CA FINAL

FR FULL
REVISION
PROF.RAHUL MALKAN

NOV 20 | MAY 21

[email protected]
rahulmalkan
www.rahulmalkan.com

rahulmalkan
rahulmalkan79
 INDEX
No. Chapter Name Page No.
Introduction to Indian Accounting
1. 1–5
Standard (IND AS)
IND AS 1 Presentation of Financial
2. 6 – 19
Statements
3. IND AS 2 – Inventories 20 – 26

4. IND AS 16 - Property, Plant and Equipment 27 – 38

5. IND AS 40 - Investment Property 39 – 47

6. IND AS 38 - Intangible Assets 48 – 57

IND AS 105 - Non Assets Current Held for
7. 58 – 66
Sale and Discontinued Operations
8. IND AS 23 - Borrowing Cost 67 – 75

9. IND AS 36 - Impairment of Assets 76 – 85

10. IND AS 41 - Agriculture 86 – 89

IND AS 21 - The Effect of changes in
11. 90 – 98
Foreign Exchange Rate
12. IND AS 7 - Cash Flow Statement 99 – 108

13. IND AS 113 - Fair Value Measurement 109 – 115

14. IND AS 108 - Operating Segments 116 – 123

15. IND AS 34 - Interim Financial Reporting 124 – 130

IND AS 8 - Accounting Policies, Changes
16. 131 – 138
in Accounting Estimates and Errors
No. Chapter Name Page No.

17. IND AS 10 - Events After Reporting Period 139 – 144

IND AS 20 - Accounting for Governor
18. Grants and Disclosure of Government 145 – 150
Assistance
19. IND AS 12 - Income Taxes 151 – 163

20. IND AS 24 - Related Party Disclosure 164 – 175

21. IND AS 33 - Earning per Share 176 – 187

22. IND AS 102 - Shared Based Payment 188 – 191

23. IND AS 19 - Employees Benefits 192 – 206

IND AS 37 - Provisions, Contingent
24. 207 – 215
Liabilities and Contingent Assets
25. IND AS 103 - Business combination 216 – 237
IND AS 110 - Consolidated Financial
26. 238 – 254
Statement
27. IND AS 111 - Joint arrangements 255 – 261
IND AS 28 - Investments in Associates and
28. 262 – 266
Joint Ventures
29. IND AS 27 – Separate Financial Statements 267 – 269
IND AS 32/107/109 - Financial Instruments
30. 270 – 274
– Part – I
IND AS 32/107/109 - Financial Instruments
30. 275 – 280
– Part – II
IND AS 32/107/109 - Financial Instruments
30. 281 – 289
– Part – III
No. Chapter Name Page No.

IND AS 32/107/109 - Financial Instruments

30. 290 – 299
– Part – IV
IND AS 32/107/109 - Financial Instruments
30. 300 – 303
– Part – V
IND AS 32/107/109 - Financial Instruments
30. 304 – 311
– Part – VI

31. IND AS 101 - First time Adoption 312 – 320

IND AS 115 - Revenue from contract with

32 321 – 336
customers
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

INTRODUCTION TO
CHAPTER - 1
INDIAN ACCOUTING
STANDARD (IND AS)

CHAPTER DESIGN

1. INTRODUCTION
2. NEED FOR CONVERGANCE
3. GOI – COMMITMENT TO IFRS CONVERGED IND AS
4. WHAT ARE INDIAN ACCOUNTING STANDARDS (IND AS)
5 KEY FEATURES OF IND AS
6. AS AND IND AS

Introduction to Indian Accounting Standard 1

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

1. INTRODUCTION :
In the present era of globalisation and liberalisation, the world has become an economic village.
The globalisation of the business world, the attendant structures and the regulations, which
support it, as well as the development of e-commerce make it imperative to have a single globally
accepted financial reporting system.

The use of different accounting frameworks in different countries, which require inconsistent
treatment and presentation of the same underlying economic transactions, creates confusion for
users of financial statements. This confusion leads to inefficiency in capital markets across the
world. Therefore, increasing complexity of business transactions and globalisation of capital
markets call for a single set of high quality accounting standards.

International Accounting Standards (IAS) (Upto April 2001) / International Financial Reporting
Standards (IFRS) (Collectively referred as IFRS) issued by International Accounting Standards
Board (IASB) since 1973 are now widely recognised as Global Accounting Standard.

Note : Standing Interpretation Committee (SIC) and International Financial Reporting

Interpretation Committee (IFRIC) are also part of IFRS.

2. NEED FOR CONVERGANCE TO IFRS :

1. Standardization
2. International capital Flow
3. Beneficial to regulators

3. GOVERNMENT OF INDIA - COMMITMENT TO IFRS CONVERGED IND AS :

Consistent, comparable and understandable financial reporting is essential to develop a robust
economy. With a view to achieve international benchmarks of financial reporting, the Institute of
Chartered Accountants of India (ICAI), as a proactive role in accounting, set out to introduce
Indian Accounting Standards (Ind AS) converged with the International Financial Reporting
Standards (IFRS). This endeavour of the ICAI is supported by the Government of India.

ROAD MAP TO IMPLEMENTATION OF IND AS

PHASE 1 PHASE 2 PHASE 3

• VOLUNTARY • MANDATORY • MANDATORY

• 1/4/2015 • 1/4/2016 • 1/4/2017

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PHASE 1 1st April 2015 or thereafter: Voluntary Basis for all companies
PHASE 2 1st April 2016: Mandatory Basis
A Companies listed / in process of listing on Stock Exchanges in India or
Outside India having net worth =/> 500 crore
B Unlisted Companies having net worth =/> 500 crore
C Parent, Subsidiary, Associate and Joint venture of above
PHASE 3 1st April 2017: Mandatory Basis
A All companies which are listed/or in process of listing inside or outside
India on Stock Exchanges not covered in Phase I (other than companies
listed on SME Exchanges)
B Unlisted companies having net worth =/> 250 crore
C Parent, Subsidiary, Associate and Joint venture of above

4. WHAT ARE INDIAN ACCOUNTING STANDARDS (IND AS) :

Indian Accounting Standards (Ind-AS) are the International Financial Reporting Standards (IFRS)
converged standards issued by the Central Government of India under the supervision and
control of Accounting Standards Board (ASB) of ICAI and in consultation with National Advisory
Committee on Accounting Standards (NACAS).

ASB is a committee under Institute of Chartered Accountants of India (ICAI) which consists of
representatives from government department, academicians, other professional bodies viz. icsi,
icai, representatives from ASSOCHAM, CII, FICCI, etc. National Advisory Committee on
Accounting Standards (NACAS) recommend these standards to the Ministry of Corporate Affairs
(MCA). MCA has to spell out the accounting standards applicable for companies in India.

The Ind AS are named and numbered in the same way as the corresponding International
Financial Reporting Standards (IFRS).

5. KEY FEATURES OF IND AS :

1. Principle Based Standard – they establish broad rules rather than dictating specific
treatments
2. Applicable to CFS and SFS
3. Substance over form
4. Rely more on Fair Valuation Approach and measurements based on Time Value of Money
5. Requires more disclosure of all the relevant information and assumption used.
6. Requires higher degree of judgement and estimates.

Introduction to Indian Accounting Standard 3

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

6. AS AND IND AS :

Ind AS
AS

No Ind AS Accounting Standards

1 Ind AS 101 : First-time Adoption of Indian No corresponding AS
Accounting Standards
2 Ind AS 102 : Share-based Payment No corresponding AS but, GN on accounting
for employee Share-based Payment
3 Ind AS 103 : Business Combinations AS 14 : Accounting for amalgamations
4 Ind AS 104 : Insurance Contracts No corresponding AS
5 Ind AS 105 : Non-current Assets Held for AS 24 : Discontinuing Operations
Sale and Discontinued Operations
6 Ind AS 106 : Exploration for and Evaluation No corresponding AS but, GN on accounting
of Mineral Resources for oil and gas producing companies
7 Ind AS 107 : Financial Instruments: AS 32 : Financial Instruments: Disclosures
Disclosures
8 Ind AS 108 : Operating Segments AS 17 : Segment reporting
9 Ind AS 109 : Financial Instruments AS 13 : Accounting for investments
AS 30 : Financial Instruments: Recognition
and Measurement
10 Ind AS 110 : Consolidated Financial AS 21 : Consolidated Financial Statements
Statements
11 Ind AS 111 : Joint Arrangements AS 27 : Financial Reporting of Interests in
Joint Ventures
12 Ind AS 112 : Disclosure of Interests in No corresponding AS
Other Entities
13 Ind AS 113 : Fair Value Measurement No corresponding AS
14 Ind AS 114 : Regulatory Deferral Accounts No corresponding AS
15 Ind AS 1 : Presentation of Financial AS 1 : Disclosure of accounting policies
Statements AS 5 : Net P/L, PPI and Change in estimates
16 Ind AS 2 : Inventories AS 2 : Valuation of Inventories
17 Ind AS 7 : Statement of Cash Flows AS 3 : Cash Flows Statement
18 Ind AS 8 : Accounting Policies, Changes in AS 5 : Net P/L, PPI and Change in estimates
Accounting Estimates and Errors
19 Ind AS 10 : Events after the Reporting AS 4 : Contingencies and events occurring
Period after balance sheet date
20 Ind AS 11 : Construction Contracts AS 7 : Construction Contracts
21 Ind AS 12 : Income Taxes AS 22 : Accounting for income Taxes

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 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

22 Ind AS 16 : Property, Plant and Equipment AS 6 : Depreciation

AS 10 : Accounting for fixed assets
23 Ind AS 17 : Leases AS 19 : Leases
24 Ind AS 115 : Revenue from contracts with AS 9 : Revenue Recognition
customer
25 Ind AS 19 : Employee Benefits AS 15 : Employee Benefits
26 Ind AS 20 : Accounting for Government AS 12 : Accounting for government grants
Grants and Disclosure of Government
Assistance
27 Ind AS 21 : The Effects of Changes in AS 11 : The Effects of Changes in Foreign
Foreign Exchange Rates Exchange Rates
28 Ind AS 23 : Borrowing Costs AS 16 : Borrowing Costs
29 Ind AS 24 : Related Party Disclosures AS 18 : Related Party Disclosures
30 Ind AS 27 : Separate Financial Statements AS 21 : Consolidated Financial Statements
31 Ind AS 28 : Investments in Associates and AS 23 : Accounting for Investments in
Joint Ventures Associates in Consolidated Fin Statements
32 Ind AS 29 : Financial Reporting in No corresponding AS
Hyperinflationary Economies
33 Ind AS 32 : Financial Instruments: AS 31 : Financial Instruments: Presentation
Presentation
34 Ind AS 33 : Earnings per Share AS 20 : Earnings per Share
35 Ind AS 34 : Interim Financial Reporting AS 25 : Interim Financial Reporting
36 Ind AS 36 : Impairment of Assets AS 28 : Impairment of Assets
AS 26 : Intangible Assets
37 Ind AS 37 : Provisions, Contingent AS 29 : Provisions, Contingent Liabilities and
Liabilities and Contingent Assets Contingent Assets
38 Ind AS 38 : Intangible Assets AS 26 : Intangible Assets
39 Ind AS 40 : Investment Property AS 13 : Accounting for investments
40 Ind AS 41 : Agriculture No corresponding AS

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

Introduction to Indian Accounting Standard 5

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 1
CHAPTER - 2
PRESENTATION OF
FINANCIAL STATEMENTS

CHAPTER DESIGN

1. INTRODUCTION
2. OBJECTIVE
3. SCOPE
4. DEFINITIONS
5. GENERAL FEATURES OF FINANCIAL STATEMENT
6. STRUCTURE AND CONTENT

6 IND AS 1 – Presentation of Financial Statements

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1. INTRODUCTION
Ind AS 1 is a basic Standard, which prescribes the overall requirements for the presentation of
financial statements and guidelines for their structure, i.e., components of financial statements,
viz., balance sheet, statement of profit and loss, statement of cash flows and notes comprising
significant accounting policies, etc. Further, the Standard prescribes the minimum disclosures
that are to be made in the financial statements and explains the general features of the financial
statements. The presentation requirements prescribed in the Standard are supplemented by the
recognition, measurement and disclosure requirements set out in other Ind AS for specific
transactions and other events.

2. OBJECTIVE
This standard prescribes the basis for presentation of general purpose financial statements to
ensure comparability a) with the entity’s financial statements of previous periods and b) with the
financial statements of other entities. It sets out overall requirements for the presentation of
financial statements, guidelines for their structure and minimum requirements for their content.

3. SCOPE
• This standard applies to all types of entities including
(a) those that present consolidated financial statements in accordance with Ind AS 110
‘Consolidated Financial Statements’
(b) those that present separate financial statements in accordance with Ind AS 27
‘Separate Financial Statements’.
• This standard does not apply to Interim Financial statements prepared in accordance with
Ind AS 34 except for para 15 to 35 of Ind AS 1.

4. DEFINITIONS :
1. General purpose financial statements :
General purpose financial statements (referred to as ‘financial statements’) are those
intended to meet the needs of users who are not in a position to require an entity to
prepare reports tailored to their particular information needs
2. Impracticable :
Impracticable Applying a requirement is impracticable when the entity cannot apply it
after making every reasonable effort to do so.
3. Indian Accounting Standards (Ind AS) :
Indian Accounting Standards (Ind AS) are Standards prescribed under Section 133 of the
Companies Act, 2013.

IND AS 1 – Presentation of Financial Statements 7

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

4. Material :
Material Omissions or misstatements of items are material if they could, individually or
collectively, influence the economic decisions that users make on the basis of the financial
statements.
5. Notes :
Notes contain information in addition to that presented in the balance sheet (including
statement of changes in equity which is a part of the balance sheet), statement of profit
and loss and statement of cash flows.
6. Owners :
Owners are holders of instruments classified as equity
7. Profit or loss :
Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income
8. Reclassification adjustments :
Reclassification adjustments are amounts reclassified to profit or loss in the current period
that were recognised in other comprehensive income in the current or previous periods.
9. Total comprehensive income :
Total comprehensive income is the change in equity during a period resulting from
transactions and other events, other than those changes resulting from transactions with
owners in their capacity as owners.
Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other
comprehensive income’
10. Other comprehensive income :
Other comprehensive income comprises items of income and expense (including
reclassification adjustments) that are not recognised in profit or loss as required or
permitted by other Ind AS.

The components of Other Comprehensive Income include the following:

No. Components Reference
1 Changes in revaluation surplus Ind AS 16
2 Remeasurements of defined benefit plans Ind AS 19
3 Gains and losses arising from translating the financial statements of Ind AS 21
a foreign operation
4 Gains and losses from investments in equity instruments Ind AS 109
designated at fair value through other comprehensive income
5 Gains and losses on financial assets measured at fair value through Ind AS 109
other comprehensive income

8 IND AS 1 – Presentation of Financial Statements

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6 The effective portion of gains and losses on hedging instruments in Ind AS 109
a cash flow hedge and the gains and losses on hedging instruments
that hedge investments in equity instruments measured at fair
value through other comprehensive income
7 For particular liabilities designated as at fair value through profit or Ind AS 109
loss, the amount of the change in fair value that is attributable to
changes in the liability’s credit risk
8 Changes in the value of the time value of options when separating Ind AS 109
the intrinsic value and time value of an option contract and
designating as the hedging instrument only the changes in the
intrinsic value
9 Changes in the value of the forward elements of forward contracts IND AS 109
when separating the forward element and spot element of a
forward contract and designating as the hedging instrument only
the changes in the spot element, and changes in the value of the
foreign currency basis spread of a financial instrument when
excluding it from the designation of that financial instrument as the
hedging instrument

5. GENERAL FEATURES OF FINANCIAL STATEMENTS

True and Fair

View and
compliance with
IND AS
Going
consistency
Concern

comparative Accrual Basis of

information Accounting

frequency of Materiality and

reporting Aggregation

offsetting

IND AS 1 – Presentation of Financial Statements 9

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

1. Presentation of True and Fair View and compliance with Ind AS

An explicit and unreserved statement : An entity whose financial statements comply with
Ind AS shall make an explicit and unreserved statement of such compliance in the notes.

Note : Departure from the Requirements of an Ind AS — Whether Permissible?

In the extremely rare circumstances in which management concludes that compliance with
a requirement in an Ind AS would be so misleading that it would conflict with the objective
of financial statements set out in the Framework, the entity shall depart from that
requirement if the relevant regulatory framework requires, or otherwise does not prohibit,
such a departure.

Question 1
An entity prepares its financial statements that contain an explicit and unreserved
statement of compliance with Ind AS. However, the auditor’s report on those financial
statements contains a qualification because of disagreement on application of one
Accounting Standard. In such case, is it acceptable for the entity to make an explicit and
unreserved statement of compliance with Ind AS?

Solution :
Yes, it is possible for an entity to make unreserved and explicit statement of compliance
with IND AS, even though the auditors report contains a qualification because of
disagreement on application of accounting standard.

2. Going Concern :
If management has significant doubt of the entity’s ability to continue as a going concern,
the uncertainties should be disclosed.

3. Accrual basis of accounting

4. Materiality and aggregation

5. Offsetting :
An entity shall not offset assets and liabilities or income and expenses, unless required or
permitted by an Ind AS.

10 IND AS 1 – Presentation of Financial Statements

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Question 2 :
Is offsetting of revenue against expenses, permissible in case of a company acting as an
agent and having sub-agents, where commission is paid to sub-agents from the
commission received as an agent?

Solution :
Net presentation would not be appropriate. The commission received should be shown as
revenue and commission paid should be shown as expense.

6. Frequency of reporting :
An entity shall present a complete set of financial statements (including comparative
information) at least annually.

7. Comparative information :
• An entity shall present, as a minimum:
o 2 Balance Sheets
o 2 Statement of Profit and Loss
o 2 Statement of Cash Flows
o 2 Statement of Changes in Equity and
o Related Notes.
• When an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements or when it reclassifies
items in its financial statements, it shall present, as a minimum, three balance
sheets, two of each of the other statements, and related notes. An entity presents
balance sheets as at
o the end of the current period,
o the end of the previous period (which is the same as the beginning of the
current period), and
o the beginning of the earliest comparative period.

8. Consistency of presentation

IND AS 1 – Presentation of Financial Statements 11

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

6. STRUCTURE AND CONTENT

DIVISION II OF THE SCHEDULE III TO THE COMPANIES ACT, 2013

FINANCIAL FINANCIAL
DIVISION I

DIVISION II
STATEMENTS STATEMENTS
APPLICABLE TO THOSE APPLICABLE TO ALL THE
COMPANIES WHO ARE COMPANIES REQUIRED
REQUIRED TO PREPARE TO FOLLOW IND AS
THEIR STATEMENT AS
PER EXISTING
ACCOUNTING
STANDARDS

FINANCIAL STATEMENTS – DIV II

FINANCIAL
STATEMENTS

STATEMENT STATEMENT
BALANCE CASH FLOW
FOR PROFIT FOR CHANGES NOTES
SHEET STATEMENT
AND LOSS IN EQUITY

PROFIT AND OTHER

LOSS COMPREHENS
ACCOUNT IVE INCOME

PART 1 – BALANCE SHEET :

Particulars Note Current Previous
No Year Year
Assets
1. Non Current Assets
a. Property, Plant and Equipment XX XX
b. Capital Work in Progress XX XX
c. Investment property XX XX
d. Goodwill XX XX

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e. Other Intangible Assets XX XX

f. Intangible Assets Under Development XX XX
g. Biological Assets other than bearer plants XX XX
h. Financial Assets
i) Investments XX XX
ii) Trade Receivables XX XX
iii) Loans XX XX
iv) Others (to be specified) XX XX
i. Deferred Tax Assets (Net) XX XX
j. Other Non-Current Assets XX XX

Current Asset
a) Inventories XX XX
2. b) Financial Assets
i) Investments XX XX
ii) Trade Receivables XX XX
iii) Cash and Cash Equivalents XX XX
iv) Bank Balance XX XX
v) Others (to be Specified) XX XX
c) Current Tax Assets (Net) XX XX
d) Other Current Assets XX XX
TOTAL XX XX

Particulars Note Current Previous

No Year Year
Equity and Liabilities
Equity
a. Equity Share Capital XX XX
b. Other Equity XX XX

Liabilities
1. Non-current Liability
a. Financial Liabilities
i) Borrowings XX XX
ii) Trade Payable XX XX
iii) Other financial Liabilities XX XX
(to be specified)

IND AS 1 – Presentation of Financial Statements 13

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b. Provisions XX XX
c. Deferred tax Liabilities XX XX
d. Other non – current liabilities XX XX
2. Current Liabilities
a. Financial Liabilities
i) Borrowings XX XX
ii) Trade Payable XX XX
iii) Other financial Liabilities XX XX
(to be specified)
b. Provisions XX XX
c. Current tax Liabilities XX XX
d. Other non – current liabilities XX XX
TOTAL XX XX

Current and Non-Current Assets :

An entity shall classify an asset as current when:
(a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the reporting period; or
(d) the asset is cash or a cash equivalent (as defined in Ind AS 7) unless the asset is restricted
from being exchanged or used to settle a liability for at least twelve months after the
reporting period.
An entity shall classify all other assets as non-current.

Current and Non-current Liabilities :

An entity shall classify a liability as current when:
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting period; or
(d) it does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period. Terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
An entity shall classify all other liabilities as non-current.

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Operating Cycle :
The operating cycle of an entity is the time between the acquisition of assets for processing and
their realisation in cash or cash equivalents. When the entity’s normal operating cycle is not
clearly identifiable, it is assumed to be twelve months.

Question 3 :
Inventory or trade receivables of X Ltd. are normally realised in 15 months. How should
X Ltd. classify such inventory/trade receivables: current or non-current if these are
expected to be realised within 15 months?

Solution :
These should be classified as current.

Question 4 :
B Ltd. produces aircrafts. The length of time between first purchasing raw materials to
make the aircrafts and the date the company completes the production and delivery is 9
months. The company receives payment for the aircrafts 7 months after the delivery. (a)
What is the length of operating cycle? (b) How should it treat its inventory and debtors?

Solution :
1. The length of operating cycle is 16 months
2. Inventory and debtors should be classified as current.

Question 5 :
Entity A has two different businesses, real estate and manufacture of passenger vehicles.
With respect to the real estate business, the entity constructs residential apartments for
customers and the normal operating cycle is three to four years. With respect to the
business of manufacture of passenger vehicles, normal operating cycle is 15 months.
Under such circumstance where an entity has different operating cycles for different
types of businesses, how classification into current and non-current be made?

Solution :
It is advisable to disclose the operating cycle relevant to different types of business and
classify the items as current and non current based on its respective operating cycle.

IND AS 1 – Presentation of Financial Statements 15

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Question 6 :
An entity has taken a loan facility from a bank that is to be repaid within a period of 9
months from the end of the reporting period. Prior to the end of the reporting period,
the entity and the bank enter into an arrangement, whereby the existing outstanding
loan will, unconditionally, roll into the new facility which expires after a period of 5
years.
(a) How should such loan be classified in the balance sheet of the entity?
(b) Will the answer be different if the new facility is agreed upon after the end of the
reporting period?
(c) Will the answer to (a) be different if the existing facility is from one bank and the
new facility is from another bank?
(d) Will the answer to (a) be different if the new facility is not yet tied up with the
existing bank, but the entity has the potential to refinance the obligation?

Solution :
a) Non current
b) Yes answer would defer, it shall now be classified as current
c) Yes – Current
d) Yes – Current

PART 2 – STATEMENT FOR CHANGES IN EQUITY :

The Statement of Changes in Equity has been introduced on the lines of IFRS. An SOCE is prepared
in order to reconcile the various components of equity in the balance sheet for any period.
A. Equity share capital
B. Other Equity
a. Share Application money pending Allotment
b. Equity Component of Compound Financial Instrument
c. Reserves and Surplus
i. Capital Reserve
ii. Security Premium Reserve
iii. Other Reserve (to be Specified)
iv. Retained Earnings
d. Debt instrument through other comprehensive income
e. Equity instrument through other comprehensive income
f. Effective portion of cash flow hedges
g. Revaluation Reserve
h. Exchange difference on translating the financial statements of a foreign operations

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i. Other items of other comprehensive income

j. Money received against share warrant

PART 3 – STATEMENT OF PROFIT AND LOSS ACCOUNT :

Particulars Note Current Previous

No Year Year
I Revenue from operations XX XX
II Other income XX XX
III Total Income (I + II) XX XX
IV Expenses
Cost of Material Consumed XX XX
Purchase of Stock in Trade XX XX
Changes in inventory of Finished goods, Stock in
trade and work in progress XX XX
Employee benefit Expense XX XX
Finance Cost XX XX
Depreciation and Amortisation Expense XX XX
Other Expense XX XX
TOTAL EXPENSES (IV) XX XX
V Profit / Loss before exceptional Items and Tax XX XX
VI Exceptional Items XX XX
VII Profit Before Tax XX XX
VIII Tax Expense
1. Current Tax XX XX
2. Deferred Tax XX XX
IX Profit / Loss for the period from continuing
operations XX XX
X Profit / Loss from discontinued operations XX XX
XI Tax expense from discontinued operations XX XX
XII Profit / Loss from discontinued operations (After XX XX
Tax)
XIII Profit / Loss for the period (IX + XII) XX XX
XIV Other comprehensive Income

IND AS 1 – Presentation of Financial Statements 17

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A (I) Items that will not be reclassified to profit XX XX

and loss Account XX XX
(II) Income tax relating to above items
B (I) Items that will be reclassified to profit and XX XX
loss Account XX XX
(II) Income tax relating to the above items
XV Total comprehensive income for period (XIII + XIV) XX XX
XVI Earnings per share (for continuing operations)
1. Basic XX XX
2. Diluted XX XX
XVII Earnings per share (for discontinuing operations)
1. Basic XX XX
2. Diluted XX XX
XVIII Earnings per share (for continuing and
discontinuing operations)
1. Basic XX XX
2. Diluted XX XX

Other Comprehensive Income :

1. It contains generally unrealised gains and losses arising from re-measurements of Assets
and Liabilities
2. On Realisation, with few exceptions, gains and losses are recognised in profit or loss
section
3. Exceptions
a. Sale of revalued assets
b. Equity instruments opted to be measured at fair value through OCI

At outset, it is worthwhile to note that Total Comprehensive Income is different from Other
Comprehensive Income and can be better understood as follows:

PROFIT /
LOSS FOR
OCI TCI
THE
PERIOD

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PART 4 – CASH FLOW STATEMENT :

Alike under the IGAAP, Schedule III for Ind AS does not provide for a format of the Cash Flow
Statement and requires that the statement be prepared in accordance with the relevant Ind AS.
However, in a sharp contrast to the AS 3 on Cash Flow Statements, Ind AS 7 on Cash Flow
Statements Statements “encourages” the use of Direct Method instead of the Indirect Method
for preparing the Cash Flow Statements but provides no format for the preparation of the same.

PART 5 – NOTES :
Notes containing information in addition to that which is presented in the financial statements
would be provided, including, where required, narrative descriptions or disaggregation of items
recognised in the financial statements and information about items that do not qualify for such
recognition.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 1 – Presentation of Financial Statements 19

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 2
CHAPTER - 3
INVENTORIES

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. DEFINITIONS
4. MEASUREMENT OF INVENTORIES
5. TECHNIQUE OF INVENTORIES VALUATION
6. RECOGNITION AS AN EXPENSE
7. DISCLOSURE

20 IND AS 2 – Inventories
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

1. INTRODUCTION :
The objective of this Standard is to prescribe the accounting treatment for inventories. This
Standard provides the guidance for
- determining the cost of inventories
- subsequent recognition as an expense, including any write-down to net realisable value.

2. SCOPE :
• This Standard is applicable to all inventories, except :
a) financial instruments (to be accounted under Ind AS 32, Financial Instruments:
Presentation and Ind AS 109, Financial Instruments);
b) biological assets (i.e. living animals or plants) related to agricultural activity and
agricultural produce at the point of harvest (to be accounted under Ind AS 41,
Agriculture);
• This Standard does not apply to the measurement of inventories held by :
a) Producers of agricultural and forest products, agricultural produce after harvest,
and minerals and mineral products, to the extent that they are measured at net
realisable value in accordance with well-established practices in those industries.
b) Commodity broker-traders who measure their inventories at fair value less costs to
sell.

3. DEFINITIONS :
1. Inventories :
Inventories are Assets

Inventories are Assets

in the form of
materials or
supplies to be
held for sale in in the process of
consumed in the
the ordinary production for
production
course of business such sale
process or in the
rendering of
services.
2. Net realisable value :
Net realisable value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.

IND AS 2 – Inventories 21
[CA – Final – Financial Reporting] | Prof.Rahul Malkan

4. MEASUREMENT OF INVENTORIES

“Inventories shall be measured at the lower of cost and net realisable value.”

Net
At lower of COST Realisable
Value

Cost of Inventories
Cost of Inventories comprises:
a) all costs of purchase;
b) costs of conversion; and
c) other costs incurred in bringing the inventories to their present location and condition.

A) Cost of Purchase :
The costs of purchase of inventories include:
a) the purchase price,
b) import duties and other taxes (other than those subsequently recoverable by the
entity from the taxing authorities),
c) transport, handling and
d) other costs directly attributable to the acquisition of finished goods, materials and
services.
Any trade discounts, rebates and other similar items are deducted in determining the costs
of purchase of inventory.

B) Cost of Conversion :
The costs of conversion of inventories include costs directly related to the units of
production, such as:
a) direct material, direct labour and other direct costs; and
b) a systematic allocation of fixed and variable production overheads that are incurred
in converting materials into finished goods.
Note : Fixed overheads should be absorbed at budgeted units or actual units whichever is
less. The inefficiency should be charged to Profit and Loss A/c

22 IND AS 2 – Inventories
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

CQuestion 1 :
Pluto ltd. has a plant with the normal capacity to produce 5,00,000 unit of a product per
annum and the expected fixed overhead is Rs.15,00,000. Fixed overhead on the basis of
normal capacity is Rs.3 per unit (15,00,000/5,00,000). How shall u treat Fixed overheads
under following circumstances
a. Actual production is 5,00,000 units
b. Actual production is 3,75,000 units
c. Actual production is 7,50,000 units.

Solution :
15,00,000
Actual cost per unit = = Rs. 3 per unit
5,00,000
A. Actual Production 5,00,000 units which is equal to Budgeted production.
15,00,000
Fixed overheads shall be absorbed at = = Rs. 3 per unit
5,00,000

B. Actual production is 3,75,000 which is less than the budgeted production

Fixed overheads shall be absorbed at Rs. 3 per unit, i.e 3,75,000 x 3 = 11,25,000. The
difference Rs. 3,75,000 is inefficiency and should be charged to Profit and loss A/c.

C. Actual production is 7,50,000 which is more than the actual production and
15,00,000
therefore overheads shall be absorbed at = Rs. 2 per unit
7,50,000

C) Other costs :
Other costs are included in the cost of inventories only to the extent that they are incurred
in bringing the inventories to their present location and condition.

Exclusions :
a) abnormal amounts of wasted materials, labour or other production costs;
b) storage costs, unless those costs are necessary in the production process before a
further production stage;
c) administrative overheads that do not contribute to bringing inventories to their
present location and condition; and
d) selling costs.

IND AS 2 – Inventories 23
[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Allocation of cost to joint products and by-products :

• A production process may result in more than one product being produced
simultaneously. This is the case, for example, when joint products are produced or
when there is a main product and a by-product.
• When the costs of conversion of each product are not separately identifiable, they
are allocated between the products on a rational and consistent basis. For example,
on the relative sales value of each product either at the stage in the production
process when the products become separately identifiable, or at the completion of
production.

Question 2 :
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
31-03-2011
Raw Material 14500 150000 MP I-5,000 units 250
Wages - 90000 MP II-4,000 units 100
Fixed Overhead - 65000 BP- 2,000 units
Variable Overhead - 50000
Average market price of MP1 and MP2 is Rs 60 per unit and Rs 50 per unit respectively,
by- product is sold @ Rs 20 per unit. There is a profit of Rs 5,000 on sale of by-product
after incurring separate processing charges of Rs.8,000 and packing charges of Rs 2,000,
Rs 5,000 was realised from sale of scrap.
Required: Calculate the value of closing stock of MP1 and MP2 as on 31-03-2011.

Solution :
1. Total Cost = 1,50,000 + 90,000 + 65,000 + 50,000 = 3,55,000
2. Scrap = 5,000
3. By – product = 2,000 × 20 = 40,000 – 8,000 – 2,000 = 30,000
4. Net cost = 3,55,000 – 5,000 – 30,000 = 3,20,000
5. Net cost allocated in sales value MP 1 MP 2
Units Produced 5,000 4,000
X Selling price 60 50

24 IND AS 2 – Inventories
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Sales value 3,00,000 2,00,000

Ratio 3 : 2
Cost (3,20,000 in ratio 3 : 2) 192,000 1,28,000
CPU (cost / Units) 38.4 32
Closing stock (units) 250 100
Closing Stock Value (Units x CPU) 9600 3200

5. TECHNIQUES OF INVENTORY VALUATION

6. RECOGNITION AS AN EXPENSE :
The amount of inventories recognised as an expense in the period will generally be:
a) carrying amount of the inventories sold in the period in which related revenue is
recognised; and
b) the amount of any write-down of inventories to net realisable value and all losses of
inventories shall be recognised as an expense in the period the write-down or loss occurs

IND AS 2 – Inventories 25
[CA – Final – Financial Reporting] | Prof.Rahul Malkan

7. DISCLOSURE :
1) Accounting policies
2) Analysis of carrying amount
3) Inventories carried at fair value less costs to sell
4) Amounts recognised in profit or loss
5) Inventories pledged as security

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

26 IND AS 2 – Inventories
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 16
CHAPTER - 4
PROPERTY, PLANT &
EQUIPMENT

CHAPTER DESIGN

1. OBJECTIVE
2. SCOPE
3. DEFINITIONS
4. RECOGNITION
5. MEASUREMENT
6. DEPRECIATION
7. IMPAIRMENT
8. DERECOGNITION

IND AS 16 – Property, Plant & Equipment 27

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

1. OBJECTIVE :
The objective of this Standard is to prescribe the accounting treatment for property, plant and
equipment. The principal issues in accounting for property, plant and equipment
- recognition of the assets,
- measurements (initial and subsequent)
- depreciation charges
- impairment losses and
- derecognitions

2. SCOPE :
• This Standard shall be applied in accounting for property, plant and equipment except
when another Standard requires or permits a different accounting treatment.
• This Standard does not apply to:
A. PPE classified as held for sale (as per Ind AS 105)
B. Biological assets related to agricultural activity other than bearer plants (Ind AS 41)
C. Recognition and measurement of exploration and evaluation assets (Ind AS 106)
D. Mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources

3. DEFINITIONS :
1. Property, Plant and Equipment :

Held for use in production or

supply/ Rental /
Administrative purposes

Expected to
Tangible Property, used during
Plant and more than
Equipment one period

2. A bearer plant is a living plant that:

(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.

28 IND AS 16 – Property, Plant & Equipment

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

3. Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.
4. Cost is the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction or,
where applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other Indian Accounting Standards, e.g. Ind
AS 102, Share based Payment.
5. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its
residual value.
6. Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life.
7. Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. (See Ind
AS 113, Fair Value Measurement.)
8. An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
9. Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in
use.
10. The residual value of an asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, if the
asset were already of the age and in the condition expected at the end of its useful life.
11. Useful life is:
a) the period over which an asset is expected to be available for use by an entity; or
b) the number of production or similar units expected to be obtained from the asset
by an entity.

4. RECOGNITION :
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only
if:

it is probable that future economic

the cost of the item can be
benefits associated with the item will
measured reliably.
flow to the entity;

Note :
1. Items such as spare parts, stand-by equipment and servicing equipment are recognised in
accordance with this Ind AS when they meet the definition of property, plant and
equipment. Otherwise, such items are classified as inventory.

IND AS 16 – Property, Plant & Equipment 29

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

2. It may be appropriate to aggregate individually insignificant items, such as moulds, tools

and dies, and to apply the criteria to the aggregate value.
3. Items of property, plant and equipment may be acquired for safety or environmental
reasons. The acquisition of such property, plant and equipment, although not directly
increasing the future economic benefits of any particular existing item of property, plant
and equipment, may be necessary for an entity to obtain the future economic benefits
from its other assets.
4. An entity does not recognise in the carrying amount of an item of property, plant and
equipment the costs of the day-to-day servicing of the item. Rather, these costs are
recognised in profit or loss as incurred.
5. Parts of some items of property, plant and equipment may require replacement at regular
intervals. The carrying amount of those parts that are replaced is derecognised in
accordance with the derecognition provisions of this Standard.
6. When each major inspection is performed, its cost is recognised in the carrying amount of
the item of property, plant and equipment as a replacement if the recognition criteria are
satisfied.

Question 1
RM acquired an aircraft for Rs. 1.5 crore on 1.4.2018. It has a life of 15 years. RM is
required to get the aircraft inspected every 3 years to check its travel worthiness. On
1.4.2018, it carried out inspection at a cost of Rs. 60,00,000. On 1.4.2021, its incurred
Rs.75,00,000 as the cost of new inspection. Show treatment

Solution :
1. For year ended 2018 to 2021
Details Aircraft Inspection
Cost 1.5 crore 60 lakhs
Life 15 years 3 years
Depreciation 10 lakhs per annum 20 lakhs per annum

2. For year ended 2022 to 2024

Details Aircraft Inspection
Cost / Carrying amount 1.2 crore 75 lakhs
Life 12 years 3 years
Depreciation 10 lakhs per annum 25 lakhs per annum

30 IND AS 16 – Property, Plant & Equipment

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

5. MEASUREMENT :
5.1. INITIAL MEASUREMENT :
An item of property, plant and equipment that qualifies for recognition as an asset should
be initially measured at its cost.

COMPONENT OF COST

Purchase price including import duties and non

refundable purchase taxes
COST

Directly attributable Cost

Initial estimate of the costs of dismantling and

removing the item and restoring

Question 2 :
An entity constructs a building for its own use. It spends Rs. 50 million for material (Rs 2
million of it was lost in a fire) and Rs. 5 million on wages and other direct expenses for
constructing the building, it uses borrowed cost of Rs. 30 million on which it pays interest
of Rs. 3 million upto the date of completion of construction. What is the amount to be
recognised as cost construction.

Solution :
Cost of material 50 million
Less : Loss by fire 2 million 48 million
Other direct cost 5 million
Borrowing cost 3 million
Total 56 million

Question 3
RM mining Ltd. has projected site restoration expenses of Rs.1,57,04,710 after 40 years.
The rate of Discount is 11%. Pass journal entry at initial recognition.

IND AS 16 – Property, Plant & Equipment 31

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
Property, Plant and Equipment Dr 2,41,608
To provision for Site restoration A/c 2,41,608
1,57,04,710
(PV of Site restoration = = 2,41,608)
(1.11)40

Question 4
Entity A has existing freehold factory property, which it intends to knock down and
redevelop. During the redevelopment period the company will move its production
facility to another temporary site. The following incremental cost will be incurred.
1. Setup cost of Rs 5,00,000 to install machinery in new Location
2. Rent of Rs.15,00,000
3. Removal Cost of Rs.3,00,000 to transport machinery from old location to the
temporary location.
Can this cost be capitalised in cost of new building.

Solution :
All the above costs should be charged to Profit and Loss A/c.

Question 5
Moon Ltd incurs the following costs in relation to the construction of a new factory and
the introduction of its products to the local market.
Particulars Rs 000’s
(cost incurred)
Site Preparation costs 150
Direct Material 2000
Direct Labour Cost, including 10,000 incurred during an industrial 1160
strike
Testing of various processes in factory 200
Consultancy fees for installation of equipment 300
Relocation of staff to new factory 450
General overheads 550
Estimated Costs to dismantle (at present value) 200
Determine the cost that should be capitalised.

32 IND AS 16 – Property, Plant & Equipment

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
Details Cost incurred IND AS 16
Site Preparation costs 150 150
Direct Material 2,000 2000
Direct Labour Cost, including 10,000 incurred during an 1,160 1150
industrial strike
Testing of various processes in factory 200 200
Consultancy fees for installation of equipment 300 300
Relocation of staff to new factory 450 -
General overheads 550 -
Estimated Costs to dismantle (at present value) 200 200
Total 4000

Deferred payment beyond normal credit terms :

The cost of an item of property, plant and equipment is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the difference between the
cash price equivalent and the total payment is recognised as interest over the period of credit
unless such interest is capitalised in accordance with Ind AS 23.

Question 6
The purchase price of the machinery is Rs. 40,000. The company did not have enough
cash, and therefore agreed to pay a year later. However they will pay Rs. 45,000. What
shall be the treated with reference to the above arrangement.

Solution :
Asset should be capitalised at 40,000 as per IND AS 16. The excess 5,000 should be treated
as finance cost and should be charged to Profit and Loss A/c

Exchange of Assets

Asset going out should be derecognised at Carrying amount

Asset coming in should be recognized at

1. Fair value of asset coming in or
2. Fair value of asset going out whichever is more reliable
3. Carrying amount asset going out of fair values of assets is
not available

IND AS 16 – Property, Plant & Equipment 33

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Question 7
RM Ltd purchases a Machinery in exchange of Motor Car B. Motor car B has a book Value
of Rs.1,50,000. Fair Value of car given up is Rs.1,70,000. Fair value of Machine is
Rs.1,80,000. Fair value of Machinery is more evidently known. Journalise.

Solution :
Machinery A/c Dr 1,80,000
To Motor Car A/c 1,50,000
To Gain (P & L) A/c 30,000

5.2 SUBSEQUENT MEASUREMENT :

An entity may choose either the cost model or the revaluation model as its accounting
policy and should apply that policy to an entire class of property, plant and equipment.

cost model
revaluation
model

Method to Revalue :
At the date of the revaluation, the asset is treated in one of the following ways:
A. the gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset.
B. the accumulated depreciation is eliminated against the gross carrying amount of
the asset.

Question 8
Jupiter Ltd. has an item of plant with an initial cost of Rs 100,000. At the date of
revaluation accumulated depreciation amounted to Rs 55,000. The fair value of asset, by
reference to transactions in similar assets, is assessed to be Rs 65,000. Find out the
entries to be passed?

34 IND AS 16 – Property, Plant & Equipment

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
Alternative 1 : Adjust the gross value along with PFD
Current Revised
Cost 1,00,000 1,44,444
Less PFD 55,000 79,444
Net 45,000 65,000

Plant A/c Dr 44,444

To PFD 24,444
To Gain (OCI) 20,000

Alternative 2 : Eliminate the PFD and Revalue the Net

PFD A/c Dr 55,000
To Plant A/c 55,000

Plant A/c Dr 20,000

To Gain (OCI) 20,000

Treatment of surplus or deficit arising on revaluation

Revalution

First Time Subsequent

Increase Decrease previously increased previously decreased

decrease - reverse the

Revaluation reserve revalution reserve - any decrease to profit and
Charged to P & L
through OCI excess loss should be loss account
charged to P & L

increase - reverse the P & L

increase to revaluation and any excess should be
reserve through oci transferred to revaluation
reserve through OCI

IND AS 16 – Property, Plant & Equipment 35

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Question 9
An item of PPE was purchased for Rs.9,00,000 on 1st April, 2011. It is estimated to have
a useful life of 10 years and is depreciated on a straight line basis. On 1st April, 2013, the
asset is revalued to Rs.9,60,000. The useful life remains unchanged as ten years. Ignore
impact of deferred taxes.
Show the necessary treatment as per Ind AS 16.

Solution :
1/4/2011 9,00,000
Depreciation for 2 years 1,80,000 ( 9,00,000 / 10 x 2)
31/3/2013 7,20,000
Add Revaluation 2,40,000 (OCI)
1/4/2013 9,60,000
Depreciation for year 1,20,000 (9,60,000 / 8)
31/3/2014 8,40,000

Note : Excess depreciation of Rs. 30,000 (1,20,000 – 90,000) should be written off from
revaluation reserve.

6. DEPRECIATION :
The depreciable amount of an asset should be allocated on a systematic basis over its useful life.
The depreciation charge for each period should be recognised in profit or loss

RESIDUAL VALUE AND USEFULL LIFE

The residual value and the useful life of an asset should be reviewed at least at each financial
year-end and, if expectations differ from previous estimates, the change(s) should be accounted
for as a change in an accounting estimate in accordance with Ind AS 8, Accounting Policies,
Changes in Accounting Estimates and Errors.

Question 10
An asset which cost Rs.10,000 was estimated to have a useful life of 10 years and residual
value Rs.2000. After two years, useful life was revised to 4 remaining years. Calculate
the depreciation charge.

36 IND AS 16 – Property, Plant & Equipment

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
Details Year 1 Year 2 Year 3
Cost / Carrying Amount 10,000 9,200 8,400
Life 10 years 9 years 4 years
Residual value 2,000 2,000 2,000
Less : Depreciation 800 800 1,600
Carrying Amount 9,200 8,600 6,800

Commencement of Depreciation
Depreciation of an asset begins when it is available for use, i.e. when it is in the location
and condition necessary for it to be capable of operating in the manner intended by
management.

Cessation of depreciation
• Depreciation of an asset ceases at the earlier of:
a) the date that the asset is classified as held for sale (or included in a disposal
group that is classified as held for sale) in accordance with Ind AS 105.
b) and the date that the asset is derecognised.
• Therefore, depreciation does not cease when the asset becomes idle or is retired
from active use unless the asset is fully depreciated. However, under usage
methods of depreciation the depreciation charge can be zero while there is no
production.

Depreciation method
The depreciation method used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.

A variety of depreciation methods can be used to allocate the depreciable amount of an

asset on a systematic basis over its useful life. These methods include:
1. Straight-line depreciation method results in a constant charge over the useful life if
the asset’s residual value does not change.
2. Diminishing balance method results in a decreasing charge over the useful life.
3. Units of production method results in a charge based on the expected use or output.

The depreciation method applied to an asset is reviewed at least at each financial year-
end and, if there has been a significant change in the expected pattern of consumption of
the future economic benefits embodied in the asset, the method should be changed to
reflect the changed pattern. Such a change is accounted for as a change in an accounting
estimate in accordance with Ind AS 8 i. change is accounted for prospectively

IND AS 16 – Property, Plant & Equipment 37

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

7. IMPAIRMENT :
AS per IND AS 36 Impairment loss = Carrying amount – recoverable amount.

8. DERECOGNITION :
• The carrying amount of an item of property, plant and equipment should be derecognised:
1. on disposal; or
2. when no future economic benefits are expected from its use or disposal.
• The gain or loss arising from the derecognition of an item of property, plant and equipment
is included in profit or loss when the item is derecognised (unless Ind AS 17 requires
otherwise on a sale and leaseback). Gains shall not be classified as revenue.

Question 11
WDV of the item of PPE is 10,00,000. The asset is sold for Rs 12,00,000 during 2016.
However the buyer will the proceeds after 1 year. The discounting rate is 10%. How
should it be accounted as per IND AS 16.

Solution :
As per IND AS 16, asset should be derecognised at cash sales price today. Any excess should
be recorded as finance cost.
Receivable A/c Dr 10,90,909
To Asset A/c 10,00,000
To Gain (P & L) 90,909
12,00,000
(Cash sales price = = 10,90,909)
1.1

Receivable A/c Dr 1,09,091

To Finance cost A/c 1,09,091
(Finance cost = 10,90,909 x 10% = 1,09,091)

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

38 IND AS 16 – Property, Plant & Equipment

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 40
CHAPTER - 5
INVESTMENT PROPERTY

CHAPTER DESIGN

1. OBJECTIVE
2. SCOPE
3. DEFINTIONS
4. CLASSIFICATION OF PROPERTY AS INVESTMENT PROPERTY OR
OWNER OCCUPIED PROPERTY
5. RECOGNISTION
6. MEASUREMENT
7. TRANSFERS
8. DISPOSALS

IND AS 40 – Investment Property 39

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

1. OBJECTIVE :

Classification of property as
SCOPE investment property or
owneroccupied property
IND AS 40
INVESTMENT PROPERTY

Transfers and Disposals Recognition and Measurement

2. SCOPE :
1) Ind AS 40 should be applied in the recognition, measurement and disclosure of investment
property.
2) This Standard does not apply to:
a) biological assets related to agricultural activity (see Ind AS 41, Agriculture and Ind
AS 16 Property, Plant and Equipment); and
b) mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources.

3. DEFINITIONS :
1. INVESTMENT PROPERTY :

is property
held (by the
(land or a
owner or by
building—or
the lessee
part of a
under a
building—or
finance lease)
both)

A. use in the production or supply of

to earn rentals
goods or services or for
or for capital rather than
appreciation for: administrative purposes; or
or both, B. sale in the ordinary course of
business.

40 IND AS 40 – Investment Property

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

2. PROPERTY, PLANT AND EQUIPMENT :

IND AS 16

3. OWNER-OCCUPIED PROPERTY :
Owner occupied property is property held (by the owner or by the lessee under a finance
lease) for use in the production or supply of goods or services or for administrative
purposes.

4. FAIR VALUE :
IND AS 113

5. COST :
IND AS 16

6. CARRYING AMOUNT :
Carrying amount is the amount at which an asset is recognised in the balance sheet.

4. CLASSIFICATION OF PROPERTY AS INVESTMENT PROPERTY OR OWNER OCCUPIED PROPERTY

Investment property is held to earn rentals or for capital appreciation or both. Therefore, an
investment property generates cash flows largely independently of the other assets held by an
entity. This distinguishes investment property from owner-occupied property.

4.1 EXAMPLES :
INVESTMENT PROPERTY NOT AN INVESTMENT PROPERTY
Land held for long-term capital Property intended for sale in the
appreciation ordinary course of business (IND AS 2)
Land held for a currently undetermined Property in the process of
future use.(if the entity is undecided it is construction or development for sale
assumed that its currently held for capital in ordinary course of business (IND AS
appreciation) 2)
A building owned by the entity (or held by Owner-occupied property, including
the entity under a finance lease) and leased property held for future use as owner
out under one or more operating leases. occupied property. (IND AS 16)
A building that is vacant but is held to be Property held for future development
leased out under one or more operating and subsequent use as owner
leases. occupied property (IND AS 16)

IND AS 40 – Investment Property 41

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Property that is being constructed or Property occupied by employees

developed for future use as investment (whether or not the employees pay
property. rent at market rates) (IND AS 16)
Property leased to another entity
under a finance lease (IND AS 17)

4.2 PROPERTY HELD FOR ONE OR MORE PURPOSE :

DUAL PURPOSE

NOT ABLE TO
ABLE TO SPLIT
SPLIT

IND AS 40
Owner Occupied Rental income
only if an
insignificant
portion is held for
use in the
IND AS 16 IND AS 40 production or
supply of goods
or services or for
administrative
purposes

Question 1
Sun Ltd owns a building having 15 floors of which it uses 5 floors for its office; the
remaining 10 floors are leased out to tenants under operating leases. According to law
company could sell legal title to the 10 floors while retaining legal title to the other 5
floors.
Explain how shall the property be classified?

