PAPER –1: FINANCIAL REPORTING

QUESTIONS
Analysis of Financial Statements/ Ind AS 101
1. HIM Limited having net worth of ` 250 crores is required to adopt Ind AS from
1 April, 20X2 in accordance with the Companies (Indian Accounting Standard) Rules
2015.
Rahul, the senior manager, of HIM Ltd. has identified following issues which need
specific attention of CFO so that opening Ind AS balance sheet as on the date of
transition can be prepared:
Issue 1 : As part of Property, Plant and Equipment, Company has elected to measure
land at its fair value and want to use this fair value as deemed cost on the date of
transition. The carrying value of land as on the date of transition was ` 5,00,000. The
land was acquired for a consideration of ` 5,00,000. However, the fair value of land as
on the date of transition was ` 8,00,000.
Issue 2 : Under Ind AS, the Company has designated mutual funds as investments at
fair value through profit or loss. The value of mutual funds as per previous GAAP was
` 4,00,000 (at cost). However, the fair value of mutual funds as on the date of transition
was ` 5,00,000.
Issue 3 : Company had taken a loan from another entity. The loan carries an interest
rate of 7% and it had incurred certain transaction costs while obtaining the same. It was
carried at cost on its initial recognition. The principal amount is to be repaid in equa l
instalments over the period of loan. Interest is also payable at each year end. The fair
value of loan as on the date of transition is ` 1,80,000 as against the carrying amount of
loan which at present equals ` 2,00,000.
Issue 4 : The company has declared dividend of ` 30,000 for last financial year. On the
date of transition, the declared dividend has already been deducted by the accountant
from the company’s ‘Reserves & Surplus’ and the dividend payable has been grouped
under ‘Provisions’. The dividend was only declared by board of directors at that time and
it was not approved in the annual general meeting of shareholders. However,
subsequently when the meeting was held it was ratified by the shareholders.
Issue 5 : The company had acquired intangible assets as trademarks amounting to
` 2,50,000. The company assumes to have indefinite life of these assets. The fair value
of the intangible assets as on the date of transition was ` 3,00,000. However, the
company wants to carry the intangible assets at ` 2,50,000 only.
Issue 6 : After consideration of possible effects as per Ind AS, the deferred tax impact is
computed as ` 25,000. This amount will further increase the portion of deferred tax
liability. There is no requirement to carry out the separate calculation of deferred tax on
account of Ind AS adjustments.

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 2 FINAL (NEW) EXAMINATION: MAY, 2021

Management wants to know the impact of Ind AS in the financial statements of company
for its general understanding.
Prepare Ind AS Impact Analysis Report (Extract) for HIM Limited for presentation to the
management wherein you are required to discuss the corresponding differences between
Earlier IGAAP (AS) and Ind AS against each identified issue for preparation of transition
date balance sheet. Also pass journal entry for each issue.
Ind AS 2
2. On 1 January 20X1 an entity accepted an order for 7,000 custom-made corporate gifts.
On 3 January 20X1 the entity purchased raw materials to be consumed in the production
process for ` 5,50,000, including ` 50,000 refundable purchase taxes. The purchase
price was funded by raising a loan of ` 5,55,000 (including ` 5,000 loan-raising fees).
The loan is secured by the inventories.
During January 20X1 the entity designed the corporate gifts for the customer.
Design costs included:
• cost of external designer = ` 7,000; and
• labour = ` 3,000.
During February 20X1 the entity’s production team developed the manufacturing
technique and made further modifications necessary to bring the inventories to the
conditions specified in the agreement. The following costs were incurred in the testing
phase:
• materials, net of ` 3,000 recovered from the sale of the scrapped output
= ` 21,000;
• labour = ` 11,000; and
• depreciation of plant used to perform the modifications = ` 5,000.
During February 20X1 the entity incurred the following additional costs in manufacturing
the customised corporate gifts:
• consumable stores = ` 55,000;
• labour = ` 65,000; and
• depreciation of plant used to manufacture the customised corporate gifts =
` 15,000.
The customised corporate gifts were ready for sale on 1 March 20X1. No abnormal
wastage occurred in the development and manufacture of the corporate gifts.
Compute the cost of the inventory? Substantiate your answer with appropriate reasons
and calculations, wherever required.

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 PAPER – 1 : FINANCIAL REPORTING 3

Ind AS 8
3. In 20X3-20X4, after the entity’s 31 March 20X3 annual financial statements were
approved for issue, a latent defect in the composition of a new product manufactured by
the entity was discovered (that is, a defect that could not be discovered by reasonable or
customary inspection). As a result of the latent defect the entity incurred `100,000 in
unanticipated costs for fulfilling its warranty obligation in respect of sales made before 31
March 20X3. An additional `20,000 was incurred to rectify the latent defect in products
sold during 20X3-20X4 before the defect was detected and the production process
rectified, `5,000 of which relates to items of inventory at 31 March 20X3. The defective
inventory was reported at cost ` 15,000 in the 20X2-20X3 financial statements when its
selling price less costs to complete and sell was estimated at `18,000. The accounting
estimates made in preparing the 31 March 20X3 financial statements were appropriately
made using all reliable information that the entity could reasonably be expected to have
been obtained and taken into account in the preparation and presentation of those
financial statements.
Analyse the above situation in accordance with relevant Ind AS.
Ind AS 38
4. PQR Ltd. is a gaming developer company. Few years back, it developed a new game
called 'Cloud9'. This game sold over 10,00,000 copies around the world and was
extremely profitable. Due to its popularity, PQR Ltd. released a new game in the
‘Cloud9’ series every year. The games continue to be the bestseller. Based on
Management’s expectations, estimates of cash flow projections for the ‘cloud9
videogame series’ over the next five years have been prepared. Based on these
projections, PQR Ltd. believes that cloud9 series brand should be recognised at
INR 20,00,000 in its financial statement. PQR Ltd. has also paid INR 10,00,000 to MNC
Ltd. to acquire rights of another video game series called the ‘Headspace’ videogame
series. The said series have huge demand in the market.
Discuss the accounting treatment of the above in the financial statements of PQR Ltd.
Ind AS 37 / Ind AS 115
5. A manufacturer gives warranties to the purchasers of its goods. Under the terms of the
warranty, the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within three years from the date of sale to
the purchasers.
On 30 April 20X1, a manufacturing defect was detected in the goods manufactured by
the entity between 1 March 20X1 and 30 April 20X1.
At 31 March 20X1 (the entity’s reporting date), the entity held approximately one week’s
sales in inventories.

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The entity’s financial statements for the year ended 31 March 20X1 have not yet been
finalised.
Three separate categories of goods require separate consideration:
Category 1—defective goods sold on or before 31 March 20X1
Category 2—defective goods held on 31 March 20X1
Category 3—defective goods manufactured in 20X1-20X2
State the accounting treatment of the above categories in accordance with relevant
Ind AS.
Ind AS 16
6. An entity has the following items of property, plant and equipment:
• Property A — a vacant plot of land on which it intends to construct its new
administration headquarters;
• Property B — a plot of land that it operates as a landfill site;
• Property C — a plot of land on which its existing administration headquarters are
built;
• Property D — a plot of land on which its direct sales office is built;
• Properties E1–E10 — ten separate retail outlets and the land on which they are
built;
• Equipment A — computer systems at its headquarters and direct sales office that
are integrated with the point of sale computer systems in the retail outlets;
• Equipment B — point of sale computer systems in each of its retail outlets;
• Furniture and fittings in its administrative headquarters and its sales office;
• Shop fixtures and fittings in its retail outlets.
How many classes of property, plant and equipment must the entity disclose?
Ind AS 23 / Ind AS 109
7. How will you capitalise the interest when qualifying assets are funded by borrowings in
the nature of bonds that are issued at discount?
Y Ltd. issued at the start of year 1, 10% (interest paid annually and having maturity
period of 4 years) bonds with a face value of ` 2,00,000 at a discount of 10% to finance a
qualifying asset which is ready for intended use at the end of year 2.
Compute the amount of borrowing costs to be capitalized if the company amortizes
discount using Effective Interest Rate method by applying 13.39% p.a. of EIR.

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 PAPER – 1 : FINANCIAL REPORTING 5

Ind AS 7
8. From the following data, identify the nature of activities as per Ind AS 7.
S.no. Nature of transaction
1 Cash paid to employees
2 Cash paid for development of property costs
3 Borrowings repaid
4 Cash paid to suppliers
5 Loan to Director
6 Bonus shares issued
7 Dividends paid
8 Cash received from trade receivables
9 Proceeds from sale of PPE
10 Depreciation of PPE
11 Advance received from customers
12 Purchased goodwill
13 Payment of promissory notes
Ind AS 40
9. X Ltd owned a land property whose future use was not determined as at
31 March 20X1. How should the property be classified in the books of X Ltd as at
31 March 20X1?
During June 20X1, X Ltd commenced construction of office building on it for own use.
Presuming that the construction of the office building will still be in progress as at
31 March 20X2
(a) How should the land property be classified by X Ltd in its financial statements as at
31 March 20X2?
(b) Will there be a change in the carrying amount of the property resulting from any
change in use of the investment property?
(c) Whether the change in classification to, or from, investment properties is a change
in accounting policy to be accounted for in accordance with Ind AS 8, Accounting
Policies, Changes in Accounting Estimates and Errors?
(d) Would your answer to (a) above be different if there were to be a management
intention to commence construction of an office building for own use; however, no
construction activity was planned by 31 March 20X2?

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Ind AS 115
10. A property sale contract includes the following:
(a) Common areas
(b) Construction services and building material
(c) Property management services
(d) Golf membership
(e) Car park
(f) Land entitlement
Analyse whether the above items can be considered as separate performance
obligations as per the requirements of Ind AS 115?
Ind AS 116
11. Entity X is an Indian entity whose functional currency is Indian Rupee. It has taken a
plant on lease from Entity Y for 5 years to use in its manufacturing process for which it
has to pay annual rentals in arrears of USD 10,000 every year. On the commencement
date, exchange rate was USD = ` 68. The average rate for Year 1 was ` 69 and at the
end of year 1, the exchange rate was ` 70. The incremental borrowing rate of Entity X on
commencement of the lease for a USD borrowing was 5% p.a.
How will entity X measure the right of use (ROU) asset and lease liability initially and at
the end of Year 1?
Ind AS 102
12. Company P is a holding company for company B. A group share-based payment is being
organized in which Parent issues its own equity shares to the employees of company B.
The details are as below –
Number of Employees of Company B 100
Grant date fair value of share ` 87
Number of shares granted to each employee 25
Vesting conditions Immediately
Face value per share ` 10

Pass the journal entries in the books of company P & company B.

Ind AS 103
13. Bima Ltd. acquired 65% of shares on 1 June, 20X1 in Nafa Ltd. which is engaged in
production of components of machinery. Nafa Ltd. has 1,00,000 equity shares of ` 10
each. The quoted market price of shares of Nafa Ltd. was ` 12 on the date of

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 PAPER – 1 : FINANCIAL REPORTING 7

acquisition. The fair value of Nafa Ltd.'s identifiable net assets as on 1 June, 20X1 was
` 80,00,000.
Bima Ltd. wired ` 50,00,000 in cash and issued 50,000 equity shares as purchase
consideration on the date of acquisition. The quoted market price of shares of
Bima Ltd. on the date of issue was ` 25 per share.
Bima Ltd. also agrees to pay additional consideration of ` 15,00,000, if the cumulative
profit earned by Nafa Ltd. exceeds ` 1 crore over the next three years. On the date of
acquisition, Nafa Ltd. assessed and determined that it is considered probable that the
extra consideration will be paid. The fair value of this consideration on the date of
acquisition is ` 9,80,000. Nafa Ltd. incurred ` 1,50,000 in relation to the acquisition. It
measures Non-controlling interest at fair value.
How will the acquisition of Nafa Ltd. be accounted by Bima Ltd., under Ind AS 103?
Prepare detailed workings and pass the necessary journal entry.
Ind AS 41
14. Analyse whether the following activities fall within the scope of Ind AS 41 with proper
reasoning:
▪ Managing animal-related recreational activities like Zoo
▪ Fishing in the ocean
▪ Fish farming
▪ Development of living organisms such as cells, bacteria and viruses
▪ Growing of plants to be used in the production of drugs
▪ Purchase of 25 dogs for security purpose of the company’s premises.
Ind AS 109
15. On 1 April 20X1, Sun Limited guarantees a `10,00,000 loan of Subsidiary – Moon
Limited, which Bank STDK has provided to Moon Limited for three years at 8%.
Interest payments are made at the end of each year and the principal is repaid at the end
of the loan term.
If Sun Limited had not issued a guarantee, Bank STDK would have charged Moon
Limited an interest rate of 11%. Sun Limited does not charge Moon Limited for providing
the guarantee.
On 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in
the next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to
recover any amount from Moon Limited.

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On 31 March 20X3, there is 3% probability that Moon Limited may default on the loan in
the next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to
recover any amount from Moon Limited.
Provide the accounting treatment of financial guarantee as per Ind AS 109 in the books
of Sun Ltd., on initial recognition and in subsequent periods till 31 March 20X3.
Ind AS 1
16. An entity has the following trial balance line items. How should these items be classified,
i.e., current or non-current as per Ind AS 1?
(a) Receivables (viz., receivable under a contract of sale of goods in which an entity
deals)
(b) Advance to suppliers
(c) Income tax receivables [other than deferred tax]
(d) Insurance spares
Ind AS 21 & Ind AS 103
17. Monsoon Limited acquired, on 30 September, 20X2, 70% of the share capital of
Mark Limited, an entity registered as company in Germany. The functional currency of
Monsoon Limited is Indian Rupee and its financial year ends on 31 March, 20X3.
The fair value of the net assets of Mark Limited was 23 million EURO and the purchase
consideration paid is 17.5 million EURO on 30 September, 20X2.
The exchange rates as on 30 September, 20X2 was ` 82 per EURO and at
31 March, 20X3 was ` 84 per EURO.
On acquisition of Mark limited, what is the value at which the goodwill / capital reserve
has to be recognized in the financial statements of Monsoon Limited as on
31 March 20X3?
Ind AS 19
18. At 1 April, 20X0, the fair value of the Plan Assets was ` 10,00,000. The Plan paid
benefits of ` 1,90,000 and received contributions of ` 4,90,000 on
30 September, 20X0. The company computes the Fair Value of Plan Assets to be
` 15,00,000 as on 31 March, 20X1 and the Present Value of the Defined Benefit
Obligation to amount to ` 14,79,200 on the same date. Actuarial losses on defined
benefit obligation were ` 6,000.
Compounding happens half-yearly. The normal interest rate for 6 months period is 10%
per annum, while the effective interest rate for 12 months period is based on the
following data:

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At 1 April, 20X0, the company made the following estimates based on market prices at
that date:
Particulars %
Interest and Dividend Income, after tax payable by the fund 9.25
Add: Realized and Unrealized Gains on Plan Assets (after tax) 2.00
Less: Administration Costs (1.00)
Expected Rate of Return 10.25
Determine actual return and expected return on plan asset. Also compute amount to be
recognized in ‘Other Comprehensive Income’ in this case.
Ind AS 12
19. The entity has an identifiable asset ASSOTA with a carrying amount of ` 10,00,000. Its
recoverable amount is ` 6,50,000. The tax base of ASSOTA is ` 8,00,000 and the tax
rate is 30%. Impairment losses are not tax deductible. Entity expects to continue to earn
profits in future.
For the identifiable asset ASSOTA, what would be the impact on the deferred tax asset/
liability at the end of the period?
Ind AS 36
20. On 31 March 20X1, Vision Ltd acquired 80% of the equity shares of Mission Ltd for
` 190 million. The fair values of the net assets of Mission Ltd that were included in the
consolidated statement of financial position of Vision Ltd at 31 March 20X1 were
` 200 million. It is the Group’s policy to value the non-controlling interest in subsidiaries
at the date of acquisition at its proportionate share of the fair value of the subsidiaries’
identifiable net assets.
On 31 March 20X4, Vision Ltd carried out its annual review of the goodwill on
consolidation of Mission Ltd and found evidence of impairment. No impairment had been
evident when the reviews were carried out at 31 March 20X2 and
31 March 20X3. The review involved allocating the assets of Mission Ltd into three cash-
generating units and computing the value in use of each unit. The carrying values of the
individual units before any impairment adjustments are given below:
Unit A Unit B Unit C
` in million ` in million ` in million
Intangible assets 30 10 -
Property, Plant and Equipment 80 50 60
Current Assets 60 30 40
Total 170 90 100
Value in use of unit 180 66 104

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It was not possible to meaningfully allocate the goodwill on consolidation to the individual
cash generating units but all the other net assets of Mission Ltd are allocated in the table
shown above.
The intangible assets of Mission Ltd have no ascertainable market value but all the
current assets have a market value that is at least equal to their carrying value. The
value in use of Mission Ltd as a single cash-generating unit on 31 March 20X4 is
` 350 million.
Discuss and compute the accounting treatment of impairment of goodwill as per
Ind AS 36?

SUGGESTED ANSWERS

1. Preliminary Impact Assessment on Transition to Ind AS in HIM Limited’s Financial

Statements
Issue 1: Fair value as deemed cost for property plant and equipment:
Accounting Standards Ind AS Impact on Company’s
(Erstwhile IGAAP) financial statements
As per AS 10, Property, Ind AS 101 allows entity The company has decided
Plant and Equipment is to elect to measure to adopt fair value as
recognised at cost less Property, Plant and deemed cost in this case.
depreciation. Equipment on the Since fair value exceeds
transition date at its fair book value, so the book
value or previous GAAP value should be brought up
carrying value (book to fair value. The resulting
value) as deemed cost. impact of fair valuation of
land ` 3,00,000 should be
adjusted in other equity.
Journal Entry on the date of transition

Particulars Debit (`) Credit (`)

Property Plant and Equipment Dr. 3,00,000
To Revaluation Surplus (OCI- Other Equity) 3,00,000
Issue 2: Fair valuation of Financial Assets:
Accounting Standards Ind AS Impact on Company’s
(Erstwhile IGAAP) financial statements
As per Accounting On transition, financial All financial assets (other
Standard, investments assets including than Investment in

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 PAPER – 1 : FINANCIAL REPORTING 11

are measured at lower of investments are subsidiaries, associates and

cost and fair value. measured at fair values JVs’ which are recorded at
except for investments in cost) are initially recognized
subsidiaries, associates
at fair value.
and JVs' which are
recorded at cost. The subsequent
measurement of such assets
are based on its
categorization either Fair
Value through Profit & Loss
(FVTPL) or Fair Value
through Other
Comprehensive Income
(FVTOCI) or at Amortised
Cost based on business
model assessment and
contractual cash flow
characteristics.
Since investment in mutual
fund are designated at
FVTPL, increase of
` 1,00,000 in mutual funds
fair value would increase the
value of investments with
corresponding increase to
Retained Earnings.
Journal Entry on the date of transition

Particulars Debit (`) Credit (`)

Investment in mutual funds Dr. 1,00,000
To Retained earnings 1,00,000
Issue 3: Borrowings - Processing fees/transaction cost:
Accounting Standards Ind AS Impact on Company’s
(Erstwhile IGAAP) financial statements
As per AS, such As per Ind AS, such Fair value as on the date of
expenditure is charged expenditure is amortised transition is ` 1,80,000 as
to Profit and loss over the period of the loan. against its book value of
account or capitalised Ind AS 101 states that if it ` 2,00,000. Accordingly,

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as the case may be is impracticable for an the difference of ` 20,000 is

entity to apply adjusted through retained
retrospectively the effective earnings.
interest method in Ind AS
109, the fair value of the
financial asset or the
financial liability at the date
of transition to Ind AS shall
be the new gross carrying
amount of that financial
asset or the new amortised
cost of that financial
liability.
Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Borrowings / Loan payable Dr. 20,000
To Retained earnings 20,000
Issue 4: Proposed dividend:
Accounting Ind AS Impact on Company’s financial
Standards statements
(Erstwhile IGAAP)
As per AS, provision As per Ind AS, Since dividend should be deducted
for proposed divided liability for proposed from retained earnings during the year
is made in the year dividend is when it has been declared and
when it has been recognised in the approved. Therefore, the provision
declared and year in which it has declared for preceding year should be
approved. been declared and reversed (to rectify the wrong entry).
approved. Retained earnings would increase
proportionately due to such
adjustment
Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Provisions Dr. 30,000
To Retained earnings 30,000

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Issue 5 : Intangible assets:

Accounting Standards Ind AS Impact on
(Erstwhile IGAAP) Company’s financial
statements
The useful life of an intangible The useful life of an Consequently, there
asset cannot be indefinite intangible asset like would be no impact as
under IGAAP principles. The brand/trademark can be on the date of
Company amortised indefinite. Not required to transition since
brand/trademark on a straight be amortised and only company intends to
line basis over maximum of 10 tested for impairment. use the carrying
years as per AS 26. Company can avail the amount instead of
exemption given in Ind AS book value at the date
101 as on the date of of transition.
transition to use the
carrying value as per
previous GAAP.
Issue 6: Deferred tax
Accounting Standards Ind AS Impact on Company’s
(Erstwhile IGAAP) financial statements
As per AS, deferred taxes As per Ind AS, deferred On date of transition to
are accounted as per taxes are accounted as Ind AS, deferred tax
income statement per balance sheet liability would be
approach. approach. increased by ` 25,000.

