TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S.

Beniwal (9990301165)
1.
a. As company have to pay capital gain tax @ 20% on the net sale consideration as per income tax laws, then
company have to recognise a current tax liability of 0.8 crore.

Particulars Amount
Sale Consideration 8
Cost of Investment 4
Net gain on Sale Consideration 4
Tax @ 20% 0.8

As per para 7 of AS 22, Timing differences are those differences between taxable income and accounting
income for a period that originate in one period and are capable of reversal in one or more subsequent
periods.

Particulars Amount Rationale

Taxable Income 4 As per income tax laws
Accounting Income Nil As the same is deducted from
the cost of investment
Timing Difference 4
As per para 15 of AS 22, deferred tax assets should be recognised and carried forward only to the extent that
there is a reasonable certainty that sufficient future taxable income will be available against which such
deferred tax assets can be realised.

Since in current scenario, due to Covid 19 the portfolio companies are not performing well and hence
company may not have sufficient future taxable income which will reverse deferred tax assets and hence
company should not recognise DTA of Rs. 0.8 crore and company should recognise only current tax liability
of Rs. 0.8 crore.

b. Expenditure to be transfer to profit or loss in 20X1-20X2

INR
Total Expenditure 3,600
Less. Expenditure during Development phase 900
Expenditure to be transfer to profit or loss 2,700

(1) Carrying Amount of Intangible Asset on 31st March 20X2.

Expenditure during Development Phase will be capitalised ₹ 900 (Recoverable amount is higher being ₹
1,000, hence no impairment)

(2) Expenditure to be charged to profit or loss in 20X2-20X3

INR
Opening balance of Intangible Asset 900
Add. Further expenditure during development phase 6,000
Expenditure for development phase 6,900
Recoverable Amount 5,000
Amount charged to profit or loss (Impairment Loss) 1,900

(3) Carrying Amount of Intangible Asset on 31st March 20X3.

Value of Intangible Asset will be recoverable amount i.e. ₹ 5,000

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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
c.
(a) The retail method can be used for measuring inventories of the beauty products. The cost of the
inventory is determined by taking the selling price of the cosmetics and reducing it by the gross
margin of 65% to arrive at the cost.
(b) The handbags can be measured using standard cost especially if the results approximate cost.
Given that The company has the information reliably on hand in relation to direct materials,
direct labour, direct expenses and overheads, it would be the best method to use to arrive at the
cost of inventories.

d. It is likely that the recoverable amount of an individual magazine title can be assessed. Even
though the level of advertising income for a title is influenced, to a certain extent, by the other
titles in the customer segment, cash inflows from direct sales and advertising are identifiable for
each title. In addition, although titles are managed by customer segments, decisions to abandon
titles are made on an individual title basis.
Therefore, it is likely that individual magazine titles generate cash inflows that are largely
independent one from another and that each magazine title is a separate cash-generating unit.

2. Consolidated Balance Sheet of Air Ltd. with its Subsidiary Cold Ltd. and Jointly controlled
Dry Ltd. as on 30th Sept. 2010

Particulars Note No. (Rs. in thousands)

I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 21,500
(b) Reserves and Surplus 2 49,050
(2) Non-Current Liabilities
Long-term borrowings 3 15,540
(3) Current Liabilities
(a) Trade Payables Rs.
(17,120 + 5,270 + 7,050) 29,440
(b) Short-term provisions 4 8,420
Total 1,23,950
II. Assets
(1) Non-current assets
Fixed assets

(a) Tangibles assets

Rs. (34,260+27,000+10,530) 71,790
(b) Intangible assets (W.N.6) 4,000
(2) Current assets
(a) Inventories Rs. (9,640 + 7,200 + 9,320) 26,160
(b) Trade receivables Rs. (11,200+5,060+2,310) 18,570
(c) Cash and cash equivalents 5 3,430
Total 1,23,950

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TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)

Notes to Accounts
(Rs. in thousands)
1. Share Capital
Equity Capital Rs. (10,000 + 4,000 + 7,500)
(Out of the above 11,500 thousand shares have been issued 21,500
for consideration other than cash)

2. Reserves and Surplus

Retained Earnings (W.N.4) 28,800
Capital Reserve (W.N.5) 3,000
Securities Premium 17,250 49,050

