CA FINAL NEW COURSE

FINANCIAL REPORTING

Chapter-8 (IND AS ON LIABILITIES OF THE FINANCIAL STATEMENTS)

Total Marks: 35

Part A

1. Which of the following is not covered by Ind AS 19

a) Salary

b) Allowances

c) Non monetary perquisites

d) None of the above

2.Sanat Pvt. Ltd. has a plan for the employees where employees are entitled to a benefit of
5% of final salary for each year of service before the age of 55. Compute the benefit
attributed up to 55 years and after 55?

a) 5%, 5%

b) 5%,10%

c) 5%, No Benefit

d) None of the above

3.X Packaging Ltd. has two segments, packaging division and paper division. In March 20X1,
the board of directors approved and announced a formal plan to sell the paper division in
June 20X1. Operating losses of the paper division are estimated to be approximately Rs
50,00,000 during the period from April 1, 20X1 to the expected date of disposal. Management
of X Packaging Ltd. wants to include the future operating loss of Rs 50,00,000 in a provision
for restructuring in the financial statements for the period ended March 31, 20X1. Can X
Packaging Ltd. include these operating losses in a provision for restructuring?

a) Yes

b) No

4. X Solar Power Ltd., a power company, has a present obligation to dismantle its plant after
35 years of useful life. X Solar Power Ltd. cannot cancel this obligation or transfer to third
party. X Solar Power Ltd. has estimated the total cost of dismantling at Rs 50,00,000, the
present value of which is Rs 30,00,000. Based on the facts and circumstances, X Solar Power
Ltd. considers the risk factor of 5% i.e., the risk that the actual outflows would be more from
the expected present value. How should X Solar Power Ltd. account for the obligation?

a) 31,50,000

b) 35,10,000

c) 30,50,000

d) 35,00,000
5.ABC Limited is an automobile component manufacturer. The automobile manufacturer has
specified a delivery schedule, non-adherence to which will entail a penalty. As on 31st March,
20X1, the reporting date, the manufacturer has a delivery scheduled for June 20X2. However,
the manufacturer is aware that he will not be able to meet the delivery schedule in June
20X2. Determine whether the entity has a present obligation as at 31st March, 20X1,
requiring recognition of provision.

a) Yes

b) No

(1 x 5 = 5 Marks)

Part B

Q-1 Arunachalam Ltd. operates a Defined Retirement Benefits Plan for its current and former
employees. Given the large size of the company, it engaged a firm of Actuaries for advice on the
Contribution Levels and overall Liabilities of the Plan to pay benefits.

Following details are given:

(a)On 1st April, 20X1, the actuarial valuation of the present value of the defined benefit
obligation was Rs 15 crores. On the same date, the fair value of the assets of the Defined
Benefit Plan was Rs 13 crores. On 1st April, 20X1, the annual market yield based on
Government Bonds was 5%.

(b)During the year ended 31st March, 20X2, Arunachalam made contributions of Rs 1.75 crore
into the Plan and the Plan paid out benefits of Rs 1.05 crore to retired members. Assume that
both these payments were made on 31st March, 20X2.

(c)The Actuarial Firm estimated that the current service cost for the year ended 31st March,
20X2 would be Rs 1.55 crores. On 28th February, 20X2, the rules of the Plan were amended
with retrospective effect which led to an increase in the present value of the defined benefit
obligation by Rs 37.5 lakhs from that date.

(d)During the year ended 31st March, 20X2, Arunachalam was in negotiation with employee
representatives regarding planned redundancies. These negotiations were completed shortly
before the year end and the redundancy packages were agreed. The impact of these
redundancies was to reduce the present value of the defined benefit obligation by Rs 2 crores.
Before 31st March, 20X2, Arunachalam made payments of Rs 1.875 crores to the employees
affected by the redundancies in compensation for a curtailment of their benefits. These
payments were made out of the assets of the Retirement Benefits Plan.

(e)On 31st March, 20X2, the present value of the defined benefit obligation was Rs 17 crores
and the fair value of the assets of the Defined Benefit Plan was Rs 14 crores.

Discuss how the above will be accounted in the books of Arunachalam Ltd. for the year 20X1-
20X2. Also give the extracts of financial statements affected due to above transactions.

