they are written off against the allowance account by SMC Ltd.
• Employee benefit liabilities are deductible only upon payment.
SMC Ltd. also holds a brand name which has a fair value of ₹4,500 lakhs as per its independent
valuation. It meets the recognition criteria for intangible assets under Ind AS 103: Business
Combinations. However, the brand has no tax base, and no tax deductions can be claimed for it.
The applicable tax rate is 30%. Unless otherwise stated, it is assumed that all other items have a
fair value and tax base equal to their carrying amounts on the acquisition date.
You are required to:
1. Compute the deferred tax assets and deferred tax liabilities arising from the business
combination. (Do not offset these amounts.)
2. Calculate the goodwill to be recognized on consolidation.
Solution:
Company ASN Ltd. is the acquirer and Company SMC Ltd. is the acquiree
Reconciliation of existing Deferred Tax Asset and Liability in the Balance Sheet:
(a) The aggregate deferred tax asset is ₹ 405 lakhs, comprised of ₹ 120 lakhs (₹ 400 lakhs × 30%)
in relation to the receivables and ₹ 285 lakhs (₹ 950 lakhs × 30%) in relation to the employee
entitlement liabilities.
(b) The aggregate deferred tax liability is ₹ 375 lakhs which is because of difference in tax base and
carrying value of plant & equipment (₹ (8,250 – 7,000) lakhs × 30%).
Computation of Deferred Tax:
in lakhs
Particulars Book value Fair value Tax Taxable Deferred DTA/
Base (Deductible) tax Asset (DTL)
Temporary (Liability)
difference @30%
Cash 890 890 890 - -
Receivables 5,300 5,300 5,700 -400 120 DTA
Plant and equipment 8,250 9,000 7,000 2,000 -600 DTL
Brands 4,500 - 4,500 -1,350 DTL
Deferred tax asset 405 405
Total assets 20,095

68 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Payables -1,250 -1,250 -1,250 - -

Borrowings -5,100 -5,100 -5,100 - -
Employee Entitlement DTA
-925 -950 - -950 285
liabilities
Deferred tax liability -375 -1,950
Total liabilities -9,250
DTA = ₹ 405 (120+285) lakhs
DTL = ₹ 1,950 (600+1350) lakhs
Computation of Net Assets of Acquiree:

Particulars Amount
Cash & cash equivalents 890
Trade receivables 5,300
Property, plant and equipment 9,000
Brands 4,500
Deferred tax asset 405
Total assets 20,095
Trade payables -1,250
Borrowings -5,100
Employee Entitlement liabilities -950
Deferred tax liability -1,950
Total liabilities -9,250
Net Assets 10,845
Computation of Consideration Transferred:

Particulars Amount
Consideration paid 12,250
12,250
Goodwill will be calculated as under:

Particulars Amount
Consideration Transferred 12,250
Non-controlling interest NIL
Less: Fair value of Net identifiable assets -10,845
Goodwill 1,405

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 69
 Work Book : Corporate Financial Reporting

Journal Entry – Acquisition Accounting:

Particulars in lakhs in lakhs

Identifiable Assets acquired 20,095
Goodwill 1,405
To Consideration Transferred 12,250
To Liabilities assumed 9,250
To Non-controlling interest -
Illustration 3
The Balance Sheet of Buyer Ltd. and Seller Ltd., as at 31st March 2023 is provided below:
(in lakhs)
Assets Buyer Ltd. Seller Ltd.
Non-Current Assets:
Property, plant and equipment 450 600
Investments 250 190
Current assets:
Inventories 370 130
Financial assets
Trade receivables 330 180
Cash and cash equivalents 150 260
Others 300 240
Total 1850 1600
Equity and Liabilities
Equity
Share capital-Equity shares of ₹ 100 each for Seller Ltd. & ₹ 10 500 400
each for Buyer Ltd.
Other Equity 700 275
Non-Current liabilities:
Long term borrowings 180 350
Long term provisions 80 80
Deferred Tax liability 20 30
Current Liabilities:
Short term borrowings 150 195
Trade payables 220 270
Total 1850 1600

70 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Other information:
(i) Buyer Ltd. acquired 75% shares of Seller Ltd. on 1st April, 2023 by issuing its own shares in
the ratio of 1 share of Buyer Ltd. for every 2 shares of Seller Ltd. The fair value of the shares of
Buyer Ltd. was 45 per share.
(ii) The fair value exercise resulted in the following:
(1) Fair value of Property, Plant and Equipment (PPE) of Seller Ltd. as on 1st April, 2023 was
₹510 lakhs.
(2) Buyer Ltd. agreed to pay an additional payment (due after 2 years) as consideration that
is higher of (i) ₹ 28 lakh or (ii) 25% of any excess profits in the first year after acquisition,
over its profits in the preceding 12 months made by Seller Ltd.
Seller Ltd. has earned 25 lakh profit in the preceding year and expects to earn another 10
Lakh in the year of acquisition.
(3) In addition to above, Buyer Ltd. also has agreed to pay one of the founder shareholder-
Director a payment of ₹ 18 lakhs provided he stays with the Company for two years after
the acquisition.
(4) Seller Ltd. had certain equity settled share-based payment award (original award) which
got replaced by the new awards issued by Buyer Ltd. As per the original term the vesting
period was 4 years and as of the acquisition date the employees of Seller 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:
a. Original award - 8 lakhs
b. Replacement award – ₹ 10 lakhs
(5) Seller Ltd. had a lawsuit pending with a customer who had made a claim of ₹ 35, lakhs.
Management reliably estimated the fair value of the liability to be ₹ 12 lakhs.
(6) The deferred tax liability as on 31.03.2023 appearing in the books of Seller Ltd. is on account
of Property, plant and equipment.
(7) Assume that the applicable tax rate for both companies is 30%. Use discounting rate of 10%
wherever it is required.
Based on the above data you are required to prepare opening consolidated balance sheet of Buyer
Ltd. as on 1st April, 2023 along with workings.
Solution:
In this case, Buyer Ltd. has paid consideration to shareholders of Seller Ltd. Therefore, Buyer Ltd.
is the acquirer and Seller Ltd. is the acquiree.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 71
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As the control over the business of Buyer Ltd. is transferred to Seller Ltd. on 1st April, 2023 that
date is considered as the acquisition date.
Computation of Deferred Tax:
The deferred tax liability as on 31.03.2023 is ₹30 lakhs, which is on account of Property, Plant and
equipment (PPE). Since the carrying value of PPE is ₹600 Lakhs the tax base for this item will be ₹
500 Lakhs. [(600-tax base)×30% = 30].
The calculation of DTA / DTL as on 01.04.2023.

in lakhs
Particulars Book Fair Tax Taxable Deferred tax
value value Base (Deductible) Asset (Liability)
Temporary @ 30%
difference
Property, Plant and equipment 600.00 510.00 500.00 -10.00 -3.00
Contingent Liability Nil -12.00 0.00 12.00 3.60
DTA 0.60
(only items where tax base is different from book value have been considered)
Computation of Net Assets of Acquiree:

Particulars Amount
Property, plant and equipment 510.00
Investment 190.00
Inventories 130.00
Financial assets:
Trade receivables 180.00
Cash and cash equivalents 260.00
Others 240.00
Deferred Tax Asset 0.60
1,510.60
Long term borrowings 350.00
Long term provisions 80.00
Deferred tax Liability -
Short term borrowings 195.00
Trade payables 270.00
Contingent liability 12.00

72 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Particulars Amount
907.00
Net assets 603.60
Computation of Consideration Transferred:
The consideration transferred will comprise the following:

Particulars Amount
Share capital of Parker Ltd. 400
Number of Shares (in lac) 4
Shares to be issued in the ratio of 2:1 (in lac) 2
Fair value per share 45.00
Consideration Transferred (2,00,000 × 75%×45 per share) (A) 67.50
Deferred consideration after discounting 28 lakhs for 2 years @10% 23.13
[28 x 0.826]- Working Note - I (B)
Replacement award i.e. (8 x 2/4) - Working Note - II (C) 4.00
Total Consideration Transferred (A+B+C) 94.63
Working Note - I: Contingent and Deferred Consideration:
In the given case, ₹28 lakh is the minimum payment to be paid after 2 years and accordingly will be
considered as deferred consideration. The other element of payment is contingent in nature as it
is linked to further performance of the Company. Hence, value for the contingent portion has been
ignored and amount which is certain has been considered with time value effect @ 10%.
Working Note - II: Replacement Award:
At the acquisition date, the employees had not rendered the required service and completed only
50% of required period of 4 years. Hence, ₹400,000 should be allocated as purchase consideration
because this is the fair value of the original scheme at the acquisition date. The remaining ₹
4,00,000 is recognised in the consolidated statement of profit or loss as a post-acquisition expense
(employee cost) when the vesting conditions get satisfied.
Note:
The additional consideration of 25 lakh to be paid to the founder shareholder is contingent to him/
her continuing in employment and hence has been ignored.
Measurement of NCI:
NCI will be recognized at ₹ 150.90 lakhs (25% of ₹ 603.6 Lakhs (net assets))

