Course Title: Financial Reporting

Module 2- APPLICATION OF IFRS (IND AS) FOR TRANSACTIONS

Course Leaders:Ms. Vanishree
Module 2- Course Delivery faculty-Dr Shivakami Rajan,
Professor ,Faculty of Management and Commerce
Ramaiah University of Applied Sciences, Bangalore
Email: shivakamirajan.ms.mc@msruas.ac.in

Course Code: COC106AAE524A

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Unit 1
• Use of IFRS and Ind AS: Understand the application of IFRS in India
through the use of Ind AS – the applicability of Ind AS – the mapping
of Ind AS to IFRS – differences between IFRS & Ind AS – the list of IFRS
(Ind AS) – Process of transition to IFRS for the first time-Conceptual &
Regulatory Framework

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UNIT 2 APPLICATION OF IFRS (IND AS) FOR
TRANSACTIONS:
• Asset based standards such as PPE, intangible assets, borrowing costs, impairment
of assets, inventory & biological assets,
• Provisions & contingencies, events after reporting period, accounting policies,
estimates & errors,
• Standards related to incomes taxes, cash flows, government grants, effects of
changes in foreign exchange rates,
• Investments in associates & joint ventures, leases, financial instruments (excluding
hedge accounting & impairment of financial assets),
• Earnings per share, investment property, non-current assets held for sale and fair
value measurement,
• Understand the principles of recognizing revenue of the business – revenue
recognition for goods, services, interest and dividends – concept of deferred
income and accounting thereof
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 Accounting standards
• Accounting standards (AS) are authoritative standards for financial reporting. It is the
primary source of generally accepted accounting principles (GAAP).
•  policy document that defines the basis of an accounting transaction in financial
statements
• AS specifies how transactions and other events are to be
• recognized,
• measured,
• presented and
• disclosed
in financial statements.
• Its objective is to provide financial information to investors, lenders, creditors, contributors,
and others that is useful in making decisions about providing resources to the entity.
• Improve the transparency of financial reporting but also facilitates financial accountability.
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IFRS and GAAP
The International Financial Reporting Standards (IFRS) specifies how
international companies should manage and report their financial
statements and define different types of transactions with financial
implications.
The GAAP Accounting Standards allow foreign public companies to be
listed on the U.S. stock exchange- facilitates the comparability of
financial statements from different companies.
GAAPs were designated in the United States and form the basis of
accepted accounting standards for preparing and reporting financial
statements across the world.

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Who?
The International Accounting Standards Board (IASB) provides rule-
based and principle-based accounting guidelines for international
companies that are based outside the U.S.
The International Accounting Standards (IAS) are intended to achieve
the uniformity of approach and identity of meaning.

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Indian Accounting Standards - Ind AS

• Indian Accounting Standards or Ind AS are rules that determine how

Indian companies prepare and present their financial statements.
• The accounting standards harmonize with IFRS, making Indian
businesses familiar with international norms.
• Adopting Ind AS helps companies become more transparent-comply
with global best practices
• There are currently 41 accounting standards that have been
published by the Council of the Institute of Chartered Accountants of
India (ICAI).

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Who should implement this?
• The applicability of Ind AS considers companies' needs based on the
following conditions:
• size,
• resources, and
• capabilities
to implement the new standards.
•From 2017-18, companies with net worth between ₹250-500
crores were required to implement Ind AS.
•Small companies with a net worth of up to ₹250 crores continue
to follow Indian GAAP. They have an option to voluntarily adopt
Ind AS.
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Indian Accounting Standards (Ind AS)
• Indian Accounting Standards (Ind AS) are IFRS-converged standards
issued by the Central Government of India
• under the supervision and control of the Accounting Standards Board (ASB)
of the Institute of Chartered Accountants of India (ICAI) and
• in consultation with the National Financial Reporting Authority (NFRA).

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Indian Accounting Standard( IND AS)
Sr NO IND AS NO: Name of Indian Accounting Standard (IND AS) Sr No IND AS NO Name of Indian Accounting Standard (IND AS)

1Ind AS 101 Ind AS is being used for the first time. 22Ind AS 11 Construction Contracts – Amendment Rules, 2018.
2Ind AS 102 Shared Payment. 23Ind AS 12 Income Taxes.
3Ind AS 103 Business Combination. 24Ind AS 16 Property, Plant, and Equipment.
4Ind AS 104 Insurance Contracts. 25Ind AS 19 Employee Benefits.
Non-Current Assets Held for Sale and Discontinued
5Ind AS 105 26Ind AS 20 Accounting for and disclosing government grants.
Operations.
6Ind AS 106 Exploration for and Evaluation of Mineral Resources. 27Ind AS 21 The Effects of Changes in Foreign Exchange Rates.

7Ind AS 107 Financial Instruments & Disclosures. 28Ind AS 21 The Effects of Changes in Foreign Exchange Rates.
8Ind AS 108 Operating Segments. 29Ind AS 23 Borrowing Costs.
9Ind AS 109 Financial Instruments. 30Ind AS 24 Related Party Disclosures.
10Ind AS 110 Consolidated Financial Statements. 31Ind AS 27 Separate Financial Statements.
11Ind AS 111 Joint Arrangements. 32Ind AS 28 Investments in Associates and Joint Ventures.
12Ind AS 112 Disclosure of Interests in Other Entities. 33Ind AS 29 Financial Reporting in Hyperinflationary Economies.
13Ind AS 113 Fair Value Measurement. 34Ind AS 32 Financial Instruments: Presentation.
14Ind AS 114 Regulatory Deferral Accounts. 35Ind AS 33 Earnings per Share.
Revenue from Contracts with Customers(Applicable
15Ind AS 115 from April 2018). 36Ind AS 34 Interim Financial Reporting.
16Ind AS 116 Leases – Applicable from April 2019. 37Ind AS 36 Impairment of Assets.
Provisions, Contingent Liabilities, and Contingent
17Ind AS 1 Presentation of Financial Statements. 38Ind AS 37
Assets.
18Ind AS 2 Inventories. 39Ind AS 38 Intangible Assets.
19Ind AS 7 Statement of Cash Flows 40Ind AS 40 Investment Property.
20Ind AS 8 Accounting Policies, Changes in Accounting Estimates 41Ind AS 41 Agriculture.
and Errors.
Dr. Shivakami Rajan 21Ind AS 10 Events occurring after Reporting Period. – – – 10
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Indian Accounting Standard (Ind AS) 16

• Deals with PPE-Property, Plant and Equipment

• The objective of this standard is to prescribe the accounting treatment for
property, plant and equipment
• Why?-so that users of the financial statements can discern information
about an entity’s investment in its property, plant and equipment and the
changes in such investment.
• The principal issues in accounting for property, plant and equipment are
• the recognition of the assets,
• the determination of their carrying amounts and
• the depreciation charges and
• impairment losses to be recognized in relation to them
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What is PPE?
Property, plant and equipment are tangible assets held by an entity for more
than one accounting period for use in
• the production or supply of goods or services,
• for rental to others, or
• for administrative purposes.
What is the recognition of these assets,
should be recognised as an asset when:
• 'it is probable that future economic benefits associated with the asset will
flow to the entity; and
• the cost of the asset can be measured reliably' (IAS 16, para 7).
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 What is PPE?
How should these assets be measured initially at its
cost?
• Include all costs incurred to bring the asset into a working conditions.
• Include all costs- such as site preparation, delivery cost, installations, borrowing
cost
• Write off as incurred- these expenses-fuel, training cost, warranty costs
• Dismantling cost- Present value of these cost should be capitalized

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Multiple portions
Properties comprising
• a portion held to earn rentals and
• another portion held for use –
Treatment –
• If these portions could be sold separately or leased out – Investment
Property :
• If portions could not be sold separately and
• the portion held for use in production, supply, use is insignificant –
Investment property:
• If Significant – Owner Occupied Property

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Ancillary Services
• Services provided by Owner –
• Insignificant – Property treated as Investment Property,
• IF Significant – Property treated as Owner occupied Property
• Ex : Owner of Office building providing security services – Property is
Investment property
• Ex : Entity owns and manages a Hotel – Owner occupied property
•

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Recognition
• It is probable that future economic benefits associated with the item
will flow to the entity; and
• The cost of the item can be measured reliably.

