PAPER –1: FINANCIAL REPORTING

QUESTIONS
Analysis of Financial Statements
1. Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein investment of
55% is done by Iktara Ltd. and rest by Deepak. Voting powers are to be given as per the
proportionate share of capital contribution. The new company formed was the subsidiary
of Iktara Ltd. with two directors, and Deepak eventually becomes one of the directors of
company. A consultant was hired and he charged ` 30,000 for the incorporation of
company and to do other necessary statuary registrations. ` 30,000 is to be charged as
an expense in the books after incorporation of company. The company, Softbharti Pvt.
Ltd. was incorporated on 1 st April 2019.
The financials of Iktara Ltd. are prepared as per Ind AS.
An accountant who was hired at the time of company’s incorporation, has prepared the
draft financials of Softbharti Pvt. Ltd. for the year ending 31 st March, 2020 as follows:
Statement of Profit and Loss
Particulars Amount (`)
Revenue from operations 10,00,000
Other Income 1,00,000
Total Revenue (a) 11,00,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase)/Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 7,45,000
Profit before tax (c) = (a)-(b) 3,55,000
Current tax 1,06,500
Deferred tax 6,000
Total tax expense (d) 1,12,500
Profit for the year (e) = (c) – (d) 2,42,500

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 2 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Balance Sheet
Particulars Amount (`)
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1,00,000
(b) Reserves & Surplus 2,27,500
(2) Non-Current Liabilities
(a) Long Term Provisions 25,000
(b) Deferred tax liabilities 6,000
(3) Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000
(c) Short Term Provisions 1,06,500
TOTAL 5,21,000

ASSETS
(1) Non Current Assets
(a) Property, plant and equipment (net) 1,00,000
(b) Long-term Loans and Advances 40,000
(c) Other Non Current Assets 50,000
(2) Current Assets
(a) Current Investment 30,000
(b) Inventories 80,000
(c) Trade Receivables 55,000
(d) Cash and Bank Balances 1,15,000
(e) Other Current Assets 51,000
TOTAL 5,21,000

Additional information of Softbharti Pvt Ltd.:

i. Deferred tax liability of ` 6,000 is created due to following temporary difference:
Difference in depreciation amount as per Income tax and Accounting profit
ii. There is only one property, plant and equipment in the company, whose closing
balance as at 31 st March, 2020 is as follows:

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 PAPER – 1 : FINANCIAL REPORTING 3

Asset description As per Books As per Income tax

Property, plant and equipment ` 1,00,000 ` 80,000

iii. Pre incorporation expenses are deductible on straight line basis over the period of
five years as per Income tax. However, the same are immediately expensed off in
the books.
iv. Current tax is calculated at 30% on PBT - ` 3,55,000 without doing any adjustments
related to Income tax. The correct current tax after doing necessary adjustments
of allowances / disallowances related to Income tax comes to ` 1,25,700.
v. After the reporting period, the directors have recommended dividend of ` 15,000
for the year ending 31st March, 2020 which has been deducted from reserves and
surplus. Dividend payable of ` 15,000 has been grouped under ‘other current
liabilities’ alongwith other financial liabilities.
vi. There are ‘Government statuary dues’ amounting to ` 15,000 which are grouped
under ‘other current liabilities’.
vii. The capital advances amounting to ` 50,000 are grouped under ‘Other non-current
assets’.
viii. Other current assets of ` 51,000 comprise Interest receivable from trade
receivables.
ix. Current investment of ` 30,000 is in shares of a company which was done with the
purpose of trading; current investment has been carried at cost in the financial
statements. The fair value of current investment in this case is ` 50,000 as at
31st March, 2020.
x. Actuarial gain on employee benefit measurements of ` 1,000 has been omitted in
the financials of Softbharti private limited for the year ending 31 st March, 2020.
The financial statements for financial year 2019-2020 have not been yet approved.
You are required to ascertain that whether the financial statements of Softbharti Pvt. Ltd.
are correctly presented as per the applicable financial reporting framework. If not, prepare
the revised financial statements of Softbharti Pvt. Ltd. after the careful analysis of
mentioned facts and information.
Ind AS 28
2. On 1st April 2019, Investor Ltd. acquires 35% interest in another entity,
XYZ Ltd. Investor Ltd. determines that it is able to exercise significant influence over
XYZ Ltd. Investor Ltd. has paid total consideration of ` 47,50,000 for acquisition of its
interest in XYZ Ltd. At the date of acquisition, the book value of XYZ Ltd.’s net assets was

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 4 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

` 90,00,000 and their fair value was ` 1,10,00,000. Investor Ltd. has determined that the
difference of ` 20,00,000 pertains to an item of property, plant and equipment (PPE) which
has remaining useful life of 10 years.
During the year, XYZ Ltd. made a profit of ` 8,00,000. XYZ Ltd. paid a dividend of
` 12,00,000 on 31st March, 2020. XYZ Ltd. also holds a long-term investment in equity
securities. Under Ind AS, investment is classified as at FVTOCI in accordance with
Ind AS 109 and XYZ Ltd. recognized an increase in value of investment by ` 2,00,000 in
OCI during the year. Ignore deferred tax implications, if any.
Calculate the closing balance of Investor Ltd.’s investment in XYZ Ltd. as at
31st March, 2020 as per the relevant Ind AS.
Ind AS 20
3. Entity A is awarded a government grant of `60,000 receivable over three years (`40,000
in year 1 and `10,000 in each of years 2 and 3), contingent on creating 10 new jobs and
maintaining them for three years. The employees are recruited at a total cost of `30,000,
and the wage bill for the first year is ` 1,00,000, rising by `10,000 in each of the
subsequent years. Calculate the grant income and deferred income to be accounted for
in the books for year 1, 2 and 3.
Ind AS 12 and Ind AS 103
4. On 1 January 2020, entity H acquired 100% share capital of entity S for `15,00,000. The
book values and the fair values of the identifiable assets and liabilities of entity S at the
date of acquisition are set out below, together with their tax bases in entity S’s tax
jurisdictions. Any goodwill arising on the acquisition is not deductible for tax purposes.
The tax rates in entity H’s and entity S’s jurisdictions are 30% and 40% respectively.
Acquisitions Book values Tax base Fair values
`’000 `’000 `’000
Land and buildings 600 500 700
Property, plant and equipment 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash equivalents 130 130 130
Accounts payable (160) (160) (160)
Retirement benefit obligations (100) - (100)
You are required to calculate the deferred tax arising on acquisition of Entity S. Also
calculate the Goodwill arising on acquisition.

