AS - 4

ACCOUNTING STANDARD – 4
12 CONTINGENCIES & EVENTS AFTER THE
BALANCE SHEET DATE

QUOTE:
Keep Going, Difficult Roads Can Lead to Beautiful Destination

1. NON-APPLICABILITY

1. Liabilities of Life Assurance and general Insurance companies.

2. Obligations under Retirement Benefit Plans (AS 15).
3. Commitments arising from Long Term Lease Co

2. MEANING OF EVENTS AFTER THE BALANCE SHEET DATE

Events (favorable or unfavorable) after the Balance Sheet date are those events that occur between
the end of the reporting period and the date when the financial statements are approved by competent
authority (Such as Board of Directors).

Example:
On 18th May,20X2, the management of an entity approves financial statements for issue to its
supervisory board. The supervisory board is made up solely of non-executives and may include
representatives of employees and other outside interests. The supervisory board approves the financial
statements on 26th May,20X2. The financial statements are made available to shareholders and others
on 1st June,20X2. The shareholders approve the financial statements at their annual meeting on 15th
July,20X2 and the financial statements are then filed with a regulatory body on 17th July,20X2.
The financial statements are approved for issue on 18th May,20X2 (date of management approval for
issue to the supervisory board).

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 AS - 4

3. TYPES OF EVENTS AND THEIR TREATEMENT

ADJUSTING EVENTS NON-ADJUSTING EVENTS

Events which provide evidence of conditions Events that are Indicative of conditions that
that exist on balance sheet date. arose after the reporting period.
The events not related to
circumstances/conditions existed on Balance
sheet date; in other words, entirely new
events after the BS date.
Examples: Examples:
1. Debtor declared insolvent after long 1. Decline in the fair value of investments
outstanding receivable. after the Balance Sheet.
2. Settlement of litigation after balance 2. Destruction of Assets of the entity by
sheet date (litigation started before floods occurring after the reporting
balance sheet date) period.
3. Detection of fraud or error after 3. Negotiation to purchase Property initiated
balance sheet date. before balance sheet date but actual
4. Asset sold before balance sheet, transaction completed after balance
consideration received after balance sheet date.
sheet date.
ACCOUNTING TREATMENT: ACCOUNTING TREATMENT:
Adjust the Assets/Liabilities of Financial No need to adjust the Assets/liabilities of
Statement is ended. financial statements.
Only disclosure is required in case of material
event.

Example of Inventory
Entity A values its inventories at cost or NRV, whichever is less. Entity A has 10 pieces of item A in its
stock at the year end. Each item costs Rs. 500. All these items are sold subsequently but before the
date of approval of financial statements for the reporting period at Rs. 450 per piece. The sale of
inventories after the reporting period normally provides evidence about their net realisable value at
the end of the reporting period.

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 AS - 4

4. SPECIAL ITEMS:

1. Equity Dividend Declared 2. Going Concern

Dividend is declared after the balance If after the Balance Sheet date, the
sheet i.e. generally in AGM entity’s going concern assumption is no
longer appropriate due to happening of an
Hence there is no obligation regarding the event, then it should adjust Assets and
balance sheet date. Liabilities of financial statement. (i.e. it is
treated as an adjusting event)
Hence it is always treated as a Non-
adjusting event. Entity should not prepare its financial
statements as per Going Concern Basis.

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 AS - 4

5. (MCQ’s from ICAI Material)

1. Cash amounting to ₹ 4 lakhs, stolen by the cashier in the month of March 20X1, was detected in
April, 20X1. The financial statements for the year ended 31st March, 20X1 were approved by the
Board of Directors on 15th May, 20X1. As per Accounting Standards, this is _ for the
financial statements year ended on 31st March, 20X1.
(a) An Adjusting event.
(b) Non-adjusting event.
(c) Contingency.
(d) Provision

2. As per Accounting Standards, events occurring after the balance sheet date are
(a) Only favourable events that occur between the balance sheet date and the date when the
financial statements are approved by the Board of directors.
(b) Only unfavourable events that occur between the balance sheet date and the date when the
financial statements are approved by the Board of directors.
(c) Those significant events, both favourable and unfavourable, that occur between the balance
sheet date and the date on which the financial statements are approved by the Board of
directors.
(d) Those significant events, both favourable and unfavourable, that occur between the balance
sheet date and the date on which the financial statements are not approved by the Board
of directors.

3. AS 4 does not apply to

(a) Obligation under retirement benefit plans.
(b) Commitments arising from long term lease contracts.
(c) liabilities of life assurance and general insurance enterprises arising from policies issued
(d) Both (a) & (b).

4. A Ltd. sold its building for ₹ 50 lakhs to B Ltd. and has also given the possession to B Ltd. The
book value of the building is ₹ 30 lakhs. As on 31st March, 20X1, the documentation and legal
formalities are pending. For the financial year ended 31st March, 20X1
(a) The company should record the sale.
(b) The company should recognise the profit of ₹ 20 lakhs in its profit and loss account.
(c) Both (a) and (b).
(d) The company should disclose the profit of ₹ 20 lakhs in notes to accounts.

ANSWERS 1 2 3 4
a c d c

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 ACCOUNTING STANDARD - 7

ACCOUNTING STANDARD – 7
13
CONSTRUCTION CONSTRACTS

Quote:
“Limitations live only in our Minds, But if we use our imaginations,
Our Possibilities become Limitless”

1. INTRODUCTION

AS 7 defines Construction Contract as a contract specifically negotiated for the construction of:
● an Asset; or
● a combination of assets that are closely interrelated or interdependent in terms of their design,
technology, function, ultimate purpose or use.

The construction contracts in AS 7 include contracts for:

(a)The rendering of services which are directly related to the construction of the asset; &
Example: Contract for the services of project managers, architects& Labour.

(b)The destruction or restoration of assets, and the restoration of the environment following the
demolition of assets.
Example: Contract for Demolition of Factory Building to save Environment.

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 ACCOUNTING STANDARD - 7

2. TYPES OF CONSTRUCTION CONTRACT

Construction Contracts are of two types:

a. Fixed price contracts - In this case of contract, contractor agrees for fixed price of the
contract or fixed rate/unit. However, in some cases the contract price is subject to escalation.
b. Cost-plus contract - In these contracts, contractor is reimbursed the Cost plus fixed
percentageof profit.
c. Hybrid - Mixed of above two.

EXAMPLE 1 (Cost Plus Contract):

ABC Constructions has a contract to build an office building. The terms and conditions are as under:
1. ABC’s profit is agreed at:

● 25% on expected contract’s cost; For this purpose, the expected cost cannot exceed ₹ 22
crores.

2. The agreed price will be revised depending upon the actual cost incurred.

● The cost for fixation will be taken actual cost or ₹ 22 crores whichever is less.

Price fixation based on expected cost:

Assume that the costs expected to be incurred by ABC are ₹ 16 crore. Thus, ABC can charge a profit
of ₹ 4 crores (25% on actual cost).
The contract price will be ₹ 20 crores. (₹ 16 crores plus ₹ 4 crores)

Price fixation based on actual cost incurred – Scenario 1:

However, if cost incurred by ABC is ₹ 15 crore, in that case, it would be able to charge a profit of:
= 25% on ₹ 15 crore = 15 x 25% = ₹ 3.75 crore
Thus, Total Value of the contract will stand revised as follows:
= Actual Costs + Profit (25% of costs) = ₹ 15 crore + ₹ 3.75 crore = ₹ 18.75 crores.

Price fixation based on actual cost incurred – Scenario 2:

For any unavoidable reasons, if total cost incurred by ABC is ₹ 25 crore, it can only charge a profit on
the expected costs of ₹ 22 crore as under:
Thus, Total Value of the contract will stand revised as follows:
= Expected Costs + Profit (25% of costs) = ₹ 22 crore + ₹ 5.50 crore = ₹ 27.50 crores.

Analysis of the above scenario:

Cost actually incurred by ABC = ₹ 25 crores.
Actual profit earned by ABC = Total Value of the contract – Actual costs incurred
= ₹ 27.50 Crores – ₹ 25 Crores = ₹ 2.50 Crores.

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 ACCOUNTING STANDARD - 7

3. CALCULATING THE PROFIT OR LOSS OF A CONSTRUCTION

CONTRACT

Profit or Loss on Construction contract is = Contract Revenue - Contract Cost

A. CONTRACT REVENUE:
Contract revenue can be recognised when there is no significant uncertainty exits regarding the
amount of collection. It is calculated as below:
Price Agreed as per contract XXX
(+) Revenue arising due to escalation clause XXX
(+/-) Variations due to change in scope of Work XXX
(+) Claims recoverable from customers in the form of reimbursements XXX
(+) Incentives recoverable from customers on achieving the Targets XXX
(-) Penalties Payable to customers for any delay XXX
Total Contract Revenue XXXX

Note:
Variations, Claims, Incentives and Penalties are considered only when:
(i) When there is certainty of collection/payment; and
(ii) they can be measured reliably

B. CONTRACT COSTS
Contract costs consist of the following:
Specific Costs of Completing the Contract:
Material Cost XXX
Labour Cost XXX
Depreciation of PPE used in Contract XXX
Cost of Hiring the PPE XXX
Cost of design & technical assistance XXX
(-) Incidental income (sale of scrap material) XXX
Cost Attributable to Contract:
Insurance Exp XXX
Overhead cost allocated to the Contract XXX
Pre contract cost (cost incurred to secure the contract) XXX
Total Contract Cost XXXX
Contract Cost incurred during the year Also means =
Work Certified + Work Uncertified

These expenses are not a part of Contract Cost: General administration cost, Selling cost, Research
and development & Abnormal Loss.

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 ACCOUNTING STANDARD - 7

4. PERCENTAGE OF COMPLETION METHOD (PCM)

As per AS 7, the contract revenue will be recognised with reference to the Percentage of Completion
(PCM) at the reporting date.
Determination of Percentage of Completion:
Cost Approach Technical Survey Approach
% of Completion = % of Completion is calculated in reference to the
Cost Incurred Till date X 100 survey conducted by Certified Engineer for each
Total Est. Cost of Project and every part of the project.

Cost Incurred Till date also means = Work Refer Example below
Certified + Work Uncertified

Example 2: A construction contract of a two floor building for Rs. 15 lakhs (with a 50% margin)
Divisions of contract Technical Completion Cost to complete
Foundation 35% 5
1st Floor 10% 1
nd
2 Floor 15% 1
Tiling, painting, fitting etc., 40% 3
100% 10
Foundation work was completed.

Conclusion:
a) Under the cost to cost method, revenue of Rs.7.5 lakhs (15 Lakhs X 5/10 Lakhs) would be
recognised & cost of Rs.5 lakhs would be recognised and profit of Rs. 2.5 lakhs would be
recognised.
b) Under the Technical survey method, revenue of Rs. 5.25 lakhs (35% of Rs. 15 lakhs) would be
recognised, cost of Rs.3.5 lakhs (35% of Rs. 10 lacs) would be recognised and a profit of Rs. 1.75
lacs would be recognised.

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 ACCOUNTING STANDARD - 7

5. IMPORTANT PROVISIONS FOR REVENUE RECOGNITION

Outcome of Contract Revenue Recognition is based on Outcome of Contract as under:

1) When the outcome of the contract is estimated reliably, Revenue
should be recognised as per % of Completion Method
2) When the outcome of the contract cannot be estimated reliably,
Revenue should be recognised only to the extent of contract costs
incurred of which recovery is probable. (i.e. Revenue = Cost
incurred i.e. No Profit/Loss)

Total Contract Cost will When it is probable that total contract may exceed total contract
exceed Total Contract revenue then Expected loss should be immediately provided for.
Revenue
Subsequent uncertainty Once revenue is recognised and then uncertainty of collection arise, in
in collection such case it is better to make provision for doubtful debts instead of
reversing the revenue.

Example 3:
X Ltd. commenced a construction contract on 01/04/X1. The contract price agreed was reimbursable
cost plus 10%. The company incurred Rs.1,00,000 in 20X1-X2, of which cost of Rs.90,000 is
reimbursable. The further non-reimbursable costs to be incurred to complete the contract are
estimated at Rs.5,000. The other costs to complete the contract cannot xbe estimated reliably.
SOLUTION:
Profit & Loss Account
Rs.000 Rs.000
To Construction Costs 100 By Contract Price 99
(90+9)
To Provision for loss 5 By Net loss 6
105 105

6. PRESENTATION IN FINANCIAL STATEMENTS

An enterprise should present:

(i) the Gross Amount due from customers for contract work as an asset; and
(ii) the Gross Amount due to customers for contract work as a liability.
Particulars Amount
Cost Incurred
+ Recognised Profits
- Recognised Losses/Recoveries Not Possible
- Progress Billings

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 ACCOUNTING STANDARD - 7

Total Amount XXX

If Amt. is positive then Due from Customer
If Amt. is Negative then Due to Customer

Note:
PROGRESS BILLING MEANS = PAYMENT RECEIVED + RETENTION

7. SUMMARY of ABOVE

Based on above Discussion we can summarize following Key Points-

1. Contract Revenue shall be recognized based on PCM until and unless the outcome of contract
cannot be estimated probably.
2. If Outcome cannot be estimated probably then do not apply PCM, Revenue shall be recognize
only to the extent of Actual Cost Incurred till date of which recovery is Probable.
3. Contract Cost shall be recognized based on Actual Cost incurred during the Period. PCM shall
not be applied on Contract Cost.

EXAMPLE 4:
Contractual Team = 3 Years
Year 1 2 3
Contract Cost incurred during the year 7,20,000 11,70,000 15,60,000
Further Estimated cost to be incurred 25,00,000 14,00,000 -
Calculate % of Completion for Every Year.
SOLUTION
1st Year = 7,20,000 / (7,20,000 + 25,00,000) x 100 = 22.36%
2nd Year = 18,90,000 / (18,90,000 + 14,00,000) x 100 = 57.45%
3rd Year = 100%

EXAMPLE 5:
(₹ IN Cr.)
1 2 3
Cost incurred till date 1,500 3,750 6,200
Further estimated cost to be incurred 4,500 2,400 0
Total fixed price agreed with customer = 8,000
SOLUTION
1 2 3
% of completion 25% 61% 100%
Cumulative Revenue 2,000 4,880 8,000
Current Year Revenue 2,000 2,880 3,120
Current Year Cost 1,500 2,250 2,450

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 ACCOUNTING STANDARD - 7

Profit 500 630 670 1,800

% = Cost incurred till date/Total Estimated Cost

EXAMPLE 6: (Provision for Expected Loss)

Contractual Term = 3 Years
Contract Revenue = 3000 Cr.
1 2 3
Contract Cost incurred till date 800 1900 3200
Further Estimated cost to be incurred 1750 1300 -
Calculate Contract Profit/Loss every year.

SOLUTION:
1 2 3
800/2,550 x 100 = 1,900/2,550 x 100 100%
31.37% = 59.38%
Cumulative Revenue 941 1,781 3,000
Current Year Revenue 941 840 1,219
Current Year Cost 800 1,100 1,219**
Current Year Profit/Loss 141 (260) 0
Loss till date Recognised - 260-141 = 119
Loss to be Recognised - 200-119 = 81*
* As per AS 7 (Contract Cost) when total Construction Cost is expected to be in excess of Contract
Revenue then Loss should be provided for immediately.
**Cost to be recognised = 3,200 – 1,900 1,300
(-) Loss already Recognised (81)
Cost to be Recognised 1,219

EXAMPLE 7:
Consider the following % of Completion in a 3 Years Construction Project:
Year 1 – 25%
Year 2 – 61%
Year 3 – 100%
Total agreed price of contract = 2,50,00,000
Year 1 2 3
Addition / deduction in Price (4,50,000) 7,00,000 20,00,000
penalty Escalation Modification
clause (Additional Assets)
How much Revenue shall be recognised every year?
SOLUTION:
Year 1
Agreed Price 2,50,00,000
(-) Penalty 4,50,000

13.7
 ACCOUNTING STANDARD - 7

Revised Price 2,45,50,000

% of Completion 25%
Revenue 61,37,500/-

Year 2
Earlier Agreed Price 2,45,50,000
(+) Escalation 7,00,000
Revised Price 2,52,50,000
% of Completion 61%
Cumulative Revenue till 2nd Year 1,54,02,500
st
(-) Revenue Recognition in 1 Year (61,37,500)
Current Year Revenue 92,65,000

Year 3
Earlier Agreed Price 2,52,50,000
(+) Modification 20,00,000
Cumulative Final Price 2,72,50,000
(-) Revenue already Recognised till date 1,54,02,500
Current Year Revenue 1,18,47,500

EXAMPLE 8:
Agreed Price = 5,000 lakhs
Term = 3 Years
Year 1 2 3
Contract Cost incurred till date 1,750 4,500 5,200
Estimated Total Cost 4,650 5,200 5,200
PCM (%) 37.63% 86.54% 100%
SOLUTION:
Year 1
Revenue 1,881.50
(-) Cost 1,750
Profit 131.50
Year 2
Cumulative Revenue 4,327
(-) Last Year Revenue 1,881.50
Current Year Revenue 2,445.50
(-) Cost of Current Year 2,750
Current Year Loss 304.50

Position of Profit/Loss till 2nd Year = 131.5 – 304.5 = 173

Loss Already Recognised till Date = 173
*When entity estimates that overall contract Cost will exceed overall Contract Revenue, then Loss to
the Contract will be Recognised Immediately.

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 ACCOUNTING STANDARD - 7

Therefore,
Revenue 5,000
Estimated Cost (5,200)
Estimated loss of entire Contract 200
Loss already Recognised (173)
Extra Loss to be recognised immediately 27

How to Measure Revenue when there is Incentive but such incentives are Variable?

Example 9:
Agreed Price = 50 lakhs
Total Term = 3 Years
Inventive is: -
(a) Either 5%, if work completed within 3 Years
(or)
(b) 10%, if work completed within 30 months
There is a 80% Probability that work will be Completed within 30 months & 20% Probability of beyond
30 months.
Calculate total revenue expected from contact.
SOLUTION: -
Total Revenue = Agreed Revenue + Incentives (Estimated)
Estimated Incentive: -
10% x 80% = 8%
5% x 20% = 1%
Weighted Average Incentive = 9%
Total Revenue = 50,00,000 + 9% = 54,50,000

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 ACCOUNTING STANDARD - 7

8. IDENTIFYING CONSTRUCTION CONTRACT

Single Contract of Multiple Treat Separate Contract for each Asset if all these conditions are
Assets satisfied:
a) Separate proposals are submitted for each asset;
b) Each asset is subject to separate negotiation i.e. both
contractor and customer have the ability to accept some part
and reject some part of the contract;
c) Cost and Revenue of Each Asset can be identified separately.

Contract Combinations: Conditions:

Two or More contracts with a) The contracts are negotiated as a package.
Same party entered into or OR
near the same time be b) All or major assets are contracted for a common objective. It
considered a “Single Contract” means assets are dependent or inter-related with each other.
if any one of these conditions
are met.
Here in this case, Single PCM shall be calculated for all the Assets
Contract combined.
Additions to the Contract When there is any addition to the existing contract then such
additional assets are treated as separate contract if any one condition
is satisfied:
a) The additional Asset is clearly distinct from the Existing Asset
under the contract in respect of design, location, function or
technology.
b) The Price of additional asset is negotiated separately without
considering the original contract (i.e. Contractor is Charging
Standalone price for that Additional Asset)

Example 10:
B Limited has taken a construction contract from the authority to develop a township.
The contract involves several other contracts such as residential complexes, roads, power stations,
reservoirs and commercial complex. Separate tenders were floated and separate proposals have been
submitted for the same. Negotiations have been separate. However, all the contracts have been
awarded to B Limited. This will be a case of segmenting the contracts as there are separate proposals,
separate negotiations, the award of one contract has no relationship with the other and costs and
revenues of each contract are separately identifiable.

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 ACCOUNTING STANDARD - 7

9. (MCQ’s from ICAI Material)

The below information relates to Questions 1 – 3:

XY Ltd. agrees to construct a building on behalf of its client GH Ltd. on 1st April 20X1. The expected
completion time is 3 years. XY Ltd. incurred a cost of ₹ 30 lakh up to 31st March 20X2. It is expected
that additional costs of ₹ 90 lakh. Total contract value is ₹ 112 lakh. As at 31st March 20X2, XY Ltd.
has billed GH Ltd. For ₹ 42 lakh as per the agreement. Assume that the work is completed to the
extent of 75% by the end of Year 2.
1. Revenue to be recognized by XY Ltd. for the year ended 31st March 20X2 is
(a) ₹ 28 lakh
(b) ₹ 42 lakh
(c) ₹ 30 lakh
(d) ₹ 32 lakh

2. Total expense to be recognised in Year 1 is

(a) ₹ 30 lakh
(b) ₹ 120 lakh
(c) ₹ 38 lakh
(d) ₹ 36 lakh

3. Revenue to be recognised for year 2 is

(a) ₹ 84 lakh
(b) ₹ 42 lakh
(c) ₹ 56 lakh
(d) ₹ 28 lakh

Below information relates to Questions 4 – 6

M/s AV has presented the information for Contract No. XY123:

Total contract value ₹ 370 lakh
Certified work completed ₹ 320 lakh
Costs incurred to date ₹ 360 lakh
Progress Payments received ₹ 300 lakh
Expected future costs to be incurred ₹ 50 lakh

4. Revenue to be recognised by M/s AV is

(a) ₹ 320 lakh
(b) ₹ 370 lakh
(c) ₹ 360 lakh
(d) ₹ 400 lakh

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 ACCOUNTING STANDARD - 7

5. Total expense to be recognised by M/s AV is

(a) ₹ 360 lakh
(b) ₹ 400 lakh
(c) ₹ 320 lakh
(d) ₹ 360 lakh

6. LP Contractors undertakes a fixed price contract of ₹ 200 lakh. Transactions related to the
contract include:
Material purchased: ₹ 80 lakh
Unused material: ₹ 30 lakh
Labour charges: ₹ 60 lakh
Machine used for 3 years for the contract. Original cost of the machine is ₹ 100 lakh. Expected
useful life is 15 years.
Estimated future costs to be incurred to complete the contract: ₹ 80 lakh. Loss on contract to
be recognised is:
(a) ₹ 40 lakh
(b) ₹ 10 lakh
(c) ₹ 90 lakh
(d) ₹ 50 lakh

ANSWERS 1 2 3 4 5 6
a d c a d b

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 ACCOUNTING STANDARD – 11

ACCOUNTING STANDARD – 11
14 “EFFECTS OF CHANGES IN FOREIGN
EXCHANGE RATES”

“The Pessimist Sees Difficulty in Every Opportunity. The Optimist Sees Opportunity in Every
Difficulty.”

THIS AS DEALS WITH: -

● Treatment of Foreign Currency Transactions
● Translation of Financial Statements of Foreign Operations (Branch/Subsidiary)
● Forward Exchange Contracts. (Hedge and Speculation)

1. FOREIGN CURRENCY TRANSACTIONS

1.1 DEFINITIONS
Currencies – For the purpose of this AS, there are two types of Currencies
(a) Reporting Currency – Any Currency in which Financial Statements are reported.
(b) Foreign Currency – Any Currency other than Reporting currency.

A Foreign Currency Transaction is a transaction which is denominated in or requires settlement in a

foreign currency for example – sale or purchase of goods in Foreign Currency, Borrowings or Lending
or Investing in Foreign Currencies etc.

Monetary items are money held and assets and liabilities to be received or paid in fixed or
determinable amounts of money. For example, cash, receivables and payables.

Non-monetary items are assets and liabilities other than monetary items. For example, fixed assets,
inventories and investments in equity shares.

Foreign Currency Monetary Items are Monetary Items which are to be settled in Foreign Currency
(i.e., Receivable or Payable in Foreign Currency)

1.2 RECOGNITION AND MEASUREMENT

Two important questions?
Q1. What is Initial Recognition?

14.1
 ACCOUNTING STANDARD – 11

Initial Recognition means first time recording in the books of accounts of Foreign Currency
Transaction.

Q2. What is Subsequent measurement?

Subsequent Measurement means measurement at Balance Sheet date of Foreign Currency Monetary
Items (FCMI) arising out of Foreign Currency Transactions.

Initial Recognition: All foreign exchange transactions are converted into reporting currency using
Spot exchange rate or approximate rates (i.e., the exchange rate prevailing on the date of
Transaction).
Examples of Foreign Currency Transactions:
● Buying or selling of Goods and Services in Foreign Currency;
● Borrowing or Lending Money in Foreign Currency;
● Acquisition or Disposal of Assets in Foreign Currency;
● Incurring or Settling any Liability in Foreign Currency

Subsequent Measurement (at BS date):

● This recognition is applied on Foreign currency Monetary Items (FCMI) and Non-Monetary
Items carried at fair value or measured at other than cost.
● Subsequent measurement is applied for preparing financial statements.
● Any exchange difference arising on subsequent measurement at Balance Sheet date shall be
transferred to Profit & Loss a/c.
S.NO. Financial Statement Items Exchange Rates
1 Monetary Items i.e. FCMI (e.g., Exchange Rate at the Reporting Date
Foreign Receivables or (i.e., Closing Exchange Rate)
Payables)
2 Non-Monetary items at Exchange Rate at the date of
historical cost (e.g., PPE) transaction
(i.e., Spot Rate)
3 Revalued Non-monetary items Exchange Rate at the date of Fair
or Items Measured at Fair valuation or Revaluation
Value (E.g., Inventory,
Investments in Equity Shares) Example: the cost or carrying amount,
as appropriate, is translated at the
Refer Example No 3 exchange rate at the date when that
amount was determined; and the net
realisable value or recoverable amount,
as appropriate, is translated at the
exchange rate at the date when that
value was determined.

