ACCOUNTING STANDARDS

INDIAN ACCOUNTING STANDARDS (Ind AS)

INTRODUCTION
Multinational companies are doing their business in different countries including India which is one
of the emerging economies in the world. After liberalisation and globalization the world has now
become an economic village where there is increase in global trade and cross border flow of capital
between capital markets. This has necessiated the integration of financial reporting with the rest of
the economies of the world so that investors from outside the countries can understand financial
results and financial position of the companies. Lack of integration of financial reporting creates
confusion for users of financial statement which leads to inefficiency in capital markets across the
world. To resolve these differences and inconsistencies the need is for a single set of high quality
accounting standards.

CONVEYANCE OF INDIAN ACCOUNTING STANDARDS WITH IFRS

India has already started the process of convergence of Indian Accounting Standards with IFRS
(International Financial Reporting Standards) at the G20 summit in 2009. In the Union Budget of
2014-15 the adoption of Indian Accounting Standard (Ind AS) was proposed. According to Budget
statement the Ministry of Corporate Affairs (MCA) has notified Companies (Indian Accounting
Standards) Rules, 2015 on February, 2015 in which MCA notified 39 Ind AS and also laid down an
Ind-AS road map for companies other than banking, insurance and non-banking finance companies.
Subsequently these rules were amended by MCA by a further notification on September, 2018 which
is called second amendment rules, 2018.

MEANING OF IFRS
IFRS or International Financial Reporting Standards are issued by London based International
Accounting Standard Board (IASB). Till now there are 25 International Accounting Standards (IASs)
from IAS 1 to IAS 41 and 17 International Financial Reporting Standards (IFRSs) from IFRS 1 to
IFRS 17, both of which are referred as IFRS. IFRSS are "Principle-based” set of standards. These
standards establish broad rules and does not dictate specific treatments. Major nations of the world
are accepting these standards with minor variations.

MEANING OF Ind AS
Ind AS stands for Indian Accounting Standards (Ind ASs) which are a set of IFRS converged or
aligned accounting standards. These standards i.e. Ind ASs are converged with corresponding IFRS
as India has taken the approach of convergence and not adoption. Convergence of the Indian
accounting standards are made by making some significant changes in international standards. So
far Ministry of Corporate Affairs (MCA) has notified the following 40 Ind AS as per Companies Act,
2013.
SL No. Ind AS Title Corresponding
IAS/IFRS No.
1 Ind AS 1 Presentation of Financial Statements IAS1
2 Ind AS 2 Inventories IAS2
3 Ind AS 7 Cash Flow Statements IAS7
4 Ind AS 8 Accounting policies, Change in Accounting IAS8
Estimates and Errors
5 Ind AS 10 Events after the Balance Sheet Date IAS10
6 Ind AS 12 Income Taxes IAS12
7 Ind AS 16 Property, Plant and Equipment IAS16
8 Ind AS 17 Leases** IAS 17
9 Ind AS 19 Employees Benefits IAS19
10 Ind AS 20 Accounting for Govt. Grants and IAS20
Disclosure of Government Assistance
11 Ind AS 21 The Effects of changes in the Foreign IAS21
Exchange Rates
12 Ind AS 23 Borrowing Costs IAS23
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13 Ind AS 24 Related Party Disclosures IAS24
14 Ind AS 27 Separate financial statements IAS27
15 Ind AS 28 Investments in Associates and Joint IAS28
Ventures
16 Ind AS 29 Financial Reporting in Hyper Inflationary IAS29
Economies
17 Ind AS 32 Financial Instruments: Presentation IAS32
18 Ind AS 33 Earnings Per Share IAS33
19 Ind AS 34 Interim Financial Reporting IAS34
20 Ind AS 36 Impairment of Assets IAS36
21 Ind AS 37 Provisions, Contingent liabilities and IAS37
Contingent Assets
22 Ind AS 38 Intangible Assets IAS38
23 Ind AS 40 Investment Property IAS40
24 Ind AS 41 Agriculture IAS41
25 IND AS 101 First time adoption of India accounting IFRS 1
standards (IAS)
26 Ind AS 102 Share Based Payments IFRS 2
27 Ind AS 103 Business Combination IFRS 3
28 Ind As 104 Insurance Contacts ** IFRS 4
29 Ind AS 105 Non-current assets held for sale and IFRS 5
discontinued operations
30 Ind AS 106 Exploration for and evaluation of mineral IFRS 6
resources
31 Ind AS 107 Financial Instrument : Disclosure IFRS 7
32 Ind AS 108 Operating Segment IFRS 8
33 Ind AS 109 Financial Instruments IFRS 9
34 Ind AS 110 Consolidated Financial Statement IFRS 10
35 Ind AS 111 Joint Arrangement IFRS 11
36 Ind AS 112 Disclosure of interest in other entities IFRS 12
37 Ind AS 113 Fair Value Measurement IFRS 13
38 Ind AS 114 Regulatory Deferral Accounts IFRS 14
39 Ind AS 115 Revenue from Contracts with Customers IFRS 15
(applicable from 1-4-2018)
40 Leases IFRS 16
41 Insurance Contracts IFRS 17
*These two IFRSs are yet to be converged and notified.
** These two Ind ASs will be withdrawn from the data IFRS 16 and IFRS 17 are converged and
notified.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

Qualitative characteristics means attributes which make the information provided in financial
statements understandable and useful to the users. A financial statement should have the following
qualitative characteristics.
(a) Relevance: The financial information provided in financial statements must be relevant so that
users can take their own decisions. The financial statements must have some predictive value,
confirmatory value or both. Information is useful to the users when they can make their own
predictions and can confirm their previous evaluations i.e. having feedback or confirmatory value.
Only then the financial statements can influence the decision of the users.

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(b) Reliability: Reliability depends on faithful representation of financial information in the financial
statements which makes it useful to the users. For perfect faithful representation, financial
statements must have three characteristics-complete, neutral i.e. without bias and free from errors.

(c) Understandability: Another quality of financial statements is understandability of the financial

information presented in it. Financial information is understandable when information is classified,
characterised and presented concisely and clearly. If the financial information is not understood by
the users then they cannot take any decision.

(d) Materiality: When misstatement i.e. wrong financial statements or omission in financial
statements influence the economic decision of users then the information is considered as material.
Materiality is organization specific and it depends on the nature and relative size of the organization
or both.

(e) Comparability: This quality of financial statements enable the users not only to identify and
understand the similarities among the items but they can also identity the dissimilarities among the
items. Comparability can be achieved on the basis of consistency which means following same
methods for same items from period to period within a reporting entity or in a single period across
entities.

PRESENTATION OF FINANCIAL STATEMENTS (Ind AS-1)

INTRODUCTION
The final result of accounting process is financial reporting. Financial reporting is done by preparing
Statement of Profit and Loss, Balance Sheet and Cash Flow Statement. The financial reporting is
expected to give a true and fair information to the users of financial statements. Ind AS-1
“Presentation of Financial Statements” prescribes how this objective of providing true and fair
information to the users of financial statements should be achieved. The principles for presentation
of General Purpose Financial Statements, the formats or structures, contents of these financial
statements everything is prescribed by this standard. Moreover such type of requirement for
presentation of financial statements are also prescribed by Schedule III of the Companies Act, 2013
in our country.

