CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

CA FINAL
FINANCIAL REPORTING
Supplementary Material
(Edition 7 to Edition 8)
This PDF is to be referred along-with Edition 7

IMPORTANT NOTE:
This is a Chapter-wise Compilation of Newly Added Questions.
Almost all questions in this supplementary PDF are New Questions of Past 3
attempts RTP/MTP/PAST EXAM

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Alternatively, instead of covering this supplementary pdf, you can also cover
RTP of May’23, Nov’23, May’24, and Past Paper of Nov’23 Separately, as
almost all new questions are from them.

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

S. Questions
Topic Name Page No.
No Added

1 Intro to IND AS 1 4
2 IND AS 1 - -
3 IND AS 2 3 4
4 IND AS 7 2 7
5 IND AS 8 2 11
6 IND AS 10 1 15
7 IND AS 12 1 17
8 IND AS 16 3 18
9 IND AS 19 3 22
10 IND AS 20 - -
11 IND AS 21 1 27
12 IND AS 23 2 30
13 IND AS 24 1 32
14 IND AS 33 2 33
15 IND AS 34 1 35
16 IND AS 36 - -
17 IND AS 37 1 35
18 IND AS 38 2 36
19 IND AS 40 1 38
20 IND AS 41 2 40
21 IND AS 101 2 41
22 IND AS 105 2 43
23 IND AS 108 1 45
24 IND AS 113 - -
25 IND AS 115 2 46
26 IND AS 116 3 48
27 IND AS 102 – Share Based Payment 3 52

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

28 IND AS 103 4 54
29 IND AS 110 3 68
30 IND AS 111 1 78
31 IND AS 28 1 79
32 IND AS 109 – Financial Instruments 6 80
33 Professional & Ethical Duty of CA 1 86
34 Accounting & Technology - -
35 Conceptual Framework 3 88
Total 58 Ques

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

INTRO TO IND AS
Question 1 (MTP May’24)

Which entities are required to prepare their financial statements mandatorily on the basis of Ind AS?

Solution: (4 Marks)

Following entities are mandatorily required to prepare their financial statements based on IND AS

 All Listed Corporate Entities

 Unlisted Corporate Entities having net worth of rupees two hundred and fifty crore or more
 All holding, subsidiary, joint venture or associate companies of the above mentioned listed and
unlisted
 corporate entities
 All Listed NBFCs
 Unlisted NBFCs having net worth of rupees two hundred and fifty crore or more
 MF schemes

IND AS 2
Question 5 (RTP May 23)

An entity has following details regarding cost and retail price of the goods purchased and unsold at the
beginning of the year:
Cost Retail Price
Opening inventory 6,250 8,000
Purchases 19,500 34,000
Inventory on hand (23,000)
Sales for the period 19,000
Applying the retail method, compute the following:
a) Percentage of cost price over retail price;
b) Cost of closing inventory;
c) Value of cost of sales (at cost); and
d) Profit earned during the year on sale of inventory
Ignore the impact of mark-ups or mark-downs on the selling price.
Solution:
Table showing application of Retail method for calculation of the goods sold during the year and
unsold inventory
S. No. Particulars ₹
Cost price of goods 6,250 + 19,500 25,750
Retail price of goods 8,000 + 34,000 42,000
(a) Cost percentage of retail price 25,750 / 42,000 61%
(b) Closing inventory (at cost) 23,000 x 61% 14,030
(c) Cost of sales for the period [(6,250 + 19,500) - 14,030] 11,720
Sales for the period 19,000
(d) Profit earned on sale of goods during the year 19,000 – 11,720 7,280

Question 6 (RTP Nov’23)

A Ltd. began operations in the year 20X1-20X2. In 20X1-20X2, it incurred the following expenditures on
purchasing the raw materials for its product:
a) Purchase price of the raw materials = ₹ 30,000;

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)
b) Import duty and other non-refundable purchase taxes = ₹ 8,000;
c) Refundable purchase taxes = ₹ 1,000;
d) Freight costs for bringing the goods from the supplier to the factory’s storeroom for raw materials =
₹ 3,000;
e) Costs of unloading the materials into the storeroom for raw materials = ₹ 20; and
f) Packaging = ₹ 2,000.
On 31st March, 20X2, A Ltd. received ₹ 530 volume rebate from a supplier for purchasing more than ₹
15,000 from the supplier during the year.
A Ltd. incurred the following additional costs in the production run:
(i) Salary of the machine workers in the factory = ₹ 5,000;
(ii) Salary of factory supervisor = ₹ 3,000;
(iii) Depreciation of the factory building and equipment used for production process = ₹ 600;
(iv) Consumables used in the production process = ₹ 200;
(v) Depreciation of vehicle used to transport the goods from the storeroom for raw materials to the
machine floor = ₹ 400;
(vi) Factory electricity usage = ₹ 300;
(vii) Factory rental = ₹ 1,000; and
(viii) Depreciation of the entity’s vehicle used by the factory supervisor is ₹ 200.
During 20X1-20X2, A Ltd. incurred the following administrative expenses:
1. Depreciation of the administration building = ₹ 500;
2. Depreciation and maintenance of vehicles used by the administrative staff = ₹ 150; and
3. Salaries of the administrative personnel = ₹ 3,050.
Of the administrative expenses, 20% is attributable to administering the factory.
Remaining expenses are attributable, in equal proportion, to the sales and other nonproduction operations
(eg financing, tax and corporate secretarial functions).
In 20X1-20X2, A Ltd. incurred the following selling expenses:
a) Advertising costs = ₹ 300;
b) Depreciation and maintenance of vehicles used by the sales staff = ₹ 100; and
c) Salaries of the administrative personnel = ₹ 6,000.
Pass necessary journal entries to record the cost of inventory in the books of A Ltd.
Solution:
Journal Entries for the year 20X1-20X2
₹ ₹
Inventory A/c (W.N.1) Dr. 42,490
To Cash/Bank A/c 42,490
(To recognise the cost of raw materials purchased)
Inventory A/c (W.N.2) Dr. 11,240
To Cash/Bank A/c (cost of direct labour) 5,000
To Property, plant and equipment (accumulated depreciation- 600
factory equipment)
To Property, plant and equipment (accumulated depreciation- 400
raw-materials delivery vehicle)
To Cash/Bank A/c (cost of electricity used) 300

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)
To Property, plant and equipment (accumulated depreciation- 200
factory supervisor’s vehicle)
To Cash/Bank A/c (factory management’s salaries) 3,000
To Cash/Bank A/c (factory rental) 1,000
To Cash/Bank A/c (administrative salaries attributable to the 610
factory)
To Property, plant and equipment (attributable portion of 100
accumulated depreciation- administration building)
To Property, plant and equipment (attributable portion of 30
accumulated depreciation- administration vehicles)
(To recognise the costs of conversion)
Inventory A/c (W.N.2) Dr. 200
To Inventory A/c (consumable stores) 200
(To recognise the costs of consumable stores inventory consumed)

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

= ₹ 42,490 + ₹ 11,240 + ₹ 200
= ₹ 53,930
Working Notes:
1. Computation of costs of purchase
Description ₹
Purchase price 30,000
Import duty and other non-refundable purchase taxes 8,000
Freight costs for bringing the goods to the factory storeroom 3,000
Cost of unloading the raw materials into the storeroom 20
Packaging 2,000
Less: Trade discounts, rebates and subsidies (530)
Cost of purchase 42,490
Note: Refundable taxes do not form part of the cost of inventories.
2. Computation of costs of conversion
Description ₹
Direct labour 5,000
Fixed production overheads
Depreciation and maintenance of factory equipment 600
Depreciation of vehicle used for transporting the goods 400
Depreciation of vehicle used by factory supervisor 200
Factory electricity usage 300
Factory management 3,000
Factory rental 1,000
Other costs of administering the factory
20% of depreciation of administration building 100
20% of depreciation of administration vehicles 30

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

20% of administrative staff costs 610

Variable production overheads
Indirect material—consumables 200
Cost of conversion 11,440

Question 7 (RTP May’24)

B Limited has valued its Stock held for distribution as free items on claim by customers (on offers) at zero.
Customers have a right to claim the free item within 14 days from date of invoice. If the time limit of 14-day
exceeds, the claim is foregone by the customer.
The majority of the free items require online registration by the buyers for participation in the contest
conducted by the respective brand which needs to be done by the buyers within 3 days from the date of
invoice.
Out of it, a few items under this category were found damaged. The replacement cost of such items would
be ₹ 2,50,000.

Determine whether the entity has to book loss of inventory or provide for replacement cost of the goods that
need to be given as free items to customers as per the principles of Ind AS.

Solution:

Ind AS 2 deals with write-off in value of inventory. The stock of free items is valued at zero by the company.
The question of “Loss of Inventory ₹ 2,50,000” does not arise as the claim of free stock is subject to various
conditions like claim within 14 days, online registration within 3 days, etc. which are all contingent in nature.

However, provision is to be made for goods to be distributed in case claims from customers are received
since the customer can claim the free items within 14 days from the date of invoice. Hence provision of ₹
2,50,000 is to be made for.

IND AS 7
Question 6 (RTP Nov 23)
One of the subsidiaries of Buildwell Ltd. submitted to Central Finance its Summarized Statement of Profit
and Loss and Balance Sheet.
Summarized Statement of Profit and Loss for the year ended 31st March, 20X3
Particulars Amount (₹)
Net sales 2,52,00,000
Less: Cash cost of sales (1,92,00,000)
Depreciation (6,00,000)
Salaries & wages (24,00,000)
Operating expenses (14,00,000)
Provision for taxation (8,80,000)
Net Operating Profit 7,20,000
Non-recurring income – profit on sale of equipment 1,20,000
8,40,000
Retained earnings and profit brought forward 15,18,000
23,58,000
Dividends declared and paid during the year (7,20,000)

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

Profit & loss balance as on 31st March, 20X3 16,38,000

Summarized Balance Sheet

Assets 31st March, 20X2 31st March, 20X3
Property, Plant and Equipment:
Land 4,80,000 9,60,000
Buildings and Equipment 36,00,000 57,60,000
Current Assets
Cash 6,00,000 7,20,000
Inventories 16,80,000 18,60,000
Trade Receivables 26,40,000 9,60,000
Advances 78,000 90,000
Total Assets 90,78,000 1,03,50,000

Liabilities & Equity

Share capital 36,00,000 44,40,000
Surplus in profit & loss 15,18,000 16,38,000
Trade Payables 24,00,000 23,40,000
Outstanding expenses 2,40,000 4,80,000
Income tax payable 1,20,000 1,32,000
Accumulated depreciation on buildings and equipment 12,00,000 13,20,000
Total 90,78,000 1,03,50,000
The original cost of equipment sold during the year 20X2-20X3 was ₹ 7,20,000.
Prepare a statement of cashflows the year ended 31st March 20X3.

Solution:
Statement of Cash Flows for the year ended 31st March, 20X3 (Indirect method)
Particulars ₹ ₹
Cash flow from operating activities:
Net Profit before taxes and extraordinary items (7,20,000 + 16,00,000
8,80,000)
Add: Depreciation 6,00,000
Operating profit before working capital changes 22,00,000
Increase in inventories (1,80,000)
Decrease in trade receivables 16,80,000
Advances (12,000)
Decrease in trade payables (60,000)
Increase in outstanding expenses 2,40,000
Cash generated from operations 38,68,000
Less: Income tax paid (Refer W.N.4) (8,68,000)
Net cash from operations 30,00,000

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

Cash from investing activities:

Purchase of land (4,80,000)
Purchase of building & equipment (Refer W.N.2) (28,80,000)
Sale of equipment (Refer W.N.3) 3,60,000
Net cash used for investment activities (30,00,000)
Cash flows from financing activities:
Issue of share capital 8,40,000
Dividends paid (7,20,000)
Net cash from financing activities: 1,20,000
Net increase in cash and cash equivalents 1,20,000
Cash and cash equivalents at the beginning 6,00,000
Cash and cash equivalents at the end 7,20,000

Working Notes:
1. Building & Equipment Account
Particulars ₹ Particulars ₹
To Balance b/d 36,00,000 By Sale of assets 7,20,000
To Cash / bank By Balance c/d 57,60,000
(purchases)(bal. fig) 28,80,000
64,80,000 64,80,000

2. Building & Equipment Accumulated Depreciation Account

Particulars ₹ Particulars ₹
To Sale of asset (acc. depreciation) 4,80,000 By Balance b/d 12,00,000
To Balance c/d 13,20,000 By Profit & Loss A/c (provisional) 6,00,000
18,00,000 18,00,000

3. Computation of sale price of Equipment

Particulars ₹
Original cost 7,20,000
Less: Accumulated Depreciation (4,80,000)
Net cost 2,40,000
Profit on sale of assets 1,20,000
Sale proceeds from sale of assets 3,60,000

4. Provision for tax Account

Particulars ₹ Particulars ₹
To Bank A/c 8,68,000 By Balance b/d 1,20,000
To Balance c/d 1,32,000 By Profit & Loss A/c (provisional) 8,80,000
10,00,000 10,00,000

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

Question 7 (RTP May’24)

Following is the Balance Sheet of Mars Ltd:
₹ in Lakhs
Particulars 31.3.20X3 31.3.20X2
ASSETS
Non-Current Assets
Property, Plant and Equipment 450 410
Intangible asset 90 90
Deferred Tax Asset (net) 45 45
Other Non-current Asset 95 85
Total Non-current Assets 680 630
Current Assets
Financial Asset
Investments 100 60
Trade Receivables 580 600
Cash and Cash Equivalents 300 300
Inventories 800 700
Other Current Assets 160 120
Total Current Assets 1,940 1,780
Total Assets 2,620 2,410
Equity and Liabilities
Equity
Equity Share Capital 280 250
Other Equity 980 820
Total Equity 1,260 1,070
Non-current Liabilities
Financial Liabilities
Borrowings 360 300
Other Non-current Liabilities 90 80
Total Non-current Liabilities 450 380
Current Liabilities
Financial Liabilities
Trade Payable 455 450
Bank Overdraft 410 420
Other current liabilities 45 90
Total Current Liabilities 910 960
Total Liabilities 1,360 1,340
Total Equity and Liabilities 2,620 2,410
Additional Information:

a) Profit before tax for the year is ₹ 200 lakhs and provision for tax is ₹ 40 lakhs.
b) Property, Plant and Equipment purchased during the year ₹ 100 lakhs.
c) Current liabilities include Capital creditors of ₹ 25 lakhs as at 31st March 20X3 (Nil – 31st March 20X2)
d) Long Term Borrowings raised during the year ₹ 120 lakhs.
From the information given, prepare a Statement of Cash Flows following Indirect Method. Assume that
Bank overdraft is an integral part of the entity’s cash management.

Solution:
Statement of Cash Flows for the year ended 31st March, 20X3

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

(₹ in lakhs) (₹ in lakhs)
Cash flows from operating activities
Profit before taxation 200
Adjustments for non-cash items:
Depreciation [410 - (450 - 100)] 60
260
Increase in inventories (800 - 700) (100)
Decrease in trade receivables (600 - 580) 20
Increase in other non-current assets (95 - 85) (10)
Increase in other current assets (160 - 120) (40)
Increase in non-current liabilities (90 - 80) 10
Increase in trade payables (455 – 25 - 450) (20)
Other current liabilities (Refer Note 1)
[(90 + 40) - 45] (85)
Net cash generated from operating activities 35
Cash flows from investing activities
Cash paid to purchase PPE (100-25) (75)
Cash paid to acquire investment (100-60) (40)
Net cash outflow from investing activities (115)
Cash flows from financing activities
Raising of equity share capital (280 - 250) 30
Long-term borrowings raised during the year 120
Long-term borrowings repaid during the year
[(300 + 120) - 360] (60)
Net cash outflow from financing activities 90
Increase in cash and cash equivalents during the year 10
Cash and cash equivalents at the beginning of the year (420-300) (Refer (120)
Note 2)
Cash and cash equivalents at the end of the year (410-300) (Refer Note 2) (110)
Note:
1. Other current liabilities are assumed to consist of provision for taxation.
2. ICAI has assumed other current and other non current to be operating in nature hence the same
has been considered in operating activities.

IND AS 8
Question 3 (RTP Nov’23)

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

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)
At 31st March, 20X3, as a result of usage of improved lubricants, Y Ltd. reassessed the useful life of
Machine A from four years to seven years. Machine A is depreciated on the straight-line method to a Nil
residual value. It was acquired for ₹ 6,000 on 1st April, 20X0.
Inventories of the type manufactured by Machine A were immaterial at the end of each reporting period.
Y Ltd.’s accounting records for the year ended 31st March, 20X3, before accounting for change in
accounting policy and change in accounting estimate, record ₹ 1,04,000 revenue (sales), ₹ 86,500 cost of
sales (including ₹ 6,500 for the error in opening inventory and ₹ 1,500 depreciation for Machine A) and ₹
5,250 income tax expense.
Y Ltd. presents financial statements with one year of comparative information.
For simplicity, the tax effect of all items of income and expenses should be assumed to be 30% of the gross
amount.
Draft an extract showing how the correction of the prior period error, change in accounting policy and
change in accounting estimate could be presented in the Statement of Profit and Loss and Statement of
Changes in Equity (Retained Earnings) and disclosed in the Notes of Y Ltd. for the year ended 31st March,
20X3.
Solution:
Extract of Y Ltd.’s Statement of Profit and Loss
for the year ended 31st March, 20X3
20X2-20X3 Reference 20X1- 20X2 Reference
to W.N. Restated to W.N.
₹ ₹
Revenue 1,04,000 73,500
Cost of sales (20X1-20X2 previously ₹ 53,500) (79,100) 1 (60,000) 4
Gross profit 24,900 13,500
Other income — change in the measurement
policy i.e. the value of investment in associate
at FVTPL 5,000 2 2,000 5
Profit before tax 29,900 15,500
Income tax expense (8,970) 3 (4,650) 6
Profit for the year 20,930 10,850

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

for the year ended 31st March, 20X3
20X2-20X3 Reference 20X1-20X2 Reference
to W.N. Restated to W.N.
₹ ₹
Retained earnings, as restated, at the
beginning of the year
- as previously stated 34,000 20,000
- effect of the correction of a prior period
error (4,550) 7 -
- effect of a change in accounting policy 11,900 13 10,500 12
41,350 30,500
Profit for the year 20,930 10,850
Retained earnings at the end of the year 62,280 41,350

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)

Y Ltd.
Extract of Notes to the Financial Statements for the year ended 31st March, 20X3
Note X : Change in Accounting Estimates
Due to usage of improved lubricants the estimated useful life of the machine used for production was
increased from four years to seven years. The effect of the change in the useful life of the machine is to
reduce the depreciation allocation by ₹ 900 in 20X2-20X3 and 20X3-20X4. The after-tax effect is an
increase in profit for the year of ₹ 630 for each of the two years.
Depreciation expense in 20X4-20X5 to 20X6-20X7 is increased by ₹ 600 because of revision in the useful
life of machinery, as under the initial estimate, the asset would have been fully depreciated at the end of
20X3-20X4. The after-tax effect for these three years is a decrease in profit for the year by ₹ 420 per year.
Note Y : Correction of Prior Period Error
In 20X2-20X3 the entity identified that ₹ 6,500 products that had been sold in 20X1-20X2 were included
erroneously in inventory at 31st March, 20X2. The financial statements of 20X1-20X2 have been restated
to correct this error. The effect of the restatement is ₹ 6,500 increase in the cost of sales and ₹ 4,550
decrease in profit for the year ended 31st March, 20X2 after decreasing income tax expense by ₹ 1,950.
This resulted in ₹ 4,550 (decrease) restatement of retained earnings at 31st March, 20X2.
Note Z : Change in Accounting Policy
In 20X2-20X3 the entity changed its accounting policy for the measurement of investments in associates
from cost model to fair value model as per Ind AS 109. Management judged that this policy provides
reliable and more relevant information because dividend income and changes in fair value are inextricably
linked as integral components of the financial performance of an investment in an associate and
measurement at fair value is necessary if that financial performance is to be reported in a more meaningful
way. This change in accounting policy has been accounted for retrospectively. The comparative information
has been restated. A new line item, ‘Other income — change in the fair value of investment in associate’,
has been added in the Statement of Profit and Loss and Retained Earnings. The effect of the restatement
has been to add income of ₹ 2,000 as a result of the increase in value of the associate during the year
ended 31st March, 20X2 which resulted in ₹ 1,400 increase in profit for the year (after including a resulting
increase in income tax expense of ₹ 600). This, together with ₹ 10,500 (increase) restatement of retained
earnings at 31st March, 20X1, resulted in a ₹ 11,900 increase in retained earnings at 31st March, 20X2.
Furthermore, profit for the year ended 31st March, 20X3 was ₹ 3,500 higher (after deducting ₹ 1,500 tax
effect) as a result of recording a further ₹ 5,000 (W.N.2) increase in the fair value of the investment in an
associate.
Working Notes:
1. ₹ 86,500 (given) minus ₹ 6,500 correction of error (now recognised as an expense in 20X1-20X2)
minus ₹ 900 (W.N.9) effect of the change in accounting estimate.
2. ₹ 25,000 fair value (20X2-20X3) minus ₹ 20,000 fair value (20X1-20X2) = ₹ 5,000 (the effect of
applying the new accounting policy (fair value model) in 20X2-20X3).
3. ₹ 5,250 + ₹ 1,950 (W.N.8) + 30% (₹ 900 (W.N.9) reduction in depreciation resulting from the change in
accounting estimate) + 30% (₹ 5,000 increase in the fair value of investment property — change in
accounting policy) = ₹ 8,970.
4. ₹ 53,500 as previously stated + ₹ 6,500 (products sold and incorrectly included in closing inventory in
20X1-20X2) = ₹ 60,000 (that is, the prior period error is corrected retrospectively by restating the
comparative amounts).
5. ₹ 20,000 fair value (20X1-20X2) minus ₹ 18,000 fair value (20X0-20X1) = ₹ 2,000 (the effect in 20X1-
20X2 of the change in accounting policy for investments in associates from the cost model to the fair
value model).

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)
6. ₹ 6,000 as previously stated minus ₹ 1,950 (W.N.8) correction of prior period error + 30% (₹ 2,000
change in accounting policy) = ₹ 4,650.
7. ₹ 6,500 (products sold and incorrectly included in inventory in 20X1-20X2) – ₹ 1,950 (W.N.8) (tax
overstated in 20X1-20X2) = ₹ 4,550.
8. ₹ 6,500 (products sold and incorrectly included in inventory in 20X1-20X2) x 30% (income tax rate) = ₹
1,950.
9. ₹ 1,500 depreciation (using old estimate, that is, ₹ 6,000 cost ÷ 4 years) minus ₹ 600 (W.N.10) (using
new estimate of useful life) = ₹ 900.
10. ₹ 3,000 (W.N.11) carrying amount ÷ 5 years remaining useful life = ₹ 600 depreciation per year.
11. [₹ 6,000 cost minus (₹ 1,500 depreciation x 2 years)] = ₹ 3,000 carrying amount at 31st March, 20X2.
12. (₹ 18,000 fair value of investment in associates at 31st March, 20X1 minus ₹ 3,000 carrying amount
based on the cost model at the same date) x 0.7 (to reflect 30% income tax rate) = ₹ 10,500 (effect of a
change in accounting policy (from cost model to fair value model)).
13. ₹ 10,500 (W.N.12) + [₹ 2,000 (W.N.5) x 0.7 (to reflect 30% income tax rate)] = ₹ 11,900.

Question 4 (Past Exam Nov’23)

HG Incredibles Limited had in the recent past made a right issue. In its offer document to its members, it
had projected a surplus of ₹ 50 crores during the year ending 31.03.2023. The draft result for the year
ended 31.03.2023, prepared on the hitherto followed accounting policies and presented for perusal of the
Board of Directors showed a surplus of ₹ 5 Crores. The Board in consultation with the Managing Director,
decided on the following:
(i) Value year-end Inventory at Works Cost (₹ 40 Crores) instead of hitherto method of valuation of
inventory at Prime Cost (₹ 20 Crores);
(ii) Not to provide for "After Sales Expenses" during the warranty period. Till the last year, provision for 1%
of Sales used to be made under the concept of "matching of costs against revenue" and actual
expenses used to be charged against provision. The Board now decided to account for expenses as
and when actually they are incurred. Sales during the year was ₹ 800 Crores;
(iii) Provide depreciation for the year on Straight Line Method on account of substantial additions in Gross
Block during the year, instead of on Reducing Balance Method, which was hitherto adopted. As a
consequence, ₹ 21 Crores depreciation is now less charged than it would have been provided under
the old method. (₹ 67 Crores on Reducing Balance method and ₹ 46 Crores in Straight Line Method).
(iv) Provide for other than temporary fall in the value of investments, which fall took place in last 6 years,
amounting to ₹ 12 Crores. Discuss the above situations as per applicable Ind AS, particularly Ind AS 8.
Whether the above are changes in accounting policies or changes in estimates? (5 Marks)
Solution:
(i) Paragraph 36(a) of Ind AS 2, ‘Inventories’, specifically requires disclosure of ‘cost formula used’ as a
part of disclosure of accounting policies adopted in measurement of inventories.
Accordingly, a change in cost formula is a change in accounting policy. The entity should apply the
change in the accounting policy retrospectively. For retrospective application of a change in accounting
policy, adjust the opening balance of each affected component for the earliest prior period presented
and the other comparative amounts disclosed for each prior period presented as if the new accounting
policy had always been applied. Usually, the adjustment is made to retained earnings.
Income tax effect due to change in accounting policy will be accounted for in accordance with Ind AS
12.
(ii) Here, since the question talks about making of provision, it is assumed that assurance warranty has
been provided by the entity. Further, providing for 1% against after sales expenses is an accounting
policy decision. Now since, the company has decided not to make provision for such expenses but to

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account for the same as and when expenses are incurred, there is a change in accounting policy
decision.
The change in accounting policy is accounted for retrospectively. For retrospective application of a
change in accounting policy, adjust the opening balance of each affected component for the earliest
prior period presented and the other comparative amounts disclosed for each prior period presented as
if the new accounting policy had always been applied. Usually, the adjustment is made to retained
earnings.
Income tax effect due to change in accounting policy will be accounted for in accordance with Ind AS
12.
(iii) Determination of depreciation method involves an accounting estimate and thus depreciation method is
not a matter of an accounting policy. Accordingly, as per Ind AS 16, a change in depreciation method
should be accounted for as a change in accounting estimate in accordance with Ind AS 8. Change in
accounting estimate is accounted for prospectively. However, the effect of the change is recognised as
income or expense of the year in which the change is made. The effect, if any, on future periods is
recognised as income or expense in those future periods.
(iv) Accounting for investment made by the entity falls under the purview of Ind AS 109 ‘Financial
Instruments’. As per Ind AS 109, subsequent measurement of financial instruments is done on
following basis:
a. Measured at Amortised cost
b. Measured at Fair value through Other Comprehensive Income (FVTOCI)
c. Measured at Fair value through Profit or Loss (FVTPL)
In case the entity has subsequently measured its financial asset i.e. investment on the basis of FVTOCI
or FVTPL, then change in fair value would have been recorded earlier in previous reporting period too.
In such a case, there is no change in accounting policy or accounting estimate. However, if the entity
had not accounted for previous changes in its books, then it is an error. 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. Further, fair
value change is to be accounted for at every reporting date. Hence, restatement of the comparative
amounts for the prior period(s) presented in which the error occurred is also required to be done.
Further, if an entity reclassifies any financial asset, it must do so prospectively from reclassification
date. The entity shall not restate any previously recognised gains, losses (including impairment gains or
losses) or interest. Reclassification of financial asset will be accounted for in accordance with the
guidance given in
Ind AS 109.