Journal Entry on the date of transition

Particulars Debit (`) Credit (`)
Retained earnings Dr. 25,000
To Deferred tax liability 25,000

2. Statement showing computation of inventory cost

Particulars Amount Remarks
(`)
Costs of purchase 5,00,000 Purchase price of raw material [purchase
price (` 5,50,000) less refundable
purchase taxes (` 50,000)]
Loan-raising fee – Included in the measurement of the
liability

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Costs of purchase 55,000 Purchase price of consumable stores

Costs of conversion 65,000 Direct costs—labour
Production overheads 15,000 Fixed costs—depreciation
Production overheads 10,000 Product design costs and labour cost for
specific customer
Other costs 37,000 Refer working note
Borrowing costs – Recognised as an expense in profit or
loss
Total cost of inventories 6,82,000
Working Note:
Costs of testing product designed for specific customer:
` 21,000 material (ie net of the ` 3,000 recovered from the sale of the scrapped output) +
` 11,000 labour + ` 5,000 depreciation.
3. Ind AS 8 is applied in selecting and applying accounting policies, and accounting for
changes in accounting policies, changes in accounting estimates and corrections of prior
period errors.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a
liability, or the amount of the periodic consumption of an asset. This change in
accounting estimate is an outcome of the assessment of the present status of, and
expected future benefits and obligations associated with, assets and liabilities. Changes
in accounting estimates result from new information or new developments and,
accordingly, are not corrections of errors.
Further, the effect of change in an accounting estimate, shall be recognised prospectively
by including it in profit or loss in: (a) the period of the change, if the change affects that
period only; or (b) the period of the change and future periods, if the change affects both.
Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse of,
reliable information that:
(a) was available when financial statements for those periods were approved for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
On the basis of above provisions, the given situation would be dealt as follows:

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The defect was neither known nor reasonably possible to detect at 31 March 20X3 or
before the financial statements were approved for issue, so understatement of the
warranty provision ` 1,00,000 and overstatement of inventory ` 2,000 (Note 1) in the 31
March 20X3 financial statements are not a prior period errors.
The effects of the latent defect that relate to the entity’s financial position at
31 March 20X3 are changes in accounting estimates.
In preparing its financial statements for 31 March 20X3, the entity made the warranty
provision and inventory valuation appropriately using all reliable information that the
entity could reasonably be expected to have obtained and had taken into account the
same in the preparation and presentation of those financial statements.
Consequently, the additional costs are expensed in calculating profit or loss for
20X3-20X4.
Working Note:
Inventory is measured at the lower of cost (ie ` 15,000) and fair value less costs to
complete and sell (ie ` 18,000 originally estimated minus ` 5,000 costs to rectify latent
defect) = ` 13,000.
4. In order to determine the accounting treatment of ‘cloud9 videogame series’ and
‘Headspace’, definition of asset and intangible asset given in Ind AS 38 may be noted:
“An asset is a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.”
“An intangible asset is an identifiable non-monetary asset without physical substance.”
In accordance with the above, for recognising an intangible asset, an entity must be able
to demonstrate that the item satisfies the criteria of identifiability, control and existence of
future economic benefits.
In order to determine whether ‘cloud9 videogame series’ meet the aforesaid conditions,
following provisions of Ind AS 38 regarding Internally Generated Intangible Assets may
be noted:
As per paragraph 63 and 64 of Ind AS 38, internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance should not be recognised
as intangible assets. Expenditure on such items cannot be distinguished from the cost of
developing the business as a whole. Therefore, such items are not recognised as
intangible assets.
Accordingly, though the cash flow projections suggest that the cloud9 brand will lead to
future economic benefits, yet the asset has been internally generated; therefore, the
Cloud9 brand cannot be recognised as intangible asset in the financial statements.

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In order to determine whether ‘Headspace’ meet the aforesaid conditions, following

provisions of Ind AS 38 regarding ‘Separately acquired Intangible Assets’ should be
analused.
As per paragraphs 25 and 26 of Ind AS 38, normally, the price an entity pays to acquire
separately an intangible asset will reflect expectations about the probability that the
expected future economic benefits embodied in the asset will flow to the entity. In other
words, the entity expects there to be an inflow of economic benefits, even if there is
uncertainty about the timing or the amount of the inflow. Therefore, the probability
recognition criterion in paragraph 21(a) is always considered to be satisfied for
separately acquired intangible assets. In addition, the cost of a separately acquired
intangible asset can usually be measured reliably. This is particularly so when the
purchase consideration is in the form of cash or other monetary assets.
The Headspace game has been purchased for INR 10,00,000 and it is expected to
generate future economic benefits to the entity. Since Headspace game is a separately
acquired asset and the future benefits are expected to flow to the entity, therefore, an
intangible asset should be recognised in respect of the ‘Headspace’ asset at its cost of
INR 10,00,000. After initial recognition, either cost model or revaluation model can be
used to measure headspace intangible asset as per guidance given in paragraphs
74-87 of Ind AS 38. In accordance with this, Headspace intangible asset should be
carried at its cost/revalued amount (as the case may be) less any accumulated
amortisation and any accumulated impairment losses.
5. Category 1—defective goods sold on or before 31 March 20X1
If customer has the option to purchase warranty separately, the warranty is a distinct
service because the entity promises to provide the service to the customer in addition to
the product that has the functionality described in the contract. In that case, entity shall
account for the promised warranty as a performance obligation and allocate a portion of
the transaction price to that performance obligation.
If a customer does not have the option to purchase a warranty separately, an entity shall
account for the warranty in accordance with Ind AS 37, Provisions, Contingent Liabilities
and Contingent Assets, unless it provides the customer with a service in addition to the
assurance that the product complies with agreed-upon specifications. If that is the case,
then, the promised service is a performance obligation. Entity shall allocate the
transaction price to the product and the service.
If an entity promises both an assurance-type warranty and a service-type warranty but
cannot reasonably account for them separately, the entity shall account for both of the
warranties together as a single performance obligation.
A law that requires an entity to pay compensation if its products cause harm or damage
does not give rise to a performance obligation. The entity shall account for such
obligations in accordance with Ind AS 37.

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 PAPER – 1 : FINANCIAL REPORTING 17

Category 2—defective goods held on 31 March 20X1

At 31 March 20X1, the entity did not have a present obligation to make good the unsold
defective goods that it held in inventories. Accordingly, at 31 March 20X1 the entity
should not recognise a provision in respect of the defective inventories.
For this category, the detection of the manufacturing defect in April 20X1 is an adjusting
event after the end of the reporting period as per Ind AS 10, Events after the End of the
Reporting Period. It provides evidence of a manufacturing defect in inventories held at 31
March 20X1.
Category 3—defective goods manufactured in 20X1-20X2
At 31 March 20X1 the entity did not have a present obligation to make good any
defective goods that it might manufacture in the future. Accordingly, at 31 March 20X1
the entity should not recognise a provision in respect of the defective goods
manufactured in 20X1-20X2.
For this category, the detection of the manufacturing defect in April 20X1 is a non-
adjusting event after the end of the reporting period as per Ind AS 10, Events After the
End of the Reporting Period.
6. To answer this question one must make a materiality judgement.
A class of assets is defined as a grouping of assets of a similar nature and use in an
entity’s operations.
The nature of land without a building is different to the nature of land with a building.
Consequently, land without a building is a separate class of asset from land and
buildings. Furthermore, the nature and use of land operated as a landfill site is different
from vacant land. Hence, the entity should disclose Property A separately. The entity
must apply judgement to determine whether the entity’s retail outlets are sufficiently
different in nature and use from its office buildings, and thus constitute a separate class
of land and buildings.
The computer equipment is integrated across the organisation and would probably be
classified as a single separate class of asset.
Furniture and fittings used for administrative purposes could be sufficiently different to
shop fixtures and fittings in retail outlets. Hence, they should be classified in two
separate classes of assets.
7. Capitalisation Method
As per the Standard, borrowing costs may include interest expense calculated using the
effective interest method. Further, capitalisation of borrowing cost should cease where
substantially all the activities necessary to prepare the qualifying asset for its intended
use or sale are complete.

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Thus, only that portion of the amortized discount should be capitalised as part of the cost
of a qualifying asset which relates to the period during which acquisition, construction or
production of the asset takes place.
Capitalisation of Interest
Hence based on the above explanation the amount of borrowing cost of year 1 & 2 are to
be capitalised and the borrowing cost relating to year 3 & 4 should be expensed.
Quantum of Borrowing
The value of the bond to Y Ltd. is the transaction price ie ` 1,80,000 (2,00,000 – 20,000)
Therefore, Y Ltd will recognize the borrowing at ` 1,80,000.
Computation of the amount of Borrowing Cost to be Capitalised
Y Ltd will capitalise the interest (borrowing cost) using the effective interest rate of
13.39% for two years as the qualifying asset is ready for intended use at the end of the
year 2, the details of which are as follows:
Year Opening Interest expense @ Total Interest Closing
Borrowing 13.39% to be capitalised paid Borrowing
(1) (2) (3) (4) (5) = (3) – (4)
1 1,80,000 24,102 2,04,102 20,000 1,84,102
2 1,84,102 24,651 2,08,753 20,000 1,88,753
48,753
Accordingly, borrowing cost of ` 48,753 will be capitalized to the cost of qualifying asset.
8.
S. No. Nature of transaction Activity as per Ind AS 7
1 Cash paid to employees Operating activity
2 Cash paid for development costs Investing activity
3 Borrowings repaid Financing activity
4 Cash paid to suppliers Operating activity
5 Loan to Director Investing activity
6 Bonus shares issued Non-cash item
7 Dividends paid Financing activity
8 Cash received from trade receivables Operating activity
9 Proceeds from sale of PPE Investing activity

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 PAPER – 1 : FINANCIAL REPORTING 19

10 Depreciation of PPE Non-cash item

11 Advance received from customers Operating activity
12 Purchased goodwill Investing activity
13 Payment of promissory notes Financing activity
9. As per paragraph 8(b) of Ind AS 40, any land held for currently undetermined future use,
should be classified as an investment property. Hence, in this case, the land would be
regarded as held for capital appreciation. Hence the land property should be classified by
X Ltd as investment property in the financial statements as at 31 March 20X1.
As per Para 57 of the Standard, an entity can change the classification of any property
to, and from, an investment property when and only when evidenced by a change in use.
A change occurs when the property meets or ceases to meet the definition of investment
property and there is evidence of the change in use. Mere management’s intention for
use of the property does not provide evidence of a change in use.
(a) Since X Ltd has commenced construction of office building on it for own use, the
property should be reclassified from investment property to owner occupied as at
31 March 20X2.
(b) As per Para 59, transfers between investment property, owner occupied and
inventories do not change the carrying amount of the property transferred and they
do not change the cost of the property for measurement or disclosure purposes.
(c) No. The change in classification to, or from, investment properties is due to change
in use of the property. No retrospective application is required and prior period’s
financial statements need not be re-stated.
(d) Mere management intentions for use of the property do not evidence change in use.
Since X Ltd has no plans to commence construction of the office building during
20X1-20X2, the property should continue to be classified as an investment property
by X Ltd in its financial statements as at 31 March 20X2.
10. Paragraph 22 of Ind AS 115 provides that at contract inception, an entity evaluates the
promised goods or services to determine which goods or services (or bundle of goods or
services) are distinct and therefore constitute a performance obligation.
A performance obligation is a promise in a contract to transfer to the customer either:
• a good or service (or a bundle of goods or services) that is distinct; and
• series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
As per paragraph 27 of Ind AS 115, a good or service that is promised to a customer i s
distinct if both of the following criteria are met:

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 20 FINAL (NEW) EXAMINATION: MAY, 2021

(a) the customer can benefit from the good or service either on its own or together with
other resources that are readily available to the customer (i.e. the good or service is
capable of being distinct); and
(b) the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract (i.e. the promise to transfer the good
or service is distinct within the context of the contract).
Each performance obligation is required to be accounted for separately.
Based on the above guidance, the following table discusses whether the common goods
and services in property sale contract should be considered as separate performance
obligation or not:
Goods/Service Whether a separate Reason
Performance
obligation (PO) or
not
Common areas Unlikely to be Common areas are unlikely to be a
separate PO separate performance obligation
because the interests received in
common areas are typically
undivided interests that are not
separable from the property itself.

However, if the common areas

were sold separately by the
developer, then they could be
considered as a separate
performance obligation provided
that it is distinct in the context of
the contract.
Construction services Unlikely to be Construction services and building
and building material separate PO materials can meet the first
criterion as they are items that can
be used in conjunction with other
readily available goods or services.

However, the developer would be

considered to be providing a
significant integration service as it
is bringing together all the separate
elements to deliver a complete
building.

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Property management Likely to be separate Property management services and

services and Golf PO golf membership are likely to be
membership separate performance obligations
as they may be used in isolation or
with the property already acquired,
i.e., management services can be
used with the property. These types
of services are not significantly
customised, integrated with, or
dependent on the property. This is
because there is no change in their
function with or without the
property. Also, a property
management service could be
undertaken by a third party.
Car park and Land Analysis required Items such as car parks and land
entitlement entitlements generally meet the first
criterion – i.e., capable of being
distinct – as the buyer benefits from
them on their own.

Whether the second criterion is met

depends on the facts and
circumstances. For example, if the
land entitlement can be sold
separately or pledged as security
as a separate item, it may indicate
that it is not highly dependent on,
or integrated with, other rights
received in the contract. In an
apartment scenario, the customer
can receive an undivided interest in
the land on which the apartment
block sits. This type of right is
generally considered as highly
inter-related with the apartment
itself.*
* However, if title to the land is transferred to the buyer separately – for example in a
single party development – then the separately identifiable criterion may be met.
PS: Other facts and circumstances of each contract should also be carefully examined
to determine performance obligations.

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 22 FINAL (NEW) EXAMINATION: MAY, 2021

11. On initial measurement, Entity X will measure the lease liability and ROU asset as under:
Year Lease Present Present Conversion INR value
Payments Value Value of rate (spot
(USD) factor @ Lease rate)
5% Payment
1 10,000 0.952 9,520 68 6,47,360
2 10,000 0.907 9,070 68 6,16,760
3 10,000 0.864 8,640 68 5,87,520
4 10,000 0.823 8,230 68 5,59,640
5 10,000 0.784 7,840 68 5,33,120
Total 43,300 29,44,400
As per Ind AS 21, The Effects of Changes in Foreign Exchange Rates, monetary assets
and liabilities are restated at each reporting date at the closing rate and the difference
due to foreign exchange movement is recognised in profit and loss whereas non-
monetary assets and liabilities carried measured in terms of historical cost in foreign
currency are not restated.
Accordingly, the ROU asset in the given case being a non-monetary asset measured in
terms of historical cost in foreign currency will not be restated but the lease liability being
a monetary liability will be restated at each reporting date with the resultant difference
being taken to profit and loss.
At the end of Year 1, the lease liability will be measured in terms of USD as under:
Lease Liability:
Year Initial Value (USD) Lease Payment Interest @ 5% Closing Value (USD)
(a) (b) (c) = (a x 5%) (d = a + c - b)
1 43,300 10,000 2,165 35,465
Interest at the rate of 5% will be accounted for in profit and loss at average rate of
` 69 (i.e., USD 2,165 x 69) = ` 1,49,385.
Particulars Dr. (`) Cr. (`)
Interest Expense Dr. 1,49,385
To Lease liability 1,49,385
Lease payment would be accounted for at the reporting date exchange rate, i.e. ` 70 at
the end of year 1
Particulars Dr. (`) Cr. (`)
Lease liability Dr. 7,00,000
To Cash 7,00,000

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As per the guidance above under Ind AS 21, the lease liability will be restated using the
reporting date exchange rate i.e., ` 70 at the end of Year 1. Accordingly, the lease
liability will be measured at ` 24,82,550 (35,465 x ` 70) with the corresponding impact
due to exchange rate movement of ` 88,765 (24,82,550 – (29,44,400 + 1,49,385 –
700,000) taken to profit and loss.
At the end of year 1, the ROU asset will be measured as under:
Year Opening Balance (`) Depreciation (` ) Closing Balance (` )
1 29,44,400 5,88,880 23,55,520
12. Journal Entries
Books of Company P
Particulars Debit (`) Credit (`)
Investment in Company B Dr. 2,17,500
To Equity Share Capital A/c (2,500 shares x ` 10) 25,000
To Securities Premium A/c (2,500 shares x ` 77) 1,92,500
(Being allotment of 25 shares each to 100 employees of B
at fair value of ` 87 per share)

Books of Company B
Particulars Debit (`) Credit (`)
Employee Benefit Expense A/c Dr. 2,17,500
To Capital Contribution from Parent P 2,17,500
(Being issue of shares by Parent to Employees pursuant to
Group Share-based Payment Plan)

13. Computation of Goodwill / Capital reserve on consolidation as per Ind AS 103

Particulars `
Cost of investment:
Share exchange (50,000 x 25) 12,50,000
Cash consideration 50,00,000
Contingent consideration 9,80,000
Consideration transferred at date of acquisition [A] 72,30,000
Fair value of non-controlling interest at date of acquisition [B] 4,20,000
(1,00,000 x 35% x 12)
Total [C] = [A] + [B] 76,50,000

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 24 FINAL (NEW) EXAMINATION: MAY, 2021

Net assets acquired at date of acquisition [D] (80,00,000)

