FR Question Bank by Sarthak Jain Sir PDF

ADDITIONAL
QUESTION BANK SM 2021

Number of Page
ADDITIONAL QUESTION BANK 2021 Questions No.
Ind As 1 Presentation Of Financial Statements 4 1 - 3
Ind AS 34 Interim Financial Reporting 6 4- 7
Ind AS 7 Statement of Cash Flows 4 8-13
Ind AS 115 Revenue From Contracts with Customers 29 14-26
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors 4 27-28
Ind AS 10 Events After the Reporting Period 1 29
Ind AS 113 Fair Value Measurement 2 30-31
Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance 4 32-35
Ind AS 102 Share Based Payment 4 36-39
Ind AS 101 First-Time Adoption of Ind AS 6 40-50
Ind AS 2 Presentation of Financial Statements 11 51-56
Ind AS 16 Property, Plant and Equipment 4 57-59
Ind AS 116 Leases 10 60-68
Ind AS 23 Borrowing Costs 10 69-75
Ind AS 36 Impairment of Assets 2 76-78
Ind AS 40 Investment Property 5 79-83
Ind AS 105 Presentation of Financial Statements 4 84-88
Ind AS 41 Agriculture 2 89-91
Ind AS 19 Employee Benefits 16 92-101
Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets 6 102-105
Ind AS 12 Income Taxes 10 106-115
Ind AS 21 The Effects of Changes in Foreign Exchange Rates 3 116-119
Ind AS 24 Related Party Disclosures 4 120-122
Ind AS 33 Earnings Per Share 1 123
Ind AS 108 Operating Segments 10 124-130
Ind AS 103 Business Combination 10 131-143
Analysis Of Financial Statements 3 144-154
Ind AS 110 Consolidated Financial Statements 37 155-175
Ind As 111 Joint Arrangements 19 176-182
Ind AS 28 Investments In Associates And Joint Ventures 14 183-191
Ind AS 27 Separate Financial Statements 1 192
Ind As 10 Unit 8: Consolidation: Test Your Knowledge 3 193-194
Financial Instruments (Ind AS 32, 107, 109)
Unit I Accounting and Reporting of Financial Instruments 2 195
Unit 2 Classification and Measurement of Financial Assets and Financial Liabilities 13 196-202
Unit 4 Derivatives and Embedded Derivatives 4 203-205
Unit 5 Recognition and Derecognition of Financial Instruments 1 206
Total Questions of SM 2021 269
CA Final FR SM 2021 New Questions Referencer By CA. Sarthak Niraj Jain
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CA Final FR - SM 2021
CA. Sarthak Niraj Jain
Striker 3.2 covers all below additional questions of SM 2021
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QUESTIONS ADDED / MODIFIED + NUMERICAL/NON NUMERICAL + NEW / AMEDMENT / RTP-MTP / STRIKER
Questions Page
Module 1 New / Type of
Added in SM No. of Source
Chapters Name Modified Question
2021 ICAI-SM
Chapter 1: Framework for Preparation and
No additions / modifications
Presentation of Financial Statements
Chapter 2: Ind AS on Presentation of Items
in the Financial Statements
TYK 5 2.66 New New Non-numerical
Unit 1: Ind AS 1: Presentation of Financial TYK 6 2.67 New New Non-numerical
Statements TYK 7 2.67 New New Non-numerical
Illustration 2 2.88 New New Numerical
Illustration 3 2.88 New Striker, Similar Q Numerical
Unit 2: Ind AS 34: Interim Financial Illustration 4 2.89 New New Numerical
Reporting Illustration 5 2.92 Modified SM-2020 Numerical
TYK 3 2.97 Modified RTP-Nov-2019 Numerical
TYK 4 2.97 New Striker, Similar Q Non-numerical
Illustration 5 2.114 New New Non-numerical
Unit 3: Ind AS 7: Statement of Cash Flows
TYK 4 2.141 New RTP-May-2018 Non-numerical
TYK 5 2.141 New RTP-May-2020 Numerical
Chapter 3: Ind AS 115: Revenue from
Contracts with Customers
TYK 4 3.130 New RTP-Nov-2019 Non-numerical
Chapter 4: Ind AS on Measurement based on
Accounting Policies
Unit 1: Ind AS 8: Accounting Policies,
Changes in Accounting Estimates and Errors
Page 1 of 7

Unit 1: Ind AS 8: Accounting Policies, TYK 2 4.41 New New Non-numerical
Changes in Accounting Estimates and Errors TYK 4 4.42 New New Non-numerical
Unit 2: Ind AS 10: Events after the Reporting
Period
Unit 3: Ind AS 113: Fair Value Measurement
Chapter 5: Other Indian Accounting
Standards
Unit 1: Ind AS 20: Accounting for
Government Grants and Disclosure of
TYK 6 5.22 New New Numerical
Government Assistance
Illustration 12 5.62 New RTP-May-2019 Numerical
TYK 9 5.76 New RTP-Nov-2018 Numerical
Unit 2: Ind AS 102: Share Based Payment
Illustration 1 6.4 New Striker, Similar Q Non-numerical
Illustration 17 6.36 New MTP-Nov-2020 Numerical
Chapter 6: Ind AS 101: First-time Adoption of Illustration 15 6.25 Modified RTP-May-2020 Numerical
Ind AS TYK 5 6.47 New RTP-May-2019 Numerical
Page 2 of 7

Questions Page
ICAI Module 2 New / Type of
2021 ICAI-SM
Chapter 7: Ind AS on Assets of the Financial
Statements
Unit 1: Ind AS 2: Inventories Illustration 14 7.25 New New Numerical
Illustration 14 7.73 Modified New Numerical
TYK 3 7.77 New Striker, Similar Q Numerical

Unit 2: Ind AS 16: Property, Plant and
Equipment TYK 4 7.77 New Striker, Similar Q Numerical
TYK 5 7.77 New Striker, Similar Q Numerical
Illustration 32 7.141 Modified Striker, Similar Q Numerical
Illustration 37 7.153 Modified Striker, Similar Q Numerical
Illustration 39 7.171 New Amendment Non-numerical

Unit 3: Ind AS 116: Leases
Alternativ
Unit 4: Ind AS 23: Borrowing Costs
Illustration 8 7.231 e Striker Numerical
approach
Unit 5: Ind AS 36: Impairment of Assets Illustration 11 7.292 New New Numerical
Page 3 of 7

Unit 6: Ind AS 38: Intangible Assets No new Q.
Unit 7: Ind AS 40: Investment Property


Unit 8: Ind AS 105: Non-Current Assets held TYK 4 7.443 New RTP-May-2018 Numerical
for Sale and Discontinued Operations TYK 5 7.444 New RTP-May-2019 Numerical
Chapter 8: Ind AS 41: Agriculture
Page 4 of 7

Questions Page
2021 ICAI-SM
Chapter 9: Ind AS on Liabilities of the
Financial Statements
Unit 1: Ind AS 19: Employee Benefits Illustration 11 9.31 New New Numerical

Unit 2: Ind AS 37: Provisions, Contingent TYK 4 9.126 New RTP-Nov-2018 Non-numerical
Liabilities and Contingent Assets TYK 5 9.127 New RTP-May-2020 Non-numerical
Chapter 10: Ind AS on Items impacting the
Illustration 5 10.53 New RTP-May-2018 Numerical
Unit 1: Ind AS 12: Income Taxes
Illustration 8 10.94 Modified SM-2020 Numerical
Unit 2: Ind AS 21: The Effects of changes in TYK 4 10.101 New RTP-May-2018 Numerical
Foreign Exchange Rates TYK 5 10.101 New RTP-Nov-2018 Numerical
Chapter 11: Ind AS on Disclosures in the
Illustration 1 11.20 Modified SM-2020 Non-numerical
TYK 5 11.26 New MTP-Nov-2020 Non-numerical
Unit 1: Ind AS 24: Related Party Disclosures
Page 5 of 7

Unit 1: Ind AS 24: Related Party Disclosures
Unit 2: Ind AS 33: Earnings Per Share Illustration 13 11.65 New New Numerical
Unit 3: Ind AS 108: Operating Segments
TYK 1 11.112 Modified SM-2020 Numerical
TYK 2 11.112 Modified SM-2020 Numerical

Chapter 12: Accounting and Reporting of Illustration 13 12.41 New New Non-numerical
Financial Instruments Illustration 14 12.41 New New Non-numerical
Page 6 of 7

Questions Page
2021 ICAI-SM
Illustration 5 13.20 New RTP-Nov-2020 Non-numerical
Chapter 13: Business Combination and TYK 8 13.11 New RTP-May-2018 Numerical
Corporate Restructuring TYK 9 13.11 New RTP-Nov-2018 Numerical
13.12 to 1 Numerical &
Example 1 to 7 New Amendment
13.16 6 Non-numerical
Chapter 14: Consolidated Financial
Statements
Unit 1: Introduction to Consolidated and
This Unit has no questions
Separate Financial Statements
Unit 2: Important Definitions This Unit has no questions
New / Modified
from previous
Unit 3: Ind AS 110: Consolidated Financial Illustration 14.6 to
New SM 2020 due to Non-Numerical
Statements 1 to 23 14.54
conceptual
erorrs
New / Modified
Unit 4: Consolidation Procedure for Illustration 1-5, 14.55 to
New from previous Numerical
Subsidiaries 18, 34-36 14.116
SM 2020
Illustration New / Modified
14.117 to Numerical & Non-
Unit 5: Ind AS 111: Joint Arrangements 1, 3, 6, 7-18, New from previous
14.142 Numerical
20, 23, 24 SM 2020
New / Modified
Unit 6: Ind AS 28: Investments in Associates Illustration 14.143 to Numerical & Non-
New from previous
& Joint Ventures 1, 3-11, 13-17 14.171 Numerical
SM 2020
Unit 7: Ind AS 27: Separate Financial
1 14.18 New New Non-Numerical
Statements
Unit 8: Disclosures This Unit has no questions
TYK 1 14.19 New New Non-Numerical
Test Your Knowledge TYK 2 14.19 New New Numerical
Case Study 5 15.18 New RTP-Nov-2020 Numerical
Chapter 15: Analysis of Financial Statements Case Study 6 15.24 New New Numerical
Case Study 7 15.28 New New Numerical
Chapter 16: Integrated Reporting No additions / modifications
Chapter 17: Corporate Social Responsibility No additions / modifications
Page 7 of 7
Striker 3.2 | Additional Question Bank
Ind AS 1
PRESENTATION OF FINANCIAL STATEMENTS
SM 1. XYZ Limited (the ‘Company’) is into the manufacturing of tractor parts and mainly supplying components
to the Original Equipment Manufacturers (OEMs). The Company does not have any subsidiary, joint
venture or associate company. During the preparation of financial statements for the year ended March
31, 20X1, the accounts department is not sure aboutthe treatment/presentation of below mentioned
matters. Accounts department approachedyou to advice on the following matters.
S. No. Matters
(i) There are qualifications in the audit report of the Company with reference to two Ind AS.
(ii) Is it mandatory to add the word ‚standalone‛ before each of the components of financial
statements?
(iii) The Company is Indian Company and preparing and presenting its financial statements in `. Is
it necessary to write in the financial statements that the financial statements has been
presented in `.
(iv) The Company is having turnover of ` 180 crores. The Company wants to present the absolute
figures in the financial statements. Because for tax audit purpose, tax related filings and
other internal purposes, Company always need figures in absolute amounts.
(v) The Company had sales transactions with 10 related party parties during previous year.
However, during current year, there are no transactions with 4 related parties out of
aforesaid 10 related parties. Hence, Company is of the view that it need not disclose sales
transactions with these 4 parties in related party disclosures because with these parties there
are no transactions during current year.
Evaluate the above matters with respect to preparation and presentation of generalpurpose financial
statement [SM 2021, TYK-5]
Ans.
(i) Yes, an entity whose financial statements comply with Ind AS shall make an explicit
andunreserved statement of such compliance in the notes. An entity shall not describefinancial
statements as complying with Ind AS unless they comply with all therequirements of Ind AS.
(Refer Para 16 of Ind AS 1)
(ii) No, but need to disclose in the financial statement that these are individual financialstatement
of the Company. (Refer Para 51(b) of Ind AS 1)
(iii) Yes, Para 51(d) of Ind AS 1 inter alia states that an entity shall display the presentationcurrency,
as defined in Ind AS 21 prominently, and repeat it when necessary for theinformation presented
to be understandable.
(iv) Yes, it is mandatory as per the requirements of Division II of Schedule III to CompaniesAct, 2013).
(v) No, as per Para 38 of Ind AS 1, except when Ind AS permit or require otherwise, anentity shall
present comparative information in respect of the preceding period for allamounts reported in
the current period‘s financial statements. An entity shall includecomparative information for
narrative and descriptive information if it is relevant tounderstanding the current period‘s
financial statements.
SM 2. A Company presents financial results for three years (i.e. one for current year and two comparative
years) internally for the purpose of management information every year in addition to the general
purpose financial statements. The aforesaid financial results are presented without furnishing the
related notes because these are not required by the management for internal purpose. During current
year, management thought why not they should present third year statement of profit and loss also in
the general purpose financial statements. It will save time and will be available easily whenever
management needs thisin future.
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With reference to above background, answer the following:
(i) Can management present the third statement of profit and loss as additionalcomparative in the
general purpose financial statements?
(ii) If management present third statement of profit and loss in the general purposefinancial
statement as comparative, is it necessary that this statement should becompliant of Ind AS?
(iii) Can management present third statement of profit and loss only as additionalcomparative in the
general purpose financial statements without furnishing othercomponents (like balance sheet,
statement of cash flows, statement of change inequity) of financial statements?
[SM 2021, TYK-6]
Ans.
(i) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in addition to
the minimum comparative financial statements required by Ind AS, as long as that information is
prepared in accordance with Ind AS. This comparative information may consist of one or more
statements referred to in paragraph 10 but need not comprise a complete set of financial
statements. When this is the case, the entity shall present related note information for those
additional statements.
(ii) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in addition to
the minimum comparative financial statements required by Ind AS, as longas that information is
prepared in accordance with Ind AS.
(iii) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in addition to
the minimum comparative financial statements required by Ind AS, as long as that information is
prepared in accordance with Ind AS. This comparative information may consist of one or more
statements referred to in paragraph 10 but need not comprise a complete set of financial
statements. When this is the case, the entityshall present related note information for those
additional statements.
SM 3. A Company while preparing the financial statements for Financial Year (FY) 20X1 -20X2,erroneously
booked excess revenue of ` 10 Crore. The total revenue reported inFY 20X1-20X2 was ` 80 Crore.
However, while preparing the financial statements for20X2-20X3, it discovered that excess revenue was
booked in FY 20X1-20X2 which it nowwants to correct in the financial statements. However,
management of the Company is notsure whether it need to present the third balance sheet as additional
comparative.
With regard to the above background, answer the following:
(i) Is it necessary to provide the third balance sheet at the beginning of the precedingperiod in this
case?
(ii) The Company wants to correct the error during FY 20X2-20X3 by giving impact in thefigures of
current year only. Is the contention of management correct? [SM 2021, TYK-7]
Ans.
(i) No, as per Para 40A of Ind AS 1, an entity shall present a third balance sheet as at thebeginning
of the preceding period in addition to the minimum comparative financialstatements required in
paragraph 38A if:
(a) it applies an accounting policy retrospectively, makes a retrospective restatementof
items in its financial statements or reclassifies items in its financial statements;and
(b) the retrospective application, retrospective restatement or the reclassification hasa
material effect on the information in the balance sheet at the beginning of thepreceding
period.
(ii) No, management need to correct the previous year figures to correct the error but neednot to
furnish third balance sheet at the beginning of preceding period. (Refer Para 40Aof Ind AS 1)
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SM 4. XYZ Limited (the ‘Company‘) is into construction of turnkey projects and has assessed itsoperating cycle
to be 18 months. The Company has certain trade receivables andpayables which are receivable and
payable within a period of twelve months from thereporting date, i.e, March 31, 20X2.
In addition to above there are following items/transactions which took place during financialyear 20X1-
20X2.
S. No. Items/transactions
(1) The Company has some trade receivables which are due after 15 months from the date of
balance sheet. So the Company expects that the payment will be received within the period
of operating cycle.
(2) The Company has some trade payables which are due for payment after 14 months from the
date of balance sheet. These payables fall due within the period of operating cycle. Though
the Company does not expect that it will be able to pay these payable within the operating
cycle because the nature of business is such that generally projects gets delayed and
payments from customers also gets delayed.
(3) The Company was awarded a contract of ` 100 Crore on March 31, 20X2. As per the terms of
the contract, the Company made a security deposit of 5% of the contract value with the
customer, of ` 5 crore on March 31, 20X2. The contract is expected to be completed in 18
months‘ time. The aforesaid deposit will be refunded back after 6 months from the date of
the completion of the contract.
(4) The Company has also given certain contracts to third parties and have received security
deposits from them of ` 2 Crore on March 31, 20X2 which are repayable on completion of the
contract but if contract is cancelled before the contract term of 18 months, then it becomes
payable immediately. However, the Company does not expect the cancellation of the
contract.
Considering the above items/transactions answer the following:

(i) The Company wants to present the trade receivable as current despite the fact thatthese are
receivables in 15 months‘ time. Does the decision of presenting the same ascurrent is correct?
(ii) The Company wants to present the trade payables as non-current despite the fact that 2these
are due within the operating cycle of the Company. Does the decision ofpresenting the same as
non-current is correct?
(iii) Can the security deposit of ` 5 Crore made by the Company with the customers bepresented as
current?
(iv) Can the security deposit of ` 2 Crore taken by the Company from contractors bepresented as
non-current? [SM 2021, TYK-8]
Ans.
(i) Yes, but additionally the Company also need to disclose amounts that are receivablewithin a
period of 12 months and after 12 months from the reporting date. (Refer Para60 and 61 of Ind
AS 1)
(ii) No, the Company cannot disclose these payables as non-current and the Company alsoneed to
disclose amounts that are payable within a period of 12 months and after 12months from the
reporting date. (Refer Para 60 and 61 of Ind AS 1)
(iii) No, because the amount will be received after the operating cycle of the Company.(Refer Para 66
of Ind AS 1)
(iv) No, because the amount may be required to be paid before completion of the contact incase the
contract is cancelled. (Refer Para 69 of Ind AS 1).
Ind AS 34
INTERIMFINANCIAL REPORTING
SM 1. ABC Ltd. presents interim financial report quarterly. On 1.4.20X1, ABC Ltd. has carried forward loss of `
600 lakhs for income-tax purpose for which deferred tax asset has not been recognized. ABC Ltd. earns `
900 lakhs in each quarter ending on 30.6.20X1, 30.9.20X1, 31.12.20X1 and 31.3.20X2 excluding the
carried forward loss. Income-tax rate is expected to be 40%. Calculatethe amount of tax expense to be
reported in each quarter. [SM 2021, Ill.-2]
Ans.
Amount of income tax expense reported in each quarter would be as below:
The estimated payment of the annual tax on earnings for the current year:
` 3,000* x 40 / 100 = ` 1,200 lakhs.
*(3,600 lakhs - ` 600 lakhs) = ` 3,000 lakhs
Average annual effective tax rate = (1,200 / 3,600) × 100 = 33.33%
Tax expense to be shown in each quarter = 900 x 33.33% = ` 300 lakhs
SM 2. Innovative Corporation Private Limited (or ‚ICPL‛) is dealing in seasonal product and the salespattern of
the product, quarter wise is as under during the financial year 20X1-20X2:
Qtr. I Qtr. II Qtr. III Qtr. IV
ending 30 June ending 30 September ending 31 December ending 31 March
10% 10% 60% 20%
For the first quarter ending on 30 June, 20X1, ICPL has provided the following information :
Particulars Amounts
(in crore)
Sales 70
Employees benefits expenses 25
Administrative and other expenses 12
Finance cost 4
ICPL while preparing interim financial report for first quarter wants to defer ` 16 crores expenditureto
third quarter on the argument that third quarter is having more sales therefore third quartershould be
debited by more expenditure. Considering the seasonal nature of business and that theexpenditures are
uniform throughout all quarters
Calculate the result of first quarter as per Ind AS 34 and comment on the company’s view.
[SM 2021, Ill.-3]
Ans.
Result of the first quarter ending 30 June
Particulars Amounts (in crore)
Sales 70
Total Revenue (A) 70
Less: Employees benefits expenses (25)
Administrative and other expenses (12)
Finance cost (4)
Total Expense (B) (41)
Profit (A-B) 29
Note- As per Ind AS 34, the income and expense should be recognized when they are earned andincurred
respectively. Seasonal incomes will be recognized when they occur. Therefore, theargument of ICPL is
not correct considering the principles of Ind AS 34.

SM 3. Fixed production overheads for the financial year is ` 10,000. Normal expected production for the year,
after considering planned maintenance and normal breakdown, also considering the future demand of
the product is 2,000 MT. It is considered that there are no quarterly / seasonal variations. Therefore,
the normal expected production for each quarter is 500 MT and the fixed production overheads for the
quarter are ` 2,500.
Actual production achieved Quantity (In MT)
First quarter 400
Second quarter 600
Third quarter 500
Fourth quarter 400
Total 1,900
Presuming that there are no quarterly / seasonal variation, calculate the allocation of fixedproduction
overheads for all the four quarters as per Ind AS 34 read with Ind AS 2. [SM 2021, Ill.-4]
Ans.
If it is considered that there is no quarterly / seasonal variation, therefore normal expectedproduction
for each quarter is 500 MT and fixed production overheads for the quarter are` 2,500 .
Fixed production overhead to be allocated per unit of production in every quarter will be ` 5 perMT
(Fixed overheads / Normal production).
Quarters Quarters
First Quarter  Actual fixed production overheads = ` 2,500
 Fixed production overheads based on the allocation rate of ` 5 perunit
allocated to actual production = ` 5 x 400 = ` 2,000
 Unallocated fixed production overheads to be charged as expense asper Ind
AS 2 and consequently as per Ind AS 34 = ` 500
Second Quarter  Actual fixed production overheads on year-to-date basis = ` 5,000
 Fixed production overheads to be absorbed on year -to-date basis = 1,000 x `
5 = ` 5,000
 Earlier, ` 500 was not allocated to production in the 1st quarter. To give effect
to the entire ` 5,000 to be allocated in the second quarter, as per Ind AS 34, `
500 are reversed by way of a credit to the statement of profit and loss of the
2nd quarter.
Third Quarter  Actual production overheads on year-to-date basis = ` 7,500
 Fixed production overheads to be allocated on year -to-date basis = 1,500 x 5
= ` 7,500
 There is no under or over recovery of allocated overheads. Hence, no further
action is reuired.
Fourth Quarter  Actual fixed production overheads on year-to-date basis= ` 10,000
 Fixed production overheads to be allocated on year-to-date basis 1,900 x 5 = `
9,500
 ` 500, i.e., [` 2,500 ” (` 5 x 400)] unallocated fixed production overheads in the
4th quarter, are to be expensed off as per the principles of Ind AS 2 and Ind
AS 34 by way of a charge to the statement of profit and loss.
 Unallocated productions overheads for the year ` 500 (i.e` 10,000 ” ` 9,500)
are expensed in the Statement of profit and loss as per Ind AS 2.
The cumulative result of all the quarters would also result in unallocated overheads of ` 500,
thus,meeting the requirements of Ind AS 34 that the quarterly results should not affect
themeasurement of the annual results.
SM 4. ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of ` 20,00,000for the
third quarter of 20X1.
Following adjustments are made while computing the net profit:
(i) Bad debts of ` 1,00,000 incurred during the quarter. 50% of the bad debts have beendeferred to
the next quarter.
(ii) Additional depreciation of ` 4,50,000 resulting from the change in the method of depreciation.
(iii) Exceptional loss of ` 28,000 incurred during the third quarter. 50% of exceptional loss havebeen
deferred to next quarter.
(iv) ` 5,00,000 expenditure on account of administrative expenses pertaining to the third quarteris
deferred on the argument that the fourth quarter will have more sales; therefore fourthquarter
should be debited by higher expenditure. The expenditures are uniform throughout allquarters.
Ascertain the correct net profit to be shown in the Interim Financial Report of third quarter to
bepresented to the Board of Directors. [SM 2021, Ill.-5 Modified]
Ans.
In the instant case, the quarterly net profit has not been correctly stated. As per Ind AS 34, Interim
Financial Reporting, the quarterly net profit should be adjusted and restated as follows:
(i) The treatment of bad debts is not correct as the expenses incurred during an inter
imreportingperiod should be recognised in the same period. Accordingly, ` 50,000 should be
deductedfrom ` 20,00,000.
(ii) Recognising additional depreciation of ` 4,50,000 in the same quarter is correct and is intune
with Ind AS 34.
(iii) Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire amountof `
28,000 incurred during the third quarter should be recognized in the same quarter.Hence `
14,000 which was deferred should be deducted from the profits of third quarter only.
(iv) As per Ind AS 34 the income and expense should be recognised when they are earned
andincurred respectively. As per para 39 of Ind AS 34, the costs should be anticipated ordeferred
only when:
(i) it is appropriate to anticipate or defer that type of cost at the end of the financial
year,and
(ii) costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of ` 5,00,000 is not correct asexpenditures
are uniform throughout all quarters.
Thus considering the above, the correct net profits to be shown in Interim Financial Report of thethird
quarter shall be ` 14,36,000 (` 20,00,000 -` 50,000 - ` 14,000 - ` 5,00,000).
SM 5. 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 or not? If not, then calculate the tax expense for each quarter as well as
for the year as perInd AS 34. [SM 2021, TYK-3 Modified]
Ans.
As illustrated in para 30 (c) of Ind AS 34 ‘Interim financial reporting’, income tax expense isrecognised in
each interim period based on the best estimate of the weighted averageannual income tax rate
expected for the full financial year.Accordingly, the management’s contention that since the net income
for the year will be zerono income tax expense shall be charged quarterly in the interim financial report,
is notcorrect. Since the effective tax rate or average annual income tax rate is already given in
thequestion as 30%, the income tax expense will be recognised in each interim quarter basedon this rate
only. The following table shows the correct income tax expense to be reportedeach quarter in
accordance with Ind AS 34:

Period Pre-tax earnings (in `) Effective tax rate Tax expense (in `)
First Quarter 1,50,000 30% 45,000
Second Quarter (50,000) 30% (15,000)
Third Quarter (50,000) 30% (15,000)
Fourth Quarter (50,000) 30% (15,000)
Annual 0 0
SM 6. Due to decline in market price in second quarter, Happy India Ltd. incurred an inventory loss. The Market
price is expected to return to previous levels by the end of the year. At the end of year, the decline had
not reversed. When should the loss be reported in interimstatement of profit and loss of Happy India
Ltd.? [SM 2021, TYK-4]
Ans.
Loss should be recongised in the second quarter of the year.
Ind AS 7
STATEMENTOF CASH FLOWS
SM 1. An entity has entered into a factoring arrangement and received money from the factor.Examine the
said transaction and state how should it be presented in the statement of cashflows?
[SM 2021, Ill.-5]
Ans.
Under factoring arrangement, it needs to be assessed whether the arrangement is recourse ornon-
recourse.
Recourse factoring:
The cash received is classified as a financing cash inflow as the entity continues to recognize
thereceivables and the amount received from the factor is indeed a liability, The substance of
thearrangement is financing, as the entity retains substantially all of the risk and rewards of thefactored
receivables.
When the cash is collected by the factor, the liability and the receivables are de-recognized. It
isacceptable for this to be disclosed as a non-cash transaction, because the settlement of theliability and
the factored receivables does not result in cash flows. The net impact of thesetransactions on the cash
flow statement is to present a cash inflow from financing, but there is nooperating cash flow from the
original sale to the entity‘s customers.
Non-recourse factoring:
Where an entity de-recognises the factored receivables and receives cash from the factor, thecash
receipt is classified as an operating cash inflow. This is because the entity has received cashin exchange
for receivables that arose from its operating activities.
SM 2. The relevant extracts of consolidated financial statements of A Ltd. are provided below:
Consolidated Statement of Cash Flows
For the year ended (` in Lac)
31st March 20X2 31st March 20X1
Assets
Non-Current Assets
Property, Plant and Equipment 4,750 4,650
Investment in Associate 800 -
Financial Assets 2,150 1,800
Current Assets
Inventories 1,550 1,900
Trade Receivables 1,250 1,800
Cash and Cash Equivalents 4,650 3,550
Liabilities
Current Liabilities
Trade Payables 1,550 3,610
Extracts from Consolidated Statement of Profit and Loss
for the year ended 31st March 20X2
Particulars Amount (` in Lac)
Revenue 12,380
Cost of Goods Sold (9,860)
Gross Profit 2,520
Other Income 300
Operating Expenses (450)

Other expenses (540)

Interest expenses (110)
Share of Profit of Associate 120
Profit before Tax 1,840
The below information is relevant for A Ltd Group.

1. A Ltd had spent ` 30 Lac on renovation of a building. A Ltd charged the entire renovationcost to
profit and loss account.
2. On 1st April 20X1, A Ltd acquired 100% shares in S Ltd, for cash of ` 300 Lac. Fair value ofthe
assets acquired and liabilities assumed under the acquisition are as under:
Property, Plant and Equipment 140 Lac
Inventories 60 Lac
Trade Receivables 30 Lac
Cash and Cash Equivalents 20 Lac
Total Assets 250 Lac
Less: Trade Payables (50 Lac)
Net Assets on acquisition 200 Lac
3. A Ltd.‘s property, plant and equipment comprise the following:
Carrying amount on 1st April 20X1 4,650 Lac
Addition (at cost) including assets in S Ltd. 800 Lac
Revaluation Surplus 80 Lac
Disposal (Sale) of Assets (490 Lac)
Depreciation for the year (290 Lac)
Carrying Amount on 31st March 20X2 4,750 Lac
A Ltd constructed a machine that is a qualifying asset and incurred construction costs of` 40 Lac
that has been charged to other expenses. Of the interest cost of ` 110 Laccharged to profit or
loss statement, ` 10 Lac includes interest cost on specific borrowingsthat need to be capitalized.
Property, plant and equipment was sold at 630 Lac. Gain on disposal is adjusted againstoperating
expenses.
4. A Ltd. purchased 30% interest in an Associate (G Ltd) for cash on 1st April 20X1. Theassociate
reported profit after tax of ` 400 Lac and paid a dividend of ` 100 Lac for theyear.
5. Impairment test was conducted on 31st March 20X2. The following were impaired as under:
Goodwill impairment loss: ` 265 Lac
Intangible Assets impairment loss ` 900 Lac
The goodwill impairment relates to 100% subsidiaries.
Assume that interest cost is all paid in cash.
You are required to determine cash generated from operations for group reporting purposesfor
the year ended 31st March 20X2. [SM 2021, Ill.-12]
Ans.
Extracts of Statement of Cash Flows for the year ended 31st March 20X2
Cash Flows from Operating Activities Amount in ` Lacs

Profit before tax (W.N.1) 1,920
Less: Profit on Sale of PPE (630 - 490) (140)
Add back: Depreciation 290
Impairment of Goodwill 265
Impairment of Intangible Assets 900
Less: Share of Profits of Associate (400 x 30%) (120)
Add: Interest expense [110 ” 10] 100
Working Capital Changes (W.N.2):
Add: Decrease in Trade Receivables 580
Add: Decrease in Inventories 410
Less: Decrease in Trade Payables (2,110)
Cash generated from operations 2,095
Working Notes:
1. Profit before tax Amount in ` Lacs
Reported profit as per Profit or Loss Statement 1,840
Add back: Renovation costs charged as expense 30
Construction costs charged as expense 40
Borrowing costs to be capitalized 10
Revised Profit before tax 1,920
2. Changes in Trade Receivables Amount in ` Lacs

Opening Balance 1,800
Add: Receivables of S Ltd. 30
1,830
Less: Closing Balance (1,250)
580
3. Changes in Inventories Amount in ` Lacs

1,960
410
4. Changes in Trade Payables Amount in ` Lacs

3,660
2,110
SM 3. Company A acquires 70% of the equity stake in Company B on July 20, 20X1. Theconsideration paid for
this transaction is as below:
(a) Cash consideration of ` 15,00,000
(b) 200,000 equity shares having face of ` 10 and fair value of ` 15 per share.
On the date of acquisition, Company B has cash and cash equivalent balance of` 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 `8,00,000.
Advise how the above transactions will be disclosed/presented in the statement of cash flowsas per Ind
AS 7. [SM 2021, TYK-4]
Ans.
As per para 39 of Ind AS 7, the aggregate cash flows arising from obtaining control ofsubsidiary 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 asconsideration for
obtaining subsidiaries is reported in the statement of cash flows net of cashand cash equivalents
acquired or disposed of as part of such transactions, events or changesin circumstances.

Further, investing and financing transactions that do not require the use of cash or cashequivalents shall
be excluded from a statement of cash flows. Such transactions shall bedisclosed elsewhere in the
financial statements in a way that provides all the relevantinformation about these investing and
financing activities.
As per para 42A of Ind AS 7, cash flows arising from changes in ownership interests in asubsidiary that do
not result in a loss of control shall be classified as cash flows fromfinancing activities, unless the
subsidiary is held by an investment entity, as defined inInd AS 110, and is required to be measured at fair
value through profit or loss. Suchtransactions are accounted for as equity transactions and accordingly,
the resulting cashflows 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` 15,00,000 less
` 250,000 will be shown under investing activities as ‚Acquisition of thesubsidiary (net of cash acquired)”.
There will not be any impact of issuance of equity shares as consideration in the cash flowstatement
however a proper disclosure shall be given elsewhere in the financial statements ina 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, cashconsideration paid for
the acquisition of additional 10% stake in Company B will be shownunder financing activities.
SM 4. Entity A acquired a subsidiary, Entity B, during the year. Summarised information from the Consolidated
Statement of Profit and Loss and Balance Sheet is provided, together withsome supplementary
information.
Consolidated Statement of Profit and Loss
Amount (`)
Revenue 3,80,000
Cost of sales (2,20,000)
Gross profit 1,60,000
Depreciation (30,000)
Other operating expenses (56,000)
Interest cost (4,000)
Profit before taxation 70,000
Taxation (15,000)
Profit after taxation 55,000
Consolidated balance sheet

20X2 20X1
Assets Amount Amount
(`) (`)
Cash and cash equivalents 8,000 5,000
Trade receivables 54,000 50,000
Inventories 30,000 35,000
Property, plant and equipment 1,60,000 80,000
Goodwill 18,000 ”
Total assets 2,70,000 1,70,000
Liabilities
Trade payables 68,000 60,000
Income tax payable 12,000 11,000
Long term debt 1,00,000 64,000
Total liabilities 1,80,000 1,35,000
Shareholders’ equity 90,000 35,000
Total liabilities and shareholders’ 2,70,000 1,70,000
Other information
All of the shares of entity B were acquired for ` 74,000 in cash. The fair values of assetsacquired and
liabilities assumed were:
Particulars Amount (`)

Inventories 4,000
Trade receivables 8,000
Cash 2,000
Property, plant and equipment 1,10,000
Trade payables (32,000)
Long term debt (36,000)
Goodwill 18,000
Cash consideration paid 74,000
Prepare the Consolidated Statement of Cash Flows for the year 20X2, as per Ind AS 7.
[SM 2021, TYK-5]
Ans.
This information will be incorporated into the Consolidated Statement of Cash Flows asfollows:
Statement of Cash Flows for the year ended 20X2 (extract)

Amount (`) Amount (`)
Cash flows from operating activities
Adjustments for non-cash items:
Depreciation 30,000
Decrease in inventories (W.N. 1) 9,000
Decrease in trade receivables (W.N. 2) 4,000
Decrease in trade payables (W.N. 3) (24,000)
Interest paid to be included in financing activities 4,000
Taxation (11,000 + 15,000 ” 12,000) (14,000)
Net cash generated from operating activities 79,000
Cash flows from investing activities
Cash paid to acquire subsidiary (74,000 ” 2,000) (72,000)
Net cash outflow from investing activities (72,000)
Cash flows from financing activities
Interest paid (4,000)
Net cash outflow from financing activities (4,000)
Increase in cash and cash equivalents during the year 3,000
Cash and cash equivalents at the beginning of the year 5,000
Cash and cash equivalents at the end of the year 8,000
Working Notes:
1. Calculation of change in inventory during the year `
Total inventories of the Group at the end of the year 30,000
Inventories acquired during the year from subsidiary (4,000)
26,000
Opening inventories 35,000
Decrease in inventories 9,000

2. Calculation of change in Trade Receivables during the year `

Total trade receivables of the Group at the end of the year 54,000
Trade receivables acquired during the year from subsidiary (8,000)
46,000
Opening trade receivables 50,000
Decrease in trade receivables 4,000
3. Calculation of change in Trade Payables during the year `

Trade payables at the end of the year 68,000
Trade payables of the subsidiary assumed during the year (32,000)
36,000
Opening trade payables 60,000
Decrease in trade payables 24,000
Ind AS 115
REVENUE FROM CONTRACTS WITH CUSTOMERS
SM 1. Contractor P enters into a manufacturing contract to produce 100 specialised CCTV Cameras for
Customer Q for a fixed price of ` 1,000 per sensor. Customer Q can cancel the contract without a penalty
after receiving 10 CCTV Cameras. Specify the contract units. [SM 2021, Ill.-3]
Ans.
P determines that because there is no substantive compensation amount payable by Q on termination of
the contract ” i.e. no termination penalty in the contract ” it is akin to a contract to produce 10 CCTV
Cameras that gives Customer Q an option to purchase an additional 90 CCTV Cameras. Hence, contract is
for 10 units.
SM 2. Software Company S enters into a contract to license its customer relationship management
software to Customer B. Three days later, in a separate contract, S agrees to provide consulting services
to significantly customise the licensed software to functio n in B’s IT environment. B is unable to use the
software until the customisation services are complete.
Would these contracts be combined? [SM 2021, Ill.-5]
Ans.
S determines that the two contracts should be combined because they were entered into at nearly the
same time with the same customer, and the goods or services in the contracts are a single performance
obligation.
SM 3. Manufacturer M enters into a contract to manufacture and sell a cyber security system to Government-
related Entity P. One week later, in a separate contract, M enters into a contract to sell the same system
to Government-related Entity Q. Both entities are controlled by the same government. During the
negotiations, M agrees to sell the systems at a deep di scount if both P and Q purchases the security
system.
Should these contracts be combined or separately accounted? [SM 2021, Ill.-6]
Ans.
M concludes that the said two contracts should be combined because, among other things, P is a related
party of Q, the contracts were entered into at nearly the same time and the contracts were negotiated
as a single commercial package, which is clearly evident from the fact that discount is being offered if
both the parties purchases the security system , thereby also making the consideration in one
contract dependent on the other contract.
SM 4. Telco T Ltd. enters into a two-year contract for internet services with Customer C. C also buys a modem
and a router from T Ltd. and obtains title to the equipment. T Ltd. does not require customers to
purchase its modems and routers and will provide internet services to customers using other equipment
that is compatible with T Ltd.’s network. There is a secondary market in which modems and routers can
be bought or sold for amounts greater than scrap value.
Determine how many performance obligations does the entity T Ltd. have? [SM 2021, Ill.-17]
Ans.
T Ltd. concludes that the modem and router are each distinct and that the arrangement includes three
performance obligations (the modem, the router and the internet services) based on the following
evaluation:
Criterion 1: Capable of being distinct
 C can benefit from the modem and router on their own because they can be resold for more than
scrap value.
 C can benefit from the internet services in conjunction with readily available resources ” i.e.

either the modem and router are already delivered at the time of contract set - up, they could be
bought from alternative retail vendors or the internet service could be used with different
equipment.
Criterion 2: Distinct within the context of the contract

 T Ltd. does not provide a significant integration service.
 The modem, router and internet services do not modify or customise one another.
 C could benefit from the internet services using routers and modems that are not sold byT Ltd.
Therefore, the modem, router and internet services are not highly dependent on or highly inter-
related with each other.
SM 5. V Ltd. grants Customer C a three-year licence for anti-virus software. Under the contract, V Ltd. promises
to provide C with when-and-if-available updates to that software during the licence period. The
updates are critical to the continued use of the anti -virus software.
Determine how many performance obligations does the entity have? [SM 2021, Ill.-18]
Ans.
V Ltd. concludes that the licence and the updates are capable of being distinct because the anti - virus
software can still deliver its original functionality during the licence period without the updates. C
can also benefit from the updates together with the licence transferred when the contract is
signed.
However, V Ltd. concludes that the licence and the updates are not separately identifiable
because the software and the service are inputs into a combined item in the contract − i.e. the nature of
V Ltd.‘s promise is to provide continuous anti -virus protection for the term of the contract. Therefore, V
Ltd. accounts for the licence and the updates as a single performance obligation.
SM 6. Media Company P Ltd. offers magazine subscriptions to customers. When customers subscribe, they
receive a printed copy of the magazine each month and access to the magazine’s online content.
Ans.
P evaluates whether the promises to provide printed copies and online access are separate performance
obligations. P determines that the arrangement includes two performance obligations for the following
reasons:
 The printed copies and online access are both capable of being distinct because the customer could
use them on their own.
 The printed copies and online access are distinct within the context of the contractbecause
they are different formats so they do not significantly customise or modify each other, nor is there
any transformative relationship into a single output.
SM 7. Implied promise to reseller’s customers

Software Company K Ltd. enters into a contract with reseller D, which then sells software products to
end users. K Ltd. has a customary business practice of providing free telephone support to end users
without involving the reseller, and both reseller and the customer expect K Ltd. to continue to provide
this support.
Determine how many performance obligations does the entity K Ltd. have? [SM 2021, Ill.-20]
Ans.
In evaluating whether the telephone support is a separate performance obligation, K Ltd. notes that the
promise to provide telephone support free of charge to end users is co nsidered a service that meets the
definition of a performance obligation when control of the software product transfers to D. As a result,
K Ltd. accounts for the telephone support as a separate performance obligationin the transaction with D.
SM 8. Implied performance obligation

Carmaker N Ltd. has a historical practice of offering free maintenance services ” e.g. oil changes and tyre
rotation ” for two years to the end customers of dealers who buy its vehicles. However, the two years’
free maintenance is not explicitly stated in the contract with its dealers, but it is typically stated in N’s
advertisements for the vehicles.
Ans.
The maintenance is treated as a separate performance obligation in the sale of the vehicle to the dealer.
Revenue from the sale of the vehicle is recognised when control of the vehicle is transferred to
the dealer. Revenue from the maintenance services is recognised separately as and when the
maintenance services are provided to the retail customer.
SM 9. Entity sells gym memberships for ` 7,500 per year to 100 customers, with an option to renew at a
discount in 2nd and 3rd years at ` 6,000 per year. Entity estimates an annual attrition rate of 50% each
year.
Determine the amount of revenue to be recognised in the first year and the amount of contract liability
against the option given to the customer for renewing the membership at discount. [SM 2021, Ill.-22]
Ans.
Allocated price per unit (year) is calculated as follows:
Total estimated memberships is 175 members (Year 1 = 100; Year 2 = 50; Year 3 = 25) = 175
Total consideration is ` 12,00,000 {(100 x 7,500) + (50 x 6,000) + (25 x 6,000)} Allocated price per
membership is ` 6,857 approx. (12,00,000 / 175)
Basis on above, it is to be noted that although entity has collected ` 7,500 but revenue can be recognised
at ` 6,857 approx. per membership and remaining ` 643 should be recorded as contract liability
against option given to customer for renewing their membership at discount.
SM 10. Company D Ltd. provides advertising services to customers. D Ltd. enters into a sub-contract with a
multinational online video sharing company, F Ltd. Under the sub-contract, F Ltd. places all of D Ltd.’s
customers’ adverts.
D Ltd. notes the following:
 D Ltd. works directly with customers to understand their advertising needs before placing adverts.
 D Ltd. is responsible for ensuring that the advert meets the customer’s needs after the advertis
placed.
 D Ltd. directs F Ltd. over which advert to place and when to place it.
 D Ltd. does not bear inventory risk because there is no minimum purchase requirement withF Ltd.
 D Ltd. does not have discretion in setting the price because fees are charged based on F Ltd.’s
scheduled rates.
D is Principal or an agent? [SM 2021, Ill.-27]
Ans.
D Ltd. is primarily responsible for fulfilling the promise to provide advertising services. Although F Ltd.
delivers the placement service, D Ltd. directly works with customers to ensure that the services
are performed to their requirements. Even though D Ltd. does not bear inventory risk and does not have
discretion in setting the price, it controls the advertising services before they are provided to the
customer. Therefore, D Ltd. is a principal in this case.

SM 11. Warranty
An entity manufactures and sells computers that include an assurance-type warranty for the first90 days.
The entity offers an optional ‘extended coverage’ plan under which it will repair or replace any defective
part for three years from the expiration of the assurance -type warranty. Since the optional ‘extended
coverage’ plan is sold separately, the entity determines that the three years of extended coverage
represent a separate performance obligation (i.e. a service -type warranty). The total transaction price
for the sale of a computer and th e extended warranty is ` 36,000. The entity determines that the stand -
alone selling prices of the computer and the extended warranty are ` 32,000 and ` 4,000, respectively.
The inventory value of the computer is ` 14,400. Furthermore, the entity estimates that, based on its
experience, it will incur ` 2,000 in costs to repair defects that arise within the 90 -day coverage period
for the assurance -type warranty.
Pass required journal entries. [SM 2021, Ill.-35]
Ans.
The entity will record the following journal entries:
` `
Cash / Trade receivables Dr. 36,000
Warranty expense Dr. 2,000
To Accrued warranty costs (assurance -type warranty)
To Contract liability (service-type warranty) To
2,000
Revenue
(To record revenue and contract liabilities related to warranties) 4,000
32,000
Cost of goods sold Dr. 14,400
To Inventory
14,400
(To derecognise inventory and recognise cost of goods sold)
The entity derecognises the accrued warranty liability associated with the assurance -type warranty as
actual warranty costs are incurred during the first 90 days after the customer receives the computer.
The entity recognises the contract liability associated with the service-type warranty as revenue during
the contract warranty period and recognises the costs associated with providing the service-type
warranty as they are incurred. The entity had to determine whether the repair costs incurred are
applied against the warranty reserve already established for claims that occur during the first 90 days or
recognised as an expense as incurred.
SM 12. Warranty
Entity sells 100 ultra-life batteries for ` 2,000 each and provides the customer with a five -year guarantee
that the batteries will withstand the elements and continue to perform to specifications. The entity,
which normally provides a one-year guarantee to customer purchasing ultra -life batteries,
determines that years two through five represent a separate performance obligation. The entity
determines that ` 1,70,000 of the ` 2,00,000 transaction price should be allocated to the batteries and `
30,000 to the service warranty (based on estimated stand -alone selling prices and a relative selling price
allocation). The entity’s normal one -year warranty cost is ` 1 per battery.
Pass required journal entries. [SM 2021, Ill.-36]
Ans.
The entity will record the following journal entries:
Upon delivery of the batteries, the entity records the following entry:
Cash/Receivables Dr. 2,00,000
To Revenue 1,70,000
To Contract liability (service warranty) 30,000
Warranty expense Dr. 10,000
To Accrued warranty costs (assurance warranty) 10,000
The contract liability is recognised as revenue over the service warranty period (years 2 - 5). The costs of
providing the service warranty are recognised as incurred . The assurance warranty obligation is used
/ derecognised as defective units are replaced / repaired during the initial year of the warranty. Upon
expiration of the assurance warranty period, any remaining assurance warranty obligation is
reversed.
SM 13. Non-cash consideration - Free advertising

Production Company Y sells a television show to Television Company X. The consideration under the
arrangement is a fixed amount of ` 1,000 and 100 advertising slots. Y determines that the stand-alone
selling price of the show would be ` 1,500. Based on market rates, Y determines that the fair value of
the advertising slots is ` 600.
Determine the transaction price. [SM 2021, Ill.-50]
Ans.
Y determines that the transaction price is ` 1,600, comprising of ` 1,000 fixed amount plus the fair value
of the advertising slots ie` 600.
If the fair value of the advertising slots could not be reasonably estimated, then the transaction
price would be ` 1,500 i.e. Y would use the stand-alone selling price of the goods or services promised for
the non -cash consideration.
SM 14. Credits to a new customer

Customer C is in the middle of a two -year contract with Telco B Ltd., its current wireless service provider,
and would be required to pay an early termination penalty if it terminated the contract today. If C
cancels the existing contract with B Ltd. and signs a two-year contract with Telco D Ltd. for ` 800 per
month, then D Ltd. promises at contract inception to give C a one -time credit of` 2,000 (referred to as a
‘port-in credit’). The amount of the port-in credit does not depend on thevolume of service subsequently
purchased by C during the two -year contract. Determine the transaction price.
[SM 2021, Ill.-53]
Ans.
D Ltd. determines that it should account for the port -in credit as consideration payable to a
customer. This is because the credit will be applied against amounts owing to D Ltd. Since, D Ltd. does
not receive any distinct goods or services in exchange for this credit, it will account for it as a reduction in
the transaction price ` 17,200 [(` 800 x 24 month) ” ` 2,000]. D Ltd. will recognise the reduction in the
transaction price as the promised goods or services are transferred.
SM 15. Discretionary credit

Telco G Ltd. grants a one-time credit of ` 50 to a customer in Month 14 of a two-year contract. The credit
is discretionary and is granted as a commercial gesture, not in response to prior service issues (often
referred to as a ‘retention credit’). The contract includes a subsidised handset and a voice and data plan.
G Ltd. does not regularly provide these credits and therefore customers do not expect them to be
granted.
How this will be accounted for under Ind AS 115? [SM 2021, Ill.-58]

Ans.
G Ltd. concludes that this is a change in the transaction price and not a variable consideration. Since, the
credit does not relate to a satisfied performance obligation, the change in transaction price resulting
from the credit is accounted for as a contract modification and recognised over the
remaining term of the contract. If, in this example, rather than providing a one-time credit, G Ltd.
granted a discount of ` 5 per month for the remaining contract term, then also G Ltd. would conclude
that it was a change in the transaction price. It would apply the contract modification guidance and
recognise the credit over the remaining term of the contract .
SM 16. Uninstalled materials

On 1st January, 20X1, an entity contracts to renovate a building including the installation of new
elevators. The entity estimates the following with respect to the contract:
Particulars Amount
(`)
Transaction price 5,000,00
Expected costs: 0
(a) Elevators 1,500,00

(b) Other costs 0
2,500,00
Total 0
4,000,00
0
The entity purchases the elevators and they are delivered to the site six months before they will be
installed. The entity uses an input method based on cost to measure progress towards completion. The
entity has incurred actual other costs of 500,000 by 31st March, 20X1.
How will the Company recognize revenue, if performance obligation is met over a period of time?
[SM 2021, Ill.-65]
Ans.
Costs to be incurred comprise two major components ” elevators and cost of construction service.
(a) The elevators are part of the overall construction project and are not a distinct
performanceobligation
(b) The cost of elevators is substantial to the o verall project and are incurred well in advance. (c)
Upon delivery at site, customer acquires control of such elevators.
(d) And there is no modification done to the elevators, which the company only procures and
delivers at site. Nevertheless, as part of materials used in overall construction project, the
company is a principal in the transaction with the customer for such elevators also.
Therefore, applying the guidance on Input method ”

 The measure of progress should be made based on percentage of costs incurred relative to the
total budgeted costs.
 The cost of elevators should be excluded when measuring such progress and revenue for such
elevators should be recognized to the extent of c osts incurred.
The revenue to be recognized is measured as follows:
Transaction price 5,000,000
Costs incurred:
(a) Cost of elevators 1,500,000
(b) Other costs 500,000

Measure of progress: 500,000 / 2,500,000 = 20%
Revenue to be recognised:
(a) For costs incurred (other than elevators) Total attributable revenue = 3,500,000
% of work completed = 20%
Revenue to be recognised = 700,000
(b) Revenue for elevators 1,500,000 (equal to costs incurred)
Total revenue to be recognised 1,500,000 + 700,000 = 2,200,000
Therefore, for the year ended 31 st March, 20X1, the Company shall recognize revenue of
` 2,200,000 on the project.
SM 17. An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a
noted orchestra. The customer, a consumer products company, has the right to use the recorded
symphony in all commercials, including television, radio and online advertisements for two years in
Country A. In exchange for providing the licence, the entity receives fixed consideration of ` 50,000 per
month. The contract does not include any other goods or services to be provided by the entity. The
contract is non-cancellable.
Determine how the revenue will be recognised? [SM 2021, Ill.-69]
Ans.
The entity assesses the goods and services promised to the cu stomer to determine which goods and
services are distinct in accordance with paragraph 27 of Ind AS 115. The entity concludes that its only
performance obligation is to grant the licence. The entity does not have any contractual or implied
obligations to change the licensed recording. The licensed recording has significant stand-alone
functionality (i.e. the ability to be played) and, therefore, the ability of the customer to obtain the
benefits of the recording is not substantially derived from the entity‘s ongoing activities. The
entity therefore determines that the contract does not require, and the customer does not reasonably
expect, the entity to undertake activities that significantly affect the licensed recording. Consequently,
the entity concludes that the nature of its promise in transferring the licence is to provide the customer
with a right to use the entity‘s intellectual property as it exists at the point in time that it is granted.
Therefore, the promise to grant the licence is a performance obligation satisfied at a point in time. The
entity recognises all of the revenue at the point in time when the customer can direct the use of, and
obtain substantially all of the remaining benefits from, the licensed intellectual property.
SM 18. Assessing the nature of a software licence with unspecified upgrades

Software Company X licenses its software application to Customer Y. Under the agreement, X will
provide updates or upgrades on a when-and-if-available basis; Y can choose whether to install them.
Y expects that X will undertake no other activities that will change the functionality of the software.
Determine the nature of license. [SM 2021, Ill.- 70]
Ans.
Basis on the facts given in question it can be concluded that, a lthough the updates and upgrades will
change the functionality of the software, they are not activities considered in determining the nature of
the entity‘s promise in granting the licence. The activities of X to provide updates or upgrades are not
considered because they transfer a promised good or service to Y ” i.e. updatesor upgrades are distinct
from the licence. Therefore, the software licence provides a right to use the IP that is satisfied at a point
in time.

