Financial Reporting

Q – 1 An entity has taken a loan facility from a bank that is to be repaid within a period of 9 months from the end of the reporting period. Prior to the end of the reporting period, the entity and the bank enter into an arrangement, whereby the existing outstanding loan will, unconditionally, roll into the new facility which expires after a period of 5 years.

a) Should the loan be classified as current or non-current in the balance sheet of the entity?

b) Will the answer be different if the new facility is agreed upon after the end of the reporting period?

c) Will the answer to (a) be different if the existing facility is from one bank and the new facility is from another bank?

d) Will the answer to (a) be different if the new facility is not yet tied up with the existing bank, but the entity has the potential to refinance the obligation?

Solution

An entity shall classify a liability as current when:

it expects to settle the liability in its normal operating cycle;
it holds the liability primarily for the purpose of trading;
the liability is due to be settled within twelve months after the reporting period; or
it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

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

Accordingly, following will be the classification of loan in the given scenarios:

a) The loan is not due for payment at the end of the reporting period. The entity and the bank have agreed for the said roll over prior to the end of the reporting period for a period of 5 years. Since the entity has an unconditional right to defer the settlement of the liability for at least twelve months after the reporting period, the loan should be classified as non-current.

(i) the original term was for a period longer than twelve months, and (ii) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are approved for issue.” As at the end of the reporting period, the entity does not have an unconditional right to defer settlement of theliability for at least twelve months after the reporting period. Hence the loan is to be classified as current.

c) Yes, loan facility arranged with new bank cannot be treated as refinancing, as the loan with the earlier bank would have to be settled which may coincide with loan facility arranged with a new bank. In this case, loan has to be repaid within a period of 9 months from the end of the reporting period, therefore, it will be classified as current liability.

d) Yes, the answer will be different and the loan should be classified as current. This is because, as per paragraph 73 of Ind AS 1, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as current.

Q – 2 On 31 March 20X1, the inventory of ABC includes spare parts which it had been supplying to a number of different customers for some years. The cost of the spare parts was Rs 10 million and based on retail prices at 31 March 20X1, the expected selling price of the spare parts is Rs 12 million. On 15 April 20X1, due to market fluctuations, expected selling price of the spare parts in stock reduced to Rs 8 million. The estimated selling expense required to make the sales would Rs 0.5 million. Financial statements were authorised by Board of Directors on 20th April 20X1. As at 31st March 20X2, Directors noted that such inventory is still unsold and lying

in the warehouse of the company. Directors believe that inventory is in a saleable condition and active marketing would result in an immediate sale. Since the market conditions have improved, estimated selling price of inventory is Rs 11 million and estimated selling expenses are same Rs. 0.5 million.

What will be the value inventory at the following dates?

a) 31st March 20X1

b) 31st March 20X2 Solution

An entity shall classify a liability as current when:

it expects to settle the liability in its normal operating cycle;
it holds the liability primarily for the purpose of trading;
the liability is due to be settled within twelve months after the reporting period; or
it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

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

Accordingly, following will be the classification of loan in the given scenarios:

b) Yes, the answer will be different if the arrangement for roll over is agreed upon after the end of the reporting period because as per paragraph 72 of Ind AS 1, “an entity classifies its financial liabilities as current when they are due to be settled within twelve months after the reporting period, even if: (a) theoriginal term was for a period longer than twelve months, and (b) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are approved for issue.” As at the end of the reporting period, the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Hence the loan is to be classified as current.

Q. 3

Night Ltd. sells beer to customers; some of the customers consume the beer in the bars run by Night Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the company takes possession of these empty bottles. The company has laid down a detailed internal record procedure for accounting for these empty bottles which are sold by the company by calling is an asset of the company;

Decide whether the stock of empty is an asset of the company;
If so, whether the stock of empty bottles existing as on the date of Balance Sheet is to be considered as inventories of the company and valued as per Ind AS-2 or to be treated as scrap and shown at realized value with corresponding credit to ‘Other Income’?

Answer

Tangible objects or intangible rights carrying probable future benefits, owned by an enterprise are called assets. Night Ltd. sell these empty bottles by calling tenders. It means furthers benefits are accured on its sale. Therefore, empty bottles are assets for the company.
As per Ind AS 2 “Valuation of Inventories”, inventories are sheets held for sale in the ordinary course of business. Stock of empty bottles existing on the Balance Sheet date is the inventory and Night Ltd. has detailed controlled recording and accounting procedure which duly signify its materiality. Hence Stock of empty bottles cannot be considered as scrap and should be valued as inventory in accordance with Ind AS 2.

Q – 4 During 20X4-X5, Cheery Limited discovered that some products that had been sold during 20X3-X4 were incorrectly included in inventory at 31st March, 20X4 at 6,500. Cheery Limited’s accounting records for 20X4-X5 show sales of 104,000, cost of goods sold of 86,500 (including 6,500 for the error in opening inventory), and income taxes of 5,250. In 20X3-X4, Cheery Limited reported:

Sales	73500
Cost of Goods Sold	- 53500
Profit before Income Taxes	20000
Income Taxes	- 6000
Profit	14000
Basic & Diluted EPS	2.8

The 20X3-X4 opening retained earnings was 20,000 and closing retained earnings was 34,000. Cheery Limited’s income tax rate was 30% for 20X4-X5 and 20X3-X4. It had no other income or expenses. Cheery Limited had 50,000 (5,000 shares of 10 each) of share capital throughout, and no other components of equity except for retained earnings. State how the above will be

treated /accounted in Cheery Limited’s Statement of profit and loss, statement

of changes in equity and in notes wherever required for current period and earlier period(s) as per relevant Ind AS.

Solution

Cheery Limited

Extract from the Statement of profit and loss

		Restated
	20X4-X5	20X3-X4
Sales	104000	73500
Cost of Goods Sold	80000	60000
Profit before Income Taxes	24000	13500
Income Taxes	7200	4050
Profit	16800	9450
Basic & Diluted EPS	3.36	1.89

Cheery Limited Statement of Changes in Equity

	Share Capital	Retained Earnings	Total
Balances at 31st March, 20X3	50000	20000	70000
Profit for the year ending 31st March, 20X4 as restated		9450	9450
Balance at 31st March, 20X4	50000	29450	79450
Profit for the year ending 31st March, 20X5		16800	16800
Balance at 31st March 20X5	50000	46250	96250

Extract from the Notes

Some products that had been sold in 20X3-X4 were incorrectly included in inventory at 31st March, 20X4 at 6,500. The financial statements of 20X3-X4 have been restated to correct this error. The effect of the restatement on those financial statements is summarized below:


Increase in cost of goods sold	- 6500
Decrease in income tax expenses	1950
Decrease in profit	- 4550
Decrease in Basic and Diluted EPS	-0.91
Decrease in Inventory	-6500
Decrease in Income Tax Payable	1950
Decrease in Equity	-4550

Q – 5 ABC Ltd. received a demand notice on 15th June, 2017 for an additional amount of 28,00,000 from the Excise Department on account of higher excise duty levied by the Excise Department compared to the rate at which the company was creating provision and depositing the same. The financial statements for the year 2016-17 are approved on 10th August, 2017. In July, 2017, the company has appealed against the demand of 28,00,000 and the company has expected that the demand would be settled at 15,00,000 only. Show how the above event will have a bearing on the financial statements for the year 2016-17. Whether these events are adjusting or non-adjusting events and explain the treatment accordingly.

Answer:

Ind AS 10 defines ‘Events after the Reporting Period’ as follows:

Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are approved by the Board of Directors in case of a company, and, by the corresponding approving authority in case of any other entity for issue.

Two types of events can be identified:

those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and
those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period)

In the instant case, the demand notice has been received on 15th June, 2017, which is between the end of the reporting period and the date of approval of financial statements. Therefore, it is an event after the reporting period. This demand for additional amount has been raised because of higher rate of excise duty levied by the Excise Department in respect of goods already manufactured during the reporting period. Accordingly, condition exists on 31st March, 2017, as the goods have been manufactured during the reporting period on which additional excise duty has been levied and this event has been confirmed by the receipt of demand notice. Therefore, it is an adjusting event.

In accordance with the principles of Ind AS 37, the company should make a provision in the financial statements for the year 2016-17, at best estimate of the expenditure to be incurred, i.e., 15,00,000.

Q – 6 The notes to the financial statements say that plant and equipment is held under the ‘cost model’. However, property which is owner occupied is revalued annually to fair value. Changes in fair value are sometimes reported in profit or loss but usually in ‘other comprehensive income’. Also, the amounts of depreciation charge do plant and equipment as a percentage of its carrying amount is much higher than for owner occupied property. Another note states that property owned by ABC Ltd. but rent out to others is depreciated annually and not fair valued. Mr. Y is of the opinion that there is no consistent treatment of PPE items in the accounts.

Elucidate how all these treatments comply with the relevant Ind AS.

Solution:

The accounting treatment of the majority of tangible non-current assets is governed by Ind AS 16 ‘Property, Plant and Equipment’. Ind AS 16 states that the accounting treatment of PPE is determined on a class byclass basis. For this purpose, property and plant would be regarded as separate classes. Ind AS 16 requires that PPE is measured using either the cost model or the revaluation model. This model is applied on a class by class basis and must be applied consistently within a class. Ind AS 16 states that when the revaluation model applies, surpluses are recorded in other comprehensive income, unless they are cancelling out a deficit which has previously been reported in profit or loss, in which case it is reported in profit or loss. Where the revaluation results in a deficit, then such deficits are reported in profit or loss, unless they are cancelling out a surplus which has previously been reported in other comprehensive income, in which case they are reported in other comprehensive income.

These two reasons together explain why the depreciation charge of a property as a percentage of its carrying amount tends to be much lower than for plant.

Properties which are held for investment purposes are not accounted for under Ind AS 16, but under Ind AS 40 ‘Investment Property’. As per Ind AS 40, investment properties should be accounted for under a cost model. ABC Ltd. had applied the cost model and thus our investment properties are treated differently from the owner occupied property which is annually to fair value.

Q – 7

B Pvt. Ltd. has a post-employment medical plan which will reimburse 20% of an employee’s postemployment medical costs if the employee leaves after more than ten and less than twenty years of service and 50% of those costs if the employee leaves after twenty or more years of service. Compute the benefit attributed for last 20 years, 10 and 20 years and within 10 years?

ANSWER:

As per Ind AS 19, the benefit will be attributed till the period the employee service will lead to no material amount of benefits. And service in later years will lead to a materially higher level of benefit than in earlier years. Therefore, for employees expected to leave after twenty or more years, the entity attributes benefit on a straight-line basis. Service beyond twenty years will lead to no material amount of further benefits.

Therefore, the benefit attributed to each of the first twenty years is 2.5% of the present value of the expected medical costs (50% divided by twenty).

For employees expected to leave between ten and twenty years, the benefit attributed to each of the first ten years is 2% (20 % divided by 10) of the present value of the expected medical costs. For these employees, no benefit is attributed to service between the end of the tenth year and the estimated date of leaving. For employees expected to leave within ten years, no benefit is attributed.

Q – 8 A company has a scheme for payment of settlement allowance to retiring employees. Under the scheme, retiring employees are entitled to reimbursement of certain travel expenses for class they are entitled to as per company rule and to a lump-sum payment to cover expenses on food and stay during the travel.

Alternatively, employees can claim a lump sum amount equal to one month pay last drawn. The company’s contentions in this matter are:

Settlement allowance does not depend upon the length of service of employee. It is restricted to employee’s eligibility under the Travel rule of the company or where option for lump-sum payment is exercised, equal to the last pay drawn.
Since it is not related to the length of service of the employees, it is accounted for on claim basis. State whether the contentions of the company are correct as per relevant Accounting Standard. Give reasons in support of your answer.

Answer:

The present case falls under the category of defined benefit scheme under Para 49 of AS 15 (Revised) “Employee Benefits”. The said para encompasses cases where payment promised to be made to an employee at or near retirement presents significant difficulties in the determination of periodic charge to the statement of profit and loss. The contention of the Company that the settlement allowance will be accounted for on claim basis is not correct even if company’s obligation under the scheme is uncertain and requires estimation.

In estimating the obligation, assumptions may need to be made regarding future conditions and events, which are largely outside the company’s control. Thus,

Settlement allowance payable by the company is a defined retirement benefit, covered by AS 15 (Revised).
A provision should be made every year in the accounts for the accruing liability on account of settlement allowance. The amount of provision should be calculated according to actuarial valuation.
Where, however, the amount of provision so determined is not material, the company can follow some other method of accounting for settlement allowances.

Q – 9 How will you recognize and present the grants received from the Government in the following cases as per Ind AS 20?

A Ltd. received one acre of land to setup a plant in backward area (fair value of land Rs 12 lakh and acquired value by Government is Rs 8 Iakhs).
B Ltd. received an amount of loan for setting up a plant at concessional rate of interest from the Government.
D Ltd. received an amount of Rs 25 lakh for immediate start-up of a business without any condition.
S Ltd. received Rs 10 lakh for purchase of machinery costing RS 80 lakh. Useful life of machinery is 10 years. Depreciation on this machinery is to be charged on straight line basis.
Government gives a grant of Rs 25 lakh to U Limited for research and development of medicine for breast cancer, even though similar medicines are available in the market but are expensive. The company is to ensure by developing a manufacturing process over a period of two years so that thecost comes down at least to 50%

Solution

As per the amendment made by MCA in Ind AS 20 on 21st September, 2018, alternatively if the company is following the policy of recognising non-monetary grants at nominal value, the company will not recognize any government grant. Land will be shown in the financial statements at Rs 1.

The land and government grant should be recognized by A Ltd. at fair value of Rs 12,00,000 and this government grant should be presented in the books as deferred income. (Refer footnote 1)
As per para 10A of Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’, loan at concessional rates of interest is to be measured at fair value and recognised as per Ind AS 109. Value of concession is the difference between the initial carrying value of the loan determined in accordance with Ind AS 109, and the proceeds received. The benefit is accounted for as Government grant.
Rs 25 lakh has been received by D Ltd. for immediate start-up of business. Since this grant is given to provide immediate financial support to an entity, it should be recognised in the Statement of Profit and Loss immediately with disclosure to ensure that its effect is clearly understood, as per para 21 of Ind AS 20.
Rs 10 lakh should be recognized by S Ltd. as deferred income and will be transferred to profit andloss over the useful life of the asset. In this case, Rs 1,00,000 [Rs 10 lakh / 10 years] should becredited to profit and loss each year over period of 10 years. (Refer footnote 2)
As per para 12 of Ind AS 20, the entire grant of Rs 25 lakh should be recognized immediately asdeferred income and charged to profit and loss over a period of two years based on the related costsfor which the grants are intended to compensate provided that there is reasonable assurance that ULtd. will comply with the conditions attached to the grant.

Q – 10 Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to deliver goods in exchange for total consideration of USD 50 million and receives an upfront payment of USD 20 million on this date. The functional currency of the supplier is INR. The goods are delivered and revenue is recognized on 31st March, 2018. USD 30 million is received on 1st April, 2018 in full and final settlement of the purchase consideration.

State the date of transaction for advance consideration and recognition of revenue. Also state the amount of revenue in INR to be recognized on the date of recognition of revenue. The exchange rates on 1st January, 2018 and 31st March, 2018 are Rs 72 per USD and Rs 75 per USD respectively.

Solution

This is the case of Revenue recognised at a single point in time with multiple payments. As per the guidance given in Appendix B to Ind AS 21:

A Ltd. will recognise a non-monetary contract liability amounting Rs1,440 million, by translating USD 20 million at the exchange rate on 1st January, 2018 ieRs72 per USD.

A Ltd. will recognise revenue at 31st March, 2018 (that is, the date on which it transfers the goods to the customer).

A Ltd. determines that the date of the transaction for the revenue relating to the advance consideration of USD 20 million is 1st January, 2018. Applying paragraph 22 of Ind AS 21, A Ltd. determines that the date of the transaction for the remainder of the revenue as 31st March, 2018.

On 31st March, 2018, A Ltd. will:

derecognise the non-monetary contract liability of USD 20 million and recognise USD 20 million of revenue using the exchange rate as at 1st January, 2018 ieRs72 per USD; and
recognise revenue and a receivable for the remaining USD 30 million, using the exchange rate on 31st March, 2018 ieRs75 per USD.
The receivable of USD 30 million is a monetary item, so it should be translated using the closing rate until the receivable is settled.

Q – 11 Global Limited, an Indian company acquired on 30th September, 20X1 70% of the share capital of Mark Limited, an entity registered as company in Germany. The functional currency of Global Limited is Rupees and its financial year end is 31st March, 20X2.

The fair value of the net assets of Mark Limited was 23 million EURO and the purchase consideration paid is 17.5 million EURO on 30th September, 20X1. The exchange rates as at 30th September, 20X1 was ` 82 / EURO and at 31st March, 20X2 was ` 84 / EURO. What is the value at which the goodwill has to be recognised in the financial statements of Global Limited as on 31st March, 20X2?
Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million EURO during the year ended 31st March, 20X2. The exchange rate on the date of purchase by Global Limited was ` 83 / EURO and on 31st March, 20X2 was ` 84 / EURO. The entire goods purchased from Mark Limited are unsold as on 31st March, 20X2. Determine the unrealised profit to be eliminated in the preparation of consolidated financial statements.

Solution

Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42. In this case the amount of goodwill will be as follows:

Net identifiable asset Dr. - 23 million

Goodwill (bal. fig.) Dr.	1.4 million
To Bank	17.5 million
To NCI	(23 x 30%)	6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x 84 = 117.6 million

2. Particulars

Sale price of Inventory – 4.20 Unrealised Profit [a] – 1.80

Exchange rate as on date of purchase of Inventory [b] 83/Euro Unrealized profit to be eliminated [a x b] - 149.40 million

As per para 39 of Ind AS 21 “income and expenses for each statement of profit and loss presented (ie including comparatives) shall be translated at exchange rates at the dates of the transactions”.

In the given case, purchase of inventory is an expense item shown in the statement profit and loss account.

Hence, the exchange rate on the date of purchase of inventory is taken for calculation of unrealized profit which is to be eliminated on the event of consolidation.

Q – 12

Alpha Ltd. on 1stApril 20X1 borrowed 9% ₹30,00,000 to finance the construction of two qualifying assets. Construction started on 1st April 20X1. The loan facility was availed on 1st April 20X1 and was utilized as follows with remaining funds invested temporarily at 7%.

Factory Building		Office Building
1st April 20X1	5,00,000	10,00,000
1st October 20X1	5,00,000	10,00,000

Calculate the cost of the asset and the borrowing cost to be capitalized.

Solution:

Particulars	Factory Building	Office Building
Borrowing Costs	(10,00,000*9%) 90,000	(20,00,000*9%) 1,80,000
Less: Investment Income	(5,00,0007%6/12)	(10,00,0007%6/12)
	(17,500)	(35,000)
	72,500	1,45,000
Cost of the asset:
Expenditure incurred	10,00,000	20,00,000
Borrowing Costs	72,500	1,45,000
Total	10,72,500	21,45,000

Q – 13 Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in ABC Limited. PQR Limited has two subsidiaries namely P Limited and Q Limited. ABC Limited has two subsidiaries namely A Limited and B Limited. Mr. KM is one of the Key management personnel in PQR Limited.

a. Determine the entity to whom exemption from disclosure of related party transactions is to be given. Also examine the transactions and with whom such exemption applies.

b. What are the disclosure requirements for the entity which has availed the exemption?

Answer:

a. As per para 18 of Ind AS 24, ‘Related Party Disclosures’, if an entity had related party transactions during the periods covered by the financial statements, it shall disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements.

However, as per para 25 of the standard a reporting entity is exempt from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with:

a government that has control or joint control of, or significant influence over, the reporting entity; and
another entity that is a related party because the same government has control or joint control of, or significant influence over, both the reporting entity and the other entity

According to the above paras, for Entity P’s financial statements, the exemption in paragraph 25 applies to:

Transactions with Government Uttar Pradesh State Government; and
Transactions with Entities PQR and ABC and Entities Q, A and B.

Similar exemptions are available to Entities PQR, ABC, Q, A and B, with the transactions with UP State Government and other entities controlled directly or indirectly by UP State Government. However, that exemption does not apply to transactions with Mr. KM. Hence, the transactions with Mr. KM needs to be disclosed under related party transactions.

b. It shall disclose the following about the transactions and related outstanding balances referred to in paragraph 25:

a. The name of the government and the nature of its relationship with the reporting entity (ie control, joint control or significant influence);

b. The following information in sufficient detail to enable users of the entity’s financial statements to understand the effect of related party transactions on its financial statements:

The nature and amount of each individually significant transaction; and
For other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent.

Q – 14 An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a three-year term, and are issued at par with a face value of Rs 1,000 per bond, giving total proceeds of Rs 2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. The entity has an option to settle the principal amount of the convertible bonds in ordinary shares or in cash.

When the bonds are issued, the prevailing market interest rate for similar debt without a conversion option is 9 per cent. At the issue date, the market price of one ordinary share is Rs3. Income tax is ignored.

Calculate basic and diluted EPS when

Profit attributable to ordinary equity holders of the parent entity Year 1

Ordinary shares outstanding Convertible bonds outstanding

Rs 1,000,000

1,200,000

2,000

Solution:

Allocation of proceeds of the bond issue:

Liability component (Refer Note 1)	Rs 1,848,122
Equity component	Rs151,878
	Rs2,000,000

The liability and equity components would be determined in accordance with Ind AS 32. These amounts are recognised as the initial carrying amounts of the liability and equity components. The amount assigned to the issuer conversion option equity element is an addition to equity and is not adjusted.

Basic earnings per share Year 1:

Rs 1,000,000/ 1,200,000= Rs 0.83 per ordinary share Diluted earnings per share Year 1:

It is presumed that the issuer will settle the contract by the issue of ordinary shares. The dilutive effect is therefore calculated in accordance with the Standard.

Rs1,000,000 + Rs166,331/1,200,000 + 500,000= Rs 0.69 per ordinary share Notes:

This represents the present value of the principal and interest discounted at 9% – Rs 2,000,000 payable at the end of three years; Rs 120,000 payable annually in arrears for three years.
Profit is adjusted for the accretion of Rs 166,331 (Rs 1,848,122 × 9%) of the liability because of the passage of time. However, it is assumed that interest @ 6% for the year has already been adjusted.
500,000 ordinary shares = 250 ordinary shares x 2,000 convertible bonds

Q – 15 An entity reports quarterly, earns 1,50,000 pre-tax profit in the first quarter but expects to incur losses of 50,000 in each of the three remaining quarters. The entity operates in a jurisdiction in which its estimated average annual income tax rate is 30%.

The management believes that since the entity has zero income for the year, its income-tax expense for the year will be zero. State whether the management’s views are correct. If not, then calculate the tax expense for each quarter as well as for the year as per Ind AS 34.

Solution

As per para 30 (c) of Ind AS 34 ‘Interim Financial Reporting’, income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

Accordingly, the management’s contention that since the net income for the year will be zero no income tax expense shall be charged quarterly in the interim financial report, is not correct. The following table shows the correct income tax expense to be reported each quarter in accordance with Ind AS 34:

Period	Pre-Tax Earnings	Effective Tax Rate	Tax Expense
First Quarter	150000	30%	45000
Second Quarter	-50000	30%	-15000
Third Quarter	-50000	30%	-15000
Fourth Quarter	-50000	30%	-15000
Annual	0	0

Q – 16

X Ltd. purchased a Property, Plant and Equipment four years ago for Rs. 150 lakhs and depreciates it at 10% p.a. on straight line method. At the end of the fourth year, it has revalued the asset at Rs. 75 lakhs and has written off the loss on revaluation to the profit and loss account. However, on the date of revaluation, the market price is Rs. 67.50 lakhs and expected disposal costs are Rs. 3 lakhs. What will be the treatment in respect of impairment loss on the basis that fair value for revaluation purpose is determined by market value and the value in use is estimated at Rs. 60 lakhs? (5 Marks)

SOLUTION

Treatment of Impairment Loss As per para 57 of AS 28 “Impairment of assets”, if the recoverable amount (higher of net selling price and its value in use) of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount. In the given case, net selling price is Rs. 64.50 lakhs (Rs. 67.50 lakhs – Rs. 3 lakhs) and value in use is Rs. 60 lakhs. Therefore, recoverable amount will be Rs. 64.50 lakhs.

