AS- Introduction & Applicability

As are written policy documents insured by expert Accounting Body, or by other

Regulatory Body, covering the following aspects of accounting transactions in
Accounting financial Statements –
Standards 1. Recognition of transactions and events in the financial Statements’
2. Measurements of these transactions events,
3. Presentation of these transactions and events in Financial Statements, in a
meaningful & understandable manner, and
4. Disclosure requirements in Financial Statements
1. To promote the dissemination of timely and financial information to all
Stakeholders and Users.
2. To provide a set of standard accounting policies, valuation norms and
Benefits disclosure requirements.
3. To improve the quality of Financial reporting, by promoting comparability,
consistency transparency.
4. To ensure disclosure a accounting principles and treatments, where
important information is not otherwise statutorily required to disclosed.
5. To reduce (or eliminate if possible), accounting alternatives, thereby leading
to better inter-Firm & intra- Firm comparison of financial Statements.
6. To reduce scope for creative accounting, i.e. twisting of accounting policies to
produce financial Statements favorable to a particular interest group.
1. In some case, alternative solutions to specific accounting problems may have
Drawbacks valid supportive arguments. Choice of any one solution becomes difficult.
2. Standards may be applied in a rigid and inflexible manner, focusing more on
form than substance.
3. Standards cannot override the statue, and should be framed within the
framework of the Law.

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As Applicability Chapter 3
Non- Corporate Entities (NCEs) are classified into three categories –Leave-I, Leave-II, Level-III &
Level-IV, for the purpose of application of Accounting Standards-

Conditions Level I Level II Level III

All Commercial Industrial and Business exceeds exceeds 50 crore, exceeds Rs. 50
Reporting Entities, whose Turnover for the Rs.250 but dose not crore, but dose
immediately preceding accounting year. crores exceed Rs. 250 not exceed Rs.
{Note-: Turnover dose not include “Other crore 50 crore
Income”}
All Commercial Industrial and Business in Rs. 10 crore, but Rs. 2 crore, but
Reporting Enterprises having Borrowings excess not excess of Rs. not inexcessof
(Including Public Deposits) at any time during Rs. 50 50 crore Rs. 10 crore
the Preceding accounting year. crores

Notes:

1. Entry falling in each Level includes its Holding and subsidiary Entities.
a. Level 1 Entities include.
(a) Entities whose Equity or Debt Securities are listed, or in the process of listing on any stock
Exchange, whether in India or outside India.

(b) Banks (Including Co-operative Banks), Financial, or Entities carrying on Insurance business.
b. Non corporate Entities which are not covered under Level I, II & III are considered as Level IV
Entities.

Ind As Applicability
Companies required to comply w.e.f

A (i) Companies whose Equity/ Debt Securities are listed or are in the Process Accounting
of being listed on any stock Exchange in India or outside India, and having Period Starting
Net Worth > Rs. 500 Crores, on
(ii) Any Other Companies having net Worth > Rs 500 Crores.
(iii) Holding, Subsidiary, joint or Associate Companies of above.

FTR.1

01.04.2016
B (i) Companies whose Equity / Debt Securities are listed or are in the process of 01.04.2017
being listed on any Stock Exchange in India or outside India, and having Net
Worth < ₹ 500 Crores,
(ii) Unlisted Companies having Net Worth > ₹ 250 Crores but < ₹500 Crores.
(iii) Holding, Subsidiary, Joint Venture or Associate Companies of above.
C (i) NBFCs having Net Worth > ₹500 Crore, and its Holding, Subsidiary, Joint 01.04.2018
Venture or Associate Companies
(ii) Holding, Subsidiary, Joint Venture or Associate Companies of Scheduled

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 Commercial Banks (excluding RRBs)
D (i) NBFCs whose Equity / Debt Securities are listed or in the process of listing on 01.04.2019
any Stock Exchange in India or outside India, and having Net Worth < ₹S00
Crore,
(ii) Unlisted NBFCs, having Net Worth > ₹ 250 Crore but < ₹500 Crore,
(iii) Holding, Subsidiary, Joint Venture Or Associate Companies of above.

Carve In/out

Ind AS vs IFRS: These changes have been made considering various factors, such as-

Changes that will not result into Changes that will result into Changes that will result into
Carve In/Outs Carve Outs Carve Ins

Removal of options and The differences which are in If there is no guidance under
terminology related changes deviation to the accounting IFRS for any particular
principles and practices stated transaction or event, then the
in IFRS, are commonly known guidance provided under Ind
as ‘Carve-outs’. AS is known as “Carve-Ins”.

Conceptual Framework Chapter 2

Assets and Liabilities can be measured under four alternative bases - (a) Historical Cost, (b) Current
Cost, (c) Realisable (Settlement) Value, and (d) Present Value.

Measurement Assets are recorded / carried at Liabilities are recorded / carried at

Base
Historical Cost Acquisition Price, i.e. the amount of Amount of cash or cash equivalents
cash or cash equivalents paid, or fair expected to be paid to satisfy the liability
value of the asset exchanged, at the in the normal course of business.
time of acquisition.
Current Cost Amount of cash or cash equivalents Undiscounted Amount of cash or cash
that would have to be paid, if the same equivalents that would be required, to
or equivalent asset were to be acquired settle the obligation currently.
currently.
Realisable Amount currently realisable on the sale Undiscounted Amount of cash or cash
Value of the asset in an orderly disposal. equivalents expected to paid to settle
the liability in the normal course of
business.
Present Value Present Value of future Net Cash Flows Present Value of future Net Cash Flows
generated by the assets, in the normal that are expected to be required to settle
course of business. the liability, in the normal course of
business.

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Capital Maintenance:

Particulars Financial Capital Financial Capital Maint. Physical Capital

Maint. at Historical at Current Purchasing Maint at Current Cost
Cost Power
Closing Capital / Selling price x No. of Selling price x No. of Units Selling price x No. of
Sales Units Units
Less: Required Opening Capital At current Purc. Power = At current cost =
Closing Capital Opening Capital x Closing cost x No. of
Units
Permissible
Drawings

Financial Statements under Non Going Concern Assumption:

1. No Depreciation shall be provided on PPE, Intangible and Other Assets. They are written down to
its current NRV.
2. Inventories should be valued at its current NRV. (i.e. 'Cost or NRV whichever is lower’ principle
is not applicable)
3. Any Unamortised Deferred Expenditure should be written off by transferring to P&L.
4. Prepayment Penalty on Loan, if any, should be provided.
5. Debtors whose collection depends on successful re-design of certain product already supplied
to the customer should be written off as Bad and Doubtful Debts.

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 AS 1 Disclosure of Accounting Policies

Fundamental 1. Going Concern: The enterprise is normally viewed as a Going Concern, i.e. as
Accounting continuing in operation for the foreseeable future. It is assumed that the
Assumptions enterprise has neither the intention nor the necessity of liquidation or of curtailing
materially the scale of operations.
2. Consistency: The accounting policies are consistent from one period to another.
3. Accrual: Revenues & costs are accrued i.e. recognised as they are earned or
incurred and recorded in Financial Statements of the periods to which they relate,
and not when money is received or paid.
Disclosure 1. Followed: Disclosure is not required, since their acceptance and use are
assumed.
2. Not followed: Disclosure is necessary specifying that the accounting assumptions
are not followed.
Factors To select and apply an accounting policy, the following points are considered -
1. Prudence: Prudence implies that Profits are not anticipated, they are recognised
only when realised, though not necessarily in cash. However, provision is made
for all known liabilities and losses, even if the amount is not certain and is only a
best estimate, based on available information. Example: Provision for Doubtful
Debts / Discount on Debtors, Valuation of stock at lower of Cost or NRV.
2. Substance over Form: This means that the accounting treatment and
presentation in Financial Statements, of transactions and events, should be
governed by their substance and not merely by the legal form. Example: Sale &
Repurchase should be recorded only as a financing transaction.
3. Materiality: Financial Statements should disclose all material items, i.e. the
knowledge of which might influence the decisions of the users of Financial
Statements. Example: Payment of fines /penalties for violation of law should be
disclosed separately, even if the amount is negligible.

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 AS 2 Valuation of Inventories

1. Valuation Principles
Inventories includes - Valuation Principles
Raw Materials (RM) FG valued at Cost: RM should also be valued at Cost.
FG valued at Cost: RM should also be valued at Cost, or NRV, whichever
is lower.
Work in Progress (WIP) Cost, or Net Realisable Value (NRV), whichever is lower.
Finished Goods (FG) Cost, or Net Realisable Value (NRV), whichever is lower.

2. Cost and NRV

Inventories Cost NRV
Raw Materials Costs of Purchase + Costs incurred to Replacement Cost
bring the inventories to present
location and condition
Work in Costs of Purchase + % of Costs of Estimated Selling Price Less Estimated
Progress Conversion Cost of Completion Less Costs necessary
to make the sale
Finished Costs of Purchase + Costs of Estimated Selling Price Less Estimated
Goods Conversion Costs necessary to make the sale.

3. Costs of Purchase
Particulars Amount
Purchase Price including Duties and Taxes (excluding tax refunds / credits)
Add: Freight Inwards
Other Expenditure directly attributable to the purchase (See Note)
Less: Trade Discounts, Rebates, Duty Drawbacks and other similar items

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 4. Costs of Conversion includes-

Type of Cost Costs directly related Variable Production Fixed Production

to the units of Overheads Overheads
production
Description/ Example e.g. Direct Labour, i.e Indirect Costs which Indirect Costs which
cost of workers who are vary directly or nearly remain respectively
directly associated in directly, with the constant regardiess of
the production volume of production, the level of production,
process. e.g Indirect Material, e.g, Factory
Indirect Labour Management Costs,
Depreciation

5. Effect of differences in production on Fixed Overheads allocation

Situation Low Producton than normal Higher Production than normal
Production Actual Production < Normal Production Actual Production > Normal
Production
Absorption Under – absorption of Overheads Over absorption of Overheads
Treatment  Cost is assigned to output on the basis of Cost per unit is decreased, to ensure
under AS-2 normal capacity only. that the inventories are not measured
 Unallocated OHs of Idle Plant are treated above cost
as Period Cost

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 AS 3 Cash Flow Statements

1. Closing Balance of Cash & Cash Equivalents (Less) Opening Balance of Cash & Cash Equivalents
= Increase / (Decrease) in Cash and Cash Equivalents during the year, attributed to-

Operating Activities Investing Activities Financing Activities

Cash Generated from Operations, Changes (increase/decrease) Changes (increase / decrease)

computed as under (Indirect in Investments & Long-Term in Capital and Long-Term
Method)- Assets Liabilities

EBT Note: Long term Assets items Note:Long Term Liability items
should be considered here. should be considered here.
+ Non-Cash Items
 Capital Flows:Purchase  Capital
± Non- Operating Items
/ Sale of Fixed Assets and Flows:Issue/Redemption of
Operating Profit before WC Long Term Investments. Equity Share
adjustments Capital/Preference Share
 Revenue Flows: Capital/Debt.
± Adjustments for WC changes Interest/Dividend from  Revenue Flows: Payment of
Operating Cash Flow before Long term Investments Interest and Dividends
Taxes (Equity and Preference)

(-) Taxes paid & Extraordinary

Items

Cash Flow Operating Activities

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 2. Classification of Items

a) Cash Receipts from Trade Receivables Operating Activities

b) Marketable Securities
Cash Equivalents [Assumed readily convertible into
known amounts of cash]
c) Purchase of Investments
d) Proceeds from Long Term Borrowings Investing Activities
e) Wages & Salaries paid
f) Bank Overdraft Financing Activities
g) Purchase of Goodwill
Operating Activities
h) Interim Dividend paid on Equity Shares
i) Short-Term Deposits Financing Activities / Operating Activities

Investing Activities
j) Underwriting Commission paid
k) TDS on Interest received Financing Activities

If readily convertible Cash Equivalents, Otherwise

Investing Activities

Financing Activities

Non Cash Flow

3. Transactions not having impact in Cash Flow Statements

1. Meaning: Many investing and financing activities do not have a direct impact on current Cash
Flows through they affect the capital and assets structure of an enterprise. These are called Non-
Cash Transactions.
2. Examples:(a) Acquisition of assets by assuming directly related liabilities, (b) Acquisition of an
enterprise by means of issue of Shares, and (c) Conversion of Debt to Equity.
3. Treatment: Investing and financing transactions that do not require tire use of Cash or Cash
Equivalents should be excluded from a Cash flow Statement. Such transactions should be
disclosed elsewhere in the Financial Statements, in a way that provides all the relevant
information about these investing and financing activities.

3. Format of Direct Method of reporting Cash Flows from Operating Activities

Particulars Amt

Cash Receipts from Customers for Sale of Goods / Rendering of Services.

Cash Receipts from Royalties, Fees, Commission and other Revenue.

Cash Payments to Suppliers for Goods and Services.

Cash Payments to and on behalf of Employees.

Cash Receipts and Payments relating to Futures / Forward / Option / Swap Contracts when
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the contracts are held for dealing or trading purposes.

Cash Generated from Operations before Taxes & Extra-ordinary Items

Less: Cash Payments (Refunds) of Income-Taxes unless they can be specifically identified
with Financing and Investing Activities.

Cash Flows before Extra-ordinary Items

Add / Less: Cash Receipts / Payments in relation to extraordinary items, e.g. Earthquake
Disaster Settlement, etc.

NET CASH FROM OPERATING ACTIVITIES

4. Format of Indirect Method of reporting Cash Flows from Operating Activities

Particulars Amt

Net Profit before Taxes and Extra-ordinary Items [Note]

Adjustments for:

Depreciation and similar non-cash items.

Foreign Exchange Losses, if any.

Interest / Dividend / Other Incomes relating to Investing / Financing Activities.

Interest Paid.

Taxes Paid (if PAT is considered initially instead of PBT).

Operating Profit before Working Capital Changes

Add / (Less): Decrease / (Increase) in Current Assets excluding Cash / Cash Equivalents.

Increase / (Decrease) in Current Liabilities excluding Cash / Cash Equivalents.

Cash Flows before extra-ordinary items

Add / Less: Cash Receipts / Payments in relation to extra-ordinary items, e.g. Earthquake
Disaster Settlement, etc.

NET CASH FROM OPERATING ACTIVITIES

Note:

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1. If PBT is not given, PBT = Increase in Reverses & Surplus + Preference & Equity Dividend + Provision
for Taxes.

2. Provision for Taxation Account

Particulars ₹ Particulars ₹

To Bank- Actual Taxes paid in CY By balance b/d Opening

Balance
To balance c/d Closing By P&L – Provision created
balance for CY

Total Total

3. Dividend payable Account

Particulars ₹ Particulars ₹

To Bank- Actual Taxes paid in CY By balance b/d Opening

Balance
To balance c/d Closing By P&L – Provision created
balance for CY

Total Total

4. If no information is available, it is assumed that opening balance in paid in CY and closing balance
is provided from P&L

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 AS- 04 Events Occurring After B/Sheet Date
Adjusting &Non Adjusting Events

A. ADJUSTING EVENTS
The following events occurring after the B/s Date Should be considered and adjusted in the
Financial Statements-
Nature of event Example

(a) Events relating to condition existing at the Balance Amount due form a customer as at 31st
Sheet date, and provide additional information March is considered should doubtful.
materially affecting the determination of the Information on his insolvency is received on
amounts of assets/liabilities thereat. 15th April.

(b) Events providing information that the fundamental Destruction of a major Production Plant, or
accounting assumption-Going Concern – is not Loss of Substratum of the enterprise.
appropriate.

(c) Statutory Requirements or special nature events. -

Accounting Treatment:
 Assets and Liabilities as at the Balance Sheet should be adjusted.
 Suitable disclosure should be made for the above in the Financial Statements.

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 B. NON-ADJUSTING EVENTS:
The following events occurring after Balance Sheet Date need not be reflected in the Financial
Statements-

Nature of Event Example

(a) Event does not relate to condition existing at As at 31st March, Cost of Investments is ₹ 75,000.
the Balance Sheet date. (Market Value ₹ 90,000) Its value declines to ₹
40,000 on 25th April.

(b) Events that do not affects the figures stated in Retirement of sales Director.
the Financial Statements.

(c) Events which represent material changes and

Substantial fall in market demand of the only
commitments affecting the financial position
product produced by the Company.
of the enterprise.

C. EXAMPLES:
Adjusting Events Non-Adjusting Events

1. Natural calamities (destruction) occurring 1. Natural calamities (destruction) occurring

after the Balance sheet date but Going after the B/s date (Going Concern
concern Assumption is getting Affected Assumption is not affected)
2. Theft or Defalcation being noticed after B/S 2. Theft or Defalcation noticed after B/s Date
Date and also after approval of Financial
3. Transaction Where sale is completed but Statement by Board
deed is entered after Balance sheet Date 3. Acquisition of a company, where (i)only
(Note: As soon as the sale is completed, it negotiation is completed or (ii) only Terms
should be recorded) and Conditions being decided, or (iii) only a
4. Cheque issued returned due to sign proposal to sell is sent.
differences. 4. Cheque in transit (i.e not received by the
5. Legal suit pending as on B/s date but entity as on the Balance Sheet Date).
subsequently won before finalization of 5. Dividend Declared after the Balance Sheet
accounts. date.

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 AS-05 Net Profit or Loss for the Period, Prior
Period Items & Changes in Accounting Policies.

Types Meaning Example

(a) Any activities which are undertaken by

an enterprises as part of its business,
and
Ordinary Purchase, Sales, Expenses paid,
(b) Such related activities in which the
Activities Income received etc.
enterprises engage in furtherance of,
incidental to, or arising from, these
activities.

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 Generally, ordinary activities need not be Write-down of Inventories to NRV, &
disclosed separately. But a separate its reversal, Corporate Restructuring,
disclosure of - (a) nature of activity, and (b) Sale of PPE / Long- Term Investments,
amount involved, is required when such Legislative changes having
Exceptional items of Income or Expense retrospective application, Litigation
a) Fall within the meaning of "ordinary" settlements and Other reversals of
Items activities, provisions.
b) Are of special size, nature or
incidence, and
c) Disclosure is relevant to explain the
entity's performance.

These are Income or Expenses -

Extra a) that arise from events or
a) Attachment of property of the
transactions that are clearly
ordinary Enterprise, (b) An Earthquake, (c)
distinct from the ordinary activities
Refund of Government Grant etc.
Items of the enterprise,
b) these are not expected to recur
frequently or regularly.
These are Income or Expenses –
a) Applying incorrect Depreciation
Prior
a) that arise in the current period, rate of in PY and rectifying it in CY,
Period b) as a result of errors or omissions in (b) Omission of Income or
the preparation of the Financial Expenditure in PY, and rectifying it
Items
Statements of one or more prior now.
periods.
These refer to

a) the specific accounting principles Change of Cost Model to Revaluation

A/c and the methods of applying those Model and vice versa, Change in Cost
principles Formula in measuring the Cost of
Policies
b) adopted by an enterprise in the Inventories.
preparation and presentation of
Financial Statements.

1. Adoption of an accounting policy for

events or transactions hat differ in
substance from previously Introduction of a formal Retirement
Not change
occurring events, Gratuity Scheme by an employer, to
in A/c
2. Adoption of a new accounting policy replace an adhocexgratia payment
Policies
for events or transactions which did scheme
not occur previously or that were
immaterial.

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 Accounting Estimates refer to Financial
A/c Statement items, which cannot be Change in estimate of Provision for
measured with precision, but can be Doubtful Debts or Change in estimate
Estimates estimated based on informed of Useful Life of PPE.
judgments.

A. Change in Accounting Estimate vs Change in Accounting Policy

Accounting Estimate Accounting Policy

Change in Accounting Estimate is a routine Change in Accounting Policy is

matter in accounting which is substantially infrequent and amounts to almost a
based on estimates, e.g. estimate of Bad permanent change in the basis of
Debts is made on the basis of information at accounting in the concerned area. For
Frequency
subsequent date, i.e. insolvency of a Debtor example, j the accounting policy for
known afterwards. charging depreciation may be
changed from Cost Model to
Revaluation Model.

A Change in Accounting Estimate arises due A Change in Accounting Policy is

to possible only for -

 change in circumstances on which the  ensuring statutory compliance, or

Change estimate was based, or  ensuring compliance with
 availability of new information, etc. another AS, or
 more appropriate presentation of
the Financial Statements.

The accounting picture may not get A change in Accounting Policy,

Effect substantiallyalteredby the change in the generally, has a far reaching, material
Accounting Estimate. and long-term effect.

