MODULE II

IFRS CONVERGED INDIAN ACCOUNTING

STANDARDS

Indian Accounting Standards – Ind AS (IFRS Converged Indian GAAP)

Applicability and accounting principles of Indian Accounting Standards
(Ind AS)
Presently, the Institute of Chartered Accountants of India (ICAI) has issued 39 Indian
Accounting Standards (Ind AS) which have been notified under the Companies (Indian
Accounting Standards) Rules, 2015 (“Ind AS Rules”), of the Companies Act, 2013.

Applicability of Ind AS
As per the notification released by the Ministry of Corporate Affairs (MCA) on 16 February
2015, the roadmap for Ind AS implementation is as follows:
Roadmap of IND AS Applicability
Financial Year Mandatorily Applicable To
2016-17 Companies (listed and unlisted) whose net worth is equal to or greater
than 500 crore INR
2017-18 Unlisted companies whose net worth is equal to or greater than 250
crore INR and all listed companies
2018-19 When a company’s net worth becomes greater than 250 crore INR
Onwards
2015-16 or later Entities, not under the mandatory roadmap, may later voluntarily
adopt Ind AS

Whenever a company gets covered under the roadmap, Ind AS becomes mandatory, its
holding, subsidiary, associate and joint venture companies will also have to adopt Ind AS
(irrespective of their net worth).
For the purpose of computing the net worth, reference should be made to the definition under
the Companies Act, 2013. In accordance with section 2 (57) of the Companies Act, 2013, net
worth is computed as follows:
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.
Ind AS will apply to both consolidated as well as standalone financial statements of a
company.
While overseas subsidiary, associate or joint venture companies are not required to prepare
standalone financial statements under Ind AS, they will need to prepare Ind AS adjusted
financial information to enable consolidation by the Indian parent.
Presently, insurance companies, banking companies and nonbanking finance companies
(NBFCs) are not required to apply Ind AS. The Ind AS rules are silent when these companies
are subsidiaries, associates or joint ventures of a parent covered under the roadmap. It appears
that these companies will need to report Ind AS adjusted financial information to enable
consolidation by the parent.
In case of conflict between Ind AS and the law, the provisions of law will prevail and
financial statements are to be prepared in compliance with the law.

Scope of IND AS
India has chosen a path of International Financial Reporting Standards (IFRS) convergence
rather than adoption. Hence, Ind AS are primarily based on the IFRS issued by the
International Accounting Standards Board (IASB). However, there are certain carve-outs
from the IFRS. There are also certain general differences between Ind AS and IFRS:
 The transitional provisions given in each of the standards under IFRS have not been given
in Ind AS, since all transitional provisions related to Ind AS, wherever considered
appropriate, have been included in Ind AS 101, First-Time Adoption of Indian
Accounting Standards, corresponding to IFRS 1, First-Time Adoption of International
Financial Reporting Standards.
 Different terminology is used in Ind AS when compared to IFRS, e.g. the term ‘balance
sheet’ is used instead of ‘statement of financial position’ and ‘statement of profit and
losses is used instead of ‘statement of comprehensive income’.
IND AS
Sl. Name IND AS
No.
First-time Adoption of International Financial Reporting IND AS 101
1 Standards
2 Share-based Payment IND AS 102
3 Business Combinations IND AS 103
4 Insurance Contracts IND AS 104
Non-current Assets Held for Sale and Discontinued
5 Operations IND AS 105
Exploration for and Evaluation of Mineral Assets
6 IND AS 106
7 Financial Instruments: Disclosures IND AS 107
8 Operating Segments IND AS 108
9 Financial Instruments IND AS 109
10 Consolidated Financial Statements IND AS 110
11 Joint Arrangements IND AS 111
Disclosure of Interests in Other Entities
12 IND AS 112
13 Fair Value Measurement IND AS 113
14 Regulatory Deferral Accounts IND AS 114
Revenue from Contracts with Customers
15 IND AS 115
Presentation of Financial Statements
16 IND AS 1
17 Inventories IND AS 2
18 Statement of Cash Flows IND AS 7
Accounting Policies, Changes in Accounting Estimates
19 and Errors IND AS 8
20 Events After the Reporting Period IND AS 10
21 Income Taxes IND AS 12
22 Property, Plant and Equipment IND AS 16
23 Leases IND AS 17
24 Employee Benefits (2011) IND AS 19
Accounting for Government Grants and Disclosure of
25 Government Assistance IND AS 20
The Effects of Changes in Foreign Exchange Rates
26 IND AS 21
27 Borrowing Costs IND AS 23
28 Related Party Disclosures IND AS 24
Accounting and Reporting by Retirement Benefit Plans
29 -
Separate Financial Statements (2011)
30 IND AS 27
Investments in Associates and Joint Ventures (2011)
31 IND AS 28
Financial Reporting in Hyperinflationary Economies
32 IND AS 29
Financial Instruments: Presentation
33 IND AS 32
34 Earnings Per Share IND AS 33
35 Interim Financial Reporting IND AS 34
36 Impairment of Assets IND AS 36
Provisions, Contingent Liabilities and Contingent
37 Assets IND AS 37
38 Intangible Assets IND AS 38
39 Investment Property IND AS 40
40 Agriculture IND AS 41
 Changes in Existing Decommissioning, Restoration and Appendix A to IND AS 16
41 Similar Liabilities
Members' Shares in Co-operative Entities
42 -
43 Determining Whether an Arrangement Contains a Lease Appendix C to IND AS 17