14.2
 ACCOUNTING STANDARD – 11

Note: Foreign Currency Monetary Items (FCMI): FCMI are those Assets/Liabilities whose
amount is Fixed under contract and they are to be settled in foreign currency. For example,
Receivable, Payables, Cash Balances.

Example 1:
Mr. A Purchased Goods of $30,000 on 1/Feb for which payment to be made in next year 30/4
Issue 1: How to record on 1/Feb because it is in $
Issue 2: What to do on Balance Sheet Date i.e., 31/3 because $ Changes
Issue 3: on 30/4 Settlement is in $ the how to Measure?
Solution:
Issue 1:
As per AS 11, all Foreign Currency transaction must be recorded at the rate prevailing on transaction
Date (i.e. SPOT Rate)
Suppose 1st Feb $1 = 76/-
Transaction Vale = $30,000 x 76 = 22,80,000/-
1st Feb:
Purchase A/c Dr. 22,80,000
To Foreign Creditor A/c 22,80,000

Trading A/c
To Purchases 22,80,000

Balance Sheet
Foreign Creditors 22,80,000
($30,000)

Issue 2:
On 31st March $1 = ₹ 77
As per AS 11, All Monetary Assets/Liabilities which are in foreign Currency (FCMI) should be
measured at Closing Exchange Rate on Balance Sheet Date.
Revised Foreign Creditors = $30,000 x 77 = 23,10,000
Exchange Difference (Loss) = 23,10,000 – 22,80,000 = 30,000

31/3
Exchange Loss A/c Dr. 30,000
To Foreign Creditor A/c 30,000

As per AS 11, Exchange Difference due to measurement of FCMI should be transfer to P&L A/c
31/3
P&L A/c Dr. 30,000
To Exchange Loss A/c 30,000

14.3
 ACCOUNTING STANDARD – 11

Trading A/c
To Purchases 22,80,000
To Exchange Loss 30,000

Balance Sheet
Foreign Creditors 23,10,000
($30,000)

Issue 3:
At the time of settlement $ again Change to ₹ 77.80
Amount to be paid in ₹ = $30,000 x 77.80 = 23,34,000/-
30/4
Foreign Creditors A/c Dr. 23,10,000
Exchange Loss A/c Dr. 24,000
To Bank A/c 23,34,000
As per AS 11, Exchange Difference at settlement shall be transferred to P&L A/c

Example 2:
On 1st Feb, Entity purchased PPE at $25,000 & Paid immediately
$1 = ₹ 76 (on 1st Feb)
$1 = ₹ 77 (on 31/3)
Apply AS 11.
Solution:
As per AS 11, all foreign Currency Transaction must be recorded & measured at the rate prevailing on
transaction date. (SPOT Rate)
Transaction Value in ₹ = $25,000 x 76 = 19,00,000/-
PPE A/c 19,00,000
Dr. 19,00,000
To Bank A/c

Example 3: (Subsequent Measurement of Foreign Currency Non-Monetary Item)

Inventory purchased costing $10,000 in cash as 1/4/23. On 30th June inventory is unsold.
Case 1: NRV is $12,000 on 30th June
Case 2: NRV is $ 9000 on 30th June & it is measured on 10th July
Rate of $1 on 1/4/23 = ₹80, on 30th June $1 = ₹ 82/- and on 10th July $1 = ₹ 82.5/-
Solution:
1) Initial recognition of Foreign Currency Transaction
Cost of Acquisition = $10,000 × 80/- = Rs. 8,00,000
01/04/23 Purchase a/c Dr 8,00,000
To Bank a/c 8,00,000

14.4
 ACCOUNTING STANDARD – 11

2) Subsequent measurement on 30th June (BS Date)

Case 1:
Cost =$10,000
NRV = $12,000
Since Cost is Lower, It is a non-monetary item measured at cost.
Conclusion:
No need to remeasure at New Ex Rate, it should be Continued at Historical Rate.
Balance Sheet
Inventory ($10000) 8,00,000

Case 2: Cost =$10,000; NVR = $ 9000

Therefore, Inventory is non-monetary item, measured at other than cost.
As per AS 11, this is to be measured at Exchange Rate on the date of Valuation of NRV i.e 10th
July = $1 = Rs. 82.50/-
Total Inventory value = $9000 x 82.5/- = Rs. 7,42,500/-
Trending a/c
Debit Credit
Purchase 8,00,000 Closing stock 742500

PARA 46 OF AS 11 ON TREATMENT OF LONG TERM FOREIGN

CURRENCY MONETARY ITEMS UNDER SUBSEQUENT MEASUREMENT
Para 46 has been introduced in AS 11 with retrospective effect from 7th December 2006 amended on
31stMarch, 2009.
(a) Corporate/Non-Corporate entities can opt for the application of this Para & option is
irrevocable.
(b) FCMI of Long Term in nature (whose realization/payment is beyond 12 months from the date of
original transaction) will be converted using closing rate in subsequent recognition.

Exchange difference arising from above point will be recognized as follows:

● Transfer Exchange difference to value of Depreciable Fixed Assets (PPE) if long term monetary
item was taken to finance such Depreciable F.A. (i.e., to be capitalized if debit difference and
subtracted if credit difference) (Refer Example No. 4)
● Transfer Exchange difference to Foreign Currency Monetary Items Translation Diff a/c (FC
MIT Diff a/c) if Long Term Monetary Item has no relation with Depreciable Fixed Assets.
(Refer Example No. 5)
● FC MIT Diff a/c will be amortised over the balance period of such long-term assets or liability,
by recognition as income or expense in each of such periods (written off in periods equally till
the life of LTFCMI.)

14.5
 ACCOUNTING STANDARD – 11

The balance in FC MIT Diff a/c (debit or credit) should be shown on the “Equity and Liabilities” side
of the balance sheet under the head “Reserves and Surplus” as a separate line item. (as decided by the
council of ICAI)

Example 4:
Vsmart Ltd. took a Foreign Currency Loan of $1,00,000 to purchase machine of the same amount. On 1 st
April, 2022 Loan is of 5Years. To be repaid in lumpsum after 5 Years.
Depreciation Rate is 10%
Exchange rates are as follows:
On 1/4/22 - $1 = ₹ 78
On 31/3/23 - $1 = ₹ 82
On 31/3/24 - $1 = ₹ 80.5
Show A/c as per AS 11 in following cases:
(a) Without PARA 46
(b) With PARA 46
Solution:
1) Initial Recognition:
Foreign Currency should recognise at the rate prevailing on transaction Date (i.e. SPOT Rate) i.e. $1
= ₹ 78
Transaction Value = $1,00,000 x 78 = 78,00,000
1/4/22
Machine A/c Dr. 78,00,000
To Foreign Currency Loan A/c 78,00,000
(Note: assuming machine is measured at cost always)
(Note: Foreign Currency Loan is a LTFCMI)
2) Subsequent measurement:
Case 1: without PARA 46
Exchange Difference due to Subsequent measurement shall be transfer to Profit & Loss A/c
1st Year end: 31/3/23
Foreign Currency Loan Should be = $1,00,000 x 82 = 82,00,000
Exchange Difference (Loss) = 4,00,000
31/3/23
Exchange Difference (P&L) A/c 4,00,000
Dr. 4,00,000
To Foreign Currency Loan A/c
Profit & Loss A/c Dr. 4,00,000
To Exchange Difference A/c 4,00,000

2nd Year end: 31/3/24

Foreign Currency Loan Should be = $1,00,000 x 80.5 = 80,50,000
Exchange Difference (Gain) = 82 – 80.5 = 1,50,000

14.6
 ACCOUNTING STANDARD – 11

Foreign Currency Loan A/c Dr. 1,50,000

To Exchange Difference (P&L) A/c 1,50,000
Exchange Difference (Gain) A/c 1,50,000
Dr. 1,50,000
To Profit & Loss A/c

Case 2: with PARA 46

Exchange Difference should be adjusted to the cost of machine
31/3/23
Exchange Difference (Loss) = 4,00,000
Machine A/c Dr. 4,00,000
To Foreign Currency Loan A/c 4,00,000

Depreciation @10& = 82,00,000 x 10% = 8,20,000

Remaining Balance of Machine = 73,80,000
31/3/24
Exchange Difference (Gain) = 1,50,000
Deduct From Machines Book Value
Foreign Currency Loan A/c Dr. 1,50,000
To Machine A/c 1,50,000
Depreciation @10% on (73,80,000 – 1,50,000) = 72,30,000 x 10% = 7,23,000

Example 5:
Vsmart Ltd. took a loan of $75,000 on 1/4/22 when $1 = ₹ 78. Loan is utilized for working capital
requirement loan is of 6 Years. Principal repayment equally every year.
1st year end - $1 = ₹ 81.30
2nd year end - $1 = ₹ 82.15
3rd year end - $1 = ₹ 82
4th year end - $1 = ₹ 81.50
5th year end - $1 = ₹ 81.90
6th year end - $1 = ₹ 82
Apply PARA 46 of AS 11:
Solution:
1) Initial Recognition:
Bank A/c Dr. 58,50,000
To Foreign Currency Loan A/c 58,50,000

2) Subsequent Measurement:
31/3/23 (Fist remeasure then pay installment)
FCMIT Difference A/c 2,47,500
Dr. 2,47,500
To FC Loan A/c ($75,000 x 3.30)

14.7
 ACCOUNTING STANDARD – 11

FC Loan A/c Dr. 10,16,250

To Bank A/c ($12,500 x 81.30) 10,16,250

Foreign Currency Book Value = 50,81,250

Amortize FCMIT Difference in 6 Years = 2,47,500 / 6 = 41,250
Profit & Loss A/c Dr. 41,250
To FCMIT Difference A/c 41,250

Balance unamortised FCMIT = 2,06,250 (Dr. Balance)

31/3/24 31/3/25 31/3/26 31/3/27 31/3/28

$1 = ₹ 82.15 $1 = ₹ 82 $1 = ₹ 81.50 $1 = ₹ 81.90 $1 = ₹ 82
Prev. rate = 81.30 Prev. rate = 81.25 Prev. rate = 82 Prev. rate = 81.50 Prev. rate = 81.90
Loss = 0.85 x $62,500 Gain = 0.15 x $50,000 Gain = 0.5 x $37,500 Loss = 0.4 x $12,500 Loss = 0.10 x $12,500
Total Loss = 53,125 Total Gain = 7,500 Total Gain = 18,750 Total Loss = 10,000 Total Loss = 1,250
Loss added to FCMIT Deduct from FCMIT Deduct from FCMIT Added to FCMIT Added to FCMIT
Difference Difference Difference Difference Difference
Revised FCMIT Revised FCMIT Revised FCMIT Revised FCMIT Revised FCMIT
Difference = 2,59,375 Difference = 2,00,000 Difference = 1,31,250 Difference = 97,500 Difference = 50,000
Year = 5 Year = 4 Year = 3 Year = 2 Year = 1
P&L A/c = 51,875 P&L A/c amortised = P&L A/c amortised = P&L A/c amortised = Fully amortised to
50,000 43,750 48,750 P&L A/c = 50,000
Closing Balance of Closing Balance of Closing Balance of Closing Balance of
FCMIT = 2,07,500 FCMIT = 1,50,000 FCMIT = 87,500 FCMIT = 48,750

2. TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN

OPERATIONS

AS 11 (Effect of Changes in Foreign Exchange Rates), classifies the foreign branches as:

● INTEGRAL FOREIGN OPERATION: The activities of which are an integral part of those of the
reporting enterprise (i.e. Head Office). An integral foreign operation carries on its business as if
it were an extension of the reporting enterprise’s operations. (Example - Foreign Branch)

● NON-INTEGRAL FOREIGN OPERATION: The business of such branch is carried on in a

substantially independent way. (Example – Foreign Subsidiary Co.)
A non-integral foreign operation accumulates cash and other monetary items, incurs expenses,
generates income and perhaps arranges borrowings, all substantially in its local currency.

TECHNIQUES FOR TRANSLATION:

(A) Integral Foreign Branch:

14.8
 ACCOUNTING STANDARD – 11

Items to be Translated Translation at

Monetary Items (such as Debtors/creditors, At Closing exchange rate
Cash/Bank, Prepaid/Outstanding expense)
Non-Monetary items (such FA, Accumulated At Cost i.e., at the exchange
depreciation on FA, Investments etc.) rate on the date of purchase
Opening Stock Opening exchange rate
Closing Stock Closing exchange rate
Revenue nature items (Incomes and expenses) Average rate
Goods sent to branch a/c and HO a/c Actual balance in HO books

Any Exchange difference arising on the translation of the Branch Trial Balance should be transferred
to Profit & Loss a/c of Branch.

(B) Non-Integral Foreign Branch:

1. Balance Sheet items i.e., Assets and Liabilities both Monetary and Non-monetary apply Closing
exchange rate.
2. Items of Income and Expenses – At the actual exchange rates on the date of transactions.
However, AS 11 allows average rate subject to materiality.
3. Any Exchange rate difference should be accumulated in a “Foreign Currency Translation Reserve”
(FCTR).
4. FCTR shall be accumulated under Reserves & Surplus as a separate line item.
5. FCTR shall be reclassified to Profit and Loss account on Conversion from Non-Integral to Integral
FO.
6. FCTR shall be reclassified to Profit and Loss account on sale/dispose of Non-Integral FO. However,
if there is no disposal or sale of FO but only carrying amount is written off then no reclassification
is allowed.
7. In the case of a partial disposal, only the proportionate share of the related accumulated exchange
differences is included in the gain or loss.

How to Identify Non-Integral Foreign Operation?

The following are indications that a foreign operation is a non-integral foreign operation rather than
an integral foreign operation:
I. While the reporting enterprise may control the foreign operation, the activities of the foreign
operation are carried out with a significant degree of autonomy from those of the reporting
enterprise.
II. Transactions with the reporting enterprise are not a high proportion of the foreign operation's
activities.
III. The activities of the foreign operation are financed mainly from its own operations or local
borrowings rather than from the reporting enterprise.
IV. Costs of labour, material and other components of the foreign operation's products or services
are primarily paid or settled in the local currency rather than in the reporting currency.

14.9
 ACCOUNTING STANDARD – 11

V. The foreign operation's sales are mainly in currencies other than the reporting currency.

3. FORWARD EXCHANGE CONTRACTS (FEC)

Meaning:
● A FEC is an agreement between two parties where by one party agrees to buy or sell to other
party an asset at future date for an agreed price.

● These contracts are over the counter in an unregulated market.

Accounting Treatment:
FEC have been classified into two types for the purpose of accounting treatment:
(1) Forward exchange contracts entered for managing risk (Hedging)
(2) Forward exchange contracts entered for trading or speculation.

Forward Exchange Contracts entered For Managing Risk (Hedging):

● Any forward premium/discount should be amortized/recognized over the tenor of contract in
the profit and loss a/c.
● If the forward contract is cancelled or renewed, the profit or loss arising on cancellation or
renewal is recognized in the profit & loss statement for the period.

Forward Exchange Contracts entered for Trading or Speculation:

● Here forward premium/discount should be ignored.
● At each balance sheet date the value of contract is marked to market, any gain or loss on the
contract is recognized immediately.
● Upon sell of forward contract, any profit or loss to be recognized immediately in the statement
of profit & loss.

Example 6: (Foreign Exchange Contracts Hedge)

Shubham Purchased an asset @35,000 on Credit for 3 months. Date of transaction is 1/3/23 (Payable on
1/6/23)
Exchange Rate on 1/3/23 is $1 = ₹ 80/-
Shubham is worried that $ may rise in future & hence Shubham entered into Hedge Contract with HDFC
to buy after 3 months. Forward Rate is $1 = ₹ 82.35/-
Show Accounting in the books of Shubham.
Solution:
1) Shubham has purchased an Asset in $35,000. Therefore, this is a “Foreign Currency Transaction”.
Foreign Currency Transaction should be recorded initially @SPOT Rate i.e., 80/-

14.10
 ACCOUNTING STANDARD – 11

1/3/23
Asset A/c Dr. 28,00,000
To Foreign Creditors A/c ($35,000 x 80) 28,00,000
2) On the same day i.e., 1/3/23, Shubham entered into Foreign Exchange (Hedge) Contract to buy
dollar @82.35 after 3 months.
It means Shubham has fixed its loss at ₹ 2.35 x $35,000 = 82,250
As per AS 11, this loss to Shubham is called as “Forward Premium” & it is to be amortised over the
life of contract to P&L A/c
82,250/3 = 27,417/-

3) On 31st March 23, Shubham shall recognise 27,417/- loss as under: -

Forward Premium A/c Dr. 27,417
To Foreign Creditor A/c 27,417
Profit & Loss A/c Dr. 27,417
To Forward Premium A/c 27,417
th st
4) On 30 April & 31 May: Shubham shall pass following entries
30/4/23
Forward Premium A/c Dr. 27,417
To Foreign Creditor A/c 27,417
Profit & Loss A/c Dr. 27,417
To Forward Premium A/c 27,417
31/5/23
Forward Premium A/c Dr. 27,416
To Foreign Creditor A/c 27,416
Profit & Loss A/c Dr. 27,416
To Forward Premium A/c 27,416
1/6/23
Foreign Creditor A/c Dr. 28,82,250
To Bank A/c 28,82,250

Example 7: (Speculation)
Shubham entered into a contract with broker to buy (Long) $10,000. Contract is made @ $1 = 80/-.
Actual SPOT Rate today is $79.75/-
Contract date is 1st Feb; Contract is for 3 months
Show the Accounting as per AS 11.
Suppose on 31/3, same contract for 1 month ca be made at $1 = 80.40/-
Actual rate on Contract expiry $1 = ₹ 81.25/-

Solution:
1) Shubham is doing speculation in dollars. Shubham feels that dollar may go up Shubham doesn’t want
to buy dollar physically.
2) Accounting Entries:

14.11
 ACCOUNTING STANDARD – 11

(a) On Contract Date: No Entry

(b) On Balance Sheet Date:
Foreign Exchange Contract Receivable A/c 4,000
Dr. 4,000
To Foreign Exchange Gain (P&L) A/c
Foreign Exchange Gain A/c Dr. 4,000
To P&L A/c 4,000

(c) On Expiry Date / Settlement Date

Foreign Exchange Contract Receivable A/c Dr. 8,500
To Foreign Exchange Gain (P&L) A/c 8,500
Cash/Bank A/c Dr. 12,500
To Foreign Exchange Contract Receivable A/c 12,500

14.12
 ACCOUNTING STANDARD – 11

4. (MCQ’s from ICAI Study Material)

1. As per AS 11 assets and liabilities of non-integral foreign operations should be converted at rate.
(a) Opening
(b) Average
(c) Closing
(d) Transaction

2. The debit or credit balance of “Foreign Currency Monetary Item Translation Difference Account”
(a) Is shown as “Miscellaneous Expenditure” in the Balance Sheet
(b) Is shown under “Reserves and Surplus” as a separate line item
(c) Is shown as “Other Non-current” in the Balance Sheet
(d) Is shown as “Current Assets” in the Balance Sheet

3. If asset of an integral foreign operation is carried at cost, cost and depreciation of tangible fixed
asset is translated at
(a) Average exchange rate
(b) Closing exchange rate
(c) Exchange rate at the date of purchase of asset
(d) Opening exchange rate

4. Which of the following can be classified as an integral foreign operation?

(a) Branch office serving as an extension of the head office in terms of operations
(b) Independent subsidiary of the parent company
(c) Branch office independent of the head office in terms of operational decisions
(d) None of the above

5. Which of the following items should be converted to closing rate for the purposes of financial
reporting?
(a) Items of Property, Plant and Equipment
(b) Inventory
(c) Trade Payables, Trade Receivables and Foreign Currency Borrowings
(d) All of the above

ANSWERS 1 2 3 4 5
c b c a c

14.13
 ACCOUNTING STANDARD – 11

Student Notes:-

14.14
 ACCOUNTING STANDARD - 15

ACCOUNTING STANDARD – 15
16
EMPLOYEE BENEFITS

“Make each day your Masterpiece”

1. EMPLOYEE BENEFITS
1) Meaning:
● Any consideration payable by employer to its employees against services rendered by them for
the employer.
● Such consideration is payable due to “contractual agreement” between employer and employee
or sometimes due to informal practices as a result of “constructive obligation”.
● AS 15 covers all types of employee benefits excluding share-based payments to employees.

Constructive Obligation:
An Obligation to pay that arises out of entity’s actions rather than a contract. It may typically
occur from past conduct (i.e. Past Practices/Commitments).

2) Types of Employee Benefits:

SHORT-TERM EMPLOYEE BENEFITS, which are expected to be settled within Twelve Months after
the end of reporting period, such as wages, salaries etc.

POST-EMPLOYMENT BENEFITS, which are payable after the completion of employment such as
gratuity, pension, other retirement benefits, post-employment life insurance and post-employment
medical care etc.

OTHER LONG-TERM EMPLOYEE BENEFITS, which are payable beyond 12 months from the end of
reporting period. E.g. Long Term Bonus plans

TERMINATION BENEFITS, which are payable to employees due to termination of their services
before retirement. E.g. Retrenchment Compensation.

16.1
 ACCOUNTING STANDARD - 15

2. SHORT-TERM EMPLOYEE BENEFITS

(NO ACTURIAL ASSUMPTION & NO DISCOUNTING)

1) General Accounting Treatment:

Employee Benefit Expenses (Salary/Bonus) A/c Dr.
To Employee Benefits Payable A/c (Provision)

Employee Benefits Payable (Provision) A/c Dr.

To Bank A/c

2) Bonus in the form of Profit Sharing:

It is also considered as an employee benefit expense if payable on satisfaction of required
conditions.
It is payable as a defined percentage of profit earned by the employer.

3) Leaves Compensation (Paid Leaves or Compensating Absence):

Employer compensates to employees for their extra services provided by them during the leave
period. Compensation can be provided in the form of either Cash or Extra leaves in the next
period.
Accumulating Paid Leaves Non-Accumulating Paid
Leaves
Unused leaves can be carried forward to the next year Unused leaves can-not be carried
forward to the next year
Vesting Leaves Non-vesting leaves (payable in
(Payable in cash) the form of excess leaves in
next year) No Accounting
Here employee is eligible for Here employee is eligible for
cash payment against unused extra leaves in the form of
leaves. Hence 100% cash carried forward of unused
expense for unused leaves are leaves.
recognised. Here it is not necessary that
employee may utilize 100%
Expenses = excess leaves allowed, hence
Total Unused Leaves employee expense is
X Avg. Salary Per Day recognised based on estimated
leaves to be utilized.

Expenses =
No. of Employees expected to
utilize the unused leaves

16.2
 ACCOUNTING STANDARD - 15

X No. of unused leaves

expected to be utilized by
each employee
X Avg. Salary Per Day
Avg. Salary Per Day = Total Annual Salary ÷ No. of Working Days

Example 1:
Annual Salary – 12,00,000; Total Working Days – 300; Leaves allowed in a year – 12 days; Leaves
actually taken by employee – 9 days. Unused leaves will be settled in form of cash.
Solution
1. Avg. Salary Per Day –› 12,00,000 ÷ 300 = 4,000/-
2. Cash Payable for Unused leaves –› 4,000 x 3 = 12,000/-
3. Total Employee Benefit Expense to be booked –› 12,12,000/-
Salary A/c Dr. 12,12,000
To Salary Payable A/c 12,12,000

Salary Payable A/c Dr. 12,12,000

To Bank A/c 12,12,000

Example 2:
Annual Salary – 12,00,000; Total Working Days – 300; Leaves allowed in a year – 12 days; Leaves
actually taken by employee – 9 days. Unused leaves will be settled in next year in the form of extra
leaves. It is expected that 2 out of 3 unused leaves will be utilized. Suppose, employee utilized 2
days next year out of 3 days allowed.
Solution
Current Year Next Year
No. of Days worked = 291 days No. of Days worked = 286 days
Avg. Salary Per Day –› 12,00,000 ÷ 300 = 4,000 But employee will get full salary of 12,00,000

Expected Value of Unused leaves to be utilized: Salary Payable A/c Dr. 8,000
4,000 x 2 = 8,000 Salary A/c Dr. 11,92,000
To Bank A/c 12,00,000
Total Employee Benefit Expense to be booked:
12,08,000

Salary A/c Dr. 12,08,000

To Salary Payable A/c 12,08,000

Salary Payable A/c Dr. 12,00,000

To Bank A/c 12,00,000

16.3
 ACCOUNTING STANDARD - 15

Worked More days – Recognised Salary for Worked lesser days – Recognised Salary for
more days lesser days

Example 3:
An enterprise has 100 employees, who are each entitled to five working days of leave for each year.
Unused leave may be carried forward for one calendar year. The leave is taken first out of the
current year's entitlement and then out of any balance brought forward from the previous year (a
LIFO basis). At 31 December 20X4, the average unused entitlement is two days per employee. The
enterprise expects, based on past experience which is expected to continue, that 92 employees will
take no more than five days of leave in 20X5 and that the remaining eight employees will take an
average of six and a half days each.
How much is the expected liability due to leaves?
Ans.:
The enterprise expects that it will pay an additional 12 days of pay as a result of the unused
entitlement that has accumulated at 31 December 20X4 (one and a half days each, for eight
employees). Therefore, the enterprise recognises a liability, as at 31 December 20X4, equal to 12
days of pay.

3. POST-EMPLOYMENT EMPLOYEE BENEFITS

1) Types of Post employment benefits:

a) Defined Contribution Plans (DCP): Fixed contribution by employer to the specific fund such as
EPF.
b) Defined Benefit Plans (DBP): Fixed Benefit (final amount payable) is payable by employer
directly to employee in form of contributing variable amount every year to the fund.