3. Long Term Borrowings

8% Debentures 14,000
Overdraft 1,540 15,540

4. Short-term provisions
Provision for taxes Rs. (5,640 + 2,400 + 380) 8,420

5. Cash and cash equivalents

Cash Rs. (3,410 + 20) 3,430

Working Notes:
1. Purchase consideration paid to Cold Ltd.
Earnings per share for the year 30th Sept., 2009
20,00,000/2,00,00,000 = Rs. 0.10 per share
Market price per share = Rs. 0.10 x 12 (i.e. P/E ratio) = Rs. 1.20 per share
Purchase consideration = Rs. 1.20 x 2,00,00,000 shares= Rs. 2,40,00,000

Purchase consideration to be paid as under:

8% Debentures Rs. 1,40,00,000
Equity Shares (40,00,000 shares of Rs. 2.50 each) Rs. 1,00,00,000
Purchase consideration paid to Cold Ltd. will be Rs. 24,000 thousands. Rs. 2,40,00,000

2. Consideration paid to Dry Ltd.

(Rs. in thousands)
Total market value (as given) 37,500
50% Shares acquired by Air Ltd.(75,00,000 shares @ Rs. 2.50 each) 18,750

3. Analysis of retained earnings of Cold Ltd. as on 30th Sept, 2010

(Rs. in thousands)
Retained earnings given in balance sheet on 31.3.2017 15,000
Less: Current profits for the year ended 31.3.2017 (Post acquisition) (8,000)
Pre acquisition retained earnings 7,000
Air Ltd. has 100% share in pre and post acquisition profits of Cold Ltd.

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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)

4. Retained Earnings in the Consolidated Balance Sheet

Rs. in thousands
Balance in Air Ltd. balance sheet 20,800
Add: Share in post acquisition profits of Cold Ltd. 8,000
Add: Share in post acquisition profits of Dry Ltd. (joint venture) 1,000
29,800
Less: Goodwill (written off) (1,000)
28,800

5. Capital Reserve
Rs. in thousands
Amount Paid 24,000
Less: Paid up value of shares 20,000
Pre-acquisition profit 7,000 (27,000)
Capital Reserve 3,000

6. Goodwill
Rs. in thousands
Amount paid for shares of Dry Ltd (Rs. 37,500 x 50%) 18,750
Less: Paid up value of shares (Rs. 25,000x 50%) (12,500)
Pre-acquisition profit (Rs. 2,500 x 50%) (1,250)
Goodwill 5,000
Less: Impairment (Written off) (1,000)
4,000

3. (i) Break up value of Rs. 1 of share capital = Rs. 28.98 lakhs/ Rs. 16.00 lakhs = Rs. 1.81

Break up value of Rs. 10 paid up share = Rs. 1.81 × Rs. 10 = Rs. 18.10

Break up value of Rs. 6 paid up share = Rs. 1.81 ×Rs. 6 = Rs. 10.86

Market value of shares:

Average dividend = (11% + 12% + 13% + 14%)/4 = 12.5%

Market value of Rs. 10 paid up share = (12.5% / 10%) X 10 = Rs.12.50

Market value of Rs. 6 paid up share = (12.5% / 10%) X 6 = Rs.7.50

(ii) Break up value of share will remain as before even if the controlling interest is being sold. But
the market value of shares will be different as the controlling interest would enable the declaration
of dividend upto the limit of disposable profit.

( Average Profit / Paid up value of shares) × 100 = (Rs. 3.4 lakhs / Rs. 16 lakhs) × 100 = 21.25%

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TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)

Market value of shares:

For Rs. 10 paid up share = (21.25% / 10%) × 10 = Rs. 21.25

For Rs. 6 paid up share = (21.25% / 10%) × 6 = Rs. 12.75

Fair value of shares = (Breakup value + Market value)/ 2

Fair value of Rs. 10 paid up share = (18.10 + 21.25 )/2 = Rs. 19.68

Fair value of Rs. 6 paid up share = (10.86 + 12.75)/2 = Rs. 11.81

Working Notes:
(a) Calculation of average capital employed
(Rs. in lakhs)
Fixed assets 24.00
Other tangible assets 3.00
Intangible assets 3.00
30.00
Less: Liabilities 10
Bonus claim 1 (11.00)
19.00
Less: ½ of profits [½ (4.1 – Bonus 1.0)] (1.55)
Average capital employed 17.45

(b) Calculation of super profit

Average profit = ¼ ( 3 + 3.5 + 4 + 4.1 – Bonus 1.0 )
= ¼ × 13.6 3.400
Less: Normal profit = 10 % of Rs. 17.45 lakh (1.745)
Super profit 1.655