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 73
 Work Book : Corporate Financial Reporting

Computation of goodwill or gain on bargain purchase:

Particulars ₹ Lakhs
Consideration Transferred 94.63
Non-controlling interest 150.90
Less: Fair value of Net identifiable assets 603.60
Bargain Purchase Gain 358.07
Consolidated Balance Sheet of David Ltd. as on 1st April, 2023
(₹ in lakhs)
Amount
Assets
Non-current assets:
Property, plant and equipment (450+510) 960.00
Investment (250 + 190) 440.00
Current assets:
Inventories (370+130) 500.00
Financial assets:
Trade receivables (330 + 180) 510.00
Cash and cash equivalents (150 + 260) 410.00
Others (300 + 240) 540.00
Deferred tax assets 0.60
Total 3360.60
Equity and Liabilities
Equity
Share capital - Equity shares of 100 each (500 +15) 515.00
Other Equity (Working Note - III) 1,114.57
Non-Controlling Interest 150.90
Non-current liabilities:
Financial liabilities:
Long term borrowings (180+350) 530.00
Long term provisions (80+80+23.81) 183.13
Deferred tax liability (20 + 0) 20.00
Current liabilities:
Financial liabilities:
Short term borrowings (150 + 195) 345.00
Trade payables (220 + 270) 490.00
Provision for law suit damages 12.00
Total 3,360.60

74 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Working Note - III: Other Equity:

Other Equity 700.00

Replacement award (SBP Reserve) 4.00
Security Premium Reserve (2,00,000 shares x 75% ×₹35) 52.50
Capital Reserve (Bargain Purchase Gain) 358.07
1114.57

Illustration 4
Four years ago, Sushma Ltd. (Sushma) acquired 80% of the shares in Trio Ltd for ₹1,50,000. On
30 June, Sushma sold all of these shares for ₹3,50,000. The net assets of Trio Ltd at the acquisition
date were ₹74,000, and at the disposal date, they were ₹95,000. Half of the goodwill created at the
time of acquisition had been written off in an earlier year. The fair value of the non-controlling
interest in Trio Ltd at the acquisition date was ₹18,000. Sushma follows the full goodwill method
for accounting of goodwill.
Determine:
(a) the profit or loss for Sushma arising from the disposal of the shares.
(b) the profit or loss for the group arising from the disposal of the shares.
Solution:
(a) Calculation of profit or loss for Sushma arising from the disposal of the shares:

₹ ‘000
Sales proceeds 350
Cost of shares sold 150
Profit on disposal 200
(b) Calculation of the profit or loss for the group arising from the disposal of the shares:

₹ ‘000 ₹ ‘000
Sales proceeds 350
Net assets at disposal date 95
Goodwill at disposal date (W1) 47
Less: NCI at disposal date (W2) (12.8) (129.2)
Profit on disposal 220.8

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 75
 Work Book : Corporate Financial Reporting

Working Notes:

(W1) Goodwill
₹ ‘000
Consideration 150
NCI at acquisition 18
FV of net assets at acquisition (74)
Goodwill at acquisition 94
Impairment (₹94 × 50%) (47)
Goodwill at disposal date 47

(W2) NCI at disposal date

NCI at acquisition 18
NCI % of post-acq’n net assets movement 4.2
(20% (₹95 - ₹74))
NCI % of impairment (20% x ₹ 47 (W1)) (9.4)
12.8
Illustration 5
AK Limited operates through two divisions, A and B. Division A has been generating steady profits,
while Division B has been consistently incurring losses. The draft extract of the Balance Sheet as at
31/03/2023 for each division is as follows:
(₹ crore)
Particulars A B Total
Fixed Assets Cost 600 1,200 1,800
Depreciation -400 -750 -1,150
Net Fixed Assets (A) 200 450 650
Current Assets 460 900 1,360
Less: Current Liabilities 60 750 810
Net Current Assets (B) 400 150 550
Total (A) + (B) 600 600 1,200
Financed by: -
Loan Funds - 700 700
Capital: Equity * 10 each 50 - 50
Surplus 550 -100 450
Total 600 600 1,200

76 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Division B, along with its assets and liabilities, was sold for ₹50 crore to ASN Limited. ASN Limited
allotted 2 crore shares of ₹10 each to the members of AK Limited at a premium of ₹15 per share,
in full settlement of the consideration, in proportion to their shareholding in the company. One of
the members of AK Limited held 52% of the shares in the company.
There is no other transaction. You are required to:
(i) Pass journal entries in the books of AK Limited.
(ii) Prepare the Balance Sheet of AK Limited after passing the entries in (i) along with notes to
accounts for ‘Other Equity’
(iii) Prepare the Balance Sheet of ASN Limited along with notes to accounts for ‘Share Capital’.
Solution:
(1) 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 (AK Ltd.).
Journal of AK Ltd.:

( in crore)
Particulars Debit Credit
Loan Funds 700
Current Liabilities 750
Provision for Depreciation 750
To Fixed Assets 1,200
To Current Assets 900
To Capital Reserve 100
(Being division B along with its assets and liabilities sold to ASN Ltd. for
50 crore)
(ii) Balance Sheet of AK Ltd.. (after demerger)
(₹ crore)
Assets Note No. Amount
Non-current assets
Property, Plant and Equipment 200
Current assets 460
660

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 77
 Work Book : Corporate Financial Reporting

EQUITY AND LIABILITIES

Equity
Equity share capital (of face value of 10 each) 1 50
Other equity 2 550
Liabilities
Current liabilities
Current liabilities 60
660
Notes to Accounts:
No. Particulars (₹ crore)
1 Equity Share Capital
5 crore equity shares of face value of 10 each 50
Consequent to transfer of Division B to newly incorporated company ASN
Ltd., the members of the company have been allotted 2 crore equity shares
of 10 each at a premium of 15 per share of ASN Ltd., in full settlement of the
consideration in proportion to their shareholding in the company

2 Other Equity
Surplus (550-100) 450
Add: Capital Reserve on reconstruction 100
550
(iii) Balance Sheet of ASN Ltd.

(in crore)
Particulars Note No. Amount
ASSETS
Non-current assets
Property, Plant and Equipment 450
Current assets 900
1,350
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of ₹ 10 each) 1 20
Other equity 2 (120)
Liabilities
Non-current liabilities
Financial liabilities

78 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Borrowings 700
Current Liabilities
Current Liabilities 750
1,350
Notes to Accounts:

No. Particulars
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 AK Ltd.. on takeover
of Division B from AK Ltd.. as fully paid-up pursuant to contract without
payment being received in cash)
2 Other Equity (120)
Capital reserve (100)
Illustration 6
The summarized Balance Sheet of SMC Limited as at 31st December, 2023, is provided below:

₹ Lakhs
Assets:
Property, plant & equipment (at cost less depreciation) 125
Debenture Redemption Reserve Investments 24
Cash and cash equivalents 80
Other Current Assets 210
Total 439
Liabilities
Share Capital: 5,00,000 equity shares of ₹ 10 each fully paid 50
Other equity: 95
Profit And loss A/c 19
Debenture Redemption Reserve 20
12.5% Convertible Debentures, 80,000 Debentures of ₹ 100 each 80
Other loans 60
Current Liabilities and Provisions 115
Total 439

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 79
 Work Book : Corporate Financial Reporting

The debentures are due for redemption on 1st January 2024 at a 10% premium, with an option
for debenture holders to convert 20% of their holdings into equity shares at ₹12 per share. The
remaining 80% of the debenture amount, along with the 10% premium, will be paid in cash, and
debenture holders must exercise the conversion option, failing which the entire amount will be
redeemed in cash.
Assuming that:
(a) Except for 90 debenture holders holding a total of 20,000 debentures, the rest exercised the
option for maximum conversion.
(b) The investments were realized at par on sale.
(c) All the transactions are put through, without any lag, on 1st January, 2024.
You are required to redraft the balance sheet of the company as of 1st January, 2024, after giving
effect to the redemption. Show your calculations for the number of equity shares to be allotted and
the necessary cash payment.
Solution:
SMC Limited
Balance Sheet as on 1st Jan, 2024
Particulars NoteNo ₹ Lakhs
I. Assets
(1)    Non-Current Assets
(a)    Property, Plant & Equipment
(i) Tangible assets 125.00
(2)    Current Assets
(a)    Cash and cash equivalent (Refer W/N (iii)) 29.20
(b)    Other current assets 210.00
Total 364.20
II. Equity and Liabilities:
(1)    Equity
(a)    Share Capital 1 61.00
(b)    Other equity 2 128.20
(2) Non-Current Liabilities
(a)    Long-term borrowing – Unsecured Loans 60.00
(3) Current Liabilities
(a)    Short-term provisions 115.00
Total 364.20

