© The Institute of Chartered Accountants of India

ii
a

This Study Material has been prepared by the faculty of the Board of Studies (Academic). The
objective of the Study Material is to provide teaching material to the students to enable them to
obtain knowledge in the subject. In case students need any clarification or have any suggestion for
further improvement of the material contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the Study Material has not been specifically discussed by the Council of the
Institute or any of its committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.

Permission of the Institute is essential for reproduction of any portion of this material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Basic draft of this publication was prepared by CA. Vandana D Nagpal

Edition : April, 2023

Committee/Department : Board of Studies (Academic)

E-mail : [email protected]

Website : www.icai.org

Price : ` /- (For All Modules)

ISBN No. : 978-81-19472-10-9

Published by : The Publication & CDS Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)

Printed by :

© The Institute of Chartered Accountants of India

 iii

v
BEFORE WE BEGIN …

The role of a chartered accountant is evolving continually to assume newer responsibilities in a

dynamic environment. There has been a notable shift towards strategic decision making and
entrepreneurial roles that add value beyond traditional accounting and auditing. The causative
factors for the change include globalisation leading to increase in cross border transactions and
consequent business complexities, significant developments in information and technology and
financial scams underlining the need for a stringent regulatory set up. These factors necessitate
an increase in the competence level of chartered accountants to bridge the gap in competence
acquired and competence expected from stakeholders. Towards this end, the scheme of
education and training is being continuously reviewed so that it is in sync with the requisites of
the dynamic global business environment; the competence requirements are being stepped up
to enable aspiring chartered accountants to acquire the requisite professional competence to
take on new roles.

Concurrent Practical Training along with academic education: Key to achieving the
desired level of Professional Competence

Under the Revised Scheme of Education and Training, at the Final Level, you are ex pected to
apply the professional knowledge acquired through academic education and the practical
exposure gained during articleship training in addressing issues and solving practical problems.
The integrated process of learning through academic education and practical training should
also help you inculcate the requisite technical competence, professional skills and professional
values, ethics and attitudes necessary for achieving the desired level of professional
competence.

Indian Accounting Standards (Ind AS): High Standards of Financial Reporting

Consistent, comparable and understandable financial reporting is essential to develop a robust

economy. High standards of financial reporting underpin the trust investors place in financial
and non-financial information. Thus, the case for a single set of globally accepted accounting
standards has prompted many countries to pursue convergence of our national accounting
standards (I GAAP) with IFRS.

The Government of India in consultation with the ICAI decided to converge and not to adopt
IFRS issued by the IASB. The decision of convergence rather than adoption was taken after the

© The Institute of Chartered Accountants of India

 iv

detailed analysis of IFRS requirements and extensive discussion with various stakeholders.
Accordingly, while formulating IFRS-converged Indian Accounting Standards (Ind AS), efforts
have been made to keep these Standards, as far as possible, in line with the corresponding
IAS/IFRS and departures have been made where considered absolutely essential. These
changes have been made considering various factors, such as, various terminology related
changes have been made to make it consistent with the terminology used in law, e.g.,
‘statement of profit and loss’ in place of ‘statement of comprehensive income’ and ‘balance
sheet’ in place of ‘statement of financial position’. Certain changes have been made considering
the economic environment of the country, which is different as compared to the economic
environment presumed to be in existence by IFRS.

Thereafter, the Ministry of Corporate Affairs (MCA) had notified IFRS-converged Indian
Accounting Standards (Ind AS) as Companies (Indian Accounting Standards) Rules, 2015 vide
Notification dated February 16, 2015 and also the roadmap for the applicability of Ind AS for
certain class of companies from financial year 2016-17. With the financial year 2016-17, the era
of implementation of Ind AS in India had begun for the listed and unlisted companies as per the
MCA roadmap for implementation of Ind AS. The MCA has also laid down roadmap for
implementation of Ind AS for NBFCs. These developments are a significant step in achieving
international benchmarks of financial reporting.

Ind AS, at the Final level, involves understanding, application and analysing of the concepts and
testing of the same. The nitty-gritties of this new standard coupled with its inherent dynamism,
makes the learning, understanding and application of the standards in problem solving very
interesting and challenging.

Know your Syllabus

Accounts being the core competence areas of chartered accountants, at Final level, the syllabus
of Financial Reporting covers Indian Accounting Standards alongwith Ethics and Technology
integrated with the profession and accounting. However, for understanding the coverage of
syllabus, it is important to read the Study Material as the content therein has been developed
keeping in mind the extent of coverage of various topics in commensuration with 100 marks
allotted to the paper. Certain Ind AS / portion of Ind AS are excluded from the study material,
keeping in view the relevancy of the content in the Indian scenario and also to avoid the volume
of the study material.

© The Institute of Chartered Accountants of India

 v

v
For understanding the coverage of syllabus, it is important to read the Study Material along with
the reference to Study Guidelines. The Study Guidelines specify the topic-wise exclusions from
the syllabus.

Know your Study Material

Efforts have been made to present the multifaceted Ind AS in a lucid manner. The Study
Material carries 17 chapters. Care has been taken to present the chapters in a logical sequence
to facilitate easy understanding by the students. Ind AS have been grouped under various
categories to make you understand the areas of relevancy and application of Ind AS. The
chapters have been numbered based on those categories and Ind AS falling in the same
category are included in that chapter. Therefore, certain chapters on Ind AS, contain several
units each unit dedicated to one Ind AS. However, for bare text of Indian Accounting standards,
students are advised to refer the notified Indian Accounting Standards uploaded on the website
at the link https://www.icai.org/post.html?post_id=15365

The various chapters/units of this subject have been structured uniformly and comprise of the
following components:

Components About the component

of each
Chapter

1. Learning Learning outcomes which you need to demonstrate after learning

Outcomes each topic have been detailed in the first page of each chapter/unit.
Demonstration of these learning outcomes will help you to achieve
the desired level of technical competence.

2. Chapter / Unit As the name suggests, the flow chart/table/diagram given at the
Overview beginning of each chapter will give a broad outline of the contents
covered in the chapter.

3. Content Ind AS have been explained by following a systematic approach of

first discussing the objective, then the scope of the pronouncement
and then extracting the underlying concepts. The concepts and
provisions of Ind AS are explained in student-friendly manner with
the aid of examples / illustrations / diagrams / flow charts.
Diagrams and flow charts will help you understand and retain the

© The Institute of Chartered Accountants of India

 vi

concept / provision learnt in a better manner. Examples and

illustrations will help you understand the application of
concepts/provisions.

Later, in the topics of Ind AS, the significant differences vis-à-vis AS

has also been incorporated so that students appreciate and
recapitulate their learning done at Intermediate level.

These value additions will, thus, help you develop conceptual clarity
and get a good grasp of the topic.

4. Illustrations Illustrations would help the students to understand the application of

involving concepts / provisions of Indian Accounting Standards. In effect, it
conceptual would test understanding of concepts / provisions as well as ability
understanding to apply the concepts / provisions learnt in solving problems and
addressing issues.

5. Summary of The summary of each Ind AS has been linked through a QR Code in
Ind AS the respective chapter/unit dedicated to that Ind AS. The QR Code
has been given at the end of the chapter discussion i.e. before ‘Test
Your Knowledge’ section

6. Test Your Questions

Knowledge
This section comprises of variety of questions which will help you to
apply what you have learnt in problem solving, and, thus, sharpen
your application skills. In effect, it will test your understanding of
concepts as well as your ability to apply the concepts learnt in
solving problems and addressing issues.

Answers

After you work out the problems / questions given under the section
“Test Your Knowledge”, you can verify your answers with the
answers given under this section. This way you can self-assess
your level of understanding of the concepts of a chapter.

© The Institute of Chartered Accountants of India

 vii

v
A new feature has been added at the end of each Module of Financial Reporting namely ‘Ind AS
Puzzlers: Test Your Accounting Acumen’. Under the title there is a crossword puzzle

Crossword After going through the chapters of a Module, you can test your Ind AS
Puzzle acumen by solving a crossword puzzle. The crossword puzzle has been
given at the end of every module with respect to the chapters dealt with in
that module. These crossword puzzles will be a fun for you to solve by
going through the clues, recall the concepts and review your understanding
and knowledge acquired. You are advised to solve the puzzle earnestly
after going through the chapters of the Module thoroughly.

Answer of the Ind AS Crossword puzzle is again linked through a QR

Code. You can scan the QR Code to match your filled crossword with the
answer given therein.

Though all efforts have been taken in developing this Study Material, the possibilities of errors /
omissions cannot be ruled out. You may bring such errors / omissions, if any, to our notice so
that the necessary corrective action can be taken.

We hope that the student-friendly features in the Study Material makes your learning process
more enjoyable, enriches your knowledge and sharpens your application skills.

Happy Reading and Best Wishes!

© The Institute of Chartered Accountants of India

 viii

SYLLABUS
PAPER – 1: FINANCIAL REPORTING
(One paper – Three hours – 100 Marks)

Objectives:

(a) To acquire the ability to integrate and solve problems in practical scenarios on Indi an
Accounting Standards (Ind AS) for deciding the appropriate accounting treatment and
formulating suitable accounting policies.

(b) To gain the prowess to recognize and apply disclosure requirements specified in Indian
Accounting Standards (Ind AS) while preparing and presenting the financial statements.

(c) To develop the expertise to prepare financial statements of group entities which includes
subsidiaries, associates and joint arrangements based on Indian Accounting Standards
(Ind AS).

(d) To develop understanding of certain Accounting Standards and solve problems in

practical scenarios where treatment is different in both the standards.

Contents:

1. Introduction to General Purpose Financial Statements as per Indian Accounting

Standard (Ind AS)

2. Conceptual Framework for Financial Reporting under Indian Accounting Standards

(Ind AS)

3. Application of Ind AS with reference to General Purpose Financial Statements

(i) Ind AS on Presentation of Items in the Financial Statements

(ii) Ind AS on Measurement based on Accounting Policies

(iii) Ind AS on Income Statement

(iv) Ind AS on Assets and Liabilities of the Financial Statements

© The Institute of Chartered Accountants of India

 ix

v
(v) Ind AS on Items impacting the Financial Statements

(vi) Ind AS on Disclosures in the Financial Statements

(vii) Other Ind AS

(viii) Ind AS on Financial Instruments (it includes Ind AS 32, Ind AS 109, Ind AS 107)

4. Ind AS on Group Accounting

5. First time adoption of Indian Accounting Standards (Ind AS 101)

6. Analysis of financial statements (as per Ind AS)

7. Ethics with Accounting Concepts

Identify and explain the key ethical issues

8. Technology and Accounting

Evolution of Accounting in the technological environment

Notes:

1. Discussion on AS 7, AS 9, AS 19 and AS 22 will be given along with corresponding Ind

AS 115, Ind AS 116 and Ind AS 12.

2. If either a new Ind AS or Announcements and Limited Revisions to Ind AS are issued or
the earlier one is withdrawn or new Ind AS, Announcements and Limited Revisions to
Ind AS are issued in place of existing Ind AS, the syllabus will accordingly include /
exclude such new developments in the place of the existing ones with effect from the
date to be notified as decided by the Institute.

3. The specific inclusions / exclusions in any topic covered in the syllabus will be af fected
every year by way of Study Guidelines.

© The Institute of Chartered Accountants of India

 x

CONTENTS

MODULE – 1
Chapter 1: Introduction to Indian Accounting Standards
Chapter 2: Conceptual Framework for Financial Reporting under Indian Accounting
Standards (Ind AS)
Chapter 3: Ind AS on Presentation of Items in the Financial Statements
Unit 1: Ind AS 1 “Presentation of Financial Statements”
Unit 2: Ind AS 34 “Interim Financial Reporting”
Unit 3: Ind AS 7 “Statement of Cash Flows”
Chapter 4: Ind AS on Measurement based on Accounting Policies
Unit 1: Ind AS 8 “Accounting Policies, Changes in Accounting Estimates and Errors ”
Unit 2: Ind AS 10 “Events after the Reporting Period”
Unit 3: Ind AS 113 “Fair Value Measurement”
Chapter 5: Ind AS 115 “Revenue from Contracts with Customers”
Annexure: Division II of Schedule III to the Companies Act, 2013
Ind AS Puzzlers: Test Your Accounting Acumen
MODULE – 2
Chapter 6: Ind AS on Assets of the Financial Statements
Unit 1: Ind AS 2 “Inventories”
Unit 2: Ind AS 16 “Property, Plant and Equipment”
Unit 3: Ind AS 23 “Borrowing Costs”
Unit 4: Ind AS 36 “Impairment of Assets”
Unit 5: Ind AS 38 “Intangible Assets”
Unit 6: Ind AS 40 “Investment Property”
Unit 7: Ind AS 105 “Non-current Assets Held for Sale and Discontinued Operations”
Unit 8: Ind AS 116 “Leases”

© The Institute of Chartered Accountants of India

 xi

Chapter 7: Other Indian Accounting Standards

Unit 1: Ind AS 41 “Agriculture”
Unit 2: Ind AS 20 “Accounting for Government Grants and Disclosure of Government Assistance”
Unit 3: Ind AS 102 “Share Based Payment”
Ind AS Puzzlers: Test Your Accounting Acumen
MODULE – 3
Chapter 8: Ind AS on Liabilities of the Financial Statements
Unit 1: Ind AS 19 “Employee Benefits”
Unit 2: Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets”
Chapter 9: Ind AS on Items impacting the Financial Statements
Unit 1: Ind AS 12 “Income Taxes”
Unit 2: Ind AS 21 “The Effects of Changes in Foreign Exchange Rates”
Chapter 10: Ind AS on Disclosures in the Financial Statements
Unit 1: Ind AS 24 “Related Party Disclosures”
Unit 2: Ind AS 33 “Earnings per Share”
Unit 3: Ind AS 108 “Operating Segments”
Chapter 11: Accounting and Reporting of Financial Instruments
Unit 1: Financial Instruments: Scope and Definitions
Unit 2: Classification and Measurement of Financial Assets and Financial Liabilities
Unit 3: Financial Instruments: Equity and Financial Liabilities
Unit 4 : Derivatives and Embedded Derivatives
Unit 5: Recognition and Derecognition of Financial Instruments
Unit 6: Hedge Accounting
Unit 7: Disclosures
Comprehensive Illustrations
Ind AS Puzzlers: Test Your Accounting Acumen

© The Institute of Chartered Accountants of India

 xii

MODULE – 4
Chapter 12: Ind AS 103 “Business Combinations”
Chapter 13: Consolidated and Separate Financial Statements of Group Entities
Unit 1 : Introduction to Consolidated and Separate Financial Statements
Unit 2 : Important Definitions
Unit 3 : Consolidated Financial Statements
Unit 4 : Ind AS 110: Consolidation Procedure for Subsidiaries
Unit 5 : Ind AS 111: Joint Arrangements
Unit 6 : Ind AS 28: Investment in Associates & Joint Ventures
Unit 7 : Ind AS 27: Separate Financial Statements
Unit 8 : Disclosures
Chapter 14: Ind AS 101 “First-time Adoption of Indian Accounting Standards”
Chapter 15: Analysis of Financial Statements
Chapter 16: Professional and Ethical Duty of a Chartered Accountant
Chapter 17: Accounting and Technology
Ind AS Puzzlers: Test Your Accounting Acumen

© The Institute of Chartered Accountants of India

 xiii

DETAILED CONTENTS: MODULE – 1

CHAPTER 1: INTRODUCTION TO INDIAN ACCOUNTING STANDARDS (IND AS)

Learning Outcomes ................................................................................................................... 1.1
Chapter Overview ..................................................................................................................... 1.2
Contents:
1. Introduction ................................................................................................................. 1.3
2. Indian Scenario prior to introduction of Ind AS in India .................................................. 1.4
3. Limitations of Accounting Standards ............................................................................ 1.7
4. Emergence of Global Accounting Standards ................................................................. 1.7
5. Need for Global Accounting standards in India ............................................................. 1.9
6. Benefits of Global Accounting Standards ................................................................... 1.10
7. Convergence vs Adoption of IFRS .............................................................................. 1.10
8. Process of development and finalisation of Indian Accounting Standards ................... 1.11
9. Transition from AS to Ind AS ...................................................................................... 1.12
9.1 About Indian Accounting Standards ............................................................... 1.13
9.2 How Ind AS have been numbered? ............................................................... 1.15
9.3 How Ind AS have been structured? ............................................................... 1.16
10. Roadmap for applicability of Ind AS ............................................................................ 1.18
10.1 For Listed Entities ......................................................................................... 1.18
10.2 Ind AS Roadmap for Non -Banking Financial Companies (NBFC) .................. 1.27
10.3 Ind AS Roadmap for Banking and Insurance Companies .............................. 1.30
10.4 Ind AS Roadmap for Mutual Funds ................................................................ 1.30
11. Ind AS relevant Statutory Provisions .......................................................................... 1.31
11.1 Relevant Sections referring to Ind AS in the Companies Act, 2013
and Rules ..................................................................................................... 1.31
11.2 Relevant SEBI Rules and Regulations ........................................................... 1.32
12. Format of Division II to Schedule III to the Companies Act – Structure ........................ 1.33

© The Institute of Chartered Accountants of India

 xiv

12.1 Introduction .................................................................................................. 1.33

12.2 Applicability .................................................................................................. 1.33
13. Guidance Note on Division II to Schedule III to the Companies Act, 2013 .................... 1.34
Summary ............................................................................................................................... 1.40

CHAPTER 2: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER INDIAN

ACCOUNTING STANDARDS (IND AS)
Learning Outcomes ................................................................................................................... 2.1
Chapter Overview ..................................................................................................................... 2.2
Contents:
Unit 1 : Introduction ................................................................................................................ 2.4
Unit 2 : Objective of General Purpose Financial Reporting ................................................... 2.6
2.1 Objectives and usefulness of general -purpose financial reporting ................................. 2.6
2.2 Limitations of general-purpose financial reporting ......................................................... 2.6
2.3 Information provided by general purpose financial reports ............................................. 2.7
2.3.1 Economic resources and claims ...................................................................... 2.7
2.3.2 Changes in economic resources and claims .................................................... 2.8
Unit 3 : Qualitative Characteristics of Useful Financial Information ................................... 2.10
3.1 Qualitative characteristics of useful financial information ............................................. 2.10
3.1.1 Relevance .................................................................................................... 2.10
3.1.2 Faithful representation .................................................................................. 2.11
3.1.3 Applying the fundamental qualitative characteristics ...................................... 2.12
3.1.4 Enhancing qualitative characteristics ............................................................. 2.13
3.1.5 Applying the enhancing qualitative characteristics ......................................... 2.14
3.2 The cost constraint on useful financial information ...................................................... 2.14
Unit 4 : Financial Statements and the Reporting Entity ....................................................... 2.16
4.1 Objective and scope of financial statements ............................................................... 2.16
4.1.1 Reporting period ........................................................................................... 2.17

© The Institute of Chartered Accountants of India

 xv

4.1.2 Perspective adopted in financial statements .................................................. 2.17

4.1.3 Going concern assumption ............................................................................ 2.17
4.2 The reporting entity .................................................................................................... 2.18
4.2.1 Consolidated and unconsolidated financial statements .................................. 2.18
Unit 5 : The Elements of Financial Statements .................................................................... 2.20
5.1 Link between information in general purpose financial reports as per conceptual
framework and elements of financial statements ......................................................... 2.20
5.2 Definition of an asset ................................................................................................. 2.21
5.2.1 Right ............................................................................................................ 2.21
5.2.2 Potential to produce economic benefits ......................................................... 2.23
5.2.3 Control ......................................................................................................... 2.24
5.3 Definition of a liability ................................................................................................. 2.25
5.3.1 Obligation ..................................................................................................... 2.26
5.3.2 Transfer of an economic resource ................................................................. 2.26
5.3.3 Present obligation as a result of past events .................................................. 2.27
5.4 Aspects which are common to assets and liabilities .................................................... 2.28
5.4.1 Unit of account ............................................................................................. 2.28
5.4.2 Executory contracts ...................................................................................... 2.29
5.4.3 Substance of contractual rights and contractual obligations ........................... 2.29
5.5 Definition of equity ..................................................................................................... 2.30
5.6 Definition of income and expenses ............................................................................. 2.30
Unit 6 : Recognition and Derecognition ............................................................................... 2.32
6.1 The recognition process ............................................................................................. 2.32
6.2 Recognition criteria .................................................................................................... 2.33
6.2.1 Relevance .................................................................................................... 2.34
6.2.2 Faithful representation .................................................................................. 2.36
6.3 Derecognition ............................................................................................................ 2.38
Unit 7 : Measurement ............................................................................................................ 2.40

© The Institute of Chartered Accountants of India

 xvi

7.1 Measurement bases of an asset or a liability .............................................................. 2.40

7.1.1 Historical cost ............................................................................................... 2.41
7.1.2 Current value ................................................................................................ 2.42
7.2 Information provided by particular measurement bases ............................................... 2.43
7.2.1 Assets .......................................................................................................... 2.44
7.2.2 Liabilities ...................................................................................................... 2.46
7.3 Factors to consider when selecting a measurement basis for initial
recognition and subsequent measurement of an asset or a liability ............................. 2.48
7.3.1 Relevance .................................................................................................... 2.49
7.3.2 Faithful representation .................................................................................. 2.50
7.3.3 Implications of enhancing qualitative characteristics for
the selection of measurement basis .............................................................. 2.56
7.4 Factors specific to initial measurement of an asset or a liability ................................... 2.57
7.4.1 Transactions on market terms ....................................................................... 2.57
7.4.2 Transactions not on market terms (or off-market transactions) ....................... 2.58
7.5 More than one measurement basis ............................................................................. 2.58
7.6 Measurement of equity ............................................................................................... 2.60
Unit 8 : Presentation and Disclosure .................................................................................... 2.61
8.1 Presentation and disclosure objectives and principles ................................................. 2.61
8.2 Classification ............................................................................................................. 2.61
8.2.1 Classification of assets and liabilities ............................................................. 2.61
8.2.2 Offsetting ...................................................................................................... 2.62
8.2.3 Classification of equity .................................................................................. 2.62
8.2.4 Classification of income and expenses .......................................................... 2.62
8.2.5 Profit or loss and other comprehensive income .............................................. 2.62
8.3 Aggregation ............................................................................................................... 2.63

© The Institute of Chartered Accountants of India

 xvii

Unit 9 : Concepts of Capital and Capital Maintenance ......................................................... 2.66

9.1 Concepts of capital .................................................................................................... 2.66
9.2 Concepts of capital maintenance and the determination of profit ................................. 2.66
9.3 Capital maintenance adjustments ............................................................................... 2.67
Test Your Knowledge ............................................................................................................ 2.70
Question ................................................................................................................................. 2.70
Answer ................................................................................................................................. 2.70

CHAPTER-3: IND AS ON PRESENTATION OF GENERAL PURPOSE FINANCIAL

STATEMENTS
Unit 1: Indian Accounting Standard 1: Presentation of Financial Statements
Learning Outcomes ................................................................................................................... 3.1
Unit Overview ........................................................................................................................... 3.2
Contents:
1.1 Ind AS 1 ‘Presentation of Financial Statements’ – Introduction ...................................... 3.3
1.2 Objective ..................................................................................................................... 3.3
1.3 Scope .......................................................................................................................... 3.3
1.4 Definitions ................................................................................................................... 3.4
1.5 Purpose of financial statements.................................................................................... 3.7
1.6 Complete set of financial statements ............................................................................ 3.7
1.7 General features of financial statements ..................................................................... 3.10
1.7.1 Presentation of True and Fair View and compliance with Ind AS .................... 3.10
1.7.2 Going concern .............................................................................................. 3.14
1.7.3 Accrual basis of accounting ........................................................................... 3.17
1.7.4 Materiality and aggregation ........................................................................... 3.17
1.7.5 Offsetting ...................................................................................................... 3.18
1.7.6 Frequency of reporting .................................................................................. 3.19
1.7.7 Comparative information ............................................................................... 3.20
1.7.8 Consistency of presentation .......................................................................... 3.22

© The Institute of Chartered Accountants of India

 xviii

1.8 Structure and content ................................................................................................. 3.23

1.8.1 Identification of Financial Statements ............................................................ 3.23
1.8.2 Balance sheet ............................................................................................... 3.24
1.8.3 Statement of profit and loss........................................................................... 3.41
1.8.4 Statement of changes in equity ..................................................................... 3.49
1.8.5 Statement of cash flows ................................................................................ 3.51
1.8.6 Notes ........................................................................................................... 3.52
1.9 Significant differences in Ind AS 1 vis-à-vis AS 1 ........................................................ 3.62
1.10 Carve out in Ind AS 1 from IAS 1 ................................................................................ 3.66
Shortcut to Ind AS Wisdom .................................................................................................. 3.68
Test Your Knowledge ............................................................................................................ 3.68
Questions ............................................................................................................................... 3.68
Answers ................................................................................................................................. 3.72
Unit 2: Indian Accounting Standard 34: Interim Financial Reporting
Learning Outcomes ................................................................................................................. 3.77
Unit Overview ......................................................................................................................... 3.78
Contents:
2.1 Introduction ............................................................................................................... 3.79
2.2 Objective ................................................................................................................... 3.79
2.3 Scope ........................................................................................................................ 3.79
2.4 Definitions ................................................................................................................. 3.79
2.5 Contents of an interim financial report ........................................................................ 3.80
2.5.1 Form and content of interim financial report ................................................... 3.81
2.5.2 Significant events and transactions ............................................................... 3.81
2.5.3 Other disclosures .......................................................................................... 3.83
2.5.4 Periods for which interim financial statements are
required to be presented ............................................................................... 3.86
2.5.5 Materiality ..................................................................................................... 3.88

© The Institute of Chartered Accountants of India

 xix

2.6 Disclosure in annual financial statements ................................................................... 3.89

2.7 Recognition and measurement ................................................................................... 3.89
2.8 Restatement of previously reported interim periods..................................................... 3.99
2.9 Interim financial reporting and impairment ................................................................ 3.100
2.10 Significant differences in Ind AS 34 vis-à-vis AS 25 .................................................. 3.102
Shortcut to Ind AS Wisdom ................................................................................................ 3.105
Test Your Knowledge .......................................................................................................... 3.105
Questions ............................................................................................................................. 3.105
Answers ............................................................................................................................... 3.106
Unit 3: Indian Accounting Standard 7: Statement of Cash Flows
Learning Outcomes ............................................................................................................... 3.111
Unit Overview ....................................................................................................................... 3.112
Contents:
3.1 Introduction ............................................................................................................. 3.113
3.2 Meaning of statement of cash flows .......................................................................... 3.113
3.3 Objective ................................................................................................................. 3.114
3.3.1 To provide information about historical changes in cash
and cash equivalents .................................................................................. 3.114
3.3.2 To assess the ability to generate cash and cash equivalents ........................ 3.114
3.3.3 To understand the timing and certainty of their generation ........................... 3.115
3.4 Benefits of cash flow information .............................................................................. 3.115
3.4.1 Provides information enabling evaluation of changes in net
assets and financial structure (Liquidity and solvency) ................................ 3.115
3.4.2 Assesses the ability to manage the cash ..................................................... 3.115
3.4.3 Assess and compare the present value of future cash flows ......................... 3.116
3.4.4 Compares the efficiency of different entities ................................................ 3.116
3.5 Scope ...................................................................................................................... 3.116
3.6 Definitions ............................................................................................................... 3.116
3.7 Cash and Cash Equivalents ..................................................................................... 3.117

© The Institute of Chartered Accountants of India

 xx

3.8 Presentation of Statement of cash flows ................................................................... 3.119

3.8.1 Operating activities ..................................................................................... 3.119
3.8.2 Investing activities ...................................................................................... 3.121
3.8.3 Financing activities ..................................................................................... 3.124
3.9 Reporting cash flows from operating activities .......................................................... 3.126
3.10 Reporting cash flows from investing and financing activities ...................................... 3.130
3.11 Reporting cash flows on a net basis ......................................................................... 3.131
3.12 Foreign currency cash flows ..................................................................................... 3.132
3.13 Interest and dividends .............................................................................................. 3.133
3.14 Taxes on income ..................................................................................................... 3.135
3.15 Investments in subsidiaries, associates and joint ventures ........................................ 3.136
3.16 Changes in ownerships interests in subsidiaries and other businesses ...................... 3.136
3.16.1 Classification of cash flows as investing activity ........................................... 3.136
3.16.2 Classification of cash flows as financing activity .......................................... 3.137
3.17 Non-cash transactions ............................................................................................. 3.138
3.17.1 Changes in liabilities arising from financing activities ................................... 3.139
3.18 Components of cash and cash equivalents .............................................................. 3.140
3.19 Other disclosures ..................................................................................................... 3.141
3.20 Extracts of financial statements of listed entity .......................................................... 3.149
3.21 Significant differences in Ind AS 7 vis-à-vis AS 3 ...................................................... 3.152
Quick Recap .................................................................................................................. 3.155
Shortcut to Ind AS Wisdom ................................................................................................ 3.156
Test Your Knowledge .......................................................................................................... 3.156
Questions ............................................................................................................................. 3.156
Answers ............................................................................................................................... 3.161

CHAPTER 4: IND AS ON MEASURMENT BASED ON ACCOUNTING POLICIES

Unit 1 : Indian Accounting Standard 8: Accounting Policies, Changes in
Accounting Estimates and Errors

© The Institute of Chartered Accountants of India

 xxi

Learning Outcomes ................................................................................................................... 4.1

Unit Overview ........................................................................................................................... 4.2
Contents:
1.1 Introduction ................................................................................................................. 4.3
1.2 Objective ..................................................................................................................... 4.3
1.2.1 To prescribe the criteria for selecting and changing
accounting policies ......................................................................................... 4.3
1.2.2 To prescribe the accounting treatment and disclosure
of changes in accounting policies .................................................................... 4.4
1.2.3 To prescribe the accounting treatment and disclosure of
changes in accounting estimates ..................................................................... 4.4
1.2.4 To prescribe the accounting treatment and disclosure
of corrections of errors .................................................................................... 4.4
1.2.5 To provide better base of inter-firm and intra-firm comparison .......................... 4.4
1.3 Scope .......................................................................................................................... 4.5
1.4 Definitions ................................................................................................................... 4.5
1.5 Accounting policies ...................................................................................................... 4.8
1.5.1 Selection and application of accounting policies .............................................. 4.8
1.5.2 Is it Compulsory to follow the accounting policies?........................................... 4.8
1.5.3 How to select and apply an accounting policy when specific Ind AS
is not available on the particular transaction/condition/ event? ......................... 4.9
1.5.4 Consistency of accounting policies ................................................................ 4.11
1.5.5 Changes in accounting policies .................................................................... 4.12
1.5.6 Disclosure regarding the Changes in Accounting Policies .............................. 4.23
1.6 Change in accounting estimates ................................................................................. 4.25
1.6.1 Meaning ...................................................................................................... 4.25
1.6.2 Can changes in estimates be related to prior periods? ................................... 4.26
1.6.3 Change in the basis of measurement – Whether a change
in accounting policy or change in estimate? ................................................... 4.26
1.6.4 Accounting treatment for applying changes in accounting estimates ............... 4.27

© The Institute of Chartered Accountants of India

 xxii

1.6.5 Disclosure of changes in estimates ............................................................... 4.29

1.7 Errors ........................................................................................................................ 4.29
1.7.1 Meaning ....................................................................................................... 4.29
1.7.2 Common types of errors ................................................................................ 4.30
1.7.3 Treatment of errors ....................................................................................... 4.30
1.7.4 Limitations on retrospective restatement ....................................................... 4.35
1.8 Disclosure of prior period errors ................................................................................. 4.36
1.9 Impracticability in respect of retrospective application
and retrospective restatement .................................................................................... 4.36
1.10 Significant differences in Ind AS 8 and AS 5 ............................................................... 4.37
Shortcut to Ind AS Wisdom .................................................................................................. 4.41
Test Your Knowledge ............................................................................................................ 4.41
Questions ............................................................................................................................... 4.41
Answers ................................................................................................................................. 4.45
Unit 2 : Ind AS 10: “Events after the Reporting Period”
Learning Outcomes ................................................................................................................. 4.51
Unit Overview ......................................................................................................................... 4.52
Contents:
2.1 Introduction ............................................................................................................... 4.53
2.2 Objective ................................................................................................................... 4.53
2.3 Scope ........................................................................................................................ 4.54
2.4 Definitions and explanations ...................................................................................... 4.54
2.4.1 Events after the Reporting Period .................................................................. 4.55
2.4.2 Approval of Financial Statements .................................................................. 4.55
2.4.3 When date of approval is after the public announcement of
some other financial information .................................................................... 4.57
2.4.4 Should the company report only unfavourable events? .................................. 4.59
2.5 Type of Events ........................................................................................................... 4.59

© The Institute of Chartered Accountants of India

 xxiii

2.6 Recognition and measurement of adjusting events ..................................................... 4.60

2.7 Accounting treatment and disclosure of Non-adjusting events after
the reporting period .................................................................................................... 4.65
2.8 Special cases ............................................................................................................ 4.66
2.8.1 Long-term Loan Arrangements ...................................................................... 4.66
2.8.2 Going concern .............................................................................................. 4.67
2.9 Dividends .................................................................................................................. 4.70
2.10 Disclosure required under Ind AS 10 .......................................................................... 4.71
2.10.1 Date of approval for issue ............................................................................ 4.71
2.10.2 Updating disclosure about conditions at the end of the reporting
period .......................................................................................................... 4.71
2.10.3 Disclosure of Non-adjusting events after the reporting period ........................ 4.72
2.11 Distribution of non cash assets to owners ................................................................... 4.74
2.11.1 Applicability .................................................................................................. 4.75
2.11.2 Non-applicability ........................................................................................... 4.75
2.11.3 Issues addressed by Appendix A to AS 10 ..................................................... 4.76
2.11.4 Accounting principles enunciated by Appendix A to Ind As 10 ......................... 4.76
2.12 Extracts of financial statements of listed entity ............................................................ 4.77
2.13 Significant differences between Ind AS 10 and AS 4 .................................................. 4.78
2.14 Carve out in Ind AS 10 from IAS 10 ........................................................................... 4.79
Shortcut to Ind AS Wisdom .................................................................................................. 4.80
Test Your Knowledge ............................................................................................................ 4.80
Questions ............................................................................................................................... 4.80
Answers ................................................................................................................................. 4.82
Unit 3- Indian Accounting Standard 113 : Fair Value Measurement
Learning Outcomes ................................................................................................................. 4.86
Unit Overview ......................................................................................................................... 4.87
Contents:
3.1 What is fair value? ..................................................................................................... 4.88

© The Institute of Chartered Accountants of India

 xxiv

3.2 Objective ................................................................................................................... 4.88

3.3 Scope ........................................................................................................................ 4.89
3.3.1 What is not covered? .................................................................................... 4.90
3.4 Definition ................................................................................................................... 4.90
3.5 Asset or liability specific fair value .............................................................................. 4.91
3.6 Unit of Account .......................................................................................................... 4.92
3.7 The transaction .......................................................................................................... 4.93
3.7.1 Principal market ............................................................................................ 4.93
3.7.2 Most advantageous market ........................................................................... 4.94
3.8 Market participants .................................................................................................... 4.94
3.8.1 What are market participants? ....................................................................... 4.95
3.9 The price ................................................................................................................... 4.95
3.9.1 Transaction cost ........................................................................................... 4.96
3.9.2 Transport cost .............................................................................................. 4.96
3.10 Applying fair value rules on non-financial assets ......................................................... 4.98
3.10.1 Highest and best use .................................................................................... 4.98
3.10.2 Valuation premise ....................................................................................... 4.100
3.11 Applying fair value rules to liabilities and an entity’s own equity instruments .............. 4.101
3.11.1 When liability and equity instruments are held by
other parties as assets ................................................................................ 4.102
3.11.2 When liability and equity Instruments are not held by other
parties as assets ........................................................................................ 4.102
3.12 Applying fair value rules to financial asset & financial liability
with offsetting position in market risk or counterparty risk .......................................... 4.102
3.13 Fair value at initial recognition .................................................................................. 4.104
3.14 Valuation techniques ................................................................................................ 4.105
3.15 Inputs to valuation techniques .................................................................................. 4.108
3.15.1 Level 1 Inputs ............................................................................................. 4.109
3.15.2 Level 2 Inputs ............................................................................................ 4.111

© The Institute of Chartered Accountants of India

 xxv

3.15.3 Level 3 Inputs ............................................................................................ 4.112

3.16 Disclosures .............................................................................................................. 4.113
3.17 Extracts of financial statements of listed entity .......................................................... 4.115
Shortcut to Ind AS Wisdom ................................................................................................ 4.117
Test Your Knowledge .......................................................................................................... 4.117
Questions ............................................................................................................................. 4.117
Answers ............................................................................................................................... 4.121

CHAPTER 5: IND AS 115 “REVENUE FROM CONTRACTS WITH CUSTOMERS”

Learning Outcomes ................................................................................................................... 5.1
Chapter Overview ..................................................................................................................... 5.2
Contents:
1. Scope .......................................................................................................................... 5.3
2. Definitions ................................................................................................................... 5.4
3. Overview ..................................................................................................................... 5.5
4. Transition .................................................................................................................... 5.6
5. Step 1: Identifying the contract ..................................................................................... 5.7
5.1 Criteria for recognizing a contract .................................................................... 5.7
5.2 Contracts that do not pass Step 1: Reassessing the Step 1 criteria ................ 5.11
5.3 Contract term ................................................................................................ 5.12
5.4 Combining contracts ..................................................................................... 5.13
5.5 Contract Modifications .................................................................................. 5.15
6. Step 2: Identifying performance obligations ................................................................ 5.20
6.1 Criteria for identifying performance obligation ................................................ 5.20
6.2 Multiple Element Arrangements/Goods and services that are not distinct ....... 5.29
6.3 Customer options for additional goods or services ......................................... 5.34
6.4 Long term arrangements ............................................................................... 5.38
6.5 Consignment Arrangements .......................................................................... 5.38
6.6 Principal vs agent consideration .................................................................... 5.40

© The Institute of Chartered Accountants of India

 xxvi

6.7 Non-refundable upfront fees .......................................................................... 5.44

7. Step 3: Determining the transaction price ................................................................... 5.45
7.1 Variable consideration .................................................................................. 5.46
7.2 Significant financing component .................................................................... 5.64
7.3 Non-cash consideration ................................................................................ 5.75
7.4 Consideration payable to a customer ............................................................. 5.78
8. Step 4: Allocating the transaction price to performance obligations ............................. 5.82
8.1 Determining stand-alone selling price ............................................................ 5.82
8.2 Changes in the transaction price ................................................................... 5.92
9. Step 5: Satisfying performance obligation ................................................................... 5.95
9.1 What does transfer of control mean? ............................................................. 5.96
9.2 Does the customer acquire control over a period of time or at a
point in time? ................................................................................................ 5.97
9.3 Repurchase agreements ............................................................................. 5.112
9.4 Bill-and-hold ............................................................................................... 5.117
9.5 Licences of intellectual property .................................................................. 5.119
10. Contract Costs ......................................................................................................... 5.124
10.1 Costs to obtain a contract (contract acquisition costs) .................................. 5.124
10.2 Costs to fulfil a contract (contract fulfilment costs) ....................................... 5.126
10.3 Amortisation and impairment ....................................................................... 5.128
11. Presentation & disclosure......................................................................................... 5.129
11.1 Presentation ............................................................................................... 5.129
11.2 Disclosure .................................................................................................. 5.129
12. Service Concession Arrangements ........................................................................... 5.131
12.1 About Arrangement ..................................................................................... 5.131
12.2 Accounting Principles .................................................................................. 5.132
12.3 Service Concession Arrangements: Disclosures .......................................... 5.136
13. Extracts of financial statements of listed entity .......................................................... 5.140

© The Institute of Chartered Accountants of India

 xxvii

14. Significant Differences in Ind AS 115 vis-à-vis AS 7 and AS 9 ................................... 5.143

Shortcut to Ind AS Wisdom ................................................................................................ 5.146
Test your knowledge ........................................................................................................... 5.146
Questions ............................................................................................................................. 5.146
Answers ............................................................................................................................... 5.149

ANNEXURE: DIVISION II OF SCHEDULE III TO THE COMPANIES ACT, 2013 ............. A.1 – A.37

Ind AS Puzzlers: Test Your Accounting Acumen ............................................................. (1)-(4)

© The Institute of Chartered Accountants of India

  
CHAPTER  
1

INTRODUCTION TO INDIAN
ACCOUNTING STANDARDS
LEARNING OUTCOMES
After studying this chapter, you will be able to:
❑ Appreciate the concept of Accounting Standards
❑ Grasp the Indian scenario prior to Ind AS and the need of time leading to emergence
of global accounting standards
❑ Acknowledge the benefits of global accounting standards
❑ Distinguish between convergence and adoption of global accounting standards
❑ Discuss about Ind AS transition in India and benefits thereof
❑ Recognise the process of development and finalisation of Ind AS (IASB to ICAI to
MCA)
❑ Describe India’s roadmap for applicability of Ind AS for listed and unlisted entities,
NBFCs, banking and insurance sector
❑ Illustrate the salient features of Ind AS like numbering, flow and structure
❑ Tabulate the important statutory provisions under the Companies Act and SEBI
regulations involving Ind AS
❑ Identify the format of balance sheet, statement of changes in equity, profit and loss
and significant notes related to them as given in Division II to Schedule III to the
Companies Act, 2013
❑ Analyse key takeaways from guidance note on Division II to Schedule III to the
Companies Act, 2013

© The Institute of Chartered Accountants of India

 1.2 2.2 &/EE/>ZWKZd/E'


UNIT OVERVIEW

Introduction

Indian Scenario prior to introduction of Ind AS in India

Limitations of AS
Emergence of Global Standards
Need for Global standard in India
Benefits of Global Accounting Standards
Convergence vs Adoption of IFRS
Introduction to Process of development and finalisation of Ind AS
Indian
Accounting
Standards Transition from AS to Ind AS About Indian Accounting Standards
How Ind AS has been numbered
How Ind AS has been structured
Roadmap for applicability of For listed entities
Ind AS
Ind AS Roadmap for Non -Banking
Financial Companies (NBFC)
Ind AS Roadmap for Banking and
Insurance Companies
Ind AS Roadmap for Mutual Funds

Ind AS relevant Statutory Relevant Sections referring Ind AS in

Provisions the Companies Act, 2013 and Rules
Relevant SEBI Rules and
Regulations
Format of Division II to Schedule Part I - Format of Balance Sheet and
III to the Companies Act - Statement of Changes in Equity
Structure
Part II – Statement of Profit and Loss

Guidance Note on Division II to Schedule III to the Companies Act, 2013

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 
1.3   

1. INTRODUCTION
A set of financial statements are a key tool of communication about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of
stakeholders in making economic decisions. Accounting Standards is an essential building block
in the financial reporting world. These Accounting Standards provide principles and rules that
must be followed to ensure accuracy, consistency and comparability of financial statements.
These accounting guidelines also ensure that financial statements should be understandable,
relevant, reliable and comparable.
Accounting Standards are a set of documents that lay down the principles covering various
aspects, such as, recognition, measurement, presentation & disclosure of accoun ting transaction
in the financial statements. Objective of accounting standards is to standardize the diverse
accounting policies & practices with a view to eliminate the non-comparability of financial
statements to the extent possible and also to enhance the reliability to the financial statements.
Accounting standards play a very significant role in enabling the stakeholders to get the reliable
and comparable accounting data and investors to make more informed economic decisions.
The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (The
ICAI), since its establishment way back in 1977, has been involved in the formulation of
Accounting Standards and standard setting process of the country. ASB has been relentlessly
working to ensure that the world’s fastest growing emerging economy of India is equipped with
high quality Accounting Standards (AS) comparable to the best in the world. The ICAI also issued
Accounting Standards which are applicable to the entities other than companies and are aligned
with Accounting Standards notified by the Ministry of Corporate Affairs (MCA) with certain
differences.
ASB is an Accounting Standards-Setting arm of the ICAI, which formulates Accounting Standards
through a process that is robust, comprehensive, and inclusive with a view to assisting the Council
of the ICAI in evolving and establishing Accounting Standards to discharge its role of national
standard-setter. Once the ASB finalises the draft of AS post incorporating the public comments
on exposure draft, ASB recommends such approved draft of AS to National Financial Reporting
Authority (NFRA)1 and then Government of India, through MCA notifies AS or Ind-AS for corporate
entities under Companies Act and ICAI issues AS for non-corporate entities.


1 NFRA was constituted under the Companies Act, 2013 which replaced National A dvisory Committee On
Accounting Standards (NACAS) which was constituted under Companies Act, 1956 .

© The Institute of Chartered Accountants of India

 1.4 2.4
4 &/EE/>ZWKZd/E'


2. INDIAN SCENARIO PRIOR TO INTRODUCTION OF

IND AS IN INDIA
Prior to introduction of Indian Accounting Standards (Ind AS) which are Accounting Standards
duly converged with International Financial Reporting Standards (IFRS), ASB has issued various
AS to deal with various reporting matters. As on February 2002, ICAI has issued 27 AS, the list
thereof with their respective applicability is as under 2. These AS are applicable to
(a) companies other than those following Ind AS,
(b) SMCs and also
(c) non-corporate entities.
AS Name of AS Applicable Applicable Applicable to Non-Corporate Entities 4
No. to all to Small Level Level Level III Level IV
Companies and I II
Other than Medium
those Sized
following Companies
Ind AS (SMCs)3
1 Disclosure of Yes Yes Yes Yes Yes Yes
Accounting
Policies
2 Valuation of Yes Yes Yes Yes Yes Yes
Inventories
(Revised)
3 Cash Flow Yes Yes Yes NA NA NA
Statement
4 Contingencies Yes Yes Yes Yes Yes Yes
and Events
occurring after
the Balance
Sheet Date

2 This table should be read in conjunction of Appendix 1 to Compe ndium of Accounting Standards (as on
1 st February, 2022)
3 SMCs are defined under Notification dated 23 rd June, 2021, issued by the Ministry of Corporate Affairs,

Government of India
4 Criteria for classification of Non-company Entities as decided by the Institute of Chartered Accountants

of India should be referred back from Appendix 1 to Compendium of Accounting Standards (as on
1 st February, 2022)

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 
1.5   

(Revised
2016)
5 Net Profit or Yes Yes Yes Yes Yes Yes
Loss for the
Period, Prior
Period Items
and Changes
in Accounting
Policies
7 Construction Yes Yes Yes Yes Yes Yes
Contracts
9 Revenue Yes Yes Yes Yes Yes Yes
Recognition
10 Property, Plant Yes Yes Yes Yes Yes (with Yes (with
and Equipment disclosure disclosure
(Revised) exemption) exemption)
11 The Effects of Yes Yes Yes Yes Yes (with Yes (with
Changes in disclosure disclosure
Foreign exemption) exemption)
Exchange
Rates
12 Accounting for Yes Yes Yes Yes Yes Yes
Government
Grants
13 Accounting for Yes Yes Yes Yes Yes ) Yes (with
Investments disclosure
(Revised) exemption
14 Accounting for Yes Yes Yes Yes Yes NA
Amalgamation
(Revised)
15 Employee No Applicable Yes Yes (With certain exemptions)
Benefits with some
exemptions
16 Borrowing Yes Yes Yes Yes Yes Yes
Costs
17 Segment No No Yes No No No
Reporting
18 Related Party Yes Yes Yes No No
Disclosure
19 Leases No Applicable Yes Yes (with disclosure exemption)

© The Institute of Chartered Accountants of India

 1.6 2.6
6 &/EE/>ZWKZd/E'


with some
exemptions
20 Earnings per No Applicable Yes No No No
share with some
exemptions
21 Consolidated Yes Yes Yes No No No
Financial
Statements
(Revised)
22 Accounting for Yes Yes Yes Yes Yes Yes (only
Taxes on related to
Income current tax
provisions)
23 Accounting for Yes Yes Yes No No No
Investments in
Associates in
Consolidated
Financial
Statements
24 Discontinuing Yes Yes Yes Yes No No
Operations
25 Interim No Applicable Yes No No No
Financial with some
Reporting exemptions
26 Intangible Yes Yes Yes Yes Yes Yes (with
Assets disclosure
exemption)
27 Financial Yes Yes Yes No No No
Reporting of
Interests in
Joint Ventures
28 Impairment of No Applicable Yes Yes (with NA
Assets with some disclosure
exemptions exemption)
29 Provisions, No Applicable Yes Yes (with disclosure exemption)
Contingent with some
Liabilities and exemptions
Contingent
Assets
(Revised)

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 
1.7   

3. LIMITATIONS OF ACCOUNTING STANDARDS

With the increasing flow of foreign funds, following were few of the rising complexities which were
not explicitly and comprehensive dealt by AS and it was needed to have guidance around the
same to witness consistent accounting treatments by entities.
a) Capital being raised in the form of complex financial instruments like optionally convert ible /
compulsorily convertible shares / debentures etc.
b) Various derivative instruments embedded in the foreign currency bonds / equity instruments ,
commodity derivatives etc.
c) Group restructuring, business acquisitions, mergers, demergers, slump sale etc.
d) Complex revenue arrangements and business models with innovating emerging digital
economy
e) Diverse stock-based compensation with innovative remuneration models for C-suite
f) Complex tax provisions and impact thereof in determination of current and deferred t ax
g) Different ways to provide shareholders’ return and various modes of shareholder’s
investments in kind in the event of group reorganisation.
Further, a need was felt to have comprehensive disclosures in the financial statements so as to
enable the investors to have a complete overview of business background, risks involved and
other important aspects. The disclosure requirements in ASs are limited and the need was felt to
improve those disclosures especially about aspects like revenue, related party transactions,
segment reporting, business combinations etc. so as to improve the quality of financial reporting
and enable investors to take an informed decision.

4. EMERGENCE OF GLOBAL ACCOUNTING STANDARDS

In 1973, International Accounting Standards Committee (IASC) was formed through an agreement
made by professional accountancy bodies from Canada, Australia, France, Germany, Japan,
Mexico, the Netherlands, the UK and Ireland, and the United States of Ameri ca. The main goal
of the committee was to harmonize different financial reporting practices. The standard setting
board of the IASC was known as the IASC Board. The IASC Board promoted various standards,
conceptual Framework, which was directly adopted by many countries and many national
accounting standards setters were referring to the same to govern the standard setting process
in their countries.
Nearly after 25 years of its operations, IASC felt a need to change its structure in order to
effectively converge national accounting standards to lead to one set of Global Accounting

© The Institute of Chartered Accountants of India

 1.8 2.8 &/EE/>ZWKZd/E'


Standards. As a result, International Accounting Standards Board (IASB) was formed on

1 st July 2000. It was further decided that it would operate under a new International Accounting
Standards Committee Foundation (IASCF, now known as IFRS Foundation). IASB members are
responsible for the development and publication of International Financial Accounting Standards
(IFRS). For IFRS to be truly global standards, consistent application and interpretation is required.
The Interpretations Committee assists the IASB in improving financial reporting through timely
assessment, discussion and resolution of financial reporting issues identified within the IFRS
framework.
As early as 1989 the International Organisation of Securities Commissions (IOSCO), the world’s
primary forum for co–operation among securities regulators, prepared a paper noting that cr oss
border security offerings would be facilitated by the development of internationally accepted
standards. For preparers, greater comparability in financial reporting with their global peers had
obvious attractions. In May 2000 IOSCO announced that it had completed its assessment of
30 accounting standards of the International Accounting Standards Committee (IASC 2000
standards). As a result, the IOSCO Presidents’ Committee recommended that its members permit
incoming multinational issuers to use the 30 IASC 2000 standards to prepare their financial
statements for cross-border offerings and listings, as supplemented by reconciliation, disclosure
and interpretation where necessary to address substantive outstanding issues at a national or
regional level.
On 19 th July 2002, a regulation was passed by the European Parliament and the European Council
of Ministers requiring the adoption of IFRS. As a result of the Regulation, all EU listed companies
were required to prepare their financial statements following IFRS from 2005. This has led to
IFRS being considered as one of the major unified GAAP in the world.
So with this, two prominent and widely adopted accounting standards have emerged:
1) Accounting Standards set up by US Financial Accounting Standards Board (FASB) (widely
known as “US GAAP”) and
2) IFRS
The "Group of 20" (G20) is made up of the finance ministers and central bank governor s of 19
countries and the European Union: Argentina, Australia, Brazil, Canada, China, France, Germany,
India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea,
Turkey, United Kingdom and United States of America. The G20 meets regularly to discuss
matters of common interest. As a result of the global financial crisis, the G20 began to explore
ways to improve the global financial system, including regulations related to financial reporting
and institutions. The G20 has for some time called for the global convergence of accounting
standards and has supported the IASB-FASB convergence process.

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 
1.9   

The joint convergence project was launched in 2002 by the International Accounting Standards
Board (IASB) and US Financial Accounting Standards Board (FASB). The objective of this project
is to eliminate a variety of differences between International Financial Reporting Standards and
US GAAP. The project, which is being done jointly by FASB and IASB, grew out of an agreement
reached by the two boards in October 2002 (the 'Norwalk Agreement'). The scope of the overall
IASB-FASB convergence project has evolved over time and is currently under progress .
So, IFRS is now, together with US GAAP, one of the two globally recognised finan cial reporting
frameworks. Although the goal of a single set of high–quality global accounting standards has not
been fulfilled, as per IASB research, presently, 167 jurisdictions require the use of IFRS
Accounting Standards for all or most publicly listed companies, whilst a furthe r 12 jurisdictions
permit its use.

5. NEED FOR GLOBAL ACCOUNTING STANDARDS IN

INDIA
Modern economies rely on cross-border transactions and the free flow of international capital.
Investors seek diversification and investment opportunities across the world, while companies
raise capital, undertake transactions or have international operations and subsidiaries in multiple
countries.
In the past, such cross-border activities were complicated to be followed by Indian Companies
due to increased compliance costs of maintaining multiple sets of financial books following varied
national accounting standards. This reworking of accounting requirements often added cost,
complexity and ultimately risk both to companies preparing financial statements and investors and
others using those financial statements to make economic decisions.
Applying local accounting standards led to a totally different basis for amounts appearing in
financial statements. Solving this complexity involved studying the details of national accounting
standards, because even a small difference in requirements could have a major impact on a
company’s reported financial performance and financial position — for example, a company may
recognise profits under one set of national accounting standards and losses under another. For
e.g.: A company has made non-current investments in equity instruments and there is a temporary
decline in the value of investments. As per AS, it may be required to report the investment at cost
but may have to fair value the same as per IFRS. Hence this may lead to recognizing losses as
per IFRS.
With this emerging need to move AS to comparable Global Standards and also considering the
limitations of AS to deal with emerging business transactions and structure, need to revamp
current AS was felt inevitably. International investors were apprehensive to rely on the financial

© The Institute of Chartered Accountants of India

 1.10 2.10
10 &/EE/>ZWKZd/E'


information of Indian Companies due to their limited understanding of accounting framework in

India and often sought companies to produce such financial information under IFRS.
Considering above, India made a commitment towards the convergence of Indian accounting
standards with IFRS at the G20 summit in 2009.

6. BENEFITS OF GLOBAL ACCOUNTING STANDARDS

Global Accounting Standards address above challenges by providing a high-quality,
internationally recognised set of accounting standards that bring transparency, accountability and
efficiency to financial markets around the world. Global Standards bring transparency by
enhancing the international comparability and quality of financial information, enabling investors
and other market participants to make informed economic decisions.
Further, Global Standards strengthen accountability by reducing the information gap between the
providers of capital and the people to whom they have entrusted their money. As a source of
globally comparable information, Global Accounting Standards are also of vital importance to
regulators around the world.
Global Accounting Standards also contribute to economic efficiency by helping investors to identify
opportunities and risks across the world, thus improving capital allocation. For businesses, the
use of a single, trusted accounting language lowers the cost of capital and reduces international
reporting costs. This also resulted into increased investment in jurisdictions adopting IFRS. Also
for a Company which has operations in multiple countries, it became easy for them to consolidate
their operations, track operational key performance indicators, and reduce the number of different
reporting systems.
These advantages of global standards have been accepted by various jurisdictions , resulting into
many countries following the path of adoption or convergency with IFRS with minimal carve outs.

7. CONVERGENCE VS ADOPTION OF IFRS

In common parlance, many users refer Convergence to IFRS and Adoption of IFRS
interchangeably. However, there exists a significant difference between the two
Adoption of IFRS, in simple terms, means that the Country applyi ng IFRS would be implementing
IFRS in the same manner as issued by the IASB and would be 100% compliant with the guidelines
issued by IASB.
The dictionary definition of Convergence states that “to move towards each other or meet at the
same point from different directions”. Hence convergence with IFRS means the national
accounting standards setter would work with IASB to develop high quality Accounting Standards
over the time. Hence the national accounting standard setter is said to have “Converged with

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.11
  

IFRS” if it has adopted IFRS with some exceptions, and work with IASB towards those exceptions
to reach at a point wherein there are no differences left.
An entity is required to apply IFRS 1 First–time Adoption of International Financial Reporting
Standards – when it first asserts compliance with IFRS. The IASB has, therefore, established
unambiguously the principle that full application of its standards and related interpreta tions is
necessary for an entity to be able to assert that its financial statements comply with IFRS (as
issued by the IASB). Consequently, it is necessary for countries that align their national standards
with IFRS to require the application of IFRS 1 so that entities reporting under those standards can
assert compliance with IFRS. In addition, an entity that applies IFRS as amended by a local
authority cannot assert compliance with IFRS.
It is merely impossible for IASB to consider the individual factors of each country. Hence, such
countries decide to converge to IFRS with limited exceptions. These exceptions are regularly
looked upon and in order to meet at a point where no exceptions are left.
Countries like Canada, Bahrain, Cambodia etc have adopted IFRS while countries like India,
China, Hongkong etc have converged with IFRS.

8. PROCESS OF DEVELOPMENT AND FINALISATION OF

INDIAN ACCOUNTING STANDARDS
As discussed above, accounting standards in India are formulated by the ASB of ICAI. The central
government prescribes the standards of accounting, or any addendum thereto, as recommended
by the ICAI, in consultation with and after examination of the recommendations made by the
NFRA. The Ministry of Corporate Affairs (MCA) notifies the standards under the Companies Act
by publishing them in the Gazette of India. Notified standards are authoritative under Indian law.
It may be noted that IFRS are being issued / revised by the IASB from time to time. As a part of
convergence with IFRS, the Ind AS may be issued/revised corresponding to the IFRS.
Accordingly, whenever IASB issues any new IFRS or update the current one, ASB of ICAI
considers the convergence thereof under Ind AS. While doing so ASB provides considerations to
local regulatory landscape, business practices, tax and other relevant provisions to develop
exposure draft with proposed carve in or carve out from IFRS.
The Ind-AS setting process can be briefly outlined as follows:
• Consideration of preliminary draft prepared (with requisite carve in and carve out) by ASB
and revision thereof, as need be.
• Circulation of Draft Ind AS to the Council members of ICAI and specified outside bodies such
as MCA, Securities and Exchange Board of India (SEBI), Comptroller and Auditor General
of India (C&AG), Central Board of Direct Taxes (CBDT) etc.
• Meeting with the representative of the specified outside bodies to ascertain their views on
the Draft Ind AS

© The Institute of Chartered Accountants of India

 1.12 2.12
12 &/EE/>ZWKZd/E'


• Finalisation of Exposure Draft of Ind AS and its issuance for inviting public comments
• Consideration of comments received on the Exposure Draft and finalisation of Ind AS by ASB
for submission to the Council of ICAI for its consideration and approval for issuance.
• Consideration of the final draft of proposed Ind AS by the Council of the ICAI, and if found
necessary, modification of the draft in consultation with the ASB
• Final draft Ind AS to be submitted to NFRA with ICAI recommendations for notification
• NFRAs reviews and provides inputs, if any, to ICAI before finalising. Post that, MCA notifies
the Ind AS under Companies Act for Companies to follow with announcement of applicability
date.
To summarise,
ŽŶƐŝĚĞƌĂƚŝŽŶŽĨ
/^ŝƐƐƵĞƐŶĞǁ/&Z^ /ƐƐƵĞŽĨdžƉŽƐƵƌĞ ĐŽŵŵĞŶƚƐƌĞĐĞŝǀĞĚ
ŽƌƵƉĚĂƚĞƐƚŚĞ ƌĂĨƚĨŽƌWƵďůŝĐ ŽŶƚŚĞdžƉŽƐƵƌĞƌĂĨƚ
ĞdžŝƐƚŝŶŐŽŶĞ ŽŵŵĞŶƚƐ ĂŶĚĨŝŶĂůŝƐĂƚŝŽŶŽĨ
ĨŝŶĂůĚƌĂĨƚ

ĞůŝďĞƌĂƚŝŽŶĂŶĚ /ŶĐŽƌƉŽƌĂƚŝŽŶŽĨ
&ŝŶĂůĚƌĂĨƚƐƵŵďŝƐƐŝŽŶ
ĐŽŶƐŝĚĞƌĂƚŝŽŶŽĨĚƌĂĨƚ ŽŵŵĞŶƚƐĨƌŽŵ
ƚŽE&ZǁŝƚŚ
/ŶĚ^ŝŶůŝŶĞǁŝƚŚ/&Z^ ŽƵŶĐŝůĂŶĚŽƵƚƐŝĚĞ
ƌĞĐŽŵŵĞŶĚĂƚŝŽŶƐ
ďLJ^ ďŽĚŝĞƐ

ŝƌĐƵůĂƚŝŽŶŽĨƌĂĨƚ DĞĞƚŝŶŐǁŝƚŚƚŚĞ
/ŶĚ^ƚŽƚŚĞŽƵŶĐŝů ƌĞƉƌĞƐĞŶƚĂƚŝǀĞŽĨƚŚĞ E&Z;DͿŶŽƚŝĨŝĞƐ
ŵĞŵďĞƌƐŽĨ//ĂŶĚ ƐƉĞĐŝĨŝĞĚŽƵƚƐŝĚĞ /ŶĚ^ƵŶĚĞƌ
ƐƉĞĐŝĨŝĞĚŽƵƚƐŝĚĞ ďŽĚŝĞƐƚŽĂƐĐĞƌƚĂŝŶ ŽŵƉĂŶŝĞƐĐƚ
ďŽĚŝĞƐ ƚŚĞŝƌǀŝĞǁƐ

9. TRANSITION FROM AS TO IND AS

India made a commitment towards the convergence of Indian accounting standards with IFRS at
the G20 summit in 2009. In line with this, MCA issued a roadmap for implementation of Ind AS
converged with IFRS beginning April 2011. However, this plan was suspended due to unresolved
tax and other issues. In the presentation of the Union Budget 2014 –15, the Honourable Minister
for Finance, Corporate Affairs and Information and Broadcasting proposed the adoption of Ind AS.
The Minister clarified that the respective regulators will separately notify the date of
implementation for banks and insurance companies. Also, standards for tax computation would
be notified separately. In accordance with the Budget statement, the MCA has notified the
Companies (Indian Accounting Standards) Rules 2015 vide its G.S.R dated 16 th February 2015.

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.13
  

Accordingly, it has notified 39 Ind AS and has laid down Ind AS transition roadmap for companies
and non-banking finance companies excluding banking companies and insurance companies.
The implementation of Indian Accounting Standards (Ind AS) converged with International
Financial Reporting Standards (IFRS) by Indian Companies is a monumental step in the
accounting history of India. It was possible due to the relentless and collective efforts of regulators
and accounting professionals of this large growing economy aspiring to be economic superpower
in the coming decades. ICAI believes that Ind AS implementation has provided better insights
into the financial affairs of the companies and Ind AS based financial statements reflect the
underlying economics of the transactions/events in a transparent and unbiased manner. It has
also improved the comparability and benchmarking of the financials of Indian Companies with
Global Peers, thereby improving the accessibility of Indian Companies to Global Capital Markets.
IFRS convergence is an ongoing initiative, and the process of issuing IFRS is dynamic. The IASB
issues new/revised IFRS on a regular basis. To avoid significant changes in Ind AS for a period
post its transition in India, it was decided to keep the applicability date of some of the IFRS earlier
than its applicability date announced by IASB.

Example 1
IFRS 15 Revenue from Contracts with Customers is effective for annual periods beginning on or
after 1st January 2017, while in India Ind AS 115 was applicable from 1 st April 2018. Hence, it
wasn’t implemented in advance of IFRS 15. Another example is that of IFRS 16 Leases, which
was issued in 2016 and made effective for annual reporting periods beginning on or after
1 st January 2019, while in India Ind AS 116 was applicable from 1 st April 2019.

9.1 About Indian Accounting Standards

Ind AS are the IFRS converged standards. Similar to IFRS they are princip les-based standards,
but substantially different from Indian GAAP. Ind AS is not the same as IFRS. It is a separate
accounting framework based on IFRS as created by the MCA and has certain carve-outs to
accommodate Indian business nuances.
As on date, 39 Ind AS are notified by Ministry of Corporate Affairs, which are as under:

IND AS Description

Ind AS 101 First-time Adoption of Indian Accounting Standard

Ind AS 102 Share-based Payment

Ind AS 103 Business Combinations

© The Institute of Chartered Accountants of India

 1.14 2.14
14 &/EE/>ZWKZd/E'


Ind AS 104 Insurance Contracts

Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations

Ind AS 106 Exploration for and Evaluation of Mineral Resources

Ind AS 107 Financial Instruments: Disclosures

Ind AS 108 Operating Segments

Ind AS 109 Financial Instruments

Ind AS 110 Consolidated Financial Statements

Ind AS 111 Joint Arrangements

Ind AS 112 Disclosure of Interests in Other Entities

Ind AS 113 Fair Value Measurement

Ind AS 114 Regulatory Deferral Accounts

Ind AS 115 Revenue from Contracts with Customers

Ind AS 116 Leases

Ind AS 1 Presentation of Financial Statements

Ind AS 2 Inventories

Ind AS 7 Statement of Cash Flows

Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Ind AS 10 Events after the Reporting Period

Ind AS 12 Income Taxes

Ind AS 16 Property, Plant and Equipment

Ind AS 19 Employee Benefits

Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance

Ind AS 21 The Effects of Changes in Foreign Exchange Rates

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.15
  

Ind AS 23 Borrowing Costs

Ind AS 24 Related Party Disclosures

Ind AS 27 Separate Financial Statements

Ind AS 28 Investments in Associates and Joint Ventures

Ind AS 29 Financial Reporting in Hyperinflationary Economies

Ind AS 32 Financial Instruments: Presentation

Ind AS 33 Earnings per Share

Ind AS 34 Interim Financial Reporting

Ind AS 36 Impairment of Assets

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Ind AS 38 Intangible Assets

Ind AS 40 Investment Property

Ind AS 41 Agriculture

9.2 How Ind AS have been numbered?

Ind AS are numbered in a similar manner as compared to IFRS. So in order to understand how
Ind AS are numbered, it is important to understand how IFRS are numbered. Ind AS differ from
the IFRS, as they contain certain carve outs and carve ins for making them contextually relevant
to the Indian economic and legal environment.
International Accounting Standard Committee (IASC) was formed in 1973 and its main objective
was to harmonize different financial reporting practices. It continued issuing standards under
heading “International Accounting standards” (IAS) and they were numbered chronologically from
1. Eg: IAS 1, IAS 2 etc. Till 2000, it had notified 41 IAS (some of them are now repealed or
omitted). Post incorporation of IASB on 1 st July 2000., standards issued are known as IFRS and
a new numerical series was started i.e. IFRS 1, IFRS 2 etc
In Indian context, numbers for IAS are retained. For e.g.: For IAS 1 – Presentation of Financial
Statements, corresponding standard in Ind AS is Ind AS 1 – Presentation of Financial statements.
For IFRS, a new series starting after 100 was used. For e.g.: For IFRS 1 – First time adoption of
International Financial Reporting Standards, corresponding Ind AS is Ind AS 101 - First time
adoption of Indian Accounting Standards.

© The Institute of Chartered Accountants of India

 1.16 2.16
16 &/EE/>ZWKZd/E'


Further, IFRS Interpretations Committee (IFRIC) is the interpretative body of the IASB. Its main
work is to address application issues and suggest official IFRS Interpretations, which are
eventually approved by the IASB. These interpretations are titled ‘IFRIC’ and numbered as IFRIC
1,2 etc. Interpretations issued before 2003 were titled ‘SIC’ and some of them are still in force
today. IFRIC and SICs are included in Ind AS as part of Appendix in relevant Ind AS.
• Total reporting standards issued under IFRS are 41. Total reporting standards issued under
Ind AS are 39. IFRS 17 Insurance Contracts and IAS 26 Accounting and Reporting by
Retirement Benefit Plans are yet not notified in India as Ind AS.

• Total interpretations under IFRS (IFRIC + SIC) are 18. Total interpretation included under
Ind AS (Appendix to relevant standards) are 17. IFRIC 2 – Members’ Shares in Co-operative
Entities and Similar Instruments and SIC -7 Introduction of the Euro are neither included
under Ind AS nor notified. However, Appendix C to Ind AS 103 – Business Combinations
was developed and additionally included in India for which no corresponding IFRIC or SIC is
available.
9.3 How Ind AS have been structured?
Ind AS have followed the structure of IFRS and IAS and have not changed the same. Ind AS
retained the paragraph numbers of IFRS and IAS too to allow readers to refer back similar
guidance under IFRS and IAS while also appreciating the carve out and carve in. For ex. If
Ind AS do not contain corresponding paragraph of IFRS, the same number had been kept blank
with a note mentioned referring to Appendix – Comparison with IFRS.
Ind AS have following components and they are generally structured as follows:
1) Objective – What is the main purpose for which the Ind AS is formed is mentioned in this
heading. On a bird’s eye view, it mentions the issues dealt by it and what objective it seeks
to achieve from laying the principles in it.

Example 2
Following is Ind AS 2’s objective:
“The objective of this Standard is to prescribe the accounting treatment for inventories. A
primary issue in accounting for inventories is the amount of cost to be recognised as an asset
and carried forward until the related revenues are recognised. This Standard deals with the
determination of cost and its subsequent recognition as an expense, including any write -
down to net realisable value. It also provides guidance on the cost formulas that are used to
assign costs to inventories.”

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.17
  

2) Scope – What the standard intends to cover in its ambit is mentioned in the scope heading.
In many cases, it defines specifically what it intends not to cover. For e.g.: Para 2 of
Ind AS 2 states that it applies to all inventories except financial instruments and biologica l
assets related to agricultural activity and agricultural produce at the point of harvest .
3) Definitions – It includes definitions of various terms used in the standards. For standards
which are converged from International Accounting standards, definition is a part of structure
while for standards which are converged from International Financial Reporting standards
(Ind AS 101 onwards), the definitions are included in appendices.
4) Content of the Standard – This includes the main principles of the standard. It generally
contains principle of recognition, measurement, subsequent measurement along with any
other standard specific contents grouped in appropriate headings .
5) Disclosure – This section covers what qualitative / quantitative information required to be
disclosed in financial statements pertaining to the matter covered in the standard. Wherever
applicable, it also contains how a particular asset / liability / income / expense should be
presented in financial statements.
6) Transitional provisions and effective date –For any Ind AS notified, it mentions effective
date and transitional provisions from which it would be applicable. Under Ind AS, transitional
provisions are mentioned mainly at two places. Firstly, it is broadly mentioned in Ind AS 101
- First-time Adoption of Indian Accounting Standard and secondly in the individual Ind AS
wherever applicable. The transitional provisions mentioned in Ind AS 101 are applicable to
first time adopter of Ind AS. The transitional provisions mentioned in individual standards
are applicable to entities that have already applied Ind AS. In many standards, transitional
provisions and effective date are mentioned in Appendices
7) Appendices – As and where applicable, the Ind AS also has appendices which are integral
part of the standard. They mainly consist of:
a. Explanation on industry specific issues which require detailed guidance. For e.g.:
Appendix to Ind AS 16 contains treatment of stripping costs in the production phase of
a surface mine
b. Application Guidance – These are mainly in standards which are converged from
International Financial Reporting Standards (Ind AS 101 and onwards). It contains
detailed guidance in applying the principles mentioned in the standard
c. Defined terms – It mentions definition of terms mentioned in the standard
d. References to matters contained in other Ind AS - It lists the appendix which is a part of
another Indian Accounting Standard and makes reference to the particular standard.

© The Institute of Chartered Accountants of India

 1.18 2.18
18 &/EE/>ZWKZd/E'


e. Comparison with IFRS – Differences with IFRS are explained in this section
f. IFRIC and SIC applicable and relevant for the respective Ind AS
In each Ind AS, certain texts are highlighted in bold while certain are in plain. The text in
bold mentions the principle while the text in plain mentions its application guidance / other
explanation. Paragraphs set in bold type and plain type, have equal authority. In
Ind AS 101, principles are numbered in chronological order while detailed explanation or
guidance applicable to these principles are included in the respective Appendices, as
applicable.

10. ROADMAP FOR APPLICABILITY OF IND AS

MCA has notified the Companies (Indian Accounting Standards) Rules, 2015 vide its G.S.R dated
16 February 2015. Accordingly, it has notified 39 Ind AS and has laid down an Ind AS transition
roadmap for companies and non- banking finance companies excluding banking companies and
insurance companies. MCA has proposed phase-wise approach for mandatory transition to
Ind AS.
10.1 For Listed Entities
Phase I
As per the Companies (Indian Accounting Standards) Rules, 2015, following companies were
covered under Phase I for accounting periods beginning on or after 1 st April 2016, with the
comparatives for the periods ending on 31 st March 2016:
a) companies whose equity or debt securities are listed or are in the process of being listed on
any stock exchange in India or outside India and having net worth of rupees five hundred
crore or more;
b) companies other than those covered by sub-clause (a) above and having net worth of rupees
five hundred crore or more;
c) holding, subsidiary, joint venture or associate companies of companies covered by sub-
clause (a) and sub-clause (b) as mentioned above

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.19
  

Phase 1

2015 2016-17

April March April March

Opening Balance Financial Statements for

Sheet Comparative for
the year ended
1st April, 2015 31st March, 2016
31st March, 2017

Phase II

Following companies were covered under Phase II for accounting periods beginning on or after
1 st April 2017, with the comparatives for the periods ending on 31 st March 2017:

a) companies whose equity or debt securities are listed or are in the process of being listed on
any stock exchange in India or outside India and having net worth of less than rupee s five
hundred crore;

b) companies other than those covered in sub-clause (a) above i.e. unlisted companies having
net worth of rupees two hundred and fifty crore or more but less than rupees five hundred
crore.

c) holding, subsidiary, joint venture or associate companies of companies covered by sub-

clause (a) and sub-clause (b) as mentioned above.

The Companies (Indian Accounting Standards) Rules, 2015 clarifies that, the roadmap shall not
be applicable to companies whose securities are listed or are in the proc ess of being listed on
SME exchange as referred to in Chapter XB or on the Institutional Trading Platform without initial
public offering in accordance with the provisions of Chapter XC of the Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. For the
purpose, it clarifies SME Exchange to have the same meaning as assigned to it in Chapter XB of
the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009.

© The Institute of Chartered Accountants of India

 1.20 2.20
20 &/EE/>ZWKZd/E'


Phase 2

2016-17 2017-18

April March April March

Opening Balance Financial Statements

Sheet Comparative for
for the year ended 31st
1st April, 2016 31st March, 2017
March, 2018

Ind AS would not be applicable to companies other than listed companies whose net worth is less
than ` 250 Crores and they will continue to follow AS as per its applicability discussed above.
However, they can voluntary adopt Ind AS.
It is notable that the Companies (Indian Accounting Standards) Rules, 2015 gave an option to the
companies for early adoption of Ind AS for their financial statements for accounting periods
beginning on or after 1 st April 2015, with the comparatives for the periods ending on
31st March 2015 or any time thereafter.
10.1.1 Key Matters on Transition
1) Comparative Financial Information
All companies applying Ind AS are required to present comparative information as per Ind
AS for one year. To comply with this requirement, Ind AS will be applicable from the beginning
of the previous period.
Example 3
A company adopted Ind AS from 1 st April, 20X4 for its accounting period 20X4-20X5. Hence
it will be required to prepare its first Ind AS financial statements for financial year 20X4-20X5
with comparatives for financial year 20X3-20X4, and the date of transition to Ind AS will be
considered as 1 st April 20X3.

2) Ind AS applicability
As per clause 4 of the aforementioned MCA notification, companies to which Indian
Accounting Standards (Ind AS) are applicable as specified in th ose rules shall prepare their
first set of financial statements in accordance with the Ind AS effective at the end of its first
Ind AS reporting period.

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.21
  

Example 4
A company adopted Ind AS from 1 st April, 20X4 for its accounting period 20X4-20X5. Hence
it shall prepare Ind AS financial statements for financial year 20X4-20X5 by applying all
Ind AS duly effective as on 31st March 20X5.
3) Consistent Application of Ind AS
As per clause 9 of the notification, once a company starts following the Indian Accounting
Standards (Ind AS) either voluntarily or mandatorily on the basis of criteria specifie d, it shall
be required to follow the Indian Accounting Standards (Ind AS) for all the subsequent
financial statements even if any of the criteria specified in the Rules does not subsequently
apply to it.
4) Ind AS Applicability for Indian Group Companies
As specified in the Companies (Indian Accounting Standards) Rules, 2015 issued by MCA,
if Ind AS is applicable to a company, it would also be applicable to its holding company,
subsidiary company, associate company and joint venture.
5) Ind AS Applicability for Overseas Group Companies
As per clause 5 of the Companies (Indian Accounting Standards) Rules, 2015 issued by
MCA, overseas subsidiary, associate, joint venture and other similar entities of an Indian
company may prepare its standalone financial statements in accordance with the
requirements of the specific jurisdiction, provided that such Indian company shall prepare its
consolidated financial statements in accordance with the Indian Accounting Standards
(Ind AS) either voluntarily or mandatorily as per the criteria as specified in the Rules.
6) Ind AS Applicability for Standalone and Consolidated Financial Statements
As per clause 3 of the notification issued by MCA, Ind AS once required to be complied with
in accordance with these rules, shall apply to both stand-alone financial statements and
consolidated financial statements.
10.1.2 Calculation of Net Worth
For the purpose of determining the applicability of Ind AS as per the roadmap, net worth shall
have meaning as per clause 57 of section 2 of the Companies Act, 2013.
Following is the definition of net worth as per the section:
“Net worth means the aggregate value of the paid-up share capital and all reserves created out of
the profits and securities premium account, after deducting the aggregate value of the
accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per
the audited balance sheet, but does not include reserves created out of revaluation of assets,
write-back of depreciation and amalgamation;”

© The Institute of Chartered Accountants of India

 1.22 2.22
22 &/EE/>ZWKZd/E'


Further, it is clarified that:

a) the net worth shall be calculated in accordance with the stand-alone financial statements of
the company as on 31 st March, 2014 or the first audited financial statements for accounting
period which ends after that date;
b) for companies which are not in existence on 31 st March, 2014 or an existing company falling
under any of thresholds specified in the Ind AS applicability thresholds above for the first
time after 31 st March, 2014, the net worth shall be calculated on the basis of the first audited
financial statements ending after that date in respect of which it meets the thresholds
specified.
Example 5
The companies meeting net worth threshold for the first time as per financial statements of
the year ending on 31 st March, 2017 shall apply Ind AS for the financial year 2017-2018 with
comparatives for financial year 2016-2017.
Hence to summarize, the roadmap considers net worth as on 31 st March 2014 as cut-off date for
Ind AS applicability. A company which meets the Ind AS applicability criteria on this cut-off date,
needs to apply Ind AS as per the applicable phase. If any company does not meet the Ind AS
applicability criteria as on the cut-off date, they will have to reassess the Ind AS applicability
criteria at each balance sheet date.
Illustration 1
Following is a snapshot of audited balance sheet of company A as on 31 st March 2014.
Company A’s equity shares are listed on Bombay Stock Exchange since 2010.

Liabilities ` in crores Assets ` in crores

Equity Share Capital 160 Fixed Assets 455
Securities Premium 200 Investments 200
General Reserve 150 Current Assets 50
Revaluation Reserve 40 Miscellaneous Expenditure not 80
written off
Profit and Loss A/c 75
Liabilities 160
Total 785 Total 785
• As per roadmap, which Phase company A fall into?
• Will your answer change if Company A is an unlisted company?

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.23
  

Solution
Calculation of Net Worth:

Particulars ` in crores
Equity Share Capital 160
Securities Premium 200
General Reserve 150
Profit and Loss A/c 75
Miscellaneous Expenditure not written off (80)
Net Worth as per Section 2(57) of The Companies Act, 2013 505

Note – Revaluation Reserve would not be included in the calculation of net worth as per definition
mentioned in section 2(57) of The Companies Act, 2013
The company is a listed company and it does meet the net worth threshold of ` 500 Crores. Hence
it would be covered under phase I. Hence Ind AS would be applicable to the company for
accounting periods beginning on or after 1 st April 2016.
Even if Company A is an unlisted company as company A’s net worth is more than 500 Crores, it
would be covered under Phase I of the road map and hence Ind AS would be applicable for the
accounting periods beginning on or after 1 st April 2016.
Illustration 2
Let’s say in Illustration 1, the balance of profit and loss account is negative ` 375 crores. When
Ind AS should be applicable to Company A? Will you answer change if Company A is an unlisted
company?
Solution
If the balance of Profit and Loss A/c is negative 375 Crores, the net worth as per section 2(57) of
The Companies Act, 2013 would be ` 55 Crores (Equity share capital ` 160 Cr + Securities
Premium ` 200 Cr + General Reserve ` 150 Cr – Debit balance of P&L `375 Cr – Miscellaneous
expenditure not written off ` 80 Cr). Hence, it does not meet the criteria as mentioned in Phase I
i.e. Listed company or Net worth of ` 500 Cr or more.
However, as Company A is a listed company, it will irrespective be covered under Phase II as the
first criteria of phase II states “companies whose equity or debt securities are listed or are in the
process of being listed on any stock exchange in India or outside India and having net worth of
less than rupees five hundred crore”. Hence, Ind AS would be applicable to Company A for the
accounting periods beginning on or after 1 st April 2017.

© The Institute of Chartered Accountants of India

 1.24 2.24
24 &/EE/>ZWKZd/E'


If Company A is an unlisted company, Ind AS would not be applicable until it breaches the net
worth criteria mentioned in the roadmap.
Illustration 3
The net worth of Company B (an unlisted company) was ` 600 crores as on 31 st March 2014.
However due to losses incurred in FY 14-15, the net worth of the company was ` 400 Crores as
on 31st March 2015. From when company B shall apply Ind AS?
Solution
Here the company’s net worth as on cut-off date was greater than ` 500 crores, which suggests
that it should be covered under phase I of the roadmap. A question may however arise in mind
that since, the net worth as on immediately preceding year-end was ` 400 crores, would the
company be covered under phase II of the roadmap?
“It may be noted that the net worth shall be calculated in accordance with the stand-alone financial
statements of the company as on 31 st March, 2014. Accordingly, if the net worth threshold criteria
for a company are once met, then it shall be required to comply with Ind AS, irrespective of the
fact that as on later date its net worth falls below the criteria specified.”
In view of the above, the Company B will be required to follow Ind AS for accounting periods
beginning on or after 1 st April 2016
Illustration 4
The net worth of Company C (an unlisted company) was ` 400 crores as on 31 st March 2014.
However, the net worth of the company was ` 600 Crores as on 31 st March 2015. From when
company B shall apply Ind AS?
Solution
Similar issue has been encountered in ITFG Bulletin 1, Issue 1 which gives reference to clause
2b of the notification wherein it is stated that:
“For companies which are not in existence on 31 st March, 2014 or an existing company falling
under any of thresholds specified in sub-rule (1) for the first time after 31 st March, 2014, the net
worth shall be calculated on the basis of the first audited financial statements ending after that
date in respect of which it meets the thresholds specified in sub -rule (1)”
Hence, any company that meets the thresholds as specified in the Companies (Indian Accounting
Standards) Rules, 2015 in a particular financial year, Ind AS will become applicable to such
company in immediately next financial year. Hence, in the present case, Company C is covered
by Phase I of the roadmap and accordingly, Ind AS will be applicable to Company C for accounting
periods beginning on or after 1 st April 2016

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.25
  

Illustration 5
Company D is the parent company of group A. Company A is an unlisted company having net
worth of 60 crores as on 31 st March 2014. Following are the other companies of the group.

Name of the company Relationship Net worth as on 31 st March 2014

Company B (Unlisted) Subsidiary of Company A ` 600 Crore

Company C (Unlisted) Subsidiary of Company B ` 150 Crore

Whether Ind AS be applicable to companyies A, B and C?

Solution
Company A and C are unlisted and do not exceed the net worth criteria. However, the net worth
of Company B exceeds ` 500 Crore hence it would be covered under Phase I of the roadmap.
As Ind AS be applicable to Company B, the parent company of Company B i.e. Company A and
subsidiary of Company B i.e. Company C would also get covered under Ind AS irrespective of net
worth criteria. Hence Ind AS would be applicable to all three companies i.e. Company A, B and C
Illustration 6
Following is the structure of Company D

ŽŵƉĂŶLJ

ŽŵƉĂŶLJ ŽŵƉĂŶLJ,
;^ƵďƐŝĚŝĂƌLJŽĨ
Ϳ ;^ƵďƐŝĚŝĂƌLJŽĨͿ

ŽŵƉĂŶLJ'
ŽŵƉĂŶLJ& ŽŵƉĂŶLJ/
;ƐƐŽĐŝĂƚĞŽĨ
;^ƵďƐŝĚŝĂƌLJŽĨͿ ;^ƵďƐŝĚŝĂƌLJŽĨ,Ϳ
Ϳ

All the companies in above structure are unlisted companies and the net worth of company E is
` 300 Crores and net worth of all the other companies is below ` 250 crores. To which company
would Ind AS be applicable?
Solution
As mentioned in the Companies (Indian Accounting Standards) Rules, 2015, if Ind AS is applicable
to a company, it would also be applicable to its Holding Company, subsidiary company, associate
company and Joint Venture.

© The Institute of Chartered Accountants of India

 1.26 2.26
26 &/EE/>ZWKZd/E'


As the turnover of company E is above ` 250 crores, it would be covered under Phase II of the
roadmap. Hence, its subsidiary (Company F), associate (Company G) and Holding (Company D)
would also be covered under Ind AS with effect from 1 st April 2017.
With respect to other companies of the group, following guidance is given in ITFG clarification
bulletin 15, Issue 10: “It may be noted that Ind AS applies to holding, subsidiary, joint venture and
associate companies of the companies which meet the net worth/listing criteria. This requirement
does not extend to another fellow subsidiary of a holding company which is required to adopt Ind
AS because of its holding company relationship with a subsidiary meeting the net worth/listing
criteria. Holding company will be required to prepare separate and consolidated financial
statements mandatorily under Ind AS, if one of its subsidiaries meets the specified criteria and
therefore, such subsidiaries may be required by the holding company to furnish financial
statements as per Ind AS for the purpose of preparing Holding company’s consolidated Ind AS
financial statements. Such fellow subsidiaries may, however, voluntarily opt to prepare their
financial statements as per Ind AS.”
Hence the other companies of the group i.e. Company H and Company I would not be covered
under Ind AS. However, as mentioned in ITFG, Company H and I would be required to prepare
its financial statements under Ind AS so as to facilitate Company D for preparation of its
consolidated financial statements. Hence, though statutorily Company H and I may continue to
prepare its financial statements under AS, but it will also have to converge to Ind AS. Moreover,
they may also opt to voluntarily adopt Ind AS and prepare its statutory accounts under Ind AS too.
Illustration 7
ABC Inc., incorporated in a foreign country has a net worth of ` 700 Crores. It has two subsidiaries
Company X whose net worth as on 31 st March 2014 is ` 600 Crores and Company Y whose net
worth is ` 150 Crores. Whether Company X and Y would be required to follow Ind AS from
accounting periods commencing on or after 1 st April 2016 on the basis of their own net worth or
on the basis of the net worth of ABC Inc.?
Solution
Similar issue has been dealt in ITFG Clarification Bulletin 2, Issue 2. ITFG noted that as per Rule
4(1)(ii)(a) of the Companies (Indian Accounting Standards) Rules, 2015, Company X having net
worth of ` 600 crores at the end of the financial year 2015-16, would be required to prepare its
financial statements for the accounting periods commencing from 1st April, 2016, as per the
Companies (Indian Accounting Standards) Rules, 2015. While Company Y Ltd. having net worth
of ` 150 crores in the year 2015-16, would be required to prepare its financial statements as per
the Companies (Accounting Standards) Rules, 2006.

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.27
  

Since, the foreign company ABC Inc., is not a company incorporated under the Companies Act,
2013 or the earlier Companies Act, 1956, it is not required to prepare its financial statements as
per the Companies (Indian Accounting Standards) Rules, 2015. As the foreign company is not
required to prepare financial statements based on Ind AS, the net worth of foreign company ABC
would not be the basis for deciding whether Indian Subsidiary Company X Ltd. and Company Y
Ltd. are required to prepare financial statements based on Ind AS.
10.2 Ind AS Roadmap for Non -Banking Financial Companies (NBFC)
For the purpose, NBFC is defined as a Non-Banking Financial Company as defined in clause (f)
of section 45-I of the Reserve Bank of India Act, 1934 and includes Housing Finance Companies,
Merchant Banking companies, Micro Finance Companies, Mutual Benefit Companies, Venture
Capital Fund Companies, Stock Broker or Sub-Broker Companies, Nidhi Companies, Chit
Companies, Securitisation and Reconstruction Companies, Mortgage Guarantee Companies,
Pension Fund Companies, Asset Management Companies and Core Investment Companies
Ministry of Corporate Affairs, in its circular dated 30 th March 2016, amended the Companies
(Indian Accounting Standards) Rules, 2015 to include its applicability to Non-Banking Finance
Companies. As per the circular, NBFCs to apply Ind AS in the following two phases :
Phase I
As per the Companies (Indian Accounting Standards) Rules, 2015, following NBFCs were cov ered
under Phase I for accounting periods beginning on or after 1 st April 2018, with the comparatives
for the periods ending on 31 st March 2018.
a. NBFCs having net worth of ` 500 Crores or more
b. Holding, subsidiary, associate or Joint Venture of NBFCs already covered under sub clause
(a) above, other than companies already covered under Ind AS roadmap for Non -Financial
companies
Phase 1

2017-18 2018-19

April March April March

Opening Balance Sheet Comparative for 31st March, Financial Statements for the
1st April, 2017 2018 year ended 31st March, 2019

© The Institute of Chartered Accountants of India

 1.28 2.28
28 &/EE/>ZWKZd/E'


Phase II
Following NBFCs were covered under Phase II for accounting periods beginning on or after
1 st April 2019, with the comparatives for the periods ending on 31 st March 2019
a. NBFCs whose equity or debt securities are listed or in the process of listing on any stock
exchange in India or outside India and having net worth less than rupees five hundred crore;
b. NBFCs, that are unlisted companies, having net worth of rupees two -hundred and fifty crore
or more but less than rupees five hundred crore; and
c. Holding, subsidiary, associate or Joint Venture of Companies already covered under sub
clause (a) and (b) above, other than companies already covered under Ind AS roadmap for
Non-financial companies

Phase 2

2018-19 2019-20

April March April March

Opening Balance Sheet Comparative for 31st March, Financial Statements for the
1st April, 2018 2019 year ended 31st March, 2020

NBFCs having net worth below rupees two fifty crores and not covered above shall continue to
apply ASs. Further, where Ind AS is applicable to NBFCs, the same shall apply to both standalone
and consolidated financial statements.
It is notable that NBFC can apply Ind AS only if they fall in any of the above criteria. Voluntary
adoption of Ind AS by NBFCs are not allowed.
10.2.1 Clarification on calculation of Net Worth
For the purposes of calculation of net worth of NBFCs for determining the applicability of Ind AS,
the following principles shall apply, namely:-
a) the net worth shall be calculated in accordance with the stand-alone financial statements of
the NBFCs as on 31st March 2016 or the first audited financial statements for accounting
period which ends after that date;
b) for NBFCs which are not in existence on 31st March 2016 or an existing NBFC falling first
time, after 31st March 2016, the net worth shall be calculated on the basis of the first audited

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.29
  

stand-alone financial statements ending after that date, in respect of which it meets the
thresholds.
Explanation.- For the purposes of sub-clause (b), the NBFCs meeting the specified thresholds as
given in the roadmap for the first time at the end of an accounting year shall apply Ind AS from
the immediately next accounting year
For E.g. –
(i) The NBFCs meeting threshold for the first time as on 31st March, 2019 shall apply Ind AS
for the financial year 2019-20 onwards.
(ii) The NBFCs meeting threshold for the first time as on 31st March, 2020 shall apply Ind AS
for the financial year 2020-21 onwards and so on.
Application of Ind AS to non-finance companies whose parent / subsidiary or associate or
joint venture is a NBFC
The date for application of Ind AS to non-finance companies is not aligned with that of NBFCs.
Hence it has been clarified in the notification that the companies shall apply AS or Ind AS on the
basis of respective standard applicable to them. However, for the purpose of preparation of
Consolidated Financial Statements it is clarified that :
A) where an NBFC is a parent (at ultimate level or at intermediate level), and prepares
consolidated financial statements as per AS, and its subsidiaries, associates and joint
ventures are non-finance companies and are required to prepare financial statements as per
Ind AS as per the roadmap given in The Companies (Indian Accounting Standards) Rule s,
2015, such subsidiaries, associate and joint venture shall prepare its financials as per Ind
AS. However, such subsidiaries, associate and joint venture has to provide the relevant
financial statement data in accordance with the accounting policies foll owed by the parent
company for consolidation purposes (until the NBFC is covered under Ind AS.
B) Where a parent is a non-finance company covered under Ind AS as per the roadmap given
in The Companies (Indian Accounting Standards) Rules, 2015 and has a NBFC s ubsidiary,
associate or a joint venture, the parent has to prepare Ind AS-compliant consolidated
financial statements and the NBFC subsidiary, associate and a joint venture has to
provide the relevant financial statement data in accordance with the accoun ting policies
followed by the parent company for consolidation purposes (until the NBFC is covered under
Ind AS).
It implies that the NBFC subsidiary, associate or a joint venture, in such case shall continue to
prepare the financials under AS until Ind AS are applicable to it.

© The Institute of Chartered Accountants of India

 1.30 2.30
30 &/EE/>ZWKZd/E'


Illustration 8
As per the roadmap, Ind AS is applicable to Company X from the financial year 2017-18. Company
X (non-finance company) is a subsidiary of Company Y (NBFC). Company Y is an unlisted NBFC
company having net worth of ` 400 crores. What will be the date of applicability of Ind AS for
company X and company Y? If Ind AS applicability date for parent NBFC is different from the
applicability date of corporate subsidiary, then, how will the consolidated financial statements of
parent NBFC be prepared?
Solution
In accordance with the roadmap, it may be noted that NBFCs having net worth of less than 500
crore shall apply Ind AS from 1 April, 2019 onwards. Further, the holding, subsidiary, joint venture
or associate company of such an NBFC other than those covered by corporate roadmap shall also
apply Ind AS from 1 April, 2019.
Accordingly, in the given case, Company Y (NBFC) shall apply Ind AS for the financial year
beginning 1 April, 2019 with comparative for the period ended 31 March, 2019 . Company X shall
apply Ind AS in its statutory individual financial statements from financial year 2017-2018 (as per
the corporate roadmap). However, for the purpose of Consolidation by Company Y for financial
years 2017-2018 and 2018-2019, Company X shall also prepare its individual financial statements
as per AS.
10.3 Ind AS Roadmap for Banking and Insurance Companies
As per the Companies (Indian Accounting Standards) (Amendment) Rules, 2016, The Banking
Companies and Insurance Companies shall apply the Ind AS as notified by the Reserve Bank of
India (RBI) and Insurance Regulatory Development Authority (IRDA) respectively. As the same
are yet to be notified, Ind AS is not applicable to Banking and Insurance Companies presently.
It is notable that Banks and Insurance Companies shall not be allowed to voluntarily adopt
Ind AS. However, this does not preclude them from providing Ind AS compliant financial
statements for the purpose of preparation of consolidated financial statements by its
parent/investor, as required by the parent/investor to comply with the existing requirements of law.
10.4 Ind AS Roadmap for Mutual Funds
The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (the MF
Regulations) lay down the regulatory framework for operations and functioning of Mutual Funds
(MFs). The MF Regulations are amended by SEBI from time to time to enhance transparency and
disclosures, to address emerging issues, to protect the interests of investors, and to strengthen
the regulatory framework of MFs.

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.31
  

On 25 January 2022, SEBI vide a notification issued the SEBI (Mutual Funds) (Amendment)
Regulations, 2022. As per this notification, the financial statements and accounts of MF schemes
will be prepared in accordance with Indian Accounting Standards (Ind AS). Additionally, SEBI
vide a circular dated 4 February 2022 (the circular) provided certain guidelines on accounting with
respect to Ind AS for MFs. The circular also provides specific formats of the financial statements
to be prepared for the MF schemes under Ind AS. The requirements of the circular will become
applicable from 1 April 2023.

11. IND AS RELEVANT STATUTORY PROVISIONS

11.1 Relevant Sections referring to Ind AS in the Companies Act, 2013
and Rules
Ind AS were initially notified under the Companies (Indian Accounting Standards) Rules, 2015.
Post that it was amended from time to time to include the amendments / changes in the Ind AS.
Following are the some of the key relevant provisions of the Companies Act 2013, which gives
reference to Ind AS:
• Section 2(2) states that accounting standards means the standards of accounting or any
addendum thereto for companies or class of companies referred to in Section 133
• Section 133 states the Central Government may prescribe the standards of accounting or
any addendum thereto, as recommended by the Institute of Chartered Accountants of India,
constituted under section 3 of the Chartered Accountants Act, 1949 ( 38 of 1949), in
consultation with and after examination of the recommendations made by the National
Financial Reporting Authority. Under the power given to the Central Government under
section 133, it notified the Companies (Indian Accounting Standards) Ru les, 2015.
• Section 129 suggests the financial statements shall give a true and fair view of the state of
affairs of the company or companies, comply with the accounting standards notified under
section 133 and shall be in the form or forms as may be provided for different class or classes
of companies in Schedule III:
• Section 134 (5) (a), a statement that the applicable accounting standards had been followed
with proper explanation relating to material departures shall be given in the Director
Responsibility statement to be issued under section 134 (3) (c) in the Director’s report to be
published in Annual General Meeting
• Section 143, auditor has to opine whether the financial statements comply with the
accounting standards

© The Institute of Chartered Accountants of India

 1.32 2.32
32 &/EE/>ZWKZd/E'


• Section 230 – Power to compromise or make arrangements with creditors and members and
Section 232 – Merger and amalgamation of Companies, the scheme of compromise or
arrangement is to be sanctioned by the tribunal only after obtaining a certificate from the
company’s auditor that the accounting treatment given proposed in the scheme of
compromise or arrangement is in conformity with the accounting standards mentioned in
Section 133.
• Section 66 – Reduction of Share Capital, which states that no application for reduction of
share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed
by the company for such reduction is in conformity with the accounting standards specified
in section 133 or any other provision of this Act and a certificate to that effect by the
company‘s auditor has been filed with the Tribunal.
11.2 Relevant SEBI Rules and Regulations
Formats for publishing financial results (Circular dated 30th November 2015)
SEBI via circular dated 30 th November, 2015 amended the format for publishing quarterly financial
statements. Point 5 of the circular clarified that Companies adopting the Ind AS in terms of
Companies (Indian Accounting Standards) Rules, 2015 notified by the Ministry of Corporate Affairs
on 16 th February, 2015 while publishing quarterly / annual financial results under Regulation 33 of
the Listing Regulations, 2015, shall ensure that the comparatives filed along with such
quarterly/annual financial results are also Ind AS compliant.
Clarification regarding applicability of Indian Accounting Standards to disclosures in offer
documents under SEBI (ICDR) Regulations, 2018
The applicability of Ind AS for financial information (last 3 years financials) to be disclosed in the
offer document as specified under SEBI (ICDR) Regulations, 2018 and provided the year wise
applicability of Ind AS based on the period of filling offer document.
Example 6
For a company filling offer document between 1 st April 2021 to 31st March 2022, the financial
statements of latest financial year, second latest financial year and third latest financial year shall
be as per Ind AS.
Revised Formats for financial results and implementation of Ind AS by Listed Entities
For the period ending on or after 31st March, 2017, the formats for Unaudited / Audited quarterly
financial results i.e. Statement of Profit and Loss and the Unaudited / Audited Half-Yearly Balance
Sheet to be submitted by the Listed Entities, with the stock exchanges, shall be as pe r the formats
for Balance Sheet and Statement of Profit and Loss (excluding notes and detailed sub -
classification) as prescribed in Schedule III to the Companies Act, 2013. However, Banking
Companies and Insurance Companies shall follow the formats as prescribed under the respective
Acts / Regulations as specified by their Regulators.

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.33
  

12. FORMAT OF DIVISION II TO SCHEDULE III TO THE

COMPANIES ACT - STRUCTURE
12.1 Introduction
Schedule III to the Companies Act, 2013 was notified along with the Companies Act, 2013 (Act)
itself on 29 th August, 2013 thereby providing the way every company registered under the Act
shall prepare its Financial Statements. Financial Statements as defined under the Act include
Balance Sheet, Statement of Changes in Equity for the period if applicable, the Statement of Profit
and Loss for the period, Cash flow statement for the period and Notes.
‘Division II’ – ‘Ind AS Schedule III’ was inserted in the Companies Act,2013 to give a format of
Financial Statements for companies that are required to comply with the Companies (Indian
Accounting Standards) Rules, 2015, as amended from time to time. This is newly inserted into
Schedule III for companies that adopt Ind AS. Accordingly, such companies, while preparing its
first and subsequent Ind AS Financial Statements, would apply Division II to Schedule III to the
Act.
The requirements of Division II to Schedule III, however, do not apply any insurance or banking
company or to any other class of company for which a form of Balance Sheet and Statement of
Profit and Loss has been specified in or under any other Act governing such class of company.
Moreover, the requirements of Division II to Schedule III do not apply to Non-Banking Finance
Companies (NBFCs) that adopt Ind AS of Companies (Indian Accounting Standards) Rules, 2015
notified in Companies (Indian Accounting Standards) (Amendment) Rules, 2016 as amended from
time to time. For NBFCs, Division III to Schedule III to the Companies Act, 2013 prescribes the
formats of financial statements.
‘Division II’ – ‘Ind AS Schedule III’ is divided into following three parts:
• Part I – Format of Balance Sheet and Statement of Changes in Equity and notes related to
them (Elements of Balance Sheet and its line items)
• Part II – Format of Statement of Profit and Loss and notes related to it (Elements of
Statement of Profit and Loss and its line items)
• Part III – General Instructions for preparation of Consolidated Financial Statements
12.2 Applicability
As per the Government Notification no. S.O. 902 (E) dated 26 March, 2014, Schedule III is
applicable for the Financial Statements prepared for the financial year commencin g on or after
1 st April, 2014. Further, as per the Government Notification no. G.S.R. 404(E) dated

© The Institute of Chartered Accountants of India

 1.34 2.34
34 &/EE/>ZWKZd/E'


6 th April, 2016, Schedule III is amended to include a format of Financial Statements for a company
preparing Financial Statements in compliance with the Companies Ind AS Rules. Schedule III has
been further amended vide the Government Notification dated 24 th March, 2021 to include certain
additional presentation and disclosures requirements and changes some existing requirements.
These changes need to be applied in preparation of financial statements for the financial year
commencing on or after 1 st April, 2021. All companies that prepare, either voluntarily or
mandatorily, Financial Statements in compliance with the Companies Ind AS Rules, should
consider Ind AS Schedule III as well as ICAI’s Guidance Note on Division II to Schedule III to the
Companies Act, 2013. Additionally, preparers of financial statements should also consider
requirements of the Act as well as other Statutes, Notifications, Circulars issued by various
Regulators.

Division II to Schedule III to the Companies Act, 2013 has been annexed at the end of the
study material for reference.

13. GUIDANCE NOTE ON DIVISION II TO SCHEDULE III TO

THE COMPANIES ACT, 2013
Corporate Laws & Corporate Governance Committee (CLCGC) of ICAI issued the Guidance Note
on Division-II to Schedule III to the Companies Act, 2013 in 2017 and kept on revising the same
as per requirements. Latest Guidance Note on the subject is issued in J anuary, 2022. This
Guidance Note aims to provide guidance on the amended Division-II to Schedule III to the
Companies Act, 2013. It also lays down broad guidelines to deal with practi cal issues that may
arise in the implementation of Division-II to Schedule III to the Companies Act, 2013. Accordingly,
wherever required conceptual guidance has been provided in the Guidance Note.
Following are the some of the key guidance stated in guidance note. The following should be read
in conjunction with Guidance Note issued on the subject:
1) Property, Plant and Equipment: Under the Ind AS Schedule III, land and building are
presented as two separate classes of property, plant and equipment. In contrast, paragraph
37 of Ind AS 16 gives an example of grouping land and building under same class for
revaluation purposes. The para states that a class of property, plant and equipment is a
grouping of assets of a similar nature and use in an entity's operations. However, companies
should continue to present land and building separately as given in Ind AS Schedule III and
such presentation needs to be followed consistently.
As per Ind AS Schedule III, capital advances/ advances for purchase of capital assets should
be included under other non- current assets and hence, should not be included under capital
work-in-progress

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.35
  

2) Non-current Investment: Under each sub-classification of Investments, there is a requirement

to disclose details of investments including names and the nature and extent of the
investment in each body corporate which is a subsidiary, associate, joint venture and
structured entity. The nature and extent would imply the number of such instruments held
and the face value of such instrument.
Ind AS Schedule III requires disclosure of the aggregate amount of quoted investments and
market value thereof and the aggregate amount of unquoted investments. The aggregate
amount of such investments would include aggregate amount of carrying value of these
investments as at the reporting date as included in the financial statements.
The market value of quoted investments would, generally, mean disclosure of the ‘fair value’
of quoted investments as at each reporting date. Ind AS 113 defines fair value and also states
that the fair value of assets might be affected when there has been a significant decrease in
the volume or level of activity for that asset in relation to normal market activity for that asset.
A decrease in the volume or level of activity on its own may not indicate that a quoted price
does not represent fair value. However, based on the company’s evaluation, if it determines
that a quoted price does not represent fair value, then the company shall disclose the market
value of quoted investments based on the quoted price which would be different from the
investment’s fair value.
As per Ind AS Schedule III, aggregate amount for impairment in value of investments should
be disclosed separately. As per Ind AS 109, the company is required to recognize a loss
allowance (i.e. impairment) for expected credit losses on investments measured at amortized
cost. Such loss allowance should be presented as an adjustment to the amortized cost of the
investment.
As per Ind AS 109, in case of debt investments measured at fair value through other
comprehensive income (FVTOCI), a company shall estimate a portion of fair value change,
if any, attributable to a change in credit risk of such investment and disclose the same in the
profit and loss section of the statement of profit and loss with a corresponding impact in other
comprehensive income section.
No disclosure is required in case of equity investments measured at fair value since Ind AS
109 does not permit a separate calculation / evaluation of impairment amount for all such
investments.
The aggregate provision for impairment as per Ind AS 36 in the value of investments may be
either presented in totality, where relevant, for all the investments or separately for each
class of investments (e.g., ‘Investment at amortized cost’, ‘Investment in debt instruments at
FVOCI’) disclosed in the financial statements.

© The Institute of Chartered Accountants of India

 1.36 2.36
36 &/EE/>ZWKZd/E'


A limited liability partnership is a body corporate and not a partnership firm as envisaged
under the Partnership Act, 1932. Hence, disclosures pertaining to Investments in partnership
firms will not extend to investments in limited liability partnerships. The investments in limited
liability partnerships will be disclosed separately under ‘other investment’.
Note: Any application money paid towards securities, where security has not been allotted
on the date of the Balance Sheet, shall be disclosed as a separate line item under ‘other
non-current financial assets’. In case the investment is of current investment in nature, such
share application money shall be accordingly, disclosed under other current financial assets.
3) Trade Receivables: A receivable shall be classified as 'trade receivable' if it is in respect of
the amount due on account of goods sold or services rendered in the normal course of
business and the company has a right to an amount of consideration that is unconditional
(i.e. if only the passage of time is required before payment of that consideration is due).
Hence, amounts due under contractual rights, other than arising out of sale of goods or
rendering of services, cannot be included within Trade Receivables. Such items may include
dues in respect of insurance claims, sale of Property, Plant and Equipment, contractually
reimbursable expenses, etc. Such receivables should be classified as "other financial assets"
and each such item should be disclosed nature-wise
The ageing of the trade receivables needs to be determined from the due date of the invoice.
Due date is generally considered to be the date on which the payment of an invoice falls due.
The due date of an invoice is determined based on terms agreed upon between the buyer
and supplier. In case if the due date is neither agreed in writing nor orally, then the ageing
related disclosure needs to be prepared from the transaction date.
Schedule III requires split of trade receivables between ‘disputed’ and ‘undisputed’. These
terms have not been defined in the Schedule III. A dispute is a matter of facts and
circumstances of the case; however, dispute means disagreement between two parties
demonstrated by some positive evidence which supports or corroborates the fact of
disagreement. In case there are any disputes such fact should also be considered while
assessing the credit risk associated with respective party while computing the impairment
loss. However, a dispute might not always be an indicator of counterparty’s credit risk and
vice-versa. Hence, both of these should be evaluated independently for the purpose of
making these disclosures.
4) Other Non-Current Financial Assets – Ind AS Schedule III does not specify about the
presentation of finance lease receivables. However, the guidance note clarifies that he non-
current portion of a finance lease receivable shall be presented under ‘Other non -current
financial assets’ while its current portion shall be presented under ‘Other current financial
assets’.

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.37
  

5) Current Assets - As per Ind AS Schedule III, all items of assets and liabilities are to be
bifurcated between current and non-current portions. In some cases, the items presented
under the “non-current” head of the Balance Sheet may not have a corresponding “current”
head under the format given in Ind AS Schedule III. Since Ind AS Schedule III permits the
use of additional line items, in such cases the current portion should be classified under the
“Current” category of the respective balance as a separate line item and ot her relevant
disclosures should be made.
6) Cash and Cash Equivalents - Cash and cash equivalents is not defined in Ind AS Schedule
III however, according to Ind AS 7 Statement of Cash Flows, Cash is defined to include cash
on hand and demand deposits with banks. Cash Equivalents are defined as short term,
highly liquid investments that are readily convertible into known amounts of cash and which
are subject to an insignificant risk of changes in value.
As per para 8 of Ind AS 7 “where bank overdrafts which are repayable on demand form an
integral part of an entity’s cash management, bank overdrafts are included as a component
of cash and cash equivalents. A characteristic of such banking arrangements is that the
bank balance often fluctuates from being positive to overdrawn.” Although Ind AS 7 permits
bank overdrafts to be included as cash and cash equivalent, however for the purpose of
presentation in the balance sheet, it is not appropriate to include bank overdraft as a
component of cash and cash equivalents unless the offset conditions as given in paragraph
42 of Ind AS 32 are complied with. Bank overdraft, in the balance sheet, should be included
as ‘borrowings’ under Financial Liabilities.
7) Current Tax Assets - If amount of tax already paid in respect of current and prior periods
exceeds the amount of tax due for those periods (assessment year -wise and not cumulative
unless tax laws allow for e.g., say tax laws in the country of overseas subsidiary permits),
then such excess tax shall be recognised as an asset. The excess tax paid (presented as
current tax assets) may not be expected to be recovered / realised within one year from the
balance sheet date and if so, the same shall be presented under non -current assets. An
entity should evaluate whether current tax assets meet the definition of current assets or not
and should accordingly present the same.
8) Equity Share Capital - The accounting definition of ‘Equity’ is principle based as compared
to the legal definition of ‘Equity’ or ‘Share’, such that any contract that evidences residual
interest in an entity’s net asset is termed as ‘Equity’ irrespective of whether it is legally
recognized as a ‘Share’ or not. Accordingly, all instruments (including convertible preference
shares and convertible debentures) that meet the definition of ‘Equity’ as per Ind AS 32 in its
entirety and when they do not have any component of liability, should be considered as
having the nature of ‘Equity’ for the purpose of Ind AS Schedule III. Such instruments shall
be termed as ‘Instruments entirely equity in nature’.

© The Institute of Chartered Accountants of India

 1.38 2.38
38 &/EE/>ZWKZd/E'


9) Borrowings- The phrase "term loan" has not been defined in the Schedule III. Term loans
normally have a fixed or pre-determined maturity period or a repayment schedule.
Terms of repayment of term loans and other loans shall be disclosed. The term ‘other loans’
is used in general sense and should be interpreted to mean all categories listed under the
heading ‘Non – Current borrowings’ as per Ind AS Schedule III. Disclosure of terms of
repayment should be made preferably for each loan unless the repayment terms of individual
loans within a category are similar, in which case, they may be aggregated.
Ind AS Schedule III requires presenting ‘current maturities of long-term debt’ under ‘current
borrowings’. Long-term debt is specified in Ind AS Schedule III as a borrowing having a
period of more than twelve months at the time of origination. The portion of non-current
borrowings, which is due for payments within twelve months of the reporting date is required
to be classified under “current borrowings” while the balance amount should be classified
under non-current borrowings.
10) Trade Payable - A payable shall be classified as 'trade payable' if it is in respect of the amount
due on account of goods purchased or services received in the normal course of business.
Hence, amounts due under contractual obligations or which are statutory payables should not
be included within Trade Payables. Such items may include dues payable in respect of
statutory obligations like contribution to provident fund or contractual obligations like
contractually reimbursable expenses, amounts due towards purchase of capital goods, etc .
Due date shall be the date by when a buyer should make payment to the supplier as per
terms agreed upon between the buyer and supplier. In case if the due date is neither agreed
in writing nor oral, then the disclosure needs to be prepared from the transa ction date.
Transaction date shall be the date on which the liability is recognised in the books of accounts
as per the requirement of applicable standards. A dispute is a matter of facts and
circumstances of the case. However, dispute means disagreement between two parties
demonstrated by some positive evidence which supports or corroborates the fact of
disagreement. Reference is given to the term “Dispute” as defined under the Insolvency and
Bankruptcy Code, 2016.
11) Current Borrowings - Loans payable on demand should be treated as part of current
borrowings. Current borrowings will include all loans payable within a period of 12 months
from the date of the loan. In the case of current borrowings, the period and the amount of
defaults existing as at the date of the Balance Sheet should be disclosed (item -wise).
To provide relevant information to the users of the financial statements regarding total
amount of liability under the respective category of noncurrent borrowings, Companies shall
provide the amount of non-current as well as current portion for each of the respective
category of non-current borrowings either by way of a note or a schedule or a cross -
reference, as appropriate. This shall be in addition to Ind AS Schedule III requirements for
presenting ‘current maturities of long-term borrowings’ under current borrowings.

© The Institute of Chartered Accountants of India

 INTRODUCTION TO INDIAN ACCOUNTING STANDARDS
 
1.39
  

12) Other Current Liabilities - Trade Deposits and Security Deposits, which do not meet the
definition of financial liabilities, should be classified as ‘Others’ grouped un der this head.
Others may also include liabilities in the nature of statutory dues such as Withholding taxes,
Service Tax, VAT, Excise Duty, Goods and Services Tax (GST), etc .
13) Contingent Liabilities and Commitments - A contingent liability in respect of guarantees
arises when a company issue guarantees to another person on behalf of a third party e.g.
when it undertakes to guarantee the loan given to a subsidiary or to another company or
gives a guarantee that another company will perform its contractual o bligations. However,
where a company undertakes to perform its own obligations, and for this purpose issues,
what is called a "guarantee", it does not represent a contingent liability and it is misleading
to show such items as contingent liabilities in the Balance Sheet. For various reasons, it is
customary for guarantees to be issued by Bankers e.g. for payment of insurance premium,
deferred payments to foreign suppliers, letters of credit, etc. For this purpose, the company
issues a "counter-guarantee" to its Bankers. Such "counter-guarantee" is not really a
guarantee at all, but is an undertaking to perform what is in any event the obligation of the
company, namely, to pay the insurance premium when demanded or to make deferred
payments when due. Hence, such performance guarantees and counter guarantees should
not be disclosed as contingent liabilities.
14) Revenue from Operations and other operating income- Indirect taxes such as Sales tax,
Goods and Services tax, etc. are generally collected from the customer on behalf of the
government in majority of the cases. However, this may not hold true in all cases and it is
possible that a company may be acting as principal rather than as an agent in collecting
these taxes. Whether revenue should be presented gross or net of taxes should depend on
whether the company is acting as a principal and hence, is responsible for paying tax on its
own account or, whether it is acting as an agent i.e. simply collecting and paying tax on
behalf of government authorities. If the entity is the principal, then revenue should also be
grossed up for the tax billed to the customer and the tax payable should be shown as an
expense. However, in cases, where a company collects such taxes only as an agent,
revenue should be presented net of taxes.
The term “other operating revenue” is not defined. This would include Revenue arising from
a company’s operating activities, i.e., either its principal or ancillary revenue -generating
activities, but which is not revenue arising from sale of products or rendering of services.
Whether a particular income constitutes “other operating revenue” or “other income” is to be
decided based on the facts of each case and detailed understanding of the company’s
activities.
15) Exceptional Items - The term ‘Exceptional items’ is neither defined in Ind AS Schedule III nor
in Ind AS. However, Ind AS 1 has reference to such items. Ind AS 1 states that disclosing
the components of financial performance assists users in understanding the financial
performance achieved and in making projections of future financial performance. An entity

© The Institute of Chartered Accountants of India

 1.40 2.40
40 &/EE/>ZWKZd/E'


considers factors including materiality and the nature and function of the items of income
and expense. It indicates circumstances that would give rise to the separate disclosures of
items of income and expenses and include:
(a) Write-downs of inventories to net realisable value or of property, plant and equipment
to recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the costs
of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.