IND AS 10
Question 6 (Past Exam May’23)
Discuss the following situations as per Ind AS 10:

i. The financial statements of a Company for the year 2021-2022 are approved by the management and
were sent on 5th June, 2022 for review and approval to its supervisory board i.e., Board of Directors.
The supervisory board approves the financial statements on 26th June, 2022. The financial statements
are then made available to shareholders on 4th July, 2022. The financial statements are approved by
shareholders in their annual general meeting on 18th August, 2022 and then filed with Ministry of
Corporate Affairs (MCA) on 19th August, 2022. Determine & discuss the date on which financial
statements were approved.
ii. A Company is in litigation with Income Tax Department with respect to allowability of certain exemptions
for financial year 2018-2019. No provision for tax has been made for disallowances of exemptions as the

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Company was under bonafide belief based on a legal opinion that it will succeed in litigation. On 21st
April, 2023, the Hon'ble Supreme Court rejected the Company's claim. The Order is received on 30th
April, 2023. The financial statements for the financial year 2022-2023 of the Company are yet to be
approved. The earlier year’s financial statements stands approved. Advise in financial statements of
which financial year the impact of the Order of the Hon'ble Supreme Court should be recognized.
iii. Z Limited while preparing its financial statements on 31st March, 2023 made a provision for doubtful
debts @ 6% on accounts receivables. In the last week of January, 2023, a debtor for ₹ 3 lakhs had
suffered heavy loss due to fire; the loss was not covered by any insurance policy. Z Limited, considering
the event of fire made a provision @ 60% of the amount receivables from that debtor apart from the
general provision @ 6% on remaining debtors. The same debtor was declared insolvent on 10th April,
2023. The financial statements have not yet been approved. You are required to suggest whether the
company should provide for the full loss arising out of insolvency of the debtor in the financial statements
for the year ended 31st March, 2023.
iv. D Limited acquired equity shares of another company on 1st March, 2023 at a cost of ₹ 28 lakhs. The
fair market value of these shares on 31st March, 2023 was ₹ 35 lakhs and the company measured it at ₹
35 lakhs (assume that it is classified as FVTOCI as per Ind AS 109 and change in fair value is
transferred to 'fair value fluctuation reserve'). Due to market conditions subsequent to the reporting date,
the value of investments drastically came down to ₹ 20 lakhs. The financial statements have not yet
been approved. You are required to suggest whether D Limited should value the investments at ₹ 35
lakhs or ₹ 20 lakhs as on 31st March, 2023.
v. Tanmay Limited was in negotiation with Varun Limited from 1st December, 2022 to acquire land for ₹
5.00 crores. The negotiations were concluded in the first week of April 2023. The transaction was
completed by last week of April, 2023. In which financial year, the purchase of land should be
recognized?

Solution:

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

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However, the same may be disclosed in the Notes to Accounts for due information to the users of the
financial statements.

IND AS 12
Question 6 (RTP Nov’23)
On 1st April, 20X1, an entity paying tax at 30% acquired a non-tax-deductible office building for ₹ 1,00,000
in circumstances in which Ind AS 12 prohibits recognition of the deferred tax liability associated with the
temporary difference of ₹ 1,00,000. The building is depreciated over 10 years at ₹ 10,000 per year to a
residual value of zero. The entity’s financial year ends on 31st March.
On 1st April, 20X2, the carrying amount of the building is ₹ 90,000, and it is revalued upwards by ₹ 45,000
to its current market value of ₹ 1,35,000. There is no change to the estimated residual value of zero, or to
the useful life of the building after revaluation.
Determine the carrying amount, depreciation for the year ended 31st March, 20X3 and defer tax thereafter
till the useful life of the building. Further analyse the treatment and impact of defer tax since 31st March,
20X3 till the useful life of the building.
Solution:
Since there is no change to the estimated residual value of zero, or to the useful life of the building after
revaluation, at the end of the 2nd year i.e. 31st March 20X3, the building will be depreciated over the next 9
years at ₹ 15,000 per year.
Following the revaluation, the temporary difference associated with the building is ₹ 1,35,000. Of this
amount, only ₹ 90,000 arose on initial recognition, since ₹ 10,000 of the original temporary difference of ₹
1,00,000 arising on initial recognition of the asset has been eliminated through depreciation of the asset.
The carrying amount (which equals the temporary difference, since the tax base is zero) and depreciation
during the year ended 31st March, 20X3 and thereafter may then be analysed as follows:
Year Carrying Tax base b Gross Unrecognised Recognised Deferred
amount a temporary temporary temporary tax liability
difference difference d difference f = e @ 30%
(c= a-b) (e=c-d)
0 1,00,000 - 1,00,000 1,00,000 - -
1 90,000 - 90,000 90,000 - -
Reval 1,35,000 - 1,35,000 90,000 45,000 13,500
2 1,20,000 - 1,20,000 80,000 40,000 12,000
3 1,05,000 - 1,05,000 70,000 35,000 10,500
4 90,000 - 90,000 60,000 30,000 9,000
5 75,000 - 75,000 50,000 25,000 7,500
6 60,000 - 60,000 40,000 20,000 6,000
7 45,000 - 45,000 60,000 15,000 4,500
8 30,000 - 30,000 20,000 10,000 3,000
9 15,000 - 15,000 10,000 5,000 1,500
10 - - - - - -
Note: The depreciation is allocated pro rata to the cost element and revalued element of the total carrying
amount.
On 31st March, 20X3, the entity recognises a deferred tax liability based on the temporary difference of ₹
45,000 arising on the revaluation (i.e., after initial recognition) giving a deferred tax expense of ₹ 13,500 (₹
45,000 @ 30%) recognised in Other Comprehensive Income (OCI).

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This has the result that the effective tax rate shown in the financial statements for the revaluation is 30% (₹
45,000 gain with deferred tax expense of ₹ 13,500).
As can be seen from the table above, as at 31st March, 20X4 (year 3), ₹ 40,000 of the total temporary
difference arose after initial recognition. The entity, therefore, provides for deferred tax of ₹ 12,000 (₹
40,000 @ 30%), and a deferred tax credit of ₹ 1,500 (the reduction in the liability from ₹ 13,500 to ₹ 12,000)
is recognised in profit or loss.
The deferred tax credit can be explained as the tax effect at 30% of the additional ₹ 5,000 depreciation
relating to the revalued element of the building.

IND AS 16
Question 7 (RTP May 23)
Company X built a new plant that was brought into use on 1st April, 20X1. The cost to construct the plant
was ₹ 1.5 crore. The estimated useful life of the plant is 20 years and Company X accounts for the plant
using the cost model. The initial carrying amount of the plant included an amount of ₹ 10 lakh for
decommissioning, which was determined using a discount rate of 10%. On 31st March, 20X2, Company X
remeasures the provision for decommissioning to ₹ 13 lakh.
Provide necessary journal entries at the end of the year i.e. 31st March, 20X2 for recording of depreciation
and decommissioning provision.

Solution:

Journal Entries in the books of Company X

for the year ending ended 31st March, 20X2

₹ in lakh ₹ in lakh
Depreciation (profit or loss) Dr. 7.5
To Accumulated depreciation (plant) 7.5
(Being depreciation on plant recognised under straight-line method (1,50,00,000 x
1/20))
Interest expense (profit or loss) Dr. 1.0
To Provision for decommissioning 1.0
(Being unwinding of decommissioning provision @10% recognized in the books)
Plant Dr. 2.0
To Provision for decommissioning 2.0
(Being increase in decommissioning provision recognized [13,00,000 – (10,00,000
+1,00,000)] at the end of the year)

Question 8 (Past Exam May’23)

Note: This Question is same as illustration 12 – Only Grey Highlighted part is the new adjustment

On 1st May, 2022, Sanskar Limited purchased ₹ 42,00,000 worth of land for construction of a new
warehouse for stocking new products.
The land purchased had an old temporary structure which was to be demolished for the purpose of
construction of warehouse. The salvaged material from the demolition was to be sold as scrap. The
company started the construction work of the warehouse on 1st June, 2022. Following costs were incurred
by the company with regard to purchase of land and construction of warehouse:
Particulars Amount (₹)
Legal fees for purchase contract of land and recording ownership 1,50,000
Architect and consultant's fee 2,70,000
Cost of demolishing existing structure on the purchased land 1,35,000

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Site preparation charges for the warehouse 1,00,000

Purchase of cement and other materials for the construction
(including GST of ₹ 1,00,000 and GST credit is 50% of the payment) 15,00,000
Employment costs of the construction workers 8,00,000
General overhead costs allocated to the construction work 30,000 per month
Overhead costs incurred directly on the construction of warehouse 35,000 per month
Income received from land used as temporary parking during construction phase 80,000
Additional Information:
 Receipt of ₹ 35,000 being proceeds from sale of salvaged and scrapped materials from demolition of
existing structure.
 Materials costing ₹ 40,000 was wasted and further ₹ 1,20,000 was spent to rectify the wrong design
work.
 The employment costs are for 10 months i.e. from 1st June 2022 till 31st March, 2023.
 The construction of factory was completed on 28th February, 2023 (which is considered as substantial
period of time as per Ind AS 23)
 The use of warehouse commenced on 1st March, 2023.
 The overall useful life of factory building was estimated at 25 years from the date of completion;
however, it is estimated that the roof of the warehouse will need to be replaced 15 years after the date
of completion and that the cost of replacing the roof at current prices would be 25% of the total cost of
the building.
 At the end of the 25-year period, Sanskar Limited is legally bound to demolish the factory and restore
the site to its original condition. The directors of the company estimate that the cost of demolition in 25
years' time (based on prices prevailing at that time) will be ₹ 80,00,000. An annual risk adjusted
discount rate which is appropriate to this project is 10% per annum. The present value of ₹ 1 payable
in 25 years' time at an annual discount rate of 10% per annum is ₹ 0.092.
 Sanskar Limited raised a loan of ₹ 60 lakhs @ 10% per annum rate of interest on 1st June, 2022. The
building of warehouse meets the definition of a qualifying asset in accordance with Ind AS 23
Borrowing Costs. Sanskar Limited received an investment income of ₹ 25,000 on the temporary
investment of the proceeds.
 Assume that cost of demolition of old structure is directly attributable to the cost of land.
 The company follows straight line method of depreciation.
You are required to compute:
(i) Cost of construction of the warehouse
(ii) Depreciation charge for the year ended 31st March, 2023
(iii) Carrying value of warehouse to be taken to Balance Sheet of the Company on 31st March, 2023.
You should explain your treatment of all the amounts referred to in this question as part of your answer.
Solution: (8 Marks)

(i) Computation of the cost of construction of the warehouse

Description Included Explanation
in P.P.E. ₹
Purchase of land 42,00,000 Separately capitalised as cost of land and do not form
part of cost of construction of warehouse
Legal fee for purchase of 1,50,000 Associated legal costs are direct costs for purchasing
contract of land the land. Hence, separately capitalised as cost of land
and do not form part of cost of construction of
warehouse
Net cost of demolishing the 1,00,000 Given in the question to assume it as directly
existing structure attributable to the cost of land. However, it will be
adjusted with the proceeds from sale of salvaged
material from demolition (1,35,000 – 35,000). Further,

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it will be separately capitalized as cost of land and do

not form part of cost of construction of warehouse.
Total cost of land 44,50,000
Architect and consultant’s fee 2,70,000 A direct cost of constructing the warehouse
Site preparation charges 1,00,000
A direct cost of constructing the warehouse Cement
and other materials 14,10,000* A direct cost of
Cement and other materials 14,10,000
constructing the warehouse net GST credit and
wastage (15,00,000 – 50,000 – 40,000)
Expense to rectify the wrong Assumed to be abnormal cost
design work Nil
Employment costs of the A direct cost of constructing the warehouse for a nine-
construction workers month period till 28th February, 2023 [(8,00,000/10) x
7,20,000 9]
Direct overhead costs A direct cost of constructing the warehouse for a nine-
3,15,000 month period (35,000 x 9)
Allocated overhead costs Nil Not a direct cost of construction
Income from temporary use of Not essential to the construction so recognised
land as car parking area Nil directly in profit or loss
Finance costs Capitalise the interest cost incurred in a nine-month
4,50,000 period (from 1st June, 2022 to 28th February, 2023)
Investment income on temporary (25,000) Offset against the interest amount capitalised
investment of the loan proceeds
Demolition cost recognised as a Recognised as part of the initial cost at present value
provision 7,36,000 (i.e 80,00,000 x 0.092)
Total cost of construction of a
warehouse 39,76,000

(ii) Computation of depreciation charges for the year ended 31st March, 2023
Note: Land is not depreciated as per Ind AS 16. Hence, only cost of warehouse is subject to depreciation.
Total depreciable amount as on 1st March, 2023 39,76,000
Depreciation for 1 month must be in two parts:
(a) Depreciation on roof component ₹5,522 39,76,000 x 25% x 1/15 x 1/12
(b) Depreciation of remaining item₹ 9,940 39,76,000 x 75% x 1/25 x 1/12
Total depreciation for the year 2022-2023 15,462

(iii) Computation of carrying value of the warehouse on 31st March, 2023 ₹

Cost of the warehouse as on 1st March, 2023 [computed in (i) above] 39,76,000
Less: Depreciation for 1 month as computed in (ii) above (15,462)
Carrying value of the warehouse as on 31st March, 2023 39,60,538

Alternate Solution
*Note: In the above solution, it has been assumed that amount spent for rectifying the faulty design
is not included in the cement and other material cost. However, alternatively, it may be considered
as part of gross cement and material cost and in such a case, the cost of material will further be
reduced with the amount of rectifying the faulty design as follows:
(i) Computation of the cost of construction of the warehouse
Description Included in P.P.E. ₹ Explanation
Purchase of land 42,00,000 Separately capitalised as cost of land and do not form
part of cost of construction of warehouse
Legal fee for 1,50,000 Associated legal costs are direct costs for purchasing
purchase of contract the land. Hence, separately capitalised as cost of land

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of land and do not form part of cost of construction of

warehouse
Net cost of 1,00,000 Given in the question to assume it as directly
demolishing the attributable to the cost of land. However, it will be
existing structure adjusted with the proceeds from sale of salvaged
material from demolition (1,35,000 – 35,000). Further, it
will be separately capitalised as cost of land and do not
form part of cost of construction of warehouse.
Total cost of land 44,50,000
Architect and 2,70,000 A direct cost of constructing the warehouse
consultant’s fee
Site preparation 1,00,000 A direct cost of constructing the warehouse
charges
Cement and other 12,90,000* A direct cost of constructing the warehouse net GST
materials credit, wastage and rectification cost (15,00,000 –
50,000 – 40,000 – 1,20,000)
Employment costs of 7,20,000 A direct cost of constructing the warehouse for a nine-
the construction month period till 2 8th February, 2023 [(8,00,000/10) x
workers 9]
Direct overhead 3,15,000 A direct cost of constructing the warehouse for a nine-
costs month period (35,000 x 9)
Allocated overhead Nil Not a direct cost of construction
costs
Income from Nil Not essential to the construction so recognised directly
temporary use of in profit or loss
land as car parking
area
Finance costs 4,50,000 Capitalise the interest cost incurred in a nine-month
period (from 1st June, 2022 to 28th February, 2023)
Investment income (25,000) Offset against the interest amount capitalised
on temporary
investment of the
loan proceeds
Demolition cost 7,36,000 Recognised as part of the initial cost at present value
recognised as a (i.e 80,00,000 x 0.092)
provision
Total cost of 38,56,000
construction of a
warehouse

(ii) Computation of depreciation charges for the year ended 31st March, 2023
Note: Land is not depreciated as per Ind AS 16. Hence, only cost of warehouse is subject to depreciation.
Total depreciable amount as on 1st March, 2023 38,56,000
Depreciation for 1 month must be in two parts:
(a) Depreciation on roof component 5,356 38,56,000 x 25% x 1/15 x 1/12
(b) Depreciation of remaining item 9,640 38,56,000 x 75% x 1/25 x 1/12
Total depreciation for the year 2022-2023 14,996

(iii) Computation of carrying value of the warehouse on 31st March, 2023 ₹

Cost of the warehouse as on 1st March, 2023 [computed in (i) above] 38,56,000
Less: Depreciation for 1 month as computed in (ii) above (14,996)
Carrying value of the warehouse as on 31st March, 2023 38,41,004

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Question 9 (Past Exam Nov’23)

A shipping company is required by law to bring all its ships into dry dock every 5 years for a major
inspection and overhaul. Overhaul expenditure might at first sight seem to be repair to the ships but is
actually a cost incurred in getting the ship back into a seaworthy condition. As such the costs must be
capitalised.
A ship that cost ₹ 40 Crore with 20-year life must have a major overhaul every 5 years.
The estimated cost of the first overhaul is ₹ 10 Crores.
Calculate:
(i) the depreciation charged for first five years;
(ii) the carrying amount at the end of 5th year. (5 Marks)
Solution:
(i) Computation of depreciation charged for the first 5 years
The depreciation charge for the first five years of the asset’s life will be as follows:
Overhaul component (₹ in Ship (other than overhaul
crores) component) (₹ in crores)
Cost 10 30
Years 5 20
Depreciation per year 2 1.50
Total accumulated depreciation for the first five years will be -
= (₹ 2 crores + ₹ 1.50 crores) x 5 years = ₹ 17.50 crores
(ii) Computation of carrying amount of the ship at the end of 5th year
Carrying amount of the ship at the end of 5th year = ₹ 40 crores - ₹ 17.50 crores = ₹ 22.50 crores

IND AS 19
Question 3 (RTP May 23)
From the following particulars, compute the net defined benefit liability and expense to be recognized in
Profit and Loss account. (₹ in lakhs)
Defined benefit Plan Assets
obligation
Particulars
31st Dec. 31st Dec. 31st Dec. 31st Dec.
20X2 20X1 20X2 20X1
Balance at the beginning of the year 63.25 47.08 21.80 14.65
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Changes in demographic assumptions 0.62 1.86 - -
Changes in financial assumptions 3.58 1.93 - -
Experience variance (2.49) 4.46 - -
Benefits paid - (0.61) - (0.61)
Investment income - - 1.47 1.12
Employers’ contribution - - 8.00 7.00
Return on plan assets - - 2.12 (0.35)

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Solution:
Computation of defined benefit liability and expenses to be charged to Statement of Profit and
Loss:
Defined benefit Plan Assets (₹ in lakhs)
obligation (₹ in lakhs)
31st Dec 31st Dec 31st Dec 31st Dec
20X2 20X1 20X2 20X1
Balance at the beginning of year 63.25 47.08 21.80* 14.65
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Changes in demographic assumptions 0.62 1.86 - -
Changes in financial assumptions 3.58 1.93 - -
Experience variance (2.49) 4.46 - -
Benefits paid - (0.61) - (0.61)
Investment income - - 1.47 1.12
Employers’ contribution - - 8.00 7.00
Return on plan assets - - 2.12 (0.35)
Balance at the end of year 75.07 63.25 33.39 21.81*
*Difference is due to approximation.
In the BALANCE SHEET, the following will be recognised:
Net defined liability to be recognised for the period ending 31st December, 20X1:
= ₹ 41.44 lakhs (₹ 63.25 lakhs - ₹ 21.81 lakhs)
Net defined liability to be recognised for the period ending 31st December, 20X2:
= ₹ 41.68 lakhs (₹ 75.07 lakhs - ₹ 33.39 lakhs)
In the STATEMENT OF PROFIT AND LOSS, the following will be recognised:

Defined benefit Plan Assets (₹ in lakhs)

obligation (₹ in lakhs)
31st Dec., 31st Dec., 31st Dec., 31st Dec.,
20X2 20X1 20X2 20X1
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Investment income - - (1.47) (1.12)
Total 10.11 8.53 (1.47) (1.12)
Expense to be recognised in the Statement of Profit and Loss for the period ending 31st December, 20X1 =
₹ 7.41 lakhs (₹ 8.53 lakhs - ₹ 1.12 lakhs)
Expense to be recognised in the Statement of Profit and Loss for the period ending 31st December, 20X2 =
₹ 8.64 lakhs (₹ 10.11 lakhs - ₹ 1.47 lakhs).

Question 4 (RTP Nov’23)

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Arunachalam Ltd. operates a Defined Retirement Benefits Plan for its current and former employees. Given
the large size of the company, it engaged a firm of Actuaries for advice on the Contribution Levels and
overall Liabilities of the Plan to pay benefits.
Following details are given:
a) On 1st April, 20X1, the actuarial valuation of the present value of the defined benefit obligation was ₹ 15
crores. On the same date, the fair value of the assets of the Defined Benefit Plan was ₹ 13 crores. On
1st April, 20X1, the annual market yield based on Government Bonds was 5%.
b) During the year ended 31st March, 20X2, Arunachalam made contributions of ₹ 1.75 crore into the Plan
and the Plan paid out benefits of ₹ 1.05 crore to retired members. Assume that both these payments
were made on 31st March, 20X2.
c) The Actuarial Firm estimated that the current service cost for the year ended 31st March, 20X2 would be
₹ 1.55 crores. On 28th February, 20X2, the rules of the Plan were amended with retrospective effect
which led to an increase in the present value of the defined benefit obligation by ₹ 37.5 lakhs from that
date.
d) During the year ended 31st March, 20X2, Arunachalam was in negotiation with employee
representatives regarding planned redundancies. These negotiations were completed shortly before the
year end and the redundancy packages were agreed. The impact of these redundancies was to reduce
the present value of the defined benefit obligation by ₹ 2 crores. Before 31st March, 20X2, Arunachalam
made payments of ₹ 1.875 crores to the employees affected by the redundancies in compensation for a
curtailment of their benefits. These payments were made out of the assets of the Retirement Benefits
Plan.
e) On 31st March, 20X2, the present value of the defined benefit obligation was ₹ 17 crores and the fair
value of the assets of the Defined Benefit Plan was ₹ 14 crores.
Discuss how the above will be accounted in the books of Arunachalam Ltd. for the year 20X1-20X2. Also
give the extracts of financial statements affected due to above transactions.