Capital Reserve [D] – [C] 3,50,000
In a business combination, acquisition-related costs (including stamp duty) are expensed
in the period in which such costs are incurred and are not included as part of the
consideration transferred. Therefore, ` 1,50,000 incurred by Nafa Ltd. in relation to
acquisition, will be ignored by Bima Ltd.
Journal entry at the date of acquisition by Bima Limited as per Ind AS 103:
` `
Identifiable net assets Dr. 80,00,000
To Equity share capital (50,000 x 10) 5,00,000
To Securities Premium (50,000 x 15) 7,50,000
To Cash 50,00,000
To Provision for contingent consideration to Nafa Ltd. 9,80,000
To Non-controlling Interest 4,20,000
To Capital Reserve 3,50,000
14.
Activity Whether in Remarks
the scope of
Ind AS 41?
Managing animal- No Since the primary purpose is to show the
related animals to public for recreational purposes,
recreational there is no management of biological
activities like Zoo transformation but simply control of the
number of animals. Hence it will not fall in the
purview of considered in the definition of
agricultural activity.
Fishing in the No Fishing in ocean is harvesting biological
ocean assets from unmanaged sources. There is
no management of biological transformation
since fish grow naturally in the ocean.
Hence, it will not fall in the scope of the
definition of agricultural activity.
Fish farming Yes Managing the growth of fish and then harvest
for sale is agricultural activity within the
scope of Ind AS 41 since there is
management of biological transformation of

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biological assets for sale or additional

biological assets.
Development of Analysis The development of living organisms for
living organisms required research purposes does not qualify as
such as cells, agricultural activity, as those organisms are
bacteria viruses not being developed for sale, or for
conversion into agricultural produce or into
additional biological assets. Hence,
development of such organisms for the said
purposes does not fall under the scope of Ind
AS 41.
However, if the organisms are being
developed for sale or use in dairy products,
the activity will be considered as agricultural
activity under the scope of Ind AS 41.
Growing of plants Yes If an entity grows plants for using it in
to be used in the production of drugs, the activity will be
production of agricultural activity. Hence it will come under
drugs the scope of Ind AS 41.
Purchase of 25 No Ind AS 41 is applied to account for the
dogs for security biological assets when they relate to
purposes of the agricultural activity.
company’s Guard dogs for security purposes do not
premises qualify as agricultural activity, since they are
not being kept for sale, or for conversion into
agricultural produce or into additional
biological assets. Hence, they are outside
the scope of Ind AS 41.
15. 1 April 20X1
A financial guarantee contract is initially recognised at fair value. The fair value of the
guarantee will be the present value of the difference between the net contractual cash
flows required under the loan, and the net contractual cash flows that would have been
required without the guarantee.
Particulars Year 1 Year 2 Year 3 Total
(` ) (` ) (` ) (` )
Cash flows based on interest rate of 11% (A) 1,10,000 1,10,000 1,10,000 3,30,000
Cash flows based on interest rate of 8% (B) 80,000 80,000 80,000 2,40,000
Interest rate differential (A-B) 30,000 30,000 30,000 90,000

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 26 FINAL (NEW) EXAMINATION: MAY, 2021

Discount factor @ 11% 0.901 0.812 0.731

Interest rate differential discounted at 11% 27,030 24,360 21,930 73,320
Fair value of financial guarantee contract (at
inception) 73,320
Journal Entry
Particulars Debit (`) Credit (`)
Investment in subsidiary Dr. 73,320
To Financial guarantee (liability) 73,320
(Being financial guarantee initially recorded)
31 March 20X2
Subsequently at the end of the reporting period, financial guarantee is measured at the
higher of:
- the amount of loss allowance; and
- the amount initially recognised less cumulative amortization, where appropriate.
At 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in
the next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to
recover any amount from Moon Limited. The 12-month expected credit losses are
therefore `10,000 (`10,00,000 x 1%).
The initial amount recognised less amortisation is `51,385 (`73,320 + `8,065 (interest
accrued based on EIR)) – `30,000 (benefit of the guarantee in year 1) Refer table below.
The unwound amount is recognised as income in the books of Sun Limited, being the
benefit derived by Moon Limited not defaulting on the loan during the period.
Year Opening balance EIR @ 11% Benefits provided Closing balance
` ` `
1 73,320 8,065 (30,000) 51,385
2 51,385 5,652 (30,000) 27,037
3 27,037 2,963* (30,000) -

* Difference is due to approximation

The carrying amount of the financial guarantee liability after amortisation is therefore
` 51,385, which is higher than the 12-month expected credit losses of ` 10,000. The
liability is therefore adjusted to ` 51,385 (the higher of the two amounts) as follows:

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 PAPER – 1 : FINANCIAL REPORTING 27

Particulars Debit (`) Credit (`)

Financial guarantee (liability) Dr. 21,935
To Profit or loss 21,935
(Being financial guarantee subsequently adjusted)
31 March 20X3
At 31 March 20X3, there is 3% probability that Moon Limited will default on the loan in
the next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to
recover any amount from Moon Limited. The 12-month expected credit losses are
therefore ` 30,000 (` 10,00,000 x 3%).
The initial amount recognised less accumulated amortisation is ` 27,037, which is lower
than the 12-month expected credit losses (` 30,000). The liability is therefore adjusted to
` 30,000 (the higher of the two amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 21,385*
To Profit or loss (Note) 21,385
(Being financial guarantee subsequently adjusted)
* The carrying amount at the end of 31 March 20X2 = ` 51,385 less 12-month expected
credit losses of ` 30,000.
16. (a) As per paragraph 66(a) of Ind AS 1, an entity shall classify an asset as current
when it expects to realise the asset, or intends to sell or consume it, in its normal
operating cycle.
Paragraph 68 provides the guidance that 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.
In accordance with above, the receivables that are considered a part of the normal
operating cycle will be classified as current asset.
If the operating cycle exceeds twelve months, then additional disclosure as required
by paragraph 61 of Ind AS 1 is required to be given in the notes.
(b) As discussed in point (a) above, advances to suppliers for goods and services
would be classified in accordance with normal operating cycle if it is given in relation
to the goods or services in which the entity normally deals. If the advances are
considered a part the normal operating cycle, it would be classified as a current
asset. If the operating cycle exceeds twelve months, then additional disclosure as
required by paragraph 61 of Ind AS 1 is required to be given in the notes.

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 28 FINAL (NEW) EXAMINATION: MAY, 2021

(c) Classification of income tax receivables [other than deferred tax] will be driven by
paragraph 66 (c) of Ind AS 1, i.e., based on the expectation of the entity to realise
the asset. If the receivable is expected to be realised within twelve months after the
reporting period, then it will be classified as current asset else non-current asset.
(d) Para 8 of Ind AS 16 states that items such as spare parts, stand-by equipment and
servicing equipment are recognised in accordance with this Ind AS when they meet
the definition of property, plant and equipment. Otherwise, such items are classified
as inventory.
Accordingly, the insurance spares that are treated as an item of property, plant and
equipment would normally be classified as non-current asset whereas insurance
spares that are treated as inventory will be classified as current asset if the entity
expects to consume it in its normal operating cycle.
17. Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be
expressed in the functional currency of the foreign operation and shall be translated at
the closing rate in accordance with paragraphs 39 and 42.
In this case, the amount of goodwill will be as follows:
Net identifiable asset Dr. ` 23 million
Goodwill (bal. fig.) Dr. ` 1.4 million
To Bank (Purchase consideration) ` 17.5 million
To NCI (23 x 30%) ` 6.9 million
Thus, goodwill on reporting date in the books of Monsoon Limited would be
= 1.4 million EURO x ` 84 = ` 117.6 million.
18. Computation of Expected Return on Plan Assets
Particulars `
Return on ` 10,00,000 for 20X0-20X1 at 10.25% = ` 10,00,000 x 1,02,500
10.25%
Add: Return on ` 3,00,000 for 6 months at 10% Normal Rate =
[3,00,000 (Inflow ` 4,90,000 less Payments ` 1,90,000) x 10% x
6/12] 15,000
Expected Return on Plan Assets 1,17,500
Computation of Actual Return on Plan Assets
Particulars `
Fair Value of Plan Assets at the year-end – 31 March 20X1 15,00,000
Less: Fair Value of Plan Assets at the beginning – 1 April 20X0 (10,00,000)

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Less: Contributions received during the year 20X0-20X1 (4,90,000)

Add: Benefits paid during the year 20X0-20X1 1,90,000
Actual Return on Plan Assets 2,00,000
Computation of Net Actuarial Gain
Particulars `
Actual Return on Plan Assets 2,00,000
Less: Expected Return on Plan Assets (1,17,500)
Actuarial Gain on Plan Assets 82,500
Less: Actuarial Loss on Defined Benefit Obligation (given) (6,000)
Net Actuarial Gain to be recognized in ‘Other Comprehensive
Income’ 76,500
19. As per Ind AS 36, the revised carrying amount of asset ASSOTA would be `6,50,000.
The tax base of asset ASSOTA is given as `8,00,000.
Carrying base of asset = `6,50,000
Tax base of asset = `8,00,000
Since tax base is greater than carrying base of asset, so deferred tax asset would be
created on the temporary difference of `1,50,000 (`8,00,000 – `6,50,000) at the given
tax rate of 30%.
Hence, Deferred tax asset for the asset ASSOTA would be `1,50,000 x 30% = `45,000.
20. The goodwill on consolidation of Mission Ltd that is recognized in the consolidated
balance sheet of Vision Ltd is ` 30 million (` 190 million – 80% x ` 200 million). This can
only be reviewed for impairment as part of the cash generating units to which it relates.
Since here the goodwill cannot be meaningfully allocated to the units, the impairment
review is in two parts.
Units A and C have values in use that are more than their carrying values. However, the
value in use of Unit B is less than its carrying amount. This means that the assets of unit
B are impaired by ` 24 million (` 90 million – ` 66 million). This impairment loss will be
charged to the statement of profit and loss.
Assets of Unit B will be written down on a pro-rata basis as shown in the table below:
(` in million)
Asset Impact on carrying value
Existing Impairment Revised
Intangible assets 10 (4) 6
Property, plant and equipment 50 (20) 30

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 30 FINAL (NEW) EXAMINATION: MAY, 2021

Current assets 30 Nil* 30

Total 90 (24) 66
* The current assets are not impaired because they are expected to realize at least their
carrying value when disposed of.
Following this review, the three units plus the goodwill are reviewed together i.e. treating
Mission Limited as single cash generating Unit. The impact of this is shown in the
following table, given that the recoverable amount of the business as a whole is
` 350 million: (` in million)
Component Impact of impairment review on carrying value
Existing Impairment Revised
Goodwill (see note below) 37.50 (23.50) 14.00
Unit A 170.00 Nil 170.00
Unit B (revised) 66.00 Nil 66.00
Unit C 100.00 Nil 100.00
Total 373.50 (23.50) 350.00
Note: As per Appendix C of Ind AS 36, given that the subsidiary is 80% owned the
goodwill must first be grossed up to reflect a notional 100% investment. Therefore, the
goodwill will be grossed up to ` 37.50 million (` 30 million x 100/80).
The impairment loss of ` 23.50 million is all allocated to goodwill, leaving the carrying
values of the individual units of the business as shown in the table immediately above.
The table shows that the notional goodwill that relates to a 100% interest is written down
by ` 23.50 million to ` 14.00 million. However, in the consolidated financial statements
the goodwill that is recognized is based on an 80% interest so the loss that is actually
recognized is ` 18.80 million (` 23.50 million x 80%) and the closing consolidated
goodwill figure is ` 11.20 million (` 14.00 million x 80%) or (` 30 million – ` 18.80
million).

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

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 2 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

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

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

Additional information of Softbharti Pvt Ltd.:

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

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Asset description As per Books As per Income tax

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

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

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

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

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Would the situation be different if:

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

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

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

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

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

SUGGESTED ANSWERS

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

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

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

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

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

DISCLOSURE FORMING PART OF FINANCIAL STATEMENTS:

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

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

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Reclassification of government statuary dues payable to

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

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

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

Year Labour Grant Deferred

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

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

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

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

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

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Exchange component of change =

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

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

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

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

charged to P&L.
Note: Selling costs are excluded from the cost of inventories and recognised as expense
in the period in which they are incurred.
13. Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are
approved by the Board of Directors in case of a company, and, by the corresponding
approving authority in case of any other entity for issue.
Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period ( non
adjusting events after the reporting period).
An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
events after the reporting period. In the instant case, since fire took place after the end of
the reporting period, it is a non-adjusting event. However, in accordance with para 21 of
Ind AS 10, disclosures regarding non-adjusting event should be made in the financial
statements, i.e., the nature of the event and the expected financial effect of the same.
With regard to going concern basis followed for preparation of financial statements, the
company needs to determine whether it is appropriate to prepare the financial statements
on going concern basis, since there is only one plant which has been damaged d ue to fire.
If the effect of deterioration in operating results and financial position is so pervasive that
management determines after the reporting period either that it intends to liquidate the
entity or to cease trading, or that it has no realistic alternative but to do so, preparation of
financial statements for the financial year 2019-2020 on going concern assumption may
not be appropriate. In that case, the financial statements may have to be prepared on a
basis other than going concern.
However, if the going concern assumption is considered to be appropriate even after the
fire, no adjustment is required in the financial statements for the year ending 31.03.20 20.
14. As per Ind AS 38, for an item to be recognised as an intangible asset, it must m eet the
definition of an intangible asset, i.e., identifiability, control over a resource and existence
of future economic benefits and also recognition criteria.
With regard to establishment of control, paragraph 13 of Ind AS 38 states that an entity
controls an asset if the entity has the power to obtain the future economic benefits flowing
from the underlying resource and to restrict the access of others to those benefits. The
capacity of an entity to control the future economic benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law. In the absence of
legal rights, it is more difficult to demonstrate control. However, legal enforceability of a

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

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

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

Activity wise Amount (in crore)

Operating Activity 28.5
Investing Activity 80

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 24 FINAL (NEW) EXAMINATION: NOVEMBER, 2020

Financing Activity (22)

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

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

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

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 PAPER –1: FINANCIAL REPORTING
QUESTIONS
Ind AS 103
1. Company X is engaged in the business of exploration & development of Oil & Gas Blocks.
Company X currently holds participating interest (PI) in below mentioned producing Block
as follows:
Block Name Company X Company Y Company Z Total
AWM/01 30% 60% 10% 100%

For the above Block, Company X, Y & Z has entered into unincorporated Joint Venture.
Company Y is the Operator of the Block AWM/01. Company X & Company Z are the
Joint Operators. Company Y incurs all the expenditure on behalf of Joint Venture and
raise cash call to Company X & Company Z at each month end in respect of their share
of expenditure incurred in Joint Venture. All the manpower and requisite facilities /
machineries owned by the Joint venture and thereby owned by all the Joint Operators.
For past few months, due to liquidity issues, Company Z defaulted in payment of cash
calls to operators. Therefore, company Y (Operator) has issued notice to company Z for
withdrawal of their participating right from on 01.04.20X1. However, company Z has filed
the appeal with arbitrator on 30.04.20X1.
Financial performance of company Z has not been improved in subsequent months and
therefore company Z has decided to withdraw participating interest rights from Block
AWM/01 and entered into sale agreement with Company X & Company Y. As per the
terms of the agreement, dated 31.5.20X1, Company X will receive 33.33% share &
Company Y will receive 66.67% share of PI rights owned by Company Z.
Company X is required to pay `1 Lacs against 33.33% share of PI rights owned by
Company Z.
After signing of sale agreement, Operator (company Y) approach government of India
for modification in PSC (Production Sharing Contract) i.e. removal of Company Z from
PSC of AWM/01 and government has approved this transaction on 30.6.20X1.
Government approval for the modification in PSC is essential given the industry in which
the joint-operators operate.

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Balance sheet of Company X & Company Z are as follows:

Company X Company Z
Particulars
31.5.20X1 30.6.20X1 31.5.20X1 30.6.20X1
` ` ` `
Assets
Non-Current Assets
Property, Plant & Equipment 5,00,000 10,00,000 1,50,000 3,00,000
Right of Use Asset 1,00,000 2,00,000 10,000 20,000
Development CWIP 50,000 1,00,000 50,000 1,00,000
Financial Assets
Loan receivable 25,000 50,000 25,000 50,000
Total Non-Current Assets 6,75,000 13,50,000 2,35,000 4,70,000
Current assets
Inventories 1,00,000 2,00,000 15,000 30,000
Financial Assets
Trade receivables 1,50,000 3,00,000 50,000 1,00,000
Cash and cash equivalents 2,00,000 4,00,000 1,00,000 2,00,000
Other Current Assets 2,25,000 50,000 25,000 50,000
Total Current Assets 6,75,000 9,50,000 1,90,000 3,80,000
Total Assets 13,50,000 23,00,000 4,25,000 8,50,000
Equity and Liabilities
Equity
Equity share capital 3,00,000 3,00,000 1,00,000 1,00,000
Other equity 2,00,000 3,00,000 75,000 2,50,000
Total Equity 5,00,000 6,00,000 1,75,000 3,50,000
Liabilities
Non-Current Liabilities
Provisions 4,00,000 8,00,000 1,00,000 2,00,000
Other Liabilities 1,50,000 3,00,000 50,000 1,00,000
Total Non-Current Liabilities 5,50,000 11,00,000 1,50,000 3,00,000
Current Liabilities
Financial Liabilities

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 PAPER – 1 : FINANCIAL REPORTING 3

Trade Payables 3,00,000 6,00,000 1,00,000 2,00,000

Total Current Liabilities 3,00,000 6,00,000 1,00,000 2,00,000
Total Liabilities 13,50,000 23,00,000 4,25,000 8,50,000
Additional Information:
1. Fair Value of PPE & Development CWIP owned by Company Z as per Market
participant approach is ` 5,00,000 & ` 2,00,000 respectively.
2. Fair Value of all the other assets and liabilities acquired are assumed to be at their
carrying values (except cash & cash equivalents). Cash and cash equivalents of
Company Z are not to be acquired by Company X as per the terms of agreement.
3. Tax rate is assumed to be 30%.
4. As per Ind AS 28, all the joint operators are joint ventures whereby each parties
that have joint control of the arrangement have rights to the net assets of the
arrangement and therefore every operator records their share of assets and
liabilities in their books.
You need to determine the following:
1. Whether the above acquisition falls under business or asset acquisition as defined
under business combination standard Ind AS 103?
2. Determine the acquisition date in the above transaction.
3. Prepare Journal entries for the above-mentioned transaction.
4. Draft the Balance Sheet for Company X based on your analysis in Part 1 above as
at acquisition date.
Ind AS 1
2. Is offsetting permitted under the following circumstances?
(a) Expenses incurred by a holding company on behalf of subsidiary, which is
reimbursed by the subsidiary - whether in the separate books of the holding
company, the expenditure and related reimbursement of expenses can be offset?
(b) Whether profit on sale of an asset against loss on sale of another asset can be
offset?
(c) When services are rendered in a transaction with an entity and services are
received from the same entity in two different arrangements, can the receivable and
payable be offset?
Ind AS 7
3. From the following data of Galaxy Ltd., prepare statement of cash flows showing cash
generated from Operating Activities using direct method as per Ind AS 7:

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 4 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

31.3.20X2 31.3.20X1
(`) (`)
Current Assets:
Inventory 1,20,000 1,65,000
Trade receivables 2,05,000 1,88,000
Cash & cash equivalents 35,000 20,500
Current Liabilities:
Trade payable 1,95,000 2,15,000
Provision for tax 48,000 65,000

Summary of Statement of Profit and Loss `

Sales 85,50,000
Less: Cost of sales (56,00,000) 29,50,000
Other Income
Interest income 20,000
Fire insurance claim received 1,10,000 1,30,000
30,80,000
Depreciation (24,000)
Administrative and selling expenses (15,40,000)
Interest expenses (36,000)
Foreign exchange loss (18,000) (16,18,000)
Net Profit before tax and extraordinary income 14,62,000
Income Tax (95,000)
Net Profit 13,67,000
Additional information:
(i) Trade receivables and Trade payables include amounts relating to credit sale and
credit purchase only.
(ii) Foreign exchange loss represents increment in liability of a long-term borrowing
due to exchange rate fluctuation between acquisition date and balance sheet date.
Ind AS 27
4. A company, AB Ltd. holds investments in subsidiaries and associates. In its separate
financial statements, AB Ltd. wants to elect to account its investments in subsidiaries at

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cost and the investments in associates as financial assets at fair value through profit or
loss (FVTPL) in accordance with Ind AS 109, Financial Instruments.
Whether AB Limited can carry investments in subsidiaries at cost and investments in
associates in accordance with Ind AS 109 in its separate financial statements?
Ind AS 113
5. On 1st January, 20X1, A Ltd assumes a decommissioning liability in a business
combination. The reporting entity is legally required to dismantle and remove an offshore
oil platform at the end of its useful life, which is estimated to be 10 years. The following
information is relevant:
If A Ltd was contractually allowed to transfer its decommissioning liability to a market
participant, it concludes that a market participant would use all of the following inputs,
probability weighted as appropriate, when estimating the price it would expect to receive:
a. Labour costs
Labour costs are developed based on current marketplace wages, adjusted for
expectations of future wage increases, required to hire contractors to dismantle and
remove offshore oil platforms. A Ltd. assigns probability to a ra nge of cash flow
estimates as follows:
Cash Flow Estimates: 100 Cr 125 Cr 175 Cr
Probability: 25% 50% 25%
b. Allocation of overhead costs:
Assigned at 80% of labour cost
c. The compensation that a market participant would require for undertaking the
activity and for assuming the risk associated with the obligation to dismantle and
remove the asset. Such compensation includes both of the following:
i. Profit on labour and overhead costs:
A profit mark-up of 20% is consistent with the rate that a market participant
would require as compensation for undertaking the activity
ii. The risk that the actual cash outflows might differ from those expected,
excluding inflation:
A Ltd. estimates the amount of that premium to be 5% of the expected cash
flows. The expected cash flows are ‘real cash flows’ / ‘cash flows in terms of
monetary value today’.
d. Effect of inflation on estimated costs and profits
A Ltd. assumes a rate of inflation of 4 percent over the 10-year period based on
available market data.

