Must Do Questions by Jai Chawla Sir CA Final FR

CA FINAL FR
MUST DO QUESTIONS FOR EXAMS MAY’25

INDEX

S. No. Topic Name NO. OF Page. No.

QUESTION
1 INDAS 1 – PRESENTION OF FINANCIAL 2 3
STATEMENTS
2 INDAS 2 - INVENTORIES 4 6
3 INDAS 7 – STATEMENT OF CASH FLOWS 3 11
4 IND AS – 8 ACCOUNTING POLICIES, 3 16
CHANGES IN ACCOUNTING ESTIMATES &
ERRORS
5 IND AS – 10 EVENTS AFTER THE 3 21
REPORTING PERIOD
6 INDAS 12 – INCOME TAXES 9 25
7 INDAS 16 – PROPERTY, PLANT & 5 37
EQUIPMENT
8 INDAS 19 – EMPLOYEE BENEFITS 7 43
9 IND AS – 20 ACCOUNTING FOR 6 49
GOVERNMENT GRANTS AND DISCLOSURE
OF GOVT. ASSISTANCE
10 INDAS 21 – THE EFFECTS OF CHANGES IN 5 55
FOREIGN EXCHANGE RATES
11 INDAS 23 – BORROWING COSTS 7 61
12 INDAS 24 - RELATED PARTY DISCLOSURES 4 68
13 INDAS 28 - INVESTMENT IN ASSOCIATES & 5 72
JV
14 FINANCIAL INSTRUMENTS 14 78
INDAS-109, 32 & 107
15 IND AS 33 – EPS 6 99
16 IND AS 34 – INTERIM FINANCIAL 2 105
REPORTING
17 IND AS 36 - IMPAIRMENT OF ASSETS 6 107

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18 IND AS 37: PROVISIONS, CONTINGENT 3 115

LIABILITIES AND CONTINGENT ASSETS
19 IND AS 38 -INTANGIBLE ASSETS 4 119
20 IND AS 40 - INVESTMENT PROPERTY 3 124
21 IND AS 41 - AGRICULTURE 3 128
22 IND AS 101 - FIRST TIME ADOPTION OF 5 132
IND AS
23 IND AS 102 - SHARE BASED PAYMENT 7 142
24 IND AS 105 - NON-CURRENT ASSETS 3 151
HELD FOR SALE AND DISCONTINUED
OPERATIONS
25 IND AS 108 - OPERATING SEGMENTS 2 155
26 IND AS 111 - JOINT ARRANGEMENTS 3 158
27 IND AS 113 - FAIR VALUE MEASUREMENT 4 165
28 IND AS 103 – BUSINESS COMBINATION 11 169
IND AS 110 – CONSOLIDATION
29 IND AS 115 - REVENUE FROM CONTRACTS 16 208
WITH CUSTOMERS
30 IND AS 116 - LEASES 9 227
31 ANALYSIS OF FINANCIAL STATEMENTS 3 242
TOTAL QUESTIONS 167

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TOPIC 1
IND AS 1 – PRESENTATION OF FINANCIAL STATEMENTS

QUESTION 1: (SIMILAR TO May22 EXAM)

([Link].24 – Question Bank)
A Limited has prepared the following draft balance sheet as on 31st March 20X1:
(₹ in crores)
Particulars 31st March, 31st March,
20X1 20X0
ASSETS
Cash 250 170
Cash equivalents 70 30
Non-controlling interest’s share of profit for the year 160 150
Dividend declared and paid by A Limited 90 70
Accounts receivable 2,300 1,800
Inventory at cost 1,500 1,650
Inventory at fair value less cost to complete and sell 180 130
Investment property 3,100 3,100
Property, plant and equipment (PPE) at cost 5,200 4,700
Total 12,850 11,800
₹ ₹
CLAIMS AGAINST ASSETS
Long term debt (₹ 500 crores due on 1stJanuary each year) 3,300 3,885
Interest accrued on long term debt (due in less than 12 months) 260 290
Share Capital 1,130 1,050
Retained earnings at the beginning of the year 1,875 1,740
Profit for the year 1,200 830
Non-controlling interest 830 540
Accumulated depreciation on PPE 1,610 1,240
Provision for doubtful receivables 200 65
Trade payables 880 790
Accrued expenses 15 30
Warranty provision (for 12 months from the date of sale) 600 445
Environmental restoration provision (restoration expected in 765 640
20X6)
Provision for accrued leave (due within 12 months) 35 25
Dividend payable 150 230
Total 12,850 11,800

Prepare a consolidated balance sheet using current and non-current classification in accordance with Ind AS
1. Assume operating cycle is 12 months

SOLUTION
A Limited
Consolidated Balance Sheet as at 31stMarch 20X1
(₹ In crores)
Particulars Note 31st March, 31st March,
20X1 20X0
ASSETS
Non-current assets
(a) Property, plant and equipment 1 3,590 3,460
(b) Investment property 3,100 3,100
Total non-current assets 6,690 6,560
Current assets
(a) Inventory 2 1,680 1,780
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(b) Financial assets

(i) Trade and other receivables 3 2,100 1,735
(ii) Cash and cash equivalents 4 320 200
Total current assets 4,100 3,715
Total assets 10,790 10,275
EQUITY & LIABILITIES
Equity attributable to owners of the parent
Share capital 1,130 1,050
Other Equity 5 2,825 2,350
Non-controlling interests 830 540
Total equity 4,785 3,940
LIABILITIES
Non-current liabilities
(a) Financial Liabilities
Borrowings - Long-term debt 6 2,800 3,385
(b) Provisions
Long-term provisions (environmental restoration) 765 640
Total non-current liabilities 3,565 4,025
Current liabilities
(a) Financial Liabilities
(i) Trade and other payables (Other than micro 7 880 790
enterprises and small enterprises)
(ii) Current portion of long-term debt 8 500 500
(iii) Interest accrued on long-term debt 260 290
(iv) Dividend payable 150 230

(b) Other Current Liabilities 15 30

(c) Provisions
(i) Warranty provision 600 445
(ii) Other short-term provisions 35 25
Total current liabilities 2,440 2,310
Total liabilities 6,005 6,335
Total equity and liabilities 10,790 10,275

Working Notes:
Notes Particulars Basis Calculation Amount
₹ crores ₹ crores
1 Property, plant and Property, plant and equipment 5,200 – 1,610 3,590 (3,460)
equipment (PPE) at cost less Accumulated (4,700 – 1,240)
(depreciation on PPE
2 Inventory Inventory at cost add Inventory 1,500 + 180 1,680 (1,780)
at fair value less cost to (1,650 + 130)
complete and sell
3 Trade and other Accounts receivable less 2,300 – 200 2,100 (1,735)
receivables Provision for doubtful (1,800 – 65)
receivables
4 Cash and cash Cash and Cash equivalents 250 + 70 320
equivalents (170 + 30) (200)
5 Other Equity Retained earnings at the 1,875 + 1,200– 2,825
beginning of the year add Profit 160 – 90
for the year less Non- (1,740 + 830 –
controlling interest’s share of 150 – 70) (2,350)
profit for the year less Dividend
declared by A Limited
6 Long-term debt Long-term debt 3,300 – 500 2,800
less Due on 1stJanuary each (3,885 – 500) (3,385)
year
7 Trade & other Trade payables 880 + 15 895
payables add Accrued expenses (790 + 30) (820)

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8 Current portion of Due on 1stJanuary each year - 500

long- term debt - (500)

Note: Figures in brackets represent the figures for comparative year.

QUESTION 2: (Jan21 EXAM)

([Link].31 – Question Bank)
Entity A had obtained a long-term bank loan during January 2019, which is subject to certain financial
covenants. One of such covenants states that during the tenure of the loan, debt equity ratio of 65:35 is to
be maintained at all times. In case of breach of this covenant, the loan will be repayable immediately. The
loan agreement also states that these covenants will be assessed at the end of each quarter and reported to
the bank within a month from the end of each quarter. If the covenants are breached at this time, the loan
will be repayable immediately. The entity closes its annual accounts on 31st March every year.
You are required to show how the loan will be classified as on 31st March 2020, if:
(i) At the financial year end, Entity A determines that it is not in breach of any of the covenants;
(ii) At the quarter ending 31st December 2019, Entity A's debt equity ratio became 75:25 and thus breaches
the covenant, however it obtains a waiver from the bank. The terms of the waiver specify that if Entity A
rectifies the breach within a period of 12 months from the reporting date then the bank cannot demand
repayment immediately on account of the breach during this period. Entity A expects to rectify the breach
by raising additional equity capital by means of a rights issue to the existing shareholders and expects
that the issue will be fully subscribed;
Considering the same facts as in (ii) above, except obtaining the waiver clause, what would be your answer?
SOLUTION
Ind AS 1 ‘Presentation of Financial Statements’, states that where there is a breach of a material provision
of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability
becomes payable on demand on the reporting date, the entity does not classify the liability as current, if
the lender agreed, after the reporting period and before the approval of the financial statements for issue,
not to demand payment as a consequence of the breach.
However, an entity classifies the liability as non-current, if the lender agreed by the end of the reporting
period to provide a period of grace ending at least twelve months after the reporting period, within which
the entity can rectify the breach and during which the lender cannot demand immediate repayment.
(i) The entity has obtained a long-term loan during January, 2019. Since the repayment period of the
loan is not mentioned in the question, it is assumed that on 31st March, 2020, the repayment period
of the loans will be more than 12 months. Further, the entity has not breached the covenants
specified in the loan; therefore, as at 31stMarch, 2020, the loan will be classified as ‘non-current
liability.
(ii) In the second case though, there is a breach of covenant on 31st December, 2019 i.e. before the
reporting date of 31st March, 2020, yet the bank agreed to provide a period of grace for twelve months
from the reporting period, within which the entity. A can rectify the breach and during this period
the bank cannot demand immediate repayments. Also, entity A has the intention to rectify the
breach. Thus, entity A will classify the liability of bank loan as non-current liability in its books as
at 31stMarch, 2020.
(iii) (b) Ind AS 1 ‘Presentation of Financial Statements’, states that where there is a breach of a material
provision of a long-term loan arrangement on or before the end of the reporting period with the effect
that the liability becomes payable on demand on the reporting date, the entity does not classify the
liability as current, if the lender agreed, after the reporting period and before the approval of the
financial statements for issue, not to demand payment as a consequence of the breach.

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TOPIC 2
INDAS 2 – INVENTORIES
QUESTION 3: (SIMILAR TO MTP Oct18 & Dec21 EXAMS)
([Link].109 - Question Bank)
In a manufacturing process of Mars ltd, one by-product BP emerges besides two main products MP1 and MP2
apart from scrap. Details of cost of production process are here under:
Item Unit Amount Output Closing Stock 31-3-20X1
Raw material 14,500 1,50,000 MP I-5,000 units 250
Wages - 90,000 MP II - 4,000 units 100
Fixed overhead - 65,000 BP- 2,000 units -
Variable overhead - 50,000 - -

Average market price of MP1 and MP2 is ₹60 per unit and ₹50 per unit respectively, by- product is sold @ ₹20
per unit. There is a profit of ₹5,000 on sale of by-product after incurring separate processing charges of ₹8,000
and packing charges of ₹2,000, ₹5,000 was realised from sale of scrap.
Required:
Calculate the value of closing stock of MP1 and MP2 as on 31-03-20X1.
SOLUTION
As per Ind 2 ‘Inventories’, most by-products as well as scrap or waste materials, by their nature, are
immaterial. They are often measured at net realizable value and this value is deducted from the cost of the
main product.

1) Calculation of NRV of By-product BP

Selling price of by-product 2,000 units x 20 per unit 40,000
Less: Separate processing charges of by- product BP (8,000)
Packing charges (2,000)
Net realizable value of by-product BP 30,000

2) Calculation of cost of conversion for allocation between joint products MP1 and MP2
Raw material 1,50,000
Wages 90,000
Fixed overhead 65,000
Variable overhead 50,000
Less: NRV of by-product BP (See Calculation 1) 30,000
Sale value of scrap 5,000 (35,000)
Joint cost to be allocated between MP1 and MP2 3,20,000

3) Determination of “basis for allocation” and allocation of joint cost to MP1 and MP2
MP I MP 2
Output in units (a) 5,000 4,000
Sales price per unit (b) 60 50
Sales value (a x b) 3,00,000 2,00,000
Ratio of allocation 3 2
Joint cost of ₹ 3,20,000 allocated in the ratio of 3:2 (c) 1,92,000 1,28,000
Cost per unit [c/a] 38.4 32

4) Determination of Value of Closing stock of MP 1 & MP 2

Particulars MP 1 MP 2
Closing stock in units 250 units 100 units
Cost per unit 38.4 30
Value of closing stock 9,600 3,200

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QUESTION 4: (SIMILAR TO RTP May20)

([Link].113 - Question Bank)
The following is relevant information for an entity:
● Full capacity is 10,000 labour hours in a year.
● Normal capacity is 7,500 labour hours in a year.
● Actual labour hours for current period are 6,500 hours.
● Total fixed production overhead is ₹ 1,500.
● Total variable production overhead is ₹ 2,600.
● Total opening inventory is 2,500 units.
● Total units produced in a year are 6,500 units.
● Total units sold in a year are 6,700 units.
● The cost of inventories is assigned by using FIFO cost formula.
How overhead costs are to be allocated to cost of goods sold and closing inventory?
SOLUTION
Hours taken to produce 1 unit = 6,500 hours / 6,500 units = 1 hour per unit.
Fixed production overhead absorption rate:
= Fixed production overhead / labour hours for normal capacity
= ₹ 1,500 / 7,500
= ₹ 0.2 per hour
Management should allocate fixed overhead costs to units produced at a rate of ₹ 0.2 per hour.
Therefore, fixed production overhead allocated to 6,500 units produced during the year (one unit per hour)
= 6,500 units x1 hour x ₹ 0.2 = ₹ 1,300.
The remaining fixed overhead incurred during the year of ₹ 200 (₹ 1500 – ₹ 1300) that remains unallocated
is recognised as an expense.
The amount of fixed overhead allocated to inventory is not increased as a result of low production by using
normal capacity to allocate fixed overhead.
Variable production overhead absorption rate:
= Variable production overhead/actual hours for current period
= ₹ 2,600 / 6,500 hours
= ₹ 0.4 per hour
Management should allocate variable overhead costs to units produced at a rate of ₹ 0.4 per hour.
The above rate results in the allocation of all variable overheads to units produced during the year.
Closing inventory = Opening inventory + Units produced during year – Units sold during year
= 2,500 + 6,500 – 6,700 = 2,300 units
As each unit has taken one hour to produce (6,500 hours / 6,500 units produced), total fixed and variable
production overhead recognised as part of cost of inventory:
= Number of units of closing inventory x Number of hours to produce each unit x (Fixed production
overhead absorption rate + Variable production overhead absorption rate)
= 2,300 units x 1 hour x (₹ 0.2 + ₹ 0.4)
= ₹ 1,380
The remaining ₹ 2,720 [(₹ 1,500 + ₹ 2,600) – ₹ 1,380] is recognised as an expense in the income statement
as follows: ₹
Absorbed in cost of goods sold (FIFO basis) (6,500 – 2,300) = 4,200 x ₹ 0.6 2,520
Unabsorbed fixed overheads, not included in the cost of goods sold 200

Total 2,720

QUESTION 5:
([Link].304 - Question Bank)
Particulars Kg. units ₹
Opening Inventory: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour 76,500
Overheads (Fixed) 75,000
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Sales 10,000 2,80,000

Closing Inventory: Raw Materials 900
Finished Goods 1200

The expected production for the year was 15,000 kg of the finished product. Due to fall in market demand
the sales price for the finished goods was ₹ 20 per kg and the replacement cost for the raw material was ₹
9.50 per kg on the closing day. You are required to calculate the closing inventory as on that date.
SOLUTION
Calculation of cost for closing inventory
Particulars ₹
Cost of Purchase (10,200 x 10) 1,02,000
Direct Labour 76,500
Fixed Overhead 75000/15000 x 10200 51,000
Cost of Production 2,29,500
Cost of closing inventory per unit (2,29,500/10,200) ₹ 22.50
Net Realisable Value per unit ₹ 20.00

Since net realisable value is less than cost, closing inventory will be valued at ₹ 20.
As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement cost
i.e. ₹ 9.50.
Therefore, value of closing inventory: Finished Goods (1,200x20) ₹ 24,000
Raw Materials (900 x 9.50) ₹ 8,550
₹ 32,550

QUESTION 6: (RTP Nov23)

([Link].404 - Question Bank)
A Ltd. began operations in the year 20X1-20X2. In 20X1-20X2, it incurred the following expenditures on
purchasing the raw materials for its product:
a. Purchase price of the raw materials = ` 30,000;
b. Import duty and other non-refundable purchase taxes = ` 8,000;
c. Refundable purchase taxes = ` 1,000;
d. Freight costs for bringing the goods from the supplier to the factory’s storeroom for raw materials =
` 3,000;
e. Costs of unloading the materials into the storeroom for raw materials = ` 20; and
f. Packaging = ` 2,000.
On 31st March, 20X2, A Ltd. received ` 530 volume rebate from a supplier for purchasing more than `
15,000 from the supplier during the year.
A Ltd. incurred the following additional costs in the production run:
i. Salary of the machine workers in the factory = ` 5,000;
ii. Salary of factory supervisor = ` 3,000;
iii. Depreciation of the factory building and equipment used for production process = ` 600;
iv. Consumables used in the production process = ` 200;
v. Depreciation of vehicle used to transport the goods from the storeroom for raw materials to the
machine floor = ` 400;
vi. Factory electricity usage = ` 300;
vii. Factory rental = ` 1,000; and
viii. Depreciation of the entity’s vehicle used by the factory supervisor is ` 200. During 20X1-
20X2, A Ltd. incurred the following administrative expenses:
1. Depreciation of the administration building = ` 500;
2. Depreciation and maintenance of vehicles used by the administrative staff = ` 150; and
3. Salaries of the administrative personnel = ` 3,050.
Of the administrative expenses, 20% is attributable to administering the factory. Remaining
expenses are attributable, in equal proportion, to the sales and other non- production operations
(eg financing, tax and corporate secretarial functions).

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In 20X1-20X2, A Ltd. incurred the following selling expenses:

a) Advertising costs = ` 300;
b) Depreciation and maintenance of vehicles used by the sales staff = ` 100; and
c) Salaries of the administrative personnel = ` 6,000.
Pass necessary journal entries to record the cost of inventory in the books of A Ltd.
Solution

` `

Inventory A/c (W.N.1) Dr. 42,490

To Cash/Bank A/c 42,490

(To recognise the cost of raw materials purchased)

Inventory A/c (W.N.2) Dr. 11,240

To Cash/Bank A/c (cost of direct labour)
To Property, plant and equipment 5,000
(accumulated depreciation-factory
equipment) 600
To Property, plant and equipment
(accumulated depreciation-raw-
materials delivery vehicle) 400
To Cash/Bank A/c (cost of electricity used)
To Property, plant and equipment 300
(accumulated depreciation-factory
supervisor’s vehicle) 200
To Cash/Bank A/c (factory management’s
salaries)
To Cash/Bank A/c (factory rental) 3,000
To Cash/Bank A/c (administrative
salaries attributable to the factory) 1,000
To Property, plant and equipment
(attributable portion of accumulated
610
depreciation- administration
building)
To Property, plant and equipment
(attributable portion of accumulated
depreciation- administration 100
vehicles)
(To recognise the costs of conversion)
30
Inventory A/c (W.N.2) Dr. 200

To Inventory A/c (consumable stores) 200

(To recognise the costs of consumable stores

inventory consumed)

The total cost of inventories = Costs of purchase + Costs of conversion

= ` 42,490 + ` 11,240 + ` 200
= ` 53,930
Working Notes:
1. Computation of costs of purchase

Description `
Purchase price 30,000
Import duty and other non-refundable purchase taxes 8,000
Freight costs for bringing the goods to the factory storeroom 3,000

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Cost of unloading the raw materials into the storeroom 20

Packaging 2,000
Less: Trade discounts, rebates and subsidies (530)
Cost of purchase 42,490

Note: Refundable taxes do not form part of the cost of inventories.

2. Computation of costs of conversion

Description `
Direct labour 5,000
Fixed production overheads
Depreciation and maintenance of factory 600
equipment Depreciation of vehicle used for 400
transporting the goods Depreciation of vehicle used 200
by factory supervisor Factory electricity usage 300
Factory management 3,000
Factory rental 1,000
Other costs of administering the factory
20% of depreciation of administration 100
building 20% of depreciation of 30
administration vehicles 20% of 610
administrative staff costs
Variable production overheads Indirect material—consumables 200
Cost of conversion 11,440

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TOPIC 3
INDAS 7 - STATEMENT OF CASH FLOWS
QUESTION 7: (RTP Nov19)
([Link].11 - Question Bank)
Following is the balance sheet of Kuber Limited for the year ended 31 March, 20X2
(Rs. in lacs)
20X2 20X1
ASSETS
Non-current assets
Property, plant and equipment 13,000 12,500
Intangible assets 50 30
Other financial assets 145 170
Deferred Tax Asset (net) 855 750
Other non-current assets 800 770
Total non-current assets 14,850 14,220
Current assets
Financial assets
Investments 2,300 2,500
Cash and cash equivalents 220 460
Other current assets 195 85
Total current assets 2,715 3,045
Total assets 17,565 17,265
EQUITY AND LIABILITIES
Equity
Equity share capital 300 300
Other equity 12,000 8,000
Total equity 12,300 8,300
Liabilities
Non-current liabilities
Financial liabilities
Long-term borrowings 2,000 5,000
Other non-current liabilities 2,740 3,615
Total non-current liabilities 4,740 8,615
Current liabilities
Financial liabilities
Trade payables 150 90
Bank overdraft 75 60
Other current liabilities 300 200
Total current liabilities 525 350
Total liabilities 5,265 8,965
Total equity and liabilities 17,565 17,265

Additional Information:
1) Profit after tax for the year ended March 31, 20X2 - Rs. 4,450 lacs
2) Interim dividend paid during the year - Rs. 450 lacs
3) Depreciation and amortisation charged in the statement of profit and loss during the current year are
as under
a) Property, Plant and Equipment - Rs. 500 lacs
b) Intangible Assets - Rs. 20 lacs
4) During the year ended March 31, 20X2 two machineries were sold for Rs. 70 lacs. The carrying amount
of these machineries as on March 31, 20X2 is Rs. 60 lacs.
5) Income taxes paid during the year Rs. 105 lacs
6) Other non-current / current assets and liabilities are related to operations of Kuber Ltd. and do not
contain any element of financing and investing activities.

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Must Do Questions by Jai Chawla Sir CA Final FR

Using the above information of Kuber Limited, construct a statement of cash flows under indirect method.
Solution:
Statement of Cash Flows
Rs. in lacs
Cash flows from Operating Activities
Net Profit after Tax 4,450
Add: Tax Paid 105
4,555
Add: Depreciation & Amortisation (500 + 20) 520
Less: Gain on Sale of Machine (70-60) (10)
Less: Increase in Deferred Tax Asset (855-750) (105)
4,960
Change in operating assets and liabilities
Add: Decrease in financial asset (170 - 145) 25
Less: Increase in other non-current asset (800 - 770) (30)
Less: Increase in other current asset (195 - 85) (110)
Less: Decrease in other non-current liabilities (3,615 – 2,740) (875)
Add: Increase in other current liabilities (300 - 200) 100
Add: Increase in trade payables (150-90) 60
4,130
Less: Income Tax (105)
Cash generated from Operating Activities 4,025
Cash flows from Investing Activities
Sale of Machinery 70
Purchase of Machinery [13,000-(12,500 – 500-60)] (1,060)
Purchase of Intangible Asset [50-(30-20)] (40)
Sale of Financial asset - Investment (2,500 – 2,300) 200
Cash outflow from Investing Activities (830)
Cash flows from Financing Activities
Dividend Paid (450)
Long term borrowings paid (5,000 – 2,000) (3,000)
Cash outflow from Financing Activities (3,450)
Net Cash outflow from all the activities (255)
Opening cash and cash equivalents (460 – 60) 400
Closing cash and cash equivalents (220 – 75) 145

QUESTION 8:
(Q.INDAS7. SM12- Question Bank)
The relevant extracts of consolidated financial statements of A Ltd. are provided below:
Consolidated Statement of Cash Flows
For the year ended (Rs. in Lac)
31st March 20X2 31st March 20X1
Assets
Non-Current Assets
Property, Plant and Equipment 4,750 4,650
Investment in Associate 800 -
Financial Assets 2,150 1,800
Current Assets
Inventories 1,550 1,900
Trade Receivables 1,250 1,800
Cash and Cash Equivalents 4,650 3,550
Liabilities
Current Liabilities
Trade Payables 1,550 3,610

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Extracts from Consolidated Statement of Profit and Loss for the year ended 31st March 20X2
Particulars Amount (Rs. in Lac)
Revenue 12,380
Cost of Goods Sold (9,860)
Gross Profit 2,520
Other Income 300
Operating Expenses (450)
Other expenses (540)
Interest expenses (110)
Share of Profit of Associate 120
Profit before Tax 1,840

The below information is relevant for A Ltd Group.

1) A Ltd had spent Rs. 30 Lac on renovation of a building. A Ltd charged the entire renovation cost to profit
and loss account.
2) On 1st April 20X1, A Ltd acquired 100% shares in S Ltd, for cash of Rs. 300 Lac. Fair value of the assets
acquired and liabilities assumed under the acquisition are as under:
Property, Plant and Equipment 140 Lac
Inventories 60 Lac
Trade Receivables 30 Lac
Cash and Cash Equivalents 20 Lac
Total Assets 250 Lac
Less: Trade Payables (50 Lac)
Net Assets on acquisition 200 Lac
3) A Ltd. ‘s property, plant and equipment comprise the following:
Carrying amount on 1st April 20X1 4,650 Lac
Addition (at cost) including assets in S Ltd. 800 Lac
Revaluation Surplus 80 Lac
Disposal (Sale) of Assets (490 Lac)
Depreciation for the year (290 Lac)
Carrying Amount on 31 March 20X2
st 4,750 Lac
A Ltd constructed a machine that is a qualifying asset and incurred construction costs of Rs. 40 Lac that
has been charged to other expenses. Of the interest cost of Rs. 110 Lac charged to profit or loss statement,
Rs. 10 Lac includes interest cost on specific borrowings that need to be capitalized. Property, plant and
equipment was sold at 630 Lac. Gain on disposal is adjusted against operating expenses.
4) A Ltd. purchased 30% interest in an Associate (G Ltd) for cash on 1st April 20X1. The associate reported
profit after tax of Rs. 400 Lac and paid a dividend of Rs. 100 Lac for the year.
5) Impairment test was conducted on 31st March 20X2. The following were impaired as under:
Goodwill impairment loss: Rs. 265 Lac
Intangible Assets impairment loss Rs. 900 Lac
The goodwill impairment relates to 100% subsidiaries.
Assume that interest cost is all paid in cash.
You are required to determine cash generated from operations for group reporting purposes for the year
ended 31st March 20X2.
Solution
Extracts of Statement of Cash Flows for the year ended 31st March 20X2
Cash Flows from Operating Activities Amount in Rs. Lacs
Profit before tax (W.N.1) 1,920
Less: Profit on Sale of PPE (630 - 490) (140)
Add back: Depreciation 290
Impairment of Goodwill 265
Impairment of Intangible Assets 900
Less: Share of Profits of Associate (400 x 30%) (120)
Add: Interest expense [110 – 10] 100
Working Capital Changes (W.N.2):
Add: Decrease in Trade Receivables 580
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Must Do Questions by Jai Chawla Sir CA Final FR

Add: Decrease in Inventories 410

Less: Decrease in Trade Payables (2,110)
Cash generated from operations 2,095

Working Notes:
1) Profit before tax Amount in Rs. Lacs
Reported profit as per Profit or Loss Statement 1,840
Add back: Renovation costs charged as expense 30
Construction costs charged as expense 40
Borrowing costs to be capitalized 10
Revised Profit before tax 1,920
2) Changes in Trade Receivables Amount in Rs. Lacs
Opening Balance 1,800
Add: Receivables of S Ltd. 30
1,830
Less: Closing Balance (1,250)
580
3) Changes in Inventories Amount in Rs. Lacs
Opening Balance 1,900
Add: Receivables of S Ltd. 60
1,960
Less: Closing Balance (1,550)
410
4) Changes in Trade Payables Amount in Rs. Lacs
Opening Balance 3,610
Add: Receivables of S Ltd. 50
3,660
Less: Closing Balance (1,550)
2,110

QUESTION 9: (Jan 21 EXAMS)

(Q.INDAS7. SM22 - Question Bank)
Z Ltd. (India) has an overseas branch in USA. It has a bank account having balance of USD 7,000
as on 1st April 2019. During the financial year 2019-2020, Z Ltd. Acquired computers for its USA
office for USD 280 which was paid on same date. There is no other transaction reported in USA
or India.
Exchange rates between INR and USD during the financial year 2019-2020 were:
Date USD 1 to INR
1st April 2019 70.00
30th November 2019 71.00 (Date of purchase of computer)
31st March 2020 71.50
Average for 2019-2020 70.50
Please prepare the extract of Cash Flow Statement for the year ended 31st March 2020, as per the relevant
Ind AS and also show the foreign exchange profitability from these transactions for the financial year 2019-
2020?
Solution
In the books of Z Ltd.
Statement of Cash Flows for the year ended 31st March 2020
Rs. Rs.
Cash flows from operating activities
Net Profit (Refer Working Note) 10,360
Adjustments for non-cash items:
Foreign Exchange Gain (10,360)
Net cash outflow from operating activities 0
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Cash flows from investing activities

Acquisition of Property, Plant and Equipment (19,880)
Net cash outflow from Investing activities (19,880)
Cash flows from financing activities
Net change in cash and cash equivalents (19,880)
Cash and cash equivalents at the beginning of the year i.e. 1st April 2019 4,90,000
Foreign Exchange difference 10,360
Cash and cash equivalents at the end of the year i.e. 31st March 2020 4,80,480

Working Note:
Computation of Foreign Exchange Gain
Bank Account USD Date USD Exchange Rs.
Rate
Opening balance 1.4.2019 7,000 70.00 4,90,000
Less: Purchase of Computer 30.11.2019 280 71.00 19,880
Closing balance calculated 6,720 4,70,120
Closing balance (at year end spot rate) 31.3.2020 6,720 71.50 4,80,480
Foreign Exchange Gain credited to Profit
and Loss account 10,360

Also Scan following QRs:

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FR MISSION SAMBHAV – REVISION LECTURES (YOUTUBE PLAYLIST)

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TOPIC - 4
INDAS 8 - ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
ESTIMATES & ERRORS
QUESTION 10: (RTP May19 & MTP Oct18)
(Q.INDAS8.SM12 - Question Bank)
ABC Ltd. changed its method adopted for inventory valuation in the year 20X2-20X3. Prior to the
change, inventory was valued using the first in first out method (FIFO). However, it was felt that
in order to match current practice and to make the financial statements more relevant and reliable,
a weighted average valuation model would be more appropriate.
The effect of the change in the method of valuation of inventory was as follows:
● 31st March, 20X1 - Increase of Rs. 10 million
● 31st March, 20X2 - Increase of Rs. 15 million
● 31st March, 20X3 - Increase of Rs. 20 million
Profit or loss under the FIFO valuation model are as follows:
20X2-20X3 20X1-20X2
Revenue 324 296
Cost of goods sold (173) (164)
Gross profit 151 132
Expenses (83) (74)
Profit 68 58
Retained earnings at 31st March, 20X1 were Rs. 423 million
Present the change in accounting policy in the profit or loss and produce an extract of the statement of changes
in equity in accordance with Ind AS 8.
Solution:
Profit or loss under weighted average valuation method is as follows:
20X2-20X3 20X1-20X2 (Restated)
Revenue 324 296
Cost of goods sold (168) (159)
Gross profit 159 137
Expenses (83) (74)
Profit 73 63

Statement of changes in Equity (extract)

Retained earnings Retained earnings
(Original)
At 1st April, 20X1 423 423
Change in inventory valuation policy 10 -
At 1st April, 20X1 (Restated) 433 -
Profit for the year 20X1-20X2 63 58
At 31st March, 20X2 496 481
Profit for the 20X2-20X3 73 68
At 31st March, 20X3 569 549

QUESTION 11: (RTP May 21)

(Q.INDAS8.SM19 - Question Bank)
In 20X3-20X4, after the entity's 31 March 20X3 annual financial statements were approved for
issue, a latent defect in the composition of a new product manufactured by the entity was
discovered (that is, a defect that could not be discovered by reasonable or customary inspection).
As a result of the latent defect the entity incurred ₹ 100,000 in unanticipated costs for fulfilling its
warranty obligation in respect of sales made before 31 March 20X3. An additional ₹ 20,000 was
incurred to rectify the latent defect in products sold during 20X3-20X4 before the defect was detected and the
production process rectified, ₹ 5,000 of which relates to items of inventory at 31 March 20X3. The defective

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Must Do Questions by Jai Chawla Sir CA Final FR

inventory was reported at cost ₹ 15,000 in the 20X2-20X3 financial statements when its selling price less costs
to complete and sell was estimated at ₹ 18,000. The accounting estimates made in preparing the 31 March
20X3 financial statements were appropriately made using all reliable information that the entity could
reasonably be expected to have been obtained and taken into account in the preparation and presentation of
those financial statements.
Analyse the above situation in accordance with relevant Ind AS.
Solution
Ind AS 8 is applied in selecting and applying accounting policies, and accounting for changes in accounting
policies, changes in accounting estimates and corrections of prior period errors. A change in accounting
estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic
consumption of an asset. This change in accounting estimate is an outcome of the assessment of the
present status of, and expected future benefits and obligations associated with, assets and liabilities.
Changes in accounting estimates result from new information or new developments and, accordingly, are
not corrections of errors. Further, the effect of change in an accounting estimate, shall be recognised
prospectively by including it in profit or loss in:
(a) The period of the change, if the change affects that period only; or
(b) The period of the change and future periods, if the change affects both. Prior period errors are omissions
from, and misstatements in, the entity's financial statements for one or more prior periods arising from a
failure to use, or misuse of, reliable information that: (a) was available when financial statements for those
periods were approved for issue; and
(b) Could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretations of facts, and fraud. On the basis of above provisions, the given situation
would be dealt as follows: The defect was neither known nor reasonably possible to detect at 31 March
20X3 or before the financial statements were approved for issue, so understatement of the warranty
provision ₹ 1,00,000 and overstatement of inventory ₹ 2,000 (Note 1) in the 31 March 20X3 financial
statements are not a prior period errors. The effects of the latent defect that relate to the entity's financial
position at 31 March 20X3 are changes in accounting estimates. In preparing its financial statements for
31 March 20X3, the entity made the warranty provision and inventory valuation appropriately using all
reliable information that the entity could reasonably be expected to have obtained and had taken into
account the same in the preparation and presentation of those financial statements. Consequently, the
additional costs are expensed in calculating profit or loss for 20X3-20X4.

Working Note:
Inventory is measured at the lower of cost (i.e. ₹ 15,000) and fair value less costs to complete and sell (i.e.
₹ 18,000 originally estimated minus ₹ 5,000 costs to rectify latent defect) = ₹ 13,000.

QUESTION 12: (RTP Nov’23)

([Link].22 – Question Bank)
In its financial statements for the year ended 31st March 20X2, Y Ltd. Reported ` 73,500 revenue (sales), `
53,500 cost of sales, ` 6,000 income tax expense ` 20,000 retained earnings at 1st April, 20X1 and ` 34,000
retained earnings at 31st March, 20X2.
In 20X2-20X3, after the 20X1 – 20X2 financial statements were approved for issue, Y Ltd. Discovered that
some products sold in 20X1 – 20X2 were incorrectly included in inventories at 31st March, 20X2 at their cost
of ` 6,500.
In 20X2-20X3, Y Ltd. Changed its accounting policy for the measurement of investments in associates after
initial recognition from cost model to the fair value model as per Ind AS 109. It acquired its only investment
in an associate for ` 3,000 many years ago. The associate’s equity is not traded on a securities exchange
(that is, a published price quotation is not available). The fair value of the investment was determined
reliably using an appropriate equity valuation model on 31 st March, 20X3 at ` 25,000 (20X1 – 20X2: and `
20,000 and 20X0 – 20X1: ` 18,000).

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At 31st March 20X3 as a result of usage of improved lubricants, Y Ltd. Reassessed the useful life of Machine
A from Years. Machine A is depreciated on the straight-line method to a Nil residual value. It was acquired for
` 6,000 on 1st April, 20X0.

SOLUTION:
Extract of Y Ltd.’s Statement of Profit and Loss
for the year ended 31st March, 20X3
20X2- Referen 20X1- Referen
20X3 ce to 20X2 ce to
W.N. Restated W.N.

` `
Revenue 1,04,000 73,500
Cost of sales (20X1-
20X2 previously ` (79,100) 1 (60,000) 4
53,500)
Gross profit 24,900 13,500
Other income — change
in the measurement
policy
i.e. the value of
investment in associate 5,000 2 2,000 5
at FVTPL
Profit before tax 29,900 15,500
Income tax expense (8,970) 3 (4,650) 6
Profit for the year 20,930 10,850

Extract of Y Ltd.’s Statement of Changes in Equity (Retained Earnings)

for the year ended 31st March, 20X3

20X2- Referen 20X1- Referen

20X3 ce to 20X2 ce to
W.N. Restated W.N.

` `

Retained earnings, as
restated, at the
beginning of the year

- as previously 34,000 20,000

stated
- effect of the -
correction of a (4,550) 7
prior period error

- effect of a change 12
in accounting 11,900 13 10,500
policy
41,350 30,500
Profit for the year 20,930 10,850
Retained earnings at the
end of the year
62,280 41,350

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Y Ltd.
Extract of Notes to the Financial Statements for the year ended 31st March, 20X3
Note X : Change in Accounting Estimates
Due to usage of improved lubricants the estimated useful life of the machine used for production was
increased from four years to seven years. The effect of the change in the useful life of the machine is to
reduce the depreciation allocation by ` 900 in 20X2-20X3 and 20X3-20X4. The after-tax effect is an increase
in profit for the year of ` 630 for each of the two years.
Depreciation expense in 20X4-20X5 to 20X6-20X7 is increased by ` 600 because of revision in the useful
life of machinery, as under the initial estimate, the asset would have been fully depreciated at the end of
20X3-20X4. The after-tax effect for these three years is a decrease in profit for the year by ` 420 per year.

Note Y : Correction of Prior Period Error

In 20X2-20X3 the entity identified that ` 6,500 products that had been sold in 20X1-20X2 were included
erroneously in inventory at 31st March, 20X2. The financial statements of 20X1-20X2 have been restated
to correct this error. The effect of the restatement is ` 6,500 increase in the cost of sales and ` 4,550 decrease
in profit for the year ended 31st March, 20X2 after decreasing income tax expense by ` 1,950. This resulted
in ` 4,550 (decrease) restatement of retained earnings at 31st March, 20X2.

Note Z : Change in Accounting Policy

In 20X2-20X3 the entity changed its accounting policy for the measurement of investments in associates
from cost model to fair value model as per Ind AS 109. Management judged that this policy provides reliable
and more relevant information because dividend income and changes in fair value are inextricably linked as
integral components of the financial performance of an investment in an associate and measurement at fair
value is necessary if that financial performance is to be reported in a more meaningful way. This change in
accounting policy has been accounted for retrospectively. The comparative information has been restated.
A new line item, ‘Other income — change in the fair value of investment in associate’, has been added in the
Statement of Profit and Loss and Retained Earnings. The effect of the restatement has been to add income
of ` 2,000 as a result of the increase in value of the associate during the year ended 31st March, 20X2 which
resulted in `1,400 increase in profit for the year (after including a resulting increase in income tax expense
of ` 600). This, together with ` 10,500 (increase) restatement of retained earnings at 31st March, 20X1,
resulted in a ` 11,900 increase in retained earnings at 31st March, 20X2. Furthermore, profit for the year
ended 31st March, 20X3 was ` 3,500 higher (after deducting ` 1,500 tax effect) as a result of recording a
further ` 5,000 (W.N.2) increase in the fair value of the investment in an associate.

Working Notes:
1. ` 86,500 (given) minus ` 6,500 correction of error (now recognised as an expense in 20X1-20X2)
minus ` 900 (W.N.9) effect of the change in accounting estimate.
2. ` 25,000 fair value (20X2-20X3) minus ` 20,000 fair value (20X1-20X2) = ` 5,000 (the effect of
applying the new accounting policy (fair value model) in 20X2-20X3).
3. ` 5,250 + ` 1,950 (W.N.8) + 30% (` 900 (W.N.9) reduction in depreciation resulting from the change
in accounting estimate) + 30% (` 5,000 increase in the fair value of investment property — change in
accounting policy) = ` 8,970.
4. ` 53,500 as previously stated + ` 6,500 (products sold and incorrectly included in closing inventory
in 20X1-20X2) = ` 60,000 (that is, the prior period error is corrected retrospectively by restating the
comparative amounts).
5. ` 20,000 fair value (20X1-20X2) minus ` 18,000 fair value (20X0-20X1) = ` 2,000 (the effect in 20X1-
20X2 of the change in accounting policy for investments in associates from the cost model to the fair
value model).
6. ` 6,000 as previously stated minus ` 1,950 (W.N.8) correction of prior period error + 30% (` 2,000
change in accounting policy) = ` 4,650.
7. ` 6,500 (products sold and incorrectly included in inventory in 20X1 -20X2) – ` 1,950 (W.N.8) (tax
overstated in 20X1-20X2) = ` 4,550.
8. ` 6,500 (products sold and incorrectly included in inventory in 20X1 -20X2) x 30% (income tax rate)
= ` 1,950.

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Must Do Questions by Jai Chawla Sir CA Final FR

9. ` 1,500 depreciation (using old estimate, that is, ` 6,000 cost ÷ 4 years) minus ` 600 (W.N.10) (using
new estimate of useful life) = ` 900.
10. ` 3,000 (W.N.11) carrying amount ÷ 5 years remaining useful life = ` 600 depreciation per year.
11. [` 6,000 cost minus (` 1,500 depreciation x 2 years)] = ` 3,000 carrying amount at 31st March,
20X2.
12. (` 18,000 fair value of investment in associates at 31 st March, 20X1 minus ` 3,000 carrying amount
based on the cost model at the same date) x 0.7 (to reflect 30% income tax rate) = ` 10,500 (effect of
a change in accounting policy (from cost model to fair value model)).
13. ` 10,500 (W.N.12) + [` 2,000 (W.N.5) x 0.7 (to reflect 30% income tax rate)] = ` 11,900.

Also Scan following QRs:

FREE FR CONCEPT BOOK (NEW VERSION)

FR MISSION SAMBHAV – REVISION LECTURES (YOUTUBE PLAYLIST)

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JOIN WHATSAPP CHANNLE FOR MORE UPDATES

JOIN TELEGRAM CHANNEL FOR MORE UPDATES

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TOPIC - 5
IND AS 10 - EVENTS AFTER THE REPORTING PERIOD
QUESTION 13: (Nov19 EXAMS) (Multiple Cases)
([Link].221 – Question Bank)
Discuss with reasons whether these events are in nature of adjusting or non-adjusting and the treatment
needed in light of accounting standard Ind AS 10.
(i) Moon Ltd. won an arbitration award on 25th April, 2019 for Rs. 1 crore. From the arbitration proceeding,
it was evident that the Company is most likely to win the arbitration award. The directors approved the
financial statements for the year ending 31.03.2019 on 1st May, 2019. The management did not consider
the effect of the above transaction in Financial Year 2018-2019, as it was favourable to the Company and
the award came after the end of the financial year.
(ii) Zoom Ltd. has a trading business of Mobile telephones. The Company has purchased 1000 mobiles phones
at Rs 5,000 each on 15th March, 2019. The manufacturers of the phone had announced the release of the
new version on 1stMarch, 2019 but had not announced the price. Zoom Ltd. has valued inventory at cost
of Rs 5,000 each at the year ending 31st March, 2019.
Due to the arrival of a new advanced version of Mobile Phone on 8th April, 2019, the selling prices of
the mobile stocks remaining with the Company were dropped at Rs. 4,000 each.
The financial statements of the company valued mobile phones @ Rs. 5,000 each and not at the value @
Rs 4,000 less expenses on sales, as the price reduction in selling price was affected after 31.03.2019.
(iii) There was an old due from a debtor amounting to Rs. 15 lakh against whom proceedings was instituted
prior to the financial year ending 31st March, 2019. The debtor was declared insolvent on 15th April,
2019.
(iv) Assume that subsequent to the year end and before the financial statements are approved, Company’s
management announces that it will restructure the operation of the company. Management plans to
make significant redundancies and to close a few divisions of the company's business; however, there is
no formal plan yet. Should management recognise a provision in the books, if the company decides
subsequent to the end of the accounting year to restructure its operations?

SOLUTION
As per Ind AS 10, the treatment of stated issues would be as under:
(i) Adjusting event: It is an adjusting event as it is the settlement after the reporting period of a court
case that confirms that the entity had a present obligation at the end of the reporting period. Even
though winning of award is favorable to the company, it should be accounted in its books as receivable
since it is an adjusting event.

(ii) Adjusting event: The sale of inventories after the reporting period may give evidence about their net
realizable value at the end of the reporting period; hence it is an adjusting event as per Ind AS 10.
Zoom Limited should value its inventory at Rs. 40,00,000. Hence, appropriate provision must be made
for Rs. 15 lakh.

(iii) Adjusting event: As per Ind AS 10, the receipt of information after the reporting period indicating that
an asset was impaired at the end of the reporting period, or that the amount of a previously recognised
impairment loss for that asset needs to be adjusted.
The bankruptcy of a customer that occurs after the reporting period usually confirms that the
customer was credit-impaired at the end of the reporting period.

(iv) Non – adjusting event:

Announcing or commencing the implementation of a major restructuring after the reporting period is
a non-adjusting event as per Ind AS 10. Though this is a non- adjusting event that occurred after the
reporting period, it would result in disclosure of the event in the financial statements, if restructuring
is material.
This would not require provision since as per Ind AS 37, decision to restructure was not taken before
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Must Do Questions by Jai Chawla Sir CA Final FR

or on the reporting date. Hence, it does not give rise to a constructive obligation at the end of the
reporting period to create a provision.

QUESTION 14: (January21 EXAMS) (Demage of Goods due to Fault)

([Link].208 – Question Bank)
H Ltd. constructed a warehouse at a cost of Rs. 10 lakhs in 2015. It first became available for use by H Ltd.
on 1st January 2016. On 29th January 2020, H Ltd. discovered that its warehouse was damaged. During
early February 2020, an investigation revealed that the damage was due to a structural fault in the
construction of the warehouse. The fault became apparent when the warehouse building leaked
severely after heavy rainfall in the week ended 27th January 2020. The discovery of the fault is an
indication of impairment. So, H Ltd. was required to estimate the recoverable amount of its warehouse at 31st
December 2019. This estimate was Rs. 6,00,000. Furthermore, H Ltd. reassessed the useful life of its
warehouse at 20 years from the date that it was ready for use. Before discovering the fault, H Ltd. had
depreciated the warehouse on the straight-line method to a nil residual value over its estimated 30-year useful
life.
Seepage of rainwater through the crack in the warehouse caused damage to inventory worth about Rs.
1,00,000 (cost price) and became un-saleable. The entire damaged inventory was on hand as at 31st
December, 2019. H Ltd. has not insured against any of the losses.
It accounts for all its property, plant and equipment under the cost model. H Ltd.’s annual financial statements
for the year ended 31st December, 2019 were approved for issue by the Board of Directors on 28th February,
2020.
You are required to:
(i) Prepare accounting entries to record the effects of the events after the end of the reporting period in the
accounting records of H Ltd. for the year ended 31st December, 2019. Kindly ignore tax impact;
(ii) Discuss disclosure requirement in above case as per relevant Ind AS; and
Will your answer be different if there was no structural fault and damage to the warehouse had been
caused by an event that occurred after 31 st December, 2019?
SOLUTION
i) Journal Entries on 31st December 2019
Rs. Rs.
Depreciation expense A/c (W.N.1) Dr. 19,608
To Warehouse or Accumulated depreciation A/c 19,608
(Being additional depreciation expense recognised for
the year ended 31st December 2019 arising from the
reassessment of the useful life of the warehouse)
Impairment loss A/c (W.N.2) Dr. 2,47,059
To Warehouse or Accumulated depreciation A/c 2,47,059
(Being impairment loss recognised due to discovery of
structural fault in the construction of warehouse at 31st
December 2019)
ii)
a) The damage to the warehouse is an adjusting event (occurred after the end of the year 2019) for the
reporting period 2019, since it provides evidence that the structural fault existed at the end of the
reporting period. It is an adjusting event, in spite of the fact that fault has been discovered after the
reporting date.

The effects of the damage to the warehouse are recognised in the year 2019 reporting period. Prior
periods will not be adjusted because those financial statements were prepared in good faith (e.g.
regarding estimate of useful life, assessment of impairment indicators etc.) and had not affected the
financials of prior years.

b) Damage of inventory due to seepage of rainwater Rs. 1,00,000 occurred during the year 2020. It is a
non-adjusting event after the end of the 2019 reporting period since the inventory was in good condition
at 31st December 2019. Hence, no accounting has been done for it in the year 2019.
H Ltd. must disclose the nature of the event (i.e. rain-damage to inventories) and an estimate of the

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Must Do Questions by Jai Chawla Sir CA Final FR

financial effect (i.e. Rs. 1,00,000 loss) in the notes to its 31st December 2019 annual financial
statements.

iii) If the damage to the warehouse had been caused by an event that occurred after 31st December 2019
and was not due to structural fault, then it would be considered as a non-adjusting event after the end
of the reporting period 2019 as the warehouse would have been in a good condition at 31st December
2019.

Working Notes:
1. Calculation of additional depreciation to be charged in the year 2019
Original depreciation as per SLM already charged during the year 2019
= Rs. 10,00,000/ 30 years = Rs. 33,333.
Carrying value at the end of 2018 = 10,00,000 – (Rs. 33,333 x 3 years)
= Rs. 9,00,000 Revised depreciation = 9,00,000 / 17 years = Rs. 52,941
Additional depreciation to be recognised in the books in the year 2019
= Rs. 52,941 – Rs. 33,333 = Rs. 19,608

2. Calculation of impairment loss in the year 2019

Carrying value after charging depreciation for the year 2019
= Rs. 9,00,000 – Rs. 52,941 = Rs. 8,47,059
Recoverable value of the warehouse = Rs. 6,00,000
Impairment loss = Carrying value - Recoverable value = Rs. 8,47,059 - Rs. 6,00,000 = Rs.
2,47,059

QUESTION 15: (May 23 EXAMS) (Multiple Cases)

([Link].222: Question Bank)
Discuss the following situations as per Ind AS 10:
i. The financial statements of a Company for the year 2021-2022 are approved by the management and
were sent on 5th June, 2022 for review and approval to its supervisory board i.e., Board of Directors.
The supervisory board approves the financial statements on 26th June, 2022. The financial statements
are then made available to shareholders on 4th July, 2022. The financial statements are approved by
shareholders in their annual general meeting on 18th August, 2022 and then filed with Ministry of
Corporate Affairs (MCA) on 19th August, 2022. Determine & discuss the date on which financial
statements were approved.
ii. A Company is in litigation with Income Tax Department with respect to allowability of certain
exemptions for financial year 2018-2019. No provision for tax has been made for disallowances of
exemptions as the Company was under bonafide belief based on a legal opinion that it will succeed in
litigation. On 21st April, 2023, the Hon'ble Supreme Court rejected the Company's claim. The Order is
received on 30th April, 2023. The financial statements for the financial year 2022-2023 of the Company
are yet to be approved. The earlier year’s financial statements stands approved. Advise in financial
statements of which financial year the impact of the Order of the Hon'ble Supreme Court
should be recognized.
iii. Z Limited while preparing its financial statements on 31st March, 2023 made a provision for doubtful
debts @ 6% on accounts receivables. In the last week of January, 2023, a debtor for ₹ 3 lakhs had
suffered heavy loss due to fire; the loss was not covered by any insurance policy. Z Limited, considering
the event of fire made a provision @ 60% of the amount receivables from that debtor apart from the
general provision @ 6% on remaining debtors. The same debtor was declared insolvent on 10th April,
2023. The financial statements have not yet been approved. You are required to suggest whether the
company should provide for the full loss arising out of insolvency of the debtor in the financial
statements for the year ended 31st March, 2023.
iv. D Limited acquired equity shares of another company on 1st March, 2023 at a cost of ₹ 28 lakhs. The
fair market value of these shares on 31st March, 2023 was ₹ 35 lakhs and the company measured it
at ₹ 35 lakhs (assume that it is classified as FVTOCI as per Ind AS 109 and change in fair value is
transferred to 'fair value fluctuation reserve'). Due to market conditions subsequent to the reporting date,
the value of investments drastically came down to ₹ 20 lakhs. The financial statements have not yet
been approved. You are required to suggest whether D Limited should value the investments at
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Must Do Questions by Jai Chawla Sir CA Final FR

₹ 35 lakhs or ₹ 20 lakhs as on 31st March, 2023.

Tanmay Limited was in negotiation with Varun Limited from 1st December, 2022 to acquire land for ₹ 5.00
crores. The negotiations were concluded in the first week of April 2023. The transaction was completed by last
week of April, 2023. In which financial year, the purchase of land should be recognized?
SOLUTION
i. As per Ind AS 10, in the case of a company, the financial statements will be treated as approved
when board of directors approves the same. Hence in the given case, the financial statements are
approved for issue on 26th June, 2022 (date of approval by the Board of Directors for issue of
financial statements to the shareholders).
ii. An event after the reporting period is an adjusting event if it provides evidence of a condition existing
at the end of the reporting period. Court order received after the reporting period (but before the
financial statements are approved) provides evidence of the liability existing at the end of the
reporting period. Therefore, the event will be considered as an adjusting event and, accordingly,
the amount will be adjusted in financial statements for the financial year 2022-2023.
iii. In the instant case, the fire took place in January, 2023 (i.e. before the end of the reporting period).
Therefore, the condition existed at the end of the reporting date though the debtor is declared
insolvent after the reporting period. Accordingly, full provision for bad debt amounting to ₹ 3
lakhs should be made to cover the loss arising due to the bankruptcy of the debtor in the
financial statements for the year ended 31st March, 2023.
iv. A decline in fair value of investments between the end of the reporting period and the date when the
financial statements are approved for issue is a non-adjusting event. The decline in fair value does
not normally relate to the condition of the investments at the end of the reporting period but reflects
circumstances that have arisen subsequently. Therefore, D Limited should value the investments
at ₹ 35 lakhs as on 31st March, 2023.
v. As per Ind AS 10, an entity should adjust the financial statements for the events that occurred after
the reporting period, but before the financial statements are approved for issue, if those events
provide evidence of conditions that existed at the end of the reporting period.
In this case, negotiations continued with Varun Limited to acquire land from 1st December, 2022
till first week of April, 2023. Since on the reporting date, the condition was only on proposal state
and transaction was completed on 1 st week of April 2023, the event will be considered as a non-
adjusting event as per Ind AS 10. Purchase of land should be recognized in the financial year 2023-
2024.
However, the same may be disclosed in the Notes to Accounts for due information to the users of the
financial statements.

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TOPIC - 6
INDAS 12 – INCOME TAXES

QUESTION 16: (MTP Nov23)

([Link].204 - Question Bank)
A Ltd prepares financial statements to 31 March each year. The rate of income tax applicable to A Ltd is 20%.
The following information relates to transactions, assets and liabilities of A Ltd during the year ended 31 March
20X2:
i) A Ltd has a 40% shareholding in L Ltd. A Ltd purchased this shareholding for ₹ 45 Cr. The shareholding
gives A Ltd significant influence over L Ltd but not control and therefore A Ltd. accounts for its interest in L
Ltd using the equity method. The equity method carrying value of A Ltd’s investment in L Ltd was ₹ 70 Cr
on 31 March 20X1 and ₹ 75 Cr on 31 March 20X2. In the tax jurisdiction in which A Ltd operates, profits
recognised under the equity method are taxed if and when they are distributed as a dividend or the relevant
investment is disposed of.
ii) A Ltd. measures its head office building using the revaluation model. The building is revalued every year
on 31 March. On 31 March 20X1, carrying value of the building (after revaluation) was ₹ 40 Cr and its tax
base was ₹ 22 Cr. During the year ended 31 March 20X2, A Ltd charged depreciation in its statement of
profit or loss of ₹ 2 Cr and claimed a tax deduction for tax depreciation of ₹ 1.25 Cr. On 31 March 20X2, the
building was revalued to ₹ 45 Cr. In the tax jurisdiction in which A Ltd operates, revaluation of property,
plant and equipment does not affect taxable income at the time of revaluation.
Basis the above information, you are required to compute:
a) The deferred tax liability of A Ltd at 31 March 20X2
b) The charge or credit to both profit or loss and other comprehensive income relating to deferred tax for the
year ended 31 March 20X2
SOLUTION:
A) Deferred Tax Liability as at 31st March 20X2
Investment in L Ltd:
Carrying Amount = ₹ 75 Cr
Tax base = ₹ 45 Cr (Purchase cost)
Temporary Difference = ₹ 30 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as a taxable
temporary difference. Using the tax rate of 20%, a deferred tax liability of ₹ 6 Cr is recognized:
Head office building
Carrying Amount = ₹ 45 Cr (Revalued amount on 31st of March 20X2)
Tax base = ₹ 20.75 Cr (22 Cr – 1.25 Cr)
Temporary Difference = ₹ 24.25 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as a taxable
temporary difference. Using the tax rate of 20%, a deferred tax liability of ₹ 4.85 Cr is created.
Total Deferred Tax Liability ₹ 6 Cr + ₹ 4.85 Cr = ₹ 10.85 Cr

B) Charge to Statement of Profit or Loss for the year ended 31st March 20X2: Investment in L Ltd.
Particulars Carrying Tax Base Temporary
amount Difference
Opening Balance (1st April 20X1) ₹ 70 Cr ₹ 45 Cr ₹ 25Cr
Closing Balance (31st March 20X2) ₹ 75 Cr ₹ 45 Cr ₹ 30 Cr
Net Change ₹ 5 Cr
Increase in Deferred Tax Liability (20% tax rate) ₹ 1 Cr
Considering the increase in the value of investment arising through Statement of Profit or Loss, the
accounting for the increase in deferred tax liability is made as under:
Tax expense (Profit or Loss Statement) Dr ₹ 1 Cr
To Deferred Tax Liability ₹ 1 Cr
(Being increase in deferred tax liability recognized)

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Head Office Building:

The deferred tax liability at 31 March 20X1 is ₹ 3.6 Cr (20% x {₹ 40 Cr – ₹ 22 Cr}). At 31 March 20X2, prior
to revaluation, the carrying amount of the property is ₹ 38 Cr and its tax base is ₹ 20.75 Cr (₹ 22 Cr – ₹
1.25 Cr). The deferred tax liability at this point is ₹ 3.45 Cr (20% x {₹ 38 Cr – ₹ 20.75 Cr}).
The reduction in this liability is ₹ 0.15 Cr (₹ 3.6 Cr – ₹ 3.45 Cr). This would be credited to income tax
expense in arriving at profit or loss.
Post revaluation, the carrying value of the building becomes ₹ 45 Cr and the tax base stays the same.
Therefore, the new deferred tax liability is ₹ 4.85 Cr (20% x (₹ 45 Cr – ₹ 20.75 Cr)). The increase in the
deferred tax liability of ₹ 1.4 Cr (₹ 4.85 Cr – ₹ 3.45 Cr) is charged to other comprehensive income.

QUESTION 17: (Similar to RTP Nov18 May19, Nov20 EXAMS, MTP May’24)
([Link].205 - Question Bank)
X Ltd. prepares consolidated financial statements to 31st March each year. During the year ended 31st March
2018, the following events affected the tax position of the group:
i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of ₹ 30,00,000. Y Ltd.
is unable to utilise this loss against previous tax liabilities. Income-tax Act does not allow Y Ltd. to transfer
the tax loss to other group companies. However, it allows Y Ltd. to carry the loss forward and utilise it
against company’s future taxable profits. The directors of X Ltd. do not consider that Y Ltd. will make
taxable profits in the foreseeable future.
ii) Just before 31st March, 2018, X Ltd. committed itself to closing a division after the year end, making a
number of employees redundant. Therefore, X Ltd. recognised a provision for closure costs of ₹ 20,00,000
in its statement of financial position as at 31st March, 2018. Income-tax Act allows tax deductions for
closure costs only when the closure actually takes place. In the year ended 31st March 2019, X Ltd. expects
to make taxable profits which are well in excess of ₹ 20,00,000. On 31st March, 2018, X Ltd. had taxable
temporary differences from other sources which were greater than ₹ 20,00,000.
iii)During the year ended 31st March, 2017, X Ltd. capitalised development costs which satisfied the criteria
in paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount capitalised was ₹ 16,00,000. The
development project began to generate economic benefits for X Ltd. from 1st January, 2018. The directors
of X Ltd. estimated that the project would generate economic benefits for five years from that date. The
development expenditure was fully deductible against taxable profits for the year ended 31st March, 2018.
iv) On 1st April, 2017, X Ltd. borrowed ₹ 1,00,00,000. The cost to X Ltd. of arranging the borrowing was ₹
2,00,000 and this cost qualified for a tax deduction on 1st April, 2017. The loan was for a three-year period.
No interest was payable on the loan but the amount repayable on 31st March, 2020 will be ₹ 1,30,43,800.
This equates to an effective annual interest rate of 10%. As per the Income-tax Act, a further tax deduction
of ₹ 30,43,800 will be claimable when the loan is repaid on 31st March, 2020.
Explain and show how each of these events would affect the deferred tax assets / liabilities in the
consolidated balance sheet of X Ltd. group at 31st March, 2018 as per Ind AS. Assume the rate of corporate
income tax is 20%.
SOLUTION:
i) The tax loss creates a potential deferred tax asset for the group since its carrying value is nil and its tax
base is ₹ 30,00,000.
However, no deferred tax asset can be recognised because there is no prospect of being able to reduce
tax liabilities in the foreseeable future as no taxable profits are anticipated.
ii) The provision creates a potential deferred tax asset for the group since it’s carrying value is ₹ 20,00,000
and its tax base is nil.
This deferred tax asset can be recognised because X Ltd. is expected to generate taxable profits in excess
of ₹ 20,00,000 in the year to 31st March, 2019.
The amount of the deferred tax asset will be ₹ 4,00,000 (₹ 20,00,000 x 20%).
This asset will be presented as a deduction from the deferred tax liabilities caused by the (larger) taxable
temporary differences.
iii)The development costs have a carrying value of ₹ 15,20,000 (₹ 16,00,000 – (₹ 16,00,000 x 1/5 x 3/12)).
The tax base of the development costs is nil since the relevant tax deduction has already been claimed.
The deferred tax liability will be ₹ 3,04,000 (₹ 15,20,000 x 20%). All deferred tax liabilities are shown
as non-current.

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iv) The carrying value of the loan at 31st March, 2018 is ₹ 1,07,80,000 (₹ 1,00,00,000 – ₹ 2,00,000 + (₹
98,00,000 x 10%)).
The tax base of the loan is ₹ 1,00,00,000.
This creates a deductible temporary difference of ₹ 7,80,000 (₹ 1,07,80,000 – ₹ 1,00,00,000) and a
potential deferred tax asset of ₹ 1,56,000 (₹ 7,80,000 x 20%). Due to the availability of taxable profits
next year (see part (ii) above), this asset can be recognised as a deduction from deferred tax liabilities.

QUESTION 18: (Similar to MTP Nov22)

([Link].206 - Question Bank)
K Ltd prepares consolidated financial statements to 31st March each year. During the year ended 31st March
20X2, K Ltd entered into the following transactions:
a) On 1st April 20X1, K Ltd purchased an equity investment for ₹ 2,00,000. The investment was designated
as fair value through other comprehensive income. On 31st March 20X2, the fair value of the investment
was ₹ 2,40,000. In the tax jurisdiction in which K Ltd operates, unrealised gains and losses arising on the
revaluation of investments of this nature are not taxable unless the investment is sold. K Ltd has no intention
of selling the investment in the foreseeable future.
b) On 1st August 20X1, K Ltd sold products to A Ltd, a wholly owned subsidiary operating in the same tax
jurisdiction as K Ltd, for ₹ 80,000. The goods had cost to K Ltd for ₹ 64,000. By 31st March 20X2, A Ltd
had sold 40% of these goods, selling the remaining during next year.
c) On 31st October 20X1, K Ltd received ₹ 2,00,000 from a customer. This payment was in respect of services
to be provided by K Ltd from 1st November 20X1 to 31st July 20X2. K Ltd recognised revenue of ₹ 1,20,000
in respect of this transaction in the year ended 31st March 20X2 and will recognise the remainder in the
year ended 31st March 20X3. Under the tax jurisdiction in which K Ltd operates, ₹ 2,00,000 received on
31st October 20X1 was included in the taxable profits of K Ltd for the year ended 31st March 20X2.
Explain and show how the tax consequences (current and deferred) of the three transactions would be
reported in its statement of profit or loss and other comprehensive income for the year ended 31st March
20X2. Assume tax rate to be 25%.

SOLUTION:
a) Because the unrealised gain on revaluation of the equity investment is not taxable until sold, there are
no current tax consequences. The tax base of the investment is ₹ 2,00,000. The revaluation creates a
taxable temporary difference of ₹ 40,000 (₹ 2,40,000 – ₹ 2,00,000).
This creates a deferred tax liability of ₹ 10,000 (₹ 40,000 x 25%). The liability would be non-current.
The fact that there is no intention to dispose of the investment does not affect the accounting treatment.
Because the unrealised gain is reported in other comprehensive income, the related deferred tax expense
is also reported in other comprehensive income.
b) When K Ltd sold the products to A Ltd, K Ltd would have generated a taxable profit of ₹ 16,000 (₹
80,000 – ₹ 64,000). This would have created a current tax liability for K Ltd and the group of ₹ 4,000 (₹
16,000 x 25%). This liability would be shown as a current liability and charged as an expense in arriving
at profit or loss for the period. In the consolidated financial statements the carrying value of the unsold
inventory would be ₹ 38,400 (₹ 64,000 x 60%). The tax base of the unsold inventory would be ₹ 48,000
(₹ 80,000 x 60%). In the consolidated financial statements there would be a deductible temporary
difference of ₹ 9,600 (₹ 38,400 – ₹ 48,000) and a potential deferred tax asset of ₹ 2,400 (₹ 9,600 x 25%).
This would be recognised as a deferred tax asset since A Ltd is expected to generate sufficient taxable
profits against which to utilise the deductible temporary difference. The resulting credit would reduce
consolidated deferred tax expense in arriving at profit or loss.
c) The receipt of revenue in advance on 1st October 20X1 would create a current tax liability of ₹ 50,000
(₹ 200,000 x 25%) as at 31st March 20X2. The carrying value of the revenue received in advance at
31st March 20X2 is ₹ 80,000 (₹ 200,000 – ₹ 120,000). Its tax base is nil. The deductible temporary
difference of ₹ 80,000 would create a deferred tax asset of ₹ 20,000 (₹ 80,000 x 25%). The asset can be
recognised because K Ltd has sufficient taxable profits against which to utilise the deductible temporary
difference.

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QUESTION 19: (Similar to RTP Nov20)

([Link].208 - Question Bank)
On 1 January 2020, entity H acquired 100% share capital of entity S for Rs.15,00,000. The book values and
the fair values of the identifiable assets and liabilities of entity S at the date of acquisition are set out below,
together with their tax bases in entity S’s tax jurisdictions. Any goodwill arising on the acquisition is not
deductible for tax purposes. The tax rates in entity H’s and entity S’s jurisdictions are 30% and 40%
respectively.
Acquisitions Book values Tax base Fair values
Rs.’000 Rs.’000 Rs.’000
Land and buildings 600 500 700
Property, plant and equipment 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash equivalents 130 130 130
Accounts payable (160) (160) (160)
Retirement benefit obligations (100) - (100)

You are required to calculate the deferred tax arising on acquisition of Entity S. Also calculate the Goodwill
arising on acquisition.

SOLUTION
Calculation of Net assets acquired (excluding the effect of deferred tax liability):
Net assets acquired Tax base Fair values
Rs.’000 Rs.’000
Land and buildings 500 700
Property, plant and equipment 200 270
Inventory 100 80
Accounts receivable 150 150
Cash and cash equivalents 130 130
Total assets 1,080 1,330
Accounts payable (160) (160)
Retirement benefit obligations - (100)
Net assets before deferred tax liability 920 1,070

Calculation of deferred tax arising on acquisition of entity S and goodwill

Rs.’000 Rs.’000
Fair values of S’s identifiable assets and liabilities 1,070
(excluding deferred tax)
Less: Tax base (920)
Temporary difference arising on acquisition 150
Net deferred tax liability arising on acquisition of 60
entity S (Rs.150,000 @ 40%)
Purchase consideration 1,500
Less: Fair values of entity S’s identifiable assets and 1,070
liabilities (excluding deferred tax)
Deferred tax liability (60) (1,010)
Goodwill arising on acquisition 490

Note: Since, the tax base of the goodwill is nil, taxable temporary difference of Rs. 4,90,000 arises on
goodwill. However, no deferred tax is recognised on the goodwill. The deferred tax on other temporary
differences arising on acquisition is provided at 40% and not 30%, because taxes will be payable or
recoverable in entity S’s tax jurisdictions when the temporary differences will be reversed.

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QUESTION 20: (RTP Nov22) (EXAM Nov22)

([Link].213 - Question Bank)
Following is the summarized statement of profit and loss of EARTH Limited as per Ind AS for
the year ended 31st March 20X1:

Particulars Rs. in Crore

Revenue from operations 1,160.00
Other income 56.00
Total Income (A) 1,216.00
Purchase of stock-in-trade 40.00
Changes in inventories of stock-in-trade 6.00
Employee benefits expense 116.00
Finance costs 130.00
Depreciation and amortization expense 30.00
Other expenses 300.00
Total Expenses (B) 622.00
Profit Before Tax (A-B) 594.00
Current tax 165.40
Deferred tax 1.50
Tax Expenses 166.90
Profit after Tax 427.10

Additional information:
● Corporate income tax rate applicable to EARTH Limited is 30%.
● Other income includes long-term capital gains of Rs. 10 crore which are taxable at the rate of 10%.
● Other expenses include the following items which are not deductible for income tax purposes:
Item Rs. in Crore
Penalties 1.00
Impairment of goodwill 44.00
Corporate Social Responsibility expense 6.00
● Other expenses include research and development (R & D) expenditure of Rs. 8 crore in respect of which
a 200% weighted deduction is available under income tax laws.
● Other income includes dividends of Rs. 4 crore, which is exempt from tax.
● Profit before tax of Rs. 594 crore includes (i) agriculture income of Rs. 55 crore which is exempt from tax;
and (ii) profit of Rs. 60 crore earned in the USA on which EARTH Limited is required to pay tax at the rate
of 20%.
● Depreciation as per income tax laws is Rs. 25.0 crore.
During review of the financial statements of EARTH Limited, the CFO multiplied profit before tax by the income
tax rate and arrived at Rs. 178.2 crore as the tax expense (Rs. 594 crore x 30% = Rs. 178.2 crore). However,
actual income tax expense appearing in the summarized statement of profit and loss is Rs. 166.9 crore.
The CFO has sought your help in reconciling the difference between the two tax expense amounts. Prepare
a reconciliation containing the disclosure as required under the relevant Ind AS.

SOLUTION
Reconciliation of Tax on Accounting Profit and Tax Expense as per P&L
Particulars Amount
Tax on A/c Profit @ 30% 594 × 30% 178.20
Less: 10 × 20% (2)
Long Term Capital Gain × Difference in Tax
Rate
R&D additional 100 % deduction (16- 8) x 30% (2.4)
Dividend exempt 4 x 30% (1.2)
Agriculture Income Exempt 55 x 30% (16.5)
Profit From USA 60 x 10 % (6)
Taxable at 20%

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Add: Tax on Expenses Disallowed Permanently

Disallowed permanently
Penalty/Goodwill/CSR
51 x 30% 15.30
Current Tax 165.40
DTL in relation to depreciation (30-25) x 30% 1.50
Tax Expense 166.90

Rates Reconciliation:
Particulars Amount
Effective Tax Rate 166 .90/594 x 100 28.10%
Differences due to:
(+) Long Term Capital Gain 2/594 x 100 0.34%
(+) R&D Expenses 2.4/594 x 100 0.404%
(+) Dividend Exempt 1.2/594 x 100 0.202%
(+) Agriculture Income 16.5/594 x 100 2.78%
(+) Profit from USA 6/594 x 100 1.01%
(-) Permanent Deductions 15.3/594 x 100 (2.58%)
(-) DTL 1.5/594 x 100 (0.256%)
Applicable Tax Rate 30%

QUESTION 21
([Link].220A - Question Bank)
H Ltd. is a manufacturing company, wanting to calculate its taxable profit or loss for the year
ended 31 March 20X8. The statement of profit and loss and other comprehensive income, the
balance sheet and the notes are given below.
Tax rate for the financial year 20X7-20X8 is 30%, but the new tax rate of 32%, for the year 20X8-20X9 and
beyond, has already been enacted before the year end.
Calculate taxable profit for the financial year 20X7-20X8 and the related current tax expense.
Balance Sheet as of 31 March 20X8

ASSETS
Non-current assets
Property, plant and equipment 4,20,00,000
Product development costs 21,00,000
Investment in subsidiary – S Ltd. 1,54,00,000
Current assets
Trading investments 72,80,000
Trade receivables 2,19,10,000
Inventories 1,06,40,000
Cash and cash equivalents 63,00,000
TOTAL ASSETS 10,56,30,000
EQUITY & LIABILITIES
Equity
Share capital 4,20,00,000
Accumulated profits 2,86,24,330
Revaluation surplus 30,80,000
Non-current liabilities
Deferred income - government grants 14,00,000
Liability for product warranty costs 5,60,000
Deferred tax liability (from 20X6-20X7) 7,75,670
Current liabilities
Trade payables 2,67,40,000
Medical benefits for employees 24,50,000
TOTAL EQUITY & LIABILITIES 10,56,30,000

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Extract of Statement of profit and loss for the year ended 31 March 20X8
Revenue 16,81,40,000
Cost of sales (13,44,00,000)
Gross profit 3,37,40,000
Operating costs (2,68,80,000)
Profit from operations 68,60,000
Finance costs (9,10,000)
Profit before taxation 59,50,000

Notes:
1. Depreciation expense for the year financial year 20X7-20X8 allowable as per the Income Tax Rules is
72,10,000. Depreciation as allowed for the purposes of financial reporting included in operating costs is
59,50,000. Cost of PPE is 5,60,00,000 and H Ltd. deducted expenses of 1,45,60,000 in its tax returns
prior to financial year 20X7-20X8. Further, as of 31 March 20X8, H Ltd. for the first time revalued its
property, plant and equipment to market value of 4,20,00,000 (revaluation surplus = 30,80,000).
2. In 20X4-20X5, H Ltd. incurred product development costs of 35,00,000. These costs were recognized
as an asset and amortized over period of 10 years. For tax purposes, H Ltd. deducted full product
development costs when they were in 20X4-20X5.
3. Trading investments were acquired in the preceding year at a cost of 80,50,000. These investments
are classified as at fair value through profit or loss and thus recognized in their fair value. Fair value
adjustments are not allowable by the tax authorities.
4. Bad debt provision amounts to 45,50,000 and relates to 2 debtors: debtor A – 28,00,000 (receivable
originates in 20X5-20X6 and 100% provision was recognized in the preceding year) and debtor B –
17,50,000 (receivable originates in 20X6-20X7 and 100% provision was recognized in F.Y. 20X7-20X8).
Tax law allows deduction of 20% of provision for debtors overdue for more than 1 year, another 30% for
debtors overdue for more than 2 years and remaining 50% for debtors overdue for more than 3 years.
5. H Ltd. created a provision for inventory obsolescence in accordance with Ind AS 2 requirements. New
provision created in 20X7-20X8 was 3,78,000 (total provision: 6,30,000). Being a general provision,
this provision is not tax deductible.
6. Government grants are not taxable. Full government grant received in 20X7-20X8 is included in the
balance sheet.
7. In 20X7-20X8, H Ltd. increased a liability for product warranty costs by 1,75,000. Product warranty
costs are not tax deductible until the company pays claims. Claims paid in 20X7-20X8 amounted to
2,17,000.
8. During the year, H Ltd. introduced health care benefits for employees. The expenses are allowable for
tax purposes only when benefits are paid but in line with Ind AS 19, recognized in profit or loss when
employees provide service.
9. Penalties towards violation of laws included in operating expenses amount to 63,000. These are not
deductible for tax purposes.
10. Tax law allows to deduct expenses for petrol only up to 1,40,000 per vehicle per year. H Ltd. had 4
vehicles in 20X7-20X8 and its total petrol expenses amounted to 7,21,000.
Note: This illustration is prepared for the purposes of understanding the computation of current tax and is in
no way based on the provisions of the Income Tax Act, 1961. For the purposes of Financial Reporting, the tax
treatments will be given in the question.