Solution:
1. Extract of Balance Sheet (Net Amount in the Balance Sheet) (₹ in lakhs)
31.3.20X2 1.4.20X1
PV of Defined Benefit Obligation (given) (1,700.00) (1,500.00)
FV of Plan Assets (given) 1,400.00 1,300.00
Net Defined Benefit Liability (under Long-term Provision) (300.00) (200.00)

2. Extract of Statement of Profit and Loss

(₹ in lakhs)
Current service cost (given) 155.00
Past service cost (given) 37.50
Gain on settlement (₹ 200 lakhs – ₹ 187.50 lakhs) (12.50)
Net interest on net defined benefit liability [₹ 75 lakhs - ₹ 65 lakhs] 10.00
Total to Statement of Profit and Loss 190.00

3. Extract of Other Comprehensive Income (Remeasurements)

(₹ in lakhs)
Actuarial loss on defined benefit obligation (W.N.1) (237.50)
Return on plan assets other than expected return (W.N.2) 152.50
Total (85.00)

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Working Notes:
1. Defined Benefit Obligation Account
Particulars ₹ in Particulars ₹ in lakhs
lakhs
To Plan Assets (benefits paid) 105.00 By Balance b/f (given) [balance as 1,500.00
on 1.4.20X1]
To Curtailment and Settlement 200.00 By Current Service Cost 155.00
To Balance c/d (given) [balance as on 1,700.00 By Interest Cost [5% on Opening 75.00
31.3.20X2] balance]
By Past service cost 37.50
By Actuarial Loss (balancing figure) 237.50
2,005.00 2,005.00

2. Plan Assets Account

Particulars ₹ in lakhs Particulars ₹ in lakhs
To Balance b/f (given) [balance as 1,300.00 By Defined Benefit Obligation 105.00
on 1.4.20X1] [benefits paid]
To Expected Return [5% on 65.00 By Payments on curtailment and 187.50
Opening balance] settlement
To Bank (contributions paid) 175.00 By Balance c/d (given) [balance as 1,400.00
on 31.3.20X2]
To Actuarial Gain (balancing figure) 152.50
1,692.50 1,692.50

The above Defined Benefit Obligation Account and Plan Assets Account can alternatively be presented in a
statement form as follows:
Defined Benefit Obligation Plan Assets
Particulars ₹ in lakhs Particulars ₹ in lakhs
PV of Obligation b/f. 1,500.00 FV of Plan Assets b/f. 1,300.00
Interest Cost [₹ 1,500 x 5%] 75.00 Interest Income [₹ 1,300 x 5%] 65.00
Current Service Cost 155.00 Contribution during 20X1- 20X2 175.00
Benefits paid during 20X1-20X2 (105.00) Benefits paid during 20X1- 20X2 (105.00)
Plan Curtailment and Settlement (200.00) Payment towards settlement (187.50)
Past Service Cost 37.50
Remeasurement Loss Remeasurement Gain
(balancing figure) 237.50 (balancing figure) 152.50
PV of Obligation c/f. 1,700.00 FV of Plan Assets c/f. 1,400.00

Question 5 (RTP Nov’23)

On 1st January, 20X2, the directors of Johansen Ltd. decided to terminate production at one of the
company’s divisions. This decision was publicly announced on 31st January, 20X2. The activities of the

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division were gradually reduced from 1st April, 20X2 and closure is expected to be complete by 30th
September, 20X2.
At 31st January, 20X2, the directors prepared the following estimates of the financial implications of the
closure:
(i) Redundancy costs were initially estimated at ₹ 2 million. Further expenditure of ₹ 8,00,000 will be
necessary to retrain employees who will be affected by the closure but remained with Johansen Ltd. in
different divisions. This retraining will begin in early July 20X2. Latest estimates are that redundancy
costs will be ₹ 1.9 million, with retraining costs of ₹ 8,50,000.
(ii) Plant and equipment having an expected carrying value at 31st March, 20X2 of ₹ 8 million will have a
recoverable amount ₹ 1.5 million. These estimates remain valid.
(iii) The division is under contract to supply goods to a customer for the next three years at a pre-
determined price. It will be necessary to pay compensation of ₹ 6,00,000 to this customer. The
compensation actually paid, on 31st May, 20X2, was ₹ 5,50,000.
(iv) The division will make operating losses of ₹ 3,00,000 per month in the first three months of 20X2-20X3
and ₹ 2,00,000 per month in the next three months of 20X2-20X3. This estimate proved accurate for
April, 20X2 and May, 20X2.
(v) The division operates from a leasehold premise. The lease is a non-cancellable operating lease with
an unexpired term of five years from 31st March, 20X2. The annual lease rentals (payable on 31st
March in arrears) are ₹ 1.5 million. The landlord is not prepared to discuss an early termination
payment.
Following the closure of the division it is estimated that Johansen Ltd. would be able to sub-let the property
from 1st October, 20X2.
Johansen Ltd. could expect to receive a rental of ₹ 3,00,000 for the six-month period from 1st October,
20X2 to 31st March, 20X3 and then annual rentals of ₹ 5,00,000 for each period ending 31st March, 20X4
to 31st March, 20X7. All rentals will be received in arrears.
Any discounting calculations should be performed using a discount rate of 5% per annum. You are given
the following data for discounting at 5% per annum:
Present value of ₹ 1 received at the end of year 1 = ₹ 0.95
Present value of ₹ 1 received at the end of year 1–2 inclusive = ₹ 1.86
Present value of ₹ 1 received at the end of year 1–3 inclusive = ₹ 2.72
Present value of ₹ 1 received at the end of year 1–4 inclusive = ₹ 3.54
Present value of ₹ 1 received at the end of year 1–5 inclusive = ₹ 4.32
Compute the amounts that will be included in the Statement of Profit and Loss for the year ended 31st
March, 20X2 in respect of the decision to close the division of Johansen Ltd.
Solution:
As per Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, closure of a division is a
restructuring exercise. Ind AS 37 states that a constructive obligation to proceed with the restructuring
arises when at the reporting date the entity has:
 Commenced activities connected with the restructuring; or
 Made a public announcement of the main features of the restructuring to those affected by it. In this
case a public announcement has been made and so a provision will be necessary at 31st March,
20X2.
This will result in the following charges to the Statement of Profit and Loss:
(i) Estimate of redundancy costs of ₹ 1.9 million is the best estimate of the expenditure at the date the
financial statements are authorized for issue. Changes in estimates after the reporting date are taken
into account for this purpose as an adjusting event after the reporting date. No charge is necessary for

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the retraining costs as these are not incurred in 20X1-20X2 and cannot form part of a restructuring
provision as they are related to the ongoing activities of the entity.
(ii) Impairment of plant and equipment of ₹ 6.5 million is although not strictly part of the restructuring
provision the decision to restructure before the year-end means that related assets need to be reviewed
for impairment. In this case the recoverable amount of the plant and equipment is only ₹ 1.5 million. As
per Ind AS 36 ‘Impairment of Assets’, property, plant and equipment should be written down to this
amount, resulting in a charge of ₹ 6.5 million to the income statement.
(iii) For compensation for breach of contract of ₹ 0.55 million, same principle applies here as applied to the
redundancy costs.
(iv) No charge is recognized in 20X1-20X2 with respect to future operating losses of 20X2-20X3. Future
operating losses relate to future events and provisions are made only for the consequences of past
events.
(v) Ind AS 37 states that an onerous contract is one for which the expected cost of fulfilling the contract
exceeds the benefits expected from the contract. Provision is made for the lower of the expected net
cost of fulfilling the contract and the cost of early termination (not available in this case).
The net cost of fulfilling the contract is ₹ 4.51 million [₹ 1.5 million x 4.32 – ₹ 0.3 million x 0.95 – ₹ 0.5
million x (4.32 – 0.95)].

IND AS 21
Question 5 (RTP Nov’23)
Infotech Global Ltd. (a stand-alone entity) has a functional currency of USD and needs to translate its
financial statements into the presentation currency (INR). The following is the draft financial statements of
Infotech Global Ltd. prepared in accordance with its functional currency.
Balance Sheet
Particulars 31st March, 20X3 31st March, 20X2
USD USD
Property, plant and equipment 50,000 55,000
Trade Receivables 68,500 56,000
Inventory 8,000 5,000
Cash 40,000 35,000
Total assets 1,66,500 1,51,000
Share Capital 50,000 50,000
Retained earnings 29,500 18,000
Total Equity 79,500 68,000
Trade payables 40,000 38,000
Loan 47,000 45,000
Total liabilities 87,000 83,000
Total equity and liabilities 1,66,500 1,51,000

Statement of Profit and Loss

Particulars USD
Revenue 1,77,214
Cost of sales 1,13,100

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Gross Profit 64,114
Distribution costs 2,400
Administrative expenses 18,000
Other expenses 11,000
Finance costs 12,000
Profit before tax 20,714
Income tax expense 6,214
Profit for the year 14,500

Extracts from Statement of Changes in Equity

Particulars 31st March, 20X3 (USD)
Retained earnings at the beginning of the year 18,000
Profit for the year 14,500
Dividends (3,000)
Retained earnings at the end of the year 29,500

 Share capital was issued when the exchange rate was USD 1 = INR 70.
 Retained earnings on 1st April, 20X1 was INR 4,00,000.
 At 31st March, 20X2, a cumulative gain of INR 4,92,000 has been recognised in the foreign exchange
reserve, which is due to translation of entity’s financial statements into INR in the previous years.
 Entity paid a dividend of USD 3,000 when the rate of exchange was USD 1 = INR 73.5
 Profit for the year 20X1-20X2 of USD 8,000, translated in INR at INR 5,72,000.
 Profit for the year 20X2-20X3 of USD 14,500, translated in INR at INR 10,72,985.
For the sake of simplicity, items of income and expense are translated at weighted average monthly rate as
there has been no significant exchange rate fluctuation during the entire year and the business of the entity
is not cyclical in nature.
Relevant exchange rates are as follows:
 Rate at 31st March, 20X2 USD 1= INR 73
 Rate at 31st March, 20X3 USD 1= INR 75
Prepare financial statements of Infotech Global Ltd. translated from functional currency (USD) to
presentation currency (INR).

Solution:
As per paragraph 39 of Ind AS 21, all assets and liabilities are translated at the closing exchange rate,
which is USD 1 = INR 73 on 31st March, 20X2 and USD 1 = INR 75 on 31st March, 20X3.
In the given case, share capital is translated at the historical rate USD 1 = INR 70. The share capital will not
be restated at each year end. It will remain unchanged.
Accordingly, the translated financial statements will be as follows:
Note 1: Retained earnings at 31st March, 20X3 and 31st March, 20X2:
Particulars 31st March, 20X3 31st March, 20X2
INR INR
Opening retained earnings 9,72,000 4,00,000
Profit for the year 10,72,985 5,72,000

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

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

Balance Sheet
Particulars 31st March, 20X3 31st March, 20X2
USD Rate INR USD Rate INR
Property, plant and 50,000 75 37,50,000 55,000 73 40,15,000
equipment
Trade Receivables 68,500 75 51,37,500 56,000 73 40,88,000
Inventory 8,000 75 6,00,000 5,000 73 3,65,000
Cash 40,000 75 30,00,000 35,000 73 25,55,000
Total assets 1,66,500 1,24,87,500 1,51,000 1,10,23,000
Share Capital 50,000 70 35,00,000 50,000 70 35,00,000
Retained earnings 29,500 18,24,485 18,000 9,72,000
(Refer note 1)
Foreign Exchange 6,38,015 - 4,92,000
reserve (Bal Fig.)
Total Equity 79,500 59,62,500 68,000 49,64,000
Trade payables 4 0,000 75 30,00,000 38,000 73 27,74,000
Loan 47,000 75 35,25,000 45,000 73 32,85,000
Total liabilities 87,000 65,25,000 83,000 60,59,000
Total equity and 1,66,500 1,24,87,500 1,51,000 1,10,23,000
liabilities
The foreign exchange reserve is the exchange difference resulting from translating income and expense at
the average exchange rate and assets and liabilities at the closing rate.

Other Comprehensive Income

Exchange differences on translating from USD to INR INR 1,46,015
(6,38,015 - 4,92,000)

Statement of Changes in Equity (INR)

Particulars Share Retained Foreign exchange Total

Capital Earnings Reserve
Balance at 1st April, 20X2 35,00,000 9,72,000 4,92,000 49,64,000
Dividends - (2,20,500) - (2,20,500)
Profit for the year - 10,72,985 - 10,72,985
Exchange difference - - 1,46,015 1,46,015
(transferred to OCI)
Balance at 31st March, 35,00,000 18,24,485, 6,38,015 59,62,500
20X3

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IND AS 23
Question 4 (RTP May 23)

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

1st January, 20X1 ₹ 5 crores

30th June, 20X1 ₹ 20 crores
31st March, 20X2 ₹ 20 crores
30th June, 20X2 ₹ 5 crores
On 1st July 20X1, LT Ltd. issued 10% Redeemable Debentures of ₹ 50 crores. The proceeds from the
debentures form part of the company's general borrowings, which it uses to finance the construction of the
qualifying asset, ie, the building. LT Ltd. had no borrowings (general or specific) before 1st July 20X1 and
did not incur any borrowing costs before that date. LT Ltd. incurred ₹ 25 crores of construction costs before
obtaining general borrowings on 1st July 20X1 (pre-borrowing expenditure) and ₹ 25 crores after obtaining
the general borrowings (post-borrowing expenditure).
For each of the financial years ended 31st March 20X1, 20X2 and 20X3, calculate the borrowing cost that
LT Ltd. is permitted to capitalize as a part of the building cost.

Solution:

Applying paragraph 17 of Ind AS 23 to the fact pattern, the entity would not begin capitalising borrowing
costs until it incurs borrowing costs (i.e. from 1st July, 20X1)
In determining the expenditures on a qualifying asset to which an entity applies the capitalisation rate
(paragraph 14 of Ind AS 23), the entity does not disregard expenditures on the qualifying asset incurred
before the entity obtains the general borrowings. Once the entity incurs borrowing costs and therefore
satisfies all three conditions in para 17 of Ind AS 23, it then applies paragraph 14 of Ind AS 23 to determine
the expenditures on the qualifying asset to which it applies the capitalization rate.
Calculation of borrowing cost for financial year 20X0-20X1

Capitalization Period Weighted average

Expenditure
(current year) Accumulated Expenditure
Date Amount
1st January 20X1 ₹ 5 crore 0/3 Nil
Borrowing Costs eligible for capitalisation = NIL. LT Ltd. cannot capitalise borrowing costs before 1st July,
20X1 (the day it starts to incur borrowing costs).
Calculation of borrowing cost for financial year 20X1-20X2

Capitalization Period Weighted average

Expenditure
(current year) Accumulated Expenditure
Date Amount
1st January, 20X1 ₹ 5 crore 9/12* ₹ 3.75 crore
30th June, 20X1 ₹ 20 crore 9/12 ₹ 15 crore
31st March, 20X2 ₹ 20 crore 0/12 Nil
Total ₹ 18.75 crore
Borrowing Costs eligible for capitalisation = 18.75 cr. x 10% = ₹ 1.875 cr.
*LT Ltd. cannot capitalise borrowing costs before 1st July, 20X1 (the day it starts to incur borrowing costs).
Accordingly, this calculation uses a capitalization period from 1st July, 20X1 to 31st March, 20X2 for this
expenditure.
Calculation of borrowing cost for financial year 20X2-20X3

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Expenditure Capitalization Period Weighted average

(current year) Accumulated Expenditure
Date Amount
1st January, 20X1 ₹ 5 crore 3/12 ₹ 1.25 crore
30th June, 20X1 ₹ 20 crore 3/12 ₹ 5 crore
31st March, 20X2 ₹ 20 crore 3/12 ₹ 5 crore
31st March, 20X2 ₹ 1.875 crore 3/12 ₹ 0.47 crore
30th June, 20X2 ₹ 5 crore 0/12 Nil
Total ₹ 11.72 crore

Borrowing costs eligible for capitalisation = ₹ 11.72 cr. x 10% = ₹ 1.172 cr.

Question 5 (RTP May’24)

PQR Limited is engaged in Tourism business in India. The company has planned to construct a Holiday
Resort (Qualifying Asset) at Shimla. The cost of the project has been met out of borrowed funds of ₹ 100
lakhs at the rate of 12% p.a. ₹ 40 lakhs were disbursed on 1st April 20X2 and the balance of ₹ 60 lakhs
were disbursed on 1st June 20X2. The site planning work commenced on 1st June 20X2, since the Chief
engineer of the project was on medical leave. The company commenced physical construction on 1st July
20X2 and the work of construction continued till 30th September 20X2 and thereafter the construction
activities stopped due to landslide on the road which leads to construction site. The road blockages have
been cleared by the government machinery by 31st December 20X2. Construction activities have resumed
on 1st January 20X3 and has completed on 28th February 20X3.

The date of opening has been scheduled for 1st March 20X3, but unfortunately, the District Administration
gave permission for opening on 16th March 20X3, due to lack of safety measures like fire extinguishers
which had not been installed by then.

Determine the amount of borrowing cost to be capitalized towards construction of the resort when

(i) Landslide is not common in Shimla and delay in approval from District Administration Office is minor
administrative work leftover.

(ii) Landslide is common in Shimla and delay in approval from District Administration Office is major
administrative work leftover.

Solution:

As per Ind AS 23 ‘Borrowing Costs’, the commencement date for capitalisation of borrowing cost on
qualifying asset is the date when the entity first meets all of the following conditions:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.
Further, an entity also does not suspend capitalising borrowing costs when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale. For example,
capitalization continues during the extended period that high water levels delay construction of a bridge, if
such high-water levels are common during the construction period in the geographical region involved.
An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are complete.

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Further, paragraph 23 explains that an asset is normally ready for its intended use or sale when the
physical construction of the asset is complete even though routine administrative work might still continue.
If minor modifications, such as the decoration of a property to the purchaser’s or user’s specification, are all
that are outstanding, this indicates that substantially all the activities are complete.
In the given case since the site planning work started for the project on 1st June, 20X2, the commencement
of capitalisation of borrowing cost will begin from 1st June, 20X2.
(i) When landslide is not common in Shimla and delay in approval from District Administration
Office is minor administrative work leftover
In such a situation, suspension of capitalisation of borrowing cost on construction work will be considered
for 3 months i.e. from October, 20X2 to December, 20X2 and cessation of capitalization of borrowing cost
shall stop at the time of completion of physical activities.
Accordingly, the borrowing cost to be capitalized will be effectively for 6 months i.e. from 1st June, 20X2 to
30th September, 20X2 and then from 1st January, 20X3 to 28th February, 20X3 i.e. total 6 months. The
amount of borrowing cost will be ₹ 6,00,000 (1,00,00,000 x 6/12 x 12%).
(ii) When landslide is common in Shimla and delay in approval from District Administration Office is
major administrative work leftover
Since landslides are common in Shimla during monsoon period, there shall be no suspension of
capitalisation of borrowing cost during that period.
Further, an asset can be considered to be ready for its intended use only on receipt of approvals and after
compliance with regulatory requirements such as “Fire Clearances” etc. These are very important to
declare the asset as ready for its scheduled operation.
In the given case, obtaining the safety approval is a necessary condition that needs to be complied with
strictly and before obtaining the same the entity will not be able to use the building.
Accordingly, it is appropriate to continue capitalisation until the said approvals are obtained.
Hence, the capitalisation of the borrowing cost will be for 9.5 months i.e. from 1st June, 20X2 till 15th
March, 20X3. The amount of borrowing cost will be ₹ 9,50,000 (1,00,00,000 x 9.5/12 x 12%).

IND AS 24
Question 4 (RTP May 23)
SEL has applied for a term loan from a bank for business purposes. As per the loan agreement, the loan
required a personal guarantee of one of the directors of SEL to be executed. In case of default by SEL, the
director will be required to compensate for the loss that bank incurs. Mr. Pure Joy, one of the directors had
given guarantee to the bank pursuant to which the loan was sanctioned to SEL. SEL does not pay premium
or fees to its director for providing this financial guarantee.
Whether SEL is required to account for the financial guarantee received from its director? Will there be any
disclosures under Ind AS 24?
Solution:
Ind AS 109 ‘Financial Instruments’, defines a financial guarantee contract as ‘a contract that requires the
issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor
fails to make payment when due in accordance with the original or modified terms of a debt instrument.
Based on this definition, an evaluation is required to be done to ascertain whether the contract between
director and Bank qualifies as a financial guarantee contract as defined in Appendix A to Ind AS 109. In the
given case, it does qualify as a financial guarantee contract as:
 the reference obligation is a debt instrument (term loan);

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 the holder i.e. Bank is compensated only for a loss that it incurs (arising on account of non-
repayment); and
 the holder is not compensated for more than the actual loss incurred.
Ind AS 109 provides principles for accounting by the issuer of the guarantee.
However, it does not specifically address the accounting for financial guarantees by the beneficiary. In an
arm’s length transaction between unrelated parties, the beneficiary of the financial guarantee would
recognise the guarantee fee or premium paid as an expense.
It is also pertinent to note that the entity needs to exercise judgment in assessing the substance of the
transaction taking into consideration relevant facts and circumstances, for example, whether the director is
being compensated otherwise for providing guarantee. Based on such an assessment, an appropriate
accounting treatment based on the principles of Ind AS should be followed.
In the given case, SEL is the beneficiary of the financial guarantee and it does not pay a premium or fees to
its director for providing this financial guarantee. Accordingly, SEL will not be required to account for such
financial guarantee in its financial statements considering the unit of account as being the guaranteed loan,
in which case the fair value would be expected to be the face value of the loan proceeds that SEL received.
In the given case based on the limited facts provided, SEL will be required to make necessary disclosures
of such financial guarantee in accordance with Ind AS 24 as follows:
a) the amount of the transactions;
b) the amount of outstanding balances, including commitments, and:
(i) their terms and conditions, including whether they are secured, and the nature of the
consideration to be provided in settlement; and
(ii) details of any guarantees given or received;
c) provisions for doubtful debts related to the amount of outstanding balances; and
d) the expense recognised during the period in respect of bad or doubtful debts due from related
parties.

IND AS 33
Illustration 2 (Existing Question – Only Highlighted Part is added in Solution)
For Question refer IND AS 33 Illustration 2
Solution:

Particulars Amount Amount

(₹) (₹)
Profit for the year attributable to the ordinary equity holders 150,000

Amortisation of discount on issue of increasing-rate preference shares (18,000)

(Refer Note 1)

Discount on repurchase of 8% preference shares (Refer Note 2) 1,000

Premium to induce Conversion (30,000) (17,000)

Profit attributable to ordinary equity holders for basic EPS (Refer Note 3-5) 1,33,000

Question 6 (RTP May 23)

Company P has both ordinary shares and equity-classified preference shares in issue.
The reconciliation of the number of shares during Year 1 is set out below:

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Dates in Year 1 Transaction Ordinary Treasury Preference

shares shares shares
1st April Balance 30,00,000 (5,00,000) 5,00,000
15th April Bonus issue – 5% (no corresponding 1,50,000 (25,000) -
changes in resources)
1st May Repurchase of shares for cash - (2,00,000) -
1st November Shares issued for cash 4,00,000 - -
31st March Balance 35,50,000 (7,25,000) 5,00,000
The following additional information is relevant for Year 1.

 Company P’s net profit for the year is ₹ 46,00,000.

 On 15th February, non-cumulative preference dividends of ₹ 1.20 per share were declared. The
dividends were paid on 15th March. Preference shares do not participate in additional dividends
with ordinary shares.
 Dividends on non-cumulative preference shares are deductible for tax purposes.
The applicable income tax rate is 30%.
The financial year of Company P ends on 31st March.
Determine the Basic EPS of the Company P for Year 1. Use the number of months or part of months,
rather than the number of days in the calculation of EPS.
Solution:
Determination of numerator for calculation of Basic EPS
The first step in the basic EPS calculation is to determine the profit or loss that is attributable to ordinary
shareholders of Company P for the period.
Non-cumulative dividends paid on equity-classified preference shares are not deducted in arriving at net
profit or loss for the period, but they are not returns to ordinary shareholders. Accordingly, these dividends
are deducted from net profit or loss for the period in arriving at the numerator.

(₹)
Net profit 46,00,000
Preference dividends (5,00,000 shares x 1.2) (6,00,000)
Related tax (₹ 6,00,000 x 30%) 1,80,000 (4,20,000)
Profit or loss attributable to P’s ordinary shareholders 41,80,000
Accordingly, the numerator for calculation of Basic EPS is ₹ 41,80,000
Determination of denominator for calculation of Basic EPS
The second step in the basic EPS calculation is to determine the weighted-average number of ordinary
shares outstanding for the reporting period.

Number of shares Time Weight Weighted

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

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Weighted average number of shares for the year 26,08,333

The denominator for calculation of Basic EPS is 26,08,333 shares.
Basic EPS = ₹ 41,80,000 / 26,08,333 shares = ₹ 1.60 per share (approx.).

IND AS 34
Question 3 (MTP Nov’23)
ABC Ltd. requires assistance on whether the following revenue can be anticipated or cost can be deferred
as of 30th June, 20X1 while preparing the interim financial statements:
(i) Dividend income from its investment which is declared in September of every year.
(ii) 60% of the advertising cost for the whole year is incurred by ABC Ltd. in the first quarter and the
remaining 40% in the second quarter. (5 Marks)
Solution:
Paragraphs 37 and 38 of Ind AS 34, Interim Financial Reporting state that 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. Additionally, some entities
consistently earn more revenues in certain interim periods of a financial year than in other interim periods,
for example, seasonal revenues of retailers. Such revenues are recognised when they occur.
Further, for costs incurred unevenly during the financial year, para 39 of Ind AS 34 states that 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.
In view of the above guidance, in the given case, dividend income received by ABC Limited cannot be
anticipated and recognised in financial statements as of 30th June, 20X1. Further, considering that 60% of
advertising cost for the whole year has been incurred by ABC Ltd during the first quarter and 40% in the
second quarter, it is a cost incurred unevenly. Applying principles of paragraph 39, it is not appropriate to
defer the charge of an incurred advertising expense (60% of whole year cost) at the end of the quarter.
Accordingly, all the advertising costs incurred till 30th June, 20X1 should be charged to P&L while
preparing its financial statements as of 30th June, 20X1.

IND AS 37
Question 8 (MTP May’24)
An entity has a contract to purchase one million units of gas at 23p per unit, giving a contract price of ₹
2,30,000. The current market price for a similar contract is 16p per unit, giving a price of ₹ 1,60,000. All of
the gas purchased by the entity is used to generate electricity using dedicated assets.
Determine in the following situations whether the contract is onerous and provision is to be made when:
(i) The electricity is sold at a profit. The electricity is sold to a wide range of customers.
(ii) The electricity is sold at a loss, and the entity makes an overall operating loss. The electricity is sold to
a wide range of customers.
(iii) The entity sells the gas under contract, which it no longer needs, to a third party for 18p per unit (5p
below cost). The entity determines that it would have to pay ₹ 55,000 to exit the purchase contract.
Solution: (6 Marks)
(i) The gas will be used to generate electricity, which will be sold at a profit. The economic benefits from the
contract include the benefits to the entity of using the gas in its business and, because the electricity will
be sold at a profit, the contract is not onerous.

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(ii) The electricity is sold to a wide range of customers. The entity first considers whether the assets used to
generate electricity are impaired. To the extent that there is still a loss after the assets have been written
down, a provision for an onerous contract should be recorded.
(iii) The only economic benefit from the purchase contract costing ₹ 2,30,000 are the proceeds from the
sales contract, which are ₹ 1,80,000. Therefore, a provision should be made for the onerous element of
₹ 50,000, being the lower of the cost of fulfilling the contract and the penalty cost of cancellation (₹
55,000).

IND AS 38
Question 6 (RTP May 23)
An entity acquired two trade secrets (secret recipes) in a business combination.
Recipe A is patented. Recipe B is not legally protected.

How the acquisition of Recipe A and Recipe B would be accounted for by the entity as per relevant Ind AS.

Solution:
Para 11 and 12 of Ind AS 38 states that the definition of an intangible asset requires an intangible asset to
be identifiable to distinguish it from goodwill. Goodwill recognized in a business combination is an asset
representing the future economic benefits arising from other assets acquired in a business combination that
are not individually identified and separately recognised. The future economic benefits may result from
synergy between the identifiable assets acquired or from assets that, individually, do not qualify for
recognition in the financial statements.
Further, an asset is identifiable if it either:
a) is separable, ie is capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract, identifiable
asset or liability, regardless of whether the entity intends to do so; or
b) arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations. In the given case, Recipe A meets the
contractual-legal criterion for identification as an intangible asset because it is protected by a patent.
This recipe is identified an recognised separately from goodwill while accounting the business
combination.
Since Recipe B is not protected by a patent, it does not meet the contractual-legal criterion for identification
as an intangible asset. However, Recipe B is identified as a separate intangible asset because it meets the
separability criterion. Such recipes can be, and often are, exchanged, licensed or leased to others.
Therefore, the unpatented Recipe B should be accounted for as a separate intangible asset acquired in the
business combination.