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 6 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

e. Time value of money, represented by the risk-free rate: 5%

f. Non-performance risk relating to the risk that Entity A will not fulfill the obligation,
including A Ltd.’s own credit risk: 3.5%
A Ltd, concludes that its assumptions would be used by market participants. In addition,
A Ltd. does not adjust its fair value measurement for the existence of a restriction
preventing it from transferring the liability.
You are required to calculate the fair value of the asset retirement obligation.
Ind AS 20
6. A Ltd. has been conducting its business activities in backward areas of the country and
due to higher operating costs in such regions, it has collectively incurred huge losses in
previous years. As per a scheme of government announced in March 20X1, the company
will be partially compensated for the losses incurred by it to the extent of
` 10,00,00,000, which will be received in October 20X1. The compensation being paid
by the government meets the definition of government grant as per Ind AS 20. Assume
that no other conditions are to be fulfilled by the company to receive the compensation.
When should the grant be recognised in statement of profit and loss? Discuss in light of
relevant Ind AS.
Ind AS 116
7. The Company has entered into a lease agreement for its retail store as on 1 st April, 20X1
for a period of 10 years. A lease rental of ` 56,000 per annum is payable in arrears.
The Company recognized a lease liability of ` 3,51,613 at inception using an incremental
borrowing rate of 9.5% p.a. as at 1 st April 20X1. As per the terms of lease agreement,
the lease rental shall be adjusted every 2 years to give effect of inflation. Inflation cost
index as notified by the Income tax department shall be used to derive the lease
payments. Inflation cost index was 280 for financial year 20X1-20X2 and 301 for financial
year 20X3-20X4. The current incremental borrowing rate is 8% p.a.
Show the Journal entry at the beginning of year 3, to account for change in lease.
Ind AS 33
8. Following information pertains to an entity for the year ending 31 st March 20X1:
Net profit for the year ` 12,00,000
Weighted average number of equity shares outstanding during 5,00,000 shares
the year
Average market price per share during the year ` 20
Weighted average number of shares under option during the year 1,00,000 shares
Exercise price per share under option during the year ` 15
Calculate basic and diluted earnings per share.

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 PAPER – 1 : FINANCIAL REPORTING 7

Ind AS 23
9. Nikka Limited has obtained a term loan of ` 620 lacs for a complete renovation and
modernisation of its Factory on 1 st April, 20X1. Plant and Machinery was acquired under
the modernisation scheme and installation was completed on 30 th April, 20X2. An
expenditure of ` 510 lacs was incurred on installation of Plant and Machinery, ` 54 lacs
has been advanced to suppliers for additional assets (acquired on 25 th April, 20X1) which
were also installed on 30 th April, 20X2 and the balance loan of ` 56 lacs has been used
for working capital purposes. Management of Nikka Limited considers the 12 months
period as substantial period of time to get the asset ready for its intended use.
The company has paid total interest of ` 68.20 lacs during financial year 20X1-20X2 on
the above loan. The accountant seeks your advice how to account for the interest paid
in the books of accounts. Will your answer be different, if the whole process of
renovation and modernization gets completed by 28 th February, 20X2?
Ind AS 38
10. X Ltd. purchased a franchise from a restaurant chain at a cost of ` 1,00,00,000 under a
contract for a period of 10 years. Can the franchise right be recognised as an intangible
asset in the books of X Ltd. under Ind AS 38?
Ind AS 32 / Ind AS 109
11. On 1 st April, 20X1, PS Limited issued 6,000, 9% convertible debentures with a face value
of ` 100 each maturing on 31 st March, 20X6. The debentures are convertible into equity
shares of PS Limited at a conversion price of ` 105 per share. Interest is payable
annually in cash. At the date of issue, non-convertible debt could have been issued by
the company at coupon rate of 13%. On 1 st April, 20X4, the convertible debentures have
a fair value of ` 6,30,000. PS Limited makes a tender offer to debenture-holders to
repurchase the debentures for ` 6,30,000 which the debenture holders accepted. At the
date of repurchase, PS Limited could have issued non-convertible debt with a 2 year
term bearing coupon interest @ 10%.
Show accounting entries in the books of PS Limited for recording of equity and liability
component:
(i) At the time of initial recognition
(ii) At the time of repurchase of the convertible debentures
Ind AS 101
12. While preparing an opening balance sheet on the date of transition, an entity is required to:
(a) recognise all assets and liabilities whose recognition is required by Ind AS;

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 8 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

(b) reclassify items that it recognised in accordance with previous GAAP as one type
of asset, liability or component of equity, but are a different type of asset, liability
or component of equity in accordance with Ind AS; and
(c) apply Ind AS in measuring all recognised assets and liabiliti es.
Give examples for each of the above 4 categories.
Ind AS 105
13. On February 28, 20X1, Entity X is committed to the following plans:
(a) To sell a property after completion of certain renovations to increase its value prior
to selling it. The renovations are expected to be completed within a short span of
time i.e., 2 months.
(b) To sell a commercial building to a buyer after the occupant vacates the building.
The time required for vacating the building is usual and customary for sale of such
commercial property. The entity considers the sale to be highly probable.
Can the above-mentioned property and commercial building be classified as non-
current assets held for sale at the reporting date i.e. 31 st March, 20X1?
Ind AS 115
14. Prime Ltd. is a technology company and regularly sells Software S, Hardware H and
Accessory A. The stand-alone selling prices for these items are stated below:
Software S – ` 50,000
Hardware H – `1,00,000 and
Accessory A – ` 20,000.
Since the demand for Hardware H and Accessory A is low, Prime Ltd. sells H and A
together at ` 100,000. Prime Ltd. enters into a contract with Zeta Ltd. to sell all the three
items for a consideration of `1,50,000.
What will be the accounting treatment for the discount in the financial statements of
Prime Ltd., considering that the three items are three different performance obligations
which are satisfied at different points in time? Further, what will be the accounting
treatment if Prime Ltd. would have transferred the control of Hardware H and Accessory
A at the same point in time.
Ind AS 109 / Ind AS 113
15. (i) Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company
XYZ has a total share capital of 5,000 shares with nominal value of ` 10. Entity XYZ’s
after-tax maintainable profits are estimated at ` 70,000 per year. An appropriate
price/earnings ratio determined from published industry data is 15 (before lack of
marketability adjustment). Entity A’s management estimates that the discount for the

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lack of marketability of company XYZ’s shares and restrictions on their transfer is

20%. Entity A values its holding in company XYZ’s shares based on earnings.
Determine the fair value of Entity A’s investment in XYZ’s shares.
(ii) Based on the facts given in the aforementioned part (i), assume that, Entity A
estimates the fair value of the shares it owns in company XYZ using a net asset
valuation technique. The fair value of company XYZ’s net assets including those
recognised in its balance sheet and those that are not recognised is ` 8,50,000.
Determine the fair value of Entity A’s investment in XYZ’s shares.
Ind AS 2
16. Whether the following costs should be considered while determining the Net Realisable
Value (NRV) of the inventories?
(a) Costs of completion of work-in-progress;
(b) Trade discounts expected to be allowed on sale; and
(c) Cash discounts expected to be allowed for prompt payment
Ind AS 8 / Ind AS 34
17. While preparing interim financial statements for the half-year ended 30 September 20X2,
an entity discovers a material error (an improper expense accrual) in the interim financial
statements for the period ended 30 September 20X1 and the annual financial statements
for the year ended 31 March 20X2. The entity does not intend to restate the comparative
amounts for the prior period presented in the interim financial statements as it believes
it would be sufficient to correct the error by restating the comparatives in the annual
financial statements for the year ended 31 March 20X3. Is this acceptable? Discuss in
accordance with relevant Ind AS.
Ind AS 27 / Ind AS 110
18. PP Ltd., a non-investment entity, is the parent of Praja Ltd. within the meaning of
Ind AS 110 ‘Consolidated Financial Statements’. The investment in Praja Ltd. was
carried in the separate financial statements of PP Ltd. at fair value with changes in fair
value recognised in the other comprehensive income. On 1st April, 20X2, PP Ltd.
qualifies as one that is an investment entity. Carrying amount of the investment on
1 st April, 20X2 was ` 8,00,000. The fair value of its investment in Praja Ltd was
` 10,00,000 on that date. PP Ltd had recognised in OCI an amount of ` 1,00,000 as a
previous fair value increase related to the investment in Praja Ltd.
How would PP Ltd account for the investment in Praja Ltd on the date of change of its
classification/status as an investment entity, in its separate financial statements?

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 10 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

Ind AS 110
19. Solar Limited has an 80% interest in its subsidiary, Mars Limited. Solar Limited holds a
direct interest of 25% in Venus Limited. Mars Limited also holds a 30% interest in
Venus Limited. The decisions concerning relevant activities of Venus Limited require a
simple majority of votes. How should Solar Limited account for its investment in
Venus Limited in its consolidated financial statements?
Ind AS 16
20. Heaven Ltd. had purchased a machinery on 1.4.2X01 for ` 30,00,000, which is reflected
in its books at written down value of ` 17,50,000 on 1.4.2X06. The company has
estimated an upward revaluation of 10% on 1.4.2X06 to arrive at the fair value of the
asset. Heaven Ltd. availed the option given by Ind AS of transferring some of the surplus
as the asset is used by an enterprise.
On 1.4.2X08, the machinery was revalued downward by 15% and the company also re-
estimated the machinery’s remaining life to be 8 years. On 31.3.2X10 the machinery
was sold for ` 9,35,000. The company charges depreciation on straight line method.
Prepare machinery account in the books of Heaven Ltd. over its useful life to record the
above transactions.

SUGGESTED ANSWERS

1. (1) Ind AS 103 defines business as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing goods or
services to customers, generating investment income (such as dividends or
interest) or generating other income from ordinary activi ties.
For a transaction to meet the definition of a business combination (and for the
acquisition method of accounting to apply), the entity must gain control of an
integrated set of assets and activities that is more than a collection of assets or a
combination of assets and liabilities.
To be capable of being conducted and managed for the purpose identified in the
definition of a business, an integrated set of activities and assets requires two
essential elements—inputs and processes applied to those inputs.
Therefore, an integrated set of activities and assets must include, at a minimum, an
input and a substantive process that together significantly contribute to the ability
to create output.
In the aforesaid transaction, Company X acquired share of part icipating rights
owned by Company Z for the producing Block (AWM/01). The output exist in this
transaction (Considering AWM/01) is a producing block. Also all the manpower and
requisite facilities / machineries are owned by Joint venture and thereby all the Joint

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 PAPER – 1 : FINANCIAL REPORTING 11

Operators. Hence, acquiring participating rights tantamount to acquire inputs

(Expertise Manpower & Machinery) and it is critical to the ability to continue
producing outputs. Thus, the said acquisition will fall under the Business
Acquisition and hence standard Ind AS 103 is to be applied for the same.
(2) As per paragraph 8 of Ind AS 103, acquisition date is the date on which the acquirer
obtains control of the acquiree. Further, paragraph 9 of Ind AS 103 clarifies that
the date on which the acquirer obtains control of the acquiree is generally the date
on which the acquirer legally transfers the consideration, acquires the assets and
assumes the liabilities of the acquiree—the closing date. However, the acquirer
might obtain control on a date that is either earlier or later than the closing date.
An acquirer shall consider all pertinent facts and circumstances in identifying the
acquisition date. Since government of India (GOI) approval is a substantive
approval for Company X to acquire control of Company Z’s operations, the date of
acquisition cannot be earlier than the date on which approval is obtained from GOI.
This is pertinent given that the approval from GOI is considered to be a substantive
process and accordingly, the acquisition is considered to be completed only on
receipt of such approval. Hence acquisition date in the above scenario is
30.6.20X1.
(3) Journal entry for acquisition
Particulars Amount Amount
(`) (`)
Property Plant & Equipment Dr. 1,66,650
Right-of-use Asset Dr. 6,666
Development CWIP Dr. 66,660
Financial Assets - Loan Receivables Dr. 16,665
Inventories Dr. 9,999
Trade Receivables Dr. 33,330
Other Current Assets Dr. 16,665
To Provisions 66,660
To Other Liabilities 33,330
To Trade Payables 66,660
To Deferred Tax Liability 29,997
To Cash & Cash Equivalent (Purchase
consideration) 1,00,000
To Gain on bargain purchase (Other
Comprehensive Income) 19,988
(Being assets acquired and liabilities assumed from Company Z recorded at
fair value along gain on bargain purchase)

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 12 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

(4) Balance Sheet of Company X as at 30.6.20X1

(Pre & Post Acquisition of PI rights pertaining to Company Z)
Pre- Adjustments Post-
Particulars Acquisition Acquisition
30.6.20X1 30.6.20X1
Assets
Non - Current Assets
Property Plant & Equipment 10,00,000 1,66,650 11,66,650
Right of Use Asset 2,00,000 6,666 2,06,666
Development CWIP 1,00,000 66,660 1,66,660
Financial Assets
Loan receivable 50,000 16,665 66,665
Total Non-Current Assets 13,50,000 16,06,641
Current assets
Inventories 2,00,000 9,999 2,09,999
Financial Assets
Trade receivables 3,00,000 33,330 3,33,330
Cash and cash equivalents 4,00,000 (1,00,000) 3,00,000
Other Current Assets 50,000 16,665 66,665
Total Current Assets 9,50,000 9,09,994
Total Assets 23,00,000 25,16,635
Equity and Liabilities
Equity
Equity share capital 3,00,000 - 3,00,000
Other equity 3,00,000 - 3,00,000
Capital Reserve (OCI) - 19,988 19,988
Total Equity 6,00,000 6,19,988
Liabilities
Non-Current Liabilities
Provisions 8,00,000 66,660 8,66,660
Other Liabilities 3,00,000 33,330 3,33,330
Deferred Tax Liability - 29,997 29,997
Total Non-Current Liabilities 11,00,000 12,29,987

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Current Liabilities
Financial liabilities
Trade Payables 6,00,000 66,660 6,66,660
Total Current Liabilities 6,00,000 6,66,660
Total Equity and Liabilities 23,00,000 25,16,635
Working Notes
1. Determination of Company Z’s balance acquired by Company X on
30.6.20X1 (Acquisition Date)
As per Carrying Acquisition Remarks
Company Z Value Date Value
Particulars Books 33.33%
30.6.20X1 Share

` ` `
Assets
Non-Current Assets
Property Plant &
Equipment 3,00,000 99,990 1,66,650 Note 1
Right of Use Asset 20,000 6,666 6,666
Development CWIP 1,00,000 33,330 66,660 Note 2
Financial Assets
Loan receivable 50,000 16,665 16,665
Total Non-Current
Assets 4,70,000 1,56,651 2,56,641
Current assets
Inventories 30,000 9,999 9,999
Financial Assets
Trade receivables 1,00,000 33,330 33,330
Cash and cash
equivalents 2,00,000 66,660 66,660
Other Current Assets 50,000 16,665 16,665
Total Current Assets 3,80,000 1,26,654 1,26,654
Liabilities
Non-Current Liabilities
Provisions 2,00,000 66,660 66,660
Other Liabilities 1,00,000 33,330 33,330

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 14 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

Total Non-Current
Liabilities 3,00,000 99,990 99,990
Current Liabilities
Financial liabilities
Trade Payables 2,00,000 66,660 66,660
Total Current
Liabilities 2,00,000 66,660 66,660

Note 1: Fair Value of PPE:

Fair Value of PPE in Company Z Books ` 5,00,000
33.33% Share acquired by Company X ` 1,66,650
Note 2: Fair Value of Development CWIP:
Fair Value of PPE in Company Z Books ` 2,00,000
33.33% Share acquired by Company X ` 66,660
2. Computation Goodwill/Bargain Purchase Gain
Particulars As at
30.6.20X1
(`)
Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of
59,994
` 66,660) (1,26,654 – 66,660)
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Total Deferred Tax Liability (Refer Working note 3) (29,997)
Net Assets Acquired 1,19,988
Less: Consideration Paid (1,00,000)
Gain on Bargain Purchase (To be transferred to OCI) 19,988
*In extremely rare circumstances, an acquirer will make a bargain purchase in
a business combination in which the value of net assets acquired in a business
combination exceeds the purchase consideration. The acquirer shall
recognise the resulting gain in other comprehensive income on the acquisition
date and accumulate the same in equity as capital reserve, if the reason for
bargain purchase gain is clear and evidence exist. If there does not exist clear
evidence of the underlying reasons for classifying the business combination
as a bargain purchase, then the gain shall be recognised directly in equity as

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 PAPER – 1 : FINANCIAL REPORTING 15

capital reserve. Since in above scenario it is clearly evident that due to

liquidity issues, Company Z has to withdraw their participating right from
AWM/01. The said bargain purchase gain should be transferred to other
comprehensive income on the acquisition date.
3. Computation of Deferred Tax Liability arising on Business Combination
Acquisition
Particulars Date Value
(`)
Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of
` 66,660) 59,994
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Net Assets Acquired at Fair Value 1,49,985
Book value of Net Assets Acquired 49,995
Temporary Difference 99,990
DTL @ 30% on Temporary Difference 29,997
: Note: As per Ind AS 103, in case an entity acquires another entity step by step
through series of purchase then the acquisition date will be the date on which
the acquirer obtains control. Till the time the control is obtained the investment
will be accounted as per the requirements of other Ind AS 109, if the investments
are covered under that standard or as per Ind AS 28, if the investments are in
Associates or Joint Ventures.
If a business combination is achieved in stages, the acquirer shall remeasure its
previously held equity interest in the acquiree at its acquisition-date fair value
and recognise the resulting gain or loss, if any, in profit or loss or other
comprehensive income, as appropriate.
Since in the above transaction, company X does not hold any prior interest in
Company Z & company holds only 30% PI rights in Block AWM/01 through
unincorporated joint venture, this is not a case of step acquisition.
2. (a) As per paragraph 33 of Ind AS 1, offsetting is permitted only when the offsetting
reflects the substance of the transaction.
In this case, the agreement/arrangement, if any, between the holding and subsidiary
company needs to be considered. If the arrangement is to reimburse the cost
incurred by the holding company on behalf of the subsidiary company, the same
may be presented net. It should be ensured that the substance of the arrangement
is that the payments are actually in the nature of reimbursement.