SUMMARY
• Accounting Standards is an essential building block in the economics financial reporting
world. These Accounting Standards provide principles and rules that must be followed to
ensure accuracy, consistency and comparability of financial statements
• Prior to introduction of Ind AS, ASB has issued various AS to deal with various reporting
matters which were known as AS and were applicable to companies and also non-corporate
entities.
• To enable free flow of capital across jurisdiction without increasing cost and complexity of
compliances along with need to provide comprehensive guidance to deal with rising
complexities of business and financial world, the need to have Global Accounting Standards
have strongly emerged, leading to rise of IFRS.
• In response to commitment to G20, MCA has notified IFRS converged Standards i.e. Ind AS
phase wise for India Corporates in 2015, which eventually got extended to NBFCs.
• MCA and ICAI had worked extensively together to align Statutory provisions not in cognisant
with Ind AS to ease the implementation challenges for the companies.
Schedule III revision, extensive guidance note dealing with practical application thereof,
amendment in listing regulations by SEBI, continuous guidance on key matters by ITFG are some
of the many initiatives which helped companies to transition to Ind AS smoothly. 

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
© The Institute of Chartered Accountants of India
CHAPTER 72
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING UNDER
INDIAN ACCOUNTING
STANDARDS (IND AS)
LEARNING OUTCOMES
After studying this chapter, you would be able to:
 Identify the objectives of general purpose financial reporting.
 Apply qualitative characteristics of useful financial information
 Define the concept of financial statements and the reporting entity
 Describe the various elements of financial statements i.e. asset, liability,
income and expenses
 Explain the criteria for including assets and liabilities in financial
statements (recognition) and when to remove them (derecognition)
 Recognize measurement bases and when to use them
 Comprehend the concept of presentation and disclosure and its
importance as communication tools
 Explain the concept of capital and capital maintenance and identify how it
links to the concept of profit.

© The Institute of Chartered Accountants of India

 2.2 2.2 a
FINANCIAL REPORTING
v
v
UNIT OVERVIEW
Conceptual Framework for Financial Reporting

Objective of Objectives and usefulness of GPFR Economic resources

general purpose and claims
financial Limitations of GPFR
reporting Changes in economic
(GPFR) Information provided by GPFR resources and claims

Qualitative Qualitative Relevance Faithful representation

characteristics of characteristics
useful financial
Applying the Enhancing
information The cost constraint on fundamental qualitative qualitative
useful financial information characteristics characteristics
Financial
Objective
statements and Reporting Perspective adopted in Going concern
and scope
the reporting period financial statements assumption
entity
The reporting entity Consolidated and unconsolidated financial statements

The elements Link between asset Aspects which are

of financial information common to assets and
statements liability liabilities
Definitions of
equity

Recognition
income and expenses
process
Recognition
and Recognition Relevance Faithful representation
derecognition criteria

Derecognition Element of financial When does derecognition

statements normally occur?

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.3

Measurement bases of an asset or a liability

Information provided by particular measurement bases

of an asset or a
Factors for selecting a measurement basis for initial liability

Measurement
recognition and subsequent measurement

Factors specific to initial measurement

More than one measurement basis

Measurement of equity

Presentation Presentation and disclosure Classification Aggregation

and objectives and principles
disclosure

Concepts of
capital and Concepts of Concepts of capital Capital
capital capital maintenance and the maintenance
maintenance determination of profit adjustments

© The Institute of Chartered Accountants of India

 2.4 2.4 a
FINANCIAL REPORTING
v
v
UNIT 1: INTRODUCTION
The Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS)
(hereinafter the ‘Conceptual Framework under Ind AS’) is not a Standard and it does not override
any standard or any requirement in any standard. Therefore, this does not form part of a set of
standards pronounced by the standard-setters. While the Conceptual Framework under Ind AS
is primarily meant for the standard-setter for formulating the standards, it has relevance to the
preparers in certain situations such as to develop consistent accounting policies for areas that are
not covered by a standard or where there is a choice of accounting policy, and to assist all parties
to understand and interpret the Standards. As a result, certain individual standards e.g.
Ind AS 1, Presentation of Financial Statements, Ind AS 8, Accounting Policies, Changes in
Accounting Estimates and Errors, Ind AS 103, Business Combinations, etc., require the preparers
to follow the guidance in the Conceptual Framework for Financial reporting under Indian
Accounting Standards.
The Institute of Chartered Accountants of India (ICAI), in the past, has issued a pronouncement
with the title ‘Framework for the Preparation and Presentation of Financial Statements under
Indian Accounting Standards’. This framework was primarily based on the Framework issued by
the International Accounting Standards Board’s (IASB’s) predecessor body IASC in 1989
(Framework 1989). In March 2018, the IASB issued a comprehensive revised framework titled
‘Conceptual Framework for Financial Reporting’. In view of the issuance of new Conceptual
Framework by the IASB and with an objective to remain converged with the global accounting
framework, the ICAI has developed the Conceptual Framework under Ind AS corresponding to
IASB’s Conceptual Framework 2018.
The purpose of the Conceptual Framework under Ind AS can be summarised as below:

• Assist ICAI in formulation of Ind AS

Standard • Formulation to be based on consistent concepts
setting

• Assist preparers to develop consistent accounting policies when no Ind AS applies to a

particular transaction or event, OR
Consistent • When an Ind AS allows a choice of accounting policy
preparation

• Assist all parties to understand Ind AS

Interpreting • Interpretation of Ind AS
Ind AS

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.5

Ind AS or any requirement in an Ind AS overrides the Conceptual Framework under Ind AS. To
meet the objective of general-purpose financial reporting, the ICAI may sometimes specify
requirements that depart from aspects of the Conceptual Framework. If the ICAI does so, it will
explain the departure in the Appendix to the relevant Ind AS.

© The Institute of Chartered Accountants of India

 2.6 2.6 a
FINANCIAL REPORTING
v
v
UNIT 2
OBJECTIVE OF GENERAL PURPOSE FINANCIAL
REPORTING
2.1 OBJECTIVES AND USEFULNESS OF GENERAL
PURPOSE FINANCIAL REPORTING
The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions relating to providing resources to the entity. Those decisions involve decisions
about:
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising rights to vote on, or otherwise influence, management’s actions that affect the
use of the entity’s economic resources.
The chart below is intended to demonstrate the strong correlation between general purpose
financial reports and decision making process of relevant stakeholders:
Assessment of the
Financial
amount, timing Expectation of
information about
and uncertainty of returns i.e.
the economic
future net cash dividends,
resources of the Decisions of
inflows to the principal and
entity, claims investors, lenders
entity and interest
against the entity and other creditors
management's repayments,
and changes in
stewardship of the market price
those resources
entity's economic increases, etc.
and claims
resources

2.2 LIMITATIONS OF GENERAL PURPOSE FINANCIAL

REPORTING
General purpose financial reports:
 do not and cannot provide all of the information that existing and potential investors, lenders
and other creditors need. Those users need to consider pertinent information from other
sources, for example, general economic conditions and expectations, political events and
political climate, and industry and company outlooks;

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.7

 are not designed to show the value of a reporting entity; but they provide information to help
existing and potential investors, lenders and other creditors to estimate the value of the
reporting entity; and
 are not primarily directed to other parties, such as regulators and members of the public other
than investors, lenders and other creditors.

2.3 INFORMATION PROVIDED BY GENERAL PURPOSE

FINANCIAL REPORTS
The chart below provides an overview of the information sought to be provided in the general
purpose financial reports, which will, in turn, be used by the relevant stakeholders in making their
economic decisions, as presented in the flowchart above.

Financial Information

Financial Effects of transactions and other events that

Position change entity's economic resources and claims

Economic Financial Cash Changes not resulting

Claims
resources of entity performance Flows from financial
performance

Assets Liabilities Profit and Loss

2.3.1 Economic resources and claims

Information about the nature and amounts of a reporting entity’s economic resources and claims
can help users to identify the reporting entity’s financial strengths and weaknesses. That
information can help users to:
(a) assess the reporting entity’s:
(i) liquidity and solvency,
(ii) its needs for additional financing and
(iii) how successful it is likely to be in obtaining that financing
(b) assess management’s stewardship of the entity’s economic resources

© The Institute of Chartered Accountants of India

 2.8 2.8 a
FINANCIAL REPORTING
v
v
(c) predict how future cash flows will be distributed among those with a claim against the
reporting entity
2.3.2 Changes in economic resources and claims
Changes in a reporting entity’s economic resources and claims result from:
 that entity’s financial performance and
 other events or transactions such as issuing debt or equity instruments
To properly assess both the prospects for future net cash inflows to the reporting entity and
management’s stewardship of the entity’s economic resources, users need to be able to identify
those two types of changes.
2.3.2.1 Financial performance reflected by accrual accounting
Accrual accounting depicts the effects of transactions and other events and circumstances on a
reporting entity’s economic resources and claims in the periods in which those effects occur, even
if the resulting cash receipts and payments occur in a different period.
Such information is useful in:
 assessing the entity’s past and future ability to generate net cash inflows,
 indicating the extent to which the reporting entity has increased its available economic
resources, and thus its capacity for generating net cash inflows through its operations,
 helping users to assess management’s stewardship of the entity’s economic resources, and
 indicating the extent to which events such as changes in market prices or interest rates have
increased or decreased the entity’s economic resources and claims, thereby affecting the
entity’s ability to generate net cash inflows.
2.3.2.2 Financial performance reflected by past cash flows
Information about a reporting entity’s cash flows during a period helps in assessment of:
 entity’s ability to generate future net cash inflows, by helping users:
 understand reporting of entity’s operations,
 evaluate its financing and investing activities,
 assess its liquidity or solvency and
 interpret other information about financial performance
 management’s stewardship of the entity’s economic resources.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.9

2.3.2.3 Changes in economic resources and claims not resulting from financial performance
A reporting entity’s economic resources and claims may also change for reasons other than
financial performance, such as issuing debt or equity instruments. Information about this type of
change is necessary to give users a complete understanding of why the reporting entity’s
economic resources and claims changed and the implications of those changes for its future
financial performance.

© The Institute of Chartered Accountants of India

 2.10 a
2.10 FINANCIAL REPORTING
v
v
UNIT 3
QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
If financial information is to be useful, it must be relevant and faithfully represent what it purports
to represent. The usefulness of financial information is enhanced if it is comparable, verifiable,
timely and understandable.
Let’s look at these two fundamental qualitative characteristics in more detail.

3.1 QUALITATIVE CHARACTERISTICS OF USEFUL

FINANCIAL INFORMATION
3.1.1 Relevance
The following chart will explain what is considered as “relevant financial information”:

Financial information Makes it capable of

with (a) predictive value making a difference in Makes it relevant
or (b) confirmatory decisions made by financial information
value or both users

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 predictive value and confirmatory value of financial information are interrelated. Information
that has predictive value often also has confirmatory value.

Example 1
Revenue information for the current year, which can be used as the basis for predicting revenues
in future years, can also be compared with revenue predictions for the current year that were
made in past years. The results of those comparisons can help a user to correct and improve
the processes that were used to make those previous predictions.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.11

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. In other words, materiality is an
entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to
which the information relates in the context of an individual entity’s financial report. Consequently,
the ICAI cannot specify a uniform quantitative threshold for materiality or predetermine what could
be material in a particular situation.
3.1.2 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.

Example 2
A complete depiction of a group of assets would include, at a minimum, a description of the
nature of the assets in the group, a numerical depiction of all of the assets in the group,
and a description of what the numerical depiction represents (for example, historical cost
or fair value). For some items, a complete depiction may also entail explanations of
significant facts about the quality and nature of the items, factors and circumstances that
might affect their quality and nature, and the process used to determine the numerical
depiction (e.g. facts such as encumbrance / hypothecation / mortgage of items of Property,
Plant and Equipment against secured borrowings, disclosure of fair value of Investment
Property etc.).

 Neutral: A neutral depiction is without bias in the selection or presentation of financial

information. A neutral depiction is not slanted, weighted, emphasised, de-emphasised or
otherwise manipulated to increase the probability that financial information will be received
favourably or unfavourably by users.
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.

© The Institute of Chartered Accountants of India

 2.12 a
2.12 FINANCIAL REPORTING
v
v
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, 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.

Example 3
The use of reasonable estimates is an essential part of the preparation of financial
statements. Examples of estimates could include useful life of an item of Property, Plant
and Equipment, net realizable value of inventories, fair value of investment in an unlisted
entity, expected credit losses etc. As long as the estimates are fair, the financial statements
will be concluded to be free from error, even though the actual outcome may be different
from the original estimate.

3.1.3 Applying the fundamental qualitative characteristics

The most efficient and effective process for applying the fundamental qualitative characteristics
would usually be as follows:

Identify an economic phenomenon, information about which is capable of

being useful to users of the reporting entity’s financial information

Identify the type of information about that phenomenon that would be

most relevant

Determine whether that information is available and whether it can

provide a faithful representation of the economic phenomenon

If faithful representation is achieved, the process of satisfying the fundamental qualitative

characteristics ends at that point. If not, the process is repeated with the next most relevant type
of information.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.13

In some cases, a trade-off between the fundamental qualitative characteristics may need to be
made in order to meet the objective of financial reporting, which is to provide useful information
about economic phenomena. For example, the most relevant information about a phenomenon
may be a highly uncertain estimate. In some cases, the level of measurement uncertainty involved
in making that estimate may be so high that it may be questionable whether the estimate would
provide a sufficiently faithful representation of that phenomenon. In some such cases, the most
useful information may be the highly uncertain estimate, accompanied by a description of the
estimate and an explanation of the uncertainties that affect it. In other such cases, if that
information would not provide a sufficiently faithful representation of that phenomenon, the most
useful information may include an estimate of another type that is slightly less relevant but is
subject to lower measurement uncertainty. In limited circumstances, there may be no estimate
that provides useful information. In those limited circumstances, it may be necessary to provide
information that does not rely on an estimate.
3.1.4 Enhancing qualitative characteristics
As mentioned at the beginning of Unit 3, the usefulness of financial information is enhanced if it
is comparable, verifiable, timely and understandable. Having identified the fundamental
qualitative characteristics of useful financial information, let’s understand how to enhance the
usefulness by applying four enhancing qualitative characteristics.
 Comparability: Users’ decisions involve choosing between alternatives, for example, selling
or holding an investment, or investing in one reporting entity or another. Consequently,
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 is neither same as consistency, nor as uniformity. Comparability is the goal;
consistency helps to achieve that goal. 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. Direct verification means verifying an amount or other
representation through direct observation, for example, by counting cash. Indirect verification
means checking the inputs to a model, formula or other technique and recalculating the
outputs using the same methodology. An example is verifying the carrying amount of

© The Institute of Chartered Accountants of India

 2.14 a
2.14 FINANCIAL REPORTING
v
v
inventory by checking the inputs (quantities and costs) and recalculating the ending inventory
using the same cost flow assumption (for example, using the first-in, first-out method).
 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. Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to understand. However,
those reports would be incomplete and therefore possibly misleading. 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.
3.1.5 Applying the enhancing qualitative characteristics
 Enhancing qualitative characteristics should be maximised to the extent possible. However,
the enhancing qualitative characteristics, either individually or as a group, cannot make
information useful if that information is irrelevant or does not provide a faithful representation
of what it purports to represent.
 Applying the enhancing qualitative characteristics is an iterative process that does not follow
a prescribed order. Sometimes, one enhancing qualitative characteristic may have to be
diminished to maximise another qualitative characteristic. For example, a temporary
reduction in comparability as a result of prospectively applying a new Ind AS may be
worthwhile to improve relevance or faithful representation in the longer term. Appropriate
disclosures may partially compensate for non-comparability.

3.2 THE COST CONSTRAINT ON USEFUL FINANCIAL

INFORMATION
Cost is a pervasive constraint on the information that can be provided by financial reporting.
Reporting financial information imposes costs, and it is important that those costs are justified by
the benefits of reporting that information.
Both the providers and users of financial information incur costs in reporting and analysing
financial information. In applying the cost constraint, the ICAI assesses whether the benefits of

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.15

reporting particular information are likely to justify the costs incurred to provide and use that
information. When applying the cost constraint in formulating a proposed Ind AS, the ICAI seeks
information from providers of financial information, users, auditors, academics and others about
the expected nature and quantity of the benefits and costs of that Ind AS. In most situations,
assessments are based on a combination of quantitative and qualitative information.
Because of the inherent subjectivity, different individuals’ assessments of the costs and benefits
of reporting particular items of financial information will vary. Therefore, the ICAI seeks to
consider costs and benefits in relation to financial reporting generally, and not just in relation to
individual reporting entities.

© The Institute of Chartered Accountants of India

 2.16 a
2.16 FINANCIAL REPORTING
v
v
UNIT 4
FINANCIAL STATEMENTS AND THE REPORTING
ENTITY
In this unit, we will address two critical aspects:
 What are financial statements?
 What is reporting entity?

4.1 OBJECTIVE AND SCOPE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide financial information about the reporting entity’s:
 assets, liabilities and equity; and
 income and expenses
(i.e. the elements of the financial statements – we will discuss this in more detail in Unit 5)
that is useful to users of financial statements in assessing:
 the prospects for future net cash inflows to the reporting entity, and
 management’s stewardship of the entity’s economic resources.
Such financial information is provided:
(a) in the balance sheet, by recognising assets, liabilities and equity;
(b) in the statement of profit and loss, by recognising income and expenses; and
(c) in other statements and notes, by presenting and disclosing information about:
(i) recognised assets, liabilities, equity, income and expenses, including information about
their nature and about the risks arising from those recognised assets and liabilities;
(ii) assets and liabilities that have not been recognised, including information about their
nature and about the risks arising from them;
(iii) cash flows;
(iv) contributions from holders of equity claims and distributions to them; and
(v) the methods, assumptions and judgements used in estimating the amounts presented
or disclosed, and changes in those methods, assumptions and judgements.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.17

4.1.1 Reporting period

Financial statements are prepared for a specified period of time (reporting period) and to help
users of financial statements to identify and assess changes and trends; financial statements also
provide comparative information for at least one preceding reporting period.
Information about possible future transactions and other possible future events (forward-looking
information) is included in financial statements if it:
(a) relates to the entity’s assets or liabilities—including unrecognised assets or liabilities—or
equity that existed at the end of the reporting period, or during the reporting period, or to
income or expenses for the reporting period; and
(b) is useful to users of financial statements.
For example, if an asset or liability is measured by estimating future cash flows, information about
those estimated future cash flows may help users of financial statements to understand the
reported measures. Financial statements do not typically provide other types of forward-looking
information, for example, explanatory material about management’s expectations and strategies
for the reporting entity.
Financial statements include information about transactions and other events that have occurred
after the end of the reporting period if providing that information is necessary to meet the objective
of financial statements.
4.1.2 Perspective adopted in financial statements
Financial statements provide information about transactions and other events viewed from the
perspective of the reporting entity as a whole, not from the perspective of any particular group of
the entity’s existing or potential investors, lenders or other creditors.
4.1.3 Going concern assumption
Financial statements are normally prepared on the assumption that the reporting entity is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that the
entity has neither the intention nor the need to enter liquidation or to cease trading. If such an
intention or need exists, the financial statements may have to be prepared on a different basis. If
so, the financial statements describe the basis used.

© The Institute of Chartered Accountants of India

 2.18 a
2.18 FINANCIAL REPORTING
v
v

4.2 THE REPORTING ENTITY

A reporting entity is an entity that is required, or chooses, to prepare financial statements. A
reporting entity can be a single entity or a portion of an entity or can comprise more than one
entity. A reporting entity is not necessarily a legal entity.
Sometimes one entity (parent) has control over another entity (subsidiary). If a reporting entity
comprises both the parent and its subsidiaries, the reporting entity’s financial statements are
referred to as ‘consolidated financial statements’. If a reporting entity is the parent alone, the
reporting entity’s financial statements are referred to as ‘standalone financial statements’ or
‘separate financial statements’ as the case may be.
If a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary
relationship, the reporting entity’s financial statements are referred to as ‘combined financial
statements’.
If the reporting entity is not a legal entity and does not comprise only legal entities linked by a
parent-subsidiary relationship, how can the boundary of reporting entity be determined?
In such cases, determining the boundary of the reporting entity is driven by the information needs
of the primary users of the reporting entity’s financial statements. Those users need relevant
information that faithfully represents what it purports to represent. Faithful representation requires
that:
(a) the boundary of the reporting entity does not contain an arbitrary or incomplete set of
economic activities;
(b) including that set of economic activities within the boundary of the reporting entity results in
neutral information; and
(c) a description is provided of how the boundary of the reporting entity was determined and of
what constitutes the reporting entity.
4.2.1 Consolidated and unconsolidated financial statements
Consolidated financial statements provide information about the assets, liabilities, equity, income
and expenses of both the parent and its subsidiaries as a single reporting entity. That information
is useful for existing and potential investors, lenders and other creditors of the parent in their
assessment of the prospects for future net cash inflows to the parent. This is because net cash
inflows to the parent include distributions to the parent from its subsidiaries, and those
distributions depend on net cash inflows to the subsidiaries.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.19

Consolidated financial statements are not designed to provide separate information about the
assets, liabilities, equity, income and expenses of any particular subsidiary. A subsidiary’s own
financial statements are designed to provide that information.
Unconsolidated financial statements are designed to provide information about the parent’s
assets, liabilities, equity, income and expenses, and not about those of its subsidiaries. That
information can be useful to existing and potential investors, lenders and other creditors of the
parent because:
(a) a claim against the parent typically does not give the holder of that claim a claim against
subsidiaries; and
(b) in some jurisdictions, the amounts that can be legally distributed to holders of equity claims
against the parent depend on the distributable reserves of the parent.
Another way to provide information about some or all assets, liabilities, equity, income and
expenses of the parent alone in consolidated financial statements, is in the notes.
Information provided in unconsolidated financial statements is typically not sufficient to meet the
information needs of existing and potential investors, lenders and other creditors of the parent.
Accordingly, when consolidated financial statements are required, unconsolidated financial
statements cannot serve as a substitute for consolidated financial statements. Nevertheless, a
parent may require, or choose, to prepare unconsolidated financial statements in addition to
consolidated financial statements.

© The Institute of Chartered Accountants of India

 2.20 a
2.20 FINANCIAL REPORTING
v
v
UNIT 5
THE ELEMENTS OF FINANCIAL STATEMENTS
As explained in Unit 2, general purpose financial reports provide the information about:
 Financial position i.e. economic resources of the entity and claims against the entity; and
 Effects of transactions and other events that change entity's economic resources and
claims
The elements of financial statements defined in the Conceptual Framework under Ind AS are:
(a) assets, liabilities and equity, which relate to a reporting entity’s financial position; and
(b) income and expenses, which relate to a reporting entity’s financial performance.

5.1 LINK BETWEEN INFORMATION IN GENERAL PURPOSE

FINANCIAL REPORTS AS PER CONCEPTUAL
FRAMEWORK AND ELEMENTS OF FINANCIAL
STATEMENTS
In this Unit 5, we will discuss how the information in general purpose financial reports is
represented by the elements of financial statements. The table below links the two:

Information provided Element of Definition or description

by general purpose financial
financial reports statements

Economic Resources Asset A present economic resource controlled by the entity

as a result of past events.
An economic resource is a right that has the potential
to produce economic benefits.

Liability A present obligation of the entity to transfer an

economic resource as a result of past events.
Claim
Equity The residual interest in the assets of the entity after
deducting all its liabilities.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.21

Income Increases in assets, or decreases in liabilities, that

Changes in economic result in increases in equity, other than those relating
resources and claims, to contributions from holders of equity claims.
reflecting financial Expenses Decreases in assets, or increases in liabilities, that
performance result in decreases in equity, other than those
relating to distributions to holders of equity claims.

- Contributions from holders of equity claims, and

Other changes in distributions to them.
economic resources
and claims - Exchanges of assets or liabilities that do not result in
increases or decreases in equity.

5.2 DEFINITION OF AN ASSET

The definition of ‘asset’, which, in turn, is dependent on definition of economic resource, has three
key aspects – right, potential to produce economic benefits and control.
Let us look at these three aspects in more detail.
5.2.1 Right
The concept of what constitutes a ‘right’ is a very wide subject and can be better illustrated with
reference to various lenses through which it can be seen, and a couple of such lenses are
explained below. It must be understood that merely having a right does not mean the entity has
an ‘asset’.
5.2.1.1 Obligation of another party
Certain rights correspond to obligation of another party. For example:
 Rights to receive cash – say, when a loan or security deposit is given or debt instrument of
another entity is subscribed for
 Rights to receive goods or services – say, when an advance for purchase of inventory or
capital goods is given
 Rights to exchange economic resources with another party on favourable terms – say, a
forward contract to buy an economic resource on terms that are currently favourable or an
option to buy an economic resource

© The Institute of Chartered Accountants of India

 2.22 a
2.22 FINANCIAL REPORTING
v
v
 Rights to benefit from an obligation of another party to transfer an economic resource if a
specified uncertain future event occurs – say, an insurance claim receivable upon happening
of the insured event.
However, there are cases when a right exists even when no other party has any obligation towards
the entity. For example,
 Rights over physical objects, such as property, plant and equipment or inventories.
Examples of such rights are a right to use a physical object or a right to benefit from the
residual value of a leased object
 Rights to use intellectual property.
5.2.1.2 Contract, legislation or similar means
Many rights are established by contract, legislation or similar means. For example, an entity might
obtain rights from owning or leasing a physical object, from owning a debt instrument or an equity
instrument, or from owning a registered patent.
However, an entity might also obtain rights in other ways, for example:
(a) by acquiring or creating know-how that is not in the public domain; or
(b) through an obligation of another party that arises because that other party has no practical
ability to act in a manner inconsistent with its customary practices, published policies or
specific statements, often referred to as a ‘constructive obligation’.
Some goods or services—for example, employee services—are received and immediately
consumed. An entity’s right to obtain the economic benefits produced by such goods or services
exists momentarily until the entity consumes the goods or services.
Not all of an entity’s rights are assets of that entity — to be assets of the entity, the rights must
have the potential to produce for the entity economic benefits beyond those available to all other
parties. The concept of ‘asset’ can also be understood if we understand what rights do not
constitute asset. A couple of such situations are discussed below:
(a) Rights available to all parties without significant cost — for instance, rights of access to public
goods, such as public rights of way over land, or know-how that is in the public domain —
are typically not assets for the entities that hold them.
(b) Similarly, an entity cannot have a right to obtain economic benefits from itself. Hence:
(i) debt instruments or equity instruments issued by the entity and repurchased and held
by it—for example, treasury shares—are not economic resources of that entity; and

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.23

(ii) if a reporting entity comprises more than one legal entity, debt instruments or equity
instruments issued by one of those legal entities and held by another of those legal
entities are not economic resources of the reporting entity.
In principle, each of an entity’s rights is a separate asset. However, for accounting purposes,
related rights are often treated as a single unit of account that is a single asset. For example,
legal ownership of a physical object may give rise to several rights, including:
(a) the right to use the object;
(b) the right to sell rights over the object;
(c) the right to pledge rights over the object; and
(d) other rights not listed in (a)–(c).
In many cases, the set of rights arising from legal ownership of a physical object is accounted for
as a single asset. Conceptually, the economic resource is the set of rights, not the physical object.
Nevertheless, describing the set of rights as the physical object will often provide a faithful
representation of those rights in the most concise and understandable way.

Example 4
Ownership of land gives the entity the right to use the land, the right to sell the land, the right to
give the land on lease, the right to pledge land to obtain a secured loan etc. However, these
rights are normally bundled up as a single asset ‘Land’ as such classification provides a faithful
representation of those rights in the most concise and understandable way.

Lastly, in some cases, it is uncertain whether a right exists.

Example 5
An entity and another party might dispute whether the entity has a right to receive an economic
resource from that other party. Until that existence uncertainty is resolved — for example, by a
court ruling — it is uncertain whether the entity has a right and, consequently, whether an asset
exists.

5.2.2 Potential to produce economic benefits

Role of probability
For the potential to exist, it does not need to be certain, or even likely, that the right will produce
economic benefits. It is only necessary that the right already exists and that, in at least one
circumstance, it would produce for the entity economic benefits beyond those available to all other
parties.

© The Institute of Chartered Accountants of India

 2.24 a
2.24 FINANCIAL REPORTING
v
v
A right can meet the definition of an economic resource, and hence can be an asset, even if the
probability that it will produce economic benefits is low. Nevertheless, that low probability might
affect decisions about what information to provide about the asset and how to provide that
information, including decisions about whether the asset is recognised and how it is measured.

Example 6
Receivable from a bankrupt customer is a right, even if the measurement principle renders the net
carrying amount of such an asset as ‘nil’.
Role of timing
Although an economic resource derives its value from its present potential to produce future
economic benefits, the economic resource is the present right that contains that potential, not the
future economic benefits that the right may produce.
For example, a purchased option derives its value from its potential to produce economic benefits
through exercise of the option at a future date. However, the economic resource is the present
right—the right to exercise the option at a future date. The economic resource is not the future
economic benefits that the holder will receive if the option is exercised.
Role of expenditure
There is a close association between incurring expenditure and acquiring assets, but the two do
not necessarily coincide. Hence, when an entity incurs expenditure, this may provide evidence
that the entity has sought future economic benefits but does not provide conclusive proof that the
entity has obtained an asset. Similarly, the absence of related expenditure does not preclude an
item from meeting the definition of an asset. Assets can include, for example, rights that a
government has granted to the entity free of charge or that another party has donated to the entity.
5.2.3 Control
Control links an economic resource to an entity. Assessing whether control exists helps to identify
the economic resource for which the entity accounts. For example, an entity may control a
proportionate share in a property without controlling the rights arising from ownership of the entire
property. In such cases, the entity’s asset is the share in the property, which it controls, not the
rights arising from ownership of the entire property, which it does not control.
An entity controls an economic resource if:
(a) it has the present ability to direct the use of the economic resource i.e. it has the right to
deploy that economic resource in its activities, or to allow another party to deploy the
economic resource in that other party’s activities, and
(b) obtain the economic benefits that may flow from it. For an entity to control an economic
resource, the future economic benefits from that resource must flow to the entity either
directly or indirectly rather than to another party. This aspect of control does not imply that

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.25

the entity can ensure that the resource will produce economic benefits in all circumstances.
Instead, it means that if the resource produces economic benefits, the entity is the party that
will obtain them either directly or indirectly. Having exposure to significant variations in the
amount of the economic benefits produced by an economic resource may indicate that the
entity controls the resource. However, it is only one factor to consider in the overall
assessment of whether control exists.
An entity controls an economic resource if it has the present ability to direct the use of the
economic resource and obtain the economic benefits that may flow from it. Control includes the
present ability to prevent other parties from directing the use of the economic resource and from
obtaining the economic benefits that may flow from it. It follows that, if one party controls an
economic resource, no other party controls that resource.
Control of an economic resource usually arises from an ability to enforce legal rights. However,
control can also arise if an entity has other means of ensuring that it, and no other party, has the
present ability to direct the use of the economic resource and obtain the benefits that may flow
from it. For example, an entity could control a right to use know-how that is not in the public
domain if the entity has access to the know-how and the present ability to keep the know-how
secret, even if that know-how is not protected by a registered patent.
It must be remembered that if one party controls an economic resource, no other party controls
that resource.
Would control exist with the principal in a principal-agent relationship?
Sometimes one party (a principal) engages another party (an agent) to act on behalf of, and for
the benefit of, the principal. For example, a principal may engage an agent to arrange sales of
goods controlled by the principal. If an agent has custody of an economic resource controlled by
the principal, that economic resource is not an asset of the agent.
Furthermore, if the agent has an obligation to transfer to a third party an economic resource
controlled by the principal, that obligation is not a liability of the agent, because the economic
resource that would be transferred is the principal’s economic resource, not the agent’s.

5.3 DEFINITION OF A LIABILITY

For a liability to exist, three criteria must all be satisfied:

Obligation Present
is to obligation
Entity has
transfer as a result Liability
obligation
economic of past
resource events

© The Institute of Chartered Accountants of India

 2.26 a
2.26 FINANCIAL REPORTING
v
v
Let us look at these three criteria in more detail.
5.3.1 Obligation
An obligation is a duty or responsibility that an entity has no practical ability to avoid. An obligation
is always owed to another party (or parties). The other party (or parties) could be a person or
another entity, a group of people or other entities, or society at large. It is not necessary to know
the identity of the party (or parties) to whom the obligation is owed. However, a requirement for
one party to recognise a liability and measure it at a specified amount does not imply that the
other party (or parties) must recognise an asset or measure it at the same amount. For example,
particular Ind AS may contain different recognition criteria or measurement requirements for the
liability of one party and the corresponding asset of the other party (or parties) if those different
criteria or requirements are a consequence of decisions intended to select the most relevant
information that faithfully represents what it purports to represent.
Many obligations are established by contract, legislation or similar means and are legally
enforceable by the party (or parties) to whom they are owed. Obligations can also arise, however,
from an entity’s customary practices, published policies or specific statements if the entity has no
practical ability to act in a manner inconsistent with those practices, policies or statements. The
obligation that arises in such situations is sometimes referred to as a ‘constructive obligation’.
Whether an entity’s duty to transfer an economic resource, that is conditional on an action
that an entity itself may choose to take, is an obligation or not?
In such situations, the entity has an obligation if it has no practical ability to avoid taking that
action. A conclusion that it is appropriate to prepare an entity’s financial statements on a going
concern basis also implies a conclusion that the entity has no practical ability to avoid a transfer
that could be avoided only by liquidating the entity or by ceasing to trade.
The factors used to assess whether an entity has the practical ability to avoid transferring an
economic resource may depend on the nature of the entity’s duty or responsibility. For example,
in some cases, an entity may have no practical ability to avoid a transfer if any action that it could
take to avoid the transfer would have economic consequences significantly more adverse than the
transfer itself. However, neither an intention to make a transfer, nor a high likelihood of a transfer,
is sufficient reason for concluding that the entity has no practical ability to avoid a transfer.
5.3.2 Transfer of an economic resource
To satisfy this criterion, the obligation must have the potential to require the entity to transfer an
economic resource to another party (or parties). For that potential to exist, it does not need to be
certain, or even likely, that the entity will be required to transfer an economic resource — the
transfer may, for example, be required only if a specified uncertain future event occurs. It is only

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.27

necessary that the obligation already exists and that, in at least one circumstance, it would require
the entity to transfer an economic resource.
An obligation can meet the definition of a liability even if the probability of a transfer of an economic
resource is low. Nevertheless, that low probability might affect decisions about what information
to provide about the liability and how to provide that information, including decisions about whether
the liability is recognised and how it is measured.
Obligations to transfer an economic resource include, for example:
(a) obligations to pay cash.
(b) obligations to deliver goods or provide services.
(c) obligations to exchange economic resources with another party on unfavourable terms. Such
obligations include, for example, a forward contract to sell an economic resource on terms
that are currently unfavourable or an option that entitles another party to buy an economic
resource from the entity.
(d) obligations to transfer an economic resource if a specified uncertain future event occurs.
(e) obligations to issue a financial instrument if that financial instrument will oblige the entity to
transfer an economic resource.
Instead of fulfilling an obligation to transfer an economic resource to the party that has a right to
receive that resource, entities sometimes decide to, for example:
(a) settle the obligation by negotiating a release from the obligation;
(b) transfer the obligation to a third party; or
(c) replace that obligation to transfer an economic resource with another obligation by entering
into a new transaction.
It is however important to note that in the situations described above, the entity has the obligation
to transfer an economic resource until it has settled, transferred or replaced that obligation.
5.3.3 Present obligation as a result of past events
A present obligation exists as a result of past events only if:
(a) the entity has already obtained economic benefits (for example, goods or services obtained
from a supplier) or taken an action (for example, operating a particular business or operating
in a particular market); and
(b) as a consequence, the entity will or may have to transfer an economic resource that it would
not otherwise have had to transfer.

© The Institute of Chartered Accountants of India

 2.28 a
2.28 FINANCIAL REPORTING
v
v
A present obligation can exist even if a transfer of economic resources cannot be enforced until
some point in the future. For example, a contractual liability to pay cash may exist now even if
the contract does not require a payment until a future date. Similarly, a contractual obligation for
an entity to perform work at a future date may exist now even if the counterparty cannot require
the entity to perform the work until that future date.
An entity does not yet have a present obligation to transfer an economic resource if it has not yet
satisfied the criteria above, that is, if it has not yet obtained economic benefits, or taken an action,
that would or could require the entity to transfer an economic resource that it would not otherwise
have had to transfer.

Example 7
If an entity has entered into a contract to pay an employee a salary in exchange for receiving the
employee’s services, the entity does not have a present obligation to pay the salary until it has
received the employee’s services. Before then the contract is executory — the entity has a
combined right and obligation to exchange future salary for future employee services. We will
discuss more about ‘executory contracts’ in more detail later in this Chapter.

5.4 ASPECTS WHICH ARE COMMON TO ASSETS AND

LIABILITIES
5.4.1 Unit of account
The unit of account is the right or the group of rights, the obligation or the group of obligations, or
the group of rights and obligations, to which recognition criteria and measurement concepts are
applied.
A unit of account is selected for an asset or liability when considering how recognition criteria and
measurement concepts will apply to that asset or liability and to the related income and expenses.
In some circumstances, it may be appropriate to select one unit of account for recognition and a
different unit of account for measurement. For example, contracts may sometimes be recognised
individually but measured as part of a portfolio of contracts. For presentation and disclosure,
assets, liabilities, income and expenses may need to be aggregated or separated into
components.
A unit of account is selected to provide useful information, which implies that:
(a) the information provided about the asset or liability and about any related income and
expenses must be relevant; and

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.29

(b) the information provided about the asset or liability and about any related income and
expenses must faithfully represent the substance of the transaction or other event from which
they have arisen.
Sometimes, both rights and obligations arise from the same source. For example, some contracts
establish both rights and obligations for each of the parties. If those rights and obligations are
interdependent and cannot be separated, they constitute a single inseparable asset or liability and
hence form a single unit of account.
Conversely, if rights are separable from obligations, it may sometimes be appropriate to group the
rights separately from the obligations, resulting in the identification of one or more separate assets
and liabilities. In other cases, it may be more appropriate to group separable rights and
obligations in a single unit of account treating them as a single asset or a single liability.
5.4.2 Executory contracts
An executory contract is a contract, or a portion of a contract, that is equally unperformed —
neither party has fulfilled any of its obligations, or both parties have partially fulfilled their
obligations to an equal extent.
An executory contract establishes a combined right and obligation to exchange economic
resources. The right and obligation are interdependent and cannot be separated. Hence, the
combined right and obligation constitute a single asset or liability. The entity has an asset if the
terms of the exchange are currently favourable; it has a liability if the terms of the exchange are
currently unfavourable.
Whether such an asset or liability is included in the financial statements depends on both the
recognition criteria and the measurement basis selected for the asset or liability, including, if
applicable, any test for whether the contract is onerous.
5.4.3 Substance of contractual rights and contractual obligations
The terms of a contract create rights and obligations for an entity that is a party to that contract.
To represent those rights and obligations faithfully, financial statements report their substance. In
some cases, the substance of the rights and obligations is clear from the legal form of the contract.
In other cases, the terms of the contract or a group or series of contracts require analysis to
identify the substance of the rights and obligations.
All terms in a contract — whether explicit or implicit — are considered unless they have no
substance. Implicit terms could include, for example, obligations imposed by statute, such as
statutory warranty obligations imposed on entities that enter into contracts to sell goods to
customers.

© The Institute of Chartered Accountants of India

 2.30 a
2.30 FINANCIAL REPORTING
v
v
Terms that have no substance are disregarded. A term has no substance if it has no discernible
effect on the economics of the contract. Terms that have no substance could include, for example:
(a) terms that bind neither party; or
(b) rights, including options, that the holder will not have the practical ability to exercise in any
circumstances.
A group or series of contracts may achieve or be designed to achieve an overall commercial effect.
To report the substance of such contracts, it may be necessary to treat rights and obligations
arising from that group or series of contracts as a single unit of account. For example, if the rights
or obligations in one contract merely nullify all the rights or obligations in another contract entered
into at the same time with the same counterparty, the combined effect is that the two contracts
create no rights or obligations. Conversely, if a single contract creates two or more sets of rights
or obligations that could have been created through two or more separate contracts, an entity may
need to account for each set as if it arose from separate contracts in order to faithfully represent
the rights and obligations.

5.5 DEFINITION OF EQUITY

Equity claims are claims on the residual interest in the assets of the entity after deducting all its
liabilities. In other words, they are claims against the entity that do not meet the definition of a
liability.
Sometimes, legal, regulatory or other requirements affect particular components of equity, such
as share capital or retained earnings. For example, some such requirements permit an entity to
make distributions to holders of equity claims only if the entity has sufficient reserves that those
requirements specify as being distributable.

5.6 DEFINITION OF INCOME AND EXPENSES

Income is increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims.
It follows from these definitions of income and expenses that contributions from holders of equity
claims are not income, and distributions to holders of equity claims are not expenses.
Income and expenses are the elements of financial statements that relate to an entity’s financial
performance. Users of financial statements need information about both an entity’s financial

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.31

position and its financial performance. Hence, although income and expenses are defined in
terms of changes in assets and liabilities, information about income and expenses is just as
important as information about assets and liabilities.
Different transactions and other events generate income and expenses with different
characteristics. Providing information separately about income and expenses with different
characteristics can help users of financial statements to understand the entity’s financial
performance.

© The Institute of Chartered Accountants of India

 2.32 a
2.32 FINANCIAL REPORTING
v
v
UNIT 6
RECOGNITION AND DERECOGNITION
6.1 THE RECOGNITION PROCESS
 Recognition is the process of capturing for inclusion
 in the balance sheet or the statement of profit and loss
 an item
 that meets the definition of one of the elements of financial statements—an asset, a liability,
equity, income or expenses.
The amount at which an asset, a liability or equity is recognised in the balance sheet is referred
to as its ‘carrying amount’.
Recognition links the elements (as discussed in Unit 5), the balance sheet and the statement of
profit and loss as follows:
Opening Statement of Other changes Closing
Balance Sheet profit and loss in equity Balance Sheet

Contributions
from holders of
Assets (-) equity claims Assets (-)
Income (-) minus
Liabilities = Liabilities =
Expenses distributions to
Equity Equity
holders of equity
claims

The balance sheet and statement of profit and loss are linked because the recognition of one item
(or a change in its carrying amount) requires the recognition or derecognition of one or more other
items (or changes in the carrying amount of one or more other items). This principle can be
explained in the form of a journal entry as below:

Particulars Statement of Balance Sheet (alternatives)

profit or loss

Recognition of Credit Income Debit Asset Debit Liability

income

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.33

(initial recognition or (derecognition or

increase in carrying decrease in carrying
amount) amount)

Recognition of Debit Expense Credit Asset Credit Liability

expense (derecognition or (initial recognition or
decrease in carrying increase in carrying
amount) amount)

The initial recognition of assets or liabilities arising from transactions or other events may result
in the simultaneous recognition of both income and related expenses.
Example 8
The sale of goods for cash results in the recognition of both income (from the recognition of one
asset — the cash) and an expense (from the derecognition of another asset—the goods sold).
The simultaneous recognition of income and related expenses is sometimes referred to as the
matching of costs with income. It may be noted that matching of costs with income is not an
objective of the Conceptual Framework under Ind AS. The Conceptual Framework under Ind AS
does not allow the recognition in the balance sheet of items that do not meet the definition of an
asset, a liability or equity.

6.2 RECOGNITION CRITERIA

Only items that meet the definition of an asset, a liability or equity are recognised in the balance
sheet. Similarly, only items that meet the definition of income or expenses are recognised in the
statement of profit and loss. However, not all items that meet the definition of one of those
elements are recognised.
Not recognising an item that meets the definition of one of the elements makes the balance sheet
and the statement of profit and loss less complete and can exclude useful information from
financial statements. On the other hand, in some circumstances, recognising some items that
meet the definition of one of the elements would not provide useful information.
An asset or liability is recognised only if recognition provides users of financial statements with
information that is useful, i.e. with:
(a) relevant information; and
(b) a faithful representation
of the asset or liability and of any resulting income, expenses or changes in equity.

© The Institute of Chartered Accountants of India

 2.34 a
2.34 FINANCIAL REPORTING
v
v
What is useful to users depends on the item and the facts and circumstances. Consequently,
judgement is required when deciding whether to recognise an item, and thus recognition
requirements may need to vary between and within Ind AS.
It is important when making decisions about recognition to consider the information that would be
given if an asset or liability were not recognised. For example, if no asset is recognised when
expenditure is incurred, an expense is recognised. Over time, recognising the expense may, in
some cases, provide useful information, for example, information that enables users of financial
statements to identify trends.
Even if an item meeting the definition of an asset or liability is not recognised, an entity may need
to provide information about that item in the notes. It is important to consider how to make such
information sufficiently visible to compensate for the item’s absence from the structured summary
provided by the balance sheet and, if applicable, the statement of profit and loss.
Let’s look at the aspects of ‘relevance’ and ‘faithful presentation’ in a bit more detail.
6.2.1 Relevance
Information about assets, liabilities, equity, income and expenses is relevant to users of financial
statements. However, recognition of a particular asset or liability and any resulting income,
expenses or changes in equity may not always provide relevant information. That may be the
case if, for example:
(a) it is uncertain whether an asset or liability exists (see 6.2.1.1 below); or
(b) an asset or liability exists, but the probability of an inflow or outflow of economic benefits is
low (see 6.2.1.2 below)
The presence of one or both of the factors described above does not lead automatically to a
conclusion that the information provided by recognition lacks relevance. Moreover, factors other
than those described above may also affect the conclusion. It may be a combination of factors
and not any single factor that determines whether recognition provides relevant information.
6.2.1.1 Existence uncertainty
 Asset
In some cases, it is uncertain whether a right exists. For example, an entity and another
party might dispute whether the entity has a right to receive an economic resource from that
other party. Until that existence uncertainty is resolved — for example, by a court ruling —
it is uncertain whether the entity has a right and, consequently, whether an asset exists.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.35

 Liability
In some cases, it is uncertain whether an obligation exists. For example, if another party is
seeking compensation for an entity’s alleged act of wrongdoing, it might be uncertain whether
the act occurred, whether the entity committed it or how the law applies. Until that existence
uncertainty is resolved — for example, by a court ruling — it is uncertain whether the entity
has an obligation to the party seeking compensation and, consequently, whether a liability
exists.
In those cases, that uncertainty, possibly combined with a low probability of inflows or outflows of
economic benefits and an exceptionally wide range of possible outcomes, may mean that the
recognition of an asset or liability, necessarily measured at a single amount, would not provide
relevant information. Whether or not the asset or liability is recognised, explanatory information
about the uncertainties associated with it may need to be provided in the financial statements.
6.2.1.2 Low probability of an inflow or outflow of economic benefits
If the probability of an inflow or outflow of economic benefits is low, the most relevant information
about the asset or liability may be information about the magnitude of the possible inflows or
outflows, their possible timing and the factors affecting the probability of their occurrence. The
typical location for such information is in the notes.
However, in some cases, recognition of the asset or liability may provide relevant information
beyond the disclosure in the notes.
Even if the probability of an inflow or outflow of economic benefits is low, recognition of the asset
or liability may provide relevant information beyond the information described above. Whether
that is the case may depend on a variety of factors. For example:
(a) if an asset is acquired or a liability is incurred in an exchange transaction on market terms,
its cost generally reflects the probability of an inflow or outflow of economic benefits. Thus,
that cost may be relevant information, and is generally readily available. Furthermore, not
recognising the asset or liability would result in the recognition of expenses or income at the
time of the exchange, which might not be a faithful representation of the transaction.
(b) if an asset or liability arises from an event that is not an exchange transaction, recognition of
the asset or liability typically results in recognition of income or expenses. If there is only a
low probability that the asset or liability will result in an inflow or outflow of economic benefits,
users of financial statements might not regard the recognition of the asset and income, or
the liability and expenses, as providing relevant information.

© The Institute of Chartered Accountants of India

 2.36 a
2.36 FINANCIAL REPORTING
v
v
6.2.2 Faithful representation
Recognition of a particular asset or liability is appropriate if it provides not only relevant
information, but also a faithful representation of that asset or liability and of any resulting income,
expenses or changes in equity. Whether a faithful representation can be provided may be affected
by the level of measurement uncertainty associated with the asset or liability or by other factors.
6.2.2.1 Measurement uncertainty
For an asset or liability to be recognised, it must be measured. In many cases, such measures
must be estimated and are therefore subject to measurement uncertainty. The use of reasonable
estimates is an essential part of the preparation of financial information and does not undermine
the usefulness of the information if the estimates are clearly and accurately described and
explained. Even a high level of measurement uncertainty does not necessarily prevent such an
estimate from providing useful information.
In some cases, the level of uncertainty involved in estimating a measure of an asset or liability
may be so high that it may be questionable whether the estimate would provide a sufficiently
faithful representation of that asset or liability and of any resulting income, expenses or changes
in equity. The level of measurement uncertainty may be so high if, for example, the only way of
estimating that measure of the asset or liability is by using cash-flow-based measurement
techniques and, in addition, one or more of the following circumstances exists:
(a) the range of possible outcomes is exceptionally wide and the probability of each outcome
is exceptionally difficult to estimate.
(b) the measure is exceptionally sensitive to small changes in estimates of the probability of
different outcomes — for example, if the probability of future cash inflows or outflows
occurring is exceptionally low, but the magnitude of those cash inflows or outflows will be
exceptionally high if they occur.
(c) measuring the asset or liability requires exceptionally difficult or exceptionally subjective
allocations of cash flows that do not relate solely to the asset or liability being measured.
In some of the cases described above, the most useful information may be the measure that relies
on the highly uncertain estimate, accompanied by a description of the estimate and an explanation
of the uncertainties that affect it. This is especially likely to be the case if that measure is the
most relevant measure of the asset or liability. In other cases, if that information would not provide
a sufficiently faithful representation of the asset or liability and of any resulting income, expenses
or changes in equity, the most useful information may be a different measure (accompanied by
any necessary descriptions and explanations) that is slightly less relevant but is subject to lower
measurement uncertainty.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.37

In limited circumstances, all relevant measures of an asset or liability that are available (or can
be obtained) may be subject to such high measurement uncertainty that none would provide useful
information about the asset or liability (and any resulting income, expenses or changes in equity),
even if the measure were accompanied by a description of the estimates made in producing it and
an explanation of the uncertainties that affect those estimates. In those limited circumstances,
the asset or liability would not be recognised.
Whether or not an asset or liability is recognised, a faithful representation of the asset or liability
may need to include explanatory information about the uncertainties associated with the asset or
liability’s existence or measurement, or with its outcome — the amount or timing of any inflow or
outflow of economic benefits that will ultimately result from it.
It may be noted that the level of measurement uncertainty beyond which a measure does not
provide a faithful representation depends on facts and circumstances and so, the standard-setters
felt, that level can be determined only when developing Standards.
6.2.2.2 Other factors
Faithful representation of a recognised asset, liability, equity, income or expenses involves not
only recognition of that item, but also its measurement as well as presentation and disclosure of
information about it.
Hence, when assessing whether the recognition of an asset or liability can provide a faithful
representation of the asset or liability, it is necessary to consider not merely its description and
measurement in the balance sheet, but also:
 the depiction of resulting income, expenses and changes in equity. For example, if an entity
acquires an asset for consideration, not recognising the asset would result in recognising
expenses, and that result could provide a misleading representation that the entity’s financial
position has deteriorated.
 whether related assets and liabilities are recognised. If they are not recognised, recognition
may create a recognition inconsistency (accounting mismatch). That may not provide an
understandable or faithful representation of the overall effect of the transaction or other event
giving rise to the asset or liability, even if explanatory information is provided in the notes.
 presentation and disclosure of information about the asset or liability, and resulting income,
expenses or changes in equity. A complete depiction includes all information necessary for
a user of financial statements to understand the economic phenomenon depicted, including
all necessary descriptions and explanations. Hence, presentation and disclosure of related
information can enable a recognised amount to form part of a faithful representation of an
asset, a liability, equity, income or expenses.

© The Institute of Chartered Accountants of India

 2.38 a
2.38 FINANCIAL REPORTING
v
v

6.3 DERECOGNITION
Derecognition is the removal of all or part of a recognised asset or liability from an entity’s balance
sheet. Derecognition normally occurs when that item no longer meets the definition of an asset
or of a liability:

Element of financial When does derecognition normally occur?

statements

Asset When the entity loses control of all or part of the recognised asset

Liability When the entity no longer has a present obligation for all or part of the
recognised liability

The accounting requirements for derecognition are as below:

(a) derecognise any assets or liabilities that have expired or have been consumed, collected,
fulfilled or transferred (referred to as ‘transferred component’), and recognise any resulting
income and expenses.
(b) continue to recognise the assets or liabilities retained, referred to as the ‘retained
component’, if any. That retained component becomes a unit of account separate from the
transferred component. Accordingly, no income or expenses are recognised on the retained
component as a result of the derecognition of the transferred component, unless the
derecognition results in a change in the measurement requirements applicable to the retained
component. For example, when a parent loses control over a subsidiary and retains a
minority shareholding therein, the measurement principles in Ind AS require that minority
shareholding to be recognised at its fair value, the resulting gain or loss is then recognised
in statement of profit or loss.
(c) applying following presentation and disclosure requirements:
(i) presenting any retained component separately in the balance sheet
(ii) presenting separately in the statement of profit and loss any income and expenses
recognised as a result of the derecognition of the transferred component
(iii) providing explanatory information.
In some cases, an entity might appear to transfer an asset or liability, but derecognition of that
asset or liability is not appropriate. For example,

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.39

 if an entity has apparently transferred an asset but retains exposure to significant positive or
negative variations in the amount of economic benefits that may be produced by the asset,
this sometimes indicates that the entity might continue to control that asset
 if an entity has transferred an asset to another party that holds the asset as an agent for the
entity, the transferor still controls the asset.

© The Institute of Chartered Accountants of India

 2.40 a
2.40 FINANCIAL REPORTING
v
v
UNIT 7
MEASUREMENT
Elements recognised in financial statements are quantified in monetary terms. This requires the
selection of a measurement basis. A measurement basis is an identified feature — for example,
historical cost, fair value or fulfilment value — of an item being measured. Applying a
measurement basis to an asset or liability creates a measure for that asset or liability and for
related income and expenses.

7.1 MEASUREMENT BASES OF AN ASSET OR A LIABILITY

Historical cost Fair value

Measurement bases
Value in use (assets)
Current value Fulfilment value
(liabilities)

Current cost

A very broad comparison between the historical cost and current value measurement bases is
given below:

Factor Historical cost Current value

Monetary information Derived, at least in part, from Using information updated to reflect
about assets, liabilities the price of the transaction or conditions at the measurement date
and related income and other event that gave rise to
expenses them

Changes in values Not reflected except to the Reflect changes, since the previous
extent that those changes measurement date, in estimates of
relate to impairment of an cash flows and other factors
asset or a liability becoming reflected in those current values
onerous

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.41

7.1.1 Historical cost

The table below summarises the concept of ‘historical cost’ in case of assets and liabilities:

Particulars Assets Liabilities

Components Consideration paid (+) transaction Consideration received (-)

costs transaction costs

Changes  consumption of part or all of the

economic resource that
constitutes the asset
(depreciation or amortisation)

 payments received that  fulfilment of the liability, for

extinguish part or all of the asset example, by making payments
(collection from trade that extinguish part or all of the
receivables) liability or by satisfying an
obligation to deliver goods

 effect of events that cause the  effect of events that increase the
historical cost of the asset to be value of the obligation to transfer
no longer recoverable the economic resources needed
(impairment) to fulfil the liability to such an
extent that the liability becomes
onerous. A liability is onerous if
the historical cost is no longer
sufficient to depict the obligation
to fulfil the liability

 accrual of interest to reflect any accrual of interest to reflect any

financing component financing component

When an asset is acquired or created (say, a loan is given by a parent to a subsidiary), or a liability
is incurred or taken on, as a result of an event that is not a transaction on market terms (say, at a
discounted interest rate), it may not be possible to identify a cost, or the cost may not provide
relevant information about the asset or liability. In some such cases, a current value of the asset
(say, fair value) or liability is used as a deemed cost on initial recognition and that deemed cost
is then used as a starting point for subsequent measurement at historical cost (say, amortised
cost in case of the loan - see next paragraph for discussion on this).

© The Institute of Chartered Accountants of India

 2.42 a
2.42 FINANCIAL REPORTING
v
v
One way to apply a historical cost measurement basis to financial assets and financial liabilities
is to measure them at amortised cost. The amortised cost of a financial asset or financial liability
reflects estimates of future cash flows, discounted at a rate determined at initial recognition. For
variable rate instruments, the discount rate is updated to reflect changes in the variable rate. The
amortised cost of a financial asset or financial liability is updated over time to depict subsequent
changes, such as the accrual of interest, the impairment of a financial asset and receipts or
payments.
7.1.2 Current value

Current Value

Exit Value Entry value

Fair value Value in use (asset) Fulfilment Current cost

value (liability)

7.1.2.1 Exit value – Fair value and Value in use / Fulfilment value
The following table summarises these concepts in a comparative form:

Particulars Fair value Value in use / Fulfilment value

Definition Price that would be received to Value in use - present value of the cash
sell an asset, or paid to transfer a flows, or other economic benefits, that an
liability, in an orderly transaction entity expects to derive from the use of
between market participants at an asset and from its ultimate disposal.
the measurement date Fulfilment value - present value of the
cash, or other economic resources, that
an entity expects to be obliged to transfer
as it fulfils a liability.
Value from Reflects the perspective of Reflect entity-specific assumptions
whose market participants—participants rather than assumptions by market
perspective? in a market to which the entity has participants
access. The asset or liability is

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.43

measured using the same

assumptions that market
participants would use when
pricing the asset or liability if
those market participants act in
their economic best interest.
How Directly by observing prices in an Cannot be observed directly and are
determined? active market or using determined using cash-flow based
measurement techniques, for measurement techniques
example, cash-flow-based
measurement techniques
Transaction Neither those costs incurred on Those costs incurred on initial
costs initial recognition, nor those costs recognition are not considered, but the
considered in to be incurred on disposal of present value of those costs to be
measurement? asset or settlement of liability are incurred on disposal of asset or
considered. settlement of liability are considered.

7.1.2.2 Entry value – Current cost

Like historical cost, current cost is also an entry value. Hence, it would be appropriate to
understand the concept of ‘current cost’ by comparing it with ‘historical cost’ as below:

Particulars Historical cost Current cost

Value Date of acquisition of asset or Each measurement date
determined on incurrence of liability
Components Assets: Consideration paid Assets: Consideration that would be paid
(+) transaction costs (+) transaction costs that would be incurred
Liabilities: Consideration Liabilities: Consideration that would be
received (-) transaction costs received (-) transaction costs that would be
incurred

7.2 INFORMATION PROVIDED BY PARTICULAR

MEASUREMENT BASES
When selecting a measurement basis, it is important to consider the nature of the information that
the measurement basis will produce in both the balance sheet and the statement of profit and
loss. The tables below summarise that information.

© The Institute of Chartered Accountants of India

 2.44 a
2.44 FINANCIAL REPORTING
v
v
7.2.1 Assets
7.2.1.1 Balance Sheet

Historical cost Current cost Fair value Value in use

(market (entity-specific
participant assumptions)
assumptions)
Carrying Historical cost to Current cost to Price that would Present value of
amount – the extent the extent be received to future cash flows
primary unconsumed or unconsumed or sell the asset from the use of the
value uncollected, and uncollected, and asset and from its
recoverable recoverable ultimate disposal
(Includes
interest accrued
on any financing
component)
Transaction Included Included Without After deducting
costs deducting present value of
transaction costs transaction costs on
on disposal disposal

7.2.1.2 Statement of profit and loss

Event Historical cost Current cost Fair value Value in use

(market (entity-specific
participant assumptions)
assumptions)
Initial - - Difference Difference
recognition – between between
primary value consideration paid consideration paid
and fair value of and value in use of
the asset acquired the asset acquired
Transaction - - Expense Expense
costs –
purchase

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.45

Event Historical cost Current cost Fair value Value in use

(market (entity-specific
participant assumptions)
assumptions)
Sale or Expense: Expense: Expense: Fair Expense: Value in
consumption Historical cost of Current cost value of the asset use of the asset
of the asset the asset sold or of the asset sold or consumed sold or consumed
consumed (eg. sold or
Cost of sales of consumed
inventory or WDV
of a fixed asset)
Income: Consideration received
Expenses and Income could be presented gross or net
Transaction Included Included Included Already
costs – sale considered in
computation of
value in use, hence
not included
Interest At historical rates, At current Already included in Already included in
income updated if the rates fair value changes, value in use
asset bears could be identified changes, could be
variable interest separately identified
separately
Impairment Expense Expense Already included in Already included in
fair value changes, value in use
could be identified changes, could be
separately identified
separately
Value None, except Effect of Already included in Already included in
changes impairment change in fair value changes value in use
Financial assets – prices is changes
effect of changes income or
in estimated cash expense
flows is an income
or expense

© The Institute of Chartered Accountants of India

 2.46 a
2.46 FINANCIAL REPORTING
v
v
7.2.2 Liabilities
7.2.2.1 Balance Sheet

Historical cost Current cost Fair value Fulfilment value

(market (entity-specific
participant assumptions)
assumptions)

Carrying Consideration Consideration that Price that would Present value of

amount – received for taking would be currently be paid to future cash flows
primary on the unfulfilled received for taking transfer the that will arise in
value part of the liability, on the unfulfilled unfulfilled part fulfilling the
increased by part of the liability, of the liability unfulfilled part of
excess of increased by the liability
estimated cash excess of
outflows over estimated cash
consideration outflows over that
received. consideration.

Transaction Netted off from Netted off from Not including Including present
costs above above transaction value of
costs that would transaction costs
be incurred on to be incurred in
transfer fulfilment or
transfer

7.2.2.2 Statement of profit and loss

Event Historical cost Current cost Fair value Fulfilment value

(market (entity-specific
participant assumptions)
assumptions)
Initial - - Difference Difference
recognition – between between
primary value consideration consideration
received and the received and the
fair value of the fulfilment value of
liability the liability

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.47

Event Historical cost Current cost Fair value Fulfilment value

(market (entity-specific
participant assumptions)
assumptions)
Transaction - - Expense Expense
costs –
purchase
Income: Income: Income: fair Income: fulfilment
historical reflects current value of the value of the
Fulfilment or consideration consideration liability liability
transfer of the
Expenses: costs incurred in fulfilling the liability or cost paid to transfer the
liability
liability
Could be presented net or gross
Interest At historical At current rates Already included Already included
expense rates, updated if in fair value in changes in
the liability bears changes, could fulfilment value,
variable interest be identified could be identified
separately separately
Effect of Expenses = Expenses = Already included Already included
events that estimated cash estimated cash in fair value in changes in
cause a outflows minus outflows minus changes, could fulfilment value,
liability to historical cost of current cost of be identified could be identified
become the liability the liability separately separately
onerous
Value None, to the Effect of change Already included Already included
changes extent that the in prices is in fair value in changes in
liability is income or changes fulfilment value
onerous. expense
Financial
liabilities – effect
of changes in
estimated cash
flows is an
income or
expense

© The Institute of Chartered Accountants of India

 2.48 a
2.48 FINANCIAL REPORTING
v
v

7.3 FACTORS TO CONSIDER WHEN SELECTING A

MEASUREMENT BASIS FOR INITIAL RECOGNITION
AND SUBSEQUENT MEASUREMENT OF AN ASSET OR
A LIABILITY
In section 7.2, we have discussed the information that various measurement basis will produce in
both the balance sheet and the statement of profit and loss. While selecting a measurement basis,
it is necessary to consider such information.

Additionally, certain other factors must also be considered while selecting a measurement basis
for initial recognition and subsequent measurement and this section 7.3 focuses on the same.
Section 7.4 will focus on certain additional factors to be considered when selecting measurement
basis for initial measurement only.
In most cases, no single factor will determine which measurement basis should be selected. The
relative importance of each factor will depend on facts and circumstances. As discussed in Unit
3, the information provided by a measurement basis must be useful to users of financial
statements. To achieve this, the information must be relevant and it must faithfully represent what
it purports to represent. In addition, the information provided should be, as far as possible,
comparable, verifiable, timely and understandable.
The following chart lays down the overall scheme of factors relevant for selection of measurement
basis, besides the information provided by the same:

Factors for selection of measurement basis

Relevance Faithful representation

Asset or liability Contribution to future

Consistency Certainty
characteristics cash flows

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.49

7.3.1 Relevance
7.3.1.1 Characteristics of the asset or liability
The relevance of information provided by a measurement basis depends partly on the
characteristics of the asset or liability, in particular, on:
 Variability of cash flows, and
 Sensitivity of the value of the asset or liability to market factors or other risks
Asset or liability carried at historical cost
If the value of an asset or liability is sensitive to market factors or other risks, its historical cost
might differ significantly from its current value and hence may not provide relevant information if
information about changes in value is important to users of financial statements.
As an example, amortised cost cannot provide relevant information about a financial asset or
financial liability that is a derivative.
Furthermore, if historical cost is used, changes in value are reported not when that value changes,
but when an event such as disposal, impairment or fulfilment occurs. This could be incorrectly
interpreted as implying that all the income and expenses recognised at the time of that event
arose then, rather than over the periods during which the asset or liability was held.
Moreover, because measurement at historical cost does not provide timely information about
changes in value, income and expenses reported on that basis may lack predictive value and
confirmatory value by not depicting the full effect of the entity’s exposure to risk arising from
holding the asset or liability during the reporting period.
Asset or liability carried at fair value
Changes in the fair value of an asset or liability reflect changes in expectations of market
participants and changes in their risk preferences. Depending on the characteristics of the asset
or liability being measured and on the nature of the entity’s business activities, information
reflecting those changes may not always provide predictive value or confirmatory value to users
of financial statements. This may be the case when the entity’s business activities do not involve
selling the asset or transferring the liability.
As an example, if the entity holds assets solely for use or solely for collecting contractual cash
flows or if the entity is to fulfil liabilities itself, information reflecting changes in the fair value of an
asset or liability may not always provide predictive value or confirmatory value to users of financial
statements.

© The Institute of Chartered Accountants of India

 2.50 a
2.50 FINANCIAL REPORTING
v
v
7.3.1.2 Contribution to future cash flows
How economic resources are used, and hence how assets and liabilities produce cash flows,
depends in part on the nature of the business activities conducted by the entity.
When a business activity of an entity involves the use of several economic resources that produce
cash flows indirectly, by being used in combination to produce and market goods or services to
customers, historical cost or current cost is likely to provide relevant information about that activity.
For example, property, plant and equipment is typically used in combination with an entity’s other
economic resources. Similarly, inventory typically cannot be sold to a customer, except by making
extensive use of the entity’s other economic resources (for example, in production and marketing
activities). Paragraphs 6.24–6.31 and 6.40–6.42 of the Conceptual Framework explain how
measuring such assets at historical cost or current cost can provide relevant information that can
be used to derive margins achieved during the period.
For assets and liabilities that produce cash flows directly, such as assets that can be sold
independently and without a significant economic penalty (for example, without significant
business disruption), the measurement basis that provides the most relevant information is likely
to be a current value that incorporates current estimates of the amount, timing and uncertainty of
the future cash flows.
As discussed in more detail in the chapter on financial instruments, when a business activity of
an entity involves managing financial assets and financial liabilities with the objective of collecting
contractual cash flows, amortised cost may provide relevant information that can be used to derive
the margin between the interest earned on the assets and the interest incurred on the liabilities.
However, in assessing whether amortised cost will provide useful information, it is also necessary
to consider the characteristics of the financial asset or financial liability. Amortised cost is unlikely
to provide relevant information about cash flows that depend on factors other than principal and
interest.
7.3.2 Faithful representation
7.3.2.1 Consistency
When assets and liabilities are related in some way, using different measurement bases for those
assets and liabilities can create a measurement inconsistency (accounting mismatch). If financial
statements contain measurement inconsistencies, those financial statements may not faithfully
represent some aspects of the entity’s financial position and financial performance.
Therefore, when the cash flows from one asset or liability are directly linked to the cash flows from
another asset or liability, using the same measurement basis for related assets and liabilities may
provide users of financial statements with information that is more useful than the information that
would result from using different measurement bases. This may be particularly likely when the

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.51

cash flows from one asset or liability are directly linked to the cash flows from another asset or
liability.
7.3.2.2 Certainty
When a measure cannot be determined directly by observing prices in an active market and must
instead be estimated, measurement uncertainty arises. The level of measurement uncertainty
associated with a particular measurement basis may affect whether information provided by that
measurement basis provides a faithful representation of an entity’s financial position and financial
performance. A high level of measurement uncertainty does not necessarily prevent the use of a
measurement basis that provides relevant information. However, in some cases the level of
measurement uncertainty is so high that information provided by a measurement basis might not
provide a sufficiently faithful representation. In such cases, it is appropriate to consider selecting
a different measurement basis that would also result in relevant information.
Measurement uncertainty is different from both outcome uncertainty and existence uncertainty,
but their presence may sometimes contribute to measurement uncertainty.
(a) outcome uncertainty arises when there is uncertainty about the amount or timing of any inflow
or outflow of economic benefits that will result from an asset or liability.
(b) existence uncertainty arises when it is uncertain whether an asset or a liability exists.
The presence of outcome uncertainty or existence uncertainty may sometimes contribute to
measurement uncertainty. However, outcome uncertainty or existence uncertainty does not
necessarily result in measurement uncertainty. For example, if the fair value of an asset can be
determined directly by observing prices in an active market, no measurement uncertainty is
associated with the measurement of that fair value, even if it is uncertain how much cash the asset
will ultimately produce and hence there is outcome uncertainty.
Illustration 1: Derecognition vs. Faithful Representation
As at 31 st March 20X2, Natasha Ltd. carried trade receivables of 280 crores in its balance sheet.
At that date, Natasha Ltd. entered into a factoring agreement with Samantha Ltd., a financial
institution, according to which it transferred the trade receivables in exchange for an immediate
cash payment of 250 crores. As per the factoring agreement, any shortfall between the amount
collected and 250 crores will be reimbursed by Natasha Ltd. to Samantha Ltd. Once the trade
receivables have been collected, any amounts above 250 crores, less interest on this amount,
will be repaid to Natasha Ltd. The directors of Natasha Ltd. are of the opinion that the trade
receivables should be derecognized.
You are required to explain the appropriate accounting treatment of this transaction in the financial
statements for the year ending 31 st March 20X2, and also evaluate this transaction in the context
of the Conceptual Framework.

© The Institute of Chartered Accountants of India

 2.52 a
2.52 FINANCIAL REPORTING
v
v
Solution:
Accounting Treatment:
Trade Receivables fall within the ambit of financial assets under Ind AS 109, Financial
Instruments. Thus, the issue in question is whether the factoring arrangement entered into with
Samantha Ltd. requires Natasha Ltd. to derecognize the trade receivables from its financial
statements.
As per Para 3.2.3, 3.2.4, 3.2.5 and 3.2.6 of Ind AS 109, Financial Instruments, an entity shall
derecognise a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire, or
(b) it transfers the financial asset or substantially all the risks and rewards of ownership of the
financial asset to another party.
In the given case, since the trade receivables are appearing in the Balance Sheet of Natasha Ltd.
as at 31 st March 20X2 and are expected to be collected, the contractual rights to the cash flows
have not expired.
As far as the transfer of the risks and rewards of ownership is concerned, the factoring
arrangement needs to be viewed in its substance, rather than its legal form. Natasha Ltd. has
transferred the receivables to Samantha Ltd. for cash of 250 crores, and yet, it remains liable
for making good any shortfall between 250 crores and the amount collected by Samantha Ltd.
Thus, in substance, Natasha Ltd. is effectively liable for the entire 250 crores, although the
shortfall would not be such an amount. Accordingly, Natasha Ltd. retains the credit risk despite
the factoring arrangement entered.
It is also explicitly stated in the agreement that Samantha Ltd. would be liable to pay to
Natasha Ltd. any amount collected more than 250 crores, after retaining an amount towards
interest. Thus, Natasha Ltd. retains the potential rewards of full settlement.
A perusal of the above clearly shows that substantially all the risks and rewards continue to remain
with Natasha Ltd., and hence, the trade receivables should continue to appear in the Balance
Sheet of Natasha Ltd. The immediate payment (i.e. consideration as per the factoring agreement)
of 250 crores by Samantha Ltd. to Natasha Ltd. should be regarded as a financial liability, and
be shown as such by Natasha Ltd. in its Balance Sheet.
*****
According to the Conceptual Framework, an asset should be derecognized when control of all, or
part of an asset is lost.
As discussed in Section 6.3 above, in some cases, an entity might appear to transfer an asset or
liability, but derecognition of that asset or liability is not appropriate. For example, if an entity has
apparently transferred an asset but retains exposure to significant positive or negative variations
in the amount of economic benefits that may be produced by the asset, then this sometimes

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.53

indicates that the entity might continue to control that asset, which appears to be the case in the
current scenario.
The accounting requirements for derecognition aim to faithfully represent both:
(a) any assets and liabilities retained after the transaction or other event that led to the
derecognition (including any asset or liability acquired, incurred or created as part of the
transaction or other event); and
(b) the change in the entity’s assets and liabilities as a result of that transaction or other event.
Meeting both the above requirements becomes difficult if there is only a part disposal of an asset,
or there is a retention of some exposure to that asset. It is difficult to faithfully represent the legal
form (which is, in this scenario, a decrease in trade receivables under the factoring arrangement)
with the substance of retaining the corresponding risks and rewards.
In view of the difficulties in practical scenarios in meeting the two aims, the Conceptual Framework
does not advocate the use of a control approach or a risk-and-rewards approach to derecognition
in every circumstance.
As such, the treatment as per Ind AS 109, as well as the principles laid down in the Conceptual
Framework do not appear to be in conflict with each other in this case.
Illustration 2:
Explain the criteria in the Conceptual Framework for Financial Reporting for the recognition of an
asset and discuss whether there are inconsistencies with the criteria in Ind AS 38, Intangible
Assets.
Solution:
The Conceptual Framework defines an asset as a present economic resource controlled by the
entity as a result of past events. An economic resource is a right that has the potential to produce
economic benefits. Assets should be recognized if they meet the Conceptual Framework definition
of an asset and such recognition provides users of financial statements with information that is
useful (i.e. it is relevant as well as results in faithful representation). However, the criteria of a
cost-benefit analysis always exists i.e. the benefits of the information must be sufficient to justify
the costs of providing such information. The recognition criteria outlined in the Conceptual
Framework allows for flexibility in the application in amending or developing the standards.
Para 8 of Ind AS 38, Intangible Assets defines an intangible asset as an identifiable non-monetary
asset without physical substance. Further, Ind AS 38 defines an asset as a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.

© The Institute of Chartered Accountants of India

 2.54 a
2.54 FINANCIAL REPORTING
v
v
Furthermore, Para 21 of Ind AS 38 states that an intangible asset shall be recognised if, and only
if:
(a) it is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity; and
(b) the cost of the asset can be measured reliably.
This requirement is applicable both in case of an externally acquired intangible asset or an
internally generated intangible asset. The probability of expected future economic benefits must
be based on reasonable and supportable assumptions that represent management’s best estimate
of the set of economic conditions that will exist over the useful life of the asset. Further, as per
Para 33 of Ind AS 38, the probability recognition criterion is always considered to be satisfied for
intangible assets acquired in business combinations. If the recognition criteria are not satisfied,
Ind AS 38 requires the expenditure to be expensed as and when it is incurred.
It is notable that the Conceptual Framework does not prescribe a ‘probability criterion’. As long
as there is a potential to produce economic benefits, even with a low probability, an item can be
recognized as an asset according to the Conceptual Framework. However, in terms of intangible
assets, it could be argued that recognizing an intangible asset having low probability of generating
economic benefits would not be useful to the users of financial statements given that the asset
has no physical substance.
The recognition criteria and definition of an asset under Ind AS 38 are different as compared to
those outlined in the Conceptual Framework. To put in simple words, the criteria in Ind AS 38 are
more specific, but definitely do provide information that is relevant and a faithful representation.
When viewed from the prism of relevance and faithful representation, the requirements of
Ind AS 38 in terms of recognition appear to be consistent with the Conceptual Framework. Further,
in case of differences between conceptual framework and Ind AS, Ind AS would prevail.
*****
Illustration 3:
The directors of Hind Ltd. are particular about the usefulness of the financial statements. They
have opined that although Ind AS implement a fair value model, Ind AS are failing in reflecting the
usefulness of the financial statements as they do not reflect the financial value of the entity.
Discuss the views of the directors as regards the use of fair value in Ind AS and the fact that the
Ind AS do not reflect the financial value of an entity, making special reference to relevant Ind AS
and the Conceptual Framework.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.55

Solution:
Usage of Fair Value in Ind AS:
Treatment under Ind AS:
The statement of the directors regarding Ind AS implementing a fair value model is not entire
accurate. Although Ind AS do use fair value (and present value), it is not a complete fair value
system. Ind AS are often based on the business model of the entity and on the expectations of
realizing the asset- and liability-related cash flows through operations and transfers.
It is notable that what is preferred is a mixed measurement system, with some items being
measured at fair value while others measured at historical cost.
About Fair Value (Ind AS 113)
Ind AS 113 defines fair value as 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. This
price is an exit price.
Ind AS 113 has given consistency to the definition and application of fair value, and this
consistency is applied across other Ind AS, which are generally required to measure fair value in
accordance with Ind AS 113. However, it cannot be implied that Ind AS requires all assets and
liabilities to be measured at fair value. Rather, many entities measure most items at depreciated
historical costs, although the exception being in the case of business combinations, where assets
and liabilities are recorded at fair value on the date of acquisition. In other cases, usage of fair
value is restricted.
Examples of use of fair value in Ind AS:
(a) Ind AS 16 Property, Plant and Equipment permits revaluation through other comprehensive
income, provided it is carried out regularly.
(b) Disclosure of fair value of Investment Property in Ind AS 40, while the companies account
for the same under the cost model.
(c) Ind AS 38 Intangible Assets allows measurement of intangible assets at fair value with
corresponding changes in equity, but only if the assets can be measured reliably by way of
existence of an active market for them.
(d) Ind AS 109 Financial Instruments requires some financial assets and liabilities to be
measured at amortized cost and others at fair value. The measurement basis is largely
determined by the business model for that financial instrument. Where the financial
instruments are carried at fair value, depending on the category and circumstances, the

© The Institute of Chartered Accountants of India

 2.56 a
2.56 FINANCIAL REPORTING
v
v
movement in the fair value (gain or loss) is either recognized in profit or loss or in other
comprehensive income.
Financial value of an entity
Although Ind AS makes use of fair values in the measurement of assets and liabilities, the financial
statements prepared under Ind AS are not intended to reflect the aggregate value of the entity, as
could be the notion among people. As discussed in 2.2 above, the Conceptual Framework
specifically states that general purpose financial statements are not intended to show the value
of a reporting entity. Furthermore, such an attempt would not be fruitful as certain internally
generated intangible assets cannot be recognized under Ind AS. Instead, the objective of general
purpose financial reports is to provide financial information about the reporting entity which would
be useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
It is only in the case of acquisition of an entity by another entity and subsequent
consolidation in group accounts that an entity’s net assets are reported at fair value.
*****
7.3.3 Implications of enhancing qualitative characteristics for the
selection of measurement basis
As per Section 3.1.4, the usefulness of financial information is enhanced by applying four
enhancing qualitative characteristics – comparability, verifiability, timeliness and
understandability. Of these, timeliness has no specific implications for measurement. Let’s briefly
discuss the implications of the other three:
Comparability: Consistently using the same measurement bases for the same items, either from
period to period within a reporting entity or in a single period across entities, can help make
financial statements more comparable. A change in measurement basis can make financial
statements less understandable. However, a change may be justified if other factors outweigh
the reduction in understandability, for example, if the change results in more relevant information.
If a change is made, users of financial statements may need explanatory information to enable
them to understand the effect of that change.
Understandability: Understandability depends partly on how many different measurement bases
are used and on whether they change over time. In general, if more measurement bases are used
in a set of financial statements, the resulting information becomes more complex and, hence, less
understandable and the totals or subtotals in the balance sheet and the statement of profit and
loss become less informative. However, it could be appropriate to use more measurement bases
if that is necessary to provide useful information.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.57

Verifiability: Verifiability is enhanced by using measurement bases that result in measures that
can be independently corroborated either directly, for example, by observing prices, or indirectly,
for example, by checking inputs to a model. If a measure cannot be verified, users of financial
statements may need explanatory information to enable them to understand how the measure was
determined. In some such cases, it may be necessary to specify the use of a different
measurement basis.

7.4 FACTORS SPECIFIC TO INITIAL MEASUREMENT OF

AN ASSET OR A LIABILITY
As a general principle, the entities should use the same measurement basis for initial recognition
and subsequent measurement. Let’s look at the two possible scenarios of “at-market” transactions
and “off-market” transactions.
7.4.1 Transactions on market terms
Transactions using currency (i.e. cash):
At initial recognition, the cost of an asset acquired, or of a liability incurred is normally similar to
its fair value at that date, unless transaction costs are significant. Therefore, whether historical
cost or current value is used as a measurement basis subsequently, the same basis is also
normally appropriate at initial recognition.
Exchange of asset or liability
When an entity acquires an asset, or incurs a liability, in exchange for transferring another asset
or liability, the initial measure of the asset acquired, or the liability incurred, determines whether
any income or expenses arise from the transaction.
For example, if the asset transferred is carried for 100 in the books and the asset acquired is
initially measured at fair value (because it is subsequently measured at fair value), of say 120,
the difference of 20 is recognised in statement of profit and loss as an income. The reverse will
apply for a liability.
Continuing with the example above, if the asset acquired is subsequently measured at cost, no
income or expenses arise at initial recognition since the asset acquired is initially measured at
cost which is the fair value of the asset transferred i.e. given up, unless income or expenses arise
from the derecognition of the transferred asset or liability, or unless the asset is impaired or the
liability is onerous.

© The Institute of Chartered Accountants of India

 2.58 a
2.58 FINANCIAL REPORTING
v
v
7.4.2 Transactions not on market terms (or off-market transactions)
Assets may be acquired, or liabilities may be incurred, as a result of an event that is not a
transaction on market terms. For example:
(a) the transaction price may be affected by relationships between the parties;
(b) an asset may be granted to the entity free of charge by a government or
(c) an asset may be donated to the entity by another party;
(d) a liability may be imposed by legislation or regulation; or
(e) a liability to pay compensation or a penalty may arise from an act of wrongdoing.
In such cases, measuring the asset acquired, or the liability incurred, at its historical cost may not
provide a faithful representation of the entity’s assets and liabilities and of any income or expenses
arising from the transaction or other event. Hence, it may be appropriate to measure the asset
acquired, or the liability incurred, at deemed cost. In some such cases, a current value of the
asset or liability is used as a deemed cost on initial recognition and that deemed cost is then used
as a starting point for subsequent measurement at historical cost. Any difference between that
deemed cost and any consideration given or received would be recognised as income or expenses
at initial recognition.
Example 9
If a parent provides an interest free loan to its subsidiary, it is an off-market transaction. The loan,
in parent’s books, should be initially measured at its fair value and the difference between the
loan given and its fair value should be appropriately accounted for (refer Ind AS 109).
When assets are acquired, or liabilities incurred, as a result of an event that is not a transaction
on market terms, all relevant aspects of the transaction or other event need to be identified and
considered. For example, it may be necessary to recognise other assets, other liabilities,
contributions from holders of equity claims or distributions to holders of equity claims to faithfully
represent the substance of the effect of the transaction or other event on the entity’s financial
position and any related effect on the entity’s financial performance.
In the example given above, the difference shall be accounted for as an equity contribution
(classified as “investments”) in the books of the parent.

7.5 MORE THAN ONE MEASUREMENT BASIS

In some cases, consideration of the factors described in sections 7.3 and 7.4 above may lead to
the conclusion that more than one measurement basis is needed for an asset or liability and for

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.59

related income and expenses in order to provide relevant information that faithfully represents
both the entity’s financial position and its financial performance.
In most cases, the most understandable way to provide that information is:
(a) to use a single measurement basis both for the asset or liability in the balance sheet and for
related income and expenses in the statement of profit and loss ; and
(b) to provide in the notes additional information applying a different measurement basis.
However, in some cases, that information is more relevant, or results in a more faithful
representation of both the entity’s financial position and its financial performance, through the use
of:
(a) a current value measurement basis for the asset or liability in the balance sheet; and
(b) a different measurement basis for the related income and expenses in the profit or loss
section of statement of profit and loss
Example 10
An entity may choose to measure an interest bearing financial asset at fair value through other
comprehensive income. In this case, the total fair value change is separated and classified so
that:
(a) the profit or loss section of statement of profit and loss includes the interest income applying
the amortised cost as the measurement basis; and
(b) other comprehensive income includes all the remaining fair value changes.
For more details on the principles used in this example, refer to chapter on financial instruments.

Therefore, the principle for all such cases is stated as below:

The total income or total expenses arising in the period from the change in the current value of
the asset or liability is separated and classified so that:
(a) the profit or loss section of statement of profit and loss includes the income or expenses
measured applying the measurement basis selected for that statement; and

(b) other comprehensive income includes all the remaining income or expenses.
As a result, the accumulated other comprehensive income related to that asset or liability equals
the difference between:
(i) the carrying amount of the asset or liability in the balance sheet; and

© The Institute of Chartered Accountants of India

 2.60 a
2.60 FINANCIAL REPORTING
v
v
(ii) the carrying amount that would have been determined applying the measurement basis
selected for the profit or loss section of statement of profit and loss.

7.6 MEASUREMENT OF EQUITY

The total carrying amount of equity (total equity) is not measured directly. It equals the total of
the carrying amounts of all recognised assets less the total of the carrying amounts of all
recognised liabilities.
What ‘equity’ in the financial statements does not represent?
The general purpose financial statements are not designed to show an entity’s value. Hence, the
total carrying amount of equity will not generally equal:
(a) the aggregate market value of equity claims on the entity;
(b) the amount that could be raised by selling the entity as a whole on a going concern basis; or
(c) the amount that could be raised by selling all of the entity’s assets and settling all of its
liabilities.
Although total equity is not measured directly, it may be appropriate to measure directly the
carrying amount of some individual classes of equity and some components of equity.
Nevertheless, because total equity is measured as a residual, at least one class of equity cannot
be measured directly. Similarly, at least one component of equity cannot be measured directly.
The total carrying amount of an individual class of equity or component of equity is normally
positive but can be negative in some circumstances. Similarly, total equity is generally positive,
but it can be negative, depending on which assets and liabilities are recognised and on how they
are measured.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.61

UNIT 8
PRESENTATION AND DISCLOSURE
A reporting entity communicates information about its assets, liabilities, equity, income and
expenses by presenting and disclosing information in its financial statements.

8.1 PRESENTATION AND DISCLOSURE OBJECTIVES AND

PRINCIPLES
To facilitate effective communication of information in financial statements, when developing
presentation and disclosure requirements in Ind ASs a balance is needed between:
(a) giving entities the flexibility to provide relevant information that faithfully represents the
entity’s assets, liabilities, equity, income and expenses; and
(b) requiring information that is comparable, both from period to period for a reporting entity and
in a single reporting period across entities.
Effective communication in financial statements is also supported by considering the following
principles:
(a) entity-specific information is more useful than standardised descriptions; and
(b) duplication of information in different parts of the financial statements is usually unnecessary
and can make financial statements less understandable.

8.2 CLASSIFICATION
Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared
characteristics for presentation and disclosure purposes. Such characteristics include — but are
not limited to — the nature of the item, its role (or function) within the business activities conducted
by the entity, and how it is measured.
Classifying dissimilar assets, liabilities, equity, income or expenses together can obscure relevant
information, reduce understandability and comparability and may not provide a faithful
representation of what it purports to represent.
8.2.1 Classification of assets and liabilities
Classification is applied to the unit of account selected for an asset or liability. However, it may
sometimes be appropriate to separate an asset or liability into components that have different

© The Institute of Chartered Accountants of India

 2.62 a
2.62 FINANCIAL REPORTING
v
v
characteristics and to classify those components separately. That would be appropriate when
classifying those components separately would enhance the usefulness of the resulting financial
information. For example, it could be appropriate to separate an asset or liability into current and
non-current components and to classify those components separately.
8.2.2 Offsetting
Offsetting occurs when an entity recognises and measures both an asset and liability as separate
units of account, but groups them into a single net amount in the balance sheet. Offsetting
classifies dissimilar items together and therefore is generally not appropriate.
Offsetting assets and liabilities differs from treating a set of rights and obligations as a single unit
of account.
8.2.3 Classification of equity
To provide useful information, it may be necessary to classify equity claims separately if those
equity claims have different characteristics.
Similarly, to provide useful information, it may be necessary to classify components of equity
separately if some of those components are subject to particular legal, regulatory or other
requirements. For example, in some jurisdictions, an entity is permitted to make distributions to
holders of equity claims only if the entity has sufficient reserves specified as distributable.
Separate presentation or disclosure of those reserves may provide useful information.
8.2.4 Classification of income and expenses
Classification is applied to:
(a) income and expenses resulting from the unit of account selected for an asset or liability; or
(b) components of such income and expenses if those components have different characteristics
and are identified separately. For example, a change in the current value of an asset can
include the effects of value changes and the accrual of interest (see tables in section 7.2).
It would be appropriate to classify those components separately if doing so would enhance
the usefulness of the resulting financial information.
8.2.5 Profit or loss and other comprehensive income
Income and expenses are classified and included either:
(a) in the profit or loss section of statement of profit and loss; or
(b) outside the profit or loss section of statement of profit and loss, in other comprehensive
income.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.63

Because the profit or loss section of statement of profit and loss is the primary source of
information about an entity’s financial performance for the period, all income and expenses are,
in principle, included in that statement. However, in formulating Ind AS, the ICAI may decide in
exceptional circumstances that income or expenses arising from a change in the current value of
an asset or liability are to be included in other comprehensive income when doing so would result
in the profit or loss section of statement of profit and loss providing more relevant information, or
providing a more faithful representation of the entity’s financial performance for that period.
In principle, income and expenses included in other comprehensive income in one period are
reclassified from other comprehensive income into the profit or loss section of statement of profit
and loss in a future period when doing so results in the profit or loss section of statement of profit
and loss providing more relevant information or providing a more faithful representation of the
entity’s financial performance for that future period. However, if, for example, there is no clear
basis for identifying the period in which reclassification would have that result, or the amount that
should be reclassified, the ICAI may, in formulating Ind AS, decide that income and expenses
included in other comprehensive income are not to be subsequently reclassified.

8.3 AGGREGATION
Aggregation is adding together of assets, liabilities, equity, income or expenses that have shared
characteristics and are included in the same classification.
Aggregation makes information more useful by summarising a large volume of detail. However,
aggregation conceals some of that detail. Hence, a balance needs to be found so that relevant
information is not obscured either by a large amount of insignificant detail or by excessive
aggregation.
Different levels of aggregation may be needed in different parts of the financial statements. For
example, typically, the balance sheet and the statement of profit and loss provide summarised
information and more detailed information is provided in the notes.
Illustration 4:
Everest Ltd. is a listed company having investments in various subsidiaries. In its annual financial
statements for the year ending 31 st March 20X2 as well as 31 st March 20X3, Everest Ltd. classified
Kanchenjunga Ltd. a subsidiary as ‘held-for-sale’ and presented it as a discontinued operation.
On 1 st November 20X1, the shareholders had authorized the management to sell all of its holding
in Kanchenjunga Ltd. within the year. In the year to 31 st March 20X2, the management made a
public announcement of its intention to sell the investment but did not actively try to sell the
subsidiary as it was still operational within the Everest group.

© The Institute of Chartered Accountants of India

 2.64 a
2.64 FINANCIAL REPORTING
v
v
Certain organizational changes were made by Everest Ltd. during the year to 31 st March 20X3,
thereby resulting in additional activities being transferred to Kanchenjunga Ltd. Additionally,
during the year ending 31 st March 20X3, there had been draft agreements and some
correspondence with investment bankers, which showed in principle only that Kanchenjunga was
still for sale.
Discuss whether the classification of Kanchenjunga Ltd. as held for sale and its presentation as a
discontinued operation is appropriate, by referring to the principles of the relevant Ind AS and
evaluating the treatment in the context of the Conceptual Framework for Financial Reporting.
Solution:
Kanchenjunga Ltd. is a disposal group in accordance with Ind AS 105, Non-current Assets Held
for Sale and Discontinued Operations. Disposal group can be defined as a group of assets to be
disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly
associated with those assets that will be transferred in the transaction.
Para 6 of Ind AS 105 provides that a disposal group shall be classified as held for sale if its
carrying amount will be recovered principally through a sale transaction rather than through
continuing use. Ind AS 105 is particularly strict as far as the application of held for sale criteria is
concerned, and often the decision to sell an asset or a disposal group is made well before the
criteria are met.
Thus, as per Ind AS 105, for the asset (or disposal group) to be classified as held for sale, it must
be available for immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets (or disposal groups) and its sale must be highly probable.
For the sale to be highly probable:
 The appropriate level of management must be committed to a plan to sell the asset (or
disposal group).
 An active programme to locate a buyer and complete the plan must have been initiated.
 The asset (or disposal group) must be actively marketed for sale at a price that is reasonable
in relation to its current fair value.
 The sale should be expected to qualify for recognition as a completed sale within one year
from the date of classification.
 It is unlikely that significant changes to the plan will be made or that the plan will be
withdrawn.
In the given case, the draft agreements and correspondence with investment bankers are not
specific enough to fit in the points above to prove that the criteria for held for sale was met at that

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.65

date. Additional information would be needed to confirm that the subsidiary was available for
immediate sale, and that it was being actively marketed at an appropriate price so as to satisfy
the criteria in the year to 31 st March 20X2.
Further, the organizational changes made by Everest Ltd. in the year 20X2-20X3 are a good
indicator that Kanchenjunga Ltd. was not available for immediate sale in its present condition at
the point of classification. The fact that additional activities have been given to Kanchenjunga
Ltd. indicate that the change wasn’t insignificant. The shareholders had authorized for a year
from 1 st November 20X1. There is no evidence that this authorization extended beyond
1 st November 20X2.
Conclusion:
Based on the information provided in the given case, it appears that Kanchenjunga Ltd. should
not be classified by Everest Ltd. as a subsidiary held for sale. Instead, the results of the subsidiary
should be reported as a continuing operation in the financial statements for the year ending
31 st March 20X2 and 31 st March 20X3.
Evaluation of treatment in context of the Conceptual Framework
The Conceptual Framework states that the users need information to allow them to assess the
amount, timing and uncertainty of the prospects for future net cash inflows. Highlighting the
results of discontinued operations separately equips users with the information that is relevant to
this assessment as the discontinued operation will not contribute to cash flows in the future.
If a company has made a firm decision to sell the subsidiary, it could be argued that the subsidiary
should be classified as discontinued operation, even if the criteria to classify it as ‘held for sale’
as per Ind AS 105 have not been met, because this information would be more useful to users.
However, Ind AS 105 criteria was developed with high degree of strictness on classification.
Accordingly, this decision could be argued to be in conflict with the Conceptual Framework.
*****

© The Institute of Chartered Accountants of India

 2.66 a
2.66 FINANCIAL REPORTING
v
v
UNIT 9
CONCEPTS OF CAPITAL AND CAPITAL
MAINTENANCE
9.1 CONCEPTS OF CAPITAL

Concepts of capital

Financial concept
Physical concept
[Invested money / purchasing
power] [Operating capability]
Net assets or Equity Productive capacity

The selection of the appropriate concept of capital by an entity should be based on the needs of
the users of its financial statements. Thus, a financial concept of capital should be adopted if the
users of financial statements are primarily concerned with the maintenance of nominal invested
capital or the purchasing power of invested capital. If, however, the main concern of users is with
the operating capability of the entity, a physical concept of capital should be used. The concept
chosen indicates the goal to be attained in determining profit, even though there may be some
measurement difficulties in making the concept operational.

9.2 CONCEPTS OF CAPITAL MAINTENANCE AND THE

DETERMINATION OF PROFIT
The concept of capital maintenance is concerned with how an entity defines the capital that it
seeks to maintain. It provides the linkage between the concepts of capital and the concepts of
profit because it provides the point of reference by which profit is measured. In general terms, an
entity has maintained its capital if it has as much capital at the end of the period as it had at the
beginning of the period. Any amount over and above that required to maintain the capital at the
beginning of the period is profit.

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.67

There are two concepts of capital maintenance:

 Financial capital maintenance: Under this concept a profit is earned only if the financial (or
money) amount of the net assets at the end of the period exceeds the financial (or money)
amount of net assets at the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period. Financial capital maintenance can be measured
in either nominal monetary units or units of constant purchasing power.
 Physical capital maintenance: Under this concept a profit is earned only if the physical
productive capacity (or operating capability) of the entity (or the resources or funds needed
to achieve that capacity) at the end of the period exceeds the physical productive capacity
at the beginning of the period, after excluding any distributions to, and contributions from,
owners during the period.
The principal difference between the two concepts of capital maintenance is the treatment of the
effects of changes in the prices of assets and liabilities of the entity.
Under the concept of financial capital maintenance where capital is defined in terms of nominal
monetary units, profit represents the increase in nominal money capital over the period. Thus,
increases in the prices of assets held over the period, conventionally referred to as holding gains,
are, conceptually, profits. They may not be recognised as such, however, until the assets are
disposed of in an exchange transaction. When the concept of financial capital maintenance is
defined in terms of constant purchasing power units, profit represents the increase in invested
purchasing power over the period. Thus, only that part of the increase in the prices of assets that
exceeds the increase in the general level of prices is regarded as profit. The rest of the increase
is treated as a capital maintenance adjustment and, hence, as part of equity.
Under the concept of physical capital maintenance when capital is defined in terms of the physical
productive capacity, profit represents the increase in that capital over the period. All price
changes affecting the assets and liabilities of the entity are viewed as changes in the measurement
of the physical productive capacity of the entity; hence, they are treated as capital maintenance
adjustments that are part of equity and not as profit.

9.3 CAPITAL MAINTENANCE ADJUSTMENTS

The revaluation or restatement of assets and liabilities gives rise to increases or decreases in
equity. While these increases or decreases meet the definition of income and expenses, they are
not included in the income statement under certain concepts of capital maintenance. Instead
these items are included in equity as capital maintenance adjustments or revaluation reserves.

© The Institute of Chartered Accountants of India

 2.68 a
2.68 FINANCIAL REPORTING
v
v
Example 11
A trader commenced business on 1.1.20X1 with 12,000 represented by 6,000 units of a
certain product at 2 per unit. During the year 20X1, he sold these units at 3 per unit and
had withdrawn 6,000. Thus:
Opening Equity = 12,000 represented by 6,000 units at 2 per unit.
Closing Equity = 12,000 ( 18,000 – 6,000) represented entirely by cash.
Retained Profit = 12,000 – 12,000 = Nil
The trader can start year 20X2 by purchasing 6,000 units at 2 per unit once again for selling
them at 3 per unit. The whole process can repeat endlessly if there is no change in purchase
price of the product.
Example 12
In the previous example, suppose that the average price indices at the beginning and at the
end of year are 100 and 120 respectively.
Opening Equity = 12,000 represented by 6,000 units at 2 per unit.
Opening equity at closing price = ( 12,000 / 100) x 120 = 14,400 (6,000 x 2.40)
Closing Equity at closing price = 12,000 ( 18,000 – 6,000) represented entirely by cash.
Retained Profit = 12,000 – 14,400 = (-) 2,400
The negative retained profit indicates that the trader has failed to maintain his capital. The
available fund 12,000 is not sufficient to buy 6,000 units again at increased price 2.40 per
unit. In fact, he should have restricted his drawings to 3,600 ( 6,000 – 2,400).
Had the trader withdrawn 3,600 instead of 6,000, he would have left with 14,400, the fund
required to buy 6,000 units at 2.40 per unit.
Example 13 (Physical Capital Maintenance)
In the previous example, suppose that the price of the product at the end of year is 2.50 per
unit. In other words, the specific price index applicable to the product is 125.
Current cost of opening stock = ( 12,000 / 100) x 125 = 6,000 x 2.50 = 15,000
Closing cash after adjustment of stock at current costs = 9,000 [( 6,000 x 2.5) – 6,000]
Opening equity at closing current costs = 15,000
Closing equity at closing current costs = 9,000
Retained Profit = 9,000 – 15,000 = (-) 6,000

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.69

The negative retained profit indicates that the trader has failed to maintain his capital. The
available fund 9,000 is not sufficient to buy 6,000 units again at increased price 2.50 per
unit. There should not be any drawings in the year.
Had the trader withdrawn nothing during the year instead of 6,000, he would have left with
15,000, the fund required to buy 6,000 units at 2.50 per unit.
Capital maintenance can be computed under all three bases as shown below:
Financial Capital Maintenance at historical costs

Closing Capital (at historical cost) 12,000

Less: Capital to be maintained
Opening capital (At historical cost) 12,000
Introduction (At historical cost) NIL (12,000)
Retained profit 12,000
Financial Capital Maintenance at current purchasing power:

Closing Capital (at closing price) 12,000

Less: Capital to be maintained
Opening capital (at closing price) 14,400
Introduction (at closing price) NIL (14,400)
Retained profit (2,400)
Physical Capital Maintenance:

Closing Capital (at current cost) 9,000

Less: Capital to be maintained
Opening capital (at current cost) 15,000
Introduction (at current cost) NIL (15,000)
Retained profit (6,000)

© The Institute of Chartered Accountants of India

 2.70 a
2.70 FINANCIAL REPORTING
v
v
TEST YOUR KNOWLEDGE
Question
1. The directors of Jayant Ltd. have received the following email from its majority shareholder:
To: Directors of Jayant Ltd.
Re: Measurement
I recently read an article published in the financial press about the ‘mixed measurement
approach’ that is used by lots of companies. I hope Jayant Ltd. does not follow such an
approach because ‘mixed’ seems to imply ‘inconsistent’. I believe that consistency is of
paramount importance, and hence feel it would be better to measure everything in a uniform
manner. It would be appreciated if you could provide further information at the next annual
general meeting on measurement bases, covering what approach is taken by Jayant Ltd. and
why, and the potential effect such an approach has on the investors trying to analyse the
financial statements.
Prepare notes for the directors of Jayant Ltd. to discuss the issue raised in the shareholders’
email with reference to the Conceptual Framework wherever appropriate.
Answer
1. ‘Mixed measurement’ approach implies that a company selects different measurement bases
(e.g. historical cost or fair value) for its various assets and liabilities, rather than using one
single measurement basis for all items. The measurement basis so selected should reflect
the type of entity and the sector in which it operates and the business model that the entity
adopts.
There are criticisms of the mixed measurement approach, particularly under the IFRS regime,
because investors think that if different measurement bases are used for assets and
liabilities, the resulting figures could lack relevance or exhibit little meaning.
It is however important to note that figures of items in the financial statements cannot be
derived by following a one-size-fits-all approach. Such an approach may not provide relevant
information to users. A particular measurement basis may be easier to understand, more
verifiable and less costly to implement. Therefore, to state that ‘mixed measurement’
approach is ‘inconsistent’ is a poor argument. In reality, a mixed approach may actually
provide more relevant information to the stakeholders.
The Conceptual Framework confirms the allowance of the usage of a mixed measurement
approach in developing standards. The measurement methods included in the standards are

© The Institute of Chartered Accountants of India

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.71

those which the standard-setters believe provide the most relevant information and which
most faithfully represent the underlying transaction or event. Based on the reactions to the
convergence to Ind AS, it feels that most investors feel this approach is consistent with their
analysis of financial statements. Thus, the arguments against a mixed measurement are far
outweighed by the greater relevance achieved by such measurement bases.
Jayant Ltd. prepares its financial statements under Ind AS, and therefore applies the
measurement bases permitted in Ind AS. Ind AS adopt a mixed measurement basis, which
includes current value (fair value, value in use, fulfilment value and current cost) and
historical cost.
Where an Ind AS allows a choice of measurement basis, the directors of Jayant Ltd. must
exercise judgment as to which basis will provide the most useful information for its primary
users. Furthermore, when selecting a measurement basis, measurement uncertainty should
also be considered. The Conceptual Framework states that for some estimates, a high level
of measurement uncertainty may outweigh other factors to such an extent that the resulting
information may be of little relevance.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER
73

IND AS ON PRESENTATION
OF GENERAL PURPOSE
FINANCIAL STATEMENTS
UNIT 1 :
INDIAN ACCOUNTING STANDARD 1 :
PRESENTATION OF FINANCIAL STATEMENTS

LEARNING OUTCOMES
After studying this unit, you will be able to:
 List the scope and objective of Ind AS 1
 Define the relevant terms used in Ind AS 1
 Explain the purpose of financial statements
 Illustrate the complete set of financial statements
 Describe the general features of the financial statements
 Follow the structure and content of the financial statements
 Identify the various components of financial statements
 Prepare the disclosures to be made in the financial statements
 Discuss the significant differences in Ind AS 1 vis-à-vis AS 1
 Reconcile the carve out in Ind AS 1 from IAS 1.

© The Institute of Chartered Accountants of India

 3.2 2.2 a
FINANCIAL REPORTING
v
v
UNIT OVERVIEW

• Objective
• Scope
• Definitions
Ind AS 1

• Purpose of financial statements

• Complete set of financial statements
Financial • General features
Statements

• Identification of the financial statements

• Components of financial statements
Structure and
Content

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.3

1.1 IND AS 1 ‘PRESENTATION OF FINANCIAL

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

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

1.3 SCOPE
 This standard applies to all types of entities including those that present:
(a) consolidated financial statements in accordance with Ind AS 110 ‘Consolidated
Financial Statements’; and
(b) separate financial statements in accordance with Ind AS 27 ‘Separate Financial
Statements’.
 This standard does not apply to structure and content of condensed interim financial
statements prepared in accordance with Ind AS 34 except for para 15 to 35 of Ind AS 1.
 This Standard uses terminology that is suitable for profit-oriented entities, including public
sector business entities.

© The Institute of Chartered Accountants of India

 3.4 2.4 a
FINANCIAL REPORTING
v
v
 If entities with not for-profit activities in the private sector or the public sector apply this
Standard, they may need to amend the descriptions used for line items in the financial
statements and for the financial statements themselves.
 Similarly, entities that do not have equity as defined in Ind AS 32 Financial Instruments:
Presentation (e.g. some mutual funds) and entities whose share capital is not equity (e.g.
some co-operative entities) may need to adapt the financial statement presentation of
members’ or unit holders’ interests.

1.4 DEFINITIONS
1. Accounting policies are defined in paragraph 5 of Ind AS 8 Accounting Policies, Changes
in Accounting Estimates and Errors, and the term is used in this Standard with the same
meaning.
2. General purpose financial statements (referred to as ‘financial statements’) are those
intended to meet the needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs.
3. Impracticable: Applying a requirement is impracticable when the entity cannot apply it after
making every reasonable effort to do so.
4. Indian Accounting Standards (Ind AS) are Standards prescribed under Section 133 of the
Companies Act, 2013.
5. Material
Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of general-purpose financial statements make on
the basis of those financial statements, which provide financial information about a specific
reporting entity.
Materiality depends on the nature or magnitude of information, or both. An entity assesses
whether information, either individually or in combination with other information, is material
in the context of its financial statements taken as a whole.
Information is obscured if it is communicated in a way that would have a similar effect for
primary users of financial statements to omitting or misstating that information.
Examples of circumstances that may result in material information being obscured:
(a) information regarding a material item, transaction or other event is disclosed in the
financial statements but the language used is vague or unclear;

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.5

(b) information regarding a material item, transaction or other event is scattered throughout
the financial statements;
(c) dissimilar items, transactions or other events are inappropriately aggregated;
(d) similar items, transactions or other events are inappropriately disaggregated; and
(e) the understandability of the financial statements is reduced as a result of material
information being hidden by immaterial information to the extent that a primary user is
unable to determine what information is material.
Assessing whether information could reasonably be expected to influence decisions made
by the primary users of a specific reporting entity’s general purpose financial statements
requires an entity to consider the characteristics of those users while also considering the
entity’s own circumstances.
Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial
statements for much of the financial information they need. Consequently, they are the
primary users to whom general purpose financial statements are directed. Financial
statements 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.
6. Notes contain information in addition to that presented in the balance sheet, statement of
profit and loss, other comprehensive income, statement of changes in equity and statement
of cash flows. Notes provide narrative descriptions or disaggregation of items presented in
those statements and information about items that do not qualify for recognition in those
statements.
7. Owners are holders of instruments classified as equity.
8. Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income.
9. Reclassification adjustments are amounts reclassified to profit or loss in the current period
that were recognised in other comprehensive income in the current or previous periods.
10. Total comprehensive income is the change in equity during a period resulting from
transactions and other events, other than those changes resulting from transactions with
owners in their capacity as owners.

© The Institute of Chartered Accountants of India

 3.6 2.6 a
FINANCIAL REPORTING
v
v
Total comprehensive income comprises all components of ‘profit or loss’ and ‘other
comprehensive income’.

11. Other comprehensive income comprises items of income and expense (including
reclassification adjustments) that are not recognised in profit or loss as required or permitted
by other Ind AS.
The components of Other Comprehensive Income include the following:

S.No. Components Reference

1. Changes in revaluation surplus Ind AS 16 ‘Property, Plant and
Equipment’ and Ind AS 38
‘Intangible Assets’
2. Re-measurements of defined benefit plans Ind AS 19, Employee Benefits
3. Gains and losses arising from translating the Ind AS 21 ‘The Effects of Changes
financial statements of a foreign operation in Foreign Exchange Rates’
4. Gains and losses from investments in equity Paragraph 5.7.5 of Ind AS 109,
instruments designated at fair value through Financial Instruments
other comprehensive income
5. Gains and losses on financial assets Paragraph 4.1.2A of Ind AS 109
measured at fair value through other
comprehensive income
6. The effective portion of gains and losses on Paragraph 5.7.5 of Ind AS 109
hedging instruments in a cash flow hedge and
the gains and losses on hedging instruments
that hedge investments in equity instruments
measured at fair value through other
comprehensive income
7. For liabilities designated as at fair value Paragraph 5.7.7 of Ind AS 109
through profit or loss, the amount of the
change in fair value that is attributable to
changes in the liability’s credit risk
8. Changes in the value of the time value of Ind AS 109
options when separating the intrinsic value
and time value of an option contract and

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.7

designating as the hedging instrument only the

changes in the intrinsic value
9. Changes in the value of the forward elements Ind AS 109
of forward contracts when separating the
forward element and spot element of a forward
contract and designating as the hedging
instrument only the changes in the spot
element, and changes in the value of the
foreign currency basis spread of a financial
instrument when excluding it from the
designation of that financial instrument as the
hedging instrument

1.5 PURPOSE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide information about the financial position, financial
performance, and cash flows of an entity that is useful to a wide range of users in making economic
decisions. To meet the objective, financial statements provide information about an entity’s:
 assets;
 liabilities;
 equity;
 income and expenses, including gains and losses;
 contributions by and distributions to owners in their capacity as owners; and
 cash flows.
These information, along with other information in the notes, assists users of financial statements
in predicting the entity’s future cash flows and, in particular, their timing and certainty.

1.6 COMPLETE SET OF FINANCIAL STATEMENTS

A complete set of financial statements comprises:
 a balance sheet as at the end of the period;
 a statement of profit and loss for the period;
 statement of changes in equity for the period;

© The Institute of Chartered Accountants of India

 3.8 2.8 a
FINANCIAL REPORTING
v
v
 a statement of cash flows for the period;
 notes, comprising material accounting policy information and other explanatory information;
 comparative information in respect of the preceding period;
 a balance sheet as at the beginning of the preceding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatements of items in its
financial statements, or when it reclassifies items in its financial statements.
An entity shall present a single statement of profit and loss, with profit or loss and other
comprehensive income presented in two sections. The sections shall be presented together, with
the profit or loss section presented first followed directly by the other comprehensive income
section.
An entity shall present with equal prominence all of the financial statements in a complete set of
financial statements.
Many entities also present reports and statements (generally in annual reports) such as financial
reviews by management, environmental reports, and value added statements that are outside the
financial statements. Such reports and statements that are presented outside the financial
statements are outside the scope of Ind AS.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.9

Complete set of financial statements

includes

A balance A statement A s tatement A statement Notes, comprising significant

sheet of profit and of changes of cash accounting policies and other
loss in equity flows explanatory information

Comparative information for

As at the end narrative and descriptive
of the period For the period Of the preceding information shall be given if it
period (comparative is relevant for understanding
information for all the current period’s financial
Of the preceding period amounts reported in statements
(comparative information for the current period’s
all amounts reported in the financial
current period’s financial statements)
statements)

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; or
 it reclassifies items in its financial statements.

Note:
1. An entity shall present a single statement of profit and loss, with profit or loss and other
comprehensive income (OCI) presented in two sections. The sections shall be presented
together, with the profit or loss section presented first followed directly by the other
comprehensive income section.
2. Reports and statements presented outside financial statements are outside the scope of
Ind AS.
3. An entity is not required to present the related notes to the opening balance sheet as at
the beginning of the preceding period.

© The Institute of Chartered Accountants of India

 3.10 a
2.10 FINANCIAL REPORTING
v
v

1.7 GENERAL FEATURES OF FINANCIAL STATEMENTS

General Features

Presentatio Going Accrual Materiality Offsetting Frequency

n of True concern basis of and of reporting
and Fair accounting aggregation
View and
compliance
Consistency of Comparative
with Ind AS
presentation information

Change in accounting policy, Additional Minimum

retrospective restatement or comparative comparative
reclassification information information

1.7.1 Presentation of True and Fair View and compliance with Ind AS
Financial statements shall present a true and fair view of the financial position, financial
performance and cash flows of an entity. Presentation of true and fair view requires the faithful
representation of the effects of transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and expenses set out in the
Conceptual Framework. The application of Ind AS, with additional disclosure when necessary, is
presumed to result in financial statements that present a true and fair view.
1.7.1.1 An explicit and unreserved statement
An entity whose financial statements comply with Ind AS shall make an explicit and unreserved
statement of such compliance in the notes.
An entity shall not describe financial statements as complying with Ind AS unless they comply with
all the requirements of Ind AS. There may be disagreement between the Company and its auditor
on the applicability of any Ind AS or any particular requirement of any Ind AS and accordingly
auditor may qualify the audit report. Even in such a situation, the financial statements shall be
assumed to be Ind AS compliant.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.11

In virtually all circumstances, presentation of a true and fair view is achieved by compliance with
applicable Ind AS. Presentation of a true and fair view also requires an entity:
(a) to select and apply accounting policies in accordance with Ind AS 8 ‘Accounting Policies,
Changes in Accounting Estimates and Errors’. Ind AS 8 sets out a hierarchy of authoritative
guidance that management considers in the absence of an Ind AS that specifically applies
to an item.
(b) to present information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information.
(c) to provide additional disclosures when compliance with the specific requirements in Ind AS
is insufficient to enable users to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and financial performance.