Question 7 (RTP Nov’23)

A company engaged in the provision of Information Technology Products and Services incurred following
expenditure during the development phase of its software product that is to be offered to its customers. The
entity also purchases software from third parties for incorporating into its end software product offered to its
customers. The company is in the process of launching it in the market for licensing to customers. The
company also takes services of external professional software developers for such software development
purpose. Costs incurred in relation to the development of its software product for the year ended 31st
March, 20X2 are as follows:
Particulars Amount
(₹ thousands)
Purchase price of imported software 600
Employment costs (Note 1) 1,200
Testing costs 1,800

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Other costs directly related to customization (Note 2) 450

Professional fees paid for external software developers 220
Costs of training provided to staff to operate the asset 195
Costs of advertising in market 1,560
Administrative and general overheads 825
Note 1: The software was developed in nine months ended 31st December, 20X1 and was capable of
operating in the manner intended by the entity. It was brought into use on 31st March, 20X2. The
employment costs are for the period of twelve months (i.e. up to 31st March, 20X2). The employees were
engaged in developing the software and related activities.
Note 2: Other costs directly related to development include an abnormal cost of ₹ 50,000 in respect of
repairing the damage which resulted from a security breach. What will be the amount of the software
development costs that can be capitalized by explaining the reason for each element of cost?
Solution:
In the given fact pattern, the entity should apply the recognition and measurement principles relevant for an
internally generated intangible asset. The entity has to ensure compliance with additional requirements
relating to internally generated intangible assets in addition to general recognition criteria and initial
measurement of intangible asset. In the instant case, for the measurement of software development cost,
entity must evaluate the costs incurred for recognition of an intangible asset arising from development
phase with reference to paragraphs 65 to 67 of Ind AS 38.
According to the said paragraphs, the initial carrying amount of the software will be computed as follows:
Particulars Amount (₹ Amount to Remarks
in be
thousands) capitalised
as
Intangible
Assets (₹ in
thousands)

Purchase price of 600 600 The cost of materials or / and services used or
imported software consumed in generating the intangible asset
and any directly attributable cost of preparing
the asset for its intended use.

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

Testing costs 1,800 1,800 The cost of testing whether the asset is
functioning properly is a directly attributable
cost. (Refer paragraph 59 of Ind AS 38)

Other costs directly 450 400 Cost of identified inefficiencies deducted, i.e., ₹
related to development 450 thousand – ₹ 50 thousand.
(Note 2)

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Professional fees paid 220 220 The cost of materials or/and services used or
for bringing the software consumed in generating the intangible asset
to its working condition

Costs of training 195 Nil Expenditure on training staff to operate the

provided to staff asset cannot be capitalised. (Refer paragraph
67 of Ind AS 38)

Costs of advertising in 1,560 Nil Selling, administrative and other general

market overhead expenditure cannot be capitalised.
(Refer paragraph 67 of Ind AS 38)

Administrative and 825 Nil

general overheads

Total 6,850 3,920

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

IND AS 40
Question 5 (RTP Nov’23)

Besides manufacturing plants, A Ltd. has various other assets, not used for operational activities, e.g.,
freehold land, townships in different locations, excess of office space rented to ABC, etc. Also, A Ltd. has
some land, which are kept vacant as per the government regulations which require that a specified area
around the plant should be kept vacant.
The details of these assets are as under:
Property Details
A Ltd.’s office A Ltd.’s registered office in Delhi, is a 15 storey building, of which only 3 floors
building (registered are occupied by A Ltd., whereas remaining floors are given on rent to other
office) companies. These agreements are usually for a period of 3 years. According to A
Ltd., such ex cess office space will continue to be let out on lease to external
parties and have no plans to occupy it, at least in near future.
Flats in Township As regards township in Location 1, there are approximately 2,000 flats in the said
located in location 1 township. It was built primarily for A Ltd.’s employees, hence, approximately 80%
of the flats are allotted to employees and remaining flats are either kept vacant or
given on rent to other external parties. A lease agreement is signed between A
Ltd. and an individual party for every 12 months being 1st April to 31st March.
The lease entered is a cancellable lease (cancellable at the option of any of the
parties). Also, besides monthly rent, additional charges are levied by A Ltd. on
account of electricity, water, cable connection, etc.
According to A Ltd., there is no intention of selling such excess flats or allotting it
to its employees.
Flats in township There are 1,000 flats in location 2 township, of which:
located in location 2 - 400 flats are given to employees for their own accommodation.

- 350 flats are given on rent to Central Government and State Government for
accommodation of their employees. Average lease period being 12 months
with cancellable clause in lease agreements.
- 250 flats are kept vacant.
Hostel located in 60 rooms in the hostel have been let out to G Ltd., to give accommodation to

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location 1 their personnel. Lease agreement is prepared for every 11 months and renewed
thereafter. Besides the monthly rent amount, some charges are levied towards
water, electricity and other amenities, e.g., cable connection, etc.
Land in location 1 In 20X4, A Ltd. purchased a plot of land on the outskirts of a major city. The area
has mainly low-cost public housing and very limited public transport facilities. The
government has plans to develop the area as an industrial park in 5 years’ time
and the land is expected to greatly appreciate in value if the government
proceeds with the plan. A Ltd. has not decided what to do with the property.
Land in location 1 A portion of land has been leased out to C Ltd. for its manufacturing operations.
Land has been given on lease on a lease rental of ₹ 10 lacs p.a. with a lease
term of 25 years.
Land in location 2 A portion of the land has been given on rent to D Ltd. which has constructed a
petrol pump on such land. It has been leased for a period of 40 years and
renewed for a further period of 40 years.
Determine the classification of properties which are not held for operational purposes, with suitable
reasoning in the financial statements of A Ltd.
Solution:
Property Classification of properties not held for operational purpose
A Ltd.’s office building Excess portion of office space has been given on lease to earn rental income.
(registered office) Out of 15 storey building, only 3 floors are occupied by A Ltd. Such excess
office space was constructed for the purpose of letting it out. According to A
Ltd., such excess office space will continue to be let out on lease to external
parties and have no plans to occupy it, at least in near future. Further, office
space given on rent, although in same building, is separately identifiable from
another owner-occupied portion and hence can be sold separately (if required).
Hence, the excess space will qualify to be an investment property.
Flats in Township Excess flats have been given on lease to earn rental income. According to A
located in location 1 Ltd., there is no intention of selling such excess flats or allotting it to its
employees. Further, flats given on rent, can be sold separately from flats
occupied by A Ltd.’s employees as they are separately identifiable. A Ltd. also
charges its lessees on account of ancillary services, i.e., water, electricity,
cable connection, etc., but the monthly charges in such cases are generally not
significant as compared to rental payments. Hence, flats given on rent should
qualify to be an ‘investment property’.
With regards to the flats kept vacant, A Ltd. has to evaluate the purpose of
holding these flats, i.e., whether these would be kept for earning rentals or will it
be allotted to its future employees. In case they are held for earning rentals, it
would be classified as an investment property; and if they are held for allotment
to future employees, it would form part of property, plant and equipment.
Flats in township 350 flats are given on lease to earn rental income and assuming that
located in location 2 management intends to let out these flats on rent in future, such flats should be
classified as an ‘investment property.
With regards to the flats kept vacant, A Ltd. has to evaluate the purpose of
holding these flats, i.e., whether these would be kept for earning rentals or will it
be allotted to its future employees. In case they are held for earning rentals, it
would be classified as an investment property; and if they are held for allotment
to future employees, it would form part of property, plant and equipment.
Hostel located in Rooms in a hostel have been let out to G Ltd. to be used by its personnel. A
location 1 Ltd. also charges G Ltd. on account of ancillary services, i.e., water, electricity,

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cable connection, etc., but the monthly charges in such cases are generally not
significant as compared to rental payments. Hence, it should be classified as
an ‘Investment property’.
Land in location 1 Although management has not determined use for property after the
development of park, yet in the medium-term the land is held for capital
appreciation. As per Ind AS 40, if an entity has not determined that it will use
the land either as owner-occupied property or for short term sale in the ordinary
course of business, then it will be considered as land held for capital
appreciation. Therefore, management should classify the property as an
investment property.
Land in location 1 Since the land is held with an intention of giving it on lease and earning capital
appreciation over a period, it should be classified as an ‘Investment property’.
Land in location 2 Since the land is held with an intention of giving it on lease and earning capital
appreciation over a period, it should be classified as ‘Investment property’.

IND AS 41
Question 4 (RTP May 23)
Fisheries Ltd. practices pisciculture in sweet waters (ponds, tanks and dams). The fishing activity of
Fisheries Ltd. in such sweet waters consists only of catching the fishes. Comment whether such fishing
activity will be covered within the scope of Ind AS 41?
Solution:
Paragraph 5 of Ind AS 41, defines agricultural activity as follows: “Agricultural activity is 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.”
For fishing to qualify as agricultural activity, it must satisfy both of the below mentioned conditions:
a. management of biological transformation of a biological asset; and
b. harvesting of biological assets for sale or for conversion into agricultural produce or into additional
biological assets.
Therefore, when fishing involves managed activity to grow and procreate fishes in designated areas, such
fishing is an agricultural activity as per the above definition.
Managing the growth of fish for subsequent sale is an agricultural activity as per Ind AS 41.
In the aforementioned scenario, only fish harvesting is managed by Fisheries Ltd.
Therefore, mere fish harvesting without management of biological transformation cannot be termed as an
agricultural activity as per Ind AS 41.
Hence, fishing in sweet waters (pond, tanks and dams) where only fishing (harvesting) is carried out
without any management of biological transformation is outside the scope of Ind AS 41.

Question 5 (RTP Nov’23)

M. Chinnaswamy & Brothers Ltd. is a company that is engaged in growing and maintaining coconut palms
and selling their output in various forms. The company has a farmland having 2,00,000 coconut palms in
the coastal area of Karnataka near Mangalore.
The fair value of each coconut palm is derived based on the average realisable price of ₹ 30 per nut (fruit).
Each coconut palm grows 80 nuts per annum on an average basis. Each coconut palm can generate
revenue for as long as 80 years and the current palms are only 20-year-old. The management thinks that
considering the risk factors in business, the valuation of each palm can be considered at 5 times its annual
revenue.

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During August, 20X5, the Ooty Hotels Association (OHA) chairman and his team visited the corporate office
of the company at Mangalore. The deal was to supply tender coconuts to Ooty Hotels at an agreed price
throughout the year. The agreement came into effect from 1st September, 20X5 whereby the company
shall reserve 15,000 coconut palms (out of 2,00,000 coconut palms) for OHA and will charge a
concessional rate of ₹ 15 only per nut supplied to OHA. OHA will in turn supply the tender coconuts to each
Ooty Hotel at the same price. This contract price is applicable irrespective of the ownership of palm trees (it
is not an entity-specific restriction). All tender coconuts of these 15,000 coconut palms were used by OHA
irrespective of the agreement being effective from 1st September, 20X5.
What will be the valuation of 2,00,000 coconut palms in the company’s farm for the quarter ended 30th
September, 20X5?
Solution:
Para 16 of Ind AS 41 says that entities often enter into contracts to sell their biological assets or agricultural
produce at a future date. Contract prices are not necessarily relevant in measuring fair value, because fair
value reflects the current market conditions in which buyers and sellers would enter into a transaction. As a
result, the fair value of a biological asset or agricultural produce is not adjusted because of the existence of
a contract.
Moreover, the OHA contract represents just 7.5% [(15,000 / 2,00,000) x 100] of t he total number of palms
in the farm. Hence, the contract price can’t be considered for fair valuation of the entire inventory of bearer
plants.
The valuation in this case would be as follows:
Adding the fair value for 15,000 coconut palm (15,000 palm x 80 nuts x ₹ 15 x 5 times) and 1,85,000
coconut palm (1,85,000 palm x 80 nuts x ₹ 30 x 5 times), we get total valuation of 2,00,000 coconut palm
as ₹ 231 crore.

IND AS 101
Question 9 (RTP May 23)

ABC Ltd., a public limited company, is in the business of exploration and production of oil and gas and
other hydrocarbon related activities outside India. It operates overseas projects directly and/or through
subsidiaries, by participation in various joint arrangements and investment in associates. The company was
following Accounting Standards as notified under the Companies (Accounting Standards) Rules until 31st
March, 20X1. However, it has adopted Indian Accounting Standards (Ind AS) with effect from 1st April,
20X1.
The goodwill recognised in accordance with AS 21 and AS 27 was due to corporate structure and the line-
by-line consolidation of subsidiaries’/proportionate consolidation of jointly controlled entities’ financial
statements which was prepared on historical costs convention. ABC Ltd. has not taken into consideration
the valuation of underlying oil and gas reserves for which excess amount (i.e. goodwill calculated as per the
relevant AS requirements) has been paid by the company at the time of acquisition. The company further
considered that in oil and gas companies, the goodwill generated on acquisition of mineral rights either
through jointly controlled entities or subsidiaries, inherently derives its value from the underlying mineral
rights and, accordingly, value of such goodwill depletes as the underlying mineral resources are extracted.
Therefore, taking a prudent approach and considering the above substance, the company amortised the
goodwill in respect of its subsidiaries / jointly controlled assets over the life of the underlying mineral rights
using Unit of Production method. This allowed the company to utilise the value of goodwill over the life of
mineral rights and completely charging off the goodwill over the life of the reserves.
For financial year 20X0-20X1, the company has availed transition exemption under Ind AS 101 and has not
applied the principles of Ind AS 103.
ABC Ltd. considering the substance over form of the goodwill to be in the nature of 'acquisition costs'
intends to continue amortisation of the goodwill recognised under AS in respect of its subsidiaries / joint
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ventures (jointly controlled entities under AS) over the life of the underlying mineral rights using Unit of
Production method, under Ind AS also post transition date.
Comment on appropriateness of the accounting treatment, under Ind AS, for amortisation of the goodwill by
the company and state whether the accounting treatment in respect of amortisation of goodwill is correct or
not.
Solution:
Point (g) of para C4 of Ind AS 101 states that the carrying amount of goodwill or capital reserve in the
opening Ind AS Balance Sheet shall be its carrying amount in accordance with previous GAAP at the date
of transition to Ind AS after the two adjustments. One of the adjustment states that the standard requires
the first-time adopter to recognise an intangible asset that was subsumed in recognised goodwill or capital
reserve in accordance with previous GAAP, the first-time adopter shall decrease the carrying amount of
goodwill or increase the carrying amount of capital reserve accordingly (and, if applicable, adjust deferred
tax and non-controlling interests)
As per the facts given, the entity paid excess amount to avail the rights to use the underlying oil and gas
reserves. However, since the rights was not recorded in the books at that time, the value of goodwill
subsumed the value of that intangible asset which should be separately identified in the books. Hence,
value of goodwill will be reduced accordingly and intangible asset for rights for using mine should be
recognised.
Further, regardless of whether there is any indication that the goodwill may be impaired, the first-time
adopter shall apply Ind AS 36 in testing the goodwill for impairment at the date of transition to Ind AS and in
recognising any resulting impairment loss in retained earnings (or, if so required by Ind AS 36, in
revaluation surplus). The impairment test shall be based on conditions at the date of transition to Ind AS.
No other adjustments (eg- previous amortisation of goodwill) shall be made to the carrying amount of
goodwill / capital reserve at the date of transition to Ind AS.
However, once goodwill is recognised in the opening transition date balance sheet, the entity has to follow
the provisions of Ind AS, which states that goodwill is not amortised but rather tested for impairment
annually. Accordingly, the amortization of goodwill based on ‘Unit of Production’ method is not correct after
implementation of Ind AS

Question 10 (Past exam Nov’23)

Diamond Limited is transitioning to Ind AS. It has certain investments in Ruby Limited's Convertible Debt
Instruments, which are currently (on the date of transition to Ind AS) exercisable and would provide
Diamond Limited with a controlling stake over Ruby Limited on exercise of the conversion rights. Diamond
Limited evaluated that Ruby Limited should be treated as its subsidiary under Ind AS. Hence it would
require consolidation in its Ind AS Consolidated Financial Statements. Ruby Limited was not considered as
a Subsidiary, Associate or a Joint Venture under Previous GAAP. How should Ruby Limited be
consolidated on transition to Ind AS. Assume that Diamond Limited has opted to avail the exemption from
retrospective re-statement of past business combinations as per applicable Ind AS? (5 Marks)
Solution:

Ind AS 101 prescribes an optional exemption from retrospective restatement in relation to past business
combinations. Ind AS 101 prescribes that when the past business combinations are not restated and a
parent entity had not consolidated an entity as a subsidiary in accordance with its previous GAAP (either
because it was not regarded as a subsidiary or no consolidated financial statements were required under
previous GAAP), then the subsidiary’s assets and liabilities would be included in the parent’s opening
consolidated financial statements at such values as would appear in the subsidiary’s separate financial
statements if the subsidiary were to adopt the Ind AS as at the parent’s date of transition. For this purpose,
the subsidiary’s separate financial statements would be prepared as if it was a first-time adopter of Ind AS
i.e. after applying the relevant first-time adoption mandatory exceptions and voluntary exemptions. In other
words, the parent will adjust the carrying amount of the subsidiary’s assets and liabilities to the amounts
that Ind AS would require in the subsidiary’s balance sheet.

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The deemed cost of goodwill equals the difference at the date of transition between:
a. the parent’s interest in those adjusted carrying amounts; and
b. the cost in the parent’s separate financial statements of its investment in the subsidiary.
The measurement of non-controlling interest and deferred tax follows from the measurement of other
assets and liabilities.
It may be noted here that the above exemption is available only under those circumstances where the
parent, in accordance with the previous GAAP, has not presented consolidated financial statements for the
previous year; or where the consolidated financial statements were prepared in accordance with the
previous GAAP, but the entity was not treated as a subsidiary, associate or joint venture under the previous
GAAP.

IND AS 105
Question 5 (RTP May’23)
Note: This Ques is similar to illus 9 of IND AS 105, the only difference is that, in illus 9 there was no
impairment loss but in this illustration there is impairment loss.

On 1st January, 20X1, the carrying amounts of the relevant assets of the division of an entity, Star Ltd.
were as follows:
 Purchased goodwill ₹ 1.2 lakhs;
 Property, plant and equipment (average remaining estimated useful life two years) ₹ 4 lakhs;
 Inventories ₹ 2 lakhs.
From 1st January, 20X1, Star Ltd. began to actively market the division and has received a number of
serious enquiries.
On 1st January, 20X1, the directors estimated that they would receive ₹ 6.4 lakhs from the sale of the
division. Since 1st January, 20X1, market conditions have improved and on 30th April, 20X1, Star Ltd.
received and accepted a firm offer to purchase the division for ₹ 6.6 lakhs. The sale is expected to be
completed on 30th June, 20X1.
₹ 6.6 lakhs can be assumed to be a reasonable estimate of the value of the division on 31st March, 20X1.
During the period from 1st January 20X1 to 31st March, 20X1, inventories of the division costing ₹ 1.6
lakhs were sold for ₹ 2.4 lakhs. At 31st March, 20X1, the total cost of the inventories of the division was ₹
1.8 lakhs. All of these inventories have an estimated net realizable value that is in excess of their cost.
Explain the disclosure requirement related to sale of division and provide the accounting treatment of
property held for sale and discontinued operations.
Solution:
The decision to offer the division for sale on 1st January, 20X1 means that from that date the division is
classified as held for sale. The division available for immediate sale, is being actively marketed at a
reasonable price, and the sale is expected to be completed within one year.
The consequence of this classification is that the assets of the division will be measured at the lower of
their existing carrying amounts (₹ 7.20 lakhs i.e. Goodwill ₹ 1.2 lakh + PPE ₹ 4 lakhs + Inventory ₹ 2 lakhs)
and their fair value less costs to sell (₹ 6.40 lakhs). This implies that the assets of the division will be
measured at ₹ 6.40 lakhs on 1st January, 20X1.
The reduction in carrying value of the assets of ₹ 0.80 lakhs (₹ 7.20 lakhs – ₹ 6.40 lakhs) will be treated as
an impairment loss and allocated to goodwill, leaving a carrying amount for goodwill of ₹ 0.40 lakhs (₹ 1.20
lakhs – ₹ 0.80 lakhs).
The increased expectation of the selling price of ₹ 0.20 lakhs (₹ 6.60 lakhs – ₹ 6.40 lakhs) will be treated as
a reversal of an impairment loss. However, since this reversal relates to goodwill, it cannot be recognised.

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The assets of the division need to be presented separately from other assets in the balance sheet. Their
major classes of assets classified as held for sale should be separately disclosed, either in the balance
sheet or in the notes.
The property, plant and equipment should not be depreciated after 1st January, 20X1, so it’s carrying value
at 31st March, 20X1 will be ₹ 4 lakhs. The inventories of the division will be shown at their year-end cost of
₹ 1.80 lakhs.
The division will be regarded as a discontinued operation for the year ended 31st March, 20X1. It will
represent a separate line of business and will be held for sale at the year end.
The statement of profit and loss should disclose, as a single amount, the post-tax profit or loss of the
division and the impairment loss arising on the re-measurement of the division on classification as held for
sale. Further analysis of this single amount may be presented in the notes or in the statement of profit and
loss. If it is presented in the statement of profit and loss it shall be presented in a section identified as
relating to discontinued operations, i.e. separately from continuing operations.

Question 6 (RTP Nov’23)

Company X has identified one of its division (disposal group) to be sold to a prospective buyer and the
Board has approved the plan to sell the division on 30th September, 20X1. The sale is expected to
complete after one year but it still qualifies to be held for sale under Appendix B of Ind AS 105. Costs to sell
the division is estimated to be ₹ 10 crores (to be incurred in March, 20X3). The fair value of the division is ₹
400 crores (on 30th September, 20X1 and 31st March, 20X2) and carrying value is ₹ 500 crores.
How shall such a division (disposal group) be measured under Ind AS 105 on following reporting dates:
A. 30th September, 20X1
B. 31st March, 20X2
Consider the discounting factor @ 10% for 1 year to 0.909 and for 1.5 years to be 0.867.

Solution:

Paragraph 15 of Ind AS 105 states that an entity shall measure a non-current asset (or disposal group)
classified as held for sale at the lower of its carrying amount and fair value less costs to sell.
Further, paragraph 17 of Ind AS 105 states that when the sale is expected to occur beyond one year, the
entity shall 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.
Company X has identified a disposal group and is committed to sell the same. The sale is expected to be
completed after a period of one year hence, it will measure the costs to sell such disposal group at present
value as per paragraph 17 of Ind AS 105.
A. On 30th September, 20X1
The disposal group will be measured at fair value less costs to sell which will be as follows:
Fair value: ₹ 400.00 crores
PV of costs to sell: (₹ 8.67 crores) (₹ 10 crores x 0.867)
Total: ₹ 391.33 crores

B. On 31st March, 20X1

The disposal group will be measured at fair value less costs to sell which will be as follows:
Fair value: ₹ 400.00 crores
PV of costs to sell: (₹ 9.09 crores) (10 x 0.909)
Total: ₹ 390.91 crores

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The increase in costs to sell the division by ₹ 0.42 crore (₹ 9.09 crores – ₹ 8.67 crores) will be recognised
in profit and loss as financing cost in accordance with paragraph 17 of Ind AS 105.