(c) Calculation of goodwill

3 Years’ purchase of average super-profit = 3 × 1.655 = Rs. 4.965 lakhs
Increase in value of goodwill = ½ (book value + 3 years’ super profit)
= ½ (5 + 4.965)
= Rs. 4.9825 lakhs
Net assets as revalued including book value of goodwill (19 + 5) 24.00
Add: Increase in goodwill (rounded-off) 4.98
Net assets available for shareholders 28.98

Notes:

1. In the above solution, tax effect of disputed bonus and corporate dividend tax has been ignored.
Also the increase in value of goodwill has been calculated on the basis of the capital employed
(excluding purchased goodwill).
2. Average dividend rate shall be calculated by using simple average method. Alternatively we can
calculate it by using Weighted Average Method.

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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)

4. Projected Balance Sheet of Mix Ltd. as on December 31, 2011

Particulars Note No. Rs.

I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 54,00,000
(b) Reserves and Surplus 2 14,25,000
Total 68,25,000
II. Assets
(1) Non-current assets
Non Current Investments 3 60,00,000
(2) Current assets
Cash & Cash equivalents 8,25,000
Total 68,25,00

Projected Profit and Loss Account for the Period ending December 31, 2011
Particulars Note No. Rs.
I. Other Income 4 1,74,000
II. Total Revenue (A) 1,74,000
I. Expenses
Management Expenses 6,000
II. Total Expenses (B) 6,000
Net Profit before Tax (A-B) 1,68,000

Notes to Accounts
(Rs.) (Rs.)
1. Share Capital
Authorised : 6,00,000 Equity shares of Rs.10 each 60,00,000
Issued : 5,40,000 (WN1) Equity shares of Rs 10 each 54,00,000 54,00,000
2. Reserves and surplus
Securities Premium Account (WN 1) 14,25,000
Profit and Loss 1,68,000 1,68,000
Deduct Dividend WN 3 (1,68,000) -
14,25,000
3. Non Current Investments
Subsidiary Companies shares at cost 60,00,000
4. Other Income
Dividend Received
Rich Ltd. (30,00,000 X 5 %) 1,50,000
Poor Ltd. (12,00,000 X 2 %) 24,000 1,74,000

Working Notes:
1. Share Capital
Rich Ltd. Poor Ltd.
Rs. Rs.
Estimated annual maintainable profits before deduction
of debenture interest and taxation 6,00,000 2,40,000
Deduct Debenture interest - (40,000)
6,00,000 2,00,000
Deduct Corporation tax 40 percent (2,40,000) (80,000)
3,60,000 1,20,000
Deduct Preference dividend - (60,000)
Profit for equity shareholders 3,60,000 60,000
P/E Ratio 15 10
Total consideration (Profit x P.E. Ratio) 54,00,000 6,00,000
Share Issue Price (Rs. 10 + Rs. 2.5 Premium) Rs.12.5 Rs.12.5
Number of shares to be issued 4,32,000 48,000
Shares Shares
Share capital (Rs. 10 X no. of shares to be issued) 4,32,000 4,80,000
Securities premium (Rs. 2.50 X no. of shares to be issued) 10,80,000 1,20,000

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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
Total Shares Issued to Rich Ltd. and Poor Ltd. = 4,32,000 + 48,000 = 4,80,000
Shares issued to public = 60,000
Total Shares issued as on 31st Dec 2011 = 5,40,000
Securities Premium Balance
From shares issued to Rich & Poor Ltd. = 4,80,000 X 2.5 = Rs. 12,00,000
From shares issued to public = 60,000 X 3.75 = Rs. 2,25,000
Total Securities Premium = Rs. 14,25,000

(2) Bank Account

Rs. Rs.
To Shares issued (Dec.31, 2011) By Management expenses 6,000
60,000 shares at Rs. 13.75 each 8,25,000 By Dividend paid (WN 3) 1,68,000
To Dividends received: By Balance c/d 8,25,000
Rich Ltd. (30,00,000 X 5 %) 1,50,000
Poor Ltd. (12,00,000 X 2 %) 24,000
9,99,000 9,99,000

3. Dividend to be paid by Mix Ltd.

Total Shares as on 31st Dec 2011 Rs. 54,00,000
Less: 60,000 shares not qualifying for dividend Rs. 6,00,000
Shares eligible for dividend Rs. 48,00,000
Dividend @ 3.5 % Rs. 1,68,000