OBJECTIVE OF Ind AS-1

(1) Basis for Presentation of Financial Statements: The Ind AS 1 prescribes the basis for
presentation of general purpose financial statements to ensure comparability both:
(i) with the entity's previous year's financial statements; and
(ii) with the financial statements of other entities

(2) Requirements for Financial Statements: This standard set out overall requirements for
the presentation of financial statements, guidelines for their structure and minimum requirements
for their client.

SCOPE OF Ind AS-1: PRESENTATION OF FINANCIAL STATEMENTS

(1) All entities shall apply this standard in preparing and presenting general purpose financial
statements.
(2) This standard is also applicable to those entities that present Consolidated Financial Statements
as per Ind AS 110 and those that present Separate Financial Statements as per Ind AS 27.
(3) The terminology used by Ind AS-1 is suitable for profit oriented entities including public sector
business entities. If any not-for-profit entities in the private sector or in the public sector apply this
standard then it needs to modify the terminology as needed.
(4) This standard is applicable to those entities whose share capital is not considered as equity.

DEFINITIONS
The following terms are used in this standard with the meaning specified:
(1) General Purpose Financial Statements:

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General purpose financial statements are also referred as "financial statements”, are those financial
statements which are intended to meet the needs of users who are not in a position to require an
entity to prepare reports tailored to their particular needs.

(2) Material Omission or Misstatements of items:

The items are called material if they could either individually or collectively influence the economic
decisions that users make on the basis of the financial statements.
Materiality depends on the size and nature of the omission or misstatement judged in the
surrounding circumstances. The size or nature of the item, or a combination of both, be the
determining factor. Assessing whether an omission or misstatement is material or not needs to take
into account how users with such attributes like reasonable knowledge of business and economic
activities and accounting could reasonably be expected to be influenced in making economic
decisions.

(3) Owners:
Owners are holders of instruments classified as equity. So a holder of redeemable preference share
capital cannot be called as owner because redeemable preference share capital is a debt capital i.e.
a liability and not equity.

(4) Complete Set of Financial Statements:

It comprises of-
(a) a balance sheet as at the end of the period;
(b) a statement of profit and loss for the period along with statement of other
comprehensive income (OCI);
(c) statement of changes in equity for the period;
(d) a statement of cash flows for the period:
(e) notes, comprising a summary of significant accounting policies and other explanatory
information; and
(f) comparative information of previous period; and
(g) a balance sheet as at the beginning of the preceding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in its financial
statements.
Points to Remember Supplementary Statements

Many entities present additional information on a voluntary basis outside the financial
statement like :
(i) Environmental reports;
(ii) Value added statements;
(iii) Human resource statement;
These supplementary reports and statements are not a part of financial statements therefore,
outside the scope of Ind AS-1.

GENERAL FEATURES OF FINANCIAL STATEMENTS

The following features and characteristics of financial statements are prescribed by Ind AS-1 in
order to make financial statements more relevant and reliable:
(i) True and fair presentation and compliance with Ind ASS.
(ii) Going Concern
(iii) Accrual basis of accounting
(iv) Materiality and aggregation
(v) Offsetting
(vi) Frequency of reporting
(vii) Comparative information
(viii) Consistency of presentation

(i) True and Fair Presentation:

True and fair view: Financial Statements shall present a true and fair view of the financial
position, financial performance and cash flow of an entity.
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Explicit and Unreserved Statement of Compliance: if financial statements of an entity comply
with Ind AS then it shall make an explicit and unreserved statement of such compliance in the
notes.

Illustration 1: An entity prepares its financial statements which contains an explicit and
unreserved statement of compliance with Ind AS. But the auditor's report on the financial
statements contain a qualification because of disagreement on application of one particular Ind AS.
Do you think such explicit and unreserved statement of the entity is acceptable?

Inappropriate Accounting Policy: An entity using inappropriate accounting policy cannot rectify
the same either by disclosure of accounting policies or by notes or explanatory material because
disclosure is not a remedy for wrong accounting policies followed by the entity.

Example: X Ltd. is valuing its inventory at cost and not on lower of cost or realizable value
whichever is lower. In this case X Ltd. is following a wrong policy which cannot be justified on the
ground that it has explained and disclosed its policy in the accounting notes.

Can an entity depart from compliance with requirement of Ind AS: Yes, in the extremely
rare circumstances in which if the management concludes that compliance with a requirement in an
Ind AS would be so misleading that it would conflict with the objective of financial statements set
out in the Framework.
An entity can depart from Ind AS requirement only when the relevant regulatory framework requires
or otherwise does not prohibit, such a departure.
When an entity departs from requirement of any Ind AS, it shall disclose.
(a) that the financial statements give a true and fair view of the entity's financial position, financial
performance and cash flows as management conclusion;
(b) that it has complied with applicable Ind ASs, except it has departed from a particular Ind AS to
present a true and fair view;
(c) Departed Ind AS information-
 the title and number of Ind AS from which the entity has departed;
 the nature of departure, explanation of the requirement of Ind AS and how complying with
Ind AS is misleading in the circumstances that it conflicts with the objective of financial
statements set out in the framework.
(d) Financial statements for each period presented i.e. current year and previous year's must
disclose the financial effect of the departure or adjustments to each item.

Illustration 2: Y Ltd. Has departed from a requirement of an Ind AS in a previous year. Do you
think that it is required to disclosed in the current year?

Departure prohibited by regulation or law: When departure from the requirement of Ind AS is
prohibited by regulation or law then the entity shall reduce the perceived misleading aspects of
compliance by disclosing and not by recognizing and adjusting in financial statements .

(iii) Going Concern:

At the time of preparing financial statements management is required to assess the ability of the
entity to continue as a going concern, that is the ability of the entity to continue its business in
unforeseeable future unless management either intends to liquidate the entity or to cease trading or
has no realistic alternative but to close.
In assessing whether the going concern assumption is appropriate, management takes into account
all available information about the future which is at least 12 months from the end of the
reporting period. The degree of consideration depends on the facts in each case like
 Current and expected profitability
 Debt repayment schedules and
 Potential sources of replacement financing.

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Points to Remember:
If an entity is no longer be a going concern according to its management then:
(1) the entity must account for all its assets at Net Realisable Value (NRV)
Or
on a liquidation basis but not on the basis of historical cost.
(2) the basis of preparation of financial statements must be disclosed and
(3) The difference between the carrying amount and net realisable value should be taken to
Profit & Loss A/c.

Illustration3:
Burnpur Cement Ltd. has incurred a net loss of ₹10 crore as per audited finance statements for the
year ended 31st March, 2019. The total current assets ₹30 lakh and total current liabilities is ₹35
lakh. The company is not doing well in the domestic markets and planning to export products.
Moreover management have arranged additional sources of finance for its expansion plan and
working capital needs for the next 12 months. The government policies for the industry is expected
to be favourable and the company is expecting profits in coming years.
Do you think that the financial statements of Burnpur Cement Ltd. is prepared Solution under going
concern assumption?

(iii) Accrual Basis of Accounting:

An entity shall prepare its financial statements, except for cash flow statement, using the accrual
basis of accounting. In accrual basis of accounting assets, liabilities, equity, income and expenses
are recognized on receivable or payable basis rather than when they are actually received or paid.