Rights to Interests arising from Decommissioning, Appendix A to IND AS 37

44 Restoration and Environmental Rehabiliation Funds
Liabilities Arising from Participating in a Specific
Market - Waste Electrical and Electrical Equipment Appendix B to IND AS 37
45
Applying the Restatement Approach under IAS 29 Appendix A to IND AS 29
Financial Reporting in Hyperinflationary Economies
46
Interim Financial Reporting and Impairment
47 Appendix A to IND AS 34
48 Service Concession Arrangements Appendix C to IND AS 115
IAS 19 - The Limit on a Defined Benefit Asset,
49 Appendix B to IND AS 19
Minimum Funding Requirements and their Interaction
Hedges of a Net Investment in a Foreign Operation
50 Appendix C to IND AS 109
Distributions of Non-cash Assets to Owners
51 Appendix A to IND AS 10
Extinguishing Financial Liabilities with Equity
52 Instruments Appendix D to IND AS 109
Stripping Costs in the Production Phase of a Surface
53 Mine Appendix B to IND AS 16
54 Levies Appendix C to IND AS 37
55 Introduction of Euro -
Government Assistance – No Specific Relation to Appendix A to IND AS 20
56 Operating Activities
57 Operating Leases – Incentives Appendix A to IND AS 17
Income Taxes - Changes in the Tax Status of an Appendix A to IND AS 12
58
Enterprise or its Shareholders
Evaluating the Substance of Transactions in the Legal Appendix B to IND AS 17
59 Form of a Lease
Disclosure - Service Concession Arrangements
60 Appendix D to IND AS 115
61 Intangible Assets - Web Site Costs Appendix A to IND AS 38
Recognition and Measurement of Ind AS 2, Ind AS 12, Ind AS 16, Ind AS
23, Ind AS 37 & Ind AS 38
INVENTORIES – Ind AS 2
Accounting for Inventories
Accounting for inventories is based on the matching concept. As per this concept, inventories
should be accounted for an expense in the year in which it is sold. Till that time, it is
accounted for as an asset, ie, closing stock. It is also credited in the statement of profit and
loss. Ind AS 2 & IAS 2 prescribe accounting treatment for inventories.

Objectives
The objective of this standard is to prescribe the accounting treatment for inventories. This
standard deals with determination of cost and its subsequent recognition as an expense,
including any write down to net realizable value.

Scope
This standard applies to all inventories except the following:
(a) Work in progress under a construction contract (dealt by Ind AS 11, Construction
Contracts)
(b) Financial instruments, e.g., share, debentures, bonds (governed by Ind AS 32,
Financial Instrument)
(c) Biological assets related to agricultural activity and agricultural produce at the
point of harvest.

Definition of Inventories
Inventories are assets that are:
1. Held for sale
2. Being prepared for sale
3. Materials to be used in the production process or provision or services.
Inventory includes raw materials, production supplies, work in progress, finished goods and
goods in saleable condition (i.e., ready to sell goods that have been purchased for resale.)

Accounting Treatment
Measurement of Inventories
Inventories must be measured at cost or net realizable value, whichever is less. Thus, the two
components are cost and net realizable value.

Cost of Inventories
The cost of inventories comprises of
1) Cost of purchase;
2) Cost of conversion;
3) Other costs incurred in bringing the inventories to their present location and condition.
1) Cost of Purchase
(a) Purchase price
(b) Import duties and other taxes
(c) Transport cost
(d) Handling cost
(e) Other cost directly attributable to the acquisition of finished goods, materials and
services.

Illustration 1
Malabar Textiles is a trading company dealing in textiles. It incurred the following expenses
for the purchase of textiles from New India Textiles:
Amount paid to supplies 2,25,300
Transportation charges 14,500
GST 5%

The purchase bill shows a value of 2,42,000 because New India Textiles allowed a special
trade discount of 5% of billed value to Malabar Textiles. New India Textiles also allowed a
cash discount of 2% for prompt payment. Calculate the cost of purchase.

Solution
Cost of purchase as per the bill 2,42,000
Less: Trade discount 5% 12,100
2,29,900
Add: GST (5% of 2,29,900) 11,495
Add: Transportation cost 14,500
Cost of purchase 2,55,895

Note: The amount paid to the supplier * 2,25,300 is after deducting trade discount Rs. 12,100
(5% of 2,42,000) and cash discount 4,600 (2% of net purchase price, i.e., Rs 2,29,900).
To arrive at purchase cost, only trade discount is deductible. Cash discount should not be
deducted because it is not allowed on purchase (it is allowed for prompt payment).

