WORK BOOK

CORPORATE FINANCIAL
REPORTING

FINAL

GROUP – IV

PAPER – 17

The Institute of Cost Accountants of India

(Statutory body under an Act of Parliament)
www.icmai.in
First Edition : March 2018

Revised Edition : March 2019

Second Edition : September 2019

Third Edition : March 2020

)RXUWK Edition : September 2020

Published By :

Directorate of Studies

The Institute of Cost Accountants of India

CMA Bhawan, 12, Sudder Street, Kolkata – 700 016

www.icmai.in

Copyright of these study notes is reserved by the Institute of Cost Accountants

of India and prior permission from the Institute is necessary for reproduction of
the whole or any part thereof.
 Preface

Professional education systems around the world are experiencing great change
brought about by the global demand. Towards this end, we feel, it is our duty to
make our students fully aware about their curriculum and to make them more
efficient.

Although it might be easy to think of the habits as a set of behaviours that we want
students to have so that we can get on with the curriculum that we need to cover.
It becomes apparent that we need to provide specific opportunities for students to
practice the habits. Habits are formed only through continuous practice. And to
practice the habits, our curriculum, instruction, and assessments must provide
generative, rich, and provocative opportunities for using them.

The main purpose of this volume is to encourage our students as we are

overwhelmed by their response after publication of the first and second editions.
Thus, we are delighted to inform our students about the e-distributionof the IRXUWK
edition of our ‘Work book’.

This book was written to meet the needs of students as it offers the practising format
that will appeal to the students to read smoothly. Each chapter includes unique
features to aid in developing a deeper under-standing of the chapter contents for
the readers. The unique features provide a consistent reading path throughout the
book, making readers more efficient to reach their goal.

Discussing each chapter with illustrations and incorporation of Ind AS in the phased
manner may integrate the key components of the subjects. In the fourth edition, we
expanded the coverage in some areas and condensed others in the said ways.

It is our hope and expectation that this fourth edition of work book will provide
further an effective learning experience to the students like the first edition.

The Directorate of Studies,

The Institute of Cost Accountants of India
 Work Book : Corporate Financial Reporting

CORPORATE FINANCIAL REPORTING

FINAL
GROUP – IV
PAPER – 17

INDEX

Sl.
Page No.
No.
SECTION - A
GAAP AND ACCOUNTING STANDARDS
1 Accounting Standards 1 – 32

SECTION - B
ACCOUNTING OF BUSINESS COMBINATIONS & RESTRUCTURING
2 Accounting of Business Combinations and Restructuring 33 – 62

SECTION - C
CONSOLIDATED FINANCIAL STATEMENTS
3 Group Financial Statements 63 – 82

SECTION - D
DEVELOPMENTS IN FINANCIAL REPORTING AND OTHER ITEM OF REPORTING
4 Recent Trends in Financial Reporting 83 – 89
5 Valuation, Accounting and Reporting of Financial Instruments and Others 90 – 108
6 Share Based Payments 109 – 118
7 Reporting through XBRL (Extended Business Reporting Language) 119 – 121

SECTION - E
GOVERNMENT ACCOUNTING IN INDIA
8 Government Accounting 122 – 124

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Suggested Marks Distribution from Examination Point of View
Only for Practice Purpose

MCQ = 20 Marks
Total 100 Marks 3 Hours
Others = 80 Marks

Objective Question

1 mark for correct answer

20 Marks (2 Marks each questions) MCQ
1 mark for justification

Short Notes / Case Study

Minimum Marks for each Questions 3 Marks

Maximum Marks for each Questions 10 Marks

Practical Problem

Minimum Marks for each Questions 4 Marks

Maximum Marks for each Questions 16 Marks
 Work Book : Corporate Financial Reporting

Study Note – 1

ACCOUNTING STANDARDS

Learning Objective:
• To understand the applicability, interpretation, scope of Accounting Standards and
applicability of Indian Accounting Standards

• To solve the numerical problems based on Accounting Standards and Indian

Accounting Standards

MULTIPLE CHOICE QUESTIONS:

Questions based on AS

1. X Ltd. deals in four products X1, X2, X3and X4 which are neither similar nor interchangeable.

At the time of closing of its account for the year 2016-17 the historical cost and net realizable value of the
items of closing stock are determined as below:

Items Historical Cost Net realizable value

(` in Lakhs) (` in Lakhs)

X1 78 82

X2 47 43

X3 23 27

X4 87 88

What will be the value of closing stock?

A. ` 235 Lakhs

B. ` 231 Lakhs

C. ` 240 Lakhs

D. None of these

Answer:

(B) ` 231 Lakhs

Computation of value of closing stock

Lower of Historical Cost and Net Realisable Value will be considered = `(78+43+23+87) lakhs = ` 231 lakhs

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
 Work Book : Corporate Financial Reporting

2. Which of the following is/are the examples of cash flows arising from investing activities?

A. cash payments to acquire equity or debt instruments of other entities and interests in joint ventures
(other than payments for those instruments considered to be cash equivalents or those held for dealing
or trading purposes);

B. cash payments for futures contracts, forward contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading purposes, or the payments are classified as
financing activities; and

C. interest and dividends received (other than for a non-financial institution)

D. All of the above

Answer:

(D) All of the above

3. Net Assets of the Transferor Company: ` 20 lakhs. If Purchase Consideration is ` 23 lakhs & amalgamation is
in the nature of purchase, then

(A) 3 lakhs will be treated as Capital Reserve

(B) 3 lakhs will be treated as Goodwill

(C) ` 20 lakhs will be treated as Capital Reserve and ` 3 lakhs will be Goodwill

(D) None of the above

Answer:

(B) 3 lakhs will be treated as Goodwill

4. Choose the correct alternative:

(i) K Ltd. agreed to absorb S Ltd. S Ltd. has 120000 Equity Shares of `10 having intrinsic value of `24 each. If
intrinsic value of K Ltd’s equity share is ` 48 each, then how many equity shares should be issued by K
Ltd. to S Ltd. to meet out the purchase consideration?

(a) 60000 shares

(b) 56000 shares

(c) 45000 shares

(d) 90000 shares

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 Work Book : Corporate Financial Reporting

(ii) At the time of absorption of B Ltd by A Ltd., 10% debenture holders of `240000 of ` 100 each in B Ltd are
to be paid off at 10% premium by 9% debentures in A Ltd. issued at a premium of 20%. How many
debentures of ` 100 each are to be issued by A Ltd?

(a) 2300

(b) 2200

(c) 2400

(d) 2100

(iii) In case of amalgamation in the nature of purchase, Fixed Assets, Current Assets, Total Debts, Debit
balance of Profit and Loss Account and Purchase consideration are ` 5120000, ` 2500000, `2260000,
`440000, `4800000 respectively. The amount of capital reserve or Goodwill will be

(a) ` 560000 (Capital Reserve)

(b) ` 1000000 (Capital Reserve)

(c) ` 120000 (Capital Reserve)

(d) ` 1940000 (Goodwill)

(iv) P Ltd. agreed to absorb R Ltd. For this purpose R Ltd.’s 10000, 9% Preference shares are valued at ` 62.25
each and 130000 equity shares are valued at ` 16 each. If P Ltd. discharged purchase consideration by
issuing its equity shares of `10 each which is having intrinsic value of ` 46 each, No. of equity shares
issued by P Ltd. to R Ltd. will be

(a) 54750

(b) 58750

(c) 63750

(d) 48750

(v) At the time of absorption of B Ltd. by A Ltd., trade receivables of both companies shown in their
Balance Sheets were ` 30 Lakhs and ` 16 Lakhs. On that date trade payable of B Ltd. includes payable
to A Ltd. ` 5 Lakhs. After absorption, the amount of trade receivables will be shown in A Ltd’s Balance
Sheet as

(a) ` 41 Lakh

(b) ` 25 Lakh

(c) ` 11 Lakh

(d) ` 35 Lakh

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 3
 Work Book : Corporate Financial Reporting
Answer:

(i) (a)

(ii) (b)

(iii) (a)

(iv) (b)

(v) (a)

5. Which of the policy is/are not in accordance with AS-15 policies for retirement benefits as under?

(a) Contribution to pension fund is made based on actuarial valuation at the year end. In respect of
employeeswho have opted for pension scheme.

(b) Contribution to the gratuity fund is made based on actuarial valuation at the year end.

(c) Leave encashment is accounted for on “PAY-AS-YOU-GO” method.

(d) None of the above

Answer:

(c) Leave encashment is accounted for on “PAY-AS-YOU-GO” method.

As regard leave encashment, which is accounted for on PAY-AS-YOU-GO basis, it is not in accordance
withAS-15. It should be accounted for on accrual basis.

6. M Ltd. has taken the assets on lease from ABC Ltd. The following information is given below:

Lease Term = 4 years

Fair value at inception of lease = ` 14,50,000

Lease Rent = ` 5,00,000 p.a. at the end of year

Guaranteed Residual Value = ` 1,00,000

Expected Residual Value = ` 2,00,000

Implicit Interest Rate = 14.97%

The leased asset and liability should be recognized at -

(A) ` 14,85,590

(B) ` 14,50,000

(C) ` 21,00,000

(D) ` 20,00,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 4
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Answer:

(B) ` 14,50,000

Present value of minimum lease payment

Year MLP Discount rate PV

(14.97%)
1 5, 00, 000 0.8698 4,34,900
2 5, 00, 000 0.7565 3,78,250
3 5, 00, 000 0.6580 3,29,000
4 6, 00, 000 0.5724 3,43,440
21, 00, 000 14, 85, 590

Fair value at the inception of lease (` 14,50,000) is less than Present value of minimum lease payment
(`14,85,590) so the leased asset and liability should be recognized at ` 14,50,500.

7. What is the weighted avg. number of equity shares for the following situation prescribed under AS-20:

Accounting year: 2016-17

01/04/2016 Balance 3600 equity shares

15/09/2016 Issued for Cash 1800 equity shares

01/02/2017 Buyback 120 equity shares

(A) 4630

(B) 4600

(C) 5280

(D) None of the above

Answer:

(A) 4630

(3600 x 12/12) + (1800 x 7/12) - (120 x 2/12) i.e. 4630 shares

8. From the following information for T Ltd, calculate the amount of tax to be debited in Profit and Loss Account
for the year 31.03.2015 as per AS-22

Accounting Profit ` 50,00,000

Book Profit as per MAT(Minimum Alternate Tax) ` 30,00,000
Profit as per Income Tax Act ` 25,00,000
Tax Rate 30%
MAT Rate 10%

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(A) ` 14, 50, 000

(B) ` 15, 00, 000

(C) ` 15, 50, 000

(D) None of the above

Answer:

(C) ` 15, 50, 000

Tax as per accounting profit: 50,00,000 x 30% = 15,00,000

Tax as per Income Tax profit: 15,00,000 x 30% = 4,50,000

Tax as per MAT: 50,00,000 x 10% = 5,00,000

Tax expense = Current tax + Deferred tax

15,00,000 = 4,50,000 + Deferred tax

Therefore, Deferred Tax Liability as on 31.3.2015 = ` 15,00,000 – ` 4,50,000 = ` 10,50,000.

Amount of tax to be debited in Profit and Loss Account for the year 31.03.2015:

= Current tax + Deferred tax liability + Excess of MAT over current tax

= 4,50,000 + 10,50,000 + (5,00,000 – 4, 50, ,000)

= 15,50,000

9. On April 2016, J Ltd.bought a trademark from I Ltd. for ` 40 lakhs. J Ltd. retained an independent valuer,who
estimated the trademark’s remaining life to be 20 years. Its unamortized cost on I ltd. records was ` 30
lakhs.J Ltd.decided to amortize the trademark over the maximum period allowed. In J Ltd.’s Balance Sheet
as on 31st March 2017, what amount should be reported as accumulated amortization?

(A) ` 1 lakhs

(B) ` 2 Lakhs

(C) ` 1.5 lakhs

(D) ` 4 lakhs

Answer:

(D) ` 4 lakhs

As per para 23 o f AS-26, intangible assets should be measured initially at cost therefore. J Ltd. should
amortize thetrademark at its cost of ` 40 lakhs. The unamortized cost on the seller’s books ` 30 lakhs is
irrelevant to the buyer.Although the trademark has a remaining useful life of 20 years, intangible assets are
generally amortized overa maximum period of 10 years as per AS-26. Therefore, the maximum amortization
expense and accumulatedamortization is ` 4 lakhs (` 40 lakhs/10).

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10. Choose the correct alternative:

(i) On 1st April 2017, H Ltd acquired 16000 shares out of 20000 equity shares of `10 each of S Ltd at `
600000. On that date balance of General reserve, Capital Reserve and Preliminary Expenses in S Ltd
were ` 242000, `320000 and ` 70000 respectively. The amount of cost of control will be

(a) ` 40000 (Goodwill)

(b) ` 40000 (Capital Reserve)

(c) ` 46400 (Goodwill)

(d) ` 46400 (Capital Reserve)

(ii) P Ltd. purchases 80% shares out of 80000 Equity shares of ` 10 each in Chandu Ltd. at ` 1000000. On that
date the balance of Capital reserve, Securities Premium, General Reserve and Discount on issue of
Debentures were ` 80000, `120000, ` 215000 and ` 40000 respectively. The amount of minority interest
will be

(a) ` 235000

(b) ` 215000

(c) ` 335000

(d) ` 315000

(iii) P Ltd. acquired 80% equity shares of R Ltd. on 1st April 2016. On 31st March 2017, goods worth ` 80000
purchased from P Ltd. were included in the stock of R Ltd. P Ltd. made a profit of 25% on sales. At the
time of preparation of consolidated Balance Sheet the amount of unrealized profit on stock will be

(a) ` 30000

(b) ` 16000

(c) ` 20000

(d) ` 22000

(iv) V Ltd. acquired 2,000 equity shares of D Ltd. on April, 01, 2016 for a price of ` 2,00,000. D Ltd. made a net
profit of ` 80,000 during the year 2016-17. The Share Capital of D Ltd. is ` 2,50,000 consisting of shares of
` 100 each. If the share of V Ltd. in the pre-acquisition profit of D Ltd. is ` 56,000, the amount of
Goodwill/Capital Reserve to be shown in the Consolidated Balance Sheet as on March 31, 2013 is —

(a) ` 44,000 (Capital Reserve)

(b) ` 56,000 (Capital Reserve)

(c) ` 44,000 (Goodwill)

(d) ` 56,000 (Goodwill)

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(v) N Ltd. acquire 60% of T Ltd.’s shares on April 2, 2015, the price paid was `2,80,000. T Ltd.’s Shareholder
equity shares are as follows:

`
Equity Shares (Paid up) 100,000
Share premium 3,00,000
Retained Earning 100,000
5,00,000

The Minority interest will be

(a) ` 200000

(b) ` 300000

(c) ` 310000

(d) ` 210000

(vi) As per AS 23, investment in associates is accounted for under

(a) Equity method

(b) Debt method

(c) Acquisition method

(d) Purchase method

(vii) As per AS 23, investor’s share in post acquisition profit of the associate is

(a) reduced from the carrying amount of investment

(b) added to the consolidated profit and loss

(c) added to the carrying amount of investment

(d) reduced from the consolidated profit or loss

(viii) As per AS 27, in which of the following cases a separate legal entity is recognized?

(a) Jointly controlled operations

(b) Jointly controlled assets

(c) Jointly controlled entities

(d) All of the above

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 8
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(ix) Which of the following statements is false?

(a) For jointly controlled operations no separate financial statements are prepared.

(b) Jointly controlled assets are not owned by a single venture.

(c) Jointly controlled entities do not prepare financial statements separately.

(d) In jointly controlled entities ventures do not own the assets, but own the interest in JCE.

Answer:

(i) (c)

(ii) (a)

(iii) (c)

(iv) (b)

(v) (a)

(vi) (a)

(vii) (a)

(viii) (c)

(ix) (c)

Questions based on Ind AS

1. Which of the following statement is not a true statement regarding foreign currency cash flows under Ind
AS– 7?

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

(B) The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional
currency and the foreign currency at the dates of the cash flows.

(C) Unrealised gains and losses arising from changes in foreign currency exchange rates are cash flows.

(D) None of the above

Answer:

(C) Unrealised gains and losses arising from changes in foreign currency exchange rates are cash flows.

Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows.
However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign
currency is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 9
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beginning and the end of the period. This amount is presented separately from cash flows from operating,
investing and financing activities and includes the differences, if any, had those cash flows been reported
at end of period exchange rates.

2. Identify the reportable segment by profitability test is demonstrated as follows for S Ltd.

Segment Profit (Loss)

V (200)
W 250
X 150
Y (350)
Z (50)

(A) W,X,Y and Z

(B) V,W,X and Z

(C) V,W,X and Y

(D) V,W,X, Y and Z

Answer:

(C) V, W, X and Y

Reportable Segment = more than 10% of higher of absolute value of Profit or Loss

= more than 10% of 600 = 60

3. An entity shall prepare its financial statements, except for , using the accrual basis of
accounting.

(A) balance sheet

(B) profit and loss

(C) changes in equity

(D) cash flows

Answer:

(D) cash flows

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Write the answer of the following questions

Questions based on AS

1. Company Y entered into an agreement to sell its immovable property included in the Balance Sheet at ` 20
lakhs to another company for ` 35 lakhs. The agreement to sell was concluded on 18.02.2017 and the sale
deed was registered on 28.04.2017. How this will be treated in Balance Sheet as on 31.03.2017.

Answer:

As per AS 4 Assets and liabilities should be adjusted for events occurring after the balance sheet date which
provides additional evidence to assist the estimation of amounts relating to conditions existing at the balance
sheet date. In the present case sale of immovable property was concluded before approval by the Board. This
is clearly an event occurring after the balance sheet date. Agreement to sell was entered into before the
balance sheet date. Registration of the sale deed simply provides additional information relating to the
conditions existing at the balance sheet date. So adjustments to assets are necessary and Asset will be
derecognized in the Balance Sheet as on 31.03.2017.

2. What is the treatment to be given in each of the following cases to an entity for re-classify its Investment in
accordance with AS-13.

(i) A portion of Current Investments purchased for ` 48 lakhs to be reclassified as long-term Investments,
as the company has decided to retain them. The market value as on the date of Balance Sheet was `
57 lakhs.

(ii) Another portion of Current Investments purchased for ` 31 lakhs has to be reclassified as Long-term
Investments. The market value of these investments as on the date of Balance Sheet was ` 24 lakhs.

(iii) Certain Long-term Investments no longer considered for holding purposes have to be re-classified as
Current Investments. The original cost of theses was ` 35 lakhs but they had been written down to ` 26
lakhs to recognize permanent decline as per AS 13.

Answer:

As per AS - 13 Accounting for Investments‘ where investments are reclassified from current to long term, transfers
are made at the lower of cost and fair value at the date of transfer. In the first case, the market value of the
investment is ` 57 lakhs, which is higher than its cost ` 48 lakhs. Therefore, the transfer to long term investments
should be carried at cost ` 48 lakhs.

In the second case, the market value of the investment is ` 24 lakhs, which is lower than its cost ` 31 lakhs.
Therefore, the transfer to long term investments should be carried in the books at the market value ` 24 lakhs.
The loss of ` 7 lakhs should be charged to profit and loss account. Where long-term investments are re-classified
as current investments, transfers are made at the lower of cost and carrying amount at the date of transfer.

In the third case, the book value of the investments is ` 26 lakhs, which is lower than its cost `35 lakhs. Here, the
transfer should be at carrying amount and hence this re-classified current investment should be carried at ` 26
lakhs.

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3. A claim lodged with the Insurance Company in February, 2015 for loss of goods of ` 15 lakhs had been
passed for payment inMarch, 2017 for ` 12 lakhs. No entry was passed in the books of the company, when
the claim was lodged. Advice the Company about the treatment of the following in the final statement of
accounts for the year ended 31st March, 2017.

Answer:

The financial statements of the company are prepared for the year ended 31.3.17.

There was a loss of goods of `15 lakhs in 2014-15 and the claim was lodged in February 2015 with the Insurance
Company. No entry was passed in the books of the company when the claim was lodged and the said
treatmentwas correct in view of AS-9, which states that if uncertainty exists as to collectability, the revenue
recognitionshould be postponed.Since, the claim is passed for payment of `12 lakhs in March, 2017, it should be
recognized as revenue in thefinancial statements prepared for the year ended 31.3.17.