An extract from the annual report of Tata Consultancy Services Limited for the
year ended 31 st March, 2022:
Notes forming part of Standalone Financial Statements
2) Statement of compliance
These standalone financial statements have been prepared in accordance with
the Indian Accounting Standards (referred to as “Ind AS”) as prescribed under
section 133 of the Companies Act, 2013 read with the Companies (Indian
Accounting Standards) Rules as amended from time to time.

1.7.1.2 Inappropriate Accounting Policies

An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory material.
1.7.1.3 Departure from the Requirements of an Ind AS — Whether Permissible?
In the extremely rare circumstances in which management concludes that compliance with a
requirement in an Ind AS would be so misleading that it would conflict with the objective of financial
statements set out in the Conceptual Framework, the entity shall depart from that requirement if
the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.
When an entity departs from a requirement of an Ind AS, it shall disclose:
(a) that management has concluded that the financial statements present a true and fair view of
the entity’s financial position, financial performance and cash flows;
(b) that it has complied with applicable Ind AS, except that it has departed from a particular
requirement to present a true and fair view;

© The Institute of Chartered Accountants of India

 3.12 a
2.12 FINANCIAL REPORTING
v
v
(c) the title of the Ind AS from which the entity has departed, the nature of the departure,
including the treatment that the Ind AS would require, the reason why that treatment would
be so misleading in the circumstances that it would conflict with the objective of financial
statements set out in the Conceptual Framework, and the treatment adopted; and
(d) for each period presented, the financial effect of the departure on each item in the financial
statements that would have been reported in complying with the requirement.
When an entity has departed from a requirement of an Ind AS in a prior period, and that departure
affects the amounts recognised in the financial statements for the current period, it shall make the
disclosures given above. For example, when an entity departed in a prior period from a
requirement in an Ind AS for the measurement of assets or liabilities and that departure affects
the measurement of changes in assets and liabilities recognised in the current period’s financial
statements.
In the extremely rare circumstances in which management concludes that compliance with a
requirement in an Ind AS would be so misleading that it would conflict with the objective of financial
statements set out in the Conceptual Framework, but the relevant regulatory framework prohibits
departure from the requirement, the entity shall to the maximum extent possible, reduce the
perceived misleading aspects of compliance by disclosing:
(a) the title of the Ind AS in question, the nature of the requirement, and the reason why
management has concluded that complying with that requirement is so misleading in the
circumstances that it conflicts with the objective of financial statements set out in the
Conceptual Framework; and
(b) for each period presented, the adjustments to each item in the financial statements that
management has concluded would be necessary to present a true and fair view.
An item of information would conflict with the objective of financial statements when it does not
represent faithfully the transactions, other events and conditions that it either purports to represent
or could reasonably be expected to represent and, consequently, it would be likely to influence
economic decisions made by users of financial statements. When assessing whether complying
with a specific requirement in an Ind AS would be so misleading that it would conflict with the
objective of financial statements set out in the Framework, management considers:
(a) why the objective of financial statements is not achieved in the particular circumstances; and
(b) how the entity’s circumstances differ from those of other entities that comply with the
requirement. If other entities in similar circumstances comply with the requirement, there is
a rebuttable presumption that the entity’s compliance with the requirement would not be so
misleading that it would conflict with the objective of financial statements set out in the
Framework.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.13

Presentation of True and Fair View and compliance with Ind AS

Of the financial position Of the financial performance Of the cash flows of an entity

Presentation of a true and fair view requires an entity to

To select and To present information, in a To provide additional

apply accounting manner that provides relevant, disclosures, if required, to
policies as per reliable, comparable and enable users to understand
Ind AS 8 understandable information the impact of particular item

When an entity departs from a requirement of an Ind AS (in extremely rare

circumstances), it shall disclose

Management’s Management’s  The title of the Ind AS For each

conclusion that compliance departed period
the financial with applicable  The nature of the departure presented, the
statements Ind AS, except  The treatment that the Ind financial effect
present a true departure from AS would require of the
and fair view a particular departure on
 The reason why that
requirement to each item in
treatment would be so
present a true the financial
misleading ; and
and fair view statements
 The treatment adopted

Note: An entity cannot rectify inappropriate accounting policies either by disclosure of

the accounting policies used or by notes or explanatory material.

© The Institute of Chartered Accountants of India

 3.14 a
2.14 FINANCIAL REPORTING
v
v
Illustration 1
An entity prepares its financial statements that contain an explicit and unreserved statement of
compliance with Ind AS. However, the auditor’s report on those financial statements contains a
qualification because of disagreement on application of one Accounting Standard. In such case,
is it acceptable for the entity to make an explicit and unreserved statement of compliance with
Ind AS?
Solution
Yes, it is possible for an entity to make an unreserved and explicit statement of compliance with
Ind AS, even though the auditor’s report contains a qualification because of disagreement on
application of Accounting Standard(s), as the preparation of financial statements is the
responsibility of the entity’s management and not the auditors. In case the management has a
bona fide reason to believe that it has complied with all Ind AS, it can make an explicit and
unreserved statement of compliance with Ind AS.
*****
1.7.2 Going concern
Financial statements prepared under Ind AS should be prepared on a going concern basis unless
management either intends to liquidate the entity or to cease trading or has no realistic alternative
but to do so. Management is required to assess, at the time of preparing the financial statements,
the entity's ability to continue as a going concern, and this assessment should cover the entity's
prospects for at least 12 months from the end of the reporting period. The 12-month period for
considering the entity's future is a minimum requirement; an entity cannot, for example, prepare
its financial statements on a going concern basis if it intends to cease operations 18 months from
the end of the reporting period.
The assessment of the entity's status as a going concern will often be straight forward. A profitable
entity with no financing problems will generally be a going concern. In other cases, management
might need to consider very carefully the entity's ability to meet its liabilities as they fall due.
Detailed cash flow and profit forecasts might be required to satisfy management that the entity is
a going concern.
The following are examples of events or conditions that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a going concern. This listing is neither all-
inclusive nor does the existence of one or more of the items always signify that a material
uncertainty exists:
 Net liability or net current liability position;

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.15

 Fixed-term borrowings approaching maturity without realistic prospects of renewal or

repayment; or excessive reliance on short-term borrowings to finance long-term assets;
 Indications of withdrawal of financial support by creditors;
 Negative operating cash flows indicated by historical or prospective financial statements;
 Adverse key financial ratios;
 Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows;
 Arrears or discontinuance of dividends;
 Inability to pay creditors on due dates;
 Inability to comply with the terms of loan agreements;
 Change from credit to cash-on-delivery transactions with suppliers;
 Inability to obtain financing for essential new product development or other essential
investments;
 Loss of key management without replacement;
 Loss of a major market, key customer(s), franchise, license, or principal supplier(s);
 Emergence of a highly successful competitor;
 Changes in law or regulation or government policy expected to adversely affect the entity.
If management has significant doubt of the entity’s ability to continue as a going concern, the
uncertainties should be disclosed.
In case the financial statements are not prepared on a going concern basis, the entity should
disclose the basis of preparation of financial statements and also the reason why the entity is not
regarded as a going concern.
Events that occur after the reporting period might indicate that the entity is no longer a going
concern. An entity does not prepare its financial statements on a going concern basis if
management’s post-year end assessment indicates that it is not a going concern. Any financial
statements that are prepared after that assessment (including the financial statements in respect
of which management are making the assessment) are not prepared on a going concern basis.
This is consistent with Ind AS 10, which requires a fundamental change to the basis of accounting
when the going concern assumption is no longer appropriate.

© The Institute of Chartered Accountants of India

 3.16 a
2.16 FINANCIAL REPORTING
v
v
Illustration 2
Entity XYZ is a large manufacturer of plastic products for the local market. On 1 st April, 20X6 the
newly elected government unexpectedly abolished all import tariffs, including the 40 per cent tariff
on all imported plastic products. Many other economic reforms implemented by the new
government contributed to the value of the country’s currency appreciating significantly against
most other currencies. The currency appreciation severely reduced the competitiveness of the
entity’s products.
Before 20X6 entity XYZ was profitable. However, because it was unable to compete with low
priced imports, entity XYZ went into losses. As at 31 st March, 20X7, entity XYZ’s equity was
1,000. During the second quarter of financial year ended 31 st March 20X7, the management
restructured entity’s operations. That restructuring helped reduce losses for the third and fourth
quarters to 400 and 380, respectively. During the year ended 31 st March, 20X7, entity XYZ
reported a loss of 4,000. In January 20X7, the local plastic industry and labour union lobbied
government to reinstate tariffs on plastic. On 15 th March, 20X7, the government announced that
it would reintroduce limited plastic import tariffs at 10 percent in 20X8. However, it emphasised
that those tariffs would not be as protective as the tariffs enacted by the previous government. In
its latest economic forecast, the government predicts a stable currency exchange rate in the short
term with a gradual weakening of the jurisdiction’s currency in the longer term.
Management of the entity XYZ undertook a going concern assessment at 31 st March, 20X7.
Management projects / forecasts that imposition of a 10 per cent tariff on the import of plastic
products would, at current exchange rates, result in entity XYZ returning to profitability. How
should the management of entity XYZ disclose the information about the going concern
assessment in entity XYZ’s 31 st March, 20X7 annual financial statements?
Solution
Going concern is a general feature to be considered while preparing the financial statements. As
per Ind AS 1, when preparing financial statements, management shall make an assessment of an
entity’s ability to continue as a going concern. An entity shall prepare financial statements on a
going concern basis unless management either intends to liquidate the entity or to cease trading
or has no realistic alternative but to do so. When management is aware, in making its assessment,
of material uncertainties related to events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. An
entity is required to disclose the facts, if the financial statements are not prepared on a going
concern basis. Along with the reason, as to why the financial statements are not prepared on a
going concern basis.
While assessing the going concern assumption, an entity is required to take into consideration all
factors covering atleast but not limited to 12 months from the end of reporting period.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.17

On the basis of Ind AS 1 and the facts and circumstances of this case, the following disclosure is
appropriate:
Extracts from the notes to entity XYZ’s 31 st March, 20X7 financial statements
Note 1: Basis of preparation
On the basis of management’s assessment at 31 st March 20X7, the financial statements have
been prepared on the going concern basis. However, management’s assessment assumes that
the government will reintroduce limited plastic import tariffs and that the currency exchange
rate will remain constant. On 15 th March 20X7, the government announced that limited import
tariffs will be imposed in 20X8. However, the government emphasised that the tariff would not
be as protective as the 40 percent tariff in effect before 20X7.
Provided that does not strengthen, management projects / forecasts that a 10 percent tariff
on all plastic products would result in entity XYZ returning to profitability. As at
31 st March, 20X7 entity XYZ had net assets of 1,000. If import tariffs are not imposed and
currency exchange rates remain unchanged, entity XYZ’s liabilities could exceed its assets by
the end of financial year 20X7-20X8. On the basis of their assessment of these factors,
management believes that entity XYZ is a going concern.

*****
1.7.3 Accrual basis of accounting
 An entity shall prepare its financial statements, except for cash flow information, using the
accrual basis of accounting.
 When the accrual basis of accounting is used, an entity recognises items as assets, liabilities,
equity, income and expenses (the elements of financial statements) when they satisfy the
definitions and recognition criteria for those elements in the Conceptual Framework.
1.7.4 Materiality and aggregation
 An entity shall present separately each material class of similar items. An entity shall present
separately items of a dissimilar nature or function unless they are immaterial except when
required by law.
 Financial statements result from processing large numbers of transactions or other events
that are aggregated into classes according to their nature or function. The final stage in the
process of aggregation and classification is the presentation of condensed and classified
data, which form line items in the financial statements. If a line item is not individually
material, it is aggregated with other items either in those statements or in the notes. An item

© The Institute of Chartered Accountants of India

 3.18 a
2.18 FINANCIAL REPORTING
v
v
that is not sufficiently material to warrant separate presentation in those statements may
warrant separate presentation in the notes.
 An entity shall not reduce the understandability of its financial statements by obscuring
material information with immaterial information or by aggregating material items that have
different natures or functions.
 An entity need not provide a specific disclosure required by an Ind AS if the information is
not material except when required by law.
Examples 1 - 3
1. Entity A has made a wrong classification of assets between 2 categories of plant and
machinery. Such a classification would not be material in amount if it affected two
categories of plant or machinery, however, it might be material if it changes the
classification between a non-current and a current asset category.
2. Losses from bad debts or pilferage that could be shrugged off as routine by a large
business may threaten the continued existence of a small business.
3. An error in inventory valuation may be material in a small enterprise for which it may cut
earnings by half but could be immaterial in an enterprise for which it might make a barely
perceptible ripple in the earnings.

*****
1.7.5 Offsetting
 An entity shall not offset assets and liabilities or income and expenses, unless required or
permitted by an Ind AS.
 An entity reports separately both assets and liabilities, and income and expenses. Measuring
assets net of valuation allowances — for example, obsolescence allowances on inventories
and doubtful debts allowances on receivables—is not offsetting.
 Ind AS 115, ‘Revenue from Contracts with Customers’, requires an entity to measure revenue
from contracts with customers at the amount of consideration to which the entity expects to
be entitled in exchange for transferring promised goods or services. For example, the
amount of revenue recognized reflects any trade discounts and volume rebates the entity
allows. An entity undertakes, in the course of its ordinary activities, other transactions that
do not generate revenue but are incidental to the main revenue-generating activities. An
entity presents the results of such transactions, when this presentation reflects the substance
of the transaction or other event, by netting any income with related expenses arising on the
same transaction.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.19

Examples 4 and 5
4. An entity presents gains and losses on the disposal of non-current assets, including
investments and operating assets, by deducting from the amount of consideration on
disposal the carrying amount of the asset and related selling expenses; and
5. An entity may net expenditure related to a provision that is recognised in accordance
with Ind AS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’, and
reimbursed under a contractual arrangement with a third party (for example, a supplier’s
warranty agreement) against the related reimbursement.

 In addition, an entity presents on a net basis gains and losses arising from a group of similar
transactions, for example, foreign exchange gains and losses or gains and losses arising on
financial instruments held for trading. However, an entity presents such gains and losses
separately if they are material.
Illustration 3
Is offsetting of revenue against expenses, permissible in case of a company acting as an agent
and having sub-agents, where commission is paid to sub-agents from the commission received
as an agent?
Solution
On the basis of the guidance regarding offsetting, net presentation in the given case would not be
appropriate, as it would not reflect substance of the transaction and would detract from the ability
of users to understand the transaction.
Accordingly, the commission received by the company as an agent is the gross revenue of the
company. The amount of commission paid by it to the sub-agent should be considered as an
expense and should not be offset against commission earned by it.
*****
1.7.6 Frequency of reporting
 An entity shall present a complete set of financial statements (including comparative
information) at least annually.
 When an entity changes the end of its reporting period and presents financial statements for
a period longer or shorter than one year, an entity shall disclose, in addition to the period
covered by the financial statements:
 the reason for using a longer or shorter period, and
 the fact that amounts presented in the financial statements are not entirely comparable.

© The Institute of Chartered Accountants of India

 3.20 a
2.20 FINANCIAL REPORTING
v
v
Example 6
In 20X8 entity ‘Superb’ was acquired by entity ‘Happy Go Luck’. To align its reporting date with
that of its parent, Superb changed the end of its annual reporting period from 31 st January to
31 st March. Consequently, entity Superb’s reporting period for the year ended 31 st March, 20X8
is 14 months. On the basis of these facts, the following disclosure would be appropriate:
Extract from the notes to entity Superb’s 31 st March, 20X8 financial statements:
Note 1
Basis of preparation and accounting policies
Reporting period
To align the entity’s reporting period with that of its parent (Happy Go Luck), the entity changed
the end of its reporting period from 31 st January to 31 st March. Amounts presented for the period
ended 31 st March, 20X8 are for 14 months. Comparative figures are for a 12 months period.
Consequently, comparative amounts for the statement of comprehensive income, statement of
changes in equity, statement of cash flows and related notes are not entirely comparable.

1.7.7 Comparative information

1.7.7.1 Minimum comparative information
 An entity should present comparative information in respect of the preceding period for all
amounts reported in the current period’s financial statements except when Ind AS permit or
require otherwise.
 Comparative information for narrative and descriptive information should be included if it is
relevant to understand the current period’s financial statements.

For example, in the current period an entity discloses details of a legal dispute whose
outcome was uncertain at the end of the immediately preceding reporting period and that is
yet to be resolved.

 An entity shall present, as a minimum:

 2 Balance Sheets
 2 Statement of Profit and Loss
 2 Statement of Cash Flows
 2 Statement of Changes in Equity and
 Related Notes.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.21

1.7.7.2 Additional comparative information

An entity may present comparative information in addition to the minimum comparative financial
statements required by Ind AS, as long as that information is prepared in accordance with Ind AS.
This comparative information may consist of one or more statements referred to in ‘Complete set
of financial statements’ but need not comprise a complete set of financial statements. When this
is the case, the entity shall present related note information for those additional statements.

Example 7
An entity may present a third statement of profit or loss (thereby presenting the current period,
the preceding period and one additional comparative period). However, the entity is not required
to present a third balance sheet, a third statement of cash flows or a third statement of changes
in equity (ie an additional financial statement comparative). The entity is required to present, in
the notes to the financial statements, the comparative information related to that additional
statement of profit or loss and other comprehensive income.

Illustration 4
A retail chain acquired a competitor in March, 20X1 and accounted for the business combination
under Ind AS 103 on a provisional basis in its 31 st March, 20X1 annual financial statements. The
business combination accounting was finalised in 20X1-20X2 and the provisional fair values were
updated. As a result, the 20X0-20X1 comparatives were adjusted in the 20X1-20X2 annual
financial statements. Does the restatement require an opening statement of financial position
(that is, an additional statement of financial position) as of 1 st April, 20X0?
Solution
An additional statement of financial position is not required, because the acquisition had no impact
on the entity’s financial position at 1 st April, 20X0.
*****
1.7.7.3 Change in accounting policy, retrospective restatement or reclassification
 When an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements or reclassifies items in its financial statements
and the retrospective application, retrospective restatement or the reclassification has a
material effect on the information in the balance sheet at the beginning of the preceding
period, it shall present, as a minimum, three balance sheets, two of each of the other
statements, and related notes. An entity presents balance sheets as at
 the end of the current period,

© The Institute of Chartered Accountants of India

 3.22 a
2.22 FINANCIAL REPORTING
v
v
 the end of the preceding period, and
 the beginning of the preceding period.
 When an entity is required to present an additional balance sheet as at the beginning of the
preceding period, it must disclose the information as required by Ind AS 8 and also the
information as explained in subsequent points. However, it need not present the related
notes to the opening balance sheet as at the beginning of the preceding period.
 When the entity changes the presentation or classification of items in its financial statements,
the entity shall reclassify comparative amounts unless reclassification is impracticable.
 When the entity reclassifies comparative amounts, the entity shall disclose:
 the nature of the reclassification;
 the amount of each item or class of items that is reclassified; and
 the reason for the reclassification.
 When it is impracticable to reclassify comparative amounts, an entity shall disclose:
 the reason for not reclassifying the amounts, and
 the nature of the adjustments that would have been made if the amounts had been
reclassified.
1.7.8 Consistency of presentation
An entity shall retain the presentation and classification of items in the financial statements from
one period to the next unless:
 it is apparent, following a significant change in the nature of the entity’s operations or a
review of its financial statements, that another presentation or classification would be more
appropriate having regard to the criteria for the selection and application of accounting
policies in Ind AS 8; or
 an Ind AS requires a change in presentation.

Example 8
A significant acquisition or disposal, or a review of the presentation of the financial statements,
might suggest that the financial statements need to be presented differently. An entity changes
the presentation of its financial statements only if the changed presentation provides information
that is reliable and more relevant to users of the financial statements and the revised structure is
likely to continue, so that comparability is not impaired. When making such changes in
presentation, an entity reclassifies its comparative information.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.23

1.8 STRUCTURE AND CONTENT

Ind AS 1 requires particular disclosures in the balance sheet or in the statement of profit and loss,
or in the statement of changes in equity and requires disclosure of other line items either in those
statements or in the notes. Ind AS 7, Statement of Cash Flows, sets out requirements for the
presentation of cash flow information.
1.8.1 Identification of Financial Statements
 An entity shall clearly identify the financial statements and distinguish them from other
information in the same published document. Ind AS apply only to financial statements, and
not necessarily to other information presented in an annual report, a regulatory filing, or
another document though they may be useful to users.
 An entity shall display the following information prominently:
 the name of the reporting entity or other means of identification, and any change in that
information from the end of the preceding reporting period
 whether the financial statements are of an individual entity or a group of entities;
 the date of end of reporting date or the period covered by the financial statements or notes
 the presentation currency
 the level of rounding used in presenting amounts in the financial statements.
 An entity meets above requirements by presenting appropriate headings for pages,
statements, notes, columns and the like. Judgement is required in determining the best
way of presenting such information.
For example, when an entity presents the financial statements electronically separate
pages are not always used; an entity then presents the above items to ensure that the
information included in the financial statements can be understood.
 An entity often makes financial statements more understandable by presenting
information in thousands or millions of units of the presentation currency. This is
acceptable as long as the entity discloses the level of rounding and does not omit
material information.

As per Schedule III of the Companies Act 2013, depending upon the total income of the
company, the figures appearing in the financial statements shall be rounded off as
below:

© The Institute of Chartered Accountants of India

 3.24 a
2.24 FINANCIAL REPORTING
v
v
 Less than one hundred crore rupees - To the nearest hundreds, thousands, lakhs
or millions, or decimals thereof.
 One hundred crore rupees or more- To the nearest, lakhs, millions or crores, or
decimals thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial
Statements.

1.8.2 Balance Sheet

At a minimum, the balance sheet shall include following line items:

a Property, plant and equipment

b Investment property

c Intangible assets

d Financial assets (excluding amounts shown under (e, h &i)

e Investments accounted for using the 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 in accordance with Ind AS 105 ‘Non-current Assets Held for Sale
and Discontinued Operations’

k Trade and other payables

l Provisions

m Financial liabilities (excluding amounts shown under k and l)

n Liabilities and assets for current tax, as defined in Ind AS 12 ‘Income Taxes’

o Deferred tax liabilities and deferred tax assets, as defined in Ind AS 12

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.25

p Liabilities included in disposal groups classified as held for sale in accordance with
Ind AS 105

q Non-controlling interests, presented within equity

r Issued capital and reserves attributable to owners of the parent

Additional line items, headings and subtotals in the balance sheet should be presented when such
presentation is relevant to an understanding of the entity’s financial position.
The descriptions of the line items, and the order in which they are shown, can be adapted
according to the entity's nature and its transactions.

Example 9
Financial institutions would amend the descriptions of line items to provide information that is
relevant to the operations of financial institutions.

1.8.2.1 Distinction between Current / Non-current

Entities preparing Ind AS financial statements are required to present the face of the balance
sheet, differentiating between current and non-current assets and between current and non-
current liabilities.
When an entity presents current and non-current assets, and current and non-current liabilities, as
separate classifications in its balance sheet, it shall not classify deferred tax assets (liabilities) as
current assets (liabilities).
An entity shall present current and non-current assets, and current and non-current liabilities, as
separate classifications in its balance sheet except when a presentation based on liquidity
provides information that is reliable and more relevant. When that exception applies, an entity
shall present all assets and liabilities in order of liquidity.
Whichever method of presentation is adopted, an entity shall disclose the amount expected to be
recovered or settled after more than twelve months for each asset and liability line item that
combines amounts expected to be recovered or settled:
a) no more than twelve months after the reporting period, and
b) more than twelve months after the reporting period.
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 useful
information by distinguishing the net assets that are continuously circulating as working capital
from those used in the entity’s long-term operations. It also highlights assets that are expected

© The Institute of Chartered Accountants of India

 3.26 a
2.26 FINANCIAL REPORTING
v
v
to be realised within the current operating cycle, and liabilities that are due for settlement within
the same period.
When an entity presents current and non-current assets, and current and non-current liabilities,
as separate classifications in its balance sheet, it shall not classify deferred tax assets (liabilities)
as current assets (liabilities).

Note:
1. Financial institutions may present assets and liabilities in increasing or decreasing order of
liquidity if the presentation is reliable and more relevant than a current / non-current
presentation. This is because such entity does not supply goods or services within a clearly
identifiable operating cycle.
2. An entity is permitted to present some of its assets and liabilities using a current / non-current
classification and others in order of liquidity. The need for a mixed basis of presentation
might arise when an entity has diverse operations.
1.8.2.2 Current Assets
An entity shall classify an asset as current when:
(a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the reporting period; or
(d) the asset is cash or a cash equivalent (as defined in Ind AS 7) unless the asset is restricted
from being exchanged or used to settle a liability for at least twelve months after the reporting
period.
An entity shall classify all other assets as non-current.
This Standard uses the term ‘non-current’ to include tangible, intangible and financial assets of a
long-term nature. It does not prohibit the use of alternative descriptions as long as the meaning
is clear.

An extract from the annual report of Reliance Industries Limited for the year ended
31 st March, 2022:
Notes to the Standalone Financial Statements for the year ended 31 st March, 2022
B.2 Summary of Significant Accounting Policies
(a) Current and Non-current Classification
The Company presents assets and liabilities in the Balance Sheet based on
Current/ Non-Current classification.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.27

An asset is treated as current when it is –

- Expected to be realised or intended to be sold or consumed in normal
operating cycle;
- Held primarily for the purpose of trading;
- Expected to be realised within twelve months after the reporting period, or
- Cash or cash equivalent unless restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting period.
All other assets are classified as non-current.
Deferred tax assets and liabilities are classified as non-current assets and
liabilities.

1.8.2.3 Operating Cycle

The operating cycle of an entity is the time between the acquisition of assets for processing and
their realisation in cash or cash equivalents. When the entity’s normal operating cycle is not
clearly identifiable, it is assumed to be twelve months. Current assets include assets (such as
inventories and trade receivables) that are sold, consumed or realised as part of the normal
operating cycle even when they are not expected to be realised within twelve months after the
reporting period. Current assets also include assets held primarily for the purpose of trading.
For example
 Some financial assets classified as held for trading in accordance with Ind AS 109
 Current portion of non-current financial assets.

Examples 10 -13
10. An entity produces whisky from barley, water and yeast in a 24-month distillation
process. At the end of the reporting period the entity has one month’s supply of barley
and yeast raw materials, 800 barrels of partly distilled whisky and 200 barrels of
distilled whisky.
All raw materials (barley and yeast) work in process (partly distilled whisky) and finished
goods (distilled whisky) are inventories. The raw materials are expected to be realised (ie
turned into cash after being processed into whisky) in the entity’s normal operating cycle.
Therefore, even though the realisation is expected to take place more than twelve months
after the end of the reporting period, the raw materials, work in progress and finished goods
are current assets.

© The Institute of Chartered Accountants of India

 3.28 a
2.28 FINANCIAL REPORTING
v
v
11. An entity owns a machine with which it manufactures goods for sale. It also owns the
building in which it carries out its commercial activities.
The machine and the building are non-current assets because:
 they are not cash or cash equivalents;
 they are not expected to be realised or consumed in the entity’s normal operating cycle;
 they are not held for the purpose of trading; and
 they are not expected to be realised within twelve months of the end of the reporting
period.
12. On 31 st December 20X2, an entity replaced a machine in its production line. The
replaced machine was sold to a competitor for 3,00,000. Payment is due 15 months
after the end of the reporting period.
The receivable is a non-current asset because:
 it is not cash or a cash equivalent;
 it is not expected to be realised or consumed in the entity’s normal operating cycle;
 it is not held for the purpose of trading; and
 it is not expected to be realised within twelve months of the end of the reporting period.
Note: If payment was due in less than twelve months from the end of the reporting period, it
would have been classified as a current asset.
13. On 1 st April, 20X2, XYZ Ltd invested 15,00,000 surplus funds in corporate bonds that
bear interest at 8 percent per year. Interest is payable on the corporate bonds on
1 st April, of each year. The principal is repayable in three annual instalments of
5,00,000 starting from 1 st April, 20X3.
In its statement of financial position at 31 st March, 20X3, the entity must present the
1,20,000 accrued interest and 5,00,000 current portion of the non-current loan (i.e. the
portion repayable on 31 st March, 20X3) as current assets because they are expected to be
realised within twelve months of the end of the reporting period.
The instalments of 10,00,000 due later than twelve months after the end of the reporting
period is presented as a non-current asset because it is not cash or a cash equivalent as it
is not expected to be realised or consumed in the entity’s normal operating cycle, it is not
held for the purpose of trading and it is not expected to be realised within twelve months of
the end of the reporting period.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.29

Illustration 5
X Ltd. provides you the following information:
Raw material stock holding period : 3 months
Work-in-progress holding period : 1 month
Finished goods holding period : 5 months
Debtors collection period : 5 months
You are requested to compute the operating cycle of X Ltd.
Solution
The operating cycle of X Ltd. will be computed as under:
Raw material stock holding period + Work-in-progress holding period + Finished goods holding
period + Debtors collection period = 3 + 1 + 5 + 5 = 14 months.
*****
Illustration 6
Inventory or trade receivables of X Ltd. are normally realised in 15 months. How should X Ltd.
classify such inventory / trade receivables: current or non-current if these are expected to be
realised within 15 months?
Solution
These should be classified as current.
*****
Illustration 7
B Ltd. produces aircrafts. The length of time between first purchasing raw materials to make the
aircrafts and the date the company completes the production and delivery is 9 months. The
company receives payment for the aircrafts 7 months after the delivery.
(a) What is the length of operating cycle?
(b) How should it treat its inventory and debtors?
Solution
(a) The length of the operating cycle will be 16 months.
(b) Assuming the inventory and debtors will be realised within normal operating cycle, i.e.,
16 months, both the inventory as well as debtors should be classified as current.
*****

© The Institute of Chartered Accountants of India

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

An extract from the annual report of Reliance Industries Limited for the year
ended 31 st March, 2022:
Notes to the Standalone Financial Statements for the year ended
31 st March, 2022
B.2 Summary of Significant Accounting Policies
(a) Current and Non-Current Classification
The Company presents assets and liabilities in the Balance Sheet based on
Current/ Non-Current classification.
A liability is current when:
- It is expected to be settled in normal operating cycle;
- It is held primarily for the purpose of trading;
- It is due to be settled within twelve months after the reporting period,
or
- There is no unconditional right to defer the settlement of the liability
for at least twelve months after the reporting period.
The Company classifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets and
liabilities.

 An entity shall classify all other liabilities as non-current.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.31

 Some current liabilities, such as trade payables and some accruals for employee and other
operating costs, are part of the working capital used in the entity’s normal operating cycle.
 An entity classifies such operating items as current liabilities even if they are due to be settled
more than twelve months after the reporting period.
 The same normal operating cycle applies to the classification of an entity’s assets and
liabilities.
 When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve
months.
 Other current liabilities which are not settled as part of the normal operating cycle, but are
due for settlement within twelve months after the reporting period or held primarily for the
purpose of trading.

Examples are some financial liabilities classified as held for trading in accordance with
Ind AS 109, bank overdrafts, and the current portion of non-current financial liabilities,
dividends payable, income taxes and other non-trade payables.

 Financial liabilities that provide financing on a long-term basis (i.e. are not part of the working
capital used in the entity’s normal operating cycle) and are not due for settlement within
twelve months after the reporting period are non-current liabilities.
 An entity classifies its financial liabilities as current when they are due to be settled within
twelve months after the reporting period, even if:
 the original term was for a period longer than twelve months, and
 an agreement to refinance, or to reschedule payments, on a long-term basis is
completed after the reporting period and before the financial statements are approved
for issue.
 If an entity expects, and has the discretion, to refinance or roll over an obligation for at least
twelve months after the reporting period under an existing loan facility, it classifies the
obligation as non-current, even if it would otherwise be due within a shorter period. However,
when refinancing or rolling over the obligation is not at the discretion of the entity (for
example, there is no arrangement for refinancing), the entity does not consider the potential
to refinance the obligation and classifies the obligation as current.
 When an entity breaches a provision of a long-term loan arrangement on or before the end
of the reporting period with the effect that the liability becomes payable on demand, the entity
does not classify the liability as current, even if the lender agreed, after the reporting period

© The Institute of Chartered Accountants of India

 3.32 a
2.32 FINANCIAL REPORTING
v
v
and before the approval of the financial statements for issue, not to demand payment as a
consequence of the breach.
 However, an entity classifies the liability as non-current if the lender agreed by the end of
the reporting period to provide a period of grace ending at least twelve months after the
reporting period, within which the entity can rectify the breach and during which the lender
cannot demand immediate repayment.
Illustration 8
On 1 st April, 20X3, Charming Ltd issued 1,00,000 10 bonds for 10,00,000. On 1 st April, each
year interest at the fixed rate of 8 percent per year is payable on outstanding capital amount of
the bonds (ie the first payment will be made on 1 st April, 20X4). On 1 st April each year (i.e from
1 st April, 20X4), Charming Ltd has a contractual obligation to redeem 10,000 of the bonds at 10
per bond. In its statement of financial position at 31 st March, 20X4. How should this be presented
in the financial statements?
Solution
Charming Ltd must present 80,000 accrued interest and 1,00,000 current portion of the non-
current bond (i.e. the portion repayable on 1 st April, 20X4) as current liabilities. The 9,00,000
due later than 12 months after the end of the reporting period is presented as a non-current
liability.
*****
Illustration 9
X Ltd provides you the following information:
Raw material stock holding period : 3 months
Work-in-progress holding period : 1 month
Finished goods holding period : 5 months
Debtors collection period : 5 months
The trade payables of the Company are paid in 12.5 months. Should these be classified as current
or non-current?
Solution
In this case, the operating cycle of X Ltd. is 14 months. Since the trade payables are expected to
be settled within the operating cycle i.e. 12.5 months, they should be classified as a current.
*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.33

Illustration 10
Entity A has two different businesses, real estate and manufacturing of passenger vehicles. With
respect to the real estate business, the entity constructs residential apartments for customers and
the normal operating cycle is three to four years. With respect to the business of manufacture of
passenger vehicles, normal operating cycle is 15 months. Under such circumstance where an
entity has different operating cycles for different types of businesses, how classification into
current and non-current be made?
Solution
As per paragraph 66(a) of Ind AS 1, an asset should be classified as current if an entity expects
to realise the same, or intends to sell or consume it in its normal operating cycle. Similarly, as
per paragraph 69(a) of Ind AS 1, a liability should be classified as current if an entity expects to
settle the liability in its normal operating cycle. In this situation, where businesses have different
operating cycles, classification of asset/liability as current/non- current would be in relation to the
normal operating cycle that is relevant to that particular asset / liability. It is advisable to disclose
the normal operating cycles relevant to different types of businesses for better understanding.
*****
Illustration 11
An entity has placed certain deposits with various parties. How the following deposits should be
classified, i.e., current or non-current?
(a) Electricity Deposit
(b) Tender Deposit/Earnest Money Deposit [EMD]
(c) GST Deposit paid under dispute or GST payment under dispute.
Solution
(a) Electricity Deposit - At all points of time, the deposit is recoverable on demand, when the
connection is not required. However, practically, such electric connection is required as long
as the entity exists. Hence, from a commercial reality perspective, an entity does not expect
to realise the asset within twelve months from the end of the reporting period. Hence,
electricity deposit should be classified as a non-current asset.
(b) Tender Deposit/Earnest Money Deposit [EMD] -Generally, tender deposit / EMD are paid
for participation in various bids. They normally become recoverable if the entity does not win
the bid. Bid dates are known at the time of tendering the deposit. But until the date of the
actual bid, one is not in a position to know if the entity is winning the bid or otherwise.

© The Institute of Chartered Accountants of India

 3.34 a
2.34 FINANCIAL REPORTING
v
v
Accordingly, depending on the terms of the deposit if entity expects to realise the deposit
within a period of twelve months, it should be classified as current otherwise non-current.
(c) GST Deposit paid under dispute or GST payment under dispute -Classification of GST
deposit paid to the Government authorities in the event of any legal dispute, which is under
protest would depend on the facts of the case and the expectation of the entity to realise the
same within a period of twelve months. In the case the entity expects these to be realised
within 12 months, it should classify such amounts paid as current otherwise these should be
classified as non-current.
*****
Illustration 12
Paragraph 69(a) of Ind AS 1 states “An entity shall classify a liability as current when it expects
to settle the liability in its normal operating cycle”. An entity develops tools for customers and this
normally takes a period of around 2 years for completion. The material is supplied by the customer
and hence the entity only renders a service. For this, the entity receives payment upfront and
credits the amount so received to “Income Received in Advance”. How should this “Income
Received in Advance” be classified, i.e., current or non-current?
Solution
Ind AS 1 provides “Some current liabilities, such as trade payables and some accruals for
employee and other operating costs, are part of the working capital used in the entity’s normal
operating cycle. An entity classifies such operating items as current liabilities even if they are due
to be settled more than twelve months after the reporting period.”
In accordance with the above, income received in advance would be classified as current liability
since it is a part of the working capital, which the entity expects to earn within its normal operating
cycle.
*****
Illustration 13
An entity has taken a loan facility from a bank that is to be repaid within a period of 9 months from
the end of the reporting period. Prior to the end of the reporting period, the entity and the bank
enter into an arrangement, whereby the existing outstanding loan will, unconditionally, roll into the
new facility which expires after a period of 5 years.
(a) How should such loan be classified in the balance sheet of the entity?
(b) Will the answer be different if the new facility is agreed upon after the end of the reporting
period?

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.35

(c) Will the answer to (a) be different if the existing facility is from one bank and the new facility
is from another bank?
(d) Will the answer to (a) be different if the new facility is not yet tied up with the existing bank,
but the entity has the potential to refinance the obligation?
Solution
(a) The loan is not due for payment at the end of the reporting period. The entity and the bank
have agreed for the said roll over prior to the end of the reporting period for a period of 5
years. Since the entity has an unconditional right to defer the settlement of the liability for at
least twelve months after the reporting period, the loan should be classified as non-current.
(b) Yes, the answer will be different if the arrangement for roll over is agreed upon after the end
of the reporting period, since assessment is required to be made based on terms of the
existing loan facility. As at the end of the reporting period, the entity does not have an
unconditional right to defer settlement of the liability for at least twelve months after the
reporting period. Hence the loan is to be classified as current.
(c) Yes, loan facility arranged with new bank cannot be treated as refinancing, as the loan with
the earlier bank would have to be settled which may coincide with loan facility arranged with
a new bank. In this case, loan has to be repaid within a period of 9 months from the end of
the reporting period, therefore, it will be classified as current liability.
(d) Yes, the answer will be different and the loan should be classified as current. This is
because, as per paragraph 73 of Ind AS 1, when refinancing or rolling over the obligation is
not at the discretion of the entity (for example, there is no arrangement for refinancing), the
entity does not consider the potential to refinance the obligation and classifies the obligation
as current.
*****
Illustration 14
In December 20X1 an entity entered into a loan agreement with a bank. The loan is repayable in
three equal annual instalments starting from December 20X5. One of the loan covenants is that
an amount equivalent to the loan amount should be contributed by promoters by 24 th March 20X2,
failing which the loan becomes payable on demand. As on 24 th March 20X2, the entity has not
been able to get the promoter’s contribution. On 25 th March, 20X2, the entity approached the
bank and obtained a grace period up to 30 th June, 20X2 to get the promoter’s contribution.
The bank cannot demand immediate repayment during the grace period. The annual reporting
period of the entity ends on 31 st March, 20X2.
(a) As on 31 st March, 20X2, how should the entity classify the loan?

© The Institute of Chartered Accountants of India

 3.36 a
2.36 FINANCIAL REPORTING
v
v
(b) Assume that in anticipation that it may not be able to get the promoter’s contribution by due
date, in February 20X2, the entity approached the bank and got the compliance date
extended up to 30 th June, 20X2 for getting promoter’s contribution. In this case will the loan
classification as on 31 st March, 20X2 be different from (a) above?
Solution
(a) Paragraph 75 of Ind AS 1, inter alia, provides, “An entity classifies the liability as non-current
if the lender agreed by the end of the reporting period to provide a period of grace ending at
least twelve months after the reporting period, within which the entity can rectify the breach
and during which the lender cannot demand immediate repayment.” In the present case,
following the default, grace period within which an entity can rectify the breach is less than
twelve months after the reporting period. Hence as on 31 st March 20X2, the loan will be
classified as current.
(b) Ind AS 1 deals with classification of liability as current or non-current in case of breach of a
loan covenant and does not deal with the classification in case of expectation of breach. In
this case, whether actual breach has taken place or not is to be assessed on 30 th June 20X2,
i.e., after the reporting date. Consequently, in the absence of actual breach of the loan
covenant as on 31 st March 20X2, the loan will retain its classification as non-current.
*****
Illustration 15
OMN Ltd has a subsidiary MN Ltd. OMN Ltd provides a loan to MN Ltd at 8% interest to be paid
annually. The loan is required to be paid whenever demanded back by OMN Ltd.
How should the loan be classified in the financial statements of OMN Ltd? Will it be any different
for MN Ltd?
Solution
The demand feature might be primarily a form of protection or a tax-driven feature of the loan.
Both parties might expect and intend that the loan will remain outstanding for the foreseeable
future. If so, the instrument is, in substance, long-term in nature, and accordingly, OMN Ltd would
classify the loan as a non-current asset.
However, OMN Ltd would classify the loan as a current asset if both the parties intend that it will
be repaid within 12 months of the reporting period.
MN Ltd would classify the loan as current because it does not have the right to defer repayment
for more than 12 months, regardless of the intentions of both the parties.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.37

The classification of the instrument could affect initial recognition and subsequent measurement.
This might require the entity’s management to exercise judgement, which could require disclosure
under judgements and estimates.
*****
1.8.2.5 Information to be provided in the Balance Sheet or in the notes
 An entity shall disclose, either in the balance sheet or in the notes, further sub-classifications
of the line items presented, classified in a manner appropriate to the entity’s operations.

 The detail provided in sub-classifications depends on the requirements of Ind AS and on the
size, nature and function of the amounts involved. The disclosures vary for each item, for
example:

(i) items of property, plant and equipment are disaggregated into classes in accordance
with Ind AS 16;

(ii) receivables are disaggregated into amounts receivable from trade customers,
receivables from related parties, prepayments and other amounts;

(iii) inventories are disaggregated, in accordance with Ind AS 2, Inventories, into

classifications such as merchandise, production supplies, materials, work in progress
and finished goods;

(iv) provisions are disaggregated into provisions for employee benefits and other items; and

(v) equity capital and reserves are disaggregated into various classes, such as paid-in
capital, share premium and reserves.

 An entity shall disclose the following, either in the balance sheet or in the statement of
changes in equity which is part of the balance sheet, or in the notes:

(i) for each class of share capital:

(a) the number of shares authorised;

(b) the number of shares issued and fully paid, and issued but not fully paid;

(c) par value per share, or that the shares have no par value;

(d) a reconciliation of the number of shares

© The Institute of Chartered Accountants of India

 3.38 a
2.38 FINANCIAL REPORTING
v
v
(e) the rights, preferences and restrictions attaching to that class including restrictions
on the distribution of dividends and the repayment of capital;

(f) shares in the entity held by the entity or by its subsidiaries or associates; and

(g) shares reserved for issue under options and contracts for the sale of shares,
including terms and amounts; and

(ii) a description of the nature and purpose of each reserve within equity.

 An entity whose capital is not limited by shares e.g., a company limited by guarantee, shall
disclose information, showing changes during the period in each category of equity interest,
and the rights, preferences and restrictions attaching to each category of equity interest.

Illustrated format of Balance Sheet

Balance Sheet (with hypothetical figures given for ease in understanding) '000

As at As at
31 st March 31 st March
20X6 20X5
Assets
Non-current Assets
Property, plant and equipment 1,37,048 97,023
Capital work in progress 17,450 3,100
Investment property 7,419 7,179
Goodwill 8,670 4,530
Other Intangible Assets 12,033 10,895
Intangible assets under development 2,365 1,965
Financial assets
Investments 38,576 32,416
Loans 1,033 850
Trade Receivables 3,238 2,376
Deferred tax assets (net) 4,598 2,774
Other non-current assets 21,586 10,565
Total Non-Current Assets (A) 2,54,016 1,73,673

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.39

Current Assets
Inventories 67,878 61,062
Financial assets
Loans 623 546
Trade receivables 30,712 30,078
Derivative instruments
Cash and cash equivalents 25,031 7,035
Investments 10,695 9,170
Other financial assets 2,856 2,093
Prepayments 459 543
1,38,254 1,10,527
Assets classified as held for sale 220 19,310
Total Current Assets (B) 1,38,474 1,29,837
Total Assets (A+B) 3,92,490 3,03,510

As at As at
31 st March 31 st March
20X6 20X5
Equity and liabilities
Equity
Equity share capital 22,400 12,600
Other equity
Equity component of compound financial instruments 372
Reserves and surplus 2,16,092 1,60,796
Other reserves 4,233 3,215
Equity attributable to equity holders of the parent 2,43,097 1,76,611
Non-Controlling interest 24,742 16,248
Total equity (C) 2,67,839 1,92,859

© The Institute of Chartered Accountants of India

 3.40 a
2.40 FINANCIAL REPORTING
v
v
Non-current liabilities
Financial liabilities
Borrowings 41,455 35,565
Other financial liabilities 1,670 199
Long term provision 241 91
Deferred Income - Government grants 2,352 2,550
Net employee defined benefit liabilities 7,296 5,076
Deferred tax liabilities (net) 12,085 9,864
Other non-current liabilities
Total non-current liabilities (D) 65,099 53,345
Current Liabilities
Financial liabilities
Borrowings 2,807 2,685
Trade payables (Other than micro enterprises and 38,011 28,977
small enterprises)
Other current financial liabilities 8,909 8,837
Deferred income - Government grants 938 1,017
Employee benefit obligations 430 378
Deferred revenue 4,152 3,986
Liabilities for current tax (net) 2,803 1,905
Provisions 1,502 531
Liabilities directly associated with the assets classified as
held for distribution 8,990
Total current liabilities (E) 59,552 57,306
Total liabilities (F=D+E) 1,24,651 1,10,651
Total equity and liabilities (C+F) 3,92,490 3,03,510

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.41

1.8.3 Statement of Profit and Loss

 The statement of profit and loss shall present, in addition to the profit or loss and other
comprehensive income sections:
(a) profit or loss;
(b) total other comprehensive income;
(c) comprehensive income for the period, being the total of profit or loss and other
comprehensive income.
 An entity shall present (in case of consolidated statement of profit and loss) the following
items as allocation of profit or loss and other comprehensive income for the period:
(a) profit or loss for the period attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.
(b) comprehensive income for the period attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.
1.8.3.1 Information to be presented in the profit or loss section of the Statement of
Profit and Loss
In addition to items required by other Ind AS, the profit or loss section of the statement of profit
and loss should include line items that present the following amounts for the period:
(a) revenue, presenting separately interest revenue calculated using the effective interest
method;
(b) gains and losses arising from the derecognition of financial assets measured at amortised
cost
(c) finance costs;
(d) impairment losses (including reversals of impairment losses or impairment gains) determined
in accordance with Section 5.5 of Ind AS 109
(e) share of the profit or loss of associates and joint ventures accounted for using the equity
method;
(f) if financial asset is reclassified out of the amortised cost measurement category so that it is
measured at fair value through profit or loss, any gain or loss arising from a difference

© The Institute of Chartered Accountants of India

 3.42 a
2.42 FINANCIAL REPORTING
v
v
between the previous amortised cost of the financial asset and its fair value at the
reclassification date;
(g) if a financial asset is reclassified out of the fair value through other comprehensive income
measurement category so that it is measured at fair value through profit or loss, any
cumulative gain or loss previously recognized in other comprehensive income that is
reclassified to profit or loss
(h) tax expense;
(i) a single amount for the total discontinued operations
1.8.3.2 Information to be presented in the Other Comprehensive Income section
 The other comprehensive income section should present line items for the amounts of other
comprehensive income classified by nature and grouped into those that, in accordance with
other Ind AS:
(i) will not be reclassified subsequently to profit or loss; and
(ii) will be reclassified subsequently to profit or loss when specific conditions are met.
 An entity shall present additional line items, headings and subtotals in the statement of profit
and loss, when such presentation is relevant to an understanding of the entity’s financial
performance.
 When an entity presents subtotals, those subtotals shall:
(a) be comprised of line items made up of amounts recognised and measured in
accordance with Ind AS;
(b) be presented and labelled in a manner that makes the line items that constitute the sub
total clear and understandable;
(c) be consistent from period to period; and
(d) not be displayed with more prominence than the subtotals and totals required in Ind AS
for the statement of profit and loss.
 An entity shall present the line items in the statement of profit and loss that reconcile any
sub totals presented with the subtotals or totals required in Ind AS for such statement.
 An entity shall not present any items of income or expense as extraordinary items, in the
statement of profit and loss or in the notes.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.43

1.8.3.3 Profit or loss for the period

With regard to profit or loss for the period, the Standard requires the recognition of all items of
income and expense in a period in profit or loss unless an Ind AS requires or permits otherwise.
Illustrative format of Statement of Profit and Loss (only profit or loss section of statement of
profit and loss)
Statement of Profit and Loss for the year ended 31 st March 20X6

31 st March 31 st March
20X6 20X5

'000 '000

Revenue from operations 6,33,124 4,86,316

Other Income 6,704 6,676

Total Income 6,39,828 4,92,992

Expenses

Cost of raw material consumed 2,43,929 2,34,262

Purchase of stock-in-trade 56,300 51,700

(Increase)/decrease in inventories of finished goods,

Stock-in-Trade and work-in-progress 2,895 (2,587)

Employee benefits expenses 80,998 69,962

Finance costs 3,085 2,963

Depreciation and amortisation expense 10,147 8,534

Impairment of non-current assets 480 790

Other expenses 15,308 9,065

Total Expense 4,13,142 3,74,689

Profit/(loss) before exceptional items and tax 2,26,686 1,18,303

Exceptional items (2,856)

Profit / (loss) before tax from operations 2,23,830 1,18,303

© The Institute of Chartered Accountants of India

 3.44 a
2.44 FINANCIAL REPORTING
v
v
a) Current tax 5,388 4,474

b) Deferred tax 427 (746)

Income tax expense 5,815 3,728

Profit / (loss) for the year 2,18,015 1,14,575

Profit for the year attributable to *

Equity holders of the parent 2,11,475 1,11,138

Non-controlling interest 6,540 3,437

* To be given in case of consolidated statement of profit and loss.

1.8.3.4 Other comprehensive income for the period

 With regard to other comprehensive income for the period, the Standard requires to disclose
the amount of income tax relating to each item of other comprehensive income, including
reclassification adjustments, either in the statement of profit and loss or in the notes.
 An entity may present items of other comprehensive income either:
(a) net of related tax effects, or
(b) before related tax effects with one amount shown for the aggregate amount of income
tax relating to those items.
 The Standard further prescribes that an entity should disclose reclassification adjustments
relating to components of other comprehensive income.
 Other Ind AS specify whether and when amounts previously recognised in other
comprehensive income are reclassified to profit or loss. Such reclassifications are referred
to in this Standard as reclassification adjustments.
 A reclassification adjustment is included with the related component of other comprehensive
income in the period that the adjustment is reclassified to profit or loss.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.45

changes in revaluation surplus

reameasurements of defined benefit plans

Components of Other Comprehensive Income (OCI)

gains and losses arising from translating the financial statements of a foreign

gains and losses from investments in equity instruments designated at fair value through
OCI

gains and losses on financial assets measured at fair value through OCI

the effective portion of gains and losses on hedging instruments in a cash flow hedge and
the gains and losses on hedging instruments that hedge investments in equity instruments
measured at fair value through OCI

for particular liabilities designated as at FVTPL, the amount of the change in fair value that
is attributable to changes in the liability’s credit risk

changes in the value of the time value of options when separating the intrinsic value and
time value of an option contract and designating as the hedging instrument only the
changes in the intrinsic value

changes in the value of the forward elements of forward contracts when separating the
forward element and spot element of a forward contract and designating as the hedging
instrument only the changes in the spot element, and changes in the value of the foreign
currency basis spread of a financial instrument when excluding it from the designation of
that financial instrument as the hedging instrument

Example 14
Gains realised on the disposal of financial assets are included in profit or loss of the current
period. These amounts may have been recognised in other comprehensive income as
unrealised gains in the current or previous periods. Those unrealised gains must be
deducted from other comprehensive income in the period in which the realised gains are
reclassified to profit or loss to avoid including them in total comprehensive income twice.

© The Institute of Chartered Accountants of India

 3.46 a
2.46 FINANCIAL REPORTING
v
v
The following table depicts some of the items which are taken to OCI (numbers are illustrative
only): in lakhs

Cash flow FVTOCI Foreign Revaluation Retained Total

Hedge reserve currency reserve earnings
reserve translation
reserve

Net Investment 2,340 2,340

hedge

Foreign Exchange (2,950) (2,950)

translation reserve

Currency Forward (7,680) (7,680)

contracts

Reclassified to 3,385 3,385

statement of profit or
loss

Commodity forward (1,850) (1,850)

contract

Gain / (loss) on (480) (480)

FVTOCI financial
assets

Re-measurement 3,085 3,085

gains (losses) on
defined benefit plans

Revaluation of land
and buildings 7,100 7,100

(6,145) (480) (610) 7,100 3,085 2,950

 An entity may present reclassification adjustments in the statement of profit and loss or in
the notes. An entity presenting reclassification adjustments in the notes presents the items
of other comprehensive income after any related reclassification adjustments.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.47

 Reclassification adjustments arise, for example, on disposal of a foreign operation (see

Ind AS 21), and when some hedged forecast cash flows affect profit or loss (see paragraph
6.5.11(d) of Ind AS 109 in relation to cash flow hedges).
 Reclassification adjustments do not arise on changes in revaluation surplus recognised in
accordance with Ind AS 16 or Ind AS 38 or on re-measurements of defined benefit plans
recognised in accordance with Ind AS 19. These components are recognised in other
comprehensive income and are not reclassified to profit or loss in subsequent periods.
Changes in revaluation surplus may be transferred to retained earnings in subsequent
periods as the asset is used or when it is derecognised (see Ind AS 16 and Ind AS 38). In
accordance with Ind AS 109, reclassification adjustments do not arise if a cash flow hedge
or the accounting for the time value of an option (or the forward element of a forward contract
or the foreign currency basis spread of a financial instrument) result in amounts that are
removed from the cash flow hedge reserve or a separate component of equity, respectively,
and included directly in the initial cost or other carrying amount of an asset or a liability.
These amounts are directly transferred to assets or liabilities.
Illustrative format of other Comprehensive Income

31.3.20X6 31.3.20X5
'000 '000

Other comprehensive income to be reclassified to profit

and loss in subsequent periods

Net gain on hedge of a net investment 467 300

Income tax effect (156) (100)

311 200

Exchange differences on translation of foreign operations (590) (281)

Income tax effect 0 0

(590) (281)

Net movement on cash flow hedges (1757) 80

Income tax effect 528 (22)

(1229) 58

Net gain / (loss) through FVTOCI debt securities (115) 7

© The Institute of Chartered Accountants of India

 3.48 a
2.48 FINANCIAL REPORTING
v
v
Income tax effect 36 (2)

(79) 5

Net other comprehensive income to be reclassified to

profit or loss in subsequent periods (1587) (18)

Other comprehensive income not to be reclassified to

profit or loss in subsequent periods

Re-measurement gains /(losses) on defined benefit plans 886 (933)

Income tax effect (269) 278

617 (655)

Revaluation of land and building 2030

Income tax effect (610)

1420 0

Net loss / (gain) through FVTOCI equity securities (24)

Income tax effect 7

(17)

Net other comprehensive income not to be classified to profit

or loss in subsequent periods 2020 (655)

Other comprehensive income for the year, net of tax 433 (673)

Total comprehensive income for the year attributable to *

Equity holders of the parent 2,11,908 1,10,465

Non-controlling interest 6,540 3,437

*To be given in case of consolidated statement of profit and loss.

1.8.3.5 Information to be presented in the Statement of Profit and Loss or in the
Notes
 When items of income or expense are material, an entity shall disclose their nature and
amount separately.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.49

 Circumstances that would give rise to the separate disclosure of items of income and
expense include:
(a) write-downs of inventories to net realisable value or of property, plant and equipment to
recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the costs
of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.
 An entity shall present an analysis of expenses recognised in profit or loss using a
classification based on the nature of expense method.

Revenue X

Other income X

Changes in inventories of finished goods and work in progress X

Raw materials and consumables used X

Employee benefits expense X

Depreciation and amortisation expense X

Other expenses X

Total expenses (X)

Profit before tax X

1.8.4 Statement of Changes in Equity

An entity shall present a statement of changes in equity which includes all changes in equity. It
includes both - relating to performance and owner changes in equity (from transactions and events
that increase or decrease equity but are not part of performance). The statement of changes in
equity includes the following information:

© The Institute of Chartered Accountants of India

 3.50 a
2.50 FINANCIAL REPORTING
v
v
a. total comprehensive income for the period, showing separately the total amounts attributable
to owners of the parent and to non-controlling interests;
b. for each component of equity, the effects of retrospective application or retrospective
restatement recognised in accordance with Ind AS 8;
c. for each component of equity, a reconciliation between the carrying amount at the beginning
and the end of the period, separately disclosing each change resulting from:
 profit or loss;
 each item of other comprehensive income;
 transactions with owners in their capacity as owners, showing separately contributions
by and distributions to owners and changes in ownership interests in subsidiaries that
do not result in a loss of control; and
 any item recognised directly in equity such as amount recognised directly in equity as
capital reserve with Ind AS 103.
1.8.4.1 Information to be presented in the statement of changes in equity or in the
notes.
 An entity shall present, either in the statement of changes in equity or in the notes, an
analysis of other comprehensive income by item.
 An entity shall present, either in the statement of changes in equity or in the notes, the
amount of dividends recognised as distributions to owners during the period, and the related
amount of dividends per share.
 Ind AS 8 requires retrospective adjustments to effect changes in accounting policies, to the
extent practicable, except when the transition provisions in another Ind AS require otherwise.
Ind AS 8 also requires restatements to correct errors to be made retrospectively, to the extent
practicable. Retrospective adjustments and retrospective restatements are not changes in
equity but they are adjustments to the opening balance of retained earnings, except when
an Ind AS requires retrospective adjustment of another component of equity.
 Para 106(b) requires disclosure in the statement of changes in equity of the total adjustment
to each component of equity resulting from changes in accounting policies and, separately,
from corrections of errors. These adjustments are disclosed for each prior period and the
beginning of the period.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.51

Format of Statement of changes in equity for the year ended 31 st March 20X6 *

Share capital

Translation

earnings
Retained
reserve

Total
Equity as at 31 st March 20X5 (A) 1,041 (47,382) 2,65,266 2,18,925

Profit for the year 28,461 28,461

Other comprehensive income for the year (3,399) (5,535) (8,934)

Total comprehensive income for the year

(3,399) 22,926 19,527
(B)

Dividend paid to shareholders of the parent (17,817) (17,817)

Equity compensation plans 15 15

Reduction in share capital (51) (26,427) (26,478)

Total transactions (C) (51) (44,229) (44,280)

Equity as at 31 st March, 20X6 (A+B+C) 990 (50,781) 2,43,963 1,94,172

*For the purpose of convenience, the movement has been given only for one year. However as
per the requirement, the similar reconciliation is also required from 31 st March, 20X4 to
31 st March, 20X5 as comparatives in the Statement of changes in equity.
1.8.5 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.
 An entity should present a statement of cash flows in accordance with Ind AS 7, Statement
of Cash Flows.

© The Institute of Chartered Accountants of India

 3.52 a
2.52 FINANCIAL REPORTING
v
v
1.8.6 Notes
1.8.6.1 Structure
The notes shall:
a. present information about the basis of preparation of the financial statements and the specific
accounting policies used;
b. disclose the information required by Ind AS that is not presented elsewhere in the financial
statements; and
c. provide information that is not presented elsewhere in the financial statements but is relevant
to an understanding of any of them.
An entity shall present notes in a systematic manner. In determining a systematic manner, the
entity shall consider the effect on the understandability and comparability of its financial
statements.
An entity shall cross-reference each item in the balance sheet, in the statement of changes in
equity, in the statement of profit and loss, and statement of cash flows to any related information
in the notes.
Examples of systematic ordering or grouping of the notes include:
(a) giving prominence to the areas of its activities that the entity considers to be most relevant
to an understanding of its financial performance and financial position, such as grouping
together information about particular operating activities;
(b) grouping together information about items measured similarly such as assets measured at
fair value; or
(c) Notes may be in the following order:
(i) statement of compliance with Ind AS;
(ii) material accounting policy information;
(iii) supporting information for items presented in the balance sheet and in the statement of
profit and loss, and in the statements of changes in equity and of cash flows, in the
order in which each statement and each line item is presented; and
(iv) other disclosures, including:
(1) contingent liabilities (see Ind AS 37) and unrecognised contractual commitments;
and

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.53

(2) non-financial disclosures, eg the entity’s financial risk management objectives and
policies (see Ind AS 107).
An entity may present notes providing information about the basis of preparation of the financial
statements and specific accounting policies as a separate section of the financial statements.
1.8.6.2 Disclosure of accounting policies
An entity shall disclose material accounting policy information. Accounting policy information is
material if, when considered together with other information included in an entity’s financial
statements, it can reasonably be expected to influence decisions that the primary users of general
purpose financial statements make on the basis of those financial statements.
Accounting policy information that relates to immaterial transactions, other events or conditions is
immaterial and need not be disclosed. Not all accounting policy information relating to material
transactions, other events or conditions is itself material.
An entity is likely to consider accounting policy information material to its financial statements if
that information relates to material transactions, other events or conditions and:
(a) the entity changed its accounting policy during the reporting period and this change resulted
in a material change to the information in the financial statements;
(b) the entity chose the accounting policy from one or more options permitted by Ind AS
(c) the accounting policy was developed in accordance with Ind AS 8 in the absence of an
Ind AS that specifically applies;
(d) the accounting policy relates to an area for which an entity is required to make significant
judgements or assumptions in applying an accounting policy, and the entity discloses those
judgements or assumptions; or
(e) the accounting required for them is complex and users of the entity’s financial statements
would otherwise not understand those material transactions, other events or conditions—
such a situation could arise if an entity applies more than one Ind AS to a class of material
transactions.
Accounting policy information that focuses on how an entity has applied the requirements of the
Ind AS to its own circumstances provides entity-specific information that is more useful to users
of financial statements than standardised information, or information that only duplicates or
summarises the requirements of the Ind AS.
If an entity discloses immaterial accounting policy information, such information shall not obscure
material accounting policy information.

© The Institute of Chartered Accountants of India

 3.54 a
2.54 FINANCIAL REPORTING
v
v
An entity’s conclusion that accounting policy information is immaterial does not affect the related
disclosure requirements set out in other Ind AS.
An entity shall disclose, along with material accounting policy information or other notes, the
judgements, apart from those involving estimations, that management has made in the process of
applying the entity’s accounting policies and that have the most significant effect on the amounts
recognised in the financial statements.
1.8.6.3 Sources of estimation uncertainty
An entity must disclose, in the notes, information about the assumptions made concerning the
future, and other important sources of estimation uncertainty at the end of the reporting period,
that have a significant risk of resulting in a material adjustment to the carrying amounts of assets
and liabilities within the next financial year. Disclosures about nature of such assets and their
carrying amount as at the end of the reporting period should also be made.
1.8.6.4 Capital
An entity shall disclose information that enables users of its financial statements to evaluate the
entity’s objectives, policies and processes for managing capital.
Examples 15 -17
15. For the purpose of the Group’s capital management, capital includes issued equity capital,
convertible preference shares, share premium and all other equity reserves attributable to
the equity holders of the parent. The primary objective of the Group’s capital management is
to maximise the shareholder value.
The Group manages its capital structure and makes adjustments in light of changes in
economic conditions and the requirements of the financial covenants. To maintain or adjust
the capital structure, the Group may adjust the dividend payment to shareholders, return
capital to shareholders or issue new shares. The Group monitors capital using a gearing
ratio, which is net debt divided by total capital plus net debt. The Group’s policy is to keep
the gearing ratio between 20% and 40%. The Group includes within net debt, interest bearing
loans and borrowings, trade and other payables, less cash and cash equivalents, excluding
discontinued operations.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.55

31.3.20X6 31.3.20X5
Borrowings other than convertible preference shares 1,44,201 1,57,506

Trade payables 1,26,489 1,36,563

Other payables 13,506 12,693

Less : Cash and cash equivalents (1,18,362) (1,05,615)

Net debt 1,65,834 2,01,147

Convertible preference shares 20,001 19,038

Equity 4,29,600 3,37,000

Total Capital 4,49,601 3,56,038

Capital and net debt 6,15,435 5,57,185

Gearing ratio 27 36

In order to achieve this overall objective, the Group’s capital management, amongst other things,
aims to ensure that it meets financial covenants attached to the interest-bearing loans and
borrowings that define capital structure requirements. Breaches in meeting the financial
covenants would permit the bank to immediately call loans and borrowings. There have been no
breaches in the financial covenants of any interest-bearing loans and borrowing in the current
period. No changes were made in the objectives, policies or processes for managing capital
during the years ended 31 st March 20X6 and 31 st March 20X5.
16. Capital Allocation Policy: The Board reviewed and approved a revised Capital Allocation
Policy of the Company after taking into consideration the strategic and operational cash
requirements of the Company in the medium term.
The key aspects of the Capital Allocation Policy are:
1. The Company’s current policy is to pay dividends of up to 50% of post-tax profits of the
Financial Year. Effective from Financial Year 20X1, the Company expects to payout up
to 70% of the free cash flow* of the corresponding Financial Year in such manner
(including by way of dividend and/or share buyback) as may be decided by the Board
from time to time, subject to applicable laws and requisite approvals, if any.

© The Institute of Chartered Accountants of India

 3.56 a
2.56 FINANCIAL REPORTING
v
v
2. In addition to the above, the Board has identified an amount of upto 13,000 crore
($2 billion)** to be paid out to shareholders during Financial Year 20X1, in such manner
(including by way of dividend and/ or share buyback), to be decided by the Board, subject
to applicable laws and requisite approvals, if any. Further announcements in this regard
will be made, as appropriate, in due course
*Free cash flow is defined as net cash provided by operating activities less capital
expenditure as per the consolidated statement of cash flows prepared under Ind AS.
**USD/Rupee exchange rate as on 31 st March, 20X0 was 65.
17. The groups’ objective when managing capital are to:
 Safeguard their ability to continue as a going concern, so that they can continue to
provide returns to shareholders and benefits for other stakeholders, and
 Maintain an optimum capital structure to reduce the cost of capital
In order to maintain or adjust the capital structure, the group may adjust the amounts of
dividends paid to shareholders, return capital to shareholders, issue new shares or sell
assets to reduce debt. Consistent with others in the industry, the group monitors capital on
the basis of the following gearing ratio: Net debt divided by the Total equity (as shown in
balance sheet including Non-Controlling Interest)
During 20X5, the group’s strategy which was unchanged from 20X4 was to maintain a gearing
ratio within 20% to 30% and credit rating of A. The credit rating was unchanged and the
gearing ratio was within the limits as follows:

31 st March 20X5 31 st March 20X4

Net debt 3,384 3,447

Total equity 16,035 11,762

Net debt to equity 21% 29%

1.8.6.5 Puttable financial instruments classified as equity

For puttable financial instruments classified as equity instruments, an entity shall disclose (to the
extent not disclosed elsewhere):
a. summary quantitative data about the amount classified as equity;

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.57

b. its objectives, policies and processes for managing its obligation to repurchase or redeem
the instruments when required to do so by the instrument holders, including any changes
from the previous period;
c. the expected cash outflow on redemption or repurchase of that class of financial instruments;
and
d. information about how the expected cash outflow on redemption or repurchase was
determined.
1.8.6.6 Other disclosures
An entity must disclose the amount of dividends proposed or declared before the financial
statements were approved for issue but not recognised as a distribution to owners during the
period, and the related amount per share and the amount of any cumulative preference dividends
not recognised.
Ind AS 1 requires certain other disclosures, if not disclosed elsewhere in information published
with the financial statements:
a) the domicile and legal form of the entity, its country of incorporation and the address of its
registered office (or principal place of business, if different from the registered office);
b) a description of the nature of the entity’s operations and its principal activities;
c) the name of the parent and the ultimate parent of the group; and
d) if it is a limited life entity, information regarding the length of its life.

(a) An extract from the annual report of Tata Consultancy Services Limited
for the year ended 31 st March, 2022:
Notes forming part of Standalone Financial Statements
1) Corporate information
Tata Consultancy Services Limited (referred to as “TCS Limited” or “the
Company”) provides IT services, consulting and business solutions and has been
partnering with many of the world’s largest businesses in their transformation
journeys. The Company offers a consulting-led, cognitive powered, integrated
portfolio of IT, business and engineering services and solutions. This is delivered
through its unique Location-Independent Agile delivery model, recognised as a
benchmark of excellence in software development.

© The Institute of Chartered Accountants of India

 3.58 a
2.58 FINANCIAL REPORTING
v
v
The Company is a public limited company incorporated and domiciled in India.
The address of its corporate office is TCS House, Raveline Street, Fort, Mumbai -
400001. As at 31 st March, 2022, Tata Sons Private Limited, the holding company
owned 72.27% of the Company’s equity share capital.
The Board of Directors approved the standalone financial statements for the year
ended 31 st March, 2022 and authorised for issue on 11 th April, 2022.
(b) An extract from the annual report of Tata Consultancy Services
Limited for the year ended 31 st March, 2022:
Overview and notes to the standalone financial statements
1. Overview
1.1 Company overview
Infosys Limited ("the Company" or Infosys) provides consulting, technology,
outsourcing and next-generation digital services, to enable clients to execute
strategies for their digital transformation. Infosys strategic objective is to build
a sustainable organization that remains relevant to the agenda of clients, while
creating growth opportunities for employees and generating profitable returns
for investors. Infosys strategy is to be a navigator for our clients as they ideate,
plan and execute on their journey to a digital future.
The Company is a public limited company incorporated and domiciled in India
and has its registered office at Electronic city, Hosur Road, Bengaluru 560100,
Karnataka, India. The Company has its primary listings on the BSE Ltd. and
National Stock Exchange of India Limited. The Company’s American Depositary
Shares (ADS) representing equity shares are listed on the New York Stock
Exchange (NYSE).
The Standalone financial statements are approved for issue by the Company’s
Board of Directors on 13th April 2022.

Illustration 16
A Limited has prepared the following draft balance sheet as on 31 st March 20X1: ( in crores)
Particulars 31 st March, 31 st March,
20X1 20X0
ASSETS
Cash 250 170

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.59

Cash equivalents 70 30
Non-controlling interest’s share of profit for the year 160 150
Dividend declared and paid by A Limited 90 70
Accounts receivable 2,300 1,800
Inventory at cost 1,500 1,650
Inventory at fair value less cost to complete and sell 180 130
Investment property 3,100 3,100
Property, plant and equipment (PPE) at cost 5,200 4,700
Total 12,850 11,800

CLAIMS AGAINST ASSET S

Long term debt ( 500 crores due on 1 st January each year) 3,300 3,885
Interest accrued on long term debt (due in less than 12 months) 260 290
Share Capital 1,130 1,050
Retained earnings at the beginning of the year 1,875 1,740
Profit for the year 1,200 830
Non-controlling interest 830 540
Accumulated depreciation on PPE 1,610 1,240
Provision for doubtful receivables 200 65
Trade payables 880 790
Accrued expenses 15 30
Warranty provision (for 12 months from the date of sale) 600 445
Environmental restoration provision (restoration expected in 765 640
20X6) 35 25
Provision for accrued leave (due within 12 months) 150 230
Dividend payable
Total 12,850 11,800

Prepare a consolidated balance sheet using current and non-current classification in

accordance with Ind AS 1. Assume operating cycle is 12 months

© The Institute of Chartered Accountants of India

 3.60 a
2.60 FINANCIAL REPORTING
v
v
Solution
A Limited
Consolidated Balance Sheet as at 31 st March 20X1
( in crores)

Particulars Note 31.3.20X1 31.3.20X0

ASSETS
Non-current assets
(a) Property, plant and equipment 1 3,590 3,460
(b) Investment property 3,100 3,100
Total non-current assets 6,690 6,560
Current assets
(a) Inventory 2 1,680 1,780
(b) Financial assets
(i) Trade and other receivables 3 2,100 1,735
(ii) Cash and cash equivalents 4 320 200
Total current assets 4,100 3,715

Total assets 10,790 10,275

EQUITY & LIABILITIES

Equity attributable to owners of the parent
Share capital 1,130 1,050
Other Equity 5 2,825 2,350
Non-controlling interests 830 540

Total equity 4,785 3,940

LIABILITIES
Non-current liabilities
(a) Financial Liabilities
Borrowings - Long-term debt 6 2,800 3,385

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.61

(b) Provisions
Long-term provisions (environmental
restoration) 765 640

Total non-current liabilities 3,565 4,025

Current liabilities
(a) Financial Liabilities
(i) Trade and other payables (Other than 7 895 820
micro enterprises and small
enterprises)
8 500 500
(ii) Current portion of long-term debt
260 290
(iii) Interest accrued on long-term debt
150 230
(iv) Dividend payable
(b) Provisions
600 445
(i) Warranty provision
35 25
(ii) Other short-term provisions
2,440 2,310
Total current liabilities
6,005 6,335
Total liabilities

Total equity and liabilities 10,790 10,275

Working Notes:

Notes Particulars Basis Calculation Amount

crores crores

1 Property, plant Property, plant and 5,200 – 1,610 3,590 (3,460)

and equipment equipment (PPE) at cost less
(4,700 –
Accumulated (depreciation
1,240)
on PPE

2 Inventory Inventory at cost add 1,500 + 180 1,680 (1,780)

Inventory at fair value less
(1,650 + 130)
cost to complete and sell

© The Institute of Chartered Accountants of India

 3.62 a
2.62 FINANCIAL REPORTING
v
v
3 Trade and other Accounts receivable less 2,300 – 200 2,100 (1,735)
receivables Provision for doubtful
(1,800 – 65)
receivables

4 Cash and cash Cash and Cash equivalents 250 + 70 320

equivalents
(170 + 30) (200)

5 Other Equity Retained earnings at the 1,875 + 2,825

beginning of the year add 1,200– 160 –
Profit for the year less Non- 90
controlling interest’s share of
(1,740 + 830 –
profit for the year less (2,350)
150 – 70)
Dividend declared by A
Limited

6 Long-term debt Long-term debt less Due on 3,300 – 500 2,800

1 stJanuary each year
(3,885 – 500) (3,385)

7 Trade & other Trade payables add Accrued 880 + 15 895

payables expenses
(790 + 30) (820)

8 Current portion Due on 1 stJanuary each year - 500

of long- term
- (500)
debt

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

*****

1.9 SIGNIFICANT DIFFERENCES IN IND AS 1 VIS-À-VIS

AS 1
Ind AS 1 deal with presentation of financial statements, whereas AS 1 deal only with the disclosure
of accounting policies. The scope of Ind AS 1 is thus much wider and some of its requirements
are contained in other AS e.g. AS 5 and, therefore, line by line comparison of the differences
between Ind AS 1 and AS 1 is not possible. Therefore, the differences between Ind AS 1 and
Indian GAAP are divided into following parts and summarised below.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.63

S.No. Particulars Ind AS 1 AS 1

I. Part 1 Ind AS 1 requirement not covered in any AS

1. Complete set of Ind AS 1 prescribes what comprises a Not covered in any

Financial complete set of financial statements such AS
Statements as balance sheet, statement of profit and
loss, statement of changes in equity,
statement of cash flows, notes,
comprising significant accounting
policies, and comparative information in
respect of preceding period.

2. Purpose and Ind AS 1 lays down purpose of financial Not covered in any
General Features statements and general feature of AS
of Financial financial statements such as True and
Statements Fair view and compliance with Ind AS. An
enterprise shall make an explicit
statement in the financial statements of
compliance with all the Indian Accounting
Standards. Further, Ind AS 1 allows
deviation from a requirement of an
accounting standard in case the
management concludes that compliance
with Ind AS will be misleading and if the
regulatory framework requires or does
not prohibit such a departure.

3. Off-setting Ind AS 1 state that an entity shall not Not covered in any
offset assets and liabilities or income and AS
expenses, unless required or permitted
by an Ind AS.

4. Frequency of Ind AS 1 requires an entity to present a Not covered in any

reporting complete set of financial statements AS
(including comparative information) at
least annually.

5. Structure and Ind AS 1 requires an entity Not covered in any

Contents AS

© The Institute of Chartered Accountants of India

 3.64 a
2.64 FINANCIAL REPORTING
v
v
S.No. Particulars Ind AS 1 AS 1
 to clearly identify the financial
statements and distinguish them from
other information in the same
published document.
 To give information about the name of
the entity, whether financial
statements are of individual entity of
group of entities, presentation
currency and level of rounding off.

6. Balance sheet  Prescribes certain line items to be Not covered in any

presented in the balance sheet and AS
permits presentation of additional line
items.
 Ind AS 1 requires presentation and
provides criteria for classification of
Current / Non- Current assets /
liabilities.
 Ind AS 1 requires presentation of
balance sheet as at the beginning of
the earliest period when an entity
applies an accounting policy
retrospectively or makes a
retrospective restatement of items in
the financial statements, or when it
reclassifies items in its financial
statements.

7. Statement of profit  Ind AS 1 requires that an entity shall Not covered in any
and loss present a single statement of profit AS
and loss, with profit or loss and other
comprehensive income presented in
two sections. The sections shall be
presented together, with the profit or
loss section presented first followed

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.65

S.No. Particulars Ind AS 1 AS 1

directly by the other comprehensive
income section.
 Ind AS 1 prohibits presentation of any
item as ‘Extraordinary Item’ in the
statement of profit and loss or in the
notes.
 Ind AS 1 requires classification of
expenses to be presented based on
nature of expenses.

8. Reclassification of Ind AS 1 requires disclosure of nature, Not covered in any

items amount and reason for reclassification in AS
the notes to financial statements.

9. Statement of Ind AS 1 requires the financial statements Not covered in any

Changes in Equity to include a ‘Statement of Changes in AS
Equity’ to be shown as a separate
statement, which, inter alia, includes
reconciliation between opening and
closing balance for each component of
equity.

10. Comparative As per Ind AS 1, an entity shall include Not covered in any
information certain comparative information for AS
understanding the current period’s
financial statements.

11. Classification of Ind AS 1 clarifies that long-term loan Not covered in any
long-term loan arrangement need not be classified as AS
arrangement current on account of breach of a material
provision, for which the lender has
agreed to waive before the approval of
financial statements for issue.
(Paragraph 74 of Ind AS 1)

© The Institute of Chartered Accountants of India

 3.66 a
2.66 FINANCIAL REPORTING
v
v
S.No. Particulars Ind AS 1 AS 1
II. Part 2 Ind AS 1 requirements vis-a-vis AS 1

1. Fundamental Ind AS 1 requires adherence to accrual AS 1 only requires

accounting basis of accounting. disclosure if this
assumptions fundamental
accounting
assumption, among
others like going
concerns and
consistency, is not
followed by the entity.

2. Rectification of Ind AS 1 explicitly states that an entity

accounting cannot rectify inappropriate accounting
policies policies either by disclosure of the
accounting policies used or by notes or
explanatory material.

3. Sources of Ind AS 1 requires to disclose information

estimation about the assumptions it makes about the
uncertainty future, and other major sources of
estimation uncertainty at the end of the
reporting period, that have a significant
risk of resulting in a material adjustment
to the carrying amounts of assets and
liabilities within the next financial year.

1.10 CARVE OUT IN IND AS 1 FROM IAS 1

As per IFRS
IAS 1 requires that in case of a non-current loan liability, if any condition of the loan agreement is
breached on or before the reporting date, such loan liability should be classified as current, even
if the breach is rectified after the balance sheet date.
Carve Out
Ind AS 1 clarifies that where there is a breach of a material provision of a long-term loan
arrangement on or before the end of the reporting period with the effect that the liability becomes

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.67

payable on demand on the reporting date, the entity does not classify the liability as current, if the
lender agreed, after the reporting period and before the approval of the financial statements for
issue, not to demand payment as a consequence of the breach. Consequent to this, requirements
of paragraph 76 of IAS 1 to treat such events as non-adjusting events are also deleted.
Reason
Under Indian banking system, a long-term loan agreement generally contains a large number of
conditions. Some of these conditions are substantive, such as, recalling the loan in case interest
is not paid, and some conditions are procedural and not substantive, such as, submission of
insurance details where the entity has taken the insurance but not submitted the details to the
lender at the end of the reporting period. Generally, in case of any procedural breach, a loan is
generally not recalled. Also, in many cases, a breach is rectified after the balance sheet date and
before the approval of financial statements. Carve out has been made as it is felt that if the breach
is rectified after the balance sheet date but before the approval of the financial statements, it
would be appropriate that the users are informed about the true nature of liabilities being non-
current liabilities instead of current liabilities.

© The Institute of Chartered Accountants of India

 3.68 a
2.68 FINANCIAL REPORTING
v
v
FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. An entity manufactures passenger vehicles. The time between purchasing of underlying raw
materials to manufacture the passenger vehicles and the date the entity completes the
production and delivers to its customers is 11 months. Customers settle the dues after a
period of 8 months from the date of sale.
(a) Will the inventory and the trade receivables be current in nature?
(b) Assuming that the production time was say 15 months and the time lag between the
date of sale and collection from customers is 13 months, will the answer be different?
2. In December 20X1 an entity entered into a loan agreement with a bank. The loan is repayable
in three equal annual instalments starting from December 20X5. One of the loan covenants
is that an amount equivalent to the loan amount should be contributed by promoters by
24 th March, 20X2, failing which the loan becomes payable on demand. As on
24 th March, 20X2, the entity has not been able to get the promoter’s contribution. On
25 th March, 20X2, the entity approached the bank and obtained a grace period upto
30 th June, 20X2 to get the promoter’s contribution.
The bank cannot demand immediate repayment during the grace period. The annual
reporting period of the entity ends on 31 st March.
(a) As on 31 st March, 20X2, how should the entity classify the loan?
(b) Assume that in anticipation that it may not be able to get the promoter’s contribution by
due date, in February 20X2, the entity approached the bank and got the compliance

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.69

date extended upto 30 th June, 20X2 for getting promoter’s contribution. In this case will
the loan classification as on 31 st March, 20X2 be different from (a) above?
3. Company A has taken a long-term loan from Company B. In the month of December 20X1,
there was a breach of material provision of the arrangement. As a consequence of which
the loan becomes payable on demand on 31 st March, 20X2. In the month of May 20X2, the
company started negotiation with company B for not to demand payment as a consequence
of the breach. The financial statements were approved for the issue in the month of June
20X2. In the month of July 20X2, both the companies agreed that the payment will not be
demanded immediately as a consequence of breach of material provision.
Advise on the classification of the liability as current / non-current.
4. Entity A has undertaken various transactions in the financial year ended 31 st March, 20X1.
Identify and present the transactions in the financial statements as per Ind AS 1.

Remeasurement of defined benefit plans 2,57,000

Current service cost 1,75,000
Changes in revaluation surplus 1,25,000
Gains and losses arising from translating the monetary assets in foreign 75,000
currency
Gains and losses arising from translating the financial statements of a 65,000
foreign operation
Gains and losses from investments in equity instruments designated at fair 1,00,000
value through other comprehensive income
Income tax expense 35,000
Share based payments cost 3,35,000

5. XYZ Limited (the ‘Company’) is into the manufacturing of tractor parts and mainly supplying
components to the Original Equipment Manufacturers (OEMs). The Company does not have
any subsidiary, joint venture or associate company. During the preparation of financial
statements for the year ended 31 st March, 20X1, the accounts department is not sure about
the treatment / presentation of below mentioned matters. Accounts department approached
you to advice on the following matters.

S. No. Matters
(i) There are qualifications in the audit report of the Company with reference to two
Ind AS.

© The Institute of Chartered Accountants of India

 3.70 a
2.70 FINANCIAL REPORTING
v
v
(ii) Is it mandatory to add the word “standalone” before each of the components of
financial statements?
(iii) The Company is Indian Company and preparing and presenting its financial
statements in . Is it necessary to write in the financial statements that the
financial statements have been presented in .
(iv) The Company had sales transactions with 10 related party parties during
previous year. However, during current year, there are no transactions with 4
related parties out of aforesaid 10 related parties. Hence, Company is of the
view that it need not disclose sales transactions with these 4 parties in related
party disclosures because with these parties there are no transactions during
current year.

Evaluate the above matters with respect to preparation and presentation of a general-
purpose financial statement.
6. A Company presents financial results for three years (i.e., one for current year and two
comparative years) internally for the purpose of management information every year in
addition to the general-purpose financial statements. The aforesaid financial results are
presented without furnishing the related notes because these are not required by the
management for internal purposes. During the current year, management thought why not
they should present third year statement of profit and loss also in the general-purpose
financial statements. It will save time and will be available easily whenever management
needs this in future.
With reference to above background, answer the following:
(i) Can management present the third statement of profit and loss as an additional
comparative in the general-purpose financial statements?
(ii) If management present third statement of profit and loss in the general-purpose financial
statement as comparative, is it necessary that this statement should- be compliant of
Ind AS?
(iii) Can management present third statement of profit and loss only as additional
comparative in the general-purpose financial statements without furnishing other
components (like balance sheet, statement of cash flows, statement of change in equity)
of financial statements?
7. A company, while preparing the financial statements for financial year 20X1-20X2,
erroneously booked excess revenue of 10 crore. The total revenue reported in financial
year 20X1-20X2 was 80 crore. However, while preparing the financial statements for
20X2-20X3, it discovered that excess revenue was booked in financial year 20X1-20X2 which

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.71

it now wants to correct in the financial statements. However, the management of the
company is not sure whether it need to present the third balance sheet as additional
comparative.
With regard to the above background, answer the following:
(i) Is it necessary to provide the third balance sheet at the beginning of the preceding
period in this case?
(ii) The company wants to correct the errors during financial year 20X2-20X3 by giving
impact in the figures of current year only. Is the contention of the management, correct?
8. XYZ Limited (the ‘Company’) is into construction of turnkey projects and has assessed its
operating cycle to be 18 months. The Company has certain trade receivables and payables
which are receivable and payable within a period of twelve months from the reporting date,
i.e., 31 st March, 20X2.
In addition to above there are following items/transactions which took place during financial
year 20X1-20X2:

S. No. Items/transactions

(1) The company has some trade receivables which are due after 15 months from
the date of the balance sheet. So, the company expects that the payment will
be received within the period of operating cycle.

(2) The company has some trade payables which are due for payment after
14 months from the date of balance sheet. These payables fall due within the
period of operating cycle. Though the company does not expect that it will be
able to pay these payables within the operating cycle because the nature of
business is such that generally projects get delayed and payments from
customers also get delayed.

(3) The company was awarded a contract of 100 crore on 31 st March, 20X2. As
per the terms of the contract, the company made a security deposit of 5% of
the contract value with the customer, of 5 crore on 31 st March, 20X2. The
contract is expected to be completed in 18 months’ time. The aforesaid deposit
will be refunded back after 6 months from the date of the completion of the
contract.

(4) The company has also given certain contracts to third parties and have received
security deposits from them of 2 crore on 31 st March, 20X2 which are
repayable on completion of the contract but if contract is cancelled before the

© The Institute of Chartered Accountants of India

 3.72 a
2.72 FINANCIAL REPORTING
v
v
contract term of 18 months, then it becomes payable immediately. However,
the Company does not expect the cancellation of the contract.

Considering the above items/transactions answer the following:

(i) The company wants to present the trade receivable as current despite the fact that these
are receivables in 15 months’ time. Does the decision of presenting the same as current
is correct?

(ii) The company wants to present the trade payables as non-current despite the fact that
these are due within the operating cycle of the company. Does the decision of
presenting the same as non-current is correct?

(iii) Can the security deposit of 5 crore made by the company with the customers be
presented as current?

(iv) Can the security deposit of 2 crore taken by the company from contractors be
presented as non-current?

9. Is offsetting permitted under the following circumstances?

(a) Expenses incurred by a holding company on behalf of subsidiary, which is reimbursed

by the subsidiary - whether in the separate books of the holding company, the
expenditure and related reimbursement of expenses can be offset?

(b) Whether profit on sale of an asset against loss on sale of another asset can be offset?

(c) When services are rendered in a transaction with an entity and services are received
from the same entity in two different arrangements, can the receivable and payable be
offset?

Answers
1. Inventory and debtors need to be classified in accordance with the requirement of Ind AS 1,
which provides that an asset shall be classified as current if an entity expects to realise the
same or intends to sell or consume it in its normal operating cycle.
(a) In this case, time lag between the purchase of inventory and its realisation into cash is
19 months [11 months + 8 months]. Both inventory and the debtors would be classified
as current if the entity expects to realise these assets in its normal operating cycle.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.73

(b) No, the answer will be the same as the classification of debtors and inventory depends
on the expectation of the entity to realise the same in the normal operating cycle. In
this case, time lag between the purchase of inventory and its realisation into cash is
28 months [15 months + 13 months]. Both inventory and debtors would be classified as
current if the entity expects to realise these assets in the normal operating cycle.
2. (a) Ind AS 1, inter alia, provides, “An entity classifies the liability as non-current if the lender
agreed by the end of the reporting period to provide a period of grace ending at least
twelve months after the reporting period, within which the entity can rectify the breach
and during which the lender cannot demand immediate repayment.” In the present
case, following the default, grace period within which an entity can rectify the breach is
less than twelve months after the reporting period. Hence as on 31 st March, 20X2, the
loan will be classified as current.
(b) Ind AS 1 deals with classification of liability as current or non-current in case of breach
of a loan covenant and does not deal with the classification in case of expectation of
breach. In this case, whether actual breach has taken place or not is to be assessed on
30 th June, 20X2, i.e., after the reporting date. Consequently, in the absence of actual
breach of the loan covenant as on 31 st March, 20X2, the loan will retain its classification
as non-current.
3. As per para 74 of Ind AS 1 “Presentation of Financial Statements”, where there is a breach
of a material provision of a long-term loan arrangement on or before the end of the reporting
period with the effect that the liability becomes payable on demand on the reporting date, the
entity does not classify the liability as current, if the lender agreed, after the reporting period
and before the approval of the financial statements for issue, not to demand payment as a
consequence of the breach.
An entity classifies the liability as non-current if the lender agreed by the end of the reporting
period to provide a period of grace ending at least twelve months after the reporting period,
within which the entity can rectify the breach and during which the lender cannot demand
immediate repayment.
In the given case, Company B (the lender) agreed for not to demand payment but only after
the reporting date and the financial statements were approved for issuance. The financial
statements were approved for issuance in the month of June 20X2 and both companies
agreed for not to demand payment in the month of July 20X2 although negotiation started in
the month of May 20X2 but could not agree before June 20X2 when financial statements
were approved for issuance.

© The Institute of Chartered Accountants of India

 3.74 a
2.74 FINANCIAL REPORTING
v
v
Hence, the liability should be classified as current in the financial statement as at
31 st March, 20X2.
4. Items impacting the Statement of Profit and Loss for the year ended 31 st March, 20X1 ( )

Current service cost 1,75,000

Gains and losses arising from translating the monetary assets in foreign 75,000
currency

Income tax expense 35,000

Share based payments cost 3,35,000

Items impacting the other comprehensive income for the year ended 31 st March, 20X1 ( )

Remeasurement of defined benefit plans 2,57,000

Changes in revaluation surplus 1,25,000

Gains and losses arising from translating the financial statements of a foreign
operation 65,000

Gains and losses from investments in equity instruments designated at fair

value through other comprehensive income 1,00,000

5. (i) Yes, an entity whose financial statements comply with Ind AS shall make an explicit
and unreserved statement of such compliance in the notes. An entity shall not describe
financial statements as complying with Ind AS unless they comply with all the
requirements of Ind AS. (Refer Para 16 of Ind AS 1)
(ii) No, but need to disclose in the financial statement that these are individual financial
statements of the Company. (Refer Para 51(b) of Ind AS 1)
(iii) Yes, Para 51(d) of Ind AS 1 inter alia states that an entity shall display the presentation
currency, as defined in Ind AS 21 prominently, and repeat it when necessary for the
information presented to be understandable.
(iv) No, as per Para 38 of Ind AS 1, except when Ind AS permit or require otherwise, an
entity shall present comparative information in respect of the preceding period for all
amounts reported in the current period’s financial statements. An entity shall include
comparative information for narrative and descriptive information if it is relevant to
understanding the current period’s financial statements.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 1 3.75

6. (i) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in
addition to the minimum comparative financial statements required by Ind AS, as long
as that information is prepared in accordance with Ind AS. This comparative
information may consist of one or more statements referred to in paragraph 10 but need
not comprise a complete set of financial statements. When this is the case, the entity
shall present related note information for those additional statements.
(ii) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in
addition to the minimum comparative financial statements required by Ind AS, as long
as that information is prepared in accordance with Ind AS.
(iii) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in
addition to the minimum comparative financial statements required by Ind AS, as long
as that information is prepared in accordance with Ind AS. This comparative
information may consist of one or more statements referred to in paragraph 10 but need
not comprise a complete set of financial statements. When this is the case, the entity
shall present related note information for those additional statements.
7. (i) No, as per Para 40A of Ind AS 1, an entity shall present a third balance sheet as at the
beginning of the preceding period in addition to the minimum comparative financial
statements required in paragraph 38A if:
(a) it applies an accounting policy retrospectively, makes a retrospective restatement
of items in its financial statements or reclassifies items in its financial statements;
and
(b) the retrospective application, retrospective restatement or the reclassification has
a material effect on the information in the balance sheet at the beginning of the
preceding period.
(ii) No, management need to correct the previous year figures to correct the error but need
not to furnish third balance sheet at the beginning of preceding period. (Refer Para 40A
of Ind AS 1)
8. (i) Yes, but additionally the Company also need to disclose amounts that are receivable
within a period of 12 months and after 12 months from the reporting date. (Refer Para
60 and 61 of Ind AS 1)
(ii) No, the Company cannot disclose these payables as non-current and the Company also
need to disclose amounts that are payable within a period of 12 months and after
12 months from the reporting date. (Refer Para 60 and 61 of Ind AS 1)

© The Institute of Chartered Accountants of India

 3.76 a
2.76 FINANCIAL REPORTING
v
v
(iii) No, because the amount will be received after the operating cycle of the Company.
(Refer Para 66 of Ind AS 1)
(iv) No, because the amount may be required to be paid before completion of the contract
in case the contract is cancelled. (Refer Para 69 of Ind AS 1).
9. (a) As per paragraph 33 of Ind AS 1, offsetting is permitted only when the offsetting reflects
the substance of the transaction.
In this case, the agreement/arrangement, if any, between the holding and subsidiary
company needs to be considered. If the arrangement is to reimburse the cost incurred
by the holding company on behalf of the subsidiary company, the same may be
presented net. It should be ensured that the substance of the arrangement is that the
payments are actually in the nature of reimbursement.
(b) Paragraph 35 of Ind AS 1 requires an entity to present on a net basis gains and losses
arising from a group of similar transactions. Accordingly, gains or losses arising on
disposal of various items of property, plant and equipment shall be presented on net
basis. However, gains or losses should be presented separately if they are material.
(c) Ind AS 1 prescribes that assets and liabilities, and income and expenses should be
reported separately, unless offsetting reflects the substance of the transaction. In
addition to this, as per paragraph 42 of Ind AS 32, a financial asset and a financial
liability should be offset if the entity has legally enforceable right to set off and the entity
intends either to settle on net basis or to realise the asset and settle the liability
simultaneously.
In accordance with the above, the receivable and payable should be offset against each
other and net amount is presented in the balance sheet if the entity has a legal right to
set off and the entity intends to do so. Otherwise, the receivable and payable should
be reported separately.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.77

v
UNIT 2:
INDIAN ACCOUNTING STANDARD 34: INTERIM
FINANCIAL REPORTING

LEARNING OUTCOMES
After studying this unit, you will be able to:
 State the objective and scope of Ind AS 34
 Define the relevant terms used in the standard
 Elaborate the contents of interim financial report
 Prescribe minimum content of Interim Financial Report
 Account for the significant events and transactions while preparing the
interim financial report
 Recommend principles of recognition and measurement in complete or
condensed financial statement for an interim period
 Prepare the interim financial report of an entity
 Differentiate between Ind AS 34 and AS 25.

© The Institute of Chartered Accountants of India

 3.78 a
2.78 FINANCIAL REPORTING
v
v

UNIT OVERVIEW

Contents of an Interim Financial Report

Minimum
Components
of Interim
Recognition and Measurement
Financial
Report

Significant
Events and Same
Transactions Accounting
Policies as Restatement of Previously
Annual
Reported Interim Periods
Revenues
Received
Seasonally,
Other Cyclically, or
Disclosures Occasionally
Costs incurred
Unevenly during Interim Financial
Disclosure in Annual
the Financial Reporting and
Year Financial Statements
Impairment

Materiality Use of Estimates

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.79

v
2.1 INTRODUCTION
Interim Financial Reporting applies when an entity prepares an interim financial report. Ind AS
34 does not mandate an entity as when to prepare such a report. Timely and reliable interim
financial reporting improves the ability of investors, creditors, lenders and others to understand
an entity’s capacity to generate earnings and cash flows and its financial condition and liquidity.
Permitting less information to be reported than in annual financial statements (on the basis of
providing an update to those financial statements), the standard outlines the recognition,
measurement and disclosure requirements for interim reports.

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

2.3 SCOPE
 This Standard does not mandate which entities should be required to publish interim
financial reports, how frequently, or how soon after the end of an interim period.
 This Standard applies if an entity is required or elects to publish an interim financial report
in accordance with Indian Accounting Standards (Ind AS).
 Each financial report, annual or interim, is evaluated on its own for conformity to Ind AS.
The fact that an entity may not have provided interim financial reports during a particular
financial year or may have provided interim financial reports that do not comply with this
Standard does not prevent the entity’s annual financial statements from conforming to Ind
AS if they otherwise do so.
 If an entity’s interim financial report is described as complying with Ind AS, it must comply
with all of the requirements of this Standard.

2.4 DEFINITIONS
1. Interim period is a financial reporting period shorter than a full financial year.

© The Institute of Chartered Accountants of India

 3.80 a
2.80 FINANCIAL REPORTING
v
v
2. Interim financial report means a financial report containing either a complete set of
financial statements (as described in Ind AS 1, Presentation of Financial Statements), or a
set of condensed financial statements (as described in this Standard) for an interim period.

2.5 CONTENTS OF AN INTERIM FINANCIAL REPORT

 An Interim Financial Report shall include, at minimum, the following:

A condensed balance sheet

A condensed statement of profit and loss

A condensed statement of changes in equity

A condensed statement of cash flows

Notes, material accounting policy information and other

explanatory information

 In the interest of timeliness and cost considerations and to avoid repetition of information
previously reported, an entity may be required to or may elect to provide less information at
interim dates as compared with its annual financial statements.
 The interim financial report focuses on new activities, events, and circumstances and does
not duplicate information previously reported.
 Nothing in this Standard is intended to prohibit or discourage an entity from publishing a
complete set of financial statements (as described in Ind AS 1) in its interim financial
report, rather than condensed financial statements and selected explanatory notes. Nor
does this Standard prohibit or discourage an entity from including in condensed interim
financial statements more than the minimum line items or selected explanatory notes asset
out in this Standard.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.81

v
2.5.1 Form and Content of Interim financial report

Form and content

If an entity’s latest annual financial report

If entity publishes a If an entity publishes
included the parent’s separate financial
complete set of condensed financial
statements in addition to consolidated
financial statements statements
financial statements

Statements Additional line This Standard

Its form and
shall included items if their neither requires
content should Present Basic
headings and ommission nor prohibits the
be in line with and diluted
subtotals would make inclusion of the
Ind AS 1 for a earnings per
included in their condensed parent’s separate
complete set of share for that
most recent interim financial statements in the
financial period
annual financial statements entity’s interim
statements
statements misleading. financial report.

2.5.2 Significant events and transactions

 An entity shall include in its interim financial report an explanation of events and
transactions that are significant to an understanding of the changes in financial position
and performance of the entity since the end of the last annual reporting period.
 Information disclosed in relation to those events and transactions shall update the relevant
information presented in the most recent annual financial report.
 A user of an entity’s interim financial report will have access to the most recent annual
financial report of that entity. Therefore, it is unnecessary for the notes to an interim
financial report to provide relatively insignificant updates to the information that was
reported in the notes in the most recent annual financial report.

The following is a list of events and transactions for which disclosures would be
required if they are significant: (The below list is not exhaustive)

1. the write-down of inventories to net realisable value and the reversal of such write-
down;

2. recognition of a loss from the impairment of financial assets, property, plant and
equipment, intangible assets, assets arising from contracts with customers, or other
assets, and the reversal of such an impairment loss;

3. the reversal of any provisions for the costs of restructuring;

4. acquisitions and disposals of items of property, plant and equipment;

© The Institute of Chartered Accountants of India

 3.82 a
2.82 FINANCIAL REPORTING
v
v
5. commitments for the purchase of property, plant and equipment;

6. litigation settlements;

7. corrections of prior period errors;

8. changes in the business or economic circumstances that affect the fair value of the
entity’s financial assets and financial liabilities, whether those assets or liabilities are
recognised at fair value or amortised cost;

9. any loan default or breach of a loan agreement that has not been remedied on or
before the end of the reporting period;

10. related party transactions;

11. transfers between levels of the fair value hierarchy used in measuring the fair value
of financial instruments;

12. changes in the classification of financial assets as a result of a change in the

purpose or use of those assets; and

13. changes in contingent liabilities or contingent assets.

 Individual Ind AS provide guidance regarding disclosure requirements for many of the
items listed above. When an event or transaction is significant to an understanding of the
changes in an entity’s financial position or performance since the last annual reporting
period, its interim financial report should provide an explanation of and an update to the
relevant information included in the financial statements of the last annual reporting period.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.83

v
Significant events and transactions

Include in interim financial report Do not include in interim financial report

An explanation of events and Avoid relatively insignificant updates to the

transactions that are significant to an information that was reported in the notes in
understanding of the changes in the most recent annual financial report
financial position and performance of because the user will have access to the most
the entity since the end of the last recent annual financial report carrying such
annual reporting period. information.

Information disclosed in relation to

those events and transactions shall
update the relevant information
presented in the most recent annual
financial report.

2.5.3 Other disclosures

The information shall normally be reported on a financial year-to-date basis. In addition to
disclosing significant events and transactions, an entity shall include the following information, in
the notes to its interim financial statements. The following disclosures shall be given either in
the interim financial statements or incorporated by cross-reference from the interim financial
statements to some other statement (such as management commentary or risk report) that is
available to users of the financial statements on the same terms as the interim financial
statements and at the same time. If users of the financial statements do not have access to the
information incorporated by cross-reference on the same terms and at the same time, the
interim financial report is incomplete.

a) a statement that the same accounting policies and methods of computation are followed
in the interim financial statements. If those recently used policies or methods have
been changed, a description of the nature and effect of the change should also be
given.

© The Institute of Chartered Accountants of India

 3.84 a
2.84 FINANCIAL REPORTING
v
v
b) explanatory comments about the seasonality or cyclicality of interim operations.

c) the nature and amount of items affecting assets, liabilities, equity, net income or cash
flows that are unusual because of their nature, size or incidence.

d) the nature and amount of changes in estimates of amounts reported in prior interim
periods of the current financial year or changes in estimates of amounts reported in
prior financial years.

e) issues, repurchases and repayments of debt and equity securities.

f) dividends paid (aggregate or per share) separately for ordinary shares and other
shares.

g) the following segment information (disclosure of segment information is required in an

entity’s interim financial report only if Ind AS 108, Operating Segments, requires that
entity to disclose segment information in its annual financial statements):
i. revenues from external customers, if included in the measure of segment profit or loss
reviewed by the chief operating decision maker or otherwise regularly provided to the
chief operating decision maker.
ii. inter segment revenues, if included in the measure of segment profit or loss reviewed
by the chief operating decision maker or otherwise regularly provided to the chief
operating decision maker.
iii. a measure of segment profit or loss.
iv. a measure of total assets and liabilities for a particular reportable segment if such
amounts are regularly provided to the chief operating decision maker and if there has
been a material change from the amount disclosed in the last annual financial
statements for that reportable segment.
v. a description of differences from the last annual financial statements in the basis of
segmentation or in the basis of measurement of segment profit or loss.
vi. a reconciliation of the total of the reportable segments’ measures of profit or loss to the
entity’s profit or loss before tax expense (tax income) and discontinued operations.
However, if an entity allocates to reportable segments items such as tax expense (tax
income), the entity may reconcile the total of the segments’ measures of profit or loss to
profit or loss after those items. Material reconciling items shall be separately identified
and described in that reconciliation.

h) events after the interim period that have not been reflected in the financial statements

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.85

v
for the interim period.

i) the effect of changes in the composition of the entity during the interim period, including
business combinations, obtaining or losing control of subsidiaries and long-term
investments, restructurings, and discontinued operations. In the case of business
combinations, the entity shall disclose the information required by Ind AS 103, Business
Combinations.

j) for financial instruments, the disclosures about fair value of Ind AS 113, Fair Value
Measurement, and Ind AS 107, Financial Instruments: Disclosures.

k) for entities becoming, or ceasing to be, investment entities, as defined in Ind AS 110,
Consolidated Financial Statements, the disclosures in Ind AS 112, Disclosure of
Interests in Other Entities.

l) the disaggregation of revenue from contracts with customers required by Ind AS 115,
Revenue from Contracts with Customers.

Other Disclosures

Shall be given (Refer the list in para 16A of Ind AS 34)

Either Or

in the interim incorporated by cross-reference from the interim financial

financial statements statements to some other statement (such as management
commentary or risk report)

Statements should be available to users of the financial statements on the same terms as the
interim financial statements and at the same time otherwise the interim financial
statements shall be considered as incomplete

The information shall normally be reported on a financial year-to-date basis.

© The Institute of Chartered Accountants of India

 3.86 a
2.86 FINANCIAL REPORTING
v
v
2.5.4 Periods for which interim financial statements are required to be
presented
Interim reports shall include interim financial statements (condensed or complete) for periods as
follows:
(a) balance sheet as of the end of the current interim period and a comparative balance sheet
as of the end of the immediately preceding financial year.
(b) statements of profit and loss for the current interim period and cumulatively for the current
financial year to date, with comparative statements of profit and loss for the comparable
interim periods (current and year-to-date) of the immediately preceding financial year.
(c) statement of changes in equity cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of the immediately preceding
financial year.
(d) statement of cash flows cumulatively for the current financial year to date,with a
comparative statement for the comparable year-to-date period of the immediately preceding
financial year.
For an entity whose business is highly seasonal, financial information for the twelve months up
to the end of the interim period and comparative information for the prior twelve-month period
may be useful.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.87

v
Periods for which interim financial statements are required to be presented

Interim reports shall include interim financial statements (condensed or complete)

ie

balance sheet statements of profit statement of statement of cash

and loss changes in equity flows

 as of the end  for the current  cumulatively  cumulatively for the

of the current interim period for the current current financial
interim
 cumulatively for financial year year to date
period
the current to date  a comparative
 a comparative financial year to  comparative statement for the
balance sheet
date statement for comparable year-
as of the end
of the  comparative the to-date period of
immediately statements of comparable the immediately
preceding profit and loss for year-to-date preceding
financial year the comparable period of the financial year
interim periods immediately
(current and preceding
year-to-date) of financial year
the immediately
preceding
financial year

Note: For an entity whose business is highly seasonal, financial information for the twelve
months up to the end of the interim period and comparative information for the prior twelve-
month period may be useful.

© The Institute of Chartered Accountants of India

 3.88 a
2.88 FINANCIAL REPORTING
v
v
Following is the illustrative example to understand the periods for which interim financial
statements are required to be presented.

Scenario (a) Entity publishes interim financial reports half-yearly

The entity's financial year ends 31 March (Financial year). The entity will present the following
financial statements (condensed or complete) in its half-yearly interim financial report as of
30 September 20X2:

Name of the component Current period Comparative

period

Balance sheet as at 30 September 20X2 31 March 20X2

Statement of profit and loss : 6 months ending 30 September 20X2 30 September 20X1

Statement of cash flows: 6 months ending 30 September 20X2 30 September 20X1

Statement of changes in equity: 6 months ending 30 September 20X2 30 September 20X1

Scenario (b) Entity publishes interim financial reports quarterly

The entity's financial year ends 31 March (Financial year). The entity will present the following
financial statements (condensed or complete) in its quarterly interim financial report as of
30 September 20X2:

Name of the component Current periods Comparative periods

Balance sheet as at 30 September 20X2 31 March 20X2

Statement of profit and loss :

6 months ending; and 30 September 20X2; and 30 September 20X1; and
3 months ending 30 September 20X2 30 September 20X1

Statement of cash flows: 6 months 30 September 20X2 30 September 20X1

ending

Statement of changes in equity: 6

months ending 30 September 20X2 30 September 20X1

2.5.5 Materiality
 In deciding how to recognise, measure, classify, or disclose an item for interim financial

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.89

v
reporting purposes, materiality shall be assessed in relation to the interim period financial
data.
 In making assessments of materiality, it shall be recognised that interim measurements
may rely on estimates to a greater extent than measurements of annual financial data.
 While judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures.
 Unusual items, changes in accounting policies or estimates, and errors are recognised and
disclosed on the basis of materiality in relation to interim period data to avoid misleading
inferences that might result from non-disclosure.

2.6 DISCLOSURE IN ANNUAL FINANCIAL STATEMENTS

 If an estimate of an amount reported in an interim period is changed significantly during the
final interim period of the financial year but a separate financial report is not published for
that final interim period, the nature and amount of that change in estimate shall be
disclosed in a note to the annual financial statements for that financial year.
 Ind AS 8 requires disclosure of the nature and (if practicable) the amount of a change in
estimate that either has a material effect in the current period or is expected to have a
material effect in subsequent periods.
 An entity is not required to include additional interim period financial information in its
annual financial statements.

2.7 RECOGNITION AND MEASUREMENT

S. No. Criteria Recognition and Measurement

1 Same accounting 1. An entity shall apply the same accounting policies in its
policies as annual interim financial statements as are applied in its annual
financial statements, except for accounting policy
changes made after the date of the most recent annual
financial statements that are to be reflected in the next
annual financial statements.
2. The frequency of an entity’s reporting (annual, half-
yearly, or quarterly) shall not affect the measurement of

© The Institute of Chartered Accountants of India

 3.90 a
2.90 FINANCIAL REPORTING
v
v
its annual results. To achieve that objective,
measurements for interim reporting purposes shall be
made on a year-to-date basis.
3. Year-to-date measurements may involve changes in
estimates of amounts reported in prior interim periods of
the current financial year. But the principles for
recognising assets, liabilities, income, and expenses for
interim periods are the same as in annual financial
statements.

2 Revenues received 1. Revenues that are received seasonally, cyclically, or

cyclically, occasionally occasionally within a financial year shall not be
or seasonally 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.

Example: Dividend revenue, royalties, and government

grants.

2. Certain entities earn more revenue in certain interim

periods of a financial year than other interim periods.
Such revenues are recognised when they occur.
Example: seasonal revenues of retaile

3 Costs incurred Costs that are incurred unevenly during an entity’s financial
unevenly during the year shall be anticipated or deferred for interim reporting
financial year purposes if, and only if, it is also appropriate to anticipate or
defer that type of cost at the end of the financial year.

4 Use of estimates 1. To ensure that the resulting information is reliable and

that all material financial information that is relevant to
an understanding of the financial position or
performance of the entity is appropriately disclosed.
2. The preparation of interim financial reports requires a
greater use of estimation methods than annual financial
reports.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.91

v
Employer payroll taxes and insurance contributions
If employer payroll taxes or contributions to government-sponsored insurance funds are
assessed on an annual basis, the employer’s related expense is recognised in interim periods
using an estimated average annual effective payroll tax or contribution rate, even though a large
portion of the payments may be made early in the financial year. A common example is an
employer payroll tax or insurance contribution that is imposed up to a certain maximum level of
earnings per employee. For higher income employees, the maximum income is reached before
the end of the financial year, and the employer makes no further payments through the end of
the year.

Major planned periodic maintenance or overhaul

The cost of a planned major periodic maintenance or overhaul or other seasonal expenditure
that is expected to occur late in the year is not anticipated for interim reporting purposes unless
an event has caused the entity to have a legal or constructive obligation. The mere intention or
necessity to incur expenditure related to the future is not sufficient to give rise to an obligation.
Provisions

A provision is recognised when an entity has no realistic alternative but to make a transfer of
economic benefits as a result of an event that has created a legal or constructive obligation. The
amount of the obligation is adjusted upward or downward, with a corresponding loss or gain
recognised in profit or loss, if the entity’s best estimate of the amount of the obligation changes.
This Standard requires that an entity apply the same criteria for recognising and measuring a
provision at an interim date as it would at the end of its financial year. The existence or non-
existence of an obligation to transfer benefits is not a function of the length of the reporting
period. It is a question of fact.

Year-end bonuses
The nature of year-end bonuses varies widely. Some are earned simply by continued
employment during a time period. Some bonuses are earned based on a monthly, quarterly, or
annual measure of operating result. They may be purely discretionary, contractual, or based on
years of historical precedent.
A bonus is anticipated for interim reporting purposes if, and only if, (a) the bonus is a legal
obligation or past practice would make the bonus a constructive obligation for which the entity
has no realistic alternative but to make the payments, and (b) a reliable estimate of the
obligation can be made. Ind AS 19, Employee Benefits provides guidance.