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 PAPER – 1 : FINANCIAL REPORTING 5

Ind AS 12, Ind AS 37 & Accounting for Expenditure on Corporate Social Responsibility
Activities
5. In order to encourage companies and organisations to generously contribute to the
Government’s COVID-19 relief fund, taxation laws have been amended to reckon these
contributions as deductible for the financial year ending 31st March, 2020 even if the
contributions are made after the year end but within three months after year end.
Government of India issued the notification on 31 st March, 2020 by way of an Ordinance.
Such contributions to COVID-19 funds are considered for compliance with annual spends
on corporate social responsibility (CSR) for the current accounting year under the
Companies Act, 2013. In this scenario, whether the contributions to COVID-19 Relief
Funds made subsequent to reporting date of the current accounting period can be
provided for as expenses of the current accounting period? Also show its impact on
deferred tax, if any.
Ind AS 115
6. A contractor enters into a contract with a customer to build an asset for ` 1,00,000, with a
performance bonus of ` 50,000 that will be paid based on the timing of completion. The
amount of the performance bonus decreases by 10% per week for every week beyond the
agreed-upon completion date. The contract requirements are similar to those of contracts
that the contractor has performed previously, and management believes that such
experience is predictive for this contract. The contractor concludes that the expected value
method is most predictive in this case.
The contractor estimates that there is a 60% probability that the contract will be completed
by the agreed-upon completion date, a 30% probability that it will be completed one week
late, and a 10% probability that it will be completed two weeks late.
Determine the transaction price.
Ind AS 34
7. An entity’s accounting year ends is 31st December, but its tax year end is 31 st March. The
entity publishes an interim financial report for each quarter of the year ended
31st December, 2019. The entity’s profit before tax is steady at `10,000 each quarter, and
the estimated effective tax rate is 25% for the year ended 31 st March, 2019 and 30% for
the year ended 31 st March, 2020.
How the related tax charge would be calculated for the year 2019 and its quarters.
Ind AS 24
8. Mr. X owns 95% of entity A and is its director. He is also beneficiary of a trust that owns
100% of entity B, of which he is a director.
Whether entities A and B are related parties?

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 6 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Would the situation be different if:

(a) Mr. X resigned as a director of entity A, but retained his 95% holding?
(b) Mr. X resigned as a director of entities A and B and transferred the 95% holding in
entity A to the trust?
Ind AS 41 & Ind AS 113
9. Entity A purchased cattle at an auction on 30 th June 2019
Purchase price at 30th June 2019 ` 1,00,000
Costs of transporting the cattle back to the entity’s farm ` 1,000
Sales price of the cattle at 31 st March, 2020 ` 1,10,000
The company would have to incur similar transportation costs if it were to sell the cattle at
auction, in addition to an auctioneer’s fee of 2% of sales price. The auctioneer charges
2% of the selling price, from both, the buyer as well as the seller.
Calculate the amount at which cattle is to be recognised in books on initial recognition and
at year end 31 st March, 2020.
Ind AS 36
10. The UK entity with a sterling functional currency has a property located in US, which was
acquired at a cost of US$ 1.8 million when the exchange rate was ₤1 = US$ 1.60. The
property is carried at cost. At the balance sheet date, the recoverable amount of the
property (as a result of an impairment review) amounted to US$ 1.62 million, when the
exchange rate ₤1 = US$ 1.80. Compute the amount which is to be reported in Profit &
Loss of UK entity as a result of impairment, if any. Ignore depreciation. Also analyse the
total impairment loss on account of change in value due to impairment component and
exchange component.
Ind AS 109 & Ind AS 21
11. An Indian entity, whose functional currency is rupees, purchases USD dominated bond at
its fair value of USD 1,000. The bond carries stated interest @ 4.7% p.a. on its face value.
The said interest is received at the year end. The bond has maturity period of 5 years and
is redeemable at its face value of USD 1,250. The fair value of the bond at the end of year
1 is USD 1,060. The exchange rate on the date of transaction and at the end of year 1 are
USD 1 = ` 40 and USD 1 = ` 45, respectively. The weighted average exchange rate for
the year is 1 USD = ` 42.
The entity has determined that it is holding the bond as part of an investment portfolio
whose objective is met both by holding the asset to collect contractual cash flows and
selling the asset. The purchased USD bond is to be classified under the FVTOCI category.
The bond results in effective interest rate (EIR) of 10% p.a.