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(b) Paragraph 35 of Ind AS 1 requires an entity to present on a net basis gains and
losses arising from a group of similar transactions. Accordingly, gains or losses
arising on disposal of various items of property, plant and equipment shall be
presented on net basis. However, gains or losses should be presented separately
if they are material.
(c) Ind AS 1 prescribes that assets and liabilities, and income and expenses should be
reported separately, unless offsetting reflects the substance of the transaction. In
addition to this, as per paragraph 42 of Ind AS 32, a financial asset and a financial
liability should be offset if the entity has legally enforceable right to set off and the
entity intends either to settle on net basis or to realise the asset and settle the
liability simultaneously.
In accordance with the above, the receivable and payable should be offset against
each other and net amount is presented in the balance sheet if the entity has a legal
right to set off and the entity intends to do so. Otherwise, the receivable and payable
should be reported separately.
3. Statement Cash Flows from operating activities
of Galaxy Ltd. for the year ended 31 March 20X2 (Direct Method)

Particulars ` `
Operating Activities:
Cash received from Trade receivables (W.N. 3) 85,33,000
Less: Cash paid to Suppliers (W.N.2) 55,75,000
Payment for Administration and Selling expenses 15,40,000
Payment for Income Tax (W.N.4) 1,12,000 (72,27,000)
13,06,000
Adjustment for exceptional items (fire insurance claim) 1,10,000
Net cash generated from operating activities 14,16,000

Working Notes:
1. Calculation of total purchases
Cost of Sales = Opening stock + Purchases – Closing Stock
` 56,00,000 = ` 1,65,000 + Purchases – ` 1,20,000
Purchases = ` 55,55,000

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2. Calculation of cash paid to Suppliers

Trade Payables

` `
To Bank A/c (balancing 55,75,000 By Balance b/d 2,15,000
figure)
To Balance c/d 1,95,000 By Purchases (W.N. 1) 55,55,000
57,70,000 57,70,000
3. Calculation of cash received from Customers
Trade Receivables

` `
To Balance b/d 1,88,000 By Bank A/c (balancing figure) 85,33,000
To Sales 85,50,000 By Balance c/d 2,05,000
87,38,000 87,38,000
4. Calculation of tax paid during the year in cash
Provision for tax

` `
To Bank A/c (balancing 1,12,000 By Balance b/d 65,000
figure)
To Balance c/d 48,000 By Profit and Loss A/c 95,000
1,60,000 1,60,000
4. Paragraph 10 of Ind AS 27 ‘Separate Financial Statements’ inter-alia provides that, when
an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either at cost, or in accordance with
Ind AS 109 ‘Financial Instruments’ in its separate financial statements. Further, the
entity shall apply the same accounting for each category of investments.
It may be noted that although the ‘category’ is used in number of Standards, it is not
defined in any of the Ind AS. It seems that subsidiaries, associates and joint ventures
would qualify as separate categories. Thus, the same accounting policies are applied
for each category of investments - i.e. each of subsidiaries, associates and joint
ventures. However, paragraph 10 of Ind AS 27 should not be read to mean that, in all
circumstances, all investments in associates are one ‘category’ of investment and all
investments in joint ventures or an associate are one ‘category’ of investment. These
categories can be further divided into sub-categories provided the sub-category can be

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defined clearly and objectively and results in information that is relevant and reliable.
For example, an investment entity parent can have investment entity subsidiary (at fair
value through profit or loss) and non-investment entity subsidiary (whose main purpose
is to provide services that relate to the investment entity's investment activities) as
separate categories in its separate financial statements.
In the present case, investment in subsidiaries and associates are considered to be
different categories of investments. Further, Ind AS 27 requires to account for the
investment in subsidiaries, joint ventures and associates either at cost, or in accordance
with Ind AS 109 for each category of Investment. Thus, AB Limited can carry its
investment in subsidiaries at cost and its investments in associates as financial assets
in accordance with Ind AS 109 in its separate financial statements.
5.
Particulars Workings Amount
(In Cr)
Expected Labour Cost (Refer W.N.) 131.25
Allocated Overheads (80% x 131.25 Cr) 105.00
Profit markup on Cost (131.25 + 105) x 20% 47.25
Total Expected Cash Flows before inflation 283.50
Inflation factor for next 10 years (4%) (1.04) 10 =1.4802
Expected cash flows adjusted for inflation 283.50 x 1.4802 419.65
Risk adjustment - uncertainty relating to cash (5% x 419.65) 20.98
flows
Total Expected Cash Flows (419.65+20.98) 440.63
Discount rate to be considered = risk-free rate +
entity’s non-performance risk 5% + 3.5% 8.5%
Expected present value at 8.5% for 10 years (440.63 / (1.085 10)) 194.88
Working Note:
Expected labour cost:
Cash Flows Estimates Probability Expected Cash Flows
100 Cr 25% 25.00 Cr
125 Cr 50% 62.50 Cr
175 Cr 25% 43.75 Cr
Total 131.25 Cr

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6. Paragraph 7 of Ind AS 20 states that, Government grants, including non-monetary grants

at fair value, shall not be recognised until there is reasonable assurance that:
(e) the entity will comply with the conditions attaching to them; and
(f) the grants will be received.
Further, paragraphs 20 and 22 of Ind AS 20 state as follows:
“A government grant that becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial support to the entity
with no future related costs shall be recognised in profit or loss of the period in which it
becomes receivable”.
“A government grant may become receivable by an entity as compensation for expenses
or losses incurred in a previous period. Such a grant is recognised in profit or loss of
the period in which it becomes receivable, with disclosure to ensure that its effect is
clearly understood.”
In accordance with the above, in the given case, as at March 20X1, A Ltd. is entitled to
receive government grant in the form of compensation for losses already incurred by it
in the previous years. Therefore, even though the compensation will be received in the
month of October 20X1, A Ltd. should recognise the compensation receivable by it as a
government grant in the profit or loss for the period in which it became receivable, i.e.,
for the financial year 20X0-20X1 with disclosure to ensure that its effect is clearly
understood.
7. As per para 27 (b) of Ind AS 116, variable lease payments that depend on an index or a
rate, are initially measured using the index or rate as at the commencement date.
At the beginning of the third year, Lessee remeasures the lease liability at the present
value of eight payments of ` 60,200 discounted at an original discount rate of 9.5% per
annum as per para 43 of Ind AS 116.
Year Revised lease rental Discount factor @ 9.5% Present value
3 [(56,000 / 280) x 301] = 60,200 0.913 54,963
4 60,200 0.834 50,207
5 60,200 0.762 45,872
6 60,200 0.696 41,899
7 60,200 0.635 38,277
8 60,200 0.580 34,916
9 60,200 0.530 31,906
10 60,200 0.484 29,137
3,27,127

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Table showing amortised cost of lease liability

Year Opening balance Interest @ 9.5% Rental paid Closing balance
1 3,51,613 33,403 56,000 3,29,016
2 3,29,016 31,257 56,000 3,04,273
Difference of ` 22,854 (3,27,127 – 3,04,273) will increase the lease liability with
corresponding increase in ROU Asset as per para 39 of Ind AS 116.
Journal entry at the beginning of year 3 would be:
Right-of-use asset Dr. ` 22,854
To Lease liability ` 22,854
8. Calculation of earnings per share
Earnings Shares Per share
Profit attributable to equity holders ` 12,00,000
Weighted average shares outstanding
during year 20X1 5,00,000
Basic earnings per share ` 2.40
Weighted average number of shares under 100,000
option
Weighted average number of shares that
would have been issued at average market
price: (1,00,000 × ` 15.00) ÷ ` 20.00 Refer Note (75,000)
Diluted earnings per share ` 1,200,000 525,000 ` 2.29

Note: Earnings have not increased because the total number of shares has increased
only by the number of shares (25,000) deemed to have been issued for no consideration.
9. As per Ind AS 23, Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of that asset. Other
borrowing costs are recognised as an expense.
Where, a qualifying asset is an asset that necessarily takes a substantial period of time
to get ready for its intended use or sale.
Accordingly, the treatment of Interest of ` 68.20 lacs occurred during the year
20X1-20X2 would be as follows:
(i) When construction of asset completed on 30 th April, 20X2
The treatment for total borrowing cost of ` 68.20 lakh will be as follows:

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 PAPER – 1 : FINANCIAL REPORTING 21

Purpose Nature Interest to be Interest to be

capitalised charged to profit
and loss account

` in lakh ` in lakh
Modernisation Qualifying [68.20 x (510/620)]
and renovation of asset = 56.10
plant and
machinery
Advance to Qualifying [68.20 x (54/620)]
suppliers for asset = 5.94
additional assets
Working Capital Not a [68.20 x (56/620)]
qualifying = 6.16
asset
62.04 6.16

(ii) When construction of assets is completed by 28 th February, 20X2

When the process of renovation gets completed in less than 12 months, the plant
and machinery and the additional assets will not be considered as qualifying assets
(until and unless the entity specifically considers that the assets took substantial
period of time for completing their construction). Accordingly, the whole of interest
will be required to be charged off / expensed off to Profit and loss account.
10. Ind AS 38 ‘Intangible Assets’, defines asset and intangible asset as under:
An asset is a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.
An intangible asset is an identifiable non-monetary asset without physical substance.
In accordance with the above, for considering an asset as an intangible asset, an entity
must be able to demonstrate that the item satisfies the criteria of identifiability, control
over a resource and existence of future economic benefits.
In the given case, the franchise right meets the identifiability criterion as it is arising from
contract to purchase the franchise right for 10 years. In addition, X Ltd. will have future
economic benefits and control over them from the franchise right. Accordingly, the
franchise right meets the definition of intangible asset. The same can be recognised if
the following recognition criteria laid down in para 21 of Ind AS 38 is met:

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 22 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
In the instant case, identifiability criterion is fulfilled, future economic be nefits from
franchise right are expected to flow to the entity and cost can also be measured reliably,
therefore, X Ltd. should recognise the franchise right as an intangible asset.
11. (i) At the time of initial recognition
`
Liability component
Present value of 5 yearly interest payments of ` 54,000,
discounted at 13% annuity (54,000 x 3.517) 1,89,918
Present value of ` 6,00,000 due at the end of 5 years, discounted
at 13%, compounded yearly (6,00,000 x 0.543) 3,25,800
5,15,718
Equity component
(` 6,00,000 – ` 5,15,718) 84,282
Total proceeds 6,00,000
Note: Since ` 105 is the conversion price of debentures into equity shares and
not the redemption price, the liability component is calculated @ ` 100 each only.
Journal Entry
` `
Bank Dr. 6,00,000
To 9% Debentures (Liability component) 5,15,718
To 9% Debentures (Equity component) 84,282
(Being debentures initially recorded at fair value)
(ii) At the time of repurchase of convertible debentures
The repurchase price is allocated as follows:
Carrying Fair Value Difference
Value @ 13% @ 10%
` ` `
Liability component
Present value of 2 remaining yearly
interest payments of ` 54,000,

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 PAPER – 1 : FINANCIAL REPORTING 23

discounted at 13% and 10%,

respectively 90,072 93,690
Present value of ` 6,00,000 due in
2 years, discounted at 13% and
10%, compounded yearly, 4,69,800 4,95,600
respectively
Liability component 5,59,872 5,89,290 (29,418)
Equity component 84,282* 40,710** 43,572
Total 6,44,154 6,30,000 14,154
*See Note (i)
**6,30,000 – 5,89,290 = 40,710
Journal Entries
` `
9% Debentures (Liability component) Dr. 5,59,872
Profit and loss A/c (Debt settlement expense) Dr. 29,418
To Bank A/c 5,89,290
(Being the repurchase of the liability component
recognised)
9% Debentures (Equity component) Dr. 84,282
To Bank A/c 40,710
To Retained Earnings A/c 43,572
(Being the cash paid for the equity component
recognised)
12. The examples of the items that an entity may need to recognise, derecognise,
remeasure, reclassify on the date of transition are as under:
(a) recognise all assets and liabilities whose recognition is required by Ind AS:
(i) customer related intangible assets if an entity elects to restate business
combinations
(ii) share-based payment transactions with non-employees
(iii) recognition of deferred tax on land
(b) reclassify items that it recognised in accordance with previous GAAP as one type
of asset, liability or component of equity, but is a different type of asset, liability or
component of equity in accordance with Ind AS:
(i) redeemable preference shares that would have earlier been classified as
equity;

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 24 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

(ii) non-controlling interests which would have been earlier classified outside
equity; and
(c) apply Ind ASs in measuring all recognised assets and liabilities:
(i) discounting of long-term provisions
(ii) measurement of deferred income taxes for all temporary differences instead
of timing differences.
13. Ind AS 105 provides guidance on classification of a non-current asset held for sale in
paragraph 7 which states that, the asset (or disposal group) must be available for
immediate sale in its present condition subject only to terms that are usual and customary
for sales of such assets (or disposal groups) and its sale must be highly probable.
(a) In respect of Entity X’s plan to sell property which is being renovated and such
renovation is incomplete as at the reporting date. Although, the renovations are
expected to be completed within 2 months from the reporting date i.e.,
March 31, 20X1, the property cannot be classified as held for sale at the reporting
date as it is not available for sale immediately in its present condition.
(b) In case of Entity X’s plan to sell commercial building, it intends to transfer the
commercial building to a buyer after the occupant vacates the building and the time
required for vacating such building is usual and customary for sale of such non -
current asset. Accordingly, the criterion of the asset being available for immediate
sale would be met and hence, the commercial building can be classified as held for
sale at the reporting date
14. Paragraph 82 of Ind AS 115 states that, “An entity shall allocate a discount entir ely to
one or more, but not all, performance obligations in the contract if all of the following
criteria are met:
(a) the entity regularly sells each distinct good or service (or each bundle of distinct
goods or services) in the contract on a stand-alone basis;
(b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some
of those distinct goods or services at a discount to the stand-alone selling prices of
the goods or services in each bundle; and
(c) the discount attributable to each bundle of goods or services described in paragraph
82(b) is substantially the same as the discount in the contract and an analysis of
the goods or services in each bundle provides observable evidence of the
performance obligation (or performance obligations) to which the entire discount in
the contract belongs”.

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 PAPER – 1 : FINANCIAL REPORTING 25

In the given case, the contract includes a discount of ` 20,000 on the overall transaction,
which should have been allocated proportionately to all three performance obligations
when allocating the transaction price using the relative stand-alone selling price method
(in accordance with paragraph 81 of Ind AS 115). However, as Prime Ltd. meets all the
criteria specified in paragraph 82 above, i.e., it regularly sells Hardware H and Acc essory
A together for ` 1,00,000 and Software S for ` 50,000, accordingly, it is evident that the
entire discount should be allocated to the promises to transfer Hardware H and
Accessory A.
In the given case, since the contract requires the entity to transfer control of Hardware
H and Accessory A at different points in time, then the allocated amount of ` 1,00,000
should be individually allocated to the promises to transfer Hardware H (stand -alone
selling price of ` 1,00,000) and Accessory A (stand-alone selling price of `20,000)
Product Allocated transaction price (`)
Hardware H 83,333 (1,00,000/ 120,000 x 100,000)
Accessory A 16,667 (20,000/120,000 x 100,000)
Total 1,00,000
However, if Prime Ltd. would have transferred the control of Hardware H and Accessory
A at the same point in time, then the Prime Ltd. could, as a practical matter, account for
the transfer of those products as a single performance obligation. That is, Prime Ltd.
could allocate ` 1,00,000 of the transaction price to the single performance obligation
and recognise revenue of ` 1,00,000 when Hardware H and Accessory A simultaneously
transfer to Zeta Ltd.
15. (i) An earnings-based valuation of Entity A’s holding of shares in company XYZ could
be calculated as follows:
Particulars Unit
Entity XYZ’s after-tax maintainable profits (A) ` 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) ` 8,40,000
Value of a share of XYZ = ` 8,40,000 ÷ 5,000 shares = ` 168
The fair value of Entity A’s investment in XYZ’s shares is estimated at ` 42,000
(that is, 250 shares × ` 168 per share).
(ii) Share price = ` 8,50,000 ÷ 5,000 shares = ` 170 per share.
The fair value of Entity A’s investment in XYZ shares is estimated to be ` 42,500
(250 shares × ` 170 per share).

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 26 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

16. Ind AS 2 defines Net Realisable Value as the “estimated selling price in the ordinary
course of business less the estimated costs of completion and the estimated costs
necessary to make the sale.”
Costs of completion of work-in-progress are incurred to convert the work-in-progress into
finished goods. Since these costs are in the nature of completion costs, in accordance
with the above definition, the same should be deducted from the estimated selling price
to determine the NRV of work-in-progress.
Trade Discount is “A reduction granted by a supplier from the list price of goods or
services on business considerations other than for prompt payment”. Trade discount is
allowed either expressly through an agreement or through prevalent commercial
practices in the terms of the trade and the same is adjusted in arriving at the selling
price. Accordingly, the trade discount expected to be allowed should be deducted to
determine the estimated selling price.
Cash Discount is “A reduction granted by a supplier from the invoiced price in
consideration of immediate payment or payment within a stipulated period.” These types
of costs are incurred to recover the sale proceeds immediately or before the end of the
specified period or credit period allowed to the customer. In other words, these costs
are not incurred to make the sale, therefore, the same should not be considered while
determining NRV.
17. Paragraph 42 of Ind AS 8, inter alia, states that an entity shall correct material prior
period errors retrospectively in the first set of financial statements approved for issue
after their discovery by restating the comparative amounts for the prior period(s)
presented in which the error occurred.
Paragraph 28 of Ind AS 34 requires an entity to apply the same accounting policie s in its
interim financial statements as are applied in its annual financial statements (except for
accounting policy changes made after the date of the most recent annual financial
statements that are to be reflected in the next annual financial statement s).
Paragraph 15B of Ind AS 34 cites ‘corrections of prior period errors’ as an example of
events or transactions which need to be explained in an entity’s interim financial report
if they are significant to an understanding of the changes in financial p osition and
performance of the entity since the end of the last annual reporting period.
Paragraph 25 of Ind AS 34, Interim Financial Statements, states as follows:
“While judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on t he basis
of materiality in relation to interim period data to avoid misleading inferences that might
result from non-disclosure. The overriding goal is to ensure that an interim financial

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 PAPER – 1 : FINANCIAL REPORTING 27

report includes all information that is relevant to understanding a n entity’s financial

position and performance during the interim period.”
In view of the above, the entity is required to correct the error and restate the comparative
amounts in interim financial statements for the half-year ended 30 September 20X2.
18. (i) As per paragraph 11B(b) of Ind AS 27, on the date of change, ie, 1 st April, 20X2,
PP Ltd (the parent) becoming an investment entity, its investment in Praja Ltd (the
subsidiary) shall be at fair value through profit and loss in accordance with
Ind AS 109. Accordingly, the new carrying amount will be ` 10,00,000.
(ii) The difference between the new carrying amount and the carrying amount of the
investment on the date of change will be recognised in the profit and loss. Hence,
PP Ltd will recognise an amount of ` 2,00,000 (` 10,00,000 – ` 8,00,000) in profit
and loss as gain.
(iii) Any fair value adjustments previously recognised in OCI in respect of subsidiary ie
Praja Ltd. shall be treated as if the investment entity had disposed off the subsidiary
at the date of change in status as per para 11B(b) of Ind AS 27.
Further, as per para B5.7.1 of Ind AS 109, amounts presented in other
comprehensive income shall not be subsequently transferred to profit or loss.
However, the entity may transfer the cumulative gain or loss within equity.
Therefore, the company shall not reclassify the fair value gains or losses to profit
or loss on change in classification from FVTOCI to FVTPL. However, the company
may transfer the fair value gains or losses from one component to the other within
equity.
Moreover, Paragraph 11A(e) of Ind AS 107, requires disclosure of any transfers of
the cumulative gain or loss within equity during the period and the reason for such
transfers. Accordingly, PP Ltd. shall provide the disclosures if it transfers the
cumulative gain or loss from one component to the other within equity.
Particulars `
Carrying amount of investment in Praja Ltd [as per (i) above] 10,00,000
Amounts recognised in profit and loss relating to investment in
Praja Ltd [as per (ii) above] 2,00,000
19. In the present case, Solar Limited controls Mars Limited (since it holds 80% of its voting
rights). Consequently, it also controls the voting rights associated with 30% equity
interest held by Mars Limited in Venus Limited. Solar Limited also has 25% direct equity
interest and related voting power in Venus Limited. Thus, Solar Limited controls 55%
(30% + 25%) voting power of Venus Limited. As the decisions concerning relevant
activities of Venus Limited require a simple majority of votes. Solar Limited controls
Venus Limited and should therefore consolidate it in accordance with Ind AS 110.