© The Institute of Chartered Accountants of India

 3.92 a
2.92 FINANCIAL REPORTING
v
v
Variable lease payments
Contingent lease payments can be an example of a legal or constructive obligation that is
recognised as a liability. If a lease provides for contingent payments based on the lessee
achieving a certain level of annual sales, an obligation can arise in the interim periods of the
financial year before the required annual level of sales has been achieved, if that required level
of sales is expected to be achieved and the entity, therefore, has no realistic alternative but to
make the future lease payment.
Intangible assets
An entity will apply the definition and recognition criteria for an intangible asset in the same way
in an interim period as in an annual period. Costs incurred before the recognition criteria foran
intangible asset are met, are recognised as an expense. Costs incurred after the specific point
in time at which the criteria are met are recognised as part of the cost of an intangible asset.
‘Deferring’ costs as assets in an interim balance sheet in the hope that the recognition criteria
will be met later in the financial year is not justified.
Vacations, holidays, and other short-term compensated absences
Accumulating compensated absences are those that are carried forward and can be used in
future periods if the current period’s entitlement is not used in full. Ind AS 19, Employee
Benefits requires that an entity measure the expected cost of and obligation for accumulating
compensated absences at the amount the entity expects to pay as a result of the unused
entitlement that has accumulated at the end of the reporting period. That principle is also
applied at the end of interim financial reporting periods. Conversely, an entity recognises no
expense or liability for non-accumulating compensated absences at the end of an interim
reporting period, just as it recognises none at the end of an annual reporting period.
Other planned but irregularly occurring costs
An entity’s budget may include certain costs expected to be incurred irregularly during the
financial year, such as charitable contributions and employee training costs. Those costs
generally are discretionary even though they are planned and tend to recur from year to year.
Recognising an obligation at the end of an interim financial reporting period for such costs that
have not yet been incurred generally is not consistent with the definition of a liability.
Measuring interim income tax expense
Interim period income tax expense is accrued using the tax rate that would be applicable to
expected total annual earnings, that is, the estimated average annual effective income tax rate
applied to the pre-tax income of the interim period.
This is consistent with the basic concept set out in the Standard that the same accounting

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.93

v
recognition and measurement principles shall be applied in an interim financial report as are
applied in annual financial statements. Income taxes are assessed on an annual basis. Interim
period income tax expense is calculated by applying to an interim period’s pre-tax income the
tax rate that would be applicable to expected total annual earnings, that is, the estimated
average annual effective income tax rate. That estimated average annual rate would reflect a
blend of the progressive tax rate structure expected to be applicable to the full year’s earnings
including enacted or substantively enacted changes in the income tax rates scheduled to take
effect later in the financial year. Ind AS 12, Income Taxes provides guidance on substantively
enacted changes in tax rates. The estimated average annual income tax rate would be re-
estimated on a year-to-date basis, consistent with paragraph 28 of this Standard. The Standard
requires disclosure of a significant change in estimate.
To the extent practicable, a separate estimated average annual effective income tax rate is
determined for each taxing jurisdiction and applied individually to the interim period pre-tax
income of each jurisdiction. Similarly, if different income tax rates apply to different categories
of income (such as capital gains or income earned in particular industries), to the extent
practicable a separate rate is applied to each individual category of interim period pre-tax
income. While that degree of precision is desirable, it may not be achievable in all cases, and a
weighted average of rates across jurisdictions or across categories of income is used if it is a
reasonable approximation of the effect of using more specific rates.
Contractual or anticipated purchase price changes
Volume rebates or discounts and other contractual changes in the prices of raw materials,
labour, or other purchased goods and services are anticipated in interim periods, by both the
payer and the recipient, if it is probable that they have been earned or will take effect. Thus,
contractual rebates and discounts are anticipated but discretionary rebates and discounts are
not anticipated because the resulting asset or liability would not satisfy the conditions in the
Conceptual Framework for Financial Reporting that an asset must be a resource controlled by
the entity as a result of a past event and that a liability must be a present obligation whose
settlement is expected to result in an outflow of resources.
Depreciation and amortisation
Depreciation and amortisation for an interim period is based only on assets owned during that
interim period. It does not take into account asset acquisitions or dispositions planned for later
in the financial year.
Inventories
Inventories are measured for interim financial reporting by the same principles as at financial
year-end. Ind AS 2, Inventories establishes standards for recognising and measuring

© The Institute of Chartered Accountants of India

 3.94 a
2.94 FINANCIAL REPORTING
v
v
inventories. Inventories pose particular problems at the end of any financial reporting period
because of the need to determine inventory quantities, costs, and net realisable values.
Nonetheless, the same measurement principles are applied for interim inventories. To save cost
and time, entities often use estimates to measure inventories at interim dates to a greater
extent than at the end of annual reporting periods. Following are examples of how to apply the
net realisable value test at an interim date and how to treat manufacturing variances at interim
dates:
 Net realisable value of inventories
The net realisable value of inventories is determined by reference to selling prices and
related costs to complete and dispose at interim dates. An entity will reverse a write-down
to net realisable value in a subsequent interim period only if it would be appropriate to do
so at the end of the financial year.
 Interim period manufacturing cost variances
Price, efficiency, spending, and volume variances of a manufacturing entity are recognised
in the statement of profit and loss at interim reporting dates to the same extent that those
variances are recognised in the statement of profit and loss at financial year-end. Deferral
of variances that are expected to be absorbed by year-end is not appropriate because it
could result in reporting inventory at the interim date at more or less than its portion of the
actual cost of manufacture.
Foreign currency translation gains and losses
Foreign currency translation gains and losses are measured for interim financial reporting by the
same principles as at financial year-end.
Ind AS 21, The Effects of Changes in Foreign Exchange Rates specifies how to translate the
financial statements for foreign operations into the presentation currency, including guidelines
for using average or closing foreign exchange rates and guidelines for recognising the resulting
adjustments in profit or loss or in other comprehensive income. Consistently with Ind AS 21, the
actual average and closing rates for the interim period are used. Entities do not anticipate some
future changes in foreign exchange rates in the remainder of the current financial year in
translating foreign operations at an interim date.
If Ind AS 21 requires translation adjustments to be recognised as income or expense in the
period in which they arise, that principle is applied during each interim period. Entities do not
defer some foreign currency translation adjustments at an interim date if the adjustment is
expected to reverse before the end of the financial year.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.95

v
Inventories
Full stock-taking and valuation procedures may not be required for inventories at interim dates,
although it may be done at financial year-end. It may be sufficient to make estimates at interim
dates based on sales margins.
Provisions
Determination of an appropriate amount of a provision (such as a provision for warranties,
environmental costs, and site restoration costs) may be complex and often costly and time-
consuming. Entities sometimes engage outside experts to assist in the annual calculations.
Making similar estimates at interim dates often entails updating of the prior annual provision
rather than the engaging of outside experts to do a new calculation.
Pensions
Ind AS 19, Employee Benefits requires that an entity determine the present value of defined
benefit obligations and the market value of plan assets at the end of each reporting period and
encourages an entity to involve a professionally qualified actuary in measurement of the
obligations. For interim reporting purposes, reliable measurement is often obtainable by
extrapolation of the latest actuarial valuation.
Contingencies
The measurement of contingencies may involve the opinions of legal experts or other advisers.
Formal reports from independent experts are sometimes obtained with respect to contingencies.
Such opinions about litigation, claims, assessments, and other contingencies and uncertainties
may or may not also be needed at interim dates.
Inter-company reconciliations
Some inter-company balances that are reconciled on a detailed level in preparing consolidated
financial statements at financial year-end might be reconciled at a less detailed level in
preparing consolidated financial statements at an interim date.

Illustration 1
Company A has reported 60,000 as pre tax profit in first quarter and expects a loss of
15,000 each in the subsequent quarters. It has a corporate tax slab of 20 percent on the first
20,000 of annual earnings and 40 per cent on all additional earnings. Calculate the amount of
tax to be shown in each quarter.

© The Institute of Chartered Accountants of India

 3.96 a
2.96 FINANCIAL REPORTING
v
v
Solution
Amount of income tax expense reported in each quarter would be as below:

Expected total Income = 15,000 [60,000 - (15,000 x 3)]

Expected tax as per slabs = 15,000 x 20% = 3,000

Average Annual Income tax rate = 3,000 / 15,000 = 20%

Q1 Q2 Q3 Q4
Profit / (Loss) before tax 60,000 (15,000) (15,000) (15,000)
Tax charge / (credit) 12,000 (3,000) (3,000) (3,000)
*****
Illustration 2
ABC Ltd. presents interim financial report quarterly. On 1.4.20X1, ABC Ltd. has carried forward
loss of 600 lakhs for income-tax purpose for which deferred tax asset has not been
recognized. ABC Ltd. earns 900 lakhs in each quarter ending on 30.6.20X1, 30.9.20X1,
31.12.20X1 and 31.3.20X2 excluding the carried forward loss. Income-tax rate is expected to be
40%. Calculate the amount of tax expense to be reported in each quarter.
Solution
Amount of income tax expense reported in each quarter would be as below:

The estimated payment of the annual tax on earnings for the current year:

3,000* x 40 / 100 = 1,200 lakhs.

*(3,600 lakhs - 600 lakhs) = 3,000 lakhs
Average annual effective tax rate = (1,200 / 3,600) × 100 = 33.33%
Tax expense to be shown in each quarter = 900 x 33.33% = 300 lakhs

*****

Illustration 3
Innovative Corporation Private Limited (or “ICPL”) is dealing in seasonal product and the sales
pattern of the product, quarter wise is as under during the financial year 20X1-20X2:

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.97

v
Qtr. I Qtr. II Qtr. III Qtr. IV
ending 30 June ending 30 September ending 31 December ending 31 March
10% 10% 60% 20%
For the first quarter ending on 30 June, 20X1, ICPL has provided the following information :

Particulars Amounts (in crore)

Sales 70
Employees benefits expenses 25
Administrative and other expenses 12
Finance cost 4

ICPL while preparing interim financial report for first quarter wants to defer 16 crores
expenditure to third quarter on the argument that third quarter is having more sales therefore
third quarter should be debited by more expenditure. Considering the seasonal nature of
business and that the expenditures are uniform throughout all quarte
Calculate the result of first quarter as per Ind AS 34 and comment on the company’s view.

Solution
Result of the first quarter ending 30 June

Particulars Amounts (in

crore)

Sales 70

Total Revenue (A) 70

Less: Employees benefits expenses (25)

Administrative and other expenses (12)

Finance cost (4)

Total Expense (B) (41)

Profit (A-B) 29

© The Institute of Chartered Accountants of India

 3.98 a
2.98 FINANCIAL REPORTING
v
v
Note- As per Ind AS 34, the income and expense should be recognized when they are earned
and incurred respectively. Seasonal incomes will be recognized when they occur. Therefore,
the argument of ICPL is not correct considering the priciples of Ind AS 34.
*****

Illustration 4
Fixed production overheads for the financial year is 10,000. Normal expected production for
the year, after considering planned maintenance and normal breakdown, also considering the
future demand of the product is 2,000 MT. It is considered that there are no quarterly /
seasonal variations. Therefore, the normal expected production for each quarter is 500 MT and
the fixed production overheads for the quarter are 2,500.

Actual production achieved Quantity (In MT)

First quarter 400

Second quarter 600

Third quarter 500

Fourth quarter 400

Total 1,900

Presuming that there are no quarterly / seasonal variation, calculate the allocation of fixed
production overheads for all the four quarters as per Ind AS 34 read with Ind AS 2. Will the
quarterly results affect the annual results?

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

Quarters Allocations
First Quarter  Actual fixed production overheads = 2,500
 Fixed production overheads based on the allocation rate of 5 per
unit allocated to actual production = 5 x 400 = 2,000

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.99

v
 Unallocated fixed production overheads to be charged as expense as
per Ind AS 2 and consequently as per Ind AS 34 = 500
Second Quarter  Actual fixed production overheads on year-to-date basis = 5,000
 Fixed production overheads to be absorbed on year-to-date basis =
1,000 x 5 = 5,000
 Earlier, 500 was not allocated to production in the 1 st quarter. To
give effect to the entire 5,000 to be allocated in the second quarter,
as per Ind AS 34, 500 are reversed by way of a credit to the
statement of profit and loss of the 2 nd quarter.
Third Quarter  Actual production overheads on year-to-date basis = 7,500
 Fixed production overheads to be allocated on year-to-date basis =
1,500 x 5 = 7,500
 There is no under or over recovery of allocated overheads. Hence,
no further action is required.
Fourth Quarter  Actual fixed production overheads on year-to-date basis
= 10,000
 Fixed production overheads to be allocated on year-to-date basis
1,900 x 5 = 9,500
 500, i.e., [ 2,500 – ( 5 x 400)] unallocated fixed production
overheads in the 4 th quarter, are to be expensed off as per the
principles of Ind AS 2 and Ind AS 34 by way of a charge to the
statement of profit and loss.
 Unallocated productions overheads for the year 500 (i.e 10,000 –
9,500) are expensed in the Statement of profit and loss as per
Ind AS 2.

The cumulative result of all the quarters would also result in unallocated overheads of 500,
thus, meeting the requirements of Ind AS 34 that the quarterly results should not affect the
measurement of the annual results.
*****

2.8 RESTATEMENT OF PREVIOUSLY REPORTED INTERIM

PERIODS
A change in accounting policy, other than one for which the transition is specified by a new

© The Institute of Chartered Accountants of India

 3.100 2. a
FINANCIAL REPORTING
100 v
v
Ind AS, shall be reflected by:
(a) restating the financial statements of prior interim periods of the current financial year and
the comparable interim periods of any prior financial years that will be restated in the
annual financial statements in accordancewith Ind AS 8; or
(b) when it is impracticable to determine the cumulative effect at the beginning of the financial
year of applying a new accounting policy to all prior periods, adjusting the financial
statements of prior interim periods of the current financial year, and comparable interim
periods of prior financial years to apply the new accounting policy prospectively from the
earliest date practicable.
Under Ind AS 8, a change in accounting policy is reflected by retrospective application, with
restatement of prior period financial data as far back as is practicable. However, if the
cumulative amount of the adjustment relating to prior financial years is impracticable to
determine, then under Ind AS 8 the new policy is applied prospectively from the earliest date
practicable.
The effect of this alongwith respect to interim periods shall be that within the current financial
year any change in accounting policy is applied either retrospectively or, if that is not
practicable, prospectively, from no later than the beginning of the financial year.

2.9 INTERIM FINANCIAL REPORTING AND IMPAIRMENT

An entity is required to assess goodwill for impairment at the end of each reporting period, and,
if required, to recognise an impairment loss at that date in accordance with Ind AS 36.
However, at the end of a subsequent reporting period, conditions may have so changed that the
impairment loss would have been reduced or avoided had the impairment assessment been
made only at that date.
Accordingly, an entity shall not reverse an impairment loss recognised in a previous interim
period in respect of goodwill.
Illustration 5
ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of 20,00,000
for the third quarter of 20X1.
Following adjustments are made while computing the net profit:
(i) Bad debts of 1,00,000 incurred during the quarter. 50% of the bad debts have been
deferred to the next quarter.
(ii) Additional depreciation of 4,50,000 resulting from the change in the method of

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.101

v
depreciation.
(iii) Exceptional loss of 28,000 incurred during the third quarter. 50% of exceptional loss have
been deferred to next quarter.
(iv) 5,00,000 expenditure on account of administrative expenses pertaining to the third
quarter is deferred on the argument that the fourth quarter will have more sales; therefore
fourth quarter should be debited by higher expenditure. The expenditures are uniform
throughout all quarters.
Ascertain the correct net profit to be shown in the Interim Financial Report of third quarter to be
presented to the Board of Directors.
Solution
In the instant case, the quarterly net profit has not been correctly stated. As per Ind AS 34,
Interim Financial Reporting, the quarterly net profit should be adjusted and restated as follows:
(i) The treatment of bad debts is not correct as the expenses incurred during an inter
imreporting period should be recognised in the same period. Accordingly, 50,000 should
be deducted from 20,00,000.
(ii) Recognising additional depreciation of 4,50,000 in the same quarter is correct and is in
tune with Ind AS 34.
(iii) Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire
amount of 28,000 incurred during the third quarter should be recognized in the same
quarter. Hence 14,000 which was deferred should be deducted from the profits of third
quarter only.
(iv) As per Ind AS 34 the income and expense should be recognised when they are earned and
incurred respectively. As per para 39 of Ind AS 34, the costs should be anticipated or
deferred only when:
(i) it is appropriate to anticipate or defer that type of cost at the end of the financial year,
and
(ii) costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of 5,00,000 is not correct as
expenditures are uniform throughout all quarters.
Thus considering the above, the correct net profits to be shown in Interim Financial Report of
the third quarter shall be 14,36,000 ( 20,00,000 - 50,000 - 14,000 - 5,00,000).
*****

© The Institute of Chartered Accountants of India

 3.102 2. a
FINANCIAL REPORTING
102 v
v

2.10 SIGNIFICANT DIFFERENCES IN IND AS 34 VIS-À-VIS

AS 25
S. Particular Ind AS 34 AS 25
No.

1. Disclosures Ind AS 34 requires disclosure by AS 25 does not specifically

way of an explanation of events requires such disclosure.
and transactions that are
significant to an understanding of
the changes in financial position
and performance of the entity since
the end of the last annual reporting
period.

2. Reversal of Ind AS 34 prohibits reversal of There is no such specific

Impairment impairment loss recognised in a prohibition in the AS 25.
Loss previous interim period in respect
of goodwill (in harmony with
paragraph 124 of Ind AS 36, which
prohibits reversal of impairment
loss recognised for goodwill in a
subsequent period) or an
investment in either an equity
instrument or a financial asset
carried at cost.
Ind AS 34 includes Appendix A
which addresses the interaction
between the requirements of Ind
AS 34 and the recognition of
impairment losses on goodwill in
Ind AS 36 and the effect of that
interaction on subsequent interim
and annual financial statements

3. Inclusion of Ind AS 34 states that it neither Under AS 25, if an entity’s

the Parent’s requires nor prohibits the inclusion annual financial report included
Separate of the parent’s separate statements the consolidated financial

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.103

v
Statements inthe entity’s interim report if an statements in addition to the
and the entity’s annual financial report separate financial statements,
Consolidated included the parent’s separate the interim financial report
Financial financial statements in addition to should include both the
Statements consolidated financial statements. consolidated financial
in the Entity’s statements and separate
Interim financial statements, complete or
Report condensed.

4. Accounting Ind AS 34 additionally requires the AS 25 requires the Notes to

Policies information in respect of methods interim financial statements, (if
of computation followed. material and not disclosed
elsewhere in the interim financial
report), to contain a statement
that the same accounting
policies are followed in the
interim financial statements as
those followed in the most recent
annual financial statements or, in
case of change in those policies,
a description of the nature and
effect of the change.

5. Contingent Ind AS 34 requires furnishing of AS 25 requires furnishing of

Liabilities information on both contingent information on contingent
and liabilities and contingent assets, if liabilities only.
Contingent they are significant.
Assets

6. Interim Ind AS 34 requires that, where an AS 25 does not contain these

Financial interim financial report has been requirements.
Statements prepared in accordance with the
prepared on requirements of Ind AS 34, that
Complete fact should be disclosed.
Basis
Further, an interim financial report
should not be described as
complying with Ind AS unless it
complies with allofthe requirements

© The Institute of Chartered Accountants of India

 3.104 2. a
FINANCIAL REPORTING
104 v
v
of Ind AS.
(The latter statement is applicable
when interim financial statements
are prepared on complete basis
instead of ‘condensed basis’).

7. Transitional Ind AS 34 does not have this Under AS 25, when an interim
provision transitional provision. financial report is presented for
the first time in accordance with
that Standard, an entity need not
present, in respect of all the
interim periods of the current
financial year, comparative
statements of profit and loss for
the comparable interim periods
(current and year-to-date) of the
immediately preceding financial
year and comparative cash flow
statement for the comparable
year-to-date period of the
immediately preceding financial
year.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.105

v
FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. The entity’s financial year ends on 31 st March. What are the “reporting periods” for which
financial statements (condensed or complete) in the interim financial report of the entity as
on 30 th September, 20X1 are required to be presented, if:
(i) Entity publishes interim financial reports quarterly
(ii) Entity publishes interim financial reports half-yearly.
2. Narayan Ltd. provides you the following information and asks you to calculate the tax
expense for each quarter, assuming that there is no difference between the estimated
taxable income and the estimated accounting income:
Estimated Gross Annual Income 33,00,000
(inclusive of Estimated Capital Gains of 8,00,000)
Estimated Income of Quarter I is 7,00,000, Quarter II is 8,00,000, Quarter III (including
Estimated Capital Gains of 8,00,000) is 12,00,000 and Quarter IV is 6,00,000.
Tax Rates: On Capital Gains 12%
On Other Income: First 5,00,000 30%
Balance Income· 40%
3. An entity reports quarterly, earns 1,50,000 pre-tax profit in the first quarter but expects to
incur losses of 50,000 in each of the three remaining quarters. The entity operates in a
jurisdiction in which its estimated average annual income tax rate is 30%.
The management believes that since the entity has zero income for the year, its income-tax
expense for the year will be zero. State whether the management’s views are correct or

© The Institute of Chartered Accountants of India

 3.106 2. a
FINANCIAL REPORTING
106 v
v
not? If not, then calculate the tax expense for each quarter as well as for the year as per
Ind AS 34.
4. Due to decline in market price in second quarter, Happy India Ltd. incurred an inventory
loss. The Market price is expected to return to previous levels by the end of the year. At
the end of year, the decline had not reversed. When should the loss be reported in interim
statement of profit and loss of Happy India Ltd.?
5. An entity’s accounting year ends is 31 st December, but its tax year end is 31 st March. The
entity publishes an interim financial report for each quarter of the year ended
31 st December, 2019. The entity’s profit before tax is steady at 10,000 each quarter, and
the estimated effective tax rate is 25% for the year ended 31 st March, 2019 and 30% for the
year ended 31 st March, 2020.
How the related tax charge would be calculated for the year 2019 and its quarters.
6. PQR Ltd. is preparing its interim financial statements for quarter 3 of the year. How the
following transactions and events should be dealt with while preparing its interim financials:
(i) It makes employer contributions to government-sponsored insurance funds that are
assessed on an annual basis. During Quarter 1 and Quarter 2 larger amount of
payments for this contribution were made, while during the Quarter 3 minor payments
were made (since contribution is made upto a certain maximum level of earnings per
employee and hence for higher income employees, the maximum income reaches
before year end).
(ii) The entity intends to incur major repair and renovation expense for the office building.
For this purpose, it has started seeking quotations from vendors. It also has
tentatively identified a vendor and expected costs that will be incurred for this work.
(iii) The company has a practice of declaring bonus of 10% of its annual operating profits
every year. It has a history of doing so.
Answers
1. Paragraph 20 of Ind AS 34, Interim Financial Reporting states as follows:
“Interim reports shall include interim financial statements (condensed or complete) for
periods as follows:
a) balance sheet as of the end of the current interim period and a comparative balance
sheet as of the end of the immediately preceding financial year.
b) statements of profit and loss for the current interim period and cumulatively for the
current financial year to date, with comparative statements of profit and loss for the

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.107

v
comparable interim periods (current and year-to-date) of the immediately preceding
financial year.
c) statement of changes in equity cumulatively for the current financial year to date, with
a comparative statement for the comparable year-to-date period of the immediately
preceding financial year.
d) statement of cash flows cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of the immediately
preceding financial year.
Accordingly, periods for which interim financial statements are required to be presented are
provided herein below:
(i) Entity publishes interim financial reports quarterly
The entity will present the following financial statements (condensed or complete) in
its interim financial report of 30 th September, 20X1:

Balance 30 th September 31 st March 20X1 - -

sheet at 20X1
Statement of 3 months ended 3 months ended 6 months 6 months ended
profit and 30 th September 30 th September ended 30 th 30 th September
loss for 20X1 20X0 September 20X0
20X1
Statement of 6 months ended 6 months ended
changes in 30 th September 30 th September
equity for 20X1 20X0
Statement of 6 months ended 6 months ended - -
cash flows for 30 th September 30 th September
20X1 20X0

(ii) Entity publishes interim financial reports half-yearly

The entity’s financial year ends 31 st March. The entity will present the following
financial statements (condensed or complete) in its half-yearly interim financial report
of 30 th September, 20X1:

Balance sheet at 30 th September, 20X1 31 st March, 20X1

Statement of profit and 6 months ending 6 months ending

loss for 30 th September, 20X1 30 th September, 20X0

© The Institute of Chartered Accountants of India

 3.108 2. a
FINANCIAL REPORTING
108 v
v
Statement of changes in 6 months ending 6 months ending
equity for 30 th September 20X1 30 th September 20X0

Statement of cash flows 6 months ending 6 months ending

for 30 th September 20X1 30 th September 20X0

2. As per para 30(c) of Ind AS 34 ‘Interim Financial Reporting’, income tax expense is
recognised in each interim period based on the best estimate of the weighted average
annual income tax rate expected for the full financial year.
If different income tax rates apply to different categories of income (such as capital gains or
income earned in particular industries) to the extent practicable, a separate rate is applied
to each individual category of interim period pre-tax income.

Estimated annual income exclusive of estimated capital gain

(33,00,000 – 8,00,000) (A) 25,00,000

Tax expense on other income:

30% on 5,00,000 1,50,000

40% on remaining 20,00,000 8,00,000

(B) 9,50,000
9,50,000
Weighted average annual income tax rate = B =  38%
A 25,00,000

Tax expense to be recognised in each of the quarterly reports

Quarter I - 7,00,000 x 38% 2,66,000

Quarter II - 8,00,000 x 38% 3,04,000

Quarter III - (12,00,000 - 8,00,000) x 38% 1,52,000

8,00,000 x 12% 96,000 2,48,000

Quarter IV - 6,00,000 x 38% 2,28,000

10,46,000

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 34 3.109

v
3. As illustrated in para 30 (c) of Ind AS 34 ‘Interim financial reporting’, income tax expense is
recognised in each interim period based on the best estimate of the weighted average
annual income tax rate expected for the full financial year.
Accordingly, the management’s contention that since the net income for the year will be
zero no income tax expense shall be charged quarterly in the interim financial report, is not
correct. Since the effective tax rate or average annual income tax rate is already given in
the question as 30%, the income tax expense will be recognised in each interim quarter
based on this rate only. The following table shows the correct income tax expense to be
reported each quarter in accordance with Ind AS 34:

Period Pre-tax earnings Effective tax rate Tax expense

(in ) (in )
First Quarter 1,50,000 30% 45,000
Second Quarter (50,000) 30% (15,000)
Third Quarter (50,000) 30% (15,000)
Fourth Quarter (50,000) 30% (15,000)
Annual 0 0

4. Loss should be recognised in the second quarter of the year.

5. Table showing computation of tax charge:

Quarter Quarter Quarter ending Quarter ending Year ending

ending ending 30 th 30 th 31 st December, 31 st December,
31 st March, June, 2019 September, 2019 2019
2019 2019

Profit before tax 10,000 10,000 10,000 10,000 40,000

Tax charge (2,500) (3,000) (3,000) (3,000) (11,500)
7,500 7,000 7,000 7,000 28,500

Since an entity’s accounting year is not same as the tax year, more than one tax rate might
apply during the accounting year. Accordingly, the entity should apply the effective tax rate
for each interim period to the pre-tax result for that period.
6. Paragraph 28 of Ind AS 34, Interim Financial Reporting states that an entity shall apply the
same accounting recognition and measurement principles in its interim financial statements
as are applied in its annual financial statements.

© The Institute of Chartered Accountants of India

 3.110 2. a
FINANCIAL REPORTING
110 v
v
Further, paragraphs 32 and 33 of Ind AS 34, Interim Financial Reporting state that for
assets, the same tests of future economic benefits apply at interim dates and at the end of
an entity’s financial year. Costs that, by their nature, would not qualify as assets at
financial year-end would not qualify at interim dates either. Similarly, a liability at the end
of an interim reporting period must represent an existing obligation at that date, just as it
must at the end of an annual reporting period.
An essential characteristic of income (revenue) and expenses is that the related inflows
and outflows of assets and liabilities have already taken place. If those inflows or outflows
have taken place, the related revenue and expense are recognised otherwise not. The
Conceptual Framework does not allow the recognition of items in the balance sheet which
do not meet the definition of assets or liabilities.
Considering the above guidance, while preparing its interim financials, the transactions and
events of the given case should be dealt with as follows:
(i) If employer contributions to government-sponsored insurance funds are assessed on
an annual basis, the employer’s related expense is recognised using an estimated
average annual effective contribution rate in its interim financial statements, even
though a large portion of the payments have been made early in the financial year.
Accordingly, it should work out an average effective contribution rate and account for
the same accordingly, in its interim financials.
(ii) The cost of a planned overhaul expenditure that is expected to occur in later part of
the year is not anticipated for interim reporting purposes unless an event has caused
the entity to have a legal or constructive obligation. The mere intention or necessity to
incur expenditure related to the future is not sufficient to give rise to an obligation.
(iii) A bonus is anticipated for interim reporting purposes, if and only if,
(a) the bonus is a legal obligation or past practice would make the bonus a
constructive obligation for which the entity has no realistic alternative but to make
the payments, and
(b) a reliable estimate of the obligation can be made. Ind AS 19, Employee Benefits
provides guidance in this regard.
A liability for bonus may arise out of legal agreement or constructive obligation because of
which it has no alternative but to pay the bonus and accordingly, needs to be accrued in
the annual financial statements.
Bonus liability is accrued in interim financial statements on the same basis as they are
accrued for annual financial statements. In the instant case, bonus liability of 10% of
operating profit for the year to date may be accrued.
In the given case, since the company has past record of declaring annual bonus every
year, the same may be accrued using a reasonable estimate (applying the principles of
Ind AS 19, Employee Benefits) while preparing its interim results.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.111

UNIT 3:
INDIAN ACCOUNTING STANDARD 7: STATEMENT
OF CASH FLOWS

LEARNING OUTCOMES
After studying this unit, you will be able to:
 Understand the meaning of cash flow statement
 Describe the objective and scope of issuance of Ind AS 7
 Define the relevant terms used in the Ind AS
 Classify the types of cash flows into operating, investing and financing
activities
 Distinguish between direct and indirect method of presentation of cash
flows under the operating activity
 Identify the provision applicable to various peculiar situations of cash
flows
 Disclose the necessary information as required in the standard
 Differentiate between Ind AS 7 and AS 3.

© The Institute of Chartered Accountants of India

 3.112 2. a
FINANCIAL REPORTING
112 v
v

UNIT OVERVIEW

• Objectives
• Scope
• Benefits
Ind AS 7 • Definitions

• Operating Cash Flows

• Investing Cash Flows
Presentation of
Statement of • Financing Cash Flows
Cash Flows

• Direct Method
Method of • Indirect Method
Presentation

• Reporting on a net basis

• Foreign Currency Transactions
• Interest and Dividend
• Taxes on Income
Peculiar Cases • Investments in Subsidiaries, associates and Joint ventures
of Cash flows • Changes in ownerships Interests in subsidiaries and other businesses
• Non Cash Transactions

• Components of cash and cash equivalents

• Other Disclosures
Discosure

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.113

3.1 INTRODUCTION
The balance sheet is a snapshot of entity’s financial resources and obligations at a particular point
of time and the statement of profit and loss reflects the financial performance for the period.
These two components of financial statements are based on accrual basis of accounting. The
statement of cash flows includes only inflows and outflows of cash and cash equivalents; it
excludes transactions that do not affect cash receipts and payments.
The information on cash flows is useful in assessing sources of generating and deploying cash
and cash equivalents during the reporting period. The statement of cash flows can be used for
comparison with earlier reporting periods of the same entity as well as comparison with other
entities for the same reporting period.
Ind AS 7, Statement of Cash Flows, prescribes principles and guidance on preparation and
presentation of cash flows of an entity from operating activities, investing activities and financing
activities for a reporting period.

3.2 MEANING OF STATEMENT OF CASH FLOWS

Cash flow statement, in simple words is a statement, which provides the details about how the
cash is generated by an entity during the particular reporting period and how it is applied. While
doing so, it takes into consideration the opening balances of cash and cash equivalents, adds the
cash generated, deducts the cash payments and reconciles it with closing balances of cash and
cash equivalents. The cash flows are classified into following three main categories:
(a) Cash flows from Operating Activities
(b) Cash flows from Investing Activities
(c) Cash flows from Financing Activities

From Operating
Activities

From Investing From Financing

Activities Activities

Cash Flows

© The Institute of Chartered Accountants of India

 3.114 2. a
FINANCIAL REPORTING
114 v
v
The simplified example of cash flow statement, for understanding purpose is given below

Particulars Amount ( )

Cash flow from Operating Activities 10,000

Cash flow used in Investing Activities (2,000)

Cash flow used in Financing Activities (4,000)

Net Cash Generated during the year 4,000

Add: Cash and Cash Equivalents at the beginning of the year 13,000

Cash and Cash Equivalents at the end of the year (which will also tally with
the cash and cash equivalents given in the balance sheet) 17,000

Thus, one can see that at the beginning of the year, the opening balance of cash and cash
equivalent was 13,000. During the year, the business generated (inflow) cash from its main
operations 10,000. Thus, the entity had 23,000 at its disposal. Out of it, the entity has used
(outflow) 2,000 for additional investments and 4,000 for financing activities. Therefore, at the
end of the year, the entity is left with the balance of 17,000.

3.3 OBJECTIVE
Ind AS 7, has specified the following objectives of Statement of Cash Flows:
3.3.1 To provide information about historical changes in cash and
cash equivalents
Cash flow statement aims at providing the information about how the cash has been generated
during the year and for what purposes has it been utilised. The information will be provided for
current year and immediate previous year.
3.3.2 To assess the ability to generate cash and cash equivalents
Cash flow statement is intended to provide the stakeholders about the efficiency of the company in
generating cash and cash equivalents. Some companies may look profitable as per profit and loss
account but whether they have enough cash for payment of their debts and creditors has to be
assessed by using cash flow statement. It is useful in examining the relationship between
profitability and net cash flow and the impact of changing prices.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.115

3.3.3 To understand the timing and certainty of their generation

The historical analysis of statement of cash flow can set a trend regarding the years in which
company could generate fair amount of cash flows and the probability of generating it.

Objectives of Ind AS 7

To assess
To require

the provision of
the ability of the the needs of the the timing and information about the
entity to generate entity to utilise certainty of historical changes in
cash and cash those cash flows generation of cash and cash
equivalents cash flows equivalents of an entity

3.4 BENEFITS OF CASH FLOW INFORMATION

3.4.1 Provides information enabling evaluation of changes in net
assets and financial structure (Liquidity and solvency)
Cash flow statement reconciles the opening balances of cash and cash equivalents with the
closing balances of cash and cash equivalents, giving the reasons for the changes happened
during the year. Thus, it provides a clear picture of cash inflows and out flows that have taken
place during the reporting period.
3.4.2 Assesses the ability to manage the cash
The stakeholders get an idea about what is the source of generation of cash and how it is used for.
The information gives a fair idea about the efficiency and ability of the company to generate cash.
For example, suppose there is negative cash flow from operations. It denotes that company is
unable to generate cash from its main business activity, which is not a favourable situation.
Cash flow statements can also throw light on whether company could generate sufficient cash or not.

© The Institute of Chartered Accountants of India

 3.116 2. a
FINANCIAL REPORTING
116 v
v
For example, company wants to expand its production capacity. The cash flow statement can
indicate whether company could generate the required cash from their operations, or whether
company has generated the funds from share capital or whether company has taken a loan for
the same.

3.4.3 Assess and compare the present value of future cash flows
The past trends of cash flows will help the company to predict about future cash flows. Such
information is useful while evaluating the projects on capital budgeting or valuation of shares.
Thus, it forms the base for future projects and can be discounted using discounting techniques.
3.4.4 Compares the efficiency of different entities
Accounting profits of various entities may have different assumptions, policies and definitions.
However, cash flows will be calculated by using the same technique and finally all differing
assumptions across the companies will melt down and entity will reach to a common comparable
base of cash and cash equivalents.

3.5 SCOPE
An entity shall prepare a statement of cash flows in accordance with the requirements of this
Standard and shall present it as an integral part of its financial statements for each period for
which financial statements are presented.
The Standard requires all entities to present a statement of cash flows.
Every organisation, whether it is small or big in size, whether it’s a manufacturing organisation or
trading concern or service organisation, needs cash for running its business. The cash is also
needed for future investments. Cash would be needed for payment of dividends, repayment of
loans as well. Thus, any organisation is required to generate the cash and utilises cash
continuously.
Banks and Financial institutions are also not an exception to the same. Even if they deal with
financial products, accept deposits and give loans day in and day out, they need to generate the
cash profit for their own organisation. They need to make investments in terms of new branches,
set ups etc. Thus, statement of cash flow is equally important for Banking and Financial
Institutions as well.

3.6 DEFINITIONS
The following terms are used in this Standard with the meanings specified:
1. Cash comprises cash on hand and demand deposits.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.117

2. Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.
5. Investing activities are the acquisition and disposal of long-term assets and other
investment not included in cash equivalents.
6. Financing activities are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity.

3.7 CASH AND CASH EQUIVALENTS

Cash Equivalent means investments which can be realised easily in cash in a short period from
the date of investing the same.
1. Purpose: Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes.
2. Known amount of cash: This means that the cash amount that will be received on
redemption should be known at the time of the initial investment. It is not sufficient that the
instrument itself is readily convertible into cash and has a determinable market value.
Instead, it means that, at the time of the initial investment, the entity is satisfied that the risk
of changes in value is insignificant and that therefore the amount of cash to be received on
redemption is known.
3. Liquidity and Risk: For an investment to qualify as a cash equivalent it must be readily
convertible to a known amount of cash and be subject to an insignificant risk of changes in
value. Therefore, an investment normally qualifies as a cash equivalent only when it has a
short maturity of, say, three months or less from the date of acquisition.
4 Equity investments are excluded from cash equivalents unless they are, in substance, cash
equivalents.
5. Bank borrowings are generally considered to be financing activities. However, the bank
overdrafts may be an integral part of an entity's cash management in which case they will be
included as a component of cash and cash equivalents. A characteristic of such banking
arrangements is that the bank balance often fluctuates from being positive to overdrawn. .
6. Cash Management: Cash flows exclude movements between items that constitute cash or
cash equivalents because these components are part of the cash management of an entity
rather than part of its operating, investing and financing activities. Cash management
includes the investment of excess cash in cash equivalents.

© The Institute of Chartered Accountants of India

 3.118 2. a
FINANCIAL REPORTING
118 v
v

Illustration 1
Company has provided the following information regarding the various assets held by company on
31 st March 20X1. Find out, which of the following items will be part of cash and cash equivalents
for the purpose of preparation of cash flow statement as per the guidance provided in Ind AS 7:
Sr.No. Name of the Security Additional Information
1. Fixed deposit with SBI 12%, 3 years maturity on 1 st January 20X4
2. Fixed deposit with HDFC 10%, original term was for 2 years, but due for
maturity on 30 th June 20X1
3. Redeemable Preference shares Acquired on 31 st January 20X1 and the
in ABC ltd redemption is due on 30 th April 20X1
4. Cash balances at various banks All branches of all banks in India
5. Cash balances at various banks All international branches of Indian banks
6. Cash balances at various banks Branches of foreign banks outside India
7. Bank overdraft of SBI Fort branch Temporary overdraft, which is payable on
demand
8. Treasury Bills 90 days maturity

Solution
Sr. No. Name of the Security Decision
1. Fixed deposit with SBI Not to be considered – long term
2. Fixed deposit with HDFC Exclude as original maturity is not less than 90
days from the date of acquisition
3. Redeemable Preference shares in Include as due within 90 days from the date of
ABC Ltd. acquisition
4. Cash balances at various banks Include
5. Cash balances at various banks Include
6. Cash balances at various banks Include
7. Bank overdraft of SBI Fort branch Include (Assumed as integral part of an entity's
cash management)
8. Treasury Bills Include

*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.119

3.8 PRESENTATION OF STATEMENT OF CASH FLOWS

The statement of cash flows shall report cash flows during the period classified by operating,
investing and financing activities.

Activities

Operating Investing Financing

Principal revenue- Activities that result in the Activities that result in

producing activities of the acquisition and disposal of changes in the size and
entity and other activities long-term assets and other composition of the
that are not investing or investment not included in contributed equity and
financing activities cash equivalents borrowings of the entity

3.8.1 Operating Activities

 Cash flows from operating activities are primarily derived from the principal revenue
producing activities of the entity ie from operations of the business. Therefore, they are, in
general, the result of the transactions and events that enter into the determination of profit or
loss.
Examples of cash flows from operating activities are:

Operating Cash Inflows Operating Cash Outflows

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

© The Institute of Chartered Accountants of India

 3.120 2. a
FINANCIAL REPORTING
120 v
v
Illustration 2
From the following transactions, identify which transactions will be qualified for the calculation of
operating cash flows, if company is into the business of trading of mobile phones.
Sr. No. Nature of Transaction
1 Receipt from sale of mobile phones
2 Purchases of mobile phones from various companies
3 Employees expenses paid
4 Advertisement expenses paid
5 Credit sales of mobile
6 Miscellaneous charges received from customers for repairs of mobiles
7 Loss due to decrease in market value of the closing stock of old mobile phones
8 Payment to suppliers of mobile phones
9 Depreciation on furniture of sales showrooms
10 Interest paid on cash credit facility of the bank
11 Profit on sale of old computers and printers, in exchange of new laptop and printer
12 Advance received from customers
13 Sales Tax and excise duty paid

Solution

Sr. No. Nature of Transaction Included / Excluded with reason

1 Receipt from sale of mobile phones Include – main revenue generating activity
2 Purchases of mobile phones from Include – expenses related to main operations
various companies of business
3 Employees expenses paid Include – expenses related to main operations
of business
4 Advertisement expenses paid Include – expenses related to main operations
of business
5 Credit sales of mobile Do not include – Credit transaction will not be
included in cash flow (receipts from customers
will be included)
6 Misc. charges received from Include – supplementary revenue generating
customers for repairs of mobiles activity
7 Loss due to decrease in market Do not include - Non cash transaction
value of the closing stock of old
mobile phones

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.121

8 Payment to suppliers of mobile Include – cash outflow related to main

phones operations of business
9 Depreciation on furniture of sales Do not include – non cash item
showrooms
10 Interest paid on cash credit facility Do not include – cost of finance
of the bank
11 Profit on sale of old computers and Do not include – non cash item
printers, in exchange of new laptop
and printer
12 Advance received from customers Include – Related to operations of business
13 Sales tax and excise duty paid Include – related to operations of business

*****
 The amount of cash flows arising from operating activities is a key indicator of the extent to
which the operations of the entity have generated sufficient cash flows or not. If the cash
flow from operations is positive, it will be treated as positive indicator whereas negative cash
flow from operations will denote that company’s ability to generate the revenue from its main
operations is very weak. The companies in the initial stage of their business or the
companies which are facing economic problems will generally have the negative cash flow
from operations.
 Cash flow from operations are used to maintain the operating capability of the entity, pay
dividends and make new investment without recourse to external sources of financing.
Therefore, it is necessary to assess how much cash is generated by the business from
operations? Are they sufficient to take care of their future investment plans? Can loans be
repaid in time without default from such cash flows? Is there sufficient amount for payment of
preference dividend? Is anything left for equity shareholders after making all these
payments? Answers to all these questions will depend on whether the entity has generated
enough cash or not.
3.8.1.1 Certain Specific Issues
1. Profit/ Loss on Sale of Assets : Some transactions, such as the sale of an item of plant,
may give rise to a gain or loss that is included in recognised profit or loss. The cash flows
relating to such transactions are cash flows from investing activities.
2. Properties built for let out : Cash payments to manufacture or acquire assets held for rental
to others and subsequently held for sale are cash flows from operating activities. The cash
receipts from rents and subsequent sales of such assets are also cash flows from operating
activities.
3.8.2 Investing Activities
Investment means sacrifice of current resource in a view to get more returns in future. All entities
need some amount of investment for their future survival.

© The Institute of Chartered Accountants of India

 3.122 2. a
FINANCIAL REPORTING
122 v
v
Ind AS 7 states that investing activities represent the extent to which expenditures have been
made for resources intended to generate future income and cash flows. Only expenditures that
result in a recognized asset in the balance sheet are eligible for classification as investing
activities.
Examples of cash flows arising from investing activities are:

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

When a contract is accounted for as a hedge of an identifiable position the cash flows of the
contract are classified in the same manner as the cash flows of the position being hedged.
Illustration 3
From the following transactions taken from a private sector bank operating in India, identify
which transactions will be classified as operating and which would be classified as Investing
activity.

S. No. Nature of transaction paid

1 Interest received on loans
2 Interest paid on Deposits

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.123

3 Deposits accepted
4 Loans given to customers
5 Loans repaid by the customers
6 Deposits repaid
7 Commission received
8 Lease rentals paid for various branches
9 Service tax paid
10 Furniture purchased for new branches
11 Implementation of upgraded banking software
12 Purchase of shares in 100% subsidiary for opening a branch in Abu Dhabi
13 New cars purchased from Honda dealer, in exchange of old cars and remaining
amount paid in cash
14 Provident fund paid for the employees
15 Issued employee stock options

Solution
Sr. No. Nature of transaction paid Operating / Investing / Not to be considered
1 Interest received on loans Operating – Main revenue generating activity
2 Interest paid on Deposits Operating – Main expenses of operations
3 Deposits accepted Operating – in case of financial institutes
4 Loans given to customers Operating – in case of financial institutes
5 Loans repaid by the customers Operating – in case of financial institutes
6 Deposits repaid Operating – in case of financial institutes
7 Commission received Operating – Main revenue generating activity
8 Lease rentals paid for various Operating – Main expenses of operations
branches
9 Service tax paid Operating – Main expenses of operations
10 Furniture for new branches Investing – Assets purchased
11 Implementation of upgraded Investing – Purchased for long term purpose
banking software
12 Purchase of shares in 100% Investing – strategic investment

© The Institute of Chartered Accountants of India

 3.124 2. a
FINANCIAL REPORTING
124 v
v
subsidiary for opening a branch in
Abu Dhabi
13 New cars purchased from Honda Investing-for cash payment
dealer, in exchange of old cars
and cash payment
14 Provident fund paid for the Operating
employees
15 Issued employee stock options Not to be considered. No cash flow

*****
3.8.3 Financing Activities
During the life time of the entity, it needs money for long term investments as well as for working
capital purpose. Company can raise the capital by way of equity or loans. Thus, the cash flows
related to raising of funds and redemption of funds will be covered under Cash flows from
financing activities. The cost of capital is also generally covered under the Financing Activity.
Ind AS 7 states that the cash flows from Financing activity are useful in predicting claims on future
cash flows by providers of capital to the entity.
Cash Inflows from Financing Activity Cash Outflows from Financing Activity
Cash proceeds from issuing shares or other Cash payments to owners to acquire or redeem
equity instruments; the entity’s shares;
Cash proceeds from issuing debentures, loans, Cash repayments of amounts borrowed; and
notes, bonds, mortgages and other
Short-term or long-term borrowings; Cash payments by a lessee for the reduction of
the outstanding liability relating to a lease.

Illustration 4
From the following transactions taken from a parent company having multiple businesses and
multiple segments, identify which transactions will be classified as Operating, Investing and
Financing:
Sr. No. Nature of transaction
1 Issued preference shares
2 Purchased the shares of 100% subsidiary company
3 Dividend received from shares of subsidiaries
4 Dividend received from other companies

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.125

5 Bonus shares issued

6 Purchased license for manufacturing of special drugs
7 Royalty received from the goods patented by the company
8 Rent received from the let out building (letting out is not main business)
9 Interest received from loans and advances given
10 Dividend paid
11 Interest paid on security deposits
12 Purchased goodwill
13 Acquired the assets of a company by issue of equity shares (not parting any cash)
14 Interim dividends paid
15 Dissolved the 100% subsidiary and received the amount in final settlement

Solution
Sr. Nature of transaction Operating / Investing /
No. Financing / Not to be
considered
1 Issued preference shares Financing
2 Purchased the shares of 100% subsidiary company Investing
3 Dividend received from shares of subsidiaries Investing
4 Dividend received from other companies Investing
5 Bonus shares issued No cash flow
6 Purchased license for manufacturing of special drugs Investing
7 Royalty received from the goods patented by the company Operating
8 Rent received from the let out building (letting out is not main Investing
business)
9 Interest received from loans and advances given Investing
10 Dividend paid Financing
11 Interest paid on security deposits Financing
12 Purchased goodwill Investing
13 Acquired the assets of a company by issue of equity shares Not to be considered
(not parting any cash)
14 Interim dividends paid Financing
15 Dissolved the 100% subsidiary and received the amount in Investing
final settlement
*****

© The Institute of Chartered Accountants of India

 3.126 2. a
FINANCIAL REPORTING
126 v
v
Illustration 5
An entity has entered into a factoring arrangement and received money from the factor.
Examine the said transaction and state how should it be presented in the statement of cash
flows?

Solution
Under factoring arrangement, it needs to be assessed whether the arrangement is recourse or
non-recourse.
Recourse factoring:
The cash received is classified as a financing cash inflow as the entity continues to recognize the
receivables and the amount received from the factor is indeed a liability, The substance of the
arrangement is financing, as the entity retains substantially all of the risk and rewards of the
factored receivables.
When the cash is collected by the factor, the liability and the receivables are de-recognized. It is
acceptable for this to be disclosed as a non-cash transaction, because the settlement of the
liability and the factored receivables does not result in cash flows. The net impact of these
transactions on the cash flow statement is to present a cash inflow from financing, but there is no
operating cash flow from the original sale to the entity’s customers.
Non-recourse factoring:
Where an entity de-recognises the factored receivables and receives cash from the factor, the
cash receipt is classified as an operating cash inflow. This is because the entity has received cash
in exchange for receivables that arose from its operating activities.
*****

3.9 REPORTING CASH FLOWS FROM OPERATING

ACTIVITIES

Major classes of gross cash receipts and

Direct Method
gross cash payments are disclosed
Cash Flows from
Operating Activities Profit or loss is adjusted for the effects of
transactions of a non-cash nature, any
deferrals or accruals of past or future operating
Indirect Method
cash receipts or payments, and items of
income or expense associated with investing
or financing cash flows

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.127

 An entity shall report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
(b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of a
non-cash nature, any deferrals or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with investing or financing cash
flows.
 Entities are encouraged to report cash flows from operating activities using the direct method.
The direct method provides information which may be useful in estimating future cash flows
and which is not available under the indirect method. Under the direct method, information
about major classes of gross cash receipts and gross cash payments may be obtained either:
(a) from the accounting records of the entity; or
(b) by adjusting sales, cost of sales (interest and similar income and interest expense and
similar charges for a financial institution) and other items in the statement of profit and
loss for:
(i) changes during the period in inventories and operating receivables and payables;
(ii) other non-cash items; and
(iii) other items for which the cash effects are investing or financing cash flows.
Analysis
Direct method starts with cash revenue / income / receipts of the company. All the cash
expenses will be deducted from such cash revenue. The cash profit will be adjusted for the
cash flows arising from investing and financing activities. Non-cash expenses / losses / gains
will not be considered. The payments to suppliers and receipts from customers are also
taken into consideration. The resultant figure would be cash flow from operating activity. The
exercise would be similar to converting the income and expenditure account (accrual system)
into receipt and payment (cash system), with certain adjustments. Thus, if we consider the
vertical operating statement, direct method will have (TOP down) approach of presentation.
 Under the indirect method, the net cash flow from operating activities is determined by
adjusting profit or loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign
currency gains and losses, and undistributed profits of associates; and
(c) all other items for which the cash effects are investing or financing cash flows.

© The Institute of Chartered Accountants of India

 3.128 2. a
FINANCIAL REPORTING
128 v
v
Alternatively, the net cash flow from operating activities may be presented under the indirect
method by showing the revenues and expenses disclosed in the statement of profit and loss
and the changes during the period in inventories and operating receivables and payables.
Analysis
Indirect method is reverse of direct method. It starts with the accounting profit after tax as
given in profit and loss accounts. Thereafter, the profit will be adjusted for non-cash items,
losses and gains on investing and financing activities, interest and dividends, collection and
payments to debtors / creditors etc. Accordingly, the cash from operating activity will derived.
Thus indirect method will have (Bottom up) approach.
Note: Under both the methods the amount of cash flow from Operating activities need to be
necessarily same. It’s only the approach for presentation which differs.

Illustration 6
Find out the cash from operations by direct method and indirect method from the following information:
Operating statement of ABC Ltd. for the year ended 31.3.20X2
Particulars
Sales 5,00,000.00
Less: Cost of goods sold 3,50,000.00
Administration & Selling Overheads 55,000.00
Depreciation 7,000.00
Interest Paid 3,000.00
Loss on sale of asset 2,000.00
Profit before tax 83,000.00
Tax (30,000.00)
Profit After tax 53,000.00
Balance Sheet as on 31 st March
20X2 20X1
Assets
Non-current Assets
Property, Plant and Equipment 75,000.00 65,000.00
Investment 12,000.00 10,000.00
Current Assets
Inventories 12,000.00 13,000.00
Trade receivables 10,000.00 7,000.00
Cash and cash equivalents 6,000.00 5,000.00

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.129

Total 1,15,000.00 1,00,000.00

Equity and Liabilities
Shareholders’ Funds 60,000.00 50,000.00
Non-current Liabilities 33,000.00 35,000.00
Current Liabilities
Trade Payables 12,000.00 8,000.00
Payables for Expenses 10,000.00 7,000.00
Total 1,15,000.00 1,00,000.00
Solution
1. Cash flow from Operations by Direct Method
Particulars See Note
Cash Sales 4,97,000.00 1
Less: Cash Purchases 3,45,000.00 2
Overheads 52,000.00 3
Interest - Financing
Depreciation - Non cash item
Loss on sale of asset - Investing item
Cash profit 100,000.00
Less: Tax (30,000.00)
Cash profit after tax 70,000.00
Note No 1 - Cash Receipts from Sales and Trade receivables
Particulars
Sales 5,00,000.00
Add : Opening Trade receivables 7,000.00
Less : Closing Trade receivables (10,000.00)
Cash Receipts 4,97,000.00

Note No 2 :- Payment to Trade Payables for Purchases

Particulars
Cost of goods sold 3,50,000.00
Closing inventories 12,000.00
Less: Opening inventories (13,000.00)
Purchases 3,49,000.00
Add: Opening Trade Payables 8,000.00

© The Institute of Chartered Accountants of India

 3.130 2. a
FINANCIAL REPORTING
130 v
v
Less: Closing Trade Payables (12,000.00)
Payment to creditors 3,45,000.00
Particulars
Overheads 55,000.00
Add: Opening payables 7,000.00
Less: Closing payables (10,000.00)
Payment for Overheads 52,000.00

2. Cash flow from Operations by Indirect Method

Indirect Method
Profit After Tax 53,000.00
Add back/(Less): Depreciation 7,000.00
Loss on sale of asset 2,000.00
Interest paid 3,000.00
Decrease in Inventory 1,000.00
Increase in Trade Receivables (3,000.00)
Increase in Trade Payables 4,000.00
Increase in Payables for expenses 3,000.00
Net cash generated from operating activities 70,000.00

Note: Cash flow derived from operations 70,000 is same in both Direct Method and Indirect
Method.
*****

3.10 REPORTING CASH FLOWS FROM INVESTING AND

FINANCING ACTIVITIES
An entity is required to report separately major classes of gross cash receipts and gross cash
payments arising from investing and financing activities, except to the extent that cash flows are
permitted to be reported on a net basis.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.131

3.11 REPORTING CASH FLOWS ON A NET BASIS

If nothing is specifically mentioned, then as per Ind AS 7, the cash flows will be presented on
Gross Basis. Gross basis means the receipts would be shown separately and the payments will
be shown separately.
Example 1
If in the year 20X1-20X2, some land is purchased for 2.5 crores and another land is sold for
3.5 crores then while presenting the information, entity shall show separately outflow of
2.5 crores and inflow of 3.5 crores.
The above base has following exceptions
1. Cash flows arising from the following operating, investing or financing activities may be
reported on a net basis:
(a) cash receipts and payments on behalf of customers when the cash flows reflect the
activities of the customer rather than those of the entity;
Examples of cash receipts and payments referred to in paragraph 22(a) are:
 the acceptance and repayment of demand deposits of a bank;
 funds held for customers by an investment entity; and
 rents collected on behalf of, and paid over to, the owners of properties.
(b) Cash receipts and payments for items in which the turnover is quick, the amounts are
large, and the maturities are short.
Examples of cash receipts and payments referred to in paragraph 22(b) are advances
made for, and the repayment of:
 principal amounts relating to credit card customers;
 the purchase and sale of investments; and
 other short-term borrowings, for example, those which have a maturity period of three
months or less.
2. Cash flows arising from each of the following activities of a financial institution maybe
reported on a net basis:
(a) cash receipts and payments for the acceptance and repayment of deposits with a fixed
maturity date;
(b) the placement of deposits with and withdrawal of deposits from other financial
institutions; and
(c) cash advances and loans made to customers and the repayment of those advances and
loans.

© The Institute of Chartered Accountants of India

 3.132 2. a
FINANCIAL REPORTING
132 v
v

3.12 FOREIGN CURRENCY CASH FLOWS

 Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s
functional currency by applying to the foreign currency amount the exchange rate between
the functional currency and the foreign currency at the date of the cash flow.
 The cash flows of a foreign subsidiary shall be translated at the exchange rates between the
functional currency and the foreign currency at the dates of the cash flows.
Example 2
Suppose the money is received on account of exports on 15 th January 20X1 in US$. The
company prepares the accounts in rupees. In such case the exchange rate between USD
and Rupee as on 15 th January 20X1 need to be applied for conversion.
 Unrealised gains and losses arising from changes in foreign currency exchange rates are not
cash flows. However, the effect of exchange rate changes on cash and cash equivalents
held or due in a foreign currency is reported in the statement of cash flows in order to
reconcile cash and cash equivalents at the beginning and the end of the period. This amount
is presented separately from cash flows from operating, investing and financing activities and
includes the differences, if any, had those cash flows been reported at end of period
exchange rates.
3.12.1 Treatment of foreign exchange differences arising from unsettled transactions
relating to operating activities
Under indirect method of preparation of statement of cash flows, the exchange differences that
arise on translation at the balance sheet date, for monetary items that form part of operating
activities, will require no adjustment in the reconciliation of profit to net cash flow from operating
activities.

Example 3
Entity A (Indian Company) purchased goods for resale from France during January for EUR 10,000
(Exchange rate: 1 EUR = 70) on a credit period of 4 months. It accounted for the purchase of
inventory at 7,00,000 (10,000 x 70). On 31st March, the exchange rate has changed to
1 EUR = 65. This would mean an unrealised gain due to exchange fluctuation of 50,000 (since
the payables will be recorded at 6,50,000 (at closing exchange rate).
Assuming that the inventory is unsold at that date, the movement is reported as under:
Profit 50,000
Less: Increase in Inventory (7,00,000)
Add: Increase in Payables 6,50,000
Net Cash flows from operating activities 0

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.133

Foreign currency cash flows

Arising from transactions in a foreign Of a foreign subsidiary

currency

Recorded in an entity’s functional

currency Cash Exchange rates
flows of a between the
foreign functional currency
subsidiary and the foreign
Foreign Exchange rate currency at the dates
currency between the of the cash flows
amount functional currency
and the foreign
currency at the date
of the cash flow

Note:
1. Cash flows denominated in a foreign currency are reported in a manner consistent with
Ind AS 21.
2. A weighted average exchange rate for a period may be used for recording foreign
currency transactions or the translation of the cash flows of a foreign subsidiary
3. Ind AS 21 does not permit use of the exchange rate at the end of the reporting period
when translating the cash flows of a foreign subsidiary

3.13 INTEREST AND DIVIDENDS

Cash flows from interest and dividends received and paid shall each be disclosed separately.
Financing company Other company
Interest paid Cash flows arising from operating Cash flows from financing
activities activities
Interest and dividends Cash flows arising from operating Cash flows from investing
received activities activities
Dividends paid Cash flows from financing Cash flows from financing
activities activities

© The Institute of Chartered Accountants of India

 3.134 2. a
FINANCIAL REPORTING
134 v
v
Interest and Dividends

Cash flows from interest and

dividends received and paid shall
each be disclosed separately

In case of financial institutions In the case of other entities

Interest paid Interest and Dividends Dividends Interest Interest and

dividends paid paid paid dividends
received received

Classified as cash Classified as cash

flows arising from Classified as cash flows from financing
flows from investing
operating activities activities
activities

They are costs of obtaining financial

They are returns on
resources
investments

Illustration 7
A firm invests in a five-year bond of another company with a face value of 10,00,000 by paying
5,00,000. The effective rate is 15%. The firm recognises proportionate interest income in its
income statement throughout the period of bond.
Based on the above information answer the following question:
a) How the interest income will be treated in cash flow statement during the period of bond?
b) On maturity, whether the receipt of 10,00,000 should be split between interest income and
receipts from investment activity.
Solution
Interest income will be treated as income over the period of bond in the income statement.
However, there will be no cash flow in these years because no cash has been received. On
maturity, receipt of 10,00,000 will be classified as investment activity with a bifurcation of
interest income & money received on redemption of bond.
*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.135

3.14 TAXES ON INCOME

Cash flows arising from taxes on income shall be separately disclosed and shall be classified as
cash flows from operating activities unless they can be specifically identified with financing and
investing activities.
Taxes on income arise on transactions that give rise to cash flows that are classified as operating,
investing or financing activities in a statement of cash flows. While tax expense may be readily
identifiable with investing or financing activities, the related tax cash flows are often impracticable
to identify and may arise in a different period from the cash flows of the underlying transaction.
Therefore, taxes paid are usually classified as cash flows from operating activities. However,
when it is practicable to identify the tax cash flow with an individual transaction that gives rise to
cash flows that are classified as investing or financing activities the tax cash flow is classified as
an investing or financing activity as appropriate.

Shall be separately
Cash flows When it is
disclosed Tax cash flow is
arising from practicable to
classified as an
taxes on identify
investing or financing
income activity as
When it is Shall be classified as
appropriate
impracticable cash flows from
to identify operating activities when
impracticable to identify
with financing and
investing activities

Note: When tax cash flows are allocated over more than one class of activity, the total amount of
taxes paid is disclosed.

Illustration 8
X Limited has paid an advance tax amounting to 5,30,000 during the current year. Out of the
above paid tax, 30,000 is paid for tax on long term capital gains.
Under which activity the above said tax be classified in the cash flow statements of X Limited?
Solution
Cash flows arising from taxes on income should be classified as cash flows from operating
activities unless they can be specifically identified with financing and investing activities. In the
case of X Limited, the tax amount of 30,000 is specifically related with investing activities.
5,00,000 to be shown under operating activities. 30,000 to be shown under investing activities.
*****

© The Institute of Chartered Accountants of India

 3.136 2. a
FINANCIAL REPORTING
136 v
v

3.15 INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND

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

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

Investments in When accounted an investor restricts its reporting in the statement

subsidiaries, for by use of the of cash flows to the cash flows between itself
associates and equity or cost and the investee,
joint ventures method for example, to dividends and advances.

When reporting its Includes in its statement of cash flows

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

3.16 CHANGES IN OWNERSHIP INTERESTS IN

SUBSIDIARIES AND OTHER BUSINESSES
3.16.1 Classification of Cash Flows as Investing Activity
 The aggregate cash flows arising from obtaining or losing control of subsidiaries or other
businesses shall be presented separately and classified as investing activities.
 An entity shall disclose, in aggregate, in respect of both obtaining and losing control of
subsidiaries or other businesses during the period each of the following:
(a) the total consideration paid or received;
(b) the portion of the consideration consisting of cash and cash equivalents;
(c) the amount of cash and cash equivalents in the subsidiaries or other businesses over
which control is obtained or lost; and

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.137

(d) the amount of the assets and liabilities other than cash or cash equivalents in the
subsidiaries or other businesses over which control is obtained or lost, summarised by
each major category.
 The separate presentation of the cash flow effects of obtaining or losing control of
subsidiaries or other businesses as single line items, together with the separate disclosure of
the amounts of assets and liabilities acquired or disposed of, helps to distinguish those cash
flows from the cash flows arising from the other operating, investing and financing activities.
The cash flow effects of losing control are not deducted from those of obtaining control.
 The aggregate amount of the cash paid or received as consideration for obtaining or losing
control of subsidiaries or other businesses is reported in the statement of cash flows net of
cash and cash equivalents acquired or disposed of as part of such transactions, events or
changes in circumstances.
3.16.2 Classification of Cash Flows as Financing Activity
 Cash flows arising from changes in ownership interests in a subsidiary that do not result in
a loss of control shall be classified as cash flows from financing activities, unless the
subsidiary is held by an investment entity and is required to be measured at fair value
through profit or loss.
 Changes in ownership interests in a subsidiary that do not result in a loss of control, such
as the subsequent purchase or sale by a parent of a subsidiary’s equity instruments, are
accounted for as equity transactions (see Ind AS 110), unless the subsidiary is held by an
investment entity and is required to be measured at fair value through profit or loss.
Accordingly, the resulting cash flows are classified in the same way as other transactions
with owners.

© The Institute of Chartered Accountants of India

 3.138 2. a
FINANCIAL REPORTING
138 v
v
Changes in ownership interests in subsidiaries and other businesses

Cash flows arising from

Obtaining control of subsidiaries or Losing control of subsidiaries or other

other businesses businesses

Shall be classified as Shall be presented Shall disclose, in aggregate, during the

investing activities separately period

The cash flow effects of losing control are not

deducted from those of obtaining control

The total The portion of the The amount of cash and The amount of the assets
consideration consideration cash equivalents in the and liabilities other than
paid or consisting of cash subsidiaries or other cash or cash equivalents
received and cash businesses over which in the subsidiaries or
equivalents control is obtained or lost other businesses over
which control is obtained
or lost, summarised by
Cash flows arising from changes in ownership interests in a each major category
subsidiary that do not result in a loss of control

Shall be classified as cash flows from Need not apply to an investment in a subsidiary
financing activities, unless the subsidiary measured at fair value through profit or loss (FVTPL)
is held by an investment entity

3.17 NON-CASH TRANSACTIONS

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

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.139

 Such transactions shall be disclosed elsewhere in the financial statements in a way that
provides all the relevant information about these investing and financing activities.
 Many investing and financing activities do not have a direct impact on current cash flows
although they do affect the capital and asset structure of an entity. Such non-cash items will
not form part of the cash flow statement.
Examples of non-cash transactions are:
(a) the acquisition of assets either by assuming directly related liabilities or by means of a
lease;
(b) the acquisition of an entity by means of an equity issue; and
(c) the conversion of debt to equity
Illustration 9
X Limited acquires fixed asset of 10,00,000 from Y Limited by accepting the liabilities of
8,00,000 of Y Limited and balance amount it paid in cash. How X Limited will treat all those
items in its cash flow statements?
Solution
Investing and financing transactions that do not require the use of cash and cash equivalents shall
be excluded from a statement of cash flows. X Limited should classify cash payment of 2,00,000
under investing activities. The non-cash transactions –liabilities and asset should be disclosed in
the notes to the financial statements.
*****
3.17.1 Changes in liabilities arising from financing activities
 An entity shall provide disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities, including both changes arising from
cash flows and non-cash changes.
 To the extent necessary to satisfy the above requirement, an entity shall disclose the
following changes in liabilities arising from financing activities:
(a) changes from financing cash flows;
(b) changes arising from obtaining or losing control of subsidiaries or other businesses;
(c) the effect of changes in foreign exchange rates;
(d) changes in fair values; and
(e) other changes.

© The Institute of Chartered Accountants of India

 3.140 2. a
FINANCIAL REPORTING
140 v
v
 Liabilities arising from financing activities are liabilities for which cash flows were, or future
cash flows will be, classified in the statement of cash flows as cash flows from financing
activities.
 In addition, the disclosure requirement also applies to changes in financial assets (for
example, assets that hedge liabilities arising from financing activities) if cash flows from those
financial assets were, or future cash flows will be, included in cash flows from financing
activities.
 One way to fulfil the disclosure requirement is by providing a reconciliation between the
opening and closing balances in the balance sheet for liabilities arising from financing
activities, including the changes identified.
 If an entity provides the disclosure required in combination with disclosures of changes in
other assets and liabilities, it shall disclose the changes in liabilities arising from financing
activities separately from changes in those other assets and liabilities.

3.18 COMPONENTS OF CASH AND CASH EQUIVALENTS

 An entity shall disclose the components of cash and cash equivalents and shall present a
reconciliation of the amounts in its statement of cash flows with the equivalent items reported
in the balance sheet.
 Company will provide a policy which it adopts in determining the composition of cash and
cash equivalents (As per Ind AS 1).
It has been clarified, that there should not be a difference in the amount of cash and cash
equivalent as per Ind AS 1 and as per Ind AS 7. However, as per Ind AS 7 “where bank
overdrafts which are repayable on demand form an integral part of an entity’s cash
management, bank overdrafts are included as a component of cash and cash
equivalents. A characteristic of such banking arrangements is that the bank balance often
fluctuates from being positive to overdrawn.” Although Ind AS 7 permits bank overdrafts to
be included as cash and cash equivalent, for the purpose of presentation in the balance
sheet, it would not be appropriate to include bank overdraft in the line item cash and cash
equivalents unless the netting off conditions as given in paragraph 42 of Ind AS 32, Financial
Instruments: Presentation are complied with.
Bank overdraft, in the balance sheet, will be included within financial liabilities. Just because
the bank overdraft is included in cash and cash equivalents for the purpose of Ind AS 7, does
not mean that the same should be netted off against the cash and cash equivalent balance in
the balance sheet. Instead Ind AS 7 requires a disclosure of the components of cash and
cash equivalent and a reconciliation of amounts presented in the cash flow statements.
Another element on account of which there could be difference between the cash and cash
equivalents presented in the balance sheet and the statement of cash flows is unrealised

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.141

gains or losses arising from changes in foreign currency exchange rates, which are not
considered to be cash flows. The following illustration would explain the issue:
Illustration 10
An entity has bank balance in foreign currency aggregating to USD 100 (equivalent to 4,500) at
the beginning of the year. Presuming no other transaction taking place, the entity reported a profit
before tax of 100 on account of exchange gain on the bank balance in foreign currency at the
end of the year. What would be the closing cash and cash equivalents as per the balance sheet?
Solution
For the purpose of statement of cash flows, the entity shall present the following:
Amount (
Profit before tax 100
Less: Unrealised exchange gain (100)
Cash flow from operating activities Nil
Cash flow from investing activities Nil
Cash flow from financing activities Nil
Net increase in cash and cash equivalents during the year Nil
Add: Opening balance of cash and cash equivalents 4,500
Cash and cash equivalents as at the year-end 4,500

Reconciliation of cash and cash equivalents

Cash and cash equivalents as per statement of cash flows 4,500
Add: Unrealised gain on cash and cash equivalents 100
Cash and cash equivalents as per the balance sheet 4,600
If any changes in the policies take place, that will be dealt with as per the provisions of Ind AS 8.
*****

3.19 OTHER DISCLOSURES

An entity shall disclose, together with a commentary by management, the amount of significant
cash and cash equivalent balances held by the entity that are not available for use by the group.
There are various circumstances in which cash and cash equivalent balances held by an entity are
not available for use by the group. Examples include cash and cash equivalent balances held by a
subsidiary that operates in a country where exchange controls or other legal restrictions apply
when the balances are not available for general use by the parentor other subsidiaries.

© The Institute of Chartered Accountants of India

 3.142 2. a
FINANCIAL REPORTING
142 v
v
Additional information may be relevant to users in understanding the financial position and liquidity
of an entity. It may include:
1. The amount of undrawn borrowing facilities that may be available for future operating
activities and to settle capital commitments, indicating any restrictions on the use of these
facilities.
2. The aggregate amount of cash flows that represent increases in operating capacity
separately from those cash flows that are required to maintain operating capacity it will help
the stakeholders to know whether entity is paying proper attention for maintenance also;
3. The amount of the cash flows arising from the operating, investing and financing activities of
each reportable segment (see Ind AS 108, Operating Segments). This will provide the idea
about the company as a whole as well as the various parts of the company and their
efficiencies.

Investing and financing shall be excluded from a statement of cash flows

transactions that do not
require the use of cash disclosed elsewhere in the financial statements
or cash equivalents

Components of cash disclose the components of cash and cash equivalents

and cash equivalents
shall present a reconciliation of the amounts in its statement of cash
flows with the equivalent items reported in the balance sheet

discloses the policy which entity adopts in determining the

composition of cash and cash equivalents.

Other disclosures disclose, together with a commentary by management, the amount of

significant cash and cash equivalent balances held and are not
available for use by the group

Note: The requirements shall be equally applicable to the entities

in case of separate financial statements also.

Illustration 11
Following is the balance sheet of Kuber Limited for the year ended 31 March, 20X2 ( in lacs)

20X2 20X1
ASSETS
Non-current assets
Property, plant and equipment 13,000 12,500

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.143

Intangible assets 50 30
Other financial assets 145 170
Deferred Tax Asset (net) 855 750
Other non-current assets 800 770
Total non-current assets 14,850 14,220
Current assets
Financial assets
Investments 2,300 2,500
Cash and cash equivalents 220 460
Other current assets 195 85
Total current assets 2,715 3,045
Total assets 17,565 17,265
EQUITY AND LIABILITIES
Equity
Equity share capital 300 300
Other equity 12,000 8,000
Total equity 12,300 8,300
Liabilities
Non-current liabilities
Financial liabilities
Long-term borrowings 2,000 5,000
Other non-current liabilities 2,740 3,615
Total non-current liabilities 4,740 8,615
Current liabilities
Financial liabilities
Trade payables 150 90
Bank overdraft 75 60
Other current liabilities 300 200
Total current liabilities 525 350
Total liabilities 5,265 8,965
Total equity and liabilities 17,565 17,265

© The Institute of Chartered Accountants of India

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

Solution
Statement of Cash Flows
in lacs
Cash flows from Operating Activities
Net Profit after Tax 4,450
Add: Tax Paid 105
4,555
Add: Depreciation & Amortisation (500 + 20) 520
Less: Gain on Sale of Machine (70-60) (10)
Less: Increase in Deferred Tax Asset (855-750) (105)
4,960
Change in operating assets and liabilities
Add: Decrease in financial asset (170 - 145) 25
Less: Increase in other non-current asset (800 - 770) (30)
Less: Increase in other current asset (195 - 85) (110)
Less: Decrease in other non-current liabilities (3,615 – 2,740) (875)
Add: Increase in other current liabilities (300 - 200) 100
Add: Increase in trade payables (150-90) 60
4,130
Less: Income Tax (105)

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.145

Cash generated from Operating Activities 4,025

Cash flows from Investing Activities
Sale of Machinery 70
Purchase of Machinery [13,000-(12,500 – 500-60)] (1,060)
Purchase of Intangible Asset [50-(30-20)] (40)
Sale of Financial asset - Investment (2,500 – 2,300) 200
Cash outflow from Investing Activities (830)
Cash flows from Financing Activities
Dividend Paid (450)
Long term borrowings paid (5,000 – 2,000) (3,000)
Cash outflow from Financing Activities (3,450)
Net Cash outflow from all the activities (255)
Opening cash and cash equivalents (460 – 60) 400
Closing cash and cash equivalents (220 – 75) 145
*****

Illustration 12
The relevant extracts of consolidated financial statements of A Ltd. are provided below:
Consolidated Statement of Cash Flows
For the year ended ( in Lac)
31 st March 20X2 31 st March 20X1
Assets
Non-Current Assets
Property, Plant and Equipment 4,750 4,650
Investment in Associate 800 -
Financial Assets 2,150 1,800

Current Assets
Inventories 1,550 1,900
Trade Receivables 1,250 1,800
Cash and Cash Equivalents 4,650 3,550

Liabilities
Current Liabilities
Trade Payables 1,550 3,610

© The Institute of Chartered Accountants of India

 3.146 2. a
FINANCIAL REPORTING
146 v
v
Extracts from Consolidated Statement of Profit and Loss
for the year ended 31st March 20X2
Particulars Amount ( in Lac)
Revenue 12,380
Cost of Goods Sold (9,860)
Gross Profit 2,520
Other Income 300
Operating Expenses (450)
Other expenses (540)
Interest expenses (110)
Share of Profit of Associate 120
Profit before Tax 1,840
The below information is relevant for A Ltd Group.
1. A Ltd had spent 30 Lac on renovation of a building. A Ltd charged the entire renovation
cost to profit and loss account.
2. On 1 st April 20X1, A Ltd acquired 100% shares in S Ltd, for cash of 300 Lac. Fair value of
the assets acquired and liabilities assumed under the acquisition are as under:
Property, Plant and Equipment 140 Lac
Inventories 60 Lac
Trade Receivables 30 Lac
Cash and Cash Equivalents 20 Lac
Total Assets 250 Lac
Less: Trade Payables (50 Lac)
Net Assets on acquisition 200 Lac
3. A Ltd.’s property, plant and equipment comprise the following:
Carrying amount on 1 st April 20X1 4,650 Lac
Addition (at cost) including assets in S Ltd. 800 Lac
Revaluation Surplus 80 Lac
Disposal (Sale) of Assets (490 Lac)
Depreciation for the year (290 Lac)
Carrying Amount on 31 st March 20X2 4,750 Lac
A Ltd constructed a machine that is a qualifying asset and incurred construction costs of
40 Lac that has been charged to other expenses. Of the interest cost of 110 Lac
charged to profit or loss statement, 10 Lac includes interest cost on specific borrowings
that need to be capitalized.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.147

Property, plant and equipment was sold at 630 Lac. Gain on disposal is adjusted against
operating expenses.
4. A Ltd. purchased 30% interest in an Associate (G Ltd) for cash on 1 st April 20X1. The
associate reported profit after tax of 400 Lac and paid a dividend of 100 Lac for the
year.
5. Impairment test was conducted on 31 st March 20X2. The following were impaired as under:
Goodwill impairment loss: 265 Lac
Intangible Assets impairment loss 900 Lac
The goodwill impairment relates to 100% subsidiaries.
Assume that interest cost is all paid in cash.
You are required to determine cash generated from operations for group reporting purposes
for the year ended 31 st March 20X2.

Solution
Extracts of Statement of Cash Flows for the year ended 31 st March 20X2

Cash Flows from Operating Activities Amount in Lacs

Profit before tax (W.N.1) 1,920
Less: Profit on Sale of PPE (630 - 490) (140)
Add back: Depreciation 290
Impairment of Goodwill 265
Impairment of Intangible Assets 900
Less: Share of Profits of Associate (400 x 30%) (120)
Add: Interest expense [110 – 10] 100
Working Capital Changes (W.N.2):
Add: Decrease in Trade Receivables 580
Add: Decrease in Inventories 410
Less: Decrease in Trade Payables (2,110)
Cash generated from operations 2,095

© The Institute of Chartered Accountants of India

 3.148 2. a
FINANCIAL REPORTING
148 v
v
Working Notes:
1. Profit before tax Amount in Lacs

Reported profit as per Profit or Loss Statement 1,840

Add back: Renovation costs charged as expense 30
Construction costs charged as expense 40
Borrowing costs to be capitalized 10
Revised Profit before tax 1,920

2. Changes in Trade Receivables Amount in Lacs

Opening Balance 1,800

Add: Receivables of S Ltd. 30
1,830
Less: Closing Balance (1,250)
580
3. Changes in Inventories Amount in Lacs

Opening Balance 1,900

Add: Inventories of S Ltd. 60
1,960
Less: Closing Balance (1,550)
410
4. Changes in Trade Payables Amount in Lacs

Opening Balance 3,610

Add: Trade Payables of S Ltd. 50
3,660
Less: Closing Balance (1,550)
2,110

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.149

3.20 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITY
Following is the extract from the financial statements of the listed entity ‘ITC Limited’ for the
financial year 2021-2022 with respect to ‘Cash Flow Statement’.

© The Institute of Chartered Accountants of India

 3.150 2. a
FINANCIAL REPORTING
150 v
v

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.151

(Source: Annual Report 2021-2022 - ‘ITC Limited’)

© The Institute of Chartered Accountants of India

 3.152 2. a
FINANCIAL REPORTING
152 v
v

3.21 SIGNIFICANT DIFFERENCES IN IND AS 7 VIS-À-VIS

AS 3

S.No. Particulars Ind AS 7 AS 3

1. Bank Overdraft Ind AS 7 specifically includes bank AS 3 is silent on this

Repayable on overdrafts which are repayable on aspect.
Demand demand as a part of cash and cash
equivalents (Refer Para 8 of Ind AS 7)

2. Treatment of Ind AS 7 provides the treatment of AS 3 does not contain

Cash Payments cash payments to manufacture or such requirements.
in Specific Cases acquire assets held for rental to others
and subsequently held for sale in the
ordinary course of business as cash
flows from operating activities.
Further, treatment of cash receipts
from rent and subsequent sale of such
assets as cash flow from operating
activity is also provided. (Refer Para
14 of Ind AS 7)

3. Examples of cash Ind AS 7 includes following examples These examples are not
flows arising from of cash flows arising from financing mentioned in AS 3
financing activities (paragraph 17 of Ind AS 7):
activities (a) cash payments to owners to
acquire or redeem the entity’s
shares;
(b) cash proceeds from mortgages;
(c) cash payments by a lessee for
the reduction of the outstanding
liability relating to a lease.

4. Adjustment of the Ind AS 7 specifically requires AS 3 does not contain

Profit or Loss for adjustment of the profit or loss for the such requirements.
the Effects of effects of ‘undistributed profits of
Undistributed associates and non-controlling
Profits of interests’ while determining the net

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.153

Associates and cash flow from operating activities

Non-controlling using the indirect method. (Refer Para
Interests 20(b) of Ind AS 7)

5. Cash Flows Ind AS 7 does not contain this AS 3 requires cash

associated with requirement. flows associated with
Extraordinary extraordinary activities
Activities to be separately
classified as arising
from operating,
investing and financing
activities

6. Disclosure of the Ind AS 7 requires an entity (except an AS 3 does not contain

Amount of Cash investment entity) to disclose the such requirements.
and Cash amount of cash and cash equivalents
Equivalents in and other assets and liabilities in the
Specific subsidiaries or other businesses over
Situations which control is obtained or lost (Refer
Para 40(c) and (d) of Ind AS 7). It
also requires to report the aggregate
amount of the cash paid or received
as consideration for obtaining or losing
control of subsidiaries or other
businesses in the statement of cash
flows, net of cash and cash
equivalents acquired or disposed of as
a part of such transactions, events or
changes in circumstances (Refer Para
42 of Ind AS 7).

7. Cash Flows Ind AS 7 requires to classify cash AS 3 does not contain

arising from flows arising from changes in such a requirement.
Changes in ownership interests in a subsidiary
Ownership that do not result in a loss of control
Interests in a as cash flows from financing activities
Subsidiary (Refer Para 42A and 42B of Ind AS 7).

© The Institute of Chartered Accountants of India

 3.154 2. a
FINANCIAL REPORTING
154 v
v
8. Investment in an Ind AS 7 mentions the use of equity or AS 3 does not contain
associate, joint cost method while accounting for an such requirements.
venture or a investment in an associate, joint
subsidiary venture or a subsidiary (refer
paragraph 37 of Ind AS 7).
It also specifically deals with the
reporting of interest in an associate or
a joint venture using equity method
(refer paragraph 38 of Ind AS 7).

9. Cash flows With regard to cash flows arising from AS 3 requires it to be

arising from transaction in a foreign currency, recorded in an entity’s
transaction in a Ind AS 7 requires it to be recorded in ‘reporting currency’.
foreign currency an entity’s functional currency.
Ind AS 7 also deals with translation of AS 3 does not deal with
cash flows of a foreign subsidiary it.
(refer paragraphs 25 to 27 of
Ind AS 7)

10. Disclosure of Ind AS 7 requires disclosure of AS 3 does not contain

changes in changes in liabilities arising from such requirement.
liabilities financing activities, both changes i.e.
changes arising from cash flows and
non-cash changes.

11. Disclosures Ind AS 7 requires more disclosures, In comparison to

i.e. additional information that may be Ind AS 7, AS 3 does not
relevant to understanding the financial have that many
position and liquidity of an entity disclosure requirements.
(Refer Paragraph 50 of the Ind AS 7)

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.155

QUICK RECAP
Presentation of a statement of cash flows

Report cash flows (inflows and outflows) during the period

Classified as

Operating activities Investing activities Financing activities Cash and cash equivalents

These are the Investing activities Financing activities Cash Cash equivalents
principal revenue- are the acquisition are activities that
producing activities and disposal of result in changes in Are short-
of the entity other It term, highly
long-term assets the size and
than investing or comprises liquid
and other composition of the
financing activities cash on investments
investments not contributed equity
hand &
included in cash and borrowings of
demand Are readily
Reporting equivalents the entity
deposits convertible to
known
An entity shall report separately amounts of
Under direct Under indirect major classes of gross cash cash
method method receipts and gross cash
payments arising from investing Are subject to
and financing activities an
Whereby Whereby profit or loss is insignificant
major classes adjusted for risk of
of gross cash  non-cash transactions changes in
receipts and value
 any deferrals or accruals of
gross cash
past or future operating Are not for
payments are
cash receipts or payments investment
disclosed
 items of income or expense purposes
associated with investing or
financing cash flows has a short
maturity of,
say, 3 months
or less from
Exception the date of
Entities are encouraged to follow the direct
acquisition
method. The direct method provides information
which may be useful in estimating future cash
flows and which is not available under the indirect
method. Equity investments are excluded from cash equivalents

© The Institute of Chartered Accountants of India

 3.156 2. a
FINANCIAL REPORTING
156 v
v
FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. Use the following data of ABC Ltd. to construct a statement of cash flows using the direct and
indirect methods: (Amount in

20X2 20X1
Cash 4,000 14,000
Accounts Receivable 25,000 32,500
Prepaid Insurance 5,000 7,000
Inventory 37,000 34,000
Fixed Assets 3,16,000 2,70,000
Accumulated Depreciation (45,000) (30,000)
Total Assets 3,42,000 3,27,500
Accounts Payable 18,000 16,000
Wages Payable 4,000 7,000
Debentures 1,73,000 1,60,000
Equity Shares 88,000 84,000
Retained Earnings 59,000 60,500
Total Liabilities & Equity 3,42,000 3,27,500
20X2
Sales 2,00,000
Cost of Goods Sold (1,23,000)

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.157

Depreciation (15,000)
Insurance Expense (11,000)
Wages (50,000)
Net Profit 1,000

During the financial year 20X2 company ABC Ltd. declared and paid dividend of 2,500.
During 20X2, ABC Ltd. paid 46,000 in cash to acquire new fixed assets. The accounts
payable was used only for inventory. No debt was retired during 20X2.
2. From the following summary cash account of XYZ Ltd, prepare cash flow statement for the
year ended March 31, 20X1 in accordance with Ind AS 7 using direct method.
Summary of Bank Account for the year ended March 31, 20X1

’000 ’000
Balance on 1.4.20X0 50 Payment to creditors 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from customers 2,800 Overhead Expenses 200
Sale of Fixed Assets 100 Payroll 100
Tax Payment 250
Dividend 50
Repayment of Bank loan 300
Balance on 31.3.20X1 150
3,250 3,250

3. Z Ltd. has no foreign currency cash flow for the year 20X1. It holds some deposit in a bank in
the USA. The balances as on 31.12.20X1 and 31.12.20X2 were US$ 100,000 and
US$ 102,000 respectively. The exchange rate on December 31, 20X1 was US$1 = 45. The
same on 31.12.20X2 was US$1 = 50. The increase in the balance was on account of
interest credited on 31.12.20X2. Thus, the deposit was reported at 45,00,000 in the
balance sheet as on December 31, 20X1. It was reported at 51,00,000 in the balance
sheet as on 31.12.20X2. How these transactions should be presented in cash flow for the
year ended 31.12.20X2 as per Ind AS 7?
4. Company A acquires 70% of the equity stake in Company B on July 20, 20X1. The
consideration paid for this transaction is as below:
(a) Cash consideration of 15,00,000
(b) 200,000 equity shares having face of 10 and fair value of 15 per share.

© The Institute of Chartered Accountants of India

 3.158 2. a
FINANCIAL REPORTING
158 v
v
On the date of acquisition, Company B has cash and cash equivalent balance of
2,50,000 in its books of account.
On October 10, 20X2, Company A further acquires 10% stake in Company B for cash
consideration of 8,00,000.
Advise how the above transactions will be disclosed/presented in the statement of cash flows
as per Ind AS 7.
5. Entity A acquired a subsidiary, Entity B, during the year. Summarised information from the
Consolidated Statement of Profit and Loss and Balance Sheet is provided, together with
some supplementary information.
Consolidated Statement of Profit and Loss

Amount ( )
Revenue 3,80,000
Cost of sales (2,20,000)
Gross profit 1,60,000
Depreciation (30,000)
Other operating expenses (56,000)
Interest cost (4,000)
Profit before taxation 70,000
Taxation (15,000)
Profit after taxation 55,000

Consolidated balance sheet

20X2 20X1
Assets Amount Amount
( ) ( )
Cash and cash equivalents 8,000 5,000
Trade receivables 54,000 50,000
Inventories 30,000 35,000
Property, plant and equipment 1,60,000 80,000
Goodwill 18,000 —
Total assets 2,70,000 1,70,000
Liabilities
Trade payables 68,000 60,000

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.159

Income tax payable 12,000 11,000

Long term debt 1,00,000 64,000
Total liabilities 1,80,000 1,35,000
Shareholders’ equity 90,000 35,000
Total liabilities and shareholders’ 2,70,000 1,70,000

Other information
All of the shares of entity B were acquired for 74,000 in cash. The fair values of assets
acquired and liabilities assumed were:

Particulars Amount ( )
Inventories 4,000
Trade receivables 8,000
Cash 2,000
Property, plant and equipment 1,10,000
Trade payables (32,000)
Long term debt (36,000)
Goodwill 18,000
Cash consideration paid 74,000

Prepare the Consolidated Statement of Cash Flows for the year 20X2, as per Ind AS 7.
6. During the financial year 2019-2020, Akola Limited have paid various taxes & reproduced the
below mentioned records for your perusal:
- Capital gain tax of 20 crore on sale of office premises at a sale consideration of
100 crore.
- Income Tax of 3 crore on Business profits amounting 30 crore (assume entire
business profit as cash profit).
- Dividend Distribution Tax of 2 crore on payment of dividend amounting 20 crore to
its shareholders.
- Income tax Refund of 1.5 crore (Refund on taxes paid in earlier periods for business
profits).
You need to determine the net cash flow from operating activities, investing activities and
financing activities of Akola Limited as per relevant Ind AS.
7. From the following data of Galaxy Ltd., prepare statement of cash flows showing cash
generated from Operating Activities using direct method as per Ind AS 7:

© The Institute of Chartered Accountants of India

 3.160 2. a
FINANCIAL REPORTING
160 v
v
31.3.20X2 31.3.20X1
( ) ( )
Current Assets:
Inventory 1,20,000 1,65,000
Trade receivables 2,05,000 1,88,000
Cash & cash equivalents 35,000 20,500
Current Liabilities:
Trade payable 1,95,000 2,15,000
Provision for tax 48,000 65,000

Summary of Statement of Profit and Loss

Sales 85,50,000
Less: Cost of sales (56,00,000) 29,50,000
Other Income
Interest income 20,000
Fire insurance claim received 1,10,000 1,30,000
30,80,000
Depreciation (24,000)
Administrative and selling expenses (15,40,000)
Interest expenses (36,000)
Foreign exchange loss (18,000) (16,18,000)
Net Profit before tax and extraordinary income 14,62,000
Income Tax (95,000)
Net Profit 13,67,000
Additional information:
(i) Trade receivables and Trade payables include amounts relating to credit sale and
credit purchase only.
(ii) Foreign exchange loss represents increment in liability of a long-term borrowing due
to exchange rate fluctuation between acquisition date and balance sheet date.
8. What will be the classification for following items in the statement of cash flows of both (i)
Banks / Financial institutions and (ii) Other Entities?
S. N o. Particulars
1 Interest received on loans and advances given
2 Interest paid on deposits and other borrowings
3 Interest and dividend received on investments in subsidiaries, associates and in

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.161

other entities
4 Dividend paid on preference and equity shares, including tax on dividend paid on
preference and equity shares by other entities
5 Finance charges paid by lessee under finance lease
6 Payment towards reduction of outstanding finance lease liability
7 Interest paid to vendor for acquiring fixed asset under deferred payment basis
8 Principal sum payment under deferred payment basis for acquisition of fixed assets
9 Penal interest received from customers for late payments
10 Penal interest paid to suppliers for late payments
11 Interest paid on delayed tax payments
12 Interest received on tax refunds

Answers
1. A. DIRECT METHOD
Cash flows from operating activities 20X2
Cash received from customers 2,07,500
Cash paid for inventory (1,24,000)
Cash paid for insurance (9,000)
Cash paid for wages (53,000)
Net cash flow from operating activities 21,500
Cash flows from investing activities
Purchase of fixed assets (46,000)
Cash flows from financing activities
Dividend paid (2,500)
Proceeds from issuance of debentures 13,000
Proceeds from issue of equity 4,000
Net cash flows from financing activities 14,500
Net decrease in cash and cash equivalents (10,000)
Opening Cash Balance 14,000
Closing Cash Balance 4,000

B. INDIRECT METHOD
Cash flows from operating activities 20X2
Net Profit 1,000
Adjustments for Depreciation 15,000

© The Institute of Chartered Accountants of India

 3.162 2. a
FINANCIAL REPORTING
162 v
v
16,000
Decrease in accounts receivable 7,500
Decrease in prepaid insurance 2,000
Increase in inventory (3,000)
Increase in accounts payable 2,000
Decrease in wages payable (3,000)
Net cash flow from operating activities 21,500

Cash flows from investing activities

Purchase of fixed assets (46,000)
Cash flows from financing activities
Dividend paid (2,500)
Proceeds from issue of debentures 13,000
Proceeds from issue of equity 4,000
Net cash flows from financing activities 14,500
Net decrease in cash and cash equivalents (10,000)
Opening Cash Balance 14,000
Closing Cash Balance 4,000

Working Notes:
Fixed Assets Account
Particulars Amount Particulars Amount (
(
To Balance b/d 2,70,000 By Balance c/d 3,16,000
To Cash (Purchase of Fixed
Assets) 46,000
3,16,000 3,16,000

Inventory Account
Particulars Amount ( Particulars Amount (
To Balance b/d 34,000 By Cost of goods sold 1,23,000
To Creditors account (credit 2,000 By Balance c/d 37,000
purchase)
To Purchase (Bal. Figure) 1,24,000
1,60,000 1,60,000

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.163

Accounts Payable Account

Particulars Amount ( Particulars Amount (
To Balance c/d 18,000 By Balance b/d 16,000
By Inventory Account 2,000
_____ (credit purchase) ______
(Bal.Fig.)
18,000 18,000

Equity Share Capital Account

Particulars Amount ( Particulars Amount (
To Balance c/d 88,000 By Balance b/d 84,000
By Bank account 4,000
(Proceeds from equity
______ share issued) ______
88,000 88,000

2. XYZ Ltd.
Cash Flow Statement for the year ended March 31, 20X1 (Using the Direct Method)
Cash flows from operating activities ‘000 ‘000
Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash from operating activities 250
Cash flow from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)

© The Institute of Chartered Accountants of India

 3.164 2. a
FINANCIAL REPORTING
164 v
v
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at the beginning of the period 50
Cash at end of the period 150

3. The profit and loss account was credited by 1,00,000 (US $ 2,000 × 50) towards interest
income. It was credited by the exchange difference of US$ 1,00,000 × ( 50 - 45) that is,
500,000. In preparing the cash flow statement, 5,00,000, the exchange difference,
should be deducted from the ‘net profit before taxes’. However, in order to reconcile the
opening balance of the cash and cash equivalents with its closing balance, the exchange
difference 5,00,000, should be added to the opening balance in note to cash flow
statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.’s
functional currency by applying to the foreign currency amount the exchange rate between
the functional currency and the foreign currency at the date of the cash flow.
4. As per para 39 of Ind AS 7, the aggregate cash flows arising from obtaining control of
subsidiary shall be presented separately and classified as investing activities.
As per para 42 of Ind AS 7, the aggregate amount of the cash paid or received as
consideration for obtaining subsidiaries is reported in the statement of cash flows net of cash
and cash equivalents acquired or disposed of as part of such transactions, events or changes
in circumstances.
Further, investing and financing transactions that do not require the use of cash or cash
equivalents shall be excluded from a statement of cash flows. Such transactions shall be
disclosed elsewhere in the financial statements in a way that provides all the relevant
information about these investing and financing activities.
As per para 42A of Ind AS 7, cash flows arising from changes in ownership interests in a
subsidiary that do not result in a loss of control shall be classified as cash flows from
financing activities, unless the subsidiary is held by an investment entity, as defined in
Ind AS 110, and is required to be measured at fair value through profit or loss. Such
transactions are accounted for as equity transactions and accordingly, the resulting cash
flows are classified in the same way as other transactions with owners.
Considering the above, for the financial year ended 31 st March, 20X2 total consideration of
15,00,000 less 250,000 will be shown under investing activities as “Acquisition of the
subsidiary (net of cash acquired)”.
There will not be any impact of issuance of equity shares as consideration in the cash flow
statement however a proper disclosure shall be given elsewhere in the financial statements in
a way that provides all the relevant information about the issuance of equity shares for non-
cash consideration.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.165

Further, in the statement of cash flows for the year ended 31 st March, 20X3, cash
consideration paid for the acquisition of additional 10% stake in Company B will be shown
under financing activities.
5. This information will be incorporated into the Consolidated Statement of Cash Flows as
follows:
Statement of Cash Flows for the year ended 20X2 (extract)

Amount ( ) Amount ( )
Cash flows from operating activities
Profit before taxation 70,000
Adjustments for non-cash items:
Depreciation 30,000
Decrease in inventories (W.N. 1) 9,000
Decrease in trade receivables (W.N. 2) 4,000
Decrease in trade payables (W.N. 3) (24,000)
Interest paid to be included in financing activities 4,000
Taxation (11,000 + 15,000 – 12,000) (14,000)
Net cash generated from operating activities 79,000
Cash flows from investing activities
Cash paid to acquire subsidiary (74,000 – 2,000) (72,000)
Net cash outflow from investing activities (72,000)
Cash flows from financing activities
Interest paid (4,000)
Net cash outflow from financing activities (4,000)
Increase in cash and cash equivalents during the year 3,000
Cash and cash equivalents at the beginning of the 5,000
year
Cash and cash equivalents at the end of the year 8,000

Working Notes:

1. Calculation of change in inventory during the year

Total inventories of the Group at the end of the year 30,000
Inventories acquired during the year from subsidiary (4,000)

© The Institute of Chartered Accountants of India

 3.166 2. a
FINANCIAL REPORTING
166 v
v
26,000
Opening inventories 35,000
Decrease in inventories 9,000

2. Calculation of change in Trade Receivables during the year

Total trade receivables of the Group at the end of the year 54,000
Trade receivables acquired during the year from subsidiary (8,000)
46,000
Opening trade receivables 50,000
Decrease in trade receivables 4,000

3. Calculation of change in Trade Payables during the year

Trade payables at the end of the year 68,000
Trade payables of the subsidiary assumed during the year (32,000)
36,000
Opening trade payables 60,000
Decrease in trade payables 24,000

6. Para 36 of Ind AS 7 inter alia states that when it is practicable to identify the tax cash flow
with an individual transaction that gives rise to cash flows that are classified as investing or
financing activities the tax cash flow is classified as an investing or financing activity as
appropriate. When tax cash flows are allocated over more than one class of activity, the total
amount of taxes paid is disclosed.
Accordingly, the transactions are analysed as follows:
Particulars Amount (in crore) Activity
Sale Consideration 100 Investing Activity
Capital Gain Tax (20) Investing Activity
Business profits 30 Operating Activity
Tax on Business profits (3) Operating Activity
Dividend Payment (20) Financing Activity
Dividend Distribution Tax (2) Financing Activity
Income Tax Refund 1.5 Operating Activity
Total Cash flow 86.5

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.167

Activity wise Amount (in crore)

Operating Activity 28.5
Investing Activity 80
Financing Activity (22)
Total 86.5

7. Statement Cash Flows from operating activities

of Galaxy Ltd. for the year ended 31 st March 20X2 (Direct Method)
Particulars
Operating Activities:
Cash received from Trade receivables (W.N. 3) 85,33,000
Less: Cash paid to Suppliers (W.N.2) 55,75,000
Payment for Administration and Selling expenses 15,40,000
Payment for Income Tax (W.N.4) 1,12,000 (72,27,000)
13,06,000
Adjustment for exceptional items (fire insurance claim) 1,10,000
Net cash generated from operating activities 14,16,000

Working Notes:
1. Calculation of total purchases
Cost of Sales = Opening stock + Purchases – Closing Stock
56,00,000 = 1,65,000 + Purchases – 1,20,000
Purchases = 55,55,000
2. Calculation of cash paid to Suppliers
Trade Payables

To Bank A/c (balancing 55,75,000 By Balance b/d 2,15,000

figure)
To Balance c/d 1,95,000 By Purchases (W.N. 1) 55,55,000
57,70,000 57,70,000

© The Institute of Chartered Accountants of India

 3.168 2. a
FINANCIAL REPORTING
168 v
v
3. Calculation of cash received from Customers
Trade Receivables

To Balance b/d 1,88,000 By Bank A/c (balancing 85,33,000

figure)
To Sales 85,50,000 By Balance c/d 2,05,000
87,38,000 87,38,000

4. Calculation of tax paid during the year in cash

Provision for tax

To Bank A/c (balancing 1,12,000 By Balance b/d 65,000

figure)
To Balance c/d 48,000 By Profit and Loss A/c 95,000
1,60,000 1,60,000
8. The following are the classification of various activities in the Statement of Cash Flows:
S. Particulars Classification for reporting cash flows
N o. Banks / financial Other entities
institutions
1 Interest received on loans and advances Operating Activities Investing activities
given
2 Interest paid on deposits and other Operating Activities Financing activities
borrowings
3 Interest and dividend received on Investing activities Investing activities
investments in subsidiaries, associates and
in other entities
4 Dividend paid on preference and equity Financing activities Financing activities
shares, including tax on dividend paid on
preference and equity shares by other
entities
5 Finance charges paid by lessee under Financing activities Financing activities
finance lease
6 Payment towards reduction of outstanding Financing activities Financing activities
finance lease liability

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 7 3.169

7 Interest paid to vendor for acquiring fixed Financing activities Financing activities
asset under deferred payment basis
8 Principal sum payment under deferred Investing activities Investing activities
payment basis for acquisition of fixed
assets
9 Penal interest received from customers for Operating Activities Operating Activities
late payments
10 Penal interest paid to suppliers for late Operating Activities Operating Activities
payments
11 Interest paid on delayed tax payments Operating Activities Operating Activities
12 Interest received on tax refunds Operating Activities Operating Activities

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER
74

IND AS ON MEASUREMENT
BASED ON ACCOUNTING
POLICIES

UNIT 1:
INDIAN ACCOUNTING STANDARD 8 :
ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS

LEARNING OUTCOMES
After studying this unit, you will be able to:
 Apply the principles laid down for selection of accounting policies.
 Explain the treatment of changes in accounting policies, changes in
accounting estimates and correction of prior period errors.
 Distinguish between accounting policies, estimates, changes in them
and errors.
 Assess the limitations of giving retrospective effect while accounting.
 Judge the impracticability of a requirement for giving retrospective effect.

© The Institute of Chartered Accountants of India

 4.2 2.2 a
FINANCIAL REPORTING
v

v
UNIT OVERVIEW

Ind AS 8 “Accounting Policies, Changes

in Accounting Estimates and Errors”

Changes in
Accounting
Accounting Errors
Policies
Estimates
• Selection and • Apply changes in • Limitations on
application of accounting retrospective
accounting estimates restatement
policies prospectively • Disclosure of prior
• Consistency of • Disclosure period errors
accounting
policies
• Changes in
accounting
policies
• Applying changes
in accounting
policies
• Retrospective
application
• Limitations on
retrospective
application
• Disclosure

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.3

1.1 INTRODUCTION
Ind AS 1, Presentation of Financial Statements, lays down the foundation for an entity regarding
how the financial statements need to be presented. Ind AS 1 gives equal importance to the
disclosure, in notes, of significant accounting policies and other explanatory information besides
balance sheet, statement of profit and loss, statement of changes in equity and statement of
cash flows.
Accounting policies, estimates and correction of errors play a major role in the presentation of
financial statements. That is why Ind AS 1 states that an entity cannot rectify inappropriate
accounting policies either by disclosure of the accounting policies used or by notes or
explanatory material. If there is any change in accounting policies, that needs to be dealt with
due diligence and not just by mere note or explanation.
Further, Ind AS 1 makes it mandatory for the entity to present a third balance sheet as at the
beginning of the preceding period, if it applies an accounting policy retrospectively, which has a
material effect on the information in the balance sheet at that date.
Further, Ind AS 1 provides detail guidance about the proper disclosure of accounting policies
and estimates.
Therefore, in the current chapter we are going to see, how to select the accounting policies, how
to make the changes in accounting policies if needed, how to deal with changes in the
estimates, how to rectify errors, etc., as all these elements will have impact on the true and fair
position of the financial statements.

1.2 OBJECTIVE
1.2.1 To prescribe the criteria for selecting and changing accounting
policies
As per Ind AS 1, an entity is required to disclose the significant accounting policies. However, it
does not specify which accounting policies are to be disclosed. Depending upon the nature of
business and types of transactions, the entity is supposed to decide whether an accounting
policy is to be disclosed. In this regard, Ind AS 1 lays emphasis on usefulness of the disclosure
in assisting the users in understanding financial statements, nature of an entity’s operations and
expectations of users. Ind AS 8 further provides some criteria / guidelines which will facilitate
the entity to take a decision on selection and application of accounting policies and also making
changes in them.

© The Institute of Chartered Accountants of India

 4.4 2.4 a
FINANCIAL REPORTING
v
1.2.2 To prescribe the accounting treatment and disclosure of changes
v
in accounting policies
At certain times, there is a need to make the changes in the policies in the light of changing
circumstances of business, changing nature of business, new guidelines issued by regulatory
authorities, enforcement of new laws etc. In such cases, an entity needs guidance as to
whether the changes need to be affected retrospectively or only prospectively and how to
present and disclose the effect of the same in the financial statements. Ind AS 8 provides
guidance to the entity in such areas.
1.2.3 To prescribe the accounting treatment and disclosure of changes
in accounting estimates
In business, there are many things which are uncertain. For example, how many trade
receivables will turn bad? What will be the estimated life of property, plant and equipment?
What will be the value of investments? Will the net realisable value of closing inventory be more
or less than the actual realised value less actual costs of completion and actual costs necessary
to make the sale? And so on. In such cases, the entity will have to make few assumptions and
make an estimate. Ind AS 1 allows an entity to do the estimation. Ind AS 8 takes it further and
deals with how to incorporate the changes in the accounting estimates already made in the past.
Is it possible to change such estimates with changing circumstances and available new
information? If yes, how would the entity incorporate the effect of the changes? Such questions
are addressed in Ind AS 8.
1.2.4 To prescribe the accounting treatment and disclosure of
corrections of errors
It is said that ‘to err is human’. Making mistakes is an integral part of life and the possibility of
having some errors in the financial statements already published cannot be ruled out. In such
cases, the question arises as to how to rectify the errors and provide the true and fair position to
the stakeholders of financial statements. Should the entity rectify the error by way of
retrospective restatement or should it rectify the same in the current reporting period? Such
questions are addressed in Ind AS 8.
1.2.5 To provide better base for inter-firm and intra-firm comparison
The standard is intended to enhance the relevance and reliability of an entity’s financial
statements and the comparability of those financial statements over time and with the financial
statements of other entities.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.5

Objective and Scope

Is to prescribe

The criteria for selecting and The accounting treatment and disclosure of
changing accounting policies

Changes in Changes in Corrections of

accounting policies accounting estimates errors

1.3 SCOPE
This standard shall be applied in
 selecting and applying accounting policies;
 accounting for changes in accounting policies;
 accounting for changes in accounting estimates; and
 accounting for corrections of prior period errors.
However, tax effects of retrospective application of accounting policy changes and correction of
prior period errors are not dealt with in this standard. The tax effects of these items are dealt
with Ind AS 12, ‘Income Taxes’.
Note: Requirements of Ind AS 8 in respect of changes in accounting policies do not apply in
an entity’s first Ind AS financial statements.

1.4 DEFINITIONS
1. Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
2. Accounting estimates are monetary amounts in financial statements that are subject to
measurement uncertainty.

© The Institute of Chartered Accountants of India

 4.6 2.6 a
FINANCIAL REPORTING
v
3. Indian Accounting Standards (Ind AS) are Standards prescribed under Section 133 of
the Companies Act, 2013 vread with Companies (Indian Accounting Standards) Rules, 2015
(as amended from time to time).
4. Material – (As per Ind AS 1) Information is material if omitting, misstating or obscuring it
could reasonably be expected to influence decisions that the primary users of general
purpose financial statements make on the basis of those financial statements, which
provide financial information about a specific reporting entity.
Materiality depends on the nature or magnitude of information, or both. An entity assesses
whether information, either individually or in combination with other information, is material
in the context of its financial statements taken as a whole.
Information is obscured if it is communicated in a way that would have a similar effect for
primary users of financial statements to omitting or misstating that information. The
following are examples of circumstances that may result in material information being
obscured:
(a) information regarding a material item, transaction or other event is disclosed in the
financial statements but the language used is vague or unclear;
(b) information regarding a material item, transaction or other event is scattered
throughout the financial statements;
(c) dissimilar items, transactions or other events are inappropriately aggregated;
(d) similar items, transactions or other events are inappropriately disaggregated; and
(e) the understandability of the financial statements is reduced as a result of material
information being hidden by immaterial information to the extent that a primary user is
unable to determine what information is material.
Assessing whether information could reasonably be expected to influence decisions made
by the primary users of a specific reporting entity‘s general purpose financial statements
requires an entity to consider the characteristics of those users while also considering the
entity‘s own circumstances.
Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial
statements for much of the financial information they need. Consequently, they are the
primary users to whom general purpose financial statements are directed. Financial
statements 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.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.7

The application of the concept of materiality is set out in two Standards. Ind AS 1
continues to specify its application to disclosures and Ind AS 8 specifies the application of
materiality in applying accounting policies and correcting errors (including errors in
measuring items).
5. Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse of, reliable
information that:
(a) was available when financial statements for those periods were approved for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements. Such errors include the
effects of mathematical mistakes, mistakes in applying accounting policies, oversights
or misinterpretations of facts, and fraud.
6. Retrospective application is applying a new accounting policy to transactions, other
events and conditions as if that policy had always been applied.
7. Retrospective restatement is correcting the recognition, measurement and disclosure of
amounts of elements of financial statements as if a prior period error had never occurred.
8. Impracticable: Applying a requirement is impracticable when the entity cannot apply it
after making every reasonable effort to do so. For a particular prior period, it is
impracticable to apply a change in an accounting policy retrospectively or to make a
retrospective restatement to correct an error if:
(a) the effects of the retrospective application or retrospective restatement are not
determinable;
(b) the retrospective application or retrospective restatement requires assumptions about
what management’s intent would have been in that period; or
(c) the retrospective application or retrospective restatement requires significant
estimates of amounts and it is impossible to distinguish objectively information about
those estimates that:
(i) provides evidence of circumstances that existed on the date(s)as at which those
amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period
were approved for issue from other information.
9. Prospective application of a change in accounting policy and of recognising the effect of
a change in an accounting estimate, respectively, are:

© The Institute of Chartered Accountants of India

 4.8 2.8 a
FINANCIAL REPORTING
v
(a) applying the new accounting policy to transactions, other events and conditions
v as at which the policy is changed; and
occurring after the date
(b) recognising the effect of the change in the accounting estimate in the current and
future periods affected by the change.

1.5 ACCOUNTING POLICIES

1.5.1 Selection and application of accounting policies
When an Ind AS specifically applies to a transaction, other event or condition, the accounting
policy or policies applied to that item shall be determined by applying the Ind AS.
Ind AS 1 narrates the importance of accounting policies but Ind AS 8 goes a step further and
gives guidance to the entity as to how to select and apply accounting policies.
Let us take few examples of accounting policies:
(a) Basis of accounting – Cash or accrual or hybrid?
(b) Method of determination of cost of inventories – FIFO or specific identification or Weighted
Average?
(c) What is included in cash equivalents and what is excluded from cash equivalents?
(d) When should revenue be recognised?
Thus, one will notice that while preparing the financial statements, the entity has to make
numerous assumptions and define the base for measurement of particular transactions, other
events or conditions. If every entity follows a different base or a different rule or a different
convention according to their convenience/ interpretation, then it will be impossible to compare
the financial statements across entities having similar nature of business. Therefore, the role of
Ind AS is very important in selection and application of the policies.
As per Ind AS 8, if any of the Ind AS already specifies the guidelines about following a particular
policy then entity must follow that standard and apply the policy as per the guidance provided.
Moreover, an entity can also refer to guidance notes which are published by ICAI, along with the
relevant Ind AS, if there is an ambiguity or there is need to go into the depth of a particular
transaction.
1.5.2 Is it compulsory to apply accounting policies?
 Ind AS set out accounting policies that result in financial statements containing relevant
and reliable information about the transactions, other events and conditions to which they
apply.
 Those policies need not be applied when the effect of applying them is immaterial.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.9

 However, it is inappropriate to make, or leave uncorrected, immaterial departures from

Ind AS to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows.
Analysis
Ind AS leaves the judgement to the entity to decide whether it would be material or not material
to apply any accounting policy. Users are assumed to have a reasonable knowledge of
business and economic activities and accounting and a willingness to study the information with
reasonable diligence. Therefore, the assessment needs to take into account how users with
such attributes could reasonably be expected to be influenced in making economic decisions.
1.5.3 How to select and apply an accounting policy when specific
Ind AS is not available on the particular transaction / condition /
event?
 In the absence of an Ind AS that specifically applies to a transaction, other event or
condition, management shall use its judgement in developing and applying an accounting
policy that results in information that is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash flows of
the entity;
(ii) reflect the economic substance of transactions, other events and conditions, and
not merely the legal form;
(iii) are neutral, i.e. free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
Analysis
The businesses may have large variety of transactions in terms of their nature and size.
Though Ind AS cover most of the transactions which are of general nature for any type of
business, there is possibility of new business models coming into picture and new
technologies changing the face of the business, resulting in some new and complex types
of transactions. In such circumstances it will be difficult to find the appropriate accounting
standard for such specific transactions.

© The Institute of Chartered Accountants of India

 4.10 a
2.10 FINANCIAL REPORTING
v
Example 1
v
Before the wake of online transactions of capital markets, the trading of shares used to
take place mainly through brokers and stock exchanges. However, OTC online terminals
changed the face of the capital markets, giving direct access to the layman to trading
transactions. Even if the basic nature of business was same, the technology changed the
face of the business, and many giant financial institutions became the dominant players in
the market as brokerage firms. In view of the changing circumstances, SEBI and ICAI have
come up with new guidelines and new standards which will cater to the need of new
business models, such as trading in derivatives. However, there was a period of
transformation when new transactions were slowly creeping in, but the guidelines were in
the preparatory phase.
In such circumstances, Ind AS 8 provides the following guiding principles for selecting and
applying the accounting policies. The main two objectives to be kept in mind while making
the decision for selecting an accounting policy would be:
(i) Whether it is relevant? The basic purpose of presenting financial statements is to
facilitate the economic decision making of the stakeholders, which would be based on
the information provided in the financial statements. So, if the management is of the
opinion that an accounting policy related to a particular transaction/ condition / event
results in information that is going to help the users to make the economic decisions,
then the entity must select and apply such accounting policy as it is relevant for
decision making.
(ii) Whether it is reliable? The information will be said to be reliable if it makes a faithful
representation, unbiased, prudent, complete in all material respects and it reflects
substance of the transaction and is not presented solely with a purpose of adhering to
the law.
 In making the judgement, management shall refer to, and consider the applicability of, the
following sources in descending order:
(a) the requirements in Ind AS dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Conceptual Framework for Financial Reporting under
Indian Accounting Standards (Conceptual Framework).
 Management may also first consider the most recent pronouncements of International
Accounting Standards Board (IASB) and in absence thereof those of the other standard-
setting bodies that use a similar conceptual framework to develop accounting standards,
other accounting literature and accepted industry practices, to the extent that these do not
conflict with the sources mentioned above.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.11

Analysis
There is a need to have some authentic base for selecting and applying the accounting
policy. Even if it is left to the judgement of the entity, there has to be some basis for
making the judgement. It cannot be left to the personal opinions/ understanding/ intuitions
of the people working for the entity. In view of this, Ind AS 8 requires that in absence of
specific Ind AS, the entity should refer to the following material, in their descending order.
Accordingly, Ind AS 8 provides the following list:
(i) Check if there are any other Ind AS available which are dealing with similar and
related issues
(ii) Check the basic Conceptual Framework of Ind AS, which provides the general
principles
(iii) Check the pronouncements of International Accounting Standard Board
(iv) Check the pronouncements of other standard setting bodies having a similar
conceptual framework
(v) Check the accounting literature and accepted industry practices.
1.5.4 Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for similar transactions, other
events and conditions, unless an Ind AS specifically requires or permits categorisation of items
for which different policies may be appropriate. If an Ind AS requires or permits such
categorisation, an appropriate accounting policy shall be selected and applied consistently to
each category.
Analysis
Accounting policies are the bases or principles or conventions or rules which are followed by an
entity while preparing the financial statements. If the entity keeps on changing the base from
year to year, it will not reflect the true and fair financial position of the entity. Secondly the
results of earlier years cannot be compared with the latest year as the base of the measurement
is changed. Therefore, it is utmost necessity that the entity follows the accounting policies
consistently.
Examples 2 & 3
2. An entity has grouped its property, plant and equipment into four classes viz., land, factory
building, plant and machinery and furniture. The entity may propose to apply revaluation
model only to land. It need not apply this model to building or plant and machinery.
3. Ind AS 2 ‘Inventories’ requires that inventory be valued at lower of cost and net realizable
value. In identifying cost, it allows alternative cost formulas; FIFO and Weighted average.

© The Institute of Chartered Accountants of India

 4.12 a
2.12 FINANCIAL REPORTING
v
The same cost formula must be applied to items of inventory having similar nature or use,
but a different cost formulav can be applied to a different classification of inventory.

1.5.5 Changes in accounting policies

 An entity shall change an accounting policy only if the change:
(a) is required by an Ind AS; or
(b) results in the financial statements providing reliable and more relevant information
about the effects of transactions, other events or conditions on the entity’s financial
position, financial performance or cash flows.
Example 4 - Voluntary change in accounting policy
As per Ind AS 27 ‘Separate Financial Statements’, investment in subsidiaries, associates
and joint ventures are accounted for in an entity’s separate financial statements at cost or
in accordance with Ind AS 109 (i.e., at fair value). The same accounting is required to be
applied for each category of investment.
Assume that an entity decides to change its policy of measuring investment in subsidiaries
(or associates or joint ventures) from cost to fair value in accordance with Ind AS 109, as
this will result in the financial statements providing reliable and more relevant information.
This would constitute a voluntary change in accounting policy.