Solution :
5 floors used for office – IND AS 16
10 floors leased out – IND AS 40

42 IND AS 40 – Investment Property

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Question 2
Moon ltd uses 35% of the office floor space of the building as its head office. It leases the
remaining 65% to tenants, but it is unable to sell the tenant’s space or to enter into
finance leases related solely to it. Head office can’t be shifted and is significant to the
overall operation of the firm.
Can the above property be classified as Investment Property as per IND AS 40?

Solution :
Full property as per IND AS 16

ANCILLARY SERVICES
In some cases, an entity provides ancillary services to the occupants of a property it holds.
An entity treats such a property as investment property if the services are insignificant to
the arrangement as a whole.

If the services provided are significant than the entity should treat the property as owner
occupied property and account for it as per IND AS 16

Question 3
If an entity owns and manages a hotel, services provided to guests are significant to the
arrangement as a whole. Can this be treated as Investment property?

Solution :
Hotel should be treated as per IND AS 16.

PROPERTY LEASED OUT TO OTHER GROUP MEMBERS

In some cases, an entity owns property that is leased to, and occupied by, its parent or
another subsidiary. The property does not qualify as investment property in the
consolidated financial statements, because the property is owner-occupied from the
perspective of the group. However, from the perspective of the entity that owns it, the
property is investment property if it meets the definition of Investment Property.
Therefore, the lessor treats the property as investment property in its individual financial
statements.

IND AS 40 – Investment Property 43

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

No. Property Does it meet definition Which Ind AS is

of Investment Property Applicable
1 Owned by a Co and leased out YES IND AS 40
under an Operating Lease
2 Held Under Finance Lease and YES IND AS 40
Leased out under an Operating
Lease
3 Held under Finance Lease and NO IND AS 17
Leased out under Finance Lease
4 Property acquired with a view NO IND AS 105 or IND
for development and resale AS 2
5 Property partly owner occupied Owner occupied IND AS 16
and partly leased out under Leased OUT IND AS 40
Operating Lease
6 Land held for currently YES IND AS 40
undetermined use
7 Property occupied by NO IND AS 16
Employees paying rent at less
than market rate
8 Investment Property held for NO IND AS 105
sale
9 Existing Investment Property YES IND AS 40
that is being redeveloped for
continued use as Investment
Property

5. RECOGNITION
Investment property shall be recognised as an asset when, and only when:
a) it is probable that the future economic benefits that are associated with the investment
property will flow to the entity; and
b) the cost of the investment property can be measured reliably.

Question 4
X Limited owns a building which is used to earn rentals. The building has a carrying
amount of Rs.50,00,000. X Limited recently replaced interior walls of the building and
the cost of new interior walls is Rs.5,00,000. The original walls have a carrying amount
of Rs.1,00,000. How X Limited should account for the above costs?

44 IND AS 40 – Investment Property

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
Cost = 50,00,000 – 1,00,000 + 5,00,000 = 54,00,000

6. MEASUREMENT
INITIAL MEASUREMENT : AT COST (SIMILAR TO IND AS 16)
DEFERRED PAYMENTS (SIMILAR TO IND AS 16)
If payment for an investment property is deferred, its cost is the cash price equivalent. The
difference between this amount and the total payments is recognised as interest expense over
the period of credit.

EXCHANGE OF ASSETS (SIMILAT TO IND AS 16)

The cost of such an investment property is measured at fair value unless:
a) the exchange transaction lacks commercial substance or
b) the fair value of neither the asset received nor the asset given up is reliably measurable.

Question 5
Sun Ltd acquired a building in exchange of a warehouse whose carrying amount is
Rs.5,00,000 and payment of cash is Rs.2,00,000. The fair value of the building received
by the Company is Rs.8,00,000. The company decided to keep that building for rental
purposes. Pass the journal Entry for the above transaction.

Solution :
Building (investment property) A/c Dr 8,00,000
To Warehouse A/c 5,00,000
To Cash A/c 2,00,000
To Gain (P & L ) A/c 1,00,000

SUBSEQUENT MEASUREMENT : AT COST

7. TRANSFERS
An entity shall transfer a property to, or from, investment property when, and only when, there
is a change in use.
Transfers between investment property, owner-occupied property and inventories do not change
the carrying amount of the property transferred and they do not change the cost of that property
for measurement or disclosure purposes.

IND AS 40 – Investment Property 45

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

8. DERECOGNITION :
1) An investment property should be derecognised (eliminated from the balance sheet)
a. on disposal or
b. when the investment property is permanently withdrawn from use and no future
economic benefits are expected from its disposal.
2) The disposal of an investment property may be achieved by:
a. sale or
b. entering into a finance lease.
3) Gains or losses arising from the retirement or disposal of investment property should be
calculated as the difference between the net disposal proceeds and the carrying amount
of the asset and is recognised in profit or loss (unless Ind AS 17 requires otherwise on a
sale and leaseback) in the period of the retirement or disposal.

9. DISCLOSURE :
An entity should disclose:
1) its accounting policy for measurement of investment property.
2) the criteria it uses to distinguish investment property from owner-occupied property and
from property held for sale in the ordinary course of business.
3) the amounts recognised in profit or loss for:
a) rental income from investment property;
b) direct operating expenses (including repairs and maintenance) arising from
investment property that generated rental income during the period; and
c) direct operating expenses (including repairs and maintenance) arising from
investment property that did not generate rental income during the period.
4) the existence and amounts of restrictions on the realisability of investment property or the
remittance of income and proceeds of disposal.
5) contractual obligations to purchase, construct or develop investment property or for
repairs, maintenance or enhancements.
6) In addition to the general disclosures required above, an entity is required to disclose:
a) the depreciation methods used;
b) the useful lives or the depreciation rates used;
c) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period;

46 IND AS 40 – Investment Property

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

7) An entity is also required to disclose the fair value of investment property. In the
exceptional cases when an entity cannot measure the fair value of the investment property
reliably, it should disclose:
a) a description of the investment property;
b) an explanation of why fair value cannot be measured reliably; and if possible, the
range of estimates within which fair value is highly likely to lie.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 40 – Investment Property 47

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 38
CHAPTER - 6
INTANGIBLE ASSETS

CHAPTER DESIGN

1. OBJECTIVE
2. SCOPE
3. DEFINITIONS
4. RECOGNITION OF INTANGIBLE ASSET
5. MEASUREMENT OF INTANGIBLE ASSET
6. AMORTIZATION OF INTANGIBLE ASSET
7. IMPAIRMENT
8. RETIREMENT AND DISPOSAL

48 IND AS 38 – Intangible Assets

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

1. OBJECTIVE :
The objective of this Standard is to prescribe the accounting treatment for intangible assets that
are not dealt with specifically in another Standard. This Standard requires an entity to recognise
an intangible asset if, and only if, specified criteria are met. This standard specifies the
requirement of recognition, measurement and disclosures of Intangible Assets.

The Standard states that intangible assets are initially measured at cost, subsequently measured
at cost or using the revaluation model, and amortised on a systematic basis over their useful lives
unless the asset has an indefinite useful life, in which case it is not amortised.

2. SCOPE :
This standard is applied to all intangible assets. except
• Intangible Assets which are within the scope of other standard like
• Intangible assets held for sale in ordinary course of business (IND AS 2)
• Deferred tax Assets (IND AS 12)
• Leases (IND AS 17)
• Assets arising from employee benefits (IND AS 19)
• Financial Assets (IND AS 32)
• Goodwill arising from Business Combination (IND AS 103)
• Deferred acquisition costs and intangible assets arising from insurance cost (IND AS 104)
• Non current intangible assets held for sale (IND AS 105)
• Exploration for and Evaluation of Mineral Resources (IND AS 106)
• Assets arising from contracts with customers (IND AS 115)

Intangible assets contained in or on a physical substance

Some intangible assets may be contained in or on a physical substance such as a compact disc (in
the case of computer software), legal documentation (in the case of a license or patent) or film.
In determining whether an asset that incorporates both tangible and intangible elements should
be treated under Ind AS 16, Property, Plant and Equipment, or as an intangible asset under this
Standard, an entity uses judgement to assess which element is more significant.

For example, computer software for a computer-controlled machine tool that cannot operate
without that specific software is an integral part of the related hardware and it is treated as
property, plant and equipment. The same applies to the operating system of a computer. When
the software is not an integral part of the related hardware, computer software is treated as an
intangible asset.

IND AS 38 – Intangible Assets 49

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

3. DEFINITIONS :
1. INTANGIBLE ASSET

Non
monetary
Identifiable Asset

Without
Physical
Substance

Intangible Asset

2. IDENTIFIABLE :
An Asset is identifiable if its either separable or contractual

3. ASSETS :
An asset is a
(a) resource:
(b) controlled by an entity
(c) as a result of past events; and
(d) from which future economic benefits are expected to flow to the entity.

4. CONTROL :

Power to obtain the

future economic
benefits from the
underlying resource
Control
Ability to restrict the
access of others to
those benefits

50 IND AS 38 – Intangible Assets

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Question 1
Company XYZ ltd has provided training to its staff on various new topics like GST, Ind AS
etc. to ensure the compliance as per the required law. Can the company recognise such
cost of staff training as intangible asset?

Solution :
Staff training cost cannot be capitalized – as its not in the control of the entity to recover
future economic benefits.

4. RECOGNITION OF INTANGIBLE ASSETS

Question 2
Mercury Ltd is preparing its accounts for the year ended 31st March, 2012 and is unsure
about how to treat the following items.
(a) The company completed a grand marketing and advertising campaign costing Rs
4.8 lakh. The finance director had authorised this campaign on the basis that it
would create Rs 8 lakh of additional profits over the next three years.
(b) A new product was developed during the year. The expenditure totaled Rs 3 lakh
of which Rs 1.5 lakh was incurred prior to 30th September, 2011, the date on
which it became clear that the product was technically viable. The new product
will be launched in the next four months and its recoverable amount is estimated
at Rs 1.4 lakh.
(c) Staff participated in a training programme which cost the company Rs 5 lakh. The
training organisation had made a presentation to the directors of the company
outlining that incremental profits to the business over the next twelve months
would be Rs 7 lakh.
What amounts should appear as intangible assets in accordance with Ind AS 38 and Ind
AS 36 in Mercury’s balance sheet as on 31st March, 2012?

IND AS 38 – Intangible Assets 51

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
A) 4.8 lakhs for advertising will be charged to P & L
B) 1.5 lakhs before 30th sept – charge to P & L
1.5 lakhs after 30th sept – capitalized
Since the recoverable is 1.4, 0.1 would be impairment loss. Revised carrying amount
will be 1.4
C) Staff training 5 lakhs shall be charged to P & L

5. MEASUREMENT OF INTANGIBLE ASSETS

An intangible asset should be measured initially at cost.

SEPARATE ACQUISITION :

52 IND AS 38 – Intangible Assets

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Question 3
Jupiter Ltd. Acquires new energy efficient technology that will significantly reduce its
energy costs for manufacturing
1. Costs of new solar technology – 10,00,000
2. Trade discount provided – (1,00,000)
3. Training course for staff in new technology – 50,000
4. Initial testing of new technology – 35,000
5. Losses incurred while other parts of plant shut down during testing and training –
25,000
Calculate the amount of Intangible Asset.

Solution :
Cost of new solar technology 10,00,000
Less Trade Discount (1,00,000) 9,00,000
Initial Training 35,000
Total 9,35,000

PART OF BUSINESS COMBINATION :

An acquirer recognises at the acquisition date, separately from goodwill, an intangible asset of
the acquiree, irrespective of whether the asset had been recognised by the acquiree before the
business combination
If an intangible asset acquired in a business combination is separable or arises from contractual
or other legal rights, sufficient information exists to measure reliably the fair value of the asset.

Question 4
Business Combination On 31st March, 20X1, Earth India Ltd paid Rs.50,00,000 for a 100%
interest in Sun India Ltd. At that date Sun Ltd’s net assets had a fair value of
Rs.30,00,000.
In addition, Sun Ltd also held the following rights:
Trade Mark named “GRAND” – valued at Rs.180,000 using a discounted cash flow
technique.
Sole distribution rights to an electronic product. Future cash flows from which are
estimated to be Rs.150,000 per annum for the next 6 years.
10% is considered an appropriate discount rate.
The 6 year, 10% annuity factor is 4.36.
Calculate goodwill and other Intangible assets arising on acquisition.

IND AS 38 – Intangible Assets 53

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
Calculation of Goodwill
Consideration Paid 50,00,000
Less Fair value of Net Assets 30,00,000
Grand 1,80,000
Sole distributions rights 6,54,000 38,34,000
Goodwill 11,66,000

GOVERNMENT GRANT : AS PER IND AS 20

EXCHANGE OF ASSETS : SIMILAR TO IND AS 16

INTERNALLY GENERATED GOODWILL : CANT BE CAPITALISED

INTERNALLY GENERATED INTANGIBLE ASSET :

Expenses on research – Profit and Loss Account
Expenses on development before technical feasibility is established – profit and loss
Expenses on development after technical feasibility is established – Capitalised.

Question 5
Development Phase Expenditure on a new production process in 2011-2012:
Rs.
1st April to 31st December 2,700
1st January to 31st March 900
3,600
The production process met the intangible asset recognition criteria for development on
1st January, 2012. The amount estimated to be recoverable from the process is Rs.1,000.
What is the carrying amount of the intangible asset at 31st March, 2012 and the charge
to profit or loss for 2011-2012?
Expenditure incurred in FY 2012-2013 is Rs.6,000.
At 31st March, 2013, the amount estimated to be recoverable from the process
(including future cash outflows to complete the process before it is available for use) is
Rs.5,000.
What is the carrying amount of the intangible asset at 31st March, 2013 and the charge
to profit or loss for 2012-2013?

54 IND AS 38 – Intangible Assets

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
1. For year ended 2011 – 12
Expenses from 2700 – charged to Profit and Loss
1st April to 31st Dec
Expenses from 900 – capitalised as per IND AS 38
1st Jan to 31st March

Note : Since the recoverable amount is 1000, which is more than the carrying amount,
there shall be no impairment and there carrying amount shall remain at 900.

2. For year ended 2012 – 2013

Opening cost 900
+ Further cost capitalised 6000
Total carrying amount 6900
Recoverable Amount 5000
Impairment 1900

REMEASUREMENT :
An entity should choose either the cost model or the revaluation model as its accounting policy.
(SIMILAR TO IND AS 16)

Question 6
1. Saturn Ltd. acquired an intangible asset on 31st March, 2011 for Rs.1,00,000. The
asset was revalued at Rs.1,20,000 on 31st March, 2012and Rs.85,000 on 31st
March, 2013.
2. Jupiter Ltd. acquired an intangible asset on 31st March, 2011 for Rs.1,00,000. The
asset was revalued at Rs.85,000 on 31st March, 2012 and at Rs.1,05,000 on 31st
March, 2013.

Solution :
1. 31/3/2011 1,00,000
Add revaluation 20,000 – revaluation reserve
31/3/2012 1,20,000
Less revaluation 35,000 – Reverse 20,000 from revaluation reserve and
Net 85,000 balance of 15000 should be charged to profit
and loss A/c.
2. 31/3/2011 1,00,000

IND AS 38 – Intangible Assets 55

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Less revaluation 15,000 – Charged to Profit and Loss A/c

31/3/2013 85,000
Add revaluation 20,000 – reverse 15,000 to P & L and balance 5000 to
1,05,000 Revaluation Reserve

6. AMORTIZATION :

Useful life of
intangible Asset

Finite Life Indefinite Life

limited period
Amortisation No foreseeable limit to Amortisation
of benefit to
required the period over which Not required
entity .
asset is expected to
generate net cash
inflows to the entity

Impairment
Needed

7. IMPAIRMENT :
1. To determine whether an intangible asset is impaired, an entity applies Ind AS 36. That
Standard explains when and how an entity reviews the carrying amount of its assets, how
it determines the recoverable amount of an asset and when it recognises or reverses an
impairment loss.
2. For an intangible asset with indefinite useful lives, an impairment review is required at
least annually.

8. RETIREMENTS AND DISPOSALS :

1. An intangible asset should be derecognised:
a. on disposal; or

56 IND AS 38 – Intangible Assets

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

b. when no future economic benefits are expected from its use or disposal The
disposal of an intangible asset may occur in a variety of ways (e.g. by sale, by
entering into a finance lease, or by donation)
2. The gain or loss arising from the derecognition of an intangible asset should be determined
as the difference between the net disposal proceeds, if any, and the carrying amount of
the asset. It is to be recognised in profit or loss when the asset is derecognized (unless Ind
AS 17 requires otherwise on a sale and leaseback). Gains should not be classified as
revenue.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 38 – Intangible Assets 57

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 105
CHAPTER - 7
NON CURRENT ASSETS
HELD FOR SALE &
DISCONTINUED OPERATIONS

CHAPTER DESIGN

1. OBJECTIVE
2. SCOPE
3. DEFINITIONS
4. CLASSIFICATION
5. MEASUREMENT OF ASSETS CLASSIFIED AS HELD FOR SALE
6. PRESENTATION AND DISCLOSURE OF NCA HELD FOR SALE
7. PRESENTATION AND DISCLOSURE OF DISCONTINUED OPERATIONS

58 IND AS 105 – Non Current Assets Held for Sale & Discontinued Operations
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1. OBJECTIVE :
Non-Current assets held for sale
• are presented separately from other assets in the Balance Sheet
• as their classification will change and
• the value will be principally recovered through sale transaction rather than through
continuous use in operations of the entity.

Measured at Fair Value

less Cost to sell;

Accounting for Depreciation on such

Assets held for Sale assets to cease

Presented separately in
the Balance Sheet

Results of Discontinuing Operations should be

• separately presented in the Statement of Profit and loss as it affects the ability of the entity
to generate future cash flows.

2. SCOPE :
The classification requirements of this Ind AS apply to all recognised noncurrent assets and to all
disposal groups of an entity.

The presentation requirements of this Ind AS apply to all recognised noncurrent assets and to all
disposal groups of an entity.

The measurement requirements of this Ind AS also apply to all recognised non-current assets and
to all disposal groups of an entity except few exceptions mentioned below.

The measurement provisions of this Ind AS do not apply to the following assets (which are covered
by the Ind ASs listed either as individual assets or as part of a disposal group):
1. Ind AS 12 - Deferred tax Assets
2. Ind AS 19 - Assets arising from Employee benefits
3. Ind AS 104 - Contractual rights under Insurance contracts
4. Ind AS 109 – Financial Assets
5. Noncurrent Assets Which are measured at Fair value less cost to sell in Ind AS 41

IND AS 105 – Non Current Assets Held for Sale & Discontinued Operations 59
[CA – Final – Financial Reporting] | Prof.Rahul Malkan

3. DEFINITIONS :
1. Current Asset :
An entity classifies an asset as current when:
 it expects to realise the asset, or intends to sell or consume it, in its normal
operating cycle;
 it holds the asset primarily for the purpose of trading;
 it expects to realise the asset within twelve months after the reporting period; or
 the asset is cash or a cash equivalent (as defined in Ind AS 7) unless the asset is
restricted from being exchanged or used to settle a liability for at least twelve
months after the reporting period.
2. Non current Asset :
Non-current assets are assets that do not meet the definition of current assets.
3. Disposal Group :
Disposal group is a group of assets to be disposed of, by sale or otherwise, together as a
group in a single transaction, and liabilities directly associated with those assets that will
be transferred in the transaction. A disposal group may be a group of cash-generating
units, a single cash-generating unit, or part of a cash-generating unit.
4. Cash Generating Unit : IND AS 36
5. Fair Value : IND AS 113
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. (Ind AS
113)
6. Discontinued operations :
A discontinued operation is a component of an entity that either has been disposed of or
is classified as held for sale and:
(a) represents a separate major line of business or geographical area of operations; or
(b) is part of a single coordinated plan to dispose of a separate major line of business
or geographical area of operations; or
(c) is a subsidiary acquired exclusively with a view to resale.
7. Component of Entity :
A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity.
8. Probable :
It means more likely than not
9. Highly Probable :
Significantly more likely than probable

60 IND AS 105 – Non Current Assets Held for Sale & Discontinued Operations
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4. CLASSIFICATION :
An entity is required to 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.
Available for
Immediate Sale in
Key requirements present condition
for Non-current
Assets held for sale
Sale must be highly
probable

Sale must be highly probable :

This Standard defines ‘highly probable’ as ‘significantly more likely than probable’ where probable
means more likely than not.

1.The appropriate level of management must

be committed to a plan to sell the asset (or
disposal group).

2. An active programme to trace a buyer and

complete the selling plan must have been
initiated.

3. The asset (or disposal group) must be

marketed for sale at a price that is reasonable
in relation to its current fair value.

4. The sale transaction is expected to be

completed within one year from the date of
classification.

5. Significant changes to or withdrawal from

the plan to sell the asset are unlikely.

IND AS 105 – Non Current Assets Held for Sale & Discontinued Operations 61
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Exception to the period of one year :

An entity can still classify an asset (or disposal group) as held for sale, even if the timeframe of
one year to conclude the sale transaction has lapsed.
For this:
(i) the delay must have been caused by the events or circumstances which are beyond the
control of the entity; and
(ii) there must be sufficient evidences that the entity is still committed to it selling plan.

Assets Acquired exclusively with a view to subsequent disposal :

When an entity acquires a non-current asset (or disposal group) exclusively with a view to its
subsequent disposal, the non-current asset (or disposal group) is classified as held for sale at the
acquisition date. This standard provides a short period (usually three months) to meet the
classification criteria that don’t met at the acquisition except requirement of one year.

5. MEASUREMENT :
1. An entity should 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.
2. Depreciation and amortization shall be immediately stopped from the moment the asset
has been classified as held for sale.
3. Interest and other expenses attributable to the liabilities of a disposal group classified as
held for sale shall continue to be recognised.
4. When the sale is expected to occur beyond one year, the entity should measure the costs
to sell at their present value. Any increase in the present value of the costs to sell that
arises from the passage of time shall be presented in profit or loss as a financing cost.
5. Non-current asset (or disposal group) classified as held for distribution are also measured
on same line as non-current asset (or disposal group) classified as held for sale.

Question 1
An item of property, plant and equipment that is measured on the cost basis should be
measured in accordance with Ind AS 16.
Entity ABC owns an item of property and it was stated at the following amounts in its
last financial statements:
31st December, 2011 Rs
Cost 12,00,000
Depreciation (6,00,000)
Net book value 6,00,000
The asset is depreciated at an annual rate of 10% ie. Rs.1,20,000 p.a.
During July, 2012, entity ABC decides to sell the asset and on 1st August it meets the
conditions to be classified as held for sale. Analyse.

62 IND AS 105 – Non Current Assets Held for Sale & Discontinued Operations
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Solution :
At 31st July, entity should ensure that the asset is measured in accordance with IND AS 16.
It should be depreciated by further Rs.70,000 (1,20,000 x 7/12) and should be carried at
Rs.5,30,000 before it is measured in accordance with IND AS 105.

Once Asset is classified as held for sale, no further depreciation shall be charged in the
asset.

RECOGNITION OF IMPAIRMENT LOSSES AND REVERSALS :

• An entity should recognise an impairment loss for any initial or subsequent write-down of
the asset (or disposal group) to fair value less costs to sell, to the extent that it has not
been recognised in accordance with above.
• An entity should recognise a gain for any subsequent increase in fair value less costs to sell
of an asset, but not in excess of the cumulative impairment loss that has been recognised
either in accordance with this Ind AS or previously in accordance with Ind AS 36,
Impairment of Assets.

CHANGES TO PLAN OF SALE :

• If an entity has classified an asset (or disposal group) as held for sale, but the held for sale
criteria no longer met, the entity should cease to classify the asset (or disposal group) as
held for sale.
• The entity shall measure a non-current asset that ceases to be classified as held for sale
(or ceases to be included in a disposal group classified as held for sale) at the lower of: (a)
its carrying amount before the asset (or disposal group) was classified as held for sale,
adjusted for any depreciation, amortization or revaluations that would have been
recognised had the asset (or disposal group) not been classified as held for sale; and (b) its
recoverable amount at the date of the subsequent decision not to sell.

Question 2
S Ltd purchased a property for Rs.6,00,000 on 1st April, 2011. The useful life of the
property is 15 years. On 31st March, 2013, S Ltd classified the property as held for sale.
The impairment testing provides the estimated recoverable amount of Rs.4,70,000.
The fair value less cost to sell on 31st March, 2013 was Rs.4,60,000. On 31st March, 2014
management changed the plan, as property no longer met the criteria of held for sale.
The recoverable amount as at 31st March, 2014 is Rs5,00,000.
Value the property at the end of 2013 and 2014.

IND AS 105 – Non Current Assets Held for Sale & Discontinued Operations 63
[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Solution :
a) Value of property on 31/3/2013, the date on which asset is classified as held for
sale.
1/4/2011 6,00,000
Less : Depreciation 80,000
31/3/2013 carrying amount 5,20,000
Recoverable Amount 4,70,000
Impairment Loss 50,000
Revised carrying amount 4,70,000
On 31/3/2013, the day asset is classified as held for sale, the asset should be valued
at lower of carrying amount and fair value less cost to sale
Carrying amount 4,70,000
Fair value less cost to sale 4,60,000
Loss charged to P & L 10,000
Revised carrying amount 4,60,000
b) Value of asset on 31/3/2014, the date property is reclassified as criteria for sale is
not met. The amount should be lower of Recoverable amount or carrying amount
of asset which would have been as if it was never classified as held for sale
Recoverable amount 5,00,000
Carrying amount 4,33,846 (4,70,000-36,154 dep. for year)

So now the carrying amount be 4,33,846. The difference 4,60,000 – 4,33,846 =

26,154 should be charged to Profit to Loss A/c.

6. PRESENTATION AND DISCLOSURE OF A NON CURRENT ASSET (OR DISPOSAL GROUP)

CLASSFIED AS HELD FOR SALE
PRESENTATION
• An entity is required to present a non-current asset classified as held for sale and the assets
of a disposal group classified as held for sale separately from other assets in the balance
sheet.
• The liabilities of a disposal group classified as held for sale should be presented separately
from other liabilities in the balance sheet. Those assets and liabilities should not be offset
and presented as a single amount.

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DISCLOSURE
An entity should disclose the following information in the notes to the financial statements in the
period in which a non-current asset (or disposal group) has been either classified as held for sale
or sold:
(a) Description of the non-current asset (or disposal group);
(b) Description of facts and circumstances of the sale, or leading to the expected disposal and
the expected manner and timing of that disposal;
(c) Gain or loss recognised and if not presented separately on the face of the income
statement, the caption in the income statement that includes that gain or loss.
(d) If applicable, the reportable segment in which the non-current asset (or disposal group) is
presented in accordance of Ind AS 108 Operating Segments.
(e) If there is a change of plan to sell, a description of facts and circumstances leading to the
decision and its effect on results.

7. DISCONTINUED OPERATIONS
Ind AS 105 defines Discontinued Operation as: A component of an entity that either has been
disposed of or is classified as held for sale and:
a) represents a separate major line of business or geographical area of operations; or
b) is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations; or
c) is a subsidiary acquired exclusively with a view to resale.

A component of an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity. In other words, a
component of an entity will have been a cash-generating unit or a group of cash generating units
while being held for use.

Question 3
Sun Ltd is a retailer of takeaway food like burger and pizzas. It decides to sell one of its
outlets located in chandni chowk in New Delhi. The company will continue to run 200
other outlets in New Delhi.
All Ind AS 105 criteria for held for sale classification were first met at 1st October, 2011.
The outlet will be sold in June, 2012.
Management believes that outlet is a discontinued operation and wants to present the
results of outlet as 'discontinued operations'. Analysis.

IND AS 105 – Non Current Assets Held for Sale & Discontinued Operations 65
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Solution :
The chandani chowk outlet is a disposal group, it is not a discontinued operation as it is
only one outlet. It is not a major line of business or geographical area, nor a subsidiary
acquired with a view of resale.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

66 IND AS 105 – Non Current Assets Held for Sale & Discontinued Operations
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IND AS 23
CHAPTER - 8
BORROWING COST

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. DEFINITIONS
4. RECOGNITION
5. PERIOD OF CAPITALISATION
6. SUSPENSION OF CAPITALIZATION
7. CESSATION OF CAPITALIZATION
8. DISCLOSURE

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1. INTRODUCTION :
This standard requires borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset are included in the cost of that asset. Other
borrowing costs are recognized as an expense.
“Borrowing costs’ that are directly
attributable to the acquisition,
construction or production of a
qualifying asset form part of the cost of
that asset

Other borrowing costs are

recognised as an expense.

2. SCOPE :
▪ An entity shall apply this standard in accounting for borrowing costs.
▪ The Standard does not apply to actual or imputed cost of equity, including preferred capital
not classified as a liability.

For example: Dividend paid on equity shares, cost of issuance of equity, cost on Irredeemable
preference share capital will not be included as borrowing cost within the purview of this
standard.

3. DEFINITIONS :
1. Borrowing Cost :
Borrowing costs are interest and other costs that an entity incurs in connection with the
borrowing of funds.
Borrowing costs may include:
(a) interest expense calculated using the effective interest method as described in Ind
AS 109 Financial Instruments;
(b) finance charges in respect of finance leases recognised in accordance with Ind AS
17 Leases; and
(c) exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs.

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Exchange Difference
1. The adjustment should be of an amount which is equivalent to the extent to which
the exchange loss does not exceed the difference between the cost of borrowing in
functional currency when compared to the cost of borrowing in a foreign currency.
2. Where there is an unrealised exchange loss which is treated as an adjustment to
interest and subsequently there is a realised or unrealised gain in respect of the
settlement or translation of the same borrowing, the gain to the extent of the loss
previously recognised as an adjustment should also be recognised as an adjustment
to interest.

Question 1
An entity can borrow funds in its functional currency (Rs) @ 12%. It borrows $ 1,000 @
4% on April 1, 2011 when $ 1 = Rs 40. The equivalent amount in functional currency is
Rs.40,000. Interest is payable on March 31, 2012. On March 31, 2012, exchange rate is $
1 = Rs.50. The loan is not due for repayment.
Calculate the amount of total borrowing cost.

Solution :
The exchange loss in this case = Rs.10,000 (1,000 x 10 (50-40)
Borrowing cost = Rs.2,000 ($1000 x 4% x 50)
Borrowing cost in local currency = Rs.4,800 (40,000 x 12%)
Savings of 2,800 (4,800 – 2,000) is eligible to be capitalized under this standard.
Thus total borrowing cost to be capitalized = Rs.2,000 + Rs.2,800 = Rs.4,800

Question 2
An entity can borrow funds in its functional currency (Rs) @ 12%. It borrows $ 1,000 @
4% on April 1, 2011 when $ 1 = Rs.40. The equivalent amount in functional currency is
Rs.40,000. Interest is payable on March 31, 2012. On March 31, 2012, exchange rate is $
1 = Rs.50. The loan is not due for repayment.
Calculate the amount of total borrowing cost.
If the exchange rate on March 31, 2013, is $ 1 = Rs.48. Discuss what shall be the
accounting treatment at the end of year 2013.

Solution :
Year ended 31/3/2012
The exchange loss in this case = Rs.10,000 (1,000 x 10 (50-40)
Borrowing cost = Rs.2,000 ($1000 x 4% x 50)

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Borrowing cost in local currency = Rs.4,800 (40,000 x 12%)

Savings of 2,800 (4800 – 2000) is eligible to be capitalized under this standard.
Thus total borrowing cost to be capitalized = Rs.2,000 + Rs.2,800 = Rs.4,800

Year ended 31/3/2013

The exchange gain = 2,000 (1000 x 2 (50 – 48)
Borrowing cost = Rs.1920 ($1000 x 4% x 48)
This will be adjusted in the borrowing cost as there is unrealised exchange loss and the
adjustment is less than the exchange loss of Rs.2,800 recognised in earlier year.

Question 3
ABC Ltd. has taken a loan of USD 20,000 on April 1, 2011 for constructing a plant at an
interest rate of 5% per annum payable on annual basis.
On April 1, 2011, the exchange rate between the currencies i.e USD vs Rupees was Rs.45
per USD. The exchange rate on the reporting date i.e March 31, 2012 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 :
A) Interest on Foreign currency loan for the period
= $ 20,000 x 5% = $ 1,000
= $ 1,000 x 48 = Rs. 48,000
B) Exchange loss = 60,000 (20,000 x 3 (48 – 45)
C) Interest on loan on Indian currency = $ 20,000 x 11% x 45 = Rs.99,000
D) Savings in interest = 99,000 – 48,000 = Rs.51,000

Total borrowing cost to be capitalized

1. Interest cost Rs.48,000
2. Exchange difference eligible to be capitalized Rs.51,000
Total Rs.99,000

2. Qualifying Assets :
- An Asset is a resource under the control of the entity which is the result of the past
event and from which the future economic benefits are going to arrive to enterprise
- It should substantial period of time to get ready for its intended use or sale

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- Substantial period of time is not defined in IND AS. It is to be understood on case to

case basis. Generally a period of more than 12 months is considered substantial.
However any shorter period, if justifiable can also be taken as substantial period.
- Generally inventory are not considered as Qualifying Asset as they are produced on
repetitive basis over a short period of time. However if the nature of inventory is
such that it takes substantial period of time to get ready for its intended use or sale
then inventory can be classified as Qualifying Asset.
Foe eg – Wine, Rice, Cheese Etc.
- If an Asset is ready for its intended use then it cannot be classified as Qualifying
Asset. However if an Asset is a part of larger asset or project then it is not
independent and therefore should be looked along with bigger asset than it should
be capitalised.

Depending on the circumstances, any of the following may be qualifying assets:

(a) inventories
(b) manufacturing plants
(c) power generation facilities
(d) intangible assets
(e) investment properties
(f) bearer plants.

4. RECOGNITION

when it is probable it will result

in future economic benefits to
the entity; and the costs can be
measured reliably.

Specific Borrowing Cost :

When an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the
entity should determine the amount of borrowing costs eligible for capitalization as the actual
borrowing costs incurred on that borrowing during the period less any investment income on the
temporary investment of those borrowings.

IND AS 23 – Borrowing Cost 71

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Funds are borrowed

specifically

Actual borrowing cost

incurred less any income on
temporary investment of
borrowed funds

Question 4.
Alpha Ltd. on 1st April, 2011 borrowed 9% Rs.30,00,000 to finance the construction of
two qualifying assets. Construction started on 1st April, 2011. The loan facility was
availed on 1st April, 2011 and was utilized as follows with remaining funds invested
temporarily at 7%.
Factory Building Office Building
1st April 2011 5,00,000 10,00,000
1st Oct 2011 5,00,000 10,00,000
Calculate the cost of the asset and the borrowing cost to be capitalized

Solution :
Details Factory Building Office Building
Borrowing cost 90,000 (10,00,000 x 9%) 1,80,000 (20,00,000 x 9%)
Less income 17,500 (5,00,000 x 7% x 6/12) 35,000 (10,00,000 x 7% x 6/12)
Net 72,500 1,45,000
Cost of Asset
Price 10,00,000 20,00,000
+ Borrowing cost 72,500 1,45,000
Total 10,72,500 21,45,000

General Borrowing Cost :

• To the extent that an entity borrows funds generally and uses them for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of borrowing costs
eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset.

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Weighted
Total general Average total
borrowing costs general
for the period borrowings Capitalization
(excluding (excluding Rate
specific specific
borrowings) borrowings)

Question 5
Advice X Limited on the weighted average cost of borrowings and the interest cost to be
capitalised based on the following
Total borrowing and interest costs of X Limited for the year ending 31st March 2016 are
as follows :
Borrowings Date of Amount (000’s) Interest (000’s)
Borrowings
18% Bank Loan 01-05-2014 1000 180
14% Term Loan 01-10-2015 2000 140
16% Term Loan 01-07-2015 3000 360
Total 680

Qualifying Assets in which these borrowed funds are utilised are

Assets Rs 000’s Period
Factory Shed 2500 12 months
Plant 1 1500 9 months
Plant 2 1000 7 months

Solution :
Total Borrowing Cost of the period (excluding specific borrowing)
1. Capitalization rate =
Weighted Average Total General Borrowing
680
= × 100 = 16%
4250
Working notes
1. Total borrowing cost = 680
2. Weighted Average total general borrowing
= 1000 × 12 / 12 = 1000
= 2000 × 6 / 12 = 1000
= 3000 × 9 / 12 = 2250

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Total = 4250

2. Borrowing cost to be capitalized

1. Factory shed = 2500 x 16% x 12/12 = 400
2. Plant 1 = 1500 x 16% x 9 / 12 = 180
3. Plant 2 = 1000 x 16% x 7 / 12 = 93.33
Total = 673.33

5. PERIOD OF CAPITALIZATION :
An entity is required to begin the capitalizing of borrowing costs as part of the cost of a qualifying
asset on the commencement date. The commencement date for capitalization is the date when
the entity first meets all of the following conditions cumulatively on a particular date:

Activities that are

Expenditures for the Borrowing costs is necessary to prepare
asset is incurred incurred the asset for its
intended use or sale

Question 6
X Ltd is commencing a new construction project, which is to be financed by borrowing.
The key dates are as follows:
(i) 15th May, 2011: Loan interest relating to the project starts to be incurred
(ii) 2nd June, 2011 : Technical site planning commences
(iii) 19th June, 2011 : Expenditure on the project started to be incurred
(iv) 18th July, 2011 : Construction work commences Identify commencement date.

Solution :
Capitalization should start from 19th June, 2011.

6. SUSPENSION OF CAPITALIZATION
• An entity is required to suspend the capitalisation of borrowing costs during extended
periods in which it suspends active development of a qualifying asset. Such costs are costs
of holding partially completed assets and do not qualify for capitalisation.

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• An entity does not required to 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.

7. CESSATION OF CAPITALIZATION :
An entity should cease capitalising borrowing costs when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.

8. DISCLOSURE
Entities are required to disclose:
(a) The amount of borrowing costs capitalized during the period; and
(b) The capitalization rate used to determine the amount of borrowing costs eligible for
capitalization.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 23 – Borrowing Cost 75

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 36
CHAPTER - 9
IMPAIRMENT OF ASSETS

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. DEFINITIONS
4. TIMING OF IMPAIRMENT
5. INDICATION OF IMPAIRMENT
6. VALUE IN USE
7. IMPAIRMENT OF CASH GENERATING UNIT
8. IMPAIREMENT OF GOODWILL
9. IMPAIREMENT OF CORPORATE ASSETS
10. REVERAL OF IMPAIRMENT

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1. INTRODUCTION :
Assets as defined by Framework for preparation and Presentation of Financial Statements means
“Any resource controlled by an enterprise and from which future economic benefit are expected
by that enterprise from that resource.
As per the above definition assets represents future economic benefit and hence should be
measured according to benefit expected out of it. However if there is decline in amount of benefit
expected than the asset should be revalued to reflect the amount i.e expected benefit.
“Impairment Loss = Carrying Amount – Recoverable Amount”

2. SCOPE :
This Standard shall be applied in accounting for the impairment of all assets, other than:
1. Inventories (as covered in Ind AS 2)
2. Contract assets and assets arising from costs to obtain or fulfill a contract (Ind AS 115)
3. Deferred tax assets (Ind AS 12)
4. Assets arising from employees benefits (Ind AS 19)
5. Biological Assets measured at fair value less cost to sell (Ind AS 41)
6. Deferred acquisition costs and intangible assets arising from insurance contracts (Ind AS
104)
7. Non-current assets (or disposal groups) classified as held for sale (as covered in Ind AS 105)
8. Financial Assets (within the scope of Ind AS 109)

3. DEFINITIONS :
The following are the key terms used in this standard:
1. Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses thereon.
2. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value
less costs of disposal and its value in use.
3. Fair value – IND AS 113
4. Useful life – IND AS 16
5. An impairment loss is the amount by which the carrying amount of an asset or a cash-
generating unit exceeds its recoverable amount.
6. Value in use is the present value of the future cash flows expected to be derived from an
asset or cash-generating unit.

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Question 1
Jupiter Ltd, a leading manufacturer of steel is having a furnace, which is carried in the
balance sheet on 31.03.2011 at Rs 250 lakh. As at that date the value in use and Fair
value is Rs 200 lakh. The cost of disposal is Rs 13 lakh.
Calculate the Impairment Loss to be recognised in the books of the Company?

Solution :
Impairment Loss = Carrying Amount – Recoverable Amount
= 250 – 200 = 50 lakhs

1. Carrying Amount = 250 lakhs

2. Recoverable amount is higher of
a. Value in use = 200
b. Fair Value less cost to sale = 200 – 13 = 187

Question 2
Uttaranchal Industries Ltd gives the following estimates of cash flows relating to fixed
asset on 31.12.2015. The discount rate is 15%
Year Cash Flows (Rs. In lacs)
2016 2000
2017 3000
2018 3000
2019 4000
2020 2000
Residual value at the end of 2020 is Rs. 500 lacs
Fixed asset purchased on 01.01.2013 for Rs. 20000 lacs
Useful life is 8 years
Residual value estimated Rs. 500 lakhs at the end of 8 years
Net Selling price Rs. 10,000 lacs
Calculate on 31.12.2015
a. Carrying amount at the end of 2015
b. Value is use on 31.12.2015
c. Recoverable amount on 31.12.2015
d. Impairment loss to be recognized for the year ended 31.12.2015
e. Revised carrying amount
f. Depreciation charges for 2016

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Solution :
A. Carrying Amount = 20,000 – 7,312.5(Dep for 3 years) = 12,687.5
B. Value in use = PV of Cash flows for 5 years (including scrap value) = 9510.06
C. Recoverable amount = higher of
i. Value in Use = 9510.06
ii Fair value less cost to sales = 10,000
i.e 10,000
D. Impairment loss = 12,687.5 – 10,000 = 2,687.5
E. Revised carrying amount = 20,000 – 7,312.5 – 2,687.5 = 10,000
F. Depreciation charge for 2016 = (10,000 – 500) / 5 = 1900

4. TIMING OF IMPAIRMENT :
Irrespective of whether there is any indication of impairment, an entity is required to test
following items for impairment at least annually:
a) intangible asset with an indefinite useful life;
b) intangible asset not yet available for use; and
c) goodwill acquired in a business combination for impairment.

5. INDICATION OF IMPAIRMENT :
In assessing whether there is any indication that an asset may be impaired, an entity shall
consider, as a minimum, the following indications:

External source of Information :

The following are external source of information which may indicate that an asset is impaired:
a) during the period, an asset’s market value has declined significantly more than would be
expected as a result of the passage of time or normal use.;
b) significant changes with an adverse effect on the entity have taken place during the period,
or will take place in the near future, in the technological, market, economic or legal
environment in which the entity operates or in the market to which an asset is dedicated;
c) market interest rates or other market rates of return on investments have increased
during the period, and those increases are likely to affect the discount rate used in
calculating an asset’s value in use and decrease the asset’s recoverable amount materially;
and
d) the carrying amount of the net assets of the entity is more than its market capitalisation.

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Internal source of Information :

The following are internal source of information which may indicate that an asset is impaired:
a) evidence is available of obsolescence or physical damage of an asset;
b) significant changes with an adverse effect on the entity have taken place during the period,
or are expected to take place in the near future, in the extent to which, or manner in which,
an asset is used or is expected to be used. These changes include the asset becoming idle,
plans to discontinue or restructure the operation to which an asset belongs, plans to
dispose of an asset before the previously expected date, and reassessing the useful life of
an asset as finite rather than indefinite;
c) evidence is available from internal reporting that indicates that the economic performance
of an asset is, or will be, worse than expected. Such evidence may include:
(i) cash flows for acquiring the asset, or subsequent cash needs for operating or
maintaining it, that are significantly higher than those originally budgeted;
(ii) actual net cash flows or operating profit or loss flowing from the asset that are
significantly worse than those budgeted;
(iii) a significant decline in budgeted net cash flows or operating profit, or a significant
increase in budgeted loss, flowing from the asset; or
(iv) operating losses or net cash outflows for the asset, when current period amounts
are aggregated with budgeted amounts for the future.

6. VALUE IN USE :
Value in use is the present value of the future cash flows expected to be derived from an asset or
cash-generating unit.
Primarily two key decisions are involved in determining value in use:

Estimating future cash

flows Discount Rate to be
Used

Estimation of expected future cash flows :

The following elements shall be reflected in the calculation of an asset’s value in use:
a) an estimate of the future cash flows the entity expects to derive from the asset;
b) expectations about possible variations in the amount or timing of those future cash flows;
c) the time value of money, represented by the current market risk-free rate of interest;
d) the price for bearing the uncertainty inherent in the asset; and

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e) other factors, such as illiquidity, that market participants would reflect in pricing the future
cash flows the entity expects to derive from the asset.

Estimating the value in use of an asset involves the following steps :

a) estimating the future cash inflows and outflows to be derived from continuing use of the
asset and from its ultimate disposal; and
b) applying the appropriate discount rate to those future cash flows.

7. RECOGNISING AND MEASURING AN IMPAIRMENT LOSS :

If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment
loss.

Question 3
NDA Ltd acquired plant on 01.04.2008 for Rs.50.00 lakhs having 10 years useful life and
provides depreciation on SLM with nil residual value. On 01.04.2013. NDA Ltd revalued
the plant at Rs.29 lakhs against its book value of Rs.25 lakhs and credited Rs.4 lakhs to
revaluation reserve.
On 31.03.2015 the plant was impaired and its recoverable amount on this date was Rs.14
lakhs. Calculate the Impairment loss and how this loss should be treated in the accounts.

Solution :
1. Cost of Asset (1/4/2008) 50
Less : Depreciation (5 yrs) 25
Carrying amount (1/4/13) 25
Add : Revaluation 4
Revised Carrying amount 29

2. Balance Asset Revaluation Reserve

Balance on 1/4/13 29 4
Less : Depreciation (2 years) 11.6 1.6- Additional Depreciation
Carrying amount (31/3/2015) 17.4 2.4

3. Carrying amount 31/3/2015 17.4

Recoverable Amount 14
Impairment Loss 3.4 -- 2.4 adjusted to Revaluation reserve
Balance 1 charged to P & L

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8. CASH GENERATING UNIT :

• A cash-generating unit is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of
assets.
• If there is any indication that an asset may be impaired, recoverable amount shall be
estimated for the individual asset. If it is not possible to estimate the recoverable amount
of the individual asset, an entity is required to determine the recoverable amount of the
cash-generating unit to which the asset belongs (the asset’s cash-generating unit).
• In such cases, value in use and, therefore, recoverable amount, can be determined only
for the asset’s cash-generating unit.
• If recoverable amount cannot be determined for an individual asset, an entity identifies
the lowest aggregation of assets that generate largely independent cash inflows.

Question 4
A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-
created. The price paid for a purchased magazine title is recognised as an intangible
asset. The costs of creating magazine titles and maintaining the existing titles are
recognised as an expense when incurred. Cash inflows from direct sales and advertising
are identifiable for each magazine title. Titles are managed by customer segments. The
level of advertising income for a magazine title depends on the range of titles in the
customer segment to which the magazine title relates. Management has a policy to
abandon old titles before the end of their economic lives and replace them immediately
with new titles for the same customer segment. What is the cash-generating unit for an
individual magazine title?

Solution :
Each magazine is a Cash Generating Unit.

Question 5
In north campus there are ten college under Delhi University having their own canteens,
which provides food and beverage to be students and staff. Under a policy of the
University the contract of running all the ten college canteens will be given to only one
contractor. Out of these 7 canteens are profitable but 3 are loss making. Identify cash
generating units.

Solution :
All 10 units together is a Cash generating Unit.

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8. GOODWILL :
Goodwill does not generate cash flows independently from other assets or groups of assets and,
therefore, the recoverable amount of goodwill as an individual asset cannot be determined. As a
consequence, if there is an indication that goodwill may be impaired, recoverable amount is
determined for the cash-generating unit to which goodwill belongs. This amount is then
compared to the carrying amount of this cash-generating unit and any impairment loss is
recognized.

Question 6
At the end of year 2000 A Ltd acquired Assets of B Ltd. at a price of Rs.90,00,000. The fair
value of Assets was established to be Rs.75,00,000. Assets is to be depreciated @10%
and goodwill over 5 years. At the beginning of 2003 new govt. was voted to power and
has some policy changes that affected the entity badly. Recoverable Amount was
Rs.49,00,000.
Find out impairment loss to be recognised by the company. How should it be treated?

Solution :
Assets Goodwill Total
Carrying Amount 2000 75,00,000 15,00,000 90,00,000
Less : Depreciation (3 years) 22,50,000 Nil22,50,000
Carrying Amount 2003 52,50,000 15,00,000 67,50,000
Recoverable Amount 49,00,000
Impairment Loss 18,50,000
Impairment Loss should be applied to goodwill first i.e 15,00,000 and the balance of
Rs.3,50,000.
Revised Carrying Amount
Goodwill = Nil
Asset = 52,50,000 – 3,50,000 = 49,00,000

9. CORPORATE ASSETS :
Corporate Assets do not generate separate cash inflows, the recoverable amount of individual
corporate assets cannot be determined unless management decided to dispose the Assets

Is there is indication that corporate asset may be impaired, recoverable amount is determined
with reference to Cash generating unit to which corporate asset belongs.

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[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Corporate Assets shall be treated in similar way to goodwill except that impairment loss shall be
applied to Corporate Asset and Other Asset in the ratio of carrying amount.

10. REVERSAL OF IMPAIRMENT :

10.1 REVERAL OF IMPAIRMENT LOSS
An entity is required to assess at the end of each reporting period whether there is any
indication that an impairment loss recognised in prior periods for an asset other than
goodwill may no longer exist or may have decreased. If any such indication exists, the
entity shall estimate the recoverable amount of that asset.

If impairment loss was written off to profit and loss account, then the reversal of
impairment loss should be recognized as income in the financial statement immediately.
If impairment loss was adjusted with the Revaluation Reserve; then reversal of impairment
loss will be written back to the reserve account to the extent it was adjusted, any surplus
will be recognised as revenue.

10.2 REVERSAL OF IMPAIRMENT LOSS ON A CGU

• A reversal of an impairment loss for a cash-generating unit shall be allocated to the
assets of the unit, except for goodwill, pro rata with the carrying amounts of those
assets. These increases in carrying amounts shall be treated as reversals of
impairment losses for individual assets and recognised as discussed above.
• In allocating a reversal of an impairment loss for a cash-generating unit, the carrying
amount of an asset shall not be increased above the lower of:
a) its recoverable amount (if determinable); and
b) the carrying amount that would have been determined (net of amortisation
or depreciation) had no impairment loss been recognised for the asset in
prior periods.
• The amount of the reversal of the impairment loss that would otherwise have been
allocated to the asset is allocated pro rata to the other assets of the unit, except for
goodwill.

10.3 REVERSAL OF IMPAIRMENT OF GOODWILL

This Statement does not permit an impairment loss to be reversed for goodwill because of
a change in estimates, an impairment loss recognised for goodwill should not be reversed
in a subsequent period unless:
a. The impairment loss was caused by a specific external event of an exceptional
nature that is not expected to recur; and

84 IND AS 36 – Impairment of Assets

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b. Subsequent external events have occurred that reverse the effect of that event.