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 Measurement - Initial
• Investment property shall be initially measured at cost, including the transaction cost.
• The cost of investment property includes:
• Its purchase price and
• Any directly attributable expenditure, such as legal fees or professional fees, property taxes, etc.
• You should NOT include:
• Start-up expenses whatsoever.
However, if these start-up expenses are directly attributable to the item of investment property, then you can
include them. But do NOT include any general start-up expenses.
• Operating losses that you incur before planned occupancy level is achieved, and
• Abnormal waste of material, labor or other resources incurred at construction.
• When payment for investment property is deferred, then you need to discount it to its present
value in order to set the cash price equivalent.

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 What is PPE?
Dismantling cost- Present value of these cost should be capitalized
Example if an oil rig is built in the sea, the cost that needs to be capitalized
include –cost of manufacturing the rig(20cr), and the present value of the
cost of dismantling it(1cr) in 20 years…the PV of the dismantling cost should
be calculated..(interest rate is 5%)
Use 1/(1+r) n where r is the interest rate and n the number of years to
settlement.
1cr *1/1.05 20 = xxx , then capitalized cost will then be 20 cr+ xxxx
Depreciation over 20 years would be (20 cr+ xxxx) *1/20= yyy amount- is spread out
throughout the asset's useful life.
NOTE- EACH YEAR THE LIABILITY INCREASES BY 5%
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Another example
A company purchases a large machine to add to an assembly line with a
sticker price of $1 million.
The company estimates its useful life is 10 years and that it will
generate, on average, $250,000 per year in sales.
As a result, the company does not include the $1 million expense on
its books in the year that it was purchased; rather, it spreads out the
capitalized cost over time according to a depreciation schedule.

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Note! PPE is for enhancement.
• It is important to note that capital expenditures are generally incurred
to improve or extend the useful life, capacity, or efficiency of an asset,
while revenue expenditures are incurred for the day-to-day
operational maintenance and repair to keep the asset in its current
condition.
• A piece of machine has an annual service costing $40,000. During the
most recent service it was decided to replace part of the engineering
meaning that it will work faster and produce more units of product
per hour. The cost of the replacement part is $20,000. Would this
expenditure be treated as capital or revenue expenditure?

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Answer
• For AS16, the key consideration is whether an expenditure is incurred
to bring an item of property, plant, and equipment (PPE) to its
working condition or to enhance its future economic benefit.
The replacement of a part of the machine with the objective of making
it work faster and produce more units per hour indicates an
enhancement to the machine's productive capacity. This type of
expenditure is typically treated as a capital expenditure. Therefore, the
$20,000 cost for the replacement part would likely be capitalized and
added to the cost of the machine. It becomes part of the machine's
historical cost and will be subject to depreciation over its useful life

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Problem

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Test yourself.
A piece of machinery has an annual service costing $10,000. During the
most recent service it was decided to replace part of the engineering
meaning that it will work faster and produce more units of product per
hour. The cost of the replacement part is $20,000.
Would this expenditure be treated as asset or expense items?
Solution-Whichever amount enhances future economic benefits and so
is an asset thereby increases the cost of non-current assets in the
statement of financial position

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Examples
Which of the following is an investment property? Identify others
• - Land owned by Real estate broker – Inventory
• - Factory building used for production – PPE – Owner occupied
• - Building used for restaurant business – PPE
• - Building given for running restaurant – Investment property
• - Purchased land for leasing purposes or sales – Investment property
• - Parent company has leased a building to subsidiary – Investment
property in P Co , PPE – in case of Consolidated statement

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Investment Property- Owner occupied property

• Owner occupied property is property held by the owner or by the

Lessee under a Finance Lease for use in the production or supply of
goods or services or for administrative purposes. Ind As 16 applies to
Owner occupied Property. (PPE - Production / Admin / Supply )

• Ex : Warehouse, office building, guest house , factories, movie theatre

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Model of measurement of PPE
In May 2008, as part of its Annual
What models are available for the improvements project, the IASB
production assets, including buildings expanded the scope of IAS 40(which
and lands? deals with investment property) to
include property under construction
There are 3 models: or development for future use as an
1.Cost model under IAS 16; investment property.
2.Revaluation model under IAS 16; and Such property previously fell within
3.Fair value model under IAS 40. the scope of IAS 16.
For PPE, Entity must choose between
these two models for measurement
1. Fair value model
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Fair value model and Cost value Model
FAIR VALUE MODEL-PPE
• The best evidence of fair value is normally given by current prices on
an active market for similar property in the same location and
condition and subject to similar lease and other contracts. [IAS 40.45]
• In the absence of such information, the entity may consider current
prices for properties of a different nature or subject to different
conditions, recent prices on less active markets, similar markets with
adjustments to reflect changes in economic conditions, and
discounted cash flow projections based on reliable estimates of
future cash flows. [IAS 40.46]

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Cost Value Model-PPE
COST VALUE- After initial recognition, investment property is accounted for in
accordance with the cost model as set out in IAS 16 Property, Plant and Equipment
Cost less accumulated depreciation and less accumulated impairment losses. [IAS
40.56]

Please note---
• An impairment loss is the amount by which the carrying amount of an asset or a cash-
generating unit exceeds its recoverable amount.
• The recoverable amount of an asset or a cash-generating unit is the higher of its fair
value less costs of disposal and its value in use.
• Value in use is the present value of the future cash flows expected to be derived from
an asset or cash-generating unit.
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Investment Property-Subsequent measurement
• An Entity shall adopt as its accounting policy, the COST MODEL
prescribed for ALL its Investment Property.
• Fair Value Model not permissible under IndAS( only under IFRS) for
investment property
• FV is only for disclosure, they are required to follow Cost Model

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Fair value- example
DoubleU a manufacturing entity, purchases a property for $1 million
on 1 January 20X1 for its investment potential. The land element of
the cost is believed to be $400,000, and the buildings element is
expected to have a useful life of 50 years. At 31 December 20X1, local
property indices suggest that the fair value of the property has risen to
$1.1 million.
Show how the property would be presented in the financial statements
as at 31 December 20X1 if DoubleU adopts:
• (a) the cost model
• (b) the fair value model
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 Fair value example
DoubleU a manufacturing entity, Solution:
purchases a property for $1 million on 1 a) COST MODEL
January 20X1 for its investment
potential. The land element of the cost • LAND AND BUILDING-10,00,000
is believed to be $400,000, and the • LAND VALUE 4,00,000
buildings element is expected to have a
• THEREFORE BUILDING IS 600000
useful life of 50 years. At 31 December
20X1, local property indices suggest that • USEFUL LIFE IS 50 YEARS.
the fair value of the property has risen Thus depreciation= 600,000*1/50= 12,000 in profit and loss as depreciation.
to $1.1 million.
In financial statement- the carrying amount will be 10,00,000- 12,000= 9,88,000.
Show how the property would be
presented in the financial statements as b) FAIR VALUE MODEL
at 31 December 20X1 if DoubleU adopts: In financial statement- property will shown 10,10,000
• (a) the cost model In statement of profit or loss- a GAIN OF 10000 WILL BE SHOWN AS FAIR VALUE
ADJUSTMENT
• (b) the fair value model
NO DEPRECIATION.

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Another- Attempt this
On 1 January 20X1, ABC company acquired a building with the total cost of Rs 30,00
,000. As of 31 December 20X1, the following information is available:
• Building’s useful life is 40 years.
• Building’s fair value at 31 December 20X1 is Rs 31,00,000.
What accounting entries shall ABC make with respect to this building in 20X1 under:
• Fair value model
• Cost model

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Another- Attempt this
On 1 January 20X1, ABC company acquired a building with the total cost of Rs 30,00
,000. As of 31 December 20X1, the following information is available:
• Building’s useful life is 40 years.
• Building’s fair value at 31 December 20X1 is Rs 31,00,000.
What accounting entries shall ABC make with respect to this building in 20X1 under:
• Fair value model
• Cost model Cost Model the depreciation= 30,00,000*1/30= 75,000 in profit and loss as
depreciation.
In financial statement- the carrying amount will be 30,00,000- 75,000=
29,25,000.
Fair Value Model –In statement of profit or loss- a GAIN OF 1,00,000 WILL BE SHOWN AS FAIR
VALUE ADJUSTMENT
In financial statement- the carrying amount will be 31,00,000
No Depreciations.
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ANNUAL REVIEW- DEPRECIATION

• An entity purchased an asset for $20,000 on 1 January 20X3.