As per AS-5 Revised, the claim amount received will not be treated as extraordinary item. AS-5 Revised
furtherstates that when items of income and expense within profit 0r loss from ordinary activities are of such size,
nature,or incidence that their disclosure is relevant to explain the performance of the enterprise for the period,
the natureand amount of such items should be disclosed separately. Accordingly, the nature and amount of
this item shouldbe disclosed separately.

4. Exchange Rate

Goods sold on 03.02.2018 of US $1,00,000 ` 64.17

Exchange rate on 31.3.2018 ` 63.58

Date of actual payment 5.04.18 ` 63.75

Calculate the loss/gain for the financial years 2017-18 and 2018-19.

Answer:

As per AS-11, all foreign currency transactions should be recorded by applying the exchange rate at the date
of transaction. Therefore, goods sold on 03.02.2018 and corresponding debtor would be recorded at ` 64.17

= 1,00,000 × 64.17 = 64,70,000

As per AS-11, at the balance sheet date all monetary items should be reported using the closing rate.

Therefore, the debtors of US $1,00,000 outstanding on 31.3.18 will be reported as:

1,00,000 × 63.58 = 63,58,000.

Exchange loss ` 1,12,000 = (64,70,000– 63,58,000) should be debited in profit and loss account for 2017-18.

As per AS-11, exchange difference on settlement on monetary items should be transferred to profit and loss
account as gain or loss thereof:

1,00,000 × 63.75 = 63,75,000 - 63,58,000 = `17,000 should be credited to profit or loss for the year 2018-19.

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5. In preparing the financial statements of X Ltd. for the year ended 31st March, 2016, you come across the
following information.

“An unquoted long-term investment is carried in the books at a cost of `15 lakhs. The published accounts of
the unlisted company received in June 2016 showed that the company was incurring cash losses with
declining market share and the long-term investment may not fetch more than ` 10lakh”. State with
reasons, how would you deal with them in the financial statements:

Answer:

As per AS-13, the long-term investments should be carried in the financial statements at cost. If there is a
diminution in the value of long term investments, which is not temporary in nature, provision should be made for
each investment individually. Any reduction in the carrying amount should be charged to the Profit and Loss
Account. The long term investments are carried at a cost of `15 lakhs in the books of accounts. The value of
investments fall down to ` 10 lakh due to cash losses and the declining market share of the company in which
the investments were made.

In view of the provision contained in AS-13, the carrying amount of long-term investments should be brought
downto ` 10 lakh and `5 lakhs should be charged to Profit and Loss Account for the year ended 31st March,
2016.

6. B Ltd., an insurance company, has classified its total investment on 31.3.2015 into three categories: (a) held
to maturity (b) available for sale (c) held for trading.

Held to maturity investment is carried at acquisition cost less amortized amount. Available for sale are
carried at marked to market. Held for trading investments are valued at weekly intervals at market rates.
Comment on the policy of the company in accordance with AS-13.

Answer:

As per para 2(d) of AS-13, the accounting standard is not applicable to bank, insurance company, mutual
funds. In this case, B Ltd. is an insurance company; therefore AS-13 does not apply here.

7. X Ltd. has obtained an institutional loan of `700 lakhs for modernization and renovation of its machinery.
Machinery acquired under the modernization scheme and installation completed on 31.3.16 amounts to
`500 lakhs. `150 lakhs have been advanced to suppliers for additional assets and balance loan of ` 50
lakhs have been utilized for working capital purpose. The total interest paid for the above loan amounted to
` 70 lakhs during 2015-16.You are required to state how the interest on the institutional loan is to be
accounted in the year 2015-16.

Answer:

The total interest of ` 70 lakhs are related to two periods. Upto the date of installation of the machinery, amount
disbursed is ` 650 lakhs (` 500 + 150). Interest on such amounting to ` 65 lakhs should be capitalized and the
balance of the interest ` 5 lakhs (i.e. ` 70-65) should be treated as an expense.

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8. Sun Ltd. has taken a loan of US $10 lakhs on 1st April, 2015, for a specific project at an interest rate of 10%
p.a., payable annually. On 1st April, 2015, the exchange rate between the currencies was ` 55 per US $. The
exchange rate, as at 31st March, 2016, is ` 58 per US $. The corresponding amount could have been
borrowed by Sun Ltd. in local currency at an interest rate of 14% p.a. as on 1st April, 2015.

Compute the amount of borrowing costs for the purposes ofAS-16.

Answer:

(a) Interest for the period = US $10,00,000 x 10% x RS. 58 per US $ = `58,00,000

(b) Increase in the liability towards the principal amount = US $ 10,00,000 x (58-55)= ` 30,00,000.

(c) Interest that would have resulted if the loan was taken in Indian currency = US $ 10,00,000 x ` 55 x 14% =
`77,00,000

(d) Difference between interest on local currency borrowing and foreign currency borrowing = ` 77,00,000 –
`58,00,000 = ` 19,00,000

Therefore, out of `30,00,000 increases in the liability towards principal amount, only `19,00,000 will be considered
as the borrowing cost. Thus, total borrowing cost would be `77,00,000 being the aggregate of interest of
`58,00,000 on foreign currency borrowings (as per Para 4(a) of AS-16) plus the exchange difference to the
extent of difference between interest on local currency borrowing and interest on foreign currency borrowing
of `19,00,000. Thus, `77,00,000 would be considered as the borrowing cost to be accounted for as per AS-16
and the remaining `11,00,000 would be considered as the exchange difference to be accounted for as per AS-
11 “The Effects of Changes in Foreign Exchange Rates”.

9. On 10.05.2016 C Ltd. obtained a loan from the bank for ` 10 crores to be utilized as under:

(i) Purchase of Machinery ` 3.5 crores.

(ii) Construction of a factory shed ` 4 crores.
(iii) Working Capital ` 2 crores.
(iv) Advance for Purchase of vehicle ` 50 lakhs.

In March 2016, construction of shed was completed and machinery installed. Delivery of truck was not
received. Total interest charged by the bank for the year ended 31.3.16 was ` 1.20 crores. Show the
treatment of interest as per AS-16.

Answer:

As per AS-16, borrowing cost (interest) should be capitalized if borrowing cost is directly attributable to the
acquisition, construction or production of qualifying asset. ` 5 crores borrowed from Bank was utilized for four
different purposes, only construction of factory shed is a qualifying asset as per AS-16, while the other three
payments are not for the qualifying asset. Therefore, borrowing cost attributable to the construction of a factory
shed should only be capitalized which will be equal to ` 1.20 crores x 4/10 = ` 48 lakhs. The balance of ` 72 lakhs
(` 120 lakhs – ` 48 lakhs) should be treated as an expense and debited to Profit and Loss Account.

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10. Define the term ‘Geographical segment’ as per AS – 17.

Answer:

A ‘Geographical segment’ is a distinguishable component of an enterprise that is engaged in providing

products or services within a particular economic environment and that is subject to risk and returns that are
different from those of components operating in other economic environments. Factors for identification of
geographical segments are:

(a) Significant difference in risk and rewards;

(b) Internal MIS and organization structure;

(c) Essential factors that defines a business segment.

11. Discuss the provision relating with Related party disclosures and the applicability under AS –18.

Answer:

Type of disclosure under AS-18

(a) in case of related party relationship by virtue of significant influence (not control) e.g. those of associates,
key management personnel, relatives, there is no need. to disclose the related party relationship unless
there has been actual transaction during the reporting period with such related parties.

(b) in the event of transaction between related parties during the existence of a related party
relationship(control or significant influence) the reporting enterprise should disclose:
(i) the name of transacting related party
(ii) description of the relationship between parties
(iii) description of nature of transaction
(iv) volume of transaction, either in amount or approximate proportions
(v) any other element of the related party transactions necessary for understanding of financial
statements(e.g. transfer of major asset taken at price different from normal commercial terms i.e. not
at fair value)
(vi) either in amount or proportion of outstanding items and provisions for doubtful debts pertaining to
related parties on B/S date.
(vii) amounts written off/back in the accounting period in respect of debts due from or to related parties.

Related party disclosures are applicable only to the following related party relationships:

1. enterprises that directly or indirectly through one or more intermediaries control or are controlled by or
under common control with the reporting enterprise

2. associates and joint ventures of the reporting enterprise and the investing party or venture in respect of
which the reporting enterprise is an associate or joint venture.

3. 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.

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4. key management personnel and relatives of such individuals.

5. enterprise over which any person in (3) and (4) is able to exercise significant influence (including enterprise
owned by directors or major shareholders of the reporting enterprise and enterprise that have a member of
key management in common with the reporting enterprise).Related party transactions involve transfer of
resources or obligations between related parties, regardless of whether or not a price is charged, e.g. use
of logo/brand name provision of management services, providing financial guarantee use of common
infrastructure etc.

12. X Ltd. sold machinery having WDV of ` 800 Lakhs to Y Ltd. for ` 900 Lakhs and the same machinery was
leased back by B Ltd. to H Ltd. The Lease back is operating lease.

Comment if –

(a) Sale price of `900 lakhs is equal to fair value

(b) Fair value is `950 lakhs

(c) Fair value is `800 lakhs and sale price is `900 lakhs

(d) Fair value is `850 lakhs and sale price is `750 lakhs

(e) Fair value is `750 lakhs and sale price is `790 lakhs

(f) Fair value is `860 lakhs and sale price is `900 lakhs

Answer:

(a) X ltd. should immediately recognize the profit of `100 lakhs in its books.

(b) Profit `100 lakhs should be immediately recognized by X Ltd.

(c) Profit of `100 lakhs is to be amortized over the lease period.

(d) Loss of ` 50 lakhs to be immediately recognized by X Ltd. in its books provided loss is not compensated by
future lease payment.

(e) Loss of `50 lakhs (800-750) to be immediately recognized by X Ltd. in its books and profit of `40lakhs (790-
750) should be amortized / deferred over lease period.

(f) Profit of `60 lakhs (860-800) to be immediately recognized in its books and balance profit of `40lakhs (900-
860) is to be amortized / deferred over lease period.

13. What is Diluted EPS as per AS – 20?

Answer:

Diluted EPS indicates the potential variability or risk attached to the basic EPS as a consequence of the issue of
potential equity shares and potential dilutive securities having significant impact on lowering EPS. However, no
potential equity shares be included in the computation of any diluted per share amount in case of continuing
loss from operation, even though the entity reports an overall net profit.

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(i) Adjustments should be made both in numerator and denominator consequent upon the conversion of
potential dilution to arrive at diluted EPS in keeping with the nature of conversion including tax implication
thereon in the respective year.

(ii) Potential equity shares are:

(a) debt instruments/preference share convertible into equity shares

(b) share warrants

(c) employees and other stock option plans which entitles them to receive equity shares as part of their
remuneration and other similar plans

(d) contingently issuable shares under contractual arrangements e.g. acquisition of a business/assets,
loan converted to equity on default

(e) share application pending allotment if not statutorily required to be kept separately and is being
utilized for business is treated as potential (dilutive) equity share.

14. C 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 2015, 2016and 2017 for ` 22,00,000, ` 32,00,000 and `42,00,000 respectively. However, for income-tax
purpose, it has adopted the completed contract method under which it has recognized revenue of `
14,00,000, ` 36,00,000 and ` 46,00,000for the years 2015, 2016 and 2017 respectively. Income-tax rate is
35%. Compute the amount of deferred tax asset/liability for the years 2015, 2016 and 2017.

Answer:

C Limited

Calculation of Deferred Tax Asset/Liability

Year Accounting Taxable Income Timing Difference Deferred Tax

Income (balance) Liability (balance)
2015 22,00,000 14,00,000 8,00,000 2,80,000
2016 32,00,000 36,00,000 4,00,000 1,40,000
2014 42,00,000 46,00,000 nil nil
96,00,000 96,00,000

15. State the provision for non-applicability of AS-23 for Investment in Associates.

Answer:

These are the following situation where AS – 23 is not applicable:

1. Investment in associates are accounted for using the ‘equity method’ in the Consolidated Financial
Statements except when,

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(a) the investment is made and held exclusively with a view to subsequent disposal in the near future, or

(b) the associate operates under severe long-term restrictions that significantly impairs its ability to transfer
funds to investor. Investments in such a situation is accounted for in accordance with AS-3 in
Consolidated Financial Statements.

2. Equity method of accounting is also not applicable if

(a) it has no investment in Association

(b) it has investment in Association but has no subsidiaries, Consolidated Financial Statements is not
required

(c) it has subsidiaries and associates but these are not material, hence Consolidated Financial Statements
is not prepared.

(d) It is not listed enterprise hence not mandatory to present Consolidated Financial Statements or has not
chosen voluntarily to present Consolidated Financial Statements.

16. X holds, 25% share in Y Ltd at a cost of ` 50 lakhs as on 31-03-2016. Y’s shares capital and reserve is ` 200
Lakh. For the year ended 31-03-2016 Y made a profit of ` 8,00,000 and 50% distributed as dividend.
Compute the value (carrying amount) as at 31.03.2016 to be shown in the Consolidated Financial
Statements.

Answer:
` in Lakhs

Cost of shares in Y Ltd. 50

Share of Reserve 50

Share of profit 02

102

Less: dividend received 01

Value of investment as at 31.03.16 101

17. What are the prerequisites conditions to determine discounting operation as per AS – 24?

Answer:

Prerequisites to determine ‘discontinuing operation’ –

1. The enterprise in term a single plan:

(a) disposing substantially in its entirety e.g. by selling the component in a single transaction or by
demergeror spin-off of ownership of the component to the enterprise’s shareholder, or

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(b) disposing in piecemeal manner e.g. selling off the assets-and settling its liabilities individually or

(c) terminating through abandonment

2. That represent, a separate major line of business or geographical area of operation, and

3. That can be distinguished operationally for financial reporting purpose.

18. When it is required to prepare and present Interim Financial Report in comply with AS-25.

Answer:

As per Clause 41 of listing agreement the companies are required to publish the financial results on a quarterly
basis. The standard itself does not categorize the enterprise or frequency of interim financial report and the time
limit for presentation from the end of an interim period, but if it is required to prepare and present, it should
comply with AS-25.

Instances for interim financial report:

(i) quarterly report to the board of directors or bank

(ii) in case of merger and amalgamation

(iii) for IPO purpose

(iv) for consolidation of parent and subsidiary when year ends are different

(v) for declaring interim dividend’ Accounting for interim transaction:

(a) interim period is considered as integral part of annual accounting period e.g. annual operating
expectations are estimated and then allocated to the interim period based on estimated sales or
other parameters and results of subsequent interim periods are adjusted for estimation errors (integral
approach)

(b) each interim period is considered as discrete and separate accounting period like a full accounting
period e.g. no estimation or allocation and operating expenses are recognized in the concerned
interim period irrespective of benefit accruing to other interim period (discrete approach).

19. Define the term ‘Intangible Assets’ as described in AS – 26.

Answer:

An intangible asset is an identifiable non-monetary asset, without physical substance held for production or
supply of goods and services for rental to others or for administrative purposes.

Essential criteria for recognition of an intangible asset:

(a) identifiable: It must be separate from goodwill and the enterprise could rem. sell: exchange or distribute
the future economic benefits attributable to the asset without disposing of future economic benefits that
flow from other assets in the same revenue earning activity - but goodwill cannot be meaningfully
transferred to a new owner without also selling the other assets or the operation of the business. e.g.

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patents, copyrights, license, brand name, import quota, computer software, lease hold right, marketing
rights, technical know-how etc.

(b) control: The enterprise has the power to obtain the future economic benefits, flowing from the underlying
resources and also can restrict the access of others to those benefits (not necessarily legal right and may
be in some other way – market and technical knowledge may give rise to future economic benefit).

(c) future economic benefits: An enterprise should asses 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 on the basis of weight age to external evidence available at
the time of initial recognition.

(d) Cost can be measured reliably :(i) Initially recognized at cost - purchase price, taxes duty and other
directly attributable expenses to make the asset ready for its intended use, if acquired separately -
purchase consideration in the form of cash or other monetary asset.

20. M.S.D. Ltd. is developing a new production process. During the financial year ending 31st March, 2016, the
total expenditure incurred was ` 60 lakhs. This process met the criteria for recognition as an intangible asset
on 1st September, 2015. Expenditure incurred till this date was `32 lakhs. Further expenditure incurred on the
process for the financial year ending 31st March, 2017 was ` 50 lakhs. As at 31st March, 2017, the
recoverable amount of know-how embodied in the process is estimated to be ` 77 lakhs. This includes
estimates of future cash outflows as well as inflows.

You are required to calculate:

(i) Amount to be charged to Profit and Loss A/c for the year ending 31st March, 2016 and carrying value
of intangible as on that date.

(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on 31st March, 2017.
Ignore depreciation.

Answer:

As per AS 26 ‘Intangible Assets’

(i) For the year ending 31.03.2016

(a) Carrying value of intangible assets as on 31.03.2016:

At the end of financial year 31st March 2016, the production process will be recognized (i.e. carrying
amount) as an i ntangible asset at a cost of ` 28 lakhs (expenditure incurred since the date the
recognition criteria were met, i.e., on 1st December 2015).

(b) Expenditure to be charged to Profit and Loss account: The `32 lakhs is recognized as an expense
because the recognition criteria were not met until 1st December 2015. This expenditure will not form
part of the cost of the production process recognized in the balance sheet.

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(ii) For the year ending 31.03.2017

(a) Expenditure to be charged to Profit and Loss account:

(` in lakhs)

Carrying Amount as on 31.03.2016 28

Expenditure during 2016 – 2017 50

Total book cost 78

Recoverable Amount 77

Impairment loss 01

` 1 lakh to be charged to Profit and loss account for the year ending 31.03.2017.

(b) Carrying value of intangible as on 31.03.2017:

(` in lakhs)

Total Book Cost 78

Less: Impairment loss 01

Carrying amount as on 31.03.2017 77

21. Discuss the term ‘Joint Venture’ as per AS-27

Answer:

A joint venture is a contractual arrangement between two or more parties undertaking an economic activity,
subject to joint control (control is the power to govern the financial and operating policies of an economic
activity to obtain benefit from it).The arrangement may be:

(a) Jointly controlled operations

(b) Jointly controlled asset

(c) Jointly controlled entities

In the event an enterprise by a contractual arrangement establishes joint control over an entity which is a
subsidiary of that enterprise within the meaning of AS-2, it will be treated as joint venture as per AS-27. Joint
control requires all the ventures to jointly agree on key decisions, else decision cannot be taken, as such even a
minority holder (owner) may enjoy joint control.

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22. What are the sources, based on which assessment for impairment of assets needs to be made?

Answer:

Assessment for impairment of assets needs to be made based on external or internal source of information.

External sources:

• Market value changes with passage of time or normal use (typewriter on invention of computer)

• Adverse effect in the light of technological, market, economic, or legal environment in which the
enterpriseoperates.

• Change in market rate of interest or returns on investment affect the discount rates used to assess an
assetvalue in use (if the effect is not a short-term phenomenon).

• Carrying amount of the net asset, exceeds its market capitalization (determined by future growth,
profitability,threat of new products/entrants etc).

Internal sources:

• Obsolescence /physical damage is evident.

• Indication obtained internally that economic performance of an asset has worsened or likely to worse
thanexpected.

• Continuous cash loss may indicate that one or more of the business division is impaired.

23. A Company acquired a machine for ` 5.6 crores on 1.1.2014. It has a life of 5 years with a salvage value of `
30 lakhs. Apply the test of impairment on 31.3.2016:

(a) Present value of future cash flow `2.3 crores

(b) Net selling price `2.2 crores

Answer:

Carrying amount of the asset: [5.6 – (5.6 – 0.3) x 27/60] = 2.43 crores.

Time period for use of the asset: 1.1.2014 to 31.3.2016 = 27 months

Total life period of the asset = 5 years = 60 months.

Recoverable amount: being the higher of present value and net selling price = ` 2.3 crores.

Impairment Loss = ` (2.43 – 2.3) crores = ` 0.13 crores.

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24. Write short notes on (A) Contingent liability (B) Contingent asset

Answer:

(A) contingent liability is:

(a) a possible obligation that arises from past events and the existence of which will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the enterprise; or

(b) a present obligation that arises from past events but is not recognized because:

(i) it is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; or

(ii) a reliable estimate of the amount of the obligation cannot be made.

(B) 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 one or more uncertain future events not wholly within the
control of the enterprise.

Whereas, present obligation is a present obligation if, based on the evidence available, its existence at the
balance sheet date is considered probable, i.e., more likely than not and possible obligation is a possible
obligation if, based on the evidence available, its existence at the balance sheet date is considered not
probable.