Impairment loss will be calculated as Rs. 10.50 lakhs [Rs. 75 lakhs (Carrying Amount after revaluation - Refer Working Note)

less Rs. 64.50 lakhs (Recoverable Amount)].

Thus impairment loss of Rs.10.50 lakhs should be recognised as an expense in the Statement of Profit and Loss immediately since there was downward revaluation of asset which was already charged to Statement of Profit and Loss.

Working Note:

Calculation of carrying amount of the Property, Plant and Equipment at the end of the fourth year on revaluation

(Rs. in lakhs)

Purchase price of a Property, Plant and Equipment

Less: Depreciation for four years [(150 lakhs / 10 years) x 4 years] Carrying value at the end of fourth year

Less: Downward revaluation charged to profit and loss account

Revalued carrying amount

150.00

(60.00)

90.00

(15.00)

75.00

Q – 17

Sun Limited has entered into a binding agreement with Moon Limited to buy a custom- made machine for Rs 4,00,000. At the end of 2017-18, before delivery of the machine, Sun Limited had to change its method of production. The new method will not require the machine ordered which is to be scrapped after delivery.

The expected scrap value is nil. Given that the asset is yet to be delivered, should any liability be recognized for the potential loss? If so, give reasons for the same, the amount of liability as well as the accounting entry.

SOLUTION

As per Ind AS 37, Executory contracts are contracts under which

neither party has performed any of its obligations; or
both parties have partially performed their obligations to an equal extent.

The contract entered by Sun Ltd. is an executory contract, since the delivery has not yet taken place.

Ind AS 37 is applied to executory contracts only if they are onerous.

Ind AS 37 defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

As per the facts given in the question, Sun Ltd. will not require the machine ordered. However, since it is a binding agreement, the entity cannot exit / cancel the agreement. Further, Sun Ltd. has to scrap the machine after delivery at nil scrap value.

These circumstances do indicate that the agreement/contract is an onerous contract. Therefore, a provision should be made for the onerous element of Rs 4,00,000 ie the full cost of the machine.

Onerous Contract Provision Expense A/c

To Provision for Onerous Contract Liability A/c

(Being asset to be received due to binding agreement recognized)

Profit and Loss Account (Loss due to onerous contract)

To Onerous Contract Provision Expense A/c

(Being loss due to onerous contract recognized and asset derecognsied)

Dr.

4,00,000

Q – 18

In 2017, an entity involved in nuclear activities recognises a provision for decommissioning costs of Rs 300 million. The provision is estimated using the assumption that decommissioning will take place in 60–70 years’ time. However, there is a possibility that it will not take place until 100–110 years’ time, in which case the present value of the costs will be significantly reduced. Draft the note.

Answer:

A provision of Rs 300 million has been recognised for decommissioning costs. These costs are expected to be incurred between 2077 and 2087; however, there is a possibility that decommissioning will not take place until 2117–2127. If the costs were measured based upon the expectation that they would not be incurred until 2117–2127 the provision would be reduced to Rs 136 million. The provision has been estimated using existing technology, at current prices, and discounted using a real discount rate of 2%.

Q - 19

An entity is involved in a dispute with a competitor, who is alleging that the entity has infringed patents and is seeking damages of ` 100 million. The entity recognises a provision for its best estimate of the obligation, but discloses none of the information required by the standard.

Draft the note.

Answer

Litigation is in process against the company relating to a dispute with a competitor who alleges that the company has infringed patents and is seeking damages of Rs 100 million. The information usually required by Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, is not disclosed on the grounds that it can be expected to prejudice seriously the outcome of the litigation. The directors are of the opinion that the claim can be successfully resisted by the company.

Q – 20

X Ltd. is operating in the telecom industry. During the Financial Year 20X1-20X2, the Income Tax authorities sent a scrutiny assessment notice under Section 143(2) of the Income-tax Act, 1961, in respect to return filed under Section 139 of this Act for Previous Year 20X0- 20X1 (Assessment Year 20X1-20X2) and initiated assessment proceedings on account of a deduction claimed by the company which in the view of the authorities was inadmissible. During the financial year 20X1-20X2 itself, the assessment proceedings were completed and the assessing officer did not allow the deduction and raised a demand of Rs 1,00,00,000 against the company. The company contested such levy and filed an appeal with the Appellate authority. At the end of the financial year 20X1-20X2, the appeal had not been heard. The company is not confident whether that the company would win the appeal. However, the company was advised by its legal counsel that on a similar matter, two appellate authorities of different jurisdictions had given conflicting judgements, one in favour of the assessee and one against the assessee. The legal counsel further stated it had more than 50% chance of winning the appeal. Please advise how the company should account for these transactions in the financial year 20X1-20X2.

Solution:

Ind AS 37 provides that in rare cases it not clear whether there is a present 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.

In the present case, the company is not confident that whether it would win the appeal. By taking into account the opinion of the legal counsel, it is not sure that whether the company would win the appeal. On the basis of such evidence, it is more likely than not that a present obligation exists at the end of the reporting period. Therefore, the entity should recognise a provision. The company should provide for a liability of Rs 1,00,00,000.

Q – 21

In the year to March, 2018, ABC Ltd. spent considerable amount on designing a new product. ABC Ltd. spent the six months from April, 2017 to September, 2017 researching into the feasibility of the product. Mr. X charged these research costs to profit or loss. From October, 2017, A Ltd. was confident that the product would be commercially successful and A Ltd. is fully committed to finance its future development. A Ltd. spent remaining part of the year in developing the product, which is expected to start from selling in the next few months. These development costs have been recognised as intangible assets in the Balance

Sheet. State whether the treatment done by Mr. X is correct when all these research and development costs are design costs. Justify your answer with reference to relevant IndAS. Provide answers to the query raised by the managing director Mr. Y as per Ind AS.

Solution:

As per Ind AS 38 ‘Intangible Assets’, the treatment of expenditure on intangible items depends on how it arose. Internal expenditure on intangible items incurred during research phase cannot be recognised as an asset. Once it can be demonstrated that a development project is likely to be technically feasible, commercially viable, overall profitable and can be adequately resourced, then future expenditure on the project can be recognised as an intangible asset. The difference in the treatment of expenditure upto 30th September, 2017 and expenditure after that date is due to the recognition phase ie. research or development phase.

Q – 22

QA Ltd. had on 1st April, 20X1 granted 1,000 share options each to 2,000 employees. The options are due to vest on 31st March, 20X4 provided the employee remains in employment till 31st March, 20X4. On 1st April, 20X1, the Directors of Company estimated that 1,800 employees would qualify for the option on 31st March, 20X4. This estimate was amended to 1,850 employees on 31st March, 20X2 and further amended to 1,840 employees on 31st March, 20X3. On 1st April, 20X1, the fair value of an option was 1.20. The fair value increased to 1.30 as on 31st March, 20X2 but due to challenging business conditions, the fair value declined thereafter. In September, 20X2, when the fair value of an option was 0.90, the Directors repriced the option and this caused the fair value to increase to 1.05. Trading conditions improved in the second half of the year and by 31st March, 20X3 the fair value of an option was1.25. QA Ltd. decided that additional cost incurred due to repricing of the options on 30th September, 20X2 should be spread over the remaining vesting period from 30th September, 20X2 to 31st March, 20X4.

The Company has requested you to suggest the suitable accounting treatment for these transactions as on 31st March, 20X3.

Solution

Paragraph 27 of Ind AS 102 requires the entity to recognise the effects of repricing that increase the total fair value of the share-based payment arrangement or are otherwise beneficial to the employee.

If the repricing increases the fair value of the equity instruments granted paragraph B43(a) of Appendix B requires the entity to include the incremental fair value granted (ie the difference between the fair value of the repriced equity instrument and that of the original equity instrument, both estimated as at the date ofthe modification) in the measurement of the amount recognised for services received as consideration for the equity instruments granted. If the repricing occurs during the vesting period, the incremental fair value granted is included in the measurement of the amount recognised for services received over the period from the repricing date until the date when the repriced equity instruments vest, in addition to the amount based on the grant date fair value of the original equity instruments, which is recognised over the remainder of the original vesting period.

Accordingly, the amounts recognised in years 1 and 2 are as follows:

Year

Calculation

Compensation Exp. for Period

Cumulative Compensation Exp

{1850 x 1000 x1.2} x 1/3

740000

(1840 x 1000 x [(1.2x2/3) +{(1.05-

0.90)x0.5/1.5}] – 740000

824000

1564000

Note: Year 3 calculations have not been provided as it was not required in the question

Q – 23

Moon Ltd. acquires 75% of Star Limited on 1st April, 2017 for consideration transferred Rs 60 lakh. Moon Limited intends to recognize the Non-Controlling Interest (NCI) at proportionate share of fair value of identifiable assets. With the assistance of a suitably qualified valuation professional, Moon Limited measures the identifiable net assets of Star Limited at Rs 90 lakh. Moon Limited performs a review and determines that the business combination did not include any transactions that should be accounted for separately from the business combination.

State whether the procedures followed by Moon Limited and the resulting measurements are appropriate or not. Also calculate the bargain purchase gain in the process.

Solution

The amount of Star Ltd.’s identifiable net assets exceeds the fair value of the consideration transferred plus the fair value of the NCI in Star Ltd.’s, resulting in an initial indication of a gain on a bargain purchase.

Accordingly, Moon Ltd. reviews the procedures it used to identify and measure the identifiable net assets acquired, to measure the fair value of both the NCI and the consideration transferred, and to identify transactions that were not part of the business combination.

Following that review, Moon Ltd. can conclude that the procedures followed and the resulting measurements were appropriate.

Identifiable net assets

Less: Consideration transferred NCI (90,00,000 x 25%)

Gain on bargain purchase

90,00,000

(60,00,000)

(22,50,000)

7,50,000

Q – 24

CK Ltd. prepares the financial statement under Ind AS for the quarter year ended 30th June, 2018. During the 3 months ended 30th June, 2018 following events occurred:

On 1st April, 2018, the Company has decided to sell one of its divisions as a going concern following a recent change in its geographical focus. The proposed sale would involve the buyer acquiring the non-monetary assets (including goodwill) of the division, with the Company collecting any outstanding trade receivables relating to the division and settling any current liabilities.

On 1st April, 2018, the carrying amount of the assets of the division were as follows: Purchased Goodwill – Rs 60,000

Property, Plant & Equipment (average remaining estimated useful life two years) - Rs 20,00,000

Inventories - Rs 10,00,000

From 1st April, 2018, the Company has started to actively market the division and has received number of serious enquiries. On 1st April, 2018 the directors estimated that they would receive Rs 32,00,000 from the sale of the division. Since 1st April, 2018, market condition has improved and as on 1st August, 2018 the Company received and accepted a firm offer to purchase the division for Rs 33,00,000. The sale is expected to be completed on 30th September, 2018 and Rs 33,00,000 can be assumed to be a reasonable estimate of the value of the division as on 30th June, 2018. During the period from 1st April to 30th June inventories of the division costing Rs 8,00,000 were sold for Rs 12,00,000. At 30th June, 2018, the total cost of the inventories of the division was Rs 9,00,000. All of these inventories have an estimated net realisable value that is in excess of their cost. The Company has approached you to suggest how the proposed sale will be reported in the interim financial statements for the quarter ended 30th June, 2018 giving relevant explanations.

Solution:

The decision to offer the division for sale on 1st April, 2018 means that from that date the division has been classified as held for sale. The division available for immediate sale is being actively marketed at a reasonable price and the sale is expected to be completed within one year.

The consequence of this classification is that the assets of the division will be measured at the lower of their existing carrying amounts and their fair value less cost to sell. Here the division shall be measured at their existing carrying amount i.e.Rs 30,60,000 since it is less than the fair value less cost to sell Rs 32,00,000. The increase in expected selling price will not be accounted for since earlier there was no impairment to division held for sale. The assets of the division need to be presented separately from other assets in the balance sheet. Their major classes should be separately disclosed either on the face of the balance sheet or in the notes.

The Property, Plant and Equipment shall not be depreciated after 1st April, 2018 so its carrying value at 30th June, 2018 will be Rs 20,00,000 only. The inventories of the division will be shown at Rs 9,00,000.

The division will be regarded as discontinued operation for the quarter ended 30th June, 2018. It represents a separate line of business and is held for sale at the year end.

The Statement of Profit and Loss should disclose, as a single amount, the post-tax profit or loss of the division on classification as held for sale.

Further, as per Ind AS 33, EPS will also be disclosed separately for the discontinued operation.

Q – 25 NAV Limited granted a loan of Rs 120 lakh to OLD Limited for 5 years @ 10% p.a. which is Treasury bond yield of equivalent maturity. But the incremental borrowing rate of OLD Limited is 12%. In this case, the loan is granted to OLD Limited at below market rate of interest. Ind AS 109 requires that a financial asset or financial liability is to be measured at fair value at the initial recognition. Should the transaction price be treated as fair value? If not, find out the fair value. What is the accounting treatment of the difference between the transaction price and the fair value on initial recognition in the book of NAV Ltd.? Present value factors at 12%:

Year	1	2	3	4	5
PVF	0.892	0.797	0.712	0.636	0.567

Solution:

Since the loan is granted to OLD Ltd at 10% i.e. below market rate of 12%. It will be considered as loan given at off market terms. Hence the Fair value of the transaction will be lower from its transaction price & not the transaction price.

Calculation of fair value

Year

Future cash flow (in lakh)

Discounting factor @ 12%

Present value (in lakh)

120+12=132

0.892

0.797

0.712

0.636

0.567

10.704

9.564

8.544

7.632

74.844

111.288

The fair value of the transaction is Rs 111.288 lakh.

Since fair value is based on level 1 input or valuation technique that uses only data from observable markets, difference between fair value and transaction price will be recognized in Profit and Loss as fair value loss i.e Rs 120 lakh– Rs 111.288 lakh= Rs 8.712 lakh.

Note: One may also calculate the above fair value by the way of annuity on interest amount rather than separate calculation

Q – 26 An entity uses the weighted average cost formula to assign costs to inventories and cost of goods sold for financial reporting purposes, but the reports provided to the chief operating decision maker use the FirstIn, First-Out (FIFO) method for evaluating the performance of segment operations. Which cost formula should be used for Ind AS 108 disclosure purposes?

Solution:

The entity should use First-In, First-Out (FIFO) method for its Ind AS 108 disclosures, even though it uses the weighted average cost formula for measuring inventories for inclusion in its financial statements. Where chief operating decision maker uses only one measure of segment asset, same measure should be used to report segment information. Accordingly, in the given case, the method used in preparing the financial information for the chief operating decision maker should be used for reporting under Ind AS 108.

However, reconciliation between the segment results and results as per financial statements needs to be given by the entity in its segment report.

Q – 27 An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for 20,00,000. P Ltd. intends to use the said machinery to start a food processing unit. The food processing industry is highly competitive and P Ltd. has very little experience in the said industry.

P Ltd. pays a non-refundable deposit of 1,00,000 at inception of the contract and enters into a long-term financing agreement with G Ltd. for the remaining 95 per cent of the agreed consideration which it intends to pay primarily from income derived from its food processing unit as it lacks any other major source of income. The financing arrangement is provided on a non-recourse basis, which means that if P Ltd. Defaults then G Ltd. can repossess the machinery but cannot seek further compensation from P Ltd., even if the full value of the amount owed is not recovered from the machinery. The cost of the machinery for G Ltd. is Rs 12,00,000. P Ltd. obtains control of the machinery at contract inception.

When should G Ltd. recognise revenue from sale of machinery to P Ltd. in accordance with Ind AS 115?

Answer:

As per paragraph 9 of Ind AS 115, “An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;
the entity can identify each party’s rights regarding the goods or services to be transferred;
the entity can identify the payment terms for the goods or services to be transferred;
the contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and
it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession”.

Paragraph (5) above, requires that for revenue to be recognised, it should be probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In the given case, it is not probable that G Ltd. will collect the consideration to which it is entitled in exchange for the transfer of the machinery. P Ltd.’s ability to pay may be uncertain due to the following reasons:

P Ltd. intends to pay the remaining consideration (which has a significant balance) primarily from income derived from its food processing unit (which is a business involving significant risk because of high competition in the said industry and P Ltd.'s little experience);
P Ltd. lacks sources of other income or assets that could be used to repay the balance consideration; and
P Ltd.'s liability is limited because the financing arrangement is provided on a non-recourse basis.

In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.

Further, para 15 states that when a contract with a customer does not meet the criteria in paragraph 9 and an entity receives consideration from the customer, the entity shall recognise the consideration received as revenue only when either of the following events has occurred:

a) the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable; or

b) the contract has been terminated and the consideration received from the customer is non- refundable. Para 16 states that an entity shall recognise the consideration received from a customer as a liability until one of the events in paragraph 15 occurs or until the criteria in paragraph 9 are subsequently met. Depending on the facts and circumstances relating to the contract, the liability recognised represents the entity’s obligation to either transfer goods or services in the future or refund the consideration received. In either case, the liability shall be measured at the amount of consideration received from the customer.

In accordance with the above, in the given case G Ltd. should account for the non-refundable deposit of Rs 1,00,000 payment as a deposit liability as none of the events described in paragraph 15 have occurred— that is, neither the entity has received substantially all of the consideration nor it has terminated the contract.

Consequently, in accordance with paragraph 16, G Ltd. Will continue to account for the initial deposit as well as any future payments of principal and interest as a deposit liability until the criteria in paragraph 9 are met (i.e. the entity is able to conclude that it is probable that the entity will collect the consideration) or one of the events in paragraph 15 has occurred. Further, G Ltd. will continue to assess the contract in accordance with paragraph 14 to determine whether the criteria in paragraph 9 are subsequently met or whether the events in paragraph 15 of Ind AS 115 have occurred.

Q – 28 An entity enters into 1,000 contracts with customers. Each contract includes the sale of one product for Rs. 50 (1,000 total products × Rs. 50 = Rs. 50,000 total consideration). Cash is received when control of a product transfers. The entity's customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund. The entity's cost of each product is Rs. 30.

The entity applies the requirements in Ind AS 115 to the portfolio of 1,000 contracts because it reasonably expects that, in accordance with paragraph 4, the effects on the financial statements from applying these requirements to the portfolio would not differ materially from applying the requirements to the individual contracts within the portfolio. Since the contract allows a customer to return the products, the consideration received from the customer is variable. To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method (see paragraph 53(a) of Ind AS 115) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled.

Using the expected value method, the entity estimates that 970 products will not be returned.The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit. Determine the amount of revenue, refund liability and the asset to be recognised by the entity for the said contracts.

Solution

The entity also considers the requirements in paragraphs 56–58 of Ind AS 115 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration of Rs. 48,500 (Rs. 50 × 970 products not expected to be returned) can be included in the transaction price. The entity considers the factors in paragraph 57 of Ind AS 115 and determines that although the returns are outside the entity's influence, it has significant experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within a short time frame (ie the 30-day return period). Thus, the entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognised (i.e. Rs. 48,500) will not occur as the uncertainty is resolved (i.e. over the return period). The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit. Upon transfer of control of the 1,000 products, the entity does not recognise revenue for the 30 products that it expects to be returned. Consequently, in accordance with paragraphs 55 and B21 of Ind AS 115, the entity recognises the following:

revenue of Rs. 48,500 (Rs. 50 × 970 products not expected to be returned);
a refund liability of Rs. 1,500 (Rs. 50 refund × 30 products expected to be returned); and
an asset of Rs. 900 (Rs. 30 × 30 products for its right to recover products from customers on settling the refund liability).

Q – 29 Comment on the following by quoting references from appropriate Ind AS.

i. DS Limited holds some vacant land for which the use is not yet determined. the land is situated in a prominent area of the city where lot of commercial complexes are coming up and there is no legal restriction to convert the land into a commercial land.

The company is not interested in developing the land to a commercial complex as it is not its business objective. Currently the land has been let out as a parking lot for the commercial complexes around. The Company has classified the above property as investment property. It has approached you, an expert in valuation, to obtain fair value of the land for the purpose of disclosure under Ind AS. On what basis will the land be fair valued under Ind AS?

ii. DS Limited holds equity shares of a private company. In order to determine the fair value' of the shares, the company used discounted cash flow method as there were no similar shares available in the market.

Under which level of fair value hierarchy will the above inputs be classified?

What will be your answer if the quoted price of similar companies were available and can be used for fair valuation of the shares?

Solution

i. As per Ind AS 113, a fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible, as follows:

A use that is physically possible takes into account the physical characteristics of the asset that market participants would take into account when pricing the asset (eg the location or size of a property).
A use that is legally permissible takes into account any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (eg the zoning regulations applicable to a property).
A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of convertingthe asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that use.

Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. However, an entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset.

To protect its competitive position, or for other reasons, an entity may intend not to use an acquired nonfinancial asset actively or it may intend not to use the asset according to its highest and best use.

Nevertheless, the entity shall measure the fair value of a non-financial asset assuming its highest and best use by market participants.

In the given case, the highest best possible use of the land is to develop a commercial complex. Although developing a business complex is against the business objective of the entity, it does not affect the basis of fair valuation as Ind AS 113 does not consider an entity specific restriction for measuring the fair value.

Also, its current use as a parking lot is not the highest best use as the land has the potential of being used for building a commercial complex.

Therefore, the fair value of the land is the price that would be received when sold to a market participant who is interested in developing a commercial complex.

ii. As per Ind AS 113, unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. The unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.

In the given case, DS Limited adopted discounted cash flow method, commonly used technique to value shares, to fair value the shares of the private company as there were no similar shares traded in the market. Hence, it falls under Level 3 of fair value hierarchy.

Level 2 inputs include the following:

quoted prices for similar assets or liabilities in active markets.
quoted prices for identical or similar assets or liabilities in markets that are not active.
inputs other than quoted prices that are observable for the asset or liability.

If an entity can access quoted price in active markets for identical assets or liabilities of similar companies which can be used for fair valuation of the shares without any adjustment, at the measurement date, then it will be considered as observable input and would be considered as Level 2 inputs.

Q – 30 An asset is sold in 2 different active markets (a market in which transaction for the asset or liability takes place with sufficient frequency and volume to provide pricing information on an ongoing basis) at different prices.

An entity enters into transactions in both markets and can access the price in those markets for the asset at the measurement date.

In Market A:

The sale price of the asset is Rs. 26, transaction cost is Rs. 3 and the cost to transport the asset to Market A is Rs. 2 (i.e., the net amount that would be received is Rs. 21).

In Market B:

The sale price of the asset is Rs. 25, transaction cost is Re. 1 and the cost to transport the asset to Market B is Rs. 2 (i.e., the net amount that would be received is Rs. 22).

Determine the fair value of the asset by supporting your answer with proper reason.

Solution

If Market A is the principal market for the sale of asset (i.e., the market with the greatest volume and level of activity for the asset), the fair value of the asset would be measured using the price that would be received in that market, after taking into account transport cost of Rs.24. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs.

If neither market is the principal market for the sale of asset, the fair value of the asset would be measured using the price in the most advantageous market. The most advantageous market is the market that maximises the amount that would be received by selling the asset, after taking into account transport cost (i.e., the net amount that would be received in the respective markets).

Since the entity would maximise the net amount that would be received for the asset in Market B, the fair value of the asset would be measured using the price in that market ie. sale of asset Rs. 25 less transport cost Rs. 2, resulting in a fair value measurement of Rs. 23.

Q – 31 ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the previous GAAP, the contributions received by ABC Ltd. from the government (which holds 100% shareholding in ABC Ltd.) which is in the nature of promoters’ contribution have been recognised in capital reserve and treated as part of shareholders’ funds in accordance with the provisions of AS 12, Accounting for Government Grants.

