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Mock Test Paper - Series II
Date of Paper: 30th September, 2024
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWER TO PART – I CASE SCENARIO BASED MCQS
1. Option (a) : Bad debts expenses incurred during third quarter should
be recognised in the same quarter. Accordingly, ` 50,000 should be
deducted from ` 20,00,000.
2. Option (d) :` 14,50,000
3. Option (c) : A single performance obligation
4. Option (b) : ` 2,05,00,000
5. Option (a) : ` 1,70,83,333
6. Option (c) : ` 34,16,667
7. Option (b) 2.40
8. Option (a) 2.29
9. Option (d) Executory contract and non-derivative contract
10. Option (c) Equity
11. Option (a) : ` 34,000 crores
12. Option (b) : ` 4,000 crores
13. Option (c) : ` 250 crores
14. Option (a) : 1st April, 20X0
15. Option (d) : 20X0-20X1
ANSWERS OF PART – II DESCRIPTIVE QUESTIONS
1. Consolidated Balance Sheet of DEF Ltd. and its subsidiary, XYZ Ltd.
as at 31 st March, 20X2

Particulars Note No. `

I. Assets
(1) Non-current assets
(i) Property Plant & Equipment 1 86,00,000
(2) Current Assets
(i) Inventories 2 17,14,000
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(ii) Financial Assets
(a) Trade Receivables 3 9,98,000
(b) Cash & Cash equivalents 4 2,25,000
Total Assets 1,15,37,000
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 5 50,00,000
(ii) Other Equity 6 49,92,000
(2) Current Liabilities
(i) Financial Liabilities
(a) Trade Payables 7 7,45,000
(b) Short term borrowings 8 8,00,000
Total Equity & Liabilities 1,15,37,000

Notes to Accounts
`
1. Property Plant & Equipment
Land & Building 43,00,000
Plant & Machinery 43,00,000 86,00,000
2. Inventories
DEF Ltd. 12,00,000
XYZ Ltd. 5,14,000 17,14,000
3. Trade Receivables
DEF Ltd. 5,98,000
XYZ Ltd. 4,00,000 9,98,000
4. Cash & Cash equivalents
DEF Ltd. 1,45,000
XYZ Ltd. 80,000 2,25,000
7. Trade payable
DEF Ltd. 4,71,000
XYZ Ltd. 2,74,000 7,45,000
8. Shorter-term borrowings
Bank overdraft 8,00,000

Statement of Changes in Equity:

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1. Equity share Capital
Balance at the Changes in Equity Balance at the
beginning of the share capital during end of the
reporting period the year reporting period
50,00,000 0 50,00,000

2. Other Equity
Reserves & Surplus Total
Capital Retained Other
reserve Earnings Reserves
Balance at the
beginning 0 24,00,000 24,00,000
Total
comprehensive
income for the year 0 5,72,000 5,72,000
Dividends 0 (2,00,000) (2,00,000)
Total
comprehensive
income attributable
to parent 0 3,35,000 3,35,000
Gain on Bargain
purchase 18,85,000 18,85,000
Balance at the end
of reporting period 18,85,000 7,07,000 24,00,000 49,92,000
It is assumed that there exists no clear evidence for classifying the
acquisition of the subsidiary as a bargain purchase and, hence, the
bargain purchase gain has been recognized directly in capital reserve.
If, however, there exists such a clear evidence, the bargain purchase
gain would be recognized in other comprehensive income and then
accumulated in capital reserve. In both the cases, closing balance of
capital reserve will be ` 18,85,000.
Working Notes:
1. Adjustments of Fair Value
The Plant & Machinery of XYZ Ltd. would stand in the books at
` 14,25,000 on 1 st October, 20X1, considering only six months’
depreciation on ` 15,00,000 total depreciation being ` 1,50,000. The
value put on the assets being ` 20,00,000 there is an appreciation to
the extent of ` 5,75,000.