Questions based on Ind AS

1. What is total comprehensive income under Ind AS – 1

Answer:

Total comprehensive income is the change in equity during a period resulting from transactions and other
events, other than those changes resulting from transactions with owners in their capacity as owners.

Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other comprehensive income’.

Other comprehensive income comprises items of income and expense (including reclassification adjustments)
that is not recognised in profit or loss as required or permitted by other Ind ASs.

The components of other comprehensive income include:

(a) changes in revaluation surplus — Ind As 16 & 38;

(b) remeasurements of defined benefit plans — Ind AS 19;

(c) gains and losses arising from translating the financial statements of a foreign operation — Ind AS 21;

(d) gains and losses from investments in equity instruments designated at fair value through other
comprehensive income — Ind AS 109;

(e) gains and losses on financial assets measured at fair value through other comprehensive income — Ind AS
109;

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(f) the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and
losses on hedging instruments that hedge investments in equity instruments measured at fair value through
other comprehensive income — Ind AS 109;

(g) for particular liabilities designated as at fair value through profit or loss, the amount of the change in fair
value that is attributable to changes in the liability’s credit risk — Ind AS 109;

(h) changes in the value of the time value of options when separating the intrinsic value and time value of an
option contract and designating as the hedging instrument only the changes in the intrinsic value — Ind AS
109;

(i) changes in the value of the forward elements of forward contracts when separating the forward element
and spot element of a forward contract and designating as the hedging instrument only the changes in
the spot element, and changes in the value of the foreign currency basis spread of a financial instrument
when excluding it from the designation of that financial instrument as the hedging instrument — Ind AS 109.

2. What do the items comprise in a complete set of financial statements under Ind AS-1?

Answer:

A complete set of financial statements comprises:

(a) a balance sheet as at the end of the period;

(b) a statement of profit and loss for the period;

(c) statement of changes in equity for the period;

(d) a statement of cash flows for the period;

(e) notes, comprising a summary of significant accounting policies and other explanatory information; and

(f) comparative information in respect of the preceding period;

(g) a balance sheet as at the beginning of the preceding period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements, or when it
reclassifies items in its financial statements

(h) An entity shall present a single statement of profit and loss, with profit or loss and other comprehensive
income presented in two sections. The sections shall be presented together, with the profit or loss section
presented first followed directly by the other comprehensive income section.

3. Discuss the terms Current assets and Current liabilities as per Ind AS -1

Answer:

An entity shall classify an asset as current when:

(a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;

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(b) it holds the asset primarily for the purpose of trading;

(c) it expects to realise the asset within twelve months after the reporting period; or

(d) the asset is cash or a cash equivalent (as defined in Ind AS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting period.

(e) An entity shall classify all other assets as non-current.

(f) This Standard uses the term ‘non-current’ to include tangible, intangible and financial assets of a long-term
nature. It does not prohibit the use of alternative descriptions as long as the meaning is clear.

The operating cycle of an entity is the time between the acquisition of assets for processing and their realisation
in cash or cash equivalents. When the entity’s normal

operating cycle is not clearly identifiable, it is assumed to be twelve months. Current assets include assets (such
as inventories and trade receivables) that are sold, consumed or realised as part of the normal operating cycle
even when they are not expected to be realised within twelve months after the reporting period. Current assets
also include assets held primarily for the purpose of trading and the current portion of non-current financial
assets.

Current liabilities

An entity shall classify a liability as current when:

(i) it expects to settle the liability in its normal operating cycle;

(ii) it holds the liability primarily for the purpose of trading;

(iii) the liability is due to be settled within twelve months after the reporting period; or

(iv) it does not have an unconditional right to defer settlement of the liability for at least twelve months after
the reporting period.

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

• Some current liabilities, such as trade payables and some accruals for employee and other operating
costs, are part of the working capital used in the entitys normal operating cycle. An entity classifies
such operating items as current liabilities even if they are due to be settled more than twelve months
after the reporting period.

• Other current liabilities are not settled as part of the normal operating cycle, but are due for settlement
within twelve months after the reporting period or held primarily for the purpose of trading. Financial
liabilities that provide financing on a long-term basis and are not due for settlement within twelve
months after the reporting period are non-current liabilities.

• An entity classifies its financial liabilities as current when they are due to be settled within twelve
months after the reporting period, even if:

(a) the original term was for a period longer than twelve months, and

(b) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the
reporting period and before the financial statements are approved for issue.

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4. X ltd. Has a loan obligation which would become due within a period shorter than 12 months from the
reporting date. What will be disclosure requirement of this loan when

(a) The entity has the power to refinance the existing loan obligation for at least 12 months after the
reporting period.

(b) refinancing the obligation is not at the discretion of the entity.

Answer:

If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months
after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it
would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not
at the discretion of the entity, the entity does not consider the potential to refinance the obligation and
classifies the obligation as current.

5. (i) State the offsetting provision under Ind AS

(ii) A Ltd, has an unused property, had no intention to use in the future. The Board of Directors decided to sell
the property to compel its liquidity problems. The Company made a profit of ` 30 Lakhs by selling the said
property. There was a fire in the factory and a part of the unused factory valued at ` 8 Lakhs was
destroyed. The Loss was set-off against the Profit from Sale of property and a Profit of ` 22 Lakh was
disclosed as Net Profit from Sale of Assets. Analyse.

Answer:

(i) An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an
Ind AS.

An entity reports separately both assets and liabilities, and income and expenses. Measuring assets net of
valuation allowances — for example, obsolescence allowances on inventories and doubtful debts
allowances on receivables — is not offsetting.

In addition, an entity presents on a net basis gains and losses arising from a group of similar transactions, for
example, foreign exchange gains and losses or gains and losses arising on financial instruments held for
trading. However, an entity presents such gains and losses separately if they are material.

(ii) An Entity shall not offset Assets and Liabilities or Income and Expenses, unless required or permitted by an
Ind AS.

When items of Income or Expense are material, an Entity shall disclose their nature and amount separately.
Disposal of items of Property, Plant and Equipment is one example of such material item.

Disclosing Net Profits by setting off Fire Losses against Profit from Sale of property is not correct. As per Ind
AS-1, Profit on Sale of property, and Loss due to Fire should be disclosed separately.

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6. What are the information to be disclosed in Statement of Changes in Equity?

Answer:

An entity shall present a statement of changes in equity. The statement of changes in equity includes the
following information:

• total comprehensive income for the period, showing separately the total amounts attributable to owners of
the parent and to non-controlling interests;

• for each component of equity, the effects of retrospective application or retrospective restatement
recognised in accordance with Ind AS 8;

• for each component of equity, a reconciliation between the carrying amount at the beginning and the
end of the period, separately (as a minimum) disclosing changes resulting from:

– profit or loss;

– other comprehensive income;

– transactions with owners in their capacity as owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of
control; and

– any item recognised directly in equity such as amount recognised directly in equity as capital reserve.

7. What is Inventories as per Ind AS 2?

Answer:

Inventories are assets:

(a) held for sale in the ordinary course of business;

(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.

In case of service providers, inventories include the cost of service for which the entity has not yet recognised
the revenue.

8. Discuss about the scope of Ind AS 2.

Answer:

This Standard applies to all inventories, except:

(a) financial instruments ; and

(b) biological assets (i.e living animals or plants) related to agricultural activity and agricultural produce at the
point of harvest.

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This Standard does not apply to the measurement of inventories held by:

commodity broker traders who measure their inventories at fair value less costs to sell and producers of
agricultural and forest products, agricultural produce after harvest and minerals and mineral products to the
extent that they are measured at net realisable value in accordance with well established practices in those
industries.

The standard also scopes out the biological assets related to agricultural activity and agricultural produce at
the point of harvest

9. How the cost of inventories can be measured? What other costs are excluded from the cost of inventories?

Answer:

Cost of inventories comprises

• all costs of purchase,

• costs of conversion and

• other costs incurred in bringing the inventories to their present location and condition.

Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the
inventories to their present location and condition.

Following costs are excluded from the cost of inventories and recognised as expenses in the period in which
they are incurred are:

(a) abnormal amounts of wasted materials, labour or other production costs;

(b) storage costs, unless those costs are necessary in the production process before a further production
stage;

(c) administrative overheads that do not contribute to bringing inventories to their present location and
condition; and

(d) selling costs.

10. MNC Ltd. Produces three joint products X, Y and Z from a joint process. It incurred ` 7,84,800. Allocate the
Joint Costs with the following information:

Particulars X Y Z

Quantity Produced 20,000 kgs 15,000 kgs 18,000 kgs

Sales Price per kg ` 15 ` 25 ` 17

Stock Quantity at the 1,000 kgs 750 kgs 250 kgs

end of year

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Answer:

As per Ind AS – 2, costs of Joint Products should be apportioned on a rational and consistent basis. The Sales
Value at Split Off Point may be used for apportionment in the given case.

Particulars X Y Z

1. Production Quantity 20,000 15,000 18,000

2. Sale price per kg ` 15 ` 25 ` 17

3. Total Sale Vale (1×2) 3,00,000 3,75,000 3,06,000

4. Joint Costs apportioned (based on Sale 3,00,000 3,00,000 2,44,800

× 7,84,800
Value) (bases on 3) 9,81,000
= 2,40,000

5. Average Joint Costs per kg (4÷1) 12 20 13.6

6. Closing Stock Quantity (given) 1000 750 250

7. Value of Closing Stock (5×6) 12,000 15,000 3,400

Note: It is presumed that the NRV of the products as at the Balance Sheet date, are higher than the respective
costs

11. In a production process, Normal Waste is 5% of input. 8,000 MT of input were put in process resulting in a
wastage of 500 MT. Cost per MT of input is `1,250. The entire quantity of waste is on stock at the year-end.
Compute the value of Inventory.

Answer:

Abnormal Amounts of Waste Materials, Labour or other Production Costs are excluded from cost of inventories
and such costs are recognised as expenses in the period in which they are incurred.

Normal Waste is 5% of 8,000 MT i.e. 400 MT and Abnormal Waste is 500 MT – 400 MT = 100 MT.

Cost of Normal Waste 400 MT (i.e. 400 MT × `1,250 = `5,00,000) will be included in determining the cost of
inventories at the year-end.

12. What is the provision regarding Taxes on income in Ind AS - 7

Answer:

Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from
operating activities unless they can be specifically identified with financing and investing activities.

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Taxes on income arise on transactions that give rise to cash flows that are classified as operating, investing or
financing activities in a statement of cash flows. While tax expense may be readily identifiable with investing or
financing activities, the related tax cash flows are often impracticable to identify and may arise in a different
period from the cash flows of the underlying transaction. Therefore, taxes paid are usually classified as cash
flows from operating activities. However, when it is practicable to identify the tax cash flow with an individual
transaction that gives rise to cash flows that are classified as investing or financing activities the tax cash flow is
classified as an investing or financing activity as appropriate. When tax cash flows are allocated over more
than one class of activity, the total amount of taxes paid is disclosed.

13. Define the term Cash and cash equivalents

Answer:

Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment
or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known
amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally
qualifies as a cash equivalent only when it has a short maturity of, say, three months or lessfrom the date of
acquisition. Equity investments are excluded from cash equivalents unless they are, in substance, cash
equivalents, for example in the case of preference shares acquired within a short period of their maturity and
with a specified redemption date.

Bank borrowings are generally considered to be financing activities. However, where bank overdrafts which are
repayable on demand form an integral part of an entity’s cash management, bank overdrafts are included as
a component of cash and cash equivalent

14. What are the disclosure requirements for Changes in accounting Policies?

Answer:

It requires retrospective application of changes in accounting policies by adjusting the opening balance of
each affected component of equity for the earliest prior period presented and the other comparative amounts
for each period presented as if the new accounting policy had always been applied (unless transitional
provisions of an accounting standard require otherwise).

15. How the Errors can be recognized in the financial statements?

Answer:

Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial
statements. Financial statements do not comply with Ind ASs if they contain either material errors or immaterial
errors made intentionally to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows.

Potential current period errors discovered in that period are corrected before the financial statements are
approved for issue. However, material errors are sometimes not discovered until a subsequent period, and

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these prior period errors are corrected in the comparative information presented in the financial statements for
that subsequent period.

An entity shall correct material prior period errors retrospectively in the first set of financial statements approved
for issue after their discovery by:

(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or

(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.

16. As at the end of the reporting period 31st March, 2017 Cost of Investments is `15,00,000. (Market Value
`18,00,000) Its value declines to `8,00,000 on 15th April, 2017. How should the entity consider the above in
its Financial Statements?

Answer:

Decline in fair value of investments does not normally relate to the condition of the Investments at the end of
the reporting period, but reflects circumstances that have arisen subsequently. So, an entity does not –

(a) Adjust the amounts recognized in its Financial Statements for the Investments, or

(b) Update the amounts disclosed for the investments as at the end of the reporting period.

The entity may need to give Additional Disclosure.

17. How the liabilities should be recognized if dividends are declared after the reporting period but before the
financial statements are approved for issue?

Answer:

If an entity declares dividends to holders of equity instruments (as defined in Ind AS 32, Financial Instruments:
Presentation) after the reporting period, the entity shall not recognise those dividends as a liability at the end of
the reporting period.

If dividends are declared after the reporting period but before the financial statements are approved for issue,
the dividends are not recognised as a liability at the end of the reporting period because no obligation exists at
that time. Such dividends are disclosed in the notes in accordance with Ind AS 1, Presentation of Financial
Statements. It depends on the fact whether the event existed at the end of the period or not.

18. State the Recognition provision of deferred tax assets and liabilities as per Ind AS 12 — Income Taxes

Answer:

Deferred income taxes are recognised for all temporary differences between accounting and tax base of
assets and liabilities except to the extent which arise from a) initial recognition of goodwill or b) asset or liability
in a transaction which i) is not a business combination; and ii) at the time of the transaction, affects neither the
accounting nor the tax profit.

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19. How the replacement costs of an item of PPE is considered as per Ind AS 16 Property, Plant and Equipment?

Answer:
Replacement cost of an item of PPE is capitalized if replacement meets the recognition criteria. Carrying
amount of items replaced is derecognised.

20. What is functional and presentation currency as per Ind AS 21 - The Effects of Changes in Foreign Exchange
Rates?

Answer:

Functional currency is the currency of the primary economic environment in which the entity operates. Foreign
currency is a currency other than the functional currency. Presentation currency is the currency in which the
financial statements are presented.

21. What do you understand by Impairment of Assets as per Ind AS 36?

Answer:

Impairment of assets means weakening in value of assets. An asset is said to be impaired when the carrying
amount of asset is more than its recoverable amount.
Carrying Amount is the amount at which assets are shown in the Balance Sheet, i.e. generally at cost less
accumulated depreciation or amortisation and accumulated impairment losses.
Recoverable amount of an asset is higher the following:

(i) Fair value less cost of disposal;

(ii) Value in use i.e. estimated future cash flow arising from use of asset+ residual price at the end of its useful
life.

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Study Note – 2

ACCOUNTING OF BUSINESS COMBINATIONS AND RESTRUCTURING

Learning Objective:
After studying this chapter of the workbook the students will be able to:

• Solve numerical problems on acquisitions, amalgamations and internal

reconstruction

OBJECTIVE TYPE QUESTIONS:

Questions based on AS
1. Choose the correct alternative.

(i) As per Ind AS 103, accounting and reporting for business combination is done under

(a) Acquisition Method

(b) Purchase method

(c) Pooling of interest method

(d) None of the above

(ii) As per Ind AS 103 Annex C, accounting and reporting for business combination under common control
is done under

(a) Acquisition Method

(b) Purchase method

(c) Pooling of interest method

(d) None of the above

(iii) As per Ind AS 103, while accounting and reporting for business combination goodwill is calculated as

(a) Consideration + Non controlling Interest – Net assets

(b) Consideration - Non controlling Interest + Net assets

(c) Consideration - Non controlling Interest – Net assets

(d) Consideration + Non controlling Interest + Net assets

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(iv) A Ltd. acquires 80% of B Ltd. for ` 10,00,000 paid by equity at par. Fair Value (FV) of B’s net assets at time
of acquisition amounts ` 9,00,000. The value of goodwill based on NCI valued at proportionate fair
value of identified net asset will be:

(a) ` 3,00,000

(b) ` 2,80,000

(c) ` 4,50,000

(d) ` 5,00,000

(v) Q Ltd. acquired a 75% interest in R Ltd. on January 1, 2018. Z Ltd. paid ` 900 Lakhs in cash for their
interest in P Ltd. The fair value of R Ltd.’s assets is ` 2,000 Lakhs, and the fair value of its liabilities is ` 920
Lakhs. NCI valued at Fair Value and at Proportionate Value are:

(a) ` 300 lakhs and ` 360 lakhs

(b) ` 225 lakhs and ` 270 lakhs.

(c) ` 300 lakhs and ` 270 lakhs.

(d) ` 225 lakhs and ` 360 lakhs.

(vi) At what value is non-controlling interest recorded in the books of the Acquiree at the time of a business
combination transaction under Ind AS 103?

(a) It is recognised at fair value only

(b) It is recognised at proportionate fair value of identified net assets only

(c) It is not recognised at all

(d) It is recognised either at fair value or at proportionate fair value of identified net assets.

(vii) On 1 January 2018 A Ltd. acquires 80 per cent of the equity interests of B Ltd in exchange of cash of `
600 lakh. The identifiable assets are measured at ` 925 lakh and the liabilities assumed are measured at
`150 lakh. The fair value of the 20 per cent non controlling interest in P is measured at ` 120 lakh. The
gain on bargain purchase will be

(a) ` 90 lakh

(b) ` 85 lakh

(c) ` 55 lakh

(d) ` 75 lakh

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(viii) X Ltd. has acquired 100% of the equity of Y Ltd. on March 31, 2018. The purchase consideration
comprises of an immediate payment of ` 50 lakhs and three further payments of ` 2.5 lakhs if the Return
on Equity exceeds 20% in each of the subsequent three financial yea` A discount rate of 10% pa is used
to find the fair value of subsequent contingent payments at present. Compute the value of total
consideration at the acquisition date.

(a) ` 50 lakhs

(b) ` 56.215 lakhs

(c) ` 55 lakhs

(d) ` 57.5 laks

(ix) As per Ind AS 103, while accounting and reporting for business combination goodwill is calculated as

(a) Consideration + Non controlling Interest + Fair value of previously held interest in the Acquiree –
Net assets

(b) Consideration + Non controlling Interest - Fair value of previously held interest in the Acquiree – Net
assets

(c) Consideration - Non controlling Interest + Fair value of previously held interest in the Acquiree – Net
assets

(d) Consideration - Non controlling Interest - Fair value of previously held interest in the Acquiree – Net
assets

(x) A Ltd. acquires 80% of B Ltd. for ` 1000000 paid by equity at par. Fair Value (FV) of B’s net assets at time
of acquisition amounts ` 900000. The value of goodwill when NCI is valued at fair value will be:

(a) ` 3,00,000

(b) ` 2,80,000

(c) ` 3,50,000

(d) ` 5,00,000

(xi) If dividend is paid by the Acquiree after acquisition out of pre-acquisition profits, goodwill recognized in
the books of Acquirer for business combination shall

(a) be reduced by the Acquirer’s share in dividend

(b) be increased by the Acquirer’s share in dividend

(c) not be adjusted for dividend

(d) be adjusted for dividend.

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(xii) Z Ltd. acquired 2/3rd interest in QLtd. at 600, when identified net assets of Q is 960 and NCI is measured
at fair value (amount in ` Lakhs). Z recognizes

(a) goodwill of 60

(b) gain on bargain purchase of 60

(c) goodwill of 160

(d) gain on bargain purchase of 160

Answer:

(i) (a)

(ii) (c)

(iii) (a)

(iv) (b)

(v) (c)

(vi) (d)

(vii) (c)

(viii) (b)

(ix) (a)

(x) (c)

(xi) (c)

(xii) (b)

Sums solved as per Ind AS 103:

2. Following are the abstracts of balance sheets of two companies A and B when A acquired control of B.
Amounts are in ` crores.

A B A B
Equity Share Capital 600 500 PPE 800 600
Other Equity 300 200
Current Assets 600 500
Creditors 500 400

Total 1,400 1100 Total 1,400 1,100

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A acquired 80% shares of B at 720, paid by shares issued at par. Fair Value of PPE is 640 and Current Assets
580.

• Pass journal entries in the books of A (a. for consolidated accounts and b. for separate financial
statements) and B for the business combination.