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 PAPER – 1 : FINANCIAL REPORTING 7

Calculate gain or loss to be recognised in Profit & Loss and Other Comprehensive Income
for year 1. Also pass journal entry to recognise gain or loss on above. (Round off the
figures to nearest rupees)
Ind AS 2
12. A company normally produced 1,00,000 units of a high precision equipment each year over
past several years. In the current year, due to lack of demand and competition, it produced
only 50,000 units. Further information is as follows:
Material = ` 200 per unit;
Labour = ` 100 per unit;
Variable manufacturing overhead = ` 100 per unit;
Fixed factory production overhead =` 1,00,00,000;
Fixed factory selling overhead = ` 50,00,000;
Variable factory selling overhead = ` 150 per unit.
Calculate the value of inventory per unit in accordance with Ind AS 2. What will be the
treatment of fixed manufacturing overhead?
Ind AS 10
13. In one of the plant of PQR Ltd., fire broke out on 10.05.2020 in which the entire plant was
damaged. PQR Ltd. estimated the loss of ` 40,00,000 due to fire. The company filed a
claim with the insurance company and expects recovery of ` 27,00,000 from the claim.
The financial statements for the year ending 31.03.2020 were approved by the Board of
Directors on 12 th June, 2020. Discuss the accounting treatment of the above situation.
Ind AS 38
14. ABC Pvt. Ltd., recruited a player. As per the terms of the contract, the player is prohibited
from playing for any other entity for coming 5 years and have to in the employment with
the company and cannot leave the entity without mutual agreement. The price the entity
paid to acquire this right is derived from the skills and fame of the said player. The entity
uses and develops the player through participation in matches. State whether the cost
incurred to obtain the right regarding the player can be recognised as an intangible asset
as per Ind AS 38?
Ind AS 16
15. Entity X has a warehouse which is closer to factory of Entity Y and vice versa. The factories
are located in the same vicinity. Entity X and Entity Y agree to exchange their warehouses.
The carrying value of warehouse of Entity X is ` 1,00,000 and its fair value is ` 1,25,000.
It exchanges its warehouse with that of Entity Y, the fair value of which is ` 1,20,000. It
also receives cash amounting to ` 5,000. How should Entity X account for the exchange
of warehouses?

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 8 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Ind AS 27
16. A company, AB Ltd. holds investments in subsidiaries and associates. In its separate
financial statements, AB Ltd. wants to elect to account its investments in subsidiaries at
cost and the investments in associates as financial assets at fair value through profit or
loss (FVTPL) in accordance with Ind AS 109, Financial Instruments. Whether AB Limited
can carry investments in subsidiaries at cost and investments in associates in accordance
with Ind AS 109 in its separate financial statements?
Ind AS 116
17. Entity X (lessee) entered into a lease agreement (‘lease agreement’) with Entity Y (lessor)
to lease an entire floor of a shopping mall for a period of 9 years. The annual lease rent
of ` 70,000 is payable at year end. To carry out its operations smoothly, Entity X
simultaneously entered into another agreement (‘facilities agreement’) with Entity Y for
using certain other facilities owned by Entity Y such as passenger lifts, DG sets, power
supply infrastructure, parking space etc., which are specifically mentioned in the
agreement, for annual service charges amounting to ` 1,00,000. As per the agreement,
the ownership of the facilities shall remain with Entity Y. Lessee's incremental borrowing
rate is 10%.
The facilities agreement clearly specifies that it shall be co-existent and coterminous with
‘lease agreement’. The facility agreement shall stand terminated automatically on
termination or expiry of ‘lease agreement’.
Entity X has assessed that the stand-alone price of ‘lease agreement’ is ` 1,20,000 per
year and stand-alone price of the ‘facilities agreement’ is ` 80,000 per year. Entity X has
not elected to apply the practical expedient in paragraph 15 of Ind AS 116 of not to separate
non-lease component (s) from lease component(s) and accordingly it separates non-lease
components from lease components.
How will Entity X account for lease liability as at the commencement date?
Ind AS 7
18. During the financial year 2019-2020, Akola Limited have paid various taxes & reproduced
the below mentioned records for your perusal:
- Capital gain tax of ` 20 crore on sale of office premises at a sale consideration of
` 100 crore.
- Income Tax of ` 3 crore on Business profits amounting ` 30 crore (assume entire
business profit as cash profit).
- Dividend Distribution Tax of ` 2 crore on payment of dividend amounting ` 20 crore
to its shareholders.
- Income tax Refund of ` 1.5 crore (Refund on taxes paid in earlier periods for
business profits).

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You need to determine the net cash flow from operating activities, investing activities and
financing activities of Akola Limited as per relevant Ind AS.
Ind AS 103
19. Veera Limited and Zeera Limited are both in the business of manufacturing and selling of
Lubricant. Veera Limited and Zeera Limited shareholders agree to join forces to benefit
from lower delivery and distribution costs. The business combination is carried out by
setting up a new entity called Meera Limited that issues 100 shares to Veera Limited’s
shareholders and 50 shares to Zeera Limited’s shareholders in exchange for the transfer
of the shares in those entities. The number of shares reflects the relative fair values of the
entities before the combination. Also respective company’s shareholders gets the voting
rights in Meera Limited based on their respective shareholding.
Determine the acquirer by applying the principles of Ind AS 103 ‘Business Combinations’.
Ind AS 40
20. Shaurya Limited owns Building A which is specifically used for the purpose of earning
rentals. The Company has not been using the building A or any of its facilities for its own
use for a long time. The company is also exploring the opportunities to sell the building if
it gets the reasonable amount in consideration.
Following information is relevant for Building A for the year ending 31 st March, 2020:
Building A was purchased 5 years ago at the cost of `10 crore and building life is estimated
to be 20 years. The company follows straight line method for depreciation.
During the year, the company has invested in another Building B with the purpose to ho ld
it for capital appreciation. The property was purchased on 1 st April, 2019 at the cost of
` 2 crore. Expected life of the building is 40 years. As usual, the company follows straight
line method of depreciation.
Further, during the year 2019-2020, the company earned / incurred following direct
operating expenditure relating to Building A and Building B:
Rental income from Building A = ` 75 lakh
Rental income from Building B = ` 25 lakh
Sales promotion expenses = ` 5 lakh
Fees & Taxes = ` 1 lakh
Ground rent = ` 2.5 lakh
Repairs & Maintenance = ` 1.5 lakh
Legal & Professional = ` 2 lakh
Commission and brokerage = ` 1 lakh