2. Acquisition date profits of XYZ Ltd. `

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Reserves on 1.4.20X1 10,00,000
Profit & Loss Account Balance on 1.4. 20X1 3,00,000
Profit for 20X2:
Total ` 8,20,000 less ` 1,00,000 (3,00,000 –
3,60,000
2,00,000) i.e. ` 7,20,000; for 6 months i.e. up to
1.10.20X1
Total Appreciation including machinery appreciation
(10,00,000 1,50,000 + 5,75,000 – 1,00,000) 16,25,000
Share of DEF Ltd. 32,85,000

3. Post-acquisition profits of XYZ Ltd. `

Profit after 1.10. 20X1 [8,20,000-1,00,000]x 6/12 3,60,000
Less: 10% depreciation on ` 20,00,000 for 6 months
less depreciation already charged for 2 nd half
of 20X1-20X2 on ` 15,00,000 (1,00,000-
75,000) (25,000)
Share of DEF Ltd. 3,35,000

4. Consolidated total comprehensive income `

DEF Ltd.
Retained earnings on 31.3.20X2 5,72,000
Less: Retained earnings as on 1.4.20X1 (0)
Profits for the year 20X1-20X2 5,72,000
Less: Elimination of intra-group dividend (2,00,000)
Adjusted profit for the year 3,72,000
XYZ Ltd.
Adjusted profit attributable to DEF Ltd. (W.N.3) 3,35,000
Consolidated profit or loss for the year 7,07,000
No Non-controlling Interest as 100% shares of XYZ Ltd. are held by
DEF Ltd.
5. Gain on Bargain Purchase `
Amount paid for 20,000 shares 34,00,000
Par value of shares 20,00,000
DEF Ltd.’s share in acquisition date
profits of XYZ Ltd. 32,85,000 (52,85,000)
Gain on Bargain Purchase 18,85,000

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6. Value of Plant & Machinery `

DEF Ltd. 24,00,000

XYZ Ltd. 13,50,000
Add: Appreciation on 1.10. 20X1 5,75,000
19,25,000
Add: Depreciation for 2nd half charged
on pre-revalued value 75,000
Less: Depreciation on ` 20,00,000 for 6
months (1,00,000) 19,00,000
43,00,000
7. Consolidated retained earnings `

DEF Ltd. XYZ Ltd. Total

As given 5,72,000 8,20,000 13,92,000
Consolidation Adjustments:
(i) Elimination of pre-
acquisition element
[3,00,000 + 3,60,000] 0 (6,60,000) (6,60,000)
(ii) Elimination of intra-
group dividend (2,00,000) 2,00,000 0
(iii) Impact of fair value
adjustments 0 (25,000) (25,000)
Adjusted retained earnings
consolidated 3,72,000 3,35,000 7,07,000
Assumptions:
1. Investment in XYZ Ltd is carried at cost in the separate financial
statements of DEF Ltd.
2. Appreciation of `10 lakhs in land & buildings is entirely attributable to
land element only.
3. Depreciation on plant and machinery is on WDV method.
4. Acquisition-date fair value adjustment to inventories of XYZ Ltd.
existing at the balance sheet date does not result in need for any
write-down.
2. (a) On the date of initial recognition, the effective interest rate of the loan
shall be computed keeping in view the contractual cash flows and
upfront processing fee paid. The following table shows the
amortisation of loan based on effective interest rate:

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Date Cash flows Cash flows Amortised Interest @
(principal) (interest cost EIR
and fee) (opening + (11.50%)
interest –
cash flows)
1-Jan-20X1 (500,000,000) 5,870,096 494,129,904
31-Dec-20X1 100,000,000 55,000,000 395,954,843 56,824,939
31-Dec-20X2 100,000,000 44,000,000 297,489,650 45,534,807
31-Dec-20X3 100,000,000 33,000,000 198,700,959 34,211,310
31-Dec-20X4 100,000,000 22,000,000 99,551,570 22,850,610
31-Dec-20X5 100,000,000 11,000,000 (0) 11,448,430

a. 1 January 20X1 –
Particulars (`) (`)