 Users of financial statements need to be able to compare the financial statements of an

entity over time to identify trends in its financial position, financial performance and cash
flows. Therefore, the same accounting policies are applied within each period and from
one period to the next unless a change in accounting policy meets one of the above
criteria.
Analysis
Continuing with the same rationale, the frequent changes in accounting policies are not
permitted by Ind AS 8. Frequent changes in accounting policies will make it impossible for
a stakeholder to make the economic decisions properly.
For example, suppose an entity has been following the FIFO method of determination of
cost for inventories. In the current year, it shifts from FIFO to weighted average method.
Assuming that cost is less than NRV, it means the opening stock is valued at FIFO method
whereas closing stock is valued at Weighted Average Method, if retrospective application of
the change is impracticable. This will directly impact the gross profit measurement of the
entity. Additionally, the opening inventories and closing inventories will not be comparable.
Moreover, if the investment companies and banks are using the information for calculation
of liquidity, then, the liquidity ratios based on opening inventory and closing inventory may

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.13

show major discrepancies. Thus, changing the base will not only affect the true and fair
position of the financial statements but it will also affect the decision making of the
stakeholders.
In view of the above, Ind AS 8 allows the entity to change the accounting policy only in
following circumstances:
(a) when the change is required by an Ind AS; or
(b) when the change results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events or conditions on
the entity’s financial position, financial performance or cash flows.
 The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or conditions that
differ in substance from those previously occurring; and
(b) the application of a new accounting policy for transactions, other events or conditions
that did not occur previously or were immaterial.

Analysis
Ind AS 8 clearly states that if the entity applies an accounting policy which is different from
the previous one to a transaction, other event or condition that differs in substance from a
previously occurring transaction, other event or condition, the application of the new policy
will not be considered as a change in accounting policy.

Example 5
A company owns several hotels and provides significant ancillary services to occupants of
rooms. These hotels are, therefore, treated as owner-occupied properties and classified as
property, plant and equipment in accordance with Ind AS 16. The company acquires a new
hotel but outsources entire management of the same to an outside agency and remains as
a passive investor. The selection and application of an accounting policy for this new hotel
in line with Ind AS 40 is not a change in accounting policy simply because the new hotel
rooms are also let out for rent. This is because the way in which the new hotel is managed
differs in substance from the way other existing hotels have been managed so far.

Similarly, if an entity is not applying the accounting policy currently and starts applying the
accounting policy newly, that will also not be treated as a change in accounting policy.

© The Institute of Chartered Accountants of India

 4.14 a
2.14 FINANCIAL REPORTING
v
Example 6
v
An entity has classified as investment property, an owner-occupied property previously
classified as part of property, plant and equipment where it was measured after initial
recognition applying the revaluation model. Ind AS 40 on investment property permits only
cost model. The entity now measures this investment property using the cost model. This
is not a change in accounting policy.
 The initial application of a policy to revalue assets in accordance with Ind AS 16 ‘Property,
Plant and Equipment’, or Ind AS 38 ‘Intangible Assets’, is a change in an accounting policy
to be dealt with as a revaluation in accordance with Ind AS 16 or Ind AS 38, rather than in
accordance with Ind AS 8.
 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. Similarly, as per Ind AS 38, a change in
amortisation method should be accounted for as a change in accounting estimate in
accordance with Ind AS 8. These changes are, therefore, not changes in accounting
policies.
Illustration 1
Can an entity voluntarily change one or more of its accounting policies?
Solution
A change in an accounting policy can be made only if the change is required or permitted by
Ind AS 8.
As per para 14 of Ind AS 8, an entity shall change an accounting policy only if the change:
(a) is required by an Ind AS; or
(b) results in the financial statements providing reliable and more relevant information about
the effects of transactions, other events or conditions on the entity’s financial position,
financial performance or cash flows.
Para 15 of the standard states that the users of financial statements need to be able to compare
the financial statements of an entity over time to identify trends in its financial position, financial
performance and cash flows. Therefore, the same accounting policies are applied within each
period and from one period to the next unless a change in accounting policy meets one of the
above criteria.
Paragraph 14(b) lays down two requirements that must be complied with in order to make a
voluntary change in an accounting policy. First, the information resulting from application of the
changed (i.e., the new) accounting policy must be reliable. Second, the changed accounting
policy must result in “more relevant” information being presented in the financial statements.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.15

Whether a changed accounting policy results in reliable and more relevant financial information
is a matter of assessment in the particular facts and circumstances of each case. In order to
ensure that such an assessment is made judiciously (such that a voluntary change in an
accounting policy does not effectively become a matter of free choice), paragraph 29 of Ind AS 8
requires an entity making a voluntary change in an accounting policy to disclose, inter alia, “the
reasons why applying the new accounting policy provides reliable and more relevant
information.”
*****
Illustration 2
Entity ABC acquired a building for its administrative purposes and presented the same as
property, plant and equipment (PPE) in the financial year 20X1-20X2. During the financial year
20X2-20X3, it relocated the office to a new building and leased the said building to a third party.
Following the change in the usage of the building, Entity ABC reclassified it from PPE to
investment property in the financial year 20X2-20X3. Should Entity ABC account for the change
as a change in accounting policy?
Solution
Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for
transactions, other events or conditions that differ in substance from those previously occurring
are not changes in accounting policies.
As per Ind AS 16, ‘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.”
As per Ind AS 40, ‘investment property’ is property (land or a building—or part of a building—or
both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.”
As per the above definitions, whether a building is an item of property, plant and equipment
(PPE) or an investment property for an entity depends on the purpose for which it is held by the
entity. It is thus possible that due to a change in the purpose for which it is held, a building that
was previously classified as an item of property, plant and equipment may warrant
reclassification as an investment property, or vice versa. Whether a building is in the nature of
PPE or investment property is determined by applying the definitions of these terms from the
perspective of that entity. Thus, the classification of a building as an item of property, plant and
equipment or as an investment property is not a matter of an accounting policy choice.

© The Institute of Chartered Accountants of India

 4.16 a
2.16 FINANCIAL REPORTING
v
Accordingly, a change in classification of a building from property, plant and equipment to
v
investment property due to change in the purpose for which it is held by the entity is not a
change in an accounting policy.
*****
Illustration 3
Whether change in functional currency of an entity represents a change in accounting policy?
Solution
Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for
transactions, other events or conditions that differ in substance from those previously occurring
are not changes in accounting policies.
As per Ind AS 21, ‘functional currency’ is the currency of the primary economic environment in
which the entity operates.
Paragraphs 9-12 of Ind AS 21 list factors to be considered by an entity in determining its
functional currency. It is recognised that there may be cases where the functional currency is
not obvious. In such cases, Ind AS 21 requires the management to use its judgement to
determine the functional currency that most faithfully represents the economic effects of the
underlying transactions, events and conditions.
Paragraph 13 of Ind AS 21 specifically notes that an entity’s functional currency reflects the
underlying transactions, events and conditions that are relevant to it. Accordingly, once
determined, the functional currency is not changed unless there is a change in those underlying
transactions, events and conditions. Thus, functional currency of an entity is not a matter of an
accounting policy choice.
In view of the above, a change in functional currency of an entity does not represent a change in
accounting policy and Ind AS 8, therefore, does not apply to such a change. Ind AS 21 requires
that when there is a change in an entity’s functional currency, the entity shall apply the
translation procedures applicable to the new functional currency prospectively from the date of
the change.
*****
1.5.5.1 How to apply the changes in accounting policies?
While discussing the process for application of changes of accounting policies, Ind AS 8, deals
with two situations:
1. An entity shall account for a change in accounting policy resulting from the initial
application of an Ind AS in accordance with the specific transitional provisions, if any, in
that Ind AS.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.17

If a change in accounting policy is due to a new Ind AS, then, generally the standard itself
provides the transitional provisions i.e., provisions applicable on initial application of the
standard, such as method of application (retrospective or prospective or modified
retrospective), availability of any transitional relief etc. In such cases, the entity needs to
follow the transitional provisions accordingly.
2. When an entity changes an accounting policy upon initial application of an Ind AS that does
not include specific transitional provisions applying to that change, or changes an
accounting policy voluntarily, it shall apply the change retrospectively.
If the change in accounting policy is made voluntarily or where the Ind AS is not containing
transitional provisions, then the accounting policy needs to be applied retrospectively.
Note: Early application of an Ind AS is not a voluntary change in accounting policy.
In the absence of an Ind AS that specifically applies to a transaction, other event or condition,
management may apply an accounting policy from the most recent pronouncements of IASB and
in absence thereof those of the other standard-setting bodies that use a similar conceptual
framework to develop accounting standards.
If, following an amendment of such a pronouncement, the entity chooses to change an
accounting policy, that change is accounted for and disclosed as a voluntary change in
accounting policy.
Suppose in absence of any specific Ind AS to a particular transaction, a company follows an
accounting policy as per the relevant IFRS which addresses that transaction and, subsequently
there is an amendment to that IFRS, then, the company may change its accounting policy as per
that amendment. In such cases, it will be considered as if the company is making the change
voluntarily and, accordingly, change in the accounting policy should be applied retrospectively.
Illustration 4
An entity developed one of its accounting policies by considering a pronouncement of an
overseas national standard-setting body in accordance with Ind AS 8. Would it be permissible
for the entity to change the said policy to reflect a subsequent amendment in that
pronouncement?
Solution
In the absence of an Ind AS that specifically applies to a transaction, other event or condition,
management may apply an accounting policy from the most recent pronouncements of
International Accounting Standards Board and in absence thereof those of the other standard-
setting bodies that use a similar conceptual framework to develop accounting standards. If,
following an amendment of such a pronouncement, the entity chooses to change an accounting
policy, that change is accounted for and disclosed as a voluntary change in accounting policy. As
such a change is a voluntary change in accounting policy, it can be made only if it results in
information that is reliable and more relevant (and does not conflict with the sources in Ind AS 8).
*****

© The Institute of Chartered Accountants of India

 4.18 a
2.18 FINANCIAL REPORTING
v
1.5.5.2 Retrospective application
v
When a change in accounting policy is applied retrospectively, the entity shall adjust the
opening balance of each affected component of equity 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.
Analysis
The word retrospective application is defined in Ind AS 8 as applying a new accounting policy to
transactions, other events and conditions as if that policy had always been applied. This means
that comparative information for all prior periods presented will be adjusted for the effect of
change in the policy. The amount of the resulting adjustment relating to periods before those
presented in the financial statements is made to the opening balance of each affected
component of equity of the earliest prior period presented. Usually the adjustment is made to
retained earnings. However, the adjustment may be made to another component of equity (for
example, to comply with an Ind AS).
Example 7
An entity which is trading in goods (and not a manufacturer) was incorporated in the year
20X1-20X2 and is a regular user of Ind AS from that year. It has been using weighted average
cost formula for determining cost of inventories. In 20X8-20X9, it decides to change the above
accounting policy. It wants to use FIFO cost formula. The change in the policy is justified
because that formula reflects the actual flow of inventories and, hence, provides reliable and
more relevant information to the users of financial statements. The entity presents one year
comparative period in its financial statements. Its purchase bills include freight etc., and
quantities of inventories as on 1 st April, 20X7 and 31 st March, 20X8 are such that latest invoices
for the relevant years can be attributed to them. Further, other purchase incidental expenses
are immaterial. Due to these reasons, retrospective application of change in accounting policy
is practicable.
The entity trades in goods, both purchases of stock-in-trade and increase/decrease in
inventories of stock-in-trade will appear in the statement of profit and loss. This is because
Ind AS 1 permits nature-wise presentation only, which is also the position in Schedule III to the
Companies Act, 2013. The change in accounting policy, however, will affect only the carrying
amount of inventories and consequently, increase/decrease in inventories, if cost is below NRV,
but will not affect amount of purchases.
In the above situation, the entity should apply the change in the accounting policy
retrospectively. For this purpose, the entity should recalculate inventory value at the lower of
cost determined on FIFO basis and NRV as at 1 st April, 20X7 and 31 st March, 20X8. The
difference between previously presented opening inventory value as at 1 st April, 20X7 (which
would have been presented in the balance sheet as at 31 st March, 20X7) and the recalculated

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.19

value as on that date as above is the cumulative effect of change in accounting policy on the
opening balance sheet for the comparative year 20X7-20X8. The difference between previously
presented closing inventory value as at 31 st March, 20X8 and the recalculated value as on that
date as above is the cumulative effect of change in accounting policy on the closing balance
sheet for the comparative year 20X7-20X8. The difference between the cumulative effects on
the opening and closing balance sheets for the comparative year 20X7-20X8 as arrived at above
is the period-specific effect of change in the policy for that comparative year. Accordingly, while
preparing the financial statements for the year 20X8-20X9, the entity should adjust the opening
inventory as at 1 st April, 20X7 and adjust retained earnings on that date for the cumulative effect
of change in accounting policy and restate comparative amount in respect of increase/decrease
in inventories in the statement of profit and loss for the comparative year 20X7-20X8. This
results in consequential restatement of profit or loss, total comprehensive income, closing
balances of retained earnings and inventories for that comparative year. The said restated
closing balances of retained earnings and inventories become opening balances of these items
for the year 20X8-20X9, which is the year of change in accounting policy. Income tax effect due
to change in accounting policy will be accounted for in accordance with Ind AS 12.
1.5.5.3 Limitations on retrospective application
 The intention of the standard is, as far as possible, that the companies should follow the
same accounting policies consistently year after year to ensure the relevance and reliability
of financial statements.
 There are some advantages of making the process of change in accounting policy so
tedious as outlined below.
i. Companies will not make the frequent changes in their accounting policies just to do
the window dressing of their financial statements.
ii. The comparison of financial statements over time and with other entities will be
possible, in a reliable way.
 Having said this, there can be practical difficulties in making the retrospective changes in
policies, when the company wants to change the policy.
Example 8
A company has been incorporated 25 years ago and since then doing the business on pan
India basis. Now, is it supposed to incorporate the changes in accounting policy for last
25 years? Will it be practicable? Will it be worth doing it? Will it be material? Such
questions arise when one wants to change the accounting policy, since voluntary change in
policy is required to be applied retrospectively.
 When retrospective application is required, a change in accounting policy shall be applied
retrospectively except to the extent that it is impracticable to determine either the period-
specific effects or the cumulative effect of the change.

© The Institute of Chartered Accountants of India

 4.20 a
2.20 FINANCIAL REPORTING
v
 The term ‘Impracticability’ is defined under Ind AS 8 as follows:
v
Impracticable - Applying a requirement is impracticable when the entity cannot apply it
after making every reasonable effort to do so. For a particular prior period, it is
impracticable to apply a change in an accounting policy retrospectively or to make a
retrospective restatement to correct an error if:
(a) the effects of the retrospective application or retrospective restatement are not
determinable;
(b) the retrospective application or retrospective restatement requires assumptions about
what management’s intent would have been in that period; or
(c) the retrospective application or retrospective restatement requires significant
estimates of amounts and it is impossible to distinguish objectively information about
those estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at which those
amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period
were approved for issue from other information.
 After going through the above-mentioned definition of impractical, it is clear that the
Ind AS 8 does provide some relief if there are practical difficulties in applying the policy
retrospectively.
 Ind AS 8 talks about two types of effects which one need to understand:
i. Period Specific: Period specific means for each financial year.
ii. Cumulative: Cumulative is the sum total of the period specific effects.
 When it is impracticable to determine the period-specific effects of changing an accounting
policy on comparative information for one or more prior periods presented, then the entity
shall apply the new accounting policy to the carrying amounts of assets and liabilities as at
the beginning of the earliest period for which retrospective application is practicable, which
may be the current period, and shall make a corresponding adjustment to the opening
balance of each affected component of equity for that period.
 Thus, if it is impracticable for an entity to change the policy from day 1, because it is
impracticable to determine period-specific effects for one or more comparative prior periods
presented, it can apply the changed policy from the earliest period for which it would be
practicable to make the changes in policies retrospectively which may be the current
period.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.21

Example 9
In the example given in the section 1.5.5.2 above, if comparative information is presented
for two years i.e., 20X6-20X7 and 20X7-20X8 and if it is not practicable to apply the
changed policy retrospectively from 20X6-20X7, then, the entity can apply the changed
policy retrospectively from 20X7-20X8. This may happen if it is not practicable to compute
the inventory value in accordance with the changed policy as on 1 st April, 20X6, for
example, due to loss of latest purchase bills for the year 20X5-20X6 and computer records
of the same are also lost.
In the above example, if comparative information is presented for one year and if it is not
practicable to compute the opening inventory value as at 1 st April, 20X7, the entity can
apply the changed policy retrospectively from 20X8-20X9.
 When an entity applies a new accounting policy retrospectively, it applies the new
accounting policy to comparative information for prior periods as far back as is practicable.
Retrospective application to a prior period is not practicable unless it is practicable to
determine the cumulative effect on the amounts in both the opening and closing balance
sheets for that period. The amount of the resulting adjustment relating to periods before
those presented in the financial statements is made to the opening balance of each
affected component of equity of the earliest prior period presented. Usually, the
adjustment is made to retained earnings. However, the adjustment may be made to another
component of equity (for example, to comply with an Ind AS). Any other information about
prior periods, such as historical summaries of financial data, is also adjusted as far back as
is practicable.
 When it is impracticable to determine the cumulative effect, at the beginning of the current
period, of applying a new accounting policy to all prior periods, the entity shall adjust the
comparative information to apply the new accounting policy prospectively from the earliest
date practicable. It therefore disregards the portion of the cumulative adjustment to assets,
liabilities and equity arising before that date. Changing an accounting policy is permitted
even if it is impracticable to apply the policy retrospectively for any prior period.
Example 10
In 20X6, an entity changes its accounting policy with respect to determination of cost of its
inventories from FIFO to weighted average cost formula. This change is made because
management believes that weighted average cost formula results in better matching of cost
with revenue. Further, weighted average cost formula is generally used by other entities
whose business is similar to that of the entity and, hence, provides reliable and more
relevant information to the users of the financial statements. This being a voluntary
change, it has to be applied retrospectively. The entity had commenced operations in
20X1. No records of earlier years are available as a virus attack on server in 20X6 had
wiped off all past records. It is not possible to recreate the records. It is therefore

© The Institute of Chartered Accountants of India

 4.22 a
2.22 FINANCIAL REPORTING
v
impracticable to determine the cumulative effect of change in policy at the beginning of
v the change in accounting policy prospectively from 20X6 only.
20X6. The entity will apply
Since the change in policy is applied prospectively from 20X6, the question of adjusting
comparative information for any prior period(s) presented does not arise at all. Cost of
closing inventories for 20X6 alone will be determined using weighted average cost formula.
The carrying amount of closing inventories for 20X5 will simply be carried as carrying
amount of opening inventories for 20X6. Cost of closing inventories for 20X5 determined
on FIFO basis will be the starting point for applying weighted average cost formula during
20X6.
Change in accounting

- Required by Ind AS - Application of

accounting policies for

Not changes in accounting

policies

- Results in financial
statements providing transactions that differ
reliable and more in substance from
relevant information those previously

policies
occurring
- Application of new
accounting policies for
new transactions

Illustration 5
Whether an entity can change its accounting policy of subsequent measurement of property,
plant and equipment (PPE) from revaluation model to cost model?
Solution
Paragraph 29 of Ind AS 16 provides that an entity shall choose either the cost model or the
revaluation model as its accounting policy for subsequent measurement of an entire class of
PPE.
A change from revaluation model to cost model for a class of PPE can be made only if it meets
the condition specified in Ind AS 8 paragraph 14(b) i.e. the change results in the financial
statements providing reliable and more relevant information to the users of financial statements.
For example, an unlisted entity planning IPO may change its accounting policy from revaluation
model to cost model for some or all classes of PPE to align the entity’s accounting policy with
that of listed markets participants within that industry so as to enhance the comparability of its

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.23

financial statements with those of other listed market participants within the industry. Such a
change – from revaluation model to cost model is not expected to be frequent.
Where the change in accounting policy from revaluation model to cost model is considered
permissible in accordance with Ind AS 8 paragraph 14(b), it shall be accounted for
retrospectively, in accordance with Ind AS 8.
*****
1.5.6 Disclosure regarding the changes in accounting policies
 When initial application of an Ind AS has an effect on the current period or any prior period,
would have such an effect except that it is impracticable to determine the amount of the
adjustment, or might have an effect on future periods, an entity shall disclose:
(a) the title of the Ind AS;
(b) when applicable, that the change in accounting policy is made in accordance with its
transitional provisions;
(c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional provisions;
(e) when applicable, the transitional provisions that might have an effect on future
periods;
(f) for the current period and each prior period presented, to the extent practicable, the
amount of the adjustment:
(i) for each financial statement line item affected; and
(ii) if Ind AS 33, ‘Earnings per Share’, applies to the entity, for basic and diluted
earnings per share;
(g) the amount of the adjustment relating to periods before those presented, to the extent
practicable; and
(h) if retrospective application required by paragraph 19(a) or (b) of Ind AS 8 is
impracticable for a particular prior period, or for periods before those presented, the
circumstances that led to the existence of that condition and a description of how and
from when the change in accounting policy has been applied.
 When a voluntary change in accounting policy has an effect on the current period or any
prior period, would have an effect on that period except that it is impracticable to determine
the amount of the adjustment, or might have an effect on future periods, an entity shall
disclose:
(a) the nature of the change in accounting policy;

© The Institute of Chartered Accountants of India

 4.24 a
2.24 FINANCIAL REPORTING
v
(b) the reasons why applying the new accounting policy provides reliable and more
relevant information; v
(c) for the current period and each prior period presented, to the extent practicable, the
amount of the adjustment:
(i) for each financial statement line item affected; and
(ii) if Ind AS 33 applies to the entity, for basic and diluted earnings per share;
(d) the amount of the adjustment relating to periods before those presented, to the extent
practicable; and
(e) if retrospective application is impracticable for a particular prior period, or for periods
before those presented, the circumstances that led to the existence of that condition
and a description of how and from when the change in accounting policy has been
applied.
Note:
 Financial statements of subsequent periods need not repeat these disclosures.
 These disclosures will form part of Notes to Accounts.
 When an entity has not applied a new Ind AS that has been issued but is not yet effective,
the entity shall disclose:
(a) this fact; and
(b) known or reasonably estimable information relevant to assessing the possible impact
that application of the new Ind AS will have on the entity’s financial statements in the
period of initial application.
 In complying with the above requirement, an entity considers disclosing:
(a) the title of the new Ind AS;
(b) the nature of the impending change or changes in accounting policy;
(c) the date by which application of the Ind AS is required;
(d) the date as at which it plans to apply the Ind AS initially;
(e) either:
(i) a discussion of the impact that initial application of the Ind AS is expected to
have on the entity’s financial statements; or
(ii) if that impact is not known or reasonably estimable, a statement to that effect.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.25

Illustration 6
Whether an entity is required to disclose the impact of any new Ind AS which is issued but not
yet effective in its financial statements as per Ind AS 8?
Solution
Paragraph 30 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors,
states as follows:
“When an entity has not applied a new Ind AS that has been issued but is not yet effective, the
entity shall disclose:
(a) this fact; and
(b) known or reasonably estimable information relevant to assessing the possible impact that
application of the new Ind AS will have on the entity’s financial statements in the period of
initial application.”
Accordingly, it may be noted that an entity is required to disclose the impact of Ind AS which has
been issued but is not yet effective.
*****

1.6 CHANGE IN ACCOUNTING ESTIMATES

1.6.1 Meaning
 An accounting policy may require items in financial statements to be measured in a way that
involves measurement uncertainty — that is, the accounting policy may require such items
to be measured at monetary amounts that cannot be observed directly and must instead be
estimated. In such a case, an entity develops an accounting estimate to achieve the
objective set out by the accounting policy. Developing accounting estimates involves the
use of judgements or assumptions based on the latest available, reliable information.
Examples of accounting estimates include:
(a) a loss allowance for expected credit losses, applying Ind AS 109, Financial
Instruments;
(b) the net realisable value of an item of inventory, applying Ind AS 2 Inventories;
(c) the fair value of an asset or liability, applying Ind AS 113, Fair Value Measurement;
(d) the depreciation expense for an item of property, plant and equipment, applying
Ind AS 16; and

© The Institute of Chartered Accountants of India

 4.26 a
2.26 FINANCIAL REPORTING
v
(e) a provision for warranty obligations, applying Ind AS 37, Provisions, Contingent
v
Liabilities and Contingent Assets.
 An entity uses measurement techniques and inputs to develop an accounting estimate.
Measurement techniques include estimation techniques (for example, techniques used to
measure a loss allowance for expected credit losses applying Ind AS 109) and valuation
techniques (for example, techniques used to measure the fair value of an asset or liability
applying Ind AS 113).
 The term ‘estimate’ in Ind AS sometimes refers to an estimate that is not an accounting
estimate as defined in this Standard. For example, it sometimes refers to an input used in
developing accounting estimates.
 The use of reasonable estimates is an essential part of the preparation of financial
statements and does not undermine their reliability.
1.6.2 Can changes in estimates be related to prior periods?
 An entity may need to change an accounting estimate if changes occur in the circumstances
on which the accounting estimate was based or as a result of new information, new
developments or more experience.
 By its nature, a change in an accounting estimate does not relate to prior periods and is not
the correction of an error.
 The effects on an accounting estimate of a change in an input or a change in a
measurement technique are changes in accounting estimates unless they result from the
correction of prior period errors.
1.6.3 Change in the basis of measurement – Whether a change in
accounting policy or change in estimate?
A change in the measurement basis applied is a change in an accounting policy and is not a
change in an accounting estimate. When it is difficult to distinguish a change in an accounting
policy from a change in an accounting estimate, the change is treated as a change in an
accounting estimate.
Illustration 7
Whether a change in inventory cost formula is a change in accounting policy or a change in
accounting estimate?
Solution
As per Ind AS 8, accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements. Further,

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.27

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.
*****
1.6.4 Accounting treatment for applying changes in accounting
estimates
 The effect of change in an accounting estimate, except to the extent that the change results
in change in assets, liabilities or relates to an item of equity, shall be recognised
prospectively by including it in profit or loss in:
(a) the period of the change, if the change affects that period only; or
(b) the period of the change and future periods, if the change affects both.
A change in an accounting estimate may affect only the current period’s profit or loss, or
the profit or loss of both the current period and future periods.
 To the extent that a change in an accounting estimate gives rise to changes in assets and
liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying
amount of the related asset, liability or equity item in the period of the change.
 Prospective recognition of the effect of a change in an accounting estimate means that the
change is applied to transactions, other events and conditions from the date of that change.
A change in an accounting estimate may affect only the current period’s profit or loss, or the
profit or loss of both the current period and future periods. For example, a change in a loss
allowance for expected credit losses affects only the current period’s profit or loss and
therefore is recognised in the current period. However, a change in the estimated useful life
of, or the expected pattern of consumption of the future economic benefits embodied in, a
depreciable asset affects depreciation expense for the current period and for each future
period during the asset’s remaining useful life. In both cases, the effect of the change
relating to the current period is recognised as income or expense in the current period. The
effect, if any, on future periods is recognised as income or expense in those future periods.

© The Institute of Chartered Accountants of India

 4.28 a
2.28 FINANCIAL REPORTING
v
Relevant extract from Annual
v Report of Indus Towers Limited for Financial Year
2020-2021 on change in accounting estimates
The Company has revised the useful life of property, plant and equipment and useful life
and estimation of ARO and taken the impact prospectively from the date of change.

Examples 11 and 12
11. A change in the estimate of the amount of bad debts affects only the current period’s
profit or loss and therefore is recognised in the current period. However, a change in
the estimated useful life of, or the expected pattern of consumption of the future
economic benefits embodied in, a depreciable asset affects depreciation expense for
the current period and for each future period during the asset’s remaining useful life.
In both cases, the effect of the change relating to the current period is recognised as
income or expense in the current period. The effect, if any, on future periods is to be
recognised as income or expense in those future periods.
12. During the financial year ended 31 st March, 20X2, Entity ABC introduced a new range
of electric motors. It sold the motors with a standard warranty of two years. Warranty
provides assurance that a product will function as expected and in accordance with
certain specifications and it has been assessed that it is not a separate performance
obligation under Ind AS 115.
Based on results of testing of the motors during trials prior to commercial production,
Entity ABC made a provision for warranty costs amounting to 1,00,000 for motors
sold during the year ended 31 st March, 20X2.
During financial year 20X2-20X3, a defect was discovered in the motors that had not
come to light during the trials. The defect resulted in the entity incurring an amount of

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.29

2,00,000 during the financial year 20X2-20X3 on repairs of motors sold during the
financial year 20X1-20X2. Besides, the entity expects to incur 1,50,000 as costs
during the year 20X3-20X4 on meeting its warranty obligations in respect of motors
sold during the financial year 20X2-20X3.
In preparing its financial statements for the year ended 31 st March, 20X3, the entity
would carry forward a warranty provision of 1,50,000 in respect of motors sold
during the financial year 20X1-20X2. It would recognise an amount of 2,50,000
( 2,00,000 plus 1,50,000 minus 1,00,000) in respect of motors sold during the
financial year 20X1-20X2 as an expense in profit or loss for the financial year
20X2-20X3. The warranty provision included in the comparatives for financial year
ended 31 st March, 20X2 would not be adjusted.
The provision for warranty costs in respect of motors sold during the financial year
20X2-20X3 would be made by considering the information concerning the defect in
motors that came to light during the financial year 20X2-20X3.

1.6.5 Disclosure of changes in estimates

 An entity shall disclose the nature and amount of a change in an accounting estimate that
has an effect in the current period or is expected to have an effect in future periods, except
for the disclosure of the effect on future periods when it is impracticable to estimate that
effect.
 If the amount of the effect in future periods is not disclosed because estimating it is
impracticable, an entity shall disclose that fact.
Thus, to summarise the above-mentioned provisions, the entity should disclose:
i. Effect of change in estimate on the current period
ii. If applicable and practicable, effect of change in estimate on the future periods
iii. If applicable but impracticable, the fact that it is impracticable to estimate the effect on
future periods.

1.7 ERRORS
1.7.1 Meaning
 Ind AS 8 deals with the treatment of errors that have taken place in past but were not
discovered at that time. Subsequently, when they are discovered, it is necessary to correct

© The Institute of Chartered Accountants of India

 4.30 a
2.30 FINANCIAL REPORTING
v
such errors in the financial statements and make sure that the financial statements present
v
relevant and reliable information in the period in which they are discovered.
As per the definition given in Ind AS 8, Prior period errors are omissions from, and
misstatements in, the entity’s financial statements for one or more prior periods arising
from a failure to use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were approved for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements. Such errors include the
effects of mathematical mistakes, mistakes in applying accounting policies, oversights
or misinterpretations of facts, and fraud.
 Errors can arise in respect of the recognition, measurement, presentation or disclosure of
elements of financial statements. Financial statements do not comply with Ind AS if they
contain either material errors or immaterial errors made intentionally to achieve a particular
presentation of an entity’s financial position, financial performance or cash flows.
1.7.2 Common types of errors
(i) Mathematical Mistakes: In accounting terms, generally the errors are called as error of
commission. Wrong calculations, carry forward of wrong balances and errors in totals are
few examples of mathematical errors.
(ii) Mistakes in applying policies: Specific standards may prescribe method of applying
specific policies for particular nature of transaction. For example, as a general rule, assets
and liabilities and income and expenses should not be offset, unless otherwise specifically
required or permitted in an Ind AS. If a receivable from another entity and payable to that
entity are offset without any currently existing legally enforceable right to set off the
recognised amounts, then, it will be an error while applying the policies, since it is against
the principles of offset prescribed in Ind AS 32, ‘Financial Instruments: Presentation’.
(iii) Misinterpretations of facts: Ind AS 10 deals with treatment of the events after the
reporting period. Whether the event is an adjusting event or a non-adjusting event
depends on whether that event provides evidence of a condition existing at the end of the
reporting period. Sometimes, this requires judgement of the management and may result
into misinterpretation of facts, if not dealt with properly.
(iv) Omissions: The mistakes that happened due to omission to record a material transaction,
perhaps, due to oversight.
(v) Frauds: Major theft undetected in the past.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.31

The abovementioned errors and any other error may happen while recognising the transaction,
or while measuring the transaction, or while presenting it in financial statements or it might be
possible that proper disclosure is not done.

Example 13
The following errors occurred in preparation of A Ltd.’s financial statements for the immediately
preceding financial year –
(a) Depreciation on plant and machinery understated by an amount equal to 0.30% of sales;
(b) Warranty provisions understated by an amount equal to 0.15% of sales;
(c) Allowance for bad debts understated by an amount of 0.25% of sales.
Individually none of these errors may be material but could collectively influence the economic
decision of the users of the financial statements. These are material prior period errors.

1.7.3 Treatment of errors

Financial statements do not comply with Ind AS if they contain either material errors or
immaterial errors made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows.
1.7.3.1 Potential errors of current period
Potential current period errors discovered in that period are corrected before the financial
statements are approved for issue.
1.7.3.2 Prior period errors discovered subsequently
Material errors are sometimes not discovered until a subsequent period, and these prior period
errors are corrected in the comparative information presented in the financial statements for that
subsequent period.
Following is the snapshot of how the balance sheet and statement of profit and loss is presented
after correction of prior period errors:

© The Institute of Chartered Accountants of India

 4.32 a
2.32 FINANCIAL REPORTING
v

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.33

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

Unless impracticable, an entity shall correct material prior period errors retrospectively in the
first set of financial statements approved for issue after their discovery by restating the
comparative amounts for the prior period(s) presented in which the error occurred;
Example 14
While preparing the financial statement for the financial year 20X2-20X3, the prior period
presented would be financial year 20X1-20X2, if one year comparative period is presented. If
the error occurred in the year 20X1-20X2 but discovered in year 20X2-20X3, then it should be
corrected in the financial statements for the year 20X2-20X3 by restating the comparative
amounts for the year 20X1-20X2. This will result in consequential restatement of opening
balances for the year 20X2-20X3.
Situation 2: Error discovered relates to period before the earliest comparative prior period
presented:
If the material error occurred before the earliest prior period presented, an entity shall, unless
impracticable, correct the same retrospectively in the first set of financial statements approved

© The Institute of Chartered Accountants of India

 4.34 a
2.34 FINANCIAL REPORTING
v
for issue after their discovery by restating the opening balances of assets, liabilities and
v
equity for the earliest prior period presented.
Examples 15-17
15. An entity presents one year comparative period in its financial statements. While preparing
the financial statements for the financial year 20X4-20X5, if an error has been discovered
which occurred in the year 20X1-20X2, i.e., for the period which was earlier than earliest
prior period presented (which is 20X3-20X4 in this example), then, the error should be
corrected by restating the opening balances of relevant assets and/or liabilities and
relevant component of equity for the year 20X3-20X4. This will result in consequential
restatement of balances as at 1 st April, 20X3 (i.e, the third balance sheet).
16. A material error in depreciation provision of the preceding year ended 31 st March, 20X2
was discovered when preparing the financial statements for the year ended
31 st March, 20X3. The amount recognised in statement of profit and loss for the year
ended 31 st March, 20X2 was 1,00,000 instead of 50,000. In this case, when presenting
the financial statements for the year ended 31 st March, 20X3, depreciation for the
comparative year 20X1-20X2 will be restated at 50,000. The carrying amount i.e., net
book value of property, plant and equipment for the comparative year ending
31 st March, 20X2 will be increased by 50,000 (due to restatement of accumulated
depreciation). This will result in consequential restatement of opening balance of retained
earnings and property, plant and equipment for the year 20X2-20X3.
17. Continuing with the aforesaid example, assume that the error relates to year ended
31 st March, 20X1 and 20X0-20X1 is not the earliest period for which comparative
information is presented. In this case, the error will be corrected by restating the opening
balances of retained earnings and carrying amount i.e., net book value, of property, plant
and equipment, for the year 20X1-20X2. This will result in restatement of balances as at
1 st April, 20X1.
Illustration 8
An entity has presented certain material liabilities as non-current in its financial statements for
periods upto 31 st March, 20X1. While preparing annual financial statements for the year ended
31 st March, 20X2, management discovers that these liabilities should have been classified as
current. The management intends to restate the comparative amounts for the prior period
presented (i.e., as at 31 st March, 20X1). Would this reclassification of liabilities from non-current
to current in the comparative amounts be considered to be correction of an error under
Ind AS 8? Would the entity need to present a third balance sheet?
Solution
As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measurement,
presentation or disclosure of elements of financial statements. Financial statements do not

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.35

comply with Ind AS if they contain either material errors or immaterial errors made intentionally
to achieve a particular presentation of an entity’s financial position, financial performance or
cash flows. Potential current period errors discovered in that period are corrected before the
financial statements are approved for issue. However, material errors are sometimes not
discovered until a subsequent period, and these prior period errors are corrected in the
comparative information presented in the financial statements for that subsequent period.
In accordance with the above, the reclassification of liabilities from non-current to current would
be considered as correction of an error under Ind AS 8. Accordingly, in the financial statements
for the year ended 31 st March, 20X2, the comparative amounts as at 31 st March, 20X1 would be
restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the preceding
period in addition to the minimum comparative financial statements, if, inter alia, it makes a
retrospective restatement of items in its financial statements and the restatement has a material
effect on the information in the balance sheet at the beginning of the preceding period.
Accordingly, the entity should present a third balance sheet as at the beginning of the preceding
period, i.e., as at 1 st April, 20X0 in addition to the comparatives for the financial year
20X0-20X1.
*****
1.7.4 Limitations on retrospective restatement
We have already discussed in detail the treatment when there are the limitations on giving
retrospective effect to changes in accounting policies. Similar provisions are included in
Ind AS 8 to deal with limitations on retrospective restatement of prior period errors.
Step 1: A prior period error shall be corrected by retrospective restatement if it is practicable to
determine both the period specific effects and cumulative effect of the error.
The correction of a prior period error is excluded from profit or loss for the period in which the
error is discovered. Any information presented about prior periods, including any historical
summaries of financial data, is restated as far back as is practicable.
Step 2: If it is not practicable to determine the period-specific effects of an error on comparative
information for one or more prior periods presented, the entity shall first find out the earliest
period for which retrospective restatement is practicable and then restate the opening balances
of assets, liabilities and equity for that period. Ind AS 8 further states that such period can be
the current period also.
For meaning of ‘impracticable’ for the purposes of Ind AS 8, see section 1.5.5.3.
Step 3: If it is not practicable to determine the cumulative effect, at the beginning of the current
period, of an error on all prior periods, the entity shall restate the comparative information to
correct the error prospectively from the earliest date practicable.

© The Institute of Chartered Accountants of India

 4.36 a
2.36 FINANCIAL REPORTING
v
When it is impracticable to determine the amount of an error (e.g., a mistake in applying an
v periods, the entity restates the comparative information
accounting policy) for all prior
prospectively from the earliest date practicable. It therefore disregards the portion of the
cumulative restatement of assets, liabilities and equity arising before that date.
Corrections of errors are distinguished from changes in accounting estimates. Accounting
estimates by their nature are approximations that may need changing as additional information
becomes known. For example, the gain or loss recognised on the outcome of a contingency is
not the correction of an error.

1.8 DISCLOSURE OF PRIOR PERIOD ERRORS

An entity shall disclose the following:
(a) the nature of the prior period error;
(b) for each prior period presented, to the extent practicable, the amount of the correction:
(i) for each financial statement line item affected; and
(ii) if Ind AS 33 applies to the entity, for basic and diluted earnings per share;
(c) the amount of the correction at the beginning of the earliest prior period presented; and
(d) if retrospective restatement is impracticable for a particular prior period, the circumstances
that led to the existence of that condition and a description of how and from when the error
has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.

1.9 IMPRACTICABILITY IN RESPECT OF RETROSPECTIVE

APPLICATION AND RETROSPECTIVE RESTATEMENT
In some circumstances, it is impracticable to adjust comparative information for one or more
prior periods to achieve comparability with the current period.
For example, data may not have been collected in the prior period(s) in a way that allows either
retrospective application of a new accounting policy (including, its prospective application to
prior periods) or retrospective restatement to correct a prior period error, and it may be
impracticable to recreate the information.
It is frequently necessary to make estimates in applying an accounting policy to elements of
financial statements recognised or disclosed in respect of transactions, other events or
conditions. Estimation is inherently subjective, and estimates may be developed after the
reporting period. Developing estimates is potentially more difficult when retrospectively applying
an accounting policy or making a retrospective restatement to correct a prior period error,

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.37

because of the longer period of time that might have passed since the affected transaction,
other event or condition occurred. However, the objective of estimates related to prior periods
remains the same as for estimates made in the current period, namely, for the estimate to reflect
the circumstances that existed when the transaction, other event or condition occurred.
Therefore, retrospectively applying a new accounting policy or correcting a prior period error
requires distinguishing information that
(a) provides evidence of circumstances that existed on the date(s) as at which the transaction,
other event or condition occurred, and
(b) would have been available when the financial statements for that prior period were
approved for issue
from other information.
For some types of estimates (eg a fair value measurement that uses significant unobservable
inputs), it is impracticable to distinguish these types of information. When retrospective
application or retrospective restatement would require making a significant estimate for which it
is impossible to distinguish these two types of information, it is impracticable to apply the new
accounting policy or correct the prior period error retrospectively.
Hindsight should not be used when applying a new accounting policy to, or correcting amounts
for, a prior period, either in making assumptions about what management’s intentions would
have been in a prior period or estimating the amounts recognised, measured or disclosed in a
prior period. For example, when an entity corrects a prior period error in calculating its liability
for employees’ accumulated sick leave in accordance with Ind AS 19, ‘Employee Benefits’, it
disregards information about an unusually severe influenza season during the next period that
became available after the financial statements for the prior period were approved for issue.
The fact that significant estimates are frequently required when amending comparative
information presented for prior periods does not prevent reliable adjustment or correction of the
comparative information.

1.10 SIGNIFICANT DIFFERENCES BETWEEN IND AS 8 AND

AS 5
S. No. Particulars Ind AS 8 AS 5

Title Accounting Policies, Net Profit or Loss for the

Changes in Accounting Period, Prior Period Items and
Estimates and Errors Changes in Accounting
Policies

1. Scope There are some differences in Under AS, selection of

the scope of the two standards. accounting policies is dealt with
For example, Ind AS 8 deals in AS 1 ‘Disclosure of

© The Institute of Chartered Accountants of India

 4.38 a
2.38 FINANCIAL REPORTING
v
with the criteria for selecting Accounting Policies’.
v
and applying accounting
policies.

2. Extraordinary Under Ind AS, presentation of AS 5, on the other hand,

items any items of income or requires separate presentation
expense as extraordinary items of extraordinary items in the
is explicitly prohibited by statement of profit and loss.
Ind AS 1. AS 5 defines extraordinary items
as income or expenses that arise
from events or transactions that
are clearly distinct from the
ordinary activities of the
enterprise and, therefore, are
not expected to recur frequently
or regularly.
As per AS 5, extraordinary items
should be disclosed in the
statement of profit and loss as a
part of net profit or loss for the
period. The nature and the
amount of each extraordinary
item should be separately
disclosed in the statement of
profit and loss in a manner that
its impact on current profit or
loss can be perceived.

3. Change in Ind AS 8 does not deal with AS 5 allows change in

accounting change in accounting policy on accounting policy if required by
policies the basis of the requirement by the statute.
the statute.

4. Accounting for Ind AS 8 requires that, subject While AS 5 does not clearly
changes in to limited exceptions, changes specify how changes in
accounting in accounting policies should accounting policies other than
policies be accounted for those dealt with by specific
retrospectively by restatement transitional provisions of an
of comparative information. In accounting standard should be

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.39

addition, a third balance sheet accounted for (i.e., whether

as of the beginning of the retrospectively or prospectively),
preceding period is also it requires that the impact of, and
required to be presented by an the adjustments resulting from, a
entity where it applies an change in an accounting policy,
accounting policy if material, should be shown in
retrospectively and the the financial statements of the
retrospective application has a period in which the change is
material effect on the made.
information in the balance
sheet at the beginning of the
preceding period.

5. Prior period Ind AS refers to the term ‘prior AS 5 defines prior period items
items period errors’ which is wider in as incomes or expenses which
scope as compared to ‘prior arise in the current period as a
period items’ used in AS 5. result of errors or omissions in
the preparation of financial
Ind AS 8 definition of prior
statements of one or more prior
period errors include the
periods.
effects of misinterpretations of
facts and fraud as well.

6. Correction of Ind AS 8 requires, subject to Unlike Ind AS 8, AS 5 requires

material prior limited exception, retrospective the correction of prior period
period errors correction of material prior items by including the required
period errors, i.e., restatement adjustments in the determination
of comparative information and of net profit or loss for the
presentation of a third balance current period, though the
sheet as in case of a standard also permits an
retrospective change in an alternative approach under
accounting policy where the which the adjustments are
retrospective correction has a included in the statement of
material effect on the profit and loss after
information in the balance determination of current net
sheet at the beginning of the profit or loss.
preceding period.
Thus, under Ind AS 8, material
prior period errors are

© The Institute of Chartered Accountants of India

 4.40 a
2.40 FINANCIAL REPORTING
v
corrected by correcting the
v
recognition, measurement and
disclosure of amounts of
elements of financial
statements retrospectively as if
the prior period error had never
occurred.

7. Disclosure Disclosure requirements of Disclosure requirements of AS 5

requirements Ind AS 8 are more detailed as are less as compared to those of
compared to those of AS 5. Ind AS 8.
For e.g. in case of a voluntary
change in accounting policy, an
entity is required to disclose
the reasons why applying the
new accounting policy provides
reliable and more relevant
information.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.41

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. A carpet retail outlet sells and fits carpets to the general public. It recognizes revenue when
the carpet is fitted, which on an average is six weeks after the purchase of the carpet.
It then decides to sub-contract the fitting of carpets to self-employed fitters. It now
recognizes revenue at the point-of-sale of the carpet.
Whether this change in recognising the revenue is a change in accounting policy as per the
provision of Ind AS 8?
2. Under what circumstances an entity is required to present a third balance sheet at the
beginning of the preceding period?
3. During 20X2, Delta Ltd., changed its accounting policy for depreciating property, plant and
equipment, so as to apply a component approach completely, whilst at the same time
adopting the revaluation model.
In years before 20X2, Delta Ltd.’s asset records were not sufficiently detailed to apply a
component approach fully. At the end of 20X1, management commissioned an engineering
survey, which provided information on the components held and their fair values, useful lives,
estimated residual values and depreciable amounts at the beginning of 20X2. However, the
survey did not provide a sufficient basis for reliably estimating the cost of those components
that had not previously been accounted for separately, and the existing records before the
survey did not permit this information to be reconstructed.
Delta Ltd.’s management considered how to account for each of the two aspects of the
accounting change. They determined that it was not practicable to account for the change to
a fuller component approach retrospectively, or to account for that change prospectively from
any earlier date than the start of 20X2. Also, the change from a cost model to a revaluation

© The Institute of Chartered Accountants of India

 4.42 a
2.42 FINANCIAL REPORTING
v
model is required to be accounted for prospectively. Therefore, management concluded that
it should apply Delta Ltd.’svnew policy prospectively from the start of 20X2.
Additional information:
(i) Delta Ltd.’s tax rate is 30%
(ii) Property, plant and equipment at the end of 20X1:
Cost 25,000
Depreciation 14,000
Net book value 11,000
(iii) Prospective depreciation expense for 20X2 (old basis) 1,500
(iv) Some results of the engineering survey:
Valuation 17,000
Estimated residual value 3,000
Average remaining asset life 7 years
Depreciation expense on existing property, plant and equipment
for 20X2 (new basis) 2,000
You are required to prepare the relevant note for disclosure in accordance with Ind AS 8.
4. Is change in the depreciation method for an item of property, plant and equipment a change
in accounting policy or a change in accounting estimate?
5. An entity charged off certain expenses as finance costs in its financial statements for the
year ended 31 st March, 20X1. While preparing annual financial statements for the year
ended 31 st March, 20X2, management discovered that these expenses should have been
classified as other expenses instead of finance costs. The error occurred because the
management inadvertently misinterpreted certain facts. The entity intends to restate the
comparative amounts for the prior period presented in which the error occurred (i.e., year
ended 31 st March, 20X1). Would this reclassification of expenses from finance costs to
other expenses in the comparative amounts will be considered as correction of an error
under Ind AS 8? Would the entity need to present a third balance sheet?
6. While preparing the annual financial statements for the year ended 31 st March, 20X3, an
entity discovers that a provision for constructive obligation for payment of bonus to selected
employees in corporate office (material in amount) which was required to be recognised in
the annual financial statements for the year ended 31 st March, 20X1 was not recognised
due to oversight of facts. The bonus was paid during the financial year ended
31 st March, 20X2 and was recognised as an expense in the annual financial statements for

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.43

the said year. Would this situation require retrospective restatement of comparatives
considering that the amount was material?
7. While preparing interim financial statements for the half-year ended 30 th September, 20X1,
an entity notes that there has been an under-accrual of certain expenses in the interim
financial statements for the first quarter ended 30 th June, 20X1. The amount of under
accrual is assessed to be material in the context of interim financial statements. However,
it is expected that the amount would be immaterial in the context of the annual financial
statements. The management is of the view that there is no need to correct the error in the
interim financial statements considering that the amount is expected to be immaterial from
the point of view of the annual financial statements. Whether the management’s view is
acceptable?
8. ABC Ltd has an investment property with an original cost of 1,00,000 which it
inadvertently omitted to depreciate in previous financial statements. The property was
acquired on 1 st April, 20X1. The property has a useful life of 10 years and is depreciated
using straight line method. Estimated residual value at the end of 10 year is Nil.
How should the error be corrected in the financial statements for the year ended
31 st March, 20X4, assuming the impact of the same is considered material? For simplicity,
ignore tax effects.
9. ABC Ltd. changed its method adopted for inventory valuation in the year 20X2-20X3. Prior
to the change, inventory was valued using the first in first out method (FIFO). However, it
was felt that in order to match current practice and to make the financial statements more
relevant and reliable, a weighted average valuation model would be more appropriate.
The effect of the change in the method of valuation of inventory was as follows:
 31 st March, 20X1 - Increase of 10 million
 31 st March, 20X2 - Increase of 15 million
 31 st March, 20X3 - Increase of 20 million
Profit or loss under the FIFO valuation model are as follows:
20X2-20X3 20X1-20X2
Revenue 324 296
Cost of goods sold (173) (164)
Gross profit 151 132
Expenses (83) (74)
Profit 68 58

Retained earnings at 31 st March, 20X1 were 423 million

© The Institute of Chartered Accountants of India

 4.44 a
2.44 FINANCIAL REPORTING
v
You are required to present the impact of change in accounting policy in the profit or loss
and produce an extract of vthe statement of changes in equity in accordance with Ind AS 8.
10. During 20X4-20X5, Cheery Limited discovered that some products that had been sold during
20X3-20X4 were incorrectly included in inventory at 31 st March, 20X4 at 6,500.
Cheery Limited’s accounting records for 20X4-20X5 show sales of 104,000, cost of goods
sold of 86,500 (including 6,500 for the error in opening inventory), and income taxes of
5,250.
In 20X3-20X4, Cheery Limited reported:

Sales 73,500
Cost of goods sold (53,500)
Profit before income taxes 20,000
Income taxes (6,000)
Profit 14,000
Basic and diluted EPS 2.8
The 20X3-20X4 opening retained earnings was 20,000 and closing retained earnings was
34,000. Cheery Limited’s income tax rate was 30% for 20X4-20X5 and 20X3-20X4. It had
no other income or expenses.
Cheery Limited had 50,000 (5,000 shares of 10 each) of share capital throughout, and
no other components of equity except for retained earnings.
State how the above will be treated /accounted in Cheery Limited’s Statement of profit and
loss, statement of changes in equity and in notes wherever required for current period and
earlier period(s) as per relevant Ind AS.
11. In 20X3-20X4, after the entity’s 31 st March 20X3 annual financial statements were
approved for issue, a latent defect in the composition of a new product manufactured by
the entity was discovered (that is, a defect that could not be discovered by reasonable or
customary inspection). As a result of the latent defect the entity incurred 1,00,000 of
unanticipated costs for fulfilling its warranty obligation in respect of sales made before
31 st March 20X3. An additional 20,000 was incurred to rectify the latent defect in
products sold during 20X3-20X4 before the defect was detected and the production
process rectified, 5,000 of which relates to items of inventory at 31 st March 20X3. The
defective inventory was reported at cost 15,000 in the 20X2-20X3 financial statements
when its selling price less costs to complete and sell was estimated at 18,000. The
accounting estimates made in preparing the 31 st March 20X3 financial statements were
appropriately made using all reliable information that the entity could reasonably be
expected to have been obtained and taken into account in the preparation and presentation
of those financial statements.
Analyse the above situation in accordance with relevant Ind AS.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.45

Answers
1. This is not a change in accounting policy as the carpet retailer has changed the way that
the carpets are fitted.
Therefore, there would not be any need to retrospectively change the prior period figures
for revenue already recognized.
2. As per paragraph 40A of Ind AS 1, Presentation of Financial Statements, an entity shall
present a third balance sheet as at the beginning of the preceding period in addition to the
minimum comparative financial statements required by paragraph 38A of the standard if:
 it applies an accounting policy retrospectively, makes a retrospective restatement of
items in its financial statements or reclassifies items in its financial statements; and
 the retrospective application, retrospective restatement or the reclassification has a
material effect on the information in the balance sheet at the beginning of the
preceding period.
3. Extract from the notes
From the start of 20X2, Delta Ltd., changed its accounting policy for depreciating property,
plant and equipment, so as to apply much more fully a components approach, whilst at the
same time adopting the revaluation model. Management takes the view that this policy
provides reliable and more relevant information because it deals more accurately with the
components of property, plant and equipment and is based on up-to-date values. The
policy has been applied prospectively from the start of 20X2 because it was not practicable
to estimate the effects of applying the policy either retrospectively, or prospectively from
any earlier date. Accordingly, the adoption of the new policy has no effect on prior years.
The effect on the current year is to increase the carrying amount of property, plant and
equipment at the start of the year by 6,000; increase the opening deferred tax provision
by 1,800; create a revaluation surplus at the start of the year of 4,200; increase
depreciation expense by 500; and reduce tax expense by 150.
4. As per paragraphs 60 and 61 of Ind AS 16, Property, Plant and Equipment, the
depreciation method used shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity. The depreciation method applied to
an asset shall be reviewed at least at each financial year-end and, if there has been a
significant change in the expected pattern of consumption of the future economic benefits
embodied in the asset, the method shall be changed to reflect the changed pattern. Such a
change is accounted for as a change in an accounting estimate in accordance with
Ind AS 8.
As per the above, depreciation method for a depreciable asset has to reflect the expected
pattern of consumption of future economic benefits embodied in the asset. Determination

© The Institute of Chartered Accountants of India

 4.46 a
2.46 FINANCIAL REPORTING
v
of depreciation method involves an accounting estimate and thus depreciation method is
not a matter of an accounting
v policy.
Accordingly, Ind AS 16 requires a change in depreciation method to be accounted for as a
change in an accounting estimate, i.e., prospectively.
5. As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition,
measurement, presentation or disclosure of elements of financial statements. Financial
statements do not comply with Ind AS if they contain either material errors or immaterial
errors made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows. Potential current period errors discovered in
that period are corrected before the financial statements are approved for issue. However,
material errors are sometimes not discovered until a subsequent period, and these prior
period errors are corrected in the comparative information presented in the financial
statements for that subsequent period.
In accordance with the above, the reclassification of expenses from finance costs to other
expenses would be considered as correction of an error under Ind AS 8. Accordingly, in
the financial statements for the year ended 31 st March, 20X2, the comparative amounts for
the year ended 31 st March, 20X1 would be restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the
preceding period in addition to the minimum comparative financial statements if, inter alia,
it makes a retrospective restatement of items in its financial statements and the
restatement has a material effect on the information in the balance sheet at the beginning
of the preceding period.
In the given case, the retrospective restatement of relevant items in statement of profit and
loss has no effect on the information in the balance sheet at the beginning of the preceding
period (1 st April, 20X0). Therefore, the entity is not required to present a third balance
sheet.
6. As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition,
measurement, presentation or disclosure of elements of financial statements. Financial
statements do not comply with Ind AS if they contain either material errors or immaterial
errors made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows. Potential current period errors discovered in
that period are corrected before the financial statements are approved for issue. However,
material errors are sometimes not discovered until a subsequent period, and these prior
period errors are corrected in the comparative information presented in the financial
statements for that subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the
beginning of the preceding period in addition to the minimum comparative financial
statements if, inter alia, it makes a retrospective restatement of items in its financial

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.47

statements and the retrospective restatement has a material effect on the information in the
balance sheet at the beginning of the preceding period.
In the given case, expenses for the year ended 31 st March, 20X1 and liabilities as at
31 st March, 20X1 were understated because of non-recognition of bonus expense and
related provision. Expenses for the year ended 31 st March, 20X2, on the other hand, were
overstated to the same extent because of recognition of the aforesaid bonus as expense
for the year. To correct the above errors in the annual financial statements for the year
ended 31 st March, 20X3, the entity should:
(a) restate the comparative amounts (i.e., those for the year ended 31 st March, 20X2) in
the statement of profit and loss; and
(b) present a third balance sheet as at the beginning of the preceding period (i.e., as at
1 st April, 20X1) wherein it should recognise the provision for bonus and restate the
retained earnings.
7. Paragraph 41 of Ind AS 8, inter alia, states that financial statements do not comply with
Ind AS if they contain either material errors or immaterial errors made intentionally to
achieve a particular presentation of an entity’s financial position, financial performance or
cash flows.
As regards the assessment of materiality of an item in preparing interim financial
statements, paragraph 25 of Ind AS 34, Interim Financial Statements, states as follows:
“While judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on the basis of
materiality in relation to interim period data to avoid misleading inferences that might result
from non-disclosure. The overriding goal is to ensure that an interim financial report
includes all information that is relevant to understanding of an entity’s financial position and
performance during the interim period.”
As per the above, while materiality judgements always involve a degree of subjectivity, the
overriding goal is to ensure that an interim financial report includes all the information that
is relevant to an understanding of the financial position and performance of the entity
during the interim period. It is therefore not appropriate to base quantitative assessments
of materiality on projected annual figures when evaluating errors in interim financial
statements.
Accordingly, the management is required to correct the error in the interim financial
statements since it is assessed to be material in relation to interim period data.

© The Institute of Chartered Accountants of India

 4.48 a
2.48 FINANCIAL REPORTING
v
8. The error shall be corrected by retrospectively restating the figures for financial year
v
20X2-20X3 and also by presenting a third balance sheet as at 1 st April, 20X2 which is the
beginning of the earliest period presented in the financial statements.
9. Profit or loss under weighted average valuation method is as follows:

20X2-20X3 20X1-20X2 (Restated)

Revenue 324 296
Cost of goods sold (168) (159)
Gross profit 156 137
Expenses (83) (74)
Profit 73 63
Statement of changes in Equity (extract)
Retained earnings Retained earnings
(Original)
At 1 st April, 20X1 423 423
Change in inventory valuation policy 10 -
At 1 st April, 20X1 (Restated) 433 -
Profit for the year 20X1-20X2 63 58
At 31 st March, 20X2 496 481
Profit for the 20X2-20X3 73 68
At 31 st March, 20X3 569 549
10. Cheery Limited
Extract from the Statement of profit and loss
20X4-20X5 (Restated) 20X3-20X4

Sales 1,04,000 73,500

Cost of goods sold (80,000) (60,000)
Profit before income taxes 24,000 13,500
Income taxes (7,200) (4,050)
Profit 16,800 9,450
Basic and diluted EPS 3.36 1.89

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 8 4.49

Cheery Limited
Statement of Changes in Equity
Share Retained Total
capital earnings
Balance at 31 st March, 20X3 50,000 20,000 70,000
Profit for the year ended 31 st March, 20X4
as restated 9,450 9,450
Balance at 31 st March, 20X4 50,000 29,450 79,450
Profit for the year ended 31 st March, 20X5 16,800 16,800
Balance at 31 st March, 20X5 50,000 46,250 96,250
Extract from the Notes
Some products that had been sold in 20X3-20X4 were incorrectly included in inventory at
31 st March, 20X4 at 6,500. The financial statements of 20X3-20X4 have been restated to
correct this error. The effect of the restatement on those financial statements is
summarized below:

Effect on 20X3-20X4
(Increase) in cost of goods sold (6,500)
Decrease in income tax expenses 1,950
(Decrease) in profit (4,550)
(Decrease) in basic and diluted EPS (0.91)
(Decrease) in inventory (6,500)
Decrease in income tax payable 1,950
(Decrease) in equity (4,550)

There is no effect on the balance sheet at the beginning of the preceding period i.e.
1 st April, 20X3.
11. Ind AS 8 is applied in selecting and applying accounting policies, and accounting for
changes in accounting policies, changes in accounting estimates and corrections of prior
period errors.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a
liability, or the amount of the periodic consumption of an asset. This change in accounting
estimate is an outcome of the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities. Changes in accounting

© The Institute of Chartered Accountants of India

 4.50 a
2.50 FINANCIAL REPORTING
v
estimates result from new information or new developments and, accordingly, are not
corrections of errors. v

Further, the effect of change in an accounting estimate, shall be recognised prospectively

by including it in profit or loss in: (a) the period of the change, if the change affects that
period only; or (b) the period of the change and future periods, if the change affects both.
Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse of, reliable
information that:
(a) was available when financial statements for those periods were approved for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.
On the basis of above provisions, the given situation would be dealt as follows:
The defect was neither known nor reasonably possible to detect at 31 st March 20X3 or
before the financial statements were approved for issue, so understatement of the warranty
provision 1,00,000 and overstatement of inventory 2,000 (Note 1) in the
st
31 March 20X3 financial statements are not prior period errors.
The effects of the latent defect that relate to the entity’s financial position at
31 st March 20X3 are changes in accounting estimates.
In preparing its financial statements for 31 st March 20X3, the entity made the warranty
provision and inventory valuation appropriately using all reliable information that the entity
could reasonably be expected to have obtained and had taken into account the same in the
preparation and presentation of those financial statements.
Consequently, the additional costs are expensed in calculating profit or loss for
20X3-20X4.
Working Note:
Inventory is measured at the lower of cost (i.e. 15,000) and fair value less costs to
complete and sell (i.e. 18,000 originally estimated minus 5,000 costs to rectify latent
defect) = 13,000.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.51

UNIT 2:
IND AS 10: EVENTS AFTER THE REPORTING PERIOD

LEARNING OUTCOMES

After studying this unit, you will be able to:

 Define the relevant terms like ‘events after the reporting period’, ‘date of
approval’, ‘adjusting events’ and ‘non-adjusting events’.

 Differentiate between adjusting events and non-adjusting events in terms

of their treatment and disclosure.

 Recommend the accounting treatment for special cases like dividend,

going concern, long-term loan arrangements.

© The Institute of Chartered Accountants of India

 4.52 a
2.52 FINANCIAL REPORTING
v
v

UNIT OVERVIEW
IND AS 10
• Of adjusting events • Long term loan
after the reporting arrangements
period • Going concern
• No recognition of non-
adjusting events after
the reporting period;
only disclosure is
required
Recognition Special
and Cases
measurement

Distribution of
Non-cash Disclosure
Assets to
Owners
• When to recognise a • Date of approval for
dividend payable issue
• Measurement of a • Non-adjusting events
dividend payable after the reporting
• Presentation and period
disclosures

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.53

2.1 INTRODUCTION
It is impossible for any company to present the information on the same day, as the day of
reporting. There would always be a gap between the end of the period for which financial
statements are presented and the date on which the same will actually be made available to the
public.
During this gap, there is a possibility of occurring of few events which will have far reaching
effects on the business / existence of the company. Now the question arises: what view the
company should take about such events? Should it leave it without any cognizance as they are
taking place after the reporting period, or should it take cognizance of such events as at the time
of preparation of the financial statement and making it available to the public? If the company is
aware of the facts and is still not disclosing the same, it may mislead the users.
Ind AS 10 deals with such events and provides guidance about its treatment in the financial
statements.

2.2 OBJECTIVE
The objective of this standard is to prescribe.
1. When an entity should adjust its financial statements for the events after the reporting
period.
2. The disclosures that an entity should give about the date when the financial statements
were approved for issue and about events after the reporting period.
The standard also requires that an entity should not prepare its financial statements on a going
concern basis if events after the reporting period indicate that the going concern assumption is
no longer appropriate.

© The Institute of Chartered Accountants of India

 4.54 a
2.54 FINANCIAL REPORTING
v
v
Objective

Ind AS 10 prescribes

When to adjust Disclosures that Not to prepare financial

financial statements for an entity should statements on a going concern
events after the give about basis if events after the
reporting period reporting period indicate that
the going concern assumption is
not appropriate

Date when the financial statements Events after the

were approved for issue reporting period

2.3 SCOPE
The Standard -shall be applied in:
1. Accounting for events after reporting period; and
2 . Disclosure of events after the reporting period.

2.4 DEFINITIONS AND EXPLANATIONS

We have seen above that the main focus of the standard is events after the reporting period.
Therefore, it is necessary to understand the meaning of it.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.55

2.4.1 Events after the Reporting Period

Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are
approved by the Board of Directors (in case of a company) and by the corresponding approving
authority (in case of any other entity) for issue. This is depicted in the below chart:

Cut off
date
Financial Statements
Start of the End of the Approved by the
reporting reporting Management Shareholders’
period period Meeting

Events after the Not covered by Ind AS 10

reporting period
covered by Ind AS 10

Example 1
The financial year of an entity ends on 31 st March, 20X2. If the board of directors approves the
financial statements on 15 th May, 20X2, ‘after the reporting period’ will be the period between
31 st March, 20X2 and 15 th May, 20X2 and the events occurring during this period should be
considered as ‘events after the reporting period’.

2.4.2 Approval of Financial statements

Now the question arises that what is meant by approval of financial statements? When can one
say that the financial statements are approved? Which body needs to be considered as an
approving authority? If there is a hierarchy of approvals, at what level one can assume that the
financial statements are approved?
What is the date of approval of financial statements?
It is worthwhile to note that the process involved in approving the financial statements for issue
will vary depending upon the (a) management structure, (b) statutory requirements and
(c) procedures followed in preparing and finalising the financial statements.

© The Institute of Chartered Accountants of India

 4.56 a
2.56 FINANCIAL REPORTING
v
v
This standard prescribes,
(i) In case of a company: The financial statements will be treated as approved when board of
directors approves the same;
(ii) In the case of any other entity: The financial statements will be treated as approved
when the corresponding approving authority approves the same. The standard does not
mention specifically what will constitute the approving authority in case of any other entity.
But from the word “Corresponding” one can construe that it is the body which is
authorised to manage the entity on behalf of all members.
It is pertinent to note that in some cases, an entity is required to submit its financial
statements to its shareholders for approval after the financial statements have been
approved by the Board for issue. In such cases, as per paragraph 5 of Ind AS 10, even
though shareholders’ approval is needed, yet, for the purpose of deciding the events after
the reporting period, the date of approval of financial statements will be considered as the
date of approval by the board of directors only.

Example 2
The Board of Directors of ABC Ltd., in its meeting on 5 th May, 20X1, reviews and approves
the financial statements for the year ended 31 st March, 20X1 and issues them to the
shareholders. The financial statements are adopted by the shareholders in the annual
general meeting on 23 rd June, 20X1. The date of approval of financial statements for the is
5 th May, 20X1 in accordance with the standard.
Likewise, in some cases, the management of an entity is required to issue its financial
statements to a supervisory board (made up solely of non-executives) for approval. In
such cases, as per paragraph 6 of Ind AS 10, the financial statements are approved for
issue when the management approves them for issue to the supervisory board.

Example 3
On 18 th May, 20X2, the management of an entity approves financial statements for issue to
its supervisory board. The supervisory board is made up solely of non-executives and may
include representatives of employees and other outside interests. The supervisory board
approves the financial statements on 26 th May, 20X2. The financial statements are made
available to shareholders and others on 1 st June, 20X2. The shareholders approve the
financial statements at their annual meeting on 15 th July, 20X2 and the financial statements
are then filed with a regulatory body on 17 th July, 20X2.
The financial statements are approved for issue on 18 th May, 20X2 (date of management
approval for issue to the supervisory board).

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.57

2.4.3 When date of approval is after the public announcement of some

other financial information
‘Events after the reporting period’ include all events up to the date when the financial statements
are approved for issue, even if those events occur after the public announcement of profit or of
other selected financial information.
Illustration 1

What is the date of approval for issue of the financial statements prepared for the reporting
period from 1 st April, 20X1 to 31 st March, 20X2, in a situation where following dates are
available? Completion of preparation of financial statements 28 th May, 20X2 Board reviews and
approves it for issue 19 th June, 20X2.
Available to shareholders 1 st July, 20X2

Annual General Meeting 15 th September, 20X2

Filed with regulatory authority 16 th October, 20X2

Will your answer differ if the entity is a partnership firm?

Solution
As per Ind AS 10 the date of approval for issue of financial statements is the date on which the
financial statements are approved by the Board of Directors in case of a company, and, by the
corresponding approving authority in case of any other entity. Accordingly, in the instant case,
the date of approval is the date on which the financial statements are approved by the Board of
Directors of the company, i.e., 19 th June, 20X2.
If the entity is a partnership firm, the date of approval will be the date when the relevant
approving authority of such entity approves the financial statements for issue i.e. the date when
the partner(s) of the firm approve(s) the financial statements.
*****

Illustration 2

ABC Ltd. prepared interim financial report for the quarter ending 30 th June, 20X1. The interim
financial report was approved for issue by the Board of Directors on 15 th July, 20X1. Whether
events occurring between end of the interim financial report and date of approval by Board of
Directors, i.e., events between 1 st July, 20X1 and 15 th July, 20X1 that provide evidence of
conditions that existed at the end of the interim reporting period shall be adjusted in the interim
financial report ending 30 th June, 20X1?

© The Institute of Chartered Accountants of India

 4.58 a
2.58 FINANCIAL REPORTING
v
v
Solution
Paragraph 3 of Ind AS 10, inter alia, defines ‘Events after the reporting period’ as those events,
favourable and unfavourable, that occur between the end of the reporting period and the date
when the financial statements are approved by the Board of Directors in case of a company,
and, by the corresponding approving authority in case of any other entity for issue.
What is reporting period has not been dealt with in Ind AS 10. Absence of any specific guidance
regarding reporting period implies that any term for which reporting is done by preparing
financial statements is the reporting period for the purpose of Ind AS 10. Accordingly, financial
reporting done for interim period by preparing either complete set of financial statements or by
preparing condensed financial statements will be treated as reporting period for the purpose of
Ind AS 10.

Paragraph 2 of Ind AS 34, inter alia, provides that each financial report, annual or interim, is
evaluated on its own for conformity with Ind AS. Further, paragraph 19 of Ind AS 34, provides
that an interim financial report shall not be described as complying with Ind AS unless it
complies with all of the requirements of Ind AS.
In accordance with the above, an entity describing that its interim financial report is in
compliance with Ind AS, has to comply with all the provisions of Ind AS including Ind AS 10.

In order to comply with the requirements of Ind AS 10, each interim financial report should be
adjusted for the adjusting events occurring between end of the interim financial report and the
date of approval by Board of Directors. Therefore, in the instant case, events occurring between
1 st July, 20X1 and 15 th July, 20X1 that provide evidence of conditions that existed at the end of
the interim reporting period should be adjusted in the interim financial report ending
30 th June, 20X1.
*****
Illustration 3
The Board of Directors of ABC Ltd. approved the financial statements for the reporting period
20X1-20X2 for issue on 15 th June, 20X2. The management of ABC Ltd. discovered a major
fraud and decided to reopen the books of account. The financial statements were subsequently
approved by the Board of Directors on 30 th June, 20X2. What is the date of approval for issue
as per Ind AS 10 in the given case?
Solution
As per paragraph 3 of Ind AS 10, the – date of approval is the date on which the financial

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.59

statements are approved by the Board of Directors in case of a company, and by the
corresponding approving authority in case of any other entity for issue. In the given case, there
are two dates of approval by Board of Directors. The financial statements were reopened for
further adjustments subsequent to initial approval. The date of approval should be taken as the
date on which financial statements are finally approved by the Board of Directors. Therefore, in
the given case, the date of approval for issue as per Ind AS 10 should be considered as
30 th June, 20X2.
*****
2.4.4 Should the company report only unfavourable events?
The standard clearly states that events after reporting period can be favourable as well as
unfavourable. Accordingly, an entity should report both favourable as well as unfavourable
events after the reporting period.

2.5 TYPES OF EVENTS

The ‘events after the reporting period’ are classified into two categories
(i) Adjusting Events: Adjusting events are those that provide evidence of conditions that
existed at the end of the reporting period (adjusting events after the reporting period);
and
(ii) Non Adjusting Events: Non-adjusting events are those that are indicative of conditions
that arose after the reporting period (non-adjusting events after the reporting period).

© The Institute of Chartered Accountants of India

 4.60 a
2.60 FINANCIAL REPORTING
v
v
Both favourable
and unfavourable
Events after the By the Board of
reporting period Directors in case of a
That occur between company
the end of the
reporting period
and the date when By the corresponding
the financial approving authority
statements are in case of any other
approved entity

Adjusting events Non -adjusting events

Those that provide evidence of Those that are indicative

conditions that existed at the of conditions that arose
end of the reporting period after the reporting period

Ind AS 10 Carve Out: Where there is a breach of a material provision of a long-term loan
arrangement on or before the end of the reporting period with the effect that the liability
becomes payable on demand on the reporting date, the agreement by lender before the
approval of the financial statements for issue, to not demand payment as a consequence of the
breach, shall be considered as an adjusting event.

2.6 RECOGNITION AND MEASUREMENT OF ADJUSTING

EVENTS
An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
events after the reporting period.
Examples of adjusting events after the reporting period
The following are examples of adjusting events after the reporting period that require an entity to
adjust the amounts recognised in its financial statements, or to recognise items that were not
previously recognised:

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.61

(a) The settlement after the reporting period of a court case that confirms that the entity had a
present obligation at the end of the reporting period. The entity adjusts any previously
recognised provision related to this court case in accordance with Ind AS 37, ‘Provisions,
Contingent Liabilities and Contingent Assets’ or recognises a new provision.
The entity does not merely disclose a contingent liability because the settlement provides
additional evidence that would be considered in accordance with paragraph 16 of
Ind AS 37.
Illustration 4
A case is going on between ABC Ltd., and GST department on claiming some exemption
for the year 20X1-20X2. The court issued the order on 15 th April, 20X2 and rejected the
claim of the company. Accordingly, the company is liable to pay additional tax. The
financial statements of the company for the year 20X1-20X2 have been approved on
15 th May, 20X2. Should the company account for such tax in the year 20X1-20X2 or should
it account for the same in the year 20X2-20X3?
Solution
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. Here, this condition is satisfied.
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
amounts will be adjusted in financial statements for 20X1-20X2.
*****
(b) The receipt of information after the reporting period indicating that an asset was impaired at
the end of the reporting period, or that the amount of a previously recognised impairment
loss for that asset needs to be adjusted. For example:
(i) The bankruptcy of a customer that occurs after the reporting period usually confirms
that the customer was credit-impaired at the end of the reporting period;
Example 4
Loss allowance for expected credit loss in respect of the amount due from a customer
was recognised at the end of the reporting period in accordance with Ind AS 109,
‘Financial Instruments’. Subsequent liquidation order on the customer issued before
the date of approval of financial statements for the reporting period indicates that
nothing could be received from the customer. This confirms that the expected credit
loss at the end of the reporting period on this particular trade receivable is equal to its

© The Institute of Chartered Accountants of India

 4.62 a
2.62 FINANCIAL REPORTING
v
v
gross carrying amount and, consequently, the entity needs to adjust the loss
allowance for the expected credit loss at the end of the reporting period so that net
carrying amount of this particular trade receivable at the end of the reporting period is
zero.

Illustration 5
While preparing its financial statements for the year ended 31 st March, 20X1, XYZ Ltd.
made a general provision for bad debts @ 5% of its debtors. In the last week of
February, 20X1 a debtor for 2 lakhs had suffered heavy loss due to an earthquake;
the loss was not covered by any insurance policy. Considering the event of
earthquake, XYZ Ltd. made a provision @ 50% of the amount receivable from that
debtor apart from the general provision of 5% on remaining debtors. In April, 20X1
the debtor became bankrupt. Can XYZ Ltd. provide for the full loss arising out of
insolvency of the debtor in the financial statements for the year ended
31 st March, 20X1?
Would the answer be different if earthquake had taken place after 31 st March, 20X1,
and therefore, XYZ Ltd. did not make any specific provision in context that debtor and
made only general provision for bad debts @ 5% on total debtors?
Solution
As per the definition of ‘Events after the Reporting Period’ and paragraph 8 of
Ind AS 10, Events after the Reporting Period, financial statements should be adjusted
for events occurring after the reporting period that provide evidence of conditions that
existed at the end of the reporting period. In the instant case, the earthquake took
place in February 20X1 (i.e. before the end of the reporting period). Therefore, the
condition exists 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 2 lakhs should be made to cover the loss arising due to the bankruptcy of the
debtor in the financial statements for the year ended 31 st March, 20X1. In this case,
assuming that the financial statements are approved by the approving authority after
April, 20X1, XYZ Ltd should provide for the remaining amount as a consequence of
declaration of this debtor as bankrupt.
In case, the earthquake had taken place after the end of the reporting period, i.e.,
after 31 st March, 20X1, and XYZ Ltd. had not made any specific provision for the
debtor who was declared bankrupt later on, since the earthquake occurred after the
end of the reporting period no condition existed at the end of the reporting period.
The company had made only general provision for bad debts in the ordinary business

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.63

course – without taking cognizance of the catastrophic situation of an earthquake.

Accordingly, bankruptcy of the debtor in this case is a non-adjusting event.
As per para 21 of Ind AS 10, if non-adjusting events after the reporting period are
material, their non-disclosure could influence the economic decisions that users make
based on the financial statements. Accordingly, an entity shall disclose the following
for each material category of non-adjusting event after the reporting period:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot be
made.”
If the amount of bad debt is considered to be material, the nature of this non-adjusting
event, i.e., event of bankruptcy of the debtor should be disclosed along with the
estimated financial effect of the same in the financial statements.
*****
(ii) The sale of inventories after the reporting period may give evidence about their net
realisable value at the end of the reporting period.
While making the valuation of closing inventories, Ind AS 2, Inventories, prescribes
the general principle that the inventories need to be valued at cost or net realisable
value, whichever is less. In cases, where inventories are valued at net realisable
value (and not ‘at cost’), the estimates of net realisable value are based on the most
reliable evidence available at the time the estimates are made, of the amount the
inventories are expected to realise. However, when the inventories are actually sold
during the period after the reporting date (but before approval of financial statements),
the selling price of the actual sale transaction provides the evidence of net realisable
value provided the market conditions remains unchanged. In contrast, if a change in
the market conditions occur (say, due to surplus production, additional import, etc.),
then the resultant changes to the selling price of inventories do not reflect the
conditions that existed on the reporting date (when the inventories were valued).
Example 5
Entity A values its inventories at cost or NRV, whichever is less. Entity A has
10 pieces of item A in its stock at the year end. Each item cost 500. All these items
are sold subsequently but before the date of approval of financial statements for the
reporting period at 450 per piece. The sale of inventories after the reporting period
normally provides evidence about their net realisable value at the end of the reporting
period.

© The Institute of Chartered Accountants of India

 4.64 a
2.64 FINANCIAL REPORTING
v
v
Illustration 6
The company has inventory of 100 finished cars on 31 st March, 20X2, which are
having a cost of 4,00,000 each. On 30 th April, 20X2, as per the new government
rules, higher road tax and penalties are to be paid by the buyers for such cars (which
were already expected to come) and hence the selling price of a car has come down
and the demand for such cars has dropped drastically. The selling price has come
down to 3,00,000 each. The financial statements of the company for the year 20X1-
20X2 are not yet approved. Should the company value its stock at 4,00,000 each or
should it value at 3,00,000 each? Ignore estimated costs necessary to make the
sale.
Solution
Events after the reporting period provide the evidence about the net realisable value
of the cars at the end of the reporting period and, therefore, the amount of 3,00,000
should be considered for the valuation of stock.
*****
(c) The determination after the reporting period of the cost of assets purchased, or the
proceeds from assets sold, before the end of the reporting period.
Same principle can be applied for sale of assets as well.
Example 6
The sale of an asset took place in March, 20X2. However, the actual consideration was
determined and collected after 31 st March, 20X2, i.e., on 10 th May, 20X2 (date of approval
of financial statements was 15 th May, 20X2). In such a situation, sale value recognised in
the books as on 31 st March, 20X2 should be adjusted.
Illustration 7
ABC Ltd. has purchased a new machinery during the year 20X1-20X2. The asset was
finally installed and made ready for use on 15 th March, 20X2. However, the company
involved in installation and training, which was also the supplier, has not yet submitted the
final bills for the same.
The supplier company sent the bills on 10 th April, 20X2, when the financial statements were
not yet approved. Should the company adjust the amount of capitalisation in the year
20X1-20X2 or in the year 20X2-20X3?
Solution
As per the provisions of the contract, the cost of installation and training of new machine is
an integral part of the cost of asset purchased. Therefore, even if the details are available

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.65

after reporting period, they provide proof about the circumstances that existed at the end of
reporting period. Therefore, the cost of installation and training will be considered for
capitalisation in the year 20X1-20X2.
*****
(d) The determination after the reporting period of the amount of profit-sharing or bonus
payments, if the entity had a present legal or constructive obligation at the end of the
reporting period to make such payments as a result of events before that date (see
Ind AS 19, Employee Benefits).
The careful reading of the above provision brings forth following two points:
(i) There is a legal or constructive obligation at the end of reporting period
(ii) The obligation is based on profit sharing or bonus payments.
Here one would understand that before the year end, one cannot determine the amount of
profit. Unless one determines the final amount of profit, one cannot finalise the amount of
profit sharing as the latter is related to the former. Therefore, such events must be
considered for the adjustments in financial statements, provided, the contract already
exists on the last day of reporting period.
(e) The discovery of fraud or errors that show that the financial statements are incorrect.
If any error or any fraud related to the reporting period is detected after the reporting
period (but before approval of the financial statements), then the entity must adjust the
financial statements appropriately by rectifying the same. This is because such fraud and
errors provide evidence that the financial statements are not correct as at the reporting
date. Discovery of such fraud and errors are adjusting events under Ind AS 10

2.7 ACCOUNTING TREATMENT AND DISCLOSURE OF

NON-ADJUSTING EVENTS AFTER THE REPORTING
PERIOD
An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period.
An example of a non-adjusting event after the reporting period is 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. 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, an entity does not adjust the amounts recognised in its financial

© The Institute of Chartered Accountants of India

 4.66 a
2.66 FINANCIAL REPORTING
v
v
statements for the investments. Similarly, the entity does not update the amounts disclosed for
the investments as at the end of the reporting period, although it may need to give additional
disclosure as required under paragraph 21 of Ind AS 10.

Recognition, Measurement and Disclosure

Adjusting events after the reporting Non -adjusting events after the reporting period
period

Do not adjust the amounts recognised in

Adjust the amounts recognised in the the financial statements to reflect it
financial statements to reflect it

If non -adjusting events after the reporting period are

material, then disclose
 the nature of the event; and
 an estimate of its financial effect, or a statement
that such an estimate cannot be made.

2.8 SPECIAL CASES

2.8.1 Long-term Loan Arrangements
Notwithstanding anything contained in the definition of adjusting events and non-adjusting
events in paragraph 3 of Ind AS 10, where there is a breach of a material provision of a long-
term loan arrangement on or before the end of the reporting period with the effect that the
liability becomes payable on demand on the reporting date, the agreement by lender before the
approval of the financial statements for issue, to not demand payment as a consequence of the
breach, shall be considered as an adjusting event.

Example 7
ABC Ltd., in order to raise funds, has privately placed debentures of 1 crore, on
st
1 January, 20X1, issued to PQR Ltd. As per the original terms of agreement, the debentures
are to be redeemed on 31 st March, 20X9. One of the conditions of the private placement of the
debentures was that debt-equity ratio at the end of any reporting year should not exceed 2:1. If
this condition is not fulfilled, then PQR Ltd., has a right to demand immediate redemption of the

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.67

debentures. On 31 st March, 20X6, debt-equity ratio of ABC Ltd., exceeds 2:1. Therefore,
PQR Ltd., decides to return the debentures.
Thus, on 31 st March, 20X6, the liability of the ABC Ltd., towards PQR Ltd., (which was originally
a long-term liability) becomes a current liability, since it is now a liability on demand. However,
ABC Ltd. enters into an agreement with PQR Ltd. on 15 th April, 20X6 that PQR Ltd., will not
demand the payment immediately. The financial statements are approved by the BOD on
30 th April, 20X6.
In this case, the agreement that PQR Ltd., will not demand the money immediately is a
subsequent event. Even though it is a subsequent event not affecting the condition existing at
the balance sheet date, yet because of the specific provisions of paragraph 3 of Ind AS 10, it
has to be given effect in the financial statements for the year 20X5-20X6. Accordingly, though
as per original terms the liability would have been otherwise reclassified as a current liability as
on 31 st March, 20X6, by giving effect to the event after the reporting period due to the specific
provisions of paragraph 3 of Ind AS 10, it would continue to be classified as a non-current
liability as on 31 st March, 20X6. In other words, the re-classification of debentures as current
liability as at 31 st March, 20X6 will be adjusted and once again classified as a non-current
liability as at that date.

2.8.2 Going Concern

 An entity shall not prepare its financial statements on a going concern basis if management
determines after the reporting period either that it intends to liquidate the entity or to cease
trading, or that it has no realistic alternative but to do so.
 Deterioration in operating results and financial position after the reporting period may
indicate a need to consider whether the going concern assumption is still appropriate. If the
going concern assumption is no longer appropriate, the effect is so pervasive that this
standard requires a fundamental change in the basis of accounting, rather than an
adjustment to the amounts recognised within the original basis of accounting.
 Ind AS 1 specifies required disclosures if:
(a) the financial statements are not prepared on a going concern basis; or
(b) management is aware of material uncertainties related to events or conditions that
may cast significant doubt upon the entity’s ability to continue as a going concern. The
events or conditions requiring disclosure may arise after the reporting period.
Going concern approach has a lot of importance in the financial statements. Going concern
approach can be applied if and only if the entity has intentions to continue its operations. The

© The Institute of Chartered Accountants of India

 4.68 a
2.68 FINANCIAL REPORTING
v
v
carrying amount of assets and carrying amount of liabilities will be much different if the entity
has plans to go in for liquidation.
Example 8
A going concern company assumes that the raw material inventory and work in progress will be
completed in due course and the inventories of finished goods would be ready for sale. But, if
the company has no intention to continue with the business, it may take a decision to sell the
raw material and WIP at best available market price, may be at scrap value also.
If a company decides to go into liquidation, then the long-term liabilities of the company will turn
into short-term liabilities as the company will have to pay all its debts before it closes down its
operations. Thus, the overall approach of accounting will change when there is no going concern
approach.
Therefore, Ind AS 10, specifically requires that if after the reporting period but before approval of
the financial statements, there are any signs of not continuing the operations, or the decision is
taken during that period not to continue with the operations, in spite of the fact that the decision
was taken after the reporting period, still the entity should prepare the financial statements with
a different approach and, accordingly, inform the stakeholders clearly that the is planning to
cease operations.
Illustration 8
Company XYZ Ltd. was formed to secure the tenders floated by a telecom company for
publication of telephone directories. It bagged the tender for publishing directories for Pune
circle for 5 years. It has made a profit in 20X1- 20X2, 20X2-20X3, 20X3-20X4 and 20X4-20X5. It
bid in tenders for publication of directories for other circles – Nagpur, Nashik, Mumbai,
Hyderabad but as per the results declared on 23 rd April, 20X5, the company failed to bag any of
these. Its only activity till date is publication of Pune directory. The contract for publication of
directories for Pune will expire on 31 st December 20X5. The financial statements for the
financial year 20X4-20X5 have been approved by the Board of Directors on 10 th July, 20X5.
Whether it is appropriate to prepare financial statements on going concern basis?
Solution
With regard to going concern basis to be followed for preparation of financial statements, paras
14 & 15 of Ind AS 10 states that-
An entity shall not prepare its financial statements on a going concern basis if management
determines after the reporting period either that it intends to liquidate the entity or to cease
trading, or that it has no realistic alternative but to do so.
Deterioration in operating results and financial position after the reporting period may indicate a
need to consider whether the going concern assumption is still appropriate. If the going concern

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.69

assumption is no longer appropriate, the effect is so pervasive that this Standard requires a
fundamental change in the basis of accounting, rather than an adjustment to the amounts
recognised within the original basis of accounting.
In accordance with the above, an entity needs to change the basis of accounting if the effect of
deterioration in operating results and financial position is so pervasive that management
determines after the reporting period either that it intends to liquidate the entity or to cease
trading, or that it has no realistic alternative but to do so.
In the instant case, since contract is expiring on 31 st December 20X5 and it is confirmed on
23 rd April, 20X5, (i.e., after the end of the reporting period and before the approval of the
financial statements), that no further contact is secured, it implies that the entity’s operations are
expected to come to an end by 31 st December 20X5. Accordingly, if entity’s operations are
expected to come to an end, the entity needs to make a judgement as to whether it has any
realistic possibility to continue or not. In case, the entity determines that it has no realistic
alternative of continuing the business, preparation of financial statements for 20X4-20X5 and
thereafter going concern basis may not be appropriate.
*****
Illustration 9
In the plant of PQR Ltd., there was a fire on 10 th May, 20X1 in which the entire plant was
damaged and the loss of 40,00,000 is estimated. The claim with the insurance company has
been filed and a recovery of 27,00,000 is expected.
The financial statements for the year ending 31 st March, 20X1 were approved by the Board of
Directors on 12 th June, 20X1. Show how should it be disclosed?
Solution
In the instant case, since fire took place after the end of the reporting period, it is a non-
adjusting event. However, in accordance with paragraph 21 of Ind AS 10, disclosures regarding
material non-adjusting event should be made in the financial statements, i.e., the nature of the
event and the expected financial effect of the same.
With regard to going concern basis followed for preparation of financial statements, the company
needs to determine whether it is appropriate to prepare the financial statements on going
concern basis, since there is only one plant which has been damaged due to fire. If the effect of
deterioration in operating results and financial position is so pervasive that management
determines after the reporting period either that it intends to liquidate the entity or to cease
trading, or that it has no realistic alternative but to do so, preparation of financial statements for
the financial year 20X0-20X1 on going concern assumption may not be appropriate. In that
case, the financial statements may have to be prepared on a basis other than going concern.

© The Institute of Chartered Accountants of India

 4.70 a
2.70 FINANCIAL REPORTING
v
v
However, if the going concern assumption is considered to be appropriate even after the fire, no
adjustment is required in the financial statements for the year ending 31 st March, 20X1.
*****

2.9 DIVIDENDS
 If an entity declares dividends to holders of equity instruments (as defined in Ind AS 32,
Financial Instruments: Presentation) after the reporting period, the entity shall not
recognise those dividends as a liability at the end of the reporting period.
 If dividends are declared after the reporting period but before the financial statements are
approved for issue, the dividends are not recognised as a liability at the end of the
reporting period because no obligation exists at that time. Such dividends are disclosed in
the notes to accounts in Financial Statements.
 The crux of difference between adjusting event and non-adjusting event depends on the
fact whether the event provides evidence for existence of a condition at the end of
reporting period or not.
Illustration 10
ABC Ltd. declares the dividend on 15 th July, 20X2 as the results of year 20X1-20X2 as well as
Q1 ending 30 th June, 20X2 are better than expected. The financial statements of the company
are approved on 20 th July, 20X2 for the financial year ending 31 st March, 20X2. Will the
dividend be accounted for in the financial year 20X2-20X3 or will it be accounted for in the year
20X1-20X2?
Solution
The dividend was declared in the year 20X2-20X3. Therefore, the obligation towards dividend
did not exist at the end date of reporting period i.e., on 31 st March, 20X2. Therefore, it will be
accounted for in the year 20X2-20X3 and not in 20X1-20X2, even if financial statements for
20X1-20X2 were approved after the declaration of dividend. It will, however, be disclosed in the
notes in the financial statements for the year 20X1-20X2 in accordance with Ind AS 1.
*****
Illustration 11
What would be the treatment for dividends declared to redeemable preference shareholders
after the reporting period but before the financial statements are approved for issue for the year
20X1-20X2. Whether Ind AS 10 prescribes any accounting treatment for such dividends?

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.71

Solution
Paragraph 12 of Ind AS 10 prescribes accounting treatment for dividends declared to holders of
equity instruments. If an entity declares dividends to holders of equity instruments (as defined
in Ind AS 32, Financial Instruments: Presentations) after the reporting period, the entity shall not
recognise those dividends as a liability at the end of the reporting period.
However, Ind AS 10 does not prescribe accounting treatment for dividends declared to
redeemable preference shareholders. As per the principles of Ind AS 32, Financial Instruments:
Presentation, a preference share that provides for mandatory redemption by the issuer for a
fixed or determinable amount at a fixed or determinable future date or gives the holder the right
to require the issuer to redeem the instrument at or after a particular date for a fixed or
determinable amount, is a financial liability. Thus, dividend payments to such preference shares
are recognised as expense in the same way as interest on a bond. Since interest will be
charged on time basis, the requirements of Ind AS 10 regarding date of declaration of dividend
is not relevant for its recognition.
*****

2.10 DISCLOSURE REQUIRED UNDER IND AS 10

2.10.1 Date of approval for issue
 An entity shall disclose the date when the financial statements were approved for issue and
who gave that approval. If the entity’s owners or others have the power to amend the
financial statements after issue, the entity shall disclose that fact.
 It is important for users to know when the financial statements were approved for issue,
because the financial statements do not reflect events after this date.
Ind AS 10, underlines the importance of date of approval, by requiring a separate disclosure of
the date of approval of financial statements. Note that this date is important because it gives a
clear idea to the stakeholders about the period, which is covered after the reporting period, for
providing information to the stakeholders. In a way, it determines the scope of the financial
statements in terms of time.
2.10.2 Updating disclosure about conditions at the end of the reporting
period
 If an entity receives information after the reporting period about conditions that existed at
the end of the reporting period, it shall update disclosures that relate to those conditions, in
the light of the new information.

© The Institute of Chartered Accountants of India

 4.72 a
2.72 FINANCIAL REPORTING
v
v
In case of adjusting events, the entity is supposed to make the necessary adjustments in
the financial statements. But just making the changes in the financial statements will not
be sufficient as the stakeholders will not be in a position to understand why the
adjustments are made. Therefore, in addition to adjustments in the financial statements, it
is necessary to make the separate disclosure of the same.
 In some cases, an entity needs to update the disclosures in its financial statements to
reflect information received after the reporting period, even when the information does not
affect the amounts that it recognises in its financial statements. One example of the need
to update disclosures is when evidence becomes available after the reporting period about
a contingent liability that existed at the end of the reporting period. In addition to
considering whether it should recognise or change a provision under Ind AS 37, an entity
updates its disclosures about the contingent liability in the light of that evidence.
2.10.3 Disclosure of Non-adjusting events after the reporting period
If non-adjusting events after the reporting period are material, non-disclosure could reasonably
be expected to influence the decisions that the primary users of general-purpose financial
statements make on the basis of those financial statements., which provide financial information
about a specific reporting entity. Accordingly, an entity shall disclose the following for each
material category of non-adjusting event after the reporting period:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.
Examples of non-adjusting events after the reporting period generally resulting in
disclosure:
(a) a major business combination after the reporting period (Ind AS 103, Business
Combinations, requires specific disclosures in such cases) or disposing of a major
subsidiary;
(b) announcing a plan to discontinue an operation;
(c) major purchases of assets, classification of assets as held for sale in accordance with
Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, other
disposals of assets, or expropriation of major assets by government;
(d) the destruction of a major production plant by a fire after the reporting period;
(e) announcing, or commencing the implementation of, a major restructuring (see Ind AS 37);
(f) major ordinary share transactions and potential ordinary share transactions after the
reporting period (Ind AS 33, Earnings per Share, requires an entity to disclose a description

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.73

of such transactions, other than when such transactions involve capitalisation or bonus
issues, share splits or reverse share splits all of which are required to be adjusted under
Ind AS 33);
(g) abnormally large changes after the reporting period in asset prices or foreign exchange
rates;
(h) changes in tax rates or tax laws enacted or announced after the reporting period that have
a significant effect on current and deferred tax assets and liabilities (see Ind AS 12, Income
Taxes);
(i) entering into significant commitments or contingent liabilities, for example, by issuing
significant guarantees; and
(j) commencing major litigation arising solely out of events that occurred after the reporting
period.
Important points to remember
S.No. Item Timing Treatment Reason
1. Dividends Declared after the  Do not recognise it No obligation exists at
reporting period as a liability at the that time
but before approval end of the reporting
of financial period.
statements  Disclosed in the
notes to accounts
2. Going If management  Do not prepare the The deterioration in
concern determines after financial statements operating results and
the reporting on a going concern financial position after
period either that it basis; or the reporting period
intends to liquidate  Make necessary may be so pervasive
the entity or to disclosure of not that it may require a
cease trading following going fundamental change
concern basis or in the basis of
events or conditions accounting
that may cast
significant doubt
upon the entity’s
ability to continue
as a going concern

© The Institute of Chartered Accountants of India

 4.74 a
2.74 FINANCIAL REPORTING
v
v
3. Date of Approved after the Disclose the date when Important for users to
approval of reporting period the financial statements know when the
financial were approved for issue financial statements
statements and who gave that were approved for
for issue approval issue because the
financial statements
do not reflect events
after this date
4. Updating Received Update disclosures that When the information
disclosure information after relate to new does not affect the
about the reporting information / conditions amounts that it
conditions at period recognises in its
the end of the financial statements,
reporting disclosures are
period required

An extract from the annual report of JSW Steel Limited for the year ended
31 st March, 2021:

2.11 DISTRIBUTION OF NON-CASH ASSETS TO OWNERS

Sometimes an entity distributes non-cash assets as dividends to its equity shareholders, acting
in their capacity as owners. In those situations, an entity may also give equity shareholders a
choice of receiving either non-cash assets or a cash alternative.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.75

It may be recalled that paragraph 107 of Ind AS 1, inter alia, requires an entity to present the
amount of dividends recognised as distributions to owners either in the statement of changes in
equity or in the notes to the financial statements but does not prescribe how to measure it.
Appendix A to Ind AS 10, Distribution of Non-cash Assets to Owners is relevant in this regard.
2.11.1 Applicability
 Appendix A to Ind AS 10 applies to the following types of non-reciprocal distributions of
assets by an entity to its owners acting in their capacity as owners:
(a) distributions of non-cash assets (e.g., items of property, plant and equipment,
businesses as defined in Ind AS 103, ownership interests in another entity or disposal
groups as defined in Ind AS 105); and
(b) distributions that give owners a choice of receiving either non-cash assets or a cash
alternative.
 It applies only to distributions in which all owners of the same class of equity instruments
are treated equally.
2.11.2 Non-applicability
 This Appendix does not apply to a distribution of a non-cash asset that is ultimately
controlled by the same party or parties before and after the distribution.
 This exclusion applies to the separate, individual and consolidated financial statements of
an entity that makes the distribution.
 For a distribution to be outside the scope of this Appendix on the basis that the same
parties control the asset both before and after the distribution, a group of individual
shareholders receiving the distribution must have, as a result of contractual arrangements,
such ultimate collective power over the entity making the distribution.
 It does not apply when an entity distributes some of its ownership interests in a subsidiary
but retains control of the subsidiary. The entity making a distribution that results in the
entity recognising a non-controlling interest in its subsidiary accounts for the distribution in
accordance with Ind AS 110, Consolidated Financial Statements.
 This Appendix addresses only the accounting by an entity that makes a non-cash asset
distribution. It does not address the accounting by shareholders who receive such a
distribution.

© The Institute of Chartered Accountants of India

 4.76 a
2.76 FINANCIAL REPORTING
v
v
2.11.3 Issues addressed by Appendix A to Ind AS 10
 When an entity declares a distribution (and hence, has an obligation to distribute the assets
concerned to its owners), it must recognise a liability for the dividend payable.
 Accordingly, this Appendix addresses the following three questions:
o When should the entity recognise the dividend payable?
o How should an entity measure the dividend payable? and
o When an entity settles the dividend payable, how should it account for any difference
between (a) the carrying amount of the assets distributed and (b) the carrying amount
of the dividend payable?
These issues have been discussed in the subsequent paragraphs.
2.11.4 Accounting Principles enunciated by Appendix A to Ind AS 10
When an entity declares a distribution and has an obligation to distribute the assets concerned
to its owners, it must recognise a liability for the dividend payable.
2.11.4.1 When to recognise a dividend payable
 The liability to pay a dividend shall be recognised when the dividend is appropriately
authorised and is no longer at the discretion of the entity
 This is the date:
(a) when declaration of the dividend (e.g., by management or the board of directors), is
approved by the relevant authority (e.g., the shareholders), if the jurisdiction requires
such approval, or
(b) when the dividend is declared, (e.g., by management or the board of directors), if the
jurisdiction does not require further approval.
2.11.4.2 Measurement of a dividend payable
 An entity shall measure a liability to distribute non-cash assets as a dividend to its owners
at the fair value of the assets to be distributed.
 If an entity gives its owners a choice of receiving either a non-cash asset or a cash
alternative, the entity shall estimate the dividend payable by considering both the fair value
of each alternative and the associated probability of owners selecting each alternative.
 At the end of each reporting period and at the date of settlement, the entity shall review
and adjust the carrying amount of the dividend payable, with any changes in the carrying

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.77

amount of the dividend payable recognised in equity as adjustments to the amount of the
distribution.
Accounting for any difference between the carrying amount of the assets distributed and
the carrying amount of the dividend payable when an entity settles the dividend payable.
 When an entity settles the dividend payable, it shall recognise the difference, if any,
between (a) the carrying amount of the assets distributed and (b) the carrying amount of
the dividend payable - in profit or loss.
2.11.4.3 Presentation and disclosures
An entity shall present the difference between carrying amount of the assets distributed and the
carrying amount of the dividend payable at the time of settlement of the dividend payable as a
separate line item in profit or loss.
An entity shall disclose the following information, if applicable:
(a) the carrying amount of the dividend payable at the beginning and end of the period; and
(b) the increase or decrease in the carrying amount recognised in the period as result of a
change in the fair value of the assets to be distributed.
If after the end of a reporting period but before the financial statements are approved for issue,
an entity declares a dividend to distribute a non-cash asset, it shall disclose:
(a) the nature of the asset to be distributed;
(b) the carrying amount of the asset to be distributed as of the end of the reporting period; and
(c) the fair value of the asset to be distributed as of the end of the reporting period, if it is
different from its carrying amount, and the information about the method(s)used to measure
that fair value required to be disclosed by Ind AS 113, Fair Value Measurement.

2.12 EXTRACTS OF FINANCIAL STATEMENT OF LISTED

ENTITIES
An extract from the annual report of JSW Steel Limited for the year ended March 31, 2021:
Subsequent Events
a) On 21 May 2021, the board of directors recommended a final dividend of 6.50 (Rupees
six and paise fifty only) per equity share of 1 each to be paid to the shareholders for the
financial year 2020-21, which is subject to approval by the shareholders at the Annual
General Meeting to be held on 21 July 2021. If approved, the dividend would result in
cash outflow of Rs. 1,571 crores.

© The Institute of Chartered Accountants of India

 4.78 a
2.78 FINANCIAL REPORTING
v
v
b) On 13 April 2021, JSW Steel Italy S.R.L, a wholly owned subsidiary of the Company
completed the acquisition of remaining 840,840 equity shares, representing 30.73%
equity share capital of GSI Luchini S.P.A. for a consideration of EUR 1 million. Consequent
to this, GSI Luchini S.P.A. has become a wholly owned subsidiary of the Company.
(Source: https://www.jswsteel.in/)

2.13 SIGNIFICANT DIFFERENCES BETWEEN IND AS 10

AND AS 4
S. No Particulars Ind AS 10 AS 4
Title Events after the Reporting Period Contingencies and
Events Occurring After
the Balance Sheet Date
1. Material non The standard requires material non- AS 4 requires the same to
adjusting adjusting events to be disclosed in be disclosed in the report
events the financial statements. of approving authority.
2. Impact on If after the reporting date it is AS 4 requires assets and
going concern determined that the fundamental liabilities to be adjusted for
of the entity accounting assumption of going events occurring after the
concern is no longer appropriate, balance sheet date that
Ind AS 10 requires a fundamental indicate that the
change in the basis of accounting. fundamental accounting
assumption of going
concern is not appropriate.
In this regard, Ind AS 10 refers to AS 4 does not require any
Ind AS 1, which requires an entity to such disclosure. However,
make the following disclosures: AS 1 requires the
 disclose the fact that the disclosure of the fact in
financial statements are not case going concern
prepared on a going concern assumption is not followed.
basis together with the basis on
which the financial statements
are prepared.
 state the reason why the entity is
not regarded as a going concern.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.79

3. Breach of a Consequent to carve-out made in No such guidance is given

material Ind AS 1, it has been provided in the in AS 4
provision of a definition of ‘Events after the
long-term loan reporting period’ that in case of
arrangement breach of a material provision of a
long-term loan arrangement on or
before the end of the reporting
period with the effect that the liability
becomes payable on demand on the
reporting date, if the lender, before
the approval of the financial
statements for issue, agrees to
waive the breach, it shall be
considered as an adjusting event.
4. Distribution of Ind AS 10 includes an Appendix No such guidance is given
non-cash Distribution of Non-cash Assets to in AS 4
assets to Owners which deals, inter alia, with
owners when to recognise dividends
payable to its owners.

2.14 CARVE OUT IN IND AS 10 FROM IAS 10

Ind AS 10 Carve Out: As a consequence to carve-out made in Ind AS 1, Ind AS 10 provides, in
the definition of ‘Events after the reporting period’ that in case of breach of a material provision
of a long-term loan arrangement on or before the end of the reporting period with the effect that
the liability becomes payable on demand on the reporting date, if the lender, before the approval
of the financial statements for issue, agrees to waive the breach, it shall be considered as an
adjusting event.
However, under IAS 10 ‘Events after the Reporting Period’, an agreement with the lender after
the reporting period but before the approval of the financial statements for issue not to demand
payment (say, arising out of breach of loan covenants) is not considered as an adjusting event.

© The Institute of Chartered Accountants of India

 4.80 a
2.80 FINANCIAL REPORTING
v
v
FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. The AGM of ABC Ltd for the year ended 31 st March, 20X2 was held on 10 th July, 20X2 and
Board Meeting has been conducted on 15 th May, 20X2. Meanwhile, the company had to
disclose certain financial information pertaining to the year ended 31 st March, 20X2 to SEBI
as per SEBI regulations on 20 th April, 20X2. Since, certain financial information pertaining to
the year ended 31 st March, 20X2 is submitted to SEBI before approval of financial statements
by the Board, the management is suggesting that 20 th April 20X2 shall be considered as ‘after
the reporting period’. Whether the management view is correct in accordance with the
guidance given in Ind AS 10?
2. ABC Ltd. is in a legal suit against the GST department. The company gets a court order in
its favour on 15 th April, 20X2, which resulted into reducing the tax liability as on
31 st March, 20X2. The financial statements for 20X1-20X2 were approved by the board of
directors on 15 th May, 20X2. The management has not considered the effect of the
transaction as the event is favourable to the company. The company’s view is that
favourable events after the reporting period should not be considered as it would hamper
the realisation concept of accounting. Comment on the company’s views in the light of Ind
AS 10.
3. ABC Ltd. trades in laptops. On 31 st March, 20X2, the company has 50 laptops which were
purchased at 45,000 each. The company has considered the same price for calculation
of closing inventory valuation. On 15 th April, 20X2, advanced version of same series of
laptops is introduced in the market. Therefore, the price of the current laptops goes down
to 35,000 each. The financial statements for 20X1-20X2 were approved by the board of
directors on 15 th May, 20X2. The company does not want to value the stock at 35,000

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.81

less estimated costs necessary to make the sale as the event of reduction in selling price
took place after 31 st March, 20X2 and the reduced prices were not applicable as on
31 st March, 20X2. Comment on the company’s views.
4. XY Ltd took a large-sized civil construction contract, for a public sector undertaking, valued
at 200 crores. The execution of the project started during 20X1-20X2 and continued in
the next financial year also. During execution of the work on 29 th May, 20X2, the company
found while raising the foundation work that it had met a rocky surface and cost of contract
would go up by an extra 50 crores, which would not be recoverable from the contractee
as per the terms of the contract. The Company’s financial year ended on 31 st March, 20X2,
and the financial statements were considered and approved by the Board of Directors on
15 th June, 20X2. How will you treat the above in the financial statements for the year
ended 31 st March, 20X2?
5. A Ltd. was required to pay a penalty for a breach in the performance of a contract. A Ltd.
believed that the penalty was payable at a lower amount than the amount demanded by the
other party. A Ltd. created provision for the penalty but also approached the arbitrator with
a submission that the case may be dismissed with costs. A Ltd. prepared the financial
statements for the year 20X1-20X2, which were approved in May, 20X2. The arbitrator, in
April, 20X2, awarded the case in favour of A Ltd. As a result of the award of the arbitrator,
the provision earlier made by A Ltd. was required to be reduced. The arbitrator also
decided that cost of the case should be borne by the other party. Now, whether A Ltd. is
required to remeasure its provision and what would be the accounting treatment of the cost
that will be recovered by A Ltd., which has already been charged to the Statement of Profit
and Loss as an expense for the year 20X1-20X2?
6. A company manufacturing and supplying process control equipment is entitled to duty
drawback if it exceeds its turnover above a specified limit. To claim duty drawback, the
company needs to file an application within 15 days of meeting the specified turnover. If
the application is not filed within stipulated time, the Department has discretionary power of
giving duty draw back credit. For the year 20X1-20X2, the company has exceeded the
specified limit of turnover by the end of the reporting period but the application for duty
drawback is filed on 20 th April, 20X2, which is after the stipulated time of 15 days of
meeting the turnover condition.
Duty drawback has been credited by the Department on 28 th June, 20X2 and financial
statements have been approved by the Board of Directors of the company on
26 th July, 20X2. Whether duty drawback credit should be treated as an adjusting event?
7. XYZ Ltd. sells goods to its customer with a promise to give a discount of 5% on list price of
the goods provided that the payments are received from customer within 15 days. XYZ Ltd.

© The Institute of Chartered Accountants of India

 4.82 a
2.82 FINANCIAL REPORTING
v
v
sold goods for 5 lakhs to ABC Ltd. between 17 th March, 20X2 and 31 st March, 20X2.
ABC Ltd. paid the dues by 15 th April, 20X2 with respect to sales made between
17 th March, 20X2 and 31 st March, 20X2. Financial statements were approved for issue by
Board of Directors on 31 st May, 20X2.
State whether discount will be adjusted from the sales at the end of the reporting period.
8. Whether the fraud related to 20X1-20X2 discovered after the end of the reporting period but
before the date of approval of financial statements for 20X3-20X4 is an adjusting event?
9. X Ltd. was having investment in the form of equity shares in another company as at the end
of the reporting period, i.e., 31 st March, 20X2. After the end of the reporting period but
before the approval of the financial statements it has been found that value of investment
was fraudulently inflated by committing a computation error. Whether such event should be
adjusted in the financial statements for the year 20X1-20X2?
10. ABC Ltd. received a demand notice on 15 th June, 20X2 for an additional amount of
28,00,000 from the Excise Department on account of higher excise duty levied by the
Excise Department compared to the rate at which the company was creating provision and
depositing the same in respect of transactions related to financial year 20X1-20X2. The
financial statements for the year 20X1-20X2 are approved on 10 th August, 20X2. In
July, 20X2, the company has appealed against the demand of 28,00,000 and the
company has expected that the demand would be settled at 15,00,000 only. Show how
the above event will have a bearing on the financial statements for the year 20X1-20X2.
Whether these events are adjusting or non-adjusting events and explain the treatment
accordingly.
Answers
1. As per Ind AS 10, even if partial information has already been published, the reporting
period will be considered as the period between the end of the reporting period and the
date of approval of financial statements. In the above case, the financial statements for the
year 20X1-20X2 were approved on 15 th May, 20X2. Therefore, for the purposes of
Ind AS 10, ‘after the reporting period’ would be the period between 31 st March, 20X2 and
15 th May, 20X2.
2. As per Ind AS 10, even favourable events need to be considered. What is important is
whether a condition exists as at the end of the reporting period and there is evidence for
the same.
3. As per Ind AS 10, the decrease in the net realizable value of the stock after the reporting
period should normally be considered as an adjusting event.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.83

4. In the instant case, the execution of work started during the financial year 20X1-20X2 and
the rocky surface was there at the end of the reporting period, though the existence of
rocky surface is confirmed after the end of the reporting period as a result of which it
became evident that the cost may escalate by 50 crores. In accordance with the
definition of ‘Events after the Reporting Period’, since the rocky surface was there, the
condition was existing at the end of the reporting period, therefore, it is an adjusting event.
The cost of the project and profit should be accounted for accordingly.
5. In the instant case, A Ltd. approached the arbitrator before the end of the reporting period,
who decided the award after the end of the reporting period but before approval of the
financial statements for issue. Accordingly, the conditions were existing at the end of the
reporting date because A Ltd. had approached the arbitrator before the end of the reporting
period whose outcome has been confirmed by the award of the arbitrator. Therefore, it is
an adjusting event.
Accordingly, the measurement of the provision is required to be adjusted for the event
occurring after the reporting period. As far as the recovery of the cost by A Ltd. from the
other party is concerned, this right to recover was a contingent asset as at the end of the
reporting period.
As per para 35 of Ind AS 37, contingent assets are assessed continually to ensure that
developments are appropriately reflected in the financial statements. If it has become
virtually certain that an inflow of economic benefits will arise, the asset and the related
income are recognised in the financial statements of the period in which the change occurs.
If an inflow of economic benefits has become probable, an entity discloses the contingent
asset.
On the basis of the above, a contingent asset should be recognised in the financial
statements of the period in which the realisation of asset and the related income becomes
virtually certain. In the instant case, the recovery of cost became certain when the
arbitrator decided the award during financial year 20X2-20X3.
Accordingly, the recovery of cost should be recognised in the financial year 20X2-20X3.
6. In the instant case, the condition of exceeding the specified turnover was met at the end of
the reporting period and the company was entitled to the duty draw back but the application
for the same has been filed after the stipulated time. Therefore, credit of duty drawback is
discretionary in the hands of the Department. Accordingly, the duty drawback credit is a
contingent asset as at the end of the reporting period, which may be realized if the
Department credits the same.

© The Institute of Chartered Accountants of India

 4.84 a
2.84 FINANCIAL REPORTING
v
v
As per para 35 of Ind AS 37, contingent assets are assessed continually to ensure that
developments are appropriately reflected in the financial statements. If it has become
virtually certain that an inflow of economic benefits will arise, asset and the related income
are recognized in the financial statements of the period in which the change occurs. If an
inflow of economic benefits has become probable, an entity discloses the contingent asset.
In accordance with the above, the duty draw-back credit which was contingent asset for the
financial year 20X1-20X2 should be recognized as asset and related income should be
recognized in the reporting period in which the change occurs. i.e., in the period in which
realization becomes virtually certain, i.e., financial year 20X2-20X3.
7. As per Ind AS 115, if the consideration promised in a contract includes a variable amount,
an entity shall estimate the amount of consideration to which the entity will be entitled in
exchange for transferring the promised goods or services to a customer.
In the instant case, the condition that sales have been made exists at the end of the
reporting period and the receipt of payment within 15 days time after the end of the
reporting period and before the approval of the financial statements confirms that the
discount is to be provided on those sales. Therefore, it is an adjusting event. Accordingly,
XYZ Ltd. should adjust the sales made to ABC Ltd. with respect to discount of 5% on the
list price of the goods.
8. In the instant case, the fraud is discovered after the end of the reporting period of 20X3-
20X4, which related to financial year 20X1-20X2. Since the fraud took place before the
end of the reporting period, the condition was existing which has been confirmed by the
detection of the same after the end of the reporting period but before the approval of
financial statements. Therefore, it is an adjusting event.
Moreover, Ind AS 10 in paragraph 9, specifically provides that the discovery of fraud or
error after the end of the reporting period, that shows that financial statements are
incorrect, is an adjusting event. Such a discovery of fraud should be accounted for in
accordance with Ind AS 8 if it meets the definition of prior period error.
9. Since it has been detected that a fraud has been made by committing an intentional error
and as a result of the same financial statements present an incorrect picture, which has
been detected after the end of the reporting period but before the approval of the financial
statements. The same is an adjusting event. Accordingly, the value of investments in the
financial statements should be adjusted for the fraudulent error in computation of value of
investments.
10. Ind AS 10 defines ‘Events after the Reporting Period’ as follows:
Events after the reporting period are those events, favourable and unfavourable, that occur

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 10 4.85

between the end of the reporting period and the date when the financial statements are
approved by the Board of Directors in case of a company, and, by the corresponding
approving authority in case of any other entity for issue. Two types of events can be
identified:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period)
In the instant case, the demand notice has been received on 15 th June, 20X2, which is
between the end of the reporting period and the date of approval of financial statements.
Therefore, it is an event after the reporting period. This demand for an additional amount
has been raised because of higher rate of excise duty levied by the Excise Department in
respect of goods already manufactured during the reporting period. Accordingly, the
condition exists on 31 st March, 20X2, as the goods have been manufactured during the
reporting period on which additional excise duty has been levied and this event has been
confirmed by the receipt of demand notice. Therefore, it is an adjusting event.
In accordance with the principles of Ind AS 37, the company should make a provision in the
financial statements for the year 20X1-20X2, at best estimate of the expenditure to be
incurred, i.e., 15,00,000.