Straightline depreciation of $5,000 per annum has been charged,
assuming a four-year useful life with no residual value.
• On 1 January 20X5 the annual review of asset values was undertaken
and the remaining useful life for this asset was estimated at four
years. The financial statements for the year ended 31 December 20X5
are being prepared.
• What is the depreciation charge for the year ended 31 December
20X5?

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 DEPRECIATION AND ANNUAL REVIEW
• An entity purchased an asset for $20,000 on SOLUTION:
1 January 20X3. Straightline depreciation of
$5,000 per annum has been charged,
• ASSET PURCHASED 1ST JAN 20X3- DEP DONE
assuming a four-year useful life with no FOR TWO YEARS
residual value. • CARRYING COST OF ASSET ON 31ST DEC-
• On 1 January 20X5 the annual review of 20X4=
asset lives was undertaken and the 20000- (5000*2)= 10000
remaining useful life for this asset was
estimated at four years. The financial ANNUL REVIEW-ADD NEW USEFUL YEARS= 4
statements for the year ended 31 December YEARS
20X5 are being prepared. Annual depreciation charge as of 31st
• What is the depreciation charge for the year December 20x5
ended 31 December 20X5?
= 10000/4= 2,500

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Asset based standards- intangible assets

AS 26-Intangible asset is an non-physical non-monetary asset which is held for

use in the production or supply of goods and services, or for rentals to others,
etc
Except(does not include the following)
1. Intangible assets that are within the scope of another standard financial
assets
2. Rights and expenditure on the exploration for or development of minerals,
oil, natural gas and similar non-regenerative resources
3. Intangible assets arising in insurance enterprise from contracts with
policyholders,
4. Expenditure in respect of termination benefits.
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Definition-intangible assets
• An intangible asset is an identifiable non-monetary asset without
physical substance the asset must be:
(a) controlled by the entity as a result of events in the past
(b) something from which the entity expects future economic benefits
to flow
Ex : computer software, patents, copyrights, motion picture films,
License, franchises and fishing rights.

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"Identifiability“- intangible assets
• An intangible asset, whether generated internally or acquired in a
business combination, is identifiable when it:
• Is separable; or
• Arises from contractual or other legal rights
• These criteria distinguish intangible assets from goodwill acquired
in a business combination.

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Different ways of acquisition and measurement
• By separate acquisition – at cost– eg. Pay and buy patents usage rights
• As part of a Business Combination – at fair value eg.- mergers and
acquistions
• By way of Government Grant – at fair value
• By Exchange of Other Assets
• By Internal Generation

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Recognition of Intangible assets
It SHOULD Includes the
• Cost of acquiring and generating an intangible asset internally.
• Cost of purchase if acquired separately- includes purchase price that includes
import duty, non-refundable purchase taxes, after deducting trade discount and
related direct cost
• If got along with acquisition--the cost of that asset should be its fair value at the
acquisition date which depends on market expectations
• If free of cost, Govt grant,- recognized at a nominal value or at the acquisition cost.
• If created internally- includes all direct expenditures related to creating, producing
and making the asset ready for its intended usage from the time it meets the first
recognition criteria.

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Recognition criteria- intangible assets
• An intangible asset should be recognized when it:
complies with the definition of an intangible asset; and
• meets the recognition criteria set out in the standard.
• The recognition criteria are that:
• it is probable that future economic benefits specifically attributable to the
asset will flow to the entity; and
• the cost of the asset can be measured reliably.

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"Control“- intangible assets
Control means:
• The power to obtain the future economic benefits from the
• Underlying resource; and
• the ability to restrict the access of others to those benefits.
• These would fail the control test because an entity does not control them.
• Staff training. Staff training creates skills that could be seen as an asset for the
employer. However, staff could leave their employment at any time, taking with
them the skills they have acquired through training. –NO CONTROL
• Customer lists. Similarly, control is not achieved by the acquisition of a customer
list, since most customers have no obligation to make future purchases.

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"Future Economic Benefits" –Intangible Assets

• These are net cash inflows and may include increased revenues
and/or cost savings

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 Initial measurement
• Intangible assets should be measured initially at cost.
• An intangible asset may be acquired: separately; as part of a business combination; by
way of a government grant; or by an exchange of assets.
• "Cost" is determined according to the same principles applied in accounting for other
assets.
• For example:
• Purchase price + import duties + non-refundable purchase tax.
• Deferred payments are included at the cash price equivalent; the difference between this amount
and the payments made are treated as interest. - the full value of the deferred payment is
recognized immediately as if it were paid upfront in cash. This difference represents the cost of
financing the purchase over time rather than paying in full upfront.
• It should not include: selling, administrative and other general overheads training costs
advertising expenditure. 46
Business Combination
• The cost of an intangible asset acquired in a business combination
is its fair value at the date of acquisition, irrespective of whether the
intangible asset had been recognised by the acquiree before the
business combination

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Government Grant
• Free of charge
• For nominal consideration by way of a Government Grant
• Ex: Airport landing rights, license to operate radio etc.
• Measured at fair value as per Ind AS -20

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 Exchanges of assets
If one intangible asset is exchanged for another, the cost of the intangible asset is
measured at fair value unless:
(a) the exchange transaction lacks commercial Substance (there is a significant
difference between the risk, timing and amount of cash flows from the asset
received and those of the asset transferred.)
Or
(b) the fair value of neither the asset received, nor the asset given up can be
measured reliably.
Otherwise, its cost is measured at the carrying amount of the asset given
up.

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Internally generated goodwill
• Internally generated goodwill may not be recognized as an asset.
• In particular, it is clearly inseparable. It only can be disposed of with
the business as a whole
• You do not recognize an asset which is subjective and cannot be
measured reliably.

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Research and Development Costs:
• Development : is the application of research findings or knowledge to a
plan or design for the production of new or substantially improved
materials, devices, products, processes, systems or services before the
start of commercial production or use.
• Research is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding

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 Research and development costs
• IAS 38 states: ‘No intangible asset arising from research .. Expenditure on research ... shall be
recognised as an expense when it is incurred.’
Examples of research costs
• (a) activities aimed at obtaining new knowledge
• (b) the search for, evaluation and final selection of, applications of research findings or other
knowledge
• (c) the search for alternatives for materials, devices, products, processes, systems or services
• (d) the formulation, design evaluation and final selection of possible alternatives for new or
improved
• Materials, devices, products, systems or services

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Development
Development costs may qualify for recognition as intangible assets
provided that the following strict criteria can be demonstrated.
• (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

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• (D) how the intangible asset will generate probable future economic
benefits. Among other things, the entity 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.
• (E) its ability to measure the expenditure attributable to the
intangible asset during its development reliably
• In contrast with research costs development costs are incurred at a later stage in
a project, and the probability of success should be more apparent.

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• If any of these conditions is not met, the development expenditure
should be treated in the same way as research costs and recognised
in full as an expense when it is incurred, and cannot be treated as an
intangible asset.
• Once such expenditure has been written off as an expense, it cannot
subsequently be reinstated as an intangible asset.

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Other internally generated intangible assets

• The standard prohibits the recognition of internally generated

brands, mastheads, publishing titles and customer lists and similar
items as intangible assets. These all fail to meet one or more (in
some cases all) the definition and recognition criteria and in some
cases are probably indistinguishable from internally generated
goodwill.