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 10 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

The company does not have any restrictions and contractual obligations against buildings
- A and B. For complying with the requirements of Ind AS, the management sought an
independent report from the specialists so as to ascertain the fair value of buildi ngs A and
B. The independent valuer has valued the fair value of property as per the valuation model
recommended by International valuation standards committee. Fair value has been
computed by the method by streamlining present value of future cash flows namely,
discounted cash flow method.
The other key inputs for valuation are as follows:
The estimated rent per month per square feet for the period is expected to be in the range
of ` 50 - ` 60. It is further expected to grow at the rate of 10 percent per annum for each
of 3 years. The weighted discount rate used is 12% to 13%.
Assume that the fair value of properties based on discounted cash flow method is
measured at ` 10.50 crore on 31st March, 2020.
What would be the treatment of Building A and Building B in the balance sheet of Shaurya
Limited? Provide detailed disclosures and computations in line with relevant Indian
accounting standards. Treat it as if you are preparing a separate note or schedule, of the
given assets in the balance sheet.

SUGGESTED ANSWERS

1. If Ind AS is applicable to any company, then Ind AS shall automatically be made applicable
to all the subsidiaries, holding companies, associated companies, and joint ventures of
that company, irrespective of individual qualification of set of standards on such
companies.
In the given case it has been mentioned that the financials of Iktara Ltd. are prepared as
per Ind AS. Accordingly, the results of its subsidiary Softbharti Pvt. Ltd. should also have
been prepared as per Ind AS. However, the financials of Softbharti Pvt. Ltd. have been
presented as per accounting standards (AS).
Hence, it is necessary to revise the financial statements of Softbharti Pvt. Ltd. as per
Ind AS after the incorporation of necessary adjustments mentioned in the question.
The revised financial statements of Softbharti Pvt. Ltd. as per Ind AS and Division II to
Schedule III of the Companies Act, 2013 are as follows:
STATEMENT OF PROFIT AND LOSS
for the year ended 31st March, 2020
Particulars Amount (`)
Revenue from operations 10,00,000

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 PAPER – 1 : FINANCIAL REPORTING 11

Other Income (1,00,000 + 20,000) (refer note -1) 1,20,000

Total Revenue 11,20,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase) / Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses 7,45,000
Profit before tax 3,75,000
Current tax 1,25,700
Deferred tax (W.N.1) 4,800
Total tax expense 1,30,500
Profit for the year (A) 2,44,500
OTHER COMPREHENSIVE INCOME
Items that will not be reclassified to Profit or Loss:
Remeasurements of net defined benefit plans 1,000
Tax liabilities relating to items that will not be reclassified to
Profit or Loss
Remeasurements of net defined benefit plans (tax) [1000 x 30%] (300)
Other Comprehensive Income for the period (B) 700
Total Comprehensive Income for the period (A+B) 2,45,200
BALANCE SHEET
as at 31 st March, 2020
Particulars (`)
ASSETS
Non-current assets
Property, plant and equipment 1,00,000
Financial assets
Other financial assets (Long-term loans and advances) 40,000
Other non-current assets (capital advances) (refer note-2) 50,000

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 12 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Current assets
Inventories 80,000
Financial assets
Investments (30,000 + 20,000) (refer note -1) 50,000
Trade receivables 55,000
Cash and cash equivalents/Bank 1,15,000
Other financial assets (Interest receivable from trade receivables) 51,000
TOTAL ASSETS 5,41,000
EQUITY AND LIABILITIES
Equity
Equity share capital 1,00,000
Other equity 2,45,200
Non-current liabilities
Provision (25,000 – 1,000) 24,000
Deferred tax liabilities (4800 + 300) 5,100
Current liabilities
Financial liabilities
Trade payables 11,000
Other financial liabilities (Refer note 5) 15,000
Other current liabilities (Govt. statuary dues) (Refer note 3) 15,000
Current tax liabilities 1,25,700
TOTAL EQUITY AND LIABILITIES 5,41,000
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 st March, 2020
A. EQUITY SHARE CAPITAL
Balance (`)
As at 31 st March, 2019 -
Changes in equity share capital during the year 1,00,000
As at 31 st March, 2020 1,00,000

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B. OTHER EQUITY
Reserves & Surplus
Retained Earnings (`)
As at 31 st March, 2019 -
Profit for the year 2,44,500
Other comprehensive income for the year 700
Total comprehensive income for the year 2,45,200
Less: Dividend on equity shares (refer note – 4) -
As at 31 st March, 2020 2,45,200

DISCLOSURE FORMING PART OF FINANCIAL STATEMENTS:

Proposed dividend on equity shares is subject to the approval of the shareholders
of the company at the annual general meeting and not recognized as liability as at
the Balance Sheet date. (refer note-4)
Notes:
1. Current investment are held for the purpose of trading. Hence, it is a financial asset
classified as FVTPL. Any gain in its fair value will be recognised through profit or
loss. Hence, ` 20,000 (50,000 – 30,000) increase in fair value of financial asset will
be recognised in profit and loss. However, it will attract deferred tax liability on
increased value (Refer W.N).
2. Assets for which the future economic benefit is the receipt of goods or services, rather
than the right to receive cash or another financial asset, are no t financial assets.
3. Liabilities for which there is no contractual obligation to deliver cash or other financial
asset to another entity, are not financial liabilities.
4. As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declare d after
the reporting period but before the financial statements are approved for issue, the
dividends are not recognized as a liability at the end of the reporting period because
no obligation exists at that time. Such dividends are disclosed in the notes in
accordance with Ind AS 1, Presentation of Financial Statements.
5. Other current financial liabilities:

(`)
Balance of other current liabilities as per financial statements 45,000
Less: Dividend declared for FY 2019 - 2020 (Note – 4) (15,000)

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 14 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Reclassification of government statuary dues payable to

‘other current liabilities’ (15,000)
Closing balance 15,000

Working Note:
Calculation of deferred tax on temporary differences as per Ind AS 12 for financial
year 2019 - 2020
Item Carrying Tax Difference DTA / DTL
amount base (`) @ 30% (`)
(`) (`)
Property, Plant and Equipment 1,00,000 80,000 20,000 6,000-DTL
Pre-incorporation expenses Nil 24,000 24,000 7,200-DTA
Current Investment 50,000 30,000 20,000 6,000-DTL
Net DTL 4,800-DTL
2. Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity method:
` `
Acquisition of investment in XYZ Ltd.
Share in book value of XYZ Ltd.’s net assets (35% of
` 90,00,000) 31,50,000
Share in fair valuation of XYZ Ltd.’s net assets [35% of
(` 1,10,00,000 – ` 90,00,000)] 7,00,000
Goodwill on investment in XYZ Ltd. (balancing figure) 9,00,000
Cost of investment 47,50,000
Profit during the year
Share in the profit reported by XYZ Ltd. (35% of
` 8,00,000) 2,80,000
Adjustment to reflect effect of fair valuation [35% of
(` 20,00,000/10 years)] (70,000)
Share of profit in XYZ Ltd. recognised in income by
Investor Ltd. 2,10,000
Long term equity investment
FVTOCI gain recognised in OCI (35% of ` 2,00,000) 70,000
Dividend received by Investor Ltd. during the year [35% of
` 12,00,000] (4,20,000)
Closing balance of Investor Ltd.’s investment in
XYZ Ltd. 46,10,000

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3. The income of ` 60,000 should be recognised over the three year period to compensate
for the related costs.
Calculation of Grant Income and Deferred Income:

Year Labour Grant Deferred

Cost Income Income
` ` `
1 1,30,000 21,667 60,000 x 18,333 (40,000 – 21,667)
(130/360)
2 1,10,000 18,333 60,000 x 10,000 (50,000 – 21,667 –
(110/360) 18,333)
3 1,20,000 20,000 60,000 x - (60,000 – 21,667 –
(120/360) 18,333 – 20,000)
3,60,000 60,000
Therefore, Grant income to be recognised in Profit & Loss for years 1, 2 and 3 are ` 21,667,
` 18,333 and ` 20,000 respectively.
Amount of grant that has not yet been credited to profit & loss i.e; deferred income is to be
reflected in the balance sheet. Hence, deferred income balance as at year end 1, 2 and
3 are ` 18,333, ` 10,000 and Nil respectively.
4. Calculation of Net assets acquired (excluding the effect of deferred tax liability):
Net assets acquired Tax base Fair values
`’000 `’000
Land and buildings 500 700
Property, plant and equipment 200 270
Inventory 100 80
Accounts receivable 150 150
Cash and cash equivalents 130 130
Total assets 1,080 1,330
Accounts payable (160) (160)
Retirement benefit obligations - (100)
Net assets before deferred tax liability 920 1,070

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 16 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Calculation of deferred tax arising on acquisition of entity S and goodwill

`’000 `’000
Fair values of S’s identifiable assets and liabilities 1,070
(excluding deferred tax)
Less: Tax base (920)
Temporary difference arising on acquisition 150
Net deferred tax liability arising on acquisition of entity 60
S (`150,000 @ 40%)
Purchase consideration 1,500
Less: Fair values of entity S’s identifiable assets and 1,070
liabilities (excluding deferred tax)
Deferred tax liability (60) (1,010)
Goodwill arising on acquisition 490
Note: Since, the tax base of the goodwill is nil, taxable temporary difference of `4,90,000
arises on goodwill. However, no deferred tax is recognised on the goodwill. The deferred
tax on other temporary differences arising on acquisition is provided at 40% and not 30%,
because taxes will be payable or recoverable in entity S’s tax jurisdictions when the
temporary differences will be reversed.
5. According to paragraph 14 of Ind AS 37, a provision shall be made if:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions
are not met as of reporting date, no provision shall be recognised for that financial
year.
Government of India issued the notification on 31 st March, 2020 by way of an Ordinance
and hence, it is most unlikely for any entity to have a present obligation on
31st March, 2020, for such a commitment. As these conditions are not met as of reporting
date of financial year 2019 - 2020, no provision should be recognised in the financial
statements for that financial year.
In the fact pattern given above, the accounting implications for the financial year
2019-2020 is as follows:
• Do not recognize expense / liability for the contribution to be made subsequent to the
year ended 31st March, 2020 as it does not meet the criteria of a present obligation
as at the balance sheet date. However, the expected spend may be explained in the