Solution:
Calculation of current tax expense
Accounting profit (A) 59,50,000
Add back:
Accounting depreciation 59,50,000
Amortization of product development costs (W.N.1) 3,50,000

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Revaluation of trading investments 7,70,000

Bad debt provisions - 20X7-20X8 17,50,000
Inventory obsolescence provision 3,78,000
Product warranty costs provision - 20X7-20X8 1,75,000
Provision for health care benefit costs 24,50,000
Fines and Penalties disallowed for tax purposes 63,000
Petrol over limit (W.N.3) 1,61,000
Total (B) 120,47,000
Deduct:
Tax depreciation (72,10,000)
Tax allowance for bad debt provisions (W.N.2) (11,90,000)
Product warranty costs provision - claims paid (2,17,000)
Total (C) (86,17,000)
Taxable profit / loss: (A+B-C) 93,80,000
Tax rate is 30%
Current income tax (93,80,000 x 30%) 28,14,000

Journal Entry
Profit or loss - Current income tax expense Dr. 28,14,000
To Credit Current income tax liabilities 28,14,000

Working Notes:
1. Product development costs:
Annual amortization ( 35,00,000/ 10) 3,50,000
2. Bad debt provisions:

Debtor A - 28,00,000 from 20X5-20X6

> 2 years - 30% deductible in 20X7-20X8 8,40,000

Debtor B - 17,50,000 from 20X6-20X7

> 1 year - 20% deductible in 20X7-20X8 3,50,000

Total - tax deductible in 20X7-20X8 11,90,000

3. Petrol expenses
Actual expenses 7,21,000

Tax deductible (4 x 140,000) 5,60,000

Excess 1,61,000

QUESTION 22
([Link].220B - Question Bank)
Based on the balance sheet and notes of H Ltd. from previous example, calculate tax base of its assets and
liabilities as of 31 March 20X8. Note that balance sheet has been adjusted by current tax expense and liability.
Balance Sheet as of 31 March 20X8

ASSETS
Non-current assets
Property, plant and equipment 4,20,00,000

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Product development costs 21,00,000

Investment in subsidiary – S Ltd. 1,54,00,000
Current assets
Trading investments 72,80,000
Trade receivables 2,19,10,000
Inventories 1,06,40,000
Cash and cash equivalents 63,00,000
TOTAL ASSETS 10,56,30,000
EQUITY & LIABILITIES
Equity
Share capital 4,20,00,000
Accumulated profits 2,58,10,330
Revaluation surplus 30,80,000
Non-current liabilities
Deferred income - government grants 14,00,000
Liability for product warranty costs 5,60,000
Deferred tax liability (from 20X6-20X7) 7,75,670
Current liabilities
Trade payables 2,67,40,000
Medical benefits for employees 24,50,000
Current Tax Liability 28,14,000
TOTAL EQUITY & LIABILITIES 10,56,30,000

Remaining information are same as per Illustration 1A.

Solution:
Determination of Tax Base
Item Carrying amount Tax base
Property, plant and equipment 420,00,000 342,30,000
Product development costs 21,00,000 0
Investment in subsidiary 154,00,000 154,00,000
Trading investments 72,80,000 80,50,000
Trade receivables 219,10,000 247,10,000
Inventories 106,40,000 112,70,000
Cash and cash equivalents 63,00,000 63,00,000
Deferred income - government grants -14,00,000 0
Liability for product warranty costs -5,60,000 0
Trade payables -267,40,000 -267,40,000
Health care benefits for employees -24,50,000 0
Working Notes:
1. Property, plant and equipment

Cost 560,00,000
Less: current tax depreciation (72,10,000)

Less: PY tax depreciation (145,60,000)

Tax base 3,42,30,000

2. Trade receivables - bad debt provisions:

I Calculation of cost
Carrying amount 219,10,000

Add back: bad debt provision 45,50,000

Cost 2,64,60,000 A

II Debtor A - 28,00,000 from 20X5-20X6

> 1 year - 20% deducted in 20X6-20X7 5,60,000

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> 2 years - 30% deducted in 20X7-20X8 8,40,000

Already deducted for tax: 14,00,000

III Debtor B - 17,50,000 from 20X6-20X7

> 1 year - 20% deducted in 20X7-20X8 3,50,000

Total deducted for tax purposes 17,50,000 B

Tax base of trade receivables: 2,47,10,000 A-B

QUESTION 23
([Link].220C - Question Bank)
Based on the data from above illustration 1A of H Ltd., calculate temporary differences and deferred tax. Note
from Illustration 1A: Tax rate for 20X7-20X8 is 30%, but the new tax rate of 32% for the year 20X8-20X9 and
beyond has already been enacted before the year end.

Solution:
Calculation of Temporary Differences / Deferred Tax

Item Carrying Tax base Temporary Taxable / DTA / DTL

amount difference deductible
at 32%
Property, plant and equipment 4,20,00,000 3,42,30,000 77,70,000 taxable (24,86,400)

Product development costs 21,00,000 0 21,00,000 taxable (6,72,000)

Investment in subsidiary S Ltd. 1,54,00,000 1,54,00,000 0 0

Trading investments 72,80,000 80,50,000 (7,70,000) deductible 2,46,400

Trade receivables 2,19,10,000 2,47,10,000 (28,00,000) deductible 8,96,000

Inventories 1,06,40,000 1,12,70,000 (6,30,000) deductible 2,01,600

Cash and cash equivalents 63,00,000 63,00,000 0 0

Deferred income - government grants (14,00,000) 0 (14,00,000) excluded 0

Liability for product warranty costs (5,60,000) 0 (5,60,000) deductible 1,79,200

Trade payables (2,67,40,000) (2,67,40,000) 0 0

Medical benefits for employees (24,50,000) 0 (24,50,000) deductible 7,84,000

Deferred tax asset - total 23,07,200

Deferred tax liability - total (31,58,400)

Deferred tax total (8,51,200)

QUESTION 24 (Newly Added in ICAI Study Material)

X Ltd., an Indian company owns a freehold land with carrying value of Rs. 10,00,000 which is not depreciated
for tax purposes but is indexed for inflation. Indexed value and fair value of such land is Rs. 15,00,000 and
Rs. 22,00,000 respectively as of the reporting date. What will be the tax base for such freehold land for
measurement of deferred tax if:
(i) X Ltd. intends to sell it as a part of slump sale of business eventually after using it for business purpose
(ii) X Ltd. intends to sell the land individually and not on a slump sale basis
(iii) X Ltd. has classified such land as investment property and intends to sell it individually and not on a
slump sale basis
(iv) X Ltd. follows a revaluation model for freehold land and intends to sell it individually and not on a slump
sale
As per the applicable tax laws in the jurisdiction, indexation benefit is not available if the freehold land is sold
as a part of slump sale of business, but indexation benefit is available if freehold land is sold individually.
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Answers
Paragraphs 51 and 51A of Ind AS 12, state that the measurement of deferred tax liabilities and deferred tax
assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at
the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
In some jurisdictions, the manner in which an entity recovers (settles) the carrying amount of an asset
(liability) may affect either or both of:
(a) the tax rate applicable when the entity recovers (settles) the carrying amount of the asset (liability);
and
(b) the tax base of the asset (liability).
In such cases, an entity measures deferred tax liabilities and deferred tax assets using the tax rate and the
tax base that are consistent with the expected manner of recovery or settlement.
The expectation of the entity at the end of the reporting period with regard to the manner of recovery or
settlement of its assets and liabilities will require exercise of judgement based on evaluation of facts and
circumstances in each case. It may be relevant to consider that there is substance to management’s
expectation of the entity being able to recover the asset through slump sale or otherwise.
Depending on the facts and circumstances, it is generally assumed that the Company will act in the most
economically advantageous way.
If a non-depreciable asset is measured using the revaluation model, then an entity is required to measure
the DTA / DTL considering the tax consequences of recovering the carrying amount through sale.
Accordingly, based on assumption around supporting facts and circumstances to support management
expectation around recovery or settlement, following will be the tax base for computing the deferred tax
assets/ liability, in the given case:

(i) X Ltd. intends to sell it as slump sale eventually after using it for business purpose
If it is concluded based on evaluation of facts that the freehold land will be sold through slump sale,
then the tax base of the land will be the same as the carrying amount of the land, as indexation benefit
is not available in case of slump sale and hence there will not be any temporary difference.

(ii) X Ltd. intends to sell the land individually and not on a slump sale basis
In the given scenario, the company intends to sell the land individually and not on a slump sale such
that the company would get indexation benefit.
Thus, book base of land, i.e. carrying amount of freehold land in the balance sheet is Rs. 10,00,000.
As per paragraph 51A of Ind AS 12, the tax base (amount that will be deductible for tax purposes
against any taxable economic benefits that will flow to the entity when it recovers the carrying amount
of the asset) is the indexed valued of Rs. 15,00,000 since the company intends to sell the land
individually and not on slump sale and thus get indexation benefit. Deferred tax assets will be set up,
subject to recoverability, on a deductible tax difference of Rs. 5,00,000.

(iii) X Ltd. has classified such land as investment property and intends to sell it individually and
not on a slump sale
Paragraph 56 of Ind AS 40, Investment property, requires that after initial recognition, an entity shall
measure all of its investment properties in accordance with the requirement for cost model as per Ind
AS 16, other than those that meet the criteria to be classified as held for sale in accordance with Ind
AS 105, Non-current Assets Held for Sale and Discontinued Operations. Ind AS 40 does not allow fair
value model. Accordingly, freehold land classified as investment property will be measured at cost.
Thus, book base of land, i.e. carrying amount of freehold land in the balance sheet is Rs. 10,00,000.
The Company intends to sell the land individually and not on a slump sale and thus get indexation
benefit. Hence, as per paragraph 51A of Ind AS 12, the tax base (amount that will be deductible for
tax purposes against any taxable economic benefits that will flow to the entity when it recovers the
carrying amount of the asset) is the indexed valued of Rs. 15,00,000. Accordingly, deferred tax assets
will be set up, subject to recoverability, on deductible tax difference of Rs. 5,00,000.
(iv) X Ltd. follows a revaluation model for freehold land and intends to sell it individually and not on a
slump sale. If X Ltd. follows a revaluation model, carrying amount of freehold land in the balance sheet

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would be Rs. 22,00,000. Thus, book base of land is Rs. 22,00,000.

The Company intends to sell the land individually and not on a slump sale and thus get indexation
benefit. Hence, as per paragraph 51A of Ind AS 12, the tax base (amount that will be deductible for
tax purposes against any taxable economic benefits that will flow to the entity when it recovers the
carrying amount of the asset) is the indexed valued of Rs. 15,00,000. Accordingly, deferred tax liability
will be set up on taxable temporary difference of Rs. 7,00,000.
As per paragraph 39 of Ind AS 16, if an asset’s carrying amount is increased as a result of a
revaluation, the increase shall be recognised in other comprehensive income and accumulated in
equity under the heading of revaluation surplus. Accordingly, the effect of deferred tax liability should
also be recognised in other comprehensive income as per paragraph 57 and 61A of Ind AS 12.

Also Scan following QRs:

FREE FR CONCEPT BOOK (NEW VERSION)

FR MISSION SAMBHAV – REVISION LECTURES (YOUTUBE PLAYLIST)

SUBSCRIBE CA. JAI CHAWLA YOUTUBE CHANNEL

JOIN WHATSAPP CHANNLE FOR MORE UPDATES

JOIN TELEGRAM CHANNEL FOR MORE UPDATES

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TOPIC - 7
INDAS 16 – PROPERTY, PLANT & EQUIPMENT
QUESTION 25: (MTP Nov23)
([Link].104 – Question Bank)
MS Ltd. has acquired a heavy machinery at a cost of Rs. 1,00,00,000 (with no breakdown of the component
parts). The estimated useful life is 10 years. At the end of the sixth year, one of the major components, the
turbine requires replacement, as further maintenance is uneconomical. The remainder of the machine is perfect
and is expected to last for the next four years. The cost of a new turbine is Rs. 45,00,000. Appropriate Discount
Rate is 5% pa
Can the cost of the new turbine be recognised as an asset, and, if so, what treatment should be used?
SOLUTION:
The new turbine will produce economic benefits to MS Ltd., and the cost is measurable. Hence, the item
should be recognised as an asset. The original invoice for the machine did not specify the cost of the
turbine; however, the cost of the replacement Rs. 45,00,000 can be used as an indication (usually by
discounting) of the likely cost, six years previously.
If an appropriate discount rate is 5% per annum, Rs. 45,00,000 discounted back six years amounts to Rs.
33,57,900 [Rs. 45,00,000/(1.05)6], i.e., the approximate cost of turbine before 6 years.
The current carrying amount of the turbine which is required to be replaced of Rs. 13,43,160 would be
derecognised from the books of account, (i.e., Original Cost Rs. 33,57,900 as reduced by accumulated
depreciation for past 6 years Rs. 20,14,740, assuming depreciation is charged on straight-line basis.)

The cost of the new turbine, Rs. 45,00,000 would be added to the cost of machine, resulting in a revision
of carrying amount of machine to Rs. 71,56,840. (i.e., Rs. 40,00,000* – Rs. 13,43,160 + Rs. 45,00,000).

*Original cost of machine Rs. 1,00,00,000 reduced by accumulated depreciation (till the end of 6 years) Rs.
60,00,000.

QUESTION 26 : (SIMILAR TO Nov18 EXAM)

([Link].107 – Question Bank)
On 1 April 20X1, Sun Ltd purchased some Land for Rs.10000 (including legal costs of Rs 1000)
in order to construct a new factory. Construction work commenced on 1 May 20X1. Sun ltd
incurred the following costs in relation with its construction:
– Preparation and levelling of the land – Rs. 300
– Purchase of materials for the construction – Rs. 6080 in total.
– Employment costs of the construction workers – Rs. 200 per month.
– Overhead costs incurred directly on the construction of the factory – Rs. 100 per month.
– Ongoing overhead costs allocated to the construction project using the company’s normal overhead
allocation model – Rs. 50 per month.
– Income received during the temporary use of the factory premises as a car park during the construction
period – Rs. 50.
– Costs of relocating employees to work at the new factory – Rs. 300
– Costs of the opening ceremony on 31st January 20X1 – Rs. 150
The factory was completed on 30 November 20X1 and production began on 1 February 20X2. The overall
useful life of the factory building was estimated at 40 years from the date of completion. However, it is
estimated that the roof will need to be replaced 20 years after the date of completion and that the cost of
replacing the roof at current prices would be 30% of the total cost of the building.
At the end of the 40-year period, Sun Ltd has a legally enforceable obligation to demolish the factory and
restore the site to its original condition. The directors estimate that the cost of demolition in 40 years’ time
(based on prices prevailing at that time) will be Rs 20000. An annual risk adjusted discount rate which is
appropriate to this project is 8%. The present value of Rs 1 payable in 40 years’ time at an annual discount
rate of 8% is Rs. 0.046

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The construction of the factory was partly financed by a loan of Rs. 17500 taken out on 1 April 20X1. The loan
was at an annual rate of interest of 6%. During the period 1 April 20X1 to 31 August 20X1 (when the loan
proceeds had been fully utilised to finance the construction), Sun Ltd received investment income of Rs 100 on
the temporary investment of the proceeds.
Required:
Compute the carrying amount of the factory in the Balance Sheet of Sun Ltd at 31 March 20X2. You should
explain your treatment of all the amounts referred to in this part in your answer.
SOLUTION:
Computation of the cost of the factory
Description Included in Explanation
P.P.E.
Purchase of land 10,000 Both the purchase of the land and the associated legal costs
are direct costs of constructing the factory.
Preparation and leveling 300 A direct cost of constructing the factory
Materials 6,080 A direct cost of constructing the factory
Employment costs of 1,400 A direct cost of constructing the factory for a seven-month
construction workers period
Direct overhead costs 700 A direct cost of constructing the factory for a seven-month
period
Allocated overhead costs Nil Not a direct cost of construction
Income from use as a car Nil Not essential to the construction so recognised directly in
park profit or loss
Relocation costs Nil Not a direct cost of construction
Opening ceremony Nil Not a direct cost of construction
Finance costs 612.50 Capitalise the interest cost incurred in as even month period
(purchase of land would not trigger off capitalisation since land
is not a qualifying asset and it is separate from building.
Construction started from 1st May)
Investment income on (100) offset against the amount capitalized
temporary investment of
the loan proceeds
Demolition cost 920 Where an obligation must recognise as part of the initial cost
recognised as a provision at PV.
Total cost of Land & 19,912.50
Building
Computation of accumulated depreciation
Total depreciable amount 9,912.50 All of the net finance cost of 512.50 (612.50 – 100) has been
allocated to the depreciable amount. Also acceptable to reduce
by allocating a portion to the non- depreciable land element
principle
Depreciation must be in
two parts: Depreciation 49.56 9,912.50x 30% x 1/20 x 4/12
of roof component 57.82 9,912.50x 70% x 1/40 x 4/12
Depreciation of
remainder
Total depreciation 107.38
Computation of 19,805.12 19,912.50 – 107.38
carrying amount

QUESTION 27: (MTP May20)

([Link].112 – Question Bank)
Flywing Airways Ltd is a company which manufactures aircraft parts and engines and sells them to large
multinational companies like Boeing and Airbus Industries.
On 1 April 20X1, the company began the construction of a new production line in its aircraft parts
manufacturing shed.
Costs relating to the production line are as follows:

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Details Amount
Rs.’000
Costs of the basic materials (list price Rs.12.5 million less a 20% trade discount) 10,000
Recoverable goods and services taxes incurred not included in the purchase cost 1,000
Employment costs of the construction staff for the three months (April to June) 1,200
Other overheads directly related to the construction 900
Payments to external advisors relating to the construction 500
Expected dismantling and restoration costs 2,000

Additional Information
The construction staff was engaged in the production line, which took two months to make ready for use and
was brought into use on 31 May 20X1.
The other overheads were incurred in the two months period ended on 31 May 20X1. They included an
abnormal cost of Rs. 3,00,000 caused by a major electrical fault.
The production line is expected to have a useful economic life of eight years. At the end of that time Flywing
Airways Ltd was legally required to dismantle the plant in a specified manner and restore its location to an
acceptable standard. The amount of Rs.2 million mentioned above is the amount that is expected to be incurred
at the end of the useful life of the production line. The appropriate rate to use in any discounting calculations
is 5%. The present value of Re.1 payable in eight years at a discount rate of 5% is approximately Re.0·68.
Four years after being brought into use, the production line will require a major overhaul to ensure that it
generates economic benefits for the second half of its useful life. The estimated cost of the overhaul, at current
prices, is Rs.3 million.
The Company computes its depreciation charge on a monthly basis. No impairment of the plant had occurred
by 31 March 20X2.
Analyze the accounting implications of costs related to production line to be recognized in the balance sheet
and profit and loss for the year ended 31 March, 20X2.
SOLUTION
Statement showing Cost of production line:
Particulars Amount Rs.’000
Purchase cost 10,000
Goods and services tax – recoverable goods and services tax not included -
Employment costs during the period of getting the production line ready 800
for use (1,200 x 2 months / 3 months)
Other overheads – abnormal costs 600
Payment to external advisors – directly attributable cost 500
Dismantling costs – recognized at present value where an obligation 1,360
exists (2,000 x 0.68)
Total 13,260

Carrying value of production line as on 31st March, 20X2:

Particulars Amount Rs. ’000
Cost of Production line 13,260
Less: Depreciation (W.N.1) (1,694)
Net carrying value carried to Balance Sheet 11,566

Provision for dismantling cost:

Particulars Amount Rs. ’000
Non-current liabilities 1,360
Add: Finance cost (WN3) 57
Net book value carried to Balance Sheet 1,417

Extract of Statement of Profit & Loss

Particulars Amount Rs. ’000
Depreciation (W.N.1) 1,694
Finance cost (W.N.2) 57
Amounts carried to Statement of Profit & Loss 1,751

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Extract of Balance Sheet

Particulars Amount Rs. ’000
Assets
Non-current assets
Property, plant and equipment 11,566
Equity and liabilities
Non-current liabilities Other liabilities
Provision for dismantling cost 1417

Working Notes:
1. Calculation of depreciation charge
Particulars Amount Rs. ’000
In accordance with Ind AS 16 the asset is split into two depreciable
components: Out of the total capitalization amount of 13,260,
Depreciation for 3,000 with a useful economic life (UEL) of four years (3,000 x
¼ x 10/12). 625
This is related to a major overhaul to ensure that it generates economic benefits
for the second half of its useful life
For balance amount, depreciation for 10,260 with an useful economic life of 1,069
eight years will be : 10,260 x 1/8 x 10/12
Total (To Statement of Profit & Loss for the year ended 31stMarch 20X2) 1,694

2. Finance costs
Particulars Amount Rs. ’000
Unwinding of discount (Statement of Profit and Loss – 57
finance cost) 1,360 x 5% x 10/12

QUESTION 28:
([Link].203 - Question Bank)
H Limited purchased an item of PPE costing Rs. 100 million which has useful life of 10 years.
The entity has a contractual decommissioning and site restoration obligation, estimated at Rs.
5 million to be incurred at the end of 10th year. The current market based discount rate is 8%.
The company follows SLM method of depreciation. H Limited follows the Cost Model for accounting of PPE.
Determine the carrying value of an item of PPE and decommissioning liability at each year end when
(a) There is no change in the expected decommissioning expenses, expected timing of incurring the
decommissioning expense and / or the discount rate
(b) At the end of Year 4, the entity expects that the estimated cash outflow on account of decommissioning
and site restoration to be incurred at the end of the useful life of the asset will be Rs. 8 million (in place
of Rs. 5 million, estimated in the past).
Determine in case (b), how H Limited need to account for the changes in the decommissioning liability?

SOLUTION
The present value of such decommissioning and site restoration obligation at the end of 10th year is Rs.
2.32 million [being 5 / (1.08)10]. H Limited will recognise the present value of decommissioning liability of
Rs. 2.32 million as an addition to cost of PPE and will also recognize a corresponding decommissioning
liability. Further, the entity will recognise the unwinding of discount as finance charge.

(a) The following table shows the relevant computations, if there is no change in the expected
decommissioning expenses, expected timing of incurring the decommissioning expense and / or the
discount rate:

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(b) ([Link] million)

Year Opening Depreciation Carrying Opening Unwinding Closing
Amount Charge (on Amount Decommissio of Interest Decommis
of PPE SLM) for 10 of PPE ning Liability @ 8% sioning
Years at the Liability
end of
the year
1 102.32 10.23 92.08 2.32 0.19 2.50
2 92.08 10.23 81.85 2.50 0.20 2.70
3 81.85 10.23 71.62 2.70 0.22 2.92
4 71.62 10.23 61.39 2.92 0.23 3.15
5 61.39 10.23 51.16 3.15 0.25 3.40
6 51.16 10.23 40.93 3.40 0.27 3.68
7 40.93 10.23 30.69 3.68 0.29 3.97
8 30.69 10.23 20.46 3.97 0.32 4.29
9 20.46 10.23 10.23 4.29 0.34 4.63
10 10.23 10.23 - 4.63 0.37 5.00
Total 102.32 2.68
(c) The changes to the estimate of expected decommissioning obligation:
o The present value of the decommissioning liability at the end of Year 4 works out to be Rs. 5.04
million [being 8 / (1.08)6].
o As against this, the carrying amount of decommissioning liability at the end of Year 4 is Rs. 3.15
million (as computed above).
o The changes in the decommissioning liability of Rs. 1.89 million (being Rs. 5.04 million less Rs.
3.15 million) shall be added to the cost of the asset in the current period and the related provision for
decommissioning liability is also adjusted.

The journal entry will be:

PPE Dr. Rs. 1.89 million
To Provision for decommissioning liability Rs. 1.89 million

o The following table shows the calculations for years 5 - 10:

Year Opening Depreciation Carrying Opening Unwindin Closing
Amount of Charge Amount Decommissionin g of Decommissioning
PPE SLM – 10 of PPE at g Liability Interest Liability
Years end of @8%
the year
5 63.28 10.55 52.73 5.04 0.40 5.44
6 52.73 10.55 42.19 5.44 0.44 5.88
7 42.19 10.55 31.64 5.88 0.47 6.35
8 31.64 10.55 21.09 6.35 0.51 6.86
9 21.09 10.55 10.55 6.86 0.55 7.41
10 10.55 10.55 - 7.41 0.59 8.00
Tota 63.28 2.96
l

Note that in the above table:

● Opening amount of PPE at the beginning of Year 5 is computed as Rs. 63.28 million (being carrying
amount of Rs. 61.39 million at the end of Year 4 plus increase of Rs. 1.89 million arising due to increase
in the present value of the decommissioning liability at the end of Year 4).
● The revised carrying amount of PPE (at Rs. 63.28 million) at the beginning of Year 5 will be depreciated
over the balance 6 years of the useful life).
● Opening decommissioning liability at the beginning of Year 5 is computed as Rs. 5.04 million (being
carrying amount of Rs. 3.15 million at the end of Year 4 plus increase of Rs. 1.89 million).
Since the entity has adjusted the increase in the decommissioning liability against the carrying amount of
PPE, it needs to evaluate whether the new carrying amount (in this case, Rs. 63.28 million) is recoverable.
If not, it will give rise to impairment loss, to be accounted for under Ind AS 36.

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QUESTION 29: (SIMILAR TO RTP May21)

([Link].503 – Question Bank)
An entity has the following items of property, plant and equipment:
● Property A — a vacant plot of land on which it intends to construct its new administration
headquarters;
● Property B — a plot of land that it operates as a landfill site;
● Property C — a plot of land on which its existing administration headquarters are built;
● Property D — a plot of land on which its direct sales office is built;
● Properties E1–E10 — ten separate retail outlets and the land on which they are built;
● Equipment A — computer systems at its headquarters and direct sales office that are integrated with the
point of sale computer systems in the retail outlets;
● Equipment B — point of sale computer systems in each of its retail outlets;
● Furniture and fittings in its administrative headquarters and its sales office;
● Shop fixtures and fittings in its retail outlets.
How many classes of property, plant and equipment must the entity disclose?
SOLUTION
To answer this question one must make a materiality judgment.
A class of assets is defined as a grouping of assets of a similar nature and use in an entity’s operations.
The nature of land without a building is different to the nature of land with a building.
Consequently, land without a building is a separate class of asset from land and buildings. Furthermore,
the nature and use of land operated as a landfill site is different from vacant land. Hence, the entity should
disclose Property A separately. The entity must apply judgment to determine whether the entity’s retail
outlets are sufficiently different in nature and use from its office buildings, and thus constitute a separate
class of land and buildings.
The computer equipment is integrated across the organisation and would probably be classified as a single
separate class of asset.
Furniture and fittings used for administrative purposes could be sufficiently different to shop fixtures and
fittings in retail outlets to be classified in two separate classes of assets.

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TOPIC - 8
INDAS 19 - EMPLOYEE BENEFITS

QUESTION 30: (MTP Oct18)

([Link].121 - Question Bank)
An employee Roshan has joined a company XYZ Ltd. in the year 2018. The annual emoluments of Roshan
as decided is Rs. 14,90,210. The company also has a policy of giving a lump sum payment of 25% of the
last drawn annual salary of the employee for each completed year of service if the employee retires after
completing minimum 5 years of service. The salary of the Roshan is expected to grow @ 10% per annum.
The company has inducted Roshan in the beginning of the year and it is expected that he will complete the
minimum five-year term before retiring.
What is the amount the company should charge in its Profit and Loss account every year as cost for the
Defined Benefit obligation? Also calculate the current service cost and the interest cost to be charged per
year assuming a discount rate of 8%.
(P.V factor for 8% - 0.735, 0.794, 0.857, 0.926, 1)
SOLUTION
Calculation of Defined Benefit Obligation
Expected last drawn salary = Rs. 14,90,210 x 110% x 110% x 110% x 110% x 110%
= Rs. 24,00,000 (see Note below)

Defined Benefit Obligation (DBO) = Rs. 24,00,000 x 25% x 5 = Rs. 30,00,000

Amount of Rs. 6,00,000 will be charged to Profit and Loss Account of the company every year as cost for
Defined Benefit Obligation.
Calculation of Current Service Cost
Yr Equal apportioned amount of Discounting @ 8% Current service cost
DBO [i.e. Rs. 30,00,000/5 PV factor (Present Value)
years]
A B C d=bxc
1 6,00,000 0.735 (4 Years) 4,41,000
2 6,00,000 0.794 (3 Years) 4,76,400
3 6,00,000 0.857 (2 Years) 5,14,200
4 6,00,000 0.926 (1 Year) 5,55,600
5 6,00,000 1 (0 Year) 6,00,000

Calculation of Interest Cost to be charged per year

Yr Opening Interest cost Current service Closing balance
balance cost
A B c = b x 8% d e=b+c+d
1 0 0 4,41,000 4,41,000
2 4,41,000 35,280 4,76,400 9,52,680
3 9,52,680 76,214 5,14,200 15,43,094
4 15,43,094 1,23,447 5,55,600 22,22,141
5 22,22,141 1,77,859* 6,00,000 30,00,000

*Due to approximations used in calculation, this figure is adjusted accordingly.

Note: Above working seems incorrect, the increment of 10% should be considered from 2 nd Year onwards
till 5th Year i.e. 4 Times and therefore the Amount of Final Salary should be Rs. 21,81,816/-. Accordingly
entire working will be changed.

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QUESTION 31: (SIMILAR TO RTP May21)

([Link].203 - Question Bank)
As on 1st April, 2008 the fair value of plan assets was Rs. 1,00,000 in respect of a pension plan of Zealous
Ltd. On 31ST March, 2009 the plan paid out benefits of Rs. 19,000 and received inward contributions of Rs.
49,000. On 31st March, 2009 the fair value of plan assets was Rs. 1,50,000 and present value of the Defined
benefit obligation was Rs 1,57,920. Actuarial losses on the obligations for the year 2008-09 were Rs.6200.
On 1st April, 2008 the company made the following estimates, based on its market studies, understanding
and prevailing prices.
Interest & dividend income, after tax payable by the fund 9.25 %
Realised & unrealized gains on plan assets (after tax) 2.00 %
Fund administrative costs 1.00 %
Expected Rate of Return 10.25 %
You are required to find the expected and actual returns on Plan assets.
SOLUTION
PLAN ASSET A/C
Date Particulars Amount Date Particulars Amount
1/01 To Opening Balance 100000 31/03 By Benefits Paid 19000
31/03 To Expected Return 10250
31/03 To Bank (Contr.) 49000 31/12 By Closing Balance
31/03 To Actuarial Gain 9750 (Fair Value) 150000
(b/f)
16500 16500
Net Actuarial Gain = 9750 – 6200 = 3550 will be transfer to OCI

BALANCE SHEET (Extract)

EQUITY & LIABILITIES AMT.
Non-Current Liability:
Long Term Provisions:
Net defined benefit Liability (157920 - 150000) 7,920

QUESTION 32
([Link].204 - Question Bank)
The fair value of plan assets of Anupam Ltd. was Rs. 2,00,000 in respect of employee benefit pension plan
as on 1st April, 2009. On 1st April, 2009 the plan paid out benefit of Rs. 25,000 and received inward
contributions of 55,000.
On 31st March, 2010 the fair value of plan assets was Rs. 2,40,560.
On 1st April, 2009 the company made the following estimates, based on its market studies and prevailing
prices:
Interest and dividend income (after tax) payable by fund 10.00 %
Realised gains on plan assets (after tax) 3.00 %
Fund administrative costs (2.00) %
Expected rate of return 11.00 %
Calculate the expected and actual returns on plan assets as on 31st March, 2010, as per INDAS- 19.
SOLUTION
PLAN ASSET A/C
Date Particulars Amount Date Particulars Amount
1/01 To Opening Balance 200000 01/04 By Benefits Paid 25000
01/04 To Bank (Contr.) 55000 31/03 By Actuarial Loss (b/f) 14740
31/03 To Expected Return 25300 By Closing Balance
31/12 (Fair Value) 240560
280300 280300
Actuarial loss of 14740 will be transfer to OCI

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QUESTION 33:
([Link].205 - Question Bank (Old Syllabus)
On 1.1.2008, the fair value of plan assets is Rs.10,000. On 30.6.2008 it paid benefits of Rs.
1,500 and received contributions of Rs. 4,500. On 31.12.2008 fair value of plan assets is
Rs.15,000 and PV of obligation was Rs. 14,972. Actuarial losses on obligation were Rs. 60 on
31.12.2008.
Find the net actuarial gain/losses on 31.12.2008 based on the following estimates:
Interest and dividend income 9.25%
Realised and unrealized gain on plan assets 2.00%
Administration costs 1.00%
(Answer: Act. Gain on PA – 825/-; Net Act Gain – 825 – 60 = 765)
SOLUTION
[Link]. 1 – Calculation of Six Monthly Rate:
{[Square Root of (1 + 0.1025)] – 1 } x 100 = 5%
PLAN ASSET A/C
Date Particulars Amount Date Particulars Amount
1/01 To Opening Balance 10000 30/06 By Benefits Paid 1500
30/06 To Expected Return 500
30/06 To Bank (Contr.) 4500
31/12 To Exp. Return 675 31/12 By Closing Balance 15000
31/12 To Actuarial Gain (b/f) 825 (Fair Value)
16500 16500
Net Actuarial Gain = 825 – 60 = 765 will be transfer to OCI

BALANCE SHEET (Extract)

ASSETS AMT.
Non-Current Asset:
Other Non-Current Asset:
Net defined benefit Asset (15000 – 14972) 28

QUESTION 34: (SIMILAR TO May22 EXAM & MTP Oct20 & RTP May20)
([Link].306 - - Question Bank)
On 1 April 20X1, the fair value of the assets of XYZ Ltd’s defined benefit plan were valued at ₹ 20,40,000 and
the present value of the defined obligation was ₹ 21,25,000. On 31st March,20X2 the plan received
contributions from XYZ Ltd amounting to ₹ 4,25,000 and paid out benefits of ₹ 2,55,000. The current service
cost for the financial year ending 31 March 20X2 is ₹ 5,10,000. An interest rate of 5% is to be applied to the
plan assets and obligations. The fair value of the plans assets at 31 March 20X2 was ₹ 23,80,000, and the
present value of the defined benefit obligation was ₹ 27,20,000. Provide a reconciliation from the opening
balance to the closing balance for Plan assets and Defined benefit obligation. Also show how much amount
should be recognised in the statement of profit and loss, other comprehensive income and balance sheet?
SOLUTION:
Reconciliation of Plan assets and Defined benefit obligation
Particulars Plan Assets Defined benefit
(₹) obligation (₹)
Fair value/present value as at 1st April 20X1 20,40,000 21,25,000
Interest @ 5% 1,02,000 1,06,250
Current service cost 5,10,000
Contributions received 4,25,000 -
Benefits paid (2,55,000) (2,55,000)
Return on gain (assets) (balancing figure) 68,000 -
Actuarial Loss (balancing figure) - 2,33,750
Closing balance as at March 31,20X2 23,80,000 27,20,000

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In the Statement of Profit and loss, the following will be recognised:

₹
Current service cost 5,10,000
Net interest on net defined liability (₹ 1,06,250 – ₹ 1,02,000 4,250

Defined benefit re-measurements recognised in Other Comprehensive Income:

₹
Loss on defined benefit obligation (2,33,750)
Gain on plan assets 68,000
(1,65,750)

In the Balance sheet, the following will be recognised: ₹

Net defined liability (₹ 27,20,000 – ₹ 23,80,000) 3,40,000

QUESTION 35:
([Link].507 – Question Bank)
Acer Ltd. has 350 employees (same as a year ago). The average staff attrition rates observed
during past 10 years represents 6% per annum. Acer Ltd. provides the following benefits to all
its employees:
Paid vacation - 10 days per year regardless of date of hiring. Compensation for paid vacation
is 100% of employee's salary and unused vacation can be carried forward for 1 year. As of 31st March,
20X1, unused vacation carried forward was 3 days per employee, average salary was ₹ 15,000 per day
and accrued expense for unused vacation in 20X0-20X1 was ₹ 65,00,000. During 20X1-20X2, employees
took 9 days of vacation in average. Salary increase in 20X1-20X2 was 10%.
How would Acer Ltd. recognize liabilities and expenses for these benefits as of 31st March, 20X2? Pass the
journal entry to show the accounting treatment.
SOLUTION
Paid Vacation:
Step 1: Calculation of Unused Vacation in man-days as on 31st March, 20X2:
A. No. of Employees in service for the whole year (94%):
Particulars Man-days
Unused vacation as on 31st March, 20X1 3 days per employee
Entitlement to vacation for 20X1-20X2 10 days per employee
Average vacation availed in 20X1-20X2 (9) days per employee
Unused vacation as on 31st March, 20X2 4 days per employee
(being unused leaves of 20X1-20X2 on FIFO basis)
Total Unused vacation as on 31st March, 20X2 - (A) 1,316 man-days
(350 employees x 94% x 4 days per employee)

B. Newcomers (6%)
Particulars Man-days
Entitlement to vacation for 20X1-20X2 10 days per employee
Average vacation availed in 20X1-20X2 (9) days per employee
Unused vacation as on 31st March, 20X2 1 days per employee
(being unused leaves of 20X1-20X2 on FIFO basis)
Total Unused vacation as on 31st March, 20X2 - (A) 21 man-days
(350 employees x 94% x 4 days per employee)
Total unused vacation as on 31st March, 20X2 (A+ B) 1,337 man-days

Step 2: Calculation of average salary per day:

Particulars Amount (₹)
Average salary per day as on 31st March, 20X1 15,000
Salary increase in 20X1-20X2 10%
Average salary per day as on 31st March, 20X2 16,500

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Step 3: Calculation of provision for unused paid vacation:

Particulars Amount (₹)
Calculation of provision for unused paid vacation 20X1-20X2: (1,337 man-days x ₹ 16,500)

2,20,60,500
Provision for unused paid vacation 20X0-20X1 65,00,000

Step 4: Accounting treatment

Provision for 20X1-20X2
Employee Benefits Expenses A/c Dr. 2,20,60,500

To Provision for Leave Encashment 2,20,60,500

Settlement of Liability of 20X0-20X1

Provision for Leave Encashment A/c Dr. 65,00,000

To Cash / Bank 65,00,000

QUESTION 36: (Exam May’24)

([Link].313 – Question Bank)
Based on the advice from actuaries regarding contribution levels and overall liabilities of the
defined benefit retirement plan to pay benefits to past and present employees, the Accountant
Mr. Krishna of M/s. TUNA Limited provides the following information:
(i) On 1st April 2023, the actuaries of the company advised that the present value of the
defined obligation was ` 2,88,420. On the same date, the fair value of the assets of
the defined benefit plan was ` 2,49,670 and the annual market yield on government bonds was
8%.
(ii) During the year ended 31st March 2024, TUNA Limited made contributions of ` 33,650 into the
plan and the plan paid out benefits of ` 20,160 to retired members. Both these payments were
made on 31st March 2024.
(iii) The actuaries advised that the current service cost for the year ended 31 st March 2024 was `
29,760. On 28th February 2024, the rules of the plan were amended meant that the present value
of the defined obligation was increased by ` 7,280 from that date.
(iv) During the year ended 31st March 2024, TUNA Limited was in negotiation with employee
representatives regarding planned redundancies. The negotiations were completed shortly before
the year end and redundancy packages were agreed. The impact of these redundancies was to
reduce the present value of the defined benefit obligation by ` 38,390. Before 31st March 2024,
TUNA Limited made payments of `` 36,270 to the employees affected by the redundancies in
compensation for the curtailment of their benefits. These payments were made out of the assets
of the retirement benefits plan.
(v) On 31st March 2024, the actuaries advised that the present value of the defined obligation was `
3,26,480. On the same date, the fair valu of the assets of the defined benefit plan were ` 2,68,340.
Examine and present how the above events would be reported in the financial statements of TUNA Ltd. For
the year ended 31st March 2024 as per Ind AS. Please note that the finance cost is to be computed on the
opening balance.
SOLUTION
Remeasurement of gain or loss
`
Liability at the start of the year (` 2,88,420 -` 2,49,670) 38,750
Current service cost 29,760
Past service cost 7,280
Net finance cost 3,100
Gain on settlement (2,120)
Contributions to plan (33,650)
Benefits paid NIL
Remeasurement loss (balancing figure) 15,020
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Liability at the end of the year (` 3,26,480 - ` 2,68,340) 58,140

On 31 st March 2024, Tuna Ltd. will report a net pension liability in the balance sheet. The amount of the
liability will be ` 58,140 (` 3,26,480 – ` 2,68,340).
For the year ended 31 st March 2024, Tuna Ltd. will report the current service cost as an operating cost in
the statement of profit or loss. The amount reported will be ` 29,760. The same treatment applies to the past
service cost of ` 7,280.
For the year ended 31 st March 2024, Tuna Ltd. will report a finance cost in profit or loss at the start of the
year of ` 38,750 (` 2,88,420 - ` 2,49,670).
The amount of the finance cost will be ` 3,100 (` 38,750 x 8%). The redundancy programme represents the
partial settlement of the curtailment of a defined benefit obligation. The gain on settlement of ` 2,120 (`
38,390 – ` 36,270) will be reported in the statement of profit and loss.

Other movements in the net pension liability will be reported as remeasurement gains or losses in other
comprehensive income.
For the year ended 31 st March, 2024, the remeasurement loss will be ` 15,020 (Refer above table).
In the Statement of Profit and loss, the following will be recognised:
`
Current service cost 29,760
Net interest on net defined liability (` 23,074 – ` 19,974) 3,100
Gain on settlement (` 38,390 – ` 36,270) 2,120

Defined benefit re-measurements recognised in Other Comprehensive Income:

`
Loss on defined benefit obligation (36,496)
Gain on plan assets 21,476
Gain on remeasurement (15,020)

In the Balance Sheet, the following will be recognised:

`
Net defined benefit liability (` 3,26,480 – ` 2,68,340) 58,140

Also Scan following QRs:

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Must Do Questions by Jai Chawla Sir CA Final FR

TOPIC - 9
IND AS – 20 ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVT. ASSISTANCE
QUESTION 37: (SIMILAR TO RTP Nov’20)
([Link].304 - Question Bank)
Entity A is awarded a government grant of ₹60,000 receivable over three years (₹40,000 in year 1 and ₹10,000
in each of years 2 and 3), contingent on creating 10 new jobs and maintaining them for three years. The
employees are recruited at a total cost of ₹30,000, and the wage bill for the first year is ₹ 1,00,000, rising by
₹10,000 in each of the subsequent years. Calculate the grant income and deferred income to be accounted for
in the books for year 1, 2 and 3.
SOLUTION:
The income of ₹ 60,000 should be recognised over the three year period to compensate for the related costs.
Calculation of Grant Income and Deferred Income:
Year Labour Cost Grant Deferred
Income Income
₹ ₹ ₹
1 1,30,000 21,667 60,000 x (130/360) 18,333 (40,000 – 21,667)
2 1,10,000 18,333 60,000 x (110/360) 10,000 (50,000 – 21,667 – 18,333)
3 1,20,000 20,000 60,000 x (120/360) - (60,000 – 21,667 – 18,333 –
20,000)
3,60,000 60,000

Therefore, Grant income to be recognised in Profit & Loss for years 1, 2 and 3 are ₹ 21,667, ₹ 18,333 and
₹ 20,000 respectively.
Amount of grant that has not yet been credited to profit & loss i.e.; deferred income is to be reflected in the
balance sheet. Hence, deferred income balance as at year end 1, 2 and 3 are ₹ 18,333, ₹ 10,000 and Nil
respectively.

QUESTION 38
([Link].401 - Question Bank)
A Limited received from the government a loan of Rs. 50,00,000 @ 5% payable after 5 years in a bulleted
payment. The prevailing market rate of interest is 12%. Interest is payable regularly at the end of each year.
Calculate the amount of government grant and Pass necessary journal entry. Also examine how the
Government grant be realized.
SOLUTION
The fair value of the loan is calculated at Rs. 37,38,328.
Year Opening Balance Interest Interest paid @ 5% Closing Balance
calculated @ on Rs 50,00,000 +
12% principal paid
(a) (b) (c) = (b) x 12% (d) (e) =(b) + (c) – (d)
1. 37,38,328 4,48,600 2,50,000 39,36,928
2. 39,36,928 4,72,431 2,50,000 41,59,359
3. 41,59,359 4,99,123 2,50,000 44,08,482
4. 44,08,482 5,29,018 2,50,000 46,87,500
5. 46,87,500 5,62,500 52,50,000 Nil

A Limited will recognise Rs. 12,61,672 (Rs. 50,00,000 – Rs. 37,38,328) as the government grant and will
make the following entry on receipt of loan:
Bank Account Dr. 50,00,000
To Deferred Income 12,61,672
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Must Do Questions by Jai Chawla Sir CA Final FR

To Loan Account 37,38,328

Rs.12,61,672 is to be recognised in profit or loss on a systematic basis over the periods in which A Limited
recognised as expenses the related costs for which the grant is intended to compensate.

QUESTION 39
([Link].402 - Question Bank)
Continuing with the facts given in the [Link].401, state how the grant will be recognized in the
statement of profit or loss assuming:
(a) The loan is an immediate relief measure to rescue the enterprise
(b) The loan is a subsidy for staff training expenses, incurred equally, for a period of 4 years
The loan is to finance a depreciable asset.
SOLUTION
Rs. 12,61,672 is to be recognised in profit or loss on a systematic basis over the periods in which A Limited
recognised as expenses the related costs for which the grant is intended to compensate.

Assuming (a), the loan is an immediate relief measure to rescue the enterprise. Rs. 12,61,672 will be
recognised in profit or loss immediately.

Assuming (b), the loan is a subsidy for staff training expenses, incurred equally, for a period of 4 years. Rs.
12,61,672 will be recognised in profit or loss over a period of 4 years.

Assuming (c), the loan is to finance a depreciable asset. Rs. 12,61,672 will be recognised in profit or loss
on the same basis as depreciation.

QUESTION 40: (SIMILAR TO MTP Mar’21 & RTP May’20)

([Link].604 - Question Bank)
Rainbow Limited is carrying out various projects for which the company has either received government
financial assistance or is in the process of receiving the same. The company has received two grants of ₹
1,00,000 each, relating to the following ongoing research and development projects:
(i) The first grant relates to the "Clean river project" which involves research into the effect of various chemicals
waste from the industrial area in Madhya Pradesh. However, no major steps have been completed by
Rainbow limited to commence this research as at 31st march, 20X2.
(ii) The second grant relates to the commercial development of a new equipment that can be used to
manufacture eco-friendly substitutes for existing plastic products. Rainbow Limited is confident about the
technical feasibility and financial viability of this new technology which will be available for sale in the market
by April 20X3.
In September 20X1, due to the floods near one of its factories, the entire production was lost and Rainbow
Limited had to shut down the factory for a period of 3 months. The State Government announced a
compensation package for all the manufacturing entities affected due to the floods.
As per the scheme, Rainbow Limited is entitled to a compensation based on the average of previous three
months' sales figure prior to the floods, for which the company is required to submit an application form on
or before 30th June, 20X2 with necessary figures. The financial statements of Rainbow Limited are to be
adopted on 31st May, 20X2, by which date the claim form would not have been filed with the State
Government.
Suggest the accounting treatment of, if any, for the two grants received and the flood-related compensation in
the books of accounts of Rainbow Limited as on 31st March, 20X2.
SOLUTION:
Accounting treatment for:
1. First Grant
The first grant for 'Clear River Project' involving research into effects of various chemicals waste from the
industrial area in Madhya Pradesh, seems to be unconditional as no details regarding its refund has been
mentioned. Even though the research has not been started nor any major steps have been completed by

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Rainbow Limited to commence the research, yet the grant will be recognised immediately in profit or loss
for the year ended 31st March, 20X2.
Alternatively, in case, the grant is conditional as to expenditure on research, the grant will be recognised
in the books of Rainbow Limited over the year the expenditure is being incurred.

2. Second Grant
The second grant related to commercial development of a new equipment is a grant related to depreciable
asset. As per the information given in the question, the equipment will be available for sale in the market
from April, 20X3. Hence, by that time, grant relates to the construction of an asset and should be initially
recognised as deferred income.
The deferred income should be recognised as income on a systematic and rational basis over the asset's
useful life.
The entity should recognise a liability on the balance sheet for the years ending 31st March, 20X2 and 31st
March, 20X3. Once the equipment starts being used in the manufacturing process, the deferred grant
income of ₹ 100,000 should be recognised over the asset's useful life to compensate for depreciation costs.
Alternatively, as per Ind AS 20, Rainbow Limited would also be permitted to offset the deferred income of
₹ 100,000 against the cost of the equipment as on 1st April, 20X3.

3. For flood related compensation

Rainbow Limited will be able to submit an application form only after 31st May, 20X2 i.e. in the year 20X2-
20X3. Although flood happened in September, 20X1 and loss was incurred due to flood related to the year
20X1-20X2, the entity should recognise the income from the government grant in the year when the
application form related to it is submitted and approved by the government for compensation.
Since, in the year 20X1-20X2, the application form could not be submitted due to adoption of financials
with respect to sales figure before flood occurred, Rainbow Limited should not recognise the grant income
as it has not become receivable as on 31st March,20X2.

QUESTION 41: (MTP Nov22 & RTP May22)

([Link].703 - Question Bank)
A Limited is engaged in the manufacturing of certain specialized chemicals. During the
manufacturing process, certain wastewater is produced which is released by A Limited in
the nearby river. To reduce pollution of the rivers, the state government has introduced a
scheme with the following salient features:
• If a manufacturer installs certain pre-approved wastewater treatment plant, the government will provide
an interest free loan equal to 50% of the cost of the plant;
• Such loan will be repayable to the government in 5 years from the date of disbursal;
• The manufacturer availing the benefit of this scheme must treat the wastewater of its factory using the
specified plant before releasing it to the river. If this condition is violated, the entire loan shall become
immediately repayable to the government along with a penalty of Rs. 10 lakh.
Cost of the wastewater treatment plant to be installed to avail the benefit of the scheme is Rs. 50 lakh. A
Limited decided to utilise this scheme because, if it were to obtain the similar loan from a bank, it would be
available at a market interest rate of 12% per annum. Accordingly, A Limited applied for and obtained the
government loan of Rs. 25 lakh on 1st April, 20X1. A Limited purchased and installed the plant such that it
became ready for use on the same date.
A Limited has an accounting policy of recognising government grant in relation to depreciable assets in the
proportion of depreciation expense. It has determined that the plant will be depreciated over a period of 5
years using straight-line method. In the month of March, 20X3, government officials conducted a surprise
audit, and it was found that A Limited was not using the wastewater treatment plant as prescribed.
Accordingly, on 31st March, 20X3, the government ordered A Limited to repay the entire loan along with
penalty. A Limited repaid the loan with interest and penalty as per the order on 31st March, 20X3.
Measure the amount of government grant as on 1st April, 20X1. Determine the nature of the government grant
and its accounting treatment (principally) for the year ended 31st March, 20X2. Also determine the impact on
profit or loss if any, on account of revocation of government grant as on 31st March, 20X3.

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SOLUTION
As per the principles of Ind AS 20 “Accounting for Government Grants and Disclosure of Government
Assistance”, the benefits of a government loan at a below market rate of interest is treated as a government
grant. The loan shall be recognized and measured in accordance with Ind AS 109 “Financial Instruments”.
The benefit of the below market rate of interest shall be measured as the difference between the initial
carrying value of the loan determined in accordance with Ind AS 109 and the proceeds received. The benefit
is accounted for in accordance with Ind AS 20. As per Ind AS 109, the loan should be initially measured at
its fair value.
Initial recognition of grant as on 1st April, 20X1
Fair value of loan = Rs. 25,00,000 x 0.567 (PVF @ 12%, 5th year) = Rs. 14,17,500
A Limited will recognize Rs. 10,82,500 (25,00,000 – 14,17,500) as the government grant and will make the
following entry on receipt of loan:

Date Particulars Dr. (Rs.) Cr. (Rs.)

1.4.20X Bank account Dr. 25,00,000
1 To Deferred Grant Income 10,82,500
To Loan account 14,17,500
(Being grant initially recorded at fair value)

Accounting treatment for year ending 31st March, 20X2

As per para 3 of Ind AS 20, grants related to assets are government grants whose primary condition is that
an entity qualifying for them should purchase, construct or otherwise acquire long-term assets.
As per para 24-27 of Ind AS 20, Government grants related to assets, including non- monetary grants at
fair value, shall be presented in the balance sheet either by setting up the grant as deferred income or by
deducting the grant in arriving at the carrying amount of the asset.
One method recognises the grant as deferred income that is recognised in profit or loss on a systematic
basis over the useful life of the asset.
The other method deducts the grant in calculating the carrying amount of the asset. The grant is recognised
in profit or loss over the life of a depreciable asset as a reduced depreciation expense.
A Ltd. has adopted first method of recognising the grant as deferred income that is recognised in profit or
loss on a systematic basis over the useful life of the asset. Here, deferred income is recognised in profit or
loss in the proportion in which depreciation expense on the asset is recognised.
Depreciation for the year (20X1-20X2) = Rs. 50,00,000 / 5 years = Rs. 10,00,000
As the loan is to finance a depreciable asset, Rs. 10,82,500 will be recognized in Profit or Loss on the same
basis as depreciation.
Since the depreciation is provided on straight line basis by A Limited, it will credit Rs. 2,16,500 (10,82,500
/ 5) equally to its statement of profit and loss over the 5 years.

Journal Entries
Date Particulars Dr. (Rs.) Cr. (Rs.)
31.3.20X Depreciation (Profit or Loss A/c) Dr. 10,00,000
2 To Property, Plant & Equipment 10,00,000
(Being depreciation provided for the
year)
Deferred grant income Dr. 2,16,500
To Profit or Loss 2,16,500
(Being deferred income adjusted)

Impact on profit or loss due to revocation of government grant as on 31st March 20X3
As per para 32 of Ind AS 20, a government grant that becomes repayable shall be accounted for as a
change in accounting estimate. Repayment of a grant related to income shall be applied first against any
unamortised deferred credit recognised in respect of the grant. To the extent that the repayment exceeds
any such deferred credit, or when no deferred credit exists, the repayment shall be recognised
immediately in profit or loss.
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Amount payable to Government on account of principal loan = Rs. 25,00,000

Amount payable to Government on account of penalty = Rs. 10,00,000

Journal Entries
Date Particulars Dr. (Rs.) Cr. (Rs.)
31.3.20X Deferred grant income Dr. 2,16,500
3 To Profit or Loss 2,16,500
(Being deferred income adjusted)
Loan account (W.N.1) Dr. 17,78,112
Deferred grant income (W.N.2) Dr. 6,49,500
Profit or Loss Dr. 72,388
To Government grant payable 25,00,000
(Being refund of government grant)
Profit or Loss Dr. 10,00,000
To Government grant payable (Being 10,00,000
penalty payable to government)
Therefore, total impact on profit or loss on account of revocation of government grant as on 31st March,
20X3 will be Rs. 10,72,388 (10,00,000 + 72,388).
Circumstances giving rise to repayment of a grant related to an asset may require consideration to be
given to the possible impairment of the new carrying amount of the asset.

Working Notes:
1. Amortisation Schedule of Loan
Year Opening balance Interest @ Closing balance
of Loan 12% of Loan
31.03.20X2 14,17,500 1,70,100 15,87,600
31.03.20X3 15,87,600 1,90,512 17,78,112

2. Deferred Grant Income

Year Opening Adjustment Closing
balance balance
31.03.20X2 10,82,500 2,16,500 8,66,000
31.03.20X3 8,66,000 2,16,500 6,49,500

Note:
In the above solution, Income and Interest Expense is recognised in the year X2-X3 i.e. in the year of
refund order. Alternatively, both can also be ignored (not to be recognised) since refund order is already
recorded in march month. Therefore, entry would be:-

Deferred Grant A/c Dr. 8,65,146

Loan A/c Dr. 15,88,795
Profit and Loss A/c 10,46,059
To Govt. Grant Payable 35,00,000

QUESTION 42: (May22 EXAM)

([Link].305 – Question Bank)
Shagun Ltd. received two different grants from State Government as per details below:
(i) A cash grant of Rs. 24 lakh was received on 31st March, 2020 towards the skill
development of employees over a period of 18 months, starting from 1st April, 2020.
Actual costs of the skill development program in financial year 2020 -2021 was Rs. 30 lakh and in
financial year 2021-2022 was Rs. 20 lakh.
State, how this grant should be accounted for in the books of account in financial year 2019-2020, 2020-
2021 & 2021-2022?
(ii) A grant of Rs. 10 lakh receivable over three years (Rs. 5 lakh in financial year 2019-2020, Rs. 2 lakh in
financial year 2020-2021 and Rs. 3 lakh in financial year 2021-2022), contingent on developing 5 gardens
and maintaining them for three years. The gardens are developed in financial year 2019-2020 at a total
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cost of Rs. 6 lakh, and the maintenance cost for financial year 2019-2020 is Rs. 12 lakh, for financial
year 2020-2021 is Rs. 15 lakh and for financial year 2021-2022 is Rs. 17 lakh.
Calculate the grant income and deferred income to be accounted for in the books for financial years 2019-
2020, 2020-2021 & 2021-2022.
SOLUTION
(i) At 31st March, 2020 the grant would be recognised as a liability and presented in the balance sheet as
a split between current and non-current amounts.
Rs. 16 lakh [(12 months / 18 month) x 24 lakh] is current and would be recognised in profit and loss
for the year ended 31st March, 2021. The balance amount of Rs. 8 lakh will be shown as non-current.
At the end of the year 2020-2021, there would be a current balance of Rs. 8 lakh (being the non-current
balance at the end of year 2019-2020 reclassified as current) in the balance sheet. This would be
recognised as profit in the statement of profit and loss for the year ended on 2021-2022.

Balance Sheet (extracts) as at

31st March, 31st March, 31st March,
2020 2021 2022
Current liabilities
Deferred income 16 lakh 8 lakh -
Non-current liabilities
Deferred income 8 lakh - -

Statement of Profit and Loss (extracts) for the year ended

31st March, 2021 31st March, 2022
Method 1 (As per para 29 of Ind AS 20)
Other Income - Government grant received 16 lakh 8 lakh
Training costs (30 lakh) (20 lakh)
Method 2 (Alternative) (As per para 29 of Ind
AS 20)
Training costs (30 lakh – 16 lakh) 14 lakh
Training costs (20 lakh – 8 lakh) 12 lakh

(ii) The income of Rs. 10 lakh should be recognised over the three-year period to compensate forthe related
costs. Since the receipt of grant is depending on fulfilling the contract, it is assumed that on initial date
certainty to fulfil the conditions by the entity could not be established. Hence, the grant is recognised
in the books on receipt basis.

Calculation of Grant Income and Deferred Income: (Rs. in lakh)

Year Maintenance Grant Income Grant received Deferred Income
Cost during the year
A b = [(10/50) x c d
a]
2019-2020 18 3.6 5 (5 – 3.6) = 1.4
2020-2021 15 3.0 2 [(5 + 2) – (3.6 + 3.0)] = 0.4
2021-2022 17 3.4 3 [(5 + 2 + 3) – (3.6+ 3.0 + 3.4)] =
50 10.0 –
Therefore, Grant income to be recognised in Profit & Loss for years 2019 -2020, 2020-2021 and 2021-2022
will be Rs. 3.6 lakh, Rs. 3.0 lakh and Rs. 3.4 lakh respectively.
Amount of grant that has not yet been credited to profit & loss i.e., deferred income will be reflected in the
balance sheet. Hence, deferred income balance as at year end 2019-2020, 2020-2021 and 2021-2022 will
be Rs. 1.4 lakh, Rs. 0.4 lakh and Nil respectively.

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TOPIC - 10
IND AS 21 – THE EFFECTS OF CHANGES IN FOREIGN
EXCHANGE RATES

QUESTION 43: (SIMILAR TO Dec21 EXAM, RTP May18, MTP Nov23)

([Link] [Link].202 - - Question Bank)
On 30th January, 20X1, A Ltd. purchased a machinery for $ 5,000 from USA supplier on credit basis. A Ltd.’s
functional currency is Rupees. The exchange rate on the date of transaction is 1 $ = ₹ 60. The fair value of the
machinery determined on 31st March, 20X1 is $ 5,500. The exchange rate on 31st March, 20X1 is 1$ = ₹ 65.
The payment to overseas supplier done on 31st March 20X2 and the exchange rate on 31st March 20X2 is 1$
= ₹ 67. The fair value of the machinery remain unchanged for the year ended on 31st March 20X2. Prepare
the Journal entries for the year ended on 31st March 20X1 and year 20X2 according to Ind AS 21. Tax rate is
30%
SOLUTION:
Journal Entries
(It is assumed that the revaluation method is followed in respect of Plant & Machinery)
Purchase of Machinery on credit basis on 30th January 20X1:

₹ ₹
Machinery A/c (5,000 x $ 60) Dr. 3,00,000
To Trade Payables 3,00,000
(Initial transaction will be recorded at exchange rate on the
date of transaction)

Exchange difference arising on translating monetary & non-monetary item on 31st March 20X1:
₹ ₹
Profit & Loss A/c Dr. 25,000
[(5,000 x $ 65) – (5,000 x $ 60)] 25,000
To Trade Payables
Machinery A/c Dr. 32,500
To Revaluation Surplus (OCI) 32,500
[Being Machinery revalued to USD 5,500; (₹ 65 x (USD 5,500
- USD 5,000)]
Machinery A/c Dr. 25,000
To Revaluation Surplus (OCI) 25,000
(Being Machinery measured at the exchange rate on 31-03-
20X1 [USD 5,000 x (₹ 65 - ₹ 60)]
Revaluation Surplus (OCI) Dr. 17,250
To Deferred Tax Liability 17,250
(DTL created @ of 30% of the total OCI amount)

Exchange difference arising on translating monetary item and settlement of creditors on 31st March 20X2:

₹ ₹
Trade Payables A/c (5,000 x $65) Dr. 3,25,000
Profit & loss A/c [(5,000 x ($ 67 -$ 65)] Dr. 10,000
To Bank A/c 3,35000
Machinery A/c Dr. 11,000
To Revaluation Surplus (OCI) 11,000
Revaluation Surplus (OCI) Dr. 3,300
To Deferred Tax Liability 3,300
(DTL created @ of 30% of the total OCI amount)

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QUESTION 44: (SIMILAR TO RTP May20)

([Link] [Link].205 - Question Bank)
On 1st April, 20X1, Makers Ltd. raised a long term loan from foreign investors. The investors subscribed for 6
million Foreign Currency (FCY) loan notes at par. It incurred incremental issue costs of FCY 2,00,000. Interest
of FCY 6,00,000 is payable annually on 31st March, starting from 31st March, 20X2. The loan is repayable in
FCY on 31st March, 20X7 at a premium and the effective annual interest rate implicit in the loan is 12%. The
appropriate measurement basis for this loan is amortised cost. Relevant exchange rates are as follows:
- 1st April, 20X1 - FCY 1 = ₹ 2.50.
- 31st March, 20X2 – FCY 1 = ₹ 2.75.
- Average rate for the year ended 31st Match, 20X2 – FCY 1 = ₹ 2.42. The functional currency of the
group is Indian Rupee.
What would be the appropriate accounting treatment for the foreign currency loan in the books of Makers Ltd.
for the FY 20X1-20X2? Calculate the initial measurement amount for the loan, finance cost for the year, closing
balance and exchange gain / loss.
SOLUTION:
Initial carrying amount of loan in books
Loan amount received = 60,00,000 FCY
Less: Incremental issue costs = 2,00,000 FCY
58,00,000 FCY

Ind AS 21, "The Effect of Changes in Foreign Exchange Rates" states that foreign currency transactions are
initially recorded at the rate of exchange in force when the transaction was first recognized.
Loan to be converted in INR = 58,00,000 FCY x ₹ 2.50/FCY
= ₹ 1,45,00,000

Therefore, the loan would initially be recorded at ₹ 1,45,00,000.

Calculation of amortized cost of loan (in FCY) at the year-end:

Period Opening Interest Cash Flow Closing
Financial @ 12% (FCY) (FCY) Financial
Liability (FCY) B C Liability (FCY)
A A+B-C
20X1-20X2 58,00,000 6,96,000 6,00,000 58,96,000

The finance cost in FCY is 6,96,000

The finance cost would be recorded at an average rate for the period since it accrues over a period of time.
Hence, the finance cost for FY 20X1-20X2 in INR is ₹ 16,84,320 (6,96,000 FCY x ₹ 2.42 / FCY)
The actual payment of interest would be recorded at 6,00,000 x 2.75 = INR 16,50,000
The loan balance is a monetary item so it is translated at the rate of exchange at the reporting date.
So the closing loan balance in INR is 58,96,000 FCY x INR 2.75 / FCY = ₹ 1,62,14,000
The exchange differences that are created by this treatment are recognized in profit and loss.
In this case, the exchange difference is
₹ [1,62,14,000 - (1,45,00,000 + 16,84,320 – 16,50,000)] = ₹ 16,79,680.
This exchange difference is taken to profit and loss.

QUESTION 45: (SIMILAR TO MTP May22, Jan21 EXAM, Nov23 Exam)

([Link] [Link].305 - Question Bank)
M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical companies and non-
pharmaceutical companies. It has a wholly owned subsidiary, G Ltd, which is engaged in the business of
pharmaceuticals. G Ltd purchases the pharmaceutical bottles from its parent company. The demand of G Ltd
is very high and the operations of M Ltd are very large and hence to cater to its shortfall, G Ltd also purchases
the bottles from other companies. Purchases are made at the competitive prices.

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M Ltd sold pharmaceuticals bottles to G Ltd for Euro 12 lacs on 1st February, 20X1. The cost of these bottles
was ₹830 lacs in the books of M Ltd at the time of sale. At the year-end i.e. 31st March, 20X1, all these bottles
were lying as closing stock with G Ltd. What should be the accounting treatment for the above?
Following additional information is available:
Exchange rate on 1st February, 20X1 1 Euro = ₹83
Exchange rate on 31st March, 20X1 1 Euro = ₹85
SOLUTION:
Accounting treatment in the books of M Ltd
M Ltd will recognize sales of ₹996 lacs (12 lacs Euro X 83)
Profit on sale of inventory = 996 lacs – 830 lacs = ₹166 lacs.
On balance sheet date receivable from G Ltd. will be translated at closing rate i.e. 1 Euro = ₹ 85. Therefore,
unrealised forex gain will be recorded in standalone profit and loss of ₹ 24 lacs. (i.e. (85 - 83) x 12 Lacs)

Journal Entries
₹ (in Lacs) ₹ (in Lacs)
G Ltd. A/c Dr 996
To Sales 996
(Being revenue recorded on initial recognition)
G Ltd. A/c Dr 24
To Foreign exchange difference (unrealised) 24
(Being foreign exchange difference recorded at year end)

1. Accounting treatment in the books of G Ltd

G Ltd will recognize inventory on 1st February, 20X1 of Euro 12 lacs which will also be its closing stock at
year end.
(in Euros) (in Euros)
Purchase Dr. 12 Lakhs
To M Ltd. 12 Lakhs

2. Accounting treatment in the consolidated financial statements

Receivable and payable in respect of above mentioned sale / purchase between M Ltd and G Ltd will get
eliminated.
The closing stock of G Ltd will be translated at year end resulting in amount of closing stock of ₹1,020 lacs
(12 lacs Euro X 85).
The closing stock of G Ltd will be recorded at lower of cost or NRV.
Euro (in lacs) Rate ₹ (in lacs)
Cost 12 83 996
NRV (Assumed Same) 12 85 1020
The restated amount of closing stock includes three components–
• Restated amount of cost of inventory for ₹830 lacs
• Profit element of ₹166 lacs; and
• Translated amount of profit element of ₹24 lacs.
At the time of consolidation, the two elements amounting to ₹190 lacs will be eliminated from the closing
stock.
Journal Entries
₹ (in Lacs) ₹ (in Lacs)
Consolidated P&L A/c Dr 190
To Inventory 190
(Being profit element of intragroup transaction eliminated)

QUESTION 46: (RTP Nov23)

([Link] [Link].310 - Question Bank)
Infotech Global Ltd. (a stand-alone entity) has a functional currency of USD and needs to translate its financial
statements into the presentation currency (INR). The following is the draft financial statements of Infotech
Global Ltd. prepared in accordance with its functional currency.
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Balance Sheet
Particulars 31st March, 20X3 31st March, 20X2
USD USD
Property, plant and equipment 50,000 55,000
Trade Receivables 68,500 56,000
Inventory 8,000 5,000
Cash 40,000 35,000
Total assets 1,66,500 1,51,000
Share Capital 50,000 50,000
Retained earnings 29,500 18,000
Total Equity 79,500 68,000
Trade payables 40,000 38,000
Loan 47,000 45,000
Total liabilities 87,000 83,000
Total equity and liabilities 1,66,500 1,51,000

Statement of Profit and Loss

Particulars USD

Revenue 1,77,214

Cost of sales 1,13,100

Gross Profit 64,114

Distribution costs 2,400

Administrative expenses 18,000

Other expenses 11,000

Finance costs 12,000

Profit before tax 20,714

Income tax expense 6,214

Profit for the year 14,500

Extracts from Statement of Changes in Equity

Particulars 31st March, 20X3 (USD)
Retained earnings at the beginning of the year 18,000
Profit for the year 14,500

Dividends (3,000)

Retained earnings at the end of the year 29,500

● Share capital was issued when the exchange rate was USD 1 = INR 70.
● Retained earnings on 1st April, 20X1 was INR 4,00,000.
● At 31st March, 20X2, a cumulative gain of INR 4,92,000 has been recognised in the foreign
exchange reserve, which is due to translation of entity’s financial statements into INR in the
previous years.
● Entity paid a dividend of USD 3,000 when the rate of exchange was USD 1 = INR 73.5
● Profit for the year 20X1-20X2 of USD 8,000, translated in INR at INR 5,72,000.
● Profit for the year 20X2-20X3 of USD 14,500, translated in INR at INR 10,72,985.

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For the sake of simplicity, items of income and expense are translated at weighted average monthly rate as
there has been no significant exchange rate fluctuation during the entire year and the business of the entity is
not cyclical in nature.
Relevant exchange rates are as follows:
● Rate at 31st March, 20X2 USD 1= INR 73
● Rate at 31st March, 20X3 USD 1= INR 75
Prepare financial statements of Infotech Global Ltd. translated from functional currency (USD) to presentation
currency (INR).
SOLUTION:
As per paragraph 39 of Ind AS 21, all assets and liabilities are translated at the closing exchange rate, which
is USD 1 = INR 73 on 31st March, 20X2 and USD 1 = INR 75 on 31st March, 20X3.
In the given case, share capital is translated at the historical rate USD 1 = INR 70. The share capital will not
be restated at each year end. It will remain unchanged.
Accordingly, the translated financial statements will be as follows:
Note 1: Retained earnings at 31st March, 20X3 and 31st March, 20X2:

Particulars 31st March, 20X3 31st March, 20X2

INR INR

Opening retained earnings 9,72,000 4,00,000

Profit for the year 10,72,985 5,72,000

Dividends paid (USD 3,000 x INR 73.5) (2,20,500) -

Closing retained earnings 18,24,485 9,72,000

Balance Sheet
Particulars 31st March, 20X3 31st March, 20X2

USD Rate INR USD Rate INR

Property, plant 50,000 75 37,50,000 55,000 73 40,15,000

and equipment
Trade 68,500 75 51,37,500 56,000 73 40,88,000
Receivables
Inventory 8,000 75 6,00,000 5,000 73 3,65,000

Cash 40,000 75 30,00,000 35,000 73 25,55,000

Total assets 1,66,500 1,24,87,50 1,51,000 1,10,23,000

0
Share Capital 50,000 70 35,00,000 50,000 70 35,00,000

Retained 29,500 18,24,485 18,000 9,72,000

earnings
(Refer note 1)
Foreign
Exchange
reserve
(Balancing
figure) 6,38,015 - 4,92,000
Total Equity 79,500 59,62,500 68,000 49,64,000

Trade payables 40,000 75 30,00,000 38,000 73 27,74,000

Loan 47,000 75 35,25,000 45,000 73 32,85,000

Total liabilities 87,000 65,25,000 83,000 60,59,000

Total equity and

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liabilities 1,66,500 1,24,87,50 1,51,000 1,10,23,000

0

The foreign exchange reserve is the exchange difference resulting from translating income and expense at
the average exchange rate and assets and liabilities at the closing rate.
Other Comprehensive Income
Exchange differences on translating from USD to INR INR 1,46,015
(6,38,015 - 4,92,000)

Statement of Changes in Equity (INR)

Particulars Share Retained Foreign Total
capital Earnings exchange
reserve
Balance at 1st April, 20X2 35,00,000 9,72,000 4,92,000 49,64,000

Dividends - (2,20,500) - (2,20,500)

Profit for the year - 10,72,985 - 10,72,985

Exchange difference
(transferred to OCI) - - 1,46,015 1,46,015
Balance at 31st March, 20X3 35,00,000 18,24,485 6,38,015 59,62,500

QUESTION 47:
([Link].103 – Question Bank)
A is an Oman based company having a foreign operation, B, in India. The foreign operation was primarily
set up to execute a construction project in India. The functional currency of A is OMR.
78% of entity B ’s finances have been raised in USD by way of contribution from A. B’s bank accounts are
maintained in USD as well as INR. Cash flows generated by B are transferred to A on a monthly basis in
USD in respect of repayment of finance received from A.
Revenues of B are in USD. Its competitors are globally based. Tendering for the construction project happened
in USD.
B incurs 70% of the cost in INR and remaining 30% costs in USD.
Since B is located in India, can it presume its functional currency to be INR?
SOLUTION:
No, B can-not presume INR to be its functional currency on the basis of its location. It needs to consider
various factors listed in Ind AS for determination of functional currency.
B can-not be said to have functional currency same as that of A Ltd.
Hence primary and secondary indicators should be used for the determination of functional currency of B
giving priority to primary indicators. The analysis is given below:
● Its significant revenues and competitive forces are in USD.
● Its significant portion of cost is incurred in INR. Only 30% costs are in USD.
● 78% of its finances have been raised in USD.
● It retains its operating cash flows partially in USD and partially in INR.

Keeping these factors in view, USD should be considered as the functional currency of B.

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TOPIC - 11
INDAS 23 – BORROWING COSTS

QUESTION 48:
([Link].204 - Question Bank)
Alpha Ltd. on 1stApril 20X1 borrowed 9% ₹30,00,000 to finance the construction of two qualifying assets.
Construction started on 1st April 20X1. The loan facility was availed on 1st April 20X1 and was utilized as
follows with remaining funds invested temporarily at 7%.
Factory Building Office Building
1st April 20X1 5,00,000 10,00,000
1st October 20X1 5,00,000 10,00,000
Calculate the cost of the asset and the borrowing cost to be capitalized.
SOLUTION:

Particulars Factory Building Office Building

Borrowing Costs (10,00,000*9%) 90,000 (20,00,000*9%) 1,80,000
Less: Investment Income (5,00,000*7%*6/12) (17,500) (10,00,000*7%*6/12) (35,000)
72,500 1,45,000
Cost of the asset:
Expenditure incurred 10,00,000 20,00,000
Borrowing Costs 72,500 1,45,000
Total 10,72,500 21,45,000

QUESTION 49: (SIMILAR TO MTP April19)

([Link].205 - Question Bank)
ABC Ltd. has taken a loan of USD 20,000 on April 1, 20X1 for constructing a plant at an interest rate of 5%
per annum payable on annual basis.
On April 1, 20X1, the exchange rate between the currencies i.e. USD Vs. INR was Rs. 45 per USD. The
exchange rate on the reporting date i.e. March 31, 20X2 is Rs. 48 per USD.
The corresponding amount could have been borrowed by ABC Ltd from State bank of India in local currency
at an interest rate of 11% per annum as on April 1, 20X1.
Compute the borrowing cost to be capitalized for the construction of plant by ABC Ltd.
SOLUTION:
In the above situation, the Borrowing cost needs to determine for interest cost on such foreign currency loan
and eligible exchange loss difference if any.
(a) Interest on Foreign currency loan for the period:
USD 20,000 x 5% = USD 1,000
Converted in Rs: USD 1,000 x Rs 48/USD = Rs. 48,000
Increase in liability due to change in exchange difference:
USD 20,000 x (48 - 45) = Rs. 60,000

(b) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x Rs. 45/USD x 11% = Rs. 99,000

(c) Difference between Interest on Foreign Currency borrowing and local Currency borrowing: Rs. 99,000 -
48,000 = Rs. 51,000
Hence, out of Exchange loss of Rs. 60,000 on principal amount of foreign currency loan, only exchange
loss to the extent of Rs. 51,000 is considered as borrowing costs.

Total borrowing cost to be capitalized is as under:

(a) Interest cost on borrowing Rs. 48,000
(b) Ex. Dif. to the extent considered to be an adjustment to Interest cost Rs. 51,000

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Total Rs. 99,000

The exchange difference of Rs. 51,000 has been capitalized as borrowing cost and the remaining Rs.
9,000 will be expensed off in the Statement of Profit and loss.