• Prepare Separate Balance Sheet and Consolidated Balance Sheet after business combination.

Answer:

In the books of B there will be no accounting for this transaction.

Amounts are in ` crores.

In the books of A there will be accounting in two sets

(a) in the set for consolidated accounting as per Ind AS 103 and

(b) in the set for Separate Financial Statements.

(a) in the books of A for consolidated accounts:

Note 1: Net assets identified of Acquiree B shall be recognized at Fair Value.

Carrying Fair
amount Value

PPE 600 640

Current Assets 600 580

Creditors 400 400

Net Assets 820

Note 2: Value of NCI can be made

(i) at Fair Value ie, 20%/80% × 720 = 180, or

(ii) at proportionate Net Asset Value ie, 20% × 820 = 164

Note 3: (i) Goodwill = Consideration + NCI – Net Asset = 720 + 180 – 820 = 80, or

(ii) Goodwill = Consideration + NCI – Net Asset = 720 + 164 – 820 = 64

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Journal Entries

(i) taking NCI at Fair Value (ii) NCI proportionate

PPE Dr. 640 640
Current Assets Dr. 580 580
Goodwill Dr. 80 64
To, Consideration 720 720
To, Creditors 400 400
To, NCI 180 164
Consideration A/C Dr. 720 720
To, Equity Share Capital 720 720

(b) In the set for Separate Financial Statements

Journal Entries

Investment A/C Dr. 720

To, Equity Share Capital 720

Separate Balance sheet of A and Consolidated Balance Sheet

(after business combination)

Working for Separate Consolidated Consolidated

consolidation (i) (ii)
PPE 800 + 640 800 1,440 1,440
Goodwill Note 3 80 64
Investment 720
Current Assets 600 + 580 600 1,180 1,180
Total 2,120 2,700 2,684
Equity Share Capital 600 + 720 1,320 1,320 1,320
Other Equity 300 300 300
NCI Note 2 180 164
Trade Payables 500 900 900
Total 2,120 2,700 2,684

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3. Following are the abstracts of balance sheets of two companies A and B when A acquired control of B.

Amounts are in ` crores.

A B A B

Equity Share Capital 600 500 PPE 800 600

Other Equity 300 200

12% Debenture 200 100 Current Assets 800 600

Creditors 500 400

Total 1,600 1200 Total 1,600 1,200

A acquired 80% shares of B at 640, paid by shares of ` 10 issued at ` 25. 12% Debentures of A were issued in
exchange of Debentures of B. Fair Value of PPE is 640 and Current Assets 580 (of B).

• Pass journal entries in the books of A (for consolidated accounts) and B for the business combination.
NCI is recognized at proportionate to net assets.

• Prepare Consolidated Balance Sheet after business combination.

Answer:

In the books of B there will be no accounting for this transaction.

Amounts are in ` crores.

In the books of A for consolidated accounts:

Note 1: Net assets identified of Acquiree B shall be recognized at Fair Value.

Carrying Fair Value

Value

PPE 600 640

Current Assets 600 580

Creditors 400 400

Debenture 100 100

Net Assets 720

Note 2: Value of NCI

At proportionate Net Asset Value ie, 20% × 720 = 144

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Note 3: (i) Goodwill = Consideration + NCI – Net Asset = 640 + 144 – 720 = 64

Journal Entries

PPE Dr. 640

Current Assets Dr. 580

Goodwill Dr. 64

To, Consideration 640

To, Creditors 400

To, 12% Debentures 100

To, NCI 144

Consideration A/c Dr. 640

To, Equity Share Capital (10/25) × 640 256

To, Security Premium (15/25) × 640 384

Consolidated Balance Sheet of A

(after business combination)

Working for consoidation Consolidated

PPE 800 + 640 1,440

Goodwill Note 3 64

Current Assets 800 + 580 1,380

Total 2,884

Equity Share Capital 600 + 256 856

Other Equity 300 + 384 684

NCI Note 2 144

Trade Payables 900

12% Debenture 300

Total 2,884

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4. X holds 20% shares of B on 1-2-20X1 at a cost of `80000. On 01-04-20X1 X further acquires 60% shares of B at
a consideration of 560000 in cash and by issue of 10000 shares of ` 10 (market price). Non-Controlling
Interest is recognized at ` 120000. The fair value of shares previously held in B amounts to ` 120000. The fair
values of assets and liabilities of B are stated below:

Fair Value `

PPE 3,00,000

Current Assets 6,20,000

Creditors 36,000

The abstracts of separate balance sheet of A and individual balance sheet of B on 31-03-20X1 are given
below:

[Amount in Rupees]

X B X B

Equity Share Capital 4,60,000 2,50,000 PPE 1,80,000 1,60,000

Other Equity 3,70,000 5,10,000 Investment 80,000

12% Debenture 60,000 Current Assets 6,80,000 6,40,000

Creditors 50,000 40,000

Total 9,40,000 8,00,000 Total 9,40,000 8,00,000

Pass journal entries in the books of A for business combination and show the consolidated balance sheet.

Answer:

Assumption: No profit or loss arises in B during the period of holding of 20% interest in B. Thus value of investment
under equity method on 01-04-20X1 stood as ` 80,000.

Working note 1: Net Identified Assets at fair value:

Fair Value `
PPE 3,00,000
Current Assets 6,20,000
Less Creditors 36,000
Net Identified Assets at fair value 8,84,000

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Working note 2: Consideration:

Cash payment 5,60,000

Issue of shares 1,00,000

Consideration 6,60,000

Working note 3: Goodwill:

Consideration 6,60,000

Fair value of previously held shares 1,20,000

NCI 1,20,000

Total 9,00,000

Net Identified Assets at fair value 8,84,000

Goodwill 16,000

Journal Entries:

Particulars (`) (`)

Investment A/C Dr. 40,000
(raised a fair value)
To, Profit and Loss A/C 40,000

PPE Dr. 3,00,000

Current Assets Dr. 6,20,000
Goodwill Dr. 16,000
To, Consideration 6,60,000
To, Creditors 36,000
To, NCI 1,20,000
To, Investment (at fair vaue) 1,20,000
Consideration A/c Dr. 6,60,000
To, Equity Share Capital 1,00,000
To, Cash 5,60,000

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Consolidated Balance Sheet

(after business combination)

Working for consolidation Consolidated (`)

PPE 1,80,000 + 3,00,000 4,80,000

Goodwill Note 3 16,000

Current Assets 6,80,000 + 6,20,000 - 5,60,000 7,40,000

Total 12,36,000

Equity Share Capital 4,60,000 + 1,00,000 5,60,000

Other Equity 3,70,000 + 40,000 4,10,000

NCI Given 1,20,000

12% Debenture 60,000 60,000

Trade Payables 50,000 + 36,000 86,000

Total 12,36,000

5. X Ltd. acquires 20% shares of B Ltd. on 01-04-20X1. X Ltd. further acquires on 01-04-20x2 60% shares of B Ltd.
at a consideration of `3,60,000 in cash and by issue of 10000 shares of ` 10 (market price `15). Debentures of
B Ltd. are exchanged for 12% Debenture of X Ltd. A contingent consideration is also payable, fair value of
which at the date of acquisition is estimated at `60,000. A pays transaction cost ` 20000. Non-Controlling
Interest is recognized at `1,20,000. The fair value of shares previously held in B Ltd. amounts to `1,10,000. The
fair values of assets and liabilities of B Ltd. are stated below:

Fair Value
(`)

PPE 3,00,000

Current Assets 4,20,000

Creditors 36,000

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The abstracts of consolidated balance sheet of A and individual balance sheet of B on 31-03-20X2 are given
below:

[Amount in Rupees]

X Ltd. B Ltd. X Ltd. B Ltd.

Equity Share Capital 4,60,000 2,50,000 PPE 1,80,000 1,60,000

Other Equity 3,70,000 3,00,000 Investment in 20% 1,00,000

shares in B Ltd. (valued
under equity method
with share of post
acquisition profits in B
Ltd. ` 16000)

12% Debenture 60,000 10,00 Current Assets 6,60,000 4,40,000

Creditors 50,000 40,000

Total 9,40,000 6,00,000 Total 9,40,000 6,00,000

Pass journal entries in the books of X Ltd. for business combination and show the Separate and Consolidated
balance sheet as at 1-04-20X2.

Answer:

Working note 1: Net Identified Assets at fair value:

Fair Value
(`)

PPE 300000

Current Assets 420000

Less Creditors 36000

Less Debenture 10000

Net Identified Assets at fair value 674000

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Working note 2: Consideration: (Payable to shareholders of the Acquiree, Debentures exchanged are
separately considered and Transaction cost is expensed in P&L of Acquirer.)

Cash payment 3,60,000

Issue of shares 1,50,000

Contingent consideration 60,000

Consideration 5,70,000

Working note 3: Fair value of previously held interest: `

Carried value 100000

Fair Value for 20% interest (based on fair value of NCI) 110000

Profit on Revaluation through P&L 10000 a

Carried value Equity method 100000

Share of profits from Associate 16000

Cost of investment 84000$

Working note 4: NCI: Non-Controlling Interest is recognized at Fair value of ` 110000

Working note 5: Goodwill:

Consideration 5,70,000

Fair value of previously held shares 1,10,000

NCI 1,10,000

Total 7,90,000

Net Identified Assets at fair value 6,74,000

Goodwill 1,16,000

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Answer:

(i) Journal Entries for consolidated accounting:

Investment A/c Dr. 10000

To, Profit and Loss A/c 10000a

PPE Dr. 300000

Current Assets Dr. 420000

Goodwill Dr. 116000

To, Consideration 570000

To, Creditors 36000

To, 12% Debentures 10000

To, NCI 110000

To, Investment 110000

Consideration A/c Dr. 570000

To, Equity Share Capital 100000

To, Security Premium 50000

To, Cash 360000

To, Liability for Contingent Consideration 60000

Transaction Cost Dr. 20000

To, Cash 20000

Profit and Loss A/c Dr. 20000

To, Transaction Cost 20000

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(ii) Journal Entries for separate accounting:

Investment A/c Dr. 5,0,000

To, Equity Share Capital 1,00,000

To, Security Premium 50,000

To, Cash 3,60,000

To, Liability for Contingent Consideration 60,000

To, 12% Debenture 10,000

Transaction Cost Dr. 20000

To, Cash 20,000

Profit and Loss A/c Dr. 20,000 b

To, Transaction Cost 20,000

(iii) Separate balance sheet of X Ltd. and Consolidated Balance Sheet of the group as at 31-03-20X2 (after
business combination)

Working for Working for Separate Separate Consolidated

consolidation

PPE 180000+300000 180000 1,80,000 4,80,000

Investment 84000$+580000 6,64,000

Goodwill Note 5 1,6,000

Current Assets 660000+420000-360000- 660000-30000-20000 2,80,000 7,00,000

20000

Total 11,24,000 12,96,000

Equity Share 460000+100000 5,60,000 5,60,000

Capital

Other Equity 370000 + 50000 + 354000$+50000-20000 3,84,000 4,10,000

10000a – 20000b
(transaction cost)

NCI Note 4 1,10,000

12% Debenture 60000+10000 70,000 70,000

Liability for 60,000 60,000

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contingent
consideration

Trade Payables 50000+36000 50000 50000 86000

Total 1124000 1286000

$ Other equity of X Ltd. excluding the share of profits from B Ltd. = 370000-16000 = 354000.

6. P Ltd. shares are quoted at ` 20 and Q Ltd. shares are quoted at ` 60. P Ltd. issues shares for acquiring all the
shares of Q Ltd. in the exchange ratio based on the quoted price. The statement of financial position
immediately before business combination:

P Q
(`) (`)

Non-Current Assets 1200 4000

Current Assets 600 800

Total Assets 1800 4800

Equity Share Capital

60 shares 600

80 shares 800

Other Equity 200 1200

Non-Current Liability 800 2000

Current Liability 200 800

Total of Equity and Liability 1800 4800

Fair value of assets and liabilities at the acquisition date:

P` Q`

Non-Current Assets 1500 4800

Current Assets 500 880

Non-Current Liability 800 2400

Current Liability 200 840

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Pass journal entries for business combination and show consolidated balance sheet of the group.

Answer:

Note 1: Price of P’s Share = ` 20; Price of Q’s Share = ` 60; Exchange ratio = 3 shares of P for every share of Q. Q
has 80 shares; P has to issue 3 × 80 = 240 shares. In the combined entity shareholders of Q hold 240 shares (80%)
and shareholders of P hold 60 shares (20%). Legal Acquirer is P but accounting Acquirer is Q. It is a Reverse
Acquisition. Net assets identified of P should be recognized at fair value and assets and liabilities of Q should be
accounted at carrying amount.

Note 2: Consideration has to be computed from the view point of the Accounting Acquirer Q. Consideration
effectively transferred from Q to P is the fair value of the shareholding of P, the accounting Acquiree = Shares
held by shareholders of P*quoted price of P’s Share = 60 × ` 20 = `1200.

Note 3: Fair value of net assets identified (of P, the Accounting Acquiree) = 1500+500-800-200 = `1000

Note 4: Goodwill = Consideration effectively transferred – Net Assets Identified (of P) at fair value = 1200 – 1000 =
` 200

Journal Entries in consolidated group accounts

(where Accounting Acquirer is Q)

(`) (`)

Non-Current Assets Dr. 1500

Current Assets Dr. 500

Goodwill Dr. 200

To, Consideration 1200

To, Non-Current Liability 800

To, Current Liability 200

Consideration Dr. 1200

To, Equity Share Capital 1200

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Consolidated Balance Sheet

Working for consolidation `

Non-Current Assets 4000+1500 5500

Goodwill Note 4 200

Current Assets 800+500 1300

Total Assets 7000

Equity Share Capital

300 shares 800+1200 2000

Other Equity 1200

Non-Current Liability 2000+800 2800

Current Liability 800+200 1000

Total of Equity and Liability 1800 7000

Note 5: Equity share capital amount in Consolidated Balance Sheet is determined from the view point of the
Accounting Acquirer Q and equity capital structure (no. of shares) is shown on the basis of legal acquirer P
including the issue of shares for business combination (60+240).

7. Entity P acquired 30 % of Entity Q at 31-03-20X1 for `12,000 and accounted investments under equity
method. At 31-03-20X2, T recognized share of Net Asset changes in B as follows: Share of Profit and Loss
amounted to ` 900 and share of OCI amounted ` 600.

At 01-04-20X2, T further acquired 50% stake in B. Consideration paid `25000 by equity shares issued at par.
Entity P identifies the net assets of B as `48,000, Fair value of investment in 30% shares `14400. NCI is valued
at 9600.

Show workings and Journal entries.

Answer:

WN 1. Investment at cost 12000

Share of Net Asset Change (900+600) 1500

Carried amount at 31-03-20X2 (12000+1500) = 13500

Fair Value at 01-04-20X2 14400

WN 2. A will make transfer to P&L:

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 Work Book : Corporate Financial Reporting

Gain on disposal of 30% investment ` (14400 – 13500) = `900

Gain previously reported in OCI = ` 600

Total transfer to P & L = ` 1500

WN 3. A will measure goodwill as follows:

Fair Value of consideration given for controlling interest ` 25,000

Non-controlling interest at Fair Value ` 9,600

Fair Value of previously-held interest ` 14,400

` 49,000

Less : Fair value of net assets of acquiree ` 48,000

Goodwill ` 1,000

Journal Entries in the books of T

Particulars Dr. Cr.

(`) (`)

Investment A/c Dr. 900

OCI A/c Dr. 600

To, P&L A/c 1,500

Net Assets A/c Dr. 48,000

Goodwill A/c Dr. 1,000

To, Consideration A/c 25,000

To, Investment A/c 14,400

To, NCI A/c 9,600

Consideration A/c Dr. 25,000

To, Equity Share Capital 25,000

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8. Company P Ltd. acquires 60% shares of company S Ltd. on 1/4/17 by issue of equity shares at fair value of
480, paid up value 100. The financial data of the companies at 31-3-2017 are stated below. Non-Controlling
Interest is valued at proportionate net assets.(All amounts are in ` Lakhs).

On 31-3-17

P S FV of S

PPE 720 480 700

CA 450 350 300

Equity 500 300

Noncurrent Liability 350 300 310

Current Liability 320 230 200

Pass entries for business combination under acquisition method and show balance sheet abstract.

Answer:

(All amounts are in ` Lakhs)

WN 1: Purchase consideration is 480 (Equity share capital 100 and Security Premium 380)

WN 2: Fair Value of Identified Net Assets

FV of S

PPE 700

CA 300

Noncurrent Liability (310)

Current Liability (200)

Net Assets 490

WN 3: NCI at proportionate net assets = 40% × 490 = 196

WN 4: Goodwill = Consideration + NCI – Net Assets = 480 + 196 – 490 = 186

Journal entries for business combination

PPE Dr. 700

CA Dr. 300

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Goodwill (WN 4) Dr. 186

To Non Current Liability 310

To Current Liability 200

To Purchase Consideration (WN 1) 480

To NCI (WN 3) 196

Purchase Consideration Dr. 480

To Equity Share Capital 100

To Security Premium 380

Consolidated Balance Sheet (abstract) at 1-4-17

Working for consolidation Consolidated

PPE 720+700 1420

Goodwill 186

CA 450+300 750

Total Assets 2356

Equity 500+480 980

NCI 196

Noncurrent Liability 350+310 660

Current Liability 320+200 520

Total of Equity and Liability 2356

9. On 31-03-20X2 X Ltd. showed NCI at ` 110000 for 20% interest in B Ltd. in Consolidated Balance Sheet and
Investment in 80% shares of B Ltd. at ` 680000 in Separate Balance Sheet. On 01-04-20X3 X Ltd. sold 5%
interest in B Ltd. for ` 54000 in cash and on 01-04-20X4 purchased 25% interest in B Ltd. at a price of `150000
by issue of equity shares at 150% premium. B Ltd. made profits of ` 50000 in the year 20X2-X3 and ` 48000 in
20X3-X4. Pass journal entries in separate and consolidated accounts of X Ltd.

Answer:

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In Separate set:

On 01-04-20X3

Cash A/c Dr. ` 54,000

To, Investment a/c [(5/80) × 6,80,000]1 42,500

To, P&L A/c 11,500

On 01-04-20X4

Investment A/c Dr. 1,50,000

To, Cash A/c 1,50,000

1 On 01-04-20X2 Investments(80%) were valued at `6,80,000. For sale of 5% interest Investment is credited by
(5/80) × 6,80,000

In consolidated set:

On 01-04-20X3

Cash A/c Dr. ` 54,000

To, NCI [(5/20) × (1,10,000 + 10,000)]2 30,000

To, Other Equity 24,000

(Difference transferred to Other Equity)

On 01-04-20X4

NCI A/c Dr. (1,50,000+12,000)3 1,62,000

To, Other Equity 12,000

To, Equity Share Capital A/c 60,000

To, Security Premium A/c (Other Equity) 90,000

10. (Amalgamation under common control and under reverse acquisition)

D Ltd. and G Ltd. were amalgamated to form a new company DG Ltd. on 31-03-X7 who issued requisite
number of equity shares of ` 10 to take over the businesses of D and G. The abstract from balance sheets of
the companies on 31-03-X7: ` Lakhs

D G

PPE 9,000 10,000

Financial Assets 5,000 6,000

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Current Assets 8,000 8,000

Equity Share Capital (`10) 10,000 11,000

Other Equity 4,000 5,000

Borrowings 5,000 6,000

Current Liabilities 3,000 2,000

Fair value of the following items is given:

D G

PPE 12000 15000

Current Assets 6000 7000

Fair Value of Business 12000 18000

Pass journal entries in the books of D Ltd., G Ltd. and DG Ltd. and show balance sheet of DG Ltd

(a) When DG Ltd. is controlled by the same parties before and after amalgamation

(b) When control of DG Ltd. is taken up by the management of G Ltd.

Answer: (a)
The combining entities or businesses are ultimately controlled by the same party or parties both before and
after the business combination. It is a business combination under common control, and pooling of interest
method of accounting is followed. Here book value and not fair value is relevant.
Workings:

D G

Net Assets (book value) 14,000 16,000

Proportion 7/15 8/15

Consideration = Equity share capital of D Ltd and G Ltd.=

10000+11000 = 21000

Consideration Payable to Transferee company 21,000 × 7/15 21,000 × 8/15

= 9,800 = 11,200

Journal in the books of Transferor D Ltd.