The nature and amount of a change in A change in Accounting Policy which

Accounting Estimate which has a material has a material effect should be
effect in the current period or expected disclosed, along with the impact of
Disclosure
material effect in future should be disclosed and adjustments resulting from that
in the Financial Statements. change in the current period Financial
Statements.

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 AS - 7 Construction Contracts
Contract Profit & Loss A/c (Non Cumulative)

Particulars ₹ in Crores Particulars ₹ in Crores

To Contract Cost Cost for the year By Contact Revenue Price x % of WC

To Provision for Loss Bal. fig. By Net Loss Expected Loss

Total Total

When a Contract Covers a number of assets, the Construction of each asset should be
treated as a separate Construction Contract when-

Criteria for
a) Separate proposals have been submitted for each asset,
Separate
b) Each asset has been subject to separate negotiation, and the Contractor and
Contracts
Customer have been

able to accept or reject that part of the Contract relating to each asset, and

c) The costs and revenues of each asset can be identified.

 Cost Incurred till date= Work Certified + Work to be Certified

 Estimated Total Contract Costs= Costs Till date + Future Costs
Formulas  Percentage of Completion = Cost Insured till date
Estimated Total Costs
 Contract Revenue= Contract Price X Percentage of Completion
 Expected Loss= Estimated Total Contract Costs Less Contract Price

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  Cost Insured + Recognised Profits- Recognised Losses-Progress Billings
If positive, Gross Amount due from customers. If negatives, Gross Amount due
to customers.

Recognition of Contract Revenue (Cumulative)

1. Basic Computation
Particulars Year 1 Year 2 Year 3

1. Expected Total Contract Cost= Cost Incurred till date + Expected

Cost

2. % of Completion = Cost Till Date

Total Contract Costs

2. Contract P&L A/C

Year Particulars Upto reporting Already recognised in Recognised during
date
Previous Year current year

1 Contract Revenue

Contract Costs

Contract Profits

2 Contract Revenue

Contract Costs

Contract Profits

3 Contract Revenue

Contract Costs

Contract Profits

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 As 9 Revenue Recognition

Revenue from sale of Goods should be recognised only when the following condition are
satisfied-

1. Transfer of Property: This involves transfer of either-(a)property in goods, or (b) all

significant risks and rewards of ownership, from the Seller to the Buyer.
Sale of 2. Control over goods lies with Buyer: The Seller retains no effective control of goods
Goods transferred, to a degree usually associated with ownership.
3. Certainty of amount: No significant uncertainty exists regarding the amount of the
consideration that will be derived from the sale of the goods.
4. Certainty of collection: It is reasonable to expect ultimate collection at the time of
performance otherwise, Revenue Recognition should be proposed

Revenue from rendering of services should be recognised if the following condition are
satisfied-

1. Performance of Service: This performance may consist of execution of one or more

acts. it should be measured using either- (a) Completed Services Contract Method, or
Service (b) Proportionate Completion Method, Whichever relates the revenue to the work
accomplished.
2. Certainty of amount: No significant uncertainty exists regarding the amount of the
consideration that will be derived from the sale of the goods.
3. Certainty of collection: It is reasonable to expect ultimate collection at the time of
performance otherwise, Revenue Recognition should be proposed.

1. Interest: On a time proportion basis considering - (a) amount outstanding, and (b)
Special rate of interest.
Points 2. Royalties: On an accrual basis in accordance with the terms of relevant agreement.
3. Dividends: When the owner's right to receive payment is established.

Special 1. Revenue on Consignment Sales is recognised only when goods are sold by the agent
Points to a third party. Cost of Inventory lying in the hands of Consignee should also be
included as Closing Stock of Consignor.

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 2. For Bill & Hold sales basis, Revenue should be recognised notwithstanding that
physical delivery has not been completed so long as there is expectation that delivery
will be made.
3. For Sale on Approval basis, Revenue should be recognised since the Buyer has
formally accepted the goods or time period for rejection has elapsed, whichever is
earlier.
4. For Sale & Repurchase basis, if the re-purchase price is pre-determined and covers
the purchasing and holding costs, such transaction should be accounted as a
Financing Transaction and not as a sale.

Trade Trade Discounts and Volume Rebates received do not fall within the definition of
Revenue, since they represent a reduction of cost. Hence, these Discounts and Volume
Discounts Rebates given should be deducted to determine revenue.

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 AS 10 Property, Plant and Equipment

Bearer Plant Bearer Plant is a living plant that is –

a) is used in the production or supply of Agricultural Produce

b) is expected to bear produce for more than one period, and
c) has a remote likelihood of being sold as Agricultural Produce, except for
incidental scrap sales.

Not a Bearer a) Plants cultivated to be harvested as Agricultural Produce (e.g. Trees grown for use
Plant as lumber),
b) Plants cultivated to produce Agricultural Produce when there is more than a
remote likelihood that the Entity will also harvest and sell the plant as Agricultural
Produce, other than as incidental scrap sales (e.g. Trees that are cultivated both
for their fruit and their lumber), and
c) Annual Crops (e.g. Maize and Wheat).

Recognition Cost of an Item of PPE should be recognised, only if –

Criteria
1. it is probable that future economic benefits associated with the Item will flow to
the Entity, and
2. Cost of the Item can be measured reliably.

Components 1. Purchase Price + Import Duties + Non-Refundable Purchase Taxes - Trade

of cost Discounts &. Rebates.
2. Any Costs directly attributable to bringing the Asset to the location and condition
necessary for it to be capable of operating in the manner intended by
Management.
3. Initial Estimate of Decommissioning, Restoration and similar Liabilities,

Directly 1. Costs of Employee Benefits arising directly from the construction or acquisition of
Attributable the item of PPE,
Costs 2. Costs of Site Preparation,
3. Initial Delivery and Handling Costs,

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 4. Installation and Assembly Costs,
5. Costs of testing whether PPE is functioning properly Less Net Proceeds from
selling any items produced while bringing PPE to that location & condition (e.g.
Samples produced when testing),
6. Professional Fees.

Not included 1. Costs of opening a New Facility or Business, such as, Inauguration Costs,
in cost 2. Costs of introducing a New Product or Service(including Costs of Advertising and
Promotional Activities),
3. Costs of conducting business in a new location or with a new class of customer
(including costs of Staff Training), and
4. Administration and other General Overhead Costs.

Models 1. Cost Model = Measured at Historical Cost - Accumulated Depreciation &

Impairment Loss.
2. Revaluation Model = Revalued at least 3 years once.

Class of PPE If an Item of PPE is revalued, the entire class of PPE to which that asset belongs
should be revalued. A Class of PPE is a grouping of Assets of a similar nature and use
in an Entity's operations. Examples of separate classes are –

(a) Land (d) Ships, (g) Furniture and Fixtures,

(b) Land and buildings (e) Aircraft, (h) Office Equipment, and

(c) Machinery, (f) Motor Vehicles, (i) Bearer Plants

Office vs 1. AS-10 permits Assets to be revalued on a class by class basis. The different
Factory characteristics of the Buildings enable them to be classified as different PPE
Buildings classes. Office Buildings can be clearly distinguished from the Factories in terms
of their function, their nature and their general location.
2. Different Models can be applied to these classes for subsequent measurement.
Hence, Office Buildings can be measured using Revaluation Model. However, all
properties within the class of Office Buildings must, be carried at Revalued
Amount. Separate disclosure of the two classes must be given.

Revaluation a) Upward Revaluation for First Time - Credited to Revaluation Reserve

b) Revalued Downwards - Charged to P&L (Impairment Loss is different from
Revalued downwards)
c) Downward Revaluation if previously revalued upwards - Debit Revaluation
Reserve to the extent of balance available, then Debit P&L
d) Upward Revaluation if previously revalued downwards - Credit P&L to the extent of
Revaluation
e) Downwards, then Credit Revaluation Reserve.

22 | P a g e By: - CA Nakul Katheria

Adjustment Whole of Surplus is realised
of
Revaluation a) The whole Surplus may be a) Some of the Surplus may be realized, as the
Reserve realized on the Assets is used by the Entity.
Retirement or Disposal of b) In this case, the amount of the Surplus
the Asset. realized = Difference between Amortisation
b) The entire Revaluation based on the Revalued Carrying Amount of
Surplus is transferred to the Asset and Amortisation that would have
Retained Earnings, been recognized based on the Asset’s
directly, on Asset de- Historical Cost.
recognition.

Cumulative Revaluation Surplus included in Equity may be transferred directly to

Retained Earnings, when the Surplus is realised. The treatment will be as under –

OR
Part of the Surplus is realized

Note: The transfer from Revaluation Surplus to Retained Earning is not made
through Profit or Loss.

Depreciation 1. Depreciation should be provided from the date when the asset is ready for use.
Actual usage is not relevant. Depreciation will not be provided only if the Residual
Value exceeds cost.
2. Permissible methods SLM, WDV & Units of Production

Components 1. Life & Depreciation for a PPE should be computed for each component
separately.
2. When each major inspection is performed / Component is replaced, its cost is
recognised in the Carrying Amount as a replacement. Any remaining Carrying
Amount of the cost of the previous inspection / Component is de-recognised.
3. De-recognition of the Carrying Amount occurs regardless of whether the cost of
the previous inspection was identified in the transaction in which the item was
acquired or constructed.
4. If necessary, the Entity may use the estimated cost of a future similar inspection
as an indication of what the cost of the existing inspection component was when
the item was acquired or constructed.

23 | P a g e By: - CA Nakul Katheria

Replacement WDV of PPE on the date of Replacement Cost - Depreciation for past years

Less: WDV of the old replaced part PV of Current Cost - Depreciation for past years
Add: Cost of the new replaced part

Revised WDV of PPE

Estimate vs. 1.Changes in Accounting Estimate: Changes in Residual Value, Changes in Useful
Policy Life Estimation and Changes in Depreciation Method (i.e. SLM to WDV or vice versa).

1. Changes in Accounting Policy: Change from Cost to Revaluation Model or vice

versa

Special 1. If Payment is deferred: Cash Price is recognised as Cost of PPE. Interest, i.e. Total
Points Payment (Less) Cash Price, is either recognized as Expense over the credit period.
2. Insurance Claim i.e. Reimbursement from third party should be disclosed
separately as Income in P&L.

If the Exchange Transaction Measured at-

Lacks commercial substance, or the Fair value of neither the Carrying Amount of
Asset received nor the Asset given up is reliably measurable. the Asset give up

Exchange Has commercial substance and the Entity is able to measure Fair Value of the
reliably the Fair value of either the Asset received or the Asset given up
Asset given up

Has commercial substance and FV of the Asset received is FV of Asset received

more clearly evident.

24 | P a g e By: - CA Nakul Katheria

 AS 11 Effects of Changes in Forex Rates

1. Para 46A Option

Generally, Exchange Differences arising on reporting of Long-Term Foreign Currency Borrowings /
Liabilities shall be expensed off in P&L. At the option of the Enterprise, such Exchange Differences
can be dealt with as under –

Borrowings relating to Treatment

 Exchange Differences relating to Foreign Currency Borrowings for

such assets, can be adjusted in (i.e. added to or deducted from) the
Depreciable Capital
cost of the asset.
Assets
 Depreciation for subsequent periods can be charged on the revised
depreciable amount.

 Exchange Differences relating to Foreign Currency Borrowings for

such assets, can be accumulated in a "Foreign Currency Monetary
Item Translation Difference Account"(FCMITDA).
 The balance in FCMITDA can be amortised over the balance period of
Other Long term Assets such long-term asset / liability, by recognition as Income or Expense
in each such periods.
 The unamortised balance, i.e. Debit or Credit balance in FCMITDA
should be shown under the head "Reserves and Surplus", as a
separate line item.

25 | P a g e By: - CA Nakul Katheria

 2. Integral Foreign Operation vs. Non Integral Foreign Operation

Particulars Integral Foreign Operation (IFO) Non-Integral Foreign

Operation (NFO)

1. Meaning It is a Foreign Operation, the activities of which are an It is a Foreign Operation

integral part of those of the reporting enterprise. that is not an Integral
Foreign Operation.

2. Business The business of IFO is carried on as if it were an The business of NFO is

extension of the reporting enterprise's operations. carried on in a
substantially
independent manner
by accumulating cash
and other monetary
items, incurring
expenses, generating
income and arranging
borrowings, in its local
currency.

3. Example Sale of goods imported from the reporting enterprise Production in a foreign
and remittance of proceeds to the reporting enterprise. country out of
resources available in
such country,
independent of the
reporting enterprise.

4. Currencies Generally, IFO carries on business in a single foreign NFO business may also
currency, i.e. of the country where it is located. enter into transactions
Operated
in foreign currencies,
including transactions
in the reporting
currency.

5. Cash Flows Cash flows from Operations of the reporting enterprise Change in the exchange
from are directly and immediately affected by a change in rate between the
Operations the exchange rate between the reporting currency and reporting currency and
the currency in the country of IFO. the local currency, has
little or no direct
effect on the present
and future Cash Flows
from Operations of
either the NFO or the
reporting enterprise.

26 | P a g e By: - CA Nakul Katheria

6. Effect of Change in the exchange rate affects the individual Change in the exchange
change in monetary items held by the IFOrather than the rate affects the
Exchange repotting enterprise's Net Investment in the IFO. reporting enterprise's
Rate Net Investment in the
NFO, rather than the
individual monetary
and non-monetary
items held by that NFO.

3. Special Points

Monetary 1. Monetary Items: They are money held and assets and liabilities to be
received or paid in fixed or determinable amounts of money. Example: Cash,
Items
Receivables, Payables.

2. Non Monetary Items: They are assets and liabilities other than
monetary items Example: Share Capital, Fixed Assets, Inventories,
Investments in Equity Shares, etc.

Forex Gain or Exchange Rate- Increases Decreases

Loss
For Receivables Forex Gain Forex Loss

For Payables Forex Loss Forex Gain

Forward 1. Value at the rate prevailing at the inception of Forward Contract = Spot Rate

Contracts 2. Value at the forward rate = Forward Rate / Agreed Rate

3. Total Loss / Gain on entering into forward contract (for the Forward Contract
Total term) [Note]

Loss / Gain to be recognized for the year ended 31st March (Proportionate for
completed months)

27 | P a g e By: - CA Nakul Katheria

 AS 12 Accounting for Government Grants

Capital Nature Grants Accounting Revenue Nature

vvvvvvv

vv

In the nature of Relating to Alternative 1:Credit Deduct from

Profit and Loss related expenses
Promoter’s Specific Fixed
Account either
vv Contribution Assets
Separately or as
Credit Capital Depreciabl Non- other Income
Reserve e Assets Depreciable
Assets

Alternative Alternative No conditions to be Conditions to be

1:Asset Cost 2:Deferred Income fulfilled fulfilled
vvvzvv Reduction Method
Method
Credit P&L Account
Credit over the period in
Capital which conditions are
Reserve to be fulfilled.

28 | P a g e By: - CA Nakul Katheria

 Refund of Government Grants relating to

Revenue Items Promoter’s Contribution Specific Fixed

Assets

 Adjust Grant Refundable (GR) Debit Grant Refundable

against Unmortised Deferred from Capital Reserve.
Credit (DC), if any.
 Debit Excess Refundable (i.e. GR
less DC) to P&L Account.
Depreciable Fixed Assets Non-Depreciable Fixed
 Credit Surplus Grant (i.e. GR less
Assets
than DC) to P&L A/c.

Where Asset Cost Reduction Where Deferred Income

Method is followed Method is followed

 Increase book value of the Adjust Grant Refundable Deduct Grant

asset by the Grant Refundable. against unamortised balance in Refundable from
 Provide Depreciation on the Deferred Income if any. Capital Reserve or
Revised Book Value Deferred Income
Prospectively over the balance balance, if any.
residual life of the rest.

29 | P a g e By: - CA Nakul Katheria

 AS13 Accounting for Investment

A. Investment in Debentures / Bonds

1. Computation of cost of Purchase & Profit on sale

Cost of Purchase

Amount paid

Less: Interest (for Cum-Interest purchase

only)

Add: Brokerage at given % of amount paid

Net Sale Proceeds

Sale Proceeds
Net Cost of Purchase
Less: Interest (for Cum-Interest purchase
only)

Less: Brokerage at 1%
Profit on sale = Net Sale Proceeds Less Cost on
FIFO Note: If specifically given, Cost is computed
on WAC basis.
Net Sale Proceeds

2. Computation of Interest:
Date Particulars FV (₹) Compute Interest from-

(a) Opening Date and Last Coupon date NIL

NIL
Account are same
Opening
date (b) Opening Date and Last Coupon XXX Last Coupon Payment
Payment date are different date to Opening Date

Purchase/ Interest is not included in Ex-Interest XXX Last Coupon Payment

sale Price date to date of

30 | P a g e By: - CA Nakul Katheria

 Interest is included in Cum-Interest transaction
price

Irrespective of the period of holding, the

Issuing company will pay full interest Last coupon Payment
Coupon
(annual or half yearly as the case may date to Coupon Payment
payment
be) to the Holder for the No. of Date (12 Months of 6
date
Debentures in hand on the date of months)
payment.

(a) Closing Date and Last Coupon

NIL
Account Payment date are same
Closing
date (b) Closing Date and Last Coupon Last Coupon Payment
Payment date are different date to Opening Date

3. Format of ..% Debentures Account

Date Particulars FV Int. Cost Date Particulars FV Int. Cost

Opening To balance b/d XXX WN 1 XXX Sale By Bank XXX XXX XXX

Purchase To Bank XXX XXX XXX Sale By P&L Loss - - XXX

Sale To P&L Profit - - XXX Coupon By Bank - XXX -

Closing To P&L - Trf - XXX Closing By P&L (WN 2) - - XXX

Closing By bal. c/d XXX WN 1 XXX

Total Total

1. Balance will arise in Interest column, only if the Opening & Closing date does not coincide Coupon
Payment date.
2. Debentures should be valued at lower of Cost or Market Value. If MV is less, such Loss should be
charged to P&L.

B. Investment in Equity Shares

1. Important Adjustments:
Due to Bonus issue, No. of Shares will increase. Since it is issued without any
consideration, it will not have any impact in Investment Accounts. However, cost
Bonus
per Share will reduce and Profit on sale will increase.
Shares 𝐏𝐫𝐜𝐡𝐚𝐬𝐞 𝐏𝐫𝐢𝐜𝐞 + 𝐒𝐭𝐚𝐦𝐩 𝐃𝐮𝐭𝐲 + 𝐁𝐫𝐨𝐤𝐞𝐫𝐚𝐠𝐞
𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐒𝐡𝐚𝐫𝐞 𝐚𝐟𝐭𝐞𝐫 𝐁𝐨𝐧𝐮𝐬 =
𝐍𝐨. 𝐨𝐟 𝐒𝐡𝐚𝐫𝐞𝐬 𝐚𝐟𝐭𝐞𝐫 𝐁𝐨𝐧𝐮𝐬
31 | P a g e By: - CA Nakul Katheria
 1. If the Investor exercises: Investment in Equity Shares Dr.

Rights To Cash / Bank Rights exercised x Exercise Price

Issue 2. If the Investor lapses: No entry will be passed.

3. If the Investor Renounces: Renouncement Proceeds will be credited to P&L A/c.

1. Final Dividend: Dividend paid by the Company after the end of the Year. (Dividend
for the Year is paid in the next year.)
Dividend
2. Interim Dividend: Dividend paid by the Company before the end of the Year.
Types
(Dividend for the Year is paid in that year itself.)

Types of Shares Interim Dividend for CY Final Dividend for PY

paid in CY

Opening No. of Shares Credited to P&L Post Acqn. Div So,

Credited to P&L
Treatment
of Dividend Additional Purchase Credited to P&L Pre Acqn. Div. So,
Credited to Investment
A/C

Bonus Shares Credited to P&L Not eligible, unless

otherwise given

Rights Shares Credited to P&L Not eligible, unless

otherwise given

Profit or Net Sale Proceeds i.e. Sale Value – Brokerage

Loss on
Sale Less: WAC per Share i.e. . .