© The Institute of Chartered Accountants of India

 4.86 a
2.86 FINANCIAL REPORTING
v
v

UNIT 3:
INDIAN ACCOUNTING STANDARD 113: FAIR
VALUE MEASUREMENT

LEARNING OUTCOMES
After studying this unit, you will be able to:
 Understand the need for issuance of Ind AS 113

 Define fair value

 Appreciate the scope and objective of this standard

 Apply the provisions of the standard on ‘non-financial assets’, ‘liabilities’ and

an entity’s ‘own equity instruments’
 Measure fair value at ‘initial recognition’

 Use valuation techniques prescribed in the standard

 Classify the fair value hierarchy under various level

 Disclose the information as per the requirements of the standards

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.87

UNIT OVERVIEW
Ind AS 113

Determine whether the item is in Scope of Ind AS 113

See Below

Establish Parameters
Identify the Item being Identify the Unit of Account Identify the Market Partcipants
Measured and Unit of Valuation and identify the market

Select appropriate Valuation approaches and techniques

Market Approach Income Approach Cost Approach

Determine Inputs to Value Fair Value

Level I Level II Level III

Measure Fair Value

Fair Value at Initial Liabilities and Portfolio

Highest and Inactive
Recognition Own Equity Measurements
Best Use Markets
Instruments Exceptions

Disclose Information about Fair Value Measurements

© The Institute of Chartered Accountants of India

 4.88 a
2.88 FINANCIAL REPORTING
v
v

3.1 WHAT IS FAIR VALUE?

Normally assets and liabilities are being exchanged between parties at their
agreed terms and conditions based on the prices which might be related to the
entity or event based or in other words which is not at arm’s length prices. To
define fair value one has to ensure that the values reflect all assumptions/
adjustments to change from transaction specific/ entity specific to normal
transaction which is common for all interested parties.
In other words, it is a market-based measurement not an entity specific measurement and this
price should be received to sell an asset or paid to transfer a liability in a normal transaction (e.g.
other than any stressed sale etc). Fair value is an exit price and not a price at which an asset/
liability sells / purchase otherwise.

3.2 OBJECTIVE

Defines fair value

Sets out in a single Ind AS a framework for measuring fair value; and

Requires disclosures about fair value measurements

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

The objective of a fair value measurement is—
 To estimate the price
 At which an orderly transaction to sell the asset or to transfer the liability would take place
 Between market participants
 At the measurement date
 Under current market conditions
(i.e. an exit price at the measurement date from the perspective of a market participant that holds
the asset or owes the liability).

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.89

When a price for an identical asset or liability is not observable, an entity measures fair value
using another valuation technique that:
 Maximises the use of relevant observable inputs and
 Minimises the use of unobservable inputs.
Because fair value is a market-based measurement, it is measured using the assumptions that
market participants would use when pricing the asset or liability, including assumptions about
risk. As a result, an entity's intention to hold an asset or to settle or otherwise fulfil a liability is
not relevant when measuring fair value.
The definition of fair value focuses on assets and liabilities because they are a primary subject
of accounting measurement. In addition, this Ind AS shall be applied to an entity's own equity
instruments measured at fair value.

3.3 SCOPE
There are many Ind AS which require measuring assets / liabilities at
fair value and whenever it is required to be fair valued, one looks at Ind
AS 113. It means that this Standard will cover all such requirements
of another standard where fair value measurement and disclosure is
needed. However, there are some specific scope exclusions. It applies
to initial measurement and subsequent measurement as required by
respective Accounting Standard.
Required for

Measurement and /or Disclosures

Applies to

Initial measurement and /or Subsequent Measurement

© The Institute of Chartered Accountants of India

 4.90 a
2.90 FINANCIAL REPORTING
v
v
Example of items covered under Ind AS 113
 Fair value less cost to sell as required under Ind AS 105 for assets held for sale.
 Fair value through Profit and Loss or through Other Comprehensive Income as required
under Ind AS 109 for Financial Instruments.
 Property, plant & equipment measured using revaluation modal as required under
Ind AS 16.
 Biological assets measure at fair value under Ind AS 41 for biological assets.

3.3.1 What is not covered?

Standard specifically describes the below exceptions which are not covered by this Accounting
Standard and hence one has to look at the respective standards to identify the process to calculate
fair values of the items of that standard. The scope exclusion will be applied on below:
3.3.1.1 Measurement and Disclosure exclusion
(a) share-based payment transactions within the scope of Ind AS 102, Share based Payment;
(b) leasing transactions accounted in accordance with Ind AS 116, Leases; and
(c) measurements that have some similarities to fair value but are not fair value, such as net
realisable value in Ind AS 2, Inventories, or value in use in Ind AS 36, Impairment of Assets.
3.3.1.2 Disclosure exclusion
(a) plan assets measured at fair value in accordance with Ind AS 19, Employee Benefits;
(b) assets for which recoverable amount is fair value less costs of disposal in accordance with
Ind AS 36.

3.4 DEFINITION
This Ind AS defines fair value as 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.

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

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.91

In order to understand the definition of the fair value, some of the major terms as used in the
definition need to be understood which are as follows:
a. The asset or liability
b. The transaction
c. Market participants
d. The price
Example 1 - Settlement vs Transfer
A bank holds a debt obligation with a face value of 1,00,000 and a market value of 95,000.
Assume that market interest rates are consistent with the amount in the note; however, there is
5,000 discount due to market concerns about the risk of non-performance by Counterparty I.
Settlement value
Counterparty I would be required to pay the face value of the note to settle the obligation, because
the bank might not be willing to discount the note by the market discount or the credit risk
adjustment. Therefore, the settlement value would equal the face value of the note.
Transfer value
In order to calculate the transfer value, Counterparty I must construct a hypothetical transaction
in which another counterparty (Counterparty II), with a similar credit profile, is seeking financing
on terms that are substantially the same as the note. Counterparty II could choose to enter into
a new note agreement with the bank or receive the existing note from Counterparty I in a transfer
transaction. In this hypothetical transaction, Counterparty II should be equally willing to obtain
financing through a new bank note or assumption of the existing note in return for a payment of
95,000. Therefore, the transfer value would be 95,000, and thus the fair value.

3.5 ASSET OR LIABILITY SPECIFIC FAIR VALUE

Ind AS 113 states that a fair value measurement takes into account the characteristics of the asset
or liability, e.g. the condition and location of the asset and restrictions, if any, on its sale or use.
The restriction or the condition relating to asset which can affect the future economic benefit from
the asset need to be considered in determining the fair value of the asset.
The standard emphasis that in order to get a fair value of an asset/ liability, the restrictions or
conditions that might be related to a particular entity should not be taken into account because a
fair value will be based on market participant assumptions rather to an entity specific conditions
or restriction which usually will not affect fair valuation of an asset/ liability.

© The Institute of Chartered Accountants of India

 4.92 2.92 FINANCIAL a REPORTING
v
v
The restrictions could be entity specific or an asset/ liability specific hence all such restrictions
which are asset/liability specific & being transfer to the buyer as it is, then these will be considered
while calculating fair value. In contrast, if the restrictions are entity specific then it will not be
considered.

To consider in Fair Value

Entity specific restrictions NO
Asset / liability specific restrictions YES
Example 2: Entity Specific restrictions
An entity is having a land which has a restriction to develop into a commercial house because of
restricted business objective in which currently the entity operates. The entity wants to sell the
land and there would not be any restriction for a buyer of the land to develop a commercial house,
since this restriction is entity specific. Hence, it will not be considered while calculating fair value
of the land.
Example 3: Asset / Liability specific restrictions
A car has been bought for private use and there is a restriction of not to use the car for any
commercial purposes. Commercial vehicle is having more fair value than private vehicle. since
the restriction to use the vehicle is asset specific and market participant will also consider the
asset specific restrictions while calculating fair values for such asset, hence this condition will be
considered while evaluating fair value of the car.

3.6 UNIT OF ACCOUNT

An Asset or a
Liability Is
For Recognition
aggregated or
disaggregated
Unit of Account

An Asset or a
Liability Is
For Measurement
aggregated or
disaggregated

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.93

Ind AS 113 describes how to measure fair value, not what is being measured at fair value. Other
Ind AS specify whether a fair value measurement considers an individual asset or liability or a
group of assets or liabilities (i.e. the unit of account).
Whether the asset or liability is a stand-alone asset or liability, a group of assets, a group of
liabilities or a group of assets and liabilities for recognition or disclosure purposes depends on its
unit of account.
The unit of account for the asset or liability shall be determined in accordance with the Ind AS that
requires or permits the fair value measurement, except as provided in this Ind AS.
This essentially defines the level of aggregation or disaggregation while calculating fair values of
the assets/ liabilities.
Examples 5 & 6
5. An entity having certain securities which are quoted at market and these are recognized at
fair value in the balance sheet. Quoted prices at individual level will be used in order to
find fair values of these investments.
6. In order to evaluate fair value of assets to identify impairment as per Ind AS 36, which
requires to measure such fair value at CGU (cash generating unit) level, group of assets will
be used to find fair values as per the requirement of such standard.

3.7 THE TRANSACTION

A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction
between market participants to sell the asset or transfer the liability at the measurement date
under current market conditions.
A fair value measurement assumes that the transaction to sell the asset or transfer the liability
takes place either:
(a) in the principal market for the asset or liability; or
(b) in the absence of a principal market, in the most advantageous market for the asset or
liability.
There could be different principal markets for different reporting entities even if they belong to the
same group. The principal market / most advantageous market would separately be evaluated for
different assets / liabilities under the fair valuation requirements.
3.7.1 Principal market
Market which is normally the place in which the assets / liabilities are being transacted with highest
volume and with high level of activities comparing with any other market available for similar
transactions.

© The Institute of Chartered Accountants of India

 4.94 a
2.94 FINANCIAL REPORTING
v
v
If there is principal market, the price in the market must be used even if the prices in the other
market are more advantageous.
Because the principal market is the most liquid market for the asset or liability, that market will
provide the most representative input for a fair value measurement.
Example 7
Shares of a company which is listed at BSE and NYSE have different closing prices at the year
end. The price at BSE has greatest volume and activity whereas at NYSE it is less in terms of
volume transacted in the period. Since BSE has got highest volume and significant level of activity
comparing to other market although the closing price is higher at NYSE, the closing price at BSE
would be taken.

3.7.2 Most advantageous market

 This is the market which either maximizes the amount that would be received when an entity
sells an asset or minimize the amount that is to be paid while transferring the liability.
 In the absence of a principal market, this market is used for fair valuation of the assets /
liabilities. In many cases Principal Market & Most Advantageous Market will be same.
 The market will be assessed based on net proceeds from the sale after deducting expenses
associated with such sale in the most advantageous market.
Example 8
Diamond (a commodity) has got a domestic market where the prices are less compared to the
price available for export of similar diamonds. The Government has a policy to cap the export of
Diamond, maximum upto 10% of total output by any such manufacturer. The normal activities of
diamond are being done in the domestic market only i.e. 90% and balance 10% only can be sold
via export. The highest level of activities with the highest volume is being done in the domestic
market. Hence, the principal market for diamond would be the domestic market. Export prices
are more than the prices in the principal market, and it would give the highest return as compared
to the domestic market. Therefore, the export market would be considered as the most
advantageous market. However, if principal market is available, then its prices would be used for
fair valuation of assets/ liabilities.

3.8 MARKET PARTICIPANTS

A fair value measurement is a market‑based measurement, not an entity‑specific measurement.
Therefore, a fair value measurement uses the assumptions that market participants would use
when pricing the asset or liability.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.95

An entity shall measure the fair value of an asset or a liability using the assumptions that market
participants would use when pricing the asset or liability, assuming that market participants act in
their economic best interest.
3.8.1 What are market participants?
The parties which eventually transact the assets/ liabilities either in principal market or the most
advantageous market in their best economic interest i.e.

 They should be independent and not related parties. However, if related parties have done
similar transaction on arm’s length price, then it can be between related parties as well.
 The parties should not be under any stress or force to enter into these transactions
 All parties should have reasonable and sufficient information about the same.
Example 9
A land has legal restriction to use it for commercial purposes in next 10 years irrespective of its
holder. The fair value of the land will include this restriction about its usage because it is an asset
related restriction and any buyer will need to take over with similar restriction to use the land for
next 10 years. Now to evaluate its fair value, one has to consider the restriction based on the
assumptions which normally would be taking into account by its market participants, mentioned
as below
a) Whether the restriction is commonly imposed on each such type of land?
b) How useful it will be after the end of 10 years?
c) Whether there is any alternative use which may be considered normally by a participant for
similar kind of deals?
d) How liquid the sale of land will be with such restrictions?
e) Comparing the price with similar kind of land without restrictions to arrive at its fair values.

3.9 THE PRICE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction in the principal (or most advantageous) market at the measurement date under
current market conditions (i.e. an exit price) regardless of whether that price is directly observable
or estimated using another valuation technique.
A fair value is being assessed based on principal market and if principal market is not available
then based on the most advantageous market.

© The Institute of Chartered Accountants of India

 4.96 a
2.96 FINANCIAL REPORTING
v
v
Illustration 1
A Ltd. has invested in certain bonds. The fair value of these bonds in different markets to which
A Ltd. has an access is as follows:
(i) Principal market 500
(ii) Highest and best use 600
(iii) Net present value of expected cash flows 550
(iv) Asset based valuation approach 450
What will be the fair value of bond as per Ind AS 113?
Solution
As per para 24 of Ind AS 113, fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction in the principal (or most advantageous) market at
the measurement date under current market conditions (i.e. an exit price) regardless of whether
that price is directly observable or estimated using another valuation technique.
Further, para 72 of the standard inter alia states that the fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1
inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
According to the above, the value of bond shall be 500 based on the principal market.
*****
3.9.1 Transaction cost
The transaction costs are not a characteristic of an asset or a liability, but a characteristic of the
transaction.
Hence, it would not be appropriate to consider any transaction cost further while assessing fair
values from such principal markets.
Note: Transaction costs do not include transport costs.

3.9.2 Transport cost

Transport costs are different from transaction costs. It is the cost that would be incurred to
transport the asset from its current location to its principal (or most advantageous) market. Unlike
transaction costs, which arise from a transaction and do not change the characteristics of the
asset or liability, transport costs arise from an event (transport) that does change a characteristic
of an asset (its location).

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.97

If location is a characteristic of the asset (as might be the case, for example, for a commodity),
the price in the principal (or most advantageous) market shall be adjusted for the costs, if any,
that would be incurred to transport the asset from its current location to that market.
It would be considered, if in case it is an inherent part of the Assets/ Liability so transacted e.g.
commodity.

Principal market Most advantageous market

Transaction Cost NO YES
Transport cost YES YES
Example 10
An entity sells certain commodity which are available actively at location A and which is considered
to be its principal market (being significant volume of transactions and activities takes place).
However, fair value of the commodity is required to be assessed for location B which is far from
location A and requires a transport cost of 100. Since the transport cost is not a transaction
cost and it is not specific to any transaction but it is inherent cost which required to be incurred
while bringing such commodity from location A to location B, it will be considered while evaluating
fair value from the principal market.

Access on
measurement
Price in a different date Need not be able to
market is potentially sell on the
favourable measurement date

No exhaustive list Assumes that

of possible Fair value transaction takes
markets required measurement place at that date

© The Institute of Chartered Accountants of India

 4.98 a
2.98 FINANCIAL REPORTING
v
v

3.10 APPLYING FAIR VALUE RULES ON NON-FINANCIAL

ASSETS

The financial assets do not have alternative uses because they have specific contractual terms
and can have a different use only if the characteristics of the financial assets (ie the contractual
terms) are changed.
Fair valuation in case of non-financial assets especially buildings and other property, plant and
equipment often require to look for the best and highest use by its market participants and that
will be the reference point to evaluate fair value of such non-financial assets.
3.10.1 Highest and best use
The highest and best use is a valuation concept used to value many non‑financial assets (eg real
estate). The highest and best use of a non‑financial asset must be physically possible, legally
permissible and financially feasible.
A fair value measurement of a non-financial asset takes into account a market participant's ability
to generate economic benefits by using the asset in its highest and best use or by selling it to
another market participant that would use the asset in its highest and best use.
The highest and the best use is determined from market participant perspective. It does not matter
whether the entity intends to use the asset differently.

Analysis of Highest and best use for non-financial asset

 The highest and best use would determine an indicative price for a non-financial asset which
usually do not have any frequently traded market unlike for other financial products.
 The concept emphasis that in order to find a fair value of such non-financial products, one
has to define its best possible use which makes the non-financial asset separate from any
specific entity who would like to use such asset in their own specific purposes which may or
may not be its best use.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.99

 To find out the best possible use, one has to identify its market participants and then to find
best legitimate use of this non- financial asset which one would normally do.
 All restrictions specific to any market participant would not be considered while finding out
fair value of the non-financial asset.
 It is imperative to understand the best use while evaluating such fair values, as there is no
need to exhaust all possible uses of such non-financial assets before concluding highest and
best use.
 In the absence of potential best use which is not easily available, its current use would be
considered as best use.

Examples 11, 12 & 13

11. An entity bought some land which is intended to be used for business purposes. However,
the entity now wants to sell this piece of land at its fair value. One has to evaluate all possible
uses of this land before determining its fair value. The land could be used to make a
commercial place, which could be more in value as compared to when it is used for business
purposes. The commercial place value would be considered its highest and best use if the
same is allowed in its near locations and condition.
12. Current use as Highest and Best Use
A Ltd acquires a machine in a business combination by acquiring controlling stake in B Ltd.
The machine will be held and used in A’s operations. The machine was originally purchased
by B Ltd from an outside vendor and, before the business combination, was customized by
B Ltd for use in its operations. However, the customization of the machine was not extensive.
A Ltd determines that the asset would provide maximum value to market participants through
its use in combination with other assets or with other assets and liabilities (as installed or
otherwise configured for use). There is no evidence to suggest that the current use of the
machine is not its highest and best use. Therefore, the highest and best use of the machine
is its current use in combination with other assets or with other assets and liabilities.
13. Potential use as Highest and Best Use
A Ltd owns a property, which comprises land with an old warehouse on it. It has been
determined that the land could be redeveloped into a leisure park. The land’s market value
would be higher if redeveloped than the market value under its current use. A Ltd is unclear
about whether the investment property’s fair value should be based on the market value of
the property (land and warehouse) under its current use, or the land’s potential market value
if the leisure park redevelopment occurred.

© The Institute of Chartered Accountants of India

 4.100 2. a
FINANCIAL REPORTING
100 v
v
The property’s fair value should be based on the land’s market value for its potential use.
The ‘highest and best use’ is the most appropriate model for fair value. Under this approach,
the property’s existing-use value is not the only basis considered. Fair value is the highest
value, determined from market evidence, by considering any other use that is physically
possible, legally permissible and financially feasible.
The highest and best use valuation assumes the site’s redevelopment. This will involve
demolishing the current warehouse and constructing a leisure park in its place. Therefore,
none of the market value obtained for the land should be allocated to the building. So, the
market value of the current building on the property’s highest and best use (as a warehouse),
is Nil. As a result, the building’s current carrying amount should be written down to zero.

3.10.2 Valuation premise

Fair value measurement of non-financial assets would be based on either
1) In combination with other assets, or
2) At standalone basis,
Standard requires to use best used value if such non-financial asset is used in combination with
some other assets and it is demonstrated that the such combination is widely used by other market
participants also in order to find best use for the non-financial asset.

Example 14
To find the fair value of customer relations where a right to receive all future technological updates/
researches is being provided as complementary (which is in a way another intangible asset) i.e.
other than customer relations. The customer relations would be valued together with the right to
receive all the future technological updates / researches, as it is likely to have less or no value for
the customer relations without considering such right to receive all future technological updates/
researches which is being provided free to them.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.101

Physically Possible

Yes No

Legally Permissible Use is not

considered in
Measuring Fair
Yes No Value

Financially Feasible Use is not

considered in
Yes No Measuring Fair
Value
Maximises Value Use is not considered in
Measuring Fair Value
Yes No

Use is Use is not considered

considred in in Measuring Fair
Measuring Fair Value
Value

3.11 APPLYING FAIR VALUE RULES TO LIABILITIES AND AN

ENTITY’S OWN EQUITY INSTRUMENTS
A fair value measurement assumes that a financial or non-financial liability or an entity's own
equity instrument (eg equity interests issued as consideration in a business combination) is
transferred to a market participant at the measurement date.
Many a times a liability or an equity instrument of an entity is being transferred to some other
market participant as part of a transaction e.g. a business combination, where certain liabilities or
equity instruments are being issued in consideration of such acquisitions.
The standard specifies an assumption that liabilities and /or equity instruments so transferred will
remain outstanding on the date of measurement. Standard prescribes to use all observable inputs
(if direct quoted prices are not available) and should minimize any un-observable inputs. The
transaction considered to find fair value should be evaluated in line with an orderly transaction
(not an entity specific).
The standard specifically provides guidance on the respective scenarios while evaluating fair
values of the liabilities and own equity instruments in case direct quoted prices are not available.
Observable Inputs : Inputs that are developed using market data, such as publicly available
information about actual events or transactions, and that reflect the assumptions that market
participants would use when pricing the asset or liability.

© The Institute of Chartered Accountants of India

 4.102 2. a
FINANCIAL REPORTING
102 v
v
Unobservable Inputs : Inputs for which market data are not available and that are developed
using the best information available about the assumptions that market participants would use
when pricing the asset or liability.

3.11.1 When liability and equity instruments are held by other parties as
assets
When directly quoted prices are not available for liabilities or equity instruments, then an entity
should use an identical price of similar liabilities or equity instruments which is held by market
participants as an asset. The quoted prices of such assets at the measurement date should be
used. However, if quoted prices are not available then observable inputs can be used. In the
absence of observable inputs, the valuation techniques such as income approach or market
approach etc. may be used.
3.11.2 When liability and equity instruments are not held by other parties
as assets
When these are not held by other parties then valuation techniques from the perspective of a
market participant that owes the liability or has issued the claim on equity would be used to
evaluate such fair values.

Fair value of liability or equity instrument

Using quoted price in Other observable If (A) or (B) are not

active market (A) inputs (B) available

Income approach Market approach

3.12 APPLYING FAIR VALUE RULES TO FINANCIAL ASSET &

FINANCIAL LIABILITY WITH OFFSETTING POSITION IN
MARKET RISK OR COUNTERPARTY RISK
Assets and liabilities that are being managed by an entity would be affected by its market risk i.e.
interest rate risk, currency risk etc. and credit risk relating to its respective counterparties.
There are many situations where a group of assets and liabilities are being managed on net basis
rather than individual basis by an entity.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.103

For example, certain contracts of derivatives which are being netted with all existing open
positions from same counterparty etc.
If the entity manages that group of financial assets and financial liabilities on the basis of its net
exposure to either market risks or credit risk, the entity is permitted to apply an exception to this
Ind AS for measuring fair value.
That exception permits an entity to measure the fair value of a group of financial assets and
financial liabilities on the basis of the price that would be received to sell a net long position (ie
an asset) for a particular risk exposure or paid to transfer a net short position (ie a liability) for a
particular risk exposure in an orderly transaction between market participants at the measurement
date under current market conditions. Accordingly, an entity shall measure the fair value of the
group of financial assets and financial liabilities consistently with how market participants would
price the net risk exposure at the measurement date.
Analysis of applying offsetting position in market or credit risk
 This exception is allowed only in case the other market participants also manage the similar
risk on net basis.
 There should ideally be same information and market practice available for making these
assets/ liabilities on net basis.
All open position for derivatives are being normally evaluated on net exposure basis from
each counterparty.
 Once the exception to fair value certain assets/ liabilities on net basis is being used, then
unit of account to measure fair value would be considered as net.
 Market risk should be same while combining any asset/ liability.
An interest rate risk can not be netted with a commodity price risk.
 Duration of a market risk should be identical to use the exception for valuing assets/ liabilities
on net basis.
1. An interest rate swap of longer period will only be allowed to value at net basis upto the
duration of financial instrument of the same duration.
2. Certain Interest rate risk from counterparty Z is being managed on net basis considering
the changes in interest rate amount receivable and amounts payable to counterparty Z
from normal sale/ purchase basis. Hence such net exposure would be used to evaluate
fair values as required by this standard. The netting should normally be followed by
other market participants as well and should not be an entity specific.

© The Institute of Chartered Accountants of India

 4.104 2. a
FINANCIAL REPORTING
104 v
v

3.13 FAIR VALUE AT INITIAL RECOGNITION

When an asset is acquired or a liability is assumed in an exchange
transaction for that asset or liability, the transaction price is the price paid
to acquire the asset or received to assume the liability (an entry price).
In contrast, the fair value of the asset or liability is the price that would be
received to sell the asset or paid to transfer the liability (an exit price).
Entities do not necessarily sell assets at the prices paid to acquire them.
Similarly, entities do not necessarily transfer liabilities at the prices received to assume them.
In many cases the transaction price will equal the fair value (eg that might be the case when on
the transaction date the transaction to buy an asset takes place in the market in which the asset
would be sold).
When determining whether fair value at initial recognition equals the transaction price, an entity
shall take into account factors specific to the transaction and to the asset or liability. For example,
the transaction price might not represent the fair value of an asset or a liability at initial recognition
if any of the following conditions exist:
(a) The transaction is between related parties, although the price in a related party transaction
may be used as an input into a fair value measurement if the entity has evidence that the
transaction was entered into at market terms.
(b) The transaction takes place under duress or the seller is forced to accept the price in the
transaction. For example, that might be the case if the seller is experiencing financial
difficulty.
(c) The unit of account represented by the transaction price is different from the unit of account
for the asset or liability measured at fair value. For example, that might be the case if the
asset or liability measured at fair value is only one of the elements in the transaction (eg in
a business combination), the transaction includes unstated rights and privileges that are
measured separately in accordance with another Ind AS, or the transaction price includes
transaction costs.
(d) The market in which the transaction takes place is different from the principal market (or most
advantageous market). For example, those markets might be different if the entity is a dealer
that enters into transactions with customers in the retail market, but the principal (or most
advantageous) market for the exit transaction is with other dealers in the dealer market.
If another Ind AS requires or permits an entity to measure an asset or a liability initially at fair
value and the transaction price differs from fair value, the entity shall recognise the resulting gain
or loss in profit or loss unless that Ind AS specifies otherwise.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.105

3.14 VALUATION TECHNIQUES

When measuring fair value, the objective of using a valuation technique is to estimate the price at
which an orderly transaction would take place between market participants at the measurement
date under current market conditions.

An entity shall use valuation techniques that are appropriate in the circumstances and for which
sufficient data are available to measure fair value, maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.
It is pertinent to note that the overall objective to use any valuation approach or technique is in
accordance with all relevant data available related to the Asset/ liability which could utilize all
directly observable inputs.
Note: It is worth to be noted that in case of availability of quoted prices which are being used in
an active market, there is no need to consider any valuation approach further.

The standard requires and allows using one or combination of more than one approach to measure
any fair value which corroborates all inputs available related to such asset/ liability. Selecting an
appropriate approach is matter of judgment and based on the available inputs related to the asset
/ liability.

Example 15
An unquoted investment can be fair valued either by taking similar entity’s quoted prices with
appropriate adjustments or a valuation of business using DCF or some other technique. This
would purely be dependent upon the available inputs and approach relevant for the asset/ liability.

Maximising the use of

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

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

© The Institute of Chartered Accountants of India

 4.106 2. a
FINANCIAL REPORTING
106 v
v

Cost Approach

Market Approach Income Approach

Valuation Techniques

1. MARKET APPROACH : The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities
or a group of assets and liabilities, such as a business.
For example, valuation techniques consistent with the market approach often use market multiples
derived from a set of comparables. Multiples might be in ranges with a different multiple for each
comparable. The selection of the appropriate multiple within the range requires judgement,
considering qualitative and quantitative factors specific to the measurement.
Quoted prices are indicative values of any business if it exchanges in an active market. However,
in the absence of such quoted prices, it is relevant to value the business based on market values
and do some adjustment relevant to the assets/ liabilities. Standard specifies a valuation
technique called “Matrix pricing” which is normally used to value debt securities. This technique
relates the securities with some similar benchmarked securities including coupons, credit ratings
etc. to derive at fair value of the debt.
An entity does not have any security which is quoted in an active market, however, its price to
earnings ratio is being used to corroborate its enterprise value with certain adjustments relevant
to the business e.g. there are some specific restrictions to use certain assets for some specific
period being in a specialized industry.
2. INCOME APPROACH: The income approach converts future amounts (e.g. cash flows or income
and expenses) to a single current (i.e. discounted) amount. When the income approach is used, the
fair value measurement reflects current market expectations about those future amounts.
It is a present value of all future earnings from an entity whose fair values are being evaluated or
in other words all future cash flows to be discounted at current date to get fair value of the asset
/ liability.
Assumption to the future cash flows and an appropriate discount rate would be based on the other
market participant’s views. Related risks and uncertainty would require to be considered and
would be taken into either in cash flow or discount rate.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.107

Illustration 2
Discount Rate assessment to measure present value:
Investment 1 is a contractual right to receive 800 in 1 year. There is an established market for
comparable assets, and information about those assets, including price information, is available.
Of those comparable assets:
a. Investment 2 is a contractual right to receive 1,200 in 1 year and has a market price of
1,083.
b. Investment 3 is a contractual right to receive 700 in 2 years and has a market price of
566.
All three assets are comparable with respect to risk (that is, dispersion of possible payoffs and
credit).
You are required to measure the fair value of Asset 1 basis above information.
Solution
On the basis of the timing of the contractual payments to be received for Investment 1 relative to
the timing for Investment 2 and Investment 3 (that is, one year for Investment 2 versus two years
for Investment 3), Investment 2 is deemed more comparable to Investment 1. Using the
contractual payment to be received for Investment 1 ( 800) and the 1-year market rate derived
from Investment 2, the fair value of Investment 1 is calculated as under:
Investment 2 Fair Value 1,083
Contractual Cash flows in 1 year 1,200
IRR = 1,083 x (1 + r) = 1,200
= (1 + r) = ( 1,200 / 1,083) = 1.108
r = 1.108 – 1 = 0.108 or 10.8%
Value of Investment 1 = 800 / 1.108 = 722
Alternatively, in the absence of available market information for Investment 2, the one-year market
rate could be derived from Investment 3 using the build-up approach. In that case, the 2-year
market rate indicated by Investment 3 would be adjusted to a 1-year market rate using the term
structure of the risk-free yield curve. Additional information and analysis might be required to
determine whether the risk premiums for one-year and two-year assets are the same. If it is
determined that the risk premiums for one-year and two-year assets are not the same, the two-
year market rate of return would be further adjusted for that effect.
*****
Standard defines the below techniques which may be considered while using Income approach
a) Present value techniques

© The Institute of Chartered Accountants of India

 4.108 2. a
FINANCIAL REPORTING
108 v
v
b) Option pricing modals e.g. Black-Scholes Merton modal or Binomial modal
c) The multi period excess earning method.
Example 16
An entity has estimated its next year’s earnings (cash flows) based on certain probability as
mentioned below:
Possible cash flows ( ) Probability Probability weighted cash flows
700 20% 140
800 40% 320
900 40% 360
Total expected cash flow 820
Risk free rate 6%
Present value of cash flow (1 year) 820 / (1.06) = 773.58
3. COST APPROACH: This method describes how much cost is required to replace existing
asset/ liability in order to make it in a working condition. All related costs will be its fair value. It
actually considers replacement cost of the asset/ liability for which we need to find fair value.

3.15 INPUTS TO VALUATION TECHNIQUES

Valuation techniques used to measure fair value shall maximize the use of relevant observable
inputs and minimize the use of unobservable inputs.
It has widely been mentioned that observable inputs should be used to evaluate fair value of an
asset/ liability and we should minimize using any unobservable inputs.
Standard describes the below instances where observable inputs are being used in case of certain
Financial Instruments:
Markets (by nature) Prices (observable) Rationale Ind AS 113
compliant
Exchange Markets Closing prices Readily available Yes
Dealer Market Bid & Ask prices Readily available than Yes
closing prices

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.109

Brokered Market Buy & Sell order matching, Broker knows better Yes
commercial and prices from both buy &
residential markets Sell side
Principal to principal Negotiated prices with no Little information Yes
Markets intermediary available in market

The inputs refer broadly to the assumptions that market participants would use when pricing the
asset or liability, including assumptions about risk.
In order to establish comparability and consistency in fair value measurement, Ind AS 113 has
made some hierarchy to define the level of inputs for fair value. The hierarchy is purely based on
the level of inputs available for the specific Asset / liability for which the fair value is to be
measured.
Some significant notes about the fair value hierarchy
 The hierarchy has been categorized in 3 levels which are based on the level of inputs that
are being used to find out such fair values. There could be a situation where more than one
level of fair value is being used, hence standard provides a guidance which states that in
case of using more than one level of input, the entire class of asset / liability will be defined
by its level which has significance on overall basis.
Note: Significance has not been defined anywhere and could be a matter of judgement.
 Standard defines the valuation techniques that could be used to evaluate fair values of
Assets/ liabilities and its level of hierarchy will be depending upon the level of inputs that
have been used while using such valuation techniques.
 If an observable input requires an adjustment using an unobservable input and that
adjustment results in a significantly higher or lower fair value measurement, the resulting
measurement would be categorized within Level 3 of the fair value hierarchy.
Example 17
If a market participant would take into account the effect of a restriction on the sale of an asset
when estimating the price for the asset, an entity would adjust the quoted price to reflect the effect
of that restriction. If that quoted price is a Level 2 input and the adjustment is an unobservable
input that is significant to the entire measurement, the measurement would be categorised within
Level 3 of the fair value hierarchy.

3.15.1 Level 1 Inputs

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

© The Institute of Chartered Accountants of India

 4.110 2. a
FINANCIAL REPORTING
110 v
v
A quoted price in an active market provides the most reliable evidence of fair value and shall be
used without adjustment to measure fair value whenever available.

A Level 1 input will be available for many financial assets and financial liabilities, some of which
might be exchanged in multiple active markets (e.g. on different exchanges). Therefore, the
emphasis within Level 1 is on determining both of the following:

The principal market for the asset or liability or, in the absence of a principal market, the
most advantageous market for the asset or liability

Whether the entity can enter into a transaction for the asset or liability at the price in that
market at the measurement date

Example 18
An entity is holding investment which is quoted in BSE, India and NYSE, USA. However,
significant activities are being done at BSE only. The fair value of the investment would be
referenced to the quoted price at BSE India (which is Level 1 fair value- Direct quoted price with
no adjustments).
3.15.1.1 Adjustment to Quoted Price when it does not reflect the fair price
In certain situations, a quoted price in an active market might not faithfully represent the fair value
of an asset or liability, such as when significant events occur on the measurement date but after
the close of trading. In these situations, companies should adjust the quoted price to incorporate
this new information into the fair value measurement. However, if the quoted price is adjusted,
the resulting fair value measurement would no longer be considered a Level 1 measurement. A
company’s valuation policies and procedures should address how these “after-hour” events will
be identified and assessed. Controls should be put in place to ensure that any adjustments made
to quoted prices are appropriate and are applied in a consistent manner.
Example 19
A Ltd., a large biotech company with shares traded publicly, has developed a new drug that is in
the final phase of clinical trials. B Ltd. has an equity investment in A Ltd.’s shares. B Ltd.
determines that the shares have a readily determinable fair value and accounts for the investment
at fair value through profit and loss. B Ltd. assesses the fair value as of the measurement date
of 31 st March 20X3. Consider the following:
(i) On 31 st March 20X3, the Drug Approval authority notifies A Ltd.’s management that the drug
was not approved. A Ltd.’s shares closed at 36.00 on 31 st March 20X3.
(ii) A Ltd. issued a press release after markets closed on 31 st March 20X3 announcing the failed
clinical trial.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.111

(iii) A Ltd.’s shares opened on next working day at 22.50.

The drug failure is a condition (or a characteristic of the asset being measured) that existed as of
the measurement date. B Ltd. concludes the 36.00 closing price on the measurement date does
not represent fair value of the A Ltd.’s shares at 31 st March 20X3 because the price does not
reflect the effect of the Authority’s non-approval.
The subsequent transactions that take place when the market opens are relevant to the fair value
measurement recorded as of the measurement date. The opening price of 22.50 indicates how
market participants have incorporated the effect of the non-approval on A Ltd.’s stock price.
B Ltd. adjusts the 31 st March 20X3 quoted price for the new information, records the shares at
22.50 per share at 31 st March 20X3 and discloses the investment as a Level 2 measurement.

3.15.2 Level 2 Inputs

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly.
If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for
substantially the full term of the asset or liability. Level 2 inputs include the following:
(a) quoted prices for similar assets or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that are not active.
(c) inputs other than quoted prices that are observable for the asset or liability, for example:
(i) interest rates and yield curves observable at commonly quoted intervals;
(ii) implied volatilities; and
(iii) credit spreads.
(iv) market-corroborated inputs.
Examples 20-22
20. Receive-fixed, pay-variable interest rate swap based on a yield curve denominated in a
foreign currency. It requires rate of swap which is of 11 years. However, normally the rates
are available only for the maximum period of 10 years. The rate for 11 years can be
established using extrapolation or some other techniques which is based on 10 years’
available rates of swap. The fair value of 11 years so derived would be level 2 fair value.
21. An entity has an investment in another entity which has no active market. However, some
similar investment is being traded in an active market. Now, the fair valuation can be done
based on either the prices based on the market which is not active or similar traded
investment in an active market. This would be considered as level 2 inputs.
22. X and Y each enter into a contractual obligation to pay 500 in cash to D in five years. X has
an AA credit rating and can borrow at 6%. Y has a BBB credit rating and can borrow at 12%.

© The Institute of Chartered Accountants of India

 4.112 2. a
FINANCIAL REPORTING
112 v
v
X will receive about 374 in exchange for its promise (the present value of 500 in five years
at 6%). Y will receive about 284 in exchange for its promise (the present value of 500 in
five years at 12%).
The fair value of the liability to each entity (that is, the proceeds) incorporates that entity’s
credit standing.

3.15.3 Level 3 Inputs

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be
used to measure fair value to the extent that relevant observable inputs are not available, thereby
allowing for situations in which there is little, if any, market activity for the asset or liability at the
measurement date. However, the fair value measurement objective remains the same, i.e. an exit
price at the measurement date from the perspective of a market participant that holds the asset
or owes the liability. Therefore, unobservable inputs shall reflect the assumptions that market
participants would use when pricing the asset or liability, including assumptions about risk.
Assumptions about risk include the risk inherent in a particular valuation technique used to
measure fair value (such as a pricing model) and the risk inherent in the inputs to the valuation
technique. A measurement that does not include an adjustment for risk would not represent a fair
value measurement if market participants would include one when pricing the asset or liability.
For example - It might be necessary to include a risk adjustment when there is significant
measurement uncertainty (e.g. when there has been a significant decrease in the volume or level
of activity when compared with normal market activity for the asset or liability, or similar assets or
liabilities, and the entity has determined that the transaction price or quoted price does not
represent fair value).
Examples 23 and 24
23. Interest rate swap
An adjustment to a mid-market consensus (non-binding) price for the swap is being
developed using data that are not directly observable and cannot otherwise be corroborated
by observable market data. This would be level 3 input for measurement of fair value.
24. Cash-generating unit
A Level 3 input would be a financial forecast (eg of cash flows or profit or loss) developed
using the entity's own data, if there is no reasonably available information that indicates
usage of different assumptions by market participants.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.113

Is Quoted price for an identical item in an active market

available?

Yes No

Are there any significant unobservable

Is the Price to be Adjusted? inputs?

No Yes Yes No

Level 1 Input Are there any significant

unobservable inputs? Level 3 Input Level 2 Input

Yes No

Level 3 Input Level 2 Input

3.16 DISCLOSURES
An entity shall disclose information that helps users of its financial statements assess both of the
following:
(a) for assets and liabilities that are measured at fair value on a recurring or non-recurring basis
in the balance sheet after initial recognition, the valuation techniques and inputs used to
develop those measurements.
(b) for recurring fair value measurements using significant unobservable inputs (Level 3), the
effect of the measurements on profit or loss or other comprehensive income for the period.

© The Institute of Chartered Accountants of India

 4.114 2. a
FINANCIAL REPORTING
114 v
v
The disclosure requirements can be summarized as per the below table –

Fair Value Measurement

Disclosure
Recurring Non-recurring
Level Level Level Level Level Level Level Level Level
1 2 3 1 2 3 1 2 3
Fair value at each      
reporting date
Reasons for   
measurement
Level of hierarchy         
Transfers   
Valuation techniques      
If change in valuation      
techniques
Quantitative info about  
significant unobservable
inputs
Reconciliation of 
opening & closing
Unrealized gains/ losses 
from remeasurement
Valuation process &  
policies
Sensitivity to changes 
in unobservable inputs
If highest & best use         
differs from actual

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.115

3.17 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITIES
Following is the extract from the financial statements of the listed entity ‘Titan Company Limited’
for the financial year 2021-2022 with respect to ‘Fair Value Measurement’ and accounting policy
adopted by the company with respect to measurement technique.

© The Institute of Chartered Accountants of India

 4.116 2. a
FINANCIAL REPORTING
116 v
v

(Source: Annual Report 2021-2022 - ‘Titan Company Limited’)

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.117

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. An asset is sold in 2 different active markets at different prices. An entity enters into
transactions in both markets and can access the price in those markets for the asset at the
measurement date.
In Market A:
The price that would be received is 26, transaction costs in that market are 3 and the
costs to transport the asset to that market are 2.
In Market B:
The price that would be received is 25, transaction costs in that market are 1 and the
costs to transport the asset to that market are 2.
You are required to calculate:
(i) The fair value of the asset, if market A is the principal market, and
(ii) The fair value of the asset, if none of the markets is principal market.
2. Company J acquires land in a business combination. The land is currently developed for
industrial use as a factory site. Although the land’s current use is presumed to be its highest
and best use unless market or other factors suggest a different use, Company J considers
the fact that nearby sites have recently been developed for residential use as high-rise
apartment buildings.
On the basis of that development and recent zoning and other changes to facilitate that
development, Company J determines that the land currently used as a factory site could be
developed as a residential site (e.g., for high-rise apartment buildings) and that market

© The Institute of Chartered Accountants of India

 4.118 2. a
FINANCIAL REPORTING
118 v
v
participants would take into account the potential to develop the site for residential use when
pricing the land.
Determine the highest and best use of the land.
3. ABC Ltd. acquired 5% equity shares of XYZ Ltd. for 10 crores in the year 20X1-20X2. The
company is in process of preparing the financial statements for the year 20X2-20X3 and is
assessing the fair value at subsequent measurement of the investment made in
XYZ Ltd. Based on the observable input, ABC Ltd. identified a similar nature of transaction
in which PQR Ltd. acquired 20% equity shares in XYZ Ltd. for 60 crores. The price of such
transaction was determined on the basis of Comparable Companies Method (CCM)-
Enterprise Value (EV) / EBITDA which was 8. For the current year, the EBITDA of
XYZ Ltd. is 40 crores. At the time of acquisition, the valuation was determined after
considering 5% of liquidity discount and 5% of non-controlling stake discount. What will be
the fair value of ABC Ltd.’s investment in XYZ Ltd. as on the balance sheet date?
4. UK Ltd. is in the process of acquisition of shares of PT Ltd. as part of business reorganization
plan. The projected free cash flows of PT Ltd. for the next 5 years are as follows:
( in crores)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5

Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965

The weightage average cost of capital of PT Ltd. is 11%. The total debt as on measurement
date is 1,465 crores and the surplus cash & cash equivalent is
106.14 crores.
The total numbers of shares of PT Ltd. as on the measurement date is 8,52,84,223 shares.
Determine value per share of PT Ltd. as per Income Approach.
5. You are a senior consultant of your firm and are in process of determining the valuation of
KK Ltd. You have determined the valuation of the company by two approaches i.e. Market
Approach and Income approach and selected the highest as the final value. However, based
upon the discussion with your partner you have been requested to assign equal weights to
both the approaches and determine a fair value of shares of KK Ltd. The details of the KK
Ltd. are as follows:

Particulars in crore
Valuation as per Market Approach 5268.2
Valuation as per Income Approach 3235.2
Debt obligation as on Measurement date 1465.9

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.119

Surplus cash & cash equivalent 106.14

Fair value of surplus assets and Liabilities 312.4
Number of shares of KK Ltd. 8,52,84,223 shares

Determine the Equity value of KK Ltd. as on the measurement date on the basis of above
details.
6. Comment on the following by quoting references from appropriate Ind AS.
(i) DS Limited holds some vacant land for which the use is not yet determined. The land
is situated in a prominent area of the city where lot of commercial complexes are coming
up and there is no legal restriction to convert the land into a commercial land.
The company is not interested in developing the land to a commercial complex as it is not
its business objective. Currently the land has been let out as a parking lot for the
commercial complexes around.
The Company has classified the above property as investment property. It has
approached you, an expert in valuation, to obtain fair value of the land for the purpose of
disclosure under Ind AS.
On what basis will the land be fair valued under Ind AS?
(ii) DS Limited holds equity shares of a private company. In order to determine the fair value'
of the shares, the company used discounted cash flow method as there were no similar
shares available in the market.
Under which level of fair value hierarchy will the above inputs be classified?
What will be your answer if the quoted price of similar companies were available and can
be used for fair valuation of the shares?
7. On 1 st January, 20X1, A Ltd assumes a decommissioning liability in a business combination.
The reporting entity is legally required to dismantle and remove an offshore oil platform at
the end of its useful life, which is estimated to be 10 years. The following information is
relevant:
If A Ltd was contractually allowed to transfer its decommissioning liability to a market
participant, it concludes that a market participant would use all of the following inputs,
probability weighted as appropriate, when estimating the price it would expect to receive:
a. Labour costs
Labour costs are developed based on current marketplace wages, adjusted for
expectations of future wage increases, required to hire contractors to dismantle and
remove offshore oil platforms. A Ltd. assigns probability to a range of cash flow
estimates as follows:

© The Institute of Chartered Accountants of India

 4.120 2. a
FINANCIAL REPORTING
120 v
v
Cash Flow Estimates: 100 Cr 125 Cr 175 Cr
Probability: 25% 50% 25%

b. Allocation of overhead costs:

Assigned at 80% of labour cost
c. The compensation that a market participant would require for undertaking the activity
and for assuming the risk associated with the obligation to dismantle and remove the
asset. Such compensation includes both of the following:
i. Profit on labour and overhead costs:
A profit mark-up of 20% is consistent with the rate that a market participant would
require as compensation for undertaking the activity
ii. The risk that the actual cash outflows might differ from those expected, excluding
inflation:
A Ltd. estimates the amount of that premium to be 5% of the expected cash flows.
The expected cash flows are ‘real cash flows’ / ‘cash flows in terms of monetary
value today’.
d. Effect of inflation on estimated costs and profits
A Ltd. assumes a rate of inflation of 4 percent over the 10-year period based on
available market data.
e. Time value of money, represented by the risk-free rate: 5%
f. Non-performance risk relating to the risk that Entity A will not fulfill the obligation,
including A Ltd.’s own credit risk: 3.5%
A Ltd, concludes that its assumptions would be used by market participants. In addition, A
Ltd. does not adjust its fair value measurement for the existence of a restriction preventing
it from transferring the liability.
You are required to calculate the fair value of the asset retirement obligation.
8. (i) Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company
XYZ has a total share capital of 5,000 shares with nominal value of 10. Entity XYZ’s
after-tax maintainable profits are estimated at 70,000 per year. An appropriate
price/earnings ratio determined from published industry data is 15 (before lack of
marketability adjustment). Entity A’s management estimates that the discount for the
lack of marketability of company XYZ’s shares and restrictions on their transfer is 20%.
Entity A values its holding in company XYZ’s shares based on earnings. Determine the
fair value of Entity A’s investment in XYZ’s shares.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.121

(ii) Based on the facts given in the aforementioned part (i), assume that, Entity A estimates
the fair value of the shares it owns in company XYZ using a net asset valuation
technique. The fair value of company XYZ’s net assets including those recognised in
its balance sheet and those that are not recognised is 8,50,000. Determine the fair
value of Entity A’s investment in XYZ’s shares.
Answers
1. (i) If Market A is the principal market
If Market A is the principal market for the asset (i.e., the market with the greatest volume
and level of activity for the asset), the fair value of the asset would be measured using
the price that would be received in that market, after taking into account transport costs.
Fair Value will be

Price receivable 26
Less: Transportation cost (2)
Fair value of the asset 24

(ii) If neither of the market is the principal market

If neither of the market is the principal market for the asset, the fair value of the asset
would be measured using the price in the most advantageous market. The most
advantageous market is the market that maximises the amount that would be received
to sell the asset, after taking into account transaction costs and transport costs (i.e., the
net amount that would be received in the respective markets).

Market A Market B
Price receivable 26 25
Less: Transaction cost (3) (1)
Less: Transportation cost (2) (2)
Fair value of the asset 21 22

Since the entity would maximise the net amount that would be received for the asset in
Market B i.e. 22, the fair value of the asset would be measured using the price in
Market B.

© The Institute of Chartered Accountants of India

 4.122 2. a
FINANCIAL REPORTING
122 v
v
Fair value

Price receivable 25
Less: Transportation cost (2)
Fair value of the asset 23

2. The highest and best use of the land is determined by comparing the following:
 The value of the land as currently developed for industrial use (i.e., an assumption that
the land would be used in combination with other assets, such as the factory, or with
other assets and liabilities); and
 The value of the land as a vacant site for residential use, taking into account the costs of
demolishing the factory and other costs necessary to convert the land to a vacant site.
The value under this use would take into account risks and uncertainties about whether
the entity would be able to convert the asset to the alternative use (i.e., an assumption
that the land would be used by market participants on a stand-alone basis).
The highest and best use of the land would be determined on the basis of the higher of these
values. In situations involving real estate appraisal, the determination of highest and best use
might take into account factors relating to the factory operations (e.g., the factory’s operating
cash flows) and its assets and liabilities (e.g., the factory’s working capital).
3. Determination of Enterprise Value of XYZ Ltd.

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

Determination of subsequent measurement of XYZ Ltd.

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

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.123

4. Determination of equity value of PT Ltd.

( in crore)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5

Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965
Discount rate factor 0.9009 0.8116 0.7312 0.6587 0.5935
Free Cash Flow available to 168.56 152.26 89.06 177.19 2,518.69
the firm
Total of all years 3,105.76
Less: Debt (1,465)
Add: Cash & Cash equivalent 106.14
Equity Value of PT Ltd. 1,746.90
No. of Shares 85,284,223.0
Per Share Value 204.83

5. Equity Valuation of KK Ltd.

Particulars Weights ( in crore)
As per Market Approach 50 5268.2
As per Income Approach 50 3235.2
Enterprise Valuation based on weights (5268.2 x 50%) + 4,251.7
(3235.2 x 50%)
Less: Debt obligation as on measurement date (1465.9)
Add: Surplus cash & cash equivalent 106.14
Add: Fair value of surplus assets and liabilities 312.40
Enterprise value of KK Ltd. 3204.33
No. of shares 85,284,223
Value per share 375.72

6. (i) As per Ind AS 113, a fair value measurement of a non-financial asset takes into account
a market participant’s ability to generate economic benefits by using the asset in its
highest and best use or by selling it to another market participant that would use the
asset in its highest and best use.

© The Institute of Chartered Accountants of India

 4.124 2. a
FINANCIAL REPORTING
124 v
v
The highest and best use of a non-financial asset takes into account the use of the asset
that is physically possible, legally permissible and financially feasible, as follows:
(a) A use that is physically possible takes into account the physical characteristics of
the asset that market participants would take into account when pricing the asset
(eg the location or size of a property).
(b) A use that is legally permissible takes into account any legal restrictions on the
use of the asset that market participants would take into account when pricing the
asset (eg the zoning regulations applicable to a property).
(c) A use that is financially feasible takes into account whether a use of the asset that
is physically possible and legally permissible generates adequate income or cash
flows (taking into account the costs of converting the asset to that use) to produce
an investment return that market participants would require from an investment in
that asset put to that use.
Highest and best use is determined from the perspective of market participants, even if
the entity intends a different use. However, an entity’s current use of a non-financial
asset is presumed to be its highest and best use unless market or other factors suggest
that a different use by market participants would maximise the value of the asset.
To protect its competitive position, or for other reasons, an entity may intend not to use
an acquired non-financial asset actively or it may intend not to use the asset according
to its highest and best use. Nevertheless, the entity shall measure the fair value of a
non-financial asset assuming its highest and best use by market participants.
In the given case, the highest best possible use of the land is to develop a commercial
complex. Although developing a business complex is against the business objective of
the entity, it does not affect the basis of fair valuation as Ind AS 113 does not consider
an entity specific restriction for measuring the fair value.
Also, its current use as a parking lot is not the highest best use as the land has the
potential of being used for building a commercial complex.
Therefore, the fair value of the land is the price that would be received when sold to a
market participant who is interested in developing a commercial complex.
(ii) As per Ind AS 113, unobservable inputs shall be used to measure fair value to the extent
that relevant observable inputs are not available, thereby allowing for situations in which
there is little, if any, market activity for the asset or liability at the measurement date. The
unobservable inputs shall reflect the assumptions that market participants would use
when pricing the asset or liability, including assumptions about risk.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 113 4.125

In the given case, DS Limited adopted discounted cash flow method, commonly used
technique to value shares, to fair value the shares of the private company as there were
no similar shares traded in the market. Hence, it falls under Level 3 of fair value hierarchy.
Level 2 inputs include the following:
(a) quoted prices for similar assets or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that are not active.
(c) inputs other than quoted prices that are observable for the asset or liability.
If an entity can access quoted price in active markets for identical assets or liabilities of
similar companies which can be used for fair valuation of the shares without any
adjustment, at the measurement date, then it will be considered as observable input and
would be considered as Level 2 inputs.
7.
Amount
(In Crore)
Expected Labour Cost (Refer W.N.) 131.25
Allocated Overheads (80% x 131.25 Cr) 105.00
Profit markup on Cost (131.25 + 105) x 20% 47.25
Total Expected Cash Flows before inflation 283.50
Inflation factor for next 10 years (4%) (1.04) 10 =1.4802
Expected cash flows adjusted for inflation 283.50 x 1.4802 419.65
Risk adjustment - uncertainty relating to cash flows (5% x 419.64) 20.98
Total Expected Cash Flows (419.65+20.98) 440.63
Discount rate to be considered = risk-free rate +
entity’s non-performance risk 5% + 3.5% 8.5%
Expected present value at 8.5% for 10 years (440.63 / (1.085 10 )) 194.97
Working Note:
Expected labour cost:
Cash Flows Estimates Probability Expected Cash Flows
100 Cr 25% 25 Cr
125 Cr 50% 62.50 Cr
175 Cr 25% 43.75 Cr
Total 131.25 Cr

© The Institute of Chartered Accountants of India

 4.126 2. a
FINANCIAL REPORTING
126 v
v
8. (i) An earnings-based valuation of Entity A’s holding of shares in company XYZ could be
calculated as follows:

Particulars Unit
Entity XYZ’s after-tax maintainable profits (A) 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) 8,40,000

Value of a share of XYZ = 8,40,000 ÷ 5,000 shares = 168

The fair value of Entity A’s investment in XYZ’s shares is estimated at 42,000 (that is,
250 shares x 168 per share).
(ii) Share price = 8,50,000 ÷ 5,000 shares = 170 per share.
The fair value of Entity A’s investment in XYZ shares is estimated to be 42,500 (250
shares x 170 per share).

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
© The Institute of Chartered Accountants of India
CHAPTER 55

IND AS 115 REVENUE

FROM CONTRACTS WITH
CUSTOMERS
LEARNING OUTCOMES
After studying this chapter, you will be able to:
 Appreciate the scope and definition of the standard.
 Identify the contract.
 Comprehend the criteria for revenue recognition.
 Gain knowledge on accounting treatment of various aspects like combination of
contracts, contract modifications etc.
 Identify performance obligations and when the performance obligation is satisfied.
 Determine the transaction price and allocate the performance obligation to
transaction price.
 Allocate discount to various performance obligations in determining their transaction
price.
 Account for the changes in the transaction price.
 Account for variable considerations while determining the transaction price.
 Deal with contract costs.
 Comply with the Presentation and disclosure requirements of the standard.

© The Institute of Chartered Accountants of India

 5.2 2.2 a
FINANCIAL REPORTING
v

CHAPTER OVERVIEW
v

Ind AS 115 Revenue from contracts with customers

Scope Definitions Recognition Contract costs Presentation and

disclosure

Incremental costs
Five step model
v/s Fulfilment costs

Step 1 – Step 2 – Step 3 – Step 4 –

Step 5 –
Identifying Identifying Determination of Allocation of
Satisfaction of
the contract performance transaction price transaction price
performance
obligation to performance
obligation
obligation
Criteria for Variable
Promises Performance
recognizing a consideration – Methods of
in obligations
contract contracts constraints in allocating
estimating transaction satisfied over
with
customers variable price time
Contract consideration
term Performance
Allocation of
Distinct obligations
Combining a discount
goods or satisfied at a
Existence of
contracts point in time
services significant
financing Allocation of
Contract component variable Measuring
modifications Long term consideration, progress
arrangements discount towards
Non cash
complete
Consignment consideration
satisfaction of
Arrangements Changes in
a performance
Consideration transaction
obligation
payable to a price
Principal vs
agent customer
consideration

Non-
refundable
upfront fees

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.3

This standard establishes principles to report useful information about the nature, amount,
timing and uncertainty of revenue and cash flows arising from a contract with a customer.
The core principle is that an entity shall recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.
The standard specifies the accounting for an individual contract with a customer. However, as a
practical expedient, an entity may apply this Standard to a portfolio of contracts (or performance
obligations) with similar characteristics if the entity reasonably expects that the effects of
applying the Standard to the portfolio would not differ materially from applying this Standard to
the individual contracts (or performance obligations) within that portfolio.

1. SCOPE
Ind AS 115 applies to all contracts with customers to provide goods or services that are outputs
of the entity’s ordinary course of business in exchange for consideration, unless specifically
excluded from the scope of the new guidance, as described below.
An entity shall apply this Standard to all contracts with customers, except the following:
(a) lease contracts within the scope of Ind AS 116, Leases;
(b) insurance contracts within the scope of Ind AS 104, Insurance Contracts
(c) financial instruments and other contractual rights or obligations within the scope of
Ind AS 109, Financial Instruments, Ind AS 110, Consolidated Financial Statements,
Ind AS 111, Joint Arrangements, Ind AS 27, Separate Financial Statements and Ind AS 28,
Investments in Associates and Joint Ventures; and
(d) non-monetary exchanges between entities in the same line of business to facilitate sales to
customers or potential customers. For example, this Standard would not apply to a
contract between two oil companies that agree to an exchange of oil to fulfil demand from
their customers in different specified locations on a timely basis.
This standard is applicable only if the counterparty to the contract is a customer. A
customer is a party that has contracted with an entity to obtain goods or services that are
an output of the entity’s ordinary activities in exchange for a consideration.
A counterparty to the contract would not be a customer if, for example, the counterparty
has contracted with the entity to participate in an activity or process in which the parties to
the contract share in the risks and benefits that result from the activity or process (such as

© The Institute of Chartered Accountants of India

 5.4 2.4 a
FINANCIAL REPORTING
v
developing an asset in a collaboration arrangement) rather than to obtain the output of the
entity’s ordinary activities.v
A contract with a customer may be partially within the scope of Ind AS 115 and partially within
the scope of other Ind AS. In such cases, the following steps should be followed to identify how
it should be split between Ind AS 115 and other Ind AS:
(i) If the other Ind AS specifies how to separate and/or measure a portion of the contract, then
that guidance should be applied first. The amounts measured under other Ind AS should
be excluded from the transaction price that is allocated to performance obligations under
Ind AS 115.
(ii) If the other Ind AS does not stipulate how to separate and/or measure a portion of the
contract, then Ind AS 115 would be used to separate and/or measure that portion of the
contract (refer discussion relating to Step 4 - Allocation of transaction price to performance
obligation).
Ind AS 115 also specifies the accounting for the incremental costs of obtaining a contract with a
customer and for the costs incurred to fulfil a contract with a customer if those costs are not
within the scope of another Standard (see section related to Contract Costs). An entity shall
apply those paragraphs only to the costs incurred that relate to a contract with a customer (or
part of that contract) that is within the scope of this Standard.

2. DEFINITIONS
Contract An agreement between two or more parties that creates enforceable rights
and obligations.
Contract asset An entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer when that right is conditioned on
something other than the passage of time (for example, the entity’s future
performance).
Contract liability An entity’s obligation to transfer goods or services to a customer for which
the entity has received consideration (or the amount is due) from the
customer.
Customer A party that has contracted with an entity to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for a
consideration.
Income Increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.5

an increase in equity, other than those relating to contributions from equity

participants.
Performance A promise in a contract with a customer to transfer to the customer either:
obligation (a) a goods or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same
and that have the same pattern of transfer to the customer.
Revenue Income arising in the course of an entity’s ordinary activities.
Stand-alone The price at which an entity would sell a promised goods or service
selling price (of separately to a customer.
goods or service)
Transaction The amount of consideration to which an entity expects to be entitled in
price (for a exchange for transferring promised goods or services to a customer,
contract with a excluding amounts collected on behalf of third parties.
customer)

3. OVERVIEW
After more than a decade of work, the International Accounting Standards Board (IASB) and
Financial Accounting Standards Board (FASB) had published their largely converged standards
on revenue recognition in May, 2014. The IASB issued IFRS 15 Revenue from Contracts with
Customers and FASB issued ASU 2014-09 with the same name.
In convergence with IFRS, the Ministry of Corporate Affairs (MCA) issued Ind AS 115, Revenue
from Contracts with Customers vide its notification dated 28 th March, 2018.
Ind AS 115 supersedes and replaces Ind AS 11 and Ind AS 18.
Ind AS 115 is based on a core principle that requires an entity to recognize revenue:
(a) In a manner that depicts the transfer of goods or services to customers
(b) At an amount that reflects the consideration the entity expects to be entitled to in exchange
for those goods or services.
To achieve the core principle, an entity should apply the following five-step model:
Step 1: Identify the contract with the customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.

© The Institute of Chartered Accountants of India

 5.6 2.6 a
FINANCIAL REPORTING
v
Step 4: Allocate the transaction price to the performance obligations in the contract.
v
Step 5: Recognize revenue when (or as) the entity satisfies its performance obligations.

Identify the contract(s) with a customer

Identify the performance obligations

Determine the transaction price

Allocate the transaction price to the performance obligations

Recognize revenue when or as an entity satisfies performance obligations

Each of these steps, and some other related guidance, is discussed in details below.
Entities will need to exercise judgement when considering the terms of the contract(s) and all of
the facts and circumstances, including implied contract terms. Entities will also have to apply
the requirements of the standard consistently to contracts with similar characteristics and in
similar circumstances.

4. TRANSITION
Ind AS 115 is effective for annual reporting periods beginning on or after 1 st April, 2018.
Entities are required to apply the new revenue standard using either of the following two
approaches:
(a) Full retrospective approach: apply retrospectively to each prior period presented in
accordance with Ind AS 8, subject to some practical expedients mentioned in the standard
or
(b) Modified retrospective approach: apply retrospectively with the cumulative effect of initial
application recognized at the date of initial application
When applying the full retrospective method, an entity shall restate all prior periods presented in
accordance with Ind AS 8. This results in comparative statements in which all periods are
presented as if Ind AS 115 had been in effect since the beginning of the earliest period
presented.
When applying modified retrospective approach, an entity does not restate prior periods
presented and the cumulative effect of initial application is recognized in the opening retained
earnings of the first year of application of Ind AS 115.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.7

5. STEP 1: IDENTIFYING THE CONTRACT

As the guidance in Ind AS 115 applies only to contracts with customers, the first step in the
model is to identify such contracts.
A contract is an agreement between two or more parties that creates enforceable rights and
obligations. Enforceability of the rights and obligations in a contract is a matter of law.
Contracts can be written, oral, or implied by an entity’s customary business practices. The
practices and processes for establishing contracts with customers vary across legal jurisdictions,
industries, and entities. In addition, they may vary within an entity (for example, they may
depend on the class of customer or the nature of the promised goods or services). An entity
shall consider those practices and processes in determining whether and when an agreement
with a customer creates enforceable rights and obligations. For example, if an entity has an
established practice of starting performance based on oral agreements with its customers, it
may determine that such oral agreements meet the definition of a contract. As a result, an entity
may need to account for a contract as soon as performance begins, rather than delay revenue
recognition until the arrangement is documented in a signed contract.
The guidance in Ind AS makes it clear that the rights and obligations in a contract must be
“enforceable” in order for an entity to apply the five-step revenue model. Enforceability is a
matter of law, so an entity needs to consider the local relevant legal environment to make that
determination. That said, while the contract must be legally enforceable, oral or implied
promises may give rise to performance obligations in the contract.
5.1 Criteria for recognizing a contract
Step 1 serves as a ‘gateway’ through which an entity must pass before proceeding to the later
steps of the model. In other words, if at the inception of an arrangement, an entity concludes
that the criteria below are not met, it should not apply Step 2 to 5 of the model until it determines
that the Step 1 criteria are subsequently met. When a contract meets the five criteria and
‘passes’ Step 1, the entity will not reassess the Step 1 criteria unless there is an indication of a
significant change in facts and circumstances.
Ind AS 115 requires an entity to account for a contract with a customer that is within the scope
of the model in this standard only when all the following criteria are met:
(a) The parties have approved (in writing, orally or in accordance with other customary
business practices) the contract and are committed to perform their contractual obligations
(b) The entity can identify each party’s rights regarding the goods or services to be transferred
(c) The entity can identify the payment terms for the goods or services to be transferred

© The Institute of Chartered Accountants of India

 5.8 2.8 a
FINANCIAL REPORTING
v
(d) The contract has commercial substance (i.e. the risk, timing or amount of the entity’s future
cash flows is expected to vchange as a result of the contract), and
(e) It is probable that the entity will collect substantially all of the consideration to which it
expects to be entitled in exchange for the goods or services that will be transferred to the
customer.
If the arrangement does not meet the five criteria at inception, an accounting contract, for
purposes of applying Ind AS 115, does not exist, and the entity should continue to reassess
whether the five criteria are subsequently met. For example, if a customer’s ability to pay the
consideration deteriorates significantly, an entity would reassess whether it is probable that the
entity will collect the consideration to which it will be entitled in exchange for the remaining
goods or services that will be transferred to the customer.
A contract may not pass Step 1, but the entity may still transfer goods or services to the
customer and receive non-refundable consideration in exchange for those goods or services. In
that circumstance, the entity cannot recognize revenue for the non-refundable consideration
received until either the Step 1 criteria are subsequently met, or one of the events outlined
below has occurred:
(a) The entity has no remaining obligations to transfer goods or services to the customer, and
all, or substantially all, of the consideration promised by the customer has been received by
the entity and is non-refundable, or
(b) The contract has been terminated, and the consideration received from the customer is
non-refundable.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.9

Consider if the contract meets each of the five criteria to Continue to assess the
pass Step 1: contract to determine if the
Step 1 criteria are met.
Have the parties approved the contract? No

Yes Recognize consideration

Can the entity identify each party's rights regarding the received as a liability until
No
goods/services to be transferred? each of the five criteria in
Yes Step 1 are met or one of
the following occurs:
Can the entity identify the payment terms for the No
goods/services to be transferred? 1. entity has no remaining
performance obligations
Yes and substantially all
No
Does the contract have commercial substance? consideration has been
Yes received and is non-
refundable.
Is it probable that the entity will collect substantially all the No
consideration to which it will be entitled in exchange for 2. contract is terminated
the goods/services that will be transferred to the and consideration is
customer? non-refundable
Yes

Proceed to Step 2 and only reassess the Step 1 criteria if

there is an indication of a significant change in facts and
circumstances.

Each of the criteria mentioned above are discussed in more detail below:
5.1.1 Criteria 1: The parties have approved the contract and are committed to
perform
To pass Step 1, the parties must approve the contract. This approval may be written, oral, or
implied, as long as the parties intend to be bound by the terms and conditions of the contract.
The form of the contract (i.e. oral, written or implied) is not determinative, in assessing whether
the parties have approved the contract. Instead, an entity must consider all relevant facts and
circumstances when assessing whether the parties intend to be bound by the terms and
conditions of the contract. In some cases, the parties to an oral or implied contract may have
the intent to fulfil their respective obligations. However, in other cases, a written contract may
be required before an entity can conclude that the parties have approved the arrangement.
In addition to approving the contract, the entity must also be able to conclude that both parties

© The Institute of Chartered Accountants of India

 5.10 a
2.10 FINANCIAL REPORTING
v
are committed to performing their respective obligations under the contract. This does not mean
v
that the parties need to be committed to fulfil all of their respective rights and obligations in
order for this criterion to be met. For example, an entity may include a requirement in a contract
for the customer to purchase a minimum quantity of goods each month, but the entity may have
a history of not enforcing the requirement. In this example, the contract approval criterion can
still be satisfied if evidence supports that the customer and the entity are both substantially
committed to the contract. Termination clauses are also an important consideration when
determining whether both parties are committed to perform under a contract and, consequently,
whether a contract exists. See 5.3.1 below for further discussion of termination clauses and
how they affect contract duration.
5.1.2 Criteria 2: The entity can identify each party’s rights
An entity must be able to identify its rights, as well as the rights of all other parties to the
contract. An entity cannot assess the transfer of goods or services if it cannot identify each
party’s rights regarding those goods or services.
5.1.3 Criteria 3: The entity can identify the payment terms for the goods or
services
An entity must also be able to identify the payment terms for the promised goods or services
within the contract. Identifying the payment terms does not require that the transaction price be
fixed or stated in the contract with the customer. As long as there is an enforceable right to
payment (i.e. enforceability as a matter of law) and the contract contains sufficient information to
enable the entity to estimate the transaction price, the contract would meet this criterion. The
entity cannot determine how much it will receive in exchange for the promised goods or services
(the “transaction price” in Step 3 of the model) if it cannot identify the contractual payment
terms.
5.1.4 Criteria 4: The contract has commercial substance
A contract has commercial substance if the risk, timing, or amount of the entity’s cash flows is
expected to change as a result of the contract. In other words, the contract must have economic
consequences. This criterion was added to prevent entities from transferring goods or services
back and forth to each other for little or no consideration to artificially inflate their revenue. This
criterion is applicable for both monetary and non-monetary transactions, because without
commercial substance, it is questionable whether an entity has entered into a transaction that
has economic consequences. Determining whether a contract has commercial substance for the
purposes of Ind AS 115 may require significant judgement. In all situations, the entity must be
able to demonstrate that a substantive business purpose exists, considering the nature and
structure of its transactions.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.11

5.1.5. Criteria 5: It is probable the entity will collect substantially all of the
consideration
To pass Step 1, an entity must determine that it is probable that it will collect substantially all of
the consideration to which it will be entitled under the contract in exchange for goods or services
that it will transfer to the customer. This criterion is also referred to as the ‘collectability
assessment’. In determining whether collection is probable, the entity considers the customer’s
ability and intention to pay considering all relevant facts and circumstances, including past
experiences with that customer or customer class. In making the determination of customer’s
ability to pay, the credit risk was an important thing to determine if the contract is valid.
However, customer’s credit risk should not affect the measurement or presentation of revenue.
The standard requires an entity to evaluate at contract inception (and when significant facts and
circumstances change) whether it is probable that it will collect the consideration to which it will
be entitled in exchange for the goods or services that will be transferred to a customer. For
purposes of this analysis, the meaning of the term ‘probable’ means ‘more likely than not’. If it is
not probable that the entity will collect amounts to which it is entitled, the model in Ind AS 115 is
not applied to the contract until the concerns about collectability have been resolved.
Illustration 1
New Way Ltd. decides to enter a new market that is currently experiencing economic difficulty
and expects that in future the economy will improve. New Way Ltd. enters into an arrangement
with a customer in the new region for networking products for promised consideration of
1,250,000. At contract inception, New Way Ltd. expects that it may not be able to collect the
full amount from the customer.
Determine how New Way Ltd. will recognize this transaction?
Solution
Assuming the contract meets the other criteria covered within the scope of the model in
Ind AS 115, New Way Ltd. need to assess whether collection is probable.
In making this assessment, New Way Ltd. considers whether the customer has the ability and
intent to pay the estimated transaction price, which may be an amount less than the contract
price.
*****
5.2 Contracts that do not pass Step 1: Reassessing the Step 1
criteria
When an entity determines that a contract passes Step 1, it should not reassess contract
existence unless there is an indication of a significant change in facts and circumstances.

© The Institute of Chartered Accountants of India

 5.12 a
2.12 FINANCIAL REPORTING
v
For example, if the customer’s ability to pay significantly deteriorates, an entity would have to
reassess whether it is probablev that the entity will collect the consideration to which it is entitled
in exchange for transferring the remaining goods and services under the contract. The updated
assessment is prospective in nature and would not change the conclusions associated with
goods and services already transferred. That is, an entity would not reverse any receivables,
revenue or contract assets already recognized under the contract.
However, the revenue related to the remaining goods or services yet to be transferred is
impacted.
5.3 Contract term
An entity applies Ind AS 115 to the contractual period over which the parties to the contract
have present enforceable rights and obligations.
Some contracts with customers may have no fixed duration and can be terminated or modified
by either party at any time. Other contracts may automatically renew on a periodic basis that is
specified in the contract. An entity shall apply this Standard to the duration of the contract (ie
the contractual period) in which the parties to the contract have present enforceable rights and
obligations.
5.3.1 Termination provisions
Some contracts can be terminated by either party at any time while others may only be
terminated by one party. The contract does not exist if each party to a contract has the
unilateral enforceable right to terminate a wholly unperformed contract without paying a
termination penalty. A ‘wholly unperformed’ contract means that the entity has not yet
performed and is not entitled to any consideration.
In some situations, only the customer has the ability to terminate the contract without penalty.
In those situations, the contract term for accounting purposes may be shorter than that stated in
the contract.
However, a substantive termination penalty payable by a customer to the entity is evidence of
enforceable rights and obligations of both parties throughout the period covered by the
termination penalty. For example, consider a four-year service contract in which the customer
has the right to cancel without cause at the end of each year, but for which the customer would
incur a termination penalty that decreases each year and is determined to be substantive. Then,
this arrangement would be treated as a four-year contract only and contract term should not be
assessed less than four years unless the entity has past experience of having such contracts
terminated by this customer or class of customer which may demand assessment of the contract
term based on previous trend or experience.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.13

Illustration 2
A gymnasium enters into a contract with a new member to provide access to its gym for a
12-month period at 4,500 per month. The member can cancel his or her membership without
penalty after three months. Specify the contract term.
Solution
The enforceable rights and obligations of this contract are for three months, and therefore the
contract term is three months.
*****
Illustration 3
Contractor P enters into a manufacturing contract to produce 100 specialised CCTV cameras for
Customer Q for a fixed price of 1,000 per sensor. Customer Q can cancel the contract without
a penalty after receiving 10 CCTV cameras. Specify the contract units.
Solution
P determines that because there is no substantive compensation amount payable by Q on
termination of the contract – i.e. no termination penalty in the contract – it is akin to a contract to
produce 10 CCTV cameras that gives Customer Q an option to purchase additional 90 CCTV
cameras. Hence, contract is for 10 units.
*****
5.4 Combining contracts
An entity should combine two or more contracts and account for them as a single contract in
certain circumstances because the substance of the individual contracts cannot be understood
without considering the entire arrangement. This evaluation takes place at contract inception.
Two or more contracts may need to be accounted for as a single contract if they are entered into
at or near the same time with the same customer (or with related parties of the customer), and if
one of the following conditions exists:
(a) The contracts are negotiated as a package with a single commercial objective;
(b) The amount of consideration paid in one contract depends on the price or performance in
the other contract; or
(c) The goods or services promised in the contract are a single performance obligation.
Note: Entities will need to apply judgement to determine whether contracts are entered into at or
near the same time because the standard does not provide a bright line for making this
assessment.

© The Institute of Chartered Accountants of India

 5.14 a
2.14 FINANCIAL REPORTING
v
Are the contracts negotiated as a package Yes
v
with a single commercial objective?
No
Whether consideration in one contract Yes
depends on the price or performance Treat as a single
obligation in another contract? contract
No
Whether goods or services promised in the contract Yes
are leading to a single performance obligation?

No
Treat as separate contracts

Illustration 4
Manufacturer of airplanes for the air force negotiates a contract to design and manufacture new
fighter planes for a Kashmir air base. At the same meeting, the manufacturer enters into a
separate contract to supply parts for existing planes at other bases.
Would these contracts be combined?
Solution
Contracts were negotiated at the same time, but they appear to have separate commercial
objectives. Manufacturing and supply contracts are not dependent on one another, and the planes
and the parts are not a single performance obligation. Therefore, contracts for supply of fighter
planes and supply of parts shall not be combined and instead, they shall be accounted separately.
*****
Illustration 5
Software Company S enters into a contract to license its customer relationship management
software to Customer B. Three days later, in a separate contract, S agrees to provide
consulting services to significantly customise the licensed software to function in B’s IT
environment. B is unable to use the software until the customisation services are complete.
Would these contracts be combined?
Solution
S determines that the two contracts should be combined because they were entered into at
nearly the same time with the same customer, and the goods or services in the contracts are a
single performance obligation.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.15

Illustration 6
Manufacturer M enters into a contract to manufacture and sell a cyber security system to
Government-related Entity P. One week later, in a separate contract, M enters into a contract to
sell the same system to Government-related Entity Q. Both entities are controlled by the same
government. During the negotiations, M agrees to sell the systems at a deep discount if both P
and Q purchases the security system.
Should these contracts be combined or separately accounted?
Solution
M concludes that the said two contracts should be combined because, among other things, P is
a related party of Q, the contracts were entered into at nearly the same time and the contracts
were negotiated as a single commercial package, which is clearly evident from the fact that
discount is being offered if both the parties purchase the security system, thereby also making
the consideration in one contract dependent on the other contract.
*****
5.5 Contract Modifications
Modifications that change the terms of a contract are common in many industries, including
manufacturing, telecommunications, defence, and construction. Depending upon the industry or
jurisdiction, the modification may be better known as a change order, a variation, or an
amendment.
The modification guidance under Ind AS 115 requires an entity to
(a) Identify if a contract has been modified.
(b) Determine if the modification results in a separate contract, a termination of the existing
contract and the creation of a new contract, or a continuation of the existing contract.
(c) Account for the contract modification accordingly.
5.5.1 Identifying a modification
A contract modification exists if three conditions are met:
(a) There is a change in the scope, price, or both in a contract.
(b) That change is approved by both the entity and the customer.
(c) The change is enforceable.
Similar to the criterion discussed above, the approval of a contract modification may be written,
oral, or implied by customary business practice.

© The Institute of Chartered Accountants of India

 5.16 a
2.16 FINANCIAL REPORTING
v
Contract modifications may take many forms and the following list includes some common
examples: v
(a) Partially terminating the contract
(b) Extending the contract term with or without a corresponding increase in price
(c) Adding new goods and/or services to the contract, with or without a corresponding change
in price
(d) Reducing the contract price without a change in goods or services promised
5.5.2 Accounting for the modification
Once an entity determines that a contract with a customer has been modified, it needs to
determine whether the modification should be accounted for as a separate contract as discussed
above. If the modification is not accounted for as a separate contract, it will be accounted for in
one of the following three ways:
(a) As a termination of the old contract and the creation of a new contract
(b) By making a cumulative catch-up adjustment to the original contract
(c) A combination of the two

Accounting for the modification

Are both of the following true:

 The scope of the contract increases because Yes
distinct promised goods or services are added to Account for the modification as a separate
the contract. contract
 The consideration increases by the stand-alone
selling price of the added goods or services.
Allocate the remaining transaction price not
No yet recognized to the outstanding
Yes
Are the remaining goods or services distinct from the performance obligations. In other words,
goods or services transferred on or before the date of treat as a termination of the old contract and
the contract modification? the creation of a new contract
No
Are the remaining goods or services not distinct and, Yes Account for the contract modification as if it
therefore, form part of a single performance obligation were a part of the existing contract—that is,
that is partially satisfied at the date of the contract the adjustment to revenue is made on a
modification? cumulative catch-up basis

No Yes
Follow the guidance above for distinct and
Are some of the remaining goods or services distinct
non-distinct remaining goods or services
and others not distinct?

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.17

5.5.2.1 Modifications that constitute separate contracts

An entity accounts for a contract modification as a separate contract if the modification both
(1) increases the scope of the work promised under the original contract by adding new
promised goods or services that are considered distinct, and
(2) the increase in the contract price reflects the stand-alone selling price of the additional
goods or services. An entity determines if the additional promised goods or services are
distinct using the guidance in Section 6.1.
The logic behind this guidance is that there is no economic difference between the entity
entering into a separate contract or modifying an existing contract for the additional goods or
services.
When assessing whether the transaction price increases by an amount of consideration that
reflects the stand-alone selling prices of the additional goods or services, an entity is allowed to
adjust the stand-alone selling price for costs that it does not incur because it is contracting with
a repeat customer. Therefore, if the stand-alone selling price in the original contract is 10 per
unit, a modification that adds units for 9.50 per unit might reflect a stand-alone selling price of
the additional units. For example, the selling effort and administration costs might be much
lower when incremental units are added, in contrast to the effort and cost of the original
quantity. The entity needs to exercise judgment to make that determination.
If a modification adds a distinct goods or service to a series of distinct goods or services that is
accounted for as a single performance obligation, the modification is accounted for as a
separate contract as long as the transaction price increases by the stand-alone selling price for
those added goods or services.
Illustration 7
An entity promises to sell 120 products to a customer for 120,000 ( 1,000 per product). The
products are transferred to the customer over a six-month period. The entity transfers control of
each product at a point in time. After the entity has transferred control of 60 products to the
customer, the contract is modified to require the delivery of an additional 30 products (a total of
150 identical products) to the customer at a price of 950 per product which is the standalone
selling price for such additional products at the time of placing this additional order. The
additional 30 products were not included in the initial contract.
It is assumed that additional products are contracted for a price that reflects the stand-alone
selling price.
Determine the accounting for the modified contract?

© The Institute of Chartered Accountants of India

 5.18 a
2.18 FINANCIAL REPORTING
v
Solution
v
When the contract is modified, the price of the contract modification for the additional
30 products is an additional 28,500 or 950 per product. The pricing for the additional
products reflects the stand-alone selling price of the products at the time of the contract
modification and the additional products are distinct from the original products.
Accordingly, the contract modification for the additional 30 products is, in effect, a new and
separate contract for future products that does not affect the accounting for the existing contract
and 950 per product for the 30 products in the new contract.
*****
5.5.2.2 Modifications that do not constitute separate contracts
If a contract modification is not accounted for as a separate contract, the guidance provides the
following three methods to account for the modification:
(a) First, account for the modification prospectively as long as the goods or services to be
provided after the modification are distinct from the goods or services that were already
provided to the customer. The logic behind this guidance is that accounting for these types
of modifications on a cumulative catch-up basis could be complex and may not faithfully
depict the economics of the modification since the modification is negotiated based on facts
and circumstances that exist after the original contract’s inception.
Illustration 8
On 1 st April, 20X1, KLC Ltd. enters into a contract with Mr. K to provide
- A machine for 2.5 million
- One year of maintenance services for 55,000 per month
On 1 st October, 20X1, KLC Ltd. and Mr. K agree to modify the contract to reduce the
amount of services from 55,000 per month to 45,000 per month.
Determine the effect of change in the contract?
Solution
The next six months of services are distinct from the services provided in the first six
months before modification in contract,
Therefore, KLC Ltd. will account for the contract modification as if it were a termination of
the existing contract and the creation of a new contract.
The consideration allocated to remaining performance obligation is 270,000, which is the
sum of

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.19

● The consideration promised by the customer (including amounts already received from
the customer) that was included in the estimate of the transaction price and had not
yet been recognized as revenue. This amount is zero.
● The consideration promised as part of the contract modification i.e. 270,000.
*****
(b) Second, when the remaining goods or services are not distinct and are part of a single
performance obligation that is partially satisfied, the entity recognizes the effect of the
modification on a cumulative catch-up basis. This is the case in many construction
contracts where a modification does not result in the transfer of additional distinct goods or
services.
Illustration 9
Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing deal.
Based on its experience, Growth Ltd determines that customising the infrastructure will
take approximately 200 hours in total to complete the project and charges 150 per hour.
After incurring 100 hours of time, Growth Ltd and the customer agree to change an aspect
of the project and increase the estimate of labour hours by 50 hours at the rate of 100
per hour.
Determine how contract modification will be accounted for as per Ind AS 115?
Solution
Considering that the remaining goods or services are not distinct, the modification will be
accounted for on a cumulative catch up basis, as given below:

Particulars Hours Rate ( ) Amount ( )

Initial contract amount 200 150 30,000
Modification in contract 50 100 5,000
Contract amount after modification 250 140* 35,000
Revenue to be recognized 100 140 14,000
Revenue already booked 100 150 15,000
Adjustment in revenue (1,000)

*35,000 / 250 = 140

*****

© The Institute of Chartered Accountants of India

 5.20 a
2.20 FINANCIAL REPORTING
v
(c) Third, there may be cases where the remaining goods or services provided after a
v
modification are a combination of both distinct and non-distinct goods or services. In this
case, the entity accounts for those remaining goods or services that are distinct on a
prospective basis and for those goods and services that are not distinct on a cumulative
catch-up basis.

6. STEP 2: IDENTIFYING PERFORMANCE OBLIGATIONS

Under the five-step model of Ind AS 115, the second step in accounting for a contract with a
customer is identifying the performance obligations. Identifying performance obligations is a
crucial process in the five-step model. Performance obligations are considered as unit of
account for the purposes of applying the revenue standard. Identification of performance
obligations requires high degree of judgment in cases where multiple goods or services are
promised in a contract. Also, it needs to be determined whether those performance obligations
should be accounted for separately or as in combination with other promised goods or services
in the contract.
The concept of performance obligations is a cornerstone of the Ind AS 115 revenue recognition
model. The timing of revenue recognition is based on satisfaction of performance obligations
rather than the contract as a whole. This area is sometimes referred to as ‘multiple element
arrangements’.

6.1 Criteria for identifying performance obligation

At contract inception, an entity shall assess
(a) the goods or services promised in a contract with a customer and
(b) shall identify performance obligation under each promise to be transferred to the customer.
A contract with a customer generally states explicitly, the goods or services that an entity
promises to transfer to the customer. However, the performance obligations identified in a
contract with the customer may not be limited to the goods or services that are explicitly stated
in that contract. This is because a contract with a customer may also include promises that are
implied by an entity’s customary business practices, published policies or specific statements if,
at the time of entering into the contract, those promises to create a valid expectation of the
customer that the entity will transfer goods or service to the customer. Therefore, performance
obligations under a contract with the customer are not always explicit or clearly mentioned in the
contract, but there can be implied promises or performance obligation under the contract as
well.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.21

Promises under the contract can be explicit or implicit if the same creates a valid expectation by
the customer that the entity will provide those goods or service based on the customary
business practices, published policies, or specific statements. Some of the examples of
promised goods or services include:

Promise Example
 Sale of manufactured goods  A manufacturing entity sells inventory
 Resale of goods purchased  A retail entity sells purchased merchandise
 Resale of rights to goods or  A hospitality entity that purchased a concert ticket
services purchased by an entity resells the ticket, acting as principal
 Performing tasks  A professional services entity provides consulting
services
 Providing goods or services to  A manufacturing entity provides maintenance
customers on stand-by basis i.e. as services on machines sold to a customer when the
and when required customer decides it wants the services performed
 Construction of an asset for the  A contractor builds a hospital
customers
 Use or access to intellectual  An entity grants a license to use its trade name
property rights of the entity
 Right to purchase additional goods  A retailer grants a customer an option to buy three
or services to the customer in the items and to receive 60 percent off of a fourth
future item at a later date

An entity, a manufacturer, sells a product to a distributor (i.e. its customer) who will then resell it
to an end customer.
I Explicit promise of service
● The entity promises to the distributor to provide maintenance services for no
additional consideration or free of cost to any party that purchases the product from
the distributor. The entity in turn appoints the distributor and pays the distributor to
provide the maintenance services on company’s behalf to the customer for an agreed
payment. In case no one avails those services, the company is not required to pay
anything to the distributor.
● Under this contract promise to provide maintenance services in the future will be
considered as a performance obligation. The entity has promised to provide

© The Institute of Chartered Accountants of India

 5.22 a
2.22 FINANCIAL REPORTING
v
maintenance services regardless of whether the entity, the distributor, or a third party
provides the service.v
II Implicit promise of service
● The entity has historically provided maintenance services for no additional
consideration (i.e. 'free') to end customers that purchase the entity's product from the
distributor. The entity does not explicitly promise maintenance services during
negotiations with the distributor and the final contract between the entity and the
distributor does not specify terms or conditions for those services.
● However, on the basis of its customary business practice, the entity determines at
contract inception that it has made an implicit promise to provide maintenance
services as part of the negotiated exchange with the distributor. That is, the entity's
past practices of providing these services create valid expectations of the entity's
customers (i.e. the distributor and end customers).
Performance obligations has been defined as a promise in a contract with a customer to transfer
to the customer either:
(a) goods or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer. Performance obligations do not include activities
that an entity must undertake to fulfil a contract unless those activities transfer the goods or
service to a customer. For example, a service provider may need to perform various
administrative tasks to set up a contract. The performance of those tasks does not transfer
a service to the customer as the tasks are performed. Therefore, those setup activities are
not a performance obligation.
A. Distinct performance obligations
A goods or service that is promised to a customer is distinct if both of the following criteria are
met:

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.23

Two-step model to identify which goods or services are distinct

Step 2 - Focus on whether the good or service

Step 1 - Focus on whether the good or service is distinct in the context of
is capable of being distinct the contract

Customer can benefit from the individual good

or service on its own The good or service is not integrated with,
highly dependent on, highly interrelated with,
Or; or significantly modifying or customising other
Customer can use good or service with other promised goods or services in the contract
readily available resources

Each of the criteria mentioned above are discussed in more detail below:
6.1.1 Customer can benefit either on a stand-alone basis or with other readily
available resources
The customer can benefit from the goods or service either on its own or with other resources
readily available to them. A readily available resource is a goods or service that is sold
separately (by the entity or by another entity) or that the customer has already obtained from the
entity or from other transactions or events.
A customer can benefit from a goods or service if the goods or service could be used,
consumed, sold for an amount that is greater than its scrap value or otherwise held in a way that
generates economic benefits.
Sometimes, a customer can benefit from a goods or service only with other readily available
resources. A readily available resource is a goods or service that is sold separately (by the
entity or another entity) or a resource that the customer has already obtained from the entity
(including goods or services that the entity will have already transferred to the customer under
the contract) or from other transactions or events. Various factors may provide evidence that
the customer can benefit from a goods or service either on its own or in conjunction with other
readily available resources.
For e.g, the fact that the entity regularly sells a goods or service on its own is an indicator that
the goods or service is capable of being distinct.
6.1.2 Separately identifiable from other promises in the contract
Factors that indicate that an entity's promise to transfer a goods or service to a customer is
separately identifiable include, but are not limited to, the following:

© The Institute of Chartered Accountants of India

 5.24 a
2.24 FINANCIAL REPORTING
v
6.1.2.1 Significant integration service
v
It indicates that two or more promises to transfer goods or services are not separately
identifiable from other goods or services in the contract if the entity provides significant
integration services. Stated differently, the entity is using the goods or services as inputs to
produce the combined output promised in the contract. When an entity provides a significant
service of integrating a goods or service with other goods or services in a contract, the bundle of
integrated goods or services represents a combined output or outputs. In other words, when an
entity provides a significant integration service, the risk of transferring individual goods or
services is inseparable from the bundle of integrated goods or services because a substantial
part of an entity’s promise to the customer is to make sure the individual goods or services are
incorporated into the combined output or outputs.
For example, construction contracts in which a contractor provides an integration (or contract
management) service to manage and coordinate the various construction tasks and to assume
the risks associated with the integration of those tasks. An integration service provided by the
contractor often includes coordinating the activities performed by any subcontractors and
making sure the quality of the work performed is in compliance with the contract specifications
and that the individual goods or services are appropriately integrated into the combined item
that the customer has contracted to receive.
6.1.2.2 Significant modification or customization
It indicates that one or more of the goods or services significantly modifies or customises, or are
significantly modified or customised by, one or more of the other goods or services promised in
the contract.
In some industries, such as the software industry, the notion of inseparable risks is more clearly
illustrated by assessing whether one goods or service significantly modifies or customizes
another goods or service in the contract. In this case, the goods or services are used as inputs
and are being assembled together to create a combined output — a customized product.

Example 1
An entity promises to provide a customer with software that it will significantly customise to
make the software function with the customer’s existing infrastructure. Based on its facts and
circumstances, the entity determines that it is providing the customer with a fully integrated
system and that the customisation service requires it to significantly modify the software in such
a way that the risks of providing it and the customisation service are inseparable (i.e. the
software and customisation service are not separately identifiable).

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.25

6.1.2.3 Highly interdependent or highly interrelated

It indicates that two or more promises to transfer goods or services are not separately
identifiable from other goods or services in the contract if the goods or services are highly
interdependent or highly interrelated.
Sometimes it may be unclear whether the entity provides an integration service or whether the
goods or services are significantly modified or customized; yet the individual goods or services
are not separately identifiable from other goods or services because they are highly dependent
on, or highly interrelated with, other promised goods or services in the contract.
The principle in evaluating whether promises are “distinct within the context of the contract” is to
consider the level of integration, interrelation, or interdependence among promises to transfer
goods or services. As a result, the entity must evaluate whether two or more promised goods or
services significantly affect the other and are therefore highly interdependent or highly
interrelated with other promised goods or services in the contract. An entity does not simply
evaluate whether one item depends on another. There must be a two-way dependency. In other
words, instead of concluding that an undelivered item would never be obtained by a customer
absent the delivered item in the contract, the entity would consider whether the undelivered item
and the delivered item each significantly affect the other and therefore are highly interdependent
or highly interrelated.
Illustration 10
A construction services company enters into a contract with a customer to build a water
purification plant. The company is responsible for all aspects of the plant including overall
project management, engineering and design services, site preparation, physical construction of
the plant, procurement of pumps and equipment for measuring and testing flow volumes and
water quality, and the integration of all components.
Determine whether the company has a single or multiple performance obligations under the
contract?
Solution
Determining whether a goods or service represents a performance obligation on its own or is
required to be aggregated with other goods or services can have a significant impact on the
timing of revenue recognition. In order to determine how many performance obligations are
present in the contract, the company applies the guidance above. While the customer may be
able to benefit from each promised goods or service on its own (or together with other readily
available resources), they do not appear to be separately identifiable within the context of the
contract. That is, the promised goods and services are subject to significant integration, and as
a result will be treated as a single performance obligation.

© The Institute of Chartered Accountants of India

 5.26 a
2.26 FINANCIAL REPORTING
v
This is consistent with a view that the customer is primarily interested in acquiring a single asset
v than a collection of related components and services.
(a water purification plant) rather
*****
Illustration 11
An entity provides broadband services to its customers along with voice call service.
Customer buys modem from the entity. However, customer can also get the connection from the
entity and modem from any other vendor. The installation activity requires limited effort and the
cost involved is almost insignificant. It has various plans where it provides either broadband
services or voice call services or both.
Are the performance obligations under the contract distinct?
Solution
Entity promises to customer to provide
 Broadband Service
 Voice Call services
 Modem
Entity’s promise to provide goods and services is distinct if
 customer can benefit from the goods or service either on its own or together with other
resources that are readily available to the customer, and
 entity’s promise to transfer the goods or service to the customer is separately identifiable
from other promises in the contract
For broadband and voice call services -
 Broadband and voice services are separately identifiable from other promises as company
has various plans to provide the two services separately. These two services are not
dependant or interrelated. Also the customer can benefit on its own from the services
received.
For sale of modem -
 Customer can either buy product from entity or third party. No significant customisation or
modification is required for selling product.
Based on the evaluation we can say that there are three separate performance obligation: -
 Broadband Service
 Voice Call services
 Modem
*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.27

Illustration 12
An entity enters into a contract to build a power plant for a customer. The entity will be
responsible for the overall management of the project including services to be provided like
engineering, site clearance, foundation, procurement, construction of the structure, piping and
wiring, installation of equipment and finishing.
Determine how many performance obligations does the entity have?
Solution
Based on the discussion above it needs to be determined that the promised goods and services
are capable of being distinct as per the principles of Ind AS 115. That is, whether the customer
can benefit from the goods and services either on their own or together with other readily
available resources. This is evidenced by the fact that the entity, or competitors of the entity,
regularly sells many of these goods and services separately to other customers. In addition, the
customer could generate economic benefit from the individual goods and services by using,
consuming, selling or holding those goods or services.
However, the goods and services are not distinct within the context of the contract. That is, the
entity's promise to transfer individual goods and services in the contract are not separately
identifiable from other promises in the contract. This is evidenced by the fact that the entity
provides a significant service of putting together the various inputs or goods and services into
the power plant or the output for which the customer has contracted.
Since both the criteria have not met, the goods and services are not distinct. The entity accounts
for all of the goods and services in the contract as a single performance obligation.
*****
B. Promise to transfer a series of distinct goods or services that are substantially the
same and have the same pattern of transfer:
There might be cases, where distinct goods or services are provided continuously over a period
of time. For e.g. security services, or bookkeeping services. This will be considered as single
performance obligation if the consumption of those services by the customers is symmetrical.
A series of distinct goods or services has the same pattern of transfer to the customer if both of
the following criteria are met:
(a) each distinct goods or service in the series that the entity promises to transfer to the
customer would meet the criteria to be a performance obligation satisfied over time; and
(b) the same method would be used to measure the entity’s progress towards complete
satisfaction of the performance obligation to transfer each distinct goods or service in the
series to the customer.

© The Institute of Chartered Accountants of India

 5.28 a
2.28 FINANCIAL REPORTING
v
If a series of distinct goods or services meets the criteria in paragraph 22(b) and paragraph 23
v
of Ind AS 115 (the series requirement), an entity is required to treat that series as a single
performance obligation (i.e. it is not optional). Cleaning services, transaction processing
services and delivering electricity to customers are some examples that meet the series
requirement.
It is important to note that, even if, the underlying activities an entity performs to satisfy a
promise vary significantly throughout the day and from day to day, that fact, by itself, does not
mean the distinct goods or services are not substantially the same.

Example 2
A vendor enters into a 5-year contract with a customer to provide continuous access to its
system and to process all transactions on behalf of the customer. The customer is obligated to
use the vendor’s system, but the ultimate quantity of transactions is unknown. The vendor
concludes that the customer simultaneously receives and consumes the benefits as it performs.
If the vendor concludes that the nature of its promise is to provide continuous access to its
system, rather than process a particular quantity of transactions, it might conclude that there is a
single performance obligation to stand ready to process as many transactions as the customer
requires. If that is the case, it would be reasonable to conclude that there are multiple distinct
time increments of the service. Each day of access to the service provided to the customer
could be considered substantially the same since the customer is deriving a consistent benefit
from the access each day, even if a different number of transactions are processed each day.
If the vendor concludes that the nature of the promise is the processing of each transaction,
then each transaction processed could be considered substantially the same even if there are
multiple types of transactions that generate different payments. Furthermore, each transaction
processed could be a distinct service because the customer could benefit from each transaction
on its own and each transaction could be separately identifiable. Accordingly, it would be
reasonable for an entity to conclude that this contract meets the series’ requirement.

Illustration 13
Could the series requirement apply to hotel management services where day to day activities
vary, involve employee management, procurement, accounting, etc?
Solution
The series guidance requires each distinct goods or service to be “substantially the same.”
Management should evaluate this requirement based on the nature of its promise to customer.
For example, a promise to provide hotel management services for a specified contract term may
meet the series criteria. This is because the entity is providing the same service of “hotel

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.29

management” each period, even though some on underlying activities may vary each day. The
underlying activities for e.g. reservation services, property maintenance services are activities to
fulfil the hotel management service rather than separate promises. The distinct service within
the series is each time increment of performing the service.
*****
6.2 Multiple Element Arrangements/ Goods and services that are not
distinct
Once an entity determines whether the goods and services would be distinct based on their
individual characteristics, the entity then has to consider if the manner in which the goods and
services have been bundled in an arrangement would require the entity to account for two or
more goods or services as one performance obligation. This determination would be required
regardless of whether or not those goods and services were determined to be distinct on their
own.
If the goods or services are not considered as distinct, those goods or services are combined
with other goods or services under the contract till the time the entity identifies a bundle of
distinct goods or services.
This combination would result in accounting of multiple goods or services in the contract as a
single performance obligation. This could also result in an entity combining a goods or service
that is not considered distinct with another goods or service that, on its own, would have met the
criteria to be considered distinct. An entity may end up accounting for all the goods or services
promised in a contract as a single performance obligation if the entire bundle of promised goods
and services is the only distinct performance obligation identified.
It is important to note that the assessment of whether a goods or service is distinct must
consider the specific contract with a customer. That is, an entity cannot assume that a particular
goods or service is distinct (or not distinct) in all instances. The manner in which promised
goods and services are bundled within a contract can affect the conclusion of whether a goods
or service is distinct. Entities may treat the same goods and services differently, depending on
how those goods and services are bundled within a contract.
Illustration 14
Entity A, a specialty construction firm, enters into a contract with Entity B to design and
construct a multi-level shopping centre with a customer car parking facility located in sub-levels
underneath the shopping centre. Entity B solicited bids from multiple firms on both phases of
the project — design and construction.
The design and construction of the shopping centre and parking facility involves multiple goods
and services from architectural consultation and engineering through procurement and

© The Institute of Chartered Accountants of India

 5.30 a
2.30 FINANCIAL REPORTING
v
installation of all the materials. Several of these goods and services could be considered
separate performance obligations v because Entity A frequently sells the services, such as
architectural consulting and engineering services, as well as standalone construction services
based on third party design, separately. Entity A may require to continually alter the design of
the shopping centre and parking facility during construction as well as continually assess the
propriety of the materials initially selected for the project.
Determine how many performance obligations does the entity A have?
Solution
Entity A analyses that it will be required to continually alter the design of the shopping centre
and parking facility during construction as well as continually assess the propriety of the
materials initially selected for the project. Therefore, the design and construction phases are
highly dependent on one another (i.e., the two phases are highly interrelated). Entity A also
determines that significant customisation and modification of the design and construction
services is required in order to fulfil the performance obligation under the contract. As such,
Entity A concludes that the design and construction services will be bundled and accounted for
as one performance obligation.
*****
Illustration 15
An entity, a software developer, enters into a contract with a customer to transfer a software
license, perform an installation service and provide unspecified software updates and technical
support (online and telephone) for a two-year period. The entity sells the license, installation
service and technical support separately. The installation service includes changing the web
screen for each type of user (for example, marketing, inventory management and information
technology). The installation service is routinely performed by other entities and does not
significantly modify the software. The software remains functional without the updates and the
technical support.
Determine how many performance obligations does the entity have?
Solution
The entity assesses the goods and services promised to the customer to determine which goods
and services are distinct. The entity observes that the software is delivered before the other
goods and services and remains functional without the updates and the technical support. Thus,
the entity concludes that the customer can benefit from each of the goods and services either on
their own or together with the other goods and services that are readily available.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.31

The entity also considers the factors of Ind AS 115 and determines that the promise to transfer
each goods and service to the customer is separately identifiable from each of the other
promises. In particular, the entity observes that the installation service does not significantly
modify or customise the software itself and, as such, the software and the installation service
are separate outputs promised by the entity instead of inputs used to produce a combined
output.
On the basis of this assessment, the entity identifies four performance obligations in the contract
for the following goods or services:
 The software license
 An installation service
 Software updates
 Technical support
*****
Illustration 16 : Significant customisation
The promised goods and services are the same as in the above Illustration, except that the
contract specifies that, as part of the installation service, the software is to be substantially
customised to add significant new functionality to enable the software to interface with other
customised software applications used by the customer. The customised installation service
can be provided by other entities.
Determine how many performance obligations does the entity have?
Solution
The entity assesses the goods and services promised to the customer to determine which goods
and services are distinct. The entity observes that the terms of the contract result in a promise
to provide a significant service of integrating the licensed software into the existing software
system by performing a customised installation service as specified in the contract. In other
words, the entity is using the license and the customised installation service as inputs to
produce the combined output (i.e. a functional and integrated software system) specified in the
contract. In addition, the software is significantly modified and customised by the service.
Although the customised installation service can be provided by other entities, the entity
determines that within the context of the contract, the promise to transfer the license is not
separately identifiable from the customised installation service and, therefore, the criterion on
the basis of the factors is not met. Thus, the software license and the customised installation
service are not distinct.

© The Institute of Chartered Accountants of India

 5.32 a
2.32 FINANCIAL REPORTING
v
The entity concludes that the software updates and technical support are distinct from the other
promises in the contract. This v is because the customer can benefit from the updates and
technical support either on their own or together with the other goods and services that are
readily available and because the promise to transfer the software updates and the technical
support to the customer are separately identifiable from each of the other promises.
On the basis of this assessment, the entity identifies three performance obligations in the
contract for the following goods or services:
a) customised installation service (that includes the software license);
b) software updates; and
c) technical support.
*****
Illustration 17
Telco T Ltd. enters into a two-year contract for internet services with Customer C. C also buys a
modem and a router from T Ltd. and obtains title to the equipment. T Ltd. does not require
customers to purchase its modems and routers and will provide internet services to customers
using other equipment that is compatible with T Ltd.’s network. There is a secondary market in
which modems and routers can be bought or sold for amounts greater than scrap value.
Determine how many performance obligations does the entity T Ltd. have?
Solution
T Ltd. concludes that the modem and router are each distinct and that the arrangement includes
three performance obligations (the modem, the router and the internet services) based on the
following evaluation:
Criterion 1: Capable of being distinct
 C can benefit from the modem and router on their own because they can be resold for more
than scrap value.
 C can benefit from the internet services in conjunction with readily available resources –
i.e. either the modem and router are already delivered at the time of contract set- up, they
could be bought from alternative retail vendors or the internet service could be used with
different equipment.
Criterion 2: Distinct within the context of the contract
 T Ltd. does not provide a significant integration service.
 The modem, router and internet services do not modify or customise one another.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.33

 C could benefit from the internet services using routers and modems that are not sold by T
Ltd. Therefore, the modem, router and internet services are not highly dependent on or
highly inter-related with each other.
*****
Illustration 18
V Ltd. grants Customer C a three-year licence for anti-virus software. Under the contract, V Ltd.
promises to provide C with when-and-if-available updates to that software during the licence
period. The updates are critical to the continued use of the anti-virus software.
Determine how many performance obligations does the entity have?
Solution
V Ltd. concludes that the licence and the updates are capable of being distinct because the anti-
virus software can still deliver its original functionality during the licence period without the
updates. C can also benefit from the updates together with the licence transferred when the
contract is signed.
However, V Ltd. concludes that the licence and the updates are not separately identifiable
because the software and the service are inputs into a combined item in the contract − i.e. the
nature of V Ltd.’s promise is to provide continuous anti-virus protection for the term of the
contract. Therefore, V Ltd. accounts for the licence and the updates as a single performance
obligation.
*****
Illustration 19
Media Company P Ltd. offers magazine subscriptions to customers. When customers subscribe,
they receive a printed copy of the magazine each month and access to the magazine’s online
content.
Determine how many performance obligations does the entity have?
Solution
P evaluates whether the promises to provide printed copies and online access are separate
performance obligations. P determines that the arrangement includes two performance
obligations for the following reasons:
 The printed copies and online access are both capable of being distinct because the
customer could use them on their own.

© The Institute of Chartered Accountants of India

 5.34 a
2.34 FINANCIAL REPORTING
v
 The printed copies and online access are distinct within the context of the contract because
they are different formats,v so they do not significantly customise or modify each other, nor
is there any transformative relationship into a single output.
*****
Illustration 20-Implied promise to reseller’s customers
Software Company K Ltd. enters into a contract with reseller D, which then sells software
products to end users. K Ltd. has a customary business practice of providing free telephone
support to end users without involving the reseller, and both reseller and the customer expect
K Ltd. to continue to provide this support.
Determine how many performance obligations does the entity K Ltd. have?
Solution
In evaluating whether the telephone support is a separate performance obligation, K Ltd. notes
that the promise to provide telephone support free of charge to end users is considered a
service that meets the definition of a performance obligation when control of the software
product transfers to D. As a result, K Ltd. accounts for the telephone support as a separate
performance obligation in the transaction with D.
*****
Illustration 21-Implied performance obligation
Carmaker N Ltd. has a historical practice of offering free maintenance services – e.g. oil
changes and tyre rotation – for two years to the end customers of dealers who buy its vehicles.
However, the two years’ free maintenance is not explicitly stated in the contract with its dealers,
but it is typically stated in N’s advertisements for the vehicles.
Determine how many performance obligations does the entity have?
Solution
The maintenance is treated as a separate performance obligation in the sale of the vehicle to
the dealer. Revenue from the sale of the vehicle is recognized when control of the vehicle is
transferred to the dealer. Revenue from the maintenance services is recognized separately as
and when the maintenance services are provided to the retail customer.
*****
6.3 Customer options for additional goods or services
Retail and consumer products entities frequently give certain customers the option to purchase
additional goods or services. These options come in many forms, including sales incentives

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.35

(e.g., coupons with a limited distribution, competitor price matching programs aimed at only
some customers, gift cards issued by a retailer as a promotion) and customer award credits
(e.g., loyalty or reward programs).
The standard states that when an entity grants a customer the option to acquire additional goods
or services, that option is only a separate performance obligation if it provides a material right to
the customer. The right is material if it results in a discount that the customer would not receive
without entering into the contract (e.g., a discount that exceeds the range of discounts typically
given for those goods or services to that class of customer in that geographical area or market).
If the option provides a material right to the customer, the customer in effect pays the entity in
advance for future goods or services and the entity recognizes revenue when those future goods
or services are transferred or when the option expires.
If the discounted price in the option reflects the stand-alone selling price (separate from any
existing relationship or contract), the entity is deemed to have made a marketing offer rather
than having granted a material right.
In such cases, the entity has made a marketing offer that it shall account for in accordance with
this Standard only when the customer exercises the option to purchase the additional goods or
services.
This standard requires an entity to allocate the transaction price to performance obligations on a
relative stand-alone selling price basis. If the stand-alone selling price for a customer’s option
to acquire additional goods or services is not directly observable, an entity shall estimate it.
That estimate shall reflect the discount that the customer would obtain when exercising the
option, adjusted for both of the following:
(a) any discount that the customer could receive without exercising the option; and
(b) the likelihood that the option will be exercised.

© The Institute of Chartered Accountants of India

 5.36 a
2.36 FINANCIAL REPORTING
v

v
Does the option provide a material right to the customers that it would not receive without
entering into the contract?

Does the contract grant the customer the option to acquire additional goods or services?

No Yes

Option is not a separate Option is a separate performance

performance obligation obligation

Illustration 22
Entity sells gym memberships for 7,500 per year to 100 customers, with an option to renew at
a discount in 2 nd and 3 rd years at 6,000 per year. Entity estimates an annual attrition rate of
50% each year.
Determine the amount of revenue to be recognized in the first year and the amount of contract
liability against the option given to the customer for renewing the membership at discount.
Solution
Allocated price per unit (year) is calculated as follows:
Total estimated memberships is 175 members (Year 1 = 100; Year 2 = 50; Year 3 = 25) = 175
Total consideration is 12,00,000 {(100 x 7,500) + (50 x 6,000) + (25 x 6,000)}
Allocated price per membership is 6,857 approx. (12,00,000 / 175)
Based on above, it is to be noted that although entity has collected 7,500 but revenue can be
recognized at 6,857 approx. per membership and remaining 643 should be recorded as
contract liability against option given to customer for renewing their membership at discount.
*****
Illustration 23
An entity enters into a contract for the sale of Product A for 1,000. As part of the contract, the
entity gives the customer a 40% discount voucher for any future purchases up to 1,000 in the
next 30 days. The entity intends to offer a 10% discount on all sales during the next 30 days as

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.37

part of a seasonal promotion. The 10% discount cannot be used in addition to the 40% discount
voucher.
The entity believes there is 80% likelihood that a customer will redeem the voucher and, on an
average, a customer will purchase 500 of additional products.
Determine how many performance obligations does the entity have and their stand-alone selling
price and allocated transaction price?
Solution
Since all customers will receive a 10% discount on purchases during the next 30 days, the only
additional discount that provides the customer with a material right is the incremental discount of
30% on the products purchased. The entity accounts for the promise to provide the incremental
discount as a separate performance obligation in the contract for the sale of Product A.
The entity believes there is 80% likelihood that a customer will redeem the voucher and, on an
average, a customer will purchase 500 worth of additional products. Consequently, the
entity’s estimated stand-alone selling price of the discount voucher is 120 ( 500 average
purchase price of additional products x 30% incremental discount x 80% likelihood of exercising
the option). The stand-alone selling prices of Product A and the discount voucher and the
resulting allocation of the 1,000 transaction price are as follows:

Performance obligations Stand-alone selling price

Product A 1000
Discount voucher 120
Total 1120

Performance obligations Allocated transaction price

(to nearest 10)
Product A ( 1000 ÷ 1120 × 1000) 890
Discount voucher ( 120 ÷ 1120 × 1000) 110
Total 1000

The entity allocates 890 to Product A and recognizes revenue for Product A when control
transfers. The entity allocates 110 to the discount voucher and recognizes revenue for the
voucher when the customer redeems it for goods or services or when it expires.
*****

© The Institute of Chartered Accountants of India

 5.38 a
2.38 FINANCIAL REPORTING
v
6.4 Long term arrangements
v
Entities frequently enter into arrangements to provide services on a long-term basis, such as
maintenance services to be provided over a long period of time.
For example, should a three-year maintenance agreement be considered a single performance
obligation representing the entire contractual period, or should it be broken into smaller periods
(daily, monthly or yearly)? It may be appropriate to treat a three-year services contract as three
separate one-year performance obligations, if the contract can be renewed or cancelled by
either party at discrete points in time (that is, at the end of each service year).
The entity would separately account for its rights and obligations for each period in which the
contract cannot be cancelled by either party.
In long-term service agreements when the consideration is fixed, the accounting generally will
not change regardless of whether a single performance obligation or multiple performance
obligations are identified.
Illustration 24
A cable company provides television services for a fixed rate fee of 800 per month for a period
of 3 years. Cable services is satisfied overtime because customer consumes and receives
benefit from services as it is provided i.e. customer generally benefits each day that they have
access to cable service .
Determine how many performance obligations does the cable company have?
Solution
Cable company determines that each increment of its services e.g. day or month, is a distinct
performance obligation because customer benefits from that period of services on its own.
Additionally, each increment of service is separately identifiable from those preceding and
following it i.e. one service period does not significantly affect, modify or customise another.
Therefore, it can be concluded that its contract with customer is a single performance obligation
to provide three years of cable service because each of the distinct increments of service is
satisfied over time. Also, cable company uses the same measure of progress to recognize
revenue on its cable television service regardless of the contract’s time period.
*****
6.5 Consignment Arrangements
Entities frequently deliver inventory on a consignment basis to other parties (e.g. distributor,
dealer). By shipping on a consignment basis, consignors are able to achieve better sales by
moving them closer to the end-customer. However, they do so without selling the goods to the

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.39

intermediary (consignee). A consignment agreement is an agreement between a consignee and

consignor for the storage, transfer, sale or resale and use of the goods. The consignee may
take goods from the consignment stock for use or resale subject to payment to the consignor
agreeably to the terms bargained in the consignment agreement. Entities frequently deliver
inventory on a consignment basis to other parties (e.g., distributor, dealer).
The following indicators have been provided to evaluate whether the arrangement is a
consignment arrangement:
(a) the product is controlled by the entity until a specified event occurs, such as the sale of the
product to a customer of the dealer or until a specified period expires;
(b) the entity is able to require the return of the product or transfer the product to a third party
(such as another dealer); and
(c) the dealer does not have an unconditional obligation to pay for the product (although it
might be required to pay a deposit).
Entities entering into a consignment arrangement must determine the nature of the performance
obligation (i.e., whether the obligation is to transfer the inventory to the consignee or to transfer
the inventory to the end customer). This determination is based on whether control of the
inventory has passed to the consignee upon delivery. In case of consignment arrangement, a
consignor will not relinquish control of consignment inventory until the inventory is sold to the
consumer or on the expiry of an agreed period. Consignees does not have an obligation to pay,
until the goods are sold to the ultimate or end consumer. As a result, revenue generally would
not be recognized for consignment arrangements when the goods are delivered to the consignee
because control has been not yet transferred. Revenue is recognized when the entity has
transferred control of the goods to the consignor or the end consumer. A consignment sale
differs from a sale with a right of return. The customer has control of the goods in a sale with
right of return and can decide whether to put the goods back to the seller. In case of
consignment sales, the consignee does not have the control over the goods.
Illustration 25
Manufacturer M enters into a 60-day consignment contract to ship 1,000 dresses to Retailer A’s
stores. Retailer A is obligated to pay Manufacturer M 20 per dress when the dress is sold to
an end customer.
During the consignment period, Manufacturer M has the contractual right to require Retailer A to
either return the dresses or transfer them to another retailer. Manufacturer M is also required to
accept the return of the inventory. State when the control is transferred.