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Particulars (`) (`)

Current Liabilities Dr. 3,000

Borrowings Dr. 5,000

To, Realisation A/c 8,000

Reaisation A/c Dr. 22,000

To PPE 9,000

To Current Assets 8,000

To Financial Assets 5,000

(transferred to Realisation A/c)

Shares in DG Ltd Dr. 9,800

To Realisation A/c (Consideration) 9,800

Equity Shareholders A/c Dr. 4,200

To Realisation A/c 4,200

Equity Share Capital A/c Dr. 10,000

Other Equity Dr. 4,000

To Equity Shareholders A/c 14,000

Equity Shareholders A/c Dr. 9,800

To Share in DG Ltd. 9,800

Journal in the books of Transferor G Ltd.

Particulars (`) (`)

Current Liabilities Dr. 2,000

Borrowings Dr. 6,000

To Realisation A/c 8,000

Realisation A/c Dr. 24,000

To PPE 10,000

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To Current Assets 8,000

To Financial Assets 6,000

(transferred to Realisation a/c)

Shares in DG Ltd Dr. 11,200

To Realisation A/c 11,200

(Consideration)

Equity Shareholders A/c Dr. 4,800

To Realisation A/c 4,800

Equity Share Capital A/c Dr. 11,000

Other Equity Dr. 5,000

To Equity Shareholders A/c 16,000

Equity Shareholders A/c Dr. 11,200

To, Shares in DG Ltd. 11,200

Journal in the books of Transferee company DG Ltd.

Particulars (`) (`)

PPE Dr. 19,000

Current Assets A/c Dr. 16,000

Financial Assets A/c Dr. 11,000

To Consideration 21,000

To Borrowings 11,000

To Current Liabilities 5,000

To Other Equity 9,000

Consideration A/c Dr. 21,000

To Equity Share Capital 21,000

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Balance Sheet of DG Ltd on 31-03-X7

Assets Amount Amount

(`) (`)

Non Current Assets

PPE 19,000

Financial Assets 11,000

Current Assets 16,000

Total 46,000

Equity and Liabilities

Equity

Equity Share Capital 21,000

Other Equity $ 9,000

Borrowings 11,000

Current Liabilities 5,000

Total 46,000

$ All profits and reserves accounts constituting Other Equity of the transferor companies will be carried in the
same name and amount in financial statements of transferee company.

Answer: (b)

G Ltd. having the control over DG Ltd., it is considered a reverse acquisition and in the merged balance sheet,
assets and liabilities of G Ltd. would be shown at carrying amount and that of D Ltd. at fair value.

D G

Fair Value of Business 10,800 18,000

Share of each company in the merged company 3/8 5/8

Fair value per share of G = 18,000/1,000 = `18

Consideration payable by G to D is : 10,800 in 10,800/18 = 600 lakh shares
Or, No. of shares held by G for 5/8 share in DG = 1,000; no. of shares to be issued to D for 3/8 share = 600. Thus
total effective consideration = 600 lakh shares of G = 10,800.

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Journal in the books of Transferor D Ltd.

Particulars (`) (`)

Current Liabilities Dr. 3,000

Borrowings Dr. 5,000

To, Realisation A/c 8,000

Reaisation A/c Dr. 22,000

To PPE 9,000

To Current Assets 8,000

To Financial Assets 5,000

(transferred to Realisation A/c)

Shares in DG Ltd. Dr. 10,800

To Realisation A/c 10,800

(Consideration)

Equity Shareholders A/c Dr. 3,200

To Realisation A/c (Loss) 3,200

Equity Share Capital A/c Dr. 10,000

Other Equity Dr. 4,000

To Equity Shareholders A/c 14,000

Equity Shareholders A/c Dr. 10,800

To Share in DG Ltd. 10,800

Journal in the books of Transferor G Ltd.

Particulars (`) (`)

Current Liabilities Dr. 2,000

Borrowings Dr. 6,000

To Realisation A/c 8,000

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Realisation A/c 24,000

To PPE 10,000

To Current Assets 8,000

To Financial Assets 6,000

(transferred to Realisation a/c)

Shares in DG Ltd Dr. 11,000

To Realisation A/c 11,000

(Consideration)

Equity Shareholders A/c Dr. 5,000

To Realisation A/c (Loss) 5,000

Equity Share Capital A/c Dr. 11,000 11,000

Other Equity Dr. 5,000

To Equity Shareholders A/c 16,000

Equity Shareholders A/c Dr. 11,000

To, Shares in DG Ltd. 11,000

Journal in the books of Transferee company DG Ltd.

Particulars Amount Amount

(`) (`)

PPE Dr. 22,000

Current Assets A/c Dr. 14,000

Financial Assets A/c Dr. 11,000

To Consideration 21,800

To Borrowings 11,000

To Current Liabilities 5,000

To Other Equity 5,000
To Gain on Bargain Purchase 4,200

Consideration A/c Dr. 21,800

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To Equity Share Capital 21,800

Note 1:

PPE 12,000

Financial Assets 5,000

Current Assets 6,000

23,000

Borrowings 5,000

Current Liabilities 3,000

8,000

Net Assets 15,000

Consideration 10,800

Gain on Bargain Purchase 4,200

Other Equity = Other Equity of G + Gain on Bargain Purchase = 5,000+4,200 = 9,200

Balance Sheet of DG Ltd on 31-03-X7

Assets Amount Amount

(`) (`)

Non Current Assets

PPE (10000+12000) 22,000

Financial Assets (6000+5000) 11,000

Current Assets (8000 + 6000) 14,000

Total 47,000

Equity and Liabilities

Equity

Equity Share Capital #(11000+10800) 21,800

Other Equity Note 1 9,200

Borrowings 11,000

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Current Liabilities 5,000

Total 47,000

# Equity structure (no. of shares) is based on legal issuer of shares DG Ltd ( 28,800/10 = 2,880 lakhs) but amount
of equity share capital is based on Accounting Acquirer G Ltd (11000+10800).

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Study Note – 3

GROUP FINANCIAL STATEMENTS

Learning Objective:
After studying this chapter of the workbook the students will be able to:

• Solve numerical problems on consolidation of company accounts and more

specifically preparation of Consolidated Balance Sheet.

QUESTIONS BASED ON IND AS

1. Choose the correct alternative:

(i) Which of the following is false?

(a) A parent company of a group preparing a separate financial statement may not prepare
consolidated financial statement.
(b) A company having investments in associates or joint ventures prepares financial statements using
equity method of accounting as per Ind AS 28.
(c) In separate financial statements investments in subsidiaries, associates and joint ventures may be
shown at cost or as per Ind AS 109.
(d) Separate financial statements must be prepared by a parent company as per Ind AS 27.

(ii) As per Ind AS 28, investment in associates is accounted for under

(a) Equity method
(b) Debt method
(c) Acquisition method
(d) Purchase method

(iii) Which of the following is true?

(a) An entity shall classify a non-current asset as held for sale if its carrying amount is expected to be
recovered principally through a sale transaction rather than through continuing use.
(b) Assets held for sale (or held for distribution to owners) to be measured at the lower of carrying
amount and fair value less costs to sell.
(c) Depreciation is to be charged on assets held for sale.
(d) A non-current asset is classified as held for distribution to owners when the entity is committed to
distribute the asset to the owners.

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(iv) An investment entity is an entity that

(a) Obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services;

(b) Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital

(c) Appreciation, investment income, or both; and measures and evaluates the performance of
substantially all of its investments on a fair value basis.

(d) All of the above

(v) Which of the following is true as per Ind AS 111?

(a) In a joint arrangement the parties are bound by a contractual arrangement.

(b) Some parties enjoy joint control in a Joint arrangement.

(c) A joint arrangement is either a joint operation or a joint control.

(d) All of the above

(vi) Which of the following is true as per Ind AS 113?

(a) The fair value of a liability reflects the effect of non-performance risk.

(b) Three widely used valuation techniques are the market approach, the cost approach and the
income approach.

(c) The asset or liability measured at fair value might be either a stand alone asset or liability or a
group of assets and/or liabilities.

(d) All of the above.

(vii) Fair value hierarchy is categorized into

(a) Four levels of inputs

(b) Three levels of input

(c) Two levels of inputs

(d) Only one level of input

(viii) Pre-acquisition dividend of subsidiary company received by parent in post-acquisition period is

(a) Subtracted from cost of investment in separate balance sheet of Parent

(b) Subtracted from cost of investment for determining goodwill in consolidated balance sheet

(c) Adjusted in other equity of consolidated balance sheet

(d) Not adjusted for preparing separate balance sheet of parent.

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(ix) For pre-acquisition dividend paid by the subsidiary company

(a) NCI is increased by its share in dividend

(b) NCI is decreased by its share in dividend

(c) Separate liability is created in consolidated balance sheet

(d) No adjustment is done in consolidated balance sheet

(x) Gain on bargain purchase is shown in consolidated balance sheet

(a) Under other equity at acquisition date value.

(b) At acquisition date value plus post acquisition dividend from subsidiary

(c) At acquisition date value plus share of pre-acquisition dividend from subsidiary

(d) None of the above.

(xi) Non-Controlling Interest in consolidated balance sheet is sown at acquisition date value

(a) Without any other adjustment

(b) Plus share of NCI in post acquisition profits of the subsidiary company

(c) Plus share of NCI in post acquisition profits less share of NCI in unpaid dividend of the subsidiary
company

(d) None of the above.

Answer:

(i) (a)

(ii) (a)

(iii) (c)

(iv) (d)

(v) (d)

(vi) (d)

(vii) (b)

(viii) (a)

(ix) (d)

(x) (a)

(xi) (c)

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Problems solved based on Ind AS:

2. Company P Ltd. (a listed company) invests in shares of company Q Ltd. on 1-4-17 at a cost of ` 66000, paid
by cash. During the financial year 17-18, Q made profits of ` 20000 and other comprehensive income of `
10000. The following alternative scenarios are presented:

I. Investment entails 25% voting power and significant influence over Q.

II. P does have joint control of Q, a joint venture.

III. Investment entails significant influence over Q, which is a Joint Venture and P does not have joint
control of Q.

IV. P does not have significant influence over Q.

V. P does not have joint control of or significant influence over Q, which is a joint venture.

For each of the cases I, II , III, IV and V:

(a) State whether for the investment in shares of Q, P requires preparation of consolidated financial
statements and separate financial statements.

(b) Pass the journal entries in books of P at the time of purchase of shares.

(c) Show the relevant accounting treatment at the end of the year for (i) consolidated financial statements,
(ii) separate financial statements and (iii) Individual financial statements of P.

Answer:

(a) In cases I, II and III, P Ltd. requires preparation of consolidated financial statements for its investment in Q
Ltd.

In case I, Q is an Associate because P has significant influence in Q by virtue of its 25% voting power. In
case II, Q is a joint venture in which P has joint control.

In case III, Q is a joint venture in which P does not have joint control, but has significant influence. For each
of the above cases, Ind AS 28 requires that accounting for investment in associate or in joint venture
(having joint control or significant influence) should be made under equity method in the consolidated
financial statement.

Ind AS 28 also requires P the investor company to prepare separate financial statement as per Ind AS 27.
For cases IV and V, P requires preparation of Individual financial statements.

(b) Journal Entry on 01-04-2017 for cases I, II and III for both Consolidated and separate financial statements:

Investment Dr. 66,000

To Cash 66,000

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Journal Entry for cases IV and V: As per Ind AS 109 for Individual financial statements.

At initial measurement:

Investment Dr. 66,000

To Cash 66,000

(c) Journal Entry on 31-03-2018 for cases I, II and III:

There will be two sets of accounting at the end the year, one (i) for consolidated accounts and the other
(ii) for separate financial statements.

(i) For consolidated accounts Ind AS 28 requires the recognition of investment by equity method.

Investment Dr. 7,500

To Profit and Loss 5,000

To Other Comprehensive Income 2,500

Working Note: Change in investee’s net assets = 20000 +10000 = 30000; share of P = 25% of 30000 = 7500.

Investor’s Profit or loss includes 25% of 20000 = 5000 and other comprehensive income includes 25% of
10000 = 2500.

(ii) At the yearend for the separate financial statements of P, Investment is valued at cost at ` 66,000 or at
a value as per Ind AS 109.

Note: There will be no individual financial statement of P for cases I, II and III.

(iii) For cases IV and V: Investment shall be valued as per Ind AS 109 in Individual financial statements.
There will be no consolidated and no separate financial statement.

3. The financial data of the companies P and S at 31-3-2017 and at 31-3-2018 are stated below.

(All amounts are in ` Lakhs)

On 31-3-17 On 31-3-18

S (Individual Fair Value P S

B/S) of S (Separate (Individual
B/S) B/S)

PPE 480 700 750 500

Investment in S (60% shares acquired 480

on 1-4-2017 by issue of Equity)

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CA 350 300 540 400

1770 900

Equity 300 1070 360

Non-current Liability 300 310 360 330

Current Liability 230 200 340 210

Prepare Consolidated Balance Sheet.

Answer:

All amounts are in ` Lakhs)

WN 1: Purchase consideration = 480

WN 2: Fair value of net identified assets at the date of acquisition:

Fair Value of S Revaluation profits (loss)

Non-Current Current

PPE 700 220

CA 300 (50)

Noncurrent Liability 310 (10)

Current Liability 200 30

Net assets 490 (20)

WN 3: Post-acquisition TCI of S:

Equity on 31-3-18 360

Less Equity on 31-3-2017 300

TCI post-acquisition (assumed no fresh issue of shares) 60

Add Reversal of Revaluation loss on Current items# 20

Adjusted Post-acquisition TCI 80

Share of Parent 60% × 80 48

Share of NCI 40% × 80 32

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# Revaluation profit (loss) on current items at acquisition date is reverted against post acquisition profits (loss)
of subsidiary

WN 4: NCI at proportionate net assets at acquisition date = 40% × 490 = 196

Add: Share of NCI in post-acquisition TCI 32

NCI at reporting date 228

WN 5: Goodwill = Consideration + NCI at acquisition – Net Assets = 480 + 196 – 490 = 186

WN 6: Consolidated Equity:
Equity of P 1,070
Share of P in Post acquisition TCI of S 48
Consolidated Equity 1,118

Consolidated Balance Sheet of P and S on 31-3-18

Adjustment on non-current
Book Value Consolidated
items (FV – BV)

PPE 750+500 +220 1470

Goodwill WN 5 186

CA 540+400 [revaluation loss 50]$ 940

Total Assets 2596

Equity WN 6 1118

NCI WN 4 228

Noncurrent Liability 360+330 +10 700

Current Liability 340+210 [revaluation gain 30]$ 550

Total of Equity and Liability 2596

$ Net revaluation loss on current items (50-30) = 20 is not adjusted in consolidated value, rather it is
reverted to Retained earnings and TCI of S is increased.

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4. Company Sky Ltd. (a listed company) acquires 60% shares in company Cloud Ltd. on 1-4-17 at a cost of
(`Lakhs) 150000, paid by issue of shares of ` 10 (market price ` 25). The abstract of balance sheets of Cloud
(along with fair values at the acquisition date) and Sky at the end of the year 2016-17 and 2017-18 are as
follows:

Cloud (`Lakhs) Sky (`Lakhs)

31-3-17 31-3-17 Fair 31-3-18 31-3-17 31-3-18

book value Value book value
PPE 194000 210000 206000 280000 300000
Investment in Q 150000

Inventories 45000 54000 58000 74000 80000

Financial Assets 88000 50000 98000 100000 120000
Total assets 327000 362000 454000 650000

Equity Share Capital 150000 150000 200000 260000

Other Equity 87000 117000 120000 240000

Borrowings 60000 60000 64000 90000 100000

Trade Payables 30000 25000 31000 44000 50000
Total 327000 362000 454000 650000

(a) Pass journal entries in consolidated accounts of P and show consolidated balance sheet on 1-4-17
based on Ind AS 103 and Ind AS 110 and separate balance sheet of P on 01-04-17 based on Ind AS 27.

(b) Prepare consolidated balance sheet of P on 31-3-18 based on Ind AS 110.

Answer:

Working Note 1: Assets and liabilities of Cloud recognized at Fair value. (` Lakhs)

1-4-17 Fair
Value
PPE 210000
Inventories 54000
Financial Assets 50000
Total 314000
Borrowings 60000
Trade Payables 25000
Total 85000

Net Assets at fair value 229000$

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(a) Journal entries in books of Sky:

PPE Dr. 2,10,000

Inventories Dr. 54,000

Financial assets Dr. 50,000

Goodwill (balancing Figure #) Dr. 21000

To Consideration 1,50,000

To NCI @ 1,00,000

To Borrowings 60,000

To Trade Payables 25,000

Consideration Dr. 1,50,000

To Equity Share Capital [(10/25) × 150000] 60,000

To Security Premium (Other Equity) [(15/25) ×150000] 90,000

[Working Notes:
@ NCI recognized at Fair Value: 40% × 150000/60% = 100000;

# Goodwill = Consideration + NCI – Fair Value of Identifiable Net Assets = 150000 + 100000@ – 229000$ = 21000.

Alternative solution: @ NCI can be measured at proportionate share of identifiable net assets = 40% × 229000

= 91600.

Balance sheet (abstracts) of Sky and Cloud as at 01-04-2017 (based on Ind AS 103, Ind AS 110 and Ind AS 27)

(` Lakhs)

Cloud Sky
(Fair Value)
Separate Consolidated
PPE 210000 280000 490000
Goodwill 21000
Investment in Cloud 150000
Inventories 54000 74000 128000
Financial Assets 50000 100000 150000
Total assets 604000 789000

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Equity Share Capital 260000 260000

Other Equity [120000+90000] 210000 210000
NCI 100000
Borrowings 60000 90000 150000
Trade Paybles 25000 44000 69000
Total of Equity and Liabilities 604000 789000

(b)

Working Note 1: Adjustment to Balance sheet data of Cloud (`Lakhs)

1 2 3 4 5 6

31-3-17 1-4-17 Fair Revaluation Reversal Change in Adj. B/S

Book Value profit (loss) of change Bk Value on 31-3-18
Value Of current in carried to
items Current subsequent
items to B/S
Retained
Earnings

PPE 194000 210000 - 12000 222000x

Financial Assets 88000 50000 10000 60000Z

Inventories 45000 54000 +9000 -9000 13000 58000Y

Borrowings 60000 60000 - - 4000 64000

Trade Payables 30000 25000 +5000 -5000 1000 31000

Total -14000

Working Note 2: #: Goodwill is recognised in (a) above.

Working Note 3: &: NCI at the year end

NCI at the time of acquisition = 100000

Post acquisition total comprehensive income of Cloud = 117000 – 87000 – 14000 = 16000;

Share of NCI = 40% ×16000 = 6400;

Total NCI at the year end = 100000 + 6400 = 106400.

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Working Note 4: $: Other Equity Consolidated

Other Equity of Sky at the end of the year = 240000;

Share of post acquisition Total comprehensive income of Cloud = 60% ×16000 = 9600; Other equity consolidated
= 240000 + 9600 = 249600.

Abstract of Separate of Sky and Consolidated balance sheet of the group as at 31-3-18

(` Lakhs)
Adjusted value of Sky (Separate Consolidated
Cloud balance sheet) balance sheet

PPE 222000X 300000 522000

Goodwill 21000#

Investment in Q 150000

Financial Assets 60000Z 120000 180000

Inventories 58000Y 80000 138000

Total assets 334000 650000 861000

Equity Share Capital 260000 260000

Other Equity 240000 249600$

NCI 106400&

Borrowings 64000 100000 164000

Trade Payables 31000 50000 81000

Total of Equity and Liabilities 365000 650000 861000

5. X Ltd. acquires 80% of equity of Y Ltd. on 31-03-20x5 at cost of (` Lakhs) 110, when the Equity Share Capital
and Other Equity of Y Ltd. were 40 and 80 respectively. For the years ending on 31-03-20x6 and 31-03-20x7,
Y Ltd accounted Total Comprehensive income of (15) and 25. Recognise NCI at Proportionate Net Asset
Mesure. X Ltd’s share in post-acquisition profits of Y Ltd. and Goodwill to be shown in CFS of X Ltd. at the end
of the years. The revaluation profit/loss for the difference between fair value and carrying amount of assets
and liabilities of Y Ltd. at acquisition date and the abstracts of separate balance sheet of X Ltd. and
individual balance sheet of Y Ltd. as at 31-03-20x8 are as follows:

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(` Lakhs)

Revaluation profit X at 31-03-20x8 Y at

(+)/loss (-) at 31-03-20x8
acquisition

Non-Current Assets + 25 480 240

Investment in shares of Y at cost 110

Current Assets - 15 310 160

Total Assets 900 400

Equity Share Capital 200 40

Other Equity 300 120

Non-Current Liabilities - 10 300 140

Current Liabilities +5 100 100

Total +5 900 400

Prepare the consolidated balance sheet at 31-03-20X8.