2) Cost of Conversion
Costs of conversion of inventories include direct costs such as direct labour, and systematic
allocation of production overhead incurred in converting materials into finished goods.
Production overhead consists of fixed production overheads and variable production
overheads.
a. Fixed production overheads: Fixed production overheads are those indirect costs of
production that remain constant irrespective of the volume of production. Examples
are depreciation and maintenance of factory buildings and equipment, cost of factory
management and administration etc.
 Fixed production overheads should be allocated on the basis of normal capacity.
Normal capacity is the production expected to be achieved on average over a number
of periods under normal circumstances. The capacity lost due to plant maintenance
should be taken into account. When production is abnormally high, the fixed
production overheads allocated to each unit will be reduced (to avoid over valuation
of inventories).
b. Variable production overhead: variable production overheads are those indirect cost
of production that vary directly with the volume of production. Examples are indirect
material and indirect labour.

Illustration 2
Fantacy toys, manufactures toys. It has incurred the following expenses:
Cost of raw materials 600000 Depreciation of machinery 20000
Rebate on purchase 30000 Wages 110000
Electricity charges (factory) 16500 Factory supervision charges
10500 Calculate cost of purchase and cost of conversion

Solution
Cost of raw material 600000
Less: Rebate 30000
Cost of purchase 570000

Wages 110000
Depreciation on machinery 20000
Factory electricity charges 16500
Factory supervision charges 10500

Cost of conversion 157000

3) Other Cost
Other cost to be included in the cost of inventory are those which are incurred in bringing the
inventories to their present location and condition. These costs include inward transport and
storage prior to completion of production and specific design work required for a special
client.

Illustration 3
How will you value the inventory per kg. of finished goods which consisted of:
Material cost: 100 per kg
Direct labour cost: 20 per kg
Direct variable production OH: 10 per kg
Fixed production charges for the year on normal capacity of 10000 kgs. Rs. 100000. At the
year end, 2000 kg. of finished goods are in stock.

Solution
The allocation of fixed production overheads is based on the normal capacity of the
production facilities, thus cost per kg. of finished goods may be calculated as follows:
Material cost 100
Direct labour cost 20
Direct variable production overhead 10
Fixed production overhead 10 40
140
Thus, the value of 2000 kgs. of finished goods stock at the year end will be Rs. 280000
(2000x140).

Cost which are excluded

(a) Abnormal wastage of material, labour and overhead.
(b) Storage cost, if they are not necessary prior to a further production process.
(c) Administrative overhead
(d) Selling cost
(e) Interest cost when inventories are purchased on deferred payment basis.

Cost of Inventories of a Service Provider

To the extent that service providers have inventories, they measure them at the costs of their
production. These costs consist primarily of the labour and other costs of personnel directly
engaged in providing the service, including supervisory personnel, and attributable
overheads. Labour and other costs relating to sales and 5 general administrative personnel are
not included but are recognised as expenses in the period in which they are incurred. The cost
of inventories of a service provider does not include profit margins or non-attributable
overheads that are often factored into prices charged by service providers.

Illustration 4
A management consultancy company is engaged by a client to analyse its internal control
systems and provide a report on the same for a fee of Rs. 20,00,000. As at the end of the
reporting period, i.e., on 31st March, 2012, the report is not ready. The costs incurred during
the financial year for the project are follows: Direct expenses: Salary expenses of staff
engaged on the project: Rs. 7,50,000 Overheads: Rs. 5,00,000 (1/5 directly attributable to the
project) General administration expenses: Rs. 2,00,000 Assuming that at the end of the
reporting period, in accordance with Ind AS 18, revenue has not been recognised, what will
be the cost of inventory with regard to this project?

Solution
Management Consultancy Company is a service provider and as per Ind AS 2, in case of a
service provider, inventories include the costs of service, for which the entity has not yet
recognised related revenue.
Since in the present case revenue has not been recognised, expenses incurred on the project
will be treated as cost of inventory.
In accordance with the above, cost of inventories will include:
Cost of personnel directly engaged in providing the services, i.e., Rs. 7,50,000
salary expenses of staff engaged on the project
Directly attributable overheads (Rs. 5,00,000/5) Rs. 1,00,000
Cost of inventories Rs. 8,50,000
Expenses incurred on general overheads and any profit margin will not be included in the cost
of inventories.

Illustration 5
Venus Trading Company purchases cars from several countries and sells them to Asian
countries. During the current year, this company has incurred following expenses:
1. Trade discounts on purchase
2. Handling costs relating to imports
3. Salaries of accounting department
4. Sales commission paid to sales agents
5. After sales warranty costs
6. Import duties
7. Costs of purchases (based on supplier's invoices)
8. Freight expense
9. Insurance of purchases
10. Brokerage commission paid to indenting agents
Evaluate which costs are allowed by Ind AS 2 for inclusion in the cost of inventory in the
books of Venus.
Solution
Items number 1, 2, 6, 7, 8, 9, 10 are allowed by Ind AS 2 for the calculation of cost of
inventories. Salaries of accounts department, sales commission, and after sale warranty costs
are not considered to be the cost of inventory therefore they are not allowed by Ind AS 2 for
inclusion in cost of inventory and are expensed off in the profit and loss account.

Techniques for measurement of cost

1. Standard costing method
2. Retail costing method

Standard Costing Method

Standard costing involves setting costs in advance considering the normal production output.
Management usually derive standards on the basis of past experience and use this method if
cost remains fairly consistent and update the standards if situation changes. Usually such
method is used for such material or labour which is hard to trace or measure its consumption
or the benefits of such measurement are not much as compared to cost of conducting such
measurement. For example cost of glue or nails consumed in production and entity still hold
at the end of the period can be done standard costing basis.
Retail Costing Method
Retail method is an easy approach to determine cost by deducting profit from the sales price.
This method is employed in situations where inventory has a fairly fast turnover rate. In such
situations managing the records of costs incurred is not easy. So this retrograde approach help
ease the pressure.