DIFFERENCE BETWEEN DCP AND DBP

Basis of Difference Defined Contribution Plans (DCP) Defined Benefit Plans (DBP)
Entity pays fixed contributions into
Post-employment benefit
a separate entity (a fund) and will
plans other than defined
Meaning have no legal or constructive
contribution plans
obligation to pay further
(i.e. No Fixed Contribution)
contributions.
Actuarial & Investment
Risk (Benefits will be Risk in substance on the
Risk in substance on the Employee
more/less than entity.
expected)

16.4
 ACCOUNTING STANDARD - 15

Provident Fund Contribution by

Examples Gratuity
employer
Actuarial Assumptions Not Required Required
Not Required unless it is payable
Discounting Always Required
beyond 12 months.
Same as short term employee Apply “Projected Unit Credit”
Accounting
benefits Method

2) Accounting For Defined Benefit Plans: (Under Post Employment Benefit and Long-Term
Employment Benefits)
Scope of Accounting:
a) Calculation of Defined Benefit Obligation (DBO) A/c and related Expenses
b) Calculation of Plan Assets A/c and related Incomes
c) Calculation of Actuarial Gains/Losses on DBO and Plan Assets
d) Presentation of DBO and Plan Asset in Balance Sheet
e) Presentation of Expenses (Incomes) in Profit and Loss Statement

RECOGNITION OF DEFINED BENEFIT OBLIGATIONS (LIABILITY)

Important Steps to Step 1:
calculate annual Defined Calculate Expected Benefits to be paid to employees
Benefit Obligation Expected Final Salary x Benefit (%) x No. of Years of Service

Step 2:
Allocate the Benefits to each year of Service (Attributed Benefits)
Step 1 ÷ No. of Years of Service

Step 3:
Calculate Current Service Cost (CSC) using discount rate.
PV of Attributed Benefits (PV working in upward mode)

Current Service Cost (CSC) A/c Dr. (P&L)

To DBO Payable A/c

Step 4:
Calculate Interest Cost on Opening Balance of DBO Payable using same
discount rate.
Interest Cost A/c Dr. (P&L)
To DBO Payable A/c
Actuarial Gains or Loss Due to change in financial and demographic assumptions of actuary or due
in DBO liability to change in final expected salary, no. of years of services, DBO liability
shall be remeasured with new assumptions.

16.5
 ACCOUNTING STANDARD - 15

Increase in DBO Liability = Actuarial Loss

Actuarial Loss (P&L) A/c Dr.
To DBO Payable A/c

Decrease in DBO Liability = Actuarial Gain

DBO Payable A/c Dr.
To Actuarial Gain (P&L) A/c Dr.
Past Service Cost (PSC) If there is a modification in Defined Benefits announced by employer
which results in increase of benefits for employee (i.e. additional
benefits) then DBO Liability shall be increased accordingly.

PSC is divided into two parts:

(a) Amortised Past service cost - which is to be recognized
immediately to the extent benefits are already vested.
(b) Unamortised Past Service cost (UPSC)– to be recognized on
straight line basis over the remaining period until the benefits
are vested.

Past Service Cost (P&L) A/c Dr.

Unamortised PSC A/c Dr.
To DBO Payable A/c
Curtailment and Curtailment means cancellation of Defined Benefits of employees.
Settlement Settlement means providing compensation to employees against
cancellation of benefits. Curtailment shall reduce the liability as under:

DBO Payable A/c Dr.

To Unamortise PSC A/c (proportionate reversal)
To Bank A/c Dr.
To Gain on Settlement A/c (P&L)
Payment of Benefits to Whenever the employee retires, he/she will be eligible for benefits.
Employee
DBO Payable A/c Dr.
To Bank A/c Dr.

RECOGNITION OF PLAN ASSETS (INVESTMENT for DBO)

Meaning Investment made by Employer for meeting DBO liability.
It is always recognised at Fair Value.

16.6
 ACCOUNTING STANDARD - 15

Contribution to Plan Contribution to Plan Asset means making Investment as per actuarial
Assets assumption under:
Plan Assets A/c Dr.
To Bank A/c
(contribution is paid in beginning of year or mid of year or end of year)
Benefits Paid out of When Employee is paid benefits, plan assets are realised as under:
Plan Assets
Bank A/c Dr.
To Plan Assets A/c
(Plan assets are realised in beginning of year or mid of year or end of year)
Expected Return on Interest Rate (%) X Balance of Plan Asset = Expected Return
Plan Assets (Take same discount rate of DBO if separate rate is not given)

Plan Asset A/c Dr. If contribution and benefit is made at end of year
To Exp. Return (P&L) Opening Balance of Plan Asset x Interest Rate (%)

If contribution and benefit is made at beginning of year

(Opening Balance of Plan Asset + Contribution Made – Benefits Paid) x
Interest Rate (%)

If contribution and benefit is made at mid of year

Expected Return 1 - Opening Plan Assets x Interest (%)
(+) Expected Return 2 - Net Contribution x Six Monthly Interest (%)
(=) Total Return

Six Monthly Rate of Expected Return as under:

[√1 + 𝑎𝑛𝑛𝑎𝑢𝑙 𝑟𝑎𝑡𝑒 - 1] x 100

If nothing is specified in question always assume that contribution is

made, and benefits are paid at end of the year.
Closing Balance of Plan Always at Fair Value provided in Question
Assets
Actuarial Gain/Loss on Any Difference in Plan Asset A/c is treated as Actuarial Gain or Loss and
Plan Assets transferred to Profit and Loss A/c

Plan Asset A/c Dr. Actuarial Loss (P&L) Dr.

To Actuarial Gain (P&L) To Plan Asset A/c

Calculation of DBO Payable and Plan Asset

DBO Payable Plan Asset
Opening Balance of DBO XXX Opening Balance of Plan Asset XXX

16.7
 ACCOUNTING STANDARD - 15

(+) Current Service Cost (CSC) XXX (+) Expected Return XXX
(+) Interest Cost XXX (+) Contribution to Plan Asset XXX
(+) Past Service Cost XXX (-) Payment of Benefits XXX
(-) Curtailment of Benefits XXX (+/-) Actuarial Gain/(loss) XXX
(-) Payment of Benefits XXX Closing Balance of Plan Asset XXX
(+/-) Actuarial Loss/(Gain) XXX
Closing Balance of DBO XXX

Presentation in Financial Statements

BALANCE SHEET STATEMENT OF PROFIT AND LOSS
Closing Balance of DBO XXX Items of P&L:
(-) Closing Bal. of Plan Asset XXX Employee Benefit Expenses
(-) Unamortised PSC XXX ● Current Service Cost under Employee
Net Defined Liability/(Asset) XXX Benefit Exp.
● Past Service Cost
● Gain on Curtailment
● Actuarial Gain/Loss on DBO
● Actuarial Gain/Loss on Plan Assets

Finance Cost
● Net Interest Cost under Employee Benefit
Exp.
(Net Interest Cost means Interest Cost on DBO
less Expected Return on Plan Asset)

Other Important Points:

1. The discount rate shall be determined by reference to market yields at the end of reporting period
on Government Bonds.

2. Current/Non-Current Distinction:
This Standard does not specify whether an entity should distinguish current and non-current
portions of assets and liabilities arising from post-employment benefits.

16.8
 ACCOUNTING STANDARD - 15

Example 4: (on Define Benefit Obligation)

An Entity announced Defined Bonus plan for its 50 employees. Bonus would be payable after
serving 5 years (Long Term Benefit). The bonus amount would be 8% of Last drawn Salary
after 5 years for each year of service. Discount Rate = 10 % p. a. Current Avg. Salary p.a.
per Employee = 6,00,000/-. Salary Inflate Rate = 7 % p.a.
Show Accounting as per As 15.
Solution :-
Defined Benefit Plan = Defined Bonus = 8% of Salary for Each year of Service.
Step - 1:
Calculate Total Defined Benefit
Current salary 6,00,000/-
Expected Salary after 5 (6,00,000 × 1.07 ) × 1.07 × 1.07 × 1.07
years Per Employee = 7,86,478/ -
Estimated Defined Benefit 7,86,478 X 8% X 5 YEARS X 50 No.
1,57,29,552

Step – 2:
Calculate Allocated Benefits per year
Allocated Benefit 1,57,29,552 ÷ 5
31,45, 901/-

Step - 3:
Calculate Current Service Cost (CSC)
Year Allocated PVF @10% CSC
Benefits
1 31,45,910 0.683 21,48,657
2 31,45,910 0.751 23,62,578
3 31,45,910 0.826 25,98,523
4 31,45,910 0.909 28,59,634
5 31,45,910 1 31,45,910

Step - 4
Calculation of Interest Cost
st
1 2nd 3rd 4th 5th
Opening Balance 0 21,48,657 47,26,101 77,97,234 114,36,591
Int. Cost (10 %) 0 2,14,866 4,72,610 7,79,723 11,47,051
CSC recognised 21,48,657 23,62,578 25,98,523 28,59,634 31,45,910
at the End
Closing Bal 21,48,657 47,26,101 77,97,234 1,14,36,591 1,57,29,552

Journal Entry
st
1 Year Current Service cost a/c Dr. 21,48,657
To Defined Benefit Obligation 21,48,657
Payable (DBO) A/c
2nd year Current Service Cost A/c Dr. 23,62,578 (P&L)
Interest Cost A/c Dr. 21,48,657 (P&L)
To DBO Payable A/c 25,77,444

16.9
 ACCOUNTING STANDARD - 15

Example 5: (on Define Benefit Obligation)

A lump sum gratuity, equal to 1% of final salary for each year of service, is payable on
termination of service. The salary in year 1 is Rs. 10,000 and is assumed to increase at 7%
(compound) each year resulting in Rs. 13,100 at the end of year 5. The discount rate used
is 10% per annum. Shows how the obligation builds up for an employee who is expected to
leave at the end of year 5, assuming that there are no changes in actuarial assumptions.
SOLUTION: (Amount in Rs.)
Computation of benefits attributed to the current and prior years:
Year 1 2 3 4 5
Benefit attributed to:
- Prior year 0 131 262 393 524
- Current year (1% of final salary) 131 131 131 131 131
- Current and prior years 131 262 393 524 655

Computation of obligation for an employee:

Year 1 2 3 4 5
Opening Obligation - 89 196 324 476
Interest at 10% - 9 20 33 48
Current service cost (see note 2) 89 98 108 119 131
Closing Obligation (see note 1) 89 196 324 476 655

Note 1
Closing obligation
Year 1 2 3 4 5
Gratuity attributable 131 262 393 524 655
Payable after (years) 4 3 2 1 0
Discounting factor .683 .751 .826 .909 1
PV 89 196 324 476 655
Note 2
Current Service Cost
Year 1 2 3 4 5
Gratuity of current year 131 131 131 131 131
Payable after (years) 4 3 2 1 0
Discounting factor .683 .751 .826 .909 1
PV 89 98 108 119 131

Example 6: (Plan Assets)

On 1.4.20X1, the fair value of plan assets is Rs.10,000. On 30.9.20X1 it paid benefits of Rs.
1,500 and received contributions of Rs. 4,500. On 31.03.20X2, fair value of plan assets is
Rs.15,000 and PV of obligation was Rs. 14,972. Actuarial losses on obligation was Rs. 60 on
31.03.20X2.
Find the net actuarial gain/losses on 31.03.20X2 based on the following estimates:
Interest and dividend income 9.00%
Realised and unrealized gain on plan assets 1.50%
Administration costs (1.00%)
Solution
● Annual Expected Return = 9.50%

16.10
 ACCOUNTING STANDARD - 15

● Six Monthly Rate = Squar Root of [(1 + 0.095) – 1)] × 100 = 4.64 %
Plan Assets A/c
01/04 To Balance b/f 10,000 30/09 By Bank 1,500
30/09 To Bank a/c 4,500
31/03 To Expected
Return
10,000 × 9.5% 950
3,000 x 4.64% 139
31/03 To Actuarial Gain 911 31/03 By Balance c/d 15,000

Example 7: (Plan Assets)

FY 23-24
1/4/23 Opening Balance of Plan 5,00,000/-
Assets
1/4/23 Contribution to Plan Assets 1,00,000/-
1/4/23 Benefits Paid out of Plan 1,50,000/-
Assets
Expected Return 12% p.a.
Fair Value on 31/03/24 5,20,000/-
Solution –
Plan Assets A/c
¼ To Balance b/d 5,00,000 ¼ By Bank (Benefits paid) 1,50,000
¼ To Bank A/c 1,00,000
31/3 To Expected 54,000
Income
(Income @ 12% on
4,50,000)
31/3 To Actuarial Gain 16,000 31/3 By Balance c/d 5,20,000
(P&L)

Expected Return + Actuarial Gain

Actual Return for the /loss
year 54,000 + 16,000
70,000

Example 8:
Assume Same Example 4 above, with following Changes:
Date of Contribution made Benefits paid is 31/3/24. Prepare Plan Asset A/c
Solution –
Plan Asset A/c
¼ To Balance 5,00,000 31/3 By Bank 1,50,000
(Benefits)
31/3 To Expected Return 60,000
(12% on Opening)
31/3 To Bank A/c 1,00,000
31/3 To Actuarial Gain (b/f) 10,000 31/3 By Balance 5,20,000

Actual Return 60,000 + 10,000

(Expected Return + Actuarial Gain) 70,000/-

16.11
 ACCOUNTING STANDARD - 15

Example 9:
Assume Same Example 4 as above But Date of Contribution & Benefits paid are on 1/10.
Prepare Plan Asset a/c
Expected Return 12% p.a. Annual Rate
Six Monthly Compound Rate [(‫ﻛ‬1+Annual rate )]-1]×100
[(‫ ﻛ‬1+0.12) -1] x100
5.83% Six monthly Compounded

Plan Asset A/c

¼ To Balance 5,00,000 31/3 By Bank 1,50,000
(Benefits)
1/10 To Bank A/c 1,00,000
31/03 To Expected Return 57,085
5,00,000 x 12% = 60,000
(50,000) x 5.83% = (2915)
31/3 To Actuarial Gain (b/f) 12,915 31/3 By Balance 5,20,000

Actual Return 57,085 + 12,915

(Expected Return + Actuarial Gain) 70,000/-

Example 10:
An enterprise operates a pension plan that provides a pension of 2% on final salary for each
year of service. The benefit will be vested after 5 years of service. On 1.1.2005, the
enterprise improves the pension to 2.5% of the final salary for each year of service starting
from 1.1.2001 at the date of improvement the Present Value of additional benefits for
service from 1.1 .2001 to as follows:

16.12
 ACCOUNTING STANDARD - 15

● Employees with more than 5 years of service at 1.1.2005 Rs. 2,00,000

● Employees with less than 5 years of service Rs. 1,20,000
(Average period until vesting = 3 years)
Suggest the accounting treatment.
Solution
1) Amortised PSC means additional Benefits payable to employees with more than 5 years
of Service, hence 2,00,000 it is to be immediately Recognised in P&L.
2) Unmortised PSC mean additional Benefits payable to employees with Less than 5 years
i.e. Unvested Benefits of Rs 1,20,000 is to recognised in next 3 years.

Example 11:
An enterprise discontinues a business segment and the employees of this segment will earn
no further benefits. This is curtailment without a settlement. Immediately before the
curtailment the details were.
Before Curtailment After Curtailment
PV of obligation 1,000 900
FV of plan assets 820 820
Unrecognized past service cost 50 45
The curtailment reduces the obligation to Rs. 900 and URPSC to Rs.45. Suggest accounting
treatment.
Solution:
DBO Payable A/c Dr. 100
To Un-amortised PSC A/c 5
To Gain on Curtailment A/c 95(P&L A/c)

16.13
 ACCOUNTING STANDARD - 15

4. TERMINATION BENEFITS

An entity is required to recognise a liability and expense for termination benefits in the year of
announcement of Termination Plan.
Amount paid for Termination of Employment Termination Benefit Exp A/c Dr. (P&L)
To Termination Benefits Payable A/c
Amount paid to receive services in future It’s a Normal Salary benefit

Example on Termination Benefits:

As a result of a recent acquisition, an entity plans to close a factory in ten months and, at that
time, terminate the employment of all of the remaining employees at the factory. Because the
entity needs the expertise of the employees at the factory to complete some contracts, it
announces a plan of termination as follows:
Each employee who stays and renders service until the closure of the factory will receive on the
termination date a cash payment of Rs 30,000. Employees leaving before closure of the factory
will receive Rs 10,000.
There are 120 employees at the factory. At the time of announcing the plan, the entity expects
20 of them to leave before closure. Therefore, the total expected cash outflows under the plan
are Rs. 3,200,000 (ie 20 × Rs10,000 + 100 × Rs 30,000). As required by paragraph 160, the entity
accounts for benefits provided in exchange for termination of employment as termination benefits
and accounts for benefits provided in exchange for services as short-term employee benefits.

Termination benefits
The benefit provided in exchange for termination of employment is Rs. 10,000. This is the amount
that an entity would have to pay for terminating the employment regardless of whether the
employees stay and render service until closure of the factory, or they leave before closure. Even
though the employees can leave before closure, the termination of all employees’ employment is a
result of the entity’s decision to close the factory and terminate their employment (i.e. all
employees will leave employment when the factory closes). Therefore, the entity recognises a
liability of Rs. 1,200,000 (i.e. 120 × Rs. 10,000) for the termination benefits provided in accordance
with the employee benefit plan at the earlier of when the plan of termination is announced and
when the entity recognises the restructuring costs associated with the closure of the factory.

Benefits provided in exchange for service

The incremental benefits that employees will receive if they provide services for the full ten-
month period are in exchange for services provided over that period. The entity accounts for
them as short-term employee benefits because the entity expects to settle them before twelve
months after the end of the annual reporting period. In this example, discounting is not required,
so an expense of Rs. 200,000 (i.e. Rs. 2,000,000 ÷ 10) is recognised in each month during the
service period of ten months, with a corresponding increase in the carrying amount of the liability.

16.14
 ACCOUNTING STANDARD - 15

5. (MCQ’s from ICAI Material)

1. Gratuity and Pension would be examples of:

(a) Short-term employee benefits
(b) Long-term employee benefits
(c) Post-employment benefits.
(d) None of the above.

2. Non-accumulating compensating absence is commonly referred to as:

(a) Earned Leave
(b) Sick Leave
(c) Casual leave
(d) All of the above

3. The plans that are established by legislation to cover all enterprises and are operated by
Governments include:
(a) Multi-Employer plans
(b) State plans
(c) Insured Benefits
(d) Employee benefit plan

4. Best estimates of the variable to determine the eventual cost of postemployment benefit is
referred to as
(a) Employer’s contribution
(b) Actuarial assumptions
(c) Cost to Company
(d) Employee’s contribution

5. Actuarial gains / losses should be:

(a) Recognised through reserves
(b) Charged over the expected life of employees
(c) Charged immediately to Profit and Loss Statement
(d) Do not charged to Profit and Loss Statement
ANSWERS 1 2 3 4 5
c c b b c

16.15
 ACCOUNTING STANDARD - 15

Student Notes:-

16.16
 AS 17

ACCOUNTING STANDARD – 17
28
SEGMENT REPORTING

Quote:
“Make Improvements, Not Excuses. Seek Respect, Not Attention”

1. WHY SEGMENT REPORTS ?

This standard requires entity to prepare a Segment wise report of entire business so that the
stakeholders can understand and evaluate the performance of business on segment wise.

• Segment report is not a part of Financial Statements.

• If a financial report contains both the consolidated and Standalone financial statements,
segment information is required only as per the consolidated financial statements.

2. REPORTABLE SEGMENTS

Those segments of entity for which financial information is required to be disclosed separately along
with the financial statements. Any Segments will be considered as reportable when any one of the
following criteria is fulfilled:
(a) If Revenue (Sales) of a segment is equal to or more than 10% of the combined revenue (sales) of
all segments.
Revenue means both External Revenue from Outside Customers and Internal Revenue from inter
segment sales.

(b) If profit or loss of that segment is equal to or more than 10% of the combined result of all
segments.
Combined Result means higher of:
(i) Combined Profit of all segments in Profits
(ii) Combined Loss of all segments in Losses

(c) If Assets of that segment are equal to or more than 10% of the combined Assets of all Segments.

Minimum 75% criteria:

If the total external revenue reported by operating segments constitutes less than 75% of
the entity’s revenue, additional operating segments should be identified as reportable
segments (even if they do not meet the criteria) until at least 75% of the entity’s revenue is
included in reportable segments.

28.1
AS 17

(i.e. External revenue of reportable segments must be ≥ 75% of the total external revenue of
the entity)

Choice of Management:
Entity can report any additional segment as reportable segment even though it does not meet
the above criteria.

Non-reportable segments:
All remaining segments which are not reportable separately should be combined and disclosed
as “Other Segments” in Segment Report.

3. IDENTIFY BUSINESS OR GEOGRAPHICAL SEGMENTS

A business segment is a part of a company that focuses on offering a specific product or a group of
related products or services. This part of the company faces different risks and makes different
profits compared to other parts of the company. Factors that should be considered to identify a
business segment are:
1. Is the Nature of these Products or Services different from Other Products or Services?
(iPhone segment is different from MacBook Segment)
2. Is the process of production of these products or services different from others?
(Tata produces CARs but Electric Car production process is different from Petrol and Deisel
Cars production)
3. Are the customers for these products or services different from other customers?
(Nike has different class of customers, Professional Athletes and Casual Customers. Both
customers will have different needs hence products can be customised according to their need)
4. Are these products or services sold or delivered differently from other products or serives?
(Amazon has two distribution channels, Some products are directly shipped from its own
warehouse and some are shipped from third party sellers)
5. Different Regulatory laws for different products or servies?
(Kotak Group has different segments with different regulatory laws such as Kotak Securities
with SEBI regulations and Kotak Bank with RBI Regulations)

A geographical segment is a part of a company that operates in a specific area, like a country or region,
and it faces different risks and profits compared to other areas. To understand a geographical
segment, consider these factors:
1. Economic and Political Conditions:
Example: McDonald's operates in many countries. In a country like the United States with a
stable economy and political environment, McDonald’s might face fewer challenges compared to
a country like India, which is different economy and price sensitive including different political
conditions. So the planning and decision making could be different.

28.2
 AS 17

2. Relationships Between Areas:

Example: Reliance operates its petrochemical plants in Jamnagar (Gujarat) while having
significant business interests in Mumbai (Maharashtra) where its corporate headquarters are
located. The strong economic ties and logistical connectivity between these two regions
facilitate smooth operations and efficient supply chain management.
3. Proximity of Operations:
Example: A Sports company like Adidas has many stores within major cities such as Mumbai or
Pune. Being close to each store helps them manage inventory and respond quickly to customer
needs. Now they have their stores in Northern and Southern India also, but connecting these
stores with Pune and Mumbai stores would not be possible due to time constraints.
4. Special Risks in a Particular Area:
Example: A tourism company have operations in India and Japan. It needs to consider
earthquake risks in Japan. But in India, it does not face the same level of concern for such
events.
5. Exchange Control Regulations:
Example: A multinational company like Nestlé, operating in India, needs to deal with the Indian
government’s strict regulations on currency exchange and conversions into their local currency.
This can complicate their financial operations compared to a country with more relaxed currency
controls such as Singapore.
6. Underlying Currency Risks:
Example: Tata Consultancy Services (TCS) earns a significant portion of its revenue from clients
in the United States and Europe. As a result, it faces underlying currency risks due to
fluctuations in the Indian Rupee against the US Dollar and Euro. These currency risks can affect
its profitability, and the company uses hedging strategies to mitigate these risks.

Important Notes:
1) A segment may engage in business activities for which it has yet to earn revenues, for example,
start-up operations may be business or geographical segments before earning revenues.
2) Corporate Headquarters cannot become the segment.
3) Two or more segments may be aggregated into a single segment if the segments have similar
economic characteristics (i.e. similar profit margin) with similar nature of Products & Services
or types of customers.

4. PRIMARY AND SECONDARY REPORTING

1) Either Business Segments or Geographical Segments can become the Primary Reporting and the
other one becomes the Secondary Reporting.
2) If a company’s risks and profits are mainly influenced by the different products or services it
offers, it should primarily report information by business segments (like separating results for its
different product lines).
For example, Tata Motors might report separately for its passenger vehicles, commercial vehicles,
and electric vehicles because each segment has different risks and returns.

28.3
AS 17

3) On the other hand, if a company’s risks and profits are mostly affected by the different regions
or countries where it operates, it should primarily report information by geographical segments.
For instance, Infosys might report its financials separately for operations in India, North America,
and Europe, because each region has its own economic environment, regulatory landscape, and
market conditions that influence the company's performance.
4) Also, it can be decided based on how the Board of Directors and Chief Executive Officer (CEO) of
the entity reviews the financial information either product wise or geographic location wise.

5. ELEMENTS FOR SEGMENT REPORTING

Aggregate of –
(a) Revenue Directly attributable to Segment
SEGMENT (b) Enterprise Re
(c) venue which is allocated to Segment on reasonable basis
REVENUE
(d) Inter Segment Revenue (Transactions with other Segments)

Does not include

● Extraordinary items (defined in AS 5)
● Interest or Dividend Income (Except Operation of segment is primarily of
financial nature such as Banks and Financial Institutions)
● Gains on Sale of Investments or Extinguishment of Debts (Except Operation of
segment is primarily of financial nature)
Aggregate of –
(a) Expense Directly attributable to Segment resulting from Operating
activities of segment.
(b) Enterprise Expense which is allocated to Segment on reasonable basis
SEGMENT
(c) Inter Segment Expenses (Transactions with other Segments)
EXPENSE
Does not include
● Extraordinary items (defined in AS 5)
● Interest Expenses (Except Operation of segment is primarily of financial
nature)
● Losses on Sale of Investments or Extinguishment of Debts (Except
Operation of segment is primarily of financial nature)
● Income Tax Expenses
● General Adm. Expenses, Head Office Exp. and Other Exp. incurred at
enterprise level and related to entity as whole.