Bank A/c Dr. 494,129,904

To Loan from bank A/c 494,129,904
(Being loan recorded at its fair value
less transaction costs on the initial
recognition date)
b. 31 December 20X1 –
Particulars (`) (`)
Loan from bank A/c Dr. 98,175,061
Interest expense (profit and loss) Dr. 56,824,939
To Bank A/c 155,000,000
(Being first instalment of loan and
payment of interest accounted for as an
adjustment to the amortised cost of
loan)
c. 31 December 20X2 – Before Wheel Co. Limited approached
the bank –
Particulars (`) (`)
Interest expense (profit and loss Dr. 45,534,807
To Loan from bank A/c 1,534,807
To Bank A/c 44,000,000
(Being loan payment of interest
recorded by the Company before it
approached the Bank for deferment of
principal)
Upon receiving the new terms of the loan, Wheel Co. Limited, re -
computed the carrying value of the loan by discounting the new cash
flows with the original effective interest rate and comparing the same
with the current carrying value of the loan. As per requirements of Ind
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AS 109, any change of more than 10% shall be considered a
substantial modification, resulting in fresh accounting for the new
loan:
Date Cash flows Interest Discount PV of cash
(principal) outflow @ factor flows
15%
31-Dec-20X2 (400,000,000)
31-Dec-20X3 40,000,000 60,000,000 0.8969 89,686,099
31-Dec-20X4 40,000,000 54,000,000 0.8044 75,609,805
31-Dec-20X5 40,000,000 48,000,000 0.7214 63,483,092
31-Dec-20X6 40,000,000 42,000,000 0.6470 53,053,542
31-Dec-20X7 40,000,000 36,000,000 0.5803 44,100,068
31-Dec-20X8 40,000,000 30,000,000 0.5204 36,429,133
31-Dec-20X9 40,000,000 24,000,000 0.4667 29,871,422
31-Dec-20Y0 40,000,000 18,000,000 0.4186 24,278,903
31-Dec-20Y1 40,000,000 12,000,000 0.3754 19,522,235
31-Dec-20Y3 40,000,000 6,000,000 0.3367 15,488,493
PV of new contractual cash flows discounted at 11.50% 451,522,791
Carrying amount of loan 397,489,650
Difference 54,033,141
Percentage of carrying amount 13.59%
Note: Calculation done above is on full decimal, though in the table
discount factor is limited to 4 decimals.
Considering a more than 10% change in PV of cash flows compared
to the carrying value of the loan, the existing loan shall be considered
to have been extinguished and the new loan shall be accounted for as
a separate financial liability. The accounting entries for the same are
included below:
d. 31 December 20X2 – accounting for extinguishment
Particulars (`) (`)
Loan from bank (old) A/c Dr. 397,489,650
Loss on modification of loan (profit and 2,510,350
loss) Dr. 400,000,000
To Loan from bank (new) A/c
(Being new loan accounted for at its
principal amount in absence of any
transaction costs directly related to
such loan and correspondingly a de-
recognition of existing loan)

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e. 31 December 20X3
Particulars (`) (`)
Loan from bank A/c Dr. 40,000,000
Interest expense (profit and loss) Dr. 60,000,000
To Bank A/c 100,000,000
(Being first instalment of the new loan
and payment of interest accounted for
as an adjustment to the amortised
cost of loan)

(b) Inventory and debtors need to be classified in accordance with the

requirement of Ind AS 1, which provides that an asset shall be
classified as current if an entity expects to realise the same or intends
to sell or consume it in its normal operating cycle.
(a) In this case, time lag between the purchase of inventory and its
realisation into cash is 19 months [11 months + 8 months]. Both
inventory and the debtors would be classified as current if the
entity expects to realise these assets in its normal operating
cycle.
(b) No, the answer will be the same as the classification of debtors
and inventory depends on the expectation of the entity to realise
the same in the normal operating cycle. In this case, time lag
between the purchase of inventory and its realisation into cash is
28 months [15 months + 13 months]. Both inventory and debtors
would be classified as current if the entity expects to realise these
assets in the normal operating cycle.
3. (a) Assessing whether the manufacturing unit can be classified as
held for sale
1. The manufacturing unit can be classified as held for sale
due to the following reasons:
(i) The disposal group is available for immediate sale and in its
present condition. The regulatory approval is customary and it is
expected to be received in one year. The date at which the
disposal group must be classified as held for sale is
31st October, 20X1, i.e., the date at which management becomes
committed to the plan.
(ii) The sale is highly probable as the appropriate level of
management i.e., board of directors in this case have approved
the plan.
(iii) A firm purchase agreement has been entered with the buyer.
(iv) The sale is expected to be complete by 30th June, 20X2, i.e.,
within one year from the date of classification.