SM 19. Assessing the nature of a film licence and the effect of marketing activities
Film Studio C grants a licence to Customer D to show a completed film. C plans to undertake significant
marketing activities that it expects will affect box office receipts for the film. The marketing
activities will not change the functionality of the film, but they could affect its value.
Determine the nature of license. [SM 2021, Ill.-71]
Ans.
C would probably conclude that the licence provides a right to use its IP and, therefore, is
transferred at a point in time. There is no expectation that C will undertake activities to change the form
or functionality of the film. Because the IP has significant stand -alone functionality, C‘s marketing
activities do not significantly affect D‘s ability to obtain benefit from the film, nor do they affect the IP
available to D.
SM 20. Assessing the nature of a team name and logo

Sports Team D enters into a three -year agreement to license its team name and logo to Apparel Maker
M. The licence permits M to use the team name and logo on its products, including display products, and
in its advertising or marketing materials.
(i) Determine the nature of license in the above case.
(ii) Modifying above facts that, Sports Team D has not played games in many years and the licensor
is Brand Collector B, an entity that acquires IP such as old team or brand names and logos from
defunct entities or those in financial distress. B’s business model is to license the IP, or obtain
settlements from entities that use the IP without permission, without undertaking any ongoing
activities to promote or support the IP
Would the answer be different in this situation? [SM 2021, Ill.-72]
Ans.
(i) The nature of D‘s promise in this contract is to provide M with the right to access the sports
team‘s IP and, accordingly, revenue from the licence will be recognised over time. In reaching this
conclusion, D considers all of the following facts :
 M reasonably expects D to continue to undertake activities that support and maintain the
value of the team name and logo by continuing to play games and field a competitive team
throughout the licence period. These activities significantly affect the IP‘s ability to provide
benefit to M because the value of the team name and logo is substantially derived from, or
dependent on, those ongoing activities.
 The activities directly expose M to positive or negative effects (i.e. whether D plays games
and fields a competitive team will have a direct effect on how successful M is in selling its
products featuring the team‘s name and logo).
 D‘s ongoing activities do not result in the transfer of a good or a service to M as theyoccur
(i.e. the team playing games does not transfer a good or service to M).
(ii) Based on B‘s customary business practices, Apparel Maker M probably does not reasonably
expect B to undertake any activities to change the form of the IP or to support or maintain the
IP. Therefore, B would probably conclude that the nature of its promise is to provide M with a
right to use its IP as it exists at the point in time at which the licence is granted.
SM 21. Customer outsources its information technology data centre

Term = 5 years plus two 1-yr renewal options
Average customer relationship is 7 years
Entity spends ` 400,000 designing and building the technology platform needed to accommodate out-
sourcing contract:
Design services `50,000

Hardware `140,000
Software `100,000
Migration and testing of data centre `110,000
TOTAL `400,000
[SM 2021, Ill.-73]
Ans.
Design services `50,000 Assess under Ind AS 115. Any resulting asset would
be amortised over 7 years (i.e. include renewals)
Hardware `140,000 Account for asset under Ind AS 16
Software `100,000 Account for asset under Ind AS 38
Migration and testing of data `110,000 Assess under Ind AS 115. Any resulting asset would
centre be amortised over 7 years (i.e. include renewals)
TOTAL `400,000
SM 22. 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` 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?
[SM 2021, TYK-4]
Ans.
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:
(a) 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;
(b) the entity can identify each party‘s rights regarding the goods or services to
betransferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;
(d) the contract has commercial substance (ie the risk, timing or amount of the entity‘sfuture cash
flows is expected to change as a result of the contract); and
(e) 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 9(e) 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:
(a) 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);
(b) P Ltd. lacks sources of other income or assets that could be used to repay the balance
consideration; and
(c) 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 o ccurs 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
` 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 paragraph16, 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.
SM 23. Entity I sells a piece of machinery to the customer for ` 2 million, payable in 90 days. Entity I is aware at
contract inception that the customer might not pay the full contract price. Entity I estimates that the
customer will pay atleast` 1.75 million, which is sufficient to cover entity I's cost of sales (` 1.5 million)
and which entity I is willing to accept because it wants to grow its presence in this market. Entity I has
granted similar price concessions in comparable contracts.
Entity I concludes that it is highly probable that it will collect ` 1.75 million, and such amount is not
constrained under the variable consideration guidance.
What is the transaction price in this arrangement? [SM 2021, TYK-5]
Ans.
Entity I is likely to provide a price concession and accept an amount less than ` 2 million in exchange for
the machinery. The consideration is therefore variable. The transaction price in this arrangement is `
1.75 million, as this is the amount which entity I expects to receive after providing the concession and it
is not constrained under the variable consideration guidance. Entity I can also conclude that the
collectability threshold is met for ` 1.75 million and therefore contract exists.
SM 24. On 1 January 20X8, entity J enters into a one-year contract with a customer to deliver water treatment
chemicals. The contract stipulates that the price per container will be adjusted retroactively once the
customer reaches certain sales volume, defined, as follows:
Price per container Cumulative sales volume
`100 1 - 1,000,000 containers

`90 1,000,001 - 3,000,000 containers
`85 3,000,001 containers and above
Volume is determined based on sales during the calendar year. There are no minimum purchase
requirements. Entity J estimates that the total sales volume for the year will be 2.8 million containers,
based on its experience with similar contracts and forecasted sales to the customer.
Entity J sells 700,000 containers to the customer during the first quarter ended31st March
20X8 for a contract price of ` 100 per container. How should entity J determine the transaction price?
[SM 2021, TYK-6]
Ans.
The transaction price is ` 90 per container based on entity J's estimate of total sales volume for the year,
since the estimated cumulative sales volume of 2.8 million containers would result in a price per
container of ` 90. Entity J concludes that based on a transaction price of` 90 per container, it is highly
probable that a significant reversal in the amount of cumulativerevenue recognised will not occur when
the uncertainty is resolved. Revenue is therefore recognised at a selling price of ` 90 per container as
each container is sold. Entity J will recognise a liability for cash received in excess of the transaction
price for the first 1 millioncontainers sold at ` 100 per container (that is, ` 10 per container) until the
cumulative sales volume is reached for the next pricing tier and the price is retroactively reduced.
For the quarter ended 31st March, 20X8, entity J recognizes revenue of ` 63 million (700,000 containers
x ` 90) and a liability of ` 7 million [700,000 containers x (` 100 - ` 90)].
Entity J will update its estimate of the total sales volume at each reporting date until the uncertainty is
resolved.
SM 25. Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included inside the electric
razor package that can be redeemed by the end consumers for C 10 per unit.
Entity K estimates that 20% to 25% of eligible rebates will be redeemed, based on its experience
with similar programmes and rebate redemption rates available in the market for similar programmes.
Entity K concludes that the transaction price should incorporate an assumption of 25% rebate
redemption, as this is the amount for which it is highly probable that a significant reversal of cumulative
revenue will not occur if estimates of the rebates change.
How should entity K determine the transaction price? [SM 2021, TYK-7]

Ans.
Entity K records sales to the retailer at a transaction price of ` 47.50 (` 50 less 25% of` 10). The
difference between the per unit cash selling price to the retailers and the transaction price is
recorded as a liability for cash consideration expected to be paid to the end customer. Entity K will
update its estimate of the rebate and the transaction price at each reporting date if estimates of re
demption rates change.
SM 26. A manufacturer enters into a contract to sell goods to a retailer for ` 1,000. The manufacturer
also offers price protection, whereby it will reimburse the retailer for any difference between the
sale price and the lowest price offered to any customer during the following six months. This clause is
consistent with other price protection clauses offered in the past, and the manufacturer believes that it
has experience which is predictive for this contract.
Management expects that it will offer a price decrease of 5% during the price protection period.
Management concludes that it is highly probable that a significant reversal of cumulative revenue will
not occur if estimates change.
How should the manufacturer determine the transaction price? [SM 2021, TYK-8]
Ans.
The transaction price is ` 950, because the expected reimbursement is ` 50. The expected payment to
the retailer is reflected in the transaction price at contract inception, as that is the amount of
consideration to which the ma nufacturer expects to be entitled after the price protection. The
manufacturer will recognise a liability for the difference between the invoice price and the transaction
price, as this represents the cash that it expects to refund to the retailer. The manufacturer will update
its estimate of expected reimbursement at each reporting date until the uncertainty is resolved.
SM 27. Electronics Manufacturer M sells 1,000 televisions to Retailer R for ` 50,00,000 (` 5,000 per television).
M provides price protection to R by agreeing to reimburse R for the difference between this price and
the lowest price that it offers for that television during the following six months. Based on M‘s
extensive experience with similar arrangements, it estimates the following outcomes.
Price reduction in next six months (`) Probability

0 70%
` 500 20%
` 1,000 10%
Determine the transaction price. [SM 2021, TYK-9]
Ans.
After considering all relevant facts and circumstances, M determines that the expected value method
provides the best prediction of the amount of consideration to which it will be entitled. As a result, it
estimates the transaction price to be `4,800 per television ” i.e. (`5,000 x70%) + (`4,500 x 20%) + (`4,000 x
10%).
SM 28. Construction Company C enters into a contract with Customer E to build an asset. Dependingon when
the asset is completed, C will receive either ` 1,10,000 or ` 1,30,000.
Outcome Consideration (`) Probability
Project completes on time 1,30,000 90%
Project is delayed 1,10,000 10%

Determine the transaction price. [SM 2021, TYK-10]
Ans.
Because there are only two possible outcomes under the contract, C determines that using the most
likely amount provides the best prediction of the amount of consideration to which it will be entitled. C
estimates the transaction price to be ` 1,30,000, which is the single most likely amount
SM 29. Franchisor Y Ltd. licenses the right to operate a store in a specified location to Franchisee F.The store
bears Y Ltd.‘s trade name and F will have a right to sell Y Ltd.‘s products for10 years. F pays an up-front
fixed fee. The franchise contract also requires Y Ltd. to maintain the brand through product
improvements, marketing campaigns etc. Determine the nature of license.
[SM 2021, TYK-11]
Ans.
The licence provides F access to the IP as it exists at any point in time in the licence period.This is
because:
 Y Ltd. is required to maintain the brand, which will significantly affect the IP by affectingF‘s ability to
obtain benefit from the brand;
 any action by Y Ltd. may have a direct positive or negative effect on F; and
 these activities do not transfer a good o r service to F.
Therefore, Y Ltd. recognises the up-front fee over the 10-year franchise period.

Ind AS 8
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS
SM 1. A carpet retail outlet sells and fits carpets to the general public. It recognizes revenue when the carpet is
fitted, which on an average is six weeks after the purchase of the carpet.
It then decides to sub-contract the fitting of carpets to self-employed fitters. It now recognizes revenue
at the point-of-sale of the carpet.
Whether this change in recognising the revenue is a change in accounting policy as per the provision of
Ind AS 8? [SM 2021, TYK-1]
Ans.
This is not a change in accounting policy as the carpet retailer has changed the way that the carpets are
fitted.Therefore, there would be no need to retrospectively change prior period figures for revenue
recognized.
SM 2. When is an entity required to present a third balance sheet as at the beginning of the preceding period?
[SM 2021, TYK-2]
Ans.
As per paragraph 40A of Ind AS 1, Presentation of Financial Statements, an entity shall present a third
balance sheet as at the beginning of the preceding period in addition to the minimum comparative
financial statements required by paragraph 38A of the standard if:
 it applies an accounting policy retrospectively, makes a retrospective restatement of items in its
financial statements or reclassifies items in its financial statements; and
 the retrospective application, retrospective restatement or the reclassification has a material effect
on the information in the balance sheet at the beginning of the preceding period
SM 3. Is change in the depreciation method for an item of property, plant and equipment a change in
accounting policy or a change in accounting estimate? [SM 2021, TYK-4]
Ans.
As Paragraphs 60 and 61 of Ind AS 16, Property, Plant and Equipment, the depreciation method used
shall reflect the pattern in which the asset‘s future economic benefits are expected to be consumed by
the entity. The depreciation method applied to an asset shall be reviewed at least at each financial year-
end and, if there has been a significant change in the expected pattern of consumption of the future
economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern.
Such a change is accounted for as a change in an accounting estimate in accordance with Ind AS 8.
As per the above, depreciation method for a depreciable asset has to reflect the expected pattern of
consumption of future economic benefits embodied in the asset. Determination of depreciation method
involves an accounting estimate and thus depreciation method is not a matter of an accounting policy.
Accordingly, Ind AS 16 requires a change in depreciation method to be accounted for as a change in an
accounting estimate, i.e., prospectively.
SM 4. ABC Ltd. changed its method adopted for inventory valuation in the year 20X2-20X3. Prior to the change,
inventory was valued using the first in first out method (FIFO). However, it was felt that in order to
match current practice and to make the financial statements more relevant and reliable, a weighted
average valuation model would be more appropriate.
The effect of the change in the method of valuation of inventory was as follows:
 31st March, 20X1 - Increase of ` 10 million
Profit or loss under the FIFO valuation model are as follows:
20X2-20X3 20X1-20X2
Revenue 324 296

Cost of goods sold (173) (164)
Gross profit 151 132
Expenses (83) (74)
Profit 68 58
Retained earnings at 31st March, 20X1 were ` 423 million

Present the change in accounting policy in the profit or loss and produce an extract of the statement of
changes in equity in accordance with Ind AS 8. [SM 2021, TYK-9]
Ans.
Profit or loss under weighted average valuation method is as follows:
20X2-20X3 20X1-20X2 (Restated)
Revenue 324 296

Cost of goods sold (168) (159)
Gross profit 156 137
Expenses (83) (74)
Profit 73 63
Statement of changes in Equity (extract)

Retained earnings Retained earnings
(Original)
At 1st April, 20X1 423 423

Change in inventory valuation policy 10 -
At 1st April, 20X1 (Restated) 433 -
Profit for the year 20 X1-20X2 63 58
At 31st March, 20X2 496 481
Profit for the 20X2-20X3 73 68
At 31st March, 20X3 569 549

Ind AS 10
EVENTS AFTER THE REPORTING PERIOD
SM 1. 10. ABC Ltd. received a demand notice on 15th June, 20X2 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 in respect of transactions
related to financial year 20X1-20X2. The financial statements for the year 20X1-20X2 are approved on
10th August, 20X2. In July, 20X2, 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 20X1-20X2. Whether these events are
adjusting or non-adjusting events and explain the treatment accordingly. [SM 2021, TYK-10]
Ans.
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:
(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)
In the instant case, the demand notice has been received on 15th June, 20X2, 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, 20X2, 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 20X1-20X2, at best estimate of the expenditure to be incurred, i.e., ` 15,00,000.
Ind AS 113
FAIR VALUE MEASUREMENT
SM 1. Discount Rate assessment to measure present value:
Investment 1 is a contractual right to receive ` 800 in 1 year. There is an established market for
comparable assets, and information about those assets, including price information, is available. Of those
comparable assets:
a. Investment 2 is a contractual right to receive ` 1,200 in 1 year and has a market price of ` 1,083.
b. Investment 3 is a contractual right to receive ` 700 in 2 years and has a market price of ` 566.
All three assets are comparable with respect to risk (that is, dispersion of possible payoffs and credit).
You are required to measure the fair value of Asset 1 basis above information. [SM 2021, Ill.-1]
Ans.
On the basis of the timing of the contractual payments to be received for Investment 1 relative to the
timing for Investment 2 and Investment 3 (that is, one year for Investment 2 versus two years for
Investment 3), Investment 2 is deemed more comparable to Investment 1. Using the contractual
payment to be received for Investment 1 (` 800) and the 1-year market rate derived from Investment 2,
the fair value of Investment 1 is calculated as under:
Investment 2 Fair Value ` 1,083
Contractual Cash flows in 1 year ` 1,200
IRR = ` 1,083 x (1 + r) = ` 1,200
= (1 + r) = (` 1,200 / ` 1,083) = 1.108
r = 1.108 ” 1 = 0.108 or 10.8%
Value of Investment 1 = ` 800 / 1.108 = ` 722
Alternatively, in the absence of available market information for Investment 2, the one-year market rate
could be derived from Investment 3 using the build-up approach. In that case, the 2-year market rate
indicated by Investment 3 would be adjusted to a 1-year market rate using the term structure of the risk-
free yield curve. Additional information and analysis might be required to determine whether the risk
premiums for one-year and two-year assets are the same. If it is determined that the risk premiums for
one-year and two-year assets are not the same, the two-year market rate of return would be further
adjusted for that effect.
SM 2. 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? [SM 2021, TYK-6]
Ans.
(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) 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).
(b) 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).
(c) 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 converting the 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 non-financial 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 wereno similar shares
traded in the market. Hence, it falls under Level 3 of fair value hierarchy.
Level 2 inputs include the following:

(a) quoted prices for similar assets or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that are not active.
(c) 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.
Ind AS 20
ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSUREOF GOVERNMENT ASSIST ANCE
SM 1. A Ltd. received a government grant of ` 10,00,000 to defray expenses for environmental protection.
Expected environmental costs to be incurred is ` 3,00,000 per annum for the next 5 years. How should A
Ltd. present such grant related to income in its financial statements?
[SM 2021, Ill.-9]
Ans.
As per paragraph 29 of Ind AS 20, Grants related to income are presented as part of profit or loss, either
separately or under a general heading such as „Other income‟; alternatively, they are deducted in
reporting the related expense.
In accordance with the above, presentation of grants related to income under both the methods are as
follows:
Method 1: Credit in the statement of profit and loss

The entity can recognise the grant as income on a straight line basis i.e., ` 2,00,000 per year in the
statement of profit and loss either separately or under the head ‚Other Income‛.
The supporters of this method consider it inappropriate to present income and expense items on a net
basis and that „separation of the grant from the expense facilitates comparison with other expenses not
affected by a grant‟.
Method 2: As a deduction in reporting the related expense

Since the grant relates to environmental expenses incurred/to be incurred by the entity, it can present
the grant by reducing the grant amount every year from the related expense i.e., environmental expense
of ` 1,00,000 (i.e., net expense ` 3,00,000 ” ` 2,00,000).
The supporters of this method are of the view that „the expenses might well not have been incurred by
the entity if the grant had not been available and presentation of the expense without offsetting the
grant may therefore be misleading‟.
The Standard regards both the methods as acceptable for the presentation of grants related to income.
However, method 2 may be more appropriate when the company can relate the grant to a specific
expenditure.
The Standard also provides that disclosure of the grant may be necessary for a proper understanding of
the financial statements. Disclosure of the effect of the grants on any item of income or expense which is
required to be separately disclosed is usually appropriate.
SM 2. Illustration 10 A Ltd. has received a grant of ` 10,00,00,000 in the year 20X1-20X2 from local government
in the form of subsidy for selling goods at lower price to lower income group population in a particular
area for two years. A Ltd. had accounted for the grant as income in the year 20X1-20X2. While accounting
for the grant in the year 20X1-20X2, A Ltd. was reasonably assured that all the conditions attached to the
grant will be complied with. However, in the year 20X5-20X6, it was found that A Ltd. has not complied
with the above condition and therefore notice of refund of grant has been served to it. A Ltd. has
contested but lost in court in 20X5-20X6 and now grant is fully repayable. How should A Ltd. reflect
repayable grant in its financial statements ending 20X5-20X6? [SM 2021, Ill.-10]
Ans.
Note: It is being assumed that the accounting done in previous years was not incorrect and was not in
error as per Ind AS 8.

Paragraph 32 of Ind AS 20, states that a Government grant that becomes repayable shall be accounted
for as a change in accounting estimate (see Ind AS 8, Accounting Policies, Changes in Accounting
Estimates and Errors).
Repayment of a grant related to income shall be applied first against any unamortised deferred credit
recognised in respect of the grant. To the extent that the repayment exceeds any such deferred credit,
or when no deferred credit exists, the repayment shall be recognised immediately in profit or loss.
Repayment of a grant related to an asset shall be recognised by increasing the carrying amount of the
asset or reducing the deferred income balance by the amount repayable. The cumulative additional
depreciation that would have been recognised in profit or loss to date in the absence of the grant shall
be recognised immediately in profit or loss.
The following journal entries should be passed:

S. Particulars NatureofAccount Dr./Cr. Amount
No. (ìncrores)
(i) RepaymentofGovernmentGrant Expense(P/L) Dr. 10
ToGrantrepayable Balancesheet(Liability) 10
(Beingrecognitionofrepayment
ofgrantinstatement ofprofitor loss)
(ii) Grantrepayable Balancesheet(Liability) Dr. 10
ToBank Balancesheet(Asset) 10
(Beinggrantrefunded)
Assuming that no deferred credit balance exists in the year 20X5-20X6, therefore repayment recognised
in P&L.
It may also be noted that the standard also provides that circumstances giving rise to repayment of a
grant related to an asset may require consideration to be given to the possible impairment of the new
carrying amount of the asset.
SM 3. An entity opens a new factory and receives a government grant of ` 15,000 in respect of capital
equipment costing ` 1,00,000. It depreciates all plant and machinery at 20% per annum on straight-line
basis. Show the statement of profit and loss and balance sheet extracts in respect of the grant for first
year under both the methods as per Ind AS 20. [SM 2021, TYK-6]
Ans.
(a) When grant is treated as deferred income
Statement of profit and loss – An extract
`
Depreciation (`1,00,000 x 20%) (20,000)
Government grant credit (W.N.1) 3,000
Balance Sheet - An extract

`
Non-current assets
Less: Accumulated depreciation (1,00,000 x 20%) (20,000) 80,000
????
Non-current liabilities
Government grant [12,000 ” 3,000 (current 9,000
Current liabilities liability)]
Government grant (15,000 x 20%) 3,000

????
Working Note:
1. Government grant deferred income account
` `
To Profit or loss 3,000 By Grant cash received 15,000
(15,000 × 20%)
To Balance c/f 12,000
15,000 15,000
(b) When grant is deducted from cost of the asset

Statement of profit and loss – An extract
`
Depreciation [(`1,00,000 ” 15,000) x 20%] (17,000)
Balance Sheet - An extract

`
Non-current assets
Property, plant and equipment (1,00,000-15,000) 85,000
Less: Accumulated depreciation (17,000) 68,000
SM 4. A company receives a cash grant of ` 30,000 on 31 March 20X1. The grant is towards the cost of training
young apprentices . Training programme is expected to last for 18 months starting from 1 April 20X1.
Actual costs of the training incurred in 20X1-20X2 was ` 50,000 and in 20X2-20X3 ` 25,000. State, how
this grant should be accounted for? [SM 2021, TYK-7]
Ans.
At 31st March 20X1 the grant would be recognised as a liability and presented in the balance
sheet as a split between current and non -current amounts.
` 20,000 [(12 months / 18 months) x 30,000] is current and would be recognised in profit and loss for the
year ended 31st March, 20X1. The balance amount of ` 10,000 will be shown as non-current.
At the end of year 20X1-20X2, there would be a current balance of 10,000 (being the non - current
balance at the end of year 20X1-20X1 reclassified as current) in the balance sheet. This would be
recognised in profit in the year 20X2-20X3.
Extracts from the financial statements are as follows:

Balance Sheet (extracts)

31 March 31 March 31 March
20X1 20X2 20X3
Current liabilities
Deferred income 20,000 10,000 -
Deferred income 10,000 - -
Statement of profit and loss (extracts)

31 March 20X2 31 March 20X3
Method 1
Other Income - Government grant received 20,000 10,000
Training costs (50,000) (25,000)
Method 2
Training costs (50,000 ” 20,000) 30,000
Training costs (25,000 ” 10,000) 15,000
Ind AS 102
SHARE BASED PAYMENT
SM 1. 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
` 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 a bove arrangement. [SM 2021, Ill.-12]
Ans.
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 sh are 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) 2,40,000
To Equity (Contribution from the parent) 2,40,000
Year 2
Remuneration expense Dr. 2,46,000
[(200 x 81 employees x Rs. 30) ” 2,40,000]
To Equity (Contribution from the parent) 2,46,000
SM 2. P Ltd. granted 400 stock appreciation rights (SAR) each to 75 employees on 1 st April 20X1 with a fair
value ` 200. The terms of the award require the employee to provide service for four years in order to
earn the award. The fair value of each SAR at each reporting date is as follows:
31st March 20X2 ` 210
31st March 20X3 ` 220
31st March 20X4 ` 215
31st March 20X5 ` 218
What would be the difference if at the end of the second year of service (i.e. at31st March
20X3), P Ltd. modifies the terms of the award to require only three years of service?
[SM 2021, TYK-9]
Ans.
Journal entries in the books of P Ltd (without modification of service period of stock appreciation
rights) (ìn lakhs)
Date Particulars Debit Credit
31.03.20X2 Profit and Loss account Dr. 15.75
To Liability against SARs
15.75
(Being expenses liability for stock appreciation rights recognised)
To Liability for SARs
17.25


15.38
17.02
Journal entries in the books of P Ltd (with modification of service period of stock appreciation
rights) (ìn lakhs)
Date Particulars Debit Credit
(Being expenses liability for stock appreciation rights 15.75
recognised)
recognised)
recognised)
Working Notes:
Calculation of expenses for issue of stock appreciation rights without modification of service period
For the year ended 31st March 20X2
= `210 x 400 awards x 75 employees x 1 year /4 years of service
= `15,75,000

= `220 x 400 awards x 75 employees x 2 years /4 years of service - `15,75,000 previous
recognised
= `33,00,000 - `15,75,000 = `17,25,000

= `215 x 400 awards x 75 employees x 3 years/4 years of service - `33,00,000 previously
recognised
= `48,37,500 - `33,00,000 = `15,37,500
For the year ended 31st March, 20X5

= `218 x 400 awards x 75 employees x 4 years / 4 years of service ” `48,37,500 previously
recognised
= `65,40,000 ” `48,37,500 = `17,02,500
Calculation of expenses for issue of stock appreciation rights with modification of service period
= `210 x 400 awards x 75 employees x 1 year / 4 years of service = `15,75,000
= `220 x 400 awards x 75 employees x 2 years / 3 years of service - `15,75,000 previous
recognised
= `44,00,000 - `15,75,000 = `28,25,000

= `215 x 400 awards x 75 employees x 3 years/ 3 years of service - `44,00,000 previous
recognised
= `64,50,000 - `44,00,000 = `20,50,000.
SM 3. QA Ltd. had on 1st April, 20X1 granted 1,000 share options each to 2,000 employees. The options are
due to vest on 31 st 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 on31st March, 20X2 and
further amended to 1,840 employees on 31 st 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 31 st March, 20X3 the fair value of an option was ` 1.25. 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 from30th September, 20X2 to 31st March, 20X4.
The Company has requested you to suggest the suitable accounting treatment for these transaction as
on 31st March, 20X3. [SM 2021, TYK-10]
Ans.
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 tha t of the original equity instrument, both estimated
as at the date of the 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 perio d, 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 Cumulative
expense for compensation
period expense
` `
1 [1,850 employees x 1,000 options x `1.20] x 1/3 7,40,000 7,40,000
2 (1,840 employees x 1,000 options x [(`1.20 x 8,24,000 15,64,000
2/3) + {(`1.05 - 0.90) x 0.5/1.5}] ” 7,40,000
Note: Year 3 calculations have not been provided as it was not required in the question.

SM 4. A parent, Company P, grants 30 shares to 100 employees each of its subsidiary, Company S, on condition
that the employees remain employed by Company S for three years. Assume that at the outset, and
at the end of Years 1 and 2, it is expected that all theemployees will remain employed for all the three
years. At the end of Year 3, none of the employees has left. The fair value of the shares on grant date is
` 5 per share.
Company S agrees to reimburse Company P over the term of the arrangement for75 percent of
the final expense recognised by Company S. What would be the accounting treatment in the books of
Company P and Company S? [SM 2021, TYK-11]
Ans.
Company S expects to recognise an expense totalling`15,000 (30 shares x 100 employees x `5 per
share) and, therefore, expects the total reimbursement to be `11,250 (`15,000 x 75%). Company S
therefore reimburses Company P `3,750 (`11,250 x 1/3) each year.
Accounting by Company S
In each of Years 1 to 3, Company S recognises an expense in profit or loss, the cash paid toCompany P,
and the balance of the capital contribution it has received from Company P.
Journal Entry `
Employee benefits expenses Dr. 5,000
To Cash/Bank
To Equity (Contribution from the parent) 3,750
(To recognise the share-based payment expense and partial
reimbursement to parent) 1,250
Accounting by Company P
In each of Years 1 to 3, Company P recognises an increase in equity for the instruments being granted,
the cash reimbursed by Company S, and the balance as investment for thecapital contribution it has
made to Company S.
Journal Entry `
Investment in Company S Dr. 1,250
Cash/Bank Dr. 3,750
5,000
To Equity
(To recognise the grant of equity instruments to employees of
subsidiary less partial reimbursement from subsidiary)
Ind AS 101
FIRST-TIME ADOPTION OF IND AS
SM 1. X Ltd. is required to adopt Ind AS from April 1, 20X1, with comparatives for one year, i.e., for 20X0-20X1.
What will be its date of transition? [SM 2021, Ill.-1]
Ans.
The date of transition for X Ltd. will be April 1, 20X0 being the beginning of the earliest comparative
period presented. To explain it further, X Ltd. is required to a dopt an Ind AS from April 1, 20X1 (i.e. year
20X1-20X2), and it will give comparatives as per Ind AS for20X0-20X1. Accordingly, the beginning of the
comparative period will be April 1, 20X0 whichwill be considered as date of transition.
SM 2. Shaurya Limited is the company having its registered and corporate office at New Delhi.60% of Shaurya
Limited’s shares are held by the Government of India and rest by otherinvestors.
This is the first time that Shaurya limited would be applying Ind AS fo r the preparation of its financials
for the current financial year 2019 -2020. Following balance sheet is prepared as per earlier GAAP as at
the beginning of the preceding period along with the additional information:
Balance Sheet as at 31 March 2018

(All figures are in ’000, unless otherwise specified)
Particulars Amount
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 10,00,000
(b) Reserves & Surplus 25,00,000
(2) Non-Current Liabilities
(a) Long Term Borrowings 4,50,000
(b) Long Term Provisions 3,50,000
(c) Deferred tax liabilities 3,50,000
(3) Current Liabilities
(a) Trade Payables 22,00,000
(b) Other Current Liabilities 4,50,000
(c) Short Term Provisions 12,00,000
TOTAL 85,00,000
ASSETS
(1) Non-Current Assets
(a) Property, Plant & Equipment (net) 20,00,000
(b) Intangible assets 2,00,000
(c) Goodwill 1,00,000
(d) Non-current Investments 5,00,000
(e) Long Term Loans and Advances 1,50,000
(f) Other Non-Current Assets 2,00,000
(2) Current Assets
(a) Current Investments 18,00,000
(b) Inventories 12,50,000
(c) Trade Receivables 9,00,000
(d) Cash and Bank Balances 10,00,000
(e) Other Current Assets 4,00,000
TOTAL 85,00,000

Additional Information (All figures are in ’000) :

1. Other current liabilities include ` 3,90,000 liabilities to be paid in cash such as expense
payable, salary payable etc. and ` 60,000 are statutory government dues.
2. Long term loans and advances include ` 40,000 loan and the remaining amount consists
Advance to staff of ` 1,10,000.
3. Other non-current assets of ` 2,00,000 consists Capital advances to suppliers.
4. Other current assets include ` 3,50,000 current assets receivable in cash and Prepaid expenses of
` 50,000.
5. Short term provisions include Dividend pay able of ` 2,00,000. The dividend payable had been as
a result of board meeting wherein the declaration of dividend for financial year 2017-2018 was
made. However, it is subject to approval of shareholders in the annual general meeting.
Chief financial officer of Shaurya Limited has also presented the following information against
corresponding relevant items in the balance sheet:
a) Property, Plant & Equipment consists a class of assets as office buildings whose carrying
amount is ` 10,00,000. However, the fair value of said office building as on the date of
transition is estimated to be ` 15,00,000. Company wants to follow revaluation model as
its accounting policy in respect of its property, plant and equipment for the first annual Ind
AS financial statements.
b) The fair value of Intangible assets as on the date of transition is estimated to be` 2,50,000.
However, the management is reluctant to incorporate the fair value changes in books of
account.
c) Shaurya Ltd. had acquired 80% shares in a company, Excel private limited few years ago thereby
acquiring the control upon it at that time. Shaurya Ltd. recognised goodwill as per
erstwhile accounting standards by accounting the excess of consideration paid over the net
assets acquired at the date of acquisition. Fair value exercise was not done at the time of
acquisition.
d) Trade receivables include an amount of ` 20,000 as provision for doubtful debts measured
in accordance with previous GAAP. Now as per latest estimates using hindsights, the
provision needs to be revised to ` 25,000.
e) Company had given a loan of ` 1,00,000 to an entity for the term of 10 years six years ago.
Transaction costs were incurred separately for this loan. The loan carries an interest rate of 7%.
The principal amount is to be repaid in equal installments over the period of ten years at the year
end. Interest is also payable at each year end. The fair value of loan as on the date of
transition is ` 50,000 as against the carrying amount of loan which at present amounts to `
40,000. However, Ind AS 109 mandates to recognise the interest income as per effective
interest method after the adjustment of transaction costs. Management says it is tedious task in
the given case to apply the effective interest rate changes with retrospective effect and hence is
reluctant to apply the same retrospectively in its first time adoption.
f) In the long-term borrowings, ` 4,50,000 of component is due towards the State
Government. Interest is payable on the government loan at 4%, however the prevailing
rate in the market at present is 8%. The fair market value of loan stands at` 4,20,000 as on the
relevant date.
g) Under Previous GAAP, the mutual funds were measured at cost or market value, whichever
is lower. Under Ind AS, the Company has designated these investments at fair value through
profit or loss. The value of mutual funds as per previous GAAP is` 2,00,000 as included in
‘current investment’. However, the fair value of mutualfunds as on the date of transition is `
2,30,000.
h) Ignore separate calculation of deferred tax on above adjustments. Assume the net deferred tax
income to be ` 50,000 on account of Ind AS transition adjustments.
Requirements:
 Prepare transition date balance sheet of Shaurya Limited as per Indian AccountingStandards
 Show necessary explanation for each of the items presented by chief financial officer in the form of
notes, which may or may not require the adjustment as on the date of transition.
[SM 2021, Ill.-17]
Ans.
Transition date (opening) IND -AS BALANCE SHEET of SHAURYA LIMITED As at 1 April 2018
(All figures are in ‟000, unless otherwise specified)
Particulars Previous Transitional Opening Ind
GAAP Ind AS AS Balance
adjustments Sheet
ASSETS
Non-current assets
Property, plant and equipment (Note 1) 20,00,000 5,00,000 25,00,000
Goodwill (Note 2) 1,00,000 - 1,00,000
Other Intangible assets (Note 3) 2,00,000 - 2,00,000
Financial assets:
Investment 5,00,000 - 5,00,000
Loans (Note 4) 40,000 10,000 50,000
Other financial assets 1,10,000 - 1,10,000
Other non-current assets 2,00,000 - 2,00,000
Current assets
Inventories 12,50,000 - 12,50,000
Financial assets
Investment (Note 5) 18,00,000 30,000 18,30,000
Trade receivables (Note 6) 9,00,000 - 9,00,000
Cash and cashequivalents/Bank 10,00,000 - 10,00,000
Other financial assets 3,50,000 - 3,50,000
Other current assets 50,000 - 50,000
TOTAL ASSETS 85,00,000 5,40,000 90,40,000
Equity
Equity share capital 10,00,000 - 10,00,000
Other equity 25,00,000 7,90,000 32,90,000
Financial liabilities
Borrowings (Note-7) 4,50,000 - 4,50,000
Provisions 3,50,000 - 3,50,000
Deferred tax liabilities (Net) 3,50,000 (50,000) 3,00,000
Current liabilities
Trade payables 22,00,000 - 22,00,000
Other financial liabilities 3,90,000 - 3,90,000
Other current liabilities 60,000 - 60,000
Provisions (Note-8) 12,00,000 (2,00,000) 10,00,000
TOTAL EQUITY AND LIABILITIES 85,00,000 5,40,000 90,40,000

OTHER EQUITY
Retained Earnings (`) Fair value reserve Total
As at 31 March, 2018 27,90,000 (W.N.1) 5,00,000 32,90,000
Working Note 1:
Retained earnings balance:
Balance as per Earlier GAAP 25,00,000
Transitional adjustment due to loans fair value 10,000
Transitional adjustment due to increase in mutual funds fair value 30,000
Transitional adjustment due to decrease in deferred tax liability 50,000
Transitional adjustment due to decrease in provisions (dividend) 2,00,000
Total 27,90,000
Disclosure forming part of financial statements:

Proposed dividend on equity shares is subject to the approval of theshareholders of thecompany
at the annual general meeting and should not recognized as liability as at the BalanceSheet date.
Note 1: Property, plant & Equipment:

As per para D5 of Ind AS 101, an entity may elect to measure an item of property, plant and equipment at
the date of transition to Ind AS at its fair value and use that fair value as its deemed cost at that date.
Para D7AA has to be applied for all items of property, plant and equipment. So, if D5 exemption is taken
for buildings, Ind AS will have to be applied retrospectively for other assets as well. Since, an entity
elect to measure an item of property, plant and equipment at the date of transition to Ind AS at its
fair value and use that fair value as its deemed cost at that date , it is assumed that the carrying amount
of other assets based on retrospective application of Ind AS is equal to their fair value of ` 10 lakhs.
Note 2: Goodwill:
Ind AS 103 mandatorily requires measuring the assets and liabilities of the acquiree at its fair value as on
the date of acquisition. However, a first time adopter may elect to not apply the provisions of Ind AS
103 with retrospective effect that occurred prior to the date of transition to Ind AS.
Hence company can continue to carry the goodwill in its books of account as per the previousGAAP.
Note 3: Intangible assets:

Para D7 read with D6 of Ind AS 101 states that a first -time adopter may elect to use a previous GAAP
revaluation at, or before, th e date of transition to Ind AS as deemed cost at the date of the revaluation,
if the revaluation was, at the date of the revaluation, broadly comparable to:
(a) Fair value; or
(b) Cost or depreciated cost in accordance with Ind AS, adjusted to reflect, f or example,
changes in a general or specific price index.
However, there is a requirement that Intangible assets must meet the definition and recognitioncriteria
as per Ind AS 38.
Hence, company can avail the exemption given in Ind AS 101 as on the date of transition to use the
carrying value as per previous GAAP.
Note 4: Loan:
Para B8C of Ind AS 101 states that if it is impracticable (as defined in Ind AS 8) for an entity to apply
retrospectively the effective interest method in Ind AS 109, the fair value of the financial asset or the
financial liability at the date of transition to Ind ASs shall be the new gross carrying amount of that
financial asset or the new amortised cost of that financial liability at the date of transition to Ind AS.
Accordingly, ` 50,000 would be the gross carrying amount of loan and difference of ` 10,000 (`50,000 ” `
40,000) would be adjusted to retained earnings.
Note 5: Mutual Funds:

Para 29 of Ind AS 101 states that an entity is permitted to designate a previously recognised financial
asset as a financial asset measured at fair value through profit or loss in accordance with paragraph
D19A. The entity shall disclose the fair value of financial assets so designated at the date of designation
and their classification and carrying amount in the previous financial statements.
D19A states that an entity may designate a financial asset as measured at fair value through profit or
loss in accordance with Ind AS 109 on the basis of the facts and circumstances that exist at the date of
transition to Ind AS.
Note 6: Trade receivables:

Para 14 of Ind AS 101 states that an entity‟s estimates in accordance with Ind AS at the date of transition
to Ind AS shall be consistent with estimates made for the same date in accordance with previous GAAP
(after adjustments to reflect any difference in accounting policies), unless there is objective evidence
that those estimates were in error.
Para 15 of Ind AS 101 further states that an entity may receive information after the date of transition to
Ind AS about estimates that it had made under previous GAAP. In accordance with paragraph 14, an
entity shall treat the receipt of that information in the same way as non - adjusting events after
the reporting period in accordance with Ind AS 10, Events after the Reporting Period.
The entity shall not reflect that new information in its opening Ind AS Balance Sheet (unless the
estimates need adjustment for any differences in accounting policies or there is objective evidence
that the estimates we re in error). Instead, the entity shall reflect that new information in profit or loss
(or, if appropriate, other comprehensive income) for the year ended 31 March2019.
Note 7: Government Grant:

Para 10A of Ind AS 20 states that the benefit of a government loan at a below-market rate of interest is
treated as a government grant. The loan shall be recognised and measured in accordance with Ind AS
109, Financial Instruments. The benefit of the below -market rate of interest shall be measured as 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 in accordance with this Standard.
However, Para B10 of Ind AS 101 states, a first -time adopter shall classify all government loans received
as a financial liability or an equity instrument in accordance with Ind AS 32, Financial Instruments:
Presentation. Except as permitted by paragraph B11, a first -time adopter shall apply the requirements
in Ind AS 109, inancial Instruments, and Ind AS 20, Accounting for Government Grants and Disclosure
of Government Assistance , prospectively to government loans existing at the date of transition to Ind
ASs and shall not recognise the corresponding benefit of the government loan at a below-market rate of
interest as a government grant. Consequently, if a first-time adopter did not, under its previous GAAP,
recognise and measure a government loan at a below-market rate of interest on a basis
consistentwith Ind AS requirements, it shall use its previous GAAP carrying amount of the loan at the

date of transition to Ind AS as the carrying amount of the loan in the opening Ind AS Balance Sheet. An
entity shall apply Ind AS 109 to the measurement of such loans after the date of transition to Ind AS.
Note 8: Dividend
Dividend should be deducted from retained earnings during the year when it has been declared and
approved. Accordingly, the provision declared for preceding year should be reversed (to rectify the
wrong entry). Retained earnings would increase proportionately due to suchadjustment.
SM 3. On April 1, 20X1, Sigma Ltd. issued 30,000 6% convertible debentures of face value of` 100 per
debenture at par. The debentures are redeemable at a premium of 10% on31 March 20X5 or these
may be converted into ordinary shares at the option of the holder. The interest rate for equivalent
debentures without conversion rights would have been 10%. The date of transition to Ind AS is 1 April
20X3. Suggest how should Sigma Ltd. account for this compound financial instrument on the date of
transition. The present value of ` 1 receivable at the end of each year based on discount rates of 6%
and 10% can be taken as:
End of year 6% 10%

1 0.94 0.91
2 0.89 0.83
3 0.84 0.75
4 0.79 0.68
[SM 2021, Ill.-15 modified]
Ans.
The carrying amount of the debenture on the date of transition under previous GAAP, assuming that all
interest accrued other than premium on redemption have been paid, will be ` 31,20,000 [(30,000 x 100) +
(30,000 x 100 x 10/100 x 2/5)]. The premium payable on redemption is being recognised as borrowing
costs as per para 4(b) of AS 16 ie under previous GAAP on straight-line basis.
As per para D18 of Ind AS 101, Ind AS 32, Financial Instruments: Presentation, requires an entity to split a
compound financial instrument at inception into separate liability and equity components. If the liability
component is no longer outstanding, retrospective application of Ind AS 32 would involve separating
two portions of equity. The first portion is recognised in retained earnings and represents the
cumulative interest accreted on the liability component. The other portion represents the original
equity component. However, in accordance with this Ind AS, a first -time adopter need not separate
these two portions if the liability component is no longer outstanding at the date of transition t o Ind AS.
In the present case, since the liability is outstanding on the date of transition, Sigma Ltd. will need to
split the convertible debentures into debt and equity portion on the date of transition. Accordingly, we
will first measure the liability component by discounting the contractually determined stream of
future cash flows (interest and principal) to present value by using the discount rate of 10% p.a.
(being the market interest rate for similar debentures with no conversion option).
(`)
Interest payments p.a. on each debenture 6
Present Value (PV) of interest payment for years 1 to 4 (6 
3.17) (Note 1) 19.02
PV of principal repayment (including premium) 110 
0.68 (Note 2) 74.80
Total liability component per debenture 93.82
Equity component per debenture (Balancing figure) 6.18
Face value of debentures 100.00
Total equity component for 30,000 debentures 1,85,400
Total debt amount (30,000 x 93.82) 28,14,600
Thus, on the date of initial recognition, the amount of `30,00,000 being the amount of debentures will
be split as under:
Debt `28,14,600
Equity `1,85,400
However, on the date of transition, unwinding of `28,14,600 will be done for two years as follows:
Year Opening Finance cost Interest paid Closing
balance @ 10% balance
1 28,14,600 2,81,460 1,80,000 29,16,060
2 29,16,060 2,91,606 1,80,000 30,27,666
Therefore, on transition date, Sigma Ltd. shall ”

a. recognise the carrying amount of convertible debentures at `30,27,666;
b. recognise equity component of compound financial instrument of `1,85,400;
c. debit `93,066 to retained earnings being the difference between the previous GAAP amount of
`31,20,000 and `30,27,666 and the equity component of compound financial instrument of
`1,85,400; and
d. derecognise the debenture liability in previous GAAP of ` 31,20,000.
Notes:
1. 3.17 is present value of annuity factor of ` 1 at a discount rate of 10% for 4 years.
2. On maturity, ` 110 will be paid (` 100 as principal payment + ` 10 as premium)
SM 4. XYZ Pvt. Ltd. is a company registered under the Companies Act, 2013 following Accounting Standards
notified under Companies (Accounting Standards) Rules, 2006. The Company has decided to voluntarily
adopt Ind AS w.e.f 1st April, 20X2 with a transition date of1st April, 20X1.
The Company has one Wholly Owned Subsidiary and one Joint Venture which are into manufacturing of
automobile spare parts.
The consolidated financial statements of the Company under Indian GAAP are as under:
Consolidated Financial Statements
(` in Lakhs)
Particulars 31.03.20X2 31.03.20X1
Shareholder's Funds
Share Capital 7,953 7,953
Reserves & Surplus 16,547 16,597
Non-Current Liabilities
Long Term Borrowings 1,000 1,000
Long Term Provisions 1,101 691
Other Long-Term Liabilities 5,202 5,904
Current Liabilities
Trade Payables 9,905 8,455
Short Term Provisions 500 475
Total 42,208 41,075

Non-Current Assets
Property Plant & Equipment 21,488 22,288
Goodwill on Consolidation of subsidiary and JV 1,507 1,507
Investment Property 5,245 5,245
Long Term Loans & Advances 6,350 6,350
Current Assets
Trade Receivables 4,801 1,818
Investments · 1,263 3,763
Other Current Assets 1,554 104
Total 42,208 41,075
Additional Information:
The Company has entered into a joint arrangement by acquiring 50% of the equity shares of ABC Pvt.
Ltd. Presently, the same has been accounted as per the proportionate consolidated method. The
proportionate share of assets and liabilities of ABC Pvt. Ltd. included in the consolidated financial
statement of XYZ Pvt. Ltd. is as under:
Particulars ìn Lakhs
Property, Plant & Equipment 1,200

Long Term Loans & Advances 405
Trade Receivables 280
Other Current Assets 50
Trade Payables 75
Short Term Provisions 35
The Investment is in the nature of Joint Venture as per Ind AS 111.

The Company has approached you to advice and suggest the accounting adjustments which are
required to be made in the opening Balance Sheet as on 1st April, 20 X1. [SM 2021, TYK-5]
Ans.
As per paras D31AA and D31AB of Ind AS 101, when changing from proportionate consolidation
to the equity method, an entity shall recognise its investment in the joint venture at transition date to
Ind AS.
That initial investment shall be measured as the aggregate of the carrying amounts of the assets and
liabilities that the entity had previously proportionately consolidated, including any goodwill arising from
acquisition. If the goodwill previously belong ed to a larger cash- generating unit, or to a group of cash -
generating units, the entity shall allocate goodwill to the joint venture on the basis of the relative
carrying amounts of the joint venture and the cash-generating unit or group of cash -generating units to
which it belonged. The balance of the investment in joint venture at the date of transition to Ind
AS, determined in accordance with paragraph D31AA above is regarded as the deemed cost of
the investment at initial recognition.
Accordingly, the deemed cost of the investment will be

Goodwill (Refer Note below) 119
Long Term Loans & Advances 405
Trade Receivables 280
Total Assets 2,054
Less: Trade Payables 75
Deemed cost of the investment in JV 1,944
Calculation of proportionate goodwill share of Joint Venture ie ABC Pvt. Ltd.
Goodwill 1,507
Long Term Loans & Advances 6,350
Trade Receivables 1,818
Total Assets 32,067
Less: Trade Payables 8,455
23,137
Note: Only those assets and liabilities have been taken into account for calculation
ofproportionate goodwill share of Joint Venture, which were given in the question
asproportionate share of assts and liabilities of ABC Ltd. added to XYZ Ltd.
Proportionate Goodwill of Joint Venture
= [(Goodwill on consolidation of subsidiary and JV/Total relative net asset) x Net asset of JV]
= (1507 / 23,137) x 1825 = 119 (approx.)
Accordingly, the proportional share of assets and liabilities of Joint Venture will be removed from the
respective values assets and liabilities appearing in the balance sheet on31.3.20X1 and Investment
in JV will appear under non -current asset in the transition date balance sheet as on 1.4.20 X1.
Adjustments made in previous GAAP balance sheet to arrive at Transition date Ind AS Balance Sheet
Transition Date Ind AS Balance Sheet of XYZ Pvt. Ltd. as at 1st April, 20X1
Particulars Previous Ind AS Ind AS

GAAP Adjustment GAAP
Non-Current Assets
Property, Plant & Equipment 22,288 (1,200) 21,088
Investment Property 5,245 - 5,245
Intangible assets - Goodwill onConsolidation 1,507 (119) 1,388
Financial Assets
Long Term Loans & Advances 6,350 (405) 5,945
Non- current investment in JV - 1,944 1,944
Current Assets
Financial Assets
Investments 3,763 - 3,763
Trade Receivables 1,818 (280) 1,538
Other Current Assets 104 (50) 54
Total 41,075 (110) 40,965
Equity and liabilities
Equity
Share Capital 7,953 - 7,953
Other equity 16,597 - 16,597
Non-Current Liabilities
Financial Liabilities
Borrowings 1,000 1,000

Long Term Provisions 691 691

Other Long-Term Liabilities 5,904 5,904
Current Liabilities
Financial Liabilities
Trade Payables 8,455 (75) 8,380
Short Term Provisions 475 (35) 440
Total 41,075 (110) 40,965
SM 5. Mathur India Private Limited has to present its first financials under Ind AS for the year ended31st March,
20X3. The transition date is 1 st April, 20X1.
The following adjustments were made upon transition to Ind AS:
(a) The Company opted to fair value its land as on the date on transition.
The fair value of the land as on 1st April, 20X1 was ` 10 crores. The carrying amount as on1st
April, 20X1 under the existing GAAP was ` 4.5 crores.
(b) The Company has recognised a provision for proposed dividend of ` 60 lacs and related
dividend distribution tax of ` 18 lacs during the year ended 31 st March, 20X1. It was written
back as on opening balance sheet date.
(c) The Company fair values its investments in equity shares on the date of transition.
The increase on account of fair valuation of shares is ` 75 lacs.
(d) The Company has an Equity Share Capital of ` 80 crores and RedeemablePreference Share
Capital of ` 25 crores.
(e) The reserves and surplus as on 1 st April, 20X1 before transition to Ind AS was` 95 crores
representing ` 40 crores of general reserve and ` 5 crores of capital reserve acquired out of
business combination and balance is surplus in the Retained Earnings.
(f) The company identified that the preference shares were in nature of financial liabilities.
What is the balance of total equity (Equity and other equity) as on 1 st April, 20X1 after transition to Ind
AS? Show reconciliation between total equity as per AS (Accounting Standards) and as per Ind AS to be
presented in the opening balance sheet as on 1 st April, 20X1.
Ignore deferred tax impact. [SM 2021, TYK-6]
Ans.
Computation of balance total equity as on 1st April, 20X1 after transition to Ind AS
ìn crore
Share capital- Equity share Capital 80
Other Equity
General Reserve 40
Capital Reserve 5
Retained Earnings (95-5-40) 50
Add: Increase in value of land (10-4.5) 5.5
Add: De recognition of proposed dividend (0.6 + 0.18) 0.78
Add: Increase in value of Investment 0.75 57.03 102.03
Balance total equity as on 1st April, 20X1 after transition to Ind AS 182.03
Reconciliation between Total Equity as per AS and Ind AS to be presented in the opening balance
sheet as on 1 st April, 20X1
ìn crore
Equity share capital 80
Redeemable Preference share capital 25
105
Reserves and Surplus 95
Total Equity as per AS 200
Adjustment due to reclassification
Preference share capital classified as financial liability (25)
Adjustment due to derecognition
Proposed Dividend not considered as liability as on 1st April 20X1 0.78
Adjustment due to remeasurement
Increase in the value of Land due to remeasurement at fair value 5.5
Increase in the value of investment due to remeasurement at fair value 0.75 6.25
Equity as on 1st April, 20X1 after transition to Ind AS 182.03
SM 6. 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 holds100% 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 Ind AS. [SM 2021, TYK-7]
Ans.
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 except in certain cases, an entity shall in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind AS;
(b) not recognise items as assets or liabilities if Ind AS do not permit such recognition;
(c) 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
(d) 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.

Ind AS 2
SM 1. ABC Ltd. buys goods from an overseas supplier. It has recently taken delivery of 1,000 units of
component X. The quoted price of component X was `1,200 per unit but ABC Ltd. has negotiated a trade
discount of 5% due to the size of the order.
The supplier offers an early settlement discount of 2% for payment within 30 days andABC Ltd.
intends to achieve this.
Import duties (basic custom duties) of `60 per unit must be paid before the goods are released through
custom. Once the goods are released through customs, ABC Ltd. must pay a delivery cost of `5,000 to
have the components taken to its warehouse.
Calculate the cost of inventory. [SM 2021, Ill.-2]
Ans.
`
Purchase price (1,000 x 1,200 x 95%) 11,40,000
Import duties (1,000 x 60) 60,000
Delivery cost 5,000
Cost of inventory 12,05,000
Note: The intention to take settlement discount is irrelevant.
SM 2. Normal production capacity

A business plans for production overheads of ` 10,00,000 per annum. The normal level of production is
1,00,000 units per annum.
Due to supply difficulties the business was only able to make 75,000 units in the current year. Other
costs per unit were ` 126.
Calculate the per unit cost and amount of overhead to be expensed during the year. [SM 2021, Ill.- 3]
Ans.
Calculation of cost per unit: `

Other costs 126
Production overhead (10,00,000/1,00,000 units) 10
Unit cost 136
Overhead to be expensed: `
Total production overhead 10,00,000
The amount absorbed into inventory is (75,000 x 10) (7,50,000)
The amount not absorbed into inventory 2,50,000
`2,50,000 that has not been included in inventory is expensed during the year i.e. recognised in the
statement of profit and loss.
SM 3. Conversion costs
ABC Ltd. manufactures control units for air conditioning systems.
Each control unit requires the following:
1 component X at a cost of `1,205 each
1 component Y at a cost of `800 each
Sundry raw materials at a cost of `150 each
The company faces the following monthly expenses:
Factory rent `16,500
Energy cost `7,500
Selling and administrative costs `10,000
Each unit takes two hours to assemble. Production workers are paid `300 per hour. Production
overheads are absorbed into units of production using an hourly rate. Thenormal level of production
per month is 1,000 hours.
Determine the cost of inventory. [SM 2021, Ill.- 4]
Ans.
The cost of a single control unit : `
Materials:
Component X 1,205
Component Y 800
Sundry raw materials 150
2,155
Labour (2 hours x 300) 600
Production overhead [(16,500 + 7,500/1,000 hours) x 2 hours] 48
2,803
Note: The selling and administrative costs are not part of the cost of inventory.
SM 4. Conversion costs
A dealer has purchased 1,000 cars costing `2,80,000 each on deferred payment basis as `25,000 per
month per car to be paid in 12 equal instalments.
At year end 31 March 20X1, twenty cars are in stock. What would be the cost of goods sold, finance cost
and inventory carrying amount? [SM 2021, Ill.- 5]
Ans.
Deferred payment price (25,000 x 12) 3,00,000
Less: Cash price 2,80,000
Interest expense 20,000
Cost of inventory 20 cars x 2,80,000 56,00,000
Finance cost 1,000 cars x 20,000 2,00,00,000
Cost of goods sold 980 cars x 2,80,000 27,44,00,000

SM 5. ABC Ltd. manufactures and sells paper envelopes. The stock of envelopes was included in the
closing inventory as of 31st March, 20X1, at a cost of `50 per pack. During the final audit, the auditors
noted that the subsequent sale price for the inventory at 15th April, 20X1, was `40 per pack.
Furthermore, enquiry reveals that during the physical stock take, a water leakage has created damages
to the paper and the glue. Accordingly, in the following week, ABC Ltd. has spent a total of `15 per pack
for repairing and reapplying glue to the envelopes.
Calculate the net realizable value and inventory write-down (loss) amount. [SM 2021, Ill.-13]
Ans.
The net realisable value is the expected sale price `40, less cost incurred to bring the goods to its saleble
condition ie`15.
Thus, NRV of envelopes pack = `40 ” `15 = `25 per pack.