QUESTION 50: (SIMILAR TO RTP May18, MTP May21 & Nov19 EXAMS)
([Link].304 - Question Bank)
An entity constructs a new head office building commencing on 1 st September 20X1, which
continues till 31st December20X1. Directly attributable expenditure at the beginning of the
month on this asset are Rs. 100,000 in September 20X1 and Rs. 250,000 in each of the
months of October to December 20X1.
The entity has not taken any specific borrowings to finance the construction of the asset but has incurred
finance costs on its general borrowings during the construction period. During the year, the entity had issued
10% debentures with a face value of Rs. 20 lacs and had an overdraft of Rs. 500,000, which increased to
Rs. 750,000 in December 20X1. Interest was paid on the overdraft at 15% until 1 October 20X1, then the rate
was increased to 16%.
Calculate the capitalization rate for computation of borrowing cost in accordance with Ind AS 23
‘Borrowing Costs’.
SOLUTION
Since the entity has only general borrowing hence first step will be to compute the capitalisation rate. The
capitalisation rate of the general borrowings of the entity during the period of construction is calculated
as follows:
Finance cost on Rs. 20 lacs 10% debentures during September – December 20X1 Rs. 66,667
Interest @ 15% on overdraft of Rs. 5,00,000 in September 20X1 Rs. 6,250
Interest @ 16% on overdraft of Rs. 5,00,000 in October and November 20X1 Rs. 13,333
Interest @ 16% on overdraft of Rs. 750,000 in December 20X1 Rs. 10,000
Total finance costs in September – December 20X1 Rs. 96,250

Weighted average borrowings during period

= (20,00,000 × 4) + (500,000 × 3) + (750,000 × 1) =
4 Rs. 25,62,500

Capitalisation rate = Total finance costs during the construction period / Weighted average
borrowings during the construction period
= 96,250 / 25,62,500 = 3.756%

Suggested Solution as per Author’s View:

Finance cost on Rs. 20 lacs 10% debentures for whole year 200000
Interest @ 15% on overdraft of Rs. 5,00,000 in January to September 20X1 56,250
Interest @ 16% on overdraft of Rs. 5,00,000 in October and November 20X1 13,333
Interest @ 16% on overdraft of Rs. 750,000 in December 20X1 10,000
Total finance costs for Whole Year 2,79,583

Weighted average borrowings during period

= (20,00,000x12/12) + (500,000 x 11/12) + (750,000 x 1/12)
= Rs. 25,20,833

Capitalisation rate = Total finance costs / Weighted average borrowings = 2,79,583 / 25,20,833 =
11.09% p.a.; and for 4 Months = 11.09x4/12 = 3.70%

Assumption - Debentures and overdraft were existing from the beginning of the year. Question asks to
compute the total borrowing cost capitalization rate. Total borrowing cost using this rate will then be
divided between capitalized and expense.

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QUESTION 51: (SIMILAR TO RTP Nov18)

([Link].305 - Question Bank)
K Ltd. began construction of a new building at an estimated cost of Rs. 7 lakh on 1 st April, 20X1. To finance
construction of the building it obtained a specific loan of Rs. 2 lakh from a financial institution at an interest
rate of 9% per annum.
The company’s other outstanding loans were:
Amount Rate of Interest per annum
Rs. 7,00,000 12%
Rs. 9,00,000 11%

The expenditure incurred on the construction was:

April, 20X1 Rs. 1,50,000
August, 20X1 Rs. 2,00,000
October, 20X1 Rs. 3,50,000
January, 20X2 Rs. 1,00,000

The construction of building was completed by 31 st January, 20X2. Following the provisions of Ind AS 23
‘Borrowing Costs’, calculate the amount of interest to be capitalized and pass necessary journal entry for
capitalizing the cost and borrowing cost in respect of the building as on 31 st January, 20X2.
SOLUTION
(i) Calculation of capitalization rate on borrowings other than specific borrowings
Amount of loan (Rs.) Rate of Amount of
interest interest
(Rs.)
7,00,000 12% = 84,000
9,00,000 11% = 99,000
16,00,000 1,83,000
Weighted average rate of interest = 11.4375%
(1,83,000/16,00,000) x 100
(ii) Computation of borrowing cost to be capitalized for specific borrowings and general borrowings
based on weighted average accumulated expenses
Date of Amount Financed through Calculation Rs.
Incurrence of spent
expenditure
1st April, 20X1 1,50,000 Specific borrowing 1,50,000 x 9% x 10/12 11,250
1st August, 20X1 2,00,000 Specific borrowing 50,000 x 9% x 10/12 3,750
General borrowing 1,50,000 x 11.4375% x 6/12 8,578.125
1st October, 20X1 3,50,000 General borrowing 3,50,000 x 11.4375% x 4/12 13,343.75
1st January, 20X2 1,00,000 General borrowing 1,00,000 x 11.4375% x 1/12 953.125
37,875

Note: Since construction of building started on 1st April, 20X1, it is presumed that all the later
expenditures on construction of building had been incurred at the beginning of the respective
month.

(iii) Total expenses to be capitalized for building

Rs.
Cost of building Rs. (1,50,000 + 2,00,000 + 3,50,000 + 1,00,000) 8,00,000
Add: Amount of interest to be capitalized 37,875
8,37,875

(iv) Journal Entry

Date Particulars Rs. Rs.
31.1.20X2 Building account Dr. 8,37,875
To Bank account 8,00,0000
To Interest payable (borrowing 37,875
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cost)
(Being expenditure incurred on
construction of building and
borrowing cost thereon capitalized)

Note: In the above journal entry, it is assumed that interest amount will be paid at the year
end. Hence, entry for interest payable has been passed on 31.1.20X2.
Alternatively, following journal entry may be passed if interest is paid on the date of
capitalization:
Date Particulars Rs. Rs.
31.1.20X2 Building account Dr. 8,37,875
To Bank account 8,37,875
(Being expenditure incurred on construction of
building and borrowing cost thereon
capitalized)

QUESTION 52: (RTP May23, MTP May’24)

([Link].307 - Question Bank)
LT Ltd. is in the process of constructing a building. The construction process is expected to take about 18
months from 1st January 20X1 to 30th June 20X2. The building meets the definition of a qualifying asset.
LT Ltd. incurs the following expenditure for the construction:

1st January, 20X1 ₹ 5 crores

30th June, 20X1 ₹ 20 crores
31st March, 20X2 ₹ 20 crores
30th June, 20X2 ₹ 5 crores
On 1st July 20X1, LT Ltd. issued 10% Redeemable Debentures of ₹ 50 crores. The proceeds from the
debentures form part of the company's general borrowings, which it uses to finance the construction of the
qualifying asset, ie, the building. LT Ltd. had no borrowings (general or specific) before 1st July 20X1 and
did not incur any borrowing costs before that date. LT Ltd. incurred ₹ 25 crores of construction costs before
obtaining general borrowings on 1st July 20X1 (pre-borrowing expenditure) and ₹ 25 crores after obtaining
the general borrowings (post-borrowing expenditure).
For each of the financial years ended 31st March 20X1, 20X2 and 20X3, calculate the borrowing cost
that LT Ltd. is permitted to capitalize as a part of the building cost.
SOLUTION:
Applying paragraph 17 of Ind AS 23 to the fact pattern, the entity would not begin capitalising borrowing
costs until it incurs borrowing costs (i.e., from 1st July, 20X1)
In determining the expenditures on a qualifying asset to which an entity applies the capitalisation rate
(paragraph 14 of Ind AS 23), the entity does not disregard expenditures on the qualifying asset incurred
before the entity obtains the general borrowings. Once the entity incurs borrowing costs and therefore
satisfies all three conditions in para 17 of Ind AS 23, it then applies paragraph 14 of Ind AS 23 to determine
the expenditures on the qualifying asset to which it applies the capitalisation rate.
Calculation of borrowing cost for financial year 20X0-20X1
Expenditure Capitalization Weighted average
Period Accumulated
(current year) Expenditure
Date Amount
1st January 20X1 ₹ 5 crore 0/3 Nil
Borrowing Costs eligible for capitalisation = NIL. LT Ltd. cannot capitalise borrowing costs before 1st July,
20X1 (the day it starts to incur borrowing costs).
Calculation of borrowing cost for financial year 20X1-20X2
Expenditure Capitalization Weighted average
Period Accumulated
(current year) Expenditure
Date Amount
1st January, 20X1 ₹ 5 crore 9/12* ₹ 3.75 crore
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30th June, 20X1 ₹ 20 crore 9/12 ₹ 15 crore

31st March, 20X2 ₹ 20 crore 0/12 Nil
Total ₹ 18.75 crore

Borrowing Costs eligible for capitalisation = 18.75 cr. x 10% = ₹ 1.875 cr.
*LT Ltd. cannot capitalise borrowing costs before 1st July, 20X1 (the day it starts to incur borrowing
costs). Accordingly, this calculation uses a capitalization period from 1st July, 20X1 to 31st March, 20X2
for this expenditure.

Calculation of borrowing cost for financial year 20X2-20X3

Expenditure Capitalization Weighted average
Period (current Accumulated
year) Expenditure
Date Amount
1st January, 20X1 ₹ 5 crore 3/12 ₹ 1.25 crore
30th June, 20X1 ₹ 20 crore 3/12 ₹ 5 crore
31st March, 20X2 ₹ 20 crore 3/12 ₹ 5 crore
31st March, 20X2 ₹ 1.875crore 3/12 ₹ 0.47 crore
30th June, 20X2 ₹ 5 crore 0/12 Nil
Total ₹ 11.72 crore
Borrowing costs eligible for capitalisation = ₹ 11.72 cr. x 10% = ₹ 1.172 cr.

QUESTION 53: (Scan QR for Alternate Solution)

([Link].402 - Question Bank)
In a group with Parent Company “P” there are 3 subsidiaries with following business: “A” – Real
Estate Company
“B” – Construction Company “C” –
Finance Company
▪ Parent Company has no operating activities of its own but performs management functions for its
subsidiaries.
▪ Financing activities and cash management in the group are coordinated centrally.
▪ Finance Company is a vehicle used by the group solely for raising finance.
▪ All entities in the group prepare Ind AS financial statements.
The following information is relevant for the current reporting period 20X1-20X2:

Real Estate Company

▪ Borrowings of Rs. 10,00,000 with an interest rate of 7% p.a.
▪ Expenditures on qualifying assets during the period amounted to Rs. 15,40,000.
▪ All construction works were performed by Construction Company. Amounts invoiced to Real Estate
Company included 10% profit margin.

Construction Company
▪ No borrowings during the period.
▪ Financed Rs. 10,00,000 of expenditures on qualifying assets using its own cash resources.

Finance Company
▪ Raised Rs. 20,00,000 at 7% p.a. externally and issued a loan to Parent Company for general corporate
purposes at the rate of 8%.

Parent Company
▪ Used loan from Finance Company to acquire a new subsidiary.
▪ No qualifying assets apart from those in Real Estate Company and Construction Company.
▪ Parent Company did not issue any loans to other entities during the period.

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What is the amount of borrowing costs eligible for capitalisation in the financial statements of
each of the four entities for the current reporting period 20X1-20X2?
SOLUTION
Following is the treatment as per Ind AS 23:
Finance Company
No expenditure on qualifying assets have been incurred, so Finance Company cannot capitalise anything.

Real Estate Company

Total interest costs in the financial statements of Real Estate Company is Rs. 70,000. Expenditures on
qualifying assets exceed total borrowings, so the total amount of interest can be capitalised.

Construction Company
No interest expense has been incurred, so Construction Company cannot capitalise anything.

Consolidated financial statements of Parent Company:

Total general borrowings of the group: Rs. 10,00,000 + Rs. 20,00,000 = Rs. 30,00,000
Although Parent Company used proceeds from loan to acquire a subsidiary, this loan cannot be excluded
from the pool of general borrowings.
Total interest expenditures for the group = Rs. 30,00,000 x 7% = Rs. 2,10,000
Total expenditures on qualifying assets for the group are added up. Profit margin charged by Construction
Company to Real Estate Company is eliminated:
Real Estate Company – Rs. 15,40,000/1.1 = Rs. 14,00,000 Construction Co – Rs. 10,00,000
Total consolidated expenditures on qualifying assets:
Rs. (14,00,000 + 10,00,000) = Rs. 24,00,000
Capitalisation rate = 7%
Borrowing costs eligible for capitalisation = Rs. 24,00,000 x 7% = Rs. 1,68,000
Total interest expenditures of the group are higher than borrowing costs eligible for capitalisation
calculated based on the actual expenditures incurred on the qualifying assets. Therefore, only Rs. 1,68,000
can be capitalised.

QUESTION 54: (RTP May24)

([Link].404 – Question Bank)
PQR Limited is engaged in Tourism business in India. The company has planned to construct a Holiday Resort
(Qualifying Asset) at Shimla. The cost of the project has been met out of borrowed funds of ₹ 100 lakhs at the
rate of 12% p.a. ₹ 40 lakhs were disbursed on 1st April 20X2 and the balance of ₹ 60 lakhs were disbursed
on 1st June 20X2. The site planning work commenced on 1st June 20X2, since the Chief engineer of the project
was on medical leave. The company commenced physical construction on 1st July 20X2 and the work of
construction continued till 30th September 20X2 and thereafter the construction activities stopped due to
landslide on the road which leads to construction site. The road blockages have been cleared by the
government machinery by 31st December 20X2. Construction activities have resumed on 1st January 20X3
and has completed on 28th February 20X3.
The date of opening has been scheduled for 1st March 20X3, but unfortunately, the District Administration
gave permission for opening on 16th March 20X3, due to lack of safety measures like fire extinguishers which
had not been installed by then.
Determine the amount of borrowing cost to be capitalized towards construction of the resort when
(i) Landslide is not common in Shimla and delay in approval from District Administration Office is minor
administrative work leftover.
(ii) Landslide is common in Shimla and delay in approval from District Administration Office is major
administrative work leftover.

SOLUTION:
As per Ind AS 23 ‘Borrowing Costs’, the commencement date for capitalisation of borrowing cost on
qualifying asset is the date when the entity first meets all of the following conditions:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
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(c) it undertakes activities that are necessary to prepare the asset for its intended use or
sale.
Further, an entity also does not suspend capitalising borrowing costs when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale. For example,
capitalisation continues during the extended period that high water levels delay construction of a bridge,
if such high-water levels are common during the construction period in the geographical region involved.
An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are complete.
Further, paragraph 23 explains that an asset is normally ready for its intended use or sale when the
physical construction of the asset is complete even though routine administrative work might still
continue. If minor modifications, such as the decoration of a property to the purchaser’s or user’s
specification, are all that are outstanding, this indicates that substantially all the activities are complete.
In the given case since the site planning work started for the project on 1st June, 20X2, the commencement
of capitalisation of borrowing cost will begin from 1st June, 20X2.

(i) When landslide is not common in Shimla and delay in approval from District Administration
Office is minor administrative work leftover
In such a situation, suspension of capitalisation of borrowing cost on construction work will be
considered for 3 months i.e. from October, 20X2 to December, 20X2 and cessation of capitalization
of borrowing cost shall stop at the time of completion of physical activities.
Accordingly, the borrowing cost to be capitalized will be effectively for 6 months i.e. from 1st June,
20X2 to 30th September, 20X2 and then from 1st January, 20X3 to 28th February, 20X3 i.e. total
6 months. The amount of borrowing cost will be ` 6,00,000 (1,00,00,000 x 6/12 x 12%).

(ii) When landslide is common in Shimla and delay in approval from District Administration Office
is major administrative work leftover
Since landslides are common in Shimla during monsoon period, there shall be no suspension of
capitalisation of borrowing cost during that period.
Further, an asset can be considered to be ready for its intended use only on receipt of approvals and
after compliance with regulatory requirements such as “Fire Clearances” etc. These are very
important to declare the asset as ready for its scheduled operation.
In the given case, obtaining the safety approval is a necessary condition that needs to be complied
with strictly and before obtaining the same the entity will not be able to use the building. Accordingly,
it is appropriate to continue capitalisation until the said approvals are obtained.
Hence, the capitalisation of the borrowing cost will be for 9.5 months i.e. from 1st June, 20X2 till
15th March, 20X3. The amount of borrowing cost will be ` 9,50,000 (1,00,00,000 x 9.5/12 x 12%).

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TOPIC – 12
INDAS – 24
RELATED PARTY DISCLOSURES

QUESTION 55: (SIMILAR TO MTP Aug18)

([Link].104 – Question Bank)

Mr. X has a 100% investment in A Limited. He is also a member of the key management personnel (KMP) of C
Limited. B Limited has a 100% investment in C Limited.
Required
(a) Examine related party relationships from the perspective of C Limited for A Limited.
(b) Examine related party relationships from the perspective of C Limited for A Limited if Mr. X is a KMP of B
Limited and not C Limited.
(c) Will the outcome in (a) & (b) would be different if Mr. X has joint control over A Limited.
(d) Will the outcome in (a) & (b) would be different if Mr. X has significant influence over A Limited?
SOLUTION:
(a) A Limited is related to C Limited because Mr. X controls A Limited and is a member of KMP of C Limited.

(b) Still A Limited will be related to C Limited.

(c) No, Still A Limited will be related to C Limited.

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(d) Yes, A Ltd. is not controlled by Mr. X. Therefore, despite Mr. X being KMP of C Ltd., A Ltd., having
significant influence of Mr. X, will not be considered as related party of C Limited.

QUESTION 56: (RTP Nov20)

([Link].106 – Question Bank)
Mr. X owns 95% of entity A and is its director. He is also the beneficiary of a trust that owns 100% of entity B,
of which he is a director.
Whether entities A and B are related parties?
Would the situation be different if:
(a) Mr. X resigned as a director of entity A, but retained his 95% holding?
(b) Mr. X resigned as a director of entities A and B and transferred the 95% holding in entity A to the trust?
SOLUTION:
Entities A and B are related parties, because the director (Mr. X) controls entity A and is a member of the
key management personnel of entity B.
Answers to different given situations would be as under:
(a) Mr. X resigned as a director of entity A, but retained his 95% holding
Mr. X continues to control entity A through his 95% holding even though he is not (nominally) a
director of the entity. Entities A and B are related if Mr. X controls the trust. Mr. X controls entity A
and also, through the trust, controls entity B. Entities A and B are controlled by the same person, and
so they are related parties.
Mr. X might still be a member of ‘key management personnel’ even though he is not (nominally) a
director of entity A. Key management personnel includes, but is not restricted to, directors, which
include those who are executive ‘or otherwise’ provided they had authority and responsibility for
planning, directing and controlling the activities of the entity. There could be two reasons why entities
A and B would continue to be related parties: Mr. X being a member of ‘Key management personnel’
of entity A and Mr. X controlling entity A.
(b) Mr. X resigned as a director of entities A and B and transferred the 95% holding in entity A to
the trust.
If Mr. X controls the trust, he controls entities A and B through the trust, so they will be related parties
(see reason in (a) above)
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Mr. X is a member of ‘key management personnel’ of the two entities (see (a) above) if, as seems likely, he
continues to direct their operating and financial policies. The substance of the relationship and not merely
the legal form should be considered. If Mr. X is regarded as a member of the key management personnel
of, say, entity A, entity B is a related party, because he exercises control or significant influence over entity
B by virtue of his control over the trust.

QUESTION 57: (SIMILAR TO MTP Oct20 & RTP Nov18)

([Link].203 – Question Bank)

ABC Ltd. is a long-standing customer of XYZ Ltd. Mrs. P whose husband is a director in XYZ Ltd. purchased a
controlling interest in entity ABC Ltd. on 1st June, 20X1. Sales of products from XYZ Ltd. to ABC Ltd. in the
two-month period from 1st April 20X1 to 31st May 20X1 totalled ₹ 8,00,000. Following the share purchase by
Mrs. P, XYZ Ltd. began to supply the products at a discount of 20% to their normal selling price and allowed
ABC Ltd. three months' credit (previously ABC Ltd. was only allowed one month's credit, XYZ Ltd.'s normal
credit policy). Sales of products from XYZ Ltd. to ABC Ltd. in the ten-month period from 1st June 20X1 to 31st
March 20X2 totalled ₹ 60,00,000. On 31st March 20X2, the trade receivables of XYZ Ltd. included ₹ 18,00,000
in respect of amounts owing by ABC Ltd.
Analyse and show (where possible by quantifying amounts) how the above event would be reported in the
financial statements of XYZ Ltd. for the year ended 31st March 20X2 as per Ind AS. You are required to mention
the disclosure requirements as well.
SOLUTION:
XYZ Ltd. would include the total revenue of ₹ 68,00,000 (₹ 60,00,000 + ₹8,00,000) from ABC Ltd.
received/receivable in the year ended 31st March 20X2 within its revenue and show ₹ 18,00,000 within
trade receivables at 31st March 20X2.
Mrs. P would be regarded as a related party of XYZ Ltd. because she is a close family member of one of the
key management personnel of XYZ Ltd.
From 1st June 20X1, ABC Ltd. would also be regarded as a related party of XYZ Ltd. because from that
date ABC Ltd. is an entity controlled by another related party.
Because ABC Ltd. is a related party with whom XYZ Ltd. has transactions, then XYZ Ltd. should disclose:
– The nature of the related party relationship.
– The revenue of ₹ 60,00,000 from ABC Ltd. since 1st June 20X1.
– The outstanding balance of ₹ 18,00,000 at 31st March 20X2.
In the current circumstances it may well be necessary for XYZ Ltd. to also disclose the favourable terms
under which the transactions are carried out.

QUESTION 58: (MTP Mar19 & MTP Mar18)

([Link].206 – Question Bank)
An Indian company has a parent company outside India parent company negotiates software licenses with
end vendor and based on number of licenses, parent company gets its reimbursement from Indian company.
Say, license cost of Rs. 12 lac is charged for calendar year of 2018. Parent company generates it’s invoice in
February 2018. Indian company account full invoice in February 18 and then for Indian financial year accounts
reimbursement expense of Rs. 3.00 lac during FY17-18 (for to licensing cost relating to. January 18 to March
18) and prepaid expenses of Rs. 9 lacs for licensing cost reimbursement relating to April 18 to December 18.
Prepaid expense is subsequently burst and expense of Rs. 9 Lac is accounted for in financial year 18-19.
What amount should be disclosed at related party transaction?

SOLUTION:
Paragraph 9 of Ind as 24 related party disclosure defines related party transactions as under:
“A Related party transaction is a transfer of resources, service or obligations between a reporting entity
and the related party, regardless of whether a price is charged.”

Paragraph 6 of Ind as 24 stated as under:

“A related parties relationships would have an effect on the profit or loss and financial position of an entity”

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In the given case, there is a transfer of resources to the extent of Rs. 12 Lac from the company to the parent
towards software license. Of this transfer of resources the company has consumed the benefit relating to
Rs. 3 lacs of software license cost which is recognise in profit or loss. The benefit relating to Rs. 9 lacs of
software license cost will be consumed in the next reporting period and therefore is recognized in the
balance sheet as prepaid expenses.

Paragraph 18 of Ind as 24 started as under:

“If an entity has had related party transaction during the period covered by the financial statements, it
shall disclose the nature of the related party relationship as well as information about those transactions
and outstanding balances, including commitments necessary for users to understand the potential effect
of the relationship of the financial statements. At a minimum, disclosures shall be include
a. The amount of the transactions;
b. Tournament of outstanding balances including commitments, and:
i. Terms and conditions, including whether they are secured, and the nature of the consideration to be provided
in statement, and;
ii. Details of any guarantees given or received;
c. Provision for doubtful debts related to the amount of outstanding balances, and
d. The expense recognized during the period in respect of bad and doubtful deaths due from related parties”

Therefore the company has to disclose:

1. The amount of transaction with the parent of Rs. 12 lac toward software license;
2. Outstanding balance of Rs. 9 lac presented as prepaid expense along with the terms and conditions
and state that the same will be settled in the next reporting period by receipt of software licensing
services
3. The amount of Rs. 3 lac recognized as software license expense in profit or loss for the benefit consumed
during the period to make it understandable to users.

Paragraph 113 off Ind as 1 presentation of financial statements stated as under:

“An entity shall present notes in a systematic manner. An entity shall cross-reference each line items in
the balance sheet and in the statement of profit and loss, and in the statement of changes in equity and of
cash flow to any related information in the notes.”
Therefore, the company shall cross-reference the software licensing expenses recognized in profit or loss
and prepared expenses recognized in the balance sheet to the notes disclosing related party transactions.

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TOPIC - 13
INDAS 28 - INVESTMENT IN ASSOCIATES & JV
QUESTION 59
([Link].205 - Question Bank)
A Ltd. acquired 40% share in B Ltd. on April 01, 20X1 for Rs. 10 lacs. On that date B Ltd. had 1,00,000 equity
shares of Rs10 each fully paid and accumulated profits of Rs. 2,00,000.
During the year 20X1-20X2, B Ltd. suffered a loss of Rs. 10,00,000.
During 20X2-20X3 loss of Rs. 12,50,000 and during 20X3-20X4 again a loss of Rs. 5,00,000. Show the
extract of consolidated balance sheet of A Ltd. on all the four dates recording the above events.
Solution
Calculation of Goodwill/Capital Reserve under Equity Method
Particulars Rs
Equity Shares 10,00,000
Reserves & Surplus 2,00,000
Net Assets 12,00,000
40% of Net Asset 4,80,000
Less: Cost of Investment (10,00,000)
Goodwill 5,20,000

Consolidated Balance Sheet (Extract) as on April 01, 20X1

Assets Rs Rs
Investment in B Ltd. 4,80,000
Add: Goodwill 5,20,000 10,00,000

Calculation of Carrying Amount of Investment in the year ended on 20X1-20X2

Particulars Rs
Investment in B Ltd. 4,80,000
Add: Goodwill 5,20,000
Cost of Investment 10,00,000
Less: Loss for the year (10,00,000 x 40%) (4,00,000)
Carrying Amount of Investment 6,00,000

Consolidated Balance Sheet (Extract) as on March 31, 20X2

Assets Rs Rs
Investment in B Ltd. 80,000
Add: Goodwill 5,20,000 6,00,000

Calculation of Carrying Amount of Investment in the year ended on 20X2-20X3.

Particulars Rs
Carrying Amount of Investment 6,00,000
Less: Loss for the year (12,50,000 x 40%) (5,00,000)
Carrying Amount of Investment 1,00,000

Consolidated Balance Sheet (Extract) as on March 31, 20X3

Assets Rs Rs
Investment in B Ltd. - -
Add: Goodwill 1,00,000 1,00,000

Calculation of Carrying Amount of Investment in the year ended on 20X3-20X4

Particulars Rs
Carrying Amount of Investment 1,00,000
Less: Loss for the year (5,00,000 x 40%) (2,00,000)
Carrying Amount of Investment (1,00,000)

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Consolidated Balance Sheet (Extract) as on March 31, 20X4

Assets Rs Rs
Investment in B Ltd. -

Note: Investment can be remeasured downward due to post acquisition losses in associate/JV, in that
case first investment will be reduced and then goodwill. However, it can-not be negative.

QUESTION 60
([Link].207 - Question Bank)
AT Ltd. purchased a 100% subsidiary for Rs. 50,00,000 on 31st March 20X1 when the fair value of the BT
Ltd. whose net assets was Rs. 40,00,000. Therefore, goodwill is Rs. 10,00,000. The AT Ltd. sold 60% of its
investment in BT Ltd. on 31st March 20X3 for Rs. 67,50,000, leaving the AT Ltd. with 40% and significant
influence. At the date of disposal, the carrying value of net assets of BT Ltd., excluding goodwill is Rs.
80,00,000. Assume the fair value of the investment in associate BT Ltd. retained is proportionate to the fair
value of the 60% sold, that is Rs. 45,00,000.
Calculate gain or loss on sale of proportion of BT Ltd. in AT Ltd’s separate and consolidated
financial statements as on 31st March 20X3.
SOLUTION:

IN SEPARATE FINANCIAL STATEMENTS

Bank A/c Dr. 67,50,000
To Investment A/c 30,00,000
To Gain on Sale (P&L) 37,50,000

IN CONSOLIDATED FINANCIAL STATEMENTS

Bank A/c Dr. 67,50,000
Investment A/c* Dr. 45,00,000
To Goodwill 10,00,000
To Net Assets 80,00,000
To Gain on Sale (P&L) 22,50,000

* In Further Years Equity method as per Ind AS 28

QUESTION 61: (MTP Nov’22 & Nov’22 EXAM & RTP Nov’20, MTP May’24)
([Link].209 - Question Bank)
On 1st April 2019, Investor Ltd. acquired 35% interest in another entity, XYZ Ltd. Investor Ltd. determines that
it is able to exercise significant influence over XYZ Ltd. Investor Ltd. has paid total consideration of Rs.
47,50,000 for acquisition of its interest in XYZ Ltd. At the date of acquisition, the book value of XYZ Ltd.’s net
assets was Rs. 90,00,000 and their fair value was Rs. 1,10,00,000. Investor Ltd. has determined that the
difference of Rs. 20,00,000 pertains to an item of property, plant and equipment (PPE) which has remaining
useful life of 10 years.
During the year, XYZ Ltd. made a profit of Rs. 8,00,000. XYZ Ltd. paid a dividend of Rs. 12,00,000 on 31st
March, 2020. XYZ Ltd. also holds a long-term investment in equity securities. Under Ind AS, investment is
classified as at FVTOCI in accordance with Ind AS 109 and XYZ Ltd. recognized an increase in value of
investment by Rs. 2,00,000 in OCI during the year. Ignore deferred tax implications, if any.
Calculate the closing balance of Investor Ltd.’s investment in XYZ Ltd. as at 31 st March, 2020 as
per the relevant Ind AS.
SOLUTION
Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity method:
Rs. Rs.
Acquisition of investment in XYZ Ltd.
A. Cost of investment 47,50,000
less: Share in book value of XYZ Ltd.’s net assets (35% of Rs. 90,00,000) 31,50,000

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less: Share in fair valuation of XYZ Ltd.’s net assets [35% of (Rs.
1,10,00,000 – Rs. 90,00,000)] 7,00,000
Goodwill on investment in XYZ Ltd. 9,00,000
B. Profit during the year
Share in the profit reported by XYZ Ltd. (35% of Rs. 8,00,000) 2,80,000
Adjustment to reflect effect of fair valuation [35% of (Rs. 20,00,000/10
years)] - depreciation on the increased value (70,000)
Share of profit in XYZ Ltd. recognised in income by Investor Ltd. 2,10,000
C. Long term equity investment
FVTOCI gain recognised in OCI (35% of Rs. 2,00,000) 70,000
D. Dividend received by Investor Ltd. during the year [35% of Rs. (4,20,000)
12,00,000]
Closing balance of Investor Ltd.’s investment in XYZ Ltd. (A+B+C+D) 46,10,000

QUESTION 62
([Link].601 - Question Bank)
An entity has following three type interests in an associate:
● Equity shares: 25% of the equity shares to which equity method of accounting is applied
● Preference shares: Non-cumulative preference shares that form part of net investment in
the associate. Such preference shares are measured at fair value as per Ind AS 109.
● Long-term loan: The loan carrying interest of 10% p.a. The interest income is received at the end of
each year. The long-term loan is accounted as per amortised cost as per Ind AS 109. This loan also
forms part of net investment in the associate.
At the start of year 1, the carrying value of each of the above interests is as follows:
● Equity shares – Rs. 10,00,000
● Preference shares – Rs. 5,00,000
● Long-term loan – Rs. 3,00,000
Following table summarises the changes in the fair value of preference shares as per Ind AS 109,
impairment loss on long-term loan as per Ind AS 109 and entity’s share in profit / loss of associate for year
1-5.
Rs.
End Increase / (Decrease) in Impairment loss / Entity’s share in
of fair value of preference (reversal) on long-term profit / (loss) of
Year shares as per Ind AS 109 loan as per Ind AS 109 associate
1 (50,000) (50,000) (16,00,000)
2 (50,000) - (2,00,000)
3 1,00,000 50,000 -
4 50,000 - 1000,000
5 30,000 - 10,00,000
Throughout year 1 to 5, there has been no objective evidence of impairment in the net investment in the
associate. The entity does not have any legal or constructive obligation to share the losses of the associate
beyond its interest in the associate.
Based on above, determine the closing balance of each of the above interests at the end of each
year.
SOLUTION:
Year 1 below table summarises the closing balance of each of the interest at the end of year 1:
Rs.
Type of interest Opening Adjustment Balance after Share in Closing
balance at the as per Ind applying Ind profit / (loss) balance at
start of the AS 109 AS 109 of the end of
year Associate the year
(A) (B) (A+B) (D) (C+D)
Equity shares 10,00,000 NA 10,00,000 (10,00,000) -
Preference shares 5,00,000 (50,000) 4,50,000 (4,50,000) -
Long-term loan 3,00,000 (50,000) 2,50,000 (1,50,000) 1,00,000
Total 18,00,000 (1,00,000) 17,00,000 (16,00,000) 1,00,000

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The entire loss of Rs. 16,00,000 is recognised. Hence, there is no unrecognized loss at the end of year 1.

Year 2
Below table summarises the closing balance of each of the interest at the end of year 2:
Rs.
Type of interest Opening Adjustment as Balance after Share in Closing
balance at the per Ind AS 109 applying Ind profit / (loss) balance at the
start of AS 109 of Associate end of
the year the year
(A) (B) (A+B) (D) (C+D)
Equity shares - NA - - -
Preference shares - (50,000) (50,000) 50,000* -
Long-term loan 1,00,000 - 1,00,000 (1,00,000) -
Total 1,00,000 (1,00,000) 17,00,000 (50,000) -
* Recognition of changes in fair value as per Ind AS 109 has resulted in the carrying amount of Preference
shares being negative Rs. 50,000. Consequently, the entity shall reverse a portion of the associate’s losses
previously allocated to Preference shares.
Out of the total loss of Rs. 2,00,000 for the year, loss of only Rs. 50,000 is recognized. Hence, there is un-
recognized loss to the extent of Rs. 1,50,000 at the end of year 2.

Year 3
Below table summarises the closing balance of each of the interest at the end of year 3:
Rs.
Type of interest Opening Adjustment Balance Share in profit Closing
balance at the as per Ind after / (loss) of balance at the
start of AS 109 applying Associate end of the
the year Ind year
AS 109
(A) (B) (A+B) (D) (C+D)
Equity shares - NA - - -
Preference shares - 1,00,000 1,00,000 (1,00,000) -
Long-term loan - 50,000 50,000 (50,000) -
Total - 1,50,000 1,50,000 (1,50,000) -
The share in profit / loss for the year is nil. However, there was previously unrecognised loss of Rs.
1,50,000 which is allocated in current year. After recognising the above loss, there is no unrecognised loss
at the end of year 3.

Year 4
Below table summarises the closing balance of each of the interest at the end of year 4:
Rs.
Type of interest Opening Adjustment Balance Share in Closing
balance at the as per Ind after profit / (loss) balance at the
start of the AS 109 applying of Associate end of the
year Ind year
AS 109
(A) (B) (A+B) (D) (C+D)
Equity shares - NA - 2,00,000 2,00,000
Preference shares - 50,000 50,000 5,00,000 5,50,000
Long-term loan - - - 3,00,000 3,00,000
Total - 50,000 50,000 10,00,000 10,50,000
The entity’s share in profit of associate for the year is Rs. 10,00,000. The entity shall allocate such profit to
each of the instruments in order of their seniority in liquidation. The entity should limit the amount of
profit to be allocated to preference shares and long-term loan to the extent of losses previously allocated to
them. Hence, the entity has allocated Rs. 5,00,000 to preference shares and Rs. 3,00,000 to long-term
debt.
There is no unrecognised loss at the end of year 4.

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Year 5
Below table summarises the closing balance of each of the interest at the end of year 5:
Rs.
Type of interest Opening Adjustment Balance Share in Closing
balance at the as per Ind after profit / (loss) balance at the
start of AS 109 applying of Associate end of the
the year Ind year
AS 109
(A) (B) (A+B) (D) (C+D)
Equity shares 2,00,000 NA 2,00,000 10,00,000 12,00,000
Preference shares 5,50,000 30,000 5,80,000 - 5,80,000
Long-term loan 3,00,000 - 3,00,000 - 3,00,000
Total 10,50,000 30,000 10,80,000 10,00,000 20,80,000
The entity’s share in profit of associate for the year is Rs. 10,00,000. The entire profit is allocated to equity
shares since there is no loss previously allocated to either preference shares or long-term loan.
There is no recognized loss at the end of year 5.

Year 1 to 5
The interest accrual on long-term loan would be done in each year at 10% p.a. This will be done without
taking into account any adjustment done in the carrying value of long-term loan as per Ind AS 28. Hence,
the entity will accrue interest of Rs. 30,000 (3,00,000 x 10%) in each year.

QUESTION 63 (SIMILAR TO MTP Oct20 & May19 EXAM)

([Link].302 - Question Bank)
On 1st April, 20X1, PQR Ltd. acquired 30% of the voting ordinary shares of XYZ Ltd. for Rs.
8,000 crore. PQR Ltd. accounts its investment in XYZ Ltd. using equity method as prescribed
under Ind AS 28. At 31st March, 20X2, PQR Ltd. recognized its share of the net asset changes
of XYZ Ltd. using equity accounting as follows:
(Rs. in crore)
Share of profit or loss 700
Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50

The carrying amount of the investment in the associate on 31st March, 20X2 was therefore Rs. 8,850 crore
(8,000 + 700 + 100 + 50).
On 1st April, 20X2, PQR Ltd. acquired the remaining 70% of XYZ Ltd. for cash Rs. 25,000 crore. The following
additional information is relevant at that date:
(Rs. in crore)
Fair value of the 30% interest already owned 9,000
Fair value of XYZ's identifiable net assets 30,000

How should such business combination be accounted for?

SOLUTION:
Paragraph 42 of Ind AS 103 provides that in a business combination achieved in stages, the acquirer shall
remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and
recognize the resulting gain or loss, if any, in statement of profit and loss or other comprehensive income,
as appropriate. In prior reporting periods, the acquirer may have recognized changes in the value of its
equity interest in the acquiree in other comprehensive income. If so, the amount that was recognized in
other comprehensive income shall be recognized on the same basis as would be required if the acquirer
had disposed directly of the previously held equity interest.
Applying the above, PQR Ltd. records the following entry in its consolidated financial statements:
(Rs. in crore)
Debit Credit
Identifiable net assets of XYZ Ltd. Dr. 30,000
Goodwill (W.N.1) Dr. 4,000

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Foreign currency translation reserve Dr. 100

PPE revaluation reserve Dr. 50
To Cash 25,000
To Investment in associate -XYZ Ltd. 8,850
To Retained earnings (W.N.2) 50
To Gain on previously held interest in XYZ 250
recognized in Profit or loss (W.N.3)
(To recognize acquisition of XYZ Ltd.)

Working Notes:
1. Calculation of Goodwill
(Rs. in crore)
Cash consideration 25,000
Add: Fair value of previously held equity interest in XYZ Ltd. 9,000
Total consideration 34,000
Less: Fair value of identifiable net assets acquired (30,000)
Goodwill 4,000

2. The credit to retained earnings represents the reversal of the unrealized gain of Rs. 50 crore in Other
Comprehensive Income related to the revaluation of property, plant and equipment. In accordance with
Ind AS 16, this amount is not reclassified to profit or loss.

3. The gain on the previously held equity interest in XYZ Ltd. is calculated as follows:
(Rs. in crore)
Fair Value of 30% interest in XYZ Ltd. at 1st April, 20X2 9,000
Carrying amount of interest in XYZ Ltd. at 1st April, 20X2 (8,850)
150
Unrealised gain previously recognized in OCI 100
Gain on previously held interest in XYZ Ltd. recognized in profit or loss 250

Also Scan following QRs:

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SUBSCRIBE CA. JAI CHAWLA YOUTUBE CHANNEL

JOIN WHATSAPP CHANNLE FOR MORE UPDATES

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TOPIC - 14
FINANCIAL INSTRUMENTS
INDAS-109, 32 & 107

QUESTION 64: (RTP MAY’25)

On 1st April, 20X1, ABC Ltd. issues a 10- year bond with a par value of Rs. 15,00,000 and an annual fixed
coupon rate of 8%, which is consistent with market rates for bonds with similar characteristics. ABC Ltd.
uses Secured Overnight Financing Rate (SOFR) as its benchmark interest rate. At the date of inception of
the bond, SOFR is 5%. At the end of the first year:
• SOFR has decreased to 4.75%; and
• The fair value of bond is Rs. 15,38,110. This value is consistent with an interest rate of 7.6%.
• The remaining cash flows on bond are Rs. 1,20,000 per year for nine years and Rs. 15,00,000 at the
end of nineth year. These cash flows discounted at 7.6% equals Rs. 15,38,110.
ABC Ltd. assumes a flat yield curve, that all changes in interest rates result from a parallel shift in the yield
curve, and that the changes in SOFR are the only relevant changes in market conditions.
Following discounting factors may be considered

Discount rate @7.75% Present value of Rs. 1

payable
At the end of year 9 51.1 paise
Cumulatively for the years 1–9 6.312
At the end of year 10 47.4 paise
Cumulatively for the years 1–10 6.786

Required
What is the amount transferred to the OCI at the end of Year 1?

Answer
The amount of change in fair value of the bond that is not attributable to changes in market conditions
giving rise to market risk is estimated as follows:
Step (a)
The bond’s IRR at the start of the period is 8%.
Step (b)
Because the benchmark interest rate (SOFR) is 5%, the instrument - specific component of the IRR is 3%.
Step (c)
The contractual cash flows of the instrument at the end of the period are:
• Interest of Rs. 1,20,000 [Rs. 15,00,000 x 8%] per year for the next 9 years.
• Principal repayment of Rs. 15,00,000 at the end of 9th year.
The present value of these cash flows is calculated using a discount rate of 7.75%. This rate is arrived at as
below:
• 4.75% end of period SOFR, plus
• 3% instrument - specific component calculated as at the start of the period
This gives a notional present value of Rs. 15,23,670
= [(15,00,000 x 0.511) + (1,20,000 x 6.312)].
Step (d)
The fair value of the liability at the end of the period is Rs. 15,38,110. Hence, ABC Ltd. should present Rs.
14,440 [Rs. 15,38,110 – Rs. 15,23,670] in the OCI.

QUESTION 65: (RTP MAY’25)

On 1st April, 2X01, A Ltd. issued a 10% convertible debenture with a face value of Rs. 1,000 maturing on
31st March, 2X11. The debenture is convertible into equity share of A Ltd. at a conversion price of Rs. 25
per share. Interest is payable half-yearly in cash. At the date of issue, A Ltd. could have issued non-
convertible debt with a ten-year term bearing a coupon interest rate of 11%.
On 1st January, 2X06, the convertible debenture has a fair value of Rs. 1,700.
A Ltd. makes a tender offer to the holder of the debenture to repurchase the debenture for Rs. 1,700, which
the holder accepts. On the date of repurchase, A Ltd. could have issued non-convertible debt with a five-
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year term bearing a coupon interest rate of 8%.

Required
How does A Ltd. account for the repurchase?

SOLUTION
In the financial statements of A Ltd., the carrying amount of the debenture is allocated on issue as
follows:

Rs.
Liability component
Present value of 20 half-yearly interest payments of
Rs. 598
50, discounted at 11% (Rs. 50 x 11.95)
Present value of Rs. 1,000 due in 10 years, discounted
at 11%, compounded half-yearly (Rs. 1,000 x 0.342) 342
940
Equity component
Difference between Rs. 1,000 total proceeds and Rs.
940 allocated above 60
Total proceeds 1,000

The repurchase price is allocated as follows:

Carrying Fair Difference
Value Value
(Rs (Rs (Rs.)
.) .)
Liability component:
Present value of 10 remaining half-
yearly interest Payments of Rs. 50,
discounted at 11% and 8%
respectively 377 406
Present value of Rs. 1,000 due in 5
years, discounted at 11% and 8%,
compounded half yearly, respectively 585 676
962 1,082 (120)
Equity component 60 618 (558)
Total 1,022 1,700 (678)

A Ltd. recognises the repurchase of the debenture as follows: (Rs.)

Liability component Dr. 962
Debt settlement expense (P&L) Dr. 120
1,082
To Cash
(To recognize the repurchase of the liability
component)

Equity component Dr. 60

Reserves and Surplus Dr. 558
618
To Cash

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(To recognize the cash paid for the equity

component)

The debt settlement expense represents the difference between the carrying value of the debt component
and its fair value.

QUESTION 66: (MTP Nov’22 & RTP Nov’20 & RTP Nov’19)
([Link].306 - Question Bank)
An Indian entity, whose functional currency is rupees, purchases USD denominated bonds at its fair value of
USD 1,000. The bond carries stated interest @ 4.7% p.a. on its face value. The said interest is received at the
year end. The bond has maturity period of 5 years and is redeemable at its face value of USD 1,250. The fair
value of the bond at the end of year 1 is USD 1,060. The exchange rate on the date of transaction and at the
end of year 1 are USD 1 = Rs 40 and USD 1 = Rs 45, respectively. The weighted average exchange rate for the
year is 1 USD = Rs 42.

The entity has determined that it is holding the bond as part of an investment portfolio whose objective is met
both by holding the asset to collect contractual cash flows and selling the asset. The purchased USD bond is
to be classified under the FVTOCI category.
The bond results in an effective interest rate (EIR) of 10% p.a. Calculate gain or loss to be recognised in Profit
& Loss and Other Comprehensive Income for year 1. Also pass journal entry to recognise gain or loss on above.
(Round off the figures to nearest rupees)
SOLUTION:
Computation of amounts to be recognized in the P&L & OCI:
Particulars USD Exchange Rs
rate
Cost of the bond 1,000 40 40,000
Interest accrued @ 10% p.a. 100 42 4,200
Interest received (USD 1,250 x 4.7%) (59) 45 (2,655)
Amortized cost at year-end 1,041 45 46,845
Fair value at year end 1,060 45 47,700
Interest income to be recognized in P & L 4,200
Exchange gain on the principal amount [1,000 x (45-40)] 5,000
Exchange gain on interest accrual [100 x (45 - 42)] 300
Total exchange gain/loss to be recognized in P&L 5,300
Fair value gain to be recognized in OCI [45 x (1,060 - 1,041)] 855

Journal entry to recognize gain/loss

Bond (Rs 47,700 – Rs 40,000) Dr. 7,700
Bank (Interest received) Dr. 2,655
To Interest Income (P & L) 4,200
To Exchange gain (P & L) 5,300
To OCI (fair value gain) 855

QUESTION 67: (RTP Nov’22)

([Link].403 - Question Bank)
On 1st April, 20X1 an entity granted an interest-free loan of Rs. 5,00,000 to an employee for a period of three
years. The market rate of interest for similar loans is 5% per year.
On 31st March, 20X3, because of financial difficulties, the employee asked to extend the interest-free loan for
further three years. The entity agreed. Under the restructured terms, repayment will take place on 31st March,
20X7. However, the entity only expects to receive a payment of Rs. 2,50,000, given the financial difficulty of
the employee.
Explain the accounting treatment on initial recognition of loan and after giving effect of the changes in the
terms of the loan as per Ind AS 109. Support your answer with Journal entries and amortised cost
calculation, as on the date of initial recognition and on the date of change in terms of loan.

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SOLUTION:
As the loan is not at a market interest rate, hence it is not recorded at the transaction price of Rs. 5,00,000.
Instead, the entity measures the loan receivable at the present value of the future cash inflows discounted
at a market rate of interest available for a similar loan.
The present value of the loan receivable (financial asset) discounted at 5% per year is Rs. 5,00,000 ÷ (1.05)3
= Rs. 4,32,000. Therefore, Rs. 4,32,000 is recorded on initial measurement of the loan receivable. This
amount will accrete to Rs. 5,00,000 over the three-year term using the effective interest method.

The difference between Rs. 5,00,000 and Rs. 4,32,000 i.e., Rs. 68,000 is accounted for as prepaid employee
cost in accordance with Ind AS 19 ‘Employee Benefits’, which will be deferred and amortised over the period
of loan on straight line basis.
The journal entries on initial recognition are:
Rs. Rs.
Loan receivable (financial asset) Dr. 4,32,000
Prepaid employee cost (asset) Dr. 68,000
To Cash / Bank (financial asset)
(Being loan granted to the employee recognised) 5,00,000

The amortised cost calculation at 1st April, 20X1 is as follows:

Period Carrying Interest Cash inflow Carrying
amount at 1st at 5% amount at
April 31st March
20X1-20X2 4,32,000 21,600 – 4,53,600
20X2-20X3 4,53,600 22,680 – 4,76,280
20X3-20X4 4,76,280 23,720* (5,00,000) –
*Difference of Rs. 94 (Rs. 23,814 – Rs. 23,720) is due to approximation.
On 31st March, 20X3, the carrying amount of the loan receivable is Rs. 4,76,280.
As a result of that modification, on 31st March, 20X3, the present value of estimated cash flows is
recalculated to be Rs. 2,05,750 using the asset’s original effective interest rate of 5% (Rs. 2,50,000 ÷ (1.05) 4).
An impairment loss of Rs. 2,70,530 (Rs. 4,76,280 – Rs. 2,05,750) is recognised in profit or loss in the year
20X2-20X3.
The carrying amount of the loan receivable may be reduced directly, as follows:
Rs. Rs.
Profit or loss - impairment loss Dr. 2,70,530
To Loan receivable 2,70,530
(Being impairment loss recognised)
In this case, the loan receivable will be measured at Rs. 2,05,750 at 31st March, 20X3. The revised amortised
cost calculation at 1st April, 20X3 is as follows:
Period Carrying Interest at 5% Cash Carrying
amount at (the original inflow amount at
1st April effective 31st March
interest rate)
20X3-20X4 2,05,750 10,288 – 2,16,038
20X4-20X5 2,16,038 10,802 – 2,26,840
20X5-20X6 2,26,840 11,342 – 2,38,182
20X6-20X7 2,38,182 11,818 (2,50,000) –

QUESTION 68: (SIMILAR TO May’22 EXAM)

([Link].505 - Question Bank)
A Ltd has made a borrowing from RBC Bank for ₹10,000 at a fixed interest of 12% per annum. Loan processing
fees were additionally paid for ₹500 and loan is payable 4 half-yearly instalments of ₹2,500 each. Details are
as follows:
Particulars Details
Loan amount ₹10,000
Date of loan (Starting 1-Apr-20X1
Date)
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Date of loan (Finishing 31-March-20X3

Date)
Description of Repayment of loan starts from 30-Sept-20X1 (To
repayment be paid half yearly)
Instalment amount ₹2,500
Interest rate 12.00%
Interest charge Interest to be charged quarterly
Upfront fees ₹500
How would loan be accounted in books of A Ltd?
Consider IRR is 16.60% p.a.

SOLUTION:
The loan taken by A Ltd shall be measured at amortised cost as follows:
- Initial measurement – At transaction price less processing fees = 10,000 – 500 = 9,500
- Subsequently – interest to be accrued using effective rate of interest as follows:
Date Amount Re- Upfront Amount Day IRR Revised Loan
of Loan paymen fees of s Calculatio Interest Balanc
t paid Interest n compute e
d
1-Apr-20X1 10,000 - 500 - - 9,500 - -
30-Jun-20X1 - - - 300 90 (300) 389 9,589
30-Sep-20X1 - 2500 - 300 92 (2,800) 401 7,190
31-Dec-20X1 - - - 225 92 (225) 301 7,266
31-Mar 20X2 - 2500 - 225 90 (2,725) 297 4,838
30-Jun-20X2 - - - 150 91 (150) 200 4,888
30-Sep-20X2 - 2500 - 150 92 (2,650) 204 2,442
31-Dec-20X2 - - - 75 92 (75) 102 2,473
31-Mar-20X3 - 2500 - 75 91 (2,575) 102 -
IRR 16.60%

QUESTION 69: (SIMILAR TO Nov’18 EXAM, May’22 Exam)

([Link].609 - Question Bank)
A Limited issues INR 1 crore convertible bonds on 1 July 20X1. The bonds have a life of eight years and a face
value of INR 10 each, and they offer interest, payable at the end of each financial year, at a rate of 6 per cent
annum. The bonds are issued at their face value and each bond can be converted into one ordinary share in
A Limited at any time in the next eight years. Companies of a similar risk profile have recently issued debt
with similar terms, without the option for conversion, at a rate of 8 per cent per annum.
Required:
(a) Identify the present value of the bonds, and, allocating the difference between the present value and the
issue price to the equity component, provide the appropriate accounting entries.
(b) Calculate the stream of interest expenses across the eight years of the life of the bonds.
(c) Provide the accounting entries if the holders of the option elect to convert the options to ordinary shares
at the end of the third year.
SOLUTION:
(a) Applying the guidance for compound instruments, the present value of the bond is computed to
identify the liability component and then difference between the present value of these bonds & the
issue price of INR 1 crore shall be allocated to the equity component. In determining the present
value, the rate of 8 per cent will be used, which is the interest rate paid on debt of a similar nature
and risk that does not provide an option to convert the liability to ordinary shares.

Present value of bonds at the market rate of debt

Present value of principal to be received in eight years discounted at 8% (10,000,000 X 54,03,000
0.5403)
Present value of interest stream discounted at 8% for 8 years 34,47,960
(6,00,000 X 5.7466)
Total present value 88,50,960
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Equity component 11,49,040

Total face value of convertible bonds 1,00,00,000

The accounting entries will be as follows:

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

(b) The stream of interest expense is summarised below, where interest for a given year is calculated
by multiplying the present value of the liability at the beginning of the period by the market rate of
interest, this is being 8 per cent.
Date Payment Interest expense at Increase in bond Total bond
8% liability liability
01 July 20X1 8,850,960
30 June 20X2 600,000 708,077 108,077 8,959,037
30 June 20X3 600,000 716,723 116,723 9,075,760
30 June 20X4 600,000 726,061 126,061 9,201,821
30 June 20X5 600,000 736,146 136,146 9,337,967
30 June 20X6 600,000 747,037 147,037 9,485,004
30 June 20X7 600,000 758,800 158,800 9,643,804
30 June 20X8 600,000 771,504 171,504 9,815,308
30 June 20X9 600,000 784,692* 184,692 10,000,000
*for rounding off
(c) if the holders of the options elect to convert the options to ordinary shares at the end of the third
year of the debentures (after receiving their interest payments), the entries in the third would be:
Dr. Amount Cr. Amount
(INR) (INR)
30 June 20X4
Interest expense Dr. 726,061
To Cash 600,000
To Convertible bonds (liability) 126,061
(Being entry to record interest expense for the period)
30 June 20X4
Convertible bonds (liability) Dr. 9,201,821
Convertible bonds (equity component) Dr. 1,149,040
To Contributed equity 10,350,861
(Being entry to record the conversion of bonds into
shares of A Limited).

QUESTION 70: (SIMILAR TO MTP Oct’21 & MTP Oct’19, May’19 EXAM, MTP May’23)
([Link].610 - Question Bank)
ABC Company issued 10,000 compulsory cumulative convertible preference shares (CCCPS) as on 1 April
20X1 @ Rs 150 each. The rate of dividend is 10% payable every year. The preference shares are convertible
into 5,000 equity shares of the company at the end of 5th year from the date of allotment. When the CCCPS

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are issued, the prevailing market interest rate for similar debt without conversion options is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the proceeds.
Key terms:
Date of Allotment 01-Apr-20X1
Date of Conversion 01-Apr-20X6
Number of Preference Shares 10,000
Face Value of Preference Shares 150
Total Proceeds 15,00,000
Rate Of dividend 10%
Market Rate for Similar Instrument 15%
Transaction Cost 30,000
Face value of equity share after conversion 10
Number of equity shares to be issued 5,000

SOLUTION:
This is a compound financial instrument with two components – liability representing present value of
future cash outflows and balance represents equity component.
a. Computation of Liability & Equity Component
Date Particulars Cash Flow Discount Factor Net present Value
01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.869565 130,434.75
31-Mar-20X3 Dividend 150,000 0.756144 113,421.6
31-Mar-20X4 Dividend 150,000 0.657516 98,627.4
31-Mar-20X5 Dividend 150,000 0.571753 85,762.95
31-Mar-20X6 Dividend 150,000 0.497177 74,576.55
Total Liability Component 502,823.25
Total Proceeds 1,500,000.00
Total Equity Component (B/f) 997,176.75

b. Allocation of transaction costs

Particulars Amount Allocation Net Amount
Liability Component 502,823 10,056 492,767
Equity Component 997,177 19,944 977,233
Total Proceeds 1,500,000 30,000 1,470,000
c. Accounting for liability at amortised cost: -
⮚ Initial accounting = Present value of cash outflows less transaction costs
⮚ Subsequent accounting = At amortised cost, i.e., initial fair value adjusted for interest and
repayments of the liability.
Assume the effective interest rate is 15.86%
Opening Financial Interest B Cash Flow C Closing Financial
Liability A Liability A+B-C

01-Apr-20X1 492,767 - - 4,92,767

31-Mar-20X2 492,767 78,153 150,000 4,20,920
31-Mar-20X3 420,920 66,758 150,000 3,37,678
31-Mar-20X4 337,678 53,556 150,000 2,41,234
31-Mar-20X5 241,234 38,260 150,000 1,29,494
31-Mar-20X6 129,494 20,506 150,000 -

d. Journal Entries to be recorded for entire term of arrangement are as follows:

Date Particulars Debit Credit

01-Apr-20X1 Bank A/c Dr. 1,470,000

To Preference Shares A/c 492,767
To Equity Component of Preference shares A/c 977,233

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(Being compulsorily convertible preference shares

issued. The same are divided into equity component
and liability component as per the calculation)
31-Mar-20X2 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X2 Finance cost A/c Dr. 78,153
To Preference Shares A/c 78,153
(Being interest as per EIR method recorded)
31-Mar-20X3 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X3 Finance cost A/c Dr. 66,758
To Preference Shares A/c 66,758
(Being interest as per EIR method recorded)
31-Mar-20X4 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X5 Finance cost A/c Dr. 53,556
To Preference Shares A/c 53,556
(Being interest as per EIR method recorded)
31-Mar-20X5 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X5 Finance cost A/c Dr. 38,260
To Preference Shares A/c 38,260
(Being interest as per EIR method recorded)
31-Mar-20X6 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the
shareholders)
31-Mar-20X6 Finance cost A/c Dr. 20,506
To Preference Shares A/c 20,506
(Being interest as per EIR method recorded)
31-Mar-20X6 Equity Component of Preference shares A/c Dr. 977,233
To Equity Share Capital A/c 50,000
To Securities Premium A/c 927,233
(Being Preference shares converted in equity shares and
remaining equity component is recognised as securities
premium)

QUESTION 71: (Extinguishment Accounting)

([Link].702 - Question Bank)
On 1 January 2000, XYZ Ltd. issue 10 years bonds for Rs 10,00,000, bearing interest at 10%
(payable annually on 31st December each year). The bonds are redeemable on 31st December 2009
for Rs 10,00,000. No costs or fees are incurred. The effective interest rate is therefore 10%. On 1 January 2005
(i.e. after 5 years) XYZ Ltd. and the bondholders agree to a modification in accordance with which:
The term is extended to 31 December 2011;
Interest payments are reduced to 5% p.a.;
The bonds are redeemable on December 2011 for Rs 15,00,000; and legal and other fees of Rs 1,00,000 are
incurred.
XYZ Ltd. determines the market interest rate on 1 January 20X5 for borrowings on similar terms is 11%
SOLUTION:

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On 1 January 20X5, the discounted present value of the remaining cash flows of the original financial
liability is Rs. 10,00,000.
On this date, XYZ Ltd. will compute the present value of:
● cash flows under the new terms – i.e., Rs. 15,00,000 payable on 31 December 20Y1 and Rs. 50,000
payable for each of the 7 years ending 31 December 20Y1.
● any fee paid (net of any fee received) – i.e., Rs. 1,00,000
using the original effective interest rate of 10%.
The total of these amounts to Rs. 11,13,158 (Refer Working Note). This differs from the discounted present
value of the remaining cash flows of the original financial liability by 11.32% i.e., by more than 10%. Hence,
extinguishment accounting applies.
The next step is to estimate the fair value of the modified liability. This is determined as the present value
of the future cash flows (interest and principal), using an interest rate of 11% (the market rate at which XYZ
Ltd. could issue new bonds with similar terms). The estimated fair value on this basis is Rs. 958,097 (Refer
Working Note). A gain or loss on modification is then determined as:
Gain (loss) = carrying value of existing liability - fair value of modified liability - fees and costs incurred i.e.,
Rs. 10,00,000 – Rs. 9,58,097 – Rs. 1,00,000 = Loss of Rs. 58,097

Working Note:
Year Discount factor @ 10% Discount factor @ 11%
1 0.909091 0.900901
2 0.826446 0.811622
3 0.751315 0.731191
4 0.683013 0.658731
5 0.620921 0.593451
6 0.564474 0.534641
7 0.513158 0.481658
Annuity 4.868419 4.712196

Amount Discounting Present Discounting Present

factor @ 10% Value factor @ 11% Value
15,00,000 0.513158 7,69,737 0.481658 7,22,487
1,00,000 1,00,000
50,000 for 7
years 4.868419 2,43,421 4.712196 2,35,610
11,13,158 9,58,097
PV of original (10,00,000)
cash flows @
original EIR
Difference 1,13,158
Difference % 11.32%

QUESTION 72: (SIMILAR TO MTP Nov’22 & July’21 EXAM & Jan’21 EXAM,
May’23 Exam)
([Link].706 - Question Bank)
Wheel Co. Limited has a policy of providing subsidized loans to its employees for the purpose of
buying or building houses. Mr. X, who’s executive assistant to the CEO of Wheel Co. Limited,
took a loan from the Company on the following terms:
● Principal amount: 1,000,000
● Interest rate: 4% for the first 400,000 and 7% for the next 600,000
● Start date: 1 January 20X1
● Tenure: 5 years
● Pre-payment option: Full or partial pre-payment at the option of the employee
● The principal amount of loan shall be recovered in 5 equal annual installments and will be first applied to
7% interest bearing principal

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● The accrued interest shall be paid on an annual basis

● Mr. X must remain in service till the term of the loan ends
The market rate of a comparable loan available to Mr. X, is 12% per annum.
Following table shows the contractually expected cash flows from the loan given to Mr. X:

(Amount in Rs)
Inflows
Date Outflows Principal Interest Interest Principal
income 7% income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-/Dec-20X2 200,000 28,000 16,000 600,000
31-Dec-20X3 200,000 14,000 16,000 400,000
31-Dec-20X4 200,000 - 16,000 200,000
31-Dec-20X5 200,000 - 8,000 -

Mr. X, pre-pays Rs 200,000 on 31 December 20X2, reducing the outstanding principal as at that date to Rs
400,000.
Following table shows the actual cash flows from the loan given to Mr. X, considering the pre-payment event
on 31 December 20X2:
(amount in Rs)
Inflows
Date Outflows Principal Interest Interest Principal
income 7% income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 400,000 28,000 16,000 400,000
31-Dec-20X3 200,000 - 16,000 200,000
31-Dec-20X4 200,000 - 8,000 -
31-Dec-20X5 - - - -
Record journal entries in the books of Wheel Co. Limited considering the requirements of Ind
AS 109.
SOLUTION:
As per requirement of Ind AS 109, a financial instrument is initially measured and recorded at its fair
value. Therefore, considering the market rate of interest of similar loan available to Mr. X is 12%, the fair
value of the contractual cash flows shall be as follows:
Inflows Discount
Date Principal Interest Interest factor @12% PV
income 7% income 4%
31-Dec-20X1 200,000 42,000 16,000 0.8929 2,30,357
31-Dec-20X2 200,000 28,000 16,000 0.7972 1,94,515
31-Dec-20X3 200,000 14,000 16,000 0.7118 1,63,709
31-Dec-20X4 200,000 - 16,000 0.6355 1,37,272
31-Dec-20X5 200,000 - 8,000 0.5674 1,18,025
Total (fair value) 8,43,878
Benefit to Mr. X, to be considered a part of employee cost for Wheel Co. Rs. 1,56,122
The deemed employee cost is to be amortised over the period of loan i.e. the minimum period that Mr. X
must remain in service.
The amortization schedule of the Rs 843,878 loan is shown in the following table:
Date Loan outstanding Total cash inflows (principal Interest @
repayment + interest 12%
1-Jan-20X1 843,878
31-Dec-20X1 687,143 258,000 101,265
31-Dec-20X2 525,600 244,000 82,457
31-Dec-20X3 358,672 230,000 63,072
31-Dec-20X4 185,713 216,000 43,041

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31-Dec-20X5 (0) 208,000 22,287

Journal Entries to be recorded at every period end:

a. 1 January 20X1 –
Particulars Dr. Amount Cr. Amount
(Rs) (Rs)
Loan to employee A/c Dr. 843,879
Pre-paid employee cost A/c Dr. 156,121
To Cash A/c 1,000,000
(Being loan asset recorded at initial fair value)

b. 31 December 20X1 –
Particulars Dr. Amount Cr. Amount
(Rs) (Rs)
Cash A/c Dr. 258,000
To Interest income (P&L) @12% A/c 101,265
To loan to employee A/c 156,735
(Being first instalment of repayment of loan
accounted for using the amortised cost and effective
interest rate of 12%)

Particulars Dr. Amount Cr. Amount

(Rs) (Rs)
Employee benefits (profit and loss) A/c Dr. 31,224
To Pre-paid employee cost A/c 31,224
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)
On 31 December
20X2, due to pre-payment of a part of loan by Mr. X, the carrying value of the loan shall be re-computed
by discounting the future remaining cash flows by the original effective interest rate.
There shall be two sets of accounting entries on 31 December 20X2, first the realisation of the contractual
cash flow as shown in (c) below and then the accounting for the pre-payment of Rs 200,000 included in (d)
below:

c. 31 December 20X2 –
Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Cash A/c Dr. 244,000
To Interest income (P&L) @12% A/c 82,457
To loan to employee A/c 161,543
(Being second instalment of repayment of loan
accounted for using the amortised cost and effective
interest rate of 12%)

Particulars Dr. Amount (Rs) Cr. Amount (Rs)

Employee benefit (profit and loss) A/c Dr. 31,224
To Pre-paid employee cost A/c 31,224
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)

Computation of new carrying value of loan to employee:

Inflows Discount
Date Principal Interest Interest factor @12% PV
income 7% income 4%
31-Dec-20X3 200,000 - 16,000 0.8929 192,857
31-Dec-20X4 200,000 - 8,000 0.7972 165,816
Total (revised carrying value) 358,673
Less: Current carrying value 525,601
Adjustment required 166,928

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The difference between the amount of pre-payment and adjustment to loan shall be considered a gain,
though will be recorded as an adjustment to pre-paid employee cost, which shall be amortised over the
remaining tenure of the loan.

d. 31 December 20X2 prepayment–

Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Cash A/c Dr. 200,000
To Pre-paid employee cost A/c 33,072
To loan to employee A/c 166,928
(Being gain to Wheel Co. Limited recorded as an
adjustment to pre-paid employee cost)

The amortisation schedule of the new carrying amount of loan shall be as follows:
Date Loan Total cash inflows (principal Interest @ 12%
outstanding repayment + interest
31-Dec-20X2 358,673
31-Dec-20X3 185,714 216,000 43,041
31-Dec-20X4 - 208,000 22,286

Amortisation of employee benefit cost shall be as follows:

Date Balance Amortised to P&L Adjustment
1-Jan-20X1 156,121
31-Dec-20X1 124,897 31,224
31-Dec-20X2 60,601 31,224 33,072
31-Dec-20X3 30,300 30,300
31-Dec-20X4 - 30,300

e. 31 December 20X3 –
Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Cash A/c Dr. 216,000
To Interest income (P&L @12% A/c 43,041
To loan to employee A/c 172,959
(Being third instalment of repayment of loan
accounted for using the amortised cost and effective
interest rate of 12%)

Particulars Dr. Amount (Rs) Cr. Amount (Rs)

Employee benefit (profit and loss) A/c Dr. 30,300
To Pre-paid employee cost A/c 30,300
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)
f. 31 December 20X4 –
Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Cash A/c Dr. 208,000
To Interest income (P&L) @12% A/c 22,286
To loan to employee A/c 185,714
(Being last instalment of repayment of loan accounted
for using the amortised cost and effective interest rate
of 12%)

Particulars Dr. Amount (Rs) Cr. Amount (Rs)

Employee benefit (profit and loss) A/c Dr. 30,300
To Pre-paid employee cost A/c 30,300
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)

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Extinguishment Accounting
QUESTION 73: (SIMILAR TO MTP May’22, Dec’21 EXAM, MTP Oct’18, MTP May’23)
([Link].707 - Question Bank)
Wheel Co. Limited borrowed Rs 50,00,00,000 from a bank on 1 January 20X1. The original
terms of the loan were as follows:
● Interest rate: 11%
● Repayment of principal in 5 equal instalments
● Payment of interest annually on accrual basis
● Upfront processing fee: Rs 5,870,096
● Effective interest rate on loan: 11.50%
On 31 December 20X2, Wheel Co. Limited approached the bank citing liquidity issues in meeting the cash
flows required for immediate instalments and re-negotiated the terms of the loan with banks as follows:
● Interest rate 15%.
● Repayment of outstanding principal in 10 equal instalments starting 31 December 20X3
● Payment of interest on an annual basis
Record journal entries in the books of Wheel Co. Limited till 31 December 20X3, after giving effect
of the changes in the terms of the loan on 31 December 20X2
SOLUTION:
On the date of initial recognition, the effective interest rate of the loan shall be computed keeping in view
the contractual cash flows and upfront processing fee paid. The following table shows the amortisation of
loan based on effective interest rate:
Date Cash flows Cash flows Amortised cost Interest @ EIR
(principal) (interest and (opening + (11.50%)
fee) interest – cash
flows)
1-Jan-20X1 (500,000,000) 5,870,096 494,129,904
31-Dec-20X1 100,000,000 55,000,000 395,954,843 56,824,939
31-Dec-20X2 100,000,000 44,000,000 297,489,650 45,534,807
31-Dec-20X3 100,000,000 33,000,000 198,700,959 34,211,310
31-Dec-20X4 100,000,000 22,000,000 99,551,570 22,850,610
31-Dec-20X5 100,000,000 11,000,000 (0) 11,448,430

a. 1 January 20X1 –
Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Cash A/c Dr. 494,129,904
To Loan from bank A/c 494,129,904
(Being loan recorded at its fair value less transaction costs
on the initial recognition date)

b. 31 December 20X1 –
Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Loan from bank A/c Dr. 98,175,061
Interest expense (profit and loss) Dr. 56,824,939
To Cash A/c 155,000,000
(Being first instalment of loan and payment of interest
accounted for as an adjustment to the amortised cost
of loan)

c. 31 December 20X2 – Before Wheel Co. Limited approached the bank –

Particulars Dr. Amount (Rs) Cr. Amount (Rs)

Interest expense (profit and loss) Dr. 45,534,807
To Loan from bank A/c 1,534,807
To cash A/c 44,000,000

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(Being loan payment of interest recorded by the

Company before it approached the Bank for deferment
of principal)
Upon receiving the new terms of the loan, Wheel Co. Limited, re-computed the carrying value of the loan
by discounting the new cash flows with the original effective interest rate and comparing the same with
the current carrying value of the loan. As per requirements of Ind AS 109, any change of more than 10%
shall be considered a substantial modification, resulting in fresh accounting for the new loan:

Date Cash flows Interest outflow Discount factor PV of cash

(principal) @15% flows
31-Dec-20X2 (400,000,000)
31-Dec-20X3 40,000,000 60,000,000 0.8969 89,686,099
31-Dec-20X4 40,000,000 54,000,000 0.8044 75,609,805
31-Dec-20X5 40,000,000 48,000,000 0.7214 63,483,092
31-Dec-20X6 40,000,000 42,000,000 0.6470 53,053,542
31-Dec-20X7 40,000,000 36,000,000 0.5803 44,100,068
31-Dec-20X8 40,000,000 30,000,000 0.5204 36,429,133
31-Dec-20X9 40,000,000 24,000,000 0.4667 29,871,422
31-Dec-20Y0 40,000,000 18,000,000 0.4186 24,278,903
31-Dec-20Y1 40,000,000 12,000,000 0.3754 19,522,235
31-Dec-20Y3 40,000,000 6,000,000 0.3367 15,488,493
PV of new contractual cash flows discounted at 11.50% 451,522,791
Carrying amount of loan as on 31 Dec 20X2 397,489,650
Difference 54,033,141
Percentage of carrying amount 13.59%

Note: Calculation above done on full decimal, though in the table discount factor is limited to 4 decimals.

Considering a more than 10% change in PV of cash flows compared to the carrying value of the loan, the
existing loan shall be considered to have been extinguished and the new loan shall be accounted for as a
separate financial liability. The accounting entries for the same are included below:

d. 31 December 20X2 – accounting for extinguishment

Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Loan from bank (old) A/c Dr. 397,489,650
Finance cost (profit and loss) Dr. 2,510,350
To Loan from bank (new) A/c 400,000,000
(Being new loan accounted for at its principal
amount in absence of any transaction costs directly
related to such loan and correspondingly a de-
recognition of existing loan)

e. 31 December 20X3
Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Loan from bank A/c Dr. 40,000,000
Interest expense (profit and loss) Dr. 60,000,000
To cash A/c 100,000,000
(Being first instalment of the new loan and payment
of interest accounted for as an adjustment to the
amortised cost of loan)

QUESTION 74: (SIMILAR TO Dec’21 EXAM & RTP May’19)

([Link].905 - Question Bank)
KK Ltd. has granted an interest free loan of Rs 10,00,000 to its wholly owned Indian Subsidiary YK Ltd. There
is no transaction cost attached to the said loan. The Company has not finalised any terms and conditions

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including the applicable interest rates on such loans. The Board of Directors of the Company are evaluating
various options and has requested your firm to provide your views under Ind AS in following situations:
1. The Loan given by KK Ltd. to its wholly owned subsidiary YK Ltd. is interest free and such loan is
repayable on demand.
2. The said Loan is interest free and will be repayable after 3 years from the date of granting such loan. The
current market rate of interest for similar loans is 10%. Considering the same, the fair value of the loan at
initial recognition is Rs 8,10,150.
3. The said loan is interest free and will be repaid as and when the YK Ltd. has funds to repay the Loan
amount.
4. Further the Company is also planning to grant interest free loan from YK Ltd. to KK Ltd. in the subsequent
period. What will be the accounting treatment of the same under applicable Ind AS?

Based on the same, KK Ltd. has requested you to suggest the accounting treatment of the above
loan in the stand-alone financial statements of KK Ltd. and YK Ltd. and also in the consolidated
financial statements of the group. Consider interest for only one year for the above loan.
SOLUTION
Scenario (i)
Since the loan is repayable on demand, it has fair value equal to cash consideration given. KK Ltd. and YK
Ltd. should recognize financial assets and liability, respectively, at the amount of loan given (assuming
that loan is repayable within a year). Upon repayment, both the entities should reverse the entries that
were made at the origination.

Journal entries in the books of KK Ltd.

At origination
Loan to YK Ltd. A/c Dr. Rs 10,00,000
To Bank A/c Rs 10,00,000
On repayment
Bank A/c Dr. Rs 10,00,000
To Loan to YK Ltd. A/c Rs 10,00,000

Journal entries in the books of YK Ltd.

At origination
Bank A/c Dr. Rs 10,00,000
To Loan from KK Ltd. A/c Rs 10,00,000
On repayment
Loan from KK Ltd. A/c Dr. Rs 10,00,000
To Bank A/c Rs 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan receivable and loan
payable will get set off.

Scenario (ii)
Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair value upon initial
recognition. Fair value is normally the transaction price. However, sometimes certain types of instruments
may be exchanged at off market terms (i.e., different from market terms for a similar instrument if exchanged
between market participants).
If a long-term loan or receivable that carries no interest while similar instruments if exchanged between
market participants carry interest, then the fair value for such loan receivable will be lower from its
transaction price owing to the loss of interest that the holder bears. In such cases where part of the
consideration given or received is for something other than the financial instrument, an entity shall measure
the fair value of the financial instrument. The difference in fair value and transaction cost will be treated as
investment in Subsidiary YK Ltd.
Both KK Ltd. and YK Ltd. should recognise financial asset and liability, respectively, at fair value on initial
recognition, i.e., the present value of Rs10,00,000 payable at the end of 3 years using discounting factor of
10%. Since the question mentions fair value of the loan at initial recognition as Rs8,10,150, the same has

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been considered. The difference between the loan amount and its fair value is treated as an equity
contribution to the subsidiary. This represents a further investment by the parent in the subsidiary.

Journal entries in the books of KK Ltd. (holding Company) (for one year)
At origination
Loan to YK Ltd. A/c Dr. Rs 8,10,150
Investment in YK Ltd. A/c Dr. Rs 1,89,850
To Bank A/c Rs 10,00,000
During periods to repayment- to recognise interest
Year 1 – Charging of Interest
Loan to YK Ltd. A/c Dr. Rs 81,015
To Interest income A/c Rs 81,015
Transferring of interest to Profit and Loss
Interest income A/c Dr. Rs 81,015
To Profit and Loss A/c Rs 81,015
On repayment
Bank A/c Dr. Rs 10,00,000
To Loan to YK Ltd. A/c Rs 10,00,000
Note- Interest needs to be recognised in statement of profit and loss. The same cannot be adjusted
against capital contribution recognised at origination.

Journal entries in the books of YK Ltd. (Subsidiary Company) (for one year)
At origination
Bank A/c Dr. Rs 10,00,000
To Loan from KK Ltd. A/c Rs 8,10,150
To Equity Contribution in KK Ltd. A/c Rs 1,89,850
During periods to repayment- to recognise interest
Year 1
Interest expense A/c Dr. Rs 81,015
To Loan from KK Ltd. A/c Rs 81,015
On repayment
Loan from KK Ltd. A/c Dr. Rs 10,00,000
To Bank A/c Rs 10,00,000

In the consolidated financial statements, there will be no entry in this regard since loan and interest
income/expense will get set off.

Scenario (iii)
Generally, a loan which is repayable when funds are available, cannot be stated as loan repayable on
demand. Rather the entity needs to estimate the repayment date and determine its measurement accordingly
by applying the concept prescribed in Scenario
In the consolidated financial statements, there will be no entry in this regard since loan and interest
income/expense will get set off.

Scenario (iv)
In case the subsidiary YK Ltd. is planning to grant interest free loan to KK Ltd., then the difference between
the fair value of the loan on initial recognition and its nominal value should be treated as dividend
distribution by YK Ltd. and dividend income by the parent KK Ltd.