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2. Measurement of the manufacturing unit as on the date of
classification as held for sale
Step 1: Immediately before the initial classification of the asset (or
disposal group) as held for sale, the carrying amounts of the asset (or
all the assets and liabilities in the group) shall be measured in
accordance with applicable Ind AS.
The carrying value of the disposal group as on 31 st October, 20X1 is
determined at ` 2,600. The difference between the carrying value as
on 31st March, 20X1 and 31st October, 20X1 is accounted for as per
the relevant Ind AS.
Step 2: An entity shall measure a non-current asset (or disposal
group) classified as held for sale at the lower of its carrying amount
and fair value less costs to sell.
The fair value less cost to sell of the disposal group as on
31st October, 20X1 is ` 1,750 (i.e. 1,850 - 100). This is lower than the
carrying value of ` 2,600. Thus, an impairment loss needs to be
recognised and allocated first towards goodwill and thereafter pro -rata
between non-current assets of the disposal group which are within the
scope of Ind AS 105 based on their carrying value.
Thus, the assets will be measured as under:
Particulars Carrying value Impairment Carrying value as
– 31st October, per Ind AS 105 –
20X1 31 st October, 20X1
Goodwill 500 (500) -
Plant and 900 (115) 785
Machinery
Building 1,850 (235) 1,615
Debtors 1,050 - 1,050
Inventory 400 - 400
Creditors (250) - (250)
Loans (1,850) - (1,850)
2,600 (850) 1,750
3. Measurement of the manufacturing unit as at the year end
The measurement as at the end of the financial year shall be on
similar lines as done above.
The assets and liabilities in the disposal group not within the scope of
this Standard are measured as per the respective Standards.
The fair value less cost to sell of the disposal group as a whole is
calculated. This fair value less cost to sell as at the year-end shall be
compared with the carrying value as at the date of classification as
held for sale. It is provided that the fair value as on the year end is
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less than the carrying amount as on that date – thus the impairment
loss shall be allocated in the same way between the assets of the
disposal group falling within the scope of this standard as shown
above.
(b) Journal Entries
Purchase of Machinery on credit basis on 30 th January 20X1:
` `
Machinery A/c ($ 5,000 x ` 60) Dr. 3,00,000
To Creditors-Machinery A/c 3,00,000
(Initial transaction will be recorded at exchange
rate on the date of transaction)
Exchange difference arising on translating monetary item on
31st March 20X1:
` `
Profit & Loss A/c [($ 5,000 x ` 65) – ($ 5,000 x 25,000
` 60)] Dr.
To Creditors-Machinery A/c 25,000
Machinery A/c Dr. 30,000
To Revaluation Surplus (OCI) 30,000
[Being Machinery revalued to USD 5,500; (` 60 x
($ 5,500 - $ 5,000)]
Machinery A/c Dr. 27,500
To Revaluation Surplus (OCI) 27,500
(Being Machinery measured at the exchange rate
on 31.3.20X1 [$ 5,500 x (` 65 - ` 60)]
Revaluation Surplus (OCI) Dr. 17,250
To Deferred Tax Liability 17,250
(DTL created @ of 30% of the total OCI amount)
Exchange difference arising on translating monetary item and
settlement of creditors on 31 st March 20X2:
` `
Creditors-Machinery A/c ($ 5,000 x ` 65) Dr. 3,25,000
Profit & loss A/c [(5,000 x (` 67 -` 65)] Dr. 10,000
To Bank A/c 3,35,000
Machinery A/c [{$ 5,500 x (` 67 - ` 65)}] Dr. 11,000
To Revaluation Surplus (OCI) 11,000
Revaluation Surplus (OCI) Dr. 3,300
To Deferred Tax Liability 3,300
(DTL created @ of 30% of the total OCI
amount)
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4. (a) The annual depreciation charges prior to the change in useful life were
Buildings ` 1,50,00,000/15 = ` 10,00,000
Plant and machinery ` 1,00,00,000/10 = ` 10,00,000
Furniture and fixtures ` 35,00,000/7 = ` 5,00,000
Total = ` 25,00,000 (A)