State whether the accounting treatment of the grants in the nature of promoters’ contribution as per AS 12 is also permitted under Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance. If not, then what will be the accounting treatment of such grants recognised in capital reserve as per previous GAAP on the date of transition to IndAS.

Solution:

Paragraph 2 of Ind AS 20, “Accounting for Government Grants and Disclosure of Government Assistance” inter alia states that the Standard does not deal with government participation in the ownership of the entity. Since ABC Ltd. is a Government company, it implies that government has 100% shareholding in the entity.

Accordingly, the entity needs to determine whether the payment is provided as a shareholder contribution or as a government. Equity contributions will be recorded in equity while grants will be shown in the Statement of Profit and Loss.

Where it is concluded that the contributions are in the nature of government grant, the entity shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101 ‘First Time Adoption of Ind AS’. Ind AS 20 requires all grants to be recognised as income on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. Unlike AS 12, Ind AS 20 requires the grant to be classified as either a capital or an income grant and does not permit recognition of government grants in the nature of promoter’s contribution directly to shareholders’ funds.

Where it is concluded that the contributions are in the nature of shareholder contributions and are recognised in capital reserve under previous GAAP, the provisions of paragraph 10 of Ind AS 101 would be applied which states that, which states that except in certain cases, an entity shall in its opening Ind AS

Balance Sheet:

recognise all assets and liabilities whose recognition is required by Ind AS;
not recognise items as assets or liabilities if Ind AS do not permit such recognition;
reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind AS; and
applyInd AS in measuring all recognised assets and liabilities.”

Accordingly, as per the above requirements of paragraph 10(c) in the given case, contributions recognized in the Capital Reserve should be transferred to appropriate category under ‘Other Equity’ at the date of transition to Ind AS.

Q – 32 Mr. X, is the financial controller of ABC Ltd., a listed entity which prepares consolidated financial statements in accordance with Ind AS. Mr. X has recently produced the final draft of the financial statements of ABC Ltd. for the year ended 31stMarch, 2018 to the managing director for approval. Mr. Y, who is not an accountant, had raised following queries from Mr. X after going through the draft financial statements:

One of the notes to the financial statements gives details of purchases made by ABC Ltd. from PQR Ltd. during the period. Mr. Y own 100% of the shares in PQR Ltd. However, he feels that there is no requirement for any disclosure to be made in ABC Ltd.’s financial statements since the transaction is carried out on normal commercial terms and is totally insignificant to ABC Ltd., as it represents less than 1% of ABC Ltd.’ s purchases.
The notes to the financial statements say that plant and equipment is held under the ‘cost model’. However, property which Is owner occupied is revalued annually to fair value. Changes in fair value are sometimes reported in profit or loss but usually in ‘other comprehensive income’. Also, the amounts of depreciation charge do plant and equipment as a percentage of its carrying amount is much higher than for owner occupied property. Another note states that property owned by ABC Ltd. but rent out to others is depreciated annually and not fair valued. Mr. Y is of the opinion that there is no consistent treatment of PPE items in the accounts. Elucidate how all these treatments comply with the relevant Ind AS.
In the year to March, 2018, ABC Ltd. spent considerable amount on designing a new product. ABC Ltd. spent the six months from April, 2017 to September, 2017 researching into the feasibility of the product. Mr. X charged these research costs to profit or loss. From October, 2017, A Ltd. was confident that the product would be commercially successful and A Ltd. is fully committed to finance its future development. A Ltd. spent remaining part of the year in developing the product, which is expected to start from selling in the next few months. These development costs have been recognised as in tangible assets in the Balance Sheet. State whether the treatment done by Mr. X is correct when all these research and development costs are design costs. Justify your answer with reference to relevant IndAS.

Provide answers to the queries raised by the managing director Mr. Y as per Ind AS.

Solution

Ongoing through the queries raised by the Managing Director Mr. Y, the financial controller Mr. X explained the notes and reasons for their disclosures as follows:

Related parties are generally characterized by the presence of control or influence between the two parties. Ind AS 24 ‘Related Party Disclosures’ identifies related parties as, inter alia, key management personnel and companies controlled by key management personnel. On this basis, PQR Ltd. is a related party of ABC Ltd.

The transaction is required to be disclosed in the financial statements of ABC Ltd. since Mr. Y is Key Management personnel of ABC Ltd. Also at the same time, it owns 100% shares of PQR Ltd. ie. he controls PQR Ltd. This implies that PQR Ltd. is a related party of ABC Ltd.

Where transactions occur with related parties, Ind AS 24 requires that details of the transactions are disclosed in a note to the financial statements. This is required even if the transactions are carried out on an arm’s length basis.

Transactions with related parties are material by their nature, so the fact that the transaction may be numerically insignificant to ABC Ltd. does not affect the need for disclosure.

2. The accounting treatment of the majority of tangible non-current assets is governed by Ind AS 16 ‘Property, Plant and Equipment’. Ind AS 16 states that the accounting treatment of PPE is determined on a class by class basis. For this purpose, property and plant would be regarded as separate classes. Ind AS 16 requires that PPE is measured using either the cost model or the revaluation model. This model is applied on a class by class basis and must be applied consistently within a class. Ind AS 16 states that when the revaluation model applies, surpluses are recorded in other comprehensive income, unless they are cancelling out a deficit which has previously been reported in profit or loss, in which case it is reported in profit or loss. Where the revaluation results in a deficit, then such deficits are reported in profit or loss, unless they are cancelling out a surplus which has previously been reported in other comprehensive income, in which case they are reported in other comprehensive income.

According to Ind AS 16, all assets having a finite useful life should be depreciated over that life. Where property is concerned, the only depreciable element of the property is the buildings element, since land normally has an indefinite life. The estimated useful life of a building tends to be much longer than for plant. These two reasons together explain why the depreciation charge of a property as a percentage of its carrying amount tends to be much lower than for plant. Properties which are held for investment purposes are not accounted for under Ind AS 16, but under Ind AS 40 ‘Investment Property’. As per Ind AS 40, investment properties should be accounted for under a cost model. ABC Ltd. had applied the cost model and thus our investment properties are treated differently from the owner occupied property which is annually to fair value.

Q – 33 OMN Ltd has a subsidiary MN Ltd. OMN Ltd provides a loan to MN Ltd at 8% interest to be paid annually. The loan is required to be paid whenever demanded back by OMN Ltd.

How should the loan be classified in the financial statements of OMN Ltd? Will it be any different for MN Ltd?

Solution

The demand feature might be primarily a form of protection or a tax-driven feature of the loan. Both parties might expect and intend that the loan will remain outstanding for the foreseeable future. If so, the instrument is, in substance, long-term in nature, and accordingly, OMN Ltd would classify the loan as a non-current asset.

However, OMN Ltd would classify the loan as a current asset if both the parties intend that it will be repaid within 12 months of the reporting period. MN Ltd would classify the loan as current because it does not have the right to defer repayment for more than 12 months, regardless of the intentions of both the parties. The classification of the instrument could affect initial recognition and subsequent measurement.

This might require the entity’s management to exercise judgement, which could require disclosure under judgements and estimates.

Q – 34 An entity reports quarterly, earns Rs. 1,50,000 pre-tax profit in the first quarter but expects to incur losses of Rs. 50,000 in each of the three remaining quarters. The entity operates in a jurisdiction in which its estimated average annual income tax rate is 30%.

The management believes that since the entity has zero income for the year, its income-tax expense for the year will be zero. State whether the management’s views are correct or not? If not, then calculate the tax expense for each quarter as well as for the year as per Ind AS 34.

Answer As illustrated in para 30 (c) of Ind AS 34 ‘Interim financial reporting’, income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

Period

Pre-tax earnings (in `)

Effective tax rate

Tax expense (in `)

First Quarter Second Quarter Third Quarter Fourth Quarter

Annual

1,50,000

(50,000)

30%

45,000

(15,000)

Q – 35 Whether change in functional currency of an entity represents a change in accounting policy?

Solution

Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring are not changes in accounting policies.

As per Ind AS 21, ‘functional currency’ is the currency of the primary economic environment in which the entity operates.

Paragraphs 9-12 of Ind AS 21 list factors to be considered by an entity in determining its functional currency. It is recognised that there may be cases where the functional currency is not obvious. In such cases, Ind AS 21 requires the management to use its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

Paragraph 13 of Ind AS 21 specifically notes that an entity’s functional currency reflects the underlying transactions, events and conditions that are relevant to it. Accordingly, once determined, the functional currency is not changed unless there is a change in those underlying transactions, events and conditions. Thus, functional currency of an entity is not a matter of an accounting policy choice.

In view of the above, a change in functional currency of an entity does not represent a change in accounting policy and Ind AS 8, therefore, does not apply to such a change. Ind AS 21 requires that when there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.

Q – 36 An entity has presented certain material liabilities as non-current in its financial statements for periods upto 31st March, 20X1. While preparing annual financial statements for the year ended 31st March, 20X2, management discovers that these liabilities should have been classified as current. The management intends to restate the comparative amounts for the prior period presented (i.e., as at 31st March, 20X1). Would this reclassification of liabilities from non-current to current in the comparative amounts be considered to be correction of an error under Ind AS 8? Would the entity need to present a third balance sheet?

Solution

As per paragraph 41 of Ind AS, errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements do not comply with Ind AS if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows. Potential current period errors discovered in that period are corrected before the financial statements are approved for issue. However, material errors are sometimes not discovered until a subsequent period, and these prior period errors are corrected in the comparative information presented in the financial statements for that subsequent period.

In accordance with the above, the reclassification of liabilities from non-current to current would be considered as correction of an error under Ind AS 8. Accordingly, in the financial statements for the year ended 31st March, 20X2, the comparative amounts as at 31st March, 20X1 would be restated to reflect the correct classification.

Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the preceding period in addition to the minimum comparative financial statements, if, inter alia, it makes a retrospective restatement of items in its financial statements and the restatement has a material effect on the information in the balance sheet at the beginning of the preceding period.

Accordingly, the entity should present a third balance sheet as at the beginning of the preceding period, i.e., as at 1st April, 20X0 in addition to the comparatives for the financial year 20X0-X1

Q – 37

While preparing interim financial statements for the half-year ended 30th September, 20X1, an entity notes that there has been an under-accrual of certain expenses in the interim financial statements for the first quarter ended 30th June, 20X1. The amount of under accrual is assessed to be material in the context of interim financial statements. However, it is expected that the amount would be immaterial in the context of the annual financial statements. The management is of the view that there is no need to correct the error in the interim financial statements considering that the amount is expected to be immaterial from the point of view of the annual financial statements. Whether the management’s view is acceptable?

Solution:

Paragraph 41 of Ind AS 8, inter alia, states that financial statements do not comply with Ind AS if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.

As regards the assessment of materiality of an item in preparing interim financial statements, paragraph 25 of Ind AS 34, Interim Financial Statements, states as follows:

“While judgement is always required in assessing materiality, this Standard bases the recognition and disclosure decision on data for the interim period by itself for reasons of understandability of the interim figures. Thus, for example, unusual items, changes in accounting policies or estimates, and errors are recognised and disclosed on the basis of materiality in relation to interim period data to avoid misleading inferences that might result from nondisclosure. The overriding goal is to ensure that an interim financial report includes all information that is relevant to understanding an entity’s financial position and performance during the interim period.”

As per the above, while materiality judgements always involve a degree of subjectivity, the overriding goal is to ensure that an interim financial report includes all the information that is relevant to an understanding of the financial position and performance of the entity during the interim period. It is therefore not appropriate to base quantitative assessments of materiality on projected annual figures when evaluating errors in interim financial statements.

Accordingly, the management is required to correct the error in the interim financial statements since it is assessed to be material in relation to interim period data.

Q – 38 In the plant of PQR Ltd., there was a fire on 10.05.20X1 in which the entire plant was damaged and the loss of Rs 40,00,000 is estimated. The claim with the insurance company has been filed and a recovery of Rs 27,00,000 is expected.

The financial statements for the year ending 31.03.20X1 were approved by the Board of Directors on 12th June 20X1. Show how should it be disclosed?

Solution

In the instant case, since fire took place after the end of the reporting period, it is a non- adjusting event. However, in accordance with paragraph 21 of Ind AS 10, disclosures regarding nonadjusting event should be made in the financial statements, i.e., the nature of the event and the expected financial effect of the same.

With regard to going concern basis followed for preparation of financial statements, the company needs to determine whether it is appropriate to prepare the financial statements on going concern basis, since there is only one plant which has been damaged due to fire. If the effect of deterioration in operating results and financial position is so pervasive that management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so, preparation of financial statements for the F.Y.20X0-X1 on going concern assumption may not be appropriate. In that case, the financial statements may have to be prepared on a basis other than going concern.

Q – 39 ABC Ltd. acquired 5% equity shares of XYZ Ltd. for Rs 10 crore in the year 20X1-X2. The company is in process of preparing the financial statements for the year 20X2-X3 and is assessing the fair value at subsequent measurement of the investment made in XYZ Ltd. Based on the observable input, the ABC Ltd. identified a similar nature of transaction in which PQR Ltd. acquired 20% equity shares in XYZ Ltd. for Rs 60 crore. The price of such transaction was determined on the basis of Comparable Companies Method (CCM)- Enterprise Value (EV) / EBITDA which was 8. For the current year, the EBITDA of XYZ Ltd. is Rs 40 crore. At the time of acquisition, the valuation was determined after considering 5% of liquidity discount and 5% of non-controlling stake discount. What will be the fair value of ABC Ltd.’s investment in XYZ Ltd. as on the balance sheet date?

Determination of Enterprise Value of XYZ Ltd

Particulars	Rs in crore
EBITDA as on the measurement date	40
EV/EBITDA multiple as on the date of valuation	8
Enterprise value of XYZ Ltd.	320

Determination of subsequent measurement of XYZ Ltd.

Particulars	Rs in crore
Enterprise Value of XYZ Ltd.	320
ABC Ltd.’s share based on percentage of holding (5% of 320)	16
Less: Liquidity discount & Non-controlling stake discount (5%+5%=10%)	(1.6)
Fair value of ABC Ltd.’s investment in XYZ Ltd.	14.4

Q – 40 You are a senior consultant of your firm and are in process of determining the valuation of KK Ltd. You have determined the valuation of the company by two approaches i.e. Market Approach and Income approach and selected the highest as the final value. However, based upon the discussion with your partner you have been requested to assign equal weights to both the approaches and determine a fair value of shares of KK Ltd. The details of the KK Ltd. are as follows:

Particulars	Rs in crore
Valuation as per Market Approach	5268.2
Valuation as per Income Approach	3235.2
Debt obligation as on Measurement date	1465.9
Surplus cash & cash equivalent	106.14
Fair value of surplus assets and Liabilities	312.4
Number of shares of KK Ltd.	8,52,84,223 shares

Determine the Equity value of KK Ltd. as on the measurement date on the basis of above details.

Answer

Equity Valuation of KK Ltd.

Particulars	Weights	(Rs in crore)
As per Market Approach	50	5268.2
As per Income Approach	50	3235.2
Enterprise Valuation based on weights (5268.2 x 50%) + (3235.2 x 50%)		4,251.7
Less: Debt obligation as on measurement date		(1465.9)
Add: Surplus cash & cash equivalent		106.14
Add: Fair value of surplus assets and liabilities		312.40
Enterprise value of KK Ltd.		3204.33
No. of shares		85,284,223
Value per share		375.72

Q – 41 As per Ind AS 2, selling costs are excluded from the cost of inventories and are required to be recognized as an expense in the period in which these are incurred. Whether the distribution costs would now be included in the cost of inventories under Ind AS 2.

Solution

Selling and distribution costs are generally used as single term because both are related, as selling costs are incurred to effect the sale and the distribution costs are incurred by the seller to complete a sale transaction by making the goods available to the buyer from the point of sale to the point at which the buyer takes possession. Since these costs are not related to bringing the goods to their present location and condition, the same are not included in the cost of inventories. Accordingly, though the word ‘distribution costs’ is not specifically mentioned in Ind AS 2, these costs would continue to be excluded from the cost of inventories.

Q – 42 X Limited started Construction on a building for its own use on 1st April, 20X0. The following costs are incurred:

Purchase price of land	30,00,000
Stamp duty & legal fee	2,000,00
Architect fee	2,000,00
Site preparation	50,000
Materials	10,000,00
Direct labour cost	4,000,00
General overheads	1,000,00

Other relevant information: Material costing Rs 1,00,000 had been spoiled and therefore wasted and a further Rs 1,50,000 was spent on account of faulty design work. As a result of these problems, work on the building was stopped for two weeks during November, 20X0 and it is estimated that Rs 22,000 of the labour cost relate to that period. The building was completed on 1st January, 20X1 and brought in use 1st April, 20X1. X Limited had taken a loan of Rs 40,00,000 on 1st April, 20X0 for construction of the building (which meets the definition of qualifying asset as per Ind AS 23). The loan carried an interest rate of 8% per annum and is repayable on 1st April, 20X2.

Calculate the cost of the building that will be included in tangible non-current asset as an addition?

Only those costs which are directly attributable to bringing the asset into working condition for its intended use should be included. Administration and general costs cannot be included. Cost of abnormal amount of wasted material/ labor or other resources is not included as per para 22 of Ind AS 16. Here, the cost of spoilt materials and faulty designs are assumed to be abnormal costs. Also it is assumed that the wastages and labor charges incurred are abnormal in nature.

Hence, same are also not included in the cost of PPE. Amount to be included in Property, Plant and Equipment (PPE):

Solution

	Rs.
Purchase price of land	30,00,000
Stamp duty & legal fee	2,00,000
Architect fee	2,00,000
Site preparation	50,000
Material (10,00,000 – 2,50,000)	7,50,000
Direct labour cost (4,00,000 – 22,000)	3,78,000
General overheads	Nil
Interest* (Old Solution it was added at 240,000)	Nil
Total to be capitalized	45,78,000

*Period for Construction of building is not a substantial period (i.e. 9 months), borrowing cost are not eligible for capitalisation.

Q – 43 XYZ Ltd., on 1st December, 20X3, purchased 100 sheep from a market for Rs 5,00,000. The transaction cost of 2% on the market price of the sheep was incurred which was paid by the seller. Sheep’s fair value increased from Rs 500,000 to Rs 600,000 on 31st March, 20X4.

Transaction cost of 2% would have to be incurred by the seller to get the sheep to the relevant market.

Determine the fair value on the date of purchase and the reporting date and pass necessary journal entries thereon.

Solution

The fair value less cost to sell of sheep’s on the date of purchase would be Rs 4,90,000 (5,00,000-10,000).

Expense of Rs 10,000 would be recognised in profit and loss.

On date of Purchase

Biological Asset

4,90,000

Loss on initial recognition

Dr.

10,000

To Bank

(Being biological asset

purchased)

5,00,000

On 31st March, 20X4 sheep would be measured at Rs 5,88,000 as Biological Asset (6,00,000- 12,000) and gain of Rs 98,000 (5,88,000 - 4,90,000) would be recognised in profit or loss.

At the end of reporting period

Biological Asset

To Gain – Change in fair value

Dr.

98,000

(Being change in fair value recognised at the end of reporting period)

Q – 44 S Ltd is a company based out of India which got listed on Bombay Stock Exchange in the financial year ended 31st March, 20X1. Since then the company’s operations have increased considerably. The company was engaged in the business of trading of motor cycles. The company only deals in imported Motor cycles. These motor cycles are imported from US.

After importing the motor cycles, these are sold across India through its various distribution channels. The company had only private customers earlier but the company also started corporate tie-up and increased its customer base to corporates also. The purchase of the motor cycles are in USD because the vendor(s) from whom these motor cycles are purchased those are all located in US. All other operating expenses of the company are incurred in India only because of its location and they generally happen to be in INR Currently, its customers are both corporate and private in the ratio of 70:30 approximately. The USD denominated prices of motor cycles in India are different from those in other countries.The company is also expecting that in the coming years, its customers base will increase significantly in India and the current proportion may also change. Currently, the invoices are raised to the corporate customers in USD for the purpose of hedging. However, private customers don’t accept the same arrangement and hence invoices are raised to them in INR.

What would be the functional currency of this company?

Solution

The functional currency of S Ltd is INR.

Following factors need to be considered for determination of functional currency: Primary indicators

i) the currency that mainly influences

sales prices for its goods and services. This will often be the currency in which sales prices are denominated and settled; and of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
labour, material and other costs of providing goods and services. This will often be the currency in which these costs are denominated and settled.

ii) Other factors that may provide supporting evidence to determine an entity’s functional currency are (Secondary indicators):

the currency in which funds from financing activities (i.e. issuing debt and equity instruments) are generated; and
the currency in which receipts from operating activities are usually retained.

Primary and secondary indicators should be used for the determination of functional currency of S Ltd. giving priority to primary indicators.

The analysis is given below:

Ind AS 21 gives greater emphasis to the currency of the economy that determines the pricing of transactions, as opposed to the currency in which transactions are denominated. Sales prices for motor cycles are mainly influenced by the competitive forces and regulations in India.

The market for motor cycles depends on the economic situation in India and the company is in competition with importers of other motor cycle brands. Even though 70% of the revenue of the company is denominated in USD, Indian economic conditions are the main factors affecting the prices. This is evidenced by the fact that USD denominated sales prices in India are different from USD denominated sales prices for the same motor cycles in other countries.

Management is able to determine the functional currency because the revenue is clearly influenced by the Indian economic environment and expenses are mixed.

On the basis of above analysis, INR should be considered as the functional currency of the company.

Q – 45 Entity A, whose functional currency is `, has a foreign operation, Entity B, with a Euro functional currency. Entity B issues to A perpetual debt (i.e. it has no maturity) denominated in euros with an annual interest rate of 6 per cent. The perpetual debt has no issuer call option or holder put option. Thus, contractually it is just an infinite stream of interest payments in Euros. In A's consolidated financial statements, can theperpetual debt be considered, in accordance with Ind AS 21.15, a monetary item "for which settlement isneither planned nor likely to occur in the foreseeable future" (i.e. part of A's net investment in B), with the exchange gains and losses on the perpetual debt therefore being recorded in equity?

Solution:

Yes, as per Ind AS 21 net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation.

As per para 15 of Ind AS 21, an entity may have a monetary item that is receivable from or payable to a foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity’s net investment in that foreign operation. Such monetary items may include long-term receivables or loans. They do not include trade receivables or trade payables.

Analysis on the basis of above mentioned guidance

Through the origination of the perpetual debt, A has made a permanent investment in B. The interest payments are treated as interest receivable by A and interest payable by B, not as repayment of the principal debt. Hence, the fact that the interest payments are perpetual does not mean that settlement is planned or likely to occur. The perpetual debt can be considered part of A's net investment in B.

In accordance with para 15 of Ind AS 21, the foreign exchange gains and losses should be recorded in equity at the consolidated level because settlement of that perpetual debt is neither planned nor likely to occur.

Q – 46 AB Limited owns 50% voting shares in XY Limited. The board of directors of XY Limited consists of six members of which three directors are nominated by AB Limited and three other investors nominate one director each pursuant to a Shareholders’ Agreement among them. All decisions concerning ‘relevant activities’ of XY Limited are taken at its board meeting by a simple majority. As per the articles of association, one of the directors nominated by AB Limited chairs the board meetings and has a casting vote in the event that the directors cannot reach a majority decision. Whether AB Limited has control over XY Limited?

Solution

Paragraph 11 of Ind AS 110 states that, “power arises from rights. Sometimes assessing power is straight forward, such as when power over an investee is obtained directly and solely from the voting rights granted by equity instruments such as shares, and can be assessed by considering the voting rights from those shareholdings. In other cases, the assessment will be more complex and require more than one factor to be considered, for example when power results from one or more contractual arrangements”. Further, paragraph B40 of Appendix B to Ind AS 110 inter alia states that other decisionmaking rights, in combination with voting rights, can give an investor the current ability to direct the relevant activities. For example, the rights specified in a contractual arrangement in combination with voting rights may be sufficient to give an investor the current ability to direct the manufacturing processes of an investee or to direct other operating or financing activities of an investee that significantly affect the investee’s returns. In the instant case, AB Limited has (though its nominee director who chairs board meetings) a casting vote at the board meetings which along with its 50% (three out of six) of the normal voting rights gives it power to take decisions concerning relevant activities, even if the nominee directors of other investors do not concur with it on any matter. Thus, AB Limited has the current ability to direct the relevant activities of XY Limited through control over board decisions and hence it controls XY Limited.