Important Point-
In case interest is capitalized to the cost of inventories as per AS 16 and such
inventories are considered part of segment assets of a particular segment, then the
interest should be considered as a segment expense.

28.4
 AS 17

SEGMENT SERGENT REVENUE LESS SEGMENT EXPENSES

RESULT
Operating Assets employed by the Segments in its operating activities (Directly
Attributable or Allocated)
SEGMENT
Investments, Advances Receivables, Loans or Other related Assets are also
ASSETS
included only and only when Interest and Dividend Income are part of Segment
Results.

Does not include-

Income Tax Assets (TDS, Advance Tax, Deferred Tax Asset)
Assets used for Head Office or General Purpose
Operating Liabilities of the Segments (Directly Attributable or Allocated)
SEGMENT Borrowings, Loans Payables are also included only and only when Interest Expenses
LIABILITIES on above are part of Segment Results.

Does not include-

Income Tax Liabilities (Deferred Tax Liability, Current Tax Liability)
Loans and Liabilities used for Head Office or General Purpose

Example:
Working Capital Loan taken for Particular Segment shall be part of Segment
Liabilities but Other Long-Term Loans may not be included if taken for whole
company.
ACCOUNTING Segment information should be prepared in conformity with the accounting policies
POLICIES adopted for preparing and presenting the financial statements of the enterprise as
a whole.
However, AS 17 does not prohibit the disclosure of additional segment information
that is prepared on a basis other than the accounting policies adopted for the
enterprise financial statements.

6. PRIMARY AND SECONDARY REPORTING DISCLOSURES

PRIMARY REPORTING INFORMATION:

An enterprise should disclose the following for each reportable segment:
(a) Segment Revenue (Separately information for External and Internal Revenue)
(b) Segment Result.
(c) Total carrying amount of Segment Assets.
(d) Total amount of Segment Liabilities.
(e) Capital Expenditure incurred during the period (PPE and Intangible assets).
(f) Depreciation and Amortisation during the Period.

28.5
AS 17

(g) Other significant non-cash expenses.

An enterprise should present a Reconciliation between the Reportable Segments and Financial
Statements.
• Segment Revenue should be reconciled to Enterprise Revenue;
• Segment Results should be reconciled with Enterprise Net Profit or Loss;
• Segment Assets should be reconciled to Enterprise Assets; and
• Segment Liabilities should be reconciled to Enterprise Liabilities.

SECONDARY REPORTING INFORMATION:

If primary format of an enterprise for reporting segment information is business segments, it should
also report the following information considering geographical area wise:
1. Segment wise Revenue from External Customers: Those geographical segments whose external
revenue is 10% or more of the total enterprise revenue.
2. Segment wise Assets: Those geographical segments whose assets value are 10% or more of the
total enterprise assets and Capital Expenditure incurrent during the year.

If primary format of an enterprise for reporting segment information is Geographic segments, it should
also report the following information considering Product/Service wise:
1. Segment wise Revenue from External Customers: Those business segments whose external revenue
is 10% or more of the total enterprise revenue.
2. Segment wise Assets: Those business segments whose assets value are 10% or more of the total
enterprise assets and Capital Expenditure incurrent during the year.

STEP 4 – PREPARE A SEGMENT REPORT (DISCLOSURES)

PRIMARY SEBMENT REPORT (Assuming Business Segments)

Particulars Segment 1 Segment 2 Inter Total

(Reportable) (Reportable) Segment
Eliminations
1. Segment Revenue & Results:
Segment Revenue (Gross)
Domestic: XXX XXX XXX
Exports: XXX XXX XXX
Total External Sales: XXX XXX - XXX
Inter Segment Sales: XXX XXX (XXX) XXX
Total Revenue XXX XXX (XXX) XXX

(-) Segment Expenses XXXX XXXX XXXX

Segment Results (Profits/Losses) XXX XXX XXX
(+) Unallocated Incomes less Expenses - - XX
Net Profit before Interest & Tax XXX
28.6
 AS 17

(-) Interest & Other Finance Cost XXX

Net Profit before Tax XXX
(-) Tax Expenses (Current +/- Deferred) XXX
Profit After Tax (Entire) XXX
2. Segment Assets & Liabilities
(i) Assets:
Non – Current Assets: XXXX XXXX XXXX
Current Assets XXXX XXXX XXXX
Total Segment Assets XXXX XXXX XXXX
Unallocated Assets - - XXX
Total Assets (Entire) - - XXXX

(ii) Equity and Liabilities:

Segment Liabilities XXX XXX XXXX
Unallocated Liabilities - - XXX
Total Liabilities XXXX XXXX XXXX
Share Capital XXXX
Reserves & Surplus XXXX
Total Equity and Liabilities (Entire) XXXX
3. Other Information:
Capital Expenditure During the Year XXX XXX XXX
Depreciation & Amortisation XXX XXX XXX
Other Non-Cash Expenses XXX XXX XXX

SECONDARY SEGMENT INFORMATION (Assuming Geographical Segment Wise)

Geographical Information: Domestic Foreign Foreign Total

Country 1 Country 2
Total Revenue XXX XXX XXX XXX
Total Assets XXX XXX XXX XXX
Total Capital Expenditure During the Year XXX XXX XXX XXX

28.7
 AS - 18

ACCOUNTING STANDARD – 18
18 RELATED PARTY DISCLOSURES

Why AS 18?
It is quite probable that a related party relationship may have an effect on the profit or loss and
financial position of an entity. Therefore, the users of the financial statements of any entity should
have the knowledge of:
● Related party relationships of an entity.
● Entity’s transactions, outstanding balances, commitments etc. with such related parties.

1. DEFINITIONS

The following definitions are relevant for understanding the Standard:

1. A related party can be
● a person or
● entity that is related to the reporting entity.
2. Relatives in relation to any person includes: children, spouse, brother, sister, father and mother

3. Key management personnel are those people who have authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly, including any director
(whether executive or otherwise) of that entity.
Note:
The definition includes executive as well as non-executive directors who have responsibility for the
management and direction of a significant part of the business. It is not necessary that these
people should have the ‘director’ designation. The term also includes members of the management
committee(s), if those committee(s) has the authority for planning, directing and controlling the
entity’s activities.

Types of Related Party Relationships:

Type 1: Reporting Entity and a Person
Type 2: Reporting Entity and Another Entity

18.1
 AS - 18

2. TYPE 1 – RELATIONSHIP WITH A PERSON

A person or his relative is related to a reporting entity if that person:

(a) Has control or joint control over the reporting entity.
(b) Has significant influence over the reporting entity; or
(c) Is a member of the key management personnel (KMP) of the reporting entity

Examples 1:
1. Mr. A holds 51% of the equity share capital of A Limited. A Limited has no other form of
share capital. Since Mr. A control A Limited, he is a related party.
2. Mrs. A is wife of Mr. A. Mr. A hold 51% of equity shares of A Limited. A Limited has no other
form of share capital. Mr. A controls A Limited. Since Mr. A is a related party, Mrs. A is also
a related party of A Limited.
3. Mr. D is a director of A Limited. Being a member of key management personnel of A Limited,
he is related to A Limited.

3. TYPE 2 –RELATIONSHIP WITH ANOTHER ENTITY

Following are the related party relationships:

(a) Parent Company and all subsidiary companies of that Parent are related to each other.
Note: Fellow subsidiary companies are also related to each other.

Example 2:
SA Limited and SB Limited are subsidiaries of H Limited. SA Limited, SB Limited and H Limited are
related to each other.

(b) Associate or JV of Parent company or any of its subsidiary companies are related to the parent and
all subsidiary companies.
Note:
i. Subsidiary companies of the above Associate or JV are also related to Parent and all its
subsidiaries.
ii. But Associate/JV of above Associate or JV is not Related Party of the Parent and all its
subsidiaries.

Example 3:
AS Limited is an associate of S Limited. S Limited is a subsidiary of H Limited. SH Limited is another
subsidiary of H Limited. AS Limited and SH Limited are related parties.

18.2
 AS - 18

Example 4:
Parent Ltd. has a joint venture in J Ltd. with co-venturer X Ltd. and Parent Ltd. has 35% investment
(significant influence) in A Ltd.
Here, Parent Ltd. and J Ltd. are related to each other.
Parent Ltd. and A Ltd. are related to each other.
But Parent Ltd. and X Ltd. (Co-Venturers) are not related to each other.

Example 5:
X Ltd. has Subsidiaries Y Ltd., Z Ltd., A Ltd. & B Ltd.
Also, B Ltd. has an Associate co. C Ltd. and A Ltd. has an associate co. D Ltd.
Here, Group consist of X, Y, Z, A & B only. Entire group is related party of each other.
C Ltd. is related party of all members of group i.e. X, Y, Z, A & B.
D Ltd. is related party of all members of group i.e. X, Y, Z, A & B.
But C Ltd. and D Ltd. are co-associate and are not related party to each other.

Example 6:
R Limited has an associate B Limited. B Limited has a subsidiary S Limited, a joint venture J Limited
and an associate A Limited. R Limited is the reporting entity. It identifies B Limited and S Limited
as its related parties. J Limited and A Limited are not related parties of R Limited.

(c) If a Person (including his relative) or an Entity is having Control/Significant Influence/KMP over
one entity and Control or Significant influence or is a KMP of another entity then both entities are
related to each other.

Example 7:
Mr. A controls A Limited (the reporting entity). He also controls B Limited. A Limited and B Limited
are related to each other.

Example 8:
Mr. A controls A Limited (the reporting entity). He is a non-executive director of B Limited. A
Limited and B Limited are related parties.

Example 9:
Mr. A is Director of A Limited (the reporting entity). He is a non-executive director of B Limited
also. A Limited and B Limited are related parties.

18.3
 AS - 18

4. NO RELATED PARTY RELASHIOSHIPS

(a) Co-venturers of the same Joint Venture are not related to each other.
(b) Major Customers, Finance Providers, Trade unions, Govt. Departments or agencies, Major Supplier,
Franchisor, distributor, Agent etc only because of their business dealings with entity.

Example 10:
A Bank and B Bank have provided finance to XY Limited. By virtue of the loan agreement, they occupy
a non-executive observer seat on the Board of Directors of XY Limited. A Bank and B Bank are not
related parties of XY Limited.

5. RELATED PARTY DISCLOSURES

The disclosure requirements can be broadly classified into two categories.

(a) Category 1: Relationship between Parent & Subsidiary, following disclosures are required even when
there are not transactions between them during the year:
1) Name of Parent or Subsidiary companies.
2) Name of Ultimate Parent Company (if immediate parent is also a subsidiary)

(b) Category 2: Any other Relationship between Entity and a Person or Another entity requires
disclosures of relationships and items only when there are related party transactions during the
year:
1) Nature of Related Party Relationship
2) Nature and Amount of Transaction during relationship period
3) Outstanding Balance due from or due to as on balance sheet date
4) Expenses recognised in respect of bad-debts due from related parties
5) Provisions created on outstanding balances from related parties

Note: Remuneration paid to key management personnel should be considered as a related party
transaction requiring disclosures. In case non-executive directors on the Board of Directors are
not related parties, remuneration paid to them should not be considered a related party
transaction.

18.4
 AS - 18

6. OTHER IMPORTANT POINTS

1) A related party transaction can be transfer of resources, services or obligations between reporting
entity and related entities, such as:
● purchases or sales of goods (finished or unfinished);
● purchases or sales of property and other assets;
● rendering or receiving of services;
● leases;
● transfers of research and development;
● transfers under licence agreements;
● transfers under finance arrangements (including loans and equity contributions in cash or in
kind);
● provision of guarantees or collateral;

2) A reporting entity is also exempt from the disclosure requirements in relation to (i) related party
transactions (ii) outstanding balances and (iii) commitments with a government or state controlled
entity that has control, joint control or significant influence over the reporting entity;

18.5
 AS - 18

7. (MCQ’s from ICAI Material)

1. According to AS-18 Related Party Disclosures, which ONE of the following is not a related party
of Skyline Limited?
(a) A shareholder of Skyline Limited owning 30% of the ordinary share capital
(b) An entity providing banking facilities to Skyline Limited in the normal course of business
(c) An associate of Skyline Limited
(d) Key management personnel of Skyline Limited

2. Are the following statements in relation to related parties true or false, according to AS-18
Related Party Disclosures?
(A) A party is related to another entity that it is jointly controlled by. (B) A party is related to
another entity that it controls.
Statement (A) Statement (B)
(a) False False
(b) False True
(c) True False
(d) True True

3. Which of the following is not a related party as envisaged by AS-18 Related Party Disclosures?
(a) A director of the entity
(b) The parent company of the entity
(c) A shareholder of the entity that holds 1% stake in the entity
(d) The spouse of the managing director of the entity

4. According to AS-18 Related Party Disclosures, related party transaction is a transfer of resources
or obligations between related parties - provided a price is charged for such transfer.
(a) True
(b) False

5. According to AS-18 Related Party Disclosures, parties are considered to be related, if and only if
at the end of the reporting period - one party has the ability to control the other party or
exercise significant influence over the other party in making financial and/or operating decisions.
(a) True
(b) False

ANSWERS 1 2 3 4 5
b d c b b

18.6
 AS 20 - EPS

ACCOUNTING STANDARD – 20
19 EARNINGS PER SHARE

"The beautiful thing about learning is

that no one can take it away from you."

1. MEASUREMENT OF BASIC EARNINGS PER SHARE

Earnings Per Share are of two types:

1) Basic EPS (BEPS)
2) Diluted EPS (DEPS)

Basic EPS is calculated as under:

Profit/Loss attributed to Equity Shareholders
Weighted Average Number of Equity Shares

Numerator for EPS – Profit/loss attributable to Equity Shareholders

Particulars Amount Remarks
Earnings Before Interest and Tax (EBIT) XXX
(-) Interest on Borrowings (XX) Actual Interest Rate given in Question
Earnings Before Tax (EBT) XXX
(-) Tax Expense (XX) CT +/- DT
Earnings After Tax (EAT/PAT) XXX
(-) Preference Dividend (XX) Assume Cumulative Preference Shares
Profit/Loss attributable to Ordinary ESH XXX

Important Points for Numerator:

Preference Dividend ● If Cumulative Preference Shares, then deduct the dividend always
● If Non-cumulative Preference Shares, then deduct the dividend only
when declared.
● Always assume cumulative if not specified in questions

Denominator for EPS – Weighted Average Outstanding Ordinary Shares

Number of Ordinary Shares are considered for Basic EPS adjusted by Time Factor (i.e. No. of
days/months for which shares were outstanding during the year as against total days/months during
the year)
Calculation of Weighted Avg. Ordinary Shares:
19.1
 AS 20 - EPS

Particulars W.Avg. No. Remarks

No. of shares in the beginning of year XX
(+) No. of shares issued during the year XX No. of days/months from issued date to
against cash consideration (Normal issue) year end ÷ 365 days or 12 months
(-) No. of shares buyback during the year XX No. of days/months from BB date to year
end ÷ 365 days or 12 months
(+) No. of Bonus shares issued during the year XX 12/12 always

Deciding the date for issue of shares

Sr. No Nature of transaction Effective Date when
1 General Rule From date of consideration receivable or date of
issue
2 Exchange for cash From date of consideration receivable or date of
issue
4 Conversion of debt instrument Date of Accrual of interest is stopped
5 In lieu of interest / principal Date of Accrual of interest is stopped
6 Exchange of liability Settlement Date
7 Consideration for acquisition of asset Asset is recognised in books
8 Rendering of services When Services are rendered
9 Amalgamation of Companies Acquisition date (Date of Acquisition of control)
10 Bonus Issue From Beginning of Previous Year

Special Cases for denominator (Weighted Average outstanding ordinary shares):

Bonus; ● These shares are issued without any consideration to existing shareholders
Share Split; and by capitalization of reserves.
Share Consolidation ● Such reserves are already available since beginning of previous year hence
time factor should always be considered from beginning of PY.
● PY EPS shall also be restated (calculated again) for CY disclosure purpose by
including Bonus shares in PY denominator.
Partly Paid-up ● First, check whether partly paid-up shares are entitled to dividend or not.
Shares ● If partly paid-up shares are not entitled to a dividend unless they become
fully paid up, then do not consider them in BEPS working. They are treated
as potential equity shares for DEPS working.
● If partly paid-up shares are entitled to a dividend, then calculate weighted
average outstanding equity share capital (in ₹) instead of No. as under:

No. of Fully Paid-up shares X Face Value X Time Factor

No. of Partly Paid-up shares X Paid up Price X Time Factor
Total Weighted Avg. Equity Share Capital (in ₹)

19.2
 AS 20 - EPS

Calculate Earnings Per Rupee (EPR):

Profit/Loss attributable to ESH ÷ Total Weighted Avg. ESC

Calculate EPS as under:

EPR (in ₹) X Paid-up price or Face Value
Right Issue (RI) Right issue of shares has bonus element hence follow the below steps:
Step 1: Calculate Theoretical Ex right price per share if not available
𝐹𝑜𝑟𝑚𝑢𝑙𝑎
[𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 (𝑏𝑒𝑓𝑜𝑟𝑒 𝑟𝑖𝑔ℎ𝑡) 𝑥 𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒 (𝑝𝑟𝑒 − 𝑟𝑖𝑔ℎ𝑡)] + 𝑅𝑖𝑔ℎ𝑡 𝑖𝑠𝑠𝑢𝑒 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠
=
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑜𝑠𝑡 𝑟𝑖𝑔ℎ𝑡

𝐶𝑢𝑚 𝑅𝑖𝑔ℎ𝑡 𝑃𝑟𝑖𝑐𝑒

Step 2: Calculate Right Factor (RF) =
𝐸𝑥 𝑅𝑖𝑔ℎ𝑡 𝑃𝑟𝑖𝑐𝑒
(Cum right price also know as Market price will be given in question)

Step 3: Weighted Average O/s Ordinary shares of current year: -

No. of shares o/s (pre-right) x RF x No. of Months till the date of RI ÷ 12
(+) No. of shares o/s (post-right) x No. of Months after RI till end of year ÷ 12
Total weighted Avg. O/s ordinary shares

Step 4: Calculate BEPS of CY as usual

Step 5: Calculate Restated BEPS of PY also by considering above RF in

weighted avg. calculation of PY

2. DILUTED EARNINGS PER SHARE

1. Diluted EPS is calculated when there are outstanding potential equity shares.

2. Potential Equity Shares are those securities which can be converted into ordinary equity shares
in future.
E.g. Convertible Preference Shares, Convertible Debentures, share warrants, ESOPs, Call
Options, partly paid-up shares if not eligible for dividend unless they become fully paid-up,
Contingently issuable shares

3. Diluted EPS means reduction of Basis EPS if same earnings will continue with additional no. of
shares when potential equity shares will be converted into ordinary shares.

4. Conversion into Ordinary shares may increase the Numerator and Denominator as under:
Numerator Denominator
Saving of Interest after Tax due toIncrease in No. of Shares due to
conversion of Debentures. conversion of Preference shares,

19.3
 AS 20 - EPS

Saving of Preference Dividend due toDebentures, Warrants, ESOPs and Call

conversion of Debentures. Options.

5. Above Change in Numerator and Denominator may increase or decrease the existing Basic EPS.
If there is a Decrease in EPS = It is Diluted EPS
If there is a Increase in EPS = It is Anti Diluted EPS

6. Anti diluted EPS is not required to be reported. In that case, DEPS = BEPS

7. DEPS formulae:
Numerator Denominator
Profit/loss attributable to ESH Weighted Avg. O/s Ordinary Shares
(+) Savings due to Conversion of Potential (+) Weighted Avg. O/s Potential Eq. Shares
Equity Shares (after Tax if required)

(Refer Examples 14 onwards)

Special Cases of DEPS:

ESOPs Earnings (Numerator) = Zero i.e. no adjustment

No. of Potential Eq. Shares (Denominator) =

Total Options (-) Total options x Exercise Price
Market Price

Time weight shall be from date of option granted to date of exercise

Example: (ESOP)
If company grants 100 ESOPs to its employee to be exercised at Rs 45 each after 31st March 20X1.
The market value of the shares on 15th April 20X1 is Rs 50 each. In Such case, company will get Rs.
4,500 funds from issue of ESOP to employee. But the same shares could have been issued to general
public at Rs. 50 each i.e. 4500 ÷ 50 = 90 Shares could have been issued to raise same amount of Rs.
4500 from general public.
It means company will issue 10 shares at free of cost to employee under ESOP. These 10 Shares will
be treated as Potential Equity Shares of Dilutive Nature.

19.4
 AS 20 - EPS

3. PRESENTATION OF EPS

1) The Entity shall present BEPS and DEPS in the face of a Statement of Profit and Loss.
2) EPS in case of SFS and CFS:
Sr. No. Type of Financial statements Consolidated EPS Separate EPS
1 Consolidated Must disclose Don't disclose
2 Separate Don't disclose Must disclose

3) Net Loss in Continuing Operation:

DEPS from continuing operation shall be calculated without considering Potential Equity Shares
otherwise it gets anti-diluted.

4. PRACTICAL EXAMPLES

EXAMPLE 1:
EBIT = 49,80,000 (Current Year = 23-24)
Current Tax = 12,45,000
DTL = 2,15,000
85% Debenture issued on 1/7/23, ₹75 lacs
9% Non-Cumulative Preference Shares Capital are Outstanding ₹ 40 lacs From Beginning
10% Preference Shares Capital are issued on 1/3/24, ₹ 80 lacs
Preference Dividend not yet Declared
Calculate EAESH
SOLUTION:
Earnings Before Interest & Tax 49,80,000
(-) Interest (4,78,125)
Earning Before Tax 45,01,875
(-) Tax Expenses (14,60,000)
Earnings After Tax 30,41,875
(-) Preference Dividend on Cumulative Shares only (66,667)
(since dividend is not declared hence Dividend on Non-
Cumulative Pref. Share is ignore)
Earnings Available for Equity Share Holder 29,75,208

EXAMPLES 2:
Current Year 23-24
1/4/23: - 10,00,000 Shares are Outstanding
1/7/23: - New issue 60,000 No.
Calculate Weighted Average.

19.5
 AS 20 - EPS

SOLUTION
Alternative 1:
1/4/23 10,00,000 x 12/12 10,00,000
1/7/23 60,000 x 9/12 45,000
10,45,000
Alternative 2:
1/4/23 Outstanding 10,00,000 x 3/12 2,50,000
1/7/23 Cumulative Outstanding 10,60,000 x 7,95,000)
9/12
10,45,000

EXAMPLE 3:
Current Year 23-24
1/4/23 10,00,000 Shares are Outstanding
1/7/23 New issue 60,000 no.
1/11/23 Buy Back 25000 no.
SOLUTION
Alternative: 1
1/4 10,00,000 x 12/12 10,00,000
New Issue 1/7 60,000 x 9/12 45,000
Buy Back 1/11 25,000 x 5/12 (10,417)
10,34,583
Alternative: 2
10,00,000 x 3/12 2,50,000
+ 10,60,000 x 4/12 3,53,333
+ 10,35,000 x 5/12 4,31,250
10,34,583

EXAMPLE 4:
EBIT = 32,50,000, Tax Rate = 30%
Current Year = 23-24
As on 1/4/23 Outstanding of Equity Shares = 10,00,000 no.
On 1/4/23 Outstanding 9% Convertible Debenture = ₹ 26,00,000, Face Value =
100/-
On 1/9/23 Convertible Debentures Converted into Equity Shares in the Ratio of 3:1
Calculate EPS
SOLUTION
Working Note 1:
Earnings Before Interest & Tax 32,50,000
(-) Interest (5 months) (97,500)

19.6
 AS 20 - EPS

Earning Before Tax 31,52,5000

(-) Tax Expenditure @30% (9,45,750)
Earning After Tax 22,06,750
(-) Preference Dividend 0
Earnings Available for Equity Share 22,06,750
Holders
Working Note 2:
1/4/23 Outstanding Equity 10,00,000 x 10,00,000
12/12
1/9/23 Conversion 26000x3 78,000 x 7/12 45,5000
10,45,500
EPS = EAESH/ Weighted average Outstanding no. = 22,06,750/10,45,500 =2.11/-

EXAMPLE 5:
EBIT – 25,00,000, Tax Rate – 30%
As on 1/4 (a) Outstanding Equity = 90,000 No.
(b) 9% Debentures of ₹ 60,00,000
On 1/7 Public Issue made of 30,000 No. of Equity Shares
On 1/10 Issued 11% Cumulative Preference Share Capital of ₹ 40,00,000
(Dividend not Declared)
On 1/12 Buyback of 20,000 Equity No.
Calculate BEPS.
Solution:
Working Note 1:
Earnings Before Interest & Tax 25,00,000
(-) Interest (5,40,000)
Earning Before Tax 19,60,000
(-) Tax Expenditure (5,88,000)
Earning After Tax 13,72,000
(-) Preference Dividend (6 (2,20,000)
Months)
Earnings Available for Equity 11,52,000
Share Holders
Working Note 2:
Calculation of Weighted Average Outstanding Equity Share Capital (in ₹)
Date Particulars Working Weighted Avg.
Amount
¼ Opening Balance 90,000 x 12/12 90,000
1/7 Public Issue 30,000 x 9/12 22,500
1/12 Buyback (20,000 x 4/12) (6,667)
Weighted Average Outstanding Share Capital 1,05,833

19.7
 AS 20 - EPS

Basic EPS = 11,52,000/1,05,833 = 10.89/- per Share.