Journal entries
In books of parent In books of subsidiary
Bank a/c Dr. Financial Asset (Loan) a/c Dr.
To Financial Liability a/c (at Present Value) Dividend (P&L) a/c Dr.
To Dividend Income (P/L) To Bank a/c

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QUESTION 75
([Link].1104 - Question Bank)
Sea Ltd. has lent a sum of Rs. 10 lakhs @ 18% pa for 10 years. The loan had a fair value of Rs. 12,23,960 at
the effective interest rate of 13%. To mitigate prepayment risks but at the same time retaining control over the
loan, Sea Ltd. transferred its right to receive the principal amount of the loan on its maturity with interest, after
retaining rights over 10% of principal and 4% interest that carries Fair Value of Rs. 29000, and 184620
respectively. The consideration for the transaction was Rs. 990000. The interest component retained included
a 2% fee towards collection of principal and interest that has a fair value of 65160. Defaults, if any are
deductible to a maximum extent of the company‟s claim on principal portion. You are required to show the
journal entries to the record the derecognition of Loan.
SOLUTION:
CA of Loan = 10,00,000
Fair Value of Loan @13% ERI = 12,23,960
In this case, 90% Principal & 14% Interest repayment have been transferred. Therefore, it is a case of
Partial Derecognition.
● Fair value of Entire FA = 12,23,960
● FV of principal retain = 29,000
● FV of Interest 4% retained = 1,84,620
1) Interest Comp = 1,19,460
2) Service Asset = 65,160
● FV of Strip Transferred (Bal. Fig.) = 10.10.340

Apportion Carrying Amount of FA (Loan) in ratio of above Fair Values:

Principal Strip Retained 10,00,000 x 29,000/12,23,960 23,694
Interest Strip Retained 10,00,000 x 1,19,460/12,23,960 97,601
Service Asset 10,00,000 x 65,160/12,23,960 53,237
Strip Transferred 10,00,000 x 10,10,340/12,23,960 8,25,468

Journal Entries
Principal Strip A/c Dr. 23,694
Interest Strip A/c Dr. 97601
Service Asset A/c Dr. 53,237
Strip Transferred A/c Dr. 8,25,468
To Loan A/c 10,00,000
Bank A/c Dr. 9,90,000
To Gain of Derecognition (P&L) 1,64,532
To Strip Transferred A/c 8,25,468

QUESTION 76: (MTP Nov’23, MTP May’24)

([Link].1405 - Question Bank)
Company A, an Indian company whose functional currency is ₹, enters into a contract to purchase machinery
from an unrelated local supplier, company B. The functional currency of company B is also ₹. However, the
contract is denominated in USD, since the machinery is sourced by company B from a US based supplier.
Payment is due to company B on delivery of the machinery.
Key terms of the contract:
Contractual features
Contract/order date 9 September 20X1
Delivery/payment date 31 December
20X1
Purchase price USD 1,000,000
USD/₹ Forward rate on 9 September 20X1 for 31 December 20X1 67.8
maturity
USD/₹ Spot rate on 9 September 20X1 66.4
USD/₹ Forward rates for 31 December, on:
30 September 67.5

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31 December (spot rate) 67.0

Company A is required to analyse if the contract for purchase of machinery (a capital asset) from company B
contains an embedded derivative and whether this should be separately accounted for on the basis of the
guidance in Ind AS 109. Also give necessary journal entries for accounting the same.

SOLUTION:
Based on the guidance above, the USD contract for purchase of machinery entered into by company A
includes an embedded foreign currency derivative due to the following reasons:
▪ The host contract is a purchase contract (non-financial in nature) that is not classified as, or measured
at FVTPL.
▪ The embedded foreign currency feature (requirement to settle the contract by payment of USD at a
future date) meets the definition of a stand-alone derivative – it is akin to a USD-₹ forward contract
maturing on 31 December 20X1.
▪ USD is not the functional currency of either of the substantial parties to the contract (i.e., neither
company A nor company B).

Accordingly, company A is required to separate the embedded foreign currency derivative from the
host purchase contract and recognise it separately as a derivative.
The separated embedded derivative is a forward contract entered into on 9 September 20X1, to exchange
USD 10,00,000 for ₹ at the USD/₹ forward rate of 67.8 on 31st December 20X1. Since the forward exchange
rate has been deemed to be the market rate on the date of the contract, the embedded forward contract has
a fair value of zero on initial recognition.

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

Accounting treatment:
Date Particulars Amount (₹) Amount (₹)
09-Sep-X1 On initial recognition of the forward contract
(No accounting entry recognised since initial fair value of Nil Nil
the forward contract is considered to be nil)
30-Sep-X1 Fair value change in forward contract
Derivative asset (company B) Dr. 3,00,000
31-Dec-X1 [(67.8-67.5) x10,00,000]
To Profit or loss 3,00,000
Fair value change in forward contract
31-Dec-X1 Forward contract asset (company B) Dr. 5,00,000
[{(67.8-67) x 10,00,000} - 3,00,000] 5,00,000
To Profit or loss
Recognition of machinery acquired and on settlement
Property, plant and equipment (at forward rate) Dr. 6,78,00,000
To Forward contract asset (company B) 8,00,000
To Creditor (company B) / Bank 6,70,00,000

QUESTION 77: (Hedge Accounting)

([Link].1501 - Question Bank)
On 1 January 20X1, Company D issues a three-year 5.5% fixed rate bond of USD 15 million
at par. D's functional currency is sterling. As part of its risk management policy, D decides to
eliminate the exposure arising from movements in the US dollar/GBP exchange rates on the
principal amount of the bond for three years. D enters into a foreign currency forward contract to buy USD 15
million and sell GBP 9,835,389 at 31 December 20X3.

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D designates and documents the forward contract as the hedging instrument in a cash flow hedge of the
variability in cash flows arising from the repayment of the principal amount of the bond due to movements in
forward US dollar/sterling exchange rates.

D states in its hedge documentation that it will use the hypothetical derivative method to assess hedge
effectiveness. D identifies the hypothetical derivative as a forward contract under which it sells USD 15 million
and purchases GBP 9,835,389 at 31 December 20X3 (the repayment date of the bond). The hypothetical foreign
currency forward contract has a fair value of zero at 1 January 20X1. The spot and the forward exchange
rates and the fair value of the foreign currency forward contract are as follows:
Date Spot rate FWD rate FV of forward FWD points
1-Jan-20X1 0.6213 0.6557 - 0.0344 USD 15,000,000
31-Dec-20X1 0.5585 0.5858 (957,205) 0.0273 Forward points 516,000
31-Dec-20X2 0.5209 0.528 (1,833,346) 0.0071
31-Dec-20X3 0.5825 0.5825 (1,097,789) -
Pass necessary journal entries.
SOLUTION
The hedge remains effective for the entire period, with changes in the fair value of the forward
contract and the hedging instrument being perfectly offset. Because D has designated the variability in
cash flows arising from movements in the forward rates as the hedged risk, the entire change in the fair
value of the forward contract is recognised in OCI.
At each reporting date, G reclassifies from equity an amount equal to the movement in the spot rate on the
principal amount of the bond.
In addition, to ensure that the forward points recognised in OCI are reclassified fully to profit or loss over
the life of the hedge, D reclassifies from equity the forward points recognised in OCI amortised over the life
of the hedging relationship. Assuming that all criteria for hedge accounting have been met, D records the
following journal entries:
Particulars Dr Cr
Cash Dr. 93,19,500
To Bond 93,19,500
(Being bond liability recognized at spot rate)
31 December 20X1
Hedging Reserve (OCI) Dr. 9,57,205
To Derivative 9,57,205
(Being loss on hedging instrument i.e. forward contract (as per Ind AS
[Link](b), change in fair value of spot element – loss of 9,42,000
and as per Ind AS [Link], change in fair value of forward element –
loss of 15,205) recognized in OCI)
Bond Dr. 9,42,000
To Foreign currency (P&L) 9,42,000
(Being gain on restatement of hedged item i.e. foreign currency bond
recognized in P&L as per Ind AS 21)
Foreign currency (P&L) Dr. 9,42,000
To Hedging Reserve (OCI) 9,42,000
(Being cash flow hedge reserve associated with hedged item recognized
as per Ind AS [Link](a))
Foreign currency (P&L) Dr. 1,72,000
To Hedging Reserve (OCI) 1,72,000
(Being reclassification adjustment in respect of amortization of forward
element at the date of designation of the forward contract as hedging
instrument over the tenor of forward contract)
Interest expense Dr. 4,60,763
To Cash 4,60,763
(Being interest expense recognized (for sake of simplicity, the same is
recognized at closing spot rate whereas Ind AS 21.21-22 mandates use
of exchange rate on the date of transaction or an average rate over the
relevant period))
31 December 20X2

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Hedging Reserve (OCI) Dr. 8,76,141

To Derivative 8,76,141
(Being loss on hedging instrument i.e. forward contract (as per Ind AS
[Link](b), change in fair value of spot element – loss of 5,64,000
and as per Ind AS [Link], change in fair value of forward element –
loss of 3,12,141) recognized in OCI)
Bond Dr. 5,64,000
To Foreign currency (P&L) 5,64,000
(Being gain on restatement of hedged item i.e. foreign currency bond
recognized in P&L as per Ind AS 21)
Foreign currency (P&L) Dr. 5,64,000
To Hedging Reserve (OCI) 5,64,000
(Being cash flow hedge reserve associated with hedged item recognized
as per Ind AS [Link](a))
Foreign currency (P&L) Dr. 1,72,000
To Hedging Reserve (OCI) 1,72,000
(Being reclassification adjustment in respect of amortization of forward
element at the date of designation of the forward contract as hedging
instrument over the tenor of forward contract)
Interest expense Dr. 4,29,743
To Cash 4,29,743
(Being interest expense recognized (for sake of simplicity, the same is
recognized at closing spot rate whereas Ind AS 21.21- 22 mandates use
of exchange rate on the date of transaction or an average rate over the
relevant period))
31 December 20X3
Derivative Dr. 7,35,346
To Hedging Reserve (OCI) 7,35,346
(Being gain on hedging instrument i.e. forward contract (as per Ind AS
[Link](b), change in fair value of spot element – gain of 9,24,000
and as per Ind AS [Link], change in fair value of forward element –
loss of 1,88,654) recognized in OCI)
Foreign currency (P&L) Dr. 9,24,000
To Bond 9,24,000
(Being loss on restatement of hedged item i.e. foreign currency bond
recognized in P&L as per Ind AS 21)
Hedging Reserve (OCI) Dr. 9,24,000
To Foreign currency (P&L) 9,24,000
(Being cash flow hedge reserve associated with hedged item recognized
as per Ind AS [Link](a))
Foreign currency (P&L) Dr. 1,72,000
To Hedging Reserve (OCI) 1,72,000
(Being reclassification adjustment in respect of amortization of forward
element at the date of designation of the forward contract as hedging
instrument over the tenor of forward contract)
Interest expense Dr. 4,80,563
To Cash 4,80,563
(Being interest expense recognized (for sake of simplicity, the same is
recognized at closing spot rate whereas Ind AS 21.21- 22 mandates use
of exchange rate on the date of transaction or an average rate over the
relevant period))
Bond Dr. 87,37,500
To Cash 87,37,500
(Being financial liability towards spot value of bonds extinguished
through repayment)
Derivative Dr. 10,97,789
To Cash 10,97,789

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(Being payment for derivative liability on date of settlement i.e.

difference between spot rate on the date of issuance of bond and date of
settlement)
Movement of hedging reserve is summarised below:
Opening (1,56,795) (16,654)
Derivative 9,57,205 8,76,141 (7,35,346)
MTM on loans (9,42,000) (5,64,000) 9,24,000
Forward point (1,72,000) (1,72,000) (1,72,000)
Closing balance (1,56,795) (16,654) -

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TOPIC - 15
IND AS 33 – EARNING PER SHARE

QUESTION 78
([Link].203 - Question Bank)
X Ltd.
1 January 1,000,000 shares in issue
28 February Issued 200,000 shares at fair value
31 August Bonus issue 1 share for 3shares held
30 November Issued 250,000 shares at fair value
Calculate the number of shares which would be used in the basic EPS calculation. Consider reporting date
as December end.
SOLUTION:
Period Calculations Weighted average number
of shares
1 January -28 February 1,000,000 × 2 / 12 × 4 / 3 222,222
1 March -31 August 1,200,000 × 6 / 12 × 4 / 3 800,000
1 September -30 November1,600,000 × 3 / 12 400,000
1 December -31 December 1,850,000 × 1 / 12 154,167
1,576,389

QUESTION 79: (RTP May23)

[Link].307:
Company P has both ordinary shares and equity-classified preference shares in issue. The reconciliation of
the number of shares during Year 1 is set out below:
Number of shares
Dates in Year Transaction Ordinary Treasury Preference
1 shares shares shares
1st April Balance 30,00,000 (5,00,000) 5,00,000
15th April Bonus issue – 5% (no corresponding 1,50,000 (25,000) -
changes in resources)
1st May Repurchase of shares for cash - (2,00,000) -
1st November Shares issued for cash 4,00,000 - -
31st March Balance 35,50,000 (7,25,000) 5,00,000

The following additional information is relevant for Year 1.

- Company P’s net profit for the year is ₹ 46,00,000.
- On 15th February, non-cumulative preference dividends of ₹ 1.20 per share were declared. The
dividends were paid on 15th March. Preference shares do not participate in additional dividends
with ordinary shares.
- Dividends on non-cumulative preference shares are deductible for tax purposes.
The applicable income tax rate is 30%.
The financial year of Company P ends on 31st March.
Determine the Basic EPS of the Company P for Year 1. Use the number of months or part of months, rather
than the number of days in the calculation of EPS.
SOLUTION:
The first step in the basic EPS calculation is to determine the profit or loss that is attributable to ordinary
shareholders of Company P for the period.

Non-cumulative dividends paid on equity-classified preference shares are not deducted in arriving at net
profit or loss for the period, but they are not returns to ordinary shareholders. Accordingly, these dividends
are deducted from net profit or loss for the period in arriving at the numerator.

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(₹)
Net profit 46,00,000
Preference dividends (5,00,000 shares x 1.2) (6,00,000)
Related tax (₹ 6,00,000 x 30%) 1,80,000 (4,20,000)
Profit or loss attributable to P’s ordinary shareholders 41,80,000
Accordingly, the numerator for calculation of Basic EPS is ₹ 41,80,000

Determination of denominator for calculation of Basic EPS

The second step in the basic EPS calculation is to determine the weighted-average number of ordinary shares
outstanding for the reporting period.

Number of shares Time Weight Weighted average

weighting number of shares
1st April – opening balance (30,00,000 – 25,00,000 1
5,00,000)
15th April – bonus issue (1,50,000 – 1,25,000
25,000)
1st April to 30th April 26,25,000 1/12 2,18,750
1st May – repurchase of shares (2,00,000)
1st May to 31st October 24,25,000 6/12 12,12,500
1st November – new shares issued 4,00,000
1st November to 31st March 28,25,000 5/12 11,77,083
Weighted average number of shares for the year 26,08,333

The denominator for calculation of Basic EPS is 26,08,333 shares.

Basic EPS = ₹ 41,80,000 / 26,08,333 shares = ₹ 1.60 per share (approx.).

QUESTION 80
([Link].504 - Question Bank)
(This illustration does not illustrate the classification of the components of convertible financial instruments as
liabilities and equity or the classification of related interest and dividends as expenses and equity as required
by Ind AS32).
Profit attributable to equity holders of the parent entity Rs. 100,000
Ordinary shares outstanding 10,000
Non-convertible preference shares 6,000
Non-cumulative annual dividend on preference shares (before any dividend is paid Rs. 5.50 per
on ordinary shares) share
After ordinary shares have been paid a dividend of Rs. 2.10 per share, the preference shares
participate in any additional dividends on a 20:80 ratio with ordinary shares.
Compute the allocation of earnings for the purpose of calculation of Basic EPS when an entity has ordinary
shares & participating equity instruments that are not convertible into ordinary shares.
SOLUTION
Dividends on preference shares paid (6000 x Rs. 5.50 per share) Rs. 33,000
Dividends on ordinary shares paid (10,000 x Rs. 2.10 per share) Rs. 21,000

Basic earnings per share is calculated as follows: Rs.

Profit attributable to equity holders of the parent entity 100,000
Less: Dividend paid:
Preference 33,000
Ordinary 21,000 (54,000)
Undistributed earnings 46,000

Allocation of undistributed earnings:

Allocation per ordinary share = A
Allocation per preference share = B; B = 1/4 A
(A x 10,000) + (1/4 x A x 6,000) = Rs. 46,000

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A = Rs. 46,000 ÷ (10,000 + 1,500)

A = Rs. 4.00
B = 1/4 A
B = Re. 1.00

Dividend per share:

Preference shares Ordinary shares
Distributed earnings Rs. 5.50 Rs. 2.10
Undistributed earnings Rs. 1.00 Rs. 4.00
Totals Rs. 6.50 Rs. 6.10

QUESTION 81: (SIMILAR TO MTP OCT 20 & RTP May19)

([Link].610 - Question Bank)
An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a three-year term and
are issued at par with a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 2,000,000. Interest is
payable annually in arrears at a nominal annual interest rate of 6per cent. Each bond is convertible at any
time up to maturity into 250 ordinary shares. The entity has an option to settle the principal amount of the
convertible bonds in ordinary shares or in cash.
When the bonds are issued, the prevailing market interest rate for similar debt without a conversion option is
9per cent. At the issue date, the market price of one ordinary share is Rs. 3. Income tax is ignored.
Calculate basic and diluted EPS when
Profit attributable to ordinary equity holders of the parent entity Year 1Rs. 1,000,000
Ordinary shares outstanding 1,200,000
Convertible bonds outstanding 2,000

SOLUTION
Allocation of proceeds of the bond issue:
Liability component (Refer Note 1) Rs. 1,848,122
Equity component Rs. 151,878
Rs. 2,000,000
The liability and equity components would be determined in accordance with Ind AS 32. These amounts are
recognised as the initial carrying amounts of the liability and equity components. The amount assigned to
the issuer conversion option equity element is an addition to equity and is not adjusted.
Basic earnings per share Year 1:
Rs.1,000,000 = Rs. 0.83 per ordinary share
1,200,000
Diluted earnings per share Year 1:
It is presumed that the issuer will settle the contract by the issue of ordinary shares. The dilutive effect is
therefore calculated in accordance with the Standard.
Rs.1,000,000 + Rs.166,331 = Rs. 0.69 per ordinary share
1,200,000 + 500,000
Notes:
1) This represents the present value of the principal and interest discounted at 9% – Rs. 2,000,000
payable at the end of three years; Rs. 120,000 payable annually in arrears for three years.
2) Profit is adjusted for the accretion of Rs. 166,331 (Rs. 1,848,122 x 9%) of the liability because of the
passage of time. However, it is assumed that interest @ 6% for the year has already been adjusted.
3) 500,000 ordinary shares = 250 ordinary shares x 2,000 convertible bonds.

QUESTION 82: (MTP May22 & Nov20 EXAM)

([Link].614 - Question Bank)
The following information is available relating to Space India Limited for the Financial Year 2019-20.
Net profit attributable to equity shareholders ₹ 90,000
No. of equity shares outstanding 16,000
Average fair value of one equity share during the year ₹ 90

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Potential Ordinary Shares:

Options 900 options with exercise price of ₹ 75
Convertible Preference Shares 7,500 shares entitled to a cumulative dividend of ₹ 9 per share.
Each preference share is convertible into 2 equity shares.
Applicable corporate dividend 8%
tax
10% Convertible Debentures of ₹ ₹ 10,00,000 and each debenture is convertible into 4 equity shares
100 each
Tax rate 25%
You are required to compute Basic and Diluted EPS of the company for the Financial Year 2019-20.
SOLUTION
i. Basic Earnings per share
Year ended
31.3.2020
Net profit attributable to equity shareholders (A) Rs. 90,000
Number of Equity shares outstanding (B) 16,000
Earnings per share (A/B) Rs. 5.625

ii. Diluted earnings per share

Options are most dilutive as their earnings per incremental share is nil. Hence, for the purpose of
computation of diluted earnings per share, options will be considered first. 10% convertible debentures
being second most dilutive will be considered next and thereafter convertible preference shares will be
considered (as per W.N.).
Net profit No. of Net Profit
attributable to equity attributable
equity shareholders shares per share Rs.
Rs.
Net profit attributable to equity 90,000 16,000 5.625
shareholders
Options 150
90,000 16,150 5.572 Dilutive
10% Convertible debentures 75,000 40,000
1,65,000 56,150 2.939 Dilutive
Convertible Preference Shares 72,900 15,000
2,37,900 71,150 3.344 Anti-Dilutive

Since diluted earnings per share is increased when taking the convertible preference shares into account
(Rs. 2.939 to Rs. 3.344), the convertible preference shares are anti- dilutive and are ignored in the calculation
of diluted earnings per share for the year ended 31 March 2020. Therefore, diluted earnings per share for
the year ended 31 March 2020 is Rs. 2.939.

Working Note:
Calculation of incremental earnings per share and allocation of rank
Increase in Increase in Earnings per Rank
earnings number of incremental
(1) equity Share (3) = (1)
shares ÷ (2)
(2)
Rs. Rs.
Options
Increase in earnings Nil
No. of incremental shares issued for no
consideration [900 x (90-75)/90] 150 Nil 1
Convertible Preference Shares

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Increase in net profit attributable to equity 72,900

shareholders as adjusted by attributable
dividend tax *
[(Rs. 9 x 7,500) + 8% (Rs. 9 x 7,500)]
No. of incremental shares (2 x 7,500) 15,000 4.86 3
10% Convertible Debentures
Increase in net profit 75,000
[(Rs. 10,00,000 x 10% x (1 – 0.25)]
No. of incremental shares (10,000 x 4) 40,000 1.875 2

Note: Grossing up of preference share dividend has been ignored here. At present dividend distribution tax
has been abolished. However, the question has been solved on the basis of the information given in the
question.

*Alternatively,
Increase in earnings for equity holders = saving due to non-payment to preference shareholders (net of tax)
= 9 x 7,500 = 67,500 - 8% = 62,100
Incremental no. of shares = 15,000

QUESTION 83: (SIMILAR TO MTP April19)

([Link].806 - Question Bank)
Calculate Subsidiary’s and Group’s Basic EPS and Diluted EPS, when

Parent:
Profit attributable to ordinary equity holders of the ₹ 12,000 (excluding any earnings of, or dividends
parent entity paid by, the subsidiary)
Ordinary shares outstanding 10,000
Instruments of subsidiary owned by the parent 800 ordinary shares

30 warrants exercisable to purchase ordinary

shares of subsidiary
300 convertible preference shares

Subsidiary:
Profit ₹ 5,400
Ordinary shares outstanding 1,000
Warrants 150, exercisable to purchase ordinary shares of the
subsidiary
Exercise price ₹ 10
Average market price of one ordinary share ₹ 20
Convertible preference shares 400, each convertible into one ordinary share
Dividends on preference shares ₹ 1 per share
No inter-company eliminations or adjustments were necessary except for dividends.
Ignore income taxes. Also, ignore classification of the components of convertible financial
instruments as liabilities and equity or the classification of related interest and dividends as expenses and equity as
required by Ind AS 32.

SOLUTION
Subsidiary’s earnings per share
Basic EPS ₹ 5.00 calculated: ₹ 5,400 (a) – ₹400 (b)
1,000 I

Diluted EPS ₹ 3.66 calculated: ₹ 5,400 (d)

(1,000 + 75 I + 400(f))

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Notes:
(a) Subsidiary’s profit attributable to ordinary equity holders.
(b) Dividends paid by subsidiary on convertible preference shares.
(c) Subsidiary’s ordinary shares outstanding.
(d) Subsidiary’s profit attributable to ordinary equity holders (₹ 5,000) increased by ₹ 400 preference
dividends for the purpose of calculating diluted earnings per share.
(e) Incremental shares from warrants, calculated: [(₹ 20 – ₹ 10) ÷ ₹ 20] × 150.
(f) Subsidiary’s ordinary shares assumed outstanding from conversion of convertible preference
shares, calculated: 400 convertible preference shares × conversion factor of 1.

Consolidated earnings per share

Basic EPS ₹ 1.63 calculated: ₹ 12,000(a) + ₹ 4,300(b)
10,000©

Diluted EPS ₹ 1.61 calculated: ₹ 12,000 + ₹ 2,928(d) + ₹ 55I + ₹ 1,098(f)

10,000

(a) Parent’s profit attributable to ordinary equity holders of the parent entity.
(b) Portion of subsidiary’s profit to be included in consolidated basic earnings per share, calculated:
(800 × ₹ 5.00) + (300 × Re 1.00).
(c) Parent’s ordinary shares outstanding.
(d) Parent’s proportionate interest in subsidiary’s earnings attributable to ordinary shares,
calculated: (800 ÷ 1,000) × (1,000 shares × ₹ 3.66 per share).
(e) Parent’s proportionate interest in subsidiary’s earnings attributable to warrants, calculated: (30
÷ 150) × (75 incremental shares × ₹ 3.66 per share).
(f) Parent’s proportionate interest in subsidiary’s earnings attributable to convertible preference
shares, calculated: (300 ÷ 400) × (400 shares from conversion × ₹ 3.66 per share).

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TOPIC 16
IND AS 34 – INTERIM FINANCIAL REPORTING

QUESTION 84: (SIMILAR TO July21 EXAM)

([Link].04– Question Bank)
Fixed production overheads for the financial year is Rs. 10,000. Normal expected production for the year, after
considering planned maintenance and normal breakdown, also considering the future demand of the product
is 2,000 MT. It is considered that there are no quarterly / seasonal variations. Therefore, the normal expected
production for each quarter is 500 MT and the fixed production overheads for the quarter are Rs. 2,500.
Actual production achieved Quantity (In MT)
First Quarter 400
Second Quarter 600
Third Quarter 500
Fourth Quarter 400
Total 1,900
Presuming that there are no quarterly / seasonal variation, calculate the allocation of fixed production
overheads for all the four quarters as per Ind AS 34 read with Ind AS 2.

SOLUTION:
If it is considered that there is no quarterly / seasonal variation, therefore normal expected production for
each quarter is 500 MT and fixed production overheads for the quarter are Rs. 2,500.
Fixed production overhead to be allocated per unit of production in every quarter will be Rs. 5 per MT
(Fixed overheads / Normal production).

Quarters Allocations
First ⮚ Actual fixed production overheads = Rs. 2,500
Quarter ⮚ Fixed production overheads based on the allocation rate of Rs. 5 per unit allocated to actual
production = Rs. 5 x 400 = Rs. 2,000
⮚ Unallocated fixed production overheads to be charged as expense as per Ind AS 2 and
consequently as per Ind AS 34 = Rs. 500
Second ⮚ Actual fixed production overheads on year-to-date basis = Rs. 5,000
Quarter ⮚ Fixed production overheads to be absorbed on year-to-date basis = 1,000 x Rs. 5 = Rs. 5,000
⮚ Earlier, Rs. 500 was not allocated to production in the 1st quarter. To give effect to the entire
Rs. 5,000 to be allocated in the second quarter, as per Ind AS 34, Rs. 500 are reversed by way
of a credit to the statement of profit and loss of the 2nd quarter.
Third ⮚ Actual production overheads on year-to-date basis = Rs. 7,500
Quarter ⮚ Fixed production overheads to be allocated on year-to-date basis = 1,500 x 5 = Rs. 7,500
⮚ There is no under or over recovery of allocated overheads. Hence, no further action is required.
Fourth ⮚ Actual fixed production overheads on year-to-date basis = Rs. 10,000
Quarter ⮚ Fixed production overheads to be allocated on year-to-date basis 1,900 x 5 = Rs. 9,500
⮚ Rs. 500, i.e., [Rs. 2,500 – (Rs. 5 x 400)] unallocated fixed production overheads in the 4th
quarter, are to be expensed off as per the principles of Ind AS 2 and Ind AS 34 by way of a
charge to the statement of profit and loss.
⮚ Unallocated productions overheads for the year Rs. 500 (i.e., Rs. 10,000 – Rs. 9,500) are
expensed in the Statement of profit and loss as per Ind AS 2.
The cumulative result of all the quarters would also result in unallocated overheads of Rs. 500, thus,
meeting the requirements of Ind AS 34 that the quarterly results should not affect the measurement of the
annual results.

QUESTION 85: (SIMILAR TO Nov 18, Dec21 EXAM & MTP April21, May’24 Exam)
([Link].05– Question Bank)
ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of Rs. 20,00,000
for the third quarter of 20X1.
Following adjustments are made while computing the net profit:

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i) Bad debts of Rs. 1,00,000 incurred during the quarter. 50% of the bad debts have been deferred to the next
quarter.
ii) Additional depreciation of Rs. 4,50,000 resulting from the change in the method of depreciation.
iii) Exceptional loss of Rs. 28,000 incurred during the third quarter. 50% of exceptional loss have been deferred
to next quarter.
iv) Rs. 5,00,000 expenditure on account of administrative expenses pertaining to the third quarter is deferred
on the argument that the fourth quarter will have more sales; therefore, fourth quarter should be debited by
higher expenditure. The expenditures are uniform throughout all quarters.
Ascertain the correct net profit to be shown in the Interim Financial Report of third quarter to be
presented to the Board of Directors.

SOLUTION:
In the instant case, the quarterly net profit has not been correctly stated. As per Ind AS 34, Interim
Financial Reporting, the quarterly net profit should be adjusted and restated as follows:
i) The treatment of bad debts is not correct as the expenses incurred during an interim reporting period
should be recognised in the same period. Accordingly, Rs. 50,000 should be deducted from Rs.
20,00,000.
ii) Recognising additional depreciation of Rs. 4,50,000 in the same quarter is correct and is in tune with
Ind AS 34.
iii) Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire amount of Rs.
28,000 incurred during the third quarter should be recognized in the same quarter. Hence Rs. 14,000
which was deferred should be deducted from the profits of third quarter only.
iv) As per Ind AS 34 the income and expense should be recognised when they are earned and incurred
respectively. As per para 39 of Ind AS 34, the costs should be anticipated or deferred only when:
1) It is appropriate to anticipate or defer that type of cost at the end of the financial year, and
2) Costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of Rs. 5,00,000 is not correct as expenditures are
uniform throughout all quarters.
Thus, considering the above, the correct net profits to be shown in Interim Financial Report of the third
quarter shall be Rs. 14,36,000 (Rs. 20,00,000 -Rs. 50,000 - Rs. 14,000 - Rs. 5,00,000).

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TOPIC 17
IND AS 36 – IMPAIRMENT OF ASSETS

QUESTION 86: (RTP Nov20)

([Link].213– Question Bank)
The UK entity with a sterling functional currency has a property located in the US, which
was acquired at a cost of US 1.8 million when the exchange rate was ₤1 = US 1.60. The
property is carried at cost. At the balance sheet date, the recoverable amount of the property
(as a result of an impairment review) amounted to US 1.62 million, when the exchange rate
₤1 = US 1.80. Compute the amount which is to be reported in Profit & Loss of the UK entity as a result of
impairment, if any. Ignore depreciation. Also, analyse the total impairment loss on account of change in value
due to impairment component and exchange component.

SOLUTION
Ignoring depreciation, the loss that would be reported in the Profit & Loss as a result of the impairment is
as follows:
£
*Carrying value at balance sheet date-US 16,20,000 @ £ 1.8 = 9,00,000
Historical cost- US 18,00,000 @ £ 1.6 = 11,25,000
Impairment loss recognised in profit and loss (2,25,000)
The components of the impairment loss can be analysed as follows:
Change in value due to impairment = US 1,80,000# @ £ 1.8 = (1,00,000)
Exchange component of change =
US 18,00,000 @ 1.8 – US 18,00,000 @ £ 1.6 (1,25,000)
* Recoverable Amount being less than cost becomes the Carrying Value.
# 18,00,000-16,20,000 = 1,80,000

QUESTION 87:
([Link].302– Question Bank)
SUN ltd is an entity with various subsidiaries. The entity closes its books of account at every
year ended on 31st March. On 1st July 20X1 Sun ltd acquired an 80% interest in Pluto ltd.
Details of the acquisition were as follows:

– Sun ltd acquired 800,000 shares in Pluto ltd by issuing two equity shares for every five
acquired. The fair value of Sun Ltd’s share on 1st July 20X1 was Rs 4 per share and the fair value of a Pluto’s
share was Rs. 1·40 per share. The costs of issue were 5% per share.

– Sun ltd incurred further legal and professional costs of Rs. 100,000 that directly related to the acquisition.

– The fair values of the identifiable net assets of Pluto Ltd at 1st July 20X1 were measured at Rs. 1·3 million.
Sun ltd initially measured the non-controlling interest in Pluto ltd at fair value. They used the market value of
a Pluto ltd share for this purpose. No impairment of goodwill arising on the acquisition of Pluto ltd was required
at 31st March 20X2 or 20X3.

Pluto ltd comprises three cash generating units A, B and C. When Pluto ltd was acquired the directors of Sun
ltd estimated that the goodwill arising on acquisition could reasonably be allocated to units [Link] on a [Link]
basis. The carrying values of the assets in these cash generating units and their recoverable amounts are as
follows:

Unit Carrying value (before Recoverable

goodwill allocation) amount
Rs. 000 Rs. 000

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A 600 740
B 550 650
C 450 400

Required:
(i) Compute the carrying value of the goodwill arising on acquisition of Pluto Ltd in the consolidated Balance
Sheet of Sun ltd at 31st March 20X4 following the impairment review.
(ii) Compute the total impairment loss arising as a result of the impairment review, identifying how much of
this loss would be allocated to the non-controlling interests in Pluto ltd.

SOLUTION
1. Computation of goodwill on acquisition
Particular Amount (Rs 000)
Cost of investment (8,00,000 x 2/5 x Rs. 4) 1,280
Fair value of non-controlling interest (2,00,000 x Rs. 1·4) 280
Fair value of identifiable net assets at date of acquisition (1,300)
So goodwill equals 260

Acquisition costs are not included as part of the fair value of the consideration given under Ind AS 103,
Business Combination.

2. Calculation of impairment loss

Unit Carrying value Recoverable Impairment
Before Allocation of After Amount Loss
Allocation goodwill ([Link]) Allocation
A 600 104 704 740 Nil
B 550 104 654 650 4
C 400* 52 452 400 52

* After writing down assets in the individual CGU to recoverable amount.

3. Calculation of closing goodwill
Goodwill arising on acquisition (W1) 260
Impairment loss (W2) (56)
So closing goodwill equals 204

4. Calculation of overall impairment loss

on goodwill (W3) 56
on assets in unit C (450 – 400) 50
So total loss equals 106

Rs 21·2 (20%) of the above is allocated to the NCI with the balance allocated to the shareholders of Sun ltd.

QUESTION 88: (SIMILAR TO RTP MAY 19 & NOV 22 EXAM)

([Link].305– Question Bank)
Elia limited is a manufacturing company which deals in to manufacturing of cold drinks and
beverages. It is having various plants across India. There is a Machinery A in the Baroda plant
which is used for the purpose of bottling. There is one more machinery which is Machinery B
clubbed with Machinery A. Machinery A can individually have an output and also sold
independently in the open market. Machinery B cannot be sold in isolation and without clubbing with Machine
A it cannot produce output as well. The Company considers this group of assets as a Cash Generating Unit
and an Inventory amounting to ₹ 2 Lakh and Goodwill amounting to ₹ 1.50 Lakhs is included in such CGU.
Machinery A was purchased on 1st April 2013 for ₹ 10 Lakhs and residual value is ₹ 50 thousands. Machinery
B was purchased on 1st April, 2015 for ₹ 5 Lakhs with no residual value. The useful life of both Machine A
and B is 10 years. The Company expects following cash flows in the next 5 years pertaining to Machinery A.
The incremental borrowing rate of the company is 10%.

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Year Cash Flows from Machinery A

1 1,50,000
2 1,00,000
3 1,00,000
4 1,50,000
5 1,00,000 (excluding Residual Value)
Total 6,00,000

On 31st March, 2018, the professional valuers have estimated that the current market value of Machinery A
is ₹ 7 lakhs. The valuation fee was ₹ 1 lakh. There is a need to dismantle the machinery before delivering it to
the buyer. Dismantling cost is ₹ 1.50 lakhs. Specialised packaging cost would be ₹ 25 thousand and legal fees
would be ₹ 75 thousand.
The Inventory has been valued in accordance with Ind AS 2. The recoverable value of CGU is ₹ 10 Lakh as on
31st March, 2018. In the next year, the company has done the assessment of recoverability of the CGU and
found that the value of such CGU is ₹ 11 Lakhs i.e. on 31st March, 2019. The Recoverable value of Machine A
is ₹ 4,50,000 and combined Machine A and B is ₹ 7,60,000 as on 31st March, 2019.
Required:
a) Compute the impairment loss on CGU and carrying value of each asset after charging impairment loss for
the year ending 31st March, 2018 by providing all the relevant working notes to arrive at such calculation.
b) Compute the prospective depreciation for the year 2018-2019 on the above assets.
c) Compute the carrying value of CGU as at 31st March, 2019.

SOLUTION
(a) Computation of impairment loss and carrying value of each of the asset in CGU after impairment loss

(i) Calculation of carrying value of Machinery A and B before impairment

Machinery A
Cost (A) ₹ 10,00,000
Residual Value ₹ 50,000
Useful life 10 years
Useful life already elapsed 5 years
Yearly depreciation (B) ₹ 95,000
WDV as at 31st March, 2018 [A- (B x 5)] ₹ 5,25,000
Machinery B
Cost (C) ₹ 5,00,000
Residual Value ----
Useful life 10 years Useful life already elapsed 3 years
Yearly depreciation (D) ₹ 50,000
WDV as at 31st March, 2018 [C- (D x 3)] ₹ 3,50,000

(ii) Calculation of Value-in-use of Machinery A

Period Cash Flows PVF Present
(₹) Value
1 1,50,000 0.909 1,36,350
2 1,00,000 0.826 82,600
3 1,00,000 0.751 75,100
4 1,50,000 0.683 1,02,450
5 1,00,000 0.621 62,100
5 50,000 0.621 31,050
Value in use 4,89,650

(iii) Calculation of Fair Value less cost of disposal of Machinery A

₹
Fair Value 7,00,000
Less: Dismantling cost (1,50,000)
Packaging cost (25,000)
Legal Fees (75,000)

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Fair value less cost of disposal 4,50,000

(iv) Calculation of Impairment loss on Machinery A

₹
Carrying Value 5,25,000
Less: Recoverable Value i.e. higher of Value-in-use
and Fair value less cost of disposal 4,89,650
Impairment Loss 35,350

(v) Calculation of Impairment loss of CGU

1. First goodwill will be impaired fully and then the remaining impairment loss of ₹ 75,000 will be
allocated to Machinery A and B.
2. If we allocate remaining impairment loss to Machinery A and B on pro-rata basis, it would come to
₹ 45,000 on Machinery A. However, the impairment loss of Machinery A cannot exceed ₹ 35,350.
Hence, impairment to CGU will be as follows:
Carrying value before Impairment Carrying value after
impairment loss loss impairment loss
₹ ₹ ₹
Machinery A 5,25,000 35,350 4,89,650
Machinery B 3,50,000 39,650* 3,10,350
Inventory 2,00,000 - 2,00,000
Goodwill 1,50,000 1,50,000 -
Total 12,25,000 2,25,000 10,00,000

* Balancing figure.

(b) Carrying value after adjustment of depreciation

₹
Machinery A [4,89,650 – {(4,89,650-50,000)/5}] 4,01,720
Machinery B [3,10,350 – (3,10,350/7)] 2,66,014
Inventory 2,00,000
Goodwill -
Total 8,67,734

(c) Calculation of carrying value of CGU as on 31st March, 2019

The revised value of CGU is ₹ 11 Lakh. However, impaired goodwill cannot be reversed. Further, the
individual assets cannot be increased above the lower of recoverable value or Carrying Value as if the
assets were never impaired.
Accordingly, the carrying value as on 31st March, 2019 assuming that the impairment loss had never
incurred, will be:
Period Carrying Recoverable Final CV as at
Value Value 31st Mar 2019
Machinery A 4,30,000 4,50,000 4,30,000
Machinery B 3,00,000 (7,60,000 – 4,50,000) 3,10,000 3,00,000
Inventory 2,00,000 2,00,000 2,00,000
Goodwill ------------- ------------- ---------
Total 9,30,000 9,30,000 9,30,000
Hence the impairment loss to be reversed will be limited to ₹ 62,266 only (₹ 9,30,000 – ₹ 8,67,734).

QUESTION 89:
([Link].304– Question Bank)
Parent acquires an 80% ownership interest in Subsidiary for Rs 2,100 on April 1, 20X1. At that
date, Subsidiary’s net identifiable assets have a fair value of Rs 1,500. Parent chooses to
measure the non-controlling interests as the proportionate interest of Subsidiary’s net
identifiable assets. The assets of Subsidiary together are the smallest group of assets that
generate cash inflows that are largely independent of the cash inflows from other assets or

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groups of assets. Because other cash-generating units of Parent are expected to benefit from the synergies of
the combination, the goodwill of Rs 500 related to those synergies has been allocated to other cash-generating
units within Parent. On March 31, 20X2, Parent determines that the recoverable amount of cash-generating
unit Subsidiary is ₹ 1,000. The carrying amount of the net assets of Subsidiary, excluding goodwill, is Rs
1,350. Allocate the impairment loss on March 31, 20X2.

SOLUTION:
Non-controlling interests is measured as the proportionate interest of Subsidiary’s net identifiable assets,
i.e., Rs 300 (20% of Rs 1,500). Goodwill is the difference between the aggregate of the consideration
transferred and the amount of the non-controlling interests (Rs 2,100 + Rs 300) and the net identifiable
assets (Rs 1,500), i.e., Rs 900.

Since, the assets of Subsidiary together are the smallest group of assets that generate cash inflows that
are largely independent of the cash inflows from other assets or groups of assets; therefore, Subsidiary is
a cash-generating unit. Because other cash-generating units of Parent are expected to benefit from the
synergies of the combination, the goodwill of Rs 500 related to those synergies has been allocated to other
cash-generating units within Parent. Because the cash-generating unit comprising Subsidiary includes
goodwill within its carrying amount, it should be tested for impairment annually, or more frequently if
there is an indication that it may be impaired.

Testing Subsidiary (cash-generating unit) for impairment

Goodwill attributable to non-controlling interests is included in Subsidiary’s recoverable amount of Rs
1,000 but has not been recognised in Parent’s consolidated financial statements. Therefore, the carrying
amount of Subsidiary should be grossed up to include goodwill attributable to the non-controlling interests,
before being compared with the recoverable amount of Rs 1,000. Goodwill attributable to Parent’s 80%
interest in Subsidiary at the acquisition date is Rs 400 after allocating Rs 500 to other cash-generating
units within Parent. Therefore, goodwill attributable to the 20% non-controlling interests in Subsidiary at
the acquisition date is Rs 100.

Testing subsidiary for impairment on March 31, 20X2

On March 31, 20X2 Goodwill of Net identifiable Total(Rs)
subsidiary(Rs) assets(Rs)
Carrying amount 400 1,350 1,750
Unrecognised non-controlling interests 100 - 100
Adjusted carrying amount 500 1,350 1,850
Recoverable amount 1,000
Impairment loss 850
Allocating the impairment loss
The impairment loss of Rs 850 should be allocated to the assets in the unit by first reducing the carrying
amount of goodwill.

Therefore, Rs 500 of the Rs 850 impairment loss for the unit is allocated to the goodwill. If the partially-
owned subsidiary is itself a cash-generating unit, the goodwill impairment loss should be allocated to the
controlling and non-controlling interests on the same basis as that on which profit or loss is allocated. In
this case, profit or loss is allocated on the basis of relative ownership interests. Because the goodwill is
recognised only to the extent of Parent’s 80% ownership interest in Subsidiary, Parent recognises only 80%
of that goodwill impairment loss (i.e., Rs 400).
The remaining impairment loss of Rs 350 is recognised by reducing the carrying amounts of Subsidiary’s
identifiable assets.

Allocation of the impairment loss for Subsidiary on March 31, 20X2 Allocation of the impairment
loss for Subsidiary on March 31, 20X2
On March 31, 20X2 Goodwill of Net identifiable Total (Rs)
subsidiary (Rs) assets (Rs)
Carrying amount 400 1,350 1,750
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Impairment loss (400) (350) (750)

Carrying amount after impairment - 1,000 1,000
loss

QUESTION 90: (RTP May21)

([Link].504– Question Bank)
On 31 March 20X1, Vision Ltd acquired 80% of the equity shares of Mission Ltd for Rs.190
million. The fair values of the net assets of Mission Ltd that were included in the consolidated
statement of financial position of Vision Ltd at 31 March 20X1 were Rs.200 million. It is the
Group’s policy to value the non-controlling interest in subsidiaries at the date of acquisition at
its proportionate share of the fair value of the subsidiaries’ identifiable net assets.
On 31 March 20X4, Vision Ltd carried out its annual review of the goodwill on consolidation of Mission Ltd and
found evidence of impairment. No impairment had been evident when the reviews were carried out on 31 March
20X2 and 31 March 20X3. The review involved allocating the assets of Mission Ltd into three cash generating
units and computing the value in use of each unit. The carrying values of the individual units before any
impairment adjustments are given below.

Unit A Unit B Unit C

Rs. in million Rs. in million Rs. in million
Intangible assets 30 10 -
Property, Plant and Equipment 80 50 60
Current Assets 60 30 40
Carrying Values 170 90 100
Total Value in use of unit 180 66 104
It was not possible to meaningfully allocate the goodwill on consolidation tothe individual cash generating
units but all the other net assets of Mission Ltd are allocated in the table shown above.
The intangible assets of Mission Ltd have no ascertainable market value but all the current assets have a
market value that is at least equal to their carrying value. The value in use of Mission Ltd as a single cash-
generating unit on 31 March 20X4 is Rs.350 million.
Discuss and compute the accounting treatment of impairment of goodwill as per Ind AS 36?

SOLUTION
The goodwill on consolidation of Mission Ltd that is recognized in the consolidated balance sheet of Vision
Ltd is Rs. 30 million (Rs.190 million – 80% x Rs.200 million). This can only be reviewed for impairment as
part of the cash generating units to which it relates. Since here the goodwill cannot be meaningfully
allocated to the units, the impairment review is done in two parts.
Units A and C have values in use that are more than their carrying values. However, the value in use of Unit
B is less than its carrying amount. This means that the assets of unit B are impaired by Rs. 24 million (Rs.
90 million – Rs.66 million). This impairment loss will be charged to the statement of profit and loss.

Assets of Unit B will be written down on a pro-rata basis as shown in the table:
(Rs. in million)
Asset Impact on carrying value
Existing Impairment Revised
Intangible assets 10 (4)# 6
Property, plant and Equipment 50 (20)## 30
Current assets 30 Nil* 30
Total 90 (24) 66
* The current assets are not impaired because they are expected to realize at least their carrying value when
disposed of.
# 24*10/60 = 4
## 24*50/60 = 20
Following this review, the three units plus the goodwill are reviewed together i.e. treating Mission Limited
as a single cash generating Unit. The impact of this is shown in the following table, given that the recoverable
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amount of the business as a whole is Rs.350 million:

Rs. in million)
Component Impact of impairment review on carrying value
Existing Impairment Revised
Goodwill (see note below) 37.50 23.50) 14.00
Unit A 170.00 Nil 170.00
Unit B (revised) 66.00 Nil 66.00
Unit C 100.00 Nil 100.00
Total 373.50 (23.50) 350.00
Note: As per Ind AS 36, given that the subsidiary is 80% owned the goodwill must first be grossed up to
reflect a notional 100% investment. Therefore, the goodwill will be grossed up to Rs.37.50 million (Rs.30
million x 100/80).
The impairment loss of Rs.23.50 million (373.50-350) is all allocated to goodwill, leaving the carrying values
of the individual units of the business as shown in the table immediately above.
The table shows that the notional goodwill that relates to a 100% interest is written down by Rs.23.50 million
to Rs.14.00 million. However, in the consolidated financial statements the goodwill that is recognized is
based on an 80% interest so the loss that is actually recognized is Rs.18.80 million (Rs.23.50 million x 80%)
and the closing consolidated goodwill figure is Rs.11.20 million (Rs. 14.00 million x 80%) or (Rs.30p–
Rs.18.80 million).

QUESTION 91: (RTP NOV’24)

At 31st March, 20X1, the assets of a CGU are being reviewed for impairment. The carrying value of the
CGU’s net assets is RS.65 lakhs (excluding any restructuring provision), and remaining useful economic life
of recognised asset is eight years.
Management’s approved budgets at 31st March, 20X1 include restructuring costs of RS. 3,50,000 to be
incurred in 20X2; the restructuring is expected to generate cost savings of RS. 1,00,000 per annum from
20X3 onwards. Formal budgets have been prepared for the three years to 31st March, 20X4. A zero-growth
rate is assumed, because market conditions are extremely competitive, and this is expected to continue for
the foreseeable future. The future cash flow estimates are as follows:
Year With restructuring consideration Without restructuring consideration
RS. RS.
20X1-20X2 5,20,000 8,70,000
20X2-20X3 10,00,000 9,00,000
20X3-20X4 10,50,000 9,50,000
20X4-20X5 10,50,000 9,50,000
20X5-20X6 10,50,000 9,50,000
20X6-20X7 10,50,000 9,50,000
20X7-20X8 10,50,000 9,50,000

In 20X2, the net cash flows without restructuring (RS. 8,70,000) exceed the net cash flows with
restructuring (RS. 5,20,000) by the amount of the restructuring costs (RS. 3,50,000).
The future cash flows (which exclude inflation) have been discounted at a rate of 4%. For simplicity, it has
been assumed that the cash flows arise at the end of each year.
Compute Impairment Loss at 31st March, 20X1 when-
(i) Restructuring costs is recognised in the financial statements at 31st March, 20X1
(ii) Restructuring costs is not recognised in the financial statements at 31st March, 20X1

Answer
Computation of present value of cash flows under both the following conditions:
(Amount in RS.)
Year Discount factor With restructuring With restructuring
consideration consideration
Future net cash Present value Future net cash Present value
flows flows
(a) (b) (c)=(a)x(b) (d) (e)=(a)x(d)
20X1-20X2 0.962 5,20,000 5,00,000 8,70,000 8,36,000
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20X2-20X3 0.925 10,00,000 9,25,000 9,00,000 8,32,000

20X3-20X4 0.889 10,50,000 9,33,000 9,50,000 8,45,000
20X4-20X5 0.855 10,50,000 8,98,000 9,50,000 8,12,000
20X5-20X6 0.822 10,50,000 8,63,000 9,50,000 7,81,000
20X6-20X7 0.790 10,50,000 8,30,000 9,50,000 7,51,000
20X7-20X8 0.760 10,50,000 7,98,000 9,50,000 7,22,000
20X8-20X9 0.730 10,50,000 7,67,000 9,50,000 6,94,000
Value in use 65,14,000 62,73,000

The impairment calculations at 31st March, 20X1 differ according to whether or not provision for the
restructuring costs is recognised in the financial statements. This will depend on whether the requirements
of Ind AS 37 have been met for recognition.

(i) Provision for restructuring costs recognised at 31st March, 20X1

If provision has been made for restructuring costs, the costs and benefits of the restructuring
are taken into account in determining the CGU’s value in use. Here, the post – restructuring
value in use (RS. 6,514,000) exceeds the CGU’s carrying value (RS. 6,500,000 less
restructuring provision of RS. 350,000). Hence, there is no impairment of the CGU’s assets.
In the year to 31st March, 20X1, the financial statements reflect the following charges.
Restructuring provision RS. 350,000
Impairment loss Nil

(ii) No provision for restructuring costs recognised at 31st March, 20X1

If no provision for restructuring costs is permitted by Ind AS 37, the costs and benefits of the
restructuring have to be stripped out of the projections in determining the CGU’s value in use.
Here, the CGU’s carrying value (RS. 65,00,000) exceeds its pre- restructuring value in use (RS.
62,73,000). Therefore, there is an impairment loss of RS. 2,27,000.
In the year to 31st March, 20X1, the financial statements reflect the following charges:
Restructuring provisions Nil
Impairment loss RS. 2,27,000

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TOPIC 18
IND AS 37: PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS
QUESTION 92: (RTP May22)
([Link].214– Question Bank)
XYZ Ltd. offers a six-month warranty on its small to medium sized equipment, which can be put to use by the
customer with no installation support. The warranty comes with the equipment and the customer cannot
purchase it separately. This equipment is typically sold at a gross margin of 40%. XYZ Ltd. has made a
provision of Rs. 30,000 during the year ended 31st March, 20X2, which is approximately 1% of its gross margin
on the sale of these equipment. Based on past experience, it is expected that 1% of equipment sold have been
returned as faulty within the warranty period. Faulty equipment returned to XYZ Ltd. during the warranty
period are scrapped and the sale value is fully refunded to the customer.
Assuming that sales occurred evenly during the year, how should XYZ Ltd. evaluate whether any
additional warranty provision is required on equipment sold in the past as at 31st March, 20X2?
Had the warranty period been 2 years instead of six months, what additional criteria would XYZ
Ltd. need to consider?

SOLUTION
Calculation of additional warranty provisions:
Warranty claim covers 1% of gross margin, whereas customers are refunded the full selling price. As the
goods are scrapped it is assumed XYZ Ltd has no potential for re- imbursement from its supplier regarding
the faulty goods.
A calculation of warranty provision is set out below:
1% of annual gross margin is Rs. 30,000 therefore 100% of annual gross margin must be Rs. 30,00,000.
Since gross margin is 40%, sales should be Rs. 75,00,000. As provide in the question that the sales are
evenly spread during the year and given the six month warranty, half of the sales occurred in the second
half of the year is still covered within the warranty period as follows.
% Annual Product under Percentage Warranty
age sales warranty at 31st expected to provision
March, 20X2 be returned
Rs. Rs. Rs. Rs.
Gross 40% 30,00,000
margin
Selling 100% 75,00,000 37,50,000 1% 37,500
price
The warranty provision should therefore be increased by Rs. 7,500 (Rs. 37,500 – Rs. 30,000). As the
provision is expected to be used in the next 6 months no discounting is required.
If the warranty period is 2 years:
Since the outstanding period of warranties is 6 months (i.e. less than a year), no discounting is required.
However, if a longer warranty period is to be given, the entity will have to take into account the effect of the
time value of money. The amount of provision shall be the present value of the expenditures expected to
be required to settle the warranty obligation. (Refer Para 45 of Ind AS 37)
The discount rate shall be a pre-tax rate that reflects current market assessments of the time value of
money and the risks specific to the liability. The discount rate shall not reflect risks for which future cash
flow estimates have been adjusted. (Refer Para 47 of Ind AS 37)
% Annual Product under Percentage Warranty
age sales warranty at expected to provision
31st March, be returned
20X2
Rs. Rs. Rs. Rs.
Gross 40% 30,00,000
margin
Selling 100% 75,00,000 75,00,000 1% 75,000
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price
The warranty provision should therefore be increased by Rs. 45,000 (Rs. 75,000 – Rs. 30,000).
Further discounting of provision would be required.

QUESTION 93: (RTP Nov22)

([Link].215– Question Bank)
HVCL manufactures heavy equipment for construction industry. An order for supply of 90 equipment was
received from ABIL. The unit price of the equipment was agreed at Rs. 190 lakhs each. 64 equipment was
supplied during the year 20X1-20X2 and balance quantity remaining to be supplied as on 31.3.20X2. HVCL
has 5 equipment in its inventory as on 31.3.20X2. HVCL considered that the contract was an onerous contract
and therefore, the net realisable value of inventory has been taken as value of inventory as on 31.3.20X2.
The management of HVCL contends that costs incurred towards administrative overheads, finance charges,
R & D expenses, sales overhead, head quarter expenditure etc., are considered as period cost and hence not
considered for creation of provision. Hence, the same have not been included in the computation of
unavoidable cost.
The management of HVCL has submitted the details of costs that have been considered for creation of
provision towards onerous contract:
o Material cost - includes cost of material procured, cost of freight & insurance incurred for material
procurement and handling, loading and unloading charges incurred.
o Labour cost/ Factory Overheads - includes salaries and other expenses of direct production department,
and also expenses allocated from indirect departments to direct department.
o Material Overheads - Includes salaries and other expenses (including expenses allocated from other
departments) booked under departments linked with materials like purchases, stores and quality
control.
Accordingly, provision has been made considering the above costs only. The value of provision created for 21
remaining equipment to be produced is as per the working shown below:
Particulars Value (Rs. in lakh)
(i) Cost of production (which includes material cost, labour 199.00
cost/factory overhead and material overhead)
(ii) Selling price (190.00)
(iii) Differential cost per equipment 9.00
(iv) Differential cost of Rs. 9 Lakh per equipment for 21 189.00
equipment
Whether the company's accounting treatment of cost for creation of provision towards onerous
contracts is in line with the provisions of Ind AS 37?

SOLUTION
As per para 68 of Ind AS 37, onerous contract is a contract in which the unavoidable costs of meeting the
obligations under the contract exceed the economic benefits expected to be received under it. The
unavoidable cost under a contract reflects the least net cost of exiting from the contract, which is the lower
of the cost of fulfilling it and any compensation for penalties arising from failure to fulfilling it.
Ind AS 37 provides that the amount recognised shall be the best estimate of the expenditure required to
settle the present obligation, which is the amount that an entity would rationally pay to settle the obligation
at the end of the reporting period or to transfer it to a third party at that time. In case of onerous contracts,
an amount that an entity would rationally pay to settle the obligation would be the lower of the
compensation or penalties arising from failure to fulfil the contacts and excess of unavoidable cost of
meeting the obligations under the contract from the economic benefits expected to be received under it.
As per para 68 of Ind AS 37, the cost of fulfilling a contract comprises the costs that relate directly to the
contract. Costs that relate directly to a contract consist of both -
(a) The incremental costs of fulfilling that contract—for example, direct labour and materials; and
(b) An allocation of other costs that relate directly to fulfilling contracts— for example, an allocation of the
depreciation charge for an item of property, plant and equipment used in fulfilling that contract among
others.
The unavoidable costs of meeting the obligations under the contract are only costs that:
● "Are directly variable with the contract and therefore incremental to the performance of the contract;"
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● Do not include allocated or shared costs that will be incurred regardless of whether the entity fulfils
the contract or not; and
● Cannot be avoided by the entity's future actions.
Accordingly, HVCL has correctly measured the cost for creation of provision for onerous contracts
by considering material cost, labour cost (to the extent it relates directly to production) and material
overheads (to the extent it relates directly to production).
Further, HVCL is correct that the period cost will not be considered for measurement of cost for the
purpose of creation of provision on onerous contracts as they do not relate directly to fulfilling the
contracts.

QUESTION 94: (PQ) (New Question)

On 1st January, 20X2, the directors of Johansen Ltd. decided to terminate production at one of the
company’s divisions. This decision was publicly announced on 31st January, 20X2. The activities of the
division were gradually reduced from 1st April, 20X2 and closure is expected to be complete by 30th
September, 20X2.
At 31st January, 20X2, the directors prepared the following estimates of the financial implications of the
closure:
(i) Redundancy costs were initially estimated at Rs. 2 million. Further expenditure of Rs. 8,00,000 will
be necessary to retrain employees who will be affected by the closure but remained with Johansen
Ltd. in different divisions. This retraining will begin in early July 20X2. Latest estimates are that
redundancy costs will be Rs. 1.9 million, with retraining costs of Rs. 8,50,000.
(ii) Plant and equipment having an expected carrying value at 31st March, 20X2 of Rs. 8 million will have
a recoverable amount Rs. 1.5 million. These estimates remain valid.
(iii) The division is under contract to supply goods to a customer for the next three years at a pre-
determined price. It will be necessary to pay compensation of Rs. 6,00,000 to this customer. The
compensation actually paid, on 31st May, 20X2, was Rs. 5,50,000.
(iv) The division will make operating losses of Rs. 3,00,000 per month in the first three months of 20X2-
20X3 and Rs. 2,00,000 per month in the next three months of 20X2- 20X3. This estimate proved
accurate for April, 20X2 and May, 20X2.
(v) The division operates from a leasehold premise. The lease is a non-cancellable operating lease with an
unexpired term of five years from 31st March, 20X2. The annual lease rentals (payable on 31st March
in arrears) are Rs. 1.5 million. The landlord is not prepared to discuss an early termination payment.
Following the closure of the division it is estimated that Johansen Ltd. would be able to sub-let the
property from 1st October, 20X2.
Johansen Ltd. could expect to receive a rental of Rs. 3,00,000 for the six-month period from 1st October,
20X2 to 31st March, 20X3 and then annual rentals of Rs. 5,00,000 for each period ending 31st March, 20X4
to 31st March, 20X7. All rentals will be received in arrears.
Any discounting calculations should be performed using a discount rate of 5% per annum. You are given
the following data for discounting at 5% per annum:
Present value of Rs. 1 received at the end of year 1 = Rs. 0.95
Present value of Rs. 1 received at the end of year 1–2 inclusive = Rs. 1.86
Present value of Rs. 1 received at the end of year 1–3 inclusive = Rs. 2.72
Present value of Rs. 1 received at the end of year 1–4 inclusive = Rs. 3.54
Present value of Rs. 1 received at the end of year 1–5 inclusive = Rs. 4.32
Compute the amounts that will be included in the Statement of Profit and Loss for the year ended 31st
March, 20X2 in respect of the decision to close the division of Johansen Ltd.

Answers
As per Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, closure of a division is a
restructuring exercise. Ind AS 37 states that a constructive obligation to proceed with the restructuring
arises when at the reporting date the entity has:
– Commenced activities connected with the restructuring; or
– Made a public announcement of the main features of the restructuring to those affected by it. In this
case a public announcement has been made and so a provision will be necessary at 31st March, 20X2.

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This will result in the following charges to the Statement of Profit and Loss:
(i) Estimate of redundancy costs of Rs. 1.9 million is the best estimate of the expenditure at the date the
financial statements are authorized for issue. Changes in estimates after the reporting date are taken
into account for this purpose as an adjusting event after the reporting date. No charge is necessary
for the retraining costs as these are not incurred in 20X1-20X2 and cannot form part of a restructuring
provision as they are related to the ongoing activities of the entity.
(ii) Impairment of plant and equipment of Rs. 6.5 million is although not strictly part of the restructuring
provision the decision to restructure before the year-end means that related assets need to be reviewed
for impairment. In this case the recoverable amount of the plant and equipment is only Rs. 1.5 million.
As per Ind AS 36 ‘Impairment of Assets’, property, plant and equipment should be written down to
this amount, resulting in a charge of Rs. 6.5 million to the income statement.
(iii) For compensation for breach of contract of Rs. 0.55 million, same principle applies here as applied to
the redundancy costs.
(iv) No charge is recognized in 20X1-20X2 with respect to future operating losses of 20X2-20X3. Future
operating losses relate to future events and provisions are made only for the consequences of past
events.
(v) Ind AS 37 states that an onerous contract is one for which the expected cost of fulfilling the contract
exceeds the benefits expected from the contract. Provision is made for the lower of the expected net
cost of fulfilling the contract and the cost of early termination (not available in this case).
The net cost of fulfilling the contract is Rs. 4.51 million [Rs. 1.5 million x 4.32 – Rs. 0.3 million x 0.95
– Rs. 0.5 million x (4.32 – 0.95)].

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TOPIC 19
IND AS 38 -INTANGIBLE ASSETS
QUESTION 95: (MTP May’24)
([Link].107– Question Bank)
X Pharmaceutical Ltd. seeks your opinion in respect of following accounting transactions:
1. Acquired a 4 year license to manufacture a specialized drug at a cost of Rs. 1,00,00,000
at the start of the year. Production commenced immediately.
2. Also purchased another company at the start of year. As part of that acquisition the
company acquired a brand with a FV of Rs. 3,00,00,000 based on sales revenue. The life of the brand is
estimated at 15 years.
3. Spent Rs. 1,00,00,000 on an advertising campaign during the first six months. Subsequent sales have
shown a significant improvement and it is expected this will continue for 3 years.
4. It has commenced developing a new drug ‘Drug-A’. The project cost would be Rs. 10,00,00,000. Clinical
trial proved successful and such drug is expected to generate revenue over the next 5 years.
Cost incurred (accumulated) till March 31, 20X1 is Rs. 5,00,00,000.
Balance cost incurred during the financial year 20X1-20X2 is Rs. 5,00,00,000.
5. It has also commenced developing another drug ‘Drug B’. It has incurred Rs. 50,00,000 towards research
expenses till March 31, 20X2. The technological feasibility has not yet been established.
How the above transactions will be accounted for in the books of account of X Pharmaceutical Ltd?

SOLUTION
X Pharmaceutical Ltd. is advised as under:
1. It should recognise the drug license as an intangible asset, because it is a separate external purchase,
separately identifiable asset and considered successful in respect of feasibility and probable future cash
inflows.
The drug license should be recorded at Rs. 1,00,00,000.
2. It should recognise the brand as an intangible asset because it is purchased as part of acquisition and
it is separately identifiable. The brand should be amortised over a period of 15 years.
The brand will be recorded at Rs. 3,00,00,000.
3. The advertisement expenses of Rs. 1,00,00,000 should be expensed off.
4. The development cost incurred during the financial year 20X1-20X2 should be capitalised.
Cost of intangible asset (Drug A) as on March 31, 20X2
Opening cost Rs. 5,00,00,000
Development cost Rs. 5,00,00,000
Total cost Rs. 10,00,00,000
5. Research expenses of Rs. 50,00,000 incurred for developing ‘Drug B’ should be expensed off since
technological feasibility has not yet established.

QUESTION 96: (Jan21 EXAMS) & (MTP Nov22 & RTP NOV’24)
([Link].209– Question Bank)
Super Sounds Limited had the following transactions during the Financial Year 2019-2020.
(i) On 1st April 2019, Super Sound Limited purchased the net assets of Music Limited for Rs.
13,20,000. The fair value of Music Limited’s identifiable net assets was Rs. 10,00,000. Super Sound
Limited is of the view that due to the popularity of Music Limited’s product, the life of goodwill is 10 years.
(ii) On 4th May 2019, Super Sounds Limited purchased a Franchisee to organize musical shows from Armaan
TV for Rs. 80,00,000 and at an annual fee of 2% of musical shows revenue. The Franchisee expires after
5 years. Musical shows revenue was Rs.10,00,000 for financial year 2019-2020. The projected future
revenues for financial year 2020-2021 is Rs. 25,00,000 and Rs. 30,00,000 p.a. for the remaining 3 years
thereafter.
(iii) On 4th July 2019, Super Sounds Limited was granted a Copyright that had been applied for by Music
Limited. During the financial year 2019-2020, Super Sound Limited incurred Rs. 2,50,000 on legal cost to
register the Patent and Rs. 7,00,000 additional cost to successfully prosecute a copyright infringement
suit against a competitor.
The life of the copyright is for 10 years.

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Super Sound Limited follows an accounting policy to amortize all intangible on SLM (Straight Line Method) basis
or any appropriate basis over a maximum period permitted by relevant Ind AS, taking a full year amortization
in the year of acquisition.
You are required to prepare:
(i) A Schedule showing the intangible section in Super Sound Limited Balance Sheet as on 31st March 2020,
and
(ii) A Schedule showing the related expenses that would appear in the Statement of Profit and Loss of Super
Sound Limited for the year ended 2019-2020.

SOLUTION
i)
Super Sounds Limited
Balance Sheet (Extract relating to intangible asset) as at 31st March 2020
Note No. Rs.
Assets
(1) Non- current asset
Intangible assets 1 69,45,000

ii) Super Sounds Limited

Statement of Profit and Loss (Extract)
For the year ended 31st March 2020
Note No. Rs.
Revenue from Operations 10,00,000
Total Revenue 10,00,000
Expenses:
Amortization expenses 2 16,25,000
Other expenses 3 7,20,000
Total Expenses 23,45,000

Notes to Accounts (Extract)

1. Intangible Assets
Gross Block (Cost) Accumulated amortisation Net block
Opening Additions Closing Opening Additions Closing Opening Closing
Balance balance Balance balance Balance balance
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Goodwill* - 3,20,000 3,20,000 - - - - 3,20,000
(W.N.1)
Franchise** - 80,00,000 80,00,000 - 16,00,000 16,00,000 - 64,00,000
(W.N.2)
Copyright 2,50,000 2,50,000 25,000 25,000 - 2,25,000
(W.N.3)
Total - 85,70,000 85,70,000 - 16,25,000 16,25,000 - 69,45,000

*As per Ind AS 36, irrespective of whether there is any indication of impairment, an entity shall test goodwill
acquired in a business combination for impairment annually. This implies that goodwill is not amortised
annually but is subject to annual impairment, if any.
**As per the information in the question, the limiting factor in the contract for the use is time i.e., 5 years
and not the fixed total amount of revenue to be generated. Therefore, an amortisation method that is based
on the revenue generated by an activity that includes the use of an intangible asset is inappropriate and
amortisation based on time can only be applied.

2. Amortization expenses
Franchise (W.N.2) 16,00,000
. Copyright (W.N.3) 25,000 16,25,000
Other expenses
Legal cost on copyright 7,00,000
Fee for Franchise (10,00,000 x 2%) 20,000 7,20,000

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Working Notes:
P Particulars Rs.
(1) Goodwill on acquisition of business
Cash paid for acquiring the business 13,20,000
Less: Fair value of net assets acquired (10,00,000)
Goodwill 3,20,000

(2) Franchise 80,00,000

Less: Amortisation (over 5 years) (16,00,000)
Balance to be shown in the balance sheet 64,00,000

(3) Copyright 2,50,000

Less: Amortisation (over 10 years as per SLM) (25,000)
Balance to be shown in the balance sheet 2,25,000

QUESTION 97: (MTP Nov’23)

([Link].210– Question Bank)
1. A company engaged in the provision of Information Technology Products and Services incurred
following expenditure during the development phase of its software product that is to be offered
to its customers. The entity also purchases software from third parties for incorporating into its
end software product offered to its customers. The company is in the process of launching it in
the market for licensing to customers. The company also takes services of external professional
software developers for such software development purpose. Costs incurred in relation to the
development of its software product for the year ended 31 st March, 20X2 are as follows:
Particulars Amount
(Rs.
thousands)
Purchase price of imported software 600
Employment costs (Note 1) 1,200
Testing costs 1,800
Other costs directly related to customization (Note 2) 450
Professional fees paid for external software 220
developers
Costs of training provided to staff to operate the asset 195
Costs of advertising in market 1,560
Administrative and general overheads 825

Note 1: The software was developed in nine months ended 31st December, 20X1 and was capable of
operating in the manner intended by the entity. It was brought into use on 31st March, 20X2. The
employment costs are for the period of twelve months (i.e. up to 31 st March, 20X2). The employees were
engaged in developing the software and related activities.

Note 2: Other costs directly related to development include an abnormal cost of Rs. 50,000 in respect of
repairing the damage which resulted from a security breach.
What will be the amount of the software development costs that can be capitalized by explaining the reason
for each element of cost?

Solution
In the given fact pattern, the entity should apply the recognition and measurement principles relevant for
an internally generated intangible asset. The entity has to ensure compliance with additional
requirements relating to internally generated intangible assets in addition to general recognition criteria
and initial measurement of intangible asset. In the instant case, for the measurement of software
development cost, entity must evaluate the costs incurred for recognition of an intangible asset arising
from development phase with reference to paragraphs 65 to 67 of Ind AS 38.
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According to the said paragraphs, the initial carrying amount of the software will be computed as follows:
Particulars Amount Amount to be Remarks
(Rs. capitalised as
in Intangible Assets
thousands) (Rs. in thousands)
Purchase price of 600 600 The cost of materials or / and
imported software services used or consumed in
generating the intangible asset
and any directly attributable
cost of preparing the asset for
its intended use.

Employment costs 1,200 900 Employment costs for the

(Note 1) period of nine months are
directly attributable costs.
Therefore, the cost to be
capitalized is Rs. 900 thousand
(i.e., 9/12 x Rs. 1,200
thousand) for nine months as
the asset was ready for its
intended use by that time. It is
assumed that Rs. 100 thousand
is equally incurred each month.
Capitalisation of eligible costs
should cease when the asset is
capable of operating in the
manner intended by
management.

Testing costs 1,800 1,800 The cost of testing whether the

asset is functioning properly is
a directly attributable cost.
(Refer paragraph 59 of Ind AS
38)

Other costs directly 450 400 Cost of identified

related to inefficiencies deducted, i.e.,
development (Note Rs. 450 thousand –
2) Rs. 50 thousand.
Professional fees 220 220 The cost of materials or/and
paid for bringing the services used or consumed in
software to its generating the intangible asset
working condition
Costs of training 195 Nil Expenditure on training staff to
provided to staff operate the asset cannot be
capitalised. (Refer paragraph 67
of Ind AS 38)
Costs of 1,560 Nil Selling, administrative and
advertising in other general overhead
market expenditure cannot be
capitalised. (Refer paragraph 67
Administrative and 825 Nil
of Ind AS 38)
general overheads
Total 6,850 3,920

Accordingly, the initial carrying value of the software is Rs. 39,20,000. The remaining costs
will be charged to profit or loss.

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QUESTION 98: (SIMILAR TO RTP NOV 18)

([Link].405– Question Bank)
One of the senior engineers at XYZ has been working on a process to improve manufacturing efficiency and,
consequently, reduce manufacturing costs. This is a major project and has the full support of XYZʼs board of
directors. The senior engineer believes that the cost reductions will exceed the project costs within twenty four
months of their implementation. Regulatory testing and health and safety approval was obtained on 1 June
20X5. This removed uncertainties concerning the project, which was finally completed on 20 April 20X6. Costs
of Rs. 18,00,000, incurred during the year till 31st March 20X6, have been recognized as an intangible asset.
An offer of Rs. 7,80,000 for the new developed technology has been received by potential buyer but it has been
rejected by XYZ. Utkarsh believes that the project will be a major success and has the potential to save the
company Rs. 12,00,000 in perpetuity. Director of research at XYZ, Neha, who is a qualified electronic engineer,
is seriously concerned about the long term prospects of the new process and she is of the opinion that
competitors would have developed new technology at some time which would require to replace the new
process within four years. She estimates that the present value of future cost savings will be Rs. 9,60,000 over
this period. After that, she thinks that there is no certainty about its future. What would be the appropriate
accounting treatment of aforesaid issue?'

SOLUTION:
Ind AS 38 'Intangible Assets' requires an intangible asset to be recognised if, and only if, certain criteria
are met. Regulatory approval on 1 June 20X5 was the last criterion to be met, the other criteria have been
met as follows:
• Intention to complete the asset is apparent as it is a major project with full support from board
• Finance is available as resources are focused on project
• Costs can be reliably measured
• Benefits are expected to exceed costs – (in 2 years)

Amount of Rs. 15,00,000 (Rs. 18,00,000 x 10/12) should be capitalised in the Balance sheet of year ending
20X5-20X6 representing expenditure since 1 June 20X5.
The expenditure incurred prior to 1 June 20X5 which is Rs. 3,00,000 (2/12 x Rs. 18,00,000) should be
recognised as an expense, retrospective recognition of expense as an asset is not allowed.
Ind AS 36 'Impairment of assets' requires an intangible asset not yet available for use to be tested for
impairment annually.
Cash flow of Rs. 12,00,000 in perpetuity would clearly have a present value in excess of Rs. 12,00,000 and
hence there would be no impairment. However, the research director is technically qualified, so impairment
tests should be based on her estimate of a four-year remaining life and so present value of the future cost
savings of Rs. 9,60,000 should be considered in that case.
Rs. 9,60,000 is greater than the offer received (fair value less costs to sell) of Rs. 7,80,000 and so Rs.
9,60,000 should be used as the recoverable amount.
So, the carrying amount should be consequently reduced to Rs. 9,60,000.

Calculation of Impairment loss

Particulars Amount Rs.
Carrying amount (Restated) 15,00,000
Less: Recoverable amount 9,60,000
Impairment loss 5,40,000

Impairment loss of Rs. 5,40,000 is to be recognised in the profit and loss for the year
20X5-20X6.

Necessary adjusting entry to correct books of account will be:

₹ ₹
Operating expenses- Development expenditure Dr. 3,00,000
Operating expenses–Impairment loss of intangible assets Dr. 5,40,000
To Intangible assets – Development expenditure 8,40,000

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TOPIC 20
IND AS 40 - INVESTMENT PROPERTY
QUESTION 99: (SIMILAR TO RTP May21 & EXAM MAY22 & MTP May23 )
([Link].401– Question Bank)
X Ltd owned a land property whose future use was not determined as at 31 March 20X1.
How should the property be classified in the books of X Ltd as at 31 March 20X1?
During June 20X1, X Ltd commenced construction of office building on it for own use.
Presuming that the construction of the office building will still be in progress as at 31 March 20X2
(a) How should the land property be classified by X Ltd in its financial statements as at 31 March 20X2?
(b) Will there be a change in the carrying amount of the property resulting from any change in use of the
investment property?
(c) Whether the change in classification to, or from, investment properties is a change in accounting policy to
be accounted for in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and
Errors?
(d) Would your answer to (a) above be different if there were to be a management intention to commence
construction of an office building for own use; however, no construction activity was planned by 31 March
20X2?

SOLUTION:
As per paragraph 8(b) of Ind AS 40, any land held for currently undetermined future use, should be
classified as an investment property. Hence, in this case, the land would be regarded as held for capital
appreciation. Hence the land property should be classified by X Ltd as investment property in the financial
statements as at 31 March 20X1.
As per Para 57 of the Standard, an entity can change the classification of any property to, and from, an
investment property when and only when evidenced by a change in use. A change occurs when the property
meets or ceases to meet the definition of investment property and there is evidence of the change in use.
Mere management's intention for use of the property does not provide evidence of a change in use.
(a) Since X Ltd has commenced construction of office building on it for own use, the property should be
reclassified from investment property to owner occupied as at 31 March 20X2.
(b) As per Para 59, transfers between investment property, owner occupied and inventories do not
change the carrying amount of the property transferred and they do not change the cost of the
property for measurement or disclosure purposes.
(c) No. The change in classification to, or from, investment properties is due to change in use of the
property. No retrospective application is required and prior period's financial statements need not be
re-stated.
(d) Mere management intentions for use of the property do not evidence change in use. Since X Ltd has
no plans to commence construction of the office building during 20X1-20X2, the property should
continue to be classified as an investment property by X Ltd. in its financial statements as at 31
March 20X2.
Note: The answer to the above is as per ICAI Module. However, Different opinion exist and the
property can be reclassified as PPE.