Q – 47 A fund is set up by a corporate entity that runs a power plant. The corporate entity (which owns all of the units in the fund) needs to keep funds available in case of a technical failure of the power plant. The entity does not have the expertise to manage the fund, so it appoints a third party asset manager. The entity can remove the fund manager on four months’ notice. The fund invests in traded equity and debt instruments (as set out in the investment management agreement and fund founding documents) and its maximum exposure to one investment is not more than 11% of monies invested. The objective of the fund is to generate returns either from dividends and interest or from selling the instruments. The fund does not invest in the power industry and the corporate entity has no other relationship with the fund; for example, it does not have options to buy any of the investments made by the fund.

The fund reports fair value information internally and to its corporate parent; and its performance is evaluated against a benchmark stock exchange index. The fund issues units that are redeemable at any time. The redeemable shares pay the net asset value of the fund when liquidated, and they are accounted for by the fund as equity under Ind AS 32. The units do not carry voting rights. Is the fund an investment entity? How does the corporate entity account for its interest in the fund?

Solution

The fund is an investment entity. It meets the definition of an investment entity to the extent that:

It provides investment management services to its investor.
Its business purpose is to invest in debt and equity instruments for capital appreciation and investment income.
It measures and evaluates the performance of its investments on a fair value basis.

The fund displays two of the four typical characteristics

The fund holds multiple investments.
The fund only has one investor but in these circumstances that is not inconsistent with its overall business purpose and with the definition of an investment entity.
The fund does not have unrelated investors, because there is only one investor; but, again, in these circumstances this is not inconsistent with the definition of an investment entity.
Units issued by the fund entitle the holder to a proportionate share of the net asset value of the fund.

Two of the characteristics are not satisfied because the fund has a single investor. When examining all the facts and circumstances, however, the fund concludes that it is an investment entity and that the failure to meet two of the typical characteristics is not inconsistent with the definition.

The corporate entity is not an investment entity. It consolidates the fund (including any controlled investments made by the fund).

Q – 48 H Limited has a subsidiary, S Limited and an associate, A Limited. The three companies are engaged in different lines of business. These companies are using the following cost formulas for their valuation in accordance with Ind AS 2, Inventories:

Name of the Company	Cost formula used
H Limited	FIFO
S Limited, A Limited	Weighted average cost

Whether H Limited is required to value inventories of S Limited and A Limited also using FIFO formula in preparing its consolidated financial statements?

Solution

Paragraph 19 of Ind AS 110 states that a parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances. Paragraph B87 of Ind AS 110 states that if a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to that group member’s financial statements in preparing the consolidated financialstatements to ensure conformity with the group’s accounting policies.

It may be noted that the above mentioned paragraphs requires an entity to apply uniform accounting policies “for like transactions and events in similar circumstances”. If any member of the group follows a different accounting policy for like transactions and events in similar circumstances, appropriate adjustments are to be made in preparing consolidated financial statements. Paragraph 5 of Ind AS 8 defines accounting policies as “the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.”

Ind AS 2 requires inventories to be measured at the lower of cost and net realisable value. Paragraph 25 of Ind AS 2 states that the cost of inventories shall be assigned by using FIFO or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified.

Elaborating on the requirements of paragraph 25, paragraph 26 of Ind AS 2 illustrates that inventories used in one operating segment may have a use to the entity different from the same type of inventories used in another operating segment. However, a difference in geographical location of inventories (or in the respective tax rules), by itself, is not sufficient to justify the use of different cost formulas.

Paragraph 36(a) of Ind AS 2 requires disclosure of “the accounting policies adopted in measuring inventories, including the cost formula used”. Thus, as per Ind AS 2, the cost formula applied in valuing inventories is also an accounting policy.

As mentioned earlier, as per Ind AS 2, different cost formulas may be justified for inventories of a different nature or use. Thus, if inventories of S Limited and A Limited differ in nature or use from inventories of H Limited, then use of cost formula (weighted average cost) different from that applied in respect of inventories of H Limited (FIFO) in consolidated financial statements may be justified. In other words, in such a case, no adjustment needs to be made to align the cost formula applied by S Limited and A Limited to cost formula applied by H Limited.

Q – 49 A Limited, an Indian Company has a foreign subsidiary, B Inc. Subsidiary B Inc. has taken a long term loan from a foreign bank, which is repayable after in the year 20X9. However, during the year ended 31st March, 20X2, it breached one of the conditions of the loan, as a consequence of which the loan became repayable on demand on the reporting date.

Subsequent to year end but before the approval of the financial statements, B Inc. rectified the breach and the bank agreed not to demand repayment and to let the loan run for its remaining period to maturity as per the original loan terms. While preparing its standalone financial statements as per IFRS, B Inc. has classified this loan as a current liability in accordance with IAS 1, Presentation of Financial Statements. Whether A limited is required to classify such loan as current while preparing its consolidated financial statement under Ind AS?

Solution

As per paragraph 74 of Ind AS 1, where there is a breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, the entity does not classify the liability as current, if the lender agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment as a consequence of the breach.

The above position under Ind AS 1 differs from the corresponding position under IAS 1. As per paragraph 74 of IAS 1, when an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional right to defer its settlement for at least twelve months after that date.

Accordingly, the loan liability recognised as current liability by B Inc. in its standalone financial statements prepared as per IFRS, should be aligned as per Ind AS in the consolidated financial statements of A Limited and should be classified as non-current in the consolidated financial statements of A Limited in accordance with Ind AS 1.

Q – 50 Entity X is owned by three institutional investors – A Limited, B Limited and C Limited – holding 40%, 40% and 20% equity interest respectively. A contractual arrangement between A Limited and B Limited gives them joint control over the relevant activities of Entity X. It is determined that Entity X is a joint operation (and not a joint venture). C Limited is not a party to the arrangement between A Limited and B Limited.

However, like A Limited and B Limited, C Limited also has rights to the assets, and obligations for the liabilities, relating to the joint operation in proportion of its equity interest in Entity X. Would the manner of accounting to be followed by A Limited and B Limited on the one hand and C Limited on the other in respect of their respective interests in Entity X be the same or different?

Solution

Paragraphs 26 and 27 of Ind AS 111 state that in its separate financial statements, a joint operator or joint venture shall account for its interest in:

a joint operation in accordance with paragraphs 20–22;
a joint venture in accordance with paragraph 10 of Ind AS 27, Separate Financial Statements.

In its separate financial statements, a party that participates in, but does not have joint control of, a joint arrangement shall account for its interest in:

a joint operation in accordance with paragraph 23;
a joint venture in accordance with Ind AS 109, unless the entity has significant influence over the joint venture, in which case it shall apply paragraph 10 of Ind AS 27.”

Paragraphs 20 and 21 of Ind AS 111 state that a joint operator shall recognise in relation to its interest in a joint operation:

its assets, including its share of any assets held jointly;
its liabilities, including its share of any liabilities incurred jointly;
its revenue from the sale of its share of the output arising from the joint operation;
its share of the revenue from the sale of the output by the joint operation; and
its expenses, including its share of any expenses incurred jointly.

A joint operator shall account for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the Ind ASs applicable to the particular assets, liabilities, revenues and expenses.”

Paragraph 23 of Ind AS 111 states that a party that participates in, but does not have joint control of a joint operation shall also account for its interest in the arrangement in accordance with paragraphs 20–22 if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation.

If a party that participates in, but does not have joint control of, a joint operation does not have rights to the assets, and obligations for the liabilities, relating to that joint operation, it shall account for its interest in the joint operation in accordance with the Ind ASs applicable to that interest. In the given case, all three investors (A Limited, B Limited and C Limited) share in the assets and liabilities of the joint operation in proportion of their respective equity interest. Accordingly, both A Limited and B Limited (which have joint control) and C Limited (which does not have joint control) shall apply paragraphs 20-22 in accounting for their respective interests in Entity X in their respective separate financial statements as well as consolidated financial statements.

Q – 51 Inventories (lower of cost and net realisable value)8.00XYZ Limited has a plant with the normal capacity to produce 10,00,000 units of a product per annum and the expected fixed overhead is Rs. 30,00,000, Fixed overhead, therefore based on normal capacity is Rs. 3 per unit.

Determine Fixed overhead as per Ind AS 2 'Inventories' if

Actual production is 7,50,000 units.
Actual production is 15,00,000 units.

Ans:

Actual production is 7,50,000 units: Fixed overhead is not going to change with the change in output and will remain constant at Rs. 30,00,000, therefore, overheads on actual basis is Rs. 4 per unit (30,00,000 / 7,50,000). Hence, by valuing inventory at Rs. 4 each for fixed overhead purpose, it will be overvalued and the losses of Rs. 7,50,000 will also be included in closing inventory leading to a higher gross profit then actually earned.

Therefore, it is advisable to include fixed overhead per unit on normal capacity to actual production (7,50,000 x 3) Rs. 22,50,000 and balance Rs. 7,50,000 shall be transferred to Profit & Loss Account. Actual production is 15,00,000 units: Fixed overhead is not going to change with the change in output and will remain constant at Rs. 30,00,000, therefore, overheads on actual basis is Rs. 2 (30,00,000 / 15,00,000).

Hence by valuing inventory at Rs. 3 each for fixed overhead purpose, we will be adding the element of cost to inventory which actually has not been incurred. At Rs. 3 per unit, total fixed overhead comes to Rs. 45,00,000 whereas, actual fixed overhead expense is only Rs. 30,00,000. Therefore, it is advisable to include fixed overhead on actual basis (15,00,000 x 2)

Rs. 30,00,000.

Q – 52 Night Ltd. sells beer to customers; some of the customers consume the beer in the bars run by Night Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the company takes possession of these empty bottles. The company has laid down a detailed internal record procedure for accounting for these empty bottles which are sold by the company by calling for tenders. Keeping this in view:

Decide whether the stock of empty bottles is an asset of the company;
If so, whether the stock of empty bottles existing as on the date of Balance Sheet is to be considered as inventories of the company and valued as per IND AS 2 or to be treated as scrap and shown at realizable value with corresponding credit to ‘Other Income’?

Ans: Tangible objects or intangible rights carrying probable future benefits, owned by an enterprise are called assets. Night Ltd. sells these empty bottles by calling tenders. It means further benefits are accrued on its sale. Therefore, empty bottles are assets for the company. As per IND AS 2 “Valuation of Inventories”, inventories are assets held for sale in the ordinary course of business. Stock of empty bottles existing on the Balance Sheet date is the inventory and Night Ltd. has detailed controlled recording and accounting procedure which duly signify its materiality. Hence stock of empty bottles cannot be considered as scrap and should be valued as inventory in accordance with IND AS 2.

Q – 53 On 31 March 20X1, the inventory of ABC includes spare parts which it had been supplying to a number of different customers for some years. The cost of the spare parts was Rs. 10 million and based on retail prices at 31 March 20X1, the expected selling price of the spare parts is Rs. 12 million. On 15 April 20X1, due to market fluctuations, expected selling price of the spare parts in stock reduced to Rs. 8 million. The estimated selling expense required to make the sales would Rs. 0.5 million. Financial statements were authorised by Board of Directors on 20th April 20X1. As at 31st March 20X2, Directors noted that such inventory is still unsold and lying in the warehouse of the company. Directors believe that inventory is in a saleable condition and active marketing would result in an immediate sale. Since the market conditions have improved, estimated selling price of inventory is Rs. 11 million and estimated selling expenses are same Rs. 0.5 million.

What will be the value inventory at the following dates:

31st March 20X1
31st March 20X2

Answer:

As per Ind AS 2 ‘Inventories’, inventory is measured at lower of ‘cost’ or ‘net realisable value’. Further, as per Ind AS 10: ‘Events after Balance Sheet Date’, decline in net realisable value below cost provides additional evidence of events occurring at the balance sheet date and hence shall be considered as ‘adjusting events’.

In the given case, for valuation of inventory as on 31 March 20X1, cost of inventory would be Rs. 10 million and net realisable value would be Rs. 7.5 million (i.e. Expected selling price Rs. 8 million- estimated selling expenses Rs. 0.5 million). Accordingly, inventory shall be measured at Rs. 7.5 million i.e. lower of cost and net realisable value. Therefore, inventory write down of Rs. 2.5 million would be recorded in income statement of that year.
As per para 33 of Ind AS 2, a new assessment is made of net realizable value in each subsequent period. It Inter alia states that if there is increase in net realizable value because of changed economic circumstances, the amount of write down is reversed so that new carrying amount is the lower of the cost and the revised net realizable value. Accordingly, as at 31 March 20X2, again inventory would be valued at cost or net realisable value whichever is lower. In the present case, cost is Rs. 1 million and net realisable value would be Rs. 10. 5 million (i.e. expected selling price Rs. 11 million – estimated selling expense Rs. 0.5 million). Accordingly, inventory would be recorded at Rs. 10 million and inventory write down carried out in previous year for Rs. 2.5 million shall be reversed.

Q – 54

On 1st April 20X1, an item of property is offered for sale at Rs. 10 million, with payment terms being three equal installments of Rs. 33,33,333 over a two years period (payments are made on 1st April 20X1, 31st March 20X2 and 31st March 20X3).

The property developer is offering a discount of 5 percent (i.e. Rs0.5 million) if payment is made in full at the time of completion of sale. Implicit interest rate of 5.36 percent p.a. Show how the property will be recorded in accordance of Ind AS 16.

Answer::

Ind AS 16 requires that the cost of an item of PPE is the cash price equivalent at the recognition date. Hence, the purchaser that takes up the deferred payment terms will recognise the acquisition of the asset as follows:

On 1st April 20X1

Property, Plant and Equipment Dr. To Cash

To Accounts Payable

(Initial recognition of property)

(INR) 95,00,000

(INR)

33,33,333

61,66,667

On 31st March 20X2 Interest Expense Dr. Accounts payable Dr.

To Cash

(Recognition of interest expense and payment of second installment)

3,30,533

30,02,800

33,33,333

On 31st March 20X3 Interest Expense Dr. Accounts payable Dr.

To Cash

(Recognition of interest expense and payment of final installment)

1,69,467

31,63,867

33,33,334

Q – 55 Mercury Ltd is preparing its accounts for the year ended 31 March 20X2 and is unsure about how to treat the following items.

The company completed a grand marketing and advertising campaign costing Rs. 4.8 Lakh. The finance director had authorised this campaign on the basis that it would create Rs. 8 lakh of additional profits over the next three years.
A new product was developed during the year. The expenditure totalled Rs. 3 lakh of which Rs. 1.5 lakh was incurred prior to 30 September 20X1, the date on which it became clear that the product was technically viable. The new product will be launched in the next four months and its recoverable amount is estimated at Rs. 1.4 lakh.
Staff participated in a training programme which cost the company Rs. 5 lakh. The training organisation had made a presentation to the directors of the company outlining that incremental profits to the business over the next twelve months would be Rs. 7 lakh.

What amounts should appear as intangible assets in accordance with Ind AS 38 in Mercury’s balance sheet as on 31 March 20X2?

Answer :

The treatment in Mercury’s financials as at 31 March 20X2 will be as follows:

Marketing and advertising campaign: no intangible asset will be recognised, because it is not possible to identify future economic benefits that are attributable only due to this campaign. All of the expenditure should be expensed in the statement of profit and loss.
New product: development expenditure appearing in the balance sheet will be valued at Rs.1.5 lakh. The expenditure prior to the date on which the product becomes technically feasible is recognised in the statement of profit and loss.
Training programme: no asset will be recognised, because there is no control of the company over the staff and when staff leaves the benefits of the training, whatever they may be, also departs.

Q – 56 X Ltd. acquired a patent right of manufacturing drug from Y Ltd. In exchange X Ltd. gives its intellectual property right to Y Ltd. Current market value of the patent and intellectual property rights are Rs. 20,00,000 and Rs. 18,00,000 respectively. At what value patent right should be initially recognised in the books of X Ltd. in following two situations?

X Ltd. did not pay any cash to Y Ltd.
X Ltd. pays Rs. 2,00,000 to Y Ltd.

Answer:

If an entity is able to determine reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure cost unless the fair value of the asset received is more clearly evident.

The transaction at the fair value of the asset received adjusted for any cash received or paid. Therefore in case (a) patent is measured at Rs. 18,00,000, in case (b) it is measured at Rs.

20,00,000 (18,00,000 + 2,00,000).

Q – 57 A Ltd. intends to open a new retail store in a new location in the next few weeks. It has spent a substantial sum on a series of television advertisements to promote this new store. It has paid for advertisements costing Rs. 8,00,000 before 31st March, 2018. Rs. 7,00,000 of this sum relates to advertisements shown before 31st March, 2018 and Rs. 1,00,000 to advertisements shown in April, 2018. Since 31st March, 2018, A Ltd. has paid for further advertisements costing Rs. 4,00,000. The accountant charged all these costs as expenses in the year to 31 March 2018. However, CFO of A Ltd. does not want to charge Rs.12,00,000 against 2017-2018 profits. He believes that these costs can be carried forward as intangible assets because the company’s market research indicates that this new store is likely to be highly successful.

Examine and justify the treatment of these costs of Rs. 12,00,000 in the financial statements for the year ended 31st March, 2018 as per Ind AS.

Ans: Ind AS 38 specifically prohibits recognising advertising expenditure as an intangible asset. Irrespective of success probability in future, such expenses have to be recognized in profit or loss. Therefore, the treatment given by the accountant is correct since such costs should be recognised as expenses.

However, the costs should be recognised on an accruals basis.

Therefore, of the advertisements paid for before 31st March, 2018, Rs. 7,00,000 would be recognised as an expense and Rs. 1,00,000 as a pre-payment in the year ended 31st March 2018. Rs. 4,00,000 cost of advertisements paid for since 31st March, 2018 would be charged as expenses in the year ended 31st March, 2019.

Q – 58 X Ltd. is engaged in the construction industry and prepares its financial statements up to 31st March each year. On 1st April, 2013, X Ltd. purchased a large property (consisting of land) for Rs. 2,00,00,000 and immediately began to lease the property to Y Ltd. on an operating lease. Annual rentals were Rs. 20,00,000. On 31st March, 2017, the fair value of the property was Rs. 2,60,00,000. Under the terms of the lease, Y Ltd. was able to cancel the lease by giving six months’ notice in writing to X Ltd. Y Ltd. gave this notice on 31st March, 2017 and vacated the property on 30th September, 2017. On 30th September, 2017, the fair value of the property was Rs. 2,90,00,000. On 1st October, 2017, X Ltd. immediately began to convert the property into ten separate flats of equal size which X Ltd. intended to sell in the ordinary course of its business. X Ltd. spent a total of Rs. 60,00,000 on this conversion project between 30th September, 2017 to 31st March, 2018. The project was incomplete at 31st March, 2018 and the directors of X Ltd. estimate that they need to spend a further Rs. 40,00,000 to complete the project, after which each flat could be sold for Rs. 50,00,000.

Examine and show how the three events would be reported in the financial statements of X Ltd. For the year ended 31st March, 2018. as per Ind AS.

Ans: From 1st April, 2013, the property would be regarded as an investment property since it is being held for its investment potential rather than being owner occupied or developed for sale. The property would be measured under the cost model. This means it will be measured at Rs. 2,00,00,000 at each year end.

On 30th September, 2017, the property ceases to be an investment property. X Ltd. begins to develop it for sale as flats. The increase in the fair value of the property from 31st March, 2017 to 30th September, 2017 of Rs. 30,00,000 (Rs. 2,90,00,000 – Rs. 2,60,00,000) would not be recognised for the year ended 31st March, 2018 as IND AS 40 do not permit Revaluation Model. Since the lease of the property is an operating lease, rental income of Rs. 10,00,000 (Rs. 20,00,000 x 6/12) would be recognised in P/L for the year ended 31st March, 2018.

When the property ceases to be an investment property, it is transferred into inventory at its then carrying amount of Rs. 2,00,00,000. This becomes the initial ‘cost’ of the inventory. The additional costs of Rs. 60,00,000 for developing the flats which were incurred up to and including 31st March, 2018 would be added to the ‘cost’ of inventory to give a closing cost of Rs. 2,60,00,000. The total selling price of the flats is expected to be Rs. 5,00,00,000 (10 x Rs. 50,00,000). Since the further costs to develop the flats total Rs. 40,00,000, their net realisable value is Rs. 4,60,00,000 (Rs. 5,00,00,000 – Rs. 40,00,000), so the flats will be measured at a cost of Rs. 2,60,00,000.

The flats will be shown in inventory as a current asset

Q – 59 On 1st April, 20X1, entity A contracted for the construction of a building for Rs. 22,00,000. The land under the building is regarded as a separate asset and is not part of the qualifying assets. The building was completed at the end of March, 20X2, and during the period the following payments were made to the contractor:

Payment date	Amount (Rs. ’000)
1st April 20X1	200
30th June, 20X1	600
31st December, 20X1	1,200
31st March, 20X2	200
Total	2,200

Entity A’s borrowings at its year end of 31st March, 20X2 were as follows:

10%, 4-year note with simple interest payable annually, which relates specifically to the project; debt outstanding on 31st March, 20X2 amounted to Rs. 7,00,000. Interest of Rs. 65,000 was incurred on these borrowings during the year, and interest income of Rs. 20,000 was earned on these funds while they were held in anticipation of payments.
12.5% 10-year note with simple interest payable annually; debt outstanding at 1st April, 20X1 amounted to Rs. 1,000,000 and remained unchanged during the year; and
10% 10-year note with simple interest payable annually; debt outstanding at 1st April, 20X1 amounted to Rs. 1,500,000 and remained unchanged during the year.

What amount of the borrowing costs can be capitalized at year end as per relevant Ind AS?

Answer:

As per Ind AS 23, when an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity should determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. The amount of borrowing costs eligible for capitalization, in cases where the funds are borrowed generally, should be determined based on the expenditure incurred in obtaining a qualifying asset. The costs incurred should first be allocated to the specific borrowings.

Analysis of expenditure:

Date	Expenditure (Rs.’000)	Amount allocated in general borrowings (Rs.’000)	Weighted for period outstanding (Rs.’000)
1st April 20X1	200	0	0
30th June, 20X1	600	100*	100×9/12=75
31st December, 20X1	1,200	1,200	1,200×3/12=300
31st March, 20X2	200	200	200×0/12=0
Total	2,200		375

*Specific borrowings of Rs. 7,00,000 fully utilized on 1st April & on 30th June to the extent of Rs. 5,00,000 hence remaining expenditure of Rs. 1,00,000 allocated to general borrowings. The expenditure rate relating to general borrowings should be the weighted average of the borrowing costs applicable to the entity’s borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Capitalisation rate = (10,00,000 x 12.5%) + (15,00,000 x 10%) /10,00,000 + 15,00,000 = 11

Borrowing cost to be capitalized:	Amount (Rs.)
On specific loan	65,000
On General borrowing (3,75,000 × 11%)	41,250
Total	1,06,250
Less interest income on specific borrowings	(20,000)
Amount eligible for capitalization	86,250

Therefore, the borrowing costs to be capitalized are Rs. 86,250.

Q – 60 A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of the same enterprise. X’s products are sold to Y at a transfer price that passes all margins to X. 80% of Y’s final production is sold to customers outside of the reporting enterprise. 60% of X’s final production is sold to Y and the remaining 40% is sold to customers outside of the reporting enterprise. For each of the following cases, what are the cash- generating units for X and Y?

Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices are higher than market prices.

Case 2: There is no active market for the products X sells to Y.