(iv) Materiality and Aggregation:

An entity shall present each material class of similar items separately in the financial statements. In
case of items that are dissimilar in nature or function should be, presented separately by an entity.
Items which are not material is not required to be disclosed except required by law. But
understandability of financial statements cannot be reduced by not disclosing or less disclosing
material information.
If a line item is not individually material then it is aggregated with other items either in
financial statements or notes.

(v) Offsetting or Deduction:

An entity shall not offset assets and liabilities, income and expenses against each other unless
required or permitted by an Ind AS. Offsetting financial statement items is reasonable if it reflects
the substance of the transaction or other event.
Example 1: Deducting provision for doubtful debts from Receivables/Debtors is not offsetting.

Example 2: Offsetting or deduction of trade discount or volume discount from the amount of
consideration to which the entity expects to be entitled in exchange for transferring goods or
services is allowed.

Example 3: Gains/losses arising from disposal of non-current assets are reported after deducting
the carrying value (book value) and selling expenses from the proceeds. It means the entity should
present the gain or loss from sale of non-current assets after deducting the relevant expenses
arising from the transaction.

Example 4: A company (X) acting as an agent and having sub-agents. Commission is paid to sub-
agents by X from the commission received. The commission received by X as an agent is the gross
revenue of the company. The commission paid by X to its sub-agents should be considered as
expense and should not be offset against commission earned by it.

(vi) Frequency of Reporting:

An entity shall present a complete set of financial statements including comparative information at
least annually In exceptional circumstances when an entity changes the end of its reporting period

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resulting in presentation of financial statements for a longer or shorter period than one year then
the entity must disclose:
(a) the reason for using a longer or shorter period, and
(b) that financial statements are not entirely comparable.

(vii) Comparative Information:

 Comparative figure for previous year should be disclosed by every entity except when
Ind ASs permit or require otherwise.
 An entity shall include comparative information for narrative and descriptive information i.e.
in notes on accounts if it is relevant to understanding the current period's financial
statements.
 An entity shall present a third balance sheet at the beginning of the preceding period in
addition to the minimum comparative financial statements if
(a) It applies an accounting policy retrospectively as determined by Ind AS 8
(b) makes a retrospective restatement of items in its financial statements in case of error
as per Ind AS 8; or
(c) reclassifies the items in the financial statements including comparative amounts also
unless it is impracticable.
Third Balance Sheet Date
At the end of current year i.e. 31st March, 2018. At the end of previous year i.e. 31st
March 2017 and opening Balance Sheet of Previous year i.e. 1st April, 2016.

(viii) Consistency of Presentation:

An entity shall retain the presentation and classification of items in the financial statements from
one period to the next unless:
(a) another presentation or change or classification is more appropriate, relevant and reliable
Or
(b) an Ind AS requires a change in presentation.

STRUCTURE & CONTENT OF FINANCIAL STATEMENTS

The general instructions for preparation of stand-alone financial statements of a company required
to comply with Ind AS is notified by Ministry Corporate Affairs (MCA) In the year 2016. These
instructions are the part of Schedule III of the Companies Act, 2013. In Ind AS no format is
prescribed for Balance Sheet but the general instructions for preparation of financial statements like
Balance Sheet, Statement of changes in Equity and Statement of Profit and Loss is prescribed in
Schedule III of the Companies Act, 2013.

FORMAT OF Ind AS COMPLIANT FINANCIAL STATEMENTS

The format of Ind AS compliant financial statements is discussed in Division II to Schedule III of the
Companies Act, 2013.
PART 1 – BALANCE SHEET
Name of the Company –_____________
Balance Sheet as at – _________________
(Rupees in - ................)
Particulars Note No Figure as at Figure as at the
the end of end of the
current previous
reporting reporting card
period
1 2 3 4
ASSETS
1 Non-Current Assets
(a) Property, Plant and
equipment
(b) Capital Work in Progress

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(c) Investment Property
(d) Goodwill
(e) Other Tangible Assets
(f) Intangible Assets Under
development
(g) Biological Assets other
than better plants
(h) Financial Assets
(i) Investment
(ii) Trade Receivables
(iii) Loans
(iv) Other (to be specified)
(i) Deferred Tax Assets (Net)
(ii) Other Non-Current Assets
(2) Currents Assets
(a) Investors
(b) Financial Assets
(i) Investments
(ii) Trade Receivable
(iii) cash and cash
Equivalent
(iv) Bank balances other
than (iii) Above
(v) Loans
(vi) Others (to be specified)
(c) Current tax Assets (Net)
(d) Other Current Assets
TOTAL ASSESTS
EQUITY AND LIABILITIES
Equity
(a) Equity Share Capital
(b) Other Equity
LIABILITIES
(1) Non-Current Liabilities
(a) Financial Liabilities
(i) Borrowings.
(ii) Trade Payable
(A) Total outstanding dues of micro-
enterprises and small enterprises
(B) Total outstanding dues of
creditors other than micro
enterprises and small enterprises
(iii) Others Financial (Other than
those other than micro enterprises
and specified in item (b), to be
specified)
(b) Provisions
(c) Deferred Tax Liabilities (Net)
(d) Other Non-Current Liabilities
Current Liabilities
(a) Financial Liabilities
(1) Borrowings
(i) Trade Payable
(i) Other Financial (Other than those

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specified in item (c), to be specified)
(b) Other Current Liabilities
(c) Provision
(d) Current Tax Liabilities (Net)
TOTAL EQUITY AND LIABILITIES

STATEMENT OF CHANGE IN EQUITY

Name of the Company.................
Statement of Changes in Equity for the period ended……………..
(Rupees in............)
A. Equity Share Capital

Balance at the beginning of the Changes in equity share capital Balance at the end of the
reporting period during the year reporting period

SHARE EQUALI RESERVE AND DEB IN EQULITY EFFE R EXCHA OTHER MO TOTAL
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REVE IES RES T
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PART II – STATEMENT OF PROFIT AND LOSS
Name of the Company............
Statement of Profit and Loss for the period ended....................

Particulars Note no. Figure for the Figure for the

current previous
reporting period reporting period
I Revenue From Operation
II Other Income
III Total Income (I + II )
IV EXPENSES
Cost of material consumed
Purchases of Stock-in-Table
Changes in inventories of finished
goods , Stock – in – Trade and
work-in-progress
Employee benefits expense
Finance costs
Depreciation and amortization
expense
Other expenses
Total expenses (IV)
v Profit / ( loss) before exceptional
items and tax (I – IV )
VI Exceptional Items
VII Profit/ (loss) Before tax (V – VI )
VIII Tax expense :
1) Current Tax
2) Deferred Tax
IX Profit (Loss) for the period from
continuing operations (VII – VIII)
X Profit / ( loss ) from discontinued
operation
XI Tax expense of discontinued
operations
XII Profit / (loss) from Discontinued
operations (after tax) (X-XI)
XIII Profit / (loss) for the period (IX +
XII )
XIV Other comprehensive Income
A (i) Items that will not be
reclassified to profit or loss
(ii) Income tax relating to items
that will not be reclassified to
profit or loss
B (i) Items that will be reclassified
to profit or loss
(ii) Income tax relating to items
that will be reclassified to profit or
loss
XV Total Comprehensive Income for
the period (XIII + XIV )
(Comprising Profit (Loss) and
Other Comprehensive Income for