QUESTION 100: (MTP Aug18)

([Link].402– Question Bank)
UK Ltd. has purchased a new head office property for Rs. 10 crores. The new office building
has 10 floors and the organization structure of UK Ltd. is as follows:

Floor 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Use Waiting Area Admin HR Accounts Inspection MD Office Canteen Vacant
Since UK Ltd. did not need the floors 8, 9 and 10 for its business needs, it has leased out the same to a
restaurant on a long-term lease basis. The terms of the lease agreement are as follows:
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⮚ Tenure of Lease Agreement - 5 Years

⮚ Non-Cancellable Period - 3 years
⮚ Lease Rent - annual lease rent receivable from these floors are Rs. 10,00,000 per floor with an escalation
of 5% every year.
Based on the certificate from its architect, UK Ltd. has estimated the cost of the 3 top floors as approximately
Rs. 3 crores. The remaining cost of Rs. 7 crores can be allocated as 25% towards Land and 75% towards
Building.
As on 31st March, 2018, UK Ltd. obtained a valuation report from an independent valuer who has estimated
the fair value of the property at Rs. 15 crores. UK Ltd. wishes to use the cost model for measuring Property,
Plant & Equipment and the fair value model for measuring the Investment Property. UK Ltd. depreciates the
building over an estimated useful life of 50 years, with no estimated residual value.
Advise UK Ltd. on the accounting and disclosures for the above as per the applicable Ind AS.

SOLUTION
(a) Ind AS 16 ‘Property, Plant and Equipment’ states that property, plant and equipment are tangible items
that are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes.
(b) As per Ind AS 40‘Investment property’, investment property is a property held to earn rentals or for
capital appreciation or both, rather than for use in the production or supply of goods or services or for
administrative purposes or sale in the ordinary course of business.
(c) Further, as per Ind AS 40, the building owned by the entity and leased out under one or more operating
leases will be classified as investment property. Here the top three floors have been leased out for 5
years with a non-cancellable period of 3 years. The useful life of the building is 50 years. The lease
period is far less than the useful life of the building leased out. Further, the lease rentals of three years
altogether do not recover the fair value of the floors leased i.e. 15 crore x 30% = 4.50 crore. Hence the
lease is an operating lease. Therefore, the 3 floors leased out as operating lease will be classified as
investment property in the books of lessor i.e. UK Ltd.
(d) However, for investment property, Ind AS 40 states that an entity shall adopt as its accounting policy
the cost model to all of its investment property. Ind AS 40 also requires that an entity shall disclose the
fair value of such investment property (ies).
(In crore)
PPE (70%) Investment Total
property (30%)
Land (25%) Building (75%)
Cost 1.75 5.25 3 10
FV 2.625 7.875 4.5 15
Valuation model followed Cost Cost Cost
Value recognized in the books 1.75 5.25 3
Less: Depreciation Nil (5.25/50) = (3/50) = 0.06
0.105 crore
Carrying value as on 31st March, 1.75 5.145 2.94
2018
Impairment loss No impairment loss since fair value is more than the cost

Note- Do not get confused over here.

Ind AS 40 will classify an asset. Ind AS 116 will do the recognition and accounting for that asset after it is
classified as a leasehold property according to Ind AS 40.

QUESTION 101: (New questions)

Besides manufacturing plants, A Ltd. has various other assets, not used for operational activities, e.g.,
freehold land, townships in different locations, excess of office space rented to ABC, etc. Also, A Ltd. has
some land, which are kept vacant as per the government regulations which require that a specified area
around the plant should be kept vacant.

The details of these assets are as under:

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Property Details
A Ltd.’s office building A Ltd.’s registered office in Delhi, is a 15 storey building, of which only 3 floors
(registered office) are occupied by A Ltd., whereas remaining floors are given on rent to other
companies. These agreements are usually for a period of 3 years. According
to A Ltd., such excess office space will continue to be let out on lease to
external parties and have no plans to occupy it, at least in near future.
Flats in Township As regards township in Location 1, there are approximately 2,000 flats in the
located in location 1 said township. It was built primarily for A Ltd.’s employees, hence,
approximately 80% of the flats are allotted to employees and remaining flats
are either kept vacant or given on rent to other external parties. A lease
agreement is signed between A Ltd. and an individual party for every 12
months being 1st April to 31st March. The lease entered is a cancellable lease
(cancellable at the option of any of the parties). Also, besides monthly rent,
additional charges are levied by A Ltd. on account of electricity, water, cable
connection, etc.
According to A Ltd., there is no intention of selling such excess flats or
allotting it to its employees.
Flats in township There are 1,000 flats in location 2 township, of which:
located in location 2 • 400 flats are given to employees for their own accommodation.
• 350 flats are given on rent to Central Government and State
Government for accommodation of their employees. Average lease
period being 12 months with cancellable clause in lease agreements.
• 250 flats are kept vacant.
Hostel located in 60 rooms in the hostel have been let out to G Ltd., to give accommodation to
location 1 their personnel. Lease agreement is prepared for every 11 months and
renewed thereafter. Besides the monthly rent amount, some charges are
levied towards water, electricity and other amenities, e.g., cable connection,
etc.
Land in location 1 In 20X4, A Ltd. purchased a plot of land on the outskirts of a major city. The
area has mainly low-cost public housing and very limited public transport
facilities. The government has plans to develop the area as an industrial park
in 5 years’ time and the land is expected to greatly appreciate in value if the
government proceeds with the plan. A Ltd. has not decided what to do with
the property.
Land in location 1 A portion of land has been leased out to C Ltd. for its manufacturing
operations. Land has been given on lease on a lease rental of Rs. 10 lacs p.a.
with a lease term of 25 years.
Land in location 2 A portion of the land has been given on rent to D Ltd. which has constructed
a petrol pump on such land. It has been leased for a period of 40 years and
renewed for a further period of 40 years.
Determine the classification of properties which are not held for operational
purposes, with suitable reasoning in the financial statements of A Ltd.

Answers
Property Classification of properties not held for operational purpose
A Ltd.’s office building Excess portion of office space has been given on lease to earn rental
(registered office) income. Out of 15 storey building, only 3 floors are occupied by A Ltd.
Such excess office space was constructed for the purpose of letting
it out. According to A Ltd., such excess office space will continue to
be let out on lease to external parties and have no plans to occupy it,
at least in near future. Further, office space given on rent, although in
same building, is separately identifiable from another owner-occupied
portion and hence can be sold separately (if required). Hence, the
excess space will qualify to be an investment property.
Flats in Township Excess flats have been given on lease to earn rental income. According
located in location 1 to A Ltd., there is no intention of selling such excess flats or allotting it
to its employees. Further, flats given on rent, can be sold separately
from flats occupied by A Ltd.’s employees as they are separately
identifiable. A Ltd. also charges its lessees on account of ancillary
services, i.e., water, electricity, cable connection, etc., but the monthly
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charges in such cases are generally not significant as compared to

rental payments. Hence, flats given on rent should qualify to be an
‘investment property’.
With regards to the flats kept vacant, A Ltd. has to evaluate the purpose
of holding these flats, i.e., whether these would be kept for earning
rentals or will it be allotted to its future employees. In case they are
held for earning rentals, it would be classified as an investment
property; and if they are held for allotment to future employees, it would
form part of property, plant and equipment.
Flats in township 350 flats are given on lease to earn rental income and assuming that
located in location 2 management intends to let out these flats on rent in future, such flats
should be classified as an ‘investment property.
With regards to the flats kept vacant, A Ltd. has to evaluate the purpose
of holding these flats, i.e., whether these would be kept for earning
rentals or will it be allotted to its future employees. In case they are
held for earning rentals, it would be classified as an investment
property; and if they are held for allotment to future employees, it would
form part of property, plant and equipment.
Hostel located in Rooms in a hostel have been let out to G Ltd. to be used by its
location 1 personnel. A Ltd. also charges G Ltd. on account of ancillary services,
i.e., water, electricity, cable connection, etc., but the monthly charges
in such cases are generally not significant as compared to rental
payments. Hence, it should be classified as an ‘Investment property’.
Land in location 1 Although management has not determined use for property after the
development of park, yet in the medium-term the land is held for capital
appreciation. As per Ind AS 40, if an entity has not determined that it
will use the land either as owner-occupied property or for short term
sale in the ordinary course of business, then it will be considered as
land held for capital appreciation. Therefore, management should
classify the property as an investment property.
Land in location 1 Since the land is held with an intention of giving it on lease and earning
capital appreciation over a period, it should be classified as an
‘Investment property’.
Land in location 2 Since the land is held with an intention of giving it on lease and earning
capital appreciation over a period, it should be classified as ‘Investment
property’.

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TOPIC 21
IND AS 41 - AGRICULTURE
QUESTION 102: (Similar to Exam May’23)
([Link].205– Question Bank)
XY Ltd. is a farming entity where cows are milked on a daily basis. Milk is kept in cold
storage immediately after milking and sold to retail distributors on a weekly basis. On 1
April 20X1, XY Ltd. ad a herd of 500 cows which were all three years old.
During the year, some of the cows became sick and on 30 September 20X1, 20 cows died.
On 1 October 20X1, XY Ltd. purchased 20 replacement cows at the market for ₹ 21,000 each. These 20
cows were all one year old when they were purchased.
On 31 March 20X2, XY Ltd. had 1,000 litres of milk in cold storage which had not been sold to retail
distributors. The market price of milk at 31 March 20X2 was ₹ 20 per litre. When selling the milk to
distributors, XY Ltd. incurs selling costs of ₹ 1 per litre. These amounts did not change during March 20X2
and are not expected to change during April 20X2.
Information relating to fair value and costs to sell is given below:
Date Fair value of a dairy cow (aged) Costs to sell a cow
1 Year 1.5 Years 3 Years 4 Years
1st April 20X1 20,000 22,000 27,000 25,000 1,000
1st October 20X1 21,000 23,000 28,000 26,000 1,000
31st March 20X2 21,500 23,500 29,000 26,500 1,100
You can assume that fair value of a 3.5 years old cow on 1st October 20X1 is ₹ 27,000.
Pass necessary journal entries of above transactions with respect to cows in the financial statements of XY
Ltd. for the year ended 31st March, 20X2? Also show the amount lying in inventory if any.

SOLUTION:
Journal Entries on 1st October, 20X1
(All figures in ₹)
Loss (on death of 20 cows) (Refer W.N.) Dr. 5,20,000
To Biological asset 5,20,000
(Loss booked on death of 20 cows)
Biological Asset (purchase of 20 new cows) (Refer W.N.) Dr. 4,00,000
To Bank 4,00,000
(Initial recognition of 20 new purchased cows at fair value less costs to sell)
Journal Entries on 31st March, 20X2
Loss on remeasurement of old cows Dr. 2,88,000
To Biological asset [(1,30,00,000 – 5,20,000) – 1,21,92,000] 2,88,000
(Subsequent measurement of cows at fair value less costs to sell)
Biological Asset (4,48,000 – 4,00,000) Dr. 48,000
To Gain on remeasurement of new cows 48,000
(Subsequent measurement of cows at fair value less costs to sell)
Inventory (Milk) as at 31st March, 20X2 = ₹ 19,000 (1,000 x (20 – 1))

Working Note:
Calculation of Biological asset at various dates
Number Age Fair Value Cost to Net(₹) Biological
Date (₹) Sell(₹) Assets(₹)
1st April 20X1 500 3 Years 27,000 1000 26,000 1,30,00,000
1st October 20X1 -20 3.5 Years 27,000 1,000 26,000 -5,20,000
1st October 20X1 20 1 Year 21,000 1,000 20,000 4,00,000
1,28,80,000
31st March 20X2 480 4 Years 26500 1100 25,400 1,21,92,000
20 1.5 Years 23500 1100 22,400 4,48,000
1,26,40,000

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QUESTION 103:
([Link].206– Question Bank)
Company X purchased 100 beef cattle at an auction for ₹ 1,00,000 on 30 September 20X1.
Subsequent transportation costs were ₹ 1,000 that is similar to the cost X would have to
incur to sell the cattle at the auction. Additionally, there would be a 2% selling fee on the
market price of the cattle to be incurred by the seller.
On 31 March 20X2, the market value of the cattle in the most relevant market increases to ₹ 1,10,000.
Transportation costs of ₹ 1,000 would have to be incurred by the seller to get the cattle to the relevant market.
An auctioneer’s fee of 2% on the market price of the cattle would be payable by the seller.
On 1 June 20X2, X sold 18 cattle for ₹ 20,000 and incurred transportation charges of ₹150. In addition, there
was a 2% auctioneer’s fee on the market price of the cattle paid by the seller.
On 15 September 20X2, the fair value of the remaining cattle was ₹ 82,820. 42 cattle were slaughtered on
that day, with a total slaughter cost of ₹ 4,200. The total market price of the carcasses on that day was ₹
48,300, and the expected transportation cost to sell the carcasses is ₹ 420. No other costs are expected.
On 30 September 20X2, the market price of the remaining 40 cattle was ₹ 44,800. The expected transportation
cost is ₹ 400. Also, there would be a 2% auctioneer’s fee on the market price of the cattle payable by the
seller.
Pass Journal entries so as to provide the initial and subsequent measurement for all above transactions.
Interim reporting periods are of 30 September and 31 March and the company determines the fair values on
these dates for reporting.

SOLUTION:
Value of cattle at initial recognition (30 September 20X1)
(All figures in ₹)
Biological asset (cattle) Dr. 97,000*
Loss on initial recognition Dr. 4,000
To Bank (Purchase and cost of transportation) 1,01,000
(Initial recognition of cattle at fair value less costs to sell)

*Fair value of cattle = 1,00,000 – 1,000 – 2,000 (2% of 1,00,000) = 97,000

Subsequent measurement at 31 March 20X2

(All figures in ₹)
Biological asset (cattle) Dr. 9,800
To Gain on Sale (Profit & Loss) 9,800
(Subsequent measurement of Cattle at fair value less costs to sell
(1,06,800** – 97,000))
** Fair value of cattle = 1,10,0000 – 1,000 – 2,200 (2% of 1,10,000) = 1,06,800

Sale of cattle on 1 June 20X2

(All figures in ₹)
Biological asset (cattle) Dr. 226
To Gain on Sale (Profit & Loss) 226
(Subsequent re-measurement of 18 Cattle at fair value less costs to sell
just prior to the point at which they are sold
[19,450 - {(1,06,800/100) x 18}]
Cost of Sales Dr. 19,450
To Biological asset (cattle) 19,450
(Recording a cost of sales figure separately with a corresponding reduction
in the value of the biological assets)
Bank Dr. 19,450
Selling expenses (150 + 400) Dr. 550
To Revenue 20,000
(Recognition of revenue from sale of cattle)

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Transfer of Cattle to Inventory on 15 September 20X2

(All figures in ₹)
Inventory (48,300 - 420) Dr. 47,880
Loss on remeasurement Dr. 1,176
To Biological Asset (Cattle) 44,856*
To Bank (Slaughtering cost) 4,200
(Transfer of cattle to inventory)
*Note: 44,856 is calculated as the proportion of cattle sold using the fair value (1,06,800+ 226 – 19,450) x
42/82)

Subsequent measurement of cattle at 30 September 20X2

(All figures in ₹)
Loss on remeasurement Dr. 18,440
To Biological Asset (Cattle) 18,440
(Subsequent measurement of Cattle at fair value less costs to sell
[43,504## – {(1,06,800 + 226 – 19,450)– 44,856}]
##Fair value of cattle = 44,800 – 400 – 896 (2% of 44,800) = 43,504

QUESTION 104:
([Link].303– Question Bank)
Agro Foods Ltd. runs a poultry farm business. It has received a government grant from the government for
setting up a new poultry unit in a backward area. Agro Foods Ltd used the amount of government grants
to buy the first batch of broiler birds, incubators etc. The broiler birds are measured at fair value less costs
to sell. However, the incubator machine is measured as per the cost model in Ind AS 16.
As such there are no conditions attached to the release of the government grants pertaining to purchase
of poultry birds. However, as regards the investment in incubators and other related plant and machinery
items, the government grant contains a condition that the plant and machinery item should be used for a
minimum period of 3 years. The useful life of the incubator machine has also been determined to be 3
years in accordance with the management estimate of the time period over which the economic benefits
embedded in the incubator machine shall be consumed.
Advise the accounting requirements prescribed in Ind AS 41 Agriculture and Ind AS 20 Accounting for
Government Grants and Disclosure of Government Assistance in respect of both the government grants?

SOLUTION
Ind AS 41 requires an unconditional government grant related to a biological asset measured at its fair
value less costs to sell to be recognised in profit or loss when, and only when, the government grant
becomes receivable.
If a government grant is conditional, including when a government grant requires an entity not to engage
in specified agricultural activity, an entity should recognize the government grant in profit or loss when,
and only when, the conditions attaching to the government grant are met.
This provision of Ind AS 41 is not applicable as we have been informed that there are no conditions attached
to the release of the government grant pertaining to broiler birds.
Accordingly, the amount of government grant attributable to the broiler birds which qualify as a biological
bird shall be recognized in profit or loss account when the grant becomes receivable.
If a government grant relates to a biological asset measured at its cost less any accumulated depreciation
and any accumulated impairment losses, the entity applies Ind AS 20 Accounting for Government Grants
and Disclosure of Government Assistance.
The incubator machine does not qualify as a biological asset as it is specifically covered by Ind AS 16 which
states that plant and machinery items used to develop or maintain biological assets is covered by Ind AS
16. Therefore, the provisions relating to Government grants contained in Ind AS 41 will not apply
to the incubator machine.
Therefore, we have to apply directly the provisions contained in Ind AS 20. Ind AS 20 contains two methods
of presentation in financial statements of grants (or the appropriate portions of grants) related to assets

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are regarded as acceptable alternatives:

▪ One method recognises the grant as deferred income that is recognized in profit or loss on a systematic
basis over the useful life of the asset.
▪ The other method deducts the grant in calculating the carrying amount of the asset. The grant is
recognized in profit or loss over the life of a depreciable asset as a reduced depreciation expense.
Therefore, the grant relating to incubator machine will have to be accounted as a deferred income that is
recognized in Profit or loss on a systematic basis over a period of 3 years in line with the condition attached
to the grant.
Alternatively, the grant may be deducted in determining the carrying amount of the incubator. In such a
case the grant is recognised in Profit or Loss over the 3-year useful life of the depreciable incubator machine
as a reduced depreciation expense

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TOPIC 22
INDAS 101 - FIRST TIME ADOPTION OF IND AS
QUESTION 105: (July21 EXAM, MTP May’23)
([Link].103– Question Bank)
Government of India provides loans to MSMEs at a below-market rate of interest to fund the set-up of a new
manufacturing facility. Sukshma Limited's date of transition to Ind AS is 1 st April 2020.
In financial year 2014-2015, the Company had received a loan of Rs. 2.0 crore at a below - market rate of
interest from the government. Under Indian GAAP, the Company had accounted for the loan as equity and the
carrying amount was Rs. 2.0 crore at the date of transition. The amount repayable on 31 st March 2024 will be
Rs. 2.50 crore.
The Company has been advised to recognize the difference of Rs. 0.50 crores in equity by correspondingly
increasing the value of various assets under property, plant & equipment by an equivalent amount on
proportionate basis. Further, on 31st March 2024 when the loan has to be repaid, Rs. 2.50 crore should be
presented as a deduction from property, plant & equipment.
Discuss the above treatment and share your views as per applicable Ind AS.

SOLUTION
Requirement as per Ind AS:
A first-time adopter shall classify all government loans received as a financial liability or an equity
instrument in accordance with Ind AS 32. A first-time adopter shall apply the requirements in Ind AS 109
and Ind AS 20, prospectively to government loans existing at the date of transition to Ind AS and shall not
recognise the corresponding benefit of the government loan at a below-market rate of interest as a
government grant.
Treatment to be done:
Consequently, if a first-time adopter did not, under its previous GAAP, recognise and measure a
government loan at a below-market rate of interest on a basis consistent with Ind AS requirements, it shall
use its previous GAAP carrying amount of the loan at the date of transition to Ind AS as the carrying
amount of the loan in the opening Ind AS Balance Sheet. An entity shall apply Ind AS 109 to the
measurement of such loans after the date of transition to Ind AS.
In the instant case, the loan meets the definition of a financial liability in accordance with Ind AS 32.
Company therefore reclassifies it from equity to liability. It also uses the previous GAAP carrying amount
of the loan at the date of transition as the carrying amount of the loan in the opening Ind AS balance sheet.
It calculates the annual effective interest rate (EIR) starting 1 st April 2020 as below: EIR = Amount /
Principal(1/t) i.e. 2.50/2(1/4) i.e. 5.74%. approx. At this rate, Rs. 2 crore will accrete to Rs. 2.50 crore as at
31st March 2024.
During the next 4 years, the interest expense charged to statement of profit and loss shall be:

Year ended Opening Interest expense for the year (Rs.) @ Closing amortised cost
amortised cost 5.74% p.a. approx. (Rs.)
(Rs.)
31st March 2021 2,00,00,000 11,48,000 2,11,48,000
31st March 2022 2,11,48,000 12,13,895 2,23,61,895
31st March 2023 2,23,61,895 12,83,573 2,36,45,468
31st March 2024 2,36,45,468 13,54,532 2,50,00,000

An entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any government loan
originated before the date of transition to Ind AS, provided that the information needed to do so had been
obtained at the time of initially accounting for that loan.
The accounting treatment is to be done as per above guidance and the advice which the company has been
provided is not in line with the requirements of Ind AS 101.

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QUESTION 106: (SIMILAR TO RTP May20)

([Link].208– Question Bank)
On April 1, 20X1, Sigma Ltd. issued 30,000 6% convertible debentures of face value of Rs. 100
per debenture at par. The debentures are redeemable at a premium of 10% on 31 March 20X5
or these may be converted into ordinary shares at the option of the holder. The interest rate for
equivalent debentures without conversion rights would have been 10%. The date of transition to
Ind AS is 1 April 20X3. Suggest how should Sigma Ltd. account for this compound financial
instrument on the date of transition. The present value of Rs. 1 receivable at the end of each year based on
discount rates of 6% and 10% can be taken as:

End of year 6% 10%

1 0.94 0.91
2 0.89 0.83
3 0.84 0.75
4 0.79 0.68

SOLUTION
The carrying amount of the debenture on the date of transition under previous GAAP, assuming that all
interest accrued other than premium on redemption have been paid, will be Rs. 31,50,000 [(30,000 x 100)
+ (30,000 x 100 x 10/100 x 2/4)]. The premium payable on redemption is being recognised as borrowing
costs as per para 4(b) of AS 16 i.e., under previous GAAP on straight-line basis.
As per para D18 of Ind AS 101, Ind AS 32, Financial Instruments: Presentation, requires an entity to split
a compound financial instrument at inception into separate liability and equity components. If the liability
component is no longer outstanding, retrospective application of Ind AS 32 would involve separating two
portions of equity. The first portion is recognised in retained earnings and represents the cumulative
interest accreted on the liability component. The other portion represents the original equity component.
However, in accordance with this Ind AS, a first-time adopter need not separate these two portions if the
liability component is no longer outstanding at the date of transition to Ind AS.
In the present case, since the liability is outstanding on the date of transition, Sigma Ltd. will need to split
the convertible debentures into debt and equity portion on the date of transition. Accordingly, we will first
measure the liability component by discounting the contractually determined stream of future cash flows
(interest and principal) to present value by using the discount rate of 10% p.a. (being the market interest
rate for similar debentures with no conversion option).
(Rs.)
Interest payments p.a. on each debenture 6
Present Value (PV) of interest payment for years 1 to 4 (6 X 3.17) (Note 1) 19.02
PV of principal repayment (including premium) 110 X 0.68 (Note 2) 74.80
Total liability component per debenture 93.82
Equity component per debenture (Balancing figure) 6.18
Face value of debentures 100.00
Total equity component for 30,000 debentures 1,85,400
Total debt amount (30,000 X 93.82) 28,14,600
Thus, on the date of initial recognition, the amount of Rs. 30,00,000 being the amount of debentures will
be split as under:
Debt Rs. 28,14,600
Equity Rs. 1,85,400
However, on the date of transition, unwinding of Rs. 28,14,600 will be done for two years as follows:
Year Opening balance Finance cost Interest paid Closing balance
@ 10%
1 28,14,600 2,81,460 1,80,000 29,16,060
2 29,16,060 2,91,606 1,80,000 30,27,666
Therefore, on transition date, Sigma Ltd. shall –
a) Recognise the carrying amount of convertible debentures at Rs. 30,27,666;
b) Recognise equity component of compound financial instrument of Rs. 1,85,400;

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c) Debit Rs. 63,066 to retained earnings being the difference between the previous GAAP amount of Rs.
31,50,000 and Rs. 30,27,666 and the equity component of compound financial instrument of Rs.
1,85,400; and
d) Derecognise the debenture liability in previous GAAP of Rs. 31,50,000.

Notes:
1. 3.17 is present value of annuity factor of Rs. 1 at a discount rate of 10% for 4 years.
2. On maturity, Rs. 110 will be paid (Rs.100 as principal payment + Rs. 10 as premium)

QUESTION 107: (RTP Nov’22)

([Link].213– Question Bank)
On 1st April 20X1, Nuogen Ltd. had granted 1,20,000 share options to its employees with the
vesting condition being a service condition as follows:
● Vesting date : 31st March 20X2 - 80,000 share options (1-year vesting period since grant
date)
● Vesting date : 31st March 20X5 - 40,000 share options (4-year vesting period since grant date)
Each option can be converted into one equity share of Nuogen Ltd. The fair value of the options on grant date,
i.e., on 1st April 20X1 was Rs. 20.
Nuogen Ltd. is required to prepare financial statements in Ind AS for the financial year ending 31st March
20X4. The transition date for Ind AS being 1st April 20X2.
The entity has disclosed publicly the fair value of both these equity instruments as determined at the
measurement date, as defined in Ind AS 102.
The previous applicable GAAP for the entity was IGAAP (AS) and therein, the entity had not adopted intrinsic
method of valuation.
The share options have not been yet exercised by the employees of Nuogen Ltd.
How the share based payment should be reflected in, the books of Nuogen Ltd. as on 31st March
20X4, assuming that the entity has erred by not passing any entry for the aforementioned
transactions in the books of Nuogen Ltd. on grant date, i.e. 1st April 20X1?

SOLUTION
For 80,000 share-based options vested before transition date:
Ind AS 101 provides that a first-time adopter is encouraged, but not required, to apply Ind AS 102 on
‘Share-based Payment’ to equity instruments that vested before the date of transition to Ind AS. Hence,
Nuogen Ltd. may opt for the exemption given in Ind AS 101 for 80,000 share options vested before the
transition date. However, since no earlier accounting was done for these share-based options under
previous GAAP too, therefore this led to an error on the transition date, as detected on the reporting date
i.e. 31st March, 20X4. Hence, being an error, no exemption could be availed by Nuogen Ltd. on transition
date with respect to Ind AS 102.

While preparing the financial statements for the financial year 20X3 -20X4, an error has been discovered
which occurred in the year 20X1 -20X2, i.e., for the period which was earlier than earliest prior period
presented. The error should be corrected by restating the opening balances of relevant assets and/or
liabilities and relevant component of equity for the year 20X2-20X3. This will result in consequential
restatement of balances as at 1st April, 20X2 (i.e., opening balance sheet as at 1st April, 20X2).
Accordingly, on retrospective calculation of Share based options with respect to 80,000 options, Nuogen
Ltd. will create ‘Share based payment reserve (equity)’ by Rs. 16,00,000 and correspondingly adjust the
same though Retained earnings.

For 40,000 share based options to be vested on 31st March, 20X5:

Since share-based options have not been vested before transition date, no option as per Ind AS 101 is
available to Nuogen Ltd. The entity will apply Ind AS 102 retrospectively. However, Nuogen Ltd. did not
account for the same at the grant date. This will result in consequential restatement of balances as at 1st
April, 20X2 (i.e., opening balance sheet as at 1st April, 20X2). Adjustment is to be made by recognising the
‘ Share based payment reserve (equity)’ and adjusting the retained earnings by Rs. 2,00,000.
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Further, expenses for the year ended 31st March, 20X3 and share based payment reserve (equity) as at
31st March, 20X3 were understated because of non-recognition of ‘employee benefits expense’ and related
reserve. To correct the above errors in the annual financial statements for the year ended 31st March,
20X4, the entity should restate the comparative amounts (i.e., those for the year ended 31 st March, 20X3)
in the statement of profit and loss. In the given case, ‘Share based payment reserve (equity)’ would be
credited by Rs. 2,00,000 and ‘employee benefits expense’ would be debited by Rs. 2,00,000

For the year ending 31st March, 20X4, ‘Share based payment reserve (equity)’ would be credited by Rs.
2,00,000 and ‘employee benefits expense’ would be debited by Rs. 2,00,000.

Working Note:

Period Lot Proportion Fair value Cumulative Expenses

expenses
a b d= b x a e = d-
previous
period d
20X1-20X2 1 (1-year vesting period) 1/1 16,00,000 16,00,000 16,00,000
20X1-20X2 2 (4-year vesting period) 1/4 8,00,000 2,00,000 2,00,000
20X2-20X3 2 (4-year vesting period) 2/4 8,00,000 4,00,000 2,00,000
20X3-20X4 2 (4-year vesting period) 3/4 8,00,000 6,00,000 2,00,000

QUESTION 108: (SIMILAR TO MTP Oct20)

([Link].302– Question Bank)
Shaurya Limited is the company having its registered and corporate office at New Delhi. 60% of Shaurya
Limited’s shares are held by the Government of India and rest by other investors.
This is the first time that Shaurya limited would be applying Ind AS for the preparation of its financials for the
current financial year 2019-2020. Following balance sheet is prepared as per earlier GAAP as at the beginning
of the preceding period along with the additional information:
Balance Sheet as at 31 March 2018
(All figures are in ’000, unless otherwise specified)
Particulars Amount
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 10,00,000
(b) Reserves & Surplus 25,00,000
(2) Non-Current Liabilities
(a) Long Term Borrowings 4,50,000
(b) Long Term Provisions 3,50,000
(c) Deferred tax liabilities 3,50,000
(3) Current Liabilities
(a) Trade Payables 22,00,000
(b) Other Current Liabilities 4,50,000
(c) Short Term Provisions 12,00,000
TOTAL 85,00,000
ASSETS
(1) Non-Current Assets
(a) Property, Plant & Equipment (net) 20,00,000
(b) Intangible assets 2,00,000
(c) Goodwill 1,00,000
(d) Non-current Investments 5,00,000
(e) Long Term Loans and Advances 1,50,000
(f) Other Non-Current Assets 2,00,000
(2) Current Assets
(a) Current Investments 18,00,000
(b) Inventories 12,50,000
(c) Trade Receivables 9,00,000
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(d) Cash and Bank Balances 10,00,000

(e) Other Current Assets 4,00,000
TOTAL 85,00,000

Additional Information (All figures are in ’000):

1) Other current liabilities include Rs. 3,90,000 liabilities to be paid in cash such as expense payable, salary
payable etc. and Rs. 60,000 are statutory government dues.
2) Long term loans and advances include Rs. 40,000 loan and the remaining amount consists Advance to staff
of Rs. 1,10,000.
3) Other non-current assets of Rs. 2,00,000 consists Capital advances to suppliers.
4) Other current assets include Rs. 3,50,000 current assets receivable in cash and Prepaid expenses of Rs.
50,000.
5) Short term provisions include Dividend payable of Rs. 2,00,000. The dividend payable had been as a result
of board meeting wherein the declaration of dividend for financial year 2017-2018 was made. However, it
is subject to approval of shareholders in the annual general meeting.
Chief financial officer of Shaurya Limited has also presented the following information against corresponding
relevant items in the balance sheet:
a) Property, Plant & Equipment consists a class of assets as office buildings whose carrying amount is Rs.
10,00,000. However, the fair value of said office building as on the date of transition is estimated to be Rs.
15,00,000. Company wants to follow revaluation model as its accounting policy in respect of its property,
plant and equipment for the first annual Ind AS financial statements.
b) The fair value of Intangible assets as on the date of transition is estimated to be Rs. 2,50,000. However,
the management is reluctant to incorporate the fair value changes in books of account.
c) Shaurya Ltd. had acquired 80% shares in a company, Excel private limited few years ago thereby acquiring
the control upon it at that time. Shaurya Ltd. recognised goodwill as per erstwhile accounting standards by
accounting the excess of consideration paid over the net assets acquired at the date of acquisition. Fair
value exercise was not done at the time of acquisition.
d) Trade receivables include an amount of Rs. 20,000 as provision for doubtful debts measured in accordance
with previous GAAP. Now as per latest estimates using hind sights, the provision needs to be revised to Rs.
25,000.
e) Company had given a loan of Rs. 1,00,000 to an entity for the term of 10 years six years ago. Transaction
costs were incurred separately for this loan. The loan carries an interest rate of 7%. The principal amount
is to be repaid in equal instalments over the period of ten years at the year end. Interest is also payable at
each year end. The fair value of loan as on the date of transition is Rs. 50,000 as against the carrying
amount of loan which at present amounts to Rs. 40,000. However, Ind AS 109 mandates to recognise the
interest income as per effective interest method after the adjustment of transaction costs. Management says
it is tedious task in the given case to apply the effective interest rate changes with retrospective effect and
hence is reluctant to apply the same retrospectively in its first-time adoption.
f) In the long-term borrowings, Rs. 4,50,000 of component is due towards the State Government. Interest is
payable on the government loan at 4%, however the prevailing rate in the market at present is 8%. The fair
market value of loan stands at Rs. 4,20,000 as on the relevant date.
g) Under Previous GAAP, the mutual funds were measured at cost or market value, whichever is lower. Under
Ind AS, the Company has designated these investments at fair value through profit or loss. The value of
mutual funds as per previous GAAP is Rs. 2,00,000 as included in ‘current investment’. However, the fair
value of mutual funds as on the date of transition is Rs. 2,30,000.
h) Ignore separate calculation of deferred tax on above adjustments. Assume the net deferred tax income to
be Rs. 50,000 on account of Ind AS transition adjustments.
Requirements:
● Prepare transition date balance sheet of Shaurya Limited as per Indian Accounting Standards
Show necessary explanation for each of the items presented by chief financial officer in the form
of notes, which may or may not require the adjustment as on the date of transition.

SOLUTION:
Transition date (opening) IND-AS BALANCE SHEET of SHAURYA LIMITED As at 1 April 2018
(All figures are in ‘000, unless otherwise specified)
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Particulars Previous Transitional Opening Ind

GAAP Ind AS AS Balance
adjustments Sheet
ASSETS
Non-current assets
Property, plant and equipment (Note 1) 20,00,000 5,00,000 25,00,000
Goodwill (Note 2) 1,00,000 - 1,00,000
Other Intangible assets (Note 3) 2,00,000 - 2,00,000
Financial assets:
Investment 5,00,000 - 5,00,000
Loans (Note 4) 40,000 10,000 50,000
Other financial assets 1,10,000 - 1,10,000
Other non-current assets 2,00,000 - 2,00,000
Current assets
Inventories 12,50,000 - 12,50,000
Financial Assets
Investment (Note 5) 18,00,000 30,000 18,30,000
Trade receivables (Note 6) 9,00,000 - 9,00,000
Cash and cash equivalents/Bank 10,00,000 - 10,00,000
Other financial assets 3,50,000 - 3,50,000
Other current assets 50,000 - 50,000
TOTAL ASSETS 85,00,000 5,40,000 90,40,000
EQUITY AND LIABILITIES
Equity
Equity share capital 10,00,000 - 10,00,000
Other equity 25,00,000 7,90,000 32,90,000
Non-current liabilities
Financial liabilities
Borrowings (Note-7) 4,50,000 - 4,50,000
Provisions 3,50,000 - 3,50,000
Deferred tax liabilities (Net) 3,50,000 (50,000) 3,00,000
Current liabilities
Financial liabilities
Trade payables 22,00,000 - 22,00,000
Other financial liabilities 3,90,000 - 3,90,000
Other current liabilities 60,000 - 60,000
Provisions (Note-8) 12,00,000 (2,00,000) 10,00,000
TOTAL EQUITY AND LIABILITIES 85,00,000 5,40,000 90,40,000

OTHER EQUITY
Retained Earnings (Rs.) Fair value reserve Total
As at 31 March, 2018 27,90,000 (W.N.1) 5,00,000 32,90,000
Working Note 1:
Retained earnings balance:
Balance as per Earlier GAAP 25,00,000
Transitional adjustment due to loan’s fair value 10,000
Transitional adjustment due to increase in mutual fund’s fair value 30,000
Transitional adjustment due to decrease in deferred tax liability 50,000
Transitional adjustment due to decrease in provisions (dividend) 2,00,000
Total 27,90,000
Disclosure forming part of financial statements:
Proposed dividend on equity shares is subject to the approval of the shareholders of the company at the
annual general meeting and should not recognized as liability as at the Balance Sheet date.

Note 1: Property, plant & Equipment:

As per para D5 of Ind AS 101, an entity may elect to measure an item of property, plant and equipment at
the date of transition to Ind AS at its fair value and use that fair value as its deemed cost at that date.

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Para D7AA has to be applied for all items of property, plant and equipment. So, if D5 exemption is taken
for buildings, Ind AS will have to be applied retrospectively for other assets as well. Since, an entity elects
to measure an item of property, plant and equipment at the date of transition to Ind AS at its fair value
and use that fair value as its deemed cost at that date, it is assumed that the carrying amount of other
assets based on retrospective application of Ind AS is equal to their fair value of Rs. 10 lakhs.

Note 2: Goodwill:
Ind AS 103 mandatorily requires measuring the assets and liabilities of the acquiree at its fair value as on
the date of acquisition. However, a first-time adopter may elect to not apply the provisions of Ind AS 103
with retrospective effect that occurred prior to the date of transition to Ind AS.
Hence company can continue to carry the goodwill in its books of account as per the previous GAAP.

Note 3: Intangible assets:

Para D7 read with D6 of Ind AS 101 states that a first-time adopter may elect to use a previous GAAP
revaluation at, or before, the date of transition to Ind AS as deemed cost at the date of the revaluation, if
the revaluation was, at the date of the revaluation, broadly comparable to:
a) Fair value; or
b) Cost or depreciated cost in accordance with Ind AS, adjusted to reflect, f or example, changes in a
general or specific price index.
However, there is a requirement that Intangible assets must meet the definition and recognition criteria as
per Ind AS 38.
Hence, company can avail the exemption given in Ind AS 101 as on the date of transition to use the carrying
value as per previous GAAP.

Note 4: Loan:
Para B8C of Ind AS 101 states that if it is impracticable (as defined in Ind AS 8) for an entity to apply
retrospectively the effective interest method in Ind AS 109, the fair value of the financial asset or the
financial liability at the date of transition to Ind ASs shall be the new gross carrying amount of that financial
asset or the new amortised cost of that financial liability at the date of transition to Ind AS.
Accordingly, Rs. 50,000 would be the gross carrying amount of loan and difference of Rs. 10,000 (Rs.
50,000 – Rs. 40,000) would be adjusted to retained earnings.

Note 5: Mutual Funds:

Para 29 of Ind AS 101 states that an entity is permitted to designate a previously recognised financial asset
as a financial asset measured at fair value through profit or loss in accordance with paragraph D19A. The
entity shall disclose the fair value of financial assets so designated at the date of designation and their
classification and carrying amount in the previous financial statements.
D19A states that an entity may designate a financial asset as measured at fair value through profit or loss
in accordance with Ind AS 109 on the basis of the facts and circumstances that exist at the date of
transition to Ind AS.

Note 6: Trade receivables:

Para 14 of Ind AS 101 states that an entity’s estimates in accordance with Ind AS at the date of transition
to Ind AS shall be consistent with estimates made for the same date in accordance with previous GAAP
(after adjustments to reflect any difference in accounting policies), unless there is objective evidence that
those estimates were in error.
Para 15 of Ind AS 101 further states that an entity may receive information after the date of transition to
Ind AS about estimates that it had made under previous GAAP. In accordance with paragraph 14, an entity
shall treat the receipt of that information in the same way as non - adjusting events after the reporting
period in accordance with Ind AS 10, Events after the Reporting Period.
The entity shall not reflect that new information in its opening Ind AS Balance Sheet (unless the estimates
need adjustment for any differences in accounting policies or there is objective evidence that the estimates
were in error). Instead, the entity shall reflect that new information in profit or loss (or, if appropriate, other
comprehensive income) for the year ended 31 March 2019.

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Note 7: Government Grant:

Para 10A of Ind AS 20 states that the benefit of a government loan at a below-market rate of interest is
treated as a government grant. The loan shall be recognised and measured in accordance with Ind AS 109,
Financial Instruments. The benefit of the below-market rate of interest shall be measured as the difference
between the initial carrying value of the loan determined in accordance with Ind AS 109, and the proceeds
received. The benefit is accounted for in accordance with this Standard.
However, Para B10 of Ind AS 101 states, a first-time adopter shall classify all government loans received
as a financial liability or an equity instrument in accordance with Ind AS 32, Financial Instruments:
Presentation. Except as permitted by paragraph B11, a first -time adopter shall apply the requirements in
Ind AS 109, Financial Instruments, and Ind AS 20, Accounting for Government Grants and Disclosure of
Government Assistance, prospectively to government loans existing at the date of transition to Ind ASs and
shall not recognise the corresponding benefit of the government loan at a below-market rate of interest as
a government grant. Consequently, if a first-time adopter did not, under its previous GAAP, recognise and
measure a government loan at a below-market rate of interest on a basis consistent with Ind AS
requirements, it shall use its previous GAAP carrying amount of the loan at the date of transition to Ind
AS as the carrying amount of the loan in the opening Ind AS Balance Sheet. An entity shall apply Ind AS
109 to the measurement of such loans after the date of transition to Ind AS.

Note 8: Dividend
Dividend should be deducted from retained earnings during the year when it has been declared and
approved. Accordingly, the provision declared for preceding year should be reversed (to rectify the wrong
entry). Retained earnings would increase proportionately due to such adjustment.

QUESTION 109: (SIMILAR TO RTP May19)

([Link].304– Question Bank)
XYZ Pvt. Ltd. is a company registered under the Companies Act, 2013 following Accounting Standards notified
under Companies (Accounting Standards) Rules, 2006. The Company has decided to voluntarily adopt Ind AS
w.e.f 1st April, 20X2 with a transition date of 1st April, 20X1.
The Company has one Wholly Owned Subsidiary and one Joint Venture which are into manufacturing of
automobile spare parts.
The consolidated financial statements of the Company under Indian GAAP are as under:
Consolidated Financial Statements
(₹ in Lakhs)
Particulars 31.03.20X2 31.03.20X2
Shareholder's Funds
Share Capital 7,953 7,953
Reserves & Surplus 16,547 16,597
Non-Current Liabilities
Long Term Borrowings 1,000 1,000
Long Term Provisions 1,101 691
Other Long-Term Liabilities 5,202 5,904
Current Liabilities
Trade Payables 9,905 8,455
Short Term Provisions 500 475
Total 42,208 41,075
Non-Current Assets
Property Plant & Equipment 21,488 22,288
Goodwill on Consolidation of subsidiary and JV 1,507 1,507
Investment Property 5,245 5,245
Long Term Loans & Advances 6,350 6,350
Current Assets
Trade Receivables 4,801 1,818
Investments 1,263 3,763
Other Current Assets 1,554 104
Total 42,208 41,075

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Additional Information:
The Company has entered into a joint arrangement by acquiring 50% of the equity shares of ABC Pvt. Ltd.
Presently, the same has been accounted as per the proportionate consolidated method. The proportionate share
of assets and liabilities of ABC Pvt. Ltd. included in the consolidated financial statement of XYZ Pvt. Ltd. is as
under:
Particulars ₹ in Lakhs
Property, Plant & Equipment 1,200
Long Term Loans & Advances 405
Trade Receivables 280
Other Current Assets 50
Trade Payables 75
Short Term Provisions 35

The Investment is in the nature of Joint Venture as per Ind AS 111.

The Company has approached you to advice and suggest the accounting adjustments which are required
to be made in the opening Balance Sheet as on 1st April, 20X1.

SOLUTION
As per paras D31AA and D31AB of Ind AS 101, when changing from proportionate consolidation to the
equity method, an entity shall recognise its investment in the joint venture at transition date to Ind AS.
That initial investment shall be measured as the aggregate of the carrying amounts of the assets and
liabilities that the entity had previously proportionately consolidated, including any goodwill arising from
acquisition. If the goodwill previously belonged to a larger cash-generating unit, or to a group of cash-
generating units, the entity shall allocate goodwill to the joint venture on the basis of the relative carrying
amounts of the joint venture and the cash-generating unit or group of cash-generating units to which it
belonged. The balance of the investment in joint venture at the date of transition to Ind AS, determined in
accordance with paragraph D31AA above is regarded as the deemed cost of the investment at initial
recognition.
Accordingly, the deemed cost of the investment will be
Property, Plant & Equipment 1,200
Goodwill (Refer Note below) 119
Long Term Loans & Advances 405
Trade Receivables 280
Other Current Assets 50
Total Assets 2,054
Less: Trade Payables 75
Short Term Provisions 35
Deemed cost of the investment in JV 1,944

Calculation of proportionate goodwill share of Joint Venture ie ABC Pvt. Ltd.

Property, Plant & Equipment 22,288
Goodwill 119
Long Term Loans & Advances 6,350
Trade Receivables 1,818
Other Current Assets 104
Total Assets 32,067
Less: Trade Payables 8,455
Short Term Provisions 457
23,137
Note:
Only those assets and liabilities have been taken into account for calculation of 'proportionate goodwill
share of Joint Venture', which were given in the question as 'proportionate share of assets and liabilities
of ABC Ltd. added to XYZ Ltd.'
Proportionate Goodwill of Joint Venture
= [(Goodwill on consolidation of subsidiary and JV/Total relative net asset) x Net asset of JV]
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= (1507 / 23,137) x 1825 = 119 (approx.)

Accordingly, the proportional share of assets and liabilities of Joint Venture will be removed from the
respective values assets and liabilities appearing in the balance sheet on 31.3.20X1 and Investment in JV
will appear under non-current asset in the transition date balance sheet as on 1.4.20X1.
Adjustments made in previous GAAP balance sheet to arrive at Transition date Ind AS Balance Sheet

Transition Date Ind AS Balance Sheet of XYZ Pvt. Ltd. as at 1st April, 20X1
Particulars Previous Ind AS Ind AS
GAAP Adjustment GAAP
Non-Current Assets
Property, Plant & Equipment 22,288 (1,200) 21,088
Investment Property 5,245 - 5,245
Intangible assets – Goodwill on Consolidation 1,507 (119) 1,388
Financial Assets
Long Term Loans & Advances 6,350 (405) 5,945
Non-current investment in JV - (405) 5,945
Current Assets
Financial Assets Investment 3,763 - 3,763
Trade Receivables 1,818 (280) 1,538
Other Current Assets 104 (50) 54
Total 41,075 (110) 40,965
Equity and Liabilities
Equity
Share Capital 7,953 - 7,953
Other Equity 16,597 - 16,597
Non-Current Liabilities
Financial Liabilities
Borrowings 1,000 - 1,000
Long Term Provisions 691 - 691
Other Long Term Liabilities 5,904 - 5,904
Current Liabilities
Financial Liabilities
Trade Payables 5,455 (75) 8,380
Short Term Provisions 475 (35) 440
Total 41,075 (110) 40,965

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TOPIC 23
IND AS 102 - SHARE BASED PAYMENT

QUESTION 110:
([Link].205– Question Bank)
Marathon Inc. issued 150 share options to each of its 1,000 employees subject to the service
condition of 3 years. Fair value of the option given was calculated at INR 129. Below are the
details and activities related to the SBP plan-
Year 1:
35 employees left and further 60 employees are expected to leave
Share options re-priced (as MV of shares has fallen) as the FV fell to INR 50.
After the re-pricing they are now worth INR 80, hence expense is expected to increase by INR 30.
Year 2:
30 employees left and further 36 employees are expected to leave
Year 3:
39 employees left
How the modification/ re-pricing will be accounted?

SOLUTION
The re-pricing has been done at the end of year 1, and hence the increased expense would be spread over
next 2 years equally.
Total increased value due to INR 30 (1/2 weight each years)
modification is
Year 1 Year 2 Year 3
No. of employees 1,000 1,000 1,000
Employee left (35) (65) 104
Expected to leave (60) (36) -
Net employees 905 899 896
Options per employee 150 150 150
Fair value of the option 129 129 129
Period weight 1/3 2/3 3/3
Modification: 30 30
Expense (original) 58,37,250 57,59,850 57,40,500
Modification Nil 20,22,750 20,09,250
(899x150x30x1/2) (896x150x30x2/2)-
(20,22,750)

QUESTION 111:
([Link].208– Question Bank)
An entity P issues share-based payment plan to its employees based on the below details:
Number of employees 100
Fair value at grant date Rs. 25
Market condition Share price to reach at Rs. 30
Service condition To remain in service until market condition is fulfilled
Expected completion of market condition 4 years
Define expenses related to such share-based payment plan in each year subject to the below scenarios -
a) Market condition if fulfilled in year 3, or
b) Market condition is fulfilled in year 5.

SOLUTION
Market conditions are required to be considered while calculating fair value at grant date. However, service
conditions will be considered as per the expected vesting right to be exercised by the employees and would
be re-estimated during vesting period. However, if the market related condition is fulfilled before it is

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expected then all remaining expenses would immediately be charged off. If market related condition takes
longer than the expected period then original expected period will be followed.

a) Market condition is fulfilled in year 3:

Year 1 2,500/4 = 625
Year 2 2,500/4 = 625
Year 3 2,500-625-625=1,250
Year 4 Nil

b) Market condition is fulfilled in year 5:

Year 1 2,500/4 = 625
Year 2 2,500/4 = 625
Year 3 2,500/4 = 625
Year 4 2,500/4 = 625
Year 5 Nil

QUESTION 112: (RTP Nov22)

([Link].212– Question Bank)
The following particulars in respect of stock options granted by a company are available:

No. of Employees covered 400 Nominal Value per share Rs. 100
No. of options per Employee 60 Exercise price per share Rs. 125

Shares offered were put in three groups. Group 1 was for 20% of shares offered with vesting period one-year.
Group II was for 40% of shares offered with vesting period two- years. Group III was for 40% of shares offered
with vesting period three-years. Fair value of option per share on grant date was Rs. 10 for Group I, Rs. 12.50
for Group II and Rs. 14 for Group III.

Position on 1st Year Position on 2nd Year Position on 3rd Year

- No. of employees left= 40 - Employees left = 35 - Employees left = 28
- Estimate of employees to - Estimate of employees to - Employees exercising
leave in Year 2 = 36 leave in Year 3 = 30 Options in Group III = 295
- Estimate of employees to - Employees exercising
leave in Year 3 = 34 Options in Group II = 319
- Employees exercising Options
in Group I= 350

Options not exercised immediately on vesting, were forfeited. Compute expenses to recognise in each year and
show important accounts in the books of the company.

SOLUTION
Total number of Options per employee = 60

Group I - 20% vesting in Group II - 40% vesting in Year Group III - 40% vesting in Yr.
Year 1 2 3
= 12 options, = 24 options, = 24 options,
Vesting period = 1 Yr. Vesting period = 2 Yrs. Vesting period = 3 Yrs.

Computation of Expenses for all the years

Group = No. of Options Group I = Group II = 24 Options Group III = 24 Options
12
Options
Year 1 Year 1 Year 2 Year 1 Year 2 Year 3
(a) Employees at year end = 400 - 40 400 - 40 = 360 - 35 400 - 360 - 35 325 - 28
[Opening = = 40 = = =
No. of Employees - Forfeiture] 360 360 325 360 325 297
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(b) Expected to leave in future NA 36 NA 36 + 34 30 NA

=
70
(c) No. of employees eligible (a - b) 360 324 325 290 295 297
(d) Options expected to Vest = (360 x 12 (324 x 24 (325 x 24 (290 x (295 x 24 (297 x 24
sh.) sh.) sh.) 24 sh.) sh.) sh.)
[(c) x No. of Shares] 4,320 7,776 7,800 6,960 7,080 7,128
(e) FV per option = Rs. 10 Rs. 12.50 Rs. 12.50 Rs. 14 Rs. 14 Rs. 14
(f) Value of Total Options Rs. Rs. 97,200 Rs. Rs. Rs. Rs.
= [d x e] 43,200 97,500 97,440 99,120 99,792
(g) Total Cumulative Cost of [(f) x 1/2] [(f) x 2/2] [(f) x [(f) x 2/3] [(f) x
Options Rs. 1/3] 3/3]
= [(f) x Completed Yrs/ Total Yrs) 43,200 Rs. 48,600 Rs.97,50 Rs.32,4 Rs.66,080 Rs.
0 80 99,792
(h) Less: Recognized in last years 0 0 Rs. 0 Rs.32,48 Rs.
48,600 0 66,080
(i) Expenses to be recognized Rs. Rs. 48,600 Rs. Rs.32,4 Rs.33,60 Rs.
43,200 48,900 80 0 33,712
(j) Employees not exercising ESOP 10 325 - 319 297 - 295 = 2 Employees
Employee = 6 Employees
s
(k) Total Expenses for-
Year 1 Rs. 43,200 (Gr. 1) + Rs. 48,600 (Gr. 2) + Rs. 32,480 (Gr. 3) = Rs. 1,24,280
Year 2 Rs. 48,900 (Gr. 2) + Rs. 33,600 (Gr. 3) = Rs. 82,500
Year 3 Rs. 33,712 (Gr. 3 only)

Employees Benefit Expenses A/c

Year 1
Rs. Rs.
To Share-based Payment Reserve A/c 1,24,280 By Profit and Loss A/c 1,24,280
1,24,280 1,24,280
Year 2
To Share-based Payment Reserve A/c 82,500 By Profit and Loss A/c 82,500
82,500 82,500
Year 3
To Share-based Payment Reserve A/c 33,712 By Profit and Loss A/c 33,712
33,712 33,712

Share-based Payment Reserve A/c

Year 1
Rs. Rs.
To Retained Earnings 1,200 By Employees Benefit Expenses A/c 1,24,28
[(360 - 350) Emp x 12 Options x Rs. 0
10]
To Share Capital By Bank A/c
(350 Emp x 12 Options x Rs. 100) 4,20,000 (350 Emp x 12 Options x Rs. 125) 5,25,000
To Securities Premium (350 Emp x 12
Options x Rs. 35) 1,47,000
To Balance c/d 81,080
6,49,280 6,49,2
80
Year 2
To Retained Earnings 1,800 By Balance b/d 81,080
[(325 - 319) Emp x 24 Options x Rs. By Employees Benefit Expenses A/c 82,500
12.50]
To Share Capital By Bank A/c
(319 Emp x 24 Options x Rs. 100) 7,65,600 (319 Emp x 24 Options x Rs. 125) 9,57,000
To Securities Premium 2,87,100
(319 Emp x 24 Options x Rs. 37.50)

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To Balance c/d 66,080

11,20,58 11,20,5
0 80
Year 3
To Retained Earnings 672 By Balance b/d 66,080
[(297 - 295) Emp x 24 Options x Rs. By Employees Benefit Expenses A/c 33,712
14]
To Share Capital By Bank A/c
(295 Emp x 24 Options x Rs. 100) 7,08,000 (295 Emp x 24 Options x Rs. 8,85,00
To Securities Premium 125) 0
(295 Emp x 24 Options x Rs. 39) 2,76,120
9,84,792 9,84,79
2

Working Note:
Calculation of Securities Premium
Group I Group II Group III
Year 1 Year 2 Year 3
Exercise Price received per share 125.00 125.00 125.00
Value of service received per share, being the
FV of the Options 10.00 12.50 14.00
Total Consideration received per share 135.00 137.50 139.00
Less: Nominal Value per share (100.00 (100.00) (100.00)
)
Securities Premium per share 35.00 37.50 39.00

QUESTION 113: (Exam Nov23)

([Link].305 – Question Bank)
A Ltd. announced a stock appreciation right (SAR) on 1st April, 2020 for each of its employees. The scheme
gives the employees the right to claim cash payment equivalent to an excess of market price of Company’s
shares on exercise date over the exercise price of ₹ 250 per share in respect of 100 shares, subject to a
condition of continuous employment of 3 years. The SAR is exercisable after 31st March, 2023 but before 30th
June,2023. The fair value of SAR was:
- ₹ 42 in 2020-2021;
- ₹ 46 in 2021-2022; and
- ₹ 48 in 2022-2023.
In 2020-2021, the company estimates that 2% of its employees shall leave the Company annually. This was
revised to 3% in 2021-2022. Actually:
- 15 employees left the company in 2020-2021;
- 10 employees left the company in 2021-2022; and
- 8 employees left the company in 2022-2023.
The SAR therefore actually vested in 492 employees on 30th June, 2023 and when SAR was exercised, the
intrinsic value was ₹ 50 per share.
Compute, by fair value method, the SAR expense for financial years;
-2020-2021;
-2021-2022;
-2022-2023;
-2023-2024.
Also provide SAR ledger from inception till closure. Discuss whether this account is in the nature of liability
or equity?

SOLUTION:
Number of employees at the grant date to whom the SARs were granted = 492 + 15 + 10 + 8 = 525
employees
The amount recognized as an expense in each year and as a liability at each year-end is as follows:
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Year Expense Liability Calculation of Liability

₹ ₹
31st March, 2021 6,86,000 6,86,000 [(525-15) x 0.98 x 0.98) x 100 x 42 x
1/3]
31st March, 2022 8,01,333 14,87,333 [{(525-15-10) x 0.97x 100 x 46 x 2/3}
– 6,86,000]
31st March, 2023 8,74,267 23,61,600 [525-15-10-8] x 48 x 100-1487333
30th June, 2023 (98,400)* 0 [(492 x 100 x 50) - 23,61,600]

*Difference of opening liability ₹ 23,61,600 and actual liability paid ₹ 24,60,000 [(492 x 100 x 50) -
23,61,600] is recognised to Profit and loss i.e. ₹ 98,400.

SAR Ledger
Date Particular Amount Date Particular Amount
31.3.2021 To Balance 6,86,000 31.3.2021 By Employee
c/d benefits expenses 6,86,000
6,86,000 6,86,000
31.3.2022 To Balance 14,87,333 1.4.2021 By Balance b/d 6,86,000
c/d
31.3.2022 By Employee
benefits expenses 8,01,333
14,87,333 14,87,333
31.3.2022 To Balance 23,61,600 1.4.2022 By Balance b/d 14,87,333
c/d
31.3.2023 By Employee benefits
expenses 8,74,267
23,61,600 23,61,600
30.6.2023 To Bank 24,60,000 1.4.2022 By Balance b/d 23,61,600
30.6.2023 By Employee benefits
expenses 98,400
24,60,000 24,60,000

SAR Account is in the nature of liability because it is a cash settled share-based transaction which is
summed up on payment of cash to the employees at the end of the exercise period.

QUESTION 114: (January21 EXAMS)

([Link].404– Question Bank)
On 1st April 2017, Kara Ltd. granted an award of 150 share options to each of its 1,000 employees, on
condition of continuous employment with Kara Ltd. for three years and the benefits will then be settled in cash
of an equivalent amount of share price. Fair value of each option on the grant date was Rs.129.
Towards the end of 31st March 2018, Kara Ltd.'s share price dropped; so on 1st April 2018 management
chose to reduce the exercise price of the options. At the date of the repricing, the fair value of each of the
original share options granted was Rs. 50 and the fair value of each re-priced option was Rs. 80. Thus, the
incremental fair value of each modified option was Rs. 30.
At the date of the award, management estimated that 10% of employees would leave the entity before the
end of three years (i.e. 900 awards would vest). During the financial year 2018-2019, it became apparent
that fewer employees than expected were leaving, so management revised its estimate of the number of
leavers to only 5 % (i.e. 950 awards would vest). At the end of 31st March 2020, awards to 930 employees
actually vested.
Determine the expense for each year and pass appropriate journal entries as per the relevant IND AS.

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SOLUTION
Note: The first para of the question states that “benefits will then be settled in cash of an equivalent amount
of share price.” This implies that the award is cash settled share-based payment. However, the second and
third para talks about repricing of the option which arises in case of equity settled share-based payment.
Hence, two alternative solutions have been provided based on the information taking certain assumptions.

1st Alternative based on the assumption that the award is cash settled share-based payment.
In such a situation, the services received against share-based payment plans to be settled in cash are
measured at fair value of the liability and the liability continues to be re-measured at every reporting date
until it is actually paid off.
There is a vesting condition attached to the share-based payment plans i.e. to remain in service for next 3
years. The recognition of such share-based payment plans should be done by recognizing the fair value of
the liability at the time of services received and not at the date of grant. The liability so recognized will be
fair valued at each reporting date and difference in fair value will be charged to profit or loss for the period.
Calculation of expenses:
For the year ended 31st March 2018
= Rs. 50 x 150 awards x 900 employees x (1 year /3 years of service)
= Rs. 22,50,000

For the year ended 31st March 2019

Note: It is assumed that the fair value of Rs.80 each of repriced option continues at the end of the remaining
reporting period i.e. 31st March, 2019 and 31st March, 2020
= [Rs. 80 x 150 awards x 950 employees x (2 year / 3 years of service)] – Rs. 22,50,000
= Rs. 7,60,00,000 – Rs. 22,50,000 = Rs. 53,50,000
Journal Entries
31st March, 2018
Employee benefits expenses Dr. 22,50,000
To Share based payment liability 22,50,000
31st March, 2019
Employee benefits expenses Dr. 53,50,000
To Share based payment liability 53,50,000
(Fair value of the liability recognized)
31st March, 2020
Employee benefits expenses Dr. 35,60,000
To Share based payment liability 35,60,000
(Fair value of the liability recognized)
[(930 x 80 x 150) – 22,50,000 – 53,50,000]
Share based payment liability Dr. 1,11,60,000
To Bank 1,11,60,00
(Being liability for awards settled in cash)
(930 x 80 x 150)

2nd Alternative based on fair value at the grant date (ignoring the fact that the award has to be
settled in cash).

Calculation of expenses:
For the year ended 31st March 2018
= [Rs. 129 x 150 awards x 900 employees x (1 year /3 years of service)]
= Rs. 58,05,000

For the year ended 31st March 2019

Ind AS 102 requires the entity to recognise the effects of repricing that increase the total fair value of the
share-based payment arrangement or are otherwise beneficial to the employee.
If the repricing increases the fair value of the equity instruments granted standard requires the entity to
include the incremental fair value granted (ie the difference between the fair value of the repriced equity
instrument and that of the original equity instrument, both estimated as at the date of the modification) in
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the measurement of the amount recognised for services received as consideration for the equity
instruments granted.
If the repricing occurs during the vesting period, the incremental fair value granted is included in the
measurement of the amount recognised for services received over the period from the repricing date until
the date when the repriced equity instruments vest, in addition to the amount based on the grant date fair
value of the original equity instruments, which is recognised over the remainder of the original vesting
period. Accordingly, the amounts recognised are as follows:

Year ended Calculation Compensation Cumulative

expense for period compensation expense
Rs. Rs.
31 March, 2018 [Rs.129 x 150 awards x 900 employees 58,05,500 58,05,000
x (1 year /3 years of service)]
31 March, 2019 [Rs.129 x 150 awards x 950 employees 85,87,500 1,43,92,500
x (2 year /3 years of service)] + (80-50)
x 150 awards x 950 employees x (1 year
/ 2 years of service) - 58,05,000
31 March, 2020 [(Rs.129 + 30) x 150 awards x 930 77,88,000 2,21,80,500
employees] - 1,43,92,500

Journal Entry
31st March, 2018
Employee benefits expenses Dr. 58,05,000
To SBP Reserve A/c 58,05,000
(Fair value of the liability recognized)
31st March, 2019
Employee benefits expenses Dr. 85,87,500
To SBP Reserve A/c 85,87,500
(Fair value of the liability re-measured)
31st March, 2020
Employee benefits expenses Dr. 77,88,000
To SBP Reserve A/c 77,88,000
(Fair value of the liability recognized)
SBP Reserve A/c Dr. 2,21,80,500
To Equity share capital 2,21,80,500
(Being award settled)

QUESTION 115:
([Link].601– Question Bank)
Anara Fertilizers Limited issued 2000 share options to its 10 directors for an exercise price of INR [Link]
directors are required to stay with the company for next 3 years.
Fair value of the option estimated INR 130
Expected no of Directors to vest the option 8
During the year 2, there was a crisis in the company and Management decided to cancel the scheme
immediately. It was estimated further as below-
Fair value of option at the time of cancellation was INR 90
Market price of the share at the cancellation date was INR 99

There was a compensation which was paid to directors and only 9 directors were currently in employment.
At the time of cancellation of such scheme, it was agreed to pay an amount of INR 95 per option to each of 9
directors.
How the cancellation would be recorded?

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SOLUTION
Year 1 Year 2
A)
Expected directors to vest 8 9
Fair value of option 130 130
No. of options 2,000 2,000 2,000
Total 20,80,000 23,40,000
Expense weightage 1/3 Full, as it is cancelled
Expense for the year 6,93,333 16,46,667 Remaining amount since cancelled
B) Cancellation compensation
No. of directors 9
Amount agreed to pay 95
No. of options/ director 2,000
Compensation amount (9 x 95 x 2,000)Also refer working notes 1 and 17,10,000

Working Notes:
1. Amount to be deducted from Equity
No. of directors 9
Fair value of option (at the date of cancellation) 90
No. of options/ director 2,000
Total 16,20,000

2. Amount transferred to Profit and Loss

Total cancellation compensation 17,10,000
Less: To deduct from Equity (16,20,000)
Balance transferred to Profit and Loss 90,000

QUESTION 116:
([Link].703– Question Bank)
A parent, Company P, grants 30 shares to 100 employees each of its subsidiary, Company S, on condition
that the employees remain employed by Company S for three years. Assume that at the outset, and at the
end of Years 1 and 2, it is expected that all the
employees will remain employed for all the three years. At the end of Year 3, none of the employees has left.
The fair value of the shares on grant date is ₹ 5 per share.
Company S agrees to reimburse Company P over the term of the arrangement for 75 percent of the final
expense recognised by Company S. What would be the accounting treatment in the books of Company P and
Company S?

SOLUTION:
Company S expects to recognise an expense totaling ₹15,000 (30 shares x 100 employees x ₹5 per share)
and, therefore, expects the total reimbursement to be ₹11,250 (₹15,000 x 75%). Company S therefore
reimburses Company P ₹3,750 (₹11,250 x 1/3) each year.
Accounting by Company S
In each of Years 1 to 3, Company S recognises an expense in profit or loss, the cash paid to Company P,
and the balance of the capital contribution it has received from Company P.
Journal Entry
Employee benefits expenses Dr. 5,000
To Cash/Bank 3,750
To Equity (Contribution from the parent) 1,250
(To recognise the share-based payment expense and partial
reimbursement to parent)

Accounting by Company P
In each of Years 1 to 3, Company P recognises an increase in equity for the instruments being granted, the
cash reimbursed by Company S, and the balance as investment for the capital contribution it has made to

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Company S.
Journal Entry
Investment in Company S Dr. 1,250
Cash/Bank Dr. 3,750
To Equity
(To recognise the grant of equity instruments to employees of 5,000
subsidiary less partial reimbursement from subsidiary)

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TOPIC 24
INDAS 105 - NON-CURRENT ASSETS
HELD FOR SALE AND DISCONTINUED OPERATIONS
QUESTION 117: (Similar in MTP Nov’23)
([Link].202– Question Bank)
S Ltd purchased a property for ₹6,00,000 on 1 April 20X1. The useful life of the property is 15 years.
On 31 March 20X3 S ltd classify the property as held for sale. The impairment testing provides the estimated
recoverable amount of ₹4,70,000.
The fair value less cost to sell on 31 March 20X3 was ₹4,60,000. On 31 March 20X4 management change
the plan as property no longer met the criteria of held for sale. The recoverable amount as at 31 March 20X4
is ₹5,00,000.
Value the property at the end of 20X3 and 20X4.

SOLUTION
(a) Value of property immediately before the classification as held for sale as per Ind AS 16 as on 31 March
20X3
Purchase Price 6,00,000
Less: Accumulated Depreciation 80,000 (for two years)
Less: Impairment loss 50,000 (5,20,000-4,70,000)
Carrying Amount 4,70,000

On initial classification as held for sale on 31 March 20X3, the value will be lower of:
Carrying amount ₹ 4,70,000
Fair Value less Cost to sell ₹ 4,60,000

On 31 March 20X3 Non-current classified as held for sale will be recorded at ₹ 4,60,000.
Depreciation of ₹ 40,000 and Impairment Loss of ₹ 60,000 (50,000 +10,000) is charged in profit or loss for
the year ended 31 March 20X3.

(b) On 31 March 20X4 held for sale property is reclassified as criteria doesn’t met. The value will be lower
of:
Carrying amount had the asset is not classified as held for sale ₹ 4,33,846
Carrying amount immediately before classification on 31 March 20X3 ₹ 4,70,000
Less Depreciation based on 13 years balance life ₹ 36,154
Recoverable Amount ₹ 5,00,000

Property will be valued at ₹ 4,33,846 on 31 March 20X4

Adjustment to the carrying amount of ₹ 26,154 (₹ 4,60,000 - 4,33,846) is charged to the profit or loss.

QUESTION 118: (SIMILAR TO RTP May’18 & May’22 EXAMS)

([Link].304– Question Bank)
Following is the extract of the consolidated financial statements of A Ltd. for the year ended on:

Asset/ (liability) Carrying amount as on

31st March, 20X1
(In ₹ ‘000)
Attributed goodwill 200
Intangible assets 950
Financial asset measured at fair value through other comprehensive income 300
Property, plant & equipment 1100
Deferred tax asset 250

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Current assets – inventory, receivables and cash balances 600

Current liabilities (850)
Non-current liabilities – provisions (300)
Total 2,250

On 15th September 20X1, Entity A decided to sell the business. It noted that the business meets the
condition of disposal group classified as held for sale on that date in accordance with Ind AS 105. However,
it does not meet the conditions to be classified as discontinued operations in accordance with that standard.
The disposal group is stated at the following amounts immediately prior to reclassification as held for sale.

Asset/ (liability) Carry amount as on

15th September 20X1
(In ₹ ‘000)
Attributed goodwill 200
Intangible assets 930
Financial asset measured at fair value through other comprehensive income 360
Property, plant & equipment 1,020
Deferred tax asset 250
Current assets – inventory, receivables and cash balances 520
Current liabilities (870)
Non-current liabilities – provisions (250)
Total 2,160

Entity A proposed to sell the disposal group at ₹ 19,00,000. It estimates that the costs to sell will be ₹ 70,000.
This cost consists of professional fee to be paid to external lawyers and accountants.
As at 31st March 20X2, there has been no change to the plan to sell the disposal group and entity A still
expects to sell it within one year of initial classification. Mr. X, an accountant of Entity A remeasured the
following assets/ liabilities in accordance with respective standards as on 31st March 20X2:
Available for sale: (In ₹ ‘000)
Financial assets 410
Deferred tax assets 230
Current assets- Inventory, receivables and cash balances 400
Current liabilities 900
Non- current liabilities- provisions 250

The disposal group has not been trading well and its fair value less costs to sell has fallen to ₹ 16,50,000.
Required:
What would be the value of all assets/ labilities within the disposal group as on the following dates in
accordance with Ind AS 105?
(a) 15 September, 20X1 and
(b) 31st March, 20X2

SOLUTION:
a) As at 15 September, 20X1
The disposal group should be measured at ₹ 18,30,000 (19,00,000-70,000). The impairment write down
of ₹ 3,30,000 (₹ 21,60,000 – ₹ 18,30,000) should be recorded within profit from continuing operations.
The impairment of ₹ 3,30,000 should be allocated to the carrying values of the appropriate non-current
assets.
Asset/ (liability) Carrying value as Impairment Revised carrying
at15 September, value as per IND
20X1 AS 105
Attributed goodwill 200 (200) -
Intangible assets 930 (62) 868
Financial asset measured at fair value through other 360 - 360
comprehensive income
Property, plant & equipment 1020 (68) 952

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Deferred tax asset 250 - 250

Current assets – inventory, receivables and cash balances 520 - 520
Current liabilities (870) - (870)
Non-current liabilities – provisions (250) - (250)
Total 2,160 (330) 1,830

The impairment loss is allocated first to goodwill and then pro rata to the other assets of the disposal group
within Ind AS 105 measurement scope. Following assets are not in the measurement scope of the
standard- financial asset measured at other comprehensive income, the deferred tax asset or the current
assets. In addition, the impairment allocation can only be made against assets and is not allocated to
liabilities.

b) As on 31 March, 20X2:
All of the assets and liabilities, outside the scope of measurement under Ind AS 105, are remeasured in
accordance with the relevant standards. The assets that are remeasured in this case under the relevant
standards are the financial asset measured at fair value through other comprehensive income (Ind AS 109),
the deferred tax asset (Ind AS 12), the current assets and liabilities (various standards) and the non-current
liabilities (Ind AS 37).

Asset/ (liability) Carrying Change in Impairment Revised

value as at value to 31st carrying value
15 Sep, 20X1 March, 20X2 as per IND AS 105
Attributed goodwill - - - -
Intangible assets 868 - (29) 839
Financial asset measured at fair value through other 360 50 - 410
comprehensive income
Property, plant & equipment 952 - (31) 921
Deferred tax asset 250 (20) - 230
Current assets – inventory, receivables and cash 520 (120) - 400
balances
Current liabilities (870) (30) - (900)
Non-current liabilities – provisions (250) - - (250)
Total 1,830 (120) (60) 1,650

QUESTION 119: (MTP May’24)

([Link].308- Question Bank)
As at 31 March 20X4, M Ltd. had a plan to dispose off its 75% subsidiary D Ltd. This plan had been approved
by the board and was reported in the media as well as to the Stock Exchange where M Ltd. was listed. It is
expected that J Ltd., the non-controlling shareholder in Di Ltd. holding 25% stake, will acquire the 75% equity
interest as well. The sale is expected to be completed by October 20X4. D Ltd. is expected to have substantial
trading losses in the period up to the sale. Mr. X, a chartered accountant, who is an employee in the finance
department of M Ltd., wishes to show D Ltd. as held for sale in the financial statements and to create a
restructuring provision to include the expected costs of disposal and future trading losses. However, the
Chief Operating Officer (COO) does not wish D Ltd. to be categorized as held for sale nor to provide for the
expected losses. The COO is concerned as to how this may affect the sales and would surely result in bonus
targets not being met. He has argued that as the management, it is his duty to secure a high sales price to
maximize the return for shareholders of M Ltd. He has also hinted that Mr. X’s job could be at stake if such
a provision were to be made in the financial statements. The expected costs from the sale are as follows:
Future Trading Losses: ₹50 crores
Various legal costs of sale : ₹ 3.75 crores
Redundancy costs for D Ltd.’s employees : ₹ 10 crores
Impairment losses on Property, Plant and Equipment :₹ 17.50 crores
Required:
Discuss the accounting treatment which M Ltd. should adopt to address the issue above for the financial
statements.

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SOLUTION:
PROVISION AS PER IND AS 105
1. In terms of Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, an entity shall
classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered
principally through a sale transaction rather than through continuing use.
2. For this to be the case, the asset (or disposal group) must be available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of such assets (or disposal groups)
and its sale must be highly probable.
3. For the sale to be highly probable, the appropriate level of management must be committed to a plan to
sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must
have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price
that is reasonable in relation to its current fair value.
4. In addition, the sale should be expected to qualify for recognition as a completed sale within one year
from the date of classification, except in specific cases as permitted by the Standard, and actions
required to complete the plan should indicate that it is unlikely that significant changes to the plan will
be made or that the plan will be withdrawn.
5. The probability of required approvals (as per the jurisdiction) should be considered as part of the
assessment of whether the sale is highly probable.
6. An entity that is committed to a sale plan involving loss of control of a subsidiary shall classify all the
assets and liabilities of that subsidiary as held for sale when the criteria set out above are met, regardless
of whether the entity will retain a non-controlling interest in its former subsidiary after the sale.

1) Based on the provisions highlighted above, the disposal of D Ltd. appears to meet the criteria of held
for sale. J Ltd. is the probable acquirer, and the sale is highly probable, expected to be completed seven
months after the year end, well within the 12-months criteria highlighted above.
2) Accordingly, D Ltd. should be treated as a disposal group, since a single equity transaction is the most
likely form of disposal.
3) In case D Ltd. is deemed to be a separate major component of business or geographical area of the group,
the losses of the group should be presented separately as a discontinued operation within the Financial
Statements of M Ltd.
4) In terms of Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, an entity shall
measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying
amount and fair value less costs to sell.
5) The carrying amount of D Ltd. (i.e., the subsidiary of M Ltd.) comprises of the net assets and goodwill
less the non-controlling interest. The impairment loss recognised to reduce D Ltd. to fair value less costs
to sell should be allocated first to goodwill and then on a pro-rata basis across the other non-current
assets of the Company.
6) The Chief Operating Officer (COO) is incorrect to exclude any form of restructuring provision in the
Financial Statements. Since the disposal is communicated to the media as well as the Stock Exchange,
a constructive obligation exists. However, ongoing costs of business should not be provided for,
only directly attributable costs of restructuring should be provided. Future operating losses should be
excluded as no obligating event has arisen, and no provision is required for impairment losses of
Property, Plant and Equipment as it is already considered in the remeasurement to fair value less costs
to sell.
7) Thus, a provision is required for ₹ 13.75 crores (₹ 3.75 crores + ₹ 10 crores).

