Ca note

Welcome to
A digital learning platform

ABOUT US:
CAP CLASSES is a digital learning platform
wherein we provide Live and Recorded
online video classes, course materials,
Handwritten notes, study plans, test series
to the students pursuing Indian and global
professional courses in finance &
accounting streams.
We provide a holistic academic system that
enables a student to learn beyond
boundaries. Using our Mobile Applications,
a student can learn at his/her place and
time of convenience. Physical location and
technical skills are not the barriers.
Welcome to the world of unbounded
learning. In this new era, we are
"SOCIALLY DISTANCED BUT
DIGITALLY CONNECTED" 1
Courses offered: Faculty Profile
We provide recorded classes for
the following subjects:
CA Final
Financial Reporting
Advanced Auditing and
Professional Ethics
CA Inter / IPCC
Advanced Accounting
Financial Management
Auditing and Assurance
Strategic Management
Accounting Standards
All India ranker with
Crash Course:
All India 1st , 5th,
Auditing and Assurance
11th, 20th and 43rd
Strategic Management
Ranks in CMA & CA
Recorded Video Classes can be viewed from
Android / iOS mobile or any Laptop / PC
Gold Medal from
ICAI
Taught over 400
Batches, 30,000
Students & nurtured
For online live & recorded video classes, 300 + Rankers
Test Series, Study plans & Question
Banks, Contact us @
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Frequently Asked Questions
How can I pay the fee?
We accept many forms of online payments including
Google Pay, PhonePe, UPI id & Bank Transfer.
How can I register to any course?
Once you make online payment, send a screenshot to us
in WhatsApp @ 98467 91598. You will get a Google
Registration form. On filling that you will be enrolled
to the course.
How can I watch videos?
If you opt for Android version, the tech team will
activate your classes in the back end. You can view the
videos as and when you are added to the batch. Usually
it takes a day or less than that.
If you opt for Windows Version, you will receive a
detailed e mail consisting of an activation code and
procedure to install and download classes. Once you
complete the process, you can view videos in your
Laptop.
How many times I can watch each video?
As of now, in our Mobile App (Android / iOS) we are
offering unlimited views. You can view a video any
number of times. Validity depends on your course.
In windows version, there is a 6 months validity and a
video can be viewed 2 times. Windows activation will
cost you Rs. 500 extra on the subject price for
encryption.
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Frequently Asked Questions
How will the doubts be clarified?
You will have access to the faculty. The core faculty
who teaches the subject will be available to clarify your
doubts through WhatsApp, E mail or a call.
How will I get study notes, MCQ Banks?
Whatever the courseware the faculty is using in the
class will be uploaded in the app. In the Study
Materials section of your batch, you can access to all
the materials. If you wish to take a printout, we will
send the materials in an e mail. Post Covid, we are not
sending physical books. Soon we make our physical
books available for sale.
I am not a technical expert? How friendly the classes are?
Both our Mobile version and Windows version are very
student friendly. The process of initial set up and
subsequent usage are very simple. We provide guidance,
instruction manual and if required our tech team will
always be happy to support you. For subsequent issues
and troubleshooting also, we are just a call away.
Do you suggest me to use Mobile Version or Windows?
It absolutely depends on your comfort level. The content
and delivery in both the platforms are absolutely same.
However Windows will come with an additional
activation fee of Rs. 500 as mentioned earlier. And
looking at the trend, majority are opting Mobile version
due to the convenience.
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K. CH. PAVAN KUMAR
B.Com, FCA, FCMA, PGDFM, (ACCA)
 A Chartered Accountant and a fellow member of the Institute of Chartered

Accountants of India.
 A qualified Cost Accountant and has completed his Bachelors in Commerce.
 10 years of experience as a CFO.
 Trained professional in International Financial Reporting Standards (IFRS) from E&Y.
 A passionate teacher having 14 years of experience. Has dealt with more than 500
batches for various levels of CA / CMA / CS / ACCA and taught over 30,000 students.
His Academic Achievements include
 All India 1st Mark in CMA final

 All India 5th Rank in CMA Final Examination
 All India 11 Rank
th
in CMA Intermediate Examination
 All India 43 Rank
rd
in CA Inter Examination
 All India 20th Rank in CMA Foundation Examination
 He received Gold Medal from the Institute of Cost and Works Accountants of India
and Silver Medal from the Institute of Chartered Accountants of India.
 National merit scholarship winner for 4 times from ICAI
He authored various text books of academic interest for students pursuing CA CMA CS
courses which are published by reputed publication houses including S. Chand
Publications.
An active YouTuber having his own channel in the name of CAP CLASSES which has a
credit of 3000 subscribers, 100 videos and 5,00,000 + minutes of viewership in its first
year itself.
He is a panel member of review committee for Accountancy and Commerce subjects,

the books are printed and prescribed by the Board of Intermediate education,
Government of Andhra Pradesh for students appearing Intermediate across the states
of AP and Telangana.
His areas of specialization include
 Financial Management
 Accounting & Advanced Accounting.
 International financial reporting standards IFRS & Accounting Standards
 Strategic Management
5
ACCOUNTING STANDARDS
AS – 1 : DISCLOSURE OF ACCOUNTING POLICIES
1. What are Accounting Policies?
Accounting policies are rules or principles and methods to adopt such principles in
financial accounts for true and fair recording and presentation of financial
statements.
2. Examples of different accounting policies

• Methods of Amortization (AS 26)
• Valuation of Inventories (AS 2)
• Valuation of Investments (AS 13)
• Valuation of Fixed Assets (AS 10)
• Treatment of Government Grants (AS 12)
• Treatment of Contingent liabilities (AS 29)
• Conversion of Foreign currency items (AS 11) etc
3. Why AS 1?
There 1s no single list of accounting policies which are applicable in all

circumstances.
The differing circumstances in which enterprises operate in a situation of diverse

and complex economic activity make alternative accounting principles and methods
of applying those principles acceptable.
If every entity follows separate method to comply with principle then even if they
follow the correct accounting policy but still books are not comparable, so there is
need for disclosure.
4. Disclosure requirement
• SIGNIFICANT ACCOUNTING POLICIES:
All significant accounting policies adopted in preparation and presentation of

financial statements should be disclosed.
Significant accounting policies means those accounting policies which deals with
material items of assets, liabilities, incomes and expenses.
Such disclosure should form part of financial statements.
These significant accounting policies should be disclosed at one place.
• INSIGNIFICANT ACCOUNTI NG POLICIES:
All accounting policies relating to immaterial items of assets, liabilities, incomes

and expenses need not be disclosed.
ACCOUNTING STANDARDS 1 CA. PAVAN KUMAR K. CH

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• FUNDAMENTAL ACCOUNTI NG ASSUMPTIONS:
Fundamntal accounting assumptions form the basis for preparations and

presentation of financial statements.
They are usually not specifically stated because their acceptance and use are
assumed. Disclosure is necessary if they are not followed.
The following are generally accepted fundamental accounting assumptions:
• Going concern
The enterpdse is normally viewed as going concern that is, as continuing in

operations for foreseeable future.
It is assumed that enterprise neither has any need nor any will to shut down
business in near future. (As per SA 570 going concern issued by the ICAI suggests
that foreseeable future means 12 months from the date of financial statements)
• Consistency:
It is assumed that accounting policies are consistent from one period to another.
However,Consistency is not an excuse to adopU continue to adopt inappropriate
accou.nting policies.
• Accrual:
It is assumed that revenues and costs are:-.> Recognized as they are

earned/incurred rather than as and when money is received /paid.
• Recorded in financial statements of the period to which they relate.
5. Factors to be considered while choosing an accounting policies:
The primary consideration in selection of accounting policies by an enterprise is

that financial statements prepared and presented on the basis of such accounting
policies should represent a true and fair view of state of affairs of enterprise as at
balance sheet date and profit or loss for the period ended on that date.
Secondary consideration governing selection and application of accounting policies

are:
• Prudence:
Anticipated profits should not be recorded, anticipated losses are to be recorded.
• Substance over form:
The accounting treatment and presentation in financial statements of transaction

and events should be governed by their substance and not merely by legal form.
Substance refers to economic reality.

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• Materiality:
Financial statements should disclose all material items i.e. items the knowledge of
which might influence the decisions of the user of financial statements.
Determination of materiality is a matter of professional judgement.
6. Changes in accounting policies:
Accounting policies can be changed ifsuch change is required by
• Law
• AS
• Management, if they can justify better presentation and preparation of financial
statements. Any change that has material effect should be disclosed.
The amount by which any item in GPFS is affected by such change should be
disclosed. Where such amount is not ascertainable, wholly/ in part, the fact should
be indicated.
AS 2 : VALUATION OF INVENTORIES
1) Appropriate / In-appropriate valuation of inventory affects both the profit / loss

from operations & financial position as reflected in the Balance Sheet
2) According to AS 2, Inventories are assets
a) held for sale in the ordinary course of business or
b) in the process of production for such sale or
c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services
3) Thus, Inventory consists of :
a) Goods purchased & held for re-sale
b) Finished goods produced for sale
c) Work in progress
d) Stores, spares, loose tools etc. awaiting use in production process (of goods
meant for sale)
4) AS 2 does not cover :
a) Financial instruments such as shares, debentures etc.held as stock
b) Work in progress under construction contracts
c) Work in progress arising in the ordinary course of business of ser.vice
providers
d) Live stock, agricultural & forest products, mineral oils (for whose valuation
certain established practices may exist)
5) Inventories are valued at COST or NRV, whichever is less.
6) Cost = Purchase cost + conversion cost + other costs incurred to bring the
inventory to its present location & condition
7) Purchase cost = purchase price + duties & taxes + freight inward + other
directly attributable expenses (like in-transit insurance) - (duties & taxes
recoverable + trade discount & rebates etc.).

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8) Conversion cost = Direct labour + variable production overheads (calculated on
actual production) + fixed production overheads (calculated on normal capacity)
In case of joint products, the conversion cost is allocated on rational & consistent
basis (e.g.:sales).
In case of by products, the NRV of by product is deducted from the conversion cost
Inventory Cost does not include : Administration cost, Selling & distribution cost,
abnormal wastage, storage costs etc.
9) Normal capacity means the production expected to be achieved on an average

over a number of periods under normal conditions. Fixed production overheads
per unit will be revised if actual production exceeds normal capacity so that
inventories are not measured above their cost.
10) Interest & other borrowing costs are usually not included in inventory
valuation. However, they can be included if time plays a major factor in bringing
about a change in the condition of inventories.
11) Excise duty paid I payable is an element of cost & should be included in the
inventory valuation. However, any amount recoverable from tax authorities by
way of CENVAT credit will have to be excluded from the valuation of finished
goods.
12) Methods of inventory valuation
a) Inventory not ordinarily interchangeable :specific identification method
b) Inventory ordinarily interchangeable : FIFO or weighted avg. method
Specific identification method tracks the actual physical flow of goods. It 1s also
called the actual cost method because specific job bears the actual cost of materials
bought for the job. This method is suited for antique shops, expensive jewellery,
custom-made merchandise etc.
13) Other methods allowed are standard cost method or retail price method if it
were to result in estimation of value of inventory that approximates the actual
cost. Standard cost is a pre-determined cost based on attainable efficiency
standard for a given volume of output . Retail price method is generally adopted
by retail stores having numerous low uft cost items. Cost is measured by
deducting gross margin from retail prices of year end inventory.
14) NRV = estimated selling price in the ordinary course of business - estimated
cost of completion - estimated costs necessary to make the sale. Considerations
governing estimation of NRV are :
a. Most reliable evidence available at the time estimates are made as to
amounts that inventories are expected to realize &
b. Fluctuations of prices or costs directly relating to events occurring after the
Balance Sheet date, to the extent that such events confirm the conditions
existing at the Balance Sheet date.
15) Materials & other supplies held for use in production are not written down
below the cost if finished goods in which they will be used are expected to be
sold at or above cost. When finished goods are not expected to fetch the cost &
there is a decline in process of material & other supplies then the materials &

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other supplies are written down to their NRV. In such a case, the replacement
cost is the NRV
16) Disclosures required :
a) Accounting policy applied in measuring inventories including cost formula
b) Carrying amount of inventory classified appropriately eg: finished goods,
work in progress, raw material spare parts, loose tools etc.
c) Any changes in accounting policy with respect to valuation of inventory & its
effect on the financial statements.
AS – 3: CASH FLOW STATEMENT
1) Cash Flow Statement shows relationship between Profitability and Cash

generating ability and hence the "quality of profits" of the reporting entity.
2) It is mandatory for listed companies and entities with a turnover exceeding 50
crores.
3) Cash comprises cash on hand & demand deposits with bank.
4) Cash equivalents are short term highly liquid investments that are readily
convertible into known amounts of cash & which are subject to an insignificant
risk.
5) Classification of Activities: According to the revised Accounting Standard 3, the
cash flow statement should show cash flows during the period classified by
operating, investing & financing activities.
(a) Operating Activities:
These are principle revenue producing activities of an enterprise other activities

which are not investing or financing activities. Cash flows from operating
activities generally result from the transactions & other events that determine
the net profit or loss of the business. e.g. of cash flows from Opening activities
are :
i) Cash receipts from sale of goods & rendering of services.

ii) Cash Receipts from commission, fees, royalties etc.
iii)Cash payments suppliers of goods & services.
iv) Cash payments of operating expenses such as salaries & wages, rent,
electricity etc.
v) Cash payments or refund of income tax
(b) Investing Activities :
This are acquisition & dispoal of Long-term assets such as land, building, plant,
furniture, goodwill, trademarks, copyrights and investments not included in
cash equivalents e.g.
i) Cash payments to acquire fixed assets.

ii) Cash payments relating to capatalisation research & development cost.
iii) Cash received on disposal of fixed assets.
iv) Loans made to third parties.
v) Cash received from repayments of loans made to third parties.
vi) Interest received on investments / Income from investment.
(c) Financing Activities:

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This are activities that result in chan•ges in the size and composition of owners
capital including preference share capital & borrowings of a business e.g.
i) Cash receipts from issue of shares, debts, bonds, loans & other borrowings.
ii) Cash repayment of loans taken.
iii) Cash payment to redeem preference shares.
iv) Interest and dividend paid.
5. Net basis reporting is allowed in following situations.
a) Cash Flows reflecting activities of customers rather than those of the

reporting entity (e g.deposits and withdrawals by a bank's customers)
b) Casn Flows in respect of items inwhich the taken over is quick and
amountsare large and maturities are short (e.g. principal amounts relatingto
credit card customers).
AS – 4 : CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET

DATE
EVENTS OCCURRING AFTER THE BALANCE SHEET DATE :
1) Post Balance Sheet events are those that occur between Balance Sheet date &
the date on which the financial statements are approved.
2) Events occurring after Balance Sheet date fall under 2 categories :
a) Events that require adjustment of Assets & Liabilities &
b) Other events, financial impact of which requires a disclosure.
3) Adjusting events provide additional evidence that assist in estimation of
amounts relating to conditions existing on the Balance Sheet date. For e.g. :
a) Condition already existing on the Balance Sheet date non-payment by a
debtor
b) Additional evidence surfacing after Balance Sheet date debtor declared
insolvent by court
c) Post Balance Sheet event Insolvency of debtor
d) Quantification of amount debts due less likely recovery
e) Adjustment to be made provision for bad debts
b. Adjusting events may provide evidence that the Fundamental Accounting

Assumption of going concern is not appropriate.
4) Non-adjusting events do not affect Balance Sheet figures but the impact of these
events have to be appropriately disclosed (in the Directors' report)
Elements constituting the principle Example
a) Post Balance Sheet event amalgamation

b) Financial impact of event material changes in commitments affecting the
financial position
c) Quantification of amount estimate the amount where possible
d) Disclosure to be made in the Directors' report

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e) Contents of disclosure nature of event & estimate of financial effect (or
an explicit statement that the financial impact cannot be quantified) '
5. Examples of Adjusting & Non-adjusting events:
Adjusting events :
a) Subsequent determination of proceeds of sale of FAs purchased or sold

before year end.
b) Property valuation that provides evidence of a permanent decrease in value.
c) Evidence regarding NRV < cost
d) Retrospective changes in tax rates.
e) Discovery of error or fraud
Non-adjusting events that occur after year end :
a) Mergers or acquisitions, investment or reconstruction

b) Issue of shares
c) Extension of activities
d) Changes in exchange rates
AS – 5 : NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND
CHANGES IN ACCOUNTING POLICIES
1. Net profit or loss for the period includes:
All items of income and expense including extra ordinary items and effects of
changes in accounting estimates which are recognized in a period.
The net profit or loss for the period comprises the following component, each of
which should be disclosed on the fae of the statement of profit and loss:
• Profit or loss from ordinary activities and

• Profit or loss from extra ordinary activities.
Profit or loss from ordinary activities:
Any activities which are undertaken by an enterprise as a part of its business and
Such related activities in which the enterprise engages in furtherance of, incidental
to, or arising from, these activities.
When the items of income and expense from ordinary activities are of such size,
nature or incidence that their disclosure is relevant to explain the performance of
the enterprise for lhe period,the nature and amount of such items should be
disclosed separately.
Following are items of income/expense which require separate disclosure:
a) The write down of inventories to NRV

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b) Disposal of fixed assets
c) Disposal of long term investments
d) Litigation settlements , etc.
Profit or loss from extra ordinary activities:
Extra ordinary items are incomes or expenses that arise from events or
transactions that are clearly distinct from ordinary activities of the enterprise and,
therefore, are not expected to occur frequently. The nature and amount of each
extraordinary items should be separately disclosed in the statement of profit or loss
in a manner that its impact on profit or loss can be perceived.
Examples of extraordinary items:
a) Loss due to earthquake

b) Attachment of property
c) Government Grants becoming refundable
d) Loss due to fire
e) Loss due to enemy attack, etc.
2. Changes in Accounting estimates;
As a result of the uncertainties inherent in business activities, many financial

statements items cannot be measured with precision but can only be estimated
based on the latest information available. Estimates may be required,for example
,of bad debts, inventory obsolescence or lives of assets.
The estimates can be revised if-
Changes occur regarding the circumstances on which the estimates are basedAs a
result of new information, more experience or subsequent developments.
NOTE: Revision of accounting estimates is not an extra-ordinary item or a prior

period item. Classification of change in accounting estimates:
The effect of a change in an accounting estimate should be classified under the

same classification in the statement of profit or loss as was used previously for the
estimate The effect of a change in an accounting estimate which was previously
included in profit or loss from ordinary activities is included inthat component of
net profit or loss.
The effect of a change in an accounting estimate which was previously included in

profit or loss as extra-ordinary item is reported as extra-ordinary item.
3. Changes in accounting policies:
Accounting policies can be changed if such change is required by
• Law
• AS

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• Management , if they can justify better presentation and preparation of financial
statements. Any change that has material effect should be disclosed
The amount by which any item in GPFS is affected by such chang-e should be
disclosed. Where such amount is not ascertainable,wholly/ in part, the fact should
be indicated.
The following are not changes in accounting policies:
• The adoption of a new accounting policy for events or transactions that differ in
substance from previously occurring events or transactions.
• The adoption of a new accounting policy for events or transactions which did
not occur previously or that were material.
4. Prior period items:
Prior period items are incomes or expenses which arise in current period as a result
of error or omissions in the preparation of financial statements of one or more prior
periods. Errors may occur as a result of:
• Mathematical mistakes,
• Mistakes in applying accounting policies,
• Misinterpretation of facts, or
• Oversight.
The nature and amount of prior period items should be separately disclosed in the
statement of profit and loss in a manner that their impact on the current profit or
loss can be perceived.
Examples of prior period item:
a) Error in calculation of depreciation

b) Use of incorrect rates of depreciation
c) Omission to provide depreciation
d) Non provision for bad/doubtful debts, etc.
AS – 10: PROPERTY, PLANT AND EQUIPMENT
Fixed asset is on asset held with the intention of being used for the purpose of
producing or providing goods or services is not held for sale in normal course of
business.
Non Applicability
Biological assets
Living animals
Living Plants (Does not include bearer plants) Wasting assets
Asset Covered by another AS Note:- AS is applicable on bearer plants

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MEASUREMENT (At what value should any asset be shown?)
At initial recognition – Cost Model
Subsequent recognition – Revaluation Model
Historic Cost Revalued Price
Historic cost
Cost Under different circumstances Purchased
Cost of an item of fixed asset comprises of its
1) purchase prices, including non refundable taxes,

2) any directly attributable cost and
3) PV of decommissioning.
Self generated fixed asset
Include all directly attributable cost (exclude any internal profits) Exchange
FMV of asset that goes out, if it is more evident otherwise FMV of asset that comes
in recd
Free
Record @ Nominal Value
Cost of jointly held assets
Pro rata cost of such jointly owned asset is grouped together with similar fully
owned assets. Cost of assets acquired under consolidated basis
Cost of each fixed asset @ FMV By component valuation officer.
Revalued Price
1st time upward revaluation -RR
1st time downward revaluation- P/L
Present increase is credited to RR if previous revaluation also led to increase
Present increase is relatable to previous decrease the credit revenue to the extent of
previous decrease and remaining increase in RR
Present decrease is charged to P/l if previous revaluation also led to decrease
If present decrease is relatable to previous increase then change RR to the extent of

previous increase & remaining in P/L
NOTE: Revaluation should be performed for an ENTIRE CLASS of PPE

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Component accounting
An asset may consist of several different and significant physical components.
If an item of PPE may consist two or More Significant components with

substantially different useful life or usage then each component must be recorded
and depreciated SEPARATELY
Note:- When a significant component is replaced, the old component is de-

recognized.
Subsequent Expenditure
It is the expenditure, which is incurred after the initial recognition i.e. after the
asset is ready to use or being used. Here, we discuss whether subsequent
expenditure will go to P&L or will be capitalized along with PPE. It depends on the
nature and benefits from the expenditure incurred.
Does the subsequent expenditure increases future economic benefits
i.e satisfies the recognition criteria?
IF YES – Then Capitalise along with PPE
IF NO – Then Charge to P&L statement
If subsequent expenditure increases the future economic benefits i.e. satisfies

recognition criteria then such expense 1s recognized as a separate component and
depreciated over its useful life.
Costs of day to day servicing are primarily the costs of labour and consumables,
and may include the cost of small parts. The purpose of such expenditures is often
described as for the "repairs and maintenance" of item of PPE and these expenses
should be charged to Profit and loss Account.
If a part of PPE is replaced then it should be capitalized as Component of PPE if it

meets recognition criteria given by AS, otherwise, it will be charged to P&L
statement.
A condition of continuing to operate an item of PPE may be performed in regular

intervals as major inspection for faults regardless of whether parts of PPE are
replaced. When each such major inspections are performed, its cost is capitalized
as part of PPE as a replacement if the recognition criteria is satisfied.
Depreciation
Depreciable amount= Cost-SV

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It is systematic allocation of depreciable amount of an asset over its useful life
Determinants-Cost-SV-Lif e-Future Economic benefits
Methods- SLM, WDV, on basis of future economic benefits
Changes in methods/ determinant - Change in Accounting estimate, effect

prospective as per AS 5
Retirement
Value @ Net Book Value
Or
Net realizable value, whichever is lower
Disposal
If Entity followed cost model then profit or loss on sale will go to profit or loss
account.
If entity followed revaluation model then profit or loss on sale will go to P/l ale
(after disposal Revaluation reserve will be transferred to general reserve)
Disclosure
Depreciation method Depreciation rate Life of PPE
Measurement basis (cost model or revaluation method)
Cost model
• In balance sheet show: Gross BV - Accumulated depreciation - Accumulated

Impairment loss = Net BV
Revaluation Model
• In balance sheet show: Gross BV - SUBSEQUENT accumulated depreciation

- SUBSEQUENT accumulated impairment loss = Net BV
Reconciliation between:
• Addition
• Retirement
• Disposal Acquisition Revaluation
• Depreciation
• Impairment loss
Contractual commitment for acquisition of PPE

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Existence and restriction on title and PPE pledged as securities If the asset is
revalued
• Date of revaluation
• Valuer is independent or not
• Methods and assumption of revaluation
• Revaluation surplus, if any
AS 11 – THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
1. AS 11 applies to the following :
a) Accounting for transactions in foreign currency.

b) Translating the financial statements of foreign operations for inclusion in
Company's financial statements.
c) Accounting for foreign currency transactions in the nature of forward
exchange contracts.
2. Definitions:
1) Reporting Currency: Currency used in presenting financial statements

2) Foreign Currency: Currency other than reporting currency of an enterprise.
3) Exchange Rate: It is the ratio for exchange of 2 currencies.
4) Average Rate: It is the mean of the exchange rates in force during a period
5) Forward Rate: It 1s the agreed exchange rate for exchange of 2 currencies at a
specified future date.
6) Forward Exchange Contract: It is an agreement to exchange different currencies
at a forward rate.
7) Closing Rate: It is the Exchange Rate at the Balance Sheet date.
8) Monetary Items: They are money held & assets & liabilities to be received or
paid in fixed or determinable amounts of money. E.g. : Cash, Bank balance,
Receivables, Payables etc.
9) Non-monetary items: They are assets & liabilities other than inventory items.
E.g. : FAs, Inventories, Investment in equity shares etc.
10) Settlement date: Date on which a receivable rs due to be collected I a payable is

due to be paid.
11) Foreign Operation: A Subsidiary, Associate. JV or Branch of the reporting
enterprise, the activities of which are based or conducted r na country other
thanthe country of the reporting enterprise. Under AS 11, a foreign operation is
classified as either 'Integral Foreign Operation' or 'Non-Integral Foreign
Operation', based on the way of financing & operation in relation to the
reporting enterprise.
12) Integral Foreign Operation (IFO): Its activities are an Integral part of those of the
reporting enterprise, its business is carried on as if it was an extension of the
reporting enterprise's operations, IFOs generally carry on business in a single
foreign currency of the country where it is located. cash flows from operations of
the reporting enterprise are directly & immediately affected by a change in the

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exchange rate between the reporting currency & currency of the IFOs country,
change in exchange rate affect individual monetary items held by the IFO rather
than the reporting enterprise's investment in IFO etc.
13) Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an
IFO. The business of NFO 1s carried on in a substantially independent manner
in its local currency, NFOs may also enter into business transactions in foreign
currencies, including transactions in reporting currency, change in the
exchange rate between 1e reporting currency & local currency has little or no
direct effect on the present or future cash flows from operations of the NFO or
the reporting enterprise, change in 1he exchange rate affects the reporting
enterprise's net investment in the NFO rather than the individual monetary /
non-monetary items held by that NFO.
Initial Recognition:
A foreign currency transaction should be recorded in the reporting currency by

applying to the foreign currency amount, the exchange rate between the reporting
currency & the foreign currency at the date of the transaction i.e. Spot Rate.
Average rate that approximates the actual rate can be adopted for a period instead
of spot rate of each transaction date, provided the exchange rates do not fluctuate
significantly monetary items in the B/S are reported at closing rate. Non-monetary
items are reported at the exchange at the date of the transaction. Contingent
Liabilities are to be reported using closing rate.
A. single transaction may have to be translated more than once. E.g: a credit
sale of goods would be first translated on the transaction date at the spot rate
prevailing on that date. Then, if the said receivable is not settled on the Balance
Sheet date, then such debtor would again be translated using the Closing Rate.
Finally, the exchange rate may have varied when the settlement date arrives.
requiring 1 more translation. Any profit/loss on account of re-translation of
monetary I non-monetary items will give rise to exchange gain/loss, which has to
be credited I charged to the P&L in the period in which it arises. Any profit / loss
arising on account of exchange rate differences on repayment I retranslation of
Fixed Asset linked Liability should not be adjusted against the carrying amount of
FAs. Instead, it should be credited I charged to the P & LA/c.
Accounting for IFO: The financial statements of IFOs should be translated using
such principles & procedures as if the transactions of the foreign operations had
been those of the reporting enterprise itself.
Accounting for NFO: In translating the financial statements of NFOs for

incorporation in its financial statements the reporting enterprise should use the
following procedure:
a) The assets & liabilities, both monetary & non-monetary, should be translated at
the closing rate.
b) Income & expense items of NFO should be translated using the average rate.
c) All resulting exchange differences should be accumulated in a Foreign Currency
Translation Reserve (FCTR) until the disposal of the net investment.

19
Disclosures:
An enterprise should disclose:
a) The amount of exchange differences included in the net profit / loss for the
period &
b) Net exchange difference accumulated in FCTR as a separate component of
shareholders' funds & a reconciliation of the amount of such exchange
differences at the beginning & end of the period.
AS 12: GOVERNMENT GRANTS
1) Government Grants are assistance by government in cash or in kind to an

enterprise for past or future compliance with certain conditions. Government
here means Central or State government, government agencies whether local,
national or international (e.g. world bank)
2) AS 12 does not deal with the following :
a) Government participation in the ownership of the enterprise i.e., investment
by government in the equity.
b) Tax exemptions in backward I notified areas.
3) Government Grants should be recognized only if there is reasonable assurance
that the conditions attached will be complied & grants will be received
4) There are 2 approaches to accounting for government grants :
a) Capital Approach: Under this approach, the grant received is credited to the
capital reserve & is treated as a part of shareholders' funds.
b) Income Approach: Under this approach, the grant is credited to P& L A/c
over 1 or more periods. The unamortised amount is carried in the Deferred
Government Grant'.
5) Government grants may be in the form of cash or kind. Non-monetary
government grants e.g.: grants in the form of assets (such as land etc.) are
recorded at nominal value. If grants are at a concessional rate then such assets
are recorded at actual cost.
6) Monetary grants may be related to FAs or revenue or capital.
7) Grants related to non-depreciable FAs like land are to be credited to Capital
Reserve. However, if conditions are attached to the grant, then the grant is to be
credited to income over the same period over which the costs of meeting such
conditions are charged to income.
8) Grants related to depreciable FAs can be accounted in the following 2 ways:
a) Grants are deducted from the gross value of the FAs & only the net BV is
then depreciated.
b) Grants are treated as deferred income.The deferred income is transferred to
the P & L over the periods & in the proportionin which depreciation on the
related asset is charged to the P & L.
9) Government grants related to revenue are recognized in the P & L over the
period necessary to match them with the related costs. They may be shown as
other income or can even be deducted from the related expenses.