80 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Notes to Accounts

1 Share Capital
6,10,000 Equity Shares 61.00
(5,00,000 +1,10,000) of ₹ 10 each (Refer
WN (i))

2 Reserves and Surplus

General Reserve 95.00
Profit & Loss 19.00
Add: Debenture Redemption Reserve
transfer 20.00
134.00
Less: Premium on redemption of
debentures -8.00 126.00
(80,000 debentures x ₹ 10 per
debenture)

Securities Premium 2.20

(110,000 shares x 2) (Refer WN (i)) 128.20
Working Notes:
(i) Calculation of number of shares to be allotted
Total number of debentures 80,000
Less: Number of debentures for which debenture
holders
did not opt for conversion -20,000
60,000
20% of 60,000 12,000
Redemption value of 12,000 debentures (12,000 x 110) 13,20,000
Number of Equity Shares to be allotted: 1,10,000
13,20,000/12 = 1,10,000 shares of 10 each
Share Price per share for conversion 12

(ii) Calculation of cash to be paid: ₹

Total number of debentures 80,000
Less: number of debentures to be converted into equity shares -12,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 81
 Work Book : Corporate Financial Reporting

Balance 68,000
Redemption value of 68,000 debentures (68,000 × ₹ 110) 74,80,000
(iii) Cash and Bank Balance: ₹
Balance before redemption 80,00,000
Add: Proceeds of investments sold 24,00,000
1,04,00,000
Less: Cash paid to debenture holders -74,80,000
29,20,000
Illustration 7
Red Ltd. and White Ltd. have been operating independently since 1st April 2021. On account of
potential synergies, both companies decided to amalgamate their businesses. The amalgamation
became effective from 1st April 2023, resulting in the formation of a new company, Pink Ltd., which
took over the businesses of both Red Ltd. and White Ltd.
The summarized Balance Sheets of Red Ltd. and White Ltd. as at 31st March 2023 are presented
below:

Liabilities Red Ltd. (₹) White Ltd. (₹)

Share Capital:
Equity share of ₹ 10 each 15,00,000 14,50,000
Revaluation Reserve 1,00,000 2,00,000
General Reserve 1,65,000 85,000
Profit & Loss Account
Opening Balance 1,50,000 1,20,000
Profit for the Year 2,00,000 1,30,000
15% Debentures of ₹ 100 each (Secured) 4,00,000 5,00,000
Trade payable 3,10,000 1,20,000
28,25,000 26,05,000
Assets Red Ltd. (₹) White Ltd. (₹)
Land and Buildings 3,20,000 7,40,000
Plant and Machinery 16,00,000 12,60,000
Investments 1,00,000 60,000
Inventory 2,20,000 1,50,000
Trade Receivable 4,25,000 2,65,000
Cash at Bank 1,60,000 1,30,000
28,25,000 26,05,000

82 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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Additional Information:
1. The authorised capital of the newly formed company, Pink Ltd., will be ₹50,00,000, divided
into 2,00,000 equity shares of ₹25 each.
2. The trade payables of Red Ltd. include an amount of ₹15,000 payable to White Ltd., and the
trade receivables of White Ltd. include ₹15,000 receivable from Red Ltd.
3. The Land & Buildings and inventory of Red Ltd. and White Ltd. are to be revalued as follows:
Red Ltd. (₹) White Ltd. (₹)
Land and Buildings 5,20,000 10,40,000
Inventory 1,80,000 1,25,000
Details of Purchase Consideration and Discharge:
(i) Equity Shares: Pink Ltd. will issue 1,80,000 fully paid-up equity shares of ₹25 each,
allocated in proportion to the profitability of Red Ltd. and White Ltd. during the
preceding two financial years.
(ii) Debentures: Pink Ltd. will issue 18% debentures of ₹100 each to the 15% debenture
holders of Red Ltd. and White Ltd. The number of debentures will be such that the total
interest payable remains unchanged.
Requirement:
Prepare the Balance Sheet of Pink Ltd. after amalgamation. Note that the amalgamation is
classified as being in the nature of a purchase.
Solution:
Balance Sheet of Pink Ltd. as at 1st April, 2023
Particulars Note No ₹
I. Assets
(1) Non- Current assets
(a) Property, Plant and Equipment 1 44,20,000
(b) Non-current investments 1,60,000
(2) Current assets
(a) Current investments -
(b) Inventories 3,05,000
(c ) Trade receivable 6,75,000
(d) Cash and cash equivalents 2,90,000
Total 58,50,000
II. Equity and Liabilities
(1) Equity
(a) Share capital 2 45,00,000
(b) Other equity 3 1,85,000

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Particulars Note No ₹
(2) Non- Current Liabilities
(a) Long -Term borrowings 4 7,50,000
(3) Current Liabilities
(a) Trade payable 4,15,000
Total 58,50,000
Notes to Accounts
1 Property, Plant and ₹ ₹
Equipment
Tangible assets
Land and Buildings 15,60,000
Plant and Machinery 28,60,000 44,20,000
2 Share Capital
Equity Share Capital
Authorised share capital:
2,00,000 Equity Share of ₹ 25 each 50,00,000
1,80,000 Equity shares of ₹ 25 each 45,00,000
(all the above shares are allotted as fully paid up pursuant to contracts without
payment being received in cash)
3 Other Equity
Capital Reserve 1,85,000
4 Long Term Borrowings
Secured Loans
18% of Debentures (₹ 100 each) 7,50,000
Working Notes:
W1: Calculation of net assets taken over

Particulars Red Ltd. (₹) White Ltd. (₹)

Assets Taken over:
Land and Buildings 5,20,000 10,40,000
Plant and Machinery 16,00,000 12,60,000
Investments 1,00,000 60,000
Inventory 1,80,000 1,25,000
Trade Receivable (W3) 4,25,000 2,50,000
Cash at Bank 1,60,000 1,30,000
(i) 29,85,000 28,65,000

84 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Particulars Red Ltd. (₹) White Ltd. (₹)

Liabilities taken over:
Debentures (W2) 3,33,333 4,16,667
Trade payables (W3) 2,95,000 1,20,000
(ii) 6,28,333 5,36,667
Net Assets taken over (i) - (ii) 23,56,667 23,28,333
W2: Calculation of value of Debentures to be issued in Pink Ltd.
Red Ltd.
Existing Debenture interest @ 15% ₹ 4 lakhs x 15/100. 60,000
Debentures to be issued in Pink Ltd. @ 18% to maintain the
₹ 60000 x 100/18 3,33,333
same amount of interest
White Ltd.

Existing Debenture interest @15% ₹ 5 lakhs x 15/100.

75,000
Debentures to be issued in Pink Ltd. @ 18% to maintain the
₹ 75000 x 100/18
same amount of interest 4,16,667
W3: Trade receivable and trade payable
Red Ltd. (₹) White Ltd. (₹)
Trade receivable
Balances before amalgamation 4,25,000 2,65,000
Less: receivable from Red - -15,000
4,25,000 2,50,000
Trade Payable
Balances before amalgamation 3,10,000 1,20,000
Less: Due to white -15,000 -
2,95,000 1,20,000
W4: Computation of Purchase Consideration:
Red Ltd. (₹) White Ltd. (₹)
1 Equity Shareholders
Equity based on two year profit
Op balance (i.e. FY21-22, as started w.e.f. 01/04/2021) 1,50,000 1,20,000
Profit of the year (i.e. FY 22-23) 2,00,000 1,30,000
Total 3,50,000 2,50,000
1,80,000 × 350 × ₹ 25
(350+250) 26,25,000
1,80,000 × 250 × ₹ 25

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 85
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Red Ltd. (₹) White Ltd. (₹)

(350+250) 18,75,000
Total Purchase consideration (a) 26,25,000 18,75,000
Net Assets takeover (W N - 1) (b) 23,56,667 23,28,333
Goodwill (a-b) 2,68,333
Capital reserve (b-a) 4,53,333
Goodwill arising from amalgamation shall be adjusted against Capital Reserve arising from
amalgamation, and only balance of ₹ 1,85,000 is to be shown in the Balance Sheet of Pink Ltd as
capital reserve.