EXAMPLE 6: (Negetive EPS)

EBIT = 8,00,000
Tax Rate = 30%
1/4 = Outstanding 10% Debenture of ₹ 1 Crore
1/4 = Outstanding No. of Equity shares 1,00,000 no.
Calculate EPS
SOLUTION
EPS can be negative also if there is a Loss to the Company
Earnings Before Interest & Tax 8,00,000
(-) Interest (10,00,000)
Earnings Before Tax (2,00,000)
(-) Tax 0
Earnings After Tax / Earnings Available for Share (2,00,000)
Holders
EPS (Loss per Share) = (2,00,000)/1,00,000 = -2

EXAMPLE 7 (Bonus):
Previous Year EAESH = 12,00,000
Current Year EAESH = 15,00,000
Current Year Outstanding no. in Beginning = 2,00,000 no.
Current Year Bonus issue in 1/7 = 50,000 no.
Current Year Public Issue in 1/9 = 30,000 no.
Current Year Buy Back in 1/11 = 10,000 no.
Calculate EPS of Current Year & Restated Eps of Previous year.
SOLUTION
Working Note 1: Calculation of weighted Average Outstanding no.
1/4 2,00,000 x 12/12 2,00,000
+ 1/7 Bonus 50,000 x 12/12 50,000
+ 1/9 Public issue 30,000 x 7/12 17,500
- 1/11 Buy Back (10,000 x 5/12) (4,167)
2,63,333
Current Year Eps = 15,00,000/2,63,333 = 5.696/-
Restated Eps of Previous Year = 12,00,000/2,00,000+50,000 = 4.8/-

Example 8 (Share Split):

EAESH PY = 10,00,000
EAESH CY = 15,00,000
Outstanding Equity Since Beginning = 1,00,000 No. of 100/- each
On 1st Nov of CY above 1,00,000 No. of 100/- each converted into 10/- each

19.8
 AS 20 - EPS

Solution:
Once the shares are Split or Consolidated, the new numbers after Split or Consolidation shall be taken
into Consideration while Calculating EPS
EPS (CY) = 15,00,000/1,00,0000x12/12 = 1.5/- per share
Profit & Loss A/c
CY PY
Net Profit 15,00,0000 10,00,000
1.5/- 10/-
As we can see from above P&L, that CY EPS and PY EPS are not Comparable because of Share Split in
CY.
Therefore, we should recalculate the PY EPS based on Share Split as under.
Restated EPS (PY) = 10,00,000/10,00,000 = 1/-

EXAMPLE 9 (Share Consolidation):

EAESH CY = 45,00,000
EAESH PY = 35,00,000
1,00,000 No. of Shares of 10/- each
During CY 10/- Shares Converted into 50/- Shares
Solution:
PY EPS (Actual) = 35,00,000/1,00,000 = 35/-
CY EPS (Actual) = 45,00,000/20,000 = 225/-
PY EPS (Restated) = 35,00,000/20,000 = 175/-

EXAMPLE 10: Partly Paid Shares

(Current Year 23-24)
EAESH = 15,00,000
1/4/23 = 50,000 no. Outstanding equity of ₹ 10 each
1/7/23 = 30,000 no. issued 10/- each, 5/- Paid Up
Calculate BEPS
SOLUTION
1/4 50,000 x 10 5,00,000x12/12 5,00,000
+ 1/7 30,000 x5 1,50,000x9/12 1,12,500
Weighted Average amount of Share 6,12,500
Capital.
Earning Per Rupee = 15,00,000/6,12,500 = 2.4489/- (or) 2.45/- per Rupee
Eps for 10/- Fully Paid = 2.4489 x 10/- = 24.489
Eps For 5/- Paid up = 2.4489 x 5/- = 12.2445.

EXAMPLE 11 - Partly Paid Shares:

As on 1/4/23 Opening Outstanding Equity Shares 50,000 of 10/- each, 6/- Paid-up.
On 1/9/23 Public Issue of 30,000 shares made at 10/- each, 7/- Paid up

19.9
 AS 20 - EPS

On 1/10/23 Amount Called @4/- on Opening but Shareholders holding 48,000 Shares
have paid.
On 1/12/23 Amount Called @3/- on public issue, all Share Holders have paid.
Note: Partly paid shares are also entitled for Dividend
Calculate Weighted Average Outstanding Equity Shares.
Solution:
Calculation of Weighted Average Outstanding Share Capital (in ₹)
Date Particulars Working Weighted Avg.
Amount
1/4/23 Opening Balance 50,000 x 6 x 12/12 3,00,000
1/9/23 Public issue 30,000 x 7 x 6/12 1,22,500
1/10/23 Called @4/- 4,80,000 x 4 x 6/12 96,000
1/12/23 Called @3/- 30,000 x 3 x 4/12 30,000
Weighted Average Outstanding Share Capital 5,48,500
Weighted Avg Outstanding No. of Shares (5,48,500/10) 54,850 No.

EXAMPLE 12:
EAESH = 18,00,000
As on 1/4/23 Opening Outstanding 1,00,000 no. of Equity Shares of 10/- each
On 1/7/23 Issued 80,000 No. at 15/- each
On 1/11/23 Issued 50,000 No. at 20/- each
Calculate Weighted Average No. of Equity Shares & BEPS
Solution:
Calculation of Weighted Average Outstanding Share Capital (in ₹)
Date Particulars Working Weighted Avg.
Amount
1/4/23 Opening Balance 1,00,000 x 10 x 12/12 10,00,000
1/7/23 Issue 80,000 x 15 x 9/12 9,00,000
1/11/23 Issue 50,000 x 20 x 5/12 4,16,667
Weighted Average Outstanding Equity Share Capital ₹ 23,16,667

Earning Per Rupee = 18,00,000/23,16,667 = 0.777 per Rupee

EPS @10/- 10 x 0.777 7.77/-
EPS @15/- 15 x 0.777 11.65/-
EPS @20/- 20 x 0.777 15.54/-

EXAMPLE 13 (Right Issue)

EAESH = 21,00,000
As on 1/4 Outstanding Shares are 1,50,000 No.
On 1/7 Public Issue of 30,000 No.
On 1/10 Right issue @90/- at ratio of 1:2

19.10
 AS 20 - EPS

On 1/1 Public issue of 50,000 No.

Cum-Right Price = 100/-

Solution:
Step 1:
Ex-Right Price = (1,50,000+30,000) x 100 + (90,000 x 90) / 2,70,000 = 96.67/-
Step 2:
Right Factor = Cum-Right Price / Ex-Right Price = 100/96.67
Step 3:
Weighted Average: - Apply Right Factor only on No. of Shares Outstanding before Right Issue
Date Working Weighted Avg.
Amount
1/4 1,50,000 x 3/12 x 38,792
100/96.67
1/7 1,80,000 x 3/12 x 46,550
100/96.67
1/10 2,70,000 x 3/12 67,500
1/1 3,20,000 x 3/12 80,000
2,32,842
BEPS = 21,00,000/2,32,842 = 9.02/- per Share.

EXAMPLE 14:
EBIT = 9,00,000 (Current Year 23-24)
Tax Rate = 30%
1/4/23 = Outstanding 8% Convertible Debenture of ₹ 15,00,000, Face Value is ₹ 100
(Convertible in next year into 50,000 no of equity shares)
1/4/23 = Outstanding equity shares 1,00,000 no.
Calculate BEPS & DEPS
SOLUTION
EBIT 9,00,000
(-) Interest 1,20,000
EBT 7,80,000
(-) Tax 30% 2,34,000
EAESH 5,46,000
Basic EPS = 5,46,000/1,00,000
= 5.46/-

DEPS = EAESH + (Saving in Interest net of Tax) / Weighted Avg no. of Equity + Weighted Avg
Potential No. of Equity
[5,46,000 + (1,20,000 – 30%)] / [(1,00,000 x 12/12) + (50,000 x 12/12)] = 4.20/-

19.11
 AS 20 - EPS

EXAMPLE 15:
Same as Example 19 But instead of Debenture there are Convertible Preference Shares
SOLUTION
(1) BEPS
EBIT 9,00,000
(-) Interest 0
EBT 9,00,000
(-) Tax @ 30% 2,70,000
EAT 6,30,000
(-) Preference Dividend (1,20,000)
EAESH 5,10,000
BEPS = 5,10,000/1,00,000 = 5.10/-

(2) DEPS =
5,10,000 + Savings in Dividend / Weighted Avg No. of Equity + Weighted Avg No. of Potential Equity
5,10,000 + 1,20,000/1,50,000 = 4.20/-

EXAMPLE 16:
Current Year 23-24
EBIT = 25,00,000
As on 1/4/23 Outstanding 10% Non-Convertible PSC of ₹20 lakhs (Dividend
Declared)
On 1/4/23 Outstanding 1,50,000 no. of equity, Tax @30%
On 1/7/23 Issued 18,000 no. of 9% Debentures (face value 100/-)
convertible after 3 years in the ratio of 3:1
SOLUTION
EBIT 25,00,000
Interest 1,21,500
EBT 23,78,500
Tax 30% 7,13,550
EAT 16,64,950
Preference Dividend (20,00,000)
EAESH 14,64,950
BEPS = 14,64,950/1,50,000 = 9.77/-
Calculation of DEPS:
1. Identify potential equity shares outstanding in current year
Convertible Debenture 9% WEF 1/7/23
18,000 x 3 = 54,000
2. Weighted average equity Outstanding;
54,000 x 9/12 = 40,500 no.
3. DEPS: EAESH + saving in Interest of Tax/ weighted Average equity + Weighted Avg. Potential
equity
19.12
 AS 20 - EPS

= 14,64,950 + (1,21,500 x 70%)/15,000+40,500

= 8.136/- Per share

EXAMPLE 17:
Same as Example 21, but Conversion Ratio is 1:5
Calculate DEPS
SOLUTION
Weighted Average = 18,000/5 x 1
= 3600
3600 x 9/12 = 2700
DEPS = 14,64,950 + 1,50,000 + 2700
= 10.15/- Anti Diluted
As per AS 20, Anti Diluted EPS need not be disclosed, In such case DEPS shall be disclosed at an
amount equal to BEPS. Therefore, Disclosed DEPS = 9.77/-

EXAMPLE 18:
EAESH = 18,00,000
No. of Equity Shares = 1,00,000
During the year, 10,000 no. of Debenture @ 11% Interest issued at face value 100/-
Conversion into equity is 40,000 no. after 3 years
Interest paid on such Debenture = 27,500/-
SOLUTION
Debenture must have been issued on 1/Jan/24
Since Interest of 27,500 belongs to 3 months
Interest Months
1,10,000 12
27,500 ?

DEPS = 18,00,000 + (27,500 x 70%)/1,00,000 + (40,000 x 3/12)

= 16.53/-

EXAMPLE 19:
EAESH = 15,00,000
No. of Outstanding Equity = 1,00,000
BEPS = 15/-
There are 60,000 option (ESOPs) are Outstanding For Full year given to employees at exercise price
of 50/- each MP Per shares is 100/- each
Calculate How many Option are dilutive Potential Shares & also Calculate DEPS
SOLUTION
Total ESOP = 60,000 no. Outstanding
1. Dilutive Potential
2. Non-Dilutive (B/F) 30,000

19.13
 AS 20 - EPS

Total ESOP – fund raised/MP

60,000 – 30,00,000/100 = 30,000 (Dilutive potential equity)
DEPS = EAESH + Saving/ Weighted Average equity + Weighted Potential equity
= 15,00,000 + 0* / 1,00,000 + 30,000 x 12/12
= 11.538/-
(* why 0? In ESOP there is no Interest or Dividend Payable)

EXAMPLE 20:
EAESH = 15,00,000
Including extra ordinary Income of 1,50,000
Opening no. of Ordinary equity = 1,00,000
On 1/8 = 10,000 no of shares warrant issued & converted into shares on 1st Jan of Current year
Calculate BEPS & DEPS
SOLUTION
1 Basic Earnings Per Share
1/4 1/Jan 31/3
Opening Outstanding Shares 10,000
1,00,000
Weighted Average: -
1,00,000 x 12/12 1,00,000
+ 10,000 x 3/12 2,500
1,02,500

BEPS = EAESH (Including Extra ordinary)/Weighted Average Outstanding equity

= 15,00,000/1,02,500
= 14.634/-

2 Diluted Earnings Per Share

1/4 1/8 1/Jan 31/3
Opening Outstanding Share warrant Share 10,000
10,00,000 10,000
Weighted Average Potential Equity = 10,000 x 5/12 = 4167
DEPS = (15,00,000 – 1,50,000) + 0 / 1,02,500 + 4167
= 12.656/-

19.14
 AS 20 - EPS

5. (MCQ’s from ICAI Material)

1. AB Company Ltd. had 1,00,000 shares of common stock outstanding on January. Additional 50,000
shares were issued on July 1, and 25,000 shares were re- acquired on September 1. The weighted
average number of shares outstanding during the year on Dec. 31 is
(a) 1,40,000 shares
(b) 1,25,000 shares
(c) 1,16,667 shares
(d) 1,20,000 shares

2. As per AS 20, potential equity shares should be treated as dilutive when, and only when, their
conversion to equity shares would
(a) Decrease net profit per share from continuing ordinary operations.
(b) Increase net profit per share from continuing ordinary operations.
(c) Make no change in net profit per share from continuing ordinary operations.
(d) Decrease net loss per share from continuing ordinary operations.

3. As per AS 20, equity shares which are issuable upon the satisfaction of certain conditions
resulting from contractual arrangements are
(a) Dilutive potential equity shares
(b) Contingently issuable shares
(c) Contractual issued shares
(d) Potential equity shares

4. In case potential equity shares have been cancelled during the year, they should be:
(a) Ignored for computation of Diluted EPS.
(b) Considered from the beginning of the year till the date they are cancelled.
(c) The company needs to make an accounting policy and can follow the treatment in (a) or
(b) as it decides.
(d) Considered for computation of diluted EPS only if the impact of such potential equity
shares would be material.

5. Partly paid up equity shares are:

(a) Always considered as a part of Basic EPS.
(b) Always considered as a part of Diluted EPS.
(c) Depending upon the entitlement of dividend to the shareholder, it will be considered as
a part of Basic or Diluted EPS as the case may be.
(d) Considered as part of Basic/ Diluted EPS depending on the accounting policy of the
company.

19.15
 AS 20 - EPS

ANSWERS 1 2 3 4 5
c a b b c

19.16
 ACCOUNTING STANDARD – 22

ACCOUNTING STANDARD – 22
20
ACCOUNTING FOR TAXES ON INCOME

“In this world nothing can be said to be certain, except death and taxes“.

Let’s Understand some important Income Tax Sections first along with
their treatment in Books of Accounts: -

1) Sec-32: Depreciation deduction as per Tax law is different from Depreciation debit in P&L A/c

2) Sec-35AD: 100% deduction of specified capital expenditures in the same year:

Books Income Tax

● Amortise/Depreciate in more than 1 year 100% Deduction in same year

● Next years Amortised Expenses will be
disallowed
● Next year Taxable Income will be Increased

3) Sec-36: Provision for bad debts debited in P&L is disallowed under Income Tax:
Income Tax will give us deduction only on actual Bad-debts incurred.
1st Year Provision for Bad-debts 15,000 debited in P&L, but there is no actual Bad-debts, then
it is disallowed in Income Tax, Current Year Taxable Income is increased.

4) Sec-37: Personal Expenditure are always dis-allowed.

1st Year: - Personal Expenses of Director debited in Profit & Loss. But in Income Tax it is
disallowed Permanently. Current Year taxable Income will be Higher.

5) Sec-43B: Deductions of some specified Expenses only on actual Cash Basis.

1st Year: - Bonus Payable is bebited in P&L, then it will be Disallowed and Current Year Taxable
Income will be Increased.
2nd Year: Bonus payable is actually Paid, Now Tax Law will give us deduction. Thus, Taxable
Income will be reduced.

6) Sec-35D: - Preliminary Expenses incurred & fully debited in P&L, but as per Tax Law, 1/5th
Deduction is allowed every Year.

20.1
 ACCOUNTING STANDARD – 22

1st 2nd 3rd 4th 5th

Income before Preliminary Expenses 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
Preliminary Expenses debited in P&L (10,000) - - - -
Accounting Income (PBT) 90,000 1,00,000 1,00,000 1,00,000 1,00,000
TAX Law:
Disallowed 10,000 - - - -
Allowed 1/5 (2,000) (2,000) (2,000) (2,000) (2,000)
Taxable Income 98,000 98,000 98,000 98,000 98,000
Timing Difference 8,000 (2,000) (2,000) (2,000) (2,000)

7) Sec-80G: Donation to religious trust is never allowed as deduction under Income Tax
(Disallowed Permanently).

1. DEFINITIONS

1. Accounting income is the Net Profit or Loss for a period, as reported in the statement of
profit and loss, before deducting income tax expense or adding income tax saving.
2. Taxable income (tax loss) is the amount of the income (loss) for a period, determined in
accordance with the tax laws, based upon which income tax payable (recoverable) is
determined.
3. Current tax is the amount of Income tax determined to be payable (recoverable) in respect of
the taxable income (tax loss) for a period.
4. Deferred tax is the tax effect of timing differences.
5. Timing differences are the 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.
6. Permanent differences are the differences between taxable income and accounting income for
a period that originate in one period and do not reverse subsequently. Permanent differences
do not result in deferred tax assets or deferred tax liabilities.
7. Tax Expense (Tax Saving) is the aggregate of Current tax and Deferred tax charged or
credited to the statement of profit and loss for the period.
Tax Expense = Current Tax Expense + Deferred Tax Expense – DT Income

20.2
 ACCOUNTING STANDARD – 22

Examples of Timing Differences Examples of Permanent Differences

● Depreciation as per Companies Act different ● Personal Expenses disallowed

from Depreciation as per Income Tax (Sec 32 always, never allowed in the
of IT Act) – Resulting DTA or DTL Future.

● Sec 43B of Income Tax Act (Deductions ● Donations to unspecified trust –

available on cash basis not on provision basis Disallowed always.
– Bonus, Interest, PF etc) – resulting DTA

● Preliminary Expenses deduction allowed in 5

years as per Income Tax, but as per AS 26
fully written off – resulting DTA

● Scientific Research Expenses or Specified

Expenses allowed 100% in the same year
however in the Books only part is written off.

● Provision for Doubtful debts disallowed

under IT Act until actual bad debts occur.

2. UNABSORBED DEPRECIATION AND CARRY FORWARD OF

LOSSES

(a) Unabsorbed depreciation and

(b) Carry forward of Losses
which can be set off against future taxable income are also considered as timing difference and result
in deferred tax assets, subject to consideration of prudence.

3. PRUDENCE LIMITS: VIRTUAL CERTAINTY

1) Deferred tax should be recognized for all timing differences, subject to the consideration of
prudence in respect of deferred tax assets.
2) Prudence concept is already being followed while creating DTL, but while recognizing DTA, income
is recognized in the Profit and Loss.
3) While creating DTA on deductible timing differences, certainty of future Taxable Income should
be checked that insures sufficient future Taxable Income so that deductions could be claimed.

20.3
 ACCOUNTING STANDARD – 22

4) Para 15 of AS 22: - DTA on All Timing Differences except “Unabsorbed Depreciation & C/F
Business Loss”.
Recognise DTA Subject to Reasonable Certainty of Sufficient Future Taxable Profits Against
which deductions will be allowed.
5) Para 17 of AS 22: - “DTA on Unabsorbed Depreciation & Business Loss carried forward”
Create DTA Subject to “Virtual Certainty supported by Convincing Evidence” that in future there
would be Sufficient Future Taxable Profit against which Deductions of unabsorbed Depreciation
and Business Losses will be allowed.
6) Most of times, DTAs are created considering reasonable certainty but there are some items on
which DTA can be created by checking “Virtual certainty supported by convincing evidence (VCCE)”

Certainty of Future Taxable Income

Reasonable Virtual
Based on Past Experience Near to or more than 90% probability of
Earning Income
It is more likely that future taxable Surety of sufficient future taxable Income
income will be available i.e. more than
50% Probability For this level of surety convincing evidence
should be available. Then only DTA to be
created
Deductible Timing difference for which Deductible Timing difference for which VCCE
Reasonable Certainty is to be checked is to be checked are:
are: C/f Business Losses, and
1) Depreciation Unabsorbed Depreciation
2) Provision for Bad Debts
3) Sec 43B (Disallowed item)

4. RE-ASSESSMENT OF “UNRECOGNISED DEFERRED TAX ASSETS”

At each balance sheet date, an enterprise re-assesses un-recognised deferred tax assets. (it can be
treated as Change in Accounting Estimates)

20.4
 ACCOUNTING STANDARD – 22

5. MEASUREMENT

1) Current tax should be measured at the amount expected to be paid to (recovered from) the
taxation authorities, using the applicable tax rates and tax laws.

2) Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have
been enacted or substantively enacted by the balance sheet date.

6. DISCOUNTING

Deferred tax assets and liabilities should not be discounted to their present value.

7. REVIEW OF DEFERRED TAX ASSETS

The carrying amount of deferred tax assets should be reviewed at each balance sheet date.

8. PRESENTATION AND DISCLOSURE

An enterprise should offset assets and liabilities representing tax if the enterprise:
(a) Has a legally enforceable right; and
(b) Intends to settle the asset and the liability on a net basis.

9. APPLICATION OF MAT

(a) Minimum Alternate Tax is different from Current Tax. MAT is calculated on Book Profit which is
derived with the help of Section 115JB of Income Tax. Book Profit is different from from
Taxable Income.
(b) While calculating Current Tax and Deferred Tax, we shall always use Regular Tax Rate and not
the MAT Rate.

20.5
 ACCOUNTING STANDARD – 22

(c) While calculating timing differences, we shall compare Accounting Income and Taxable Income
(not the Book Profit)
(d) MAT is Payable only when it is more than Current Tax. Although, the excess payment is allowed
as Credit in Future Years if in Future Current Tax would be higher.
(e) If MAT is higher than Regular Tax, then Current Tax will be Equal to Regular Tax. In that case
the Excess of MAT amount over Current Tax amount shall be recognized separately in the Profit
and Loss account as an additional Tax Expense.
(f) Hence Items to be debited in Profit and Loss Statements are:
(i) Current Tax calculated on Taxable Income at Regular Tax Rate.
(ii) Deferred Tax calculated on Timing Difference at Regular Tax Rate.
(iii) Excess of MAT over Current Tax.

10. TAX HOLIDAY

(a) The deferred tax in respect of timing differences which reverse during the tax holiday period is
not recognised.

(b) Deferred tax in respect of timing differences which reverse after the tax holiday period is
recognised in the year in which the timing differences originate. However, recognition of
deferred tax assets is subject to the consideration of prudence as laid down in paragraphs 15 to
18.

(c) For the above purposes, the timing differences which originate first are considered to reverse
first. (FIFO)

Important Examples to understand the Entire Tax Accounting

Example 1
Assume Income before Provision for Bad-Debts for 23-24 & 24-25 is 10,00,000 p.a.
In FY 23-24 Provision for Bad-Debts created of ₹ 70,000 & Debited to P&L but disallowed in Income
Tax.
In FY 24-25 actual Bad-Debts occur for ₹ 70,000 & allowed in Income Tax.
Show Tax Accounting & P&L Extract for both years. Tax Rate 30%.

20.6
 ACCOUNTING STANDARD – 22

Solution:
1) Accounting for Provision and Actual Bad-Debts:
FY 23-24
Profit & Loss A/c Dr. 70,000
To Provision for Bad-Debts A/c 70,000
FY 24-25
Bad Debts A/c Dr. 70,000
To Debtors A/c 70,000
Provision for Bad-Debts A/c Dr. 70,000
To Bad-Debts A/c 70,000

2) Calculation of Accounting Income (PBT):

23-24 24-25
Income Before Provision 10,00,000 10,00,000
(-) Provision for Bad Debts (70,000) -
A/c Income (PBT) 9,30,000 10,00,000

3) Calculation of Taxable income & CT thereon:

23-24 24-25
PBT (A/c Income) 9,30,000 10,00,000
(+) Disallowed Provision 70,000 -
(-) Bad-Debts Allowed - (70,000)
Taxable Income 10,00,000 9,30,000
Current Tax @30% 3,00,000* 2,79,000**

FINANCIAL YEAR 23-24

*(1) CT Expense A/c Dr. 3,00,000
To CT Payable A/c 3,00,000
(2) Profit & Loss A/c Dr. 3,00,000
To CT Expense A/c 3,00,000
FINANCIAL YEAR 24-25
**(1) CT Expense A/c Dr. 2,79,000
To CT Payable A/c 2,79,000
(2) Profit & Loss A/c Dr. 2,79,000
To CT Expense A/c 2,79,000

4) Statement of P&L (Extract)

23-24 24-25
Profit Before Tax (Accounting Income) 9,30,000 10,00,000
(-) Tax Expense 2,79,000 3,00,000

20.7
 ACCOUNTING STANDARD – 22

23-24 24-25
CT Expense 3,00,000 2,79,000
(-) DTA (21,000) -
(+) DTA Reserve - 21,000

5) Calculation of Tax Difference & DT

23-24 24-25
Tax Difference Arise 70,000 (DTA) -
Tax Difference Reversed - 70,000 (DTA Reversal)
DT Created @30% 21,000 (DTA) 21,000 (DTA Reversal)
DTA Dr. P&L Dr.
To P&L To DTA

Example 2
Following information is of X Ltd.
Sale 20,00,000
Cost of goods sold 11,00,000
Income from other sources (Bank Interest) 1,00,000
Salary 1,00,000
Provision for Legal Damages 40,000
Interest to Bank (Not yet paid) 30,000
Service Tax (Not yet Paid) 50,000

X Ltd purchased during the year one Machine for Scientific Research for Rs. 120000 whose life is 3
years and is 100% tax deductible during the year
X Ltd also made contribution for Scientific Research activity of Rs. 10000 on which 100% deduction is
allowed in the same year. Effective Rate of Tax 32.33%.
Prepare Profit and Loss Account.
Solve Here:
Calculation of Deferred Tax
S.No. Particulars Timing Difference Nature DT Amount
1 Provision for Legal Demages 40,000 DTA 12,932
2 Interest Payable 30,000 DTA 9,699
3 Service Tax Payable 50,000 DTA 16,165
4 Capital Expenditure on Scientific 80,000 DTL 25,864
Research
Net DTA 12,932

DTA A/c Dr.