20
10) Government grants in the nature of promoters' contribution are credited to
capital reserve & are treated as a part of shareholders' funds.
11) Government grants which become refundable due to non-fulfilment of
conditions attached are treated as extra-ordinary item under AS 5.
12) Refund of revenue related grants should be adjusted against the balance in
DGG A/c, if any,& the balance is charged to P& L A/c.
13) When grant received was credited to capital reserve then the refundable amount
is to be adjusted with the capital reserve.
14) Treatment of refund of government grant related to FA depends on the
accounting done at the time of receipt of grant. If grant received was deducted
from FA, then refundable amount should be added to the BV of the asset.
Depreciation on revised BV will be provided prospectively over the remaining life
of the asset. If grant received was treated as deferred income, then the
refundable amount is adjusted against the balance in DGG A/c & balance if
any, will be charged to P&L A/c.
15) The following disclosures are required :
a) The accounting policy adopted for government grants including methods of
presentatio1 in the financial statements.
b) The nature& extent of government grants recognized in financial statements
including non-monetary assets given at a concessional rate or free of cost.
AS - 13: INVESTMENTS
What are Investments?
Investments are Assets Held by an enterprise for earning incomes by way of

dividends, interest, and, rentals, for capital apprec1at1on, or for other benefits to
the investing enterprise.
Assets held as stock in trade are not 'investments'.
Some investments have no physical existence and are represented merely by

certificates or similar documents while others exist in physical form.
Determination of Cost:
If investments are purchased:
The cost of an investment includes acquisition charges such as brokerage, fees and
duties. Interest,dividends and rentals receivables in connection with an invest-
ment are generally regarded as income, being the return on investment. However,
in some circumstances, such inflows represent a recovery of cost and do not form
part of income. In such case, it should be deducted from the cost.
• If investments are acquired for consideration other than cash:

21
Sr. Consideration in the Valued at
no form of
1. Shares or securities Fair value of securities issued
2. Other assets Fair value of asset given up or Fair value of asset
acquired whichever is known more appropriately.
• Cost of right shares:
When right shares offered are subscribed for, the cost of right shares is added to
the carrying amount of the original holding.
If the right shares are not subscribed for but are sold in the market, the sale
proceeds are taken to the profit and loss statement.
• However, where the investments are acquired on cum cum-right basis and the
market value of investments immediately after their becoming ex-right is lower
than the cost for which they were acquired, it may be appropriate to apply the
sale proceeds of right to reduce the carrying amount of such investments to the
market value.
Determination of fair value:
Fair value is the amount for which an asset could be exchanged between a
knowledge able, willing buyer and a knowledgeable, willing seller in an arms' length
transaction.
5. Determination of carrying amount of Investments:

• Current investments
Current Investments should be carried in the financial statement at lower of cost or

fair value.The lower of cost or fair value should not be determined on overall basis.
It should be determined-
a) On an individual investment basis (More prudent) or

b) By category of investment.
Any reduction to fair value of current investments or any reversal of such reduction
should be included in profit or loss account.
• Long term Investments:
Long term investments are usually carried at cost.
However, when there is a decline, other than temporary, in the value of a long term
investment, the carrying amount is reduced to recognize the decline.
Such reduction should be determined and made for each long term investments
individually.
6. Disposal:
On disposal of an investment, the difference between the carrying amount and

disposal proceeds, net of expenses, is recognized in profit or loss account.

22
When disposing of a part of the holding of an individual investment, the carrying
amount to be allocated to that part is to be determined on the basis of the average
carrying amount of the total holding of the investment (i.e. weighted average cost)
7. Reclassification:
The accounting policies for determination of carrying amount of investments.
An Enterprise should disclose current Investments and long term investments

separately.
• As per Schedule Ill of Companies Act, 2013 further classification should

disclose investments in :
a) Government securities
b) Shares, Debentures or bonds
c) Investment properties
d) Others-Specifying nature.
The amounts included in profit or loss statement for:
a) Interest, dividends and rentals on investments showing separately such in-

come from long term and current investments. Gross income should be stated,
the amount of income tax deducted at source being included under Advance
Taxes paid.
b) Profit or loss on disposal of current investments and changes in the carrying
amount of such investments.
c) Profit or loss on disposal of Long term investments and changes in the car•
rying amount of such investments.
Significant restrictions on the rights of ownership, realisability of investments or

the remittance of income and proceeds of the disposal.
AS 16: BORROWING COST
1) A qualifying asset (QA) is an asset that necessarily takes substantial period of

time to get ready for its intended use (FA) or sale (inventory). Inventories
produced over a short period of time or assets ready to use at the time of
acquisition are not QAs. Ordinarily a period of 12 months is considered
substantial period unless a shorter or longer period can be justified.
2) If funds are borrowed to acquire a QA then the matching principle requires that
the interest on funds borrowed be expensed in such a manner that it would
match with future revenue generated from the asset. Borrowing costs of a QA
are to be capitalized within certain limits.
3) Borrowing costs include :
a) Interest & commitment charges on bank borrowings.
b) Other ancillary costs for arranging borrowings.
c) Finance charges in respect of assets under Finance lease,hire purchase etc.
d) Exchange rate differences relatable to foreign currency borrowings to the
extent that they are regarded as an adjustment of interest costs.

23
4) Borrowing costs can be related either to specific borrowings or general
borrowings :
a) Specific borrowings are those that could have been avoided if the
expenditure on QA was not to be incurred.
b) General borrowings are loans, debentures, working capital borrowings etc
used either wholly or partly for expenditure on QAs.
5) Capitalization rate is the rate at which borrowing costs will be capitalized. In
case of specific borrowing, the capitalization rate is the rate at which actual
borrowing costs are incurred. Any income on temporary investment of fund
from specific borrowing should be deducted from borrowing costs & only the net
amount should be capitalized. In case of general borrowings, the capitalization
rate would be the weighted average of borrowing costs outstanding during the
relevant period, where time is the weight provider.
6) Borrowing costs capitalized should not exceed the actual borrowing costs
incurred. This may happen in case of general borrowing.
7) Borrowing costs can be capitalized only if the following 3 conditions are satisfied
:
a) Expenditure on QAs is being incurred
b) Borrowing costs are being incurred &
c) Activities which are essential to prepare the asset for its intended use should
be in progress.
8) Where activities necessary to prepare the asset for its intended use or sale stand
suspended, then borrowing costs incurred during such periods should not be
capitalized. Where there is a temporary delay which is necessary for getting the
asset ready e.g.: maintaining of inventory for maturing the wine etc., the
borrowing costs for such periods should be capitalized.
9) Cap1tahzation of borrowing costs should cease when all activities necessary for
making assets ready for intended use I sale are substantially complete.
10) When an asset is completed in parts & the completed part is capable of use
when work on others is in progress, capitalization of borrowing costs pertaining
to the completed part should be stopped.
11) Financial statements should disclose the accounting policy followed for
treatment of borrowing costs & the amount or borrowing costs capitalized
during the period.
AS : 17: ACCOUNTING STANDARDS
1) Many businesses now a days operate in many industries or many states I

countries. Therefore there is a need to give more details regarding different
segments.
2) The segment report is made as per Accounting Standard - 17 which is
mandatory and is effective for the accounting periods starting on or after
1.04.2003. The Accounting Standard is mandatory for listed companies or
companies intending to be listed or whose turnover exceeds 50 crores.
3) Segmentation can be done on the basis of products on services or a group of
related products & services. Segmentation can also be geographical. Whether
segmentation should be primarily product wise or geographical depends on

24
whether primary risk is due to products or services or due to geographical area.
To identify the primary risk the internal organisation & management structure
& its system of reporting to the Board of Directors or CEO of the company
should be considered
4) A business segment is a distinguishable component of an enterprise which is
engaged in providing an individual product or service or a group of related
products or services and that is subject to risks & returns which are different
from those of other segments. Factors which would be considered in
determining whether products or service are related includes :
a) Nature of products or services
b) Nature of production process
c) Type of or class of customers for products or services
d) The methods used to distribute the products or provide the services
e) Nature of regulatory environment.
5) A geographical segment is a distinguishable component of an enterprise which
is engaged in providing products or services within a particular economic
environment and it is subject to risks and returns that are different from those
of other segments operating in other economic environment. It includes:
a) Similarity of economic & political conditions.
b) Relationship between operations
c) Proximity of operations
d) Special Risks
e) Exchange Control Regulations
f) Underlying Currency Risks
The risks & returns of an enterprise are categorised by geographical location of its
assets and location of its customers.
6) Determining the composition of a business or geographical segment involves a

certain amount of judgement.
7) Reportable Segment
It is a business or geographical is identified on the basis of the foregoing definition

for which segment information is required to be disclosed by the financial
statements.
a) Para 27a of Accounting Standard - 17 states that if total revenue (External +

inter segment) of a segment is 10% or more of total revenue of all segment
then those segments are reportable.
b) Para 27 b states that if the-result i.e. profit or loss of any segment is 10% or
more
c) of combined profit I combined loss of all segments in absolute terms- then
that segment is reportable.
d) Para 27 c states that if assets of any segment is 10% or more than the total
assets of all segments then that segment is reportable.
e) Para 28 states that management may designate any segment as reportable
even if it doesn't satisfy above mentioned criteria.

25
f)Para 29 requires that if the total external revenue of reportable segments
identified as per para 27 & 28 is less than 75% of total enterprise revenue,
additional segments should be identified as reportable till limit of 75% is
reached.
8) Disclosure
Accounting Standard - 17 is a reporting standard. Hence " disclosures" is its core

element. The intensity of disclosures is high in case of primary segments and low
for secondary segments.
For each Primary segment the following disclose have to be made.
a) Segment Revenue (External + Internal segment)

b) Segment Result
c) Segment Assets
d) Segment Liabilities
e) Capital expense incurred during the period
f) Depreciation charge for the period
g) Other non-cash expenses during the period. Disclosure required for
secondary segments.
If Business segments are primary then geographical segments are secondary.

Disclose:
• Revenue from external customers by geographical location (10% Test)

• Assets by geographical location of assets (10% Test)
• Fixed Asset acquired during the period.
If Geographical sales are primary then Business segs are secondary. If a business
segment's external sales are 10% of total external revenue or Business segment
assets are •10% of total assets of all business segments, then disclose for those
business segments:
• Segments revenue from external customers.

• Segments assets
• Fixed assets acquired during the period.
Also if the primary geographic segments are based on location of customers, also
make the following disclosures:
Assets located in each geographic segment (10 % Test) Additions to fixed assets
during the period.
If the Primary geographic segments are based on location of assets, also make the
following disclosure :
Sales to external customers for each customer based geographical segment (10%
Test).
1) Until recently the amount of tax provision was determined on the Profit or Loss
calculated on per Income Tax laws.As per Accounting Standard - 22 tax should

26
be accounted by following the principle of Matching Concept i.e. tax should be
accounted in the period in which the corresponding revenue and expenses are
accounted.
2) Accounting Standard - 22 covers domestic and foreign taxes based on taxable
income . The standard does not deal with corporate dividend tax or wealth tax.
3) There is a difference between accounting profit (1.e Profit calculated on the
basis of accounting policies) and taxable profit (i.e profit calculated as per
Income Tax laws).
There are two main reasons for this difference
a) Timing difference:
These difference originate in one period and is capable of reversal in one or more
subsequent periods. e.g.
• Difference in rate of depreciation

• Difference in method of depreciation
• Section 438 items of the Income Tax Act (Outstanding Interest, Bonus, etc).
• Provision for doubtful debts
• Provision for warranties
• Provision for decrease in value of assets
• Provision for impairment of assets etc.
b) Permanent Difference:
These differences originate in one period and do not reverse subsequently
e.g., expenses charged to profit & Loss but not allowed for tax purpose at all
in any year or incomes credited to Profit & Loss but are exempt from tax.
4) Timing differences will lead to either Deferred Tax Asset or Deferred Tax
Liability. When accounting profit is more than taxable profit, a deferred tax
liability is created. However when accounting profit is less than taxable profit, a
Deferred Tax Asset 1s created e.g.
• Accelerated depreciation allowed by Income Tax Act leads to creation of
Deferred Tax Liability.
• Provision for doubtful debts will lead to creation of Deferred Tax Asset.
5) Permanent differences are differences that always remain and are of permanent
nature.
• Permanent differences do not create Deferred Tax Asset I Deferred Tax
liability.
• These are excluded for determining of tax expense.
6) The difference between tax expenses and current tax (i.e. Tax payable as per
Income Tax Laws) arises only on account of timing difference which creates
Deferred Tax Asset
or Deferred Tax liability
:.Tax expense = Current Tax + Deferred Tax

27
Current tax is calculated using tax rates and tax laws applicable for the relevant
accounting year. Deferred Tax Assets or Deferred Tax liab1liy 1s determined using
tax rate and tax laws that have been enacted or substantially enacted at the
Balance Sheet date. Further deferred tax 1s not discounted to its P.V.
7) Deferred Tax liabiliy must be provided for,but prudence would require that
Deferred Tax Assets should be recognised and carried forward only to the extent
that there is resonable certainty that sufficient future taxable income will be
available against which such Deferred Tax Asset can be realised. However in
case of unabsorbed depreciation and carry forward losses under Income Tax
laws, Deferred Tax Asset should be recognised only to the extent there is virtual
certainty that sufficient future taxable income will be available against which
such Def erred Tax Asset can be realised.
8) Review of deferred tax asset: The carrying amount of deferred tax asset should
be reviewed at each balance sheet date, if it is evident that any portion of the
deferred tax asset is not recoverable because of uncertainty of future income.
the deferred tax asset should be written down. Any such written down amount
may be reversed in subsequent period to the extent that 1t becomes reasonably
certain that sufficient future taxable income will be available.
9) Re - assessment of unrecognized deferred tax Asset: Previously unrecognized
deferred tax asset is re-assessed at every balance sheet date. If it becomes
reasonably certain that such unrecognized deferred tax asset will be realised,
then unrecognized deferred tax asset is recognised now.
10) Any adjustment arising out of such review I reassessment is charged I credited
to Profit & loss account of the year. ( i e. year of review I reassessment) It is not
prior period item but a change in accounting estimate. However if the amount is
material proper disclosure should be made because this item would be an item
of exceptional nature.
11) For determining taxes during an interim period, the integral approach is
followed. (see Accounting Standard - 25).
12) Transitional Provision: When this accounting standard of taxes on income is
first time applied. The amount of deferred tax asset / liability should be treated
in the same way had this accounting standard been in effect from the
beginning. The corresponding debit I credit to the revenue reserves is subject to
the consideration of prudence in case of deferred tax assets.
13) Disclosure:
• The break - up of deferred tax asset / liability should be disclosed.
• In case of deferred tax asset arising out of unabsorbed depreciation or loss.
Evidence supporting recognition should be disclosed.
• Deferred tax asset / liability should be disclosed separately from current
asset / liabilities. They should also be distinguished from advance tax I tax
provision I tax refund due.
• Deferred tax asset and liability should be set off if permissible under the tax
laws but to be shown separately if not permissible.

28
GROUP – II
AS – 7: CONSTRUCTION CONTRACTS
1. AS 7 addresses the issue of allocation of revenue & costs attributable to

contract activity to the accounting period in which construction work is
performed.
2. A construction contract is defined as a contract specifically negotiated for the
construction of an asset or combination of assets that are closely inter-related
or inter-dependent in terms of their design, technology & function or their
ultimate purpose or use e.g. :- contract for construction of a bridge, building,
dam. pipeline, road etc. Construction contracts also include contract for
rendering services relating to construction of assets (e.g. :- service of architect)
& contracts for destruction or restoration of asset & restoration of environment
following demolition of asset.
3. Construction contracts are of the following 2 types :
a) Fixed price construction contracts : are those in which parties agree to a
fixed price or fixed rate per unit & in some cases subject to escalation clause
b) Cost plus construction contracts : are those which involves reimbursement
of defined costs plus a percentage of such cost or a fixed fee .
Cost plus contracts involving a maximum ceiling would bear the characteristics of
both the above types.
4. Profit I Loss is to be calculated for each contract separately but when a group of
contracts have been negotiated as a single package with an overall profit margin
then all such contracts put together would be treated as a single contract.
5. Construction contracts may provide for construction of additional asset at the
option of the customer. The construction of additional asset should be treated
as a separate contract if the asset differs significantly from the asset covered by
the original contract & the price of the additional asset is independent of the
original contract price.
6. To calculate the contract profit/loss, contract revenue & costs must be
calculated. Contract revenue consists of :
a) Agreed price
b) Claims arising due to escalation clause
c) Claims for re-imbursement of costs not included in the contract price
d) Increase or decrease in revenue due to change or variation in scope of work
to be performed
e) Incentives (additional amounts paid if performance exceeds agreed targets)
Contract costs consists of the following •
a) Direct or specific costs : Direct materials, direct labour & direct expenses
b) Allocable costs : Insurance, design & technical assistance expenditure etc.
c) specifically chargeable under the contract
Following costs are excluded from contract costs :

29
a) General administration cost
b) Selling costs
c) R & D costs
d) Depreciation on idle plant & equipment
Costs incurred in securing contracts & pre-contract costs are included in the
contract costs if it is probable that contract will be obtained. Otherwise they should
be charged to the General P & LA/c.
Interest cost can be included in contract costs if the asset is a qualifying asset as
per AS - 16. Recognition of contract cost & revenue : When the outcome of the
contract can be estimated reliably then contract revenue & related costs are
recognized as revenue & costs by reference to the stage of completion of the
contract activity at the Balance Sheet date. This is also called Percentage
Completion Method (PCM). The stage of completion can be determined in a variety
of ways:
a) Cost to cost method: Compare the total cost incurred to date with the total
estimated cost of the contract. Therefore, % of completion = [cost incurred till
date I (cost incurred till date + cost likely to be incurred for completion)] * 100.
b) Survey of work performed
c) Completion of a physical proportion of the contract work.
Contract revenue recognition = Contract price * % of completion -Revenue

recognized earlier
When it is probable that total contract costs will exceed total contract revenue,
expected loss should be recognized as an expense immediately irrespective of
a. Whether or not work has commenced

b. The stage of completion
c. The amount of profit on other contracts which are not treated as a single
contract 12 when the outcome of a contract cannot be reliably estimated then
revenue should be recognized only to the extent of costs incurred & of which
recovery is possible.
Recognition of revenue & expenditure in construction contracts is based on

estimates. Changes in estimates in year-to-year are accounted as a change in
accounting estimate as per AS 5. This change will neither be a PPI nor an extra-
ordinary item.
Disclosure:
An enterprise should disclose the method used to determine the stage of

completion & method used to determine contract revenue. In addition to the policy
disclosure, the following disclosures are also required:
a) Amount of contract revenue recognized during the period

b) Contract cost incurred & recognition of profit
c) Advance received

30
d) Gross amount due to / from customers
(Costs Incurred + Recognised Profit - Recognised Losses - Progressive
Billing)
e) Gross amount due to customers (Progressive Billing + Recognised
Losses - Recognised Profit - Costs Incurred)
f) Retentions
AS – 9: REVENUE RECOGNITION
1) Why AS 9?
It is basically concerned with the "timing of recognition" in the statement of Profit

and Loss. It lays down criteria for recognition of revenue most suited to preparers
of FS of enterprises engaged in varied activities.
2) What is Revenue?
Revenue means the gross inflow of cash, receivable or other consideration arising
in the course of ordinary activities of an enterprise from sale of goods, from the
rendering of services and from the use by others of the resources of the enterprise
yielding interest, royalties and dividend.
3) Common elements for recognition of revenue:
To all these three groups aforesaid, there are two common elements. It is
imperative to seek answers to two questions.
No significant uncertainty exists regarding the amount of the consideration that

will be derived (MEASURABILITY)
Are we certain that the amount will be received? (COLLECTABI LITY) NOTE:
a) If Consideration is not measurable
Consideration receivable for sale of goods or for rendering of services should be

determinable. When such consideration is not determinable within reasonable
limits, revenue recognition will be postponed.
b) If collectability is uncertain
When there is uncertainty about the collection of revenue even at the time when
claim is raised recognition must be postponed to the extent of uncertainty involved.
In such cases, it may be appropriate to recognize revenue only when it is reason-
ably certain that the ultimate collection will be made.
Where there is no uncertainty as to ultimate collection, revenue is recognized at the

time of sale or rendering of service even though payments are made by
installments.
c) Effect of postponement

31
When recognition of revenue is postponed due to the effect of uncertainties', the
amount is considered as revenue of the period in which it is properly recognized.
d) Uncertainty arises later - make a provision (Do not adjust revenue)
When a transaction was concluded initially, the collectability was certain. Revenue,
therefore, stood recognized. Subsequent to sale or rendering of the service, and at a
much later date, the collectability of consideration is rendered uncertain. In such a
situation, it is more appropriate to make a separate provision to reflect the
uncertainty rather than to adjust the amount of revenue originally recorded.
4) Sale of goods:
Revenue is to be recognized when the following conditions are satisfied:
a) The seller has transferred to the buyer the property in goods for a consideration.
OR
b) Significant risks and rewards of ownership have been transferred to the buyer
AND
c) No significant uncertainty exists regarding the amount of consideration that will
be derived from the sale of goods
5) Rendering of services
The Standard prescribes two methods:
a) COMPLETED SERVICE CONTRACT METHOD: Performance in a service contract

may consist of
(i) one single act
(ii) or more than one act, where services not performed are significant enough in
relation to all transaction taken as whole. Under such conditions, performance is
not deemed complete and service is not chargeable unless all the transactions are
completed.
Revenue is recognized only when the SOLE or FINAL act takes place and the service
becomes chargeable.
c) PROPORTIONATE COMPLETION METHOD:
This method - evolved out of accrual concept - is to be applied when performance

consists of execution of more than one act. Revenue is to be recognized
proportionately by reference to the performance of each act.
Revenue is recognized when EACH independent act takes place and the
proportionate service becomes chargeable.
6) Other income:
a) INTEREST:
Revenue must be recognized on time proportion basis.

32
b) ROYALTIES:
Revenue is recognized on accrual basis in accordance with the terms of
relevant agreement.
c) DIVIDENDS:
Revenue is to be recognized only when the owner's right to receive payment
is established (When dividends are DECLARED)
EXECEPTION:
When interest, royalties and dividends are receivable from other countries which
requires forex permission, revenue recognition has to be on CASH BASIS.
AS 18: RELATED PARTY TRANSACTIONS
1) This standard deals only with related party relationships described in (a) to (e)
below :
a) enterprises that directly, or indirectly through one or rrore intermediates,
control, or are controlled by,or are under common control with, the reporting
enterprise (this includes holding companies, subsidiaries and fellow
subsidiaries) ;
b) associates and joint ventures of the reporting enterprise and the investing
party or venturer in respect of which the reporting enterprise is an associate
or a joint venture ;
c) individuals owning, directly or indirectly, an interest in the voting power of
the reporting enterprise that gives them control or significant influence over
the enterprise, and relatives of any such individual ;
d) key management personnel and relatives of such personnel ; and
e) enterprises over which any person described in {c} or (d) is able to exercise
significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprises that have a mem-
ber key management 1n common with the reporting enterprise.
2) In the context of this statement ,the following are deemed not to be related
parties:
a) two companies simply because they have a director in common,
notwithstanding paragraph 3(d) or (e) above {unless the director is able to
affect the policies of both companies in their manual dealings};
b) a single customer, supplier, franchiser, distributor, or general agent with
whom an enterprise transacts a significant volume of business merely by
virtue of the resulting economic dependence ;and
c) the parties listed below, in the course of their normal dealings with an
enterprise by virtue of those dealings (although they may circumscribe the
freedom of action of the enterprise or participate in its decision making
process) :
a. providers of finance;
b. trade unions ;
c. public utilities ;

33
d. government departments and government agencies including
government sponsored bodies.
3) Exemptions
a) Related party disclosure requirements as laid down in this Statement do no
apply in circumstances where providing such disclosures would conflict with
the reporting enterprises duties of confidentiality as specifically required in
terms of statute or by any regulator or similar competent authority.
For example, banks are obliged by law to maintain confidentiality in respect of their
customer's transactions and this Statement would not override the obligation to
preserve the confidentiality of customer's dealings.
b) Disclosure of transactions between members of group is unnecessary 1s

consolidated financial statement because consolidated financial statements
present information about the holding and its subsidiaries as a single
reporting enterprise.
c) No disclosure is required in the financial statements of state - controlled
enterprises as regards related party relationships with other state -
controlled enterprises and transactions with such enterprises .
4) Definitions
For the purpose of this standard, the following terms are used with the meanings
specified:
Related Party - parties are considered to be related if at any time during the
reporting period one party has the ability to control the other party or exercise
significant influence over the other party in making financial and I or operating
decisions.
Related Party Transactions - a transfer of resources or obligations between related

parties regardless of whether or not a price is charged.
Control - (a) ownership, directly or indirectly, of more than one half of the voting
power of an enterprise,or (b) control of the composition of the board of directors in
the case of a company or of the composition of the cofiesponding governing body in
case of any other enterprise, or (c) a substantial interest in voting power and the
power to direct,by statute or agreement , the financial and I or operating policies of
the enterprise.
Significant Influence - participation in the financial and I or operating policy

decisions of an enterprise, but not control of those policies.
An Associate - an enterprise in which an investing reporting party has significant

influence and which is neither a subsidiary nor a joint venture of that party.
A Joint Venture - a contractual arrangement whereby two ore more parties

undertake an economic activity which is subject to joint control.
"Joint Control - the contractually agreed sharing of power to govern the financial
and operating policies of an economic activity so as to obtain benefits from it.

34
Key Management Personnel - those persons who have the authority and
responsibility for planning, directing and controlling the activities of the reporting
enterprise.
Relative - in relation to an individual, means the spouse , son, daughter . brother,

sister, father and mother who may be expected to influence, or be influenced by,
that individual in his I her dealings with the reporting enterprise.
Holding Company - a company having one ore more subsidiaries .
Subsidiary - a company:
a) in which another company (the holding company) holds, either by itself and I or
through one ore more subsidiaries, more than one - half in nominal value of its
equity share capital ; or
b) of which another company (the holding company) controls, either by itself and I
or through one or more subsidiaries, the composition of its board of directors.
Fellow subsidiary a company is considered to be a fellow subsidiary of another

company if both are subsidiaries of the same holding company.
State - Controlled Enterprise an enterprise which 1s under the control of the

Central Government and I or any State Government(s).
5) For the purpose of this standard, an enterprise is considered to control the

composition of-
(i) the board of directors of a company, if it has the power, without the consent
or concurrence of any other person. to appoint or remove all or a majority of
directors of that company An enterprise is deemed to have the power to appoint a
director if any of the following conditions is satisfied:
a) a person cannot be appointed as director without the exercise in his favour by

that enterprise of such a power as aforesaid : or
b) a person's appointment as director follows necessarily from his appointment
to a position held by him in that enterprise ; or
c) the director is nominated by that enterprise, in case that enterprise is a
company, the director is nominated by the company I subsidiary thereof.
{ii) the governing body of an enterprise that is not a company, if it has the power,
without the consent or the concurrence of any other person, to appoint or remove
all or a majority of members of the governing body of that other enterprise An
enterprise is deemed to have the power to appoint a member if any of the following
conditions is satisfied : Similar to (a}, (b) & (c) above.
6) An enterprise 1s considered to have a substantial interest in another enterprise

if that enterprise owns, directly or indirectly, 20 per cent or more interest in the
voting power of the other enterprise. Similarly, an individual 1s considered to
have a substantial interest in an enterprise, if that individual owns, directly or
indirectly, 20 per cent or more interest in the voting power of the enterpnse

35
7) Significant influence may be exercised in sever always, for example, by
representation on the board of directors, participation in the policy making
process, material intercompany transactions, interchange of managerial
personnel, or dependence on technical information.
8) Key management personnel are those persons who have the authority and
responsibility for planning, directing and controlling the activities of the
reporting enterprise. For example, in the case of a company. the managing
director(s), whole time director(s), manager and any person in accordance with
whose directions or instructions the board of directors of the company 1s
accustomed to act, are usually considered key management personnel
9) Without related party disclosures, there is a general presumption that
transactions reflected in financial statements are consummated on an arm's -
length basis between independent parties. However that presumption may not
be valid when related party relationships exist because related parties may
enter into transactions which unrelated parties would not enter into.
10) Disclosure : Name of the related party and nature of the related party
relationship where control exists should be disclosed irrespective of whether or
not there have been transactions between the related parties.
If there have been transactions between related parties, during the existence of a
related party relationship, the reporting enterprise should disclose the following :
i) the name of the transacting related party ;

ii) a description of the relationship between the parties ;
iii)a description of the nature of transactions ;
iv) volume of the transactions either as an amount or as an appropriate proportion
;
v) any other elements of the related party transactions necessary for an
understanding of the financial statements ; the amounts or appropriate
proportions of outstanding items pertaining to related parties at the balance
sheet date and provisions for doubtful debts due from such parties at that date ;
and
vi) amount written off or written back in the period in respect of debts due from or
to related parties.
The following are examples of the related party transactions in respect of which
disclosures may be made by a reporting enterprise :
a) purchases or sales of goods (finished or unfinished) ;

b) purchases or sales of fixed assets ;
c) rendering or receiving of services ;
d) agency arrangements ;
e) leasing or hire purchase arrangements ;
f) transfer of research and development ;
g) licences agreements ;
h) finance (including loans and equity contributions in cash or in kind) ;
i) guarantees and collaterals ; and
j) management contracts including for deputation of employees.