Illustration 8
On 30 June 2024, AB Ltd. sold a 25% stake in JK Ltd. for ₹215,000. Five years earlier, AB Ltd. had
acquired a 70% stake in JK Ltd.. AB Ltd. applies the full goodwill method. Prior to this disposal the
Goodwill has been fully impaired and already written off in full.
Other details of JK Ltd. are as follows:
₹
Net assets at disposal date 420,000
Fair value of a 45% holding at 30 June 2024 355,000
Carrying value of the non-controlling interest (NCI) on 30.06.2024 90,000
Show the accounting treatment in the consolidated financial statements.
Solution:
The group’s holding in JK Ltd. has reduced from 70% to 45%. Control over JK Ltd. has been lost
hence profit or loss on disposal need to be calculated.
Calculation of profit on disposal for the consolidated statement of profit or loss:
₹ ₹
Proceeds 2,15,000
FV of retained interest 3,55,000
5,70,000
Net assets recognised at disposal 4,20,000
Goodwill at disposal -
Less: NCI at disposal date (90,000)
(3,30,000)
Profit on disposal 2,40,000

86 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

A 45% shareholding would normally give the investor significant influence over the investee
and so this would meet the definition of an associate. Hence, from 30 June 2024, the investment
will be accounted for using the equity method in the consolidated financial statements and the
remaining investment in JK Ltd. will be recognised at its fair value of ₹3,55,000.
Illustration 9
Until 30 September 2024, H Ltd. was holding 90% stake in S Ltd. On this date, it sold 10% stake in S
Ltd. for ₹22,000. At the time of the disposal, the carrying amount of S Ltd.’s net assets and goodwill
were ₹1,15,000 and ₹35,000 respectively. The non-controlling interest (NCI) was valued at fair
value at the time of acquisition.
Give accounting treatment in the consolidated financial statements of the H Ltd. group.
Solution:
H Ltd.’s shareholding has decreased from 90% to 80%. H Ltd. still exercises control over S Ltd.
and therefore S Ltd. continues to be a subsidiary.
No gain or loss on the sale of the shares is recognized in the consolidated financial statements.
Goodwill is not recalculated. Instead, the transaction is accounted for in equity, as an increase
to the non-controlling interest.

₹
Cash proceeds 22,000 Debit
Increase in NCI [10% (₹1,15,000 + ₹35,000)] 15,000 Credit

Increase in other components of equity (Bal. fig.) 7,000 Credit

As per the calculation above, the non-controlling interest should be increased by ₹15,000 and
the difference between the proceeds received and the increase in the non-controlling interest
i.e. ₹7,000 will be recognized as an increase in the equity attributable to the owners of H Ltd.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 87
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6
Consolidated Financial Statements and
Separate Financial Statements
[Study Material - Module 6]

Illustration 1
On 1 April 2023, XYZ Ltd. (XYZ) acquired 60% of the shares of ABC Ltd. (ABC). At the acquisition
date, ABC had share capital of ₹25,000 and retained earnings of ₹210,000.
ABC’s property, plant, and equipment include land with a carrying value of ₹20,000 but a fair value
of ₹60,000.
ABC also has intangible assets that include goodwill of ₹40,000, which resulted from the purchase
of the proprietorship business. Furthermore, ABC possesses an internally generated brand, which
is not recognized in the books of accounts, however, the fair value of this brand is ₹120,000.
The company, ABC disclosed a contingent liability in its financial statements, where a customer
has initiated legal proceedings. Although legal counsel believes the risk is unlikely, if the customer
prevails, estimated damages could be ₹10 lakh. The fair value of this contingent liability is assessed
at ₹150,000 on the acquisition date.
Lastly, the management of the company, XYZ anticipate closing one of ABC’s divisions, with an
estimated redundancy payment cost of ₹225,000.
Based on the above information determine the fair value of ABC’s identifiable net assets at the
acquisition date.
Solution:
Fair Value of identifiable net assets at the acquisition date:
Particulars ₹
Share capital 25,000
Retained earnings 2,10,000
Land fair value uplift (WN 1) 40,000
Goodwill (WN 2) (40,000)
Brand (WN 3) 1,20,000
Contingent liability (WN 4) (1,50,000)
Anticipated redundancy cost (WN 5) NIL
Fair value of identifiable net assets at acquisition 2,05,000

88 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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Working Notes:
1. Land should be recognised in the consolidated financial statements at ₹60,000. Therefore, its
carrying amount must be increased by ₹40,000 (₹60,000 – ₹20,000).
2. Goodwill in the subsidiary’s own financial statements is not an identifiable asset because it
cannot be disposed of separately from the rest of the business. As such, it is not recognised in
the consolidated financial statements.
3. The brand is unrecognised in the individual financial statements but must be recognised in the
consolidated financial statements at its fair value of ₹1,20,000.
4. The contingent liability is disclosed in the individual financial statements. However, it must
be recognised in the consolidated financial statements at its fair value of ₹1,50,000. This is a
liability and so reduces the total fair value of the identifiable net assets.
5. No adjustment is made to the fair value of the net assets for the estimated redundancy provision.
This is because no obligation exists as at the acquisition date.

Illustration 2
On 1 April 2023, X Ltd. acquired 60% of the equity shares in A Ltd. The total purchase consideration
paid by X Ltd. for acquiring control of A Ltd. is as follows:
• An upfront cash payment of ₹2,00,000
• A deferred payment of ₹3,00,000, payable after one year
• 15,000 equity shares of X Ltd., each having a nominal value of ₹1 and a fair value of ₹4 as on the
acquisition date
• A contingent consideration of ₹2,00,000, payable after one year if A Ltd. achieves a profit before
tax (PBT) exceeding ₹25 Lakhs. The probability of achieving this target is 50%, and the fair
value of the contingent consideration is determined using the present value of the expected
value.
• X Ltd. is required to replace a share-based payment scheme previously granted by A Ltd. to its
employees. At the acquisition date, the employees had rendered the required service but had
not exercised their options. The fair value of the original award in A Ltd. was ₹4,50,000, whereas
the fair value of X Ltd.’s replacement award (with no post-acquisition vesting conditions) was
₹6,00,000.
• Legal fees associated with the acquisition amounted to ₹25,000.
Using a discount rate of 10% wherever applicable, determine the fair value of the consideration
transferred to acquire control of A Ltd.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 89
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Solution:
The total fair value of the consideration transferred is calculated below:
Particulars ₹
Cash paid 2,00,000
Deferred cash (WN 2) 2,72,727
Shares (WN 3) 60,000
Contingent consideration (WN 4) 90,909
Replacement share-based payment (WN 5) 4,50,000
Fair value of consideration 10,73,636
Working Notes:
1. Purchase consideration should be measured at its fair value as at the acquisition date.
2. Deferred cash = ₹2,72,727 ((₹300,000 × (1/1.1)).
3. Share consideration = ₹60,000 (15,000 × ₹4).
4. Contingent consideration should be measured at its fair value i.e. ₹90,909 ((₹200,000 × 50% ×
(1/1.1)).
5. Only ₹450,000 should be allocated as purchase consideration because this is the fair value of
the original scheme at the acquisition date. The remaining ₹150,000 is recognised immediately
in the consolidated statement of profit or loss as a post-acquisition expense because there are
no vesting conditions to satisfy.
6. Legal fees are expensed to the statement of profit or loss.

Illustration 3
On 1st April 2024, Lucky Group acquired 80% of Happy for ₹6,00,000. The fair value of Happy’s
identifiable net assets at the acquisition date was ₹7,20,000.
On 31st March 2025, the carrying amount of Happy’s net assets is ₹6,90,000 (excluding goodwill).
Happy qualifies as a cash-generating unit. The recoverable amount of Happy’s net assets is
₹7,00,000.
Determine the effect of the impairment review on 31st March 2025 in the following cases:
(a) the NCI at acquisition was measured at its fair value of ₹2,20,000.
(b) the NCI at acquisition was measured at its share of the fair value of Happy’s identifiable net
assets.

90 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Solution:
(a) Full goodwill method
Goodwill arising on acquisition:
Particulars ₹ in ‘000
Fair value of consideration paid 600
NCI at acquisition 220
820
Less fair value of net assets at acquisition (720)
Goodwill 100

Impairment review:
Particulars ₹ in ‘000
Goodwill 100
Net assets 690
Carrying amount 790
Recoverable amount (700)
Impairment 90

(b) Proportionate method

Goodwill arising on acquisition:
Particulars ₹ in ‘000
Fair value of consideration paid 600
NCI at acquisition (20% × ₹720,000) 144
744
Less: fair value of net assets at acquisition (720)
Goodwill 24

Impairment review:
Particulars ₹ in ‘000
Goodwill 24
Unrecognised NCI (20/80 × ₹24,000) 6
Total notional goodwill 30
Net assets 690
Carrying amount 720
Recoverable amount (700)
Impairment 20

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Illustration 4
Extracts from the Balance Sheet at 31 March 2024 for three companies ASN Ltd. (ASN), SB Ltd. (SB)
& AC Ltd. (AC) are below:
ASN Ltd. SB Ltd. AC Ltd.
₹ Lakhs ₹ Lakhs ₹ Lakhs
Non-current assets
Property, plant and equipment 37 21 36
Investments in subsidiary and associates 19 – –
Equity and liabilities
Equity shares of ₹1 each 20 8 10
Retained earnings
– at 31 March 2023 32 12 22
– for year ended 31 March 2024 19 6 12
The following information is relevant to the preparation of the consolidated Balance Sheet.
(i) Investments in subsidiary and associate are made on 01.04.2023 and the amount under this
head includes the following:
Cash paid by ASN to AC for purchase of 30% of AC’s equity shares for ₹ 1.8 per share and the
cash consideration paid by ASN to SB for the shares acquired in SB @ Rs. 2 per SB’s shares
acquired. Investment does not include the share consideration paid by ASN to the shareholders
of SB. Further the investment includes ₹1.6 lakh in professional costs associated with the
acquisition of SB.
(ii) ASN acquired 6 lakhs equity shares of SB by exchanging one share of ASN for every two shares
of SB, along with a cash payment as indicated in point no (i). Further, at the acquisition date,
the market price of each ASN share was ₹6 and the market price of each SB share was ₹ 4.
(iii)At the time of acquisition, SB had an internally generated brand name, which was not recognized
in its separate financial statements. ASN has estimated that this brand name has a fair value of
₹8 lakhs, with an indefinite useful life.
(iv)ASN values non-controlling interests at fair value at the acquisition date, using SB’s share price
for this purpose.
(v) Impairment testing on 31 March 2024 revealed that the recoverable amount of SB’s net assets
was ₹40 lakhs.
With the above data you are required to calculate:
(a) the carrying amount of goodwill arising on the acquisition of SB that will be reported in the
consolidated Balance Sheet as at 31 March 2024.