The revised annual depreciation for the year ending 31 st March, 20X5,
would be
Buildings [`1,50,00,000 – (` 10,00,000 × 3)] / 10 ` 12,00,000
Plant and [` 1,00,00,000 – (` 10,00,000 × 3)] / 7 ` 10,00,000
machinery
Furniture and [` 35,00,000 – (` 5,00,000 × 3)] / 5 ` 4,00,000
fixtures
Total ` 26,00,000 (B)
The impact on Statement of Profit and Loss for the year ending
31st March, 20X5 = ` 26,00,000 – ` 25,00,000 = ` 1,00,000
This is a change in accounting estimate which is adjusted prospectively
in the period in which the estimate is amended and, if relevant, to
future periods if they are also affected. Accordingly, from 20X4-20X5
onward, excess of ` 1,00,000 will be charged in the Statement of Profit
and Loss every year till the time there is any further revision.
(b) Journal entries in the books of P Ltd (without modification of
service period of stock appreciation rights) (` in lakhs)
Date Particulars Debit Credit
31.03.20X2 Profit and Loss account Dr. 15.75
To Liability against SARs 15.75
(Being expenses liability for stock
appreciation rights recognised)
31.03.20X3 Profit and Loss account Dr. 17.25
To Liability for SARs 17.25
(Being expenses liability for stock
appreciation rights recognised)
31.03.20X4 Profit and Loss account Dr. 15.38
To Liability for SARs 15.38
(Being expenses liability for stock
appreciation rights recognised)
31.03.20X5 Profit and Loss account Dr. 17.02
To Liability for SARs 17.02
(Being expenses liability for stock
appreciation rights recognised)

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Journal entries in the books of P Ltd
(with modification of service period of stock appreciation rights)
(` in lakhs)
Date Particulars Debit Credit
31.03.20X2 Profit and Loss account Dr. 15.75
To Liability for SARs 15.75
(Being expenses liability for stock
appreciation rights recognised)
31.03.20X3 Profit and Loss account Dr. 28.25
To Liability for SARs 28.25
(Being expenses liability for stock
appreciation rights recognised)
31.03.20X4 Profit and Loss account Dr. 20.50
To Liability for SARs 20.50
(Being expenses liability for stock
appreciation rights recognised)
Working Notes:
Calculation of expenses for issue of stock appreciation rights
without modification of service period
For the year ended 31 st March 20X2
= ` 210 x 400 awards x 75 employees x 1 year /4 years of
service = ` 15,75,000
For the year ended 31 st March 20X3
= ` 220 x 400 awards x 75 employees x 2 years /4 years of
service - ` 15,75,000 previous recognised
= ` 33,00,000 - ` 15,75,000 = ` 17,25,000
For the year ended 31 st March 20X4
= ` 215 x 400 awards x 75 employees x 3 years/4 years of
service - ` 33,00,000 previously recognised
= ` 48,37,500 - ` 33,00,000 = ` 15,37,500
For the year ended 31 st March, 20X5
= ` 218 x 400 awards x 75 employees x 4 years / 4 years
of service – ` 48,37,500 previously recognised
= ` 65,40,000 – ` 48,37,500 = ` 17,02,500
Calculation of expenses for issue of stock appreciation rights
with modification of service period
For the year ended 31 st March 20X2
= ` 210 x 400 awards x 75 employees x 1 year / 4 years of
service
= ` 15,75,000
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For the year ended 31 st March 20X3
= ` 220 x 400 awards x 75 employees x 2 years / 3 years of
service - ` 15,75,000 previous recognised
= ` 44,00,000 - ` 15,75,000 = ` 28,25,000
For the year ended 31 st March 20X4
= ` 215 x 400 awards x 75 employees x 3 years/ 3 years of
service - ` 44,00,000 previous recognised
= ` 64,50,000 - ` 44,00,000 = ` 20,50,000.
5. (a) In determining the transaction price, AST Limited separately estimates
variable consideration for each element of variability i.e. the early
completion bonus and the quality bonus.
AST Limited decides to use the expected value method to estimate the
variable consideration associated with the early completion bonus
because there is a range of possible outcomes, and the entity has
experience with a large number of similar contracts that provide a
reasonable basis to predict future outcomes. Therefore, the entity
expects this method to best predict the amount of variable
consideration associated with the early completion bonus. AST’s best
estimate of the early completion bonus is ` 2.13 crore, calculated as
shown in the following table:
Bonus % Amount of bonus Probability Probability-
(` in crore) weighted amount
(` in crore)
15% 3.75 25% 0.9375
10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% -
2.125