36
Items of a similar nature may be disclosed in aggregate by type of related party.
AS 19: LEASES
1) Lease is an arrangement bywhich the lessor gives a right to use an asset for a
given period of time to the lessee on rent
2) Leases are classified into Finance Lease & Operating Lease
3) Finance Lease : It is a lease that transfers substantially all the risks & rewards
incidental to ownership of an asset to the lessee by the lessor, but not legal
ownership. In the following situations, the lease transactions are called Finance
Lease :
a) The lessee will get the ownership of the leased asset at the end of the lease
term (i.e. hire purchase transactions).
b) The lessee has an option to buy the leased asset at the end of the lease term
at a price which is lower than its expected fair value at the date on which
option will be exercisable & the lessee is likely to exercise the option.
c) The lease term covers the major part of the useful life of the asset.
d) At the beginning of the lease term. the PVof Minimum Lease Payments
(MLPs) covers substantially the fair value (FV).
e) The asset given is of specialised nature & can be used only bythe lessee
without major modifications.
4) Operating Lease :It is a lease other than Finance Lease
5) Definitions :
(a) Minimum Lease Payments (ML,P)
(1) MLP(lessee) = Lease Rents (LR) + Guaranteed Residual Value (GRV} by or on

behalf of the lessee
(ii) MLP (lessor) = LR + GRV byor on behalf of the lessee or byan

independent 3rd party (i.e. anybody)
MLPs do not include contingent rent, cost of services & taxes to be paid by &
reimbursed to the lessor by the lessee. E.g. :property tax etc.
(b) If lessee has purchase option & is likely to exercise it then
(i) MLP (lessor & lessee) = LR + Purchase Price (Option Price)
(c) Definitions from Lessor point of view only :
i) Residual Value (RV) = Itistheestimated FVof theleased

assetattheendoftheleaseterm
ii) Unguaranteed Residual Value (UGRV) = RV-GRV (anybody)
iii) Gross Investment (GI) = MLP(lessor) + UGRV
It is just like Hire Purchase Price. In other words, GI is the maximum amount a
lessor can get i.e. LR + RV
iv) Unearned Finance Income = GI - PV of GI

37
In other words, it is the interest earned by the lessor
v) Net Investment in Lease (NI)= GI- unearned finance income Inother words, it
is just like cash price i.e. PV of GI
vi) FV is basically the market price (generally the cost price}
vii) Lease Term :The lease term is the non-cancellable period for which the
lessee has agreed to take on lease the asset together with any future periods
for which the lessee has the option to continue the lease of the asset with or
without further payment, which option at the inception of the lease it is
reasonably certain that the lessee will exercise
viii) Implicit Interest Rate: It is the discounting rate that equates PV of GI
to the FV. Implicit Interest Rate can be calculated by the IRR technique.
AS 20 : EARNING '
1) Basic EPS= Netprofit attributable to ESHs I Weighted average no. of equity

shares (WANES)
2) Numerator includes PPls, extra-ordinary items & is after deduction of tax
(current & deferred) & deduction of preference dividend including dividend tax
on preference dividend.
3) Time is the weight factor for calculation of WANES. WANES is calculated on the
basis of equity shares outstandingduring the period.Shares are included in the
calculation of WANES from the date the consideration is receivable. For e.g. :
Shares issued Included from
For cash Date of cash receivable
Against conversion of debentures Date of conversion
Against interest or principle Date on which interest ceases to accrue Against

settlement of liability Date on which settlement becomes effective For
acquisition of assets Date on which the acquisition is recognized
Amalgamation in the nature of purchase Date of acquisition
Amalgamation in the nature of merger Beginning of the reporting period Bonus

sharesBeginning of the reporting period
4) Partly paid equity shares should be treated as a fraction of an equity share i.e.
converted to equivalent fully paid shares.
5) Bonus Issue: WANES should be so adjusted as if the bonus iss11e was made at
the start of the earliest reporting period.
6) Rights Issue: If the rights issue is made at fair value, then it is treated as a
normal issue i.e. included in WANES from the date of issue. However, generally
a rights issue is below the fair price i.e. there is a bonus element to it. In this
case, the no of shares before the rights issue are to be multiplied by a Rights
Factor, which is calculated as follows :

38
Rights Factor= FV per share immediately prior to the exercise of rights I Theoretical
ex-rights FV per share
7) In case of a share split or consolidation only the number of shares changes

without any change in resources. EPS must be calculated on the basis of
revised no. of shares from the beginning of the reporting period (similar to
bonus issue).
8) Potential equity share is a financial instrument or a contract that entitles its
holders to equity shares i.e. convertible debentures, convertible preference
shares, Esops etc.
9) Potential equity shares are considered dilutive when their conversion into equity
shares result in a decrease in EPS.
10) Diluted EPS = Net profit / loss attributable to ESHs after adjustment for diluted
earnings / WANES (assuming the conversion of potential equity shares).
11) 11 Only dilutive potential equity shares are considered for calculating Diluted
EPS. Anti-dilutive potential equity shares are ignored.
Re-statement: If the no. of equity shares or potential shares outstanding is

increased as a
•cf bonus issue/share split I consolidation of shares then the Basic EPS & Diluted
EPS
=...... he adjusted for all the periods presented.
, osures : The amount used as numerator for calculating Basic & Giluted EPS & its
n:>.!' : t onwith the net rrofit / loss for the period.
Also, t;1e calculation of V 1Al\JES US• as o to- m the calculation of Basic EPS &
Diluted EPS.
AS 24: DISCONTINUING OPERATIONS
1) Definition :
A discontinuing operation is a component of an enterprise
that the enterprise, pursuant to a single plan, is
i) disposing of substantially in its entirety,such as by selling the component in

a single transaction, or by demerger or spin-off of ownership of the
component to the enterprise's shareholders,
ii) disposing of piecemeal, such as by selling off the component's assets and
settling its liabilities individually, or
iii) terminating through abandonment ,and
(b) that represents a separate major line of business or geographical area of

operations, and
(c) that can be distinguished operationally and for financial reporting purposes.

39
2) Discontinuing Operations are expected to occur infrequently. However
Discontinuing Operation is not an extraordinary item as defined in Accounting
Standard - 5: Also a Discontinuing Operation does not automatically bring into
question the fundamental assumption of going concern.
3) A restructuring event is not necessarily a Discontinuing Operation.

Examples of activities that do not necessarily on their own satisfy the discontinuing
definition, but that might do so in combination with other circumstances, include:
a) Gradual or evolutionary phasing out of a product line or class of service;

b) Discontinuing, even if relatively abruptly, several products within an ongoing
line of business;
c) Shifting of some production or marketing activities for a particular line of
business from one location to another; and
d) Closing of a facility to achieve productivity improvements or other cost savings.
4) A Discontinuing Operation is a component of an enterprise that can be

distinguished operationally and for financial reporting.A component can be
distinguished operationally and for financial reporting purposes if all the following
conditions are met:
a) the operating assets and liabilities of the component can be directly attributed
to it ;
b) its revenue can be directly attributed to it ;
c) at least a majority of its operating expenses can be directly attributed to it.
Assets, liabilities, revenue, and expenses are directly attributable to a
component if they would be eliminated when the component is sold, abandoned
or otherwise disposed of. If debt is attributable to a component , the related
interest and other financing costs are similarly attributed to it.
5) Discontinuance begins when initial disclosure event takes place. A

disclosure is required when either of the following two events takes place
(whichever is earlier) :
a) the enterprise has entered into a binding sale agreement for substantially all of
the assets attributable to the discontinuing operation ; or
b) the enterprise's board of directors or similar governing body has both
(i) approved a detailed, formal plan for the discontinuance and (It) made an
announcement of the plan.
A detailed formal plan for the discontinuance normally includes:
a) identification of the major assets to be disposed of ;

b) the expected method of disposal ;
c) the penod expected to be required for completion of the disposal;
d) the principallocations affected :
e) the location, function, and approximate number of employees who will be
compensated for terminating their services . and
f) the estimated proceeds or salvage to be realised by disposal

40
An enterprise's board of directors or similar governing body is considered to have
made the announcement of a detailed formal plan for discontinuance, if 1t has
announced the main features of the plan to those affected by it, such as. lenders.
stock exchanges, creditors, trade unions. etc. in a sufficiently specific manner so
as to make the enterprise demonstrably committed to the discontinuance.
6) The initial disclosure required relating to a discontinuing Operations are
a) a description of the discontinuing operation ;

b) the business or geographical segment in which it is reported as per Accounting
Standard - 17, Segment Reporting :
c) the date and nature of the initial disclosure event ;
d) the date or period in which the discontinuance is expected to be completed if
known or determinable ;
e) the carrying amounts, as of the balance sheet date, of the total assets to be
disposed of and the total liabilities to be settled
f) the amount of revenue and expenses in respect of the ordinary actwities
attributable to the discontinuing operation during the current financialreporting
period ;
g) the amount of pre-tax profit or loss from ordinary activities attributable to the
discontinuing operation during the current financial reporting period, and the
income tax expense (as defined under Accounting Standard - 22) related
thereto; and
h) the amounts of net cash flows attributable to the operating. investing, and
financing activities of the discontinuing operation during the current financial
reporting period.
For the purpose of presentation and disclosures required by Accounting Standard -

24, the items of assets, liabilities. revenues. expenses. gains, losses, and cash flows
can be attributed to a discontinuing operation only if they will be disposed of,
settled. reduced, or eliminated when the discontinuance is completed.
When an enterprise disposes of assets or settles liabilities attributable to a

discontinuing operation or enters into binding agreements tor the sale of such
assets or the settlement of such liabilities, it should include, in its financial
statements , the following information when the events occur :
a) For any gain or loss that is recognised on the disposal of assets or settlement
of liabilities attributable to the discontinuing operation,
i) the amount of the pre tax gain or loss and
ii) income tax expense relating to the gain or loss; and
b) The net selling price or range of prices (which is after deducting expected
disposal costs) of the those net assets for which the enterprise has entered
into one or more binding sale agreements, the expected timing of receipt of
those cash flows and the carrying amount of those net assets on the balance
sheet date.
7) If an initial disclosure event occurs between the balance sheet date and the
date on which the financial statements for that period are approved by the board of

41
directors in the case of a company or by the corresponding approving authority in
the case of any other enterprise. disclosures as required by Accounting Standard -
4, Contingencies and Events Occurring After Balance Sheet Date, are made.
However, disclosures under Accounting Standaro - 24 are not required.
8) The disclosure should continue in Financial Statement for the periods upto
and includ- . ing the period in which the discontinuance is completed.
9) Narrative disclosures are given as notes to Financial Statement giving the

following information :
Description of Discontinuing Operations.
Business geographical segment in which it is covered under Accounting Standard -

17.
* Date & nature of initial disclosure event
.. Dateand period inwhich discontinuance is likely to becompleted if known or

determinable.
Quantitative disclosures are as follows :
* Carrying amount of Assets and Liabilities to be disposed.
" Revenue, expenses, Pre-tax profits, tax related to Discontinuing Operations.
Cash flow classified as operating, Investing & Financrng activities for current
period to be separately shown for Discontinuing Operations.
AS 26: INTANGIBLE ASSETS
1. An assets is defined as ci resource controlled by an enterprise as a result of

past events & from which futureeconomic benefits are expected to flow to the
enterprise.
2. Objective : AS 26 prescribes recognition criteria, measurement , amortization

& disclosure of IAs
3. AS 26 is applicable to :
a) Goodwill
b) Advertising exps
c) Preliminary exps
d) R & D costs
e) Patents, trademarks & copyrights
f) Computer software etc
4. Definition ofIA:An IA is an identifiable, non-monetary asset without physical

substance held for use in the production or supplying of goods or services, or for
rentals to others or for administrative purposes.

42
5. Recognition Criteria :An IAwill be recognized i.e.recorded in the books
provided both the following conditions are fulfilled :
a. Probable future economic benefits willflow from the IA to the enterprise &
b. The cost of the IAscan be reliably measured
6. The cost of IA depends on the way it is acquired :
a) Separate Acquisition
b) Exchange for another asset
c) Issueof shares or securities
d) IAsarising from amalgamation (inthe nature of purchase)
e) Acquisition through government grants
7. Subsequent Expenditure•on IAs : Expenditure incurred on IAs after they

have been recognized I recorded is called subsequent expenditure .Itshould
beadded to the cost of IA only if such subsequent expenditure will enable the asset
to generate future economic benefits in excess of its originally assessed standard of
performance & the expenditure can be
• measured & attributed to the asset reliably.
8. Carrying amount of IAs :It is the amount at which assets are recognized in
the Balance Sheet, netof accumulated amortization & impairment losses thereon
9. Amortization method : The depreciable amount of IAs is amortised over its

useful life. Depreciable amount is cost less residual value. AS 26 provides that
amortisation method should reflect the pattern in which the asset's economic
benefits are consumed. If that is not determinable then SLM should be used. The
residual value of IAs is assumed to be zero unless :
a There is commitment by a third party to purchase the asset at the end of its
useful life or
b. There is an active market for the asset that can be used to determine the
residual value & that such a market would probably exist at the end of the asset's
useful life. The residual value cannot be subsequently increase for changes in value
(decrease is permitted).
The useful life of the IAs should be taken as 10 years unless there is clear evidence
that the usefullife is longer than 10 years. If economic benefits from IAs are
achieved through legal right granted for finite period then the usefullife cannot
exceed the legal nght penod unless the
legal right is renewable & the renewal is certain.
10. Amortisation method should be review annually. It should be changed if :
a. The expected useful life has significantly changed or
b. The pattern offuture economic benefits has significantly changed.

43
Prospective I retrospective effect would depend upon whether it 1s a change m
accounting estimate I policy.
11 An IA should be de-recognised I eliminated from Balance Sheet If :
a. It is disposed or
b. No future economic benefits are expected from its use.
Gain/ loss on disposal should be recognized as income I expense in the P & LAie.
12. Internally generated goodwill is not recognized in the financial statements

because the cost cannot be reliably measured.
13. R & D expense :Research is original & planned investigation undertaken

with the prospect
of gaining new scientific or technical knowledge & understanding. Development is

the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials. devices, products. process
systems or services prior to the commencement of commercial production or use. If
an enterprise cannot distinguish the research phase from the development phase of
a project to create an intangible asset, it should treat the expenditure on that
project as if it were incurred in the research phase only.As per AS 26, research cost
must be expensed when it is incurred i.e.research cost cannot be pitalized
Development costs are also to be expensed unless they meetthe asset recognition
criteria & the enterprise can demonstrate the following :
a. Technical feasibility of completing the IAso that it will be available for use or
sale.
b. Its intention to complete the IA & its intention & ability to use or sell it etc..
14. Cost of internally generated intangible would comprise of the costs which are
incurred during the development phase of the IA & which are directly attributable
to or reasonably allocable to the IA.
15. AS 26 is not applicable to :
a. Ownership interest in other enterprise,investments
b. Goodwillarising on amalgamation
c. Goodwill arising on consolidation
d. OTA
e. Issue exps, discounts & premiums on borrowings & issue of shares etc.
16. Disclosures :The financial statements should disclose the following in

respect of IA :

44
a. Useful life or amortisation rate
b. Amortisation method
c. Gross carryingamount & accumulated amortisation at the beginning & end

of the period
d. Reconciliation of carrying amount at the beginning & end of the period
e. If amortisation period is more than 10 years. the reason thereof
f. R & 0 exps recognized as expenses during the period etc..
AS 29: PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES
1 As per AS 4, contingency refers to conditions or situations on the Balance Sheet

date, the outcome of which is not known & the result would be determined by
future events which may or may not occur.
2. Definitions:
a. A provision is a liability which can be measured only by using a substantial

degree of estimation.
b. A liability is a present obligation of the enterprise arising from past events,

the settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.
c. An obligating event is an event that creates an obligation that results in an

enterprise having no realistic alternative to settling that obligation. Thus, a past
event that leads to a present obligation is called an obligating event.
d. A contingent liability is :
i. A possible obligation that arises from past events & the existence of which
be confirmed only by the occurrence or non-occurrence of one or more

uncertainfuture events not wholly within the controlof the enterprise.or
ii. A present obligation that arises from past events but is not recognized
because :
1. it is not probable that an outflow of resources embodying economic benefits

w ill be required to settle the obligation or
2. a reliable estimate of the amount of obligation cannot be made

45
e. A contingent asset is a possible asset that arises from past events, the
existence of which will be confirmed only by the occurrence or non-occurrence of 1
or more uncertainfuture events not wholly within the control of the enterprise
f. An obligation isa present obligation if based on the evidence available,its

existence at the balance sheet date is considered probable i.e. more likely than not
g. An obligation is a possible obli gation if based on the evidence available,its

existence at the balance sheet date is considered not probable.
1. Provisions :A provision should be recognized when :-
a. An enterprise has a present obligation as a result of a past event
b. Its is probable that an outflow of resources embodying economic benefits will

be required to settle the obligation &
c. A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognized. The amount of
provision should be recognized before tax & is not discounted to its PY.
4. Financial statements deal with the financial position of an enterprise at the

end of its reporting period & not its possible position in the future. Therefore. no
provision is recognized for costs that need to be incurred to operate in the future.
The only liabilities recognized in an enterprise's B/S are those that exist at the B/S
date. It is only those obligation arising from past events existing independently of
an enterprise's future actions (i.e. the future conduct of its business) that are
recognized as provisions.
5. Where there are a number of similar obligations (e.g. : product warranties).

the probability that an outflow willbe required in settlement is determined by
considering the class of obligations as a whole.
6. An enterprise should not recognize a contingent liability. A contingent

liability is to be disclosed unless the possibility of an outflow of resources
embodying economic benefits is remote. When an enterprise is jointly & severally
liable for an obligation, that part of the obligation which is expected to be met by
other parties is treated as a contingent liability. Contingent liabilities may develop
in a way not initially expected. Therefore, they are assessed continually to
determine whether an outflow of resources economic benefits has become probable.
7. Where some or all of the expenditure required to settle a provision is

expected to be reimbursed by another party, the reimbursement should be
recognized when & only when, it is virtually certain that reimbursement will be
received if the enterprise settles the obligation. The reimbursement should be
treated as a separate asset. The amount recognized for the reimbursement should

46
not exceed the amount of the provision. In the statement of the P & L, the expense
relating to a provision may be presented net of the amount recognized for a
reimbursement
8 Provisions should be reviewed at each Balance Sheet date & adjusted to reflect
the current best estimate. If it is no longer probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, the provision
should be reversed.
9. An enterprise should not recognize a contingent asset. Contingent assets usually

arise from unplanned or other unexpected events that give rise to the possibility of
an inflow of economic benefits to the enterprise. E.g : a claim that an enterprise is
pursuing through legal processes, where the outcome is uncertain. Where an inflow
of economic benefits is probable, the contingent asset is usually disclosed in the
Directors' Report & not in the financial statements. Contingent assets are assessed
continually & if it has become virtually certain that an inflow of economic benefits
will arise. the asset & the related income are recognized in the financial statements
of the period in which the change occurs.

47
CAP CLASSES 9846791598
PRACTICAL QUESTIONS ON ACCOUNTING STANDARDS
APPLICABI LITY OF ACCOUNTING STANDARDS

Q.1.What are the issues, with which Accounting Standards deal?
Q.2.List the criteria to be applied for rating a non-corporate entity as Level-I entity for the
purpose of compliance of Accounting Standards in India.
Q.3.List the criteria to be applied for rating a non-corporate entity as Level-II entity for the
purpose of compliance of Accounting Standards in India.
AS 1 "DISCLOSURE OF ACCOUNTI NG POLI CIES"

Problem No. 1
What are the three fundamental accounting assumptions recognized by Accounting Standard
(AS) 1? Briefly describe each one of them.
Problem No. 2
Mention few areas in which different accounting policies are followed by companies.
Problem No. 3
In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to Rs. 1,63,000
(on the basis of FIFO method). The company decides to change from FIFO method to weighted
average method for ascertaining the cost of inventory from the year 2014-15. On the basis of
weighted average method, closing inventory as on 31.03.2015 amounts to Rs. 1,47,000.
Realizable value of the inventory as on 31.03.2015 amounts to Rs. 1,95,000. Discuss disclosure
requirement of change in accounting policy as per AS-1
ACCOUNTING STANDARDS 1 CA. PAVAN KUMAR
48
AS 2 "VALUATION OF INVENTORIES"
Problem No. 1
Cost of a partly finished unit at the end of 2016-17 is Rs. 150. The unit can be finished next year
by a further expenditure of Rs. 100. The finished unit can be sold at Rs. 250, subject to payment
of 4% brokerage on selling price. Determine the value of inventory.
Problem No. 2
An enterprise ordered 13,000 Kg. of certain material at Rs. 90 per unit. The purchase price
includes excise duty Rs. 5 per Kg., in respect of which full CENVAT credit is admissible. Freight
incurred amounted to Rs. 80,600. Normal transit loss is 4%. The enterprise actually received
12,400 Kg and consumed 10,000 Kg.
Calculate Cost of inventory and show how material cost is allocated.
Problem No. 3
A Ltd’s normal production volume is 50,000 units and the Fixed overheads are estimated at Rs.
5,00,000. Give the treatment of Fixed Production Overheads under AS 2, if the actual production
during a period is a) 42,000 units b) 50,000 units and c) 60,000 units.
Problem No. 4
A trader purchased certain articles for Rs. 85,000. He sold some of articles for Rs. 1,05,000. The
average percentage of gross margin is 25% on cost. Opening stock of inventory at cost was Rs.
15,000.
Calculate the Cost of closing inventory.
Problem No. 5
The company deals in three products, A, B and C, which are neither similar nor interchangeable.
At the time of closing of its account for the year 2014-15, the Historical Cost and Net Realizable
Value of the items of closing stock are determined as follows:
Items Historical Cost Net Realisable Value
(Rs. In Lakhs) (Rs. In Lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of closing stock?
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Problem No. 6
X Co. Limited purchased goods at the cost of Rs. 40 lakhs in October, 2014. Till March, 2015,
75% of the stocks were sold. The company wants to disclose closing stock at Rs. 10 lakhs. The
expected sale value is Rs. 11 lakhs and a commission at 10% on sale is payable to the agent.
Advise, what is the correct closing stock to be disclosed as at 31.3.2015.
Problem No. 7
The company X Ltd., has to pay for delay in cotton clearing charges. The company up to
31.3.2014 has included such charges in the valuation of closing stock. This being in the nature of
interest, X Ltd. decided to exclude such charges from closing stock for the year 2014-15. This
would result in decrease in profit by Rs. 5 lakhs. Comment.
Problem No. 8
In a production process, normal waste is 5% of input. 5,000 MT of input were put in process
resulting in wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire quantity of waste is
on stock at the year end. State with reference to Accounting Standard, how will you value the
inventories in this case?
Problem No. 9
You are required to value the inventory per kg of finished goods consisting of:
Particulars Rs. Per KG
Direct Material Cost 200
Labour 40
Direct Variable Overhead 20
Fixed production charges for the year on normal working capacity of 2 lakh kgs
is Rs. 20 lakhs. 4,000 kgs of finished goods are in stock at the year end.
Problem No. 10
On 31st March 2013 a business firm finds that cost of a partly finished unit on that date is Rs.
530. The unit can be finished in 2013-14 by an additional expenditure of Rs. 310. The finished
unit can be sold for Rs. 750 subject to payment of 4% brokerage on selling price. The firm seeks
your advice regarding the amount at which the unfinished unit should be valued as at 31st
March, 2013 for preparation of final accounts.
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Problem No. 11
Calculate the value of raw materials and closing stock based on the following information:
Raw Material X Closing Balance 500 Units
Particulars Rs Per Unit
Cost price including GST 200
GST 10
Freight Inwards 20
Unloading Charges 10
Replacement Cost 150
Finished Goods Y - Closing Balance 1500 Units
Particulars Rs Per Unit
Materials Consumed 220
Direct Labour 60
Direct Overhead 40
Total Fixed overhead for the year was Rs. 2,00,000 on normal capacity of 20,000 units.
Calculate the value of the closing stock, when
(i) Net Realizable Value of the Finished Goods Y is Rs. 400.
(ii) Net Realizable Value of the Finished Goods Y is Rs. 300.
Problem No. 12
Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year
2013-14 the Company used 12,000 MT of raw material costing Rs. 150 per MT. At the end of the
year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to be
treated in the books. Explain in the context of AS 2 the treatment of normal loss and abnormal
loss and also find out the amount of abnormal loss if any.
Problem No. 13
Mr. Mehul gives the following information relating to items forming part of inventory as on 31-
3-2015. His factory produces Product X using Raw material A.
i) 600 units of Raw Material A (purchased @ Rs. 120). Replacement cost of raw material A as
on 31-3-2015 is Rs. 90 per unit.
ii) 500 units of partly finished goods in the process of producing X and cost incurred till date
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Rs. 260 per unit. These units can be finished next year by incurring additional cost of Rs. 60
per unit.
iii) 1500 units of finished Product X and total cost incurred Rs. 320 per unit. Expected selling
price of Product X is Rs. 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate the value
of total inventory as on 31-3-2015.
AS 3 CASH FLOW STATEMENT

Problem No. 1
Classify the following activities as (a) Operating Activities, (b) Investing Activities, (c) Financing
Activities (d) Cash Equivalents.
1) Purchase of Machinery.
2) Proceeds from issuance of equity share capital
3) Cash Sales.
4) Proceeds from long-term borrowings.
5) Proceeds from Trade receivables.
6) Cash receipts from Trade receivables.
7) Trading Commission received.
8) Purchase of investment.
9) Redemption of Preference Shares.
10) Cash Purchases.
11) Proceeds from sale of investment
12) Purchase of goodwill.
13) Cash paid to suppliers.
14) Interim Dividend paid on equity shares.
15) Wages and salaries paid.
16) Proceed from sale of patents.
17) Interest received on debentures held as investment.
18) Interest paid on Long-term borrowings.
19) Office and Administration Expenses paid
20) Manufacturing Overheads paid.
21) Dividend received on shares held as investments.
22) Rent Received on property held as investment.
23) Selling and distribution expense paid.
24) Income tax paid
25) Dividend paid on Preference shares.
26) Underwritings Commission paid.
27) Rent paid.
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28) Brokerage paid on purchase of investments.

29) Bank Overdraft
30) Cash Credit
31) Short-term Deposits
32) Marketable Securities
33) Refund of Income Tax received.
Solution
(a) Operating Activities: c, e, f, g, j, m, o, s, t, w, x, aa & gg.