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notes to the accounts as the same will also be considered in measurement of deferred
tax liability.
• If the entity claims a deduction in the Income Tax return for the financial year
2019 - 2020 for that contribution made subsequent to 31st March, 2020, recognise
Deferred Tax Liability as there would be a tax saving in financial year 2019 - 2020 for
a spend incurred in subsequent year.
6. The transaction price should include management’s estimate of the amount of
consideration to which the entity will be entitled for the work performed.
Probability-weighted Consideration
`1,50,000(fixed fee plus full performance bonus) x 60% `90,000
`1,45,000 (fixed fee plus 90% of performance bonus) x 30% `43,500
`1,40,000 (fixed fee plus 80% of performance bonus) x 10% `14,000
Total probability-weighted consideration `1,47,500
The total transaction price is ` 1,47,500, based on the probability-weighted estimate. The
contractor will update its estimate at each reporting date.
7. Table showing computation of tax charge:
Quarter Quarter Quarter Quarter Year
ending 31st ending 30 th ending 30 th ending 31 st ending 31 st
March, June, September, December, December,
2019 2019 2019 2019 2019
` ` ` ` `
Profit before tax 10,000 10,000 10,000 10,000 40,000
Tax charge (2,500) (3,000) (3,000) (3,000) (11,500)
7,500 7,000 7,000 7,000 28,500
Since an entity’s accounting year is not same as the tax year, more than one tax rate might
apply during the accounting year. Accordingly, the entity should apply the effective tax
rate for each interim period to the pre-tax result for that period.
8. Entities A and B are related parties, because the director (Mr. X) controls entity A and is a
member of the key management personnel of entity B.
Answers to different given situations would be as under:
(a) Mr. X resigned as a director of entity A, but retained his 95% holding
Mr. X continues to control entity A through his 95% holding even though he is not
(nominally) a director of the entity. Entities A and B are related if Mr. X controls the
trust. Mr. X controls entity A and also, through the trust, controls entity B. Entities A
and B are controlled by the same person, and so they are related parties.

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Mr. X might still be a member of ‘key management personnel’ even though he is not
(nominally) a director of entity A. Key management personnel includes, but is not
restricted to, directors, which include those who are executive ‘or otherwise’ provided
they had authority and responsibility for planning, directing and controlling the
activities of the entity. There could be two reasons why entities A and B would
continue to be related parties: Mr. X being a member of ‘Key management personnel’
of entity A and Mr. X controlling entity A.
(b) Mr. X resigned as a director of entities A and B and transferred the 95% holding
in entity A to the trust.
If Mr. X controls the trust, he controls entities A and B through the trust, so they will
be related parties (see reason in (a) above)
Mr. X is a member of ‘key management personnel’ of the two entities (see (a) above)
if, as seems likely, he continues to direct their operating and financial policies. The
substance of the relationship and not merely the legal form should be considered. If
Mr X is regarded as a member of the key management personnel of, say, entity A,
entity B is a related party, because he exercises control or significant influence over
entity B by virtue of his control over the trust.
9. Initial recognition of cattle
`
Fair value less costs to sell (`1,00,000 – `1,000 - `2,000) 97,000
Cash outflow (`1,00,000 + `1,000 + `2,000) 1,03,000
Loss on initial recognition 6,000
Cattle Measurement at year end
Fair value less costs to sell (`1,10,000 – 1,000 – (2% x 1,10,000)) 1,06,800
At 31st March, 2020, the cattle is measured at fair value of ` 1,09,000 less the estimated
auctioneer’s fee of ` 2,200). The estimated transportation costs of getting the cattle to the
auction of ` 1,000 are deducted from the sales price in determining fair value.
10. Ignoring depreciation, the loss that would be reported in the Profit and Loss as a result of
the impairment is as follows:
₤
*Carrying value at balance sheet date-US$ 16,20,000 @ ₤ 1.8 = 9,00,000
Historical cost- US$ 18,00,000 @ ₤ 1.6 = 11,25,000
Impairment loss recognised in profit and loss (2,25,000)
The components of the impairment loss can be analysed as follows:
Change in value due to impairment = US$ 1,80,000 @ ₤ 1.8 = (1,00,000)

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 PAPER – 1 : FINANCIAL REPORTING 19

Exchange component of change =

US$ 18,00,000 @ 1.8 – US$ 18,00,000 @ ₤ 1.6 (1,25,000)
*Recoverable amount being less than cost becomes the carrying value.

11. Computation of amounts to be recognized in the P&L and OCI:

Particulars USD Exchange rate `
Cost of the bond 1,000 40 40,000
Interest accrued @ 10% p.a. 100 42 4,200
Interest received (USD 1,250 x 4.7%) (59) 45 (2,655)
Amortized cost at year-end 1,041 45 46,845
Fair value at year end 1,060 45 47,700
Interest income to be recognized in P & L 4,200
Exchange gain on the principal amount [1,000 x (45-40)] 5,000
Exchange gain on interest accrual [100 x (45 - 42)] 300
Total exchange gain/loss to be recognized in P&L 5,300
Fair value gain to be recognized in OCI [45 x (1,060 - 1,041)] 855
Journal entry to recognize gain/loss
Bond (` 47,700 – ` 40,000) Dr. 7,700
Bank (Interest received) Dr. 2,655
To Interest Income (P & L) 4,200
To Exchange gain (P & L) 5,300
To OCI (fair value gain) 855
12. Calculation of Inventory value per unit as per Ind AS 2:
Particulars Value per unit
(` )
Raw material 200
Labour 100
Variable manufacturing overhead 100
Fixed production overhead (1,00,00,000/1,00,000) 100
500
Fixed overheads are absorbed based on normally capacity level, i.e.; 1,00,000 units,
rather than on the basis of actual production, i.e.; 50,000 units. Therefore, fixed
manufacturing overhead on 50,000 units, will be absorbed as inventory value. The