IND AS 108
Question 3 (Past Exam Nov’23)
Haymond Limited has three segments H, M & D. The following information is provided for the year ending
31st March, 2023: All amounts are in ₹ Lakhs
Particulars Segments Head Office
H M D
Sales to M 500 - -
Sales to D – 5 -
Other Sales (Domestic) 10 - -
Sales (Export) 680 170 40
Operating Profit /(Loss) before tax 30 5 (8)
Reallocated cost from Head Office 4 2 2
Interest cost 2 3 1
Fixed Assets* 20 4 12 5
Net Current Assets 12 4 9 3
Long Term Liabilities 2 1 12 2
Other Information:
(i) Share Capital amounts to ₹ 40,00,000
(ii) Reserve & Surplus amounts to ₹ 12,00,000
Prepare segment information as per Ind AS 108. (8 Marks)
Solution:
(A) Information about operating segment
1) The company’s operating segment comprise: H, M & D
2) Segment revenue, results and other information
Haymond Ltd.
Segment Information / Report
(All amounts are ₹ in lakhs)
Particulars Reportable Segments Head Total
Office/
Unallocated
items
H M D
1. Segment Revenue
Sales:
Domestic 10 − − − 10
Export 680 170 40 − 890
External Sales 690 170 40 900
Inter-segment sales 500 5 − − 505

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Total Sales 1,190 175 40 1,405

Less: Inter-segment sales (500) (5) − − (505)
Total Sales / Revenue 690 170 40 900
2. Results
Segment result 30 5 (8) 27
Reallocated cost (4) (2) (2) (8)
Profit from operation before interest, 26 3 (10) 19
taxation and Exceptional items
Finance cost (Interest expense) (2) (3) (1) (6)
Profit before tax and exceptional items 24 0 (11) 13
3. Information in relation to assets
and liabilities
Reportable segment non-current 20 4 12 5 41
assets
Reportable segment net current 12 4 9 3 28
assets
Total Assets 32 8 21 8 69
Non-current liabilities 2 1 12 2 17

B. Geographical Information
₹ in lakhs
Domestic Sales Export Sales Total
External sales 10 890 900

IND AS 115
Question 13 (RTP Nov’23)
On 1st April, 20X1, Entity X enters into a contract with Entity Y to sell mobile chargers for ₹ 100 per
charger. As per the terms of the contract, if Entity Y purchases more than 1,000 chargers till March 20X2,
the price per charger will be retrospectively reduced to ₹ 90 per unit. Till September 20X1, Entity X sold 95
chargers to Entity Y.
Entity X estimates that Entity Y's purchases by March 20X2 will not exceed the required threshold of 1,000
chargers.
In October 20X1, Entity Y acquires another Entity C and from October 20X1 to December 20X1, Entity X
sells an additional 600 chargers to Entity Y. Due to these developments, Entity X estimates that purchases
of Entity Y will exceed the 1,000 chargers threshold for the period and therefore, it will be required to
retrospectively reduce the price per charger to ₹ 90. Analyse the above scenario in light of Ind AS 115 and
state how the revenue should be recognised in such a situation.
Solution:
Paragraph 56 of Ind AS 115 states that an entity shall include in the transaction price some or all of an
amount of variable consideration estimated in accordance with paragraph 53 only to the extent that it is
highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur
when the uncertainty associated with the variable consideration is subsequently resolved.
Further, paragraph 57 of Ind AS 115 state that in assessing whether it is highly probable that a significant
reversal in the amount of cumulative revenue recognised will not occur once the uncertainty related to the

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variable consideration is subsequently resolved, an entity shall consider both the likelihood and the
magnitude of the revenue reversal. Factors that could increase the likelihood or the magnitude of a revenue
reversal include, but are not limited to, any of the following:
a) the amount of consideration is highly susceptible to factors outside the entity’s influence. Those factors
may include volatility in a market, the judgement or actions of third parties, weather conditions and a
high risk of obsolescence of the promised good or service.
b) the uncertainty about the amount of consideration is not expected to be resolved for a long period of
time.
c) the entity’s experience (or other evidence) with similar types of contracts is limited, or that experience
(or other evidence) has limited predictive value.
d) the entity has a practice of either offering a broad range of price concessions or changing the payment
terms and conditions of similar contracts in similar circumstances.
e) the contract has a large number and broad range of possible consideration amounts.
Entity X estimates that the consideration in the above contract is variable. Therefore, in accordance with
paragraphs 56 and 57 of Ind AS 115, Entity X is required to consider the constraints in estimating variable
consideration. Entity X determines that it has significant experience with this product and with the
purchasing pattern of the Entity Y. Thus, if Entity X concludes that it is highly probable that a significant
reversal in the cumulative amount of revenue recognised (i.e. ₹ 100 per unit) will not occur when the
uncertainty is resolved (i.e. when the total amount of purchases is known), then the Entity X will recognise
revenue of ₹ 9,500 (95 chargers x ₹ 100 per charger) for the half year ended 30th September, 20X1.
Further, paragraphs 87 and 88 of Ind AS 115 that after contract inception, the transaction price can change
for various reasons, including the resolution of uncertain events or other changes in circumstances that
change the amount of consideration to which an entity expects to be entitled in exchange for the promised
goods or services.
An entity shall allocate to the performance obligations in the contract any subsequent changes in the
transaction price on the same basis as at contract inception.
Consequently, an entity shall not reallocate the transaction price to reflect changes in stand-alone selling
prices after contract inception. Amounts allocated to a satisfied performance obligation shall be recognised
as revenue, or as a reduction of revenue, in the period in which the transaction price changes.”
In accordance with the above, in the month of October 20X1, due to change in circumstances on account of
Entity Y acquiring Entity C and consequential increase in sale of chargers to Entity Y, Entity X estimates
that Entity Y's purchases will exceed the 1,000 chargers threshold till March 20X2 for the period and
therefore, it will be required to retrospectively reduce the price per charger to ₹ 90.
Consequently, the Entity X will recognise revenue of ₹ 53,050 for the quarter ended December 20X1 which
is calculated as follows:
Particulars Amount in ₹
Sale of 600 chargers (600 chargers x ₹ 90 per charger) 54,000
Less: Change in transaction price (95 chargers x ₹ 10 price reduction) for the reduction (950)
of revenue relating to units sold till September 20X1.
Revenue recognised for the quarter ended December 20X1 53,050

Question 14 (Past Exam Nov’23)

Whether the following expenses shall form part of ‘costs incurred to obtain a contract'. Give reasons:
(i) Commission paid only upon successful signing of the contract;
(ii) Legal fees for drafting the terms of the arrangement/ agreement;
(iii) Travel expenses of a sales person pitching for a new client contract;
(iv) Salaries of sales people working exclusively on obtaining new clients;

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(v) Bonus based on quarterly sales;
(vi) Commission paid to sales manager which is based on contracts obtained. (6 Marks)

Solution:
Table showing expenses whether forming part of ‘Cost to obtain a Contract’
S.No. Cost Capitalize or Reason
expense / cost to
obtain a contract
i Commission paid Capitalize/Yes Assuming the entity expects to recover the cost, the
only upon successful commission is incremental since it would not have
signing of a contract been paid if the parties decided not to enter into the
arrangement just before signing.
ii Legal fees for Expense/No Capitalize/Yes If the parties walk away during
drafting terms of negotiations, the costs would still be incurred and
agreement therefore are not incremental costs of obtaining the
contract. Alternatively, it can be ‘Capitalised / Yes’,
due to the absence of words “to approve & sign” i.e.
if the agreement is approved and signed, then is an
incremental cost which needs to be capitalised.
iii Travel expenses for Expense/No Because the costs are incurred regardless of
a salesperson whether the new contract is won or lost, the entity
pitching a new client expense out the costs, unless they are expressly
contract reimbursable.
iv Salaries for Expense/No Salaries are incurred regardless of whether
salespeople working contracts are won or lost and therefore are not
exclusively on incremental costs to obtain the contract.
obtaining new clients
v Bonus based on Capitalize/Yes Bonuses based solely on sales are incremental
quarterly sales costs to obtain a contract.
vi Commission paid to Capitalize/Yes The commissions are incremental costs that would
sales manager not have been incurred had the entity not obtained
based on contracts the contract.
obtained

IND AS 116
Illustration 47 to 51 have been deleted by ICAI as they related to covid 19 which is no more
applicable – The Ques Number has changed accordingly
i.e. Illustration 52 (of edition 6/7) has become illustration 47 in new edition
Illustration 53 (of edition 6/7)has become illustration 48 in new edition
and so on.

Question 7 (RTP May 23)

How will Entity Y account for the incentive in the following scenarios:
Scenario A:

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Entity Y (lessor) enters into an operating lease of property with Entity X (lessee) for a five-year term at a
monthly rental of ₹ 1,10,000. In order to induce Entity X to enter into the lease, Entity Y provides ₹ 6,00,000
to Entity X at lease commencement for lessee improvements (i.e., lessee’s assets).
Scenario B:
Entity Y (lessor) enters into an operating lease of property with Entity X (lessee) for a five-year term at a
monthly rental of ₹ 1,10,000. At lease commencement, Entity Y provides ₹ 6,00,000 to Entity X for
leasehold improvements which will be owned by Entity Y (i.e., lessor’s assets). The estimated useful life of
leasehold improvements is 5 years
Solution:
Para 70 of Ind AS 116 state that at the commencement date, the lease payments included in the
measurement of the net investment in the lease comprise the following payments for the right to use the
underlying asset during the lease term that are not received at the commencement date:
a) fixed payments (including in-substance fixed payments as described in para B42), less any lease
incentives payable;
b) variable lease payments that depend on an index or a rate, initially measured using the index or rate
as at the commencement date;
c) any residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a
third party unrelated to the lessor that is financially capable of discharging the obligations under the
guarantee;
d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option
(assessed considering the factors described in para B37); and
e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.
Further para 71 of the standard states that a lessor shall recognise lease payments from operating leases
as income on either a straight-line basis or another systematic basis. The lessor shall apply another
systematic basis if that basis is more representative of the pattern in which benefit from the use of the
underlying asset is diminished.”
Scenario A
In accordance with above, in the given case, at lease commencement, Entity Y accounts for the incentive
as follows:
To account for the lease incentive
Deferred lease incentive Dr. ₹ 6,00,000
To Cash ₹ 6,00,000
Recurring monthly journal entries in Years 1 – 5
To record cash received on account of lease rental and amortisation of lease incentive over the lease term
Cash Dr. ₹ 1,10,000
To Lease income ₹ 1,00,000
To Deferred lease incentive ₹ 10,000*
* This is calculated as ₹ 6,00,000 ÷ 60 months.
Scenario B
Entity Y has provided lease incentive amounting to ₹ 6,00,000 to Entity X for leasehold improvements in the
premises. As Entity Y has the ownership of the leasehold improvements carried out by the lessee, it shall
account for the same as property, plant and equipment and shall depreciate the same over its useful life.
In accordance with above, in the given case, at lease commencement, Entity Y accounts for the incentive
as follows:
To record the lease incentive
Property, plant & Equipment Dr. ₹ 6,00,000
To Cash ₹ 6,00,000
Recurring monthly journal entries in Years 1 – 5

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To record cash received on account of lease rental over the lease term
Cash Dr. ₹ 1,10,000
To Lease income ₹ 1,10,000
To record depreciation on PPE over the lease term using straight line method
Depreciation Dr. ₹ 10,000
To Accumulated Depreciation ₹ 10,000

Question 8 (RTP Nov’23)

Entity X, a utility company enters into a contract for twenty years with Entity Y, a power company, to
purchase all of the electricity produced by a new solar power station. The solar power station is explicitly
specified in the contract and Entity Y has no substitution rights. Entity Y owns the solar power station and
will receive tax credits relating to the construction and ownership of the solar power station, and Entity X
will receive renewable energy credits that accrue from use of the solar power station.

Whether Entity X has the right to obtain substantially all of the economic benefits from the solar power
station during the period of arrangement?
Solution:
Paragraphs B21 of Ind AS 116 states that to control the use of an identified asset, a customer is required to
have the right to obtain substantially all of the economic benefits from use of the asset throughout the
period of use (for example, by having exclusive use of the asset throughout that period). A customer can
obtain economic benefits from use of an asset directly or indirectly in many ways, such as by using, holding
or subleasing the asset. The economic benefits from use of an asset include its primary output and by-
products (including potential cash flows derived from these items), and other economic benefits from using
the asset that could be realised from a commercial transaction with third party.
In the given case, Entity X has the right to obtain substantially all of the economic benefits from the use of
the solar power station over the 20-year period because it obtains:
 electricity produced by power station i.e. primary product from use of asset over the lease term and
 renewable energy credits – i.e. the by-product from use of the asset.
Although Entity Y will receive economic benefits from the solar power station in the form of tax credits,
those economic benefits relate to the ownership of the solar power station rather than the use of the power
station. Thus, these credits are not considered in this assessment.

Question 9 (Past Exam Nov’23)

A consumer products entity, Entity A Limited (lessee) enters into a lease agreement with Entity B Limited
(lessor) for a dedicated production line to manufacture one of its storebrand household products for a
period of three years. Entity A Limited has agreed to order a minimum 1,00,000 units per month and to
make a payment to Entity B Limited as per the following agreed rates:
(i) ₹ 240 per unit if the ordered quantity is between 1,00,000 to 1,20,000 units;
(ii) ₹ 246 per unit if the ordered quantity is between 1,20,001 to 1,50,000 units.
As per the terms of the agreement, Entity A Limited has the exclusive right to use the production line. Entity
B Limited cannot use the specified production line for any other customer. The type of household product is
specified in the contract. Entity A Limited issues instructions to Entity B about the quantity and timing of
products to be delivered.
If the production line is not producing the household product for Entity A, it remains idle. Entity B Limited
operates and maintains the production line on a daily basis. Entity A Limited has estimated that for
manufacturing each unit, Entity B Limited incurs an average cost of ₹ 195. Further, the observable stand-

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alone price for the rent of the production line is ₹ 60,00,000 per month. Entity A Limited's incremental
borrowing rate at the commencement date of the lease is 10% per annum.
Entity A Limited concludes that the arrangement contains a lease as per Ind AS 116. It also elects not to
apply the practical expedient in paragraph 15 of Ind AS 116 of not to separate the non-lease component(s)
from the lease component(s). Accordingly, it separates non-lease components from lease components.
You are required to:
(i) Analyse the above and identify lease component(s) and non-lease component(s); And at the
commencement of the lease:
(ii) Compute and allocate the consideration into lease component(s) & non-lease component(s);
(iii) Compute the lease liability (the present value factor @ 10% per annum of 2.49 for 3 years may be
adopted);
(iv) Determine the recognition / treatment of lease component(s) and non-lease component(s). (8 Marks)
Solution:
(i) and (ii) Identification of lease and non-lease components and allocation of consideration into
these components
In the given case, the agreement contains a lease component (production line) and a non-lease component
(job work). As Entity A has not elected to apply the practical expedient as provided in paragraph 15 of Ind
AS 116, it will separate the lease and non-lease components and allocate the total consideration to the
lease and nonlease components in the ratio of their relative stand-alone selling prices.
As Entity A is required to purchase a minimum of 1,00,000 units per month at the rate of ₹ 240 per unit,
there is in substance fixed payment of ₹ 2,40,00,000 per month – although the payments are structured as
variable lease payments, there is no genuine variability in those payments as Entity A is required to
purchase a minimum quantity 1,00,000 units per month, i.e., for ₹ 2,40,00,000 per month.
The observable stand-alone price for lease component (which is factory rent) is ₹ 60,00,000. The
observable stand-alone price of non-lease component (which is job work charges) is ₹ 1,95,00,000 (₹ 195 x
1,00,000 units).
Entity A is required to allocate the total consideration per month as follows:
Observable standalone price: Lease component ₹ 60,00,000
Observable standalone price: Non-lease component ₹ 1,95,00,000
Total ₹ 2,55,00,000
Lease component as a percentage of observable prices (₹ 60 lakh / ₹ 255 lakh) x 100 23.53%
Allocation of consideration to lease component (₹ 2,40,00,000 x 23.53%) ₹ 56,47,200
Non-lease component (₹ 2,40,00,000 – ₹ 56,47,200) ₹ 1,83,52,800

(iii) Computation of lease liability

The total allocation for a year will be ₹ 6,77,66,400 (₹ 56,47,200 x 12)
As Entity A's incremental borrowing rate is 10%, it discounts lease payments using this rate and the lease
liability at the commencement date is calculated as follows:
Lease Liability at commencement date = ₹ 6,77,66,400 x 2.49 = ₹ 16,87,38,336.

(iv) Accounting treatment of lease components and non-lease components

a. Entity A recognises lease liability amounting to ₹ 16,87,38,336 as at commencement date based on
lease payments amounting to ₹ 56,47,200 per month.
b. The remaining amount of ₹ 1,83,52,800 (₹ 2,40,00,000 – ₹ 56,47,200) which is attributable to job work
charges is recognised in the statement of profit and loss as and when incurred.

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IND AS 102
Question 4 (RTP May 23)
Entity A runs a copper-mining business. Entity A has a year-end of 31st March. Dividends declared on the
shares accrue to the employees during the three-year period. If the condition is met, the employees will
receive the shares together with the dividends that have been declared on those shares during the three
years upto 31st March, 20X3.
The entity estimates that on 1st April, 20X0 its shares are valued at ₹ 10 each. The grant date fair amount
of each share is ₹ 10.
Entity A prepares annual financial statements for the year ended 31st March and:
 on 1st April, 20X0 it estimates that 800 shares will vest;
 at the end of the first year (31st March, 20X1) it has revised this estimate to 780;
 at 31st March, 20X2 it has further revised this estimate to 750; and
 750 shares vest on 31st March, 20X3 based on the number of employees still employed on that date.
On 1st April, 20X0 as part of a long-term incentive scheme, Entity A provisionally awards its sales
employees 1,000 Entity A’s shares receivable on 31st March, 20X3.
Explain the accounting treatment for the above share-based awards based on satisfaction of the condition
that the sales employees must remain in employment until 31st March, 20X3. The requirement to remain in
employment is a service condition and would not be reflected in the fair value of the share awards.
Solution:
The grant date fair value amount would be recognised as an expense over the three year service period
adjusted by the number of shares expected to vest. Consequently, for each period, Entity A estimates how
many eligible employees are expected to be employed on 31st March, 20X3 and this forms the basis for
that adjustment. The journal entries would be:
Year 1 (Year ended 31st March, 20X1)
Employee benefit expenses A/c Dr. ₹ 2,600
To Share-based payment reserve ₹ 2,600
(To recognise the receipt of employee services in exchange for shares)
Year 2 (Year ended 31st March, 20X2)
Employee benefit expenses A/c Dr. ₹ 2,400
To Share-based payment reserve ₹ 2,400
(To recognise the receipt of employee services in exchange for shares)
Year 3 (Year ended 31st March, 20X3)
Employee benefit expenses A/c Dr. ₹ 2,500
To Share-based payment reserve ₹ 2,500
(To recognise the receipt of employee services in exchange for shares)

Working Notes:

1) Year 1
780 shares expected to vest x ₹ 10 grant date fair value of each share x 1/3 of vesting period elapsed = ₹
2,600 recognised in Year 1.
2) Year 2
(750 shares expected to vest x ₹ 10 grant date fair value of each share x 2/3 of vesting period elapsed) less
₹ 2,600 recognised in Year 1 = ₹ 2,400 recognised in Year 2.

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3) Year 3
(750 shares x ₹ 10 grant date fair value of each share) less ₹ 5,000 recognised in Years 1 and 2 = ₹ 2,500
recognised in Year 3.

Question 5 (RTP May’24)

Fashion India Ltd. (FIL) entered into an agreement with RFD Ltd. on 10th August, 20X2 for purchasing a
machinery. The agreement has a clause that FIL will have to settle the consideration of machinery
purchased by issuing its equity shares. FIL agreed to the clause and the order was confirmed. Machinery
was supplied vide invoice dated 25th October, 20X2 and delivered on 1st November, 20X2. Agreed
purchase consideration was ₹ 150 Lakhs and the fair value of the machinery supplied was estimated to be
₹ 160 Lakhs. As agreed, FIL issued 1,00,000 equity shares of face value ₹ 100 each to RFD Ltd. As per Ind
AS 102 ‘Share Based Payment’, what should be the price and the date for recording the machinery
purchased from RFD Ltd.?
Solution:
As per para 10 of Ind AS 102, for equity settled share-based payment transactions, the entity shall measure
the goods or services received, and the corresponding increase in equity, directly, at the fair value of the
goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate
reliably the fair value of the goods or services received, the entity shall measure their value, and the
corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.
Here, since the fair value of the asset received can be estimated reliably, the price for recording the
machinery would be ₹ 160 lakhs.
Further the control is assumed to be transferred on the date the delivery is received which is 1st November,
20X2. Therefore, this will be the date for recognizing the machinery in the books.

Question 6 (Past Exam Nov’23)

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

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Also provide SAR ledger from inception till closure. Discuss whether this account is in the nature of liability
or equity? (8 Marks)
Solution:
Number of employees at the grant date to whom the SARs were granted = 492 + 15 + 10 + 8 = 525
employees
The amount recognized as an expense in each year and as a liability at each year-end is as follows:
Year Expense Liability Calculation of Liability
₹ ₹
31st March, 2021 6,86,000 6,86,000 [(525-15) x 0.98 x 0.98) x 100 x 42 x 1/3]
31st March, 2022 8,01,333 14,87,333 [{(525-15-10) x 0.97x 100 x 46 x 2/3 –
6,86,000]
31st March, 2023 8,74,267 23,61,600 [525-15-10-8] x 48 x 100-1487333
30th June, 2023 (98,400)* 0 [(492 x 100 x 50) - 23,61,600]
*Difference of opening liability ₹ 23,61,600 and actual liability paid ₹ 24,60,000 [(492 x 100 x 50) -
23,61,600] is recognised to Profit and loss i.e. ₹ 98,400.
SAR Ledger
Date Particular Amount Date Particular Amount
31.3.2021 To Balance c/d 6,86,000 31.3.2021 By Employee benefits 6,86,000
expenses
6,86,000 6,86,000
31.3.2022 To Balance c/d 14,87,333 1.4.2021 By Balance b/d 6,86,000
31.3.2022 By Employee benefits 8,01,333
expenses
14,87,333 14,87,333
31.3.2022 To Balance c/d 23,61,600 1.4.2022 By Balance b/d 14,87,333
31.3.2023 By Employee benefits 8,74,267
expenses
23,61,600 23,61,600
30.6.2023 To Bank 24,60,000 1.4.2022 By Balance b/d 23,61,600
30.6.2023 By Employee benefits 98,400
expenses
24,60,000 24,60,000
SAR Account is in the nature of liability because it is a cash settled share-based transaction which is
summed up on payment of cash to the employees at the end of the exercise period.

IND AS 103
Question 7 (RTP May 23)

'High Speed Limited' manufactures and sells cars. The Company wants to foray into the two-wheeler
business and therefore it acquires 30% interest in Quick Bikes Limited for ₹ 5,00,000 as at 1st November,
20X1 and an additional 25% stake as at 1st January, 20X2 for ₹ 5,00,000 at its fair value.
Following is the Balance Sheet of Quick Bikes Limited as at 1st January, 20X2:

Liabilities Carrying Fair Assets Carrying Fair

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value value value value

Share capital 1,00,000 Plant and equipment 3,50,000 7,50,000
Reserves 5,50,000 Investment in bonds 4,00,000 5,00,000
Trade payables 1,50,000 Trade Receivables 50,000 50,000
1,50,000
Total 8,00,000 Total 8,00,000

Quick Bikes Limited sells the motorcycles under the brand name 'Super Start' which has a fair value of ₹
3,50,000 as at 1st January, 20X2. This is a self- generated brand therefore Quick Bikes Limited has not
recognized the brand in its books of accounts.
Following is the separate balance sheet of High Speed Limited as at 1st January, 20X2:

Liabilities Amount Assets Amount

Share capital 5,00,000 Plant and equipment 13,50,000
Reserves 15,00,000 Investment in Quick Bike 10,00,000
Short term loans 4,00,000 Trade Receivables 80,000
Trade payables 3,00,000 Cash and bank balances 5,20,000
Other liabilities 2,50,000
Total 29,50,000 Total 29,50,000
In relation to the acquisition of Quick Bikes Limited, you are required to:
(i) Pass the necessary journal entries to give effect of business combination in accordance with Ind AS
103 as at acquisition date 1st January, 20X2. NCI is measured by the entity at fair value. Provide
working notes, Ignore deferred tax implication; and

Prepare a consolidated balance sheet of High Speed Limited as at 1st January, 20X2.

Solution:

(i) Journal Entry

₹ ₹
Plant and Equipment Dr. 7,50,000
Investment in bonds Dr. 5,00,000
Trade Receivables Dr. 50,000
Brand Dr. 3,50,000
Goodwill (balancing figure) Dr. 5,00,000
To Investment in Quick Bikes 10,00,000
To Profit or loss A/c (W.N.1) 1,00,000
To Trade Payables 1,50,000
To NCI (W.N.3) 9,00,000
(Being assets and liabilities acquired at fair value and previous investment
considered at fair value on the acquisition date)
Working Notes:
1) Calculation of fair value of shares on the acquisition date 1st January, 20X2

25% Shares purchase on 1st January, 20X2 (fair value) ₹ 5,00,000

30% Shares purchase on 1st November, 20X1 at ₹ 5,00,000
Fair value = [(5,00,000 / 25%) x 30%] ₹ 6,00,000
Total consideration at fair value on acquisition date ₹ 11,00,000
Less: Cost of investment (5,00,000 + 5,00,000) (₹ 10,00,000)
Gain recognised to Profit or Loss/OCI (as appropriate) ₹ 1,00,000

2) Computation of Net Identifiable Assets at fair value

₹
Plant and Equipment 7,50,000
Investment in bonds 5,00,000

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Trade Receivables 50,000

Self-generated Brand 3,50,000
16,50,000
Less: Trade Payables (1,50,000)
Net Identifiable Assets at fair value 15,00,000

3) Measurement of Non-controlling Interest (on fair value basis)

Share of NCI (100- 30-25) 45%

Taking fair value of shares on 1st January, 20X2 as a base [(11,00,000/ 55%) x ₹ 9,00,000
45%]

(ii) Consolidated Balance Sheet of High Speed Limited as at 1st January, 20X2

Note No. ₹
Assets
Non-current assets
(a) Property, plant and equipment 1 21,00,000
(b) Intangible asset 2 8,50,000
(c) Investment in bonds 5,00,000
Current Assets
(a) Financial assets
(i) Trade receivables 3 1,30,000
(ii) Cash and cash equivalents 4 5,20,000
41,00,000
Equity and Liabilities
Equity
(a) Equity share capital 5,00,000
(b) Other Equity 5 16,00,000
Non-controlling Interest (W.N.3) 9,00,000
Current Liabilities
(a) Financial liabilities
(i) Borrowings 6 4,00,000
(ii) Trade Payables 7 4,50,000
(b) Other Current Liabilities 8 2,50,000
41,00,000

Notes to Accounts

S. ₹ ₹
No.
1. Property, plant and equipment
High Speed Ltd. 13,50,000
Quick Bikes Ltd. 7,50,000 21,00,000
2. Intangible asset
Goodwill 5,00,000
Brand value of Quick Bikes Ltd. 3,50,000 8,50,000
3. Trade Receivables
High Speed Ltd. 80,000
Quick Bikes Ltd. 50,000 1,30,000
4. Cash and cash equivalents
Quick Bikes Ltd. 5,20,000
5. Other Equity - Reserves
High Speed Ltd. 15,00,000
Add: Gain on investment in Quick Bikes Ltd. 1,00,000 16,00,000

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6. Borrowings
Short term loans of High Speed Ltd. 4,00,000
7. Trade Payables
High Speed Ltd. 3,00,000
Quick Bikes Ltd. 1,50,000 4,50,000
8. Other Current Liabilities
High Speed Ltd. 2,50,000

Question 8 (RTP Nov’23)

Mini Limited is a manufacturing entity in textile industry. Mini Limited decided to reduce the cost of
manufacturing by setting up its own power plant for their captive consumption. As per market research
report, there was non-operational power plant in nearby area. Hence, it decided to acquire that power plant
which was having capacity of 80MW along with all entire labour force. This Power entity was owned by
another entity Max Limited. Mini Limited approached Max Limited for acquisition of 80MW power plant at
following terms:
(i) Mini Limited will seek an independent valuation for determining fair value of 80MW power plant.
(ii) Value of other Non-current assets acquired, and Non–current financial liabilities assumed is ₹ 11.10
million and ₹ 32 million respectively.
(iii) Consideration agreed between both the parties is at ₹ 51 million.
Both the parties agreed to the terms and entered into agreement on 1st April, 20X1 with immediate effect.
Due to unavoidable circumstances, valuation could not be completed by the time Max Limited finalizes its
financial statements for the year ending 31st March, 20X1.
Max Limited’s annual financial statements records the fair value of 80 MW Power Plant at ₹ 46.90 million
with remaining useful life at 40 years.
Max Limited also has license to operate that power plant unrecorded in books. As on 31st March, 20X1, it
has fair value of ₹ 5 million.
Six months after acquisition date, Mini Limited received the independent valuation, which estimated the fair
value of 80MW Power Plant as ₹ 54.90 million.
CFO of Mini Limited, wants you to work upon following aspects of the transaction:
a) Determine whether transaction should be accounted as asset acquisition or business combination.
b) Calculate Goodwill / Bargain Purchase due to the above acquisition.
c) Pass necessary journal entities in the books of Mini Limited as per Ind AS 103 and prepare balance
sheet as on date of acquisition.
d) Determine whether any adjustment is required in case of valuation received subsequent to
acquisition. If yes, pass the necessary entries in the books of Mini Limited.
Balance Sheet of Mini Limited as at 31st March, 20X1
Particulars (₹ in Million)
ASSETS
Non-current assets
Property, plant and equipment 2,158
Capital work-in-progress 12
Deferred Tax Assets (Net) 324
Other non-current assets 25
Total non-current assets 2,519
Current assets

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Inventories 368
Financial assets
(i) Investments 45
(ii) Trade Receivables 762
(iii) Cash and Cash Equivalents 110
(iv) Bank balances other than (iii) above 28
(v) Other financial assets 267
Total current assets 1,580
Total assets 4,099
EQUITY AND LIABILITIES
Equity
Equity Share Capital 295
Other equity
Equity component of compound financial instruments 717
Reserves and surplus 2,481
Total equity 3,493
Liabilities
Non-current liabilities
Financial Liabilities
Borrowings 268
Total non-current liabilities 268
Current liabilities
Financial Liabilities
(i) Trade payables 302
Other current liabilities 36
Total current liabilities 338
Total liabilities 606
Total equity and liabilities 4,099

Solution:

(a) Ind AS 103 defines business as an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing goods and services to customers, generating
investment income (such as dividends or interest) or generating other income from ordinary activities.
In the given scenario, acquisition of power plant along with its labour force will be considered as integrated
set of activity as it is capable of being generating power.
Hence, transaction will be considered as business combination and not asset acquisition and acquisition
method of accounting will be applied.
Thus, following will be the case:
(i) Acquirer – Mini Ltd;
(ii) Acquiree – Max Ltd;
(iii) Acquisition date – 1st April, 20X1

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(b) Calculation of Goodwill:

Particulars ₹ in Million
Purchase consideration (A) 51
Fair Value of Power Plant – PPE 46.90
Fair Value of other non-current assets 11.10
Fair Value of Intangible Asset (License) – Refer Note 1 below 5
Non-Current Liabilities assumed (32)
Value of net assets acquired (B) 31
Goodwill 20
Note 1: The licence to operate power plant is an intangible asset that meets the contractual-legal criterion
for recognition separately from goodwill though acquirer cannot sell or transfer it separately from the
acquired power plant. Intangible Assets needs to be recorded by the acquirer at the time of accounting for
acquisition though not recorded by the acquiree in its book.