92 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

(b) the investment in AC in the consolidated Balance Sheet as at 31 March 2024.

(c) the value for non-current assets which should appear in the consolidated Balance Sheet as at
31 March 2024.
Solution:
(a) Calculation of Goodwill on acquisition date:
Goodwill arising at acquisition is calculated as follows:

Particulars ₹ Lakhs
Fair value of consideration:
Share exchange (WN 1) 18
Cash paid (WN 1) 12
FV of NCI at acquisition (WN 3) 8
Less: FV of net assets at acquisition (WN 2) (28)
Goodwill at acquisition 10
Impairment of Goodwill:

₹ Lakhs ₹ Lakhs
Goodwill (as determined above) 10
Net assets:
Share capital 8
Retained earnings bfd 12
Profit for the period 6
Brand value 8
34
Total carrying amount 44
Recoverable amount (as given) (40)
Impairment 4
The impairment loss will reduce goodwill from ₹10 lakhs to ₹6 lakhs. The loss of ₹4 lakhs will be
charged to the statement of profit or loss. ₹3 (4 x 75%) will go to parent company & ₹1 (4 X 25%)
will go to NCI.
Working Notes:
1. Calculation of Consideration (at fair value):

Particulars Calculation
(i) Share exchange ₹ 18 lakh [3 lakh shares (1/2 × 6 lakhs) × ₹ 6 each (at their fair value)]
(ii) Cash Paid ₹ 12 lakh (6 lakhs × ₹ 2)

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The inclusion of ₹1.6 lakh (professional fees) in the investment is not correct and this must be
written off in the statement of profit or loss.
1. Fair value of net assets at acquisition date:
SB’s brand name is an identifiable asset because it can be sold separately. Therefore, it must be
included in the consolidated financial statements at its fair value of ₹8 lakh. Therefore, the fair
value of SB’s identifiable net assets at acquisition = ₹28 lakhs (equity shares ₹8 lakh +retained
earning ₹12 lakh + ₹8 lakh).
The brand has an indefinite useful life so will not be amortised. It should be reviewed annually for
impairment.
2. Non-controlling interest (at fair value):
The value of NCI = ₹ 8 lakhs (2 lakh × ₹ 4).
(b) Calculation of value for investment in associate as on 31/03/2024.
Particulars ₹ in Lakh
Initial Investment in AC Ltd. (10L x 30% x ₹ 1.8) 5.40
Add: Profit share for the year (12L x 30%) 3.60
Carrying Value of associate as on 31/03/2024 9.00
(c) Extract from consolidated Balance Sheet as at 31 March 2024
Non-current assets
₹ Lakhs
Property, plant and equipment (₹37 + ₹21) 58
Goodwill (₹10 lakhs – ₹4 lakhs impairment) 6
Intangible assets 8
Investment in associate 9
81

Illustration 5
The Balance Sheet for three entities White Ltd. (White), Blue Ltd. (Blue) and Pink Ltd. (Pink) for
the year ending 31st March,2024 are presented below:
White Blue Pink
Assets ₹ ₹ ₹
Property, plant and equipment 100,000 80,000 65,000
Investments 125,000 – –

94 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Inventories 22,000 30,000 15,000

Receivables 70,000 10,000 4,000
Cash and cash equivalents 43,000 25,000 6,000
––––––– –––––– ––––––
360,000 145,000 90,000
––––––– –––––– ––––––
Equity and liabilities
Equity capital (₹1 shares) 100,000 75,000 40,000
Retained earnings as on 01/04/23 80,000 30,000 25,000
Profit during the year 1,20,000 20,000 15,000
Other components of equity (during the year) 10,000 5,000 –
Liabilities 50,000 15,000 10,000
––––––– –––––– ––––––
360,000 145,000 90,000
––––––– –––––– ––––––
On 1st April 2023, White acquired 45,000 shares in Blue for ₹100,000. Blue’s net assets had a fair
value of ₹120,000, and the fair value of the non-controlling interest was ₹55,000. It is the group’s
policy to measure the non-controlling interest at acquisition at fair value.
The excess of the fair value of Blue’s net assets over their carrying amounts at the acquisition date
pertains to property, plant, and equipment, which had an estimated remaining useful life of five
years. Goodwill has been assessed and was found to be impaired by ₹5,000.
On 1st April 2023, White purchased 12,000 equity shares in Pink for ₹25,000.
During the year, White sold goods to Blue for ₹20,000 at a 50% margin. By the reporting date, Blue
had sold 90% of these goods. Included in the receivables of White and the liabilities of Blue are
intragroup balances of ₹12,000.
On 4th April 2024, White received notice of a claim for damages from an employee as a result of a
workplace accident that occurred on 20th February, 2024. Legal counsel has advised that there is a
60% chance White will lose the case and be required to pay damages of ₹50,000.
Prepare the consolidated Balance Sheet as at 31st March 2024.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 95
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Solution:
Consolidated Balance Sheet as at 31st March 2024
₹
Non-Current Assets
Goodwill (WN3) 30,000
Property, plant and equipment (₹100,000 + ₹80,000 + ₹15,000 (WN2) – ₹3,000 (WN2)) 1,92,000
Investment in Associate (WN7) 29,500
Current Assets
Inventories (₹22,000 + ₹30,000 – ₹1,000 (WN6)) 51,000
Receivables (₹70,000 + ₹10,000 – ₹12,000 inter.co) 68,000
Cash and cash equivalents (₹43,000 + ₹25,000) 68,000
4,38,500
Equity capital 1,00,000
Retained earnings (WN5) 1,60,700
Other components of equity (WN5) 13,000
Non-controlling interest (WN4) 61,800
Total equity 3,53,500
Liabilities (₹50,000 + ₹15,000 – ₹12,000 inter.co + ₹50,000 (WN8)) 1,03,000
4,38,500
Working Notes:
1. Group structure
White is the parent
Blue is a 60% subsidiary (45/75)
Pink is a 30% associate (12/40)
Both acquisitions took place on 01/04/2023
2. Net assets of Blue

On Acquisition date On Reporting date

₹ ₹
Equity capital 75,000 75,000
Other components of equity - 5,000
Retained earnings 30,000 50,000
Fair value adjustment (FVA) 15000* 15,000
Depreciation on FVA (₹15,000/5) - (3,000)
*bal fig 1,20,000 1,42,000

96 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

1. Goodwill
₹
Consideration 1,00,000
FV of NCI at acquisition date 55,000
1,55,000
FV of net assets at acquisition (WN2) (1,20,000)
Goodwill at acquisition date 35,000
Impairment (5,000)
Goodwill at the reporting date 30,000
The impairment of goodwill need to be absorbed to NCI and Group in
proportion to 40% and 60% respectively.

2. Non-controlling interest
₹
Fair value of NCI at acquisition 55,000

NCI % of post-acquisition net assets 8,800

(40% × (₹,142,000 – ₹1,20,000) (WN2))
NCI share of goodwill impairment (40% ×
(2,000)
₹5,000)
61,800

3. Group reserves
Group retained earnings
₹
Parent 2,00,000
Provision (WN8) (50,000)
Share of post-acquisition retained earnings:
Blue: 60% × (₹20,000 – ₹3,000) (WN2) 10,200
Pink: 30% × ₹15,000 4,500
Group share of goodwill impairment (3,000)
(60% × ₹5,000)
Provision for unrealised profit (WN6) (1,000)
1,60,700

Other components of equity

₹
Parent 10,000

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Share of post-acquisition other components of

equity: 3,000
Blue: 60% × (₹5,000 – Nil) (WN2)
13,000
4. Provision for unrealised profit
The profit on the intra-group sale was ₹10,000 (50% × ₹20,000).
The unrealised profit still in inventory is ₹1,000 (10% × ₹10,000).
The parent was the seller, so retained earnings is adjusted in (WN5)
Dr Retained earnings 1,000
Cr Inventories 1,000
5. Investment in the associate
₹
Cost 25,000
Share of increase in retained earnings (30% × ₹15,000) 4,500

29,500
6. Provision
The obligating event, the accident, happened during the reporting period. This means that there is
an obligation from a past event, and a probable outflow of resources that can be measured reliably.
A provision is therefore required for the best estimate of the amount payable, which is ₹50,000.
This is charged to the statement of profit or loss so will reduce retained earnings in (WN5).