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 20 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

remaining fixed manufacturing overhead ` 50,00,000 (1,00,00,000 - 50,00,000) will be

charged to P&L.
Note: Selling costs are excluded from the cost of inventories and recognised as expense
in the period in which they are incurred.
13. 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:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period ( non
adjusting events after the reporting period).
An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
events after the reporting period. 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 para 21 of
Ind AS 10, disclosures regarding non-adjusting 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 d ue 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 financial year 2019-2020 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.
However, if the going concern assumption is considered to be appropriate even after the
fire, no adjustment is required in the financial statements for the year ending 31.03.20 20.
14. As per Ind AS 38, for an item to be recognised as an intangible asset, it must m eet the
definition of an intangible asset, i.e., identifiability, control over a resource and existence
of future economic benefits and also recognition criteria.
With regard to establishment of control, paragraph 13 of Ind AS 38 states that an entity
controls an asset if the entity has the power to obtain the future economic benefits flowing
from the underlying resource and to restrict the access of others to those benefits. The
capacity of an entity to control the future economic benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law. In the absence of
legal rights, it is more difficult to demonstrate control. However, legal enforceability of a

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 PAPER – 1 : FINANCIAL REPORTING 21

right is not a necessary condition for control because an entity may be able to control the
future economic benefits in some other way.
Further, paragraph 15 of Ind AS 38 provides that an entity may have a team of skilled staff
and may be able to identify incremental staff skills leading to future economic benefits from
training. The entity may also expect that the staff will continue to make their skills available
to the entity. However, an entity usually has insufficient control over the expected future
economic benefits arising from a team of skilled staff and from training for these items to
meet the definition of an intangible asset. For a similar reason, specific management or
technical talent is unlikely to meet the definition of an intangible asset, unless it is protected
by legal rights to use it and to obtain the future economic benefits expected from it, and it
also meets the other parts of the definition.
Since the right in the instant case is contractual, identifiability criterion is satisfied. Based
on the facts provided in the given case, the player is prohibited from playing in other teams
by the terms of the contract which legally binds the player to stay with ABC Ltd for 5 years.
Accordingly, in the given case, the company would be able to demonstrate control. Future
economic benefits are expected to arise from use of the player in matches. Further, cost
of obtaining rights is also reliably measurable. Hence, it can recognise the costs incurred
to obtain the right regarding the player as an intangible asset. However, careful
assessment of relevant facts and circumstances of each case is required to be made.
15. Paragraph 24 of Ind AS 16, inter alia, provides that when an item of property, plant and
equipment is acquired in exchange for a non-monetary asset or assets, or a combination
of monetary and non-monetary assets, the cost of such an item of property, plant and
equipment is measured at fair value unless (a) the exchange transaction lacks commercial
substance or (b) the fair value of neither the asset received nor the asset given up is reliably
measurable. If the acquired item is not measured at fair value, its cost is measured at the
carrying amount of the asset given up.
Further as per paragraph 25 of Ind AS 16, an entity determines whether an exchange
transaction has commercial substance by considering the extent to which its future cash
flows are expected to change as a result of the transaction. An exchange transaction has
commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received
differs from the configuration of the cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the entity’s operations affected by the
transaction changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets
exchanged.
In the given case, the transaction lacks commercial substance as the company’s cash flows
are not expected to significantly change as a result of the exchange because the factories
are located in the same vicinity i.e. it is in the same position as it was before the transaction.

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 22 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Hence, Entity X will have to recognise the assets received at the carrying amount of asset
given up, i.e., ` 1,00,000 being carrying amount of existing warehouse of Entity X and
` 5,000 received will be deducted from the cost of property, plant and equipment.
Therefore, the warehouse of Entity Y is recognised as property, plant and equipment with
a carrying value of ` 95,000 in the books of Entity X.
16. Paragraph 10 of Ind AS 27, Separate Financial Statements inter-alia provides that, when
an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either at cost, or in accordance with Ind AS 109,
Financial Instruments in its separate financial statements. Further, the entity shall apply
the same accounting for each category of investments.
It may be noted that although the ‘category’ is used in number of Standards, it is not defined
in any of the Ind AS. It seems that subsidiaries, associates and joint ventures would qualify
as separate categories. Thus, the same accounting policies are applied for each category
of investments - i.e. each of subsidiaries, associates and joint ventures. However,
paragraph 10 of Ind AS 27 should not be read to mean that, in all circumstances, all
investments in associates are one ‘category’ of investment and all investment s in joint
ventures or an associate are one ‘category’ of investment. These categories can be further
divided into sub-categories provided the sub-category can be defined clearly and
objectively and results in information that is relevant and reliable. For example, an
investment entity parent can have investment entity subsidiary (at fair value through profit
or loss) and non-investment entity subsidiary (whose main purpose is to provide services
that relate to the investment entity's investment activities) as separate categories in its
separate financial statements. In the present case, investment in subsidiaries and
associates are considered to be different categories of investments. Further, Ind AS 27
requires to account for the investment in subsidiaries, joint ventures and associates either
at cost, or in accordance with Ind AS 109 for each category of Investment. Thus, AB
Limited can carry its investments in subsidiaries at cost and its investments in associates
as financial assets in accordance with Ind AS 109 in its separate financial statements.
17. Entity X identifies that the contract contains lease of premises and non-lease component
of facilities availed. As Entity X has not elected to apply the practical expedient as provided
in paragraph 15, it will separate the lease and non-lease components and allocate the total
consideration of ` 1,70,000 to the lease and non-lease components in the ratio of their
relative stand-alone selling prices as follows:
Particulars Stand-alone % of total Stand- Allocation of
Prices alone Price consideration
` `
Building rent 1,20,000 60% 1,02,000
Service charge 80,000 40% 68,000
Total 2,00,000 100% 1,70,000