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TOPIC 25
INDAS 108 - OPERATING SEGMENTS

QUESTION 120: (MTP May’23)

([Link].305– Question Bank)
XYZ Ltd. has eight segments namely A, B, C, D, E, F, G and H. The information regarding respective
segments for the year ended 31st March, 20X1 is as follows:
Segments A B C D E F G H
External sales 0 255 15 10 15 50 25 35
Inter-segment sales 100 60 30 5
Total 100 315 45 15 15 50 25 35
Segment result 5 (90) 15 (5) 8 (5) 5 7
Profit/(Loss)
Segment assets 15 47 5 11 3 5 5 9
Identify which of the above segments out of A to H would be considered as reportable segments of XYZ Ltd.
for the year ending 31st March, 20X1?

SOLUTION:
An entity has eight segments and the relevant information is as follows:
Criteria 1: Segment revenue is 10% or more of total external + intersegment sales
Segments A B C D E F G H Total
Total sales 100 315 45 15 15 50 25 35 600
% to total sales 16.7 52.5 7.5 2.5 2.5 8.3 4.2 5.8
Reportable segments A B - - - - -

Criteria 2: 10% or more of segment result

Consider segment profit and loss separately in absolute terms
Segments A B C D E F G H Total
Profit 5 - 15 - 8 - 5 7 40
Segments loss - 90 - 5 - 5 - - 100
Since segment loss is greater, we select 100 as evaluating the segment percentage

Segments A B C D E F G H Total
% to segment loss 5 90 15 5 8 5 5 7
Reportable segments - B C - - - - -

Criteria 3: 10% or more of segment assets

egments A B C D E F G H Total
Assets 15 47 5 11 3 5 5 9 100
% 15 47 5 11 3 5 5 9 100
Reportable segments A B - D - - - -

Based on the above 3 criteria, the Reportable Segments are A, B, C & D

However, 75% test for external sales should also be checked.

Reportable Segments A B C D TOTAL

External sales 0 255 15 10 280
Total entity’s sales (external) 405
% of reportable segments external sales to entity’s sales 69.14%
Required percentage 75%

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Hence, in the above scenario, additional operating segments need to be identified as reportable segments,
till the 75% test is satisfied, even if those segments do not satisfy the quantitative threshold limits.

QUESTION 121: (SIMILAR TO MTP May22 & July21 EXAM & May18 EXAM, Exam May’23)
([Link].401– Question Bank)
X Ltd. is operating in coating industry. Its business segment comprise coating and others consisting of
chemicals, polymers and related activities. Certain information for financial year 20X1-20X2 is given below :
(Rs in lakhs)
Segments External sale Tax Other operating Result Assets Liabilities
income
Coating 2,00,000 5,000 40,000 10,000 50,000 30,000
Others 70,000 3,000 15,000 4,000 30,000 10,000
Additional information:
1. Unallocated revenue net of expenses is Rs. 30,00,00,000
2. Interest and bank charges is Rs. 20,00,00,000
3. Income tax expenses is Rs. 20,00,00,000 (current tax Rs. 19,50,00,000 and deferred tax Rs. 50,00,000)
4. Investments Rs. 1,00,00,00,000 and unallocated assets Rs. 1,00,00,00,000.
5. Unallocated liabilities, Reserve & surplus and share capital are Rs. 2,00,00,00,000, Rs. 3,00,00,00,000 &
Rs. 1,00,00,00,000 respectively.
6. Depreciation amounts for coating & others are Rs. 10,00,00,000 and Rs. 3,00,00,000 respectively.
7. Capital expenditure for coating and others are Rs. 50,00,00,000 and Rs. 20,00,00,000 respectively.
8. Revenue from outside India is Rs. 3,00,00,00,000 and segment asset outside India Rs. 1,00,00,00,000.
Based on the above information, how X Ltd. would disclose information about reportable segment
revenue, profit or loss, assets and liabilities for financial year 20X1-20X2?

SOLUTION:
Segment information
(A) Information about operating segment
(1) the company’s operating segments comprise :
Coatings: consisting of decorative, automotive, industrial paints and related activities. Others:
consisting of chemicals, polymers and related activities.

(2) Segment revenues, results and other information.

(Rs in Lakhs)
Revenue Coating Others Total
1. External sales (gross) 2,00,000 70,000 2,70,000
Tax (5,000) (3,000) (8,000)
External sales (net) 1,95,000 67,000 2,62,000
Other operating income 40,000 15,000 55,000
Total Revenue 2,35,000 82,000 3,17,000
2. Results
Segment results 10,000 4,000 14,000
Unallocated income (net of unallocated expenses) 3,000
Profit from operation before 17,000
interest, taxation and exceptional items
Interest and bank charges (2,000)
Profit before exceptional items 15,000
Exceptional items Nil
Profit before taxation 15,000
Income Taxes
-Current taxes 1,950
-Deferred taxes 50
Profit after taxation 13,000
3. Other Information
(a) Assets
Segment Assets 50,000 30,000 80,000

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Investments 10,000
Unallocated assets 10,000
Total Assets 1,00,000
(b) Liabilities/Shareholder’s funds
Segment liabilities 30,000 10,000 40,000
Unallocated liabilities 20,000
Share capital 10,000
Reserves and surplus 30,000
Total liabilities/shareholder’s funds 1,00,000
(c) Others
Capital Expenditure (5,000) (2,000)
Depreciation (1,000) (300)
Geographical Information (Rs in lakhs)
India (Rs ) Outside Total (Rs )
India (Rs)
Revenue 2,00,000 62,000 2,62,000
Segment assets 90,000 10,000 1,00,000
Capital expenditure 7,000 - 7,000

Notes:
(i) The operating segments have been identified in line with the Ind AS 108, taking into account the nature
of product, organisation structure, economic environment and internal reporting system.
(ii) Segment revenue, results, assets and liabilities include the respective amounts identifiable to each of
the segments. Unallocable assets include unallocable fixed assets and other current assets.
Unallocable liabilities include unallocable current liabilities and net deferred tax liability.
(iii) Corresponding figures for previous year have not been provided. However, in practical scenario the
corresponding figures would need to be given.

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TOPIC 26
INDAS 111 - JOINT ARRANGEMENTS

QUESTION 122: (RTP Nov’22, MTP May’23)

([Link].116– Question Bank)
Identify the type of joint arrangements in each of the following scenarios:
(i) X Ltd and Y Ltd, manufacturing similar type of mobile phones, form a joint arrangement to manufacture
and sell mobile phones. Under the terms of the arrangement, both X Ltd and Y Ltd are to use their own
assets to manufacture the mobile phones and both are responsible for liabilities related to their
respective manufacture. The arrangement also lays down the distribution revenues from the sale of the
mobile phones and expenses incurred thereof. X Ltd however has exclusive control over the marketing
and distribution functions and does not require the consent of Y Ltd in this aspect. No separate entity
is created for the arrangement.
(ii) Continuing with (i) above, what would be the classification of the joint arrangement if X Ltd and Y Ltd
both jointly control all the relevant activities of the Joint arrangement including the marketing and the
distribution functions?
(iii) What would be the classification of the joint arrangement if under the terms of the arrangement, a
separate entity is created to manufacture the mobile phones.
(iv) Continuing with (iii) above, the joint arrangement is a means of manufacturing mobile phones on a
common platform but the output of the joint arrangement is purchased by both X Ltd and Y Ltd in the
ratio of 50:50. The joint arrangement cannot sell output to third parties. The price of the output sold to
X Ltd and Y Ltd is set by both the parties to the arrangement to cover the production costs and other
administrative costs of the joint arrangement entity.
(v) Would your answer in (iv) above be different if X Ltd and Y Ltd sold their respective share of output to
third parties?
Assume that in (iv) above, the contractual terms of the arrangement were modified so that the joint
arrangement entity is not obliged to sell the output to X Ltd and Y Ltd but was able to sell the output to third
parties.

SOLUTION
For a joint arrangement to be either a joint operation or joint venture, it depends on whether the parties to
the joint arrangement have rights to the assets and obligations for liabilities (will be a joint operation) OR
whether the parties to the joint arrangement have rights to the net assets of the arrangement (will be joint
venture).
(i) In order to fit into the definition of a joint arrangement, the parties to the joint arrangement should
have joint control over the arrangement. In the given case, decisions relating to relevant activities, i.e.,
marketing and distribution, are solely controlled by X Ltd and such decisions do not require the
consent of Y Ltd. Hence, the joint control test is not satisfied in this arrangement and the
arrangement does not fit into the definition of a joint arrangement in accordance with the
Standard.

(ii) Where X Ltd and Y Ltd both jointly control all the relevant activities of the arrangement and since no
separate entity is formed for the arrangement, the joint arrangement is in the nature of a joint
operation.

(iii) Where under a joint arrangement, a separate vehicle is formed to give effect to the joint arrangement,
then the joint arrangement can either be a joint operation or a joint venture.
Hence in the given case, if:
(a) The contractual terms of the joint arrangement, give both X Ltd and Y Ltd rights to the assets and
obligations for the liabilities relating to the arrangement, and the rights to the corresponding
revenues and obligations for the corresponding expenses, then the joint arrangement will be in
the nature of a joint operation.

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(b) The contractual terms of the joint arrangement, give both X Ltd and Y Ltd. rights to the net assets
of the arrangement, then the joint arrangement will be in the nature of a joint venture.

(iv) Where the rights to assets and liabilities to obligations are not clear from the contractual arrangement,
then other facts and circumstances also need to be considered to determine whether the joint
arrangement is a joint operation or a joint venture.
When the provision of the activities of the joint venture is primarily to produce output and the output
is available / distributed only to the parties to the joint arrangement in some pre-determined ratio,
then this indicates that the parties have substantially all the economic benefits of the assets of the
arrangement. The only source of cash flows to the joint arrangement is receipts from parties through
their purchases of the output and the parties also have a liability to fund the settlement of liabilities
of the separate entity. Such an arrangement indicates that the joint arrangement is in the nature of a
joint operation.
In the given case, the output of the joint arrangement is exclusively used by X Ltd. and Y Ltd. and the
joint arrangement is not allowed to sell the output to outside parties. Hence, the joint arrangement
between X Ltd. and Y Ltd. is in the nature of a joint operation.

(v) It makes no difference whether the output of the joint arrangement is exclusively for use by the parties
to the joint arrangement or the parties to the arrangement sold their share of the output to third
parties.
Hence, even if X Ltd. and Y Ltd. sold their respective share of output to third parties, the fact still
remains that the joint arrangement cannot sell output directly to third parties. Hence, the joint
arrangement will still be deemed to be in the nature of a joint operation.

(vi) Where the terms of the contractual arrangement enable the separate entity to sell the output to third
parties, this would result in the separate entity assuming demand, inventory and credit risks. Such
facts and circumstances would indicate that the arrangement is a joint venture.

QUESTION 123: (SIMILAR TO MTP Nov22 & RTP Nov21)

([Link].306– Question Bank)
Company X is engaged in the business of exploration & development of Oil & Gas Blocks.
Company X currently holds participating interest (PI) in below mentioned producing Block as follows:
Block Name Company X Company Y Company Z Total
AWM/01 30% 60% 10% 100%

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

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

Financial performance of company Z has not been improved in subsequent months and therefore company
Z has decided to withdraw participating interest rights from Block AWM/01 and entered into sale agreement
with Company X & Company Y. As per the terms of the agreement, dated 31.5.20X1, Company X will receive
33.33% share & Company Y will receive 66.67% share of PI rights owned by Company Z.

Company X is required to pay ₹ 1 Lacs against 33.33% share of PI rights owned by Company Z.
After signing of sale agreement, Operator (company Y) approach government of India for modification in PSC
(Production Sharing Contract) i.e. removal of Company Z from PSC of AWM/01 and government has approved
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this transaction on 30.6.20X1. Government approval for the modification in PSC is essential given the
industry in which the joint operators operate.

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

Particulars Company X Company Z
31.5.20X1 30.6.20X1 31.5.20X1 30.6.20X1
₹ ₹ ₹ ₹
Assets
Non-Current Assets
Property, Plant & Equipment 5,00,000 10,00,000 1,50,000 3,00,000
Right of Use Asset 1,00,000 2,00,000 10,000 20,000
Development CWIP 50,000 1,00,000 50,000 1,00,000
Financial Assets
Loan receivable 25,000 50,000 25,000 50,000
Total Non-Current Assets 6,75,000 13,50,000 2,35,000 4,70,000
Current assets
Inventories 1,00,000 2,00,000 15,000 30,000
Financial Assets
Trade receivables 1,50,000 3,00,000 50,000 1,00,000
Cash and cash equivalents 2,00,000 4,00,000 1,00,000 2,00,000
Other Current Assets 2,25,000 50,000 25,000 50,000
Total Current Assets 6,75,000 9,50,000 1,90,000 3,80,000
Total Assets 13,50,000 23,00,000 4,25,000 8,50,000
Equity and Liabilities
Equity
Equity share capital 3,00,000 3,00,000 1,00,000 1,00,000
Other equity 2,00,000 3,00,000 75,000 2,50,000
Total Equity 5,00,000 6,00,000 1,75,000 3,50,000
Liabilities
Non-Current Liabilities
Provisions 4,00,000 8,00,000 1,00,000 2,00,000
Other Liabilities 1,50,000 3,00,000 50,000 1,00,000
Total Non-Current Liabilities 5,50,000 11,00,000 1,50,000 3,00,000
Current Liabilities
Financial Liabilities
Trade Payables 3,00,000 6,00,000 1,00,000 2,00,000
Total Current Liabilities 3,00,000 6,00,000 1,00,000 2,00,000
Total Liabilities 13,50,000 23,00,000 4,25,000 8,50,000

Additional Information:
1. Fair Value of PPE & Development CWIP owned by Company Z as per Market participant approach is ₹
5,00,000 & ₹ 2,00,000 respectively.
2. Fair Value of all the other assets and liabilities acquired are assumed to be at their carrying values (except
cash & cash equivalent). Cash and cash equivalents of Company Z are not to be acquired by Company X
as per the terms of agreement.
3. Tax rate is assumed to be 30%.
4. As per Ind AS 28, all the joint operators are joint ventures whereby each parties that have joint control of
the arrangement have rights to the net assets of the arrangement and therefore every operator records
their share of assets and liabilities in their books.

You need to determine the following:

1. Whether the above acquisition falls under business or asset acquisition as defined under business
combination standard Ind AS 103?
2. Determine the acquisition date in the above transaction?
3. Prepare Journal entries for the above-mentioned transaction?
4. Draft the Balance Sheet for Company X based on your analysis in Part 1 above as at acquisition date.

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SOLUTION:
(1) Ind AS 103 defines business as an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing goods or services to customers, generating
investment income (such as dividends or interest) or generating other income from ordinary activities.
For a transaction to meet the definition of a business combination (and for the acquisition method of
accounting to apply), the entity must gain control of an integrated set of assets and activities that is
more than a collection of assets or a combination of assets and liabilities.
To be capable of being conducted and managed for the purpose identified in the definition of a business,
an integrated set of activities and assets requires two essential elements—inputs and processes applied
to those inputs.
Therefore, an integrated set of activities and assets must include, at a minimum, an input and a
substantive process that together significantly contribute to the ability to create output.
In the aforesaid transaction, Company X acquired share of participating rights owned by Company Z
for the producing Block (AWM/01). The output exist in this transaction (Considering AWM/01) is a
producing block. Also all the manpower and requisite facilities / machineries are owned by Joint venture
and thereby all the Joint Operators. Hence, acquiring participating rights tantamount to acquire inputs
(Expertise Manpower & Machinery) and it is critical to the ability to continue producing outputs. Thus,
the said acquisition will fall under the Business Acquisition and hence standard Ind AS 103 is to
be applied for the same.

(2) As per paragraph 8 of Ind AS 103, acquisition date is the date on which the acquirer obtains control of
the acquiree. Further, paragraph 9 of Ind AS 103 clarifies that the date on which the acquirer obtains
control of the acquiree is generally the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree—the closing date. However, the acquirer
might obtain control on a date that is either earlier or later than the closing date.
An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.
Since government of India (GOI) approval is a substantive approval for Company X to acquire control of
Company Z's operations, the date of acquisition cannot be earlier than the date on which approval is
obtained from GOI. This is pertinent given that the approval from GOI is considered to be a substantive
process and accordingly, the acquisition is considered to be completed only on receipt of such approval.
Hence acquisition date in the above scenario is 30.6.20X1.

(3) Journal entry for acquisition

Particulars Amount (₹) Amount (₹)
Property Plant & Equipment Dr. 1,66,650
Right-of-use Asset Dr. 6,666
Development CWIP Dr. 66,660
Financial Assets - Loan Receivables Dr. 16,665
Inventories Dr. 9,999
Trade Receivables Dr. 33,330
Other Current Assets Dr. 16,665
To Provisions 66,660
To Other Liabilities 33,330
To Trade Payables 66,660
To Deferred Tax Liability 29,997
To Cash & Cash Equivalent (purchase consideration) 1,00,000
To Gain on bargain purchase (Other Comprehensive Income) 19,988
(Being assets acquired and liabilities assumed from Company Z recorded at fair value along gain on
bargain purchase)

(4) Balance Sheet of Company X as at 30.6.20X1

(Pre & Post Acquisition of PI rights pertaining to Company Z)

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Particulars Pre- Adjustments Pre-

Acquisition Acquisition
30.6.20X1 30.6.20X1
Assets
Non - Current Assets
Property, Plant & Equipment 10,00,000 1,66,650 11,66,650
Right of Use Asset 2,00,000 6,666 2,06,666
Development CWIP 1,00,000 33,330 1,66,660
Financial Assets
Loan receivable 50,000 16,665 66,665
Total Non-Current Assets 13,50,000 16,06,641
Current assets
Inventories 2,00,000 9,999 2,09,999
Financial Assets
Trade receivables 3,00,000 33,330 3,33,330
Cash and cash equivalents 4,00,000 (1,00,000) 3,00,000
Other Current Assets 50,000 16,665 66,665
Total Current Assets 9,50,000 9,09,994
Total Assets 23,00,000 25,16,635
Equity and Liabilities
Equity
Equity share capital 3,00,000 3,00,000
Other equity 3,00,000 3,00,000
Capital Reserve (OCI) 19,988 19,988
Total Equity 6,00,000 6,19,988
Liabilities
Non-Current Liabilities
Provisions 8,00,000 66,660 8,66,660
Other Liabilities 3,00,000 33,330 3,33,330
Deferred Tax Liability 29,997 29,997
Total Non-Current Liabilities 11,00,000 3,00,000
Current Liabilities
Financial Liabilities
Trade Payables 6,00,000 66,660 6,66,660
Total Current Liabilities 6,00,000 6,66,660
Total Liabilities 23,00,000 25,16,635

Working Notes
1. Determination of Company Z's balance acquired by Company X on 30.6.20X1
(Acquisition Date)
Particulars As per Company Carrying Acquisition Remarks
Z Books Value 33.33% Date Value
30.6.20X1 Share
₹ ₹ ₹
Assets
Non - Current Assets
Property, Plant & Equipment 3,00,000 99,990 1,66,650 Note 1
Right of Use Asset 20,000 6,666 6,666
Development CWIP 1,00,000 33,330 66,660 Note 2
Financial Assets
Loan receivable 50,000 16,665 16,665
Total Non-Current Assets 4,70,000 1,56,651 2,56,641
Current assets
Inventories 3,00,000 9,999 9,999
Financial Assets
Trade receivables 1,00,000 33,330 33,330
Cash and cash equivalents 2,00,000 66,660 66,660
Other Current Assets 50,000 6,665 16,665

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Total Current Assets 3,80,000 1,26,654 1,26,654

Total Assets 23,00,000 25,16,635
Liabilities
Non-Current Liabilities
Provisions 2,00,000 66,660 66,660
Other Liabilities 1,00,000 33,330 33,330
Total Non-Current Liabilities 3,00,000 99,990
Current Liabilities
Financial Liabilities
Trade Payables 2,00,000 66,660 66,660
Total Current Liabilities 2,00,000 66,660 66,660

Note 1: Fair Value of PPE:

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

Note 2: Fair Value of Development CWIP:

Fair Value of PPE in Company Z Books ₹ 2,00,000
33.33% Share acquired by Company X ₹ 66,650

2. Computation Goodwill/Bargain Purchase Gain

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

*In extremely rare circumstances, an acquirer will make a bargain purchase in a business combination in
which the value of net assets acquired in a business combination exceeds the purchase consideration. The
acquirer shall recognise the resulting gain in other comprehensive income on the acquisition date and
accumulate the same in equity as capital reserve, if the reason for bargain purchase gain is clear and
evidence exist. If there does not exist clear evidence of the underlying reasons for classifying the business
combination as a bargain purchase, then the gain shall be recognised directly in equity as capital reserve.
Since in above scenario it is clearly evident that due to liquidity issues, Company Z has to withdraw their
participating right from AWM/01. The said bargain purchase gain should be transferred to other
comprehensive income on the acquisition date.

3. Computation of Deferred Tax Liability arising on Business Combination

Particulars Acquisition Date Value
₹
Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of ₹ 66,660) 59,994
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Net Assets Acquired at Fair Value 1,49,985
Book value of Net Assets Acquired (49,995)
Temporary Difference 99,990
DTL @ 30% on Temporary Difference 29,997

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

QUESTION 12: (RTP Nov’24)

P Limited and Q Limited enter into a contractual arrangement to buy a building that has 12 floors, which
they will lease to other parties. P Limited and Q Limited are authorised to lease five floors each. P Limited
and Q Limited can unilaterally make all decisions related to their respective floors and are entitled to all of
the income from those floors. The remaining two floors will be jointly managed – all decisions concerning
these two floors must be unanimously agreed to between P Limited and Q Limited who will share net profits
or net losses in respect of these two floors equally, i.e. they both have the rights to the net assets of the
arrangement. The leasing of property is determined to be the relevant activity.
Whether this arrangement is a joint operation or a joint venture?

Answer
Paragraphs 15-17 of Ind AS 111 state that a joint operation is a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the assets and obligations for the liabilities, relating to
the arrangement. Those parties are called joint operators.
Further, a joint venture is a joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement. Those parties are called joint venturers.
Furthermore, an entity applies judgement when assessing whether a joint arrangement is a joint operation
or a joint venture. An entity shall determine the type of joint arrangement in which it is involved by
considering its rights and obligations arising from the arrangement. An entity assesses its rights and
obligations by considering the structure and legal form of the arrangement, the terms agreed by the parties
in the contractual arrangement and, when relevant, other facts and circumstances.
In the given case, accounting by P Limited and Q Limited would be as follows:
(i) Five floors that P Limited controls
Five floors that are controlled by P Limited shall be accounted for by P Limited as investment
property under Ind AS 40, Investment Property, which defines the term ‘investment property’
as property (land or a building—or part of a building—or both) held (by the owner or by the
lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.

(ii) Five floors that Q Limited controls

Five floors that are controlled by Q Limited shall be accounted for by Q Limited as investment
property under Ind AS 40.

(iii) Two floors that P Limited and Q Limited jointly control

For the two floors that are jointly controlled by P Limited and Q Limited, as per the contractual arrangement,
both P Limited and Q Limited will share net profits or net losses equally i.e. they both have the rights to the
net assets of the arrangement. Thus, the arrangement in respect of these two floors is a joint venture and
shall be accounted for accordingly by P Limited and Q Limited.

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TOPIC 27
INDAS 113 - FAIR VALUE MEASUREMENT
QUESTION 125:
([Link].02– Question Bank)
ABC Ltd. acquired 5% equity shares of XYZ Ltd. for Rs. 10 crore in the year 20X1-X2. The company is in
process of preparing the financial statements for the year 20X2-X3 and is assessing the fair value at
subsequent measurement of the investment made in XYZ Ltd. Based on the observable input, the ABC Ltd.
identified a similar nature of transaction in which PQR Ltd. acquired 20% equity shares in XYZ Ltd. for Rs. 60
crore. The price of such transaction was determined on the basis of Comparable Companies Method (CCM) -
Enterprise Value (EV) / EBITDA which was 8. For the current year, the EBITDA of XYZ Ltd. is Rs. 40 crore. At
the time of acquisition, the valuation was determined after considering 5% of liquidity discount and 5% of non-
controlling stake discount. What will be the fair value of ABC Ltd.’s investment in XYZ Ltd. as on the balance
sheet date?

SOLUTION:
Determination of Enterprise Value of XYZ Ltd.
Particulars Rs. in crore
EBITDA as on the measurement date 40
EV/EBITDA multiple as on the date of valuation 8
Enterprise value of XYZ Ltd. 320

Determination of subsequent measurement of XYZ Ltd.

Particulars Rs. in crore
Enterprise Value of XYZ Ltd. 320
ABC Ltd.’s share based on percentage of holding (5% of 320) 16
Less: Liquidity discount & Non-controlling stake discount (5%+5%=10%) (1.6)
Fair value of ABC Ltd.’s investment in XYZ Ltd. 14.4

QUESTION 126: (SIMILAR TO RTP NOV 21)

([Link].07– Question Bank)
On 1st January, 20X1, A Ltd assumes a decommissioning liability in a business combination. The reporting
entity is legally required to dismantle and remove an offshore oil platform at the end of its useful life, which is
estimated to be 10 years. The following information is relevant:
If A Ltd. was contractually allowed to transfer its decommissioning liability to a market participant, it concludes
that a market participant would use all of the following inputs, probability weighted as appropriate, when
estimating the price it would expect to receive:

a. Labour costs
Labour costs are developed based on current marketplace wages, adjusted for expectations of future wage
increases, required to hire contractors to dismantle and remove offshore oil platforms. A Ltd. assigns
probability to a range of cash flow estimates as follows: Cash Flow Estimates: 100 Cr 125 Cr 175 Cr
Probability: 25% 50% 25%

b. Allocation of overhead costs:

Assigned at 80% of labour cost

c. The compensation that a market participant would require for undertaking the activity and for assuming
the risk associated with the obligation to dismantle and remove the asset. Such compensation includes
both of the following:
i. Profit on labour and overhead costs:

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A profit mark-up of 20% is consistent with the rate that a market participant would require as
compensation for undertaking the activity
ii. The risk that the actual cash outflows might differ from those expected, excluding inflation:
A Ltd. estimates the amount of that premium to be 5% of the expected cash flows. The expected cash
flows are 'real cash flows' / 'cash flows in terms of monetary value today'.
d. Effect of inflation on estimated costs and profits
A Ltd. assumes a rate of inflation of 4 percent over the 10-year period based on available market data.

e. Time value of money, represented by the risk-free rate: 5%

f. Non-performance risk relating to the risk that Entity A will not fulfill the obligation, including A Ltd.'s own
credit risk: 3.5%
A Ltd, concludes that its assumptions would be used by market participants. In addition, A Ltd. does not
adjust its fair value measurement for the existence of a restriction preventing it from transferring the liability.
You are required to calculate the fair value of the asset retirement obligation.

SOLUTION
Amount (In Cr)
Expected Labour Cost (Refer W.N.) 131.25
Allocated Overheads (80% x 131.25 Cr) 105.00
Profit markup on Cost (131.25 + 105) x 20% 47.25
Total Expected Cash Flows before inflation 283.50
Inflation factor for next 10 years (4%) (1.04)10 = 1.4802
Expected cash flows adjusted for inflation 283.50 x 1.4802 419.65
Risk adjustment - uncertainty relating to cash flows (5% x 419.64) 20.98
Total Expected Cash Flows (419.65+20.98) 440.63
Discount rate to be considered = risk-free rate + 5% + 3.5% 8.5%
entity's non-performance risk
Expected present value at 8.5% for 10 years (440.63 / (1.08510)) 194.97

Working Note:
Expected labour cost:
Cash Flows Estimates Probability Expected Cash Flows
100 Cr 25% 25 Cr
125 Cr 50% 62.50 Cr
175 Cr 25% 43.75 Cr
Total 131.25 Cr

QUESTION 127: (SIMILAR TO May’22 EXAM, RTP Nov’21, MTP May’23, MTP Nov’23)
([Link].08– Question Bank)
(I) Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company XYZ has a total share
capital of 5,000 shares with nominal value of ₹ 10. Entity XYZ’s after-tax maintainable profits are estimated
at ₹ 70,000 per year. An appropriate price/earnings ratio determined from published industry data is 15
(before lack of marketability adjustment). Entity A’s management estimates that the discount for the lack of
marketability of company XYZ’s shares and restrictions on their transfer is 20%. Entity A values its holding in
company XYZ’s shares based on earnings. Determine the fair value of Entity A’s investment in XYZ’s
shares.
(ii) Based on the facts given in the aforementioned part (I), assume that, Entity A estimates the fair value of
the shares it owns in company XYZ using a net asset valuation technique. The fair value of company XYZ’s
net assets including those recognised in its balance sheet and those that are not recognised is ₹ 8,50,000.
Determine the fair value of Entity A’s investment in XYZ’s shares.
SOLUTION
(i) An earnings-based valuation of Entity A's holding of shares in company XYZ could be calculated as
follows:
Particulars Unit
Entity XYZ's after-tax maintainable profits (A) ₹ 70,000

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Price/Earnings ratio (B) 15

Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) ₹ 8,40,000

Value of a share of XYZ = ₹ 8,40,000 ÷ 5,000 shares = ₹ 168

The fair value of Entity A's investment in XYZ's shares is estimated at ₹ 42,000 (that is, 250 shares × ₹
168 per share).

(ii) Share price = ₹ 8,50,000 ÷ 5,000 shares = ₹ 170 per share.

The fair value of Entity A's investment in XYZ shares is estimated to be ₹ 42,500 (250 shares × ₹ 170 per
share).

QUESTION 128: (SIMILAR TO MTP Aug18 & Nov18 EXAM & Nov19 EXAM)
([Link].09– Question Bank)
An asset is sold in two different active markets at different prices. Manor Ltd. enters into transactions in
both markets and can access the price in those markets for the asset at the measurement date.
In the Mumbai market, the price that would be received is Rs 290, transaction costs in that market are Rs
40 and the costs to transport the asset to that market are Rs 30. Thus, the net amount that would be
received is Rs 220.
In the Kolkata market the price that would be received is Rs 280, transaction costs in that market are Rs
20 and the costs to transport the asset to that market are Rs 30. Thus, the net amount that would be
received in Kolkata market is Rs 230.
(i) What should be the fair value of the asset if Mumbai Market is the principal market? What should be
fair value if none of the markets is a principal market?
(ii) The net realization after expenses is more in the export market, say Rs 280, but the Government allows
only 15% of the production to be exported out of India. Discuss what would be fair value in such a
case.

SOLUTION
i)
a) If Mumbai Market is the principal market
If Mumbai Market is the principal market for the asset (i.e., the market with the greatest volume and level
of activity for the asset), the fair value of the asset would be measured using the price that would be received
in that market, after taking into account transportation costs.
Fair value will be
Rs.
Price receivable 290
Less: Transportation cost (30)
Fair value of the asset 260

(b) If neither of the market is the principal market

If neither of the markets is the principal market for the asset, the fair value of the asset would be
measured using the price in the most advantageous market. The most advantageous market is the
market that maximises the amount that would be received to sell the asset, after taking into account
transaction costs and transportation costs (i.e., the net amount that would be received in the respective
markets).
Rs Rs
Mumbai Kolkata
Market Market
Fair value of the asset as per the question 220 230
Since the entity would maximise the net amount that would be received for the asset in Kolkata Market
i.e., Rs 230, the fair value of the asset would be measured using the price in Kolkata Market.
Fair value in such a case would be

Rs
Price receivable 280
Less: Transportation cost (30)
Fair value of the asset 250
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ii) Export prices are more than the prices in the principal market and it would give the highest return
compared to the domestic market. Therefore, the export market would be considered as the most
advantageous market. But since the Government has capped the export, maximum upto 15% of total
output, maximum sale activities are being done at domestic market only i.e. 85%. Since the highest level
of activities with the highest volume is being done in the domestic market, the principal market for assets
would be the domestic market. Therefore, the prices received in the domestic market would be used for
fair valuation of assets.

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TOPIC – 28
INDAS 103 – BUSINESS COMBINATION
QUESTION 129
([Link].802 - Question Bank)
P Ltd. acquired 30% shares in S Ltd. for Rs. 3,50,000 on 1/04/2017, thereafter purchased another lot of
40% shares in S Ltd. for Rs. 5,25,000 on 1/10/2017. Followings are the Balance Sheets of P and S as on
31/03/2018:
Particulars Parent Ltd. Subsidiary Ltd.
PPE 15,00,000 9,00,000
Investments in S Ltd. 8,75,000 -
Other Assets 6,25,000 6,00,000
Share Capital 12,00,000 8,00,000
Other Equity 10,00,000 3,50,000
Liabilities 8,00,000 3,50,000
1. At the time of acquiring control, NCI was calculated at Fair Value based on the shares acquired by P
on that date.
2. Fair value of previous equity investment of P on 30/09/2017 is to be calculated with reference to the
transaction value of purchase of 2nd lot.
3. Subsidiary co. paid dividend on 15/12/18 for the year 16-17 Rs. 80000.
4. Abnormal loss on 21/08/2017 was Rs. 25000 in subsidiary co.
Statement of Profit and Loss for the year ending 31/03/2018 of P and S
Particulars Parent Ltd. Subsidiary Ltd.
Incomes
Revenue from Operation 18,00,000 10,00,000
Dividend Received 56,000 -
Expenses (including abnormal loss) 12,00,000 8,50,000
Net Profits/Total Comprehensive Income 6,56,000 1,50,000

Statement of Changes in Equity are as under:

Parent Ltd.
Particulars General Profit and Loss Total
Reserve a/c
Opening Balances as on 1/04/2017 3,00,000 44,000 3,44,000
Total Comprehensive Income during the year - 6,56,000 6,56,000
Closing Balances as on 31/03/2018 3,44,000 6,56,000 10,00,000
Subsidiary Ltd.
Particulars General Profit and Loss Total
Reserve a/c
Opening Balances as on 1/04/2017 2,30,000 50,000 2,80,000
Total Comprehensive Income during the year - 1,50,000 1,50,000
Dividend Paid - {80000) (80000)
Closing Balances as on 31/03/2018 2,30,000 1,20,000 3,50,000
From the above information, prepare Consolidated Financial Statements (BS & SPL)
SOLUTION:
1) NCI (FV) = 3,93,750
2) FV of Previous Investment = 3,93,750
FV Gain = 3,93,750 – 3,50,000 = 43,750
3) Dividend Paid = 80,000
Profit & Loss A/c – 56,000
NCI – 24,000
Consolidated Statement of P&L
Revenue from operation 18,00,000 23,00,000
5,00,000
Other income (Dividend) 56,000 Nil
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(-) Inter Co. (56,000)

23,00,000
Expenses 16,12,500
P 12,00,000
S 4,12,500
Net Profit 6,87,500
Net Profit Attributable to NCI 26,250
NP attributable to SH of Parent 6,43,750
6,62,500
Net NCI = 26,250
(-) Dividend = 24,000
= 2,250

W.N. 1: -
NCI: -
NCI as on DOA (FV) 3,93,750
+ Post Acquisition share 26,250
(-) Dividend Paid (24,000)
3,96,000

W.N.2: -
Cost of Control: -
FV of 40% Consideration 5,25,0000
FV of 30% Investment 3,93,750
+ NCI 30% as on DOA 3,93,750
(-) 100% Net Assets (11,42,500)
Goodwill 1,70,000

W.N. 3: -
DOA Changes Balance Sheet
ESC 8,00,000 - 8,00,000
Other Equity 2,80,000 70,000 3,50,000
+ DIvidend - 80,000
10,80,000 1,50,000
+ Abnormal Loss - 25,000
10,80,000 1,75,000
+/- T. Adjustment (6 Months) 87,500 (87,500)
11,67,500 87,500
(-) Abnormal Loss (25,000) -
11,42,500 87,500
100% Net Assets P – 61,250
NCI – 26,250

(Hint: Cons. P&L of Grp 1049000; BS Total 3795000)

QUESTION 130: (RTP May’24)

([Link].804 - Question Bank)
On 1st April, 20X1, PQR Ltd. acquired 30% of the voting ordinary shares of XYZ Ltd. for Rs. 8,000 crore. PQR
Ltd. accounts its investment in XYZ Ltd. using equity method as prescribed under Ind AS 28. At 31st March,
20X2, PQR Ltd. recognized its share of the net asset changes of XYZ Ltd. using equity accounting as follows:

(Rs. in crore)
Share of profit or loss 700
Share of exchange difference in OCI 100

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Share of revaluation reserve of PPE in OCI 50

The carrying amount of the investment in the associate on 31st March, 20X2 was therefore Rs. 8,850 crore
(8,000 + 700 + 100 + 50).
On 1st April, 20X2, PQR Ltd. acquired the remaining 70% of XYZ Ltd. for cash Rs. 25,000 crore. The
following additional information is relevant at that date:
(Rs. in crore)
Fair value of the 30% interest already owned 9,000
Fair value of XYZ's identifiable net assets 30,000
How should such business combination be accounted for?

SOLUTION:
Paragraph 42 of Ind AS 103 provides that in a business combination achieved in stages, the acquirer
shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value
and recognize the resulting gain or loss, if any, in statement of profit and loss or other comprehensive
income, as appropriate. In prior reporting periods, the acquirer may have recognized changes in the value
of its equity interest in the acquiree in other comprehensive income. If so, the amount that was recognized
in other comprehensive income shall be recognized on the same basis as would be required if the acquirer
had disposed directly of the previously held equity interest.
Applying the above, PQR Ltd. records the following entry in its consolidated financial statements:
(Rs. in crore)
Debit Credit
Identifiable net assets of XYZ Ltd. Dr. 30,000
Goodwill (W.N.1) Dr. 4,000
Foreign currency translation reserve Dr. 100
PPE revaluation reserve Dr. 50
To Cash 25,000
To Investment in associate -XYZ Ltd. 8,850
To Retained earnings (W.N.2) 50
To Gain on previously held interest in XYZ recognized in P or l 250
(W.N.3)
(To recognize acquisition of XYZ Ltd.)

Working Notes:
1. Calculation of Goodwill
(Rs. in crore)
Cash consideration 25,000
Add: Fair value of previously held equity interest in XYZ Ltd. 9,000
Total consideration 34,000
Less: Fair value of identifiable net assets acquired (30,000)
Goodwill 4,000

2. The credit to retained earnings represents the reversal of the unrealized gain of Rs. 50 crore in
Other Comprehensive Income related to the revaluation of property, plant and equipment. In
accordance with Ind AS 16, this amount is not reclassified to profit or loss.

3. The gain on the previously held equity interest in XYZ Ltd. is calculated as follows:
(Rs. in crore)
Fair Value of 30% interest in XYZ Ltd. at 1st April, 20X2 9,000
Carrying amount of interest in XYZ Ltd. at 1st April, 20X2 (8,850)
150
Unrealised gain previously recognized in OCI 100
Gain on previously held interest in XYZ Ltd. recognized in profit or 250
loss

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QUESTION 131: (RTP May’24)

([Link].1013 - Question Bank)
At the beginning of its current financial year, AB Limited holds 90% equity interest in BC Limited.
During the financial year, AB Limited sells 70% of its equity interest in BC Limited to PQR Limited for a
total consideration of ₹ 56 crore and consequently loses control of BC Limited.
At the date of disposal, fair value of the 20% interest retained by AB Limited is ₹ 16 crore and the net
assets of BC Limited are fair valued at ₹ 60 crore.
These net assets include the following:
(a) Debt investments classified as fair value through other comprehensive income (FVOCI) of ₹ 12
crore and related FVOCI reserve of ₹ 6 crore.
(b) Net defined benefit liability of ₹ 6 crore that has resulted in a reserve relating to net measurement
losses of ₹ 3 crore.
(c) Equity investments (considered not held for trading) of ₹ 10 crore for which irrevocable option of
recognising the changes in fair value in FVOCI has been availed and related FVOCI reserve of ₹ 4
crore.
(d) Net assets of a foreign operation of ₹ 20 crore and related foreign currency translation reserve of ₹
8 crore.
In consolidated financial statements of AB Limited, 90% of the above reserves were included in equivalent
equity reserve balances, with the 10% attributable to the non-controlling interest included as part of the
carrying amount of the non-controlling interest.
What would be the accounting treatment on loss of control in the consolidated financial statements of AB
Limited?
SOLUTION
Paragraph 25 of Ind AS 110 states that, “if a parent loses control of a subsidiary, the parent:
(a) derecognises the assets and liabilities of the former subsidiary from the consolidated balance sheet.
(b) recognises any investment retained in the former subsidiary at its fair value when control is lost
and subsequently accounts for it and for any amounts owed by or to the former subsidiary in
accordance with relevant Ind AS. That fair value shall be regarded as the fair value on initial
recognition of a financial asset in accordance with Ind AS 109 or, when appropriate, the cost on
initial recognition of an investment in an associate or joint venture.
(c) recognises the gain or loss associated with the loss of control attributable to the former controlling
interest.”
Paragraph B98(c) of Ind AS 110 states that, on loss of control over a subsidiary, a parent shall reclassify to
profit or loss, or transfer directly to retained earnings if required by other Ind AS, the amounts recognised
in other comprehensive income in relation to the subsidiary on the basis specified in paragraph B99.
As per paragraph B99, if a parent loses control of a subsidiary, the parent shall account for all amounts
previously recognised in other comprehensive income in relation to that subsidiary on the same basis as
would be required if the parent had directly disposed of the related assets or liabilities. Therefore, if a gain
or loss previously recognised in other comprehensive income would be reclassified to profit or loss on the
disposal of the related assets or liabilities, the parent shall reclassify the gain or loss from equity to profit or
loss (as a reclassification adjustment) when it loses control of the subsidiary. If a revaluation surplus
previously recognised in other comprehensive income would be transferred directly to retained earnings on
the disposal of the asset, the parent shall transfer the revaluation surplus directly to retained earnings when
it loses control of the subsidiary.
In view of the basis in its consolidated financial statements, AB Limited shall:
(a) re-classify the FVOCI reserve in respect of the debt investments of ₹ 5.4 crore (90% of ₹ 6 crore)
attributable to the owners of the parent to the statement of profit or loss in accordance with paragraph
B5.7.1A of Ind AS 109, Financial Instruments which requires that the cumulative gains or losses
previously recognised in OCI shall be recycled to profit and loss upon derecognition of the related
financial asset. This is reflected in the gain on disposal. Remaining 10% (i.e., ₹ 0.6 crore) relating to
non- controlling interest (NCI) is included as part of the carrying amount of the non-controlling interest
that is derecognised in calculating the gain or loss on loss of control of the subsidiary.

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(b) transfer the reserve relating to the net measurement losses on the defined benefit liability of ₹ 2.7
crore (90% of ₹ 3 crore) attributable to the owners of the parent within equity to retained earnings. It
is not reclassified to profit or loss. The remaining 10% (i.e., ₹ 0.3 crore) attributable to the NCI is
included as part of the carrying amount of NCI that is derecognised in calculating the gain or loss on
loss of control over the subsidiary. No amount is reclassified to profit or loss, nor is it transferred
within equity, in respect of the 10% attributable to the non-controlling interest.
(c) reclassify the cumulative gain on fair valuation of equity investment of ₹ 3.6 crore (90% of ₹ 4 crore)
attributable to the owners of the same parent from OCI to retained earnings under equity as per
paragraph B5.7.1 of Ind AS 109, Financial Instruments, which provides that in case an entity has
made an irrevocable election to recognise the changes in the fair value of an investment in an equity
instrument not held for trading in OCI, it may subsequently transfer the cumulative amount of gains
or loss within equity. The remaining 10% (i.e., ₹ 0.4 crore) related to the NCI are derecognised along
with the balance of NCI and not reclassified to profit and loss.
(d) reclassify the foreign currency translation reserve of ₹ 7.2 crore (90% × ₹ 8 crore) attributable to the
owners of the parent to statement of profit or loss as per paragraph 48 of Ind AS 21 ‘The Effects of
Changes in Foreign Exchange Rates’, which specifies that the cumulative amount of exchange
differences relating to the foreign operation, recognised in OCI, shall be reclassified from equity to
profit or loss on the disposal of foreign operation. This is reflected in the gain on disposal. Remaining
10% (i.e., ₹ 0.8 crore) relating to the NCI is included as part of the carrying amount of the NCI that is
derecognised in calculating the gain or loss on the loss of control of subsidiary, but is not reclassified
to profit or loss in pursuance of paragraph 48B of Ind AS 21, which provides that the cumulative
exchange differences relating to that foreign operation attributed to NCI shall be derecognised on
disposal of the foreign operation, but shall not be reclassified to profit or loss.
The impact of loss of control over BC Limited on the consolidated financial statements of AB Limited is
summarised below: (₹ in crore)

Particular Amount Amount P&L RE

(Dr) (Cr) Impact Impact
Gain / Loss on Disposal on
Investments
Bank 56
Non-controlling interest 6
(Derecognised)
Investment at FV (20% 16
Retained)
Gain on Disposal (P&L) 18 18
balancing figure
De-recognition of total net 60
assets of subsidiary
Reclassification of FVTOCI
reserve on debt
instruments to profit or loss
FVTOCI reserve on debt 5.4
instruments (6 cr. x 90%)
To Profit and loss 5.4 5.4
Reclassification of net
measurement loss reserve to
profit or loss
Reserve and Surplus 2.7 -2.7
To Net measurement loss 2.7
reserve (FVTOCI) [(3 cr. x 90%)]
Reclassification of FVTOCI
reserve on equity
instruments to retained
earnings

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FVTOCI reserve on equity 3.6

instruments (4 crux 90%)
To Reserve and Surplus 3.6 3.6
Foreigncurrency
translation reserve
reclassified to profit or loss
Foreign currency translation 7.2
reserve (FVOCI) [8 cr. x 90%]
To Profit and loss 7.2 7.2

Total 30.6 0.9

QUESTION 132
([Link].1104 - Question Bank)
The Balance Sheets of three companies Sun Ltd., Moon Ltd. and Light Ltd. as at 31st March, 2018 are given
below:
Sun Ltd. Moon Ltd. Light Ltd.
Equity & Liabilities:
Shareholder Funds:
Share Capital (of Rs.10 each) 1,50,000 1,00,000 60,000
Reserves 50,000 40,000 30,000
Profit and Loss A/c 60,000 50,000 40,000
Current Liabilities:
Sundry Creditors 30,000 35,000 25,000
Sun Ltd. - 10,000 8,000
2,90,000 2,35,000 1,63,000
Assets:
Non-Current Assets:
Fixed Assets 70,000 1,20,000 1,03,000
Investments (at Cost)
Shares in Moon Ltd. 90,000 - -
Shares in Light Ltd. 40,000 - -
Shares in Light Ltd. - 50,000 -
Current Assets:
Stock-in-Trade 40,000 30,000 20,000
Debtors 20,000 25,000 30,000
Due from Moon Ltd. 12000 - -
Due from Light Ltd. 8,000 - -
Cash in Hand 10,000 10,000 10,000
2,90,000 2,35,000 1,63,000

(a) Sun Ltd. held 8,000 shares of Moon Ltd. and 1,800 shares of Light Ltd.
(b) Moon Ltd. held 3,600 shares of Light Ltd.
(c) All investments were made on 1st July, 2017.
(d) The following balances were there on 1st July, 2017:

Moon Ltd. Light Ltd.

Reserves 25,000 15,000
Profit and Loss A/c 20,000 25,000
(e) Moon Ltd. invoiced goods to Sun Ltd. for Rs. 40,000 as cost plus 25% in December, 2017. The Closing
stock of Sun Ltd. includes such goods valued at Rs. 5,000
Prepare the Consolidated Balance Sheet of the group as at 31 st March, 2018. Working should be part of the
answer.

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SOLUTION:
Sun Ltd. hold 8% in Moon Ltd.
Moon Ltd. hold 60% in Light Ltd.
Sun Ltd. hold 30% in Light Ltd.

Working Note - 1:
a) Sun to Moon:
Sun’s Share in Moon 80%
NCI in Moon 20%

B) Sun to Light
Sun’s Share in Light (60% x 80%) + 30% = 78%
NCI in Light = 22%

Working Note – 2:
Statement of Changes in Net assets:
Particulars DOA Changes Balance Sheet
Profit & Loss General Reserve
Equity share Capital 1,00,000 - - 1,00,000
Profit & Loss 20,000 30,000 - 50,000
General Reserve 25,000 - 15,000 40,000
(-) Eliminate - (1,000) - -
1,45,000 29,000 15,000
100% Net Assets as 80% - Holding- 80% - Holding-
on Date of 23,200 12,000
Acquisition 20% -NCI- 5,800 20% -NCI- 3,000

Moon Limited:
Particulars DOA Changes Balance
Sheet
Profit & Loss General Reserve
Equity share Capital 60,000 - - 60,000
Profit & Loss 25,000 15,000 - 40,000
General Reserve 15,000 - 15,000 30,000
- (1,000) - -
1,00,000 15,000 15,000 15,000
100% Net Assets as 78% - Holding- 78% - Holding-
on Date of 11,700 11,700
Acquisition 22% -NCI- 3,300 22% -NCI- 3,300

Working Note – 3:
Cost of Control:
Particulars For Moon For Light
Investment by Sun in Moon 90,000 -
Investment by Sun in Light (Direct) (30%) - 40,000
Investment by Sun in Light (Indirect) - 40,000
(50,000 x 80%)
90,000 80,000
(+) Non-Controlling Interest : - -
(1,45,000 x 20%) in Moon @ 20% 29,000 -
(1,00,000 x 22%) in Light @ 22% - 22,000
(-) 100% Met Assets (1,45,000) (1,00,000)
Goodwill / (Gain from Bargain Purchase) (26,000) 2,000

Working Note – 4:
Calculation of Non-Controlling Interest:

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Particulars For Moon For Light

NCI on DOA 29,000 22,000
(+) Post Acquisition share 8,800 6,600
37,800 28,600
(-) Investment held by NCI in Moon (10,000) -

Working Note – 5:
Consolidated other Equity:
Particulars Profit & General Other Comprehensive
Loss Reserve Income / Capital Reserve
Balance of Sun limited 60,000 50,000 -
(+) Post Acquisition share - - -
From Moon 23,200 12,000 -
From Light 11,700 11,700 -
Gain from Bargain Purchase - - 26,000
Total 94,900 73,700 26,000

Total Other Equity = 1,94,600

CONSOLIDATED BALANCE SHEET OF SUN GROUP

Particulars Amount
Fixed Assets 2,93,000
Goodwill 2,000
Stock (40,000 + 30,000 + 20,000 - 1,000) 89,000
Debtors 75,000
Cash in hand 30,000
Cash in Transit 2,000
4,91,000
Equity share Capital 1,50,000
Consolidated Other Equity 1,94,600
Non-Controlling Interest -
Moon (37,800 - 10,000) = 27,800 56,400
Light (Remaining Share in Net Assets of Moon) = 28,600
Equity share Capital 90,000
4,91,000

QUESTION 133: (SIMILAR MTP March’21 & May’18 EXAM)

([Link].1204 - Question Bank)
Enterprise Ltd. has 2 divisions Laptops and Mobiles. Division Laptops has been making constant profit while
division Mobiles has been invariably suffering losses.
On 31st March, 20X2, the division-wise draft extract of the Balance Sheet was:
(Rs in Crores)
Laptops Mobiles Total
Fixed assets cost 250 500 750
Depreciation (225) (400) (625)
Net assets (A) 25 100 125
Current assets 200 500 700
Less: Current liabilities (25) (400) (425)
Net Current Assets (B) 175 100 275
Total (A+B) 200 200 400
Financed by:
Loan funds - 300 300
Capital: Equity Rs 10 each - - 25
Surplus 175 (100) 75
200 200 400

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Division Mobiles along with its assets and liabilities was sold for Rs. 25 crores to Turnaround Ltd. a new
company, who allotted 1 crores equity shares of Rs. 10 each at a premium of Rs. 15/- per share to the members
of Enterprise Ltd. in full settlement of the consideration, in proportion to their shareholding in the company.
One of the members of the Enterprise Ltd. was holding 52% shareholding of the Company.
Assuming that there no other transactions, you are asked to:
(i) Pass journal entries in the books of Enterprise Ltd.
(ii) Prepare the Balance Sheet of Enterprise Ltd. after the entries in (i)
(iii) Prepare the Balance Sheer of Turnaround Ltd.

Solution:
Journal of Enterprise Ltd.
(Rs. in crores)
Dr. Rs Cr. Rs
Loan funds Dr. 300
Current liabilities Dr. 400
Provision for Depreciation Dr. 400
To fixed Assets 500
To Current Assets 500
To Capital Reserve 100
(Being division Mobiles along with its assets and liabilities sold to
turnaround Ltd. for Rs 25 crores)
Notes:
(i) Any other alternative set of entries, with the same net effect on various accounts, may be
given by the students.
(ii) In the given scenario, this assets and liabilities will meet the definition of common control
transaction.
Accordingly, the transfer of assets and liabilities will be derecognized and recognized as per book value
and the resultant loss or gain will be recorded as capital reserve in the books of demerged entity
(Enterprise Ltd.).
Enterprise Ltd.
Balance Sheet after reconstruction
(Rs. in crores)
Assets Note No. Amount
Non-current assets
Property, plant and equipment 25
Current assets
Other current assets 200
225
Equity and Liabilities
Equity
Equity share capital (of face value of INR 10 each) 25
Other equity (R&S + CR) 1 175
Liabilities
Current liabilities
Current liabilities 25
225

Notes to Account:
(Rs. in crores)
1. Reserves and surplus 75
Add: Capital Reserves on reconstruction 100
175

Notes to Accounts:
Consequent on transfer of Division Mobiles to newly incorporated company Turnaround Ltd. the
member of the company have been allotted 1 crore equity shares of Rs 10 each at a premium of Rs
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15 per share of Turnaround Ltd. in full settlement of the consideration in proportion to their
shareholding in the company.
Balance Sheet of Turnaround Ltd.
Assets Note No. Amount
Non-current assets
Property, plant and equipment 100
Current assets
Other current assets 500
600
Equity and Liabilities
Equity
Equity share capital (of face value of INR 10 each) 1 10
Other equity (Security Premium + {Surplus} + {CR}) (110)
Liabilities
Non-Current liabilities
Financial liabilities
Borrowings 300
Current liabilities
Current liabilities 400
600

Notes to Accounts
(Rs in crores)
1. Shares Capital:
Issued and paid-up capital
1 crores Equity shares of Rs 10 each fully paid up 10
All the above share have been issued for consideration other than cash, to the
members of Enterprise ltd. on takeover of Division Mobiles from Enterprise Ltd.)

Working Notes:
In the given case, since both the entities are under common control, this will be accounted as
follows”
❖ All assets and liabilities will be recorded at book value
❖ Identity of reserves to be maintained.
❖ No goodwill will be recorded.
❖ Securities issued will be recorded as per the nominal value.

QUESTION 134: (SIMILAR TO Dec21 EXAM, MTP Oct18, MTP May’23)

([Link].1301 - Question Bank)
AX Ltd. and BX Ltd. amalgamated on and from 1st January 20X2. A new Company ABX Ltd. was found to
take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-20X2
INR in ‘000
Assets AX Ltd. BX Ltd.
Non-current assets
Property, Plant and Equipment 8500 7500
Financial assets
Investments 1050 550
Current assets
Inventory 1250 2750
Trade receivable 1800 4000
Cash and Cash equivalent 450 400
13050 15200
Equity and Liabilities
Equity
Equity share capital (of face value of INR 10 each) 6000 7000

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Other Liabilities 3050 2700

Liabilities
Non-current liabilities
Financial liabilities
Borrowings 3000 4000
Current Liabilities
Trade payable 1000 1500
13050 15200

ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of the
transferor companies.
Prepare a note showing purchase consideration and discharge thereof and draft the Balance Sheet of ABX
Ltd:
(a) Assuming that both the entities are under common control
(b) Assuming BX ltd is a larger entity and their management will take the control of the entity. The
fair value of net assets of AX and BX limited are as follows;

Assets AX Ltd. (‘0000 BX Ltd. (‘000)

Fixed assets 9500 1000
Inventory 1300 2900
Fair value of the business 11000 14000

SOLUTION
(a) (Assumption: Common control transaction)
1. Calculation of Purchase Consideration
AX Ltd. BX Ltd.
(Rs. ‘000) (Rs. ‘000)
Assets taken over:
Fixed assets 8500
Investments 1050
Inventory 1250
Trade receivable 1800
Cash & bank 450
Gross Assets 13050
Less: Liabilities
12% Debenture 300 4000
Trade payables 1000 (4000) 1500 (5500)
Net Assets taken over 9050 9700
Less: Reserve and surplus:
General Reserve 1500 2000
P & L A/c 1000 500
Investment Allowance Reserve 500 100
Export Profit Reserve 50 (3050) 100 (2700)
Purchase Consideration 6000 7000

Total Purchase Consideration- 13,000(6000 of AX Ltd. & 7000 of BX Ltd.)

2. Discharge of Purchase Consideration

No. of shares to be issued to AX Ltd=
Net assets taken over of AX Ltd/Net assets taken over of AX Ltd. and BX Ltd * Purchase Consideration

No. of shares to be issued to BX Ltd=

Net assets taken over of AX Ltd/Net assets taken over of AX Ltd. and BX Ltd x Purchase Consideration
AX Ltd. Rs ‘000 BX Ltd. Rs ‘000
13000*9050/18750=6,27,500 Equity shares of Rs 10 each 6275
13000*9700/18750=6,27,500 Equity shares of Rs 10 each 6725

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The total purchase consideration is to be discharged by ABX Ltd. in such a way that the rights of the
shareholders of AX Ltd. and BX Ltd. remain unaltered in the future profit of ABX Ltd.

Balance Sheet of ABX Ltd. as on 1.1.20X2

INR in ‘000
Assets Note No. Amount
Non-current assets
Property, Plant and Equipment 16000
Financial assets
Investments 1600
Current assets
Inventory 4000
Trade receivable 5800
Cash and Cash equivalent 850
28250
Equity and Liabilities
Equity 1 13000
Equity share capital (of face value of INR 10 each) 2 5750
Other Liabilities
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 3 7000
Current Liabilities
Trade payable 2500
28250

Notes to Accounts
(Rs. 000) Rs. 000)
1 Share capital
13,00,000 Equity Shares of Rs 10 each 13000
2. Reserve and surplus
General Reserve (1500+2000) 3500
Profit & Loss (1000+500) 1500
Investment Allowance Reserve (500+100) 600
Export Profit Reserve (50+100) 150 5750
3 Long term Borrowing
12% debenture (Assumed that new debenture were issued in 7000
exchanged of the old series) (3000+4000)

(b) Assessment: In this case BX Ltd. and AX Ltd. are not under common control and hence Ind AS
103 for business combination accounting will be applied. A question arises here is who is the
accounting acquirer AXBCX Ltd which is issuing the share or AX Ltd. or BX Ltd. As per the
accounting guidance provided in Ind AS 103 sometimes the legal acquirer may not be the
accounting acquirer. In the given scenario although AX BX Ltd. is issuing the share but the BX
Ltd. post-merger will have control and is bigger in size which is a clear indicator that BX Ltd.
will be accounting acquirer. Accordingly, the following accounting steps has to be followed:
❖ BX Ltd. assets will be recorded at historical cost in the merged financial statements.
❖ Shares issued to the shareholders of BX Ltd. will be recorded at nominal value and the shares
issued to the members of AX Ltd. will be recorded at the fair value of the business which is 11000.
❖ The above purchase price will be allocated to the assets and liabilities of AX Ltd. at fair value and
the resultant amount will be recorded as goodwill.

JUSTIFICATION FOR ABOVE STEPS -

In the given scenario, although XY Ltd. is issuing the shares but Y Ltd. post-merger will have control and
is bigger in size which is a clear indicator that Y Ltd. will be an accounting acquirer. This can be justified
by the following table:
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(In ‘000s)
X Ltd. Y Ltd.
Fair Value 11,000 14,000
Value per share 10 10
No. of shares 1,100 1,400
i.e. Total No. of shares in XY Ltd. = 2,500 thousand shares
Thus, % Held by each Company in Combined Entity 44% 56%

Note: It is a case of Reverse Acquisition.

Accordingly, Y Ltd.’s assets will be recorded at historical cost in the merged financial statements.

(1) Calculation of Purchase Consideration

AX Ltd. BX Ltd.
(RsRs.000) (RsRs.000)
Assets taken over:
Fixed assets 9500 7500
Investment 1050 550
Inventory 1300 2750
Trade receivables 1800 4000
Cash & Bank 450 400
Goodwill 900 -
Gross Assets 15000 15200
Less: Liabilities
12% Debentures 3000 4000
Trade payables 1000 (4000) 1500 (5500)
Purchase consideration 11000 9700

(2) Discharge of Purchase Consideration (PC):

AX Ltd. BX Ltd.
(Rs.000) (Rs.000)
Fair value of BX Ltd. business is 11000 and accordingly per 11,000
share fair value is 20. Considering the above AXBX Ltd. will
issue 5,50,000 shares as PC to the members of AX Ltd.
5,50,000 Equity shares of Rs 10 each at a premium of 10 each
7,00,000 Equity Shares of Rs 10 each 70,000

Balance Sheet of ABX Ltd. as on 1.1.20X2

INR in ‘000
Assets Note No. Amount
Non-current assets
Goodwill 900
Property, Plant and Equipment (9500+7500) 17000
Financial assets
Investments (1050+550) 1600
Current assets
Inventory (1300+2750) 4050
Trade receivable (1800+4000) 5800
Cash and Cash equivalent (450+400) 850
30200
Equity and Liabilities
Equity 1 12500
Other Liabilities 2 8200
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 3 7000
Current Liabilities

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Trade payable 2500

30200

Notes to Accounts
Rs (‘000) Rs (‘000)
1. Share Capital
1,25,000 Equity Shares of Rs 10 each (700,000) to BX 12500
Ltd and 550,000 as computed above to AX Ltd)
2. Reserves and Surplus
Security Premium 5500
General reserve of BX Ltd 2200
P & L BX Ltd 500
Export Profit Reserve of BX Ltd 100
Investment Allowance Reserve of BX Ltd 100 8200
3. Long Term Borrowings
12% Debenture (Assumed that new debenture were 7000
issued in exchanged of the old series)

QUESTION 135
([Link].1403 - Question Bank)
'Bread' Limited is a company carrying on the business of Dairy products and is having a subsidiary 'Butter'
Limited. Their Balance-sheets as on 31st March 2019 were as under:
ASSETS Bread Limited Butter
(Rs) Limited (Rs)
Non-Current Assets
Fixed Assets 21,70,000 6,25,000
Investments
4060 Shares in Butter 5,10,400 -
Current Assets
Inventories 4,80,000 3,19,200
Trade Receivable 1,80,000 1,64,000
Bills Receivable 68,000 1,00,000
Cash and Bank Balance 87,100 15,300
Total 34,95,500 12,23,500

Equity and Liabilities Bread Limited Butter

(Rs) Limited (Rs)
Shareholders’ Funds
Share Capital (100/- each) 25,00,000 5,80,000
Reserves and Surplus
General Reserves 2,00,000 1,20,000
Profit and Loss Account 3,12,500 2,05,000
Current Liabilities
Trade Payable 4,55,000 2,35,500
Bills Payable 28,000 83,000
Total 34,95,500 12,23,500

Bread Limited has also given the following information:

(i) Bread Limited has acquired the shares in Butter Limited in two lots on two different dates.
The relevant information at the time of acquisition of shares was as under:
No. of shares acquired Date of Purchase Bal. in General Reserve Bal. in P&L A/c
1st acquisition 1740 @ 120/- 1/4/18 80,000 25,000
2nd acquisition 2320 @ 130/- 1/07/18 85,000 1,02,000
(ii) Bills Receivable of Bread Limited includes Rs. 15,000 being acceptance from Butter
Limited.
(iii) Butter Ltd. has paid dividend of 10% on 31st July 2018.
Prepare the Consolidated Balance Sheet of BREAD Limited along with 'Notes to accounts’.
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SOLUTION:
Working Note – 1: Statement of Changes in Net assets:
Particulars DOA Changes Balance Sheet
General Profit & 31/03/2019
Reserve Loss
Equity share Capital 5,80,00 5,80,00
Profit & Loss 1,02,000 1,03,000 2,05,000
General Reserve 85,000 35,000 65,000
7,67,000 1,38,000
(+/-) Dividend Paid - 58,000
Normal Profits 7,67,000 1,96,000
(+/-) Time Adjustments - -
Normal Balance 7,67,000 1,96,000
100% Net 75% - Holding-
Assets as on 1,37,200
Date of 30% -NCI-
Acquisition 58,800

Working Note – 2: Non - Controlling Interest:

Particulars Amount
NCI on Proportion Net Assets method (7,67,000 x 30%) 2,30,100
(+) Post Acquisition Profit 58,800
(-) Dividend already Received (17,400)
Non-Controlling Interest on Balance Sheet Date 2,71,500

Working Note – 3: Cost of Control:

Particulars Amount
Investment @ 40% Acquisition 3,01,600
(+) Fair Value of Previously Held Investments (1,740 x 130) 2,26,200
(+) Non-Controlling Interest on DOA 2,30,100
(-) 100% Net Assets (7,67,000)
Gain From Bargain Purchase 9,100

Working Note – 4: Consolidated Other Equity:

Particulars Retained Capital
Earnings Reserves
Balance with Holding Company 5,12,500
(+) Fair Value Gain on Previously Held Investments (1,740 x 10) 17,400
(+) Post Acquisition Share 1,37,200
(-) Dividend already to P/L Account in SFS (40,600)
Financial Statements
Gain From bargain Purchase 9,100
6,26,500 9,100
Total Other Equity (6,26,500 + 9,100) = 6,35,600

CONSOLIDATED BALANCE SHEET OF PARENT

Particulars Amount
I. Assets
1) Non-Current Assets:
Property, Plant & Equipment 27,95,000
2) Current Assets
Inventory 7,99,200
Trade Receivable 3,44,000
Bill Receivable 1,53,000
Cash & Cash Equivalent 1,02,400
41,93,600
II. Equity & Liability
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1) Shareholder’s Fund
a) Equity share Capital 25,00,000
b) Other equity 6,35,600
c) Non-Controlling Interest 2,71,500
2) Non-Current Liabilities
3) Current Liabilities
a) Trade Receivable 6,90,500
b) Bills Payable 96,000
41,93,600

QUESTION 136: (RTP Nov’23)

([Link].1409 - Question Bank)
Ishwar Ltd. holds investments in Vinayak Ltd. The draft balance sheets of two entities at 31 st March, 20X4
were as follows:

Particulars Ishwar Ltd. Vinayak Ltd.

₹ in ‘000s ₹ in ‘000s
Assets
Non-current Assets
Property, Plant and Equipment 26,20,000 18,50,000
Investment 21,15,000 NIL
Total non-current assets 47,35,000 18,50,000
Current Assets
Inventories 6,00,000 3,75,000
Trade Receivables 4,50,000 3,30,000
Cash and Cash Equivalents 75,000 60,000
Total current assets
11,25,000 7,65,000
TOTAL ASSETS
58,60,000 26,15,000
Equity and Liabilities Equity
Share Capital (₹ 1 shares) Retained Earnings
Other Components of Equity
7,00,000 5,00,000
Total Equity
28,65,000 10,50,000
Non-current Liabilities
12,50,000 50,000
Provisions
Long-term Borrowings Deferred Tax 48,15,000 16,00,000
Total Non-current Liabilities
Current Liabilities 6,250 NIL
Trade and Other Payables Short-term Borrowings 4,13,750 4,50,000
Total Current Liabilities
2,25,000 1,40,000
TOTAL EQUITY AND LIABILITIES

6,45,000 5,90,000
3,00,000 2,50,000
1,00,000 1,75,000
4,00,000 4,25,000
58,60,000 26,15,000

Additional Information:
Ishwar Ltd.’s investment in Vinayak Ltd.
On 1st April, 20X1, Ishwar Ltd. acquired 400 million shares in Vinayak Ltd. by means of a share exchange of
one share in Ishwar Ltd. for every two shares acquired in Vinayak Ltd. On 1st April, 20X1, the market value
of one share of Ishwar Ltd. was ₹ 7.
Ishwar Ltd. appointed a professional firm for conducting due diligence for acquisition of Vinayak Ltd., the cost
of which amounted to ₹ 15 million. Ishwar Ltd. included these acquisition costs in the carrying amount of the

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investment in Vinayak Ltd. in the draft balance sheet of Ishwar Ltd. There has been no change to the carrying
amount of this investment in Ishwar Ltd.’s own balance sheet since 1 st April, 20X1.
On 1st April, 20X1, the individual financial statements of Vinayak Ltd. showed the following balances:
- Retained earnings ₹ 750 million
- Other components of equity₹ 25 million
The directors of Ishwar Ltd. carried out a fair value exercise to measure the identifiable assets and liabilities
of Vinayak Ltd. at 1st April, 20X1. The following matters emerged:
- Property having a carrying amount of ₹ 800 million (land component ₹ 350 million, buildings
component ₹ 450 million) had an estimated fair value of ₹ 1,000 million (land component ₹ 400
million, buildings component ₹ 600 million). The buildings component of the property had an
estimated useful life of 30 years at 1st April, 20X1.
- Plant and equipment having a carrying amount of ₹ 600 million had an estimated fair value of ₹
700 million. The estimated remaining useful life of this plant at 1st April, 20X1 was four years.
None of this plant and equipment had been disposed of between 1st April, 20X1 and 31st March,
20X4.
- On 1st April, 20X1, the notes to the financial statements of Vinayak Ltd. disclosed contingent
liability. On 1st April, 20X1, the fair value of this contingent liability was reliably measured at ₹
30 million. The contingency was resolved in the year ended 31st March, 20X2 and no payments
were required to be made by Vinayak Ltd. in respect of this contingent liability.
- The fair value adjustments have not been reflected in the individual financial statements of
Vinayak Ltd. In the consolidated financial statements, the fair value adjustments will be
regarded as temporary differences for the purposes of computing deferred tax. The rate of
deferred tax to apply to temporary differences is 20%.
The directors of Ishwar Ltd. used the proportion of net assets method when measuring the non-controlling
interest in Vinayak Ltd. in the consolidated balance sheet.

Impairment review of goodwill on acquisition of Vinayak Ltd.

No impairment of the goodwill on acquisition of Vinayak Ltd. was evident when the reviews were carried out
on 31st March, 20X2 and 20X3. On 31st March, 20X4, the directors of Ishwar Ltd. carried out a further review
and concluded that the recoverable amount of the net assets of Vinayak Ltd. at that date was ₹ 2,000 million.
Vinayak Ltd. is regarded as a single cash generating unit for the purpose of measuring goodwill impairment.

Provision
On 1st April, 20X3, Ishwar Ltd. completed the construction of a non-current asset with an estimated useful life
of 20 years. The costs of construction were recognised in property, plant and equipment and depreciated
appropriately. Ishwar Ltd. has a legal obligation to restore the site on which the non-current asset is located
on 31st March, 2X43. The estimated cost of this restoration work, at 31st March, 2X43 prices, is ₹ 125 million.

The directors of Ishwar Ltd. have made a provision of ₹ 6.25 million (1/20 x ₹ 125 million) in the draft balance
sheet at 31st March, 20X4.
An appropriate annual discount rate to use in any relevant calculations is 6% and at this rate the present value
of ₹ 1 payable in 20 years is 31.2 paise.
Prepare the consolidated balance sheet of Ishwar Ltd. at 31 st March, 20X4. Consider deferred tax
implications.

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Solution :
Consolidated Balance Sheet of Ishwar Ltd. at 31st March, 20X4
Particulars ₹ in ‘000s
Assets
Non-current Assets:
Property, Plant and Equipment
[(26,20,000 + 18,50,000) + {(2,00,000 (W.N.1) – 15,000 (W.N.1)) +
(1,00,000 (W.N.1) – 75,000 (W.N.1)) + (39,000 – 1,950) (WN 7)}] 47,17,050
Investment (21,15,000 – 14,00,000 – 15,000) 7,00,000
Goodwill (W.N.2) 1,85,600
Total non-current assets 56,02,650
Current Assets:
Inventories (6,00,000 + 3,75,000) 9,75,000
Trade Receivables (4,50,000 + 3,30,000) Cash and Cash 7,80,000
Equivalents (75,000 + 60,000) 1,35,000
Total current assets 18,90,000
TOTAL ASSETS 74,92,650
Equity and Liabilities
Equity attributable to equity holders of the parent Share Capital
Retained Earnings (W.N.5) 7,00,000
Other Components of Equity (W.N.6) 30,31,960
12,70,000
Non-controlling Interest (W.N.4) 50,01,960
Total equity 3,53,600
53,55,560
Non-current Liabilities
Provisions (39,000 + 2,340 (W.N.7))
Long-term Borrowings (4,13,750 + 4,50,000) Deferred Tax (W.N.8) 41,340
Total non-current liabilities 8,63,750
4,07,000
13,12,090
Current Liabilities
Trade and Other Payables (3,00,000 + 2,50,000) 5,50,000
Short-term Borrowings (1,00,000 + 1,75,000) 2,75,000
Total Current Liabilities 8,25,000
TOTAL EQUITY AND LIABILITIES 74,92,650

Working Notes:
1. Computation of Net Assets of Vinayak Ltd.
1st April, 31st March, 20X4
20X1 (Date of
(Date of consolidation)
acquisition) ₹ in ‘000s
₹ in ‘000s
Share Capital 5,00,000 5,00,000
Retained Earnings:
Per accounts of Vinayak Ltd. 7,50,000 10,50,000
Fair Value Adjustments:
Property (10,00,000 – 8,00,000)* #2,00,000 $2,00,000

Extra depreciation due to

Buildings
appreciation*
((6,00,000 – 4,50,000) x 3/30) $(15,000)

Plant and Equipment

(7,00,000 – 6,00,000)* #1,00,000 $1,00,000

Extra depreciation due to Plant

and
Equipment appreciation*

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(1,00,000 x ¾) $(75,000)

Contingent Liability* #(30,000) $NIL

Other Components of Equity 25,000 50,000

Deferred Tax on Fair Value Adjustments*:
Date of acquisition (20% x #2,70,000

(from
above)) (54,000)
Date of Consolidation (20% x $2,10,000
(from above)) (42,000)
Net Assets for Consolidation 14,91,000 17,68,000
The post-acquisition increase in Net Assets is ₹ 2,77,000 (₹ 17,68,000 –
₹ 14,91,000). ₹ 25,000 of this increase is due to changes in Other Components
of Equity and the remaining ₹ 2,52,000 due to changes in retained earnings.

2. Computation of Goodwill on Consolidation

Vinayak Ltd.
₹ in ‘000s
Cost of Investment:
Shares issued to acquire Vinayak Ltd. (4,00,000 x ½ x ₹ 7) 14,00,000
Non-controlling Interests at the date of acquisition:
Vinayak Ltd. – 20% x ₹ 1,491,000 (from W.N.1) 2,98,200
16,98,200
Net Assets at the date of acquisition:
Vinayak Ltd. (W.N.1) (14,91,000)
Goodwill before Impairment 2,07,200
Less: Impairment of Goodwill (refer W.N.3) (21,600)
Goodwill reported in Consolidated Balance Sheet 1,85,600

3. Impairment of Goodwill on acquisition of Vinayak Ltd.

Vinayak Ltd.
₹ in ‘000s
Net Assets of Vinayak Ltd. at 31st March, 20X4 (W.N.1) 17,68,000
Grossed up Goodwill on acquisition (100/80 x ₹ 2,07,200)
(Refer Note 1 below) 2,59,000
20,27,000
Recoverable amount of Vinayak Ltd. as a CGU (20,00,000)
Therefore, gross impairment will be 27,000
Impairment attributed to Parent (refer Note 2 below) 21,600

Note 1: Grossing up of Goodwill

As per Para C4 of Appendix C to Ind AS 36 Impairment of Assets – If an entity measures non-controlling
interests at its proportionate interest in the net identifiable assets of a subsidiary at the acquisition date,
rather than at fair value, goodwill attributable to non-controlling interests is included in the recoverable
amount of the related Cash Generating Unit but is not recognised in the parent’s consolidated financial
statements. As a consequence, an entity shall gross up the carrying amount of goodwill allocated to
the unit to include the goodwill attributable to the non-controlling interest. This adjusted carrying amount
is then compared with the recoverable amount of the unit to determine whether the cash-generating
unit is impaired.

Note 2: Allocation of Impairment of Goodwill

Since the non-controlling interests of Vinayak Ltd. are measured at proportionate share of identifiable net
assets of Vinayak Ltd., the goodwill computed is entirely attributable only to the parent of Vinayak Ltd.
Accordingly, the impairment also would be attributed entirely to the parent of Vinayak Ltd., and not to the
non- controlling interest.