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Impairment of assets
When the carrying amount of an asset exceeds its recoverable
amount.
Implicationswhere the value of an asset on a company's books is
higher than its actual value, leading to a reduction in the asset's value
on the balance sheet.
Impairment loss is recognized in the financial statements and
represents a decrease in the asset's value that is deemed to be
permanent or long-term

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Example
• Doug & Co is developing a new production
process. During 20X3, expenditure incurred was
$100,000, of which $90,000 was incurred
before 1 December 20X3 and $10,000 between
1 December 20X3 and 31 December 20X3.
• Doug co can demonstrate that, at 1 December
20X3, the production process met the criteria
for recognition as an intangible asset. The
recoverable amount of the know-how
embodied in the process is estimated to be
$50,000.
• Required -How should the expenditure be
treated?

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Example Solution
The criteria for recognition as an intangible asset are met as of
• Doug & Co is developing a new production
process. During 20X3, expenditure incurred was 1 December 20X3.
$100,000, of which $90,000 was incurred • the expenditure incurred before this date can be
before 1 December 20X3 and $10,000 between capitalized as part of the cost of the intangible asset.
1 December 20X3 and 31 December 20X3. • any expenditure incurred after 1 December 20X3 is
• Doug co can demonstrate that, at 1 December expensed as incurred
20X3, the production process met the criteria  Expenditure before 1 December 20X3=total cost capitalized
for recognition as an intangible asset. The is $90,000 in B/S
recoverable amount of the know-how  Expenditure after 1 December 20X3= total cost expensed is
embodied in the process is estimated to be $10,000 in income statement.
$50,000.  Impairment Test-recoverable amount IS $50000
• Required -How should the expenditure be WE HAVE CAPITALISED $90000-IE THE CARRYCOST OF THE
treated? ASSET
SO the carrying amount of $90,000 exceeds the recoverable
amount of $50,000, an impairment loss $40000 be recognized
in income statement.
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Amortisation and impairment of intangible assets
The useful life of an intangible should be assessed as being either:
• Finite, or
indefinite.
• A finite useful life is a useful life that will come to an end, within a
foreseeable time. An indefinite useful life is one where there is no
foreseeable limit to the asset’s useful life.

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Intangibles with a finite useful life
• Where the useful life is assessed as finite:
• the intangible should be amortised over its estimated useful life
• its residual value is usually assumed to be zero
• amortisation charges should be charged as an expense in each period over the useful life
of the asset
• if there are any indications of impairment, then an (IAS 36) impairment review should be
carried out.

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• Amortisation should start when the asset is available for use. / commercialization starts
• Amortisation should cease at the earlier of the date that the asset is classified as held
for sale in accordance with IFRS 5 non-current assets held for sale and discontinued
operations and the date that the asset is derecognised.
• the amortisation method used should reflect the pattern in which the asset's future
economic benefits are consumed. If such a pattern cannot be predicted reliably, the
straight-line method should be used.
• the amortisation charge for each period should normally be recognised in profit or loss.
• The amortisation period and the amortisation method used for an intangible asset with
a finite useful life should be reviewed at each financial year end.

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Intangibles with an indefinite useful life

• Where the useful life is assessed as indefinite:

• the intangible asset should not be amortised
• impairment reviews should be carried out annually (and even more
frequently if there are any indications of impairment).

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Impairment IndAS 36
• IND AS 36 deals with the subject of Impairment of Assets

The objective of IAS 36 Impairment of assets is to ensure that assets

are ‘carried’ (valued) in the financial statements at no more than
their recoverable amount
• To prescribe accounting requirements for Impaired Assets
• To specify the circumstances and conditions for reversal of
Impairment Loss

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Definition
• Impaired Asset : an Asset is said to be impaired when its carrying amount
exceeds its Recoverable Amount
• Impairment Loss : refers to the excess of the Carrying Amount of an Asset or
CGU, over its Recoverable Amount
• Carrying Amount : amount which an Asset is recognised, after Accumulated
Depreciation and Accumulated Impairment Losses thereon
• Recoverable Amount : Fair value less Cost of Disposal or Value in Use whichever
is higher
• Cash Generating Unit CGUs: is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the Cash flows from other
Assets or group of Assets- example Commercial Vehicles Division, XYZ
Manufacturing Company- impairment test of assets of this CGU

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Example of CGU -

• A mining entity owns a private railway to support its mining

activities. The private railway could be sold only for scrap value and it
does not generate cash inflows that are largely independent of the
cash inflows from the other assets of the mine.
• Thus, a private railway can not be recognized as CGU but entire mine
shall be treated as CGU

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Definitions
• Fair value : is the price that would be received to sell an Asset or paid to transfer a
Liability in an orderly transaction between Market Participants at the Measurement Date
• Costs of Disposal : Incremental Costs directly attributable to the disposal of an
Asset/CGU excluding Finance Costs and Income tax expenses
• Value in Use : Present value of Future Cash Flows expected to be derived from an Asset /
CGU-
• VIU is defined in the definition’s clause of IND AS 36 as “the present value of the future
cash flows expected to be derived from an asset or cash-generating unit”.

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Measuring the recoverable amount of the asset
An asset's fair value less costs of disposal is the price that would be
received to sell the asset in an orderly transaction between market
participants at the measurement date, less direct disposal costs,
such as legal expenses.

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Identifying a potentially impaired asset
• An entity should assess at the end of each reporting period whether
there are any indications of impairment to any assets.
• If there are indications of possible impairment, the entity is of the
assets concerned. required to make a formal estimate of the
recoverable amount
Even if there are no indications of impairment, the following assets
must always be tested for impairment annually.
(a) An intangible asset with an indefinite useful life
(b) Goodwill acquired in a business combination
( c) Intangible asset not yet available for use(capitalised devlpt exp)
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Fair Value Less Costs of Disposal

• X operates in leased premises. It owns a bottling plant which is situated in a single

factory unit. Bottling plants are sold periodically as complete assets.
• Professional valuers have estimated that the plant might be sold for $100,000.
They have charged a fee of $1,000 for providing this valuation.
• X would need to dismantle the asset and ship it to any buyer. Dismantling and
shipping would cost $5,000. Specialist packaging would cost $4,000 and legal fees
$1,500.
• What is the fair value of disposal of the bottling plant?
•

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 Fair Value Less Costs of Disposal

Solutions
• XYZ Co., operates in leased premises. It owns a
bottling plant which is situated in a single factory unit. 1.Estimated Selling Price: $100,000
Bottling plants are sold periodically as complete 2.Valuation Fee: -$1,000 (negative as it's an
assets.
expense)
• Professional valuers have estimated that the plant
might be sold for $100,000. They have charged a fee
3.Dismantling and Shipping Costs: -$5,000
of $1,000 for providing this valuation. 4.Specialist Packaging Costs: -$4,000
• Xyz would need to dismantle the asset and ship it to 5.Legal Fees: -$1,500
any buyer. Dismantling and shipping would cost
$5,000. Specialist packaging would cost $4,000 and
legal fees $1,500. Fair Value of Disposal = Estimated Selling Price
– (Valuation Fee +Dismantling and Shipping
• Costs +Specialist Packaging Costs +Legal Fees)
1,00,000- (1000+5000+4000+1500)
=88500
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Value in use
• Value in use is the present value of the future cash flows expected to
be derived from an asset. Estimating it involves:
• estimating the future cash inflows and outflows to be derived from
continuing use of the asset and from its ultimate disposal; and
• applying the appropriate discount rate

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Example
PVF: = $ 1 ( 1 + 10 % ) n.
Year Cash inflow(in P V factor @ 10% Discounted cash
Lakhs) flow
( in lakhs)
1 2 0.909 1.82
2 2 0.826 1.65
3 2 0.751 1.502
4 2 0.683 1.367
5 2 0.620 1.24
Value in Use = 7.57

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Recognition and measurement of an impairment loss
• This impairment loss is recognised as a loss for the period.
• However, if the impairment loss relates to an asset that has
previously been re-valued upwards, it is first offset against any
remaining revaluation surplus for that asset.
• When this happens it is reported as other comprehensive income for
the period (a negative value) and not charged against profit.
• Revised Carrying amount to be reported
• Depreciation charges for the impaired asset in future periods should
be adjusted to allocate the asset’s revised carrying amount, minus
any residual value, over its remaining useful life (revised if necessary).
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Reversal of an impairment loss – external and internal factors-

• An impairment loss may be reversed when there is

evidence that this has happened. Any reversal:
• must be justifiable, by reference to an
improvement in the indicators of impairment, and
• should not lead to a carrying amount in excess of
what the carrying amount of the asset would have
been without the recognition of the original
impairment loss. the
•
entity may need to review and adjust the:
the remaining useful life
•the depreciation (amortisation method), and/or
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•the residual value of the asset.
Retirements and Disposals of intangible A
An intangible asset should be derecognized
• on disposal or
• when no future economic benefits are expected from its use,
• The disposal of an intangible asset may occur in a variety of ways (eg by
sale, by entering into a finance lease, or by donation)
• It shall be determined as the difference between the net disposal
proceeds, if any, and the carrying amount of the asset.
• Any gain and loss (difference between the net disposal proceeds and the
carrying amount of the asset) arising should be recognized as income or
expenses in statement of P & L.