Answer:

Workings:

(` in Lakhs)

At the end of the years 31-03-20x5 31-03-20x6 31-03-20x7 31-03-20x8

TCI (15) 25 120 -90 = 30

Other Equity of Y Ltd. 80 85 -15 = 65 65+25 = 90 120

Net Asset at balance sheet value = 40+80 = 120

Equity share capital + other equity

Revaluation Profit/loss at acquisition 5

Net Assets at fair value at acquisition 125

Revaluation profit/loss on current +10

items reverted in next year (reversal)

Adjusted TCI (L) -15+10 = -5 25 30

(Adjusted) Net Assets = Opening Net 125 - 5 = 120 120+5 = 145 145+30 =
Assets + Adj. TCI (M) 175

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Consideration (Investment at cost) 110

a. NCI = Net Asset (M) × 20% 25 24 29 35

b. Goodwill = Consideration + NCI – 10

Net Assets at acquisition

X Ltd’s share in post-acquisition profits - (4) 20 24

= 80% × Adj TCI (L) (P)

Other Equity of X at 31-03-20X8 300

Add: Share of post acquisition profits - 4 +20+24 40

of Y

c. Consolidated other equity 340

Consolidated Balance sheet as at 31-03-20x8

(` in Lakhs)

Workings Consolidated

Non-Current Assets 480 + 240 + 25 (revaluation profit) 745

Goodwill b 10

Current Assets 310 + 160 470

Total Assets 900 1225

Equity Share Capital 200 200

Other Equity c 340

NCI a 35

Non-Current Liabilities 300 + 140 + 10 (revaluation loss) 450

Current Liabilities 100 + 100 200

Total 1225

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6. P acquires 60% shares in Q on 1- 10 - 2017 at 30000. Q makes profits 20000 in the year 20X7-X8 and
declared dividend 9000. NCI is valued at proportionate net assets. Abstracts of Separate Balance Sheet of P
(Dividend from subsidiary not accounted) and Individual Balance Sheet of Q as at 31-03-20X8:

(` Lakhs)

P Q

PPE 50,000 30,000

Investment in shares of Q at cost 30,000

Current Assets 20,000 28,000

1,00,000 58,000

Equity Share Capital (`10) 60,000 25,000

Other Equity 25,000 15,000

Current Liabilities

Trade Payables 15,000 9,000

Dividend Payable 9,000

1,00,000 58,000

Show Consolidated Balance Sheet and Separate Balance Sheet of P.

Answer:

Working Notes:

1. Analysis of profits of Q:

Opening P/L = Other Equity at the end + Dividend – Profits for the year = 15000+9000-20000 = 4000

2. Net Assets identified on acquisition in the mid of the year, represented by Value of Equity of Q = 25000 +
Pre acquisition profits (Opening P/L + 50% of yearly profit) = 25000+ 4000 + 10000 = 39000 (A)

3. Goodwill = B + C - A = 15600+30000 – 39000 = 6600 Where:

A = 39000

B NCI = 40% × 39000 = 15600

C Consideration = Investment in shares of Q = 30000.

4. NCI at the reporting date = NCI at acquisition + Share of NCI in post acquisition profits of Q – Dividend
payable to NCI = 15600 + 40% × 10000 (50% of yearly profit) - 40% × 9000 (dividend payable to be shown
separately) = 15600 + 4000 – 3600 = 16000.

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5. Consolidated Other Equity = P’s Other Equity + Share from Post acquisition profits of Q = 25000 + 60% ×10000
= 31000

Separate Other Equity = 25000 + 2700 (post-acquisition profits) = 27700

(` in Lakhs)

In P’s Book

Separate Consolidated

Goodwill (3) 6,600

PPE = 50000 + 30000 50,000 80,000

Investment in shares of Q (30000 – 2700 Pre-acquisition Dividend) 27,300

Current Assets (20000 + 5400 Div Receivable) 25,400 48,000#

1,02,700 1,34,600

Equity Shares 60,000 60,000

Other Equity (5) 27,700 31,000

NCI (4) 16,000

Current Liabilities

Trade Payables 15,000 24,000

Dividend Payable (to NCI) 3,600

1,02,700 1,34,600

# (20000 + 28000 = 48000); In Consolidated balance sheet Inter-company dividend is set off and does not
appear.

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7. On 1-4-x6 BB Ltd. acquired 90% share of CM Ltd. at 1080000, when the fair value of its net assets was
1000000. During 1-4-x6 to 31-3-x7 CM Ltd made TCI 200000. On that date BM sold 15% holding to outsiders at
220000. Pass journal entries for sale of partial holding retaining control.

Answer:

Workings:

Net Assets on 31-3-17 = 10,00,000 + 1,50,000 (TCI) = 12,00,000

Carrying amount of 15% holding sold ie. NCI recognized (assumed at proportionate net asset) = 15% ×12,00,000
= 1,80,000

Sale price = 2,20,000

Gain credited to Other Equity = 2,20,000 –1,80,000 = 40,000

Journal:

Bank Dr. 2,20,000

To NCI 1,80,000

To Other Equity 40,000

Alternative:

NCI assumed to be recognized at fair value:

Carrying amount of 15% holding sold i.e. NCI recognized (at fair value) = 15% × 10,80,000 + 15% of 2,00,000 (TCI)
= 1,92,000

Sale price = 2,20,000

Gain credited to Other Equity = 2,20,000 – 1,92,000 = 28,000

Journal:

Bank Dr. 2,20,000

To NCI 1,92,000

To Other Equity 28,000

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8. Prepare Consolidated Balance Sheet (CBS) of a group of P Ltd., Q Ltd. and R Ltd. for which the abstracts of
Balance sheets on 31-03-20x6 are given below.

(` In lakhs)

P Q R

PPE 400 500 320

Investment in Q (80%) 480

Investment in R (75%) 300

Current Assets:

Inventory 250 80 60

Trade Receivables 280 120 200

Bills Receivables 70 50

Cash and Bank 180 50 60

Total Assets 1660 1050 690

Equity and Liabilities

Equity Share Cap (` 10) 600 500 300

Other Equity 460 160 120

Current Liabilities

Trade Payables 500 250 200

Dividend Payable 50

Bills Payables 100 90 70

Total 1660 1050 690

Control was acquired on 01-10-2015 when fair value of PPE was in excess of carrying amount by Q: 50 and R:
30. On 01-04-2015 the balances of Other Equity were Q : 100 and R : 50 NCI is measured at fair value.

Inventory of Q included 16 purchased from R at cost plus 33.33%.

Bills Receivables of R includes 30 from P and Bills Receivables of R includes 40 from Q.

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Answer:

Consolidated Balance sheet of the group as at 31-03-2016

(` in lakhs)

Assets Workings

Non-Current:

PPE 400 + 500 + 320 + 50 + 30 1300

Current Assets:

Inventory 250 + 80 + 60 - 4 386

Trade Receivables 280 + 120 + 200 600

Bills Receivables 70 + 50 - 30 - 40 50

Cash and Bank 180 + 50 + 60 290

Total Assets 2626

Equity and Liabilities

Equity Share Cap 600

Other Equity Note 2 641

NCI of Q Note 3 61

NCI of R Note 2 174

Current Liabilities

Trade Payables 500+250+200 950

Dividend Payable 10

Bills Payables 100+90+70-30-40 190

Total 2626

Workings:

I. Share of parent and NCI

Share of P in Q = 80%

Share of Q in R = 75%

Share of Group in R = 80% × 75% = 60%

NCI in R = 40%

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II. Analysis of Profits

P Q R

Other Equity at the yearend + dividend payable 460 210 120

Other Equity at the beginning 100 50

Profits during the year 110 70

Pre-acquisition upto 30-09-2015 55 35

Post-acquisition Profits 55 35

Share from Q = 80% × 55 44

Share from R = 60% × 35 21

525

Less Unrealised Profits in inter-company Inventory = 16 × 1/4 4

Other Equity 521

III. Net Assets on acquisition

Net Assets on acquisition Q R

Share Cap 500 300

Other Equity on 01-04-2015 100 50

Revaluation 50 30

Add Profits 55 35

Net Assets 705 415

IV. NCI on 01-10-2015

Consideration X (NCI Share/Parent Share) Q R

NCI - Q = 480 × 20%/80% 120

NCI - R = 300 × 40%/75% 160

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Note 1: Goodwill/ Bargain Purchase

Q R consolidated

Net Assets a 705 415

Consideration b 480 240$

NCI on acquisition at fair value c 120 160

Gains on bargain Purchase a-(b+c) 105 15

Net amount to Other Equity 120

$ 80% × 300

Note 2: Consolidated Other Equity = Other Equity (II) + Net Gains on Bargain Purchase = 521+120 = 641

Note 3: NCI on 31-03-2016

Q R

NCI on acquisition 120 160

Post acquisition profit = Q: 55 × 20%; R: 35 × 40% 11 14

Less: NCI share in investment in R = 20% × 300 -60

Less; Dividend payable -10

NCI on Reporting date 61 174

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Study Note – 4

RECENT TRENDS IN FINANCIAL REPORTING

Learning Objective:
• To gain concept of Sustainability Reporting, Triple Bottom Line and Concept of Triple Bottom Line
Reporting
• To be aware of benefits of Triple Bottom Line Reporting, process of Implementation of Triple
Bottom Line Reporting and the form of TBL Reporting to satisfy the users of TBL Report by better
presentation and reporting procedure.
• To gain knowledge of stakeholders in corporations and concepts of corporate responsibility,
accountability and reporting, regulatory actions to be taken in corporate social responsibility,
accountability and reporting.

MCQS ON TRIPLE BOTTOM LINE REPORTING

1. Choose the correct alternative:

(i) Which of the following is not a pillar of Sustainability?

(a) Profit

(b) Plant

(c) Product

(d) People

(ii) Which of the following is not a form of sustainability considered by the organisations?

(a) Political Sustainability

(b) Environmental Sustainability

(c) Economic Sustainability

(d) Social Sustainability

(iii) In traditional accounting, the term ‘bottom line’ means

(a) Operating Results

(b) Total Asset

(c) Total Liabilities

(d) Sales or Revenue

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(iv) Which of the following is not a dimension of Triple Bottom Line (TBL) reporting?

(a) Social Equity

(b) Economic Factors

(c) Environmental Factors

(d) Regulatory Factors

(v) Which of the following is not an advantage of TBL reporting?

(a) Enhancement of reputation and brand

(b) Securing a social licence to operate

(c) Improved access to investor market

(d) Reducing the tax liability

(vi) Which of the following is/are the challenges associated with the implementation of TBL reporting?

(a) Understanding stakeholder requirements;

(b) Aligning TBL reporting with objectives and risks; and

(c) Determining and measuring performance indicators

(d) All of the above

(vii) Integrated Reporting aims to provide a more holistic form of reporting the value created by a business
by considering

(a) Financial Capital

(b) Intellectual Capital

(c) Natural Capital

(d) All of the above

(viii) Business Responsibility Reporting does not require compliance to the principle

(a) That business should promote wellbeing of all employees

(b) That business should respect and promote human rights

(c) That business should make efforts to restore the Environment

(d) That business should maximise return to the shareholders

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(ix) As per Ind AS 113 the fair value of an asset is its exit price

(a) In an actual transaction;

(b) In an assumed orderly transaction;

(c) In a forced transaction

(d) To the specific entity holding the asset

(x) A fair value measurement of an asset assumes the transaction to take place

(a) In the market nearest to the entity;

(b) In the most advantageous market when principal market is present;

(c) In the principal market

(d) In the principal market only when most advantageous market is absent.

(xi) The price in the principal (or most advantageous) market used to measure the fair value of the asset or
liability

(a) shall not be adjusted for transaction costs but shall be adjusted for transport costs.

(b) shall be adjusted for transaction costs but shall not be adjusted for transport costs.

(c) shall not be adjusted for transaction costs and transport costs.

(d) shall be adjusted for transaction costs and transport costs.

Answer:

(i) (c)

The three pillars of sustainability are People – Planet – Profit

(ii) (a)

Organisations considered only three forms of sustainability, viz. Environmental Sustainability, Economic
Sustainability, Social Sustainability.

(iii) (a)

In traditional accounting and common parlance, “bottom line” refers to “operating result”, which is
usually recorded at the very last line (or, bottom) of the income statement.

(iv) (d)

The concept of ‘triple bottom line’ consists of three dimensions, namely ‘social equity’, ‘economic’,
and ‘environmental factors’.

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(v) (d)

TBL reporting does not have any direct impact on determination of tax liability.

(vi) (d)

All of (a), (b) and (c) are associated with the successful implementation of TBL reporting.

(vii) (d)

IR uses six capitals as resources: Financial, Intellectual, Natural, Manufactured, Social and Human
Capital.

(viii) (d)

Nine principles under Responsibility Reporting contains all other principles stated above except d.

(ix) (b)

Fair value is exit price in an assumed orderly transaction and it is not entity specific.

(x) (c)

A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes
place either:

(i) in the principal market for the asset or liability; or

(ii) in the absence of a principal market, in the most advantageous market for the asset or liability.

(xi) (a)

The price in the principal (or most advantageous) market used to measure the fair value of the asset or
liability shall not be adjusted for transaction costs but shall be adjusted for transport costs.

MCQS ON CORPORATE SOCIAL RESPONSIBILITY REPORTING

2. Choose the correct alternative:

(i) By which of the following is the CSR Reporting in India governed?

(a) Companies Act 2013

(b) Companies (Corporate Social Responsibility Policy) Rules 2014

(c) Both of the above

(d) None of the above

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(ii) Which of the following sections of the Companies Act 2013 contains the provisions on CSR?

(a) Section 141

(b) Section 139

(c) Section 135

(d) Section 148

(iii) As per Section 135 of the Companies Act 2013, the minimum percentage of average net profit that must
be spent on CSR activities is ______________.

(a) 1.5%

(b) 2%

(c) 2.5%

(d) 3%

(iv) For the purpose of determining the minimum amount to be spent on CSR activities, the average net
profits must be calculated based on the net profits of ____________.

(a) Immediately Preceding 3 Financial Years

(b) Immediately Preceding 3 Calendar Years

(c) Immediately Preceding 3 Assessment Years

(d) Immediately Preceding 4 Calendar Years

(v) The CSR committee to be constituted under Section 135(1) of the Companies Act 2013 must have

(a) At least 2 directors

(b) At least 3 directors

(c) At least 4 directors

(d) At least 5 directors

(vi) As per Schedule VII of the Companies Act 2013, which of the following activity/activities
qualifies/qualify for CSR spending by an eligible company?

(a) Eradicating extreme hunger and poverty;

(b) Promotion of education;

(c) Promoting gender equality and empowering women

(d) All of the above

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(vii) As per Rule 8 of the Companies (CSR Policy) Rule 2014, which of the following items must be
incorporated in the Annual CSR Report?

(a) A brief outline of the company’s CSR policy

(b) Composition of CSR committee

(c) Prescribed CSR expenditure

(d) All of the above

Answer:

(i) (c)

CSR reporting in India is guided by both Companies Act 2013 and Companies (Corporate Social
Responsibility Policy) Rules 2014.

(ii) (c)

Section 135 of the Companies Act 2013 contains the provisions related to CSR.

(iii) (b)

(iv) (a)

As per Section 135 (5) of the Companies Act 2013, an eligible company must spend at least 2% of the
average net profits of the company made during the three immediately preceding financial years, in
pursuance of its Corporate Social Responsibility Policy.

(v) (b)

As per section 135, the CSR Committee shall be comprised of 3 or more directors.

(vi) (d)

Activities may be included by the company in their CSR Policy as per Schedule VII of the Companies
Act, 2013:

Eradicating extreme hunger and poverty; Promotion of education; Promoting gender equality and
empowering women; Reducing child mortality and improving maternal health; Combating HIV, AIDS,
malaria and other diseases; Ensuring environmental sustainability; Employment enhancing vocational
skills; Social business projects; Contribution to the Prime Minister’s National Relief Fund or any other fund
set up by the Central Government or the State Governments for socio-economic development and
relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes,
minorities and women; or Such other matters as may be prescribed.

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(vii) (d)

The following are required to be incorporated in any CSR Report.

(a) A brief outline of the company’s CSR Policy, including overview of projects or programs proposed
to be undertaken and a reference to the web-link to the CSR policy and projects or programs;

(b) The composition of the CSR Committee;

(c) Average net profit of the company for last three financial years;

(d) Prescribed CSR Expenditure (2% of the amount of the net profit for the last 3 financial years);

(e) Details of CSR Spent during the financial year;

(f) In case the company has failed to spend the 2% of the average net profit of the last three
financial year, reasons thereof;

(g) A responsibility statement of the CSR Committee that the implementation and monitoring of CSR
Policy, is in compliance with CSR objectives and Policy of the company.

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Study Note – 5

VALUATION, ACCOUNTING AND REPORTING OF FINANCIAL INSTRUMENTS AND OTHERS

Learning Objective:
• To gain concept of Ind As 32, 10, Ind AS 107 and Ind AS 109 and related terms and matters.
• To gain knowledge and to be able to recognize and measure the outlines of financial
assets, financial liabilities, and some contracts to buy or sell non-financial items.
• To gain concept of NBFCs in India.
• To be able to evaluating credit and security interest and structure different forms of funding
transactions, pricing of credit assets.
• To know the regulatory framework of NBFCs, RBI regulations and other relevant terms and
accounting treatments
• To know what is goodwill and share, the nature and sources of it.
• To understand the terms — future maintainable profit; normal rate of return; capital
employed and average capital employed.
• To be able to calculate average capital employed and the value of goodwill and shares
under different methods.
• To be able to understand “minority” and “majority” holdings and other key terms
associated with “Valuation of Goodwill and Shares”.

OBJECTIVE TYPE QUESTIONS:

Recognition & Valuation of Financial Instruments (Ind AS-32, Ind AS-107 & Ind AS-109)

MCQon Ind AS 32:

1. Choose the correct alternative:

(i) Ind AS 32 provides rules for classification of a financial instrument into:

(i) financial asset

(ii) Financial liability

(iii) equity instrument

Which of the following statements is true?

(a) (i) and (ii) only

(b) (iii) only

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(c) (i), (ii) and (iii) all

(d) none of the above

(ii) A financial instrument is any contract that gives rise to

(a) a financial asset of one entity and financial liability of another entity.

(b) financial asset and equity instrument of one entity and financial liability of another entity.

(c) a financial asset of one entity and financial liability or equity instrument of another entity.

(d) financial asset and financial liability of one entity and equity instrument of another entity.

(iii) A financial asset does not include

(a) Cash
(b) Foreign currency
(c) Prepaid Expenses
(d) Receivables

(iv) State which of the following classification is incorrect?

(a) Borrowing from bank is classified as financial liability.
(b) Investment in shares of another company classified as financial asset.
(c) Cash held in foreign currency classified as financial asset.
(d) Equity shares issued by the entity are classified as financial liability.

Answer:

(i) (c)

This standard provides rules for classification of a financial instrument into:

• Financial asset

• Financial liability

• Equity instrument

(ii) (c)

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.

(iii) (c)

Prepaid expense does not entail a right to receive cash or other financial assets.

(iv) (d)

It is classified as equity instrument and not financial liability.

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MCQ on Ind AS 109:

2. Choose the correct alternative:

(i) Ind AS 109 shall be applied to all types of financial instruments including:

(a) Interests in subsidiaries, associates and joint ventures

(b) Financial instruments resulting in business combination

(c) Equity instruments issued by the entity

(d) Debenture of another company

(ii) A loan given to a party is a financial asset to be measured at

(a) amortised cost

(b) fair value through other comprehensive income or

(c) fair value through profit or loss

(d) is not a financial asset.

(iii) Which of the following assets is a financial asset to be classified as ‘at fair value through profit and loss’?

(a) an investment in equity shares of another entity.

(b) an investment in Debenture of another entity.

(c) a loan given to a party

(d) trade receivables

(iv) A Ltd. issued 10% debenture. Is it a financial liability to A Ltd. to be subsequently measured at …?