Answer :

Case 1

X could sell its products on an active market and, so, generate cash inflows from continuing use that would be largely independent of the cash inflows from Y. Therefore, it is likely that X is a separate cash-generating unit, although part of its production is used by Y. It is likely that Y is also a separate cash-generating unit. Y sells 80% of its products to customers outside of the reporting enterprise. Therefore, its cash inflows from continuing use can be considered to be largely independent. Internal transfer prices do not reflect market prices for X’s output.

Therefore, in determining value in use of both X and Y, the enterprise adjusts financial budgets/forecasts to reflect management’s best estimate of future market prices for those of X’s products that are used internally.

Case 2

It is likely that the recoverable amount of each plant cannot be assessed independently from the recoverable amount of the other plant because:

the majority of X’s production is used internally and could not be sold in an active market. So, cash inflows of X depend on demand for Y’s products. Therefore, X cannot be considered to generate cash inflows that are largely independent from those of Y; and
the two plants are managed together.

As a consequence, it is likely that X and Y together is the smallest group of assets that generates cash inflows from continuing use that are largely independent.

Q - 61 A company operates a mine in a country where legislation requires that the owner must restore the site on completion of its mining operations. The cost of restoration includes the replacement of the overburden, which must be removed before mining operations commence. A provision for the costs to replace the overburden was recognised as soon as the overburden was removed. The amount provided was recognised as part of the cost of the mine and is being depreciated over the mine’s useful life. The carrying amount of the provision for restoration costs is Rs. 500, which is equal to the present value of the restoration costs.

The entity is testing the mine for impairment. The cash-generating unit for the mine is the mine as a whole. The entity has received various offers to buy the mine at a price of around Rs. 800. This price reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs for the mine are negligible. The value in use of the mine is approximately Rs.1,200, excluding restoration costs. The carrying amount of the mine is Rs. 1,000.

Answer:

The cash-generating unit’s fair value less costs of disposal is Rs. 800. This amount considers restoration costs that have already been provided for. As a consequence, the value in use for the cash-generating unit is determined after consideration of the restoration costs and is estimated to be Rs. 700 (Rs. 1,200 less Rs. 500). The carrying amount of the cash-generating unit is Rs. 500, which is the carrying amount of the mine (Rs. 1,000) less the carrying amount of the provision for restoration costs (Rs. 500). Therefore, the recoverable amount of the cash- generating unit exceeds its carrying amount.

Q – 62 X Telecom Ltd. has income tax litigation pending before appellate authorities. Legal advisor’s opinion is that X Telecom Ltd. will lose the case and estimated that liability of Rs. 1,00,00,000 may arise in two years. The liability is recognised on a discounted basis. The discount rate at which the liability has been discounted is 10% and it is assumed that discount rate does not change over the period of 2 years. How should X Telecom Ltd. calculate the amount of borrowing cost?

Answer :

The discount factor of 10% for 2 years is 0.827. X Telecom Ltd. will initially recognise provision for Rs. 82,70,000 (Rs. 1,00,00,000 x 0.827).

The discount factor of 10% at the end of year 1 is 0.909. At the end of year 1, provision amount would be Rs. 90,90,000 (Rs. 1,00,00,000 x 0.909).

As per the standard, the difference between the two present values i.e., Rs. 8,20,000 is recognised as a borrowing cost in year 1.

At the end of the Year 2, the liability would be Rs. 1,00,00,000.

The difference between the two present values i.e., Rs. 9,10,000 (Rs. 1,00,00,000 - Rs. 90,90,000) is recognised as borrowing cost in year 2.

Q – 63 U Ltd. is a large conglomerate with a number of subsidiaries. It is preparing consolidated financial statements as on 31st March 2018 as per the notified Ind AS. The financial statements are due to be authorised for issue on 15th May 2018. It is seeking your assistance for some transactions that have taken place in some of its subsidiaries during the year. G Ltd. is a wholly owned subsidiary of U Ltd. engaged in management consultancy services. On 31st January 2018, the board of directors of U Ltd. decided to discontinue the business of G Ltd. from 30th April 2018. They made a public announcement of their decision on 15th February 2018 G Ltd. does not have many assets or liabilities and it is estimated that the outstanding trade receivables and payables would be settled by 31st May 2018. U Ltd. would collect any amounts still owed by G Ltd’s customers after 31st May 2018. They have offered the employees of G Ltd. termination payments or alternative employment opportunities.

Following are some of the details relating to G Ltd.

On the date of public announcement, it is estimated by G Ltd. that it would have to pay 540 lakhs as termination payments to employees and the costs for relocation of employees who would remain with the Group would be Rs. 60 lakhs. The actual termination payments totalling to Rs. 520 lakhs were made in full on 15th May 2018. As per latest estimates made on 15th May 2018, the total relocation cost is Rs. 63 lakhs.
G Ltd. had taken a property on operating lease, which was expiring on 31st March 2022. The present value of the future lease rentals (using an appropriate discount rate) is Rs. 430 lakhs. On 15th May 2018, G Ltd. made a payment to the lessor of Rs. 410 lakhs in return for early termination of the lease.

The loss after tax of G Ltd. for the year ended 31st March 2018 was Rs. 400 lakhs. G Ltd. made further operating losses totalling Rs. 60 lakhs till 30th April 2018. How should U Ltd. present the decision to discontinue the business of G Ltd. in its consolidated statement of comprehensive income as per Ind AS?

What are the provisions that the Company is required to make as per lnd AS 37?

Answer:

A discontinued operation is one that is discontinued in the period or classified as held for sale at the year end. The operations of G Ltd were discontinued on 30th April 2018 and therefore, would be treated as discontinued operation for the year ending 31st March 2019. It does not meet the criteria for held for sale since the company is terminating its business and does not hold these for sale. Accordingly, the results of G Ltd will be included on a line-by-line basis in the consolidated statement of comprehensive income as part of the profit from continuing operations of U Ltd for the year ending 31st March 2018.

As per para 72 of Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, restructuring includes sale or termination of a line of business. A constructive obligation to restructure arises when:

an entity has a detailed formal plan for the restructuring
has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

The Board of directors of U Ltd have decided to terminate the operations of G Ltd. from 30th April 2018. They have made a formal announcement on 15th February 2018, thus creating a valid expectation that the termination will be implemented. This creates a constructive obligation on the company and requires provisions for restructuring.

A restructuring provision includes only the direct expenditures arising from the restructuring that are necessarily entailed by the restructuring and are not associated with the ongoing activities of the entity.

The termination payments fulfil the above condition. As per Ind AS 10 ‘Events after Reporting Date’, events that provide additional evidence of conditions existing at the reporting date should be reflected in the financial statements. Therefore, the company should make a provision for Rs. 520 lakhs in this respect.

The relocation costs relate to the future conduct of the business and are not liabilities for restructuring at the end of the reporting period. Hence, these would be recognised on the same basis as if they arose independently of a restructuring.

The operating lease would be regarded as an onerous contract. A provision would be made at the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. Hence, a provision shall be made for Rs. 410 lakhs.

Further operating losses relate to future events and do not form a part of the closure provision.

Therefore, the total provision required = Rs. 520 lakhs + Rs. 410 lakhs = Rs. 930 lakhs.

Q – 64 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?

Answer:

The obligation should be measured at the present value of outflows i.e., Rs. 30,00,000. Further a risk adjustment of 5% i.e., Rs. 1,50,000 (Rs. 30,00,000 x 5%) would be made. So, the liability will be recognised at = Rs. 30,00,000 + Rs.1,50,000 = Rs. 31,50,000

Q – 65 X Ltd. is operating in the telecom industry. During the Financial Year 20X1-20X2, the Income Tax authorities sent a scrutiny assessment notice under Section 143(2) of the Income- tax Act, 1961, in respect to return filed under Section 139 of this Act for Previous Year 20X0- 20X1 (Assessment Year 20X1-20X2) and initiated assessment proceedings on account of a deduction claimed by the company which in the view of the authorities was inadmissible.

During the financial year 20X1-20X2 itself, the assessment proceedings were completed and the assessing officer did not allow the deduction and raised a demand of Rs. 1,00,00,000 against the company. The company contested such levy and filed an appeal with the Appellate authority. At the end of the financial year 20X1-20X2, the appeal had not been heard. The company is not confident whether that the company would win the appeal. However, the company was advised by its legal counsel that on a similar matter, two appellate authorities of different jurisdictions had given conflicting judgements, one in favour of the assessee and one against the assessee. The legal counsel further stated it had more than 50% chance of winning the appeal. Please advise how the company should account for these transactions in the financial year 20X1-20X2.

Answer Ind AS 37 provides that in rare cases it not clear whether there is a present 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.

Q – 66 Company XYZ Ltd. was formed to secure the tenders floated by a telecom company for publication of telephone directories. It bagged the tender for publishing directories for Pune circle for 5 years. It has made a profit in 2011- 2012, 2012-2013, 2013-2014 and 2014-2015. It bid in tenders for publication of directories for other circles – Nagpur, Nashik, Mumbai, Hyderabad but as per the results declared on 23rd April, 2015, the company failed to bag any of these. Its only activity till date is publication of Pune directory. The contract for publication of directories for Pune will expire on 31st December 2015. The financial statements for the F.Y. 2014-15 have been approved by the Board of Directors on July 10, 2015. Whether it is appropriate to prepare financial statements on going concern basis?

Solution: With regard to going concern basis to be followed for preparation of financial statements, paras 14 & 15 of Ind AS 10 states thatAn entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so. Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognized within the original basis of accounting. In accordance with the above, an entity needs to change the basis of accounting if the effect of deterioration in operating results and financial position is so pervasive that management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

In the instant case, since contract is expiring on 31st December 2015 and it is confirmed on 23rd April, 2015, i.e., after the end of the reporting period and before the approval of the financial statements, that no further contact is secured, implies that the entity’s operations are expected to come to an end. Accordingly, if entity’s operations are expected to come to an end, the entity needs to make a judgement as to whether it has any realistic possibility to continue or not. In case, the entity determines that it has no realistic alternative of continuing the business, preparation of financial statements for 2014-15 and thereafter on going concern basis may not be appropriate.

Q – 67 XYZ Ltd. was formed to secure the tenders floated by a telecom company for publication of telephone directories. It bagged the tender for publishing directories for Pune circle for 5 years. It has made a profit in 2013-2014, 2014-2015, 2015-2016 and 2016-2017. It bid in tenders for publication of directories for other circles – Nagpur, Nashik, Mumbai, Hyderabad but as per the results declared on 23rd April, 2017, the company failed to bag any of these. Its only activity till date is publication of Pune directory. The contract for publication of directories for Pune will expire on 31st December 2017. The financial statements for the F.Y. 2016-17 have been approved by the Board of Directors on July 10, 2017. Whether it is appropriate to prepare financial statements on going concern basis?

Answer:

With regard to going concern basis to be followed for preparation of financial statements, Ind AS 10 provides as follows:

“An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting.”

In accordance with the above, an entity needs to change the basis of accounting if the effect of deterioration in operating results and financial position is so pervasive that management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

In the instant case, since contract is expiring on 31st December 2017 and it is confirmed on 23rd April, 2017, i.e., after the end of the reporting period and before the approval of the financial statements, that no further contact is secured, implies that the entity’s operations are expected to come to an end. Accordingly, if entity’s operations are expected to come to an end, the entity needs to make a judgement as to whether it has any realistic possibility to continue or not. In case, the entity determines that it has no realistic alternative of continuing the business, preparation of financial statements for 2016-17 and thereafter on going concern basis may not be appropriate.

Q – 68 A Ltd. had on 1st April, 2015 granted 1,000 share options each to 2,000 employees. The options are due to vest on 31st March, 2018 provided the employee remains in employment till 31st March, 2018.

On 1st April, 2015, the Directors of Company estimated that 1,800 employees would qualify for the option on 31st March, 2018. This estimate was amended to 1,850 employees on 31st March, 2016 and further amended to 1,840 employees on 31st March, 2017.

On 1st April, 2015, the fair value of an option was Rs. 1.20. The fair value increased to Rs. 1.30 as on 31st March, 2016 but due to challenging business conditions, the fair value declined thereafter.

In September 2016, when the fair value of an option was Rs. 0.90, the Directors repriced the option and this caused the fair value to increase to Rs. 1.05. Trading conditions improved in the second half of the year and by 31st March, 2017 the fair value of an option was Rs.1.25. QA Ltd. decided that additional cost incurred due to repricing of the options on 30th September, 2016 should be spread over the remaining vesting period from 30th September, 2016 to 31st March, 2018. The Company has requested you to suggest the suitable accounting treatment for these transaction as on 31st March, 2017.

Answer

If the repricing increases the fair value of the equity instruments granted paragraph B43(a) of Appendix B requires the entity to include the incremental fair value granted (ie the difference between the fair value of the repriced equity instrument and that of the original equity instrument, both estimated as at the date of the modification) in the measurement of the amount recognized for services received as consideration for the equity instruments granted. If the repricing occurs during the vesting period, the incremental fair value granted is included in the measurement of the amount recognised for services received over the period from the repricing date until the date when the repriced equity instruments vest, in addition to the amount based on the grant date fair value of the original equity instruments, which is recognised over the remainder of the original vesting period.

Accordingly, the amounts recognised in years 1 and 2 are as follows:

Year	Calculation	Compensation expense for period	Cumulative compensation expense
		Rs.	Rs.
1	[1,850 employees× 1,000 options × Rs. 1.20] × 1/3	7,40,000	7,40,000
2	(1,840 employees× 1,000 options × [(Rs.1.20 × 2/3)+ {(Rs.1.05 - 0.90) ×0.5/1.5}] – 7,40,000	8,24,000	15,64,000

Q – 69 A parent grants 200 share options to each of 100 employees of its subsidiary, conditional upon the completion of two years’ service with the subsidiary. The fair value of the share options on grant date is Rs. 30 each. At grant date, the subsidiary estimates that 80 percent of the employees will complete the two-year service period. This estimate does not change during the vesting period. At the end of the vesting period, 81 employees complete the required two years of service. The parent does not require the subsidiary to pay for the shares needed to settle the grant of share options.

Pass the necessary journal entries for giving effect to the above arrangement.

Answer: - As required by paragraph B53 of the Ind AS 102, over the two-year vesting period, the subsidiary measures the services received from the employees in accordance, the requirements applicable to equity-settled share-based payment transactions as given in paragraph 43B. Thus, the subsidiary measures the services received from the employees on the basis of the fair value of the share options at grant date. An increase in equity is recognised as a contribution from the parent in the separate or individual financial statements of the subsidiary.

The journal entries recorded by the subsidiary for each of the two years are as follows:

Year 1

Remuneration expense Dr. (200 x 100 employees x Rs. 30 x 80% x ½)

To Equity (Contribution from the parent)

2,40,000

Year 2

Remuneration expense Dr. [(200 x 81 employees x Rs. 30) – 2,40,000]

To Equity (Contribution from the parent)

2,46,000

Q – 70 As at 31st March, 2017, a plantation consists of 100 Pinus Radiata trees that were planted 10 years earlier. The tree takes 30 years to mature, and will ultimately be processed into building material for houses or furniture. The enterprise’s weighted average cost of capital is 6% p.a. Only mature trees have established fair values by reference to a quoted price in an active market. The fair value (inclusive of current transport costs to get 100 logs to market) for a mature tree of the same grade as in the plantation is:

As at 31st March, 2017: 171

As at 31st March, 2018: 165

Assume that there would be immaterial cash flow between now and point of harvest. The present value factor of Rs. 1 @ 6% for 19th year = 0.331 20th year = 0.312

State the value of such plantation as on 31st March, 2017 and 2018 and the gain or loss to be recognised as per Ind AS.

Answer

As at 31st March, 2017, the mature plantation would have been valued at 17,100 (171 x 100). As at 31st March, 2018, the mature plantation would have been valued at 16,500 (165 x 100). Assuming immaterial cash flow between now and the point of harvest, the fair value (and therefore the amount reported as an asset on the statement of financial position) of the plantation is estimated as follows:

As at 31st March, 2017: 17,100 x 0.312 = 5,335.20.

As at 31st March, 2018: 16,500 x 0.331 = 5,461.50.

Gain or loss

The difference in fair value of the plantation between the two year end dates is 126.30 (5,461.50 – 5,335.20), which will be reported as a gain in the statement or profit or loss (regardless of the fact that it has not yet been realised).

Q – 71 A farmer owned a dairy herd, of three years old cattle as at April 1, 20X1 with a fair value of Rs. 13,750 and the number of cattle in the herd was 250. The fair value of three year cattle as at March 31, 20X2 was Rs. 60 per cattle. The fair value of four year cattle as at March 31, 20X2 is Rs.75 per cattle. Calculate the measurement of group of cattle as at March 31, 20X2 stating price and physical change separately.

Answer

Particulars	Amount (Rs.)
Fair value as at April 1, 20X1	13,750
Increase due to Price change [250 x {60 - (13,750/250)}]	1,250
Increase due to Physical change [250 x {75-60}]	3,750
Fair value as at March 31, 20X2	18,750

Q – 72 On 1 April 20X3 Charming Ltd issued 100,000 Rs 10 bonds for Rs 1,000,000. On 1 April each year interest at the fixed rate of 8 per cent per year is payable on outstanding capital amount of the bonds (ie the first payment will be made on 1 April 20X4). On 31 March each year (i.e from 31 March 20X4), Charming Ltd has a contractual obligation to redeem 10,000 of the bonds at Rs 10 per bond. How should Charming Ltd. classify such Bonds: current or non- current?

Answer: In its statement of financial position at 31 March 20X4, Charming Ltd must present Rs 80,000 accrued interest and Rs 100,000 current portion of the non-current bond (ie the portion repayable on 31 Mach 20X4) as current liabilities. The Rs900,000 due later than 12 months after the end of the reporting period is presented as a noncurrent liability.

Q – 73 OMN Ltd has a subsidiary MN Ltd. OMN Ltd provides a loan to MN Ltd at 8% interest to be paid annually. The loan is required to be paid whenever demanded back by OMN Ltd.

How should the loan be classified in the financial statements of OMN Ltd? Will it be any different for MN Ltd?

Answer

The classification of the instrument could affect initial recognition and subsequent measurement. This might require the entity’s management to exercise judgement, which could require disclosure under judgements and estimates.

Q – 74 An entity reports quarterly, earns Rs. 1,50,000 pre-tax profit in the first quarter but expects to incur losses of Rs. 50,000 in each of the three remaining quarters. The entity operates in a jurisdiction in which its estimated average annual income tax rate is 30%.

Answer

As per para 30 (c) of Ind AS 34 ‘Interim Financial Reporting’, income tax expense is recognized in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

Period

Pre-tax earnings (in)

Effective tax rate

Tax expense (in Rs.)

First Quarter Second Quarter Third Quarter Fourth Quarter

Annual

1,50,000

(50,000)

30%

45,000

(15,000)

Q – 75 While preparing the annual financial statements for the year ended 31st March, 2013, an entity discovers that a provision for constructive obligation for payment of bonus to selected employees in corporate office (material in amount) which was required to be recognised in the annual financial statements for the year ended 31st March, 2011 was not recognised due to oversight of facts. The bonus was paid during the financial year ended 31st March, 2012 and was recognised as an expense in the annual financial statements for the said year. Would this situation require retrospective restatement of comparatives considering that the error was material?

Solution: As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements do not comply with Ind AS if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows. Potential current period errors discovered in that period are corrected before the financial statements are approved for issue. However, material errors are sometimes not discovered until a subsequent period, and these prior period errors are corrected in the comparative information presented in the financial statements for that subsequent period.

As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the beginning of the preceding period in addition to the minimum comparative financial statements if, inter alia, it makes a retrospective restatement of items in its financial statements and the retrospective restatement has a material effect on the information in the balance sheet at the beginning of the preceding period.

In the given case, expenses for the year ended 31st March, 2011 and liabilities as at 31st March, 2011 were understated because of non-recognition of bonus expense and related provision.

Expenses for the year ended 31st March, 2012, on the other hand, were overstated to the same extent because of recognition of the aforesaid bonus as expense for the year. To correct the above errors in the annual financial statements for theyear ended 31st March, 2013, the entity should:

restate the comparative amounts (i.e., those for the year ended 31st March, 2012) in the statement of profit and loss; and
present a third balance sheet as at the beginning of the preceding period (i.e., as at 1st April, 2011) wherein it should recognise the provision for bonus and restate the retained earnings.

Q – 76 Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a bank in the USA. The balances as on 31.12.2017 and 31.12.2018 were US$ 100,000 and US$ 102,000 respectively. The exchange rate on December 31, 2017 was US$1 = Rs. 45. The same on 31.12.2018 was US$1 = Rs. 50. The increase in the balance was on account of interest credited on 31.12.2018. Thus, the deposit was reported at Rs. 45,00,000 in the balance sheet as on December 31, 2017. It was reported at Rs. 51,00,000 in the balance sheet as on 31.12.2018.

How these transactions should be presented in cash flow for the year ended 31.12.2018 as per Ind AS 7?

Answer : The profit and loss account was credited by Rs. 1,00,000 (US$ 2000 × Rs. 50) towards interest income. It was credited by the exchange difference of US$ 100,000 × (Rs. 50 - Rs.45) that is, Rs. 500,000. In preparing the cash flow statement, Rs. 500,000, the exchange difference, should be deducted from the ‘net profit before taxes, and extraordinary item’. However, in order to reconcile the opening balance of the cash and cash equivalents with its closing balance, the exchange difference Rs. 500,000, should be added to the opening balance in note to cash flow statement.

Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.’s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow.

Q – 77 X Ltd. has identified the following business components.

Segment	Revenue (Rs. )		Profit (Rs. )	Assets (Rs. )
	External	Internal
Pharma	97,00,000	Nil	20,00,000	55,00,000
FMCG	Nil	4,00,000	2,50,000	25,00,000
Ayurveda	3,00,000	Nil	2,00,000	4,00,000
Others	8,00,000	41,00,000	5,50,000	6,00,000
Total for the entity	1,08,00,000	45,00,000	30,00,000	90,00,000

Which of the segments would be reportable as per the criteria prescribed in Ind AS108? Answer

Segments	Pharma	FMCG Ayurveda	Others	Segments
% segment sales to total sales	63.40	2.61	1.96	32.03
% segment profit to total profits	66.67	8.33	6.67	18.33
% segment assets to total assets	61.11	27.78	4.44	6.67

Segment Pharma would separately reportable since they meet all three size criteria, though any one criteria is required. FMCG segment does not satisfy the revenue and profit test but does satisfy the asset test. So it would be separately reportable. Ayurveda segment does not meet any threshold. It may not be classified as reportable segment.

An entity may combine information about operating segments that do not meet the quantitative thresholds with information about other operating segments that do not meet the quantitative thresholds to produce a reportable segment only if the operating segments have similar economic characteristics and share a majority of the aggregation criteria.

If the total external revenue reported by operating segments constitutes less than 75% of the entity’s revenue, additional operating segments should be identified as reportable segments (even if they do not meet the criteria) until at least 75% of the entity’s revenue is included in reportable segments.

Q – 78 CK Ltd. prepares the financial statement under Ind AS for the quarter year ended 30th June, 2018. During the 3 months ended 30th June, 2018 following events occurred:

Purchased Goodwill – Rs. 60,000
Property, Plant & Equipment

(average remaining estimated useful life two years) - Rs. 20,00,000

Inventories - Rs. 10,00,000

The sale is expected to be completed on 30th September, 2018 and Rs. 33,00,000 can be assumed to be a reasonable estimate of the value of the division as on 30th June, 2018. During the period from 1st April to 30th June inventories of the division costing Rs. 8,00,000 were sold for Rs. 12,00,000. At 30th June, 2018, the total cost of the inventories of the division was Rs. 9,00,000. All of these inventories have an estimated net realisable value that is in excess of their cost. The Company has approached you to suggest how the proposed sale will be reported in the interim financial statements for the quarter ended 30th June, 2018 giving relevant explanations.