The loss (inventory write-down) per pack is the difference between cost and net realizable value =
`50 ” `25= `25 per pack.
SM 6. At the end of its financial year, Company P has 100 units of inventory on hand recorded at a carrying
amount of `10 per unit. The current market price is `8 per unit at which these units can be sold.
Company P has a firm sales contract with Company Q to sell60 units at `11 per unit, which cannot be
settled net. Estimated incremental selling cost is `1 per unit.
Determine Net Realisable Value (NRV) of the inventory of Company P. [SM 2021, Ill.- 14]
Ans.
While performing NRV test, the NRV of 60 units that will be sold to Company Q is`10 per unit (i.e. 11-1).
NRV of the remaining 40 units is `7 per unit (i.e. 8-1).
Therefore, Company P will write down those remaining 40 units by `120 (i.e. 40 x 3). Total cost of
inventory would be
Goods to be sold to Company Q 60 units x `10 + `600
Remaining goods 40 unit x `7 `280
`880
SM 7. A business has four items of inventory. A count of the inventory has established that the amounts of
inventory currently held, at cost, are as follows:
`
Cost Estimated Sales price Selling costs
Inventory item A1 8,000 7,800 500
Inventory item A2 14,000 18,000 200
Inventory item B1 16,000 17,000 200
Inventory item C1 6,000 7,500 150
Determine the value of closing inventory in the financial statements of a business. [SM 2021, Ill.- 15]
Ans.
The value of closing inventory in the financial statements:
Itemof inventory Cost NRV (Estimated Sales Measurement base Value
price- Selling costs) (lower of cost or NRV)
A1 8,000 (7,800 ” 500) 7,300 NRV 7,300
A2 14,000 (18,000 ” 200) 17,800 Cost 14,000
B1 16,000 (17,000 ” 200) 16,800 Cost 16,000
C1 6,000 (7,500 ” 150) 7,350 Cost 6,000
Value of Inventory 43,300
SM 8.
Particulars Kg. `
Opening Inventory: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour 76,500
Overheads (Fixed) 75,000
Sales 10,000 2,80,000
Closing Inventory: Raw Materials 900
Finished Goods 1200
The expected production for the year was 15,000 kg of the finished product. Due to fall in market
demand the sales price for the finished goods was ` 20 per kg and the replacement cost for the raw
material was ` 9.50 per kg on the closing day. You are required to calculate the closing inventory as on
that date. [SM 2021, Ill.- 16]
Ans.
Calculation of cost for closing inventory
Particulars `
Cost of Purchase (10,200 x 10) 1,02,000
Direct Labour 76,500
Fixed Overhead 75,000 x 10,200 51,000
15,000
Cost of Production 2,29,500

Cost of closing inventory per unit (2,29,500/10,200) `22.50
Net Realisable Value per unit `20.00
Since net realisable value is less than cost, closing inventory will be valued at ` 20.
As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement
cost i.e. ` 9.50.
Therefore, value of closing inventory: Finished Goods (1,200 x 20) ` 24,000
Raw Materials (900 x 9.50) ` 8,550
` 32,550
SM 9. 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 ` 10 million and based on retail
prices at 31 March 20X1, the expected selling price of the spare parts is` 12 million. On 15 April 20X1,
due to market fluctuations, expected selling price of the spare parts in stock reduced to ` 8 million. The
estimated selling expense required to make the sales would ` 0.5 million. Financial statements were
approved by the Board of Directors on 20th April20X1.
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 ` 11 million and estimated selling expenses are same ` 0.5 million.

What will be the value inventory at the following dates:

(a) 31st March 20X1
(b) 31st March 20X2 [SM 2021, TYK-3]
Ans.
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’.
(a) In the given case, for valuation of inventory as on 31 March 20X1, cost of inventory would be ` 10
million and net realisable value would be ` 7.5 million (i.e. Expected selling price` 8 million-
estimated selling expenses ` 0.5 million). Accordingly, inventory shall bemeasured at ` 7.5
million i.e. lower of cost and net realisable value. Therefore, inventory write down of ` 2.5
million would be recorded in income statement of that year.
(b) 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 ` 10 million and net realisable value would be ` 10.5 million (i.e. expected
selling price ` 11 million ” estimated selling expense ` 0.5 million). Accordingly, inventory would
be recorded at ` 10 million and inventory write down carried out in previous year for ` 2.5 million
shall be reversed.
SM 10. The following is relevant information for an entity:

 Full capacity is 10,000 labour hours in a year.
 Normal capacity is 7,500 labour hours in a year.
 Actual labour hours for current period are 6,500 hours.
 Total fixed production overhead is ` 1,500.
 Total variable production overhead is ` 2,600.
 Total opening inventory is 2,500 units.
 Total units produced in a year are 6,500 units.
 Total units sold in a year are 6,700 units.
 The cost of inventories is assigned by using FIFO cost formula.
How overhead costs are to be allocated to cost of goods sold and closing inventory? [SM 2021, TYK-4]
Ans.
Hours taken to produce 1 unit = 6,500 hours / 6,500 units = 1 hour per unit.
Fixed production overhead absorption rate:
= Fixed production overhead / labour hours for normal capacity
= ` 1,500 / 7,500
= ` 0.2 per hour
Management should allocate fixed overhead costs to units produced at a rate of ` 0.2 per hour.
Therefore, fixed production overhead allocated to 6,500 units produced during the year (oneunit per
hour) = 6,500 units x1 hour x ` 0.2 = ` 1,300.
The remaining fixed overhead incurred during the year of ` 200 (` 1500 ” ` 1300) that remains
unallocated is recognised as an expense.
The amount of fixed overhead allocated to inventory is not increased as a result of low production by
using normal capacity to allocate fixed overhead.
Variable production overhead absorption rate:
= Variable production overhead/actual hours for current period
= ` 2,600 / 6,500 hours
= ` 0.4 per hour
Management should allocate variable overhead costs to units produced at a rate of ` 0.4 per hour.
The above rate results in the allocation of all variable overheads to units produced during the year.
Closing inventory = Opening inventory + Units produced during year ” Units sold during year
= 2,500 + 6,500 ” 6,700 = 2,300 units
As each unit has taken one hour to produce (6,500 hours / 6,500 units produced), total fixed and variable
production overhead recognised as part of cost of inventory:
= Number of units of closing inventory x Number of hours to produce each unit x (Fixed production
overhead absorption rate + Variable production overhead absorption rate)
= 2,300 units x 1 hour x (` 0.2 + ` 0.4)
= ` 1,380
The remaining ` 2,720 [(` 1,500 + ` 2,600) ” ` 1,380] is recognised as an expense in the income statement
as follows:
`
Absorbed in cost of goods sold (FIFO basis) (6,500 ” 2,300) = 4,200 x ` 0.6 2,520
Unabsorbed fixed overheads, not included in the cost of goods sold 200
Total 2,720
SM 11. Sharp Trading Inc. purchases motorcycles from various countries and exports them to Europe.Sharp
Trading has incurred these expenses during 20X1:
(a) Cost of purchases (based on vendors’ invoices) 5,00,000
(b) Trade discounts on purchases 10,000
(c) Import duties 200
(d) Freight and insurance on purchases 250
(e) Other handling costs relating to imports 100
(f) Salaries of accounting department 15,000
(g) Brokerage commission payable to indenting agents for arranging imports 300
(h) Sales commission payable to sales agents 150
(i) After-sales warranty costs 600
Sharp Trading Inc. is seeking your advice as if which of the above item is to be included in the cost of
inventory and wants you to calculate cost of inventory as per Ind AS 2. [SM 2021, TYK-5]
Ans.
Items (a), (b), (c), (d), (e), and (g) are permitted to be included in the cost of inventory since these
elements contribute to cost of purchase, cost of conversion and other costs incurred in bringing the
inventories to their present location and condition, as per Ind AS 2
Statement showing cost of inventory
`
Cost of purchases (based on vendors’ invoices) 5,00,000
Trade discounts on purchases (10,000)
Import duties 200
Freight and insurance on purchases 250
Other handling costs relating to imports 100
Brokerage commission payable to indenting agents for arranging imports 300
Cost of inventory under Ind AS 2 4,90,850
Note: Salaries of accounting department, sales commission, and after-sales warranty costs are not
considered as part of cost of inventory under Ind AS 2.

Ind AS 16
PROPERTY, PLANT AND EQUIPMENT
SM 1. B Ltd. owns an asset with an original cost of ` 2,00,000. On acquisition, management determined
that the useful life was 10 years and the residual value would be ` 20,000. The asset is now 8 years old,
and during this time there have been no revisions to the assessed residual value.
At the end of year 8, management has reviewed the useful life and residual value and has determined
that the useful life can be extended to 12 years in view of the maintenance program adopted by the
company. As a result, the residual value will reduce to ` 10,000.
How would the above changes in estimates be accounted by B Ltd.? [SM 2021, TYK-3]
Ans.
Calculation of accumulated depreciation till 8th year
Depreciable amount {Cost less residual value} = ` 2,00,000 ” ` 20,000 = ` 1,80,000. Annual depreciation =
Depreciable amount / Useful life = 1,80,000 / 10 = ` 18,000. Accumulated depreciation = 18,000 x No. of
years (8) = ` 1,44,000.
Calculation of carrying amount at the end of the 8th year
The asset has a carrying amount of ` 56,000 at the end of year 8 [ie. ` 2,00,000 ” ` 1,44,000]
Accounting of the changes in estimates
Revision of the useful life to 12 years results in a remaining useful life of 4 years (ie 12 years” 8 years).
The revised depreciable amount is ` 46,000 (` 56,000 ” ` 10,000)
Thus, depreciation should be charged in future ie from 9th year onwards at ` 11,500 per annum (`
46,000 / 4 years).
SM 2. X Ltd. has a machine which got damaged due to fire as on 31st January, 20X1. The carrying amount of
machine was ` 1,00,000 on that date. X Ltd. sold the damaged asset as scrap for ` 10,000. X Ltd. has
insured the same asset against damage. As on 31st March, 20X1, thecompensation proceeds was still in
process but the insurance company has confirmed the claim. Compensation of ` 50,000 is receivable
from the insurance company. How X Ltd. will account for the above transaction? [SM 2021, TYK-4]
Ans.
As per para 66 of Ind AS 16, impairment or losses of items of property, plant and equipment and related
claims for or payments of compensation from third parties are separate economic events and should be
accounted for separately.
X Ltd. should account for the above transaction as given below:
At the time of sale of scrap machine, X Ltd. should write off the carrying amount of asset from books of
account and provide a loss of ` 90,000. (i.e., carrying amount of ` 1,00,000 ” realised amount of ` 10,000)
As on 31st March, 20X1, X Ltd. should recognise income of ` 50,000 against the compensation receivable
in its profit or loss.
SM 3. An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant
started operating on 1st April, 2XX1. The plant has a useful life of 40 years. Its initial costwas ` 1,20,000
which included an amount for decommissioning costs of ` 10,000, which represented ` 70,400 in
estimated cash flows payable in 40 years discounted at a risk-adjusted rate of 5 per cent. The entity’s
financial year ends on 31st March. On March, 2X11, the net present value of the decommissioning
liability has decreased by ` 8,000. The discount rate has not yet changed.
How the entity will account for the above changes in decommissioning liability in the year 2X11, if it
adopts cost model? [SM 2021, TYK-5]
Ans.
On 31st March, 2X11, the plant is 10 years old. Accumulated depreciation is ` 30,000 (` 120,000 x 10
/ 40 years). Due to unwinding of discount @ 5% over the 10 years, the amount of decommissioning
liability has increased from ` 10,000 to ` 16,300 (approx.).
On 31st March, 2X11, the discount rate has not changed. However, the entity estimates that, as a result
of technological advances, the net present value of the decommissioning liability has decreased by `
8,000. Accordingly, the entity adjusts the decommissioning liability from ` 16,300 to ` 8,300. On this
date, the entity passes the following journal entry to reflect the change:
` `
Provision for decommissioning liability Dr. 8,000
To Asset 8,000
Following this adjustment, the carrying amount of the asset is ` 82,000 (` 1,20,000 ” ` 8,000” ` 30,000),
which will be depreciated over the remaining 30 years of the asset’s life giving a depreciation expense
for the next year of ` 2,733 (` 82,000 / 30). The next year’s finance cost for unwinding of discount will be
` 415 (` 8,300 × 5 per cent).
SM 4. H Limited purchased an item of PPE costing ` 100 million which has useful life of 10 years. The entity has
a contractual decommissioning and site restoration obligation, estimated at ` 5 million to be incurred at
the end of 10th year. The current market based discount rate is 8%.
The company follows SLM method of depreciation. H Limited follows the Cost Model for accounting of
PPE.
Determine the carrying value of an item of PPE and decommissioning liability at each year end when
(a) There is no change in the expected decommissioning expenses, expected timing of incurring the
decommissioning expense and / or the discount rate
(b) At the end of Year 4, the entity expects that the estimated cash outflow on account of
decommissioning and site restoration to be incurred at the end of the useful life of the asset will
be ` 8 million (in place of ` 5 million, estimated in the past).
Determine in case (b), how H Limited need to account for the changes in the decommissioning liability?
[SM 2021, Ill. 14 Modified]
Ans.
The present value of such decommissioning and site restoration obligation at the end of 10th year is `
2.32 million [being 5 / (1.08)10]. H Limited will recognise the present value of decommissioning liability
of ` 2.32 million as an addition to cost of PPE and will also recognize a corresponding decommissioning
liability. Further, the entity will recognise the unwinding of discount as finance charge.
(a) The following table shows the relevant computations, if there is no change in the expected
decommissioning expenses, expected timing of incurring the decommissioning expense and / or
the discount rate: (` in million)
Year Opening Depreciation Carrying Opening Unwinding Closing
Amount Charge (on Amount of Decommissioning of Interest Decommissioning
of PPE SLM) for 10 PPE at the end Liability @ 8% Liability
Years of
the year
1 102.32 10.23 92.08 2.32 0.19 2.50
2 92.08 10.23 81.85 2.50 0.20 2.70
3 81.85 10.23 71.62 2.70 0.22 2.92
4 71.62 10.23 61.39 2.92 0.23 3.15
5 61.39 10.23 51.16 3.15 0.25 3.40
6 51.16 10.23 40.93 3.40 0.27 3.68
7 40.93 10.23 30.69 3.68 0.29 3.97
8 30.69 10.23 20.46 3.97 0.32 4.29
9 20.46 10.23 10.23 4.29 0.34 4.63
10 10.23 10.23 - 4.63 0.37 5.00
Total 102.32 2.68

(b) The changes to the estimate of expected decommissioning obligation:

 The present value of the decommissioning liability at the end of Year 4 works out to be `
5.04 million [being 8 / (1.08)6].
 As against this, the carrying amount of decommissioning liability at the end of Year 4 is ` 3.15
million (as computed above).
 The changes in the decommissioning liability of ` 1.89 million (being ` 5.04 million less ` 3.15
million) shall be added to the cost of the asset in the current period and the related provision
for decommissioning liability is also adjusted.
The journal entry will be:
PPE Dr. ` 1.89 million
To Provision for decommissioning liability ` 1.89 million
 The following table shows the calculations for years 5 - 10:
Year Opening Depreciation Carrying Opening Unwinding Closing

Amount Charge Amount of Decommissioning of Interest Decommissioning
of PPE SLM – 10 PPE at end Liability @8% Liability
Years of the year
5 63.28 10.55 52.73 5.04 0.40 5.44
6 52.73 10.55 42.19 5.44 0.44 5.88
7 42.19 10.55 31.64 5.88 0.47 6.35
8 31.64 10.55 21.09 6.35 0.51 6.86
9 21.09 10.55 10.55 6.86 0.55 7.41
10 10.55 10.55 - 7.41 0.59 8.00
Total 63.28 2.96
Note that in the above table:
 Opening amount of PPE at the beginning of Year 5 is computed as ` 63.28 million (being carrying
amount of ` 61.39 million at the end of Year 4 plus increase of ` 1.89 million arising due to increase in
the present value of the decommissioning liability at the end of Year 4).
 The revised carrying amount of PPE (at ` 63.28 million) at the beginning of Year 5 will be depreciated
over the balance 6 years of the useful life).
 Opening decommissioning liability at the beginning of Year 5 is computed as ` 5.04 million (being
carrying amount of ` 3.15 million at the end of Year 4 plus increase of ` 1.89 million).
Since the entity has adjusted the increase in the decommissioning liability against the carrying
amount of PPE, it needs to evaluate whether the new carrying amount (in this case, ` 63.28 million) is
recoverable. If not, it will give rise to impairment loss, to be accounted for under Ind AS 36.
Ind AS 116
LEASES
SM 1. Remeasurement of a lease with variable lease payments

Entity W entered into a contract for lease of retail store with Entity J on January 01/01/20X1. The initial
term of the lease is 5 years with a renewal option of further 3 years. The annual payments for initial term
and renewal term is ` 100,000 and ` 110,000 respectively. The annual lease payment will increase based
on the annual increase in the CPI at the end of the preceding year. For example, the payment due on
01/01/20X2 will be based on the CPI available at 31/12/20X1.
Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/20X4 is 5% and6%
respectively and the CPI at lease commencement date and as at 01/01/20X4 is 120 and 125 respectively.
At the lease commencement date, Entity W did not have a significant economic incentive to exercise the
renewal option. In the first quarter of 20X4, Entity W installed unique lease improvements into the retail
store with an estimated five-year economic life. Entity W determined that it would only recover the cost
of the improvements if it exercises the renewal option, creating a significant economic incentive to
extend.
Is Entity W required to remeasure the lease in the first quarter of 20X4? [SM 2021, Ill.-32 Modified]
Ans.
Since Entity W is now reasonably certain that it will exercise its renewal option, it is required to
remeasure the lease in the first quarter of 20X4.
The following table summarizes information pertinent to the lease remeasurement.

Remeasured lease term 5 years; 2 years remaining in
the initial term plus 3
years in the renewal period
Entity W’s incremental borrowing rate
6%
On the remeasurement date
CPI available on the remeasurement date 125
Right-of-use asset immediately before the remeasurement `1,81,840 (Refer note 1)
Lease liability immediately before the remeasurement `1,95,244 (Refer note 1)
To remeasure the lease liability, Entity W would first calculate the present value of the future lease
payments for the new lease term (using the updated discount rate of 6%). The following table shows the
present value of the future lease payments based on an updated CPI of 125. Since the initial lease
payments were based on a CPI of 120, the CPI has increased by 4.167% approx. As a result, Entity W
would increase the future lease payments by 4%. As shown in the table, therevised lease liability is `
4,91,376.
Year 4 5 6 7 8 Total
Lease payment 1,04,167 1,04,167 1,14,583 1,14,583 1,14,583 5,52,083
Discount 1 0.943 0.890 0.840 0.792
Present value 1,04,000 98,230 1,01,979 96,250 90,750 4,91,376
To calculate the adjustment to the lease liability, Entity W would compare the recalculated and original
lease liability balances on the remeasurement date.

Revised lease liability 4,91,376

Original lease liability (1,95,244)
2,96,132
Entity W would record the following journal entry to adjust the lease liability.
ROU Asset Dr. 2,96,132
To Lease liability 2,96,132
Being lease liability and ROU asset adjusted on account of remeasurement.
Working Notes:
1 Calculation of ROU asset before the date of remeasurement
Year Lease Payment Present value Present value of lease
beginning (A) factor @ 5% (B) payments (A x B=C)
1 1,00,000 1.000 1,00,000
2 1,00,000 0.952 95,200
3 1,00,000 0.907 90,700
4 1,00,000 0.864 86,400
5 1,00,000 0.823 82,300
Lease liability as at commencement date 4,54,600
2 Calculation of Lease Liability and ROU asset at each year end

Year Lease Liability ROU asset
Initial Lease Interest Closing Initial Depreciation Closing
value payments expense balance Value for 5 years balance
@ 5%
1 4,54,60 1,00,000 17,730
3,72,330 4,54,600 90,920 3,63,680
2 0
3,72,33 1,00,000 13,617
2,85,947 3,63,680 90,920 2,72,760
3 0
2,85,94 1,00,000 9,297
1,95,244 2,72,760 90,920 1,81,840
4 7
1,95,24 1,81,840
4
SM 2. Modification that both increases and decreases the scope of the lease
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments
are ` 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a.
At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:
(a) include an additional 1,500 square metres of space in the same building starting from the
beginning of Year 6 and
(b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500
square metres is ` 1,50,000 payable at the end of each year (from Year 6 to Year 8). Lessee’s
incremental borrowing rate at the beginning of Year 6 is 7% p.a.
The consideration for the increase in scope of 1,500 square metres of space is not commensurate with
the stand-alone price for that increase adjusted to reflect the circumstances of the contract.
Consequently, Lessee does not account for the increase in scope that adds the right to use an additional
1,500 square metres of space as a separate lease.
How should the said modification be accounted for? [SM 2021, Ill.-37 Modified]
Ans.
The pre-modification ROU Asset and the pre-modification lease liability in relation to the lease are as
follows:
Lease liability ROU Asset
Opening Interest Lease Closing Opening Depreciati Closing
Year
balance expense @ payment balance balance on charge balance
1 7,35,900* 6%44,154 (1,00,000) 6,80,054 7,35,900 (73,590) 6,62,310
2 6,80,054 40,803 (1,00,000) 6,20,857 6,62,310 (73,590) 5,88,720
(1,00,000) (73,590)
3 6,20,857 37,251 5,58,108 5,88,720 5,15,130
(1,00,000) (73,590)
4 5,58,108 33,486 (1,00,000) 4,91,594 5,15,130 (73,590) 4,41,540
5 4,91,594 29,496 4,21,090 4,41,540 3,67,950
6 4,21,090 3,67,950
*Refer Note 4.
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease
liability on the basis of:
(a) A three-year remaining lease term (ie. till 8th year), (b) Annual payments of `150,000 and
(c) Lessee’s incremental borrowing rate of 7% p.a.
Year Lease Payments Present value @ 7% Present value of

lease payments
(A) (B) (A x B = C)
1 1,50,000 0.935 1,40,250
2 1,50,000 0.873 1,30,950
3 1,50,000 0.816 1,22,400
Modified lease liability 3,93,600
The modified liability equals `3,93,600, of which (a) `1,31,200 relates to the increase of `50,000 in the
annual lease payments from Year 6 to Year 8 and (refer note 1) (b) `2,62,400 relates to the remaining
three annual lease payments of `1,00,000 from Year 6 to Year 8 with reduction of lease term (Refer Note
3)
Decrease in the lease term:

At the effective date of the modification (at the beginning of Year 6), the pre-modification ROU Asset is
`3,67,950. Lessee determines the proportionate decrease in the carrying amount of the ROU Asset
based on the remaining ROU Asset for the original 2,000 square metres of office space (i.e., a remaining
three-year lease term rather than the original five-year lease term). Theremaining ROU Asset for
the original 2,000 square metres of office space is `2,20,770 [i.e., `(3,67,950 / 5) x 3 years].
At the effective date of the modification (at the beginning of Year 6), the pre-modification lease liability
is `4,21,090. The remaining lease liability for the original 2,000 square metres of office space is
`2,67,300 (i.e., present value of three annual lease payments of `1,00,000, discounted at the original
discount rate of 6% p.a.) (refer note 2).
Consequently, Lessee reduces the carrying amount of the ROU Asset by `1,47,180 (`3,67,950 ”

`2,20,770), and the carrying amount of the lease liability by `1,53,790 (`4,21,090
” `2,67,300). Lessee recognises the difference between the decrease in the lease liability and the
decrease in the ROU Asset (`1,53,790 ” `1,47,180 = `6,610) as a gain in profit or loss at the effective date
of the modification (at the beginning of Year 6).
Lease Liability Dr. 1,53,790

To ROU Asset 1,47,180
To Gain 6,610
At the effective date of the modification (at the beginning of Year 6), Lessee recognises the effect of the
remeasurement of the remaining lease liability reflecting the revised discount rate of 7% p.a., which is
`4,900 (`2,67,300 ” `2,62,400*), as an adjustment to the ROU Asset.
*(Refer note 3)
Lease Liability Dr. 4,900
To ROU Asset 4,900
Increase in the leased space:
At the commencement date of the lease for the additional 1,500 square metres of space (at the
beginning of Year 6), Lessee recognises the increase in the lease liability related to the increase in leased
space of `1,31,200 (i.e., present value of three annual lease payments of `50,000,discounted at the
revised interest rate of 7% p.a.) as an adjustment to the ROU Asset.
ROU Asset Dr. 1,31,200

To Lease Liability 1,31,200
The modified ROU Asset and the modified lease liability in relation to the modified lease are as follows:
Lease liability ROU Asset
Opening Interest Lease Depreciation

Closing Opening Closing
Year balance expense@7% payment charge
balance balance balance
6 3,93,600 27,552 (1,50,000) 2,71,152 3,47,070** (1,15,690) 2,31,380
7 2,71,152 18,981 (1,50,000) 1,40,133 2,31,380 (1,15,690) 1,15,690
8 1,40,133 9,867* (1,50,000) - 1,15,690 (1,15,690) -
*Difference is due to approximation.

**Refer Note 5
Working Notes:
1 Calculation of lease liability on increased consideration:
Year Lease Payments (A) Present value @7% (B) Present value of lease
payments (A x B = C)
1 50,000 0.935 46,750
2 50,000 0.873 43,650
3 50,000 0.816 40,800
Modified lease liability 1,31,200
2 Calculation of remaining lease liability for the original contract of 2000 square meters at
Original discount rate:
Year Lease Payments Present value factor @ Present value of lease

(A) 6% (B) payments (A x B = C)
1 1,00,000 0.943 94,300
2 1,00,000 0.890 89,000
3 1,00,000 0.840 84,000
Remaining lease liability 2,67,300
3 Calculation of remaining lease liability for the original contract of 2000 square meters at
revised discount rate:
Year Lease Payments Present value factor @ Present value of lease
7% (B) payments
(A) (A x B = C)
1 1,00,000 0.935 93,500
2 1,00,000 0.873 87,300
3 1,00,000 0.816 81,600
Remaining lease liability 2,62,400
4 Calculation of Initial value of ROU asset and lease liability:

Year Lease Payment Present value factor @ Present value of lease
(A) 6% (B) payments
(A x B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
Lease liability as at modification date 7,35,900
5 Calculation of opening balance of Modified ROU Asset at the beginning of 6th year:
The remaining ROU Asset for the original 2,000 square metres of office 2,20,770
space after decrease in term

Less: Adjustment for increase in interest rate from 6% to 7% (4,900)

Add: Adjustment for increase in leased space 1,31,200
3,47,070
SM 3. Deferral of lease payments not a lease modification

Lessor L leases retail space to Lessee Z and classifies the lease as an operating lease. The lease includes
fixed lease payments of ` 10,000 per month.
Due to the COVID-19 pandemic, L and Z agree on a rent concession that allows Z to pay no rent in the
period from July, 2020 to September 2020 but to pay rent of 20,000 per month in the period from
January 2021 to March 2021. There are no other changes to the lease.
How this will be accounted for by lessor? [SM 2021, Ill.-39]

Ans.
L determines that the reduction in lease payments in July 2020 to September 2020 and the proportional
increase in January 2021 to March 2021 does not result in an overall change in the consideration for the
lease.
L does not account for the change as a lease modification. L continues to recognise operating lease
income on a straight-line basis, which is representative of the pattern in which Z’s benefit from use of the
underlying asset is diminished.
SM 4. Unamortised lease incentive: Lease modification

Lessor M enters into a 10-year lease of office space with Lessee K, which commences on 1 April2015. The
rental payments are 15,000 per month, payable in arrears. M classifies the lease as an operating lease. M
reimburses K’s relocation costs of K of 600,000, which M accounts for as a lease incentive. The lease
incentive is recognised as a reduction in rental income over the lease term using the same basis as for
the lease income ” in this case, on a straight- line basis over 10 years.
On 1 April 2020, during the COVID-19 pandemic, M agrees to waive K’s rental payments for May, June
and July 2020.
This decrease in consideration is not included in the original terms and conditions of the lease and is
therefore a lease modification.
Ans.
M accounts for this modification as a new operating lease from its effective date ” i.e. 1 April 2020. M
recognises the impact of the waiver on a straight-line basis over the five-year term of the new lease. M
also takes into account the carrying amount of the unamortised lease incentive on 1 April2020 of `
3,00,000. M amortises this balance on a straight-line basis over the five-year term ofthe new lease.
SM 5. Modification that is not a separate lease and lease would have been classified as an operating
lease
Lessor L enters into an eight-year lease of 40 lorries with Lessee M that commences on 1 January2018.
The lease term approximates the lorries’ economic life and no other features indicate thatthe lease
transfer or does not transfer substantially all of the risks and rewards incidental to ownership of the
lorries. Assuming that substantially all of the risks and rewards incidental to ownership of the lorries are
transferred, L classifies the lease as a finance lease.
During the COVID-19 pandemic, M’s business has contracted. In June 2020, L and M amend the contract
so that it now terminates on 31 December 2020.
Early termination was not part of the original terms and conditions of the lease and this is therefore a
lease modification. The modification does not grant M an additional right to use the underlying assets
and therefore cannot be accounted for as a separate lease.
Ans.
L determines that, had the modified terms been effective at the inception date, the lease term would
not have been for the major part of the lorries’ economic life. Furthermore, there are no other indicators
that the lease would have transferred substantially all of the risks and rewards incidental to ownership
of the lorries. Therefore, the lease would have been classified as an operating lease.
In June 2020, L accounts for the modified lease as a new operating lease. The lessor L:
a) derecognises the finance lease receivable and recognises the underlying assets in its
statement of financial position according to the nature of the underlying asset ” i.e. as property,
plant and equipment in this case; and
b) measures the aggregate carrying amount of the underlying assets as the amount of the net
investment in the lease immediately before the effective date of the lease modification.
SM 6. Revised consideration is substantially the same as or less than the original consideration
Retailer Q leases a store in a large retail mall. The rent payable is ` 1,00,000 per month. As a result of the
COVID-19 pandemic, Q agrees with the lessor to defer the rent originally due in the months April, 2020
to June, 2020.
As part of this agreement, the rent for the period January, 2021 to March 2021 will be increased by `
1,10,000 per month, which compensates the lessor for the deferred rent as adjusted for the time value
of money.
Whether the rent deferral is eligible for the practical expedient if the other conditions are met?
[SM 2021, Ill.-47]
Ans.
The rent deferral satisfies the criteria to apply the practical expedient because:
(1) It is a rent concession occurring as a direct consequence of the pandemic;
(2) Increase in rentals during January, 2021 to March 2021 compensates for the time value ofmoney;
(3) Rent deferral reduces lease payments originally due on or before 30 June 2021; and
(4) There is no substantive change to other terms and conditions of the lease. Hence, Q considers
applying the practical expedient.
SM 7. Consider only payments that were originally due on or before 30 June, 2021
Lessee P operates a chain of restaurants and leases several outlets. As a result of COVID-19 pandemic, P
agrees a rent deferral with the lessor.
Under the terms of the rent deferral, rent originally due in the period July 2020 to December 2020 will
be added to the rent due in the period July 2021 to December 2021.
[SM 2021, Ill.-48]
Ans.
The rent deferral satisfies the criteria to apply the practical expedient because:
(1) It is a rent concession occurring as a direct consequence of the pandemic;

(2) Recovery of rentals during July, 2021 to December, 2021 is substantially the same as, orless than,
the consideration for the lease immediately preceding the change;
(3) Rent deferral reduces lease payments originally due on or before 30 June 2021; and
(4) There is no substantive change to other terms and conditions of the lease.
Therefore, P concludes that the rent deferral meets the ‘payments due’ eligibility criterion.
SM 8. Reduction in rent payments that extends beyond 30 June 2021

Lessee T leases office buildings from a lessor. As a result of the COVID-19 pandemic, in September 2020,
T agrees a rent concession with the lessor, under which the monthly rent will be reduced by 50% per
month for the 12 months commencing 1 October 2020.
[SM 2021, Ill.-49]
Ans.
The rent deferral does not satisfies the criteria to apply the practical expedient because out of the listed
eligibility criteria given in para 46B of Ind AS 116, rent deferral reduces lease payments starting from
October, 2020 and reduction will continue till September, 2021 which is beyond30 June 2021.
Therefore, T is not permitted to apply the practical expedient.
SM 9. Deferral of rent payments by extending the lease term

A lessee is granted a rent concession by the lessor whereby the lease payments for the period April 2020
to June 2020 are deferred. Three months are added to the end of the lease term at the same monthly
rent, and the lessee repays the deferred rent during those additional months. The rent concession is a
direct consequence of COVID-19.
Whether the rent deferral is eligible for the practical expedient? [SM 2021, Ill.-50]
Ans.
The lessee considers applying the practical expedient. In considering whether this rent concession
is eligible for the practical expedient, the lessee notes the following.
Firstly, the revised consideration in the lease is substantially the same as the original ” i.e. the condition
in paragraph 46B(a) of Ind AS 116 is met.
Secondly, the rent concession only reduces lease payments originally due in 2020 ” i.e. before30 June
2021 ” so the condition in paragraph 46B(b) of Ind AS 116 is met. Thirdly, there is a change in the lease
term ” an extension by three months.
There is no explicit guidance on what is considered ‘substantive’. Judgement will need to be applied,
considering both qualitative and quantitative factors. The lessee assesses that three- month extension
at the end of the lease term with substantially the same lease payments, would not constitute a
substantive change.
Hence, the condition in paragraph 46B(c) of Ind AS 116 is met. Since, the rent concession is a direct
consequence of COVID-19 and all three conditions in paragraph 46B of Ind AS 116 are met, the lessee
concludes that the rent concession is eligible for application of practical expedient.
SM 10. Forgiveness of lease payments

Lessee Z entered into a lease contract with Lessor L to lease 1,500 sqm of retail space for five years. The
lease commenced on 1 April 2018 and the rental payments are 100,000 payable quarterly in advance on 1
April, 1 July, 1 October and 1 January. Z’s incremental borrowing rate at commencement of the lease is
5% (assume that the interest rate implicit in the lease cannot be readily determined). There are no initial
direct costs, lease incentives or dismantling costs.
Z’s business is severely impacted by the COVID-19 pandemic and L and Z negotiate a rent concession. On
1 June 2020, L agrees to provide Z with an unconditional rent concession that allows Z to forego
payment of its rent due on 1 July ” i.e. L forgives Z the rent payment of 100,000 due on 1 July.
What will be the accounting treatment in the books of lessee for rent concessions assuming that it is
eligible for practical expedient? [SM 2021, Ill.-51]
Ans.
Z determines that the rent concession is eligible for the practical expedient.
Applying the practical expedient, Z should account for the forgiveness of rent as a negative variable
lease payment. The rent concession is unconditional, so the event that triggers the variable lease
payment is the agreement between Z and L for the rent concession on 1 June 2020.
Therefore, Z accounts for the rent concession as a negative variable lease payment on 1 June. Assuming
that there are no other changes to the lease, Z continues to use the retail space andthe right-of-use
asset is not impaired. The lease accounting entries will be as follows:
 recognise the rent concession as a variable lease payment in profit or loss (i.e. record a debit to the
lease liability and a corresponding credit in the income statement); and
 continue to accrue interest on the lease liability at the unchanged incremental borrowing rate of 5%
(i.e. record a debit to interest expense and a corresponding credit to the lease liability).
After accounting for the impact of the rent concession, Z’s lease liability represents the present value of
all future lease payments owing to L, discounted at the unchanged incremental borrowing rate. Z has
effectively derecognised the portion of the lease liability that has been extinguished by the forgiveness
of the quarterly lease payment due on 1 July 2020.
In addition, Z continues to depreciate the carrying amount of the right-of-use asset, which is unchanged
as a result of the rent concession.

Ind AS 23
BORROWING COSTS
SM 1. A company deals in production of dairy products. It prepares and sells various milk products like ghee,
butter and cheese. The company borrowed funds from bank for manufacturing operation. The cheese
takes substantial longer period to get ready for sale.
State whether borrowing costs incurred to finance the production of inventories (cheese) that have a
long production period, be capitalised? [SM 2021, Ill.-1]
Ans.
Ind AS 23 does not require the capitalisation of borrowing costs for inventories that are manufactured in
large quantities on a repetitive basis. However, interest capitalisation is permitted as long as the
production cycle takes a ‘substantial period of time’, as with cheese.
SM 2. A company is in the process of developing computer software. The asset has been qualified for
recognition purposes. However, the development of computer software will take substantial period of
time to complete.
(i) Can computer software be termed as a ‘qualifying asset’ under Ind AS 23?
(ii) Is management intention considered when assessing whether an asset is a qualifying asset?
[SM 2021, Ill.-2]
Ans.
(i) Yes. An intangible asset that takes a substantial period of time to get ready for its intended use
or sale is a ‘qualifying asset’. This would be the case for an internally generated computer
software in the development phase when it takes a ‘substantial period of time’ to complete.
(ii) Yes. Management should assess whether an asset, at the date of acquisition, is ‘ready for its
intended use or sale’. The asset might be a qualifying asset, depending on how management
intends to use it. For example, when an acquired asset can only be used in combination with a
larger group of fixed assets or was acquired specifically for the construction of one specific
qualifying asset, the assessment of whether the acquired asset is a qualifying asset is made on a
combined basis.
SM 3. A telecom company has acquired a 3G license. The licence could be sold or licensed to a third party.
However, management intends to use it to operate a wireless network. Development of the network
starts when the license is acquired.
Should borrowing costs on the acquisition of the 3G license be capitalised until the network is ready for
its intended use? [SM 2021, Ill.-3]
Ans.
Yes. The license has been exclusively acquired to operate the wireless network. The fact that the license
can be used or licensed to a third party is irrelevant. The acquisition of the license is the first step in a
wider investment project (developing the network). It is part of the network investment, which meets
the definition of a qualifying asset under Ind AS 23.
SM 4. A real estate company has incurred expenses for the acquisition of a permit allowing the construction of
a building. It has also acquired equipment that will be used for the construction of various buildings.
Can borrowing costs on the acquisition of the permit and the equipment be capitalised until the
construction of the building is complete? [SM 2021, Ill.-4]
Ans.
With respect to Permit
Yes, since permit is specific to one building. It is the first step in a wider investment project. It is part of
the construction cost of the building, which meets the definition of a qualifying asset.
With respect to Equipment
No, since the equipment will be used for other construction projects. It is ready for its ‘intended use’at
the acquisition date. Hence, it does not meet the definition of a qualifying asset.
SM 5. On 1st April, 20X1, A Ltd. took a 8% loan of ` 50,00,000 for construction of building A which is repayable
after 6 years ie on 31st March 20X7. The construction of building was completed on31st March 20X3.
A Ltd. started constructing a new building B in the year 20X3-20X4, for which he used his existing
borrowings. He has outstanding general purpose loan of ` 25,00,000, interest on which is payable @ 9%
and ` 15,00,000, interest on which is payable @ 7%.
Is the specific borrowing transferred to the general borrowings pool once the respective qualifying
asset is completed? Why [SM 2021, Ill.-7]
Ans.
Yes. If specific borrowings were not repaid once the relevant qualifying asset was completed, they
become general borrowings for as long as they are outstanding.
The borrowing costs that are directly attributable to obtaining qualifying assets are those
borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been
made. If cash was not spent on other qualifying assets, it could be directed to repay this specific loan.
Thus, borrowing costs could be avoided (that is, they are directly attributable to other qualifying assets).
 When general borrowings are used for qualifying assets, Ind AS 23 requires that, borrowing costs
eligible for capitalisation is calculated by applying a capitalisation rate to the expenditures on
qualifying assets.
 The amount of borrowing costs eligible for capitalisation is always limited to the amount of actual
borrowing costs incurred during the period.
SM 6. Beta Ltd had the following loans in place at the end of 31st March, 20X2:
(Amounts in ` 000s)
st st
Loan 1 April, 20X1 31 March, 20X2
18% Bank Loan 1,000 1,000
16% Term Loan 3,000 3,000
14% Debentures - 2,000
14% debenture was issued to fund the construction of Office building on 1st July, 20X1 but the
development activities has yet to be started.
On 1st April, 20X1, Beta ltd began the construction of a Plant being qualifying asset using the existing
borrowings. Expenditure drawn down for the construction was: ` 500,000 on1st April, 20X1 and `
2,500,000 on 1st January, 20X2.
Calculate the borrowing cost that can be capitalised for the plant.
[SM 2021, Ill.-8 Alternative Approach]
Ans.
Capitalisation rate (18% x 1,000)+ (16% x 3,000) 16.5%
1,000 + 3,000 1,000 + 3,000
Borrowing Costs (500,000 x 16.5%)+(2,500,000 x16.5% x 3/12) `1,85,625
Capitalisation rate for above illustration could also be calculated with the following approach by
assigning weights to the borrowings:
Particulars Loan Weighted average Interest rate Capitalisation
(a) (b) rate (a*b)
18% Bank Loan 1,000 25% 18% 4.5%

16% Term Loan 3,000 75% 16% 12%

Total 4,000 100% 16.5%
Answer in both the approaches would be same as can be seen from the above two solutions.
SM 7. An entity constructs a new head office building commencing on 1st September 20X1, which continues
till 31st December 20X1. Directly attributable expenditure at the beginning of the month on this asset
are ` 100,000 in September 20X1 and ` 250,000 in each of the months of October to December 20X1.
The entity has not taken any specific borrowings to finance the construction of the asset but has
incurred finance costs on its general borrowings during the construction period. During the year, the
entity had issued 10% debentures with a face value of ` 20 lacs and had an overdraft of ` 500,000, which
increased to ` 750,000 in December 20X1. Interest was paid on the overdraft at 15% until 1 October
20X1, then the rate was increased to 16%.
Calculate the capitalization rate for computation of borrowing cost in accordance withInd AS 23
‘Borrowing Costs’. [SM 2021, TYK-3]
Ans.
Since the entity has only general borrowing hence first step will be to compute the capitalisation rate.
The capitalisation rate of the general borrowings of the entity during the period of construction is
calculated as follows:
Finance cost on ` 20 lacs 10% debentures during September ” December 20X1 ` 66,667
Interest @ 15% on overdraft of ` 5,00,000 in September 20X1 ` 6,250
Interest @ 16% on overdraft of ` 5,00,000 in October and November 20X1 ` 13,333
Interest @ 16% on overdraft of ` 750,000 in December 20X1 ` 10,000
Total finance costs in September ” December 20X1 ` 96,250
Weighted average borrowings during period

= (20,00,000 × 4) + (500,000 × 3) + (750,000 × 1) = ` 25,62,500
4
Capitalisation rate = Total finance costs during the construction period / Weighted average borrowings
during the construction period
= 96,250 / 25,62,500 = 3.756%
SM 8. K Ltd. began construction of a new building at an estimated cost of ` 7 lakh on 1st April, 20X1.To finance
construction of the building it obtained a specific loan of ` 2 lakh from a financial institution at an
interest rate of 9% per annum.
The company’s other outstanding loans were:
Amount Rate of Interest per annum
`7,00,000 12%
`9,00,000 11%
The expenditure incurred on the construction was:

April, 20X1 `1,50,000
August, 20X1 `2,00,000
October, 20X1 `3,50,000
January, 20X2 `1,00,000
The construction of building was completed by 31st January, 20X2. Following the provisions of Ind AS 23
‘Borrowing Costs’, calculate the amount of interest to be capitalized and pass necessary journal entry
for capitalizing the cost and borrowing cost in respect of the building as on 31st January, 20X2.
[SM 2021, TYK-4]
Ans.
(i) Calculation of capitalization rate on borrowings other than specific borrowings
Amount of loan (`) Rate of Amount of interest (`)
interest
7,00,000 12% = 84,000

9,00,000 11% = 99,000
16,00,000 1,83,000
Weighted average rate of interest = 11.4375%
(1,83,000/16,00,000) x 100
(ii) Computation of borrowing cost to be capitalized for specific borrowings and general
borrowings based on weighted average accumulated expenses
Date of incurrence Amount Financed through Calculation `

of expenditure spent
1st April, 20X1 1,50,000 Specificborrowing 1,50,000 x 9% x 10/12 11,250
1st August, 20X1 2,00,000 Specificborrowing 50,000 x 9% x 10/12 3,750
Generalborrowing 1,50,000 x 11.4375% x6/12 8,578.125
1st October, 20X1 3,50,000 Generalborrowing 3,50,000 x 11.4375% x4/12 13,343.75
1st January, 20X2 1,00,000 Generalborrowing 1,00,000 x 11.4375% x1/12 953.125
37,875
Note: Since construction of building started on 1st April, 20X1, it is presumed that all the later
expenditures on construction of building had been incurred at the beginning of the respective
month
(iii) Total expenses to be capitalized for building

`
Cost of building `(1,50,000 + 2,00,000 + 3,50,000 + 1,00,000) 8,00,000
Add: Amount of interest to be capitalized 37,875
8,37,875
(iv) Journal Entry

Date Particulars ` `
31.1.20X2 Building account Dr. 8,37,875
To Bank account 8,00,000
To Interest payable (borrowing cost) 0
37,875
(Being expenditure incurred on construction of building
and borrowing cost thereon capitalized)

Note: In the above journal entry, it is assumed that interest amount will be paid at the year end.
Hence, entry for interest payable has been passed on 31.1.20X2.
Alternatively, following journal entry may be passed if interest is paid on the date of
capitalization:
Date Particulars ` `
31.1.20X2 Building account Dr. 8,37,875
To Bank account 8,37,875
(Being expenditure incurred on
construction of building and borrowing
cost thereon capitalized)
SM 9. On 1st April, 20X1, entity A contracted for the construction of a building for ` 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 (`’000)
st
1 April, 20X1 200
th
30 June, 20X1 600
st
31 December, 20X1 1,200
st
31 March, 20X2 200
Total 2,200
Entity A’s borrowings at its year end of 31st March, 20X2 were as follows:
a. 10%, 4-year note with simple interest payable annually, which relates specifically to the project;
debt outstanding on 31st March, 20X2 amounted to ` 7,00,000. Interest of `65,000 was
incurred on these borrowings during the year, and interest income of ` 20,000was earned on
these funds while they were held in anticipation of payments.
b. 12.5% 10-year note with simple interest payable annually; debt outstanding at1st April,
20X1 amounted to ` 1,000,000 and remained unchanged during the year; and
c. 10% 10-year note with simple interest payable annually; debt outstanding at1st April,
20X1 amounted to ` 1,500,000 and remained unchanged during the year.
What amount of the borrowing costs can be capitalized at year end as per relevantInd AS?
[SM 2021, TYK-5]
Ans.
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 capitalisation rate and expenditure incurred in obtaining a
qualifying asset. The costs incurred should first be allocated to the specific borrowings.
Analysis of expenditure:
Date Expenditure Amount allocated in Weighted for
(`’000) generalborrowings periodoutstanding
(`’000) (`’000)
1st April 20X1 200 0 0
30th June 20X1 600 100* 100 × 9/12 = 75
31st Dec 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 ` 7,00,000 fully utilized on 1st April & on 30th June to the extent of` 5,00,000
hence remaining expenditure of ` 1,00,000 allocated to general borrowings.
The capitalisation 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%) = 11%

10,00,000 + 15,00,000
Borrowing cost to be capitalized: Amount
(`)
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 `86,250.
SM 10. In a group with Parent Company ‚P‛ there are 3 subsidiaries with following business:
‚A‛ ” Real Estate Company
‚B‛ ” Construction Company
‚C‛ ” Finance Company
 Parent Company has no operating activities of its own but performs management functions for its
subsidiaries.
 Financing activities and cash management in the group are coordinated centrally.
 Finance Company is a vehicle used by the group solely for raising finance.
 All entities in the group prepare Ind AS financial statements.
The following information is relevant for the current reporting period 20X1-20X2:
Real Estate Company

 Borrowings of ` 10,00,000 with an interest rate of 7% p.a.
 Expenditures on qualifying assets during the period amounted to ` 15,40,000.
 All construction works were performed by Construction Company. Amounts invoiced toReal Estate
Company included 10% profit margin.
Construction Company
 No borrowings during the period.
 Financed ` 10,00,000 of expenditures on qualifying assets using its own cash resources.

Finance Company
 Raised ` 20,00,000 at 7% p.a. externally and issued a loan to Parent Company for general corporate
purposes at the rate of 8%.
Parent Company
 Used loan from Finance Company to acquire a new subsidiary.
 No qualifying assets apart from those in Real Estate Company and Construction Company.
 Parent Company did not issue any loans to other entities during the period.
What is the amount of borrowing costs eligible for capitalisation in the financial statements of each of
the four entities for the current reporting period 20X1-20X2? [SM 2021, TYK-6]
Ans.
Following is the treatment as per Ind AS 23:
Finance Company
No expenditure on qualifying assets have been incurred, so Finance Company cannot capitalise
anything.
Real Estate Company

Total interest costs in the financial statements of Real Estate Company is ` 70,000. Expenditures
on qualifying assets exceed total borrowings, so the total amount of interest can be capitalised.
Construction Company
No interest expense has been incurred, so Construction Company cannot capitalise anything.
Consolidated financial statements of Parent Company:

Total general borrowings of the group: ` 10,00,000 + ` 20,00,000 = ` 30,00,000
Although Parent Company used proceeds from loan to acquire a subsidiary, this loan cannot be excluded
from the pool of general borrowings.
Total interest expenditures for the group = ` 30,00,000 x 7% = ` 2,10,000
Total expenditures on qualifying assets for the group are added up. Profit margin charged by
Construction Company to Real Estate Company is eliminated:
Real Estate Company ” ` 15,40,000/1.1 = ` 14,00,000
Construction Co ” ` 10,00,000
Total consolidated expenditures on qualifying assets:
` (14,00,000 + 10,00,000) = ` 24,00,000
Capitalisation rate = 7%
Borrowing costs eligible for capitalisation = ` 24,00,000 x 7% = ` 1,68,000
Total interest expenditures of the group are higher than borrowing costs eligible for capitalisation
calculated based on the actual expenditures incurred on the qualifying assets. Therefore, only ` 1,68,000
can be capitalised.
Ind AS 36
IMPAIRMENT OF ASSETS
SM 1. Entity A acquires Entity B for ` 50 million, of which ` 35 million is the fair value of the identifiable assets
acquired and liabilities assumed. The acquisition of B Ltd. is to be integrated into two of Entity A’s CGUs
with the net assets being allocated as follows: ` in million
CGU 1 CGU 2 Total
Fair value of acquired identifiable tangible and intangible assets 25 10 35
In addition to the net assets acquired that are assigned to CGU 2, the acquiring entity expects CGU 2 to
benefit from certain synergies related to the acquisition (e.g. CGU 2 is expected to realise higher sales of
its products because of access to the acquired entity’s distribution channels). There is no synergistic
goodwill attributable to other CGUs.
Entity A allocated the purchase consideration of the acquired business to CGU 1 and CGU 2 as ` 33
million and ` 17 million respectively.
Determine the allocation of goodwill to each CGU? [SM 2021, Ill.-7]
Ans.
If goodwill is allocated to the CGUs based on the difference between the purchase consideration
and the fair value of net assets acquired ie direct method, the allocation would
be as follows: (All figures are ` in million, unless otherwise specified)
CGU 1 CGU 2 Total

Allocation of Purchase consideration 33 17 50
Less: Acquired identifiable tangible and intangible assets (25) (10) (35)
Goodwill assigned to CGUs 8 7 15
SM 11. NCI measurement and Goodwill impairment

A Ltd acquires 80% shares of a subsidiary B Ltd. for ` 3,200 thousand. At the date of acquisition, B Ltd.’s
identifiable net assets is ` 3,000 thousand. A elects to measure NCI at proportionate share
of net identifiable assets. It recognizes
ìn thousand
Purchase Consideration 3,200
NCI (3,000 x 20%) 600
3,800
Less: Net Assets (3,000)
Goodwill 800
At the end of next financial year, B Ltd.’s carrying amount is reduced to ` 2,700 thousand (excluding
goodwill).
Recoverable amount of B Ltd.’s assets is
Case (i) ` 2,000 thousand, Case (ii) ` 2,800 thousand
Calculate impairment loss allocable to Parent and NCI in both the cases. [SM 2021, Ill.-11]

Ans.
Case (i) ` in thousand

Particulars Goodwill Other Asset Total
Carrying amount 800 2,700 3,500
Unrecognised NCI (notional) [(800 / 80%) x 20%] 200 - 200
Notional Total 1,000 2,700 3,700
Recoverable amount - - 2,000
Total Impairment loss - - (1,700)
Impairment loss recognised in CFS (800) (700) (1,500)
Carrying amount after impairment - 2,000 2,000
Impairment loss on: Parent NCI

Goodwill (800) -
Other assets (560) (140)
Total (1,360) (140)
Case (ii)
Particulars Goodwill Other Asset Total
Carrying amount 800 2,700 3,500
Unrecognised NCI (notional) (800 / 80% x 20%) 200 - 200
Notional Total 1,000 2,700 3,700
Recoverable amount - - 2,800
Total Impairment loss - - (900)
Impairment loss recognised in CFS (900 x 80%) (720) - (720)
Carrying amount after impairment (800 ” 720) 80 2,700 2,780
Impairment loss on: Parent NCI

Goodwill (720) -
Other assets - -
Total (720) -
It is to be noted that since an entity measures NCI at its proportionate interest in the net identifiable
assets of a subsidiary at the acquisition date, rather than at fair value, goodwill attributable to NCI is not
recognised in the parent’s consolidated financial statements and so the impairment loss on such
goodwill not recognised
SM 2. 14. On 1 January Year 1, Entity Q purchased a machine costing `2,40,000 with an estimated useful life of
20 years and an estimated zero residual value. Depreciation is computed on straight-line basis. The
asset had been re-valued on 1 January Year 3 to `2,50,000, but with no change in useful life at that date.
On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be `1,00,000
and its estimated remaining useful life to be 10 years.
Calculate:
a) The carrying amount of the machine on 31 December Year 2 and the revaluation surplus arising on 1
January Year 3.
b) The carrying amount of the machine on 31 December Year 3 (immediately before the impairment).
c) The impairment loss recognised in the year to 31 December Year 4 and its treatment thereon
d) The depreciation charge in the year to 31 December Year 4.
Note: During the course of utilization of machine, the company did not opt to transfer part of the
revaluation surplus to retained earnings. [SM 2021, TYK-14]
Ans.
(a) Calculation of Carrying amount of machine at the end of Year 2 `
Cost of machine 2,40,000
Accumulated depreciation for 2 years [2 years × (2,40,000 ÷ 20)] (24,000)
Carrying amount of the machine at the end of Year 2 2,16,000
(b) Calculation of carrying amount of the machine on 31 December Year 3 `

Carrying amount at the beginning of Year 3 2,16,000
Revaluation done at the beginning of Year 3 2,50,000
Revaluation surplus 34,000
(c) Calculation of Impairment loss at the end of Year 4

When machine is revalued on 1 January Year 3, depreciation is charged on the revalued amount
over its remaining expected useful life.
Valuation at 1 January (re-valued amount) 2,50,000
Accumulated depreciation in Year 3 (2,50,000 / 18) (13,889)
Carrying amount of the asset at the end of Year 3 2,36,111
On 1 January Year 4, recoverable amount of the machine 1,00,000
Impairment loss (2,36,111 ” 1,00,000) 1,36,111
An impairment loss of ` 34,000 will be taken to other comprehensive income (reducing the
revaluation surplus for the asset to zero)
The remaining impairment loss of ` 1,02,111 (1,36,111 ” 34,000) is recognised in theStatement

of Profit and Loss for the Year 4.
(d) Calculation of depreciation charge in the Year 4

Carrying value of the machine at the beginning of Year 4 ` 1,00,000
Estimated remaining useful life 10 years
Depreciation charge is (` 1,00,000 / 10 years) ` 10,000

Ind AS 40
INVESTMENT PROPERTY
SM 1. Netravati Ltd. purchased a commercial office space as an Investment Property, in the Global Trade
Centre Commercial Complex, for ₹ 5 crores. However, for purchasing the same, the Company had to
obtain membership of the Global Trade Centre Commercial Complex Association by paying ₹
6,25,000 as a one-time joining fee. Netravati Ltd. wants to write off the one-time joining fees paid as an
expense under Membership and Subscription Charges and value the investment property at ₹ 5 crores.
Advise.
Would you answer change if the office space was purchased with the intention of using it as an
administrative centre of the company? [SM 2021, Ill.-2]
Ans.
Cost of Investment Property
As per Ind AS 40, the cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure (e.g. professional fees for legal services, property transfer taxes and
other transaction costs). Accordingly, on initial recognition, the one-time joining fee of ₹ 6,25,000
should be added to the purchase price. Therefore, the investment property should be measured at ₹
5,06,25,000 (i.e. cost of the commercial office space + one-time joining fee). Writing off the amount of ₹
6,25,000 to the P&L is not appropriate
Use as Administrative Office

If the property is used as an administrative centre, it is not an investment property, but rather an ‘owner
occupied property’. Hence, Ind AS 16 will be applicable.
Even under Ind AS 16, all direct costs relating to the acquisition of the asset should be added to the
purchase price. Hence, cost of the asset under Ind AS 16 would be ₹ 5,06,25,000.
SM 2. X Limited purchased a building for ₹ 30,00,000 on 1st May, 20X1 with an intention to earn rentals. The
purchase price was funded by a loan, interest on which is payable @ 5%. Property transfer taxes and
direct legal costs of ₹ 1,00,000 and ₹ 20,000 respectively were incurred in acquiring the building. X
Limited redeveloped the building into retail shops for rent under operating leases to independent third
parties. Expenditures on redevelopment were:
(a) `2,00,000 planning permission.
(b) `7,00,000 construction costs (including ₹ 40,000 refundable purchase taxes) What is the cost of
the Building as per Ind AS 40? [SM 2021, Ill.-3]
Ans.
As per Ind AS 40, the cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure (e.g. professional fees for legal services, property transfer taxes and
other transaction costs).
Accordingly, cost of the Building is arrived at as under:
Particulars Amount in ₹ Total ₹
Purchase price 30,00,000
Add: Property transfer taxes 1,00,000
Direct legal costs 20,000
Fee for planning permission 2,00,000
Construction costs 7,00,000
Less: Refundable purchase taxes 40,000 6,60,000
Cost of the Building as per Ind AS 40 39,80,000
Note: The building does not qualify the substantial period criteria for redevelopment of property.
Hence, borrowing cost of loan fund has not been capitalized
SM 3. X Limited purchased a land worth of ₹ 1,00,00,000. It has option either to pay full amount at the time of
purchases or pay for it over two years for a total cost of ₹ 1,20,00,000. What should be the cost of the
building under both the payment methods? [SM 2021, Ill.-4]
Ans.
Using either payment method, the cost will be ₹ 1,00,00,000. If the second payment option is used, ₹
20,00,000 will be treated as interest expenses over the credit period of 2 years.
SM 4. X Ltd. is engaged in the construction industry and prepares its financial statements up to31st March each
year. On 1st April, 20X1, X Ltd. purchased a large property (consisting of land) for ₹ 2,00,00,000 and
immediately began to lease the property to Y Ltd. on an operating lease. Annual rentals were ₹
20,00,000. On 31st March, 20X5, the fair value of the propertywas ₹ 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, 20X5 and vacated the property on 30th September, 20X5. On 30th September,
20X5, the fair value of the property was ₹ 2,90,00,000. On 1st October, 20X5, 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 ₹ 60,00,000 on this conversion project between30th
September, 20X5 to 31st March, 20X6. The project was incomplete at 31st March, 20X6 and the directors
of X Ltd. estimate that they need to spend a further ₹ 40,00,000 to complete the project, after which
each flat could be sold for ₹ 50,00,000.
Examine and show how the three events would be reported in the financial statements ofX Ltd. for the
year ended 31st March, 20X6 as per Ind AS. [SM 2021, TYK-4]
Ans.
From 1st April, 20X1, 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₹ 2,00,00,000 at
each year end.
On 30th September, 20X5, the property ceases to be an investment property. X Ltd. begins to develop it
for sale as flats.
As per para 59 of Ind AS 40, transfers between investment property, owner-occupied property and
inventories do not change the carrying amount of the property transferred and they do not change the
cost of that property for measurement or disclosure purposes. Hence, the carrying value of the
reclassified property will be ₹ 2,00,00,000.
Since the lease of the property is an operating lease, rental income of ₹ 10,00,000 (₹ 20,00,000 x
6/12) would be recognised in P/L for the year ended 31st March, 20X6.
The additional costs of ₹ 60,00,000 for developing the flats which were incurred up to and including 31st
March, 20X6 would be added to the ‘cost’ of inventory to give a closing cost of ₹ 2,60,00,000.
The total selling price of the flats is expected to be ₹ 5,00,00,000 (10 x ₹ 50,00,000). Since the further
costs to develop the flats total ₹ 40,00,000, their net realisable value is₹ 4,60,00,000 (₹ 5,00,00,000
” ₹ 40,00,000), so the flats will be measured at a cost of₹ 2,60,00,000.
The flats will be shown in inventory as a current asset.