(a) Fair value

(b) Fair value through Profit or loss

(c) Fair value through other comprehensive income

(d) Amortised cost

Answer:

(i) (d)

This Standard shall be applied by all entities to all types of financial instruments except those specified in
the standard:
• Interests in subsidiaries, associates and joint ventures
• Financial instruments resulting in business combination

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• Equity instruments issued by the entity

(ii) (a)

At amortised cost since it is a part of portfolio that the entity manages in order to collect the contractual
cash flows.

(iii) (a)

In investment in equity shares there is no contractual cash flows it does not attract ‘at amortised cost’ or
‘at fair value through other comprehensive income’. In other alternatives there are contractual cash
flows.

(iv) (d)

Financial liability is measured at amortised cost for fixed contractual cash flows

MCQ on Ind AS 107:

3. Choose the correct alternative:

(i) The carrying amounts of which of the following categories shall not be disclosed either in the balance
sheet or in the notes?

(a) financial assets and liabilities measured at fair value through profit or loss,

(b) financial assets and liabilities measured at amortised cost.

(c) financial assets measured at fair value through other comprehensive income

(d) financial liabilities measured at fair value through other comprehensive income

Answer:

(i) (d)

Since there is no financial liabilities measured at fair value through other comprehensive income.

MCQ on GST:

4. Choose the correct alternative:

(i) I. GST is applicable on the sale of goods or services.

II. GST is applicable on the supply of goods or services.

III. It is a source based tax.

IV. It is a destination based tax.

(a) I only is correct

(b) II and III both are correct

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(c) III only is correct

(d) II and IV both are correct.

(ii) GST is a tax

(a) On value addition basis on the cost of sale.

(b) On value addition basis on the transaction value of inward supply.

(c) On value addition basis on the transaction value of outward supply.

(d) On the purchase price.

(iii) GST is applicable to

(a) Petrol.

(b) Tobacco.

(c) Alcoholic liquor for human consumption.

(d) Aviation turbine fuel.

(iv) A supplier has output tax liability: CGST `6,000; SGST `6,000, IGST `8,000 and Input Tax Credit (ITC) for
IGST `16,000. He would finally pay

(a) Output IGST ` 4,000.

(b) Output CGST ` 4,000.

(c) Output IGST ` 2,000 and Output CGST ` 2,000.

(d) Output SGST ` 4,000.

(v) There are ITC for purchase of Air-conditioner in the office: CGST ` 5,000 and SGST ` 5,000. There is output
tax liability for outward supply of goods to other state ` 12,000.

(a) Output IGST ` 2,000 is finally payable after ITC.

(b) Output CGST ` 1,000 and Output SGST ` 1,000 are finally payable after ITC.

(c) Output IGST ` 12,000 is payable and no ITC is available for set off.

(d) Output SGST ` 6,000 and CGST ` 6,000 payable and no ITC set off.

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(vi) Reverse Charge is levied on

(a) Inward supply from registered supplier.

(b) Inward supply from unregistered supplier.

(c) Outward supply to unregistered buyer.

(d) Outward supply to registered buyer.

(vii) Composition levy

(a) Is applied on Inter-state supply.

(b) Is collected from customers.

(c) Paid is available as Input Tax Credit.

(d) None of the above.

Answer:

(i) (d)

GST is a destination-based tax on supply of goods or services.

(ii) (c)

GST is a tax on value addition basis on the transaction value of outward supply.

(iii) (b)

GST is not applicable to Petrol, alcoholic liquor or Aviation turbine fuel. But it is applicable to Tobacco.

(iv) (d)

ITC for IGST of ` 16000 will be first set off against output tax liability for IGST ` 8,000, then for CGST ` 6,000
and last for SGST ` 2,000 left. Remaining Output SGST ` 4,000 is finally payable.

(v) (a)

ITC ` 5,000 + 5,000 = 10,000. It is set off against IGST ` 12,000 (For inter-state supply)

(vi) (b)

Reverse Charge is levied on inward supply from unregistered supplier.

(vii) (d)

Composition levy is not applied on Inter-state supply, is not collected from customers, is not available as
Input Tax Credit.

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MCQ on NBFC – Provisioning Norms and Accounting:

5. Choose the correct alternative:

(i) In the balance sheet of NBFC as per Division III of Schedule III the following is the sequences:

(a) Non-current assets, current assets, equity, non-current liabilities and current liabilities.

(b) Non-financial assets, financial assets, financial liabilities and non-financial liabilities, equity.

(c) Financial assets, non-financial assets, financial liabilities and non-financial liabilities, equity.

(d) Financial assets, non-financial assets, equity, financial liabilities and non-financial liabilities.

(ii) In the statement of profit and loss of NBFC as per Division III of Schedule III Revenue from operations
includes:

(a) Interest Income and Rental Income but not Dividend Income

(b) Interest Income and Dividend Income but not Rental Income

(c) Interest Income, Rental Income and Dividend Income

(d) Interest income but neither Rental Income nor Dividend Income

(iii) Separate disclosure is required under Division III for NBFC for

(a) Only the Receivables which have significant increase in Credit Risk.

(b) Only the Receivables that are Credit Impaired

(c) The Receivables which have significant increase in Credit Risk and that are Credit Impaired

(d) None of the above.

Answer:

(i) (d)— Financial assets, non-financial assets, financial liabilities and non-financial liabilities, equity.

(ii) (c)— Interest Income, Rental Income and Dividend Income

(iii) (c)— The Receivables which have significant increase in Credit Risk and that are Credit Impaired

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VALUATION OF SHARE

1. From the information supplied bellow compute the value of equity share of X Ltd. On the “Assets – Backing
Method”:

I. The summarised balance Sheet of X Ltd. (a manufacturing concern) as on 31.3.2019:

Balance Sheet of X Ltd. at 31.03. 2019

Particulars Note No. Amount (`)

(1) (2) (3)
I Assets

(1) Non Current Assets:

a. PPE (3) 4,80,000
b. Non – Current Investment – 10% Government Securities 60,000
(2) Current Assets (4) 3,60,000
TOTAL 9,00,000

II Equity and liabilities

(1) Equity
a. Equity Share Capital (1) 6,00,000
b. Other Equity – General reserve 1,20,000
(2) Non-Current Liabilities (2) 1,20,000
(3) Current Liabilities
b. Trade Payable – Sundry Creditors 60,000
TOTAL 9,00,000

Note to Accounts:

(1) Equity Share Capital

Particulars (`)
Issued, Subscribed and Paid up Capital :
6000 Equity Shares of `100 each full paid 6,00,000
60,000
6,60,000

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(2) Non-Current Liabilities:

(2) Particulars (`)

600, 10% Preference Shares of ` 100 each full paid 60,000
Long Term Borrowings – 600, 9%Debenture of `100 each 60,000
1,20,000

(3) PPE

Particulars (`)
Tangible building 2,40,000
Plant and Machinery 2,40,000
4,80,000

(4) Current Assets

Particulars (`)
Inventories 1,20,000
Trade receivables – Sundry debtors 30,000
Cash and Cash equivalent – Cash at bank 2,10,000
3,60,000

(ii) Fair return on capital employed in this type of business in around 10% p.a.
(iii) Goodwill is to be taken at 5years purchase of super profits.
(iv) Average of profits for the last seven years is `120000. Profit is more or less stable over years and the same
treated is expected to be maintained in the future. Ignore taxation.
*Preference Share Capital is a liability.

Answer:

Computation of Capital Employed Computation of Average Maintainable Super Profits

Particulars ` Particulars `
Sundry Assets: Average annual profit for the last seven years 1,20,000
Land and Buildings 2,40,000 Less : interest on investment (10% on `60,000) 6,000
Plant and Machinery 2,40,000 1,14,000
Sundry Debtors 30,000 Add : interest on debenture (9% on `60000) 5,400
Investment 1,20,000 11,90,000
Cash at Bank 21,0,000 8,40,000 Less: Normal return on capital employed. 78,000
Less: Current Liabilities (10%on ` 780000)
Sundry Creditors 60,000 Average Annual Super profit 41,400
Average Tangible Capital Employed 7,80,000

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Goodwill valued at 5years purchase of average annual super profit = `41400×5 years = ` 2,07,000.

Computation of Net Assets Available to Equity Shareholders

Particulars `
Trading tangible capital employed (as above) 7,80,000
Add Goodwill (as above) 2,07,000
investment 60,000
Gross Capital Employed 10,47,000
Less : 9% debenture 60,000
Net assets available to equity and preference shareholders 9,87,000
Less : 10% Preference share capital 60,000
Net Assets available to equity share holders 9,27,000

Value of share under assets backing Method:

Value of each full paid share = value of net assets available to equity Shares/number of equity Shares
= 927000/6000 = `154.40

2.

Balance Sheet of D Ltd as at 31.03.2019

Particulars Note Amount

No. `
(1) (2) (3)
(I) ASSETS

(1) Non – Current Assets :

PPE (2) 2,40,000
Intangible Assets – Patent and Trademarks 20,000
(2) Current Assets :
Inventories 48,000
Trade Receivable – debtors 88,000
Cash and cash equivalent – bank Balances 52,000
TOTAL 4,48,000

(II) Equity and liabilities

(1) Equity
Equity Share Capital – 2000 equity Share of ` 100 each 2,00,000
(1)
Other Equity 1,20,000

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(2) Share Application Money Pending Allotment

(3) Non- Current Liabilities -
(4) Current Liabilities: -
Trade payable – Sundry creditors 1,28,000
TOTAL 4,48,000

Note to Accounts:

(1) Other Equity

Particulars (`)
General Reserve 2,00,000
Profit and Loss Account 20,000
1,20,000

(3) PPE

Particulars (`)
Land and Building 1,10,000
Plant and Machinery 1,30,000
2,40,000

The expect valuer valued the land and building at ` 2,40,000. Goodwill at `1,60,000; and plant and
machinery at `1,20,000. Out of the total debtors, it is found that debtors of `8,000 are bad. The profit of
Company has been as follows: 2016-17 – `80,000; 2017-18 – `90,000; 2018-19 – `1,06,000.

Rate of depreciation on plant and machinery @15% and on land and building @ 10%.

The company follows the practice of transferring 25% of profit to general reserve. Similar type of companies
earn at 10% of the value of their shares. Ascertain the value of shares of company under (i) Intrinsic value
method. (ii) Yield value method (iii) Fair value method. Ignore taxation.

Answer:

Valuation of Shares of D Ltd.

(i) Intrinsic Value Method ` (ii) Yield Value Method `

Sundry Assets: Total profit of last three years 2,76,000
Land And Building 2,40,000 Less : Bad debts 8,000
Goodwill 1,60,000 2,68,000
Plant And machinery 1,20,000 Average Profit (` 268000/3) 89,333
Patent And trademark 20,000 Add : Reduction in depreciation on plant 1,500
48,000 and machinery @15% on 10000
`
Inventories

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Debtors less Bad debts 80,000 Less: Additional depreciation on Land & (13,000)
Bank balance 52,000 Building @ 10% on ` 130000
Average Maintainable Profit
7,20,000 Less : Transfer to Reserve @25% on `77833 7,78,333
Less Sundry Creditors
1,28,000 19,458
Net Assets
5,29,000 Profit available for dividend
Numbers Of Shares
Value of Each Shares (`5,92,000/2,000) 2,000 58,375
`296

(i) Expected Rate of Dividend

Profit available for Dividend /Share capital ×100 = 58,375/2,00,000×100 = 29.187%

(ii) Yield Value of Each Share

Expected rate of dividend/Normal Rate of return* Paid up value of each shares = 29.187%/10% × `100 = `291.87

(iii) Fair Value Method

Fair value of each share = (Intrinsic value + yield value)/2 = (296 + 291.87)/2 = ` 293.94

3. Following information is finished in respect of S.S. Ltd.

(1) Share capital: 200000 equity shares of `10 each fully paid.

(2) Profit after tax, dividends declared and retained earnings:

Year Profit after tax Dividend Declared Retained Earnings

(`) (`) (`)
2018 7,10,000 3,40,000 3,70,000
2017 6,00,000 3,00,000 3,00,000
2016 4,00,000 2,60,000 1,40,000

(3) Normal rate of return expected by Shareholders in the market is 12%

(4) The Normal earnings of similar companies in the fiber industry is 15%

You are required to calculate the value of shares if: (a) Only a few shares are to be sold (b) Majority shares
are to be sold.

Answer:

(a) The company has contently maintained a growing trend from 2016 to 2018. Profits are to be weighted in
the ratio of 1:2:3 - the greatest weight being given in the last year.

Since only a few shares are to be sold, the shares should be valued on the basis of dividend declared and
expected normal rate of return.

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Year Dividend Share Capital Rate of Dividend weights Weighted

Declared (`) (`) Dividend Rate
2016 2,60,000 20,00,000 (2,60,000/20,00,000)×100 = 13% 1 13
2017 3,00,000 20,00,000 (3,00,000/20,00,000)×100 = 15% 2 30
2018 3,40,000 20,00,000 (3,40,000/20,00,000)×100 = 17% 3 51
6 94

Weighted average rate of dividend ratio = 94/6= 15.67%

Therefore, yield value of each equity share:

Weighted Average Rate of Dividend/Normal Rate of Dividend × paidup value of each equity share
=15.67/12×10 = `13.06.

(b) When majority share are to be sold, the shares should be valued on the basic of weighted average profits
of the business and expected normal earnings of similar companies in the same industry.

Calculation of Weighted Earnings

Year Earnings Weights Weighted Therefore, Weighted Average Earnings = ` 37,30,000/6 =

(`) (`) earnings ` 6,21,667
2016 4,00,000 1 4,00,000 Weighted Average Rate of Earnings = `
2017 6,00,000 2 12,00,000 6,21,667/20,00,000×100 = 31 % (approx.)
2018 7,10,000 3 21,30,000 Value of Each Equity Shares = {weighted average rate of
6 37,30,000 earnings/normal return} × Paid up value of each share
= (31/15)×10 = ` 20.67

4. Following is balance sheet of A Ltd. as at 31.12.2018

Balance Sheet of A Ltd. as on 31.12.2018

Particulars Note Amount

No. (`)
(1) (2) (3)
I. Assets

(1) Non-current Assets

I. PPE
Land and Building 4,00,000

Machinery 4,50,000

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Motor Car 25,000

Furniture 25,000
II. Non- Current investment 50,000
(2) Current Assets
Inventories 7,25,000
Trade Receivable- Sundry Debtors 2,00,000
Cash and Cash Equivalent- Cash at Bank 1,05,000

TOTAL 19,80,000

II. Equity And Liabilities

(1) Equity:
Equity Share Capital 9,00,000
Other Equity – General reserve 3,30,000
Profit And Loss Account 2,50,000
(2) Non-Current Liabilities -

(3) Current liabilities -

Trade Payable – Sundry Creditors 5,00,000

TOTAL 19,80,000

Additional information is as under:

(i) PPE are Worth: Building – ` 6,00,000, Machinery – ` 5,20,000

(ii) All investments Are Non- trading investments and to be valued at 20% above cost. Dividend at uniform
rate of 20% is earned on all investments.

(iii) For the purpose of valuation of share, goodwill is to be valued on the basic of 3year purchase of super
profit based on average profit (after tax) of last 3years

(iv) Depreciation on appreciated value of land and building is not to considered for valuation of goodwill.

(v) Profit (after tax) are as follows: 2016 - ` 3,80,000: 2017 - ` 4,20,000: 2018 - ` 5,00,000

Rate of Income Tax Similar business, return on capital employed is 20% (after tax)

(vi) In 2016 machinery (book value ` 20,000) was sold for ` But processed was wrongly credited to profit and
loss Account. The mistake has not yet been rectified. Depreciation has been changed on machinery
@10% per annum on reducing balance method.

Find out the value of each fully paid and partly paid equity share on net assets basis.

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Answer:

Working Notes: Average maintainable trading profit

Particulars 2016 (`) 2017 (`) 2018 (`)

Profit after Tax 38,00,000 4,20,000 5,00,000
Less : Sales Precedes of Machinery wrongly credited to profit 10,000
and loss Account (net of tax)
3,70,000
Less : Dividend for Non-trading investment (net of tax) 5,000 5,000 5,000
3,65,000 4,15,000 4,95,000
Add: Depreciation Wrongly charged on the Assets sold (net 1,000 900 810
tax ) – 50% of ` 2,000; 1800 and `1620
3,66,000 4,15,900 4,95,810

Average profit = ` (3,66,000 + 4,15,900 + 4,95,810)/3 =

`4,25,903; Say `425900

(2) Computation of capital employed

Particulars `
Sundry Assets:
Land and Building 6,00,000
Machinery 5,20,000
Motorcar 25,000
Furniture 25,000
Investment 7,25,000
Debtors 2,00,000
cash 1,05,000
22,00,000
Less Creditors 5,00,000
17,00,000

(3) Calculation of Super profits

Particulars `
Average maintain able trading Profit (as above) 4,25,900
Less: Normal Profit @ 20% on ` 17,00,000 3,40,000
Super Profits 85,900

Therefore, Goodwill = `85,900 ×3 Years = `2,57,700

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Valuation of Shares on net Assets Basis

Particulars `

Value of Goodwill(W.N.-3) 2,57,700

Capital Employed(W.N.-20 17,00,000
Non-Trading investment (` 50000/100*120) 60,000
Notional call on Shares 1,00,000
21,17,700

Value of full paid up share = 21,17,700/10,000 = ` 211.77

Value partly paid up shares = `211.77 - `20 = `191.77

VALUATION OF GOODWILL

5. The following are the particulars about Koley & Co. a partnership firm:
(a) average capital employed in the business is ` 7,00,000
(b) Net trading profit of the firm for the past three years : ` 1,07,600; ` 90,700; ` 1,12,500.
(c) Market rate of interest on investments 8%
(d) Rate of risk return on capital invested in business 2%
(e) Fair remuneration to the partners for their services ` 12,000 p.a.
(f) The profit included non-recurring profits on average basics of ` 1000 out of which it was considered that
even non-recurring profits had a tendency to recurring at an average rate of ` 600 p.a.
(g) Sundry assets of the firm ` 7,50,000 and current liabilities is ` 30,000
Ascertain the value of goodwill of the firm under the following method for Koley & Co.
Three year purchase of super profit method and Capitalization method

Answer:

Average profit = ` (1,07,600 + 90,700 + 1,12,500)/3 = ` 1,03,600

Calculation of super profit

Particulars `
Average profit 1,03,600
Less: partners remuneration 12,000
91,600
Less: non-recurring income(1000-600) 400
91,200
Less: normal return on capital employed (` 700000 x 10%)
Super profit 70,000
21,200

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(1) value of goodwill = super profit x number of year’s purchase

= ` 21,200 x 3 = ` 63,600

(2) valuation of goodwill = super profit/normal rate of return × 100

= 21,200/10 x 100 = ` 2,12,000

6. The net profit of the KB Ltd after tax, for the past five years are: ` 2,00,000; ` 2,12,500; ` 2,30,000; ` 2,62,500
and ` 2,95,000. The capital employed in the business is ` 20,00,000. The normal rate of return expected in this
type of business is 10%. It is expected that company will be able to maintain the super profit for the last 5
years. Calculate the value of goodwill on the basics of capitalization of super profit method for KB. Ltd.

Answer:

Average maintainable profit = (2,00,000 +2,12,500+2,30,000+2,62,500+2,95,000)/5

= ` 12,00,000/5 = ` 2,40,000

Goodwill = P – rc/m

= [2,40,000-(10% of 20,00,000)]/10% = 4,00,000

Where,

P = average maintainable profit = `2,40,000

r = normal rate of return = 10%

c = capital employed = ` 20,00,000

m = capitalization ratio = 10%

7. From the following information, calculate the value of goodwill as on 31.03.19 of JK Ltd.

Equity share capital (`10) `5,00,000

10% Preference share capital ` 2,00,000

Other Equity ` 70,000

9% Debentures ` 1,00,000

Depreciation fund ` 60,000

Creditors ` 50,000

Assets side of balance sheet includes preliminary expenses ` 20,000

Market value of assets is ` 70,000 more than the book value

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Profits for the last three years after 40% tax were: ` 75,000; ` 84,000 and ` 1,14,000 respectively.

Fair return on capital on capital employed in this type of business is estimated at 10%.