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 PAPER – 1 : FINANCIAL REPORTING 23

As Entity X's incremental borrowing rate is 10%, it discounts lease payments using this
rate and the lease liability at the commencement date is calculated as follows:
Year Lease Payment Present value Present value of lease
(A) factor @ 10% (B) payments (A X B = C)
Year 1 1,02,000 .909 92,718
Year 2 1,02,000 .826 84,252
Year 3 1,02,000 .751 76,602
Year 4 1,02,000 .683 69,666
Year 5 1,02,000 .621 63,342
Year 6 1,02,000 .564 57,528
Year 7 1,02,000 .513 52,326
Year 8 1,02,000 .467 47,634
Year 9 1,02,000 .424 43,248
Lease Liability at commencement date 5,87,316
Further, ` 68,000 allocated to the non-lease component of facility used will be recognised
in profit or loss as and when incurred.
18. Para 36 of Ind AS 7 inter alia states that when it is practicable to identify the tax cash flow
with an individual transaction that gives rise to cash flows that are classified as investing
or financing activities the tax cash flow is classified as an investing or financing activity as
appropriate. When tax cash flows are allocated over more than one class of activity, the
total amount of taxes paid is disclosed.
Accordingly, the transactions are analysed as follows:
Particulars Amount (in crore) Activity
Sale Consideration 100 Investing Activity
Capital Gain Tax (20) Investing Activity
Business profits 30 Operating Activity
Tax on Business profits (3) Operating Activity
Dividend Payment (20) Financing Activity
Dividend Distribution Tax (2) Financing Activity
Income Tax Refund 1.5 Operating Activity
Total Cash flow 86.5

Activity wise Amount (in crore)

Operating Activity 28.5
Investing Activity 80

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 24 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Financing Activity (22)

Total 86.5
19. As per para B15 of Ind AS 103, in a business combination effected primarily by exchanging
equity interests, the acquirer is usually the entity that issues its equity interests. However,
in some business combinations, commonly called ‘reverse acquisitions’ , the issuing entity
is the acquiree.
Other pertinent facts and circumstances shall also be considered in identifying the acquirer
in a business combination effected by exchanging equity interests, including:
The relative voting rights in the combined entity after the business combination -
The acquirer is usually the combining entity whose owners as a group retain or receive the
largest portion of the voting rights in the combined entity.
Based on above mentioned para, acquirer shall be either of the combining entities (i.e.
Veera Limited or Zeera Limited), whose owners as a Group retain or receive the largest
portion of the voting rights in the combined entity.
Hence, in the above scenario Veera Limited’s shareholder gets 66.67% share (100 / 150 x
100) and Zeera Limited’s shareholder gets 33.33% share in Meera Limited. Hence, Veera
Limited is acquirer as per the principles of Ind AS 103.
20. Investment property is held to earn rentals or for capital appreciation or both. Ind AS 40
shall be applied in the recognition, measurement and disclosure of investment property.
An investment property shall be measured initially at its cost. After initial recognition, an
entity shall measure all of its investment properties in accordance with the requirement of
Ind AS 16 for cost model.
The measurement and disclosure of Investment property as per Ind AS 40 in the balance
sheet would be depicted as follows:
INVESTMENT PROPERTIES:
Particulars Period ended 31 st March, 2020
(` in crore)
Gross Amount:
Opening balance (A) 10.00
Additions during the year (B) 2.00
Closing balance (C) = (A) + (B) 12.00
Depreciation:
Opening balance (D) 2.50
Depreciation during the year (E) (0.5 + 0.05) 0.55

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Closing balance (F) = (D) + (E) 3.05

Net balance (C) - (F) 8.95
The changes in the carrying value of investment properties for the year ended
31st March, 2020 are as follows:
Amount recognised in Profit and Loss with respect to Investment Properties
Particulars Period ending
31st March, 2020
(` in crore)
Rental income from investment properties (0.75 + 0.25) 1.00
Less: Direct operating expenses generating rental income
(5+1+2.5+1.5+2+1) (0.13)
Profit from investment properties before depreciation and
indirect expenses 0.87
Less: Depreciation (0.55)
Profit from earnings from investment properties before indirect
expenses 0.32
Disclosure Note on Investment Properties acquired by the entity
The investment properties consist Property A and Property B. As at 31st March, 2020, the
fair value of the properties is `10.50 crore. The valuation is performed by independent
valuers, who are specialists in valuing investment properties. A valuation model as
recommended by International Valuation Standards Committee has been applied. The
Company considers factors like management intention, terms of rental agreements, area
leased out, life of the assets etc. to determine classification of assets as investment
properties.
The Company has no restrictions on the realisability of its investment properties and no
contractual obligations to purchase, construct or develop investment properties or for
repairs, maintenance and enhancements.
Description of valuation techniques used and key inputs to valuation on investment
properties:
Valuation Significant unobservable inputs Range (Weighted average)
technique
Discounted - Estimated rental value per - ` 50 to ` 60
cash flow (DCF) sq. ft. per month
method - Rent growth per annum - 10% every 3 years
- Discount rate - 12% to 13%

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