Illustration 6
Mars Fashions is a new luxury retail company located in Lajpat Nagar, New Delhi. Kindly
advise the accountant of the company on the necessary accounting treatment for the following
items:
(a) One of Company's product lines is beauty products, particularly cosmetics such as
lipsticks, moisturizers and compact make-up kits. The company sells hundreds of
different brands of these products. Each product is quite similar, is purchased at
similar prices and has a short lifecycle before a new similar product is introduced. The
point of sale and inventory system is not yet fully functioning in this department. The
sales manager of the cosmetic department is unsure of the cost of each product but is
confident of the selling price and has reliably informed you that the Company, on
average, make a gross margin of 65% on each line.
(b) Mars Fashions also sells handbags. The Company manufactures their own handbags
as they wish to be assured of the quality and craftsmanship which goes into each
handbag. The handbags are manufactured in India in the head office factory which has
made handbags for the last fifty years. Normally, Mars manufactures 100,000
handbags a year in their handbag division which uses 15% of the space and overheads
of the head office factory. The division employs ten people and is seen as being an
efficient division within the overall company.
In accordance with Ind AS 2, explain how the items referred to in (a) and (b) should be
measured.
Solution
(a) The retail method can be used for measuring inventories of the beauty products. The
cost of the inventory is determined by taking the selling price of the cosmetics and
reducing it by the gross margin of 65% to arrive at the cost.
(b) The handbags can be measured using standard cost especially if the results
approximate cost. Given that the company has the information reliably on hand in
relation to direct materials, direct labour, direct expenses and overheads, it would be
the best method to use to arrive at the cost of inventories.

Cost Formulas
An entity shall use the same cost formula for all inventories having similar nature and use.
For inventories with a different nature or use, different cost formulas may be justified.
Following are the important cost formulas for the valuation of inventories:
1. Specific identification method
Specific identification is a method of finding out ending inventory cost. It requires a
detailed physical count, so that the company knows exactly how many of each goods
brought on specific dates remained at year end inventory. When this information is found,
 the amount of goods are multiplied by their purchase cost at their purchase date, to get a
number for the ending inventory cost.
2. FIFO method
This method assumes that the first items bought are the first items sold. Therefore, at the
end of the period, any items in inventory are the items purchased most recently.

3. Weighted average method

The weighted average method is an inventory costing method that assigns average costs
to each piece of inventory when it is sold during the year.

Illustration 7
Mercury Ltd. uses a periodic inventory system. The following information relates to 2018-
2019.
Date Particular Unit Cost p.u. Total Cost
April Inventory 200 10 2,000
May Purchases 50 11 550
September Purchases 400 12 4,800
February Purchases 350 14 4,900
Total 1,000 12,250
Physical inventory at 31.03.2019, 400 units. Calculate ending inventory value and cost of
sales using:
(a) FIFO
(b) Weighted Average
Solution
FIFO inventory 31.03.2019 350 @14 = 4,900
50 @ 12 = 600
5,500
Cost of Sales 12,250 – 5,500 = 6,750

Weighted average cost per item 12,250/1000 = 12.25

Weighted average inventory at 31.03.2019 400 × 12.25 = 4,900

Cost of sales 2018-2019 12,250-4,900 = 7,350

Net Realizable Value

Estimation of net realizable value is necessary in the valuation of inventories. Net realizable
value is the estimated selling price in the ordinary course of business, less the estimated cost
of completion and the estimated costs necessary to make the sale.

Written Down of Inventories

The general rule is that inventories should not be carried in excess of amounts expected to be
realized from their sale or use.
In some situations, NRV is likely to be less than cost. Following are the situations
1) An increase in cost
2) Fall in selling price
3) Physical deterioration in the condition of inventory
4) Obsolescence
5) Errors in production or purchasing

Recognition as an Expense
The following treatment is required when inventories are sold:
(a) The carrying amount of the inventory is recognized as an expense in the period in which
the related revenue is recognized.
(b) The amount of any write down of inventories to its net realizable value and all losses of
inventories are recognized as an expense in the period the write down or loss occurs
(c) If an inventory item which was written down previously, remains unsold and its NRV has
subsequently increased, then in such a case, the previous write down should reversed and
the inventory should be carried at cost.
(d) Some inventories may be allocated or transferred to other assets account.

Presentation and Disclosure

The financial statements should disclose the following in respect of inventories
(a) Accounting policies adopted for measuring inventories and cost formula used.
(b) Total carrying amount of inventories and amount per category.
(c) Amount of inventory recognized as an expense during the period
(d) Amount of inventory carried at fair value less costs to sell.
(e) Circumstances led to the reversal of a written down.
(f) Inventory pledged as security for liabilities.
(g) The amount of any written down of inventories recognized as an expense in the period.
(h) The amount of any reversal of any written down that is recognized in the period.