Question 7
Continuing with Question 6 …
During the year 2005, the government adopted liberal policies which are expected to
improve the working position and profitability of A Ltd. the recoverable amount at the
end of year 2005, is estimated at Rs. 40,00,000.
Find out the impairment loss in year 2003 and the reversal of impairment loss and its
treatment in the year 2005.

Solution :
Carrying Amount 2003 49,00,000
Less Depreciation (2 years) 14,00,000
Carrying amount on 2005 35,00,000
Add : Reversal of Impairment Loss 2,50,000
Carrying amount 37,50,000

Note the carrying amount in reversal should be lower of

i. Recoverable amount = 40,00,000
ii. Carrying amount as if no impairment was charged = 37,50,000 i.e (75,00,000 –
37,50,000 depreciation for 5 years)

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 36 – Impairment of Assets 85

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 41
CHAPTER - 10
AGRICULTURE

CHAPTER DESIGN

1. INTRODUCTION AND OBJECTIVE

2. SCOPE
3. RELEVANT DEFINITIONS
4. RECOGNITION OF ASSETS
5. MEASUREMENT
6. GAINS AND LOSSES
7. GOVERNMENT GRANTS
8. DISCLOSURE

86 IND AS 41 – Agriculture
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

1. INTRODUCTION AND OBJECTIVE :

Ind AS 41, Agriculture is the first standard that specifically covers the accounting and reporting
requirements for the primary sector. Prior to this standard, there were no established guidance
on agriculture and allied industry. This Standard introduces a fair value model to agriculture
accounting which is a major shift away from the traditional cost model widely applied in primary
industry.

2. SCOPE :
1. This Standard shall be applied to account for the following when they relate to agricultural
activity:
(a) biological assets;
(b) agricultural produce at the point of harvest; and
(c) government grants
2. Ind AS 41 does not apply to:
(a) land related to agricultural activity
(b) bearer plants related to agricultural activity.
(c) government grants related to bearer plants (Ind AS 20 Accounting for Government
Grants and Disclosure of Government Assistance).
(d) intangible assets associated with the agricultural activity,
This Standard is applied to agricultural produce, which is the harvested product of the entity’s
biological assets, only at the point of harvest. Thereafter, Ind AS 2 or another applicable Standard
is applied.

3. DEFINITIONS :
1. Agricultural activity :
Agricultural activity refers to the management by an entity of the biological transformation
and harvest of biological assets for sale or for conversion into agricultural produce or into
additional biological assets.
2. Biological Asset :
Biological Asset is defined as a living animal or plant.
3. Biological transformation :
Biological transformation comprises the processes of growth, degeneration, production,
and procreation that cause qualitative or quantitative changes in biological asset.
4. Agricultural produce :
Agricultural produce is the harvested product of the entity’s biological assets.
5. Harvest :
Harvest is the detachment of produce from a biological asset or the cessation of a
biological asset’s life processes.
6. Fair Value : IND AS 113

IND AS 41 – Agriculture 87
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7. Bearer plant : IND AS 16

Question 1
ABC Ltd grows vines, harvests the grapes and produces wine. Which of these activities
are in the scope of Ind AS 41?

Solution :
Vines – they are bearer plants – Apply IND AS 16.
Grapes – Agricultural produce – Apply IND AS 41

4. RECOGNITION OF ASSETS :
Entities are required to recognise a biological asset or agricultural produce when, and only when,
all of the following conditions are met:
a) Entity is in control over biological asset or agricultural produce.
b) It is probable that future economic benefits associated with the asset will flow to the
entity;
c) The fair value or cost of the asset can be measured reliably.

5. MEASUREMENT :
Biological Asset should be measured on initial recognition and at the end of each reporting period
at its fair value less costs to sell, except for the case where the fair value cannot be measured
reliably.

Question 2
A farmer owned a dairy herd, of three years old cattle as at April 1, 2011 with a fair value
of Rs.13,750 and the number of cattle in the herd was 250.
The fair value of three year cattle as at March 31, 20X2 was Rs.60 per cattle. The fair
value of four year cattle as at March 31, 20X2 is Rs.75 per cattle.
Calculate the measurement of group of cattle as at March 31, 2012 stating price and
physical change separately.

Solution :
1/4/2011 250 cattle 55 per cattle 13,750
31/3/2011 250 cattle 60 per cattle 15,000
Difference due to change in fair value 1,250
31/3/2011 250 cattle 75 per cattle 18,750
Difference due to change in age 3,750
Total profit 5,000

88 IND AS 41 – Agriculture
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

6. GAINS AND LOSSES :

1) Biological Asset :
A gain or loss arising on initial recognition of a Biological Asset at Fair value less costs to
sell and from a change in Fair value less costs to sell of a biological asset shall be included
in Profit or Loss for the period in which it arises.
2) Agriculture Produce :
A gain or loss arising on initial recognition of Agricultural produce at Fair value less costs
to sell shall be included in Profit or Loss for the period in which it arises.
A gain or loss may arise on initial recognition of agricultural produce as a result of
harvesting.

7. GOVERNMENT GRANTS :

8. DISCLOSURE :
1) Description of biological assets and activities.
2) Gains and losses recognised during the period.
3) Reconciliation of changes in biological assets.
4) Restricted assets, commitments and risk management strategies.
5) Additional disclosures when fair value cannot be measured reliably.
6) Government grants

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 41 – Agriculture 89
[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 21
CHAPTER - 11
THE EFFECTS OF
CHANGES IN FOREIGN
EXCHANGE RATES

CHAPTER DESIGN

1. INTRODUCTION
2. OBJECTIVE
3. SCOPE
4. FUNCTIONAL CURRENCY
5. MONETARY VS NON – MONETARY ITEMS
6. BRIEF APPROACH UNDER THE STANDARD
7. ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS
8. USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL
CURRENCY
9. TRANSLATION OF FOREIGN OPERATIONS
10. GOODWILL AND FAIR VALUE ADJUSTMENTS ARISING FROM A
BUSINESS COMBINATION
11. DISPOSAL OR PARTIAL DISPOSAL OF FOREIGN OPERATIONS
12. TAX EFFECT OF ALL EXCHANGE DIFFERENCES
13. DISCLOSURES

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1. INTRODUCTION :
With the growing globalization and rise in number of multinational organisation business has
crossed national boundaries and this give rise to transactions in multiple currencies. Infact many
firms are have foreign subsidiaries. This calls for a standard to look into such transactions and
operations.

2. OBJECTIVE :
The objective of the Standard is to address the accounting for foreign activities which include:
• transactions in foreign currencies; or
• foreign operations.
Considering that an entity may present its financial statements in a foreign currency, the Standard
also seeks to prescribe how to translate financial statements into a presentation currency.

Types of Currency

Foreign Currency Functional Currency Presentation Currency

The currency of the The currency in which

A currency other than
primary economic the financial
the functional
environment in which statements are
currency of the entity
the entity operates presented

3. SCOPE :
• Ind AS 21 applies to:
(a) in accounting for transactions and balances in foreign currencies, except for
derivative transactions and balances covered by Ind AS 109.
Foreign currency derivatives not covered by Ind AS 109 (e.g., some foreign currency
derivatives that are embedded in other contracts) are within the scope of this
Standard.The Standard also applies for translation of amounts relating to
derivatives from functional currency to presentation currency.
(b) in translating the results and financial position of foreign operations; and
(c) in translating an entity’s results and financial position into a presentation currency.
• Ind AS 21 does not apply to:

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(a) hedge accounting for foreign currency items, including the hedging of a net
investment in a foreign operation; Ind AS 109 should be applied for hedge
accounting;
(b) presentation of cash flows from transactions in a foreign currency or to translation
of cash flows of a foreign operation in the statement of cash flows (refer to Ind AS
7).
• This standard also does not apply to long term foreign currency items for which an entity
has opted for the exemption as per Ind AS 101.
• Such an entity may continue to apply the accounting policy as opted for such long term
foreign currency monetary items.

4. FUNCTIONAL CURRENCY :
• An entity measures its assets, liabilities, equity, income and expenses in its functional
currency.
• All transactions in currencies other than the functional currency are foreign currency
transactions.
Ind AS 21 requires each entity to determine its functional currency.
• In determining its functional currency, an entity emphasises the currency that determines
the pricing of the transactions that it undertakes, rather than focusing on the currency in
which those transactions are denominated.
• The following are the factors that may be considered in determining an appropriate
functional currency:
(a) the currency that mainly influences sales prices for goods and services; this often
will be the currency in which sales prices are denominated and settled;
(b) the currency of the country whose competitive forces and regulations mainly
determine the sales prices of its goods and services; and
(c) the currency that mainly influences labour, material and other costs of providing
goods and services; often this will be the currency in which these costs are
denominated and settled.
• Other factors that may provide supporting evidence to determine an entity’s
functional currency are:
(a) the currency in which funds from financing activities i.e., issuing debt and equity
instruments) are generated;
(b) the currency in which receipts from operating activities are usually retained.
• If an entity is a foreign operation, additional factors are set out in the Standard
which should be considered to determine whether its functional currency is the

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same as that of the reporting entity of which it is a subsidiary, branch, associate or

joint venture:
(a) whether the activities of foreign operations are carried out as an extension of that
reporting entity, rather than being carried out with a significant degree of
autonomy.
(b) transactions with the reporting entity as a proportion of the foreign operation’s
activities;
(c) impact of cash flows from the activities of the foreign operations on the cash flows
of the reporting entity and whether such cash flows are readily available for
remittance;
(d) whether cash flows from the activities of the foreign operation are sufficient to
service existing and normally expected debt obligation without funds being made
available by the reporting entity.
In practice, the functional currency of a foreign operation that is integral to the group will
usually be the same as that of the parent.

Question 1
Future Ltd. sells a revitalising energy drink that is sold throughout the world. Sales of the
energy drink comprise over 90% of the revenue of Future Ltd. For convenience and
consistency in pricing, sales of the energy drink are denominated in USD. All financing
activities of Future Ltd. are in its local currency (L$), although the company holds some
USD cash reserves. Almost all of the costs incurred by Future Ltd. are denominated in L$
What is the functional currency of Future Ltd.?

Solution :
The functional currency of Future Ltd. is the L$ Looking at the primary indicators, the facts
presented indicate that the currency that mainly influences the cost of producing the
energy drink is the L$. As stated in the fact pattern, pricing of the product in USD is done
for convenience and consistency purposes; there is no indication that the sales price is
influenced by the USD.

5. MONETARY VS NON – MONETARY ITEMS :

Sr No. Particulars Monetary Items Non-monetary

1 Units of Currency Units of currency held and assets There is no fixed or
and liabilities to be received or paid determinable number of
units of currency

IND AS 21 – The Effects of Changes in Foreign Exchange Rates 93

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are in a fixed or determinable

number of units of currency.
Most debt securities are
considered as monetary items
because their contractual cash
flows are fixed or determinable

Examples of Monetary items include :

• pensions and other employee benefits to be paid in cash;
• provisions that are to be settled in cash; Rs cash dividends that are recognised as a liability;
• contract to receive (or deliver) a variable number of the entity’s own equity instruments
or a variable amount of assets in which the fair value to be received (or delivered) equals
a fixed or determinable number of units of currency.
Most debt securities are considered as monetary items because their contractual cash flows are
fixed or determinable.

Examples of non-monetary items include :

• amounts prepaid for goods and services (e.g., prepaid rent) and income received in
advance, on the basis that no money will be paid or received in the future;
• goodwill;
• intangible assets;
• inventories;
• property, plant and equipment;
• provisions that are to be settled by the delivery of a non-monetary asset.

6. BRIEF APPROACH UNDER THE STANDARD :

The following is a summary of the approach under Ind AS 21 to foreign currency translation:
• Determine the functional currency of the entity - each entity, whether a stand-alone entity,
an entity with foreign operations (such as a parent) or a foreign operation (such as a
subsidiary or branch) should determine its functional currency. Foreign currency
transactions (i.e., transactions not in entity’s functional currency) are translated into the
entity’s functional currency at the transaction date.
• Translation of assets and liabilities denominated in foreign currency at the reporting date
- At the reporting date assets and liabilities denominated in foreign currency are translated
into functional currency as follows:
— Monetary items: at the exchange rate at the reporting date i.e., closing date.
— Non-monetary items measured at historical cost: not retranslated/restated.

94 IND AS 21 – The Effects of Changes in Foreign Exchange Rates

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— Non-monetary items measured at fair value: at the exchange rate on the date of
fair value determination.

7. ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS :

Foreign Currency
Transactions

Subsequent
Initial Recognition
Measurement

Non Monetary Items

Spot rate on the date Monetary Items at
at Historical Cost - No
of transaction Closing Rate
Translation

Non Monetary Items

at Fair Value -When
Fair Value is
measured

1. Monetary Items :
Exchange differences arising on the settlement of monetary items or on translating
monetary items are recognised in profit or loss, except:
(i) for accounting for exchange difference as required by application of hedge
accounting under Ind AS 109 – for example Ind AS 109 requires that exchange
differences on monetary items that qualify as hedging instruments in a cash flow
hedge should be recognised initially in other comprehensive income to the extent
that the hedge is effective;
(ii) for monetary items that in substance form part of the reporting entity’s net
investment in a foreign operation (discussed below);
(iii) for long-term foreign currency monetary items in case the entity has exercised the
option for recognising exchange differences on such items in equity (discussed
below).

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2. Non-Monetary Items :
(i) Ind AS require certain gains and losses to be recognised in other comprehensive
income.
(ii) If the gain or loss on a non-monetary item is recognised in profit or loss, any
exchange component of that gain or loss is also recognized in profit or loss.

Change in Functional Currency :

• Once an entity has determined its functional currency, it is not changed unless there is a
change in the relevant underlying transactions, events and conditions.
• If circumstances change and a change in functional currency is appropriate, then the
change is accounted for prospectively from the date of the change.

8. USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL CURRENCY :

• An entity measures items in its financial statements in its functional currency; but it may
decide to present its financial statements in a currency or currencies other than its
functional currency.
• The results and financial position of an entity whose functional currency is not the currency
of a hyperinflationary economy are translated into a different presentation currency as
follows:
(a) assets and liabilities for each balance sheet presented (i.e., including comparatives)
are translated at the closing rate at the date of that balance sheet;
(b) income and expenses are translated at exchange rates at the dates of relevant
transactions; weighted average rates may be used if they are a reasonable
approximation;
(c) all resulting exchange differences should be recognised in other comprehensive
income as they have little or no direct effect on the present and future cash flows
from operations and are presented in a separate component of equity until disposal
of the foreign operation.
• In case of an entity whose functional currency is the currency of a hyperinflationary
economy, the translation into a different presentation currency, also being the currency
of a hyperinflationary economy, is done by translating all amounts (i.e., assets, liabilities,
equity items, income and expenses, including comparatives) at the closing rate at the date
of the most recent balance sheet.

9. TRANSLATION OF FOREIGN OPERATIONS :

The guidance provided on determining an entity’s functional currency equally applies to
determine the functional currency of a foreign operation of the entity.

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10. GOODWILL AND FAIR VALUE ADJUSTMENTS ARISING FROM A BUSINESS COMBINATION :
• Goodwill and fair value acquisition accounting adjustments arising from a business
combination are treated as assets and liabilities of the foreign operation.
• Hence they are expressed in the functional currency of the foreign operation and should
be translated at the closing exchange rate as is the case for other assets and liabilities.

11. DISPOSAL OR PARTIAL DISPOSAL OF FOREIGN OPERATIONS :

• A disposal may arise, for example, through sale, liquidation or repayment of share capital.
On disposal of the foreign operation, the cumulative exchange differences relating to that
foreign operation recognised in other comprehensive income and accumulated separately
in equity are reclassified to profit or loss (reclassification adjustment) when the gain or loss
on disposal is recognised.
• On disposal of a subsidiary that includes a foreign operation, the cumulative amount of the
exchange differences related to that foreign operation that have been attributed to the
non- controlling interests forms part of the non-controlling interests that is derecognised
and is included in the calculation of the gain or loss on disposal, but it is not reclassified to
profit or loss.
• In addition to the disposal of an entity’s entire interest in a foreign operation, the following
are accounted for as disposals even if the entity retains an interest in the former subsidiary,
associate or jointly controlled entity:
 the loss of control of a subsidiary that includes a foreign operation;
 the loss of significant influence over an associate that includes a foreign operation;
and
 the loss of joint arrangement over a jointly controlled entity that includes a foreign
operation.

12. TAX EFFECT OF ALL EXCHANGE DIFFERENCES :

Ind AS 12 applies to tax effects of gains and losses on foreign currency transactions and exchange
differences arising on translating the results and financial position of an entity (including a foreign
operation) into a different currency.

13. DISCLOSURES :
Ind AS 21 requires the following disclosures:
(a) amount of exchange differences recognised in profit or loss except for those arising on
financial instruments measured at fair value through profit or loss in accordance with Ind
AS 109;

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(b) net exchange differences recognised in other comprehensive income and accumulated in
a separate component of equity, along with the reconciliation of the amount at the
beginning and end of the period;
(c) if the presentation currency is different from the functional currency - that fact shall be
stated, together with disclosure of the functional currency and the reason for using a
different presentation currency;
(d) in case of change in functional currency of either the reporting entity or a significant
foreign operation:
(i) fact of such change;
(ii) reason for the change and;
(iii) date of change in functional currency;
(e) if presentation currency is different from functional currency, the financial statements can
be described as complying with Ind AS only if all Ind AS including the translation method
of this Standard is complied with. However, if an entity presents its financial statements
or supplementary financial information in a currency other than its functional or
presentation currency:
(i) the information should be clearly identified as supplementary information to
distinguish it from the information that complies with Ind AS;
(ii) the currency in which the supplementary information is displayed should be
disclosed; and
(iii) the entity’s functional currency and the method of translation used to determine
the supplementary information should be disclosed.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

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98 IND AS 21 – The Effects of Changes in Foreign Exchange Rates

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IND AS 7
CHAPTER - 12
CASH FLOW STATEMENT

CHAPTER DESIGN

1. INTRODUCTION
2. MEANING
3. OBJECTIVE
4. BENEFIT OF CASH FLOW STATEMENT
5. SCOPE
6. DEFINITIONS
7. CASH AND CASH EQUIVALENT
8. PRESENTATION OF CASH FLOW STATEMENT
9. REPORTING CASH FLOWS FROM OPERATING ACTIVITY
10. FOREIGN CURRENCT CASH FLOW
11. INTEREST AND DIVIDEND
12. TAXES ON INCOME
13. INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES
14. CHANGES IN OWNERSHIPS INTERESTS IN SUBSIDIARIES AND OTHER
BUSINESSES
15. NON CASH TRANSACTIONS

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1. INTRODUCTION :
The balance sheet is a snapshot of entity’s financial resources and obligations at a particular point
of time and the statement of profit and loss reflects the financial performance for the period.
These two components of financial statements are based on accrual basis of accounting. The
statement of cash flows includes only inflows and outflows of cash and cash equivalents; it
excludes transactions that do not affect cash receipts and payments.

2. MEANING :

From Operating
Activity

CASH FLOW
STATEMENT

From Investing From Financing

Activities Activities

3. OBJECTIVE :
1. To provide information about historical changes in cash and cash equivalents
2. To assess the ability to generate cash and cash equivalents
3. To understand the timing and certainty of their generation

4. BENEFIT OF CASH FLOW STATEMENT :

1. Provides information enabling evaluation of changes in net assets and financial structure
(Liquidity and solvency)
2. Assesses the ability to manage the cash
3. Assess and compare the present value of future cash flows
4. Compares the efficiency of different entities

5. SCOPE :
An entity shall prepare a statement of cash flows in accordance with the requirements of this
Standard and shall present it as an integral part of its financial statements for each period for
which financial statements are presented.
The Standard requires all entities to present a statement of cash flows.

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6. DEFINITIONS :
The following terms are used in this Standard with the meanings specified:
1. Cash comprises cash on hand and demand deposits.
2. Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.
5. Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
6. Financing activities are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity.

7. CASH AND CASH EQUIVALENTS :

Cash Equivalent means investments which can be realised easily in cash in a short period from
the date of investing the same.
1. Purpose : Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes.
2. Liquidity and Risk : For an investment to qualify as a cash equivalent it must be readily
convertible to a known amount of cash and be subject to an insignificant risk of changes in
value. Therefore, an investment normally qualifies as a cash equivalent only when it has a
short maturity of, say, three months or less from the date of acquisition.
3. Equity investments are excluded from cash equivalents unless they are, in substance, cash
equivalents.
For example, preference shares acquired within a short period of their maturity and with
a specified redemption date.
4. Bank borrowings are generally considered to be financing activities. However, where bank
overdrafts which are repayable on demand form an integral part of an entity's cash
management, bank overdrafts are included as a component of cash and cash equivalents.
A characteristic of such banking arrangements is that the bank balance often fluctuates
from being positive to overdrawn.
5. Cash Management : Cash flows exclude movements between items that constitute cash
or cash equivalents because these components are part of the cash management of an
entity rather than part of its operating, investing and financing activities. Cash
management includes the investment of excess cash in cash equivalents.

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Question 1
Company has provided the following information regarding the various assets held by
company on 31st March 2011. Find out, which of the following items will be part of cash
and cash equivalents for the purpose of preparation of cash flow statement as per the
guidance provided in Ind AS 7:
No. Name of Security Additional Information
1 Government Bonds 5%, open ended, main purpose was to park
the excess funds for temporary period
2. Fixed deposit with SBI 12%, 3 years maturity on 1st Jan 2014
3. Fixed deposit with HDFC 10%, original term was for 2 years, but due
for maturity on 30.06.2011
4. Redeemable Preference shares The redemption is due on 30th April 2011
in ABC ltd
5. Cash balances at various banks All branches of all banks in India
6. Cash balances at various banks All international branches of Indian banks
7. Cash balances at various banks Branches of foreign banks outside India
8 Bank overdraft of SBI Fort branch Temporary overdraft, which is payable on
demand
9 Treasury Bills 90 days maturity

Solution :
No. Name of Security Additional Information
1 Government Bonds Included as intention is not to hold long term
2. Fixed deposit with SBI Not to be considered – long term
3. Fixed deposit with HDFC Exclude as original maturity is less than 90 days
from the date of acquisition
4. Redeemable Preference Include as due within 90 days from the date of
shares in ABC ltd acquisition
5. Cash balances at various Include
banks
6. Cash balances at various Include
banks

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7. Cash balances at various Include

banks
8 Bank overdraft of SBI Fort Include
branch
9 Treasury Bills Include

8. PRESENTATION OF STATEMENT OF CASH FLOWS :

Principal Activities that result Activities that result

revenueproducing in the acquisition and in changes in the size
activities of the entity disposal of long-term and composition of
OPERATING ACTIVITY

FINANCING ACTIVITY
and other activities assets and other the contributed
INVESTING ACTIVTY

that are not investing investments not equity and

or financing activities included in cash borrowings of the
equivalents entity

OPERATING ACTIVITY :
Operating Cash Inflows Operating Cash Outflows
Cash receipts from the sale of goods and the Cash payments to suppliers for goods and
rendering of services services
Cash receipts from royalties, fee, commission Cash payments to and on behalf of
and other revenue employees
Cash receipts and cash payments of an Cash payments or refunds of income taxes
insurance entity for premiums and claims, unless they can be specifically identified with
annuities and other policy benefits financing and investing activities
Cash receipts and payments from contracts held
for dealing or trading purposes

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INVESTING ACTIVITY :
Investing Cash Inflows Investing Cash Outflows
Cash receipts from sales of property, plant and Cash payments to acquire property, plant
equipment, intangibles and other long-term and equipment, intangibles and other long-
assets term assets. These payments include those
relating to capitalised development costs
and self constructed property, plant and
equipment
Cash receipts from sales of equity or debt Cash payments to acquire equity or debt
instruments of other entities and interests in instruments of other entities and interests
joint ventures (other than receipts for those in joint ventures (other than payments for
instruments considered to be cash equivalents those instruments considered to be cash
and those held for dealing or trading purposes) equivalents or those held for dealing or
trading purposes);
Cash receipts from the repayment of advances Cash advances and loans made to other
and loans made to other parties (other than parties (other than advances and loans
advances and loans of a financial institution) made by a financial institution)
Cash receipts from futures contracts, forward Cash payments for futures contracts,
contracts, option contracts and swap contracts forward contracts, option contracts and
except when the contracts are held for dealing swap contracts except when the contracts
or trading purposes, or the receipts are are held for dealing or trading purposes, or
classified as financing activities the payments are classified as financing
activities

FINANCING ACTIVITY :
Cash Inflows from Financing Activity Cash Outflows from Financing Activity
Cash proceeds from issuing shares or other Cash payments to owners to acquire or
equity instruments; redeem the entity’s shares;
Cash proceeds from issuing debentures, loans, Cash repayments of amounts borrowed; and
notes, bonds, mortgages and other
Short-term or long-term borrowings; Cash payments by a lessee for the reduction
of the outstanding liability relating to
A finance lease.

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Question 2
From the following transactions taken from a parent company having multiple
businesses and multiple segments, identify which transactions will be classified as
operating Investing and Financing:
No. Nature of transaction
1 Issued Preference Shares
2 Purchased the shares of 100% subsidiary company
3 Dividend received from shares of subsidiaries
4 Dividend received from other companies
5 Bonus shares issued
6 Purchased license for manufacturing of special drugs
7 Royalty received from the goods patented by the company
8 Rent received from the let out building (letting out is not main business)
9 Interest received from the advances given
10 Dividend paid
11 Interest paid on security deposits
12 Purchased goodwill
13 Acquired the assets of a company by issue of equity shares (not parting any
cash)
14 Interim dividends paid
15 Dissolved the 100% subsidiary and received the amount in final settlement

Solution :
No. Nature of transaction Operating / Investing / Financing
1 Issued Preference Shares Financing
2 Purchased the shares of 100% subsidiary Operating
company
3 Dividend received from shares of Operating
subsidiaries
4 Dividend received from other companies Investing / Financing
5 Bonus shares issued No cash Flow
6 Purchased license for manufacturing of Investing
special drugs
7 Royalty received from the goods patented Operating
by the company

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8 Rent received from the let out building Investing

(letting out is not main business)
9 Interest received from the advances given Operating
10 Dividend paid Financing
11 Interest paid on security deposits Financing
12 Purchased goodwill Investing
13 Acquired the assets of a company by issue Not to be Considered
of equity shares (not parting any cash)
14 Interim dividends paid Financing
15 Dissolved the 100% subsidiary and received Investing
the amount in final settlement

9. REPORTING CASH FLOWS FROM OPERATING ACTIVITY :

• An entity shall report cash flows from operating activities using either:
1. the direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
2. the indirect method, whereby profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense associated
with investing or financing cash flows.
• Entities are encouraged to report cash flows from operating activities using the direct
method.

10. FOREIGN CURRENCT CASH FLOW :

• Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s
functional currency by applying to the foreign currency amount the exchange rate
between the functional currency and the foreign currency at the date of the cash flow.
• The cash flows of a foreign subsidiary shall be translated at the exchange rates between
the functional currency and the foreign currency at the dates of the cash flows.
Example : Suppose the money is received on account of exports on 15th January 2017 in
US $. The company prepares the accounts in rupees. In such case the exchange rate
between USD and Rupee as on 15th January 2017 need to be applied for conversion.

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• Unrealised gains and losses arising from changes in foreign currency exchange rates are
not cash flows. However, the effect of exchange rate changes on cash and cash equivalents
held or due in a foreign currency is reported in the statement of cash flows in order to
reconcile cash and cash equivalents at the beginning and the end of the period. This
amount is presented separately from cash flows from operating, investing and financing
activities and includes the differences, if any, had those cash flows been reported at end
of period exchange rates.

11. INTEREST AND DIVIDENDS :

Financing Company Other company

Interest Paid Cash flows arising from Cash flows from financing
operating activities activities
Interest and Dividend Cash flows arising from Cash flows from investing
Received operating activities activities
Dividend Paid Cash flows from financing Cash flows from financing
activities activities

12. TAXES ON INCOME :

Cash flows arising from taxes on income shall be separately disclosed and shall be classified as
cash flows from operating activities unless they can be specifically identified with financing and
investing activities.

13. INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES :

When accounting for an investment in an associate, a joint venture or a subsidiary accounted for
by use of the equity or cost method, an investor restricts its reporting in the statement of cash
flows to the cash flows between itself and the investee, for example, to dividends and advances.

An entity that reports its interest in an associate or a joint venture using the equity method
includes in its statement of cash flows the cash flows in respect of its investments in the associate
or joint venture, and distributions and other payments or receipts between it and the associate
or joint venture.

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14. CHANGES IN OWNERSHIPS INTERESTS IN SUBSIDIARIES AND OTHER BUSINESSES :

Classification of Cash Flows as Investing Activity :
The aggregate cash flows arising from obtaining or losing control of subsidiaries or other
businesses shall be presented separately and classified as investing activities

Classification of Cash Flows as Financing Activity :

Cash flows arising from changes in ownership interests in a subsidiary that do not result in a loss
of control shall be classified as cash flows from financing activities, unless the subsidiary is held
by an investment entity and is required to be measured at fair value through profit or loss.

15. NON-CASH TRANSACTIONS :

Investing and financing transactions that do not require the use of cash or cash equivalents shall
be excluded from a statement of cash flows.

Thanks ….

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rahulmalkan

rahulmalkan

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IND AS 113
CHAPTER - 13
FAIR VALUE
MEASUREMENT

CHAPTER DESIGN

1. WHAT IS FAIR VALUE

2. SCOPE
3. DEFINITIONS
4. ASSET OR LIABILITY SPECIFIC FAIR VALUE
5. THE TRANSACTION
6. MARKET PARTICIPANTS
7. THE PRICE
8. APPLYING FAIR VALUE RULES ON NON-FINANCIAL ASSETS
9. APPLYING FAIR VALUE RULES TO LIABILITIES AND AN ENTITY’S OWN
EQUITY INSTRUMENTS
10. FAIR VALUE AT INITIAL RECOGNITION
11. VALUATION TECHNIQUES
12. FAIR VALUE HIERARCHY

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1. WHAT IS FAIR VALUE :

It is a market based value rather than an entity specific prices and this price should be received
to sell an asset or paid to transfer a liability in a normal transaction (e.g. other than any stressed
sale etc). Fair Value is an exit price and not a price at which an Asset/ liability sells/ purchases
otherwise.

Fair Value is market-based measurement, not an entity-specific measurement.

2. SCOPE :
There are many Ind AS which require measuring assets/ liabilities at fair value and whenever it is
required to be fair valued, one looks at Ind AS 113.

Example
• Fair value less cost to sell as required under Ind AS 105 for assets held for sale.
• Fair value through Profit & Loss as required under Ind AS 109 for Financial Instruments.
• Property, plant & equipment measured using revaluation modal as required under Ind AS 16.
• Biological assets measure at fair value under Ind AS 41 for biological assets.

What is not covered ?

Measurement and Disclosure exclusion :

(a) share-based payment transactions within the scope of Ind AS 102, Share based Payment;
(b) leasing transactions within the scope of Ind AS 17, Leases; and
(c) measurements that have some similarities to fair value but are not fair value, such as net
realisable value in Ind AS 2, Inventories, or value in use in Ind AS 36, Impairment of Assets.

Disclosure exclusion
(a) plan assets measured at fair value in accordance with Ind AS 19, Employee Benefits;
(b) assets for which recoverable amount is fair value less costs of disposal in accordance with
Ind AS 36.

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3. DEFINITION :

Fair Value

The price that

would be
Between At the
received to sell In an orderly
market measurement
an asset or transaction
participants date
paid to transfer
a liability

4. ASSET OR LIABILITY SPECIFIC FAIR VALUE :

The standard emphasis that in order to get a fair value of an asset/ liability, the restrictions or
conditions that might be related to a particular entity should not be taken into account because
a fair value will be based on market participant assumptions rather to an entity specific conditions
or restriction which usually will not affect fair valuation of an asset/ liability.

5. THE TRANSACTION :
A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction
between market participants to sell the asset or transfer the liability at the measurement date
under current market conditions.

A fair value measurement assumes that the transaction to sell the asset or transfer the liability
takes place either:
(a) in the principal market for the asset or liability; or
(b) in the absence of a principal market, in the most advantageous market for the asset or
liability.

5.1 Principal market :

Market which is normally the place in which the assets/ liabilities are being transacted with
highest volume with high level of activities comparing with any other market available for
similar transactions.

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5.2 Most advantageous market :

• This is the market which either maximizes the amount that would be received when
an entity sells an asset or minimize the amount that is to be paid while transferring
the liability.
• In the absence of principal market, this market is used for Fair Valuation of the
Assets/ Liabilities. In many cases Principal market & most advantageous market will
be same.
• The market will be assessed based on net proceeds from the sale which will deduct
expenses associated with such sale in most advantageous market.

6. MARKET PARTICIPANTS :
The parties which eventually transact the assets/ liabilities either in principal market or most
advantageous market in their best economic interest i.e.
• They should be independent and not a related party. However, if related parties have
done similar transaction on arm’s length price, then it can be between related parties as
well.
• The parties should not be under any stress or force to enter into these transactions
• All parties should have reasonable and sufficient information about the same.

7. THE PRICE :
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction in the principal (or most advantageous) market at the measurement date
under current market conditions (i.e. an exit price) regardless of whether that price is directly
observable or estimated using another valuation technique.

7.1 Transaction cost :

Principal (or most advantageous) market is where significant level of transactions and
activities takes place and it eventually covers/ considers all such transaction costs. Hence,
it would not be appropriate to consider any transaction cost further while assessing fair
values from such principal markets.

7.2 Transport cost :

If location is a characteristic of the asset (as might be the case, for example, for a
commodity), the price in the principal (or most advantageous) market shall be adjusted for
the costs, if any, that would be incurred to transport the asset from its current location to
that market.

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Principal Most advantageous

market market
Transaction Cost NO YES
Transport cost YES YES

8. APPLYING FAIR VALUE RULES ON NON-FINANCIAL ASSETS :

Fair valuation in case of non-financial assets especially buildings and other fixed assets often
require to look for the best and highest use by its market participants and that will be the
reference point to evaluate fair value of such non-financial assets.

9. APPLYING FAIR VALUE RULES TO LIABILITIES AND AN ENTITY’S OWN EQUITY INSTRUMENTS:

Fair value of
liability or equity
instrument

Using quoted
Other observable If (A) or (B) are
price in active
inputs (B) not available
market (A)

Income approach Market approach

10. FAIR VALUE AT INITIAL RECOGNITION :

(a) The transaction is between related parties, although the price in a related party transaction
may be used as an input into a fair value measurement if the entity has evidence that the
transaction was entered into at market terms.
(b) The transaction takes place under duress or the seller is forced to accept the price in the
transaction. For example, that might be the case if the seller is experiencing financial
difficulty.

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11. VALUATION TECHNIQUE :

An entity shall use valuation techniques that are appropriate in the circumstances and for which
sufficient data are available to measure fair value, maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.

Appropriate in the Maximising the

circumstances use of relevant
observable inputs
Valuation And
Techniques For which sufficient Minimising the use
data are available to of unobservable
measure Fair Value inputs

Ind AS 113 specifies following three approaches to measure fair values:

Cost
Approach

Market Income
Approach Approach

Valuation
Techniques

1. MARKET APPROACH : The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable (i.e. similar) assets,
liabilities or a group of assets and liabilities, such as a business.
2. INCOME APPROACH : The income approach converts future amounts (e.g. cash flows or
income and expenses) to a single current (i.e. discounted) amount. When the income
approach is used, the fair value measurement reflects current market expectations about
those future amounts.
3. COST APPROACH : This method describes how much cost is required to replace existing
asset/ liability in order to make it in a working condition. All related costs will be its fair
value. It actually considers replacement cost of the asset/ liability for which we need to
find fair value.

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12. FAIR VALUE HIERARCHY :

The hierarchy has been categorized in 3 levels which are based on the level of inputs that are
being used to find out such fair values.

Level 1 Inputs
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
that the entity can access at the measurement date.

Level 2 Inputs
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly.
If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for
substantially the full term of the asset or liability. Level 2 inputs include the following:
(a) quoted prices for similar assets or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that are not active.
(c) inputs other than quoted prices that are observable for the asset or liability, for example:
(i) interest rates and yield curves observable at commonly quoted intervals;
(ii) implied volatilities; and
(iii) credit spreads.
(iv) market-corroborated inputs.

Level 3 Inputs
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used
to measure fair value to the extent that relevant observable inputs are not available, thereby
allowing for situations in which there is little, if any, market activity for the asset or liability at the
measurement date.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

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IND AS 108
CHAPTER - 14
OPERATING SEGMENTS

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. OPERATING SEGMENTS
4. CODM – “CHIEF OPERATING DECISION MAKER”
5. REPORTABLE SEGMENTS
6. AGGREGATION CRITERIA
7. QUANTITATIVE THRESHOLDS
8. DISCLOSURE
9. MEASUREMENT
10. RESTATMENT OF PREVIOUSLY REPORTED INFORMATION
11. ENTITY WIDE DISCLOSURES

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1. INTRODUCTION :

2. SCOPE :
Ind AS 108 should apply to companies to which Indian Accounting Standards notified under the
Companies Act, 2013 apply.
If an entity that is not required to apply Ind AS 108 chooses to disclose information about
segments that does not comply with Ind AS 108, it should not describe the information as
segment information.
If a financial report contains both the consolidated financial statements of a parent that is within
the scope of Ind AS 108 as well as the parent’s separate financial statements, segment
information is required only in the consolidated financial statements.

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3. OPERATING SEGMENTS :

Question 1
ABC Ltd. manufactures and sells healthcare products, and food and grocery products.
Three products namely A, B & C are manufactured. Product A is classified as healthcare
product and product B & C are classified as food and grocery products. Products B & C
are similar products. Discrete financial information is available for each manufacturing
locations and for the selling activity of each product. There are two line managers
responsible for manufacturing activities of products A, B & C. Manager X manages
product A and Manager B manages products B & C. The operating results of health care
products (product A) and food and grocery products (products B & C) are regularly
reviewed by the CODM. Identify reportable segments of ABC Ltd.

Solution :
There are 2 segments
1. Segment A
2. Segment B and C

4. CODM :
The term ‘chief operating decision maker’ (CODM) identifies a function, not necessarily a manager
with a specific title.
• That function is to allocate resources to
• assess the performance of the operating segments of an entity.

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• Often the CODM of an entity is its chief executive officer or chief operating officer but, for
example, it may be a group of executive directors or others.

5. REPORTABLE SEGMENTS :

Identify Determine
Identify Disclose
operating Reportable
CODM information
Segments Segments

6. AGGREGATION CRITERIA :
Two or more operating segments may be aggregated into a single operating segment if
aggregation is consistent with the core principle of Ind AS 108, the segments have similar
economic characteristics, and the segments are similar in each of the following respects:
(a) the nature of the products and services;
(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services; and
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance
or public utilities.

7. QUANTITATIVE THRESHOLDS :
1. An entity should report separately information about an operating segment that meets
any of the following quantitative thresholds:
a) Its reported revenue, including both sales to external customers and intersegment
sales or transfers, is 10% or more of the combined revenue, internal and external,
of all operating segments.
b) The absolute amount of its reported profit or loss is 10% or more of the greater, in
absolute amount, of
(i) the combined reported profit of all operating segments that did not report a
loss and
(ii) the combined reported loss of all operating segments that reported a loss
c) Its assets are 10% or more of the combined assets of all operating segments.
2. Operating segments that do not meet any of the quantitative thresholds may be
considered reportable and separately disclosed, if management believes that information
about the segment would be useful to users of the financial statements.

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3. External revenue of reportable segments must be ≥ 75% of total external revenue of the
entity.

Question 2
From the information given for RM Ltd. identity its reportable segments
Segments External Inter Segment Total Total Profit Total
Sales Transfers Revenue Assets
A 200 60 260 -85 48
B -- 100 100 10 20
C 35 30 65 15 6
D 10 -- 10 -25 4
E 15 5 20 12 2
F 55 -- 55 5 6
G 50 5 55 7 5
H 45 5 50 23 9

Solution :
Segments External Inter Segment Total Total Profit Total
Sales Transfers Revenue Assets
A 200 60 260 -85 48
B -- 100 100 10 20
C 35 30 65 15 6
D 10 -- 10 -25 4
E 15 5 20 12 2
F 55 -- 55 5 6
G 50 5 55 7 5
H 45 5 50 23 9
Total 410 205 615 Loss = 110 100
Profit = 72

1. 10% of total revenue = 615 x 10% = 61.5, so segment A, B and C shall be reported
2. 10% of loss = 110 x 10% = 11, so segment A, C, D, E and H shall be reported
3. 10% of Assets = 100 x 10% = 10, so segment A and B shall be reported
Taking the above 3 into consideration = A, B, C, D, E and H shall be reported
The total external sales of the segments selected (A, B, C, D, E and H) is 305 i.e 74.39 %
which is less than 75%. Therefore Any one of the balance segment F or G shall also be
reported.
Also management can add any more segments, if they feel that disclosing such a segment
is important.

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8. DISCLOSURES :
An entity should disclose the following for each period for which a statement of profit and loss is
presented:
a. general information;
b. information about reported segment profit or loss, including specified revenues and
expenses included in reported segment profit or loss, segment assets, segment liabilities
and the basis of measurement; and
c. reconciliations of the totals of segment revenues, reported segment profit or loss, segment
assets, segment liabilities and other material segment items to corresponding entity
amounts.

GENERAL INFORMATION
An entity should disclose the following general information:
a. factors used to identify
b. the judgements made by management in applying the aggregation criteria.
c. types of products and services from which each reportable segment derives its revenues.

INFORMATION ABOUT PROFIT OR LOSS, ASSETS AND LIABILITIES :

a. revenues from external customers;
b. revenues from transactions with other operating segments of the same entity;
c. interest revenue;
d. interest expense;
e. depreciation and amortisation;
f. material items of income and expense disclosed in accordance with Ind AS 1, Presentation
of Financial Statements;
g. the entity’s interest in the profit or loss of associates and joint ventures accounted for by
the equity method;
h. income tax expense or income; and
i. material non-cash items other than depreciation and amortisation.

9. MEASUREMENTS :
The amount of each segment item reported should be the measure reported to the CODM for
the purposes of making decisions about allocating resources to the segment and assessing its
performance.

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RECONCILIATIONS :
An entity should provide reconciliations of all of the following:
a. the total of the reportable segments’ revenues to the entity’s revenue;
b. the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss
before tax expense (tax income) and discontinued operations. However, if an entity
allocates to reportable segments items such as tax expense (tax income), the entity may
reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss
after those items;
c. the total of the reportable segments’ assets to the entity’s assets if the segment assets are
reported;
d. the total of the reportable segments’ liabilities to the entity’s liabilities if segment liabilities
are reported; and
e. the total of the reportable segments’ amounts for every other material item of information
disclosed to the corresponding amount for the entity.

10. RESTATEMENTS OF PREVIOUSLY REPORTED INFORMATION :

If an entity changes the structure of its internal organisation in a manner that causes the
composition of its reportable segments to change, the corresponding information for earlier
periods, including interim periods, should be restated unless the information is not available and
the cost to develop it would be excessive. The determination of whether the information is not
available and the cost to develop it would be excessive should be made for each individual item
of disclosure. Following a change in the composition of its reportable segments, an entity should
disclose whether it has restated the corresponding items of segment information for earlier
periods.

11. ENTITY – WIDE DISCLOSURE :

INFORMATION ABOUT PRODUCTS AND SERVICES

INFORMATION ABOUT GEOGRAPHICAL AREAS

INFORMATION ABOUT MAJOR CUSTOMERS

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Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

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IND AS 34
CHAPTER - 15
INTERIM FINANCIAL
REPORTING

CHAPTER DESIGN

1. INTRODUCTION
2. OBJECTIVE
3. SCOPE
4. DEFINITIONS
5. CONTENTS OF AN INTERIM FINANCIAL REPORT
6. RECOGNITION AND MEASUREMENT
7. RESTATEMENT OF PREVIOUSLY REPORTED INTERIM PERIODS
8 INTERIM FINANCIAL REPORTING AND IMPAIRMENT

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1. INTRODUCTION :
Interim Financial Reporting applies when an entity prepares an interim financial report. Ind AS 34
does not mandate an entity as when to prepare such a report. Timely and reliable interim financial
reporting improves the ability of investors, creditors, and others to understand an entity’s
capacity to generate earnings and cash flows and its financial condition and liquidity.

2. OBJECTIVE :
The objective of this Standard is to prescribe
a) the minimum content of an interim financial report
b) the principles for recognition and measurement in complete or condensed financial
statements for an interim period.

3. SCOPE :
• This Standard does not mandate which entities should be required to publish interim
financial reports, how frequently, or how soon after the end of an interim period.
• This Standard applies if an entity is required or elects to publish an interim financial report
in accordance with Indian Accounting Standards (Ind AS).
• If an entity’s interim financial report is described as complying with Ind AS, it must comply
with all of the requirements of this Standard.

4. DEFINITIONS :
1. Interim period is a financial reporting period shorter than a full financial year.
2. Interim financial report means a financial report containing either a complete set of
financial statements (as described in Ind AS 1, Presentation of Financial Statements), or a
set of condensed financial statements (as described in this Standard) for an interim period.

5. CONTENTS OF INTERIM FINANCIAL :

• A condensed balance sheet

• A condensed statment of profit and loss

CONTENTS • A condensed statement of changes in equity

• A consensed statement of cash flows
• Notes, comprising significant accounting policies
and other explanatory information

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5.1 FORM AND CONTENT OF INTERIM FINANCIAL REPORT :

Its form and content should be in line

If entity publishes a complete set of
with Ind AS 1 for a complete set of
financial statements
financial statements

Statements shall included headings

and subtotals included in most recent
annual financial statements
Form and content

If an entity published condensed Present Basic and diluted earnings per

financial statements share for that period

Additional line items if their

ommission would make their
condensed interim financial
statements misleading

If an entity’s annual financial report This Standard neither requires nor

included the parent’s separate prohibits the inclusion of the parent’s
financial statements in addition to separate statements in the entity’s
consolidated financial statements interim financial report.

5.2 PERIODS FOR WHICH INTERIM FINANCIAL STATEMENTS ARE REQUIRED TO BE

PRESENTED :
Interim reports shall include interim financial statements (condensed or complete) for
periods as follows:
(a) balance sheet as of the end of the current interim period and a comparative balance
sheet as of the end of the immediately preceding financial year.
(b) statements of profit and loss for the current interim period and cumulatively for the
current financial year to date, with comparative statements of profit and loss for
the comparable interim periods (current and year-to-date) of the immediately
preceding financial year.
(c) statement of changes in equity cumulatively for the current financial year to date,
with a comparative statement for the comparable year-to-date period of the
immediately preceding financial year.
(d) statement of cash flows cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of the immediately
preceding financial year. For an entity whose business is highly seasonal, financial

126 IND AS 34 – Interim Financial Reporting

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information for the twelve months up to the end of the interim period and
comparative information for the prior twelve-month period may be useful.

Question 1
A company has to prepare interim financial statements for the quarter ended 31st Dec,
2016. As per IND AS 34 describe the periodicity of its interim financial statements along
with comparatives

Solution :
Statement Period Comparative
Balance sheet As on 31/12/16 As on 31/3/16
Profit and loss A/c 1/10/16 to 31/12/16 1/10/15 to 31/12/15
1/4/16 to 31/12/16 1/4/15 to 31/12/15
Statement for changes in Equity 1/4/16 to 31/12/16 1/4/15 to 31/12/15
Cash flow statement 1/4/16 to 31/12/16 1/4/15 to 31/12/15

6. RECOGNITION AND MEASUREMENT :

1. Accounting Policies :
An entity shall apply the same accounting policies in its interim financial statements as are
applied in its annual financial statements, except for accounting policy changes made after
the date of the most recent annual financial statements that are to be reflected in the next
annual financial statements.
2. Revenues received cyclically, occasionally or seasonally :
1. Revenues that are received seasonally, cyclically, or occasionally within a financial
year shall not be anticipated or deferred as of an interim date if anticipation or
deferral would not be appropriate at the end of the entity’s financial year.
Examples include dividend revenue, royalties, and government grants.
2. Certain entities earn more revenue in certain interim periods of a financial year than
other interim periods. Such revenues are recognised when they occur.
Example seasonal revenues of retailers.
3. Costs incurred unevenly during the financial year :
Costs that are incurred unevenly during an entity’s financial year shall be anticipated or
deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate
or defer that type of cost at the end of the financial year

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4. Use of Estimates :
1. To ensure that the resulting information is reliable and that all material financial
information that is relevant to an understanding of the financial position or
performance of the entity is appropriately disclosed.
2. The preparation of interim financial reports requires a greater use of estimation
methods than annual financial reports.

Measuring interim income tax expense

Interim period income tax expense is accrued using the tax rate that would be applicable to
expected total annual earnings, that is, the estimated average annual effective income tax rate
applied to the pre-tax income of the interim period.

Depreciation and amortisation

Depreciation and amortisation for an interim period is based only on assets owned during that
interim period. It does not take into account asset acquisitions or dispositions planned for later
in the financial year.

Question 2
Company A has reported Rs.60,000 as pre tax profit in first quarter and expects a loss of
Rs.15,000 each in the subsequent quarters. It has a corporate tax slab of 20 percent on
the first Rs.20,000 of annual earnings and 40 per cent on all additional earnings. Calculate
the amount of tax to be shown in each quarter.

Solution :
Annual Profit = Rs. 60,000 – (15,000 x 3) = 15000
Tax = 15,000 x 20% = 3000
Effective tax rate = 3000 / 15000 x 100 = 20%

Details Q1 Q2 Q3 Q4
Sales 60,000 (15,000) (15,000) (15,000)
Tax 12,000 (3,000) (3,000) (3,000)

128 IND AS 34 – Interim Financial Reporting

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Question 3
An enterprise reports quarterly. At the end of Q-1 estimate of pre-tax annual profit was
Rs.6 lakhs and aggregate of deductions from GTO under tax laws was estimated at Rs.1
lakh.
At the end of Q-2, estimate of Pre-tax annual profit was Rs. 6.30 lakhs and aggregate of
deductions from GTI under tax law was estimated at Rs.84,000.
The pre-tax earnings of Q-1 and Q-2 was 1.2 lakh and 1.3 lakh. Tax rate is 30%. Compute
PAT for the quarters.