(7 Marks)

Q-2 HVCL manufactures heavy equipment for construction industry. An order for supply of 90
equipment was received from ABIL. The unit price of the equipment was agreed at Rs 190 lakhs
each. 64 equipment was supplied during the year 20X1-20X2 and balance quantity remaining to
be supplied as on 31.3.20X2. HVCL has 5 equipment in its inventory as on 31.3.20X2. HVCL
considered that the contract was an onerous contract and therefore, the net realisable value of
inventory has been taken as value of inventory as on 31.3.20X2.

The management of HVCL contends that costs incurred towards administrative overheads,
finance charges, R & D expenses, sales overhead, head quarter expenditure etc., are considered
as period cost and hence not considered for creation of provision. Hence, the same have not
been included in the computation of unavoidable cost.
The management of HVCL has submitted the details of costs that have been considered for
creation of provision towards onerous contract:

• Material cost - includes cost of material procured, cost of freight & insurance incurred for
material procurement and handling, loading and unloading charges incurred.

• Labour cost/ Factory Overheads - includes salaries and other expenses of direct production
department, and also expenses allocated from indirect departments to direct department.

• Material Overheads - Includes salaries and other expenses (including expenses allocated
from other departments) booked under departments linked with materials like purchases,
stores and quality control.

Accordingly, provision has been made considering the above costs only. The value of provision
created for 21 remaining equipment to be produced is as per the working shown below:

Particulars Value (Rs in lakh)

(i) Cost of production (which includes material cost, labour cost/factory 199.00
overhead and material overhead)
(ii) Selling price (190.00)
(iii) Differential cost per equipment 9.00
(iv) Differential cost of Rs 9 Lakh per equipment for 21 equipment 189.00
Whether the company's accounting treatment of cost for creation of provision towards onerous
contracts is in line with the provisions of Ind AS 37?

(7 Marks)

Q-3 AKJ Ltd. is a listed company engaged in the business of manufacturing of electronic
equipment. The company has various branch offices spread out across India and has 1,000
employees.
As per the statutory requirements, gratuity shall be payable to an employee on the termination
of his employment after he has rendered continuous service for not less than five years –

(a) on his superannuation, or

(b) on his retirement or resignation, or

(c) on his death or disablement due to accident or disease.

The completion of continuous service of five years shall not be necessary where the
termination of the employment of any employee is due to death or disablement.

The amount payable is determined by a formula linked to number of years of service and last
drawn salary. The amount payable to an employee shall not exceed Rs. 10,00,000.

Compute the amount of employee benefit, if any, attributed to each year of service.

(5 Marks)

Q-4 XYZ Ltd. offers a six-month warranty on its small to medium sized equipment, which can be
put to use by the customer with no installation support. The warranty comes with the
equipment and the customer cannot purchase it separately. This equipment is typically sold at a
gross margin of 40%. XYZ Ltd. has made a provision of Rs 30,000 during the year ended 31 st
March, 20X2, which is approximately 1% of its gross margin on the sale of these equipment.
Based on past experience, it is expected that 1% of equipment sold have been returned as
faulty within the warranty period. Faulty equipment returned to XYZ Ltd. during the warranty
period are scrapped and the sale value is fully refunded to the customer.

Assuming that sales occurred evenly during the year, how should XYZ Ltd. evaluate whether any
additional warranty provision is required on equipment sold in the past as at 31st March, 20X2?
Had the warranty period been 2 years instead of six months, what additional criteria would XYZ
Ltd. need to consider?

(5 Marks)

Q-5 D Ltd is a company that owns several shops and which has a year end of 31 December
20X1. One of the shop is loss-making. At 31 December 20X1. D Ltd forecasts that this shop will
make a loss of Rs. 50,000 in the year ended 31 December 20x2.

On 31 December 20X1. D Ltd closed down a different shop. At that date, there were still three
years left to run in the shop’ lease – Lease rentals are Rs. 100.000 per annum – The landlord will
allow D Ltd to cancel the lease if it pays a one-off fee of Rs. 2,00,000.

Required:

Discuss the accounting treatment of the above in the financial statements for the year ended
31 December 20X1.

(3 Marks)

Q-6 X Ltd. has entered into an agreement with its selling agent Y, in accordance with which X
Ltd. has to pay a base percentage of commission on export sales and an additional commission
is to be paid if the export incentives are received. As per the accounting policy of X Ltd., it
recognises export incentives when actually realised, on account of the uncertainty in realising
such incentives. Export incentives have not been received for the year 20X1-20X2, however X
Ltd. is hopeful of receiving the export incentives in the year 20X2-20X3. In the financial
statements for 20X1-20X2, should X Ltd. provide for both base commission and additional
commission?

(3 Marks)