(b) Investing Activities: a, h, k, l, p, q, u, v, bb & ee.
(c) Financing Activities: b, d, i, n, r, y, z, cc & dd.
(d) Cash Equivalent: ff.
Problem No. 2
What are the main features of the Cash Flow Statement? Explain with special reference to AS 3.
Problem No. 3
X Ltd. purchased debentures of Rs. 10 lacs of Y Ltd., which are redeemable within three months.
How will you show this item as per AS 3 while preparing cash flow statement for the year ended
on 31st March, 2017?
Problem No. 4
On 1st may, 2016 X ltd purchased debentures of Y ltd which are redeemable after one year i.e.,
on 30th April, 2017. On 31st March, 2017 X Ltd is preparing its financial Statements. How the
debentures acquired is to be shown in Cash flow statement?
Would there be a change in your answer if the debentures are redeemable on 31st July, 2017.
Problem No. 5
G Ltd acquired fixed assets namely plant and machinery for 20 lakhs. During the same year it
sold its furniture and fixtures for Rs. 5 Lakhs. Can the company disclose, net cash outflow
towards purchase of fixed assets in the cash flow statement as per AS 3.
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AS 4 CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
Problem No. 1
A Ltd., whose accounting year ends on 31/03/2013, agreed in principle to sell a plot of land on
18/03/2013 at a price to be determined by an independent valuer. Pending the agreement for
sale and due to non-receipt of valuers report, the sale of the land could not be completed up to
31/03/13. The company received the report on April 7, 2013 and the agreement was signed on
April 10, 2013. The financial statements for 2012-13 were approved by the board on May 12,
2013.
The sale of land is an event occurring after the balance sheet date. Also, the condition, which led
to the sell, existed on the balance sheet date. The signing of the agreement provides further
evidence as to the condition that existed on the balance sheet date. The sale of land after the
balance sheet date is therefore an adjusting event, which means the sale transaction should be
recorded in books of A Ltd. for the purpose of its financial statements for 2012-13.
Problem No. 2
An earthquake destroyed a major warehouse of C Ltd. on April 20, 2013. The last accounting
year of the company ended on 31/03/13 and the financial statements for the year were
approved on May 8, 2013. The destruction of warehouse is a significant event occurring after the
balance sheet date, but since the earthquake did not exist on the balance sheet date, the
destruction by earthquake is a non-adjusting event. The value of property lost by earthquake
therefore need not be recognised in financial statement of 2012-13
The Report of the Directors for 2012-13 should disclose the fact of earthquake together with an
estimate of loss on earthquake. If no estimate of loss can be made, the report should state that
loss on earthquake could not be estimated.
Problem No. 3
A company follows April-March as its financial year. The company recognizes cheques dated
31st March or before, received from customers after balance sheet date but before approval of
financial statement by debiting Cheques in hand A/c and crediting the Debtors A/c. The
Cheques in hand is shown in balance sheet as an item of cash and cash equivalents. All Cheques
in hand are presented to bank in the month of April and are also realised in the same month in
normal course after deposit in the bank.
Even if the cheques bear the date 31st March or before, the cheques received after 31st March
do not represent any condition existing on 31st March. Thus the collection of cheques after
54
balance sheet date is not an adjusting event. Recognition of cheques in hand is therefore not
consistent with requirements of AS 4. Moreover, the collection of cheques after balance sheet
date does not represent any material change or commitments affecting financial position of the
enterprise, and so no disclosure of such collections in the Directors’ Report is necessary.
It should also be noted that, the Framework for Preparation and Presentation of Financial
Statement defines assets as resources controlled by an enterprise as a result of past events from
which economic benefits are expected to flow to the enterprise. Since the company acquires
custody of the cheques after 31st March, it does not have any control over the cheques on 31st
March and hence cheques in hand do not qualify to be recognized as asset on 31st March.
Problem No. 4
In X Co. Ltd., theft of cash of Rs. 5 lakhs by the cashier in January, 2013 was detected only in
May, 2013. The accounts of the company were not yet approved by the Board of Directors of the
company.
Whether the theft of cash has to be adjusted in the accounts of the company for the year ended
31.3.2013. Decide.
Problem No. 5
An earthquake destroyed a major warehouse of ACO Ltd. on 20.5.2012. The accounting year of
the company ended on 31.3.2012. The accounts were approved on 30.6.2012. The loss from
earthquake is estimated at Rs. 30 lakhs. State with reasons, whether the loss due to earthquake
is an adjusting or non-adjusting event and how the fact of loss is to be disclosed by the
company.
Problem No. 6
A company has filed a legal suit against the debtor from whom Rs. 15 lakh is recoverable as on
31.3.2012. The chances of recovery by way of legal suit are not good as per legal opinion given
by the counsel in April, 2012. Can the company provide for full amount of Rs. 15 lakhs as
provision for doubtful debts? Discuss in detail.
Problem No. 7
You are an accountant preparing accounts of A Ltd. as on 31.3.2011. After year end the
following events have taken place in April, 2011:
i) A fire broke out in the premises damaging, uninsured stock worth Rs. 10 lakhs (Salvage value
Rs. 2 lakhs).
55
ii) A suit against the company’s advertisement was filed by a party claiming damage of Rs. 20
lakhs.
Describe, how above will be dealt with in the accounts of the company for the year ended on
31.3.2011.
Problem No. 8
MEC Limited could not recover an amount of Rs. 8 lakhs from a debtor. The company is aware
that the debtor is in great financial difficulty. The accounts of the company for the year ended
31-3-2011 were finalized by making a provision @ 25% of the amount due from that debtor. In
May 2011, the debtor became bankrupt and nothing is recoverable from him. Do you advise the
company to provide for the entire loss of Rs. 8 lakhs in books of account for the year ended 31-
3-2011?
Problem No. 9
A major fire has damaged the assets in a factory of a Limited Company on 5th April – five days
after the year end and closure of accounts. The loss is estimated at Rs. 10 crores out of which Rs.
7 crores will be recoverable from the insurers. Explain briefly how the loss should be treated in
the final accounts for the previous year.
Problem No. 10
A Company entered into an agreement to sell its immovable property to another company for
Rs. 35 lakhs. The property was shown in the Balance Sheet at Rs. 7 lakhs. The agreement to sell
was concluded on 15th February, 2011 and sale deed was registered on 30th April, 2011.
You are required to state, with reasons, how this event would be dealt with in the financial
statements for the year ended 31st March, 2011.
Problem No. 11
In Raj Co. Ltd., theft of cash of Rs. 2 lakhs by the cashier in January, 2011 was detected in May,
2011. The accounts of the company were not yet approved by the Board of Directors of the
company.
Whether the theft of cash has to be adjusted in the accounts of the company for the year ended
31.3.2011. Decide.
Problem No. 12
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A Company follows April to March as its financial year. The Company recognizes cheques dated
31st March or before, received from customers after balance sheet date, but before approval of
financial statement by debiting ‘Cheques in hand account’ and crediting ‘Debtors account’. The
‘cheques in hand’ is shown in the Balance Sheet as an item of cash and cash equivalents. All
cheques in hand are presented to bank in the month of April and are also realised in the same
month in normal course after deposit in the bank. State with reasons, whether the collection of
cheques bearing date 31st March or before, but received after Balance Sheet date is an
adjusting event and how this fact is to be disclosed by the company?
Problem No. 13
While preparing its final accounts for the year ended 31st March 2010, a company made a
provision for bad debts @ 4% of its total debtors (as per trend followed from the previous
years). In the first week of March 2010, a debtor for Rs. 3,00,000 had suffered heavy loss due to
an earthquake; the loss was not covered by any insurance policy. In April, 2010 the debtor
became a bankrupt. Can the company provide for the full loss arising out of insolvency of the
debtor in the final accounts for the year ended 31st March, 2010?
Problem No. 14
In preparing the financial statements of Lotus Limited for the year ended 31st March, 2010 you
come across the following information. State with reason, how you would deal with this in the
financial statements?
The company invested Rs. 50 lakhs in April, 2010 in the acquisition of another company doing
similar business, the negotiations for which had just started.
Problem No. 15
Cashier of A-One Limited embezzled cash amounting to Rs. 6,00,000 during March, 2012.
However same comes to the notice of Company management during April, 2012 only. Financial
statements of the company are not yet approved by the Board of Directors of the company.
With the help of provisions of AS 4 “Contingencies and Events Occurring after the Balance Sheet
Date” decide, whether the embezzlement of cash should be adjusted in the books of accounts
for the year ending March, 2012?
What will be your reply, if embezzlement of cash comes to the notice of company management
only after approval of financial statements by the Board of Directors of the company?
Problem No. 16
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Neel Limited has its corporate office in Mumbai and sells its products to stockists all over India.
On 31st March, 2013, the company wants to recognize receipt of cheques bearing date 31st
March, 2013 or before, as "Cheques in Hand" by reducing "Trade Receivables". The "Cheques in
Hand" is shown in the Balance Sheet as an item of cash and cash equivalents. All cheques are
presented to the bank in the month of April 2013 and are also realized in the same month in
normal course after deposit in the bank. State with reasons, whether each of the following is an
adjusting event and how this fact is to be disclosed by the company, with reference to the
relevant accounting standard.
i) Cheques collected by the marketing personnel of the company from the stockists on or
before 31st March, 2013.
ii) Cheques sent by the stockists through courier on or before 31st March, 2013.
Problem No. 17
State with reasons, how the following events would be dealt with in the financial statements of
Pradeep Ltd. for the year ended 31st March, 2013:
i) An agreement to sell a land for Rs. 30 lakhs to another company was entered into on 1st
March, 2013. The value of land is shown at Rs. 20 lakhs in the Balance Sheet as on 31st
March, 2012. However, the Sale Deed was registered on15th April, 2013.
ii) The negotiation with another company for acquisition of its business was started on 2nd
February, 2013. Pradeep Ltd. invested Rs. 40 lakhs on 12th April, 2013.
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AS – 5 NET PROFIT OR LOSS FOR THE PERIOD CHANGES IN ACCOUNTING POLICIES AND
ACCOUNTING ESTIMATES
Problem No. 1
Cost of a machine acquired on 01/04/2010 was Rs. 1,00,000. The machine is expected to realise
Rs. 5,000 at the end of its working life of 10 years. Straight-line depreciation of Rs. 9,500 per
year has been charged up to 2011-12. For and from 2012-13, the company switched over to
17% p.a. reducing balance method of depreciation in respect of the machine. The new rate of
depreciation is based on revised useful life of 13 years. The new rate shall apply with
retrospective effect from 01/04/10.
Problem No. 2
The company finds that the stock sheets of 31.3.2012 did not include two pages containing
details of inventory worth Rs. 20 lakhs. State, how will you deal with this matter in the accounts
of A Ltd., for the year ended 31st March, 2013 with reference to AS 5.
Problem No. 3
A limited company created a provision for bad and doubtful debts at 2.5% on debtors in
preparing the financial statements for the year 2010-2011. Subsequently on a review of the
credit period allowed and financial capacity of the customers, the company decided to increase
the provision to 8% on debtors as on 31.3.2011. The accounts were not approved by the Board
of Directors till the date of decision. While applying the relevant accounting standard can this
revision be considered as an extraordinary item or prior period item?
Problem No. 4
X Co. Ltd. signed an agreement with its employees’ union for revision of wages in June, 2012.
The wage revision is with retrospective effect from 1.4.2008. The arrear wages up to 31.3.2012
amounts to Rs. 80 lakhs. Arrear wages for the period from 1.4.2012 to 30.06.2012 (being the
date of agreement) amounts to Rs. 7 lakhs. Decide whether a separate disclosure of arrear
wages is required.
Problem No. 5
Goods of Rs. 5,00,000 were destroyed due to flood in September, 2009. A claim was lodged with
insurance company, but no entry was passed in the books for insurance claim.
In March, 2012, the claim was passed and the company received a payment of Rs. 3,50,000
against the claim. Explain the treatment of such receipt in final accounts for the year ended 31st
March, 2012.
Problem No. 6
59
S.T.B. Ltd. makes provision for expenses worth Rs. 7,00,000 for the year ending March 31, 2011,
but the actual expenses during the year ending March 31, 2012 comes to Rs. 9,00,000 against
provision made during the last year. State with reasons whether difference of Rs. 2,00,000 is to
be treated as prior period item as per AS-5.
Problem No. 7
A company created a provision of Rs. 75,000 for staff welfare while preparing the financial
statements for the year 2010 - 11. On 31st March, in a meeting with staff welfare association, it
was decided to increase the amount of provision for staff welfare to Rs. 1,00,000. The accounts
were approved by Board of Directors on 15th April, 2011
Explain the treatment of such revision in financial statements for the year ended 31st March,
2011
Problem No. 8
Give two examples on each of the following items:
(i) Change in Accounting Policy

(ii) Change in Accounting Estimate
(iii) Extra Ordinary Items
(iv) Prior Period Items.
Answer
(i) Examples of Changes in Accounting Policy:
a. Change of valuation of PPE on revaluation model from cost model
b. Change in cost formula in measuring the cost of inventories.
(ii) Examples of Changes in Accounting Estimates:
a. Change in estimate of provision for doubtful debts on sundry debtors.
b. Change in estimate of useful life of fixed assets.
(iii) Examples of Extraordinary items:
a. Loss due to earthquakes / fire / strike
b. Attachment of property of the enterprise by government
(iv) Examples of Prior period items:
a. Applying incorrect rate of depreciation in one or more prior periods.
b. Omission to account for income or expenditure in one or more prior periods.
Problem No. 19
60
Cost of a machine acquired on 01.04.2009 was Rs. 5,00,000. The machine is expected to realize
Rs. 50,000 at the end of its working life of 10 years. Straight-line depreciation of Rs. 45,000 per
year has been charged up to 2011-2012. For and from 2012-13, the company switched over to
15% p.a. reducing balance method of depreciation in respect of the machine. The new rate of
depreciation is based on revised useful life of 15 years. The new rate shall apply with
retrospective effect from 01.04.2009. State how would you deal with the above in the annual
accounts of the Company for the year ended 31st March, 2013 in the light of AS 5.
Problem No. 10
Closing Stock for the year ending on 31st March, 2013 is Rs. 1,50,000 which includes stock
damaged in a fire in 2011-12. On 31st March, 2012, the estimated net realizable value of the
damaged stock was Rs. 12,000. The revised estimate of net realizable value of damaged stock
included in closing stock at 2012-13 is Rs. 4,000. Find the value of closing stock to be shown in
Profit and Loss Account for the year 2012-13, using provisions of Accounting Standard 5.
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AS – 7 CONSTRUCTION CONTRACTS
Problem No. 1 (The percentage completion method)

X Ltd. commenced a construction contract on 01/04/13. The fixed contract price agreed was Rs.
2,00,000. The company incurred Rs. 81,000 in 2013-14 for 45% work and received Rs. 79,000 as
progress payment from the customer. The cost incurred in 2014-15 was Rs. 89,000 to complete
the rest of work.
Problem No. 2
X Ltd. commenced a construction contract on 01/04/13. The contract price agreed was
reimbursable cost plus 20%. The company incurred Rs. 1,00,000 in 2013-14, of which Rs. 90,000
is reimbursable. The further non-reimbursable costs to be incurred to complete the contract are
estimated at Rs. 5,000. The other costs to complete the contract could not be estimated reliably.
How the above is shown in profit and loss a/c?
Problem No. 3
Show Profit & Loss A/c (Extract) in books of a contractor in respect of the following data.
Rs. 000
Contract price (Fixed) 600
Cost incurred to date 390
Estimated cost to complete 260
Problem No. 4
Mr. Shyam, a construction contractor undertakes the construction of an industrial complex. He
has separate proposals raised for each unit to be constructed in the industrial complex. Since
each unit is subject to separate negotiation, he is able to identify the costs and revenues
attributable to each unit. Should Mr. Shyam treat construction of each unit as a separate
construction contract according to AS 7?
Problem No. 5
A firm of contractors obtained a contract for construction of bridges across river Revathi. The
following details are available in the records kept for the year ended 31st March, 2018.
(Rs. in lakhs)
Total Contract Price 1,000
Work Certified 500
Work not Certified 105
Estimated further Cost to Completion 495
Progress Payment Received 400
To be Received 140
62
The firm seeks your advice and assistance in the presentation of accounts keeping in view the
requirements of AS 7 (Revised) issued by your institute.
Problem No. 6
On 1st December, 2014, Vishwakarma Construction Co. Ltd. undertook a contract to construct a
building for Rs. 85 lakhs. On 31st March, 2015 the company found that it had already spent Rs.
64,99,000 on the construction. Prudent estimate of additional cost for completion was Rs.
32,01,000. Calculate total estimated loss on contract and what amount should be charged to
revenue in the final accounts for the year ended 31st March, 2015 as per provisions of
Accounting Standard 7 (Revised)?
Problem No. 7
B Ltd. undertook a construction contract for Rs. 50 crores in April, 2014. The cost of construction
was initially estimated at Rs. 35 crores. The contract is to be completed in 3 years. While
executing the contract, the company estimated the cost of completion of the contract at Rs. 53
crores.
Can the company provide for the expected loss in the book of account for the year ended 31st
March, 2015?
Problem No. 8
M/s Excellent Construction Company Limited undertook a contract to construct a building for
Rs. 3 crore on 1st September, 2014. On 31st March, 2015 the company found that it had already
spent Rs. 1 crore 80 lakhs on the construction. Prudent estimate of additional cost for
completion was Rs. 1 crore 40 lakhs. What amount should be charged, to revenue in the final
accounts for the year ended on 31st March, 2015, as per the provisions of Accounting Standard
7 "Construction Contracts (Revised)"?
Problem No. 9
M/s. Highway Constructions undertook the construction of a highway on 01.04.2013. The
contract was to be completed in 2 years. The contract price was estimated at Rs. 150 crores. Up
to 31.03.2014 the company incurred Rs. 120 crores on the construction. The engineers involved
in the project estimated that a further Rs. 45 crores would be incurred for completing the work.
What amount should be charged to revenue for the year 2013 -14 as per the provisions of
Accounting Standard 7 "Construction Contracts"? Show the extract of the Profit & Loss A/c in
the books of M/s. Highway Constructions.
Problem No. 10
A construction contractor has a fixed price contract for ` 9,000 lacs to build a bridge in 3 years
time frame. A summary of some of the financial data is as under:
(Amount Rs. in lacs)

Year 1 Year 2 Year 3
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Initial Amount for revenue agreed in contract 9,000 9,000 9,000

Variation in Revenue (+) - 200 200
Contracts costs incurred up to the reporting date 2,093 6,168* 8,100**
Estimated profit for whole contract 950 1,000 1,000
Up to the reporting Recognized in Recognized

date previous years in current
Year 1 year
Revenue (9,000 x 26%) 2,340 - 2,340
Expenses (8,050 x 26%) 2,093 - 2,093
Profit 247 - 247
Year 2
Revenue (9,200 x 74%) 6,808 2,340 4,468
Expenses (8,200 x 74%) 6,068 2,093 3,975
Profit 740 247 493
Year 3
Revenue (9,200 x 100%) 9,200 6,808 2,392
Expenses (8,200 x 100%) 8,200 6,068 2,132
Profit 1,000 740 260
Year 1 Year 2 Year 3

Revenue after consider variations 9,000 9,200 9,200
Less: Estimated profit for whole contract 950 1,000 1,000
Estimated total cost of the contract (A) 8,050 8,200 8,200
Actual cost incurred up to the reporting date (B) 2,093 6,068 8,200
(6,168-100) (8,100+100)
Degree of completion (B/A) 26% 74% 100%
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AS 9 REVENUE RECOGNITION
Problem No. 1
The stages of production and sale of a producer are as follow:

Date Activity Costs to date Net Realisable Value
Rs. Rs.
20.1.12 Raw Materials 10,000 8,000

25.1.12 WIP 1 12,000 13,000
27.1.12 WIP 2 15,000 19,000
25.2.12 Finished Product 17,000 30,000
12.3.12 Ready for Sale 17,000 30,000
27.3.12 Sale Agreed and invoice raised 19,000 30,000
02.4.12 Delivered and paid for 19,000 30,000
Explain the stage on which you think revenue will be recognized and state how much would be
net profit on a unit of this product according to AS 9?
Problem No. 2
Y Co. Ltd., used certain resources of X Co. Ltd. In return X Co. Ltd. received Rs. 10 lakhs and Rs.
15 lakhs as interest and royalties respective from Y Co. Ltd. during the year 2014-15.
You are required to state whether and on what basis these revenues can be recognised by X Co.
Ltd.
Problem No. 3
SCL Ltd., sells agriculture products to dealers. One of the condition of sale is that interest is
payable at the rate of 2% p.m., for delayed payments. Percentage of interest recovery is only
10% on such overdue outstanding due to various reasons. During the year 2013-2014 the
company wants to recognise the entire interest receivable. Do you agree?
Problem No. 4
Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale is
payment of consideration in 14 days and in the event of delay interest is chargeable @ 15% per
annum. The Company has not realized interest from the dealers in the past. However, for the
year ended 31.3.2015, it wants to recognise interest due on the balances due from dealers. The
amount is ascertained at Rs. 9 lakhs. Decide, whether the income by way of interest from dealers
is eligible for recognition as per AS 9?
Problem No. 5
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The Board of Directors of X Ltd. decided on 31.3.2015 to increase sale price of certain items of
goods sold retrospectively from 1st January, 2015. As a result of this decision the company has
to receive Rs. 5 lakhs from its customers in respect of sales made from 1.1.2015 to 31.3.2015.
But the Company’s Accountant was reluctant to make-up his mind. You are asked to offer your
suggestion.
Problem No. 6
A Ltd. entered into a contract with B Ltd. to dispatch goods valuing Rs. 25,000 every month for 4
months upon receipt of entire payment. B Ltd. accordingly made the payment of Rs. 1,00,000
and A Ltd. started dispatching the goods. In third month, due to a natural calamity, B Ltd.
requested A Ltd. not to dispatch goods until further notice though A Ltd. is holding the
remaining goods worth Rs. 50,000 ready for dispatch. A Ltd. accounted Rs. 50,000 as sales and
transferred the balance to Advance Received against Sales. Comment upon the treatment of
balance amount with reference to the provisions of Accounting Standard 9.
Problem No. 7
M/s. Moon Ltd. sold goods worth Rs. 6,50,000 to Mr. Star. Mr. Star asked for a trade discount
amounting to Rs. 53,000 and same was agreed to by M/s. Moon Ltd. The sale was effected and
goods were dispatched. On receipt of goods, Mr. Star has found that goods worth Rs. 67,000 are
defective. Mr. Star returned defective goods to M/s. Moon Ltd. and made payment due
amounting to Rs. 5,30,000. The accountant of M/s. Moon Ltd. booked the sale for Rs. 5,30,000.
Discuss the contention of the accountant with reference to Accounting Standard (AS) 9.
Problem No. 8
Sarita Publications publishes a monthly magazine on the 15th of every month. It sells advertising
space in the magazine to advertisers on the terms of 80% sale value payable in advance and the
balance within 30 days of the release of the publication. The sale of space for the March 2014
issue was made in February 2014. The magazine was published on its scheduled date. It received
Rs. 2,40,000 on 10.3.2014 and Rs. 60,000 on 10.4.2014 for the March 2014 issue. Discuss in the
context of AS 9 the amount of revenue to be recognized and the treatment of the amount
received from advertisers for the year ending 31.3.2014. What will be the treatment if the
publication is delayed till 2.4.2014?
Problem No. 9
Given the following information of M/s. Paper Products Ltd.
(i) Goods of Rs. 60,000 were sold on 20-3-2015 but at the request of the buyer these were
delivered on 10-4-2015.
(ii) On 15-1-2015 goods of Rs. 1,50,000 were sent on consignment basis of which 20% of the
goods unsold are lying with the consignee as on 31-3-2015.
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(iii) Rs. 1,20,000 worth of goods were sold on approval basis on 1-12-2014. The period of
approval was 3 months after which they were considered sold. Buyer sent approval for
75% goods up to 31-1-2015 and no approval or disapproval received for the remaining
goods till 31-3-2015.
(iv) Apart from the above, the company has made cash sales of Rs. 7,80,000 (gross). Trade
discount of 5% was allowed on the cash sales.
You are required to advise the accountant of M/s. Paper Products Ltd., with valid reasons, the
amount to be recognized as revenue in above cases in the context of AS-9 and also determine
the total revenue to be recognized for the year ending 31-3-2015.
Problem No. 10
M/s Umang Ltd. sold goods through its agent. As per terms of sales, consideration is payable
within one month. In the event of delay in payment, interest is chargeable @ 12% p.a. from the
agent. The company has not realized interest from the agent in the past. For the year ended 31st
March, 2015 interest due from agent (because of delay in payment) amounts to Rs. 1,72,000. The
accountant of M/s Umang Ltd. booked Rs. 1,72,000 as interest income in the year ended 31st
March, 2015. Discuss the contention of the accountant with reference to Accounting Standard-9.
Problem No. 11
X ltd deposited Rs. 1,00,00,000 in ICICI Bank in a fixed deposit where in the principal amount will
be doubled in six years. At the end of sixth year X Ltd will receive Rs. 2,00,00,000. The
accountant contended that the amount of interest i.e., Rs. 1,00,00,000 is to be credited to the
P&L account of sixth year. Whether the contention of the accountant is correct?
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AS – 10 PROPERTY, PLANT AND EQUIPMENT
Problem No. 1
ABC Ltd. is constructing a fixed asset. Following are the expenses incurred on the construction:
Particulars Rs.
Materials 10,00,000
Direct Expenses 2,50,000
Total Direct Labour (1/10th of the total labour time was 5,00,000
chargeable to the construction)
Total office & administrative expenses (5% is chargeable to the 8,00,000
construction)
Depreciation on the assets used for the construction of this assets 10,000
Calculate the cost of fixed assets.
Solution
Calculation of the cost of construction of Assets
Particulars Rs.
Direct Materials 10,00,000
Direct Labour 50,000
Office & Administrative Expenses 40,000
Depreciation 10,000
Cost of the Asset 13,50,000
Problem No. 2
On March 01, 2013, X Ltd. purchased Rs. 5 lakhs worth of land for a factory site. Company
demolished an old building on the property and sold the material for Rs. 10,000. Company
incurred additional cost and realized salvaged proceeds during the March 2013 as follows:
Legal fees for purchase contract and recording ownership Rs. 25,000
Title guarantee insurance Rs. 10,000
Cost for demolition of building Rs. 50,000
In March 31, 2013 balance sheet, X Ltd. should report a balance in the land account.
Solution
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Calculation of the cost for Purchase of Land

Particulars Rs.
Cost of Land 5,00,000
Legal Fees 25,000
Title Insurance 10,000
Cost of Demolition 50,000
Less: Salvage value of Material (10,000) 40,000
Cost of the Asset 575,000
Problem No. 3
During the year M/s Progressive Company Limited made additions to its factory by using its own
workforce, at a cost of Rs. 4,50,000 as wages and materials. The lowest estimate from an outside
contractor to carry out the same work was Rs. 6,00,000. The directors contend that, since they
are fully entitled to employ an outside contractor, it is reasonable to debit the Factory Building
Account with Rs. 6,00,000. Comment whether the directors' contention is right in view of the
provisions of Accounting Standard 10 "PPE"?
Solution
1. AS 10, PPE, clearly states that the gross book value of the self-constructed fixed asset
includes
a. the cost of construction that relate directly to the specific asset and
b. the costs that are attributable to the construction activity in general
2. If any internal profit is there it should be eliminated.
3. Thus, only Rs. 4,50,000 should be debited to the factory building account and not Rs.
6,00,000.
4. The contention of the directors of the company to capitalize Rs. 6,00,000 as cost of factory
building, on the ground that the company is fully entitled to employ an outside contractor is
not justifiable.
Problem No. 4
M/s. Tiger Ltd. allotted 7,500 equity shares of Rs. 100 each fully paid up to Lion Ltd. in
consideration for supply of a special machinery. The shares exchanged for machinery are quoted
at National Stock Exchange (NSE) at Rs. 95 per share, at the time of transaction. In the absence
of fair market value of the machinery acquired, show how the value of the machinery would be
recorded in the books of Tiger Ltd.?
Solution
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As per AS 10 “PPE”, fixed asset acquired in exchange for shares or other securities in the
enterprise should be recorded at its fair market value, or the fair market value of the securities
issued, whichever is more clearly evident.
Since, in the given situation, the market value of the shares exchanged for the asset is more
clearly evident, the company should record the value of machinery at Rs. 7,12,500 (i.e., 7,500
shares x Rs. 95 per share) being the market price of the shares issued in exchange.
Problem No. 5
PQR Ltd. constructed a fixed asset and incurred the following expenses on its construction:
Rs.
Materials 16,00,000
Direct Labour (1/15th of the total labour time was chargeable to the 6,00,000
construction)
Total Office & Administrative Expenses (4% of office and administrative 9,00,000
expenses are specifically attributable construction of a fixed asset)
Depreciation on assets used for the construction of this asset 15,000
Calculate the cost of the fixed asset.
Solution:
Calculation of cost of fixed asset
Particulars Rs.
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of Rs. 6,00,000) 40,000
Office and administrative expenses (4% Rs. 9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000
Problem No. 6
Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed in

Department A in two months’ time. Special foundations were required for the plant, which were
to be prepared within this supply lead time. The cost of site preparation and laying foundations
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were Rs. 47,290. These activities were supervised by a technician during the entire period, who is
employed for this purpose of Rs. 15,000 per month. The Technician's services were given to
Department A by Department B, which billed the services at Rs. 16,500 per month after adding
10% profit margin.
The machine was purchased at Rs. 52,78,000. Sales Tax was charged at 4% on the invoice. Rs.
18,590 transportation charges were incurred to bring the machine to the factory. An Architect
was engaged at a fee of Rs. 10,000 to supervise machinery installation at the factory premises.
Also, payment under the invoice was due in 3 months. However, the Company made the
payment in 2nd month. The company operates on Bank Overdraft@ 11%.
Ascertain the amount at which the asset should be capitalized under AS 10.
Solution
Calculation of Cost of Fixed Asset (i.e. Machine)

Particulars Rs.
Purchase Price Given 52,78,000
Add: Sales Tax at 4% Rs. 52,78,000 x 4% 2,11,120
Site Preparation Cost Given 47,290
Technician’s Salary Specific/Attributable overheads for 2 months 30,000
Initial Delivery Cost Transportation 18,590
Professional Fees for Installation Architect’s Fees 10,000
Total Cost of the Asset 55,95,000
Note:
(i) Interest on Bank Overdraft for earlier payment of invoice is not relevant under AS 10.
(ii) In case of self constructed assets, internal profits should be eliminated in arriving at the cost
of Fixed Assets.
(iii) It has been assumed that the purchase price of Rs. 52,78,000 excludes amount of sales tax.
Problem No. 7
XYZ Ltd. has acquired a heavy road transporter at a cost of Rs. 1,00,000 (with no breakdown of
the component parts). The estimated useful life is 10 years. At the end of the sixth year, the
power train (one of its component) requires replacement, as further maintenance is
uneconomical due to the off-road time required. The remainder of the vehicle is perfectly
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roadworthy and is expected to last for the next four years. The cost of a new power train is Rs.
45,000.
Can the cost of the new power train be recognized as an asset, and, if so, what treatment should
be used?
Answer
The new power train will produce economic benefits to XYZ Ltd., and the cost is measurable.
Hence the item should be recognized as an asset as per AS 10 (Revised) as the recognition
criteria is satisfied.
The original invoice for the transporter did not specify the cost of the power train. However, its
cost of the replacement is Rs. 45,000 which can be used as an indication (usually by discounting
factor) of the likely cost, six years previously.
If an appropriate discount rate is 5% per annum, Rs. 45,000 discounted back six years amounts
to Rs. 33,570 (45,000 x 0.746), which would be written out of the asset records.
The cost of the new power train, Rs. 45,000, would be added to the asset record, resulting in a
new asset cost of Rs. 1,11,430 (Rs. 1,00,000 – Rs. 33,570 + Rs. 45,000).
Problem No. 8
ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) Rs. 25,00,000
2. Initial delivery and handling costs Rs. 2,00,000
3. Cost of site preparation Rs. 6,00,000
4. Consultants used for advice on the acquisition of the plant Rs. 7,00,000
5. Interest charges paid to supplier of plant for deferred credit Rs. 2,00,000
6. Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000
7. Operating losses before commercial production Rs. 4,00,000
Please advise ABC Ltd. on the costs that can be capitalized in accordance with AS 10 (Revised).
Solution
According to AS 10 (Revised), these costs can be capitalized:
1. Cost of the plant Rs. 25,00,000
2. Initial delivery and handling costs Rs. 2,00,000
3. Cost of site preparation Rs. 6,00,000
4. Consultants’ fees Rs. 7,00,000
5. Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000
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Rs. 43,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a
qualifying asset) of Rs. 2,00,000 and operating losses before commercial production amounting
to Rs. 4,00,000 are not regarded as directly attributable costs and thus cannot be capitalized.
They should be written off to the Statement of Profit and Loss in the period they are incurred.
Problem No. 9
A Ltd. has an item of plant with an initial cost of Rs. 1,00,000. At the date of revaluation,
accumulated depreciation amounted to Rs. 55,000. The fair value of the asset, by reference to
transactions in similar assets, is assessed to be Rs. 65,000.
Pass Journal Entries with regard to Revaluation?
Solution
The entries to be passed would be:

Rs. Rs.
Accumulated depreciation Dr. 55,000
To Asset A/c 55,000
(Being elimination of accumulated depreciation

the cost of the asset)
Asset A/c Dr 20,000
To Revaluation Surplus 20,000

(Being increase of net asset value to Fair value)
Note: The net result is that the asset has a carrying amount of Rs. 65,000 [1,00,000–
55,000+20,000.]
Problem No. 10
B Ltd. owns an asset with an original cost of Rs. 2,00,000. On acquisition, management
determined that the useful life was 10 years and the residual value would be Rs. 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 Rs. 10,000.
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How would the above changes in estimates be made by B Ltd.?
Solution
Statement showing revised carrying amount of the asset and revised depreciation
Sl No Particulars Amount Rs
1 Original Cost of the Asset 2,00,000
2 Less: Depreciation for 8 years [2,00,000-20,000]/10 * 8 1,44,000
3 WDV at the end of 8th year 56,000
4 Depreciation from 9th year onwards [56,000-10,000]/4 11,500
Problem No. 11
Determine if the following costs can be added to the invoiced purchase price and included in
the initial recognition of the cost of the asset:
Sl No Particulars of cost incurred
1 Consultants fees for choosing the new asset
2 A trade discount received of 5% of the purchase price of the asset
3 A discount received for paying the invoice within 90 days
Interest paid on a short term loan taken to provide the necessary