Solution :
Details Q1 Q2
Annual Expected Profit 6–1=5 6.3 – 0.84 = 5.46
Tax 5 x 30% = 1.5 5.46 x 30% = 1.638
Tax Rate 1.5 / 6 x 100 = 25% 1.638 / 6.3 x 100 = 26%
Profit for the period 1.2 1.2 + 1.3 = 2.5
Tax for the quarter 1.2 x 25% = 0.3 (2.5 x 26%) – 0.3 = 0.35

7. RESTATEMENT OF PREVIOUSLY REPORTED INTERIM PERIODS :

A change in accounting policy, other than one for which the transition is specified by a new Ind
AS, shall be reflected by:
(a) restating the financial statements of prior interim periods of the current financial year and
the comparable interim periods of any prior financial years that will be restated in the
annual financial statements in accordance with Ind AS 8; or
(b) when it is impracticable to determine the cumulative effect at the beginning of the
financial year of applying a new accounting policy to all prior periods, adjusting the
financial statements of prior interim periods of the current financial year, and comparable
interim periods of prior financial years to apply the new accounting policy prospectively
from the earliest date practicable.

8. INTERIM FINANCIAL REPORTING AND IMPAIRMENT :

An entity is required to assess goodwill for impairment at the end of each reporting period, and,
if required, to recognise an impairment loss at that date in accordance with Ind AS 36. However,
at the end of a subsequent reporting period, conditions may have so changed that the impairment
loss would have been reduced or avoided had the impairment assessment been made only at
that date.

Accordingly, an entity shall not reverse an impairment loss recognised in a previous interim period
in respect of goodwill.

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[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Question 4
ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of R.
20,00, 000 for the third quarter of 2011.
Following adjustments are made while computing the net profit:
(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) 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 :
Net profit = 20,00,000 – 50,000 – 5,00,000 = Rs.14,50,000

Thanks ….

[email protected]

www.rahulmalkan.com

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130 IND AS 34 – Interim Financial Reporting

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IND AS 8
CHAPTER - 16
ACCOUNTING POLICIES,
CHANGES IN ACCOUNTING
ESTIMATES & ERRORS

CHAPTER DESIGN

1. INTRODUCTION
2. OBJECTIVE
3. SCOPE
4. DEFINITIONS
5. ACCOUTING POLICIES
6. CHANGE IN ACCOUNTING ESTIMATES
7. ERRORS

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1. INTRODUCTION :
Accounting policies, estimates and correction of errors play a major role in the presentation of
financial statements.

2. OBJECTIVE :
1. To prescribe the criteria for selecting and changing accounting policies
2. To prescribe the accounting treatment and disclosure of changes in accounting policies
3. To prescribe the accounting treatment and disclosure of changes in accounting estimates
4. To prescribe the accounting treatment and disclosure of corrections of errors
5. To provide better base for inter-firm and intra-firm comparison

3. SCOPE :
This standard shall be applied in
• selecting and applying accounting policies;
• accounting for changes in accounting policies;
• accounting for changes in accounting estimates; and
• accounting for corrections of prior period errors.

However, tax effects of retrospective application of accounting policy changes and correction of
prior period errors are not dealt with in this standard. The tax effects of these items are dealt
with Ind AS 12, ‘Income Taxes’

Note : Requirements of Ind AS 8 in respect of changes in accounting policies do not apply in an

entity’s first Ind AS financial statements.

4. DEFINITIONS :
1. Accounting Policy
Accounting policies are the
• specific principles,
• bases,
• conventions,
• rules and practices
• applied by an entity in preparing and presenting financial statements.

2. A change in accounting estimate

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, that results from the

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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.

3. Material Omissions or misstatements

Material Omissions or misstatements of items are material if they could, individually or
collectively, influence the economic decisions that users make on the basis of the financial
statements.

4. Prior period errors

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.

5. Retrospective application
Retrospective application is applying a new accounting policy to transactions, other events
and conditions as if that policy had always been applied.

6. Retrospective restatement
Retrospective restatement is correcting the recognition, measurement and disclosure of
amounts of elements of financial statements as if a prior period error had never occurred.

7. Impracticable
Applying a requirement is impracticable when the entity cannot apply it after making every
reasonable effort to do so.

8. Prospective application
Prospective application of a change in accounting policy and of recognising the effect of a
change in an accounting estimate, respectively, are:
A. applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed; and

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B. recognising the effect of the change in the accounting estimate in the current and
future periods affected by the change.

5. ACCOUNTING POLICIES :
5.1. SELECTION AND APPLICATION OF ACCOUNTING POLICIES
1. When an Ind AS specifically applies to a transaction, other event or condition, the
accounting policy or policies applied to that item shall be determined by applying
the Ind AS.
2. The Guidance provided in the implementation guidance of a concerned standard is
also part of the standard and should be considered equally important for selection
and application of accounting policies.
3. In the absence of an Ind AS that specifically applies to a transaction, other event or
condition, management shall use its judgement in developing and applying an
accounting policy that results in information that is:
A. relevant to the economic decision-making needs of users; and
B. reliable in that the financial statements:
I. represent faithfully the financial position, financial performance and
cash flows of the entity;
II. reflect the economic substance of transactions, other events and
conditions, and not merely the legal form;
III. are neutral, i.e. free from bias;
IV. are prudent; and
V. are complete in all material respects.
Accordingly, Ind AS 8 provides the following list:
(i) Check if there are any other Ind AS available which are dealing with similar and
related issues
(ii) Check the basic Framework of Ind AS, which provides the general principles
(iii) Check the pronouncements of International Accounting Standard Board
(iv) Check the pronouncements of other standard setting bodies having a similar
conceptual framework
(v) Check the accounting literature and accepted industry practices

5.2. Consistency of accounting policies

An entity shall select and apply its accounting policies consistently for similar transactions,
other events and conditions, unless an Ind AS specifically requires or permits
categorisation of items for which different policies may be appropriate.

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5.3 Changes in Accounting Policies

Change should be Retrospective unless impractical

Changes in Accounting Policies

A. is required by an Ind AS; - Application of accounting

or policies for transactions
B. results in the financial that differ in substance
statements providing from those previously
occurring

Not Changes in Accounting

reliable and more relevant
information about the - Application of new
effects of transactions, accounting policies for
other events or conditions newtransactions
on the entity’s financial
position, financial
performance or cash flows.

Policies
Question 1
A company owns several hotels and provides significant ancillary services to occupants
of rooms. These hotels are, therefore, treated as owner-occupied properties and
classified as property, plant and equipment in accordance with Ind AS 16. The company
acquires a new hotel but outsources entire management of the same to an outside
agency and remains as a passive investor. The selection and application of an accounting
policy for this new hotel in line with Ind AS 40. Is it change in accounting policy?

Solution :
Its not a change in Accounting Policy

Question 2
RM Ltd. manufactured bags until 2015. It had 5 motor vehicles at that time which were
used for the delivery of bags. It classified all the vehicles as Non-current Assets in 2015.
However in 2016 shareholders have approved a proposal to change the nature of
business from manufacturing bags to sell of unused motor vehicles. It reclassified the
motor vehicles as current Assets during 2016 as they will be sold as part of normal
business. Should this be treated as change in accounting policy.

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Solution :
Its not a change in accounting policy

6. CHANGES IN ACCOUNTING ESTIMATES :

6.1 Meaning
As a result of the uncertainties inherent in business activities, many items in financial
statements cannot be measured with precision but can only be estimated. Estimation
involves judgements based on the latest available, reliable information.
For example, estimates may be required of:
• bad debts;
• inventory obsolescence;
• the fair value of financial assets or financial liabilities;
• the useful lives of, or expected pattern of consumption of the future economic
benefits embodied in, depreciable assets; and
• warranty obligations.

6.2 Accounting treatment for a change in estimate

• The effect of change in an accounting estimate, except to the extent that the change
results in change in assets, liabilities or equity, shall be recognised prospectively by
including it in profit or loss in:
o the period of the change, if the change affects that period only; or
o the period of the change and future periods, if the change affects both. A
change in an accounting estimate may affect only the current period’s profit
or loss, or the profit or loss of both the current period and future periods.
• To the extent that a change in an accounting estimate gives rise to changes in assets
and liabilities, or relates to an item of equity, it shall be recognised by adjusting the
carrying amount of the related asset, liability or equity item in the period of the
change.
• Prospective recognition of the effect of a change in an accounting estimate means
that the change is applied to transactions, other events and conditions from the
date of the change in estimate.

6.3. Change in the basis of measurement – Whether a change in accounting policy or change
in estimate?
A change in the measurement basis applied is a change in an accounting policy, and is not
a change in an accounting estimate.

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When it is difficult to distinguish a change in an accounting policy from a change in an

accounting estimate, the change is treated as a change in an accounting estimate

6.4. Disclosure of changes in estimates

The entity should disclose:
i. Effect of change in estimate on the current period
ii. If applicable and practicable, effect of change in estimate on the future periods
iii. If applicable but impracticable, the fact that it is impracticable to estimate the effect
on future periods.

7. ERRORS :
7.1 Meaning
Ind AS 8 deals with the treatment of errors that have taken place in past, but were not
revealed at that time. Subsequently, when they are revealed, it is necessary to correct
such errors in the financial statements and make sure that the financial statements present
relevant and reliable information in the period in which they are revealed.

7.2 Common types of Errors

• Mathematical Mistakes
• Mistakes in applying policies
• Misinterpretations of facts
• Omissions
• Frauds

7.3 Treatment of Errors

1. Potential Errors of Current Period
Potential current period errors discovered in that period are corrected before the
financial statements are approved for issue.

2. Prior period errors discovered subsequently

Material errors are sometimes not discovered until a subsequent period, and these
prior period errors are corrected in the comparative information presented in the
financial statements for that subsequent period.

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Situation 1: Error discovered relates to the comparative prior period presented:

Unless impracticable, an entity shall correct material prior period errors retrospectively in
the first set of financial statements approved for issue after their discovery by restating
the comparative amounts for the prior period(s) presented in which the error occurred;

Situation 2: Error discovered relates to period before the earliest comparative prior period
presented:
If the material error occurred before the earliest prior period presented, an entity shall,
unless impracticable, correct the same retrospectively in the first set of financial
statements approved for issue after their discovery by restating the opening balances of
assets, liabilities and equity for the earliest prior period presented.

Question 3
Nish Ltd. prepares its financial statements by recording a purchase of Air Dryer(Machine)
during 2015 worth Rs. 50,000 under purchases instead of purchase of non-current asset.
The error comes to light in the following accounting year. Can this be treated as the prior
period error?

Solution :
Yes it should be treated as prior period error.

Thanks ….

[email protected]

www.rahulmalkan.com

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IND AS 10
CHAPTER - 17
EVENTS AFTER
REPORTING PERIOD

CHAPTER DESIGN

1. INTRODUCTION
2. OBJECTIVE
3. SCOPE
4. DEFINITIONS
5. TYPES OF EVENTS
6. RECOGNITION AND MEASUREMENTS OF ADJUSTING EVENTS
7. DISCLOSURE OF NON ADJUSTING EVENTS
8. SPECIAL CASES
9. DIVIDENDS
10. DISCLOSURE
11. DISTRIBUTION OF NON CASH ASSETS TO OWNERS

IND AS 10 – Events After Reporting Period 139

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1. INTRODUCTION :
It is impossible for any company to present the information on the same day, as the day of
reporting. There would always be a gap between the end of the period for which financial
statements are presented and the date on which the same will actually be made available to the
public.
Ind AS 10 deals with such events and provides guidance about its treatment in the financial
statements.

2. OBJECTIVE :
The objectives of the standard are divided mainly in three points.
1. Guidelines for taking a decision regarding adjusting or not adjusting the financial
statements for the events after the reporting period.
2. Guidelines regarding the disclosures that an entity should give about the date when the
financial statements were approved for issue and about events after the reporting period.
3. Guidelines when the going concern assumption is no longer appropriate: The standard
requires that an entity should not prepare its financial statements on a going concern basis
if events after the reporting period indicate that the going concern assumption is no longer
appropriate.

3. SCOPE :
The Standard is mainly applicable in respect of the following two matters:
1. Accounting for events after reporting period
2. Disclosure of events after the reporting period.

4. DEFINITION :
1. EVENTS AFTER THE REPORTING PERIOD
Events after the reporting period are those events, favourable and unfavourable, that
occur between the end of the reporting period and the date when the financial statements
are approved.
2. APPROVAL OF FINANCIAL STATEMENTS
The financial statements will be treated as approved when board of directors approves the
same.
3. SHOULD THE COMPANY REPORT ONLY UNFAVOURABLE EVENTS?
The standard clearly states that events can be favourable as well as unfavourable

140 IND AS 10 – Events After Reporting Period

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5. TYPES OF EVENTS :

ADJUSTING

those that provide those that are

evidence of indicative of
conditions that conditions that
existed at the end arose after the
of the reporting reporting period
period
NON ADJUSTING

6. RECOGNITION AND MEASUREMENTS OF ADJUSTING EVENTS :

(a) 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.
(b) 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.
(c) The sale of inventories after the reporting period may give evidence about their net
realisable value at the end of the reporting period.
(d) The determination after the reporting period of the cost of assets purchased, or the
proceeds from assets sold, before the end of the reporting period.
(e) The determination after the reporting period of the amount of profit-sharing or bonus
payments, if the entity had a present legal or constructive obligation at the end of the
reporting period to make such payments as a result of events before that date (see Ind AS
19, Employee Benefits).
(f) The discovery of fraud or errors that show that the financial statements are incorrect.

Question 1
A case is going on between ABC Ltd., and GST department on claiming some exemption
for the year 2011-2012. The court has issued the order on 15th April, 2012 and rejected
the claim of the company. Accordingly, the company is liable to pay the additional tax.
The financial statements of the company for the year 2011-2012 have been approved on
15th May, 2012. Should the company account for such tax in the year 2011-2012 or
should it account for the same in the year 2012-2013?

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Solution :
Yes, its an adjusting event and we should record the amount is liability.

Question 2 :
A customer went bankrupt after the reporting period. Can this be treated as a adjusting
event?

Solution :
Yes it is an adjusting event.

Question 3
A company has inventory of 100 finished cars on 31st March, 2012, which are having a
cost of Rs.4,00,000 each. On 30th April, 2012, as per the new government rules, higher
road tax and penalties are to be paid by the buyers for such cars (which were already
expected to come) and hence the selling price of a car has come down and the demand
for such cars has dropped drastically. The selling price has come down to Rs.3,00,000
each. The financial statements of the company for the year 2011-2012 are not yet
approved. Should the company value its stock at Rs.4,00,000 each or should it value at
Rs.3,00,000 each? Ignore estimated costs necessary to make the sale.

Solution :
Yes its an adjusting event. Fall in value of inventory is an adjusting event. Inventory should
be valued at 3,00,000

Question 4
ABC Ltd., has purchased a new machinery during the year 2011-2012. The asset was
finally installed and made ready for use on 15th March, 2012. However, the company
involved in installation and training, which was also the supplier, has not yet submitted
the final bills for the same. The supplier company sent the bills on 10th April, 2012, when
the financial statements were not yet approved. Should the company adjust the amount
of capitalisation in the year 2011-2012 or in the year 2012-2013?

Solution :
Yes its an adjusting event

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7. DISCLOSURE OF NONADJUSTING EVENTS AFTER THE REPORTING PERIOD :

An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period.

8. SPECIAL CASES :
8.1 LONG TERM LOAN ARRANGEMENTS
Notwithstanding anything contained in the definition of non-adjusting events, 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 agreement by lender before the approval of the financial
statements for issue, to not demand payment as a consequence of the breach, shall be
considered as an adjusting event.

8.2 GOING CONCERN

An entity shall not prepare its financial statements on a going concern basis if management
determines after the reporting period either that it intends to liquidate the entity or to
cease trading, or that it has no realistic alternative but to do so.

9. DIVIDENDS :
• If an entity declares dividends to holders of equity instruments (as defined in Ind AS 32,
Financial Instruments: Presentation) after the reporting period, the entity shall not
recognise those dividends as a liability at the end of the reporting period.
• If dividends are declared after the reporting period but before the financial statements are
approved for issue, the dividends are not recognised 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.

Question 5
ABC Ltd., declares the dividend on 15th July, 2012 as the results of year 2011-2012 as
well as Q1 ending 30th June, 2012 are better than expected. The financial statements of
the company are approved on 20th July, 2012 for the financial year ending 31st March,
2012. Will the dividend be accounted for in the financial year 2012-2013 or will it be
accounted for in the year 2011-2012?

Solution :
It should be accounted for in the year 2012 – 13

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10. DISCLOSURE :
• An entity shall disclose the date when the financial statements were approved for issue
and who gave that approval.
• It is important for users to know when the financial statements were approved for issue,
because the financial statements do not reflect events after this date.

11. DISTRIBUTION OF NON-CASH ASSETS TO OWNERS :

Sometimes an entity distributes non-cash assets as dividends to its equity shareholders. An entity
may also give equity shareholders a choice of receiving either non-cash assets or a cash
alternative.

When an entity declares a distribution and has an obligation to distribute the assets concerned
to its owners, it must recognise a liability for the dividend payable

Measurement of a dividend payable

• An entity shall measure a liability to distribute non-cash assets as a dividend to its owners
at the fair value of the assets to be distributed.
• If an entity gives its owners a choice of receiving either a non-cash asset or a cash
alternative, the entity shall estimate the dividend payable by considering both the fair
value of each alternative and the associated probability of owners selecting each
alternative.

Thanks ….

[email protected]

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144 IND AS 10 – Events After Reporting Period

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IND AS 20
CHAPTER - 18
ACCOUNTING FOR GOVT.
GRANT & DISCLOSURE OF
GOVT. ASSISTANCE

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. DEFINITIONS
4. RECOGNITION OF GOVT GRANTS
5. ACCOUNTING FOR GOVT GRANTS
6. PRESENTATION OF GRANTS RELATED TO INCOME
7. REPAYMENT OF GOVERNMENT GRANTS
8. DISCLOSURE

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1. INTRODUCTION :

2. SCOPE :
Ind AS 20 should be applied for:
(a) accounting and disclosure of government grants; and
(b) disclosure of other forms of government assistance.

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3. DEFINITIONS :
1. Government refers to government, government agencies and similar bodies whether
local, national or international.

2. Government assistance is action by government designed to provide an economic benefit

specific to an entity or range of entities qualifying under certain criteria.
Government assistance for the purpose of Ind AS 20 does not include benefits provided
only indirectly through action affecting general trading conditions, such as the provision of
infrastructure in development areas or the imposition of trading constraints on
competitors.

3. Government grants are assistance by government in the form of transfers of resources to

an entity in return for past or future compliance with certain conditions relating to the
operating activities of the entity.

4. 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.
Subsidiary conditions may also be attached restricting the type or location of the assets or
the periods during which they are to be acquired or held.

5. Grants related to income are government grants other than those related to assets.

6. Forgivable loans are loans which the lender undertakes to waive repayment of under
certain prescribed conditions.

7. Fair value (Ind AS 113, Fair Value Measurement).

4. RECOGNITION OF GOVT GRANTS :

Recognition of government grant

Reasonable assurance
that

Entity will comply with

Grant will be received
conditions of grant

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Question 1
Government gives a grant of Rs.10,00,000 for research and development of H1N1
vaccine to A Pharmaceuticals Limited. There is no condition attached to the grant.
Examine how the Government grant be realized.

Solution :
Since no conditions is attached to the grant it should be recognised in profit and Loss A/c
immediately.

Question 2
Government gives a grant of Rs.10,00,000 for research and development of H1N1 vaccine
to A Pharmaceuticals Limited even though similar vaccines are available in the market
but are expensive. The entity has to ensure by developing a manufacturing process over
a period of 2 years that the costs come down by at least 40%. Examine how the
Government grant be realized.

Solution :
Grant should be recognised over the period of 2 years.

5. ACCOUNTING FOR GOVT GRANTS :

5.1 Grant related to Depreciable Asset
The Standard prescribes only the income approach

5.2 Grant related to Non-Depreciable Asset

Grants related to non-depreciable assets may also require the fulfilment of certain
obligations and would then be recognised in profit or loss over the periods that bear the
cost of meeting the obligations.

5.3 Non-monetary government grants

A government grant may take the form of a transfer of a non-monetary asset, such as land
or other resources, for the use of the entity. In these circumstances the fair value of the
non-monetary asset is assessed and both grant and asset are accounted for at that fair
value. Alternatively, an entity may measure these grants at nominal value.

148 IND AS 20 – Accounting for Govt. Grant & Disclosure of Got. Assistance
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Question 3
A Limited wants to establish a manufacturing unit in a backward area and requires 5
acres of land. The government provides the land on a leasehold basis at a nominal value
of Rs 10,000 per acre. The fair value of the land is Rs.100,000 per acre. Calculate the
amount of the Government grant to be recognized by an entity.

Solution :
Alternative 1 – Grant and Asset recorded at Fair value

Land A/c Dr 5,00,000

To Bank A/c 50,000
To Deferred Grant A/c 4,50,000

Alternative 2 – Grant and Asset recorded at Nominal Value

Land A/c Dr 50,000

To Bank A/c 50,000

6. PRESENTATION OF GRANTS RELATED TO INCOME :

Presented in balance
sheet by setting up
grant as deferred
income
Related to assets
Presented as part of
profit or loss, either
Presentation of separately or under
government grant 'other income'

Alternateively,
Related to income deducted in reporting
related expense

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7. REPAYMENT OF GOVERNMENT GRANTS :

Repayment of government grant

Related to income Related to asset
First applied towards any
unapplied deferred credit and then REducing the defered income
charged to profit and loss account balance by the amount payable
immediately

A government grant that becomes repayable should be accounted for as a change in accounting
estimate and be treated in accordance with Ind AS 8, Accounting Policies, Changes in Accounting
Estimates and Errors.

8. DISCLOSURE :
The following should be disclosed:
(a) the accounting policy adopted for government grants;
(b) the methods of presentation adopted for government grants in the financial statements;
(c) the nature and extent of government grants recognised in the financial statements;
(d) an indication of other forms of government assistance from which the entity has directly
benefited. At times, the significance of the benefit of government assistance may be such
that disclosure of the nature, extent and duration of the assistance is necessary in order
that the financial statements may not be misleading; and
(e) unfulfilled conditions and other contingencies attaching to government assistance that has
been recognised.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

150 IND AS 20 – Accounting for Govt. Grant & Disclosure of Got. Assistance
 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 12
CHAPTER - 19
INCOME TAXES

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. DEFINTIONS
4. CURRENT TAX, ITS RECOGNITION, MEASUREMENT AND
PRESENTATION
5. DEFERRED TAX, ITS RECOGNITION, MEASUREMENT AND
PRESENTATION

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1. INTRODUCTION :
There was a time in India, few decades back when the concept of zero income tax entities was
prevalent. Due to various income tax benefits, these companies had no current tax liability for
any income tax that was payable based on that year’s accounting profit. Thus, no provision of
income tax was created. Profit after tax used to be equal to profit before tax. But from accounting
perspective, this was not a correct reflection of results. Quite a few of these tax benefits were
primarily accelerated benefits.

Example : An entity has acquired an asset for Rs.10,000. The depreciation rate as per income tax
is 40% on WDV basis. In books of account, entity claims depreciation on equivalent SLM basis of
16.21%. The entity has accounting and taxable profits of Rs.20,000 from year 1 to year 4, inclusive,
before any allowance of depreciation in either case. The tax rate is 30%. Assuming no concept of
deferred tax, the provision for current tax would be computed as under:

Year 1 2 3 4
Cost of the asset 10,000 10,000 10,000 10,000
Depreciation rate - WDV 40% 40% 40% 40%
Depreciation amount - WDV 4,000 2,400 1,440 864
Taxable profits before depreciation 20,000 20,000 20,000 20,000
Less : Depreciation (4,000) (2,400) (1,440) (864)
Taxable profit after depreciation 16,000 17,600 18,560 19,136
Tax rate 30% 30% 30% 30%
Tax amount 4,800 5,280 5,568 5,741

However, in the books of accounts, the situation will be as under:

Year 1 2 3 4
(a) Cost of the asset 10,000 10,000 10,000 10,000
(b) Depreciation rate – SLM 16.21% 16.21% 16.21% 16.21%
(c) Depreciation amount - SLM 1,621 1,621 1,621 1,621
(d) Accounting profits before depreciation 20,000 20,000 20,000 20,000
(e) Less : Depreciation (1,621) (1,621) (1,621) (1,621)
(f) Accounting profits after depreciation 18,379 18,379 18,379 18,379
(g) Tax amount – as above 4,800 5,280 5,568 5,741
(h) Effective tax rate = (g)/(f) 26.12% 28.73% 30.30% 31.24%
(i) Tax provision @30% tax rate {30%*(f)} 5,514 5,514 5,514 5,514

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Thus, from the above two tables, for an accountant the tax should be Rs.5,514 in all cases as per
the accounting profit. The results are distorted. You will observe that in year 3, in books, the
amount of tax provision is higher by Rs.54 (5,568 – 5,514) and in year 4, it is higher by Rs.227
(5,741 – 5,514). This is so because in year 1 and 2, these figures are lower by Rs.714 (5,514 –
4,800) and Rs.234 (5,514 – 5,280). Thus, the liability that was incurred in year 1 and 2 is paid year
3 onwards. However, no provision of the differential (Rs.714 in year 1 and Rs.234 in year 2) is
made.

Differences

Other than
Temporary
Temporary
Differences
Differences

Taxable Deductible
Temporary Temporary Cannot be
Difference Difference reversed
(Results in DTL) (Results in DTA)

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover
or settle the carrying amount of that asset or liability. If it is probable that recovery or settlement
of that carrying amount will make future tax payments larger (smaller) than they would be if such
recovery or settlement were to have no tax consequences, this Standard requires an entity to
recognise a deferred tax liability (deferred tax asset).

Let us try to understand the aforesaid principle with the help of an example:
A. Whenever an entity recognises an asset, it expects that it will recover the carrying value of
that asset. For example, if an entity recognises an item of land at Rs.1,00,000, it expects that
it will be able to recover at least Rs.1,00,000 if that land is sold is sometime in future.
B. The income tax provisions, assuming, provides that if this piece of land is sold after one year,
there will be an indexation benefit @ 10% per year. Thus, if the land is sold after one year,
the cost of the land will for the purpose of taxation will be assumed at Rs 1,10,000 (Rs 1,00,000

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+ 10%). If it is sold after two years, the cost of the land for the purpose of taxation will be
assumed at Rs 1,21,000 (Rs 1,10,000 + 10%).
C. The tax rate in all years continues to be flat 30%.
D. Thus, the recovery of the carrying value of land after two years will result into a tax saving of
Rs 6,300 i.e. 30% of 21000 (121000-100000).
E. Thus, if after two and half year, land is sold for Rs 1,50,000, the entity will pay a tax of Rs
8,700 at 30% of Rs 29,000 (Rs 1,50,000 – Rs 1,21,000). If there would have been no indexation
benefits, the tax liability would have been Rs 15,000 at 30% of Rs 50,000 (Rs 1,50,000 – Rs
1,00,000). Saving in tax is of Rs 6,300 (15,000-8,700).
F. The entity should recognise a deferred tax asset of Rs 6,300 in this case.
G. This principle has to be applied to each item of asset or liability.
Note: There are controversial view in case of Indexation of land for a temporary difference
because if the land is not going to be sold in a near future particularly in business then in such
case it is not advisable to calculate temporary difference.

2. SCOPE :
The objective of this Standard is to prescribe the accounting treatment for income taxes. Income
taxes for the purpose of this Standard includes:
(a) all domestic and foreign taxes which are based on taxable profits;
(b) taxes, such as withholding taxes (Tax Deducted at Source), which are payable by a
subsidiary, associate or joint venture on distributions to the reporting entity.

• Items of current tax or defer tax recognized in profit and loss are subject to two exceptions:
1. An item of current tax or defer tax pertaining to other comprehensive income
should be recognized in other comprehensive income
2. An item of current tax or defer tax pertaining to direct equity should be recognized
in direct equity

• In addition, the Standard deals with the:

(a) recognition of deferred tax assets arising from unused tax losses or unused tax
credits;
(b) presentation of income taxes in the financial statements; and
(c) disclosure of information relating to income taxes.

• The Standard however, does not deal with the methods of accounting for government
grants (see Ind AS 20, Accounting for Government Grants and Disclosure of Government

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Assistance) or investment tax credits. However, it deals with the accounting for temporary
differences that may arise from such grants or investment tax credits.

3. DEFINITIONS :
A. Accounting profit is profit or loss for a period before deducting tax expense.
B. Taxable profit (tax loss) is the profit (loss) for a period, computed as per the income tax
act, upon which income taxes are payable (recoverable).
C. Tax expense (tax income) is the aggregate amount included in the determination of profit
or loss for the period in respect of current tax and deferred tax.
D. Current tax is the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period.
E. Deferred tax liabilities are the amounts of income taxes payable in future periods in
respect of taxable temporary differences.
F. Deferred tax assets are the amounts of income taxes recoverable in future periods in
respect of:
• deductible temporary differences;
• the carry forward of unused tax losses; and
• the carry forward of unused tax credits.
G. Temporary differences are differences between the carrying amount of an asset or liability
in the balance sheet and its tax base.
H. Temporary differences may be either:
• taxable temporary differences, which are temporary differences that will result in
taxable amounts in determining taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is recovered or settled; or
• deductible temporary differences, which are temporary differences that will result
in amounts that are deductible in determining taxable profit (tax loss) of future
periods when the carrying amount of the asset or liability is recovered or settled.
I. The tax base of an asset or liability is the carrying amount to that asset or liability for tax
purposes.

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4. CURRENT TAX :
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit
(tax loss) for a period.

RECOGNITION
A) Current tax liability
• Current tax for current and prior periods shall, to the extent unpaid, be recognised
as a liability.
• The exact liability of current tax crystallises only on preparation and finalisation of
financial statements at the end of the reporting period.
• Any excess of this liability over the prepaid taxes (advance tax) and withhold taxes
(TDS) is to be treated as current liability. This liability may be for the current
reporting period or may relate to earlier reporting periods.
B) Current tax assets
If the amount already paid in respect of current and prior periods exceeds the amount due
for those periods, the excess shall be recognised as an asset.

MEASUREMENT
Current tax liabilities (assets) for the current and prior periods shall be measured at the amount
expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws)
that have been enacted.

5. DEFERRED TAX, ITS RECOGNITION, MEASUREMENT AND PRESENTATION :

The following steps should be followed in the recognition, measurement and presentation of
deferred tax liabilities or assets:
Step 1 : Compute carrying amounts of assets and liabilities
Step 2 : Compute tax base
Step 3 : Compute temporary differences
Step 4 : Classify temporary differences into either:
• Taxable temporary difference
• Deductible temporary difference
Step 5 : Identify exceptions
Step 6 : Assess deductible temporary differences, tax losses and tax credits
Step 7 : Determine the tax rate
Step 8 : Calculate and recognise deferred tax
Step 9 : Accounting of deferred tax
Step 10: Offsetting of deferred tax liabilities and deferred tax assets

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STEP 1 : COMPUTE CARRYING AMOUNT

For the purpose of this Standard, we can define carrying amount at which an asset or liability is
recognised in the balance sheet, after making necessary adjsutments like depreciation,
impairment, etc. In other words carrying amount of the assets and liabilities means balance as
per the ledger.

Example : Entity A had acquired an item of plant and machinery for Rs.1,00,000 on April 1, 2001.
It depreciated this item @ 10% per annum on SLM basis. For the year ended March 31, 2002, it
provides depreciation of Rs.10,000. The carrying amount of this item of plant and machinery as
on March 31, 2002 is Rs.90,000.

STEP 2 : COMPUTE TAX BASE :

(a) The tax base of an asset or liability is the amount attributed to that asset or liability for tax
purposes.

Example : Entity A had acquired an item of plant and machinery for Rs.1,00,000 on April 1,
2001. It depreciated this item @ 10% per annum on SLM basis. For the year ended March
31, 2002, it provides depreciation of Rs.10,000. The carrying amount of this item of plant
and machinery as on March 31, 2002 is Rs.90,000. As per taxation laws, this item of plant
and machinery has to be depreciated @ 30% per annum on WDV basis. The entity thus
for the purposes of taxation computes depreciation of Rs.30,000. The tax base of this item
of plant and machinery is Rs.70,000 (Rs.1,00,000 – Rs.30,000).

(b) Four scenarios could be anticipated for computation of the tax base of either an asset or a
liability:
• Tax base of an asset.
• Tax base of a liability.
• Items with a tax base but no carrying amount.
• Items of assets and liabilities where tax base is not apparent.

1. TAX BASE OF ASSET

The principle to compute tax base of an asset is as under:
 The tax base of an asset is the amount that will be deductible for tax
purposes against any taxable economic benefits that will flow to an entity
when it recovers the carrying amount of the asset.

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 The carrying amount of the asset could be recovered either through sale of
the asset or through its use or partly through use and partly through sale.
The method of recovery has to be determined at each reporting date.

Example : Entity A has inventory with carrying amount of Rs.1,00,000 as at the

reporting date. It recovers the value of inventory through sale in a subsequent
reporting period. The sale value is the economic benefit derived by the entity and
is taxable. However, as per the matching and other concepts, against this sale the
entity is entitled to deduct its cost. The cost is the carrying amount of the inventory
i.e., Rs.1,00,000. The tax base in this case is Rs.1,00,000.

 If those economic benefits will not be taxable, the tax base of the asset is
equal to its carrying amount.
 It is quite feasible that in certain cases, the economic benefits that are
derived from the recovery of an asset are not taxable. In these situations, the
tax base of the asset is taken at its carrying amount.

Example : An entity has an investment in listed equity shares. There is no tax on

gains that arise on sale of these listed equity shares. Thus, the tax base in this case
will be the carrying amount of the investments.

Example : An entity has given a loan of Rs.10,000 which is the carrying amount. The
repayment of loan has no tax consequences. The tax base is Rs.10,000.

2. TAX BASE OF LIABILITY

The principle to compute tax base of a liability is as under:
❖ The tax base of a liability is its carrying amount, less any amount that will be
deductible for tax purposes in respect of that liability in future periods.

Example : Current liabilities include accrued expenses with a carrying amount of

Rs.100. The related expense will be deducted for tax purposes on a cash basis. The
tax base of the accrued expenses is nil.

❖ If those liabilities are not tax deductible, the tax base of that liability is equal
to its carrying amount.

158 IND AS 12 – Income Taxes

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Example : Current liabilities include accrued fines and penalties with a carrying
amount of Rs.100. Fines and penalties are not deductible for tax purposes. The tax
base of the accrued fines and penalties is Rs.100.

❖ It is an other than temporary difference, as the expenses are not allowable

as per income tax.

Example : A loan payable has a carrying amount of Rs.100. The repayment of the
loan will have no tax consequences. The tax base of the loan is Rs.100.

❖ In the case of revenue which is received in advance, the tax base of the
resulting liability is its carrying amount, less any amount of the revenue that
will not be taxable in future periods.

Example : Current liabilities include interest revenue received in advance, with a

carrying amount of Rs.100. The related interest revenue was taxed on a cash basis.
The tax base of the interest received in advance is nil.

❖ It is an other than temporary difference, as the expenses are not allowable

as per income tax.

Example : A loan payable has a carrying amount of Rs.100. The repayment of the
loan will have no tax consequences. The tax base of the loan is Rs.100.

❖ In the case of revenue which is received in advance, the tax base of the
resulting liability is its carrying amount, less any amount of the revenue that
will not be taxable in future periods.

Example : Current liabilities include interest revenue received in advance, with a

carrying amount of Rs.100. The related interest revenue was taxed on a cash basis.
The tax base of the interest received in advance is nil.

3. ITEMS WITH A TAX BASE BUT NO CARRYING AMOUNT

❖ There are certain items that have a tax base but no carrying amount. These
include items that are charged to revenue statement in the period in which
they are incurred but are allowed as a deduction over a number of periods
as per the taxation laws.

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Example : A Limited has been incorporated recently. It incurred Rs.1,00,000 on its

incorporation. It has been charged to revenue in the very first accounting period.
The taxation laws allow deduction over a period of 5 years. The carrying amount at
the end of year 1 is Nil. The tax base will be Rs.80,000 (20,000 x 4) as Rs.20,000
being 1/5th is allowable as a deduction in taxation laws over 4 years.

4. ITEMS OF ASSETS AND LIABILITIES WHERE TAX BASE IS NOT APPARENT

❖ There could be situations where it may be difficult to compute the tax base
of an item. One however, knows the carrying amount. This is because of the
provisions of taxation laws. Whereas in books of accounts, all or most of the
revenue and gains are included as part of one single performance statement,
in the taxation laws they are charged under different head.

Example : Entity A has an industrial undertaking that consists of land, building, plant
and machinery. It is contemplating disposing the entity. It has the option to recover
the carrying amount of the entity either by disposing the entire entity as a slump
sale or dispose of each asset on a piecemeal basis. Depending upon the manner of
recovery and period of holding, the carrying amount may be subject to indexation
benefit, the recovery may be charged either as a business profit or capital gains.
Again it could be long term gain capital gain or short term capital gain. As at the end
of the reporting period, the entity is not sure of the manner and time of recovery.

STEP 3 : COMPUTE TEMPORARY DIFFERENCE :

Temporary
Differences

Deferred Tax Deferred Tax

Assets Liabilities

In respect of In respect of In respect of In respect of

Deductible carry forward carry fotward Taxable
Temporary of unused tax of unused tax Temporary
Differences losses credit Differences

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Example : An entity has an item of plant and machinery acquired on the first day of the reporting
period for Rs.1,00,000. It depreciates it @ 20% p.a on SLM basis. The carrying amount in balance
sheet is Rs.80,000. The taxation laws require depreciation @ 30% on WDV basis. The tax base at
the end of the reporting period is Rs.70,000. The temporary difference is Rs.10,000 (Rs.80,000 –
Rs.70,000).

STEP 4 : CLASSIFY TEMPORARY DIFFERENCE :

Based on the above discussions, a matrix as under may be drawn:
For Assets For Liabilities
If carrying amount Taxable Temporary Difference Deductible Temporary Difference
> tax base ↓ ↓
Deferred Tax Liability Deferred Tax Asset
(e.g. WDV as per books > WDV as (e.g. Provision for Bonus as per books
per Income Tax) > Provision for Bonus as per IT)
If carrying amount Deductible Temporary Difference Taxable Temporary Difference
< tax base ↓ ↓
Deferred Tax Asset Deferred Tax Liability
(e.g. WDV as per books < WDV as (e.g. Loan carrying amount as per
per Income Tax) books< Loan carrying amounts as per
tax)
If carrying amount No temporary difference No temporary difference
= tax base

STEP 5: IDENTIFY EXCEPTIONS :

Exception 1 : The initial recognition of goodwill in the case of a business combination

Exception 2 : The initial recognition of an asset or liability in a transaction which: (i) is not a
business combination; and (ii) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss)

Exception 3 : Temporary differences associated with investments in subsidiaries, branches and

associates, and interests in joint ventures

STEP 6: ASSESS (ALSO REASSESS) DEDUCTIBLE TEMPORARY DIFFERENCES, TAX LOSSES AND TAX
CREDITS :
An entity should recognise deferred tax assets only when it is probable that taxable profits will be
available against which the deductible temporary differences can be utilised. This is based on the

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principle of prudence and conservatism. It should be noted that the entity has to make sufficient
taxable profits in future. Not making losses will not suffice.

STEP 7 : DETERMINE THE TAX RATE :

Having determined the taxable temporary differences and deductible temporary difference that
needs to be considered for recognition of deferred tax liabilities or assets respectively, we now
need to determine the tax for creation to deferred tax liabilities or assets. The principal is:
• Deferred tax assets and liabilities shall be measured:
(i) at the tax rates that are expected to apply to the period when the asset is realised
or the liability is settled;
(ii) based on tax rates (and tax laws) that have been enacted or substantively enacted
by the end of the reporting period.

STEP 8 : CALCULATE AND RECOGNISE DEFERRED TAX

(a) This is the simplest of all steps. Having determined the taxable temporary differences and
the deductible temporary differences as per Step 6 and the applicable tax rates with
reference to tax laws, one has to multiply amount determined in Step 6 with the rates
determined in Step 7.
• Taxable temporary differences when multiplied with tax rates will lead to deferred
tax liabilities.
• Deductible temporary differences when multiplied with rates will lead to deferred
tax assets.
(b) The following should be kept in mind:
• Deferred tax liabilities or assets should not be discounted.
• The carrying amount of a deferred tax asset shall be reviewed at the end of each
reporting period.
• An entity shall reduce the carrying amount of a deferred tax asset to the extent that
it is no longer probable that sufficient taxable profit will be available to allow the
benefit of part or all of that deferred tax asset to be utilised.
• Any such reduction shall be reversed to the extent that it becomes probable that
sufficient taxable profit will be available.

STEP 9: ACCOUNTING OF DEFERRED TAX :

(a) The accounting of deferred tax effects of a transaction of an event is consistent with the
accounting for that transaction or event.
(b) A transaction and the deferred tax effects of a transaction may be accounted for in:
• Statement of profit and loss;

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• Outside profit and loss account:

(i) In other comprehensive income such as revaluation amount in accordance
with Ind AS 16, Property, Plant and Equipment
(ii) Directly in equity such as correction of an error in accordance with Ind AS 8,
Accounting Policies, Changes in Accounting Estimates and Errors.

STEP 10 : OFFSETTING DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES :

An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
• the entity has a legally enforceable right to set off current tax assets against current tax
liabilities; and
• the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the
same taxation authority on either:
(i) the same taxable entity; or
(ii) different taxable entities which intend either to settle current tax liabilities and
assets on a net basis, or to realise the assets and settle the liabilities simultaneously,
in each future period in which significant amounts of deferred tax liabilities or assets
are expected to be settled or recovered.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 12 – Income Taxes 163

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 24
CHAPTER - 20
RELATED PARTY
DISCLOSURE

CHAPTER DESIGN

1. INTRODUCTION
2. OBJECTIVE
3. SCOPE
4. DEFINITIONS
5. UNDERSTANDING RELATIONSHIP BETWEEN THE REPORTING ENTITY
AND A PERSON(S)
6. UNDERSTANDING RELATIONSHIP BETWEEN THE REPORTING ENTITY
AND ANOTHER ENTITY/ENTITIES
7. UNDERSTANDING WHO ARE NOT RELATED PARTIES
8. DISCLOSURE
9. EXEMPTION TO GOVERNMENT – RELATED ENTITIES

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1. INTRODUCTION :
It is quite probable that related party relationship may have an effect on the profit or loss and
financial position of an entity. The effect gets manifested through:

(a) Transactions that are entered • Example : An entity may sell goods to its parent at
between related parties may not be cost. It may not sell goods at cost to an unrelated
entered with unrelated parties; party.

• Example : S Limited, a subsidiary of H

Limited, in steel manufacturing used to
purchase billets from UR Limited. H Limited
(b) Transactions with unrelated acquires 100% stake in FS Limited who also
parties get influenced because of manufactures billets. FS Limited is now a
related party relationships. fellow subsidiary of S Limited. H Limited
instructs S Limited not to purchase billets
from UR Limited but from FS Limited.

Therefore, the users of the financial statements of any entity should have:
(a) the knowledge of:
• related party relationships of an entity;
• entity’s transactions, outstanding balances, commitments etc. with such related
parties;
(b) as it may affect the users assessments:
• of operations of the entity and
• the risks and opportunities facing the entity.

2. OBJECTIVE :
The objective of the Standard is to ensure that the financial statements of an entity contains
necessary disclosures with respect to:
OBJECTIVES (a) related party relationships;

(b) related party transactions;

(c) outstanding balances with related parties; and

(d) commitments with related parties.

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The disclosures are necessary so that users’ attention could be drawn to the possibility that
financial statements may be affected by such related party relationships and other items as
mentioned above.

3. SCOPE :
The standard is applied to

Identifying
outstanding
Identifying Related Identifying Related
balances between
Party relationship Party transactions
an entity and its
related parties

Identifying the Identifying

Determining the
circumstances in commitments
disclosure to be
which disclosures of between an entity
made about the
above items is to be and its related
above items
made and parties

4. DEFINITIONS :
1. A related party is
(i) a person or (ii) entity
that is related to the reporting entity.
2. A reporting entity in this Standard is an entity that is preparing its financial statements.

Thus two types of related party relationships are envisaged.

1. One relationship is between the reporting entity and a person or persons.
2. The other relationship is between the reporting entity and another entity or entities.

Note: The Standard clarifies that in considering each possible related party relationship, the
attention should be directed to the substance of the relationship and not merely the legal form.

5. UNDERSTANDING RELATIONSHIP BETWEEN THE REPORTING ENTITY AND A PERSON(S) :

1. A person or a close member of that person’s family is related to a reporting entity if that
person:

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a) has control or joint control over the reporting entity;

b) has significant influence over the reporting entity; or
c) is a member of the key management personnel of
• the reporting entity or
• a parent of the reporting entity.
2. Close members of the family of a person are the one who may be expected to influence
or be influenced by that person in their dealings with the entity. It includes:
a) that person’s children, spouse or domestic partner, brother, sister, father and
mother;
b) children of that person’s spouse or domestic partner; and
c) dependants of that person or that person’s spouse or domestic partner.
3. A parent is an entity that controls one or more subsidiaries to present consolidated
financial statements.

EXAMPLES
1. Mr. A holds 51% in equity share capital of A Limited. A Limited has no other form of share
capital. As Mr. A controls A Limited, he is a related party.
2. Mrs. A is wife of Mr. A. Mr. A holds 51% of equity shares of A Limited. A Limited has no other
form of share capital. Mr. A controls A Limited. Since Mr. A is a related party, Mrs. A is also a
related party of A Limited.
3. Mr. D is a director of A Limited. Being a member of key management personnel of A Limited,
he is related to A Limited.
4. Mr. D is a director of H Limited. S Limited is a subsidiary of H Limited. Mr. D is related to S
Limited.

6. UNDERSTANDING RELATIONSHIP BETWEEN THE REPORTING ENTITY AND ANOTHER

ENTITY/ENTITIES :
1. Control is the power over the investee when it is exposed or has rights to variable returns
from its involvement with the investee and has the ability to affect those returns.
2. Joint Control is the contractually agreed sharing of control of an arrangement which exists
only when decisions about the relevant activities require the unanimous consent of the
parties sharing control.

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3. Significant influence is the power to participate in the financial and operating policy
decisions of the investee, but is not control of those policies. The terms ‘control’, ‘joint
control’ and ‘significant influence’ are discussed in detail in chapters on Ind AS 110,
Consolidated Financial Statements, Ind AS 111 ‘Joint Arrangements’ & Ind AS 28,
Investments in Associates & Joint Ventures.
4. Key management personnel are those persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or indirectly,
including any director (whether executive or otherwise) of that entity.
5. An entity is related to a reporting entity if any of the following conditions applies:
(a) The entity and the reporting entity are members of the same group (which means
that each parent, subsidiary and fellow subsidiary is related to the others).

Example : SA Limited and SB Limited are subsidiaries of H Limited. SA Limited, SB Limited

and H Limited are related to each other.

(b) One entity is an associate or joint venture of the other entity (or an associate or
joint venture of a member of a group of which the other entity is a member).

Example : AS Limited is an associate of S Limited. S Limited is a subsidiary of H Limited. SH

Limited is another subsidiary of H Limited. AS Limited and SH Limited are related parties.

(c) Both entities are joint ventures of the same third party.

Example : H Limited has entered into 2 joint ventures, JHA Limited (joint venture with A
Limited) and JHB Limited (joint venture with B Limited). JHA Limited and JHB Limited are
related parties.

(d) One entity is a joint venture of a third entity and the other entity is an associate of
the third entity.

Example : JH Limited is a joint venture of H Limited. AH limited is an associate of H Limited.

JH Limited and AH Limited are related parties.

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(e) The entity is a post-employment benefit plan for the benefit of employees of either
the reporting entity or an entity related to the reporting entity. If the reporting
entity is itself such a plan, the sponsoring employers are also related to the
reporting entity.

(f) The entity is controlled or jointly controlled by a person identified above.

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

(g) A person identified above has significant influence over the entity or is a member
of the key management personnel of the entity (or of a parent of the entity).

Example : Mr. A controls A Limited (the reporting entity). He is a non-executive director in

B Limited. A Limited and B Limited are related parties.

(h) The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting entity.

Example : A Ltd is a parent company with 3 subsidiary companies B Ltd. C Ltd & D Ltd. It
also has an associate company E Ltd. Subsidiary F Ltd of E Ltd provides key management
personnel services to A Ltd. F Ltd. is in a related party relationship with A, B, C D & E Ltd.

The aforesaid definition is wide and exhaustive. It is quite possible that the identification of
related parties may become an onerous task. The Standard therefore, as has been stated above,
lays emphasis on the substance of the relationship rather than legal form. For example, there
may be a special purpose entity in which the reporting entity may not have any ownership interest
but where it may exercise control being the sole customer. This special purpose entity could fall
in the definition of related party as envisaged by this Standard.

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7. UNDERSTANDING WHO ARE NOT RELATED PARTIES :

The Standard clarifies that certain relationships are not related party relationships. These are as
follows:
(a) Two entities are not related parties simply because they have a director or other member
of key management personnel in common or because a member of key management
personnel of one entity has significant influence over the other entity.

Example
Mr. A is a director in X Limited. He is also a director in Y Limited. He has no other interest
in either of these companies. There are no transactions between these two entities. X
Limited and Y Limited are not related parties.

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Example
Mr. A is a director in X Limited. He is also a director in Y Limited. He has no other interest
in either of these companies. Y Limited purchases the entire production of X Limited. The
transactions are always at arm’s length. X Limited and Y Limited may be related parties as
it is quite possible that Y Limited may be able to exercise control/significant control over
X Limited. As per this Standard substance is more important than mere legal form.

(b) Two venturers are not related parties simply because they share joint control over a joint
venture.

Example
JV Limited is an equal joint venture of J Limited and V Limited. J Limited and V Limited are
not related parties.

(c) (i) providers of finance, (ii) trade unions, (iii) public utilities, and (iv) departments and
agencies of a government that does not control, jointly control or significantly influence
the reporting entity, are not related parties simply by virtue of their normal dealings with
an entity (even though they may affect the freedom of action of an entity or participate in
its decision making process).

(d) a customer, supplier, franchisor, distributor or general agent with whom an entity
transacts a significant volume of business, simply by virtue of the resulting economic
dependence.

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Understanding related party transactions

1. A related party transaction is a transfer of resources, services or obligations between a
reporting entity and a related party, regardless of whether a price is charged.

Examples :
(a) purchases or sales of goods (finished or unfinished);
(b) purchases or sales of property and other assets;
(c) rendering or receiving of services;
(d) leases;
(e) transfers of research and development;
(f) transfers under licence agreements;
(g) transfers under finance arrangements (including loans and equity contributions in
cash or in kind);
(h) provision of guarantees or collateral;
(i) commitments to do something if a particular event occurs or does not occur in the
future, including executory contracts1 (recognised and unrecognised);
(j) settlement of liabilities on behalf of the entity or by the entity on behalf of that
related party; and
(k) management contracts including for deputation of employees.

8. DISCLOSURE :
The disclosure requirements can be broadly classified into two categories.
a. Category 1 – Where the relationship is as a result of control - requires disclosures of
relationships even though there are no related party transactions between the disclosed
related parties.
b. Category 2 – In other related party relationship - requires disclosures of relationships and
items only when there are related party transactions.