5.
a. The present value of earnings of each category of employees by applying 15% discount factor
is ascertained as below:
(A) Unskilled employees:
Age group 30-39. Assume that all 70 employees are just 30 years old:

Present value
Rs.
Rs. 3,000 p.a. for next 10 years 15,057
Rs. 4,000 p.a. for years 11 to 20 4,960
Rs. 5,000 p.a. for years 21 to 25 1,025
21,042
Age group 40-49. Assume that all 20 employees are just 40 years old:

Rs. 4,000 p.a. for next 10 years 20,076

Rs. 5,000 p.a. for years 11 to 15 4,140
24,216
Age group 50-54: Assume that all 10 employees are just 50 years old:

Rs. 5,000 p.a. for next 5 years 16,760

Similarly, present value of each employee under other categories will be calculated.

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TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)

(B) Semi-skilled employees:

Age group 30-39

Present value
Rs.
Rs. 3,500 p.a. for next 10 years 17,567
Rs. 5,000 p.a. for years 11 to 20 6,200
Rs. 6,000 p.a. for years 21 to 25 1,230
24,997

Age group 40-49

Rs. 5,000 p.a. for next 10 years 25,095

Rs. 6,000 p.a. for years 11 to 15 4,968
30,063

Age group 50-54

Rs. 6,000 p.a. for next 5 years 20,112

(C) Skilled employees:

Age group 30-39

Present value
Rs.
Rs. 5,000 p.a. for next 10 years 25,095
Rs. 6,000 p.a. for years 11 to 20 7,440
Rs. 7,000 p.a. for years 21 to 25 1,435
33,970

Age group 40-49

Rs. 6,000 p.a. for next 10 years 30,114

Rs. 7,000 p.a. for years 11 to 15 5,796
35,910

Age group 50-54

Rs. 7,000 p.a. for next 5 years 23,464

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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)

Total value of Human Capital

Age Unskilled Semi-skilled Skilled Total

No. Av. Annual No. Av. Annual No. Av. Annual No. Av. Annual
earnings earnings earnings earnings
(Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000)
30-39 70 14,72,940 50 12,49,850 30 10,19,100 150 37,41,890

40-49 20 4,84,320 15 4,50,945 15 5,38,650 50 14,73,915

50-54 10 1,67,600 10 2,01,120 5 1,17,320 25 4,86,040

100 21,24,860 75 19,01,915 50 16,75,070 57,01,845

b. (i) Calculation of securitized component of loan

Rs . Rs.
Fair Value 12,23,960
Less: Principal strip receivable (fair value ) 29,000
Less: Interest strip receivable (fair value) 1,19,460
Less: Value of service asset (fair value) 65,160 1,84,620 2,13,620
10,10,340

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

Fair value Apportionment
Rs. (Rs)
Securitized component of loan 10,10,340 (10,10,340x10,00,000)/12,23,960 8,25,468
Principal strip receivable 29,000 (29,000x10,00,000)/12,23,960 23,694
Interest strip receivable 1,19,460 (1,19,460x10,00,000)/12,23,960 97,601
Servicing asset 65,160 (65,160x10,00,000)/12,23,960 53,237

(iii) Entries to record the derecognition of the Loan

Particulars Rs Rs
Bank A/C Dr. 9,90,000
To Loan A/C 8,25,468
To Profit &Loss A/C 1,64,532
(Being entry for securitization of 90% principal with
14%interst )
Interest strip a/c Dr. 97,601
Servicing strip A/c Dr. 53,237
Principal strip A/c Dr. 23,694
To Loan A/c 1,74,532
(Being entry for interest, servicing asset and principal
strips received )

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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
6.
a. Calculation of expenses to be recognised in respect of the liability component at the end of
each year
Year 1
Provision required at the year-end 1,000 x Rs. 52.00 x 1/3 = Rs. 17,333
Less: provision at the beginning of the year Nil
Expense for the year Rs. 17,333

Year 2
Provision required at the year-end 1,000 x Rs. 55.00 x 2/3 = Rs. 36,667
Less: provision at the beginning of the year Rs. 17,333
Expense for the year Rs. 19,334

Year 3
Provision required at the year-end 1,000 x Rs. 60.00 = Rs. 60,000
Less: provision at the beginning of the year Rs. 36,667
Expense for the year Rs. 23,333

Journal Entries for each year

Year Particulars Rs. Rs.