SM 5. Shaurya Limited owns a 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 31st March, 20X2:
Building A was purchased 5 years ago at the cost of ₹ 10 crores 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 hold it for capital
appreciation. The property was purchased on 1st April, 20X1 at the cost of
₹ 2 crores. Expected life of the building is 40 years. As usual, the company follows straight line method of
depreciation.
Further, during the year 20X1-20X2 the company earned/incurred following direct operating expenditure
relating to Building A and Building B:
Rental income from Building A = ₹ 75 lakhs

Rental income from Building B = ₹ 25 lakhs
Sales promotion expenses = ₹ 5 lakhs
Fees & Taxes = ₹ 1 lakhs
Ground rent = ₹ 2.5 lakhs
Repairs & Maintenance = ₹ 1.5 lakhs
Legal & Professional = ₹ 2 lakhs
Commission and brokerage = ₹ 1 lakhs
The company does not have any restrictions and contractual obligations against Property - 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 buildings 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.
And 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
crores. The treatment of fair value of properties is to be given in the financials as per the requirements of
Indian accounting standards.
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.
[SM 2021, TYK-5]
Ans.
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 Ind AS 16’s requirements 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 31st March,

20X2 (₹ in crores)
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
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 ended31st March,
20X2 are as follows:
Amount recognised in Profit and Loss with respect to Investment Properties
Particulars Period ending31st March,

20X2 (₹ in crores)
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 March 31, 20X2, the fair value of the
properties is ₹ 10.50 crores. 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 technique Significant unobservable inputs Range

(Weighted average)
Discounted cash flow - Estimated rental value per sq. ft. per month -₹50 to₹60
(DCF) method - Rent growth per annum -10% every 3 years
- Discount rate -12% to 13%
Ind AS 105
SM 1. Identify whether each of the following scenarios gives rise to a discontinued operation and/or
classification of assets as held for sale:
S. No Particulars Discontinued Assets held
operation for sale
Yes/No Yes/No
1 MNO disposes of a component of the entity by selling the
underlying assets. The sales transaction is incomplete at
the reporting date.
2 PQR has ceased activities that meet the definition of a
discontinued operation without selling any assets.
3 STU ceases activities and has already completed the sale
of the underlying assets at the reporting date.
4 VWX will sell or has sold assets that are within the scope
of Ind AS 105, but does not discontinue any of its
operations.
[SM 2021, Ill.-.3]
Ans.
Discontinued operations and assets held for sale
S. No Particulars Discontinued Assets held
operation for sale
Yes/No Yes/No
1 MNO disposes of a component of the entity by selling the Yes Yes
underlying assets. The sales transaction is incomplete at
the reporting date.
2 PQR has ceased activities that meet the definition of a Yes No
discontinued operation without selling any assets.
3 STU ceases activities and has already completed the sale Yes No
of the underlying assets at the reporting date.
4 VWX will sell or has sold assets that are within the scope No Yes
of Ind AS 105, but does not discontinue any of its
operations.
SM 2. 4. Following is the extract of the consolidated financial statements of A Ltd. for the year ended on:
Asset/ (liability) Carrying amount as

on 31st March, 20X1
(In `‘000)
Attributed goodwill 200
Intangible assets 950
Financial asset measured at fair value through other comprehensive income 300
Property, plant & equipment 1100

Deferred tax asset 250

Current assets ” inventory, receivables and cash balances 600
Current liabilities (850)
Non-current liabilities ” provisions (300)
Total 2,250
On 15th September 20X1, Entity A decided to sell the business. It noted that the business meets the
condition of disposal group classified as held for sale on that date in accordance with Ind AS 105.
However, it does not meet the conditions to be classified as discontinued operations in accordance with
that standard.
The disposal group is stated at the following amounts immediately prior to reclassification as held for
sale.
Asset/ (liability) Carry amount as on

15th September
20X1 (In `‘000)
Attributed goodwill 200
Financial asset measured at fair value through other comprehensive 360
income
Property, plant & equipment 1,020
Deferred tax asset 250
Current assets ” inventory, receivables and cash balances 520
Current liabilities (870)
Non-current liabilities ” provisions (250)
Total 2,160
Entity A proposed to sell the disposal group at `19,00,000. It estimates that the costs to sell will be
`70,000. This cost consists of professional fee to be paid to external lawyers and accountants.
As at 31st March 20X2, there has been no change to the plan to sell the disposal group and entity A still
expects to sell it within one year of initial classification. Mr. X, an accountant of Entity A remeasured the
following assets/ liabilities in accordance with respective standards as on 31st March 20X2:
Available for sale: (In `‘000)

Financial assets 410
Deferred tax assets 230
Current assets- Inventory, receivables and cash balances 400
Current liabilities 900
Non- current liabilities- provisions 250
The disposal group has not been trading well and its fair value less costs to sell has fallen to`16,50,000.
Required:
What would be the value of all assets/ labilities within the disposal group as on the following dates
inaccordance with Ind AS 105?
(a) 15 September, 20X1 and
(b) 31st March, 20X2 [SM 2021, TYK-4]
Ans.
(a) As at 15 September, 20X1
The disposal group should be measured at `18,30,000 (19,00,000-70,000). The impairment
write down of `3,30,000 (`21,60,000 ” `18,30,000) should be recorded within profit from
continuing operations.
The impairment of `3,30,000 should be allocated to the carrying values of the appropriate non-
current assets.
Asset/ (liability) Carrying Impairment Revised

value as at 15 carrying value
September, as per IND AS
20X1 105
Attributed goodwill 200 (200) -
Intangible assets 930 (62) 868
Financial asset measured at fair value 360 - 360
through other comprehensive income
Property, plant & equipment 1,020 (68) 952
Deferred tax asset 250 - 250
Currentassets” inventory, receivables 520 - 520
and cash balances
Current liabilities (870) - (870)
Non-current liabilities ” provisions (250) - (250)
Total 2,160 (330) 1,830
The impairment loss is allocated first to goodwill and then pro rata to the other assets of the
disposal group within Ind AS 105 measurement scope. Following assets are not in the
measurement scope of the standard- financial asset measured at other comprehensive
income, the deferred tax asset or the current assets. In addition, the impairment allocation can
only be made against assets and is not allocated to liabilities.
(b) As on 31 March, 20X2:

All of the assets and liabilities, outside the scope of measurement under Ind AS 105, are
remeasured in accordance with the relevant standards. The assets that are remeasured in this
case under the relevant standards are the Financial asset measured at fair value through other
comprehensive income (Ind AS 109), the deferred tax asset (Ind AS 12), the current assets and
liabilities (various standards) and the non-current liabilities (Ind AS 37).
Asset/ (liability) Carrying amount Change in value Impairment Revised carrying

as on 15 to 31st March value as per Ind
September, 20X1 20X2 AS105
Attributed goodwill - - - -
Intangible assets 868 - (29) 839

Financial asset
measured at fair value
through other 360 50 - 410
Property,
comprehensive
plant&equipment
income 952 - (31) 921
Deferred tax asset 250 (20) - 230
Current assets ”
inventory, receivables
and cash balances 520 (120) - 400
Current liabilities (870) (30) - (900)
”provisions (250) - - (250)
Total 1,830 (120) (60) 1,650
SM 3. CK Ltd. prepares the financial statement under Ind AS for the quarter year ended 30th June,20X1.
During the 3 months ended 30th June, 20X1 following events occurred:
On 1st April, 20X1, 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, 20X1, the carrying amount of the assets of the division were as follows:
 Purchased Goodwill ” ` 60,000
 Property, Plant & Equipment (average remaining estimated useful life two years) -` 20,00,000
 Inventories - ` 10,00,000
From 1st April, 20X1, the Company has started to actively market the division and has received number
of serious enquiries. On 1st April, 20X1 the directors estimated that they would receive Rs. 32,00,000
from the sale of the division. Since 1st April, 20X1, market condition has improved and as on 1st
August, 20X1 the Company received and accepted a firm offer to purchase the division for ` 33,00,000.
The sale is expected to be completed on 30th September, 20X1 and ` 33,00,000 can be assumed to be a
reasonable estimate of the value of the division as on 30th June, 20X1. During the period from 1st April
to 30th June inventories of the division costing ` 8,00,000 were sold for ` 12,00,000. At 30th June,
20X1, the total cost of the inventories of the division was ` 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 of the division will be reported in
the interim financial statements for the quarter ended 30th June, 20X1 giving relevant explanations.
[SM 2021, TYK-5]
Ans.
The decision to offer the division for sale on 1st April, 20X1 means that from that date the division has
been classified as held for sale. The division available for immediate sale, isbeing 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 ie` 30,60,000 since it is less than the fair value less cost to sell `
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, 20X1 so its carrying value at
30th June, 20X1 will be ` 20,00,000 only. The inventories of the division will be shown at ` 9,00,000.
The division will be regarded as discontinued operation for the quarter ended30th June, 20X1. 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.
SM 4. Identify which of the following is a disposal group at 31 March 20X1:

(1) On 21 March 20X1, XYZ announced the Board’s intention to sell its shares in a subsidiary
company, Alpha, contingent upon the approval of Alpha’s shareholders. It seems unlikely that
approval will be granted in the near future and no specific potential buyer has been identified.
(2) PQR has entered into a contract to sell the entire delivery fleet of vehicles operated from its
warehouse to a competitor, ABC, on 14 March 20X1. The assets will be transferred on 28 April
20X1 from which date the Group will outsource its delivery activities to another company, LMN.
(3) On 16 January 20X1, DEF’s management and shareholders approved a plan to sell its retail
business in Mumbai and a consultant is hired to manage the sale. As at 31 March20X1 heads of
agreement had been signed although due diligence and the negotiation of final terms are still in
process. The transaction is expected to be completed in April 20X1. [SM 2021, TYK-6]
Ans.
Presented as held for sale
(2) PQR’s fleet is classified as held for sale because it constitutes a group of assets to be sold in
their present condition and the sale is highly probable at the reporting date (as a contract has
been entered into).
(3) DEF’s sale of its retail business will not be completed until the final terms (e.g. of purchase price)
are agreed. However, the business is ready for immediate sale and the sale is highly probable
unless other evidence after the reporting date but before the financial statements are approved
for issue, comes to light to indicate the contrary.
Not presented as held for sale

(1) XYZ’s shares in Alpha are not available for an immediate sale as shareholders’ approval is
required. Also no specific potential buyer has been identified. In taking these fact into
consideration for the assessment of whether the sale is highly probable, it is clearly not highly
probable.

Ind AS 41
AGRICULTURE
SM 1. XY Ltd. is a farming entity where cows are milked on a daily basis. Milk is kept in cold storage
immediately after milking and sold to retail distributors on a weekly basis. On 1 April 20X1, XY Ltd. ad a
herd of 500 cows which were all three years old.
During the year, some of the cows became sick and on 30 September 20X1, 20 cows died. On1 October
20X1, XY Ltd. purchased 20 replacement cows at the market for ` 21,000 each. These 20 cows were all
one year old when they were purchased.
On 31 March 20X2, XY Ltd. had 1,000 litres of milk in cold storage which had not been sold to retail
distributors. The market price of milk at 31 March 20X2 was ` 20 per litre. When selling the milk to
distributors, XY Ltd. incurs selling costs of ` 1 per litre. These amounts did not change during March
20X2 and are not expected to change during April 20X2.
Information relating to fair value and costs to sell is given below:
Date Fair value of a dairy cow (aged) Costs to sell a cow
1 year 1.5 3 4
years years years
1st April 20X1 20,000 22,000 27,000 25,000 1,000
1st October 20X1 21,000 23,000 28,000 26,000 1,000
31st March 20X2 21,500 23,500 29,000 26,500 1,100
You can assume that fair value of a 3.5 years old cow on 1st October 20X1 is ` 27,000.
Pass necessary journal entries of above transactions with respect to cows in the financial statements of
XY Ltd. for the year ended 31st March, 20X2? Also show the amount lying in inventory if any.
[SM 2021, TYK-2]
Ans.
Journal Entries on 1st October, 20X1
(All figures in `)
Loss (on death of 20 cows) (Refer W.N.) Dr. 5,20,000
To Biological asset 5,20,000
(Loss booked on death of 20 cows)
Biological Asset (purchase of 20 new cows) (Refer W.N.) Dr. 4,00,000
To Bank 4,00,000
(Initial recognition of 20 new purchased cows at fair value less costs to sell)
Journal Entries on 31st March, 20X2

Loss on remeasurement of old cows Dr. 2,88,000
To Biological asset [(1,30,00,000 ” 5,20,000) ”1,21,92,000] 2,88,000
(Subsequent measurement of cows at fair value less costs to sell)
Biological Asset (4,48,000 ” 4,00,000) Dr. 48,000
To Gain on remeasurement of new cows
(Subsequent measurement of cows at fair value less costs to sell) 48,000
Inventory (Milk) as at 31st March,20X2 = `19,000 (1,000 x (20 ” 1))
Working Note:
Calculation of Biological asset at various dates
Date Number Age Fair Value Cost to Sell Net Biological asset
(`) (`) (`) (`)
1st April 20X1 500 3 years 27,000 1,000 26,000 1,30,00,000
1st October (20) 3.5 years 27,000 1,000 26,000 (5,20,000)
20X1
1st October 20 1 year 21,000 1,000 20,000 4,00,000
20X1 1,28,80,000
31st March 480 4 years 26,500 1,100 25,400 1,21,92,000
20X2 20 1.5 years 23,500 1,100 22,400 4,48,000
1,26,40,000
SM 2. Company X purchased 100 beef cattle at an auction for ` 1,00,000 on 30 September 20X1.Subsequent
transportation costs were ` 1,000 that is similar to the cost X would have to incur to sell the cattle at the
auction. Additionally, there would be a 2% selling fee on the market price of the cattle to be incurred by
the seller.
On 31 March 20X2, the market value of the cattle in the most relevant market increases to` 1,10,000.
Transportation costs of ` 1,000 would have to be incurred by the seller to get the cattle to the relevant
market. An auctioneer’s fee of 2% on the market price of the cattle would be payable by the seller.
On 1 June 20X2, X sold 18 cattle for ` 20,000 and incurred transportation charges of` 150. In
addition, there was a 2% auctioneer’s fee on the market price of the cattle paid by the seller.
On 15 September 20X2, the fair value of the remaining cattle was ` 82,820. 42 cattle were slaughtered
on that day, with a total slaughter cost of ` 4,200. The total market price of the carcasses on that day
was ` 48,300, and the expected transportation cost to sell the carcasses is ` 420. No other costs are
expected.
On 30 September 20X2, the market price of the remaining 40 cattle was ` 44,800. The expected
transportation cost is ` 400. Also, there would be a 2% auctioneer’s fee on the market price of the cattle
payable by the seller.
Pass Journal entries so as to provide the initial and subsequent measurement for all above transactions.
Interim reporting periods are of 30 September and 31 March and the company determines the fair values
on these dates for reporting. [SM 2021, TYK-3]
Ans.
Value of cattle at initial recognition (30 September 20X1) (All figures are in `)
Biological asset (cattle) Dr. 97,000*
Loss on initial recognition Dr. 4,000
To Bank (Purchase and cost of transportation) 1,01,000
(Initial recognition of cattle at fair value less costs to sell)
*Fair value of cattle = 1,00,000 ” 1,000 ” 2,000 (2% of 1,00,000) = 97,000
Subsequent measurement at 31 March 20X2 (All figures are in `)

Biological Assets (Cattle) Dr. 9,800

To Gain on Sale (Profit & Loss) 9,800
(Subsequent measurement of Cattle at fair value less costs to sell
(1,06,800** ” 97,000))
** Fair value of cattle = 1,10,0000 ” 1,000 ” 2,200 (2% of 1,10,000) = 1,06,800

Sale of cattle on 1 June 20X2 (All figures are in `)
Biological Assets (Cattle) Dr. 226

To Gain on Sale (Profit & Loss)
(Subsequent re-measurement of 18 Cattle at fair value less costs to 226
sell just prior to the point at which they are sold [19,450 -
{(1,06,800/100) x 18}]
Cost to Sales Dr. 19,450
To Biological Assets (Cattle) 19,450
(Recording a cost of sales figure separately with a corresponding
reduction in the value of the biological assets)
Bank Dr. 19,450
Selling expenses (150 + 400) Dr. 550
To Revenue 20,000
(Recognition of revenue from sale of cattle)
Transfer of Cattle to Inventory on 15 September 20X2 (All figures are in `)
Inventory (48,300 - 420) Dr. 47,880

Loss on remeasurement Dr. 1,176
To Biological Asset (Cattle) 44,856#
To Bank (Slaughtering cost) 4,200
(Transfer of cattle to inventory)
#Note: 44,856 is calculated as the proportion of cattle sold using the fair value (1,06,800+ 226” 19,450) x
42/82)
Subsequent measurement of cattle at 30 September 20X2 (All figures are in `)
Loss on remeasurement Dr. 18,440

To Biological Asset (Cattle) 18,440
(Subsequent measurement of Cattle at fair value less costs to

sell [43,504## ” {(1,06,800 + 226 ”
19,450)” 44,856}]
Fair value of cattle = 44,800 ” 400 ” 896 (2% of 44,800) = 43,504
Ind AS 19
EMPLOYEE BENEFITS
SM 1. Vested Accumulating Benefits

Mr. Rajan is working for Infotech Ltd. Consider the following particulars: Annual salary of Mr. Rajan = ₹
30,00,000
Total working days in 20X0-X1 = 300 days
Leaves allowed in 20X0-X1 as per company policy = 10 days
Leaves utilized by Mr. Rajan in 20X0-X1 = 8 days
The unutilized leaves are settled by way of payment and accordingly, carry forward of such leaves to the
subsequent period is not allowed.
Compute the total employee benefit expense for Infotech Ltd. in respect of 20X0-X1.
[SM 2021, Ill.-1]
Ans.
Mr Rajan is entitled to a salary of ₹ 30,00,000 for 300 total working days.
Thus, per day salary works out to ₹ 30,00,000 ÷ 300 days = Rs. 10,000 per day
In the year 20X0-20X1, Mr. Rajan availed 8 out of 10 leaves allowed by the company. Accordingly, leaves
unutilized = 10 ” 8 = 2 days
In line with the company policy, Infotech Ltd. will pay Mr. Rajan for the unutilized leave.
Thus, total expense for 20X0-20X1 = ₹ 30,00,000 + (2 days unutilized leaves x ₹ 10,000 per day) = ₹
30,20,000.
SM 2. Non-Vested Accumulating Benefits

Mr. Niranjan is working for Infotech Ltd. Consider the following particulars:
Year 20X0-20X1 Year 20X1-20X2
Annual salary ₹ 30,00,000 ₹ 30,00,000
No. of working days during the year 300 days 300 days
Leave allowed 10 days 10 days
Leave taken 7 days 13 days
Leave unutilized carried forward to next year 3 days NIL
Based on past experience, Infotech Ltd. assumes that Mr. Niranjan will avail the unutilized leaves of 3
days of 20X0-20X1 in 20X1-20X2.
Infotech Ltd. contends that it will record ₹ 30,00,000 as employee benefits expense in each ofthe years
20X0-20X1 and 20X1-20X2, stating that the leaves will, in any case, be utilized by20X1-20X2.
Comment on the accounting treatment proposed to be followed by Infotech Ltd. Also pass journal
entries for both the years. [SM 2021, Ill.-2]
Ans.
Particulars Year Year
20X0-20X1 20X1-20X2
Annual Salary ₹ 30,00,000 ₹ 30,00,000
No. of working days (A) 300 days 300 days
Leaves Allowed 10 days 10 days
Leaves Taken (B) 7 days 13 days
Therefore, No. of days worked (A ” B) 293 days 287 days
Expense proposed to be recognized by Infotech Ltd. ₹ 30,00,000 ₹ 30,00,000

Based on the evaluation above, Mr. Niranjan has worked for 6 days more (293 days ” 287 days) in 20X0-
X1 as compared to 20X1-20X2.
Since he has worked more in 20X0-20X1 as compared to 20X1-20X2, the accrual concept requires that
the expenditure to be recognized in 20X0-20X1 should be more as compared to20X1-20X2.
Thus, if Infotech Ltd. recognizes the same expenditure of ₹ 30,00,000 for each year, it would be in
violation of the accrual concept.
The expenditure to be recognized will be as under:
Particulars Year 20X0-20X1 Year 20X1-20X2

Annual salary (A) ₹ 30,00,000 ₹ 30,00,000
No. of working days (B) 300 days 300 days
Salary cost per day (A ÷ B) ₹ 10,000 per day ₹ 10,000 per day
No. of days worked (from above) 293 days 287 days
Expense to be recognised:
In 20X0-20X1: ₹ 30,00,000 + [₹ 10,000 per day x3 days (leaves
unutilized expected to be utilized subsequently)] ₹ 30,30,000
In 20X1-20X2: ₹ 30,00,000 ” [₹ 10,000 per day ”3 days (excess
leave utilized in 20X1-20X2)] ₹ 29,70,000
Journal Entry for 20X0-20X1
Employee Benefits Expense Account Dr. 30,30,000

To Bank Account 30,00,000
To Provision for Leave Encashment 30,000

Provision for Leave Encashment Account Dr. 30,000
SM 3. Non-Vested Accumulating Benefits

Assume same information as in Illustration 2.
Based on past experience, Infotech Ltd. assumes that Mr. Niranjan will avail the unutilized leaves of 2
days of 20X0-20X1 subsequently.
However, in 20X1-20X2, Mr. Niranjan availed in actual all 3 days of brought forward leave.
Compute the expense to be recognised in 20X0-20X1 and 20X1-20X2. Also pass journal entries for both
the years. [SM 2021, Ill.-3]
Ans.
The expenditure to be recognized will be as under:
Particulars Year 20X0-20X1 Year 20X1-20X2

Annual salary (A) ₹ 30,00,000 ₹ 30,00,000
No. of working days (B) 300 days 300 days
Salary cost per day (A ÷ B) ₹ 10,000 per day ₹ 10,000 per day
No. of days worked (from above) 293 days 287 days
Expense to be recognised:
In 20X0-20X1: ₹ 30,00,000 + [₹ 10,000 per day x 2 days
(leaves unutilized expected to be utilized subsequently)] ₹ 30,20,000
In 20X1-20X2: ₹ 30,00,000 ” [₹ 10,000 per day x 3 days
(excess leave utilized in 20X1-20X2)] + ₹ 10,000 (additional
expense due tochange in accounting estimate) ₹ 29,80,000
The additional ₹ 10,000 booked as an expense in 20X1-20X2 represents a change in accounting

estimate (i.e. as against the entity’s estimation that 2 days of unutilized leave would
be utilized subsequently, actually 3 days were utilized subsequently), for which a prospective effect
needs to be given, in line with Para 36 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates
and Errors.
To Provision for Leave Encashment 20,000

Provision for Leave Encashment Account Dr. 20,000
SM 4. An entity has 100 employees, who are each entitled to ten working days of paid sick leave for each year.
Unused sick leave may be carried forward for one financial year. Sick leave is taken first out of the
current year’s entitlement and then out of any balance brought forward from the previous year (a LIFO
basis).
At 31 March 20X1, the average unused entitlement is two days per employee. Based on past
experience, the management expects that only 20% of the employees will use 1 day from their carried
forward leave. Salary per day is ₹ 2,500.
Compute the expenses in respect of the short-term compensated absences, if they are assumed
to be (a) vested short-term compensated absences, and (b) non-vested short-term compensated
absences. [SM 2021, Ill.-5]
Ans.
Vested short-term compensated absences:
Employee Benefit Expense = 100 Employees x 2 Days x ₹ 2,500 = ₹ 5,00,000
Non-vested short-term compensated absences:
Employee Benefit Expense = 100 Employees x 20% x 1 Days x ₹ 2,500 = ₹ 50,000
SM 5. Acer Ltd. has 350 employees (same as a year ago). The average staff attrition rates observed during past
10 years represents 6% per annum. Acer Ltd. provides the following benefits to all its employees:
Paid vacation - 10 days per year regardless of date of hiring. Compensation for paid vacation is 100% of
employee's salary and unused vacation can be carried forward for 1 year. As of31st March, 20X1, unused
vacation carried forward was 3 days per employee, average salary was ₹ 15,000 per day and accrued
expense for unused vacation in 20X0-20X1 was₹ 65,00,000. During 20X1-20X2, employees took 9
days of vacation in average. Salaryincrease in 20X1-20X2 was 10%.

How would Acer Ltd. recognize liabilities and expenses for these benefits as of31st March,
20X2?. Pass the journal entry to show the accounting treatment. [SM 2021, Ill.-6]
Ans.
Paid Vacation:
Step 1: Calculation of Unused Vacation in man-days as on 31st March, 20X2:
A. No. of Employees in service for the whole year (94%):
Particulars Man-days
Unused vacation as on 31st March, 20X1 3 days per employee
Entitlement to vacation for 20X1-20X2 10 days per employee
Average vacation availed in 20X1-20X2 (9) days per employee
Unused vacation as on 31st March, 20X2 4 days per employee
(being unused leaves of 20X1-20X2 on FIFO basis)
Total Unused vacation as on 31st March, 20X2 - (A) 1,316 man-days
(350 employees x 94% x 4 days per employee)
B. Newcomers (6%):
Particulars Man-days
Entitlement to vacation for 20X1-20X2 10 days per employee
Average vacation availed in 20X1-20X2 (9) days per employee
Unused vacation as on 31st March, 20X2 1 day per employee
(being unused leaves of 20X1-20X2 on FIFO basis)
Total Unused vacation as on 31st March, 20X2 - (B) 21 man-days

(350 employees x 6% x 1 day per employee)
Total unused vacation as on 31st March, 20X2 (A + B) 1,337 man-days
Step 2: Calculation of average salary per day:
Particulars Amount (₹)

Average salary per day as on 31st March, 20X1 15,000
Salary increase in 20X1-20X2 10%
Average salary per day as on 31st March, 20X2 16,500
Step 3: Calculation of provision for unused paid vacation:

Calculation of provision for unused paid vacation 20X1-20X2: 2,20,60,500
(1,337 man-days x ₹ 16,500)
Provision for unused paid vacation 20X0-20X1 65,00,000
Step 4: Accounting treatment

Provision for 20X1-20X2
Employee Benefits Expenses A/c Dr. 2,20,60,500
To Provision for Leave Encashment 2,20,60,500
Settlement of Liability of 20X0-20X1

Provision for Leave Encashment A/c Dr. 65,00,000
To Cash / Bank 65,00,000
SM 6. Acer Ltd. has 350 employees (same as a year ago). The average staff attrition rates as observed during
past 10 years represents 6% per annum. Acer provides the following benefits to all its employees:
Annual bonus - during past 10 years.
Acer paid bonus to all employees who were in service during the entire financial year. Bonus was paid in
June following the financial year-end. Amount of bonus for 20X1-20X2 paid in June20X2 represented ₹
1,25,000 per employee. Acer Ltd. used to increase amount of bonusbased on official inflation rate
which is 8.5% for 20X2-20X3, although there was no legal obligation to increase the bonus by such
inflation rate.
How would Acer Ltd. recognize liabilities and expenses for these employee benefits as on31st March,
20X3? Pass the journal entry to show the accounting treatment. [SM 2021, Ill.-8]
Ans.
Bonus paid for 20X1-20X2 1,25,000 per employee
Bonus for 20X2-20X3 - increased by inflation of 8.5%: 1,35,625 per employee
[1,25,000 x (100% + 8.5%)]
No. of employees in staff during the whole year [350 x (100- 329 employees
6%)]
Provision for Bonus for 20X2-20X3 4,46,20,625
Accounting Treatment:
Provision for Bonus for 20X2-20X3
Employee Benefits Expenses A/c Dr. 4,46,20,625
To Provision for Bonus 20X2-20X3 4,46,20,625
Note:
It is given that the company is under no legal obligation to increase the bonus by the official inflation
rate. However, the company has been increasing the bonus by the inflation rate over the past years.
This has given rise to a constructive obligation for Acer Ltd. Informal practices, such as these, give rise to
a constructive obligation where the entity has no realistic alternative but to pay employee benefits.
Accordingly, provision is made for the amount considering theinflation rate.
SM 7. A company pays each employee a lump-sum one-time benefit upon retirement. This benefit is
computed based on the employee's years in service in the company and the final salary prior to
retirement. To cover its liabilities from this remuneration, the company contributes 3% of annual gross
salaries to the fund. Would this obligation represent a defined contribution plan or a defined benefit
plan and why? [SM 2021, Ill.-9]
Ans.
Defined benefit plan.
Reason: Although the Company pays contributions to the fund to cover its liabilities, amount of
remuneration is determined in advance and Company will have to carry the risk in case the fund's assets
are not sufficient to cover remuneration in full.
SM 8. In accordance with applicable legislation, company contributes 12% and employees 12% of annual gross
salaries to the provident and pension fund. Upon retirement, the employees will get the accumulated
balance that is calculated based on employee's years of service and his average salary for past 15 years

before retirement. The pension will be paid out of the state fund assets and the company has no further
obligation except to make contributions. Would this obligation represent a defined contribution plan or
a defined benefit plan? [SM 2021, Ill.-10]
Ans.
Defined contribution plan.
Reason: Although employee's pension is determined in advance by the formula (and thus
employees neither carry actuarial nor investment risks), Company's liability is limited to contributions to
the fund. In this case, as pension will be paid out of the state fund, it is a state fund which carries all the
risks.
SM 9. Acer Ltd. provides lump-sum remuneration upon retirement to its employees. Remuneration is paid out
of the fund to which Acer Ltd. contributes 12% of annual gross salaries. Contributions are made twice a
year ie in November of the related financial year and in June after the financial year-end. Total annual
gross salaries for 20X0-X1 amounted to ₹ 50 crores. Contribution made by Acer Ltd. in November 20X0
was ₹ 2.8 crores. Remuneration depends on the number of employee's service and amount of cash in
the fund at retirement date (Acer Ltd. has no further obligations except for contributions).
How should this transaction appear in the financial statements of Acer Ltd. as of 31 March 20X1?
[SM 2021, Ill.-11]
Ans.
1. Calculation of accrual for contributions in 20X0-20X1:
Annual gross salaries in 20X0-20X1: ₹ 50.00 crores
Amount of total contributions for 20X0-20X1 (12%): ₹ 6.00 crores
Contributions already made in November 20X0: ₹ 2.80 crores
Accrual (₹ 6 crores - ₹ 2.8 crores) ₹ 3.20 crores
2. Accounting Treatment:
Employee Benefits Expenses Account Dr. 6.00 crores
To Bank Account 2.80 crores
To Contribution Payable 3.20 crores
The contribution of ₹ 6 crores will be debited to the statement profit and loss. The contribution payable
of ₹ 3.20 crores will appear as a liability as at 31st March, 20X1.
SM 10. How will the following information be presented in the Balance Sheet of Udyog Ltd.?
Particulars ₹ in lakhs
PV of Defined Benefit Obligations 3,500
Fair Value of Plan Assets 3,332
[SM 2021, Ill.-13]
Ans.
Less: Fair Value of Plan Assets (3,332)
Deficit, to be treated as Net Defined Benefit Liability under Non-current
Liabilities as Provisions in the Balance Sheet 168
SM 11. How will the following information be presented in the Balance Sheet of Udyog Ltd.?
Fair Value of Plan Assets 2,975
Asset Ceiling 175
[SM 2021, Ill.-14]

Ans.
Less: Fair Value of Plan Assets (2,975)
Surplus, to be treated as Net Defined Benefit Asset, 225
Asset Ceiling as per Ind AS 19 175
Least of above is Surplus to be treated as Net Defined Benefit Asset under Balance 175
Sheet
SM 12. A post-employment medical plan reimburses 40 percent of an employee’s post-employment medical

costs if the employee leaves after more than ten and less than twenty years of service and 50 per cent
of those costs if the employee leaves after twenty or more years of service. How will the benefit be
attributed to the years of service? [SM 2021, Ill.-20]
Ans.
1. Under the Plan's Benefit Formula, the entity should attribute 4% of the present value of the
expected medical costs (40% ÷ 10 years) to each of the first ten years, and 1% (10% ÷ 10 years)
to each of the second ten years.
2. For employees expected to leave within 10 years, no benefit is attributed.
3. The Current Service Cost in each year reflects the probability that the employee may not
complete the necessary period of service to earn part or all of the benefits.
SM 13. A post-employment medical plan reimburses 10 percent of an employee’s post-employment medical

costs if the employee leaves after more than ten and less than twenty years of service and 50 per cent
of those costs if the employee leaves after twenty or more years of service.
How will the benefit be attributed to the years of service? [SM 2021, Ill.-21]
Ans.
1. Service in later years will lead to a materially higher level of benefit than in earlier year. So, for
employees expected to leave after 20 or more years, the entity should attribute benefit on a straight-
line basis under Para 71. Service beyond 20 years will lead to no material amount of further benefits.
So, the benefit attributed to each of the first 20 years will be 2.5% of the Present Value of the Expected
Medical Costs (50% ÷ 20 years).
2. For employees expected to leave between 10 and 20 years, the benefit attributed to each of the first 10
years is 1% (10% ÷ 10 years) 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.
3. For employees expected to leave within ten years, no benefit is attributed.
4. The Current Service Cost in each year reflects the probability that the employee may not complete the
necessary period of service to earn part or all of the benefits.

SM 14. Pratap Ltd. belongs to the ship-building industry. The company reviewed an Actuarial Valuation for the
first time for its pension scheme which revealed a surplus of ₹ 60 lakhs. It wants to spread the same
over the next 2 years by reducing the annual contribution to ₹ 20 lakhs instead of ₹ 50 lakhs.
The average remaining life of the employees is estimated to be 6 years. Advise the Company in line with
Ind AS 19. [SM 2021, Ill.-23]
Ans.
1. Recognition: As per Ind AS 19, any Actuarial Gains and Losses should be recognized as a re-
measurement of the Net Defined Benefit Liability / (Asset) in "Other Comprehensive Income".
2. Measurement and Presentation: In the given case, the amount of surplus from Pension Scheme
of ₹ 60 lakhs is an Actuarial Gain and should be recognized as a "re-measurement" in "Other
Comprehensive Income", and not to be adjusted from the amount of annual contribution in
future years.
3. Disclosure: The change relating to Actuarial Valuation for the Pension Scheme requires
disclosure under Ind AS 8. Disclosures required by Ind AS 19 should also be made in thefinancial
statements.
SM 15. 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,
20X1, the actuaries advised that the present value of the defined benefit obligation was ₹ 6,00,00,000.
On the same date, the fair value of the assets of the defined benefit plan was ₹ 5,20,00,000. On 1st
April, 20X1, the annual market yield on government bonds was 5%. During the year ended 31st March,
20X2, A Ltd. made contributions of ₹ 70,00,000 into the plan and the plan paid out benefits of ₹
42,00,000 to retired members. Both these payments were made on 31st March, 20X2.
The actuaries advised that the current service cost for the year ended 31st March, 20X2 was₹ 62,00,000.
On 28th February, 20X2, 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 ₹
15,00,000 from that date.
During the year ended 31st March, 20X2, 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 ₹ 80,00,000. Before31st March, 20X2, A Ltd. made payments of ₹
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, 20X2, the actuaries advised that the present value of the defined benefit obligation was
₹ 6,80,00,000. On the same date, the fair value of the assets of the defined benefit plan were ₹
5,60,00,000.
Examine and present how the above event would be reported in the financial statements ofA Ltd. for
the year ended 31st March, 20X2 as per Ind AS. [SM 2021, TYK-8]
Ans.
All figures are ₹ in ’000.
On 31st March, 20X2, 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, 20X2, 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, 20X2, 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, 20X2, the remeasurement loss will be 3,400 (Refer W. N.).
Working Note:
Remeasurement of gain or loss
₹ 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
SM 16. On 1 April 20X1, the fair value of the assets of XYZ Ltdʼs defined benefit plan were valued at₹ 20,40,000
and the present value of the defined obligation was ₹ 21,25,000. On31st March,20X2 the plan
received contributions from XYZ Ltd amounting to ₹ 4,25,000 and paid out benefits of ₹ 2,55,000. The
current service cost for the financial year ending 31 March20X2 is ₹ 5,10,000. An interest rate of 5% is to
be applied to the plan assets and obligations.The fair value of the planʼs assets at 31 March 20X2 was ₹
23,80,000, and the present valueof the defined benefit obligation was ₹ 27,20,000. Provide a
reconciliation from the opening balance to the closing balance for Plan assets and Defined benefit
obligation. Also show how much amount should be recognised in the statement of profit and loss, other
comprehensive income and balance sheet? [SM 2021, TYK-9]
Ans.
Reconciliation of Plan assets and Defined benefit obligation
Plan Assets Defined benefit obligation
₹ ₹
Fair value/present value as at 1st April 20X1 20,40,000 21,25,000
Interest @ 5% 1,02,000 1,06,250
Current service cost 5,10,000
Contributions received 4,25,000 -
Benefits paid (2,55,000) (2,55,000)
Return on gain (assets) (balancing figure) 68,000 -
Actuarial Loss (balancing figure) - 2,33,750
Closing balance as at March 31,20X2 23,80,000 27,20,000
In the Statement of Profit and loss, the following will be recognised:

₹
Current service cost 5,10,000
Net interest on net defined liability (₹ 1,06,250 ” ₹ 1,02,000) 4,250
Defined benefit re-measurements recognised in Other Comprehensive Income:
₹
Loss on defined benefit obligation (2,33,750)
Gain on plan assets 68,000
(1,65,750)
In the Balance sheet, the following will be recognised :
₹
Net defined liability (₹ 27,20,000 ” ₹ 23,80,000) 3,40,000
Ind AS 37
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
SM 1. ABC Limited is an automobile component manufacturer. The automobile manufacturer has specified a
delivery schedule, non-adherence to which will entail a penalty. As on31st March, 20X1, the
reporting date, the manufacturer has a delivery scheduled for June20X2. However, the manufacturer is
aware that he will not be able to meet the delivery schedule in June 20X2.
Determine whether the entity has a present obligation as at 31st March, 20X1, requiring recognition of
provision. [SM 2021, Ill.-1]
Ans.
In this case, there is no present obligation arising out of a past event as the goods are scheduled for
delivery in June 20X2 and there is no delay as at 31st March, 20X1. Hence, there is no present obligation
to pay the penalty in the current year. Therefore, there is no present obligation torecognise the
provision.
SM 2. ABC Ltd. has an obligation to restore the seabed for the damage it has caused in the past. It has to pay `
10,00,000 cash on 31st March 20X3 relating to this liability. ABC Ltd.’s management considers that 5%
is an appropriate discount rate. The time value of money is considered to be material.
Calculate the amount to be provided for at 31st March 20X1 for the costs of restoring the seabed.
[SM 2021, Ill.-8]
Ans.
Discounting factor of 5% for 2nd year as on 31st March 20X1 = (1/1.05)2 = 0.907
The present value of the provision as on 31st March 20X1 is= ` 10,00,000 x 0.907 = ` 9,07,000
The amount of increase in the provision resulting from unwinding of discounting to reflect the passage
of time should be included as an element of borrowing cost in determining the profit or loss for the
year.
The provision should be initially recognised at ` 9,07,000 which is the present value of` 10,00,000
discounted at 5% for two years. At the end of year 1 i.e. 31st March 20X2, the provision increases to `
9,52,350, and the difference of ` 45,350 is recognised as borrowing cost. Similarly, for the year ending
31st March 20X3, the provision will increase to 10,00,000 and the increase being recognised as
borrowing cost. Consequently, at the end of year 2 the amount of provision will be equal to the amount
due, i.e., ` 10,00,000.
Note: There may be some difference in amount due to approximation (limiting discounting factor to 3
place decimal), which can be overcome either by full scale calculation or adjustment at the end.
SM 3. U Ltd. is a large conglomerate with a number of subsidiaries. It is preparing consolidated financial

statements as on 31st March 20X2 as per the notified Ind AS. The financial statements are due to be
approved for issue on 15th May 20X2. Following are a few 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 20X2, the board of directors of U Ltd. decided to discontinue the business of G Ltd. from 30th
April 20X2. They made a public announcement of their decision on 15th February 20X2.
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 20X2. U Ltd. would collect any amounts still owed by G
Ltd.’s customers after 31st May 20X2. 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 ` 60 lakhs. The actual termination payments totalling to ` 520 lakhs
were made in full on 15th May 20X2. As per latest estimates made on 15th May 20X2, the total
relocation cost is ` 63 lakhs.
 G Ltd. had taken a property on operating lease, which was expiring on 31st March 20X6.The present
value of the future lease rentals (using an appropriate discount rate) is` 430 lakhs. On 15th May
20X2, G Ltd. made a payment to the lessor of ` 410 lakhs in return for early termination of the lease.
The loss after tax of G Ltd. for the year ended 31st March 20X2 was ` 400 lakhs. G Ltd. made further
operating losses totalling ` 60 lakhs till 30th April 20X2.
What are the provisions that the Company is required to make as per lnd AS 37?
[SM 2021, TYK-4]
Ans.
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 20X2 and therefore, would be
treated as discontinued operation for the year ending 31st March 20X3. It does not meet the criteria for
held for sale since the company is terminating its business and does not hold these for sale.
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:
(a) an entity has a detailed formal plan for the restructuring
(b) 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. from30th April 20X2.
They have made a formal announcement on 15th February 20X2, 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 ` 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 ` 410 lakhs.
Further operating losses relate to future events and do not form a part of the closure provision.
Therefore, the total provision required = ` 520 lakhs + ` 410 lakhs = ` 930 lakhs
SM 4. A company manufacturing and supplying process control equipment is entitled to duty draw back if it
exceeds its turnover above a specified limit. To claim duty drawback, the company needs to file
application within 15 days of meeting the specified turnover. If application is not filed within stipulated
time, the Department has discretionary power of giving duty draw back credit. For the year 20X1-20X2
the company has exceeded the specified limit of turnover by the end of the reporting period. However,
duty drawback can be claimed on filing of application within the stipulated time or on discretion of
the Department if filing of application is late. The application for duty drawback is filed on April 20,
20X2, which is after the stipulated time of 15 days of meeting the turnover condition. Duty drawback
has been credited by the Department on June 28, 20X2 and financial statements have been approved by
the Board of Directors of the company on July 26, 20X2. What would be the treatment of duty
drawback credit as per the given information? [SM 2021, TYK-5]
Ans.
In the instant case, the condition of exceeding the specified turnover was met at the end of the
reporting period and the company was entitled for the duty drawback. However, the application for the
same has been filed after the stipulated time. Therefore, credit of duty drawback was discretionary in
the hands of the Department. Since the claim was to be accrued only after filing of application, its
accrual will be considered in the year 20X2-20X3 only.
Accordingly, the duty drawback credit is a contingent asset as at the end of the reporting period 20X1-
20X2, which will be realised when the Department credits the same.
As per para 35 of Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, contingent
assets are assessed continually to ensure that developments are appropriately reflected in the financial
statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset
and the related income are recognised in the financial statements of the period in which the change
occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent asset.
In accordance with the above, the duty drawback credit which was contingent asset for the F.Y. 20X1-
20X2 should be recognised as asset and related income should be recognized in the reporting period in
which the change occurs. i.e., in the period in which realisation becomes virtually certain, i.e., F.Y. 20X2-
20X3.
SM 5. Entity XYZ entered into a contract to supply 1000 television sets for ` 2 million. An increase in the cost
of inputs has resulted into an increase in the cost of sales to ` 2.5 million. The penalty for non-
performance of the contract is expected to be ` 0.25 million. Is the contract onerous and how much
provision in this regard is required? [SM 2021, TYK-6]
Ans.
Ind AS 37 ‚Provisions, Contingent Liabilities and Contingent Assets‛ 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.
Paragraph 68 of Ind AS 37 states that the unavoidable costs under a contract reflect the least net cost of
exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or
penalties arising from failure to fulfill it.
In the instant case, cost of fulfilling the contract is ` 0.5 million (` 2.5 million ” ` 2 million)and cost of
exiting from the contract by paying penalty is ` 0.25 million.
In accordance with the above reproduced paragraph, it is an onerous contract as cost of meeting the
contract exceeds the economic benefits.
Therefore, the provision should be recognised at the best estimate of the unavoidable cost, which is
lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it, i.e., at
` 0.25 million (lower of ` 0.25 million and ` 0.5 million).
SM 6. Marico has an obligation to restore environmental damage in the area surrounding its factory.Expert
advice indicates that the restoration will be carried out in two distinct phases; the first phase requiring
expenditure of ` 2 million to remove the contaminated soil from the area and the second phase,
commencing three years later from the end of first phase, to replant thearea with suitable trees and
vegetation. The estimated cost of replanting is ` 3.5 million. Marico uses a cost of capital (before
taxation) of 10% and the expenditure, when incurred, will attract tax relief at the company’s marginal
tax rate of 30%. Marico has not recognised any provision for such costs in the past and today’s date is
31 March 20X2. The first phase of the clean up will commence in a few months time and will be
completed on 31 March 20X3 when the first payment of ` 2 million will be made. Phase 2 costs will be
paid three years later from the end of first phase. Calculate the amount to be provided at 31 March
20X2 for the restoration costs. [SM 2021, TYK-7]
Ans.
Year Cash Flow 10% Discount factor Present Value
20X2-20X3 20,00,000 0.909 18,18,000
20X5-20X6 35,00,000 0.683 23,90,500
Provision required at 31 March 20X2 42,08,500
The provision is calculated using the pre-tax costs and a pre-tax cost of capital. The fact that the
eventual payment will attract tax relief will be reflected in the recognition of a deferred tax asset for
the deductible temporary difference (assuming that the recognition criteria for deferred tax assets are
met.)
Ind AS 12
INCOME TAXES
SM 1. The directors of H wish to recognise a material deferred tax asset in relation to ` 250 Cr of unused
trading losses which have accumulated as at 31st March 20X1. H has budgeted profits for ` 80 Cr for
the year ended 31st March 20X2. The directors have forecast that profits will grow by 20% each year
thereafter. However, the improvement in trading results may occur after the next couple of years to
come at the position of breakeven. The market is currently depressed and sales orders are at a lower
level for the first quarter of 20X2 than they were for the same period in any of the previous five years.
H operates under a tax jurisdiction which allows for trading losses to be only carried forward for a
maximum of two years.
Analyse whether a deferred tax asset can be recognized in the financial statements of H for the year
ended 31st March 20X1? [SM 2021, Ill.-1]
Ans.
In relation to unused trading losses, the carrying amount is zero since the losses have not yet been
recognised in the financial statements of H. A potential deferred tax asset does arise but the
determination of the tax base is more problematic.
The tax base of an asset is the amount which will be deductible against taxable economic benefits from
recovering the carrying amount of the asset. Where recovery of an asset will have no tax consequences,
the tax base is equal to the carrying amount. H operates under a tax jurisdiction which only allows losses
to be carried forward for two years. The maximum the tax base could be is therefore equal to the
amount of unused losses for years 20X0 and 20X1 since these only are available to be deducted from
future profits. The tax base though needs to be restricted to the extent that there is a probability of
sufficient future profits to offset the trading losses. The directors of H should base their forecast of the
future profitability on reasonable and supportable assumptions. There appears to be evidence that this
is not the case.
H has accumulated trading losses and there is little evidence that there will be an improvement in
trading results within the next couple of years. The market is depressed and sales orders for the first
quarter of 20X2 are below levels in any of the previous five years.
The forecast profitability for 20X2 and subsequent growth rate therefore appear to be unrealistically
optimistic.
Given that losses can only be carried forward for a maximum of two years, it is unlikely that any deferred
tax asset should be recognised.
Hence, the contention of directors to recognized deferred tax assets in relation to `250 crores is not
correct.
SM 2. On 1st April 20X1, S Ltd. leased a machine over a 5 year period. The present value of lease liability is `
120 Cr (discount rate of 8%) and is recognized as lease liability and corresponding Right of Use (RoU)
Asset on the same date. The RoU Asset is depreciated under straight line method over the5 years. The
annual lease rentals are ` 30 Cr payable starting 31st March 20X2. The tax law permitstax deduction on
the basis of payment of rent.
Assuming tax rate of 30%, you are required to explain the deferred tax consequences for the above
transaction for the year ended 31st March 20X2. [SM 2021, Ill.-2]
Ans.
A temporary difference effectively arises between the value of the machine for accounting purposes and
the amount of lease liability, since the rent payment is eligible for tax deduction.
Tax base of the machine is nil as the amount is not eligible for deduction for tax purposes.
Tax base of the lease liability is nil as it is measured at carrying amount less any future tax deductible
amount
Recognition of deferred tax on 31st March 20X2:

Carrying amount in balance sheet
RoU Asset (120 Cr ” 24 Cr (Depreciation)) ` 96.00 Dr
Lease Liability (120 Cr + 9.60 Cr (120 Cr x 8%) - 30 Cr) ` 99.60 Cr
Net Amount ` 3.60 Cr
Tax Base ` 0.00 Cr
Temporary Difference (deductible) ` 3.60 Cr
Deferred Tax asset to be recognized (` 3.60 Cr x 30%) ` 1.08 Cr
SM 3. On 1 April 20X1, A Ltd. acquired 12 Cr shares (representing 80% stake) in B Ltd. by means of a cash
payment of ` 25 Cr. It is the group policy to value the non-controlling interest in subsidiaries at the date
of acquisition at fair value. The market value of an equity share in B Ltd. at 1 April 20X1 can be used for
this purpose. On 1 April 20X1, the market value of a B Ltd. share was ` 2.00
On 1 April 20X1, the individual financial statements of B Ltd. showed the net assets at` 23 Cr.
The directors of A Ltd. carried out a fair value exercise to measure the identifiable assets and liabilities of
B Ltd. at 1 April 20X1. The following matters emerged:
 Property having a carrying value of ` 15 Cr at 1 April 20X1 had an estimated market value of ` 18 Cr
at that date.
 Plant and equipment having a carrying value of ` 1 Cr at 1 April 20X1 had an estimated market value
of ` 13 Cr at that date.
 Inventory in the books of B Ltd. is shown at a cost of ` 2.50 Cr. The fair value of the inventory on the
acquisition date is ` 3 Cr.
The fair value adjustments have not been reflected in the individual financial statements of B Ltd. In the
consolidated financial statements, the fair value adjustments will be regarded as temporary differences
for the purposes of computing deferred tax. The rate of deferred tax to apply to temporary differences
is 20%.
Calculate the deferred tax impact on above and calculate the goodwill arising on acquisition of B Ltd.
[SM 2021, Ill.-3]
Ans.
Purchase Consideration: ` 25 Cr
Non-Controlling Interest [{(12 Cr x (20% / 80%)} x ` 2 per share] ` 6 Cr
Computation of Net Assets of B Ltd.
As per books ` 23.00 Cr
Add: Fair value differences not recognized in books of B Ltd.:
Property (18 Cr ” 15 Cr) ` 3.00 Cr
Plant and Equipment (13 Cr ” 11 Cr) ` 2.00 Cr
Inventory (3 Cr ” 2.5 Cr) ` 0.50 Cr
` 28.5 Cr
Less: Deferred tax liability on fair value difference @ 20%
[(3 Cr + 2 Cr + 0.50 Cr) x 20%] (` 1.10 Cr)
Total Net Assets at Fair Value ` 27.40 Cr
Computation of Goodwill:
Purchase Consideration ` 25.00 Cr
Add: Non-Controlling Interest ` 6.00 Cr
` 31.00 Cr
Less: Net Assets at Fair Value (` 27.40 Cr)
Goodwill on acquisition date ` 3.60 Cr
SM 4. On 1st April 20X1, P Ltd. had granted 1 Cr share options worth ` 4 Cr subject to a two-year vesting
period. The income tax law permits a tax deduction at the exercise date of the intrinsic value of the
options. The intrinsic value of the options at 31st March 20X2 was ` 1.60 Cr and at 31st March 20X3 was
` 4.60 Cr. The increase in the fair value of the options on 31st March 20X3 was not foreseeable at 31st
March 20X2. The options were exercised at 31st March 20X3.
Give the accounting for the above transaction for deferred tax for period ending 31st March, 20X2 and
31st March, 20X3. Assume that there are sufficient taxable profits available in future against any
deferred tax assets. Tax rate of 30% is applicable to P Ltd. [SM 2021, Ill.-4]
Ans.
On 31st March 20X2:
The tax benefit is calculated as under:
Carrying amount of Share based payment ` 0.00 Cr
Tax Base of Share based payment (` 1.60 Cr x ½) ` 0.80 Cr
Temporary Difference (Carrying amount ” tax base) ` 0.80 Cr
Deferred Tax Asset recognized (Temporary Difference x Tax rate)
(0.80 Cr x 30%) ` 0.24 Cr
Journal Entry for above:

Deferred Tax Asset Dr.` 0.24 Cr
To Tax Expense ` 0.24 Cr
(Being DTA recognized on equity option)
On 31st March 20X3:

The options have been exercised and a current tax benefit will be available to the entity on the basis of
intrinsic value of ` 4.60 Cr. Initially recognized deferred tax asset will no longer be required.
The accounting entry will be done as under:

Tax Expense Dr ` 0.24 Cr
To Deferred Tax Asset ` 0.24 Cr
(Being DTA reversed on the exercise of the option)
SM 5. A’s Ltd. profit before tax according to Ind AS for Year 20X1-20X2 is ` 100 thousand and taxable profit for
year 20X1-20X2 is ` 104 thousand. The difference between these amounts arose as follows:
1. On 1st February, 20X2, it acquired a machine for ` 120 thousand. Depreciation is charged on the
machine on a monthly basis for accounting purpose. Under the tax law, the machine will be
depreciated for 6 months. The machine’s useful life is 10 years according to Ind AS as well as for
tax purposes.
2. In the year 20X1-20X2, expenses of ` 8 thousand were incurred for charitable donations.These
are not deductible for tax purposes.
Prepare necessary entries as at 31st March 20X2, taking current and deferred tax into account. The tax
rate is 25%.
Also prepare the tax reconciliation in absolute numbers as well as the tax rate reconciliation.
[SM 2021, Ill.-5]
Ans.
Current tax= Taxable profit x Tax rate = ` 104 thousand x 25% = ` 26 thousand.
Computation of Taxable Profit:
ìn thousand
Accounting profit 100
Add: Donation not deductible 8
Less: Excess Depreciation (6-2) Total Taxable profit (4)
104
ìn thousand ìn thousand

Profit & loss A/c Dr. 26
To Current Tax 26
Deferred tax:
Machine’s carrying amount according to Ind AS is `118 thousand (`120 thousand ” `2 thousand)
Machine’s carrying amount for taxation purpose = `114 thousand (`120 thousand ” `6 thousand)
Deferred Tax Liability = `4 thousand x 25%
ìn thousand
Profit & loss A/c Dr. 1
To Deferred Tax Liability 1
Tax reconciliation in absolute numbers:

ìn thousand
Profit before tax according to Ind AS 100
Applicable tax rate @ 25%
Tax 25
Expenses not deductible for tax purposes (`8 thousand x 25%) 2
Tax expense (Current and deferred) 27
Tax rate reconciliation

Applicable tax rate 25%
Expenses not deductible for tax purposes 2%
Average effective tax rate 27%
SM 6. A Ltd prepares financial statements to 31 March each year. The rate of income tax applicable to A Ltd is
20%. The following information relates to transactions, assets and liabilities of A Ltd during the year
ended 31 March 20X2:
(i) A Ltd has a 40% shareholding in L Ltd. A Ltd purchased this shareholding for ` 45 Cr. The
shareholding gives A Ltd significant influence over L Ltd but not control and therefore A Ltd.
accounts for its interest in L Ltd using the equity method. The equity method carrying value of A
Ltd’s investment in L Ltd was ` 70 Cr on 31 March 20X1 and ` 75 Cr on 31 March 20X2. In the tax
jurisdiction in which A Ltd operates, profits recognised under the equity method are taxed if and
when they are distributed as a dividend or the relevant investment is disposed of.
(ii) A Ltd. measures its head office building using the revaluation model. The building is revalued
every year on 31 March. On 31 March 20X1, carrying value of the building (after revaluation) was
` 40 Cr and its tax base was ` 22 Cr. During the year ended 31 March 20X2, A Ltd charged
depreciation in its statement of profit or loss of ` 2 Cr and claimed a tax deduction for tax
depreciation of ` 1.25 Cr. On 31 March 20X2, the building was revalued to ` 45 Cr. In the tax
jurisdiction in which A Ltd operates, revaluation of property, plant and equipment does not
affect taxable income at the time of revaluation.
Basis the above information, you are required to compute:
(a) The deferred tax liability of A Ltd at 31 March 20X2
(b) The charge or credit to both profit or loss and other comprehensive income relating to deferred tax
for the year ended 31 March 20X2 [SM 2021, Ill.-8]
Ans.
(A) Deferred Tax Liability as at 31st March 20X2
Investment in L Ltd:
Carrying Amount = ` 75 Cr
Tax base = ` 45 Cr (Purchase cost)
Temporary Difference = ` 30 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as a
taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of ` 6 Cr is
recognized:
Head office building

Carrying Amount = ` 45 Cr (Revalued amount on 31st of March 20X2)
Tax base = ` 20.75 Cr (22 Cr ” 1.25 Cr)
Temporary Difference = ` 24.25 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as a
taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of ` 4.85 Cr is
created.
Total Deferred Tax Liability ` 6 Cr + ` 4.85 Cr = ` 10.85 Cr
(B) Charge to Statement of Profit or Loss for the year ended 31st March 20X2: Investment in L Ltd.
Particulars Carrying Tax Base Temporary
amount Difference
Opening Balance (1st April 20X1) ` 70 Cr ` 45 Cr ` 25 Cr
Closing Balance (31st March 20X2) ` 75 Cr ` 45 Cr ` 30 Cr
Net Change ` 5 Cr
Increase in Deferred Tax Liability (20% tax rate) ` 1 Cr
Considering the increase in the value of investment arising through Statement of Profit or
Loss,the accounting for the increase in deferred tax liability is made as under:
Tax expense (Profit or Loss Statement) Dr ` 1 Cr
To Deferred Tax Liability ` 1 Cr
(Being increase in deferred tax liability recognized)
Head Office Building:

The deferred tax liability at 31 March 20X1 is ` 3.6 Cr (20% x {` 40 Cr ” ` 22 Cr}).
At 31 March 20X2, prior to revaluation, the carrying amount of the property is ` 38 Cr and its tax base is
` 20.75 Cr (` 22 Cr ” ` 1.25 Cr). The deferred tax liability at this point is `3.45 Cr (20% x {` 38 Cr ” `
20.75 Cr}).
The reduction in this liability is ` 0.15 Cr (` 3.6 Cr ” ` 3.45 Cr). This would be credited to income tax
expense in arriving at profit or loss.
Post revaluation, the carrying value of the building becomes ` 45 Cr and the tax base stays the same.
Therefore, the new deferred tax liability is ` 4.85 Cr (20% x (` 45 Cr ” ` 20.75Cr)). The increase in the
deferred tax liability of ` 1.4 Cr (` 4.85 Cr ” ` 3.45 Cr) is charged to other comprehensive income.
SM 7. K Ltd prepares consolidated financial statements to 31st March each year. During the year ended31st
March 20X2, K Ltd entered into the following transactions:
(a) On 1st April 20X1, K Ltd purchased an equity investment for ` 2,00,000. The investment was
designated as fair value through other comprehensive income. On 31st March 20X2, the fair
value of the investment was ` 2,40,000. In the tax jurisdiction in which K Ltd operates,
unrealised gains and losses arising on the revaluation of investments of this nature are not
taxable unless the investment is sold. K Ltd has no intention of selling the investment in the
foreseeable future.
(b) On 1st August 20X1, K Ltd sold products to A Ltd, a wholly owned subsidiary operating in the
same tax jurisdiction as K Ltd, for ` 80,000. The goods had cost to K Ltd for ` 64,000. By31st
March 20X2, A Ltd had sold 40% of these goods, selling the remaining during next year.
(c) On 31st October 20X1, K Ltd received ` 2,00,000 from a customer. This payment was in respect
of services to be provided by K Ltd from 1st November 20X1 to 31st July 20X2. K Ltd recognised
revenue of ` 1,20,000 in respect of this transaction in the year ended 31st March 20X2 and will
recognise the remainder in the year ended 31st March 20X3. Under the tax jurisdiction in which K
Ltd operates, ` 2,00,000 received on 31st October 20X1 was included in the taxable profits of K
Ltd for the year ended 31st March 20X2.
Explain and show how the tax consequences (current and deferred) of the three transactions would be
reported in its statement of profit or loss and other comprehensive income for the year ended31st
March 20X2. Assume tax rate to be 25%. [SM 2021, Ill.-9]
Ans.
(a) Because the unrealised gain on revaluation of the equity investment is not taxable until sold,
there are no current tax consequences. The tax base of the investment is ` 2,00,000. The
revaluation creates a taxable temporary difference of ` 40,000 (` 2,40,000 ” ` 2,00,000).
This creates a deferred tax liability of ` 10,000 (` 40,000 x 25%). The liability would be non-
current. The fact that there is no intention to dispose of the investment does not affect the
accounting treatment. Because the unrealised gain is reported in other comprehensive income,
the related deferred tax expense is also reported in other comprehensive income.
(b) When K Ltd sold the products to A Ltd, K Ltd would have generated a taxable profit of ` 16,000
(` 80,000 ” ` 64,000). This would have created a current tax liability for K Ltd and the group of `
4,000 (` 16,000 x 25%). This liability would be shown as a current liability and charged as an
expense in arriving at profit or loss for the period.
In the consolidated financial statements the carrying value of the unsold inventory would be`
38,400 (` 64,000 x 60%). The tax base of the unsold inventory would be ` 48,000 (`
80,000 x 60%). In the consolidated financial statements there would be a deductible temporary
difference of ` 9,600 (` 38,400 ” ` 48,000) and a potential deferred tax asset of` 2,400 (` 9,600 x
25%). This would be recognised as a deferred tax asset since A Ltd is expected to generate
sufficient taxable profits against which to utilise the deductible temporary difference. The
resulting credit would reduce consolidated deferred tax expense in arriving at profit or loss.
(c) The receipt of revenue in advance on 1st October 20X1 would create a current tax liability of`
50,000 (` 200,000 x 25%) as at 31st March 20X2. The carrying value of the revenue received in
advance at 31st March 20X2 is ` 80,000 (` 200,000 ” ` 120,000). Its tax base is nil. The deductible
temporary difference of ` 80,000 would create a deferred tax asset of ` 20,000 (`80,000 x 25%).
The asset can be recognised because K Ltd has sufficient taxable profitsagainst which to utilise
the deductible temporary difference.
SM 8. 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:
(i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of` 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.
(ii) 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 ` 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 closureactually takes place. In the year
ended 31st March 2019, X Ltd. expects to make taxable profits which are well in excess of `
20,00,000. On 31st March, 2018, X Ltd. had taxable temporary differences from other sources
which were greater than ` 20,00,000.
(iii) During the year ended 31st 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 `
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 31st March,2018.
(iv) On 1st April, 2017, X Ltd. borrowed ` 1,00,00,000. The cost to X Ltd. of arranging the borrowing
was ` 2,00,000 and this cost qualified for a tax deduction on 1st April, 2017. The loan was for a
three-year period. No interest was payable on the loan but the amount repayable on 31st March,
2020 will be ` 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 ` 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 31st March, 2018 as per Ind AS. Assume the rate of
corporate income tax is 20%. [SM 2021, TYK-7]
Ans.
(i) The tax loss creates a potential deferred tax asset for the group since its carrying value is nil and
its tax base is ` 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.
(ii) The provision creates a potential deferred tax asset for the group since its carrying value is `
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 ` 20,00,000 in the year to 31st March, 2019.
The amount of the deferred tax asset will be ` 4,00,000 (` 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.
(iii) The development costs have a carrying value of ` 15,20,000 (` 16,00,000 ” (` 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 ` 3,04,000 (` 15,20,000 x 20%). All deferred tax liabilities are
shown as non-current.
(iv) The carrying value of the loan at 31st March, 2018 is ` 1,07,80,000 (` 1,00,00,000 ”` 2,00,000 + (`
98,00,000 x 10%)).
The tax base of the loan is ` 1,00,00,000.
This creates a deductible temporary difference of ` 7,80,000 (` 1,07,80,000 ”` 1,00,00,000)
and a potential deferred tax asset of ` 1,56,000 (` 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.
SM 9. PQR Ltd., a manufacturing company, prepares consolidated financial statements to31st March
each year. During the year ended 31st March, 2018, the following events affected the tax position of
the group:
 QPR Ltd., a wholly owned subsidiary of PQR Ltd., incurred a loss adjusted for tax purposes of `
30,00,000. QPR Ltd. is unable to utilise this loss against previous tax liabilities. Income-tax Act does
not allow QPR Ltd. to transfer the tax loss to other group companies. However, it allows QPR Ltd. to
carry the loss forward and utilise it against company’s future taxable profits. The directors of PQR
Ltd. do not consider that QPR Ltd. will make taxable profits in the foreseeable future.
 During the year ended 31st March, 2018, PQR Ltd. capitalised development costs which satisfied the
criteria as per Ind AS 38 ‘Intangible Assets’. The total amount capitalised was ` 16,00,000. The
development project began to generate economic benefits for PQR Ltd. from 1st January, 2018.
The directors of PQR 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 31st March, 2018.
 On 1st April, 2017, PQR Ltd. borrowed ` 1,00,00,000. The cost to PQR Ltd. of arranging the
borrowing was ` 2,00,000 and this cost qualified for a tax deduction on 1st April 2017. The loan was
for a three-year period. No interest was payable on the loan but the amount repayable on 31st March
2020 will be ` 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 ` 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 PQR Ltd. group at 31st March, 2018 as per Ind AS. The rate of corporate
income tax is 30%. [SM 2021, TYK-8]
Ans.
Impact on consolidated balance sheet of PQR Ltd. group at 31st March, 2018
 The tax loss creates a potential deferred tax asset for the PQR Ltd. group since its carrying value is
nil and its tax base is ` 30,00,000. However, no deferred tax asset can berecognised because there is
no prospect of being able to reduce tax liabilities in the foreseeable future as no taxable profits are
anticipated.
 The development costs have a carrying value of ` 15,20,000 (` 16,00,000 ” (` 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 ` 4,56,000 (` 15,20,000 x 30%). All deferred tax liabilities
are shown as non-current.
 The carrying value of the loan at 31st March, 2018 is ` 1,07,80,000 (` 1,00,00,000 ”` 200,000 + (`
98,00,000 x 10%)). The tax base of the loan is 1,00,00,000. This creates a deductible temporary
difference of ` 7,80,000 and a potential deferred tax asset of` 2,34,000 (` 7,80,000 x 30%).
SM 10. An entity is finalising its financial statements for the year ended 31st March, 20X2. Before 31st March,
20X2, the government announced that the tax rate was to be amended from 40 per cent to 45 per cent
of taxable profit from 30th June, 20X2.
The legislation to amend the tax rate has not yet been approved by the legislature. However, the
government has a significant majority and it is usual, in the tax jurisdiction concerned, to regard an
announcement of a change in the tax rate as having the substantive effect of actual enactment (i.e. it is
substantively enacted).
After performing the income tax calculations at the rate of 40 per cent, the entity has the following
deferred tax asset and deferred tax liability balances:
Deferred tax asset ` 80,000
Deferred tax liability ` 60,000
Of the deferred tax asset balance, ` 28,000 related to a temporary difference. This deferred tax asset
had previously been recognised in OCI and accumulated in equity as a revaluation surplus.
The entity reviewed the carrying amount of the asset in accordance with para 56 of Ind AS 12 and
determined that it was probable that sufficient taxable profit to allow utilisation of the deferred tax
asset would be available in the future.
Show the revised amount of Deferred tax asset & Deferred tax liability and present the necessary journal
entries. [SM 2021, TYK-9]
Ans.
Calculation of Deductible temporary differences:
Deferred tax asset = ` 80,000

Existing tax rate = 40%
Deductible temporary differences = 80,000/40%
= ` 2,00,000
Calculation of Taxable temporary differences:
Deferred tax liability = ` 60,000
Existing tax rate = 40%
Deductible temporary differences = 60,000 / 40%
= ` 1,50,000
Of the total deferred tax asset balance of ` 80,000, ` 28,000 is recognized in OCI
Hence, Deferred tax asset balance of Profit & Loss is ` 80,000 - ` 28,000 = ` 52,000
Deductible temporary difference recognized in Profit & Loss is ` 1,30,000 (52,000 / 40%) Deductible
temporary difference recognized in OCI is ` 70,000 (28,000 / 40%)
The adjusted balances of the deferred tax accounts under the new tax rate are:
Deferred tax asset `

Previously credited to OCI-equity `70,000 x 0.45 31,500
Previously recognised as Income `1,30,000 x 0.45 58,500
90,000
Deferred tax liability
Previously recognized as expense `1,50,000 x 0.45 67,500
The net adjustment to deferred tax expense is a reduction of ` 2,500. Of this amount,` 3,500 is
recognised in OCl and ` 1,000 is charged to P&L.
The amounts are calculated as follows:

Carrying Carrying Increase
amount at amount at (decrease) in
45% 40% deferred tax
Deferred tax assets expense
Previously credited to OCI-equity 31,500 28,000 (3,500)
Previously recognised as Income 58,500 52,000 (6,500)
90,000 80,000 (10,000)
Deferred tax liability
Previously recognized as expense 67,500 60,000 7,500
Net adjustment (2,500)
An alternative method of calculation is: `

DTA shown in OCI ` 70,000 x (0.45 - 0.40) 3,500
DTA shown in Profit or Loss ` 1,30,000 x (0.45-0.40) 6,500
DTL shown in Profit or Loss ` 1,50,000 x (0.45 -0.40) 7,500
Journal Entries
` `
Deferred tax asset 3,500
OCI ”revaluation surplus 3,500
Deferred tax asset 6,500
Deferred tax expense 6,500
Deferred tax expense 7,500
Deferred tax liability 7,500
Alternatively, a combined journal entry may be passed as follows:
` `
Deferred tax asset Dr. 10,000
Deferred tax expense Dr. 1,000
To OCI ”revaluation surplus 3,500
To Deferred tax liability 7,500
Ind AS 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
SM 1. M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical companies and non-
pharmaceutical 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, 20X1. The cost of these
bottles was ` 830 lacs in the books of M Ltd at the time of sale. At the year-end i.e.31st March, 20X1, all
these bottles were lying as closing stock with G Ltd.
Euro is the functional currency of G Ltd. while Indian Rupee is the functional currency of M Ltd. Following
additional information is available:
Exchange rate on 1st February, 20X1 1 Euro = ` 83
Exchange rate on 31st March, 20X1 1 Euro = ` 85
Provide the accounting treatment for the above in books of M Ltd. and G Ltd. Also show its impact on
consolidated financial statements. Support your answer by Journal entries, wherever necessary, in the
books of M Ltd. [SM 2021, Ill.-8 Modified]
Ans.
Accounting treatment in the books of M Ltd (Functional Currency INR)
M Ltd will recognize sales of ` 996 lacs (12 lacs Euro x 83) Profit on sale of inventory = 996 lacs ” 830 lacs
= ` 166 lacs.
On balance sheet date receivable from G Ltd. will be translated at closing rate i.e. 1 Euro = ` 85.
Therefore, unrealised forex gain will be recorded in standalone profit and loss of ` 24 lacs. (i.e. (85 - 83) x
12 Lacs)
Journal Entries
`(in Lacs) `(in Lacs)
G Ltd. A/c Dr. 996
To Sales 996
(Being revenue recorded on initial recognition)
G Ltd. A/c Dr. 24
To Foreign exchange difference (unrealised) 24
(Being foreign exchange difference recorded at year end)
Accounting treatment in the books of G Ltd (Functional currency EURO)

G Ltd will recognize inventory on 1st February, 20X1 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 recorded at lower of cost or NRV.
Euro (in lacs) Rate `(in lacs)
Cost 12 83 996
NRV (Assumed Same) 12 85 1020
Therefore, no write off is required.

The amount of closing stock includes two components”
 Cost of inventory for `830 lacs; and
 Profit element of `166 lacs; and
At the time of consolidation, the two elements amounting to `166 lacs will be eliminated from the
closing stock.
Journal Entry
`(in Lacs) `(in Lacs)
Consolidated P&L A/c Dr. 166
To Inventory 166
(Being profit element of intragroup transaction eliminated)
SM 2. On 30th January, 20X1, A Ltd. purchased a machinery for $ 5,000 from USA supplier on credit basis. A
Ltd.’s functional currency is Rupees. The exchange rate on the date of transactionis 1 $ = ` 60. The fair
value of the machinery determined on 31st March, 20X1 is $ 5,500.
The exchange rate on 31st March, 20X1 is 1$ = ` 65. The payment to overseas supplier done on 31st
March 20X2 and the exchange rate on 31st March 20X2 is 1$ = ` 67. The fair value of the machinery
remain unchanged for the year ended on 31st March 20X2. Prepare the Journal entries for the year
ended on 31st March 20X1 and year 20X2 according to Ind AS 21. Tax rate is 30% [SM 2021, TYK-4]
Ans.
Journal Entries
(It is assumed that the revaluation method is followed in respect of Plant & Machinery) Purchase of
Machinery on credit basis on 30th January 20X1:
` `
Machinery A/c (5,000 x $ 60) Dr. 3,00,000
To Trade Receivables 3,00,000
(Initial transaction will be recorded at exchange rate on the date of transaction)
Exchange difference arising on translating monetary item on 31st March 20X1:

` `
Profit & Loss A/c [(5,000 x $ 65) ” (5,000 x $ 60)] Dr. 25,000
To Trade Receivables 20,000
Machinery A/c Dr. 30,000
To Revaluation Surplus (OCI) 30,000
[Being Machinery revalued to USD 5,500; (`60 x (USD 5,500 - USD 5,000)]
Machinery A/c Dr. 27,500
To Revaluation Surplus (OCI) 27,500
(BeingMachinerymeasuredattheexchange rate on31-03-20X1
[USD 5,500 x (`65 - `60)]
Revaluation Surplus (OCI) Dr. 17,250
To Deferred Tax Liability 17,250
(DTL created @ of 30% of the total OCI amount)
Exchange difference arising on translating monetary item and settlement of creditors on31st March
20X2:
` `
Trade Receivables A/c (5,000 x $65) Dr. 3,25,000

Profit & loss A/c [(5,000 x ($ 67 -$ 65)] Dr. 10,000
To Bank A/c 3,35,000
Machinery A/c [(5,500 x ($ 67 - $ 65)) Dr. 11,000
To Profit & loss A/c 11,000
SM 3. On 1st January, 2018, P Ltd. purchased a machine for $ 2 lakhs. The functional currency of P Ltd. is
Rupees. At that date the exchange rate was $1= ` 68. P Ltd. is not required to pay for this purchase
until 30th June, 2018. Rupees strengthened against the $ in the three months following purchase and
by 31st March, 2018 the exchange rate was $1 = ` 65. CFO of P Ltd. feels that these exchange
fluctuations wouldn’t affect the financial statements because P Ltd. has an asset and a liability
denominated in rupees. which was initially the same amount. He also feels that P Ltd. depreciates this
machine over four years so the future year-end amounts won’t be the same.
Examine the impact of this transaction on the financial statements of P Ltd. for the year ended 31st
March, 2018 as per Ind AS. [SM 2021, TYK-5]
Ans.
As per Ind AS 21 ‘The Effects of Changes in Foreign Exchange Rates’ the asset and liability would initially
be recognised at the rate of exchange in force at the transaction date ie1st January, 2018. Therefore,
the amount initially recognised would be ` 1,36,00,000 ($ 2,00000 x ` 68).
The liability is a monetary item so it is retranslated using the rate of exchange in force at31st March,
2018. This makes the closing liability of ` 1,30,00,000 ($ 2,00,000 x ` 65).
The loss on re-translation of ` 6,00,000 (` 1,36,00,000 ” ` 1,30,00,000) is recognised in theStatement of
profit or loss.
The machine is a non-monetary asset carried at historical cost. Therefore, it continues to be translated
using the rate of ` 68 to $ 1.
Depreciation of ` 8,50,000 (` 1,36,00,000 x ¼ x 3/12) would be charged to profit or loss for the year
ended 31st March, 2018.
The closing balance in property, plant and equipment would be ` 1,27,50,000 (` 1,36,00,000” ` 8,50,000).
This would be shown as a non-current asset in the statement of financial position.
SM 3. 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 on1st 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 ` 72 per USD and ` 75 per USD respectively.
[SM 2021, TYK-6]
Ans.
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 ` 1,440 million, by translating USD
20 million at the exchange rate on 1st January, 2018 ie` 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` 72 per USD; and
 recognise revenue and a receivable for the remaining USD 30 million, using the exchange rate
on 31st March, 2018 ie` 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.
Ind AS 24
RELATED PARTY DISCLOSURES
SM 1. Associates and subsidiaries
Entity P Limited has a controlling interest in subsidiaries SA Limited and SB Limited and SC
Limited. SC Limited is a subsidiary of SB Limited. P Limited also has significant influence over associates
A1 Limited and A2 Limited. Subsidiary SC Limited has significant influence over associate A3 Limited
Examine related party relationships of various entities. [SM 2021, Ill.-1 Modified]
Ans.
P
Satisfied Associates
SA SB A1 A2
Associate
SC A3
 In Separate Financial Statements of P Limited, SA Limited, SB Limited, SC Limited, A1 Limited,
A2 Limited and A3 Limited are all related parties.
 In the Individual Financial Statements of SA Limited, P Limited, SB Limited, SC Limited, A1 Limited, A2
Limited and A3 Limited are all related parties.
 In the Individual Financial Statements of SB Limited, P Limited, SA Limited, SC Limited, A1 Limited, A2
 In the Individual Financial Statements of SC Limited, P Limited, SA Limited, SB Limited, A1 Limited, A2
 In the Individual Financial Statements of associates A1 Limited, A2 Limited and A3 Limited; P Limited,
SA Limited, SB Limited and SC Limited are related parties.
 A1 Limited, A2 Limited and A3 Limited are not related to each other.
 For Parent’s consolidated financial statements, A1 Limited, A2 Limited and A3 Limited are related to
the Group
SM 2. 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 31st March, 20X2 to the managing director Mr. Y for
approval. Mr. Y, who is not an accountant, had raised following query 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 20X1-20X2. Mr. Y owns 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.
Provide answers to the query raised by the Managing Director Mr. Y as per Ind AS. [SM 2021, TYK-5]
Ans.
Ongoing through the queries raised by the Managing Director Mr. Y, the financial controllerMr. X
explained the notes and reasons for their disclosures as follows:
Related parties are generally characterised 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 Notes 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.
SM 3. 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?
[SM 2021, TYK-6]
Ans.
(a) As per para 18 of Ind AS 24, ‘Related Party Disclosures’, if an entity had related partytransactions
during the periods covered by the financial statements, it shall disclose the nature of the related
party relationship as well as information about thosetransactions and outstanding balances,
including commitments, necessary for users tounderstandthe 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:
(i) a government that has control or joint control of, or significant influence over,
thereporting entity; and
(ii) 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:
(i) transactions with Government Uttar Pradesh State Government; and
(ii) 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:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant, a
qualitative or quantitative indication of their extent.
SM 4. S Ltd., a wholly owned subsidiary of P Ltd is the sole distributor of electricity to consumers in a specified
geographical area. A manufacturing facility of P Ltd is located in the said geographical area and,
accordingly, P Ltd is also a consumer of electricity supplied by S Ltd. The electricity tariffs for the
geographical area are determined by an independent rate-setting authority and are applicable to all
consumers of S Ltd, including P Ltd. Whether the above transaction is required to be disclosed as a
related party transaction as per Ind AS 24, Related Party Disclosures in the financial statements of S
Ltd.? [SM 2021, TYK-7]
Ans.
As per paragraph 9(b)(i) of Ind AS 24, each parent, subsidiary and fellow subsidiary in a‘group’ is related
to the other members of the group. Thus, in the case under discussion, P Ltd is a related party of S Ltd
from the perspective of financial statements of S Ltd.
Paragraph 11 of Ind AS 24 states as follows:
‚In the context of this Standard, the following are not related parties:
(a) two entities simply because they have a director or other member of management personnel in
common or because a member of key management personnel of one entity has significant
influence over the other entity.
(b) two joint venturers simply because they share joint control of a joint venture.
(c) (i) providers of finance,(ii) trade unions, (iii) public utilities, and (iv) departments and agencies of
a government that does not control, jointly control or significantly influence the reporting
entity, simply by virtue of their normal dealings with an entity (even though they may affect the
freedom of action of an entity or participate in its decision-making process).
(d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts
a significant volume of business, simply by virtue of the resulting economic dependence.‛
Being engaged in distribution of electricity, S Ltd is a public utility. Had the only relationship
between S Ltd and P Ltd been that of a supplier and a consumer of electricity, P Ltd would not
have been regarded as a related party of S Ltd. However, as per the facts of the given case, this is
not the only relationship between S Ltd and P Ltd. Apart from being a supplier of electricity to P
Ltd., S Ltd is also a subsidiary of P Ltd; this is a relationship that is covered within the related
party relationships to which the disclosure requirements of the standard apply. In view of the
above, the supply of electricity by S Ltd to P Ltd is a related party transaction that attracts the
disclosure requirements contained in paragraph 18 and other relevant requirements of the
standard. This is notwithstanding the fact that P Ltd is charged the electricity tariffs determined
by an independent rate-setting authority (i.e., the terms of supply to P Ltd are at par with those
applicable to other consumers)
Ind AS 24 does not exempt an entity from disclosing related party transactions merely
because they have been carried out on an arm’s length basis.
Ind AS 33
EARNINGS PER SHARE
SM 1. Assume the following facts for Company XY:

 Income from continuing operations: INR 30,00,000
 Loss from discontinued operations: (INR 36,00,000)
 Net loss: (INR 6,00,000)
 Weighted average Number of shares outstanding 10,00,000
 Incremental common shares outstanding relating to stock options 2,00,000
(a) You are required to calculate the basic and diluted EPS for Company XY from the above
information.
(b) Assume, if in above case, Loss from continued operations is ` 10,00,000 and income from
discontinued operations is ` 36,00,000 calculate the diluted EPS. [SM 2021, Ill.-13]
Ans.
(a) Step 1:
Basic EPS = Profit for the year / Weighted average Number of shares outstanding
Basic EPS (Continued Operations) = Profit from continued operations / Weighted average
Number of shares outstanding
= ` 30,00,000 / 10,00,000 = ` 3.00
Basic Loss per share (Discontinued operations) = Loss from discontinued operations / Weighted
average Number of shares outstanding
= ` (36,00,000) / 10,00,000 = (` 3.60)
Overall Basic Loss per share = (` 6,00,000) / 10,00,000 = ` (0.60) (i)
Step 2: Calculation of Diluted EPS

Diluted EPS =Profit for the year / Adjusted Weighted average Number of shares outstandingEPS
(Continued Operations) = Profit from continued operations / Adjusted Weighted average
Number of shares outstanding
= ` 30,00,000 / 12,00,000 = ` 2.50
Loss per share (Discontinued operations) = Loss from discontinued operations / Adjusted
weighted average number of shares outstanding
= ` (36,00,000) / 12,00,000 = (` 3.00)
Overall Diluted Loss per share = ` 6,00,000 / 12,00,000 = ` (0.50) (ii)
The income from continuing operations is the control number, there is a dilution in basic EPS for
income from continuing operations (reduction of EPS from ` 3.00 to ` 2.50). Therefore, even
though there is an anti-dilution [Loss per share reduced from ` 0.60 (i) to ` 0.50 (ii) above],
diluted loss per share of ` 0.50 is reported.
(b) In case of loss from continuing operations, the potential shares are excluded since including
those shares would result into anti-dilution effect on the control number (loss from continuing
operations). Therefore, the diluted EPS will be calculated as under:
Diluted EPS = Profit for the year / Adjusted weighted average number of shares outstanding
Overall Profit = Loss from continuing operations + Gain from discontinued operations
= ` (10,00,000) + ` 36,00,000
= ` 26,00,000
Weighted average number of shares outstanding = 10,00,000
Diluted EPS = ` 2.60
The dilutive effect of the potential common shares on EPS for income from discontinued
operations and net income would not be reported because of the loss from continuing
operations.
Ind AS 108
OPERATING SEGMENTS
SM 1. The CEO along with other Board members do a review of financial information about various business
segments and take decisions on the basis of discrete information available for these segments and are
correctly identified as Chief Operating Decision Maker (CODM). Review of only revenue information is
done for decision making about those segments by the CODM. As per CODM, many segments require
minimal costs due to centralization of costs. Whether review of only the revenue related information is
sufficient for these segments to be considered as operating segments for the purposes of Ind AS 108
‘Operating Segments’? [SM 2021, Ill.-2]
Ans.
Many entities would be considering the decision making for segments on the basis of revenue growth ”
especially the ones aggressively trying to build a market share. Common examples would be businesses
into technology sector or those creating or launching new products from time to time. For them, the
decision making for different regional segments would need revenue growth and related information for
further investment decision.
The logic given by the CODM is that since many segments require minimal costs (due to centralization of
costs), therefore, revenue-only data is a fair representation of the operating results.
In the above case, review of the information that is based only on revenue data may be appropriate to
consider that the segment meets the definition of an operating segment.
SM 2. CODM of XY Ltd. receives and reviews multiple sets of information when assessing the
businesses’overall performance to take a decision on resources allocation. It receives the information as
under:
 Level 1 Report: Summary report for all 4 regions
 Level 2 Report: Summary report for 20 Sub-regions within those regions
 Level 3 Report: Detailed report for 50 Branches within the sub-regions
What factors and level should be considered for determining an operating segment? [SM 2021, Ill.-4]
Ans.
We need to consider multiple factors (including but not limited to below):
 The process that CODM may use to assess the performance (Key Financial Matrix, KPIs, Ratio etc.);
 Identify the segment managers and their responsibility areas;
 The process of budgeting for resource allocations.
SM 3. XY Ltd. has operations in France, Italy, Germany, UK and India. It wishes to apply aggregation criteria on
geographical basis.
How will the aggregation criteria apply for reporting segments in the given scenario? [SM 2021, Ill.-5]
Ans.
XY Ltd. needs to assess and prove that each country possesses the same economic characteristics.
Factors including exchange control regulations, currency risks and economic conditions are required to
be considered.
Considering above factors, it may be possible to aggregate the results of France, Italy and
Germany (falling within EU region) and results of UK and India may be separately reported (no
aggregation is permitted).
SM 4. T Ltd is engaged in transport sector, running a fleet of buses at different routes. T Ltd has identified
3 operating segments:
 Segment 1: Local Route
 Segment 2: Inter-city Route
 Segment 3: Contract Hiring
The characteristics of each segment are as under:

Segment 1: The local transport authority awards the contract to ply the buses at different routes for
passengers. These contracts are awarded following a competitive tender process; the ticket price paid
by passengers are controlled by the local transport authority. T Ltd would charge the local transport
authority on a per kilometer basis.
Segment 2: T Ltd operates buses from one city to another, prices are set by T Ltd on the basis of services
provided (Deluxe, Luxury or Superior).
Segment 3: T Ltd also leases buses to schools under a long-term arrangement.
While Segment 1 has been showing significant decline in profitability, Segment 2 is performing well in
respect of higher revenues and improved margins. The management of the company is not sure why is
the segment information relevant for users when they should only be concerned about the returns from
overall business. They would like to aggregate the Segment 1 and Segment2 for reporting
under‘Operating Segment’
Required:
Whether it is appropriate to aggregate Segments 1 and 2 with reference to Ind AS 108 ‘Operating
Segments’? and
Discuss, in the above context, whether disclosure of segment information is relevant to an
investor’s appraisal of financial statements? [SM 2021, Ill.-7]
Ans.
Ind AS 108 ‘Operating Segments’ requires operating segments to be aggregated to present a reportable
segment if the segments have similar economic characteristics, and the segments are similar in each of
the following aggregation criteria:
(a) The nature of the products and services
(b) The nature of the production process
(c) The type or class of customer for their products and services
(d) The methods used to distribute their products or provide their services
(e) If applicable, the nature of the regulatory environment
While the products and services are similar, the customers for those products and services are different.
In Segment 1, the decision to award the contract is in the hands of the local authority, which also sets
prices and pays for the services. The company is not exposed to passenger revenue risk, since a contract
is awarded by competitive tender.
On the other hand, in the inter-city segment, the customer determines whether a bus route is
economically viable by choosing whether or not to buy tickets. T Ltd sets the ticket prices but will be
affected by customer behavior or feedback. T Ltd is exposed to passenger revenue-risk, as it sets prices
which customers may or may not choose to pay.
Operating Segment provides information that makes the financial statements more useful to investors.
In making the investment decisions, investors and creditors consider the returns they are likely to make
on their investment. This requires assessment of the amount, timing and uncertainty of the future cash
flows of T Ltd as well as of management's stewardship of T Ltd’s resources. How management derives
profit is therefore relevant information to an investor.
Inappropriately aggregating segments reduces the usefulness of segment disclosures to investors.

Ind AS 108 requires information to be disclosed that is not readily available elsewhere in the financial
statements, therefore it provides additional information which aids an investor's understanding of how
the business operates and is managed.
In T Ltd.’s case, if the segments are aggregated, then the increased profits in segment 2 will hide the
decreased profits in segment 1. However, the fact that profits have sharply declined in segment 1
would be of interest to investors as it may suggest that future cash flows from this segment are at risk.
SM 5. An entity has branches in different parts of the country ” catering to different customers and selling
local made products (a product of one region is not sold in any other region). No region or product
contributes more than 5% to total revenue of the entity.
Discuss how many segments are reportable? [SM 2021, Ill.-9]
Ans.
Under the quantitative threshold, external revenue of reportable segments must be ≥ 75% of total
external revenue of the entity. Considering above case, minimum 15 operating segments need to be
reportable (75% [threshold] / 5% {revenue}).
SM 6. GH Ltd. has four distinct operating segments. The management of GH is concerned as it is unsure on how
common costs be reasonably allocated to different operating segments. They intend to allocate
management charges, interest costs of internal funding, cost of management of properties and pension
costs.
Whether such costs need to conform to the accounting policies as used to prepare the financial
statements? [SM 2021, Ill.-10]
Ans.
Ind AS 108 does not prescribe any specific basis but suggests that a reasonable basis to be used in
allocation of common costs. Here, it may not be reasonable to allocate management charges to most
profitable segment. However, it may be reasonable to charge interest costs of internalfunding on the
basis of actual usage over time, even if majority of funds are used for running a loss-making segment.
A reasonable manner of allocation of above costs could be:

Management Charges: These may be allocated based on Net Assets invested or Revenue earned by the
segments. It needs to be understood if there is an operating segment which is yet to earn revenue, it
would fail to have any costs being allocated.
Interest costs: As mentioned above, these may be allocated on the basis of actual usage and time.
Cost of management of properties: Based on value of property used at each segment.
Pension costs: Based on salary expenses of each segment.
SM 7. X Ltd. has identified 4 operating segments for which revenue data is given below:
External Revenue (`) Internal Revenue (`) Total (`)

Segment A 30,00,000 Nil 30,00,000
Segment B 6,50,000 Nil 6,50,000
Segment C 8,50,000 1,00,000 9,50,000
Segment D 5,00,000 49,00,000 54,00,000
Total Revenue 50,00,000 50,00,000 1,00,00,000
Additional information:
Segment C is a new business unit and management expect this segment to make a significant
contribution to external revenue in coming years.
Which of the segments would be reportable under the criteria identified in Ind AS 108?
[SM 2021, TYK-1 Modified]
Ans.
Threshold amount is ` 10,00,000 (` 1,00,00,000 × 10%).
Segment A exceeds the quantitative threshold (` 30,00,000 > ` 10,00,000) and hence reportable
segment.
Segment D exceeds the quantitative threshold (` 54,00,000 > ` 10,00,000) and hence reportable
segment.
Segment B & C do not meet the quantitative threshold amount and may not be classified as reportable
segment.
However, the total external revenue generated by these two segments A & D represent only70% [(`
35,00,000 / 50,00,000) x 100] of the entity’s total external revenue. If the total external revenue
reported by operating segments constitutes less than 75% of the entity total external revenue,
additional operating segments should be identified as reportable segments until at least 75% of the
revenue is included in reportable segments.
In case of X Ltd., it is given that Segment C is a new business unit and management expect this segment
to make a significant contribution to external revenue in coming years. Inaccordance with the
requirement of Ind AS 108, X Ltd. designates this start-up segment C as a reportable segment, making
the total external revenue attributable to reportable segments87% [(` 43,50,000/ 50,00,000) x 100] of
total entity revenues.
In this situation, Segments A, C and D will be reportable segments and Segment B will be shown as other
segment.
Alternatively, segment B can be considered as a reportable segment as well as it meets the definition of
operating segment. If Segment B is considered as reportable segment:
External revenue reported: ` 30,00,000 + ` 6,50,000 + ` 5,00,000 = ` 41,50,000
% of Total External Revenue = ` 41,50,000 / ` 50,00,000 = 83%
Accordingly, Segments A, B and D will be reportable segments and Segment C will be shown as other
segment.
SM 8. X Ltd. is operating in coating industry. Its business segments comprise Coating and Others (consisting of
chemicals, polymers and related activities). Certain information for financial year 20X1-20X2 is given
below: (` in lakhs)
Segments External Revenue GST Other operating Result Asset Liabilities

(including GST) income
Coating 2,00,000 5,000 40,000 10,000 50,000 30,000
Others 70,000 3,000 15,000 4,000 30,000 10,000
Additional information:
1. Unallocated income net of expenses is ` 30,00,00,000
2. Interest and bank charges is ` 20,00,00,000
3. Income tax expenses is ` 20,00,00,000 (current tax ` 19,50,00,000 and deferred tax` 50,00,000)
4. Unallocated Investments are ` 1,00,00,00,000 and other assets are ` 1,00,00,00,000.
5. Unallocated liabilities, Reserves & surplus and share capital are ` 2,00,00,00,000,` 3,00,00,00,000
&` 1,00,00,00,000 respectively.
6. Depreciation amounts for coating & others are ` 10,00,00,000 and ` 3,00,00,000
respectively.
7. Capital expenditure for coating and others are ` 50,00,00,000 and ` 20,00,00,000 respectively.
8. Revenue from outside India is ` 6,20,00,00,000 and segment asset outside India`
1,00,00,00,000.
Based on the above information, how X Ltd. would disclose information about reportable segment
revenue, profit or loss, assets and liabilities for financial year 20X1-20X2? [SM 2021, TYK-2 Modified]
Ans.
Segment information
(A) Information about operating segment
(1) the company’s operating segments comprise:
Coatings: consisting of decorative, automotive, industrial paints and related
activities.
Others: consisting of chemicals, polymers and related activities.
(2) Segment revenues, results and other information. (` in Lakhs)
Revenue Coating Others Total
1. External Revenue (gross) 2,00,000 70,000 2,70,000
GST (5,000) (3,000) (8,000)
Total Revenue (net) 1,95,000 67,000 2,62,000
Other operating income 40,000 15,000 55,000
Total Revenue 2,35,000 82,000 3,17,000
2. Results
Segment results 10,000 4,000 14,000
Unallocated income(netofunallocated expenses) 3,000
Profitfromoperationbeforeinterest, taxation and
exceptional items 17,000
Interest and bank charges (2,000)
Profit before exceptional items 15,000
Exceptional items Nil
Income Taxes (1,950)
-Current taxes
-Deferred taxes
Profit after taxation (50)
3. Other Information 13,000
(a) Assets
Segment Assets 50,000 30,000 80,000
Investments 10,000
Unallocated assets 10,000
Total Assets 1,00,000
(b) Liabilities/Shareholder’s funds
Segment liabilities 30,000 10,000 40,000
Unallocated liabilities 20,000
Share capital 10,000
Reserves and surplus 30,000
Total liabilities/shareholder’s funds 1,00,000
(c) Others
Capital Expenditure (5,000) (2,000)
Depreciation (1,000) (300)
Geographical Information (` in lakhs)

India Outside Total
(`) India (`) (`)
Revenue 2,00,000 62,000 2,62,000
Segment assets 90,000 10,000 1,00,000
Capital expenditure 7,000 7,000
Notes:
(i) The operating segments have been identified in line with the Ind AS 108, taking into account the
nature of product, organisation structure, economic environment and internal reporting
system.
(ii) Segment revenue, results, assets and liabilities include the respective amounts identifiable
to each of the segments. Unallocable assets include unallocable fixed assets and other current
assets. Unallocable liabilities include unallocable current liabilities and net deferred tax liability.
(iii) Corresponding figures for previous year have not been provided. However, in practical scenario
the corresponding figures would need to be given.
SM 9. 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
First-In, First-Out (FIFO) method for evaluating the performance of segment operations. Which cost
formula should be used for Ind AS 108 disclosure purposes? [SM 2021, TYK-3]
Ans.
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.
SM 10. ABC Limited has 5 operating segments namely A, B, C, D and E. The profit/ loss of respective segments
for the year ended March 31, 20X1 are as follows:
Segment Profit/(Loss)
(` in crore)
A 780
B 1,500
C (2,300)
D (4,500)
E 6,000
Total 1,480
Based on the quantitative thresholds, which of the above segments A to E would be considered as
reportable segments for the year ending March 31, 20X1? [SM 2021, TYK-4]
Ans.
With regard to quantitative thresholds to determine reportable segment relevant in context of instant
case, paragraph 13(b) of Ind AS 108 may be noted which provides as follows:
‚The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute
amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii)
the combined reported loss of all operating segments that reported a loss.‛
In compliance with Ind AS 108, the segment profit/loss of respective segment will be compared
with the greater of the following:
(i) All segments in profit, i.e., A, B and E ” Total profit ` 8,280 crores.
(ii) All segments in loss, i.e., C and D ” Total loss ` 6,800 crores.
Greater of the above ” ` 8,280 crores.
Based on the above, reportable segments will be determined as follows:
Segment Profit/(Loss) As absolute % of Reportable

(` in crore) ` 8,280 crore segment
A 780 9% No
B 1,500 18% Yes
C (2,300) 28% Yes
D (4,500) 54% Yes
E 6,000 72% Yes
Total 1,480
Hence B, C, D, E are reportable segments.
Ind AS 103
BUSINESS COMBINATION
SM 1. Veera Limited and Zeera Limited are both in the business of manufacturing and selling of Lubricant.
Shareholders of Veera Limited and Zeera Limited agreed 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 shareholders and 50 shares to Zeera Limited
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 thecombination. Also respective company’s shareholders
get the voting rights in Meera Limited based on their respective shareholdings.
Determine the acquirer by applying the principles of Ind AS 103 ‘Business Combinations’
[SM 2021, Ill.-5]
Ans.
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 the 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 shareholder gets 67% Share [(100/150) x100] and Zeera
Limited shareholder gets 33.33% share in Meera Limited. Hence Veera Limited is acquirer as per the
principles of Ind AS 103.
SM 2. Business Combination Achieved by Contract Alone

Sita Ltd and Beta Ltd decides to combine together for forming a Dual Listed Corporation (DLC). As per
their shareholder’s agreement, both the parties will retain original listing and Board of DLC will be
comprised of 10 members out of which 6 members will be of Sita Ltd and remaining 4 board members
will be of Beta Ltd.
The fair value of Sita Ltd is ` 100 crores and fair value of Beta Ltd is ` 80 crores. The fair value of net
identifiable assets of Beta Limited is ` 70 crores. Assume non-controlling Interest (NCI) to be measured
at fair value.
You are required to determine the goodwill to be recognised on acquisition. [SM 2021, Ill.-12]
Ans.
Sita Ltd has more Board members and thereby have majority control in DLC. Therefore, Sita Ltd is
identified as acquirer and Beta Ltd as acquiree.
Since no consideration has been transferred, the goodwill needs to be calculated as the difference of
Part A and Part B:
Part A:
1) Consideration paid by Acquirer. - Nil
2) Controlling Interest in Acquiree ” ` 80 crores
3) Acquirer’s previously held interest - Nil
Part B:
Fair value of net identifiable asset ” ` 70 crores
Goodwill is recognised as ` 10 crores (80 ” 70 crores) in business combination achieved through contract
alone when NCI is measured at fair value.
SM 3. How will the financial statement of the prior periods be restated under common control in the following
scenarios:
a) Common Control period extends beyond the start of comparative period
XYZ Ltd acquired PQR Ltd in a common control transaction on 1 October 20X9. The year-end of
XYZ Ltd is 31 March. Both XYZ Ltd and PQR Ltd have been controlled by shareholders since
their incorporation.
b) Common Control period started in the comparative period
ABC Ltd acquired DEF Ltd in a common control transaction on 1 October 20X9. The year end of
ABC Ltd is 31 March. Both ABC Ltd and DEF Ltd are controlled by shareholder A. A made
investment in ABC Ltd in 20X0 and made investment in DEF Ltd on 1 October 20X8.
[SM 2021, Ill.-34]
Ans.
Paragraph 9(iii) of Appendix C to Ind AS 103 states that the financial information in the financial
statements in respect of prior periods should be restated as if the business combination had
occurred from the beginning of the preceding period in the financial statements, irrespective of the
actual date of the combination. However, if business combination had occurred after that date, the prior
period information shall be restated only from that date.
a) In accordance with Paragraph 9(iii) above, the entity will be required to restate its financial
statements as if the business combination had occurred from the beginning of the
preceding period in the financial statements, accordingly in the present case XYZ Ltd will have to
restate its comparatives for the financial year 20X8-20X9 as if the acquisition had occurred
before1 April 20X8. Additionally, the results of current year of PQR Ltd will be required to
include XYZ'sfinancial statements for the period from 1 April 20X9 to 30 September 20X9.
b) In accordance with paragraph 9(iii) above, ABC Ltd will have to restate its comparatives for the
financial year ended 20X8-20X9 as if the acquisition had occurred on 1 October 20X8, but not
earlier. Additionally, the results of current year of DEF Ltd will be required to include the
financialstatements of ABC Ltd for the period from 1 April 20X9 to 1 October 20X9.
SM 4. Entity A owns 100% equity shares of entity B since 01.04.20X1. Entity A arranges loan funding from a
financial institution in a new wholly-owned subsidiary called ‚Entity C‛. The loan is used by Entity C to
acquire 100% shareholding in entity B, for cash consideration of ` 2,00,000. Entity A applies Ind AS 103
to account for common control transactions and Entity C will adopt the same policy. Fair Value of Net
identifiable Assets is ` 1,50,000 and Carrying Value of Net Identifiable Assets is ` 1,00,000.
How will Entity C apply acquisition accounting in its consolidated financial statements?
[SM 2021, Ill.-35]
Ans.
As per para 2 of appendix C of Ind AS 103, Common control business combination means a business
combination involving entities or businesses in which all the combining entities or businesses are
ultimately controlled by the same party or parties both before and after the business combination,
and that control is not transitory.
In the above scenario, the Entity A controls Entity B before and after the acquisition. After acquisition,
entity A controls entity B through entity C.
As per para 8 of appendix C of Ind AS 103, Business combinations involving entities or businesses under
common control shall be accounted for using the pooling of interest method.
As per para 9(i) of appendix C of Ind AS 103, the pooling of interest method is considered to involve the
assets and liabilities of the combining entities are reflected at their carrying amounts.
Based on the above analysis, Entity C cannot be the acquirer. Entity A has created Entity C and is the
seller, so Entity C has effectively been formed and issued shares to effect the business combination.
Entity C is not a business and the transaction between entity B and Entity C is not a business
combination. It is a reorganisation of entity B. As a result, entity B’s assets and liabilities are included
in Entity C consolidated financial statements at their pre-combinationcarrying amounts without a fair
value uplift.
SM 5. Entity A and entity B provide construction services in India. Entity A is owned by a group of individuals,
none of whom has control and does not have a collective control agreement. Entity B is owned by a
single individual, Mr. Ram. The owners of entities A and B have decided to combine their businesses.
The consideration will be settled in shares of entity B. Entity B issues new shares, amounting to 40% of
its issued share capital, to its controlling shareholder, Mr. Ram. Mr. Ram then transfers the shares
to the owners of entity A in exchange for their interest in entity A. At this point Mr. Ram controls
both entities A and B, owning 100% of entity A and 71.42% of entity B. Mr. Ram had a controlling
interest in both entity A and entity B before and after the contribution. Is the combination of entities A
and B a combination of entities under common control? [SM 2021, TYK-7]
Ans.
No. This is not a business combination of entities under common control. Mr. Ram’s control of both
entities before the business combination was transitory. The substance of the transaction is that
entity B has obtained control of entity A. Entity B accounts for this transaction as a business
combination under Ind AS 103 using acquisition accounting.
SM 6. On 1 April 20X1, Alpha Ltd. acquires 80 percent of the equity interest of Beta Pvt. Ltd. in exchange for
cash of ` 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 ` 500 and the liabilities assumed are measured at ` 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 ` 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? [SM 2021, TYK-8]
Ans.
The amount of Beta Pvt. Ltd. identifiable net assets [`400, calculated as `500 - `100) exceeds the fair
value of the consideration transferred plus the fair value of the non controlling interest in Beta
Pvt. Ltd. [`384 calculated as 300 + 84]. Alpha Ltd. measures the gain on its purchase of the 80 per cent
interest as follows:
ìn lakh
Amount of the identifiable net assets acquired (`500 - `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
ìn lakhs ìn lakhs