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the period )
XVI Earnings per equity share (for
continued operation ) :
1) Basic
2) Diluted
XVII Earnings per equity share (for
discontinued & continuing
operations )
1) Basic
2) Diluted
XVII Earnings per equity share (for
discontinued & continuing
operations )
1) Basic
2) Diluted

OTHER COMPREHENSIVE INCOME (OCI)

As per framework for preparation and presentation of financial statements ‘Income’ means increase
in assets and decrease in liabilities which ultimately result in increase in equity other than
contribution by equity participants. This includes realised and unrealised gains or profits like
revaluation gain, which is an income but cannot be routed through the Statement of Profit & Loss.
Those incomes or expenses which are not routed through Statement of Profit & Loss should be
routed through Other Comprehensive Income (OCI) and which are allowed by other Ind AS.
An entity shall present a Single Statement of Profit and Loss, with Profit and Loss and Other
Comprehensive Income i.e. presented in two sections. These two sections shall be presented
together, with the Profit or Loss section presented first followed directly by the Other
Comprehensive Income section.

IDENTIFICATION OF THE FINANCIAL STATEMENTS

An entity shall clearly identify the financial statements and distinguish them from other information
(like Management Discussion and Analysis, Board of Directors Report etc. which is not prepared as
required by Ind AS) in the same published document.
In addition, an entity shall display the following information prominently and repeat it when
necessary:
(a) the name of the reporting entity and any change in that information from previous year;
(b) whether the financial statements are of an individual entity (separate financial statements) or a
group of entities (consolidated financial statements).
(c) the date of the end of the reporting period;
(d) the presentation currency; and
(e) the level of rounding used in presenting amounts in the financial statements.

BALANCE SHEET
In Ind As there is no format for Balance Sheet but includes the following line items. But the format
of Balance Sheet is prescribed in Schedule III of the Companies Act, 2013.
(a) property, plant and equipment;
(b) investment property:
(c) intangible assets;
(d) financial assets (excluding amounts shown under (e), (h) and (i)])
(e) investments accounted for using equity method;
(f) biological assets;
(g) inventories:
(h) trade and other receivables;
(i) cash and cash equivalents;
(j) the total of assets classified as held for sale and assets included in disposal groups classified as
held for sale, Non-current Assets Held for Sale and discontinued operations
(k) trade and other payables;
(l) provisions:
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(m) financial liabilities (excluding amounts shown under (k) and (l)];
(n) Liabilities and assets for current tax, Income taxes;
(o) deferred tax liabilities and deferred tax assets;
(p) liabilities included in disposal groups classified as held for sale;
(q) non-controlling interests; presented within equity; and
(r) issued capital and reserves attributable to owners of the parent.

CURRENT/NON-CURRENT DISTINCTION
An entity shall present current and non-current assets and current and non-current liabilities as
separate classification in its balance sheet as prescribed in Ind AS. For example, when an entity
supplies goods or services within a clearly identifiable operating cycle, separate classification of
current and non-current assets and liabilities in the balance sheet provides more useful information.
But a presentation based on liquidity provides more relevant and reliable information like it is
suitable for financial institutions because they don't supply goods and services within a clearly
Identified operating cycle.

MEANING OF OPERATING CYCLE

The operating cycle of an entity is the time between the acquisition of assets for processing and
their realisation in cash or cash equivalent.
When the entity's normal operating cycle is not clearly identifiable, is assumed to be 12 months.
Current assets include assets (such as inventories and trade receivables) that are sold months
consumed or realised as part of the normal operating cycle even when they are not expected to be
realised within 12 months after the reporting period.

Illustration 4:
A company manufacturers computer. The time period between first purchase of raw materials to
make the computer and the date of completion of production and delivery is 10 months. The
company receives payment for the computer 6 months after delivery.

Illustration 5:
On 31st March, 2019, an entity replaced a machine from its production line. The replaced machine
was sold to X Ltd. for 6,00,000. Payment is still due 16 months after the end of the reporting period.
Classify the machine as current or non-current.

STATEMENT OF PROFIT & LOSS

The Statement of Profit and Loss shall include-
(a) Profit or Loss for the period;
(b) Other Comprehensive Income;
(c) Total Comprehensive Income for the period, being the total of (a)+ (b) i.e. total of (a) Profit or
Loss and (b) Other Comprehensive Income.
The Statement of Profit and Loss shows-
(a) the revenue realised during a particular period;
(b) the relevant costs incurred to generate such revenues; and
(c) the different between revenues and costs is the profit or loss made during a particular period.

STATEMENT OF CASH FLOWS

Cash flow information provides users of financial statements with a basis to assess the ability of the
entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows.
Ind AS 7 gives the requirements for the presentation and disclosure of cash flow information.

DISCLOSURE OF ACCOUNTING POLICIES

An entity shall disclose in the summary of significant accounting policies:
(a) the measurement basis used in preparing the financial statements, and
(b) the other accounting policies used that are relevant to an understanding of the financial
statements.

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PUTTABLE FINANCIAL INSTRUMENTS CLASSIFIED AS EQUITY
The owner's fund is called equity which is the residual interest in assets after deducting liabilities. A
shareholder of a company cannot demand his proportion of net assets except in the case of buy
back.
Redeemable preferences shares is not equity because there is an obligation to redeem or pay back
the amount .Similarly in case of mutual funds the unit holders will get back their money they have
invested whenever they want. These instruments are called puttable instruments. These
instruments are not equity but it will be classified as equity. This is an exception which Ind AS 32-
Financial instruments: Presentation.

PROPERTY, PLANT & EQUIPMENT

MEANING OF PROPERTY, PLANT & EQUIPMENT

Generally Property, plant, Equipment are tangible fixed assets like land, building, plant & machinery,
furniture and fitting and office equipment etc. These fixed assets are not intangible assets which are
dealt by another Ind AS-38.

OBJECTIVE
An entity's property, plant and equipment constitute a significant portion of the total assets. The
objectives of this standard is to prescribe accounting treatment for property, plant and equipment
so that user's can understand about an entity's investment in its property, plant and equipment and
the changes in such investment.

SCOPE
This standard prescribes accounting for property, plant and equipment except when another Ind AS
requires or permits different accounting treatment. This standard does not apply to:
(a) Property, plant and equipment classified as held for sale in accordance with Ind AS 105, Non-
current Assets held for Sale and Discontinued Operations.
(b) Biological assets (a living animal or living plant) related to agricultural activity other than
bearer plants. This standard applies to bearer plants but it does not apply to the produce on
bearer plants.
(c) The recognition and measurement of exploration and evaluation of assets (see Ind AS 106,
Exploration for and Evaluation of Mineral Resources)
(d) Mineral rights and mineral reserves such as oil, natural gas and similar non regenerative
resources. It is not applicable for acquisition of mineral rights and other wasting assets. However,
this standard applies to property, plant and equipment acquired to develop or maintain the
activities described in (b), (c) and (d) above.

Example 1:
X Ltd is involved in exploration of minerals and they acquired a machine for ₹ 60 lakh for
exploration of minerals. Discuss the applicability of Ind AS 16 in this case.