1. Entry: Investment in Equity Shares Dr. Cost of Debentures converted x % of

Conversion

To Investment in % Debentures

2. Coupon Payment after Conversion: Interest shall be computed as under for the
Conversion
period -
of
a) before Conversion = No. of Debentures x FV x Coupon % x No. of Months /12
Debentures
b) after Conversion = No. of Debentures x (FV - % Conversion) x Coupon % x No.
of Months /12
3. Valuation = Lower of – (a) Cost or (b) Closing Market value × (100- %Conversion)

32 | P a g e By: - CA Nakul Katheria

 2. Format of Investment in Equity Shares Account
Date Particulars FV Dividend Cost Date Particulars FV Dividend Cost

Opening To balance b/d XXX - XXX Sale By Bank XXX - XXX

Purchase To Bank XXX - XXX Sale By P&L Loss - - XXX

Sale To P&L Profit - - XXX Note 1 By Bank - Note 1 Note 1

Closing To P&L – Trf - XXX - Closing By P&L - - Note 2

Closing By bal. c/d XXX - XXX

Total Total

Note:
1. Alternatively, Dividend Column can be written as a separate Account.
Items credited in Dividend Column Items credited I Cost Column (i.e. Investment A/c)

Post Acquisition Dividend on Opening No. of Pre Acquisition Dividend on Shares that are
Shares, Interim Dividend, Renouncement additionally purchased during the Year.
Value of Rights Shares renounced.

2. Shares should be valued at lower of cost or Market Value. If MV is less, such Loss should be
charged to P&L.
C. Types of Investments
Current Investment Lower of Cost or Market Value

Long Term Investment – Valued at Cost

D. Re-classification of Investments
Re-classification of From:Long Term Investments From: Current Investments
Investments
To: Current Investments To: Long Term Investments

a) Cost, or a) Cost, or
b) Carrying Account, b) Fair Value,

whichever is less, at the date of whichever is less, at the date of

Transfer are made at
transfer. transfer.

33 | P a g e By: - CA Nakul Katheria

 AS 15 Employee Benefits

Types Meaning

Employee a) Short Term Employee Benefits, STEB

b) Post Employment Benefits, PEB
Benefits
c) Other Long Term Employee Benefits OLTEB
d) Termination Benefits, TB

Note: For the purpose of this Standard, employee includes Directors and other
Management Personnel.

STEB a) Employee Benefits (other than Termination Benefits) that are expected to be settled
wholly before 12 months after the end of the annual reporting period in which the
Employees render the related service. 1
b) Example: Wages, Salaries, Paid Annual Leave, Profit Sharing and Bonuses, Non
Monetary Benefits (such as Medical Care, Housing, Cars and free or subsidised
goods or services) for current employees.
c) Measurement:Recognised as Expenses.
 Measurement of Short Term Benefits are measured on an undiscounted basis; and
 It involves no Actuarial Assumptions to be made. So, any Actuarial Gain/Loss is not
applicable.

Types a) Short Term Paid Absences: Sick Leave, Maternity Leave.

of STEB  Accumulating Paid Absences: Carried forward to future periods if not used now. It
can be Vestingi.e. entitled to a Cash Payment for unutilized entitlement at the time
of leaving the entity or Non-Vesting i.e. not entitled to a Cash Payment for unused
entitlement on leaving. Recognized , when the Employees render service that
increases their entitlement to future paid absences.
 Non Accumulating Paid Absences: Not Carry Forward and they will lapse if the

34 | P a g e By: - CA Nakul Katheria

 current period's entitlement is not used in full by the employee and this also do not
entitle employees to a cash payment for unused entitlement on leaving the entity. No
Liability or Expense. E.g. Maternity Leave.
b) Profit Sharing Bonus Plans - Charge Not Appn.: Recognized when it has a present legal
or constructive j obligation to make such payments as a result of past events and a
reliable estimate can be made.

PEB a) Employee Benefits (other than Termination Benefits and STEB) that are payable after the
completion of employment. Example: Pensions, Lumpsum Payments oh retirement.
b) Type: Defined Contribution Plan, Defined Benefit Plan, Multi Employer Plans, State Plan,
Insured Benefits

Particulars Defined Contribution Plans Defined Benefit Plans

Obligation To contribute a limited amount to the To provide the agreed benefits to current
fund as its legal or constructive and former employees.
obligation.

Risk bearer Actuarial Risk and Investment Risk fall Actuarial Risk and Investment Risk fall on
on the Employee and not on the Entity. the Entity and not on the Employee.

Increase in Generally, no change in the If Actuarial or Investment experience are

obligation Contribution of an Entity is made except worse than expected, obligation may be
certain conditions. increased.

Amount of Determined by the amount of Pre determined / Agreed Post

benefit Contributions paid by an Entity and Employment Benefits are received by the
Employee. Employee.

Example Provident Fund contribution by the Gratuity / Leave Travel Concession

employer

Point Description

Defined Contribution Plans or Defined Benefit Plans that:

a) pool the assets contributed by various Entities that are not under Common
Control; and
Multi-
b) Use those assets to provide benefits to Employees of more than one Entity, on
Employer the basis that contribution and benefit levels are determined without regard to
the identity of the Entity that employs the Employees.
Plans
Note: If it is DBP, it shall account for its share in the same way as for any other DBO.
If information is not available, it shall account as DCO.

35 | P a g e By: - CA Nakul Katheria

 There may be a Contractual Agreement between the Multi-Employer Plan and its
Participants that determines how the surplus will be distributed (or deficit funded).
In such case, Participant should -
Contract
a) recognize the asset or liability that arises from the Contractual Agreement and
b) Resulting income or expense in Profit or Loss.

a) Normally established by Legislation to cover all Entities and are operated by

National or Local Government or by another body which is not subject to control
or influence by the Reporting Entity. Normally DCP.
State Plans b) Insured Benefits: An Entity normally pays Insurance Premiums for funding a
and Insured Post Employment Benefit Plan. The Entity shall treat such a Plan as a Defined
Benefits Contribution Plan.

All Employee Benefits other than STEB, TB and PEB. Example: Long Term paid
absences such as Long Service Leave or Sabbatical Leave, Jubilee or other Long
OLTEB
Service Benefits.

Employee Benefits provided in exchange for the termination of an Employee's

Employment as a result of:

a) Entity's Decision to terminate an Employee's Employment before the normal

TB
retirement date; or
b) Employee's Decision to accept an offer of benefits in exchange for the
termination of Employment.

a) PV of DBO Less FV of Plan Assets Less Unamortized Past Service Cost = +ve Net
Liability / -ve Net Assets
b) An entity shall recognize immediately in P&L all of its actuarial gains and losses
in measuring its defined benefit liability and this shall be presented in the
statement of profit and loss.
Actuarial c) Actuarial gains and losses may result from increases or decreases in either the
Gains and present value of a defined benefit obligation or the fair value of any related plan
Losses assets.

a) Current Service Cost: Increase in the Present Value of a Defined Benefit

Obligation resulting from Employee Service in the current period.
b) Interest Cost: Increase during a period in the Present Value of a Defined Benefit
Obligation which arises because the benefits are one period closer to
Settlement.
Cost c) Past Service Cost: Change in the Present Value of the Defined Benefit
Obligation resulting from a Plan Amendment or Curtailment is known as Past
Service Cost.

36 | P a g e By: - CA Nakul Katheria

 In order to measure PV of DBO and the related Current Service Cost, it is necessary
to –

a) apply an Actuarial Valuation Method;

PV of DBO
b) attribute benefit to periods of service; and
c) make Actuarial Assumptions.

Projected Unit Credit Method (also known as Accrued Benefit Method pro-rated on
service /Years of service method) perceives each period of service as which gives
Actuarial
rise to an additional unit of benefit entitlement and measures each unit separately
Valuation
to report the final obligation.
Method

An Entity will attribute benefit to periods in which the obligation to provide PEB
arises as Employees render services in return for PEB. If an employee's service in
later years will lead to a materially higher level of benefit than in earlier years, an
Attribute entity shall attribute benefit on a straight-line basis from:
benefit to
a) date when service by the Employee first leads to benefits under the plan; until
periods of
b) date when further service by the Employee will lead to no material amount of
service
further benefits.

Actuarial assumptions are an entity’s best estimates of the variables that will
determine the ultimate cost of providing PEB, Actuarial comprise:

a) Demographic Assumptions deal with: Mortality, both during and after

employment, employee turnover, disability and early-retirement, proportion of
Actuarial plan members with dependents who will be eligible for benefits, and claim rates
Assumptions under medical plans;
b) Financial Assumptions, deal with: Discount Rate, Future Salary, in the case of
Medical Costs, Cost of administering claims if material and the expected rate of
return on plan assets.

1. Net Defined Benefit Liability (Asset) = Amount of the Deficit or Surplus = Present
Value of the Defined Benefit Obligation (less) Fair Value of Plan Assets.
2. Amounts to be recognised in P&L - (a)Current Service Cost, (b) Past Service
Cost and Gain or Loss on Settlement, (c) Net Interest on Net Defined Benefit
Liability (Asset), (d) Expected Return on Plan Assets.
Treatment 3. Re-measurements of the Net Defined Benefit Liability (Asset), to be recognised
in "OCI" as Actuarial Gains and Losses and Return on Plan Assets.

Plan Assets A/c

Particulars Particulars

To balance b/d (given) By Benefits paid out of Plan

37 | P a g e By: - CA Nakul Katheria

 (Fair Value of Plan Assets at year beginning) Assets

(Outflow out of Plan Assets)

To Expected Return P&L By balance c/d (given)

(Fair Value at year beginning × Interest Rate) (Fair Value of Plan Assets at year
end)

To Employer’s Contribution for the period

(Inflow to Create more Plan Assets)

To Re-measurement Gain (b/f) OCI

(being Excess Actual Return on Plan Assets)

Total Total

Defined Benefit Obligation A/c

Particulars Particulars

To Benefits paid out of Plan Assets By balance b/d (given)

(Outflow out of Plan Assets) (PV of DBO at year beginning)

To Reduction in DBO due to Curtailment By Interest Cost (Opg. × Interest P&L

rate)

To balance c/d (given) By Current & Past Service Cost P&L

(PV of DBO at year end) By Re-measurement Loss (b/f) OCI

Total Total

38 | P a g e By: - CA Nakul Katheria

 4. Journal Entries 5. Extract of Statement of Profit or
Loss
Profit & Loss Dr. Profit or Loss Service Cost

Other Comprehensive Dr. Net Interest

Income

To Cash Other Comprehensive Income Re-

(Contribution) Measurement

To Net Defined Total Comprehensive Income

Benefit Liability

39 | P a g e By: - CA Nakul Katheria

 AS 16 Borrowing Costs

Qualifying Asset that necessarily takes substantial period of time to get ready for
Asset its intended use. The term "substantial period of time" is not defined
and hence determined based on facts and circumstances.

Exclusions 1. Financial assets & inventories that are manufactured or produced,

over a short period of time.
2. Assets that are ready for their intended use or sale when acquired are
Not Qualifying Assets.

Borrowing 1. Interest Expense calculated using the Effective Interest Method as per
Financial Instruments Ind AS
Costs
2. Finance Charges in respect of Finance Leases recognised in
accordance with Leases, and
3. Exchange Differences arising from Foreign Currency Borrowings to the
extent that they are regarded as an adjustment to Interest Costs.

1. Find the difference between Interest on actual Foreign Borrowings

and notional Indian Borrowings
a) Interest on actual Foreign Loan = Forex Loan x Forex Interest Rate
x Closing Exchange Rate
b) Interest on Notional Indian Loan = (Forex Loan x Opening
Exchange Rate) x Indian Interest Rate
2. Find the Exchange difference on actual Foreign Borrowings
Exchange
3. Additional Borrowing Cost that can be capitalized = Lower of (1) or (2)
Difference 4. Borrowing Cost that can be capitalized = Interest on actual Foreign
Loan + Additional Borrowing Cost
5. Exchange difference transferred to P&L as per Ind AS 21 = Step 2 - Step

40 | P a g e By: - CA Nakul Katheria

 3, if any

If there is an Unrealised Exchange Loss which is treated as an adjustment

to interest and subsequently there is a realised or unrealised Gain of the
Subsequent
same borrowing, the Gain to the extent of the loss previously recognised
Treatment as an adjustment should also be recognised as an adjustment to interest.

1. Expenditure are directly attributable to the acquisition, construction,

production of a Qualifying Assets,
2. Borrowing costs are being incurred,
Criteria for 3. Activities necessary to prepare the asset for its intended use / sale are
Capitalisation in progress.
4. It is probable it will result in future economic benefits to the entity;
and
5. Costs can be measured reliably.

1. Specific Borrowings: Actual Borrowing Costs - Income on temporary

investment of such borrowings
Specific vs.
2. General Borrowings: Expenditure incurred x Capitalisation Rate x No.
General
of months outstanding - 12 Where Capitalisation Rate = (Interest
Expenses - Income on temporary investment) - Total Borrowings.

An Entity shall suspend capitalisation of Borrowing Costs during extended

periods in which it suspends active development of a qualifying asset.
However, an entity does not normally suspend capitalising when -

a) it carries out substantial technical and administrative work

b) temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
Suspension
Example:Capitalisation continues during the extended period that high
water levels delay construction of a bridge, if such high water levels are
common during the construction period in the geographical region.

An Entity shall cease capitalising borrowing costs when substantially all

the activities necessary to prepare the Qualifying Asset for its intended
use or sale are complete even though routine administrative work might
Cessation still continue. If minor modifications, such as the decoration of a property
to the purchaser's or user's specification, are all that are outstanding, this
indicates that substantially all the activities are complete.

41 | P a g e By: - CA Nakul Katheria

 AS – 17 Segment Reporting

A Business Segment is a distinguishable component of an Enterprise

that is –
Business
Segment  engaged in providing an individual product or service or a group of
related products or services, and
 Subject to risks &returns that are different fro these of other
Business Segments.

A Geographical Segment is a distinguishable component of an enterprise

that is –
Geographical
Segment  Engaged in providing products or services within a particulars
economics environment, and
 Subject to risks and returns that are different from those of components
operating in other economic environments.

1. Basic product is Batteries, but the risks and returns of the Batteries for
Automobiles (Scooters, Cars and Trucks) and Batteries for Invertors and
UPS are affected by different set of factors.
2. In the case of Automobile Batteries, the risks and returns are affected by
the Government Policy, road conditions, quality of automobiles, etc.
Examples of whereas in case of batteries for Invertors and UPS, the risks and returns
Business are affected by power condition, standard of living, etc.
Segment 3. Thus, it has two Business Segments viz. 'Automobile Batteries' and
'Batteries for Invertors and UPS'.

1. AS-17 requires that inter-segment transfers should be measured on the

basis that the Enterprise had actually used to price these transfers. The
Transfer Pricing
basis of pricing inter-segment transfers and any change therein should
be disclosed in the Financial Statements.

42 | P a g e By: - CA Nakul Katheria

 2. The Enterprise can have its own policy for pricing inter-segment
transfers. Hence, inter-segment transfers may be based on cost, below
cost, below cost or market price, etc. Whichever policy is followed, the
same should be disclosed and applied consistently.

Reportable Segment is Identified based on

1. 75% Principle :If Total External Revenue attributable to Reportable Segments

constitutes less than 75% of the Total Enterprise Revenue, additional segments
should be identified a Reportable Segments, even if they do not meet the 10%
thresholds, until atleast 75% of Total Enterprise Revenue include in Reportable
Segments.
2. Continuity Principle: A Segment identified as a Reportable Segment in the
immediately preceding period upon satisfaction of the relevant 10% thresholds,
continues to be a Reportable Segment for the current period notwithstanding that
its Revenue, Result, and Assets no longer meet the 10% criteria.
3. Comparison Principle: Where a Segment is identified as a Reportable Segment in
the current period upon satisfaction of the relevant 10% criteria, preceding-period
data presented for comparative purposes should be re-stated (unless it is
impracticable to do so) to reflect the newly Reportable Segment as a separate
segment, even if that segment did not satisfy the 10% criteria in the preceding
period.

Segmental Reporting Matters

Divisions Inter Segment Consolidated

Total
Particulars A B C Eliminations

Segment Revenue

Sales:

Domestic

Export

External Sales

Inter-Segment Sales

Total Revenue

43 | P a g e By: - CA Nakul Katheria

 Segment Result (given)

Head Office Expenses

Operating Profit

Interest Expense

Profit before tax

Other Information:

Property, Plant & Equipment Net Current

Assets Segment Assets Unallocated
Corporate Assets Segment Liabilities
Unallocated Corporate Liabilities

Sales Revenue by Geographical Market (₹000’s)

Particulars Home Export Sales Export Export Consolidated

Sales to to
(by Division A) Total
Europe America

External Sales

44 | P a g e By: - CA Nakul Katheria

 AS 18 Related Party Disclosures

Disclose the name of Party & nature of the relationship irrespective of

any transactions exist or not -

a) Enterprises that control the Reporting Enterprise,

b) Enterprises that are controlled by the Reporting Enterprise, or
Control c) Enterprises that are under common control with the Reporting
Enterprise (this includes Holding Companies, Subsidiaries and fellow
Relationship Subsidiaries),

The above control may be either direct or indirect (through one or more
Intermediaries).

Other Relationship Disclose the details of transactions for the period during which the
Related Party relationship exists-

1. Associates / Joint Ventures

a) Associates and Joint Venture of the Reporting Enterprise, and
b) Investing Party or Venturer, for whom the Reporting Enterprise is an
Associate / Joint Venture.
2. Ownership
Disclosures 1. Name of the transacting Related Party,
2. Description of the Relationship between the parties,
3. Description of the nature of transactions,
4. Volume of the transactions either as an amount or as an appropriate
proportion,
5. Any other elements of the Related Party transactions necessary for an
understanding of the Financial Statements, e.g. disclosure making an
indication that the transfer of a major asset had taken place at an amount

45 | P a g e By: - CA Nakul Katheria

 materially different from that obtainable on normal commercial terms.
6. Amounts or appropriate proportions of outstanding items pertaining to
related parties at the Balance Sheet date and provisions for doubtful
debts due from such parties at that date, and
7. Amounts written off or written back in the period in respect of debts due
from or to Related Parties

Residual Value of a Leased Asset –

Estimated Fair Value of the asset at the end of the Lease Term.

46 | P a g e By: - CA Nakul Katheria

 AS 19 Leases

Guaranteed Residual Value (GRV) Unguaranteed Residual Value (URV)

a) For the Lessee: That part of the Residual
URV of a Leased Asset is the amount by
Value which is guaranteed by the Lessee or
which the Residual Value of the asset
by a party on behalf of the Lessee (the
exceeds its Guaranteed Residual Value.
amount of the guarantee being the
maximum amount that could, in any event,
become payable), and Hence, URV = RV - GRV
b) For the Lessor: That part of the Residual (OR) RV = GRV + URV
Value which is guaranteed b\ or on behalf of
the Lessee, or by an independent third party
who is financially capable of discharging
the obligations under the guarantee.

47 | P a g e By: - CA Nakul Katheria

Residual RV of a Leased Asset is the Estimated Fan Value of the asset at the
Value end of the Lease Term. It is classified into – (a) Guaranteed Residual
Value (GRV), and (b) Unguaranteed Residual Value (URV).

Terms 1. Gross Investment in the Lease, is the aggregate of the Minimum

Lease Payments under a Finance Lease from the standpoint of the
Lessor and any Unguaranteed Residual Value accruing to the
Lessor.
2. Net Investment in the Lease is the Gross Investment in the Lease
less Unearned Finance Income.
3. Unearned Finance Income is the difference between:
a) Gross Investment in the Lease, and
b) Present Value of -
 Minimum Lease Payments under a Finance Lease from the
standpoint of the Lessor, and
 Any Unguaranteed Residual Value accruing to the Lessor.

For Lessor 1. Gross Investment in the Lease= Minimum Lease Payments +

Unguaranteed Residual Value.
2. Net Investment in the Lease = Gross Investment - Unearned Finance
Income.
3. Unearned Finance Income = (MLP + URV) less (Present Value of
MLP & URV)

Substance Whether a Lease is a Finance Lease or an Operating Lease depends on

over Form the substance of the transaction rather than its form. Situations that
would classify a lease as Finance Lease are -

a) Transfer of ownership of the asset to the Lessee by the end of the

lease term,
b) Option to purchase the asset, to the Lessee, at a price which is
sufficiently lower than the fair value at the date the option becomes
exercisable such that, at the inception of the lease, it is reasonably
certain that the option will be exercised,
c) Lease Term is for the major part of the economic life of the asset
even if title is not transferred,
d) Present Value of the Minimum Lease Payments at the inception of
the lease amounts to atleast substantially all of the Fair Value of the
Leased Asset, (i.e. PV of MLP = Fair Value approximately), and
e) The Leased Asset is of a specialised nature such that only the
Lessee can use it without major modifications being made.