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Retirements and Disposals of intangible A
Example- An enterprise incurred costs to develop and produce a
software product during 2023-24, as follows:
Design of the software-45000, coding and testing-30,000; other sub-
codes cost-40,000; testing costs-10,000; product masters for training
materials 15000.
What amount should be capitalized as software costs in Balance Sheet?
Solution-
design and coding & testing- 75000 as expenses.
Rest- from point of technological feasibility –
65000(40000+10000+15000) will be capitalized as software cost.
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Borrowing Cost
IndAS 23

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Borrowing Cost - (Ind AS) 23
• Definition :
Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost
of that asset. Other borrowing costs are recognised as an expense.
• Borrowing cost paid on the qualifying asset only has to be capitalized
– added to the balance sheet value of asset
• Borrowing costs are Interest and other costs incurred by an entity in
connection with the borrowing of funds.
and a Qualifying asset is an assets that necessarily takes a substantial
period of time to get ready for its intended use or sale.
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 Borrowing cost
• The standard lists what may be included in borrowing costs.
• Interest on bank overdrafts and short-term and long-term borrowings
• Amortization of discounts or premiums relating to borrowings
• Amortization of ancillary costs incurred in connection with the arrangement
of borrowings
• Finance charges in respect of finance leases recognised in accordance with
IAS 17
• Exchange differences arising from foreign currency borrowings to the extent
that they are regarded as an adjustment to interest costs
When you spread the cost of an intangible asset out over the time it will be
useful, you are amortising it. This is like depreciation, which spreads the cost of
things out over the time they are useful.
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 Qualifying assets
• Ind AS 23, "Borrowing Costs," specifically addresses qualifying assets in the context of
borrowing costs that can be capitalized.
• According to Ind AS 23, borrowing costs that are directly attributable to the acquisition,
construction, or production of a qualifying asset form part of the cost of that asset
• EXAMPLES- property, plant, and equipment under construction, intangible assets being
developed internally, and investment properties under construction.
• Inventories
• Manufacturing plants
• Power generation facilities
• Intangible assets
• Investment properties

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Qualifying Asset
• Financial assets and inventories that are manufactured, or otherwise
produced over a short period of time are not qualifying assets.
• Assets that are ready for their intended use or sale when purchased
are not qualifying assets.

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Recognition OF QUALIFYING ASSET
• Borrowing costs which are directly attributable to the acquisition,
construction or production of a qualifying asset are capitalised as
part of the cost of that asset.
• All other borrowing costs must be recognised as an expense in the
period in which they are incurred.
• The amount of borrowing costs eligible for capitalisation is
determined in accordance with IndAS 23.

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Examples
Identify which of the following is not a borrowing cost?
• Interest on loan taken
• Deferred loan interest
• Bank commission in loan taken
• Foreign exchange
Which is not a qualifying asset?
• Customised plant as an inventory to be delivered - 7 months to manufacture
and deliver

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Examples
Examples of qualifying assets:
• Inventories which require a substantial period of time to bring them to a
saleable condition (e.g. whisky)
• Manufacturing plant, Power generation facilities, Investment properties.
Examples of assets which do not qualify:
• Inventories routinely manufactured or otherwise produced in large
quantities on a repetitive basis over a short period of time.
• Assets ready for their intended use or sale when acquired.

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86
Example Problem of Borrowing Cost.
• The borrowing costs to be capitalized will be the net amount after
considering the interest incurred on the loan and the investment
income earned on the surplus funds.

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Example Problem of Borrowing Cost.

Solution:
Interest 24,00,000*8%* 10/12= 1,60,000-10 months1st March to 31st December
Unutilized-10,00,000*6%*4/12= 20,000-4 months 1st march to 30 June
Difference =1,60,000- 20,000= 1,40,000- Capitalize as Borrowing cost
Note: The borrowing cost in January20x9 till march would be expensed in profit or loss.

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Example : Specific Borrowings
• On 1st May 20X1, DEF took a loan of Rs. 10,00,000 from a bank at the annual interest rate of 5%.
The purpose of this loan was to finance a construction of a production hall.
• The construction started on 1 June 20X1. DEF temporarily invested Rs. 8,00,000 borrowed money
during the months of June and July 20X1 at the rate of 2% p.a.
• What borrowing cost can be capitalized in 20X1? (Assume all interest was paid).

ANS :
Interest expense: Rs. 1000000 x 5% x 7/12 = Rs. 29 167- June to Dec-7 months.
investment income: Rs. 800 000 x 2% x 2/12 = Rs 2 667 –June and July- 2 months.
Total borrowing cost to capitalize in 20X1: Rs. 26 500
(the borrowing cost in May 20X1 is expensed in profit or loss, as the capitalization criteria were not
met in that period.)

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 General Borrowings
KLM had the following loans in place at the beginning and end of 20X1:

Description 1 January 20X1 31 December 20X1

Bank loan, 6% p.a. 0 200 000
Bank loan, 8% p.a. 130 000 130 000
Debenture stock, 5.5%
50 000 50 000
p.a.

1.The bank loan at 6% p.a. was taken in July 20X1 to finance the construction of a new
production department (construction began on 1 March 20X1).
2.The bank loan at 8% p.a. and debenture stock were taken for no specific purpose and KLM
used them to finance general spending and the construction of a new machinery.
3.KLM used
• Rs. 60 000 for the construction of the machinery on 1 February 20X1 and
• Rs. 25 000 on 1 September 20X1.

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 Solutions
1. You ignore bank loan at 6% p.a., because it is a specific borrowing for another asset.
for this the Interest = 200000 x 6% x 6/12 = Rs. 6000 – to be capitalized in B/S.(July to Dec 6 months)
2. The general borrowings relate to the financing of the new machinery and therefore, we need to calculate the
capitalization rate:
Capitalization Rate = (Total interest paid on Loans) / Total loan taken
CAPITALISATION RATE =
=(TOTAL INTEREST / TOTAL LOAN )*100
= (10400+2750 / 130000+50000) X 100 = 7.31 %
Can also use the Weighted average rate =
(8% x 130 000 /(130 000+50 000))*100 + (5.5% x 50 000/(130 000+50 000)) *100 = 5.78%+ 1.53% = 7.31%
Interest on 2nd Bank loan Interest on debenture stock
Therefore using the derived capitalization rate, the Borrowing costs for the new machinery in 20X1 =
Rs. 60 000 x 7.31% x 11/12= 4021 for the months of feb to dec
Rs. 25 000 x 7.31% x 4/12 = 609 for sept, oct, nov & Dec
• = RS. 4 021 + Rs. 609 = Rs. 4630. – INTEREST TO BE CAPITALISED
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Commencement of Capitalisation

• Capitalisation commences:
• expenditures for the asset are being incurred;
• borrowing costs are being incurred; and
• activities which are necessary to prepare the asset for its intended use or sale are in progress.
• Expenditures on a qualifying asset include only:
1. payments of cash;
2. transfers of other assets; or
3. the assumption of interest-bearing liabilities.
• Expenditures are reduced by any progress payments received and grants received in connection with the
asset.
The average carrying amount of the asset during a period, including borrowing costs previously capitalised, is
normally a reasonable approximation of the expenditures to which the capitalisation rate is applied in that
period.