Disclosure- Relationships between parent and subsidiaries

The following disclosures of relationships, if exist, must be made irrespective of the fact whether
there have been related party transactions by the entity:

Under this an entity is required to disclose the name of its parent and, if different, the ultimate
controlling party. It may be noted that the ultimate controlling party may be a person.

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Example
S4 Limited (reporting entity) is a subsidiary of S3 Limited. S3 Limited is a subsidiary of S2 Limited.
S2 Limited is a subsidiary of S1 Limited. S1 Limited is a subsidiary of H Limited. S4 Limited must
disclose the name and relationship with S3 Limited and H Limited.

If neither the entity’s parent nor the ultimate controlling party produces consolidated financial
statements available for public use, the name of the next most senior parent that does so shall
also be disclosed.

Example
S4 Limited (reporting entity) is a subsidiary of S3 Limited. S3 Limited is a subsidiary of S2 Limited.
S2 Limited is a subsidiary of S1 Limited. S1 Limited is a subsidiary of H Limited. Only S2 Limited
and S1 Limited produces consolidated financial statements for public use. S4 Limited must
disclose the name and relationship with S3 Limited, S2 Limited and H Limited.

Example
S4 Limited (reporting entity) is a subsidiary of S3 Limited. S3 Limited is a subsidiary of S2 Limited.
S2 Limited is a subsidiary of S1 Limited. S1 Limited is a subsidiary of H Limited. S3 Limited, S2
Limited, S1 Limited and H Limited all produces consolidated financial statements for public use.
S4 Limited must disclose the name and relationship with S3 Limited and H Limited.

The Standard clarifies that the requirement to disclose related party relationships between a
parent and its subsidiaries is in addition to the disclosure requirements in Ind AS 110,
Consolidated Financial Statements, Ind AS 28, Investments in Associates, and Joint Ventures.

Category 2 Disclosure
Under this category, two types of disclosures are required. The first requires disclosures related
to compensation to key management personnel. The second requires other disclosures where
there have been related party transactions during the year.

Disclosures of compensation to key management personnel

An entity is required to disclose
(i) total compensation to key management personnel and
(ii) Compensation for each of the following categories:
(a) short–term employee benefits;
(b) post–employment benefits;
(c) other long-term benefits;
(d) termination benefits;
(e) share–based payments.

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9. EXEMPTION TO GOVERNMENT – RELATED ENTITIES :

• A reporting entity is also exempt from the disclosure requirements in relation to (i) related
party transactions (ii) outstanding balances and (iii) commitments with:
(a) a government that has control, joint control or significant influence over the
reporting entity; and
(b) another entity that is a related party because the same government has control,
joint – control or significant influence over both the reporting entity and the other
entity.
• However, it shall disclose:
(a) the name of the government;
(b) the nature of the government’s relationship with the entity (whether the
government has control, joint control or significant influence over the entity);
(c) to enable the users of the entity’s financial statements to understand the effect of
related party transactions on its financial statements, the following information in
sufficient details:
• the nature and amount of each individually significant transaction;
• for other transactions that are not significant individually but are significant when
aggregated, either a qualitative or quantitative indication of their extent.

Question 1
Entity P Limited has a controlling interest in subsidiaries SA Limited and SB Limited and
SC Limited. SC Limited is a subsidiary of SB Limited. P Limited also has significant
influence over associates A1 Limited and A2 Limited. Subsidiary SC Limited has
significant influence over associate A3 Limited Examine related party relationships of
various entities.

Solution :

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1. For P Limited - SA, SB, SC, A1, A2 and A3 are related

2. For SA Limited - P, SB, SC, A1, A2, A3 are related parties
3. For SB Limited - P, SA, SC, A1, A2, A3 are related parties
4. For SC Limited - P, SA, SB, A1, A2, A3 are related parties
5. For A1 - P, A2, A3, SA, SB, SC are related parties
6. A1, A2 and A3 are not related parties

Question 2
Mr. X has an investment in A Limited and B Limited.
Required
(i) Examine when can related party relationship be established
(a) from the perspective of A Limited’s financial statements:
(b) from the perspective of B Limited’s financial statements:
(ii) Will A Limited and B Limited be related parties if Mr. X has only significant
influence over both A Limited and B Limited.

Solution :
1. A. Entity B and Mr X are related parties
B. Entity A and Mr X are related parties
2. No, A Limited and B Limited will not be considered as related parties.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

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IND AS 33
CHAPTER - 21
EARNINGS PER SHARE

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. DEFINITIONS
4. MEASUREMENT OF BASIC EARNINGS PER SHARE
5. DILUTED EARNINGS PER SHARE
6. RETROSPECTIVE ADJUSTMENTS
7. PRESENTATION
8. ADDITIONAL TOPICS

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1. INTRODUCTION :
Earnings per share (EPS) is an important measure of the performance of the company. EPS is a
ratio that is widely used by financial analysts, investors and other users to gauge an entity’s
profitability and to value its shares. Its purpose is to indicate how effective an entity has been in
using the resources provided by the ordinary shareholders, and to assess the entity’s current net
earnings.

2. SCOPE :
This standard is applicable, ie EPS should be disclosed while preparing CFS and SFS. Information
to be used should be from respective financial statements

3. DEFINITIONS :
1. An ordinary share is an equity instrument that is subordinate to all other classes of equity
instruments.
An equity instrument is any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.
2. A potential ordinary share is a financial instrument or other contract that may entitle its
holder to ordinary shares.
Examples of potential ordinary shares are:
(a) financial liabilities or equity instruments, including preference shares, that are
convertible into ordinary shares;
(b) options and warrants.
3. Dilution is a reduction in earnings per share or an increase in loss per share resulting from
the assumption that convertible instruments are converted, that options or warrants are
exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.
4. Antidilution is an increase in earnings per share or a reduction in loss per share resulting
from the assumption that convertible instruments are converted, that options or warrants
are exercised, or that ordinary shares are issued upon the satisfaction of specified
conditions.

“As per IND AS 33 – Antidilution should be not be reported”

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4. MEASUREMENT OF BASIC EARNINGS PER SHARE

4.1. Meaning and Formula
Meaning
An entity shall calculate basic earnings per share for profit or loss attributable to ordinary
equity holders of the parent entity and, if presented, profit or loss from continuing
operations attributable to those equity holders.
Formula
Profit/Loss attributes to Equity Shareholders
=
Weighted average number of Equity shares outstanding during the period

4.2. Measurement of Earnings

For the purpose of calculating basic earnings per share, the amounts attributable to
ordinary equity holders of the parent entity in respect of
(a) profit or loss from continuing operations attributable to the parent entity; and
(b) profit or loss attributable to the parent entity

Note :
1. Preference dividend should be deducted from PAT as per EIR (IND as 32)
2. Any premium / Discount on early redemption should also be adjusted to PAT.
3. Premium/ Discount should be calculated as a difference between carrying amount
and redemption value

Example :
ABC Ltd. had issued preference shares at Rs.100 each 10 years ago. Now ABC Ltd. buy backs
the shares for Rs.120 each. Rs.20 premium for each share is charged to retained earnings. No
amount is recorded in the statement of profit and loss for this transaction. However, for EPS
purposes, Rs.20 for each share is charged to the statement of profit or loss for the period of
the transaction.

Question 1
Calculate Basic EPS for RM Limited from the following information
1. No of shares 10 lakhs
2. 8% cumulative preference shares
a. Face Value Rs. 100 each
b. Issued at Rs. 92 each
c. Maturity 5 years
d. Date of issue 1/4/17
e. Number of shares of issue 10 lakhs
f. EIR 10.12 %
g. Dividend Distribution Tax 17%
3. PAT 280 lakhs

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Solution :
Profits available for Equity Shareholders
EPS = = 173.296
10
= Rs.17.3296/share
No. of shares

Profits available for ESH

PAT 280
Less : Dividend as per EIR (10 x 92 x 10.12% ) 93.104
Less : Dividend Distribution Tax (10 x 100 x 8% x 17%) 13.6
Profits available for Equity share holders 173.296

Question 2
RM Ltd. issues 10000 11% preference shares of Rs.100 each @ 102 each. Other details
are as follows
Maturity 5 years
Dividend Distribution Tax 17%
EIR 10.47 %
PAT 3,00,000
No of equity shares 1,00,000
RM Ltd redeems the preference shares early at year end @ Rs.104.
Calculate Basic EPS?

Solution :

Profits available for Equity Shareholders 151300

EPS = = = Rs.1.513/share
No. of shares 100000

1. Profits available for ESH

PAT 3,00,000
Less : Dividend as per EIR (10,000 x 102 x 10.47% ) 1,06,794
Less : Dividend Distribution Tax (10,000 x 100 x 11% x 17%) 18,700
Less : Premium on Redemption 23,206
Profit for Equity share holder 1,51,300

2. Premium on Redemption
Opening (10,000 x 102) 10,20,000
Add : EIR 1,06,794
Less : Dividend 1,10,000

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Carrying Amount 10,16,794

Redemption 10,40,000
Premium on Redemption 23,206

4.3. Shares
For the purpose of calculating basic earnings per share, the number of ordinary shares shall
be the weighted average number of ordinary shares outstanding during the period.

Question 3
Following is the data for company XYZ in respect of number of equity shares during the
financial year 2011-2012. Find out the number of shares for the purpose of calculation
of basic EPS as per Ind AS 33.
No. Date Particulars No of shares
1 1/4/2011 Opening balance of outstanding equity 100,000
shares
2 15/6/2011 Issue of equity shares 75,000
3 8/11/2011 Conversion of convertible preference 50,000
shares in Equity
4 22/2/2012 Buy back of shares (20,000)
5 31/3/2012 Closing balance of outstanding equity 205,000
shares

Solution :
Date Particulars No of shares Days Weighted
Average
1/4/2011 Opening 1,00,000 365 1,00,000
15/6/2011 Issue 75,000 290 59,589
8/11/2011 Conversion 50,000 144 19,726
22/2/2012 Buy Back (20,000) (38) (2,082)
Closing 1,77,233

Change in the number of shares without change in value of capital

Ordinary shares may be issued, or the number of ordinary shares outstanding may be
reduced, without a corresponding change in resources. Examples include:
(a) a capitalisation or bonus issue (sometimes referred to as a stock dividend);
(b) a bonus element in any other issue, for example a bonus element in a rights issue
to existing shareholders;

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(c) a share split; and

(d) a reverse share split (consolidation of shares).

Question 4
On 31 March, 2012, the issued share capital of a company consisted of Rs.100,000,000 in
ordinary shares of Rs.25 each and Rs.500,000 in 10% cumulative preference shares of Re
1 each. On 1 October, 2012, the company issued 1,000,000 ordinary shares fully paid by
way of capitalization of reserves in the proportion 1:4 for the year ended 31 March, 2013.
Profit for 2011-2012 and 2012-2013 is Rs.450,000 and Rs.550,000 respectively.
Calculate the basic EPS for 2011-2012 and 2012-2013.

Solution :
Year 2011 – 2012 4,50,000 − 50,000 10 paise
40,00,000
Year 2012 – 2013 5,50,000 − 50,000 10 paise
40,00,000 + 10,00,000
Year 2011 – 2012 4,50,000 − 50,000 8 paise
(restated) 40,00,000 + 10,00,000

Question 5
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 3 shares 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 :
Date Particulars No of shares Days Weighted
Average
1/1 Opening 10,00,000 12 months 10,00,000
28/2 Issue 2,00,000 10 months 1,66,667
31/8 Bonus 3,33,333 12 months 3,33,333
Bonus 66,667 10 months 55,556
30/11 Issue 2,50,000 1 month 20,833
Closing 15,76,389

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Rights issues
Faire value per share immediately before the exercise of right
=
Theoretical ex - rights fair value per share

where,
Theoretical ex-rights fair value per share
Faire value of all outstanding shares before exercise of right + Total amount received from exercise of rights
=
No. of shares outstanding before exercise + No. of shares issued in exercise

Question 6
At 31 December 2011, the issued share capital of a company consisted of 1.8 million
ordinary shares of Rs.10 each, fully paid. The profits for the year ended 31 December
2011 and 2012 amounted to Rs.6,30,000 and Rs.875,000 respectively. On 31 March 2012,
the company made a rights issue on a 1 for 4 basis at Rs30. The market price of the shares
immediately before the rights issue was Rs.60. Calculate EPS.

Solution :
6,30,000
1. Year 2011 = = 0.35 / share
18,00,000

2. Year 2012

18,00,000 𝑥𝑥 60+4,50,000 𝑥𝑥 30
Ex-right price = = 54
18,00,000+4,50,000
60
Adjustment factor = = 1.1111
54
Bonus element = 18,00,000 x 1.1111
= 20,00,000 – 18,00,000 = 2,00,000
Total Issue = 4,50,000
Fresh Issue = 4,50,000 – 2,00,000 = 2,50,000

8,75,000
Therefore EPS = 9
18,00,000+200,000+(2,50,000 𝑥𝑥 )
12

= 0.40 / share

6,30,000
3. Year 2011 (restated) = = 0.315 / share
18,00,000+2,00,000

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5. DILUTED EARNINGS PER SHARE :

The formula can be mathematically expressed as follows:
Profit/Loss attributable to Equity share holders when dilutive potential shares are converted into ordinary shares
Weighted average number of Equity shares + Weighted average number of dilutive potential ordinary shares

5.1 EARNINGS
For the purpose of calculating diluted earnings per share, an entity shall adjust profit or
loss attributable to ordinary equity holders of the parent entity, by the after-tax effect of:
(a) any dividend or other items related to dilutive potential ordinary shares is deducted
in arriving at profit or loss attributable to ordinary equity holders of the parent
entity;
(b) any interest recognised in the period related to dilutive potential ordinary shares;
and
(c) any other changes in income or expense that would result from the conversion of
the dilutive potential ordinary shares.

Question 7
Entity A has in issue 25,000 4% debentures with a nominal value of Re 1. The debentures
are convertible to ordinary shares at a rate of 1:1 at any time until 20X9. The entity’s
management receives a bonus based on 1% of profit before tax. Entity A’s results for
20X2 showed a profit before tax of ` 80,000 and a profit after tax of ` 64,000 (for
simplicity, a tax rate of 20% is assumed in this example). Calculate Earnings for the
purpose of diluted EPS.

Solution :
Amount (Rs)
Profit after tax 64,000
Add: Reduction in interest cost (25,000 × 4%)
(Refer Note) 1,000
Less: Tax expense (1,000 × 20%) (200)
Less: Increase in management bonus (1,000 × 1%) (10)
Add: Tax benefit (10 × 20%) 2
Earnings for the purpose of diluted EPS 64,792

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5.2. SHARES

Question 8
ABC Ltd. has 1,000,000 Rs.1 ordinary shares and 1,000 Rs.100 10% convertible bonds
(issued at par), each convertible into 20 ordinary shares on demand, all of which have
been in issue for the whole of the reporting period. ABC Ltd.’s share price is Rs.4.50 per
share and earnings for the period are Rs.500,000. The tax rate applicable to the entity is
21%. Calculate earnings per incremental share for the convertible bonds.

Solution :
Basic EPS is Rs.0.50 per share (i.e. 500,000/1,000,000)

Incremental earnings
The earnings per incremental share for the convertible bonds is calculated as follows:
Earnings effect = No. of bonds x nominal value x interest cost - tax deduction @ 21%
= 1,000 x 100 x 10% x (1- 0.21) = Rs.7,900.

Incremental shares calculation

Assume all bonds are converted to shares, even though this converts Rs.100 worth of
bonds into 20 shares worth only Rs 90 and is therefore not economically rational. This gives
1000 x 20 = 20,000 additional shares.

Earnings per incremental share = Rs.7,900 / 20,000 = Rs.0.395

Note : Since the incremental EPS is less than basic EPS – it will lead to dilution of Future
EPS, which is to be reported.
Diluted EPS = (Rs.500,000 + Rs.7,900) / (1,000,000 + 20,000) = Rs.0.498 per share.

EMPLOYEE STOCK OPTIONS

Employee share options with fixed or determinable terms and non-vested ordinary shares
are treated as options in the calculation of diluted earnings per share, even though they
may be contingent on vesting. They are treated as outstanding on the grant date.
Performance-based employee share options are treated as contingently issuable shares
because their issue is contingent upon satisfying specified conditions in addition to the
passage of time.

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Question 9 - Effects of share options on diluted earnings per share

Profit attributable to ordinary equity holders of the parent entity for Rs 1,200,000
year 20X1
Weighted average number of ordinary shares outstanding during 500,000 shares
year 20X1
Average market price of one ordinary share during year 20X1 Rs 20.00
Weighted average number of shares under option during year 20X1 100,000 shares
Exercise price for shares under option during year 20X1 Rs 15.00
Calculate basic and diluted EPS.

Solution :
12,00,000
1. Basic EPS = = Rs. 2.4 / share
5,00,000

12,00,000
2. Diluted EPS = = Rs. 2.285 / share
5,00,000+25,000

6. RETRPSPECTIVE ADJUSTMENTS
• Diluted EPS of any prior period presented should not be restated for changes in the
assumptions used (such as for contingently issuable shares) or for the conversion of
potential ordinary shares (such as convertible debt) outstanding at the end of the previous
period. These factors are already taken into account in calculating the basic and, where
applicable, the diluted EPS for the current period. Prior period’s EPS data should be
restated for the effects of errors and adjustments resulting from changes to accounting
policies accounted for retrospectively.
• Basic and diluted EPS figures for the current period and for prior periods should include
bonus issues, share splits, share consolidations and other similar events occurring during
the period that change the number of shares in issue without a corresponding change in
the resources of the entity (that is, retrospective application).

7. PRESENTATION :
• Earnings per share is presented for every period for which a statement of profit and loss is
presented. If diluted earnings per share is reported for at least one period, it shall be
reported for all periods presented, even if it equals basic earnings per share. If basic and
diluted earnings per share are equal, dual presentation can be accomplished in one line in
the statement of profit and loss.

IND AS 33 – Earnings Per Share 185

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

• If company does not have any potential ordinary shares, then company’s basic and diluted
EPS will be same. In such case company need not mention Basic EPS and Diluted EPS
separately on two different lines. It can just mention on one line
20X1 20X0
Basic and Diluted EPS 3.60 2.45

8. ADDITIONAL TOPICS :
8.1. PARTICIPATING EQUITY INSTRUMENTS AND TWO-CLASS ORDINARY SHARES

Question 10
An entity has two classes of shares in issue:
• 5,000 non-convertible preference shares
• 10,000 ordinary shares
The preference shares are entitled to a fixed dividend of Rs.5 per share before any
dividends are paid on the ordinary shares. Ordinary dividends are then paid in which the
preference shareholders do not participate. Each preference share then participates in
any additional ordinary dividend above Rs.2 at a rate of 50% of any additional dividend
payable on an ordinary share.
The entity’s profit for the year is Rs.100,000, and dividends of Rs.2 per share are declared
on the 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 :
Profit 1,00,000
Less : Dividends to Preference (5,000 x 5) 25,000
Less : Dividends to Equity (10,000 x 2) 20,000
Balance profit 55,000

Balance profit shall be distributed between preference and equity in the ratio (4 : 1)
Equity = 10,000 x 1 = 10,000
Preference = 5,000 x 0.5 = 2,500

Balance profit 55,000

Equity (4) 44,000
Preference (1) 11,000

186 IND AS 33 – Earnings Per Share

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EPS
20,000+44,000
1. For Equity = = Rs. 6.4 / shares
10,000
25,000+11,000
2. For Preference = = Rs. 7.2 / shares
5000

8.2. PARTLY PAID SHARES

Question 11
An entity issues 100,000 ordinary shares of Re.1 each for a consideration of Rs.2.50 per
share. Cash of Rs.1.75 per share was received by the balance sheet date. The partly paid
shares are entitled to participate in dividends for the period in proportion to the amount
paid. Calculate number of shares for calculation of Basic EPS.

Solution :
The number of ordinary share equivalents that would be included in the basic EPS
calculation on a weighted basis is as follows: (100,000 × Rs.1.75) / Rs.2.50 = 70,000 shares.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 33 – Earnings Per Share 187

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 102
CHAPTER - 22
SHARE BASED PAYMENT

IMPORTANT TERMS TO REMEMBER

 Grant : Grant of the option means giving an option to the employees to

subscribe to the shares of the company
 Vesting : It is the process by which the employee is given the right to apply
for shares of the company against the option granted to him in purchase of
employee in pursuance of employee stock option scheme (ESOS)
 Vesting Period : It is the time period during which the vesting of the option
granted to the employees on pursuance of ESOS takes place.
 Option : Option means a right but not an obligation granted to an employee
in pursuance of ESOS to apply for shares of the company at a pre-
determined price.
 Exercise Period : It is the time period after vesting within which the
employee should exercise his right to apply for shares against the option
vested in him in pursuance of the ESOS.
 Exercise Price : It is price payable by the employee for exercising the option
granted to him in pursuance of ESOS
 Intrinsic Value : It is the excess of the market price of the share under ESOS
over the exercise price of the option (including upfront payment, if any)
 Fair Value of share : The refers to expected market price of the share on
the date of exercising the options
 Fair Value of Option : The excise of fair value of share over the exercise
price is referred as fair value of option.

188 IND AS 102 – Share Based Payment

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Question 1
XYZ issued 10,000 Share Appreciation Rights (SARs) that vest immediately to its employees
on 1 April 2000. The SARs will be settled in cash. At that date it is estimated, using an
option pricing model, that the fair value of a SAR is INR 95. SAR can be exercised any time upto
31st March 2003. At the end of period on 31 March 2001 it is expected that 95% of total
employees will exercise the option, 92% of total employees will exercise the option at the
end of next year and finally 89% will be vested only at the end of the 3rd year. Fair Values
at the end of each period have been given below:
Fair Value of SAR INR
31/3/2001 112
31/3/2002 109
31/3/2003 114
Pass the Journal entries assuming the SAR was exercised on 31st March 2003.

Solution :
Date % Expected Calculation Cumulative Expense
1/4/2000 100 10,000 x 95 950000 950000
31/3/2001 95 10000x95%x112 1064000 114000
31/3/2002 92 10000x92%x109 1002800 (61200)
31/3/2003 89 10000x89%x114 1014600 11800

Date Particulars J.F Debit (Rs.) Credit (Rs.)

2000-01
01-04-2000 Employee Compensation Exp A/c Dr. 950000
To SAR A/c (FL) 950000
31-03-2001 Employee Compensation Exp A/c Dr. 114000
To SAR A/c (FL) 114000
31-03-2001 Profit and Loss A/c Dr. 1064000
To Employee Compensation 1064000
Exp
2001-02
31-03-2002 SAR A/c Dr. 61200
To General Reserve 61200
2002-03
31-03-2003 Employee Compensation Exp A/c Dr. 11800
To SAR A/c (FL) 11800

IND AS 102 – Share Based Payment 189

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

31-03-2003 Profit and Loss A/c Dr. 11800

To Employee Compensation 11800
Exp
31-03-2003 SAR A/c (FL) Dr Dr. 1014600
To Bank A/c 1014600

Question 2
On 1 January 2001, ABC limited gives options to its key management personnel
(employees) to take either cash equivalent to 1,000 shares or 1,500 shares. The minimum
service requirement is 2 years and shares being taken must be kept for 3 years.
Fair values of the shares are as follows: INR
Share alternative fair value (with restrictions) 102
Grant date fair value on 1 Jan 2001 113
Fair value on 31st Dec 2001 120
Fair Value on 31st Dec 2002 132
The employees exercise their cash option at the end of 2002.
Pass the journal entries.

Solution :
1/1/01 Shares = 1500 x 102 = 153000
Cash = 1000 x 113 = 113000
Excess Shares = 40000

31/12/01 31/12/02
1,000 × 120
Cash = x 1 = 60,000 Cash = 1000×132
2
× 2 = 1,32,000 – 60,000 = 72,000
2

Shares = 40,000
× 1 = 20,000 Shares = 40,000 – 20,000 = 20,000
2

Total = 1,07,740 Total = 1,17,340

Year 2001
31/12/2001 Employee Compensation Expense 80000
To Employee Cash Option 60000
To Employee Stock Option 20000

31/12/2001 Profit & Loss Account 80000

To Employee Compensation 80000

190 IND AS 102 – Share Based Payment

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

Expense
Year 2002
31/12/2002 Employee Compensation Expense 92000
To Employee Cash Option 72000
To Employee Stock Option 20000

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 102 – Share Based Payment 191

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 19
CHAPTER - 23
EMPLOYEES BENEFITS

CHAPTER DESIGN

1. OBJECTIVE
2. SCOPE
3. EMPLOYEE BENEFIT
4. DEFINITIONS
5. SHORT-TERM EMPLOYEE BENEFITS
6. POST-EMPLOYMENT BENEFITS
7. ACCOUNTING FOR DEFINED CONTRIBUTION PLANS
8. ACCOUNTING FOR DEFINED BENEFIT PLANS
9. RECOGNITION AND MEASUREMENT: PRESENT VALUE OF DEFINED BENEFIT
OBLIGATIONS AND CURRENT SERVICE COST
10. COMPONENTS OF DEFINED BENEFIT COST
11. PRESENTATION
12. OTHER LONG-TERM EMPLOYEE BENEFITS
13. TERMINATION BENEFITS

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1. OBJECTIVE :
• The objective of this standard is to prescribe the accounting and disclosure for employee
benefits.
• Ind AS 19 requires an entity to recognise:
(a) a liability for advance services received from an employee; and
(b) an expense for consumption of economic benefits raised from the service provided
by an employee in exchange for employee benefits.

2. SCOPE :
• This Standard shall be applied by an employer in accounting for all employee benefits other
than benefits to which Ind AS 102, Share-based Payment, is applicable.
• This Standard does not deal with reporting by employee benefit plans.  Emp
are required to be paid
• under formal plans/agreements between an entity and its individual employees/group of
employees/their representatives,
o as required by law or as required by any type of industry arrangements an entity is
required to contribute to any nation/state/industry or other multi-employer plans;
or
o where due to some change in informal practice entity is required to pay due to
constructive obligation.

3. EMPLOYEE BENEFITS :

Employees
Benefits

Other Long Term Post

Short Term Termination
Employee Employment
Benefits Benefits
Benefits Benefits

4. DEFINITIONS :
1. Employee Benefits : All forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment.

IND AS 19 – Employees Benefits 193

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2. Short-term Employee Benefits : Employee benefits (other than termination benefits) that
are expected to be settled wholly before twelve months after the end of the annual
reporting period in which the employees render the related service.
Example : Wages, salaries, paid annual leave.

3. Post-employment Benefits : Employee benefits (other than termination benefits and

short-term employee benefits) that are payable after the completion of employment.
Example : Pensions, lumpsum payments on retirement.

4. Other long-term employee benefits are all employee benefits other than short-term
employee benefits, post-employment benefits and termination benefits.
Example : Long-term paid absences such as long-service leave or sabbatical leave, jubilee
or other long-service benefits.

5. Termination benefits are employee benefits provided in exchange for the termination of
an employee’s employment as a result of either:
(a) an entity’s decision to terminate an employee’s employment before the normal
retirement date; or
(b) an employee’s decision to accept an offer of benefits in exchange for the
termination of employment.

6. Post-employment Benefit Plans : These plans are formal or informal arrangements under
which an entity provides post-employment benefits for one or more employees.
Under these plans the benefits given to employees are after employment like gratuity,
pension, provident fund etc.
Note: Defined contribution plans and Defined Benefit Plans are two categories of
postemployment benefits plans.

7. Defined Contribution Plans : They are post-employment benefit plans under which an
entity pays fixed contributions into a separate entity (a fund) and will have no legal or
constructive obligation to pay further contributions if the fund does not hold sufficient
assets to pay all employee benefits relating to employee service in the current and prior
periods.
In such kind of plans the contribution is defined which means it is fixed and known to the
entity.
Example : Provident Fund contribution by the employer.

194 IND AS 19 – Employees Benefits

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8. Defined Benefit Plans: Post-employment benefit plans other than defined contribution
plans.
Example : Gratuity.

9. Multi-employer Plans: Defined contribution plans (other than state plans) or defined
benefit plans (other than state plans) that:
(a) pool the assets contributed by various entities that are not under common control;
and
(b) use those assets to provide benefits to employees of more than one entity, on the
basis that contribution and benefit levels are determined without regard to the
identity of the entity that employs the employees.

10. Net defined benefit liability (asset): The deficit or surplus, adjusted for any effect of
limiting a net defined benefit asset to the asset ceiling.

11. Deficit or surplus :

(a) the present value of the defined benefit obligation less
(b) the fair value of plan assets (if any).

12. Asset ceiling : The present value of any economic benefits available in the form of refunds
from the plan or reductions in future contributions to the plan.

13. Present Value of a Defined Benefit Obligation : Present value, without deducting any plan
assets, of expected future payments required to settle the obligation resulting from
employee service in the current and prior periods. Plan assets comprise:
(a) assets held by a long-term employee benefit fund; and
(b) qualifying insurance policies.

14. Assets Held by a Long-term Employee Benefit Fund : Assets (other than non-transferable
financial instruments issued by the reporting entity) that:
(a) are held by an entity (a fund) that is legally separate from the reporting entity and
exists solely to pay or fund employee benefits; and
(b) are available to be used only to pay or fund employee benefits, are not available to
the reporting entity’s own creditors (even in bankruptcy), and cannot be returned
to the reporting entity, unless either:
(i) the remaining assets of the fund are sufficient to meet all the related
employee benefit obligations of the plan or the reporting entity; or

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(ii) the assets are returned to the reporting entity to reimburse it for employee
benefits already paid.

15. Qualifying Insurance Policy: Insurance policy issued by an insurer that is not a related party
(as defined in Ind AS 24, Related Party Disclosures) of the reporting entity, if the proceeds
of the policy:
(a) can be used only to pay or fund employee benefits under a defined benefit plan;
and
(b) are not available to the reporting entity’s own creditors (even in bankruptcy) and
cannot be paid to the reporting entity, unless either:
(i) the proceeds represent surplus assets that are not needed for the policy to
meet all the related employee benefit obligations; or
(ii) the proceeds are returned to the reporting entity to reimburse it for
employee benefits already paid.

16. Fair Value : The price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. (Ind AS
113, Fair Value Measurement.)

17. Service cost comprises:

(a) Current service cost, which is the increase in the present value of the defined
benefit obligation resulting from employee service in the current period;
(b) Past service cost, which is the change in the present value of the defined benefit
obligation for employee service in prior periods, resulting from a plan amendment
(the introduction or withdrawal of, or changes to, a defined benefit plan) or a
curtailment (a significant reduction by the entity in the number of employees
covered by a plan); and
(c) any gain or loss on settlement.

18. Net interest on the net defined benefit liability (asset): The change during the period in
the net defined benefit liability (asset) that arises from the passage of time.

19. Remeasurements of the net defined benefit liability (asset) comprise:

(a) actuarial gains and losses;
(b) the return on plan assets, excluding amounts included in net interest on the net
defined benefit liability (asset); and

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(c) any change in the effect of the asset ceiling, excluding amounts included in net
interest on the net defined benefit liability (asset).

20. Actuarial gains and losses are changes in the present value of the defined benefit
obligation resulting from:
(a) experience adjustments (the effects of differences between the previous actuarial
assumptions and what has actually occurred); and
(b) the effects of changes in actuarial assumptions.

21. Return on plan assets: Interest, dividends and other income derived from the plan assets,
together with realised and unrealised gains or losses on the plan assets, less:
(a) any costs of managing plan assets; and
(b) any tax payable by the plan itself, other than tax included in the actuarial
assumptions used to measure the present value of the defined benefit obligation.

22. Settlement: A transaction that eliminates all further legal or constructive obligations for
part or all of the benefits provided under a defined benefit plan, other than a payment of
benefits to, or on behalf of, employees that is set out in the terms of the plan and included
in the actuarial assumptions.

5. SHORT-TERM EMPLOYEE BENEFITS :

• Short-term employee benefits include items expected to be settled wholly before twelve
months after the end of the annual reporting period in which the employees render the
related services.
• It includes
(a) wages, salaries and social security contributions;
(b) paid annual leave and paid sick leave;
(c) profit-sharing and bonuses; and
(d) non-monetary benefits (such as medical care, housing, cars and free or subsidised
goods or services) for current employees.

5.1 Recognition and Measurement of Short-term Benefits

Accounting for short term benefits has two characteristics:
(a) measurement of short term benefits are measured on an undiscounted basis; and
(b) it involves no actuarial assumptions to be made, hence there is no accounting
required for any actuarial gain/loss.

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[CA – Final – Financial Reporting] | Prof.Rahul Malkan

Note : Recognition of short term employee benefit is in the form of either paid expenses
or profit sharing or bonus plans

5.2 Short -term paid absences

When the employees

render service that
Accumulating increases their
entitlement to future
Short Term Paid paid absences
Absences

When the absences

Non-Accumulating
occur

5.2.1 Accumulating Paid Absences

These are the absences that are carried forward and can be used in future periods if the
employee is not able to use them in current reporting period of the employer. They can
be either:
(i) Vesting : In this case, employees are entitled to a cash-payment for the unutilised
entitlement at the time of leaving the entity.
(ii) Non-vesting : In this case, employees are not entitled to a cash payment for unused
entitlement on leaving.

Question 1
Sunderam Pvt. Ltd. has a headcount of 100 employees in 20X0-20X1. As per the
employee policy, the employees are entitled for 30 annual leaves out of which 10 may
be carried forward to the next current year, 10 sick leaves out of which 2 may be carried
forward as paid leave. At March 31, 20X1, the average unused entitlement is 5 days per
employee for privilege leave and 1 for sick leave. On an average, it is found that the
number of such employees who would be claiming annual leaves would be 30 and 10
employees who would claim sick leaves. Compute the liability to be recognised as sick
pay and privilege leave by the entity in 20X0-20X1.

Solution :
The entity will recognise liability in the books equal to 150(30 x 5) days of paid casual leaves
and 10 (10 x 1) days of sick pay

198 IND AS 19 – Employees Benefits

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5.2.2 Non-accumulating Paid Absences:

• These are the absences that do not carry forward and they will lapse if the current
period’s entitlement is not used in full by the employee and
• This also do not entitle employees to a cash payment for unused entitlement on
leaving the entity.
Example: Sick pay (to the extent that unused past entitlement does not increase
future entitlement), maternity or paternity leave and compensated absences for
jury service or military service.
• An entity shall recognise no liability or expense as the employee service does not
increase the amount of the benefit.

5.3 Profit-sharing and Bonus Plans :

• Expected costs of profit-sharing and bonus plans shall be recognised when: (a) the
entity has a present legal or constructive obligation to make such payments as a
result of past events; and (b) a reliable estimate of the obligation can be made by
the entity.
• A present obligation exists when, and only when, an entity has no realistic
alternative but to make the payments in lieu of profits and bonuses to its
employees.
• An obligation under profit-sharing and bonus plans results from employee service
and not from a transaction with the entity’s owners.
• Therefore, an entity recognises the cost of profit-sharing and bonus plans not as a
distribution of profit but as an expense.

6. POST-EMPLOYMENT BENEFITS :
Post-employment benefits include:
(a) Retirement benefits such as pensions and lump sum payments on retirement; and
(b) Other post-employment benefit plans such as post-employment life insurance and
postemployment medical care.

6.1 Classification of Post-employment Benefit Plans into Defined Contribution Plan vs

Defined Benefit Plans :

Defined
Contribution
Plans Defined Benefit
Plans

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7. ACCOUNTING FOR DEFINED CONTRIBUTION PLANS :

The above differences can be summarized as follows :
No. Particulars Defined Contribution Plans Defined Benefits Plans
1. Amount contributed The entity agrees to contribute The entity’s obligation is to
a limited amount to the fund as provide the agreed benefits to
its legal or constrictivecurrent and former
obligation employees.
2. Risk bearer Actuarial risk and investment Actuarial risk and investment
risk fall on the employee and risk fall on the entity and not on
not on the entity. the employee.
3. Change in the Generally, no change in the If actuarial or investment
obligation contribution of an entity is experience are worse than
made except certain expected, the entity’s
conditions. obligation may be increased for
providing to the employees.
4. Determination of the The amount of the post- Pre-determined / Agreed post-
amount of post- employment benefits received employment benefits are
employment benefit by the employee is determined received by the employee.
by the amount of contribution
paid by an entity and employee
as well.

• The reporting entity’s obligation for each period is determined by the amounts to be
contributed for that period.
• No actuarial assumptions are required to measure the obligation or the expense and there
is no possibility of any actuarial gain or loss.
• The obligations are measured on an undiscounted basis.
Exception:
Discounting is done where the obligation falls due after twelve months after the end of
the annual reporting period in which the employees render the related service.

7.1 Recognition and Measurement

In case when an employee renders service to an entity during a period, the entity shall
recognise the contribution payable to a defined contribution plan in exchange for that
service:
(a) as a liability (accrued expense), after deducting any contribution already paid.
In case the amount of contribution already paid under a defined contribution plan
exceeds the contribution due for service before the end of the reporting period, an

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entity shall recognise that excess as an asset (prepaid expense) to the extent that
the prepayment will lead to, a reduction in future payments or a cash refund; and
(b) as an expense if not included in the cost of an asset as per other Ind AS (for example,
according to Ind AS 2 and Ind AS 16).

8. ACCOUNTING FOR DEFINED BENEFIT PLANS :

Accounting for defined benefit plans is complex as –
• actuarial assumptions are required to measure the obligation and the expense
• there is a possibility of recognising actuarial gains and losses
• the obligations are measured on a discounted basis because they may be settled many
years after the employees render the related service.

8.1 Steps involved in Accounting by an entity for defined benefit plans :

• PUCM
Determining the deficit or
• Discounting
surplus
• Fair value of plan assets

Determining the amount of the

• As the amount of the
net defined benefit liability
deficit or surplus
(asset)

• Current service cost

Determining amount to be
• Past service cost
recognised in Profit or Loss
• Net interest
• Acturial Gain or Loss
Determining the
• Return on Plan Assets
remeasurements of the net
defined benefit liability (Asset) • Any Change in effect of
Asset Celling

8.2 Accounting for the Constructive Obligation :

• Accounting for any constructive obligation will also be done by an entity that arises
from the entity’s informal practices and for its legal obligation under the formal
terms of a defined benefit plan.
• Constructive obligation arises due to informal practices where the entity has no
realistic alternative but to pay employee benefits. An example of a constructive

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obligation is where a change in the entity’s informal practices would cause

unacceptable damage to its relationship with employees.
• The formal terms of a defined benefit plan may permit an entity to terminate its
obligation under the plan. Hence, it is usually difficult for an entity to cancel a plan
if employees are to be retained. Hence, accounting for post-employment benefits
assumes that an entity which is currently promising such benefits will continue to
do so over the remaining working lives of employees in the absence of evidence to
the contrary.

8.3 Balance Sheet :

• An entity is required to recognise the net defined benefit liability (asset) in the
balance sheet.
• When an entity has a surplus in a defined benefit plan, it shall measure the net
defined benefit asset at the lower of:
(a) the surplus in the defined benefit plan; and
(b) the asset ceiling, determined using the discount rate.
• A net defined benefit asset may arise where a defined benefit plan has been
overfunded or in certain cases where actuarial gains are recognised. An entity
recognises an asset in such cases because:
(a) the entity controls a resource, which is the ability to use the surplus to
generate future benefits;
(b) that control is a result of past events (contributions paid by the entity and
service rendered by the employee); and
(c) future economic benefits are available to the entity in the form of a
reduction in future contributions or a cash refund, either directly to the
entity or indirectly to another plan in deficit.

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9. RECOGNITION AND MEASUREMENT: PRESENT VALUE OF DEFINED BENEFIT OBLIGATIONS

AND CURRENT SERVICE COST :
The cost of a defined benefit plan is influenced by many variables, such as final salaries, employee
turnover and mortality, employee contributions and medical cost trends. Hence, the final cost of
the plan is uncertain and this uncertainty is likely to persist over a long period of time.
In order to measure the present value of the post-employment benefit obligations and the related
current service cost, it is necessary to:
(a) apply an actuarial valuation method;
(b) attribute benefit to periods of service; and
(c) make actuarial assumptions.

Question 2
A defined benefit plan provides a lump-sum benefit of Rs.200 payable on retirement for
each year of service. A benefit of Rs.200 is attributed to each year. The current service
cost is the present value of Rs.200. The present value of the defined benefit obligation
is the present value of Rs.200, multiplied by the number of years of service up to the end
of the reporting period. What is the current service cost?

Solution :
The current service cost is equal to Rs.200

10. COMPONENTS OF DEFINED BENEFIT COST :

An entity is required to recognise the components of defined benefit cost, except to the extent
that another Ind AS (refer Ind AS 2 and Ind AS 16) requires or permits their inclusion in the cost
of an asset, as follows:
(a) service cost in profit or loss;
(b) net interest on the net defined benefit liability (asset) in profit or loss; and
(c) remeasurements of the net defined benefit liability (asset) in other comprehensive
income.

11. PRESENTATION :
11.1 Offset :
• An asset relating to one plan will be offset against a liability relating to another plan
in case the entity:
(a) has a legally enforceable right to use a surplus in one plan to settle
obligations under the other plan; and

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(b) there is an intention either to settle the obligations on a net basis, or to

realise the surplus in one plan and settle its obligation under the other plan
simultaneously.
• The offsetting criteria are similar to those established for financial instruments in
Ind AS 32, Financial Instruments: Presentation.

11.2 Current/Non-current Distinction :

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

11.3 Components of Defined Benefit Costs :

This Standard does not specify whether an entity should present current service cost and
net interest cost on net defined liability (asset) as components of a single item of income
or expense in the statement of profit and loss. An entity presents those components in
accordance with Ind AS 1 Presentation of Financial Statements.

12. OTHER LONG-TERM EMPLOYEE BENEFITS :

• Other long-term employee benefits which are not expected to be settled wholly before
twelve months after the end of the annual reporting period in which the employees render
the related service.
• Other long-term employee benefits include, for example:
(a) long-term paid absences such as long-service or sabbatical leave;
(b) jubilee or other long-service benefits;
(c) long-term disability benefits;
(d) profit-sharing and bonuses; and
(e) deferred remuneration.
• The measurement of other long-term employee benefits is not usually subject to the same
degree of uncertainty as the measurement of post-employment benefits. It is also there
that the introduction of, or changes to, other long-term employee benefits rarely causes a
material amount of past service cost. This method does not recognise remeasurements in
other comprehensive income as required under the accounting required for post-
employment benefits.

Recognition and Measurement :

• The amount recognised as a liability for other long-term employee benefits shall be the
net total of the following amounts:

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(a) the present value of the defined benefit obligation at the end of the reporting
period;
(b) minus the fair value at the end of the reporting period of plan assets (if any) out of
which the obligations are to be settled directly.
• An entity shall recognise the net total of the following amounts as expense or income for
other long-term employee benefits, except to the extent that another Standard requires
or permits their inclusion in the cost of an asset:
(a) service cost;
(b) net interest on the net defined benefit liability (asset); and
(c) remeasurements of the net defined benefit liability (asset).
• One form of other long-term employee benefit is long-term disability benefit. If the level
of benefit depends on the length of service, an obligation arises when the service is
rendered. Measurement of that obligation reflects the probability that payment will be
required and the length of time for which payment is expected to be made. If the level of
benefit is the same for any disabled employee regardless of years of service, the expected
cost of those benefits is recognised when an event occurs that causes a long-term
disability.

13. TERMINATION BENEFITS :

• This Standard deals with termination benefits separately from other employee benefits
because the event which gives rise to an obligation is the termination of employment
rather than employee service.
• Termination benefits results from:
(a) either an entity’s decision to terminate the employment or
(b) an employee’s decision to accept an entity’s offer of benefits in exchange for
termination of employment.

13.1 Recognition :
An entity is required to recognise a liability and expense for termination benefits at the
earlier of the following dates:
(a) when the entity can no longer withdraw the offer of those benefits; and
(b) when the entity recognises costs for a restructuring which is within the scope of Ind
AS 37 and involves the payment of termination benefits.

13.2 Measurement :
An entity shall measure termination benefits on initial recognition, and shall measure and
recognise subsequent changes, in accordance with the nature of the employee benefit,

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provided that if the termination benefits are an enhancement to post-employment

benefits, the entity shall apply the requirements for post-employment benefits.
Otherwise:
(a) If the termination benefits are expected to be settled wholly before twelve months
after the end of the annual reporting period in which the termination benefit is
recognised, the entity shall apply the requirements for short-term employee
benefits.
(b) If the termination benefits are not expected to be settled wholly before twelve
months after the end of the annual reporting period, the entity shall apply the
requirements for other long term employee benefits.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

206 IND AS 19 – Employees Benefits

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IND AS 37
CHAPTER - 24
PROVISIONS,
CONTINGENT LIABILITIES
& CONTINGENT ASSETS

CHAPTER DESIGN

1. OBJECTIVE
2. SCOPE
3. PROVISIONS
• DEFINITIONS
• DIFFERENCE BETWEEN PROVISION AND OTHER LIABILITY
• RECOGNITION
• MEASUREMENT
• CHANGES IN PROVISIONS
• USE OF PROVISIONS
4. CONTINGENT LIABILITY
• DEFINITIONS
• DIFFERENCE BETWEEN PROVISIONS AND CONTINGENT
LIABILTY
• RECOGNITION
5. CONTINGENT ASSETS
• RECOGNITION
• CONTINGENT ASSETS V/S CONTINGENT LIABILITY
• SUMMARY

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1. OBJECTIVE :
The standard Deals with recognition, measurement and derognitions of Provisions, Contingent
Liability and Contingent liabilities.

2. SCOPE :
Ind AS 37 should be applied by all entities in accounting for provisions, contingent liabilities and
contingent assets, except:
1. Financial Instruments (IND AS 109)
2. Income taxes (IND AS 12)
3. Leases (IND AS 17)
4. Employee Benefits (IND AS 19)
5. Insurance contracts (IND AS 104)
6. Contingent consideration of an Acquirer in Business Combinations (IND AS 103)
7. Executory contracts (Except those which are onerous in nature)
8. Revenue from contract with customers (IND AS 115)

Executory Contracts
Executory contracts are contracts under which
• neither party has performed any of its obligations or
• both parties have partially performed their obligations to an equal extent.
Note : Ind AS 37 is applied to executory contracts only if they are onerous.

3. PROVISIONS :
DEFINITIONS
1. A provision is a liability of uncertain timing or amount.
2. A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic
benefits.
3. An obligating event is an event that creates a legal or constructive obligation that results
in an entity having no realistic alternative to settling that obligation.
4. A legal obligation is an obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.
5. A constructive obligation is an obligation that derives from an entity’s actions where:
(a) by an established pattern of past practice, published policies or a sufficiently specific
current statement, the entity has indicated to other parties that it will accept certain
responsibilities; and

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(b) as a result, the entity has created a valid expectation on the part of those other
parties that it will discharge those responsibilities.

DIFFERENCE BETWEEN PROVISION AND OTHER LIABILITY :

Since there is uncertainty about the timing or amount of the future expenditure required in
settlement of the provisions, they are different from liabilities. In case of liability, uncertainty is
generally much less than for provisions.
For example
(a) trade payables are liabilities to pay for goods or services that have been received or
supplied and have been invoiced or formally agreed with the supplier; and
(b) accruals are liabilities to pay for goods or services that have been received or supplied but
have not been paid, invoiced or formally agreed with the supplier, including amounts due
to employees.

RECOGNITION :

Probable that
Present As a outflow of Reliable
Obligation result of resources will estimate Provision
(legal or past be required to can be made
constructive) event settle made
obligation

A provision should be recognised when:

(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.

Question 1
X Shipping Ltd. is required by law to overhaul its shipping fleet once in every 3 years. The
company’s finance team was of the view that recognising the costs only when paid would
prevent matching of revenue earned all the time with certain costs of large amounts
which are incurred occasional. Thereby, it has formulated an accounting policy of
providing in its books of account for the future cost of maintenance (overhauls, annual
inspection etc.) by calculating a rate per hours sailed on sea and accumulating a provision
over time. The provision is adjusted when the expenditure is actually incurred. Is the
accounting policy of X Shipping Ltd. correct?

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Solution :
A provision is made for a present obligation arising out of past events. Overhauling does
not arise out of past events. Even there is no present obligation. Hence no provision cannot
be recorded.

MEASUREMENT

Best
Estimate

Risk and Present

Uncertainity Value

Expected
Future
Disposal of
Events
Assetts

Question 2
An entity sells goods with a warranty under which customers are covered for the cost of
repairs of any manufacturing defects that become apparent within the first six months
after purchase. If minor defects were detected in all products sold, repair costs of Rs 1
million would result. If major defects were detected in all products sold, repair costs of
Rs 4 million would result. The entity’s past experience and future expectations indicate
that, for the coming year, 75% of the goods sold will have no defects, 20% of the goods
sold will have minor defects and 5% of the goods sold will have major defects. In
accordance with the standard, an entity assesses the probability of an outflow for the
warranty obligations as a whole.

Solution :
75% x Nil + 20% x 1 + 5% x 4 = Rs.4,00,000

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CHANGES IN PROVISIONS :
Provisions should be reviewed at the end of each reporting period and adjusted to reflect the
current best estimate. If it is no longer probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, the provision should be reversed.
Where discounting is used, the carrying amount of a provision increases in each period to reflect
the passage of time. This increase is recognised as borrowing cost.

USE OF PROVISIONS :
A provision should be used only for expenditures for which the provision was originally
recognised.
Only expenditures that relate to the original provision are set against it. Setting expenditures
against a provision that was originally recognised for another purpose would conceal the impact
of two different events.

Onerous contracts :
If an entity has a contract that is onerous, the present obligation under the contract should be
recognised and measured as a provision.

Question 3
X Metals Ltd. had entered into a non-cancellable contract with Y Ltd. to purchase 10,000
units of raw material at Rs 50 per unit at a contract price of Rs 5,00,000. As per the terms
of contract, X Metals Ltd. would have to pay Rs 60,000 to exit the said contract. X Metals
Ltd. has discontinued manufacturing the product that would use the said raw material.
For that X Metals Ltd. has identified a third party to whom it can sell the said raw material
at Rs 45 per unit.
How should X Metals Ltd. account for this transaction in its books of account in respect
of the above contract?

Solution :
Provide for 50,000 or 60,000 whichever is lower, i.e provide for 50,000.

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Restructuring :

Include only the direct expenditures arising

from the restructuring that are both:
(i) Necessarily entailed by restructuring
(ii) Not associated by the ongoing activities of
the tntity

Does not include such cost :

1. Retraining or Relocating continuing staff
2. Marketing or
3. Investment in new systems and distribution
networks.

Question 4
X Cements Ltd. has three manufacturing units situated in three different states of India.
The board of directors of X Cements Ltd., in their meeting held on January 10, 2011,
decided to close down its operations in one particular state on account of environmental
reasons. A detailed formal plan for shutting down the above unit was also formalised
and agreed by the board of directors in that meeting, which specifies the approximate
number of employees who will be compensated and expenditure expected to be
incurred. Date of implementation of plan has also been mentioned. Meetings were also
held with customers, suppliers, and workers to communicate the features of the formal
plan to close down the operations in the said state, and representatives of all interested
parties were present in those meetings. Do the actions of the board of directors create
a constructive obligation that needs a provision for restructuring?