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4. Computation of Non-controlling Interest (NCI)

Vinayak Ltd.
₹ in ‘000s
NCI at the date of acquisition (W.N.2) 2,98,200
Share of post-acquisition increase in net assets
(20% x ₹ 2,77,000 (from W.N.1)) 55,400
3,53,600

5. Computation of consolidated Retained Earnings

₹ in ‘000s
Balance as per accounts of Ishwar Ltd. 28,65,000
Adjustments:
Acquisition costs (15,000)
Restoration Provision (W.N.7) 1,960
Share of Vinayak Ltd.’s post-acquisition profits
(80% x ₹ 2,52,000 (W.N.1)) 2,01,600
Impairment of Goodwill (W.N.3) (21,600)
30,31,960

6. Other Components of Equity

₹ in ‘000s
Balance as per accounts of Ishwar Ltd. 12,50,000
Share of Vinayak Ltd.’s post-acquisition balance
(80% x ₹ 25,000 (W.N.1)) 20,000
12,70,000

7. Computation of Restoration Provision

₹ in ‘000s

Provision for Restoration originally required (₹ 1,25,000 x 0.312) 39,000

One year’s unwinding of discount (₹ 39,000 x 6%) A (2,340)
One year’s depreciation of capitalized cost (₹ 39,000 x 1/20) B (1,950)
Original provision incorrectly made C 6,250
So retained earnings adjustment equals [C -A – B] 1,960

8. Computation of Deferred Tax

₹ in ‘000s
Ishwar Ltd. + Vinayak Ltd. 3,65,000
Fair value adjustments in Vinayak Ltd. (from W.N.1) 42,000
4,07,000

QUESTION 137: (Exam Nov’23)

([Link].1410 - Question Bank)
The extracts of the Balance Sheets of Hammer Ltd. and its subsidiary Sleek Ltd. as on 31 st March, 2023 are
given below:
Particulars Note Hammer Sleek Ltd.
No. Ltd. (₹)
(₹)
I. ASSETS
A. Non-Current Assets
Property, Plant and Equipment 1 6,00,000 3,25,000
Intangible Assets 2 1,25,000 75,000
Investments 6,25,000 1,25,000

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B. Current Assets

Inventories 1,25,000 1,60,000

Financial Assets

Trade receivables 3,25,000 2,90,000

Cash and Cash equivalents 1,50,000 3,50,000

Total Assets 19,50,000 13,25,000

II EQUITY AND LIABILITIES

A. Equity

Equity Share Capital (₹ 10 each) 10,00,000 5,00,000

Other Equity 3 5,50,000 3,75,000

B. Non- Current Liabilities

Financial Liabilities

Borrowings 4 - 1,00,000

C. Current Liabilities

Financial Liabilities

Short term borrowings

Bank Overdraft 1,00,000 50,000

Trade Payables 3,00,000 3,00,000

Total Equity and Liabilities 19,50,000 13,25,000

Notes to Accounts
Note Particulars Hammer Sleek Ltd.
No. Ltd. (₹)
(₹)
1. Property, Plant and Equipment
(a) Plant and Machinery 2,00,000 1,25,000
(b) Furniture and Fittings 4,00,000 2,00,000
6,00,000 3,25,000
2. Intangible Assets
Goodwill 1,25,000 75,000

3. Other Equity
(a) General Reserve 2,00,000 1,25,000
(b) Retained Earnings 3,50,000 2,50,000
5,50,000 3,75,000
4. Borrowings
8% Debentures of ₹ 100 each - 1,00,000

Additional information:
Hammer Ltd. acquired 20,000 equity shares of Sleek Ltd. on 1 st April, 2022 at a cost of ₹ 2,40,000 and
further acquired 17,500 equity shares on 1 st October, 2022 at a cost of ₹ 1,92,500;
The 8% debentures of Sleek Ltd. includes debentures held by Hammer Ltd. of nominal value of ₹ 35,000.
These were acquired by Hammer Ltd. on 1st January, 2022 at a cost of ₹ 84,000;
The retained earnings of Sleek Ltd. had a credit balance of ₹ 75,000 as on 1st April, 2022. On that date the
balance of General Reserve was ₹ 50,000;
- Sleek Ltd. had paid dividend @ 10% on its paid-up equity share capital out of the balance of
retained earnings as on 1st April, 2022 for the financial year 2021-2022. The entire dividend
received by Hammer Ltd. was credited in its statement of profit and loss;

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- As per the resolution dated 28th February 2023, Sleek Ltd. had allotted bonus shares @ 1 equity
share for every 10 shares held out of its general reserve. The accounting effect has not been given;
- Trade receivables of Hammer Ltd. includes bills receivables of ₹ 2,00,000 drawn upon Sleek Ltd.
Out of this, bills of ₹ 50,000 have been discounted with bank;
- During the financial year 2022-2023, Hammer Ltd. purchased goods from Sleek Ltd., of
₹ 25,000 at a sales price of ₹ 30,000, 40% of these goods remained unsold on 31st March, 2023;
- On 1st October, 2022, machinery of Sleek Ltd. was overvalued by 20,000 for which necessary
adjustments are to be made. Depreciation is charged @ 10% per annum:
- The parent company i.e., Hammer Ltd. has adopted an accounting policy to measure non-controlling
interest at fair value (quoted market price) applying Ind AS 103. Assume the fair value per equity
share of Sleek Ltd. at ₹ 11 on the date when control of Sleek Ltd. was acquired by Hammer Ltd.
You are required to prepare a consolidated balance sheet, as per Ind AS, of Hammer Ltd. and its subsidiary
Sleek Ltd. as at 31st March, 2023.

Solution
Consolidated Balance Sheet of Hammer Ltd. as at 31st March, 2023

Notes No. ₹ in lakhs

Assets

Non-current assets
Property, plant and equipment 1 9,06,000
Intangible assets 1 2,00,000

Financial assets

Investment 1 2,33,500

Current assets
Inventories 1 2,83,000
Financial assets

Trade receivables 1 4,65,000

Cash and cash equivalents 1 5,00,000

Total 25,87,500

Equity and Liabilities

Equity
Share capital - Equity shares of ₹ 10 each 2 10,00,000
Other equity 3 7,47,750
Non-controlling interest (W.N.) 1,74,750

Non-current liabilities:
Financial liabilities
Borrowings 1 65,000

Current Liabilities:
Financial liabilities
Bank Overdraft 1 1,50,000
Trade payables 1 4,50,000

Total 25,87,500

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Notes to Accounts
Note 1: Assets and Liabilities ₹

Particulars Hammer Sleek Adjustments Total

Ltd. Ltd.
Property, Plant and 6,00,000 3,25,000 -20,000 9,06,000
Equipment +1,000
Intangible Assets 1,25,000 75,000 2,00,000
Investments 1,92,500* 1,25,000 -84,000 2,33,500
Inventories 1,25,000 1,60,000 -2,000 2,83,000
Trade Receivables 3,25,000 2,90,000 -1,50,000 4,65,000
Cash and Cash Equivalents 1,50,000 3,50,000 5,00,000
Borrowings 0 1,00,000 -35,000 65,000
Bank Overdraft 1,00,000 50,000 1,50,000
Trade Payables 3,00,000 3,00,000 -1,50,000 4,50,000

*6,25,000 – 2,40,000-1,92,500

Note 2: Equity Share Capital

1,00,000 equity shares of ₹ 10 each, fully paid 10,00,000
10,00,000

Note 3: Consolidated Other Equity

General Reserve W.N.1 2,28,125
Retained Earnings W.N.1 3,64,625
Capital Reserve W.N.2 1,55,000
7,47,750

Working Notes:
1. Consolidated Other Equity
Particulars General Retained
Reserve Earnings
Standalone - Hammer Ltd. 2,00,000 3,50,000
Less: Fair Value Loss of existing stake
[2,40,000 - (20,000 x 11)] (20,000)
Less: Loss on cancellation of debentures (49,000)
Add: Share in Post-acquisition Profits 28,125 83,625
2,28,125 3,64,625

2. Computation of Goodwill or Bargain Purchase for (75% stake)

(i) Computation of net worth (net identifiable assets) as on 1 st October, 2022
Share Capital 5,00,000
Pre-acquisition Retained Earnings (after adjusting 1,17,500
downward revaluation of machinery)
Pre-acquisition General Reserve 37,500
Bonus issue* 50,000
Net Identifiable assets 7,05,000

*Note: Bonus shares issued in 1:10 ratio i.e. ₹ 50,000 and bonus issue has not been accounted for yet. The
opening balance of the general reserve is ₹ 50,000 while the closing balance is ₹ 1,25,000 which implies that
₹ 75,000 have been transferred during the year and this amount should be allocated between pre and post-
acquisition based on time proportion. Therefore, the general reserve on the date of acquisition will be ₹
50,000 + 50% of ₹ 75,000 i.e. ₹ 37,500 = ₹ 87,500. Here, it should be noted that the date of bonus issue is
28th February, 2023 and bonus amount is ₹ 50,000. Since the balance of post-acquisition general reserve
(50% of ₹ 75,000 i.e. ₹ 37,500) is insufficient, it is assumed that bonus shares are issued from pre-
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acquisition general reserve i.e. balance on the date of acquisition assuming that transfer to general reserve,
in general, is an appropriation of profit which is done at the end of the year. This implies that outstanding
balance in general reserve at the time of bonus issue is the opening balance.
However, one may assume otherwise like insufficient post-acquisition balance of ₹ 12,500 (50,000 – 37,500)
has only been adjusted through pre-acquisition share of ₹ 87,500 or first adjustment of bonus issue has
been done and later bifurcation of remaining balance has been done into pre and post-acquisition. In such
a case balance of consolidated general reserve (post-acquisition), net worth, bargain purchase and NCI will
undergo a change.

(i) Computation of bargain purchase i.e capital reserve

Net worth or Net identifiable assets 7,05,000
Purchase consideration (1,92,500 + 2,20,000) 4,12,500
NCI [12,500 shares x ₹ 11 (i.e. ₹ 1,92,500 / 17,500
shares)] 1,37,500 5,50,000
Bargain purchase (capital reserve) 1,55,000

3. Non-Controlling Interest A/c (at Fair Value)

NCI at fair value as on 1st October, 2023 1,37,500
Post-acquisition General Reserve 9,375
Post-acquisition Retained Earnings 27,875
NCI at fair value as on 31st March, 2023 1,74,750

1. Analysis of Other Equity

(i) General Reserve
Closing balance as on 31st March, 2023 1,25,000
Less: Opening Balance pre (50,000)
Net Profit transferred during the year 75,000
For 6 months till 30th September, 2022 pre 37,500
For 6 months from 1st October, 2022 to 31st March, post 37,500
2023
Total pre-acquisition reserve (50,000 + 37,500) pre 87,500
Less: Bonus issue pre (50,000)
Balance General Reserve pre 37,500
Share of Hammer Ltd. in pre-acquisition reserve (75%) pre 28,125
Share of NCI in pre-acquisition reserve (25%) pre 9,375
Share of Hammer Ltd. in post-acquisition reserve (75%) post 28,125

Share of NCI in post-acquisition reserve (25%) post 9,375

(ii) Retained Earnings (RE)

Closing balance as on 31st March, 2023 2,50,000
Less: Opening balance 75,000
Less: Dividend @10% (50,000) pre (25,000)
During the year 2,25,000
For 6 months till 30th September, 2022 pre 1,12,500
For 6 months from 1st October 2022 to 31st March, post 1,12,500
2023
Add: Saving in Depreciation (W.N.5) 1,000
Less: Unrealised Gain [(30,000-25,000) x 40%] (2,000)
Net post-acquisition RE post 1,11,500
Total pre-acquisition RE (25,000 + 1,12,500) pre 1,37,500
Less: Downward revaluation of machinery (20,000)
pre 1,17,500
Share of Hammer Ltd. in pre-acquisition RE (75%) pre 88,125
Share of NCI in pre-acquisition RE (25%) pre 29,375
Share of Hammer Ltd. in post-acquisition RE (75%) post 83,625
Share of NCI in post-acquisition RE (25%) post 27,875

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1. Plant and Machinery balance as on 31st March 2023

₹
Balance as on 31.3.2023 as given in question (after depreciation) 1,25,000
Less: Downward revaluation less depreciation saving (19,000)*
1,06,000

*Saving in depreciation = ₹ 20,000 - ₹ 19,000 = ₹ 1,

QUESTION 138: (Exam May’24))

([Link].1411 - Question Bank)
The Accountant Mr. Ramesh Kanna of ‘H’ Limited submitted to you the 14 following standalone Balance Sheet
extracts as at 31st March 2024:
Amount in Rs.
Assets H Ltd. S Ltd. A Ltd.
Non- current assets
Property, Plant and Equipment 5,50,000 4,80,000 2,50,000
Financial Assets :
Investments:
14,000 shares in S Ltd. 5,60,000 - -
4,000 shares in A Ltd. 1,00,000 12,10,000 - 4,80,000 - 2,50,000
a) current assets
Inventory 4,85,000 3,82,500 2,45,500
b) financial Assets
Cash and cash equivalents 89,000 98,000 1,77,000
Trade receivables 3,95,000 9,69,000 3,05,000 7,85,500 1,78,500 6,01,000
Total Assets : 21,79,000 12,65,500 8,51,000
Equity & Liabilities
Shareholder’s Equity
Equity share Capital (Rs. 10 per 5,00,000 2,00,000 1,00,000
share)
Other Equity 9,00,000 14,00,000 7,50,000 9,50,000 4,24,000 5,24,000
Retained earnings
Non-current liabilities
Financial Liabilities 4,00,000 1,50,000 1,00,000
Borrowings -Term Loans
Current liabilities
Financial Liabilities 3,79,000 1,65,500 2,27,000
Trade Payables
Total Liabilities : 21,79,000 12,65,500 8,51,000

The following additional information is made available in respect of these companies:

(i) H Limited purchased the shres in S Limited on 31st October 2023 when retrained earnings of S Limited
was Rs. 500,000 and the shares in A Limited were acquired on 30 th June 2023 when its retained
earnings stood at Rs. 1,75,000.
(ii) Inventory of A Limited as on 31st March, 2024 include inventory valued at Rs. 60,000 which had been
purchased from H Limited, on 01-01-2024 at cost plus 20%
(iii) Trade Payable of H Limited include Rs. 25,000 payable to A Limited, the amount receivable being
recorded in the receivables of A Limited.
(iv) Goodwill in respect of the acquisition of S Limited has been fully impaired. The recoverable amount of
the investment in A Limited exceeds its’ carrying value at 31 st March 2024. Non-controlling interest is
valued at the proportionate share of the identifiable net assets.
(v) 10% dividends were declared by both H Limited and S Limited where as A Limited declared 15%
dividend for the year 2023-24.
(vi) On 31st March 2024, S Limited made a bonus issue of one equity share for every two shares held by
the shareholder of S Limited.
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(vii) Dividends were declared but were not accounted for by all these companies in the books before the
year end. Similarly, the bonus issued by S Limited was not reflected in the statement of financial
position as on 31st March 2024.
You are required to take note of the above available information and draw the consolidated balance – sheet
of H Limited as at 31st March 2024. Notes to accounts are not required.

Solution
Note: Since adjustments (v) and (vii) of the question state that dividend has been declared by all the entities
but no information is provided whether it has been paid or due. In this regard, it may be noted that since
dividend is paid for the entire year 2023-2024, it is assumed as final dividend which is approved in the
Annual General Meeting conducted at later point time from the reporting date.
Accordingly, following assumptions are possible based on which alternative solutions have been provided:
A. Ignored the adjustment for dividend completely as dividend has to be approved in the Annual
General Meeting.
B. Considered dividend as declared but not paid.
C. Considered dividend as declared and paid.

Alternative A:Ignored the adjustment for dividend completely as it has to be approved in the AGM.
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. and Associate A Ltd. as at 31st
March, 2024
Rs.
Assets
Non-current assets
Property, plant and equipment (Rs. 5,50,000 + Rs. 10,30,000
4,80,000)
Goodwill (Rs. 70,000- Impaired Rs. 70,000) Nil
Financial assets
Investment in A Ltd. (W.N.1 (iii)) 2,05,600
Current assets
Inventory (Rs. 4,85,000+ Rs. 3,82,500) 8,67,500
Financial assets
Cash and cash equivalents (Rs. 89,000 + Rs. 98,000) 1,87,000
Trade receivables (Rs. 3,95,000+Rs. 3,05,000) 7,00,000
Total 29,90,100
Equity and Liabilities
Equity
Share capital - Equity shares of Rs. 10 each 5,00,000
Other equity (W.N.4+ W.N.1(i)) 11,10,600
Non-controlling interest (W.N.3) 2,85,000
Non-current liabilities
Financial liabilities
Borrowings-term loans (Rs. 4,00,000 + Rs. 1,50,000) 5,50,000
Current Liabilities
Financial liabilities
Trade payables (Rs.3,79,000+Rs. 1,65,500) 5,44,500

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Total 29,90,100

Working Notes:
1. Computation of Investment in Associate A Ltd. as per Equity method
(i) Capital reserve on the date of acquisition
The cost of the investment is lower than the net fair value of the investee’s identifiable assets and
liabilities. Hence there is capital reserve calculated as follows:
Rs.
Cost of acquisition of investment 1,00,000
H Ltd.’s share in fair value of net assets of A Ltd.
on the date of acquisition [(1,00,000 + 1,75,000)
x 40%] (1,10,000)
Capital Reserve 10,000

Capital reserve is recorded directly in equity.

(i) Share in profit of A Ltd.
Rs.

Share in post-acquisition profit of A Ltd. [(4,24,000 99,600

- 1,75,000) x 40%]

(ii) Closing balance of investment of Associate A Ltd. at the end of the year

Rs.
Cost of acquisition of investment 1,00,000
Add: Capital reserve 10,000
Share in post-acquisition profit 99,600
Less: Unrealised gain on inventory [(60,000 x
20/120) x 40%] (4,000)
Closing balance of investment 2,05,600
2. Analysis of Retained Earnings of S Ltd.
(i) Retained Earnings (RE) of S Ltd. Rs.

Closing balance as on 31st March, 2024 7,50,000

Less: Pre-acquisition as on 31st October, 2023 (5,00,000)
Post-acquisition Profit 2,50,000

(ii) Computation of net worth (net identifiable assets) as on 31st October, 2023
Rs.

Share Capital of S Ltd. 2,00,000

Pre-acquisition Retained Earnings 5,00,000
Net Identifiable assets 7,00,000

(i) Computation of Goodwill on acquisition date of S Ltd. Rs.

Purchase consideration 5,60,000

NCI as per proportionate share
method (7,00,000 x 30%) 2,10,000 7,70,000

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Less: Net worth or Net Identifiable

Assets (7,00,000)

Goodwill 70,000

3. Non-Controlling Interest as on 31st March, 2024 Rs.

NCI (by proportionate share method) as on

31st October, 2023 2,10,000
Post-acquisition Retained Earnings (W.N.4) 75,000
NCI as on 31st March, 2024 2,85,000

4. Consolidated Retained Earnings

Particulars H Ltd S Ltd.

Rs. Rs.
Opening Balance of Retained Earnings 9,00,000
Post-acquisition Retained Earnings 2,50,000
(W.N.2(i))
Less: Unrealised gain on downstream (4,000)
transaction with Associate A Ltd.
Less: Impairment of Goodwill on (70,000)
acquisition of S Ltd.
Add: Share of profit and loss in Associate 99,600
A Ltd.
Less: Share of NCI in post-acquisition
Retained Earnings [2,50,000 x 30%] (75,000)

9,25,600 1,75,000

Total Consolidated Retained Earnings 11,00,600

Note: Bonus issue by a subsidiary is a transaction with owner in their capacity as owner. Therefore, bonus
issue is only a transfer from one component of equity to the other thereby not changing the equity.
Accordingly, though bonus issue shall be accounted in the individual financial statements of subsidiary,
the same shall not have any effect in consolidated financial statements of the Group.
Alternative B: Considered dividend as declared but not paid Consolidated Balance Sheet of H Ltd.
and its subsidiary S Ltd. and
Associate A Ltd. as at 31st March, 2024
Rs.
Assets
Non-current assets
Property, plant and equipment (Rs. 5,50,000 +
Rs. 4,80,000) 10,30,000
Goodwill (Rs. 70,000- Impaired Rs. 70,000) Nil
Financial assets
Investment in A Ltd. (Refer W.N.1 (iii)) 1,99,600
Current assets
Inventory (Rs. 4,85,000 + Rs. 3,82,500) 8,67,500

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Financial assets
Cash and cash equivalents (Rs. 89,000+ Rs. 1,87,000
98,000)
Trade receivables (Rs. 3,95,000+Rs. 3,05,000) 7,00,000
Other Receivables
(Dividend receivable from A Ltd. (Rs. 15,000 x 6,000
40%)
Total 29,90,100
Equity and Liabilities
Equity
Share capital - Equity shares of Rs. 10 each 5,00,000
Other equity (W.N.4+W.N.1(i)) 10,60,600
Non-controlling interest (W.N.3) 2,79,000
Non-current liabilities
Financial liabilities
Borrowings- term loans (Rs. 4,00,000 + Rs. 1,50,000) 5,50,000
Current Liabilities
Financial liabilities
Trade payables (Rs. 3,79,000+Rs. 1,65,500) 5,44,500
Other payables 56,000
[Dividend payable to NCI by S Ltd. (Rs. 20,000 x 30%)
Rs. 6,000+ Dividend payable by H Ltd. to its
shareholders Rs. 50,000)
Total 29,90,100

Working Notes:
1. Computation of Investment in Associate A Ltd. as per Equity method
(i) Capital reserve on the date of acquisition
The cost of the investment is lower than the net fair value of the investee’s identifiable assets
and liabilities. Hence there is capital reserve calculated as follows:

Rs.
Cost of acquisition of investment 1,00,000
Less: H Ltd.’s share in fair value of net assets of A
Ltd. on the date of acquisition [(1,00,000 +
1,75,000) x 40%] (1,10,000)
Capital Reserve 10,000
Capital reserve is recorded directly in equity.
(ii) Share in profit of A Ltd.

Rs.
Share in post-acquisition profit of A Ltd.
[(4,24,000-1,75,000) x 40%] 99,600
Less: Dividend (1,00,000 x 15% x 40%) (6,000)
Share in profit of A Ltd. 93,600
(i) Closing balance of investment of Associate A Ltd. at the end of the year
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Rs.
Cost of acquisition of investment 1,00,000
Add: Capital reserve 10,000
Share in post-acquisition profit 93,600
Less: Unrealised gain on inventory
[(60,000 x 20/120) x 40%] (4,000)
Closing balance of investment 1,99,600

2. Analysis of Retained Earnings of S Ltd.

(i) Retained Earnings (RE) of S Ltd. Rs.

Closing balance as on 31st March, 2024 7,50,000

Less: Pre-acquisition as on 31st October, 2023 (5,00,000)
Post-acquisition Profit 2,50,000

(ii) Computation of net worth (net identifiable assets) as on 31st October, 2023
Rs.

Share Capital of S Ltd. 2,00,000

Add: Pre-acquisition Retained Earnings 5,00,000
Net Identifiable assets 7,00,000

(iii) Computation of Goodwill on acquisition date of S Ltd. Rs.

Purchase consideration 5,60,000

NCI as per proportionate share
method (7,00,000 x 30%) 2,10,000 7,70,000

Less: Net worth or Net Identifiable

Assets (7,00,000)
Goodwill 70,000

1. Non-Controlling Interest as on 31st March, 2024 Rs.

NCI (by proportionate share method) as on

31st October, 2023 2,10,000
Post-acquisition Retained Earnings (W.N.4) 69,000
NCI as on 31st March, 2024 2,79,000

2. Consolidated Retained Earnings

Particulars H Ltd. S Ltd.

Rs. Rs.

Opening Balance of Retained Earnings 9,00,000

Post-acquisition Retained Earnings (W.N.2(i)) 2,50,000
Less: Unrealised gain on downstream
transaction with Associate A Ltd. (4,000)

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Less: Impairment of Goodwill on acquisition

of S Ltd. (70,000)
Add: Share of profit and loss in Associate
A Ltd. 93,600
Less: Dividend payable by H Ltd. (50,000) (20,000)
Add: Dividend Income receivable from S Ltd. 14,000
Add: Dividend income receivable from A Ltd. 6,000
Less: Share of NCI in post-acquisition
Retained Earnings
[(2,50,000 - 20,000) x 30%] (69,000)

8,89,600 1,61,000

Total Consolidated Retained Earnings 10,50,600

Note: Bonus issue by a subsidiary is a transaction with owner in their capacity as owner.
Therefore, bonus issue is only a transfer from one component of equity to the other thereby not
changing the equity. Accordingly, though bonus issue shall be accounted in the individual
financial statements of subsidiary, the same shall not have any effect in consolidated financial
statements of the Group.

Alternative C: Considered dividend as declared and paid

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. and Associate A Ltd. as at
31st March, 2024

Rs.
Assets
Non-current assets
Property, plant and equipment (Rs. 5,50,000 +
Rs. 4,80,000) 10,30,000
Goodwill (Rs. 70,000- Impaired Rs. 70,000) Nil
Financial assets
Investment in A Ltd. (Refer W.N.1 (iii)) 1,99,600
Current assets
Inventory (Rs. 4,85,000+ Rs. 3,82,500) 8,67,500
Financial assets
Cash and cash equivalents [(Rs. 89,000 - Rs.
50,000 + 1,37,000
Rs. 14,000 + Rs. 6,000) + (Rs. 98,000 - Rs.
20,000)]
Trade receivables (Rs. 3,95,000+Rs. 3,05,000) 7,00,000
Total 29,34,100
Equity and Liabilities
Equity
Share capital - Equity shares of Rs. 10 each 5,00,000
Other equity (W.N.4+W.N.1(i)) 10,60,600
Non-controlling interest (W.N.3) 2,79,000

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Non-current liabilities
Financial liabilities
Borrowings- term loans (Rs. 4,00,000 + Rs. 5,50,000
1,50,000)
Current Liabilities
Financial liabilities
Trade payables (Rs. 3,79,000+Rs. 1,65,500) 5,44,500
Total 29,34,100

Working Notes:
1. Computation of Investment in Associate A Ltd. as per Equity method
(i) Capital reserve on the date of acquisition
The cost of the investment is lower than the net fair value of the investee’s identifiable assets
and liabilities. Hence there is capital reserve calculated as follows:

Rs.
Cost of acquisition of investment 1,00,000
Less: H Ltd.’s share in fair value of net assets
of A Ltd. on the date of acquisition
[(1,00,000 + 1,75,000) x 40%] (1,10,000)

Capital Reserve 10,000

Capital reserve is recorded directly in equity.

(ii) Share in profit of A Ltd.

Rs.
Share in post-acquisition profit of A Ltd. [(4,24,000 - 99,600
1,75,000) x 40%]
Less: Dividend (1,00,000 x 15% x 40%) (6,000)
Share in profit of A Ltd. 93,600

(iii) Closing balance of investment of Associate A Ltd. at the end of the year

Rs.
Cost of acquisition of investment 1,00,000
Add: Capital reserve 10,000
Share in post-acquisition profit 93,600
Less: Unrealised gain on inventory [(60,000 x
20/120) x 40%] (4,000)
Closing balance of investment 1,99,600

1. Analysis of Retained Earnings of S Ltd.

(i) Retained Earnings (RE) of S Ltd. Rs.

Closing balance as on 31st March, 2024 7,50,000

Less: Pre-acquisition as on 31st October, 2023 (5,00,000)

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Post-acquisition Profit 2,50,000

(ii) Computation of net worth (net identifiable assets) as on 31st October, 2023
Rs.

Share Capital of S Ltd. 2,00,000

Pre-acquisition Retained Earnings 5,00,000
Net Identifiable assets 7,00,000

(iii) Computation of Goodwill on acquisition date of S Ltd. Rs.

Purchase consideration 5,60,000

NCI as per proportionate share
method (7,00,000 x 30%) 2,10,000 7,70,000
Less: Net worth or Net Identifiable
Assets (7,00,000)
Goodwill 70,000

2. Non-Controlling Interest as on 31st March, 2024 Rs.

NCI (by proportionate share method) as on

31st October, 2023 2,10,000
Post-acquisition Retained Earnings (W.N.4) 69,000
NCI as on 31st March, 2024 2,79,000

3. Consolidated Retained Earnings Rs.

Particulars H Ltd. S Ltd.

Opening Balance of Retained Earnings 9,00,000
Post-acquisition Retained Earnings
2,50,000
(W.N.2(i))
Less: Unrealised gain on downstream
transaction with Associate A Ltd. (4,000)
Less: Impairment of Goodwill on
acquisition of S Ltd. (70,000)
Add: Share of profit and loss in Associate
A Ltd. 93,600
Less: Dividend paid (50,000) (20,000)
Add: Dividend Income received from
S Ltd. 14,000
Add: Dividend income received from
A Ltd. 6,000
Less: Share of NCI in post-acquisition
Retained Earnings
[(2,50,000 - 20,000) x 30%] (69,000)

8,89,600 1,61,000

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Total Consolidated Retained Earnings 10,50,600

Note: Bonus issue by a subsidiary is a transaction with owner in their capacity as owner. Therefore, bonus
issue is only a transfer from one component of equity to the other thereby not changing the equity.
Accordingly, though bonus issue shall be accounted in the individual financial statements of subsidiary, the
same shall not have any effect in consolidated financial statements of the Group.

QUESTION 139: (Exam May’23)

([Link].1507 - Question Bank)
The draft balance sheets of Swan Limited and Duck Limited as at 31 st March 2023 is as under:

Amount ₹in lakhs

Particulars Swan Duck
Limited Limited
Assets
Non-Current Assets
Property, Plant and Equipment 800 1,000
Investments 900 240
Current Assets
Inventories 360 260
Financial Assets
- Trade Receivables 1,040 540
- Cash & Cash Equivalents 520 290
Other Current Assets 700 350
Total 4,320 2,680
Swan Duck
Limited Limited
Equity and Liabilities
Equity
Share Capital
- Swan Limited: Equity Shares of ₹10 1,200 -
each
- Duck Limited: Equity Shares of ₹100 - 900
each
Other Equity 1,450 420
Non-Current Liabilities
Financial Liabilities
- Long-Term Borrowings 700 5010
Long-Term Provisions 140 200
Deferred Tax 80 -
Current Liabilities
Financial Liabilities
- Short-Term Borrowings 250 290
- Trade Payables 500 370
Total 4,320 2,680
On 1st April 2023, Swan Limited acquired 80% equity shares of Duck Limited. Swan Limited agreed to pay
to each shareholder of Duck Limited, ₹20 per equity share in cash and to issue five equity shares of ₹10

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each of Swan Limited in lieu of every six shares held by the shareholders of Duck Limited. The fair value of
the shares of Swan Limited was ₹100 per share as on the date of acquisition.
Swan Limited also agreed to pay an additional consideration being higher of ₹90 lakhs and 30% of any
excess profits in the first year, after acquisition, over Duck Limited's profits in the preceding 12 months
(financial year 2022-2023) made by Duck Limited. The additional amount will be due in 3 years post the
date of acquisition. Duck Limited earned ₹30 lakhs profit in the preceding year and expects to earn ₹40
lakhs in financial year 2023-2024.
The fair value exercise resulted in the following:
i. Fair value of Property, Plant and Equipment and Investments of Duck Limited on 1 st April, 2023
was ₹1,200 lakhs and ₹300 lakhs respectively.
ii. Duck Limited owns a popular brand name that meets the recognition criteria for Intangible
Assets under Ind AS 103 'Business Combinations'. Independent valuers have attributed a fair
value of ₹250 lakhs for the brand. However, the brand does not have any cost for tax purposes
and no tax deductions are available for the same.
iii. Following is the statement of contingent liabilities of Duck Limited as on 1st April, 2023:

Particulars Fair Value Remarks

(₹in lakhs)
Lawsuit filed by a 5 It is not probable that an outflow of resources
customer for a claim embodying economic benefits will be required
of ₹20 lakhs to settle the claim. Any amount which would
be paid in respect of lawsuit will be tax
deductible.
Income tax demand 20 It is not probable that an outflow of resources
of ₹70 lakhs raised embodying economic
by tax authorities.
Duck Limited
has challenged the benefits will be required to settle the claim.
demand in the High Court
i. Duck Limited had certain equity settled share-based payment awards (original award) which
were replaced by the new awards issued by Swan Limited. As per the terms of original
awards, the vesting period was 5 years and as of the acquisition date the employees of Duck
Limited had already served 2 years of service. As per the new awards, the vesting period has
been reduced to 1 year (1 year from the acquisition date). The fair value of the award on
acquisition date was as follows: Original Awards: ₹12 lakhs New Awards: ₹18 lakhs.
ii. Further, Swan Limited has also agreed to pay one of the founder shareholder of Duck Limited
a sum of ₹15 lakhs provided he stays with the Company for two years after the acquisition.
iii. The acquisition cost of Swan Limited for Duck Limited was ₹26 lakhs.
iv. The applicable tax rate for both the companies is 30%.
v. Assume 10% per annum discount rate.
vi. Also, assume, unless stated otherwise, all items have a fair value and tax base equal to their
carrying amounts at the acquisition date.
You are required to prepare opening Consolidated Balance Sheet of Swan Limited as on 1 st April 2023.
Working Notes should form part of your answer.

Solution
(a) Consolidated Balance Sheet of Swan Ltd as on 1st April, 2023
Notes No. ₹in lakhs
Assets
Non-current assets
Property, plant and equipment 9 2,000.00
Intangible assets 10 250.00
Financial assets

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Investment 11 1,200.00
Current assets
Inventories 12 620.00
Financial assets:
Trade receivables 13 1,580.00
Cash and cash equivalents 14 640.00
Other current assets 15 1,050.00
Total 7,340.00
Equity and Liabilities
Equity
Share capital - Equity shares of ₹10 each 1 1,260.00
Other equity 2 2,475.18
Non-controlling interest (W.N.4) 330.70
Non-current liabilities
Financial liabilities
Long-term borrowings 3 1,200.00
Long-term provisions 4 407.62
Deferred tax liability 5 231.50
Current Liabilities
Financial liabilities
Short-term borrowings 6 540.00
Trade payables 7 870.00
Short-term provision 8 25.00
Total 7,340.00

Notes to Accounts (All figures are ₹in lakhs)

1) Equity Share capital
Equity shares of ₹10 each as per the balance sheet before 1,200
acquisition of Duck Ltd.
Shares allotted to Duck Ltd. (7,50,000 x 80% x ₹10) 60 1,260

2) Other Equity
As per the balance sheet before acquisition of Duck Ltd. 1,450

Less: Acquisition cost (26) 1,424

Replacement award 4.80
Security Premium (7,50,000 shares x 80% x ₹90) 540
Capital Reserve (W.N.5) 506.38
2,475.18

3) Long-term borrowings
As per the balance sheet before acquisition of Duck Ltd. 700
Duck Ltd. 500 1,200

4) Long-term provisions
As per the balance sheet before acquisition of Duck Ltd. 140
Deferred consideration 67.62
Duck Ltd. 200 407.62

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5) Deferred tax liability

As per the balance sheet before acquisition of Duck Ltd. 80
231.50
Deferred tax impact due to acquisition of Duck Ltd. 151.50
(W.N.2)

6) Short term borrowings

As per the balance sheet before acquisition of Duck Ltd. 250
Duck Ltd. 290 540

7) Trade payables
As per the balance sheet before acquisition of Duck Ltd. 500
Duck Ltd. 370 870

8) Short-term provisions
Lawsuit damages 5
Income-tax demand 20 25

9) Property, plant and equipment

As per the balance sheet before acquisition of Duck Ltd. 800
2000
Duck Ltd. 1,200

10) Intangible assets

Brand of Duck Ltd. acquired 250

11) Investment
As per the balance sheet before acquisition of Duck Ltd. 900
Duck Ltd. 300 1,200

12) Inventories
As per the balance sheet before acquisition of Duck Ltd. 360
Duck Ltd. 260
620

13) Trade receivables

As per the balance sheet before acquisition of Duck Ltd. 1,040
Duck Ltd. 540 1,580

14) Cash and cash equivalents

As per the balance sheet before acquisition of Duck Ltd. 520
Less: Acquisition cost paid (26)
Less: Paid to Duck Ltd. (144) 350
Duck Ltd. 290

640

15) Other current assets

As per the balance sheet before acquisition of Duck Ltd. 700
Duck Ltd. 350 1,050

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Working Notes:
1. Computation of Purchase Consideration
Particulars No. of ₹ in
shares lakhs

Share capital of Duck Ltd. 900

Number of shares 9,00,000
Shares to be issued (5 shares against 6 shares of 7,50,000
Duck Ltd.)

Fair value of Swan Ltd.’s share is ₹100 per share

Purchase consideration
Shares issued (7,50,000x 80% x ₹100 per share) (A) 600
Cash payment (₹20 x 9,00,000 x 80%) (B) 144
Deferred consideration (discounting ₹90 lakhs for 3 67.62
years @10%) (C)

Replacement award [Market based measure of the

acquiree award (12) x ratio of the portion of the
vesting period completed (2) / greater of the total
vesting period
(3) or the original vesting period (5) of the acquiree 4.80
award (ie 12 x 2/5)] (D)
Purchase consideration for 70% shares (A + B + C + 816.42
D)

2. Computation of deferred tax impact due to change in fair value of asset and liabilities
acquired
Particulars Book Fair FV
value value adjustment
(A) (B) (A-B)

Property, plant and equipment 1,000 1,200 200

Intangible assets (Brand) - 250 250
Investment 240 300 60
1,750 510
Less: Contingent liability acquired
Provision for lawsuit damages (5)

Net difference in fair value 505

Deferred tax liability @ 30% 151.5

3. Computation of fair value of net identifiable assets acquired f rom Duck Ltd.
Particulars Book value
Total assets as per the balance sheet 2,680
Add: Fair value adjustment in PPE and Investment 260
(200+60)
Add: Intangible assets (Brand) 250
Fair value of total identifiable assets 3,190
Less: Total liabilities as per the balance sheet (1,360)
(500+200+290+370)
Less: Contingent liability acquired
Lawsuit damages 5
Income tax demand 20 (25)

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Less: Defer tax liability (W.N.2) (151.50)

Fair value of net identifiable assets (100%) 1,653.50

4. Computation of non-controlling interest in Duck Ltd. (Proportionate share basis)

Non-controlling interest (1,653.50 x 20%) = 330.70

5. Computation of capital reserve on acquisition of Duck Ltd.

Particulars Book value
Fair value of net identifiable assets 1,653.50
Less: Purchase consideration (816.42)
Less: NCI (W.N.4) (330.70)
Capital reserve 506.38

Notes:
(a) The value of replacement award is allocated between consideration transferred and post combination
expense. The portion attributable to purchase consideration is determined based on the fair value of
the replacement award for the service rendered till the date of the acquisition. Accordingly, ₹4.8 lakh
(12 x 2/5) is considered as a part of purchase consideration and is credited to Swan Ltd.’s equity as
this will be settled in its own equity. Since the fair value of the award on the acquisition date is ₹18 lakh
the balance of (18 - 4.8) ₹13.2 lakh will be recorded as employee expense in the books of Duck Ltd. over
the remaining life, which is 1 year in this scenario.
(b) With respect to deferred consideration, ₹90 lakh is the minimum payment to be paid after 3 years. The
other element is if company meet certain target then they will get 30% of that or ₹90 lakh whichever is
higher. In the given case, since the minimum what is expected to be paid the fair value of the contingent
consideration has been considered as zero. The impact of time value on deferred consideration has been
given @ 10%.
(c) The additional consideration of ₹15 lakhs to be paid to the founder shareholder is contingent to him/her
continuing in employment and hence this will be considered as employee compensation and will be
recorded as post combination expenses in the statement of profit and loss of Duck Ltd.

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TOPIC - 29
INDAS 115 - REVENUE FROM CONTRACTS WITH
CUSTOMERS
QUESTION 140
([Link].104 - Question Bank)
An entity promises to sell 120 products to a customer for Rs. 120,000 (Rs. 1,000 per product). The products
are transferred to the customer over a six-month period. The entity transfers control of each product at a point
in time. After the entity has transferred control of 60 products to the customer, the contract is modified to
require the delivery of an additional 30 products (a total of 150 identical products) to the customer at a price
of Rs. 950 per product which is the standalone selling price for such additional products at the time of placing
this additional order. The additional 30 products were not included in the initial contract.
It is assumed that additional products are contracted for a price that reflects the stand-alone selling price.
Determine the accounting for the modified contract?

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

Solution Suggested by Author:

Revenue already recognised on supply of 60 products = 60x1000 = 60,000/-

Cumulative Revised Price per product after modification:

120 x 1000 = 1,20,000
30 x 950 = 28,500
Total Amount = 1,48,500 for 150 Products
Price Per Product = 990/-
Revenue should be recognised on 60 supplied products - 990 x 60 = 59,400/-
Conclusion -
1. Revenue to be reversed by 600/- at the time of modification.
2. Further Revenue will be recognised at 990/- only per product.

QUESTION 141: (SIMILAR TO Nov’22 EXAM & MTP May’20, Exam May’24)
([Link].304 - Question Bank)
An entity enters into a contract for the sale of Product A for Rs. 1,000. As part of the contract, the entity gives
the customer a 40% discount voucher for any future purchases up to Rs. 1,000 in the next 30 days. The entity
intends to offer a 10% discount on all sales during the next 30 days as part of a seasonal promotion. The 10%
discount cannot be used in addition to the 40% discount voucher.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an average, a
customer will purchase Rs. 500 of additional products.
Determine how many performance obligations does the entity have and their stand-alone selling
price and allocated transaction price?

SOLUTION
Since all customers will receive a 10% discount on purchases during the next 30 days, the only additional
discount that provides the customer with a material right is the incremental discount of 30% on the
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products purchased. The entity accounts for the promise to provide the incremental discount as a
separate performance obligation in the contract for the sale of Product A.
The entity believes there is 80% likelihood that a customer will redeem the voucher and, on an average, a
customer will purchase Rs. 500 of additional products. Consequently, the entity’s estimated stand-alone
selling price of the discount voucher is Rs. 120 (Rs. 500 average purchase price of additional products ×
30% incremental discount × 80% likelihood of exercising the option). The stand-alone selling prices of
Product A and the discount voucher and the resulting allocation of the Rs. 1,000 transaction price are as
follows:
Performance obligations Stand-alone selling
price
Product A Rs 1000
Discount voucher Rs 120
Total Rs 1120

Performance Obligations Allocated transaction price

(to nearest Rs. 10)
Product A (Rs. 1000 ÷ Rs. 1120 ×Rs. 1000) Rs. 890
Discount voucher (Rs. 120 ÷ Rs. 1120 × Rs. 1000) Rs. 110
Total Rs. 1000

The entity allocates Rs. 890 to Product A and recognises revenue for Product A when control transfers. The
entity allocates Rs. 110 to the discount voucher and recognises revenue for the voucher when the customer
redeems it for goods or services or when it expires.

QUESTION 142
([Link].314 - Question Bank)
VT Limited enters into a contract with a customer to sell equipment. Control of the equipment transfers to the
customer when the contract is signed. The price stated in the contract is Rs. 1 crore plus a 10% contractual
rate of interest, payable in 60 monthly instalments of Rs. 212,470. Determine the discounting rate and the
transaction price when
Case A—Contractual discount rate reflects the rate in a separate financing transaction
Case B—Contractual discount rate does not reflect the rate in a separate financing transaction i.e., 14%.
SOLUTION
Case A—Contractual discount rate reflects the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, VT Limited
observes that the 10% contractual rate of interest reflects the rate that would be used in a separate
financing transaction between the entity and its customer at contract inception (i.e., the contractual rate
of interest of 10% reflects the credit characteristics of the customer).
The market terms of the financing mean that the cash selling price of the equipment is Rs. 1 crore. This
amount is recognised as revenue and as a loan receivable when control of the equipment transfers to the
customer. The entity accounts for the receivable in accordance with Ind AS 109.

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

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QUESTION 143: (SIMILAR TO MTP May20)

([Link].322 - Question Bank)
ST Limited enters into a contract with a customer to sell an asset. Control of the asset will transfer to the
customer in two years (i.e. the performance obligation will be satisfied at a point in time). The contract includes
two alternative payment options:
1) Payment of ₹ 5,000 in two years when the customer obtains control of the asset or
2) Payment of ₹ 4,000 when the contract is signed. The customer elects to pay ₹ 4,000 when the contract is
signed.
ST Limited concludes that the contract contains a significant financing component because of the length of time
between when the customer pays for the asset and when the entity transfers the asset to the customer, as
well as the prevailing interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary to make the
two alternative payment options economically equivalent. However, the entity determines that, the rate that
should be used in adjusting the promised consideration is 6%, which is the entity's incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant financing component

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

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

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

Contract liability Dr. ₹ 4,494
To Revenue ₹ 4,494
(Year 1 - 4,000 + 6% = 4,240; year 2 - 4,240 + 6% = 4,494)

QUESTION 144: (RTP May19 & MTP Oct19)

([Link].335 - Question Bank)
KK Ltd. runs a departmental store which awards 10 points for every purchase of Rs500 which can be
discounted by the customers for further shopping with the same merchant. Each point is redeemable on any
future purchases of KK Ltd.’s products within 3 years. Value of each point is Rs0.50. During the accounting
period 2017-2018, the entity awarded 1,00,00,000 points to various customers of which 18,00,000 points
remained undiscounted (to be redeemed till 31st March, 2020). The management expects only 80% of the
remaining will be discounted in future.
The Company has approached your firm with the following queries and has asked you to suggest the
accounting treatment (Journal Entries) under the applicable Ind AS for these award points:
(a) How should the recognition be done for the sale of goods worth Rs. 10,00,000 on a particular day?
(b) How should the redemption transaction be recorded in the year 2017-2018? The Company has requested
you to present the sale of goods and redemption as an independent transaction. Total sales of the entity
is Rs. 5,000 lakhs.
(c) How much of the deferred revenue should be recognised at the year-end (2017-2018) because of the
estimation that only 80% of the outstanding points will be redeemed?
(d) In the next year 2018-2019, 60% of the outstanding points were discounted Balance 40% of the outstanding
points of 2017-2018 still remained outstanding. How much of the deferred revenue should the merchant
recognize in the year 2018-2019 and what will be the amount of balance deferred revenue?
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(e) How much revenue will the merchant recognize in the year 2019-2020, if 3,00,000 points are redeemed in
the year 2019-2020?
SOLUTION
a) Points earned on Rs. 10,00,000 @ 10 points on every Rs. 500 = [(10,00,000/500) x 10] = 20,000 points.
Value of points = 20,000 points x Rs. 0.5 each point = Rs. 10,000

Total of standalone values of both the components = 10,00,000+10,000 = 10,10,000

Actual consideration = 10,00,000.

Hence, proportionate consideration is as follows –

Revenue recognized for sale of goods Rs 9,90,099 [10,00,000 x (10,00,000/10,10,000)]

Revenue for points deferred Rs 9,901 [10,00,000 x (10,000/10,10,000)]

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

b) Points earned on Rs. 50,00,00,000 @ 10 points on every Rs. 500 = [(50,00,00,000/500) x 10] =
1,00,00,000 points.
Value of points = 1,00,00,000 points x Rs. 0.5 each point = Rs. 50,00,000

Total of standalone values of both the components = 50,00,00,000+50,00,000 = 50,50,00,000

Actual consideration = 50,00,00,000. Hence, proportionate consideration is as follows -

Revenue recognized for sale of goods = Rs. 49,50,49,505

[50,00,00,000 x (50,00,00,000 / 50,50,00,000)]

Revenue for points = Rs. 49,50,495 [50,00,00,000x (50,00,000 / 50,50,00,000)]

Total liability = 49,50,495 for 1,00,00,000 points. Out of this, 82,00,000 points will be redeemed in 17-18
and remaining 18,00,000 in 18-19 & 19-20.
As per company expectations, only 80% of remaining points will be redeemed .i.e. 80% x 18,00,000 =
14,40,000 points.
Therefore, the liability of 49,50,495 is actually for 96,40,000 points only (82,00,000 + 14,40,000) and not
1,00,00,000 points.

Journal Entries in the year 2017-18

Rs Rs
Bank A/c Dr. 50,00,00,000
To Sales A/c 49,50,49,505
To Liability under Customer Loyalty programme A/c 49,50,495
(On sale of Goods)

Liability under Customer Loyalty programme A/c Dr. 42,11,002

To Sales A/c 42,11,002
(On redemption of 82 lakhs points)

Revenue to be recognised with respect to discounted point = 49,50,495 x (82,00,000/96,40,000) =

42,11,002
(Being proportionate revenue for 82,00,000 points redeemed in 17-18)
c) Revenue to be deferred with respect to undiscounted point in 2017-2018= 49,50,495 – 42,11,002 =
7,39,493

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

Journal Entry in the year 2018-2019

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

The Liability under Customer Loyalty programme at the end of the year 2018-2019 will be Rs. 7,39,493 –
5,54,620 = 1,84,873.

e) In the year 2019-2020, the merchant will recognize the balance revenue of Rs. 1,84,873 irrespective of
the points redeemed as this is the last year for redeeming the points. Journal entry will be as follows:

Journal Entry in the year 2019-2020

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

QUESTION 145: (RTP May’22, MTP Nov’22, MTP May’23, Exam May’23)
([Link].336 - Question Bank)
On 1st April, 20X1, S Limited enters into a contract with Corp Limited to construct heavy- duty equipment for
a promised consideration of Rs. 20,00,000 with a bonus of Rs. 2,50,000 if the equipment is completed within
24 months. At the inception of the contract, S Limited correctly accounts for the promised bundle of goods and
services as a single performance obligation in accordance with Ind AS 115. At the inception of the contract,
the Company expects the costs to be Rs. 11,00,000 and concludes that it is highly probable that a significant
reversal in the amount of cumulative revenue recognised will occur. Completion of the heavy-duty equipment
is highly susceptible to factors outside of the Company’s influence, mainly due to difficulties with the supply
of components.
At 31st March, 20X2, S Limited has satisfied 65% of its performance obligation on the basis of costs incurred
to date and concludes that the variable consideration is still constrained in accordance with Ind AS 115.
However, on 4 June 20X2, the contract is modified with the result that the fixed consideration and expected
costs increase by Rs. 1,50,000 and Rs. 80,000 respectively. The time allowable for achieving the bonus is
extended by six months with the result that S Limited concludes that it is highly probable that the bonus will
be achieved and that the contract remains a single performance obligation.
S Limited wants your opinion on the accounting treatment of contract with Corp Limited in light
of Ind AS 115, for the year 20X1-20X2 and 20X2-20X3.
ANSWER:
For the year 20X1-20X2
S Limited accounts for the promised bundle of goods and services as a single performance obligation
satisfied over time in accordance with Ind AS 115. At the inception of the contract, S Limited expects the
following:
Transaction price – Rs. 20,00,000
Expected costs – Rs. 11,00,000
Expected profit (45%) – Rs. 9,00,000
At contract inception, S Limited excludes the Rs. 2,50,000 bonus from the transaction price because it
cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue
recognised will not occur. Completion of the heavy-duty equipment is highly susceptible to factors outside
the entity’s influence.
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By the end of the first year, the entity has satisfied 65% of its performance obligation on the basis of costs
incurred to date. Costs incurred to date are therefore Rs. 7,15,000 and S Limited reassesses the variable
consideration and concludes that the amount is still constrained. Therefore at 31st March, 20X2, the
following would be recognised:

Revenue (A) – Rs. 13,00,000 (Rs. 20,00,000 x 65%)

Costs (B) – Rs. 7,15,000 (Rs. 11,00,000 x 65%)
Gross profit (C) i.e.(A-B) – Rs. 5,85,000

For the year 20X2-20X3

On 4th June, 20X2, the contract is modified. As a result, the fixed consideration and expected costs
increase by Rs. 1,50,000 and Rs. 80,000, respectively.
The total potential consideration after the modification is Rs. 24,00,000 which is Rs. 21,50,000 fixed
consideration + Rs. 2,50,000 completion bonus. In addition, the allowable time for achieving the bonus is
extended by six months with the result that S Limited concludes that it is highly probable that including
the bonus in the transaction price will not result in a significant reversal in the amount of cumulative
revenue recognised in accordance with Ind AS 115. Therefore, the bonus of Rs. 2,50,000 can be included
in the transaction price.
S Limited also concludes that the contract remains a single performance obligation. Thus, S Limited
accounts for the contract modification as if it were part of the original contract. Therefore, S Limited updates
its estimates of costs and revenue as follows:
S Limited has satisfied 60.60% of its performance obligation (Rs. 7,15,000 actual costs incurred compared
to Rs. 11,80,000 total expected costs). The entity recognises additional revenue of Rs. 1,54,400 [(60.60% of
Rs. 24,00,000) – Rs. 13,00,000 revenue recognised to date] at the date of modification i.e. on 4th June,
20X2 as a cumulative catch-up adjustment.

QUESTION 146: (Nov’20 EXAM, MTP May’23, MTP Nov’23, MTP May’24)
([Link].337 - Question Bank)
ABC Limited supplies plastic buckets to wholesaler customers. As per the contract entered into between ABC
Limited and a customer for the financial year 2019-20, the price per plastic bucket will decrease retrospectively
as sales volume increases within the stipulated time of one year.
The price applicable for the entire sale will be based on the sales volume bracket during the year.
Price per unit (INR) Sales volume
90 0 — 10,000 units
80 10,001 —35,000 units
70 35,001 units & above
All transactions are made in cash.
(i) Suggest how revenue is to be recognised in the books of accounts of ABC Limited as per expected value
method, considering a probability of 15%, 75% and 10% for sales volumes of 9,000 units, 28,000 units and
36,000 units respectively. For workings, assume that ABC Limited achieved the same number of units of
sales to the customer during the year as initially estimated under expected value method for the financial
year 2019-20.
(ii) In case ABC Limited decides to measure revenue, based on the most likely method instead of expected
value method, how will the revenue be recognised in the books of accounts of ABC Limited based on above
available information? For workings, assume that ABC Limited achieved the same number of units of sales
to the customer during the year as initially estimated under most likely value method for the financial year
2019-20
You are required to pass Journal entries in the books of ABC Limited if the revenue is accounted for as per
expected value method for financial year 2019-20.

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SOLUTION
i) Determination of how revenue is to be recognised in the books of ABC Ltd. as per expected value
method
Calculation of probability weighted sales volume
Sales volume Probability Probability-weighted sales volume
(units) (units)
9,000 15% 1,350
28,000 75% 21,000
36,000 10% 3,600
25,950

Calculation of probability weighted sales value

Sales volume Sales price per unit Probability Probability-weighted sales
(units) (Rs) value (Rs)
9,000 90 15% 1,21,500
28,000 80 75% 16,80,000
36,000 70 10% 2,52,000
20,53,500
Average unit price = Probability weighted sales value
Probability weighted sales volume
= 20,53,500 / 25,950 = Rs. 79.13 per unit

Revenue is recognised at ₨. 79.13 for each unit sold. First 10,000 units sold will be booked at ₨.90 per
unit and liability is accrued for the difference price of ₨. 10.87 per unit (₨. 90 – ₨. 79.13), which will be
reversed upon subsequent sales of 15,950 units (as the question states that ABC Ltd. achieved the same
number of units of sales to the customer during the year as initially estimated under the expected value
method for the financial year 2019-2020). For, subsequent sale of 15,950 units, contract liability is accrued
at ₨. 0.87 (80 – 79.13) per unit and revenue will be deferred.

(ii) Determination of how revenue is to be recognised in the books of ABC Ltd. as per most likely
method
Note: It is assumed that the sales volume of 28,000 units given under the expected value method,
with highest probability is the sales estimated under the most likely method too.
Transaction price will be:
28,000 units x ₨. 80 per unit = ₨. 22,40,000
Average unit price applicable = ₨. 80
First 10,000 units sold will be booked at ₨. 90 per unit and liability of ₨. 1,00,000 is accrued for the
difference price of ₨. 10 per unit (₨. 90 – ₨. 80), which will be reversed upon subsequent sales of 18,000
units (as question states that ABC Ltd. achieved the same number of units of sales to the customer during
the year as initially estimated under the most likely method for the financial year 2019-2020).

Note: Alternatively, the question may be solved based on 25,950 units (as calculated under expected value
method assuming that the targets were met) as follows:
Transaction price will be:
25,950 units x ₨. 80 per unit = ₨. 20,76,000
Average unit price applicable = ₨. 80.
First 10,000 units sold will be booked at ₨. 90 per unit and liability is accrued for the difference price of
₨.10 per unit (₨. 90 – ₨. 80), which will be reversed upon subsequent sales of 15,950 units.

Journal Entries in the books of ABC Ltd.

(when revenue is accounted for as per expected value method for financial year 2019-2020)

Rs Rs
1. Bank A/c (10,000 x ₨. 90) 9,00,000
Dr.

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To Revenue A/c (10,000 x ₨. 79.13) 7,91,300

To Liability (10,000 x ₨. 10.87) 1,08,700
(Revenue recognised on sale of first 10,000 units)
2. Bank A/c [(25,950 x ₨. 80)- 9,00,000] Dr. 11,76,000
Liability Dr. 86,124
To Revenue A/c (15,950 x ₨. 79.13) 12,62,124
(Revenue recognised on sale of remaining 15,950 units
(25,950 - 10,000). Amount paid by the customer will be
the balance amount after adjusting the excess paid earlier
since, the customer falls now in second slab)
3. Liability (1,08,700 – 86,124) Dr. 22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
(On reversal of liability at the end of the financial year
2019-2020 i.e. after completion of stipulated time)

Alternatively, in place of first two entries, one consolidated entry may be passed as follows:

Bank A/c (25,950 x ₨.80) Dr. 20,76,000

To Revenue A/c (25,950 x ₨.79.13) 20,53,424
To Liability (25,950 x ₨.0.87) 22,576
Note: In 2nd (Revenue recognised on sale of 25,950 units) journal entry, it
is assumed that the customer had paid balance amount of ₨. 11,76,000 after adjusting excess ₨.
1,00,000 paid with first lot of sale of 10,000 unit. However, one can pass journal entry with total
sales value of ₨. 12,76,000 (15,950 units x ₨. 80 per unit) and later on pass third entry for refund.
In such a situation, alternatively, 2nd and 3rd entries would be as follows:

Bank A/c (15,950 x ₨. 80) Dr. 12,76,000

To Revenue A/c (15,950 x ₨. 79.13) 12,62,124
To Liability 13,876
(Revenue recognised on sale of remaining 15,950
units (25,950 - 10,000))
Liability (1,08,700 + 13,876) Dr. 1,22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
To Bank 1,00,000
(On reversal of liability at the end of the financial year
2019-2020 i.e. after completion of stipulated time
and excess amount refunded)

QUESTION 147: (SIMILAR TO July21 EXAM)

([Link].401 - Question Bank)
An entity regularly sells Products X, Y and Z individually, thereby establishing the following stand-alone selling
prices:
Product Stand-alone selling price
Rs
Product X 50,000
Product Y 25,000
Product Z 45,000
Total 1,20,000
In addition, the entity regularly sells Products Y and Z together for Rs. 50,000.

Case A—Allocating a discount to one or more performance obligations

The entity enters into a contract with a customer to sell Products X, Y and Z in exchange for Rs. 100,000. The
entity will satisfy the performance obligations for each of the products at different points in time; or Product Y
and Z at same point of time. Determine the allocation of transaction price to Product Y and Z.

Case B—Residual approach is appropriate

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

Case C—Residual approach is inappropriate

The same facts as in Case B apply to Case C except the transaction price is Rs. 1,05,000 instead of Rs.
130,000.

SOLUTION
Case A—Allocating a discount to one or more performance obligations
The contract includes a discount of Rs. 20,000 on the overall transaction, which would be allocated
proportionately to all three performance obligations when allocating the transaction price using the relative
stand-alone selling price method.
However, because the entity regularly sells Products Y and Z together for Rs. 50,000 and Product X for Rs.
50,000, it has evidence that the entire discount should be allocated to the promises to transfer Products Y
and Z in accordance with paragraph 82 of Ind AS 115.

If the entity transfers control of Products Y and Z at the same point in time, then the entity could,
as a practical matter, account for the transfer of those products as a single performance obligation. That
is, the entity could allocate Rs. 50,000 of the transaction price to the single performance obligation and
recognise revenue of Rs. 50,000 when Products Y and Z simultaneously transfer to the customer.

If the contract requires the entity to transfer control of Products Y and Z at different points in time,
then the allocated amount of Rs. 50,000 is individually allocated to the promises to transfer Product Y
(stand-alone selling price of Rs. 25,000) and Product Z (stand-alone selling price of Rs. 45,000) as follows:
Product Allocated transaction price
Rs
Product Y 17,857 (Rs. 25,000 ÷ Rs. 70,000 total stand-alone selling price
× Rs. 50,000)
Product Z 32,143 (Rs. 45,000 ÷ Rs. 70,000 total stand-alone selling price
× Rs. 50,000)
Total 50,000

Case B—Residual approach is appropriate

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

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

Using the residual approach, the entity estimates the stand-alone selling price of Product Alpha to be Rs.
30,000 as follows:
Product Stand-alone selling price Method
Rs
Product X 50,000 Directly observable
Products Y & Z 50,000 Directly observable with discount
Product Alpha 30,000 Residual approach
Total 130,000
The entity observes that the resulting Rs30,000 allocated to Product Alpha is within the range of its
observable selling prices (Rs. 15,000 – Rs. 45,000).

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Case C—Residual approach is inappropriate

The same facts as in Case B apply to Case C except the transaction price is Rs. 105,000 instead of Rs.
130,000. Consequently, the application of the residual approach would result in a stand-alone selling price
of Rs. 5,000 for Product Alpha (Rs. 105,000 transaction price less Rs. 100,000 allocated to Products X, Y
and Z).
The entity concludes that Rs. 5,000 would not faithfully depict the amount of consideration to which the
entity expects to be entitled in exchange for satisfying its performance obligation to transfer Product Alpha,
because Rs. 5,000 does not approximate the stand-alone selling price of Product Alpha, which ranges from
Rs. 15,000 – Rs. 45,000.
Consequently, the entity reviews its observable data, including sales and margin reports, to estimate the
stand-alone selling price of Product Alpha using another suitable method. The entity allocates the
transaction price of Rs. 1,05,000 to Products X, Y, Z and Alpha using the relative stand-alone selling prices
of those products in accordance with paragraphs 73–80 of Ind AS 115.

QUESTION 148: (SIMILAR TO MTP Mar19)

([Link].403 - Question Bank)
An entity enters into a contract with a customer for two intellectual property licences (Licences A and B), which
the entity determines to represent two performance obligations each satisfied at a point in time. The stand-
alone selling prices of Licences A and B are ₹ 1,600,000 and ₹ 2,000,000, respectively. The entity transfers
Licence B at inception of the contract and transfers Licence A one month later.
Case A—Variable consideration allocated entirely to one performance obligation
The price stated in the contract for Licence A is a fixed amount of ₹ 1,600,000 and for Licence B the
consideration is three per cent of the customer's future sales of products that use Licence B. For purposes of
allocation, the entity estimates its sales-based royalties (i.e. the variable consideration) to be ₹ 2,000,000.
Allocate the transaction price.
Case B—Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for Licence A is a fixed amount of ₹ 600,000 and for Licence B the consideration
is five per cent of the customer's future sales of products that use Licence B. The entity's estimate of the sales-
based royalties (i.e. the variable consideration) is ₹ 3,000,000. Here, Licence A is transferred 3 months later.
The royalty due from the customer's first month of sale is ₹ 4,00,000.
Allocate the transaction price and determine the revenue to be recognised for each licence and the contract
liability, if any.

SOLUTION:
Case A — Variable consideration allocated entirely to one performance obligation
To allocate the transaction price, the entity considers the criteria in paragraph 85 and concludes that the
variable consideration (i.e. the sales-based royalties) should be allocated entirely to Licence B. The entity
concludes that the criteria are met for the following reasons:
(a) The variable payment relates specifically to an outcome from the performance obligation to transfer
Licence B (i.e. the customer's subsequent sales of products that use Licence B).
(b) Allocating the expected royalty amounts of ₹ 2,000,000 entirely to Licence B is consistent with the
allocation objective in paragraph 73 of Ind AS 115. This is because the entity's estimate of the amount of
sales-based royalties (₹ 2,000,000) approximates the stand-alone selling price of Licence B and the fixed
amount of ₹ 1,600,000 approximates the stand-alone selling price of Licence A. The entity allocates ₹
1,600,000 to Licence A. This is because, based on an assessment of the facts and circumstances relating
to both licences, allocating to Licence B some of the fixed consideration in addition to all of the variable
consideration would not meet the allocation objective in paragraph 73 of Ind AS 115.
The entity transfers Licence B at inception of the contract and transfers Licence A one month later. Upon
the transfer of Licence B, the entity does not recognise revenue because the consideration allocated to
Licence B is in the form of a sales-based royalty. Therefore, the entity recognises revenue for the sales-
based royalty when those subsequent sales occur.
When Licence A is transferred, the entity recognises as revenue the ₹ 1,600,000 allocated to Licence A.

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

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To allocate the transaction price, the entity applies the criteria in paragraph 85 of Ind AS 115 to determine
whether to allocate the variable consideration (i.e. the sales-based royalties) entirely to Licence B.
In applying the criteria, the entity concludes that even though the variable payments relate specifically to
an outcome from the performance obligation to transfer Licence B (i.e. the customer's subsequent sales of
products that use Licence B), allocating the variable consideration entirely to Licence B would be
inconsistent with the principle for allocating the transaction price. Allocating ₹ 600,000 to Licence A and ₹
3,000,000 to Licence B does not reflect a reasonable allocation of the transaction price on the basis of the
stand-alone selling prices of Licences A and B of ₹ 1,600,000 and ₹ 2,000,000, respectively. Consequently,
the entity applies the general allocation requirements of Ind AS 115.
The entity allocates the transaction price of ₹ 600,000 to Licences A and B on the basis of relative stand-
alone selling prices of ₹ 1,600,000 and ₹ 2,000,000, respectively. The entity also allocates the consideration
related to the sales-based royalty on a relative stand-alone selling price basis. However, when an entity
licenses intellectual property in which the consideration is in the form of a sales-based royalty, the entity
cannot recognise revenue until the later of the following events: the subsequent sales occur or the
performance obligation is satisfied (or partially satisfied).
Licence B is transferred to the customer at the inception of the contract and Licence A is transferred three
months later. When Licence B is transferred, the entity recognises as revenue ₹ 333,333 [(₹ 2,000,000 ÷ ₹
3,600,000) × ₹ 600,000] allocated to Licence B. When Licence A is transferred, the entity recognises as
revenue ₹ 266,667 [(₹ 1,600,000 ÷ ₹ 3,600,000) × ₹ 600,000] allocated to Licence A.
In the first month, the royalty due from the customer's first month of sales is ₹ 400,000. Consequently,
the entity recognises as revenue ₹ 222,222 (₹ 2,000,000 ÷ ₹ 3,600,000 × ₹ 400,000) allocated to Licence B
(which has been transferred to the customer and is therefore a satisfied performance obligation). The entity
recognises a contract liability for the ₹ 177,778 (₹ 1,600,000 ÷ ₹ 3,600,000 × ₹ 400,000) allocated to Licence
A. This is because although the subsequent sale by the entity's customer has occurred, the performance
obligation to which the royalty has been allocated has not been satisfied.

QUESTION 149: (SIMILAR TO Dec21 EXAM)

([Link].503 - Question Bank)
An entity has a fixed fee contract for ₹ 1 million to develop a product that meets specified performance criteria.
Estimated cost to complete the contract is ₹ 9,50,000. The entity will transfer control of the product over five
years, and the entity uses the cost-to-cost input method to measure progress on the contract. An incentive
award is available if the product meets the following weight criteria:
Weight (kg) Award % of fixed fee Incentive fee
951 or greater 0% -
701-950 10% ₹ 1,00,000
700 or less 25% ₹ 2,50,000

The entity has extensive experience creating products that meet the specific performance criteria. Based on its
experience, the entity has identified five engineering alternatives that will achieve the 10 percent incentive and
two that will achieve the 25 percent incentive. In this case, the entity determined that it has 95 percent
confidence that it will achieve the 10 percent incentive and 20 percent confidence that it will achieve the 25
percent incentive.
Based on this analysis, the entity believes 10 percent to be the most likely amount when estimating the
transaction price. Therefore, the entity includes only the 10 percent award in the transaction price when
calculating revenue because the entity has concluded it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration
is subsequently resolved due to its 95 percent confidence in achieving the 10 percent award.
The entity reassesses its production status quarterly to determine whether it is on track to meet the criteria for
the incentive award. At the end of the year four, it becomes apparent that this contract will fully achieve the
weight-based criterion. Therefore, the entity revises its estimate of variable consideration to include the entire
25 percent incentive fee in the year four because, at this point, it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur when including the entire variable consideration in the
transaction price.
Evaluate the impact of changes in variable consideration when cost incurred is as follows:
Year ₹
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1 50,000
2 1,75,000
3 4,00,000
4 2,75,000
5 50,000

SOLUTION
Note: For simplification purposes, the table calculates revenue for the year independently based on costs
incurred during the year divided by total expected costs, with the assumption that total expected costs do
not change.
Fixed consideration A 1,000,000
Estimated costs to complete* B 950,000
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated variable consideration C 100,000 100,000 100,000 250,000 250,000
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable revenue E=C x H/B 5,263 18,421 42,105 72,368 13,158
Cumulative revenue adjustment F (see below) - - - 99,370 -
Total revenue G=D+E+F 57,895 202,632 463,158 461,212 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 186,212 15,790
Margin (rounded off) J=I/G 14% 14% 14% 40% 24%

* For simplicity, it is assumed there is no change to the estimated costs to complete throughout the contract
period.
* In practice, under the cost-to-cost measure of progress, total revenue for each period is determined by
multiplying the total transaction price (fixed and variable) by the ratio of cumulative cost incurred to total
estimated costs to complete, less revenue recognized to date.

Calculation of cumulative catch-up adjustment:

Updated variable consideration L 250,000
Percent complete in Year 4: (rounded off) M=N/O 95%
Cumulative costs through Year 4 N 900,000
Estimated costs to complete O 950,000
Cumulative variable revenue through Year 4: P 138,157
Cumulative catch-up adjustment F=L x M–P 99,343

QUESTION 150: (Jan’21 EXAM & MTP Nov’22, MTP May’24)

([Link].515 - Question Bank)
A Ltd. is a company which is in the business of manufacturing engineering machines and providing after sales
services. The company entered into a contract with Mr. Anik to supply and install a machine, namely 'model
pi' on 1st April 2018 and to service this machine on 30th September 2018 and 1st April 2019. The cost of
manufacturing the machine to A Ltd. was Rs. 1,60,000.
It is possible for a customer to purchase both the machine 'model pi' and the maintenance services separately.
Mr. Anik is contractually obliged to pay A Ltd Rs. 4,00,000 on 1st April, 2019.
The prevailing rate for one-year credit granted to trade customers in the industry is 5 percent per six-month
period. As per the experience, the servicing of the machine 'model pi' sold to Mr. Anik is expected to cost A Ltd.
Rs. 30,000 to perform the first service and Rs. 50,000 to perform the second service. Assume actual costs
equal expected costs. When A Ltd. provides machine services to customers in a separate transaction it earns
a margin of 50% on cost. On 1st April, 2018, the cash selling price of the machine 'model pi' sold to Mr. Anik
was Rs. 2,51,927.
The promised supply of machine 'model pi' and maintenance service obligations are satisfactorily carried out
in time by the company.
You are required to:
(i) Segregate the components of the transaction that A Ltd. shall apply to the revenue recognition criteria
separately as per Ind AS 115;

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(ii) Calculate the amount of revenue which A Ltd. must allocate to each component of the transaction;
(iii) Prepare journal entries to record the information set out above in the books of accounts of A Ltd. for the
years ended 31st March·2019 and 31st March 2020; and
(iv) Draft an extract showing how revenue could be presented and disclosed in the financial statements of A
Ltd. for the year ended 31st March 2019 and 31st March 2020.
SOLUTION
(i) As per Ind AS 115, a good or service that is promised to customer is distinct if both of the
following criteria are met:
a) The customer can benefit from the good or service either on its own or together with other resources
that are readily available to them. A readily available resource is a good or service that is sold
separately (by the entity or another entity) or that the customer has already obtained from the entity
or from other transactions or events; and
b) The entity’s promise to transfer the goods or service to the customer is separately identifiable from
other promises in the contract.
Factors that indicate two or more promise to transfer goods or services to a customer are separately
identifiable include, but are not limited to, the following:
a) Significant integration services are not provided (i.e. the entity is not using the goods or services
as inputs to produce or deliver the combined output called for in the contract)
b) The goods or services do not significantly modify or customize other promised goods or services
in the contract.
c) The goods or services are not highly inter–dependent or highly interrelated with other promised
goods or services in the contract.
Accordingly, on 1st April, 2018, entity A entered into a single transaction with three identifiable
separate components:
1. Sale of goods (i.e. engineering machine);
2. Rendering of services (i.e. engineering machine maintenance service on 30th September, 2018
and 1st April, 2019); and
3. Providing finance (i.e. sale of engineering machine and rendering of services on extended period
credit)

(ii) Calculation and allocation of revenue to each component of the transaction.

Date Opening Finance Goods Services Payment Closing
balance income Received balance
1st April, 2018 - - 2,51,927 2,51,927
30th September, 2,51,927 12,596 - 45,000 - 3,09,523
2018 (Note 1) (30,000 + 50%)
31ST March 2019 3,09,523 15,477 - - - 3,25,000
(Note 2)
1st April, 2019 3,25,000 - - 75,000 (4,00,000)
(50,000 + 50%)
Notes:
Calculation of finance income as on 30th September, 2018
= 5 % x 2,51,927 = Rs. 12,596
Calculation of finance income as on 31st March, 2018
= 5% x 3,09,523 = Rs. 15,477

(iii) Journal Entries

Date Particulars Dr. Cr.
1st April,2018 Mr. Anik Dr. 2,51,927
To Revenue- sale of goods (Profit or Loss A/c) 2,51,927
(Being revenue recognized from the sale of the machine
on credit)
Cost of goods sold (Profit or loss) Dr. 1,60,000
To Inventories 1,60,000
(Being costs of goods sold recognized)
30th September Mr. Anik Dr. 12,596

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2018 To Finance Income (Profit or loss) 12,596

(Being finance income recognized)
Mr. Anik Dr. 45,000
To Revenue- rendering of services (Profit or loss) 45,000
(Being revenue from the rendering of maintenance
services recognized)
Cost of services (Profit or loss) Dr. 30,000
To Cash/Bank or payables 30,000
(Being the cost of performing maintenance services
recognised)
31st March 2019 Mr. Anik Dr. 15,477
To Finance Income (Profit or loss) 15,477
(Being finance income recognised)
1st April, 2019 Mr. Anik Dr. 75,000
To Revenue- rendering of services (Profit or loss) 75,000
(Being revenue from the rendering of maintenance
services recognised)
Cost of services (Profit or loss) Dr. 50,000
To Cash/Bank or payables 50,000
(Being the cost of performing maintenance services
recognized)
Cash/ Bank Dr. 4,00,000
To Mr. Anik 4,00,000
(Being the receipt of cash from the customer recognized)

(iv) Extract of Notes to the financial statements for the year ended 31st March, 2019 and 31st
March 2020
2019-2020 2018-2019
Rs. Rs.
Sale of goods - 2,51,927
Rendering of machine- maintenance services 75,000 45,000
Finance income (12,596 + 15,477) - 28,073
75,000 3,25,000

QUESTION 151: (Nov’23 EXAM)

([Link].603 - Question Bank)
XYZ Limited is a sales and marketing company in amusement and entertainment domain. It negotiates and
agrees in advance with four famous amusement parks to purchase their tickets for online sale through its
payment gateway to general public. The negotiated rates are at a discount when compared with the price of
tickets sold directly by amusement parks to the general public. XYZ Limited is free to determine its sale price
of the ticket. As part of the agreement, XYZ Limited will also assist the amusement parks/general public with
respect to services provided by the amusement parks to the general public. However, each amusement park
will continue to be responsible for fulfilling its / their obligation associated with the ticket, including solutions
to dissatisfied customers. For XYZ Limited, there is no credit risk as payment is collected from customers
beforehand. However, it carries an inventory risk as tickets have to be purchased in advance and unsold
tickets are loss to XYZ Limited. Discuss whether XYZ Limited is a principal or an agent?

SOLUTION
To determine whether the entity’s performance obligation is to provide the specified goods or services itself
(i.e. the entity is a principal) or to arrange for another party to provide those goods or services (i.e. the entity
is an agent), the entity considers the nature of its promise. The entity determines that its promise is to
provide the customer with a ticket, which provides the right to enter the particular amusement park on a
particular date. The entity considers the following indicators for assessment as principal or agent under the
contract with the customers:
a) the entity is primarily responsible for fulfilling the contract, which is providing the right to enter the
amusement part. However, the entity is not responsible for providing the services in amusement
park, which will be provided by the amusement park owner.
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b) the entity has inventory risk for the tickets because they are purchased before they are sold to the
entity’s customers and the entity is exposed to any loss as a result of not being able to sell the tickets
for more than the entity’s cost.
c) the entity has discretion in setting the sales prices for tickets to its customers.
The entity i.e. XYZ Limited concludes that its promise is to provide a ticket (i.e. a right to enter the
amusement park on a particular date) for the customer. On the basis of the indicators, the entity concludes
that it controls the ticket before it is transferred to the customer. Thus, the entity concludes that it is a
principal in the transaction and recognises revenue in the gross amount of consideration to which it is
entitled in exchange for the tickets transferred.

QUESTION 152
([Link].803 - Question Bank)
Sports Team D enters into a three-year agreement to license its team name and logo to Apparel Maker M. The
license permits M to use the team name and logo on its products, including display products, and in its
advertising or marketing materials.
(i) Determine the nature of license in the above case.
(ii) Modifying above facts that, Sports Team D has not played games in many years and the licensor is Brand
Collector B, an entity that acquires IP such as old team or brand names and logos from defunct entities or
those in financial distress. B’s business model is to license the IP, or obtain settlements from entities that
use the IP without permission, without undertaking any ongoing activities to promote or support the IP
Would the answer be different in this situation?

SOLUTION:
(i) The nature of D’s promise in this contract is to provide M with the right to access the sports team’s IP
and, accordingly, revenue from the license will be recognised over time. In reaching this conclusion,
D considers all of the following facts:
- M reasonably expects D to continue to undertake activities that support and maintain the value of
the team name and logo by continuing to play games and field a competitive team throughout the
license period. These activities significantly affect the IP’s ability to provide benefit to M because the
value of the team name and logo is substantially derived from, or dependent on, those ongoing
activities.
- The activities directly expose M to positive or negative effects (i.e., whether D plays games and fields
a competitive team will have a direct effect on how successful M is in selling its products featuring
the team’s name and logo).
- D’s ongoing activities do not result in the transfer of a good or a service to M as they occur (i.e., the
team playing games does not transfer a good or service to M).