DEFINITIONS
Property. Plant and Equipment (PPE)
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period.

Note: An item can be classified as PPE, investment or inventory provided the expenditure should
satisfy the definition of asset and conditions for recognition asset as per framework. Once it is
recognized as an asset, considering the intention of usage, it is classified as PPE, Investment or
Inventory.

Example 2:
Y Ltd. is mainly involved in the business of purchasing, acquiring, contracting, developing,
cultivating and selling agricultural and urban lands. The cost of acquiring and developing land is
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treated as Fixed Assets in the Balance Sheet. Discuss whether the treatment is correct or not.

Depreciation:
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Cost:
Cost is the amount of cash and/or cash equivalents paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction.

Fair value:
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.

Carrying amount:
Carrying amount is the amount at which as asset is recognised after deducting any accumulated
depreciation and accumulated impairment losses.

Carrying amount
Particulars ₹
Gross book value XXX
Less: Accumulated depreciation XXX
XXX
Less: Accumulated impairment loss (if any) XXX
XXX
Carrying amount

Impairment Loss:
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.

Recoverable amount:
Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

Useful Life:
Useful life is –
(a) The period over which an asset is expected to be available for use by an entity, or
(b) The number of production or similar units expected to be obtained from the asset by an entity.

Residual Value:
The residual value of an asset is the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated cost of disposal.

RECOGNITION & MEASUREMENT

Recognition & Measurement

Initial Recognition Subsequent Recognition

& &
Measurement
Measurement

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The time when the Measurement of Property, Plant

entity incurred the and Equipment on the Balance
costs Sheet date.

Meaning of Recognition:
Here recognition means when should the Property, Plant and Equipment to be recognized i.e. to be
recorded in the books of account.

Criteria for Recognition:

The cost of an item of PPE should be recognised in the books of account as an asset if and only if:
 Probable future economic benefits inflow to the entity, and
 Cost of the item can be measured reliably.

Initial Recognition:
Initial recognition means at the time of acquisition at what amount PPE should be capitalised
initially.
An item of Plant, Property and Equipment that qualifies for recognition as an asset should be
measured at cost.
Costs are incurred:
(i) At the time of initial acquisition or self-construction of Property, Plant and Equipment.
(ii) Subsequently to add or increase to the existing Property, Plant and Equipment, replace a part or
service it.
Based on the nature of consideration paid for the asset, amount is to be capitalised.

Ways of Acquiring Assets

Entity acquires assets which is initially recognised at cost. Property, Plant and Equipment can be
acquired in three ways:

Initial acquisition of PPE / Construction

1. Assets purchased 2. Self-constructed 3. Exchange of assets

by payment of cash/ Asset
for credit

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I. ASSETS PURCHASED BY PAYMENT OF CASH/FOR CREDIT:
In this case cost of items of PPE includes the following:
Calculation of Cost of Asset

Particulars ₹ ₹
Purchase Price (Basic Price) XXX
Add : Non-refundable taxes & duties XXX
Add: Directly attributable costs to bring the asset
to the location & condition
Cost of site preparation XXX
Installation and assembly costs XXX
Cost of testing less the net proceeds from the sale XXX
of any product arising from test production
Borrowing cost to the extent permitted by Ind AS XXX
23, Borrowing Costs
XXX
Professional fees
XXX
XXX
Add : Present value of Decommissioning.
restoration costs (see Example)
Add/Less: Any subsequent price adjustments XXX
Add/Less: Changes in duties or similar items XXX
XXX
Less: (XXX)
Govt grants specific to the asset as per Ind AS 20
(XXX)
Trade discounts and rebates (if included in above
items)
XXX
Amount to be capitalised
Points to Remember:
 Directly attributable cost or expensive means that if the PPE is not acquired or
constructed then these expenses would not have been incurred.
 General administration and other overhead expenses are not included in the cost of
the asset as it is not directly attributable or related to acquisition of the asset and
it is an allocation of overheads only.

Example 3:
X Ltd. acquired machinery for ₹80 lakh, freight cost ₹3 lakh, professional fees paid ₹4 lakh. General
and administration overhead incurred during the installation period are ₹8 lakh. For removing the
existing machinery and prepare proper base for new machinery X Ltd. spent ₹6 lakh. Moreover it
also incurred ₹5 lakh for trail run, material and labour. The products which were manufactured
during the trail run was sold for ₹30,000. Calculate the cost of acquisition of the machinery as per
Ind AS 16.

Example 4:
During 2018-19, Z Ltd. acquired a standby generator for ₹30 lakh. It also acquired servicing
equipments for ₹10 lakh. Can the company capitalise these assets as Property, Plant and
Equipment.

Example 5:
During 2017-18, Y Ltd. purchased a plant and machinery for ₹50 lakh. The company paid ₹42 lakh
and the balance of ₹8 lakh is still due to the supplier. The supplier waived off the balance of ₹8 lakh

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during 2019-20. Y Ltd. treated it as income and accordingly the amount of ₹8 lakh was credited to
Profit & Loss A/c. Do you think that the accounting treatment is correct. Discuss.

Example 6:
A machine was installed at a cost of ₹35 lakh in a rented premises on 01.04.2019, whose estimated
life is 5 years. As per rent agreement, the Machine should be decommissioned and the building
should be brought to its original position. The company is required to incur ₹5,00,000 at the end of
5th year to restore the premises into its original position. Assume borrowing rate 10% and calculate
the total cost of PPE to be capitalised.

Machinery Spares:
(1) Items such as spare parts should be recognized as PPE, only when it satisfies the definition of
PPE.
(2) Otherwise it should be classified as Inventory and charged to Profit & Loss Statement when it is
issued for usage.
(3) When these items are recognised as PPE, then the total cost incurred is required to be
depreciated in a systematic basis over the useful life of the asset;
(4) When the principal PPE is either discarded or sold, then the net carrying amount of spares
should be written off to Profit & Loss A/c.

II. SELF-CONSTRUCTED ASSET

When the assets are constructed by the entity then the following costs should be capitalised.

Calculation of Cost of Self Constructed PPE

Particulars ₹ ₹
All the costs which are capitalised under asset XXX
purchased by payment of cash/for credit
Any other costs of construction that directly relate to
Add: the specific asset XXX

Any other costs that can be attributable/ allocable to XXX

the construction company
Borrowing costs when the PPE is a qualifying asset as XXX
per Ind AS 23

Cost of self-constructed PPE XXX

Points to Remember:
 As one cannot sell to himself, therefore the entity should not include internal profits on
any items used from its stores. The amount to be capitalised is only the cost of items.
 Abnormal loss of materials, labour or any other resources should not be a part of self-
constructed assets.

Example 7:
Burnpur Cement constructed a building at a cost of ₹ 35 lakhs. The cement required for the
construction was taken from the warehouse and total 1,500 bags of cement were utilised for
constructing the building. The company sells each bag of cement at ₹ 600 per bag in the open
market whereas cost to the company is ₹ 500 per bag. The accountant capitalised ₹600 x 1,500
bags = ₹9,00,000 to the building cost. Do you think that the accounting treatment is correct?

III. PROPERTY, PLANT & EQUIPMENT ACQUIRED BY EXCHANGE OF ASSETS

When a Property, Plant and Equipment is acquired in exchange or part exchange for another asset,
then the asset received is usually recorded at FAIR VALUE.