Answer: The decision to offer the division for sale on 1st April, 2018 means that from that date the division has been classified as held for sale. The division available for immediate sale, is being actively marketed at a reasonable price and the sale is expected to be completed within one year.

The assets of the division need to be presented separately from other assets in the balance sheet. Their major classes should be separately disclosed either on the face of the balance sheet or in the notes.

The Property, Plant and Equipment shall not be depreciated after 1st April, 2018 so its carrying value at 30th June, 2018 will be Rs. 20,00,000 only. The inventories of the division will be shown at Rs. 9,00,000. The division will be regarded as discontinued operation for the quarter ended 30th June, 2018. It represents a separate line of business and is held for sale at the year end.

The Statement of Profit and Loss should disclose, as a single amount, the post-tax profit or loss of the division on classification as held for sale.

Further, as per Ind AS 33, EPS will also be disclosed separately for the discontinued operation.

Q – 79 State whether any unspent amount of CSR expenditure (any shortfall in the amount that was expected to be spent as per the provisions of the Companies Act on CSR activities) at the reporting date shall be provided for? Also state in case the excess amount has been spent (ie more than what is required as per the provisions of the Companies Act on CSR activities), can it be carry forward to set-off against future CSR expenditure.

Answer

(i)Treatment of any unspent amount of CSR expenditure

Section 135 (5) of the Companies Act, 2013, requires that the Board of every eligible company, “shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy”. A proviso to this Section states that “if the company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project, transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year”.
Any amount remaining unspent, pursuant to any ongoing project, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account. Such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
If a company contravenes the provisions, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty- five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

(ii)Treatment of excess amount spent on CSR Activities Since 2% of average net profits of immediately preceding three years is the minimum amount which is required to be spent under section 135 (5) of the Act, the excess amount cannot be carried forward for set off against the CSR expenditure required.

Q – 80 After the havoc caused by flood in Jammu and Kashmir, a group of companies undertakes during the period from October, 20X1 to December, 20X1 various commercial activities, with considerable concessions/discounts, along the related affected areas. The management intends to highlight the expenditure incurred on such activities as expenditure incurred on activities undertaken to discharge corporate social responsibility, while publishing its financial statements for the year 20X1-20X2.

Required: State whether the management’s intention is correct or not and why?

Solution: Corporate Social Responsibility (CSR) Reporting is an information communiqué with respect to discharge of social responsibilities of corporate entity. Through ‘CSR Report’ the corporate enterprises disclose the manner in which they are discharging their social responsibilities. More specifically, it is addressed to the public or society at large, although it can be squarely used by other user groups also.

Section 135 of the Companies Act, 2013 mandated the companies fulfilling the criteria mentioned in the said section to spend certain amount of their profit on activities as specified in the Schedule VII to the Act. Companies not falling within that criteria can also spend on CSR activities voluntarily. However, besides the requirements of constitution of a CSR committee and a CSR policy, the corporate entities should also take care that expenditure incurred for CSR should not be the expenditure incurred for the activities in the ordinary course of business. If expenditure incurred is for the activities in the ordinary course of business, then it will not be qualified as expenditure incurred on CSR activities.

Here, it is assumed that the commercial activities performed at concessional rates are the activities done in the ordinary course of business of the companies. Therefore, the intention of the management to highlight the expenditure incurred on such commercial activities in its financial statements as the expenditure incurred on activities undertaken to discharge CSR, is not correct.

Q – 81 QA Ltd. is in the process of computation of the deferred taxes as per applicable Ind AS. QA Ltd. Had acquired 40% shares in GK Ltd. for an aggregate amount of Rs. 45 crores. The shareholding gives QA Ltd. significant influence over GK Ltd. but not control and therefore the said interest in GK Ltd. Is accounted using the equity method. Under the equity method, the carrying value of investment in GK Ltd. was Rs. 70 crores on 31st March, 2017 and Rs. 75 crores as on 31st March, 2018. As per the applicable tax laws, profits recognised under the equity method are taxed if and when they are distributed as dividend or the relevant investment is disposed of. QA Ltd. wants you to compute the deferred tax liability as on 31st March, 2018 and the charge to the Statement of Profit for the same. Consider the tax rate at 20%.

Answer

DTL created on accumulation of undistributed profits as on 31.3.2018

	31st March, 2017	31st March, 2018
Carrying value	70 crore	75 crore
Value as per tax records	45 crore	45 crore
Tax base	45 crore	45 crore
Taxable temporary differences	25 crore	30 crore
Total Deferred tax liability @ 20%	5 crore	6 crore
Charged to P&L during the year	5 crore	1 crore (6 crore – 5 crore)

Q – 82 Entity A acquires 80% of the share capital of Entity B, which holds a single asset, or a group of assets not constituting a business. The remaining 20% of the share capital is held by Entity M, an unrelated third party. The fair value of the asset is Rs. 20,000. Entity A controls Entity B, as defined in Ind AS 110 Consolidated Financial Statements. Cash paid for the acquisition is Rs. 16,000 and fair value of non-controlling interest is Rs. 4,000. How does an acquirer account for the acquisition of a controlling interest in another entity that is not a business?

Answer: Under Ind AS 110, an entity must consolidate all investees that it controls, not just those that are businesses, and recognise any non-controlling interest in non-wholly owned subsidiaries.

When the acquisition of an entity is not a business combination, the requirements of acquisition accounting of Ind AS 103 relating to the allocation of the consideration transferred to the identifiable assets and liabilities and the recognition of goodwill are not applicable.

Paragraph 2(b) of Ind AS 103 states that upon the acquisition of an asset or a group of assets that does not constitute a business, the acquirer shall identify and recognise the individual identifiable assets acquired and liabilities assumed. The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.

Ind AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets state that "Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction. Therefore, when an asset is acquired, its cost is the amount of consideration paid, plus the amount of non-controlling interest (NCI) recorded related to that asset- as this represents a 'claim' relating to that asset.

With respect to case above, the following entries would be recorded:

Asset	Dr	20,000
NCI	Cr	4,000
Cash	Cr	16,000

Q – 83 On 1 January 2018, Entity X writes a put option for 1,00,000 of its own equity shares for which it receives a premium of Rs. 5,00,000. Under the terms of the option, Entity X may be obliged to take delivery of 1,00,000 of its own shares in one year’s time and to pay the option exercise price of Rs. 22,000,000. The option can only be settled through physical delivery of the shares (gross physical settlement). Examine the nature of the financial instrument and how it will be accounted assuming that the present value of option exercise price is Rs. 20,000,000?

Answer

This derivative involves Entity X taking delivery of a fixed number of equity shares for a fixed amount of cash. Even though the obligation for Entity X to purchase its own equity shares for Rs. 22,000,000 is conditional on the holder of the option exercising the option, Entity X has an obligation to deliver cash which it cannot avoid. As per para 23 of Ind AS 32 ‘Financial Instruments: Presentation’, the accounting for financial instrument will be as below:

The financial liability is recognised initially at the present value of the redemption amount, and is reclassified from equity. This would imply that a financial liability for an amount of present value of Rs. 22,000,000, say Rs. 20,000,000 will be recognised through a debit to equity. The initial premium received (Rs. 5,00,000) is credited to equity.
Subsequently, the financial liability is measured in accordance with Ind AS 109. While a subsequent paragraph will deal with measurement of financial liabilities. The financial liability of Rs. 20,000,000 will be measured at amortised cost as per Ind AS 109 and finance cost of Rs. 2,000,000 will be recognised over the exercise period.
If the contract expires without delivery, the carrying amount of the financial liability is reclassified to equity ie. an amount of Rs. 22,000,000 will be reclassified from financial liability to equity.

Q – 84 On 1st April 2017, A Ltd. lent Rs. 2 crores to a supplier in order to assist them with their expansion plans. The arrangement of the loan cost the company Rs. 10 lakhs. The company has agreed not to charge interest on this loan to help the supplier's short -term cash flow but expected the supplier to repay Rs. 2.40 crores on 31st March 2019. As calculated by the finance team of the company, the effective annual rate of interest on this loan is 6.9% On 28th February 2018, the company received the information that poor economic climate has caused the supplier significant problems and in order to help them, the company agreed to reduce the amount repayable by them on 31st March 2019 to Rs. 2.20 crores. Suggest the accounting entries as per applicable Ind AS.

Answer : The loan to the supplier would be regarded as a financial asset. The relevant accounting standard Ind AS 109 provides that financial assets are normally measured at fair value. If the financial asset in which the only expected future cash inflows are the receipts of principal and interest and the investor intends to collect these inflows rather than dispose of the asset to a third party, then Ind AS 109 allows the asset to be measured at amortised cost using the effective interest method.

If this method is adopted, the costs of issuing the loan are included in its initial carrying value rather than being taken to profit or loss as an immediate expense. This makes the initial carrying value Rs. 2,10,00,000.

Under the effective interest method, part of the finance income is recognised in the current period rather than all in the following period when repayment is due. The income recognised in the current period is Rs. 14,49,000 (Rs. 2,10,00,000 x 6.9%) evidence that the financial asset suffered impairment at 31st March 2018.

The asset is re-measured at the present value of the revised estimated future cash inflows, using the original effective interest rate. Under the revised estimates the closing carrying amount of the asset would be Rs. 2,05,79,981 (Rs. 2,20,00,000 / 1.069). The reduction in carrying value of Rs. 18,69,019 (Rs. 2,24,49,000 – 2,05,79,981) would be charged to profit or loss in the current period as an impairment of a financial asset.

Therefore, the net charge to profit or loss in respect of the current period would be Rs. 4,20,019 (18,69,019 – 14,49,000).

Q – 85

ABC Ltd. acquired 5% equity shares of XYZ Ltd. for Rs. 10 crore in the year 2011-12. The company is in process of preparing the financial statements for the year 2012-13 and is assessing the fair value at subsequent measurement of the investment made in XYZ Ltd. Based on the observable input, the ABC Ltd. identified a similar nature of transaction in which PQR Ltd. acquired 20% equity shares in XYZ Ltd. for Rs. 60 crore. The price of such transaction was determined on the basis of Comparable Companies Method (CCM)- Enterprise Value (EV) / EBITDA which was 8. For the current year, the EBITDA of XYZ Ltd. is Rs. 40 crore. At the time of acquisition, the valuation was determined after considering 5% of liquidity discount and 5% of non-controlling stake discount. What will be the fair value of ABC Ltd.’s investment in XYZ Ltd. as on the balance sheet date?

Solution:

Determination of Enterprise Value of XYZ Ltd.

Particulars	Rs. in crore
EBITDA as on the measurement date	40
EV/EBITDA multiple as on the date of valuation	8
Enterprise value of XYZ Ltd.	320

Determination of subsequent measurement of XYZ Ltd.

Particulars	Rs. in crore
Enterprise Value of XYZ Ltd.	320
ABC Ltd.’s share based on percentage of holding (5% of 320)	16
Less: Liquidity discount & Non-controlling stake discount (5%+5%=10%)	(1.6)
Fair value of ABC Ltd.’s investment in XYZ Ltd.	14.4

Q – 86

ABC Ltd. is a long-standing customer of XYZ Ltd. Mrs. P whose husband is a director in XYZ Ltd. purchased a controlling interest in entity ABC Ltd. on 1st June, 2017. Sales of products from XYZ Ltd. to ABC Ltd. in the two-month period from 1st April 2017 to 31st May 2017 totalled Rs. 8,00,000. Following the shares purchased by Mrs. P, XYZ Ltd. began to supply the products at a discount of 20% to their normal selling price and allowed ABC Ltd. three months’ credit (previously ABC Ltd. was only allowed one month’s credit, XYZ Ltd.’s normal credit policy). Sales of products from XYZ Ltd. to ABC Ltd. in the ten-month period from 1st June 2017 to 31st March 2017 totalled Rs. 60,00,000. On 31st March 2018, the trade receivables of XYZ Ltd. included Rs. 18,00,000 in respect of amounts owing by ABC Ltd.

Analyse and show how the above event would be reported in the financial statements of XYZ Ltd. For the year ended 31 March 2018 and mention the disclosure requirements also as per Ind AS.

Answer:

XYZ Ltd. would include the total revenue of Rs. 68,00,000 (Rs. 60,00,000 + Rs. 8,00,000) from ABC Ltd. received / receivable in the year ended 31st March 2018 within its revenue and show Rs. 18,00,000 within trade receivables at 31st March 2018. Mrs. P would be regarded as a related party of XYZ Ltd. because she is a close family member of one of the key management personnel of XYZ Ltd.

From 1st June 2017, ABC Ltd. would also be regarded as a related party of XYZ Ltd. because from that date ABC Ltd. is an entity controlled by another related party.

Because ABC Ltd. is a related party with whom XYZ Ltd. has transactions, then XYZ Ltd. should disclose:

The nature of the related party relationship
The revenue of Rs. 60,00,000 from ABC Ltd. since 1st June 2017.
The outstanding balance of Rs. 18,00,000 at 31st March 2018

In the current circumstances it may well be necessary for XYZ Ltd. to also disclose the favourable terms under which the transactions are carried out.

Q – 87 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 –

on his superannuation, or
on his retirement or resignation, or
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.

Answer: The amount of gratuity would be attributed to each year of service and calculated as follows:

Number of employees not likely to fulfill the eligibility criteria will be ignored.

Other employees will be grouped according to period of service they are expected to render taking into account:

mortality rate
disablement and
resignation after 5 years.

Gratuity payable will be calculated in accordance with the formula prescribed in the governing statute based on the period of service and the salary at the time of termination of employment, assuming promotion, salary increases etc.

For those employees for whom the amount payable as per the formula does not exceed Rs. 10,00,000, over the expected period of service, the amount payable will be divided by the expected period of service and the resulting amount will be attributed to each year of the expected period of service, including the period before the stipulated period of 5 years.

In case of the remaining employees, the amount as per the formula exceeds Rs. 10,00,000 over the expected period of service of 10 years, and the amount of the threshold of Rs.

10,00,000 is reached at the end of 8 years i.e. Rs. 1,25,000 (Rs. 10,00,000 divided by 8) is attributed to each of the first 8 years. In this case, no benefit is attributed to subsequent two years. This is because service beyond 8 years will lead to no material amount of further benefits.

Q – 88: OPQ Ltd is a listed company having its corporate office at Nagpur. The company has a branch office at Chennai. The company has been operating in Indian market for the last 10 years. The company operates a pension plan that provides a pension of 2.5% of the final salary for each year of service. The benefits become vested after seven years of service.

On 1st April, 2018, the company increased the pension to 3% of the final salary for each year of service starting from 1st April, 2011. On the date of the improvement, the present value of the additional benefits for service from 1April, 2011 to 1st April 218 was as follows:

Employees with more than seven years’ service on 1 January 2018 – Rs. 2,75,000
Employees with less than 7 years of service – Rs. 2,21,000 (average 4 years to go). What would be the accounting treatment in this case?

Answer: OPQ Ltd increased the pension to 3% of the final salary for each year of service starting from 1st April, 2011 to 1st April, 2018.

The company would recognize the total amount of Rs. 4,96,000 (i.e. Rs. 2,75,000 + Rs. 2,21,000) immediately, as for the purpose of recognition it does not make any difference as to whether the benefits are already vested or not.

Q – 89:

Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to deliver goods in exchange for total consideration of USD 50 million and receives an upfront payment of USD 20 million on this date. The functional currency of the supplier is INR. The goods are delivered and revenue is recognised on 31st March, 2018. USD 30 million is received on 1st April, 2018 in full and final settlement of the purchase consideration.

Answer: This is the case of Revenue recognised at a single point in time with multiple payments. As per the guidance given in Appendix B to Ind AS 21:

A Ltd. will recognise a non-monetary contract liability amounting Rs. 1,440 million, by translating USD 20 million at the exchange rate on 1st January, 2018 ie Rs. 72 per USD.

A Ltd. will recognise revenue at 31st March, 2018 (that is, the date on which it transfers the goods to the customer).

A Ltd. determines that the date of the transaction for the revenue relating to the advance consideration of USD 20 million is 1st January, 2018. Applying paragraph 22 of Ind AS 21,

A Ltd. determines that the date of the transaction for the remainder of the revenue as 31st March, 2018.

On 31st March, 2018, A Ltd. will:

derecognise the non-monetary contract liability of USD 20 million and recognise USD 20 million of revenue using the exchange rate as at 1st January, 2018 ie Rs. 72 per USD; and
recognise revenue and a receivable for the remaining USD 30 million, using the exchange rate on 31st March, 2018 ie Rs. 75 per USD.
The receivable of USD 30 million is a monetary item, so it should be translated using the closing rate until the receivable is settled.

Q – 90 M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical companies and nonpharmaceutical companies. It has a wholly owned subsidiary, G Ltd, which is engaged in the business of pharmaceuticals. G Ltd purchases the pharmaceutical bottles from its parent company. The demand of G Ltd is very high and the operations of M Ltd are very large and hence to cater to its shortfall, G Ltd also purchases the bottles from other companies. Purchases are made at the competitive prices. M Ltd sold pharmaceuticals bottles to G Ltd for Euro 12 lacs on 1st February, 2011. The cost of these bottles was Rs. 830 lacs in the books of M Ltd at the time of sale. At the year-end i.e. 31st March, 2011, all these bottles were lying as closing stock with G Ltd. What should be the accounting treatment for the above? Following additional information is available:

Exchange rate on 1st February, 2011 - 1 Euro = Rs. 83 Exchange rate on 31st March, 2011 - 1 Euro = Rs. 85

Answer: Accounting treatment in the books of M Ltd

M Ltd will recognize sales of Rs. 996 lacs (12 lacs Euro X 83)

Profit on sale of inventory = 996 lacs – 830 lacs = Rs. 166 lacs. Accounting treatment in the books of G Ltd G Ltd will recognize inventory on 1February, 2011 of Euro 12 lacs which will also be its closing stock at year end.

Accounting treatment in the consolidated financial statements

Receivable and payable in respect of above mentioned sale / purchase between M Ltd and G Ltd will get eliminated.

The closing stock of G Ltd will be translated at year end resulting in amount of closing stock of Rs. 1,020 lacs (12 lacs Euro X 85).

The restated amount of closing stock includes three components–

Restated amount of cost of inventory for Rs. 850 lacs
Profit element of Rs. 166 lacs; and
Translated amount of profit element of Rs. 4 lacs

At the time of consolidation, the two elements amounting to Rs. 170 lacs will be eliminated from the closing stock.

Q – 91

Entity A, whose functional currency is Rs., has a foreign operation, Entity B, with a Euro functional currency. Entity B issues to A perpetual debt (i.e. it has no maturity) denominated in euros with an annual interest rate of 6 per cent. The perpetual debt has no issuer call option or holder put option. Thus, contractually it is just an infinite stream of interest payments in Euros.

In A's consolidated financial statements, can the perpetual debt be considered, in accordance with Ind AS 21.15, a monetary item "for which settlement is neither planned nor likely to occur in the foreseeable future" (i.e. part of A's net investment in B), with the exchange gains and losses on the perpetual debt therefore being recorded in equity

Answer:

Yes, as per Ind AS 21 net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation.

Analysis on the basis of above mentioned guidance

Q – 92 Parent P acquired 90 percent of subsidiary S some years ago. P now sells its entire investment in S for Rs. 1,500 lakhs. The net assets of S are 1,000 and the NCI in S is Rs. 100 lakhs. The cumulative exchange differences that have arisen during P’s ownership are gains of Rs. 200 lakhs, resulting in P’s foreign currency translation reserve in respect of S having a credit balance of Rs.180 lakhs, while the cumulative amount of exchange differences that have been attributed to the NCI is Rs. 20 lakhs

Calculate P’s gain on disposal.

Ans:

P’s gain on disposal would be calculated in the following manner:

Rs in Lakhs
Sale proceeds	1500
Net assets of S	(1000)
NCI derecognised	100
Foreign currency translation reserve	180
Gain on disposal	780

Q – 93 ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the previous GAAP, the contributions received by ABC Ltd. from the government (which holds 100% shareholding in ABC Ltd.) which is in the nature of promoters’ contribution have been recognised in capital reserve and treated as part of shareholders’ funds in accordance with the provisions of AS 12, Accounting for Government Grants.

State whether the accounting treatment of the grants in the nature of promoters’ contribution as per AS 12 is also permitted under Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance. If not, then what will be the accounting treatment of such grants recognized in capital reserve as per previous GAAP on the date of transition to Ind AS.

Answer: Paragraph 2 of Ind AS 20, “Accounting for Government Grants and Disclosure of Government Assistance” inter alia states that the Standard does not deal with government participation in the ownership of the entity.

Since ABC Ltd. is a Government company, it implies that government has 100% shareholding in the entity. Accordingly, the entity needs to determine whether the payment is provided as a shareholder contribution or as a government. Equity contributions will be recorded in equity while grants will be shown in the Statement of Profit and Loss.

Where it is concluded that the contributions are in the nature of government grant, the entity shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101 ‘First Time

Adoption of Ind AS’. Ind AS 20 requires all grants to be recognised as income on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. Unlike AS 12, Ind AS 20 requires the grant to be classified as either a capital or an income grant and does not permit recognition of government grants in the nature of promoter’s contribution directly to shareholders’ funds.

recognise all assets and liabilities whose recognition is required by Ind AS;
not recognise items as assets or liabilities if Ind AS do not permit such recognition;
reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind AS; and
apply Ind AS in measuring all recognised assets and liabilities.”

Accordingly, as per the above requirements of paragraph 10(c) in the given case, contributions recognised in the Capital Reserve should be transferred to appropriate category under ‘Other Equity’ at the date of transition to Ind AS.

Q – 94: An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a three-year term, and are issued at par with a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 20,00,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. The entity has an option to settle the principal amount of the convertible bonds in ordinary shares or in cash. When the bonds are issued, the prevailing market interest rate for similar debt without a conversion option is 9 per cent. At the issue date, the market price of one ordinary share is Rs. 3. Income tax is ignored.

Profit attributable to ordinary equity holders of the parent entity Year 1 - Rs. 10,00,000 Ordinary shares outstanding - Rs. 12,00,000

Convertible bonds outstanding - 2,000 Calculate basic and diluted EPS when

Answer:

Allocation of proceeds of the bond issue:

Liability component- Rs. 18,48,122* Equity component - Rs. 1,51,878

- Rs. 20,00,000

The liability and equity components would be determined in accordance with IND AS 32 Financial Instruments: Presentation. These amounts are recognised as the initial carrying amounts of the liability and equity components.

*This represents the present value of the principal and interest discounted at 9% Rs. 20,00,000 payable at the end of three years; Rs. 1,20,000 payable annually in arrears for three years.

Basic earnings per share Year 1:

Rs. 10,00,000 / 1,200,000 = Rs. 0.83 per ordinary share Diluted earnings per share Year 1:

It is presumed that the issuer will settle the contract by the issue of ordinary shares. The dilutive effect is therefore calculated as under.

[Rs. 1,000,000 + Rs166,3312] / [1,200,000 + 500,0003] = Rs. 0.69 per ordinary share

Profit is adjusted for the accretion of Rs. 166,331 (Rs. 1,848,122 × 9%) of the liability because of the passage of time.

500,000 ordinary shares = 250 ordinary shares × 2,000 convertible bonds

Q – 95 On 1 April 20X1, Alpha Ltd. acquires 80 percent of the equity interest of Beta Pvt. Ltd. in exchange for cash of Rs. 300. Due to legal compulsion, Beta Pvt. Ltd. had to dispose of their investments by a specified date. Therefore, they did not have sufficient time to market Beta Pvt. Ltd. to multiple potential buyers. The management of Alpha Ltd. initially measures the separately recognizable identifiable assets acquired and the liabilities assumed as of the acquisition date in accordance with the requirement of Ind AS 103. The identifiable assets are measured at Rs. 500 and the liabilities assumed are measured at Rs. 100. Alpha Ltd. engages on independent consultant, who determined that the fair value of 20 per cent non-controlling interest in Beta Pvt. Ltd. is Rs. 84. Alpha Ltd. reviewed the procedures it used to identify and measure the assets acquired and liabilities assumed and to measure the fair value of both the non controlling interest in Beta Pvt. Ltd. and the consideration transferred. After the review, it decided that the procedures and resulting measures were appropriate.