Illustration 8
Sun Pharma Limited, a renowned company in the field of pharmaceuticals has the following
four items in inventory: The Cost and Net realizable value is given as follows:
Item Cost Net Realisable Value
A 2,000 1,900
B 5,000 5,100
C 4,400 4,550
D 3,200 2,990
Total 14,600 14,540
Determine the value of Inventories:
(a) On an item by item basis
(b) On a group basis
Solution
Inventories shall be measured at the lower of cost and net realisable value.
 Item by item basis:
A 1,900
B 5,000
C 4,400
D 2,990
14,290
Group basis 14,540

Illustration 9
The following information of Zenith Ltd. is given below: You are required to:
(1) Calculate the value of raw materials and finished goods at cost.
(2) Calculate the value of closing stock when
(a) Net realizable value of finished goods B is Rs. 800
(b) Net realizable value of finished goods B is Rs. 600

Raw Material A
Closing Balance 1000 units

Rs. per unit

Cost price including excise duty 400
GST (Input credit is available) 20
Freight inward 40
Unloading charges 20
Replacement cost 300
Finished Goods B
Closing balance 2400 units
Raw materials consumed 440
Direct labour 120
Direct overhead 80
Raw material A is used for production of finished goods B. The total fixed overhead for the
year was Rs. 4 lakhs on normal capacity of 20,000 units.

Solution
Statement showing valuation of Raw Material and Finished Goods at cost
Raw Material A Rs. per unit
Cost price 400
Less: GST on which Input credit is available (20)
380
Add: Freight inward 40
Unloading charges 20
 Total cost 440
Finished Goods B Rs. per unit
Raw materials consumed 440
Direct labour 120
Direct overhead 80
Fixed overhead (Rs. 4,00,000/20,000 units) 20
Total cost 660

a) When Net Realisable Value (NRV) of the Finished Goods B is Rs. 800 per unit
NRV is greater than the cost of Finished Goods B i.e. Rs. 660 per unit Hence, Raw Material
and Finished Goods will be valued at cost. Accordingly, value of closing stock will be:
Quantity Rate Amount (Rs.)

Raw Material A 1,000 440 4,40,000

Finished Goods B 2,400 660 15,84,000
Total cost of closing stock 20,24,000
b) When Net Realisable Value of the Finished Goods B is Rs. 600 per unit
NRV is less than the cost of Finished Goods B i.e. Rs. 660 per unit
Hence, Raw Material is to be valued at replacement cost and Finished Goods are to be valued
at NRV.
Accordingly, value of closing stock will be:
Quantity Rate Amount (Rs.)

Raw Material A 1,000 300 3,00,000

Finished Goods B 2,400 600 14,40,000
Total cost of closing stock 17,40,000

Illustration 10
The closing inventory at cost of a company amounted to Rs. 2,84,700. The following items
were included at cost in the total:
(a) 400 coats, which had cost Rs. 80 each and normally sold for Rs. 150 each. Owing to a
defect in manufacture, they were all sold after the balance sheet date at 50% of their
normal price. Selling expenses amounted to 5% of the proceeds.
(b) 800 skirts, which had cost Rs. 20 each. These too were found to be defective.
Remedial work in April cost Rs. 5 per skirt, and selling expenses for the batch totalled
Rs. 800. They were sold for Rs. 28 each.
What should the inventory value be according to Ind AS 2 after considering the above items?
Solution
Valuation of Closing Inventory
Particulars Rs. Rs.
Closing Inventory at cost 2,84,700
Less: Cost of 400 coats (400 x 80) 32,000
Less: Net Realisable Value [(400 x 75) - (5% of Rs. 75) × 400] (28,500) (3,500)
Value of Closing Inventory 2,81,200
Note: Since, 800 defective skirts were sold, the reduction in the price of the same had not
been adjusted from the value of the closing inventory.

Illustration 11
On 1.6.2018, X Ltd. Purchases raw material from one of its regular supplier at Rs. 60 lakhs.
As per terms of the contract, the entity would pay the amount after 2 years.
Assume Incremental borrowing rate of X Ltd. is 11%.
1. Find out purchase price applying Ind AS 2?
2. How should the difference be accounted for?

Solution
Purchase price = Present value of Rs. 60 lakhs discounted at the purchaser’s incremental
borrowing rate.
Purchase Price = Rs. 60 lakhs = Rs. 48.70 lakhs
(1+11%)2
Accounting entries:
(Amount in Rs. Lakhs)
Date Particulars Dr. Cr.

1.6.2015 Purchase A/c Dr. 48.70

To Trade Payables A/c 48.70
31.3.2016 Unwinding of Discount A/c Dr. 4.46
To Trade Payables A/c 4.46
31.3.2017 Unwinding of Discount A/c Dr. 5.85
To Trade Payables A/c 5.85
Date Particulars Dr. Cr.