To P&L A/c

20.8
 ACCOUNTING STANDARD – 22

11. (MCQ’s from ICAI Material)

1. As per AS 22 on ‘Accounting for Taxes on Income’, tax expense is:

(a) Current tax + deferred tax charged to profit and loss account
(b) Current tax-deferred tax credited to profit and loss account
(c) Either (a) or (b)
(d) Deferred tax charged to profit and loss account

2. G Ltd. has provided the following information: Depreciation as per accounting records = ₹
2,00,000 Depreciation as per tax records = ₹ 5,00,000
There is adequate evidence of future profit sufficiency.
How much deferred tax asset/liability should be recognized as transition adjustment when the
tax rate is 50%?
(a) Deferred Tax asset = ₹ 2,70,000.
(b) Deferred Tax asset = ₹ 1,35,000.
(c) Deferred Tax Liability = ₹ 2,70,000
(d) Deferred Tax Liability = ₹ 1,50,000

3. State which of the following statements are correct:

(1) There are no pre-conditions required to recognize deferred tax liability,
(2) Deferred tax asset under all circumstances can only be created if and only if there is
reasonable certainty that future taxable income will arise.
(a) Both are correct.
(b) Only (1) is correct.
(c) Only (2) is correct.
(d) None of the statements are correct.

4. Which of the following statement are incorrect:

(a) Only timing differences result in creation of deferred tax.
(b) Permanent differences do not result in recognition of deferred tax.
(c) The tax rate used for measurement of deferred tax is substantively enacted tax rate.
(d) The entity has to recognize deferred tax liability/asset arising out of timing difference.
There are no conditions which are required to evaluated for their recognition.

ANSWERS 1 2 3 4
c d a d

20.9
 ACCOUNTING STANDARD – 22

Student Notes:-

20.10
 ACCOUNTING STANDARD - 23

ACCOUNTING STANDARD – 23
21 ACCOUNTING FOR INVESTMENTS IN
ASSOCIATES IN CONSOLIDATED FINANCIAL
STATEMENTS

Be miserable. Or motivate yourself. Whatever has to be done, it’s always your

choice.

1. NEED OF AS 23

● AS 23 describes the principles and procedures for recognizing Investments in Associates (in which
the investor has significant influence, but not a subsidiary or joint venture of investor) in the
Consolidated Financial Statements (CFS) of the investor.
● An investor which presents consolidated financial statements should account for investments in
associates as per Equity Method in Consolidated Financial Statements accordance with this
standard.
● For Standalone Financial Statements, AS 13 shall be applied for Investments.

2. IMPORTANT DEFINITIONS

1) A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

2) A parent is an enterprise that has one or more subsidiaries.
3) A group is a parent and all its subsidiaries.
4) An associate is an enterprise in which the investor has significant influence, and which is neither
a subsidiary nor a joint venture of the investor.
5) Significant influence is the power to participate in the financial and/or operating policy decisions
of the investee but not control over those policies.
6) The equity method is a method of accounting whereby the investment is initially recorded at
cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying
amount of the investment is adjusted thereafter for the post acquisition change in the
investor’s share of net assets of the investee. The consolidated statement of profit and loss
reflects the investor’s share of the results of the operations of the investee.
7) Equity is the residual interest in the assets of an enterprise after deducting all its liabilities.
8) Consolidated financial statements are the financial statements of a group presented as those
of a single enterprise.

21.1
 ACCOUNTING STANDARD - 23

Note 1: Presumption of significant influence:

● If an entity holds (directly or indirectly through a subsidiary) 20% or more of the
voting rights of an investee then it is presumed that the entity has significant
influence, unless it can be clearly demonstrated that it is not the case.
● Conversely, if the entity holds, (directly or indirectly through a subsidiary), less than
20% of the voting power of the investee, it is presumed that the entity does not have
significant influence, unless such influence can be clearly demonstrated.
● It should be noted that a substantial or majority ownership by another investor does
not necessarily preclude an entity from having significant influence.

Note 2:
The potential equity shares of the investee held by the investor should not be taken into
account for determining the voting power of the investor

Example 1
A Ltd. has 70% holding in C Ltd. and B Ltd. also has 28% holding in the same company.
So, A Ltd., with the majority holding i.e., more than 50% is the parent company i.e., a
holding company. Since B Ltd. holds more than 20% but not more than 50% in C Ltd., C
Ltd. will be an associate of B Ltd.

Example 2
A Ltd. holds 90% shares in B Ltd. and 10% shares in C Ltd., and B Ltd. is holding
11%shares in C Ltd. In this case, A Ltd. is parent of B Ltd.
As far as the relationship between A Ltd. and C Ltd. is concerned, A Ltd. has a total
of direct and indirect holdings of (10 + 11) 21% in C Ltd., Thus, C Ltd. is an associate
of A Ltd. It may however be noted that for consolidated financial statement purposes,
the holding will be 19.9% (10% + 90% of 11%).

21.2
 ACCOUNTING STANDARD - 23

3. EQUITY METHOD

In a Simple Language, Equity means Net Assets. Therefore, Equity Method means Measuring the value
of Investments in Proportion to Fair Value of Net Assets of Investee (i.e. Associate Entity).

Value of Investment shall be increased or decreased Rs. 2nd effect to-

by-
Cost of Investments (Including Goodwill) xxxx
Add/Less: Post acquisition share in P&L of Associate Co. xxx CPL of investor
(EAESH)
Less: Distributions received by way of dividend xxx CPL of Investor
Less: Additional depreciation on revaluation profit of PPE xxx CPL of Investor
(if any)
Less: Un-realised profit on downstream transaction to the xxx CPL of Investor
extent of Investor’s share in gain/loss of Associate/JV
Value of Investments as per Equity Method XXXX

Note:
1. Goodwill:
If cost of Investment is greater than investor’s share of investees’ net assets – it is not separately
presented. It is included in the carrying amount of investment.
2. Capital reserves:
If the cost of investment is less than investor’s share of investee’s net assets – it is recognised
directly in Reserves & Surplus in the period in which investment is made.
Journal Entry as on acquisition date:
Investment A/c Dr.
To Capital Reserve A/c

Example 3: -
On 1/4/24, B Ltd. acquired 20% Equity interest in A Ltd. at a cost of 2,40,000/-
Fair Value of Net Assets of A Ltd. on 1/4/24 is 10,00,000/-
Apply Equity Method on DOA.
Solution:
Cost of Investment @ 20% 2,40,000
(-) Proportionate Value of Net Assets @ 20% 2,00,000
Goodwill 40,000

SFS of B Ltd. as on 1/4/24 (AS 13)

Investment @ 20% 2,40,000

21.3
 ACCOUNTING STANDARD - 23

CFS of B Ltd. as on 1/4/24 (AS 23)

Investment @ 20% (Including Goodwill 40,000) 2,40,000

As per AS 23, Goodwill is not required to be recognized separately, it is just a part of Investment
Cost.

Example 4: -
Same as Example 3, But Fair Value of Net Assets on DOA is 15,00,000
Solution:
Cost of Investment @ 20% 2,40,000
(-) Proportionate Value of Net Assets @ 20% 3,00,000
60,000

Investment are under-valued, We have to record 60,000 to make it @3,00,000

Investment A/c Dr. 60,000
To Capital Reserve A/c 60,000

CFS of B Ltd. as on 1/4/24 (AS 23)

Reserves & Surplus : CR 60,000

Investment @ 20% 3,00,000

Example 5: -
On 1/4/24, B Ltd acquired 20% Equity Interest in A Ltd. at a cost of 2,40,000/-
On 1/4/24, Equity share Capital of A Ltd. was 8,00,000/- and Reserves & Surplus was 3,00,000
On 31/3/25 Reserves & Surplus of A Ltd was 5,00,000
Apply AS 23 on DOA & Balance Sheet Date.
Solution:
Fair Value of Net Assets = 11,00,000
Hence Proportionate Investments should be = 2,20,000
Therefore, Goodwill = 20,000

Equity Method (AS 23)

Investment Cost as on DOA (Including Goodwill 20,000) 2,40,000
+ 20% Share in Post-Acquisition Profits of Associate (2,00,000 x 20%) 40,000
Investment 31/3 2,80,000

Post Acquisition Profit Earned by Associate = 2,00,000

Share of Investor in Post Acquisition Profit = 40,000
Investor Shall Increase its Value of Investment by 40,000

21.4
 ACCOUNTING STANDARD - 23

31/3 Journal Entry

Investment A/c Dr. 40,000
To Consolidated P&L A/c 40,000

Consolidated Balance Sheet of Investor

Reserves & Surplus: Consolidated P&L will be increased 40,000
by-

Investment @ 20% (Including Goodwill) 2,80,000

Example 6: -
On 1/4/24 B Ltd. acquired 20% Equity interest in A Ltd. at a cost of 2,40,000/-
On 1/4/24 Equity Share Capital of A Ltd was 8,00,000 and Reserves & Surplus of A Ltd. was 3,00,000
On 31/3/25 Reserves & Surplus of A Ltd. was 5,00,000
During 24-25, Dividend Paid by A Ltd. to its Share Holders 15%
Apply AS 23 on DOA & Balance Sheet Date.
Solution:
Analysis of Profit of A Ltd.
Capital Profit Post – Acquisition Balance
Sheet
Reserves & Surplus 3,00,000 2,00,000 5,00,000
+ Dividend - 1,20,000
3,00,000 3,20,000

● 3,20,000 is the Total Earning of A Ltd. for the year

● Post-Acquisition share in Profit (20%) = 64,000

Equity Method
Investment Cost as on DOA (Including Goodwill 20,000) 2,40,000
(+) 20% share in Post – Acquisition Profit @ 20% 64,000
(-) Dividend Received (24,000)
Investment @ 20% as per Equity 2,80,000

1/4/24 - Investment Purchased

Investment A/c Dr. 2,40,000
To Bank A/c 2,40,000

31/3/25 - Consolidation
Investment A/c Dr. 64,000
To Consolidated P&L 64,000

21.5
 ACCOUNTING STANDARD - 23

During 24-25 - Dividend Received

Bank A/c Dr. 24,000
To Investment A/c 24,000
(This is not Income. This is Recovery)

4. EXEMPTIONS FROM APPLYING THE EQUITY METHOD

Equity method of accounting is to be followed by all the enterprises having significant influence on
their associates except in the following cases:
a. Significant Influence (Control over Investment) is intended to be temporary because the
investment is acquired and held exclusively with a view to its subsequent disposal in the near
future.

b. Or Associate Entity operates under severe long-term restrictions, which significantly impair its
ability to transfer funds to the investor.
In both the above cases, investment of investor in the share of the investee is treated as
investment according to AS 13.

21.6
 ACCOUNTING STANDARD - 23

5. STEP ACQUISITION IN CASE OF AN ASSOCIATE:

● An enterprise having a share of profits of more than 50% in other company, they are said to be in
Parent-Subsidiary relationship. However, if the share in profits is more than 20% but upto 50%
then this relationship is termed as associate relationship.
● This stake of 20% can be acquired either in one go or in more than one transaction.
● This share of stake can be increased further say from 25% to 30%. Adjustment should be made
with each transaction.

21.7
 ACCOUNTING STANDARD - 23

Case 1: Conversion from a passive investor to an associate in the same year:

Example 7: A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 during
the same year. Other information is as follow:
Cost of Investment for 10% ₹ 1,00,000 and for 15% ₹ 1,45,000
Net asset on April 01 ₹ 8,50,000 and on October 01 ₹ 10,00,000.
Calculations for April 01:
Cost of investment ₹ 1,00,000
10% share in net asset ₹ 85,000
Goodwill ₹ 15,000

Calculations for October 01:

15% share in net asset ₹ 1,50,000
Cost of investment ₹ 1,45,000
Capital Reserve ₹ 5,000
Total goodwill (15,000 – 5,000) ₹ 10,000

Example 8: A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on 1st October of the
same year. Other information is as follow:
Cost of Investment for 10% ₹ 1,00,000 and for 15% ₹ 1,55,000
Net asset on 1st April ₹ 8,50,000 and on 1st October ₹ 10,00,000.
Calculations for April 01:
Cost of investment ₹ 1,00,000
10% share in net asset ₹ 85,000
Goodwill ₹ 15,000

Calculations for October 01:

Cost of investment ₹ 1,55,000
15% share in net asset ₹ 1,50,000
Goodwill ₹ 5,000
Total goodwill (15,000 + 5,000) ₹ 20,000

Case 2: Further acquisition in an associate in the same year:

Example 9: A Ltd. acquired 25% stake of B Ltd. on 1st April and further 5% on 1st October of the
same year. Other information is as follow:
Cost of Investment for 25% ₹ 1,50,000 and for 5% ₹ 20,000
Net asset on 1st April ₹ 5,00,000.
Profit for the year ₹ 90,000 earned in the ratio 2:1 respectively.
Calculations for April 01:
Cost of investment ₹ 1,50,000
25% share in net asset ₹ 1,25,000
Goodwill ₹ 25,000

21.8
 ACCOUNTING STANDARD - 23

Calculations for October 01:

Profits for the first half (90,000/3) x 2 ₹ 60,000
Additional share of A Ltd. 5%
Pre-acquisition profits i.e. capital reserve (60,000 x 5%) ₹ 3,000
5% share in net asset ₹ 25,000
Cost of investment ₹ 20,000
Capital Reserve ₹ 5,000
Cost of Investment on April 01 ₹ 1,50,000
Less: Goodwill ₹ 25,000
Carrying Amount on April 01 ₹ 1,25,000
Add: Additional Share in Net Asset on October 01 ₹ 25,000
Add: Capital share of Profits for first half ₹ 3,000
Add: Revenue shares of Profits for first half (60,000 x 25%) ₹ 15,000
Add: Revenue shares of Profits for second half (30,000 x 30%) ₹ 9,000
Total Carrying Amount on March 31 ₹ 1,77,000

21.9
 ACCOUNTING STANDARD - 23

6. MISCELLENEOUS POINTS UNDER AS 23

1. Loss Making Associate Entity:

If, under the equity method, an investor’s share of losses of an associate equals or exceeds the
carrying amount of the investment, the investor ordinarily discontinues recognising its share of
further losses and the investment is reported at nil value. Additional losses are provided for to the
extent that the investor has incurred obligations or made payments on behalf of the associate to
satisfy obligations of the associate that the investor has guaranteed or to which the investor is
otherwise committed. If the associate subsequently reports profits, the investor resumes including
its share of those profits only after its share of the profits equals the share of net losses that
have not been recognised.

2. Different Reporting Periods:

● As far as possible the reporting date of the financial statements should be same for
consolidated financial statement. If practically it is not possible to draw up the financial
statements of one or more enterprise to such date and, accordingly, those financial statements
are drawn up to reporting dates different from the reporting date of the investor,
adjustments should be made for the effects of significant transactions or other events that
occur between those dates and the date of the consolidated financial statements.
● In any case, the difference between reporting dates of the concern and consolidated financial
statement should not be more than six months.

3. Uniform Accounting Policies:

● Accounting policies followed in the preparation of the financial statements of the investor,
investee and consolidated financial statement should be uniform for like transactions and other
events in similar circumstances.
● If accounting policies followed by different enterprises in the group are not uniform, then
adjustments should be made in the items of the individual financial statements to bring it in line
with the accounting policy of the consolidated statement.

4. Decline in the Value of Investment:

The carrying amount of investment in an associate should be reduced to recognise a decline, other
than temporary, in the value of the investment, such reduction being determined and made for
each investment individually.

5. Proposed Dividend in Associate Entity:

In case an associate has made a provision for proposed dividend (i.e. dividend declared after the
reporting period but it pertains to that reporting year) in its financial statements, the investor's
share of the results of operations of the associate should be computed without taking into
consideration the proposed dividend.

21.10
 ACCOUNTING STANDARD - 23

6. Treatment of Un-realised Profit on Unsold Stock

S.No. Downstream Transaction Upstream Transaction
(Sale of goods by Investor to Associate) (Sale by Associate to Investor)
1. Profit is earned by investor Profit is earned by Associate
2. Unsold Inventory is lying with Associate Unsold Inventory is lying with Investor
3. Investor shall reverse in its own share of Investor shall reverse its own share of
profit earned a such Inventory in profit in Consolidated Financial Statement.
Consolidated Financial Statement.
4. Consolidated Profit and Loss A/c Dr. Consolidated Profit and Loss A/c Dr.
To Investment A/c To Inventory A/c

(Since Inventory is lying with Associate, (Here Inventory is lying with Investor,
hence Investor can-not credit inventory hence the same is credited)
a/c)

Example 10:
B Ltd. (Investor) has 30% Investment in A Ltd. (Associate)
A Ltd. has sold goods costing Rs. 1,00,000 to B Ltd. @Rs. 1,50,000.
All goods are Unsold at year end.
How to eliminate Unrealised Profit?
Solution:
Associate has sold goods to Investor so this is an Upstream Transaction
A Ltd. must have recognised profit on sale of Rs. 50,000 in its P&L.
Therefore, Investor's Share in above Profit is Rs. 15,000 (30% of Rs. 50,000) & through equity method
this must have been a part of Investment A/c and P&L A/c of B Ltd.
Investment A/c Dr. 15,000
To Consolidated P & L A/c 15,000

Now, Investor B Ltd. has unsold Inventory of Rs. 1,50,000 Which includes Rs. 15,000 Profit Shares of
Investor (B Ltd.)
Therefore, 15,000 Profit shall be eliminated as under:
Consolidated P & L A/c Dr. 15,000
To Inventory A/c 15,000

In case of A Ltd. is a Subsidiary:

Consolidated P & L A/c Dr. 12,000
Minority Interest A/c 3,000
To Investment A/c 15,000

21.11
 ACCOUNTING STANDARD - 23

Example 11:
In Above Example assume B Ltd. (Investor) has Sold goods to A Ltd. (Associate)
Solution:
Downstream Transaction
1) Full 50,000 earned by Investor (B Ltd.) from sale of goods.
2) Unsold Inventory lying at Associate at 1,50,000/-
Since Inventory is a part of Net Assets of Associates, we can conclude that Net Assets of Associate
Company includes Un-realised profit of 50,000/-
Equity Method means Proportionate Share of Net Assets of Associates. Therefore, when we will apply
equity method, Investment must be shown in Proportion of Net Assets i.e., 30% of Net Assets
Which means Investment Value must include 15,000 Un-realised Profit which is to be eliminated.
Consolidated P&L A/c Dr. 15,000
To Investment A/c 15,000

21.12
 ACCOUNTING STANDARD - 23

7. (MCQ’s from ICAI Material)

1. Identity which of the statements are correct.

An enterprise can influence the significant economic decision making by many ways like:
(i) Representation on the board of directors or governing body of the investee.
(ii) Participation in policy-making processes.
(iii) Interchange of managerial personnel.
(iv) Provision of essential technical information.
(a) Statement (i) and (ii) are correct.
(b) Statement (i), (ii) and (iii) are correct.
(c) Statement (i), (ii), (iii) and (iv) are correct.
(d) Statement (ii) and (iii) are correct.

2. A Ltd. is holding 90% share in B Ltd. and 10% shares in C Ltd., and B Ltd. is holding 11% shares in
C Ltd.
Identity which of the statements are incorrect.
(i) In this case, A Ltd. is parent of B Ltd.
(ii) As far as the relationship between A Ltd. and C Ltd. is concerned; A Ltd. has a total of
direct and indirect holding of (10% + 90% of 11%) 19.9 % in C Ltd.
(iii) C Ltd. is an associate of A Ltd.
(a) Statement (ii) is incorrect.
(b) Statement (iii) is incorrect.
(c) Statement (ii) and (iii) both are incorrect.
(d) All statements are incorrect.

3. A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 of the same year.
Other information is as follows:
Cost of Investment for 10% ₹ 1,00,000 and for 15% ₹ 1,55,000
Net asset on April 01 ₹ 8,50,000 and on October 01 ₹ 10,00,000.
What is the amount of goodwill or capital reserve arising on significant influence?
(a) Goodwill = ₹ 10,000.
(b) Goodwill = ₹ 20,000.
(c) Capital Reserve = ₹ 10,000.
(d) Capital Reserve = ₹ 20,000.

4. A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 during the same
year. Other information is as follow:
Cost of Investment for 10% ₹ 1,00,000 and for 15% ₹ 1,45,000
Net asset on April 01 ₹ 8,50,000 and on October 01 ₹ 10,00,000.
What is the amount of goodwill or capital reserve arising on significant influence?
(a) Goodwill = ₹ 10,000.

21.13
 ACCOUNTING STANDARD - 23

(b) Goodwill = ₹ 20,000.

(c) Capital Reserve = ₹ 10,000.
(d) Capital Reserve = ₹ 20,000.

5. Identity which of the statements are correct.

(i) In case an associate has made a provision for proposed dividend (i.e. dividend declared after
the reporting period but it pertains to that reporting year) in its financial statements, the
investor's share of the results of operations of the associate should be computed without
taking into consideration the proposed dividend.
(ii) In case an associate has made a provision for proposed dividend (i.e. dividend declared after
the reporting period but it pertains to that reporting year) in its financial statements, the
investor's share of the results of operations of the associate should be computed after
taking into consideration the proposed dividend.
(iii) The potential equity shares of the investee held by the investor should not be taken into
account for determining the voting power of the investor.
(iv) The potential equity shares of the investee held by the investor should be taken into
account for determining the voting power of the investor.
(a) Statement (i) and (iii).
(b) Statement (ii) and (iv).
(c) Statement (i) only.
(d) Statement (iii) only.

ANSWERS 1 2 3 4 5
c a b a a

21.14
 ACCOUNTING STANDARD – 24

ACCOUNTING STANDARD – 24
22
DISCONTINUING OPERATION

SUCCESS IS THE SUM OF SMALL EFFORTS,

REPEATED DAY IN AND DAY OUT.

1. INTRODUCTION

Para 3: AS 24 is applicable to all discontinuing operations.

DISCONTINUING OPERATION:
A discontinuing operation is a component of an enterprise:
a. That the enterprise, pursuant to a single plan, is:
(i) Disposing of substantially in its entirety, such as by selling the component in a single
transaction or by demerger or spin-off of ownership of the component to the
enterprise's shareholders or
(ii) Disposing of piecemeal, such as by selling off the component's assets and settling its
liabilities individually or
(iii) Terminating through abandonment (giving up completely) and

b. That represents a separate major line of business or geographical area of operations.

(for example Business Segments or geographical Segments as defined in AS 17)

c. That can be distinguished operationally and for financial reporting purposes.

22.1
 ACCOUNTING STANDARD – 24

2. DISCONTINUED OPERATION DOES NOT INCLUDE

DISCONTINUATION OF A SINGLE PRODUCT ONLY OR
DISCONTINUING A BUSINESS IN A PARTICULAR AREA.

To qualify as a discontinuing operation, the disposal must be pursuant to a single coordinated plan.
However, changing the scope of an operation or the manner in which it is conducted is not abandonment
because that operation, although changed, is continuing.

Examples of Not a Discontinuing Operations:

a. Gradual or evolutionary phasing out of a product line or class of service.
b. Discontinuing, even if relatively abruptly, several products within an ongoing line of business.
c. Shifting of some production or marketing activities for a particular line of business from one
location to another and
d. Closing of a facility to achieve productivity improvements or other cost savings.

(V.V.IMP)
A component can be distinguished operationally and for financial reporting purposes -
criterion (c) of the definition of a discontinuing operation - if all the following conditions are
met:
a. The operating assets and liabilities of the component can be directly attributed to it.
b. Its revenue can be directly attributed to it.
c. At least a majority of its operating expenses can be directly attributed to it.
(Assets, liabilities, Revenues and Expenses can be directly attributable)

The fact that a disposal of a component of an enterprise is classified as a discontinuing operation

under AS 24 does not, in itself, bring into question the enterprise's ability to continue as a going
concern.

(V.V.IMP)
Initial Disclosure event
With respect to a discontinuing operation, the initial disclosure event is the occurrence of
one of the following, whichever occurs earlier:
a. The enterprise has entered into a binding sale agreement for substantially all of the
assets attributable to the discontinuing operation or
b. The enterprise's board of directors or similar governing body has both
(i) approved a detailed, formal plan for the discontinuance and
(ii) Made an announcement of the plan.

22.2
 ACCOUNTING STANDARD – 24

Note:
A detailed, formal plan for the discontinuance normally includes:
● Identification of the major assets to be disposed of;
● The expected method of disposal; (i.e. how we are going to dispose the business or assets)
● The period expected to be required for completion of the disposal;
● The principal locations affected;
● Approximate number of employees who will be compensated for terminating their services; and
● The estimated proceeds or salvage to be realised by disposal.
An enterprise’s board of directors or similar governing body is considered to have made the
announcement of a detailed, formal plan for discontinuance, if it has announced the main features of
the plan to those affected by it, such as, lenders, stock exchanges, trade payables, trade unions, etc.
in a sufficiently specific manner so as to make the enterprise demonstrably committed to the
discontinuance.