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 28 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

Although, Solar Limited controls Venus Limited, its entitlement to the subsidiary’s
economic benefits is determined on the basis of its actual ownership interest. For the
purposes of the consolidated financial statements, Solar Limited's share in
Venus Limited is determined as 49% [25% + (80% × 30%)]. As a result, 51% of profit or
loss, other comprehensive income and net assets of Venus Limited shall be attributed to
the non-controlling interests in the consolidated financial statements (this comprises 6%
attributable to holders of non-controlling interests in Mars Limited [reflecting 20% interest
of non-controlling shareholders of Mars Limited in 30% of Venus Limi ted] and 45% to
holders of non-controlling interests in Venus Limited).
20. In the books of Heaven Ltd.
Machinery A/c
Date Particulars Amount Date Particulars Amount
1.4.2X01 To Bank / Vendor 30,00,000 31.3.2X02 By Depreciation 2,50,000
(W.N.1)
31.3.2X02 By Balance c/d 27,50,000
30,00,000 30,00,000
1.4.2X02 To Balance b/d 27,50,000 31.3.2X03 By Depreciation 2,50,000
31.3.2X03 By Balance c/d 25,00,000
27,50,000 27,50,000
1.4.2X03 To Balance b/d 25,00,000 31.3. 2X04 By Depreciation 2,50,000
31.3.2X04 By Balance c/d 22,50,000
25,00,000 25,00,000
1.4.2X04 To Balance b/d 22,50,000 31.3.2X05 By Depreciation 2,50,000
31.3.2X05 By Balance c/d 20,00,000
22,50,000 22,50,000

1.4.2X05 To Balance b/d 20,00,000 31.3.2X06 By Depreciation 2,50,000

31.3.2X06 By Balance c/d 17,50,000
20,00,000 20,00,000
1.4.2X06 To Balance b/d 17,50,000 31.3.2X07 By Depreciation 2,75,000
(W.N.2)
1.4.2X06 To Revaluation 31.3.2X07 By Balance c/d 16,50,000
Reserve @ 10% 1,75,000
19,25,000 19,25,000
1.4.2X07 To Balance b/d 16,50,000 31.3.2X08 By Depreciation 2,75,000
31.3.2X08 By Balance c/d 13,75,000
16,50,000 16,50,000

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 PAPER – 1 : FINANCIAL REPORTING 29

1.4.2X08 To Balance b/d 13,75,000 1.4.2X08 By Revaluation 1,25,000

Reserve (W.N.4)
31.3.2X09 By Profit and 81,250
Loss A/c (W.N.5)
31.3.2X09 By Depreciation 1,46,094
(W.N.3)
31.3.2X09 By Balance c/d 10,22,656
13,75,000 13,75,000
1.4.2X09 To Balance b/d 10,22,656 31.3.2X10 By Depreciation 1,46,094
31.3.2X10 To Profit and 31.3.2X10 By Bank A/c 9,35,000
Loss A/c
(balancing figure) 58,438*
10,81,094 10,81,094

Working Notes:
1. Calculation of useful life of machinery on 1.4.2X01
Depreciation charge in 5 years = (30,00,000 – 17,50,000) = ` 12,50,000
Depreciation per year as per Straight Line method = 12,50,000 / 5 years
= ` 2,50,000
Remaining useful life = ` 17,50,000 / ` 2,50,000 = 7 years
Total useful life = 5 years + 7 years = 12 years
2. Depreciation after upward revaluation as on 31.3.2X06 `
Book value as on 1.4.2X06 17,50,000
Add: 10% upward revaluation 1,75,000
Revalued amount 19,25,000
Remaining useful life 7 years (Refer W.N.1)
Depreciation on revalued amount = 19,25,000 / 7 years = ` 2,75,000 lakh
3. Depreciation after downward revaluation as on 31.3.2X08 `
Book value as on 1.4.2X08 13,75,000
Less: 15% Downward revaluation (2,06,250)
Revalued amount 11,68,750
Revised useful life 8 years
Depreciation on revalued amount = 11,68,750 / 8 years = ` 1,46,094

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 30 FINAL (NEW) EXAMINATION: NOVEMBER, 2021

4. Amount transferred from revaluation reserve

Revaluation reserve on 1.4.2X06 (A) ` 1,75,000
Remaining useful life 7 years
Amount transferred every year (1,75,000 / 7) ` 25,000
Amount transferred in 2 years (25,000 x 2) (B) ` 50,000
Balance of revaluation reserve on 1.4.2X08 (A-B) ` 1,25,000
5. Amount of downward revaluation to be charged to Profit and Loss Account
Downward revaluation as on 1.4.2X08 (W.N.3) ` 2,06,250
Less: Adjusted from Revaluation reserve (W.N.4) (` 1,25,000)
Amount transferred to Profit and Loss Account ` 81,250

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 PAPER – 1 : FINANCIAL REPORTING
Question No.1 is compulsory. Candidates are required to answer any four questions from
the remaining five questions.
Wherever necessary, suitable assumptions may be made and disclosed by way of a note.
Working notes should form part of the answers.
Question 1
(a) On 1 st April 2017, A Limited acquired 80% of the share capital of S Limited. On
acquisition date the share capital and reserves of S Ltd . stood at ` 5,00,000 and
` 1,25,000 respectively. A Limited paid initial cash consideration of ` 10,00,000.
Additionally, A Limited issued 2,00,000 equity shares with a nominal value of ` 1 per
share at current market value of ` 1.80 per share.
It was also agreed that A Limited would pay a further sum of ` 5,00,000 after three years.
A Limited's cost of capital is 10%. The appropriate discount factor for ` 1 @ 10%
receivable at the end of
1st year: 0.91
2nd year: 0.83
3rd year: 0.75
The shares and deferred consideration have not yet been recorded by A limited.
Below are the Balance Sheet of A Limited and S Limited as at 31 st March, 2019:
A Limited ( ` 000) S Limited ( ` 000)
Non-current assets:
Property, plant & equipment 5,500 1,500
Investment in S Limited at cost 1,000
Current assets:
Inventory 550 100
Receivables 400 200
Cash 200 50
7,650 1,850
Equity:
Share capital 2,000 500
Retained earnings 1,400 300
3,400 800

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 2 FINAL (NEW) EXAMINATION: JANUARY 2021

Non-current liabilities 3,000 400

Current liabilities 1,250 650
7,650 1,850
Further information:
(i) On the date of acquisition the fair values of S Limited's plant exceeded its book
value by ` 2,00,000. The plant had a remaining useful life of five years at this date;
(ii) The consolidated goodwill has been impaired by ` 2,58,000; and
(iii) The A Limited Group, values the non-controlling interest using the fair value
method. At the date of acquisition, the fair value of the 20 % non-controlling interest
was ` 3,80,000.
You are required to prepare Consolidated Balance Sheet of A Limited as at
31st March, 2019. (Notes to Account on Consolidated Balance Sheet is not required).
(15 Marks)
(b) Entity A had obtained a long-term bank loan during January 2019, which is subject to
certain financial covenants. One of such covenants states that during the tenure of the
loan, debt equity ratio of 65:35 is to be maintained at all time. In case of breach of this
covenant, the loan will be repayable immediately. The loan agreement also states that
these covenants will be assessed at the end of each quarter and reported to the bank
within a month from the end of each quarter. If the covenants are breached at this time,
the loan will be repayable immediately. The entity closes its annual accounts as on
31st March every year.
You are required to show how the loan will be classified as on 31st March 2020, if:
(i) At the financial year end, Entity A determines that it is not in breach of any of the
covenants;
(ii) At the quarter ending 31st December 2019, Entity A's debt equity ratio became 75:25
and thus breaches the covenant, however it obtains a waiver from the bank. The
terms of the waiver specify that if Entity A rectifies the breach within a period of
12 months from the reporting date then the bank cannot demand repayment
immediately on account of the breach during this period. Entity A expects to rectify
the breach by raising additional equity capital by means of a rights issue to the
existing shareholders and expects that the issue will be fully subscribed;
(iii) Considering the same facts as in (ii) above, except obtaining the waiver clause,
what would be your answer? (5 Marks)

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 PAPER – 1 : FINANCIAL REPORTING 3

Answer
(a) Consolidated Balance Sheet of A Ltd. and its subsidiary, S Ltd.
as at 31st March, 2019
Particulars ` in 000s
I. Assets
(1) Non-current assets
(i) Property Plant & Equipment (W.N.4) 7,120.00
(ii) Intangible asset – Goodwill (W.N.3) 1,032.00
(2) Current Assets
(i) Inventories (550 + 100) 650.00
(ii) Financial Assets
(a) Trade Receivables (400 + 200) 600.00
(b) Cash & Cash equivalents (200 + 50) 250.00
Total Assets 9,652.00
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital (2,000 + 200) 2,200.00
(ii) Other Equity
(a) Retained Earnings (W.N.6) 1190.85
(b) Securities Premium 160.00
(2) Non-Controlling Interest (W.N.5) 347.40
(3) Non-Current Liabilities (3,000 + 400) 3,400.00
(4) Current Liabilities (W.N.8) 2,353.75
Total Equity & Liabilities 9,652.00

Notes:
1. Since the question required not to prepare Notes to Account, the column of Note
to Accounts had not been drawn.
2. It is assumed that shares were issued during the year 2018-2019 and entries are
yet to be made.

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 4 FINAL (NEW) EXAMINATION: JANUARY 2021

Working Notes:
1. Calculation of purchase consideration at the acquisition date i.e.
1st April, 2017

` in 000s
Payment made by A Ltd. to S Ltd.
Cash 1,000.00
Equity shares (2,00,000 shares x ` 1.80) 360.00
Present value of deferred consideration (` 5,00,000 x 0.75) 375.00
Total consideration 1,735.00
2. Calculation of net assets i.e. net worth at the acquisition date i.e.
1st April, 2017

` in 000s
Share capital of S Ltd. 500.00
Reserves of S Ltd. 125.00
Fair value increase on Property, Plant and Equipment 200.00
Net worth on acquisition date 825.00
3. Calculation of Goodwill at the acquisition date i.e. 1 st April, 2017 and
31st March, 2019

` in 000s
Purchase consideration (W.N.1) 1,735.00
Non-controlling interest at fair value (as given in the question) 380.00
2,115.00
Less: Net worth (W.N.2) (825.00)
Goodwill as on 1 st April 2017 1,290.00
Less: Impairment (as given in the question) 258.00
Goodwill as on 31st March 2019 1,032.00
4. Calculation of Property, Plant and Equipment as on 31st March 2019

` in 000s
A Ltd. 5,500.00
S Ltd. 1,500.00

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 PAPER – 1 : FINANCIAL REPORTING 5

Add: Net fair value gain not recorded yet 200.00

Less: Depreciation [(200/5) x 2] (80.00) 120.00 1,620.00
7,120.00

5. Calculation of Post-acquisition gain (after adjustment of impairment on

goodwill) and value of NCI as on 31 st March 2019

` in 000s ` in 000s
NCI A Ltd.
(20%) (80%)
Acquisition date balance 380.00 Nil
Closing balance of Retained Earnings 300.00
Less: Pre-acquisition balance (125.00)
Post-acquisition gain 175.00
Less: Additional Depreciation on PPE [(200/5) x 2] (80.00)
Share in post-acquisition gain 95.00 19.00 76.00
Less: Impairment on goodwill 258.00 (51.60) (206.40)
347.40 (130.40)

6. Consolidated Retained Earnings as on 31 st March 2019

` in 000s
A Ltd. 1,400.00
Add: Share of post-acquisition loss of S Ltd. (W.N.5) (130.40)
Less: Finance cost on deferred consideration (37.5 + 41.25) (W.N.7) (78.75)
Retained Earnings as on 31 st March 2019 1,190.85

7. Calculation of value of deferred consideration as on 31 st March 2019

` in 000s
Value of deferred consideration as on 1 st April 2017 (W.N.1) 375.00
Add: Finance cost for the year 2017-2018 (375 x 10%) 37.50
412.50
Add: Finance cost for the year 2018-2019 (412.50 x 10%) 41.25
Deferred consideration as on 31 st March 2019 453.75

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8. Calculation of current Liability as on 31 st March 2019

` in 000s
A Ltd. 1,250.00
S Ltd. 650.00
Deferred consideration as on 31 st March 2019 (W.N.7) 453.75
Current Liability as on 31 st March 2019 2,353.75
(b) Para 74 of Ind AS 1 ‘Presentation of Financial Statements’, states that where there is a
breach of a material provision of a long-term loan arrangement on or before the end of
the reporting period with the effect that the liability becomes payable on demand on the
reporting date, the entity does not classify the liability as current, if the lender agreed,
after the reporting period and before the approval of the financial statements for issue,
not to demand payment as a consequence of the breach.
However, an entity classifies the liability as non-current, if the lender agreed by the end
of the reporting period to provide a period of grace ending at least twelve months after
the reporting period, within which the entity can rectify the breach and during which the
lender cannot demand immediate repayment.
(i) The entity has obtained a long-term loan during January, 2019. Since repayment
period of the loan is not mentioned in the question, it is assumed that on
31st March 2020, the repayment period of the loan is more than 12 months. Further,
the entity has not breached the covenants specified in the loan; therefore, as at
31st March, 2020, the loan will be classified as ‘non-current liability.
(ii) In the second case, though there is a breach of covenant on 31 st December, 2019
i.e. before reporting date of 31 st March, 2020, yet the bank had agreed to provide a
period of grace for twelve months from the reporting period, within which the entity
A can rectify the breach and during this period bank cannot demand immediate
repayment. Also, entity A has intention to rectify the breach. Thus, entity A w ill
classify the liability of bank loan as non-current liability in its books as at
31st March, 2020.
(iii) Since the covenant for the bank loan has been breached during the quarter ended
31st December, 2019 and reported to the bank within one month from the en d of the
quarter i.e. by 31 st January, 2020, the bank loan becomes repayable immediately.
Therefore, it will be presented as current liability in the books of entity A as on
31st March, 2020.
Question 2
(a) H Ltd. constructed a warehouse at a cost of ` 10 lakhs in 2015. It first became available
for use by H Ltd. on 1st January 2016. On 29th January 2020, H Ltd. discovered that its
warehouse was damaged. During early February 2020, an investigation revealed that
the damage was due to a structural fault in the construction of the warehouse. The fault

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became apparent when the warehouse building leaked severely after heavy rainfall in
the week ended 27th January 2020. The discovery of the fault is an indication of
impairment. So, H Ltd. was required to estimate the recoverable amount of its warehouse
at 31st December 2019. This estimate was ` 6,00,000. Furthermore, H Ltd. reassessed
the useful life of its warehouse at 20 years from the date that it was ready for use. Before
discovering the fault, H Ltd. had depreciated the warehouse on the straight -line method
to a nil residual value over its estimated 30-year useful life.
Seepage of rain water through the crack in the warehouse caused damage to inventory
worth about ` 1,00,000 (cost price) and became un-saleable. The entire damaged
inventory was on hand as at 31 st December, 2019. H Ltd. has not insured against any
of the losses.
It accounts for all its property, plant and equipment under the cost model. H Ltd.’s annual
financial statements for the year ended 31 st December, 2019 were approved for issue by
the Board of Directors on 28 th February, 2020.
You are required to :
(i) Prepare accounting entries to record the effects of the events after the end of the
reporting period in the accounting records of H Ltd. for the year ended
31st December, 2019. Kindly ignore tax impact;
(ii) Discuss disclosure requirement in above case as per relevant Ind AS; and
(iii) Will your answer be different if there was no structural fault and damage to the
warehouse had been caused by an event that occurred after 31 st December, 2019?
(8 Marks)
(b) A Ltd. is a company which is in the business of manufacturing engineering machines and
providing after sales services. The company entered into a contract with Mr. Anik to
supply and install a machine, namely 'model pi' on 1 st April 2018 and to service this
machine on 30 th September 2018 and 1 st April 2019. The cost of manufacturing the
machine to A Ltd. was ` 1,60,000.
It is possible for a customer to purchase both the machine 'model pi' and the maintenance
services separately. Mr. Anik is contractually obliged to pay A Ltd ` 4,00,000 on
1st April, 2019.
The prevailing rate for one-year credit granted to trade customers in the industry is
5 percent per six-month period.
As per the experience, the servicing of the machine 'model pi' sold to Mr. Anik is expected
to cost A Ltd. ` 30,000 to perform the first service and ` 50,000 to perform the second
service. Assume actual costs equal expected costs. When A Ltd. provides machine
services to customers in a separate transaction it earns a margin of 50 % on cost. On
1st April, 2018, the cash selling price of the machine 'model pi' sold to Mr. Anik is
` 2,51,927.