© The Institute of Chartered Accountants of India

 5.40 a
2.40 FINANCIAL REPORTING
v
Solution
v
Manufacturer M determines that control has not been transferred to Retailer A on delivery, for
the following reasons:
(a) Retailer A does not have an unconditional obligation to pay for the dresses until they have
been sold to an end customer;
(b) Manufacturer M is able to require that the dresses be transferred to another retailer at any
time before Retailer A sells them to an end customer; and
(c) Manufacturer M is able to require the return of the dresses or transfer them to another
retailer.
Manufacturer M determines that control of the dresses transfers when they are sold to an end
customer i.e. when Retailer A has an unconditional obligation to pay Manufacturer M and can no
longer return or otherwise transfer the dresses.
Manufacturer M recognizes revenue as the dresses are sold to the end customer.
*****
6.6 Principal vs agent consideration
Some contracts result in an entity’s customer receiving goods or services from another entity
that is not a direct party to the contract with the customer. The standard states that when other
parties are involved in providing goods or services to an entity’s customer, the entity must
determine whether its performance obligation is to provide the goods or service itself (i.e., the
entity is a principal) or to arrange for another party to provide the goods or service (i.e., the
entity is an agent). The determination of whether the entity is acting as a principal, or an agent
affects the amount of revenue the entity recognizes. That is,
 when the entity is the principal in the arrangement, the revenue recognized is the gross
amount to which the entity expects to be entitled.
 when the entity is acting as an agent, the revenue recognized is the net amount i.e. the
amount, entity is entitled to retain in return for its services under the contract. The entity’s
fee or commission may be the net amount of consideration that the entity retains after
paying the other party the consideration received in exchange for the goods or services to
be provided by that party.
A principal’s performance obligations in an arrangement differ from an agent’s performance
obligations. For example, if an entity obtains control of the goods or services of another party
before it transfers those goods or services to the customer, the entity’s performance obligation
may be to provide the goods or services itself. Hence, the entity likely is acting as a principal

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.41

and would recognize revenue in the gross amount to which it is entitled. An entity that obtains
legal title of a product only momentarily before legal title is transferred to the customer is not
necessarily acting as a principal. In contrast, an agent facilitates the sale of goods or services
to the customer in exchange for a fee or commission and generally does not control the goods
or services for any length of time. Therefore, the agent’s performance obligation is to arrange
for another party to provide the goods or services to the customer. Since the identification of
the principal in a contract is not always clear, Ind AS 115 provides indicators that a performance
obligation involves an agency relationship.
Indicators that an entity is a principal (and therefore controls the goods or service before it is
provided to a customer) include the following:
(a) the entity is primarily responsible for fulfilling the contract. This typically includes
responsibility for the acceptability of the specified goods or service;
(b) the entity has inventory risk before the specified good or service has been transferred to a
customer or after transfer of control to the customer (for example, if the customer has a
right of return).
(c) the entity has discretion in establishing prices for the goods or services.
After an entity identifies its promise and determines whether it is the principal or the agent, the
entity recognizes revenue when it satisfies that performance obligation. In some contracts in
which the entity is the agent, control of the goods or services promised by the agent might
transfer before the customer receives the goods or services from the principal.
For example, an entity might satisfy its promise to provide customers with loyalty points when
those points are transferred to the customer if:
(a) The entity’s promise is to provide loyalty points to customers when the customer purchases
goods or services from the entity
(b) The points entitle the customers to future discounted purchases with another party (i.e., the
points represent a material right to a future discount)
(c) The entity determines that it is an agent (i.e., its promise is to arrange for the customers to
be provided with points) and the entity does not control those points before they are
transferred to the customer.
In contrast, if the points entitle the customers to future goods or services to be provided by the
entity, the entity may conclude it is not an agent. This is because the entity’s promise is to
provide those future goods or services.

© The Institute of Chartered Accountants of India

 5.42 a
2.42 FINANCIAL REPORTING
v
Therefore, the entity controls both the points and the future goods or services before they are
transferred to the customer. Inv these cases, the entity’s performance obligation may only be
satisfied when the future goods or services are provided.
In other cases, the points may entitle customers to choose between future goods or services
provided by either the entity or another party. In this situation, the nature of the entity’s
performance obligation may not be known until the customer makes its choice. That is, until the
customer has chosen the goods or services to be provided (and, therefore, whether the entity or
the third party will provide those goods or services), the entity is obliged to stand ready to
deliver goods or services. Therefore, the entity may not satisfy its performance obligation until it
either delivers the goods or services or is no longer obliged to stand ready. If the customer
subsequently chooses the goods or services from another party, the entity would need to
consider whether it was acting as an agent. If so, it would recognize revenue, but only for the
fee or commission that the entity receives in return for providing the services to the customer
and the third party.
Following illustrations explain the application of the principal versus agent application guidance:
Illustration 26
An entity negotiates with major airlines to purchase tickets at reduced rates compared with the
price of tickets sold directly by the airlines to the public. The entity agrees to buy a specific
number of tickets and will pay for those tickets even if it is not able to resell them. The reduced
rate paid by the entity for each ticket purchased is negotiated and agreed in advance. The
entity determines the prices at which the airline tickets will be sold to its customers. The entity
sells the tickets and collects the consideration from customers when the tickets are sold;
therefore, there is no credit risk.
The entity also assists the customers in resolving complaints with the service provided by
airlines. However, each airline is responsible for fulfilling obligations associated with the ticket,
including remedies to a customer for dissatisfaction with the service.
Determine whether the entity is a principal or an agent.
Solution
To determine whether the entity’s performance obligation is to provide the specified goods or
services itself (i.e. the entity is a principal) or to arrange for another party to provide those
goods or services (i.e. the entity is an agent), the entity considers the nature of its promise. The
entity determines that its promise is to provide the customer with a ticket, which provides the
right to fly on the specified flight or another flight if the specified flight is changed or cancelled.
The entity considers the following indicators for assessment as principal or agent under the
contract with the customers:

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.43

(a) the entity is primarily responsible for fulfilling the contract, which provides the right to fly.
However, the entity is not responsible for providing the flight itself, which will be provided
by the airline.
(b) the entity has inventory risk for the tickets because they are purchased before, they are
sold to the entity’s customers and the entity is exposed to any loss as a result of not being
able to sell the tickets for more than the entity’s cost.
(c) the entity has discretion in setting the sales prices for tickets to its customers.
The entity concludes that its promise is to provide a ticket (i.e. a right to fly) to the customer. On
the basis of the indicators, the entity concludes that it controls the ticket before it is transferred
to the customer. Thus, the entity concludes that it is a principal in the transaction and
recognizes revenue in the gross amount of consideration to which it is entitled in exchange for
the tickets transferred.
*****
Illustration 27
Company D Ltd. provides advertising services to customers. D Ltd. enters into a sub-contract
with a multinational online video sharing company, F Ltd. Under the sub-contract, F Ltd. places
all of D Ltd.’s customers’ adverts.
D Ltd. notes the following:
– D Ltd. works directly with customers to understand their advertising needs before placing
adverts.
– D Ltd. is responsible for ensuring that the advert meets the customer’s needs after the
advert is placed.
– D Ltd. directs F Ltd. over which advert to place and when to place it.
– D Ltd. does not bear inventory risk because there is no minimum purchase requirement
with F Ltd.
– D Ltd. does not have discretion in setting the price because fees are charged based on
F Ltd.’s scheduled rates.
D is Principal or an agent?
Solution
D Ltd. is primarily responsible for fulfilling the promise to provide advertising services. Although
F Ltd. delivers the placement service, D Ltd. works directly with customers to ensure that the
services are performed to their requirements. Even though D Ltd. does not bear inventory risk

© The Institute of Chartered Accountants of India

 5.44 a
2.44 FINANCIAL REPORTING
v
and does not have discretion in setting the price, it controls the advertising services before they
are provided to the customer. vTherefore, D Ltd. is the principal in this case.
*****
6.7 Non-refundable upfront fees
In some contracts, an entity charges the customer a non-refundable upfront fee. Examples
include joining fees in health club membership, activation fees for telecom services, setup fees
in certain service contracts and initial fees or joining fees in some supply contracts with the
distributors or customers.
To identify performance obligations in such contracts, an entity shall assess whether the fee
relates to an activity that the entity is required to undertake at the inception of the contract, or
that activity does not result in the transfer of a promised goods or service to the customer.
In many cases, even though a non-refundable upfront fee relates to an activity that the entity is
required to undertake at or near contract inception to fulfil the contract, that activity does not
result in the transfer of a promised goods or service to the customer. Instead, the upfront fee is
an advance payment for future goods and services and, therefore, would be recognized as
revenue when those future goods and services are provided.
If the non-refundable upfront fee relates to a goods or service, the entity shall evaluate whether
to account for the goods or services as a separate performance obligation. An entity may
charge a non-refundable fee as a part of compensation of costs incurred in setting up a contract
(or other administrative tasks). If those setup activities do not satisfy performance obligation,
the entity shall disregard those activities (and related costs) when measuring progress. That is
because the costs of setup activities do not depict transfer of services to customer.

Does the fee relate to specific goods or services

transferred to customer?

Yes No
Account for as an advanced
Account for as a promised good payment for future goods or
or service services

Recognize allocated Recognize as revenue when

consideration as revenue on control of future goods or
transfer of promised good or services is transferred, which
service may include future contract
periods

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.45

Illustration 28
A customer buy a new data connection from the telecom entity. It pays one-time registration
and activation fees at the time of purchase of new connection. The customer will be charged
based on the usage of the data services of the connection on monthly basis.
Are the performance obligations under the contract distinct?
Solution
By selling a new connection, the entity promises to supply data services to customer. Customer
will not be able to benefit from just buying a data card and data services from third party. The
activity of registering and activating connection is not a service to customer and therefore does
not represent satisfaction of performance obligation.
Entity’s obligation is to provide data service and hence activation is not a separate performance
obligation.
*****

7. STEP 3: DETERMINING THE TRANSACTION PRICE

Measurement
“When (or as) a performance obligation is satisfied, an entity shall recognize as revenue the
amount of the transaction price (which excludes estimates of variable consideration that are
constrained in accordance with paragraphs 56 – 58) that is allocated to that performance
obligation.”

After identifying the contract in Step 1 and the performance obligations in Step 2, an entity next
applies Step 3 to determine the transaction price of the contract. The objective of Step 3 is to
predict the total amount of consideration to which the entity will be entitled from the contract.

What is the transaction price?

“The transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties (for example, some sales taxes).”

The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. Further, an entity shall consider the terms of the contract and its customary
business practices to determine the transaction price.

© The Institute of Chartered Accountants of India

 5.46 a
2.46 FINANCIAL REPORTING
v
For the purpose of determining the transaction price, an entity shall assume that the goods or
v customer as promised in accordance with the existing contract
services will be transferred to the
and that the contract will not be cancelled, renewed or modified.
The nature, timing and amount of consideration promised by a customer affect the estimate of
the transaction price. When determining the transaction price, an entity shall consider the
effects of all of the following:

Variable consideration (and the constraint) Significant financing component

An entity estimates the amount of For contracts with a significant financing

variable consideration to which it expects component, an entity adjusts the promised
to be entitled, considering the risk of amount of consideration to reflect the time
reversal of revenue in making the value of money
estimate

Price
Non-cash consideration Consideration payable to a
customer
Non-cash consideration is measured at fair
value, if that can be reasonably estimated. An entity needs to determine whether
If not, then an entity uses the stand-alone consideration payable to a customer
selling price of the goods or service that represents a reduction of the transaction
was promised in exchange for non-cash price, a payment for a distinct good or
consideration service, or a combination of the two.

Comparison with AS 7 and AS 9

Neither AS 7 nor AS 9 has any specific mention about significant financing component in a
transaction price.

7.1 Variable consideration

What is variable consideration?
“If the consideration promised in a contract includes a variable amount, an entity shall estimate
the amount of consideration to which the entity will be entitled in exchange for transferring the
promised goods or services to a customer.”

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.47

Examples of variable consideration

“An amount of consideration can vary because of discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, or other similar items. The promised
consideration can also vary if an entity’s entitlement to the consideration is contingent on the
occurrence or non-occurrence of a future event. For example, an amount of consideration would
be variable if either a product was sold with a right of return, or a fixed amount is promised as a
performance bonus on achievement of a specified milestone.”

Variable consideration may be fixed in amount, but the entity’s right to receive that consideration
is contingent on a future outcome. For example, the amount of a performance bonus might be
fixed, but because the entity is not entitled to that bonus until a performance target is met, the
outcome is uncertain and therefore the amount is considered variable. Items such as discounts,
rebates, refunds, rights of return, early settlement discounts, credits, price concessions,
incentives, performance bonuses, penalties or similar items may result in variable consideration.
The variability relating to the consideration promised by a customer may be explicitly stated in
the contract. In addition to the terms of the contract, the promised consideration is variable if
either of the following circumstances exists:
(a) the customer has a valid expectation arising from an entity’s customary business
practices, published policies or specific statements that the entity will accept an amount of
consideration that is less than the price stated in the contract. That is, it is expected that
the entity will offer a price concession. Depending on the jurisdiction, industry or customer
this offer may be referred to as a discount, rebate, refund or credit.
(b) other facts and circumstances indicate that the entity’s intention, when entering into the
contract with the customer, is to offer a price concession to the customer.

© The Institute of Chartered Accountants of India

 5.48 a
2.48 FINANCIAL REPORTING
v
Is the amount of consideration variable or fixed?
v

Variable Fixed

Estimate the amount using the expected value or the most likely amount

Apply the constraint – i.e. determine the portion of the amount, if any, for which
it is highly probable that a significant revenue reversal will not subsequently
occur

Include the amount in the transaction price

7.1.1 Penalties
Penalties shall be accounted for as per the substance of the contract. Where the penalty is
inherent in determination of transaction price, it shall form part of variable consideration.

Example 3
Where an entity agrees to transfer control of a goods or service in a contract with customer at
the end of 30 days for 100,000 and if it exceeds 30 days, the entity is entitled to receive only
95,000, the reduction of 5,000 shall be regarded as variable consideration. In other cases,
the transaction price shall be considered as fixed at 95,000.

7.1.2 Estimating the amount of variable consideration

As per Ind AS 115.53, an entity shall estimate an amount of variable consideration by using
either of the following methods, depending on which method the entity expects to better predict
the amount of consideration to which it will be entitled:
(a) The expected value - the expected value is the sum of probability-weighted amounts in a
range of possible consideration amounts. An expected value may be an appropriate
estimate of the amount of variable consideration if an entity has a large number of
contracts with similar characteristics.
(b) The most likely amount - the most likely amount is the single most likely amount in a
range of possible consideration amounts (ie the single most likely outcome of the contract).

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.49

The most likely amount may be an appropriate estimate of the amount of variable
consideration if the contract has only two possible outcomes (for example, an entity either
achieves a performance bonus or does not).
An entity is required to choose between the expected value method and the most likely
amount method. The choice is based on the method which better predicts the amount of
consideration to be entitled. That is, the method selected is not meant to be a ‘free
choice’. Rather, an entity selects the method that is best suited, based on the specific
facts and circumstances of the contract.
An entity shall apply one method consistently throughout the contract when estimating the
effect of an uncertainty on an amount of variable consideration to which the entity will be
entitled. An entity shall consider all the information that is reasonably available to the
entity and shall identify a reasonable number of possible consideration amounts.
A contract may contain different types of variable consideration. It may be appropriate for
an entity to use different methods (i.e. expected value or most likely amount) for estimating
different types of variable consideration within a single contract.
Illustration 29 : Estimating variable consideration
XYZ Limited enters into a contract with a customer to build sophisticated machinery. The
promise to transfer the asset is a performance obligation that is satisfied over time. The
promised consideration is 2.5 crore, but that amount will be reduced or increased depending
on the timing of completion of the asset. Specifically, for each day after 31 st March, 20X1 that
the asset is incomplete, the promised consideration is reduced by 1 lakh. For each day before
31 st March, 20X1 that the asset is complete, the promised consideration increases by 1 lakh.
In addition, upon completion of the asset, a third party will inspect the asset and assign a rating
based on metrics that are defined in the contract. If the asset receives a specified rating, the
entity will be entitled to an incentive bonus of 15 lakh.
Determine the transaction price.
Solution
In determining the transaction price, the entity prepares a separate estimate for each element of
variable consideration to which the entity will be entitled using the estimation methods described
in paragraph 53 of Ind AS 115:
a) the entity decides to use the expected value method to estimate the variable consideration
associated with the daily penalty or incentive (i.e. 2.5 crore, plus or minus 1 lakh per
day). This is because it is the method that the entity expects to better predict the amount
of consideration to which it will be entitled.

© The Institute of Chartered Accountants of India

 5.50 a
2.50 FINANCIAL REPORTING
v
b) the entity decides to use the most likely amount to estimate the variable consideration
v bonus. This is because there are only two possible outcomes
associated with the incentive
( 15 lakh or Nil) and it is the method that the entity expects to better predict the amount of
consideration to which it will be entitled.
*****
The entity considers the requirements in paragraphs 56–58 of Ind AS 115 (discussed below) on
constraining estimates of variable consideration to determine whether the XYZ Limited should
include some or all of its estimate of variable consideration in the transaction price.
Illustration 30 : Estimating variable consideration
AST Limited enters into a contract with a customer to build a manufacturing facility. The entity
determines that the contract contains one performance obligation satisfied over time.
Construction is scheduled to be completed by the end of the 36 th month for an agreed-upon
price of 25 crore.
The entity has the opportunity to earn a performance bonus for early completion as follows:
 15 percent bonus of the contract price if completed by the 30th month (25% likelihood)
 10 percent bonus if completed by the 32nd month (40% likelihood)
 5 percent bonus if completed by the 34th month (15% likelihood)
In addition to the potential performance bonus for early completion, AST Limited is entitled to a
quality bonus of 2 crore if a health and safety inspector assigns the facility a gold star rating
as defined by the agency in the terms of the contract. AST Limited concludes that it is 60%
likely that it will receive the quality bonus.
Determine the transaction price.
Solution
In determining the transaction price, AST Limited separately estimates variable consideration for
each element of variability i.e. the early completion bonus and the quality bonus.
AST Limited decides to use the expected value method to estimate the variable consideration
associated with the early completion bonus because there is a range of possible outcomes, and
the entity has experience with a large number of similar contracts that provide a reasonable
basis to predict future outcomes. Therefore, the entity expects this method to best predict the
amount of variable consideration associated with the early completion bonus. AST’s best
estimate of the early completion bonus is 2.13 crore, calculated as shown in the following
table:

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.51

Bonus % Amount of bonus ( in crore) Probability Probability-weighted

amount ( in crore)
15% 3.75 25% 0.9375
10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% -
2.125

AST Limited decides to use the most likely amount to estimate the variable consideration
associated with the potential quality bonus because there are only two possible outcomes
( 2 crore or Nil) and this method would best predict the amount of consideration associated
with the quality bonus. AST Limited believes the most likely amount of the quality bonus is
2 crore.
*****
As per para 54 of Ind AS 115, an entity shall apply one method consistently throughout the
contract when estimating the effect of an uncertainty on an amount of variable consideration to
which the entity will be entitled. In addition, an entity shall consider all the information
(historical, current and forecast) that is reasonably available to the entity and shall identify a
reasonable number of possible consideration amounts. The information that an entity uses to
estimate the amount of variable consideration would typically be similar to the information that
the entity’s management uses during the bid-and-proposal process and in establishing prices for
promised goods or services.
7.1.3 Refund liabilities
An entity shall recognize a refund liability if the entity receives consideration from a customer
and expects to refund some or all of that consideration to the customer. A refund liability is
measured at the amount of consideration received (or receivable) for which the entity does not
expect to be entitled (i.e. amounts not included in the transaction price). The refund liability
(and corresponding change in the transaction price and, therefore, the contract liability) shall be
updated at the end of each reporting period for changes in circumstances.
While the most common form of refund liabilities may be related to sales with a right of return,
the refund liability requirements also apply when an entity expects that it will need to refund
consideration received due to poor customer satisfaction with a service provided (i.e. there was
no goods delivered or returned) and/or if an entity expects to have to provide retrospective price
reductions to a customer (e.g. if a customer reaches a certain threshold of purchases, the unit
price will be retrospectively adjusted).

© The Institute of Chartered Accountants of India

 5.52 a
2.52 FINANCIAL REPORTING
v
7.1.4 Constraining estimates of variable consideration
v
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 recognized will not occur when the
uncertainty associated with the variable consideration is subsequently resolved.
In assessing whether it is highly probable that a significant reversal in the amount of cumulative
revenue recognized will not occur once the uncertainty related to the variable consideration is
subsequently resolved, an entity shall consider both the likelihood and the magnitude of the
revenue reversal. Factors that could increase the likelihood or the magnitude of a revenue
reversal include, but are not limited to, any of the following:
(a) the amount of consideration is highly susceptible to factors outside the entity’s influence.
Those factors may include volatility in a market, the judgement or actions of third parties,
weather conditions and a high risk of obsolescence of the promised goods 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.
7.1.5 Reassessment of variable consideration
At the end of each reporting period, an entity shall update the estimated transaction price
(including updating its assessment of whether an estimate of variable consideration is
constrained) to represent faithfully the circumstances present at the end of the reporting period
and the changes in circumstances during the reporting period. The entity shall account for
changes in the transaction price in accordance with paragraphs 87 – 90 of Ind AS 115.

Comparison with AS 7 and AS 9

AS 7 and AS 9 both are silent on a situation where revenue should be reversed as specified in
Ind AS 115.

Illustration 31 : Volume discount incentive

HT Limited enters into a contract with a customer on 1 st April, 20X1 to sell Product X for 1,000
per unit. If the customer purchases more than 100 units of Product A in a financial year, the

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.53

contract specifies that the price per unit is retrospectively reduced to 900 per unit.
Consequently, the consideration in the contract is variable.
For the first quarter ended 30 th June, 20X1, the entity sells 10 units of Product A to the
customer. The entity estimates that the customer's purchases will not exceed the 100 unit
threshold required for the volume discount in the financial year. HT Limited determines that it
has significant experience with this product and with the purchasing pattern of the customer.
Thus, HT Limited concludes that it is highly probable that a significant reversal in the cumulative
amount of revenue recognized (i.e. 1,000 per unit) will not occur when the uncertainty is
resolved (i.e. when the total amount of purchases is known).
Further, in May, 20X1, the customer acquires another company and in the second quarter ended
30 th September, 20X1 the entity sells an additional 50 units of Product A to the customer. In the
light of the new fact, the entity estimates that the customer's purchases will exceed the 100-unit
threshold for the financial year and therefore it will be required to retrospectively reduce the
price per unit to 900.
Determine the amount of revenue to be recognize by HT Ltd. for the quarter ended
30 th June, 20X1 and 30 th September, 20X1.
Solution
The entity recognizes revenue of 10,000 (10 units × 1,000 per unit) for the quarter ended
30 th June, 20X1.
HT Limited recognizes revenue of 44,000 for the quarter ended 30 th September, 20X1. That
amount is calculated from 45,000 for the sale of 50 units (50 units x 900 per unit) less the
change in transaction price of 1,000 (10 units x 100 price reduction) for the reduction of
revenue relating to units sold for the quarter ended 30 th June, 20X1.
*****

Illustration 32 : Measurement of variable consideration

An entity has a fixed fee contract for 1 million to develop a product that meets specified
performance criteria. Estimated cost to complete the contract is 9,50,000. The entity will
transfer control of the product over five years, and the entity uses the cost-to-cost input method
to measure progress on the contract. An incentive award is available if the product meets the
following weight criteria:

Weight (kg) Award % of fixed fee Incentive fee

951 or greater 0% —

© The Institute of Chartered Accountants of India

 5.54 a
2.54 FINANCIAL REPORTING
v
701–950 10% 100,000
v
700 or less 25% 250,000

The entity has extensive experience creating products that meet the specific performance
criteria. Based on its experience, the entity has identified five engineering alternatives that will
achieve the 10 percent incentive and two that will achieve the 25 percent incentive. In this case,
the entity determined that it has 95 percent confidence that it will achieve the 10 percent
incentive and 20 percent confidence that it will achieve the 25 percent incentive.
Based on this analysis, the entity believes 10 percent to be the most likely amount when
estimating the transaction price. Therefore, the entity includes only the 10 percent award in the
transaction price when calculating revenue because the entity has concluded it is probable that
a significant reversal in the amount of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is subsequently resolved due to its
95 percent confidence in achieving the 10 percent award.
The entity reassesses its production status quarterly to determine whether it is on the track to
meet the criteria for the incentive award. At the end of the year four, it becomes apparent that
this contract will fully achieve the weight-based criterion. Therefore, the entity revises its
estimate of variable consideration to include the entire 25 percent incentive fee in the year four
because, at this point, it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when including the entire variable consideration in the
transaction price.
Evaluate the impact of changes in variable consideration when cost incurred is as follows:

Year
1 50,000
2 1,75,000
3 4,00,000
4 2,75,000
5 50,000

Solution
Note: For simplification purposes, the table calculates revenue for the year independently based
on costs incurred during the year divided by total expected costs, with the assumption that total
expected costs do not change.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.55

Fixed A 1,000,000
consideration
Estimated costs B 950,000
to complete*
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated C 100,000 100,000 100,000 250,000 250,000
variable amount
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable revenue E=C x H/B 5,263 18,421 42,105 72,368 13,158
Cumulative F (see below) — — — 99,370 —
revenue
adjustment
Total revenue G=D+E+F 57,895 202,632 463,158 461,212 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 186,212 15,790
Margin (rounded J=I/G 14% 14% 14% 40% 24%
off)

* For simplicity, it is assumed there is no change to the estimated costs to complete

throughout the contract period.
* In practice, under the cost-to-cost measure of progress, total revenue for each period is
determined by multiplying the total transaction price (fixed and variable) by the ratio of
cumulative cost incurred to total estimated costs to complete, less revenue recognized to date.

Calculation of cumulative catch-up adjustment:

Updated variable consideration L 250,000
Percent complete in Year 4: (rounded off) M=N/O 95%
Cumulative costs through Year 4 N 900,000
Estimated costs to complete O 950,000
Cumulative variable revenue through Year 4: P 138,157
Cumulative catch-up adjustment F=L x M–P 99,343

*****

© The Institute of Chartered Accountants of India

 5.56 a
2.56 FINANCIAL REPORTING
v
Illustration 33 : Management fees subject to the constraint
v
On 1 st April, 20X1, an entity enters into a contract with a client to provide asset management
services for five years. The entity receives a two per cent quarterly management fee based on
the client's assets under management at the end of each quarter. At 31 st March, 20X2, the
client's assets under management are 100 crore. In addition, the entity receives a
performance-based incentive fee of 20 per cent of the fund's return in excess of the return of an
observable market index over the five-year period. Consequently, both the management fee
and the performance fee in the contract are variable considerations.
Analyse the revenue to be recognized on 31 st March, 20X2.
Solution
The entity accounts for the services as a single performance obligation because it is providing a
series of distinct services that are substantially the same and have the same pattern of transfer
(the services transfer to the customer over time and use the same method to measure progress
— that is, a time-based measure of progress).
The entity observes that the promised consideration is dependent on the market and thus is
highly susceptible to factors outside the entity's influence. In addition, the incentive fee has a
large number and a broad range of possible consideration amounts. The entity also observes
that although it has experience with similar contracts, that experience is of little predictive value
in determining the future performance of the market. Therefore, at contract inception, the entity
cannot conclude that it is highly probable that a significant reversal in the cumulative amount of
revenue recognized would not occur if the entity included its estimate of the management fee or
the incentive fee in the transaction price.
At each reporting date, the entity updates its estimate of the transaction price. Consequently, at
the end of each quarter, the entity concludes that it can include in the transaction price the
actual amount of the quarterly management fee because the uncertainty is resolved. However,
the entity concludes that it cannot include its estimate of the incentive fee in the transaction
price at those dates. This is because there has not been a change in its assessment from
contract inception — the variability of the fee based on the market index indicates that the entity
cannot conclude that it is highly probable that a significant reversal in the cumulative amount of
revenue recognized would not occur if the entity included its estimate of the incentive fee in the
transaction price.
At 31 st March, 20X2, the client's assets under management are 100 crore. Therefore, the
resulting quarterly management fee and the transaction price is 2 crore.
At the end of each quarter, the entity allocates the quarterly management fee to the distinct
services provided during the quarter. This is because the fee relates specifically to the entity's

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.57

efforts to transfer the services for that quarter, which are distinct from the services provided in
other quarters.
Consequently, the entity recognizes 2 crore as revenue for the quarter ended
31 st March, 20X2.
*****
7.1.6 Sale with a right of return
In some contracts, an entity transfers control of a product to a customer (refer Step 5) and also
grants the customer the right to return the product for various reasons (such as dissatisfaction
with the product) and receive any combination of the following:
(a) a full or partial refund of any consideration paid;
(b) a credit that can be applied against amounts owed, or that will be owed, to the entity; and
(c) another product in exchange.
In some contracts, an entity transfers control of a product to a customer with an unconditional
right of return. In such cases, the recognition of revenue shall be as per the substance of the
arrangement. Where the substance is that of a consignment sale, the entity shall account for
such a contract as per the provisions of Ind AS 115’s application guidance related to
consignment sales (refer paragraph B77 and B78 of Application Guidance to Ind AS 115). In
other cases, the accounting for contracts with customers shall be as per provisions laid out
below.
To account for the transfer of products with a right of return (and for some services that are
provided subject to a refund), an entity shall recognize all of the following:
(a) revenue for the transferred products in the amount of consideration to which the entity
expects to be entitled (therefore, revenue would not be recognized for the products
expected to be returned);
(b) a refund liability; and
(c) an asset (and corresponding adjustment to cost of sales) for its right to recover products
from customers on settling the refund liability.
An entity’s promise to stand ready to accept a returned product during the return period shall not
be accounted for as a performance obligation in addition to the obligation to provide a refund.
An entity shall apply the requirements in paragraphs 47 – 72 (including the requirements for
constraining estimates of variable consideration in paragraphs 56 – 58) to determine the amount
of consideration to which the entity expects to be entitled (i.e. excluding the products expected

© The Institute of Chartered Accountants of India

 5.58 a
2.58 FINANCIAL REPORTING
v
to be returned). For any amounts received (or receivable) for which an entity does not expect to
be entitled, the entity shall notv recognize revenue when it transfers products to customers but
shall recognize those amounts received (or receivable) as a refund liability. Subsequently, at
the end of each reporting period, the entity shall update its assessment of amounts for which it
expects to be entitled in exchange for the transferred products and make a corresponding
change to the transaction price and, therefore, in the amount of revenue recognized.
An entity shall update the measurement of the refund liability at the end of each reporting period
for changes in expectations about the amount of refunds. An entity shall recognize
corresponding adjustments as revenue (or reductions of revenue).
An asset recognized for an entity’s right to recover products from a customer on settling a
refund liability shall initially be measured by reference to the former carrying amount of the
product (for example, inventory) less any expected costs to recover those products (including
potential decreases in the value to the entity of returned products). At the end of each reporting
period, an entity shall update the measurement of the asset arising from changes in
expectations about products to be returned. An entity shall present the asset separately from
the refund liability.
Exchanges by customers of one product for another of the same type, quality, condition and
price (for example, one colour or size for another) are not considered returns for the purposes of
applying this Standard.
Accounting for restocking fees for goods that are expected to be returned
Entities sometimes charge customers a ‘restocking fee’ when a product is returned. This fee
may be levied by entities to compensate them for the costs of repackaging, shipping and/or
reselling the item at a lower price to another customer.
Restocking fees for goods that are expected to be returned would be included in the estimate of
the transaction price at contract inception and recorded as revenue when (or as) control of the
goods transfers.

Example 4
An entity enters into a contract with a customer to sell 10 units of a product for 100 per unit.
The customer has the right to return the product, but if it does so, it will be charged a 3%
restocking fee (or 3 per returned unit). The entity estimates that 10% of the sold units will be
returned. Upon transfer of control of the 10 units, the entity will recognize revenue of 903
[(9 units not expected to be returned x 100 selling price) + (1 unit expected to be returned x
3 restocking fee per unit)]. A refund liability of 97 will also be recorded [1 unit expected to
be returned x ( 100 selling price – 3 restocking fee)].

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.59

Contracts in which a customer may return a defective product in exchange for a functioning
product shall be evaluated in accordance with the guidance on warranties given below.
Illustration 34 : Right of return
An entity enters into contracts with 1,000 customers. Each contract includes the sale of one
product for 50 (1,000 total products × 50 = 50,000 total consideration). Cash is received
when control of a product transfers. The entity's customary business practice is to allow a
customer to return any unused product within 30 days and receive a full refund. The entity's
cost of each product is 30.
The entity applies the requirements in Ind AS 115 to the portfolio of 1,000 contracts because it
reasonably expects that, in accordance with paragraph 4, the effects on the financial statements
from applying these requirements to the portfolio would not differ materially from applying the
requirements to the individual contracts within the portfolio. Since the contract allows a
customer to return the products, the consideration received from the customer is variable. To
estimate the variable consideration to which the entity will be entitled, the entity decides to use
the expected value method (see paragraph 53(a) of Ind AS 115) because it is the method that
the entity expects to better predict the amount of consideration to which it will be entitled. Using
the expected value method, the entity estimates that 970 products will not be returned.
The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.
Determine the amount of revenue, refund liability and the asset to be recognized by the entity
for the said contracts.
Solution
The entity considers the requirements in paragraphs 56 – 58 of Ind AS 115 on constraining
estimates of variable consideration to determine whether the estimated amount of variable
consideration of 48,500 ( 50 × 970 products not expected to be returned) can be included in
the transaction price. The entity considers the factors in paragraph 57 of Ind AS 115 and
determines that although the returns are outside the entity's influence, it has significant
experience in estimating returns for this product and customer class. In addition, the uncertainty
will be resolved within a short time frame (ie the 30-day return period). Thus, the entity
concludes that it is highly probable that a significant reversal in the cumulative amount of
revenue recognized (i.e. 48,500) will not occur as the uncertainty is resolved (i.e. over the
return period).
The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.

© The Institute of Chartered Accountants of India

 5.60 a
2.60 FINANCIAL REPORTING
v
Upon transfer of control of the 1,000 products, the entity does not recognize revenue for the 30
products that it expects to be vreturned. Consequently, in accordance with paragraphs 55 and
B21 of Ind AS 115, the entity recognizes the following:
(a) revenue of 48,500 ( 50 × 970 products not expected to be returned)
(b) a refund liability of 1,500 ( 50 refund × 30 products expected to be returned), and
(c) an asset of 900 ( 30 × 30 products for its right to recover products from customers on
settling the refund liability).
*****
7.1.7 Warranties
It is common for an entity to provide (in accordance with the contract, the law or the entity’s
customary business practices) a warranty in connection with the sale of a product (whether a
goods or service). The nature of a warranty can vary significantly across industries and
contracts. Some warranties provide a customer with assurance that the related product will
function as the parties intended because it complies with agreed-upon specifications. Other
warranties provide the customer with a service in addition to the assurance that the product
complies with agreed-upon specifications.
The flowchart below summarises the accounting treatment for the two broad types of warranties:
Warranties

Customer has option to Customer does not have option

purchase separately to purchase separately

Distinct service, as the entity promises to provide Warranty provides an assurance that the
service in addition to the product’s described product complies with agreed-upon
functionality specifications

Account for the promised warranty as a Account for the warranty in accordance
performance obligation and allocate a portion of the with Ind AS 37
transaction price to that performance obligation

In assessing whether a warranty provides a customer with a service in addition to the assurance
that the product complies with agreed-upon specifications, an entity shall consider factors such
as:

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.61

(a) Whether the warranty is required by law — if the entity is required by law to provide a
warranty, the existence of that law indicates that the promised warranty is not a
performance obligation because such requirements typically exist to protect customers
from the risk of purchasing defective products.
(b) The length of the warranty coverage period — the longer the coverage period, the more
likely it is that the promised warranty is a performance obligation because it is more likely
to provide a service in addition to the assurance that the product complies with agreed-
upon specifications.
(c) The nature of the tasks that the entity promises to perform — if it is necessary for an entity
to perform specified tasks to provide the assurance that a product complies with agreed-
upon specifications (for example, a return shipping service for a defective product), then
those tasks likely do not give rise to a performance obligation.
If an entity promises both an assurance-type warranty and a service-type warranty but cannot
reasonably account for them separately, the entity shall account for both of the warranties
together as a single performance obligation.
A law that requires an entity to pay compensation if its products cause harm or damage does not
give rise to a performance obligation. For example, a manufacturer might sell products in a
jurisdiction in which the law holds the manufacturer liable for any damages (for example, to
personal property) that might be caused by a consumer using a product for its intended purpose.
Similarly, an entity’s promise to indemnify the customer for liabilities and damages arising from
claims of patent, copyright, trademark or other infringement by the entity’s products does not
give rise to a performance obligation. The entity shall account for such obligations in
accordance with Ind AS 37.
Comparison with AS 7 and AS 9
Ind AS 115 deals with warrantees in two specific ways as discussed above. However, as per
AS 9 only a general provision for warrantees is sufficient without revenue reversal or recognition
of a contractual liability.

Illustration 35 : Warranty
An entity manufactures and sells computers that include an assurance-type warranty for the first
90 days. The entity offers an optional ‘extended coverage’ plan under which it will repair or
replace any defective part for three years from the expiration of the assurance-type warranty.
Since the optional ‘extended coverage’ plan is sold separately, the entity determines that the
three years of extended coverage represent a separate performance obligation (i.e. a service-
type warranty). The total transaction price for the sale of a computer and the extended warranty
is 36,000. The entity determines that the stand-alone selling prices of the computer and the

© The Institute of Chartered Accountants of India

 5.62 a
2.62 FINANCIAL REPORTING
v
extended warranty are 32,000 and 4,000, respectively. The inventory value of the computer
is 14,400. Furthermore, the ventity estimates that, based on its experience, it will incur 2,000
in costs to repair defects that arise within the 90-day coverage period for the assurance-type
warranty.
Pass required journal entries.
Solution
The entity will record the following journal entries:

Cash / Trade receivables Dr. 36,000

Warranty expense Dr. 2,000
To Accrued warranty costs (assurance-type warranty) 2,000
To Contract liability (service-type warranty) 4,000
To Revenue 32,000
(To record revenue and contract liabilities related to warranties)
Cost of goods sold Dr. 14,400
To Inventory 14,400
(To derecognize inventory and recognize cost of goods sold)

The entity derecognizes the accrued warranty liability associated with the assurance-type
warranty as actual warranty costs are incurred during the first 90 days after the customer
receives the computer. The entity recognizes the contract liability associated with the service-
type warranty as revenue during the contract warranty period and recognizes the costs
associated with providing the service-type warranty as they are incurred. The entity had to
determine whether the repair costs incurred are applied against the warranty reserve already
established for claims that occur during the first 90 days or recognized as an expense as
incurred.
*****
In the above illustration, the net effect of the accounting treatment can be seen as follows:

Accounting point Treatment under Ind AS 115 Treatment as per AS 9

How warranty is Expense and liability effect Provision is made on past

accounted created at the inception of experience based on a certain
contract with customer percentage of total revenue to give
effect to subsequent warranty costs,
say 5% of revenue.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.63

Accounting treatment Total cash inflow 36,000 Total cash inflow 36,000
Warranty expense 2000 Provision for warranty (at 5% of
transaction price) 1800
Accrued warranty cost 2,000
Contract liability – None
Contract liability (for future
service cost) 4000 Actual revenue 34,200
Actual revenue 32,000

Illustration 36 : Warranty
Entity sells 100 ultra-life batteries for 2,000 each and provides the customer with a five-year
guarantee that the batteries will withstand the elements and continue to perform to
specifications. The entity, which normally provides a one-year guarantee to customer
purchasing ultra-life batteries, determines that from the years 2 to 5 represent a separate
performance obligation. The entity determines that 1,70,000 of the 2,00,000 transaction
price should be allocated to the batteries and 30,000 to the service warranty (based on
estimated stand-alone selling prices and a relative selling price allocation). The entity’s normal
one-year warranty cost is 100 per battery.
Pass required journal entries.
Solution
The entity will record the following journal entries:
Upon delivery of the batteries, the entity records the following entry:

Cash/Receivables Dr. 2,00,000

To Revenue 1,70,000
To Contract liability (service warranty) 30,000
Warranty expense Dr. 10,000
To Accrued warranty costs (assurance warranty) 10,000

The contract liability is recognized as revenue over the service warranty period (years 2 - 5).
The costs of providing the service warranty are recognized as incurred. The assurance warranty
obligation is used / derecognized as defective units are replaced / repaired during the initial year
of the warranty. Upon expiration of the assurance warranty period, any remaining assurance
warranty obligation is reversed.

© The Institute of Chartered Accountants of India

 5.64 a
2.64 FINANCIAL REPORTING
v
7.1.8 Sales-based or usage-based royalties
v
As per Ind AS 115.B63, notwithstanding the requirements of Ind AS 115 related to constraining
estimate of variable consideration (discussed above), an entity shall recognize revenue for a
sales-based or usage-based royalty promised in exchange for a licence of intellectual property
only when (or as) the later of the following events occurs:
(a) the subsequent sale or usage occurs; and
(b) the performance obligation to which some or all of the sales-based or usage-based royalty
has been allocated has been satisfied (or partially satisfied).
As per Ind AS 115.B63A, the accounting requirements for a sales-based or usage-based royalty
discussed above apply when the royalty relates only to a licence of intellectual property or when
a licence of intellectual property is the predominant item to which the royalty relates (for
example, the licence of intellectual property may be the predominant item to which the royalty
relates when the entity has a reasonable expectation that the customer would ascribe
significantly more value to the licence than to the other goods or services to which the royalty
relates).
As per Ind AS 115.B63B, when the requirement in paragraph B63A is met, revenue from a
sales-based or usage-based royalty shall be recognized wholly in accordance with paragraph
B63. When the requirement in paragraph B63A is not met, the requirements on variable
consideration discussed earlier apply to the sales-based or usage-based royalty.
7.2 Significant financing component
In determining the transaction price, an entity shall adjust the promised amount of consideration
for the effects of the time value of money if the timing of payments agreed to by the parties to
the contract (either explicitly or implicitly) provides the customer or the entity with a significant
benefit of financing the transfer of goods or services to the customer. Either party may benefit
from financing — that is, the customer may pay before the entity performs its obligation (a
customer loan to the entity) or the customer may pay after the entity performs its obligation (a
loan by the entity to the customer). In those circumstances, the contract contains a significant
financing component.
A significant financing component may exist regardless of whether the promise of financing is
explicitly stated in the contract or implied by the payment terms agreed to by the parties to the
contract.
The objective when adjusting the promised amount of consideration for a significant financing
component is for an entity to recognize revenue at an amount that reflects the price that a

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.65

customer would have paid for the promised goods or services if the customer had paid cash for
those goods or services when (or as) they transfer to the customer (ie the cash selling price).
An entity shall consider all relevant facts and circumstances in assessing whether a contract
contains a financing component and whether that financing component is significant to the
contract, including both of the following:
(a) the difference, if any, between the amount of promised consideration and the cash selling
price of the promised goods or services; and
(b) the combined effect of both of the following:
(i) the expected length of time between when the entity transfers the promised goods or
services to the customer and when the customer pays for those goods or services;
and
(ii) the prevailing interest rates in the relevant market.
To meet the objective stated above, when adjusting the promised amount of consideration for a
significant financing component, an entity shall use the discount rate that would be reflected in a
separate financing transaction between the entity and its customer at contract inception. That
rate would reflect the credit characteristics of the party receiving financing in the contract, as
well as any collateral or security provided by the customer or the entity, including assets
transferred in the contract.
An entity may be able to determine that rate by identifying the rate that discounts the nominal
amount of the promised consideration to the price that the customer would pay in cash for the
goods or services when (or as) they transfer to the customer. After contract inception, an entity
shall not update the discount rate for changes in interest rates or other circumstances (such as
a change in the assessment of the customer’s credit risk).
An entity considers the significance of a financing component only at a contract level and not
whether the financing is material at a portfolio level. In other words, if the combined effects for a
portfolio of similar contracts were material to the entity as a whole, but if the effects of the
financing component were not material to the individual contract, such financing component
shall not be considered significant and shall not be separately accounted for.
As mentioned above, when a significant financing component exists in a contract, the
transaction price is adjusted so that the amount recognized as revenue is the ‘cash selling price’
of the underlying goods or services at the time of transfer. Essentially, a contract with a
customer that has a significant financing component would be separated into a revenue
component (for the notional cash sales price) and a loan component (for the effect of the
deferred or advance payment terms). Consequently, the accounting for accounts receivable

© The Institute of Chartered Accountants of India

 5.66 a
2.66 FINANCIAL REPORTING
v
arising from a contract that has a significant financing component should be comparable to the
v
accounting for a loan with the same features.
The amount allocated to the significant financing component would have to be presented
separately from revenue recognized from contracts with customers. The financing component is
recognized as interest expense (when the customer pays in advance) or interest income (when
the customer pays in arrears). The interest income or expense is recognized over the financing
period using the effective interest method described in Ind AS 109. The standard notes that
interest is only recognized to the extent that a contract asset, contract liability or receivable is
recognized in accordance with Ind AS 115. An entity may present interest income as revenue
only when interest income represents income from an entity’s ordinary activities.
Illustration 37 : Financing component: significant or insignificant?
A commercial airplane component supplier enters into a contract with a customer for a promised
consideration of 70,00,000. Based on an evaluation of the facts and circumstances, the
supplier concluded that 1,40,000 represented an insignificant financing component because of
an advance payment received in excess of a year before the transfer of control of the product.
State whether company needs to make any adjustment in determining the transaction price.
What if the advance payment was larger and received further in advance, such that the entity
concluded that 14,00,000 represented the financing component based on an analysis of the
facts and circumstances.
Solution
The entity may conclude that 1,40,000, or 2 percent of the contract price, is not significant,
and the entity may not need to adjust the consideration promised in determining the transaction
price.
However, when the advance payment was larger and received further in advance, such that the
entity may conclude that 14,00,000 represents the financing component based on an analysis
of the facts and circumstances. In such a case, the entity may conclude that 14,00,000, or 20
percent of the contract price, is significant, and the entity should adjust the consideration
promised in determining the transaction price.
Note: In this illustration, the entity’s conclusion that 2 percent of the transaction price was not
significant and 20 percent was significant is a judgment based on the entity’s facts and
circumstances. An entity may reach a different conclusion based on its facts and circumstances.
*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.67

Illustration 38 : Accounting for significant financing component

NKT Limited sells a product to a customer for 1,21,000 that is payable 24 months after
delivery. The customer obtains control of the product at contract inception. The contract permits
the customer to return the product within 90 days. The product is new, and the entity has no
relevant historical evidence of product returns or other available market evidence.
The cash selling price of the product is 1,00,000 which represents the amount that the
customer would pay upon delivery for the same product sold under otherwise identical terms and
conditions as at contract inception. The entity's cost of the product is 80,000. The contract
includes an implicit interest rate of 10 per cent (i.e. the interest rate that over 24 months
discounts the promised consideration of 1,21,000 to the cash selling price of 1,00,000).
Analyse the above transaction with respect to its financing component.
Solution
The contract includes a significant financing component. This is evident from the difference
between the amount of promised consideration of 1,21,000 and the cash selling price of
1,00,000 at the date that the goods are transferred to the customer.
The contract includes an implicit interest rate of 10 per cent (i.e. the interest rate that over
24 months discounts the promised consideration of 1,21,000 to the cash selling price of
1,00,000). The entity evaluates the rate and concludes that it is commensurate with the rate
that would be reflected in a separate financing transaction between the entity and its customer
at contract inception.
Until the entity receives the cash payment from the customer, interest revenue would be
recognized in accordance with Ind AS 109. In determining the effective interest rate in
accordance with Ind AS 109, the entity would consider the remaining contractual term.
*****

Comparison with AS 7 and AS 9

Point of accounting Treatment under Ind AS 115 Treatment under AS 9

Cash selling price 1,00,000 Transaction price will be Transaction price of 1,21,000
Promised selling price of bifurcated as 1,00,000 and shall be treated as revenue once
1,21,000 21,000 the risk and rewards are
1,00,000 will be recognised transferred to the customer.
as revenue and 21,000 shall Here, there is no requirement to
be treated as interest income dissect the transaction price to
being a price difference due to look for multiple element
financing arrangement involved arrangement like financing
in the transaction component.

© The Institute of Chartered Accountants of India

 5.68 a
2.68 FINANCIAL REPORTING
v
Revenue recognized 1,00,000 1,21,000
v
Other income (interest) 21,000 over 2 years as per No interest income is
Ind AS 109 recognized.
*****
Illustration 39 : Determining the discount rate
VT Limited enters into a contract with a customer to sell equipment. Control of the equipment
transfers to the customer when the contract is signed. The price stated in the contract is
1 crore plus a 10% contractual rate of interest, payable in 60 monthly instalments of
2,12,470.
Determine the discounting rate and the transaction price when -
Case A — Contractual discount rate reflects the rate in a separate financing transaction.
Case B — Contractual discount rate does not reflect the rate in a separate financing transaction
ie 14%.
Solution
Case A — Contractual discount rate reflects the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component,
VT Limited observes that the 10% contractual rate of interest reflects the rate that would be
used in a separate financing transaction between the entity and its customer at contract
inception (i.e. the contractual rate of interest of 10% reflects the credit characteristics of the
customer).
The market terms of the financing mean that the cash selling price of the equipment is 1 crore.
This amount is recognized as revenue and as a loan receivable when control of the equipment
transfers to the customer. The entity accounts for the receivable in accordance with Ind AS 109.
Case B — Contractual discount rate does not reflect the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component,
the entity observes that the 10% contractual rate of interest is significantly lower than the 14%
interest rate that would be used in a separate financing transaction between the entity and its
customer at contract inception (i.e. the contractual rate of interest of 10% does not reflect the
credit characteristics of the customer). This suggests that the cash selling price is less than
1 crore.
VT Limited determines the transaction price by adjusting the promised amount of consideration
to reflect the contractual payments using the 14% interest rate that reflects the credit
characteristics of the customer. Consequently, the entity determines that the transaction price is

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.69

9,131,346 (60 monthly payments of 212,470 discounted at 14%). The entity recognizes
revenue and a loan receivable for that amount. The entity accounts for the loan receivable in
accordance with Ind AS 109.
*****
Illustration 40 : Advance payment and assessment of discount rate
ST Limited enters into a contract with a customer to sell an asset. Control of the asset will
transfer to the customer in two years (i.e. the performance obligation will be satisfied at a point
in time). The contract includes two alternative payment options:
1) Payment of 5,000 in two years when the customer obtains control of the asset or
2) Payment of 4,000 when the contract is signed. The customer elects to pay 4,000 when
the contract is signed.
ST Limited concludes that the contract contains a significant financing component because of
the length of time between when the customer pays for the asset and when the entity transfers
the asset to the customer, as well as the prevailing interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary
to make the two alternative payment options economically equivalent. However, the entity
determines that, the rate that should be used in adjusting the promised consideration is 6%,
which is the entity's incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant financing
component.
Solution
Journal Entries showing accounting for the significant financing component:
(a) Recognize a contract liability for the 4,000 payment received at contract inception:
Cash Dr. 4,000
To Contract liability 4,000

(b) During the two years from contract inception until the transfer of the asset, the entity
adjusts the promised amount of consideration and accretes the contract liability by
recognizing interest on 4,000 at 6% for two years:
Interest expense Dr. 494*
To Contract liability 494
* 494 = 4,000 contract liability × (6% interest per year
for two years).

© The Institute of Chartered Accountants of India

 5.70 a
2.70 FINANCIAL REPORTING
v
(c) Recognize revenue for the transfer of the asset:
v
Contract liability Dr. 4,494
To Revenue 4,494

*****
Ind AS 115.62 contains an overriding provision, which specifies that, a contract with a customer
would not have a significant financing component if any of the following factors exist:
(a) the customer paid for the goods or services in advance and the timing of the transfer of
those goods or services is at the discretion of the customer. For example, consider a
prepaid card for mobile phone services, wherein the customer has the discretion to avail
mobile services within a certain band of time.
(b) a substantial amount of the consideration promised by the customer is variable and
the amount or timing of that consideration varies on the basis of the occurrence or non-
occurrence of a future event that is not substantially within the control of the customer
or the entity (for example, if the consideration is a sales-based royalty).
(c) the difference between the promised consideration and the cash selling price of the goods
or service arises for reasons other than the provision of finance to either the customer
or the entity, and the difference between those amounts is proportional to the reason for
the difference. For example, the payment terms might provide the entity or the customer
with protection from the other party failing to adequately complete some or all of its
obligations under the contract.
Illustration 41 : Withheld payments on a long-term contract
ABC Limited enters into a contract for the construction of a power plant that includes scheduled
milestone payments for the performance by ABC Limited throughout the contract term of three
years. The performance obligation will be satisfied over time and the milestone payments are
scheduled to coincide with the expected performance by ABC Limited. The contract provides
that a specified percentage of each milestone payment is to be withheld as retention money by
the customer throughout the arrangement and paid to the entity only when the building is
complete.
Analyse whether the contract contains any financing component.
Solution
ABC Limited concludes that the contract does not include a significant financing component
since the milestone payments coincide with its performance and the contract requires amounts
to be retained for reasons other than the provision of finance. The withholding of a specified

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.71

percentage of each milestone payment is intended to protect the customer from the contractor
failing to adequately complete its obligations under the contract.
*****
Illustration 42 : Advance payment
XYZ Limited, a personal computer (PC) manufacturer, enters into a contract with a customer to
provide global PC support and repair coverage for three years along with its PC. The customer
purchases this support service at the time of buying the product. Consideration for the service
is an additional 3,000. Customers electing to buy this service must pay for it upfront (i.e. a
monthly payment option is not available).
Analyse whether there is any significant financing component in the contract or not.
Solution
To determine whether there is a significant financing component in the contract, the entity
considers the nature of the service being offered and the purpose of the payment terms. The
entity charges a single upfront amount, not with the primary purpose of obtaining financing from
the customer but, instead, to maximise profitability, taking into consideration the risks
associated with providing the service. Specifically, if customers could pay monthly, they would
be less likely to renew and the population of customers that continue to use the support service
in the later years may become smaller and less diverse over time (i.e. customers that choose to
renew historically are those that make greater use of the service, thereby increasing the entity's
costs). In addition, customers tend to use services more if they pay monthly rather than making
an upfront payment. Finally, the entity would incur higher administration costs such as the costs
related to administering renewals and collection of monthly payments.
In assessing whether or not the contract contains a significant financing component, XYZ
Limited determines that the payment terms were structured primarily for reasons other than the
provision of finance to the entity. XYZ Limited charges a single upfront amount for the services
because other payment terms (such as a monthly payment plan) would affect the nature of the
risks it assumes to provide the service and may make it uneconomical to provide the service.
As a result of its analysis, XYZ Limited concludes that there is not a significant financing
component.
*****
Illustration 43 : Advance payment
A computer hardware vendor enters into a three-year arrangement with a customer to provide
support services. For customers with low credit ratings, the vendor requires the customer to pay

© The Institute of Chartered Accountants of India

 5.72 a
2.72 FINANCIAL REPORTING
v
for the entire arrangement in advance of the provision of service. Other customers pay
overtime. v

Analyse whether there is any significant financing component in the contract or not.
Solution
Due to this customer’s credit rating, the customer pays in advance for the three-year term.
Because there is no difference between the amount of promised consideration and the cash
selling price (that is, the customer does not receive a discount for paying in advance), the
vendor requires payment in advance only to protect against customer non-payment, and no
other factors exist to suggest the arrangement contains a financing, the vendor concludes this
contract does not provide the customer or the entity with a significant benefit of financing.
*****
Illustration 44 : Sales based royalty
A software vendor enters into a contract with a customer to provide a license solely in exchange
for a sales-based royalty.
Analyse whether there is any significant financing component in the contract or not.
Solution
Although the payment will be made in arrears, because the total consideration varies based on
the occurrence or non-occurrence of a future event that is not within the control of the customer
or the entity, the software vendor concludes the contract does not provide the customer or the
entity with a significant benefit of financing.
*****
Illustration 45 : Payment in arrears
An EPC contractor enters into a two-year contract to develop customized machine for a
customer. The contractor concludes that the goods and services in this contract constitute a
single performance obligation.
Based on the terms of the contract, the contractor determines that it transfers control over time,
and recognizes revenue based on an input method best reflecting the transfer of control to the
customer. The customer agrees to provide the contractor monthly progress payments, with the
final 25 percent payment (holdback payment) due upon contract completion. As a result of the
holdback payment, there is a gap between when control transfers and when consideration is
received, creating a financing component.
Analyse whether there is any significant financing component in the contract or not.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.73

Solution
There is no difference between the amount of promised consideration and the cash selling price
(that is, the customer did not pay a premium for paying a portion of the consideration in arrears).
The payment terms included a holdback payment only to ensure successful completion of the
project, and no other factors exist to suggest the arrangement contains a financing. Hence, the
contractor concludes this contract does not provide the customer or the contractor with a
significant benefit of financing.
*****
Illustration 46 : Payment in arrears
Company Z is a developer and manufacturer of defence systems that is primarily a Tier-II
supplier of parts and integrated systems to original equipment manufacturers (OEMs) in the
commercial markets. Company Z enters into a contract with Company X for the development
and delivery of 5,000 highly technical, specialized missiles for use in one of Company X’s
platforms.
As a part of the contract, Company X has agreed to pay Company Z for their cost plus an award
fee up to 100 crore. The consideration will be paid by the customer related to costs incurred
near the time Company Z incurs such costs. However, the 100 crore award fee is awarded
upon successful completion of the development and test fire of a missile to occur in 16 months
from the time the contract is executed.
The contract specifies Company Z will earn up to 100 crore based on Company X’s
assessment of Company Z’s ability to develop and manufacture a missile that achieves multiple
factors, including final weight, velocity, and accuracy.
Partial award fees may be awarded based on a pre-determined scale based on their success.
Assume Company Z has assessed the contract under Ind AS 115 and determined the award fee
represents variable consideration. Based on their assessment, Company Z has estimated a
total of 80 crore in the transaction price related to the variable consideration pursuant to
guidance within Ind AS 115. Further, the entity has concluded it should recognize revenue over
time for a single performance obligation using a cost-to-cost input method.
Analyse whether there is any significant financing component in the contract or not.
Solution
Company Z will transfer control over time beginning shortly after the contract is executed but will
not receive the cash consideration related to the award fee component from Company X for
more than one year in the future. Hence, Company Z should assess whether the award fee
represents a significant financing component.

© The Institute of Chartered Accountants of India

 5.74 a
2.74 FINANCIAL REPORTING
v
The intention of the parties in negotiating the award fee due upon completion of the test fire, and
based on the results of that testv fire, was to provide incentive to Company Z to produce high
functioning missiles that achieved successful scoring from Company X. Therefore, it was
determined the contract does not contain a significant financing component, and Company Z
should not adjust the transaction price.
*****
As per Ind AS 115.63, as a practical expedient, an entity need not adjust the promised amount
of consideration for the effects of a significant financing component if the entity expects, at
contract inception, that the period between:
(a) when the entity transfers a promised goods or service to a customer and
(b) when the customer pays for that goods or service
will be one year or less.
Illustration 47 : Applying practical expedient
Company H enters into a two-year contract to develop customized software for Company C.
Company H concludes that the goods and services in this contract constitute a single
performance obligation.
Based on the terms of the contract, Company H determines that it transfers control over time,
and recognizes revenue based on an input method best reflecting the transfer of control to
Company C.
Company C agrees to provide Company H monthly progress payments. Based on the
expectation of the timing of costs to be incurred, Company H concludes that progress payments
are being made such that the timing between the transfer of control and payment is never
expected to exceed one year.
Analyse whether there is any significant financing component in the contract or not.
Solution
Company H concludes it will not need to further assess whether a significant financing
component is present and does not adjust the promised consideration in determining the
transaction price, as they are applying the practical expedient under Ind AS 115.
As per Ind AS 115.65, an entity shall present the effects of financing (interest revenue or
interest expense) separately from revenue from contracts with customers in the statement of
profit and loss. Interest revenue or interest expense is recognized only to the extent that a
contract asset (or receivable) or a contract liability is recognized in accounting for a contract
with a customer.
*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.75

7.3 Non-cash consideration

Sometimes a customer promises to pay for a goods or service in a form other than cash, such
as shares of common stock or other equity instruments, advertising, or equipment.
To determine the transaction price for contracts in which a customer promises consideration in a
form other than cash, an entity shall:
 In the first instance, measure the non-cash consideration (or promise of non-cash
consideration) at fair value.
 And, if it cannot reasonably estimate the fair value of the non-cash consideration, it shall
measure the consideration indirectly by reference to the stand-alone selling price of the
goods or services promised to the customer (or a class of customers) in exchange for the
consideration.
The fair value of non-cash consideration may change both because of the form of consideration
(e.g. a change in the price of a share an entity is entitled to receive from a customer) and for
reasons other than the form of consideration (e.g. a change in the exercise price of a share
option because of the entity’s performance).
7.3.1 Subsequent measurement of non-cash consideration
 If the fair value of the non-cash consideration varies after contract inception because of its
form (for example, a change in the price of a share to which an entity is entitled to receive
from a customer), the entity does not adjust the transaction price for any changes in the fair
value of the consideration.
Illustration 48 : Entitlement to non-cash consideration
An entity enters into a contract with a customer to provide a weekly service for one year.
The contract is signed on 1 st April, 20X1 and work begins immediately. The entity
concludes that the service is a single performance obligation. This is because the entity is
providing a series of distinct services that are substantially the same and have the same
pattern of transfer (the services transfer to the customer over time and use the same
method to measure progress — that is, a time-based measure of progress).
In exchange for the service, the customer promises its 100 equity shares per week of
service (a total of 5,200 shares for the contract). The terms in the contract require that the
shares must be paid upon the successful completion of each week of service.
How should the entity decide the transaction price?

© The Institute of Chartered Accountants of India

 5.76 a
2.76 FINANCIAL REPORTING
v
Solution
v
The entity measures its progress towards complete satisfaction of the performance
obligation as each week of service is complete. To determine the transaction price (and
the amount of revenue to be recognized), the entity has to measure the fair value of 100
shares that are received upon completion of each weekly service. The entity shall not
reflect any subsequent changes in the fair value of the shares received (or receivable) in
revenue.
*****
 If the fair value of the non-cash consideration promised by a customer varies for reasons
other than only the form of the consideration (for example, the fair value could vary
because of the entity’s performance), the entity is required to apply the guidance on
variable consideration and the constraint when determining the transaction price.
Illustration 49 : Fair value of non-cash consideration varies for reasons other than
the form of the consideration
RT Limited enters into a contract to build an office building for AT Limited over an 18-month
period. AT Limited agrees to pay the construction entity 350 crore for the project.
RT Limited will receive a bonus of 10 lakh equity shares of AT Limited if it completes
construction of the office building within one year. Assume a fair value of 100 per share
at contract inception.
Determine the transaction price.
Solution
The ultimate value of any shares the entity might receive could change for two reasons:
1) the entity earns or does not earn the shares and
2) the fair value per share may change during the contract term.
When determining the transaction price, the entity would reflect changes in the number of
shares to be earned. However, the entity would not reflect changes in the fair value per
share. Said another way, the share price of 100 is used to value the potential bonus
throughout the life of the contract.
As a result, if the entity earns the bonus, its revenue would be 350 crore plus
10 lakh equity shares at 100 per share for total consideration of 360 crore.
*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.77

Illustration 50 : Non-cash consideration - Free advertising

Production Company Y sells a television show to Television Company X. The
consideration under the arrangement is a fixed amount of 1,000 and 100 advertising
slots. Y determines that the stand-alone selling price of the show would be 1,500.
Based on market rates, Y determines that the fair value of the advertising slots is 600.
Determine the transaction price.
Solution
Y determines that the transaction price is 1,600, comprising of 1,000 fixed amount plus
the fair value of the advertising slots ie 600.
If the fair value of the advertising slots could not be reasonably estimated, then the
transaction price would be 1,500 i.e. Y would use the stand-alone selling price of the
goods or services promised for the non-cash consideration.
*****
7.3.2 Customer-provided goods or services
If a customer contributes goods or services (for example, materials, equipment or labour) to
facilitate an entity’s fulfilment of the contract, the entity shall assess whether it obtains control of
those contributed goods or services. If so, the entity shall account for the contributed goods or
services as non-cash consideration received from the customer.
Illustration 51 : Customer-provided goods or services
MS Limited is a manufacturer of cars. It has a supplier of steering systems – SK Limited.
MS Limited places an order of 10,000 steering systems on SK Limited. It also agrees to pay
25,000 per steering system and contributes tooling to be used in SK’s production process.
The tooling has a fair value of 2 crore at contract inception. SK Limited determines that each
steering system represents a single performance obligation and that control of the steering
system transfers to MS Limited upon delivery.
SK Limited may use the tooling for other projects and determines that it obtains control of the
tooling.
Determine the transaction price?
Solution
As a result, SK Limited includes the fair value of the tooling in the transaction price at contract
inception, which it determines to be 27 crore ( 25 crore for the steering systems and
2 crore for the tooling).
*****

© The Institute of Chartered Accountants of India

 5.78 a
2.78 FINANCIAL REPORTING
v
7.4 Consideration payable to a customer
v
The rationale behind the accounting provisions related to “consideration payable to a customer”
is that an entity should not overstate its revenue by amounts given to customers in a contract
that it will receive back through the purchase of its goods or services.
Consideration payable to a customer includes cash amounts that an entity pays, or expects to
pay, to the customer (or to other parties that purchase the entity’s goods or services from the
customer). Consideration payable to a customer also includes credit or other items (for
example, a coupon or voucher) that can be applied against amounts owed to the entity (or to
other parties that purchase the entity’s goods or services from the customer).
The key to appropriately accounting for consideration payable to a customer is
determining whether the payment is made in exchange for a distinct goods or service:
 When the entity receives a goods or service from the customer, it applies the guidance in
Step 2 in identifying its performance obligations to determine if that goods or service is
distinct.
When an entity concludes that the consideration paid to a customer is in exchange for a
distinct goods or service, it accounts for the distinct goods or service as it would any other
purchase from a supplier, as long as the consideration paid does not exceed the fair value
of the goods or services received. When the consideration exceeds the fair value of the
distinct goods or services received, any excess is accounted for as a reduction in the
transaction price. If the entity cannot reasonably estimate the fair value of the goods or
service received from the customer, it shall account for all of the consideration payable to
the customer as a reduction of the transaction price.
 If, on the other hand, the entity concludes that the consideration paid to the customer is not
in exchange for a distinct goods or service, the entity would reduce the transaction price by
the amount it pays or owes the customer.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.79

The below diagram summarises the guidance above:

No
Is the consideration payable to a Account for the consideration as a
customer a payment for a distinct reduction of the transaction price
goods or service from the customer?

Yes

Does the consideration exceed the fair Yes

Account for the excess portion as a
value of the distinct goods or services
reduction of the transaction price.
that the entity receives from the
However, remainder is accounted for as
customer?
a purchase from suppliers
No

Account for the purchase of the good or

service in the same way that the entity
accounts for other purchases from
suppliers

If the consideration payable to a customer includes a variable amount, an entity shall estimate
the transaction price (including assessing whether the estimate of variable consideration is
constrained) in accordance with accounting guidance on “variable consideration” discussed
earlier.
As per Ind AS 115.72, if consideration payable to a customer is accounted for as a reduction of
the transaction price, an entity shall recognize the reduction of revenue when (or as) the later of
either of the following events occurs:
(a) the entity recognizes revenue for the transfer of the related goods or services to the
customer; and
(b) the entity pays or promises to pay the consideration (even if the payment is conditional on
a future event). That promise might be implied by the entity’s customary business
practices.
Consideration paid or payable to a customer can take many different forms. Therefore, entities
will have to carefully evaluate each transaction to determine the appropriate treatment of such
amounts. Some common examples of consideration paid to a customer are given below:
1. Slotting fees – Manufacturers of consumer products commonly pay retailers fees to have
their goods displayed prominently on store shelves. Those shelves can be physical (i.e. in

© The Institute of Chartered Accountants of India

 5.80 a
2.80 FINANCIAL REPORTING
v
a building where the store is located) or virtual (i.e. they represent space in an internet
v Generally, such fees do not provide a distinct goods or service
reseller’s online catalogue).
to the manufacturer and are treated as a reduction of the transaction price.

Example 5
A producer entity sells energy drinks to a retailer, a convenience store. Producer also pays
Retailer a fee to ensure that its products receive prominent placement on store shelves, to
attract the customer’s eyeballs so that chances of sales of its products are higher. The fee
is negotiated as part of the contract for sale of the energy drinks. In this case, Producer
should reduce the transaction price for the sale of the energy drinks by the amount of
slotting fees paid to Retailer. Producer does not receive a goods or service that is distinct
in exchange for the payment to Retailer.

2. Co-operative advertising arrangements – In some arrangements, a vendor agrees to

reimburse a reseller for a portion of costs incurred by the reseller to advertise the vendor’s
products. The determination of whether the payment from the vendor is in exchange for a
distinct goods or service at fair value will depend on a careful analysis of the facts and
circumstances of the contract.

Example 6
Mobile-Co sells 1,000 phones to Retailer for 10,00,000. The contract includes an
advertising arrangement that requires Mobile-Co to pay 1,00,000 toward a specific
advertising promotion that Retailer will provide. The retailer will provide the advertising on
strategically located billboards and in local advertisements. Mobile-Co could have elected
to engage a third party to provide similar advertising services at a cost of 1,00,000. In
this case, Mobile-Co should account for the payment to Retailer consistent with other
purchases of advertising services. The payment from Mobile-Co to the Retailer is
consideration for a distinct service provided by Retailer and reflects fair value. The
advertising is distinct because Mobile-Co could have engaged a third party who is not its
customer to perform similar services. The transaction price is 10,00,000 and is not
affected by the payment made by Retailer for the sale of the phones. However, it is to be
noted here that, if price paid to retailer for this service is not the fair value of such
advertising services, then any excess paid to retailer over the fair value of said services
should be reduced from transaction price.

3. Price protection – A vendor may agree to reimburse a retailer up to a specified amount for
shortfalls in the sales price received by the retailer for the vendor’s products over a
specified period of time. Normally such fees do not provide a distinct goods or service to
the manufacturer and are treated as a reduction of the transaction price.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.81

Illustration 52 : Consideration payable to a customer

An entity that manufactures consumer goods enters into a one-year contract to sell goods to a
customer that is a large global chain of retail stores. The customer commits to buy at least
15 crore of products during the year. The contract also requires the entity to make a non-
refundable payment of 1.5 crore to the customer at the inception of the contract. The
1.5 crore payment will compensate the customer for the changes it needs to make to its
shelving to accommodate the entity's products. The entity does not obtain control of any rights
to the customer's shelves.
Determine the transaction price.
Solution
The entity considers the requirements in paragraphs 70 – 72 of Ind AS 115 and concludes that
the payment to the customer is not in exchange for a distinct goods or service that transfers to
the entity. This is because the entity does not obtain control of any rights to the customer's
shelves. Consequently, the entity determines that, in accordance with paragraph 70 of Ind AS
115, the 1.5 crore payment is a reduction of the transaction price.
The entity applies the requirements in paragraph 72 of Ind AS 115 and concludes that the
consideration payable is accounted for as a reduction in the transaction price when the entity
recognizes revenue for the transfer of the goods. Consequently, as the entity transfers goods to
the customer, the entity reduces the transaction price for each goods by 10 per cent
[( 1.5 crore ÷ 15 crore) x 100]. Therefore, in the first month in which the entity transfers
goods to the customer, the entity recognizes revenue of 1.125 crore ( 1.25 crore invoiced
amount less 0.125 crore of consideration payable to the customer).
*****
Illustration 53 : Credits to a new customer
Customer C is in the middle of a two-year contract with Telco B Ltd., its current wireless service
provider, and would be required to pay an early termination penalty if it terminated the contract
today. If C cancels the existing contract with B Ltd. and signs a two-year contract with
Telco D Ltd. for 800 per month, then D Ltd. promises at contract inception to give C a one-
time credit of 2,000 (referred to as a ‘port-in credit’). The amount of the port-in credit does not
depend on the volume of service subsequently purchased by C during the two-year contract.
Determine the transaction price.
Solution
D Ltd. determines that it should account for the port-in credit as consideration payable to a
customer. This is because the credit will be applied against amounts owing to D Ltd. Since, D

© The Institute of Chartered Accountants of India

 5.82 a
2.82 FINANCIAL REPORTING
v
Ltd. does not receive any distinct goods or services in exchange for this credit, it will account for
v
it as a reduction in the transaction price 17,200 [( 800 x 24 month) – 2,000]. D Ltd. will
recognize the reduction in the transaction price as the promised goods or services are
transferred.
*****

8. STEP 4: ALLOCATING THE TRANSACTION PRICE TO

PERFORMANCE OBLIGATIONS
Allocation objective- While allocating the transaction price, the objective of the entity should be
to allocate the transaction price to each performance obligation (or distinct goods or service) in
an amount that depicts the amount of consideration to which the entity expects to be entitled in
exchange for transferring the promised goods or services to the customer.
To meet the above allocation objective, an entity shall allocate the transaction price to each
performance obligation identified in the contract on a relative stand-alone selling price basis as
per the standard, except for allocating discounts and for allocating consideration that includes
variable amounts.
Simply put, there are two exceptions to the general allocation guidance:
 allocating discounts, and
 allocating variable consideration
Under these exceptions, an entity allocates a disproportionate amount of the transaction price to
specific performance obligations based on evidence that suggests the discount or variable
consideration relates to those specific performance obligations.
8.1 Determining stand-alone selling price
To allocate the transaction price on a relative stand-alone selling price basis, an entity must first
determine the stand-alone selling price of the distinct goods or service underlying each
performance obligation. The stand-alone selling price is the price at which an entity would sell a
promised goods or service separately to a customer.
The best evidence of a stand-alone selling price is - the observable price of a goods or
service when the entity sells that goods or service separately in similar circumstances
and to similar customers.
An entity shall determine the stand-alone selling price at contract inception of the distinct goods
or service underlying each performance obligation in the contract and allocate the transaction

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.83

price in proportion to those stand-alone selling prices, to allocate the transaction price to each
performance obligation on a relative stand-alone selling price basis. Stand-alone selling prices
are determined at contract inception and are not updated to reflect changes between contract
inception and when performance is complete. Furthermore, if the contract is modified and that
modification is treated as a termination of the existing contract and the creation of a new
contract (see 5.5.2 above), the entity would update its estimate of the stand-alone selling price
at the time of the modification. If the contract is modified and the modification is treated as a
separate contract (see 5.5.2.1 above), the accounting for the original contact would not be
affected (and the stand-alone selling prices of the underlying goods and services would not be
updated), but the stand-alone selling prices of the distinct goods or services of the new,
separate contract would have to be determined at the time of the modification.
A contractually stated price or a list price for a goods or service may be (but shall not be
presumed to be) the stand-alone selling price of that goods or service.
If a stand-alone selling price is not directly observable, for example, the entity does not sell the
goods or service separately, an entity shall estimate the stand-alone selling price at an amount
that would result in the allocation of the transaction price meeting the allocation objective in
paragraph 73 above. When estimating a stand-alone selling price, an entity shall consider all
information (including market conditions, entity-specific factors and information about the
customer or class of customer) that is reasonably available to the entity. In doing so, an entity
shall maximise the use of observable inputs and apply estimation methods consistently in similar
circumstances.
Evaluating the evidence related to estimating a stand-alone selling price may require significant
judgment.
An entity should establish policies and procedures for estimating stand-alone selling price and
apply those policies and procedures consistently to similar performance obligations. As a best
practice, an entity should document its evaluation of the market conditions and entity-specific
factors considered in estimating each stand-alone selling price, including factors that it
considers to be irrelevant and the reasons why.
Suitable methods for estimating the stand-alone selling price of a goods or service include, but
are not limited to, the following:
(a) Adjusted market assessment approach—an entity could evaluate the market in which it
sells goods or services and estimate the price that a customer in that market would be
willing to pay for those goods or services. That approach might also include referring to
prices from the entity’s competitors for similar goods or services and adjusting those prices
as necessary to reflect the entity’s costs and margins. Applying this approach will likely be
convenient when an entity has sold the goods or service for a period of time (such that it

© The Institute of Chartered Accountants of India

 5.84 a
2.84 FINANCIAL REPORTING
v
has data about customer demand), or a competitor offers similar goods or services that the
entity can use as a basis v for its analysis. However, applying this approach would be
difficult when an entity is selling entirely new goods or service because in that case it may
be difficult to anticipate market demand.
(b) Expected cost plus a margin approach—an entity could forecast its expected costs of
satisfying a performance obligation and then add an appropriate margin for that goods or
service. When determining which costs to include in the selling price analysis, an entity
should develop and consistently apply a methodology that considers direct and indirect
costs, as well as other relevant costs considered in its normal pricing practices, such as
research and development costs. Determining the margin to use when applying a cost-
plus-a-margin approach requires significant judgment, particularly when the entity is not
planning to separately sell a product or service. Furthermore, using an expected cost-plus-
margin approach may not be appropriate in many circumstances, such as when direct
fulfillment costs are not easily identifiable or when costs are not a significant input in
setting the price for the goods or services.
(c) Residual approach—an entity may estimate the stand-alone selling price by reference to
(1) the total transaction price, less (2) the sum of the observable stand-alone selling prices
of other goods or services promised in the contract.
However, an entity may use a residual approach to estimate the stand-alone selling price of
a goods or service only if one of the following criteria is met:
(i) the entity sells the same goods or service to different customers (at or near the same
time) for a broad range of amounts (ie the selling price is highly variable because a
representative stand-alone selling price is not discernible from past transactions or
other observable evidence); or
(ii) the entity has not yet established a price for that goods or service and the goods or
service has not previously been sold on a stand-alone basis (ie the selling price is
uncertain).
An entity shall allocate the discount before using the residual approach to estimate the stand-
alone selling price of a goods or service where the discount is allocated entirely to one or more
performance obligations in the contract.
A combination of methods may need to be used to estimate the stand-alone selling prices of the
goods or services promised in the contract if two or more of those goods or services have highly
variable or uncertain stand-alone selling prices. For example, an entity may use a residual
approach to estimate the aggregate stand-alone selling price for those promised goods or
services with highly variable or uncertain stand-alone selling prices and then use another

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.85

method to estimate the stand-alone selling prices of the individual goods or services relative to
that estimated aggregate stand-alone selling price determined by the residual approach. When
an entity uses a combination of methods to estimate the stand-alone selling price of each
promised goods or service in the contract, the entity shall evaluate whether allocating the
transaction price at those estimated stand-alone selling prices would be consistent with the
allocation objective in paragraph 73 and the requirements for estimating stand-alone selling
prices.
Below chart summarises the above concept:

8.1.1 Allocation of a discount

A customer receives a discount for purchasing a bundle of goods or services if the sum of the
stand-alone selling prices of those promised goods or services in the contract exceeds the
promised consideration in a contract.
Unless an entity has observable evidence (if (c) criteria below are fulfilled) that the entire
discount relates to only one or more, but not all, performance obligations in a contract, the entity
shall allocate a discount proportionately to all performance obligations in the contract. The
proportionate allocation of the discount in those circumstances is a consequence of the entity
allocating the transaction price to each performance obligation on the basis of the relative stand-
alone selling prices of the underlying distinct goods or services (as discussed earlier).

© The Institute of Chartered Accountants of India

 5.86 a
2.86 FINANCIAL REPORTING
v
When to allocate discount to ‘less than all’ performance obligations?
v
As per Ind AS 115.82, an entity shall allocate a discount entirely to one or more, but not all,
performance obligations in the contract if all of the following criteria are met:
(a) the entity regularly sells each distinct goods or service (or each bundle of distinct goods or
services) in the contract on a stand-alone basis;
(b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of those
distinct goods or services at a discount to the stand-alone selling prices of the goods or
services in each bundle; and

(c) the discount attributable to each bundle of goods or services described in (b) above is
substantially the same as the discount in the contract and an analysis of the goods or
services in each bundle provides observable evidence of the performance obligation (or
performance obligations) to which the entire discount in the contract belongs.

Note: As a first step, always allocate the discount entirely to one or more performance
obligations in the contract (if applicable), and then as a second step, use the residual
approach to estimate the stand-alone selling price of a goods or service.

Illustration 54 : Allocation methodology

An entity enters into a contract with a customer to sell Products A, B and C in exchange for
10,000. The entity will satisfy the performance obligations for each of the products at different
points in time. The entity regularly sells Product A separately and therefore the stand-alone
selling price is directly observable. The stand-alone selling prices of Products B and C are not
directly observable.
Because the stand-alone selling prices for Products B and C are not directly observable, the
entity must estimate them. To estimate the stand-alone selling prices, the entity uses the
adjusted market assessment approach for Product B and the expected cost plus a margin
approach for Product C. In making those estimates, the entity maximises the use of observable
inputs.
The entity estimates the stand-alone selling prices as follows:

Product Stand-alone selling price Method

Product A 5,000 Directly observable

Product B 2,500 Adjusted market assessment approach

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.87

Product C 7,500 Expected cost plus a margin approach

Total 15,000
Determine the transaction price allocated to each product.
Solution
The customer receives a discount for purchasing the bundle of goods because the sum of the
stand-alone selling prices ( 15,000) exceeds the promised consideration ( 10,000). The entity
considers that there is no observable evidence about the performance obligation to which the
entire discount belongs. The discount is allocated proportionately across Products A, B and C.
The discount, and therefore the transaction price, is allocated as follows:

Product Allocated transaction price (to nearest 100)

Product A 3,300 ( 5,000 ÷ 15,000 × 10,000)

Product B 1,700 ( 2,500 ÷ 15,000 × 10,000)
Product C 5,000 ( 7,500 ÷ 15,000 × 10,000)
Total 10,000

*****

Illustration 55 : Allocating a discount

An entity regularly sells Products X, Y and Z individually, thereby establishing the following
stand-alone selling prices:
Product Stand-alone selling price

Product X 50,000
Product Y 25,000
Product Z 45,000
Total 1,20,000

In addition, the entity regularly sells Products Y and Z together for 50,000.
Case A—Allocating a discount to one or more performance obligations
The entity enters into a contract with a customer to sell Products X, Y and Z in exchange for
100,000. The entity will satisfy the performance obligations for each of the products at
different points in time; or Product Y and Z at same point of time. Determine the allocation of

© The Institute of Chartered Accountants of India

 5.88 a
2.88 FINANCIAL REPORTING
v
transaction price to Product Y and Z.
v
Case B—Residual approach is appropriate
The entity enters into a contract with a customer to sell Products X, Y and Z as described in
Case A. The contract also includes a promise to transfer Product Alpha. Total
consideration in the contract is 130,000. The stand-alone selling price for Product Alpha is
highly variable because the entity sells Product Alpha to different customers for a broad
range of amounts ( 15,000 – 45,000). Determine the stand-alone selling price of
Products, X, Y, Z and Alpha using the residual approach.
Case C—Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is 1,05,000
instead of 130,000.

Solution
Case A—Allocating a discount to one or more performance obligations
The contract includes a discount of 20,000 on the overall transaction, which would be
allocated proportionately to all three performance obligations when allocating the transaction
price using the relative stand-alone selling price method.
However, because the entity regularly sells Products Y and Z together for 50,000 and Product
X for 50,000, it has evidence that the entire discount of 20,000 should be allocated to the
promises to transfer Products Y and Z in accordance with paragraph 82 of Ind AS 115.
If the entity transfers control of Products Y and Z at the same point in time, then the entity
could, as a practical matter, account for the transfer of those products as a single performance
obligation. That is, the entity could allocate 50,000 of the transaction price to the single
performance obligation of Product X and recognize revenue of 50,000 when Products Y and Z
simultaneously transfer to the customer.
If the contract requires the entity to transfer control of Products Y and Z at different
points in time, then the allocated amount of 50,000 is individually allocated to the promises to
transfer Product Y (stand-alone selling price of 25,000) and Product Z (stand-alone selling
price of 45,000) as follows:

Product Allocated transaction price

Product Y 17,857 ( 25,000 ÷ 70,000 total stand-alone selling price × 50,000)

Product Z 32,143 ( 45,000 ÷ 70,000 total stand-alone selling price × 50,000)
Total 50,000

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.89

Case B—Residual approach is appropriate

Before estimating the stand-alone selling price of Product Alpha using the residual approach,
the entity determines whether any discount should be allocated to the other performance
obligations in the contract.
As in Case A, because the entity regularly sells Products Y and Z together for 50,000 and
Product X for 50,000, it has observable evidence that 1,00,000 should be allocated to those
three products and a 20,000 discount should be allocated to the promises to transfer Products
Y and Z in accordance with paragraph 82 of Ind AS 115.
Using the residual approach, the entity estimates the stand-alone selling price of Product Alpha
to be 30,000 as follows:
Product Stand-alone selling price Method

Product X 50,000 Directly observable

Products Y and Z 50,000 Directly observable with discount
Product Alpha 30,000 Residual approach
Total 130,000

The entity observes that the resulting 30,000 allocated to Product Alpha is within the range of
its observable selling prices ( 15,000 – 45,000).
Case C—Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is 1,05,000 instead
of 1,30,000. Consequently, the application of the residual approach would result in a stand-
alone selling price of 5,000 for Product Alpha ( 105,000 transaction price less 1,00,000
allocated to Products X, Y and Z).
The entity concludes that 5,000 would not faithfully depict the amount of consideration to
which the entity expects to be entitled in exchange for satisfying its performance obligation to
transfer Product Alpha, because 5,000 does not approximate the stand-alone selling price of
Product Alpha, which ranges from 15,000 – 45,000.
Consequently, the entity reviews its observable data, including sales and margin reports, to
estimate the stand-alone selling price of Product Alpha using another suitable method. The
entity allocates the transaction price of 1,05,000 to Products X, Y, Z and Alpha using the
relative stand-alone selling prices of those products in accordance with paragraphs 73–80 of
Ind AS 115.
*****

© The Institute of Chartered Accountants of India

 5.90 a
2.90 FINANCIAL REPORTING
v
8.1.2 Allocation of variable consideration
v
Variable consideration may be attributable to (1) the entire contract or (2) a specific part of the
contract, such as either of the following:
(a) one or more, but not all, performance obligations in the contract. For example, a contract
may include two performance obligations: the construction of a building and the provision of
services related to the ongoing maintenance of the property after construction. But a
bonus for early completion may relate entirely to the construction of the building; or
(b) one or more, but not all, distinct goods or services promised in a series of distinct goods or
services that forms part of a single performance obligation (for example, the consideration
promised for the second year of a two-year cleaning service contract will increase on the
basis of movements in a specified inflation index).
How to allocate variable consideration?
In accordance with Ind AS 115.85, an entity shall allocate a variable amount (and subsequent
changes to that amount) entirely to a performance obligation or to a distinct goods or service
that forms part of a single performance obligation if both of the following criteria are met:
 the terms of a variable payment relate specifically to the entity’s efforts to satisfy the
performance obligation or transfer the distinct goods or service (or to a specific outcome
from satisfying the performance obligation or transferring the distinct goods or service); and
 allocating the variable amount of consideration entirely to the performance obligation or the
distinct goods or service is consistent with the allocation objective in paragraph 73 when
considering all of the performance obligations and payment terms in the contract.
The general principles of allocation of transaction price shall be applied to allocate the
remaining amount of the transaction price that does not meet the criteria in paragraph 85 above.
Illustration 56 : Allocation of variable consideration
An entity enters into a contract with a customer for two intellectual property licences (Licences A
and B), which the entity determines to represent two performance obligations each satisfied at a
point in time. The stand-alone selling prices of Licences A and B are 16,00,000 and
20,00,000, respectively. The entity transfers Licence B at inception of the contract and
transfers Licence A one month later.
Case A—Variable consideration allocated entirely to one performance obligation
The price stated in the contract for Licence A is a fixed amount of 16,00,000 and for Licence B
the consideration is three per cent of the customer's future sales of products that use Licence B.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.91

For purposes of allocation, the entity estimates its sales-based royalties (ie the variable
consideration) to be 20,00,000. Allocate the transaction price.
Case B — Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for Licence A is a fixed amount of 6,00,000 and for Licence B
the consideration is five per cent of the customer's future sales of products that use Licence B.
The entity's estimate of the sales-based royalties (ie the variable consideration) is 30,00,000.
Here, Licence A is transferred 3 months later. The royalty due from the customer’s first month
of sale is 4,00,000.
Allocate the transaction price and determine the revenue to be recognized for each licence and
the contract liability, if any.
Solution
Case A—Variable consideration allocated entirely to one performance obligation
To allocate the transaction price, the entity considers the criteria in paragraph 85 and concludes
that the variable consideration (ie the sales-based royalties) should be allocated entirely to
Licence B. The entity concludes that the criteria are met for the following reasons:
(a) the variable payment relates specifically to an outcome from the performance obligation to
transfer Licence B (ie the customer's subsequent sales of products that use Licence B).
(b) allocating the expected royalty amounts of 20,00,000 entirely to Licence B is consistent
with the allocation objective in paragraph 73 of Ind AS 115. This is because the entity's
estimate of the amount of sales-based royalties ( 20,00,000) approximates the stand-
alone selling price of Licence B and the fixed amount of 16,00,000 approximates the
stand-alone selling price of Licence A. The entity allocates 16,00,000 to Licence A. This
is because, based on an assessment of the facts and circumstances relating to both
licences, allocating to Licence B some of the fixed consideration in addition to all of the
variable consideration would not meet the allocation objective in paragraph 73 of
Ind AS 115.
The entity transfers Licence B at inception of the contract and transfers Licence A one month
later. Upon the transfer of Licence B, the entity does not recognize revenue because the
consideration allocated to Licence B is in the form of a sales-based royalty. Therefore, the
entity recognizes revenue for the sales-based royalty when those subsequent sales occur.
When Licence A is transferred, the entity recognizes as revenue the 16,00,000 allocated to
Licence A.

© The Institute of Chartered Accountants of India

 5.92 a
2.92 FINANCIAL REPORTING
v
Case B—Variable consideration allocated on the basis of stand-alone selling prices
v
To allocate the transaction price, the entity applies the criteria in paragraph 85 of Ind AS 115 to
determine whether to allocate the variable consideration (ie the sales-based royalties) entirely to
Licence B.
In applying the criteria, the entity concludes that even though the variable payments relate
specifically to an outcome from the performance obligation to transfer Licence B (ie the
customer's subsequent sales of products that use Licence B), allocating the variable
consideration entirely to Licence B would be inconsistent with the principle for allocating the
transaction price. Allocating 6,00,000 to Licence A and 30,00,000 to Licence B does not
reflect a reasonable allocation of the transaction price on the basis of the stand-alone selling
prices of Licences A and B of 16,00,000 and 20,00,000, respectively. Consequently, the
entity applies the general allocation requirements of Ind AS 115.
The entity allocates the transaction price of 6,00,000 to Licences A and B on the basis of
relative stand-alone selling prices of 16,00,000 and 20,00,000, respectively. The entity also
allocates the consideration related to the sales-based royalty on a relative stand-alone selling
price basis. However, when an entity licenses intellectual property in which the consideration is
in the form of a sales-based royalty, the entity cannot recognize revenue until the later of the
following events: the subsequent sales occur or the performance obligation is satisfied (or
partially satisfied).
Licence B is transferred to the customer at the inception of the contract and Licence A is
transferred three months later. When Licence B is transferred, the entity recognizes as revenue
3,33,333 [( 20,00,000 ÷ 36,00,000) × 6,00,000] allocated to Licence B. When Licence A
is transferred, the entity recognizes as revenue 2,66,667 [( 16,00,000 ÷ 36,00,000) ×
6,00,000] allocated to Licence A.
In the first month, the royalty due from the customer's first month of sales is 4,00,000.
Consequently, the entity recognizes as revenue 2,22,222 ( 20,00,000 ÷ 36,00,000 ×
4,00,000) allocated to Licence B (which has been transferred to the customer and is therefore
a satisfied performance obligation). The entity recognizes a contract liability for the 1,77,778
( 16,00,000 ÷ 36,00,000 × 4,00,000) allocated to Licence A. This is because although the
subsequent sale by the entity's customer has occurred, the performance obligation to which the
royalty has been allocated has not been satisfied.
*****
8.2 Changes in the transaction price
After contract inception, the transaction price can change for various reasons, including the

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.93

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.
The following principles should be noted:
 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 recognized as revenue, or
as a reduction of revenue, in the period in which the transaction price changes.
When reallocating consideration because of a change in the transaction price, the entity
continues to allocate the variable amount entirely to a performance obligation or to a distinct
goods or service that forms part of a single performance obligation if the criteria in
Ind AS 115.85 (as discussed above) continue to be met.
If the change in transaction price is the result of a contract modification, the entity should follow
the contract modification guidance.
However, when the transaction price changes after a modification, the entity should allocate the
change in transaction price to the performance obligations identified before the modification if
both:
 The change in the transaction price is attributable to variable consideration promised prior
to the modification.
 The modification is accounted for as a termination of the old contract and the creation of a
new contract.
An entity allocates all other changes in the transaction price to performance obligations under
the modified contract (i.e. the performance obligations that were unsatisfied or partially satisfied
immediately after the modification) as long as the modification was not accounted for as a
separate contract.
Changes in the transaction price should be allocated entirely to one or more, but not all, distinct
goods or services promised in a series that forms part of a single performance obligation if the
criteria for allocating variable consideration are met.
Comparison with AS 7 and AS 9
Subsequent changes in transaction price are not specifically dealt with either AS 7 or AS 9 unlike
in Ind AS 115.

© The Institute of Chartered Accountants of India

 5.94 a
2.94 FINANCIAL REPORTING
v
Illustration 57 : Allocating a change in transaction price
v
On 1 st April, 20X0, a consultant enters into an arrangement to provide due diligence, valuation,
and software implementation services to a customer for 2 crore. The consultant can earn
20 lakh bonus if it completes the software implementation by 30 th September, 20X0 or
10 lakh bonus if it completes the software implementation by 31 st December, 20X0.
The due diligence, valuation, and software implementation services are distinct and therefore
are accounted for as separate performance obligations. The consultant allocates the transaction
price, disregarding the potential bonus, on a relative stand-alone selling price basis as follows:
 Due diligence – 80 lakh
 Valuation – 20 lakh
 Software implementation – 1 crore
At contract inception, the consultant believes it will complete the software implementation by
30 th January, 20X1. After considering the factors in Ind AS 115, the consultant cannot conclude
that a significant reversal in the cumulative amount of revenue recognized would not occur when
the uncertainty is resolved since the consultant lacks experience in completing similar projects.
As a result, the consultant does not include the amount of the early completion bonus in its
estimated transaction price at contract inception.
On 1 st July, 20X0, the consultant notes that the project has progressed better than expected and
believes that implementation will be completed by 30 th September, 20X0 based on a revised
forecast. As a result, the consultant updates its estimated transaction price to reflect a bonus of
20 lakh.
After reviewing its progress as of 1 st July, 20X0, the consultant determines that it is 100 percent
complete in satisfying its performance obligations for due diligence and valuation and 60 percent
complete in satisfying its performance obligation for software implementation.
Determine the transaction price.
Solution
On 1 st July, 20X0, the consultant allocates the bonus of 20 lakh to the software
implementation performance obligation, for total consideration of 1.2 crore allocated to that
performance obligation and adjusts the cumulative revenue to date for the software
implementation services to 72 lakh (60 percent of 1.2 crore).
*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.95

Illustration 58 : Discretionary credit

Telco G Ltd. grants a one-time credit of 50 to a customer in Month 14 of a two-year contract.
The credit is discretionary and is granted as a commercial gesture, not in response to prior
service issues (often referred to as a ‘retention credit’). The contract includes a subsidised
handset and a voice and data plan. G Ltd. does not regularly provide these credits and
therefore customers do not expect them to be granted.
How this will be accounted for under Ind AS 115?
Solution
G Ltd. concludes that this is a change in the transaction price and not a variable consideration.
Since, the credit does not relate to a satisfied performance obligation, the change in transaction
price resulting from the credit is accounted for as a contract modification and recognized over
the remaining term of the contract. If, in this example, rather than providing a one-time credit,
G Ltd. granted a discount of 5 per month for the remaining contract term, then also G Ltd.
would conclude that it was a change in the transaction price. It would apply the contract
modification guidance and recognize the credit over the remaining term of the contract.
*****

9. STEP 5: SATISFYING PERFORMANCE OBLIGATION

An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by
transferring a promised goods or service (i.e. an asset) to a customer. An asset is transferred
when (or as) the customer obtains control of that asset.
In other words, the transfer of ‘control’ is the key determinant under Ind AS 115. Decision
making on how ‘control’ will be transferred to the customer is done at the inception of
transaction.
Following is a diagrammatic presentation of the aforesaid guidance:

Therefore, the key questions that need to be answered at contract inception to determine if the
seller has satisfied its performance obligation are –
 Establish what does transfer of control mean in the context of the arrangement between
the parties?

© The Institute of Chartered Accountants of India

 5.96 a
2.96 FINANCIAL REPORTING
v
 Does the customer acquire control over a period of time or at a point in time?
v

Is the performance obligation satisfied over time

– i.e. is one of the criteria met?

Identify an appropriate method (i.e. Input Recognize revenue at the point in time
Method or Output Method) to measure progress at which control of the good or service is
and apply that method to recognize revenue transferred
over time

9.1 What does transfer of control mean?

Control is…
the ability – The customer has a present right

to direct the – The right enables it to:

use of - deploy the asset in its activities
- allow another entity to deploy the asset in its activities
- prevent another entity from deploying the asset

and obtain – The right also enables it to obtain potential cash flows directly or
the indirectly – e.g. through:
remaining - use of the asset
benefits
- consumption of the asset
from
- sale or exchange of the asset
- pledging the asset
- holding the asset

… an asset

Control of an asset refers to –

(i) the ability to direct the use of, and obtain substantially all of the remaining benefits from,
the asset.
(ii) Control includes the ability to prevent other entities from directing the use of, and obtaining
the benefits from, an asset.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.97

 The benefits of an asset are the potential cash flows (inflows or savings in outflows) that
can be obtained directly or indirectly in many ways, such as by:
(a) using the asset to produce goods or provide services (including public services);
(b) using the asset to enhance the value of other assets;
(c) using the asset to settle liabilities or reduce expenses;
(d) selling or exchanging the asset;
(e) pledging the asset to secure a loan; and
(f) holding the asset.
 In addition, an entity shall consider indicators of the transfer of control, which include, but
are not limited to, the following:
(a) The entity has a present right to payment for the asset;
(b) The customer has legal title to the asset;
(c) The entity has transferred physical possession of the asset;
(d) The customer has the significant risks and rewards of ownership of the asset;
(e) The customer has accepted the asset.
The standard indicates that an entity must determine, at contract inception, whether it will
transfer control of a promised goods or service over time. If an entity does not satisfy a
performance obligation over time, the performance obligation is satisfied at a point in time.
To help entities determine whether control transfers over time (rather than at a point in time), the
standard states below guidance:
9.2 Does the customer acquire control over a period of time or at a
point in time?
9.2.1 Transfer of control over a period of time:
Per para 35 of Ind AS 115, an entity transfers control of a goods or service over time and,
therefore, satisfies a performance obligation and recognizes revenue over time, if any of the
following criteria is met:
Criteria (a) – The customer simultaneously receives and consumes the benefits provided by the
entity's performance as the entity performs;
Or
Criteria (b) – the entity's performance creates or enhances an asset (for example, work in
progress) that the customer controls as the asset is created or enhanced; or

© The Institute of Chartered Accountants of India

 5.98 a
2.98 FINANCIAL REPORTING
v
Or
v
Criteria (c) – the entity's performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance completed to date.
Following diagram below depicts if the control is transferred over a period of time.
- If any of the criteria are met, then revenue is recognized over a period of time.
- If none of the criteria are met, then revenue is recognized at a point in time.

Does customer control the asset

as it is created or enhanced? Yes

No
Does customer receive and consume
the benefits as the entity performs? Yes
No Does entity have
the enforceable
right to receive Yes
Does asset have an alternative use
to the entity? payment for work to
No date?
Yes
No
Control is transferred at a Control is transferred
point in time over time

In this regard, it is important to understand how each of the above criteria are evaluated –
Criteria (a) – Customer simultaneously receives and consumes the benefits provided by
the entity's performance as the entity performs
This criterion is ordinarily applied in situations in which the benefits of seller’s performance are
immediately consumed by the customer, for eg.: routine or recurring services in which the
consumer consumes the benefits immediately as the services are performed, which means that
the customer obtains control of seller entity’s output as soon as the entity performs.
Hence, in such situations, entity’s performance is said to be performed over a period of time.
Illustration 59
Minitek Ltd. is a payroll processing company. Minitek Ltd. enters into a contract to provide
monthly payroll processing services to ABC limited for one year. Determine how entity will
recognize the revenue?

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.99

Solution
Payroll processing is a single performance obligation. On a monthly basis, as Minitek Ltd carries
out the payroll processing –
 The customer, ie, ABC Limited simultaneously receives and consumes the benefits of the
entity’s performance in processing each payroll transaction.
 Further, once the services have been performed for a particular month, in case of
termination of the agreement before maturity and contract is transferred to another entity,
then such new entity will not need to re-perform the services for expired months.
Therefore, it satisfies the first criterion, ie, services completed on a monthly basis are consumed
by the entity at the same time and hence, revenue shall be recognized over the period of time.
*****
For certain performance obligations, an entity may not be able to readily identify whether a
customer simultaneously receives and consumes the benefits from the entity's performance as
the entity performs. In such cases, a performance obligation is satisfied over time if an entity
determines that another entity would not need to substantially re-perform the work that the entity
has completed to date if that other entity were to fulfil the remaining performance obligation to
the customer.
In making such determination, an entity shall make both of the following assumptions:
(a) disregard potential contractual restrictions or practical limitations that otherwise would
prevent the entity from transferring the remaining performance obligation to another entity;
and
(b) presume that another entity fulfilling the remainder of the performance obligation would not
have the benefit of any work in progress.
Illustration 60
T&L Limited (‘T&L’) is a logistics company that provides inland and sea transportation services.
A customer – Horizon Limited (‘Horizon’) enters into a contract with T&L for transportation of its
goods from India to Sri Lanka through sea. The voyage is expected to take 20 days from
Mumbai to Colombo. T&L is responsible for shipping the goods from Mumbai port to Colombo
port.
Whether T&L’s performance obligation is met over period of time?
Solution
T&L has a single performance to ship the goods from one port to another. The following factors
are critical for assessing how services performed by T&L are consumed by the customer –

© The Institute of Chartered Accountants of India

 5.100 2. a
FINANCIAL REPORTING
100
v
 As the voyage is performed, the service undertaken by T&L is progressing, such that no
v
other entity will need to re-perform the service till so far as the voyage has been performed,
if T&L was to deliver only part-way.
 The customer is directly benefitting from the performance of the voyage as & when it
progresses.
Therefore, such performance obligation is said to be met over a period of time.
*****
Criteria (b) – the entity's performance creates or enhances an asset (for example, work in
progress) that the customer controls as the asset is created or enhanced. Refer guidance on
“control” given at the beginning of this section.
 In such cases, the customer ordinarily obtains control of the asset whose work is in
progress and therefore, the entity carrying out the work can recognize revenue over a
period of time.
 Ordinarily, this criterion is applied to the following type of contracts with customers:
(a) Construction contracts, wherein the contractor engages to construct a specific asset
for the customer on customer’s land;
(b) Contracts with the government, wherein the government agency is ordinarily entitled
to any work in process performed by the service provider.
Criteria (c) – the entity's performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance completed to date.
Where a customer does not meet either criterion (a) or criterion (b), the seller entity evaluates
the third and last criterion to determine if performance obligation is satisfied over a period of
time.
 This criterion refers to situations in which an asset is created at customer’s discretion,
which the seller is restricted from using for any other purpose and at the same time, the
seller entity reserves a right to seek payment for work in process. Therefore, this criterion
is met if two factors exist simultaneously –
(i) The asset so created does not have an alternate use to the entity; and
(ii) Seller entity has a legally enforceable right to payment for performance completed to
date.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.101

This evaluation is done at contract inception and involves

consideration of following factors –
Asset has no  For the asset created - Seller is restricted contractually from
alternate use to readily directing the asset for another use during its creation
Seller entity or enhancement; or
 The seller is limited practically from readily directing the asset
in it completed state for another use.

And

 An entity has a right to payment at all times that at least

compensates for performance completed to date, i.e, an
Legally amount that approximates selling price of goods which is
enforceable right equal to cost of goods plus a reasonable profit margin
to payment for  Legally enforceable right comes from operation of law or
work completed legal precedent that could supplement or override
contractual terms. This may be affected if company’s
customary business practice is to not enforce payment if
customer defaults, etc.

Let’s take a closer look at each of the above-mentioned factors.

 Asset does not have alternate use to the seller entity:
This evaluation is carried out at inception of transaction and is not reassessed unless
the contract is substantially modified. In doing this assessment, the entity shall
consider the practical limitations and/ or contractual restrictions in redirecting the
asset for another use, like selling to another customer.
 A contractual restriction referred to above must be substantive, ie, a customer
should be able to enforce its right to the asset if at any time the seller tries to
redirect the asset to another customer. Therefore, if any customer’s right to an
asset is inter-changeable with other equivalent assets, then the right is not
substantive to restrict the seller entity from redirecting the use of the asset.
 A practical limitation exists when the seller entity would require incurring
significant economic losses to direct the asset for another use, such that the
seller is practically limited from doing so. This may occur, for example, if the
costs of rework of the asset are significant to direct for another use, or a
significant loss would occur upon selling the asset to another customer, etc.

© The Institute of Chartered Accountants of India

 5.102 2. a
FINANCIAL REPORTING
102
v
 Right to payment for performance completed to date
v
 An entity has a right to payment for performance completed to date if the entity
would be entitled to an amount that at least compensates the entity for its
performance completed to date in the event that the customer or another party
terminates the contract for reasons other than the entity's failure to perform as
promised.
 Such a right to enforce payment should result in compensation for the costs
incurred by the entity for work completed to date, plus a reasonable profit
margin. A meagre compensation for potential loss of profit, if the contract was to
be terminated does not tantamount to legally enforceable right for work
completed to date.
 Compensation for a reasonable profit margin need not equal the profit margin
expected if the contract was fulfilled as promised, but an entity should be entitled
to compensation for either of the following amounts:
(a) a proportion of the expected profit margin in the contract that reasonably
reflects the extent of the entity's performance under the contract before
termination by the customer (or another party); or
(b) a reasonable return on the entity's cost of capital for similar contracts (or the
entity's typical operating margin for similar contracts) if the contract-specific
margin is higher than the return the entity usually generates from similar
contracts.
 Sometimes, the right of the entity need not be a present unconditional right.
Entity may have a right to seek payment only upon achievement of specific
milestones or upon completion of entire performance obligation. In such case,
entity would need to determine if it has a right to enforce payment, in case the
contract was to be terminated prior to completion, for reasons other than
company’s failure to perform.
 Also, sometimes termination clauses in an agreement may not provide the
customer with right to cancel or terminate. In such cases, if the customer seeks
cancellation, the entity may still have a right to complete performance and seek
payment for work carried out.
 Alternatively, if the contract provides for right to demand payment as work
progresses, but customer may have a right to refund if he proposes to terminate
the contract before completion. In such cases, entity cannot be said to have a
right to enforce payment for work completed to date.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.103

Illustration 61
AFS Ltd. is a risk advisory firm and enters into a contract with a company – WBC Ltd to provide
audit services that results in AFS issuing an audit opinion to the Company. The professional
opinion relates to facts and circumstances that are specific to the company. If the Company was
to terminate the consulting contract for reasons other than the entity's failure to perform as
promised, the contract requires the Company to compensate the risk advisory firm for its costs
incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit margin that
the entity earns from similar contracts.
Whether risk advisory firm’s performance obligation is met over period of time?
Solution
AFS has a single performance to provide an opinion on the professional audit services proposed
to be provided under the contract with the customer. Evaluating the criterion for recognizing
revenue over a period of time or at a point in time, Ind AS 115 requires one of the following
criteria to be met –
 Criterion (a) – whether the customer simultaneously receives and consumes the benefits
from services provided by AFS: Company shall benefit only when the audit opinion is
provided upon completion. Further, in case the contract was to be terminated, any other
firm engaged to perform similar services will have to substantially re-perform.
Hence, this criterion is not met.
 Criterion (b) – An asset created that customer controls: This is service contract and no
asset created, over which customer acquires control.
 Criterion (c) – no alternate use to entity and right to seek payment:
 The services provided by AFS are specific to the company – WBC and do not have
any alternate use to AFS
 Further, AFS has a right to enforce payment if the contract was early terminated, for
reasons other than AFS’s failure to perform. And the profit margin approximates what
the entity otherwise earns.
Therefore, criterion (c) is met, and such performance obligation is said to be met over a period
of time.
*****

© The Institute of Chartered Accountants of India

 5.104 2. a
FINANCIAL REPORTING
104
v
Illustration 62
v
Space Ltd. enters into an arrangement with a government agency for construction of a space
satellite. Although Space Ltd is in the business of building such satellites for various customers
across the world, the specifications for each satellite may vary based on technology that is
incorporated in the satellite. In the event of termination, Company has a right to enforce
payment for work completed to date.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
Solution
While evaluating the pattern of transfer of control to the customer, the Company shall evaluate
conditions laid in para 35 of Ind AS 115 as follows:
 Criterion (a) – whether the customer simultaneously receives and consumes the benefits:
Customer can benefit only when the satellite is fully constructed, and no benefits are
consumed as its constructed. Hence, this criterion is not met.
 Criterion (b) – An asset created that customer controls: Per provided facts, the customer
does not acquire control of the asset as its created.
 Criterion (c) – no alternate use to entity and right to seek payment:
 The asset is being specifically created for the customer. The asset is customised to
customer’s requirements, such that any diversion for a different customer will require
significant work. Therefore, the asset has practical limitation in being put to alternate
use.
 Further, Space Ltd. has a right to enforce payment if the contract was terminated
early, for reasons other then Space Ltd.’s failure to perform.
Therefore, criterion (c) is met and such performance obligation is said to be met over a
period of time.
*****
Illustration 63
ABC enters into a contract with a customer to build an item of equipment. The customer pays
10% advance and then 80% in instalments of 10% each over the period of construction with
balance 10% payable at the end of construction period. The payments are non-refundable
unless the company fails to perform as per the contract. Further, if the customer terminates the
contract, then entity is entitled to retain payments made. The company will have no further right
to compensation from the customer.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.105

Solution
The Company shall evaluate conditions laid in para 35 of Ind AS 115 as follows:
 Criterion (a) – whether the customer simultaneously receives and consumes the benefits:
Customer can benefit only when the asset is fully constructed and no benefits are
consumed as its constructed. Hence, this criterion is not met.
 Criterion (b) – An asset created that customer controls: As per provided facts, the customer
does not acquire control of the asset as it is created.
 Criterion (c) – no alternate use to entity and right to seek payment:
 The customer has specific right over the asset and company does not have right to
divert it for any alternate use. In other words, there is contractual restriction to use
the asset for any alternate purpose.
 In the event of early termination, Company has a right to retain any payments made
by the customer. However, such payments need not necessarily compensate the
selling price of the partially constructed asset, if the customer was to stop making
payments.
Therefore, Company does not have a legally enforceable right to payment for work
completed to date and the criterion under para 35 is not satisfied. Thus, revenue cannot be
recognized over a period of time.
*****
All above discussed three criteria can be summarized in below diagram:

Criterion Example
1. The customer simultaneously receives and Routine or recurring services – e.g.
consumes the benefits provided by the entity’s cleaning services, Routine
performance as the entity performs transaction processing services,
Hotel management services.
2. The entity’s performance creates or enhances Building an asset on a customer’s
an asset that the customer controls as the asset site
is created or enhanced
3. The entity’s performance does not create an Building a specialized/highly
asset with an alternative use to the entity and customized asset that only the
the entity has an enforceable right to payment customer can use or building an
for performance completed to date asset according to a customer’s
specifications

© The Institute of Chartered Accountants of India

 5.106 2. a
FINANCIAL REPORTING
106
v
When an entity has determined that a performance obligation is satisfied over time, the standard
requires the entity to select a vsingle revenue recognition method for the relevant performance
obligation. The objective is to faithfully depict an entity’s performance in transferring control of
goods or services promised to a customer (i.e. the satisfaction of an entity’s performance
obligation). The standard provides two methods for recognizing revenue on contracts involving
the transfer of goods and services over time: input methods and output methods.
Methods of measuring progress of a performance obligation satisfied over time

Output Methods Input Methods

Recognize revenue based on direct Recognize revenue based on the entity’s
measurements of the value to the customer of efforts or inputs to the satisfaction of a
the goods or services transferred to date performance obligation.
relative to the remaining goods or services
promised under the contract.
For Example: Surveys of performance For Example: Resources consumed labour
completed to date, appraisals of results hours expended, costs incurred, time
achieved elapsed or machine hours used

A. Output methods:
 Output methods recognize revenue on the basis of direct measurements of the value,
to the customer, of the goods or services transferred to date relative to the remaining
goods or services promised under the contract. Output methods include methods
such as surveys of performance completed to date, appraisals of results achieved,
milestones reached, time elapsed and units produced or units delivered. Output
method is selected if it would faithfully depict the entity's performance towards
complete satisfaction of the performance obligation. It may not be useful in depicting
the entity's performance if it would fail to measure some of the goods or services for
which control has transferred to the customer. For example, output methods based on
units produced or units delivered would not faithfully depict an entity's performance in
satisfying a performance obligation if, at the end of the reporting period, the entity's
performance has produced work in progress or finished goods controlled by the
customer that are not included in the measurement of the output.
 As a practical expedient – if a company has a right to consideration from a customer
in an amount which corresponds directly with the value billed to the customer of the
entity’s performance completed to date, then company may recognize revenue for the
amount to which the entity has a right to invoice. For eg.: a service contract in which
entity bills a fixed amount for each hour of service provided, etc.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.107

B. Input methods:
 Input methods recognize revenue on the basis of the entity’s efforts or inputs to the
satisfaction of a performance obligation (e.g. resources consumed, labour hours
expended, costs incurred, time elapsed or machine hours used) relative to the total
expected inputs to the satisfaction of that performance obligation. If the entity's efforts
or inputs are expended evenly throughout the performance period, it may be
appropriate for the entity to recognize revenue on a straight-line basis.
 While applying input method, a careful consideration should be given for events that
do not depict a direct relationship between entity’s inputs and transfer of control of
goods or services. For example, when cost-based input method is used, an
adjustment may be required in the following cases –
(a) When any cost incurred does not contribute to an entity’s progress in satisfying
performance obligation – any excess costs incurred owing to entity’s
inefficiencies that were not reflected in the price of the contract must be ignored
for measuring progress of work. For eg: cost of wasted materials, labour or other
resources, etc.
(b) When cost incurred is not proportionate to entity’s progress in satisfying its
performance obligation. In such cases, the best reflection is to adjust the input
method to recognize revenue only to the extent of costs incurred. Such
recognition of revenue to the extent of costs incurred is appropriate, if at contract
inception, all the following conditions exist:
(i) The goods do not represent a distinct performance obligation;
(ii) Customer is expected to obtain control of the goods significantly before
receiving the services;
(iii) Cost of such goods is significant relative to the total expected costs to
complete the performance obligation; and
(iv) The entity procures the goods from a third party and does not significantly
involve in designing / manufacturing the goods (even if the entity is a
principal in the arrangement between the entity and end customer).
An entity shall apply a single method of measuring progress for each performance obligation
satisfied over time, and the entity shall apply that method consistently to similar performance
obligations and in similar circumstances. At the end of each reporting period, an entity shall
remeasure its progress towards complete satisfaction of a performance obligation satisfied over
time.