4
cash for payment of the purchase price
5 Import duties paid
6 Shipping costs and cost of road transport
7 Insurance for the shipping
8 An economic development rebate from the state
9 VAT paid on the purchase
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Cost of laying a new concrete slab and installing special rubber

10 mounted footings for the new press in order to reduce vibration
during use
Hire of a crane to transfer the press from the vehicles into the
11
factory
Costs associated with removing a section of the factory roof to

12 allow the machine to be dropped into place and subsequently
refitting the roof
Cost of installing soundproofing in the roof at the same time in

13 order to provide protection for workers in other parts of the factory
building
Professional fees charged by consulting engineer for overseeing the

14
installation process
15 Electricians fees for connecting the press to the power supply
A portion of the operating costs (salaries, office expenses) of the

16
purchasing department
Costs of materials (papers and inks) used in calibrating the machine

17
and setting it up for operation
18 Costs of training the operators of the new machine
A portion of the inefficiencies in production for the first month of

19 use while the operators became comfortable with using the
machine
Solution
Included in Cost:
Point no. 1,2,5,6,7,8,10,11,12,14,15 and 17
Excluded from Cost:
Point no. 3,4,9,13,16,18 and 19
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Problem No. 12
A Ltd. has carried out certain works on various machines in their engineering plant, which
manufactures high quality metal patterns and templates for use in industry.
Determine in each case whether the costs of the improvements can be added to the existing
carrying value of the assets concerned?
1) The costs of an annual machine overhaul which will maintain the originally assessed
standard of performance of the machine for the coming 12 months.
2) The cost of repairs to a press machine, which was damaged by the emergency services while
trying to extricate the arm of a worker who had become trapped in the press.
3) Modifications to a cutting machine which will increase its rate of output from 500 to 560
patterns per shift.
4) Modifications to a lathe which will replace the current water cooling system with an oil-
based system, thereby extending the life of the lathe by a forecast 2 years.
5) The upgrading of a cutting machine with new software which will improve the accuracy of its
measurement and cutting tolerances by a number of microns, thereby raising the quality of
output.
6) Alterations to a production line which will allow automatic feeding from a machine to the
next one in the production process, thereby removing the need for an employee to manually
load the second machine.
Solution
Point 1: No. This may not be capitalized as subsequent expenditure, since it merely maintains
the originally assessed standard of performance of the asset.
Point 2: Yes. An impairment loss should have been recognized when the damage occurred and
any insurance payment received as compensation should have been recognized as income in
the Statement of Profit and Loss when received.
When expenditure is incurred to restore the asset, such expenditure is added to the carrying
amount of the asset to the extent that it is probable that future economic benefits will flow to
the enterprise.
Point 3: Yes. The cost of such modifications may be added to the carrying amount of the asset.
Point 4: Yes. Such costs may be capitalized.
Problem No. 13
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An entity bought a plot of land for development of office buildings. Development of the land
was scheduled into six phases. The land scheduled for development in phases five and six was
leased to another entity on a short-term basis as a parking lot for heavy vehicles.
What is the treatment of rental income from car parking lot?
Solution
Rental income from the car park lease is recognized in the Statement of Profit and Loss for the
period.
The car park activity is incidental to the entity’s principal activity of property development.
Operations that are incidental to the construction or development of property, plant and
equipment are not necessary to bring the asset to its working condition for its intended use.
The income and related expenses of incidental operations are recognized in the Statement of
Profit and Loss for the period.
Problem No. 14
An entity acquires the right to use an underground cave for gas storage purposes for a period of
50 years. The cave is filled with gas, but a substantial part of that gas will only be used to keep
the cave under pressure in order to be able to get gas out of the cave. It is not possible to
distinguish the gas that will be used to keep the cave under pressure and the rest of the gas.
Evaluate whether AS 10 would apply or AS 2?
Solution
The total volume of gas must be virtually split into
(i) Gas held for sale, and
(ii) Gas held to keep the cave under pressure.
The former must be accounted for under AS 2 as Inventories. The latter must be accounted for
as PPE under AS 10 and depreciated over the period the cave is expected to be used.
Problem No. 15
An entity operates an oil refining plant. For the refining process to take place, the plant must
contain a certain minimum quantity of oil. This can only be taken out once the plant is
abandoned and would then be polluted to such an extent that the plant’s value is significantly
reduced.
Evaluate whether AS 10 would apply or AS 2?
Solution
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The part of the crude that is necessary to operate the plant and cannot be recouped (or can be
recouped but would then be significantly impaired), even when the plant is abandoned, should
be considered as an item of PPE under AS 10 and amortized over the life of the plant.
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AS – 11 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
Problem No. 1
Kalam Ltd. borrowed US$ 4,50,000 on 01/01/2016, which will be repaid as on 31/07/2017. Kalam
Ltd. prepares financial statement ending on 31/03/2017. Rate of exchange between reporting
currency (INR) and foreign currency (USD) on different dates are as under:
01/01/2016 1 US$ = Rs. 48.00

31/03/2016 1 US$ = Rs. 49.00
31/07/2016 1 US$ = Rs. 49.50
Problem No. 2
Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2017, payable after three months.
Company entered into a forward contract for three months @ Rs. 49.15 per dollar.
Exchange rate per dollar on 01st Feb. was Rs. 48.85. How will you recognize the profit or loss on
forward contract in the books of Rau Ltd.
Problem No. 3
Mr. A bought a forward contract for three months of US$ 1,00,000 on 1st December at 1 US$ =
Rs. 47.10 when exchange rate was US$ 1 = Rs. 47.02. On 31st December when he closed his
books exchange rate was US$ 1 = Rs. 47.15. On 31st January, he decided to sell the contract at
Rs. 47.18 per dollar. Show how the profits from contract will be recognized in the books.
Problem No. 4
1. Beekay Ltd. purchased fixed assets costing Rs. 5,000 lakhs on 01.04.2012 payable in
foreign currency (US$) on 05.04.2013. Exchange rate of 1 US$ = Rs. 50.00 and Rs. 54.98
as on 01.04.2012 and 31.03.2013 respectively.
2. The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three
annual equal instalments. First instalment was due on 01.05.2013.
You are required to state, how these transactions would be accounted for in the books of
accounts ending 31st March, 2013.
Problem No. 5
(a) Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 2011 payable after 4
months. The company entered into a forward contract for 4 months @ Rs. 48.85 per dollar. On
31st December, 2011, the exchange rate was Rs. 47.50 per dollar. How will you recognize the
profit or loss on forward contract in the books of Sterling Limited for the year ended 31st March,
2012.
(b) Exchange Rate per $
Goods purchased on 1.1.2016 of US $ Rs. 45

10,000 Exchange rate on 31.3.2016 Rs. 44
Date of actual payment 15.9.2016 Rs. 43
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Ascertain the loss/gain for financial years 2010-11 and 2011-12, also give their treatment as per
AS 11.
Problem No. 6
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25th February,
2011, when the exchange rate was Rs. 44 per US Dollar. The transaction was recorded in the
books at the above mentioned rate. The payment for the transaction was made on 10th April,
2011, when the exchange rate was Rs. 48 per US Dollar. At the year end 31st March, 2011, the
rate of exchange was Rs. 49 per US Dollar.
The Chief Accountant of the company passed an entry on 31st March, 2011 adjusting the cost of
raw material consumed for the difference between Rs. 48 and Rs. 44 per US Dollar. Discuss
whether this treatment is justified as per the provisions of AS-11 (Revised).
Problem No. 7
Mr. Y bought a forward contract for three months of US $ 2,00,000 on 1st December 2010 at 1
US $ = Rs. 44.10 when the exchange rate was 1 US $ = Rs. 43.90. On 31-12-2010, when he
closed his books, exchange rate was 1 US $ = Rs. 44.20. On31st January, 2011 he decided to sell
the contract at Rs. 44.30 per Dollar. Show how the profits from the contract will be recognized in
the books of Mr. Y.
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AS – 12 GOVERNMENT GRANTS
Problem No. 1
Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with
the salvage value of Rs. 5,00,000. On purchase of the assets government granted it a grant for
Rs. 10 lakhs. Pass the necessary journal entries in the books of the company for first two years if
the grant amount is deducted from the value of fixed asset.
Problem No. 2
Rs. 10 lakhs. Pass the necessary journal entries in the books of the company for first two years if
the grant is treated as deferred income.
Problem No. 3
Rs. 10 lakhs. Grant was considered as refundable in the end of 2nd year to the extent of Rs.
7,00,000. Pass the journal entry for refund of the grant as per
a) The first method.

b) The second method.
c) In first method if refund of government grant is Rs. 5,00,000
d) In second method if refund of government grant is Rs. 5,00,000
Problem No. 4
A fixed asset is purchased for Rs. 20 lakhs. Government grant received towards it is Rs. 8 lakhs.
Residual Value is Rs. 4 lakhs and useful life is 4 years. Assume depreciation on the basis of
Straight Line method. Asset is shown in the balance sheet net of grant. After 1 year, grant
becomes refundable to the extent of Rs. 5 lakhs due to non compliance with certain conditions.
Pass journal entries for first two years.
Problem No. 5
Supriya Ltd. received a grant of Rs. 2,500 lakhs during the accounting year 2010-11 from
government for welfare activities to be carried on by the company for its employees. The grant
prescribed conditions for its utilization. However, during the year 2011-12, it was found that the
conditions of grants were not complied with and the grant had to be refunded to the
government in full. Elucidate the current accounting treatment, with reference to the provisions
of AS-12.
Problem No. 6
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A Ltd. purchased a machine for Rs. 40 lakhs. (Useful life 4 years and residual value Rs. 8 lakhs)
Government grant received is Rs. 16 lakhs.
Show the Journal Entry to be passed at the time of refund of grant in the third year and the
value of the fixed assets, if:
i) the grant is credited to Fixed Assets A/c.

ii) the grant is credited to Deferred Grant A/c.
Problem No. 7
Santosh Ltd. has received a grant of Rs. 8 crores from the Government for setting up a factory in
a backward area. Out of this grant, the company distributed Rs. 2 crores as dividend. Also,
Santosh Ltd. received land free of cost from the State Government but it has not recorded it at
all in the books as no money has been spent. In the light of AS 12 examine, whether the
treatment of both the grants is correct.
Problem No. 8
Viva Ltd. received a specific grant of Rs. 30 lakhs for acquiring the plant of Rs. 150 lakhs during
2007-08 having useful life of 10 years. The grant received was credited to deferred income in the
balance sheet. During 2010-11, due to non-compliance of conditions laid down for the grant,
the company had to refund the whole grant to the Government. Balance in the deferred income
on that date was Rs. 21 lakhs and written down value of plant was Rs. 105 lakhs.
i) What should be the treatment of the refund of the grant and the effect on cost of the fixed
asset and the amount of depreciation to be charged during the year 2010-11 in profit and
loss account?
ii) plant during 2007-08 assuming plant account showed the balance of Rs. 84 lakhs as on
1.4.2010?
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AS – 13 ACCOUNTING FOR INVESTMENTS
Problem No. 1
X Ltd. on 1-1-2014 had made an investment of Rs. 600 lakhs in the equity shares of Y Ltd. of
which 50% is made in the long term category and the rest as temporary investment. The
realizable value of all such investment on 31-3-2014 became Rs. 200 lakhs as Y Ltd. lost a case of
copyright. From the given market conditions, it is apparent that the reduction in the value is
permanent in nature. How will you recognize the reduction in financial statements for the year
ended on 31-3-2014?
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AS – 16 BORROWING COST
Problem No. 1
An industry borrowed Rs. 40,00,000 for purchase of machinery on 1.6.2011. Interest on loan is
9% per annum. The machinery was put to use from 1.1.2012. Pass journal entries for the year
ended 31.3.2012 to record the borrowing cost of loan, as per AS 16.
Problem No. 2
X Ltd. began construction of a new building on 1st January, 2012. It obtained Rs. 1 lakh special
loan to finance the construction of the building on 1st January, 2012 at an interest rate of 10%.
The company’s other outstanding two non-specific loans were:
Amount Rate of Interest

Rs. 5,00,000 11%
Rs. 9,00,000 13%
The expenditures that were made on the building project were as follows:
Rs.
January 2012 2,00,000
April 2012 2,50,000
July 2012 4,50,000
December 2012 1,20,000
Building was completed by 31st December, 2012. Following the principles prescribed in AS 16
‘Borrowing Cost,’ calculate the amount of interest to be capitalized and pass one Journal Entry
for capitalizing the cost and borrowing cost in respect of the building.
Problem No. 3
GHI Limited obtained a loan for Rs. 70 lakhs on 15th April, 2010 from JKL Bank, to be utilized as
under:
Rs. in lakhs
Construction of Factory shed 25
Purchase of Machinery 20
Working capital 15
Advance for purchase of Truck 10
In March 2011, construction of the factory shed was completed and machinery, which was ready
for its intended use, was installed. Delivery of Truck was received in the next financial year. Total
interest of Rs. 9,10,000 was charged by the bank for the financial year ending 31-03- 2011.
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Show the treatment of interest under AS 16 and also explain the nature of Assets.
Problem No. 4
Axe Limited began construction of a new plant on 1st April, 2011 and obtained a special loan of
Rs. 4,00,000 to finance the construction of the plant. The rate of interest on loan was 10%.
The expenditure that were made on the project of plant were as follows:
Rs.
1st April, 2011 5,00,000
1st August, 2011 12,00,000
1st January, 2012 2,00,000
The company’s other outstanding non-specific loan was Rs. 23,00,000 at an interest rate of 12%.
The construction of the plant completed on 31st March, 2012. You are required to:
a) Calculate the amount of interest to be capitalized as per the provisions of AS 16 “Borrowing

Cost”.
b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant.
Problem No. 5
On 1st April, 2011, Amazing Construction Ltd. obtained a loan of Rs. 32 crores to be utilized as
under:
Construction of sealink across two cities: Rs. 25 Crores

(Work was held up totally for a month during the year due to high water levels)
(i) Purchase of equipments and machineries : Rs. 3 crores

(ii) Working capital : Rs. 2 crores
(iii) Purchase of vehicles : Rs. 50,00,000
(iv) Advance for tools/cranes etc. : Rs. 50,00,000
(v) Purchase of technical know-how : Rs. 1 crores
(vi) Total interest charged by the bank for the year ending 31st March, 2012
Show the treatment of interest by Amazing Construction Ltd.
Problem No. 6
A company capitalizes interest cost of holding investments and adds to cost of investment every
year, thereby understating interest cost in profit and loss account. Comment on the accounting
treatment done by the company in context of the relevant AS.
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AS – 17 SEGMENT REPORTING
Problem No. 1
Microtech Ltd. produces batteries for scooters, cars, trucks, and specialised batteries for
invertors and UPS. How many segments should it have and why?
Problem No. 2
The Chief Accountant of Sports Ltd. gives the following data regarding its six segments:
Rs. in lakhs
Particulars M N O P Q R Total
Segment Assets 40 80 30 20 20 10 200

Segment Results 50 (190) 10 10 (10) 30 (100)
Segment Revenue 300 620 80 60 80 60 1,200
The Chief accountant is of the opinion that segments “M” and “N” alone should be reported. Is
he justified in his view? Discuss.
Problem No. 3
A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The
market prices are generally 25% above cost. Is the policy adopted by the company correct?
Problem No. 4
M/s XYZ Ltd. has three segments namely X, Y, Z. The total Assets of the Company are Rs. 10.00
crores. Segment X has Rs. 2.00 crores, segment Y has Rs. 3.00 crores and segment Z has Rs. 5.00
crores. Deferred tax assets included in the assets of each segments are X- Rs. 0.50 crores, Y— Rs.
0.40 crores and Z— Rs. 0.30 crores. The accountant contends that all the three segments are
reportable segments. Comment.
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AS – 18 RELATED PARTY DISCLOSURES
Problem No. 1
Identify the related parties in the following cases as per AS 18
A Ltd. holds 51% of B Ltd.
B Ltd holds 51% of O Ltd.
Z Ltd holds 49% of O Ltd.
Problem No. 2
Narmada Ltd. sold goods for Rs. 90 lakhs to Ganga Ltd. during financial year ended 31-3-2014.
The Managing Director of Narmada Ltd. own 100% of Ganga Ltd. The sales were made to Ganga
Ltd. at normal selling prices followed by Narmada Ltd. The Chief accountant of Narmada Ltd
contends that these sales need not require a different treatment from the other sales made by
the company and hence no disclosure is necessary as per the accounting standard. Is the Chief
Accountant correct?
Problem No. 3
Mr. Raj a relative of key management personnel received remuneration of Rs. 2,50,000 for his
services in the company for the period from 1.4.2016 to 30.6.2016. On 1.7.2016 he left the
service.
Should the relative be identified as at the closing date i.e. on 31.3.2014 for the purposes of AS
18?
Problem No. 4
X Ltd. sold goods to its associate Company for the 1st quarter ending 30.6 .2014. After that, the
related party relationship ceased to exist. However, goods were supplied as was supplied to
any other ordinary customer. Decide whether transactions of the entire year have to be
disclosed as related party transaction.
Problem No. 5
P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd. directly
enjoys voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P
Ltd. The management of R Ltd. has not disclosed its relationship with P Ltd.
How would you assess the situation from the viewpoint of AS 18 on Related Party Disclosures?
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AS – 19 LEASES
Problem No. 1
Annual lease rents = Rs. 50,000 at the end of each year.
Lease period = 5 years;
Guaranteed residual value = Rs. 25,000
Unguaranteed residual value = Rs. 15,000
Fair Value at the inception (beginning) of lease = Rs. 2,00,000
Calculate the implicit rate of interest in the lease.
Solution
Interest rate implicit on lease is computed below:
Interest rate implicit on lease is a discounting rate at which present value of minimum lease
payments and unguaranteed residual value is Rs. 2 lakhs.
Step 1: Calculate PV of minimum lease payments and unguaranteed residual value at guessed
rate 10% and 14%.
Step 2: Apply interpolation formula (similar to IRR)
Problem No. 2
Consider the data given in Problem No. 1 above and calculate the present value of minimum
lease payments. Also pass journal entry at the inception of lease in the books of Lessee
Problem No. 3
Using data for example 1 and assuming zero residual value, allocate finance charge over lease
period and pass journal entries for year 1 in the books of lessee
Problem No. 4
Suppose outputs from a machine taken on a 3 year operating lease are estimated as 10,000
units in year 1, 20,000 units in year 2 and 50,000 units in year 3. The agreed annual lease
payments are Rs. 25,000, Rs. 45,000 and Rs. 50,000 respectively. The total lease payment Rs.
1,20,000 in this example should be recognised in proportion of output as Rs. 15,000 in year 1,
Rs. 30,000 in year 2 and Rs. 75,000 in year 3. The difference between lease rent due and lease
rent recognised can be debited / credited to Lease Rent Adjustment A/c.
Pass journal entries for the first year in the books of the lessee.
Problem No. 5
Outputs from a machine having economic life of 6 years are estimated as 10,000 units in year 1,
20,000 units in year 2 and 30,000 units in year 3, 40,000 units in year 4, 20,000 units in year 5
and 5,000 units in year 6.
The machine was given on 3-year operating lease by a dealer of the machine for equal annual
lease rentals to yield 20% profit margin on cost Rs. 5,00,000. Straight-line depreciation in
proportion of output is considered appropriate.
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Step 1: Calculation of total lease rent income and lease rent income per annum
= 5,00,000 * 120% * 60000 / 125000 = 2,88,000
= 2,88,000 / 3 years = 96,000 per annum
Note:
1) Lessor will receive Rs. 96,000 from lessee as lease rent every year
2) However, the lease rentals earned are in the proportion of the output which is calculated as
follows
LEASE RENT UNITS LEASE RENTALS LEASE RENT
YEAR
RECEIVED PRODUCED EARNED ADJUSTMENT A/C
1 96,000 10,000 48,000 48,000 Income
received in advance
2 96,000 20,000 96,000 0
3 96,000 30,000 1,44,000 48,000 Reversal of
above
2,88,000 60,000 2,88,000
3) The lease rent adjustment account will be shown in the balance sheet under Current Assets
or Current Liabilities as the case may be.
Step 3: Calculation of Depreciation
YEAR OUTPUT WORKING DEPRECIATION Rs
1 10,000 5,00,000*10,000/1,25,000 40,000
2 20,000 5,00,000*20,000/1,25,000 80,000
3 30,000 5,00,000*30,000/1,25,000 1,20,000
4 40,000 5,00,000*40,000/1,25,000 1,60,000
5 20,000 5,00,000*20,000/1,25,000 80,000
6 5,000 5,00,000*5,000/1,25,000 20,000
1,25,000 5,00,000 5,00,000
Problem No. 6
X Ltd took a 7-year finance lease under which the annual lease rental has been fixed at Rs.
1,20,000. The implicit rate of interest has been estimated at 11%. Find out the finance charge for
different years.
Solution:
PV of minimum lease payment = Annual lease rental * PVAF(n,r)
= 1,20,000 * 4.7122 = 5,65,464
Asset A/c Dr. 5,65,464
To Lessor A/c 5,65,464
Calculation of Annual finance charges and repayment of principal amount
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YEAR Amount Interest @ Lease Rent Principal Amount

outstanding at 11% Amount outstanding at
the beginning the end of the
of the year year
1 565,464 62,201 120,000 57,799 507,665
2 507,665 55,843 120,000 64,157 443,508
3 443,508 48,786 120,000 71,214 372,294
4 372,294 40,952 120,000 79,048 293,246
5 293,246 32,257 120,000 87,743 205,503
6 205,503 22,605 120,000 97,395 108,108
7 108,108 11,892 120,000 108,108 (0)
Problem No. 7
S. Square Private Limited has taken machinery on lease from S.K. Ltd. The information is as
under:
Lease term = 4 years
Fair value at inception of lease = Rs. 20,00,000
Lease rent = Rs. 6,25,000 p.a. at the end of year
Guaranteed residual value = Rs. 1,25,000
Expected residual value = Rs. 3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and
0.5718 respectively.
Calculate the value of the lease liability as per AS-19.
In the Books of lessor – Finance Lease

1. Gross Investment in lease = Minimum lease payment + UGRV
2. Minimum lease payment = Lease rentals + GRV
3. Unearned finance Income = Gross Investment – PV (at implicit interest rate) of Gross
Investment
4. Interest rate implicit in the lease = it is IRR from Lessor’s POV
5. Net Investment in lease = Gross Investment – Unearned Finance Income
Problem No. 8
Prakash Limited leased a machine to Badal Limited on the following terms:
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(Rs. In lakhs)
(i) Fair value of the machine 48.00
(ii) Lease term 5 years
(iii) Lease rental per annum 8.00
(iv) Guaranteed residual value 1.60
(v) Expected residual value 3.00
(vi) Internal rate of return 15%
Discounted rates for 1st year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718, and 0.4972
respectively.
Ascertain Unearned Finance Income.
Problem No. 9
A Ltd. sold machinery having WDV of Rs. 40 lakhs to B Ltd. for Rs. 50 lakhs and the same
machinery was leased back by B Ltd. to A Ltd. The lease back is operating lease. Comment if –
(a) Sale price of Rs.50 lakhs is equal to fair value.
(b) Fair value is Rs. 60 lakhs.
(c) Fair value is Rs. 45 lakhs and sale price is Rs. 38 lakhs.
(d) Fair value is Rs. 40 lakhs and sale price is Rs.50 lakhs.
(e) Fair value is Rs.46 lakhs and sale price is Rs. 50 lakhs
(f) Fair value is Rs.35 lakhs and sale price is Rs.39 lakhs.
Problem No. 10
Annual lease rent = Rs. 40,000 at the end of each year Lease period = 5 years
Guaranteed residual value = Rs. 14,000
Fair value at the inception (beginning) of lease = Rs. 1,50,000
Interest rate implicit on lease is 12.6%. The present value factors at 12.6% are 0.89, 0.79, 0.7,
0.622, 0.552 at the end of first, second, third, fourth and fifth year respectively.
Show the Journal entry to record the asset taken on finance lease in the books of the lessee.
Problem No. 11
B&P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under:
(i) Lease period is 3 years, in the beginning of the year 2010, for equipment costing Rs.
10,00,000 and has an expected useful life of 5 years.
(ii) The Fair market value is also Rs. 10,00,000.
(iii) The property reverts back to the lessor on termination of the lease.
(iv) The unguaranteed residual value is estimated at Rs. 1,00,000 at the end of the year 2012
(v) 3 equal annual payments are made at the end of each year. Consider IRR = 10%.
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The present value of Rs. 1 due at the end of 3rd year at 10% rate of interest is Rs. 0.7513. The
present value of annuity of Rs. 1 due at the end of 3rd year at 10% IRR is Rs. 2.4868.
State whether the lease constitute finance lease and also calculate unearned finance income.
Problem No. 12
An equipment having expected useful life of 5 years, is leased for 3 years. Both the cost and the
fair value of the equipment are Rs. 6,00,000. The amount will be paid in 3 equal installments and
at the termination of lease, lessor will get back the equipment. The unguaranteed residual value
at the end of 3rd year is Rs. 60,000. The IRR of the investment is 10%. The present value of
annuity factor of Rs. 1 due at the end of 3rd year at 10% IRR is 2.4868. The present value of Rs. 1
due at the end of 3rd year at 10% rate of interest is 0.7513. State with reason whether the lease
constitutes finance lease and also compute the unearned finance income.
Problem No. 13
Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being Rs. 7,00,000.
The economic life of machine as well as the lease term is 3 years. At the end of each year Lessee
Ltd. pays Rs. 3,00,000. The Lessee has guaranteed a residual value of Rs. 22,000 on expiry of the
lease to the Lessor. However, Lessor Ltd., estimates that the residual value of the machinery will
be only Rs. 15,000. The implicit rate of return is 15% p.a. and present value factors at 15% are
0.869, 0.756 and 0.657 at the end of first, second and third years respectively.
Calculate the value of machinery to be considered by Lessee Ltd. and the finance charges in
each year.
Problem No. 14
X Ltd. sold JCB Machine having WDV of Rs. 50 Lakhs to Y Ltd for Rs. 60 Lakhs and the same JCB
was leased back by Y Ltd to X Ltd. The lease is operating lease
Comment according to relevant Accounting Standard if
(i) Sale price of Rs. 60 Lakhs is equal to fair value
(ii) Fair Value is Rs. 50 Lakhs and sale price is Rs.45 Lakhs.
(iii) Fair value is Rs. 55 Lakhs and sale price isRs. 62 lakhs
(iv) Fair value is Rs. 45 Lakhs and sale price is Rs. 48 Lakhs.
Problem No. 15
Classify the following into either operating or finance lease:
(i) Lessee has option to purchase the asset at lower than fair value, at the end of lease term;
(ii) Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired at the
end of the lease term;
(iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature
and has been procured only for use of the lessee;
(iv) Present value (PV) of Minimum lease payment (MLP) = "X". Fair value of the asset is "Y".
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AS – 20 EARNINGS PER SHARE
Problem No. 1
Date Particulars Purchased Sold Balance
1st January Balance at beginning of year 1,800 - 1,800
31st May Issue of shares for cash 600 - 2,400
1st Nov Buy Back of shares - 300 2,100
Calculate Weighted Number of Shares.