(c) Journal Entries for acquiring power plant

Particulars ₹ in Million ₹ in Million
Fair Value of Power Plant Dr. 46.90
Fair Value of other assets Dr. 11.10
Fair Value of License acquired Dr. 5
Goodwill Dr. 20
To Liabilities assumed 32
To Bank (PC paid) 51

Balance Sheet of Mini Limited as at 1st April, 20X1

Particulars Notes to ₹ in Million
Accounts
ASSETS
Non-current assets
Property, plant and equipment 1 2,204.90
Intangible Asset (License acquired in business combination) 5.00
Capital work-in-progress 12.00
Goodwill on acquisition 20.00
Deferred Tax Assets (Net) 324.00
Other non-current assets 2 36.10
Total non-current assets 2,602.00
Current assets
Inventories 368.00
Financial assets
(i) Investments 45.00
(ii) Trade Receivables 762.00
(iii) Cash and Cash Equivalents 3 59.00

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(iv) Bank balances other than (iii) above 28.00

(v) Other financial assets 267.00
Total current assets 1,529.00
Total assets 4,131.00
EQUITY AND LIABILITIES
Equity
Equity Share Capital 295.00
Other equity
Equity component of compound financial instruments 717.00
Reserves and surplus 2,481.00
Total equity 3,493.00
Liabilities
Non-current liabilities
Financial Liabilities
Borrowings 4 300.00
Total non-current liabilities 300.00
Current liabilities
Financial Liabilities
(i) Trade payables 302.00
Other current liabilities 36.00
Total current liabilities 338.00
Total liabilities 638.00
Total equity and liabilities 4,131.00
Notes to Accounts
1) Property, Plant and Equipment
Particulars ₹ in Million
PPE value as on 1st April, 20X1 2,158.00
Add: Fair Value of Power Plant acquired 46.90
Total 2,204.90

2) Other Non-current Assets

Particulars ₹ in Million
Other non-current assets value as on 1st April, 20X1 25.00
Add: Fair Value of Non-current assets acquired 11.10
Total 36.10

3) Cash and Cash equivalents

Particulars ₹ in Million
Cash and Cash equivalents as on 1st April, 20X1 110
Less: Payment of Purchase consideration transferred (51)
Total 59

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4) Non-current Liabilities
Particulars ₹ in Million
Non-current Liabilities value as on 1st April, 20X1 268
Add: Non-current liabilities assumed in acquisition 32
Total 300

(d) Subsequent Accounting: Ind AS 103 provides a measurement period window, wherein if all the
required information is not available on the acquisition date, then entity can do price allocation on
provisional basis. During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date to reflect new information obtained about facts and
circumstances that existed as on the acquisition date and, if known, would have affected the measurement
of the amounts recognised as of that date. Any change i.e. increase or 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.
Accordingly, in the financial statements for half year ending 30th September, 20X1, Mini Limited will
retrospectively adjusts the prior year information as follows:
(i) the carrying amount of PPE (including power plant) as of 1st April, 20X1 is increased by ₹ 8 million (i.e.
₹ 54.90 million minus ₹ 46.90 million). The adjustment is measured as the fair value adjustment at the
acquisition date less the additional depreciation that would have been recognised if the asset’s fair
value at the acquisition date had been recognised from that date [(80,00,000/40) x (6/12) = 0.1 million]
(ii) the carrying amount of goodwill as of 1st April, 20X1 is decreased by ₹ 8 million; and
(iii) depreciation expense for the period ending 30th September, 20X1 will increase by ₹ 0.1 million
(iv) disclose in its financial statements of 1st April, 20X1, that the initial accounting for the business
combination has not been completed because the valuation of property, plant and equipment has not
yet been received;
(v) disclose in its financial statements of 30th September, 20X1, the amounts and explanation of the
adjustments to the provisional values recognised during the current reporting period. Therefore, Mini
Limited discloses that comparative information is adjusted retrospectively to increase the fair value of
the item of property, plant and equipment at the acquisition date by ₹ 8 million, offset by decrease in
goodwill of ₹ 8 million.
Journal Entries
(1) PPE (Power Plant) Dr. ₹ 8 Million
To Goodwill ₹ 8 Million
(2) Depreciation Dr. ₹ 0.1 Million
To Provision for Depreciation ₹ 0.1 Million

Question 9 (Past Exam May’23)

The draft balance sheets of Swan Limited and Duck Limited as at 31st March 2023 is as under:
Amount ₹ in lakhs
Particulars Swan Limited Duck Limited
Assets
Non-Current Assets
Property, Plant and Equipment 800 1,000
Investments 900 240
Current Assets

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Inventories 360 260

Financial Assets
- Trade Receivables 1,040 540
- Cash & Cash Equivalents 520 290
Other Current Assets 700 350
Total 4,320 2,680
Swan Limited Duck Limited
Equity and Liabilities
Equity
Share Capital
- Swan Limited: Equity Shares of ₹ 10 each 1,200 -
- Duck Limited: Equity Shares of ₹ 100 each - 900
Other Equity 1,450 420
Non-Current Liabilities
Financial Liabilities
- Long-Term Borrowings 700 500
Long-Term Provisions 140 200
Deferred Tax 80 -
Current Liabilities
Financial Liabilities
- Short-Term Borrowings 250 290
- Trade Payables 500 370
Total 4,320 2,680
On 1st April 2023, Swan Limited acquired 80% equity shares of Duck Limited.
Swan Limited agreed to pay to each shareholder of Duck Limited, ₹ 20 per equity share in cash and to
issue five equity shares of ₹ 10 each of Swan Limited in lieu of every six shares held by the shareholders of
Duck Limited. The fair value of the shares of Swan Limited was ₹ 100 per share as on the date of
acquisition.
Swan Limited also agreed to pay an additional consideration being higher of ₹ 90 lakhs and 30% of any
excess profits in the first year, after acquisition, over Duck Limited's profits in the preceding 12 months
(financial year 2022-2023) made by Duck Limited.
The additional amount will be due in 3 years post the date of acquisition. Duck Limited earned ₹ 30 lakhs
profit in the preceding year and expects to earn ₹ 40 lakhs in financial year 2023-2024.
The fair value exercise resulted in the following:
(i) Fair value of Property, Plant and Equipment and Investments of Duck Limited on 1st April, 2023 was ₹
1,200 lakhs and ₹ 300 lakhs respectively.
(ii) Duck Limited owns a popular brand name that meets the recognition criteria for Intangible Assets
under Ind AS 103 'Business Combinations'. Independent valuers have attributed a fair value of ₹ 250
lakhs for the brand. However, the brand does not have any cost for tax purposes and no tax
deductions are available for the same.
(iii) Following is the statement of contingent liabilities of Duck Limited as on 1st April, 2023:
Particulars Fair Value Remarks
(₹ in lakhs)
Lawsuit filed by a customer for a 5 It is not probable that an outflow of resources
claim of ₹ 20 lakhs embodying economic benefits will be required to
settle the claim. Any amount which would be paid in
respect of lawsuit will be tax deductible.
Income tax demand of ₹ 70 20 It is not probable that an outflow of resources
lakhs raised by tax authorities. embodying economic has challenged the demand in
Duck Limited the High Court benefits will be required to settle the
claim.

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(iv) Duck Limited had certain equity settled share-based payment awards (original award) which were
replaced by the new awards issued by Swan Limited. As per the terms of original awards, the vesting
period was 5 years and as of the acquisition date the employees of Duck Limited had already served
2 years of service. As per the new awards, the vesting period has been reduced to 1 year (1 year
from the acquisition date). The fair value of the award on acquisition date was as follows:
Original Awards: ₹ 12 lakhs
New Awards: ₹ 18 lakhs.
(v) Further, Swan Limited has also agreed to pay one of the founder shareholder of Duck Limited a sum
of ₹ 15 lakhs provided he stays with the Company for two years after the acquisition.
(vi) The acquisition cost of Swan Limited for Duck Limited was ₹ 26 lakhs.
(vii) The applicable tax rate for both the companies is 30%.
(viii) Assume 10% per annum discount rate.
(ix) Also, assume, unless stated otherwise, all items have a fair value and tax base equal to their carrying
amounts at the acquisition date.
You are required to prepare opening Consolidated Balance Sheet of Swan Limited as on 1st April 2023.
Working Notes should form part of your answer. (15 Marks)

Solution:

Consolidated Balance Sheet of Swan Ltd as on 1st April, 2023

Notes No. ₹ in lakhs
Assets
Non-current assets
Property, plant and equipment 9 2,000.00
Intangible assets 10 250.00
Financial assets
Investment 11 1,200.00
Current assets
Inventories 12 620.00
Financial assets:
Trade receivables 13 1,580.00
Cash and cash equivalents 14 640.00
Other current assets 15 1,050.00
Total 7,340.00
Equity and Liabilities
Equity
Share capital - Equity shares of ₹ 10 each 1 1,260.00
Other equity 2 2,475.18
Non-controlling interest (W.N.4) 330.70
Non-current liabilities
Financial liabilities
Long-term borrowings 3 1,200.00
Long-term provisions 4 407.62
Deferred tax liability 5 231.50
Current Liabilities
Financial liabilities
Short-term borrowings 6 540.00
Trade payables 7 870.00
Short-term provision 8 25.00
Total 7,340.00

Notes to Accounts (All figures are ₹ in lakhs)

1. Equity Share capital

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Equity shares of ₹ 10 each as per the balance sheet before acquisition of 1,200
Duck Ltd.
Shares allotted to Duck Ltd. (7,50,000 x 80% x ₹ 10) 60 1,260

2. Other Equity
As per the balance sheet before acquisition of Duck Ltd. 1,450
Less: Acquisition cost (26) 1,424
Replacement award 4.80
Security Premium (7,50,000 shares x 80% x ₹ 90) 540
Capital Reserve (W.N.5) 506.38 2,475.18

3. Long-term borrowings
As per the balance sheet before acquisition of Duck Ltd. 700
Duck Ltd. 500 1,200

4. Long-term provisions
As per the balance sheet before acquisition of Duck Ltd. 140
Deferred consideration 67.62
Duck Ltd. 200 407.62

5. Deferred tax liability

As per the balance sheet before acquisition of Duck Ltd. 80
Deferred tax impact due to acquisition of Duck Ltd. (W.N.2) 151.50 231.50

6. Short term borrowings

As per the balance sheet before acquisition of Duck Ltd. 250
Duck Ltd. 290 540

7. Trade payables
As per the balance sheet before acquisition of Duck Ltd. 500
Duck Ltd. 370 870

8. Short-term provisions
Lawsuit damages 5
Income-tax demand 20 25

9. Property, plant and equipment

As per the balance sheet before acquisition of Duck Ltd. 800
Duck Ltd. 1,200 2000

10. Intangible assets

Brand of Duck Ltd. acquired 250

11. Investment
As per the balance sheet before acquisition of Duck Ltd. 900
Duck Ltd. 300 1,200

12. Inventories
As per the balance sheet before acquisition of Duck Ltd. 360
Duck Ltd. 260 620

13. Trade receivables

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As per the balance sheet before acquisition of Duck Ltd. 1,040

Duck Ltd. 540 1,580

14. Cash and cash equivalents

As per the balance sheet before acquisition of Duck Ltd. 520
Less: Acquisition cost paid (26)
Less: Paid to Duck Ltd. (144) 350
Duck Ltd. 290 640

15. Other current assets

As per the balance sheet before acquisition of Duck Ltd. 700
Duck Ltd. 350 1,050

Working Notes:
1. Computation of Purchase Consideration
Particulars No. of shares ₹ in lakhs
Share capital of Duck Ltd. 900
Number of shares 9,00,000
Shares to be issued (5 shares against 6 shares of Duck Ltd.) 7,50,000
Fair value of Swan Ltd.’s share is ₹ 100 per share
Purchase consideration
Shares issued (7,50,000x 80% x ₹ 100 per share) (A) 600
Cash payment (₹ 20 x 9,00,000 x 80%) (B) 144
Deferred consideration (discounting ₹ 90 lakhs for 3 years @10%) (C) 67.62
Replacement award [Market based measure of the acquiree award
(12) x ratio of the portion of the vesting period completed (2) / greater
of the total vesting period (3) or the original vesting period (5) of the
acquire award (ie 12 x 2/5)] (D) 4.80
Purchase consideration for 70% shares (A + B + C + D) 816.42

2. Computation of deferred tax impact due to change in fair value of asset and liabilities
acquired
Particulars Book Fair value FV
value (A) (B) adjustment
(A-B)
Property, plant and equipment 1,000 1,200 200
Intangible assets (Brand) - 250 250
Investment 240 300 60
1,750 510
Less: Contingent liability acquired
Provision for lawsuit damages (5)
Net difference in fair value 505
Deferred tax liability @ 30% 151.5

3. Computation of fair value of net identifiable assets acquired from Duck Ltd.
Particulars Book value
Total assets as per the balance sheet 2,680
Add: Fair value adjustment in PPE and Investment (200+60) 260
Add: Intangible assets (Brand) 250
Fair value of total identifiable assets 3,190
Less: Total liabilities as per the balance sheet (500+200+290+370) (1,360)
Less: Contingent liability acquired

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Lawsuit damages 5
Income tax demand 20 (25)
Less: Defer tax liability (W.N.2) (151.50)
Fair value of net identifiable assets (100%) 1,653.50

4. Computation of non-controlling interest in Duck Ltd. (Proportionate share basis)

Non-controlling interest (1,653.50 x 20%) = 330.70

5. Computation of capital reserve on acquisition of Duck Ltd.

Particulars Book value
Fair value of net identifiable assets 1,653.50
Less: Purchase consideration (816.42)
Less: NCI (W.N.4) (330.70)
Capital reserve 506.38

Notes:
a) The value of replacement award is allocated between consideration transferred and post combination
expense. The portion attributable to purchase consideration is determined based on the fair value of the
replacement award for the service rendered till the date of the acquisition. Accordingly, ₹ 4.8 lakh (12 x
2/5) is considered as a part of purchase consideration and is credited to Swan Ltd.’s equity as this will
be settled in its own equity. Since the fair value of the award on the acquisition date is ₹ 18 lakh the
balance of (18 - 4.8) ₹ 13.2 lakh will be recorded as employee expense in the books of Duck Ltd. over
the remaining life, which is 1 year in this scenario.
b) With respect to deferred consideration, ₹ 90 lakh is the minimum payment to be paid after 3 years. The
other element is if company meet certain target then they will get 30% of that or ₹ 90 lakh whichever is
higher. In the given case, since the minimum what is expected to be paid the fair value of the contingent
consideration has been considered as zero. The impact of time value on deferred consideration has
been given @ 10%.
c) The additional consideration of ₹ 15 lakhs to be paid to the founder shareholder is contingent to him/her
continuing in employment and hence this will be considered as employee compensation and will be
recorded as post combination expenses in the statement of profit and loss of Duck Ltd.

Question 10 (MTP Nov’23, May’24)

On 1st April, 20X1, Johansen Ltd. acquired a new subsidiary, Bosman Ltd., purchasing all 150 million
shares of Bosman Ltd. The terms of the sale agreement included the exchange of four shares in Johansen
Ltd. for every three shares acquired in Bosman Ltd. On 1 st April, 20X1, the market value of a share in
Johansen Ltd. was ₹ 10 and the market value of a share in Bosman Ltd. ₹ 12

The terms of the share purchase included the issue of one additional share in Johansen Ltd. for every five
acquired in Bosman Ltd., if the profits of Bosman Ltd. for the two years ending 31st March, 20X3 exceeded
a target figure. Current estimates are that it is 80% probable that the management of Bosman Ltd. will
achieve this target.

Legal and professional fees associated with the acquisition of Bosman Ltd. shares were ₹ 12,00,000,
including ₹ 2,00,000 relating to the cost of issuing shares. The senior management of Johansen Ltd.
estimates that the cost of their time that can be fairly allocated to the acquisition is ₹ 2,00,000. This figure of
₹ 2,00,000 is not included in the legal and professional fees of ₹ 12,00,000 mentioned above.

The individual Balance Sheet of Bosman Ltd. at 1st April, 20X1 comprised net assets that had a fair value
at that date of ₹ 1,200 million. Additionally, Johansen Ltd. considered Bosman Ltd. possessed certain
intangible assets that were not recognized in its individual Balance Sheet:

 Customer relationships – reliable estimate of value ₹ 100 million. This value has been derived from the
sale of customer databases in the past.
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 An in-process research and development project that had not been recognised by Bosman Ltd. since
the necessary conditions laid down in Indian Accounting Standards for capitalisation were only just
satisfied at 31st March, 20X2. However, the fair value of the whole project (including the research
phase) is estimated at ₹ 50 million.
 Employee expertise – estimated value of Director employees of Bosman Ltd. is ₹ 80 million. • The
market value of a share in Johansen Ltd. on 31st March, 20X2 was ₹ 11.

Compute the goodwill on consolidation of Bosman Ltd. that will appear in the consolidated Balance Sheet
of Johansen Ltd. at 31st March, 20X2 with necessary explanation of adjustments therein. Also state the
treatment of contingent consideration as on 31st March, 20X2 (12 Marks)

Solution:

Calculation of purchase consideration:

Particulars ₹ in
million
Market value of shares issued (150 million x 4/3 x ₹ 10) 2,000
Initial estimate of market value of shares to be issued (150 million x 1/5 x ₹ 10) 300
Total consideration 2,300
Contingent consideration is recognized in full if payment is probable.
As per para 53 of Ind AS 103, acquisition‑related costs are costs the acquirer incurs to effect a business
combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional
or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions
department; and costs of registering and issuing debt and equity securities. The acquirer shall account for
acquisition-related costs as expenses in the periods in which the costs are incurred and the services are
received, with one exception. The costs to issue debt or equity securities shall be recognised in accordance
with Ind AS 32 and Ind AS 109
Statement of fair value of identifiable net assets at the date of acquisition
Particulars ₹ in million
As per Bosman Ltd.’s Balance Sheet 1,200
Fair value of customer relationships 100
Fair value of research and development project 50
Total net assets acquired 1,350
As per Ind AS 38 ‘Intangible assets’, intangible assets can be recognized separately from goodwill provided
they are identifiable, are under the control of the acquiring entity, and their fair value can be measured
reliably.
Customer relationships that are similar in nature to those previously traded, pass these tests but employee
expertise fail the ‘control’ test. Both the research and development phases of in process project can be
capitalised provided their fair value can be measured reliably.
Statement of computation of goodwill
Particulars ₹ in million
Fair value of consideration given 2,300
Fair value of net assets acquired (1,350)
Goodwill on acquisition 950
Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for contingent consideration.
In general, an equity instrument is any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities. Ind AS 32 describes an equity instrument as one that meets both of the
following conditions:

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 There is no contractual obligation to deliver cash or another financial asset to another party, or to
exchange financial assets or financial liabilities with another party under potentially unfavourable
conditions (for the issuer of the instrument).
 If the instrument will or may be settled in the issuer's own equity instruments, then it is:
 a non-derivative that comprises an obligation for the issuer to deliver a fixed number of its own
equity instruments; or
 a derivative that will be settled only by the issuer exchanging a fixed amount of cash or other
financial assets for a fixed number of its own equity instruments.
In the given case, given that the acquirer has an obligation to issue fixed number of shares on fulfillment of
the contingency, the contingent consideration will be classified as equity as per the requirements of Ind AS
32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as equity should not be re-
measured and its subsequent settlement should be accounted for within equity.