Dr Retained earnings 50,000

Cr Provisions 50,000

Illustration 6
For many years, H Ltd. (H) has held 80% of the ordinary shares of S Ltd. (S) and 30% of the ordinary
shares of A Ltd. (A). The following information is needed to prepare the consolidated statement of
profit or loss for the year ending 31st March, 2024.

98 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Statements of profit or loss for the year ended 31st March, 2024
H S A
₹ ₹ ₹
Revenue
5,10,000 1,90,000 1,20,000
Total Revenue 5,10,000 1,90,000 1,20,000
Expenses:
Cost of materials consumed (98,000) (62,500) (55,000)
Employee benefits expense (1,70,000) (25,000) (12,000)
Depreciation and amortization expense (12,000) (7,500) (5,000)
Other expenses (1,30,000) (35,000) (8,000)
Total expenses (4,10,000) (1,30,000) (80,000)
Profit before tax
1,00,000 60,000 40,000
Tax
-33,000 -24,000 -12,000
Profit for the period 67,000 36,000 28,000
Note: There were no items of other comprehensive income in the year.
At the acquisition date, the fair value of S’s plant and machinery, which had a remaining useful life
of 10 years, exceeded its book value by ₹15,000.
During the year, S sold goods to H for ₹20,000 at a margin of 25%. By the end of the year, H had
sold 60% of these goods.
The group’s accounting policy is to measure non-controlling interests using the proportionate
share of net assets method. The goodwill impairment loss for the current year was ₹1,200 which
should be charged to other expenses.
As on 31/03/2024, the investment in A had been impaired by ₹2,500, of which there is no loss in
the current year.
On 1 January 2024, H entered into a contract to provide a customer with support services for
the next 12 months. H received the full payment of ₹45,000 in advance, and this amount was
recognized as revenue.
Prepare the consolidated statement of profit or loss for the year ended 31st March, 2024.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 99
 Work Book : Corporate Financial Reporting

Solution:
Consolidated Statement of Profit or Loss for the year ended 31st March, 2024
₹
Revenue (₹5,10,000 + ₹1,90,000 – ₹20,000 (W3) – ₹33,750 (W4)) 6,46,250
Total Income 6,46,250
Cost of materials consumed (₹98,000 + ₹62,500 – ₹20,000 (W3) + ₹2,000 (W3)) (1,42,500)
Employees’ benefits expense (₹1,70,000 + ₹25,000) (1,95,000)
Depreciation and amortization expense (₹12,000 + ₹7,500 + ₹1,500 (WN2)) (21,000)
Other expenses (₹1,30,000 + ₹35,000 + ₹1,200 Goodwill Impairment) (1,66,200)
Total Expenses 5,24,700
Profit from operations 1,21,550
Share of profit of associate (30% × ₹28,000 Less Impairment ₹0 during the year) 8,400
Profit before tax 1,29,950
Tax (₹33,000 + ₹24,000) (57,000)
Profit for the period 72,950
Attributable to:
Equity holders of the parent (bal. fig) 66,450
Non-controlling interest (W5) 6,500
Profit for the period 72,950
Workings:
(W1) Group structure
H has held 80% of the ordinary shares of S and 30% of the ordinary shares of A.
(W2) Additional depreciation: ₹15,000/10 years = ₹1,500.
The adjusting entry is:
Dr Depreciation 1,500
Cr PPE 1,500
(W3) Intra-group trading
The ₹20,000 trading between S and H must be eliminated:
Dr Revenue 20,000
Cr Cost of material consumed 20,000

100 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

The profit on the sale was ₹5,000 (25% × ₹20,000). Of this, ₹2,000 (₹5,000 × 40%) remains within
the inventories of the group. The Provision for Unrealized Profit adjustment is therefore:
Dr Cost of material consumed 2,000
Cr Inventories 2,000
(W4) Revenue
The performance obligation is satisfied over time. Based on the passage of time, the contract is 25%
(3/12) complete so only 25% of the revenue should be recognized by the reporting date.
Therefore ₹33,750 (₹45,000 × 25%) should be removed from revenue and held as a liability on the
SFP.
Dr Revenue 33,750
Cr Contract liability 33,750
(W5) Profit attributable to NCI
₹ ₹
S’s profit for the year 36,000
PURP (W3) (2,000)
Additional depreciation (W2) (1,500)
32,500
Profit attributable to NCI (32,500 × 20%) 6,500
Note: If the parent had sold goods to the subsidiary then the Provision for Unrealised Profit
adjustment would not be included when calculating the profit attributable to the NCI.
Goodwill has been calculated using the share of net assets method. Therefore, none of the
impairment loss is attributable to the NCI.

Illustration 7
P Ltd. has multiple investments in subsidiary companies. On 1 October 2023, it acquires 30% of
the ordinary shares of A Ltd. for ₹18 lakhs. This acquisition grants P Ltd. significant influence over
A Ltd., leading to its classification as an associate.
At the acquisition date, the fair value of A Ltd.’s net assets was equal to their carrying values, except
for a building. The carrying value of the building was ₹12 lakhs, but its fair value was ₹20 lakhs.
The remaining useful life of the building is 8 years.
Between 1 October 2023 and 31 March 2024, A Ltd. sold goods to P Ltd. for ₹10 lakhs, generating a
profit of ₹60,000. All of these goods remain in the inventory of P Ltd. . This sale was made on credit,
and the invoice is yet to be settled.

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 Work Book : Corporate Financial Reporting

A Ltd. made a profit after tax of ₹6,50,000 for the year ended 31 March 2024 (profit is earned evenly
throughout of the year). At 31 March 2024, the Company P Ltd. determined that the investment in
the associate requires impairment by ₹45,000.
Prepare extracts from the consolidated Balance Sheet and the consolidated statement of profit or
loss, reflecting the treatment of the associate for the year ended 31 March 2024.
Solution:
Extract of Consolidated Balance Sheet as on 31st March, 2024.
₹
Non-current assets
Investment in associate (W1) 18,37,500

Extract of Consolidated statement of profit or loss for year ended 31st March, 2024
Share of profit of associate (W2) 19,500
Note: Adjustment for receivables and payables held between
P Ltd. and A Ltd. is not required.
(W1) Investment in associate
₹
Acquisition cost 18,00,000
Share of post-acquisition profit (30% × ₹6,50,000 × 6/12) 97,500
Share of excess depreciation (15,000)
(30% × ((₹20 lakhs - ₹12 lakh)/8 years) x 6/12)
Impairment (45,000)
Investment in associate 18,37,500
The inventory is held within the group so the parent’s share of the Provision for Unrealised Profit
is credited against inventory rather than the investment in the associate.
(W2) Share of profit of associate
₹
P Ltd.’s share of B Ltd.’s profit after tax (30% × ₹6,50,000 × 6/12) 97,500
Impairment (45,000)
P Ltd.’s share of excess depreciation (30% × ((₹20 lakhs - ₹12 lakh)/8 years) x 6/12) (15,000)
P Ltd.’s share of Provision for Unrealised Profit (30% × ₹60,000) (18,000)
Share of profit of associate 19,500
Illustration 8
A holds 80% of B. As on 31 October 2024, the carrying amount of B’s net assets is ₹75 lakhs,
excluding goodwill of ₹10 lakhs that was recognized at the time of the original acquisition.

102 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

The recoverable amount of the net assets of B is ₹80 lakhs.