Sale and 1. When the transaction is established at Fair Value, there has been in
effect a normal sale transaction and any Profit or Loss should be

48 | P a g e By: - CA Nakul Katheria

Leaseback recognised in the P & L Account immediately.
2. If Sale Price < Fair Value, any Profit or Loss should be recognised
immediately. However, if the loss is compensated by Future Lease
Payments at below Market Price, it should be deferred and
amortised in proportion to the Lease Payments over the period for
which the asset is expected to be used.
3. If Sale Price > Fair Value, the excess of Sale Proceeds over Fair
Value should be deferred and amortised over the period for which
the asset is expected to be used.
4. If the Fair Value at the time of a Sale and Leaseback Transaction is
less than the Carrying Amount of the asset, a loss equal to the
amount of the difference between the Carrying Amount and Fair
Value should be recognised immediately.

Finance Lease Vs Operating Lease

Particulars Finance Lease Operating Lease

1. Definition as It is a lease that transfers It is a Lease other than a

per AS – 19 substantially all the risks and Finance Lease.
rewards incident to ownership
of an asset.

A Finance Lease is an A lease is classified as an

2. Meaning arrangement to finance the use Operating Lease if it does not
of equipment for a major part of secure for the Lessor the
its useful life. It is also called recovery of capital outlay plus
Capital Lease, as it is nothing a return on the funds invested,
but a loan in disguise. during the lease term.

3. Term Compared to an Operating The term of Operating Lease is

Lease, a Financial Lease is shorter than the asset's
longer-term in nature. economic life.

Risks and Rewards incident to The Lessee is only provided the

ownership are passed on to the use of the asset for a certain
4. Risks and
Lessee. The Lessor only time. Risk incident to
Rewards
remains the legal owner of the ownership belong wholly to the
asset. Lessor.

Lessee bears the risk of All risks (including

Obsolescence Risk) incidental

49 | P a g e By: - CA Nakul Katheria

5. Obsolescence obsolescence. to ownership belong wholly to
the Lessor.

6. Right to Cancel Lessor is interested in his As the Lessor does not have
rentals and not in the asset. He difficulty in leasing the same
must get his principal back asset to any other willing
along with interest. So, the Lessor, the lease is kept
lease is generally non- cancellable by the Lessor.
cancellable by either party.

7. Cost of Lessor enters into the Usually, the Lessor bears cost
Repairs, etc. transaction only as Financier. of repairs, maintenance or
He does not bear the cost of operations.
repairs, maintenance or
operations.

The lease is usually full pay-out, The lease is usually non-

8. Full pay-out that is, the single lease repays payout, since the Lessor
the cost of the asset together expects to lease the same
with interest thereon. asset over and over again to
several users.

Journal Entries in the Books of the Lessee

S.No. Particulars Dr.( ) Cr.( )

1 Plant and Machinery A/c Dr.

To Lease Payables A/c

(Being Plant and Machinery purchased on Finance Lease

recorded)

2 Interest Suspense A/c Dr.

To Lease Payables A/c

(Being Interest Portion of Lease Payments recognized as

Payable)

3 Interest on Lease Payables A/c Dr.

To Interest Suspense A/c

50 | P a g e By: - CA Nakul Katheria

 (Being Interest Expense recognized for Year 1)

4 Depreciation A/c Dr. (17,25, 820 ×10%)

To Plant and Machinery A/c

(Being Depreciation for the year, at 10% on Cost of Asset)

5 Profit and Loss A/c Dr.

To Depreciation A/c

To Interest on Lease Payables A/c

(Being Interest and Depreciation for the period transferred to

P&L Account)

6 Lease Payables A/c Dr.

To Bank A/c

(Being Payment to Lessor for the year)

51 | P a g e By: - CA Nakul Katheria

 AS 20 Earnings Per Share

Cumulative 1. Dividend on Non cumulative Preference Shares is deducted when

Share Capital declared in respect of the period.
2. Dividend on Cumulative Preference Shares for the period is deducted
whether or not it is declared.

Change 1. Capitalisation or Bonus Issue (sometimes referred to as a stock Dividend);

without a 2. Bonus Element in any other issue, for example a Bonus Element in a Rights
corresponding Issue;
change in 3. Share Split; and Reverse Share Split (Consolidation of Shares).
Resources 4. No. of Shares outstanding before the event is adjusted for the proportionate
change in the No. of Shares outstanding as if the event had occurred at the
beginning of the earliest period presented.

1. Determine Weighted Average Number of Equity Shares ignoring the Bonus

Issue / Share split.
2. Apply Bonus Ratio / Share Split ratio on the WANES before Bonus Issue /
Share Split.
3. Based on the above Adjusted WANES, determine Basic EPS for current year.
Bonus Issue 4. Compute Adjusted Basic EPS for previous year, using Denominator as
Previous year's WANES adjusted for Bonus Issue / Share Split Ratio.

52 | P a g e By: - CA Nakul Katheria

 1. Theoretical Ex-Rights Fair Value / Price: Weighted Average Price
(Base Shares Quantity × Fair Value per Share Before Rights) + (Rights Issue Price)
Base Shares Quantity + Rights Shares Quanity
2. Adjustment Factor = ( )
3. WANES: Re-state all the shares prior to the date of Rights Issue, after
multiplying with Adjustment Factor. Multiplication by Adjustment Factor is
not applicable for shares after the date of Rights.

Rights Issue 4. Basic EPS for Current Year= .

5. Adjustment EPS for Previous Year
.
= ′ ×

Diluted EPS, an Entity shall adjust PAES, by the after tax effect of:

a) Dividend /other items related to Dilutive Potential Ordinary Shares is

deducted in arriving at PAES;
Diluted EPS –
b) any Interest recognised in the period related to Dilutive Potential Ordinary
Incr. Earnings
Shares; and
c) Any other changes that would result from the Conversion of the dilutive
Potential Ordinary Shares.

Diluted EPS – 1. Convertible Instruments: No. of Instruments x Maximum Conversion Ratio

Incr. Earnings 2. Options / Warrants: Number of Shares issuable under Option x (FV-IP) / FV

Control 1. The income from continuing operations is the control number. If there is a
Number dilution in basic EPS for income from continuing operations, even though
there is an anti-dilution for discontinued operations, diluted loss per share is
reported.
2. If the inclusion of potential shares would result into anti-dilution effect on the
control number (Continuing Operations), the dilutive effect of potential
shares on EPS for income from discontinued operations and net income
would not be reported because of the Loss from Continuing Operations.

A. Computation of Additional Earni8ngs per Incremental Share to determine

Sequence
Particulars Options Convertible Convertible
Preference Shares Debentures

Incremental Nil Pref. Dividend + DDT if Interest × (100% - Tax)

Earnings any

53 | P a g e By: - CA Nakul Katheria

 Incremental No. of Options No. of Preference No. of Debenture ×
Shares × (FV-IP) / FV Shares × Conversion Conv. Ration × Timing
Ratio × Timing Factor Factor

Incremental Sequence in Ascending Order

EPS

C. Computation of Diluted EPS in the above sequence

Particulars PAES WANES EPS Nature

(1) (2) (3) (4)=(2)+(3) (5)

1. Net Profit as given Basic EPS

2. Add: Adjustment for Options

3. After Options Adjustment=(1+2) Dilutive

4. Add: Adjustment for Preference
Shares

5. After Pref. Shares Dilutive

Adjustment=(3+4)
6. Add: Adjustment for Debentures

7. After Debentures Adjustment=(5+6 Anti-Dilutive

Note: Anti-Dilutive effect of the potential shares on EPS would not be

reported (i.e. Diluted EPS < Basic EPS)

54 | P a g e By: - CA Nakul Katheria

 AS 22 Accounting for Taxes on Income

Point Permanent Differences Timing Differences

Meaning They originate in one period and do They originate in one period and
not reverse subsequently. are capable ofreversal in one
more subsequent periods.

Cash Payments for Revenue Expenditure of the nature

Expenditure exceeding? 20,000 are mentioned in Sec.43B like Taxes,
Examples
disallowed u/s 40A (3). Such items Duty, Cess, Fees, etc. accrued but
will not be deductible in any period. allowed for tax purposes on
payment basis.

They result in DTA (when Current

Accounting Income < Taxable
Effect They do not result in Deferred Tax
Income) and DTL (if Current
under AS- Assets (DTA) or Deferred Tax
Accounting Income > Taxable
22 Liabilities (DTL)
Income)

Step Procedure

1 Compute Accounting Income (PBT) and Taxable Income (TI)

2 Compute Gross Difference (GD) between PBT and TI.

If PBT < TI it is Deferred Tax Asset (DTA), When PBT > TI, it is Deferred Tax
Liability (DTL)

3 Compute Permanent Difference / Disallowances.

55 | P a g e By: - CA Nakul Katheria

 4 Commute Timing Differences for the year, and cumulative Timing Differences
including past differences.

5 Compute Deferred Tax Asset / Liability = Step 4 x Tax Rate.

Tax Expense for the period, comprising Current Tax and Deferred Tax, should
be included in the determination of the Net Profit or Loss for the period. [Para
9]

6 Pass Journal Entries for the above.

Particulars Creation of DTA / DTL

PBT as per Books PBT

Add: Items as per Books A

(e.g. Depreciation as per Books, cNet If Positive , create

Disallowed Expenses (Timing
DTA
Differences))
Diff.
Less: Depreciation as per IT Rules, Allowable
Expenses Under IT Act (Timing B A–B
Differences)
If Negative , create DTL

Net Balance

Add / Less: Permanent Differences C No Effect

PBT + A – B ±
C=D
Total Income under IT Act

If negative, the above Total Income will be

segregated as-

a) Unabsorbed Depreciation, and

X Create DTA subject to virtual
b) Business Losses
certainty condition
Y

X+Y=D

56 | P a g e By: - CA Nakul Katheria

 In Accounting In Tax Computation Effect

Credited in Current Year Taxable in Later Years Create DTL in CY, Reverse DTL in Next
year.
Creditable in Later Years Taxed in Current Year
Create DTA in CY, Reverse DTA in Next
Credited in Current Year Exempt
Income

year.

Permanent difference , Ignored

Debited in Current Year Allowable in Later Create DTA in CY, Reverse DTA in Next
Years Year.
debatable in Later Years
Allowed in Current Create DTL in CY, Reverse DTL in Next
Debited in Current Year
Expenses

Year year.

Disallowed Permanent difference, Ignored

Alternative Procedure

DTA Account will be as under –

Particulars Particulars

To balance b/d (Opening Balance) By P&L A/c (balancing figure) (if any)

To P&L A/c (balancing figure) (if any) By balance c/d (to be evaluated item-
wise as under)

Total Total

DTL Account will be as under -

Particulars Particulars

To P&L A/c (balancing figure) (if any) By balance b/d (Opening Balance)

To balance c/d (to be evaluated item- By P&L A/c (balancing figure) (if any)
wise as under)

Total Total

57 | P a g e By: - CA Nakul Katheria

Closing Balance of DTA / DTL Account will be the total of the following –
a) Opening Balance of DTL/DTA, not yet reversed fully during Current Financial
Year, reviewed based on new tax rates,
b) Current year originating Timing Differences.
c) Previously unrecognized DTA items, now re-assessed, due to virtual certainty
condition.

58 | P a g e By: - CA Nakul Katheria

 Recognition of DTA for Timing Differences arising due to …

Virtual Certainty Condition Other reasons- Reasonable Certainty

Unabsorbed Depreciation or Carry Condition [Para 15-16
Forward of Losses

(Para 17-18) DTA should be recognised only to the extent

DTA should be recognised and carried that there is “Virtual certainty supported by
forward, only to the extent that there is a convincing evidence” that sufficient future
reasonable certainty that sufficient future taxable income will be available against which
Taxable Income will be available against such DTA can be realised.
which such DTA can be realised.

 There should be Timing Differences, the

reversal of which will result in sufficient
income , or
Reasonable level of certainty would
 There should be other convincing evidence
normally be achieved by-
that sufficient Taxable Income will be
available against which such DTA can be  Examining the past record of the
realized. enterprise, and
 The nature of evidence supporting the  Making realistic estimates of future
recognition of DTA should be disclosed. profits.

59 | P a g e By: - CA Nakul Katheria

 AS 24 Discontinuing Operations

A Discontinuing Operation is a component of an Enterprise -

a) that the Enterprise, pursuant to a single plan, is -

 disposing of substantially in its entirety, such as by selling the
component in a single transaction or by demerger or spin-off of
ownership of the component to the Enterprise's Shareholders, or
 disposing of piecemeal, such as by selling off the Component's assets
and settling its liabilities individually, or
 terminating through abandonment, and
b) that represents a separate major line of business or geographical area of
Discounting operations, and
Operation c) that can be distinguished operationally and for Financial Reporting
purposes.

Note: A Discontinuing Operation may be disposed of in its entirety or piecemeal,

but always pursuant to an overall plan to discontinue the entire component.

Exclusions Activities that do not necessarily result in Discontinuing Operation, but that
might do so in combination with other circumstances, include -

Gradual or evolutionary phasing out of a product line or class of service,

2- Discontinuing, even if relatively abruptly, several products within an ongoing

line of business,

3. Shifting of some production or marketing activities for a particular line of

60 | P a g e By: - CA Nakul Katheria

 business from on* location to another,

d. Closing of a facility, to achieve productivity Improvements or other cost

savings,

5. Changing the size of the workforce In response to market forces, and

6. Selling a Subsidiary whose activities are similar to those of the Parent or

other Subsidiaries, (in 1 relation to Consolidated Financial Statements)

Initial In relation to a Discontinuing Operation, the initial disclosure event is the

occurrence of one of the following, whichever occurs earlier -
Disclosure
1. the Enterprise has entered into a binding sale agreement for substantially
Event
all of the assets attributable to the Discontinuing Operation, or

2. the Enterprise's Board of Directors or similar Governing Body has both - (i)
approved a detailed, formal plan for the discontinuance, and (ii) made an
announcement of the plan.

61 | P a g e By: - CA Nakul Katheria

 Chapter 22 –
AS 25 Interim Financial Reporting

Applicability 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 Repoit in accordance with Regulatory
Requirements.

Interim Financial Report containing either a Complete Set of Financial Statements, or

a set of Condensed Financial Statements for an interim period. It include, at
Financial
minimum
Report
1. A Condensed Balance Sheet

2. A Condensed

3. A Condensed

4. A Condensed Statement of Cash Flows

5. Notes, comprising significant accounting policies and other

explanatory information

Reporting Current Comparative

Period Balance Sheet Current Interim Period Current Interim Period

Statement of Current Interim Period Comparable Interim Periods

Profit & Loss and cumulatively for CY to and cumulatively PY to date
date

62 | P a g e By: - CA Nakul Katheria

 Statement of Cumulatively for CY to Cumulatively for CY to date
Cash Flows date

Principle Income and Expense should be recognised when they are earned and
incurred respectively. Costs should be anticipated or deferred only when:

(a) it is appropriate to anticipate or defer that type of cost at the end of the
financial year, and

(b) Costs are incurred unevenly during the financial year of an enterprise.

Income Tax 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.

63 | P a g e By: - CA Nakul Katheria

 24

10/March
AS 26 Intangible Assets

Objective
Internally To
gain
generated

-
.

Intangible .
knowledge
Plastic Asset

↓ Research Phase Activities

Research Activities include [Para 43]:

-
-
Development Phase Activities

Development Activities include [Para 46]:

-

Resent
-

(a) activities aimed at obtaining new (a) design, construction and testing of pre-
↓ knowledge, production or pre¬use prototypes and models,

(b) search for, evaluation and final selection (b) design of tools, jigs, moulds and dies
A of, applications of research findings or other involving new technology,
knowledge,
(c) design, construction and operation of a
(c) search for alternatives of materials, pilot plant which is not of a scale economically
devices, products, processes, systems or feasible for commercial production, and
services, and
(d) design, construction and testing of a
(d) formulation, design, evaluation and final chosen alternative for new or improved
selection of possible alternatives for new or materials, devices, products, processes,
improved materials, devices, products, systems or services.
processes, systems or services.

Research Phase Treatment Development Phase Treatment

Recognition as EXPENSE [Para 41]: PecAK Recognition as ASSET [Para 44]:

(a) Intangible Asset arising from the Intangible Asset arising from Development (or
Research (or from the research phase of an from
internal project) should not be recognised.
Development Phase of an internal project)
(b) Expenditure on Research (or on the

64 | P a g e By: - CA Nakul Katheria

 OI

Accounting
Standard 26 .

Amortisatio
Asset D
-

ntangible
=>
--

Measurement

Meaning 9 Entangiblee
-tang ible Asset
Y
-nclusions
-
4
Reognioftion
and
E

i ble
Exclusion IntangAsset
-

#-

In House
Purchase
from outside Researen
&
.

Deviopmel
②
ntangiblset
e
-

I
- -

Meani
H ng
Assets
of Intangible
.

Balsheet

Assets
ment
Intangible
means .

Asset
identifiable
soG
an
t -
Non
Monetary asset
+ O AS26

without
physical substance
any
.

↓ heid for

Q use in production
of OR OR
Goods
&

zendemung
or

services Administratio
of Perpouse
Rene
to
others

⑮
-

Identifiable. An asset
mengible shall
of

be dis visible
from Goodwill
coun hig steases Patent Tradimal,
of y
·

Lianse y
 ③

&-
Monetary
NonAsset - T Thosecomisa
s < Y
t
Monetary Asut that asset which can be determined in

fixed
of money.
som

3)Without
any Physical
substance
.

Y
Essential
--
element
↓ present
TAsset
Tangible
Recognition and Measurements

Recognition

. Itis certain that ②

Cost can be
future economic &
measured
benifit will ause
&

Telliably
 9 Measurement
of Intangible
Asset

If
intangible
Asset is Self Generated
&

mang
able
accguised
Asset
prom outside .

↓
t

-intermally
Generated

In case when
intangible
asset is acguind from
outside's

Purchase The X xxx

CHet
of Discount)
Pac : Taxes. (but
i (claim
is notavailable
-
my XXXX

Professional legal
Edd: xxxX
Fees
&
XXX
all other cost which
* XXX

directly
are related
.

Total XXXXX
Cost
 PoT R -
.
⑤
j
asset
any intangible
In case
.

is imported
-

just
of
all

will
potyp
Custom
be added in

After added custom

Duty
Y
Save xxx

↓
otherTax is I hand
- on
this Value ,
 ⑥
Research Phase of an internal project) should should be recognised
be recognised as an expense when it is
only when the Enterprise demonstrates all of
incurred.
the follov/ing -
Reason: During the Research Phase of a project,
(a) technical feasibility of completing the
an Enterprise cannot demonstrate -
Intangible Asset so that it will be available for
• The existence of an Intangible Asset and use or sale,

• The probable future economic benefits (b) its intention to complete the Intangible
arising from such asset. Asset and use or sell it,

Therefore, this expenditure is-recognised as an (c) its ability to use or sell the Intangible
expense when it is incurred. [Para 42] Asset,

However, identification of the existence of an (d) manner of generation of probable future

Intangible Asset and the resultant future economic benefits by Intangible Asset,
economic benefits is possible during the existence of a market for the output of the
development phase as the project gets further Intangible Asset or Intangible Asset itself or, if it
advanced than the research phase. [Para 45] is to be used internally, usefulness of the asset,

(e) availability of adequate technical,

financial and other resources to complete the
development and to use or sell the Intangible
Asset, and

(f) its ability to measure the expenditure

attributable to the Intangible Asset during its
development reliably.

1 Po ToRE
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*
① Dexlopment expenditure can be capitalized
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 Accounting Standard 26 x

Question 1 - publ Resear D

*
.

K Ltd. launched a project for producing product X in October, 2016. The Future
Company incurred ` 40 lakhs towards Research and Development expenses upto 31st
March, 2017. Due to prevailing market conditions, the Management came to conclusion
that the product cannot be manufactured and sold in the market for the next 10 years. Econig
The Management hence wants to defer the expenditure write off to future years. Technical
&

2018) ↓
You are required to advise the Company as per the applicable Accounting Standard.(RTP MAY
Incorrect
Feasible .