Problem No. 2
Date Particulars No. of Shares Face Value Paid up
Value
1st January Balance at beginning of year 1,800 Rs. 10 Rs. 10
31st October Issue of Shares 600 Rs. 10 Rs. 5

Calculate Weighted Number of Shares.
Problem No. 3
Net profit for the year 2011 is Rs. 18,00,000
Net profit for the year 2012 is Rs.60,00,000
No. of equity shares outstanding until 30th September 2012 - 20,00,000
Bonus issue 1st October 2012 was 2 equity shares for each equity share outstanding at 30th
September, 2012
Calculate Basic Earnings Per Share.
Problem No. 4
Net profit for the year 2011 Rs. 11,00,000
No. of shares outstanding prior to rights issue
5,00,000 shares Rights issue price Rs. 15.00
Last date to exercise rights 1st March 2012
Rights issue is one new share for each five outstanding (i.e. 1,00,000 new shares)
Fair value of one equity share immediately prior to exercise of rights on 1st March 2012 was Rs.
21.00. Compute Basic Earnings Per Share.
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Problem No. 5
Net profit for the current year Rs. 1,00,00,000
No. of equity shares outstanding 50,00,000
Basic earnings per share Rs. 2.00
No. of 12% convertible debentures of Rs. 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expense for the current year Rs. 12,00,000
Tax relating to interest expense (30%) Rs. 3,60,000
Compute Diluted Earnings Per Share.
Problem No. 6
Weighted average number of equity shares outstanding during the year 2012 5,00,000 shares
Average fair value of one equity share during the year 2012 Rs. 20.00 Weighted average number
of shares under option during the year 2012 1,00,000 shares Exercise price for shares under
option during the year 2012 Rs. 15.00 Compute Basic and Diluted Earnings Per Share.
Problem No. 7
Net profit for the year 2012: Rs. 24,00,000
Weighted average number of equity shares outstanding during the year 2012: 10,00,000
Average Fair value of one equity share during the year 2012: Rs. 25.00
Weighted average number of shares under option during the year 2012: 2,00,000 Exercise price
for shares under option during the year 2012: Rs. 20.00
Compute Basic and diluted earnings per share.
Problem No. 8
In April, 2010, A Limited issued 18,00,000 Equity shares of Rs. 10 each, Rs. 5 per share was called
up on that date which was paid by all the shareholders. The remaining Rs. 5 was called up on 1-
9-2010. All the Shareholders (except one having 3,60,000 shares) paid the sum in September
2010. The net profit for the year ended 31-3-2011 is Rs. 33 lakhs after dividend on preference
shares and dividend distribution tax of Rs. 6.60 lakhs.
Compute the basic EPS for the year ended 31st March, 2011 as per AS 20.
Problem No. 9
“While calculating diluted earnings per share, effect is given to all dilutive potential equity shares
that were outstanding during that period.” Explain. Also calculate the diluted earnings per share
from the following information:
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Net profit for the current year 85,50,000
No. of equity shares outstanding 20,00,000

No. of 8% convertible debentures of Rs. 100 each 1,00,000
Each debenture is convertible into 10 equity shares Interest

expenses for the current year
6,00,000
Tax relating to interest expenses 30%
Problem No. 10
Compute Basic Earnings per share from the following information:
Date Particulars No. of shares
1st April, 2008 Balance at the beginning of the year 1,500
1st August, 2008 Issue of shares for cash 600
31st March, 2009 Buy back of shares 500
Net profit for the year ended 31st March, 2009 was Rs. 2,75,000.
Problem No. 11
Ram Ltd. had 12,00,000 equity shares on April 1, 2009. The company earned a profit of Rs.
30,00,000 during the year 2009-10. The average fair value per share during 2009-10 was Rs. 25.
The company has given share option to its employees of 2,00,000 equity shares at option price
of Rs. 15. Calculate basic E.P.S. and diluted E.P.S.
Problem No. 12
From the following information relating to Y Ltd. Calculate Earnings Per Share (EPS):
Rs. in crores
Profit before V.R.S. payments but after depreciation 75.00
Depreciation 10.00
VRS payments 32.10
Provision for taxation 10.00
Fringe benefit tax 5.00
Paid up share capital (shares of Rs. 10 each fully paid) 93.00
Problem No. 13
The following information is available for Raja Ltd. for the accounting year 2009-10 and 2010-11:
Net profit for Rs.
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Year 2009-10 25,00,000

Year 2010-11 40,00,000
No. of shares outstanding prior to right issue 12,00,000 shares.
Right issue: One new share for each three outstanding i.e. 4,00,000 shares
Right issue price Rs. 22
Last date to exercise rights 30-6-2010
Fair value of one equity share immediately prior to exercise of rights on 30-6-2010 = Rs. 28.
You are required to compute the basic earnings per share for the years 2009-10 and 2010-11.
Problem No. 14
XYZ Ltd. had issued 30,000, 15% convertible debentures of Rs. 100 each on 1st April, 2008.
The debentures are due for redemption on 1st March, 2011. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
debenture holders to convert 20% of their holding into equity shares (Nominal Value Rs. 10) at a
price of Rs. 15 per share. Debenture holders holding 2500 debentures did not exercise the
option. Calculate the number of equity shares to be allotted to the Debenture holders exercising
the option to the maximum.
Problem No. 15
Explain the concept of ‘weighted average number of equity shares outstanding during the
period’. State how would you compute, based on AS-20, the weighted average number of equity
shares in the following case:
No. of shares
1st April, 2010 Balance of equity shares 7,20,000
31st August, 2010 Equity shares issued for cash 2,40,000
1st February, 2011 Equity shares bought back 1,20,000
31st March, 2011 Balance of equity shares 8,40,000
Problem No. 16
Compute adjusted earnings per share and basic EPS based on the following information:
Net profit 2009-10 Rs. 7,20,000
Net profit 2010-11 Rs. 24,00,000
No. of equity shares outstanding until 31st December, 2010 8,00,000
Bonus issue on 1st January, 2011, 2 equity shares for each equity share outstanding at 31st
December, 2010.
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AS 22 ACCOUNTING FOR TAXES ON INCOME

Problem No. 1
Ultra Ltd. has provided the following information.
Depreciation as per accounting records =Rs. 2,00,000
Depreciation as per tax records =Rs. 5,00,000
Unamortised preliminary expenses as per tax record = Rs. 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/liability
should be recognized as transition adjustment when the tax rate is 50%?
Problem No. 2
PQR Ltd.'s accounting year ends on 31st March. The company made a loss of Rs. 2,00,000 for the
year ending 31.3.2012. For the years ending 31.3.2013 and 31.3.2014, it made profits of Rs.
1,00,000 and Rs. 1,20,000 respectively. It is assumed that the loss of a year can be carried
forward for eight years and tax rate is 40%. By the end of 31.3.2012, the company feels that
there will be sufficient taxable income in the future years against which carry forward loss can be
set off. There is no difference between taxable income and accounting income except that the
carry forward loss is allowed in the years ending 2013 and 2014 for tax purposes. Prepare a
statement of Profit and Loss for the years ending 2012, 2013 and 2014.
Problem No. 3
Omega Limited is working on different projects which are likely to be completed within 3 years’
period. It recognizes revenue from these contracts on percentage of completion method for
financial statements during 2012-2013, 2013-2014 and 2014-2015 for Rs.11,00,000,
Rs.16,00,000 and Rs.21,00,000 respectively. However, for Income-tax purpose, it has adopted the
completed contract method under which it has recognized revenue of Rs.7,00,000, Rs.18,00,000
and Rs.23,00,000 for the years 2012-2013, 2013-2014 and 2014-2015 respectively. Income-tax
rate is 35%. Compute the amount of deferred tax asset/liability for the years 2012-2013, 2013-
2014 and 2014-2015.
Problem No. 4
Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year
of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is Rs.
200 lakhs and Rs. 400 lakhs respectively. From the third year it is expected that the timing
difference would reverse each year by Rs. 10 lakhs. Assuming tax rate of 40%, find out the
deferred tax liability at the end of the second year and any charge to the Profit and Loss
account.
Problem No. 5
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Acute Ltd. is the owner of a CGU (Cash Generating Unit) block of assets whose current carrying
cost is Rs. 999 lakhs. The company, after a detailed study by its technical team, has assessed the
present recoverable amount of this CGU block of assets at Rs. 555 lakhs. The value of the block
of assets as per the Income Tax Records is Rs. 777 lakhs. The Approving Authority of the
company have issued a signed statement confirming that the impairment in the value of the
CGU is only a temporary phenomenon which is reversible in subsequent periods and also
assuring virtual certainty of taxable incomes in the foreseeable future. You are required to show
Deferred Tax workings as per Accounting Standards in force, given the tax rate of 30% plus 10%
surcharge thereon. The depreciation rate for tax purposes is 15% and that per books is 13.91%.
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AS – 26 INTANGIBLE ASSETS
Problem No. 1
ABC Ltd. developed know-how by incurring expenditure of Rs. 20 lakhs, The know-how was
used by the company from 1.4.2005. The useful life of the asset is 10 years from the year of
commencement of its use. The company has not amortised the asset till 31.3.2012. Pass Journal
entry to give effect to the value of know-how as per Accounting Standard-26 for the year ended
31.3.2012.
Problem No. 2
The company had spent Rs. 45 lakhs for publicity and research expenses on one of its new
consumer product, which was marketed in the accounting year 2011-2012, but proved to be a
failure. State, how you will deal with the following matters in the accounts of U Ltd. for the year
ended 31st March, 2012.
Problem No. 3
A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crores
had taken up the marketing of a new product. It was estimated that the company would have a
turnover of Rs. 25 crores from the new product. The company had debited to its Profit and Loss
account the total expenditure of Rs. 2 crore incurred on extensive special initial advertisement
campaign for the new product.
Is the procedure adopted by the company correct?
Problem No. 4
Decide when research and development cost of a project can be deferred to future periods as
per AS 26.
Answer
As per para 41 of AS 26 ‘Intangible Assets’, no intangible asset arising from research should be
recognized. The expenditure incurred on development phase can be deferred to the subsequent
years if the company can demonstrate all of the following conditions (as specified in para 44 of
AS 26 ‘Intangible Assets’):
a) the technical feasibility of completing the intangible asset so that it will be available for use
or sale;
b) its intention to complete the intangible asset and use or sell it;
c) its ability to use or sell the intangible asset;
d) how the intangible asset will generate probable future economic benefits. Among other
things, the enterprise should demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of
the intangible asset;
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e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset; and
f) its ability to measure the expenditure attributable to the intangible asset during its
development reliably.
Problem No. 5
How is software acquired for internal use accounted for under AS-26?
Answer
Paragraphs 10 and 11 of Appendix A to the Accounting Standard 26 on Intangible Assets, lays
down the following procedure for accounting of software acquired for internal use:-
 The cost of a software acquired for internal use should be recognised as an asset if it meets
the recognition criteria prescribed in paragraphs 20 and 21 of this statement.
 The cost of a software purchased for internal use comprises its purchase price, including any
import duties and other taxes (other than those subsequently recoverable by the enterprise
from the taxing authorities) and any directly attributable expenditure on making the
software ready for its use.
 Any trade discounts and rebates are deducted in arriving at the cost. In the determination of
cost, matters stated in paragraphs 24 to 34 of the Statement which deal with the method of
accounting for ‘Separate Acquisitions’, ‘Acquisitions as a part of Amalgamations’,
Acquisitions by way of Government Grant’, and ‘Exchanges of Assets’, need to be considered,
as appropriate.
Recognition criteria as per paragraphs 20 and 21 of the standard are stated below: -
 An intangible asset should be recognised if, and only if:
o it is probable that the future economic benefits that are attributable to the asset will flow
to the enterprise; and
o the cost of the asset can be measured reliably.
 An enterprise should assess the probability of future economic benefits using reasonable
and supportable assumptions that represent best estimate of the set of economic conditions
that will exist over the useful life of the asset.
Problem No. 6
What are the costs that are to be included in Research and Development costs as per AS 26?
Answer
According to paras 41 and 43 of AS 26, “No intangible asset arising from research (or from the
research phase of an internal project) should be recognized in the research phase. Expenditure
on research (or on the research phase of an internal project) should be recognized as an
expense when it is incurred.
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Examples of research costs are:

 Costs of activities aimed at obtaining new knowledge;
 Costs of the search for, evaluation and final selection of, applications of research findings or
other knowledge;
 Costs of the search for alternatives for materials, devices, products, processes, systems or
services; and
 Costs of the activities involved in formulation, design, evaluation and final selection of
possible alternatives for new or improved materials, devices, products, processes systems or
services.”
According to paras 45 and 46 of AS 26, “In the development phase of a project, an enterprise
can, in some instances, identify an intangible asset and demonstrate that future economic
benefits from the asset are probable. This is because the development phase of a project is
further advanced than the research phase.
Examples of development activities/costs are:
 Costs of the design, construction and testing of pre-production or pre-use prototypes and
models;
 Costs of the design of tools, jigs, moulds and dies involving new technology;
 Costs of the design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
 Costs of the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.”
Problem No. 7
A Company had deferred research and development cost of Rs. 150 lakhs. Sales expected in the
subsequent years are as under:
Years Sales (Rs. in lakhs)
I 400
II 300
III 200
IV 100
You are asked to suggest how should Research and Development cost be charged to Profit and
Loss account. If at the end of the III year, it is felt that no further benefit will accrue in the IV
year, how the unamortised expenditure would be dealt with in the accounts of the Company?
Problem No. 8
AB Ltd. launched a project for producing product X in October, 2009. The Company incurred Rs.
20 lakhs towards Research and Development expenses up to 31st March, 2011. Due to
prevailing market conditions, the Management came to conclusion that the product cannot be
101
manufactured and sold in the market for the next 10 years. The Management hence wants to
defer the expenditure write off to future years.
Advise the Company as per the applicable Accounting Standard.
Answer
As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognized as an
expense when it is incurred. An intangible asset arising from development (or from the
development phase of an internal project) should be recognized if, and only if, an enterprise can
demonstrate all of the conditions specified in para 44 of the standard. An intangible asset
(arising from development) should be derecognised when no future economic benefits are
expected from its use according to para 87 of the standard. Therefore, the manager cannot
defer the expenditure write off to future years.
Hence, the expenses amounting Rs. 20 lakhs incurred on the research and development project
has to be written off in the current year ending 31st March, 2011.
Problem No. 9
An enterprise acquired patent right for Rs. 400 lakhs. The product life cycle has been estimated
to be 5 years and the amortization was decided in the ratio of estimated future cash flows which
are as under:
Year Estimated Future Cash Flows
(Rs. in lakhs)
1 200
2 200
3 200
4 100
5 100
Problem No. 10
Plymouth Ltd. is engaged in research on a new process design for its product. It had incurred
Rs. 10 lakhs on research during first 5 months of the financial year 2012-13. The development of
the process began on 1st September, 2012 and up to 31st March, 2013, a sum of Rs. 8 lakhs
were incurred as Development Phase Expenditure, which meets assets recognition criteria.
From 1st April, 2013, the Company has implemented the new process design and it is likely that
this will result in after tax saving of Rs. 2 lakhs per annum for next five years.
The cost of capital is 10%. The present value of annuity factor of Rs. 1 for 5 years @ 10% is
3.7908.
Decide the treatment of Research and Development Cost of the project as per AS 26.
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Problem No. 11
NDA Corporation is engaged in research on a new process design for its product. It had incurred
an expenditure of Rs. 530 lakhs on research up to 31st March, 2011
The development of the process began on 1st April, 2011 and Development phase expenditure
was Rs. 360 lakhs up to 31st March, 2012 which meets assets recognition criteria.
From 1st April, 2012, the company will implement the new process design which will result in
after tax saving of Rs. 80 lakhs per annum for the next five years.
The cost of capital of company is 10%.
Explain:
a) Accounting treatment for research expenses.
b) The cost of internally generated intangible asset as per AS 26.
c) The amount of amortization of the assets. (The present value of annuity factor of Rs. 1 for 5
years @ 10% = 3.7908)
Problem No. 12
M Ltd. launched a project for producing product A in Nov. 2008. The company incurred Rs. 30
lakhs towards Research and Development expenses up to 31st March, 2010. Due to unfavorable
market conditions the management feels that it is not possible to manufacture and sell the
product in the market for next so many years.
The management hence wants to defer the expenditure write off to future years. Advise the
company as per the applicable Accounting Standard.
Problem No. 13
A company acquired for its internal use a software on 28.01.2012 from the USA for US $
1,00,000. The exchange rate on that date was Rs. 52 per USD. The seller allowed trade discount
@ 5 %. The other expenditure was:
 Import Duty: 20%
 Purchase Tax: 10%
 Entry Tax: 5 % (Recoverable later from tax department)
 Installation expenses: Rs. 25,000
 Profession fees for Clearance from Customs: Rs. 20,000
Compute the cost of Software to be capitalized.
Problem No. 14
Base Limited is showing an intangible asset at Rs. 85 lakhs as on 1-4-2011. This asset was
acquired for Rs. 112 lakhs on 1-4-2008 and the same was available for use from that date. The
company has been following the policy of amortization of the intangible asset over a period of
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12 years on straight line basis. Comment on the accounting treatment of the above with
reference to the relevant accounting standard.
Problem No. 15
Hera Ltd. has got the license to manufacture particular medicines for 10 years at a license fee of
Rs. 200 lakhs. Given below is the pattern of expected production and expected operating cash
inflow:
Year Production Net operating
in bottles cash flow (Rs.
(in lakhs) in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
8 800 3,200
9 800 3,200
10 800 3,200
Net operating cash flow has increased for third year because of better inventory management
and handling method. Suggest the amortization method.
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AS – 29 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
Problem No. 1
X Ltd. has its financial year ended 31.3.2011, fifteen law suits outstanding, none of which has
been settled by the time the accounts are approved by the directors. The directors have
estimated that the probable outcomes as below:
Result Probability Amount of Loss
Rs.
For first ten cases:
---
Win 0.6
Loss-low damages 0.3 90,000
Loss-high damages 0.1 2,00,000
For remaining five cases:
Win 0.5 --
Loss-low damages 0.3 60,000
Loss-high damages 0.2 1,00,000
The directors believe that the outcome of each case is independent of the outcome of all the
others.
Estimate the amount of contingent loss and state the accounting treatment of such contingent
loss.
Problem No. 2
Shyam Ltd. (a Public Sector Company) provides consultancy and engineering services to its
clients. In the year 2010-11, the Government has set up a commission to decide about the pay
revision. The pay will be revised with respect from 1-1-2006 based on the recommendations of
the commission. The company makes the provision of Rs. 680 lakhs for pay revision in the
financial year 2010-11 on the estimated basis as the report of the commission is yet to come. As
per the contracts with the client on cost plus job, the billing is done on the actual payment
made to the employees and allocated to jobs based on hours booked by these employees on
each job.
The company discloses through notes to accounts:
“Salaries and benefits include the provision of Rs. 680 lakhs in respect of pay revision. The
amount chargeable from reimbursable jobs will be billed as per the contract when the actual
payment is made”.
The accountant feels that the company should also book/recognise the income by Rs. 680 lakhs
in Profit and Loss Account as per the terms of the contract. Otherwise, it will be the violation of
matching concept & understatement of profit.
105
Problem No. 3
A company is in a dispute involving allegation of infringement of patents by a competitor
company who is seeking damages of a huge sum of Rs. 900 lakhs. The directors are of the
opinion that the claim can be successfully resisted by the company. How would you deal the
same in the annual accounts of the company?
Problem No. 4
An airline is required by law to overhaul its aircraft once in every five years. The pacific Airlines
which operate aircrafts does not provide any provision as required by law in its final accounts.
Discuss with reference to relevant Accounting Standard 29.
Problem No. 5
An engineering goods company provides after sales warranty for 2 years to its customers. Based
on past experience, the company has been following policy for making provision for warranties
on the invoice amount, on the remaining balance warranty period:
Less than 1 year: 2% provision
More than 1 year: 3% provision
The company has raised invoices as under:
Invoice Date Amount (Rs.)
19th January, 2011 40,000

29th January, 2012 25,000
15th October, 2012 90,000
Calculate the provision to be made for warranty under Accounting Standard 29 as at 31st March,
2012 and 31st March, 2013. Also compute amount to be debited to Profit and Loss Account for
the year ended 31st March, 2013.
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CAP CLASSES
Problem No. 1 Net Payments Method

A Ltd. took over B Ltd. and discharges consideration for the business as follows:
1. Issued 42,000 fully paid equity shares of Rs. 10 each at par to the equity shareholders
of B Ltd.
2. Issued fully paid up 15% preference shares of Rs. 100 each to discharge the
preference shareholders worth Rs. 1,00,000 of B Ltd. at a premium of 10%.
3. It is agreed that the debentures of B Ltd. will be converted into equal number and
amount of 13% debentures of A Ltd.
Calculate Purchase Consideration.
Problem No. 2 Net Asset Method

A Ltd. takes over B Ltd’s net assets worth Rs. 2,00,000 at an agreed price of Rs. 2,60,000.
A Ltd discharges the PC by allotment of 20,000 equity shares of Rs. 10 each at an agreed
value of Rs. 12 each of A Ltd. and by the payment of the balance in cash.
Calculate Purchase consideration.
Problem No. 3 Net Assets – revaluation and Intrinsic Value

Given below is the summarized Balance Sheet of AB Ltd. as on 31.12.2017 on which date
its assets and liabilities are taken over by CD Ltd.
Equity and Liabilities Rs. ’000 Assets Rs. ’000
Shareholders’ funds Non-current assets

Share Capital Fixed assets
Equity Shares of Rs. 10 each 52,00 Plant and Machinery 26,00
fully paid up
General Reserve 650 Furniture 12,00
12% Debentures 13,50 Inventory 24,00
Trade payables and Trade receivables 7,50
Other current Liabilities 7,50 Cash 10,00
79,50 79,50
CD Ltd. agreed to issue 12% Debentures to the debenture holders of AB Ltd. at par.
Calculate the purchase consideration if
1. Assets and liabilities are taken over at book values
2. Assets and liabilities are taken at agreed values as given below.
 Plant and Machinery – 30% Depreciation
 Furniture – 20% Depreciation
 Inventory – 20% upward revaluation
3. Also calculate intrinsic value per share
ADDITIONAL PROBLEMS ON AMALGAMATION 1

107
CAP CLASSES
Problem No. 4
Summarised Balance Sheet of PX Ltd. as on 31.12.2017
Equity and Liabilities Rs. in ’000 Assets Rs. in ’000
Share Capital: Fixed Assets 50,00
Equity shares of Rs. 10 each 50,50 Inventory 20,00
8% Preference shares 9,50 Trade receivables 10,00
12% Debentures 15,00 Cash & Bank 5,00
Trade payables & Other Liabilities 10,00
85,00 85,00
ZX Ltd. agreed to take over PX Ltd. by issuing requisite number of preference shares of
Rs. 10 each at 5% discount to the preference shareholders of PX Ltd. and requisite
number of equity shares of Rs. 10 each at par to the equity shareholders of PX Ltd.
Purchase consideration is settled as per book value of the assets and the debentures will
be taken over by ZX Ltd. on the agreement that they will be paid off at 10% premium
after one year. Debenture-holders of PX Ltd. will accept 12% debentures of ZX Ltd.
Calculate purchase consideration and discharge of purchase consideration
Problem No 5
Given below is the summarized Balance Sheet of LMN Ltd. as on 31.12.2017 at which date
the company was taken over by PQR Ltd.
Equity and Liabilities Rs. in ’000 Assets Rs. in ’000
Share Capital Fixed assets 80,00
Equity Shares 70,00 Current assets 42,00
Preference shares 12,00
12% Debentures 25,00
Trade payables 15,00
122,00 122,00
Decided that fixed assets of LMN Ltd. will be taken over at a valuation of Rs. 102,00
thousand.
8% preference shareholders of LMN Ltd. are to be discharged by issuing 8% preference
shares of the transferee company to the extent of 50% and the balance in cash.
Claims of the equity shareholders to be discharged by issuing equity shares of the
transferee company to the extent of 60% and the balance in cash.
The transferee company will issue preference shares at par but equity shares of Rs. 10
each at a premium of 20%.
Calculate purchase consideration and discharge of purchase consideration.
ADDITIONAL PROBLEMS ON AMALGAMATION 2

108
CAP CLASSES ADVANCED ACCOUNTING
ACCOUNTS OF BANKING COMPANIES

Introduction:
 The banking activities in India are regulated by the Banking Regulations Act, 1949.
 U/s. 5 (b) of the said Act “Banking” means, the accepting, for the purpose of lending
or investment, of deposits of money from the public, repayable on demand or otherwise,
and withdrawal by cheque, draft, order or otherwise.
 Any bank which transacts this business in India is called a banking company.
PROVISIONS OF BANKING REGULATION ACT, 1949

All Banking companies in India are governed by the Provisions of Banking Regulation Act,
1949:
a) Prohibition of “Trading”: A Banking company cannot directly or indirectly deal in
the buying and selling or bartering of goods. However, it may buy, sell or barter in
connection with bills of exchange received for collection or negotiation.
b) Disposal of Non-Banking Assets: A Banking Company cannot acquire certain assets
for Investment Purposes (i.e.) it can acquire assets only for its own use. But if the
Bank takes into possession any “Non- Banking Asset” (due to the borrowers failure
to repay the bank loan taken) these non-banking assets should be disposed off within a
period of 7 years from their date of acquisition.
Until they are disposed off they will be shown in the Balance Sheet separately under
the heading “Other Assets” (Schedule-11).
c) Capital Structure:
 The Subscribed Capital of a Banking Company should not be less than 50% of its
Authorised Capital
 The paid up capital should not be less than 50% of its subscribed Capital.
 The “Share Capital” of a Banking Company should consist of only Equity Shares.
Note: The Voting Right of any single shareholder must not exceed 1% of the total
Voting Rights.
d) Statutory Reserve (or) Reserve Fund:
 Every Banking company incorporated in India is required to transfer atleast 25%
of its profits to the Reserve Fund.
 The profit of the year as per the profit and loss account prepared under section
29 is to be taken as base for the purpose of such transfer and transfer to reserve fund
should be made before declaration of any dividend.
e) Cash Reserve:
 Every Banking Company (not being schedule Bank) has to maintain in India by way
of cash reserve with itself or by way of balance in current Account with Reserve Bank,
(or) by way of Net Balance in Current Accounts or in one or more of the aforesaid
ways of a sum equivalent to at least 3% of the total of its time and demand liabilities
as on the last Friday on the preceding fortnight.
 Every scheduled Bank is required, to maintain with the Reserve Bank an average
daily balance the amount of which shall not be less than 15% of the total of demand
and time liabilities in India.
f) Capital Reserves:
 The Expression “Capital Reserves” shall not include any amount regarded as free
for distribution through the Profit & Loss Account.
 Surplus on revaluation should be treated as Capital Reserve. Such reserves should
Banking Companies Page

109
be reflected on the face of the Balance Sheet as Revaluation Reserves.

 Surplus on translation of financial statements of foreign branches (which includes
fixed assets also) is not a revaluation reserve.
g) Revenue and Other Reserves:
 The expression “Revenue Reserve” shall mean any reserve other than capital
reserve. This item will include all reserves other than those separately classified. The
expression reserve shall not include any amount written off or retained by way of
providing for depreciation, renewals or diminution in value of assets or retained by
way of providing for any known liability.
 Excess provision towards depreciation on investments should be transferred to
“Investment Fluctuation Reserve Account” which should be shown as a separate
item under the head “Reserve and Other Reserves”.
SPECIAL POINTS
The following points are to be noted-while preparing the P & L A/c & Balance Sheet of
Banking Company
a) Net Profit
The Net Profit for the year as disclosed by the P&L Account must be after
deducting the following
 Provision for Bad & Doubtful Debts
 Provision for Taxation
 Transfer to Contingency Funds
 Any other necessary Provisions
b) Interest on Doubtful Debts
If any loan given by the bank is doubtful, then the interest on that doubtful debt should
not be credited to Interest A/c (i.e.) it should not be taken as income earned since
it is doubtful.
This Interest on Doubtful Debts, shall now be credited to a separate account
called “Interest Suspense Account”
Loan A/c Dr
To Interest Suspense Account
On Recovery of Interest on Doubtful Debts

If the interest on doubtful debts is realised later on –then it should be taken as
Income (in the year of recovery) by crediting “Interest Account” as follows:
Interest Suspense A/c Dr
To Interest A/c
c) A bank may purchase a bill or any other credit instrument from a customer. For this
purpose following entry is passed by bank.
i) On purchase of bills from customer:
Bill Purchase & Discounted A/c Dr. (Full amount)
To Customer A/c
To Discount A/c (Discount Amount)
ii) On payment made to customer:
Customer A/c Dr. (Amount of bill net of discount)
To Cash A/c

110
iii) On the maturity date upon collection of Bill:

Cash A/c ' Dr
To Bill Purchase & Discounted A/c
Note: Bill Purchase and discounted account is an asset and are to be shown under
the head ‘Advances’ (schedule 9) on the assets side of the Balance Sheet.
REBATE ON BILLS DISCOUNTED OR UNEXPIRED DISCOUNTS:

This item is like interest received in advance and represents unearned discounts for those
bills, which will mature after the closing of the financial accounts.
When a bank discounts a bill, the following entry is recorded: Bills
Discounted a/c Dr (with full value of the bill)
To Customers a/c (with the amount of present cash value)
To Discount a/c (Discount deducted by the bank)
Bank discounts the bills, and credits the discount account with the discount earned on
those bills. At the close of the Financial Year, some of the bills discounted may not have
matured. Consequently, the total discount credited in respect of such bills cannot be treated
as discount earned during the Current Year. In other words, discount so received may not
be only for the period ending 31st march, but may be even for future period. The discount
so received in the Financial Year for the future period is known as Discount Received in
Advance or Rebate on Bills Discounted or Unexpired Discount
The Unexpired discount or Rebate on bills discounted is carry forward to the next
year by passing the following entry:
Discount a/c Dr
To Rebate on bills discounted a/c
At the commencement of the next year, reverse entry is passed as follows:

Rebate on Bills Discounted a/c Dr
To Discount a/c
Un expired Discount Account is shown in the liabilities side of the Balance Sheet and next
year it will be credited to Discounted Account.
PROFIT AND LOSS ACCOUNT
A Banking company is required to prepare its Profit and Loss Account according to Form
B in the Third Schedule to the Banking Regulation Act, 1949. Form B is in a summary
form and the details of the various items are given in the schedules. Form B is given as
follows:
PROFIT& LOSS ACCOUNT for the year ended 31st March xxxxx
Particulars Schedule. Curren Previous
No. t Year Year
I. Income
Interest earned 13
Other income 14
Total: A
II. Expenditure
Interest expended 15

111
Operating expenses 16
Provisions and Contingencies
Total: B
III Profit/Loss
Net Profit/Loss for the year (A-B)
Profit/Loss brought forward
Total: C
IV Appropriations
Transfer to statutory reserve (@ 25% of C/y.
profit)
Transfer to other reserve
Transfer to Government / Proposed
dividend
Balance carried over to balance sheet
Total:(D) = (C)
SCHEDULE 13—INTEREST EARNED
Particulars C/Y P/Y
I. Interest /discount on advances/ bills
II. Income on investments
III Interest on balance with Reserve Bank
Iv. Others
Total:
Add: Rebate on bills discounted brought from the previous year.
Less: Rebate on bills discounted related to the next year.
SCHEDULE 14—OTHER INCOME

Particulars C/Y P/Y
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less: Loss on sale of investments
III. Profit on revaluation of investments
Less: Loss on revaluation of investments
IV. Profit on sale of land, Buildings and other assets
Less: Loss on sale of land, Buildings and other
assets
V. Profit on exchange transactions
Less: Loss on exchange transactions
VI. Income earned by way of dividends etc. from
Subsidiaries/
companies and /of joint ventures abroad/in India
VII. Miscellaneous Income
Total:
Note: Under items II to V loss figures may be show in brackets.
SCHEDULE 15—INTEREST EXPENDED

Particulars C/Y P/Y
I. Interest on deposits

112
II. Interest on Reserve Bank of India /

inter- Bank borrowings
III. Others.
Total
SCHEDULE 16--- OPERATING EXPENSES
Particulars C/Y P/Y
I. Payments to and provisions for
employees
II. Rent taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on Bank’s property
VI. Director’s fees, allowances and
expenses
VII. Auditors fees, allowances and
expenses
(including branch auditors)
VIII. Law charges
IX. Postages, telegrams telephone, etc.
X. Repairs and maintenance
XI. Insurance
XII. Other expenditure
Total:
NOTE: Outstanding and Prepaid Expenses adjustments are to be made.
BALANCE SHEET
The Balance Sheet of Banking Company is drawn up according to Form A in Third
Schedule. Form A is reproduced as follow:
BALANCE SHEET OF xxxx as on 31st March xxxx
Sch. As on 31-3— As on 31-3---
Capital and Liabilities (Current Year) (Previous Year)
Capital 1
Reserve & Surplus 2
Deposits 3
Borrowings 4
Other Liabilities and Provisions 5
Total:
Assets
Cash and Balance with Reserve
Bank of India 6
Balance with Banks and Money at
Call and Short Notice 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total:
Contingent Liabilities 12