IND AS 110
Question 9 (RTP Nov’23)
Ishwar Ltd. holds investments in Vinayak Ltd. The draft balance sheets of two entities at 31st March, 20X4
were as follows:
Particulars Ishwar Ltd. Vinayak Ltd.
₹ in ‘000s ₹ in ‘000s
Assets
Non-current Assets
Property, Plant and Equipment 26,20,000 18,50,000
Investment 21,15,000 NIL
Total non-current assets 47,35,000 18,50,000
Current Assets
Inventories 6,00,000 3,75,000
Trade Receivables 4,50,000 3,30,000
Cash and Cash Equivalents 75,000 60,000
Total current assets 11,25,000 7,65,000
TOTAL ASSETS 58,60,000 26,15,000
Equity and Liabilities
Equity
Share Capital (₹ 1 shares) 7,00,000 5,00,000
Retained Earnings 28,65,000 10,50,000
Other Components of Equity 12,50,000 50,000
Total Equity 48,15,000 16,00,000
Non-current Liabilities
Provisions 6,250 NIL
Long-term Borrowings 4,13,750 4,50,000
Deferred Tax 2,25,000 1,40,000
Total Non-current Liabilities 6,45,000 5,90,000

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Current Liabilities
Trade and Other Payables 3,00,000 2,50,000
Short-term Borrowings 1,00,000 1,75,000
Total Current Liabilities 4,00,000 4,25,000
TOTAL EQUITY AND LIABILITIES 58,60,000 26,15,000
Additional Information:
Ishwar Ltd.’s investment in Vinayak Ltd.
On 1st April, 20X1, Ishwar Ltd. acquired 400 million shares in Vinayak Ltd. by means of a share exchange
of one share in Ishwar Ltd. for every two shares acquired in Vinayak Ltd. On 1st April, 20X1, the market
value of one share of Ishwar Ltd. was ₹ 7.
Ishwar Ltd. appointed a professional firm for conducting due diligence for acquisition of Vinayak Ltd., the
cost of which amounted to ₹ 15 million. Ishwar Ltd. included these acquisition costs in the carrying amount
of the investment in Vinayak Ltd. in the draft balance sheet of Ishwar Ltd. There has been no change to the
carrying amount of this investment in Ishwar Ltd.’s own balance sheet since 1st April, 20X1.
On 1st April, 20X1, the individual financial statements of Vinayak Ltd. showed the following balances:
- Retained earnings ₹ 750 million
- Other components of equity ₹ 25 million
The directors of Ishwar Ltd. carried out a fair value exercise to measure the identifiable assets and liabilities
of Vinayak Ltd. at 1st April, 20X1. The following matters emerged:
- Property having a carrying amount of ₹ 800 million (land component ₹ 350 million, buildings
component ₹ 450 million) had an estimated fair value of ₹ 1,000 million (land component ₹ 400
million, buildings component ₹ 600 million). The buildings component of the property had an
estimated useful life of 30 years at 1st April, 20X1.
- Plant and equipment having a carrying amount of ₹ 600 million had an estimated fair value of ₹ 700
million. The estimated remaining useful life of this plant at 1st April, 20X1 was four years. None of
this plant and equipment had been disposed of between 1st April, 20X1 and 31st March, 20X4.
- On 1st April, 20X1, the notes to the financial statements of Vinayak Ltd. disclosed contingent
liability. On 1st April, 20X1, the fair value of this contingent liability was reliably measured at ₹ 30
million. The contingency was resolved in the year ended 31st March, 20X2 and no payments were
required to be made by Vinayak Ltd. in respect of this contingent liability.
- The fair value adjustments have not been reflected in the individual financial statements of Vinayak
Ltd. In the consolidated financial statements, the fair value adjustments will be regarded as
temporary differences for the purposes of computing deferred tax. The rate of deferred tax to apply
to temporary differences is 20%.
The directors of Ishwar Ltd. used the proportion of net assets method when measur ing the non-controlling
interest in Vinayak Ltd. in the consolidated balance sheet.
Impairment review of goodwill on acquisition of Vinayak Ltd.
No impairment of the goodwill on acquisition of Vinayak Ltd. was evident when the reviews were carried out
on 31st March, 20X2 and 20X3. On 31st March, 20X4, the directors of Ishwar Ltd. carried out a further
review and concluded that the recoverable amount of the net assets of Vinayak Ltd. at that date was ₹
2,000 million. Vinayak Ltd. is regarded as a single cash generating unit for the purpose of measuring
goodwill impairment.
Provision
On 1st April, 20X3, Ishwar Ltd. completed the construction of a non-current asset with an estimated useful
life of 20 years. The costs of construction were recognised in property, plant and equipment and
depreciated appropriately. Ishwar Ltd. has a legal obligation to restore the site on which the non-current
asset is located on 31st March, 2X43. The estimated cost of this restoration work, at 31st March, 2X43

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prices, is ₹ 125 million. The directors of Ishwar Ltd. have made a provision of ₹ 6.25 million (1/20 x ₹ 125
million) in the draft balance sheet at 31st March, 20X4.
An appropriate annual discount rate to use in any relevant calculations is 6% and at this rate the present
value of ₹ 1 payable in 20 years is 31.2 paise.
Prepare the consolidated balance sheet of Ishwar Ltd. at 31st March, 20X4. Consider deferred tax
implications.
Solution:
Consolidated Balance Sheet of Ishwar Ltd. at 31st March, 20X4

Particulars ₹ in ‘000s
Assets
Non-current Assets:
Property, Plant and Equipment
[(26,20,000 + 18,50,000) + {(2,00,000 (W.N.1) – 15,000 (W.N.1)) + (1,00,000 (W.N.1) 47,17,050
– 75,000 (W.N.1)) + (39,000 – 1,950) (WN 7)}]
Investment (21,15,000 – 14,00,000 – 15,000) 7,00,000
Goodwill (W.N.2) 1,85,600
Total non-current assets 56,02,650
Current Assets:
Inventories (6,00,000 + 3,75,000) 9,75,000
Trade Receivables (4,50,000 + 3,30,000) 7,80,000
Cash and Cash Equivalents (75,000 + 60,000) 1,35,000
Total current assets 18,90,000
TOTAL ASSETS 74,92,650
Equity and Liabilities
Equity attributable to equity holders of the parent
Share Capital 7,00,000
Retained Earnings (W.N.5) 30,31,960
Other Components of Equity (W.N.6) 12,70,000
50,01,960
Non-controlling Interest (W.N.4) 3,53,600
Total equity 53,55,560
Non-current Liabilities
Provisions (39,000 + 2,340 (W.N.7)) 41,340
Long-term Borrowings (4,13,750 + 4,50,000) 8,63,750
Deferred Tax (W.N.8) 4,07,000
Total non-current liabilities 13,12,090
Current Liabilities
Trade and Other Payables (3,00,000 + 2,50,000) 5,50,000
Short-term Borrowings (1,00,000 + 1,75,000) 2,75,000
Total Current Liabilities 8,25,000
TOTAL EQUITY AND LIABILITIES 74,92,650

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Working Notes:
1. Computation of Net Assets of Vinayak Ltd.
1st April, 31st March,
20X1 20X4
(Date of (Date of
acquisition) consolidation)
₹ in ‘000s ₹ in ‘000s
Share Capital 5,00,000 5,00,000
Retained Earnings:
Per accounts of Vinayak Ltd. 7,50,000 10,50,000
Fair Value Adjustments:
Property (10,00,000 – 8,00,000)* # 2,00,000 $2,00,000
Extra depreciation due to Buildings appreciation*
((6,00,000 – 4,50,000) x 3/30) $(15,000)
Plant and Equipment
(7,00,000 – 6,00,000)* #1,00,000 $1,00,000
Extra depreciation due to Plant and Equipment appreciation*
(1,00,000 x ¾) $( 75,000)
Contingent Liability* #(30,000) $ NIL
Other Components of Equity 25,000 50,000
Deferred Tax on Fair Value Adjustments*:
Date of acquisition (20% x#2,70,000 (from above)) (54,000)
Date of Consolidation (20% x $ 2,10,000 (from above)) . (42,000)
Net Assets for Consolidation 14,91,000 17,68,000
The post-acquisition increase in Net Assets is ₹ 2,77,000 (₹ 17,68,000 – ₹ 14,91,000). ₹ 25,000 of this
increase is due to changes in Other Components of Equity and the remaining ₹ 2,52,000 due to changes in
retained earnings.
2. Computation of Goodwill on Consolidation
Vinayak Ltd. ₹
in ‘000s
Cost of Investment:
Shares issued to acquire Vinayak Ltd. (4,00,000 x ½ x ₹ 7) 14,00,000
Non-controlling Interests at the date of acquisition:
Vinayak Ltd. – 20% x ₹ 1,491,000 (from W.N.1) 2,98,200
16,98,200
Net Assets at the date of acquisition:
Vinayak Ltd. (W.N.1) (14,91,000)
Goodwill before Impairment 2,07,200
Less: Impairment of Goodwill (refer W.N.3) (21,600)
Goodwill reported in Consolidated Balance Sheet 1,85,600

3. Impairment of Goodwill on acquisition of Vinayak Ltd.

Vinayak Ltd.
₹ in ‘000s
Net Assets of Vinayak Ltd. at 31st March, 20X4 (W.N.1) 17,68,000
Grossed up Goodwill on acquisition (100/80 x ₹ 2,07,200)
(Refer Note 1 below) 2,59,000
20,27,000
Recoverable amount of Vinayak Ltd. as a CGU (20,00,000)

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Therefore, gross impairment will be 27,000

Impairment attributed to Parent (refer Note 2 below) 21,600
Note 1: Grossing up of Goodwill
As per Para C4 of Appendix C to Ind AS 36 Impairment of Assets – If an entity measures non-controlling
interests at its proportionate interest in the net identifiable assets of a subsidiary at the acquisition date,
rather than at fair value, goodwill attributable to non-controlling interests is included in the recoverable
amount of the related Cash Generating Unit but is not recognised in the parent’s consolidated financial
statements. As a consequence, an entity shall gross up the carrying amount of goodwill allocated to the unit
to include the goodwill attributable to the non-controlling interest. This adjusted carrying amount is then
compared with the recoverable amount of the unit to determine whether the cash-generating unit is
impaired.
Note 2: Allocation of Impairment of Goodwill
Since the non-controlling interests of Vinayak Ltd. are measured at proportionate share of identifiable net
assets of Vinayak Ltd., the goodwill computed is entirely attributable only to the parent of Vinayak Ltd.
Accordingly, the impairment also would be attributed entirely to the parent of Vinayak Ltd., and not to the
noncontrolling interest.
4. Computation of Non-controlling Interest (NCI)
Vinayak Ltd.
₹ in ‘000s
NCI at the date of acquisition (W.N.2) 2,98,200
Share of post-acquisition increase in net assets (20% x ₹ 2,77,000 (from W.N.1)) 55,400
3,53,600

5. Computation of consolidated Retained Earnings

₹ in ‘000s
Balance as per accounts of Ishwar Ltd. 28,65,000
Adjustments:
Acquisition costs (15,000)
Restoration Provision (W.N.7) 1,960
Share of Vinayak Ltd.’s post-acquisition profits
(80% x ₹ 2,52,000 (W.N.1)) 2,01,600
Impairment of Goodwill (W.N.3) (21,600)
30,31,960

6. Other Components of Equity

₹ in ‘000s
Balance as per accounts of Ishwar Ltd. 12,50,000
Share of Vinayak Ltd.’s post-acquisition balance
(80% x ₹ 25,000 (W.N.1)) 20,000
12,70,000

7. Computation of Restoration Provision

₹ in ‘000s
Provision for Restoration originally required (₹ 1,25,000 x 0.312) 39,000
One year’s unwinding of discount (₹ 39,000 x 6%) A (2,340)
One year’s depreciation of capitalized cost (₹ 39,000 x 1/20) B (1,950)
Original provision incorrectly made C 6,250
So retained earnings adjustment equals [C -A – B] 1,960

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8. Computation of Deferred Tax
₹ in ‘000s
Ishwar Ltd. + Vinayak Ltd. 3,65,000
Fair value adjustments in Vinayak Ltd. (from W.N.1) 42,000
4,07,000

Question 10 (Past Exam Nov’23)

The extracts of the Balance Sheets of Hammer Ltd. and its subsidiary Sleek Ltd. as on 31st March, 2023
are given below:
Particulars Note Hammer Ltd. (₹) Sleek Ltd. (₹)
No.
I. ASSETS
A. Non-Current Assets
Property, Plant and Equipment 1 6,00,000 3,25,000
Intangible Assets 2 1,25,000 75,000
Investments 6,25,000 1,25,000
B. Current Assets
Inventories 1,25,000 1,60,000
Financial Assets
Trade receivables 3,25,000 2,90,000
Cash and Cash equivalents 1,50,000 3,50,000
Total Assets 19,50,000 13,25,000
II EQUITY AND LIABILITIES
A. Equity
Equity Share Capital (₹ 10 each) 10,00,000 5,00,000
Other Equity 3 5,50,000 3,75,000
B. Non- Current Liabilities
Financial Liabilities
Borrowings 4 - 1,00,000
C. Current Liabilities
Financial Liabilities
Short term borrowings
Bank Overdraft 1,00,000 50,000
Trade Payables 3,00,000 3,00,000
Total Equity and Liabilities 19,50,000 13,25,000

Notes to Accounts
Note No. Particulars Hammer Ltd. (₹) Sleek Ltd. (₹)
1. Property, Plant and Equipment
(a) Plant and Machinery 2,00,000 1,25,000
(b) Furniture and Fittings 4,00,000 2,00,000

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6,00,000 3,25,000
2. Intangible Assets
Goodwill 1,25,000 75,000
3. Other Equity
(a) General Reserve 2,00,000 1,25,000
(b) Retained Earnings 3,50,000 2,50,000
5,50,000 3,75,000
4. Borrowings
8% Debentures of ₹ 100 each - 1,00,000
Additional information:
Hammer Ltd. acquired 20,000 equity shares of Sleek Ltd. on 1st April, 2022 at a cost of ₹ 2,40,000 and
further acquired 17,500 equity shares on 1st October, 2022 at a cost of ₹ 1,92,500;
The 8% debentures of Sleek Ltd. includes debentures held by Hammer Ltd. of nominal value of ₹ 35,000.
These were acquired by Hammer Ltd. on 1st January, 2022 at a cost of ₹ 84,000;
The retained earnings of Sleek Ltd. had a credit balance of ₹ 75,000 as on 1st April, 2022. On that date the
balance of General Reserve was ₹ 50,000;
 Sleek Ltd. had paid dividend @ 10% on its paid-up equity share capital out of the balance of retained
earnings as on 1st April, 2022 for the financial year 2021-2022. The entire dividend received by
Hammer Ltd. was credited in its statement of profit and loss;
 As per the resolution dated 28th February 2023, Sleek Ltd. had allotted bonus shares @ 1 equity share
for every 10 shares held out of its general reserve. The accounting effect has not been given;
 Trade receivables of Hammer Ltd. includes bills receivables of ₹ 2,00,000 drawn upon Sleek Ltd. Out of
this, bills of ₹ 50,000 have been discounted with bank;
 During the financial year 2022-2023, Hammer Ltd. purchased goods from Sleek Ltd., of ₹ 25,000 at a
sales price of ₹ 30,000, 40% of these goods remained unsold on 31st March, 2023;
 On 1st October, 2022, machinery of Sleek Ltd. was overvalued by 20,000 for which necessary
adjustments are to be made. Depreciation is charged @ 10% per annum:
 The parent company i.e., Hammer Ltd. has adopted an accounting policy to measure non-controlling
interest at fair value (quoted market price) applying Ind AS 103. Assume the fair value per equity share
of Sleek Ltd. at ₹ 11 on the date when control of Sleek Ltd. was acquired by Hammer Ltd.
You are required to prepare a consolidated balance sheet, as per Ind AS, of Hammer Ltd. and its
subsidiary Sleek Ltd. as at 31st March, 2023.
Solution: (20 Marks)
Consolidated Balance Sheet of Hammer Ltd. as at 31st March, 2023
Notes No. ₹ in lakhs
Assets
Non-current assets
Property, plant and equipment 1 9,06,000
Intangible assets 1 2,00,000
Financial assets
Investment 1 2,33,500
Current assets
Inventories 1 2,83,000

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Financial assets
Trade receivables 1 4,65,000
Cash and cash equivalents 1 5,00,000
Total 25,87,500
Equity and Liabilities
Equity
Share capital - Equity shares of ₹ 10 each 2 10,00,000
Other equity 3 7,47,750
Non-controlling interest (W.N.) 1,74,750
Non-current liabilities:
Financial liabilities
Borrowings 1 65,000
Current Liabilities:
Financial liabilities
Bank Overdraft 1 1,50,000
Trade payables 1 4,50,000
Total 25,87,500

Notes to Accounts
Note 1: Assets and Liabilities ₹
Particulars Hammer Ltd. Sleek Ltd. Adjustments Total
Property, Plant and Equipment 6,00,000 3,25,000 -20,000 +1,000 9,06,000
Intangible Assets 1,25,000 75,000 2,00,000
Investments 1,92,500* 1,25,000 -84,000 2,33,500
Inventories 1,25,000 1,60,000 -2,000 2,83,000
Trade Receivables 3,25,000 2,90,000 -1,50,000 4,65,000
Cash and Cash Equivalents 1,50,000 3,50,000 5,00,000
Borrowings 0 1,00,000 -35,000 65,000
Bank Overdraft 1,00,000 50,000 1,50,000
Trade Payables 3,00,000 3,00,000 -1,50,000 4,50,000
*6,25,000 – 2,40,000-1,92,500

Note 2: Equity Share Capital

1,00,000 equity shares of ₹ 10 each, fully paid 10,00,000
10,00,000

Note 3: Consolidated Other Equity

General Reserve W.N.1 2,28,125
Retained Earnings W.N.1 3,64,625
Capital Reserve W.N.2 1,55,000
7,47,750

Working Notes:
1. Consolidated Other Equity

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Particulars General Reserve Retained Earnings

Standalone - Hammer Ltd. 2,00,000 3,50,000
Less: Fair Value Loss of existing stake
[2,40,000 - (20,000 x 11)] (20,000)
Less: Loss on cancellation of debentures (49,000)
Add: Share in Post-acquisition Profits 28,125 83,625
2,28,125 3,64,625

2. Computation of Goodwill or Bargain Purchase for (75% stake)

(i) Computation of net worth (net identifiable assets) as on 1st October, 2022
Share Capital 5,00,000
Pre-acquisition Retained Earnings (after adjusting downward revaluation of machinery) 1,17,500
Pre-acquisition General Reserve 37,500
Bonus issue* 50,000
Net Identifiable assets 7,05,000
*Note: Bonus shares issued in 1:10 ratio i.e. ₹ 50,000 and bonus issue has not been accounted for yet. The
opening balance of the general reserve is ₹ 50,000 while the closing balance is ₹ 1,25,000 which implies
that ₹ 75,000 have been transferred during the year and this amount should be allocated between pre and
post-acquisition based on time proportion. Therefore, the general reserve on the date of acquisition will be
₹ 50,000 + 50% of ₹ 75,000 i.e. ₹ 37,500 = ₹ 87,500. Here, it should be noted that the date of bonus issue
is 28th February, 2023 and bonus amount is ₹ 50,000. Since the balance of post-acquisition general
reserve (50% of ₹ 75,000 i.e. ₹ 37,500) is insufficient, it is assumed that bonus shares are issued from pre-
acquisition general reserve i.e. balance on the date of acquisition assuming that transfer to general reserve,
in general, is an appropriation of profit which is done at the end of the year. This implies that outstanding
balance in general reserve at the time of bonus issue is the opening balance.
However, one may assume otherwise like insufficient post-acquisition balance of ₹ 12,500 (50,000 –
37,500) has only been adjusted through pre-acquisition share of ₹ 87,500 or first adjustment of bonus issue
has been done and later bifurcation of remaining balance has been done into pre and post-acquisition. In
such a case balance of consolidated general reserve (post-acquisition), net worth, bargain purchase and
NCI will undergo a change.

(ii) Computation of bargain purchase i.e capital reserve

Net worth or Net identifiable assets 7,05,000
Purchase consideration (1,92,500 + 2,20,000) 4,12,500
NCI [12,500 shares x ₹ 11 (i.e. ₹ 1,92,500 / 17,500 shares)] 1,37,500 5,50,000
Bargain purchase (capital reserve) 1,55,000

3. Non-Controlling Interest A/c (at Fair Value)

NCI at fair value as on 1st October, 2023 1,37,500
Post-acquisition General Reserve 9,375
Post-acquisition Retained Earnings 27,875
NCI at fair value as on 31st March, 2023 1,74,750

4. Analysis of Other Equity

(i) General Reserve
Closing balance as on 31st March, 2023 1,25,000
Less: Opening Balance Pre (50,000)
Net Profit transferred during the year 75,000
For 6 months till 30th September, 2022 Pre 37,500

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For 6 months from 1st October, 2022 to 31st March, 2023 Post 37,500
Total pre-acquisition reserve (50,000 + 37,500) Pre 87,500
Less: Bonus issue Pre (50,000)
Balance General Reserve pre 37,500
Share of Hammer Ltd. in pre-acquisition reserve (75%) Pre 28,125
Share of NCI in pre-acquisition reserve (25%) Pre 9,375
Share of Hammer Ltd. in post-acquisition reserve (75%) Post 28,125
Share of NCI in post-acquisition reserve (25%) Post 9,375

(ii) Retained Earnings (RE)

Closing balance as on 31st March, 2023 2,50,000
Less: Opening balance 75,000
Less: Dividend @10% (50,000) Pre (25,000)
During the year 2,25,000
For 6 months till 30th September, 2022 Pre 1,12,500
For 6 months from 1st October 2022 to 31st March, 2023 Post 1,12,500
Add: Saving in Depreciation (W.N.5) 1,000
Less: Unrealised Gain [(30,000-25,000) x 40%] (2,000)
Net post-acquisition RE Post 1,11,500
Total pre-acquisition RE (25,000 + 1,12,500) Pre 1,37,500
Less: Downward revaluation of machinery (20,000)
Pre 1,17,500
Share of Hammer Ltd. in pre-acquisition RE (75%) Pre 88,125
Share of NCI in pre-acquisition RE (25%) Pre 29,375
Share of Hammer Ltd. in post-acquisition RE (75%) Post 83,625
Share of NCI in post-acquisition RE (25%) Post 27,875

5. Plant and Machinery balance as on 31st March 2023

₹
Balance as on 31.3.2023 as given in question (after depreciation) 1,25,000
Less: Downward revaluation less depreciation saving (19,000)*
1,06,000
*Saving in depreciation = ₹ 20,000 - ₹ 19,000 = ₹ 1,000.

Question 11 (MTP May’23)

Company P Ltd., a manufacturer of textile products, acquires 40,000 equity shares of Company X (a
manufacturer of complementary products) out of 1,00,000 shares in issue. As part of the same agreement,
the Company P purchases an option to acquire an additional 25,000 shares. The option is exercisable at
any time in the next 12 months. The exercise price includes a small premium to the market price at the
transaction date. After the above transaction, the shareholdings of Company X’s two other original
shareholders are 35,000 and 25,000. Each of these shareholders also has currently exercisable options to
acquire 2,000 additional shares. Assess whether control is acquired by Company P. (5 Marks)
Solution:
In assessing whether it has obtained control over Company X, Company P should consider not only the
40,000 shares it owns but also its option to acquire another 25,000 shares (a so -called potential voting
right). In this assessment, the specific terms and conditions of the option agreement and other factors are
considered as follows:

 the options are currently exercisable and there are no other required conditions before such options
can be exercised

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 if exercised, these options would increase Company P’s ownership to a controlling interest of over 50%
before considering other shareholders’ potential voting rights (65,000 shares out of a total of 1,25,000
shares)
 although other shareholders also have potential voting rights, if all options are exercised Company P
will still own a majority (65,000 shares out of 1,29,000 shares)
 the premium included in the exercise price makes the options out -of-the-money. However, the fact that
the premium is small and the options could confer majority ownership indicates that the potential voting
rights have economic substance.
By considering all the above factors, Company P concludes that with the acquisition of the 40,000 shares
together with the potential voting rights, it has obtained control of Company X.

IND AS 111
Question 3 (RTP Nov’23)
Entities A and B establish a 50:50 joint operation in the form of a separate legal entity, Entity J, whereby
each operator has a 50% ownership interest and takes 50% of the output.
On formation of the joint operation, Entity A contributes a property with fair value of ₹ 110 lakhs and
intangible asset with fair value of ₹ 10 lakhs whereas Entity B contributes equipment with a fair value of ₹
120 lakhs.
The carrying amounts of the assets contributed by Entities A and B are ₹ 100 lakhs and ₹ 80 lakhs,
respectively.
What will be the amount of any gain or loss to be recognised by Entity A and Entity B in its separate
financial statements as well as consolidated financial statements?
Solution:
Paragraph B34 of Ind AS 111 states that when an entity enters into a transaction with a joint operation in
which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the
other parties to the joint operation and, as such, the joint operator shall recognise gains and losses
resulting from such a transaction only to the extent of the other parties’ interests in the joint operation.
The amount of gain or loss to be recognised by Entity A in its separate financial statements as well as
consolidated financial statements will be computed as below:
(All amounts are ₹ in lakhs)
A’s share of fair value of asset contributed by Entity B (50% x ₹ 120 lakhs) 60
Less: Asset contributed by Entity A to the joint operation – carrying amount of proportion
ceded to Entity B (50% x ₹ 100 lakhs) (50)
Gain to be recognised by Entity A 10

The gain can alternatively be calculated as:

Share acquired in fair value of net assets of joint operation (50% x ₹ 240 lakhs) 120
Less: Carrying amount of asset contributed (100)
Less: Unrealised portion of gain on asset contributed (
50% × (₹ 120 lakhs – ₹ 100 lakhs)) (10)
Gain to be recognised by Entity A 10
The amount of gain or loss to be recognised by Entity B in its separate financial statements as well as
consolidated financial statements will be computed as below:
(All amounts are ₹ in lakhs)

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B’s share of fair value of asset contributed by Entity A (50% x ₹ 120 lakhs) 60
Less: Asset contributed by Entity B to the joint operation – carrying amount of proportion
ceded to Entity A (50% x ₹ 80 lakhs) (40)
Gain to be recognised by Entity B 20

The gain can alternatively be calculated as:

Share acquired in fair value of net assets of joint operation (50% x ₹ 240 lakhs) 120
Less: Carrying amount of asset contributed (80)
Less: Unrealised portion of gain on asset contributed (50% × (₹ 120 lakhs – ₹ 80 lakhs)) (20)
Gain to be recognised by Entity B 20

IND AS 28
Question 1 (MTP OCT’19) – Existing Ques – Only Rectified the Amount of URP
Sumeru Limited holds 35% of total equity shares of Meru Limited, an associate company. The value of
Investments in Meru Limited on March 31, 20X1 is Rs. 3 crores in the consolidated financial statements of
Sumeru Limited.
Sumeru Limited sold goods worth Rs. 3,50,000 to Meru Limited. The cost of goods sold. is Rs. 3,00,000.
Out of these, goods costing Rs. 1,00,000 to Meru Limited were in the closing stock of Meru Limited.
During the year ended March 31, 20X2 the profit and loss statement of Meru Limited showed a loss of Rs.
1 crore.
(A) What is the value of investment in Meru Limited as on March 31, 20 X2 in the consolidated financial
statements of Sumeru Limited, if equity method is adopted for valuing the investments in associates?
(B) Will your answer be different if Meru Limited had earned a profit of Rs. 1.50 crores and declared a
dividend of Rs. 75 lacs to the equity shareholders of the Company?
Solution
(a) Value of investment in Meru Ltd. as on 31st March, 20X2 as per equity method in the
consolidated financial statements of Sumeru Ltd.

Rs.
Cost of Investment 3,00,00,000

Less: Share in Post-acquisition Loss (1,00,00,000 x 35%) (35,00,000)

Less: Unrealised gain on inventory left unsold with Meru Ltd.

[{(50,000/3,00,000) x 1,00,000} x 35%] (5,000)

Carrying value as per Equity method 2,64,95,000

(b) Value of investment in Meru Ltd. as on 31st March, 20X2 as per equity method in the
consolidated financial statements of Sumeru Ltd.

Rs.

Cost of Investment 3,00,00,000

Add: Share in Post-Acquisition Profit (1,50,00,000 x 35%) 52,50,000

Less: Unrealised gain on inventory left unsold with Meru Ltd.

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[{(50,000/3,00,000) x 1,00,000} x 35%] (5,000)

Less: Dividend (75,00,000 x 35%) (26,25,000)

Carrying value as per Equity method 3,26,20,000

IND AS 109
CONCEPTS ADDED IN IND AS 32
Note: This Concept was already covered through Illustration 101 of (Edition 6 / 7), now we have just
added the relevant concept regarding the same.

1. CONTRACTS TO BUY OR SELL NON-FINANCIAL ITEMS (‘OWN USE EXEMPTION’)

 Contracts to buy or sell non-financial items are outside scope of ‘financial instruments’.
 Following Contracts will be within the scope of IND AS 109 and accounted for as a
derivative contract.
(a) Contracts to buy or sell a non-financial item that can be settled NET in cash or
another financial instrument or:
(b) when ability to settle net, is not explicit in terms of contract, but entity has a
practice of settling similar contracts NET or
(c) Entity has a practice of taking delivery and selling it within a short period after
delivery for generating a profit from short-term fluctuations in price;

Example: ABC Ltd. enters into a contract to buy 100 tonnes of cocoa beans at 1,000
per tonne for delivery in 12 months. On settlement date market price for cocoa beans
is 1,500 per tonne.