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Cessation of Capitalisation
• Capitalization ceases when "substantially all" the activities necessary to
prepare the qualifying asset for its intended use or sale are completed
• An asset is normally ready for its intended use or sale when the physical
construction of the asset is complete even though routine administrative
work might still continue.
If minor modifications are all that are outstanding (e.g. interior decoration of
a property to the purchaser's or user's specification), this indicates that
substantially all the activities are complete.
• When a construction is completed in parts and each part is capable of being
used while construction continues on other parts, capitalisation ceases when
substantially all the activities necessary to prepare each part are completed.

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Suspension of Capitalization

• Capitalization is suspended during extended periods in which active

development is interrupted.
• Capitalization is not normally suspended:
- during a period when substantial technical and administrative work is being
carried out; or
- when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
Example : During pandemic, construction work stopped for 10 months, in
such case, int on loan will be expensed in P/L)
Example : 20 days break after Concrete work for a floor roofing – no
suspension of capitalization
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Review of Useful Lives and Residual values
• Useful life and residual value should be reviewed at the end of each
reporting period and revised if expectations are significantly different
from previous estimates.
• The carrying amount of the asset at the date of revision less any
residual value should be depreciated over the revised remaining
useful life.

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Inventory & Biological asset
Ind AS 41 has introduced the concept of biological assets in India,
which had no specific accounting literature for its recognition and
measurement under the previous GAAP.
• Agriculture (Ind AS 41) has introduced the concept of biological assets
where a biological asset is defined to be a living animal or plant, and
includes produce growing on bearer plants.
• It also defines agricultural activity as management of biological
transformation and harvest of biological assets, where biological
transformation comprises various processes that cause qualitative
and quantitative changes in the biological asset.

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 Applicability, Recognition and measurement of IND AS 41.

• These are recognized when the biological assets and agricultural produce are in the CONTROL OF
AN ENTITY AS A RESULTS OF PAST EVENTS AND THERE IS A PROBALE FUTURE ECONOMIC BENEFITS
ASSOCIATED WITH THE ASSET INTO THE ENTITY.
• AGRICULTURAL PRODUCE IS recognized when it is HARVESTED FROM THE BIOLOGICAL ASSETS.
• Measured at FAIR VALUE LESS ESTIMATED COSTS TO SETT –at the point of harvest.
• FV is at market rate, if not available than using discounted cash flows- valuation to be considered.
Fair value- estimated cost to sell= carrying amount of the biological asset.

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Reporting
Biological assets and agricultural produce should be presented as separate line items
under the following headings:
Non-current assets
• Property, Plant and Equipment – would include bearer plants
• Biological assets – would include all agricultural produce to be harvested more than 12
months from the reporting date, livestock to be held for more than 12 months and trees
cultivated for lumber and fruit.
Current assets
• Biological assets – would include produce to be harvested within 12 months of reporting
date, livestock to be slaughtered within 12 months and annual crops eg wheat, maize
• Inventories – includes the inventories produced from agricultural produce eg the Tea to
be sold, produced from the tea leaves
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AFTER REPORTING-Provisions & contingencies, events after reporting
period, accounting policies, estimates & errors,

AS 10 Events After The Reporting Period

• IAS 10 was reissued in December 2003 and applies to annual periods beginning
on or after 1 January 2005---
• In December 2003 the Board issued a revised IAS 10 with a modified title—
Events after the Balance Sheet Date
• An event, which could be favorable or unfavorable, that occurs between the end of the
reporting period and the date that the financial statements are authorized for issue.
• Two types- Adjusting event and non-adjusting event.
• Adjusting event- provides further evidences of conditions that existed at the end of the
reporting period including the firm’s assumption related to the whole or part of the
enterprises.
• Non- Adjusting event- that is indicative of a condition that arose AFTER THE END OF THE
REPORTING PERIOD.
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Disclosure of events
Non-adjusting events should be disclosed if they are of such
importance that non-disclosure would affect the ability of users to
make proper evaluations and decisions.
Adjusting events- update disclosures that relate to conditions that
existed at the end of the reporting period to reflect any new
information that it receives after the reporting period about those
conditions. [IAS 10.19]

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Standards related to incomes taxes- (Ind AS) 12

(Ind AS) 12- prescribes the accounting treatment for income taxes.

The principal issue in accounting for income taxes is how to account for the
current and future tax consequences of:
(a) the future recovery (settlement) of the carrying amount of assets
(liabilities) that are recognized in an entity’s balance sheet; and
(b) transactions and other events of the current period that are recognized in
an entity’s financial statements
This Standard requires an entity to account for the tax consequences of
transactions and other events in the same way that it accounts for the
transactions and other events themselves
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1
 Cash flows-AS) 3-
government grants,
effects of changes in foreign exchange rates,

Student- Library Assignment

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2
Indian Accounting Standard (Ind AS) 28, Investment in Associates and Joint
Ventures

• Objective
1 The objective of this Standard is to prescribe the accounting for
investments in associates and to set out the requirements for the
application of the equity method when accounting for investments
in associates and joint ventures.
• Scope
2 This Standard shall be applied by all entities that are investors
with joint control of, or significant influence over, an investee.

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Ind AS 28- definitions
• An associate is an entity over which the investor has significant influence.
• Consolidated financial statements are the financial statements of a group
in which assets, liabilities, equity, income, expenses and cash flows of the
parent and its subsidiaries are presented as those of a single economic
entity.
• The equity method is a method of accounting whereby the investment is
initially recognised at cost and adjusted thereafter for the post-
acquisition change in the investor’s share of the investee’s net assets.
The investor’s profit or loss includes its share of the investee’s profit or
loss and the investor’s other comprehensive income includes its share of
the investee’s other comprehensive income.
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Ind AS 28- definitions
• A joint arrangement is an arrangement of which two or more parties have
joint control.
• Significant influence is the power to participate in the financial and
operating policy decisions of the investee but is not control or joint control
of those policies.
• If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent
or more of the voting power of the investee, it is presumed that the entity
has significant influence, unless it can be clearly demonstrated that this is not
the case. Conversely, if the entity holds, directly or indirectly (eg through
subsidiaries), less than 20 per cent of the voting power of the investee, it is
presumed that the entity does not have significant influence, unless such
influence can be clearly demonstrated.
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5
Significant influence

The existence of significant influence by an entity is usually evidenced

in one or more of the following ways:
(a) representation on the board of directors or equivalent governing
body of the investee;
(b) participation in policy-making processes, including participation in
decisions about dividends or other distributions;
(c) material transactions between the entity and its investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.

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Significant Influence.
An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of
that investee.
The loss of significant influence can occur with or without a change in
absolute or relative ownership levels.
It could occur, for example, when an associate becomes subject to the
control of a Government, court, administrator or regulator.
It could also occur as a result of a contractual arrangement.

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Equity method
• The initial recognition the investment in an associate or a joint venture is recognised at cost,
and the carrying amount is increased or decreased to recognise the investor’s share of the
profit or loss of the investee after the date of acquisition.
• The investor’s share of the investee’s profit or loss is recognised in the investor’s profit or
loss.
• Distributions received from an investee reduce the carrying amount of the investment.
• Adjustments to the carrying amount may also be necessary for changes in the investor’s
proportionate interest in the investee arising from changes in the investee’s other
comprehensive income.
• Such changes include those arising from the revaluation of property, plant and equipment
and from foreign exchange translation differences.
• The investor’s share of those changes is recognised in the investor’s other comprehensive
income
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Exemptions from applying the equity
method
An entity need not apply the equity method to its investment in an associate or a joint venture
if the entity is a parent that is exempt from preparing consolidated financial statements by the scope
exception in paragraph 4(a) of Ind AS 110 or if all the following apply:
(a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity
and its other owners, including those not otherwise entitled to vote, have been informed about,
and do not object to, the entity not applying the equity method.
(b) The entity’s debt or equity instruments are not traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local and regional markets).
(c) The entity did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation, for the purpose of issuing any class
of instruments in a public market.
(d) The ultimate or any intermediate parent of the entity produces consolidated financial
statements available for public use that comply with Ind ASs.
(d) The ultimate or any intermediate parent of the entity produces financial statements
available for public use that comply with Ind ASs, in which subsidiaries are consolidated
or are measured at fair value through profit or loss in accordance with Ind AS 110.