31.5.2017 Unwinding of Discount A/c Dr. 0.99

To Trade Payables A/c 0.99
31.3.2017 Trade Payables A/c Dr. 60.00
To Bank A/c 60.00
Illustration 12
A dealer of sanitary fittings hold 1000 pcs of wash basins for delivering a constructor under
firm contract. The contract quantity is 900 pcs @ Rs. 3,400 whereas retail price of the same is
Rs. 4,200.
What should be the net realisable value of the inventories?
Solution
As per Paragraph 31, Ind AS 2, the net realisable value of the quantity of inventory held to
satisfy firm sales or service contracts is based on the contract price. If the sales contracts are
for less than the inventory quantities held, the net realisable value of the excess is based on
general selling prices.
Accordingly, net realisable value of 1000 pcs of wash basin should be -
900 x 3,400 = Rs. 30,60,000
100 x 4,200 = Rs. 4,20,000
Rs. 34,80,000

INCOME TAX – (IAS 12 and Ind AS 12)

IAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of
accounting for income taxes which recognises both the current tax consequences of
transactions and events and the future tax consequences of the future recovery or settlement
of the carrying amount of an entity's assets and liabilities. Differences between the carrying
amount and tax base of assets and liabilities, and carried forward tax losses and credits, are
recognised, with limited exceptions, as deferred tax liabilities or deferred tax assets, with the
latter also being subject to a 'probable profits' test.

Objectives
 Calculate taxes under Ind AS 12
 Describe the recognition criteria for deferred tax liabilities and assets
 Explain the deferred tax effects on business combinations.
 Detail the recognition of deferred tax assets arising from unused tax
 Detail the recognition of deferred tax assets arising from unused tax losses or credits.
 Detail presentation and disclosure requirements of income taxes

Some Definitions
1. Accounting Profit – Profit or loss for a period per the books of account.
2. Taxable Profit – The profit (loss) for a period, determined in accordance with the
rules established by the taxation authorities, upon which income taxes are payable
(recoverable)
3. Tax expense – The aggregate amount included in the determination of profit or loss
for the period in respect of current tax and deferred tax
4. Current tax – The amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period. The amount of income taxes payable
(recoverable) in respect of the taxable profit (tax loss) for a period. If the income is
positive we have to pay taxes. But if the entity incurs a loss then taxes are c/f in
India. But in some
 countries government pays refunds for tax loss. Hence the act has used the term taxes
payable and recoverable both.
5. Taxbase of asset / liability: It is the amount attributable to that asset or liability for
tax purposes.
6. Carrying amount of asset / liability: It is the amount attributable to that asset or
liability for accounting purposes.
7. Deductible temporary differences: Carry forward of unused tax losses and credits.
IT gives rise to the recovery of tax if the asset / liability is settled. à it gives rise to
DTA
8. Taxable temporary differences: It results in the payment of tax when the carrying
amount of the asset or liability is settled à it gives rise to DTL
9. Deferred Tax Assets (DTA): The amounts of income taxes recoverable in future
periods. It is the tax effect on Deductible temporary difference.
10. Deferred Tax Liabilities (DTL):The amounts of income taxes payable in future
periods. It is the tax effect on Taxable temporary difference.

Important Terms Used

Tax base = Carrying Amount → No DTA / DTL
For an Asset: Tax base > Carrying Amount → DTA
For an Asset: Tax base < Carrying Amount → DTL
For a liability: Tax base > Carrying Amount → DTL
For a liability: Tax base < Carrying Amount → DTA
Consolidated Financial Statements
(1) Temporary differences can also arise from adjustments on consolidation.
(2) Deferred tax is determined on the basis of the consolidated financial statements
and nottheindividual entity accounts.
(3) Therefore, the carrying value of an item in the consolidated accounts can be
different from the carrying value in the individual entity accounts, thus giving
rise to a temporary difference.
(4) An example is the consolidation adjustment that is required to eliminate
unrealized profits / losses on intergroup transfer of inventory. Such an
adjustment will give rise to a temporary difference, which will reverse when the
inventory is sold outside the group

Illustration 13
An entity acquired plant and equipment for ₹ 10,00,000 on 1/4/2015. The asset is depreciated
at 30% a year on the straight-line basis, and local tax legislation permits the management to
depreciate the asset at 25% a year for tax purposes. At the end of March 2017 the asset was
tested for impairment and the recoverable amount estimated to be ₹ 3,00,000.
Required: Calculatethefollowingforeachoftheyears:31/3/2016,31/3/2017:
1. Carrying amount of the asset
2. Tax base of the asset
3. Taxable temporary difference (TTD)
 4. Deductible temporary difference (DTD)
5. DTA / DTL
Assuming tax rate of 30%.
Solution
Year Carrying Tax Deductible Taxable DTA # DTL
Amount Base TD TD
31/3/2016 Rs. 7,00,000 7,50,000 50,000 - 15,000 -
31/3/2017 Rs. *3,00,000 5,00,000 2,00,000 - 60,000 -
* 3,00,000 = 7,00,000 – 3,00,000 Depreciation – 1,00,000 Impairment loss = ₹ 3,00,000.
# DTA in the first year is ₹ 15000 [50000×30%] and in the second year it increased to ₹
60,000 [200000×30%] which means DTA further arises ₹ 45,000 during 31/3/2017.

Illustration 14
Land carried in the balance sheet ₹ 45,00,000 as on 31/3/2016. It was revalued @ 40%
upwards. Tax rate 30%. Calculate the following: Carrying Amount, Tax base (TB),
Deductible Timing Difference (DTD), Deferred Tax Asset (DTA), Taxable Timing
Difference (TTD), Deferred Tax Liabilities (DTL).
Solution
CA = Rs. 63,00,000, TB = Rs. 45,00,000, TTD = Rs. 18,00,000, DTL = ₹ 5,40,000 (the
company will sell the asset and then it has to pay tax on revaluation).