Answer Plakh > PELAK

- DR

As per provisions of AS 26 “Intangible Assets”, expenditure on research should be

recognized as an expense when it is incurred. An intangible asset arising from development (or
from the development phase of an internal project) should be recognized if, and only if, an
enterprise can demonstrate all of the conditions specified in para 44 of the standard. An
intangible asset (arising from development) should be derecognized when no future economic
benefits are expected from its use according to para 87 of the standard. Thus, the manager
cannot defer the expenditure write off to future years in the given case. Hence, the expenses
amounting ` 40 lakhs incurred on the research and development project has to be written off in
the current year ending 31st March, 2017.

Question 2 +

Desire Ltd. acquired a patent at a cost of ` 1,00,00,000 for a period of 5

years and the product life-cycle is also 5 years. The company capitalized the cost and
started amortizing the asset onE SLM. After two years it was found that the product life- do
Ho
cycle may continue for another 5 years from then. The net cash flows from the product
during these 5 years were expected to be ` 45,00,000, ` 42,00,000, ` 40,00,000, `
38,00,000 and ` 35,00,000. Patent is renewable and company changed amortization
Eliza
method from 3rd year (i.e. from SLM to ratio of expected new cash flows). lasch .

You are required to compute the amortization cost of the patent for each of the years (1st year
- -

Es T
to 7th year).(RTP NOV 2018) Bookyale =Golach .

- Ho

Answer Remaining Golac . 45 : 42 : 40 : 30 : 35.

Ro
Desire Limited amortised ` 20,00,000 per annum for the first two years i.e. ` 40,00,000.
The remaining carrying cost can be amortized during next 5 years on the basis of net cash flows
arising from the sale of the product. The amortisation may be found as follows:
--
Year Net cash flows Amortization Amortization
` Ratio Amount `
I - 0.200 20,00,000
II - 0.200 20,00,000
III 45,00,000 0.225 13,50,000
IV 42,00,000 0.21 12,60,000
V 40,00,000 0.20 12,00,000
VI 38,00,000 0.19 11,40,000
VII 35,00,000 0.175 10,50,000
Total 2,00,00,000 1.000 1,00,00,000
It may be seen from above that from third year onwards, the balance of carrying amount i.e., `
60,00,000 has been amortized in the ratio of net cash flows arising from the product of Desire
Ltd.

Question 3

A Company with a turnover of ` 375 crores and an annual advertising

budget of ` 3 crores had taken up the marketing of a new product. It was estimated that
the company would have a turnover of ` 37.5 croes from the new product. The company
had debited to its Profit and Loss account the total expenditure of ` 3 crores incurred on
extensive special initial advertisement campaign for the new product.

investe
Is the procedure adopted by the Company correct?(RTP MAY 2019)

Answer
- -

According to AS 26 ‘Intangible Assets’, “expenditure on an intangible item

should be recognized as an expense when it is incurred unless it forms part of the cost
of an intangible asset”.
In the given case, advertisement expenditure of ` 3 crores had been taken up for the
marketing of a new product which may provide future economic benefits to an enterprise
by having a turnover of `37.5 crores. Here, no intangible asset or another asset is
acquired or created that can be recognized.
Therefore, the accounting treatment by the company of debiting the entire advertising
expenditure of `3 crores to the Profit and Loss account of the year is correct.

Question 4
K Ltd. launched a project for producing product X in October, 2018. The
Company incurred ` 40 lakhs towards Research and Development expenses upto 31st
March, 2019. Due to prevailing market conditions, the Management came to conclusion
that the product cannot be manufactured and sold in the market for the next 10 years.
The Management hence wants to defer the expenditure write off to future years.
Advise the Company as per the applicable Accounting Standard.(RTP NOV 2019)
Repeated Question
ated
ICPI
Answer

As per para 41 of AS 26 “Intangible Assets”, expenditure on research should

be recognized as an expense when it is incurred. An intangible asset arising from
development (or from the development phase of an internal project) should be
recognized if, and only if, an enterprise can demonstrate all of the conditions specified in
para 44 of the standard. An intangible asset (arising from development) should be
derecognised when no future economic benefits are expected from its use according to
para 87 of the standard. Thus, the manager cannot defer the expenditure write off to
future years in the given case.
Hence, the expenses amounting ` 40 lakhs incurred on the research and development project
has to be written off in the current year ending 31st March, 2019.(RTP MAY 2020)

Question 5
 7 IITIA
-

A company acquired patent right for ` 1200 lakhs. The product life cycle has been
estimated to be 5 years and the amortization was decided in the ratio of estimated future cash
flows which are as under:
3= N life .

Year 1 2 3 4 5
2 yes Romany
Estimated future cash flows
·

(` in 600 600 600 300 300 RevisedRemaining lif

lakhs) ~ 00 & .

After 3rd year, it was ascertained that the patent would have an estimated balance future life of
3 years and the estimated cash flow after 5th year is expected to be ` 150 lakhs. You are required
to determine the amortization pattern under Accounting Standard 26.(RTP MAY 2020)

Answer 1200-900
-
⑳
Look
3

Amortization Estimated Amortization Amortized 10

of cost of future cash Ratio Amount (` in 24 00
patent as per flow (` in lakhs) lakhs)
AS 26 Year
1 600
* > -
.25 300 i200x600
-
- -

2 600 .25 300 1200x600

2400
3 600 .25 300 - -

0
24
4 300 .40(Revised) 120
5 X/ - 300 .40(Revised) 120 300
6 150 .20(Revised) 60
300⑳
300
1200 100
⑳
-

In the first three years, the patent cost will be amortized in the ratio of estimated future
cash flows i.e. (600: 600: 600: 300: 300).
The unamortized amount of the patent after third year will be ` 300 lakh (1,200-900) which will
be amortized in the ratio of revised estimated future cash flows (300:300:150) in the fourth,
fifth and sixth year.

↑
Question 6 #

X Ltd. carried on business of manufacturing of Bakery products. The company has

use
two trademarks "Sun" and "Surya''. One month before the company knows through one of the
E-Te
marketing managers that both trademarks have allegedly been infringed by other competitors
engaged in the same field. After investigation, legal department of the company informed that it
② ②
had weak case on trademark “Sun” and strong case in regard to trademark “Surya”'. X Ltd.
incurred additional legal fees to stop infringement on both trademarks. Both trademarks have a
# -#
remaining legal life of 10 years. How should X Ltd. account for these legal costs incurred relating
to the two trademarks?(RTP NOV 2020)

Answer
As per AS 26, subsequent expenditure on an intangible asset after its
purchase or its completion should be recognized as an expense. However, if the
subsequent expenditure enables the asset to generate future economic benefits in
 excess of its originally assessed standard of performance or can be measured and
attributed to the asset reliably, then such subsequent expenditure should be added to
the cost of the intangible asset.
The legal costs incurred for both the trademarks do not enable them to generate future
-

economic benefits in excess of its originally assessed standard of performance. They only ensure
to maintain them if the case is decided in favour of the company. Therefore, such legal costs
incurred for both trademarks must be recognized as an expense.

Question 7
Naresh Ltd. had the following transactions during the financial year 2019-
2020:
- (i) Naresh Ltd. acquired running business of Sunil Ltd.② for ` 10,80,000 on 15th May,
I
alwke [s
-
2019. The fair value of Sunil Ltd.'s net assets was # ` 5,16,000. Naresh Ltd. is of the view
that due to popularity of Sunil Ltd.’s product in the market, its goodwill exists.
by

⑮jogos
-
POCTNIO
f
(ii) Naresh Ltd. had taken a franchise on July 2019 to operate a restaurant from Sankalp
Ltd. for ` 1,80,000 and at an annual fee of 10% of net revenues (after deducting
expenditure). The franchise expires after 6 years. Net revenues were ` 60,000 during the
Goodwill financial year 2019-2020.*
- (iii) On 20th August, 2019, Naresh Ltd, incurred costs of ` 2,40,000 to register the patent
-
OLNIO E
for its product. Naresh Ltd. expects the patent’s economic life to be 8 years.
# Naresh Ltd. follows an accounting policy to amortize all intangibles on straight line basis
Ces over the maximum period permitted by accounting standards taking a full year
amortization in the year of acquisition. Goodwill on acquisition of business to be
amortized over 5 years (SLM) as per AS 14.
Prepare a schedule showing the intangible assets section in Naresh Ltd. Balance Sheet at 31st ,
March, 2020.(RTP MAY 2021)

Answer
Naresh Ltd.
Balance Sheet (Extract relating to intangible asset) as on 31st March 2020

Note no. Rupees

Assets
(1) Non Current Assets
Intangible assets
1 8,11,200

Notes to Accounts (Extracts)

Rupees Rupees
1. Intangible Assets
 Goodwill (Refer to 4,51,200
note 1)
Franchise (Refer note
2) 1,50,000

Patents (Refer note

3) 2,10,000 8,11,200

Working notes:

Rupees
(1) Goodwill on acquisition of
business
Cash paid for acquiring
business ( purchase
consideration) 10,80000
Less: Fair value of net assets
acquired
( 5,16,000)
Goodwill
5,64,000

Less: Amortisation as per AS

14 ie. Over 5 years (as per
SLM) ( 1,12,800)
(
Balance to be shown in the 4,51,200
balance sheet
(2) 1,80,000

-)
Franchise
30, 000

umwanie
Less: Amortisation (over 6 00

years) ( 30,000)

Directly Balance to be shown in the

balance sheet
1,50,000
Patent
(3) 2,40,000
Less: Amortisation (over 8
↓
2 40,
,
000/0
year as per SLM) ⑯ 0 , 000

②
( 30,000)
 Balance to be shown in the 2,10,000
balance sheet

Question 8
#
A company is showing an intangible asset at( ` 88 lakhs as on 01.04.2021.
This asset -
H
⑭
was acquired for ` 120 lakhs on-01.04.2017 and the same was available for use from
that date. The company has been following the policy of amortization of the intangible
assets over a period of 15 years on straight line basis. Comment on the accounting
treatment of the above with reference to the relevant Accounting Standard.( RTP NOV
2021)
Answer L
Mama
As per AS 26 'Intangible Assets', the depreciable amount of an intangible asset
should
be allocated on systematic basis over the best estimate of its useful life. There is a
rebuttable presumption that the useful life of an intangible asset will not exceed ten
years from the date when the asset is available for use. Company has been following
the policy of amortization of the intangible asset over a period of 15 years on straight LX
line basis. The period of 15 years is more than the maximum period of 10 years
- - 15
specified as per AS 26. Accordingly, the company would be required to restate the
carrying amount of intangible asset as on 01.04.2021 at ` 72 lakhs i.e. #x4
` 120 lakhs less ` 48 lakhs 120 lakhs x4 years = 48 lakhs
`. 10 years · Blac
The difference of ` 16 Lakhs (` 88 lakhs – ` 72 lakhs) will be adjusted against the

ougI
opening balance of revenue reserve. The carrying amount of ` 72 lakhs will be
amortized over remaining 6 years by amortizing ` 12 lakhs per year.

Question 9
Pausi
(a) PQR Ltd. has acquired a Brand from another company for ` 100
*
lakhs. PQR Ltd. contends that since the said brand is a very popular and famous brand,
c
no amortization needs to be provided. Comment on this in line with the Accounting
Standards. -wong . ↑nation - > Needs to be

-
(b) X Ltd. is engaged in the business of newspaper and radio broadcasting. It operates through
- -
Done
.

different brand names. During the year ended 31st March, 2021, it incurred substantial amount
-

on business communication and branding expenses by participation in various corporate social

responsibility initiatives. The company expects to benefit by this expenditure by attracting new
customers over a period of time and accordingly it has capitalized the same under brand
development expenses and intends to amortize the same over the period in which it expects the
-
benefits to flow. As the accountant of the company do you concur with these views? You are
required to explain in line with provisions of Accounting Standards.( RTP MAY 2022)

Answer

(a) AS 26 ‘Intangible Assets” provides that an intangible asset should be measured

initially at cost. After initial recognition, an intangible asset should be carried at cost less any
accumulated amortization and any accumulated impairment losses. The amount of an intangible
asset should be allocated on a systematic basis over the best estimate of its useful life for
computing amortization. There is a rebuttable presumption that the useful life of an intangible
asset will not exceed 10 years from the date when the asset is available for use. It must be
ensured that the value of brand is amortized in accordance with AS 26, as brand is considered to
be intangible asset. The contention of PQR Ltd. that Brand is very popular and famous, hence no
amortization needs to be provided is not correct as there is no persuasive evidence that the
useful life of the intangible asset will exceed 10 years.

(b) As per AS 26 on Intangible Assets, expenditure on an intangible item should be recognized

as on expense when it is incurred unless it forms part of the cost of an intangible asset that
meets the recognition criteria. An intangible asset should be recognized if, and only if: (i) it is
probable that the future economic benefits that are attributable to the asset will flow to the
enterprise; and (ii) the cost of the asset can be measured reliably. In the given case, no
intangible assets or other asset is acquired or created that can be recognized, the accounting
treatment by the company to amortize the entire expenditure over the period in which it
expects the benefits to flow is not correct and the same should be debited to the profit and loss
statement during the year ended 31st March, 2021.
 F NEXTAs
1.A Company had deferred research and development cost of ` 150 lakhs. Sales expected inthe subsequent years are as under:
Years Sales (` in lakhs)
I 400
II 300
III 200
IV 100
You are asked to suggest how should Research and Development cost be charged to Profit and Loss
account. If at the end of the III year, it is felt that no further benefit will accrue in the IV year, how the
unamortised expenditure would be dealt with in the accounts of the Company? (PPYQ)
Answer
(i) Based on sales, research and development cost to be allocated as follows:
Year Research and Development cost allocation
(` in lakhs)
400
I 150 60
1,000
300
II 150 45
1,000
200
III 150 30
1,000
100
IV 150 15
1,000

(ii) If at the end of the III year, the circumstances do not justify that further benefit will accrue in IV
year, then the company has to charge the unamortised amount i.e. remaining ` 45 lakhs [150 – (60
+ 45)] as an expense immediately.
Note: As per para 41 of AS 26 on Intangible Assets, expenditure on research (or on theresearch phase of
an internal project) should be recognized as an expense when it is incurred. It has been assumed in the
above solution that the entire cost of ` 150 lakhs is development cost. Therefore, the expenditure has
been deferred to the subsequent years on the basis of presumption that the company can demonstrate
all the conditions specified in para 44 of AS
26. An intangible asset should be derecognised when no future economic benefits are expected from its
use according to para 87 of the standard. Hence the remaining unamortised amount of ` 45,00,000 has
been written off as an expense at the end of third year.

2. AB Ltd. launched a project for producing product X in October, 2009. The Company incurred
` 20 lakhs towards Research and Development expenses upto 31st March, 2011. Due to prevailing
market conditions, the Management came to conclusion that the product cannot be manufactured and
sold in the market for the next 10 years. The Management hence wants to defer the expenditure write
off to future years.
Advise the Company as per the applicable Accounting Standard. (PPYQ)
Answer
As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognized as an expense
when it is incurred. An intangible asset arising from development (or from the development phase of an
internal project) should be recognized if, and only if, an enterprise can demonstrate all of the conditions
specified in para 44 of the standard. An intangible asset (arising from development) should be
derecognised when no future economic benefits are expected from its use according to para 87 of the
standard. Therefore, the manager cannot defer the expenditure write off to future years.
Hence, the expenses amounting ` 20 lakhs incurred on the research and development project has to be
written off in the current year ending 31st March, 2011.

3. An enterprise acquired patent right for ` 400 lakhs. The product life cycle has been estimated to be 5
years and the amortization was decided in the ratio of estimated future cash flows which are as under:
Year Estimated Future Cash Flows
(` in lakhs)
1 200
2 200
3 200
4 100
5 100
After 3rd year, it was ascertained that the patent would have an estimated balance future life of 3 years
and the estimated cash flow after 5th year is expected to be ` 50 lakhs. Determine the amortization under
Accounting Standard 26. (PPYQ)
Answer
Amortization of cost of patent as per AS 26
Year Estimated future cash flow(` Amortization Ratio Amortized Amount(`
in lakhs) in lakhs)
1 200 .25 100
2 200 .25 100
3 200 .25 100

4 100 .40 (Revised) 40

5 100 .40 (Revised) 40
6 50 .20 (Revised) 20
400
In the first three years, the patent cost will be amortised in the ratio of estimated future cash flows i.e.
(200: 200: 200: 100: 100).
The unamortized amount of the patent after third year will be ` 100 (400-300) which will be amortised in
the ratio of revised estimated future cash flows (100:100:50) in the fourth, fifth and sixth year.

4. Plymouth Ltd. is engaged in research on a new process design for its product. It had incurred
` 10 lakh on research during first 5 months of the financial year 2012-13. The development of the process
began on 1st September, 2012 and upto 31st March, 2013, a sum of ` 8 lakh was incurred as Development
Phase Expenditure, which meets assets recognition criteria.
From 1st April, 2013, the Company has implemented the new process design and it is likelythat this
will result in after tax saving of ` 2 lakh per annum for next five years.
The cost of capital is 10%. The present value of annuity factor of ` 1 for 5 years @ 10% is 3.7908.
Decide the treatment of Research and Development Cost of the project as per AS 26. (PPYQ)
Answer
Research Expenditure – According to AS 26 ‘Intangible Assets’, the expenditure on researchof new
process design for its product ` 10 lakhs should be charged to Profit and Loss Account in the year in
which it is incurred. It is presumed that the entire expenditure is incurred in the financial year 2012-13.
Hence, it should be written off as an expense in that year itself.
Cost of internally generated intangible asset – it is given that development phase expenditure amounting
` 8 lakhs incurred upto 31st March, 2013 meets asset recognition criteria. As per AS 26, for measurement
of such internally generated intangible asset, fair value should be estimated by discounting estimated
future net cash flows.
Savings (after tax) from implementation of new design for next 5 years ` 2 lakhs p.a.
Company’s cost of capital 10 %
Annuity factor @ 10% for 5 years 3.7908
Present value of net cash flows (` 2 lakhs x 3.7908) ` 7.582 lakhs
The cost of an internally generated intangible asset would be lower of cost value ` 8 lakhs or present
value of future net cash flows ` 7.582 lakhs.
Hence, cost of an internally generated intangible asset will be ` 7.582 lakhs. The difference of ` 0.418
lakhs (i.e. ` 8 lakhs – ` 7.582 lakhs) will be amortized by Plymouthfor the financial year 2012-13.
Amortisation - The company can amortise ` 7.582 lakhs over a period of five years bycharging `
1.516 lakhs per annum from the financial year 2013-2014 onwards.

5. NDA Corporation is engaged in research on a new process design for its product. It had
incurred an expenditure of ` 530 lakhs on research upto 31st March, 2011
The development of the process began on 1st April, 2011 and Development phase expenditure was `
360 lakhs upto 31st March, 2012 which meets assets recognition criteria.
From 1st April, 2012, the company will implement the new process design which will result inafter
tax saving of ` 80 lakhs per annum for the next five years.
The cost of capital of company is 10%.Explain:
(1) Accounting treatment for research expenses.
(2) The cost of internally generated intangible asset as per AS 26.
(3) The amount of amortization of the assets. (The present value of annuity factor of
` 1 for 5 years @ 10% = 3.7908) (PPYQ)
Answer
(1) Research Expenditure - According to para 41 of AS 26 ‘Intangible Assets’, the expenditure on
research of new process design for its product ` 530 lakhs should be charged to Profit and Loss
Account in the year in which it is incurred. As the questionstates that the expenditure was
incurred as ` 360 Lakhs in 2011-12 and ` 230 Lakhs inthe financial year 2012-13 it should be
written off as an expense in these two financial years
(2) Cost of internally generated intangible asset - The question states that the development phase
expenditure amounting ` 360 lakhs incurred upto 31st March, 2012 meets asset recognition criteria.
As per AS 26 for measurement of such internally generated intangible asset, fair value can be
estimated by discounting estimated futurenet cash flows.
Savings (after tax) from implementation of new design for next 5 years 80 lakhs p.a.
Company’s cost of capital 10 %
Annuity factor @ 10% for 5 years 3.7908
 Present value of net cash flows (` 80 lakhs x 3.7908) 303.26 lakhs
The cost of an internally generated intangible asset would be lower of cost value
` 360 lakhs or present value of future net cash flows `303.26 lakhs.
Hence, cost of an internally generated intangible asset will be ` 303.26 lakhs.
The difference of ` 56.74 lakhs (i.e. ` 360 lakhs – ` 303.26 lakhs) will be amortized bythe
enterprise for the financial year 2011-12.
(3) Amortisation - The company can amortise ` 303.26 lakhs over a period of five years bycharging
` 60.65 lakhs per annum from the financial year 2012-13 onwards.