© The Institute of Chartered Accountants of India

 5.108 2. a
FINANCIAL REPORTING
108
v
As circumstances change over time, an entity shall update its measure of progress to reflect any
changes in the outcome of the vperformance obligation. Such changes to an entity’s measure of
progress shall be accounted for as a change in accounting estimate in accordance with
Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
*****
Illustration 64 : Measuring progress on straight line basis
An entity, an owner and manager of health clubs, enters into a contract with a customer for one
year of access to any of its health clubs. The customer has unlimited use of the health clubs
and promises to pay CU100 per month. The entity’s promise to the customer is to provide a
service of making the health clubs available for the customer to use as and when the customer
wishes.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time. If
yes, how should an entity measure its progress of service provided?
Solution
The entity shall determine if revenue should be recognized over a period of time by evaluating
the conditions laid in para 35 of Ind AS 115.
- Applying the first criterion of para 35 to establish if the customer simultaneously receives
and consumes the benefits, as the entity provides service – The health club provides
access to services uniformly through the year. The extent to which the customer uses the
health clubs does not affect the amount of the remaining goods and services to which the
customer is entitled. The customer therefore simultaneously receives and consumes the
benefits of the entity's performance as it performs by making the health clubs available.
- Consequently, the entity's performance obligation is satisfied over time
- Once the pattern of satisfying performance obligation is defined, the Company then
determines how progress should be measured. The services are uniformly provided to the
customer through the year. Therefore, the best measure of progress is to recognize
revenue on a straight line basis over the year.
*****

Illustration 65 : Uninstalled materials

On 1 st January, 20X1, an entity contracts to renovate a building including the installation of new
elevators. The entity estimates the following with respect to the contract:

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.109

Particulars Amount ( )
Transaction price 5,000,000
Expected costs:
(a) Elevators 1,500,000
(b) Other costs 2,500,000
Total 4,000,000

The entity purchases the elevators, and they are delivered to the site six months before they will
be installed. The entity uses an input method based on cost to measure progress towards
completion. The entity has incurred actual other costs of 500,000 by 31 st March, 20X1.
How will the Company recognize revenue, if performance obligation is met over a period of
time?

Solution
Costs to be incurred comprise two major components – elevators and cost of construction
service.
(a) The elevators are part of the overall construction project and are not a distinct performance
obligation

(b) The cost of elevators is substantial to the overall project and are incurred well in advance.
(c) Upon delivery at site, the customer acquires control of such elevators.
(d) And there is no modification made to the elevators, which the company only procures and
delivers at site. Nevertheless, as part of materials used in overall construction project, the
company is a principal in the transaction with the customer for such elevators also.
Therefore, applying the guidance on Input method –

- The measure of progress should be made based on the percentage of costs incurred
relative to the total budgeted costs.
- The cost of elevators should be excluded when measuring such progress and revenue
for such elevators should be recognized to the extent of costs incurred.

© The Institute of Chartered Accountants of India

 5.110 2. a
FINANCIAL REPORTING
110
v
The revenue to be recognized is measured as follows:
v
Particulars Amount ( )
Transaction price 5,000,000
Costs incurred:
(a) Cost of elevators 1,500,000
(b) Other costs 500,000
Measure of progress: 500,000 / 2,500,000 = 20%
Revenue to be recognized:
(a) For costs incurred (other than elevators) Total attributable revenue = 3,500,000
% of work completed = 20%
Revenue to be recognized = 700,000
(b) Revenue for elevators 1,500,000 (equal to costs incurred)
Total revenue to be recognized 1,500,000 + 700,000 = 2,200,000

Therefore, for the year ended 31 st March, 20X1, the Company shall recognize revenue of
2,200,000 on the project.
*****
Other considerations in measuring progress of work:
Stand-Ready Obligations
When the nature of an entity’s performance obligation is to stand ready to provide goods or
services, it may be appropriate to utilize a time-based measure of progress.
- When the pattern of benefit and the entity’s efforts to fulfill the contract are not even
throughout the contract period, a time-based method of measuring progress may not be
appropriate.
- On the other hand, when an entity expects the customer will receive and consume the
benefits of the entity’s promise equally throughout the contract period, or if the entity does
not know and cannot reasonably estimate how and when the customer will request
performance, then a straight-line revenue attribution resulting from a time-based measure of
progress may be appropriate.
9.2.2 Transfer of control at a point in time:
Where a company does not meet any of the aforementioned criteria for recognizing revenue
over a period of time, then revenue shall be recognized at a point in time.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.111

The following is an indicative list of indicators which may exist, to imply the point of time at
which control of goods has been passed to the customer. This is not an exhaustive list and there
may be more factors that may be considered to determine the point in time at which revenue
shall be recognized:

Indicators that control has passed include a customer having

a present risks and

physical accepted the
obligation to legal title rewards of
possession asset
pay ownership

Indicator Evaluation
The entity has a If a customer is presently obliged to pay for an asset, then that may
present right to indicate that the customer has obtained the ability to direct the use of,
payment and obtain substantially all of the remaining benefits from, the asset in
exchange.
The customer has a - Legal title may indicate which party to a contract has the ability to
legal title to the asset direct the use of, and obtain substantially all of the remaining
benefits from, an asset or to restrict the access of other entities to
those benefits.
If an entity retains legal title solely as protection against the customer's
failure to pay, those rights of the entity would not preclude the
customer from obtaining control of an asset.
The customer has The customer's physical possession of an asset may indicate that the
physical possession of customer has the ability to direct the use of the asset.
the asset - However, physical possession may not coincide with control of an
asset. For example, in some repurchase agreements and in some
consignment arrangements, a customer or consignee may have
physical possession of an asset that the entity controls.
The customer has - Transfer of risks & rewards for an asset may indicate that the
assumed significant customer has the ability to direct the use of and obtain
risks & rewards of substantially all of the benefits from the asset.
owning the asset When evaluating the risks and rewards of ownership of a promised
asset, an entity shall exclude any risks that give rise to a separate
performance obligation in addition to the performance obligation to
transfer the asset. For example, an entity may have transferred control

© The Institute of Chartered Accountants of India

 5.112 2. a
FINANCIAL REPORTING
112
v
of an asset to a customer but not yet satisfied an additional
v
performance obligation to provide maintenance services related to the
transferred asset.
The customer has Customer acceptance clauses allow a customer to cancel a contract or
accepted the asset require an entity to take remedial action if a goods or service does not
meet agreed-upon specifications.
An entity shall consider such clauses to evaluate when a customer
obtains control of a goods or service.
- If an entity can objectively determine that control of a goods or
service has been transferred to the customer in accordance with
the agreed-upon specifications in the contract, then customer
acceptance is a formality that would not affect the entity's
determination of when the customer has obtained control of the
goods or service.
- However, if an entity cannot objectively determine that the goods
or service provided to the customer is in accordance with the
agreed-upon specifications in the contract, then the entity would
not be able to conclude that the customer has obtained control until
the entity receives the customer's acceptance.

9.3 Repurchase agreements

When a company determines the timing of transfer of control, it is important to take into
consideration any repurchase agreements that may have been executed by the Company.
A repurchase agreement is a contract in which an entity sells an asset and also promises or has
the option (either in the same contract or in another contract) to repurchase the asset. The
repurchased asset may be the asset that was originally sold to the customer, an asset that is
substantially the same as that asset, or another asset of which the asset that was originally sold
is a component.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.113

Repurchase agreements generally come in three forms:

Put option:
Forward: Call option: An entity's
An entity's obligation to
An entity's right to repurchase the
obligation to repurchase the
repurchase the asset at the
asset customer's
asset
request

A. Forward or call option:

 If an entity has an obligation or a right to repurchase the asset (a forward or a call option),
a customer does not obtain control of the asset because the customer is limited in its ability
to direct the use of, and obtain substantially all of the remaining benefits from, the asset
even though the customer may have physical possession of the asset.
Consequently, the entity shall account for the contract as either of the following:
(a) a lease in accordance with Ind AS 116, Leases, if the entity can or must repurchase
the asset for an amount that is less than the original selling price of the asset, unless
the contract is part of a sale and leaseback transaction. If the contract is part of a
sale and leaseback transaction, the entity shall continue to recognize the asset and
shall recognize financial liability for any consideration received from the customer.
The entity shall account for the financial liability in accordance with Ind AS 109; or
(b) a financing arrangement, if the entity can or must repurchase the asset for an amount
that is equal to or more than the original selling price of the asset.
 When comparing the repurchase price with the selling price, an entity shall consider the
time value of money.
 If the repurchase agreement is a financing arrangement, the entity shall continue to
recognize the asset and also recognize a financial liability for any consideration received
from the customer.
 The entity shall recognize the difference between the amount of consideration received
from the customer and the amount of consideration to be paid to the customer as interest
and, if applicable, as processing or holding costs (for example, insurance).

© The Institute of Chartered Accountants of India

 5.114 2. a
FINANCIAL REPORTING
114
v
 If the option lapses unexercised, an entity shall derecognize the liability and recognize
revenue. v

B. Put option
 If an entity has an obligation to repurchase the asset at the customer's request (a put
option) at a price that is lower than the original selling price of the asset, the entity shall
consider at contract inception whether the customer has a significant economic incentive to
exercise that right. The customer's exercising of that right results in the customer
effectively paying the entity consideration for the right to use a specified asset for a period
of time. Therefore, the entity shall account for the agreement as a lease in accordance
with Ind AS 116, unless the contract is part of a sale and leaseback transaction. If the
contract is part of a sale and leaseback transaction, the entity shall continue to recognize
the asset and shall recognize a financial liability for any consideration received from the
customer. The entity shall account for the financial liability in accordance with Ind AS 109.
 To determine whether a customer has a significant economic incentive to exercise its right,
an entity shall consider various factors, including the relationship of the repurchase price to
the expected market value of the asset at the date of the repurchase and the amount of
time until the right expires. For example, if the repurchase price is expected to significantly
exceed the market value of the asset, this may indicate that the customer has a significant
economic incentive to exercise the put option and hence the customer is expected to
ultimately return the asset to the entity.
 If the repurchase price is equal to or greater than original selling price and more than the
expected market value of the asset, the contract is in effect a financing arrangement.
 If the repurchase price of the asset is equal to or greater than the original selling price and
is less than or equal to the expected market value of the asset, and the customer does not
have a significant economic incentive to exercise its right, then the entity shall account for
the agreement as if it were the sale of a product with a right of return.
 If the customer does not have a significant economic incentive to exercise its right at a
price that is lower than the original selling price of the asset, the entity shall account for the
agreement as if it were the sale of a product with a right of return.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.115

 The following decision tree may be useful to account for the arrangement –

Is the repurchase price => Original Yes

Selling price and; Account for the transaction as a
the repurchase price > expected market financing arrangement
price of the asset

No
Is the repurchase price < Original
Is the repurchase price => Original Selling No Selling Price and Significant
Price and; economic
Repurchase price <= to expected market incentive to exercise?
price
Yes No
Yes

Account for the agreement as lease

Yes under Ind AS 116 unless the contract
Does the customer have significant is part of a sale and lease back
economic incentive to exercise the right? transaction

No If the contract is part of a sale and

leaseback transaction, the entity
shall continue to recognize the asset
Recognize revenue with a right to return and shall recognize a financial
liability (as per Ind AS 109) for any
consideration received from the
customer.

 When comparing the repurchase price with the selling price, an entity shall consider the
time value of money.
 If the option lapses unexercised, an entity shall derecognize the liability and recognize
revenue.
Illustration 66
An entity enters into a contract with a customer for the sale of a tangible asset on
1 st January, 20X1 for 1 million. The contract includes a call option that gives the entity the
right to repurchase the asset for 1.1 million on or before 31 st December, 20X1.
How would the entity account for this transaction?

© The Institute of Chartered Accountants of India

 5.116 2. a
FINANCIAL REPORTING
116
v
Solution
v
In the above case, where the entity has a right to call back the goods upto a certain date –
 The customer cannot be said to have acquired control, owing to the repurchase right with
the seller entity
 Since the original selling price ( 1 million) is lower than the repurchase price
( 1.1 million), this is construed to be a financing arrangement and accounted as follows:
(a) Amount received shall be recognized as ‘liability’
(b) Difference between sale price and repurchase price to be recognized as ‘finance cost’
and recognized over the repurchase term.
*****
Illustration 67
An entity enters into a contract with a customer for the sale of a tangible asset on
1 st January, 20X1 for 10,00,000. The contract includes a put option that gives the customer
the right to sell the asset for 9,00,000 on or before 31 st December, 20X1. The market price for
such goods is expected to be 7,50,000
How would the entity account for this transaction?
Solution
In the above case, where the entity has an obligation to buy back the goods upto a certain date–
 The entity shall evaluate if the customer has a significant economic incentive to return the
goods. Since the repurchase price is significantly higher than market price, therefore,
customer has a significant economic incentive to return the goods. There are no other
factors which may affect this assessment.
 Therefore, company determines that ‘control’ of goods is not transferred to the customer till
31 st December, 20X1, ie, till the put option expires.
 Against payment of 10,00,000; the customer only has a right to use the asset and put it
back to the entity for 9,00,000. Therefore, this will be accounted as a lease transaction
in which difference between original selling price (ie, 10,00,000) and repurchase price (ie,
9,00,000) shall be recognized as lease income over the period of lease.
 At the end of repurchase term, ie, 31 st December, 20X1, if the customer does not exercise
such right, then the control of goods would be passed to the customer at that time and
revenue shall be recognized for sale of goods for repurchase price (ie, 9,00,000).
*****

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.117

9.4 Bill-and-hold
 A bill-and-hold arrangement is a contract under which an entity bills a customer for a
product but the entity retains physical possession of the product until it is transferred to the
customer at a point in time in the future. For example, a customer may request an entity to
enter into such a contract because of the customer's lack of available space for the product
or because of delays in the customer's production schedules.
 In such arrangements, the entity shall determine at which point does control transfer to the
customer.
In some cases, control is transferred either when the product is delivered to the customer’s
site or when the product is shipped, depending on the terms of the contract (including
delivery and shipping terms). While in other cases, a customer may obtain control of a
product even though that product remains in an entity’s physical possession. In that case,
the customer has the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the product even though it has decided not to exercise its right to
take physical possession of that product. Consequently, the entity does not control the
product. Instead, the entity provides custodial services to the customer over the
customer’s asset
 In addition, the indicators defined earlier in this chapter for establishing transfer of control,
all the following criteria must be met:
(a) the reason for the bill-and-hold arrangement must be substantive (for example, the
customer has requested the arrangement);
(b) the product must be identified separately as belonging to the customer;
(c) the product currently must be ready for physical transfer to the customer; and
(d) the entity cannot have the ability to use the product or to direct it to another customer.
 Where an entity recognizes revenue on bill & hold basis, the entity shall determine if it has
any additional performance obligations forming part of the transaction price, which would
need to be segregated and accounted separately, when such performance obligations are
met. (for eg.: custodial services for goods held, extended warranty, etc.) For identification
of performance obligations, refer step 2 – identifying performance obligations.
Illustration 68
An entity enters into a contract with a customer on 1 st April, 20X1 for the sale of a machine and
spare parts. The manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare parts

© The Institute of Chartered Accountants of India

 5.118 2. a
FINANCIAL REPORTING
118
v
meet the agreed-upon specifications in the contract. The promises to transfer the machine and
v in two performance obligations that each will be satisfied at a
spare parts are distinct and result
st
point in time. On 31 March, 20X3, the customer pays for the machine and spare parts, but only
takes physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at the entity's warehouse
because of its close proximity to the customer's factory. The customer has legal title to the
spare parts and the parts can be identified as belonging to the customer. Furthermore, the
entity stores the spare parts in a separate section of its warehouse and the parts are ready for
immediate shipment at the customer's request. The entity expects to hold the spare parts for
two to four years and the entity does not have the ability to use the spare parts or direct them to
another customer.
How will the Company recognize revenue for sale of machine and spare parts? Is there any
other performance obligation attached to this sale of goods?
Solution
In the facts provided above, the entity has made sale of two goods – machine and space parts,
whose control is transferred at a point in time. Additionally, company agrees to hold the spare
parts for the customer for a period of 2-4 years, which is a separate performance obligation.
Therefore, total transaction price shall be divided amongst 3 performance obligations –
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.
Recognition of revenue for each of the three performance obligations shall occur as follows:
- Sale of machinery: Machine has been sold to the customer and physical possession as well
as legal title passed to the customer on 31 st March, 20X3. Accordingly, revenue for sale of
machinery shall be recognized on 31 st March, 20X3.
- Sale of spare parts: The customer has made payment for the spare parts and legal title has
been passed to specifically identified goods, but such spares continue to be physically held
by the entity. In this regard, the company shall evaluate if revenue can be recognized on
bill-and-hold basis if all below criteria are met:

(a) the reason for the bill-and-hold The customer has specifically requested
arrangement must be substantive (for for entity to store goods in their
example, the customer has requested warehouse, owing to close proximity to
the arrangement); customer’s factory.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.119

(b) the product must be identified The spare parts have been specifically
separately as belonging to the identified and inspected by the customer.
customer;
(c) the product currently must be ready The spares are identified and
for physical transfer to the customer; segregated, therefore, ready for delivery.
and
(d) the entity cannot have the ability to Spares have been segregated and
use the product or to direct it to cannot be redirected to any other
another customer customer.

Therefore, all conditions of bill-and-hold are met and hence, company can recognize
revenue for sale of spare parts on 31 st March, 20X3.
- Custodial services: Such services shall be given for a period of 2 to 4 years from
31 st March, 20X3. Where services are given uniformly and customer receives & consumes
benefits simultaneously, revenue for such service shall be recognized on a straight-line
basis over a period of time.
*****
9.5 Licences of intellectual property
Ind AS 115 provides application guidance specific to the recognition of revenue for licences of
intellectual property, which differs from the recognition model for other promised goods and
services.
Considering the fact that licences include a wide range of features and economic characteristics,
an entity will need to evaluate the nature of its promise to grant a licence of intellectual property
in order to determine whether the promise is satisfied (and revenue is recognized) over time or
at a point in time.
A licence will either provide:
 a right to access the entity’s intellectual property throughout the licence period, which
results in revenue that is recognized over time; or
 a right to use the entity’s intellectual property as it exists at the point in time in which the
licence is granted, which results in revenue that is recognized at a point in time.
The standard states that licences of intellectual property establish a customer’s rights to the
intellectual property of an entity and may include licences for any of the following: software and

© The Institute of Chartered Accountants of India

 5.120 2. a
FINANCIAL REPORTING
120
v
technology, media and entertainment (e.g. motion pictures and music), franchises, patents,
trademarks and copyrights. v
9.5.1 Right to access
A licence that provides an entity with the right to access intellectual property is satisfied over
time ‘because the customer simultaneously receives and consumes the benefit from the entity’s
performance as the performance occurs’, including the related activities undertaken by entity.
This conclusion is based on the determination that when a licence is subject to change (and the
customer is exposed to the positive or negative effects of that change), the customer is not able
to fully gain control over the licence of intellectual property at any given point in time, but rather
gains control over the licence period.
Example 7
Pogo has created a popular television show called “Chhota Bheem”. Pogo grants a three-year
license to Toy Manufacturer for use of the character “Chhota Bheem” on its toys. As per the
contract, Pogo will continue to produce the show, popularize the character, carry out marketing
activities. Toy Manufacturer produces and sells “Chhota Bheem” toys. In this case, the license
provides access to Pogo’s Intellectual Property (IP). Pogo will undertake activities that
significantly affect the IP by production and marketing of the show, development of the
characters. Toy manufacturer is directly exposed to any positive or negative effects by Pogo’s
activities ie. how the show is received by kids and their parents. These activities are not
separate performance obligations as they do not transfer a goods or service to Toy
Manufacturer separate from the license. Hence, Pogo will recognize revenue over time.

9.5.2 Right to use

In contrast, when the licence represents a right to use the intellectual property as it exists at a
specific point in time, the customer gains control over that intellectual property at the beginning
of the period for which it has the right to use the intellectual property. This timing may differ
from when the licence was granted.
Illustration 69
An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony
by a noted orchestra. The customer, a consumer products company, has the right to use the
recorded symphony in all commercials, including television, radio and online advertisements for
two years in Country A. In exchange for providing the licence, the entity receives fixed
consideration of 50,000 per month. The contract does not include any other goods or services
to be provided by the entity. The contract is non-cancellable.
Determine how the revenue will be recognized?

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.121

Solution
The entity assesses the goods and services promised to the customer to determine which goods
and services are distinct in accordance with paragraph 27 of Ind AS 115. The entity concludes
that its only performance obligation is to grant the licence. The entity does not have any
contractual or implied obligations to change the licensed recording. The licensed recording has
significant stand-alone functionality (i.e. the ability to be played) and, therefore, the ability of the
customer to obtain the benefits of the recording is not substantially derived from the entity’s
ongoing activities. The entity therefore determines that the contract does not require, and the
customer does not reasonably expect, the entity to undertake activities that significantly affect
the licensed recording. Consequently, the entity concludes that the nature of its promise in
transferring the licence is to provide the customer with a right to use the entity’s intellectual
property as it exists at the point in time that it is granted. Therefore, the promise to grant the
licence is a performance obligation satisfied at a point in time. The entity recognizes all of the
revenue at the point in time when the customer can direct the use of, and obtain substantially all
of the remaining benefits from, the licensed intellectual property.
*****

Access to the IP (over time) Right to use the IP (at a point in time)

1 . The entity is required (by the

- If all 3 criteria for access (over
contract) or reasonably expected (by
time) are not met, the nature of
the customer) to undertake activities
the entity’s promise is to provide a
that significantly affect the licensed
right to use the IP as the IP exists
IP
at the point in time the licence is
2. The licence exposes the customer granted to the customer
to any effects of the entity’s activities
- Effectively, this means the
3. The entity’s activities are not a customer is able to direct the use
performance obligation under the of and obtain all remaining benefits
contract from the licensed IP when granted
(i.e., the IP is static)
All criteria must be met

Illustration 70 : Assessing the nature of a software licence with unspecified upgrades

Software Company X licenses its software application to Customer Y. Under the agreement, X
will provide updates or upgrades on a when-and-if-available basis; Y can choose whether to

© The Institute of Chartered Accountants of India

 5.122 2. a
FINANCIAL REPORTING
122
v
install them. Y expects that X will undertake no other activities that will change the functionality
of the software. v

Determine the nature of license.

Solution
Based on the facts given in question it can be concluded that, although the updates and
upgrades will change the functionality of the software, they are not activities considered in
determining the nature of the entity’s promise in granting the licence. The activities of X to
provide updates or upgrades are not considered because they transfer a promised goods or
service to Y – i.e. updates or upgrades are distinct from the licence. Therefore, the software
licence provides a right to use the IP that is satisfied at a point in time.
*****
Illustration 71 : Assessing the nature of a film licence and the effect of marketing
activities
Film Studio C grants a licence to Customer D to show a completed film. C plans to undertake
significant marketing activities that it expects will affect box office receipts for the film. The
marketing activities will not change the functionality of the film, but they could affect its value.
Determine the nature of license.
Solution
C would probably conclude that the licence provides a right to use its IP and, therefore, is
transferred at a point in time. There is no expectation that C will undertake activities to change
the form or functionality of the film. Because the IP has significant stand-alone functionality, C’s
marketing activities do not significantly affect D’s ability to obtain benefit from the film, nor do
they affect the IP available to D.
*****
Illustration 72 : Assessing the nature of a team name and logo
Sports Team D enters into a three-year agreement to license its team name and logo to Apparel
Maker M. The licence permits M to use the team name and logo on its products, including
display products, and in its advertising or marketing materials.
(i) Determine the nature of license in the above case.
(ii) Modifying above facts that, Sports Team D has not played games in many years and the
licensor is Brand Collector B, an entity that acquires IP such as old team or brand names
and logos from defunct entities or those in financial distress. B’s business model is to

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.123

license the IP, or obtain settlements from entities that use the IP without permission,
without undertaking any ongoing activities to promote or support the IP
Would the answer be different in this situation?
Solution
(i) The nature of D’s promise in this contract is to provide M with the right to access the sports
team’s IP and, accordingly, revenue from the licence will be recognized over time. In
reaching this conclusion, D considers all of the following facts:
– M reasonably expects D to continue to undertake activities that support and maintain
the value of the team name and logo by continuing to play games and field a
competitive team throughout the licence period. These activities significantly affect
the IP’s ability to provide benefit to M because the value of the team name and logo is
substantially derived from, or dependent on, those ongoing activities.
– The activities directly expose M to positive or negative effects (i.e. whether D plays
games and fields a competitive team will have a direct effect on how successful M is
in selling its products featuring the team’s name and logo).
– D’s ongoing activities do not result in the transfer of a goods or a service to M as they
occur (i.e. the team playing games does not transfer a goods or service to M).
(ii) Based on B’s customary business practices, Apparel Maker M probably does not
reasonably expect B to undertake any activities to change the form of the IP or to support
or maintain the IP. Therefore, B would probably conclude that the nature of its promise is
to provide M with a right to use its IP as it exists at the point in time at which the licence is
granted.
*****

© The Institute of Chartered Accountants of India

 5.124 2. a
FINANCIAL REPORTING
124
v

10. CONTRACTv COSTS

Contract Cost

Contract acquisition Contract fulfilment

Cost to fulfil (i.e. perform /

Incremental costs to obtain a contract that deliver) a contract.
would not be incurred if contract not obtained Consider deferral under
(Eg. Sales commission) Ind AS 115.95 only if not
covered in scope of
another standard.
Recognize as an asset the
incremental costs to obtain a contract Recognize as an asset
that are expected to be recovered under this standard if
costs:
All

Directly relate to a contract (or anticipated contract), such as

direct labour and materials, indirect costs of production, etc.

Generate or enhance resources that will be used to

satisfy performance obligations in the future, AND

Expect to be recovered

10.1 Costs to obtain a contract (contract acquisition costs)

Entities may incur various costs to obtain or acquire a contract with a customer, including, but
not limited to, legal fees, advertising expenses, travel expenses, and salespersons’ salaries and
commissions.
Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a
contract with a customer that it would not have incurred if the contract had not been obtained
(for example, a sales commission).

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.125

Once an entity has determined that costs incurred relate to a specific contract with a customer, it
should then determine if the costs meet the conditions for capitalisation. Incremental costs to
obtain a contract that an entity expects to recover should be capitalised, while costs to obtain a
contract that do not qualify for capitalisation should be expensed as incurred.
The test to determine if a cost is incremental is to ask whether the entity would have incurred
the cost had one or both of the parties decided to walk away just before signing the
arrangement. In this context, any legal costs (for example, to draft or negotiate the contract) or
salaries for salespeople would be incurred regardless of whether the contract is finalized.
Therefore, these costs are not incremental. On the other hand, a commission paid only upon the
successful signing of the contract would be incremental and should be capitalized.
As a practical expedient, Ind AS 115 allows an entity to expense the incremental costs of
obtaining a contract as incurred if the amortisation period of the asset that the entity would have
otherwise recognized is one year or less.
Cost Capitalize Reason
or expense
Commission paid only Capitalize Assuming the entity expects to recover the cost,
upon successful signing of the commission is incremental since it would not
a contract have been paid if the parties decided not to enter
into the arrangement just before signing.
Travel expenses for sales Expense Because the costs are incurred regardless of
person pitching a new whether the new contract is won or lost, the entity
client contract incurs the costs, unless they are expressly
reimbursable.
Legal fees for drafting Expense If the parties walk away during negotiations, the
terms of arrangement for costs would still be incurred and therefore are not
parties to approve and incremental costs of obtaining the contract.
sign
Salaries for sales people Expense Salaries are incurred regardless of whether
working exclusively on contracts are won or lost and therefore are not
obtaining new clients incremental costs to obtain the contract.
Bonus based on quarterly Capitalize Bonuses based solely on sales are incremental
sales target costs to obtain a contract.
Commission paid to sales Capitalize The commissions are incremental costs that
manager based on would not have been incurred had the entity not
contracts obtained by the obtained the contract. Ind AS 115 does not
sales manager’s local differentiate costs based on the function or title of
employees the employee that receives the commission.

© The Institute of Chartered Accountants of India

 5.126 2. a
FINANCIAL REPORTING
126
v
Comparison with AS 7 and AS 9
v
Contract acquisition cost is not specifically dealt with in either in AS 7 or AS 9. Let’s take an
illustration to understand the treatment in AS 7 / AS 9 and how it is different from Ind AS:
Example 8
A software company has agreed to pay a special commission of 1% of the contract value to a
sales consultant who has agreed to work based on the successful bidding of the proposal to a
customer. In case the contract is not signed by the company and the customer, for whatever
reason, then there is no commission to be paid to the sales consultant.
The contract value is 1 crore over 3 years and the company has signed the contract with the
customer after successful bidding with the help of the sales consultant.
In this context, the accounting differences will be as follows:

Particulars Treatment under Ind AS 115 Treatment under AS 9

1 st year of operations -  Amortization as expense of Expense of 1 crore as sales
Contract acquisition cost of the year 33.33 lakhs commission
1 crore  Contract asset 66.67 lakhs
2 nd year of operations -  Amortization as expense of No accounting treatment
Contract acquisition cost of the year 33.33 lakhs
1 crore  Contract asset 33.34 lakhs
3 rd year of operations -  Amortization as expense of No accounting treatment
Contract acquisition cost of the year 33.34 lakhs
1 crore  Contract asset of nil

10.2 Costs to fulfil a contract (contract fulfilment costs)

If costs incurred in fulfilling a contract with a customer are covered under another Standard
(such as Ind AS 2 'Inventories' and Ind AS 16 'Property, Plant, and Equipment'), an entity
accounts for those costs in accordance with those Standards. If not, an entity recognizes an
asset for such costs, provided all of the criteria mentioned below are met:
(a) the costs relate directly to a contract or to an anticipated contract that the entity can
specifically identify (for example, costs relating to services to be provided under renewal of
an existing contract or costs of designing an asset to be transferred under a specific
contract that has not yet been approved), including:
(i) direct labour
(ii) direct materials

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.127

(iii) allocations that relate directly to the contract or contract activities (for example,
contract management and supervision costs and depreciation of tools and equipment
and right-of-use assets used in fulfilling the contract)
(iv) costs that are explicitly chargeable to the customer
(v) other costs that the entity incurs only because it entered into the contract (e.g.
payments to subcontractors)
(b) the costs generate or enhance resources of the entity that will be used to satisfy
performance obligations in the future
(c) the entity expects to recover the costs, for e.g. through the expected margin
The following costs should be expensed as incurred:
(a) general and administrative costs that are not explicitly chargeable to the customer
(b) costs of wasted materials, labour, or other resources that were not reflected in the contract
price
(c) costs that relate to satisfied performance obligations
(d) costs related to remaining performance obligations that cannot be distinguished from costs
related to satisfied performance obligations.
Costs incurred in fulfilling a contract with a customer that are within the scope of another
Standard, an entity shall account for those costs in accordance with those other Standards.

Illustration 73
Customer outsources its information technology data centre
Term = 5 years plus two 1-yr renewal options
Average customer relationship is 7 years

Entity spends 4,00,000 designing and building the technology platform needed to
accommodate out-sourcing contract:
Design services 50,000
Hardware 140,000
Software 100,000
Migration and testing of data centre 110,000
TOTAL 400,000

© The Institute of Chartered Accountants of India

 5.128 2. a
FINANCIAL REPORTING
128
v
Solution
v
Design services 50,000 Assess under Ind AS 115. Any resulting
asset would be amortised over 7 years
(i.e. include renewals)
Hardware 140,000 Account for asset under Ind AS 16
Software 100,000 Account for asset under Ind AS 38
Migration and testing of data 110,000 Assess under Ind AS 115. Any resulting
centre asset would be amortised over 7 years
(i.e. include renewals)
TOTAL 400,000

*****
10.3 Amortisation and impairment
Under Ind AS 115, an entity amortises capitalised contract costs on a systematic basis
consistent with the pattern of transferring the goods or services related to those costs. If an
entity identifies a significant change to the expected pattern of transfer, it updates its
amortisation to reflect that change in estimate in accordance with Ind AS 8.
An entity recognizes an impairment loss in earnings if the carrying amount of an asset exceeds
the remaining amount of consideration that the entity expects to receive in connection with the
related goods or services less any directly related contract costs yet to be recognized. When
determining the amount of consideration, it expects to receive, an entity ignores the constraint
on variable consideration previously discussed, and adjusts for the effects of the customer's
credit risk.
Before recognizing an impairment loss under the revenue recognition guidance, an entity
recognizes impairment losses associated with assets related to the contract that are accounted
in accordance with another Standard (for example, Ind AS 2, Ind AS 16 and Ind AS 38).
An entity would reverse a previously recognized impairment loss when the impairment
conditions no longer exist or have improved. The increased carrying amount of the asset shall
not exceed the amount that would have been determined (net of amortisation) if no impairment
loss had been recognized previously.
Illustration 74 : Amortisation
An entity enters into a service contract with a customer and incurs incremental costs to obtain
the contract and costs to fulfil the contract. These costs are capitalised as assets in accordance
with Ind AS 115. The initial term of the contract is five years but it can be renewed for

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.129

subsequent one-year periods up to a maximum of 10 years. The average contract term for
similar contracts entered into by entity is seven years.
Determine appropriate method of amortisation?
Solution
The most appropriate amortisation period is likely to be seven years (i.e. the initial term of five
years plus two anticipated one year renewals) because that is the period over which the entity
expects to provide services under the contract to which the capitalised costs relate.
*****

11. PRESENTATION & DISCLOSURE

11.1 Presentation
Under Ind AS 115, an entity presents a contract in its balance sheet as a contract liability, a
contract asset, or a receivable, depending on the relationship between the entity’s performance
and the customer’s payment at the reporting date. An entity shall present any unconditional
rights to consideration separately as a receivable.
An entity presents a contract as a contract liability if the customer has paid consideration, or if
payment is due as of the reporting date but the entity has not yet satisfied a performance
obligation by transferring a goods or service. Conversely, if the entity has transferred goods or
services as of the reporting date but the customer has not yet paid, the entity recognizes either
a contract asset or a receivable. An entity recognizes a contract asset if it’s right to
consideration is conditioned on something other than the passage of time; otherwise, an entity
recognizes a receivable.
A receivable is an entity’s right to consideration that is unconditional. A right to consideration is
unconditional if only the passage of time is required before payment of that consideration is due.
An entity shall account for a receivable in accordance with Ind AS 109. Upon initial recognition
of a receivable from a contract with a customer, any difference between the measurement of the
receivable in accordance with Ind AS 109 and the corresponding amount of revenue recognized
shall be presented as an expense.
An entity shall also present separately the amount of excise duty included in the revenue
recognized in the statement of profit and loss. This is an additional requirement inserted due to
the Indian context in Ind AS 115.
11.2 Disclosure
Ind AS 115 requires many new disclosures about contracts with customers. The following table
provides a summary:

© The Institute of Chartered Accountants of India

 5.130 2. a
FINANCIAL REPORTING
130
v
Disclosures
v
Disclosure area Summary of requirements
General  revenue recognized from contracts with customers, separately from its
other sources of revenue
 impairment losses on receivables or contract assets
Disaggregation of  categories that depict the nature, amount, timing, and uncertainty of
revenue revenue and cash flows
 sufficient information to enable users of financial statements to
understand the relationship with revenue information disclosed for
reportable segments under Ind AS 108 'Operating Segments'
Information about  including opening and closing balances of contract assets, contract
contract balances liabilities, and receivables (if not separately presented)
 revenue recognized in the period that was included in contract
liabilities at the beginning of the period and revenue from performance
obligations (wholly or partly) satisfied in prior periods
 explanation of relationship between timing of satisfying performance
obligations and payment
 explanation of significant changes in the balances of contract assets
and liabilities
Information about  when the entity typically satisfies performance obligations
performance  significant payment terms
obligations  nature of goods and services
 obligations for returns, refunds and similar obligations
 types of warranties and related obligations
Transaction price  transaction price allocated to the performance obligations that are
allocated to the unsatisfied and an explanation of when the entity expects to recognize
remaining such revenue.
performance
obligations
Timing of  performance obligations that an entity satisfies over time:
satisfaction of o methods used to recognize revenue
performance o why the methods used provide a faithful depiction
obligations
 performance obligations satisfied at a point in time:
o judgements made in evaluating when a customer obtains control

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.131

Information about  judgements impacting the expected timing of satisfying performance

significant obligations transaction price and amounts allocated to performance
judgements obligations (e.g. estimating variable consideration and assessing if
constrained and allocating to performance obligations).
Transaction price  determining transaction price, estimating variable consideration,
and amount adjusting the consideration for the effects of the time value of money
allocated to and measuring non-cash consideration
performance  estimate of variable consideration is constrained
obligations  measuring obligations for returns, refunds and other similar obligations
 allocating the transaction price, discounts and variable consideration
to a specific part of the contract
 reconcile the amount of revenue recognized in the statement of profit
and loss with the contracted price
Assets recognized  judgements made in determining costs amount of the costs incurred
from the costs to  to obtain or fulfil a contract with a customer
obtain or fulfil a  amortisation method used
contract
 closing balances by main category and amortisation expense
Practical  practical expedient elected by an entity in either paragraph 63 (about
expedients the existence of a significant financing component) or paragraph 94
(about the incremental costs of obtaining a contract)

12. SERVICE CONCESSION ARRANGEMENTS

12.1 About Arrangement
 Service Concession Arrangement involves a private sector entity (an operator) constructing
the infrastructure used to provide the public service or upgrading it (for example, by
increasing its capacity) and operating and maintaining that infrastructure for a specified
period of time. The operator is paid for its services over the period of the arrangement.
The arrangement is governed by a contract that sets out performance standards,
mechanisms for adjusting prices, and arrangements for arbitrating disputes.
 Such an arrangement is often described as a ‘build-operate-transfer’, a ‘rehabilitate-
operate-transfer’ or a ‘public-to-private’ service concession arrangement.

Infrastructure for public services—such as roads, bridges, tunnels, prisons, hospitals,

airports, water distribution facilities, energy supply and telecommunication networks—has

© The Institute of Chartered Accountants of India

 5.132 2. a
FINANCIAL REPORTING
132
v
traditionally been constructed, operated and maintained by the public sector and financed
v
through public budget appropriation.

 A feature of these service arrangements is the public service nature of the obligation
undertaken by the operator.
 Public policy is for the services related to the infrastructure to be provided to the public,
irrespective of the identity of the party that operates the services. The service arrangement
contractually obliges the operator to provide the services to the public on behalf of the
public sector entity. Other common features are:
(a) the party that grants the service arrangement (the grantor) is a public sector entity,
including a governmental body, or a private sector entity to which the responsibility for
the service has been devolved.
(b) the operator is responsible for at least some of the management of the infrastructure
and related services and does not merely act as an agent on behalf of the grantor.
(c) the contract sets the initial prices to be levied by the operator and regulates price
revisions over the period of the service arrangement.
(d) the operator is obliged to hand over the infrastructure to the grantor in a specified
condition at the end of the period of the arrangement, for little or no incremental
consideration, irrespective of which party initially financed it.
12.2 Accounting Principles
12.2.1 Treatment of the operator’s rights over the infrastructure
 Infrastructure shall not be recognized as property, plant and equipment of the operator
because the contractual service arrangement does not convey the right to control the use
of the public service infrastructure to the operator.
 The operator has access to operate the infrastructure to provide the public service on
behalf of the grantor in accordance with the terms specified in the contract.
12.2.2 Recognition and measurement
 Since the operator acts as a service provider, he shall recognize and measure revenue in
accordance with Ind AS 115 for the services it performs. The operator constructs or
upgrades infrastructure (construction or upgrade services) used to provide a public service
and operates and maintains that infrastructure (operation services) for a specified period of
time.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.133

 If the operator performs more than one service (ie construction or upgrade services and
operation services) under a single contract or arrangement, consideration received or
receivable shall be allocated by reference to the relative fair values of the services
delivered, when the amounts are separately identifiable.
 The nature of the consideration i.e. whether financial asset or intangible asset determines
its subsequent accounting treatment.
 The operator shall account for revenue and costs relating to construction or upgrade
services.
 The operator shall account for revenue and costs relating to operation services in
accordance with Ind AS 115.
12.2.3 Consideration given by the grantor to the operator
 If the operator provides construction or upgrade services, the consideration received or
receivable by the operator shall be recognized at its fair value. The consideration may be
rights to:
(a) a financial asset, or
(b) an intangible asset.
 The operator shall recognize a financial asset to the extent that
 it has an unconditional contractual right to receive cash or another financial asset from
or at the direction of the grantor for the construction services; the grantor has little, if
any, discretion to avoid payment, usually because the agreement is enforceable by
law.
 it has an unconditional right to receive cash if the grantor contractually guarantees to
pay the operator (a) specified or determinable amounts or (b) the shortfall, if any,
between amounts received from users of the public service and specified or
determinable amounts, even if payment is contingent on the operator ensuring that the
infrastructure meets specified quality or efficiency requirements.
 The operator shall recognize an intangible asset to the extent that it receives a right (a
licence) to charge users of the public service. A right to charge users of the public service
is not an unconditional right to receive cash because the amounts are contingent on the
extent that the public uses the service.
 If the operator is paid for the construction services partly by a financial asset and partly by
an intangible asset it is necessary to account separately for each component of the
operator’s consideration. The consideration received or receivable for both components
shall be recognized initially at the fair value of the consideration received or receivable.

© The Institute of Chartered Accountants of India

 5.134 2. a
FINANCIAL REPORTING
134
v
12.2.4 Contractual obligations to restore the infrastructure to a specified level of
serviceability v

The operator may have contractual obligations it must fulfil as a condition of its licence, like to
maintain or restore infrastructure, except for any upgrade element, which shall be recognized
and measured in accordance with Ind AS 37, ie at the best estimate of the expenditure that
would be required to settle the present obligation at the end of the reporting period.
12.2.5 Borrowing costs incurred by the operator
 Borrowing costs attributable to the arrangement shall be recognized as an expense in the
period in which they are incurred unless the operator has a contractual right to receive an
intangible asset (a right to charge users of the public service).
 If the operator does not have a contractual right to receive an intangible asset, borrowing
costs attributable to the arrangement shall be capitalised during the construction phase of
the arrangement.
12.2.6 Financial asset
 For recognition of financial asset, Ind AS 32, Ind AS 107 and Ind AS 109 shall be applied.
The amount due from or at the direction of the grantor is accounted at:
(a) amortised cost;
(b) fair value through other comprehensive income; or
(c) fair value through profit or loss.
 If the amount due from the grantor is measured at amortised cost or fair value through
other comprehensive income, Ind AS 109 requires interest calculated using the effective
interest method to be recognized in profit or loss.
12.2.7 Intangible asset
For recognition and measurement of intangible asset, one has to apply Ind AS 38 for guidance
on measuring intangible assets acquired in exchange for a non-monetary asset or assets or a
combination of monetary and non-monetary assets.

Comparison with AS 7 and AS 9

Service concession arrangements are specifically dealt with in detail unlike with AS 9 or AS 7.
Also, there’s a specific mention about recognition of financial asset or intangible asset as per Ind
AS 115 which is not mentioned in either AS 7 or AS 9.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.135

12.2.8 Items provided to the operator by the grantor

 Infrastructure items to which the operator is given access by the grantor for the purposes of
the service arrangement are not recognized as property, plant and equipment of the
operator.
 The grantor may also provide other items to the operator that the operator can keep or deal
with as it wishes. If such assets form part of the consideration payable by the grantor for
the services, they are not government grants as defined in Ind AS 20. They are recognized
as assets of the operator, measured at fair value on initial recognition.
 The operator shall recognize a liability in respect of unfulfilled obligations it has assumed in
exchange for the assets.
Information note 1
Accounting framework for public-to-private service arrangements

© The Institute of Chartered Accountants of India

 5.136 2. a
FINANCIAL REPORTING
136
v

12.3 Service Concession Arrangements: Disclosures

 All aspects of a service concession arrangement shall be considered in determining the
appropriate disclosures in the notes. An operator and a grantor shall disclose the following
in each period:
(a) a description of the arrangement;

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.137

(b) significant terms of the arrangement that may affect the amount, timing and certainty
of future cash flows (eg the period of the concession, re-pricing dates and the basis
upon which re-pricing or re-negotiation is determined);
(c) the nature and extent (eg quantity, time period or amount as appropriate) of:
(i) rights to use specified assets;
(ii) obligations to provide or rights to expect provision of services;
(iii) obligations to acquire or build items of property, plant and equipment;
(iv) obligations to deliver or rights to receive specified assets at the end of the
concession period;
(v) renewal and termination options; and
(vi) other rights and obligations (eg major overhauls);
(d) changes in the arrangement occurring during the period; and
(e) how the service arrangement has been classified.
 An operator shall disclose the amount of revenue and profits or losses recognized in the
period on exchanging construction services for a financial asset or an intangible asset.
 The disclosures required in accordance with paragraph 6 of this Appendix shall be provided
individually for each service concession arrangement or in aggregate for each class of
service concession arrangements. A class is a grouping of service concession
arrangements involving services of a similar nature (eg toll collections, telecommunications
and water treatment services).

Illustration 75
A Ltd. is in the business of infrastructure and has two divisions; (I) Toll Roads and (II) Wind
Power. The brief details of these business and underlying project details are as follows:
I. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the
project in the current year and has incurred total expenses aggregating to 50 crore as on
31 st December, 20X1. Under IGAAP, the Company has 'recorded such expenses as
Intangible Assets in the books of account. The brief details of the Concession Agreement
are as follows:
 Total Expenses estimated to be incurred on the project 100 crore;
 Fair Value of the construction services is 110 crore;
 Total Cash Flow guaranteed by the Government under the concession agreement is
200 crore;

© The Institute of Chartered Accountants of India

 5.138 2. a
FINANCIAL REPORTING
138
v
 Finance revenue over the period of operation phase is 15 crore:
v
 Other income relates to the services provided during the operation phase.
II. Kolhapur- Nagpur Expressway - The Company has also entered into another concession
agreement with Government of Maharashtra in the current year. The construction cost for
the said project will be 110 crore. The fair value of such construction cost is
approximately 200 crore. The said concession agreement is Toll based project and the
Company needs to collect the toll from the users of the expressway. Under IGAAP, A Ltd.
has recorded the expenses incurred on the said project as an Intangible Asset.
(i) What would be the classification of Bhilwara-Jabalpur Toll Project as per applicable
Ind AS? Give brief reasoning.
(ii) What would be the classification of Kolhapur-Nagpur Expressway Toll Project as per
applicable Ind AS? Give brief reasoning.
(iii) Also, suggest suitable accounting entries for the preparation of financial statements as per
Ind AS for the above 2 projects.

Solution
(i) Here the operator has a contractual right to receive cash from the grantor. The grantor has
little, if any, discretion to avoid payment, usually because the agreement is enforceable by
law. The operator has an unconditional right to receive cash if the grantor contractually
guarantees to pay the operator. Hence, the operator recognizes a financial asset to the
extent it has a contractual right to receive cash.
(ii) Here the operator has a contractual right to charge users of the public services. A right to
charge users of the public service is not an unconditional right to receive cash because the
amounts are contingent on the extent that the public uses the service. Therefore, the
operator shall recognize an intangible asset to the extent it receives the right (a licence) to
charge users of the public service.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.139

(iii) Accounting treatment for preparation of financial statements

Bhilwara-Jabalpur Toll Project
Journal Entries
Particulars Dr. Cr.
( in crore) ( in crore)
During construction:
1 Financial asset A/c Dr. 110
To Construction revenue 110
[To recognize revenue relating to construction services, to
be settled in case]
2 Cost of construction (profit or loss) Dr. 100
To Bank A/c (As and when incurred) 100
[To recognize costs relating to construction services]
During the operation phase:
3 Financial asset Dr. 15
To Finance revenue (As and when received or due to 15
receive)
[To recognize interest income under the financial asset
model]
4 Financial asset Dr. 75
To Revenue [(200-110) – 15] 75
[To recognize revenue relating to the operation phase]
5 Bank A/c Dr. 200
To Financial asset 200
[To recognize cash received from the grantor]
Kolhapur-Nagpur Expressway -Intangible asset
Journal Entries
Particulars Dr. Cr.
( in crore) ( in crore)
During construction:
1 Cost of construction (profit or loss) Dr. 110
To Bank A/c (As and when incurred) 110
[To recognize costs relating to construction services]

© The Institute of Chartered Accountants of India

 5.140 2. a
FINANCIAL REPORTING
140
v
2 Intangible asset Dr. 200
v
To Revenue 200
[To recognize revenue relating to construction services
provided for non-cash consideration]
During the operation phase:
3 Amortisation expense Dr. 200
To Intangible asset (accumulated amortisation) 200
[To recognize amortisation expense relating to the
operation phase over the period of operation]
4 Bank A/c Dr. ?
To Revenue ?
[To recognize revenue relating to the operation phase]

Note: Amount in entry 4 is kept blank as no information in this regard is given in the question.
*****

13. EXTRACTS OF FINANCIAL STATEMENTS FROM

LISTED ENTITIES
Following is the extract from the financial statements of the listed entity ‘Hindustan Unilever
Limited’ for the financial year 2021-2022 with respect to ‘Revenue from Contract with
Customers’ and its accounting policy thereon.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.141

© The Institute of Chartered Accountants of India

 5.142 2. a
FINANCIAL REPORTING
142
v

(Source: Annual Report 2021-2022 – Hindustan Unilever Limited)

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.143

14. SIGNIFICANT DIFFERENCES IN IND AS 115 VIS-À-VIS

AS 7 AND AS 9
S. Particular Ind AS 115 AS 7 and AS 9
No.
1. Framework of Ind AS 115 gives a framework of AS 7 and AS 9 do not
Revenue revenue recognition within a provide any such
Recognition standard. It specifies the core overarching principle to fall
principle for revenue recognition upon in case of doubt.
which requires the ‘revenue to There is no emphasis on
depict the transfer of promised performance obligation under
goods or services to customers in the contract with customer.
an amount that reflects the
consideration to which the entity
expects to be entitled in exchange
for those goods or services’.
2. Comprehensive Ind AS 115 gives comprehensive AS 7 and AS 9 do not
Guidance on guidance on how to recognize and provide comprehensive
Recognition and measure multiple elements within guidance on this aspect.
Measurement of a contract with customer.
Multiple Elements
within a Contract
with Customer:

3. Coverage Ind AS 115 comprehensively deals AS 7 covers only revenue

with all types of performance from construction contracts
obligation contracts with which is measured at
customers. However, it does not consideration received /
deal with revenue from ‘interest’ receivable. AS 9 deals only
and ‘dividend’ which are covered with recognition of revenue
in financial instruments standard. from sale of goods,
rendering of services,
interest, royalties and
dividends.

4. Measurement of As per Ind AS 115, revenue is As per AS 9, Revenue is the

measured at transaction price, i.e., gross inflow of cash,

© The Institute of Chartered Accountants of India

 5.144 2. a
FINANCIAL REPORTING
144
v
Revenue the amount of consideration to receivables or other
v
which an entity expects to be considerations arising in the
entitled in exchange for course of the ordinary
transferring promised goods or activities. Revenue is
services to a customer, excluding measured by the charges
amounts collected on behalf of made to customers or clients
third parties. for goods supplied and
services rendered to them
and by the charges and
rewards arising from the use
of resources by them. As
per AS 7, revenue from
construction contracts is
measured at consideration
received / receivable and to
be recognized as revenue as
construction progresses if
certain conditions are met.

5. Recognition of As per Ind AS 115, revenue is As per AS 9, revenue is

Revenue recognized when the control is recognized when significant
transferred to the customer. It risks and rewards of
introduces a 5-step model for ownership is transferred to
revenue recognition. the buyer. As per AS 7,
revenue is recognized when
the outcome of a
construction contract can be
estimated reliably, contract
revenue should be
recognized by reference to
the stage of completion of
the contract activity at the
reporting date.

6. Multiple element or Ind AS 115 gives comprehensive AS 7 and AS 9 provide no

linked transactions guidance on how to recognize and specific guidance for
measure multiple elements / multiple element or linked
performance obligations within a transactions.
contract with customer.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.145

7. Capitalisation of Ind AS 115 provides guidance on AS 7 and AS 9 do not deal

Costs recognition of costs to obtain and with such capitalisation of
fulfil a contract, as asset. costs.

8. Guidance on Ind AS 115 provides guidance on AS 7 and AS 9 do not deal

combining contracts combining contracts entered into with such aspects.
and variable and at or near the same time with the
contingent same customer (or related parties
consideration of the customer), guidance on
treatment of variable and
contingent consideration.

9. Adjustment for time As per Ind AS 115, transaction As per AS 9, revenue is not
value of money price is adjusted for the effect of adjusted for time value of
time value of money when a money.
significant financing component
exists.

10. Guidance on Service Ind AS 115 gives guidance on AS does not provide such
Concession service concession arrangements guidance.
Arrangements and disclosures thereof.

11. Disclosure Ind AS 115 contains detailed Less disclosure

Requirements disclosure requirements. requirements are prescribed
in AS.

© The Institute of Chartered Accountants of India

 5.146 2. a
FINANCIAL REPORTING
146
v

FOR SHORTCUTv TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for
the same, Q TV allowed Deshabandhu a free advertisement spot, which was duly utilised
by Deshabandu. How revenue for these non-monetary transactions in the area of
advertising will be recognized and measured?
2. A Ltd. a telecommunication company, entered into an agreement with B Ltd. which is
engaged in generation and supply of power. The agreement provided that A Ltd. will
provide 1,00,000 minutes of talk time to employees of B Ltd. in exchange for getting power
equivalent to 20,000 units. A Ltd. normally charges 0.50 per minute and B Ltd. charges
2.5 per unit. How should revenue be measured in this case?
3. Company X enters into an agreement on 1 st January, 20X1 with a customer for renovation
of hospital and install new air-conditioners for total consideration of 50,00,000. The
promised renovation service, including the installation of new air-conditioners is a single
performance obligation satisfied over time. Total expected costs are 40,00,000 including
10,00,000 for the air conditioners.
Company X determines that it acts as a principal in accordance with paragraphs B34-B38
of Ind AS 115 because it obtains control of the air conditioners before they are transferred
to the customer. The customer obtains control of the air conditioners when they are
delivered to the hospital premises.
Company X uses an input method based on costs incurred to measure its progress towards
complete satisfaction of the performance obligation.

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.147

As at 31 st March, 20X1, other costs incurred excluding the air conditioners are 6,00,000.
Whether Company X should include cost of the air conditioners in measure of its progress
of performance obligation? How should revenue be recognized for the year ended
March 20X1?
4. An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for
20,00,000. P Ltd. intends to use the said machinery to start a food processing unit. The
food processing industry is highly competitive and P Ltd. has very little experience in the
said industry.
P Ltd. pays a non-refundable deposit of 1,00,000 at inception of the contract and enters
into a long-term financing agreement with G Ltd. for the remaining 95 per cent of the
agreed consideration which it intends to pay primarily from income derived from its food
processing unit as it lacks any other major source of income. The financing arrangement is
provided on a non-recourse basis, which means that if P Ltd. defaults then G Ltd. can
repossess the machinery but cannot seek further compensation from P Ltd., even if the full
value of the amount owed is not recovered from the machinery. The cost of the machinery
for G Ltd. is 12,00,000. P Ltd. obtains control of the machinery at contract inception.
When should G Ltd. recognize revenue from sale of machinery to P Ltd. in accordance with
Ind AS 115?
5. Entity I sells a piece of machinery to the customer for 2 million, payable in 90 days.
Entity I is aware at contract inception that the customer might not pay the full contract
price. Entity I estimates that the customer will pay atleast 1.75 million, which is sufficient
to cover entity I's cost of sales ( 1.5 million) and which entity I is willing to accept because
it wants to grow its presence in this market. Entity I has granted similar price concessions
in comparable contracts.
Entity I concludes that it is highly probable that it will collect 1.75 million, and such
amount is not constrained under the variable consideration guidance.
What is the transaction price in this arrangement?
6. On 1 st January 20X8, entity J enters into a one-year contract with a customer to deliver
water treatment chemicals. The contract stipulates that the price per container will be
adjusted retroactively once the customer reaches certain sales volume, defined, as follows:

Price per container Cumulative sales volume

100 1 - 1,000,000 containers
90 1,000,001 - 3,000,000 containers
85 3,000,001 containers and above

© The Institute of Chartered Accountants of India

 5.148 2. a
FINANCIAL REPORTING
148
v
Volume is determined based on sales during the calendar year. There are no minimum
v
purchase requirements. Entity J estimates that the total sales volume for the year will be
2.8 million containers, based on its experience with similar contracts and forecasted sales
to the customer.
Entity J sells 700,000 containers to the customer during the first quarter ended
31 st March 20X8 for a contract price of 100 per container.
How should entity J determine the transaction price?
7. Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included
inside the electric razor package that can be redeemed by the end consumers for C 10 per
unit.
Entity K estimates that 20% to 25% of eligible rebates will be redeemed, based on its
experience with similar programmes and rebate redemption rates available in the market
for similar programmes. Entity K concludes that the transaction price should incorporate an
assumption of 25% rebate redemption, as this is the amount for which it is highly probable
that a significant reversal of cumulative revenue will not occur if estimates of the rebates
change.
How should entity K determine the transaction price?
8. A manufacturer enters into a contract to sell goods to a retailer for 1,000. The
manufacturer also offers price protection, whereby it will reimburse the retailer for any
difference between the sale price and the lowest price offered to any customer during the
following six months. This clause is consistent with other price protection clauses offered
in the past, and the manufacturer believes that it has experience which is predictive for this
contract.
Management expects that it will offer a price decrease of 5% during the price protection
period. Management concludes that it is highly probable that a significant reversal of
cumulative revenue will not occur if estimates change.
How should the manufacturer determine the transaction price?
9. Electronics Manufacturer M sells 1,000 televisions to Retailer R for 50,00,000 ( 5,000
per television). M provides price protection to R by agreeing to reimburse R for the
difference between this price and the lowest price that it offers for that television during the
following six months. Based on M’s extensive experience with similar arrangements, it
estimates the following outcomes.

Price reduction in next six months ( ) Probability

0 70%

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.149

500 20%
1,000 10%
Determine the transaction price.
10. Construction Company C enters into a contract with Customer E to build an asset.
Depending on when the asset is completed, C will receive either 1,10,000 or 1,30,000.

Outcome Consideration ( ) Probability

Project completes on time 1,30,000 90%
Project is delayed 1,10,000 10%
Determine the transaction price.
11. Franchisor Y Ltd. licenses the right to operate a store in a specified location to Franchisee
F. The store bears Y Ltd.’s trade name and F will have a right to sell Y Ltd.’s products for
10 years. F pays an up-front fixed fee. The franchise contract also requires Y Ltd. to
maintain the brand through product improvements, marketing campaigns etc. Determine
the nature of license.
Answers
1. Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the
same line of business to facilitate sales to customers or potential customers. For example,
this Standard would not apply to a contract between two oil companies that agree to an
exchange of oil to fulfil demand from their customers in different specified locations on a
timely basis.
In industries with homogenous products, it is common for entities in the same line of
business to exchange products in order to sell them to customers or potential customers
other than parties to exchange. The current scenario, on the contrary, will be covered
under Ind AS 115 since the same is exchange of dissimilar goods or services because both
of the entities deal in different mode of media, i.e., one is print media and another is
electronic media and both parties are acting as customers and suppliers for each other.
Further, in the current scenario, it seems it is for consumption by the said parties and
hence it does not fall under paragraph 5(d). It may also be noted that, even if it was to
facilitate sales to customers or potential customers, it would not be scoped out since the
parties are not in the same line of business.

As per paragraph 47 of Ind AS 115, “An entity shall consider the terms of the contract and

© The Institute of Chartered Accountants of India

 5.150 2. a
FINANCIAL REPORTING
150
v
its customary business practices to determine the transaction price. The transaction price
v
is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties (for example, some sales taxes). The consideration promised in a
contract with a customer may include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall
measure the non-cash consideration (or promise of non-cash consideration) at fair value.
In accordance with the above, Q TV and Deshabandhu should measure the revenue
promised in the form of non-cash consideration as per the above referred principles of
Ind AS 115.
2. Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the
same line of business to facilitate sales to customers or potential customers. For example,
this Standard would not apply to a contract between two oil companies that agree to an
exchange of oil to fulfil demand from their customers in different specified locations on a
timely basis.
However, the current scenario will be covered under Ind AS 115 since the same is
exchange of dissimilar goods or services.
As per paragraph 47 of Ind AS 115, “an entity shall consider the terms of the contract and
its customary business practices to determine the transaction price. The transaction price
is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties (for example, some sales taxes). The consideration promised in a
contract with a customer may include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall
measure the non-cash consideration (or promise of noncash consideration) at fair value.
On the basis of the above, revenue recognized by A Ltd. will be the consideration in the
form of power units that it expects to be entitled for talktime sold, i.e. 50,000 (20,000
units x 2.5). The revenue recognized by B Ltd. will be the consideration in the form of
talk time that it expects to be entitled for the power units sold, i.e., 50,000 (1,00,000
minutes x 0.50).
3. Paragraph B19 of Ind AS 115 inter alia, states that, “an entity shall exclude from an input
method the effects of any inputs that, in accordance with the objective of measuring

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.151

progress in paragraph 39, do not depict the entity’s performance in transferring control of
goods or services to the customer”.
In accordance with the above, Company X assesses whether the costs incurred to procure
the air conditioners are proportionate to the entity’s progress in satisfying the performance
obligation. The costs incurred to procure the air conditioners ( 10,00,000) are significant
relative to the total costs to completely satisfy the performance obligation ( 40,00,000).
Also, Company X is not involved in manufacturing or designing the air conditioners.
Company X concludes that including the costs to procure the air conditioners in the
measure of progress would overstate the extent of the entity’s performance. Consequently,
in accordance with paragraph B19 of Ind AS 115, the entity adjusts its measure of progress
to exclude the costs to procure the air conditioners from the measure of costs incurred and
from the transaction price. The entity recognizes revenue for the transfer of the air
conditioners at an amount equal to the costs to procure the air conditioners (i.e., at a zero
margin).
Company X assesses that as at March, 20X1, the performance is 20 per cent complete
(i.e., 6,00,000 / 30,00,000). Consequently, Company X recognizes the following-
As at 31 st March, 20X1

Amount in
Revenue 18,00,000
Cost of goods sold 16,00,000
Profit 2,00,000

Revenue recognized is calculated as (20 per cent × 40,00,000) + 10,00,000.

( 40,00,000 = 50,00,000 transaction price – 10,00,000 costs of air conditioners.)
Cost of goods sold is 6,00,000 of costs incurred + 10,00,000 costs of air conditioners.
4. As per paragraph 9 of Ind AS 115, “An entity shall account for a contract with a customer
that is within the scope of this Standard only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in
accordance with other customary business practices) and are committed to perform
their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be
transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;

© The Institute of Chartered Accountants of India

 5.152 2. a
FINANCIAL REPORTING
152
v
(d) the contract has commercial substance (ie the risk, timing or amount of the entity’s
v
future cash flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in
exchange for the goods or services that will be transferred to the customer. In
evaluating whether collectability of an amount of consideration is probable, an entity
shall consider only the customer’s ability and intention to pay that amount of
consideration when it is due. The amount of consideration to which the entity will be
entitled may be less than the price stated in the contract if the consideration is
variable because the entity may offer the customer a price concession”.
Paragraph 9(e) above, requires that for revenue to be recognized, it should be probable
that the entity will collect the consideration to which it will be entitled in exchange for the
goods or services that will be transferred to the customer. In the given case, it is not
probable that G Ltd. will collect the consideration to which it is entitled in exchange for the
transfer of the machinery. P Ltd.’s ability to pay may be uncertain due to the following
reasons:
(a) P Ltd. intends to pay the remaining consideration (which has a significant balance)
primarily from income derived from its food processing unit (which is a business
involving significant risk because of high competition in the said industry and P Ltd.'s
little experience);
(b) P Ltd. lacks sources of other income or assets that could be used to repay the
balance consideration; and
(c) P Ltd.'s liability is limited because the financing arrangement is provided on a non-
recourse basis.
In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.
Further, para 15 states that when a contract with a customer does not meet the criteria in
paragraph 9 and an entity receives consideration from the customer, the entity shall
recognize the consideration received as revenue only when either of the following events
has occurred:
(a) the entity has no remaining obligations to transfer goods or services to the customer
and all, or substantially all, of the consideration promised by the customer has been
received by the entity and is non-refundable; or
(b) the contract has been terminated and the consideration received from the customer is
non-refundable.
Para 16 states that an entity shall recognize the consideration received from a customer as
a liability until one of the events in paragraph 15 occurs or until the criteria in paragraph 9

© The Institute of Chartered Accountants of India

 INDIAN ACCOUNTING STANDARD 115 5.153

are subsequently met. Depending on the facts and circumstances relating to the contract,
the liability recognized represents the entity’s obligation to either transfer goods or services
in the future or refund the consideration received. In either case, the liability shall be
measured at the amount of consideration received from the customer.
In accordance with the above, in the given case G Ltd. should account for the non-
refundable deposit of 1,00,000 payment as a deposit liability as none of the events
described in paragraph 15 have occurred—that is, neither the entity has received
substantially all of the consideration, nor it has terminated the contract. Consequently, in
accordance with paragraph 16, G Ltd. will continue to account for the initial deposit as well
as any future payments of principal and interest as a deposit liability until the criteria in
paragraph 9 are met (i.e. the entity is able to conclude that it is probable that the entity will
collect the consideration) or one of the events in paragraph 15 has occurred. Further,
G Ltd. will continue to assess the contract in accordance with paragraph 14 to determine
whether the criteria in paragraph 9 are subsequently met or whether the events in
paragraph 15 of Ind AS 115 have occurred.
5. Entity I is likely to provide a price concession and accept an amount less than 2 million in
exchange for the machinery. The consideration is therefore variable. The transaction price
in this arrangement is 1.75 million, as this is the amount which entity I expects to receive
after providing the concession and it is not constrained under the variable consideration
guidance. Entity I can also conclude that the collectability threshold is met for 1.75
million and therefore contract exists.
6. The transaction price is 90 per container based on entity J's estimate of total sales
volume for the year, since the estimated cumulative sales volume of 2.8 million containers
would result in a price per container of 90. Entity J concludes that based on a
transaction price of 90 per container, it is highly probable that a significant reversal in the
amount of cumulative revenue recognized will not occur when the uncertainty is resolved.
Revenue is therefore recognized at a selling price of 90 per container as each container
is sold. Entity J will recognize a liability for cash received in excess of the transaction price
for the first 1 million containers sold at 100 per container (that is, 10 per container) until
the cumulative sales volume is reached for the next pricing tier and the price is
retroactively reduced.
For the quarter ended 31 st March, 20X8, entity J recognizes revenue of 63 million
(700,000 containers x 90) and a liability of 7 million [700,000 containers x ( 100 -
90)].
Entity J will update its estimate of the total sales volume at each reporting date until the
uncertainty is resolved.
7. Entity K records sales to the retailer at a transaction price of 47.50 ( 50 less 25% of
10). The difference between the per unit cash selling price to the retailers and the

© The Institute of Chartered Accountants of India

 5.154 2. a
FINANCIAL REPORTING
154
v
transaction price is recorded as a liability for cash consideration expected to be paid to the
end customer. Entity K willv update its estimate of the rebate and the transaction price at
each reporting date if estimates of redemption rates change.
8. The transaction price is 950, because the expected reimbursement is 50. The
expected payment to the retailer is reflected in the transaction price at contract inception,
as that is the amount of consideration to which the manufacturer expects to be entitled
after the price protection. The manufacturer will recognize a liability for the difference
between the invoice price and the transaction price, as this represents the cash that it
expects to refund to the retailer. The manufacturer will update its estimate of expected
reimbursement at each reporting date until the uncertainty is resolved.
9. After considering all relevant facts and circumstances, M determines that the expected
value method provides the best prediction of the amount of consideration to which it will be
entitled. As a result, it estimates the transaction price to be 4,800 per television – i.e.
( 5,000 x 70%) + ( 4,500 x 20%) + ( 4,000 x 10%).
10. Because there are only two possible outcomes under the contract, C determines that using
the most likely amount provides the best prediction of the amount of consideration to which
it will be entitled. C estimates the transaction price to be 1,30,000, which is the single
most likely amount.
11. The licence provides F access to the IP as it exists at any point in time in the licence
period. This is because:
– Y Ltd. is required to maintain the brand, which will significantly affect the IP by
affecting F’s ability to obtain benefit from the brand;
– any action by Y Ltd. may have a direct positive or negative effect on F; and
– these activities do not transfer a goods or service to F.
Therefore, Y Ltd. recognizes the up-front fee over the 10-year franchise period.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
© The Institute of Chartered Accountants of India
ANNEXURE

DIVISION II OF SCHEDULE III

TO THE COMPANIES ACT,
2013
Division II
Financial Statements for a company whose financial statements are drawn up
in compliance of the Companies (Indian Accounting Standards) Rules, 2015.
GENERAL INSTRUCTIONS FOR PREPARATION OF FINANCIAL STATMENT OF A COMPANY
REQUIRED TO COMPLY WITH Ind AS
1. Every company to which Indian Accounting Standards apply, shall prepare its financial
statements in accordance with this Schedule or with such modification as may be required
under certain circumstances.
2. Where compliance with the requirements of the Act including Indian Accounting Standards
(except the option of presenting assets and liabilities in the order of liquidity as provided by the
relevant Ind AS) as applicable to the companies require any change in treatment or disclosure
including addition, amendment substitution or deletion in the head or sub-head or any changes
inter se, in the financial statements or statements forming part thereof, the same shall be made
and the requirements under this Schedule shall stand modified accordingly.
3. The disclosure requirements specified in this Schedule are in addition to and not in substitution
of the disclosure requirements specified in the Indian Accounting Standards. Additional
disclosures specified in the Indian Accounting Standards shall be made in the Notes or by way
of additional statement or statements unless required to be disclosed on the face of the
Financial Statements. Similarly, all other disclosures as required by the Companies Act, 2013
shall be made in the Notes in addition to the requirements set out in this Schedule.
4. (i) Notes shall contain information in addition to that presented in the Financial Statements
and shall provide where required-
(a) narrative description or disaggregation of items recognised in those statements; and
(b) information about items that do not qualify for recognition in those statements.

© The Institute of Chartered Accountants of India

 A.2 2.2 a
FINANCIAL REPORTING
v
v
(ii) Each item on the face of the Balance Sheet, Statement of Changes in Equity and
Statement of Profit and Loss shall be cross-referenced to any related information in the
Notes. In preparing the Financial Statements including the Notes, a balance shall be
maintained between providing excessive detail that may not assist users of Financial
Statements and not providing important information as a result of too much aggregation.
5. Depending upon the Total Income of the company, the figures appearing in the Financial
Statements shall be rounded off as below:

Total Income Rounding off

(i) less than one hundred crore To the nearest hundreds, thousands, lakhs or
rupees millions, or decimals thereof
(li) one hundred crore rupees or more To the nearest, lakhs, millions or crores, or
decimals thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial Statements.
6. Financial Statements shall contain the corresponding amounts (comparatives) for the
immediately preceding reporting period for all items shown in the Financial Statement including
Notes except in the case of first Financial Statements laid before the company after
incorporation.
7. Financial Statements shall disclose all 'material' items, i,e, the items if they could. individually
or collectively, influence the economic decisions that users make on the basis of the financial
statements. Materiality depends on the size or nature of the item or a combination of both, to
be judged in the particular circumstances.
8. For the purpose of this Schedule, the terms used herein shall have the same meanings
assigned to them in Indian Accounting Standards.
9. Where any Act or Regulation requires specific disclosure to be made in the standalone financial
statement of a company, the said disclosure shall be made in addition to those required under
this Schedule.
Note: This Schedule sets out the minimum requirements for disclosure on the face of the Financial
Statements, i.e, Balance Sheet, Statement of Changes in Equity for the period, the Statement of
profit and Loss for the period (The term 'Statement of Profit and Loss' has the same meaning as
Profit and Loss Account) and Notes. Cash flow statement shall be prepared, where applicable, in
accordance with the requirement of the relevant Indian Accounting Standard.
Line items, sub-line items and sub-totals shall be presented as an addition or substitution on the
face of the Financial Statements when such presentation is relevant to an understanding of the
company's financial position or performance to cater to industry or sector-specific disclosure
requirements or when required for compliance with the amendments to the Companies Act, 2013 or
under the Indian Accounting Standards.

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISION II A.3

PART I -BALANCE SHEET

Name of the Company....................
Balance Sheet as at ......................
( in.........)

Particulars Note Figures as Figures as at

No. at the end the end of the
of current previous
reporting reporting
period period
1 2 3 4
(1) ASSETS
Non-current assets
(a) Property, Plant and Equipment
(b) Capital work-in-progress
(c) lnvestment Property
(d) Goodwill
(e) Other Intangible assets
(f) Intangible assets under development
(g) Biological Assets other than bearer
plants
(h) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Loans
(i) Deferred tax assets (net)
(j) Other non-current assets
(2) Current assets
(a) Inventories
(b) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Cash and cash equivalents

© The Institute of Chartered Accountants of India

 A.4 2.4 a
FINANCIAL REPORTING
v
v
(iv) Bank balances other than (iii) above
(v) Loans
(vi) Others (to be specified)
(c) Current Tax Assets (Net)
(d) Other current assets
Total Assets
EQUITY AND LIABILITIES
Equity
(a) Equity Share capital
(b) Other Equity
LIABILITIES
(1) Non-current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade Payables:
(A) total outstanding dues of micro enterprises
and small enterprises; and
(B) total outstanding dues of creditors other
than micro enterprises and small enterprises.
(iii) Other financial liabilities (other
than those specified in item (b), to be
specified)
(b) Provisions
(c) Deferred tax liabilities (Net)
(d) Other non-current liabilities
(2) Current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade payables:
(A) total outstanding dues of micro enterprises
and small enterprises; and

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISION II A.5

(B) total outstanding dues of creditors other

than micro enterprises and small enterprises
(iii) Other financial liabilities (other
than those specified in item (c)
(b) Other current liabilities
(c) Provisions
(d) Current Tax Liabilities (Net)
Total Equity and Liabilities
see accompanying notes to the financial statements
STATEMENT OF CHANGES IN EQUITY
Name of the Company..............
A. Equity Share Capital
(1) Current reporting period
Balance at Changes in Restated Changes in Balance at the
the Equity Share balance at the equity share end of the
beginning of Capital due to beginning of the capital during current
the current prior period current the current reporting
reporting errors reporting period year period
period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at the
the Equity Share balance at the equity share end of the
beginning of Capital due to beginning of the capital during previous
the previous prior period previous the previous reporting
reporting errors reporting period year period
period

© The Institute of Chartered Accountants of India

B. Other Equity a
v
(1) Current Reporting Period
v

A.6
Share Equity Reserves and Surplus Debt Equity Effective Revaluat Exchange Other items Money Total
application component Capital Securities Other Retained Instruments Instruments portion of ion differences of Other received
on money of Reserve Premium Reserve Earnings through other through Other Cash Flow Surplus on Comprehen against
pending compound s Comprehensive Comprehensiv Hedges translating sive Income share
allotment financial (specify Income e Income the financial (specify capital
instrument nature) statements nature)
s of a foreign
operation
Balance at the

FINANCIAL REPORTING
A.6
beginning of the
current
reporting period
Changes in
accounting
policy or prior
period errors
Restated
balance at the
beginning of the
current
reporting period
Total
comprehensive
Income for the
current year
Dividends
Transfer to
retained
earnings
Any other
change (to be
specified)
Balance at the
end of the
current
reporting period

© The Institute of Chartered Accountants of India

(1) Previous Reporting Period
Share Equity Reserves and Surplus Debt Equity Effective Revaluation Exchange Other items of Money Total
application component Capital Securities Other Retained Instruments Instruments portion Surplus differences Other received
on money of Reserve Premium Reserves Earnings through other through Other of Cash on Comprehensive against
pending compound (specify Comprehensive Comprehensive Flow translating Income (specify share
allotment financial nature) Income Income Hedges the financial nature) capital
instruments statements
of a foreign
operation
Balance at the
beginning of the
previous
reporting period
Changes in
accounting
policy or prior
period errors
Restated
balance at the

SCHEDULE III : DIVISON II

beginning of the
previous
reporting period
Total
comprehensive
Income for the
previous year
Dividends
Transfer to
retained
earnings
Any other
change (to be
specified)
Balance at the
end of the
previous
reporting period
Note: Re-measurement of defined benefit plans and fair value changes relating to own credit risk of financial liabilities designated at fair value through profit or loss

A.7
shall be recognised as a part of retained earnings with separate disclosure of such items alongwith the relevant amounts in the Notes or shall be shown as a separate
column under Reserves and Surplus.

© The Institute of Chartered Accountants of India

 A.8 2.8 a
FINANCIAL REPORTING
v
v
GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET
1. An entity shall classify an asset as current when-
(a) it expects to realise the asset, or intends to sell or consume it, in its normal operating
cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the reporting period; or
(d) the asset is cash or a cash equivalent unless the asset is restricted from being exchanged
or used to settle a liability for at least twelve months after the reporting period.
An entity shall classify all other assets as non-current.
2. The operating cycle of an entity is the time between the acquisition of assets for processing
and their realisation in cash or cash equivalents, When the entity's normal operating cycle is
not clearly identifiable, it is assumed to be twelve months.
3. An entity shall classify a liability as current when-
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting period; or
(d) it does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period. Terms of a liability that could, at the option of the
counterparty, result in it settlement by the issue of equity instruments do not affect its
classification.
An entity shall classify all other liabilities as non-current.
4. A receivable shall be classified as a 'trade receivable' if it is in respect of the amount due on
account of goods sold or services rendered in the normal course of business.
5. A payable shall be classified as a 'trade payable' if it is in respect of the amount due on account
of goods purchased or services received in the normal course of business.
6. A company shall disclose the following in the Notes:
A Non-Current Assets
l. Property, Plant and Equipment
(i) Classification shall be given as:
(a) Land
(b) Buildings

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.9

(c) Plant and Equipment

(d) Furniture and Fixtures
(e) Vehicles
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of
assets
(iii) A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing additions,
disposals, acquisitions through business combinations, amount of
change due to revaluation (if change is 10% or more in the aggregate
of the net carrying value of each class of Property ,Plant and
Equipment) and other adjustments and the related depreciation and
impairment losses or reversals shall be disclosed separately.
ll. Investment Property
A reconciliation of the gross and net carrying amounts of each class of property at the beginning
and end of the reporting period showing additions, disposals, acquisitions through
business combinations and other adjustments and the related depreciation and
impairment losses or reversals shall be disclosed separately.
III. Goodwill
A reconciliation of the gross and net carrying amount of goodwill at the beginning and end of
the reporting period showing additions, impairments, disposals and other adjustments.
IV. Other Intangible assets
(i) Classification shall be given as:
(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services and operating
rights
(f) Recipes, formulae, models, designs and prototypes

© The Institute of Chartered Accountants of India

 A.10 a
2.10 FINANCIAL REPORTING
v
v
(g) Licenses and franchises
(h) Others (specify nature)
(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals, acquisitions
through business combinations, amount of change due to revaluation (if change
is 10% or more in the aggregate of the net carrying value of each class of
intangible assets) and other adjustments and the related amortization and
impairment losses or reversals shall be disclosed separately.
V. Biological Assets other than bearer plants
A reconciliation of the carrying amounts of each class of assets at the beginning and end of the
reporting period showing additions, disposals, acquisitions through business
combinations and other adjustments shall be disclosed separately.
VI. Investment
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms; or
(g) Other investments (specify nature)
Under each classification, details shall be given of names of the bodies corporate
that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature and extent of the investment
so made in each such body corporate (showing separately investments which are
partly-paid). lnvestment in partnership firms along with names of the firms, their
partners, total capital and the shares of each partner shall be disclosed separately.
(ii) The following shall also be disclosed:

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.11

(a) Aggregate amount of quoted investment and market value thereof:

(b) Aggregate amount of unquoted investment: and
(c) Aggregate amount of impairment in value of investment.
VII. Trade Receivables
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and
(d) Trade Receivables - credit impaired
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iii) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or private companies
respectively in which any director is a partner or a director or a member should be
separately stated.
(iv) For trade receivables outstanding, following ageing schedule shall be given:
Trade Receivables ageing schedule (Amount in Rs.)

Particulars Outstanding for following periods from due

date of payment*
Less 6 1-2 2-3 More Total
than 6 months- years years than 3
months 1 year years
(i) Undisputed Trade
receivables –
considered good
(ii) Undisputed Trade
Receivables – which
have significant
increase in credit risk
(iii) Undisputed Trade
Receivables – credit
impaired

© The Institute of Chartered Accountants of India

 A.12 a
2.12 FINANCIAL REPORTING
v
v
(iv) Disputed Trade
Receivables–
considered good
(v) Disputed Trade
Receivables – which
have significant
increase in credit risk
(vi) Disputed Trade
Receivables – credit
impaired

* similar information shall be given where no due date of payment is specified in that
case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately
VIII. Loans
(i) Loans shall be classified as-
(a) Loans to related parties (giving details thereof); and
(b) Other loans (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit Risk; and
(d) Loans Receivables - credit impaired;
The above shall also be separately sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful.
(iii) Allowance for bad and doubtful loans shall be disclosed under the relevant heads
separately.
(iv) Loans due by directors or other officers of the company or any of them either
severally or jointly with any other persons or amounts due by firms or private
companies respectively in which any director is a partner or a director or a member
should be separately stated.

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.13

IX. Other financial assets

(i) Security Deposits
(ii) Bank deposits with more than 12 months maturity
(iii) Others (to be specified)
X. Other non-current asset: Other non-current assets shall be classified as
(i) Capital Advances; and
(ii) Advances other than capital advances;
(1) Advances other than capital advances shall be classified as:
(a) Security deposits;
(b) Advances to related parties (giving details thereof; and
(c) Other advances (specify nature).
(2) Advances to directors or other officers of the company or any of them either
severally or jointly with any other persons or advances to firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated, ln case advances are of the nature of a
financial asset as per relevant Ind AS, these are to be disclosed under other
financial assets separately.
(iii) Others (specify nature).
B. Current Assets
I. Inventories
(i) Inventories shall be classified as-
(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.

© The Institute of Chartered Accountants of India

 A.14 a
2.14 FINANCIAL REPORTING
v
v
II. Investment
(i) Investments shall be classified as-
(a) Investments in Equity lnstruments;
(b) lnvestment in Preference Shares;
(c) lnvestment in government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) lnvestment in partnership firms; and
(g) Other investments (specify nature).
Under each classification, details shall be given of names of the bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature and extent of the investment so made in
each such body corporate (showing separately investments which are partly-paid)
(ii) The following shall also be disclosed
(a) Aggregate amount of quoted investments and market value thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate amount of impairment in value of investments,
III. Trade Receivables
(i) Trade receivables shall be sub-classified as:
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and
(d) Trade Receivables - credit impaired.
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iii) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or. private companies

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.15

respectively in which any director is a partner or a director or a member should be

separately stated.
(iv) For trade receivables outstanding, following ageing schedule shall be given:
Trade Receivables ageing schedule (Amount in Rs.)
Particulars Outstanding for following periods from due
date of payment*
Less 6 1-2 2-3 More Total
than 6 months- years years than 3
months 1 year years
(i) Undisputed Trade
receivables –
considered good
(ii) Undisputed Trade
Receivables – which
have significant
increase in credit risk
(iii) Undisputed Trade
Receivables – credit
impaired
(iv) Disputed Trade
Receivables–
considered good
(v) Disputed Trade
Receivables – which
have significant
increase in credit risk
(vi) Disputed Trade
Receivables – credit
impaired
* similar information shall be given where no due date of payment is specified in that
case disclosure shall be from the date of the transaction.

© The Institute of Chartered Accountants of India

 A.16 a
2.16 FINANCIAL REPORTING
v
v
Unbilled dues shall be disclosed separately
IV. Cash and cash equivalents
Cash and cash equivalents shall be classified as-
a. Balances with Banks (of the nature of cash and cash equivalents);
b. Cheques, drafts on hand;
c. Cash on hand; and
d. Others (specify nature).
V. Loans
(i) Loans shall be classified as:
(a) Loans to related parties (giving details thereof); and
(b) others (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit Risk; and
(d) Loans Receivables - credit impaired.
(iii) Allowance for bad and doubtful loans shall be disclosed under the relevant heads
separately.
(iv) Loans due by directors or other officers of the company or any of them either
severally or jointly with any other person or amounts due by firms or private
companies respectively in which any director is a partner or a director or a member
shall be separately stated.
VA. Other Financial Assets: This is an all-inclusive heading, which incorporates financial
assets that do not fit into any other financial asset categories, such as, Security Deposits.
VI. Other current assets (specify nature)
This is an all-inclusive heading, which incorporates current assets that do not fit into any
other asset categories.

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.17

Other current assets shall be classified as-

(i) Advances other than capital advances
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);
(c) Other advances (specify nature)
(2) Advances to directors or other officers of the company or any of them either
severally or jointly with any other persons or advances to firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated.
(a) Earmarked balances with banks (for example for unpaid dividend) shall be
separately stated.
(b) Balances with banks to the extent held as margin money or security
against the borrowings, guarantees, other commitments shall be disclosed
separately.
(c) Repatriation restrictions, if any, in respect of cash and bank balances shall
be separately stated.
D. Equity
I. Equity Share Capital
For each class of equity share capital:
(a) the number and amount of shares authorised;
(b) the number of shares issued, subscribed and fully paid, and subscribed but not fully
paid;
(c) par value per Share;
(d) a reconciliation of the number of shares outstanding at the beginning and at the end
of the period;
(e) the rights, preferences and restrictions attaching to each class of shares including
restrictions on the distribution of dividends and the repayment of capital;
(f) shares in respect of each class in the company held by its holding company or its
ultimate holding company including shares held by subsidiaries or associates of the
holding company or the ultimate holding company in aggregate;

© The Institute of Chartered Accountants of India

 A.18 a
2.18 FINANCIAL REPORTING
v
v
(g) shares in the company held by each shareholder holding more than five per cent.
shares specifying the number of shares held;
(h) shares reserved for issue under options and contracts or commitments for the sale
of shares or disinvestment, including the terms and amounts;
(i) for the period of five years immediately preceding the date at which the Balance
Sheet is prepared
 aggregate number and class of shares allotted as fully paid up pursuant to
contract without payment being received in cash;
 aggregate number and class of shares allotted as fully paid up by way of bonus
shares; and
 aggregate number and class of shares bought back;
(j) terms of any securities convertible into equity shares issued along with the earliest
date of conversion in descending order starting from the farthest such date;
(k) calls unpaid (showing aggregate value of calls unpaid by directors and officers);
(l) forfeited shares (amount originally paid up).
(m) A company shall disclose Shareholding of Promoters* as under:

Shares held by promoters at the end of the year % Change during

the year***
S. No Promoter No. of % of total
name Shares** shares
Total
*Promoter here means promoter as defined in the Companies Act, 2013.
**Details shall be given separately for each class of shares
***Percentage change shall be computed with respect to the number at the beginning
of the year or if issued during the year for the first time then with respect to the date
of issue.
II. Other Equity
(i) ‘Other Reserves’ shall be classified in the notes as-
(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.19

(d) Others- (specify the nature and purpose of each reserve and the amount in
respect thereof);
(Additions and deductions since last balance sheet to be shown under each of the
specified heads)
(ii) Retained Earnings represents surplus i.e. balance of the relevant column in the
Statement of Changes in Equity;
(iii) A reserve specifically represented by earmarked investments shall disclose the fact
that it is so represented;
(iv) Debit balance of Statement of Profit and Loss shall be shown as a negative figure
under the head 'retained earnings'. Similarly, the balance of 'Other Equity', after
adjusting negative balance of retained earnings, if any, shall be shown under the
head 'Other Equity' even if the resulting figure is in the negative; and
(v) Under the sub-head 'Other Equity', disclosure shall be made for the nature and
amount of each item.
E. Non-Current Liabilities
I. Borrowings
(i) borrowings shall be classified as-
(a) Bonds or debentures
(b) Term loans
(I) from banks
(lI) from other Parties
(c) Deferred payment liabilities
(d) Deposits
(e) Loans from related parties
(f) Liability component of compound financial instruments
(g) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case.
(iii) where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed;
(iv) bonds or debentures (along with the rate of interest, and particulars of redemption
or conversion, as the case may be) shall be stated in descending order of maturity

© The Institute of Chartered Accountants of India

 A.20 a
2.20 FINANCIAL REPORTING
v
v
or conversion, starting from farthest redemption or conversion date, as the case may
be, where bonds/debentures are redeemable by installments, the date of maturity for
this purpose must be reckoned as the date on which the first installment becomes
due;
(v) particulars of any redeemed bonds or debentures which the company has power to
reissue shall be disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amount of default as on the balance sheet date in repayment of
borrowings and interest shall be specified separately in each case.
III. Provisions
The amounts shall be classified as-
(a) Provision for employee benefits; and
(b) Others (specify nature).
IV. Other non-current liabilities
(a) Advances; and
(b) Others (specify nature).
F. Current Liabilities
I. Borrowings
(i) Borrowings shall be classified as-
(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case;
(iii) where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed;
(iv) period and amount of default as on the balance sheet date in repayment of
borrowings and interest, shall be specified separately in each case;

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.21

(v) Current maturities of long-term borrowings shall be disclosed separately.

II. Other Financial Liabilities
Other Financial liabilities shall be classified as-
(a) Interest accrued;
(b) Unpaid dividends;
(c) Application money received for allotment of securities to the extent refundable and
interest accrued thereon;
(d) Unpaid matured deposits and interest accrued thereon;
(e) Unpaid matured debentures and interest accrued thereon; and
(f) Others (specify nature).
‘Long term debt’ is a borrowing having a period of more than twelve months at the time of
origination.
III. Other current liabilities
The amounts shall be classified as-
(a) revenue received in advance;
(b) other advances (specify nature); and
(c) others (specify nature);
IV. Provisions
The amounts shall be classified as-
(i) provision for employee benefits; and
(ii) others (specify nature)
FA. Trade Payables
The following details relating to micro, small and medium enterprises shall be disclosed in the
notes:
(a) the principal amount and the interest due thereon (to be shown separately) remaining
unpaid to any supplier at the end of each accounting year;
(b) the amount of interest paid by the buyer in terms of section 16 of the Micro, Small and
Medium Enterprises Development Act, 2006 (27 of 2006), along with the amount of the
payment made to the supplier beyond the appointed day during each accounting year;
(c) the amount of interest due and payable for the period of delay in making payment (which
has been paid but beyond the appointed day during the year) but without adding the

© The Institute of Chartered Accountants of India

 A.22 a
2.22 FINANCIAL REPORTING
v
v
interest specified under the Micro, Small and Medium Enterprises Development Act,
2006;
(d) the amount of interest accrued and remaining unpaid at the end of each accounting year;
and
(e) the amount of further interest remaining due and payable even in the succeeding years,
until such date when the interest dues above are actually paid to the small enterprise, for
the purpose of disallowance of a deductible expenditure under section 23 of the Micro,
Small and Medium Enterprises Development Act, 2006.
Explanation.- The terms ‘appointed day’, ‘buyer’, ‘enterprise’, ‘micro enterprise’, ‘small
enterprise’ and ‘supplier’, shall have the same meaning as assigned to them under clauses (b),
(d), (e), (h), (m) and (n) respectively of section 2 of the Micro, Small and Medium Enterprises
Development Act, 2006.
FB. For trade payables due for payment, following ageing schedule shall be given:
Trade Payables aging schedule (Amount in )
Particulars Outstanding for following periods from due
date of payment*
Less than 1-2 years 2-3 More than Total
1 year years 3 years
(i) MSME
(ii) Others
(iii) Disputed dues – MSME
(iv) Disputed dues - Others
*Similar information shall be given where no due date of payment is specified in that case
disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.
G. The presentation of liabilities associated with group of assets classified as held for sale and
non-current assets classified as held for sale shall be in accordance with the relevant Indian
Accounting Standards (Ind ASs)
H. Contingent Liabilities and Commitments (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
(ii) Commitments shall be classified as-

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.23

(a) estimated amount of contracts remaining to be executed on capital account and not
provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).
I. The amount of dividends proposed to be distributed to equity and preference shareholders for
the period and title related amount per share shall be disclosed separately. Arrears of fixed
cumulative dividends on irredeemable preference shares shall also be disclosed separately.
J. Where in respect of an issue of securities made for a specific purpose the whole or part of
amount has not been used for the specific purpose at the Balance sheet date, there shall be
indicated by way of note how such unutilised amounts have been used or invested.
JA. Where the company has not used the borrowings from banks and financial institutions for the
specific purpose for which it was taken at the balance sheet date, the company shall disclose
the details of where they have been used.
L. Additional Regulatory Information
(i) Title deeds of Immovable Properties not held in name of the Company
The company shall provide the details of all the immovable properties (other than properties
where the Company is the lessee and the lease agreements are duly executed in favour
of the lessee) whose title deeds are not held in the name of the company in following
format and where such immovable property is jointly held with others, details are required
to be given to the extent of the company‘s share.

Relevant Descriptio Gross Title deeds Whether Property Reason for

line item in n of item of carrying held in the title deed held since not being
the property value name of holder is a which date held in the
Balance promoter, name of
sheet director or the
relative# of company**
promoter*/
director or
employee
of
promoter/d
irector
PPE Land - - - - **also
- Building indicate if in
dispute

© The Institute of Chartered Accountants of India

 A.24 a
2.24 FINANCIAL REPORTING
v
v
Investment Land
property
- Building
PPE retired Land
from active Building
use and
held for
disposal
Others
#Relative here means relative as defined in the Companies Act, 2013.
*Promoter here means promoter as defined in the Companies Act, 2013.
(ii) The Company shall disclose as to whether the fair value of investment property (as
measured for disclosure purposes in the financial statements) is based on the valuation
by a registered valuer as defined under rule 2 of Companies (Registered Valuers and
Valuation) Rules, 2017.
(iii) Where the Company has revalued its Property, Plant and Equipment (including Right-of-
Use Assets), the company shall disclose as to whether the revaluation is based on the
valuation by a registered valuer as defined under rule 2 of Companies (Registered Valuers
and Valuation) Rules, 2017.
(iv) Where the company has revalued its intangible assets, the company shall disclose as to
whether the revaluation is based on the valuation by a registered valuer as defined under
rule 2 of Companies (Registered Valuers and Valuation) Rules, 2017.
(v) The following disclosures shall be made where Loans or Advances in the nature of loans
are granted to promoters, directors, KMPs and the related parties (as defined under
Companies Act, 2013), either severally or jointly with any other person, that are:
(a) repayable on demand; or
(b) without specifying any terms or period of repayment,

Type of Borrower Amount of loan or advance Percentage to the total

in the nature of loan Loans and Advances in the
outstanding nature of loans
Promoters
Directors
KMPs
Related Parties

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.25

(vi) Capital-Work-in Progress (CWIP)

(a) For Capital-work-in progress, following ageing schedule shall be given:
CWIP aging schedule
(Amount in Rs.)
CWIP Amount in CWIP for a period of Total*
Less than 1-2 2-3 More than 3
1 year years years years
Project in progress
Projects temporarily
suspended
*Total shall tally with CWIP amount in the balance sheet.
(b) For capital-work-in progress, whose completion is overdue or has exceeded
its cost compared to its original plan, following CWIP completion schedule
shall be given**:
(Amount in )
CWIP To be completed in
Less than 1 1-2 years 2-3 years More than 3
year years
Project 1
Project 2
**Details of projects where activity has been suspended shall be given separately.
(vii) Intangible assets under development:
(a) For Intangible assets under development, following ageing schedule shall be
given:
Intangible assets under development aging schedule
(Amount in )
Intangible assets Amount in CWIP for a period of Total*
under development Less 1-2 2-3 More than
than 1 years years 3 years
year
Project in progress
Projects temporarily
suspended

© The Institute of Chartered Accountants of India

 A.26 a
2.26 FINANCIAL REPORTING
v
v
* Total shall tally with the amount of Intangible assets under development in the
balance sheet.
(b) For Intangible assets under development, whose completion is overdue or has
exceeded its cost compared to its original plan, the following Intangible assets
under development completion schedule shall be given**:
(Amount in )
CWIP To be completed in
Less than 1 year 1-2 years 2-3 years More than 3 years
Project 1
Project 2
**Details of projects where activity has been suspended shall be given
separately.
(viii) Details of Benami Property held
Where any proceeding has been initiated or pending against the company for holding any
benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and
rules made thereunder, the company shall disclose the following:
(a) Details of such property,
(b) Amount thereof,
(c) Details of Beneficiaries,
(d) If property is in the books, then reference to the item in the Balance Sheet,
(e) If property is not in the books, then the fact shall be stated with reasons,
(f) Where there are proceedings against the company under this law as an abetter of
the transaction or as the transferor then the details shall be provided,
(g) Nature of proceedings, status of same and company’s view on same.
(ix) where the Company has borrowings from banks or financial institutions on the
basis of security of current assets, it shall disclose the following:
(a) whether quarterly returns or statements of current assets filed by the Company with
banks or financial institutions are in agreement with the books of accounts;
(b) if not, summary of reconciliation and reasons of material discrepancies, if any to be
adequately disclosed.

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.27

(x) Wilful Defaulter*

Where a company is a declared wilful defaulter by any bank or financial Institution or other
lender, following details shall be given:
(a) Date of declaration as wilful defaulter,
(b) Details of defaults (amount and nature of defaults)
* wilful defaulter" here means a person or an issuer who or which is categorized as a wilful
defaulter by any bank or financial institution (as defined under the Companies Act, 2013)
or consortium thereof, in accordance with the guidelines on wilful defaulters issued by the
Reserve Bank of India.
(xi) Relationship with Struck off Companies
Where the company has any transactions with companies struck off under section
248 of the Companies Act, 2013 or section 560 of Companies Act, 1956, the Company
shall disclose the following details, namely:
Name of Nature of transactions Balance Relationship with
struck off with struck off Company Outstanding the Struck off
Company company, if any, to
be disclosed
Investments in securities
Receivables
Payables
Shares held by stuck off
company
Other outstanding
balances (to be specified)

(xii) Registration of charges or satisfaction with Registrar of Companies (ROC)

Where any charges or satisfaction yet to be registered with ROC beyond the statutory
period, details and reasons thereof shall be disclosed.
(xiii) Compliance with number of layers of companies
Where the company has not complied with the number of layers prescribed under clause
(87) of section 2 of the Act read with the Companies (Restriction on number of Layers)
Rules, 2017, the name and CIN of the companies beyond the specified layers and the
relationship or extent of holding of the company in such downstream companies shall be
disclosed.

© The Institute of Chartered Accountants of India

 A.28 a
2.28 FINANCIAL REPORTING
v
v
(xiv) Following Ratios to be disclosed:
(a) Current Ratio,
(b) Debt-Equity Ratio,
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,
(i) Net profit ratio,
(j) Return on Capital employed,
(k) Return on investment.
The company shall explain the items included in numerator and denominator for
computing the above ratios. Further explanation shall be provided for any change in the
ratio by more than 25% as compared to the preceding year.
(xv) Compliance with approved Scheme(s) of Arrangements
Where the Scheme of Arrangements has been approved by the Competent Authority in
terms of sections 230 to 237 of the Companies Act, 2013, the company shall disclose that
the effect of such Scheme of Arrangements have been accounted for in the books of
account of the Company in accordance with the Scheme and in accordance with
accounting standards‘ and any deviation in this regard shall be explained.
(xvi) Utilisation of Borrowed funds and share premium:
(A) Where company has advanced or loaned or invested funds (either borrowed funds or
share premium or any other sources or kind of funds) to any other person(s) or entity(ies),
including foreign entities (Intermediaries) with the understanding (whether recorded in
writing or otherwise) that the Intermediary shall
(i) directly or indirectly lend or invest in other persons or entities identified in any
manner whatsoever by or on behalf of the company (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of the Ultimate
Beneficiaries; the company shall disclose the following:
(I) date and amount of fund advanced or loaned or invested in Intermediaries
with complete details of each Intermediary.

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.29

(II) date and amount of fund further advanced or loaned or invested by such
Intermediaries to other intermediaries or Ultimate Beneficiaries alongwith
complete details of the ultimate beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on behalf of
the Ultimate Beneficiaries
(IV) declaration that relevant provisions of the Foreign Exchange Management
Act, 1999 (42 of 1999) and Companies Act has been complied with for such
transactions and the transactions are not violative of the Prevention of Money-
Laundering act, 2002 (15 of 2003).
(B) Where a company has received any fund from any person(s) or entity(ies),
including foreign entities (Funding Party) with the understanding (whether
recorded in writing or otherwise) that the company shall
(i) directly or indirectly lend or invest in other persons or entities identified in any
manner whatsoever by or on behalf of the Funding Party (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries,
the company shall disclose the following:
(I) date and amount of fund received from Funding parties with complete details
of each Funding party.
(II) date and amount of fund further advanced or loaned or invested other
intermediaries or Ultimate Beneficiaries alongwith complete details of the
other intermediaries or ultimate beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on behalf of
the Ultimate Beneficiaries
(IV) declaration that relevant provisions of the Foreign Exchange Management
Act, 1999 (42 of 1999) and Companies Act has been complied with for such
transactions and the transactions are not violative of the Prevention of Money-
Laundering act, 2002 (15 of 2003).]
7. When a company applies an accounting policy retrospectively or makes a restatement of items
in the financial statements or when it reclassifies items in its financial statements, the company
shall attach to the Balance Sheet, a "Balance Sheet" as at the beginning of the earliest
comparative period presented.
8. Share application money pending allotment shall be classified into equity or liability in
accordance with relevant Indian Accounting Standards. share application money to the extent
not refundable shall be shown under the head Equity and share application money to the extent
refundable shall be separately shown under 'Other financial liabilities'.
9. Preference shares including premium received on issue, shall be classified and presented as
'Equity' or 'Liability' in accordance with the requirements of the relevant Indian Accounting
Standards. Accordingly, the disclosure and presentation requirements in that regard applicable

© The Institute of Chartered Accountants of India

 A.30 a
2.30 FINANCIAL REPORTING
v
v
to the relevant class of equity or liability shall be applicable mutatis mutandis to the preference
shares. For instance, plain vanilla redeemable preference shares shall be classified and
presented under 'non-current liabilities' as 'borrowings' and the disclosure requirements in this
regard applicable to such borrowings shall be applicable mutatis mutandis to redeemable
preference shares.
10. Compound financial instruments such as convertible debentures, where split into equity and
liability components, as per the requirements of the relevant Indian Accounting Standards, shall
be classified and presented under the relevant heads in 'Equity' and 'Liabilities'
11. Regulatory Deferral Account Balances shall be presented in the Balance Sheet in accordance
with the relevant Indian Accounting Standards.

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.31

PART II - STATEMENT OF PROFIT AND LOSS

Name of the Company.........................
Statement of Profit and Loss for the period ended................

Particulars Note Figures as at Figures for the

No. the end of previous
current reporting
reporting period
period
I Revenue from operations
II Other Income
III Total Income (l + Il)
IV EXPENSES
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished
goods, Stock-in -Trade and work-in-
progress
Employee benefits expense
Finance costs
Depreciation and amortization
expenses
Other expenses
Total expenses (lV)
V Profit/(loss) before exceptional items
and tax (I-IV)
VI Exceptional Items
VII Profit/ (loss) before exceptions items
and tax(V-VI)
VIII Tax expense:
(1) Current tax
(2) Deferred tax
IX Profit (Loss) for the period from
continuing operations (VlI - VlII)
X Profit/(loss) from discontinued
operations

© The Institute of Chartered Accountants of India

 A.32 a
2.32 FINANCIAL REPORTING
v
v
XI Tax expenses 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) lncome 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 the period)
XVI Earnings per equity share (for
continuing operation):
(1) Basic
(2) Diluted
XVII Earnings per equity share (for
discontinued operation):
(1) Basic
(2) Diluted
Earning per equity share (for
XVIII
discontinued & continuing operation)
(1) Basic
(2) Diluted
see accompanying notes to the financial statements
GENERAL INSTRUCTIONS FOR PREPARING OF STATEMENT OF PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure account, in like manner
as they apply to a Statement of Profit and Loss,

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.33

2. The Statement of Profit and Loss shall include:

(1) Profit of loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is “Total Comprehensive Income"
3. Revenue from operations shall disclose separately in the notes
(a) sale of products (including Excise Duty);
(b) sale of services;
(ba) Grants or donations received (relevant in case of section 8 companies only); and
(c) other operating revenues.
4. Finance Costs: Finance costs shall be classified as-
(a) interest;
(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment to borrowing costs; and
(d) other borrowing costs (specify nature).
5. Other income: other income shall be classified as-
(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such income)
6. Other Comprehensive Income shall be classified into-
(A) Items that will not be reclassified to profit or loss
(i) Changes in revaluation surplus;
(ii) Re-measurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive Income;
(iv) Fair value changes relating to own credit risk of financial liabilities designated at fair
value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the
extent not to be classified into profit or loss; and
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the
extent not to be classified into profit or loss; and

© The Institute of Chartered Accountants of India

 A.34 a
2.34 FINANCIAL REPORTING
v
v
(vi) Others (specify nature).
(B) Items that will be reclassified to profit or loss;
(i) Exchange differences in translating the financial statements of a foreign operation;
(ii) Debt instruments through Other Comprehensive Income;
(iii) The effective portion of gains and loss on hedging instruments in a cash flow hedge;
(iv) Share of other comprehensive income in Associates and Joint Ventures, to the extent
to be classified into profit or loss; and
(v) Others (specify nature)
7. Additional Information: A Company shall disclose by way of notes, additional information
regarding aggregate expenditure and income on the following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii) contribution
to provident and other funds, (iii) share based payments to employees, (iv) staff welfare
expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds one per cent of the revenue from
operations or 10,00,000, whichever is higher, in addition to the consideration of
'materiality ‘as specified in clause 7 of the General Instructions for Preparation of Financial
Statements of a Company;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation (other than considered as
finance cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law
matters, (d) for other services, (e) for reimbursement of expenses;
(j) in case of companies covered under section 135, amount of expenditure incurred on
corporate social responsibility activities; and
(k) details of items of exceptional nature;
(l) Undisclosed income
The Company shall give details of any transaction not recorded in the books of accounts that
has been surrendered or disclosed as income during the year in the tax assessments under

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.35

the Income Tax Act, 1961 (such as, search or survey or any other relevant provisions of the
Income Tax Act, 1961), unless there is immunity for disclosure under any scheme and shall
also state whether the previously unrecorded income and related assets have been properly
recorded in the books of account during the year.
(m) Corporate Social Responsibility (CSR)
Where the company covered under section 135 of the Companies Act, the following shall be
disclosed with regard to CSR activities:-
(i) amount required to be spent by the company during the year,
(ii) amount of expenditure incurred,
(iii) shortfall at the end of the year,
(iv) total of previous years shortfall,
(v) reason for shortfall,
(vi) nature of CSR activities,
(vii) details of related party transactions, e.g.,contribution to a trust controlled by the company
in relation to CSR expenditure as per relevant Accounting Standard,
(viii) where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year shall be shown separately.
(n) Details of Crypto Currency or Virtual Currency
Where the Company has traded or invested in Crypto currency or Virtual Currency during the
financial year, the following shall be disclosed:-
(i) profit or loss on transactions involving Crypto currency or Virtual Currency,
(ii) amount of currency held as at the reporting date,
(iii) deposits or advances from any person for the purpose of trading or investing in Crypto
Currency or virtual currency.
8. Changes in Regulatory Deferral Account Balances shall be presented in the Statement of Profit
and Loss in accordance with the relevant Indian Accounting Standards

© The Institute of Chartered Accountants of India

 A.36 a
2.36 FINANCIAL REPORTING
v
v
PART III - GENERAL INSRUCTIONS FOR THE PREPARATION OF CONSOLIDATED
FINANCIAL STATEMENTS
1. Where a company is required to prepare Consolidated Financial Statements, i.e,, consolidated
balance sheet, consolidated statement of changes in equity and consolidated statement of
profit and loss, the company shall mutatis mutandis follow the requirements of this Schedule
as applicable to a company in the preparation of balance sheet, statement of changes in equity
and statement of profit and loss .ln addition, the consolidated financial statements shall disclose
the information as per the requirements specified in the applicable Indian Accounting Standards
notified under the Companies (lndian Accounting Standards) Rules 2015, including the
following, namely:
(i) Profit or loss attributable to 'non-controlling interest ‘and to ‘owners of the parent' in the
statement of profit and loss shall be presented as allocation for the period Further, 'total
comprehensive income for the period attributable to 'non-controlling interest' and to
'owners of the parent shall be presented in the statement of profit and loss as allocation
for the period. The aforesaid disclosures for 'total comprehensive income shall also be
made in the statement of changes in equity. In addition to the disclosure requirements in
the Indian Accounting Standards, the aforesaid disclosures shall also be made in respect
of 'other comprehensive Income
(ii) 'Non-controlling interests' in the Balance Sheet and in the Statement of Changes in Equity,
within equity, shall be presented separately from the equity of the 'owners of the parent'.
(iii) Investments accounted for using the equity method.
2. In Consolidated Financial Statement, the following shall be disclosed by the way of additional
information
Name of the Net Asset i.e. total Share in profit or Share in other Share in total
entity in the assets minus total loss comprehensive comprehensive
Group liabilities income income
As % of Amount As % of Amount As % of Amount As % of Amount
consolidat consolid consolidate total
ed net ated d other comprehen
assets profit or comprehen sive
loss sive income
income
Parent
Subsidiaries In
dian
1.
2.
3.
Foreign

© The Institute of Chartered Accountants of India

 SCHEDULE III : DIVISON II A.37

1.
2.
3.
Non-
Controlling
Interest in all
subsidiaries
Associates
(Investment as
per the equity
method)
Indian
1.
2.
3.
Foreign
1.
2.
3.
Joint Venture
(Investment as
per the equity
method)
Indian
1.
2.
3.
Foreign
1.
2.
3.
Total
3. All subsidiaries, associates and joint venture (whether Indian or Foreign) will be covered under
consolidated financial statement.
4. An entity shall disclose the list of subsidiaries or associates or joint venture which have been
consolidated in the consolidated financial statement along with the reason of not consolidating.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
 IND AS PUZZLERS: TEST YOUR ACCOUNTING ACUMEN 
1

2 3

5 6 7

9 10

11

13

14 12

15

16

17 18

19 20

21

22

23 24

25 26 27

28

29

30

ACROSS:

3. Objective of Ind AS 34 is to prescribe the principles for recognition and

measurement in complete or __________ financial statements for an interim
period. (9)

Related to Chapters of Module 1 only

© The Institute of Chartered Accountants of India

 IND AS PUZZLERS: TEST YOUR ACCOUNTING ACUMEN 
1

2 3

5 6 7

9 10

11

13

14 12

15

16

17 18

19 20

21

22

23 24

25 26 27

28

29

30

ACROSS:

3. Objective of Ind AS 34 is to prescribe the principles for recognition and

measurement in complete or __________ financial statements for an interim
period. (9)

Related to Chapters of Module 1 only

© The Institute of Chartered Accountants of India

5. Ind AS are the IFRS converged standards issued by the Central Government
of India through _____. (Abbreviation 3)

6. An entity shall not __________ the amounts recognised in its financial

statements to reflect non-adjusting events occurred after the reporting
period. (5)

7. Under Ind AS Conceptual Framework, ________ representation means financial

information must be complete, neutral, free from error, relevant,
understandable, and complete. (8)

9. _______________ are short-term, highly liquid investments that are readily

convertible to known amounts of cash. (4,11)

10. Prior period errors include the effects of mathematical mistakes, mistakes in
applying accounting policies, oversights, or misinterpretations of facts, and
_________. (5)

13. Negative cash flow from _________ denotes that company is unable to
generate cash from its main business activity. (10)

15. As per conceptual framework, a _________ depiction is being non-bias in the

selection or presentation of financial information. (7)

18. _________ is an entity's obligation to transfer goods or services to a customer

for which the consideration is received or due from the customer. (8,9)

22. In the absence of observable inputs, _________ techniques such as income

approach or market approach may be used. (9)

23. As per Ind AS 1, if compliance with a requirement in an Ind AS would be so

misleading that it would conflict with the __________ of financial statements
set out in the Conceptual Framework, the entity shall depart from that
requirement if the relevant regulatory framework requires, or otherwise does
not prohibit, such a departure. (9)

© The Institute of Chartered Accountants of India

25. Ind AS 1 state that applying a requirement is __________ when the entity cannot
apply it after making every reasonable effort to do so. (13)

27. Cash flows arising from _________ paid or received in the case of a financial
institution should be classified as cash flows from operating activities. ( 8)

28. Cash flows arising from taxes on income shall be ________ disclosed under
cash flows from operating activities unless they can be specifically identified
with financing and investing activities. (10)

29. The entity shall not recognise _________ when it transfers products to
customers but shall recognise those amounts received (or receivable) as a
refund liability. (7)

30. ________ is the present economic resource controlled by the entity as a result
of past events. (5)

DOWN:

1. A ___________ obligation is a distinct promise to transfer a good or service to

a customer as part of a contract. (11)

2. Transaction costs do not include _________ costs. (9)

4. Ind AS 113 provides guidance on how to determine fair _______ for financial
reporting purposes. (5)

8. A change in accounting policy is applied __________. (15)

9. Entities have to consider variable ____________, such as discounts, rebates, and

performance bonuses, when determining the transaction price. (13)

11. Financial statements should be prepared on a __________ basis unless

management either intends to liquidate the entity or to cease trading. (5,7)

12. The asset held primarily for the purpose of trading is known as _________. (7,5)

© The Institute of Chartered Accountants of India

14. Fair value is the price that would be received to sell an asset or paid to
_________ a liability in an orderly transaction between market participants at
the measurement date. (8)

16. Ind AS 113 establishes a fair value _________ that categorizes inputs into three
levels based on their reliability and observability. (9)

17. As per conceptual framework, _________ are present obligations of the entity
to transfer economic resources. (11)

19. Ind AS are accompanied by mandatory _________ that is integral part of Ind AS
to assist entities in applying their requirements. (8)

20. An entity whose financial statements comply with Ind AS shall make an
__________ and unreserved statement of such compliance in the notes. (8)

21. Even if the ___________ is declared after the reporting period but before the
financial statements are approved for issue, it is disclosed in the notes to
financial statements. (8)

24. The exercise of prudence means that assets and income are not overstated,
and liabilities and _________ are not understated. (8)

26. _______ two are observable inputs other than quoted prices in active markets.
(5)

To know the answer of the above Ind AS Puzzle, scan the QR Code

© The Institute of Chartered Accountants of India