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Example 8:
On 31.03.2019, X Ltd exchanged an old machine having a carrying amount ₹20,000 and the paid
cash difference of ₹8,000 for the new machine having total cash price of ₹25,000. What amount of
loss the company must recognize for this exchange?

Determination of cost of the asset acquired by exchange of assets:

In this case asset is recorded on the basis of following conditions:
Can fair value of the asset acquired by
exchange be measured reliably
Yes
No

Recognized at It should be measured at cost

i.e., carrying amount of the
asset given up
1. Fair value of the asset is given (1st preference)
2. Fair value of the asset received whichever is evident clearly.
Points to Remember:
When PPE is acquired by issuing shares of the entity then it will be dealt by Ind AS 102 -
Share Based Payments.

MEASUREMENT AFTER RECOGNITION

An entity shall choose either the COST MODEL or the REVALUATION MODEL.

(1) Cost Mode:

In this model PPE should be measured every year at COST. The measurement of PPE under this
model is shown below.
Particulars ₹
Cost XXX
Less: Accumulated depreciation XXX
Less: Accumulated Impairment loss XXX

XXX
Net Carrying Amount

Meaning of Impairment:
The meaning of impairment is weakening in value of asset.

Meaning of Carrying Amount:

The amount at which the asset is shown in the Balance Sheet is known as Carrying Amount. In the
Balance Sheet asset is shown at Cost less accumulated depreciation/amortization and accumulated
impairment losses.

Example 9:
X Ltd. purchased a plant on 01.04.2017 for ₹ 12,00,000. It provides depreciation on WDV basis @
20%. During the year ended 31.03.2019, X Ltd provided impairment loss on plant of 60,000.
Calculate the carrying amount.
Balance Sheet as at 31.03.2019
ASSETS ₹
Plant at cost 12,00,000
Less: Depreciation up to 31.03.18 @ 20% 2,40,000

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9,60,000
Less: Depreciation up to 31.03.19 @ 20% 1,92,000

7,68,000
Less: Impairment Loss 60,000

Net Carrying Amount 7,08,000

(2) Revaluation Model:

Revaluation model should be selected when FAIR VALUE of the PPE can be measured reliably. This
model measures PPE in the following manner
Particulars ₹
Fair value of Property, Plant and Equipment XXX
Less: Subsequent accumulated depreciation XXX
Less: Subsequent accumulated impairment loss XXX

Net Carrying Amount XXX

Revaluation option is not mandatory for the entities. It is an option which can be used by an entity
on the basis of decision by its management. But if the entity opts to revalue its assets then it must
comply with guidance of the standard.

When Revaluation is done?

Revaluation of PPE is done at that time when there is a material difference between:
(a) the carrying amount; and
(b) its fair value on the balance sheet date.
It is to be checked on a regular basis and it should be performed by a professionally qualified valuer.

Revaluation model need to be followed for All or only for selected PPE:
Revaluation model is required to be followed for the ENTIRE Class of PPE like plant & machinery or
buildings or lands etc. When the entity revalue its Machineries then it should revalue ALL the
Machineries because revaluation of some selected assets within a class is not permitted.

Limit on Revaluation Amount:

The revalued amount should not be more than recoverable amount i.e. recoverable from the sale.

DEPRECIATION
Meaning of Depreciation:
The systematic allocation of the depreciable amount of an asset over its useful life is called
depreciation.

Depreciable Amount:
The depreciable amount is calculated in the following way:
Particulars ₹
Historical Cost/Revalued amount XXX
Less: Estimated residual value XXX

Depreciable amountXXX
The residual value and the useful life of an asset shall be reviewed at least at the end of each
financial year and if expectations differ from previous estimates then the changes shall be
accounted for as a change in accounting estimate in accordance with Ind AS 8 (Accounting
Policies, Changes in Accounting Estimates end Errors) i.e. application should be
prospective.
In this case, the remaining depreciable amount after adjusting the revised residual value should
be depreciated over the remaining revised useful life of the PPE.

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Example 10:
A building whose cost is ₹ 36 lakh is depreciated on a straight line basis for the first three years.
The estimated working life of the building is 10 years and residual value ₹6 lakh. In the fourth year
the entity revalued the building and from the fourth year the building was revalued upward by ₹5
lakh and residual value is also revalued upward by ₹2 lakh. The remaining useful life of the asset is
10 years. Find the amount of depreciation for the 4th year onwards.

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

DISCLOSURE
The financial statements shall disclose, for each class of property, plant and equipment:
(a) the measurement bases used for determining the gross carrying amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period; and
(e) a reconciliation of the carrying amount at the beginning and end of the period showing
(i) additions;
(ii) assets classified as held for sale or included in a disposal group classified as held for sale in
accordance with Ind AS 105 and other disposals;
(iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations under paragraphs 31,39 and 40 and from
impairment losses recognised or reversed in other comprehensive income in accordance with Ind AS
36;
(v) impairment losses recognised in profit or loss in accordance with Ind AS 36:
(vi) impairment losses reversed in profit or loss in accordance with Ind AS 36:
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the financial statements from the
functional currency into a different presentation currency, including the translation of a foreign
operation into the presentation currency of the reporting entity: and
(ix) Other changes.
The financial statements shall also disclose:
(a) the existence and amounts of restrictions on title, and property, plant and equipment pledged as
security for liabilities;
(b) the amount of expenditures recognised in the carrying amount of an item of property, plant and
equipment in the course of its construction;
(c) the amount of contractual commitments for the acquisition of property, plant, and equipment;
(d) If it is not disclosed separately in the statement of profit and loss, the amount of compensation
from third parties for items of property, plant and equipment that were impaired, lost or given up
that is included in profit or loss; and
(e) the amount of assets retired from active use and held for disposal.

EARNING PER SHARE (Ind AS 33)

MEANING OF EARNINGS PER SHARE

Earnings Per Share (EPS) is a financial ratio which provides information regarding earnings available
to per equity share. It is calculated for comparing with the earnings of other firms. Prospective
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investors look for growth in EPS from year to year. The EPS figure can be easily manipulated by
change in accounting policies and by other means because it is based on past data. Therefore to
minimize the manipulation in EPS a standard is required which will prescribe the computation of
EPS.

OBJECTIVE OF Ind AS 33
The objective of Ind AS 33 is to prescribe principles for computation of Earnings Per Share (EPS)
and presentation guidance. The objectives of EPS presentation in financial statements is to help
users to compare the performance between different entities in the same reporting period and
between different reporting periods for the same entity.

SCOPE OF Ind AS 33
 This Indian Accounting Standard is applicable to companies that have issued ordinary shares.
 When an entity presents both consolidated financial statements and separate financial
statements, the disclosures required by this standard i.e. Ind AS 33, shall be presented both
in the consolidated financial statements and separate financials statements.
 In consolidated financial statements disclosures must be based on consolidated information
and in separate financial statements such disclosures shall be based on information given in
separate financial statements.

DEFINITIONS
The following terms are used in the Standard:

ORDINARY SHARE
An ordinary share is an equity instrument that is subordinate to all other classes of equity
instruments.
Ordinary shares participate in profit for the period only after participation of other types of shares
like Preference Shares. An entity may have more than one class of ordinary shares but ordinary
shares of the same class have the same rights to receive dividends.