6. M Ltd. launched a project for producing product A in Nov. 2008. The company incurred
` 30 lakhs towards Research and Development expenses upto 31st March, 2010. Due to unfavourable
market conditions the management feels that it is not possible to manufactureand sell the product
in the market for next so many years.
The management hence wants to defer the expenditure write off to future years. Advise the
company as per the applicable Accounting Standard. (PPYQ)
Answer
As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognised as an expense
when it is incurred. An intangible asset arising from development (or from the development phase of an
internal project) should be recognized if and only if, an enterprise can demonstrate all of the conditions
specified in para 44 of the standard. An intangible asset (arising from development) should be
derecognised when no future economic benefits are expected from its use according to the provisions of
AS 26. Therefore, the managementcannot defer the expenditure write off to future years and the
company is required to expense the entire amount of ` 30 lakhs in the Profit and Loss account of the year
ended 31st March, 2010.

7. A company acquired for its internal use a software on 28.01.2012 from the USA for US $ 1,00,000.
The exchange rate on that date was ` 52 per USD. The seller allowed trade discount @ 5 %. The
other expenditure were:
(i) Import Duty : 20%
(ii) Purchase Tax : 10%
(iii) Entry Tax : 5 % (Recoverable later from tax department)
(iv) Installation expenses : ` 25,000
(v) Profession fees for Clearance from Customs : ` 20,000
Compute the cost of Software to be capitalized. (PPYQ)
Answer
Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software $ 1,00,000
Less: Trade discount @ 5% ($ 5,000)
$ 95,000
Cost in ` (US $ 95,000 x ` 52) 49,40,000
Add: Import duty on cost @ 20% (`) 9,88,000
59,28,000
Purchase tax @ 10% (`) 5,92,800
 Installation expenses (`) 25,000
Profession fee for clearance from customs (`) 20,000
Cost of the software to be capitalized (`) 65,65,800

Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as part of
the cost of the asset.

8. Base Limited is showing an intangible asset at ` 85 lakhs as on 1-4-2011. This asset was acquired for `
112 lakhs on 1-4-2008 and the same was available for use from that date. The company has been
following the policy of amortization of the intangible asset over a period of12 years on straight line
basis. Comment on the accounting treatment of the above with reference to the relevant accounting
standard. (PPYQ)
Answer
As per para 63 of AS 26 “Intangible Assets,” the depreciable amount of an intangible asset should be
allocated on a systematic basis over the best estimates of its useful life. There is a rebuttable presumption
that the useful life of an intangible asset will not exceed ten years from the date when the asset is
available for use. Amortization should commence when the assetis available for use.
Base Limited has been following the policy of amortization of the intangible asset over a period of 12
years on straight line basis. The period of 12 years is more than the maximum period of 10 years
specified as per AS 26.
Accordingly, Base Limited would be required to restate the carrying amount of intangible asset
as on 1.4.2011 at ` 112 lakhs less ` 33.6 lakhs 112 lakhs = ` 78.4 lakhs.
×3 years
 10 years
9. Hera Ltd. has got the license to manufacture particular medicines for 10 years at a
license feeof ` 200 lakhs. Given below is the pattern of expected production and
expected operatingcash inflow:

Year Production in bottles (in thousands) Net operating cash flow (` in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
8 800 3,200
9 800 3,200
10 800 3,200

Net operating cash flow has increased for third year because of better inventory
managementand handling method. Suggest the amortization method. (PPYQ)
Answer
As per para 72 of AS 26 ‘Intangibles Assets’, the amortization method used should reflect
the pattern in which economic benefits are consumed by the enterprise. If pattern cannot
bedetermined reliably, then straight-line method should be used.
In the instant case, the pattern of economic benefit in the form of net operating cash flow
vis- à-vis production is determined reliably. Initially net operating cash flow per
thousand bottles is
` 3 lakhs for first two years and ` 4 lakhs from fourth year onwards, the pattern is
established. Therefore Hera Ltd. should amortize the license fee of ` 200 lakhs as
under:
Year Net Operating Cash Inflow (NOCI) Ratio Amortize amount (` in lakhs)
1 900 0.03 6
2 1,800 0.06 12
3 2,300 0.08 16
4 3,200 0.12 24
5 3,200 0.12 24
6 3,200 0.12 24

7 3,200 0.12 24
8 3,200 0.12 24
9 3,200 0.12 24
10 3,200 0.11 (bal.) 22
27,400 1.00 200
10. A company is showing an intangible asset at ` 88 lakhs as on 01.04.2013. This asset
was acquired for ` 120 lakhs on 01.04.2009 and the same was available for use
from that date.The company has been following the policy of amortization of the
intangible assets over a period of 15 years on straight line basis. Comment on the
accounting treatment of the above with reference to the relevant Accounting
Standard. (PPYQ)
Answer
As per para 63 of AS 26 'Intangible Assets', the depreciable amount of an intangible asset
should be allocated on systematic basis over the best estimate of its useful life. There is a
rebuttable presumption that the useful life of an intangible asset will not exceed ten
years from the date when the asset is available for use.
Company has been following the policy of amortisation of the intangible asset over a
period of 15 years on straight line basis. The period of 15 years is more than the maximum
period of 10 years specified as per AS 26.
Accordingly, the company would be required to restate the carrying amount of intangible
asset as on 01.04.2013 at ` 72 lakhs i.e. ` 120 lakhs less ` 48 lakhs .
The difference of ` 16 Lakhs (` 88 lakhs – ` 72 lakhs) will be adjusted against the opening
balance of revenue reserve. The carrying amount of ` 72 lakhs will be amortised over
remaining 6 years by amortising ` 12 lakhs per year.

process is estimated to be ` 82 lacs. This includes estimates of future cash outflows

andinflows:

You are required to work out:

(i) What is the expenditure to be charged to Profit & Loss Account for the year
ended 31st March, 2013 ?
(ii) What is the carrying amount of the intangible asset as on 31st March, 2013 ?
(iii) What is the expenditure to be charged to Profit & Loss Account for the year
ended 31st March, 2014 ?
(iv) What is the carrying amount of the intangible asset as on 31st March, 2014 ? (PPYQ)
Answer
As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ending
31.03.2013
` 32 lakhs is recognized as an expense because the recognition criteria were not
met until 1st December 2012. This expenditure will not form part of the cost of the
production process recognized as an intangible asset in the balance sheet.
(ii) Carrying value of intangible asset as on 31.03.2013
At the end of financial year, on 31st March 2013, the production process will be
recognized (i.e. carrying amount) as an intangible asset at a cost of ` 28 (60-32) lacs
(expenditure incurred since the date the recognition criteria were met, i.e., from 1st
December 2012).
(iii) Expenditure to be charged to Profit and Loss account for the year ended
31.03.2014
(` in lacs)
Carrying Amount as on 31.03.2013 28
Expenditure during 2013 – 2014 90
Book Value 118
Recoverable Amount (82)
Impairment loss 36
` 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2014.
(iv) Carrying value of intangible asset as on 31.03.2014
(` in lacs)
Book Value 118

Less: Impairment loss (36)

Carrying amount as on 31.03.2014 82
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 AS 28 Impairment of Assets

Applicable An Entity shall assess at the end of each reporting period whether there is any
indication that an asset may be impaired. If any such indication exists, it is
required to estimate the Recoverable Amount of the asset.

Indicators of 1. External source of Information

Impairment
• Decline in Market Value of Assets (other than as a result of passage of
time)

• Technological / Market / Legal / economic changes with an adverse effect

on the Entity

• Increase in Market Interest Rate

• Carrying Amount of Net Assets > Market Capitalisation

2. Internal Source of Information

• Obsolescence or Physical damage

• Significant changes with adverse effect on the Asset

• Poor economic performance of the Assets

• Net Cash Loss from the operations

Recoverable Higher of -
Amount
(a) Net Selling Price i.e. Fair Value Less Cost of Disposal or

(b) Value in Use (i.e. Present Value of Cash Flows)

Exclusion Estimates of Future Cash Flows do not include Cash inflows or outflows -
from Value in

66 | P a g e By: - CA Nakul Katheria

Use (a) from receivables / Cash outflows from payables

(b) expected to arise from future restructuring to which an entity is not yet
committed

(c) expected to arise from improving or enhancing the asset's performance

(d) from financing activities / Income Tax (i.e. Discount Rate and Cash Flows
should be pre tax).

CGU Cash Generating Unit (CGU) Is the smallest WentJflaWe group" of assets that
grates Cash Wlow largely independent of the Cash inflows from other assets or
ciroup r>f ' /,r,;i

Significance The Recoverable Amount of the Machine (in a CGU) alone cannot be estimated
of CGU because its value in uv

(a) may differ from its Fair Value less Costs of Disposal, and

(b) can be determined only for CGU to which the Machine belongs.

Therefore, no Impairment Loss is recognised for the Machine. Nevertheless, the

Entity may need to m- 1 assess the Depreciation Period / Method for the
Machine. Perhaps a shorter depreciation period or a Uyjr-r 1 Depreciation
Method is required to reflect, the expected remaining useful life of the Machine
or the pattern j in which economic benefits are expected to be consumed by the
Entity.

Corporate Corporate Assets are those Assets other than Goodwill that contribute to the Future
Assets Cash Flows of all CGUs It includes group or divisional assets such as the Building or
Research Centre. Its characteristics are that - (a) they do not generate Cash Inflows
independently of other assets or groups of assets, and | (b) their Carrying Amount
cannot be fully attributed to a particular CGU.

Corporate The primary purpose of the building is to serve as a Corporate Asset. Therefore,
Asset given for the building cannot be considered to generate Cash Inflow which are largely
Rent independent of the Cash flows from the Company as a whole. Since the Building
is not held as Investment, it is inappropriate to determine Value in Use of the
Building based on the Future Market Rent.

Entry Impairment Loss Dr. To PPE Revaluation Reserve Dr. (balance available) P&L
Dr. (balancing figure)

To Impairment Loss

67 | P a g e By: - CA Nakul Katheria

Reversal The Increased Carrying Amount of an Asset other than Goodwill, attributable to
reversal of Impairment Loss, should not exceed the Carrying Amount that would
have been determined (net of Amortisation cr Depreciation), had the Impairment
Loss not been recognized in prior years. Such excess over Carrying Amount is a
revaluation, and should be dealt as per the applicable Ind AS.

No Reversal Value in Use may become greater than the Carrying Amount simply because the
Present Value of Future Cash Inflows increases as they become closer.
Because, the service potential of the asset has not increased. Therefore, an
Impairment Loss is not reversed just because of the passage of time, even if the
recoverable amount of the asset becomes higher than its carrying amount.

Allocation of First goodwill will be impaired fully and then the remaining Impairment Loss will
Loss be allocated to PPE & Intangibles on pro-rata basis (i.e. Carrying Amount Ratio).
If Impairment Loss can be computed for one PPE in that CGU individually, such
allocated Impairment Loss cannot exceed such Impairment Loss.

Processing 1. If an Active Market exists for the Output produced, that asset shall be
Industries – identified as a CGU, even if some or all of the Output is used internally.
CGU
2. Even if part or all of the output produced is used by other units, this asset
forms a separate CGU, if the entity could sell the output on an active market.
This is because the asset could generate cash inflows that would be largely
independent of the cash inflows from other assets or groups of assets.

3. If the Output produced could not be sold in an active market and is used
internally, its Cash Flows are dependent on others and it cannot be considered
to generate independent cash flows. In this case, both plants are the smallest
group of assets that generates Cash inflows that are largely independent.

4. Though there is an active market for the products if the Cash inflows are
dependent on the allocation of Production, it is unlikely that the future cash
inflows can be determined individually. |

Transfer price If the Cash Inflows generated by any CGU are affected by Internal Transfer
≠ MP Pricing, an Entity shall use Management's best estimate of Future Price(s) that
could be achieved in Arm's Length Transactions in estimating the Future Cash
Inflows used to determine the CGU's value in use.

Say Corporate Asset X - Can be allocated on reasonable basis, Corporate Asset Y -

Cannot beallocated

68 | P a g e By: - CA Nakul Katheria

 1. Allocation of Corporate Asset X and Computation of Impairment Loss
Particulars CGU A CGU B CGU C Total

Weighted Carrying Amount = (Carrying amount x Life)

Allocation of Carrying Amount of Corporate Assets in above

ratio

Total Carrying Amount (after allocation of Corporate Assets)

Recoverable Amount (given)

Impairment Loss (only if Carrying Amount > Recoverable

Amount)

2. Allocation of Impairment Loss in CGUs of B and C

Particulars For CGU B For CGU C

Corp Others Total Corp Others Total

Assets Assets

Carrying Amt before Impairment Loss

(above)

Imp. Loss allocated in ratio of Carrying

Amounts

Carrying Amt after Impairment Loss

3. Impairment Loss for the Larger CGU, i.e. the Company as a whole
Particulars A B C X Y Total Company

Carrying Amount (given)

Impairment Loss (WN 2)

Carrying Amount (after WN 2)

Recoverable Amount for the Company as a whole

1mpairment Loss for the Larger CGU, i.e. Company

69 | P a g e By: - CA Nakul Katheria

 AS 29 Provisions, Contingent Liabilities/Assets

Criteria for 1. Present obligation (Legal / Contractual) as a result of past events.

Provision
2. Economic outflow of resources is probable to settle the obligation.

3. Reliable estimate can be made.

Note: If there is possible obligation and it is probable (i.e. more likely than not), then
it will become present obligation i.e. Present obligation includes possible
obligation with more than 50% probability. However, Provision should not be made
for future operating losses.

Expert Ind AS-37 provides that, in rare cases, it not clear whether there is a present
advice obligation, for example, in a lawsuit, it may be disputed either whether certain
events have occurred or whether those events result in a present obligation. In
such a case, an Entity should determine whether a present obligation exits at the
end of the reporting period by taking account of all available evidence, for example,
the opinion of Experts.

Contingent 1. A Possible Obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of uncertain future events
Liability
not wholly within the control of the entity.

2. A Present Obligation that arises from past events but is not recognised
because -

(a) it is not probable that an outflow of economic resources will be required to

70 | P a g e By: - CA Nakul Katheria

 settle the obligation; or

(b) the amount of the obligation cannot be measured with sufficient reliability.

Contingent A Contingent Asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or
Asset
more uncertain future events not wholly within the control of the entity.

Likelihood Likelihood Probability Contingent Liability Contingent Assets

Virtually certain > 95% Recognize the No disclosure is

Provision permitted

Recognize the No disclosure is

Probable 50% - 95%
Provision permitted
Possible but not 5% - 50%
Disclose Contingent No disclosure is
probable
Liability permitted
Remote
< 5% No disclosure is No disclosure is
permitted permitted

Risk & 1. A risk adjustment should be made for the amount that the entity would pay
in excess of the expected present value of outflows due to uncertainty attached
Present
with the actual outcome.
Value
2. Where the effect of the time value of money is material, the amount of a
provision should be the present value of the expenditures expected to be required
to settle the obligation.

3. Where discounting is used, the carrying amount of a provision increases in

each period to reflect the passage of time. This increase is recognised as Borrowing
Cost, (unwinding of discount)

Onerous 1. Contract in which the unavoidable costs of meeting the obligations under
the contract exceed the economic benefits expected to be received under it.
Contract
2. Before a separate provision is established, an entity should recognize any
impairment loss that has occurred on assets dedicated to that contract.

3. Therefore, a provision should be made for the onerous element, being the
lower of cost of fulfilling the contract and the penal cost of cancellation.

Exception In extremely rare cases, disclosure of some or all of the information required can be
to expected to prejudice seriously the position of the entity in a dispute with other
parties on the subject matter of the provision, contingent liability or contingent

71 | P a g e By: - CA Nakul Katheria

Disclosures asset. In such cases, an entity need not disclose the information, but should
disclose the general nature of the dispute, together with the fact that, and reason
why, the information has not been disclosed.

Reimburse In certain cases, an Entity will be able to look to another party to pay part or all of
ments the expenditure required to settle a Provision. The other party may either – (a)
reimburse amounts paid by the Entity, or, (b) pay the amounts directly. Some
examples of Third Party Reimbursements are – (a) Insurance Contracts, (b)
Indemnity Clauses, and (c) Product Warranties.

Branch Accounts

1. Classification of Branches from the viewpoint of Accounting —

Branches are classified as under, from the accounting viewpoint –

2. Branch Stock Account /Trading Account when Goods are Invoiced at Wholesale
Price to Retail Branches –
Particulars Amt Particulars Amt

To Opening Stock at Shop (at Wholesale By Sales at Shop (Actual Sale

Price) Proceeds)

To Value of Goods sent to Branch / Shop By Value of Goods lost, stolen, etc. if
any
(at Wholesale Price) To Gross Profit at
Branch / Shop c/d (at Wholesale Price) j By Closing
Stock at Shop (at Wholesale Price) 1

Total Total

To Branch Expenses (incl Abnormal Loss) By Gross Profit at Branch / Shop b/d

72 | P a g e By: - CA Nakul Katheria

To Gross Profit at Branch / Shop c/d

Total Total

To Stock Reserve on Closing Stock (Note) By Net Profit at Branch / Shop b/d By
To Net Profit after all adjustments Stock Reserve on Opening Stock
(Note)

Total Total

Note: Stock Reserve represents the difference between Wholesale Price and Cost to
HD (Manufacturer)

3. Steps in Accounting for Independent Branches –

Step Description

I Preparation of Branch and HO Trading and P & L Account.

II Preparation of Balance Sheet for Branch, HO, and Overall Company.

III Preparation of any other account as required in the Question, i.e. Branch A/c in HO
Books, HO A/c in Branch Books, etc. [Note: HO Balance in Branch Books and Branch
Balance in HO Books are called Inter-Office Balances]

IV Reconciliation of Inter-Office balances and passing Adjusting Journal Entries as

required in the Question for 1 broadly four types of transactions - (a) Goods-in-Transit,
(b) Cash-in-Transit, (c) Depreciation on Fixed Assets, where Fixed Asset Accounts
maintained in HO Books, and (d) Any other Inter-Office Expenses/Errors.

4. Accounting Entries to be passed, when the Branches independently maintain

Books of Accounts-
Transaction HD Books Branch Books

Goods sent by HO to Branch Branch A/c Dr. Goods Recd. from HO A/c Dr.

To Goods Sent to Branch To HO A/c

Goods returned by Branch to Goods Sent to Branch A/c Dr. HO A/c Dr.
HO
To Branch A/c To Goods Recd. from HO

Branch Expenses incurred and Expenses A/c Dr. 1 To Cash /

paid by Branch Bank A/c

73 | P a g e By: - CA Nakul Katheria

Branch Expenses paid by the Branch A/c Dr. To Cash / Expenses A/c Dr. 1 To HO A/c
Head Office Bank A/c

Collection from Debtors, Cash / Bank A/c Dr. To HO A/c Dr. To Sundry Debtors A/c
received directly by the HO Branch A/c

Payment by HO, for purchase Branch A/c Dr. To Bank A/c Purchases / Creditors A/c Dr. 1
made by the Branch To HO A/c

Purchase of Assets by Branch Sundry Assets A/c Dr. 1 To Bank /

Liability A/c

Asset Account maintained at Branch A/c Dr. To Branch HO A/c Dr. To Bank / Liability A/c
HO and Asset purchased by Asset A/c
Branch

Depreciation when Asset Branch Asset A/c Dr. To Depreciation A/c Dr. 1 To HO A/c
Account is maintained by HO Branch A/c

Remittance of Funds by HO to Bank A/c Dr. To Branch A/c Bank A/c Dr. To HO A/c
Branch

Remittance of Funds to HO by Branch A/c Dr. To Bank A/c HO A/c Dr. 1 To Bank A/c
Branch

Transfer of Goods between Recipient Branch A/c Dr. To Supplying Branch A/c Dr. 1 To
different Branches Supplying Branch A/c Goods reed, from HO A/c Goods
reed, from HO A/c Dr. To HO A/c

HO Allocated Expenses to Branch A/c Dr. Expense A/c Dr. To HO A/c

Branch ! Note: Reverse entry
To Expenses A/c
for Income

5. "Debtors System" of Accounting for Dependent Branches –

Under "Debtors System", the Branch A/c is prepared in the following format to
ascertain the Net Profit from Branch –
Particulars Amt Particulars Amt

To balances b/d (Assets at Branch By Balance b/d (Liabilities at the

at beginning) Stock Debtors beginning) Stock Reserve on Opening
Stock Creditors (or) O/s Expenses By
Cash - Remittances reed from Branch

74 | P a g e By: - CA Nakul Katheria

 Petty Cash at Branch By Goods sent to Branch (Profits
included) By balances c/d (Assets at
To Goods sent to Branch (at
Branch at end) Stock Debtors
Invoice Price)
Petty Cash at Branch
To Bank - various expenses
incurred at Branch To Balance c/d
(Liabilities at the end of the year)
Stock Reserve on Closing Stock
Creditors (or) O/s Expenses To Net
Profit trfd to General P&L Account

Note: If goods are invoiced above cost, the Loading (i.e. Profit Element) on Opening
Stock, Goods Sent from Head Office (net of returns) and Closing Stock are reversed, in
order to ascertain the true profits.