Identifiable assets acquired Dr. 500
To Cash 300
To Liabilities assumed 100
To OCI/Equity-Gain on the bargain purchase 16
To Equity-non controlling interest in Beta Pvt Ltd. 84
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 `80 (`400 x 0.20). The gain on the bargain purchase then would be
`20 (`400- (`300 + `80)
SM 7. ABC Ltd. prepares consolidated financial statements upto 31st March each year. On1st July 20X1,
ABC Ltd. acquired 75% of the equity shares of JKL Ltd. and gained control of JKL Ltd. the issued
shares of JKL Ltd. is 1,20,00,000 equity shares. Details of the purchase consideration are as
follows:
 On 1st July, 20X1, ABC Ltd. issued two shares for every three shares acquired in JKL Ltd. On 1st
July, 20X1, the market value of an equity share in ABC Ltd. was ` 6.50 and the market value of an
equity share in JKL Ltd. was ` 6.
 On 30th June, 20X2, ABC Ltd. will make a cash payment of ` 71,50,000 to the former shareholders
of JKL Ltd. who sold their shares to ABC Ltd. on 1st July, 20X1. On 1st July, 20X1, ABC Ltd. would
have to pay interest at an annual rate of 10% on borrowings.
 On 30th June, 20X3, ABC Ltd. may make a cash payment of ` 3,00,00,000 to the former
shareholders of JKL Ltd. who sold their shares to ABC Ltd. on 1st July, 20X1. This payment is
contingent upon the revenues of ABC Ltd. growing by 15% over the two-year period from 1st July,
20X1 to 30th June, 20X3. On 1st July, 20X1, the fair value of this contingent consideration was `
2,50,00,000. On 31st March, 20X2, the fair value of the contingent consideration was ` 2,20,00,000.
On 1st July, 20X1, the carrying values of the identifiable net assets of JKL Ltd. in the books of that
company was ` 6,00,00,000. On 1st July, 20X1, the fair values of these net assets was ` 7,00,00,000.
The rate of deferred tax to apply to temporary differences is 20%.
During the nine months ended on 31st March, 20X2, JKL Ltd. had a poorer than expected operating
performance. Therefore, on 31st March, 20X2 it was necessary for ABC Ltd. to recognise an
impairment of the goodwill arising on acquisition of JKL Ltd., amounting to10% of its total
computed value.
Compute the impairment of goodwill in the consolidated financial statements of ABC Ltd. under both
the methods permitted by Ind AS 103 for the initial computation of the non- controlling interest in JKL
Ltd. at the acquisition date. [SM 2021, TYK-9]
Ans.
Computation of goodwill impairment
NCI at fair NCI at of net

value assets
ìn ‘000 ìn ‘000
Cost of investment
Share exchange (12,000 x 75% x 2/3 x `6.50) 39,000 39,000
Deferred consideration (7,150 / 1.10) 6,500 6,500
Contingent consideration 25,000 25,000
Non-controlling interest at date of acquisition:
Fair value ” 3000 x `6 18,000
% of net assets ” 68,000 (Refer W.N.) x 25% 17,000
Net assets on the acquisition date (Refer W.N.) (68,000) (68,000)
Goodwill on acquisition 20,500 19,500
Impairment @ 10% 2,050 1,950
Working Note:
Net assets on the acquisition date `’000

Fair value at acquisition date 70,000
Deferred tax on fair value adjustments [20% x (70,000 ” 60,000)] (2,000)
68,000
SM 8. How should contingent consideration payable in relation to a business combination be accounted for on
initial recognition and at the subsequent measurement as per Ind AS in the following cases:
(i) On 1 April 20X1, A Ltd. acquires 100% interest in B Ltd. As per the terms of agreement
the purchase consideration is payable in the following 2 tranches:
a. an immediate issuance of 10 lakhs shares of A Ltd. having face value of INR 10 per share;
b. a further issuance of 2 lakhs shares after one year if the profit before interest and tax of
B Ltd. for the first year following acquisition exceeds INR 1 crore.
i. The fair value of the shares of A Ltd. on the date of acquisition is INR 20 per
share. Further, the management has estimated that on the date of
acquisition, the fair value of contingent consideration is ` 25 lakhs.
ii. During the year ended 31 March 20X2, the profit before interest and tax of B
Ltd. exceeded ` 1 crore. As on 31 March 20X2, the fair value of shares of A Ltd. is
` 25 per share.
iii. Continuing with the fact pattern in (a) above except for:
c. The number of shares to be issued after one year is not fixed.

d. Rather, A Ltd. agreed to issue variable number of shares having a fair value equal to `
40 lakhs after one year, if the profit before interest and tax for the first year following
acquisition exceeds ` 1 crore. A Ltd. issued shares with ` 40 lakhs after a year.
[SM 2021, TYK-10]
Ans.
Paragraph 37 of Ind AS 103, inter alia, provides that the consideration transferred in a business
combination should be measured at fair value, which should be calculated as the sum of (a) the
acquisition-date fair values of the assets transferred by the acquirer, (b) the liabilities incurred by the
acquirer to former owners of the acquiree and (c) the equity interests issued by the acquirer.
Further, paragraph 39 of Ind AS 103 provides that the consideration the acquirer transfers in exchange
for the acquiree includes any asset or liability resulting from a contingent consideration
arrangement. The acquirer shall recognize the acquisition-date fair value of contingent consideration as
part of the consideration transferred in exchange for the acquiree.
With respect to contingent consideration, obligations of an acquirer under contingent consideration
arrangements are classified as equity or a liability in accordance with Ind AS32 or other applicable Ind
AS, i.e., for the rare case of non-financial contingent consideration. Paragraph 40 provides that the
acquirer shall classify an obligation to pay contingent consideration that meets the definition of a
financial instrument as a financial liability or as equity on the basis of the definitions of an equity
instrument and a financial liability in paragraph 11 of Ind AS 32, Financial Instruments: Presentation. The
acquirer shall classify as an asset a right to the return of previously transferred consideration if specified
conditions are met. Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for
contingent consideration.
(i) In the given case the amount of purchase consideration to be recognized on
initialrecognitionshall be as follows:
`
Fair value of shares issued (10,00,000 x `20) 2,00,00,000
Fair value of contingent consideration 25,00,000
Total purchase consideration 2,25,00,000
Subsequent measurement of contingent consideration payable for business combination
In general, an equity instrument is any contract that evidences a residual interest in the assets of
an entity after deducting all of its liabilities. Ind AS 32 describes an equity instrument as one
that meets both of the following conditions:
(a) There is no contractual obligation to deliver cash or another financial asset to

another party, or to exchange financial assets or financial liabilities with another party
under potentially unfavorable conditions (for the issuer of the instrument).
(b) If the instrument will or may be settled in the issuer's own equity instruments, then it is:
(i) a non-derivative that comprises an obligation for the issuer to deliver a fixed
number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed amount of
cash or other financial assets for a fixed number of its own equity
instruments.
In the given case, given that the acquirer has an obligation to issue fixed number of shares on
fulfilment of the contingency, the contingent consideration will be classified as equity as per the
requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as equity should

not be re-measured and its subsequent settlement should be accounted for within equity.
Here, the obligation to pay contingent consideration amounting to `25,00,000 is recognized as a

part of equity and therefore not re-measured subsequently or on issuance of shares.
(ii) The amount of purchase consideration to be recognized on initial recognitionis shall be

asfollows:
`
Fair value of shares issued (10,00,000 x `20) Fair value of 2,00,00,000
contingent consideration 25,00,000
Total purchase consideration 2,25,00,000
Subsequent measurement of contingent consideration payable for businesscombination
The contingent consideration will be classified as liability as per Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration not classified as equity should be
measured at fair value at each reporting date and changes in fair value should be recognized in
profit or loss.
As at 31 March 20X2, (being the date of settlement of contingent consideration), the liability
would be measured at its fair value and the resulting loss of `15,00,000 (`40,00,000 ”
`25,00,000) should be recognized in the profit or loss for the period. ALtd. would recognize
issuance of 160,000 (`40,00,000/25) shares at a premium of `15 per share.
SM 9. As part of its business expansion strategy, KK Ltd. is in process of setting up a pharma intermediates
business which is at very initial stage. For this purpose, KK Ltd. has acquired on 1st April, 20X1,
100% shares of ABR Ltd. that manufactures pharma intermediates. The purchase consideration for the
same was by way of a share exchange valued at ` 35 crores. The fair value of ABR Ltd.' s net assets was `
15 crores, but does not include:
(i) A patent owned by ABR Ltd. for an established successful intermediate drug that has a
remaining life of 8 years. A consultant has estimated the value of this patent to be` 10 crores.
However, the outcome of clinical trials for the same are awaited. If the trials are successful, the
value of the drug would fetch the estimated ` 15 crores.
(ii) ABR Ltd. has developed and patented a new drug which has been approved for clinical
use. The cost of developing the drug was `12 crores. Based on earlyassessment of its
sales success, the valuer has estimated its market value at ` 20 crores.
(iii) ABR Ltd.'s manufacturing facilities have received a favourable inspection by a government
department. As a result of this, the Company has been granted an exclusive five-year
license to manufacture and distribute a new vaccine. Although the license has no direct cost to
the Company, its directors believe that obtaining the license is a valuable asset which
assures guaranteed sales and the value for the same is estimated at ` 10 crores.
KK Ltd. has requested you to suggest the accounting treatment of the above transaction under
applicable Ind AS. [SM 2021, TYK-11]
Ans.
As per para 13 of Ind AS 103 ‘Business Combination’, the acquirer's application of the recognition
principle and conditions may result in recognising some assets and liabilities that the acquiree had not
previously recognised as assets and liabilities in its financial statements. This may be the case when the
asset is developed by the entity internally and charged the related costs to expense.
Based on the above, the company can recognise following Intangible assets while determining
Goodwill / Bargain Purchase for the transaction:
(i) Patent owned by ABR Ltd.: The patent owned will be recognised at fair value by KK Ltd. even
though it was not recognised by ABR Ltd. in its financial statements. The patent will be
amortised over the remaining useful life of the asset i.e. 8 years. Since the company is awaiting
the outcome of the trials, the value of the patent cannot be estimated at `15 crore and the
extra `5 crore should only be disclosed as a Contingent Asset and not recognised.
(ii) Patent internally developed by ABR Ltd.: As per para 18 of Ind AS 103 ‘Business Combination’,
the acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
acquisition date fair values. Since the patent developed has been approved for clinical use, it is
an identifiable asset, hence the same will be measured at fair value ie`20 crore on the
acquisition date.
(iii) Grant of Licence to ABR Ltd. by the Government: As regards to the five-year license,
applying para 18 of Ind AS 103, grant asset will be recognised at fair value on the acquisition
date by KK Ltd. On acquisition date, the fair value of the license is Rs.10 crore. However, since
the question does not mention about the fair value of the identifiable liability with respect to
grant of license for the acquirer, it is assumed that no conditions with respect to compliance of
grant (if any) have been passed to the acquirer. Hence, the fair value of the liability with respect
to grant, for acquirer would be nil. Only, the grant asset (license) would be recognised at `10
crore in the books of acquirer KK Ltd.
Hence the revised working would be as follows:
`
Fair value of net assets of ABR Ltd. 15 crore
Add: Patent (10 + 20) 30 crore
Add: License 10 crore
Less: Grant for License (Nil)
55 crores
Purchase Consideration (35 crores)
Bargain purchase 20 crore
SM 10. H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as mentioned in the below
table:
Date Equity stake purchased Remarks

1st November, 20X6 15% The shares were purchased based on the quoted
1st January, 20X7 45% price on the stock exchange on the relevant dates.
Both the above-mentioned companies have Rupees as their functional currency. Consequently, H Ltd.
acquired control over S Ltd. on 1st January, 20X7. Following is the Balance Sheet of S Ltd. as on that
date:
Particulars Carrying value Fair value
(ìn crore) (ìn crore)
ASSETS:
Non-current assets
(a) Property, plant and equipment 40.0 90.0
(b) Intangible assets 20.0 30.0
(c) Financial assets
- Investments 100.0 350.0
Current assets
(a) Inventories
(b) Financial assets 20.0 20.0
- Trade receivables
- Cash held in functional currency 20.0 20.0
(c) Other current assets 4.0 4.5
Non-current asset held for sale 4.0 4.5
TOTAL ASSETS 208
EQUITY AND LIABILITIES:
Equity
(a) Share capital (face value `100) 12.0 50.4
(b) Other equity 141.0 Not applicable

(a) Financial liabilities
- Borrowings 20.0 20.0
Current liabilities
(a) Financial liabilities
- Trade payables 28.0 28.0
(b) Provision for warranties 3.0 3.0
(c) Current tax liabilities 4.0 4.0
TOTAL EQUITY AND LIABILITIES 208.0
Other information:
Property, plant and equipment in the above Balance Sheet include leasehold motor vehicles having
carrying value of `1 crore and fair value of `1.2 crore. The date of inception of the lease was 1st
April, 20X0. On the inception of the lease, S Ltd. had correctly classified the lease as a finance
lease. However, if facts and circumstances as on 1st April, 20X7 are considered, the lease would be
classified as an operating lease.
Following is the statement of contingent liabilities of S Ltd. as on 1st January, 20X7:
Particulars Fair value Remarks

(ìn crore)
Law suit filed by a customer for a 0.5 It is not probable that an outflow of
claim of`2 crore resourcesembodyingeconomic benefits
will be required to settle the claim.
Any amount which would be paid in
respect of law suit will be tax
deductible.
Income tax demand of`7 crore raised 2.0 It is not probable that an outflow of
by tax authorities; S Ltd. has resources embodying economic benefits
challengedthe demand in thecourt. will be required to settle the claim.
In relation to the above-mentioned contingent liabilities, S Ltd. has given an indemnification

undertaking to H Ltd. up to a maximum of `1 crore.
`1 crore represents the acquisition date fair value of the indemnification undertaking.
Any amount which would be received in respect of the above undertaking shall not be taxable.
The tax bases of the assets and liabilities of S Ltd. is equal to their respective carrying values being
recognised in its Balance Sheet.
Carrying value of non-current asset held for sale of `4 crore represents its fair value less cost to sell in
accordance with the relevant Ind AS.
In consideration of the additional stake purchased by H Ltd. on 1st January, 20X7, it has issued to the
selling shareholders of S Ltd. 1 equity share of H Ltd. for every 2 shares held in S Ltd. Fair value of equity
shares of H Ltd. as on 1st January, 20X7 is `10,000 per share.
On 1st January, 20X7, H Ltd. has paid `50 crore in cash to the selling shareholders of S Ltd. Additionally,
on 31st March, 20X9, H Ltd. will pay `30 crore to the selling shareholders of S Ltd. if return on equity of S
Ltd. for the year ended 31st March, 20X9 is more than 25% per annum. H Ltd. has estimated the fair
value of this obligation as on 1st January, 20X7 and 31st March, 20X7 as `22 crore and `23 crore
respectively. The change in fair value of the obligation is attributable to the change in facts and
circumstances after the acquisition date.
Quoted price of equity shares of S Ltd. as on various dates is as follows:
As on November, 20X6 `350 per share
As on 1st January, 20X7 `395 per share
As on 31st March, 20X7 `420 per share
On 31st May, 20X7, H Ltd. learned that certain customer relationships existing as on 1st January, 20X7,
which met the recognition criteria of an intangible asset as on that date, were not considered during the
accounting of business combination for the year ended 31st March, 20X7. The fair value of such
customer relationships as on 1st January, 20X7 was`3.5 crore (assume that there are no temporary
differences associated with customer relations; consequently, there is no impact of income taxes on
customer relations).
On 31st May, 20X7 itself, H Ltd. further learned that due to additional customer relationships
being developed during the period 1st January, 20X7 to 31st March, 20X7, the fair value of such
customer relationships has increased to `4 crore as on 31st March,20X7.
On 31st December, 20X7, H Ltd. has established that it has obtained all the information necessary for
the accounting of the business combination and that more information is not obtainable.
H Ltd. and S Ltd. are not related parties and follow Ind AS for financial reporting. Income tax rate
applicable is 30%.
You are required to provide your detailed responses to the following, along with reasoning and
computation notes:
(a) What should be the goodwill or bargain purchase gain to be recognised by H Ltd. in its
financial statements for the year ended 31st March, 20X7. For this purpose, measure non-
controlling interest using proportionate share of the fair value of the identifiable net assets of S
Ltd.
(b) Will the amount of non-controlling interest, goodwill, or bargain purchase gain so recognised in
(a) above change subsequent to 31st March, 20X7? If yes, provide relevant journal entries.
(c) What should be the accounting treatment of the contingent consideration as on31st
March, 20X7? [SM 2021, TYK-12]
Ans.
(i) As an only exception to the principle of classification or designation of assets as they exist at the
acquisition date is that for lease contract and insurance contracts classification which will be
based on the basis of the conditions existing at inception and not on acquisition date.
Therefore, H Ltd. would be required to retain the original lease classification of the lease
arrangements and thereby recognise the lease arrangements as finance lease.
(ii) The requirements in Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, do
not apply in determining which contingent liabilities to recognise as of the acquisition date as
per Ind AS 103 ‘Business Combination’. Instead, the acquirer shall recognise as of the acquisition
date a contingent liability assumed in a business combination if it is a present obligation that
arises from past events and its fair value can be measured reliably. Therefore, contrary to Ind AS
37, the acquirer recognises a contingent liability assumed in a business combination at the
acquisition date even if it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation. Hence H Ltd. will recognize contingent
liability of `2.5 cr.
Since S Ltd. has indemnified for `1 cr., H Ltd. shall recognise an indemnification asset at the
same time for `1 cr.
As per the information given in the question, this indemnified asset is not taxable. Hence, its tax
base will be equal to its carrying amount. No deferred tax will arise on it.
(iii) As per Ind AS 103, non-current assets held for sale should be measured at fair value less cost to
sell in accordance with Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued
Operations’. Therefore, its carrying value as per balance sheet has been considered in the
calculation of net assets.
(iv) Any equity interest in S Ltd. held by H Ltd. immediately before obtaining control over S Ltd. is
adjusted to acquisition-date fair value. Any resulting gain or loss is recognised in the profit or
loss of H Ltd.
Calculation of purchase consideration as per Ind AS 103 ìn lakh
Investment in S Ltd.
On 1st Nov. 20X6 15% [(12/100) x 395 x 15%] 7.11
On 1st Jan. 20X7 45%
Own equity given 10,000 x 12% x 45% x 1/2 270
Cash 50
Contingent consideration 22
349.11
(v) Calculation of deferred tax on assets and liabilities acquired as part of the business combination,
including current tax and goodwill.
ìn crore
Book Fair Tax Taxable Deferred
Item value value base (deductible) tax assets
temporary (liability)
difference @ 30%
Property, plant and equipment 40 90 40 50 (15)
Intangible assets 20 30 20 10 (3)
Investments 100 350 100 250 (75)
Inventories 20 20 20 - -
Trade receivables 20 20 20 - -
Cash held in functional currency 4 4 4 - -
Non-current asset held for sale 4 4 - -
Indemnified asset 4 1 1 - -
Borrowings - 20 20 - -
Trade payables 20 28 28 - -
Provision for warranties 28 3 3 - -
Current tax liabilities 3 4 4 - (0.5) -
Contingent liability 4 0.5 - 0.15
Deferred tax Liability (92.85)
(vi) Calculation of identifiable net assets acquired
ìn crore ìn crore
Property, plant and equipment 90
Investments 350
Inventories 20
Trade receivables 20
Cash held in functional currency 4
Non-current asset held for sale 4
Indemnified asset 1
Total asset 519
Less: Borrowings 20
Trade payables 28
Provision for warranties 3
Current tax liabilities 4
Contingent liability (2 + 0.5) 2.50
Deferred tax liability (W.N.2) 92.85 (150.35)
Net identifiable assets 368.65
(a) Calculation of NCI by proportionate share of net assets

Net identifiable assets of S Ltd. on 1.1.20X7 (Refer W.N.3) = 372.85 crore
NCI on 1.1.20X7 = 368.65 crore x 40% = 147.46 crore
Calculation of Goodwill as per Ind AS 103
Goodwill on 1.1.20X7 = Purchase consideration + NCI ” Net assets
= 349.11 + 147.46 ” 368.65
= 127.92 crore
(b) As per para 45 of Ind AS 103 ‘Business Combination’, if the initial accounting for a business
combination is incomplete by the end of the reporting period in which the combination occurs,
the acquirer shall report in its financial statements provisional amounts for the items for
which the accounting is incomplete.
Duringthemeasurement period, the acquirer shall retrospectively adjust the provisional

amounts recognised at the acquisition date to reflect new information obtained about facts and
circumstances that existed as of the acquisition date and, if known, would have affected the
measurement of the amounts recognised as of that date.
During the measurement period, the acquirer shall also recognise additional assets or liabilities
if new information is obtained about facts and circumstances that existed as of the acquisition
date and, if known, would have resulted in the recognition of those assets and liabilities as of
that date.
The measurement period ends as soon as the acquirer receives the information it was seeking
about facts and circumstances that existed as of the acquisition date or learns that more
information is not obtainable. However, the measurement period shall not exceed one year
from the acquisition date.
Further, as per para 46 of Ind AS 103, the measurement period is the period after the acquisition
date during which the acquirer may adjust the provisional amounts recognised for a business
combination. The measurement period provides the acquirer with a reasonable time to obtain
the information necessary to identify and measure the following as of the acquisition date in
accordance with the requirements of this Ind AS:
(a) the identifiable assets acquired, liabilities assumed and any non-controlling interest in
the acquiree;
(b) …..
(c) ……; and
(d) the resulting goodwill or gain on a bargain purchase.
Para 48 states that the acquirer recognises an increase (decrease) in the provisional amount
recognised for an identifiable asset (liability) by means of a decrease (increase) in goodwill.
Para 49 states that during the measurement period, the acquirer shall recognise adjustments to
the provisional amounts as if the accounting for the business combination had been
completed at the acquisition date.
Para 50 states that after the measurement period ends, the acquirer shall revise the accounting
for a business combination only to correct an error in accordance with Ind AS 8 ‘Accounting
Policies, Changes in Accounting Estimates and Errors’.
On 31st December, 20X7, H Ltd. has established that it has obtained all the information
necessary for the accounting of the business combination and the more information is not
obtainable. Therefore, the measurement period for acquisition of S Ltd. ends on 31st December,
20X7.
On 31st May, 20X7 (ie within the measurement period), H Ltd. learned that certain customer
relationships existing as on 1st January, 20X7 which met the recognition criteria of an
intangible asset as on that date were not considered during the accounting of business
combination for the year ended 31st March, 20X7. Therefore, H Ltd. shall account for the
acquisition date fair value of customer relations existing on1st January, 20X7 as an identifiable
intangible asset. The corresponding adjustment shall be made in the amount of goodwill.
Accordingly, the amount of goodwill will be changed due to identification of new asset from
retrospective date for changes in fair value of assets and liabilities earlier recognised on
provisional amount (subject to meeting the condition above for measurement period). NCI
changes would impact the consolidated retained earnings (parent’s share). Also NCI will be
increased or decreased based on the profit during the post-acquisition period.
Journal entry
Customer relationship Dr. 3.5 crore
To NCI 1.4 crore
To Goodwill 2.1 crore
However, the increase in the value of customer relations after the acquisition date shall not be
accounted by H Ltd., as the customer relations developed after 1st January, 20X7
represents internally generated intangible assets which are not eligible for recognition on the
balance sheet.
(c) Since the contingent considerations payable by H Ltd is not classified as equity and is within the
scope of Ind AS 109 ‘Financial Instruments’, the changes in the fair value shall be recognised in
profit or loss. Change in Fair value of contingent consideration (23-22) ` 1 crore will be
recognized in the Statement of Profit and Loss.
ANALYSIS OF FINANCIAL STATEMENTS
SM 1. Deepak started a new company SoftbhartiPvt. 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, SoftbhartiPvt. Ltd.
was incorporated on 1st April 20X1.
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 SoftbhartiPvt. Ltd. for the year ending 31st March, 20X2 as follows:
Statement of Profit and Loss

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
Balance Sheet
(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
31st March, 20X2 is as follows:
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, 20X2 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, 20X2.
x. Actuarial gain on employee benefit measurements of ` 1,000 has been omitted in the
financials of Softbharti private limited for the year ending 31st March, 20X2.
The financial statements for financial year 20X1-20X2 have not been yet approved.
You are required to ascertain that whether the financial statements of SoftbhartiPvt. Ltd. are correctly
presented as per the applicable financial reporting framework. If not, prepare the revised financial
statements of SoftbhartiPvt. Ltd. after the careful analysis of mentioned facts and information.
[SM 2021, Case Study - 5]
Ans.
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 perInd 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 IIIof the
Companies Act, 2013 are as follows:
STATEMENT OF PROFIT AND LOSS

for the year ended 31st March, 20X2
Revenue from operations 10,00,000
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 31st March, 20X2
Particulars (`)
ASSETS
Non-current assets
Financial assets
Other financial assets (Long-term loans and advances) 40,000
Other non-current assets (capital advances) (refer note-2) 50,000
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
Provision (25,000 ” 1,000) 24,000
Deferred tax liabilities (4800 + 300) 5,100
Current 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 31st March, 20X2
A. EQUITY SHARE CAPITAL
Balance (`)
As at 31st March, 20X1 -
Changes in equity share capital during the year 1,00,000
As at 31st March, 20X2 1,00,000
B. OTHER EQUITY
Reserves & Surplus

Retained Earnings (`)
As at 31st March, 20X1 -
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 31st March, -
20X2 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 not 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 declared 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
(15,000)
Less: Dividend declared for FY 20X1 ” 20X2 (Note ” 4)
(15,000)
Reclassification of government statuary dues payable to
‘other current liabilities’ 15,000
Closing balance
Working Note:
Calculation of deferred tax on temporary differences as per IndAS 12for financial year 20X1 –
20X2
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
SM 2. Mumbai Challengers Ltd., a listed entity, is a sports organization owning several cricket and hockey
teams. The issues below pertain to the reporting period ending 31 March 20X2.
(a) Owing to the proposed schedules of Indian Hockey League as well as Cricket Premier
Tournament, Mumbai Challengers Ltd. needs a new stadium to host the sporting events. This
stadium will form a part of the Property, Plant and Equipment of the company. Mumbai
Challengers Ltd. began the construction of the stadium on 1 December, 20X1. The construction
of the stadium was completed in 20X2-20X3. Costs directly related to the construction
amounted to ₹ 140 crores in December 20X1. Thereafter, ₹ 350 crores have been incurred per
month until the end of the financial year. The company has not taken any specific borrowings
to finance the construction of the stadium, although it has incurred finance costs on its
regular overdraft during the period, which were avoidable had the stadium not been
constructed. Mumbai Challengers Ltd. has calculated that the weighted averagecost of the
borrowings for the period 1 December 20X1 to 31 March 20X2 amounted to 15%per annum on
an annualized basis.
The company seeks advice on the treatment of borrowing costs in its financial statements for
the year ending 31 March 20X2.
(b) Mumbai Challengers Ltd. acquires and sells players’ registrations on a regular basis. For a player
to play for its team, Mumbai Challengers Ltd. must purchase registrations for that player. These
player registrations are contractual obligations between the player and the company. The costs
of acquiring player registrations include transfer fees, league levy fees, and player agents’ fees
incurred by the club.
At the end of each season, which happens to also be the reporting period end for Mumbai
Challengers Ltd., the club reviews its contracts with the players and makes decisions as to
whether they wish to sell/transfer any players’ registrations. The company actively markets
these registrations by circulating with other clubs a list of players’ registrations and their
estimated selling price. Players’ registrations are also sold during the season, often with
performance conditions attached. In some cases, it becomes clear that a player will not play for
the club again because of, for example, a player sustaining a career threatening injury or being
permanently removed from the playing squad for any other reason. The playing
registrations of certain players were sold after the year end, for total proceeds, net of
associated costs, of ₹ 175 crores. These registrations had a net book value of ₹ 49 crores.
Mumbai Challengers Ltd. seeks your advice on the treatment of the acquisition, extension,
review and sale of players’ registrations in the circumstances outlined above.
(c) Mumbai Challengers Ltd. measures its stadiums in accordance with the revaluation model.
An airline company has approached the directors offering ₹ 700 crores for the property naming
rights of all the stadiums for five years. Three directors are on the management boards of both
Mumbai Challengers Ltd. and the airline. Additionally, statutory legislations regulate the
financing of both the cricket and hockey clubs. These regulations prevent contributions to the
capital from a related party which ‘increases equity without repayment in return’. Failure to
adhere to these legislations could lead to imposition of fines and withholding of prize
money.
Mumbai Challengers Ltd. wants to know how to take account of the naming rights in the
valuations of the stadium and the potential implications of the financial regulations imposed by
the legislations. [SM 2021, Case Study -6]
Ans.
(a) Borrowing Costs
As per Ind AS 23 Borrowing Costs, an entity shall capitalize borrowing costs that are directly
attributable to the acquisition, construction or production of a qualifying asset (i.e. an asset that
necessarily takes a substantial period of time to get ready for its intended use or sale)as part of
the cost of that asset. The borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset are those borrowing costs that would have been
avoided if the expenditure on the qualifying asset had not been made. To the extent that an
entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset,
the entity shall determine the amount of borrowing costs eligible for capitalization by applying
a capitalization rate to the expenditures on that asset. The capitalization rate shall be the
weighted average of the borrowing costs applicable to all borrowings of the entity that are
outstanding during the period.
The capitalization rate of the borrowings of Mumbai Challengers Ltd. during the period of
construction is 15% per annum (as given in the question), and therefore, the total amount of
borrowing costs to be capitalized is the expenditures incurred on the asset multiplied by
thecapitalization rate, which is as under:
Particulars ₹ in crores
Costs incurred in December 20X1: (₹ 140 crores x 15% x 4/12) 7.000
Costs incurred in January 20X2: (₹ 350 crores x 15% x 3/12) 13.125
Costs incurred in February 20X2: (₹ 350 crores x 15% x 2/12) 8.750
Costs incurred in March 20X2: (₹ 350 crores x 15% x 1/12) 4.375
Borrowing Costs to be capitalized in 20X1-X2 33.250
OR
Weighted average carrying amount of the stadium during 20X1-X2 is:
₹ (140 + 490 + 840 + 1,190) crores/4 = ₹ 665 crores
Applying the weighted average rate of borrowings of 15% per annum, the borrowing cost to be
capitalized is computed as:
₹ 665 crores x (15% x 4/12) = ₹ 33.25 crores
(b) Players’ Registrations

Acquisition
As per Ind AS 38 Intangible Assets, an entity should recognize an intangible asset where it is
probable that the expected future economic benefits that are attributable to the asset will flow
to the entity and the cost of the asset can be measured reliably. Accordingly, the costs
associated with the acquisition of players’ registrations would need to be capitalized which
would be the amount of cash or cash equivalent paid or the fair value of other
consideration given to acquire such registrations. In line with Ind AS 38 Intangible Assets,
costs would include transfer fees, league levy fees, and player agents’ fees incurredby the club,
along with other directly attributable costs, if any. Amounts capitalized would be fully amortized
over the period covered by the player’s contract.
Sale of registrations
Player registrations would be classified as assets held for sale under Ind AS 105 Non- Current
Assets Held for Sale and Discontinued Operations when their carrying amount is expected to be
recovered principally through a sale transaction and a sale is considered to be highly probable.
To consider a sale to be ‘highly probable’, the assets (in this case, player registrations) should be
actively marketed for sale at a price that is reasonable in relation to its current fair value. In the
given case, it would appear that the management is committed to a plan to sell the registration,
that the asset is available for immediate sale and that an active plan to locate a buyer is already
in place by circulating clubs. Ind AS 105 stipulates that it should be unlikely that the plan to sell
the registrations would be significantly changed or withdrawn. To fulfil this requirement, it
would be prudent if only those registrations are classified as held for sale where unconditional
offers have been received prior to the reporting date.
Once the conditions for classifying assets as held for sale in accordance with Ind AS 105 have
been fulfilled, the player registrations would be stated at lower of carrying amount and fair
value less costs to sell, with the carrying amount stated in accordance with Ind AS 38 prior to
application of Ind AS 105, subjected to impairment, if any.
Profits and losses on sale of players’ registrations would be computed by deducting the carrying
amount of the players’ registrations from the fair value of the consideration receivable,
net of transactions costs. In case a portion of the consideration is receivable on the occurrence
of a future performance condition (i.e. contingent consideration), this amount would be
recognized in the Statement of Profit and Loss only when the conditions are met.
The players registrations disposed of, subsequent to the year end, for ₹ 175 crores, having a
corresponding book value of ₹ 49 crores would be disclosed as a non-adjusting event in
accordance with Ind AS 10 Events after the Reporting Period.
Impairment review
Ind AS 36 Impairment of Assets requires companies to annually test their assets for
impairment. An asset is said to be impaired if the carrying amount of the asset exceeds its
recoverable amount. The recoverable amount is higher of the asset’s fair value less costs to sell
and its value in use (which is the present value of future cash flows expected to arise from the
use of the asset). In the given scenario, it is not easy to determine the value in use of any player
in isolation as that player cannot generate cash flows on his/her own unless via a sale
transaction or an insurance recovery. Whilst any individual player cannot really be separated
from the single cash-generating unit (CGU), being a cricket team or a hockey team in the instant
case, there may be certain instances where a player is taken out of the CGU when it becomes
clear that he/she will not play for the club again. If such circumstancesarise, the carrying amount
of the player should be assessed against the best estimate of the player’s fair value less any
costs to sell and an impairment charge should be recognized in the profit or loss, which reflects
any loss arising.
(c) Valuation of stadiums

In terms of Ind AS 113 Fair Value Measurement, stadiums would be valued at the price which
would be received to sell the asset in an orderly transaction between market participants at the
measurement date (i.e. exit price). The price would be the one which maximizes the value of the
asset or the group of assets using the principle of the highest and best use. The price would
essentially use Level 2 inputs which are inputs other than quoted market prices included within
Level 1 which are observable for the asset or liability, either directly or indirectly. Property
naming rights present complications when valuing property. The status of the property indicates
its suitability for inviting sponsorship attached to its name. It has nothing to do with the
property itself but this can be worth a significant amount. Therefore, Mumbai Challengers Ltd.
could include the property naming rights in the valuation of the stadium and write it off over
three years.
Ind AS 24 Related Party Disclosures lists the criteria for two entities to be treated as related
parties. Such criteria include being members of the same group or where a person or a close
member of that person’s family is related to a reporting entity if that person has control or joint
control over the reporting entity. Ind AS 24 deems that parties are not related simply because
they have a director or a key manager in common. In this case, there are three directors in
common and in the absence of any information to the contrary, it appears as though the entities
are not related. However, the regulator will need to establish whether the sponsorship deal is a
related party transaction for the purpose of the financial control provisions. There would need
to be demonstrated that the airline may be expected to influence, or be influenced by, the club
or a related party of the club. If the deal is deemed to be a related party transaction, the
regulator will evaluate whether the sponsorship is at fair value or not.
SM 3. (a) Neelanchal Gas Refinery Ltd. (hereinafter referred to as Neelanchal), a listed company, is
involved in the production and trading of natural gas and oil. Neelanchal jointly owns an
underground storage facility with another entity, Seemanchal Refineries Ltd. (hereinafter
referred to as Seemanchal). Both the companies are engaged in extraction of gas from offshore
gas fields, which they own and operate independently of each other. Neelanchal owns 60% of
the underground facility and Seemanchal owns 40%. Both the companies have agreed to share
services and costs accordingly, with decisions relating to the storage facility requiring unanimous
agreement of the parties. The underground facility is pressurised so that the gas is pushed out
when extracted. When the gas pressure is reduced to a certain level, the remaining gas is
irrecoverable and remains in the underground storage facility untilit is decommissioned. As per
the laws in force, the storage facility should be decommissioned at the end of its useful life.
Neelanchal seeks your advice on the treatment of the agreement with Seemanchal as well as the
accounting for the irrecoverable gas.
(b) Neelanchal has entered into a ten-year contract with Uttaranchal Refineries Pvt. Ltd.
(hereinafter referred to as Uttaranchal) for purchase of natural gas. Neelanchal has paid an
advance to Uttaranchal equivalent to the total quantity of gas contracted for ten years based on
the forecasted price of gas. This advanced amount carries interest at the rate of 12.5% per
annum, which is settled by Uttaranchal way of supply of extra gas. The contract requires fixed
quantities of gas to be supplied each month. Additionally, there is a price adjustment
mechanism in the contract whereby the difference between the forecasted price of gas and the
prevailing market price is settled in cash on a quarterly basis. If Uttaranchal does not deliver the
gas as agreed, Neelanchal has the right to claim compensation computed at the current market
price of the gas.
Neelanchal wants to account for the contract with Uttaranchal in accordance with Ind AS
109Financial Instruments and seeks your inputs in this regard. [SM 2021, Case Study - 7]
Ans.
(a) Joint Arrangement
As per Ind AS 111 Joint Arrangements, a joint arrangement is an arrangement of which two or
more parties have joint control. Joint control is the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant activities require the
unanimous consent of the parties sharing control. The structure and form of the arrangement
determines the nature of the relationship. However, irrespective of the purpose, structure or
form of the arrangement, the classification of joint arrangements depends upon the parties’
rights and obligations arising from the arrangement. Accordingly, a joint arrangement could be
classified as a joint operation or as a joint venture. A joint arrangement which is NOT structured
through a separate vehicle is a joint operation. In such cases, the contractual arrangement
establishes the parties’ rights and obligations. A joint operator accounts for the assets,
liabilities, revenues and expenses relating to its involvement in a joint operation in accordance
with the relevant Ind AS. Based on the information provided, the arrangement with Seemanchal
Refineries Ltd. is a joint operation as no separate vehicle is formed and the companies have
agreed to share services and costs with decisions regarding the storage facility requiring
unanimous agreement of the parties. Neelanchal Gas Refinery Ltd. should recognize its share of
the asset as Property, Plant and Equipment.
As per Para 16 of Ind AS 16 Property, Plant and Equipment, the cost of an item of property, plant
and equipment comprises the initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located. Ind AS 37 Provisions, Contingent Liabilities and
Contingent Assets provides guidance on measuring decommissioning,restoration and similar
liabilities. Para 45 of Ind AS 37 provides that where the effect of the time value of money is
material, the amount of a provision shall be the present value of the expenditures expected to
be required to settle the obligation. Thus, costs incurred by an entity in respect of obligations
for dismantling, removing and restoring the site on which an item of property, plant and
equipment is situated are recognized and measured in accordance with Ind AS 16 and Ind AS 37,
with the journal entry being as under:
Property, Plant and Equipment Dr. xxx
To Provision for Dismantling, Removal and Restoration xxx
Neelanchal Gas Refinery Ltd. should recognize 60% of the cost of decommissioning of the
underground storage facility. However, in line Para 29 of Ind AS 37 where an entity is jointly and
severally liable for an obligation, the part of the obligation that is expected to be met by other
parties is treated as a contingent liability. Accordingly, Neelanchal Gas Refinery Ltd. should also
disclose 40% of the cost of decommissioning of the underground facility as a contingent
liability, should there arise future events that prevent Seemanchal Refineries Ltd. from fulfilling
its obligations under the arrangement.
As per Ind AS 16, Property, Plant and Equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period.
Thus, Neelanchal Gas Refinery Ltd. should classify and account for its share of irrecoverable gas
as property, plant and equipment, as the irrecoverable gas is necessary for the storage facility to
perform its function. Therefore, the irrecoverable gas, being a part of the storage facility, should
be capitalized as a component of the storage facility asset, and should be depreciated to its
residual value over the life of the storage facility. However, if the gas is recoverable in full upon
decommissioning of the storage facility, then depreciation against the irrecoverable gas
component will be recorded only if the estimated residual value of the gas decreases below cost
during the life of the facility. Upon decommissioning of the storage facility, when the cushion
gas is extracted and sold, the sale of irrecoverable gas is accounted as a disposal of an item of
property, plant and equipment in accordance with Ind AS 16 and the resulting gain or loss is
recognized in the Statement of Profit and Loss. The natural gas in excess of the irrecoverable
gas which is injected into the facility would be treated as inventory in accordance with Ind AS 2
Inventories.
(b) Contract with Uttaranchal Refineries Pvt. Ltd.

As per para 2.4 of Ind AS 109 Financial Instruments, this standard applies to those contracts to
buy or sell a non-financial item that can be settled net in cash or another financial instrument, or
by exchanging financial instruments, as if the contracts were financial instruments, with the
exception of contracts that were entered into and continue to be heldfor the purpose of the
receipt or delivery of a non-financial item in accordance with the entity’s expected purchase,
sale or usage requirements (i.e. own use contracts). This contract will result in physical delivery
of the commodity i.e. extra gas.
Para 2.5 of Ind AS 109 further provides that a contract to buy or sell a non-financial item that can
be settled net in cash or another financial instrument, or by exchanging financial instruments, as
if the contract was a financial instrument, may be irrevocably designated as measured at fair
value through profit or loss even if it was entered into for the purpose of the receipt or delivery
of a non-financial item in accordance with the entity’s expected purchase, sale or usage
requirements. This designation is available only at inception of the contract and only if it
eliminates or significantly reduces a recognition inconsistency (sometimes referred to as an
‘accounting mismatch’) that would otherwise arise from not recognising that contract because it
is excluded from the scope of this Standard.
There are various ways in which a contract to buy or sell a non-financial item can be settled net
in cash or another financial instrument or by exchanging financial instruments. These include:
(a) when the terms of the contract permit either party to settle it net in cash or another
financial instrument or by exchanging financial instruments;
(b) when the ability to settle net in cash or another financial instrument, or by exchanging
financial instruments, is not explicit in the terms of the contract, but the entity has a
practice of settling similar contracts net in cash or another financial instrument or by
exchanging financial instruments (whether with the counterparty, by entering into
offsetting contracts or by selling the contract before its exercise or lapse);
(c) when, for similar contracts, the entity has a practice of taking delivery of the underlying
and selling it within a short period after delivery for the purpose of generating a profit
from short-term fluctuations in price or dealer’s margin; and
(d) when the non-financial item that is the subject of the contract is readily convertible to
cash.
A written option to buy or sell a non-financial item, such as a commodity, that can be settled net
in cash or another financial instrument, or by exchanging financial instruments, is within the
scope of Ind AS 109. Such a contract is accounted as a derivative. Such a contract cannot be
entered into for the purpose of the receipt or delivery of the non-financial item in accordance
with the entity’s expected purchase, sale or usage requirements. Judgment would be
required in this area as net settlements caused by unique events beyond management’s control
may not necessarily prevent the entity from applying the ‘own use’ exemption to all similar
contracts.
In the given case, the contract with Uttaranchal Refineries Pvt. Ltd. will result in physical delivery
of extra gas (which is a commodity and not cash, or a financial instrument) for theuse of
Neelanchal Gas Refinery Ltd. Accordingly, it appears that this contract would be an own use
contract falling outside the scope of Ind AS 109 and therefore, would be treated as an executory
contract. However, arguments could be placed that the contract is net settled due to the
penalty mechanism requiring Uttaranchal Refineries Pvt. Ltd. to compensate Neelanchal Gas
Refinery Ltd. at the current prevailing market price. Further, if natural gas is readily convertible
into cash at the location of delivery, the contract could be considered net settled. Additionally, if
there is volume flexibility, the contract could be regarded as a written option which falls within
the scope of Ind AS 109.
However, the contract will probably continue to be regarded as ‘own use’ as long as it has been
entered into and continues to be held for expected counterparties’ sale / usage requirements.
Additionally, the entity has not irrevocably designated the contract as measured at fair
value through profit or loss, thus emphasizing the ‘own use’ designation
Ind AS 110
CONSOLIDATED FINANCIAL STATEMENTS
SM 1. Exception to prepare consolidated financial statements

Scenario A:
Following is the structure of a group headed by Company X:
Company X
100%
Company A
100% 100%
Company B Company C
Company X is a listed entity in India and prepares consolidated financial statements as per the
requirements of Ind AS. Company A is an unlisted entity and it is not in the process of listing any of its
instruments in public market.Company X does not object to Company A not preparing consolidated
financial statements. WhetherCompany A is required to prepare consolidated financial statements as
per the requirements of Ind AS 110?
Scenario B:
Assume the same facts as per Scenario A except, Company X is a foreign entity and is listed in stock
exchange of a foreign country and it prepares its financial statements as per the generally accepted
accounting principles (GAAP) applicable to that country. Will your answer be different in this case?
Scenario C:
Assume the same facts as per Scenario A except, 100% of the investment in Company A is held by Mr. X
(an individual) instead of Company X. Will your answer be different in this case? [SM 2021, Ill.-1]
Ans.
Scenario A:
In this case, Company A satisfies all the conditions for not preparing consolidated financial statements
i.e. it is not a listed entity nor it is in the process of listing, the parent of Company A prepares
consolidated financial statements as per Ind AS which is available for public use and parent of Company
A does not object Company A not preparing consolidated financial statements.
Hence, Company A is not required to prepare consolidated financial statements.
Scenario B:
In this case, the consolidated financial statements of parent of Company A are not prepared under Ind
AS. Hence Company A cannot avail the exemption from preparation of consolidated financial
statements.
Scenario C:
In thiscase, Mr. X (an individual) would not be preparing its financial statements as per the
requirements of Ind AS which is available for public use.
Hence Company A cannot avail the exemption from preparation of consolidated financial
statements.
SM 2. Exception to prepare consolidated financial statements
Scenario A:
Following is the structure of a group headed by Company A.
Company A
100% 60%
Company B Company C
100%
Company X
Company A is a listed entity in India and prepares consolidated financial statements as per the
requirements of Ind AS. Company C is an unlisted entity and it is not in the process of listing any of its
instruments in public market. 60% of the equity share capital of Company C is held by Company A and
balance 40% equity share capital is held by other outside investors. Company A does not object to
Company C not preparing consolidated financial statements. Whether CompanyC is required to prepare
consolidated financial statements as per the requirements of Ind AS 110?
Scenario B:
Assume the same facts as per Scenario A except, the balance 40% of the equity share capital ofCompany
C is held by Company B.
State whether C Limited is required to inform its other owner B Limited (owning 40%) of its
intention to not prepare consolidated financial statements as mentioned in paragraph 4(a)(i)?
[SM 2021, Ill.-2]
Ans.
Scenario A:
Company C is a partly owned subsidiary of Company A. In such case, Company C should inform the
other 40% equity shareholders about Company C not preparing consolidated financial statements
and if they do not object then only Company C can avail the exemption from preparing consolidated
financial statements.
Scenario B:
In this scenario, Company C is 100% held by Company A (60% direct investment and 40%
investment through Company B). Hence, Company C is not required to inform to Company B of not
preparing consolidated financial statements and can avail the exemption from preparing the
consolidated financial statements.
SM 3. Different investors have ability to direct different relevant activities

A Ltd. and B Ltd. have formed a new entity AB Ltd. for constructing and selling a scheme of residential
units consisting of 100 units. Construction of the residential units will be done by A Ltd. and it will take
all the necessary decision related to the construction activity. B Ltd. will do the marketing and selling
related activities for the units and it will take all the necessary decisions related to marketing and
selling. Based on above, who has the power over AB Ltd.? [SM 2021, Ill.-3]
Ans.
In this case, both the investors A Ltd. and B Ltd. have the rights to unilaterally direct different relevant
activities of AB Ltd. Here, investors shall determine which activities can most significantly affect the
returns of the investee and the investor having the ability to direct those activities would be considered
to have power over the investee. Hence, if the investors conclude that the construction related
activities would most significantly affect the returns of AB Ltd. then A Ltd. would be said to have power
over AB Ltd. On the other hand, if it is concluded that marketing and selling related activities would
most significantly affect the returns of AB Ltd. then B Ltd. would besaid to have power over AB Ltd.
SM 4. Determining the relevant activities

A Ltd. is an asset manager of a venture capital fund i.e. Fund X. Out of the total outstanding units of the
fund, 10% units are held by A Ltd. and balance 90% units are held by other investors. Majority of the
unitholders of the fund have right to appoint a committee which will manage the day to day
administrative activities of the fund. However, the decisions related to the investments / divestments to
be done by Fund X is taken by asset manager i.e. A Ltd. Based on above, who has power over Fund X?
[SM 2021, Ill.-4]
Ans.
In this case, A Ltd. is able to direct the activities that can most significantly affect the returns ofFund X.
Hence A Ltd. has power over the investee. However, this does not mean that A Ltd. hascontrol over the
fund and consideration will have to be given to other elements of control evaluation as well i.e.
exposure to variable returns and link between power and exposure tovariable returns.
SM 5. Current ability to direct the relevant activities

An investment vehicle (the investee) is created and financed with a debt instrument held by an investor
(the debt investor) and equity instruments held by a number of other investors. The equity tranche is
designed to absorb the first losses and to receive any residual return from the investee. One of the
equity investors who holds 30 per cent of the equity is also the asset manager.
The investee uses its proceeds to purchase a portfolio of financial assets, exposing the investee to the
credit risk associated with the possible default of principal and interest payments of the assets. The
transaction is marketed to the debt investor as an investment with minimal exposure to the credit
riskassociated with the possible default of the assets in the portfolio because of the nature of these
assets and because the equity tranche is designed to absorb the first losses of the investee.
The returns of the investee are significantly affected by the management of the investee’s asset
portfolio, which includes decisions about the selection, acquisition and disposal of the assets
within portfolio guidelines and the management upon default of any portfolio assets. All those activities
are managed by the asset manager until defaults reach a specified proportion of the portfolio value (ie
when the value of the portfolio is such that the equity tranche of the investee has been consumed).
From that time, a third-party trustee manages the assets according to the instructions of the debt
investor.
Based on the above, who has power over the investment vehicle? [SM 2021, Ill.-5]
Ans.
Managing the investee’s asset portfolio is the relevant activity of the investee.
The asset manager has the ability to direct the relevant activities until defaulted assets reach the
specified proportion of the portfolio value; the debt investor has the ability to direct the relevant
activities when the value of defaulted assets surpasses that specified proportion of the portfolio value.
The asset manager and the debt investor each need to determine whether they are able to direct the
activities that most significantly affect the investee’s returns, including considering the purpose and
design of the investee as well as each party’s exposure to variability of returns.
SM 6. Voting rights are substantive or not

Scenario A:
Following is the voting power holding pattern of B Ltd.
 10% voting power held by A Ltd.
 90% voting power held by 9 other investor each holding 10%
All the investors have entered into a management agreement whereby they have granted the decision-
making powers related to the relevant activities of B Ltd. to A Ltd. for a period of 5 years.
After 2 years of the agreement, the investors holding 90% of the voting powers have some disputes
with A Ltd. and they want to take back the decision-making rights from A Ltd. This can be done by
passing a resolution with majority of the investors voting in favour of the removal of rights from A Ltd.
However, as per the termination clause of the management agreement, B Ltd. will have to pay a huge
penalty to A Ltd. for terminating the agreement before its stated term.
Whether the rights held by investors holding 90% voting power are substantive?
Scenario B:
Assume the same facts as per Scenario A except, there is no penalty required to be paid by B Ltd. for
termination of agreement before its stated term. However, instead of all other investors, there are only
4 investors holding total 40% voting power that have disputes with A Ltd. and want to take back
decision-making rights from A Ltd.
Whether the rights held by investors holding 40% voting power are substantive? [SM 2021, Ill.-5]
Ans.
Scenario A:
If the investors holding 90% of the voting power exercise their right to terminate the management
agreement, then it will result in B Ltd. having to pay huge penalty which will affect the returns of B Ltd.
This is a barrier that prevents such investors from exercising their rights and hence such rights are not
substantive.
Scenario B:
To take back the decision-making rights from A Ltd., investors holding majority of the voting power
need to vote in favour of removal of rights from A Ltd. However, the investors having disputes with A
Ltd. do not have majority voting power and hence the rights held by them are not substantive.
SM 7. Potential voting rights are substantive or not

Scenario A:
An investor is holding 30% of the voting power in ABC Ltd. The investor has been granted an option to
purchase 30% more voting power from other investors. However, the exercise price of the option is too
high compared to the current market price of ABC Ltd. because ABC Ltd. is incurring losses since last 2
years and it is expected to continue to incur losses in future period as well. Whether the right held by
the investor to exercise purchase option is substantive?
Scenario B:
Assume the same facts as per Scenario A except, the option price is in line with the current market price
of ABC Ltd. and ABC Ltd. is making profits. However, the option can beexercised in next 1 month
only and the investor is not in a position to arrange for the require amount in 1 month’s time to exercise
the option. Whether the right held by the investor to exercise purchase option is substantive?
Scenario C:
Assume the same facts as per Scenario A except, ABC Ltd. is making profits. However, the current
market price of ABC Ltd. is not known since the ABC Ltd. is a relatively new company, business of
the company is unique and there are no other companies in the market doing similar business. Hence
the investor is not sure whether to exercise the purchase option. Whether the right held by the
investor to exercise purchase option is substantive? [SM 2021, Ill.-6]
Ans.
Scenario A:
The right to exercise purchase option is not substantive since the option exercise price is too high as
compared to current market price of ABC Ltd.
Scenario B:
The right to exercise purchase option is not substantive since the time period for the investor to
arrange for the requisite amount for exercising the option is too narrow.
Scenario C:
The right to exercise purchase option is not substantive. This is because the investor is not able to
obtain information about the market value of ABC Ltd. which is necessary in order to compare the
option exercise price with market price so that it can decide whether the exercise of purchase option
would be beneficial or not.
SM 8. Removal rights are substantive or not

A venture capital fund is managed by an asset manager who has right to take the investment and
divestments decisions related to the fund corpus. The asset manager is also holding some stake in the
fund. The other investors of the fund have right to remove the asset manager.
However, in the present scenario, there is absence of other managers who are willing or able to provide
specialised services that the current asset manager is providing and purchase the stake that the
current asset manager is holding in the fund. Whether the removal rights available with other investors
are substantive? [SM 2021, Ill.-7]
Ans.
If the other investors exercise their removal rights, then it will impact the operations of the fund and
ultimately the returns of the fund since there is no substitute of the current asset manager available
who can manage the corpus of the fund. Hence the removal rights held by other investors are not
substantive.
SM 9. Protective rights of a franchisor