If contract cannot be settled net in cash and this contract is entered for delivery of
cocoa beans in line with ABC Ltd.’s expected purchase/ usage requirements, then own-
use exemption applies.

In such case, contract is considered to be an executory contract outside the scope of Ind
AS 109 and hence shall not be accounted as a derivative.

QUESTIONS ADDED
Question 20 (RTP May 23)
State whether the following items meet the definition of Financial Asset or Financial Liability for an entity:
(i) A bank advances an entity a five-year loan. The bank also provides the entity with an overdraft facility
for a number of years.
(ii) Entity A owns preference shares in Entity B. The preference shares entitle Entity A to dividends, but
not to any voting rights.
(iii) An entity has a present obligation in respect of income tax due for the prior year.
(iv) In a lawsuit brought against an entity, a group of people is seeking compensation for damage to their
health as a result of land contamination believed to be caused by waste from the entity’s production
process. It is unclear whether the entity is the source of the contamination since many entities operate
in the same area and produce similar waste.

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Solution:
i) The entity has two financial liabilities namely (a) the obligation to repay the fiveyear loan and (b) the
obligation to repay the bank overdraft to the extent that it has borrowed using the overdraft facility. Both
the loan and the overdraft result in contractual obligations for the entity to pay cash to the bank for the
interest incurred and for the return of the principal.

ii) For Entity B: The preference shares may be equity instruments or financial liabilities of Entity B,
depending on their terms and conditions.
For Entity A: Irrespective of Entity B’s treatment, the preference shares are a financial asset because the
investment satisfies the definition of a financial asset.

iii) An income tax liability is created as a result of statutory requirements imposed by the government. The
rights and obligations are not created by a contract. Hence, the liability for income-tax dues is not a
financial liability.

iv) The fact that a lawsuit may result in the payment of cash does not create a financial liability for the entity
because there is no contract between the entity and the affected group. The entity will need to consider
providing for the payment as per Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.

Question 21 (RTP May 23)

In an arm’s length transaction, Entity X buys 10,000 convertible preference shares in Company Z for cash
payments of ₹ 40,000, with ₹ 25,000 payable immediately and ₹ 15,000 payable in two years. The market
rate of annual interest for a two-year loan to the entity would be 6%.
Explain the accounting treatment for the said transaction.
Solution:
Since payment of ₹ 15,000 is deferred for two years, the fair value of the consideration given for the shares
is equal to ₹ 25,000 plus the present value of ₹ 15,000. The present value of ₹ 15,000 deferred payment is
₹ 13,350 (₹ 15,000 ÷ 1.062). Entity X will initially measure the shares purchased at ₹ 38,350 (i.e., ₹ 25,000
+ ₹ 13,350).
Since this transaction took place at an arm’s length, this is considered to be fair value for initial recognition
in the absence of evidence to the contrary.
The difference between the ₹ 40,000 cash paid out and the ₹ 38,350, i.e. ₹ 1,650, will be recognised as
interest expense in profit or loss over the two year period of deferred payment.

Question 22 (RTP Nov’23)

On 1st April, 20X1, a bank provides an entity with a four-year loan of ₹ 5,000 on normal market terms,
including charging interest at a fixed rate of 8% per year. Interest is payable at the end of each year. The
figure of 8% is the market rate for similar four - year fixed-interest loans with interest paid annually in
arrears. Transaction cost of ₹ 100 is incurred on originating the loan. Effective interest rate in this case is
8.612%.
In 20X1-20X2, the entity experienced financial difficulties. On 31st March, 20X2, the bank agreed to modify
the terms of the loan. Under the new terms, the interest payments in 20X2-20X3 to 20X4-20X5 will be
reduced from 8% to 5%. The entity paid the bank a fee of ₹ 50 for paperwork relating to the modification.
Analyse whether the modification of the loan terms constitutes an extinguishment of the original financial
liability or not.
Solution:
Since the interest was initially set at the market rate, on 1st April, 20X1 the entity on initial recognition will
measure the loan at the transaction price, less transaction costs i.e. at ₹ 4,900.
The following is the original amortised cost calculation at 1st April, 20X1:

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Time Carrying amount Effective Interest Cash outflow Carrying amount

at 1st April @ 8.612% at 31st March
(a) (b=ax8.612%) (c=5000x8%) (d = a + b - c)
20X1-20X2 4,900.00 421.99 (400.00) 4,921.99
20X2-20X3 4,921.99 423.88 (400.00) 4,945.87
20X3-20X4 4,945.87 425.94 (400.00) 4,971.81
20X4-20X5 4,971.81 428.19 (5,400.00) –
At 31st March, 20X2:
1. The present value of the remaining cash flows of the original financial liability is ₹ 4,921.99 discounted
at the original effective interest rate of 8.612%.
2. The present value of the cash flows under the new terms discounted using the original effective
interest rate is ₹ 4,537.25 (Refer W.N.). Including the ₹ 50 fee, the present value of the total cash flows
is ₹ 4,587.25.
3. The difference between ₹ 4,921.99 and ₹ 4,587.25 is ₹ 334.74 which is only 6.8% (₹ 334.74 ÷ ₹
4,921.99) of the present value of the remaining cash flows of the original financial liability.
The entity applies its judgement to decide whether the terms of the instruments exchanged are
substantially different. Since the difference of the discounted present value of the cash flows under the new
terms, including any fees paid net of any fees received and discounted using the original effective interest
rate, is less than 10% of the present value of the remaining cash flows of the original financial liability, this
modification should not be considered a substantial modification of the terms of the existing loan.
Therefore, the modification would not be accounted for as an extinguishment of the original financial
liability.
Working Note:
The calculation of the present value of the cash flows under the new terms discounted using the original
effective interest rate is as follows:
Time Cash outflow Discounting factor @ Present value at 31st
8.612% March
31st March, 20X3 250.00 0.921 230.25
31st March, 20X4 250.00 0.848 212.00
31st March, 20X5 5,250.00 0.780 4,095.00
Total present value 4,537.25

Question 23 (RTP May’24)

The company has made sales of ₹ 60,00,000 to a customer SS LLP on 31st December 20X2. The normal
credit is for one month. However, sometimes, it goes upto 2 months. The company expects to receive the
payment by 28th February 20X3. However, no payment has been received till 31st March 20X3. On 15th
April 20X3, the sales department of the company became aware that the customer is passing through
financial crisis and has major cash flow problems.
The company has agreed to allow the customer to settle the debt by 31st March 20X4, by which time the
customer is confident that the cashflow problem will be resolved.
The company expects that an annual interest of 9% (i.e. effective interest rate) can be received against any
money lent out, yet it allowed the customer an interest-free payment period.
Determine the amount to be shown as 'trade receivable' from SS LLP in the books of the company as on
31st March 20X3.

Solution:

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Ind AS 10 ‘Events after the Reporting Date’, classify an event as adjusting if it provides additional evidence
of conditions existing at the reporting date. In this case the additional information relates to evidence of
impairment of a financial asset, since the customer had financial difficulties prior to 31st March 20X3.
Ind AS 109 ‘Financial Instruments’ requires financial assets to be reviewed at each reporting date for
evidence of impairment. Such evidence exists here because although the customer is expected to pay the
amount due the payment date has been deferred. As per para B5.5.33 of Ind AS 109, for a financial asset
that is credit-impaired at the reporting date, but that is not a purchased or originated creditimpaired financial
asset, an entity shall measure the expected credit losses as the difference between the asset’s gross
carrying amount and the present value of estimated future cash flows discounted at the financial asset’s
effective interest rate. Any adjustment is recognized in the profit or loss as an impairment gain or loss.
Further, para B5.5.44 of Ind AS 109 provides that expected credit losses shall be discounted to the
reporting date, not to the expected default or some other date, using the effective interest rate determined
at initial recognition or an approximation thereof.
In such circumstances, Ind AS 109 requires that the financial asset be re-measured at the present value of
the expected future receipt, discounted (in the case of a trade receivable) using effective interest rate.
Therefore, in the financial statements for the year ended 31st March 20X3, asset should be measured at ₹
55,04,587 (₹ 60,00,000 / 1.09) and an impairment loss of ₹ 4,95,413 (₹ 60,00,000 – ₹ 4,95,413) recognised
in profit and loss.
In the year ended 31st March 20X4, interest income of ₹ 4,95,413 (₹ 55,04,587 x 9%) should be
recognised in the profit and loss.

Question 24 (Past Exam – May’23)

Autumn Limited has a policy of providing subsidized loans to its employees for their personal purposes.
Mrs. Jama Bai, a senior HR manager in the Company, took a loan of ₹ 12.00 lakhs on the following terms:

 Interest rate 4% per annum

 Loan disbursement date: 1st April, 2019
 The principal amount of the loan shall be recovered in 4 equal annual installments commencing from
31st March, 2020
 The accumulated interest computed on reducing balance at simple interest is collected in 3 equal
annual installments after collection of the principal amount
 Mrs. Jama Bai must remain in service till the principal and interest are paid
 The market rate of a comparable loan to Mrs. Jama Bai is 9% per annum
 The present value of ₹ 1 at 9% per annum at the end of respective years is as follows:
Year ending 31st March 2020 2021 2022 2023 2024 2025 2026
Present Value 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470

Under the assumption that no probable future economic benefits except the return of loan has been
guaranteed by the employee, you are required to:
i. Provide the journal entries at the time of initial recognition of loan on 1st April, 2019 and as at 31st
March, 2020; and
ii. Prepare ledger account of 'Loan to Mrs. Jama Bai' from the inception of the loan till its final payment.
(14 Marks)

Solution:
(i) Journal Entry
Date Particulars Dr. Cr.
₹ ₹
1/4/2019 Loan to Mrs. Jama Bai A/c Dr. 10,43,638
Pre-paid employee cost A/c Dr. 1,56,362
To Bank A/c 12,00,000
(Being loan to employee recorded at fair value)

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31/3/2020 Loan to Mrs. Jama Bai A/c Dr. 93,927

To Finance Income A/c 93,927
(Being finance income @ 9% recorded in the books)
31/3/2020 Bank A/c Dr. 3,00,000
To Loan to Mrs. Jama Bai A/c 3,00,000
(Being installment received at the end of the year)

(ii) In the books of Autumn Ltd.

Loan to Mrs. Jama Bai A/c
Date Particulars Amount Date Particulars Amount
(₹) (₹)
1.4.2019 To Bank A/c 10,43,638 31.3.2020 By Bank A/c 3,00,000
31.3.2020 To Finance income 31.3.2020 By Balance c/d
(W.N.3) 93,927 8,37,565
11,37,565 11,37,565
1.4.2020 To Balance b/d 8,37,565 31.3.2021 By Bank A/c 3,00,000
31.3.2021 To Finance income 31.3.2021 By Balance c/d
(W.N.3) 75,381 6,12,946
9,12,946 9,12,946
1.4.2021 To Balance b/d 6,12,946 31.3.2022 By Bank A/c 3,00,000
31.3.2022 To Finance income 31.3.2022 By Balance c/d
(W.N.3) 55,165 3,68,111
6,68,111 6,68,111
1.4.2022 To Balance b/d 3,68,111 31.3.2023 By Bank A/c 3,00,000
31.3.2023 To Finance income 31.3.2023 By Balance c/d
(W.N.3) 33,130 1,01,241
4,01,241 4,01,241
1.4.2023 To Balance b/d 1,01,241 31.3.2024 By Bank A/c 40,000
31.3.2024 To Finance income 31.3.2024 By Balance c/d
(W.N.3) 9,112 70,353
1,10,353 1,10,353
1.4.2024 To Balance b/d 70,353 31.3.2025 By Bank A/c 40,000
31.3.2025 To Finance income 31.3.2025 By Balance c/d
(W.N.3) 6,332 36,685
76,685 76,685
1.4.2025 To Balance b/d 36,685 31.3.2026 By Bank A/c 40,000
31.3.2026 To Finance income
(W.N.3) 3,315*
40,000 40,000
*Difference of ₹ 13 (₹ 3,315 – ₹ 3,302) is due to approximation.

Working Notes:
1. Calculation of initial recognition amount of loan to employee
Year Estimated Cash Flows ₹ PV Factor @9% Present Value ₹
31/3/2020 3,00,000 0.9174 2,75,220
31/3/2021 3,00,000 0.8417 2,52,510
31/3/2022 3,00,000 0.7722 2,31,660
31/3/2023 3,00,000 0.7084 2,12,520
31/3/2024 40,000 (W.N.2) 0.6499 25,996
31/3/2025 40,000 (W.N.2) 0.5963 23,852
31/3/2026 40,000 (W.N.2) 0.5470 21,880
Fair Value of Loan 10,43,638

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2. Computation of Interest to be paid

Year Opening Cash Flows Principal Interest @ 4% Cumulative
outstanding outstanding at on a Interest
balance year end
a b c d e
₹ ₹ ₹ ₹
31/3/2020 12,00,000 3,00,000 9,00,000 48,000 48,000
31/3/2021 9,00,000 3,00,000 6,00,000 36,000 84,000
31/3/2022 6,00,000 3,00,000 3,00,000 24,000 1,08,000
31/3/2023 3,00,000 3,00,000 Nil 12,000 1,20,000
31/3/2024 1,20,000 40,000
(1,20,000/3)
31/3/2025 40,000
(1,20,000/3)
31/3/2026 40,000
(1,20,000/3)

3. Computation of finance cost as per amortization table

Year Opening Balance Interest @ 9% Repayment Closing Balance
(1) (2) (3) (1+2-3)
₹ ₹ ₹ ₹
1/4/2019 10,43,638
31/3/2020 10,43,638 93,927 3,00,000 8,37,565
31/3/2021 8,37,565 75,381 3,00,000 6,12,946
31/3/2022 6,12,946 55,165 3,00,000 3,68,111
31/3/2023 3,68,111 33,130 3,00,000 1,01,241
31/3/2024 1,01,241 9,112 40,000 70,353
31/3/2025 70,353 6,332 40,000 36,685
31/3/2026 36,685 3,315* 40,000 Nil
*Difference of ₹ 13 (₹ 3,315 – ₹ 3,302) is due to approximation.

Question 25 (Past Exam Nov’23)

Poor Limited borrowed 120 Lakhs from a Scheduled Bank. The terms of loan are as under:
 Rate of Interest @ 10% per annum, payable yearly
 Tenure of Loan 12 Years.
 Principal to be paid at the end of tenure i.e. 12th Year.
Poor Limited defaulted in payment of Interest in year 5, 6, 7 and 8. A loan reschedule agreement took place
at the end of 9th year with the Bank. As per the agreement,
Poor Limited is required to pay ₹ 220 Lakhs at the end of 10th year. The default continued till the end of
10th year.
You are required to calculate as per relevant Ind AS:
(i) Book Value of the Loan at the end of the 10th Year.
(ii) Additional amount to be paid to the Bank on Account of Rescheduling. (assume interest is
compounded in the case of default). (5 Marks)
Solution:

(i) Computation of book value of the loan at the end of 10th year
= ₹ 1,20,00,000 x 1.10 x 1.10 x 1.10 x 1.10 x 1.10 x 1.10

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= ₹ 2,12,58,732 (i.e. adding interest for 5th to 10th year)
(ii) Computation of additional amount to be paid to bank on rescheduling
Rescheduled amount to be paid at the end of the 10th year = ₹ 2,20,00,000
Additional amount to be paid on rescheduling = ₹ 2,20,00,000 - ₹ 2,12,58,732
= ₹ 7,41,268

Please Note: Illustration 66 has been deleted, so the Ques Number has changed accordingly
i.e. Illustration 67 (of edition 6/7) has become illustration 66 in new edition
Illustration 68 (of edition 6/7) has become illustration 67 in new edition
and so on upto last Illustration.
Question Numbering of RTP/MTP/Past Paper section has not changed

Professional & Ethical Duty of a CA

Question 1 (RTP May’24)
Astra Ltd. is a listed entity which operates in the defence and fibre optics sector. It supplies fibre optic
cables and racks in the domestic country. This activity is only a trading activity for Astra Ltd. as it procures
goods from pre-approved suppliers, and after inspection, sells the goods to IT companies. The sale
contract requires Astra Ltd. to deliver these goods to the IT companies’ locations (i.e., delivery on site).
Payment terms are 30 days after the invoice date to Astra Ltd.
Ms. Suparna Dasgupta, a chartered accountant, has recently joined Astra Ltd. as the Head of the Finance
Department.
The Chief Operating Officer (also the executive director) of Astra Ltd. is Ms. Padmaja Srinivasan, a
mechanical engineer with an MBA from Harvard University, who rose through the ranks through her
excellent skills in project management, marketing, and customer management.
Her remuneration includes a bonus computed as a percentage of turnover achieved during the year, and
an additional incentive for achieving an EBITDA in excess of 15% of turnover.
Astra Ltd. has sold fibre optic cables amounting to ₹ 2 crores (invoice dated 31st March 20X2) to Ethernet
Bullet Ltd., a company providing high-speed internet connectivity services through fibre optic cables as well
as dedicated leased lines. The service unit of Ethernet Bullet Ltd. is located next to the factory of Astra Ltd.
Though the goods were not moved to Ethernet Bullet Ltd.’s service unit, Astra Ltd. recognized the sale for
the year, based on the contention that the service unit is adjacent, and hence the transfer can happen
within few minutes.
The annual results are due for board approval, for the year ending 31st March, and require the sign-off of
Ms. Suparna Dasgupta.
Ms. Suparna Dasgupta has been given a 40% increment on joining Astra Ltd., which enables her to
comfortably pay off her housing loan mortgage every month. Additionally, she is also given perquisites in
the form of business class travel, an exclusive chauffeur-driven car and stock options of the company.
Accordingly, she has stated that she cannot afford to lose this job as the salary and perquisites are among
the best in the country.
Ms. Padmaja Srinivasan has communicated to Ms. Suparna Dasgupta that many more benefits will accrue
if she agrees to present the numbers without any modifications. She has also said that the company would
not hesitate to replace Ms. Suparna Dasgupta should she disagree with the contentions above.
Required:
Discuss the potential conflicts which are arising in the above scenario and the ethical principles that would
guide Ms. Suparna Dasgupta in responding to the situation.
Solution:

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Presentation of Revenue numbers:
Ind AS 115 ‘Revenue from Contracts with Customers’ requires revenue to be recognized only on
satisfaction of the performance obligations under the contract. It is crucial that the performance obligations
be identified at the commencement of the contract, so that the trigger points for revenue recognition
become identifiable.
Management would always have an incentive to present higher revenue numbers. In the given case, the
fact that the COO is given an incentive for revenues and EBITDA indicates that revenue is a potential area
for material misstatement, given the personal interest of the COO in the same.
The sale of fibre optic cable cannot be recognized on 31st March 20X2 as the goods are not yet transferred
to the customer Ethernet Bullet Ltd.’s factory premises, which is one of the critical obligations of Astra Ltd.
The contention of the COO that it takes merely a few minutes to shift the goods, and hence the sale can be
recognized does not hold true. One can always cross-question as to why the movement of goods did not
happen, if it was merely a few minutes job. It could be a possibility that the goods may not be packed, or
there may still be some pending inspection of the goods before transferring the same etc. In view of this,
the performance obligation under this contract has not been completed, and hence booking the revenue
has resulted in an overstatement of revenue by ₹ 2 crores, and a consequent inflation of profits, assuming
that Astra Ltd. is making profit on this sale transaction. Additionally, booking this sale has resulted in an
understatement of inventory as at the reporting date of 31st March 20X2.
In view of the above, multiple conflicts of interest arise for Ms. Suparna Dasgupta:
(a) Pressure to present favourable revenue figures and chartered accountant’s personal
circumstances
The chartered accountant is under pressure to present favourable numbers, notably in favour of the COO,
thereby increasing the incentives to the COO, and in turn benefiting with the continued job prospects. Thus,
the ethical and professional standards required of the accountant are at odds with the pressures of her
personal circumstances.
(b) Duty to stakeholders
The directors have a duty to act in the best interests of the company’s stakeholders. While higher revenue
numbers do indicate a good growth trajectory of the company, recognizing the revenue before fulfilling the
performance obligations, or incorrectly booking grant income as revenue, results in misleading the
stakeholders about the actual performance of the entity, thereby actually becoming detrimental to the
stakeholders.
Ethical principles guiding the chartered accountant’s response
By exhibiting bias in reporting higher revenue figures due to the risk of losing the job, objectivity stands
compromised. Knowingly disclosing incorrect information compromises integrity, and erring in complying
with Ind AS requirements, though continuing to report so in the financial statements, results in displaying
absence of professional competence.
Appropriate action
In the given case, the chartered accountant faces an ethical dilemma, and must apply her moral and ethical
judgment. As a professional, she is responsible for presenting the truth, and to avoid indulging in ‘creative
accounting practices’ due to pressure.
The chartered accountant accordingly must put the interests of the company and professional ethics first
and insist that the financial statements represent correct revenue numbers, in compliance with the relevant
Ind AS. Being an advisor to the directors, she must prevent deliberate misrepresentation / fraudulent
financial reporting, regardless of the personal consequences. The accountant should not allow any undue
influence from the directors to override her professional judgment or integrity. This is in the long-term
interests of the company, Further, knowingly providing incorrect information is regarded as professional
misconduct. To prevent such misconduct, the chartered accountant should not sign off on the financial
statements containing incorrect financial information. By adhering to the ethical principles, the chartered

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)
accountant will maintain her professional integrity and contribute to the trust and reliability placed in the
work expected from her.
However, if she signs the financial statements containing the inflated revenue numbers, Ms. Suparna
Dasgupta would be guilty of professional misconduct under Clause I of Part II of Second Schedule to the
Chartered Accountants Act, 1949. The Clause states that a member of the Institute, whether in practice or
not, shall be guilty of professional misconduct, if he contravenes any of the provisions of this Act or the
regulations made thereunder, or any guidelines issued by the Council. As per the Council guidelines, a
member of the Institute who is an employee shall exercise due diligence and shall not be grossly negligent
in the conduct of his duties.

Conceptual Framework
Question 4 (Past Exam May’23)
Discuss with respect to 'Conceptual Framework for Financial Reporting under Indian Accounting
Standards', 'faithful representation', one of the qualitative characteristics of financial information. (6 Marks)

Solution:
Faithful representation
To be useful, financial information must faithfully represent the substance of the phenomena that it purports
to represent. In many circumstances, the substance of an economic phenomenon and its legal form are the
same. If they are not the same, providing information only about the legal form would not faithfully
represent the economic phenomenon.
To be a perfectly faithful representation, a depiction would have following three characteristics:
 Complete: A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
 Neutral: A neutral depiction is without bias in the selection or presentation of financial information.
Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making
judgements under conditions of uncertainty. The exercise of prudence means that assets and income
are not overstated, and liabilities and expenses are not understated. Equally, the exercise of prudence
does not allow for the understatement of assets or income or the overstatement of liabilities or
expenses.
 Free from error: Free from error means there are no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information has been selected and
applied with no errors in the process. In this context, being free from error does not mean perfectly
accurate in all respects. For example, an estimate of an unobservable price or value cannot be
determined to be accurate or inaccurate. However, a representation of that estimate can be faithful if
the amount is described clearly and accurately as being an estimate, the nature and limitations of the
estimating process are explained, and no errors have been made in selecting and applying an
appropriate process for developing the estimate.

Question 5 (Past Exam Nov’23)

Discuss the characteristics of good financial statements. (6 Marks)
Solution:
Characteristics of good financial information are:
1. Relevance
“Relevant financial information”
• Is financial information with (a) predictive value or (b) confirmatory value or both
• Makes it capable of making a difference in decisions made by users
• Makes it relevant financial information

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CA Final – Financial Reporting Additional Ques (Ed 7 to Ed 8)
Financial information has predictive value if it can be used as an input to processes employed by users
to predict future outcomes. Financial information need not be a prediction or forecast to have predictive
value. Financial information with predictive value is employed by users in making their own predictions.
Financial information has confirmatory value if it provides feedback about (confirms or changes)
previous evaluations.
The characteristic of ‘relevance’ also includes the concept of materiality.
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence
decisions that the primary users of general-purpose financial reports make on the basis of those
reports, which provide financial information about a specific reporting entity.
2. Faithful Representation
To be useful, financial information must also faithfully represent the substance of the phenomena that it
purports to represent. In many circumstances, the substance of an economic phenomenon and its legal
form are the same. If they are not the same, providing information only about the legal form would not
faithfully represent the economic phenomenon.
To be a perfectly faithful representation, a depiction would have following three characteristics:
 Complete: A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
 Neutral: A neutral depiction is without bias in the selection or presentation of financial information.
Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when
making judgements under conditions of uncertainty. The exercise of prudence means that assets
and income are not overstated and liabilities and expenses are not understated.
 Free from error: Free from error means there are no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information has been selected and
applied with no errors in the process. In this context, free from error does not mean perfectly
accurate in all respects.

Question 6 (MTP May’24)

How can one enhance the usefulness of financial information by applying four enhancing qualitative
characteristics? (4 Marks)
Solution:
The usefulness of financial information can be enhanced by applying four enhancing qualitative
characteristics as follows:
 Comparability: Users’ decisions involve choosing between alternatives. Information about a reporting
entity is more useful if it can be compared with similar information about other entities and with similar
information about the same entity for another period or another date. Comparability refers to the use of
the same methods for the same items, and uniformity implies that like things must look alike and
different things must look different.
 Verifiability: Verifiability means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a faithful
representation. Verification can be direct or indirect.
 Timeliness: Timeliness means having information available to decision-makers in time to be capable
of influencing their decisions. Generally, the older the information is the less useful it is. However,
some information may continue to be timely long after the end of a reporting period because, for
example, some users may need to identify and assess trends.
 Understandability: Classifying, characterising and presenting information clearly and concisely makes
it understandable. Some phenomena are inherently complex and cannot be made easy to understand.
Financial reports are prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyse the information diligently. At times, even well-informed and
diligent users may need to seek the aid of an adviser to understand information about complex
economic phenomena.

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