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 Financial Instruments- IND AS 109
IND AS 109 Financial Instruments deals Classification of financial assets:
Ind AS 109 has two measurement categories:
with classification, recognition, de- • amortised cost
recognition and measurement • fair value
requirements for all the financial assets To determine which measurement category a financial asset
and liabilities. falls into, management should first consider whether the
financial asset is an investment in an equity instrument,
This standard provides guidelines for as defined in Ind AS 32, Financial Instruments:
accounting and reporting of the by considering the perspective of the issuer or a debt
instrument.
Financial Instruments (FI) which will
enable the stakeholders to assess the
timing and uncertainty of a business
future cash flow.

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Contd..
Contd…Classification of financial assets:
Classification of debt instruments:
Investments in equity instruments (as defined in If the financial asset is a debt instrument (or does not
Ind AS 32, from the perspective of the issuer) are meet the definition of an equity instrument in its
always measured at fair value. entirety), the management should consider the
• Equity instruments that are held for trading following assessments in determining its classification:
(including all equity derivative instruments,such 1.The entity’s business model for managing the
as warrants and rights issues) are required to be financial asset.
classified at FVPL(Fair Value through Profit or 2.The contractual cash flows characteristics of the
Loss.), with dividend income recognised inprofit
financial assets..
or loss.
Mainly through
fair value through other comprehensive income
(FVOCI)

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Summary.

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leases.-Ind AS 116.
• Ind AS 116 sets out the principles for the recognition, measurement, presentation, and
disclosure of leases.
• A contract is, or contains, a lease if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for consideration.
• There are two main parties in a lease agreement- A lease is a contractual arrangement where
one party, called the lessor, provides an asset for use by the other party, referred to as the
lessee, based on periodic payments for an agreed period. The lessee pays the lessor for the
usage of the asset or property.
• The objective is
• to ensure that lessees and lessors provide relevant information in a manner that faithfully represents
those transactions.
• gives a basis for users of financial statements to assess the effect that leases have on the financial
position, financial performance and cash flows of an entity.

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Idenfication of Leases
• A finance lease or capital lease is a financial product, in which a
leasing company gives operating control of an asset(a new machine)
to a business for an agreed period, and typically at the end of the
contract, the lessee will become the owner of the asset at the end of
the lease, and both parties share some of the economic risks and
rewards for a period of time.
• As per Ind 116- A lease is classified as a finance lease if it transfers
substantially all the risks and rewards incident to ownership. All other
leases are classified as operating leases.
• Classification is made at the inception of the lease.

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Ind 117 classifies –Finance/capital lease as

• the lease transfers ownership of the asset to the lessee by the end of the lease
term
• the lessee has the option to purchase the asset at a price which is expected to
be sufficiently lower than fair value at the date the option becomes exercisable
that, at the inception of the lease, it is reasonably certain that the option will be
exercised
• the lease term is for the major part of the economic life of the asset, even if
title is not transferred
• at the inception of the lease, the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset
• the lease assets are of a specialised nature such that only the lessee can use
them without major modifications being made
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Other finance lease(Ind AS 117)
The other situations that might also lead to classification as a finance
lease are: [IAS 17.11]
• if the lessee is entitled to cancel the lease, the lessor's losses
associated with the cancellation are borne by the lessee
• gains or losses from fluctuations in the fair value of the residual fall
to the lessee (for example, by means of a rebate of lease payments)
• the lessee has the ability to continue to lease for a secondary period
at a rent that is substantially lower than market rent

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Accounting Models for Lease.
• Scope
• IAS 17 applies to all leases other than lease agreements for minerals, oil,
natural gas, and similar regenerative resources and licensing agreements for
films, videos, plays, manuscripts, patents, copyrights, and similar items.
DOES NOT APPLY TO
• property held by lessees that is accounted for as investment property for
which the lessee uses the fair value model set out in IAS 40
• investment property provided by lessors under operating leases (see IAS 40)
• biological assets held by lessees under finance leases (see IAS 41)
• biological assets provided by lessors under operating leases (see IAS 41)
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Land and Building for Lease.
When a lease includes both land and buildings elements, an entity assesses
the classification of each element as a finance or an operating lease
separately.
In determining whether the land element is an operating or a finance lease,
an important consideration is that land normally has an indefinite economic
life [IAS 17.15A].
Whenever necessary in order to classify and account for a lease of land and
buildings,
• the minimum lease payments (including any lump-sum upfront payments) are
allocated between the land and the buildings elements in proportion to the
relative fair values of the leasehold interests in the land element and buildings
element of the lease at the inception of the lease. [IAS 17.16]
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Land and Building for Lease.16,17,18,
Whenever necessary in order to classify and account for a lease of land and
buildings, (Proportion of relative FV), single unit,
• the minimum lease payments (including any lump-sum upfront payments) are
allocated between the land and the buildings elements in proportion to the
relative fair values of the leasehold interests in the land element and buildings
element of the lease at the inception of the lease. [IAS 17.16]
• For a lease of land and buildings in which the amount that would initially be
recognised for the land element is immaterial, the land and buildings may be
treated as a single unit for the purpose of lease classification and classified as a
finance or operating lease. [IAS 17.17]
• However, separate measurement of the land and buildings elements is not required
if the lessee's interest in both land and buildings is classified as an investment
property in accordance with IAS 40 and the fair value model is adopted. [IAS 17.18]
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Accounting Model for Leasee.
1.at commencement of the lease term, finance leases should be recorded as an asset and a
liability at the lower of the fair value of the asset
2. the depreciation policy for assets held
• under finance leases should be consistent with that for owned assets and the asset should be
depreciated over the shorter of the lease term or the life of the asset [IAS 17.27] if it is not sure that
the lessee will gain ownership at end of lease period.
• Under operating leases, the lease payments should be recognized as an expense in the income
statement over the lease term on a straight-line basis, unless another systematic basis is more
representative of the time pattern of the user's benefit [IAS 17.33]
3. finance lease payments should be apportioned between the finance charge and the
reduction of the outstanding liability.
• Record the capital lease expense payment on the cash flow statement. A capital lease payment includes interest and
principal.
• The interest portion of the payment is included in the Cash Flows From Operating Activities section as a cash outflow.
• The principal portion of the payment is included in the Cash Flows From Financing Activities section as a cash outflow
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Accounting Model for Leasor.
• at commencement of the lease term, the lessor should record a
finance lease in the balance sheet as a receivable, at an amount
equal to the net investment in the lease [IAS 17.36]
• the lessor should recognise finance income based on a pattern
reflecting a constant periodic rate of return on the lessor's net
investment outstanding in respect of the finance lease [IAS 17.39]
• Assets held for operating leases should be presented in the balance
sheet of the lessor according to the nature of the asset. [IAS 17.49]
• Lease income should be recognised over the lease term on a straight-
line basis, unless another systematic basis is more representative of
the time pattern in which use benefit is derived from the leased asset
is diminished
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Sale and leaseback transactions
• For a sale and leaseback transaction that results in a finance lease, any excess of
proceeds over the carrying amount is deferred and amortised over the lease term. [IAS
17.59]
Operating lease----
• if the transaction is clearly carried out at fair value - the profit or loss should be
recognised immediately
• if the sale price is above fair value - the excess over fair value should be deferred and
amortised over the period of use
• When the sale price is below fair value - profit or loss should be recognised immediately,
except if a loss is compensated for by future rentals at below market price, the loss
should be amortised over the period of use
• if the fair value at the time of the transaction is less than the carrying amount – a loss
equal to the difference should be recognised immediately [IAS 17.63]
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Disclosures for both Lessee and Lessor.
Disclosure: lessees – finance leases [IAS 17.31]
General description of significant leasing arrangements, including contingent rent provisions,
renewal or purchase options, and restrictions imposed on dividends, borrowings, or further
leasing