Calculate the impairment of goodwill, if any, under the following situations:
(a) Non-Controlling Interest (NCI) at acquisition was measured at fair value
(b) Non-Controlling Interest (NCI) at acquisition was measured at its proportion of the fair value
of the subsidiary’s identifiable net assets.
Solution:
(a) NCI at fair value
If the NCI at acquisition was measured at fair value then full goodwill has been calculated. This
means that recoverable amount should be compared with goodwill and subsidiary’s net asset to
calculate the impairment.
₹ in lakhs
Goodwill 10
Net assets 75
Carrying amount 85
Recoverable amount 80
Impairment 5
The impairment loss will be allocated against goodwill, reducing it from ₹10 lakhs to ₹5 lakhs
The ₹5 lakhs impairment expenses will be charged to profit or loss. Of this, ₹4 lakhs (₹5,00,000 x
80%) is attributable to the group and ₹1 lakhs (₹5,00,000 x 20%) is attributable to the NCI.
(b) NCI using proportionate method
If the NCI at acquisition was measured using the proportionate method then only the group’s
share of the goodwill has been calculated- i.e. 80% of the goodwill. This means that the carrying
amount of the subsidiary’s net assets and goodwill cannot be compared to the subsidiary’s
recoverable amount on a like-for-like basis. As such, goodwill must be grossed up to include the
NCI’s unrecognised 20% share.
₹ in lakhs ₹ in lakhs
Goodwill 10
Unrecognised NCI (20/80 x ₹10 lakhs) 2.5
Total notional goodwill 12.5
Net assets 75
Carrying amount 87.5
Recoverable amount 80
Impairment 7.5

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 Work Book : Corporate Financial Reporting

The impairment loss is allocated against the total notional goodwill of ₹12.5 lakhs.
However, only the group’s share of goodwill has been recognised in the financial statements and so
only the group’s share (80%) of the impairment is recognised. The impairment charged to profit or
loss = ₹6 lakhs and goodwill will be reduced to ₹4 lakhs (₹10 lakhs- ₹6 lakhs)

Illustration 9
The statements of profit or loss for Light Ltd. (Light) and Fairy Ltd. (Fairy) for the year ended 31
March 2024 are as follows.
Light Fairy
₹ ₹
Revenue from operations 61,000 24,000
Investment Income 75 -
Total Revenue 61,075 24,000
Expenses:
Cost of materials consumed (40,500) (19,200)
Employee benefits expense (2,900) (50)
Depreciation & Amortisation (1,500) (800)
Finance Cost - (200)
Other expenses (3,100) (150)
Total expenses (48,000) (20,400)
Profit before tax 13,075 3,600
Tax (3,000) (600)
Profit for the period 3,000
10,075
Retained earnings bfd 12,746 5,400
There were no items of other comprehensive income in the year.
Other relevant information:
1. On 1 July 2023, Light acquired 1,600 out of the 2,000 ₹1 equity shares of Fairy for ₹10,280. As
on the acquisition date, the retained earnings of Fairy stood at ₹6,150.
2. At the acquisition date, the fair values of Fairy’s net assets were the same as their carrying
values, except for plant and equipment. This asset had a carrying value of ₹7,000 but a fair
value of ₹10,200. The remaining useful life of the plant and equipment at the acquisition date
was four years.
3. In the post-acquisition period, Light sold goods to Fairy for ₹15,000. The original cost of these
goods was ₹12,000. In the subsequent months, Fairy sold ₹13,000 (at cost to Fairy) of these
goods to third parties for ₹16,000.

104 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

4. Incomes and expenses (including depreciation) accrued evenly throughout the year.
5. Light follows a policy of valuing non-controlling interests using the full goodwill method. At
the acquisition date, the fair value of the non-controlling interest was ₹2,520.
6. At the reporting date, the recoverable amount of Fairy’s net assets was ₹14,150. Any impairment
of goodwill should be recognized as part of other expenses.
Prepare a consolidated statement of profit or loss for Light group for the year ended 31st March,
2024.
Solution:
Consolidated Statement of Profit or Loss for the year ended 31st March, 2024
Particulars ₹

Revenue (₹61,000 + (9/12 × ₹24,000) – ₹15,000) 64,000

Investment income (₹75 + nil) 75
Total Income 64,075
Cost of materials consumed (₹40,500 + (9/12 × ₹19,200) – ₹15,000 + ₹600 (W6)
(40,900)
+ ₹400 (W5))
Employee benefits expense (₹2,900 + (9/12 × ₹50)) (2,937.5)
Depreciation & Amortisation ((₹1,500 + (9/12 × ₹800)) (2,100)
Finance costs (nil + (9/12 × ₹200)) (150)
Other expenses (₹3,100 + (9/12 × ₹150) + ₹300 (W2)) (3,512.5)
Total Expenses 49,600
Profit before tax 14,475
Tax (₹3,000 + (9/12 × ₹600)) (3,450)
Profit after tax for the period 11,025
Profit attributable to:
Owners of the parent (bal. fig) 10,755
Non-controlling interest (W7) 270
11,025
There were no items of other comprehensive income in the year.
(W1) Group structure – Light owns 80% of Fairy
– the acquisition took place three months into the year
– nine months is post-acquisition.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 105
 Work Book : Corporate Financial Reporting

(W2) Goodwill impairment

₹
Net assets of the subsidiary (W3) 13,000
Goodwill (W4) 1,450
14,450
Recoverable amount (14,150)
Impairment 300
The impairment will be allocated against goodwill and charged to the statement of profit or loss.
(W3) Net assets
Acq’n date Rep. date
₹ ₹
Equity capital 2,000 2,000
Retained earnings 6,150 8,400 #
Fair value adjustment – PPE (₹ 10,200 – ₹7,000) 3,200 3,200
Depreciation on FVA (W6) - (600)
11,350 13,000
# (₹5,400 bfd + ₹3,000)
(W4) Goodwill
₹
Consideration 10,280
FV of NCI at acquisition 2,520
12,800
FV of net assets at acquisition (W3) (11,350)
Goodwill pre-impairment review (W2) 1,450
(W5) Provision for Unrealised Profit
₹2,000 (₹15,000 – ₹13,000) of the ₹15,000 intra-group sale remains in inventory.
The profit that remains in inventory is ₹400 ((₹15,000 – ₹12,000) × 2/15).
(W6) Excess depreciation
There has been a fair value uplift in respect of PPE of ₹3,200 which has a remaining life of 4 years.
The depreciation charge in respect of this uplift in the current year statement of profit or loss is
₹600 ((₹3,200/4 years) × 9/12).

106 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

(W7) Profit attributable to the NCI

₹ ₹
Profit of Fairy (9/12 × ₹3,000) 2,250
Excess depreciation (W6) (600)
Goodwill impairment (W2) (300)
Total (a) 1,350

Profit attributable to the NCI [20% of (a)] 270

Illustration 10
The Balance sheets of Janvee Limited, Isha Limited and Tanisha Limited as on 31.03.2024 are given
below:
Amounts in ₹ Lakhs
Janvee Ltd. Isha Ltd. Tanisha Ltd.
Assets
Non-Current Assets
Tangible assets 180 200 140
Investments:
16 lakhs shares in Isha Ltd. 170 - -
12 Lakhs shares in Tanisha Ltd. 140 -
Current Assets
Cash and cash equivalents 94 20 30
Bills Receivable 36 - 15
Trade Receivables 130 30 110
Inventories 110 35 25
720 425 320
Equity and Liabilities
Shareholder’s Equity
Share capital (10 per Share) 300 200 160
Reserves as on 01.04.2023 70 40 30
Reserve during the year 20 10 10
Retained earnings as on 01.04.2023 50 10 15
Retained earnings during the year 30 20 12
Current Liabilities
Trade Payables 235 110 93
Bills Payable
Janvee Ltd. - 35 -
Tanisha Ltd. 15 - -
720 425 320

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 107
 Work Book : Corporate Financial Reporting

The following additional information is available:

(i) All acquisition of shares took place on 30th September, 2023. The parent company has chosen
an accounting policy to measure non-controlling interest at fair value (quoted market price) in
accordance with Ind AS 103. Assume that the market prices of Isha Limited and Tanisha Limited
are equal to their respective face values. Further, it is assumed that profits are generated evenly
throughout the year.
(ii) The inventory figure of Isha Limited includes ₹6 Lakhs worth of inventory that was purchased
from Tanisha Limited at cost plus 20%.
Prepare the consolidated Balance Sheet as on 31 March, 2024 of the group. Working should be part
of your answer.
Solution:
(i) Date of Acquisition (DOA) = 30th September, 2023
(ii) Computation of Effective Interest of Parent company i.e. Janvee Ltd. in Tanisha Ltd. (% of
Acquisition)
Acquisition by Janvee Ltd. in Isha Ltd. = 80%
Acquisition by Isha Ltd. in Tanisha Ltd. = 75%
Acquisition by Group in Tanisha Ltd. (80% x 75%) = 60%
Thus, Non-controlling Interest = 40%
(iii) Analysis of Other Equity
Isha Ltd.:
(₹ in lakh)
Pre-Acquisition Post-Acquisition Profits
Particulars Profits (Pre-30th (1st October, 2023 to
September, 2023) 31st March, 2024)
Reserves on 1st April, 2023 40
Increase in Reserves 5 5
Retained Earnings on 1st April, 2023 10
Increase in Retained Earnings 10 10
65 15
Thus,
Equity/Net Assets on DOA: 265
[Share Capital + Pre-Acquisition profits] [200 + 65]

108 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Tanisha Ltd.:
(₹ in lakh)
Pre-Acquisition Post-Acquisition Profits
Particulars Profits (Pre-30th (1st October, 2023 to
September, 2023) 31st March, 2024)
Reserves on 1st April, 2023 30
Increase in Reserves 5 5
Retained Earnings on 1st April, 2023 15
Increase in Retained Earnings 6 6
Unrealized Profit - Stock sale [ 6 × 1/6] -1
56 10
Thus,
Equity/Net Assets on DOA: 216
[Share Capital Pre-Acquisition profits] [160 + 56]