Solution :
Entity should create provision for the same.

DISCLOSURE :
For each class of provision, an entity should disclose:
1. the carrying amount at the beginning and end of the period;
2. additional provisions made in the period, including increases to existing provisions;
3. amounts used (i.e., incurred and charged against the provision) during the period;

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4. unused amounts reversed during the period; and (e) the increase during the period in the
discounted amount arising from the passage of time and the effect of any change in the
discount rate. Comparative information is not required to be disclosed.

4. CONTINGENT LIABILITY :
DEFNITIONS
A contingent liability is:
a) a possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity; or
b) a present obligation that arises from past events but is not recognised because:
a. it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
b. the amount of the obligation cannot be measured with sufficient reliability.

DIFFERENCE BETWEEN PROVISIONS AND CONTINGENT LIABILTY

In a general sense, all provisions are contingent because they are uncertain in timing or amount.
However, Ind AS 37 distinguishes between the term ‘contingent’ and ‘provisions’.
(a) Provisions – which are recognised as liabilities (assuming that a reliable estimate can be
made) ; and
(b) Contingent Liabilities – which are not recognised as liabilities

RECOGNITION
• An entity should not recognise a contingent liability.
• A contingent liability should be disclosed, if the possibility of an outflow of resources
embodying economic benefits is not remote.

The principles describing provisions and contingent liabilities is as follows:

Where, as a result of past events, there may be an outflow of resources embodying future
economic benefits in settlement of: (a) a present obligation; or (b) a possible obligation
whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.
There is a present obligation There is a possible obligation There is a possible obligation
that probably requires an or a present obligation that or a present obligation
outflow of resources. may, but probably will not, v/here the likelihood of an
require an outflow of outflow of resources is
resources. remote.
A provision is recognised. No provision is recognised. No provision is recognised.
Disclosures are required for Disclosures are required for No disclosure is required.
the provision. the contingent liability.

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5. CONTINGENT ASSETS :
A contingent asset is a possible asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity.

RECOGNITION
• An entity should not recognise a contingent asset.
• Contingent assets usually arise from unplanned or other unexpected events that give rise
to the possibility of an inflow of economic benefits to the entity.
• Contingent assets are not recognised in financial statements since this may result in the
recognition of income that may never be realised.
• However, when the realisation of income is virtually certain, then the related asset is not
a contingent asset and its recognition is appropriate.
• A contingent asset should be disclosed, where an inflow of economic benefits is probable.
Where, as a result of past events, there is a possible asset whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the entity
The inflow of economic The inflow of economic benefits The inflow is not probable
benefits is virtually is probable, but not virtually
certain certain
The asset is not contingent No asset is recognised No asset is recognised
and its recognition is
appropriate
Disclosures are required No disclosure is required

CONTINGENT ASSETS V/S CONTINGENT LIABILITY

Likelihood of outcome Contingent liability Contingent asset

Virtually certain (greater than Recognise the provision Recognise the asset
95% probability)
Probable (50% - 95% of Recognise the provision Disclose about the contingent
probability) asset
Possible but not probable (5% - Disclose the contingency No disclosure permitted
50% of probability)
Remote (less than 5% No disclosure required No disclosure permitted
probability)

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SUMMARY
Provisions Contingent liability Contingent assets
• Present legal or • Possible obligations • Possible assets arising
constructive obligation arising from a past from a past event to be
as a result of a event to be confirmed confirmed by future
past event by future events not events not wholly
• Probable outflow of wholly within the within control of entity
economic benefits to control of the entity, or
settle the obligation • Present obligations
• Obligation can be arising from a past
estimated reliably event
• of which the
outflow of
economic benefits
is not probable, or
• that cannot be
measured reliably

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 37 – Provisions, Contingent Liabilities & Contingent Assets 215

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 103
CHAPTER - 25
BUSINESS COMBINATION

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. DEFINITION
4. BUSINESS ACQUISITION V/S ASSET ACQUISITION
5. ACCOUNTING FOR BUSINESS COMBINATION
A. IDENTIFY THE ACQUIRER
B. DETERMINE THE DATE OF ACQUISITION
C. IDENTIFY AND MEASURE THE CONSIDERATION TRANSFERRED
D. IDENTIFY AND MEASURE IDENTIFIABLE ASSETS AND
LIABILITIES ASSUMED
E. RECOGNITION
F. MEASUREMENT
6. OTHER RELATED CONCEPTS
A. MEASUREMENT PERIOD
B. DETERMINE WHAT IS PART OF BUSINESS COMBINITION
C. SHARE BASED PAYMENT AWARDS
7. COMMON CONTROL TRANSACTIONS INCLUDING MERGERS
8. REVERSE ACQUISITION

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1. INTRODUCTION :
The existing AS 14 covers only those transaction which are true mergers, however with growing
complexity in the world of business, the changes in the way business is conducted, there was a
need for more comprehensive standard to look into various complexity involved.

The necessity of a standard on Business Combination in India assumes importance considering

the fact that Indian companies are increasingly stretching their business in foreign countries for
best-fit business combinations. Presently in India, Accounting Standard (AS) 14 ‘Accounting for
Amalgamation’ lays out specific treatment for Amalgamation and AS 21, ‘Consolidated Financial
Statements’ are applied for consolidation. However, it is not matching the global reporting
standards requirements.

After convergence of IFRS as Ind AS, Ind AS 103 which is in line with IFRS 3 takes care of the global
requirements in case of business combinations worldwide.

2. SCOPE :
This Indian Accounting Standard applies to a transaction or other event that meets the definition
of a business combination.

This Indian Accounting Standard does not apply to:

A. The formation of a joint venture.
B. The acquisition of an asset or a group of assets that does not constitute a business i.e. it is
an asset acquisition.

3. DEFINITIONS :
1. Business Combination :
Under Ind AS 103, Business combination occurs when an entity obtains control of a
business by acquiring net assets or acquiring its significant equity interest.
As such, two elements are required for a transaction to be a business combination under
Ind AS 103:
 the acquirer obtains control of an acquiree (“control” as defined in Ind AS 110); and
 the acquiree is a business

2. Business :
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 a return in the form of
dividends, lower costs or other economic benefits directly to investors or other owners,
members or participants.

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INPUT PROCESS OUTPUT

Question 1
RM Ltd. has a separate IT department what provides software solutions to various firms.
RM Ltd sells its IT department to NISH Ltd. IT Department had Plant and Equipment
working capital and staff. Can IT dept of RM Ltd be termed as separate business?

Solution :
Yes IT dept should be termed as business.

Question 2
Company X is a liquor manufacturer and has traded for a number of years. The company
produces a wide variety of liquor and employs a workforce of machine operators,
testers, and other operational, marketing and administrative staff. It owns and operates
a factory, warehouse and machinery and holds raw material inventory and finished
products.
On 1st January 20X1, Company Y pays USD 80 million to acquire 100% of the ordinary
voting shares of Company X. No other type of shares has been issued by Company X. On
the same day, the four main executive directors of Company Y take on the same roles in
Company X.
Can company X be referred as Business.

Solution :
Yes company X should be termed as business

Question 3
Company D is a development stage entity that has not started revenue- generating
operations. The workforce consists mainly of research engineers who are developing a
new technology that has a pending patent application. Negotiations to license this
technology to a number of customers are at an advanced stage. Company D requires
additional funding to complete development work and commence planned commercial
production.
The value of the identifiable net assets in Company D is INR 750 million. Company A pays
INR 600 million in exchange for 60% of the equity of Company D (a controlling interest).
Does company D qualify to be known as business.

218 IND AS 103 – Business Combination

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Solution :
Yes company D qualify to be known as business.

3. Control :
As per Ind AS 110 ‘Consolidated Financial Statements’, an investor controls an investee if
and only if the investor has all the following:
a. Power over the investee
b. exposure, or rights, to variable returns from its involvement with the investee; and
c. The ability to use its power over the investee to affect the amount of the investor’s
returns.

4. Purchase Consideration :
An acquirer might obtain control of an acquiree in a variety of ways, for example:
 by transferring cash, cash equivalents or other assets (including net assets that
constitute a business);
 by incurring liabilities;
 by issuing equity interests;
 by providing more than one type of consideration; or
 without transferring consideration, including by contract alone.

4. BUSINESS ACQUISITION V/S. ASSET ACQUISTION :

For a transaction to meet the definition of business combination, the entity must gain the control
of an integrated set of assets and activities that is more than the collection of assets or a
combination of assets and liabilities. Some key difference between a business combination and
an asset acquisition are summarized in the following table.
Area Business Combination Asset or Group of Asset
Acquisition
Measurement of assets At Fair Value Recorded at cost. Cost is
and liabilities allocated over the group of
assets based on relative fair
value
Transaction Costs Expensed Capitalized
Contingent liabilities Recognized if represents Not recognized, Subject to Ind
assumed present obligation that arises AS – 37
from past events and its fair
value can be measured reliably

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with subsequent changes to

profit and loss
Goodwill May be recognized Not Recognized
Deferred taxes Deferred tax assets and Initial recognition exception
liabilities, related to any applies. Deferred tax assets
temporary differences, tax carry and liabilities for temporary
forwards are recorded differences are not recognized

Question 4
RM Ltd purchased from Nisha Ltd a group of assets comprising of plant and machinery,
furniture, equipment and software at combined price of Rs. 400 lakhs. Assets do not
constitute business as per Ind AS 103. How would RM Ltd. Measure these assets for the
purpose of initial reorganization?
The fair value of these assets determined applying Ind AS – 113 fair value measurement
is:
Amount (Rs)
Plant and Machinery 200 lakhs
Furniture 30 lakhs
Equipment 50 lakhs
Licenses 70 lakhs
Total 350 lakhs

Solution :
The above purchase should be accounted for as purchase of Asset and not purchase of
business. Assets should be recorded at cost. No goodwill can be recognized.
Details Fair Value Cost
Plant and Machinery 200 228.57
Furniture 30 34.29
Equipment 50 57.14
Licenses 70 80.00
Total 350 400

5. ACCOUNTING FOR BUSINESS COMBINATIONS :

The business combination is accounted by applying “Acquisition Method” – The nature of
purchase.
The following are the steps for Accounting for Business Combinations
1. Identify Acquirer

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2. Determine Acquisition Date

3. Identify and Measure the consideration transferred (PC)
4. Identify and Measure identifiable Assets and liabilities assumed
5. Measure non – controlling interest

Determine goodwill or gain from bargain purchase

Determine
Identify consideration
Acquisition
Acquirer transferred (PC)
Date

identifiable
goodwill or gain non –
Assets and
from bargain controlling
liabilities
purchase interest
assumed

A. Identify Acquirer :
All business combination within the scope of Ind AS 103 are accounted under the
acquisition method (also known as purchase method).
• In order to apply the purchase method, the parties involved has to identify the
acquirer i.e the entity that obtains the control of another entity.
• The entity on whom the control is established is termed as acquiree.

Usually, Acquirer is
• The entity that transfers the cash or other assets or incurs the liabilities.
• The entity that issues its equity interests.
• The combining entity whose owners as a group retain or receive the largest portion
of the voting rights in the combined entity.
• The combining entity whose single owner or organized group of owners holds the
largest minority voting interest in the combined entity.
• The combining entity whose owners have the ability to elect or appoint or to
remove a majority of the members of the governing body of the combined entity.
• The combining entity whose (former) management dominates the management of
the combined entity.
• The combining entity that pays a premium over the pre-combination fair value of
the equity interests of the other combining entity or entities.

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• The combining entity whose relative size (measured in, for example, assets,
revenues or profit) is significantly greater than that of the other combining entity
or entities.
Note : Reserve is exception to the above points.

Reverse Acquisition
A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is
identified as the acquiree for accounting purposes on the basis of the guidance above. The
entity whose equity interests are acquired (the legal acquiree) must be the acquirer for
accounting purposes for the transaction to be considered a reverse acquisition.

Question 5
Shareholders of Company B would receive 10 Equity Shares of Company A for every 1
Share held in Company B Such issue of Shares would comprise 70% of the Issued Share
Capital of the Combined Entity. After discharge of purchase consideration, the pre-
merger Shareholders of Company A hold 30% of Capital of Company A. Post acquisition,
the Management of Company B would manage the operations of the Combined Entity.

Solution :
Entity B is the acquirer.

B. Determine The Date of Acquisition :

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.

“Acquisition Date will be the date on which the acquirer obtains control”.

Question 6
On April 1, Company X agrees to acquire the Shares of Company B in an all equity deal.
As per the Binding Agreement Company X will get the effective control on 1 April.
However, the consideration will be paid only when the Shareholders' approval is
received. The Shareholders' Meeting is scheduled to happen on 30 April. If the
Shareholder Approval is not received for issue of New Shares, then the consideration will
be settled in cash. What is the Acquisition Date in this case?

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Solution :
1st April will be the acquisition date.

C. Identify and Measure Consideration Transferred :

The consideration transferred in a business combination shall be measured at fair value,
which shall be calculated as the total of
• the acquisition-date fair values of the assets (including cash) transferred by the
acquirer,
• the liabilities incurred by the acquirer to former owners of the acquiree and
• the equity interests issued by the acquirer.
Examples of potential forms of consideration include
• cash,
• other assets,
• a business or a subsidiary of the acquirer,
• contingent consideration,
• ordinary or preference equity instruments,
• options,
• warrants and
• member interests of mutual entities.

Contingent Consideration :
The acquirer shall recognize the acquisition-date fair value of contingent consideration as part
of the consideration transferred in exchange for the acquiree.

Question 7
Company A acquires Company B in April 20X1 for cash. The acquisition agreement states
that an additional Rs 20 million of cash will be paid to B’s former shareholders if B
succeeds in achieving certain specified performance targets. A determines the fair value
of the contingent consideration liability to be 15 million at the acquisition date. How
shall this be accounted for keeping Ind AS 103 in mind.

Solution :
Contingent consideration shall be recorded at its Fair Value of 15 million.

DIRECT COST OF ACQUISITION

The direct cost of acquisition is not included in determination of the purchase
consideration. Such cost should be expensed.

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D. Identify And Measure Identifiable Assets And Liabilities Assumed

As of the acquisition date, the acquirer shall recognize,
1. Separately from goodwill,
2. the identifiable assets acquired,
3. the liabilities assumed and
4. any non-controlling interest in the acquiree.

E. Recognition
1. Assets acquired and liabilities assumed should meet the definition of assets and
liabilities.
2. Only those assets and liabilities acquired should be recorded as the part of business
combination.
3. When the acquirer applies the recognition principle under business combination it
may record certain assets and liabilities which the acquiree had not recorded earlier
in their financial statements.

F. Measurement
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at
their acquisition-date fair values. There are certain exceptions which are discussed in detail
in the following paras.

Exceptions to Recognition and Measurement Principle :

1. Contingent liability
2. Income Taxes
3. Employee benefits
4. Indemnification assets
5. Reacquired Rights
6. Intangible Assets
7. Share based payment transactions
8. Assets held for sale
9. Operating Lease
10. Assembled Workforce
11. Unearned Revenue

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1. Contingent Liability :
Therefore, contrary to Ind AS 37, the acquirer recognises a contingent liability
assumed in a business combination at the acquisition date even if it is not probable
that an outflow resources embodying economic benefits will be required to settle
the obligation.

2. Income Tax :
As per the requirement of Ind AS 12, no deferred tax consequence should be
recorded on initial recognition of deferred tax except assets and liabilities acquired
during business combination. Accordingly, the acquirer shall recognize and measure
a deferred tax asset or liability arising from the assets acquired and liabilities
assumed in a business combination in accordance with Ind AS 12, Income Taxes.

3. Employee Benefits :
As per IND AS 19

4. Indemnification Assets :
The seller in a business combination may contractually indemnify the acquirer for
the outcome of a contingency or uncertainty related to all or part of a specific asset
or liability.

Question 8
Company A acquires Company B in a Business Combination. B is being sued by one of its
customers for breach of contract The Sellers of B provide an indemnification to A for the
reimbursement of any losses greater than Rs.100Lakhs. There are no collectability issues
around this indemnification. At the acquisition date, Company A determined that there
is a present obligation and the Fair Value of the Obligation would be Rs.250 Lakhs. What
will be the accounting for these items?

Solution :
Entity A should record the liability at its Fair value of Rs. 250 lakhs. It should also record
indemnification asset at 150 lakhs

5. Reacquired Rights :
These are the rights which the acquirer before acquisition may have granted to the
acquiree to use certain assets which belongs to the acquirer.

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The acquirer shall measure the value of a reacquired right recognized as an

intangible asset on the basis of the remaining contractual term of the related
contract without considering the effect of potential renewals.

6. Intangible Assets :
The acquirer shall record separately from Goodwill, the identifiable intangible
acquired in a business combination. An intangible asset is identifiable if it meets
either the separability criterion or the contractual-legal criterion.

Question 9
The acquiree possesses a show room on operating lease in a prime location of the city @
1 million rent p.a. for a period of Rs.3 years.
It is a non-cancellable lease. Its current market value is Rs.2 million p.a. Should the
acquirer recognize any intangible assets? (Discount factor 10%)

Solution :
Acquirer shall record separate intangible asset. The gain of 1 million for next 3 years at its
present value. i.e 1 x PVIFA (10%,3years) = 2.48685 million

7. Share based payments :

AS Per IND AS 102

8. Assets held for sale in accordance with IND AS 105

9. Operating Lease :
• Acquiree is a lessee
The acquirer shall measure no assets or liabilities related to an operating
lease in which the acquiree is the lessee except:
If the terms of the operating lease are favorable to the acquirer then it
should record an intangible asset and if it is unfavorable then it should
record a liability.
• Acquiree is the lessor
If the Acquiree is a lessor then no adjustment is recorded for the asset which
is recorded in the financial statements of the acquiree, however, the lease
rentals are considered for determining the fair of the assets.

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10. Assembled Workforce :

The acquirer subsumes into Goodwill the value of an acquired intangible asset that
is not identifiable as of the acquisition date.

11. Unearned Revenue :

Unearned revenue arises because of the application of the revenue recognition
criteria applied by the acquiree.

Measure Non Controlling Interest :

Should not measured at either
• fair value; or
• proportionate share in the recognized amounts of the acquiree’s identifiable net
assets

Question 10
RM Ltd. Acquires 800 shares of Nisha Ltd. that constitutes 80% of its capital. The Fair
Value of shares of Nisha Ltd. was determined at Rs. 160 / share. The Fair Value of Net
Assets of Nisha Ltd. is determined at 120,000 on the date of Acquisition. Explain how the
Non-controlling interest shall be calculated.

Solution :
Non controlling interest shall be measured at either
a. Fair value = 200 x 160 = 32,000
b. Proportionate share in Net Assets = 1,20,000 x 20% = 24,000

Determine Goodwill Or Gain From Bargain Purchase :

Question 11
Entity A acquired 15% of Entity B in 2009 for Rs.10,000. In 2010, further acquired 60%
stake, Consideration paid for Rs.60,000. Entity A identifies the net assets of B as
Rs.80,000, fair value of 15% shares is Rs.12,500 and Fair value of NCI is 25,000. Calculate
goodwill if NCI is measured at Fair value and Proportionate share.
CALCULATION OF GOODWILL/ Capital Reserve
Consideration transferred XXX
Add: Proportionate value of NCI XXX
Fair value of previously held interest XXX
Less: Fair value of the identifiable net assets acquired XXX

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GOODWILL / Capital Reserve XXX

Solution :
NCI at Fair Value NCI at prop Share
Consideration Paid 60,000 60,000
Add : Fair value of previously held stake 12,500 12,500
Add : Non controlling interest 25,000 20,000
Total 97,500 92,500
Less : Net Assets at Fair value 80,000 80,000
Goodwill 17,500 12,500

Question 12
Mariplex acquires 75% of shares of Barnlet for $140 million. The identifiable assets are
measured at $250 million and the liabilities assumed are measured at $5 million. The
valuer appointed by Mariplex determines the fair value of the 25% non-controlling
interest in Barnlet as $42 million.
Calculate goodwill/capital reserve by both methods.

Solution :
Details NCI at Fair Value NCI at prop Share
Consideration Paid 140 140
Add : Fair value of previously held stake - -
Add : Non controlling interest 42 61.25
Total 182 201.25
Less : Net Assets at Fair value 245 245
Goodwill 63 43.75

6. OTHER RELATED CONCEPTS :

A. Measurement Period :
• Ind AS 103 provides a measurement period window wherein if all the required
information is not available on the acquisition date then the entity will be requiring
to do the purchase price allocation on a provision basis.
• The measurement period shall not exceed one year from the acquisition date.
• During the measurement period, the acquirer shall also recognize additional assets
or liabilities if new information is obtained about facts and circumstances that
existed as of the acquisition date.

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• The measurement period shall not exceed one year from the acquisition date.
• Any change i.e. increase and decrease in the net assets acquired due to new
information available during the measurement period which existed on the
acquisition date will be adjusted against goodwill.
• After the measurement period ends, any change in the value of assets and liabilities
due to an information which existed on the valuation date will be accounted as an
error as per Ind AS 8, “Accounting policies, Changes in Accounting Estimates and
Errors”.

Question 13
RM Ltd. Acquires 80% of Nisha Ltd. For Rs. 60,000. The Asset of Nisha Ltd. At the date of
Acquisition were Rs. 62,500. In the year following the acquisition, but within 12 months
of the acquisition date, it was identified that the value of land was 2,500 greater than
that recognized on the acquisition date. Calculate goodwill on the date of acquisition and
accounting treatment on revaluation of land during measurement period?

Solution :
Calculation of goodwill
Details Date of Acquisition Remeasurement date
Consideration paid (80%) 60,000 60,000
Add : NCI at proportionate share (20%) 12,500 13,000
Total 72,500 73,000
Less : Fair Value of Net Assets 62,500 65,000
Goodwill 10,000 8,000

Journal Entry
1. On the Date of Acquisition
Net Assets A/c Dr 62,500
Goodwill A/c Dr 10,000
To Bank A/c 60,000
To NCI A/c 12,500

2. On the date of remeasurement

Net Assets A/c Dr 2,500
To Goodwill A/c 2000
To NCI A/c 500

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B. Determining What Is Part Of The Business Combination Transaction :

The following are examples of separate transactions that are not to be included in applying
the acquisition method:
• a transaction that in effect settles pre-existing relationships between the acquirer
and acquiree;
• a transaction that remunerates employees or former owners of the acquiree for
future services; and
• a transaction that reimburses the acquiree or its former owners for paying the
acquirer’s acquisition-related costs.

Question 14
Progressive Ltd is being sued by Regressive Ltd for an infringement of its Patent. At 31
March 20X2, Progressive Ltd recognized a INR 10 million liability related to this litigation.
On 30 July 20X2, Progressive Ltd acquired the entire equity of Regressive Ltd for INR 500
million.
On that date, the estimated fair value of the expected settlement of the litigation is INR
20 million.

Solution :
Progressive should settle the litigation at 20 million before recording business acquisition.
The consideration as per IND AS 103 should be recorded at 500 – 20 = 480 million.

C. Acquirer Share Based Payment Awards Exchnaged For Awards Held By The Acquiree’s
Employees :
An acquirer may exchange its share-based payment awards (replacement awards) for
awards held by employees of the acquiree. The above share based payment awards will
include vested and unvested shares.
The following procedure shall be followed to calculate and account for the same.
Step 1 : Calculate Fair Value of original award on Acquisition Date

Step 2 : Calculate Fair Value of Replacement Award on Acquisition Date

Step 3 : Pre – combination obligation

𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
Fair Value of original award x
𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑒𝑒𝑒𝑒 𝑜𝑜𝑜𝑜 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑜𝑜𝑜𝑜 𝑁𝑁𝑁𝑁𝑁𝑁 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

Note : The Pre combination obligation will be included in purchase consideration

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Step 4 : Post combination remuneration cost = Fair value of replacement award – pre
combination obligation (Step 3)

Note : It will be post combination expense and it will be amortized as service cost over
the remaining vesting period

Question 15
Acquirer A Ltd. issues a replacement award under a business combination transaction
market based measurement of which under Ind AS 102 is Rs.10 million. The original
award of acquiree has a market based measure of Rs.9 million.
Under the replacement awards the employees are not required to provide any further
service after the acquisition date, and vesting period has been completed under the
acquiree’s award.
Should the additional obligation be treated as liability assumed in business combination?

Solution :
Step 1 : Fair value of original Award = 9 million

Step 2 : Fair value of replacement award = 10 million

Step 3 : Pre – combination obligation

𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑑𝑑

Fair Value of original award x = 9 million
𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑒𝑒𝑒𝑒 𝑜𝑜𝑜𝑜 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑜𝑜𝑜𝑜 𝑁𝑁𝑁𝑁𝑁𝑁 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

Step 4 : Post combination remuneration cost = Fair value of replacement award – pre
combination obligation = 10 – 9 = 1 million

7. COMMON CONTROL TRANSACTION INCLUDING MERGERS :

Examples of Common Control Transactions
A. Merger between fellow subsidiaries
B. Merger of subsidiary with parent
C. Acquisition of an entity from an entity within the same group
D. Bringing together entities under common control in a corporate legal structure

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Question 16
Company X, the ultimate parent of a large number of subsidiaries, reorganizes the retail
segment of its business to consolidate all of its retail businesses in a single entity. Under
the reorganization, Company Z (a subsidiary and the biggest retail company in the group)
acquires Company X’s shareholdings in its one operating subsidiary, Company Y by
issuing its own shares to Company X. After the transaction, Company X will directly
control the operating and financial policies of Companies Y.

Solution :
Before reorganization = Company X

Company Z Company Y

After reorganization = Company X

Company Z

Company Y

Note : Before and after reorganization Company Y is still under control of Company X.

Accounting for Common Control Business Combinations

Business combinations involving entities or businesses under common control shall be accounted
for using the pooling of interest method.
The pooling of interest method is considered to involve the following:
A. The assets and liabilities of the combining entities are reflected at their carrying amounts.
B. No adjustments are made to reflect fair values, or recognize any new assets or liabilities.
The only adjustments that are made are to harmonies accounting policies.
C. The consideration for the business combination may consist of securities, cash or other
assets. Securities shall be recorded at nominal value. In determining the value of the
consideration, assets other than cash shall be considered at their fair values.
D. The balance of the retained earnings appearing in the financial statements of the
transferor is aggregated with the corresponding balance appearing in the financial
statements of the transferee. Alternatively, it is transferred to General Reserve, if any.
E. The identity of the reserves shall be preserved and shall appear in the financial statements
of the transferee in the same form in which they appeared in the financial statements of
the transferor.

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F. The difference, if any, between the amount recorded as share capital issued plus any
additional consideration in the form of cash or other assets and the amount of share capital
of the transferor shall be transferred to capital reserve and should be presented separately
from other capital reserves with disclosure of its nature and purpose in the notes.
“The acid test in assessing common control transaction is that before and after the reorganization
the entity should be controlled by the same shareholders.”

Question 17
Enterprise Ltd. has 2 divisions Laptops and Mobiles. Division Laptops has been making
constant profits while division Mobiles has been invariably suffering losses.
On 31st March, 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)
(B) 175 100 275
Total (A+B) 200 200 400
Financed by:
Loan Funds - 300 300
Capital: Equity Rs.10 Each 25 - 25
Surplus 175 (100) 75
200 200 400
Division Mobiles along with its assets and liabilities was sold for Rs.25 crores to
Turnaround Ltd. a new company, who allotted 1 crore 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 are no other transactions, you are asked to:
I. Pass journal entries in the books of Enterprise Ltd.
II. Prepare the Balance Sheet of Enterprise Ltd. after the entries in (i).
III. Prepare the Balance Sheet of Turnaround Ltd.

Solution :
1. Journal of Enterprise

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Loan Funds A/c Dr 300

Current Liabilities A/c Dr 400
Provision for Deprecation Dr 400
To Property, Plant and Equipment A/c 500
To current Assets a/c 500
To capital Reserve a/c 100

2. Balance sheet of Enterprise

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 25
Rs.10 each)
Other equity (Surplus) 175
Liabilities
Current liabilities
Current liabilities 25
225

3. Balance sheet of Turnaround

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 1 10

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Rs.10 each)
Other equity 2 (110)
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 300
Current liabilities
Current liabilities 400
600

8. REVERSE ACQUISITION :
We have already studied the basic of Reverse Acquisition, let us consolidate your understanding
on the same. Let me help you with the simple example.

B Ltd. a small sized firm acquires A Ltd. B Ltd has 1,00,000 shares issued and existing. To acquire
A Ltd. it issues further 10,00,000 to the shareholders of A Ltd.
Now if we study carefully, B Ltd. has total issued capital of 11,00,000 shares out of which
10,00,000 are held by shareholders of A Ltd. Therefore it A Ltd. which will control B Ltd.

B Ltd. is legal Acquirer but is accounting Acquiree

A Ltd. is legal Acquiree but is accounting Acquirer

To Account for Reverse Acquisition, following steps should be followed

Step 1 Identify Reverse Merger
Step 2 Calculate the purchase consideration as per reverse acquisition. How much the legal
Acquiree Accounting Acquirer) would have paid for acquisition.
Step 3 Calculate goodwill/capital reserve

PC as per Reserve Acquisition (Step 2) XX

Less : Net Assets taken over by Accounting
Acquirer XX
Goodwill / Capital Reserve XX
Step 4 Prepare Financial Statements in the name of Legal Acquirer
Step 5 Consolidated Assets and Liabilities
Accounting Acquirer = At Carrying Amount
Accounting Acquiree = At Fair Value (Revised Values)

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Step 6 Consolidated retained earnings will comprise of legal subsidiary (Accounting Acquirer)
only.
Step 7 Consolidated Equity Instrument
Amount = Equity for the Accounting Acquirer + Consideration (Step 2)
Number = Existing no of Legal Acquirer + Shares issued by legal Acquirer

Question 18
On September 30, 2001 Entity A issues 2.5 shares in exchange for each ordinary shares
of Entity B. All the B’s shareholders exchange their shares. Issued share capital of Entity
shows 60 ordinary shares.
The fair value of each ordinary share of Entity B at September 30, 2001 is 40. The Quoted
market Price of Entity A’s ordinary shares at that date is 16.
The fair values of Entity A identifiable assets and liabilities at September 30, 2001 are
the same their carrying amounts, except that the fair value of Entity A’s non – current is
1500.
The Statement of financial position of Entity A and Entity B immediately before the
business combination are
Entity A Entity B
Current Assets 500 700
Non-Current Assets 1300 3000
Total Assets 1800 3700
Current Liabilities 300 600
Non-Current Liability 400 1100
Total Liabilities 700 1700
Shareholders’ Equity
Retained Earnings 800 1400
100 ordinary shares 300
60 ordinary shares 600
Total Shareholders’ Equity 1100 2000
Total Liabilities and Equity 1800 3700
Prepare the balance sheet immediately after Business combination?

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Solution :
The consolidated statement of financial position immediately after the business
combination is :
Current assets (700 + 500) 1,200
Non-current assets (3,000 + 1,500) 4,500
Goodwill 300
Total assets 6,000
Current liabilities (600 + 300) 900
Non-current liabilities (1,100 + 400) 1,500
Total liabilities 2,400
Shareholders’ equity
Issued equity 250 ordinary shares (600 + 1,600) 2,200
Retained earnings 1,400
Total shareholders’ 3,600
Total liabilities and shareholders’ equity 6,000

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

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IND AS 110
CHAPTER - 26
CONSOLIDATION OF
FINANCIAL STATEMENTS

CHAPTER DESIGN

1. INTRODUCTION
2. FROM AS TO IND AS
3. SCOPE
4. DEFINITION
5. CONCEPT OF CONTROL
6. ASSEMENT OF CONTROL
7. ACCOUNTING FOR SUBSIDIARIES
8. CONSOLIDATION OF BALANCE SHEET
9. CONSOLIDATION OF PROFIT AND LOSS STATEMENT
10. CONSOLIDATION OF CASH FLOW STATEMENTS
11. CHANGES IN SHARE OF NON CONTROLLING INTEREST
12. LOSS OF CONTROL

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1. INTRODUCTION :
The objective of this IND AS is to establish principles for the presentation and preparation
of Consolidated Financial
Statements when an entity controls one or more other entities.
This Standard defines control for all entities that could be consolidated.
This standard does not deal with accounting requirements for business combinations and their
effect on consolidation, including goodwill arising on a business combination.

2. FROM AS TO IND AS :
Under the Companies (Accounting Standards) Rules 2006, the following accounting standards
provided guidance on preparation of consolidated financial statements:
1. Accounting Standard (AS) 21 : Consolidated Financial Statements
2. Accounting Standard (AS) 23 : Accounting for Investments in Associates in Consolidated
Financial Statements
3. Accounting Standard (AS) 27 : Financial Reporting of Interests in Joint Ventures
Under Ind AS, the guidance is much more detailed. As per the Companies (Indian Accounting
Standards) Rules 2015, the following accounting standards provides guidance on preparation of
consolidated financial statements:
1. Indian Accounting Standard (Ind AS) 110 : Consolidated Financial Statements
2. Indian Accounting Standard (Ind AS) 111 : Joint Arrangements
3. Indian Accounting Standard (Ind AS) 112 : Disclosure of Interests in Other Entities
4. Indian Accounting Standard (Ind AS) 27 : Separate Financial Statements
5. Indian Accounting Standard (Ind AS) 28 : Investments in Associates and Joint Ventures
Note :
1. The focus in Ind AS is on substance over form
2. The objective of Ind AS 110, Consolidated Financial Statements, is to establish principles
for the presentation and preparation of consolidated financial statements when an entity
controls one or more entities.
3. The objective of Ind AS 111, Joint Arrangements, is to establish principles for financial
reporting by entities that have an interest in arrangements that are controlled jointly (Joint
arrangements).
4. The objective of Ind AS 112, Disclosure of Interests in Other Entities, is to require an entity
to disclose information that enables users of its financial statements to evaluate.
5. The objective of Ind AS 27, Separate Financial Statements, is to prescribe the accounting
and disclosure requirements for investments in subsidiaries, joint ventures and associates
when an entity prepares separate financial statements.

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6. The objective of Ind AS 28, Investments in Associates & Joint Ventures, is to prescribe the
accounting for investments in associates and to set out the requirements for the
application of the equity method when accounting for investments in associates & joint
ventures.

3. SCOPE :
A parent who controls one or more entities is required to present consolidated financial
statements
However, a parent is not required to present consolidated financial statements if it meets all of
the following four conditions
1. The parent is either a wholly owned subsidiary or a partially owned subsidiary of another
entity. Further its other owners (including those not entitled to vote) have been informed
and do not object, to the parent not presenting the consolidated financial statements.
2. The equity instruments or the debt instruments of the parent are not traded in a public
market. The public market could be a domestic or foreign stock exchange or an over the
counter market including local and regional markets.
3. The parent has neither filed nor is in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of issuing any class
of instruments in a public market.
4. The ultimate or any intermediate parent, of the parent (that is required to present
consolidated financial statements), produces financial statements that are available for
public use and comply with Ind AS, in which subsidiaries are consolidated or are measured
at fair value through profit or loss in accordance with Ind AS 110.
Further, a parent who fulfils the following two conditions is also not required to present
consolidated financial statements:
1. The parent is an investment entity
2. The parent is required to measure all its subsidiaries at fair value through statement of
profit or loss.

Question 1
Entity X owns the following other entities:
1. 100% interest in entity Y. Entity Y owns 60% interest in entity Z.
2. 80% interest in entity M. Entity M owns 60% interest in entity N.
It is further stated that X is a listed company and prepares Ind AS Compliant consolidated
Financial Statement. Entities Y and M do not have their securities publically traded &
they are not in the process of issuing securities in public markets. Analyze if Entity Y and
M are required to prepare the CFS.

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Solution :
Entity M is not required to prepare consolidated financial statements provided, the non
controlling interest holders have been informed about, and do not object to Entity M
presenting consolidated financial statements.

4. DEFINITIONS :
1. Consolidated financial statements :
Consolidated financial statements are the financial statements of a group in which assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.
2. Control of an investee :
An investor controls an investee when the investor is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee.
3. Group :
A parent and its subsidiaries.
4. Parent :
An entity that controls one or more entities.
5. Subsidiary :
An entity that is controlled by another entity.
6. Non–controlling interest :
Equity in a subsidiary not attributable, directly or indirectly, to a parent.
7. Power :
Existing rights that give the current ability to direct the relevant activities.
8. Relevant activities :
For the purpose of this Ind AS, relevant activities are activities of the investee that
significantly affect the investee’s returns.

5. CONCEPT OF CONTROL :
As per Ind AS 110, consolidation of an investee shall begin from the date the investor (parent)
obtains CONTROL of the investee (subsidiary);
Thus:
1. Parent (Investor) is an entity that controls one or more entities;
2. Subsidiary (Investee) is an entity that is controlled by another entity;

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CONTROL

An investor controls an investee if and only if the investor has all the following
3 elements:
1. Power over the investee;
2. Exposure, or rights, to variable returns from its involvement with the
investee; and
3. The ability to use its power over the investee to affect the amount of the
investor’s returns.

POWER RIGHTS TO VARIABLE ABILITY TO USE THE

RETURNS

VARIABLE
POWER RETURNS

ABILITY
TO USE
POWER

CONTROL

6. ASSEMENT OF CONTROL :
The following seven steps should be adopted to assess control. Steps 1 to 5 assist in establishing
whether an investor has power over the investee. Step 6 discusses the exposure to variable
returns whereas step 7 deliberates on link between power & returns.
1. What is the purpose of the investee?
2. What is the design of the investee?
3. What are the relevant activities of the investee that significantly affect its returns?
4. How decisions about the relevant activities are made?

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5. Whether the decision maker is empowered and has the right to take those decisions?
6. The investor should examine whether it is exposed to or have variable returns from its
involvement with the investee.
Variable returns are returns that are not fixed and have the potential to vary as a result of
the performance of an investee. Variable returns can be only positive, only negative or
both positive and negative.
7. Link between power & variable returns.
This step needs examination whether the investor can use its power to impact the variable
returns. If so, this condition is also satisfied.

Question 2
A Limited has 48% of the voting rights of B Limited. The remaining voting rights are held
by thousands of shareholders, none individually holding more than 1 per cent of the
voting rights. None of the shareholders has any arrangements to consult any of the
others or make collective decisions. Does A Limited have sufficiently dominant voting
interest to meet power criterion?

Solution :
In the above case, based on the absolute size of A Limited holding’s (48%) and the relative
size of the other shareholdings, A Limited may conclude that it has a sufficiently dominant
voting interest to meet the power criterion.

Question 3
Investor A holds 40% of the voting rights of an investee and six other investors each hold
10% of the voting rights of the investee. A shareholder agreement grants investor A the
right to appoint, remove and set the remuneration of management responsible for
directing the relevant activities. To change the agreement, a two-thirds majority vote of
the shareholders is required. Is the absolute size of the investor’s holding and the relative
size of the other shareholdings alone is conclusive in determining whether the investor
has rights sufficient to give it power?

Solution :
No, the absolute size of investors holding and the relative size of others shareholdings are
not conclusive in determining whether investor has power.

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Question 4
Entity P Ltd. develops pharmaceutical products. It has acquired 47% of entity S Ltd with
an option to purchase remaining 53%. Entity S is a specialist entity that develops latest
technology and does research in pharmaceuticals. Entity P has acquired stake in S Ltd. to
complement its own technological research. The remaining 53% is held by key
management of P Ltd. who are key to running a major project that will market a medicine
with features completely new to the industry. However, if P Ltd. exercises the option the
management personnel are likely to leave. They have unique technological knowledge
in relation to the specific medicine. Option strike price is 5 times the value of entity’s
share price. Is the option substantive?

Solution :
The option may not be substantive if entity P would derive no economic benefit from
exercising it. High strike price and likely loss of key management indicate that the option
may not be substantive.

7. ACCOUNTING FOR SUBSIDIARIES :

Ind AS 110, ‘ Consolidation of Financial Statements’ and Division II of Schedule III of companies
Act 2013, should be applied for preparation and presentation of CFS, which includes
1. Consolidated Balance Sheet
2. Consolidated Statement of Profit and Loss A/c
3. Consolidated Statement for Changes in Equity
4. Consolidated Cash Flow Statement
5. Consolidated Notes to Financial Statements

Non-Controlling Interest :
It Can be measured at FV or At Prop Share in Net Assets (Ind AS 103)

Calculation of Goodwill / Capital Reserve :

Goodwill should be calculated as Per Ind AS 103.

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8. CONSOLIDATION OF BALANCE SHEET :

Question 5
Black Co. acquired 100% shares in White Co. on 31st December 2019. BS of Black and
White on that date were:
Black White
Non-current assets
Tangible assets 60,000 35,000
Investments: Shares of White Co. (100% shares in White) 30,000 -
Loan Stock of White Co. 5,000 -
Current assets
Inventories 10,000 8,000
Receivables 8,000 9,000
Cash at Bank 4,000 -
Total Assets 1,17,000 52,000
Equity and Liabilities
Equity
Ordinary shares 73,000 16,000
Retained earnings 30,000 12,500
Non-current liabilities
Loan Stock 10,000
Current Liabilities
Bank Overdraft 3,000
Payables 14,000 10,500
Total Liabilities 1,17,000 52,000
Prepare CBS.

Solution :
Consolidated Balance sheet of Black Ltd along with its subsidiary White Ltd. as on
31/12/2019 as per IND AS 110.
Amount (Rs)
Assets
1 Non Current Assets
Property, Plant and Equipment 95,000
Goodwill 1,500
2 Current Assets

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Inventory 18,000
Financial Assets
Trade Receivable 17,000
Bank 4,000
Total 1,35,500
Equity and Liabilities
1 Equity
Share Capital 73,000
Other Equity 30,000
Non Controlling Interest -
2 Liabilities
A. Non Current Liabilities
Financial Liabilities
Borrowing 5,000
B. Current Liabilities
Borrowing 3,000
Trade Payables 24,500
Total 1,35,500

Question 6
DEF Ltd. Acquired 100% shares of Rs.100 each of XYZ Ltd. on 1st Oct, 2019. On March 31,
2020 the summarized balance sheet of the two companies were as given below
DEF Ltd. XYZ Ltd.
Assets
Property, Plant and Equipment
Land & building 15,00,000 18,00,000
Plant & Machinery 24,00,000 13,50,000
Investment in XYZ Ltd. 34,00,000 -
Inventory 12,00,000 3,64,000
Financial Assets
Trade Receivable 5,98,000 4,00,000
Cash 1,45,000 80,000
Total 92,43,000 39,94,000
Equity and Liabilities
Equity Capital 50,00,000 20,00,000
Other Equity

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Other Reserves 24,00,000 10,00,000

Retained Earnings 5,72,000 8,20,000
Financial Liabilities
Bank Overdraft 8,00,000 -
Trade Payables 4,71,000 1,74,000
Total 92,43,000 39,94,000
The retained earnings of XYZ Ltd. showed a credit balance of Rs.3,00,000 on 1st April,
2019 out of which a dividend of 10% was paid on 1st Nov, DEF Ltd. has recognized the
dividend received to profit to loss Account. Fair value of P & M as on 1st Oct, 2019 was
Rs.20,00,000. The rate of depreciation on Plant & Machinery is 10%.
Following are the increases on comparison of Fair Value as per respective Ind AS with
Book Value as on 1st Oct, 2019 which are to be considered while consolidating the
balance sheet.
Trade payable 1,00,000
Land and Building 10,00,000
Inventories 1,50,000
Note :
1. It may be assumed that the inventory is still unsold on balance sheet date and the
trade payables are also not yet settled
2. Also assume that the other reserves of both the companies as on 31st March, 2020
are the same as was on 1st April, 2019.
3. All fair values adjustments have not yet started impacting consolidated post-
acquisition profits.
Prepare consolidated Balance sheet as on March 31, 2020.

Solution :
DEF Ltd.
Assets
Property, Plant and Equipment 86,00,000
Investment in XYZ Ltd. -
Inventory 17,14,000
Financial Assets
Trade Receivable 9,98,000
Cash 2,25,000
Total 1,15,37,000
Equity and Liabilities
Equity Capital 50,00,000

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Other Equity 49,92,000

Financial Liabilities
Bank Overdraft 7,45,000
Trade Payables 8,00,000
Total 1,15,37,000

Question 7
Ram Ltd. Acquired 60% shares of Rs.100 each of Krishan Ltd. on 1st Oct, 2019. On March
31, 2020 the summarized balance sheet of the two companies were as given below
Ram Ltd. Krishan Ltd.
Assets
Property, Plant and Equipment
Land & building 3,00,000 3,60,000
Plant & Machinery 4,80,000 2,70,000
Investment in XYZ Ltd. 8,00,000 -
Inventory 2,40,000 72,800
Financial Assets
Trade Receivable 1,19,600 80,000
Cash 29,000 16,000
Total 19,68,600 7,98,800
Equity and Liabilities
Equity Capital 10,00,000 4,00,000
Other Equity
Other Reserves 6,00,000 2,00,000
Retained Earnings 1,14,400 1,64,000
Financial Liabilities
Bank Overdraft 1,60,000 -
Trade Payables 94,200 34,800
Total 19,68,600 7,98,800
The retained earnings of XYZ Ltd. showed a credit balance of Rs.60,000 on 1st April, 2019
out of which a dividend of 10% was paid on 1st Nov, DEF Ltd. has recognized the dividend
received to profit to loss Account. Fair value of P & M as on 1st Oct, 2019 was Rs.4,00,000.
The rate of depreciation on Plant & Machinery is 10%.
Following are the increases on comparison of Fair Value as per respective Ind AS with
Book Value as on 1st Oct, 2019 which are to be considered while consolidating the
balance sheet.

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Trade payable 20,000

Land and Building 2,00,000
Inventories 30,000
Note :
1. It may be assumed that the inventory is still unsold on balance sheet date and the
trade payables are also not yet settled
2. Also assume that the other reserves of both the companies as on 31st March, 2020
are the same as was on 1st April, 2019.
3. All fair values adjustments have not yet started impacting consolidated post-
acquisition profits.
Prepare consolidated Balance sheet as on March 31, 2020.

Solution :
DEF Ltd.
Assets
Property, Plant and Equipment 17,20,000
Goodwill 1,65,800
Inventory 3,42,800
Financial Assets
Trade Receivable 1,99,600
Cash 45,000
Total 24,73,200
Equity and Liabilities
Equity Capital 10,00,000
Other Equity 7,30,600
Non controlling interest 4,33,600
Financial Liabilities
Bank Overdraft 1,49,000
Trade Payables 1,60,000
Total 24,73,200

9. CONSOLIDATION OF PROFIT AND LOSS STATEMENT :

For preparation of Consolidated Profit and Loss Account of holding company and its subsidiaries,
the revenue items are to be added on line by line basis and from the consolidated revenue items

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inter-company transactions should be eliminated. For example, a holding company may sell goods
or services to its subsidiary, receives consultancy fees, commission, royalty etc. These items are
included in sales and other income of the holding company and in the expense items of the
subsidiary. Alternatively, the subsidiary may also sell goods or services to the holding company.
These inter-company transactions are to be eliminated in full.

10. CONSOLIDATION OF CASH FLOW STATEMENTS :

Same as consolidated Statement of Profit and Loss, the preparation of consolidated cash flow
statement is also not difficult. All the items of cash flow from operating activities and financing
activities are to be added on line by line basis and from the consolidated items, inter – company
transactions should be eliminated.

11. CHANGES IN SHARE OF NON CONTROLLING INTEREST :

A parent shall present non-controlling interests in the consolidated balance sheet within equity,
separately from the equity of the owners of the parent.
Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing
control of the subsidiary are equity transactions (ie transactions with owners in their capacity as
owners).

Question 8
Amla Ltd. purchase a 100% subsidiary for Rs.10,00,000 at the end of 20X1 when the fair
value of the subsidiary’s Lal Ltd. net asset was Rs.8,00,000.
The parent sold 40% of its investment in the subsidiary in March 20X4 to outside
investors for 9,00,000. The parent still maintains a 60% controlling interest in the
subsidiary. The carrying value of the subsidiary’s net assets is Rs.18,00,000 (including net
assets of Rs.16,00,000 & goodwill of Rs.2,00,000).
Calculate gain or loss on sale of interest in subsidiary as on 31st March 20X4.

Solution :
Cash A/c Dr 900000
To Non controlling interest 7,20,000
To Gain (P & L) 1,80,000

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Question 9
A Ltd. acquired 10% additional shares of its 70% subsidiary. The following relevant
information is available in respect of the change in non-controlling interest on the basis
of Balance sheet finalized as on 1.4. 2000:
Investment in Subsidiary (70% interest – at cost) 14,000
Purchase price of additional 10% interest 2,600
Consolidated financial statements :
Non – controlling interest (30%) 6,600
Consolidated profit and loss account balance 2,000
Goodwill 600
The reporting date of the subsidiary and the parent is 31st March, 2010. Prepare note
showing adjustment for change of non-controlling interest. Should goodwill be adjusted
for the change?

Solution :
Non controlling Interest A/c Dr 2200 (6600 / 30 x 10)
Loss A/c (P & L ) A/c Dr 400
To Bank A/c 2600

Note : Goodwill will not change.

12. LOSS OF CONTROL :

If a parent loses control of a subsidiary, it shall:
• derecognize:
o the assets (including any goodwill) and liabilities of the subsidiary at their carrying
amounts at the date when control is lost; and
o the carrying amount of any non-controlling interests in the former subsidiary at the
date when control is lost (including any components of other comprehensive
income attributable to them).
• recognize:
o the fair value of the consideration received, if any, from the transaction, event or
circumstances that resulted in the loss of control;

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o if the transaction, event or circumstances that resulted in the loss of control

involves a distribution of shares of the subsidiary to owners in their capacity as
owners, that distribution; and
o Any investment retained in the former subsidiary at its fair value at the date when
control is lost.

Question 10
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
Rs10,00,000. 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 2003.

Solution :
A. Separate Financial Statements
Bank A/c Dr 67,50,000
To Investments A/c 30,00,000
To Gain A/c 37,50,000

B. Consolidation of Financial Statement

Bank A/c Dr 67,50,000
Investment A/c Dr 45,00,000
To Goodwill A/c 10,00,000
To Net Assets A/c 80,00,000
To Gain A/c 22,50,000

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Question 11
A Ltd. Acquired 70% of shares of B Ltd. On 1/4/2019 when fair value of net assets of B
Ltd. was Rs. 200 lakh. During 2019-2020 B Ltd. made profit of Rs. 100 lakh. Individual and
consolidated balance sheet as on 31/3/2020 are as follows
A B Group
Assets
Goodwill - - 10
PPE 627 200 827
Financial Assets
Investments 150 - -
Cash 200 30 230
Other Current Assets 23 70 93
Total 1,000 300 1,160
Equity and Liabilities
Share Capital 200 100 200
Other Equity 800 200 870
Non – controlling interest - - 90
Total 1,000 300 1,160
A Ltd. acquired another 10% stake in B Ltd. on 1/4/2020 at Rs. 32 lakhs. The
proportionate carrying amount of the non – controlling interest is Rs. 30 lakh. Show the
individual and consolidated balance sheet of the group immediately after the change in
non – controlling interest.