3. PRESENTATION AND DISCLOSURE

1. Initial Disclosure (in the first financial statements subsequent to announcement)

An enterprise should include the following information relating to a discontinuing operation in its
financial statements beginning with the financial statements for the period in which the initial
disclosure event occurs:
a. A description of the discontinuing operation(s)
b. The business or geographical segment(s) in which it is reported as per AS 17
c. The date and nature of the initial disclosure event.
d. The date or period in which the discontinuance is expected to be completed if known or
determinable
e. The carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the
total liabilities to be settled
f. The amounts of revenue and expenses in respect of the ordinary activities attributable to the
discontinuing operation during the current financial reporting period
g. The amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing
operation during the current financial reporting period, and the income tax expense related
thereto
h. The amounts of net cash flows attributable to the operating, investing, and financing activities of
the discontinuing operation during the current financial reporting period

Where to disclose above items?

All the disclosures above should be presented in the notes to the financial statements except
for amounts pertaining to pre-tax profit/loss of the discontinuing operation and the income tax

22.3
 ACCOUNTING STANDARD – 24

expense thereon (second last bullet above) which should be shown on the face of the statement
of profit and loss.

2. Further disclosures (in the next financial statements)

When an enterprise disposes of assets or settles liabilities attributable to a discontinuing operation
or enters into binding agreements for the sale of such assets or the settlement of such liabilities, it
should include, in its financial statements, the following information

when the events occur:

a. For any gain or loss that is recognised on the disposal of assets or settlement of liabilities
attributable to the discontinuing operation,
(i) the amount of the pre-tax gain or loss and
(ii) income tax expense relating to the gain or loss and
b. The net selling price or range of prices (which is after deducting expected disposal costs) of those
net assets for which the enterprise has entered into one or more binding sale agreements, the
expected timing of receipt of those cash flows and the carrying amount of those net assets on the
balance sheet date.

3. Updating the disclosures

In addition to these disclosures, an enterprise should include, in its financial statements, for
periods subsequent to the one in which the initial disclosure event occurs, a description of any
significant changes in the amount or timing of cash flows relating to the assets to be disposed or
liabilities to be settled and the events causing those changes.

4. TILL WHICH PERIOD THE DISCLOSURES SHOULD BE GIVEN?

(IMPORTANT)

The disclosures should continue in financial statements for periods upto and including the period in
which the discontinuance is completed.
Discontinuance is completed when the plan is substantially completed or abandoned, though full
payments from the buyer(s) may not yet have been received.
If an enterprise abandons or withdraws from a plan that was previously reported as a discontinuing
operation, that fact, reasons therefore and its effect should be disclosed.

22.4
 ACCOUNTING STANDARD – 24

5. SEPARATE DISCLOSURE FOR EACH DISCONTINUING OPERATION

Any disclosures required by AS 24 should be presented separately for each discontinuing operation.

V.V.IMP
Presentation of the required disclosures
The above disclosures should be presented in the notes to the financial statements except the
following which should be shown on the face of the statement of profit and loss:
a. The amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing
operation during the current financial reporting period, and the income tax expense related
thereto and
b. The amount of the pre-tax gain or loss recognised on the disposal of assets or settlement of
liabilities attributable to the discontinuing operation.

6. RESTATEMENT OF PRIOR PERIODS

Comparative information for prior periods that is presented in financial statements prepared after the
initial disclosure event should be restated to segregate assets, liabilities, revenue, expenses, and cash
flows of continuing and discontinuing operations in a manner similar to that mentioned above.

7. DISCLOSURE IN INTERIM FINANCIAL REPORTS

Disclosures in an interim financial report in respect of a discontinuing operation should be made in

accordance with AS 25, ‘Interim Financial is reporting’, including:
a) Any significant activities or events since the end of the most recent annual reporting period
relating to a discontinuing operation and
b) Any significant changes in the amount or timing of cash flows relating to the assets to be
disposed or liabilities to be settled.

Note: Discontinuing One Operations (component) doesn’t always necessary that there is doubt of
Going concern on other continuing operation.

22.5
 ACCOUNTING STANDARD – 24

Example 1.
Co XY runs a famous chain of restaurants. It decides to sell its stake in one of the restaurant. This
restaurant contributes around 5% of total revenue to the entire business. XY does not sell any other
restaurant as part of its strategy.
In the above case, the sale of one restaurant out of the chain does not constitute disposal of business
under a single plan, or a portion that represents a major line of business or geographical area of
operations. Thus, it cannot be regarded as a discontinuing operation.

Example 2
Group MN operates in various industries including Hotels, Airlines and Software through its
subsidiaries. It has decided to sell its Airline business to be able to concentrate on other verticals. As
a result, it has started to sell its aircrafts and paying off the associated liabilities. During the year, it
has sold off 5 aircrafts out of the fleet of 50 aircrafts so far as part of the sale. The Airline business
constitutes 25% of total group revenue.
In the above case, Airline business may be considered as discontinuing operation. This is due to the
fact that the assets are sold off as part of a single plan, and that the business represents a separate
major line of business, and can be distinguished both operationally and for financial reporting
purposes.

Example 3
Entity RT operates in a single state and is trading in 3 products – X, Y and Z. Details with respect to
the performance of each of the products are as under:
Particulars X Y Z Total
Sales 1,00,000 14,00,000 20,00,000 35,00,000
Cost of Goods Sold (80,000) (10,80,000) (14,40,000) (26,00,000)
Gross Margin 20,000 3,20,000 5,60,000 9,00,000
Operational Expenses (15,000) (1,70,000) (3,60,000) (5,45,000)
Profit before Tax 5,000 1,50,000 2,00,000 3,55,000
RT has decided to sell the business relating to Product Y to another entity. Since Product Y constitutes
a major product, it may be considered as a discontinuing operations.

Example 4
GH, a large car manufacturing company, decides to discontinue its manufacturing operations relating
to the diesel cars production. It plans to restructure the business by revamping its existing operations,
and starting new manufacturing process for manufacture and sale of electric vehicles.
In the above example, it needs to be evaluated whether the restructuring is a result of continuing
operations, or termination of existing operations, and accordingly it can be concluded whether it is a
case of discontinuing operations or not.

22.6
 ACCOUNTING STANDARD – 24

8. (MCQ’s from ICAI Material)

1. AB decided to dispose of its Clothing division as part of its long-term strategy.

(a) Date of Board approval - 1st March 20X1;
(b) Date of formal announcement made to affected parties - 15th March 20X1.
(c) Date of Binding Sale agreement – 1st July 20X1;
(d) Reporting date – 31st March 20X1

The date of initial disclosure event would be:

(a) 1st March 20X1
(b) 15th March 20X1
(c) 31st March 20X1
(d) 31st July 20X1

2. To qualify as a component that can be distinguished operationally and for financial reporting
purposes, the condition(s) to be met is (are):
(a) The operating assets and liabilities of the component can be directly attributed to it.
(b) Its revenue can be directly attributed to it.
(c) At least a majority of its operating expenses can be directly attributed to it.
(d) All of the above

3. Identify which of the following statements is incorrect?

(a) A discontinuing operation is a component of an enterprise that represents a separate major
line of business or geographical area of operations.
(b) A discontinuing operation is a component of an enterprise that can be distinguished
operationally and for financial reporting purposes.
(c) A discontinuing operation is a component of an enterprise that may or may not be
distinguished operationally and for financial reporting purposes.
(d) A discontinuing operation may be disposed of in its entirety or piecemeal, but always
pursuant to an overall plan to discontinue the entire component.

4. Identify the incorrect statement.

(a) Discontinuing operations are infrequent events, but this does not mean that all infrequent
events are discontinuing operations.
(b) The fact that a disposal of a component of an enterprise is classified as a discontinuing
operation under AS 24 would always raise a question regarding the enterprise's ability to
continue as a going concern.
(c) For recognising and measuring the effect of discontinuing operations, AS 24 does not
provide any guidelines, but for the purpose the relevant Accounting Standards should be
referred.
(d) An enterprise shall include a description of the discontinuing operation, in its financial

22.7
 ACCOUNTING STANDARD – 24

statements beginning with the financial statements for the period in which the initial
disclosure event occurs.

ANSWERS 1 2 3 4
b d c b

22.8
 ACCOUNTING STANDARD – 25

ACCOUNTING STANDARD – 25
23 INTERIM FINANICAL REPORTING

Always Remember that your present situation is not your final destination,
the Best is yet to come

PURPOSE OF INTERIM FINANCIAL REPORTING

To update the Shareholders and other stakeholders along with timely information.

1. INTERIM PERIOD MEANS:

Interim period is a financial reporting period shorter than a full financial year.

2. INTERIM FINANCIAL REPORT MEANS:

1. Interim financial report means a financial report for less than 1 financial year which contains either
a complete set of financial statements or a set of condensed financial statements.
2. Annual Financial Reporting means preparation of financial statements for annual period i.e. 1 year
as per Schedule III

Note: During the first year of operations of an enterprise its annual financial reporting period may
be shorter than a financial year. In such cases that shorter period is not considered as an interim
period.

3. CONTENTS OF AN INTERIM FINANCIAL REPORT – CONDENSED

SET:

An Interim Financial Report shall include the following:

● A condensed balance-sheet
● A condensed statement of profit and loss
● A condensed statement of changes in equity
● A condensed statement of cash flows
● Notes, comprising significant accounting policies and other explanatory information
✔ An entity may be required to or may elect to provide less information at interim dates as compared
with its annual financial statements.
23.1
 ACCOUNTING STANDARD – 25

✔ The interim financial report focuses on new activities, events, and circumstances and does not
duplicate information previously reported.
✔ Choice with Entity: Entity has the option to select either to prepare the Complete set of interim
financial reporting or to prepare a set of condensed financial report.
✔ Condensed statements should include, at a minimum:
● each of the headings and sub-headings that were included in its most recent annual
financial statements;
● the selected explanatory notes as required by this Statement.
● Additional line items or notes should be included if their omission would make the
condensed interim financial statements misleading.
● If an enterprise presents basic and diluted earnings per share in its annual financial
statements in accordance with AS 20, then it has to present basic and diluted earnings
per share as per AS 20 on the face of Statement of Profit and Loss complete for an
interim period also.

4. PERIODS FOR WHICH INTERIM FINANCIAL STATEMENTS ARE

REQUIRED TO BE PRESENTED:

Example: Suppose entity is preparing Interim Financial Report for the period 1st July 20X2 to 30th
September 20X2 i.e. 3 Months, then following should be reported:
Current Year Previous Year
Balance Sheet As at the End of Current Interim Comparative BS as at the end of
th
Period i.e. 30 Sep 20X2 Previous financial year 31st March,
20X1
Statement of Profit and Current Interim Period Previous Interim Period
Loss 01/07/X2 – 30/09/X2 01/07/X1 – 30/09/X1

Year to Date (CY) Year to Date (PY)

01/04/X2 – 30/09/X2 01/04/X1 – 30/09/X1
Statement of Cash Year to Date Only Year to Date Only
Flows 01/04/X2 – 30/09/X2 01/04/X1 – 30/09/X1

23.2
 ACCOUNTING STANDARD – 25

5. RECOGNITION AND MEASUREMENT:

Sr. Criteria Recognition and Measurement

No.
1 Same accounting An entity shall apply the same accounting policies in its
policies as annual interim financial statements as are applied in its annual
financial statements, except for accounting policy changes
made after the date of the most recent annual financial
statements that are to be reflected in the next annual
financial statements.
2 Recognition of Incomes and Expenses shall be fully recognised in the same
Incomes and interim period in which they are earned or incurred.
Expenses
Entity should not defer the expenses to next period or
anticipate the expenses early from next period on the
assumption of higher or lower sales in those periods.

Note: Bonus to Employees can be deferred or anticipated.

Examples of such items are:

Bad-debts, Marketing and promotion, depreciation,
employee benefit expenses, interest cost, general and
administration overheads etc.

Revenues that are received seasonally, cyclically, or

occasionally within a financial year shall not be anticipated
or deferred.
Examples include dividend revenue, royalties, and
government grants.
3 Fixed Overheads Step 1: Calculate Fixed Overhead rate per unit:
allocation to Total Fixed Overheads
Production Higher of Normal or Actual Capacity

Step 2: Allocation of Fixed Overheads

Actual Production Year to Date x Fixed OH rate (Step 1)
(-) Absorbed till last interim period

Step 3: Remaining Fixed Overheads

Total Fixed Overheads Less Absorbed overheads are
charged to Profit and loss.
4 Tax Expense for Profit/loss of each interim period may contain 2 parts:
Interim Period (a) Normal Business Profit and;
23.3
 ACCOUNTING STANDARD – 25

(b) Special Income (e.g. capital gains) taxable at special

rate

Tax Expense for Interim Period will be sum of:

(a) Normal Profit/loss X WATR
(b) Special Income X Special Rate

Weighted Average Tax Rate (WATR):

Estimated Annual Tax Amount X 100
Estimated Annual Income
Note: Estimated Annual Tax will be calculated after w/off
carried forward losses if given in the question.
5 Reversal of Except for Goodwill, Impairment loss recognised in earlier
Impairment Loss interim period can be reversed due to change in conditions.

6. SIGNIFICANT EVENTS AND TRANSACTIONS

The following is a list of events and transactions for which disclosures would be required if they are
significant: the list is not exhaustive.
1. The write-down of inventories to Net Realisable value and the reversal of such write down;
2. Recognition of a loss from the impairment of financial assets, property, plant and equipment,
intangible assets, or other assets, and the reversal of such an impairment loss
3. Acquisitions and disposals of items of property, plant and equipment.
4. Litigation settlements.
5. Corrections of prior period errors.
6. Any loan default or breach of a loan agreement that has not been rectified on or before the end
of the reporting period.
7. Related party transactions.
8. Transfers between levels of the fair value hierarchy used in measuring the fair value of financial
instruments.
9. Changes in the classification of financial assets as a result of a change in the purpose or use of
those assets; and
10. Changes in contingent liabilities or contingent assets.

23.4
 ACCOUNTING STANDARD – 25

7. (MCQ’s from ICAI Material)

1. AS 25 mandates the following in relation to interim financial reports.

(a) which entities should publish interim financial reports.
(b) how frequently it should publish interim financial reports.
(c) how soon it should publish after the end of interim period.
(d) none of the above.

2. The standard defines Interim financial Report as a financial report for an interim period that
contains a set of ……… financial statements.
(a) Complete
(b) Condensed
(c) Financial statement similar to annual
(d) Either complete or condensed

3. ABC Limited has reported ₹ 85,000 as per tax profit in first quarter and expects a loss of ₹
25,000 each in subsequent quarters. It has corporate tax rate slab of 20% on the first ₹ 20,000
earnings and 40% on all additional earnings. Calculate tax expenses that should report in first
quarter interim financial report.
(a) ₹ 17,000
(b) ₹ 30,000
(c) ₹ 2,000
(d) AS 25 does not mandate to report tax expenses

4. An entity prepares quarterly interim financial reports in accordance with AS 25. The entity is
engaged in sale of mobile phones and normally 5% of customers claim on their warranty. The
provision in the first quarter was calculated as 5% of sales to date, which was ₹10 million.
However, in the second quarter, a fault was found and warranty claims were expected to be 10%
for the whole of the year. Sales in the second quarter were ₹15 million. What would be the
provision charged in the second quarter’s interim financial statements?
(a) ₹1 million
(b) ₹ 2 million
(c) ₹ 1.25 million
(d) ₹ 1.5 million

Answers 1 2 3 4
d d a b

23.5
 ACCOUNTING STANDARD – 25

Student Notes: -

23.6
 ACCOUNTING STANDARD – 27

ACCOUNTING STANDARD – 27
24 FINANCIAL REPORTING OF INTERESTS IN
JOINT VENTURES

1. WHY AS 27

● There are so many examples in real life where 2 or more entities are working together to achieve
a certain purpose. Hindustan Unilever Ltd (HUL), Tata Starbucks Ltd, Tata SIA Airlines Ltd.
(Vistara), etc. are a few popular examples of Joint Ventures.
● Depending on the contractual arrangement, the accounting and reporting for Joint Ventures is done
and the same is prescribed in AS 27
● This Standard should be applied in accounting for interests in joint ventures and the reporting of
joint venture assets, liabilities, income and expenses in the financial statements of venturers and
investors, regardless of the structures or forms under which the joint venture activities take
place.
● The provisions of this AS need to be referred to for consolidated financial statement only when
CFS is prepared and presented by the venturer.

24.1
 ACCOUNTING STANDARD – 27

2. IMPORTANT DEFINITIONS

1. A joint venture is a contractual arrangement whereby two or more parties undertake an

economic activity, which is subject to joint control.
From the above definition we conclude that the essential conditions for any business relation
to qualify as joint venture are:
a. Two or more parties coming together: Parties can be an individual or any form of
business organization say, BOI, AOP, Company, firm.
b. Venturers undertake some economic activity: Economic activity means activities with
the profit-making motive. Joint venture is separate from the regular identity of the
venturers, it may be in the form of independent and separate legal organization other
than regular concern of the venturer engaged in the economic activity.
c. Venturers have joint control on the economic activity: The operating and financial
decisions are influenced by the venturers and they also share the results of the economic
activity.
d. There exists a contractual agreement: The relationship between venturers is governed
by the contractual agreement. This agreement can be in the form of written and signed
agreement or as minutes of venturer meeting or in any other written form.

2. Joint control is the contractually agreed sharing of control over an economic activity.

3. Control is the power to govern the financial and operating policies of an economic activity so as
to obtain benefits from it.

4. A venturer is a party to a joint venture and has joint control over that joint venture.

5. An investor in a joint venture is a party to a joint venture and does not have joint control over
that joint venture.

6. Proportionate consolidation Method is a method of accounting and reporting whereby a

venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled
entity is reported as separate line items in the venturer’s financial statements.

24.2
 ACCOUNTING STANDARD – 27

3. CONTRACTUAL ARRANGEMENT

The joint venture covered under this statement is governed on the basis of contractual agreement.
Non-existence of contractual agreement will disqualify an organization to be covered in AS 27. Joint
ventures with contractual agreement will be excluded from the scope of AS 27 only if the investment
qualifies as subsidiary under AS 21, in this case, it will be covered by AS 21. Contractual agreement
can be in the form of written contract, minutes of discussion between parties (venturers), articles of
the concern or by-laws of the relevant joint venture
The main object of contractual agreement is to distribute the economic control among the venturers,
it ensures that no venturer should have unilateral control.

Example 1
IDBI gave loan to the joint venture entity of L&T and Tantia Construction, they signed an agreement
according to which IDBI will be informed for all important decisions of the joint venture entity. This
agreement is to protect the right of the IDBI, hence just signing the contractual agreement will not
make investor a venturer.

Example 2
X Ltd invested ₹ 200 crore as initial capital along with Y Ltd and Z Ltd in GFH Ltd. The purpose of X
Ltd making this investment is to grow the business of GFH Ltd along with the other investors. All
investors have a right to attend to the meetings and to take decisions with respect to the business
of GFH Ltd. All investors are actively involved in running the business of GFH Ltd and have a share in
the returns generated by GFH Ltd in an agreed proportion.
GFH Ltd is an example of a Joint Venture and X Ltd, Y Ltd and Z Ltd are all Venturers.
Similarly, just because contractual agreement has assigned the role of a manager to any of the
venturer will not disqualify him as venturer.

Example 3
Mr. A, M/s. B & Co. and C Ltd. entered into a joint venture, where according to the agreement, all
the policies making decisions on financial and operating activities will be taken in a regular meeting
attended by them or their representatives. Implementation and execution of these policies will be
the responsibility of Mr. A. Here Mr. A is acting as venturer as well as manager of the concern.

Note:
Any structure which satisfies the following characteristics can be classified as joint
ventures:
(a) Two or more venturers are bound by a contractual arrangement and
(b) The contractual arrangement establishes joint control.

24.3
 ACCOUNTING STANDARD – 27

4. FROM OF JOINT VENTURES

Joint ventures may take many forms and structures, this Statement identifies them in three broad
types –
● Jointly Controlled Operations (JCO),
● Jointly Controlled Assets (JCA) and
● Jointly Controlled Entities (JCE).

4.1 JOINTLY CONTROLLED OPERATIONS (JCO)

Under this set up, venturers do not create a separate entity for their joint venture business but
they use their own resources for the purpose. They raise any funds required for joint venture on their
own, they incur any expenses and sales are also realised individually. They use same set of assets and
employees for joint venture business and their own business.
Since there is no separate legal entity and venturers don’t recognize the transactions separately, they
do not maintain a separate set of books for joint venture. All the transactions of joint venture are
recorded in their books only.

Following are the key features of JCO:

a. Each venturer has his own separate business.
b. There is no separate entity for joint venture business.
c. All venturers are creating their own assets and maintain them.
d. Each venturer record only his own transactions without any separate set of books maintained for
the joint venture business.
e. Venturers use their assets for the joint venture business.
f. Venturers met the liabilities created by them for the joint venture business.
g. Venturers met the expenses of the joint venture business from their funds.
h. Any revenue generated or income earned from the joint venture is shared by the venturers as
per the contract.

In respect of its interests in jointly controlled operations, a venturer should recognise in its separate
financial statements and consequently in its consolidated financial statements:
(a) the assets that it controls and the liabilities that it incurs; and

(b) the expenses that it incurs and its share of the income that it earns from the joint venture.

However, the venturers may prepare accounts for internal management reporting purposes so that
they may assess the performance of the joint venture.

24.4
 ACCOUNTING STANDARD – 27

Example 4
Mr. A (dealer in tiles and marbles), Mr. B (dealer in various building materials) and Mr. C (Promoter)
enters into a joint venture business, where any contract for construction received will be completed
jointly, say, Mr. A will supply all tiles and marbles, Mr. B will supply other materials from his godown
and Mr. C will look after the completion of construction. As per the contractual agreement, they will
share any profit/loss in a predetermined ratio. None of them are using separate staff or other
resources for the joint venture business and neither do they maintain a separate account. Everything
is recorded in their personal business only.
Venturer doesn’t maintain a separate set of books but they record only their own transactions of the
joint venture business in their books. Any transaction of joint venture recorded separately is only for
internal reporting purpose. Once all transactions recorded in venturer financial statement, they don’t
need to be adjusted for in consolidated financial adjustment.

4.2 JOINTLY CONTROLLED ASSETS (JCA)

Separate legal entity is not created in this form of joint venture but venturer owns the assets jointly,
which are used by them for the purpose of generating economic benefit to each of them. They take up
any expenses and liabilities related to the joint assets as per the contract. We can conclude the
following points:
● There is no separate legal identity.
● There is a common control over the joint assets.
● Venturers use this asset to derive some economic benefit to themselves.
● Each venturer incurs separate expenses for their transactions.
● Expenses on jointly held assets are shared by the venturers as per the contract.
● In their financial statement, venturer shows only their share of the asset and total income earned
by them along with total expenses incurred by them.
● Since the assets, liabilities, income and expenses are already recognised in the separate financial
statements of the venturer and consequently in its consolidated financial statements, no
adjustments or other consolidation procedures are required in respect of these items when the
venturer presents consolidated financial statements.
● Financial statements may not be prepared for the joint venture, although the venturers may prepare
accounts for internal management reporting purposes so that they may assess the performance of
the joint venture.

Example 5
ABC Ltd., BP Ltd. and HP Ltd. having the same point of oil refinery and same place of customers agreed
to spread a pipeline from their unit to customers place jointly. They agreed to share the expenditure
on the pipeline construction and maintenance in the ratio 3:3:4 respectively and the time allotted to
use the pipeline was in the ratio 4:3:3 respectively.

24.5
 ACCOUNTING STANDARD – 27

For the joint venture, each venturer will record his share of joint assets as classified according to
the nature of the assets rather than as an investment and any expenditure incurred or revenue
generated will be recorded with other items similar to JCO.
Following are the few differences between JCO and JCA for better understanding:
● In JCO, venturers use their own assets for joint venture business but in JCA they
jointly own the assets to be used in joint venture.
● JCO is an agreement to joint carry on the operations to earn income whereas, JCA
is an agreement to jointly construct and maintain an asset to generate revenue to
each venturer.
● Under JCO all expenses and revenues are shared at an agreed ratio, in JCA only
expenses on joint assets are shared at the agreed ratio.

4.3 JOINTLY CONTROLLED ENTITIES (JCE)

● This is the format where venturer creates a new entity for their joint venture business. A jointly
controlled entity is a joint venture which involves the establishment of a corporation, partnership
or other entity in which each venturer has an interest.
● The entity operates in the same way as other enterprises, except that a contractual arrangement
between the venturers establishes joint control over the economic activity of the entity.
● All the venturers pool their resources under new banner and this entity purchases its own assets,
create its own liabilities, expenses are incurred by the entity itself and sales are also made by this
entity.
● The net result of the entity is shared by the venturers in the ratio agreed upon in the contractual
agreement.
● This contractual agreement also determines the joint control of the venturer. Each venturer
usually contributes cash or other resources to the jointly controlled entity. These contributions
are included in the accounting records of the venturer and are recognised in its separate financial
statements as an investment in the jointly controlled entity.
● A jointly controlled entity maintains its own accounting records and prepares and presents financial
statements in the same way as other enterprises in conformity with the requirements applicable
to that jointly controlled entity.
● The investors who don’t have joint control over the entity recognized his share of net results
and his investments in joint venture as per AS 13. In the consolidated financial statement it
is recognized as per AS 13, AS 21 or AS 23 as appropriate.

24.6
 ACCOUNTING STANDARD – 27

Example 6
A Ltd and B Ltd are two infrastructure companies operating in City A. The local authority has issued
a tender to construct a metro stretch for ₹ 2,000 crore and had invited bidders to apply for the
tender. A Ltd and B Ltd, jointly form a new entity AB Ltd that bids for the tender. All machinery
and equipment will be the responsibility of A Ltd. All funding will be managed and controlled by B
Ltd. Revenue and operating expenses will be shared jointly by A Ltd and B Ltd in the proportion of
60:40.
In the above example AB Ltd constitutes a Jointly Controlled Entity (JCE).