ABC Ltd. is a manufacturer of branded garments and is the owner of Brand X. PQR Ltd. has entered into
a franchise agreement with ABC Ltd. to allow PQR Ltd. to set up a retail outlet to sell the products of
Brand X.
As per the agreement, PQR Ltd. will set up the retail outlet from its own funds, decide the capital
structure of the entity, hire employees and their remuneration, select vendors for acquiring capital
items, etc. However, ABC Ltd. will give certain operating guidelines like the interior of the retail outlet,
uniform of the employees and other such guidelines to protect the brand name of ABC Ltd.
Whether the rights held by ABC Ltd. protective or substantive? [SM 2021, Ill.-8]
Ans.
The activities that most significantly affect the returns of PQR Ltd. are the funding and capital structure
of PQR Ltd., hiring of employees and their remuneration, vendors for capital items, etc.which are
exercisable by PQR Ltd. Further, the retails outlet is being set up by PQR Ltd. without any financial
support from ABC Ltd. The rights available with ABC Ltd. are to protect the brand name of ABC Ltd. and
such rights do not affect the ability of PQR Ltd. to take decisions about relevant activities. Hence, the
rights held by ABC Ltd. are protective rights.
SM 10. Voting rights of investor are sufficient to give it power

An investor holds 45% of the voting rights of an investee. The remaining voting rights are held by
thousands of shareholders, none individually holding more than 1% of the voting rights. None of the
shareholders has any arrangements to consult any of the others or make collective decisions. Whether
the investor holding 45% voting right have power over the investee? [SM 2021, Ill.-9]
Ans.
On the basis of the absolute size of its holding by the investor and the relative size of the voting rights
held by other shareholders, it is more likely that the investor would have power over the investee.
SM 11. Voting rights of investor are sufficient to give it power
ABC Ltd. holds 40% of the voting rights of XYZ Ltd. The remaining voting rights are held by 6 other
shareholders, each individually holding 10% each. Whether the investor holding 40% voting right have
power over the investee? [SM 2021, Ill.-10]
Ans.
In this case, it is less likely that ABC Ltd. will have power over XYZ Ltd. since the size of the number of
shareholders required to outvote ABC Ltd. is not so high. Additional facts and circumstances should also
be considered to determine whether ABC Ltd. has power or not.
SM 12. Voting patterns at previous shareholders’ meetings

An investor holds 35% of the voting rights of an investee. Three other shareholders each hold 5% of the
voting rights of the investee. The remaining voting rights are held by numerous other shareholders,
none individually holding more than 1% of the voting rights. None of the shareholders has
arrangements to consult any of the others or make collective decisions. Decisions about the
relevant activities of the investee require the approval of a majority of votes cast at relevant
shareholders’ meetings„75% of the voting rights of the investee have been cast at recent relevant
shareholders’ meetings.
Whether the investor’s voting rights are sufficient to give it power to direct the relevant activities of the
investee? [SM 2021, Ill.-11]
Ans.
In this case, the active participation of the other shareholders at recent shareholders’ meetings indicates
that the investor would not have the practical ability to direct the relevant activities unilaterally,
regardless of whether the investor has directed the relevant activities because a sufficient number
of other shareholders voted in the same way as the investor.
SM 13. Potential voting rights

Investor A and two other investors each hold a third of the voting rights of an investee. The investee’s
business activity is closely related to investor A. In addition to its equity instruments, investor A also
holds debt instruments that are convertible into ordinary shares of the investee at any time for a fixed
price. The conversion rights are substantive. If the debt were converted, investor A would hold 60% of
the voting rights of the investee. Investor A would benefit from realising synergies if the debt
instruments were converted into ordinary shares. Whether investor A has power over the investee?
[SM 2021, Ill.-12]
Ans.
Investor A has power over the investee because it holds voting rights of the investee together with
substantive potential voting rights that give it the current ability to direct the relevant activities.
SM 14. Purpose and design of the investee

PQR Ltd. has entered into a contract with a state government to construct a power plant and distribute
the electricity generated from the plant to the households of the state. For this, PQR Ltd. has set up a
new entity XYZ Ltd. PQR Ltd. was involved in the design of XYZ Ltd. The decisions related to the
relevant activities of XYZ Ltd. i.e. how much electricity to generate or the price at which units of
electricity to be sold to customers, etc. are not determined by the voting rights. Whether PQR Ltd. has
power over XYZ Ltd.? [SM 2021, Ill.-13]
Ans.
PQR Ltd. was involved in the design of XYZ Ltd. Accordingly, its involvement in the design may indicate
that the investor had the opportunity to obtain rights that are sufficient to give it power over the
investee. However, being involved in the design of XYZ Ltd. alone is not sufficient to give PQR Ltd.
control over XYZ Ltd. and hence other facts and circumstances, such as other contractual
arrangements, should also be considered.
SM 15. Rights contingent upon future events

An investee’s only business activity, as specified in its founding documents, is to purchase receivables
and service them on a day-to-day basis for its investors. Following is the relevant fact pattern:
 The servicing on a day-to-day basis includes the collection and passing on of principal and interest
payments as they fall due.
 Upon default of a receivable the investee automatically puts the receivable to an investor as agreed
separately in an agreement between the investee and the investor.
 The only relevant activity is managing the receivables upon default because it is the only activity
that can significantly affect the investee’s returns.
 Managing the receivables before default is not a relevant activity because the activities
before default are predetermined and amount only to collecting cash flows as they fall due and
passing them on to investors.
Whether the investor has power over the investee? [SM 2021, Ill.-14]
Ans.
In this question, the design of the investee ensures that the investor has decision-making power only in
case of default of a receivable. The terms of the agreement between investee and investor are integral
to the overall transaction and the establishment of the investee. Therefore, the terms of the agreement
together with the founding documents of the investee lead to the conclusion that the investor has
power over the investee even though the investor takes ownership of the receivables only upon
default and manages the defaulted receivables outside the legal boundaries
of the investee.
SM 16. Commitment to ensure that an investee operates as designed

A Ltd. is a manufacturer of pharmaceutical products. A Ltd. has invested in share capital of B Ltd. which
is a manufacturer of packing material for pharmaceutical products. A Ltd.’s requirements of packing
materials for its products are entirely supplied by B Ltd. A Ltd. is not purchasing the packing materials
from any other vendors because the materials supplied by other vendors are of inferior quality. Whether
A Ltd. has power over B Ltd.? [SM 2021, Ill.-15]
Ans.
A Ltd. would be the most affected by the operations of B Ltd. since it is dependent on B Ltd. for the
supply of packing materials. Therefore A Ltd. would be committed to ensure that B Ltd. operates as
designed. This can be an indicator of A Ltd. having power over B Ltd. But it has to consider other facts
and circumstances as well to conclude whether it control B Ltd. or not.
SM 17. Link between power and returns

A decision maker (fund manager) establishes, markets and manages a publicly traded, regulated fund
according to narrowly defined parameters set out in the investment mandate as required by its local
laws and regulations. The fund was marketed to investors as an investment in a diversified portfolio of
equity securities of publicly traded entities. Following is the relevant fact pattern related to fund
manager:
 Within the defined parameters, the fund manager has discretion about the assets in which to invest.
 The fund manager has made a 10% pro rata investment in the fund and receives a market- based fee
for its services equal to 1% of the net asset value of the fund.
 The fees are commensurate with the services provided.
 The fund manager does not have any obligation to fund losses beyond its 10% investment. The fund
is not required to establish, and has not established, an independent board of directors.
The investors do not hold any substantive rights that would affect the decision-making authority of the
fund manager but can redeem their interests within particular limits set by the fund.
Whether the fund manager controls the fund? [SM 2021, Ill.-16]
Ans.
Although operating within the parameters set out in the investment mandate and in accordance with
the regulatory requirements, the fund manager has decision-making rights that give it the current ability
to direct the relevant activities of the fund„the investors do not hold substantive rights that could
affect the fund manager’s decision-making authority. The fund manager receives a market-based fee for
its services that is commensurate with the services provided and has also made a pro rata investment in
the fund. The remuneration and its investment expose the fundmanager to variability of returns from
the activities of the fund without creating exposure that is of such significance that it indicates that the
fund manager is a principal.
In this case, consideration of the fund manager’s exposure to variability of returns from the fund
together with its decision-making authority within restricted parameters indicates that the fund
manager is an agent. Thus, the fund manager concludes that it does not control the fund.
[SM 2021, Ill.-17]

A decision maker establishes, markets and manages a fund that provides investment opportunities
to a number of investors. The decision maker (fund manager) must make decisions in the best interests
of all investors and in accordance with the fund’s governing agreements. Nonetheless, the fund
manager has wide decision-making discretion. The fund manager receives a market- based fee for its
services equal to 1% of assets under management and 20% of all the fund’s profits if a specified profit
level is achieved. The fees are commensurate with the services provided.
Although it must make decisions in the best interests of all investors, the fund manager has
extensive decision-making authority to direct the relevant activities of the fund. The fund manager is
paid fixed and performance-related fees that are commensurate with the services provided. In addition,
the remuneration aligns the interests of the fund manager with those of the other investors to
increase the value of the fund, without creating exposure to variability of returns from the activities of
the fund that is of such significance that the remuneration, when considered in isolation, indicates that
the fund manager is a principal.
The above fact pattern and analysis applies to various scenarios described below. Each scenario is
considered in isolation. Determine whether the fund manager control the fund?
Scenario A
The fund manager also has a 2% investment in the fund that aligns its interests with those of the other
investors. The fund manager does not have any obligation to fund losses beyond its 2% investment. The
investors can remove the fund manager by a simple majority vote, but only for breach of contract.
Scenario B
The fund manager has a more substantial pro rata investment in the fund but does not have any
obligation to fund losses beyond that investment. The investors can remove the fund manager by a
simple majority vote, but only for breach of contract.
Scenario C
The fund manager has a 20% pro rata investment in the fund but does not have any obligation to fund
losses beyond its 20% investment. The fund has a board of directors, all of whose members are
independent of the fund manager and are appointed by the other investors. The boardappoints
the fund manager annually. If the board decided not to renew the fund manager’s contract, the
services performed by the fund manager could be performed by other managers in the industry.
[SM 2021, Ill.-18]
Ans.
Scenario A
The fund manager’s 2% investment increases its exposure to variability of returns from
theactivities of the fund without creating exposure that is of such significance that it indicates that the
fund manager is a principal. The other investors’ rights to remove the fund manager are
considered to be protective rights because they are exercisable only for breach of contract. In this
example, although the fund manager has extensive decision-making authority and is exposed to
variability of returns from its interest and remuneration, the fund manager’s exposure indicates that the
fund manager is an agent. Thus, the fund manager concludes that it does not control the fund.
Scenario B
In this scenario, the other investors’ rights to remove the fund manager are considered to be protective
rights because they are exercisable only for breach of contract. Although the fund manager is
paid fixed and performance-related fees that are commensurate with the services provided, the
combination of the fund manager’s investment together with its remuneration could create exposure to
variability of returns from the activities of the fund that is of such significance that it indicates that the
fund manager is a principal. The greater the magnitude of, and variability associated with, the fund
manager’s economic interests (considering its remuneration and other interests in aggregate), the more
emphasis the fund manager would place on those economic interests in the analysis, and the more likely
the fund manager is a principal.
For example, having considered its remuneration and the other factors, the fund manager might
consider a 20% investment to be sufficient to conclude that it controls the fund. However, in different
circumstances (i.e. if the remuneration or other factors are different), control may arise when the level
of investment is different.
Scenario C
Although the fund manager is paid fixed and performance-related fees that are commensurate with the
services provided, the combination of the fund manager’s 20% investment together with its
remuneration creates exposure to variability of returns from the activities of the fund that is of such
significance that it indicates that the fund manager is a principal. However, the investors have
substantive rights to remove the fund manager„the board of directors provides a mechanism to ensure
that the investors can remove the fund manager if they decide to do so.
In this scenario, the fund manager places greater emphasis on the substantive removal rights in the
analysis. Thus, although the fund manager has extensive decision-making authority and is exposed to
variability of returns of the fund from its remuneration and investment, the substantiverights held by
the other investors indicate that the fund manager is an agent. Thus, the fund manager concludes that it
does not control the fund.

An investee is created to purchase a portfolio of fixed rate asset-backed securities, funded by fixed
rate debt instruments and equity instruments. The equity instruments are designed to provide first loss
protection to the debt investors and receive any residual returns of the investee.
The transaction was marketed to potential debt investors as an investment in a portfolio of asset-
backed securities with exposure to the credit risk associated with the possible default of the
issuers of the asset-backed securities in the portfolio and to the interest rate risk associated with the
management of the portfolio.
On formation, the equity instruments represent 10% of the value of the assets purchased. A decision
maker (the asset manager) manages the active asset portfolio by making investment decisions within
the parameters set out in the investee’s prospectus. For those services, the asset manager receives a
market-based fixed fee (i.e. 1% of assets under management) and performance-related fees (i.e.
10% of profits) if the investee’s profits exceed a specified level. The fees are commensurate with the
services provided. The asset manager holds 35% of the equity in the investee. The remaining 65% of
the equity, and all the debt instruments, are held by a large number of widely dispersed unrelated third-
party investors. The asset manager can be removed, without cause, by a simple majority decision of the
other investors.
Does the asset manager control the investee? [SM 2021, Ill.-18]
Ans.
The asset manager is paid fixed and performance-related fees that are commensurate with the services
provided. The remuneration aligns the interests of the fund manager with those of the other investors
to increase the value of the fund. The asset manager has exposure to variability of returns from the
activities of the fund because it holds 35% of the equity and from its remuneration.
Although operating within the parameters set out in the investee’s prospectus, the asset manager has
the current ability to make investment decisions that significantly affect the investee’s returns - the
removal rights held by the other investors receive little weighting in the analysis because those rights
are held by a large number of widely dispersed investors. In this example, the asset manager
places greater emphasis on its exposure to variability of returns of the fund from its equity interest,
which is subordinate to the debt instruments. Holding 35% of the equity creates subordinated exposure
to losses and rights to returns of the investee, which are of such significance that it indicates
that the asset manager is a principal. Thus, the asset manager
concludes that it controls the investee.

A decision maker (the sponsor) sponsors a fund, which issues short-term debt instruments to unrelated
third-party investors. The transaction was marketed to potential investors as an investment in a
portfolio of highly rated medium-term assets with minimal exposure to the credit risk associated with
the possible default by the issuers of the assets in the portfolio. Various transferors sell high quality
medium-term asset portfolios to the fund. Each transferor services the portfolio of assets that it sells to
the fund and manages receivables on default for a market-based servicing fee. Each transferor also
provides first loss protection against credit losses from its asset portfolio through over-
collateralisation of the assets transferred to the fund. The sponsor establishes the terms of the
fund and manages the operations of the fund for a market-based fee. The fee is commensurate with the
services provided. The sponsor approves the sellers permitted to sell to the fund, approves the assets to
be purchased by the fund and makes decisions about the funding of the fund. The sponsor must act in
the best interests of all investors.
The sponsor is entitled to any residual return of the fund and also provides credit enhancement and
liquidity facilities to the fund. The credit enhancement provided by the sponsor absorbs losses of up to
5% of all of the fund’s assets, after losses are absorbed by the transferors. The liquidity facilities are not
advanced against defaulted assets. The investors do not hold substantive rights that could affect the
decision-making authority of the sponsor. Whether the sponsor has control over the fund?
[SM 2021, Ill.-19]
Ans.
Even though the sponsor is paid a market-based fee for its services that is commensurate with the
services provided, the sponsor has exposure to variability of returns from the activities of the fund
because of its rights to any residual returns of the fund and the provision of credit enhancement and
liquidity facilities (i.e. the fund is exposed to liquidity risk by using short-term debt instruments to fund
medium-term assets). Even though each of the transferors has decision-making rights that affect the
value of the assets of the fund, the sponsor has extensive decision-making authority that gives it the
current ability to direct the activities that most significantly affect the fund’s returns (i.e. the sponsor
established the terms of the fund, has the right to make decisions about the assets (approving the
assets purchased and the transferors of those assets) and the funding of the fund (for which new
investment must be found on a regular basis)). The right to residual returns of the fund and the
provision of credit enhancement and liquidity facilities expose the sponsor to variability of returns
from the activities of the fund that is different from that of the other investors. Accordingly, that
exposure indicates that the sponsor is a principal and thus the sponsor concludes that it controls the
fund. The sponsor’s obligation to act in the best interest of all investors does not
prevent the sponsor from being a principal.
SM 21. Business purpose of an investment entity

An asset manager has set up and investment fund for the purpose of acquiring capital
contributions from various investors (by issuing them units in the fund) and investing those
contributions in the equity share capital of various entities for the purpose of earning capital
appreciation on those investments. Following is the existing structure of the fund.
Various investors
Investment Fund
Strategic Advisory Services

and financial support
Investment in equity
shares of various
entities
Apart from the investments in various entities, the investment fund also provides its investee the
strategic advisory services so that it can result in increase in the capital appreciation from investments in
those investees. It also provides its investees financial support in the form of loan to provide them with
funds for acquiring capital assets. The investment fund does not hold such investments for a period
longer than 5 years. The investment fund measures and evaluate the performance of the investments
on fair value basis.
Whether the investment fund can be treated as an investment entity? [SM 2021, Ill.-20]
Ans.
Out of the three elements of the definition of an investment entity, the investment fund fulfils the two
elements very clearly i.e. it obtains fund from more than one investor for providing investment
management services and measures and evaluates its investments on fair value basis.
The typical characteristics of an investment entity are also present in the structure of the
investment fund i.e. more than one investment, more than one investor, investors are unrelated and
investment fund issues units in the fund to the investors.
With respect to the business objective of the investment fund, the objective is to earn capital
appreciation from its investments. The strategic advisory services and financial support provided to
investees are extended with the intention of earning higher capital appreciation from the investees.
However, judgement should to be applied that these do not represent substantial business activity or a
separate substantial source of income for the investment fund. If the investment fund concludes
that these services and financial support to investees are not substantial business activity and
substantial source of income for the investment fund, then only the investment fundcan be treated as
an investment entity.
SM 22. Exit strategies of an investment entity

ABC Ltd. Is established with primary objective of investing in the equity shares of various entities across
various industries based on the detailed research about each industry and entities within that industry
being done by the investment manager of the company.
The investment manager decides the timing as to when the investments should be made considering
the current market situation. Sometimes, the investment manager decides to invest the idle funds into
short-term to medium-term debt instruments with fixed maturity. The exit strategies are in place for the
investments done in equity shares but the same is not there for investments done in debt instruments.
Determine whether the entity fulfils the exit strategy condition of being classified as investment entity?
[SM 2021, Ill.-21]
Ans.
The exit strategies are in place for investments done in equity shares. But not in place for
investments done in debt instruments. However, it should be noted that the debt instruments have
fixed maturity period and they cannot be held for indefinite period. Hence, there is no need for having
exit strategies for such instruments. Accordingly, the exit strategy condition is fulfilled for being
classified as investment entity.
SM 23. Earnings from investments of an investment entity

PQR Ltd. Is established with primary objective of investing in the equity shares of various
pharmaceutical companies which are involved in the research and development of medicine for a critical
illness. DEF Ltd. Is a follow subsidiary of PQR Ltd. And DEF Ltd. Has entered into contractual
arrangements with all the investees of PQR Ltd. That in case they are successful in developing the
medicine then they will transfer the patent and distribution rights for that medicineto DEF Ltd. At less
then market price. This arrangement is explained in following diagram:
Fellow subsidiaries
PQR Ltd. DEF Ltd.
Contractual
Investment in equity arrangements
shares of pharmaceutical
companies
Determine whether PQR Ltd. Can be classified as investment entity? [SM 2021, Ill.-22]
Ans.
PQR Ltd. And DEF Ltd. Are part of same group. Further, DEF Ltd. Have exclusive right to acquire the
patent and distributions rights from the investees of PQR Ltd. And that too at less then the market
price. Hence, the related party of PQR Ltd. Is in position to obtain benefits other than capital
appreciation and investment income from the investees that are not available to otherparties
unrelated to the investee. Accordingly, PQR Ltd. Cannot be classified as investment entity.
SM 24. HTF Ltd. Was formed by T Ltd. To invest in technology start-up companies for capital appreciation. T Ltd.
Holds a 70 percent interest in HTF Ltd. And controls HTF Ltd. The other 30 percent ownership interest
in HTF Ltd. Is owned by 10 unrelated investors. T Ltd. Holds options to acquire investments held by HTF
Ltd., at their fair value, which would be exercised if the technology developed by the investees would
benefit the operations of T Ltd. No plans for exiting the investments have been identified by HTF Ltd.
HTF Ltd. Is managed by an investment adviser that acts as agent for the investors in HTF Ltd.
Determine whether HTF Ltd. Is an investment entity or not. [SM 2021, Ill.-23]
Ans.
Even though HTF Ltd.’s business purpose is investing for capital appreciation and it provides investment
management services to its investors, HTF Ltd. Is not an investment entity because of the following
arrangements and circumstances:
(a) T Ltd., the parent of HTF Ltd. Holds options to acquire investments in investees held by HTF Ltd.
If the assets developed by the investees would benefit the operations of T Ltd. This provides a
benefit in addition to capital appreciation or investment income; and
(b) the investment plans of HTF Ltd. Do not include exit strategies for its investments, which are
equity investments. The options held by T Ltd. Are not controlled by HTF Ltd. And do
notconstitute an exit strategy.
UNIT : 4
CONSOLIDATION PROCEDURE FOR SUBSIDIARIES
SM 25. Determination of goodwill

A Limited acquires 80% of B Limited by paying cash consideration of `120 crore. The fair value of non-
controlling interest on the date of acquisition is `30 crore. The value of subsidiary’s identifiable
net assets as per Ind AS 103 is `130 crore. Determine the value of goodwill and pass the journal entry.
[SM 2021, Ill.-1]
Ans.
The amount of non-controlling interest can be measured as per i) Fair value method or ii) Proportionate
share method (i.e. proportionate share in the net identifiable assets of the acquiree). The value of
goodwill will be different under both the methods. The goodwill is calculated as per both the methods
below:
Fair value method `crore

Fair value of consideration transferred 120
Fair value of non-controlling interest 30
150
Value of subsidiary’s identifiable net assets as per Ind AS 103 (130)
Goodwill 20
Proportionate share method `crore
Proportional share of non-controlling interest in the net identifiable assets of acquiree
(130 x 20%) 26
146
Goodwill 16
Journal entries
Fair value method `crore
Dr. Cr.
Net identifiable assets Dr. 130
Goodwill Dr. 20
To Cash 120
To Non-controlling interest 30
Proportionate share method `crore
Dr. Cr.
Goodwill Dr. 16
To Cash 120
SM 26. Determination of goodwill

Ram Ltd. Acquires 60% of Raja Ltd. By paying cash consideration of `750 lakh (including control
premium). The fair value of non-controlling interest on the date of acquisition is`480 lakh. The value
of subsidiary’s identifiable net assets as per Ind AS 103 is `1,000 lakh.Determine the value of goodwill
and pass the journal entry. [SM 2021, Ill.-2]
Ans.
The amount of non-controlling interest can be measures wither as per i) Fair value method or ii)
Proportionate share method (i.e. proportionate share in the net identifiable assets of the acquiree). The
value of goodwill will be different under both the methods. The goodwill is calculated as per both the
methods below:
Fair value method `lakh

1,230
Value of subsidiary’s identifiable net assets as per Ind AS 103 (1,000)
Goodwill 230
Proportionate share method `lakh

(1,000 x 40%) 400
1,150
Value of subsidiary’s identifiable net assets as per Ind AS 103 (1,000)
Goodwill 150
Journal entries
Dr. Cr.
Net identifiable assets Dr. 1,000
Goodwill Dr. 230
To Cash 750
Dr. Cr.
Net identifiable assets Dr. 1,000
Goodwill Dr. 150
To Cash 750
SM 27. Determination of gain on bargain purchase

X Ltd. Acquires 80% of Y Ltd. By paying cash consideration of `400 lakh. The fair value of non-
controlling interest on the date of acquisition is `100 lakh. The value of subsidiary’s identifiable net
assets as per Ind AS 103 is `520 lakh. Determine the value of gain on bargain purchase and pass the
journal entry. [SM 2021, Ill.-3]
Ans.
The amount of non-controlling interest can be measures wither as per i) Fair value method or ii)
Proportionate share method (i.e. proportionate share in the net identifiable assets of the acquiree). The
value of gain on bargain purchase will be different under both the methods. The gain is calculated as
per both the methods below:

500
Gain on bargain purchase (20)
(520 x 20%) 104
504
Gain on bargain purchase (16)
Journal entries
Dr. Cr.
To Cash 400
To Gain on bargain purchase* 20
Dr. Cr.
To Cash 400
To Gain on bargain purchase* 16
* Gain on bargain purchase is either recognised in OCI or is recognised directly in equity as a capital
reserve.
SM 28. Determination of goodwill when there is no non-controlling interest

M Ltd. Acquires 100% of N Ltd. By paying cash consideration of `100 lakh. The value of
subsidiary’s identifiable net assets as per Ind AS 103 is `80 lakh. Determine the value of goodwill.
[SM 2021, Ill.-4]
Ans.
The value of goodwill is calculated as follows:
Determination of goodwill `lakh

Goodwill 20
SM 29. Step acquisition

RS Ltd. Holds 30% stake in PQ Ltd. This investment in PQ Ltd. Is accounted as an investment in associate
in accordance with Ind AS 28 and the carrying value of such investment in `100 lakh. RS Ltd. Purchases
the remaining 70% stake for a cash consideration of `700 lakh. The fair value of previously held 30%
stake is measured to be `300 lakh on the date of acquisition of 70% stake. The value of PQ Ltd.’s
identifiable net assets as per Ind AS 103 on that date is `800 lakh. How should RS Ltd. Account for the
business combination? [SM 2021, Ill.-5]
Ans.
The amount of goodwill is calculated as follows:
Determination of goodwill `lakh

Fair value of previously held equity interest 300
1,000
Goodwill 200
RS Ltd. Should record the difference between the fair value of previously held equity interest in the
subsidiary and the carrying value of that interest in the profit or loss i.e. `200 lakh (300 ” 100)should be
recognised in profit or loss.
Journal entries

Dr. Cr.
Goodwill Dr. 200
To Cash 700
To Investment in associate 100
To Gain on fair valuation of previously held equity interest 200
SM 30. Property, plant and equipment (PPE) sold by parent to subsidiary

A Ltd. (which is involved in the business of selling capital equipment) a parent company sold a capital
equipment costing ` 100 lakh to its 80% subsidiary B Ltd. At ` 120 lakh. The capital equipment is
recorded as PPE by B Ltd. The useful life of the PPE on the date of transfer was 10 years. Show the
necessary adjustment in the consolidated financial statements (CFS). [SM 2021, Ill.-18]
Ans.
A Ltd. shall reduce the value of PPE of ` 120 lakh of B Ltd., by ` 20 lakh in CFS This will increase expenses
and reduce consolidated profit by ` 20 lakh. Further, A Ltd. should also reduce the depreciation charge
of B Ltd. to the extent of value of PPE reduced as above. Hence, A Ltd. should reduce the depreciation
by ` 2 lakh (` 20 lakh ÷ 10 years). Further, the sales and cost of goods sold recorded by parent A Ltd.
shall also be eliminated.
The double entry on consolidation is as follows:

Dr. Cr.
Consolidated revenue Dr. 120
To Cost of sales 100
To PPE 18
To Depreciation 2
SM 31. Loss control of a subsidiary in two transactions

MN Ltd. was holding 80% stake in UV Ltd. Now, MN Ltd. has disposed of the entire stake in UV Ltd. in
two different transactions as follows:
 Transaction 1: Sale of 25% stake for a cash consideration of `2,50,000
 Transaction 2: Sale of 55% stake for a cash consideration of `5,50,000
Both the transactions have happened within a period of one month. In accordance with the
guidance given in Ind AS 110, both the transactions have to be accounted as a single transaction.
The net assets of UV Ltd. and non-controlling interest on the date of both the transactions was
`9,00,000 and `1,80,000 respectively (assuming there were no earnings between the period of two
transactions).
How MN Ltd. should account the transaction? [SM 2021, Ill.-34]
Ans.
MN Ltd. will account for the transaction as follows:
`
Recognise:
Fair value of consideration (2,50,000 + 5,50,000)
Derecognise: 8,00,000
Net assets of UV Ltd. (9,00,000)
Non-controlling interest 1,80,000 (7,20,000)
Gain to be recorded in profit or loss 80,000
If MN Ltd. loses control over UV Ltd. on the date of transaction 1, then the above gain is recorded on the
date of transaction 1 and MN Ltd. will stop consolidating UV Ltd. from that date. The consideration of
`5,50,000 receivable in transaction 2 will be shown as consideration receivable.
If MN Ltd. loses control over UV Ltd. on the date of transaction 2, then the above gain is recorded on the
date of transaction 2 and MN Ltd. will stop consolidating UV Ltd. from that date. The consideration of
`2,50,000 received in transaction 1 will be shown as advance consideration received.
SM 32. An entity ceases to be an investment entity

A Limited ceased to be in investment entity from 1st April 20X1 on which date it was holding 80% of B
Limited. The carrying value of such investment in B Limited (which was measured at fair value through
profit or loss) was `4,00,000. The fair value of non-controlling interest on the date of change in status
was `1,00,000. The value of subsidiary's identifiable net assets as per Ind AS103 was `4,50,000 on the
date of change in status. Determine the value of goodwill and pass thejournal entry on the date of
change in status of investment entity. (Assume that non-controlling interest is measured at fair value
method) [SM 2021, Ill.-35]
Ans.
Goodwill calculation: `
Deemed consideration (i.e. fair value of subsidiary on the date of change in status) 4,00,000
Fair value of non-controlling interest 1,00,000
5,00,000
Value of subsidiary's identifiable net assets as per Ind AS 103 (4,50,000)
Goodwill 50,000
Journal entry `
Dr. Cr.
Net identifiable assets Dr. 4,50,000
Goodwill Dr. 50,000
To Investment in B Limited (on date of change in status) 4,00,000
To Non-controlling interest 1,00,000
SM 33. An entity becomes an investment entity

CD Ltd. purchased a 100% subsidiary for `20,00,000 on 31st March 20X1 when the fair value of the net
assets of KL Ltd. was `16,00,000. Therefore, goodwill was `4,00,000. CD Ltd. becomes an investment
entity on 31st March 20X3 when the carrying value of its investment in KL Ltd. (measured at fair value
through profit or loss) was `25,00,000. At the date of change in status, the carrying value of net assets
of KL Ltd. excluding goodwill was `19,00,000.
Calculate gain or loss with respect to investment in KL Ltd. on the date of change in investment entity
status of CD Ltd. [SM 2021, Ill.-36]
Ans.
The gain on the disposal will be calculated as follows:
`
Fair value of retained interest (100%) 25,00,000
Less: Net assets disposed, including goodwill (19,00,000 + 4,00,000) (23,00,000)
Gain on the date of change in investment entity status of CD Ltd. 2,00,000
SM 34. Elimination of intra-group profit on sale of assets by a subsidiary to its parent

A parent owns 60% of a subsidiary. The subsidiary sells some inventory to the parent for ` 35,000 and
makes a profit of ` 15,000 on the sale. The inventory is in the parent’s balance sheet at the year end.
Examine the treatment of intra-group transaction and pass the necessary journal entry.
[SM 2021, Ill.-14 Modified]
Ans.
The parent must eliminate 100% of the unrealized profit on consolidation. The inventory will, therefore,
be carried in the group’s balance sheet at ` 20,000 (` 35,000 - ` 15,000). The consolidated income
statement will show a corresponding reduction in profit of ` 15,000.
`’ 000
Dr. Cr.
35
Consolidated revenue Dr.
To Cost of sales 20
To Inventory 15
The reduction of group profit of ` 15,000 is allocated between the parent company and non- controlling
interest in the ratio of their interests 60% and 40%.
SM 35. Elimination of intra-group profit on sale of assets by a parent to its subsidiary

In the above illustration, assume that it is the parent that makes the sale. The parent owns 60% of a
subsidiary. The parent sells some inventory to the subsidiary for ` 35,000 and makes a profit of ` 15,000.
On the sale the inventory is in the subsidiary’s balance sheet at the year end. Examine the treatment of
intra-group transaction and pass the necessary journal entry. [SM 2021, Ill.-15 Modified]
Ans.
The parent must eliminate 100% of the unrealized profit on consolidation. The inventory will, therefore,
be carried in the group’s balance sheet at ` 20,000 (` 35,000 - ` 15,000). The consolidated income
statement will show a corresponding reduction in profit of ` 15,000.
The double entry on consolidation is as follows:

`’ 000
Dr. Cr.
Consolidated revenue Dr. 35
To Cost of sales 20
To Inventory 15
In this case, since it is the parent that has made the sale, the reduction in profit of ` 15,000 is allocated
entirely to the parent company.
SM 36. Non-controlling interest and goodwill

From the following data, determine in each case:
1) Non-controlling interest at the date of acquisition (using proportionate share method) and at the
date of consolidation
2) Goodwill or Gain on bargain purchase.
3) Amount of holding company’s share of profit in the consolidated Balance Sheet assuming
holding company’s own retained earnings to be ` 2,00,000 in each case
Case Subsidiary % of Cost Date of Acquisition Consolidation date

Company shares 1.04.20X1 31.03.20X2
owned Share Retained Share Retained
Capital earnings Capital earnings
[A] [B] [C] [D]
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 56,000
The company has adopted an accounting policy to measure Non-controlling interest at NCI’s
proportionate share of the acquiree’s identifiable net assets. It may be assumed that the fair value of
acquiree’s net identifiable assets is equal to their book values. [SM 2021, Ill.-20 Modified]
Ans.
(1) Non-controlling Interest = the equity in a subsidiary not attributable, directly or indirectly, to a
parent. Equity is the residual interest in the assets of an entity after deducting all its liabilities i.e.
in this given case Share Capital + Balance in Statement of Profit & Loss (Assuming it to be the
net aggregate value of identifiable assets in accordance with Ind AS)
% shares Non-controlling interest Non-controlling interest as
owned by NCI as at the at the date of consolidation
[E] date of acquisition [E] X [C + D]
[E] X [A + B]
Case 1 [100-90] 10% 15,000 17,000
Case2 [100-85] 15% 19,500 18,000
Case 3 [100-80] 20% Nil 14,000 14,000
Case 4 [100-100] Nil Nil
(2) Calculation of Goodwill or Gain on bargain purchase
Consideration Non- Net Identifiable Goodwill Gain on bargain

controlling assets Purchase [I]
interest [A] + [B] = [I] [G] + [H] – [G] – [H]
[H] – [I]
Case 1 [G]
1,40,000 15,000 1,50,000 5,000 -
Case 2 1,04,000 19,500 1,30,000 - Nil 6,500
Case 3 56,000 14,000 70,000 10,000 Nil
Case 4 1,00,000 0 90,000 -
(3) On 31.03.20X2 in each case the following amount shall be added or deducted from the balance
of holding Co.’s Retained earnings.
% Share Retained Retained Retained Amount to be
Holding earnings as on earnings as on earnings post- added/(deducted)
31.03.20X1 consolidation acquisition from holding’s
[L] Date [M] [N] = [M] – [L] Retained earnings
[O] = [K] X [N]
1 90%
[K] 50,000 70,000 20,000 18,000
2 85% 30,000 20,000 (10,000) (8,500)
3 80% 20,000 20,000 Nil Nil
4 100% 40,000 56,000 16,000 16,000
SM 37. Acquisition of additional stake in a subsidiary

A Ltd. Acquired 70% shares of B Ltd. On 1.4.20X0 when the fair value of net assets of B Ltd. Was`200
lakh. During 20X0-20X1, B Ltd. Made profit of `100 lakh. Individual and consolidated balance sheets as on
31.3.20X1 are as follows:
`lakh
A B Group
Assets
Goodwill 10
PPE 627 200 827
Financial assets:
Investments 150
Cash 200 30 230
23 70 93
Other current assets 1,000 300 1160
Equity and liability 200 100 200

Share capital 800 200 870
Other equity 90
Non-controlling interest 1,000 300 1160
A Ltd. Acquired another 10% stake in B Ltd. On 1.4.20X1 at `32 lakh. The proportionate carrying
amount of the non-controlling interest is `30 lakh. Show the individual and consolidated balance sheet
of the group immediately after the change in non-controlling interest.
[SM 2021, Ill.-24 Modified]
Ans.
`lakh
A B Workings Group
Assets
Goodwill 10
PPE 627 200 827
Financial assets:
Investments (150+32) 182
Cash* (200-32) 168 30 (200+30)-32) 198
Other current assets 23 70 93
1,000 300 1,128
Equity and liability
Share capital 200 100 200
Other equity 800 200 870-2 868
Non-controlling interest _____ _____ 90-30 60
1,000 300 1,128
*Cash has been adjusted through Individual Balance Sheet.

Journal entry
`lakh
Dr. Cr.
Non-controlling interest (90 ÷ 30 x 10) Dr. 30
Other Equity (Loss on acquisition of interest in subsidiary) Dr. 2
To Cash 32
Ind AS 111
UNIT 5 : JOINT ARRANGEMENTS
SM 1. Joint control
ABC Ltd. and DEF Ltd. have entered into a contractual arrangement to manufacture a product and sell
that in retail market. As per the terms of the arrangement, decisions about the relevant activities
require consent of both the parties. The parties share the returns of the arrangement equally amongst
them. Whether the arrangement can be treated as joint arrangement? [SM 2021, Ill.-1]
Ans.
The arrangement is a joint arrangement since both the parties are bound by the contractual
arrangement and the decisions about relevant activities require unanimous consent of both theparties.
SM 2. Implicit joint control

A Ltd., B Ltd. and C Ltd. established an arrangement whereby A Ltd. has 50% of the voting rights in the
arrangement, B Ltd. has 30% and C has 20%. The contractual arrangement between A Ltd., B Ltd. and C
Ltd. specifies that at least 75% of the voting rights are required to make decisions about the relevant
activities of the arrangement. Whether the arrangement can be treated as joint arrangement?
[SM 2021, Ill.-3]
Ans.
In this case, even though A can block any decision, it does not control the arrangement because it needs
the agreement of B. The terms of their contractual arrangement requiring at least 75% of the voting
rights to make decisions about the relevant activities imply that A Ltd. and B Ltd. havejoint control of the
arrangement because decisions about the relevant activities of the arrangement cannot be made
without both A Ltd. and B Ltd. agreeing.
SM 3. Joint control through board representation

Electronics Ltd. is established by two investors R Ltd. and S Ltd. The investors are holding 60%and 40%
of the voting power of the investee respectively.
As per the articles of association of Electronics Ltd., both the investors have right to appoint 2 directors
each on the board of Electronics Ltd. The directors appointed by each investor will act in accordance with
the directions of the investor who has appointed such director. Further, articles of association provides
that the decision about relevant activities of the entity will be taken by board of directors through
simple majority.
Determine whether Electronics Ltd. is controlled by a single investor or is jointly controlled by both the
investors. [SM 2021, Ill.-6]
Ans.
The decisions about relevant activities are required to be taken by majority of board of directors. Hence,
out of the 4 directors, at least 3 directors need to agree to pass any decision. Accordingly, the directors
appointed by any one investor cannot take the decisions independently without the consent of at least
one director appointed by other investor. Hence, Electronics Ltd. is jointly controlled by both the
investors. R Ltd. holding majority of the voting rights is not relevant in this case since the voting rights do
not given power over the relevant activities of the investee.
SM 4. Chairman with casting vote

MN Software Ltd. is established by two investors M Ltd. and N Ltd. Both the investors are holding50% of
the voting power each of the investee.
As per the articles of association of MN Software Ltd., both the investors have right to appoint 2
directors each on the board of the company. The directors appointed by each investor will act in
accordance with the directions of the investor who has appointed such director. The decision about
relevant activities of the entity will be taken by board of directors through simple majority. Articles of
association also provides that M Ltd. has right to appoint the chairman of the board who will have right
of a casting vote in case of a deadlock situation.
Determine whether MN Software Ltd. is jointly controlled by both the investors. [SM 2021, Ill.-7]
Ans.
appointed by any one investor cannot take the decisions independently without the consent of at least
one director appointed by other investor. However, the chairman of the board has right for a casting
vote in case of a deadlock in the board. Hence, M Ltd. has the ability to takedecisions related to relevant
activities through 2 votes by directors and 1 casting vote by chairman of the board. Therefore, M Ltd.
individually has power over MN Software Ltd. and there is no jointcontrol.
SM 5. Equal voting rights but no joint control

ABC Ltd. is established by two investors AB Ltd. and BC Ltd. Each investor is holding 50% of the voting
power of the investee.
As per the articles of association of ABC Ltd., AB Ltd. and BC Ltd. have right to appoint 3 directors and 2
directors respectively on the board of ABC Ltd. The directors appointed by each investor will act in
accordance with the directions of the investor who has appointed such director. Further, articles of
association provides that the decision about relevant activities of the entity will be taken by board of
directors through simple majority.
Determine whether ABC Ltd. is jointly controlled by both the investors. [SM 2021, Ill.-8]
Ans.
appointed by AB Ltd. can take the decisions independently without the consent of any of the directors
appointed by BC Ltd. Hence, ABC Ltd. is not jointly controlled by both the investors. Equal voting
rights held by both the investors is not relevant in this case since the voting rights do not given power
over the relevant activities of the investee.
SM 6. Joint control over specific asset

X Ltd. and Y Ltd. entered into a contractual arrangement to buy a piece of land to constructresidential
units on the said land and sell to customers.
As per the arrangement, the land will be further divided into three equal parts. Out of the three parts,
both the parties will be responsible to construct residential units on one part each by taking decision
about relevant activities independently and they will entitled for the returns generated from their own
part of land. The third part of the land will be jointing managed by both the parties requiring unanimous
consent of both the parties for all the decision making.
Determine whether the arrangement is a joint arrangement or not. [SM 2021, Ill.-9]
Ans.
The two parts of the land which are required to be managed by both the parties independently on their
own would not fall within the definition of a joint arrangement. However, the third part of the land which
is required to be managed by both the parties with unanimous decision making wouldmeet the definition
of a joint arrangement.
SM 7. Multiple relevant activities directed by different investors

Entity R and entity S established a new entity RS Ltd. to construct a national highway and operate the
same for a period of 30 years as per the contract given by government authorities.
As per the articles of association of RS Ltd, the construction of the highway will be done by entity R and
all the decisions related to construction will be taken by entity R independently. After the construction
is over, entity S will operate the highway for the period of 30 years and all the decisions related
to operating of highway will be taken by entity S independently. However, decisions related to
funding and capital structure of RS Ltd. will be taken by both the parties with unanimous consent.
Determine whether RS Ltd. is a joint arrangement between entity R and entity S? [SM 2021, Ill.-10]
Ans.
In this case, the investors should evaluate which of the decisions about relevant activities can most
significantly affect the returns of RS Ltd. If the decisions related to construction of highway or operating
the highway can affect the returns of the RS Ltd. most significantly then the investor directing those
decision has power over RS Ltd. and there is no joint arrangement. However, if the decisions related to
funding and capital structure can affect the returns of the RS Ltd. most significantly then RS Ltd. is a joint
arrangement between entity R and entity S.
SM 8. Informal agreement for sharing of control

An entity has four investors A, B, C and D holding 10%, 20%, 30% and 40% voting power respectively. The
articles of association requires decisions about relevant activities to be taken by majority voting rights.
However, investor A, B and C have informally agreed to vote together. This informal agreement has been
effective in recent meetings of the investors to take decisions about relevant activities. Whether A, B
and C have joint control over the entity? [SM 2021, Ill.-11]
Ans.
In this case, three investors have informally agreed to make unanimous decisions. These three investors
together also have majority voting rights in the entity. Hence, investor A, B and C have joint control over
the entity. The agreement between investor A, B and C need not be formally documented as long as
there is evidence of its existence in recent meetings of the investors.
SM 9. Party with protective rights

D Ltd., E Ltd. and F Ltd. have established a new entity DEF Ltd. As per the arrangement,
unanimous consent of all three parties is required only with respect to decisions related to change of
name of the entity, amendment to constitutional documents of the entity to enter into a new business,
change in the registered office of the entity, etc. Decisions about other relevant activities require
consent of only D Ltd. and E Ltd. Whether F Ltd. is a party with joint control of the arrangement?
[SM 2021, Ill.-12]
Ans.
Consent of F Ltd. is required only with respect to the fundamental changes in DEF Ltd. Hence these are
protective rights. The decisions about relevant activities are taken by D Ltd. and E Ltd. Hence, F Ltd. is
not a party with joint control of the arrangement.
SM 10. Resolution of disputes without unanimous consent

Entity A and Entity B established a contractual arrangement whereby the decision related to
relevant activities are required to be taken by unanimous consent of both the parties. However, in case
of any dispute with any vendor or customer of the arrangement, entity A has right to take necessary
decisions for the resolution of disputes including decisions of going for the arbitration or filing a suit in
court of law. Whether the arrangement is a joint arrangement? [SM 2021, Ill.-13]
Ans.
The arrangement is a joint arrangement since the contractual arrangement requires decisions about
relevant activities to be taken by unanimous consent of both the parties. The right available with entity A
to take decisions for resolution of disputes will not prevent the arrangement frombeing a joint
arrangement.
SM 11. Joint operation

P Ltd.andQLtd.aretwoconstruction entities and they have entered into a contractual arrangement to
jointly construct a metro rail project.
The construction of metro rail project involves various activities such as construction of
infrastructure (like metro station, control room, pillars at the centre of the road, etc.) for the metro,
laying of the tracks, acquiring of the coaches of the metro, etc. The total length of the metro line to be
constructed is 50 kms. As per the arrangement, both the parties are responsible to construct 25 kms
each. Each party is required to incur its own cost, use its own assets, incur the liability and has right to the
revenue from their own part of the work.
Determine whether the arrangement is a joint operation or not? [SM 2021, Ill.-14]
Ans.
The arrangement is a joint operation since the arrangement is not structured through a separate vehicle
and each party has rights to the assets, and obligations for the liabilities relating to their own part of
work in the joint arrangement.
SM 12. Joint operation by sharing an asset

RS Ltd. and MN Ltd. entered into a contractual arrangement to run a business of providing cars of hire.
The cars will be owned by both the parties jointly. The expenses to run the car (like driver salary, petrol,
maintenance, insurance, etc.) and revenues from the business will be shared between both the
parties as agreed in the contractual arrangement. Determine whether the arrangement is a joint
operation or not? [SM 2021, Ill.-15]
Ans.
The arrangement is a joint operation since the arrangement is not structured through a separate vehicle.
SM 13. Legal form indicates the arrangement to be a joint venture

Entity X and Entity Y are engaged in the business of Engineering, Procurement and Construction (EPC)
for its customers. Both the parties have jointly won a contract from a customer for executing an EPC
contract and for that the parties have established a new entity XY Ltd. The contract will be executed
through XY Ltd.
All the assets required for the execution of the contract will be acquired and liabilities relating to the
execution will be incurred by XY Ltd. in its own name. Entity X and entity Y will have share in the net
profits of XY Ltd. in the ratio of their shareholding i.e. 50% each. Assuming that the arrangement
meets the definition of a joint arrangement, determine whether the joint arrangement is a joint
operation or a joint venture? [SM 2021, Ill.-16]
Ans.
The legal form of the separate vehicle is a company. The legal form of the separate vehicle causes the
separate vehicle to be considered in its own right. Hence, it indicates that the arrangement is a joint
venture. In this case, the parties should further evaluate the terms of contractual arrangements
and other relevant facts and circumstance to conclude whether the arrangement is ajoint venture or a
joint operation.
SM 14. Legal form indicates the arrangement to be a joint operation
Two entities have established a partnership firm with each party having 50% share in the net profits of
the firm. Assuming that the arrangement meets the definition of a joint arrangement, determine
whether the joint arrangement is a joint operation or a joint venture? [SM 2021, Ill.-17]
Ans.
In this case, the parties to the arrangement should evaluate whether the legal form creates
separation between the partners and the partnership firm. If the parties conclude that they have rights
in the assets and obligations for the liabilities relating to the partnership firm then this would be a joint
operation. If the assessment of legal form of the partnership firm indicates that the firm is a joint
operation then there is no need to evaluate any other factors and it is concluded that thepartnership
firm is a joint operation.
SM 15. Assessing the terms of the contractual arrangement

Continuing with the illustration 16 above, assume that Entity X and Entity Y have entered into a separate
agreement whereby they have agreed that each party has an interest in the assets of the XY Ltd. and
each party is liable for the liabilities of XY Ltd. in a specified proportion. Determine whether the joint
arrangement is a joint operation or a joint venture? [SM 2021, Ill.-18]
Ans.
In this case, the terms of the separate agreement may cause the arrangement to be a joint operation
SM 16. Multiple joint arrangements under single framework agreement

AB Ltd. and CD Ltd. have entered into a framework agreement to manufacture and distribute a new
product i.e. Product X. The two activities to be performed as per the framework agreement are i)
Manufacture of Product X and ii) Distribution of Product X. The manufacturing of the product will not be
done through a separate vehicle. The parties will purchase the necessary machinery in their joint name.
For the distribution of the product, the parties have established a new entity ABCD Ltd. All the goods
manufactured will be sold to ABCD Ltd. as per price mutually agreed by the parties. Then ABCD Ltd. will
do the marketing and distribution of the product. Both the parties will have joint control over ABCD Ltd.
The legal form of ABCD Ltd. causes it to be considered in its own right (ie the assets and liabilities held in
ACD Ltd. are the assets and liabilities of ABC Ltd. and not the assets and liabilities of the parties).
Further, the contractual arrangement and other relevant facts and circumstances also do not indicate
otherwise.
Determine whether various arrangements under the framework agreement are joint operation or joint
venture? [SM 2021, Ill.-20]
Ans.
The manufacturing of Product X is not done through a separate vehicle and the assets used to
manufacture the product are jointly owned by both the parties. Hence, the manufacturing activity is a
joint operation.
The distribution of Product X is done through a separate vehicle i.e. ABCD Ltd. Further, AB Ltd. and CD
Ltd. do not have rights to the assets, and obligations for the liabilities, relating to ABCD Ltd. Hence ABCD
Ltd. is a joint venture.
SM 17. Accounting for sales or contributions of assets to a joint operation

A Ltd. is one of the parties to a joint operation holding 60% interest in a joint operation and the balance
40% interest is held by another joint operator. A Ltd. has contributed an asset held by it to the joint
operation for the activities to be conducted in joint operation. The carrying value of the asset sold was `
100 and the asset was actually sold for ` 80 i.e. at a loss of ` 20. How should A Ltd. account for the sale
of asset to joint operation in its books? [SM 2021, Ill.-23]
Ans.
A Ltd. should record the loss on the transaction only to the extent of other party’s interest in the joint
operation.
The total loss on the transaction is ` 20. Hence, A Ltd. shall record loss on sale of asset to the extent of `
8 (` 20 x 40%) which is the loss pertaining to the interest of other party to the jointoperation. The loss of
` 12 (` 20 - ` 8) shall not be recognised as that is unrealised loss.
Further, while accounting its interest in the joint operation, A Ltd. shall record its share in that asset at
value of ` 60 [A Ltd. share of asset ` 48 (` 80 x 60%) plus unrealised loss of ` 12].
The journal entry for the transaction would be as follows:
Bank Dr. ` 32
Loss on sale Dr. `8
To Asset ` 40
SM 18. Accounting for purchases of assets from a joint operation

A Ltd. is one of the parties to a joint operation holding 60% interest in the joint operation and the
balance 40% interest is held by another joint operator. A Ltd. has purchased an asset from the joint
operation. The carrying value of the asset in the books of joint operation was ` 100 and the asset was
actually purchased for ` 80 i.e. at a loss of ` 20. How should A Ltd. account for the purchase of asset from
joint operation in its books? [SM 2021, Ill.-24]
Ans.
A Ltd. should not record its share of the loss until the asset is resold to a third party.
The joint operation has sold the asset at ` 80 by incurring a loss of ` 20. Hence, A Ltd. shall record the
asset at ` 92 [Purchase price ` 80 + A Ltd.’s share in loss ` 12 (` 20 x 60%)].
Further, while accounting its interest in the joint operation, A Ltd. shall not record any share in the loss
incurred in sale transaction by the joint operation.
The journal entry for the transaction would be as follows:

Asset Dr. ` 32
To Bank ` 32
SM 19. Assessing other facts and circumstances

Two parties structure a joint arrangement in an incorporated entity i.e. Entity A in which each party has a
50% ownership interest. The purpose of the arrangement is to manufacture materialsrequired by the
parties for their own, individual manufacturing processes. The arrangement ensures that the parties
operate the facility that produces the materials to the quantity and quality specifications of the parties.
The legal form of Entity A (an incorporated entity) through which the activities are conducted initially
indicates that the assets and liabilities held in Entity A are the assets and liabilities of Entity A. The
contractual arrangement between the parties does not specify that the parties have rights to the assets
or obligations for the liabilities of Entity A. There are following other relevant facts and circumstances
applicable in this case:
 The parties agreed to purchase all the output produced by Entity A in a ratio of 50:50. Entity A
cannot sell any of the output to third parties, unless this is approved by the two parties to the
arrangement. Because the purpose of the arrangement is to provide the parties with output they
require, such sales to third parties are expected to be uncommon and not material.
 The price of the output sold to the parties is set by both parties at a level that is designed to cover
the costs of production and administrative expenses incurred by Entity A. On the basis of this
operating model, the arrangement is intended to operate at a break-even level.
Based on the above fact pattern, determine whether the arrangement is a joint operation or a joint
venture? [SM 2021, Ill.-19 Modified]
Ans.
The legal form of Entity A and the terms of the contractual arrangement indicate that the arrangement
is a joint venture. However, the other relevant facts and circumstances mentioned above indicates that:
 the obligation of the parties to purchase all the output produced by Entity A reflects the exclusive
dependence of Entity A upon the parties for the generation of cash flows and, thus, the parties have
an obligation to fund the settlement of the liabilities of Entity A.
 the fact that the parties have rights to all the output produced by Entity A means that the parties are
consuming, and therefore have rights to, all the economic benefits of the assets of Entity A.
These facts and circumstances indicate that the arrangement is a joint operation. The conclusion about
the classification of the joint arrangement in these circumstances would not change if, instead of the
parties using their share of the output themselves in a subsequent manufacturing process, the parties
sold their share of the output to third parties.
If the parties changed the terms of the contractual arrangement so that the arrangement was able to
sell output to third parties, this would result in Entity A assuming demand, inventory and credit risks. In
that scenario, such a change in the facts and circumstances would require reassessment of the
classification of the joint arrangement. Such facts and circumstances would indicate that the
arrangement is a joint venture.
Ind AS 28
UNIT 6 : INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
SM 1. Significant influence
E Ltd. holds 25% of the voting power of an investee. The balance 75% of the voting power is held by
three other investors each holding 25%.
The decisions about the financing and operating policies of the investee are taken by investors holding
majority of the voting power. Since, the other three investors together hold majority voting power, they
generally take the decisions without taking the consent of E Ltd. Even if E Ltd. proposes any
changes to the financing and operating policies of the investee, the other three investors do not vote in
favour of those changes. So, in effect the suggestions of E Ltd. are not considered while taking decisions
related to financing and operating policies.
Determine whether E Ltd. has significant influence over the investee? [SM 2021, Ill.-1]
Ans.
Since E Ltd. is holding more than 20% of the voting power of the investee, it indicates that E Ltd. might
have significant over the investee. However, the other investors in the investee prevent E Ltd. from
participating in the financing and operating policy decisions of the investee. Hence, in this case, E Ltd. is
not in a position to have significant influence over the investee.
SM 2. Participation in policy-making processes