Solution :
A B Group
Assets
Goodwill - - 10
PPE 627 200 827
Financial Assets
Investments 182 - -
Cash 168 30 198

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Other Current Assets 23 70 93

Total 1,000 300 1,128
Equity and Liabilities
Share Capital 200 100 200
Other Equity 800 200 868
Non – controlling interest - - 60
Total 1,000 300 1,128

Thanks ….

[email protected]

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rahulmalkan

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IND AS 111
CHAPTER - 27
JOINT ARRANGEMENTS

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. CONCEPT OF JOINT CONTROL
4. FEATURES OF JOINT ARRANGEMENTS
5. TYPES OF JOINT ARRANGEMENTS
6. CLASSIFICATION OF JOINT ARRANGEMENTS
7. SUMMARY

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1. INTRODUCTION :
Ind AS 111, Joint Arrangements, describes principles for financial reporting by parties to a joint
agreement.
It has been observed that some agreements are called as ‘joint arrangements’ or ‘joint ventures’
but in reality, only one party has control. On the other hand, some arrangements are not referred
as ‘joint arrangement’ or ‘joint control’, but may still be treated as joint arrangements, as defined
by Ind AS 111. Hence the terminology used is not important to describe the arrangement.
The accounting treatment will be decided based on the substance of the arrangement and the
kind of interest investors have in it.

2. SCOPE :
It covers all the entities that are party to a joint arrangement including venture capital
organisations, mutual funds, unit trusts, investment-linked insurance funds and similar entities.

3. CONCEPT OF JOINT CONTROL :

1. COLLECTIVE CONTROL : Here, no single party enjoys full control. Here it is important to
assess whether the contract gives all the parties or a group of parties, control of the
arrangement.
2. UNANIMOUS DECISION : There has to unanimous consent of all the parties having joint
control on the decisions of the arrangement.

Question 1
Two parties A & B agree in their contractual arrangement to establish an arrangement.
Each has 50% of the voting rights. The contract specifies that at least 51% of the voting
rights are required to make decisions with respect to the relevant activities. Do A & B
have joint control over the arrangement?

Solution :
A & B are in joint control.

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Question 2
NFG Limited is owned by numerous shareholders with the following holdings:
• Shareholders N owns 51%
• Shareholders F owns 30%
• The rest of the shares are widely held by other investors, altogether 19%.
NFG Limited’s articles of association require a 75% majority to approve decisions about
any of the entity’s relevant activities. They also outline that each shareholder is entitled
to vote in proportion to its respective ownership interest. Is NFG ltd jointly controlled?

Solution :
NFG is jointly controlled by shareholders of N and F.

Question 3
Hari and Ram enter into a contractual arrangement to buy a two storied music store,
which they will lease to other parties. Hari will be responsible for leasing first floor and
Ram will be responsible for leasing second floor. They can make all decisions related to
their respective floors and keep all of the income with respect to their floors. Ground
floor will be jointly managed — all decisions and with respect to ground floor must be
unanimously agreed between Hari and Ram. Discuss the applicability of Ind AS 111.

Solution :
First floor is controlled by Hari – will not be accounted under IND AS 111.
Second floor is controlled by Ram – Will not be accounted under IND AS 111.
Ground floor is under joint control – should be accounted under IND AS 111.

ASSESSING CONTROL

Does the contractual arrangement give all No Outside the Scope

the Parties, or a group of the parties, of IND AS 111
control of the arrangements collectively?

Yes

Do decisions about the relevant activities No

Require the unanimous consent of all the Outside the Scope
Parties, or of a group of the parties, that of IND AS 111
Collectively, control the arrangement?

Yes

The arrangement is jointly controlled. The

arrangement is a joint arrangement

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4. FEATURES OF JOINT ARRANGEMENTS :

Sometimes ventures are named as joint arrangement but one party has control over the activities
of the entity. In such cases the Ind AS – 111 will not apply. On the other hand, there may be
arrangements which are not referred as joint arrangements but still complies with the
requirement of the Standard and hence follow the guidelines.

A joint arrangement is an arrangement where two or more parties have joint control over an
entity under the contractual agreement. The two key characteristics are
1. CONTRACTUAL ARRANGEMENT
2. JOINT CONTROL

Question 4
ECL Limited has a wholly owned subsidiary, entity B, that holds a portfolio of buildings.
ECL Limited wishes to reduce its exposure to this market. It sells 50% of its investment
in entity B to Investment Bank. ECL Limited and Investment Bank enter into a contractual
agreement, whereby decisions regarding entity B’s relevant activities are made jointly.
ECL Limited continues to act as asset manager of entity B for a specified fee, and
decisions are made in line with the entity B’s pre- approved budgets and business plan.
Is entity B jointly controlled?

Solution :
Entity B is jointly controlled by ECL Limited and Investment Bank.

5. TYPES OF JOINT ARRANGEMENTS :

1. Joint Operations :
In case of joint operations, each party (known as “Joint Operators”) recognizes its share of
assets, liabilities, revenues and expenses of the joint arrangement. Here the contract
determines the share of each joint operator based on rights and obligations of each party.
The joint operator shall then apply the corresponding IND ASs to the particular asset,
liability, revenue and expenses.

2. Joint Ventures :
In a joint venture, each party (known as “Joint Venturer”) recognizes its interest in a joint
venture as an investment. The investment is accounted for using the equity method in
accordance with Ind AS 28, Investments in Associates and Joint Ventures, unless the entity
is exempted from applying the equity method as specified in that standard.

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6. CLASSIFICATION OF JOINT ARRANGEMENTS :

As stated above, all the joint arrangements which are not structured through separate vehicle are
Joint operations. Further, the arrangements which are structured through separate vehicle can
be classified as Joint operation or Joint venture depending on the following

1. Structure of the Joint Arrangement :

Structure or the legal form of the joint arrangement is important in assessing the type of
joint arrangement. It determines the initial assessment of parties’ rights to the assets and
obligations for the liabilities held in the separate vehicle. The legal form specifies whether
the parties have interests in the assets held in the separate vehicle and whether they are
liable for the liabilities held in the separate vehicle.

Question 5
Entities B and C form a partnership to own and operate a crude oil refinery. Each party
has a 50% interest in the net profits of the partnership. What considerations would the
management have to consider in classifying the arrangement as joint venture or joint
operation?

Solution :
The joint arrangement is structured through a vehicle, and venture parties each have 50%
interest in net profit of the partnership; so this appears to be a joint venture. However
management needs to evaluate whether the partnership creates separation, that is simply
are the assets and liabilities those of the separate vehicle or do the parties have direct
rights to the assets and have direct obligations for the liabilities held by the entity.

2. Assessing The Terms Of The Contractual Arrangement :

It is essential to understand the terms of the contractual arrangement in order to classify
the joint arrangement. The pertinent questions, to be analysed from the contract, are
a. Do the parties have rights to assets and obligation to liabilities of the joint
arrangements?
b. Do the parties share all interests (e.g. rights, title or ownership) in the assets relating
to the arrangement in a specified proportion?
c. Do parties share all liabilities, obligations, costs and expenses in a specified
proportion?
d. Does the allocation of revenue and expenses are agreed on the basis of the relative
performance of each party to the joint arrangement?

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If the answer to the above questions is ‘yes’, then the arrangement shall be classified as
joint operation. However where the parties are sharing net assets in the joint arrangement,
the arrangement shall be treated as joint venture.

3. Assessing Other Facts and Circumstances :

When the terms of the contractual arrangement do not specify that the parties have rights
to the assets, and obligations for the liabilities, relating to the arrangement, the parties
shall consider other facts and circumstances to assess whether the arrangement is a joint
operation or a joint venture.
It will then be worthwhile to consider whether the activities of the arrangement primarily
aim to provide parties with an output. This indicates that parties shall have rights to all the
benefits of the assets of the arrangement. The parties will make sure that the output is not
sold to the third parties but used by them only. Such are joint operations.

7. SUMMARY :

Conditions YES NO
Structure of the joint Does the legal form If yes, the joint If no, obtain
arrangement give the parties rights arrangement is more
to the assets and concluded to be a information
obligations for the joint operation
liabilities relating to the
arrangement?
Assessing the terms of the Do the terms of the If yes, the joint If no, obtain
contractual arrangement Contractual arrangement is more
arrangement specify concluded to be a information
that the parties have joint operation
rights to the assets and
obligations for the
liabilities relating to the
arrangement?
Assessing other facts and Does the arrangement If yes, the joint If no, the joint
circumstances so designed that its arrangement is arrangement is a
activities mainly concluded to be a joint venture
provide the parties joint operation.
with an output and so
that it depends on the

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parties on a regular
basis for settling the
liabilities of the
arrangement?

Thanks ….

[email protected]

www.rahulmalkan.com

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IND AS 28
CHAPTER - 28
INVESTMENTS IN JOINT
VENTURES & ASSOCIATES

CHAPTER DESIGN

1. INTRODUCTION
2. SCOPE
3. SIGNIFICANT INFLUENCE
4. POTENTIAL VOTING RIGHTS
5. EQUITY METHOD

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1. INTRODUCTION :
Ind AS 28, Investments in Associates and Joint Ventures,
a) prescribes the accounting for investments in associates and
b) sets out the requirements for the application of the equity method when accounting for
investments in associates and joint ventures.

It is important to note here that Ind AS 111, describes joint arrangements including joint ventures
and prescribes equity method for joint ventures. But here, in Ind AS 28, the equity method is
described for both Associate and Joint Ventures.

2. SCOPE :
This Standard shall be applied by all entities that are investors with joint control of, or significant
influence over, an investee.

3. SIGNIFICANT INFLUENCE :
Significant influence is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control of those policies.

Analysis
 HOLDING 20% OR MORE OF THE VOTING RIGHTS: If an entity holds, directly or indirectly
(eg through subsidiaries), 20 per cent or more of the voting power of the investee, it is
presumed that the entity has significant influence, unless it can be clearly demonstrated
that this is not the case.

 HOLDING LESS THAN 20% OF VOTING RIGHTS: Also, in cases where the entity holds,
directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of
the investee, it is presumed that the entity does not have significant influence, unless such
influence can be clearly demonstrated.

Question 1
X Ltd. owns 20% of the voting rights in Y Ltd. and is entitled to appoint one director to
the board, which consist of five members. The remaining 80% of the voting rights are
held by two entities, each of which is entitled to appoint two directors. A quorum of four
directors and a majority of those present are required to make decisions. The other
shareholders frequently call board meeting at the short notice and make decisions in the
absence of X Ltd’s representative. X Ltd has requested financial information from Y Ltd,
but this information has not been provided. X Ltd’s representative has attended board
meetings, but suggestions for items to be included on the agenda have been ignored and
the other directors oppose any suggestions made by X Ltd. Is Y Ltd an associate of X Ltd.?

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Solution :
Despite the fact that the X Ltd owns 20% of the voting rights and has representations on
the board, the existence of other shareholders holding a significant proportion of the
voting rights prevent X Ltd. from exerting significant influence. Whilst it appears the X Ltd
should have the power to participate in the financial and operating policy decision, the
other shareholders prevent X Ltd’s efforts and stop X Ltd from actually having any
influence.
In this situation, Y Ltd would not be an associate of X Ltd.

Question 2
Kuku Ltd. holds 12% of the voting shares in Boho Ltd. Boho Ltd.’s board comprise of eight
members and two of these members are appointed by Kuku Ltd. Each board member
has one vote at meeting. Is Boho Ltd an associate of Kuku Ltd?

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

Question 3
Soul Ltd has 18% interest in God Ltd. Soul Ltd manufacture mobile telephone handsets
using technology developed by God Ltd. God Ltd licenses the technology to Soul Ltd and
updates the license agreement for new technology on a regular basis. The handsets are
sold by Soul Ltd and represent substantially Soul Ltd’s entire sale. Analyse.

Solution :
Soul Ltd is dependent on the technology that God Ltd supplies since a high proportion of
Soul Ltd’s sales are based on that technology. Therefore, Soul Ltd is likely to be an associate
of God Ltd because of the provision of essential technical informational.

264 IND AS 28 – Investments in Joint Ventures & Associates

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4. POTENTIAL VOTING RIGHTS :

An investor may hold any instrument (such as share warrants, share call options, debt or equity
instruments) issued by an associate and terms of the instrument is that a holder will get an equity
rights on the expiry of the term i.e. they are convertible into ordinary shares, to give the entity
additional voting power or to reduce another party’s voting power over the financial and
operating policies of another entity (ie potential voting rights). Only an existing right will be
considered for determining the Significant influence. Any potential voting rights that will arise in
future will not be considered while determining Significant influence.

It is worth nothing that a substantial or majority ownership by another investor does not
necessarily preclude an entity from having significant influence

5. EQUITY METHOD :
1. On the Date of Acquisition
Investment in Associate A/c Dr
To cash A/c.
2. Subsequently at year end
A. If Associate makes the profit
Investment in Associate A/c Dr
To Profit and Loss A/c

B. If the Associate makes the loss

Profit and Loss A/c Dr
To Investment in Associate A/c

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3. For Dividend Received

Cash A/c Dr
To Investment in Associate A/c

Question 4
Amar Ltd. acquires 40% shares of Ram Ltd. On 1 April, 20X1, the price paid is
Rs.10,00,000. Ram Ltd has reported a profit of Rs.2,00,000 and paid dividend of
Rs.1,00,000. Calculate Carrying Amount of Investment as per Equity Method?

Solution :
Cost 10,00,000
Add: Share in Post-Acquisition Profits
(2,00,000 x 40%) 80,000
Less: Distribution of Dividend (1,00,000 x 40%) (40,000)
10,40,000
Adjustments to the carrying amount may also be necessary for a change in the investor’s
proportionate interest in the investee arising from changes in the investee’s other comprehensive
income. Such changes include those arising from the revaluation of property, plant and
equipment and from foreign exchange translation differences. The investor’s share of those
changes is recognised in other comprehensive income of the investor.

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IND AS 27
CHAPTER - 29
SEPARATE FINANCIAL
STATEMENT

CHAPTER DESIGN

1. INTRODUCTION
2. PREPARATION OF SEPARATE FINANCIAL STATEMENTS

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1. INTRODUCTION :
1. It is necessary to distinguish between a consolidated financial statements, a separate
financial statements and an Individual financial statements.
a. An individual financial statement is prepared by an entity that does not have a
subsidiary, an associate or a joint venture’s interest in a joint venture.

b. Separate financial statements are statements of an investor where investments in

the subsidiary, joint venture and associate are accounted for at cost or in
accordance with Ind AS 109, Financial Instruments.

c. Consolidated financial statements are the financial statements of a group in which

the assets, liabilities, equity, income and cash flows of the parent and its
subsidiaries are presented as those of a single entity.

2. Separate financial statements are presented in addition to:

a. Consolidated Financial Statements (prepared in case of a subsidiary or subsidiaries);
or

b. Financial Statements in which investments in associates and joint ventures are

accounted for using equity method.

2. PREPARATION OF SEPARATE FINANCIAL STATEMENTS :

1. Separate financial statements shall be prepared in accordance with all applicable Ind AS,
except that it shall account for investments in subsidiaries, joint ventures and associates
either:
a. At cost: Account for in accordance with Ind AS 105, ‘Non-current Assets Held for
Sale and Discontinued Operations’ (if investment is classified as held for sale then
cost will be accounted for as per Ind AS; or
b. In accordance with Ind AS 109 ‘Financial Instruments’.

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2. The entity shall apply the same accounting for each category of investments.
For example, an entity that has investments in subsidiaries, associates & joint ventures can
account for its investments in subsidiaries & associates at cost and investments in joint
ventures in accordance with Ind AS 109. However, if that entity has investments in two
associates, it cannot account investment in one associate as cost & investment in other
associate in accordance with Ind AS 109. It has to choose either of the method for both
the investments in associates.

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IND AS 32, 107, 109

CHAPTER - 29
FINANCIAL INSTRUMENTS

PART - I

IND AS 32 - FINANCIAL INSTUMENTS - PRESENTATION

IND AS 109 - FINANCIAL INSTRUMENTS

IND AS 107 - DISCLOSURE

IND AS 32
- CLASSIFICATION OF LIABILITY VS EQUITY
- OFFSETTING FA AND FL

IND AS 109
- RECOGNIZATION AND DE-RECOGNIZATION OF FA AND FL
- CLASSIFICATION OF FA AND FL
- MEASUREMENT OF FA AND FL
- HEDGE ACCOUTING

IND AS 107
- DISCLOSURE

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1. INTRODUCTION :
These IND AS are largely aligned with the prevailing guidance in IFRS which require classification
of a financial instrument based on substance of the arrangement between the parties rather than
their legal form.
1. Financial Instruments – Scope and Definitions
2. Financial Instruments – Equity and Financial Liabilities
3. Classification and measurement of financial Assets and Financial Liabilities
4. Recognition and Derecognition of Financial Instrument
5. Derivatives and Embedded Derivatives
6. Hedge Accounting
7. Disclosures

PART 1
FINANCIAL INSTRUMENTS – SCOPE AND DEFINITIONS

1. FINANCIAL INSTRUMENT :
A financial instrument is any contract that gives rise to a financial asset of one entity and
a financial liability or equity instrument of another entity.
A Financial Instrument can be
• A Primary instrument
• A Derivatives instrument
• A Hybrid instrument.

2. FINANCIAL ASSET :
A ‘financial asset’ is any asset that is:
1. Cash;
2. An equity instrument of another entity;
3. A contractual right:
I. to receive cash or another financial asset from another entity; or
II. to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favorable to the entity; or
4. a contract that will or may be settled in entity’s own equity instruments and is:
I. a non-derivative for which the entity is or may be obliged to receive
a variable number of entity’s own equity instruments; or
II. a derivative that will or may be settled other than by exchange of fixed
amount of cash or another financial asset for a fixed number of entity’s

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own equity instruments. For this purpose, entity’s own equity instruments
do not include puttable financial instruments classified as equity
instruments, instruments that impose on the entity an obligation to deliver
to another party a pro-rata share of net assets of the entity on liquidation
and are classified as equity instruments, or instruments that are themselves
contracts for future receipt or delivery of entity’s own equity instruments

3. FINANCIAL LIABILITY :
A ‘financial liability’ is any liability that is:
1. A contractual obligation:
i. To deliver cash or other financial asset to another entity; or
ii. To exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity;
2. A contract that will or may be settled in entity’s own equity instruments and is:
i. A non-derivative for which the entity is or may be obliged to deliver a
variable number of entity’s own equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a
fixed amount of cash or another financial asset for a fixed number of the
entity's own equity instruments.

4. EQUITY :
An equity instrument is any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.
EQUITY = ASSETS - LIABILITIES

5. PREFERENCE SHARES :
Preference shares is a class of shares issued by Indian companies, whose terms may
provide for redemption at a pre-determined amount or may be irredeemable, with a fixed
return which may be cumulative or discretionary.
Preference shares, depending on its charactertics, will be classified as Equity or Financial
Liability. Preference shares can have element of both Equity and Financial Liability. i.e it
can be compound FI

6. DERIVATIVES :
It is a Financial Instrument or any other contract which fulfills all the 3 conditions given
below

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1. The value changes to the underlying Asset

2. No Initial Investment or Very low Initial Investments
3. Settlement at a future date.
Examples – Forward Agreements, Swaps, Futures, Options, etc.

7. NON FINANCIAL ASSETS / LIABILITIES :

1. Tangible Fixed Assets / Intangible Fixed Asset / Inventory / Gold Bullion
• Such Assets gives opportunity to generate cash but does not give rise to a
present right to receive cash or another financial asset.
2. Prepaid Expenses, Deferred Income
• Because it is not be settled by cash by services.
3. Operating Lease
• Lessors continues to hold an asset and not receivables
4. Income tax payable / Refundable
• because it is not contractual
5. Warranty obligations, Prov. For estimated litigation obligation
• because it is not contractual

Question 1.
A Ltd. makes sale of goods to customers on credit of 45 days. The customers are entitled
to earn a cash discount@ 2% per annum if payment is made before 45 days
and an interest @ 10% per annum is charged for any payments made after 45 days.
Company does not have a policy of selling its debtors and holds them to collect
contractual cash flows. Evaluate the financial transaction ?

Solution :
Customer, in the books of A is classified as Financial Assets. It’s the right to receive
cash from other entity.

Question 2
A Ltd issues a bond at principal amount of CU 1000 per bond. The terms of bond require
annual payments in perpetuity at a stated interest rate of 8 per cent applied to the
principal amount of CU 1000. Assuming 8 per cent to be the market rate of interest for
the instrument when it was issued, the issuer assumes a contractual obligation to make
a stream of future interest payments having a fair value (present value) of CU1,000 on
initial recognition. Evaluate the financial instrument in the hands of both the holder and
the issuer.

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Solution :
Issuer : Financial Liability – A contractual obligation to deliver cash
Holder : Financial Asset – A right to receive cash

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IND AS 32, 107, 109

CHAPTER - 29
FINANCIAL INSTRUMENTS

PART – II

FINANCIAL INSTRUMENTS – EQUITY OR FINANCIAL LIABILITY

Ind AS 32 lays down the accounting principles for classifying a financial instrument issued by an
entity as either a financial liability or equity or both (a compound instrument). The classification
of a financial instrument is governed by the substance of a contract and not its legal form.
Classification of Financial instrument as Financial Liability or Equity should be done from Equity
point of View.

FINANCIAL LIABILITY EQUITY

(IND AS 32 – para 11) (IND AS 32 – para 16)
A Financial instrument that fulfills either of (A) A Financial instrument that fulfills both (A) or
or (B) below : (B) below :

Condition A : Condition A :
An instrument that is contractual obligation An instrument that has no contractual
To deliver cash or another financial asset to obligation
another entity or To deliver cash or another financial asset to
To exchange financial asset or financial another entity or
liabilities with another entity under conditions To exchange financial asset or financial
that are potentially unfavorable to the entity. liabilities with another entity under
conditions that are potentially unfavorable
to the entity.

Condition B : Condition B :
An instrument that will or may be settled in the An instrument that will or may be settled in
entity’s own equity instrument and is the entity’s own equity instrument and is
A non derivative for which the entity is or may A non derivative for which the entity has no
be obliged to deliver a variable number of the obigation to deliver a variable number of the
entity’s own equity instrument, or entity’s own equity instrument, or

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A derivative that will or may be settled other

than by the exchange of a fixed amount of cash A derivative that will or may be settled only
or another financial asset for a fixed number of by the exchange of a fixed amount of cash or
the entity's own equity instruments. another financial asset for a fixed number of
the entity's own equity instruments.

No
Is there a contractual
No
Obligation Not a Financial Instrument

↓ YES
Yes
Obligation to deliver cash or

↓ NO
Obligation to exchange financial Yes
assets or liabilities under
potentially unfavorable conditions

↓ NO Financial Liability

A. Obligation to Issue own Equity

Instrument, AND Yes
B. Either of the consideration
Received/Receivable or number
of equity instrument is VARIABLE

↓ NO, This implies

A. Obligation to Issue own Equity
Instrument, AND
B. Either of the consideration Equity Instrument
Received/Receivable or number of
equity instrument is FIXED

Note :
Ask the following questions
1. Is the cash outflow contractual?
2. Can the outflow be avoided i.e is it at the discretion of the issuer.

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Question 1
A Ltd. (issuer) issues preference shares to B Ltd. (holder). Those preference shares are
redeemable at the end of 10 years from the date of issue and entitle the holder to a
cumulative dividend of 15% p.a. The rate of dividend is commensurate with the credit
risk profile of the issuer. Examine the nature of the financial instrument.

Solution :
Preference shares should be classified as Financial Liability because entity has contractual
obligation to deliver principal as well as dividends.

Question 2
X Co. Ltd. (issuer) issues debentures to Y Co. Ltd. (holder). Those debentures are
redeemable at the end of 10 years from the date of issue. Interest of 15% p.a. is payable
at the discretion of the issuer. The rate of interest is commensurate with the credit risk
profile of the issuer. Examine the nature of the financial instrument.

Solution :
This instrument has two components
1. Redemption – Its mandatory and hence should be classified as Financial Liability
2. Interest – Its at the discretion of the issuer and therefore should be classified as
Equity
It’s a compound Financial Instrument

COMPOUND INSTRUMENT :
A Financial Instrument may be structured such that it contains both equity and liability
components (i.e the instrument is neither completely a liability nor entirely an equity instrument).
The requirement to separate out the equity and financial liability components of a compound
instrument is consistent with the principle that a financial instrument must be classified in
accordance with its substance, rather than its legal form.

Method to separate the liability and equity components

Total Fair
Equity Liability
Value of the
Component Component
instrument

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Calculation of Fair Value of Liability

Steps
1. Classify the instrument as Compound Financial Instrument
2. Identify the contractual cash flows i.e cash flows which cannot be denied by the company
3. Identify the discount rate i.e rate on similar instrument without equity component (for eg
rate on non-convertible Financial Instrument.
4. Calculate PV of Contractual CF discounted by using rate arrived at Step 3.
5. Calculate Equity i.e Equity = Total Liability – Financial Liability

Question 3
Entity A issues 2000 convertible bond on 1 January 2005. The bonds have a 3 year term
and are issued at par with a face values of Rs 1000 per bond, resulting in total proceeds
of Rs 2 million. Interest is payable annually in arrears at an annual interest rate of 6%.
Each Bond is convertible at the holders discretion at any time up to maturity into 250
ordinary shares. When the bonds are issued the market interest rate for similar debt
without the conversation option is 9% (i.e. the market interest rate for similar bonds
with the same credit standing having no conversation rights).

Solution :
1. Financial Liability = PV of Contractual cash Flows
Year Cash Flows PV @ 9%
2005 1,20,000 1,10,092
2006 1,20,000 1,01,002
2007 1,20,000 + 20,00,000 16,37,029
Total 18,48,123
2. Equity = Total Proceeds – Financial Liability
= 20,00,000 – 18,48,123 = 1,51,877
3. Journal Entry
Bank A/c 20,00,000
To Bond (FL) 18,48,123
To Bond (Equity) 1,51,877

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Question 4
On 1st April 2008 D ltd. Issued Rs.3000000, 6% convertible debentures of face value of
Rs.100 per debenture at par. the debentures are redeemable at a premium of 10% on
31.03.12 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%.
Being compounded financial instrument, you are required to separate equity and debts
portion as on 01.04.08.

Solution :
1. Financial Liability = PV of Contractual cash Flows
Year Cash Flows PV @ 10%
31/3/09 1,80,000 1,63,636
31/3/10 1,80,000 1,48,760
31/3/11 1,80,000 1,35,237
31/3/12 1,80,000 + 30,00,000 + 3,00,000 23,76,887
Total 28,24,520
2. Equity = Total Proceeds – Financial Liability
= 30,00,000 – 28,24,520 = 1,75,480
3. Journal Entry
Bank A/c 30,00,000
To Bond (FL) 28,24,520
To Bond (Equity) 1,75,480

CONTINGENT SETTELEMENT PROVISIONS :

• Financial instruments may be structured such that the obligation to deliver cash or another
financial instrument arises only on the occurrence or non-occurrence of uncertain future
events (or on the outcome of uncertain circumstances) that are beyond the control of both
the issuer and the holder of the instrument.
• The issuer does not have an unconditional right to avoid the obligation to deliver cash or
another financial instrument and, therefore, such instruments are financial liabilities of the
issuer unless:
o the contingent settlement provision that could require payment in cash or another
financial asset is not genuine; or
o settlement in cash or another financial asset can only be required in the event of
liquidation of the issuer; or
o the instrument meets the specified criteria for a puttable instrument or an
obligation arising on liquidation to be classified as equity.

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Question 5
Entity A issues preference shares bearing 5 percent cumulative dividends. The shares will
be redeemed if the applicable taxation or accounting requirements were to change.
The contingent event of a change in taxation or accounting requirements is deemed to
be genuine. The requirement for redemption on change of taxation or accounting
requirements represents a contingent settlement provision (i.e. it is an uncertain future
event beyond the control of both the issuer and the holder of the instrument).
Is the instrument a financial liability?

Solution :
The above instrument should be classified as Financial Liability, as contingent settlement
provision of change in taxation or accounting requirements is deemed to be genuine.

CONVERTIBLE BOND WITH CALL FEATURE :

If company issues the bond which has convertible feature, the value of liability should be
calculated as follows

Liability component (Disregarding Call) – Value of call payable by the Issuer

Value of Equity = Proceeds – Value of Liability

Question 6
RM Ltd issues callable convertible debentures as issued at Rs. 60. The value of similar
debentures without call or equity conversion option Rs. 57. The Value of call as
determined using option pricing model is Rs. 2. Determine the value of liability and
equity component.

Solution :
1. Value of Liability = 57 – 2 = 55
2. Value of Equity = 60 – 55 = 5

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IND AS 32, 107, 109

CHAPTER - 29
FINANCIAL INSTRUMENTS

PART – III

CLASSIFICATION AND MEASUREMENT OF FA AND FL

CLASSIFICATION OF FA
FA are classified in to following three categories based on their subsequent measurement:
FA measured at

FA

At Fair Value Through

At Fair Value Through
Amortized Cost (AC) Other Comprehensive
Profit or Loss (FVTPL)
Income (FVTOCI)

FA are further classified as Investments in

FA

Debt Instrument Equity Instrument Derivatives

Entity shall classify financial assets on the basis of

1. Business Model (BM) for managing the FA &
2. Contractual Cash Flow Characteristics (CCFC) and options elected by the entity :

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Classification

Contractual Cash
Business Model
Flow Characteristics

BUSINESS MODEL
BM refers to how an entity manages its FA to generate Cash flows. Whether its objective is met
by
1. Collecting contractual cash flows or
2. By selling financial assets or
3. By both.

Business Model

Collect and
Collect Sell
Sell

CONTRACTUAL CASH FLOW CHARACTERISTICS (CCFC)

An entity has to asses that the contractual cash flows from a financial assets are solely collection
of principal and interest on the outstanding principal or otherwise. Principal is the fair value at
initial recognition and it will change over the life of the financial asset. Interest is the
consideration for time value of money, for credit risk and for other basic lending risk & cost.

Question 1
An entity holds investments to collect their contractual cash flows. The funding needs of
the entity are predictable and the maturity of its financial assets is matched to the
entity's estimated funding needs.
The entity performs credit risk management activities with the objective of minimizing
credit losses. In the past, sales have typically occurred when the financial assets' credit
risk has increased such that the assets no longer meet the credit criteria specified in the
entity's documented investment policy. In addition, infrequent sales have occurred as a
result of unanticipated funding needs.
Reports to key management personnel focus on the credit quality of the financial assets
and the contractual return. The entity also monitors fair values of the financial assets,
among other information.
Evaluate the business model.

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Solution :
Collect Contractual Cash Flows.

Question 2
Entity B sells goods to customers on credit. Entity B typically offers customers up to 60
days following the delivery of goods to make payment in full. Entity B collects cash in
accordance with the contractual cash flows of trade receivables and has no intention to
dispose of the receivables.
Evaluate the business model.

Solution :
Collect contractual Cash Flows

Question 3
An entity anticipates capital expenditure in a few years. The entity invests its excess cash
in short and long-term financial assets so that it can fund the expenditure when the need
arises. Many of the financial assets have contractual lives that exceed the entity's
anticipated investment period.
The entity will hold financial assets to collect the contractual cash flows and, when an
opportunity arises, it will sell financial assets to re- invest the cash in financial assets with
a higher return. The managers responsible for the portfolio are remunerated based on
the overall return generated by the portfolio.
Evaluate the business model.

Solution :
Collect and Sell.

Question 4
Instrument A is a bond with a stated maturity date. Payments of principal and interest
on the principal amount outstanding are linked to an inflation index of the currency in
which the instrument is issued. The inflation link is not leveraged and the principal is
protected.
Evaluate the Contractual cash flows characteristics test

Solution :
The instrument is solely made of principal and interest.

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CLASSIFICATION OF FA

Classification of Financial Assets (FA) – 1. At Amortized Cost

(AC) 2. FVTPL 3. FVTOCI

Debt Instrument Equity Instrument Derivatives

At Amortized Cost if two At FVTPL if held for Always measured

conditions fulfilled: trading. Others also at Fair Value
1.BM- Collection of at FVTPL except as through Profit or
contractual cash flows. follows: Loss (FVTPL)
2. CCFC- Periodic cash
flow is repayment of
principal &interest

At FVTOCI (with Exception: Entity can

recycling) if two at initial recognition
conditions fulfilled: irrevocably elect to
1.BM- Collection of measure investment
contractual cash flows & in equity instrument
selling of FA at FVTOCI (no
2. CCFC- Periodic cash recycling)
flow is repayment of
principal & interest

Otherwise at FVTPL

Special Note: Irrespective of what is stated in above chart an entity can at initial recognition
irrevocably designate a Financial Asset as measured at FVTPL so as to avoid accounting
mismatch

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FA At Amortized cost (AC):

Debt instrument where
(a) Business model objective is met through collecting contractual cash flows and
(b) Contractual cash flows are only payment of principal and interest on it.

Question 5
An entity acquires a financial asset for Rs. 100. Entity also pays purchase commission of
Rs.2. The instrument is measured at Amortized Cost. How shall the instrument be
measured?

Solution :
The instrument shall be recorded at 102.

Question 6
On Jan 1, 2005, RM Purchases a bond in the market for Rs. 53,993. The bond has a
principal amount of Rs. 50,000 that will be repaid on Dec 31,2009. The bond has stated
rate of 10% payable annually, and quoted market interest for the bond is 8%.
Required :
1. How shall bond be measured initially
2. Prepare the amortization schedule at the end year.

Solution :
1. The instrument should be recognized at Fair value = PV of all future cash flows
Fair Value = 50,000 x 10% x PVIFA (8%, 5 years) + 50,000 x PVIF (8%, 5 years)
= 53,993
2. Amortization schedule
Year Balance Interest @8% Cash Flows Closing
31/12/2005 53,993 4,319 5000 53,312
31/12/2006 53,312 4,265 5000 52,577
31/12/2007 52,577 4,206 5000 51,783
31/12/2008 51,783 4,143 5000 50,926
31/12/2009 50,926 4,074 55000 Nil

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Question 7
RM Ltd granted Rs.10,00,000 loan to its employees on Jan 1, 2009 at a concessional Rate
of 4%. Loan is to be paid in 5 equal principal installments along with interest. Market
rate of Interest for such loans is 10%.
Calculate the amount at which loan should recorded initially and amortized cost for all
the subsequent years.

Solution :
1. The loan should be recognized at Fair Value
Fair Value
Year Cash Flows PV @10%
2009 2,00,000 + 40,000 2,18,182
2010 2,00,000 + 32,000 1,91,736
2011 2,00,000 + 24,000 1,68,295
2012 2,00,000 + 16,000 1,47,531
2013 2,00,000 + 8,000 1,29,152
Total 8,54,896

Note :
1. The difference between 10,00,000 – 8,54,896 = 1,45,104 shall be charged to P/L as
an employee expense.
2. Subsequently loan shall be measured at Amortized cost as per Amortization
schedule.

FA At Fair Value through Profit & Loss (FVTPL): This includes:

1. Derivatives always in this category.
2. FA which are Debt or Equity instrument and are Held for trading.
3. Debt instrument which at initial recognition irrevocably designated at FVTPL to remove
accounting mismatch. It eliminates or significantly reduces a measurement or recognition
inconsistency i.e. related FA & FL are measured or recognized on different basis (also
known as an accounting mismatch)
4. Equity instrument other than those which at initial recognition irrevocably designated at
FVTOCI.
5. Debt instrument which do not fit in FVTOCI or at AC

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Question 8
A Ltd. invested in equity shares of C Ltd. on 15th March for Rs.10,000. Transaction costs
were 500 in addition to the basic cost of Rs.10,000. On 31 March, the fair value of the
equity shares was Rs.11,200. Pass necessary journal entries. Analyze the measurement
principle and pass necessary journal entries.

Solution :
1. Investment in Equity A/c Dr 10,000
To Bank A/c 10,000

2. Brokerage (P/L) Dr 500

To Bank A/c 500

3. Investment in Equity A/c Dr 1200

To Gain (P/L) 1200

FA At Fair Value through OCI (FVTOCI) :

Debt instrument where
(a) Business model objective is met through collecting contractual cash flows and by selling of
asset and
(b) Contractual cash flows are only payment of principal and interest on it.
Equity instrument which at initial recognition irrevocably designated at FVTOCI (no recycling).

Question 9
A Ltd. invested in equity shares of C Ltd. on 15th March for Rs.10,000. Transaction costs
were 500 in addition to the basic cost of Rs.10,000. On 31 March, the fair value of the
equity shares was Rs.11,200. Pass necessary journal entries. Analyze the measurement
principle and pass necessary journal entries. The Company has taken an irrevocable
option to measure such investment at fair value through other comprehensive income.

Solution :
1. Investment in Equity A/c Dr 10,500
To Bank A/c 10,500

2. Investment in Equity A/c Dr 700

To Gain (OCI) 700

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Financial Asset: Classification, Valuation & Recognition :

Item At FVTPL At At FVTOCI At FVTOCI Trade
Amortized (Debt (Equity Receivable
cost Instrument) Instrument)
Initial Fair value Fair value Fair value Fair value Transaction
Recognition at value
Transaction Charge to Add to Add to above Add to above Charge to
cost P&L above P&L
Subsequent Fair value Amortised Fair value Fair value Original
Measurement Cost Transaction
Value
Difference Recognise N.A. Recognise in Recognise in N.A.
arising on re- in P&L OCI OCI
measurement
at fair value
Subject to No Yes Yes No Yes
review for
impairment
Impairment N.A. P&L In OCI N.A. P&L
loss charged to
Reversal of N.A. Yes Yes N.A. Yes
impairment loss
allowed

CLASSIFICATION OF FINANCIAL LIABILITY :

FL are classified in to following two categories based on their subsequent measurement:
FL measured at
1. Measured at amortized cost
2. Measured at fair value through profit or loss:
a) Liabilities that meet the definition of “held for trading”
b) Contingent consideration recognized by an acquirer in a business combination
3. Designated at fair value through profit or loss

FL

At Fair Value Through

Amortized Cost (AC)
Profit or Loss (FVTPL)

Note : Irrespective of above classification, any financial liabilities may be designated at fair value
through profit and loss A/c

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Financial Liability: Classification, Valuation & Recognition :

Item At FVTPL- Held for At FVTPL- Designated At Amortized Cost
Trading
Initial Recognition At fair value At fair value At Fair value
Transaction cost Charge to P&L Charge to P&L Deduct from above
Subsequent Valuation At Fair Value. Change At Fair Value. Change Amortised Cost
in value taken to P&L in value taken to P&L
Gain/loss due to changes P&L OCI NA
in own credit risk

Question 10
A Company purchases its raw materials from a vendor at a fixed price of Rs.1,000 per
tonne of steel. The payment terms provide for 45 days of credit period, after which an
interest of 18% per annum shall be charged. How would the creditors be classified in
books of the Company?

Solution :
Creditors should be classified at Amortized Cost

RECLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITY

FINANCIAL ASSETS: An entity shall reclassify financial assets, only if the entity changes its business
model for managing those financial assets.
• Amortized cost to FVTPL
• Amortized cost to FVOCI
• FVTPL to Amortized cost
• FVTPL to FVOCI
• FVOCI to Amortized cost
• FVOCI to FVTPL

FINANCIAL LIABILITY : Financial Liability are not permitted to be reclassified

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

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IND AS 32, 107, 109

CHAPTER - 29
FINANCIAL INSTRUMENTS

PART – IV

RECOGNITION AND DERECOGNITION OF FINANCIAL INSTRUMENTS

INITIAL RECOGNISATION
Recognize Financial Asset (FA) or Financial Liability (FL) when and only when entity becomes party
to the contractual provisions of the instrument.

REGULAR WAY PURCHASE OR SALE OF FINANCIAL ASSETS

Ind AS 109 defines a regular way purchase or sale as,
– a purchase or sale of a financial asset
– under a contract
– whose terms require delivery of the asset
– within the time frame
– established generally by regulation or convention in the marketplace concerned

Regular way Purchase or sale of Financial Asset

Trade date Accounting Settlement date Accounting

Trade date = Date that an Settlement date = date

entity commits itself to that an asset is delivered
purchase or sell an asset to or by an entity

 Recognition of an asset to be received and the liability to pay for it

 Derecognition of an asset that is sold, recognition of any gain or loss and
disposal and the recognition of a receivable from the buyer for payment

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Question 1
On 1st Jan, 2019, X ltd. Enters into a contract to purchase a financial asset for Rs. 10 lakhs,
which is its fair value on trade date. On 4th Jan, 2019, the fair value of the asset is Rs. 10.5
lakhs. The amounts to be recorded for the financial asset will depend on how it is
classified and whether trade or settlement date accounting is used. Pass necessary
journal entries.

Solution :
Journal Entries in the Buyers Books – Trade Date Accounting
At AC AT FVTPL AT FVTOCI
1/1/2019
Investments A/c Dr 10,00,000 10,00,000 10,00,000
To Payable A/c 10,00,000 10,00,000 10,00,000
4/1/2019
Payable A/c Dr 10,00,000 10,00,000 10,00,000
To Bank A/c 10,00,000 10,00,000 10,00,000
Investment A/c Dr - 50,000 50,000
To Gain 50,000 (P & L) 50,000 (OCI)

Journal Entries in the Buyers Books – Settlement Date Accounting

At AC AT FVTPL AT FVTOCI
4/1/2019
Investment A/c Dr 10,00,000 10,50,000 10,50,000
To Bank A/c 10,00,000 10,00,000 10,00,000
To Gain A/c - 50,000 (P &L) 50,000 (OCI)

DE-RECOGNITION
Derecognition is the removal of a previously recognized financial asset or financial liability from
an entity’s balance sheet.
• DE-RECOGNITION OF FINANCIAL ASSET
 Asset is derecognized
– when contractual right to cash flow expires or
– when contractual right to cash flow is transferred
 Transferred
– if risk and reward substantially all – transferred – derecognize
– if risk and reward substantially all – retained – keep it i.e. do not derecognize
– if risk and reward substantial all – neither transferred nor retained then

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• if control transferred – derecognize

• if control not transferred – keep it – continuing involvement

Question 2
ST Ltd. assigns its trade receivables to AT Ltd. The carrying amount of the receivables is
Rs.10,00,000. The consideration received in exchange of this assignment is Rs.9,00,000.
Customers have been instructed to deposit the amounts directly in a bank account for
the benefit of AT Ltd. AT Ltd. has no recourse to ST Ltd. in case of any shortfalls in
collections.
State whether the derecognition principles will be applied or not.

Solution :
ST Ltd. Derecognizes the Financial Asset and recognizes Rs.1,00,000, the difference, as an
expense to profit and loss A/c

Question 3
A has given a loan of Rs.10,000 to Mr. B. He transferred a part of that asset at a fair value
of Rs.9,460 and he retained the remaining part whose fair value is rs.3,740. Pass the
journal entries.

Solution :
Fair value Cost
Part transferred 9,460 7167 ---- (10,000 x 9460 / 13200)
Part retained 3,740 2833
Total 13,200 10,000

Journal Entry

Bank A/c Dr 9460

To Loan (FA) 7167
To Gain A/c (P &L) 2293

Question 4
B Ltd has given 10% Loan to X Ltd for Rs.10,00,000. B Ltd has securitized it for 12% rate
of interest with ARCIL. Term of loan is 3 years. B Ltd has only securitized only interest
strip journalize

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Solution :
Fair Value of loan = PV of Interest + PV of Principal
= 1,00,000 × PVIFA (12%, 3 years) + 10,00,000 × PVIF (12%, 3 years)
= 9,51,963

Journal Entry
Bank A/c Dr 9,51,963
Loss A/c Dr 48,037
To Loan (FA) 10,00,000

Question 5
RM Ltd. has lent a sum of Rs.10 lakhs @ 18% per annum for 10 years. The loan had a Fair
value of Rs.12,23,960 at the effective interest rate of 13%.
RM 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.29,000 and Rs.1,84,620 respectively.
The consideration for the transaction was Rs.9,90,000.
The interest component retained included a 2% fee towards collection of principal and
interest that has a Fair Value of Rs.65,160.
You are required to show the journal Entries to record derecognition of the Loan.

Solution :
Fair Value Cost
90% Principal + 14% interest 10,10,340 8,25,468
10 % Principal 29,000
2% interest (Collection fee) 65,160
2% interest 1,19,460
Total 12,23,960 10,00,000

Journal Entry
Bank A/c Dr 9,90,000
To Loan (FA) 8,25,468
To Gain A/c (P &L) 1,64,532

• DE-RECOGNITION OF FINANCIAL LIABILITY

 Derecognition of FL (or part of FL) when and only when obligation
is discharged, cancelled or expires or

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 Exchanged with FL with substantially different terms or substantial modification of

terms then derecognize old liability and recognize new.
 Gain/loss recognize in P&L
 If part derecognized (part repurchased) then allocate carrying amount on the basis
of fair value.

• EXCHANGE OF FINANCIAL LIABILITY INSTRUMENTS

Many times entities re-negotiate terms of their existing debt with the lenders. In India, this
is popularly known as “Strategic Debt Restructuring” or SDR. Sometimes, entities approach
their lenders to renegotiate terms of their debt, when they want to take advantage of the
falling interest rate regime.

In accounting terms, such situations need to be evaluated to determine whether the

original debt is extinguished.

As per Ind AS 109, an exchange between an existing borrower and lender of debt
instruments with substantially different terms shall be accounted for as:
 an extinguishment of the original financial liability, and
 the recognition of a new financial liability.

As per Ind AS 109, the terms are substantially different if:

(A) (B)
Present Value of Present Value of Is greater
– Cash Flows under new – Cash Flows of original than or
terms financial liability equal to
LESS
– any fees paid net of – discounted using the 10% of B
any fees received original effective
– discounted using the interest rate
original effective
interest rate

If an exchange of debt instruments or modification of terms is accounted for as an

extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the
extinguishment.

If the exchange or modification is not accounted for as an extinguishment, any costs or

fees incurred adjust the carrying amount of the liability and are amortised over the
remaining term of the modified liability.

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Substantial modification of existing debt or replacement of

existing debt with new debt having substantially different terms

YES NO
Extinguishment Modification
Accounting Accounting

Costs or fees incurred are Any costs or fees incurred adjust the
recognised as part of the carrying amount of the liability and are
gain or loss on the amortised over the remaining term of
extinguishment the modified liability

EXTINGUISHMENT ACCOUNTING
If the 10% test is passed, principle of “extinguishment accounting” are applied, that is:
• De-recognition of the existing liability
• Recognition of the new or modified liability at its fair value (net of any fees incurred directly
related to the new liability)
• Recognition of a gain or loss equal to the difference between the carrying value of the old
liability and the fair value of the new one
• Recognizing any incremental costs or fees incurred for modification (and not for the new
liability), and any consideration paid or received, in profit or loss
• Calculating a new effective interest rate for the modified liability, which is then used in
future periods.
Fair value of the new or modified liability is estimated based on the expected future cash flows
of the modified liability, discounted using the interest rate at which the entity could raise debt
with similar terms and conditions in the market.

Question 6
On 1 January 2010, XYZ Ltd. issues 10 year bonds for Rs.10,00,000, bearing interest at
10% (payable annually on 31st December each year). The bonds are redeemable on 31
December 2019 for Rs.10,00,000. No costs or fees are incurred. The effective interest
rate is therefore 10%. On 1 January 2015 (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 2021;

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• interest payments are reduced to 5% p.a.;

• the bonds are redeemable on 31 December 2021 for Rs.15,00,000; and
• legal and other fees of Rs.1,00,000 are incurred.
XYZ Ltd. determines that the market interest rate on 1 January 2015 for borrowings on
similar terms is 11%.

Solution :
Step 1 : Substantial Check
A. PV of Cash Flows under New Terms using old “EIR”
= 1,00,000 + 50,000 × PVIFA (10%, 7 years) + 15,00,000 × PVIF (10%, 7 years)
= 11,13,158

B. PV of Cash Flows under Old Terms using old “EIR = Rs. 10,00,000

C. Difference of A – B = 1,13,158 which is 11.32% i.e more than 10% of B, therefore we

should follow extinguishment Accounting.

Step 2 : Extinguishment Accounting

A. Fair Value of New terms under new “EIR”
= 1,00,000 + 50,000 x PVIFA (11%, 7 years) + 15,00,000 x PVIF (11%, 7 years)
= 10,58,097

Journal Entry
Loan (FL) A/c Dr 10,00,000
Loss (P & L ) A/c Dr 58,097
To Loan (FL) A/c 10,58,097

MODIFICATION ACCOUNTING
Ind AS 109 is not clear as to the accounting treatment if the 10% test is failed. Two alternate
approaches are therefore possible:

Approach 1: Recognition of gain or loss on date of modification

Under this approach, the difference between:
• discounted present value of the remaining cash flows of the original financial liability, and
• discounted present value of the remaining cash flows of the new financial liability
• both computed using original effective interest rate,

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• is recognized in profit or loss. In addition, any fees or costs incurred will also be recognized
in profit or loss.

Approach 2: Amortization of gain or loss on date of modification

• Under this approach,
• the fees or costs incurred are netted against the existing liability;
• the effective interest rate is recalculated. This is the rate which discounts the future cash
flows as per modified contractual terms to the adjusted carrying amount mentioned above
• the adjusted effective interest rate is used to determine the amortised cost and interest
expense in future periods

Question 7
On 1 January 20X0, XYZ Ltd. issues 10 year bonds for Rs.1,000,000, bearing interest at
10% (payable annually on 31st December each year). The bonds are redeemable on 31
December 20X9 for Rs.1,000,000. No costs or fees are incurred. The effective interest
rate is therefore 10%. On 1 January 20X5 (i.e. after 5 years) XYZ Ltd. and the bondholders
agree to a modification in accordance with which:
1. no further interest payments are made
2. the bonds are redeemed on the original due date (31 December 20X9) for `
1,600,000;
3. legal and other fees of Rs.50,000 are incurred.

Solution :
Step 1 : Substantial Check
A. PV of Cash Flows under New Terms using old “EIR”
= 50,000 + 16,00,000 x PVIF (10%, 5 years)
= 10,43,474

B. PV of Cash Flows under Old Terms using old “EIR = Rs. 10,00,000

C. Difference of A – B = 43,474 which is 4.35% i.e less than 10% of B, therefore we

should follow Modification Accounting.

Step 2 : Extinguishment Accounting

A. Adjust the fees paid of 50,000 to the amount of Loan
Loan (FL) Dr 50,000
To Bank A/c 50,000

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Note : The New modified Loan Amount shall be 9,50,000. New “EIR” shall be calculated by
using IRR method which comes to 10.99%. Loan will then be accounted “At Amortized
Cost” as per new “EIR” of 10.99%.