Example 7 (Jointly Controlled Entity (JCE))

Three separate aerospace companies form a separate entity, Aero Ltd, to jointly manufacture an
aircraft. They carry responsibility for different areas of expertise, such as: manufacturing engines;
manufacturing fuselage and wings; and aerodynamics.
The companies carry out different parts of the manufacturing process, each using its own resources
and expertise in order to manufacture, market and distribute the aircraft jointly. The three entities
share the revenues from the sale of aircraft and jointly incur expenses.
The revenues and common costs are shared, as agreed in the consortium contract. Parties also incur
their own separate costs, such as labour costs, manufacturing costs, supplies, inventory of unused
parts and work in progress. Each party recognises its separately incurred costs in full.
Aero Ltd maintains separate accounting records. The consortium agreement comprises the following:
Aero Ltd will invoice the customers on the investors’ behalf. The allocation of revenue from the
aircraft’s sale is in proportion to the investors’ interests.
All administrative costs incurred by Aero Ltd are shared by the parties in proportion to their
interests; Aero Ltd will recharge these, with no additional margin.
The companies carry out different parts of the manufacturing process, each using its own resources
and expertise to manufacture, market and distribute the aircraft jointly.
Each company incurs its own separate costs, such as labour costs, manufacturing costs, supplies,
inventory of unused parts and work in progress. Each company recognises its separately incurred
costs in full.

Difference Between Jointly Controlled Operation and Jointly Controlled Entity

S.No. Jointly Controlled Operation (JCO) Jointly Controlled Entity (JCE)

1. No Separate Entity Separate Entity
2. Each Venturer records his own Shore of Assets, Liabilities, Revenue & Expenses
Assets/ Liabilities, Revenue/Expenses in belongs to JCE.
its own Books. Venturer has right to share in Net Assets
& Profits of JCE.
3. No Separate Books Of JCO Separate Books are maintained for JCE

24.7
 ACCOUNTING STANDARD – 27

4. Here Venturer is recording in his own Here Venturer co. in its books is showing
Books its share in Assets/Liability in Investment in JCE
JCO.

5. CONSOLIDATED FINANCIAL STATEMENTS OF A VENTURER

Proportionate consolidation is a method of accounting and reporting whereby a venturer's share of

each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as
separate line items in the venturer's financial statements.
Proportionate consolidation method of accounting is to be followed except in the following cases:
a. Investment is intended to be temporary because the investment is acquired and held exclusively
with a view to its subsequent disposal in the near future. And
b. Joint venture operates under severe long-term restrictions, which significantly impair its ability
to transfer funds to the venturers.

In both the above cases, investment of venturer in the share of the investee is treated as
investment according to AS 13.

From the date of discontinuing the use of the proportionate consolidation method,
a. If interest in entity is more than 50%, investments in such joint ventures should be accounted
for in accordance with AS 21, Consolidated Financial Statement.
b. If interest is 20% or more but upto 50%, investments are to be accounted for in accordance with
AS 23, Accounting for Investment in Associates in Consolidated Financial Statement.
c. For all other cases investment in joint venture is treated as per AS 13, Accounting for
Investment.
d. For this purpose, the carrying amount of the investment at the date on which joint venture
relationship ceases to exist should be regarded as cost thereafter.

Most of the provisions of Proportionate Consolidation Method are similar to the provisions of AS
21.

Example 8 (JCE & Proportionate Consolidation Method)

Balance Sheet of J Ltd. (31/3/24)
Equity Share Capital 10,00,000
Reserves and Surplus 6,00,000
Liabilities 14,00,000
30,00,000
Non-Current Assets 18,00,000

24.8
 ACCOUNTING STANDARD – 27

Current Assets 12,00,000

30,00,000
● J Ltd. is a J.V. Of A Ltd. & B Ltd. with 50% Investment by each.
● A Ltd. Invested in J Ltd. on 1/4/23, When R&S Balance of J Ltd. was 2,00,000/-
● Investment made by A Ltd. Was 6,50,000
● How A Ltd Shall accounts for this Investment in J Ltd. in its Consolidated Financial Statement.
Solution:-
A Ltd. (Venturer) Shall apply Proportionate Consolidation Method as under :-
Working Note 1 - Cost of Control as on DOA
Investment Cost 6,50,000
(-) 50% of Net Assets
ESC 10 Lacs × 50% (5,00,000)
Pre-Acquisition Profit 2 Lacs × 50% (1,00,000)
Goodwill 50,000

Working Note 2 - Share in Post Acquisition Profit of JCE :-

4,00,000 × 50% = 2,00,000
(Note: Minority Interest will never be Calculated)
A Ltd.
Consolidation B/s (Extract)
Equity Share Capital XXX
Consolidated R&S :-
A’s Balance XXX
+ Post Acquisition Profit Share 2,00,000
Liability A Ltd. XXX
Share in JV 7,00,000
Non-Current Assets
A Ltd. XXX
JV 9,00,000
Goodwill 50,000
Current Assets
A Ltd. XXX
JV 6,00,000

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 ACCOUNTING STANDARD – 27

6. TRANSACTION BETWEEN A VENTURER AND JOINT VENTURER

● When venturer transfers or sells assets to Joint Venture, the venturer should recognise only that
portion of the gain or loss which is attributable to the interests of the other venturers.
● The venturer should recognise the full amount of any loss only when the contribution or sale
provides evidence of a reduction in the net realisable value of current assets or an impairment loss.
● When the venturer from the joint venture purchases the assets, venturer will not recognized his
share of profits in the joint venture of such transaction unless he disposes off the assets.
● A venturer should recognise his share of the losses resulting from these transactions in the same
way as profits except that losses will be recognised in full immediately only when they represent a
reduction in the net realisable value of current assets or an impairment loss.

24.10
 ACCOUNTING STANDARD – 27

Example 9
A and B established a separate vehicle i.e. entity J, wherein each operator has a 50% ownership
interest and each takes 50% of the output. On formation of the joint venture, A contributed a
property with fair value of ₹ 110 crore and agreed to contribute his experience over the years towards
this venture; and B contributed equipment with a fair value of ₹ 120 crore. The carrying values of the
contributed assets were ₹ 100 crore and ₹ 80 crore, respectively.
Answer
A’s share in the fair value of assets contributed by entity B (50% × 120) 60
A’s share in the carrying value of asset contributed by
A to the joint venture (50% × 100) (50)
Gain recognised by A 10

Example 10
A Ltd. is a Venturer has invested in a JV AB Ltd. with 50% Share. Another Venturer is B Ltd. A Ltd.
sold one Asset to JV (AB Ltd.) whose cost is Rs. 1,00,000 and Sold at 1,25,000. How to treat this
transaction in the books of A Ltd. and B Ltd. Describe with the help of Journal Entry.
Answer
A Ltd. has total Gain of 25,000 out of which 12,500 (50% share) earned from B Ltd. (i.e. Outside
party) and rest 12,500 earned from itself. A Ltd. shall not record its own share of Gain earned from
itself.
Books of JV (AB Ltd. – Books of B Ltd. (Venturer) Books of A Ltd. (Seller and
Purchaser) Venturer)
Asset A/c Dr. 1,25,000 Share in JV’s Asset Dr. 62,500 B Ltd. A/c Dr. 62,500
To A Ltd. 1,25,000 To Share in JV’s Liability (A Ltd.) Share in JV’s Asset Dr. 50,000
A/c 62,500 To Assets A/c 1,00,000
To Gain on Sale A/c 12,500

Example 11
AB Ltd. (JV of A Ltd. and B Ltd.) sold one Asset costing Rs. 1,00,000 to A Ltd. at 1,30,000. Pass
necessary journal entries.
Answer
JV Ltd. has total Gain of 30,000 out of which 15,000 (50% share) of B Ltd. (i.e. Outside party) and
15,000 of A Ltd. A Ltd. shall not record its own share of Gain earned from itself.
Books of JV (AB Ltd. – Seller) Books of B Ltd. (Venturer) Books of A Ltd. (Purchaser
and Venturer)
A Ltd. A/c Dr. 1,30,000 A Ltd. A/c Dr. 65,000 Asset A/c Dr.1,15,000
To Asset A/c 1,00,000 To Share in Asset A/c 50,000 To B Ltd. A/c 65,000
To Gain A/c 30,000 To Gain A/c 15,000 To Share in Asset A/c 50,000

24.11
 ACCOUNTING STANDARD – 27

7. (MCQ’s from ICAI Material)

1. State which of the following statements are incorrect.

(i) The requirements relating to accounting for joint ventures in consolidated financial
statements according to proportionate consolidation method, as contained in AS 27, applies
only when consolidated financial statements are prepared by venturer.
(ii) The requirements relating to accounting for joint ventures in consolidated financial
statements according to proportionate consolidation method, as contained in AS 27, applies
irrespective whether consolidated financial statements are prepared by venturer or not.
(iii) An investor in joint venture, which does not have joint control, should report its interest in
a joint venture in its consolidated financial statements in accordance with AS 13, AS 21 and
AS 23as the case may be.
(a) Point (i) is incorrect.
(b) Point (ii) is incorrect.
(c) Point (iii) is incorrect.
(d) None of the above.

2. Identify which of the following is not a feature of a Jointly controlled operations (JCO):
a. Each venturer has his own separate business.
b. There is a separate entity for joint venture business.
c. Each venturer record only his own transactions without any separately set of books
maintained for the joint venture business.
d. There is a common agreement between all of them.

3. Identify which of the following is/are not a feature of a Jointly controlled assets (JCA):
(i) There is a separate legal identity.
(ii) There is a common control over the joint assets.
(iii) Expenses on jointly held assets are shared by the venturers as per the contract.
(iv) In their financial statement, venturer shows only their share of the asset and total income
earned by them along with total expenses incurred by them.
(a) Point no. (i) only.
(b) Point no. (i) and (iii).
(c) Point no. (iii) and (iv).
(d) Point (i) and (ii).

4. Identify which is/ are features of a Jointly controlled entity (JCE):

(i) Venturer creates a new entity for their joint venture business.
(ii) All the venturers pool their resources under new banner and this entity purchases its own
assets, create its own liabilities, expenses are incurred by the entity itself and sales are
also made by this entity.
(iii) The revenues and expenses of the entity is shared by the venturers in the ratio agreed
upon in the contractual agreement.

24.12
 ACCOUNTING STANDARD – 27

(a) Point no. (i) only.

(b) Point no. (i) and (ii).
(c) Point no. (iii).
(d) Point no. (iii).

5. Identify the correct statements.

From the date of discontinuing the use of the proportionate consolidation method:
(i) If interest in entity is more than 50%, investments in such joint ventures should be
accounted for in accordance with AS 21, Consolidated Financial Statements.
(ii) If interest is 20% or more but upto 50%, investments are to be accounted for in accordance
with AS 23, Accounting for Investment in Associates in Consolidated Financial Statements.
(iii) For all other cases investment in joint venture is treated as per AS 13, Accounting for
Investments.
(iv) For this purpose, the fair value of the investment at the date on which joint venture
relationship ceases to exist should be regarded as cost thereafter.
(a) Point no. 1 and 2.
(b) Point no. 1, 2 and 3.
(c) Point no. 1, 2, 3 and 4.
(d) None of the above.

Answers 1 2 3 4 5
b b a c b

24.13
 ACCOUNTING STANDARD – 27

Student Notes: -

24.14
 ACCOUNTUNG STANDARD - 29

ACCOUNTING STANDARD – 29
25
PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS

“Failure is your best asset, complacency is your worst liability,

and talent is your greatest capital.”

1. NON-APPLICABILITY OF AS 29

AS 29 doesn’t apply to:

(a) Executory contracts, except where the contract is onerous;
(b) financial instruments such as Shares, debentures, bonds etc.
(c) Deferred Tax Liabilities (AS 22);
(d) Lease Liabilities (AS 19, Leases);
(e) Employee benefit liabilities (AS 15, Employee Benefits); and
(f) Liabilities relating to Insurance contracts i.e. claims payable to customers.
(g) Provisions which are recognised as an adjustment to Assets such as Provision for depreciation,
doubtful debts etc.

2. WHAT IS LIABILITY

Important Definitions:
● Obligating Event: an event that creates an obligation that results in an enterprise having no
realistic alternative to settling that obligation.
● Present Obligation: if based on evidences available, its existence on the balance sheet date
is considered probable i.e. more likely than not.
● Possible Obligation: if based on evidences available, its existence on the balance sheet date
is considered not probable.

A Liability is a:
● Present Obligation of the Entity
● Arising from past events
● Settlement of which is possible only by outflow of resources (resources means any asset)

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Past Events can create two types of Obligations:

● Legal obligation which arises from a contract or law
● Constructive Obligation which arises from Past Practices or Commitments. The occurrence of
event creates valid expectations in other parties that “Entity will discharge its obligations”.
Valid expectations are created when an entity has committed or communicated to do something.

Examples of Past Events:

1. In respect of warranty provision, it would be the original sale.
2. In respect of contamination of land, it would be the original contamination.
3. In respect of Provision for dismantling or cleaning the oil rig, it would be when the oil rig is
first built.

3. WHAT IS A PROVISION?

Provision is a:
● liability
● of uncertain timing or amount
● whose outflow can be estimated reliably

Note: If there is no past event, then there is no liability, and no provision should be recognized.

Formulae for Liability Formulae for Provision

Past Event + Present Obligation + Outflow + Past Event + Present Obligation + Outflow
Certainty of settlement probability more than 50% + Uncertain Amt.
or Timing + Estimation

Some Examples on Liabilities and Provisions:

Nature of Recognition as Reasons
obligation provision as per
AS 29
(Yes/No)
Amount payable for No Amount payable for utilities represents an accrual
utilities like of liability to pay for services that have been
electricity, gas, received. The amount and timing of payment can
etc. be determined with a reasonable certainty.
It is a liability.
Goods or services No It is a liability. In such a case, amount and timing
received, but not of payment would be driven by the terms agreed
invoiced with the supplier.

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Warranty Yes Warranty obligation represents the additional

obligations cost that the seller may have to incur to rectify
product defects. This is in the nature of provision
as there is an uncertainty associated with the
amount and timing of the liability.
Damages claimed Yes If Entity is disputing the amount of claim then
by customer for Rs. there is uncertainty of amount payable. It is a
20 Lacs Provision.
However, when court has passed the judgement
for Rs. 15 Lacs, it will become the liability.

4. HOW TO MEASURE A PROVISION?

The amount of the provision should be measured at the best estimate of the expenditure required to
satisfy the obligation at the end of the reporting period.

Methods to Measure the Provision

1. Expected value method: this method is used when there are more than 2 possible outcomes with
probability of each outcome is given. In such a case we need to weight each outcome by its
probability. Amount of provision will be equal to the “Weighted Average Amount”
2. The most likely outcome: This method is suitable in the case there are two possible outcomes. The
outcome with highest probability is taken as the amount of Provision.

Discounting (Present Value)

● When the amount of provision is required to be settled beyond 1 year then provision should be
measured at Present Value of future outflow.
● In such a case, interest cost shall be recognised to unwind the discount over the period in Profit
and Loss account.
● Discount rate should be taken pre-tax always.
● If there is risk of actual outflow more than present value, the amount of present value shall be
increased by % of risk factor.

Examples of Best Estimate:

An entity faces a single legal claim, with a 40 percent likelihood of success with no cost and a
60 percent likelihood of failure with a cost of ₹1 million. Expected value is not valid in this
case because the outcome will never be a cost of ₹600,000 (60 percent × ₹1 million); the
outcome will either be nil or ₹1 million. AS 29 indicates that the provision may be estimated
at the individual most likely outcome. In this example, it is more likely that a cost of ₹1 million
will result and, therefore, a provision for ₹1 million should be recognised.

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(Author Note - When there are only 2 outcomes use MOST LIKELY OUTCOME)

Other Important Points for Provision

1) Provision should not be made for “Future operating losses” since there is no past obligating event.

2) Provision should be recognised as soon as the obligating event takes place such as:
● Sale of Product with warranty, provision should be recognised on the date of sale
● PPE Installed with decommissioning cost, provision should be recognised as on PPE
recognition date

3) Legal or Constructive obligation should be present as on Balance Sheet to create a Liability or

Provision.

4) Onerous Contracts: Provision should be created at lower of:

a) Net Cost of Completing the Contract or
b) Penalty Cost of Cancellation of Contract
Note: Onerous contract means a contract in which the unavoidable cost (labor cost, material cost,
variable production overheads) of meeting the obligation exceeds the expected benefits to be
obtained. (e.g. Binding sale agreement or non-cancellable contract)

5) In case of Executory contracts, no provision is required.

Executory contracts are contracts under which
● Neither party has performed any of its obligations or
● Both parties have partially fulfilled their obligations to an equal extent.

6) When probability is given in the question then check if there is more than 50% chance of outflow
then only provision is recognised.

7) If there is difficulty in estimating the provision amount due to unavailability of data or past
experience, it is not justified to ignore the provision or not create the provision. Provision should
be recognised based on industry data.

8) Reimbursements:
● If any expenditure is expected to be reimbursed by the other party and it is virtually certain
to be received (more than 90% chance) then such reimbursement shall be recognised as a
separate asset in the Balance Sheet.
● In the profit and loss account, provision can be presented net of reimbursement income.
● Amount of Reimbursement can never exceed the provision amount.

9) Provision should be reviewed at each balance sheet date and adjusted as per the current best
estimate. If it is no longer required, then reverse the provision.

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10) If the entity can avoid any future expenditure by its future actions, then NO provision is
recognised for such expenditure. Example – future operating costs such as inspection of ships in
the next 5 years, company can sale the ship before 5 years then no provision of inspection is
required.

11) Restructuring:
a) Restructuring is a plan of management to change the scope of business or the manner of
conducting a business.
Example: discontinuing a line of business or closure of one or two segments or operations
b) Provision for restructuring cost is required when:
● There is a detailed formal plan for restructuring with relevant information in it (about
business, location, employees, time schedule and expenditures)
● A valid expectation related to restructuring has been raised in the affected parties.
c) Restructuring provision should include only the direct expenditures such as staff termination
cost, compensation to customers, lease termination penalty etc.
d) Following costs are not considered for restructuring provision:
● Training cost of employees
● Cost of relocating asset from one location to another
● Impairment cost

Example on Restructuring Cost:

Closure of a division – communication/ implementation before end of the reporting period
On 12th March, 20X1 (reporting date), the board of an entity decided to close down a division
making a particular product. On 20th March, 20X1 a detailed plan for closing down the division was
agreed by the board; letters were sent to customers warning them to seek an alternative source
of supply and redundancy notices were sent to the staff of the division. It is assumed that a reliable
estimate can be made of any outflows expected.

Present obligation as a result of a past obligating event – The obligating event is the
communication of the decision to the customers and employees, which gives rise to a constructive
obligation from that date, because it creates a valid expectation that the division will be closed.

An outflow of resources embodying economic benefits in settlement – Probable.

Conclusion – A provision is recognised at 31st March, 20X1 for the best estimate of the costs of
closing the division.

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IMPORTANT EXAMPLES ON PROVISION

1. Example on Legal requirement to fit smoke filters

Under new legislation, an entity is required to fit smoke filters to its factories by 30th September,
20X1. The entity has not fitted the smoke filters. It is assumed that a reliable estimate can be
made of any outflows expected.

(a) At 31st March, 20X1, the end of the reporting period

Present obligation as a result of a past obligating event – There is no obligation because there is
no obligating event either for the costs of fitting smoke filters or for fines under the legislation.

Conclusion – No provision is recognised for the cost of fitting the smoke filters.

(b) At 31st March, 20X2, the end of the reporting period

Present obligation as a result of a past obligating event – There is still no obligation for the costs
of fitting smoke filters because no obligating event has occurred (the fitting of the filters).
However, an obligation might arise to pay fines or penalties under the legislation because the
obligating event has occurred (the non-compliant operation of the factory).

An outflow of resources embodying economic benefits in settlement – Assessment of probability

of incurring fines and penalties by non-compliant operation depends on the details of the legislation
and the stringency of the enforcement regime.

Conclusion – No provision is recognised for the costs of fitting smoke filters. However, a provision
is recognised for the best estimate of any fines and penalties that are more likely than not to be
imposed.

2. Example Contaminated land and constructive obligation

An entity in the oil industry (having 31st March year-end) causes contamination and operates in a
country where there is no environmental legislation. However, the entity has a widely published
environmental policy in which it undertakes to clean up all contamination that it causes. The entity
has a record of honoring this published policy. It is assumed that a reliable estimate can be made
of any outflows expected.

Present obligation as a result of a past obligating event- The obligating event is the
contamination of the land, which gives rise to a constructive obligation because the conduct of the
entity has created a valid expectation on the part of those affected by it that the entity will clean
up contamination.

An outflow of resources embodying economic benefits in settlement- Probable.

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Conclusion- A provision is recognised for the best estimate of the costs of clean-up.

3. Example Offshore oilfield

An entity operates an offshore oilfield where its licensing agreement requires it to remove the oil
rig at the end of production and restore the seabed. 90% of the eventual costs relate to the
removal of the oil rig and restoration of damage caused by building it, and 10% arise through the
extraction of oil. At the end of the reporting period, the rig has been constructed but no oil has
been extracted. It is assumed that a reliable estimate can be made of any outflows expected.

Present obligation as a result of a past obligating event – The construction of the oil rig creates
a legal obligation under the terms of the license to remove the rig and restore the seabed and is
thus an obligating event. At the end of the reporting period, however, there is no obligation to
rectify the damage that will be caused by extraction of the oil.

An outflow of resources embodying economic benefits in settlement – Probable.

Conclusion – A provision is recognised for the best estimate of ninety per cent of the eventual
costs that relate to the removal of the oil rig and restoration of damage caused by building it.
These costs are included as part of the cost of the oil rig. The 10% of costs that arise through
the extraction of oil are recognised as a liability when the oil is extracted

4. Example on Warranties
A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms
of the contract for sale the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within three years from the date of sale. On past
experience, it is probable (i.e., more likely than not) that there will be some claims under the
warranties. It is assumed that a reliable estimate can be made of any outflows expected.

Present obligation as a result of a past obligating event – The obligating event is the sale of the
product with a warranty, which gives rise to a legal obligation.

An outflow of resources embodying economic benefits in settlement – Probable for the

warranties as a whole.

Conclusion – A provision is recognised for the best estimate of the costs of making good under the
warranty products sold before the end of the reporting period

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5. WHAT ARE CONTINGENCIES?

In Addition to Liabilities and Provisions, AS 29 deals with Contingent Liabilities and Contingent Assets.

Contingent Liabilities:
A contingent liability is either:
● A possible obligation (not present) from past event that will be confirmed by occurrence or non-
occurrence of uncertain future event; or
● A present obligation from past event, but either:
• The outflow of resources to satisfy this obligation is not probable (less than 50%), or
• The amount cannot be reliably measured.

Treatment of Contingent Liability:

● Contingent liability shall not be recognised.
● It should be disclosed in Notes to Financial Statements.
● If the probability of outflow is less than 5% i.e. remote then disclosure is even not required.

Note:
When the entity is jointly and severely liable to settle the obligation along with another entity,
in such case a part of the obligation which is expected to be met by other entity is treated as
Contingent liability and the balance obligation is recognised either as Liability or Provision if it
can be measured reliably.

Contingent Assets
A contingent asset is a possible asset arising from past events that will be confirmed by occurrence
or non-occurrence of uncertain future events not fully under the entity’s control.

Situations
Likelihood of outcome Contingent liability Contingent asset
Virtually certain (greater Recognise the Provision Recognise the Asset
than 95% probability)
Probable (50% - 95% of Recognise the Provision Disclose the Contingent
probability) Asset
Possible but not probable Disclose the Contingent Disclosure is not required
(5% - 50% of probability) Liability
Remote Disclosure is not required Disclosure is not required
(less than 5% probability)

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6. (MCQ’s from ICAI Material)

1. Which of the following best describes a provision?

(a) A provision is a liability of uncertain timing or amount.
(b) A provision is a possible obligation of uncertain timing.
(c) A provision is a credit balance setup to offset a contingent asset so that the effect on the
statement of financial position is nil.
(d) A provision is a possible obligation of uncertain amount.

2. X Co is a business that sells second hand cars. If a car develops a fault within 30 days of the sale,
X Co will repair it free of charge. At 1st March 20X1, X Co had made a provision for repairs of ₹
25,000. At 31st March 20X1, X Co calculated that the provision should be ₹ 20,000. What entry
should be made for the provision in X Co's income statement for the month 31st March 20X1?
(a) A charge of ₹ 5,000
(b) A credit of ₹ 5,000
(c) A charge of ₹ 20,000
(d) A credit of ₹ 25,000

3. Which of the following item does the statement bellowed scribe?

“A possible obligation that arises from past events and whose existence will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly within the
entity's control”
(a) A provision
(b) A current liability
(c) A contingent liability
(d) Deferred tax liability

4. Z Ltd has commenced a legal action against Y Ltd claiming substantial damages for supply of a
faulty product. The lawyers of Y Ltd have advised that the company is likely to lose the case,
although the chances of paying the claim is not remote. The estimated potential liability estimated
by the lawyers are:
Legal cost (to be incurred irrespective of the outcome of the case) ₹ 50,000 Settlement if the
claim is required to be paid ₹ 5,00,000
What is the appropriate accounting treatment in the books of Z Ltd.?
(a) Create a Provision of ₹ 5,50,000
(b) Make a Disclosure of a contingent liability of ₹ 5,50,000
(c) Create a Provision of ₹ 50,000 and make a disclosure of contingent liability of ₹ 5,00,000
(d) Create a Provision of ₹ 5,00,000

Answers 1 2 3 4
a b c c

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Student Notes: -

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