Calculate the gain or loss on acquisition of Beta Pvt. Ltd. and also show the journal entries for accounting of its acquisition. Also calculate the value of the non-controlling interest in Beta Pvt. Ltd. on the basis of proportionate interest method, if alternatively applied?

Answer

The amount of Beta Pvt. Ltd. identifiable net assets [Rs. 400, calculated as Rs. 500 - Rs. 100) exceeds the fair value of the consideration transferred plus the fair value of the non controlling interest in Beta Pvt. Ltd. [Rs. 384 calculated as 300 + 84]. Alpha Ltd. measures the gain on its purchase of the 80 per cent interest as follows: Rs. in lakh

Amount of the identifiable net assets acquired (Rs. 500 - Rs. 100)	400
Less: Fair value of the consideration transferred for Alpha Ltd. 80 per cent interest in Beta Pvt. Ltd.	300
Add: Fair value of non controlling interest in Beta Pvt. Ltd.	84
	(384)
Gain on bargain purchase of 80 per cent interest	16

Journal Entry

Rs. in lakhs

Identifiable assets acquired Dr To Cash

To Liabilities assumed

To OCI/Equity-Gain on the bargain purchase

To Equity-non controlling interest in Beta Pvt Ltd.

500

300

100

If the acquirer chose to measure the non controlling interest in Beta Pvt. Ltd. on the basis of its proportionate interest in the identifiable net assets of the acquire, the recognized amount of the non controlling interest would be Rs. 80 (Rs. 400 x 0.20). The gain on the bargain purchase then would be Rs. 20 (Rs. 400- (Rs. 300 + Rs. 80)

Q – 96 On 1st April 2017 Alpha Ltd. commenced joint construction of a property with Gama Ltd. For this purpose, an agreement has been entered into that provides for joint operation and ownership of the property. All the ongoing expenditure, comprising maintenance plus borrowing costs, is to be shared equally. The construction was completed on 30th September 2017 and utilisation of the property started on 1st January 2018 at which time the estimated useful life of the same was estimated to be 20 years.

Total cost of the construction of the property was Rs. 40 crores. Besides internal accruals, the cost was partly funded by way of loan of Rs. 10 crores taken on 1st January 2017. The loan carries interest at an annual rate of 10% with interest payable at the end of year on 31st December each year. The company has spent Rs. 4,00,000 on the maintenance of such property. The company has recorded the entire amount paid as investment in Joint Venture in the books of accounts. Suggest the suitable accounting treatment of the above transaction as the accounting entries as per applicable Ind AS.

Answer:

As provided in Ind- AS 111 - Joint Arrangements - this is a joint arrangement because two or more parties have joint control of the property under a contractual arrangement. The arrangement will be regarded as a joint operation because Alpha Ltd. and Gama Ltd. have rights to the assets and obligations for the liabilities of this joint arrangement. This means that the company and the other investor will each recognise 50% of the cost of constructing the asset in property, plant and equipment.

The borrowing cost incurred on constructing the property should under the principles of Ind AS 23 ‘Borrowing Costs’, be included as part of the cost of the asset for the period of construction. In this case, the relevant borrowing cost to be included is Rs. 50,00,000 (Rs. 10,00,00,000 x 10% x 6/12).

The total cost of the asset is Rs. 40,50,00,000 (Rs. 40,00,00,000 + Rs. 50,00,000)

Rs. 20,25,00,000 crores is included in the property, plant and equipment of Alpha Ltd. and the same amount in the property, plant and equipment of Gama Ltd.

The depreciation charge for the year ended 31 March 2018 will therefore be Rs. 1,01,25,000 (Rs. 40,50,00,000 x 1/20 x 6/12) Rs. 50,62,500 will be charged in the statement of profit or loss of the company and the same amount in the statement of profit or loss of Gama Ltd. (finance cost for the second half year of Rs. 50,00,000 plus maintenance costs of Rs. 4,00,000) will be charged to the statement of profit or loss of Alpha Ltd. and Gama Ltd. in equal proportions- Rs. 27,00,000 each.

Q – 97 Pluto Ltd. has purchased a manufacturing plant for Rs. 6 lakhs on 1 April 20X1. The useful life of the plant is 10 years. On 30th September 20X3, Pluto temporarily stops using the manufacturing plant because demand has declined. However, the plant is maintained in a workable condition and it will be used in future when demand picks up.

The accountant of Pluto ltd. decided to treat the plant as held for sale until the demands picks up and accordingly measures the plant at lower of carrying amount and fair value less cost to sell.

Also, the accountant has also stopped charging the depreciation for the rest of period considering the plant as held for sale. The fair value less cost to sell on 30th September 20X3 and 31 March 20X4 was Rs. 4 lakhs and Rs. 3.5 lakhs respectively.

The accountant has performed the following working:

Carrying amount on initial classification as held for sale
Purchase Price of Plant	6,00,000
Less: Accumulated dep (6,00,000/ 10 Years)* 2.5 years	(1,50,000)
	4,50,000
Fair Value less cost to sell as on 31 March 20X3	4,00,000
The value will be lower of the above two	4,00,000

Balance Sheet extracts as on 31 March 20X4

Assets
Current Assets
Other Current Assets
Assets classified as held for sale	3,50,000

Required:

Analyse whether the above accounting treatment made by the accountant is in compliance with the Ind AS. If not, advise the correct treatment alongwith working for the same.

Solution:

The above treatment needs to be examined in the light of the provisions given in Ind AS 16 ‘Property, Plant and Equipment’ and Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’.

Para 6 of Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’ states that: “An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use”.

Paragraph 7 of Ind AS 105 states that:

“For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable. Thus, an asset (or disposal group) cannot be classified as a non-current asset (or disposal group) held for sale, if the entity intends to sell it in a distant future”.

Further, paragraph 8 of Ind AS 105 states that:

“For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.”

Paragraph 13 of Ind AS 105 states that:

“An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned. This is because its carrying amount will be recovered principally through continuing use.”

Paragraph 55 of Ind AS 16 states that:

“Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated.”

Going by the guidance given above,

The Accountant of Pluto Ltd. has treated the plant as held for sale and measured it at the fair value less cost to sell. Also, the depreciation has not been charged thereon since the date of classification as held for sale which is not correct and not in accordance with Ind AS 105 and Ind AS 16.

Accordingly, the manufacturing plant should be treated as abandoned asset rather as held for sale because its carrying amount will be principally recovered through continuous use. Pluto Ltd. shall not stop charging depreciation or treat the plant as held for sale because its carrying amount will be recovered principally through continuing use to the end of their economic life.

The working of the same for presenting in the balance sheet is given as below:

Calculation of carrying amount as on 31 March 20X4
Purchase Price of Plant	6,00,000
Less: Accumulated depreciation (6,00,000/ 10 Years)* 3 Years	(1,80,000)
	4,20,000

Balance Sheet extracts as on 31 March 20X4

Assets
Non – Current Assets
Property, Plant and Equipment	4,20,000

Q – 98 Mercury Ltd. is an entity engaged in plantation and farming on a large scale diversified across India. On 1st April 20X1, the company has received a government grant for Rs. 10 lakhs subject to a condition that it will continue to engage in plantation of eucalyptus tree for a coming period of five years.

The management has a reasonable assurance that the entity will comply with condition of engaging in the plantation of eucalyptus tree for specified period of five years and accordingly it recognizes proportionate grant for Rs. 2 lakhs in Statement of Profit and Loss as income following the principles laid down under Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance.

Required: Analyse whether the above accounting treatment made by the management is in compliance of the Ind AS. If not, advise the correct treatment alongwith working for the same.

Answer:

As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41 Agriculture shall be applicable to this company.

The above facts need to be examined in the light of the provisions given in Ind AS 20

‘Accounting for Government Grants and Disclosure of Government Assistance’ and Ind AS 41 ‘Agriculture’.

Para 2(d) of Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government

Assistance’ states: “This Standard does not deal with government grants covered by Ind AS 41, Agriculture”.

Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:

“This Standard shall be applied to account for the government grants covered by paragraphs 34 and 35 when they relate to agricultural activity”.

Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:

“If a government grant related to a biological asset measured at its fair value less costs to sell is conditional, including when a government grant requires an entity not to engage in specified agricultural activity, an entity shall recognise the government grant in profit or loss when, and only when, the conditions attaching to the government grant are met”. Understanding of the

given facts, The Company has recognised the proportionate grant for Rs 2 lakhs in Statement of Profit and Loss before the conditions attaching to government grant are met which is not correct and nor in accordance with provision of Ind AS 41 ‘Agriculture’.

Accordingly, the accounting treatment of government grant received by the Mercury Ltd. is governed by the provision of Ind AS 41 ‘Agriculture’ rather Ind AS 20 ‘Accounting for

Government Grants and Disclosure of Government Assistance’.

Government grant for Rs. 10 lakhs shall be recognised in profit or loss when, and only when, the conditions attaching to the government grant are met i.e. after the expiry of specified period of five years of continuing engagement in the plantation of eucalyptus tree.

Balance Sheet extracts showing the presentation of Government Grant as on 31st March 20X2

Liabilities	INR
Non – Current Liabilities
Other Non – Current liabilities
Government Grants	10,00,000

Q – 99 Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing deal. Based on its experience, Growth Ltd determines that customising the infrastructure will take approximately 200 hours in total to complete the project and charges Rs. 150 per hour. After incurring 100 hours of time, Growth Ltd and the customer agree to change an aspect of the project and increases the estimate of labour hours by 50 hours at the rate of Rs. 100 per hour.

Determine how contract modification will be accounted as per Ind AS 115?

Answer: Considering that the remaining goods or services are not distinct, the modification will be accounted for on a cumulative catch up basis, as given below:

Particulars	Hours	Rate (Rs.)	Amount (Rs.)
Initial contract amount	200	150	30,000
Modification in contract	50	100	5,000
Contract amount after modification	250	140*	35,000
	100	140	14,000
	100	150	15,000
Adjustment in revenue *35,000 / 250 = 140			(1000)

Q – 100 An entity provides broadband services to its customers along with voice call service. Customer buys modem from the entity. However, customer can also get the connection from the entity and modem from any other vendor. The installation activity requires limited effort and the cost involved is almost insignificant. It has various plans where it provides either broadband services or voice call services or both.

Are the performance obligations under the contract distinct?

Answer

Entity promises to customer to provide

Broadband Service
Voice Call services
Modem

Entity’s promise to provide goods and services is distinct

if customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and
entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract

For broadband and voice call services –

Broadband and voice services are separately identifiable from other promises as company has various plans to provide the two services separately. These two services are not dependant or interrelated. Also the customer can benefit on its own from the services received.

For sale of modem –

Customer can either buy product from entity or third party. No significant customisation or modification is required for selling product.

Based on the evaluation we can say that there are three separate performance obligation: -

Broadband Service
Voice Call services
Modem

Q – 101 An entity, a software developer, enters into a contract with a customer to transfer a software license, perform an installation service and provide unspecified software updates and technical support (online and telephone) for a two-year period. The entity sells the license, installation service and technical support separately. The installation service includes changing the web screen for each type of user (for example, marketing, inventory management and information technology). The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support.Determine how many performance obligations does the entity have?

Answer: The entity assesses the goods and services promised to the customer to determine which goods and services are distinct. The entity observes that the software is delivered before the other goods and services and remains functional without the updates and the technical support. Thus, the entity concludes that the customer can benefit from each of the goods and services either on their own or together with the other goods and services that are readily available.

The entity also considers the factors of Ind AS 115 and determines that the promise to transfer each good and service to the customer is separately identifiable from each of the other promises. In particular, the entity observes that the installation service does not sign ificantly modify or customise the software itself and, as such, the software and the installation service are separate outputs promised by the entity instead of inputs used to produce a combined output.

On the basis of this assessment, the entity identifies four performance obligations in the contract for the following goods or services:

The software license
An installation service
Software updates
Technical support

Q – 102 Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for the same, Q TV allowed Deshabandhu a free advertisement spot, which was duly utilised by Deshabandu.

How revenue for these nonmonetary transactions in the area of advertising will be recognised and measured?

Answer Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For example, this

Standard would not apply to a contract between two oil companies that agree to an exchange of oil to fulfil demand from their customers in different specified locations on a timely basis. In industries with homogenous products, it is common for entities in the same line of business to exchange products in order to sell them to customers or potential customers other than parties to exchange. The current scenario, on the contrary, will be covered under Ind AS 115 since the same is exchange of dissimilar goods or services because both of the entities deal in different mode of media, i.e., one is print media and another is electronic media and both parties are acting as customers and suppliers for each other.

Further, in the current scenario, it seems it is for consumption by the said parties and hence it does not fall under paragraph 5(d). It may also be noted that, even if it was to facilitate sales to customers or potential customers, it would not be scoped out since the parties are not in the same line of business.

As per paragraph 47 of Ind AS 115, “An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both”.

Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in which a customer promises consideration in a form other than cash, an entity shall measure the non-cash consideration (or promise of non-cash consideration) at fair value.

In accordance with the above, QTV and Deshabandhu should measure the revenue promised in the form of non-cash consideration as per the above referred principles of Ind AS 115.

Q – 103 X Ltd. is engaged in manufacturing and selling of designer furniture. It sells goods on extended credit. X Ltd. sold furniture for Rs. 40,00,000 to a customer, the payment against which was receivable after 12 months with interest at the rate of 3% per annum. The market interest rate on the date of transaction was 8% per annum. How will X Ltd. recognise revenue for the above transaction?

Answer X Ltd. should determine the fair value of revenue by calculating the present value of the cash flows receivable.

Total amount receivable = Rs. 40,00,000 x 1.03 = Rs. 41,20,000.

Present Value of receivable (Revenue) = Rs. 41,20,000/1.08 = Rs. 38,14,815. Interest income = Rs. 41,20,000 - Rs. 38,14,815 = Rs. 3,05,185.

Therefore, on transaction date Rs. 38,14,815 will be recognised as revenue from sale of goods and Rs. 3,05,185 will be recognised as interest income over the period in accordance with Ind AS 109.

Q – 104 A lessee enters into a lease of an equipment. The contract stipulates the lessor will perform maintenance of the leased equipment and receive consideration for that maintenance service. The contract includes the following fixed prices for the lease and non-lease component:

Lease	80,000
Maintenance	10,000
Total	90,000

Assume the stand-alone prices cannot be readily observed, so the lessee makes estimates, maximising the use of observable information, of the lease and non-lease components, as follows:

Lease	85,000
Maintenance	15,000
Total	1,00,000

In the given scenario, assuming lessee has not opted the practical expedient, how will the lessee allocate the consideration to lease and non-lease component?

Solution: The stand-alone price for the lease component represents 85% (i.e., Rs. 85,000 / Rs. 1,00,000) of total estimated stand-alone prices. The lessee allocates the consideration in the contract (i.e., Rs. 90,000), as follows:

Lease (Rs. 90,000 x 85%)	76,500
Maintenance (Rs. 90,000 x 15%)	13,500
T otal	90,000

Q – 105 Mars Fashions is a new luxury retail company located in Lajpat Nagar, New Delhi. Kindly advise the accountant of the company on the necessary accounting treatment for the following items:

One of Company’s product lines is beauty products, particularly cosmetics such as lipsticks, moisturizers and compact make-up kits. The company sells hundreds of different brands of these products. Each product is quite similar, is purchased at similar prices and has a short lifecycle before a new similar product is introduced. The point of sale and inventory system is not yet fully functioning in this department. The sales manager of the cosmetic department is unsure of the cost of each product but is confident of the selling price and has reliably informed you that the Company, on average, make a gross margin of 65% on each line.
Mars Fashions also sells handbags. The Company manufactures their own handbags as they wish to be assured of the quality and craftsmanship which goes into each handbag.

The handbags are manufactured in India in the head office factory which has made handbags for the last fifty years. Normally, Mars manufactures 100,000 handbags a year in their handbag division which uses 15% of the space and overheads of the head office factory. The division employs ten people and is seen as being an efficient division within the overall company.

In accordance with Ind AS 2, explain how the items referred to in a) and b) should be measured.

Answer:

The retail method can be used for measuring inventories of the beauty products. The cost of the inventory is determined by taking the selling price of the cosmetics and reducing it by the gross margin of 65% to arrive at the cost.
The handbags can be measured using standard cost especially if the results approximate cost. Given that The company has the information reliably on hand in relation to direct materials, direct labour, direct expenses and overheads, it would be the best method to use to arrive at the cost of inventories.

Q – 106 Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license. The telecommunication license is carried at Rs. 5,00,000 in the books of Sun Ltd. The Software is carried at Rs. 10,000 in the books of the Earth Ltd which is not the fair value.

Advise journal entries in the following situations in the books of Sun Ltd and Earth Ltd:-

Fair value of software is Rs. 5,20,000 and fair value of telecommunication license is Rs. 5,00,000.
Fair Value of Software is not measureable. However similar Telecommunication license is transacted by another company at Rs. 4,90,000.
Neither Fair Value of Software nor Telecommunication license could be reliably measured.

Situation	Sun Ltd.	Earth Ltd
1	If an entity is able to measure reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure cost unless the fair value of the asset received is more clearly evident. If the fair value of Telecommunication license is clearly evident Dr. Software 500 Cr. Telecommunication license 500 If the fair value of Telecommunication license is not clearly evident Dr. Software 520 Cr. Telecommunication license 500 Cr. Profit on Exchange 20	If an entity is able to measure reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure cost unless the fair value of the asset received is more clearly evident. If the fair value of Software is clearly evident Dr. Telecommunication license 520 Cr. Software 10 Cr. Profit on Exchange 510 If the fair value of Software not is clearly evident Dr. Telecommunication license 500 Cr. Software 10 Cr. Profit on Exchange 490
2	Dr. Software 490 Dr. Loss on Exchange 10 Cr. Telecommunication license 500	Dr. Telecommunication license 490 Cr. Software 10 Cr. Profit on Exchange 480
	Note: The company may first recognise Impairment loss and then pass an entry. The effect is the same as impairment loss will also be charged to Income Statement.
3	Dr. Software 500 Cr. Telecommunication license 500	Cr. Software 10 Dr. Telecommunication license 10

Q – 107 Assume that the firm has not been operating its warranty for five years, and reliable data exists to suggest the following:

If minor defects occur in all products sold, repair costs of Rs. 20,00,000 would result.
If major defects are detected in all products, costs of Rs. 50,00,000 would result.
The manufacturer’s past experience and future expectations indicate that each year 80% of the goods sold will have no defects. 15% of the goods sold will have minor defects, and 5% of the goods sold will have major defects.

Calculate the expected value of the cost of repairs in accordance with the requirements of Ind AS 37, if any. Ignore both income tax and the effect of discounting.

Answer: The expected value of cost of repairs in accordance with Ind AS 37 is: (80% x nil) + (15% x Rs. 20,00,000) + (5% x Rs. 50,00,000) = 3,00,000 + 2,50,000

= 5,50,000

Q – 108 What is the date of approval for issue of the financial statements prepared for the reporting period from April 1, 2011 to March 31, 2012, in a situation where following dates are available? Completion of preparation of financial statements May 28, 2012 Board reviews and approves it for issue June 19, 2012

Available to shareholders - July 01, 2012 Annual General Meeting - September 15, 2012

Filed with regulatory authority - October 16, 2012

Will your answer differ if the entity is a partnership firm?

Answer: As per Ind AS 10 the date of approval for issue of financial statements is the date on which the financial statements are approved by the Board of Directors in case of a company, and, by the corresponding approving authority in case of any other entity. Accordingly, in the instant case, the date of approval is the date on which the financial statements are approved by the Board of Directors of the company, i.e., June 19, 2012.

In the case of an entity is a partnership firm, the date of approval will be the date when the relevant approving authority of such entity approves the financial statements for issue ie. the date when the partner(s) of the firm approve(s) the financial statements.

Q – 109 ABC Ltd. is trading company in Laptops. On 31st March 20X2 company has 50 laptops which were purchased at Rs. 45,000 each. Company has considered the same price for calculation of closing inventory. On 15th April 20X2, advanced version of same series of laptops is introduced in the market. Therefore, the price of the current laptops crashes to Rs. 35,000 each. Company does not want to value the stock as Rs. 35,000 as the event of reduction took place after the 31stMarch 20X2 and the reduced prices were not applicable as on 31st March 20X2. Comment

Answer: As per Ind AS 10, the decrease in the net realizable value of the stock after reporting period should be considered as adjusting event.

Q – 110 X Ltd. was having investment in form of equity shares in another company as at the end of the reporting period, i.e., 31st March, 2012. After the end of the reporting period but before the approval of the financial statements it has been found that value of investment was fraudulently inflated by committing a computation error. Whether such event should be adjusted in the financial statements for the year 2011-12?

Answer: Since it has been detected that a fraud has been made by committing an intentional error and as a result of the same financial statements present an incorrect picture, which has been detected after the end of the reporting period but before the approval of the financial statements.

The same is an adjusting event. Accordingly, the value of investments in the financial statements should be adjusted for the fraudulent error in computation of value of investments.

Q – 111 MINDA issued 11,000 share appreciation rights (SARs) that vest immediately to its employees on 1 April 20X0. The SARs will be settled in cash. Using an option pricing model, at that date it is estimated that the fair value of a SAR is INR 100. SAR can be exercised any time up until 31 March 20X3. At the end of period on 31 March 20X1 it is expected exercise the option 95% of total employees, 92% at the end of next year and finally it was vested only 89% at the end of the 3rd year.

Fair value of SAR	INR
31-Mar-20X1	132
31-Mar-20X2	139
31-Mar-20X3	141

Pass the Journal entries?

Answer:

Period	Fair value	To be vested	Cumulative	Expense
Start	100	100%	11,00,000	11,00,000
Period 1	132	95%	13,79,400	2,79,400
Period 2	139	92%	14,06,680	27,280
Period 3	141	89%	13,80,390	(26,290)
13,80,390

Q – 112 An entity has taken a loan facility from a bank that is to be repaid within a period of 9 months from the end of the reporting period. Prior to the end of the reporting period, the entity and the bank enter into an arrangement, whereby the existing outstanding loan will, unconditionally, roll into the new facility which expires after a period of 5 years.

How should such loan be classified in the balance sheet of the entity?
Will the answer be different if the new facility is agreed upon after the end of the reporting period?
Will the answer to (a) be different if the existing facility is from one bank and the new facility is from another bank?
Will the answer to (a) be different if the new facility is not yet tied up with the existing bank, but the entity has the potential to refinance the obligation?

Answer

The loan is not due for payment at the end of the reporting period. The entity and the bank have agreed for the said roll over prior to the end of the reporting period for a period of 5 years. Since the entity has an unconditional right to defer the settlement of the liability for at least twelve months after the reporting period, the loan should be classified as non-current.
Yes, the answer will be different if the arrangement for roll over is agreed upon after the end of the reporting period, since assessment is required to be made based on terms of the existing loan facility. As at the end of the reporting period, the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Hence the loan is to be classified as current.
Yes, loan facility arranged with new bank cannot be treated as refinancing, as the loan with the earlier bank would have to be settled which may coincide with loan facility arranged with a new bank. In this case, loan has to be repaid within a period of 9 months from the end of the reporting period, therefore, it will be classified as current liability.
Yes, the answer will be different and the loan should be classified as current. This is because, as per paragraph 73 of Ind AS 1, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as current.

Q – 113 Paragraph 69(a) of Ind AS 1 states “An entity shall classify a liability as current when it expects to settle the liability in its normal operating cycle”. An entity develops tools for customers and this normally takes a period of around 2 years for completion. The material is supplied by the customer and hence the entity only renders a service. For this, the entity receives payments upfront and credits the amount so received to “Income Received in Advance”. How should this “Income Received in Advance” be classified, i.e., current or non- current?