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The promised supply of machine 'model pi' and maintenance service obligations are
satisfactorily carried out in time by the company.
You are required to:
(i) Segregate the components of the transaction that A Ltd. shall apply to the revenue
recognition criteria separately as per Ind AS 115;
(ii) Calculate the amount of revenue which A Ltd. must allocate to each component of
the transaction;
(iii) Prepare journal entries to record the information set out above in the books of
accounts of A Ltd. for the years ended 31 st March·2019 and 31 st March 2020; and
(iv) Draft an extract showing how revenue could be presented and disclosed in the
financial statements of A Ltd. for the year ended 31 st March 2019 and
31st March 2020. (12 Marks)
Answer
(a) (i) Journal Entries on 31 st December 2019
` `
Depreciation expense A/c (W.N.1) Dr. 19,608
To Warehouse or Accumulated depreciation A/c 19,608
(Being additional depreciation expense recognised for the
year ended 31 st December 2019 arising from the
reassessment of the useful life of the warehouse)
Impairment loss A/c (W.N.2) Dr. 2,47,059
To Warehouse or Accumulated depreciation A/c 2,47,059
(Being impairment loss recognised due to discovery of
structural fault in the construction of warehouse at
31st December 2019)
(ii) (a) The damage to warehouse is an adjusting event (occurred after the end of
the year 2019) for the reporting period 2019, since it provides evidence that
the structural fault existed at the end of the reporting period. It is an adjusting
event, in spite of the fact that fault has been discovered after the reporting
date.
The effects of the damage to the warehouse are recognised in the year
2019 reporting period. Prior periods will not be adjusted because those
financial statements were prepared in good faith (eg regarding estimate of
useful life, assessment of impairment indicators etc) and had not affected the
financials of prior years.

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(b) Damage of inventory due to seepage of rainwater ` 1,00,000 occurred during

the year 2020. It is a non-adjusting event after the end of the 2019 reporting
period since the inventory was in good condition at 31 st December 2019.
Hence, no accounting has been done for it in the year 2019.
H Ltd. must disclose the nature of the event (i.e. rain-damage to
inventories) and an estimate of the financial effect (i.e. ` 1,00,000 loss) in the
notes to its 31 st December 2019 annual financial statements.
(iii) If the damage to the warehouse had been caused by an event that occurred after
31st December 2019 and was not due to structural fault, then it would be considered
as a non-adjusting event after the end of the reporting period 2019 as the
warehouse would have been in a good condition at 31 st December 2019.
Working Notes:
1. Calculation of additional depreciation to be charged in the year 2019
Original depreciation as per SLM already charged during the year 2019
= ` 10,00,000/ 30 years = ` 33,333.
Carrying value at the end of 2018 = 10,00,000 – (` 33,333 x 3 years) = ` 9,00,000
Revised depreciation = 9,00,000 / 17 years = ` 52,941
Additional depreciation to be recognised in the books in the year 2019
= ` 52,941 – ` 33,333 = ` 19,608
2. Calculation of impairment loss in the year 2019
Carrying value after charging depreciation for the year 2019
= ` 9,00,000 – ` 52,941 = ` 8,47,059
Recoverable value of the warehouse = ` 6,00,000
Impairment loss = Carrying value - Recoverable value
= ` 8,47,059 - ` 6,00,000 = ` 2,47,059
(b) (i) As per para 27 of Ind AS 115, a good or service that is promised to a customer is
distinct if both of the following criteria are met:
(a) the customer can benefit from the good or service either on its own or together
with other resources that are readily available to the m. A readily available
resource is a good or service that is sold separately (by the entity or another
entity) or that the customer has already obtained from the entity or from other
transactions or events; and
(b) the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract.

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Factors that indicate that two or more promises to transfer goods or services to a
customer are separately identifiable include, but are not limited to, the following:
(a) significant integration services are not provided (i.e. the entity is not using the
goods or services as inputs to produce or deliver the combined output called
for in the contract)
(b) the goods or services does not significantly modify or customize other
promised goods or services in the contract.
(c) the goods or services are not highly inter-dependent or highly interrelated with
other promised goods or services in the contract
Accordingly, on 1st April, 2018, entity A entered into a single transaction with three
identifiable separate components:
1. Sale of a good (i.e. engineering machine);
2. Rendering of services (i.e. engineering machine maintenance services on
30th September, 2018 and 1 st April, 2019); and
3. Providing finance (i.e. sale of engineering machine and rendering of services
on extended period credit).
(ii) Calculation and allocation of revenue to each component of the transaction
Date Opening Finance Goods Services Payment Closing
balance income received balance

1st April, 2018 – – 2,51,927 – – 2,51,927

30th 2,51,927 12,596 – 45,000 – 3,09,523
September, (Note 1)
2018
31st March 3,09,523 15,477 – – – 3,25,000
2019 (Note 2)
1st April, 2019 3,25,000 – – 75,000 (4,00,000)
Notes:
1. Calculation of finance income as on 30 th September, 2018
= 5% x 2,51,927 = ` 12,596
2. Calculation of finance income as on 31 st March, 2019
= 5% x 3,09,523 = ` 15,477

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(iii) Journal Entries

Date Particulars Dr. (`) Cr. (`)
1st April, 2018 Mr. Anik Dr. 2,51,927
To Revenue - sale of goods (Profit 2,51,927
or loss A/c)
(Being revenue recognised from the
sale of the machine on credit)
Cost of goods sold (Profit or loss) Dr. 1,60,000
To Inventories 1,60,000
(Being cost of goods sold recognised)
30th September Mr. Anik Dr. 12,596
2018 To Finance Income (Profit or loss) 12,596
(Being finance income recognised)
Mr. Anik Dr. 45,000
To Revenue- rendering of services 45,000
(Profit or loss)
(Being revenue from the rendering of
maintenance services recognised)
Cost of services (Profit or loss) Dr. 30,000
To Cash/Bank or payables 30,000
(Being the cost of performing
maintenance services recognised)
31st March Mr. Anik Dr. 15,477
2019 To Finance Income (Profit or loss) 15,477
(Being finance income recognised)
1 April, 2019
st Mr. Anik Dr. 75,000
To Revenue - rendering of 75,000
services (Profit or loss)
(Being revenue from the rendering of
maintenance services recognised)
Cost of services (Profit or loss) Dr. 50,000
To Cash/Bank or payables 50,000
(Being the cost of performing
maintenance services recognised)

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Cash/Bank Dr. 4,00,000

To Mr. Anik 4,00,000
(Being the receipt of cash from the
customer recognised)
(iv) Extract of Notes to the financial statements for the year ended
31st March, 2019 and 31 st March, 2020
Note on Revenue
2019-2020 2018-2019
` `
Sale of goods – 2,51,927
Rendering of machine - maintenance services 75,000 45,000
Finance income – 28,073
75,000 3,25,000
Question 3
(a) Coups Limited availed a machine on lease from Ferrari Limited. The terms and
conditions of the Lease are as under:
Lease period is 3 years, machine costing ` 8,00,000.
- Machine has expected useful life of 5 years.
- Machine reverts back to Ferrari Limited on termination of lease.
- The unguaranteed residual value is estimated at ` 50,000 at the end of 3rd year.
- 3 equal annual installments are made at the end of each year.
- Implicit Interest Rate (IRR) = 10%.
- Present value of ` 1 due at the end of 3rd year at 10% rate of interest is 0.7513.
- Present value of annuity of ` 1 due at the end of 3rd year at 10% IRR is 2.4868.
You are required to ascertain whether it is a Finance Lease or Operating Lease and also
calculate Unearned Finance Income with the relevant context to rele vant Ind AS.
(6 Marks)
(b) Super Sounds Limited had the following transactions during the Financial Year
2019-2020.
(i) On 1 st April 2019, Super Sounds Limited purchased the net assets of Music Limited
for ` 13,20,000. The fair value of Music Limited's identifiable net assets was

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` 10,00,000. Super Sounds Limited is of the view that due to popularity of Music
Limited's product, the life of goodwill is 10 years.
(ii) On 4th May 2019, Super Sounds Limited purchased a Franchisee to organize
musical shows from Armaan TV for ` 80,00,000 and at an annual fee of 2% of
musical shows revenue. The Franchisee expires after 5 years. Musical shows
revenue were ` 10,00,000 for financial year 2019-2020. The projected future
revenues for financial year 2020-2021 is ` 25,00,000 and ` 30,00,000 p.a. for
remaining 3 years thereafter.
(iii) On 4th July 2019, Super Sounds Limited was granted a Copyright that had been
applied for by Music Limited. During financial year 2019-2020, Super Sound
Limited incurred ` 2,50,000 on legal cost to register the Patent and ` 7,00,000
additional cost to successfully prosecute a copyright infringement suit against a
competitor.
The life of the Copyright is for 10 years.
Super Sound Limited follows an accounting policy to amortize all intangible on SLM
(Straight Line Method) basis or any appropriate basis over a maximum period permitted
by relevant Ind AS, taking a full year amortization in the year of acquisition.
You are required to prepare:
(i) A Schedule showing the intangible section in Super Sound Limited Balance Sheet
as on 31 st March 2020, and
(ii) A Schedule showing the related expenses that would appear in the Statement of
Profit and Loss of Super Sound Limited for the year ended 2019-2020. (10 Marks)
(c) Heavy Goods Ltd. has 6 operating segments namely L-Q (below). The total revenues
(internal and external), profits or losses and assets are set out below : (In `)
Segment Inter Segment Sales External Profit / loss Total assets
Sales
L 4,200 12,300 3,000 37,500
M 3,500 7,750 1,500 23,250
N 1,000 3,500 (1,500) 15,750
0 0 5,250 (750) 10,500
P 500 5,500 900 10,500
Q 1,200 1,050 600 5,250
10,400 35,350 3,750 1,02,750
Heavy Goods Ltd. needs to determine how many reportable segments it has. You are
required to advice Heavy Goods Ltd. as per the criteria defined in Ind AS 108. (4 Marks)

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Answer
(a) It is assumed that the fair value of the machine on lease is equivalent to the cost of the
machine.
(i) A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incidental to ownership of an underlying asset. A lease is classified as an
operating lease if it does not transfer substantia lly all the risks and rewards
incidental to ownership of an underlying asset.
(ii) Computation of annual lease payment to the lessor
`
Cost of equipment / fair value 8,00,000
Unguaranteed residual value 50,000
Present value of residual value after third year @ 10% (50,000 x 37,565
0.7513)
Fair value to be recovered from lease payments (8,00,000 – 37,565) 7,62,435
Present value of annuity for three years is 2.4868
Annual lease payment = 7,62,435 / 2.4868 3,06,593
The present value of lease payment i.e., ` 7,62,435 is more than 95% of the fair
market value i.e., ` 8,00,000. The present value of minimum lease payments
substantially covers the initial fair value of the leased asset and lease term (i.e. 3
years) covers the major part of the life of asset (i.e. 5 years). Therefore, it
constitutes a finance lease.
(ii) Computation of Unearned Finance Income
`
Total lease payments (` 3,06,593 x 3) 9,19,779
Add: Unguaranteed residual value 50,000
Gross investment in the lease 9,69,779
Less: Present value of investment (lease payments and
residual value) (37,565 + 7,62,435) (8,00,000)
Unearned finance income 1,69,779
(b) (i) Super Sounds Limited
Balance Sheet (Extract relating to intangible asset) as at 31st March 2020
Note No. `
Assets
(1) Non- current asset
Intangible assets 1 69,45,000

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(ii) Super Sounds Limited

Statement of Profit and Loss (Extract)
for the year ended 31 st March 2020
Note No. `
Revenue from Operations 10,00,000
Total Revenue
Expenses:
Amortization expenses 2 16,25,000
Other expenses 3 7,20,000
Total Expenses
Notes to Accounts (Extract)
1. Intangible Assets
Gross Block (Cost) Accumulated amortisation Net block
Opening Additions Closing Opening Additions Closing Opening Closing
balance Balance balance Balance balance Balance
` ` ` ` ` ` ` `
1. Goodwill* - 3,20,000 3,20,000 - - - - 3,20,000
(W.N.1)
2. Franchise** - 80,00,000 80,00,000 - 16,00,000 16,00,000 - 64,00,000
(W.N.2)
3. Copyright
(W.N.3) - 2,50,000 2,50,000 - 25,000 25,000 - 2,25,000
- 85,70,000 85,70,000 - 16,25,000 16,25,000 - 69,45,000
*As per Ind AS 36, irrespective of whether there is any indication of impairment,
an entity shall test goodwill acquired in a business combination for impairment
annually. This implies that goodwill is not amortised annually but is subject
to annual impairment, if any.
**As per the information in the question, the limiting factor in the contract for
the use is time i.e., 5 years and not the fixed total amount of revenue to be
generated. Therefore, an amortisation method that is based on the revenue
generated by an activity that includes the use of an intangible asset is
inappropriate and amortisation based on time can only be applied.
2. Amortization expenses
Franchise (W.N.2) 16,00,000
Copyright (W.N.3) 25,000 16,25,000

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3. Other expenses
Legal cost on copyright 7,00,000
Fee for Franchise (10,00,000 x 2%) 20,000 7,20,000

Working Notes:
`
(1) Goodwill on acquisition of business
Cash paid for acquiring the business 13,20,000
Less: Fair value of net assets acquired (10,00,000)
Goodwill 3,20,000
(2) Franchise 80,00,000
Less: Amortisation (over 5 years) (16,00,000)
Balance to be shown in the balance sheet 64,00,000
(3) Copyright 2,50,000
Less: Amortisation (over 10 years as per SLM) (25,000)
Balance to be shown in the balance sheet 2,25,000

(c) As per paragraph 13 of Ind AS 108, an entity shall report separately information about
an operating segment that meets any of the following quantitative thresholds:
(a) Its reported revenue, including both sales to external customers and inter-segment
sales or transfers, is 10 per cent or more of the combined revenue, internal and
external, of all operating segments.
Combined total sales of all the segment = ` 10,400 + ` 35,350 = ` 45,750.
10% thresholds = 45,750 x 10% = 4,575.
(b) The absolute amount of its reported profit or loss is 10 per cent or more of the
greater, in absolute amount, of
(i) the combined reported profit of all operating segments that did not report a
loss and
(ii) the combined reported loss of all operating segments that reported a loss.
In the given situation, combined reported profit = ` 6,000 and combined reported
loss (` 2,250). Hence, for 10% thresholds ` 6,000 will be considered.
10% thresholds = ` 6,000 x 10% = ` 600

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(c) Its assets are 10 per cent or more of the combined assets of all operating segments.
Combined total assets of all the segment = ` 1,02,750
10% thresholds = ` 1,02,750 x 10% = 10,275
Accordingly, quantitative thresholds are calculated below:

Segments L M N O P Q Reportable
segments
% segment sales 36.66% 24.59% 9.84% 11.48% 13.11% 4.92% L, M,O,P
to total sales
% segment profit 50% 25% 25% 12.5% 15% 10% L,M,N,O,P,Q
to total profits
% segment 36.50% 22.63% 15.33% 10.22% 10.22% 5.11% L,M,N,O,P
assets to total
assets

Segments L, M, O and P clearly satisfy the revenue and assets tests and they are
separate reportable segments.
Segments N does not satisfy the revenue test, but it does satisfy the asset test and it is
a reportable segment.
Segment Q does not satisfy the revenue or the assets test but is does satisfy the profits
test. Therefore, Segment Q is also a reportable segment.
Hence, all segments i.e; L, M, N, O, P and Q are reportable segments.
Question 4
(a) Lovely Limited has a policy of providing subsidized loans to its employees for the purpose
of buying 2 Wheelers and 4 Wheelers vehicle. Simran who is a Sales Executive, took a
loan for a Four-wheeler vehicle from the Company. The following were the terms of the
loan:
- Principal Amount : ` 9,00,000
- Interest: 5% p.a. for the First ` 3,00,000 and 8% p.a. for the remaining amount.
- Loan disbursed date: 1 st April 2017
- Loan Tenure: 3 Years
- Pre-Payment : Full or Partial payment at the option of the employee.
- Simran shall remain in service till the term of the loan ends.

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- The Principal amount should be recovered in 3 equal installments at the end of each
year and will be first applied to 8% interest bearing principal.
- The accrued interest shall be paid on annual basis.
The market rate of a comparable loan available to Simran is 12 % per annum.
Following table shows the expected contractual cash flows from the loan given to Simran.
(In `)
Inflows·
Date Outflows Principal Interest Interest Principal
Income 8% Income 5% Outstanding
01.04.2017 (9,00,000) 9,00,000
31.03.2018 3,00,000 48,000 15,000 6,00,000
31.03.2019 3,00,000 24,000 15,000 3,00,000
31.03.2020 3,00,000 - 15,000 -
Simran pre-pays ` 1,00,000 on 31 st March, 2019.
Following table shows the actual cash flows from the loan, considering the prepayment
on 31 st March 2019. (In `)
Inflows
Date Outflows Principal Interest Interest Principal
Income 8% Income 5% Outstanding
01.04.2017 (9,00,000) 9,00,000
31.03.2018 3,00,000 48,000 15,000 6,00,000
31.03.2019 4,00,000 24,000 15,000 2,00,000
31.03.2020 2,00,000 - 10,000 -
You are required to pass journal entries in the books of Lovely Limited considering the
requirements of Ind AS 109. (14 Marks)
(b) Sun Shine Limited is a company which seems to be covered under the ambit of CSR
rules. As part of its CSR contribution an amount of ` 40,000 p.m. was spent by way of
adoption of 2 families of drought hit area.
The average net profits of immediately preceding financial year was ` 1,80,00,000.
Please note that the company commenced its commercial activities only on the first day
of the immediately preceding financial year. The Accountant of the company says that
CSR provisions are not applicable to his company since it is one year old and in case if
it is applicable he wants to carry forward the excess amount spent on account of CSR
activities to future years.

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You are required to comment with the figures, whether the contention of the Accountant
is correct in context of CSR provisions?
OR
With respect to Integrated Reporting, state whether following statements are true or f alse
with reason for your answer:
(i) An integrated report is necessarily to be a stand-alone report;
(ii) The framework of Integrated reporting is written primarily for private companies;
(iii) A report prepared as required by local law containing a management commentary
or other report that provides context for its financial statements can serve the
purpose of Integrated reporting; and
(iv) An integrated report should include only positive material matters. (6 Marks)
Answer
(a) As per requirement of Ind AS 109, a financial instrument is initially measured and
recorded at its fair value. Therefore, considering the market rate of interest of similar
loan available to Simran is 12%, the fair value of the contractual cash flows shall be as
follows: Amount in `

Inflows
Date Principal Interest Interest Total Discount PV
income income inflow factor @
8% 5% 12%
31.03.2018 3,00,000 48,000 15,000 3,63,000 0.893 3,24,159
31.03.2019 3,00,000 24,000 15,000 3,39,000 0.797 2,70,183
31.03.2020 3,00,000 - 15,000 3,15,000 0.712 2,24,280
Total (fair value) 8,18,622

Benefit to Simran, to be considered as part of employee cost for Lovely Ltd. ` 81,378
(9,00,000 – 8,18,622).
The deemed employee cost is to be amortised over the period of loan i.e. the minimum
period that Simran must remain in service.