• Carrying amount of asset

• Reconciliation between total minimum lease payments and their present value
• Amounts of minimum lease payments at balance sheet date and the present value thereof, for:
• the next year
• years 2 through 5 combined
• beyond five years
• Contingent rent recognized as an expense
• Total future minimum sublease income under no cancellable subleases
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Disclosure: lessees – operating leases [IAS 17.35]
general description of significant leasing arrangements, including contingent rent
provisions, renewal or purchase options, and restrictions imposed on dividends,
borrowings, or further leasing
• Amounts of minimum lease payments at balance sheet date under non cancellable
operating leases for:
• the next year
• years 2 through 5 combined
• beyond five years
• total future minimum sublease income under non cancellable subleases
• lease and sublease payments recognised in income for the period
• contingent rent recognised as an expense
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• Disclosure: lessees – finance leases [IAS 17.31]
• carrying amount of asset
• reconciliation between total minimum lease payments and their present value
• amounts of minimum lease payments at balance sheet date and the present value thereof,
for:
• the next year
• years 2 through 5 combined
• beyond five years
• contingent rent recognised as an expense
• total future minimum sublease income under noncancellable subleases
• general description of significant leasing arrangements, including contingent rent
provisions, renewal or purchase options, and restrictions imposed on dividends,
borrowings, or further leasing
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Lessor
• Disclosure: lessors – operating leases [IAS 17.56]
• amounts of minimum lease payments at balance sheet date under
noncancellable operating leases in the aggregate and for:
• the next year
• years 2 through 5 combined
• beyond five years
• contingent rent recognised as in income
• general description of significant leasing arrangements

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Non-current Assets Held For Sale And Fair Value Measurement,

• Non-current Assets Held for Sale-are long-term assets that a

company intends to sell in the near future, typically within one year.
These assets are considered to be held for sale when the company
has made a decision to sell them, and has initiated a plan to do so.
• The criteria- they must be available for immediate sale in their
current condition, and the sale must be highly probable within one
year from the date of classification- for example-property, plant, and
equipment, intangible assets, and investment properties.

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Discontinued operations
• In 2018, Mexico’s Coca-Cola FEMSA – the world’s biggest franchise
bottler of Coca-Cola trademark drinks – sold its 51% controlling
shareholding in Coca-Cola FEMSA Philippines for $715 million. This
disposal meant that the entity sold a component representing a
geographical area of operations.
• In 2022, Germany’s adidas – one of the world’s leading sports
companies – sold its entire shareholding in Reebok for €2.1 billion and
generated a profit from discontinued operations of €348 million. This
disposal meant that the entity sold a component representing a
separate major line of business.

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What is a discontinued operations?
A component of an entity that either has been disposed of or is
classified as held for sale and:
a) represents a separate major line of business or geographical area of
operations,
b) is part of a single co-ordinated plan to dispose of a separate major
line of business or geographical area of operations or
c) is a subsidiary acquired exclusively with a view to resale.
Component of an entity- Operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.

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What does it entail?
• Disposal group may be a group of cash-generating units, a single cash-
generating unit,or part of a cash-generating unit.
• The group may include any assets and any liabilities of the entity, including
current assets, current liabilities and assets
• An entity shall classify a non-current asset (or disposal group) as held
for sale if its carrying amount will be recovered principally through a
sale transaction rather than through continuing use.
• The asset (or disposal group) must be actively marketed for sale at a
Price that is reasonable in relation to its current fair value.
Should be sold within one year of classifications
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The objective
specify the accounting for assets held for sale, and the presentation
and disclosure of discontinued operations. This requires:
(a) assets that meet the criteria to be classified as held for sale to be
measured at the lower of carrying amount and fair value less costs to
sell, and depreciation on such assets to cease; and
(b) assets that meet the criteria to be classified as held for sale to be
presented separately in the balance sheet and the results of
discontinued operations to be presented separately in the statement
ofprofit and loss

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Measurement
The entity must be committed to the distribution, the assets must be available for
immediate distribution and the distribution must be highly probable
Non-current assets or disposal groups that are classified as held for sale are
measured at the lower of carrying amount and fair value less costs to sell
• fair value less costs to distribute in the case of assets classified as held for distribution to
owners
• At classification-Any impairment loss is recognised in profit or loss unless the asset had
been measured at revalued amount
• After classification as held for sale-
• any impairment loss based on the difference between the adjusted carrying amounts of the
asset/disposal group and fair value less costs to sell-must be recognised in profit or loss
• Subsequent increases in fair value-A gain for any subsequent increase in fair value less costs to sell of an
asset can be recognised in the profit or loss to the extent that it is not in excess of the cumulative
impairment loss that has been recognised

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Non-current assets that are to be abandoned

Non-current assets (or disposal groups) to be abandoned include non-

current assets (or disposal groups) that are to be used to the end of
their economic life and non-current assets (or disposal groups) that are
to be closed rather than sold
• An entity shall not account for a non-current asset that has been
temporarily taken out of use as if it had been abandoned

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In case of Changes to a plan of sale

The entity shall measure a non-current asset that ceases to be classified

as held for sale (or ceases to be included in a disposal group classified
as held for sale) at the lower of:
(a)its carrying amount before the asset (or disposal group) was classified
as held for sale, adjusted for any depreciation, amortisation or revaluations
that would have been recognised had the asset (or disposal group) not been
classified as held for sale, and
(b) its recoverable amount at the date of the subsequent decision not to
sell
financial statements for the periods- shall be amended accordingly
The entity shall present that adjustment in the same caption in the statement of profit
and loss used to present a gain or loss, if any,
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Revenue recognition for goods, services, interest and
dividends
Ind AS 18 -Standard is to prescribe the accounting treatment of
revenue arising from certain types of transactions and events.
(a) the sale of goods;
(b) the rendering of services; and
(c) the use by others of entity assets yielding interest, royalties and
dividends.
Measurement of revenue- Revenue shall be measured at the fair value
of the consideration received or receivable taking into account the
amount of any trade discounts and volume rebates allowed by the
entity.

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Revenue recognition for goods, services, interest and
dividends
When the outcome of a transaction involving the rendering of services
can be estimated reliably, revenue associated with the transaction shall
be recognised
1) by reference to the stage of completion of a transaction is
often referred to as the percentage of completion method.

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Revenue recognition for goods, services, interest and
dividends
In case of interest, royalties and dividends– deemed when
(a) it is probable that the economic benefits associated with the
transaction will flow to the entity; and
(b) the amount of the revenue can be measured reliably
In the books this will be
a)These interest shall be recognised using the effective interest method
(b) royalties shall be recognised on an accrual basis in accordance with
the substance of the relevant agreement; and
(c) dividends shall be recognised when the shareholder’s right to receive
payment is established.

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Revenue recognition for goods, services, interest and
dividends
An entity shall disclose:
(a) the accounting policies adopted for the recognition of revenue,
including the methods adopted to determine the stage of completion
of transactions involving the rendering of services;
(b) the amount of each significant category of revenue recognised during
the period, including revenue arising from:
(i) the sale of goods;
(ii) the rendering of services;
(iii) interest;
(iv) royalties
(v) dividends;
(c) the amount of revenue arising from exchanges of goods or services
included in each significant category of revenue.
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Deferred revenue
• Deferred revenue, also called unearned revenue, applies to advance payments obtained
by a company for goods or services that are to be provided or performed in the future.
• The company which receives the prepayment reports the sum on its balance sheet as
deferred revenue, a liability.
• when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be
less than the nominal amount of cash received or receivable.
For example an entity may provide
• interest-free credit to the buyer or
• accept a note receivable bearing a below-market interest rate from the buyer as consideration for
the sale of goods.
When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is
determined by discounting all future receipts using an imputed rate of interest.

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Deferred revenue- imputed interest.
When the arrangement effectively constitutes a financing transaction, the fair value of the
consideration is determined by discounting all future receipts using an imputed rate of interest.
• Imputed interest comes into play when someone makes a "below-market-rate" loan.
• IT is interest that the tax code assumes you collected but you didn't actually collect.

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