113
Bills for collection
SCHEDULE 1 — CAPITAL
Particulars C/Y P/Y
Authorised Capital
(Shares of ` Each)
Issued Capital
(Shares of ` Each)
Subscribed Capital
(Shares of `Each)
Called-up Capital
(Shares of `Each)
Less: Calls unpaid
Add: Forfeited Shares
Total
SCHEDULE 2— RESERVES & SURPLUS
Particulars C/Y P/Y

I. Statutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. Capital Reserves
Opening Balance
III. Securities premium
Opening Balance
IV. Revenue and other Reserves
Opening Balance
V. Balance in Profit and Loss Account
Total:
SCHEDULE 3 — DEPOSITS
Particulars C/Y P/Y

A. I. Demand Deposits
From Banks
From others
II. Saving Deposits
III. Term Deposits
From Banks
Fixed Deposits
Total:
B. (i) Deposits of branches in India
(ii) Deposits of branches outside India

114
Total:
SCHEDULE 4—BORROWINGS
Particulars C/Y P/Y
I. Borrowings in India
i) Reserve Bank of India
ii) Other banks
iii) Other institutions and agencies
II. Borrowings outside India
Total:
SCHEDULE 5—OTHER LIABILITIES AND PROVISIONS
Particulars C/Y P/Y
I. Bills Payable (Demand Draft, Telegraphic Transfers, Traveller’s
Cheques, Mail Transfers, Staff Security deposits)
II. Inter-office adjustments (net)
III. Interest accrued
IV. Others (Rebate on bills discounted, provision for tax,
proposed dividend, sundry creditors, unclaimed dividend)
Total:
SCHEDULE 6—CASH AND BALANCES WITH RESERVE BANK OF INDIA
Particulars C/Y P/Y
I. Cash in hand
(Including foreign currency notes)
II. Balance with Reserve Bank of India
i) In current Account
ii) In other Accounts
Total: (I and II)
SCHEDULE 7—BALANCE WITH BANKS& MONEY AT CALL & SHORT NOTICE
Particulars C/Y P/Y
I In India
i) Balance with banks
a) In Current Accounts
b) In other Deposit Accounts
ii) Money at call and short notice
a) With Banks
b) With other institutions
Total: (i) and (ii)
II Outside India
i) In Current Accounts
ii) In Other Deposit Accounts
iii) Money at Call and Short Notice
Total: (i) and (ii)
Grand Total I and II
SCHEDULE 8 – INVESTMENTS
I. Investments in India in

115
i) Government securities
ii) Other approved securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and / or joint ventures
vi) Others (Gold, Silver, Commercial paper)
Total:
II Investments Outside India in
i) Government securities
ii) Subsidiaries and /or Joint Ventures
iii) Other investments (GOLD)
Total:
Grand Total I and II
SCHEDULE 9 - ADVANCES
Particulars C/Y P/Y
A. i) Bills purchased and discounted
ii) Cash Credits, overdrafts and loans repayable on
demand
iii) Term loans
Total:
B. i) Secured by tangible assets
ii) Covered by Bank / Government guarantees
iii) Unsecured
Total:
C. I. Advances in India
i) Priority Sectors
ii) Public Sector
iii) Banks
iv) Others
Total:
D.II. Advances Outside India
i) Due from Banks
ii) Due from Others
SCHEDULE 10- FIXED ASSETS

Particulars C/Y P/Y
Premises/Fixed Assets
At cost as on 31st March of the preceding year
Depreciation to date
Other Assets (including Furniture and Fixtures)
At cost as on 31st March of the preceding year
Depreciation to date

116
Total

117
SCHEDULE 11- OTHER ASSETS
Particulars C/Y P/Y

I. Inter –Office adjustments (net)
II. Interest accrued
III. Tax paid in advance/ Tax deducted at source
Iv. Stationery and stamps.
V. Non Banking assets acquired in satisfaction of claims.
VI. Others @
Total
@
In case there is any unadjusted balance of loss the same may be show under this item with
appropriate footnote.
SCHEDULE 12 – CONTINGENT LIABILITIES

Particulars C/Y P/Y
I. Claims against the bank not acknowledged as debts.
II. Liability for partly paid investments
III. Liability on account of outstanding forward
Exchange contracts.
IV. Guarantees given on behalf of constituents
a) In India
b) Outside India
V. Acceptances, endorsements and other obligations (Letter of
Credit, bills accepted on behalf of customers)
VI. Other items for which the bank is contingently
Liable
Total:
IMPORTANT NOTE POINTS
1) Money at Call and Short Notice:
This item appears on the assets side of balance sheet and represents temporary loans to
Bill Brokers, Stock brokers etc. If the loan is given for 1 day, it is called ‘money at call’.
If the loan cannot be called back on demand without a notice of atleast of 3 days it is
called ‘money at short notice.’ It also includes deposits repayable within 10 days or
less than 15 days notice lent in the inter bank call money market.
2) Advances appear on asset side include loans, cash credits, bank overdrafts and bills
discounted and purchased. Provisions in respect of doubtful advances are deducted
from advances.
3) Inter office adjustments:
A bank having several branches will receive periodical statements from them
regarding inter branch transactions. It is possible that some entries may remain
unadjusted in the head office of the bank at the close of the financial year. If it has a
debit balance it appear on the assets side under ‘Other Assets’ and if it is credit balance
it appears under ‘Other Liabilities’.
4) Interest / Discount on advances / bills includes interest and discount on all types of
loans and advances like cash credits, demand loans, overdrafts, export loans, term loans,
domestic and foreign bills purchased and discounted.

118
INCOME RECOGNITION, ASSET CLASSIFICATION AND

PROVISION FOR DOUBTFUL DEBTS
The Narasimham Committee advocated for change in the accounts and in the policy in
relation to income recognition, classification of assets and provisioning by banks.
Accordingly, all the commercial banks are now required to follow the Prudential Norms
for income recognition, assets classification and provisioning while preparing the final
accounts.
Income Recognition:
The RBI issued guidelines NOT to include interest on Non-Performing Assets (NPA’s)*
into income unless it is actually received. Income on performing asset is recognised on
Accrual Basis.
*Non-Performing Assets (NPAs)

According to RBI an asset becomes non-performing when it ceases to generate income
for a bank. Advance becomes NPA where, as on balance sheet date, in respect of:
1. Term loans: If interest or principal instalments remain overdue for more than 90
days.
2. Overdrafts and Cash Credits: If it remains “Out Of Order” for a period of more than
90 days. An account is treated as out of order:
a) If the outstanding balance remains continuously in excess of the sanctioned
limit/drawing power
b) Though the outstanding balance is less than the sanctioned limit/ drawing
power
 There are no credits continuously for 90 days as on the balance sheet date or
 Credits are not enough to cover the interest debited during the same
period.
3. Bills purchased/discounted: If the bill remains overdue and unpaid for a period of
more than 90 days.
4. In respect of any other credit facility: It should be treated NPA if any amount to
be received in respect of the facility remains overdue for a period of 90 days.

119
Provisioning: Provisions for doubtful debts for different classes of assets are made in the
following manner:
Category of Advances Revised Rate
(%)
Standard Advances
(a) Direct advances to agricultural and SME 0.25
(b) Advances to Commercial Real Estate (CRE) Sector 1.00
(c) All other loans and advances not included in (a) and (b) 0.40
above
Sub-Standard Advances
 Secured Exposures 15
 Unsecured Exposures 25
 Unsecured Exposures in respect of infrastructure loan accounts 20
where certain safeguards such as escrow accounts are available
Doubtful Advances – Unsecured Portion 100

Doubtful Advances – Secured Portion
 For doubtful upto 1 year 25
 For doubtful > 1 year and upto 3 years 40
 For Doubtful > 3 years 100
Loss advances 100
Advances covered by the guarantees of DICGC/ECGC: The RBI has advised that the
commercial banks in case of advances guaranteed by Deposit Insurance & Credit Guarantee
Corporation (DICGC) and Export Credit Guarantee Corporation (ECGC) provision should
be made only for the balances in excess of the amount guaranteed by these corporations.
Thus amount of advances should be deducted by the cover given by these corporations. For
the balance amount provision should be created as per normal rules.
Loan (`)
Balance Outstanding
Less: Realisable Value of security (A)
(B)
Less: DICGC / ECGC cover (--- % of B)
Unsecured Balance (C)
`
Provisioning in respect of:
Unsecured Portion (100% of C) xxxx
Add: % for Secured Portion (of A) xxxx
Less: Covered under
DICGC / ECGC cover (xxx) xxxx
xxxx
(or)
Loan (`)
Balance Outstanding
Less: Realisable Value of security (A)
Unsecured Balance (B)

120
`
Provision for Unsecured Portion (100% of B) xxxx
Add: Provision for Secured Portion ( 50% of A) xxxx
xxxx
Less: DICGC / ECGC Cover (xxx)
xxxx
Capital Adequacy Norms

Capital Adequacy Ratio was introduced to strengthen the capital Base of banks in India.
The main idea is to avoid the risk of insolvency of banks and for this purpose bank should
have adequate capital against advances or other business undertaken by them.
At present, Banks in India are required to maintain a CAR of 9%. This implies that if a Bank
makes an advance of `100 – it should atleast have `9 as capital
Total Capital Funds
Capital Adequacy Ratio =  100
Risk Adjusted or Weighted Assets
CAPITAL FUNDS
The total capital funds of the banks are divided under two tiers:
a) Tier I – Capital (Permanent Capital and readily available) and
b) Tier II Capital (Less permanent in nature and less readily available)
(a) Elements of Tier I – Capital or Core Capital :

Particulars `
Share Capital
Share premium
Statutory Reserve
General Reserve
Capital Reserve (on sale of fixed assets)
Less: Investments in Equity shares in Subsidiary Co.

Preliminary Exp,
Intangible assets and losses.
In case of public sector banks which have introduced
Voluntary
Retirement Schemes, the VRS amount being deferred
revenue will not be deducted
Elements of Tier II capital

 Undisclosed Reserves
 Cumulative perpetual preferential shares
 Revaluation Reserves at a discount of 55%
 Investment Fluctuation Reserves
 General Provisions and core Reserves
 Hybrid debt Capital Instruments (Ex. Convertible Debentures etc)
 Subordinated debts

121
Calculation of Risk Adjusted Assets

a) Risk adjusted assets are weighted aggregate of funded and non-funded items given
below.
b) Weights have been assigned to various assets shown in the Balance Sheet.
c) The value of each asset shall be multiplied by related weights or credit conversion
factor to produce adjusted value of assets and off-balance sheet items.
Item no On Balance sheet Rs Percentage Weighted
items Weight Amount
Total A
Off Balance sheet Rs Credit Equivalent Risk Weighted

items (B conversion value B x C Weight Amount
(A) ) Factor (D) (E) DxE
( C) (F)
Total B
Total Risk Weighted Assets= Total A+ Total B
The aggregate of total risk weighted assets will be taken into account to calculate Risk
Weighted Assets Ratio for Capital adequacy ratio. Note: Tier-II capital is limited to Maximum
of 100% of Tier-I Capital
Risk Weighted Assets & Off Balance Sheet Items

Various assets of the bank carry varying degrees of risk, cash balance carries no risk while
advances are subjected to credit risk. Similarly various off balance sheet items also carry
varying degree of risk, a guarantee given against a counter guarantee of another bank has
less risk. RBI has assigned different risk weights to different categories of assets as
below:
Category of Assets Risk Weight %
Cash in hand (including foreign currency notes) 0
Balances with RBI 0
Balances with other Banks 20
Money at Call & Short Notice 0
Investments
- In Government securities 0
- In securities guaranteed by Central or State Governments 0
- In Government undertakings guaranteed by government but not 20
forming part of approved market borrowing program
- In bonds issued by other banks / financial institutions 20
- In securities guaranteed by other banks or financial 20
Institutions
In subordinated debt instruments issued by other banks / financial 100
institutions as part of Tier II capital
- Other investments 10
Loans & Advances
- Guaranteed by Central Government 0
- Guaranteed by State Government 0
- Backed by insurance policies, NSCs, Indira Vikas Patras & 0
CA INTER/ADVANCED ACCOUNTING/BANKING COMPANIES Page 160
122
Kisan Vikas Patras (where adequate margins have been kept)

- Loans to Staff fully covered by superannuation benefits and 20
mortgage of house or flat (if not backed by these then 100%)
- Guaranteed by DICGC cover to the extent of the guaranteed 50
Amount
- Other advances 100
- Claims on other banks 20
- Take out finance
Where the credit risk is unconditionally and fully or partially assumed by 20
the taking over bank / institution
Conditional take out finance 100
Premises, furniture & Fixtures 100
Income tax deducted at source net of provision 0
Advance Tax paid net of provisions 0
Interest due on government securities 0
Accrued interest on CRR balances and claims on RBI 0
Other assets 100
Off Balance Sheet items – Risk weight is 100% and if however there is Counter guarantee
by other banks the risk weight will be 20%
VALUATION OF INVESTMENTS
Banks are required to classify their investments into three categories for valuation purposes:
(a) Investments held-to-maturity
(b) Investment held-for- maturity / Held for Trading and
(c) Investments available for sale
a) Investments Held-to-Maturity
Securities acquired by banks with intention to held them upto maturity are classified as
‘held-to-maturity’. These should not exceed 25% of the total investments of the bank.
“Held-to-maturity” investments should be shown at their Acquisition cost unless it is
more than face value in which case premium should be amortized over the remaining
period to maturity.
b) Investments Held for Maturity / Held for Trading
Securities acquired by banks with the intention to trade by taking advantage of short-
term price and/or interest rate movements should be classified as Held for Maturity /
Held-for-trading.
These should be revalued at monthly or at more frequent intervals and net
appreciation / depreciation of investment should be carried to Profit and Loss
Account. The book value should be charged to reflect variation in market value.
c) Investments available for sale
Securities which do not fall within the above two categories should be classified as
‘available-for-sale’.
These investments should be shown at market value at the year-end or at more frequent
intervals, while the net depreciation under each of the categories should be recognized
and fully provided for. However, net appreciation should be ignored. Thus gains in
respect of some investments may be offset against losses in other investments under that
category and not across different categories.
123
BILLS FOR COLLECTION

The bank may accept bills receivables of customers for collection on their behalf. These
bills are recorded in a special book known as ‘Bills for Collection Register’. Unless these
bills are collected no entry is required. On the collection of bill, cash will be debited with
the amount received and Customer’s Account will be credited by the amount after deducting
commission, and commission charges will be credited to Commission Account. Bills held
by the bank for collection are shown as a note below Balance Sheet.
However, for information purpose, Bills for Collection (Asset A/c.) and Bills for Collection
(Liability A/c.) is prepared by the banker.
Bills for Collection (Assets A/c.)
To Balance B/d. XXX By Bills for Collection (Liability A/c.) XXX
To Bills for Collection (Liability A/c.) XXX [Bills Collected]
[Bills received for collection] By Bills for Collection (Liability A/c.) XXX
[Bills Dishonoured]
By Balance C/d. XXX
XXX XXX
Bills for Collection (Liabilities A/c.)
To Bills for Collection (Assets A/c.)[Bills XXX By Balance b/d. XXX
collected] By Bills for Collection XXX
To Bills for Collection (Assets A/c.) XXX (Assets A/c.)
[Bills Dishonoured] [Bills received for
To Balance C/d. XXX collection]
XXX XXX
Acceptance and Endorsement
Banks may accept or endorse the bills on behalf of its customers. It is just to provide a
guarantee and thus bank undertakes a liability to wards the drawer or receiver of the bill.
But against this liability the bank has corresponding claim against the drawee or
acceptor. Such liabilities, which are outstanding at the close of the year and the
corresponding claim, are disclosed as ‘Contingent Liabilities’ (Sch.12). The party on whose
behalf bank has accepted or endorsed the bill may be required to deposit a security. A
record of the particulars of bills accepted as well as of the securities deposited by the
customers are kept in a ‘Bills Accepted Register’.
Acceptances, Endorsement and Other Obligation A/c.
To Constituents, Liabilities for XXX By Balance B/d. XXX
Acceptances, Endorsements etc. By Constituents, Liabilities for XXX
[Acceptances Honoured by Bank] Acceptances, endorsements
To Constituents, Liabilities for XXX etc.
Acceptances, Endorsements etc. [Acceptances given in the C/Y.]
[Acceptances paid by Clients]
To Constituents, Liabilities for XXX
Acceptances, Endorsements etc.
[Acceptances paid by bank
on failure of client]
To Balance C/d.
124
125
CLASSIFICATION OF INVESTMENTS FOR VALUATION PURPOSES

Held-to-Maturity Securities
Meaning These are the securities which are acquired by bank with the intention to
hold them upto maturity.
Maximum The amount of these investments must not exceed 25% of the total
Limit investments of the bank.
Valuation The guidelines for the valuation of such securities are as follows:
(a) Where securities have been These should be valued at Cost.
acquired at Cost equal to/less than
face value
(b) Where securities have been These should be valued at face value
acquired at Cost more than face and the premium should be
value amortised over the remaining period
to maturity
(c) Where there is any diminution in The permanent diminution should be
the value of investments in determined and provided for each
subsidiaries/joint ventures investment individually [AS 13]
These are the securities which are acquired by bank with the intention to
trade by taking advantage of short-term price/interest rate movements.
The guidelines for valuation of such securities are as follows:
(a) Monthly Valuation The individual scrips should be valued at
monthly or at more frequent intervals
(b)Recognition of Net appreciation/depreciation of scrips
Appreciation/ Depreciation in under each of the categories in which
P&L A/c investments are presented in the Balance
Sheet should be recognized in the Profit
and Loss Account.
(c) Recording of The depreciation/appreciation in value of
Appreciation/Depreciation in an individual scrips isrecorded in
Individual Scrip Account Individual Scrip Account.
(d) Change in Book Value of The book value of the individual scrips
Individual Scrips should be changed to reflect the market-
to-market valuations.
Meaning These are the securities which do not fall within the above two
categories.
Variation The guidelines for valuation of such securities are as follows:
(a) Marked to Market The individual scrips should be marked to
Valuation at year end market at quarterly or at more frequent
intervals.
(b) Provide Net depreciation of scrips under each of the
Depreciation in P & L categories in which investments are
A/c presented in the Balance Sheet should be
recognized and fully provided for in the
Profit and Loss Account.
(c) Ignore Appreciation Net appreciation of scrips under any of
126
the categories should be ignored.

(d) Recording of The depreciation/appreciation in value of an
Appreciation/ individual scrip is not recorded in Individual
Depreciation in scrip Account but is recorded in a separate
separate A/c account.
in
(e)No Changes The book value of the individual scrips
in book value should not be changed to reflect the marked
to market valuations.
Note: Offsetting of gains and losses is allowed within a particular category and is not
allowed across different categories.
127
Advanced Accounting
BUYBACK OF SHARES
What is meant by Buyback of Shares?
Buy back of shares means purchase of its own shares by a company. When shares are bought back by
a company, they have to be cancelled by the company. Thus, shares buy back results in a decrease in
share capital of the company. A company cannot buy its own shares for the purpose of investment. A
company having sufficient cash may decide to buy back its own shares.
Why Buyback of Shares?
The following may be the Objectives/Advantages of Buy-Back of shares:

1. to increase earnings per share if there is no dilution in company’s earnings as the buy-back of
shares reduces the outstanding number of shares.
2. to increase promoters holding as the shares which are bought back are cancelled.
3. to discourage others from making hostile bids to take over the company as the buyback will
increase the promoters holding.
4. to support the share price on the stock exchanges when the share price, in the opinion of
company management, is less than its worth, especially in the depressed market.
5. to pay surplus cash to shareholders when the company does not need it for business.
Provisions of the companies Act 2013
1. The Companies Act, 2013 under Section 68 (1) permits companies to buy back their own shares
and other specified securities out of:
 its free reserves; or
 the securities premium account; or
 the proceeds of the issue of any shares or other specified securities.
2. The buy-back of equity shares in any financial year shall not exceed twenty- five per cent of its total
paid-up equity capital in that financial year.
3. There shall be a minimum gap of one year in buyback offer from the date of closure of the previous
buy back.
4. The ratio of the debt owed by the company is not more than twice the capital and its free reserves
after such buy-back.
Note: No buy-back of any kind of shares or other specified securities shall be made out of the proceeds
of an earlier issue of the same kind of shares or same kind of other specified securities. For example,
if equity shares are to be bought-back, then, preference shares may be used for the purpose.
Other important provisions relating to the buyback are:
1. Section 68 (2) further states that no company shall purchase its own shares or other specified
securities unless—
 the buy-back is authorised by its articles;
 a special resolution has been passed in general meeting of the company authorising the buy-
back;
 the buy-back must be equal or less than twenty-five per cent of the total paid-up capital and
free reserves of the company: (Resource Test)
 The buy-back of shares in any financial year must not exceed 25% of its number of shares
outstanding (Share Outstanding Test)
 the ratio of the debt owed by the company (both secured and unsecured) after such buy-back
is not more than twice the total of its paid up capital and its free reserves: (Debt-Equity Ratio
Test)
CA PAVAN KUMAR 1|Page
128
Advanced Accounting
Exception to AOA & Special resolution:
However, the above provisions do not apply where the buy back is ten percent or less of the paid up
equity capital + free reserves and is authorized by a board resolution passed at a duly convened
meeting of the directors. Hence, in case the buy back is upto 10% of paid up equity + free reserves, the
same may be done with the authorization of the Board Resolution without the necessity of its being
authorized by the articles of association of the company and by a special resolution of its members
passed at a general meeting of the company.
Note: Central Government may prescribe a higher ratio of the debt than that specified under this
clause for a class or classes of companies. Debt here should include both long term debt as well as
short term debt.
Transfer of amount equal to the nominal value of shares to CRR
Section 69 (1) states that where a company purchases its own shares out of the free reserves or
securities premium account, a sum equal to the nominal value of shares so purchased shall be
transferred to the Capital Redemption Reserve Account and details of such account shall be disclosed
in the Balance Sheet.
NOTE: This provision is applicable only if shares are bought out of free reserves or securities premium
account. However, if the shares are bought back out of proceeds of issue of new securities, the transfer
of amount provision as mentioned above is not applicable.
Other Important provisions which are relevant for accounting:
 The shares or other specified securities which are proposed to be bought- back must be fully paid-
up.
 The Capital Redemption Reserve Account may be applied by the company in paying up unissued
shares of the company to be issued to members of the company as fully paid bonus shares.
 Premium (excess of buy-back price over the par value) paid on buy-back should be adjusted against
free reserves and/or securities premium account. Revaluation reserve represents unrealized profit
and hence it cannot be used for buy-back of securities.
129
Advanced Accounting
EQUITY SHARES WITH DIFFERENTIAL VOTING RIGHTS
Section 43 Companies Amendment Act, 2013 allows companies to issue equity shares
with differential rights as to dividend, voting or otherwise in accordance with such rules as
may be prescribed.
As we know that share capital is of two types – equity and preference. Preference share
capital carry a preferential right with respect to:
a) Payment of dividend; and
b) Repayment in the case of a winding up or repayment of capital.
Section 43(a) of The Companies Act, 2013 defines equity share capital to include of two types
viz.,
(i) With voting rights; or
(ii) With differential rights as to dividend, voting or otherwise in accordance with such
rules as may be prescribed
Hence, differentiation can be done by giving superior dividend / Superior voting right/
diluted voting right to a class of equity shareholder.
It is to be noted that preference shares are not issued with differential rights. Only the
equity shares can be issued with differential voting rights.
Thus there are two kinds of share capital as given below:

Two Kinds of share capital
Equity share capital Preference share capital
With differential rights as to dividend, voting or

With voting otherwise in accordance with such rules and subject to
such conditions as may be prescribed.
rights
VOTING RIGHTS
Section 2 (93) defines “voting right,” as the right of a member of a company to vote in any
meeting of the company or by means of postal ballot.
Equity shareholder voting rights
Equity shares have a general voting right, whereas preference shares have restrictive voting
rights.
According to section 47 (1),
(i) Every member of a company shall have a right to vote on every resolution placed
before the company; and
(ii) His voting right on a poll shall be in proportion to his share in the paid-up equity
share capital of the company.
Normally, the blanket rule in Companies Act is one share-one vote. This gives equal
voting right to every shareholder. This is a fairly democratic process and is quite robust
130
Advanced Accounting
from the corporate governance perspective.
However, sometime a segment of shareholders, normally promoters and executive
management may like to have more control over decision-making process.
This intention of shareholders or management can be activated if they have more voting
rights, even if they hold fewer shares. This can be structured by giving them shares with
superior voting rights.
Section 43(a)(ii) enables the same in the form of equity shares with differential rights.
Voting rights to Preference Shareholders:
Normally preference shareholders have superior financial rights but less management
control rights. Usually Preference Shareholders have a restrictive right to vote only on
resolutions placed before the company
a. Which directly affect the rights attached to his preference shares and,
b. Any resolution for the winding up of the company or
c. For the repayment or
d. Reduction of its equity or preference share capital.
In these situations, preference shareholders voting right on a poll shall be in proportion
to his share in the paid-up preference share capital of the company. This once again
points to one share – one vote doctrine of company law.
Release of Preference shareholder restrictive voting rights
It is provided further that where the dividend in respect of a class of preference shares
has not been paid for a period of two years or more, such class of preference shareholders
shall have a right to vote on all the resolutions placed before the company.
Relative weight of equity and preference share capital, when entitled to vote
It is further provided that the proportion of the voting rights of equity shareholders to the
voting rights of the preference shareholders shall be in the same proportion as the paid-
up capital in respect of the equity shares bears to the paid-up capital in respect of the
preference shares.
Problem No. 1
In X Ltd, the Equity capital is held by X, Y and Z in the proportion of 40:40:20. A, B and C hold
preference share capital in the proportion of 50:30:20. If the paid up equity share capital of
the company is Rs.1 Crore and Preference share capital is Rs.50 Lakh, calculate the voting
rights of all the shareholders.
Answer:
The relative weight in the voting right of equity shareholders and preference shareholders
will be 2/3 and 1/3.
The respective voting right of various shareholders will be
X = 2/3X40/100= 4/15
Y = 2/3X40/100= 4/15
Z = 2/3X20/100= 2/15
A = 1/3X50/100= 1/6
131
Advanced Accounting
B = 1/3X30/100= 1/10
C = 1/3X20/100= 2/30
Hence their relative weights are 4/15:4/15:1/15:1/6:1/10:2/30 or 8:8:4:5:3:2.
Their voting power is X (26.67%), Y (26.67%), Z (13.33%), A (16.67%), B (10%) and C

(6.67%)
Problem No. 2
W, X, Y and Z hold Equity capital is held by in the proportion of 40:30:10:20. A, B, C and D hold
preference share capital in the proportion of 30:40:20:10. If the paid up capital of the company
is Rs. 40 Lakh and Preference share capital is Rs. 20 Lakh, Find their voting rights in case of
resolution of winding up of the company.
Solution
W, X, Y and Z hold Equity capital is held by in the proportion of 40:30:10:20 and A, B, C and
D hold preference share capital in the proportion of 30:40:20:10. As the paid up equity share
capital of the company is Rs. 40 Lakhs and Preference share capital is Rs. 20 Lakh (2:1), then
relative weights in the voting right of equity shareholders and preference shareholders will
be 2/3 and 1/3. The respective voting right of various shareholders will be
W= 2/3X40/100 = 4/15
X= 2/3X30/100 = 3/15
Y = 2/3X10/100 = 1/15
Z = 2/3X20/100 = 2/15
A= 1/3X30/100 = 1/10
B = 1/3X40/100 = 2/15
C= 1/3X20/100 = 1/15
D= 1/3X10/100 = 1/30
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132
LIQUIDATION OF COMPANIES
Mode of Winding
Up
On Inability to Pay Grounds other than Voluntary winding

Debts inability to pay debts up
Insolvency and Companies Act,

Upto 31st March, From 01st April,
Bankcrupcy Code 2013 with Court
2017 2017
with its Regulations Rules
Section 59 of the IBC

Companies Act,
Code with voluntary
2013 with Court
liquidation process
Rules
Regulations, 2017.
INTRODUCTION
A company being a creation of law cannot die a natural death. A company, when found
necessary, can be liquidated.
DEFINITION OF WINDING UP
As per Section 2 (94A) of the Companies Act, 2013, winding up means winding up under
this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.
Modes of winding up
A company can be liquidated in any of the following modes
a) Compulsory winding up by order of court
b) Voluntary winding up
Compulsory Winding Up
a) Circumstances of Compulsory winding up by an order of Court:
b) If there is default in conducting Statutory Meeting or Submitting Statutory Report.
c) If it fails to commence business within one year of its incorporation.
d) If no. of members falls below seven in case of a Public Co. and two in case of a
Private Co
e) If company is unable to pay its debts, etc.,
VOLUNTARY WINDING UP
A company may be wound up voluntarily
a) if the company in general meeting passes a resolution requiring the company to
CA PAVAN KUMAR Liquidation of Companies 133