Land Dr. ₹ 18,00,000

To Revaluation Reserves ₹18,00,000
Revaluation Reserves Dr. ₹ 5,40,000
To DTL ₹ 5,40,000

Illustration 15
From the following calculate Carrying Amount, Tax base (TB), Deductible Timing
Difference (DTD), Deferred Tax Asset (DTA), Taxable Timing Difference (TTD), Deferred
Tax Liabilities (DTL).
The following are some of the transactions related to Systis Co.
The following details for the year ended 31.03.2016, being the end of the reporting period,
are given:
1. Interest receivable is ₹ 100,000 is included in the SOFP (balance sheet). This will be
included in the taxable profit when cash is collected.
2. Development costs of ₹200,000 were incurred. They are capitalised and are to be
amortised over future periods when determining the accounting profit. However, the
amount is deducted when determining the taxable profit for the year 31.3.2016.
3. The cost of retirement benefits provided for (unpaid on end of the reporting period) of
₹50,000 while determining accounting profits. However, the amount is deductible for tax
purposes only when contributions are paid into a fund.
4. Research costs worth ₹30,000 are recognised as an expense while determining the
accounting profits. According to local tax laws, the amount is permitted as a deduction in
the future on the fulfilment of certain conditions.
Show the effect of these transactions on the financial statements of Systis Co. Tax 30%.
Solution
Carrying Tax Base Deductible TD Taxable TD DTA DTL
Amount
₹ 1,00,000 (A) Nil - ₹ 1,00,000 - ₹ 30,000
₹ 2,00,000 (A) Nil - ₹ 2,00,000 - ₹ 60,000
₹ 50,000 (L) Nil ₹ 50,000 - ₹ 15000 -
₹ 30,000* ₹ 9000 - ₹ 9000
30,000* it is the tax base which indicate the amount of deduction to be received in future. In
Accounting Income it is already expensed.
Net Summarised Entry:
DTA Dr ₹ 24,000
To P/L ₹ 24,000
P/L Dr ₹ 90,000
To DTL ₹ 90,000

Illustration 16
An entity purchases plant and equipment for $2 million. In the tax jurisdiction, there are no
tax allowances available for the depreciation of this asset; neither are any profits or losses on
disposal taken into account for taxation purposes. The entity depreciates the asset at 25% per
annum. Taxation is 40%.
Required: Explain the deferred tax position of the plant and equipment on initial recognition
and at the first yearend after initial recognition. Also calculate DTL / DTA.
Solution:
Tax base = Nil, DTA/ DTL = Nil. The entity will not receive any tax benefit in any way from
the asset. It is a permanent difference.

Illustration 17
Menulist Limited a subsidiary of Catalogue Limited sold goods costing ₹ 10,00,000 to its
parent for ₹ 11,00,000 and all of these goods are still held in inventory at the year-end.
Assume a tax rate of 40%.
Required: Explain the deferred tax implications.

Solution:
The unrealized profit of ₹ 1,00,000 will have to be eliminated from the consolidated income
statement and from the consolidated balance sheet in group inventory. The sale of the
inventory is a taxable event, and it causes a change in the tax base of the inventory. The
carrying amount in the consolidated financial statements of the inventory will be ₹10,00,000,
but the tax base is
₹11,00,000. This gives rise to a deferred tax asset of ₹1,00,000 at the tax rate of 40%, which is
40,000.
ACCOUNTING FOR TANGIBLE NON-CURRENT ASSETS – (Ind AS 16)
Scope of Ind AS- 16
The requirements of Ind AS 16 are applied to accounting for all property, plant, and
equipment unless another Standard permits otherwise, except:
 Property, plant, and equipment classified as held for sale in accordance with Ind AS-105
 Biological assets relating to agricultural activity under Ind AS – 41
 Mineral rights, mineral reserves, and similar non-regenerative resources

Criteria for Recognition

An item of property, plant, and equipment should be recognized as an asset if and only if it is
probable that future economic benefits associated with the asset will flow to the entity and the
cost of the item can be measured reliably. Any expenditure incurred that meets these
recognition criteria must be accounted for as an asset.

Measurement for Recognition

Cost in case of purchase in consideration of cash
An item of property, plant, and equipment that satisfies the recognition criteria should be
recognized initially at its cost. The Standard specifies that cost comprises:
 Purchase price, including import duties, non-refundable purchase taxes, less trade
discounts and rebates.
 Costs directly attributable to bringing the asset to the location and condition necessary
for it to be used in a manner intended by the entity
 Initial estimates of dismantling, removing, and site restoration costs.