POTENTIAL ORDINARY SHARE

A Potential Ordinary Share is a financial instrument or other contract that may entitle its holder
to ordinary shares.
Example:
(i) Convertible instruments
(ii) Share options and warrants
(iii) shares which will be issued upon the satisfaction of conditions being met, such as the purchase
of a business or other assets.

OPTIONS, WARRANTS & THEIR EQUIVALENTS

These are financial instruments that give the holder the right to purchase ordinary shares.

DILUTION
Dilution is a reduction in earnings per share or an increase in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or
that ordinary shares are issued upon the satisfaction of specified conditions.

ANTIDILUTION
It is an increase in earnings per share or a reduction in loss per share resulting from the assumption
that convertible instruments are converted, that options or warrants are exercised or that ordinary
shares are issued upon the satisfaction of specified conditions.

CONTINGENT SHARE AGREEMENT

It is an agreement to issue shares that is dependent on the satisfaction of specified conditions.

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CONTINGENTLY ISSUABLE ORDINARY SHARES
Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other
consideration upon the satisfaction of specified conditions in a contingent share agreement.

PUT OPTIONS
Put options on ordinary shares are contracts that give the holder the right to sell ordinary shares at
a specified price for a given period.

MEASUREMENT OF EPS
There are two types of EPS which are required to be reported by an entity in the Statement Profit
and Loss Account.
 Basic Earnings Per Share (Basic EPS)
 Diluted Earnings Per Share (Diluted EPS)

CALCULATION OF BASIC EARNINGS PER SHARE

Profit or Loss for the period attributable to ordinary
equity shareholders of parent entity
Basic Earnings Per Share = Weighted average number of ordinary
shares outstanding during the period

Numerator Calculation of Profit or Loss for the period attributable to ordinary equity
shareholders of parent entity
The Profit or Loss for the period attributable to ordinary equity shareholders of parent entity is
calculated after considering:
(a) Tax expenses i.e. current tax and deferred tax;
(a) Preference dividend.

When Preference Share Capital is a Liability:

In this case preference dividend is treated as finance expense and charged in the profit and loss
statement using effective rate of interest.

When Preference Share Capital is Classified as Equity:

In this case preference dividend, discount on issue and premium on redemption of preference share
capital will be deducted before arriving at Profit After Tax (PAT) for computation of EPS.

Non-cumulative Preference Shares:

In case of non-cumulative preference dividend, it is required to be deducted only if it is declared or
provided by the entity during the period.

Cumulative Preference Share:

In case of cumulative preference share dividend of current year is deducted even if not provided in
accounts. Besides dividend paid during the current year in respect of previous periods is to be
excluded.

Income or expenses to be recognized in Profit & Loss Statement but debited other
accounts:
Where any item of income or expense which is required to be recognized in Profit or Loss as per Ind
AS, but it is debited or credited to Securities Premium Account or other Reserves, such amounts
shall be deducted or added from profit & loss from continuing operations for the purpose of
calculating basic earnings per share.

Example 1:
The Statement of Profit and Loss of X Ltd. shows a profit of ₹4,00,000 for the year 2018-19. The
accountant of X Ltd. set off ₹25,000 preliminary expenses with Securities Premium A/c according to
the provisions of Companies Act, 2013. Calculate the amount of earnings for calculation of Basic
EPS.

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Denominator Calculation of weighted average number of outstanding ordinary
shares during the period.
The number of ordinary shares shall be weighted average number of ordinary shares outstanding
during the period. It is calculated in the following manner:
Particulars ₹
No. of equity shares outstanding at the beginning of the period XXX
Add/Less: No. of equity shares issued/bought back during the period X time-
weighting factor" XXX

Weighted average number of shares

XXX
*Time-weighting factor = No. of days that the shares are outstanding as a proportion of the total
number of days in the period.

Illustration 6:
Z Ltd. has the following transactions for the year 2018-19.
Date Particulars No. of share No. of shares No. of shares
issued Bought Back Outstanding
01.04.2018 Balance on the opening date 2,400 ___ 2,400
31.08.2018 Issue of shares for cash 1,200 ___ 3,600
31.01.2019 Buy back of shares ----- 300 3,900
31.03.2019 Balance at the year end 3,900
Find out weighted average number of shares.

BALANCE METHOD
Weighted Average Number of Shares-
5 5 2
(2,400 𝑥 ) + (3,600 𝑥 ) + (3,900 𝑥 )
12 12 12

= 1,000 + 1,500 + 650 = 3,150 shares

Shares are usually included in the weighted average number of shares from the date consideration
is receivable i.e. from the date of issue of shares.
According to Ind AS 33 the time of inclusion in calculation of weighted average number of shares is
as follows:
Nature of Transaction Included when
(a) General Rule Consideration is receivable
(b) Ordinary shares issued in exchange for cash. Date of cash receivable
(c) Ordinary shares issued on the voluntary Dividends are reinvested
reinvestment of dividends on ordinary or
preference shares
(d) Ordinary shares issued as a result of the The date from when interest stops to accrue
conversion of a debt Instrument to ordinary
shares
(e) Ordinary shares issued in lieu of interest or The date from when interest stops to accrue
principal of financial instruments
(f) Ordinary shares issued upon the conversion Date the contract is entered into
of mandatorily convertible instruments
(see Illustration 7)
(g) Ordinary shares issued in exchange for the From the settlement date (see Illustration 8)
settlement of a liability of the entity
(h) Ordinary shares issued as consideration for The date on which acquired asset is recognized
the acquisition of an asset other than cash
(i) Ordinary shares issued for the rendering of When the services are rendered
services to the entity
(j) Business combination From the date of acquisition

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(k) Contingently issuable shares When all necessary conditions are satisfied i.e.
the events have occurred. Shares that are
issuable solely after the passage of time are not
contingently issuable shares. (see Illustration 6)

Illustration 7:
Z Ltd. issued 8% mandatorily convertible debentures of ₹ 20,00,000 on 31.06.2018 and these are
convertible into equity shares at ₹100 each at the end of 3rd year. The equity share outstanding are
2,00,000 and the profit attributable to equity shareholders in the current year is ₹10,00,000
Calculate basic EPS.

Illustration 8: Ordinary Shares issued in exchange for the settlement of a liability.

At the beginning of the financial year A Ltd. has 1,00,000 equity shares. The company is liable to
pay Mr. Sen for an amount of 24,00,000 from the financial year 2016-17. The company entered into
an understanding with Mr. Sen on 30-06-2018 and on the basis of this understanding, A Ltd. issued
equity shares @₹50 each (face value ₹10 per share) for the settlement of the liability. The company
earned a profit of ₹10,00,000 for the financial year 2018-19 calculate basic EPS.

Illustration 9:
XYZ Ltd entered into an agreement with Burnpur Cement 01.04.2018 that it will issue 20,000 shares
only if the company achieves the after tax profitability of 20%. The profitability on 31.03.2019 and
31.03.2020 are 18% and 25%. For computation of EPS from which date these shares can be
considered.

In case of Partly Paid-up Equity Shares:

Partly paid shares are entitled to participate in the dividend to the extent of amount paid. For this
reason the partly paid-up equity shares of a company are required to be converted into equivalent
shares.