AST Limited decides to use the most likely amount to estimate the
variable consideration associated with the potential quality bonus
because there are only two possible outcomes (` 2 crore or Nil) and
this method would best predict the amount of consideration associated
with the quality bonus. AST Limited believes the most likely amount of
the quality bonus is ` 2 crore.
Total transaction price would be 25 cr + 2.125 cr + 2 cr = 29.125 cr.
(b) Players’ Registrations
Acquisition
As per Ind AS 38 Intangible Assets, the costs associated with the
acquisition of players’ registrations would need to be capitalized which
would be the amount of cash or cash equivalent paid or the fair value
of other consideration given to acquire such registrations. In line with
Ind AS 38 Intangible Assets, costs would include transfer fees, league
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levy fees, and player agents’ fees incurred by the club, along with other
directly attributable costs, if any. Amounts capitalized would be fully
amortized over the period covered by the player’s contract.
Sale of registrations
Player registrations would be classified as assets held for sale under
Ind AS 105 Non-Current Assets Held for Sale and Discontinued
Operations when their carrying amount is expected to be recovered
principally through a sale transaction and a sale is considered to be
highly probable. To consider a sale to be ‘highly probable’, the assets
(in this case, player registrations) should be actively marketed for sale
at a price that is reasonable in relation to its current fair value. In the
given case, it would appear that the management is committed to a
plan to sell the registration, that the asset is available for immediate
sale and that an active plan to locate a buyer is already in place by
circulating clubs. Ind AS 105 stipulates that it should be unlikely that
the plan to sell the registrations would be significantly changed or
withdrawn. To fulfil this requirement, it would be prudent if only those
registrations are classified as held for sale where unconditional offers
have been received prior to the reporting date.
Once the conditions for classifying assets as held for sale in
accordance with Ind AS 105 have been fulfilled, the player registrations
would be stated at lower of carrying amount and fair value less costs to
sell, with the carrying amount stated in accordance with Ind AS 38 prior
to application of Ind AS 105, subjected to impairment, if any.
Profits and losses on sale of players’ registrations would be computed
by deducting the carrying amount of the players’ registrations from the
fair value of the consideration receivable, net of transactions costs. In
case a portion of the consideration is receivable on the occurrence of a
future performance condition (i.e. contingent consideration), this
amount would be recognized in the Statement of Profit and Loss only
when the conditions are met.
The players registrations disposed of, subsequent to the year end, for
` 175 crores, having a corresponding book value of ` 49 crores would
be disclosed as a non-adjusting event in accordance with Ind AS 10
Events after the Reporting Period.
Impairment review
Ind AS 36 Impairment of Assets requires companies to annually test
their assets for impairment. An asset is said to be impaired if the
carrying amount of the asset exceeds its recoverable amount. The
recoverable amount is higher of the asset’s fair value less costs to sell
and its value in use (which is the present value of future cash flows
expected to arise from the use of the asset). In the given scenario, it is
not easy to determine the value in use of any player in isolation as that
player cannot generate cash flows on his/her own unless via a sale
transaction or an insurance recovery. Whilst any individual player
cannot really be separated from the single cash-generating unit (CGU),
being a cricket team or a hockey team in the instant case, there may
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be certain instances where a player is taken out of the CGU when it
becomes clear that he/she will not play for the club again. If such
circumstances arise, the carrying amount of the player should be
assessed against the best estimate of the player’s fair value less any
costs to sell and an impairment charge should be recognized in the
profit or loss, which reflects any loss arising.
(c) Five fundamental principles of ethics for Chartered Accountants:
(1) Integrity – to be straightforward and honest in all professional
and business relationships.
(2) Objectivity – not to compromise professional or business
judgments because of bias, conflict of interest or undue influence
of others.
(3) Professional Competence and Due Care – to:
(i) attain and maintain professional knowledge and skill at the
level required to ensure that a client or employing
organization receives competent professional service,
based on current technical and professional standards and
relevant legislation; and
(ii) act diligently and in accordance with applicable technical
and professional standards.
(4) Confidentiality – to respect the confidentiality of information
acquired as a result of professional and business relationships.
(5) Professional Behaviour – to comply with relevant laws and
regulations and avoid any conduct that the Chartered Accountant
knows or should know might discredit the profession.
6. (a) (i) An earnings-based valuation of Entity A’s holding of shares in
company XYZ could be calculated as follows:
Particulars Unit
Entity XYZ’s after-tax maintainable profits (A) ` 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) ` 8,40,000
Value of a share of XYZ = ` 8,40,000 ÷ 5,000 shares = ` 168
The fair value of Entity A’s investment in XYZ’s shares is
estimated at ` 42,000 (that is, 250 shares x ` 168 per share).
(ii) Share price = ` 8,50,000 ÷ 5,000 shares = ` 170 per share.
The fair value of Entity A’s investment in XYZ shares is
estimated to be ` 42,500 (250 shares x ` 170 per share).