(ii) Based on B’s customary business practices, Apparel Maker M probably does not reasonably expect B to
undertake any activities to change the form of the IP or to support or maintain the IP. Therefore, B
would probably conclude that the nature of its promise is to provide M with a right to use its IP as it
exists at the point in time at which the license is granted.

QUESTION 153: (SIMILAR TO Nov’22 EXAM)

([Link].901 - Question Bank)
A Ltd. is in the business of the infrastructure and has two divisions under the same; (I) Toll Roads and (II)
Wind Power. The brief details of these business and underlying project details are as follows:
I. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the project in the
current year and has incurred total expenses aggregating to Rs. 50 crores as on 31st December, 20X1.
Under IGAAP, the Company has 'recorded such expenses as Intangible Assets in the books of account. The
brief details of the Concession Agreement are as follows:
● Total Expenses estimated to be incurred on the project Rs. 100 crores;
● Fair Value of the construction services is Rs. 110 crores;
● Total Cash Flow guaranteed by the Government under the concession agreement is Rs. 200 crores;

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● Finance revenue over the period of operation phase is Rs. 15 crores:

● Other income relates to the services provided during the operation phase.
II. Kolhapur- Nagpur Expressway - The Company has also entered into another concession agreement with
Government of Maharashtra in the current year. The construction cost for the said project will be Rs. 110
crores. The fair value of such construction cost is approximately Rs. 200 crores. The said concession
agreement is Toll based project and the Company needs to collect the toll from the users of the expressway.
Under IGAAP, A Ltd. has recorded the expenses incurred on the said project as an Intangible Asset.
Required
(i) What would be the classification of Bhilwara-Jabalpur Toll Project as per applicable Ind AS? Give brief
reasoning for your choice.
(ii) What would be the classification of Kolhapur-Nagpur Expressway Toll Project as per applicable Ind AS?
Give brief reasoning for your choice.
(iii)Also, suggest suitable accounting treatment for preparation of financial statements as per Ind AS for the
above 2 projects.

SOLUTION
(i) Here the operator has a contractual right to receive cash from the grantor. The grantor has little, if
any, discretion to avoid payment, usually because the agreement is enforceable by law. The operator
has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator.
Hence, operator recognizes a financial asset to the extent it has a contractual right to receive cash.
(ii) Here the operator has a contractual right to charge users of the public services. A right to charge users
of the public service is not an unconditional right to receive cash because the amounts are contingent
on the extent that the public uses the service. Therefore, the operator shall recognise an intangible
asset to the extent it receives a right (a license) to charge users of the public service.
(iii) Accounting treatment for preparation of financial statements

Bhilwara-Jabalpur Toll Project

Journal Entries
Particulars Dr. (Rs in Cr. (Rs in
crores) crores)
During construction:
1 Financial asset A/c Dr. 110
To Construction revenue 110
[To recognise revenue relating to construction services, to be
settled in case]
2 Cost of construction (profit or loss) Dr. 100
To Bank A/c (As and when incurred) 100
[To recognise costs relating to construction services]
During the operation phase:
3 Financial asset Dr. 15
To Finance revenue (As and when received or due to receive) 15
[To recognise interest income under the financial asset model]
4 Financial asset Dr. 75
To Revenue [(200-110) – 15] 75
[To recognise revenue relating to the operation phase]
5 Bank A/c Dr. 200
To Financial asset 200
[To recognise cash received from the grantor]

Kolhapur-Nagpur Expressway -Intangible asset

Journal Entries
Particulars Dr. (Rs in Cr. (Rs in
crores) crores)
During construction:
1 Cost of construction (profit or loss) Dr. 110
To Bank A/c 110

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[To recognise costs relating to construction services]

2 Intangible asset Dr. 200

To Revenue A/c 200
[To recognise revenue relating to construction services
provided for non-cash consideration]
During the operation phase:
3 Amortization expense Dr. 200
To Intangible asset (accumulated amortization) 200
[To recognise amortization expense relating to the operation
phase over the period of operation]
4 Bank A/c Dr. ?
To Revenue ?
[To recognise revenue relating to the operation phase]

Note: Amount in entry 4 is kept blank as no information in this regard is given in the question.

QUESTION 154: (Nov19 EXAM)

([Link].1201 - Question Bank)
Nivaan Limited commenced work on two long-term contracts during the financial year ended on 31 stMarch,
2019.
The first contract with A & Co. commenced on 1stJune, 2018 and had a total sales value of Rs. 40 lakh. It was
envisaged that the contract would run for two years and that the total expected costs would be Rs. 32 lakh.
On 31stMarch, 2019, Nivaan Limited revised its estimate of the total expected cost to Rs. 34 lakh on the basis
of the additional rectification cost of Rs 2 lakh incurred on the contract during the current financial year. An
independent surveyor has estimated at 31stMarch, 2019 that the contract is 30% complete. Nivaan Limited has
incurred costs up to 31stMarch, 2019 of Rs 16 lakh and has received payments on account of Rs 13 lakh.
The second contract with B & Co. commenced on 1 stSeptember, 2018 and was for 18 months. The total sales
value of the contract was Rs 30 lakh and the total expected cost is Rs. 24 lakh. Payments on account already
received were Rs 9.50 lakh and total costs incurred to date were Rs. 8 lakh. Nivaan Limited has insisted on a
large deposit from B & Co. because the companies had not traded together prior to the contract. The
independent surveyor estimated that on 31stMarch, 2019 the contract was 20% complete.
The two contracts meet the requirement of Ind AS 115 ‘Revenue from Contracts with Customers’ to recognize
revenue over time as the performance obligations are satisfied over time.
The company also has several other contracts of between twelve and eighteen months in duration. Some of
these contracts fall into two accounting periods and were not completed as at 31 st March, 2019. In absence of
any financial data relating to the other contracts, you are advised to ignore these other contracts while
preparing the financial statements of the company for the year ended 31 stMarch, 2019.
Prepare financial statement extracts for Nivaan Limited in respect of the two construction contracts
for the year ending 31stMarch, 2019.

SOLUTION
Extracts of Balance Sheet of Nivaan Ltd. as on 31stMarch, 2019
Rs in lakh
Current Assets
Contract Assets- Work-in-progress (Refer W.N. 3) 9.0
Current Liabilities
Contract Liabilities (Advance from customers) (Refer W.N. 2) 4.5

Extracts of Statement of Profit and Loss of Nivaan Ltd. as on 31 stMarch, 2019

Rs in lakh
Revenue from contracts (Refer W.N. 1) 18
Cost of Revenue (Refer W.N. 1) (15)
Net Profit on Contracts (Refer W.N. 1) 3

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Working Notes:
1. Table showing calculation of total revenue, expenses and profit or loss on contract for the year
Rs in lakh
A & Co. B & Co. Total
Revenue from contracts (40 x 30%) = 12 (30 x 20%) = 6 18
Expenses due for the year (34 x 30%) = 10.2 (24 x 20%) = 4.8 15
Profit or loss on contract 1.8 1.2 3

2. Calculation of amount due from / (to) customers

Rs in lakh
A & Co. B & Co. Total
Billing on the basis of revenue recognised in the books 12 6 18
Payments received from the customers (13) (9.5) (22.5)
Advance received from the customers 1 3.5 4.5

3. Work in Progress recognised as part of contract asset at the end of the year
Rs in lakh
A & Co. B & Co. Total
Total actual cost incurred during the year 16 8 24
Less: Cost recognised in the books for the year 31.3.2019 (10.2) (4.8) (15)
Work-in-progress recognised at the end of the year 5.8 3.2 9.0

Alternate Answer -
Additional rectification cost of Rs 2 lakh has been treated as normal cost. Hence total expected cost has
been considered as Rs 34 lakh. However, in case this Rs. 2 lakh is treated as an abnormal cost, then
expense due for the year would be Rs. 11.6 lakh (i.e. 30% of Rs. 32 lakh + Rs. 2 lakh). Accordingly, with
respect to A & Co., the profit for the year would be Rs. 0.4 lakh and work-in-progress recognised at the
end of the year would be Rs. 4.4 lakh.

Working Notes:
1. Table showing calculation of total revenue, expenses and profit or loss on contract for the year
Rs in lakhs
A & Co. B & Co. Total
Revenue from contracts 12 6 18
Expenses due for the year 11.60 4.80 16.40
Profit or loss on contract 0.40 1.20 1.60

2. Work in Progress recognised as part of contract asset at the end of the year
Rs in lakhs
A & Co. B & Co. Total
Total actual cost incurred during the year 16 8 24
Less: Cost recognised in the books for the year 31.3.2019 (11.60) (4.80) (16.40)
Work-in-progress recognised at the end of the year 4.40 3.2 7.60

QUESTION 155
On 1st April, 20X1, Entity X enters into a contract with Entity Y to sell mobile chargers for Rs. 100 per
charger. As per the terms of the contract, if Entity Y purchases more than 1,000 chargers till March 20X2,
the price per charger will be retrospectively reduced to Rs. 90 per unit. Till September 20X1, Entity X sold
95 chargers to Entity Y. Entity X estimates that Entity Y's purchases by March 20X2 will not exceed the
required threshold of 1,000 chargers.
In October 20X1, Entity Y acquires another Entity C and from October 20X1 to December 20X1, Entity X
sells an additional 600 chargers to Entity Y. Due to these developments, Entity X estimates that purchases
of Entity Y will exceed the 1,000 chargers threshold for the period and therefore, it will be required to
retrospectively reduce the price per charger to Rs. 90.
Analyse the above scenario in light of Ind AS 115 and state how the revenue should be recognised in such

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a situation.

Answers
Paragraph 56 of Ind AS 115 states that an entity shall include in the transaction price some or all of an
amount of variable consideration estimated in accordance with paragraph 53 only to the extent that it is
highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur
when the uncertainty associated with the variable consideration is subsequently resolved.
Further, paragraph 57 of Ind AS 115 state that in assessing whether it is highly probable that a significant
reversal in the amount of cumulative revenue recognised will not occur once the uncertainty related to the
variable consideration is subsequently resolved, an entity shall consider both the likelihood and the
magnitude of the revenue reversal. Factors that could increase the likelihood or the magnitude of a revenue
reversal include, but are not limited to, any of the following:
(a) the amount of consideration is highly susceptible to factors outside the entity’s influence. Those factors
may include volatility in a market, the judgement or actions of third parties, weather conditions and
a high risk of obsolescence of the promised good or service.
(b) the uncertainty about the amount of consideration is not expected to be resolved for a long period of
time.
(c) the entity’s experience (or other evidence) with similar types of contracts is limited, or that experience
(or other evidence) has limited predictive value.
(d) the entity has a practice of either offering a broad range of price concessions or changing the payment
terms and conditions of similar contracts in similar circumstances.
(e) the contract has a large number and broad range of possible consideration amounts.
Entity X estimates that the consideration in the above contract is variable. Therefore, in accordance with
paragraphs 56 and 57 of Ind AS 115, Entity X is required to consider the constraints in estimating variable
consideration. Entity X determines that it has significant experience with this product and with the
purchasing pattern of Entity Y. Thus, if Entity X concludes that it is highly probable that a significant
reversal in the cumulative amount of revenue recognised (i.e. Rs. 100 per unit) will not occur when the
uncertainty is resolved (i.e. when the total amount of purchases is known), then the Entity X will recognise
revenue of Rs. 9,500 (95 chargers x Rs. 100 per charger) for the half year ended 30th September, 20X1.
Further, paragraphs 87 and 88 of Ind AS 115 that after contract inception, the transaction price can change
for various reasons, including the resolution of uncertain events or other changes in circumstances that
change the amount of consideration to which an entity expects to be entitled in exchange for the promised
goods or services.
An entity shall allocate to the performance obligations in the contract any subsequent changes in the
transaction price on the same basis as at contract inception. Consequently, an entity shall not reallocate
the transaction price to reflect changes in stand-alone selling prices after contract inception. Amounts
allocated to a satisfied performance obligation shall be recognised as revenue, or as a reduction of revenue,
in the period in which the transaction price changes.”
In accordance with the above, in the month of October 20X1, due to change in circumstances on account of
Entity Y acquiring Entity C and consequential increase in sale of chargers to Entity Y, Entity X estimates
that Entity Y's purchases will exceed the 1,000 chargers threshold till March 20X2 for the period and
therefore, it will be required to retrospectively reduce the price per charger to Rs. 90.
Consequently, the Entity X will recognise revenue of Rs. 53,050 for the quarter ended December 20X1 which
is calculated as follows:

Particulars Amount in Rs.

Sale of 600 chargers (600 chargers x Rs. 90 per charger) 54,000
Less: Change in transaction price (95 chargers x Rs. 10 price reduction) for the (950)
reduction of revenue relating to units sold till September 20X1.
Revenue recognised for the quarter ended December 20X1 53,050

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TOPIC – 30
IND AS 116 - LEASES
QUESTION 156: (Exam Nov’23)
([Link].137 - Question Bank)
A consumer products entity, Entity A Limited (lessee) enters into a lease agreement with Entity B Limited
(lessor) for a dedicated production line to manufacture one of its store - brand household products for a
period of three years. Entity A Limited has agreed to order a minimum 1,00,000 units per month and to
make a payment to Entity B Limited as per the following agreed rates:
(i) ₹ 240 per unit if the ordered quantity is between 1 ,00,000 to 1,20,000 units;
(ii) ₹ 246 per unit if the ordered quantity is between 1,20,001 to 1,50,000 units.
As per the terms of the agreement, Entity A Limited has the exclusive right to use the production line. Entity
B Limited cannot use the specified production line for any other customer. The type of household product is
specified in the contract. Entity A Limited issues instructions to Entity B about the quantity and timing of
products to be delivered. If the production line is not producing the household product for Entity A, it remains
idle. Entity B Limited operates and maintains the production line on a daily basis. Entity A Limited has
estimated that for manufacturing each unit, Entity B Limited incurs an average cost of ₹ 195. Further, the
observable stand-alone price for the rent of the production line is ₹ 60,00,000 per month. Entity A Limited's
incremental borrowing rate at the commencement date of the lease is 10% per annum.
Entity A Limited concludes that the arrangement contains a lease as per Ind AS 116. It also elects not to
apply the practical expedient in paragraph 15 of Ind AS 116 of not to separate the non-lease component(s)
from the lease component(s). Accordingly, it separates non-lease components from lease components.
You are required to:
(i) Analyse the above and identify lease component(s) and non-lease component(s);
And at the commencement of the lease:
(ii) Compute and allocate the consideration into lease component(s) & non-lease component(s);
(iii) Compute the lease liability (the present value factor @ 10% per annum of 2.49 for 3 years may be
adopted);
Determine the recognition / treatment of lease component(s) and non-lease component(s).
SOLUTION
(i) and (ii) Identification of lease and non-lease components and allocation of consideration into these
components
In the given case, the agreement contains a lease component (production line) and a non-lease component
(job work). As Entity A has not elected to apply the practical expedient as provided in paragraph 15 of Ind
AS 116, it will separate the lease and non-lease components and allocate the total consideration to the
lease and non- lease components in the ratio of their relative stand-alone selling prices.
As Entity A is required to purchase a minimum of 1,00,000 units per month at the rate of ₹ 240 per unit,
there is in substance fixed payment of ₹ 2,40,00,000 per month – although the payments are structured
as variable lease payments, there is no genuine variability in those payments as Entity A is required to
purchase a minimum quantity 1,00,000 units per month, i.e., for ₹ 2,40,00,000 per month.
The observable stand-alone price for lease component (which is factory rent) is ₹ 60,00,000. The observable
stand-alone price of non-lease component (which is job work charges) is ₹ 1,95,00,000 (₹ 195 x 1,00,000
units).
Entity A is required to allocate the total consideration per month as follows:
Observable standalone price: Lease component ₹ 60,00,000

Observable standalone price: Non-lease component ₹ 1,95,00,000

Total ₹ 2,55,00,000
Lease component as a percentage of observable prices 23.53%
(₹ 60 lakh / ₹ 255 lakh) x 100

Allocation of consideration to lease component ₹ 56,47,200

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(₹ 2,40,00,000 x 23.53%)
Non-lease component (₹ 2,40,00,000 – ₹ 56,47,200) ₹ 1,83,52,800
(iii) Computation of lease liability
The total allocation for a year will be ₹ 6,77,66,400 (₹ 56,47,200 x 12)
As Entity A's incremental borrowing rate is 10%, it discounts lease payments using this rate and
the lease liability at the commencement date is calculated as follows:
Lease Liability at commencement date = ₹ 6,77,66,400 x 2.49 = ₹ 16,87,38,336.
(iv) Accounting treatment of lease components and non-lease components
(a) Entity A recognises lease liability amounting to ₹ 16,87,38,336 as at commencement date
based on lease payments amounting to ₹ 56,47,200 per month.
(b) The remaining amount of ₹ 1,83,52,800 (₹ 2,40,00,000 – ₹ 56,47,200) which is attributable to
job work charges is recognised in the statement of profit and loss as and when incurred.

QUESTION 157:
([Link].205 - Question Bank)
Company EFG enters into a property lease with Entity H. The initial term of the lease is 10 years with a 5-
year renewal option. The economic life of the property is 40 years and the fair value of the leased property is
Rs50 Lacs. Company EFG has an option to purchase the property at the end of the lease term for Rs30 lacs.
The first annual payment is Rs5 lacs with an increase of 3% every year thereafter. The implicit rate of interest
is 9.04%. Entity H gives Company EFG an incentive of Rs2 lacs (payable at the beginning of year 2), which is
to be used for normal tenant improvement.
Company EFG is reasonably certain to exercise that purchase option. How would EFG measure the right-of-
use asset and lease liability over the lease term?
SOLUTION:
As per Ind AS 116, Company EFG would first calculate the lease liability as the present value of the annual
lease payments, less the lease incentive paid in year 2, plus the exercise price of the purchase option using
the rate implicit in the lease of approximately 9.04%.
PV of lease payments, less lease incentive (W.N. 1) Rs. 37,39,648
PV of purchase option at end of lease term (W.N. 2) Rs. 12,60,000
Total lease liability Rs. 49,99,648 or Rs. 50,00,000
(approx)
The right-of-use asset is equal to the lease liability because there is no adjustment required for initial direct
costs incurred by Company EFG, lease payments made at or before the lease commencement date, or lease
incentives received prior to the lease commencement date.

Entity EFG would record the following journal entry on the lease commencement date.
Right-of-use Asset Dr. Rs 50,00,000
To Lease Liability Rs 50,00,000
To record ROU asset and lease liability at the commencement date.
Since the purchase option is reasonably certain to be exercised, EFG would amortize the right-of-use asset
over the economic life of the underlying asset (40 years). Annual amortization expense would be Rs.
1,25,000 (Rs. 50,00,000 / 40 years)

Interest expense on the lease liability would be calculated as shown in the following table. This table
includes all expected cash flows during the lease term; including the lease incentive paid by Entity H and
Company EFG’s purchase option.

Year Payment Principal paid at Interest paid Interest Lease

the beginning of expense Liability (end
the year of the year
A b= a-c c = (d of pvs. d = [(e of pvs. e = (e of pvs.
Year) year- a) x Year + d – a)
9.04%]
Commencem 50,00,000
ent
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Year 1 5,00,000 5,00,000 - 4,06,800 49,06,800

Year 2 3,15,000* (91,800) 4,06,800 4,15,099 50,06,899
Year 3 5,30,450 1,15,351 4,15,099 4,04,671 48,81,120
Year 4 5,46,364 1,41,693 4,04,671 3,91,862 47,26,618
Year 5 5,62,754 1,70,892 3,91,862 3,76,413 45,40,277
Year 6 5,79,637 2,03,224 3,76,413 3,58,042 43,18,682
Year 7 5,97,026 2,38,984 3,58,042 3,36,438 40,58,094
Year 8 6,14,937 2,78,499 3,36,438 3,11,261 37,54,418
Year 9 6,33,385 3,22,124 3,11,261 2,82,141 34,03,174
Year 10 6,52,387 3,70,246 2,82,141 2,49,213* 30,00,000
Year 10 30,00,000 27,50,787 2,49,213* - -
Total 85,31,940 50,00,000 35,31,940 35,31,940

*(5,00,000 + increased by 3% - lease incentive paid amounting to 2,00,000)

Although the lease was for 10 years, the asset had an economic life of 40 years. When Company EFG
exercises its purchase option at the end of the 10-year lease, it would have fully extinguished its lease
liability but continue depreciating the asset over the remaining useful life.

Working Notes
1. Calculating PV of lease payments, less lease incentive:
Year Lease Present value Present value of
Payment (A) factor @ 9.04% (B) lease payments
(A*B=C)
Year 1 5,00,000 1 5,00,000
Year 2 3,15,000 0.92 2,89,800
Year 3 5,30,450 0.84 4,45,578
Year 4 5,46,364 0.77 4,20,700
Year 5 5,62,754 0.71 3,99,555
Year 6 5,79,637 0.65 3,76,764
Year 7 5,97,026 0.59 3,52,245
Year 8 6,14,937 0.55 3,38,215
Year 9 6,33,385 0.50 3,16,693
Year 6,52,387 0.46 3,00,098
10
Total 37,39,648

2. Calculating PV of purchase option at end of lease term:

Year Payment on Present value factor Present value of purchase
purchase option (A) @ 9.04%(B) option (A*B=C)
Year 10 30,00,000 0.42 12,60,000
Total 12,60,000

The discount rate for year 10 is different in the above calculations because in the earlier one its beginning
of year 10 and in the later one its end of the year 10.

QUESTION 158:
([Link].206 - Question Bank)
Entity W entered into a contract for lease of retail store with Entity J on January 01/01/2017. The initial term
of the lease is 5 years with a renewal option of further 3 years. The annual payments for initial term and
renewal term isRs100,000 and Rs110,000 respectively. The annual lease payment will increase based on the
annual increase in the CPI at the end of the preceding year. For example, the payment due on 01/01/18 will
be based on the CPI available at 31/12/17.
Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/2020 is 5% and 6%
respectively and the CPI at lease commencement date and as at 01/01/2020 is 120 and 125 respectively.

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Must Do Questions by Jai Chawla Sir CA Final FR

At the lease commencement date, Entity W did not have a significant economic incentive to exercise the renewal
option. In the first quarter of 2020, Entity W installed unique lease improvements into the retail store with an
estimated five-year economic life. Entity W determined that it would only recover the cost of the improvements
if it exercises the renewal option, creating a significant economic incentive to extend.
Is Entity W required to remeasure the lease in the first quarter of 2020?
SOLUTION:
Since Entity W is now reasonably certain that it will exercise its renewal option, it is required to remeasure
the lease in the first quarter of 2020.
The following table summarizes information pertinent to the lease remeasurement.

Remeasured lease term 5 years; 2 years remaining in the

initial term plus 3 years in the
renewal period
Entity W’s incremental borrowing rate On the remeasurement 6%
date
CPI available on the remeasurement date 125
Right-of-use asset immediately before the remeasurement Rs 1,81,840 (Refer note 1)
Lease liability immediately before the remeasurement Rs 1,95,244 (Refer note 1)
To remeasure the lease liability, Entity W would first calculate the present value of the future lease
payments for the new lease term (using the updated discount rate of 6%). The following table shows the
present value of the future lease payments based on an updated CPI of 125. Since the initial lease payments
were based on a CPI of 120, the CPI has increased by 4.167% approx. As a result, Entity W would increase
the future lease payments by 4.167%. As shown in the table, the revised lease liability is Rs. 4,91,376.

Year 4 5 6 7 8 Total
Lease payment 104,167 104,167 114,583 114,583 114,583 552,083
Discount 1 0.943 0.890 0.840 0.792
Present value 104,167 98,230 101,979 96,250 90,750 491,376
To calculate the adjustment to the lease liability, Entity W would compare the recalculated and original
lease liability balances on the remeasurement date.
Revised lease liability 491,376
Original lease liability (1,95,244)
2,96,132

Entity W would record the following journal entry to adjust the lease liability.
ROU Asset Dr. 2,96,132
To Lease liability 2,96,132
Being lease liability and ROU asset adjusted on account of remeasurement.

Working Notes:
1. Calculation of ROU asset before the date of remeasurement
Year Lease Present value Present value of lease
beginning Payment(A) factor @ 5%(B) payments(AxB=C)
1 1,00,000 1.000 1,00,000
2 1,00,000 0.952 95,200
3 1,00,000 0.907 90,700
4 1,00,000 0.864 86,400
5 1,00,000 0.823 82,300
Lease liability as at commencement date 4,54,600

2. Calculation of Lease Liability and ROU asset at each year end

Year Lease Liability ROU asset
Initial Lease Interest Closing Initial Depreci Closing
value payments expense balance Value ation balance
1 4,54,600 1,00,000 17,730 3,72,330 4,54,600 90,920 3,63,680
2 3,72,330 1,00,000 13,617 2,85,947 3,63,680 90,920 2,72,760

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3 2,85,947 1,00,000 9,297 1,95,244 2,72,760 90,920 1,81,840

4 1,95,244 1,81,840

QUESTION 159: (SIMILAR TO RTP May21 & MTP May23)

([Link].209 - Question Bank)
Entity X is an Indian entity whose functional currency is Indian Rupee. It has taken a plant on lease from
Entity Y for 5 years to use in its manufacturing process for which it has to pay annual rentals in arrears of
USD 10,000 every year. On the commencement date, exchange rate was USD = Rs. 68. The average rate for
Year 1 was Rs. 69 and at the end of year 1, the exchange rate was Rs. 70. The incremental borrowing rate of
Entity X on commencement of the lease for a USD borrowing was 5% p.a.
How will entity X measure the right of use (ROU) asset and lease liability initially and at the end of Year 1?
ANSWER:
On initial measurement, Entity X will measure the lease liability and ROU asset as under:

Year Lease Payments Present Value Present Value of Conversion INR value
(USD) factor @ 5% Lease Payment rate (spot
rate)
1 10,000 0.952 9,520 68 6,47,360
2 10,000 0.907 9,070 68 6,16,760
3 10,000 0.864 8,640 68 5,87,520
4 10,000 0.823 8,230 68 5,59,640
5 10,000 0.784 7,840 68 5,33,120
Total 43,300 29,44,400

As per Ind AS 21, the Effects of Changes in Foreign Exchange Rates, monetary assets and liabilities are
restated at each reporting date at the closing rate and the difference due to foreign exchange movement is
recognised in profit and loss whereas non-monetary assets and liabilities carried measured in terms of
historical cost in foreign currency are not restated.
Accordingly, the ROU asset in the given case being a non-monetary asset measured in terms of historical
cost in foreign currency will not be restated but the lease liability being a monetary liability will be restated
at each reporting date with the resultant difference being taken to profit and loss.
At the end of Year 1, the lease liability will be measured in terms of USD as under:
Lease Liability:
Year Initial Value Lease Payment Interest @ 5% Closing Value (USD)
(USD) (a) (b) (c) = (a x 5%) (d = a + c - b)
1 43,300 10,000 2,165 35,465

Interest at the rate of 5% will be accounted for in profit and loss at average rate of ₹ 69
(i.e., USD 2,165 x 69) = ₹ 1,49,385.

Particulars Dr. (₹) Cr. (₹)

Interest Expense Dr. 1,49,385
To Lease liability 1,49,385

Lease payment would be accounted for at the reporting date exchange rate, i.e. ₹ 70 at the end of year 1
Particulars Dr. (₹) Cr. (₹)
Lease liability Dr. 7,00,000
To Cash 7,00,000

As per the guidance above under Ind AS 21, the lease liability will be restated using the reporting date
exchange rate i.e., ₹ 70 at the end of Year 1. Accordingly, the lease liability will be measured at ₹ 24,82,550
(35,465 x ₹ 70) with the corresponding impact due to exchange rate movement of ₹ 88,765 (24,82,550 –
(29,44,400 + 1,49,385 – 700,000) taken to profit and loss.

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At the end of year 1, the ROU asset will be measured as under:

Year Opening Balance (₹) Depreciation (₹) Closing Balance (₹)
1 29,44,400 5,88,880 23,55,520

QUESTION 160: (MTP Nov22)

([Link].216 - Question Bank)
Feel Fresh Limited (the Company) is into manufacturing and retailing of FMCG products listed on stock
exchanges in India. One of its products is bathing soap which the Company sells under the brand name
'Feel Fresh'. The Company does not have its own manufacturing facilities for soap and therefore it enters
into arrangements with a third party to procure the soaps. The Company entered into a long-term purchase
contract of 10 years with M/s. Radhey. Following are the relevant terms of the contract with M/s. Radhey.
(i) M/s. Radhey has to purchase a machine costing Rs. 10,00,000 from the supplier as specified by the
Company. The machine will be customized to produce the soaps as designed by the Company. This
machine cannot be used by M/s. Radhey to produce the soaps for buyers other than the Company due
to the design specifications. The machine has a useful life of 10 years and the straight-line method of
depreciation is best suited considering the use of the machine.
(ii) The Company will pay Rs. 4.75 per soap for the first year of contract. This is calculated based on the
budgeted annual purchase of 7,00,000 soaps as follows:

Particulars Per soap

price
Variable cost of manufacturing 4.00
Cost of machine (Rs. 1,74,015 / 7,00,000 soaps) 0.25
M/s. Radhey's margin 0.50
Per soap cost to the Company 4.75
In case the Company purchases more than 7,00,000 (i.e. budgeted number of soaps) soaps in the first year
then the cost of the machine (i.e. 0.25 per soap) will not be paid for soaps procured in excess of 7,00,000
units. However, in case Company procures less than budgeted number of soaps, then the Company will pay
the differential unabsorbed cost of the machine, at the end of the year. For example, if the Company
purchases only 6,00,000 soaps in first year then the differential amount of Rs. 24,015 (1,74,015 - (6,00,000
x 0.25)) will be paid by the Company to M/s. Radhey at the end of the year. Variable cost will be actualized
at the end of the year.

(iii) The cost per soap will be calculated for each year in advance based on the budgeted number of soaps
to be produced each year. An amount of Rs. 1,74,015 shall be considered each year for the cost of
machine for year 1 to year 8 while calculating the cost per soap. Any differential under absorbed amount
shall be paid by the Company to M/s. Radhey at the end of that year. A charge of Rs. 1,74,015 per
annum for the machine is derived using borrowing cost of 8% p.a. For year 9 and year 10, only variable
cost and margins will be paid.
(iv) M/s. Radhey does not have any right to terminate the contract but the Company has the right to
terminate the contract at the end of each year. However, if the Company terminates the contract, it has
to compensate M/s. Radhey for any unabsorbed cost of Machine. For example, if the Company
terminates the contract at the end of second year then it has to pay Rs. 10,44,090 (i.e. 1,74,015 per
year x 6 remaining years). If it terminates the contract after the 8th year then the Company does not
have to pay the compensation since the cost of the machine would have been absorbed.
(v) In the first year, the Company purchases 5,50,000 soaps at Rs. 4.75 per soap.
Evaluate the contract of the Company with M/s. Radhey and provide necessary accounting entries for first
year in accordance with Ind AS with working notes. Assume all cash flows occur at the end of the year.

SOLUTION
Identification of the contract (by applying para 9 of Ind AS 116)
(a) Identified asset
Feel Fresh Ltd. (a customer company) enters into a long-term purchase contract with M/s Radhey (a
manufacturer) to purchase a particular type and quality of soaps for 10 year period.
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Since for the purpose of the contract M/s Radhey has to buy a customized machine as per the
directions of Feel Fresh Ltd. and also the machine cannot be used for any other type of soap, the
machine is an identified asset.
(b) Right to obtain substantially all of the economic benefits from use of the asset throughout the
period of use
Since the machine cannot be used for manufacture of soap for any other buyer, Feel Fresh Ltd. will
obtain substantially all the economic benefits from the use of the asset throughout the period of use.
(c) Right to direct the use
Feel Fresh Ltd. controls the use of machine and directs the terms and conditions of the contract with
respect to recovery of fixed expenses related to machine.
Hence the contract contains a lease.
Lease term
The lease term shall be 10 years assuming reasonable certainty. Though the lessee is not contractually
bound till 10th year, i.e., the lessee can refuse to make payment anytime without lessor’s permission
but, it is assumed that the lessee is reasonably certain that it will not exercise this option to terminate.
Identification of lease payment
Lease payments are defined as payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives
(b) variable lease paym
(c) ents that depend on an index or a rate
(d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option
(e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease
Here in-substance fixed payments in the given lease contract are Rs. 1,74,015 p.a. The present value
of lease payment which would be recovered in 8 years @ 8% would be Rs. 10,00,000 (approx.)
Variable lease payments that do not depend on an index or rate and are not, in substance, fixed are
not included as lease payments. Instead, they are recognised in profit or loss in the period in which
the event that triggers the payment occurs (unless they are included in the carrying amount of another
asset in accordance with other Ind AS).
Hence, lease liability will be recognized by Rs. 10,00,000 in the books of Feel Fresh Ltd. Since there
are no payments made to lessor before commencement date less lease incentives received from lessor
or initial direct costs incurred by lessee or estimate of costs for restoration / dismantling of underlying
asset, the right of use asset is equal to lease liability.

Journal Entries
On initial recognition
ROU Asset Dr. 10,00,000
To Lease Liability 10,00,000
To initially recognise the Lease Liability and the corresponding ROU Asset

At the end of the first year

Interest Expense Dr. 80,000
To Lease Liability 80,000
To record interest expense and accrete the lease liability using the effective interest method
(Rs. 10,00,000 x 8%)
Depreciation Expense (10,00,000 / 10 years) Dr. 1,00,000
To ROU Asset 1,00,000
To record depreciation on ROU using the straight-line method (Rs. 10,00,000 / 10 years)
Lease Liability Dr. 1,74,015
To Bank / M/s. Radhey 1,74,015
To record lease payment
Cost of soap Dr. 24,75,000
To Bank / M/s. Radhey {5,50,000 x (4 + 0.5)} 24,75,000

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To record variable expenses paid as cost of the goods purchased

QUESTION 161: (SIMILAR To MTP May21, May22, Exam Nov22)

([Link].303 - Question Bank)
Lessee enters into a 10-year lease for 5,000 square meters of office space. The annual lease payments are Rs.
50,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined.
Lessee’s incremental borrowing rate at the commencement date is 6% p.a. At the beginning of Year 6, Lessee
and Lessor agree to amend the original lease to reduce the space to only 2,500 square meters of the original
space starting from the end of the first quarter of Year 6. The annual fixed lease payments (from Year 6 to Year
10) are Rs. 30,000. Lessee’s incremental borrowing rate at the beginning of Year 6 is 5% p.a.
How should the said modification be accounted for?
SOLUTION:
In the given case, Lessee calculates the ROU asset and the lease liabilities before modification as follows:

Lease Liability ROU asset

Ye Initial Lease Interest Closing Initial Depreciat Closing
ar value payment expense @ balance Value ion balance
s 6%
A B c = a x 6% d = a-b + e f g
c
1 3,67,950* 50,000 22,077 3,40,027 3,67,950 36,795 3,31,155
2 3,40,027 50,000 20,402 3,10,429 3,31,155 36,795 2,94,360
3 3,10,429 50,000 18,626 2,79,055 2,94,360 36,795 2,57,565
4 2,79,055 50,000 16,743 2,45,798 2,57,565 36,795 2,20,770
5 2,45,798 50,000 14,748 2,10,546 2,20,770 36,795 1,83,975
6 2,10,546 1,83,975

*(refer note 1)
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability
based on:
(a) a five-year remaining lease term,
(b) annual payments of Rs. 30,000 and
(c) Lessee’s incremental borrowing rate of 5% p.a.
Year Lease Present value factor Present value of
Payment(A) @ 5% (B) lease payments (A x
B = C)
6 30,000 0.952 28,560
7 30,000 0.907 27,210
8 30,000 0.864 25,920
9 30,000 0.823 24,690
10 30,000 0.784 23,520
Total 1,29,900

Lessee determines the proportionate decrease in the carrying amount of the ROU Asset on the basis of the
remaining ROU Asset (i.e., 2,500 square meters corresponding to 50% of the original ROU Asset).

50% of the pre-modification ROU Asset (Rs. 1,83,975) is Rs. 91,987.50.

50% of the pre-modification lease liability (Rs. 2,10,546) is Rs. 1,05,273.

Consequently, Lessee reduces the carrying amount of the ROU Asset by Rs. 91,987.50 and the carrying
amount of the lease liability by Rs. 1,05,273. Lessee recognises the difference between the decrease in the
lease liability and the decrease in the ROU Asset (Rs. 1,05,273 – Rs. 91,987.50 = Rs. 13,285.50) as a gain
in profit or loss at the effective date of the modification (at the beginning of Year 6).

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Lessee recognises the difference between the remaining lease liability of Rs. 1,05,273 and the modified
lease liability of Rs. 1,29,900 (which equals Rs. 24,627) as an adjustment to the ROU Asset reflecting the
change in the consideration paid for the lease and the revised discount rate.

Working Note:
Calculation of Initial value of ROU asset and lease liability:
Year Lease Present value Present value of lease
Payment(A) factor @ 6% (B) payments (A x B = C)
1 50,000 0.943 47,150
2 50,000 0.890 44,500
3 50,000 0.840 42,000
4 50,000 0.792 39,600
5 50,000 0.747 37,350
6 50,000 0.705 35,250
7 50,000 0.665 33,250
8 50,000 0.627 31,350
9 50,000 0.592 29,600
10 50,000 0.558 27,900
3,67,950

QUESTION 162:
([Link].305 - Question Bank)
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments are
Rs1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a.
At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:
(a) Include an additional 1,500 square metres of space in the same building starting from the beginning of
Year 6 and
(b) Reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500 square metres
is Rs1,50,000 payable at the end of each year (from Year 6 to Year 8). Lessee’s incremental borrowing rate
at the beginning of Year 6 is 7% p.a.
The consideration for the increase in scope of 1,500 square metres of space is not commensurate with the
stand-alone price for that increase adjusted to reflect the circumstances of the contract. Consequently, Lessee
does not account for the increase in scope that adds the right to use an additional 1,500 square metres of
space as a separate lease.
How should the said modification be accounted for?
SOLUTION:
The pre-modification ROU Asset and the pre-modification lease liability in relation to the lease are as
follows:

Lease liability ROU Asset

Year Opening Interest Lease Closing Opening Depreci Closing
balance expense payment balance balance ation balance
@ 6% charge
1 7,35,900* 44,154 (1,00,000) 6,80,054 7,35,900 (73,590) 6,62,310
2 6,80,054 40,803 (1,00,000) 6,20,857 6,62,310 (73,590) 5,88,720
3 6,20,857 37,251 (1,00,000) 5,58,108 5,88,720 (73,590) 5,15,130
4 5,58,108 33,486 (1,00,000) 4,91,594 5,15,130 (73,590) 4,41,540
5 4,91,594 29,496 (1,00,000) 4,21,090 4,41,540 (73,590) 3,67,950
6 4,21,090 3,67,950
*Refer Note 4.
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability
on the basis of:
(a) A three-year remaining lease term (i.e. till 8th year),
(b) Annual payments of Rs150,000 and
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(c) Lessee’s incremental borrowing rate of 7% p.a.

Year Lease Payments Present value @ 7% Present value of

(A) (B) lease payments (A x
B = C)
1 1,50,000 0.935 1,40,250
2 1,50,000 0.873 1,30,950
3 1,50,000 0.816 1,22,400
Modified lease liability 3,93,600

The modified liability equals Rs3,93,600, of which (a) Rs1,31,200 relates to the increase of Rs50,000 in the
annual lease payments from Year 6 to Year 8 and (refer note 1) (b) Rs2,62,400 relates to the remaining
three annual lease payments of Rs1,00,000 from Year 6 to Year 8 with reduction of lease term (Refer Note
3)

Decrease in the lease term:

At the effective date of the modification (at the beginning of Year 6), the pre-modification ROU Asset is Rs.
3,67,950. Lessee determines the proportionate decrease in the carrying amount of the ROU Asset based
on the remaining ROU Asset for the original 2,000 square metres of office space (i.e., a remaining three-
year lease term rather than the original five-year lease term). The remaining ROU Asset for the original
2,000 square metres of office space is Rs. 2,20,770 [i.e., Rs. (3,67,950 / 5) x 3 years].

At the effective date of the modification (at the beginning of Year 6), the pre-modification lease liability is
Rs. 4,21,090. The remaining lease liability for the original 2,000 square metres of office space is Rs.
2,67,300 (i.e., present value of three annual lease payments of Rs. 1,00,000, discounted at the original
discount rate of 6% p.a.) (refer note 2).

Consequently, Lessee reduces the carrying amount of the ROU Asset by Rs. 1,47,180 (Rs. 3,67,950 – Rs.
2,20,770), and the carrying amount of the lease liability by Rs. 1,53,790 (Rs. 4,21,090 – Rs. 2,67,300).
Lessee recognises the difference between the decrease in the lease liability and the decrease in the ROU
Asset (Rs. 1,53,790 – Rs. 1,47,180 = Rs. 6,610) as a gain in profit or loss at the effective date of the
modification (at the beginning of Year 6).
Lease Liability Dr. 1,53,790
To ROU Asset 1,47,180
To Gain 6,610

At the effective date of the modification (at the beginning of Year 6), Lessee recognises the effect of the
remeasurement of the remaining lease liability reflecting the revised discount rate of 7% p.a., which is
Rs4,900 (Rs2,67,300 – Rs2,62,400*), as an adjustment to the ROU Asset.
*(Refer note 3)
Lease Liability Dr. 4,900
To ROU Asset 4,900

Increase in the leased space:

At the commencement date of the lease for the additional 1,500 square metres of space (at the beginning
of Year 6), Lessee recognises the increase in the lease liability related to the increase in leased space of
Rs1,31,200 (i.e., present value of three annual lease payments of Rs50,000, discounted at the revised
interest rate of 7% p.a.) as an adjustment to the ROU Asset.
ROU Asset Dr. 1,31,200
To Lease Liability 1,31,200

The modified ROU Asset and the modified lease liability in relation to the modified lease are as follows:
Lease liability ROU Asset
Year Opening Interes Lease Closing Opening Depreciati Closing
balance t payment balance balance on charge balance

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expens
e @ 7%
6 3,93,600 27,552 (1,50,000) 2,71,152 3,47,100 (1,15,700) 2,31,400
**
7 2,71,152 18,981 (1,50,000) 1,40,133 2,31,400 (1,15,700) 1,15,700
8 1,40,133 9,867* (1,50,000) - 1,15,700 (1,15,700) -

*Difference is due to approximation.

**Refer Note 5

Working Notes:
1. Calculation of lease liability on increased consideration:
Year Lease Payments Present value @7% Present value of
(A) (B) lease payments (A x
B = C)
1 50,000 0.935 46,750
2 50,000 0.873 43,650
3 50,000 0.816 40,800
Modified lease liability 1,31,200
2. Calculation of remaining lease liability for the original contract of 2000 square meters at
Original discount rate:

Year Lease Payments (A) Present value factor @ Present value of lease
6% (B) payments (A x B = C)
1 1,00,000 0.943 94,300
2 1,00,000 0.890 89,000
3 1,00,000 0.840 84,000
Remaining lease liability 2,67,300

3. Calculation of remaining lease liability for the original contract of 2000 square meters at
revised discount rate:
Year Lease Payments (A) Present value factor Present value of lease
@ 7%(B) payments (A x B = C)
1 1,00,000 0.935 93,500
2 1,00,000 0.873 87,300
3 1,00,000 0.816 81,600
Remaining lease liability 2,62,400

4. Calculation of Initial value of ROU asset and lease liability:

Year Lease Payment Present value factor Present value of lease
(A) @ 6%(B) payments (A x B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500

5. Calculation of opening balance of Modified ROU Asset at the beginning of 6th year:
The remaining ROU Asset for the original 2,000 square metres of office 2,20,770
space after decrease in term
Less: Adjustment for increase in interest rate from 6% to 7% (4,870)
Add: Adjustment for increase in leased space 1,31,200
3,47,100

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QUESTION 163:
([Link].401 - Question Bank)
A Lessor enters into a 10-year lease of equipment with Lessee. The equipment is not specialised in nature and
is expected to have alternative use to Lessor at the end of the 10-year lease term. Under the lease:
❖ Lessor receives annual lease payments of Rs15,000, payable at the end of the year
❖ Lessor expects the residual value of the equipment to be Rs50,000 at the end of the 10-year lease term
❖ Lessee provides a residual value guarantee that protects Lessor from the first Rs30,000 of loss for a sale
at a price below the estimated residual value at the end of the lease term (i.e., Rs50,000)
❖ The equipment has an estimated remaining economic life of 15 years, a carrying amount of Rs1,00,000
and a fair value of Rs1,11,000
❖ The lease does not transfer ownership of the underlying asset to Lessee at the end of the lease term or
contain an option to purchase the underlying asset
❖ The interest rate implicit in the lease is 10.078%.
How should the Lessor account for the same in its books of accounts?

SOLUTION:
Lessor shall classify the lease as a FINANCE LEASE because the sum of the present value of lease
payments amounts to substantially all of the fair value of the underlying asset.
At lease commencement, Lessor accounts for the finance lease, as follows:
Net investment in the lease
Rs 1,11,000(a)
Cost of goods sold
Rs 92,340(b)
Revenue
Rs 1,03,340(c)
Property held for lease
Rs 1,00,000(d)

To record the net investment in the finance lease and derecognise the underlying asset.
(a) The net investment in the lease consists of:
(1) The present value of 10 annual payments of Rs15,000 plus the guaranteed residual value of
Rs30,000, both discounted at the interest rate implicit in the lease, which equals Rs1,03,340 (i.e.,
the lease payment) (Refer note 1) AND
(2) The present value of unguaranteed residual asset of Rs20,000, which equals Rs7,660 (Refer note
2).Note that the net investment in the lease is subject to the same considerations as other assets
in classification as current or non-current assets in a classified balance sheet.
(b) Cost of goods sold is the carrying amount of the equipment of Rs1,00,000 (less) the present value of
the unguaranteed residual asset of Rs7,660.
(c) Revenue equals the lease receivable.
(d) The carrying amount of the underlying asset.

At lease commencement, Lessor recognises selling profit of Rs11,000 which is calculated as = lease
payment of Rs1,03,340 – [carrying amount of the asset (Rs1,00,000) – net of any unguaranteed
residual asset (Rs7,660) i.e. which equals Rs92,340]
Cash
Rs 15,000(e)
Net investment in the lease
Rs 3,813(f)
Interest income
Rs 11,187(g)

(e) Receipt of annual lease payments at the end of the year.

(f) Reduction of the net investment in the lease for lease payments received of Rs15,000, net of interest
income of Rs11,187
(g) Interest income is the amount that produces a constant periodic discount rate on the remaining
balance of the net investment in the lease. Please refer the computation below:

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The following table summarises the interest income from this lease and the related amortisation of the
net investment over the lease term:
Year Annual Rental Annual Interest Net investment at the end
Payment Income(h) of the year
Initial net - - 1,11,000
investment
1 15,000 11,187 1,07,187
2 15,000 10,802 1,02,989
3 15,000 10,379 98,368
4 15,000 9,914 93,282
5 15,000 9,401 87,683
6 15,000 8,837 81,520
7 15,000 8,216 74,736
8 15,000 7,532 67,268
9 15,000 6,779 59,047
10 15,000 5,953
50,000(i)

(h) Interest income equals 10.078% of the net investment in the lease at the beginning of each year. For
e.g., Year 1 annual interest income is calculated as Rs1,11,000 (initial net investment) x 10.078%.
(i) The estimated residual value of the equipment at the end of the lease term.

Working Notes:
1. Calculation of net investment in lease:
Year Lease Payment Present value factor @ Present value of lease
(A) 10.078% (B) payments (A x B = C)
1 15,000 0.908 13,620
2 15,000 0.825 12,375
3 15,000 0.750 11,250
4 15,000 0.681 10,215
5 15,000 0.619 9,285
6 15,000 0.562 8,430
7 15,000 0.511 7,665
8 15,000 0.464 6,960
9 15,000 0.421 6,315
10 15,000 0.383 5,745
10 30,000 0.383 11,480*
1,03,340
* Figure has been rounded off for equalization of journal entry.

2. Calculation of present value of unguaranteed residual asset

Year Lease Payment Present value factor @ Present value of lease
(A) 10.078% (B) payments (A x B = C)
10 20,000 0.383 7,660

QUESTION 164: (SIMILAR TO Nov20 EXAM, MTP May’24)

([Link].701 - Question Bank)
An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of Rs. 30,00,000. Immediately
before the transaction, the building is carried at a cost of Rs. 15,00,000. At the same time, Seller-lessee enters
into a contract with Buyer-lessor for the right to use the building for 20 years, with annual payments of Rs.
2,00,000 payable at the end of each year.
The terms and conditions of the transaction are such that the transfer of the building by Seller-lessee satisfies
the requirements for determining when a performance obligation is satisfied in Ind AS 115 Revenue from
Contracts with Customers.
The fair value of the building at the date of sale is Rs. 27,00,000. Initial direct costs, if any, are to be ignored.
The interest rate implicit in the lease is 12% p.a., which is readily determinable by Seller-lessee.
Buyer-lessor classifies the lease of the building as an operating lease.
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How should the said transaction be accounted by the Seller-lessee and the Buyer-lessor?

SOLUTION:
Considering facts of the case, Seller-lessee and buyer-lessor account for the transaction as a sale and
leaseback.
Firstly, since the consideration for the sale of the building is not at fair value, Seller-lessee and Buyer -
lessor make adjustments to measure the sale proceeds at fair value. Thus, the amount of the excess sale
price of Rs3,00,000 (as calculated below) is recognised as additional financing provided by Buyer-lessor to
Seller-lessee.
Sale Price: 30,00,000
Less: Fair Value (at the date of sale): (27,00,000)
Additional financing provided by Buyer-lessor to Seller-lessee 3,00,000
Next step would be to calculate the present value of the annual payments which amounts to Rs14,94,000
(calculated considering 20 payments of Rs2,00,000 each, discounted at 12% p.a.) of which Rs3,00,000
relates to the additional financing (as calculated above) and balance Rs11,94,000 relates to the lease —
corresponding to 20 annual payments of Rs40,164 and Rs1,59,836, respectively (refer calculations below).

Proportion of annual lease payments:

Present value of lease payments (as calculated above) (A) 14,94,000
Additional financing provided (as calculated above) (B) 3,00,000
Relating to the Additional financeing provided (C) = (E x B /A) 40,160
Relating to the Lease (D) = (E –C) 1,59,840
Annual payments (at the end of each year) (E) 2,00,000

Seller-Lessee:
At the commencement date, Seller-lessee measures the ROU asset arising from the leaseback of the
building at the proportion of the previous carrying amount of the building that relates to the right-of-use
retained by Seller-lessee, calculated as follows:

Carrying Amount (A) 15,00,000

Fair Value (at the date of sale) (B) 27,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
ROU Asset [(A / B) xC] 6,63,333

Seller-lessee recognises only the amount of the gain that relates to the rights transferred to Buyer-lessor,
calculated as follows:
Fair Value (at the date of sale) (A) 27,00,000
Carrying Amount (B) 15,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
Gain on sale of building (D) = (A -B) 12,00,000
Relating to the right to use the building retained by Seller-lessee(E) = [(D / A) 5,30,667
x C]
Relating to the rights transferred to Buyer-lessor (D -E) 6,69,333

At the commencement date, Seller-lessee accounts for the transaction, as follows:

Cash Dr. 30,00,000
ROU Asset Dr. 6,63,333
To Building 15,00,000
To Financial Liability 14,94,000
To Gain on rights transferred 6,69,333
Buyer-Lessor:
At the commencement date, Buyer-lessor accounts for the transaction, as follows:
Building Dr. 27,00,000
Financial Asset (20 payments of Rs40,160 discounted @ 12% 3,00,000
p.a.) (approx.) Dr.
To Cash 30,00,000

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After the commencement date, Buyer-lessor accounts for the lease by treating Rs1,59,840 of the annual
payments of Rs2,00,000 as lease payments. The remaining Rs40,160 of annual payments received from
Seller-lessee are accounted for as:
(a) payments received to settle the financial asset of Rs3,00,000 AND
(b) Interest revenue.

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TOPIC - 31
ANALYSIS OF FINANCIAL STATEMENTS
QUESTION 165: (SIMILAR TO RTP Nov’20, MTP Nov’23)
([Link].05 – Question Bank )
Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein investment of 55% is done by
Iktara Ltd. and rest by Deepak. Voting powers are to be given as per the proportionate share of capital
contribution. The new company formed was the subsidiary of Iktara Ltd. with two directors, and Deepak
eventually becomes one of the directors of company. A consultant was hired and he charged Rs. 30,000 for
the incorporation of company and to do other necessary statuary registrations. Rs. 30,000 is to be charged as
an expense in the books after incorporation of company. The company, Softbharti Pvt. Ltd. was incorporated
on 1st April 20X1.
The financials of Iktara Ltd. are prepared as per Ind AS.
An accountant who was hired at the time of company’s incorporation, has prepared the draft financials of
Softbharti Pvt. Ltd. for the year ending 31st March, 20X2 as follows:

Statement of Profit and Loss

Particulars Amount (Rs.)
Revenue from operations 10,00,000
Other Income 1,00,000
Total Revenue (a) 11,00,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase)/Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 7,45,000
Profit before tax (c) = (a)-(b) 3,55,000
Current tax 1,06,500
Deferred tax 6,000
Total tax expense (d) 1,12,500
Profit for the year (e) = (c) – (d) 2,42,500

Balance Sheet
Particulars Amount (Rs.)
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1,00,000
(b) Reserves & Surplus 2,27,500
(2) Non-Current Liabilities
(a) Long Term Provisions 25,000
(b) Deferred tax liabilities 6,000
(3) Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000
(c) Short Term Provisions 1,06,500
TOTAL 5,21,000
ASSETS
(1) Non-Current Assets
(a) Property, plant and equipment (net) 1,00,000
(b) Long-term Loans and Advances 40,000
(c) Other Non-Current Assets 50,000
(2) Current Assets
(a) Current Investment 30,000

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(b) Inventories 80,000

(c) Trade Receivables 55,000
(d) Cash and Bank Balances 1,15,000
(e) Other Current Assets 51,000
TOTAL 5,21,000

Additional information of Softbharti Pvt Ltd.:

i) Deferred tax liability of Rs. 6,000 is created due to following temporary difference: Difference in
depreciation amount as per Income tax and Accounting profit
ii) There is only one property, plant and equipment in the company, whose closing balance as at 31 st March,
20X2 is as follows:
Asset description As per Books As per Income tax
Property, plant and equipment Rs. 1,00,000 Rs. 80,000
iii) Pre incorporation expenses are deductible on straight line basis over the period of five years as per Income
tax. However, the same are immediately expensed off in the books.
iv) Current tax is calculated at 30% on PBT - Rs. 3,55,000 without doing any adjustments related to Income
tax. The correct current tax after doing necessary adjustments of allowances / disallowances related to
Income tax comes to Rs. 1,25,700.
v) After the reporting period, the directors have recommended dividend of Rs. 15,000 for the year ending 31 st
March, 20X2 which has been deducted from reserves and surplus. Dividend payable of Rs. 15,000 has
been grouped under ‘other current liabilities’ along with other financial liabilities.
vi) There are ‘Government statuary dues’ amounting to Rs. 15,000 which are grouped under “other current
liabilities”.
vii) The capital advances amounting to Rs. 50,000 are grouped under ‘Other non-current assets.
viii) Other current assets of Rs. 51,000 comprise Interest receivable from trade receivables.
ix) Current investment of Rs. 30,000 is in shares of a company which was done with the purpose of trading;
current investment has been carried at cost in the financial statements. The fair value of current investment
in this case is Rs. 50,000 as at 31st March, 20X2.
x) Actuarial gain on employee benefit measurements of Rs. 1,000 has been omitted in the financials of
Softbharti private limited for the year ending 31st March, 20X2. The financial statements for financial year
20X1-20X2 have not been yet approved.
You are required to ascertain that whether the financial statements of Softbharti Pvt. Ltd. are
correctly presented as per the applicable financial reporting framework. If not, prepare the revised
financial statements of Softbharti Pvt. Ltd. after the careful analysis of mentioned facts and
information.

SOLUTION
If Ind AS is applicable to any company, then Ind AS shall automatically be made applicable to all the
subsidiaries, holding companies, associated companies, and joint ventures of that company, irrespective
of individual qualification of set of standards on such companies.
In the given case it has been mentioned that the financials of Iktara Ltd. are prepared as per Ind AS.
Accordingly, the results of its subsidiary Softbharti Pvt. Ltd. should also have been prepared as per Ind
AS. However, the financials of Softbharti Pvt. Ltd. have been presented as per accounting standards (AS).
Hence, it is necessary to revise the financial statements of Softbharti Pvt. Ltd. as per Ind AS after the
incorporation of necessary adjustments mentioned in the question. The revised financial statements of
Softbharti Pvt. Ltd. as per Ind AS and Division II to Schedule III of the Companies Act, 2013 are as follows:
STATEMENT OF PROFIT AND LOSS
for the year ended 31st March, 20X2
Particulars Amount (Rs.)
Revenue from operations 10,00,000
Other Income (1,00,000 + 20,000) (refer note -1) 1,20,000
Total Revenue 11,20,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase) / Decrease in stock in trade (50,000)

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Employee benefits expense 1,75,000

Depreciation 30,000
Other expenses 90,000
Total Expenses 7,45,000
Profit before tax 3,75,000
Current tax 1,25,700
Deferred tax (W.N.1) 4,800
Total tax expense 1,30,500
Profit for the year (A) 2,44,500
OTHER COMPREHENSIVE INCOME
Items that will not be reclassified to Profit or Loss:
Remeasurements of net defined benefit plans 1,000
Tax liabilities relating to items that will not be reclassified to
Profit or Loss
Remeasurements of net defined benefit plans (tax) [1000 x 30%] (300)
Other Comprehensive Income for the period (B) 700
Total Comprehensive Income for the period (A+B) 2,45,200

BALANCE SHEET
as at 31st March, 20X2
Particulars Rs.
ASSETS
Non-current assets
Property, plant and equipment 1,00,000
Financial assets
Other financial assets (Long-term loans and advances) 40,000
Other non-current assets (capital advances) (refer note-2) 50,000
Current assets
Inventories 80,000
Financial assets
Investments (30,000 + 20,000) (refer note -1) 50,000
Trade receivables 55,000
Cash and cash equivalents/Bank 1,15,000
Other financial assets (Interest receivable from trade receivables) 51,000
TOTAL ASSETS 5,41,000
EQUITY AND LIABILITIES
Equity
Equity share capital 1,00,000
Other equity 2,45,200
Non-current liabilities
Provision (25,000 – 1,000) 24,000
Deferred tax liabilities (4800 + 300) 5,100
Current liabilities
Financial liabilities
Trade payables 11,000
Other financial liabilities (Refer note 5) 15,000
Other current liabilities (Govt. statuary dues) (Refer note 3) 15,000
Current tax liabilities 1,25,700
TOTAL EQUITY AND LIABILITIES 5,41,000

STATEMENT OF CHANGES IN EQUITY

For the year ended 31st March, 20X2
A) EQUITY SHARE CAPITAL
Balance Rs.
As at 31st March, 20X1-
Changes in equity share capital during the year 1,00,000
As at 31st March, 20X2 1,00,000

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B) OTHER EQUITY
Reserves & Surplus
Retained Earnings Rs.
As at 31st March, 20X1-
Profit for the year 2,44,500
Other comprehensive income for the year 700
Total comprehensive income for the year 2,45,200
Less: Dividend on equity shares (refer note – 4) -
As at 31st March, 20X2 2,45,200

DISCLOSURE FORMING PART OF FINANCIAL STATEMENTS:

Proposed dividend on equity shares is subject to the approval of the shareholders of the company at the
annual general meeting and not recognized as liability as at the Balance Sheet date. (Refer note 4)
Notes:
1) Current investment are held for the purpose of trading. Hence, it is a financial asset classified as FVTPL.
Any gain in its fair value will be recognised through profit or loss. Hence, Rs. 20,000 (Rs. 50,000 – Rs.
30,000) increase in fair value of financial asset will be recognised in profit and loss. However, it will
attract deferred tax liability on increased value (Refer W.N).
2) Assets for which the future economic benefit is the receipt of goods or services, rather than the right to
receive cash or another financial asset, are not financial assets.
3) Liabilities for which there is no contractual obligation to deliver cash or other financial asset to another
entity, are not financial liabilities.
4) As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared after the reporting period
but before the financial statements are approved for issue, the dividends are not recognized as a liability
at the end of the reporting period because no obligation exists at that time. Such dividends are disclosed
in the notes in accordance with Ind AS 1, Presentation of Financial Statements.
5) Other current financial liabilities:

Rs.
Balance of other current liabilities as per financial statements 45,000
Less: Dividend declared for FY 20X1 – 20X2 (Note – 4) (15,000)
Reclassification of government statuary dues payable to ‘other current liabilities’ (15,000)
Closing balance 15,000

Working Note:
Calculation of deferred tax on temporary differences as per Ind AS 12 for financial year 20X1 – 20X2
Item Carrying Tax Base Difference DTA / DTL
amount Rs. (Rs.) Rs. @ 30% Rs.
Property, Plant and Equipment 1,00,000 80,000 20,000 6,000-DTL
Pre-incorporation expenses Nil 24,000 24,000 7,200-DTA
Current Investment 50,000 30,000 20,000 6,000-DTL
Net DTL 4,800-DTL

QUESTION 166: (MTP May’23)

([Link].12 – Question Bank )
Master Creator Private Limited (a subsidiary of listed company) is an Indian company to whom Ind AS are
applicable. Following draft balance sheet is prepared by the accountant for year ending 31st March 20X2.
Balance Sheet of Master Creator Private Limited as at 31st March, 20X2

Particulars Amount (Rs.)

ASSETS
Non-Current Assets
Property, plant and equipment 85,37,500
Financial Assets
Other financial assets (Security deposits) 4,62,500
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Other non-current assets (capital advances) 17,33,480

Deferred tax assets 2,54,150
Current Assets
Trade Receivables 7,25,000
Inventories 5,98,050
Financial assets
Investments 55,000
Other Financial Assets 2,17,370
Cash and Bank Balances 1,16,950
TOTAL 1,27,00,000
EQUITY AND LIABILITIES
Equity Share Capital 10,00,000
Other Equity 25,00,150
Non-Current Liabilities
Deferred tax liabilities 4,74,850
Borrowings 64,00,000
Long Term Provisions 5,24,436
Current Liabilities
Financial Liabilities
Other financial Liabilities 2,00,564
Trade Payables 6,69,180
Current Tax Liabilities 9,30,820
TOTAL 1,27,00,000

Additional Information:
1. On 1st April 20X1, 8% convertible loan with a nominal value of ₹ 64,00,000 was issued by the entity. It is
redeemable on 31st March 20X5 also at par. Alternatively, it may be converted into equity shares on the
basis of 100 new shares for each ₹ 200 worth of loan.
An equivalent loan without the conversion option would have carried interest at 10%. Interest of ₹ 5,12,000
has already been paid and included as a finance cost.
Present Value (PV) rates are as follows:

Year End @ 8% @ 10%

1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
4 0.73 0.68

2. After the reporting period, the board of directors have recommended dividend of ₹ 50,000 for the year
ending 31st March, 20X1. However, the same has not been yet accounted by the company in its financials.

3. 'Other current financial liabilities' consists of the following:

Particulars Amount (₹)
Wages payable 21,890
Salary payable 61,845
TDS payable 81,265
Interest accrued on trade payables 35,564

4. Property, Plant and Equipment consists following items:

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

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

Particulars Amount (₹)
Interest accrued on bank deposits 57,720
Prepaid expenses 90,000
Royalty receivable from dealers 69,650

6. Current Investments consist of securities held for trading which are carried at fair value through profit &
loss. Investments were purchased on 1st January,20X2 at ₹ 55,000 and accordingly are shown at cost as
at 31st March 20X2. The fair value of said investments as on 31st March 20X2 is ₹ 60,000.
7. Trade payables and Trade receivables are due within 12 months.
8. There has been no changes in equity share capital during the year.
9. Entity has the intention to set off a deferred tax asset against a deferred tax liability as they relate to
income taxes levied by the same taxation authority and the entity has a legally enforceable right to set off
taxes.
10. Other Equity consists retained earnings only. The opening balance of retained earnings was ₹ 21,25,975
as at 1st April 20X1.
11. No dividend has been actually paid by company during the year.
12. Assume that the deferred tax impact, if any on account of above adjustments is correctly calculated in
financials.
Being Finance & Accounts manager, you are required to identify the errors and misstatements if any in the
balance sheet of Master Creator Private Limited and prepare corrected balance sheet with details on the face
of the balance sheet i.e. no need to prepare notes to accounts, after considering the additional information.
Provide necessary explanations/workings for the treated items, wherever necessary.

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

Particulars Working/ Note (₹)

reference
ASSETS
Non-current assets
Property, plant and equipment 1 49,87,750
Capital work-in-progress 2 20,01,600
Investment Property 3 15,48,150
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 4 17,33,480
Current assets
Inventories 5,98,050
Financial assets
Investments (55,000 + 5,000) 5 60,000
Trade receivables 6 7,25,000
Cash and cash equivalents 7 1,16,950
Other financial assets 8 1,27,370
Other current assets (Prepaid expenses) 9 90,000
TOTAL ASSETS 1,24,50,850
EQUITY AND LIABILITIES
Equity
Equity share capital A 10,00,000
Other equity B 28,44,606
Non-current liabilities
Financial liabilities
8% Convertible loan 11 60,60,544
Long term provisions 5,24,436
Deferred tax liability 12 2,20,700

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Current liabilities
Financial liabilities
Trade payables 13 6,69,180
Other financial liabilities 14 1,19,299
Other current liabilities (TDS payable) 15 81,265
Current tax liabilities 9,30,820
TOTAL EQUITY AND LIABILITIES 1,24,50,850

Statement of changes in equity

For the year ended 31st March, 20X2
A. Equity Share Capital
Balance (₹)
As at 31st March, 20X1 10,00,000
Changes in equity share capital during the year
As at 31st March, 20X2 10,00,000

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

Disclosure forming part of Financial Statements:

Proposed dividend on equity shares is subject to the approval of the shareholders of the company at the
annual general meeting and not recognized as liability as at the Balance Sheet date. (Note 9)

Notes/ Workings: (for adjustments/ explanations)

1. Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of
goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used
during more than one period. Therefore, the items of PPE are Buildings (₹ 37,50,250) and Vehicles (₹
12,37,500), since those assets are held for administrative purposes.
2. Property, plant and equipment which are not ready for intended use as on the date of Balance Sheet are
disclosed as "Capital work-in-progress". It would be classified from PPE to Capital work-in-progress.
3. Investment property is property (land or a building—or part of a building—or both) held (by the owner or
by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:
(a) Use in the production or supply of goods or services or for administrative purposes; or
(b) Sale in the ordinary course of business.
Therefore, Land held for capital appreciation should be classified as Investment property rather than
PPE.
4. Assets for which the future economic benefit is the receipt of goods or services, rather than the right to
receive cash or another financial asset, are not financial assets.
5. Current investments here are held for the purpose of trading. Hence, it is a financial asset classified as
FVTPL. Any gain in its fair value will be recognised through profit or loss. Hence, ₹ 5,000 (60,000 – 55,000)
increase in fair value of financial asset will be recognised in profit and loss.
6. A contractual right to receive cash or another financial asset from another entity is a financial asset.
Trade receivables is a financial asset in this case and hence should be reclassified.
7. Cash is a financial asset. Hence it should be reclassified.
8. Other current financial assets:
Particulars Amount (₹)
Interest accrued on bank deposits 57,720
Royalty receivable from dealers 69,650
Total 1,27,370

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Prepaid expenses does not result into receipt of any cash or financial asset. However, it results into future
goods or services. Hence, it is not a financial asset.

9. As per Ind AS 10, 'Events after the Reporting Period', If dividends are declared after the reporting period
but before the financial statements are approved for issue, the dividends are not recognized as a liability
at the end of the reporting period because no obligation exists at that time. Such dividends are disclosed
in the notes in accordance with Ind AS 1, Presentation of Financial Statements.
10. 'Other Equity' cannot be shown under 'Non-current liabilities'. Accordingly, it is reclassified under
'Equity'.

11. There are both 'equity' and 'debt' features in the instrument. An obligation to pay cash i.e. interest at
8% per annum and a redemption amount will be treated as 'financial liability' while option to convert
the loan into equity shares is the equity element in the instrument. Therefore, convertible loan is a
compound financial instrument.

Calculation of debt and equity component and amount to be recognised in the books:
S. No Year Interest Discounting Amount
amount @ 8% factor @ 10%
Year 1 20X2 5,12,000 0.91 4,65,920
Year 2 20X3 5,12,000 0.83 4,24,960
Year 3 20X4 5,12,000 0.75 3,84,000
Year 4 20X5 69,12,000 0.68 47,00,160
Amount to be recognised as a liability 59,75,040
Initial proceeds (64,00,000)
Amount to be recognised as equ 4,24,960

* In year 4, the loan note will be redeemed; therefore, the cash outflow would be ₹ 69,12,000 (₹ 64,00,000 +
₹ 5,12,000).
Presentation in the Financial Statements:
In Statement of Profit and Loss for the year ended on 31 March 20X2
Finance cost to be recognised in the Statement of Profit and Loss (59,75,040 x 10%) ₹ 5,97,504
Less: Already charged to the Statement of Profit and Loss (₹ 5,12,000)
Additional finance charge required to be recognised in the Statement of Profit and Loss ₹ 85,504

In Balance Sheet as at 31 March 20X2

Equity and Liabilities
Equity
Other Equity (8% convertible loan) 4,24,960
Non-current liability
Financial liability [8% convertible loan 60,60,544
– [(59,75,040+ 5,97,504– 5,12,000)]

12. Since entity has the intention to set off deferred tax asset against deferred tax liability and the entity
has a legally enforceable right to set off taxes, hence their balance on net basis should be shown as:
Particulars Amount (₹)
Deferred tax liability 4,74,850
Deferred tax asset (2,54,150)
Deferred tax liability (net) 2,20,700

13. A liability that is a contractual obligation to deliver cash or another financial asset to another entity is
a financial liability. Trade payables is a financial liability in this case.
14. 'Other current financial liabilities':
Particulars Amount (₹)
Wages payable 21,890
Salary payable 61,845

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Interest accrued on trade payables 35,564

Total 1,19,299

15. Liabilities for which there is no contractual obligation to deliver cash or other financial asset to another
entity, are not financial liabilities. Hence, TDS payable should be reclassified from 'Other current
financial liabilities' to 'Other current liabilities' since it is not a contractual obligation.

QUESTION 167: (NOV 19 EXAM)

([Link].15 – Question Bank)
Following are the Financial Statements of Abraham Ltd.:
Balance Sheet
Particulars Note As at 31stMarch,2019
No. (Rs in lakh)
EQUITY AND LIABILITIES:
Shareholders’ funds
Share capital (shares of Rs 10 each) 1,000
Reserves and surplus 1 2,400
Non-current liabilities
Long term borrowings 2 5,700
Deferred tax liabilities 3 400
Current liabilities
Trade payables 300
Short-term provisions 300
Other current liabilities 4 200
Total 10,300
ASSETS
Non-current assets
Fixed assets 5,000
Deferred tax assets 3 700
Current assets
Inventories 1,500
Trade receivables 5 1,100
Cash and bank balances 2,000
Total 10,300

Statement of Profit & Loss

Particular Note No. Year ended
31stMarch,2019 (Rs
inlakh)
Revenue from operations 6,000
Expenses:
Employee benefit expense 1,200
Operating costs 3,199
Depreciation 450
Total expenses 4,849
Profit before tax 1,151
Tax expense 201
Profit after tax 950

Notes to Accounts:
Note 1: Reserves and surplus (Rs in lakh)
Capital reserve 500
Surplus from P & L

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Opening balance 550

Additions 950 1,500
Reserve for foreseeable loss 400
Total 2,400

Note 2: Long-term borrowings

Term loan from bank 5,700
Total 5,700
Note 3: Deferred tax
Deferred tax asset 700
Deferred tax liability 400
Total 300
Note 4: Other current liabilities
Unclaimed dividends 10
Billing in advance 150
Other current liabilities 40
Total 200
Note 5: Trade Receivables
Considered good (outstanding within 6 months) 1,065
Considered doubtful (due from past 1 year) 40
Provision for doubtful debts (5)
Total 1,100

Additional information:
(i) Share capital comprises of 100 lakh shares of Rs 10each.
(ii) Term Loan from bank for Rs 5,700 lakh also includes interest accrued and due of Rs 700 lakh as on the
reporting date.
(iii) Reserve for foreseeable loss is created against a service contract due within 6months.
(iv) Inventory should be valued at cost Rs 1,500 lakh, NRV as on date is Rs1,200 lakh.
(v) Adividendof10%wasdeclaredbytheBoardofdirectorsofthecompany.
(vi) Accrued Interest income of Rs 300 lakh is not booked in the books of the company.
(vii) Deferred taxes related to taxes on income are levied by the same governing tax laws.
Identify and report the errors and misstatements in the above extracts and prepare corrected Balance Sheet
and Statement of Profit & Loss and where required the relevant notes to the accounts with explanations thereof.
SOLUTION
Following adjustments / rectifications are required to be done
1. Reserve for foreseeable loss for Rs 400 lakh, due within 6 months, should be a part of provisions. Hence
it needs to be regrouped. If it was also part of previous year’s comparatives, a note should be added in
the notes to account on the regrouping done this year.
2. Interest accrued and due of Rs 700 lakh on term loan will be a part of current liabilities.
Thus, it should be shown under the heading “Other Current Liabilities”.
3. As per Ind AS 2, inventories are measured at the lower of cost and net real is able value. The amount
of any write down of inventories to net realisable value is recognised as an expense in the period the
write-down occurs. Hence, the inventories should be valued at Rs 1,200 lakh and write down of Rs 300
lakh (Rs 1,500 lakh – Rs 1,200 lakh) will be added to the operating cost of the entity.
4. In the absence of the declaration date of dividend in the question, it is presumed that the dividend is
declared after the reporting date. Hence, no adjustment for the same is made in the financial year 2018-
2019. However, a note will be given separately in this regard (not forming part of item of financial
statements).
5. Accrued income will be shown in the Statement of Profit and Loss as ‘Other Income’ and as ‘Other
Current Asset’ in the Balance Sheet.
6. Since the deferred tax liabilities and deferred tax assets relate to taxes on income levied by the same
governing taxation laws, these shall be set off, in accordance with IndAS12. The net DTA of Rs 300 lakh
will be shown in the balance sheet.
7. As per Division II of Schedule III to the Companies Act, 2013, the Statement of Profit and Loss should
present the Earnings per Equity Share.
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8. In Ind AS, Assets are not presented in the Balance sheet as ‘Fixed Asset’; rather they are classified
under various categories of Non-current assets. Here, it is assumed as ‘Property, Plant and Equipment’.
9. The presentation of the notes to ‘Trade Receivables’ will be modified as per the requirements of Division
II of Schedule III.

Balance Sheet of Abraham Ltd. For the year ended 31stMarch, 2019
Note No. (Rs in lakh)
ASSETS
Non-current assets
Property, plant and equipment 5,000
Deferred tax assets 1 300
Current assets
Inventories 1,200
Financial assets
Trade receivables 2 1,100
Cash and cash equivalents 2,000
Others financial asset (accrued interest) 300
TOTAL 9,900
EQUITY AND LIABILITIES
Equity
Equity share capital 3 1,000
Other equity 4 2,000
Non-current liabilities
Financial liabilities
Long-term borrowings 5 5,000
Current liabilities
Financial liabilities
Trade payables 300
Others 6 710
Short-term provisions (300 + 400) 7 700
Other current liabilities 8 190
TOTAL 9,900

Statement of Profit and Loss of Abraham Ltd.

For the year ended 31stMarch, 2019
Note No. (Rs in
lakh)
Revenue from operations 6,000
Other income 300
Total income 6,300
Expenses
Operating costs 3,199
Change in inventories cost 9 300
Employee benefits expense 1,200
Depreciation 450
Total expenses 5,149
Profit before tax 1,151
Tax expense (201)
Profit for the period 950
Earnings per equity share
Basic 9.5
Diluted 9.5
Number of equity shares (face value of Rs 10 each) 100 lakh

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Statement of Changes in Equity of Abraham Ltd.

For the year ended 31stMarch, 2019
3. Equity Share Capital (Rs in lakh)
Balance at the Changes in Equity Balance at the end of
beginning of the share capital during the reporting period
reporting period the year

1,000 0 1,000
4. Other Equity (Rs in lakh)
Particulars Reserves & Surplus Total
Capital Retained
reserve Earnings
Balance at the beginning of the year 500* 550 1,050
Total comprehensive income for the year 950 950
Balance at the end of the year 500 1,500 2,000
*Note: Capital reserve given in the Note 1 of the question is assumed to be brought forward from the previous
year. However, alternatively, if it may be assumed as created during the year.

1. Deferred Tax (Rs in lakh)

Deferred Tax Asset 700
Deferred Tax Liability 400
300

2. Trade Receivables (Rs in lakh)

Trade receivables considered good 1,065
Trade receivables which have significant increase in credit 40
risk
Less: Provision for doubtful debts (5) 35
Total 1,100

5. Long Term Borrowings (Rs in lakh)

Term Loan from Bank (5,700 - 700) 5,000
Total 5,000

6. Other Financial Liabilities (Rs in lakh)

Unclaimed dividends 10
Interest on term loan 700
Total 710

7. Short-term provisions (Rs in lakh)

Provisions 300
Foreseeable loss against a service contract 400
Total 700

8. Other Current Liabilities (Rs in lakh)

Billing in Advance 150
Other 40
Total 190

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

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

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