M Ltd. holds 10% of the voting power an investee. The balance 90% voting power is held by nine other
investors each holding 10%.
The decisions about the relevant activities (except decision about taking borrowings) of the investee are
taken by the members holding majority of the voting power. The decisions about taking borrowings are
required to be taken by unanimous consent of all the investors. Further, decisions about taking
borrowing are not the decisions that most significantly affect the returns of the investee.
Determine whether M Ltd. has significant influence over the investee? [SM 2021, Ill.-3]
Ans.
In this case, though M Ltd. is holding less than 20% of the voting power of the investee, M Ltd.’s consent
is required to take decisions about taking borrowings which is one of the relevant activities. Further,
since the decisions about taking borrowing are not the decisions that most significantly affect the
returns of the investee, it cannot be said that all the investors have joint control over the investee.
Hence, it can be said that M Ltd. has significant influence over the investee.
SM 3. Material transactions between the entity and its investee

RS Ltd. is an entity engaged in the business of pharmaceuticals. It has invested in the share capital of an
investee XY Ltd. and is holding 15% of XY Ltd.’s total voting power.
XY Ltd. is engaged in the business of producing packing materials for pharmaceutical entities. One
of the incentives for RS Ltd. to invest in XY Ltd. was the fact that XY Ltd. is engaged in the business of
producing packing materials which is also useful for RS Ltd. Since last many years, XY Ltd.’s almost 90%
of the output is procured by RS Ltd.
Determine whether RS Ltd. has significant influence over XY Ltd.? [SM 2021, Ill.-4]
Ans.
Since 90% of the output of XY Ltd. is procured by RS Ltd., XY Ltd. would be dependent on RS Ltd. for the
continuation of its business. Hence, even though RS Ltd. is holding only 15% of the voting power of XY
Ltd. it has significant influence over XY Ltd.
SM 4. Provision of essential technical information

R Ltd. is a tyre manufacturing entity. The entity has entered into a technology transfer agreement with
another entity Y Ltd. which is also involved in the business of tyre manufacturing. R Ltd. is an established
entity in this business whereas Y Ltd. is a relatively new entity.
As per the agreement, R Ltd. has granted to Y Ltd. a license to use its the technical information
and know-how which are related to the processes for the manufacture of tyres. Y Ltd. is dependent on
the technical information and know-how supplied by R Ltd. because ofits lack of expertise and
experience in this business. Further, R Ltd. has also invested in 10%of the equity share capital of Y Ltd.
Determine whether R Ltd. has significant influence over Y Ltd.? [SM 2021, Ill.-6]
Ans.
Y Ltd. obtains essential technical information for the running of its business from R Ltd. Hence R Ltd. has
significant influence over Y Ltd. despite of holding only 10% of the equity share capital of Y Ltd
SM 5. Potential voting rights

An entity which is currently holding 10% of the voting power of an entity has an option of purchase
additional 15% voting power of the investee from other investors. However, the entity currently does
not have financial ability to purchase additional 15% voting power of the investee. Determine whether
the entity has significant influence over the investee? [SM 2021, Ill.-7]
Ans.
Considering the potential voting rights, the entity can have more than 20% of the voting power of the
investee and hence it is presumed that the entity has significant influence over the investee. The fact
that the entity does not have financial ability to purchase such additional voting power is not considered
in such assessment (It should be noted that under Ind AS 110, potential voting rights which an entity
cannot exercise because of its financial ability are not considered as substantive and hence not factored
in the assessment. However, under Ind AS 28, there is no such requirement given. Hence the potential
voting rights, even if they are not substantive as per Ind AS 110, are included in the assessment of
significant influence.)
SM 6. Accounting entries related investment in associate / joint venture

On the first day of a financial year, A Ltd. invested in the equity share capital of B Ltd. at a cost of`
1,00,000 to acquire 25% share in the voting power of B Ltd. A Ltd. has concluded that B Ltd. is an
associate of A Ltd. At the end of the year, B Ltd. earned profit of ` 10,000 and other
comprehensive income of ` 2,000. In that year, B Ltd. also declared dividend to the extent of `4,000. Pass
necessary entries in the books of A Ltd. to account for the investment in associate. [SM 2021, Ill.-8]
Ans.
Following entries would be passed in the books of A Ltd.:
1) Initial entry to record investment done in associate
Investment in B Ltd. A/c Dr. 1,00,000
To Bank A/c 1,00,000
2) Recording of share in the profit of the associate
Investment in B Ltd. A/c Dr.2,500
To Share in profit of investee (P&L) 2,500
[A Ltd. share in profit would be ` 2,500 (` 10,000 x 25%)]
3) Recording of share in the other comprehensive income (OCI) of the associate
Investment in B Ltd. A/c Dr.500

To Share in OCI of investee (OCI) 500
[A Ltd. share in OCI would be ` 500 (` 2,000 x 25%)]
4) Recording of dividend distributed by associate
Dividend income A/c (P&L) Dr.1,000
To Investment in B Ltd. A/c 1,000
[A Ltd. share in dividend would be ` 1,000 (` 4,000 x 25%)]
SM 7. Exemption from applying equity method

MNO Ltd. holds 15% of the voting power of DEF Ltd. PQR Mutual Fund (which is a subsidiary of MNO
Ltd.) also holds 10% voting power of DEF Ltd. Hence, MNO Ltd. holds total 25% voting power of DEF Ltd.
(15% held by own and 10% held by subsidiary) and accordingly has significant influence over DEF Ltd.
How should MNO Ltd. account for investment in DEF Ltd. in its consolidated financial statements?
[SM 2021, Ill.-9]
Ans.
The 15% interest which is held directly by MNO Ltd. should be measured as per equity method of
accounting. However, with respect to the 10% interest which is held through a mutual fund, MNO Ltd.
can avail the exemption from applying the equity method to that 10% interest and insteadmeasure that
investment at fair value through profit or loss. To summarise, the total interest of25% in DEF Ltd. should
be measured as follows:
 15% interest held directly by MNO Ltd.: Measure as per equity method of accounting
 10% interest held indirectly through a mutual fund: Measure as per equity method of
accounting or at fair value thorough profit or loss as per Ind AS 109
SM 8. Acquisition of interest in an associate

Blue Ltd. acquired 25% of the equity share capital of Green Ltd. on the first day of the financial year for `
1,25,000. As of that date, the carrying value of the net assets of Green Ltd. was `3,00,000 and the fair
value was ` 4,00,000. The excess of fair value over the carrying value was attributable to one of the
buildings owned by Green Ltd. having a remaining useful life of 20 years.
Green Ltd. earned profit of ` 40,000 and other comprehensive income of ` 10,000 during the year.
Calculate the goodwill / capital reserve on the date of acquisition, Blue Ltd.’s share in the profitand other
comprehensive income for the year and closing balance of investment at the end of the year.
[SM 2021, Ill.-10]
Ans.
(1) Goodwill / capital reserve on the date of acquisition
The cost of the investment is higher than the net fair value of the investee’s identifiable assets
and liabilities. Hence there is goodwill. Amount of goodwill is calculated as follows
`
Cost of acquisition of investment 1,25,000
Blue Ltd.’s share in fair value of net assets of Green Ltd. on the date of acquisition
(4,00,000 *25%) (1,00,000)
Goodwill 25,000
Above goodwill will be recorded as part of carrying amount of the investment. (2) Share in
profit and other comprehensive income of Gren Ltd.
`
Share in profit of Green Ltd. (40,000 x 25%) 10,000
Adjustment for depreciation based on fair value(1,00,000 ÷ 20) x 25% (1,250)
Share in profit after adjustment 8,750
Share in other comprehensive income (10,000 x 25%) 2,500
(3) Closing balance of investment at the end of the year

`
Cost of acquisition of investment (including goodwill of `25,000) 1,25,000
Share in profit after adjustments 8,750
Share in other comprehensive income 2,500
Closing balance of investment 1,36,250
SM 9. Cumulative preference shares issued by associate or joint venture

KL Ltd. has invested in 50% voting power of a joint venture MN Ltd. MN Ltd. has also issued 10%
cumulative preference shares to other investors worth `10,00,000. During the year, MN Ltd. earned
profit of `4,00,000. Also, MN Ltd. has not declared any dividend on the preference shares for current
year. Calculate KL Ltd.’s share in the net profit of MN Ltd. for the year. [SM 2021, Ill.-11]
Ans.
If an associate or a joint venture has outstanding cumulative preference shares that are held by parties
other than the entity and are classified as equity, the entity should compute its share of profit or loss
after adjusting for dividend on such shares, whether or not the dividends have been declared.
In current case, KL Ltd.’s share in net profit of MN Ltd. would be as follows.
`
Profit of MN Ltd. for the year 4,00,000
Dividend on cumulative preference shares (10,00,000*10%) (1,00,000)
Net profit attributable to the holders of equity share 3,00,000
KL Ltd.’s 50% share in net profit of MN Ltd. 1,50,000
SM 10. Upstream and downstream transaction between an entity and its associate
Scenario A
M Ltd. has invested in 40% share capital of N Ltd. and hence N Ltd. is an associate of M Ltd. During the
year, N Ltd. sold inventory to M Ltd. for a value of ` 10,00,000. This included profit of10% on the
transaction price i.e. profit of ` 1,00,000. Out the above inventory, M Ltd. Soldinventory of `
6,00,000 to outside customers. Hence, the inventory of ` 4,00,000 purchased from N Ltd. is still lying
with M Ltd. Determine the unrealised profit to be eliminated on above transaction.
Scenario B
Assume the same facts as per Scenario A except that the inventory is sold by M Ltd. to N Ltd. instead of N
Ltd. selling to M Ltd. Determine the unrealised profit to be eliminated on above transaction.
[SM 2021, Ill.-13]
Ans.
Scenario A
Firstly, as part of its equity method accounting for investment in N Ltd., M Ltd. will pass this journalentry:
Investment in N Ltd. Dr. 40,000
To Share in profit of N Ltd. 40,000
Out of the inventory of ` 10,00,000, M Ltd. has sold inventory worth ` 6,00,000 to outside
customers. Hence, the profit of ` 60,000 (6,00,000 *10% profit margin) on such inventory is
realised. However, the inventory worth ` 4,00,000 is still held by M Ltd. which consists profit of `40,000
(4,00,000*10%). Hence, M Ltd.’s share in such profit i.e. ` 16,000 (40,000*40%) is considered as
unrealised.
Accordingly, after recording of share in total profit of N Ltd., M Ltd. should pass following
adjustment entry to reverse the unrealised profit margin:
Share in profit of N Ltd. Dr. 16,000
To Inventory 16,000
In subsequent period, when this inventory of ` 4,00,000 is sold by N Ltd. to an outside customer then the
above profit margin of ` 16,000 will be treated as realised and hence the above entry will be reversed in
that period.
[Note: in the separate financial statements of M Ltd., inventory is carried at ` 4,00,000 whereas in its
consolidated financial statements, inventory is carried at ` 3,84,000 (due to elimination entry above in
respect of unrealized profit). In the subsequent period, when the inventory is sold, Inventory
Account is credited by ` 4,00,000 whereas for the purpose of consolidated financial statements, it
should have been credited by only ` 3,84,000. The difference is adjusted by debiting back ` 16,000
to the Inventory Account and a corresponding recognition of share in profit of associate.]
Scenario B
Out of the inventory of ` 10,00,000, N Ltd. has sold inventory worth ` 6,00,000 to outside
customers. Hence, the profit of ` 60,000 (6,00,000 x 10% profit margin) on such inventory is realised.
However, the inventory worth ` 4,00,000 is still held by N Ltd. which consists profit of` 40,000
(4,00,000*10%). Out of this profit of ` 40,000, profit to the extent of other investor’sinterest in the
investee is treated as realised profit i.e. ` 24,000 (40,000*60%) is treated as realised profit. Balance
profit of ` 16,000 (40,000*40%) is considered as unrealised. Hence, M Ltd. should pass following
adjustment entry to reverse the unrealised profit:
Sales Dr. 160,000
To Cost of material consumed 144,000
To Investment in N Ltd. 16,000
In subsequent period, when this inventory of ` 4,00,000 is sold by N Ltd. to an outside customer then the
above profit margin of ` 16,000 will be treated as realised and hence the above entry will be reversed in
that period.
SM 11. Impairment loss on downstream and upstream transaction between an entity and its joint venture
Scenario A
X Ltd. has invested in a joint venture Y Ltd. by holding 50% of its equity share capital. During the year, X
Ltd. sold an asset to Y Ltd. at its market value of ` 8,00,000. The asset’s carrying value in X Ltd.’s books
was ` 10,00,000. Determine how should X Ltd. account for the sale transaction in its books.
Scenario B
Assume the same facts as per Scenario A except that the asset is sold by Y Ltd. to X Ltd. instead of X Ltd.
selling to Y Ltd. Determine how should X Ltd. account for the above transaction in its books.
[SM 2021, Ill.-14]
Ans.
Scenario A
X Ltd. should record full loss of ` 2,00,000 (10,00,000 ” 8,00,000) in its books as that would represent the
impairment loss because the market value has actually declined. This loss would have been recorded
even if X Ltd. would have first impaired the asset and then sold to Y Ltd. Atzero profit / loss. Following
entry should be passed in the books of X Ltd.
Bank A/c Dr. 8,00,000

Loss on sale of asset Dr. 2,00,000
To Asset 10,00,000
Scenario B
X Ltd. should record loss to the extent of its share in Y Ltd. Hence, X Ltd.’s share in loss i.e.` 1,00,000
[(10,00,000 ” 8,00,000) x 50%] should be recorded by X Ltd. in its books. The loss should be recorded
since the market value of the asset has actually declined and this would represent impairment. This
loss would have been recorded even if Y Ltd. would have first recorded an impairment loss of `
2,00,000 and then sold to X Ltd. at zero profit / loss. Following entry should be passed in the books of X
Ltd.
Asset Dr. 8,00,000

Share in loss of Y Ltd. Dr. 1,00,000
To Bank 8,00,000
To Investment in Y Ltd. 1,00,000
SM 12. Loss making associate and long-term interests

An entity has following three type interests in an associate:
“ Equity shares: 25% of the equity shares to which equity method of accounting is applied
“ Preference shares: Non-cumulative preference shares that form part of net investment in the
associate. Such preference shares are measured at fair value as per Ind AS 109.
“ Long-term loan: The loan carrying interest of 10% p.a. The interest income is received at the end of
each year. The long-term loan is accounted as per amortised cost as per Ind AS 109. This loan also
forms part of net investment in the associate.
At the start of year 1, the carrying value of each of the above interests is as follows:
“ Equity shares ” ` 10,00,000
“ Preference shares ” ` 5,00,000
“ Long-term loan ” ` 3,00,000
Following table summarises the changes in the fair value of preference shares as per Ind AS 109,
impairment loss on long-term loan as per Ind AS 109 and entity’s share in profit / loss of associate for
year 1-5.
`
End of Increase / (Decrease) in fair Impairment loss / Entity’s share in profit /
Year value of preference shares (reversal) on long-term (loss) of associate
as per IndAS109 loan as per Ind AS 109
1 (50,000) (50,000) (16,00,000)
2 (50,000) - (2,00,000)
3 1,00,000 50,000 -
4 50,000 - 10,00,000
5 30,000 - 10,00,000
Throughout year 1 to 5, there has been no objective evidence of impairment in the net investment in the
associate. The entity does not have any legal or constructive obligation to share the losses of the
associate beyond its interest in the associate.
Based on above, determine the closing balance of each of the above interests at the end of each year.
[SM 2021, Ill.-15]
Ans.
Year 1
Below table summarises the closing balance of each of the interest at the end of year 1:
`
Type of interest Opening Adjustment Balance after Share in Closing
balance at as per Ind AS applying Ind profit / (loss) balance at
the start of 109 AS 109 ofassociate the end of
the year the year
(A) (B) I = (A+B) (D) I = (C+D)
Equity shares 10,00,000 NA 10,00,000 (10,00,000) -
Preference shares 5,00,000 (50,000) 4,50,000 (4,50,000) -
Long-term loan 3,00,000 (50,000) 2,50,000 (1,50,000) 1,00,000
Total 18,00,000 (1,00,000) 17,00,000 (16,00,000) 1,00,000
The entire loss of `16,00,000 is recognised. Hence, there is no unrecognised loss at the end of year 1.
Year 2
Type of interest Opening Adjustment Balance after Share in profit Closing
balance at as per Ind AS applying / (loss) of balance at
the start 109 Ind AS 109 associate the end of
of the year the year
(A) (B) I = (A+B) (D) I = (C+D)
Equity shares - NA - - -
Preference shares - (50,000) (50,000) 50,000 * -
Long-term loan 1,00,000 - 1,00,000 (1,00,000) -
Total 1,00,000 (1,00,000) 17,00,000 (50,000) -
* Recognition of changes in fair value as per Ind AS 109 has resulted in the carrying amount of
Preference shares being negative `50,000. Consequently, the entity shall reverse a portion of the
associate’s losses previously allocated to Preference shares.
Out of the total loss of `2,00,000 for the year, loss of only `50,000 is recognized. Hence, there is
recognized loss to the extent of `1,50,000 at the end of year 2.
Year 3
`
the start of 109 Ind AS 109 associate the end of
the year the
(A) (B) I = (A+B) (D) I = (C+D)year
Equity shares - NA - - -
Preference shares - 1,00,000 1,00,000 (1,00,000) -
Long-term loan - 50,000 50,000 ___(50,000) -
Total - 1,50,000 1,50,000 (1,50,000) -
The share in profit / loss for the year is nil. However, there was previously unrecognised loss of`1,50,000
which is allocated in current year. After recognising the above loss, there is no unrecognised loss
at the end of year 3.
Year 4
the start of 109 Ind AS 109 associate the end of
the year the year
(A) (B) I = (A+B) (D) I = (C+D)
Equity shares - NA - 2,00,000 2,00,000
Preference shares - 50,000 50,000 5,00,000 5,50,000
Long-term loan - - - 3,00,000 3,00,000
Total - 50,000 50,000 10,00,000 10,50,000
The entity’s share in profit of associate for the year is `10,00,000. The entity shall allocate such profit to
each of the instruments in order of their seniority in liquidation. The entity should limit the amount of
profit to be allocated to preference shares and long-term loan to the extent of losses previously
allocated to them. Hence, the entity has allocated `5,00,000 to preference shares and`3,00,000 to long-
term debt.
There is no unrecognised loss at the end of year 4.
Year 5
Type of interest Opening Adjustment Balance after Share in profit / Closing
balance at as per Ind AS applying (loss) of balance at
the start 109 Ind AS 109 associate the end of
of the year the year
(A) (B) I = (A+B) (D) I = (C+D)
Equity shares 2,00,000 NA 2,00,000 10,00,000 12,00,000
Preference shares 5,50,000 30,000 5,80,000 - 5,80,000
Long-term loan 3,00,000 - 3,00,000 - 3,00,000
Total 10,50,000 30,000 10,80,000 10,00,000 20,80,000
The entity’s share in profit of associate for the year is `10,00,000. The entire profit is allocated to equity
shares since there is no loss previously allocated to either preference shares or long-term loan.
There is no recognized loss at the end of year 5.
Year 1 to 5
The interest accrual on long-term loan would be done in each year at 10% p.a. This will be done without
taking into account any adjustment done in the carrying value of long-term loan as per Ind AS 28. Hence,
the entity will accrue interest of `30,000 (3,00,000 x 10%) in each year.
SM 13. Recording in profit or loss of the gain / loss on discontinuation of equity method
CD Ltd. held 50% of the voting power of RS Ltd. which is a joint venture of CD Ltd. The carrying value of
the investment in RS Ltd. is ` 1,00,000. Now out of the 50% stake, CD Ltd. has sold 20% stake in RS Ltd.
to a third party for a consideration of ` 80,000. The fair value of the retained 30% interest is ` 1,20,000.
Determine how much gain / loss should be recorded in profit or loss of CD Ltd. [SM 2021, Ill.-16]
Ans.
CD Ltd. Shall record in profit or loss difference between below:
“ the fair value of any retained interest (i.e. ` 1,20,000) and any proceeds from disposing of a part
interest in the joint venture (i.e. ` 80,000); and
“ the carrying amount of the investment at the date the equity method was discontinued (i.e. `
1,00,000).
Hence, CD Ltd. Shall record gain of ` 1,00,000 in profit or loss.
SM 14. Investment in joint venture held for sale

Ram Ltd. holds 50% of the equity share capital of Shyam Ltd. The balance 50% equity share capital is held
by another investor. Ram Ltd. has joint control over Shyam Ltd. and it is a jointventure of Ram Ltd.,
accounted using equity method. Now Ram Ltd. is planning to sell 10% of the equity share capital of
Shyam Ltd. to a third party. Such 10% investment meets the criteria of an asset held for sale and has
been measured and disclosed accordingly. Now determine how should Ram Ltd. account 40% interest
retained in Shyam Ltd. [SM 2021, Ill.-17]
Ans.
Till the time 10% stake is sold, Ram Ltd. shall account for the retained interest of 40% as per equity
method. After the sale of 10% investment, if Ram Ltd. still has joint control over Shyam Ltd. (e.g. through
contractual arrangement) then it shall continue to measure that investment using equity method.
However, if Ram Ltd. is not going to have joint control over Shyam Ltd. post the disposal of10%
investment then retained investment of 40% shall be accounted as per Ind AS 109.
Ind AS 27
UNIT 7 : SEPARATE FINANCIAL STATEMENTS
SM 1. Reorganisation of the group structure

Following is the existing and proposed group structure of an original parent A Ltd.
Existing structure Proposed structure
Owners Owners
100% 100%
New Co.
100% Company A
Company A
100% 100%
100 100
Company Company Company B Company C
As per the above structure, the Owners of Company A will transfer all their shareholding in
Company A to New Co. In exchange of such shares, New Co. will issue its equity shares to the Owners.
New Co. will issue the shares to the owners in the same ratio of their existing holding in Company A so
that they have same absolute and relative interests in the net assets of the groupimmediately before
and after the reorganisation. The assets and liabilities of the group immediately before the and after the
proposed restructuring will also be the same.
The cost of the investment in Company A in the books of the Owners is ` 10 lakh. Total equity of
Company A (i.e. equity share capital and other equity attributable to the owners) as per its
separate financial statements on the date of proposed restructuring is ` 15 lakh.
After the proposed restructuring, New Co. wants to record its investment in Company A at cost.
Determine how it should measure the cost of investment in Company A? [SM 2021, Ill.-1]
Ans.
In current case, New Co. should measure the cost of investment in Company A at the carrying amount of
its share of the equity items shown in the separate financial statements of Company A at the date of the
restructuring because:
a) New Co. obtains control of Company A by issuing equity instruments to the Owners in
exchange for their existing equity instruments of Company A;
b) the assets and liabilities of the group immediately before and the proposed restructuring will be
same; and
c) the Owners will have the same absolute and relative interests in the net assets of the group
immediately before and after the proposed restructuring.
Hence, New Co. will measure the cost of investment in Company A at ` 15 lakh.
Ind AS 10
UNIT 8 : CONSOLIDATION: TEST YOUR KNOWLEDGE
SM 1. X Limited was holding 100% of the equity share capital of Y Limited and Y Limited was treated as a
subsidiary by X Limited. Now, Y Limited issues convertible preference shares to Z Limited. As per the
issue document of convertible preference shares, Z Limited also gets the rights to participate in the
relevant activities of Y Limited whereby Z Limited’s consent is also necessary to pass any decision by the
equity shareholder of Y Limited (i.e. X Limited). Determine how should X Limited account for its
investment in Y Limited in its consolidated financial statements after the issue of convertible
preference shares by Y Limited to Z Limited? [SM 2021, TYK-1]
Ans.
As per the issue document of convertible preference shares, unanimous consent of both X Limited and Z
Limited are required to pass any decision about the relevant activities of Y Limited. Hence, Y Limited is
jointly controlled by X Limited and Z Limited and thereby, Y Limited becomes a joint arrangement
between X Limited and Z Limited.
Y Limited is structured through a separate vehicle. The legal form of Y Limited, terms of the contractual
arrangement or other facts and circumstances do not give X Limited and Z Limited rights to the
assets, and obligations for the liabilities, relating to Y Limited. Hence, Y Limited is a joint venture
between X Limited and Z Limited.
When the convertible preference shares are issued to Z Limited, X Limited losses control over Y Limited.
Hence X Limited should derecognise the assets and liabilities of Y Limited from its consolidated financial
statements. 100% equity shares in Y Limited is still held by X Limited. Hence such investment would be
accounted at fair value on the date of loss of control by X Limited. The difference between the fair value
of 100% equity shares retained in Y Limited and the carrying value of assets and liabilities of Y
Limited derecognised is recognised in profit or loss of X Limited. After the loss of control, the
investment in Y Limited is accounted as per equity method of accounting by X Limited whereby the
investment value in Y Limited will be adjusted for the change in the X Limited’s share of the net assets Y
Limited post the date of loss of control. Also, the difference between the fair value of
investment in Y Limited and fair value of net identifiable assets of Y Limited shall be goodwill or capital
reserve.
SM 2. M Limited holds 90% interest in subsidiary N Limited. N Limited holds 25% interest in an associate O
Limited. As at 31 March 20X1, the net assets of O Limited was` 300 lakhs including profit of
` 40 lakhs for the year ended 31 March 20X1. Calculate how the investment in O Limited will be
accounted in the consolidated financial statements of M Limited? [SM 2021, TYK-2]
Ans.
Since N Limited is a subsidiary of M Limited, the consolidated financial statements of M Limited will
include 100% amounts of the consolidated financial statements of N Limited (including investment
in O Limited accounted for using equity method). Accordingly, the investment in O Limited will be
accounted as follows in the consolidated financial statements of M Limited:
`’ lakh
Investment in O Limited (300 x 25%) 75
Share in profit of O Limited
Attributable to M Limited (40 x 25% x 90%) 9
Attributable to Non-controlling interest of N Limited (50 x 25% x10%) 1 10
SM 3. AB Limited holds 30% interest in an associate which it has acquired for a cost of ` 300 lakhs.On the date
of acquisition of that stake, the fair value of net assets of the associate was ` 900 lakh. The value of
goodwill on acquisition was ` 30 lakhs. After the acquisition, AB Limited accounted for the investment in
the associate as per equity method of accounting and now the carrying value of such investment in the
consolidated financial statements of AB Limited is ` 360 lakhs. The associate has now issued equity
shares to some investors other than AB Limited for a consideration of ` 800 lakhs. This has effectively
reduced the holding of AB Limited to 20%. Determine how AB Limited should account for such
reduction in interest in the associate? [SM 2021, TYK-3]
Ans.
Because of the issue of shares by associate to other investors, AB Limited has effectively sold 10% (30 ”
20) of its interest in the associate. The gain / loss on reduction in interest in associate in calculated as
follows:
`’ lakhs
AB Limited’s share in the consideration received by the associate for issue of 160
shares (800 x 20%) (1)
Less: Carrying value of interest sold (360 x 1/3)(2) (120)
Gain on reduction in interest in associate(3) 40
Notes:
(1) The share in the consideration received by associate on issue of shares (i.e. ` 160 lakhs) would be
recorded as part of investment in associate.
(2) The carrying amount of interest sold (i.e. ` 120 lakhs) will be derecognised, including
proportionate goodwill of ` 10 lakhs (30 * 1/3).
(3) Gain of ` 40 lakhs will be recorded in the profit or loss.
FINANCIAL INSTRUMENTS (Ind AS 32, 107, 109)
UNIT I
ACCOUNTING AND REPORTING OF FINANCIAL INSTRUMENTS
SM 1. Creditors for sale of goods

A Ltd. (the ‘Company’) makes purchase of steel for its consumption in normal course of business. The
purchase terms provide for payment of goods at 30 days credit and interest payable @ 12% per annum
for any delays beyond the credit period.
Analyse whether the transaction leads to any financial instruments and if yes, then what is the nature of
that financial instrument? (SM 2021, Illu.4)
Ans.
A financial liability is any liability where there is a contractual obligation to deliver cash or other financial
asset to another entity.
In the above case, A Ltd. has entered into a contractual arrangement for purchase of goods at a fixed
consideration payable to the creditor. A contractual arrangement that provides for payment in fixed
amount of cash to another entity meets the definition of financial liability.
SM 2. Contract for exchange on unfavorable conditions

A Ltd. (the ‘Company’) makes a borrowing for INR 10 lacs from RBC Bank, with bullet repayment of INR
10 lacs and an annual interest rate of 12% per annum. Now, Company defaults at the end of 5th year and
consequently, a rescheduling of the payment schedule is made beginning 6th year onwards. The
Company is required to pay INR 1,300,000 at the end of 6th year for one time settlement, in lieu of
defaults in payments made earlier.
(a) Does the above instrument meet definition of financial liability? Please explain.
(b) Analyse the differential amount to be exchanged for one-time settlement.
(SM 2021, Illu.5)
Ans.
(a) A Ltd. has entered into an arrangement wherein against the borrowing, A Ltd. has contractual
obligation to make stream of payments (including interest and principal). This meets definition
of financial liability.
(b) Let’s compute the amount required to be settled and any differential arising upon one time
settlement at the end of 6th year ”
 Loan principal amount = ` 10,00,000
 Amount payable at the end of 6th year = ` 12,54,400 [10,00,000 x 1.12 x 1.12 (Interest for 5th
& 6th year in default plus principal amount)]
 One time settlement = INR 13,00,000
 Additional amount payable = ` 45,600
The above represents a contractual obligation to pay cash against settlement of a financial liability under
conditions that are unfavorable to A Ltd. (owing to additional amount payable in comparison to amount
that would have been paid without one time settlement). Hence the rescheduled arrangement meets
definition of ‘financial liability’.
UNIT 2
CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
SM 1. Hold-to-collect’ business model test

An entity purchased a debt instrument for 1,00,000.
The instrument pays interest of 6,000 annually and has 10 years to maturity when purchased. The entity
intends to hold the asset to collect the contractual cash flows.
Evaluate the business model test. (SM 2021, Illu.12)
Ans.
Entity’s objective is to hold the asset to collect the contractual cash flows and not to sell the assets
before the maturity period.
Thus, the debt instrument would meet the ‘hold-to-collect’ business model test.
SM 2. Hold-to-collect’ business model test

An entity purchased a debt instrument for 1,00,000.
The instrument pays interest of 6,000 annually and has 10 years to maturity when purchased. The entity
intends to hold the asset to collect the contractual cash flows.
Six years have passed and the entity is suffering a liquidity crisis and needs to sell the asset to raise
funds.
Evaluate the business model test. (SM 2021, Illu.13)
Ans.
Since the sale of financial assets was not expected on initial classification and therefore, does not affect
the classification (i.e. there is no retrospective reclassification).
Thus, the debt instrument would still meet the ‘hold-to-collect’ business model test.
SM 3. SPPI or contractual cash flow test

SPPI test for loan with zero interest and no fixed repayment terms
Parent H Ltd. provides a loan to its Subsidiary S Ltd. The loan is classified as a current liability in
Subsidiary S’s financial statements and has the following terms:
” Interest free loan.
” No fixed repayment terms
” Repayable on demand of Parent H Ltd.
Does the loan meet the ‘SPPI’ or contractual cash flows characteristic test? (SM 2021, Illu.14)
Ans.
Yes. The terms for the repayment of the principal amount of the loan on demand satisfies the criterion
of SPPI.
SM 4. SPPI Test for loan with zero interest repayable in ten years
Parent H Ltd. provides a loan of INR 100 million to Subsidiary B. The loan has the following terms:
” No interest
” Repayable in ten years.
Ans.
Yes. The terms for the repayment of the principal amount of the loan on demand satisfies the criterion
of SPPI.
SM 5. SPPI Test for loan with interest rate

Entity A Ltd. lends Entity B Ltd. INR 5 million for ten years, subject to the following terms:
” Interest is based on the prevailing variable market interest rate.
” Variable interest rate is capped at 10%.
” Repayable in ten years.
Ans.
Contractual cash flows of both a fixed rate instrument and a floating rate instrument are payments of
principal and interest as long as the interest reflects consideration for the time value of money and
credit risk.
Therefore, a loan that contains a combination of a fixed and variable interest rate meets the contractual
cash flow characteristics test.
SM 6. Trade receivables – Amortised cost

H Ltd. makes sale of goods to customers on credit of 60 days. The customers are entitled to earn a cash
discount @ 5% per annum if payment is made before 60 days and an interest @ 12% per annum is
charged for any payments made after 60 days. Company does not have a policy of selling its debtors and
holds them to collect contractual cash flows.
Evaluate the financial instrument. (SM 2021, Illu.17)
Ans.
In the above case, since H Ltd. has a contractual right to receive cash flows from its customers and
therefore such trade receivable are financial assets for H Ltd.
Further, H Ltd. business model test to collect will satisfy as the objective is to hold its trade receivable to
collect contractual cash flows till the end of maturity period. And such tradereceivable recorded in books
represents contractual cash flows that are solely payments of principal and interest if paid beyond credit
period.
Hence such trade receivables are classified at amortised cost.
SM 7. Security Deposits – Amortized Costs

A Ltd. (the ‘Company’) has obtained the premises from B Ltd. on lease to carry on its business. The lease
contract period is 5 years. As per the lease agreement, A Ltd. has paid security deposits to B Ltd.
amounting to ` 10 Lac which is refundable after the expiry of lease agreement.
How would such deposits be treated in books of the A Ltd. ? (SM 2021, Illu.18)
Ans.
In the above case, since A Ltd. has a contractual right to receive cash flows from its Lessor, B Ltd. and
therefore such security deposits receivable are financial assets for A Ltd.
Further, A Ltd. business model test to collect will be satisfied as the objective is to hold its security
deposits receivable to collect contractual cash flows till the end of maturity period. And such trade
receivable recorded in books represents contractual cash flows that are solely payments of principal and
interest.
Hence such security deposits receivables are classified at amortised cost.
SM 8. Deposits carrying off-market rate of interest:

Containers Ltd provides containers for use by customers for multiple purposes. The containers are
returnable at the end of the service contract period (3 years) between Containers Ltd and its customers.
In addition to the monthly charge, there is a security deposit that each customer makes with Containers
Ltd for ` 10,000 per container and such deposit is refundable when the service contract terminates.
Deposits do not carry any interest. Analyse the fair value upon initial recognition in books of customers
leasing containers. Market rate of interest for 3 year loan is 7% per annum. (SM 2021, Illu.21 Modified)
Ans.
In the above case, lessee (ie, customers leasing the containers) make interest free deposits, which are
refundable at the end of 3 years. Now, this money if it was to lent to a third party would fetch interest @
7% per annum.
Hence, discounting all future cash flows (ie, ` 10,000)
Fair value on initial recognition = 10,000 / (1+0.07)3 = 8,163.
Differential on day 1 = 10,000 ” 8,163 = 1,837
The differential on day 1 shall be treated as follows:
- Scenario 1 – If fair valuation is determined using level 1 inputs or other observable inputs, difference
on day 1 recognised in profit or loss
- Scenario 2 – If fair valuation is determined using other inputs, difference on day 1 shall be
recognised in profit or loss unless it meets definition of an asset or liability.
However, in case of security deposits level 1 fair value is not available. Therefore, in the above case, the
fair valuation is made based on unobservable inputs and hence applying scenario 2, difference can be
recognised as an asset if it meets the definition. Now, since the lessee gets to use the containers in
return for making an interest free deposit plus monthly charges, the lost interest representing day 1
difference between value of deposit and its fair value is like ‘’prepaid lease rent’ and can be recognised
as such. Prepaid rent (ROU Asset) shall be charged off to profit or loss in a straight lined manner as ‘lease
rent’.
SM 9. Accounting for assets at amortised cost

A Ltd has made a security deposit whose details are described below. Make necessary journal entries for
accounting of the deposit in the first year and last year. Assume market interest rate for a deposit for
similar period to be 12% per annum.
Particulars Details
Date of Security Deposit (Starting Date) 1-Apr-20X1
Date of Security Deposit (Finishing Date) 31-Mar-20X6
Description Lease
Total Lease Period 5 years
Discount rate 12.00%
Security deposit (A) 10,00,000
Present value factor at the 5th year 0.567427
(SM 2021, Illu.25 Modified)
Ans.
The above security deposit is an interest free deposit redeemable at the end of lease term for `
10,00,000. Hence, this involves collection of contractual cash flows and shall be accounted at amortised
cost.
Upon initial measurement –

Particulars Details
Security deposit (A) 10,00,000
Total Lease Period (Years) 5
Discount rate 12.00%
Present value factor of 5th year end 0.56743
Present value of deposit at beginning (B) 5,67,427
Prepaid lease payment at beginning (A-B) 4,32,573
Journal Entries
Year – 1 beginning
Particulars Amount Amount
Security deposit A/c Dr. 5,67,427
Prepaid lease expenses Dr. 4,32,573
To Bank A/c 10,00,000
Subsequently, every annual reporting year, interest income shall be accrued @ 12% per annum and
prepaid expenses shall be amortised on straight line basis over the lease term.
Year 1 end

Security deposit A/c (5,67,427 x 12%) Dr. 68,091
To Interest income A/c 68,091
Depreciation (4,32,573 / 5 years) Dr. 86,515
To Prepaid lease expenses 86,515
At the end of 5th year, the security deposit shall accrue `10,00,000 and prepaid lease expenses shall be
fully amortised (i.e. depreciated as per Ind AS 116, this prepaid lease rent would be shown as ROU asset).
Journal entry for realisation of security deposit ”
Security deposit A/c Dr. 1,07,143
To Interest income A/c 1,07,143
Depreciation (4,32,573 / 5 years) Dr. 86,515
To Prepaid lease expenses (ROU Asset) 86,515
Bank A/c Dr. 10,00,000
To Security deposit A/c 10,00,000
SM 10. Issue of borrowings with fixed rate of interest

A Ltd has made a borrowing from RBC Bank for ` 10,000 at a fixed interest of 10% per annum. Loan
processing fees were additionally paid for ` 500 and loan is payable after 5 years in bullet repayment of
principal. Details are as follows:
Particulars Details
Loan amount `10,000
Date of loan (Starting Date) 1-Apr-20X1
Date of repayment of principal amount (FinishingDate) 31-March-20X6
Interest rate 10.00%
Interest charge Interest to be charged and paid yearly
Upfront fees `500
How would loan be accounted in books of A Ltd? (SM 2021, Illu.31)
Ans.
The loan taken by A Ltd shall be measured at amortised cost as follows:
” Initial measurement ” At transaction price less processing fees
= 10,000 ” 500 = 9,500
” Subsequently ” interest to be accrued using effective rate of interest as follows:
Year end Opening Interest@ 11.42% Repayment of Closing
balance interest & principal balance
1 9,500 1,085 1,000 9,585
2 9,585 1,095 1,000 9,679
3 9,679 1,105 1,000 9,785
4 9,785 1,117 1,000 9,902
5 9,902 1,098* 11,000 -
* Difference due to approximation
Computation of IRR
IRR would be the rate using which the present value of cash flow should come out to be` 9,500 i.e. (`
10,000 less ` 500).
For this, we should first compute present value of cashflows using any two rates as follows:
Year Opening Repayment/C Closing PVF @ Present PVF @ Present
end balance ashflows balance 10% Value at 13% Value at
10% rate 13% rate
1 9,500 1,000 8,500 0.909 909 0.885 885
2 8,500 1,000 7,500 0.826 826 0.783 783
3 7,500 1,000 6,500 0.751 751 0.693 693
4 6,500 1,000 5,500 0.683 683 0.613 613
5 5,500 11,000 (5,500) 0.621 6,830 0.543 5,970*
10,000 8,945
*Difference is due to approximation
Taking 10% as discount rate, present value (PV) comes out to be ` 10,000.
If rate is increased by 3% over a base rate of 10%, PV decreases by ` 1,055 (i.e. ` 10,000 less ` 8945).
To decrease PV by ` 1,055, rate should be increased = 3%
To decrease PV by Re.1, rate should be increased = 3%
1,055
To decrease PV by ` 500, rate should be increased = 3 % X 500
1,055
= 1.42%
This would mean that the discount rate to get present value of cashflows equivalent to` 9,500 should be
11.42% (i.e. 10% + 1.42%).
SM 11. Accounting treatment of processing fees belonging to undisbursed loanAmount

X Ltd. had taken 6 year term loan in April 20X0 from bank and paid processing fees at the time of
sanction of loan.
The term loan is disbursed in different tranches from April 20X0 to April 20X6. On the date of transition
to Ind AS, i.e. 1.4.20X5, it has calculated the net present value of term loan disbursed upto 31.03.20X5 by
using effective interest rate and proportionate processing fees has been adjusted in disbursed amount
while calculating net present value.
What will be the accounting treatment of processing fees belonging to undisbursed term loan amount?
(SM 2021, Illu.34)
Ans.
Processing fee is an integral part of the effective interest rate of a financial instrument and shall be
included while calculating the effective interest rate.
(a) Accounting treatment in case future drawdown is probable
It may be noted that to the extent there is evidence that it is probable that the undisbursed term
loan will be drawn down in the future, the processing fee is accounted for as a transaction cost
under Ind AS 109, i.e., the fee is deferred and deducted from the carrying value of the financial
liabilities when the draw down occurs and considered in the effective interest rate calculations.
(b) Accounting treatment in case future drawdown is not probable

If it is not probable that the undisbursed term loan will be drawn down in the future, then the
fees is recognised as an expense on a straight-line basis over the term of the loan.
SM 12. Accounting treatment of prepayment premium and processing fees for obtaining new loan to prepay old
loan
PQR Limited had obtained term loan from Bank A in 20X1-20X2 and paid loan processing fees and
commitment charges.
In May 20X5, PQR Ltd. has availed fresh loan from Bank B as take-over of facility i.e. the new loan is
sanctioned to pay off the old loan taken from Bank A. The company paid prepayment premium to Bank A
to clear the old term loan and paid processing fees to Bank B for the new term loan.
Whether the prepayment premium and the processing fees both will be treated as transaction cost (as
per Ind AS 109, Financial Instruments) of obtaining the new loan, in the financial statements of PQR Ltd?
(SM 2021, Illu.35)
Ans.
(a) Accounting treatment of prepayment premium
Ind AS 109, provides that if an exchange of debt instruments or modification of terms is
accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain
or loss on the extinguishment in the statement of profit and loss.
Since the original loan was prepaid, the prepayment would result in extinguishment of the
original loan. The difference between the CV of the financial liability extinguished and the
consideration paid shall be recognised in profit or loss as per Ind AS 109.
Accordingly, the prepayment premium shall be recognised as part of the gain or loss on
extinguishment of the old loan.
(b) Accounting treatment of Unamortised processing fee of old loan

Unamortised processing fee related to the old loan will also be required to be charged to the
statement of profit and loss.
(c) Accounting treatment of Processing fee for new loan

Transaction costs are ‚Incremental costs that are directly attributable to the acquisition, issue or
disposal of a financial asset or financial liability. An incremental cost is one that would not have
been incurred if the entity had not acquired, issued or disposed of the financial instrument.‛
It is assumed that the loan processing fees solely relates to the origination of the new loan (i.e.
does not represent loan modification/renegotiation fees). Hence, the processing fees paid to
avail fresh loan from Bank B will be considered as transaction cost in the nature of origination
fees of the new loan and will be included while calculating effective interest rate as per Ind AS
109.
SM 13. Accounting treatment of share held as stock in trade
A share broking company is dealing in sale/purchase of shares for its own account and therefore is having
inventory of shares purchased by it for trading.
How will these instruments be accounted for in the financial statements? (SM 2021, Illu.36)
Ans.
Ind AS 2, Inventories, states that this Standard applies to all inventories, except financial instruments (Ind
AS 32, Financial Instruments: Presentation and Ind AS 109, Financial Instruments).
Accordingly, the principles of recognising and measuring financial instruments are governed by Ind AS
109, its presentation is governed by Ind AS 32 and disclosures are in accordance with Ind AS 107,
Financial Instruments: Disclosures, even if these instruments are held as stock-in trade by a company.
Further Ind AS 101, First-time Adoption of Indian Accounting Standards does not provide any transitional
relief from the application of the above standards.
Accordingly, in the given case, the relevant requirements of Ind AS 109, Ind AS 32 and Ind AS 107 shall be
applied retrospectively.
UNIT 4
DERIVATIVES AND EMBEDDED DERIVATIVES
SM 1. The definition of a derivative requires that the instrument ‚is settled at a future date‛. Is this criterion
met even if an option is expected not to be exercised, for example, because it is out of the money?
(SM 2021, Illu.5)
Ans.
Yes. An option is settled upon exercise or at its maturity. Expiry at maturity is a form of settlement even
though there is no additional exchange of consideration.
SM 2. Lease contracts dependent on inflation index

A lease contract, between two Indian companies of an asset in India, includes contingent lease rentals
that are dependent upon an US inflation index. Can the entity treat inflation linked features as closely
related? (SM 2021, Illu.11)
Ans.
For inflation linked features, an embedded derivative in a lease contract is considered as closely related
to the host if it is an inflation„related index related to inflation in the entity’s own economic
environment.
In this case, whilst the asset and the lessor and lessee are located in India, lease payment are linked to US
index. Hence, embedded derivative is not closely related and needs to be separated.
SM 3. Contracts for purchase or sale of non-financial item

Key terms of contracts to buy/sell non-financial items
Company Z is engaged in the business of importing oil seeds for further processing as well as trading
purposes. It enters into the following types of contracts as on 1 October 20X1:
Particulars Contract 1 Contract 2 Contract 3
Nature of Import of oil seeds Purchase of oil seeds Contract to sell oil seeds
Contract from a foreign supplier from a domestic producer on the commodity
/ supplier exchange
Quantity and rate 100 MT at USD 400 per 50 MT at ` 30,000 per MT 50 MT at USD 450 per MT,
MT to be delivered as to be delivered as on 31 maturing as on 15
on 31 March 20X2 January 20X2 January 20X2
Net settlement Yes Yes Yes
clause included in
the contract
Net settlement in There have also been Yes ” company Z has net Yes ” these contracts are
practice for several instances of settled some of the required to be net settled
similar contracts the oil seeds being sold domestic purchase with the exchange on the
prior to or shortly after contracts. However, these maturity date. Company Z
taking delivery. These instances constitute only enters into these types of
instances of net 1 per cent of the total derivative contracts to
settlement constitute domestic purchase hedge the risks on its
approximately 30 per contracts in value. The domestic oil seeds
cent of the value of remaining contracts are purchase contracts
total import contracts. settled by taking delivery
of oil seeds which are
used for further
processing.
Company Z is required to determine if the contracts entered into for purchase and sale of oil seeds are
derivatives within the scope of lnd AS 109 or are executory contracts outside the scope of lnd AS 109.
(SM 2021, Illu.15)
Ans.
Contract 1:
The following factors indicate that this contract does not meet the 'own use’ exemption:
 The contract permits net settlement, and
 There is a past practice of a significant proportion (30 per cent in this illustration) of similar contracts
being settled on a net basis either in cash or by sale of the oil seeds prior to delivery/shortly after
taking delivery.
Therefore, this contract would fall within the scope of lnd AS 109 and should be recognised as a
derivative instrument as on 1 October 20X1. The contract would be in the nature of a forward contract to
buy 100 MT of oil seeds as on 31 March 20X2 at USD 400 per MT. Company Z would have to recognise the
fair value changes (based on change in forward purchase rate) on this contract in the statement of profit
and loss at each reporting date.
Contract 2
Contract 2 also permits net settlement in cash. Further, there have been some instances of similar
domestic purchase contracts being settled net in cash in the past. However, these have been infrequent
in nature and insignificant in proportion to the total value of similar contracts (i.e.1 percent in this
illustration).
Company Z is in the practice of taking delivery of the oil seeds purchased under similar contracts and
using them for further processing in its plants.
This indicates that the domestic purchase contract meets the criteria for the 'own-use’ exemption and
should be considered as an executory contract.
Therefore, this contract would not fall within the scope of Ind AS 109.
Contract 3
This contract is in the nature of a derivative contract transacted on a commodity exchange and is
required to be net settled in cash on maturity. Therefore, this derivative contract would be covered by
lnd AS 109 and required to be classified and measured at FVTPL.
SM 4. Foreign currency embedded derivatives

Company A, an Indian company whose functional currency is `, enters into a contract to purchase
machinery from an unrelated local supplier, company B. The functional currency of company B is also `.
However, the contract is denominated in USD, since the machinery is sourced by company B from a US
based supplier. Payment is due to company B on delivery of the machinery.
Key terms of the contract:

Contractual features Details
Contract/order date 9 September 20X1
Delivery/payment date 31 December 20X1
Purchase price USD 1,000,000
USD/` Forward rate on 9 September 20X1 for 31 December 20X1 maturity 67.8
USD/` Spot rate on 9 September 20X1 66.4
USD/` Forward rates for 31 December, on:
30 September 67.5
31 December (spot rate) 67.0
Company A is required to analyse if the contract for purchase of machinery (a capital asset) from
company B contains an embedded derivative and whether this should be separately accounted for on the
basis of the guidance in Ind AS 109. Also give necessary journal entries for accounting the same.
(SM 2021, Illu.16)
Ans.
Based on the guidance above, the USD contract for purchase of machinery entered into by company A
includes an embedded foreign currency derivative due to the following reasons:
 The host contract is a purchase contract (non-financial in nature) that is not classified as, or
measured at FVTPL.
 The embedded foreign currency feature (requirement to settle the contract by payment of USD at a
future date) meets the definition of a stand-alone derivative ” it is akin to a USD-` forward contract
maturing on 31 December 20X1.
 USD is not the functional currency of either of the substantial parties to the contract (i.e., neither
company A nor company B).
 Machinery is not routinely denominated in USD in commercial transactions around the world. In this
context, an item or a commodity may be considered ‘routinely denominated’ in a particular currency
only if such currency was used in a large majority of similar commercial transactions around the
world. For example, transactions in crude oil are generally considered routinely denominated in USD.
A transaction for acquiring machinery in this illustration would generally not qualify for this
exemption.
 USD is not a commonly used currency for domestic commercial transactions in the economic
environment in which either company A or B operate. This exemption generally applies when the
business practice in a particular economic environment is to use a more stable or liquid foreign
currency (such as the USD), rather than the local currency, for a majority of internalor cross-border
transactions, or both. In the illustration above, companies A and B are companies operating in India
and the purchase contract is an internal/domestic transaction. USD is not a commonly used currency
for internal trade within this economic environment and therefore the contract would not qualify for
this exemption.
Accordingly, company A is required to separate the embedded foreign currency derivative from the host
purchase contract and recognise it separately as a derivative.
The separated embedded derivative is a forward contract entered into on 9 September 20X1, to
exchange USD 10,00,000 for ` at the USD/` forward rate of 67.8 on 31 December 20X1. Since the
forward exchange rate has been deemed to be the market rate on the date of the contract, the
embedded forward contract has a fair value of zero on initial recognition.
Subsequently, company A is required to measure this forward contract at its fair value, with changes in
fair value recognised in the statement of profit and loss. The following is the accounting treatment at
quarter-end and on settlement:
Accounting treatment:
Date Particulars Amount (`) Amount (`)
09-Sep-X1 On initial recognition of the forward contract Nil Nil
(No accounting entry recognised since initial fair value of the
forward contract is considered to be nil)
30-Sep-X1 Fair value change in forward contract 3,00,000
Derivative asset (company B) Dr.
[(67.8-67.5) x10,00,000]
To Profit or loss 3,00,000
31-Dec-X1 Fair value change in forward contract
Forward contract asset (company B) Dr.
[{(67.8-67) x 10,00,000} - 3,00,000] 5,00,000
To Profit or loss 5,00,000
31-Dec-X1 Recognition of machinery acquired and on settlement
Property, plant and equipment Dr. 6,78,00,000
(at forward rate)
To Forward contract asset (company B) 8,00,000
To Creditor (company B) / Bank 6,70,00,000
UNIT 5
RECOGNITION AND DERECOGNITION OF FINANCIAL INSTRUMENTS
SM 1. Part of a financial asset

State whether the derecognition principles will be applied or not.
i. Entity Y transfers the rights to the first or the last 90 per cent of cash collections from a financial
asset (or a group of financial assets)
ii. Entity Z transfers the rights to 90 per cent of the cash flows from a group of receivables, but
provides a guarantee to compensate the buyer for any credit losses up to 8 per cent of the
principal amount of the receivables.
(SM 2021, Illu.5)
Ans.
In the above circumstances, Entity Y and Entity Z need to apply the derecognition requirements to the
financial asset (or a group of similar financial assets) in its entirety.

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ADDITIONAL

QUESTION BANK SM 2021

JUST WHAT YOU WANTED ANALYSIS!

JUST WHAT YOU WANTED ANALYSIS!

JUST WHAT YOU WANTED ANALYSIS!

TYK 3 7.77 New Striker, Similar Q Numerical

TYK 5 7.77 New Striker, Similar Q Numerical

Illustration 32 7.141 Modified Striker, Similar Q Numerical

Illustration 37 7.153 Modified Striker, Similar Q Numerical

Illustration 39 7.171 New Amendment Non-numerical

JUST WHAT YOU WANTED ANALYSIS!

Illustration 3 7.395 New Striker, Similar Q Numerical

Unit 7: Ind AS 40: Investment Property

TYK 4 7.408 New RTP-Nov-2018 Numerical

JUST WHAT YOU WANTED ANALYSIS!

Illustration 21 9.54 New Striker, Similar Q Non-numerical

JUST WHAT YOU WANTED ANALYSIS!

Illustration 5 12.12 New Striker, Similar Q Non-numerical

JUST WHAT YOU WANTED ANALYSIS!

Chapter 16: Integrated Reporting No additions / modifications

Chapter 17: Corporate Social Responsibility No additions / modifications

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Considering the above items/transactions answer the following:

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Other expenses (540)

The below information is relevant for A Ltd Group.

Cash Flows from Operating Activities Amount in ` Lacs

2. Changes in Trade Receivables Amount in ` Lacs

3. Changes in Inventories Amount in ` Lacs

4. Changes in Trade Payables Amount in ` Lacs

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Consolidated balance sheet

Particulars Amount (`)

Statement of Cash Flows for the year ended 20X2 (extract)

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2. Calculation of change in Trade Receivables during the year `

3. Calculation of change in Trade Payables during the year `

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Criterion 2: Distinct within the context of the contract

SM 7. Implied promise to reseller’s customers

SM 8. Implied performance obligation

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SM 13. Non-cash consideration - Free advertising

SM 14. Credits to a new customer

SM 15. Discretionary credit

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SM 16. Uninstalled materials

(a) Elevators 1,500,00

Therefore, applying the guidance on Input method ”

(b) Other costs 500,000

SM 18. Assessing the nature of a software licence with unspecified upgrades

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SM 20. Assessing the nature of a team name and logo

SM 21. Customer outsources its information technology data centre

Design services `50,000

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Price per container Cumulative sales volume