Illustration 10:
Z Ltd. has the following transactions with respect to equity share capital:
Date Particulars No. of shares Nominal value Amount paid
issued of shares (₹) (₹)
01.01.2019 Balance at the 2,000 10 10
beginning of the year
31.11.2019 Issue of shares 1,200 10 5
Compute weighted average number of shares.

BASIC EPS CALCULATION IN CASE OF BONUS ISSUE, SHARE SPLIT & SHARE
CONSOLIDATION

BONUS ISSUE- MEANING

In case of bonus issue number of shares are increased along with increase in share capital because
for bonus issue no consideration is received from the existing shareholders.

SHARE SPLIT- MEANING

It means dividing the face value of the share into small values. For this reason share capital is not
increased but number of shares increases.
A Ltd. has 1,00,000 equity shares of ₹ 10 each fully paid up and the company split the shares to ₹
10,00,000
2 each fully paid up. After share splitting, the company's share capital increased to =5,00,000
2
shares of ₹2 each fully paid up.

SHARE CONSOLIDATION- MEANING

It is exactly the opposite of share split where two or more shares with smaller face value combined
to make it one share of higher face value. In this case no consideration is paid to shareholders.

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Example:
A Ltd. has 1,00,000 equity shares of ₹ 2 each fully paid up and it wants to reverse share split i.e. to
consolidate its share to ₹ 10 each fully paid. After consolidation the number of shares will be
2
1,00,000 x = 20,000 shares of ₹10 each fully paid up.
10

Illustration 11: On 01.01.2019, XYZ Ltd. had 2,00,000 ordinary shares outstanding. On 1.10.2019
it issued 2 ordinary bonus shares for each share outstanding on 30.9.2019. Profit for the year 2018
was ₹20,00,000 and profit for 2019 was ₹65,00,000. Calculate Basic EPS for the year 2019 and
adjusted EPS for the year 2018.

In case of bonus shares the number of shares are increased along with increase in share capital. As
bonus shares are issued without any consideration, the issue is treated or assumed as if it had
occurred at the beginning of the year 2018 i.e. at the beginning of the earliest period
presented i.e. previous year.

BASIC EPS CALCULATION IN CASE OF RIGHT ISSUE

Right shares are offered to the existing shareholders at a price less than the fair value of the share.
It means that there is bonus element in right issue. Since right issue includes bonus element, the
treatment remains the same i.e. previous year's Basic EPS should be multiplied by Right Factor.
Fair value per share immediately prior to right issue
Right Factor =
Theoretical ex−right fair value per share

Theoretical ex-right fair value per share

Fair value of shares outstanding before right issue + Amount received on Issue of rights
Total number of shares immediately after the right issue

Illustration 12: Compute Basic EPS for the year 2018 & 2019 and Restate EPS for 2018.
No. of shares outstanding prior to right issue 10,00,000 shares
Right issue at ₹ 30 1 new share for each 5 shares outstanding i.e.
2,00,000 new shares
Last date of exercising rights 01.03.2019
Net profit : 2018 ₹22,00,000
2019 ₹30,00,000
Fair value of 1 equity share immediately prior to ₹42
exercise of rights on 01.03.2019

DILUTED EPS

Definition

(1) Potential Ordinary Share

It is a financial instrument or other contract, which may entitle the holder to ordinary shares.
Example:
a) Convertible debentures or convertible preference shares;
b) Options and warrants;
c) Employee Stock Option Plans:
d) Shares which will be issue upon the satisfaction of conditions mentioned in the contract, like
purchase of a business or other assets.

(2) Dilution
It is a reduction in EPS or an increase in loss per share which arises from the assumption that:
(a) Convertible instruments like convertible debentures are converted into equity shares;
(b) Ordinary shares are issued upon satisfaction of specified conditions or;
(c) Options and warrants are exercised.

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If the conversion/exercising the options leads to dilution then these instruments are called Dilutive
Potential Ordinary shares. The dilutive potential ordinary shares are taken into consideration for
calculation of diluted EPS.

(2) Anti-Dilution
It means an increase in EPS or a reduction in loss per share which arises from the assumption that:
(a) Convertible instruments are converted,
(b) Ordinary shares are issued upon satisfaction of specified conditions; of
(c) Options and warrants are exercised.
If the conversion/exercising the options leads to increase in EPS then these instruments are called
anti-dilutive potential shares. In calculation of diluted EPS these anti-dilutive instruments are
considered.

Calculation of Diluted EPS

Net Profit or Loss attributable to ordinary Equity

Shareholders after giving effect of potentially dilutive equity shares
Diluted EPS = Weighted average number of shares outstanding
after giving effect of potentially dilutive equity shares
Here after giving effect of potentially dilutive equity shares means that equity shares are issued to
all potential ordinary shareholders.

Example 1: The best known example of potential ordinary shares is convertible debentures. On the
balance sheet date if there is any potential ordinary share then it is assumed that these are
converted into equity shares. After conversion, say convertible debentures to equity shares the
company need not to pay interest on debentures. As a result the net profit attributable to equity
shareholders increases, the company's tax liability on increased profits increases and the weighted
average number of shares are also increased.
In this case the interest expenses which is charged in Profit & Loss Statement (Effective rate of
interest-considering the discount/transaction costs) should be added back to profit or loss
attributable to ordinary shareholders after giving the tax effect.
Points to Remember:
Dilutive potential ordinary shares shall be deemed to have been converted into ordinary shares
either at the beginning of the period.
Or
If later, the date of the issue of the potential ordinary shares.

Example 1: At the beginning of the year i.e. on 1st April if there exists any convertible
debentures-then in that case it is assumed that all convertible debentures are converted into equity
shares on 1st April, i.e. beginning of the year.

Example 2: When convertible dentures are increased in the middle of the year, 30th June, then to
this case is to be assumed that convertible debentures are converted into equity shares on 30th
June. Therefore weighted average of these based on time should be considered in computing
9
diluted EPS i.e. no of shares to be issued x . So dilutive potential shares should be determined
12
Independently for each period.

Illustration 13: The equity capital of Burnpur Comment Ltd is 60,00,000 consisting of fully paid
equity shares of ₹ 10 each. The net profit for the year 2018-19 was 80,00,000. The company has
also issued 38,000, 10% Convertible Debentures of ₹ 100 each. Each debenture is convertible into
five equity shares. The rate applicable is 30%. Compute basic and diluted EPS.

OPTIONS OR WARRANTS
Options and warrants are financial instruments which gives the holder a right to acquire equity
shares of a company at a specified price called exercise price at a future date.

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 There is no dilution or anti-dilution when equity shares are issued at average market value
during the period.
 But when equity shares are issued at less than the average fair value then it leads to
dilution.
 The difference between the number of shares to be issued or issuable at fair value and
shares issued at actual price is treated as an issue of equity shares for no consideration.
 Options are highly dilutive and does not generate any proceeds. It has no effect on profit or
loss attributable to ordinary shares.

Illustration 14: Z Ltd. has issued 2,00,000 options to its employees with exercise price of 40 per
share. The fair value of the share during 2019 is ₹ 50. The company earned ₹ 20,00,000 profit
during the year and it has 10,00,000 equity shares during 2019. Compute basic and diluted EPS.

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