1 Employee compensation expense A/c Dr. 17,333
To Provision for liability component of 17,333
employee share-based payment plan
(Being compensation expense recognised in
respect of liability component of employee share-
based payment plan with cash alternative)

Employee compensation expense A/c Dr. 2,533

To Stock Options Outstanding A/c 2,533
(Being compensation expense recognised in
respect of equity component of employee share-
based payment plan with cash alternative)

2 Employee compensation expense A/c Dr. 19,334

To Provision for liability component of 19,334
employee share-based payment plan
(Being compensation expense recognised in
respect of liability component of employee share-
based payment plan with cash alternative)

Employee compensation expense A/c Dr. 2,533

To Stock Options Outstanding A/c 2,533
(Being compensation expense recognised in
respect of equity component of employee share-
based payment plan with cash alternative)

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TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
3 Employee compensation expense A/c Dr. 23,333
To Provision for liability component of 23,333
employee share-based payment plan
(Being compensation expense recognised in
respect of liability component of employee share-
based payment plan with cash alternative)

Employee compensation expense A/c Dr. 2,533

To Stock Options Outstanding A/c 2,533
(Being compensation expense recognised in
respect of equity component of employee share-
based payment plan with cash alternative)

On settlement for each year

Scenario 1: The cash alternative
Provision for liability component of employee Dr. 60,000
share-based payment plan
To Bank A/c 60,000
(Being cash paid on exercise of cash alternative
under the employee share-based payment plan)

Stock Options Outstanding A/c Dr. 7,600

To General Reserve 7,600
(Being the balance standing to the credit of the
Stock Options Outstanding Account transferred to
the general reserve upon exercise of cash
alternative)

Scenario 2: The equity alternative

Stock Options Outstanding A/c Dr. 7,600
Provision for liability component of employee Dr. 60,000
share-based payment plan
To Share Capital A/c (1,000 shares x Rs. 10) 10,000
To Securities Premium A/c 57,600
(Being shares issued on exercise of equity
alternative under the employee share-based
payment plan)

Working Note:
The employee share-based payment plan granted by the enterprise has two components, viz., (i) a
liability component, i.e., the employees’ right to demand settlement in cash, and (ii) an equity
component, i.e., the employees’ right to demand settlement in shares rather than in cash. The
enterprise measures, on the grant date, the fair value of two components as below:

Fair value under equity settlement 1,200 shares x Rs. 48 = Rs. 57,600
Fair value under cash settlement 1,000 shares x Rs. 50 = Rs. 50,000
Fair value of the equity component (Rs. 57,600 – Rs. 50,000) = Rs. 7,600
Fair value of the liability component Rs. 50,000

The expense to be recognised in respect of the equity component at the end of each year is one third
of the fair value (Rs. 7,600) determined above.
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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
b. Market Value Added (MVA) is the difference between the current market value of a firm and the
capital contributed by investors (both debenture holders and shareholders). In other words, it is the
sum of all capital claims held against the company plus market value of debt and equity. If MVA is
positive, firm has added value.
Market Value Added = Market value of firm less amount invested in the firm

Rs. in lakh
Equity Share Capital (market value)
(505 lakh x 600%) 3030
Preference share capital (15,00,000 x 30) 450
Debentures 50
Current market value of firm 3,530
Less: Equity Share Capital 505
Preference share capital 150
Reserves 101
Debentures 50
Statutory Reserve 50.50 (856.50)
Market Value Added 2,673.50
The significant Market Value addition implies that the management of W Ltd. has
created wealth for its shareholders and that market investors are willing to pay a price
greater than the historical net worth of the company.

c. Calculation of effective yield on per annum basis in respect of three mutual fund schemes of
Ramesh Goyal upto 31.03.2017

X Y Z

1 Amount of Investment (Rs.) 2,00,000 4,00,000 2,00,000

2 Date of investment 1.12.2016 1.1.2017 1.3.2017

3 NAV at the date of investment (Rs.) 10.50 10.00 10.00

4 No. of units on date of investment [1/3] 19,047.62 40,000 20,000

5 NAV per unit on 31.03.2017 (Rs.) 10.40 10.10 9.80

6 Total NAV of mutual fund investments

on 31.03.2017 [4 x 5] 1,98,095.25 4,04,000 1,96,000

7 Increase/ decrease of NAV [6-1] (1,904.75) 4,000 (4,000)

8 Dividend received upto 31.3.2017 3,800 6,000 Nil

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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)