Examples of directly attributable costs include

 Employee benefits of those involved in the construction or acquisition of an asset
 Cost of site preparation
 Initial delivery and handling costs
 Installation and assembly costs
 Costs of testing, less the net proceeds from the sale of any product arising from test
production (Trial run).
 Borrowing costs to the extent permitted by Ind AS 23, Borrowing Costs
 Professional fees

Examples of costs that are not directly attributable costs and therefore
must be expensed in the income statement include
 Costs of opening a new facility (inaugural expenses)
 Costs of introducing a new product or service e.g.: advertisement
 Office and administration expenses e.g.: office rent
 Advertising and promotional costs
 Costs of conducting business in a new location or with a new class of customer
 Training costs
 Administration and other general overheads
 Costs of incidental operations, Example: cost of material for sample testing (not
intended to be for commercial reason)
 Initial operating losses e.g.: loss of gross profit due to low capacity.
 Costs of relocating or reorganizing part or all of an entity’s operations e.g.: costs of
shifting business.
Illustration 18
Pollisure Limited is installing a new plant at its production facility. It has incurred these costs:
1) Cost of the plant (cost as per supplier’s invoice plus taxes) ₹ 75,00,000, includes
refundable taxes ₹ 1,70,000 and non – refundable taxes ₹ 6,45,000
2) Initial delivery and handling costs ₹ 200,000
3) Cost of site preparation 5,00,000
4) Consultants used for advice on the acquisition of the plant ₹700,000
5) Estimated dismantling costs to be incurred after 5 years ₹ 5,20,000
6) Trial run costs: Materials ₹ 2,20,000, Labour ₹ 1,87,000, Overheads ₹ 1,70,000. The
entire product was sold at 75% of cost.
7) Inauguration expenses ₹ 25,000
8) Operating losses before commercial production 1,10,000. Discounting rate: 10%.
Required: Please advise Pollisure Limited on the costs that can be capitalized in accordance
with Ind AS - 16.
Solution:
According to Ind AS - 16, these costs can be capitalized:
Cost of the plant:
Purchase price ₹ 75,00,000
Add:

Initial delivery and handling costs 2,00,000

Cost of site preparation 5,00,000
Consultants used for advice on the acquisition of the
plant 7,00,000
PV of Estimated dismantling costs to be incurred after
5 years 3,22,879*
Trial run costs (Materials ₹ 2,20,000+Labour ₹
1,87,000+Overheads ₹ 1,70,000) 5,77,000 ₹ 22,99,879

Less:
Sale proceeds of trail run production (187000+170,000+220,000) × 0.75 ₹ 4,32,750
₹ 93,67,129
Working Note:
Inauguration expenses ₹25,000, Operating losses before commercial production
₹1,10,000 cannot be capitalized. They should be written off to the income statement
in the period they are incurred.
* PV of ₹ 5,20,000 = ₹5,20,000 / (1+0.10)5 = ₹ 3,22,879

Cost in Case of Exchange of Asset:

If an asset is acquired in exchange for another asset, then the acquired asset is measured at its
fair value. In the following cases the deemed cost will not be the Fair Value:
i) if the exchange lacks commercial substance
 ii) or the fair value cannot be reliably measured, in which case the acquired
asset should be measured at the carrying amount of the asset given up.

Cost of Asset in Case of Share Based Payment:

If the asset is acquired under share based payment transaction, its cost will be determined
as per Ind AS – 102.

Cost of Asset in Case of Deferred Credit Basis:

The cost of an asset is measured at the cash price equivalent at the date of acquisition. If
payment is “deferred” beyond normal credit terms, then the difference between the cash
price and the total price is recognized as a finance cost and treated accordingly. The
general practice is not to discount the future cash flows.

Dismantle and Restoration Cost:

Dismantle and site restoration cost is to be capitalized to the cost of an asset. It is incurred
while the asset is installed. A provision at present value is required for the site restoration
cost on the other hand. In case of a Mine site restoration costs is to be added to the mine.
But the further digging and extracting of ore is to be added to the inventory production
while the inventory is extracted.
Self Constructed Asset
 Cost is same as the cost of constructing an asset for sale.
 Internal profits are eliminated.
 Cost of abnormal amount of wasted material, labour or other resources not
included in the cost of asset.
Example:
Z ltd is constructing a fixed asset . The cost of project is given as:
Materials 7,00,000
Direct expenses 1,00,000
Total wages of the company during the year 1,20,000
(1/12 is chargeable to project)
Total administrative expenses of the company during the year Rs 8,00,000(5% is
chargeable to the project)
Depreciation on asset used 12,000
Calculate the Cost of asset

Subsequent Measurement
Two valuation models:
1.Cost Model
 An item of PPE is carried at its cost less any accumulated depreciation and any
impairment loss.
 Entities in India usually use the cost model but revalue items of PPE from time to
 time.
2.Revaluation Model

 PPE carried at an amount i.e. the fair value at the date of revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment
losses.
 Fair value - accumulated depreciation - subsequent accumulated impairment losses

a) Under the revaluation model , revaluations should be carried out regularly so that the
carrying amount of an asset doesn’t differ materially from its fair value in the BS.
b) If an item is revalued the entire class of assets to which that asset belongs should be
revalued.
c) Revalued assets are depreciated in the same way as under the cost model.

Accounting treatment for Revaluation of assets

Upward Revaluation (Revaluation Increase)
Asset’s carrying amount increased - Increased amount is recognised in OTHER
COMPREHENSIVE INCOME
Recorded under the head REVALUATION SURPLUS(Equity side)

Downward Revaluation (Revaluation Decrease)

Asset’s carrying amount decreased - Decreased amount is recognised in Profit & Loss
Statement(as expense)