DEBT FOR EQUITY SWAPS

A debtor and creditor might renegotiate the terms of a financial liability with the result that the
debtor extinguishes the liability fully or partially by issuing equity instruments to the creditor.
These transactions are sometimes referred to as ‘debt for equity swaps’.

The accounting principles are summarized below:

• An entity shall remove a financial liability (or part of a financial liability) from its balance
sheet when, and only when, it is extinguished in accordance with derecognition principles
mentioned above
• When equity instruments issued to a creditor to extinguish all or part of a financial liability
are recognised initially, an entity shall measure them at the fair value of the equity
instruments issued, unless that fair value cannot be reliably measured.
• If the fair value of the equity instruments issued cannot be reliably measured then the
equity instruments shall be measured to reflect the fair value of the financial liability
extinguished.
• If only part of the financial liability is extinguished, the entity shall assess whether some
of the consideration paid relates to a modification of the terms of the liability that remains
outstanding. If part of the consideration paid does relate to a modification of the terms
of the remaining part of the liability, the entity shall allocate the consideration paid
between the part of the liability extinguished and the part of the liability that remains
outstanding.
• The consideration allocated to the remaining liability shall form part of the assessment of
whether the terms of that remaining liability have been substantially modified. If the
remaining liability has been substantially modified, the entity shall account for the
modification as the extinguishment of the original liability and the recognition of a new
liability.
• The difference between the carrying amount of the financial liability (or part of a financial
liability) extinguished, and the consideration paid, shall be recognised in profit or loss.

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Question 8
JK Ltd. has an outstanding unsecured loan of Rs 90 crores to a bank. The effective interest
rate (EIR) of this loan is 10%. Owing to financial difficulties, JK Ltd. is unable to service
the debt and approaches the bank for a settlement.
The bank offers the following terms which are accepted by JK Ltd.:
• 2/3rd of the debt is unsustainable and hence will be converted into 70% equity
interest in JK Ltd. The fair value of net assets of JK Ltd. is Rs 80 crores.
• 1/3rd of the debt is sustainable and the bank agrees to certain moratorium period
and decrease in interest rate in initial periods. The present value of cash flows as
per these revised terms calculated using original EIR is Rs 25 crores. The fair value
of the cash flows as per these revised terms is Rs 28 crores.
Fair value of the consideration paid is Rs 56 crores (70% of Rs 80 crores) plus Rs 28 crores
i.e. Rs 84 crores.

Solution :
1. 2/3rd of the loan i.e 60 lakhs will be swapped with Equity
Loan (FL) A/c Dr 60
To Equity 56 (80 x 70%)
To Gain A/c (P & L) 4

2. 1/3rd of the loan will be extinguished

Loan (FL) A/c Dr 30
To Loan (FL) A/c 28
To Gain (P & L ) 2

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

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IND AS 32, 107, 109

CHAPTER - 29
FINANCIAL INSTRUMENTS

PART – V

DERIVITIVES AND EMBEDDED DERIVIATIVES

DERIVITIVES
It is a Financial Instrument or any other contract which fulfills all the 3 conditions given below
1. The value changes to the underlying Asset
2. No Initial Investment or Very low Initial Investments
3. Settlement at a future date.
Examples of common derivative contracts and the identified underlying variable:
Interest rate swap Interest Rates
Currency Swap Currency Rates
Commodity Swap Commodity prices
Equity Swap Equity Prices
Credit Swap Credit rating, credit index or credit price
Total Return Swap Total fair value of the reference asset and
interest rates
Purchased or written treasury bond option Interest rates
Purchased or written currency option (call or Currency rates
Put)
Purchased or written commodity option (Call or Commodity Prices
Put)
Purchased or written Stock option (Call or Put) Equity Prices
Interest rate future linked to government debt Interest rates
(treasury futures)
Currency futures Currency rates
Commodity futures Commodity prices
Interest rate forward linked to government debt Interest rates
(treasury forward)
Currency forward Currency rates
Commodity forward Commodity prices
Equity Forward Equity prices

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Question 1
Entity S enters into a Rs.100 crores notional amount five-year pay-fixed, receive-variable
interest rate swap with Counterparty C.
• The interest rate of the variable part of the swap is reset on a quarterly basis to
three-month Mumbai Interbank Offer Rate (MIBOR).
• The interest rate of the fixed part of the swap is 10% p.a.
• Entity S prepays its fixed obligation under the swap of Rs.50 crores (Rs.100 crores
× 10% × 5 years) at inception, discounted using market interest rates
• Entity S retains the right to receive interest payments on the Rs.100 crores reset
quarterly based on three-month MIBOR over the life of the swap.
Does the above contract fall under the definition of derivatives?

Solution :
The contract is regarded as Derivative contract.

EMBEDDED DERIVATIVE
“An embedded derivative is:
• a component of a hybrid contract
• that also includes a non-derivative host
• with the effect that some of the cash flows of the combined instrument vary in a
way similar to a stand-alone derivative.

HOST ENBEDDED HYDRID

CONTRACT DERIVATIVE INSTRUMENT

SEPARATION OF EMBEDDED DERIVATIVES FROM HOST CONTRACT

In certain circumstances, an embedded derivative is required to be separated from the host
contract and accounted for separately as a financial instrument.
For this purpose it’s important to understand
1. If the host contract is a Financial Asset (Equity / Debt) or
2. If the host contract is not a Financial Asset (Sale / Insurance / Purchase / Service)

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3. If a hybrid contract contains a host that is an asset within the scope of this standard then
requirement of classification and measurement be applied to entire hybrid contract. (No
need to separate embedded derivative)
4. If a hybrid contract contains a host that is not an asset within the scope of this standard,
then an embedded derivative should be separated from the host contract and accounted
for as a derivative under this Standard if, and only if:
(a) the economic characteristics and risks of the embedded derivative are not closely
related to the economic characteristics and risks of the host contract;(Factor
affecting risk and return of the host contract is different from the factors affecting
the derivative)
(b) a separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative; and (if the embedded derivative can be meet the
definition of standalone basis)
(c) the hybrid (combined) instrument is not measured at fair value through profit or
loss (i.e., a derivative that is embedded in a financial liability at fair value through
profit or loss is not separated).

Is the contract No Would it be Yes Is it closely No

Split and account

carried
No at fair value derivative on related to host

separately
through P & L standalone basis contract

Yes Yes Yes

Do not split the embedded derivative

Question 2 (Embedded Derivative)

A Lease contract between 2 Indian companies of an Asset in India includes contingent
lease rentals that are depended upon US inflation index. Can the entity inflation linked
feature as closely related.

Solution :
No they are closely related since its related to US inflation.

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Question 3
On 1 January 20X1, ABG Pvt. Ltd., a company incorporated in India enters into a contract
to buy solar panels from A&A Associates, a firm domiciled in UAE, for which delivery is
due after 6 months i.e. on 30 June 20X1
The purchase price for solar panels is US$ 50 million.
The functional currency of ABG is Indian Rupees (INR) and of A&A is Dirhams.
The obligation to settle the contract in US Dollars has been evaluated to be an embedded
derivative which is not closely related to the host purchase contract.
Exchange rates:
1. Spot rate on 1 January 20X1: USD 1 = INR 60
2. Six-month forward rate on 1 January 20X1: USD 1 = INR 65
3. Spot rate on 30 June 20X1: USD 1 = INR 66

Solution :
Journal Entries
1. Loss on Derivative A/c Dr 5
To Derivative Liability A/c 5
2. Inventory A/c Dr 325
To Trade Payable A/c 325
3. Derivative liability A/c Dr 5
To Trade Payable 5

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 32,107,109 – Financial Instruments 303

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 32, 107, 109

CHAPTER - 29
FINANCIAL INSTRUMENTS

PART – VI

HEDGE ACCOUNTING IS AT THE OPTION AT THE MANAGEMENT

HEDGING
• Hedge refer to actions designed to reduce future uncertainty of cash flows or value of
Assets, liabilities etc
• A forward exchange contract to buy foreign currency for future payments in foreign
currency is an example of hedge
• The hedge accounting refers to recognition of changes in values of hedged item and
financial instrument used for hedging in the same period.

Example :
ABC Ltd. an Indian Company enters into a contract to acquire new machinery from AI, an
American company. The cost of the machinery is $ 50,000 and payable in 1 years time. ABC Ltd.
functional currency is INR and the current exchange rate is Rs/$ 50.
ABC Ltd. faces the exchange risk associated with this contract. To eliminate this risk, ABC Ltd
enters into a forward contract to acquire $ 50,000 in 1 year at the current exchange rate.
In 1 years time when ABC Ltd. has to pay $ 50,000 to AI, pay Rs.25,00,000 for the machinery
irrespective of whether the exchange rate has moved up or down.
This is known as hedging.

HEDGED ITEM
• Hedged item is an
o Asset
o Liability or
o Transaction
• That exposes an entity to risk of changes in fair value or future cash flows and is designated
as being hedged.
• Hedged items
o Recognised Asset

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o Recognised Liability
o Unrecognised firm commitment
o Highly probable forecast transaction
o Net investment in a foreign operations

HEDGING INSTRUMENT
A hedging instrument is a Financial instrument, mostly a derivative, designated for hedging a
specific item of asset, liability etc.
Note : Derivatives not regarded as hedge instruments are treated as held for trading instruments.

HEDGE ACCOUNTING
The objective of hedge accounting is to represent, in the financial statements, the effect of an
entity’s risk management activities that use financial instruments to manage exposures arising
from particular risks that could affect profit or loss (or other comprehensive income, in the case
of investments in equity instruments at FVTOCI).
Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values
of the hedging instrument and the hedged item.

Hedging relationships are of three types:

(a) Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or
liability or an unrecognised firm commitment, or an identified portion thereof, that is
attributable to a particular risk and could affect profit or loss.
(b) Cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is attributable
to a particular risk associated with a recognised asset or liability (such as all or some future
interest payments on variable rate debt) or a highly probable forecast transaction and (ii)
could affect profit or loss.
(c) Hedge of a net investment in a foreign operation as defined in IndAS 21.
A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair
value hedge or as a cash flow hedge.

Items and their hedging

Item being Hedged Fair Value Hedge Cash Flow Hedge
1 Recognised Asset Yes Yes
2 Recognised Liability Yes Yes
3 Unrecognized firm commitment Yes No
4 Foreign currency risk of a unrecognized firm Yes Yes
commitment

IND AS 32,107,109 – Financial Instruments 305

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5 Highly probable forecast transaction No Yes

Hedging: Fair value Hedge or Cash flow hedge

Risk Types Example Reason
Fluctuation in Fair value : Investment in Fixed Rate With change in Market interest rate
Bond Bonds interest will not change but its
market value will change
Fluctuation in cash flows : Investment in Variable With change in Market interest rate
Rate Bond Bond interest (i.e. cash flow) will
change & not the value of bond.

Fair Value Hedges

Hedged Item Hedging Instrument
(Derivative)
1 Hedging instrument - Always at P & L
2 FA measured at AC Shall be revalued at Fair Value P & L
and difference shall be
recorded through P & L
3 FA asset (Debt measured Shall be revalued at Fair Value P & L
at OCI) and difference shall be
recorded through P & L
4 FA asset (Equity OCI Derivative shall be
measured at OCI) recorded through OCI
5 Unrecognized Firm Shall be remeasured at Fair P & L
commitment Value and difference shall be
recorded through P & L

Question 1
RM Ltd has Rs. as its functional currency. It has chosen to treat all hedges of foreign
currency risk associated with firm commitment as fair value hedges. In jan 2017, it
contracts which the US supplier to purchase a machinery. The machine will be delivered
in july 2017 and the contracted price is $ 1000. RM Ltd contracts with the bank to
purchase $ 1000 in july at a fwd rate of Rs/$ 60. If the Fair value of fwd contract at the
end 31st March 2017, is Rs. 3000 positive to RM, on delivery Rs. 5000 positive to RM.
Spot exchange rate in july is Rs/$ 65. Pass journal Entries

306 IND AS 32,107,109 – Financial Instruments

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Solution :
Hedged item – firm commitment to purchase machinery
Hedging instrument – Forward contract
Date Hedged Item Hedging instrument
Jan 2017 No Entry No Entry (FV is Nil)
31/3/2017 Loss 3000 FC (FA) 3000
Remeasurement To FC (FL) 3000 To Gain (P&L) 3000
July 2017 Loss 2000 FC (FA) 2000
Remeasurement To FC (FL) 2000 To Gain (P&L) 3000
July 2017 Machinery 60000 Bank A/c 5000
Settlement FC (FL) 5000 To FC (FA) 5000
To Bank 65000

Question 2
Entity A has originated a 5% fixed rate loan asset that is measured at amortized cost
($100,000). Because Entity A is considering whether to securitize the loan asset (i.e., to
sell it in a securitization transaction), it wants to eliminate the risk of changes in the fair
value of the loan asset. Thus on January 1, 2006, Entity A enters into a pay-fixed, receive-
floating interest rate swap to convert the fixed interest receipts into floating interest
receipts and thereby offset the exposure to changes in a fair value. Entity A designates
the swap as a hedging instrument in a fair value hedge of the loan asset. Market interest
rates increase. At the end of the year, Entity A receives $5,000 in interest income on the
loan and $200 in net interest payments on the swap. The change in the fair value of the
interest rate swap is an increase of $1,300. At the same time, the fair value of the loan
asset decreases by $1,300.
Required :
• Prepare the appropriate journal entries at the end of the year.
• Assume that all conditions for hedge accounting are met.

Solution :
Hedged item – 5% fixed loan Asset
Hedging instrument – Interest rate swap
Date Hedged Item Hedging instrument
Jan 2017 Opening balance –
5% Loan Asset $1,00,000
Jan 2017 No Entry No Entry – FV is Nil
March 2017 Loss 1300 Swap (FA) 1300

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To Loan Asset 1300 To Gain (P&L) 1300

March 2017 Bank A/c Dr 5000
To Interest (P&L) 5000
Bank A/c Dr 1300
To Interest (P&L) 1300

Question 3
During year 1 an investor purchases a Equity security for Rs. 10 million. Based on IND AS
109 Principle it is classified as FVTOCI. At the end of Year 1, the FV of the asset is Rs 11
million. To Protect this value the investor enters into a Hedge by acquiring a Derivative
with FV of NIL. At the end of Year 2, the derivative has a fair value 0.5 million and the
debt security has a corresponding decline in Fair Value. Pass journal Entries for the FV
Hedge.

Solution :
Hedged item – Fixed Rate Debt classified at FVTOCI
Hedging instrument – Derivative
Date Hedged Item Hedging instrument
Year 1 Debt (FA) 10 NA
To Bank A/c 10
Year end 1 Debt (FA) 1 No Entry – FV is Nil
To Gain (OCI) 1
Year end 2 Loss (OCI) 0.5 FA 0.5
To Debt (FA) 0.5 To Gain (OCI) 0.5

Question 4
Taking data from question no 106, assume that we have purchased a debt instrument
which is measured at OCI. Pass journal entries.

Solution :
Hedged item – Fixed Rate Debt classified at FVTOCI
Hedging instrument – Derivative
Date Hedged Item Hedging instrument
Year 1 Debt (FA) 10 NA
To Bank A/c 10
Year end 1 Debt (FA) 1 No Entry – FV is Nil
To Gain (P&L) 1

308 IND AS 32,107,109 – Financial Instruments

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Year end 2 Loss (P&L) 0.5 FA 0.5

To Debt (FA) 0.5 To Gain (P&L) 0.5

Cash Flow Hedges

1. Hedged item is highly probable future cash flows – therefore they are not be accounted
until the transaction takes place.
2. Hedging instrument is derivative
3. We are required to understand if the hedge is fully effective or it does have ineffective
portion
4. Hedge is fully effective is the cumulative change in hedging instrument is equal to or less
than the cumulative change in hedged item.
5. The portion of change in hedging instrument that exceeds the change in hedged item is
referred is ineffective portion.
6. We must remember that the hedge can never be fully ineffective.
7. The effective portion of hedge is taken to OCI and the ineffective portion is taken directly
to Profit and loss A/c.
8. When the forecast transaction does take place, the cumulative OCI is adjusted against the
transaction.
9. When the forecast transaction is no longer expected to occur the same should be
recognised in the statement of profit and loss.

Question 5
On 4th Jan, 2012, R Ltd. has forecasted sale of 1 million of chemical on 15th Dec, 2012 to
M Ltd. in UK. On 4th Jan 2012, R Ltd designates, the cash flow of forecast sale as the
Hedged Item and inters into Forward exchange contract to sale 4 million pound based in
the forecast receipt (1 million x pound 4 per Kg). Forward contract locks the value of the
pound to be received @ Rs/Pound 80. At the inception at the FV of the derivative is Nil.
On 30th June, 2012 the FV of Forward contract is Rs. -1,00,000. On 15st Dec, 2012, the
transaction occurred as expected. The FV of Forward contract is -1,50,000 as Rs
continued to weaken against pound. Pass journal Entries

Solution :
Hedged item – Highly probable forecast sale
Hedging instrument – Forward Contract
Date Hedged Item Hedging instrument
th
4 Jan No Entry No Entry (FV is Nil)
30th June No Entry Loss (OCI) 1,00,000

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To FC (FL) 1,00,000
15th Dec No Entry Loss (OCI) 50,000
To FC (FL) 50,000
15th Dec Bank A/c 32,01,50,000 FC (FL) 1,50,000
To sale 32,01,50,000 To Bank A/c 1,50,000
Sales A/c Dr 1,50,000
To Loss (OCI) 1,50,000

Question 6
On 30/9/2017, Entity A Hedges the anticipated sales 24 tons of PULP on 1/3/2018 by
entering into a Forward contract. The contract requires net settlement in cash,
determined as the difference between the future spot price of PULP on a specified
commodity exchange and Rs.1000.
Entity A expects to sale the PULP in the different local market. Entity A determines that
the Forward contract is the effective Hedge.
On 31st Dec, the spot price of PULP has increased both in the local market and the
exchange. The increase in local market exceeds the increase in commodity exchange as
a result the present value of Expected cash inflow from the sale on the local market is
Rs.1100. The FV of forward contract is – Rs.80. Pass journal Entry.

Solution :
Hedged item – Highly probable forecast sale
Hedging instrument – Forward Contract

Loss (OCI) A/c 80

To FC (FL) 80

Note : 1. Since the change Forward (80) is less than the change in hedge item (100) – the
hedge is fully effective and therefore the difference shall be recorded through OCI.

Question 7
Assume above data, consider on 31/12 the spot price of pulp increase in both the local
market and the exchange. The increase in commodity exchange exceeds the local
market. The price is expected to be 1080 in the local market and the Forward contract
the FV is 100. Pass journal entries.

310 IND AS 32,107,109 – Financial Instruments

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Solution :
Hedged item – Highly probable forecast sale
Hedging instrument – Forward Contract

Loss (OCI) A/c 80

Loss (P&L) A/c 20
To FC (FL) 100

Note : 1. Since the change Forward (100) is more than the change in hedge item (80) – the
hedge is fully effective to the extent of 80 and ineffective for 20. The ineffective portion
should be transferred directly to P&L.

Hedges of a Net Investment

Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is
accounted for as part of the net investment (see Ind AS 21), should be accounted for similarly to
cash flow hedges:
(a) the portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge should be recognised directly in the OCI as Foreign currency translation
reserve account (It should be recognised in the statement of profit and loss on disposal of
the foreign operation); and
(b) the portion of the gain or loss on the hedging instrument that is determined to be an
ineffective hedge should be recognised in the statement of profit and loss.

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

IND AS 32,107,109 – Financial Instruments 311

[CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 101
CHAPTER - 31
FIRST TIME ADOPTION

CHAPTER DESIGN

1. INTRODUCTION
2. OBJECTIVE
3. DEFINITIONS
4. SCOPE
5. EXCEPTIONS / MANDATORY
6. EXEMPTIONS / OPTIONAL

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1. INTRODUCTION :
Ind AS 101 prescribes the accounting principles for first - time adoption of Ind AS.
It lays down various ‘transition’ requirements when a company adopts Ind AS for the first time,
i.e., a move from Accounting Standards (Indian GAAP) to Ind AS.
Conceptually, the accounting under Ind AS should be applied retrospectively at the time of
transition to Ind AS.
However, to ease the process of transition, Ind AS 101 has given certain exemptions from
retrospective application of Ind AS.

2. OBJECTIVE :

EXEMPTIONS

MANDATORY VOLUNTARY

Company may elect not to

Company is not allowed to
apply certain requirements of
appply IND AS retrospectively
IND AS retrospectively

3. DEFINITIONS :
1. First Ind AS Financial Statements :
The first annual financial statements in which an entity adopts Ind AS, by an explicit and
unreserved statement of compliance with Ind AS.
This means compliance with ALL Ind-AS, partial compliance is not enough to make entity
Ind AS complian

2. First – time adopter :

An entity that presents its first Ind AS financial statements, that entity is known as first
time adopter

3. Opening Ind As Balance sheet :

An entity’s balance sheet at the date of transition to Ind AS

4. Date of Transition to Ind As :

The beginning of the earliest period for which an entity presents full comparative
information under Ind ASs in first Ind AS Financial statements.

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5. First Ind AS reporting period :

The latest reporting period covered by an entity’s first Ind AS financial statements

EXAMPLE :
XYZ Ltd. is a BSE listed company having net worth of Rs.100 cr. So XYZ Ltd. has to prepare
financial statements as per Ind AS from 1st April 2019.
In this example,
• First Ind AS Financial Statements would be the statement for period ending as on
31.03.2020.
• First –time adopter- “XYZ Ltd” with effect from 01.04.2019
• Opening Ind AS Balance sheet – 01.04.2018
• Date of Transition to Ind AS-01.04.2018
• First Ind AS reporting period-01.04.2019 to 31.03.2020

6. Deemed Cost :
An amount used as a surrogate for cost or depreciated cost at a given date. Subsequent
depreciation or amortisation assumes that the entity had initially recognised the asset or
liability at the given date and that its cost was equal to the deemed cost. Previous

7. GAAP :
The basis of accounting that a first-time adopter used for its statutory reporting
requirements in India immediately before adopting Ind AS. For instance, companies
required to prepare their financial statements in accordance with Section 133 of the
Companies Act, 2013, shall consider those financial statements as previous GAAP financial
statements.

4. SCOPE :
Ind AS 101 Applies to:
• First Ind AS financial statements
• Each interim financial report for part of the period covered by its first Ind AS financial
statements.
However, it does not apply to:
• Changes in accounting policies made by an entity that already applied Ind AS.

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Question 1
E Ltd. is required to first time adopt Indian Accounting Standards (Ind AS) from April 1,
20X1. The management of E Ltd. has prepared its financial statements in accordance with
Ind AS and an explicit and unreserved statement of compliance with Ind AS has been
given. However, the there is a disagreement on application of one Ind AS. Can such
financial statements of E Ltd. be treated as first Ind AS financial statements?

Solution :
YES, such financial statements should be treated as first IND AS financial statements.

5. EXCEPTIONS (MANDATORY) :
1. ESTIMATES
2. DEREOGNITION OF FINANCIAL ASSETS AND LIABILITIES
3. HEDGE ACCOUNTING
4. NON – CONTROLLING INTEREST
5. CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS
6. IMPAIRMENT OF FINANCIAL ASSETS
7. EMBEDDED DERIVATIVES
8. GOVERNMENT LOANS

1. ESTIMATES :
An entity’s estimates in accordance with Ind AS at the date of transition to Ind AS shall be
consistent with estimates made for the same date in accordance with previous GAAP (after
adjustments to reflect any difference in accounting policies), unless there is objective
evidence that those estimates were in error.

2. Derecognition of Financial Assets and Liabilities :

A first-time adopter shall apply the derecognition requirements in Ind AS 109 prospectively
for transactions occurring on or after the date of transition to Ind AS.
Example If a first time adopter derecognised non-derivative financial assets or non-
derivative financial liabilities in accordance with its previous GAAP as a result of a
transaction that occurred before the date of transition to Ind AS, it shall not recognise
those assets and liabilities in accordance with Ind AS (unless they qualify for recognition as
a result of a later transaction or event).

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3. Hedge Accounting :
At the date of transition to Ind AS an entity shall: (a) measure all derivatives at fair value;
and (b) eliminate all deferred losses and gains arising on derivatives that were reported in
accordance with previous GAAP as if they were assets or liabilities.
An entity shall not reflect in its opening Ind AS Balance Sheet a hedging relationship of a
type that does not qualify for hedge accounting in accordance with Ind AS 109.
Transactions entered into before the date of transition to Ind ASs shall not be
retrospectively designated as hedges.

4. Non – controlling interest :

A first-time adopter shall apply the following requirements of Ind AS 110 prospectively
from the date of transition to Ind AS:
a) Total comprehensive income is attributed to the owners of the parent and to the
noncontrolling interests even if this results in the non-controlling interests having a
deficit balance;
b) Accounting for changes in the parent’s ownership interest in a subsidiary that do
not result in a loss of control; and
c) Accounting for a loss of control over a subsidiary, and the related requirements of
Ind AS 105, Non-current Assets Held for Sale and Discontinued operations.

Question 2
Ind AS requires allocation of losses to the non-controlling interest, which may ultimately
lead to a debit balance in non-controlling interests, even if there is no contract with the
noncontrolling interest holders to contribute assets to the Company to fund the losses.
Whether this adjustment is required or permitted to be made retrospectively?

Solution :
Ind AS 101 contains a mandatory exception that prohibits retrospective allocation of
accumulated profits between the owners of the parent and the NCI. In case an entity elects
not to restate past business combinations, the previous GAAP carrying value of NCI is not
changed other than for adjustments made (remeasurement of the assets and liabilities
subsequent to the business combination) as part of the transition to Ind AS. As such, the
carrying value of NCI in the opening Ind AS balance sheet cannot have a deficit balance on
account of recognition of the losses attributable to the minority interest, which was not
recognised under the previous GAAP as part of NCI in the absence of contract to contribute
assets to fund such a deficit.

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5. Classification and Measurement of Financial Assets :

An entity shall assess whether a financial asset meets the conditions of Ind AS 109 on the
basis of the facts and circumstances that exist at the date of transition to Ind AS.

6. Impairment of Financial Assets :

An entity shall apply the impairment requirements of Ind AS 109 retrospectively subject to
• At the date of transition to Ind AS, an entity shall use reasonable and supportable
information that is available without undue cost or effort to determine the credit
risk at the date that financial instruments were initially recognised.
• An entity is not required to undertake an exhaustive search for information when
determining, at the date of transition to Ind AS, whether there have been significant
increases in credit risk since initial recognition.
• If, at the date of transition to Ind ASs, determining whether there has been a
significant increase in credit risk since the initial recognition of a financial
instrument would require undue cost or effort, an entity shall recognise a loss
allowance at an amount equal to lifetime expected credit losses at each reporting
date until that financial instrument is derecognised, unless that financial instrument
is low credit risk at a reporting date

7. Embedded Derivatives :
A first-time adopter shall assess whether an embedded derivative is required to be
separated from the host contract and accounted for as a derivative on the basis of the
conditions that existed at the later of the date it first became a party to the contract and
the date a reassessment is required by Ind AS 109.

8. Government Loans :
• A first-time adopter shall classify all government loans received as a financial
liability or an equity instrument in accordance with Ind AS 32, Financial Instruments:
Presentation.
• A first-time adopter shall apply the requirements in Ind AS 109, Financial
Instruments, and Ind AS 20, Accounting for Government Grants and Disclosure of
Government Assistance, prospectively to government loans existing at the date of
transition to Ind AS and shall not recognise the corresponding benefit of the
government loan at a below-market rate of interest as a government grant.
• An entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively
to any government loan originated before the date of transition to Ind AS, provided

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that the information needed to do so had been obtained at the time of initially
accounting for that loan.

6. EXEMPTIONS (OPTIONAL) :
1. BUSINESS COMBINATION
2. SHARE BASED PAYMENT TRANSACTIONS
3. DEEMED COST OF PPE AND INTANGIBLE ASSETS
4. CUMULATIVE TRANSLATION DIFFERENCE
5. INVESTMENT IN SUBSIDIARIES, JOINT VENTURE AND ASSOCIATES
6. COMPOUND FINANCIAL INSTRUMENTS
7. FAIR VALUE MEASUREMENT OF FA AND FL
8. DECOMMISIONING LIABILITY INCLUDED IN PPE
9. NON CURRENT ASSETS HELD FOR SALE AND DISCOUNTINUED OPERATIONS

1. Business Combination :
Ind AS 103 need not be applied to combinations before date of transition. But, if one
combination is restated, all subsequent combinations are restated. When the exemption
is used
➢ There won’t be any change in classification
➢ Assets and liabilities of past combination measured at carrying amount (deemed
cost)
➢ Assets and liabilities measured at fair value restated at date of transition- adjusted
retained earnings

Question 3
A Ltd. has a subsidiary B Ltd. On first time adoption of Ind AS by B Ltd., it availed the
optional exemption of not restating its past business combinations. However, A Ltd. in
its consolidated financial statements has decided to restate all its past business
combinations. Whether the amounts recorded by subsidiary need to be adjusted while
preparing the consolidated financial statements of A Ltd. considering that A Ltd. does
not avail the business combination exemption? Will the answer be different if the A Ltd.
adopts Ind AS after the B Ltd?

Solution :
As per Ind AS 101: “A first-time adopter may elect not to apply Ind AS 103 retrospectively
to past business combinations (business combinations that occurred before the date of
transition to Ind AS). However, if a first-time adopter restates any business combination to

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comply with Ind AS 103, it shall restate all later business combinations and shall also apply
Ind AS 110 from that same date.

2. Share Based Transactions :

Apply Ind AS 102, Share-based Payment, to equity instruments that vested before date of
transition to Ind AS. However, a first-time adopter may apply Ind AS 102 to equity
instruments, if it has disclosed publicly the fair value of those equity instruments,
determined at the measurement date.

3. Deemed Cost For PPE And Intangible Assets :

If an entity uses fair value in its opening Ind AS Balance Sheet as deemed cost for an item
of property, plant and equipment or an intangible asset, the entity’s first Ind AS financial
statements shall disclose, for each line item in the opening Ind AS Balance Sheet: (a) the
aggregate of those fair values; and (b) the aggregate adjustment to the carrying amounts
reported under previous GAAP
A first-time adopter may elect to use a previous GAAP revaluation of an item of property,
plant and equipment 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 ASs,
adjusted to reflect, for example, changes in a general or specific price index.
For Investment Property Ind AS 40, Investment Property permits only the cost model.
Therefore, option of availing fair value as deemed cost for investment property is not
available for first time adopters of Ind AS for its financial statements.

4. Cumulative Translation Difference :

No need to:
• Recognise some translation differences in other comprehensive income.
• Reclassify cumulative translation differences for foreign operation from entity to
profit or loss as part of gain or loss on its disposal If first time adopter uses this
exemption:
• Cumulative translation differences set to zero for all foreign operations.
• Gain/ loss on subsequent disposal of a foreign operation shall exclude these
differences that arose before transition A first time adopter may continue the policy
adopted for accounting for exchange differences arising from long term monetary
foreign currency items, as per previous GAAP

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5. Investment in Subsidiaries, Joint Venture and Associate :

It is measured at cost, the cost may be :
• Cost determined in accordance with Ind AS 27 or
• Deemed cost (which may be fair value or previous GAAP carrying amount.

6. Compound Financial Instrument :

A first time adopter need not split the compound financial instruments into separate
liability and equity component, if liability component not outstanding as at transition date.

7. Fair Value Measurement of Financial Assets or Financial Liabilities :

An entity may apply requirement of Ind AS 109 prospectively to transactions entered into
on or after the date of transition.

8. Decommissioning Liabilities Included in Property Plant Equipment :

An entity need not comply with the requirement for changes in such liabilities that
accounted before the date of transition. However, entity may measure liability as at the
transition date as per Ind AS 37 and recognise its effect.

9. Non-current Assets held for Sale and Discounted Operations :

A first time adopter can:
• Measure noncurrent assets held for sale or discontinued operation at the lower
carrying value and fair value less cost to sell at the date of transition to Ind AS in
accordance with Ind AS 105; and
• Recognize directly in retain earnings any difference between that amount and the
carrying amount of those assets at the date of transition to Ind AS determined under
the entity’s previous GAA

Thanks ….

[email protected]

www.rahulmalkan.com

rahulmalkan

rahulmalkan

rahulmalkan79

320 IND AS 101 – First Time Adoption

 [CA – Final – Financial Reporting] | Prof.Rahul Malkan

IND AS 115
CHAPTER - 32
REVENUE FROM
CONTRACT WITH CUSTOMER

CHAPTER DESIGN

1. INTRODUCTION
2. STEP MODEL
3. SPECIAL ISSUES

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1. INTRODUCTION :
The world we knew has changed and is changing as we still speak. The older days of doing business
has changed. The way buy and sell used to take place changed. Let us look at some new ways of
business
1. Maruti offering free services along with the car.
2. Exchange offers – buy new product at discounted price when exchanged with old product.
3. Discounts coupons / cash backs / bundled goods and services / return offers and so on
We deal with all such issues we needed a comprehensive standard.

STEP MODEL :

Identify the contract with customer

Identify the performance obligation

Determine the transaction price

Allocate the transaction price to the performance
obligation
Recognise revenue when or as an entity satisfies
performance obligation

Step 1 : IDENTIFY THE CONTRACT WITH CUSTOMER :

DEFINITION
A contract is an agreement between two or more parties that creates enforceable rights and
obligations. Enforceability of the rights and obligations in a contract is a matter of law. None of
the parties have right to unilaterally cancel the wholly unperformed contract without paying
consideration. Contracts can be written, oral, or implied by an entity’s customary business
practices.

CRITERIA OF RECOGNISING THE CONTRACT

An accounting contract exists only when an arrangement with a customer meets each of the
following five criteria:

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1. The parties have approved (in writing, orally or in accordance with other customary
business practices) the contract and are committed to perform their contractual
obligations
2. The entity can identify each party’s rights regarding the goods or services to be transferred
3. The entity can identify the payment terms for the goods or services to be transferred
4. The contract has commercial substance (i.e. the risk, timing or amount of the entity’s
future cash flows is expected to change as a result of the contract), and
5. It is probable that the entity will collect substantially all of the consideration to which it
expects to be entitled.

CONTRACT TERM :
Some contracts with customers may have no fixed duration and can be terminated or modified
by either party at any time. Other contracts may automatically renew on a periodic basis that is
specified in the contract. An entity shall apply this Standard to the duration of the contract (i.e.
the contractual period) in which the parties to the contract have present enforceable rights and
obligations.

Question 1
A gymnasium enters into a contract with a new member to provide access to its gym for
a 12month period at Rs 4,500 per month. The member can cancel his or her membership
without penalty after three months. Specify the contract term.

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

COMBINING CONTRACTS :
Two or more contracts may need to be accounted for as a single contract if they are entered into
at or near the same time with the same customer (or with related parties), and if one of the
following conditions exists:
1. The contracts are negotiated as a package with a single commercial objective
2. The amount of consideration paid in one contract depends on the price or performance in
the other contract; or
3. The goods or services promised in the contract are a single performance obligation.

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CONTRACT MODIFICATION :
The modification guidance under Ind AS 115 requires an entity to Identify if a contract has been
modified. Determine if the
1. modification results in a separate contract,
2. a termination of the existing contract and the creation of a new contract, or
3. a continuation of the existing contract.

Question 2
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 :
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 ` 950 per product for the 30 products in the new contract.

Step 2 : IDENTIFY THE PERFORMANCE OBLIGATION :

Definition :
Performance obligations has been defined as a promise in a contract with a customer to transfer
to the customer either:
1. good or service (or a bundle of goods or services) that is distinct; or
2. a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer

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Question 3
An entity provides broadband services to its customers along with voice call service.
Customer buys modem from the entity. However, customer can also get the connection
from the entity and modem from any other vendor. The installation activity requires
limited effort and the cost involved is almost insignificant. It has various plans where it
provides either broadband services or voice call services or both. Are the performance
obligations under the contract distinct?

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

Question 4
An entity enters into a contract to build a power plant for a customer. The entity will be
responsible for the overall management of the project including services to be provided
like engineering, site clearance, foundation, procurement, construction of the structure,
piping and wiring, installation of equipment and finishing. Determine how many
performance obligations does the entity have?

Solution :
The goods and services are not distinct. The entity accounts for all of the goods and
services in the contract as a single performance obligation.

Customers option to purchase additional goods and services :

Retail and consumer products entities frequently give certain customers the option to purchase
additional goods or services. These options come in many forms, including sales incentives (e.g.,
coupons with a limited distribution, competitor price matching programs, gift cards, customer
award credits (e.g., loyalty or reward programs).

Question 5
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?

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Solution :
Performance Obligation Stand – Alone Selling Price
Product A Rs.1000
Discount voucher (500 x 30% x 80%) Rs.120
Total Rs.1120

Performance Obligation Allocated Transaction Price

Product A 1000 / 1120 x 1000 890
Discount Voucher 120 / 1120 x 1000 110
Total Rs.1000

The entity allocates Rs.890 to Product A and recognizes revenue for Product A when
control transfers. The entity allocates Rs.110 to the discount voucher and recognizes
revenue for the voucher when the customer redeems it for goods or services or when it
expires.

Consignment Arrangements :
Revenue generally would not be recognized for consignment arrangements when the goods are
delivered to the consignee because control has not yet transferred. Revenue is recognized when
the entity has transferred control of the goods to the end consumer.

Question 6
Manufacturer M enters into a 60-day consignment contract to ship 1,000 dresses to
Retailer A’s stores. Retailer A is obligated to pay Manufacturer M Rs 20 per dress when
the dress is sold to an end customer.
During the consignment period, Manufacturer M has the contractual right to require
Retailer A to either return the dresses or transfer them to another retailer.
Manufacturer M is also required to accept the return of the inventory. State when the
control is transferred.

Solution :
Manufacturer M determines that control of the dresses transfers when they are sold to an
end customer i.e. when Retailer A has an unconditional obligation to pay Manufacturer M
and can no longer return or otherwise transfer the dresses. Manufacturer M recognizes
revenue as the dresses are sold to the end customer.

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Principal and Agent :

When the entity is the principal in the arrangement, the revenue recognized is the gross amount
to which the entity expects to be entitled. When the entity is acting as an agent, the revenue
recognized is the net amount i.e. the amount, entity is entitled to retain in return for its services
under the contract.

Step 3 : DETERMINING THE TRANSACTION PRICE :

Definition :
“The transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excluding amounts collected
on behalf of third parties (for example, some sales taxes).”

Variable Consideration :
An amount of consideration can vary because of discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, or other similar items. An entity shall estimate an
amount of variable consideration by using either of the following methods
1. The expected value - the expected value is the sum of probability-weighted amounts in a
range of possible consideration amounts.
2. The most likely amount - the most likely amount is the single most likely amount in a range
of possible consideration amounts

Question 7
XYZ Limited enters into a contract with a customer to build a sophisticated machinery.
The promise to transfer the asset is a performance obligation that is satisfied over time.
The promised consideration is Rs.2.5 crores, but that amount will be reduced or
increased depending on the timing of completion of the asset. Specifically, for each day
after 31 March 20X1 that the asset is incomplete, the promised consideration is reduced
by Rs.1 lakh. For each day before 31 March 20X1 that the asset is complete, the
promised consideration increases by Rs.1 lakh.
In addition, upon completion of the asset, a third party will inspect the asset and assign
a rating based on metrics that are defined in the contract. If the asset receives a specified
rating, the entity will be entitled to an incentive bonus of Rs 15 lakhs. Determine the
transaction price.

Solution :
A. the entity decides to use the expected value method to estimate the variable
consideration associated with the daily penalty or incentive (i.e. Rs.2.5 crores, plus

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or minus Rs.1 lakh per day). This is because it is the method that the entity expects
to better predict the amount of consideration to which it will be entitled.
B. the entity decides to use the most likely amount to estimate the variable
consideration associated with the incentive bonus. This is because there are only
two possible outcomes (Rs.15 lakhs or Rs.Nil) and it is the method that the entity
expects to better predict the amount of consideration to which it will be entitled.

Sale with right to return :

To account for the transfer of products with a right of return (and for some services that are
provided subject to a refund), an entity shall recognize all of the following:
1. revenue for the transferred products in the amount of consideration to which the entity
expects to be entitled (therefore, revenue would not be recognized for the products
expected to be returned).
2. a refund liability; and
3. an asset (and corresponding adjustment to cost of sales) for its right to recover products
from customers on settling the refund liability.

Warranties :
It is common for an entity to provide (in accordance with the contract, the law or the entity’s
customary business practices) a warranty in connection with the sale of a product (whether a
good or service). Some warranties provide a customer with assurance that the related product
will function as the parties intended because it complies with agreed-upon specifications. Other
warranties provide the customer with a service in addition to the assurance that the product
complies with agreed upon specifications.

Financing Component :
In determining the transaction price, an entity shall adjust the promised amount of consideration
for the effects of the time value of money if the timing of payments agreed to by the parties to
the contract (either explicitly or implicitly) provides the customer or the entity with a significant
benefit of financing the transfer of goods or services to the customer.

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Question 8
NKT Limited sells a product to a customer for Rs 121,000 that is payable 24 months after
delivery. The customer obtains control of the product at contract inception. The contract
permits the customer to return the product within 90 days. The product is new and the
entity has no relevant historical evidence of product returns or other available market
evidence.
The cash selling price of the product is Rs.100,000 which represents the amount that the
customer would pay upon delivery for the same product sold under otherwise identical
terms and conditions as at contract inception. The entity's cost of the product is
Rs.80,000. The contract includes an implicit interest rate of 10 per cent (i.e. the interest
rate that over 24 months discounts the promised consideration of Rs.121,000 to the cash
selling price of Rs.100,000).
Analyse the above transaction with respect to its financing component.

Solution :
The contract includes a significant financing component. This is evident from the difference
between the amount of promised consideration of Rs.121,000 and the cash selling price
of Rs.100,000 at the date that the goods are transferred to the customer.
The contract includes an implicit interest rate of 10 per cent (i.e. the interest rate that over
24 months discounts the promised consideration of Rs.121,000 to the cash selling price of
Rs.100,000). The entity evaluates the rate and concludes that it is commensurate with the
rate that would be reflected in a separate financing transaction between the entity and its
customer at contract inception.

Question 9
XYZ Limited, a personal computer (PC) manufacturer, enters into a contract with a
customer to provide global PC support and repair coverage for three years along with its
PC. The customer purchases this support service at the time of buying the product.
Consideration for the service is an additional Rs 3,000. Customers electing to buy this
service must pay for it upfront (i.e. a monthly payment option is not available). Analyze
whether there is any significant financing component in the contract or not.

Solution :
In assessing whether or not the contract contains a significant financing component, XYZ
Limited determines that the payment terms were structured primarily for reasons other
than the provision of finance to the entity. XYZ Limited charges a single upfront amount
for the services because other payment terms (such as a monthly payment plan) would

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affect the nature of the risks it assumes to provide the service and may make it
uneconomical to provide the service. As a result of its analysis, XYZ Limited concludes that
there is not a significant financing component.

Non cash Consideration :

To determine the transaction price for contracts in which a customer promises consideration in a
form other than cash, an entity shall:
1. In the first instance, measure the non-cash consideration (or promise of non-cash
consideration) at fair value.
2. And, if it cannot reasonably estimate the fair value of the non-cash consideration, it shall
measure the consideration indirectly by reference to the stand-alone selling price of the
goods or services promised to the customer (or class of customer) in exchange for the
consideration.

Customer provided goods and services

If a customer contributes goods or services (for example, materials, equipment or labour) to
facilitate an entity’s fulfilment of the contract, the entity shall assess whether it obtains control
of those contributed goods or services. If so, the entity shall account for the contributed goods or
services as non-cash consideration received from the customer.

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

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

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Step 4 : ALLOCATING THE TRANSACTION PRICE TO PERFORMANCE OBLIGATIONS :

Objective :
An entity shall allocate the transaction price to each performance obligation identified in the
contract on a relative stand-alone selling price basis as per the standard. There are two exceptions
to the general allocation guidance:
1. allocating discounts
2. allocating variable consideration

Determining Stand Alone Price : The stand-alone selling price is the price at which an entity would
sell a promised good or service separately to a customer.

Methods of evaluating stand-alone price

1. Observable Price : The observable price of a good or service when the entity sells that
good or service separately in similar circumstances and to similar customers.
2. Unobservable Price :
A. Adjusted market assessment approach—an entity could evaluate the market in
which it sells goods or services and estimate the price that a customer in that
market would be willing to pay for those goods or services.
B. Expected cost plus a margin approach—an entity could forecast its expected costs
of satisfying a performance obligation and then add an appropriate margin for that
good or service.
C. Residual approach—an entity may estimate the stand-alone selling price by
reference to
1. the total transaction price, less
2. the sum of the observable stand-alone selling prices of other goods or
services promised in the contract.

Changes in Transaction Price :

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.
If the change in transaction price is the result of a contract modification, the entity should follow
the contract modification guidance.

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Question 11
On 1 April 20X0, a consultant enters into an arrangement to provide due diligence,
valuation, and software implementation services to a customer for Rs.2 crores. The
consultant can earn Rs.20 lakhs bonus if it completes the software implementation by
30 September 20X0 or Rs.10 lakhs bonus if it completes the software implementation
by 31 December 20X0.
The due diligence, valuation, and software implementation services are distinct and
therefore are accounted for as separate performance obligations. The consultant
allocates the transaction price, disregarding the potential bonus, on a relative stand-
alone selling price basis as follows:
• Due diligence – Rs.80 lakhs
• Valuation – Rs.20 lakhs
• Software implementation – Rs.1 crore
At contract inception, the consultant believes it will complete the software
implementation by 30 January 20X1. After considering the factors in Ind AS 115, the
consultant cannot conclude that a significant reversal in the cumulative amount of
revenue recognized would not occur when the uncertainty is resolved since the
consultant lacks experience in completing similar projects. As a result, the consultant
does not include the amount of the early completion bonus in its estimated transaction
price at contract inception.
On 1 July 20X0, the consultant notes that the project has progressed better than
expected and believes that implementation will be completed by 30 September 20X0
based on a revised forecast. As a result, the consultant updates its estimated transaction
price to reflect a bonus of Rs.20 lakhs.
After reviewing its progress as of 1 July 20X0, the consultant determines that it is 100
percent complete in satisfying its performance obligations for due diligence and
valuation and 60 percent complete in satisfying its performance obligation for software
implementation.
Determine the transaction price

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

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Step 5 : SATISFYING PERFORMANCE OBLIGATION :

An asset is transferred when (or as) the customer obtains control of that asset.

Satisfaction of Revenue
Transfer of
performance recognition
control
obligation achieved

Transfer of Control :
Control of an asset refers to
A. the ability to direct the use of, and obtain substantially all of the remaining benefits from, the
asset.
B. Control includes the ability to prevent other entities from directing the use of, and obtaining
the benefits from, an asset.

Question 12
Minitek Ltd. is a payroll processing company. Minitek Ltd. enters into a contract to
provide monthly payroll processing services to ABC limited for one year. Determine how
entity will recognise the revenue?

Solution :
Therefore, it satisfies the first criterion, i.e., services completed on a monthly basis are
consumed by the entity at the same time and hence, revenue shall be recognised over the
period of time.

Methods of measuring progress of a performance obligation satisfied over time

Output Methods Input Methods
Recognise revenue on the basis of direct Recognise revenue on the basis of the
measurement of the value to the customer of entity's efforts or inputs to the satisfaction of
the goods or services transferred to date a performance obligation.
relative to the remaining goods or services
promised under the contract.
For Example : Surveys of performance For Example : Resources consumed labour
completed to date, appraisals of results hours expended, costs incurred, time
achieved. elapsed or machine hours used

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Question 13
On 01 January 20X1, an entity contracts to renovate a building including the installation
of new elevators. The entity estimates the following with respect to the contract
Particulars Amount (Rs.)
Transaction price 5,000,000
Expected costs :
(a) Elevators 1,500,000
(b) Other costs 2,500,000
Total 4,000,000
The entity purchases the elevators and they are delivered to the site six months before
they will be installed. The entity uses an input method based on cost to measure progress
towards completion. The entity has incurred actual other costs of 500,000 by March 31,
20X1.
How will the Company recognize revenue, if performance obligation is met over a period
of time?

Solution :
Particulars Amount (Rs.)
Transaction price 5,000,000
Costs incurred :
(a) Cost of elevators 1,500,000
(b) Other costs 500,000
Measure of progress : 500,000 / 2,500,000 = 20%
Revenue to be recognised :
(a) For costs incurred (other than elevators) Total attributable revenue = 3,500,000
% of work completed = 20%
Revenue to be recognised = 700,000
(b) Revenue for elevators 1,500,000 (equal of costs incurred)
Total revenue to be recognised 1,500,000 + 700,000 = 2,200,000

Repurchase Agreement :
When a company determines the timing of transfer of control, it is important to take into
consideration any repurchase agreements that may have been executed by the Company.

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Question 14
An entity enters into a contract with a customer for the sale of a tangible asset on 1
January 20X1 for Rs.1 million. The contract includes a call option that gives the entity the
right to repurchase the asset for Rs.1.1 million on or before December 31, 20X1. How
would the entity account for this transaction?

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

SPECIAL ISSUES :
Bill and Hold :
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but
the entity retains physical possession of the product until it is transferred to the customer at a
point in time in the future.
In such arrangements, the entity shall determine at which point does control transfer to the
customer.

Contract Costs :
Entities may incur various costs to obtain or acquire a contract with a customer, including, but
not limited to, legal fees, advertising expenses, travel expenses, and salespersons’ salaries and
commissions.
Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract
with a customer that it would not have incurred if the contract had not been obtained (for
example, a sales commission).

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Question 15
Customer outsources its information technology data centre
Term = 5 years plus two 1-yr renewal options
Average customer relationship is 7 years
Entity spends Rs.400,000 designing and building the technology platform needed to
accommodate out-sourcing contract:
Design Services Rs.50,000
Hardware Rs.1,40,000
Software Rs.1,00,000
Migration and testing of data center Rs.110,000
Total Rs.4,00,000
How should such costs be treated?

Solution :
Design services Rs.50,000 Assess under Ind AS 115. Any
resulting asset would be amortised
over 7 years (i.e. include renewals)
Hardware Rs.140,000 Account for asset under Ind AS 16
Software Rs.100,000 Account for asset under Ind AS 38
Migration and testing of Rs.110,000 Assess under Ind AS 115. Any
data centre resulting asset would be amortised
over 7 years (i.e. include renewals)
Total Rs.400,000

SERVICE CONCESSION ARRANGEMENTS :

Infrastructure shall not be recognized as property, plant and equipment of the operator because
the contractual service arrangement does not convey the right to control the use of the public
service infrastructure to the operator. Since the operator acts as a service provider, he shall
recognize and measure revenue in accordance with Ind AS 115 for the services it performs.

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