CAP CLASSES Advanced Accounting
be wound up voluntarily as a result of the expiry of the period for its duration, if
any, fixed by its articles or on the occurrence of any event in respect of which
the articles provide that the company should be dissolved; or
b) if the company passes a special resolution that the company be wound up
voluntarily.
LIQUIDATORS’ STATEMENT OF ACCOUNT
In case of Compulsory wound-up, the Company Liquidator should keep proper books in such
manner, as may be prescribed, in which he should cause entries or minutes to be made
of proceedings at meetings and of such other matters as may be prescribed.
While preparing the liquidator’s statement of account, receipts are shown in the
following order:
(a) Amount realized from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from
it, if any, is entered as ‘surplus from securities’.
(c) In case of partly paid up shares, the equity shareholders should be called up to pay
necessary amount (not exceeding the amount of uncalled capital) if creditors’
claims/claims of preference shareholders can’t be satisfied with the available
amount. Preference shareholders would be called upon to contribute (not
exceeding the amount as yet uncalled on the shares) for paying off creditors.
(d) Amounts received from calls to contributories made at the time of winding up are
shown on the Receipts side.
(e) Receipts per Trading Account are also included on the Receipts side.
(f) Payments made to redeem securities and cost of execution and payments per
Trading Account are deducted from total receipts.
Payments are made and shown in the following order:
a) Legal charges;
b) Liquidator’s expenses;
c) Debenture holders (including interest up to the date of winding up if the
company is insolvent and to the date of payment if it is solvent);
d) Creditors:
(i) Preferential (in actual practice, preferential creditors are paid before
debenture holders having a floating charge);
(ii) Unsecured creditors;
e) Preferential shareholders (Arrears of dividends on cumulative preference shares
should be paid up to the date of commencement of winding up); and
f) Equity shareholders.
STATEMENT OF AFFAIRS
In case of winding up by Tribunal, Section 272(5) of the Companies Act, 2013 provides that
a petition presented by the company for winding up before the Tribunal shall be admitted
only if accompanied by a statement of affairs in such form and in such manner as may be
prescribed.
The broad lines on which the Statement of Affairs is prepared are the following
1) Include assets on which there is no fixed charge at the value they are expected to

realise. Students should note to include calls in arrear but not uncalled capital.
2) Include assets on which there is a fixed charge. The amount expected to be
realised would be compared with the amount due to the creditor concerned. Any
surplus is to be extended to the other column. A deficit (the amount owed to
the creditor exceeding the amount realisable from the asset) is to be added to
unsecured creditors.
3) The total of assets in point (1) and any surplus from assets mentioned in point
(2) is available for all the creditors (except secured creditors already covered
by specifically mortgaged assets).
4) From the total assets available, the following should be deducted one by one: -
(i) Preferential creditors,
(ii) Debentures having a floating charge, and
(iii) Unsecured creditors.
If a minus balance emerges, there would be deficiency as regards creditors,
otherwise there would be a surplus.
5) The amount of total paid-up capital (giving details of each class of shares)
should be added and the figure emerging will be deficiency (or surplus) as
regards members.
Note: Statement of affairs should accompany eight lists:

List A Full particulars of every description of property not specifically
pledged and included in any other list are to be set forth in this list.
List B Assets specifically pledged and creditors fully or partly secured.
List C Preferential creditors for rates, taxes, salaries, wages and otherwise. List D
List of debenture holders secured by a floating charge.
List E Unsecured creditors.
List F List of preference shareholders. List G
List of equity shareholders.
List H Deficiency or surplus account.
DEFICIENCY ACCOUNT
1) The official liquidator will specify a date for period (minimum three years) beginning
with the date on which information is supplied for preparation of an account to explain
the deficiency or surplus.
2) On that date either assets would exceed capital plus liabilities, that is, there would be a
reserve or
3) There would be a deficit or debit balance in the Profit and Loss Account.
4) The Deficiency account is divided into two parts:
(i) The first part starts with the deficit (on the given date) and contains every item that
increases deficiency (or reduces surplus such as losses, dividends etc.).
(ii) The second part starts with the surplus on the given date and includes all profits.
If the total of the first exceeds that of the second, there would be a deficiency to the

extent of the difference, and if the total of the second part exceeds that of the first,
there would be a surplus.
OVERRIDING PREFERENTIAL PAYMENTS
In the winding up of a company under this Act, the following debts should be paid in
priority to all other debts,
1. workmen’s dues; and
2. where a secured creditor has realized a secured asset, so much of the debts due to
such secured creditor as could not be realized by him or the amount of the
workmen’s portion in his security (if payable under the law), whichever is less,
paripassu with the workmen’s dues:
Illustration
The value of the security of a secured creditor of a company is Rs. 1,00,000. The total
amount of the workmen’s dues is Rs. 1,00,000. The amount of the debts due from the
company to its secured creditors is Rs.3,00,000. The aggregate of the amount of
workmen’s dues and the amount of debts due to secured creditors is Rs. 4,00,000. The
workmen’s portion of the security is, therefore, one-fourth of the value of the security,
that is Rs. 25,000.
Explanation: For the purposes of this section, and section 327 -
a) Workmen, in relation to a company, means the employees of the company, being
workmen within the meaning of Section 2 (s) of the Industrial Disputes Act, 1947;
b) Workmen’s dues, in relation to a company, means the aggregate of the
following sums due from the company to its workmen,
c) Workmen’s portion, in relation to the security of any secured creditor of a
company, means the amount which bears to the value of the security the same
proportion as the amount of the workmen’s dues bears to the aggregate of the
amount of workmen’s dues and the amount of the debts due to the secured
creditors.
PREFERENTIAL CREDITORS
In a winding up there should be paid in priority to all other debts subject to the provisions
of section 326.
(a) Government Taxes:
(b) Salary and Wages: All wages or salary due for a period not exceeding four months
within the 12 months immediately before the relevant date
(c) Holiday Remuneration:
(d) Contribution under ESI Act:
(e) Compensation in respect of death of disablement: The amount due in respect of
any compensation or liability for compensation under the said Act in respect of
the death or disablement of any employee of the company:
(f) PF, Pension Fund or Gratuity Fund:
(g) Expenses of Investigation:
Example

A company went into liquidation whose creditors are Rs. 36,000. This amount of
Rs. 36,000 includes Rs. 6,000 on account of wages of 15 men at Rs. 100 per month for
4 months, immediately before the date of winding up, Rs. 9,000 being the salaries of
5 employees at Rs. 300 per month for the previous 6 months, rent for godown for the
last six months amounting to Rs. 3,000; Income-tax deducted out of salaries of
employees Rs. 1,000. In addition, it is estimated that the company would have to pay
Rs. 3,000 as compensation to an employee for injuries suffered by him, which was
contingent liability not accepted by the company and not included in above said
creditors figure.
Find the amount of Preferential Creditors.
Solution
Calculation of Preferential Creditors
Particulars Amount RS.
Tax deducted at source on salaries 1,000
Wages (15 men for 4 months at Rs. 100 each) 6,000
Salaries (5 men for 4 months at Rs. 300 each) 6,000
Workmen’s compensation 3,000
Total 16,000
Note:
a) Wages or Salaries payable to any employee due for the period not exceeding 4
months within the twelve months next before commencement of winding up
subject to maximum 20,000 per claimant are preferential creditors.
b) Rent for godown is not included in preferential creditors.
Liquidators Final Statement of Account

It is a final statement A/c that is to be submitted by Official Liquidator/Liquidator to
the court/members/creditors as the case may be in the event the company is finally
being wound up.
PROFORMA
Name of the Company
Liquidator Final Statement of Account
Receipts Rs. Payments Rs.
To Realisation from sale of Assets XXX By Legal Charges XXX
[not specifically pledged] By Liquidator remuneration XXX
To Realisation from Assets By Expenses of Liquidation XXX
specifically pledged XXX By Amt. paid to Debenture holders XXX
Less: amount paid to By Preferential Creditors** XXX
Secured creditors (XXX) XXX By Unsecured Creditors XXX
By Preference Share Holders XXX
[at the rate of --- per share] XXX
To Receipts from contributory By Equity Share Holders
[to the extent of uncalled capital] [at the rate of --- per share]
XXX XXX
Note: In actual practice preferential creditors are paid before debenture holders
having a floating charge.

Points to be noted:
1) Liquidator's Remuneration can be paid in any of the following ways:
 In Lump sum.
 As a percentage of the assets realised.
 As a percentage of the payments made to unsecured creditors (or)
shareholders.
 Or in any one or more of the above ways.
2) Assets realised means:
 The terms assets realised for the purpose of liquidator remuneration generally
does not include cash in hand, unless otherwise specified.
 In case of an asset specifically pledged, it is generally presumed that such
asset has been realised by the concerned creditor himself. So, liquidator will
be allowed only on the amount of surplus realised from such creditor.
 In case of hypothecation of an asset, it is generally presumed that liquidator
has himself realise the asset and will be allowed remuneration of the full value
realise on account of sale of such an asset.
 The term unsecured creditors also include preferential creditors unless
otherwise specified.
 In case liquidator is entitled to get commission on payments made to persons
who are last in order of payment because the amount is insufficient then the
liquidator's remuneration should be calculated as follows:

Problem No. 1
LT Ltd. went into liquidation with the following liabilities:
Particulars Amount ( Rs.)
Secured Creditors 40,000
(securities realised 50,000)
Preferential Creditors 1,200
Unsecured Creditors 61,000
Liquidation expenses 500
The liquidator is entitled to a remuneration of 3% on the amount realised (including
securities in the hands of secured creditors) and 1-1/2% on the amount distributed to
unsecured creditors. The various assets (excluding the securities in the hands of the
secured creditors) realised are Rs. 52,000. Prepare the liquidator's statement of
account
showing the payment made to the unsecured creditors.
Solution:
Particulars Rs. Particulars Rs.

Amount realised 52,000 By Liquidation expenses 500
Surplus from secured By Liquidator’s
10,000 3,924
creditors remuneration
By Preferential creditors 1,200
By secured creditors (b/f) 56,376
62,000 62,000
Working Notes:
Calculation of liquidator’s remuneration
Sl No Particulars Amount Rs
1 3 % of 52,000 + 50,000 3,060
2 1.5% on Preferential creditors (1,200*1.5%) 18
3 1.5% on (62,000-500-1,200-3060-18-x) 846
57222 * 1.5 / 101.5
Total 3,924

CONSOLIDATED FINANCIAL STATEMENS

INTRODUCTION
1) Consolidated financial statements (CFS) are the financial statements of a ‘group’
presented as those of a single enterprise, where a ‘group’ refers to a parent and all its
subsidiaries.
2) Parent company needs to inform the users about the financial position and results of
operations of not only of their enterprise itself but also of the group as a whole.
3) For this purpose, consolidated financial statements are prepared and presented by a
parent/holding enterprise to provide financial information about a parent and its
subsidiary(ies) as a single economic entity. (Substance over form)
4) CFS are intended to show the financial position of the group as a whole - by showing the
economic resources controlled by them, by presenting the obligations of the group and
the results the group achieves with its resources.
5) CFS normally include
a. consolidated balance sheet,
b. consolidated statement of profit and loss,
c. notes to accounts, other statements and explanatory material that form an integral
part thereof.
d. Consolidated cash flow statement is presented in case a parent presents its own
cash flow statement.
Consolidated Balance Sheet

consolidated financial statements
Consolidated Statement of Profit and Loss

Account
Consolidated Cash Flow Statement (in case

parent presents cash flow statement)
Notes and statements and explanatory

schedules
6) The consolidated financial statement are presented, to the extent possible, in the same
format as that adopted by the parent for its separate financial statements.
CA PAVAN KUMAR 1 | Page
140
Definitions as per the Companies Act, 2013

Holding Company:
As per Section 2(46) of the Companies Act, 2013,
“Holding company”, in relation to one or more other companies, means a company of
which such companies are subsidiary companies.
It may be defined as one, which has one or more subsidiary companies and enjoys control
over them.
 Legally a holding company and its subsidiaries separate legal entities.
 However, in substance holding and subsidiary companies work as a group.
 Accordingly, users of holding company’s accounts need financial information of
subsidiaries also to understand the performance and financial position of the group
(i.e. holding company and subsidiaries on a combined basis).
 Group refers to holding company and subsidiary company put together.
Subsidiary Company
Section 2(87) of the Companies Act, 2013 defines “subsidiary company” as a company in
which the holding company -
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one half of the total share capital either at its own
or together with one or more of its subsidiary companies:
 A company shall be deemed to be a subsidiary company of the holding company
even if there is indirect control through the subsidiary company (ies).
 The control over the composition of a subsidiary company’s Board of Directors
means exercise of power to appoint or remove all or a majority of the directors of
the subsidiary company.
Question No. 1
X Ltd has 1,00,000 equity shares of Rs. 10 each in its share capital. Y Ltd owns 60,000 shares
in X Ltd. However, these shares are issued with differential voting rights and pursuant to the
agreement with shareholders, Y Ltd has only 30% voting rights in X Ltd. Whether X Ltd is to
be treated as the subsidiary of Y Ltd?
Total share capital, as mentioned in section 2(87) (ii) above, has been further clarified
by the Rule 2(1)(r) of the Companies (Specification of Definitions Details) Rules, 2016. As
per the Rule, total share capital includes
a) paid up equity share capital; and
b) convertible preference share capital.
141
Question No. 2
The share capital of X Ltd comprises:
Equity Share Capital is Rs. 10,00,000 (Rs 10 each)
Convertible Preference Share capital is Rs. 5,00,000 (Rs. 100 each)
Y Ltd holds
a) 40,000 equity shares and 2,000 preference shares in X Ltd. Whether X Ltd is
subsidiary company of Y Ltd?
b) 60,000 equity shares
c) 45,000 equity shares and 4,000 preference shares.
Determine in each case, whether X Ltd is the subsidiary company of Y Ltd?
Question No. 3
Can a subsidiary company hold shares in holding company?
Answer:
Section 19 of the Companies Act, 2013 prohibits a subsidiary company from holding
shares in the holding company. According to this section, no company shall, either by
itself or through its nominees, hold any shares in its holding company and no holding
company shall allot or transfer its shares to any of its subsidiary companies and any
such allotment or transfer of shares of a company to its subsidiary company shall be void.
However, a subsidiary may continue to be a member of its holding company when
(a) the subsidiary company holds such shares as the legal representative of a
deceased member of the holding company; or
(b) the subsidiary company holds such shares as a trustee; or
(c) the subsidiary company is a shareholder even before it became a subsidiary
company of the holding company.
The subsidiary company shall have a right to vote at a meeting of the holding company
only in respect of the shares held by it as a legal representative or as a trustee, as
mentioned above in point (a) and (b).
Definitions as per Accounting Standard (AS) 21

1) Control:
a) the ownership, directly or indirectly through subsidiary(ies), of more than one half
of the voting power of an enterprise; or
b) control of the composition of the board of directors in the case of a company or
of the composition of the corresponding governing body in case of any other
enterprise so as to obtain economic benefits from its activities.
142
Question No. 4
X Ltd has 1,00,000 equity shares of Rs. 10 each. Y Ltd holds 80,000 shares in X Ltd. There is
an agreement between X Ltd and Z Ltd according to which Z Ltd has the power to appoint
or to remove all the directors of X Ltd. Discuss whether X Ltd is a subsidiary company to Y
Ltd or of Z Ltd. Who is the parent of X Ltd and who has to prepare the consolidated financial
statements incorporating the financials of X Ltd?
Answer:
It is possible that an enterprise is controlled by two enterprises – one controls by virtue
of ownership of majority of the voting power of that enterprise and the other controls, by
virtue of an agreement or otherwise, the composition of the board of directors so as to
obtain economic benefits from its activities.
In such a rare situation, when an enterprise is controlled by two enterprises as per the
definition of ‘control’, the first mentioned enterprise will be considered as subsidiary
of both the controlling enterprises within the meaning of AS 21 and, therefore, both
the enterprises need to consolidate the financial statements of that enterprise.
Therefore, both Y Ltd and Z Ltd are to be considered as the parent of X Ltd and both the
parents have to prepare Consolidated Financial Statements incorporating the financial
statements of X Ltd.
2) Subsidiary is an enterprise that is controlled by another enterprise (known as the

parent).
3) Minority interest is that part of the net results of operations and of the net assets of
a subsidiary attributable to interests which are not owned, directly or indirectly
through subsidiary(ies), by the parent.
Wholly owned and partly owned subsidiaries
S.No Wholly owned subsidiary company Partly owned subsidiary company
.1. A wholly owned subsidiary In a partly owned subsidiary, all the
company is one in which all the shares of subsidiary company are
shares are owned by the holding not acquired by the holding
company. company i.e. only the majority of
shares (i.e., more than 50%) are
owned by the holding company.
2. 100% voting rights are vested by Voting rights of more than 50% but
the holding company. less than 100% are vested by the
holding company.
3. There is no minority interest There is a minority interest because
because all the shares with voting less than 50% shares with voting
rights are held by the holding rights are held by outsiders other
company. than the holding company.
143
Provisions of the Companies Act, 2013

[Section 129(3) of the Companies Act 2013]
1) Where a company has one or more subsidiaries or associate companies, it shall, in
addition to the standalone financial statements, prepare a consolidated financial
statement of the company and of all the subsidiaries and associate companies in the
same form and manner as that of its own and in accordance with applicable accounting
standards, which shall also be laid before the annual general meeting (AGM) of the
company along with the laying of its financial statement.
2) For the purpose of section 129, ‘subsidiary’ includes ‘associate company’ and ‘joint
venture’ which means that the company would be required to prepare consolidated
financial statements including associate/ joint venture even if there is no subsidiary of
a company.
3) The consolidation of financial statements of the company shall be made in accordance
with the provisions of Schedule III of the Companies Act 2013 and the applicable
accounting standards.
Question No. 5
A Ltd is a listed public limited company. It has an associate company B Ltd and a joint
venture along with D Ltd which is C Ltd. However, A Ltd has no subsidiary company. Is it
necessary for A Ltd to prepare CFS?
Answer:
Yes. As per Sec 129 of the companies Act, subsidiary company includes an associate and a
joint venture company. Therefore, if a company has an associate or a JV, it has to prepare
CFS even though, it has no subsidiary company.
Exemptions from preparation of CFS:

As per Companies (Accounts) Amendment Rules, 2016, preparation of consolidated
financial statements by a company is not required if it meets ALL the following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another
company and all its other members, including those not otherwise entitled to vote,
having been intimated in writing and for which the proof of delivery of such
intimation is available with the company, do not object to the company not
presenting consolidated financial statements;
(ii) it is a company whose securities are not listed or are not in the process of listing
on any stock exchange, whether in or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial
statements with the Registrar which are in compliance with the applicable
Accounting Standards.
144
Note:
As per AS 21, a subsidiary should be excluded from consolidation when:
(a) control is intended to be temporary because the subsidiary is acquired and
held exclusively with a view to its subsequent disposal in the near future; or
(b) it operates under severe long-term restrictions which significantly impair its ability
to transfer funds to the parent.
AS 21: Consolidated Financial Statements

1) This Standard should be applied in the preparation and presentation of
consolidated financial statements for a group of enterprises under the control of a
parent.
2) AS 21 is mandatory if an enterprise presents consolidated financial statements. In
other words, the accounting standard does not mandate an enterprise to present
consolidated financial statements but, if the enterprise presents consolidated
financial statements for complying with the requirements of any statute or
otherwise, it should prepare and present consolidated financial statements in
accordance with AS 21.
Advantages of CFS
The main advantages of consolidation are given below:

(i) Single source document: From the consolidated financial statements, the users
of accounts can get an overall picture of the Group (i.e. holding company and its
subsidiaries). Consolidated profit and loss account gives the overall profitability of
the group.
(ii) Intrinsic value of share: Intrinsic share value of the holding company can be
calculated directly from the Consolidated Balance Sheet.
(iii) Acquisition of subsidiary: The minority interest data of the consolidated
financial statement indicates that the amount payable to the outside
shareholders of the subsidiary company at book value which is used as the
starting point of bargaining at the time of acquisition of a subsidiary by the holding
company.
(iv) Evaluation of holding company in the market: The overall financial health of the
holding company can be judged using consolidated financial statements. Those
who want to invest in the shares of the holding company or acquire it, need such
consolidated statement for evaluation.
145
CONSOLIDATION PROCEDURES
Rule 6 of the Companies (Accounts) Rules, 2014 states that the manner of consolidation of
financial statements of the company shall be in accordance with the provisions of Schedule
III of the Act and the applicable accounting standards. AS 21, lays down the procedure for
consolidation of financial statements of the companies within the group.
When preparing consolidated financial statements, the individual balances of the parent
and its subsidiaries are combined or consolidated on a line-by-line basis, and then certain
consolidation adjustments are made.
For example, the cash, trade receivables and prepayments of the parent and each subsidiary
are added together to arrive at the cash, trade receivables and prepayments of the group,
before consolidation adjustments are made.
Sl No Item H Ltd S Ltd CFS
1 Cash 10,000 5,000 15,000
2 Debtors 22,000 10,000 32,000
3 Creditors 25,000 6,000 31,000
The objective is that the consolidated financial statements should present the information
contained in the consolidated financial statements of a parent and its subsidiaries as if they
were the financial statements of a single economic entity. (Substance over form). X Ltd and
Y Ltd are two different legal entities. However, for the purpose of economic reality for a
shareholder, they are one and same that is one economic entity.
CONSOLIDATION ADJUSTMENTS
The various steps involved in the consolidation process are as follows:
Adjustment No. 1:
Cancellation of Holding Company investment in Subsidiary and the share of holding
companies Net Assets in Subsidiary (calculation of cost of control)
The cost to the parent of its investment (cost of acquisition) in each subsidiary and the
parent’s portion of equity of each subsidiary (acquirer’s interest), at the date on which
investment in each subsidiary is made, should be eliminated. In case, cost of acquisition
exceeds or is less than the acquirer’s interest, at the date on which investment in the
subsidiary is made, goodwill or capital reserve should be recognized respectively in the
CFS.
146
Problem No. 1 (Wholly Owned Subsidiary):

Balance Sheet as on 31st March, 2020
Liabilities H Ltd Rs S Ltd Rs Assets H Ltd Rs S Ltd Rs
Share Capital of
1,00,000 50,000 Sundry Assets 1,50,000 80,000
Rs. 10 each
Investments in 5000
Creditors 1,00,000 30,000 50,000 -
Shares of S Ltd at par
2,00,000 80,000 2,00,000 80,000
Prepare a consolidated balance sheet.
Consolidated Balance sheet of H Ltd along with its subsidiary S Ltd

As on 31st March, 2020
Liabilities Rs Assets Rs
Share Capital (10,000 shares 1,00,000 Sundry Assets
of Rs. 10 each fully paid) (150000+80000) 2,30,000
Sundry Creditors 1,30,000
(100000+30000)
2,30,000
2,30,000
Note:
Investment which is made by the Holding Company in the form of shares of subsidiary
company is replaced by the subsidiary company’s assets and liabilities.
Problem No. 2 (Goodwill):

The following are the Balance Sheet of H and S as at 31st December on which date H
acquires all the shares of S:
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share 5,00,000 1,00,000 Sundry Assets 7,50,000 190000
Capital
Reserves - 25,000 Investment in
Profit 1,00,000 15,000 shares of S Ltd at cost 2,00,000 0
and Loss
A/c
Sundry 3,50,000 50,000
Creditors
9,50,000 1,90,000 9,50,000 1,90,000
Prepare Consolidated Balance Sheet.
147
Solution:
Since cost of shares is in excess of the net worth at the date of acquisition, the price paid
for goodwill is to be calculated as follows:
Particulars Rs Amount Rs
Cost of Shares 2,00,000
Less: Share of H Ltd in the Net worth of S Ltd represented
by
 Share Capital 1,00,000
 Reserves 25,000
 P & L A/c 15,000
Total 1,40,000
Goodwill A - B 60,000
Consolidated Balance Sheet as on 31st March, 2020
Share Capital 5,00,000 Goodwill 60,000
Profit and Loss A/c 1,00,000 Sundry Assets 9,40,000
Creditors 4,00,000
10,00,000 10,00,000
Problem No. 3 (Capital Reserve):

Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share
Capital Rs. 1
share 12,000 6,000 Sundry Assets 20,000 12000
Reserves 3,000 2,000 Investment in
Profit and
Loss A/c 2,000 1,000 6000 shares of S Ltd 7,500 0
Sundry
Creditors 10,500 3,000
27,500 12,000 27,500 12,000
H Ltd has acquired shares on 31st March.
Prepare Consolidated Balance Sheet.
Solution:
Consolidated Balance Sheet of H Ltd as on 31st March, 2020
Share Capital in Rs. 1 each 12,000 Sundry Assets 32,000
Capital Reserve 1,500
Reserves 3,000
Profit and Loss A/c 2,000
148
Creditors 13,500
32,000 32,000
Note:
The Reserve and Profit and Loss Account balances of the Subsidiary Company do not figure
in the consolidated Balance Sheet as they are considered together with share capital in the
calculation of Capital Reserve.
Working Note: Calculation of Capital Reserve
Amount
Particulars Rs Rs
a) Consideration paid 7,500
b) Holding Company’s share in the Net Assets of Subsidiary
company
i) Share Capital
ii) Reserves 6000
iii) Profit and Loss A/c 2000
1000
Total Net Assets 9,000
c) Capital Reserve (b-a) 1,500
Alternatively, the net assets can also be calculated as

a) Total Assets 12,000
b) Outside Liabilities 3,000
c) Net Assets 9,000
Adjustment No. 2:
Cancellation of Intra group transactions and intra group indebtedness
1) Intragroup transactions, including sales, expenses and dividends, are eliminated, in full;
2) Adjustments in respect of unrealized profits/ losses should be made;
Adjustment No. 3:
Minority Interest (in Net Assets – Balance sheet and in Net Income – P & L)
1) Minority interest in the net income of consolidated subsidiaries for the reporting period
are identified and adjusted against the income of the group in order to arrive at the net
income attributable to the owners of the parent; and
2) minority interests in the net assets of consolidated subsidiaries should be identified
and presented in the consolidated balance sheet separately from liabilities and the
equity of the parent’s shareholders. Minority interests in the net assets consist of:
(i) the amount of equity attributable to minorities at the date on which
CA PAVAN KUMAR 10 | P a g e
149
investment in a subsidiary is made; and

(ii) the minorities share of movements in equity since the date the parent-
subsidiary relationship came in existence.
Treatment of the profits and losses of subsidiary in the consolidated financial statements of
the parent
1) The results of operations of a subsidiary are included in the CFS as from the date on
which parent-subsidiary relationship came in existence.
2) The results of operations of a subsidiary with which parent-subsidiary relationship
ceases to exist are included in the consolidated statement of profit and loss until the
date of cessation of the relationship.
3) The difference between the proceeds from the disposal of investment in a
subsidiary and the carrying amount of its assets less liabilities as of the date of
disposal is recognised in the consolidated statement of profit and loss as the profit
or loss on the disposal of the investment in the subsidiary.
4) In order to ensure the comparability of the financial statements from one
accounting period to the next, supplementary information is often provided about
the effect of the acquisition and disposal of subsidiaries on the financial position at
the reporting date and the results for the reporting period and on the corresponding
amounts for the preceding period.
5) An investment in an enterprise should be accounted for in accordance with AS 13,
Accounting for Investments, from the date that the enterprise ceases to be a
subsidiary and does not become an associate.
6) The carrying amount of the investment at the date that it ceases to be a subsidiary
is regarded as cost thereafter.
Question No. 5
X Ltd holds 65% of shares of Y Ltd. During the year, X Ltd sold
a) 40% shares and is holding only 25% of shares in Y Ltd
b) 58% shares and is holding only 7% shares n Y Ltd.
Discuss the accounting treatment of shares after sale of part of stake in Y Ltd.
Solution:
a) Y Ltd ceases to be the subsidiary of X Ltd but still continues to be the associate.
Therefore, AS 23 is to be applied.
b) Y Ltd ceases to be the subsidiary of X Ltd and also it is not an associate. Therefore, AS
13 is to be followed.
CA PAVAN KUMAR 11 | P a g e
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Welcome to

A digital learning platform

 A Chartered Accountant and a fellow member of the Institute of Chartered

His Academic Achievements include

 All India 1st Mark in CMA final

He is a panel member of review committee for Accountancy and Commerce subjects,

His areas of specialization include

AS – 1 : DISCLOSURE OF ACCOUNTING POLICIES

1. What are Accounting Policies?

2. Examples of different accounting policies

There 1s no single list of accounting policies which are applicable in all

The differing circumstances in which enterprises operate in a situation of diverse

• SIGNIFICANT ACCOUNTING POLICIES:

All significant accounting policies adopted in preparation and presentation of

Such disclosure should form part of financial statements.

These significant accounting policies should be disclosed at one place.

• INSIGNIFICANT ACCOUNTI NG POLICIES:

All accounting policies relating to immaterial items of assets, liabilities, incomes

ACCOUNTING STANDARDS 1 CA. PAVAN KUMAR K. CH

Fundamntal accounting assumptions form the basis for preparations and

The following are generally accepted fundamental accounting assumptions:

The enterpdse is normally viewed as going concern that is, as continuing in

It is assumed that revenues and costs are:-.> Recognized as they are

• Recorded in financial statements of the period to which they relate.

5. Factors to be considered while choosing an accounting policies:

The primary consideration in selection of accounting policies by an enterprise is

Secondary consideration governing selection and application of accounting policies

Anticipated profits should not be recorded, anticipated losses are to be recorded.

• Substance over form:

The accounting treatment and presentation in financial statements of transaction

ACCOUNTING STANDARDS 2 CA. PAVAN KUMAR K. CH

6. Changes in accounting policies:

Accounting policies can be changed ifsuch change is required by

1) Appropriate / In-appropriate valuation of inventory affects both the profit / loss

ACCOUNTING STANDARDS 3 CA. PAVAN KUMAR K. CH

9) Normal capacity means the production expected to be achieved on an average

ACCOUNTING STANDARDS 4 CA. PAVAN KUMAR K. CH

AS – 3: CASH FLOW STATEMENT

1) Cash Flow Statement shows relationship between Profitability and Cash

These are principle revenue producing activities of an enterprise other activities

i) Cash receipts from sale of goods & rendering of services.

i) Cash payments to acquire fixed assets.

ACCOUNTING STANDARDS 5 CA. PAVAN KUMAR K. CH

5. Net basis reporting is allowed in following situations.

a) Cash Flows reflecting activities of customers rather than those of the

AS – 4 : CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET

EVENTS OCCURRING AFTER THE BALANCE SHEET DATE :

b. Adjusting events may provide evidence that the Fundamental Accounting

Elements constituting the principle Example

a) Post Balance Sheet event amalgamation

ACCOUNTING STANDARDS 6 CA. PAVAN KUMAR K. CH

5. Examples of Adjusting & Non-adjusting events:

a) Subsequent determination of proceeds of sale of FAs purchased or sold

Non-adjusting events that occur after year end :

a) Mergers or acquisitions, investment or reconstruction

1. Net profit or loss for the period includes:

• Profit or loss from ordinary activities and

Profit or loss from ordinary activities:

Following are items of income/expense which require separate disclosure:

a) The write down of inventories to NRV