9 Total yield [7+8] 1,895.25 10,000 (4,000)

10 Yield % [9/1] x 100 0.95% 2.5% (2%)

11 Number of days from date of investment 121 90 31

12 Effective yield p.a. [10/11] x 365 days 2.87% 10.14% (23.55%)

7.
a. According to Para 21 of AS 3 (Revised) ‘Cash Flow Statements’, an enterprise should report
separately major classes of gross cash receipts and gross cash payments arising from investing and
financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are
reported on a net basis. Acquisition and disposal of fixed assets is not prescribed in para 22 and 24
of the standard. Hence, the company cannot disclose net cash flow in respect of acquisition of plant
and machinery and disposal of furniture and fixtures.

b. Schedule III to the companies Act, 2013 provides that:

“A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting date. Terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments and do not affect its
classification.”
In the present situation, Astha Ltd. does not have an unconditional right to defer settlement of the
liability for at least 12 months after the reporting date. The position will be same even when the
FCCB holders are expected to convert their holdings into equity shares of Astha Ltd.
Expectations cannot be called as unconditional rights. Thus, in both the situations, Astha Ltd.
should classify the FCCBs as current liabilities as on 31 March 2013

c. Mere gradual phasing is not considered as discontinuing operation as defined under para 3 of AS
24, ‘ Discontinuing Operation’.
Examples of activities that do not necessarily satisfy criterion of the definition, but that might do so
in combination with other circumstances, include:
(1) Gradual or evolutionary phasing out of a product line or class of service.
(2) Shifting of some production or marketing activities for a particular line of business from one
location to another and
(3) Closing of a facility to achieve productivity improvements or other cost savings.
A Reportable business segment or geographical segment as defined in AS-17, would normally
satisfy criteria (b) of the definition.

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 TEST 6: (Solution) CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
In view of the above the answers are:
(i) No. The companys’ strategic plan has no final approval from the board through a resolution
and no specific time bound activities like shifting of Assets and employees and above all the
new segment commercial vehicle production line and factory has started.
(ii) No. The resolution is salient about stoppage of the Car segment in definite time period.
Though, some assets sales and transfer proposal was passed through a resolution to the new
factory, closure road map and new segment starting road map is missing. Hence, AS-24 will
not be applicable.
(iii) Yes. Phased and time bound programme resolved in the board clearly indicates the closure of
the passenger car segment in a definite time frame and clear road map. Hence, this action will
attract AS-24 compliance.

d. Calculation of Profit or Loss to be recognised in the book of Stem Ltd.

Forward contract rate ₹ 62.15 per dollar
Less Spot Rate ₹ 60.75 per dollar
Loss ₹ 1.40 per dollar
Forward Contract Amount US$ 30000
Total Loss on entering into forward contract = (US$ 30,000 x ₹ 1.40
= ₹ 42,000
Contract Period 6 Months
Out of total contract period of 6 months, 4 months are falling in the financial year 2013-
14. Loss for the period from 1st Dec.2013 to 31st March, 2014= (₹ 42,000/6) x 4 = ₹ 28,000. Thus
the loss amounting to ₹ 28,000 for the period is to be recognised in the year 2013-14.

e. This carve-out is due to difference in application of accounting principles and practices and
economic conditions prevailing in India.
IAS 1 requires that in case of a loan liability, if any condition of the loan agreement which was
classified as non-current is breached on the reporting date, such loan liability should be classified as
current. Where the breach is rectified after the balance sheet date IAS requires loans to be classified
as current.

Carve Out: Ind AS 1 clarifies that where there is a breach of a material provision of a long - term
loan arrangement on or before the end of the reporting period with the effect that the liability
becomes payable on demand on the reporting date, the entity does not classify the liability as
current, if the lender agreed, after the reporting period and before the approval of the financial
statements for issue, not to demand payment as a consequence of the breach.

Reason: Under Indian banking system, a long-term loan agreement generally contains a large
number of conditions. Some of these conditions are substantive, such as, recalling the loan in case
interest is not paid, and some conditions are procedural and not substantive, such as, submission of
insurance details where the entity has taken the insurance but not submitted the details to the lender
at the end of the reporting period. Generally, customer-banker relationships are developed whereby
in case of any procedural breach, a loan is generally not recalled. Also, in many cases, a breach is
rectified after the balance sheet date and before the approval of financial statements. Carve out has
been made on the basis of above mentioned reason.

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