Answer: Ind AS 1 provides “Some current liabilities, such as trade payables and some accruals for employee and other operating costs, are part of the working capital used in the entity’s normal operating cycle. An entity classifies such operating items as current liabilities even if they are due to be settled more than twelve months after the reporting period.”

In accordance with the above, income received in advance would be classified as current liability since it is a part of the working capital, which the entity expects to earn within its normal operating cycle.

Q – 114 In December 2XX1 an entity entered into a loan agreement with a bank. The loan is repayable in three equal annual instalments starting from December 2XX5. One of the loan covenants is that an amount equivalent to the loan amount should be contributed by promoters by March 24 2XX2, failing which the loan becomes payable on demand. As on March 24, 2XX2, the entity has not been able to get the promoter’s contribution. On March 25, 2XX2, the entity approached the bank and obtained a grace period upto June 30, 2XX2 to get the promoter’s contribution. The bank cannot demand immediate repayment during the grace period. The annual reporting period of the entity ends on March 31, 2XX2.

As on March 31, 2XX2, how should the entity classify the loan?

Assume that in anticipation that it may not be able to get the promoter’s contribution by due date, in February 2XX2, the entity approached the bank and got the compliance date extended upto June 30, 2XX2 for getting promoter’s contribution. In this case will the loanclassification as on March 31, 2XX2 be different from (a) above?

Answer:

Ind AS 1, inter alia, provides, “An entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.” In the present case, following the default, grace period within which an entity can rectify the breach is less than twelve months after the reporting period. Hence as on March 31, 2XX2, the loan will be classified as current.
Ind AS 1 deals with classification of liability as current or non-current in case of breach of a loan covenant and does not deal with the classification in case of expectation of breach. In this case, whether actual breach has taken place or not is to be assessed on June 30, 2XX2, i.e., after the reporting date. Consequently, in the absence of actual breach of the loan covenant as on March 31, 2XX2, the loan will retain its classification as non-current.

Q – 115 To comply with listing requirements and other statutory obligations Quaker Ltd. prepares interim financial reports at the end of each quarter. The company has brought forward losses of Rs. 700 lakhs under Income Tax Law, of which 90% is eligible for set off as per the recent verdict of the Court, that has attained finality. No Deferred Tax Asset has been recognized on such losses in view of the uncertainty over its eligibility for set off. The company has reported quarterly earnings of Rs. 700 lakhs and Rs. 300 lakhs respectively for the first two quarters of Financial year 2013-14 and anticipates a net earning of Rs. 800 lakhs in the coming half year ended March 2014 of which Rs. 100 lakhs will be the loss in the quarter ended Dec. 2013. The tax rate for the company is 30% with a 10% surcharge.

You are required to calculate the amount of Tax Expense to be reported for each quarter of financial year 2013-14.

Answer

Estimated tax liability on annual income

= [Income Rs.1,800 lakhs less b/f losses Rs. 630 lakhs (90% of 700)] x 33%

= 33% of Rs. 1,170 lakhs = Rs. 386.10 lakhs

As per Para 29(c) of AS 25‘Interim Financial Reporting’, income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

Thus, estimated weighted average annual income tax rate = Rs. 386.10 lakhs divided by Rs. 1,800 lakhs=21.45%

Tax expense to be recognised in each quarter

		Rs. in lakhs
Quarter I–	Rs. 700 lakhs x 21.45%	150.15
Quarter II–	Rs. 300 lakhs x 21.45%	64.35
Quarter III–	(Rs. 100 lakhs) x 21.45%	(21.45)
Quarter IV–	Rs. 900 lakhs x 21.45%	193.05

Q – 116 Entity ABC acquired a building for its administrative purposes and presented the same as property, plant and equipment (PPE) in the financial year 2011- 12. During the financial year 2012- 13, it relocated the office to a new building and leased the said building to a third party. Following the change in the usage of the building, Entity ABC reclassified it from PPE to investment property in the financial year 2012- 13. Should Entity ABC account for the change as a change in accounting policy?

Solution: Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring are not changes in accounting policies.

As per Ind AS 16, ‘property, plant and equipment’ are tangible items that:

are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
are expected to be used during more than one period.”

As per Ind AS 40, ‘investment property’ is property (land or a building—or part of a building—or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:

use in the production or supply of goods or services or for administrative purposes; or
sale in the ordinary course of business.”

As per the above definitions, whether a building is an item of property, plant and equipment (PPE) or an investment property for an entity depends on the purpose for which it is held by the entity. It is thus possible that due to a change in the purpose for which it is held, a building that was previously classified as an item of property, plant and equipment may warrant reclassification as an investment property, or vice versa. Whether a building is in the nature of PPE or investment property is determined by applying the definitions of these terms from the perspective of that entity. Thus, the classification of a building as an item of property, plant and equipment or as an investment property is not a matter of an accounting policy choice.

Accordingly, a change in classification of a building from property, plant and equipment to investment property due to change in the purpose for which it is held by the entity is not a change in an accounting policy.

Q – 117 Company A acquires 70% of the equity stake in Company B on July 20, 20X1. The consideration paid for this transaction is as below:

Cash consideration of Rs. 15,00,000
200,000 equity shares having face of Rs. 10 and fair value of Rs. 15 per share.

On the date of acquisition, Company B has cash and cash equivalent balance of Rs. 2,50,000 in its books of account.

On October 10, 20X2, Company A further acquires 10% stake in Company B for cash consideration of Rs. 8,00,000.

Advise how the above transactions will be disclosed/presented in the statement of cash flows as per Ind AS 7.

Answer:

As per para 39 of Ind AS 7, the aggregate cash flows arising from obtaining control of subsidiary shall be presented separately and classified as investing activities.

As per para 42 of Ind AS 7, the aggregate amount of the cash paid or received as consideration for obtaining subsidiaries is reported in the statement of cash flows net of cash and cash equivalents acquired or disposed of as part of such transactions, events or changes in circumstances.

Further, investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.

As per para 42A of Ind AS 7, cash flows arising from changes in ownership interests in a subsidiary that do not result in a loss of control shall be classified as cash flows from financing activities, unless the subsidiary is held by an investment entity, as defined in Ind AS 110, and is required to be measured at fair value through profit or loss. Such transactions are accounted for as equity transactions and accordingly, the resulting cash flows are classified in the same way as other transactions with owners.

Considering the above, for the financial year ended March 31, 20X2 total consideration of Rs. 15,00,000 less Rs. 250,000 will be shown under investing activities as “ Acquisition of the subsidiary (net of cash acquired)”.

There will not be any impact of issuance of equity shares as consideration in the cash flow statement however a proper disclosure shall be given elsewhere in the financial statements in a way that provides all the relevant information about the issuance of equity shares for non-cash consideration.

Further, in the statement of cash flows for the year ended March 31, 20X3, cash consideration paid for the acquisition of additional 10% stake in Company B will be shown under financing activities.

Q – 118 A Ltd. is to sell a non-current asset, being a piece of land. The piece of land has been contaminated and will require the entity to carry out Rs. 100,000 of work in order to rectify the contamination. If the land was not contaminated, it could be sold for Rs. 300,000. With the contamination, it is worth only Rs. 200,000. The work that is needed to rectify the contamination will extend the period of sale by one year from the date the land is first marketed for sale.

Required:

In the following situations, examine with suitable reasons whether land can be classified as held for sale in accordance with Ind AS 105: Non-current assets held for sale and discontinued operations

Situation 1 The land is marketed for Rs. 300,000 and A Ltd. was not aware of the contamination till the time a firm purchase commitment was signed with a purchaser. The purchaser found the contamination through a survey. The purchaser signed the firm purchase commitment on condition that the contamination damage will be rectified.

Situation 2 A Ltd. marketed the land for Rs. 300,000, knowing about the contamination when the proposal to sale the land went in the market. However, A Ltd. marketed it with an agreement that it would carry out the rectification work within few months from signing the firm purchase commitment.

Situation 3 A Ltd. knew about the contamination prior to float the proposal to sell the land and markets it for Rs. 200,000 with no obligation on itself to rectify or fix the contamination.

Answer:

Situation 1 - As far as the entity was aware, the land was marketed and available for immediate sale in its present condition at a reasonable price. The event extending the one-year period was imposed by the buyer after the firm purchase commitment was received and the entity is taking steps to address it. The land qualifies as held for sale and continues to do so after it is required to carry out the rectification work.

Situation 2 - The land is not available for immediate sale in its present condition when it is first marketed. It is being marketed at a price that involves further work to the land. It cannot be classified as held for sale when it is first marketed. It also cannot be classified as held for sale when a purchase commitment is received, because even then it is not for sale in its present condition and no conditions have been unexpectedly imposed. The land will not be classified as held for sale until the rectification work is actually carried out.

Situation 3 - The land in this case is available for immediate sale in its present condition and it would qualify to be classified as held for sales since it is being marketed at reasonable price.

Q – 119 X Ltd. prepares consolidated financial statements to 31st March each year. During the year ended 31st March 2018, the following events affected the tax position of the group:

Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of Rs. 30,00,000. Y Ltd. is unable to utilise this loss against previous tax liabilities . Income-tax Act does not allow Y Ltd. to transfer the tax loss to other group companies. However, it allows Y Ltd. to carry the loss forward and utilise it against company’s future taxable profits. The directors of X Ltd. do not consider that Y Ltd. will make taxable profits in the foreseeable future.
Just before 31st March, 2018, X Ltd. committed itself to closing a division after the year end, making a number of employees redundant. Therefore X Ltd. recognised a provision for closure costs of Rs. 20,00,000 in its statement of financial position as at 31st March, 2018. Income tax Act allows tax deductions for closure costs only when the closure actually takes place. Inthe year ended 31 March 2019, X Ltd. expects to make taxable profits which are well in excess of Rs. 20,00,000. On 31st March, 2018, X Ltd. had taxable temporary differences from other sources which were greater than Rs. 20,00,000.
During the year ended 31 March 2017, X Ltd. capitalised development costs which satisfied the criteria in paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount capitalised was Rs. 16,00,000. The development project began to generate economic benefits for X Ltd. from 1st January 2018. The directors of X Ltd. estimated that the project would generate economic benefits for five years from that date. The development expenditure was fully deductible against taxable profits for the year ended 31 March 2018.
On 1 April 2017, X Ltd. borrowed Rs. 1,00,00,000. The cost to X Ltd. of arranging the borrowing was Rs. 2,00,000 and this cost qualified for a tax deduction on 1 April 2017. The loan was for a three-year period. No interest was payable on the loan but the amount repayable on 31 March 2020 will be Rs. 1,30,43,800. This equates to an effective annual interest rate of 10%. As per the Income-tax Act, a further tax deduction of Rs. 30,43,800 will be claimable when the loan is repaid on 31st March, 2020.

Explain and show how each of these events would affect the deferred tax assets / liabilities in the consolidated balance sheet of X Ltd. group at 31 March, 2018 as per Ind AS. Assume the rate of corporate income tax is 20%.

Answer:

The tax loss creates a potential deferred tax asset for the group since its carrying value is nil and its tax base is Rs. 30,00,000. However, no deferred tax asset can be recognised because there is no prospect of being able to reduce tax liabilities in the foreseeable future as no taxable profits are anticipated
The provision creates a potential deferred tax asset for the group since its carrying value is Rs. 20,00,000 and its tax base is nil. This deferred tax asset can be recognised because X Ltd. is expected to generate taxable profits in excess of Rs. 20,00,000 in the year to 31st March, 2019. The amount of the deferred tax asset will be Rs. 4,00,000 (Rs. 20,00,000 x 20%). This asset will be presented as a deduction from the deferred tax liabilities caused by the (larger) taxable temporary differences.
The development costs have a carrying value of Rs. 15,20,000 (Rs. 16,00,000 – (Rs. 16,00,000 x 1/5 x 3/12)).

The tax base of the development costs is nil since the relevant tax deduction has already been claimed.

The deferred tax liability will be Rs. 3,04,000 (Rs. 15,20,000 x 20%). All deferred tax liabilities are shown as non-current.

4. The carrying value of the loan at 31st March, 2018 is Rs. 1,07,80,000 (Rs. 1,00,00,000 – Rs. 2,00,000 + (Rs. 98,00,000 x 10%)).

The tax base of the loan is Rs. 1,00,00,000.

This creates a deductible temporary difference of Rs. 7,80,000 (Rs. 1,07,80,000 – Rs. 1,00,00,000) and a potential deferred tax asset of Rs. 1,56,000 (Rs. 7,80,000 x 20%). Due to the availability of taxable profits next year (see part (ii) above), this asset can be recognised as a deduction from deferred tax liabilities.

Q – 120 Motu Ltd acquired Chotu Ltd. During the analysis of the financial statement they discovered that Chotu Ltd has an existing lease arrangement where Chotu Ltd. is a lessee. The lease term is 5 years and is an operating lease for an office space at a prime location. The remaining lease period under the arrangement is 3 years. Motu Ltd.’s M&A head assess that that:

the lease is ‘at-market’; and
other market participants would not be willing to pay a premium for it.

The annual rentals are:

Year 1: INR 2,000

Year 2: INR 2,100

Year 3: INR 2,200

Year 4: INR 2,300

Year 5: INR 2,400

Chotu Ltd financial statements include an annual rent expense of INR2,200 (determined on a straightline basis) as lease rental increase is not linked to inflation and a deferred rent liability of INR 300 at the acquisition date.

Please discuss the treatment of the lease arrangement in the business combination accounting?

Answer: The accrued rent for straight-lining does not represent a liability and accordingly it is not recorded as a liability on the acquisition date. However, the rental expenses will be recorded based on straight-lining (which will be computed based on the remaining lease period) for INR 2,300 per year.

Q – 121 D Ltd. issues callable preference shares to G Ltd. for a consideration of Rs. 10 lakhs. The holder has an option to convert these preference shares to a fixed number of equity instruments of the issuer anytime up to a period of 3 years. If the option is not exercised by the holder, the preference shares are redeemed at the end of 3 years. The preference shares carry a coupon of RBI base rate plus 1% p.a.

The prevailing market rate for similar preference shares, without the conversion feature or issuer’s redemption option, is RBI base rate plus 4% p.a. On the date of contract, RBI base rate is 9% p.a. The value of call as determined using Black and Scholes model for option pricing is is Rs. 29,165

Calculate the value of the liability and equity components.

Answer:

The values of the liability and equity components are calculated as follows:

Present value of principal payable at the end of 3 years (Rs. 10 lakhs discounted at 13% for 3 years) = Rs. 6,93,050

Present value of interest payable in arrears for 3 years (Rs. 100,000 discounted at 13% for each of 3 years) = Rs. 2,36,115

The issuer's right to call the instrument in the event that interest rates go up makes a callable instrument less attractive to the holder than a plain vanilla instrument. This results in a derivative asset. The value of that early redemption option is Rs. 29,165

Net financial liability (A + B – C) = Rs. 9,00,000

Therefore, equity component = fair value of compound instrument, say, Rs. 1,000,000 less net financial liability component i.e. Rs. 9,00,000 = Rs. 1,00,000.

In subsequent years, the profit and loss account is charged with interest of RBI base rate plus 4% p.a. on the liability component at (A) above.

Q – 122 Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in ABC Limited. PQR Limited has two subsidiaries namely P Limited and Q Limited. ABC Limited has two subsidiaries namely A Limited and B Limited. Mr. KM is one of the Key management personnel in PQR Limited. ·

Determine the entity to whom exemption from disclosure of related party transactions is to be given. Also examine the transactions and with whom such exemption applies.
What are the disclosure requirements for the entity which has availed the exemption?

Answer

As per para 18 of Ind AS 24, ‘Related Party Disclosures’, if an entity had related party transactions during the periods covered by the financial statements, it shall disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements. However, as per para 25 of the standard a reporting entity is exempt from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with:
- a government that has control or joint control of, or significant influence over, the reporting entity; and
- another entity that is a related party because the same government has control or joint control of, or significant influence over, both the reporting entity and the other entity.

According to the above paras, for Entity P’s financial statements, the exemption in paragraph 25 applies to:

transactions with Government Uttar Pradesh State Government; and
transactions with Entities PQR and ABC and Entities Q, A and B.

Similar exemptions are available to Entities PQR, ABC, Q, A and B, with the transactions with UP State Government and other entities controlled directly or indirectly by UP State

Government. However, that exemption does not apply to transactions with Mr. KM. Hence, the transactions with Mr. KM needs to be disclosed under related party transactions.

2. It shall disclose the following about the transactions and related outstanding balances referred to in paragraph 25:

a) the name of the government and the nature of its relationship with the reporting entity (ie control, joint control or significant influence);

b) the following information in sufficient detail to enable users of the entity’s financial statements to understand the effect of related party transactions on its financial statements:

the nature and amount of each individually significant transaction; and
for other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent.

Q – 123 A Ltd. prepares its financial statements to 31st March each year. It operates a defined benefit retirement benefits plan on behalf of current and former employees. A Ltd. receives advice from actuaries regarding contribution levels and overall liabilities of the plan to pay benefits. On 1st April, 2017, the actuaries advised that the present value of the defined benefit obligation was Rs. 6,00,00,000. On the same date, the fair value of the assets of the defined benefit plan was Rs. 5,20,00,000. On 1st April, 2017, the annual market yield on government bonds was 5%. During the year ended 31st March, 2018, A Ltd. made contributions of Rs. 70,00,000 into the plan and the plan paid out benefits of Rs. 42,00,000 to retired members. Both these payments were made on 31st March, 2018.

The actuaries advised that the current service cost for the year ended 31st March, 2018 was Rs. 62,00,000. On 28th February, 2018, the rules of the plan were amended with retrospective effect.

These amendments meant that the present value of the defined benefit obligation was increased by Rs. 15,00,000 from that date.

During the year ended 31st March, 2018, A Ltd. was in negotiation with employee representatives regarding planned redundancies. The negotiations were completed shortly before the year end and redundancy packages were agreed. The impact of these redundancies was to reduce the present value of the defined benefit obligation by Rs. 80,00,000. Before 31st March, 2018, A Ltd. Made payments of Rs. 75,00,000 to the employees affected by the redundancies in compensation for the curtailment of their benefits. These payments were made out of the assets of the retirement benefits plan.

On 31st March, 2018, the actuaries advised that the present value of the defined benefit obligation was Rs. 6,80,00,000. On the same date, the fair value of the assets of the defined benefit plan were Rs. 5,60,00,000.

Examine and present how the above event would be reported in the financial statements of A Ltd. for the year ended 31st March, 2018 as per Ind AS.

Answer: All figures are Rs. in ’000.

On 31st March, 2018, A Ltd. will report a net pension liability in the statement of financial position. The amount of the liability will be 12,000 (68,000 – 56,000).

For the year ended 31st March, 2018, A Ltd. will report the current service cost as an operating cost in the statement of profit or loss. The amount reported will be 6,200. The same treatment applies to the past service cost of 1,500.

For the year ended 31st March, 2018, A Ltd. will report a finance cost in profit or loss based on the net pension liability at the start of the year of 8,000 (60,000 – 52,000). The amount of the finance cost will be 400 (8,000 x 5%).

The redundancy programme represents the partial settlement of the curtailment of a defined benefit obligation. The gain on settlement of 500 (8,000 – 7,500) will be reported in the statement of profit or loss.

Other movements in the net pension liability will be reported as remeasurement gains or losses in other comprehensive income.

For the year ended 31st March, 2018, the remeasurement loss will be 3,400 (Refer W. N.).

Working Note:

Remeasurement of gain or loss

	Rs. in ’000
Liability at the start of the year (60,000 – 52,000)	8,000
Current service cost	6,200
Past service cost	1,500
Net finance cost	400
Gain on settlement	(500)
Contributions to plan	(7,000)
Remeasurement loss (balancing figure)	3,400
Liability at the end of the year (68,000 – 56,000)	12,000

Q – 124 Global Limited, an Indian company acquired on 30th September, 20X1 70% of the share capital of Mark Limited, an entity registered as company in Germany. The functional currency of Global Limited is Rupees and its financial year end is 31st March, 20X2.

i) The fair value of the net assets of Mark Limited was 23 million EURO and the purchase consideration paid is 17.5 million EURO on 30th September, 20X1.

The exchange rates as at 30th September, 20X1 was Rs. 82 / EURO and at 31st March,

20X2 was Rs. 84 / EURO. What is the value at which the goodwill has to be recognised in the financial statements of Global Limited as on 31st March, 20X2

ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million EURO during the year ended 31st March, 20X2. The exchange rate on the date of purchase by Global Limited was Rs. 83 / EURO and on 31st March, 20X2 was Rs. 84 / EURO. The entire goods purchased from Mark Limited are unsold as on 31st March, 20X2. Determine the unrealised profit to be eliminated in the preparation of consolidated financial statements.

Answer

(i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42. In this case the amount of goodwill will be as follows:

Net identifiable asset Dr.

Goodwill(bal. fig.) Dr.

To Bank

To NCI (23 x 30%)

23 million

1.4 million

17.5 million

6.9 milli

Particulars	EURO in million
Sale price of Inventory	4.20
Unrealised Profit [a]	1.80

(ii) Exchange rate as on date of purchase of Inventory [b]Rs. 83 / Euro Unrealized profit to be eliminated [a x b] - Rs 149.40 millionThus, goodwill on reporting date would be 1.4 million EURO x Rs. 84 = Rs. 117.6 million

In the given case, purchase of inventory is an expense item shown in the statement profit and loss account. Hence, the exchange rate on the date of purchase of inventory is taken for calculation of unrealized profit which is to be eliminated on the event of consolidation.

Q – 125 While preparing its financial statements for the year ended 31st March, 20X1, XYZ Ltd. made a general provision for bad debts @ 5% of its debtors. In the last week of February, 20X1 a debtor for Rs. 2 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. Considering the event of earthquake, XYZ Ltd. made a provision @ 50% of the amount receivable from that debtor apart from the general provision of 5% on remaining debtors. In April, 20X1 the debtor became bankrupt. Can XYZ Ltd. provide for the full loss arising out of insolvency of the debtor in the financial statements for the year ended 31st March, 20X1?

Would the answer be different if earthquake had taken place after 31st March, 20X1, and therefore, XYZ Ltd. did not make any specific provision in context that debtor and made only general provision for bad debts @ 5% on total debtors?

Answer: As per the definition of ‘Events after the Reporting Period’ and paragraph 8 of Ind AS 10, Events after the Reporting Period, financial statements should be adjusted for events occurring after the reporting period that provide evidence of conditions that existed at the end of the reporting period. In the instant case, the earthquake took place before the end of the reporting period, i.e., in February 20X1. Therefore, the condition exists at the end of the reporting date though the debtor is declared insolvent after the reporting period. Accordingly, full provision for bad debt amounting to Rs 2 lakhs should be made to cover the loss arising due to the bankruptcy of the debtor in the financial statements for the year ended March 31, 20X1. Since provision for bad debts on account of amount due from that particular debtor was made @ 50%, XYZ Ltd should provide for the remaining amount as a consequence of declaration of this debtor as bankrupt.

In case, the earthquake had taken place after the end of the reporting period, i.e., after 31st March, 20X1, and XYZ Ltd. had not made any specific provision for the debtor who was declared bankrupt later on, since the earthquake occurred after the end of the reporting period no condition existed at the end of the reporting period. The company had made only general provision for bad debts in the ordinary business course and not to recognise the catastrophic situation of an earthquake. Accordingly, bankruptcy of the debtor in this case is a non-adjusting event.

As per para 21 of Ind AS 10, if non-adjusting events after the reporting period are material, non- disclosure could influence the economic decisions that users make on the basis of the financial statements.

Accordingly, an entity shall disclose the following for each material category of non-adjusting event after the reporting period:

the nature of the event; and
an estimate of its financial effect, or a statement that such an estimate cannot be made.” If the amount of bad debt is considered to be material, the nature of this non-adjusting event, i.e., event of bankruptcy of the debtor should be disclosed along with the estimated financial effect of the same in the financial statements.

CA Final important Financial reporting

Financial Reporting