You are required to calculate the value of goodwill by capitalization of super profit. (Take weighted average
profit)

Answer:
Calculation of Capital Employed

Particulars `
Equity share capital 5,00,000
10% Preference share capital 2,00,000
Other Equity 70,000
9% Debenture 1,00,000
Increase in the value of fixed assets 70,000
9,40,000
Less: Preliminary expanses 20,000
Capital employed 9,20,000

Calculation of weighted average profit

Particulars `

Weighted average profit (W.N-1) after tax 97,500

Add: Debenture interest (net of tax) (100-40/100) x (1,00,000 x 9/100) 5400

Weighted average profit 1,02,900

Calculation of super profit

Particulars `

Weighted average profit 1,02,900

Less: normal profit (` 920000 x 10% ) 92,000

Super Profit 10,900

Goodwill capitalization by super profit:

Goodwill = super profit/normal rate of return = 10,900/10% = ` 1,09,000

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Workings notes:

(1) Profits for last three years (after tax) have been given. The profit is increasing steadily. Therefore highest
weight should be given to 3rd year and lowest weight be given to 1st year. Based on this, the weighted
average profit will be as follows:

1st year – ` 75,000 x 1 75,000

2nd year – ` 84,000 x 2 1,68,000

3rd year – ` 1,14,000 x 3 3,42,000

Total 5,85,000

Weighted average profit = 5,85,000/6 = 97,500.

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Study Note – 6

SHARE BASED PAYMENTS

Learning Objective:
• Objectives of this chapter is to enable the students test their knowledge about the
nature, recognition, measurement and recording of share based payment
transactions through objective type multiple choice and short questions and long
problems.

MULTIPLE CHOICE QUESTIONS:

Share based payment transactions under Ind AS 102

1. Choose the correct alternative:

(i) Ind AS 102 applies in accounting for all share-based payment transactions including:

(a) transactions forming part of business combination under Ind AS 103,

(b) transactions forming part of joint venture under Ind AS 111,

(c) transactions where the entity cannot identify specifically some of the goods or services received,

(d) transactions in which the entity incurs liability to transfer cash or other asset based on the value of
the debt instruments of the entity.

(ii) In a share-based payment transaction when the entity receives goods or services but neither issues
equity instruments nor incurs liability as parent or any other entity in the group settles the transaction,

(a) It is called equity-settled share-based payment transaction.

(b) It is called cash-settled share-based payment transaction.

(c) It is not considered as a transaction.

(d) It is not considered as a share based payment transaction.

(iii) For share based payment transactions with employees the entity shall measure the services received

(a) at the Fair Value of the services received.

(b) by reference to the fair value of the equity instruments granted on the grant date.

(c) at the negotiated value.

(d) at the market value of the equity instruments on the grant date.

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(iv) In an employee share based payment transaction there may be a condition

(i) of completing a specified period of service only.

(ii) that is related to the market price of equity instruments.

(iii) of meeting the target sales.

Which of the following is true?

(a) both (i) and (ii) are service conditions

(b) (i) is service condition and (ii) is market condition

(c) Only (iii) is performance condition

(d) both (i) and (ii) are performance conditions

(v) A company granted 100 shares to an employee on the conditions:

(i) That the employee will complete 2 year’s service

(ii) That the company will make sales over ` 2 crore in each of the years in the two years

(iii) That the share price will not be below `50 at the end of the 2nd year

(iv) And that the employee will be issued shares 4 months after completion of 2 year service (which
has no impact on vesting right).

Which one of the following is true?

(a) all the conditions (i) to (iv) are vesting conditions

(b) (ii) and (iii) are market conditions

(c) (iv) is non-vesting condition and (ii) and (iii) are performance conditions

(d) (i) and (iv) are service conditions.

(vi) If the equity options are granted on a vesting condition that the employee shall complete a specified
period of service:

(a) Employee expenses will be recognized at the completion of the specified period of service.

(b) Employee expenses will be recognized during the specified period of service.

(c) Employee expenses will be recognized at the grant date.

(d) Employee expenses will be recognized when options will be exercised.

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Answer:

(i) (c)

Apply this Standard in accounting for all share-based payment transactions, whether or not the entity can
identify specifically some or all of the goods or services received.

(ii) (a)

It is called equity-settled share-based payment transaction.

In a share-based payment transaction the entity

(a) receives goods or services from the supplier or employee and recognizes it as asset or as expense
(when no asset is qualified for recognition), and

(b) issues equity instruments (called equity-settled transaction) or incurs liability to transfer cash or other
asset based on the value of the equity instruments of the entity (cash-settled) to settle the transaction,
or

(c) neither issues equity instruments nor incurs liability as parent or any other entity in the group settles the
transaction (it is also called equity-settled).

(iii) (b)

For transactions with employees and others providing similar services, the entity shall measure the fair
value of the services received by reference to the fair value of the equity instruments granted, because
typically it is not possible to estimate reliably the fair value of the services received.

(iv) (b)

The vesting condition may be a service condition or a performance condition.

• If the condition requires completing a specified period of service only, it is a service condition;

• Otherwise it is a performance condition.

• When a performance condition is related to the market price of equity instruments it is a market
condition.

• When the performance is not related to market price of equity instruments it is non-market performance
condition such as meeting the target sales or profits or any other activity of the entity.

(v) (c)

See answer reference of D above

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(vi) (b)

If the equity instruments granted does not vest until the counterparty completes a specified period of
service or fulfils the performance condition, the entity shall presume that the services to be rendered by
the counterparty as consideration for those equity instruments will be received in the future, during the
vesting period.

Short Questions

2. M Ltd. offers shares to its employees as bonus for achieving a target. (a) Is it a share based payment
transaction? (b) Is it equity settled or cash settled? (c) When will it be recognized? (d) What will be the
journal entries?

Answer:

(a) It is share-based payment transaction.

(b) It is equity settled share based payment transaction as M issues its shares against receiving of services from
the employees achieving the target.

(c) It will be recognized at the grant date.

(d) The journal entry is: Employee Expenses Dr. and Equity Cr.

3. Mr. Q is granted share options conditional upon completing 3 years’ service. How is the transaction
recognized in the books of the entity?

Answer:

The transaction will be recognized as equity-settled share based payment transaction. The services from the
employee will be assumed to be rendered in future during the vesting period. In each financial statements
falling in the vesting period the fair value of the share options as on the grant date will be recognized in
proportion of the period expired to the total vesting period.[See problems 6,7 and 9 for its application]

4. Mr. X is an employee of P Ltd. and also holder of equity shares of P Ltd. P Ltd. makes a right issue on equity
and X receives his right. Is it a share based payment transaction?

Answer:

No. For the purpose of Ind AS 102, a transaction with an employee (or other party) in his/her capacity as a
holder of equity instruments of the entity is not a share based payment transaction.

5. F Ltd. grants 20 share appreciation rights to M, an employee, entitling him to receive cash payment for the
increase in quoted price of F’s shares from the exercise price of ` 300 per share after 3 years. What is the
type of transaction and type of vesting condition? How the transaction should be recognized?

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Answer:

The transaction should be recognized as cash-settled share based payment transaction. The vesting condition
is identified as a market condition as it is related to market price of share. The transaction will be recognized at
fair value of the rights on the grant date in each financial statements falling in the vesting period proportionate
to the period expired to total vesting period.[see problem 10 for its application]

Long Questions (on application)

6. Z Ltd. grants 80 share options to each of its 300 employees conditional on their continuing in service for 3
years. Fair value of share option on the grant date is ` 25.

What amount of expenses will be recognized in each year?

Answer:

Calculation of Cumulative Remuneration expense and Remuneration expense for 3 years

Year Calculation Cumulative

remuneration expense
(`)

1 300 × 80 × 25 × 1/3 2,00,000

2 300 × 80 × 25 × 2/3 4,00,000

3 300 × 80 × 25 × 3/3 6,00,000

Year Calculation: Remuneration expense

Cumulativen – Cumulative n-1 recognized in each year
(`)

1 200000 – 0 2,00,000

2 400000 – 200000 2,00,000

3 600000 – 400000 2,00,000

7. Z Ltd. grants 80 share options to each of its 300 employees conditional on their continuing in service for 3
years. Fair value of share option on the grant date is ` 25.

Answer:

Z Ltd. estimates that 20 per cent of employees will leave during the three-year period and therefore forfeit their
rights to the share options.

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Year Calculation Cumulative Remuneration expense

remuneration expense recognized in each year (`)
(`) Cumulativen – Cumulative n-1

1 300 × 80 × 25 × 80% × 1/3 1,60,000 1,60,000

2 300 × 80 × 25 × 80% × 2/3 3,20,000 1,60,000

3 300 × 80 × 25 × 80% × 3/3 4,80,000 1,60,000

8. D Ltd. offers the employees shares at a discount in recognition of their past services. In total 60000 shares of
` 10 each were accepted (and paid) by the employees at weighted average price of ` 40 when weighted
average market price of the shares on the purchase date was ` 60. Pass journal entries.

Answer:

As for past services employee expense will be fully recognized immediately.

Market value of shares = 60000 × ` 60 = ` 36,00,000. Concession in share price is same as share option = ` 20 (i.e.,
60 – 40). Hence service received is measured at ` 20 × 60000 = ` 12,00,000; Amount paid per share = `40; for
60000 shares total bank received by the company = ` 24,00,000; Premium per share = market price – paid up
value = 60 – 10 = 50; Security premium total credited and to be shown under Other Equity = ` 50 × 60000 =
3000000.

Journal :

Bank Dr. 24,00,000

Employee expense Dr. 12,00,000

To Equity Share Capital Cr. 6,00,000

To Other Equity (Security Premium) 30,00,000

(Employee expense recognized for share based payment by issue of equity at concession)

9. Z Ltd. grants 100 share options to each of its 400 employees conditional on their continuing in service for 3
years. Fair value of share option on the grant date is ` 30. Z Ltd. estimates that 20 per cent of employees will
leave during the three-year period and therefore forfeit their rights to the share options.

During year 1, 18 employees leave. The entity revises its estimate of total employee departures over the
three-year period from 20 per cent to 16 per cent.

During year 2, a further 20 employees leave. The entity revises its estimate of total employee departures
over the three-year period from 16 per cent to 13 per cent.

During year 3, a further 14 employees leave.

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All the continuing employees exercised the option to subscribe in the equity shares of ` 10 each at ` 50
only, when market price stands at ` 80. The fair value of the option at the grant date is taken at ` 30 only.

Pass journal entries with working notes.

Answer:

Calculation of Expenses recognized during the vesting period:

Year Calculation Cumulative remuneration Remuneration expense

expense (`) recognized in each year
(`)

1 400 × 100 × 30 × 84% × 1/3 (Note #) 3,36,000 3,36,0001

2 400 × 100 × 30 × 87% × 2/3 (Note #) 6,96,000 3,60,0002

3 348 × 100 × 30 × 3/3 (Note #) 10,44,0004 3,48,0003

Total 10,44,0004

Note #: At the end of year 1, 16% is revised estimated departure, balance 84% is taken for calculation, at the
end of year 2, 13% is revised estimated departure, balance 87% is taken for calculation and at the end of year
3, 52 is actual departure, and balance 348 is taken for calculation.

Journal entries (without narration) in the books of Z Ltd.:

During the vesting period:

Year 1: Employee Expenses Dr. 3,36,000

To, Share based payment reserve (Other Equity) Cr. 3,36,0001

Year 2: Employee Expenses Dr. 3,60,000

To, Share based payment reserve (Other Equity) Cr. 3,60,0002

Year 3: Employee Expenses Dr. 3,48,000

To, Share based payment reserve (Other Equity) Cr. 3,48,0003

At the time option is exercised:

Bank [348 × 100 × 50] Dr. 17,40,000

Share based payment reserve (Other Equity) Dr. 10,44,0004

To Equity Share Capital [348 × 100 × 10] Cr. 3,48,000

To Other Equity (Security Premium) [348 × 100 × 70] Cr. 24,36,000

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10. MLL Ltd. grants 80 cash share appreciation rights (SARs) to each of its 400 employees, on condition that the
employees remain in its employment for the next three years. During year 1, 30 employees leave. The entity
estimates that a further 50 will leave during years 2 and 3. During year 2, 40 employees leave and the entity
estimates that a further 30 will leave during year 3. During year 3, 40 employees leave. At the end of year 3,
100 employees exercise their SARs, another 120 employees exercise their SARs at the end of year 4 and the
remaining employees exercise their SARs at the end of year 5.

The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown
below. At the end of year 3, all SARs held by the remaining employees vest. The intrinsic values of the SARs
at the date of exercise (which equal the cash paid out) at the end of years 3, 4 and 5 are also shown below.

At the end of Year Fair Value ` Intrinsic Value `

1 15

2 16

3 18 15
4 21 20
5 24

Pass journal entries and working notes.

Answer:

(a) Basis of Calculation

At the [Actual]+Estimated Expense and liability SAR exercised by Remaining

end of reduction in no. of recognized for Employees
Year employees

1 [30]+50 = 80 320 employees at ` 15

2 [30+40]+30 = 100 300 employees at ` 16

3 [30+40+40] = 110 290 employees at ` 18 100 employees at `15 190

4 120 employees at `20 70

5 70 employees at `24 0

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(b) Calculation of employee expense and liability

Year Calculation Expense Liability

1 (400 – 80) × 80 × 15 × 1/3 128000 128000L1

2 (400 – 100) × 80 × 16 × 2/3 – L1 128000 256000L2

3 (400 –110 –100) × 80 × 18 – L2 17600 273600L3

100 × 80 × 15 120000 137600

4 (190 – 120) × 80 × 18 – L3 -156000 117600L4

120 × 80 × 20 192000 36000

5 0 – L4 -117600 0

70 × 80 × 24 134400 16800

446400

(c) Journal:

Year 1: Employee Expense Dr. 1,28,000

To Share based Payment Liability Cr. 1,28,000

(Fair value of SAR recognized)

Year 2: Employee Expense Dr. 1,28,000

To Share based Payment Liability Cr. 1,28,000

(Fair Value of SAR recognized and remeasured)

Year 3: Employee Expense Dr. 1,37,600

To Share based Payment Liability Cr. 1,37,600

(Fair Value of SAR recognized and remeasured)

Share based payment Liability Dr. 1,20,000

To Cash Cr. 1,20,000

(SAR settled for 100 employees)

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Year 4: Share based payment Liability Dr. 1,56,000

Employee Expense Dr. 36,000

To Cash Cr. 1,92,000

(SAR settled for 120 employees)

Year 5: Share based payment Liability Dr. 1,17,600

Employee Expense Dr. 16,800

To Cash Cr. 1,34,400

(SAR settled for 70 employees)

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Study Note – 7

REPORTING THROUGH XBRL (Extended Business Reporting Language)

Learning Objective:
• To gain concept of XBRL, related terms.
• To acquire knowledge of the features and the benefits of XBRL Reporting.
• To acquire knowledge of users of XBRL and XBRL in Indian context of economy.

OBJECTIVE TYPE QUESTIONS:

1. Choose the correct alternative:

(i) What is the full form of XBRL?

(a) eXtensible Business Reporting Language

(b) Expanded Business Reporting Language

(c) Exempted Business Reporting Language

(d) Exploratory Business Reporting Language

(ii) Today XBRL is used in

(a) Accounting (individual transactions tagged with XBRL Global Ledger);

(b) Internal Reporting (for drafting of management reports);

(c) External Reporting (for drafting of financial statements, regulatory reports, corporate tax filings,
statistical reports etc.)

(d) All of the above

(iii) XBRL is based on

(a) Hypertext Mark-up Language

(b) External Mark-up Language

(c) eXtensible Mark-up Language

(d) Hyper eXtensible Mark-up Language

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(iv) Which of the following is not a recognised taxonomy?

(a) India Banking GAAP Taxonomy 2010

(b) BRAZIL GAAP Commercial and Industrial Taxonomy

(c) Indonesia Stock Exchange (IDX) Taxonomy 2014

(d) India Insurance GAAP Taxonomy

(v) Which of the following is not true?

(a) XBRL is not a set of Accounting Standards

(b) XBRL is not a GAAP translator

(c) XBRL does not help in automatic data processing

(d) XBRL is not a proprietary technology

(vi) Which of the following is not a feature of XBRL?

(a) Clear definitions

(b) Testable business rules

(c) Single language support

(d) Strong software support

(vii) Which of the following is not a benefit of XBRL?

(a) More accurate and efficient:

(b) Data review

(c) Manual data processing

(d) improved reporting quality

(viii) Apart from those already covered by the2011 Rules, which of the following classes of companies
need(s) to file the financial statement through XBRL?

(a) All companies listed in India and their subsidiaries;

(b) All companies having a paid up capital of Rs. 5 crore and above; or

(c) All companies having turnover of Rs. 100 crore or above

(d) All of the above

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(ix) As per the Companies (Filing of Documents and Forms in Extensible Business Reporting Language)
Rules, 2015, which of the following companies are exempted from filling their financial statements in
XBRL?

(a) Banking Companies

(b) Insurance Companies

(c) Power sector Companies

(d) All of the above

Answer:

(i) (a)
The full form of XBRL is eXtensible Business Reporting Language

(ii) (d)
Today XBRL is used in accounting, internal as well as external reporting.

(iii) (c)
XBRL is based on eXtensible Mark-up Language. It is basically a family of XML.

(iv) (d)
There is no XBRL taxonomy for insurance sector in India.

(v) (c)
In XBRL, data processing is done automatically.

(vi) (c)
XBRL provides multi-language support

(vii) (c)
In XBRL, data processing is done automatically and not manually.

(viii) (d)
All the three options (a), (b) and (c) are correct.

(ix) (d)
All the three types of companies are exempted.

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Study Note – 8

GOVERNMENT ACCOUNTING

Learning Objective:
• Governmental financial statements are quite a bit different from commercial financial
statements. Main objectives to learn Government Accounting is to acquire knowledge of
different types of funds used in governmental accounting, including why, when, and how to
use each.
• To understand bases and methods of accounting standards issued by the Government
Accounting Standards Board (GASB).
• To be aware of the sources and applications of Government Funds and their justifications.

OBJECTIVE TYPE QUESTIONS:

1. Choose the correct alternative:

(i) Which of the following is not a feature of Government Accounting?

(a) Reporting of Utilisation of Public Funds

(b) Government Regulations:

(c) Budget Heads

(d) Single Entry System

(ii) Which of the following is the objective of Government Accounting?

(a) To record financial transactions of revenues and expenditure relating to the government
organizations.

(b) To provide reliable financial data and information about the operation of public fund.

(c) To record the expenditures as per the appropriate Act, Rules, and legal provisions as set by the
government.

(d) All of the above

(iii) Which of the following is not a general principle of Government Accounting?

(a) Classification of expenditures

(b) Based on budget

(c) Cash basis of accounting

(d) Quarterly Accounting

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(iv) Audit of the Government Accounts is done by

(a) an independent auditor appointed by the public

(b) Ministry of corporate affairs

(c) Auditor General Office

(d) Ministry of finance

(v) Which of the following is the apex accounting body in Government of India?

(a) Institute of Chartered Accountants of India

(b) Institute of Cost Accountants of India

(c) Institute of Company Secretaries of India

(d) Comptroller General of India

(vi) Which of the following is not a software package used in Government Accounts?

(a) GAINS

(b) CONTACT

(c) TALLY

(d) IMPROVE

(vii) Which of the following is not a part of Government Accounts in India?

(a) RBI Fund

(b) Consolidated Fund,

(c) Contingency Fund and

(d) Public Account

(viii) IGAS 1 stands for

(a) Guarantees given by Governments: Disclosure Requirements

(b) Accounting and Classification of Grants-in-aid

(c) Loans and Advances made by Governments

(d) None of the above

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Answer:

(i) (d)

Government accounting is based on Double Entry System.

(ii) (d)

All the above are the objectives of Government Accounting.

(iii) (d)

Government accounting is done on annual basis i.e. from 1st April to 31st March.

(iv) (c)

The audit the books of accounts maintained by government departments, offices or institutions are to
be audited by a recognised department of the government (namely, the Auditor General Office).

(v) (d)

Controller General of Accounts (CGA) is the apex accounting body in the Government of India. It is the
principal Accounts Adviser to the Government of India.

(vi) (c)

At the three levels, namely the Controller General of Accounts, Principal Accounts Offices and the field
Pay and Accounts Offices software packages, namely GAINS (Government Accounting Information
System), CONTACT (Controller’s Accounts) and IMPROVE (Integrated Multimodule Processor for
Voucher Entries), are being used to consolidate Government of India Accounts.

(vii) (a)

The Constitution of India provides for the manner in which the accounts of the Government have to be
kept. The accounts of Government are kept in three parts namely, Consolidated Fund, Contingency
Fund and Public Account.

(viii) (a)

IGAS 1 stands for Guarantees given by Governments: Disclosure Requirements.

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