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(b) Either
Calculation of Net Worth:
Particulars ` in crores
Equity Share Capital 160
Securities Premium 200
General Reserve 150
Profit and Loss A/c 75
Miscellaneous Expenditure not written off (80)
Net Worth as per Section 2(57) of The Companies 505
Act, 2013
Note – Revaluation Reserve would not be included in the calculation
of net worth as per definition mentioned in section 2(57) of The
Companies Act, 2013
The company is a listed company and it does meet the net worth
threshold of ` 500 Crores. Hence it would be covered under phase I.
Hence Ind AS would be applicable to the company for accounting
periods beginning on or after 1 st April 2016.
Even if Company A is an unlisted company as company A’s net worth
is more than 500 Crores, it would be covered under Phase I of the
road map and hence Ind AS would be applicable for the accounting
periods beginning on or after 1 st April 2016.
Or
Accounting Treatment:
Trade Receivables fall within the ambit of financial assets under
Ind AS 109, Financial Instruments. Thus, the issue in question is whether
the factoring arrangement entered into with Samantha Ltd. requires
Natasha Ltd. to derecognize the trade receivables from its financial
statements.
As per Para 3.2.3, 3.2.4, 3.2.5 and 3.2.6 of Ind AS 109, Financial
Instruments, an entity shall derecognise a financial asset when, and
only when:
(a) the contractual rights to the cash flows from the financial asset
expire, or
(b) it transfers the financial asset or substantially all the risks and
rewards of ownership of the financial asset to another party.
In the given case, since the trade receivables are appearing in the
Balance Sheet of Natasha Ltd. as at 31 st March 20X2 and are
expected to be collected, the contractual rights to the cash flows have
not expired.
As far as the transfer of the risks and rewards of ownership is
concerned, the factoring arrangement needs to be viewed in its
substance, rather than its legal form. Natasha Ltd. has transferred
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the receivables to Samantha Ltd. for cash of ` 250 crores, and yet, it
remains liable for making good any shortfall between ` 250 crores and
the amount collected by Samantha Ltd. Thus, in substance,
Natasha Ltd. is effectively liable for the entire ` 250 crores, although
the shortfall would not be such an amount. Accordingly, Natasha Ltd.
retains the credit risk despite the factoring arrangement entered.
It is also explicitly stated in the agreement that Samantha Ltd. would
be liable to pay to Natasha Ltd. any amount collected more than
` 250 crores, after retaining an amount towards interest. Thus,
Natasha Ltd. retains the potential rewards of full settlement.
A perusal of the above clearly shows that substantially all the risks
and rewards continue to remain with Natasha Ltd., and hence, the
trade receivables should continue to appear in the Balance Sheet of
Natasha Ltd. The immediate payment (i.e. consideration as per the
factoring agreement) of ` 250 crores by Samantha Ltd. to Natasha
Ltd. should be regarded as a financial liability and be shown as such
by Natasha Ltd. in its Balance Sheet.
(c) (a) At 31 st March, 20X1, the end of the reporting period
Present obligation as a result of a past obligating event – There
is no obligation because there is no obligating event either for
the costs of fitting smoke filters or for fines under the legislation.
Conclusion – No provision is recognised for the cost of fitting
the smoke filters.
(b) At 31 st March, 20X2, the end of the reporting period
Present obligation as a result of a past obligating event – There
is still no obligation for the costs of fitting smoke filters because
no obligating event has occurred (the fitting of the filters).
However, an obligation might arise to pay fines or penalties
under the legislation because the obligating event has occurred
(the non-compliant operation of the factory).
An outflow of resources embodying economic benefits in
settlement – Assessment of probability of incurring fines and
penalties by non-compliant operation depends on the details of
the legislation and the stringency of the enforcement regime.
Conclusion – No provision is recognised for the costs of fitting
smoke filters. However, a provision is recognised for the best
estimate of any fines and penalties that are more likely than not
to be imposed.

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