Consolidated Balance Sheet as on 31st March, 2024

Particulars Note No. (₹ in lakh)
ASSETS
Non-current assets
Property, plant and equipment 1 520
Current assets
(a) Inventories 2 169
(b) Financial assets
Trade receivables 3 270
Bills receivable 4 1
(c) Cash and cash equivalents 5 144
Total Assets 1,104
EQUITY & LIABILITIES
Equity attributable to owners of the
parent
Share capital 300
Other Equity
Reserves (Working Note -1) 97
Retained Earnings (Working Note-
91
1)
Capital Reserve (Working Note-3) 95
Non-controlling interests (Working
83
Note-2)
Total equity 666

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 109
 Work Book : Corporate Financial Reporting

LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
(i) Trade payables 6 438
Total liabilities 438
Total equity and liabilities 1,104

Notes to Accounts:
(₹ in lakh)
1. Property Plant & Equipment
Parent 180
Isha Ltd. 200
Tanisha Ltd. 140 520

2. Inventories
Parent 110
Isha Ltd. (35-1) 34
Tanisha Ltd. 25 169

3. Trade Receivables
Parent 130
Isha Ltd. 30
Tanisha Ltd. 110 270

4. Bills Receivable
Parent (36-35) 1
Tanisha Ltd. (15-15) Nil 1

5. Cash & Cash equivalents

Parent 94
Isha Ltd. 20
Tanisha Ltd. 30 144

6. Trade Payables
Parent 235
Isha Ltd. 110
Tanisha Ltd. 93 438

110 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Working Note - 1
Computation of Consolidated Other Equity:
Particulars Reserves Retained Earnings
Janvee Ltd. 90 80
Add: Share in Isha Ltd. 4 8
(5 x 80%) (10 x 80%)
Add: Share in Tanisha Ltd. 3 3
(5 x 60%) (5 x 60%)
97 91

Working Note - 2
Computation of NCI (at Fair Value)
NCI for Goodwill/Bargain Purchase Gain-on DOA:
Particulars Amount (Lakhs) Amount (Lakhs)
Isha Ltd. Tanisha Ltd.
NCI at Fair Value
(200 x 20%) 40
(160 x 40%) 64

NCI for CBS:

Particulars Amount (Lakhs) Amount (Lakhs)
Isha Ltd. Tanisha Ltd.
NCI at Fair Value 40 64
Add: Share in Post-Acquisition Profits 3 4
(15 x 20%) (10 x 40%)
43 68
Less: NCI share of investment in Tanisha
-28
Ltd.*
15 68
Total 83
*20% of Investment in Tanish by Isha is made by NCI of Isha.

Working Note - 3
Computation of Goodwill/Bargain purchase gain

Particulars Amount (Lakhs) Amount (Lakhs)

Isha Ltd. Tanisha Ltd.
Consideration paid 170 112
[140 x 80%]

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 111
 Work Book : Corporate Financial Reporting

Add: NCI on DOA 40 64

Less: Acquisition date fair value of Net
265 216
assets/ Equity
Capital Reserve 55 40
Total 95

Illustration 11
On 31st March 2022, H Ltd acquired 90% of the ordinary shares of S Ltd for $2.75 lakh. At this date,
S Ltd.’s retained earnings amounted to $ 1.5 Lakh. The fair value of the non-controlling interest at
the acquisition date was $ 1.4 Lakh.
The financial statements of H Ltd and S Ltd for the year ended 31st March 2023 are presented
below:
Statements of profit or loss for year ended 31st March 2023
H Ltd S Ltd
₹ Lakh $ Lakh
Revenue 1200 5.15
Costs (1000) (4.50)
Profit 200 0.65

Balance Sheet as at 31st March 2023

H Ltd S Ltd
₹ Lakh $ Lakh
Property, plant and equipment 340 2.70
Investments 220 -
Current assets 40 1.30
600 4.00

H Ltd S Ltd
₹ Lakh $ Lakh
Share capital 10 0.05
Retained earnings 330 2.15
Liabilities 260 1.80
600 4.00
There has been no intra-group trading. Goodwill arising on the acquisition of S Ltd is not impaired.
The presentation currency of the consolidated financial statements is the rupee (₹).

112 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Exchange rates are as follows:

1$
31st March 2022 ₹ 80
31st March 2023 ₹ 85
Average for year to 31st March 2023 ₹ 82
Prepare the consolidated balance sheet and the consolidated profit or loss and other comprehensive
income for the group for the year ended 31st March 2023.
Solution:
Consolidated Balance Sheet as at 31st March 2023
₹ Lakhs
Property, plant and equipment (WN 1) 569.50
Goodwill (WN 2) 221.00
Current assets (WN 1) 150.50
941.00
Share capital 10.00
Retained earnings (WN 5) 377.97
Translation reserve (WN 6) 20.43
408.40
Non-controlling interest
119.60
(WN 4)
528.00
Liabilities (WN 1) 413.00
941.00
Consolidated Statement of profit or loss and other comprehensive income for year ended
31st March 2023
Revenue (WN 1) 1622.30
Costs (WN 1) -1369.00
Profit for the year 253.30
Other comprehensive income – items that may be classified to profit or loss in
future periods
Exchange differences on translation of foreign subsidiary (₹13 + ₹9.70) 22.70
Total comprehensive income for the year 276.00
Profit attributable to:
Shareholders of A Ltd (bal. fig.) 247.97

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 113
 Work Book : Corporate Financial Reporting

Non-controlling interest (10% × ($0.65 × 82 avg. rate)) 5.33

Profit for the year 253.30
Total comprehensive income attributable to:
Shareholders’ of A Ltd (bal. fig.) 268.40
Non-controlling interest (₹5.33(profit) + ₹1.30 + ₹0.97) 7.60
Total comprehensive income for the year 276.00
Working Notes:
1. Translation of income and expenses of overseas subsidiary in Indian Rupees
Particulars ₹ Lakhs
Revenue (₹1,200 + ($5.15x82)) 1622.30
Costs (₹1000+($4.5x82)) -1369.00
PPE (₹340 + ($2.7x85)) 569.50
Investments (eliminated on consolidation) 0.00
Current assets (₹40 + ($1.3x85)) 150.50
Share capital (A Ltd only) 10.00
Liabilities (₹260 + ($1.8x85)) 413.00
Income and expenses of an overseas subsidiary are translated at the average rate and the assets
and liabilities are translated at the closing rate.
1. Goodwill calculation
Particulars $ Lakhs
Consideration 2.75
NCI at acquisition 1.40
Net assets at acquisition (WN3) -1.55
2.60
Goodwill impairments 0.00
Closing Goodwill 2.60
Goodwill is translated at the closing rate to give a value of ₹221L ($ 2.60x85).
$ Lakhs Exchange Rate ₹ Lakhs
Opening goodwill 2.60 80 208.00
Impairment loss in year 0.00 82 0.00
Translation gain* 0.00 Bal fig. 13.00
Closing goodwill 2.60 85 221.00
*The total translation gain of ₹13 Lakhs will be credited to other comprehensive income and
then allocated to the group and NCI based on their respective shareholdings:
Group: ₹ 13 L × 90% = ₹ 11.7 L
NCI: ₹ 13L × 10% = ₹ 1.31

114 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

2. Net assets of B Ltd

Acquisition Date Reporting Date Post acquisition
$ Lakhs $ Lakhs $ Lakhs
Share capital 0.05 0.05 0.00
Retained earnings 1.50 2.15 0.65
1.55 2.20 0.65

$ Lakhs Exchange Rate ₹ Lakhs

Opening net assets* 1.55 80 124.00
Profit/(loss) for the year* 0.65 82 53.30
Translation gain/(loss)# 0.00 Bal. fig. 9.70
Closing net assets* 2.20 85 187.00
*These figures are taken from the net assets working.
#The total translation gain of ₹9.70 Lakhs will be credited to other comprehensive income
and allocated to the group and NCI based on their respective shareholdings:
Group: 9.70 L × 90% = ₹ 8.73 L
NCI: 9.70 L × 10% = ₹ 0.97 L

3. Non-controlling interest ₹ Lakhs

NCI at acquisition ($1.40 x 80 opening rate) 112.00
NCI % of B Ltd.’s post-acquisition profits (10% × ($0.65 x 82 average rate)) 5.33
NCI % of goodwill translation 1.30
NCI % of net assets and profit translation 0.97
119.60
2. Retained earnings
₹ Lakhs
100% of A Ltd 330.00
90% of B Ltd’s post-acquisition profits (90% × ($0.65x82)) 47.97
377.97

3. Translation reserve
₹ Lakhs
Group share of translation gain on Goodwill 11.70
Group share of translation gain on net assets 8.73
20.43
4. Group Structure:
S Ltd. is 90% subsidiary of H Ltd.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 115
 Work Book : Corporate Financial Reporting

Notes:
Notes

116 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Corporate Financial Reporting

Notes:
Notes

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 117
 Work Book : Corporate Financial Reporting
Work Book : Corporate Financial Reporting

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Directorate of Studies, The Institute of Cost Accountants of India (Statutory Bodyusunder
on an Act of Parliament)
118 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)

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