6. "Stock and Debtors System" of Accounting for Dependent Branches –

Format of Branch Stock Account
Particulars Amt Particulars Amt

To balance b/d (Opg. Stock at Cost By Cash (Cash Sales)

+ Loading if any)
By Branch Debtors (Credit Sales)
To Goods Sent to Branch (Transfers
By Goods sent to Branch (Returns at
made, at cost)
Cost)
To Branch Adjustment A/c (Loading
By Branch Adjtmt (Loading on Returns)
on Transfers made) To Branch
Adjustment A/c (excess of Branch By Goods Lost / Stolen (recorded at
Sale Price if any, over the Invoice cost)
Price, i.e. rate at which goods were
invoiced by HO to Branch) By Branch Adjtmt (Loading on
lost/stolen)

By balance c/d (Clg. Stock at Cost +

Loading)

Total Total

Format of Branch Debtors Account

75 | P a g e By: - CA Nakul Katheria

Particulars Amt Particulars Amt

To balance b/d (Opening Balance) By Branch Stock A/c (Sales Returns)

To Branch Stock A/c (Credit Sales By Branch Cash (Collections made)

made)
By Branch Expenses (Discount, Bad
Debts, etc.) By balance c/d (Closing
Balance)

Total Total

Format of Branch Expenses Account

Particulars Amt Particulars Amt

To Branch Cash A/c (Cash By Branch P&L Account (transfer)

Expenses met at Branch) To (Main)
Cash A/c (Expenses paid by HO
directly) To Branch Debtors
(Discounts, Bad Debts, etc.)

To Branch Assets (Depredation, if

any)

Total Total

Format of Branch Adjustment Account

Particulars Amt Particulars Amt

To Branch Stock (Loading reversed By Stock Reserve (Loading on Opg.

on Returns) To Stock Reserve Stock)
(Loading on Closing Stock)
By Branch Stock (Loading on Transfers
To Branch P&L Account (Gross made) By Branch Stock (Excess of Sale
Profit trfd) Price over Invoice Price, if any)

Total Total

Format of Branch P&L Account

Particulars Amt Particulars Amt

To Branch Expenses Account By Branch Adjustment (GP Transfer)

(Expenses Transfer) To General

76 | P a g e By: - CA Nakul Katheria

 P&L Account (NP Transferred)

Total Total

Format of Goods sent to Branch Account

Particulars Amt Particulars Amt

To Branch Stock (Returns from By Branch Stock (Transfers made, at

Branch, at Cost) Cost)

To Purchases / Trading A/c

(balancing figure)

Total Total

7. Applicable Exchange Rate for Integral Foreign Operations:

Item Rate

Revenue Items Average Rate for the year.

Opening Stock Rates prevalent at the Commencement of the Accounting Period, i.e.
Opening Rate.

Closing Stock Rates prevalent at the close of the Accounting Period, i.e. Closing Rate.

Fixed Asset Translated at the Original Rate. If there is a change in the value of the
Foreign currency Liabilities, adjustment should be made to Cost of Fixed
Assets in Rupees.

Depreciation Rate used for translation of value of Fixed Assets on which the
depreciation is calculated.

Current Assets Rates prevalent at the Close of the Accounting Period, i.e. Closing Rate.

Current Liabilities Rates prevalent at the Close of the Accounting Period, i.e. Closing Rate.

Long Term Liabilities Rates prevalent at the Close of the Accounting Period, i.e. Closing Rate.

Head Office Account Balance in 'Head Office Account' in the Branch Books is taken at the
Indian Rupees for which 'Branch Account' in the Head Office books
stands. It must be ensured that no transaction is left unaccounted in both
the books.

77 | P a g e By: - CA Nakul Katheria

 Chapter 27 – Buyback of Shares
Determination of Maximum Number of Shares for Buy Back
Rule Condition Maximum Permissible Buyback Shares

1 Percentage 25% of Total Shares Outstanding

of Shares
Bought
Back

2 Amount < (Equity Share Capital + FreeReserve + Sec. Premium) × 25%

25% of Buyback Price i. e. Market Price + Premium
(ESC +
Free
Reserves)

3 Debt (Equity Share Capital + FreeReserve + Sec. Premium) − (Debt − 2)

Equity Buyback Price + Face Value
Ratio to be
2:1

Note: If one Share is bought back, the following Reduction will be made from Equity -
(a) Face Value will be reduced from Share Capital,
(b) Premium on Buy Back will be reduced from Securities Premium,
(c) Amount equal to the Face Value ? 10 will be transferred from Free Reserves to
CRR. Since CRR is not available for Dividend distribution, it is not a Free Reserves.
Hence, on buy back such amount should also be excluded from Equity.
Hence, Total Reduction in Equity if one Share is bought back = FV + Premium + FV = Buy
Back Price + FV

1. Accounting Entries for Buyback of Equity Shares-

Transaction Journal Entry

Amount due on Buyback on Equity Equity Share Capital A/c Dr. Premium on
Shares Buyback A/c Dr. To Equity Shareholders A/c

Sourcing / Providing for Premium Securities Premium A/c Dr. Profit and Loss A/c
payable on Buyback Dr. General Reserve / Other Free Reserves A/c
Dr. To Premium on Buyback A/c

Transferring Divisible Profit to Capital Profit and Loss A/c Dr. General Reserve /
Redemption Reserve Account, to the Revenue Reserves A/c Dr. Other Divisible

78 | P a g e By: - CA Nakul Katheria

 extent of Nominal Value of Shares Profits A/c (e.g. Dividend Equalization Reserve)
bought back Dr. To Capital Redemption Reserve A/c

Payment to Equity Shareholders Equity Shareholders A/c Dr. To Bank A/c

Note: Amount transferred to CRR = Nominal Value of Preference capital to be

Redeemed
Less: Nominal Value of any Fresh Issue of Share Capital

Financial Statements of Companies

PART I – FORM OF BALANCE SHEET

Name of the Company: …… Balance Sheet as at: ………… (Rupees in ……..)

Particulars Note Figures as at the Figures as at the
end of Current end of the
Reporting Previous
Period Reporting Period

1 2 3 4

I. EQUITY AND LIABILITIES

(1) Shareholder’s’ Funds

a) Share Capital
b) Reserve &Surplus
c) Money Received against Share
Warrants

(2) Share Application money pending

allotment

(3) Non-Current Liabilities

a) Long-Term Borrowings
b) DTL (Net)
c) Other Long Term Liabilities
d) Long Term Provisions

(4) Current Liabilities

a) Short Term Borrowings

b) Trade Payables
(A) Total Outstanding Dues of

79 | P a g e By: - CA Nakul Katheria

 Micro Enterprises and small
Enterprises, and
(B) Total outstanding Dues of
Creditors other than Micro
Enterprises and Small
Enterprises
c) Other Current Liabilities
d) Short Term Provisions

TOTAL

II. ASSETS

(1) Non-Current Assets

a) Fixed Assets
(i) Tangible Assets
(ii) Intangible Assets
(iii) Capital WIP
(iv) Intangible Assets under
Development
b) Non-Current Investments
c) DTA (Net)
d) Long Term Loans & Advances
e) Other Non-Current Assets

(2) Current Assets

a) Current Investments
b) Inventories
c) Trade Receivables
d) Cash & Cash Equivalents
e) Short Term Loans & Advances
f) Other Current Assets

TOTAL

80 | P a g e By: - CA Nakul Katheria

 PART II – FORM OF STATEMENT OF PROFIT AND LOSS

Particulars Note Figures for the Figures for the

No. Current Previous

Reporting Reporting Period

Period

I Revenue from Operations XXX XXX

II Other Income XXX XXX

III Total Income (I + II) XXX XXX

IV Expenses:

Cost of Materials Consumed XXX XXX

Purchases of Stock-In-Trade XXX XXX

Changes in Inventories of Finished XXX XXX

Gods / Work-in-progress and
Stock-In-Trade

Employee Benefits Expense

Finance Cost

Depreciation and Amortization

Expense

Other Expenses

Total Expenses XXX XXX

V Profit before Exceptional & XXX XXX

Extraordinary Items & Tax (III—IV)

VI Exceptional Items XXX XXX

VII Profit before Extraordinary Items XXX XXX

and Tax (V -VI)

VIII Extraordinary Items XXX XXX

IX Profit before Tax (VII—VIII) XXX XXX

X Tax Expense:

81 | P a g e By: - CA Nakul Katheria

 1) Current Tax XXX XXX
2) Deferred Tax
XXX XXX

XI Profit / (Loss) for the period from XXX XXX

Continuing Operations

XII Profit / (Loss) from Discontinuing XXX XXX

Operations

XIII Tax Expense of Discontinuing XXX XXX

Operations

XIV Profit / (Loss) from Discontinuing XXX XXX

Operations (After Tax)

XV Profit / (Loss) for the period (XI + XXX XXX

XIV)

XVI Earnings per Equity Share: Basic &

Diluted

Terms Description

Current & Non- Current Assets: An Asset shall classified as Current when it satisfies any of
Current Assets the following criteria -

(a) It is expected to be realized in, or is intended for sale or consumption

in the Company's normal Operating Cycle,

(b) It is held primarily for the purpose of being traded,

(c) It is expected to be realized within 12 months after the Reporting

Date,

(d) It is Cash or Cash Equivalent unless it is restricted from being

exchanged or used to settle a Liability for atleast 12 months after the
Reporting Date.

Non-Current Assets: All other Assets shall be classified as Non-Current.

Current Liability & Current Liabilities: A Liability shall classified as Current when it satisfies any
Non-Current of the following -
Liabilities
(a) It is expected to be settled in the Company's normal Operating

82 | P a g e By: - CA Nakul Katheria

 Cycle,

(b) It is held primarily for the purpose of being traded,

(c) It is due to be settled within 12 months after the Reporting Date, or

(d) The Company does not have an unconditional right to defer

settlement of the Liability for atleast 12 months after the reporting date
(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.)

Non-Current Liabilities: All other Liabilities shall be classified as Non-

Current.

Operating Cycle (OC) An Operating Cycle is the time between the Acquisition of Assets for
processing & their realization in Cash or Cash Equivalents. If Operating
Cycle cannot be identified, it is assumed to have duration of 12 months.
Operating Cycle = Raw Materials Lead time + Raw Materials Holding Period
+ WIP Holding Time + Finished Goods Holding Time + Credit Period given for
Debtors.

Dividend out of Free In case of inadequacy or absence of profits in any year, a Company can
Reserves declare dividend only out of Free Reserves, on fulfilling the following
conditions -

1. Rate of Dividend should be <Average Rates of Dividend of 3 immediately

preceding,

2. Amt withdrawn: Amount to be withdrawn from Accumulated Profits <l/10th

of its Paid-Up Capital and Free Reserves. [Note: Amount withdrawn shall
first be utilized to set off Current Year Losses, before declaration of Equity
Dividend.]

Reserves Balance: Balance in Reserves after such withdrawal >15% of its

Paid-Up Share Capital

83 | P a g e By: - CA Nakul Katheria

 Internal Reconstruction

Journal Entries for various transactions In the course of Internal Reconstruction —

Transaction Journal Entry

Reduction of Share Capital by reducing Paid- Equity Share Capital (7 100 each) Dr. 85
Up Value of Shares, without reducing Pace
To Reconstruction A/c gtj
Value (say 7 100 Face Value retained, bul 7 100
already paid up is reduced to 7 IS paid up)

Reduction ol Share Capital by reducing both Equity Share Capital (7 100 each) Dr. 1Q0
Face Value and Paid-Up Value, (say 7 J00
To Equity Share Capital (7 15 each) 15 To
reduced to 7 15)
Reconstruction A/c (balance written off) 85

Shareholders giving up their claim to Reserves Reserves A/c (individually) Dr. To Reconstruction
and Accumulated Profits A/c

Shares surrendered and cancelled Equity Share Capital Dr. To Shares Surrendered A/c
subsequently
Shares Surrendered A/c Dr. To Reconstruction A/c
(to the extent cancelled)

Downward Revaluation of Assets Reconstruction A/c Dr. To Sundry Assets A/c

(individually)

Upward Revaluation of Assets, i.e. Increase / Sundry Assets A/c (individually) Dr. To
Appreciation in Asset Values Reconstruction A/c

Sacrifices made by Debenture holders, External Liabilities A/c (individually) Dr.

Creditors, 1 etc. by agreeing for a lower amount
To Reconstruction A/c (to the extent sacrifice
of dues i payable to them
made)

To Bank A/c (to the extent payment made

immediately)

Expenses of Reconstruction and previously Reconstruction A/c Dr. To Bank A/c

unrecorded liability paid

Provisions settled at higher amount than Provision (for Taxation, etc.) (as per B/s) Dr.
appearing in the Balance Sheet Reconstruction A/c (difference / additional amt) Dr.
To Bank A/c (Total amount paid now)

Writing off of Fictitious Assets, Intangible Reconstruction A/c Dr.

84 | P a g e By: - CA Nakul Katheria

Items, and Losses To Fictitious Asset A/cs (e.g. Goodwill, Patents,
etc.)

To P&L A/c (Dr. Balance if any)

To Mise. Expenditure A/c (Disc, on Issue of Shares,

etc.)

Transferring the balance left in Reconstruction Reconstruction A/c Dr. To Capital Reserve A/c
A/c to Capital Reserve

Variation in Shareholders' Rights without Change in Rate of Dividend for Preference Shares:
affecting Reconstruction A/c
(Old) % Cum. Pref. Share Capital A/c Dr.
(Refer Note below)
To (New) % Cum. Pref. Share Capital A/c
Conversion from Cumulative to Non-Cumulative
Pref.Shares: ...% Cum. Pref. Share Capital A/c Dr.

To ...%Non-Cum. Pref. Share Capital A/c

Conversion of Fully Paid Shares into Stock, or Conversion of Shares into Stock:
vice-versa (Refer Note below)
Equity Share Capital (? each) Dr.

To Equity Stock A/c

Re-conversion of Stock into Stock:

Equity Stock A/c Dr. To Equity Share Capital (^

each)

Sub-Division and Consolidation of Shares Equity Share Capital (? 100 each) Dr. To Equity
(Refer Note below) (say ? 100 Share divided Share Capital (? 10 each)
into 10 Shares of ? 10 each)

Notes: The following alterations can be done without affecting Reconstruction A/c –
Variation in • When a Company has issued different classes of Shares with different
rights or privileges attached to such Shares, e.g. Rights as to Dividend, Voting
Shareholders'
Rights, etc. any of such rights may be changed in any manner.
Rights
• Some examples for change in rights are - (a) change in rate of dividend
on Preference Shares, or (b) conversion of Cumulative Preference Shares into
Non-Cumulative Preference Shares without changing the amount of Share

85 | P a g e By: - CA Nakul Katheria

 Capital.

Conversion of Fully • Stock is the aggregate of fully paid-up Shares of a Member, merged
Paid Shares into into one fund of equal value.
Stock, or vice-
• A Company can convert its Fully Paid Shares into Stock, by a
versa
resolution passed in General Meeting.

• Stock can be divided into fractions of any amount. Any part of the Fund
can be transferred. Flowever, Companies may restrict the transfer of stock to
multiples of, say, ? 100.

• Upon the Company converting its Shares into Stock, the book-keeping
entries merely record the transfer from Share Capital A/c. A separate Stock
Register is now maintained, in which details of Members' holdings are
entered and the Annual Return is modified accordingly.

Sub-Division authorised by its Articles, a Company may, in a General Meeting, by passing

an Ordinary Resolution, decide to sub-divide or consolidate the shares into
and
those of a smaller or higher denomination than that fixed by the
Consolidation of Memorandum of Association, so long as the proportion between the paid up
Shares and unpaid amount, if any, on the Shares continues to be the same as it was
in the case of the Original Shares.

86 | P a g e By: - CA Nakul Katheria

 Accounting for Amalgamations
Steps involved in Accounting for Amalgamations
Step Procedure

1 See whether the Amalgamation is in the nature of Merger or in the nature of Purchase.

2 • Determine the Purchase Consideration, i.e. Cash, Securities or Other Assets paid by the
Purchasing Company to the Shareholders of the Selling Company.

• Payment made to Debentureholders of the Selling Company or reimbursement of

Liquidation Expenses of the Selling Company, does not constitute Purchase
Consideration.

• Purchase Consideration can be determined based on -

(a) Net Payments basis, i.e. total of shares and cash paid by the Purchasing Company to
the Selling Company, or

Net Assets basis, i.e. Assets (Including Goodwill, if any) Less Liabilities taken over, at the
agreed values.

3 Pass the necessary Journal Entries in the books of the Selling Company, so as to close its
books.

4 Compute Goodwill / Capital Reserve for the Purchasing Company, in case of an

amalgamation in the nature of Purchase.

5 Pass the necessary Journal Entries in the books of the Purchasing Company, and prepare the
revised Balance Sheet of the Purchasing Company after absorption / takeover.

Journal Entries in the Books of Selling Company

Note: No distinction is made between Amalgamation in the nature of Merger or
Purchase, in the books of the Selling Company. The Journal Entries are similar in both
cases.
Transaction Journal Entry

1 Transfer of Assets taken over by Purchasing Realisation A/c Dr.

Company

87 | P a g e By: - CA Nakul Katheria

 To Sundry Assets (individually) (at B/S Value)

Note:

• If Cash is not taken over by the Purchasing Company, it should not be transferred to
Realisation A/c.

• If Selling Company already holds Shares in Purchasing Company, such "Investments in

Shares of Purchasing Company" A/c, should not be transferred to Realisation A/c.

2 Transfer of Liabilities taken over by Purchasing Sundry Liabilities A/c(individually) (at B/S
Company Value) Dr. To Realisation A/c

3 Direct Sale of specific Assets not taken over by Cash / Bank A/c (amount received)
Purchasing Company
Realisation A/c (if sold at Loss) Dr.

To Sundry Assets A/c (specified asset) (at B/s

Value) To Realisation A/c (if sold at Profit)

4 Direct Settlement of specific Liabilities not Sundry Liabilities A/c (at B/s Value) Dr.
taken over by Purchasing Company
Realisation A/c (if settled at Loss) Dr.

To Cash / Bank A/c (amount settled)

To Realisation A/c (if settled at Profit)

5 Expenses of Liquidation / Realisation met by Realisation A/c

Selling Company
To Cash / Bank A/c

Note:

If Purchasing Company meets the Realisation Expenses directly, no entry is required in Selling
Co.'s Books.

If the Purchasing Company reimburses the Liquidation Expenses, then "Purchasing Company"
Account should be debited instead of "Realisation Account". A separate receipt entry should be
passed for the reimbursement received. [Alternatively, the payment of Liquidation Expenses and
receipt of reimbursement car be ignored in the books of the Selling Company]

If the Liquidation Expenses are shared by the Purchasing Company and Selling Company, the
Journal Entry in Item 5 should be made only for the Selling Company's Share of Expenses.

6 Transfer of Share Capital to Sundry Transfer of Share Capital to Sundry

88 | P a g e By: - CA Nakul Katheria

 Shareholders Account Shareholders 5 | Account

If Purchasing Co. holds Shares in Selling Co If Purchasing Co. holds Shares in Selling Co

7 Transfer of Reserves and Surplus (to Sundry Reserves & Surplus A/c Dr.
Shareholders, i.e. Outsiders' Share only)
To Sundry Shareholders A/c (fully transferred)

8 Transfer of Accumulated Losses, if any Sundry Shareholders A/c Dr.

To P&L Account / Mise. Expenditure, etc.

9 Recording of Purchase Consideration due Purchasing Company A/c To Realisation A/c

Dr.

10 Receipt of Purchase Consideration Cash / Bank A/c

Shares in Purchasing Co. A/c

11 Transfer of Profit on Realisation (reverse entry Realisation A/c

is passed for Loss, if any)
To Sundry Shareholders A/c

12 Final Settlement to Shareholders Sundry Shareholders A/c

To Cash / Bank A/c

To Shares in Purchasing Co. A/c

Format of some Ledger Accounts in the books of Selling Company

1. Realisation Account
Particulars Particulars

To Sundry Assets A/c (Assets taken over) By Sundry Liabilities (Liab. taken
over)
(individually) (transfer at Book Values)
(individually) (transfer at Book
To Cash / Bank (Liquidation Expenses
Values)
met)
By Purchasing Co. A/c (Purchase
To Sundry' Assets / Liabilities A/c
Consideration Due)
(Assets disposed off at loss if any,
(Assets disposed off at a gain if any,
Liabilities settledat higher amounts than
Liabilities settled at lower amounts
Book Values, if any)
than Book Values, if any)

89 | P a g e By: - CA Nakul Katheria

To Sundry Shareholders A/c By Equity Share Capital A/c

(Profit on Realisation transferred) (Purchasing Co.’s Share in Equity

Cap. Of Selling Co, If any )

By Sundry Shareholders A/c

(Loss on Realisation transferred, if

any)

Total Total

2. Equity Shareholders Account / Sundry Shareholders’ Account

Particulars Particulars

To P&L A/c / Misc. Expenditure By Equity Share Capital

(Transfer of Accumulated Losses, Dr. Bal. (Outside Shareholders Portion of

etc.) Equity Capital)

To Realisation A c (Loss on Realisation, if By Reserves (All Reserves, fully

any) transferred)

To Cash / Bank (Final Settlement) By Realisation A/c (Profit on

Realisation)
To Equity Shares in Purchasing Company

(Final Settlement)

Total Total

3. Purchasing CompanyAccount
Particulars Particulars

To Realisation A/c (Purchase By Cash /Bank

Consideration due)
(Settlement of Purchase
Consideration)

By Equity Shares in Purchasing

Co.(Settlement of Purchase
Consideration)

Total Total

90 | P a g e By: - CA Nakul Katheria

 4. Investment in Equity Shares of Purchasing Company Account
(If Selling Company already holds Shares in Purchasing Company)
Particulars Particulars

To balance b/d (Shares already held) By Sundry Shareholders A/c

To Purchase Company A/c (Final Settlement / Distribution to

Outside Shareholders)
(Purchase Consideration received now)

Total Total

Journal Entries in the Books of Purchasing Company

Transaction Journal Entry

1 Purchase Consideration Due Business Purchase A/c Dr. To Liquidator of Selling

Company A/c

2 Assets and Liabilities taken over (Note: PURCHASE METHOD:

Where the Purchasing Company already
Sundry Assets A/c (at agreed values) Dr. Goodwill
holds some Shares in the Selling
A/c (balancing figure, if any) Dr.
Company, the relevant Investment
Account is also credited, for cancellation To Sundry Liabilities A/c (at agreed values)
purposes.)
To Business Purchase A/c (Purchase Consideration)

Either Goodwill or Capital Reserve will To Capital Reserve A/c (balancing figure, if any)
arise j jthe balancing figure in case of
(If Purc Consi > Net Assets, Goodwill will arise as
Punch a. ! Method.
bal. fig.)
j Excess consideration is adjusted
(If Pure Consi < Net Assets, Capital Reserve will arise
against - j (a) Free Resen'es (ind. P & L) of
as b/f)
Selling Co. j (b) Free Reserves of
Purchasing Co. and (c) finally, against P B. MERGER METHOD:
& L /\/c of Purchasing Co.
When Purchase Consideration >5.Can of Selling Co.
¡All Reserves (i.e. Statutory and Free) of
Selling j Company are fully recorded. Sundry Assets A/c (at B/s Values) Dr.
Shortfall in 1 consideration is credited to
Reserves A/c (balancing figure, if any) Dr.
Capital Reserve A/c.
To Sundry Liabilities A/c (at B/s Values)

To Statutory Reserves of Selling Company A/c (if any)

91 | P a g e By: - CA Nakul Katheria

 To Business Purchase A/c (Purchase Consideration)

To Reserves A/c (balancing figure, if any)

When Purchase Consideration <S.Cap of Sellina Co.

Sundry Assets A/c (at B/s Values) Dr.

To Sundry Liabilities A/c (at B/s Values)

To Statutory Reserves of Selling Company A/c (if any)

To Business Purchase A/c (Purchase Consideration)
To Free Reserves of Selling Co. A/c To Capital
Reserve A/c (as per EAC Opinion)

3 Discharge of Purchase Consideration Liquidator of Selling Company A/c Dr.

To Equity / Preference Share Capital A/c To

Securities Premium A/c (if any)

To Cash / Bank A/c (for fractions, etc.)

4 Realisation / Liquidation Expenses met / A. PURCHASE Goodwill / Capital Reserve A/c

Dr. To Cash / Bank A/c
METHOD

B. MERGER P & L Account / Reserves A/c

Dr. To Cash / Bank A/c
METHOD

• If Selling Co. meets the Realisation Expenses directly, no entry is required in Purchasing
Co's Books.

• If the Realisation Expenses are shared by the Purchasing Company and Selling Company,
the Entry in Item 4 should be recorded only for the Purchasing Company's Share of expenses.

5 Recording of Statutory Reserves of Amalgamation Adjustment A/c Dr.

Selling Company (for amalgamation in
To Statutory Reserve A/c
the nature of PURCHASE only)
(Note: This entry is Not Applicable for Merger
Method)

Statutory Reserve is shown on the Liabilities Side under "Reserves and Surplus". Amalgamation
Adjustment A/c; shown on the Assets Side of the Balance Sheet.

The above entry is reversed once the statutory time period expires / obligations are completed.

92 | P a g e By: - CA Nakul Katheria

6 Elimination of Unrealised Profits on A. PURCHASE Goodwill / Capital Reserve Dr.
Stocks, if any
METHOD To Stock Reserve / Stock

B. MERGER P&L Account / Reserve / A/c Dr.

METHOD To Stock Reserve / Stock

Types of Consolidation

Types AS Method Hokling % in General

 Subsidiaries 21 Line by line Addition Method More than 50%

 Associate
23 Equity Method 20% or more
 Joint
Venture 27 Proportionate
Consolidation

Consolidated Financial Statements

Consolidated P &L

Account Sales & Admin. Selling RM Changes in

Head Other Expense &Distrbn. Consumed Inventory
Income Exp.

In the books A B B Ltd. A Ltd. B Ltd. B Ltd.

of Ltd. Ltd.

Given Balance

Inter (XX) (XX)

Company
Sales
(X)
Profit included
in Clg Stock

Inter (X) (X)

Company
Transactions

93 | P a g e By: - CA Nakul Katheria

Revised
Balances

Verification: Profit after Tax in Consolidated P & L can be confirmed as Profit of A +

Profit of B (-) Stock Reserve.

Steps for Consolidated Balance Sheet

Step 1 Step 2 Step 3 Step 4 Step 5

Basic Computation Analysis of Consolidation of Balances Financial

of Revised Reserves to calculate -
Information Statements
Balances of
(a) Cost of Control /
Analysis Subsidiary Consolidation
Goodwill / Capital
Reserve,
(b) Minority Interest, &
(c) Consolidated
Reserves.

Step 1: BASIC INFORMATION ANALYSIS

1. Holding Company, Subsidiary (ies).
2. Date of Obtaining Control
3. Date of Consolidation.
4. Extent of Holding Company’s Share
(P %) and Minority Interest (Q %)

94 | P a g e By: - CA Nakul Katheria

For GI = Shares held by Holding / Total Shares in Subsidiary. Cost of Investments should not be
considered.

Step 2: COMPUTATION OF REVISED BALANCES

Adjustments to be made for Pre-Acquisition Dividend, Stock Reserve, Bonus Shares not accounted,
Revaluation of Assets & its additional Depreciation etc. See table below

Step 3: ANALYSIS OF RESERVE OF SUBSIDIARY

P&L Balance on DoC B/s Value R&S Balance on DoC B/s Value

As on DOA Given From DOA to DOC As on DOA From DOA to DOC

(bal.fig.)

Less: Dividend declared Less: Bonus declared

Capital Profit Revenue Reserve Capital Profit Revenue Reserve

In case of Intermediate Acquisition

Profit and Loss A/c: Balance on DoC B/s Value

As on 1st January = Given 1st January to 31st December = Bal.fig

Upto 31st July Total Profit × 7 / 12 Upto 31st December = Balance

Capital Profit Capital Profit Rev. Profit

Total Capital Profit

95 | P a g e By: - CA Nakul Katheria

Special Adjustments 1. Revaluation Reserve & Additional Depreciation (Say Depn 10%)
Particulars Result
(₹) Particulars Result (₹)

(a) Balance on 1st April = Clg (a) Depn. Required from Oct to
balance + 90% Mar
(b) Depn. For 6 months = (a) Fair value × 10% × 6/12
× 10% × 6/12 (b) Depn. Provided from Oct to
(c) Balance on 1st October = Mar
(a - b) Total Depn. – Depn. For 6
(d) Fair value on 1st October months
= Given Additional Depreciation
Revaluation Reserve = (d – Provided
c)

Step 4: CONSOLIDATION OF BALANCES

(Credit in Positive, Debit in Negative)
Particulars Total Minority Group Interest (P %)
Interest
Pre Acquisition Post Acquisition

Stakeholding 100% Q% (All Reserves) Reserve 1 Reserve 2

(a) Share Capital XXX XXX XXX - -

(including Bonus if
XXX
any)
(b) Reserve 1 (General XXX
Reserve)
(c) Reserve 2 (Profit and XXX XXX XXX -
Loss A/c)
(d) Adjustments in case
of Intermediate XXX XXX - XXX
Acqns:
(i) Stock Reserve on
Upstream
Transactions
(ii) Deprn
Adjustment on
Revaluation of FA
(XXX) (XXX)

(XXX) (XXX)

96 | P a g e By: - CA Nakul Katheria

 Sub-Total [Cr.] XXX XXX XXX XXX

(XXX)

Cost of Investment (as

per Step 2)

Parent's Balances in
Reserves (as per Step 2) XXX XXX

For Consolidated XXX XXX XXX XXX

Balance Sheet

Minority Capital Reserve Reserve 1 Reserve 2

Interest / (Goodwill) (Gen. Res.) (P&L A/c)

Notes: Goodwill and Capital Reserve arising from different Subsidiaries can be netted off to disclose
a Sing the Consolidated B/Sheet.

Step 5: FINANCIAL STATEMENTS CONSOLIDATION

Consolidated Balance of Holding Company and its Subsidiary as on ………

Particulars as at 31st March Note This Year Prev.Yr

I EQUITY AND LIABILITIES

(1) Shareholders' Funds:

Share Capital (Capital of Parent) 1

Reserves & Surplus (Consolidated P&L+ Reserve of Parent + 2

Capital Reserve)

Minority Interest (Step 4)

Non-Current Liabilities (individually)(net of Mutual Owings) H

(2) XXX
+ S - m/o
(3) XXX
Current Liabilities(individually)(net of Mutual Owings) H + S -
m/o

(4) XXX

Total

97 | P a g e By: - CA Nakul Katheria

II ASSETS

(1) Non-Current Assets

PPE & Intangibles: (i) Tangible H + S ± Revaluation and XXX

Depreciation adjts

(ii) Intangible Assets - Goodwill on

XXX
Consolidation (Step 4)

Non-Current Investments (outside Investments only)

(2) Current Assets

Inventories (H + S – Stock Reserve) XXX

Trade Receivables (H + S – m/o) XXX

Cash & Cash Equivalents (H + S) Remittances in Transit (if any) XXX

Total

Revised Balances
Item Books Treatment
of

It is a recovery of Cost and not Income. So, it has to be reduced

1. Pre-Acquisition from Cost of Acquisition.
Dividend
(a) If it is already credited to Investment: No Adjustments
H
required now.
(b) If it is already credited to P&L: Deduct from P&L [to reverse
Income]

Stock Reserve should be created to the extent of Profit element

involved. So,

(a) Deduct Profit element from Stock A/c of Buying Company,

2. Sale of Goods at
and
profit, and stock lying
H/S (b) Deduct Profit element from Profit & Loss A/c of Selling
unsold with Buying
Company.
Co.
Special Point: In case ofIntermediate Acquisition, Profit of
Subsidiary will be apportioned without considering this
adjustment, since it is a post-acquisition adjustment.

Only in the books of Issuer] It should be accounted for -

3. Bonus Shares issued
(a) debiting Reserves, i.e. reduce from Reserve A/c Balance, and
by H/S not
98 | P a g e By: - CA Nakul Katheria
 accounted H/S (b) Crediting Share Capital, i.e., add to Share Capital of Issuer
Company.

If some Fixed Assets of Subsidiaries are revalued for the purpose

of Consolidation, such i Revaluation Gain should be treated as
Capital Profit, and Additional Depreciation should be provided for
such amounts out of Post-Acquisition Profits. Fixed Assets
should be disclosed at revalued amounts. So -

(a) Add Revaluation Gain to Fixed Assets A/c of Subsidiary,

(b) Include the Gain as Capital Profit for computing Capital
Reserve / Goodwill, in the

4. Revaluation of Consolidation of Balances Step 4

Subsidiary's Assets
(c) Deduct Additional Deprn on the above, from Subsidiary's
S
Fixed Assets A/c & P&L A/c.

Note: In case of Loss on Revaluation, the reverse of the above

should be applied.

Special Point: In case of Intermediate Acquisition, Profit of

Subsidiary/ will be apportioned without considering this
adjustment, since it is a post-acquisition adjustment.

If the Creditors balance as per one Company's Books is different

from the Debtors i balance as per other Company's Books, the
different is treated as the Remittance in Transit (even if the
question does not specify so).

Suppose, Remittance made by Subsidiary is not received yet by

5. Remittances in
Holding Company, then the Cash / Remittance in Transit can be
Transit
adjusted in two ways as under -

(a) By passing entry in the Receivers' Books: Cash in Transit

A/c Dr. To Debtors, or
H/S
(b) By reversing entry in the Payers' Books: Cash in Transit A/c
Dr. To Creditors.

All Mutual Owings, i.e. Debtors, B/R, Loans Receivable cf one

Company should be set off / eliminated against Creditors, B/P,
6. Mutual Owings Loans Payable of the Other Company.
H/S
Note: Only after adjusting the Remittances in Transit, Mutual
Owings should be adjusted.

99 | P a g e By: - CA Nakul Katheria

 AS 23 A/c for Investments in Associates

Significant Influence represents power to participate in financial & operating policy

decisions of Investee (i.e. not control of the policies). It is generally presumed that -

(a) Holding 20% or more: Significant Influence exists, unless otherwise clearly
Significant
demonstrated
Influence
(b) Holding<20%: Significant Influence does not exist, unless otherwise clearly
demonstrated

Equity Method
Consolidated P&L Investment in ES of Associate

Net Assets on DOA (incl. Revn Reserve) x %

Add / Less: Goodwill / CR

Cost of Investment as per SFS

Add: Post Acquisition Profits x % Add: Post Acquisition Profits x %

Less: Additional Depn. on Revalued Less: Additional Depn. on Revalued amounts x

amounts No Adjustments, since already %
added in Profit
Less: Dividend received
Less: Stock Reserve x %
Less: Stock Reserve x % (In case of Downstream
Transaction)

Consolidated P&L Investment in ES of Associate

Note: In case of Upstream Transaction, Stock Reserve should be deducted from the Inventories in
Investor Balance Sheet.

100 | P a g e By: - CA Nakul Katheria

 AS 27 Financial Reporting of Interest in JV

Proportionate Consolidation Method is same as Line by line Addition Method except Minority
Interest Computation.
Particulars Jointly Controlled Jointly Controlled Assets Jointly Controlled
Operations (JCO) (JCA) Entities (JCE)

JCO is an arrangement 1 JCA exists when there is JCE is a separate

where two or more Venturers (a) Joint Control & (b) Joint Entity, whose 1
j combine their operations, Ownership by the economic activity is
resources and expertise, to Venturers, of one or more jointly j controlled by
manufacture, market and assets, which are two or more Joint
Meaning distribute, a product jointly. contributed to / acquired Venturers as a result of
for & dedicated for the a1 contractual
purposes of JV. arrangement.

Different parts of the (a) Oil Pipelines jointly (a) When two
manufacturing process of a controlled and Enterprises
product (say Aircraft) are operated by a number combine their
carried out by each of the of Oil Production activities in a
Venturers, each Venturer Companies, each particular line of
bearing its own costs and I Company uses the business by
sharing the revenue from the pipeline to transport transferring the
j sale of the aircraft, such | its own products and relevant assets &.
share being determined in j bears an agreed liabilities into a JCE.
accordance with the proportion of the (b) When an Enterprise
Example(s)
contractual arrangement. operating expenses, establishes a JCE
(b) Two Enterprises jointly abroad, in
control a property, conjunction with
each taking a share of the Government or
the Rents received & other Agency in that
bearing a share of the country, the JCE
expenses. jointly controlled by

101 | P a g e By: - CA Nakul Katheria

 the Enterprise & the
Govt. / other
Agency,

Legal Entity Not a separate Entity Not a separate Entity Separate Legal Entity
separate Entity

Venture does not fully Venturer does not own

own the assets, but owns the asset, but owns the
Creation and Venturer creates and fully
them jointly or there is a interest in the JCE
Ownership of owns the assets.
common control over the jointly with others
Assets
assets. leading to common
control.

Books of Not maintained separately. Not maintained Maintained separately.

Account separately

Prepared separately for

applying Proportionate
Consolidation Method,
Financial Not prepared separately. Not prepared separately j
Statements

In both SFS and CFS - In SFS: Interest in JCE

will be accounted as
• Share in JCA
per AS - 30.
classified according to the
nature of Asset. In CFS: Proportionate
Recognition In bothSFSand CFS - Consolidation Method
• Direct Liabilities
Principles in will be used. 1 Income,
• Asset it controls and the incurred by the Venturer. Expenses, Assets or|
Ventures’
Liability it incurs. Liabilities will be
books • Share in Joint
Expenses incurred by it and Liabilities, if any, incurred. reflected as separate
line items.
its share of Income from the
• Share of Income
JCO.
&Exps.

• Expenses incurred
in respect of own interest
in Joint Venture.

1. Recognize the share of Profit or Loss attributable to In SFS: Full Gain / Loss
other Venturers. should be recognised.
Contribution /
2. Recognize full Loss if there is reduction in NRV of
Sale of asset In CFS: Principles 1
Current Asset or Impairment Loss
by Venturer to and 2 given will apply.
JV

102 | P a g e By: - CA Nakul Katheria

Purchase of 1. Recognize the share of Profit or Loss when it resells In SFS: Full Gain / Loss
Asset by the asset to an independent party. should be recognised.

Venturer from 2. Recognize full Loss if there is reduction in NRV of In CFS: Principles 1
Joint Venture Current Asset or Impairment Loss. and 2 given will apply.

103 | P a g e By: - CA Nakul Katheria

 LIST OF ACCOUNTING STANDARDS ISSUED BY ICAI

S.NO AS Tittle
1 Disclosure of Accounting Policies
2 Valuation of Inventories
3 Cash Flow Statements
4 Contingencies and Events Occurring After the Balance Sheet Date
5 Net Profit or Loss for the Period, Prior Period Items, and Changes in
Accounting Policies
6 Depreciation Accounting
7 Construction Contracts
8 Research & development withdraw
9 Revenue Recognition
10 Accounting for fixed assets
11 The effects of changes in foreign Exchange rates
12 Accounting for Government grants
13 Accounting for Investments
14 Accounting for Amalgamations
15 Employee Benefits
16 Borrowing Costs
17 Segments Reporting
18 Related party Disclosures
19 Leases
20 Earning Per Share
21 Consolidated Financial Statements and Accounting ForInvt. In
Subsidiaries in financial statement
22 Accounting for Taxes on Income
23 Accounting for Invt. in associates
24 Discontinuing Operation
25 Interim financial reporting
26 Intangible Assets
27 Financial Reporting of interests in Joint Ventures
28 Impairment of Assets
29 Provisions, Contingent Liabilities and Contingent Assets
30 Financial Instrument: Recognition & Measurement
31 Financial Instrument: Presentation
32 Financial Instrument: Disclosure

104 | P a g e By: - CA Nakul Katheria