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The amortization schedule of the ` 8,18,622 loan is shown in the following table:
Amount in `
Date Opening Total cash inflows Interest Closing
outstanding (principal repayment + @ 12% outstanding
Loan interest Loan
01.04.2017 8,18,622 8,18,622
31.03.2018 8,18,622 3,63,000 98,235 5,53,857
31.03.2019 5,53,857 3,39,000 66,463 2,81,320
31.03.2020 2,81,320 3,15,000 33,680* Nil
* Difference is due to approximation of discounting factor and interest amount.
Journal Entries to be recorded at every period end:
a. 1 April 2017 –

Particulars Dr. ( `) Cr. ( `)

Loan to employee A/c Dr. 8,18,622
Pre-paid employee cost A/c Dr. 81,378
To Bank A/c 9,00,000
(Being loan asset recorded at initial fair value)

b. 31 March 2018 –

Particulars Dr. ( `) Cr. ( `)

Bank A/c Dr. 3,63,000
To Interest income A/c 98,235
To Loan to employee A/c 2,64,765
(Being first instalment of repayment of loan
accounted for using the amortised cost and effective
interest rate of 12%)
Employee benefit A/c Dr. 27,126
To Pre-paid employee cost A/c 27,126
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost
on straight line basis)

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c. On 31 March 2019, due to pre-payment of a part of loan by Simran, the carrying

value of the loan shall be re-computed by discounting the future remaining cash
flows by the original effective interest rate.
There shall be two sets of accounting entries on 31 March 2019, first the realisation
of the contractual cash flow as shown below and then the accounting for the pre -
payment of ` 1,00,000 included in (d) below:
31 March 2019 –

Particulars Dr. ( `) Cr. ( `)

Bank A/c Dr. 3,39,000
To Interest income A/c 66,463
To Loan to employee A/c 2,72,537
(Being second instalment of repayment of loan
accounted for using the amortised cost and effective
interest rate of 12%)
Employee benefit (profit and loss) A/c Dr. 27,126
To Pre-paid employee cost A/c 27,126
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)

Computation of new carrying value of loan to employee:

Inflows
Date Principal Interest Interest Discount PV
income 8% income 5% factor @12%
31.03.2020 200,000 - 10,000 0.893 1,87,530
Total (revised carrying value) 1,87,530
Less: Current carrying value (2,81,320)
Adjustment required 93,790

The difference between the amount of pre-payment and adjustment to loan shall be
considered a gain, though will be recorded as an adjustment to pre -paid employee
cost, which shall be amortised over the remaining tenure of the loan.

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 22 FINAL (NEW) EXAMINATION: JANUARY 2021

d. 31 March 2019 prepayment–

Particulars Dr. ( `) Cr. ( `)
Bank A/c Dr. 1,00,000
To Pre-paid employee cost A/c 6,210
To Loan to employee A/c 93,790
(Being gain to Lovely Limited recorded as an
adjustment to pre-paid employee cost)
The amortisation schedule of the new carrying amount of loan shall be as follows:
Date Loan Total cash inflows (principal Interest
outstanding repayment + interest) @ 12%
31.03.2019 1,87,530
31.03.2020 - 2,10,000 22,470

Amortisation of employee benefit cost shall be as follows:

Date Opening Amortised to P&L Adjustment Closing

Balance balance
01.04.2017 81,378 81,378
31.03.2018 81,378 27,126 54,252
31.03.2019 54,252 27,126 6,210 20,916
31.03.2020 20,916 20,916 Nil

e. 31 March 2020 –
Particulars Dr. ( `) Cr. ( `)
Bank A/c Dr. 2,10,000
To Interest income (profit and loss) @ 12% A/c 22,470
To Loan to employee A/c 1,87,530
(Being last instalment of repayment of loan accounted
for using the amortised cost and effective interest rate of
12%)
Employee benefit (profit and loss) A/c Dr. 20,916
To Pre-paid employee cost A/c 20,916
(Being amortization of pre-paid employee cost charged
to profit and loss as employee benefit cost)

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 PAPER – 1 : FINANCIAL REPORTING 23

(b) EITHER
As per section 135 of the Companies Act 2013, every company having either
 net worth of ` 500 crore or more, or
 turnover of ` 1,000 crore or more or
 a net profit of ` 5 crore or more
during the immediately preceding financial year shall constitute a Corporate Social
Responsibility (CSR) Committee.
In the given case, the average net profits of immediate preceding financial year of Sun
Shine Limited is ` 1,80,00,000 (i.e. ` 1.80 crore). Hence, net profit criteria is not met.
Company is covered under the ambit of CSR rules (assuming that net worth or
turnover criteria is met):
Since it is given in the question that the company seems to be covered under the ambit
of CSR rules, it is assumed that either the net worth of Sun Shine Limited might have
exceeded ` 500 crore or more, or turnover might have exceeded ` 1,000 crore or more
during immediate preceding financial year. Accordingly, CSR provisions are applicable
to Sun Shine Limited irrespective of the fact that the company is in second year of
operations.
If the company meets any one of the thresholds in the immediately preceding previous
year, then the contention of accountant is incorrect that CSR provisions will not be
applicable to the company as it is only one year old.
The accountant wants to carry forward the excess amount spent on account o f CSR
activities to future years which is ` 1,20,000 [` 40,000 x 12 - (` 1,80,00,000 x 2%)].
However, there is no provision to carry forward the excess CSR expenditure spent  in a
particular year. Hence, here also the contention of the accountant is incorrect. The
excess expenditure made shall be considered as voluntary made by the entity.
(b) OR
(i) False. An integrated report may be prepared in response to existing compliance
requirements and may be either a standalone report or be included as a
distinguishable, prominent and accessible part of another report or communication.
(ii) True. The Framework is written primarily in the context of private sector, for-profit
companies of any size but it can also be applied, adapted as necessary, by pub lic
sector and not-for-profit organizations.


The amendments in section of CSR has been made effective from January, 2021. Hence not
applicable for January, 2021 examination.

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 24 FINAL (NEW) EXAMINATION: JANUARY 2021

(iii) True. If the report is required to include specified information beyond that required
by this Framework, the report can still be considered an integrated report if that
other information does not obscure the concise information required by this
Framework.
(iv) False. An integrated report should include all material matters, both positive and
negative, in a balanced way and without material error. Both the increases and
reductions in the value of the important capital should be reflected. Where the
information is not perfectly accurate, estimates should be used and appropriate
processes should be in place to insure that the risk of material misstatement is
reduced.
Question 5
(a) On 1 st April 2017, Kara Ltd. granted an award of 150 share options to each of its
1,000 employees, on condition of continuous employment with Kara Ltd. for three years
and the benefits will then be settled in cash of an equivalent amount of share price. Fair
value of each option on the grant date was ` 129.
Towards the end of 31 st March 2018, Kara Ltd.'s share price dropped; so on
1st April 2018 management chose to reduce the exercise price of the options.
At the date of the re-pricing, the fair value of each of the original share options granted
was ` 50 and the fair value of each re-priced option was ` 80. Thus, the incremental
fair value of each modified option was ` 30.
At the date of the award, management estimated that 10% of employees would leave the
entity before the end of three years (i.e., 900 awards would vest). During financial year
2018-2019, it became apparent that fewer employees than expected were leaving, so
management revised its estimate of the number of leavers to only 5 % (i.e. 950 awards
would vest). At the end of 31 st March 2020, awards to 930 employees actually vested.
Determine the expense for each year and pass appropriate journal entries as per the
relevant lnd AS. (12 Marks)
(b) C Ltd. acquired the following assets and liabilities of D Ltd. in a business combination:
` in ’000s
Fair Value Carrying Amount Temporary
Difference
Plant & equipment 500 510 (10)
Inventory 130 150 (20)
Trade receivables 200 210 (10)
Loans and advances 80 85 (5)
910 955 (45)

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10% Debentures 200 200

710 755
Consideration Paid 760 760
Goodwill 50 5 45
Goodwill is deductible as permissible expenses under the existing tax law. Calculate
Deferred Tax Asset / liability as per relevant Ind AS and also pass related journal entry
in books of C Ltd. and assume tax rate at 25%. (4 Marks)
(c) On 1st November 2019, Crattle Agro Limited purchased 100 goats of special breed from
a market for ` 10,00,000 with a transaction cost of 2%. Goats fair value decreased from
` 10,00,000 to ` 9,00,000 as on 31st March 2020. Determine the fair value on the date
of purchase and as on financial year ended 31 st March 2020. Also pass relevant journal
entries on 1 st November 2019 and 31st March 2020. (4 Marks)
Answer
(a) Note: The first para of the question states that “benefits will then be settled in cash
of an equivalent amount of share price.” This implies that the award is cash settled
share-based payment. However, the second and third para talks about repricing of the
option which arises in case of equity settled share-based payment.
Hence, two alternative solutions have been provided based on the information taking
certain assumptions.
1st Alternative based on the assumption that the award is cash settled share-based
payment.
In such a situation, the services received against share-based payment plan to be settled
in cash are measured at fair value of the liability and the liability continues to be re-
measured at every reporting date until it is actually paid off.
There is a vesting condition attached to the share-based payment plans i.e. to remain in
service for next 3 years. The recognition of such share-based payment plans should be
done by recognizing fair value of the liability at the time of services received and not at
the date of grant. The liability so recognized will be fair valued at each reporting date
and difference in fair value will be charged to profit or loss for the period.
Calculation of expenses:
For the year ended 31 st March 2018
= ` 50 x 150 awards x 900 employees x (1 year /3 years of service)
= ` 22,50,000

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 26 FINAL (NEW) EXAMINATION: JANUARY 2021

For the year ended 31 st March 2019

Note: It is assumed that the fair value of ` 80 each of repriced option continues at the
end of the remaining reporting period ie 31 st March, 2019 and 31 st March, 2020
= [` 80 x 150 awards x 950 employees x (2 year / 3 years of service)] - ` 22,50,000
= ` 7,60,00,000 – ` 22,50,000 = ` 53,50,000
For the year ended 31 st March 2020
= [` 80 x 150 awards x 930 employees] - ` 22,50,000 - ` 53,50,000
= ` 1,11,60,000 – ` 22,50,000 - ` 53,50,000= ` 35,60,000
Journal Entries
31st March, 2018
Employee benefits expenses Dr. 22,50,000
To Share based payment liability 22,50,000
(Fair value of the liability recognized)
31st March, 2019
Employee benefits expenses Dr. 53,50,000
To Share based payment liability 53,50,000
(Fair value of the liability re-measured)
31st March, 2020
Employee benefits expenses Dr. 35,60,000
To Share based payment liability 35,60,000
(Fair value of the liability recognized)
Share based payment liability Dr. 1,11,60,000
To Bank 1,11,60,000
(Being liability for awards settled in cash)

2nd Alternative based on fair value at the grant date (ignoring the fact that the award
has to be settled in cash).
Calculation of expenses:
For the year ended 31 st March 2018
= [` 129 x 150 awards x 900 employees x (1 year /3 years of service)]
= ` 58,05,000
For the year ended 31 st March 2019

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 PAPER – 1 : FINANCIAL REPORTING 27

Ind AS 102 requires the entity to recognise the effects of repricing that increase the
total fair value of the share-based payment arrangement or are otherwise beneficial
to the employee.
If the repricing increases the fair value of the equity instruments granted standard
requires the entity to include the incremental fair value granted (ie the difference
between the fair value of the repriced equity instrument and that of the original
equity instrument, both estimated as at the date of the modification) in the
measurement of the amount recognised for services received as consideration for
the equity instruments granted.
If the repricing occurs during the vesting period, the incremental fair value granted
is included in the measurement of the amount recognised for services received over
the period from the repricing date until the date when the repriced equity
instruments vest, in addition to the amount based on the grant date fair value of the
original equity instruments, which is recognised over the remainder of the original
vesting period. Accordingly, the amounts recognised are as follows:
Year Calculation Compensation Cumulative
ended expense for compensation
period expense
` `
31 March, [` 129 x 150 awards x 900 employees 58,05,000 58,05,000
2018 x (1 year /3 years of service)]
31 March, [` 129 x 150 awards x 950 employees 85,87,500 1,43,92,500
2019 x (2 year /3 years of service)] + (80-50)
x 150 awards x 950 employees x (1
year / 2 years of service) - 58,05,000
31 March, [(` 129 + 30) x 150 awards x 930 77,88,000 2,21,80,500
2020 employees] - 1,43,92,500

Journal Entries
31st March, 2018
Employee benefits expenses Dr. 58,05,000
To Outstanding Share based payment option 58,05,000
(Fair value of the liability recognized)
31st March, 2019
Employee benefits expenses Dr. 85,87,500
To Outstanding Share based payment option 85,87,500
(Fair value of the liability re-measured)

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 28 FINAL (NEW) EXAMINATION: JANUARY 2021

31st March, 2020

Employee benefits expenses Dr. 77,88,000
To Outstanding Share based payment option 77,88,000
(Fair value of the liability recognized)
Outstanding Share based payment option Dr. 2,21,80,500
To Equity share capital 2,21,80,500
(Being award settled)
(b) In this case there is a Deferred Tax Asset as the Tax base of assets acquired is higher
by ` 45,000. Deferred Tax Asset would be ` 11,250 (45,000 x 25%)
Journal entry
Plant and equipment Dr. 5,00,000
Inventory Dr. 1,30,000
Trade receivables Dr. 2,00,000
Loans and advances Dr. 80,000
Goodwill (50,000 - 11,250) Dr. 38,750
Deferred Tax Asset Dr. 11,250
To 10% Debentures 2,00,000
To Bank 7,60,000
(Assets and liabilities taken over, goodwill and deferred tax asset have been recognised)
(c) The fair value less cost to sell of goats on the date of purchase i.e. on
1st November, 2019, would be ` 9,80,000 (10,00,000-20,000). Expense of ` 20,000
would be recognised in profit and loss.
On date of Purchase
Biological Asset Dr. 9,80,000
Expense on initial recognition Dr. 20,000
To Bank 10,00,000
(Being biological asset purchased)
On 31st March, 2020 goats would be measured at ` 8,82,000 as Biological Asset
(9,00,000-18,000) and loss of ` 98,000 (9,80,000 - 8,82,000) would be recognised in
profit or loss.

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 PAPER – 1 : FINANCIAL REPORTING 29

At the end of reporting period

Loss – Change in fair value Dr. 98,000
To Biological Asset 98,000
(Being change in fair value recognised at the end of reporting period)
Note: It is assumed that the transaction cost is borne by the seller.
Question 6
(a) On 1 st April 2019, an entity purchased an office block (building) for ` 50,00,000 and paid
a non-refundable property transfer tax and direct legal cost of ` 2,50,000 and ` 50,000
respectively while acquiring the building.
During 2019, the entity redeveloped the building into two-story building. Expenditures
on re-development were:
 ` 1,00,000 Building plan approval;
 ` 10,00,000 construction costs (including ` 60,000 refundable purchase taxes); and
 ` 40,000 due to abnormal wastage of material and labour.
When the re-development of the building was completed on 1st October 2019, the entity
rents out Ground Floor of the building to its subsidiary under an operating lease in return
for rental payment. The subsidiary uses the building as a retail outlet for its products.
The entity kept first floor for its own administration and maintenance staff usage. Equal
value can be attributed to each floor.
How will the entity account for all the above mentioned expenses in the books of
account?
Also, discuss how the above building will be shown in Consolidated financial state ment
of the entity as a group and in its separate financial statements as per relevant Ind AS.
(5 Marks)
(b) Jewels Ltd. entered into a transaction to purchase 1,000 gms of platinum on
15th January, 2020. The transaction provides for a price payable which is equal to market
value of 1,000 gms of platinum on 15 th April 2020 and shall be settled by issue of such
number of equity shares as is required to settle the aforementioned transaction, at a
price of ` 100 per share on 15 th April 2020. Whether this is to be classified as liability
or equity as on 31 st March 2020 as per Ind AS 109?
You are required to explain with reasons. (5 Marks)
(c) Z Ltd. (India) has an overseas branch in USA. It has a bank account having balance of
USD 7,000 as on 1 st April 2019. During the financial year 2019-2020, Z Ltd. acquired
computers for its USA office for USD 280 which was paid on same date. There is no
other transaction reported in USA or India.

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 30 FINAL (NEW) EXAMINATION: JANUARY 2021

Exchange rates between INR and USD during the financial year 2019-2020 were:
Date USD 1 to INR
1st April 2019 70.00
30th November 2019 71.00 (Date of purchase of computer)
31st March 2020 71.50
Average for 2019-2020 70.50
Please prepare the extract of Cash Flow Statement for the year ended 31 st March 2020
as per the relevant Ind AS and also show the foreign exchange profitability from these
transactions for the financial year 2019-2020? (5 Marks)
(d) On 1st April 2019, Big Limited acquired a 35 interest in Dig Limited and achieved a
significant influence. The cost of the investment was ` 3,00,000. Dig Limited has net
assets of ` 5,50,000 as on 1 st April 2019. The fair value of those net assets is ` 6,50,000,
since the fair value of property, plant and equipment is ` 1,00,000 higher than its book
value. This property, plant and equipment have a remaining useful life of 8 years. For
the financial year 2019-2020, Dig Limited earned a profit (after tax) of ` 1,00,000 and
paid a dividend of ` 11,000 out of these profits. Dig Ltd. has also recognized the loss of
` 15,000, that arose from re-measurement of defined benefit directly in 'Other
Comprehensive Income'.
Calculate Big Ltd.'s interest in Dig Ltd. as at the year ended 31 st March 2020 under the
relevant method. (5 Marks)
Answer
(a) In accordance with Ind AS 16, all costs required to bring an asset to its present location
and condition for its intended use should be capitalised. Therefore, the initial purchase
price of the building would be:
Particulars Amount (`)
Purchase amount 50,00,000
Non-refundable property tax 2,50,000
Direct legal cost 50,000
53,00,000
Expenditures on redevelopment:
Building plan approval 1,00,000
Construction costs (10,00,000 – 60,000) 9,40,000
Total amount to be capitalised at 1 st October 2019 63,40,000

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Treatment of abnormal wastage of material and labour:

As per Ind AS 16, the cost of abnormal amounts of wasted material, labour, or other
resources incurred in self-constructing an asset is not included in the cost of the asset.
It will be charged to Profit and Loss in the year it is incurred. Hence, abnorm al wastage
of ` 40,000 will be expensed off in Profit & Loss in the financial year 2019-2020.
Accounting of property- Building
When the property is used as an administrative centre, it is not an investment property,
rather it is an ‘owner occupied property’. Hence, Ind AS 16 will be applicable.
When the property (land and/or buildings) is held to earn rentals or for capital
appreciation (or both), it is an Investment property. Ind AS 40 prescribes the cost model
for accounting of such investment property.
Since equal value can be attributed to each floor, Ground Floor of the building will be
considered as Investment Property and accounted as per Ind AS 40 and First Floor would
be considered as Property, Plant and Equipment and accounted as per Ind AS 16.
Cost of each floor = ` 63,40,000 / 2 = ` 31,70,000
As on 1 st October 2019, the carrying value of building vis-à-vis its classification would be
as follows:
(i) In Separate Financial Statements: The Ground Floor of the building will be
classified as investment property for ` 31,70,000, as it is property held to earn
rentals. While First Floor of the building will be classified as item of property, plant
and equipment for ` 31,70,000.
(ii) In Consolidated Financial Statements: The consolidated financial statements
present the parent and its subsidiary as a single entity. The consolidated entity
uses the building for the supply of goods. Therefore, the leased-out property to a
subsidiary does not qualify as investment property in the consolidated financial
statements. Hence, the whole building will be classified as an item of Property,
Plant and Equipment for ` 63,40,000.
(b) There is a contract for purchase of 1,000 gms of platinum whose consideration varies in
response to changing value of platinum. Analysing this contract as a derivative with all
three of the following characteristics:
(a) Value of contract changes in response to change in market value of platinum ;
(b) There is no initial net investment
(c) It will be settled at a future date, i.e. 15 th April 2020.
Since the above criteria are met, this is a derivative contract.
Now, a derivative contract that is settled in own equity other than exchange of fixed
amount of cash for fixed number of shares is classified as ‘liability’. In this case, since

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 32 FINAL (NEW) EXAMINATION: JANUARY 2021

the contract results in issue of variable number of shares based on transacti on price to
be determined in future, hence, this shall be classified as ‘derivative financial liability’ as
per Ind AS 109.
(c) In the books of Z Ltd.
Statement of Cash Flows for the year ended 31 st March 2020

` `
Cash flows from operating activities
Net Profit (Refer Working Note) 10,360
Adjustments for non-cash items:
Foreign Exchange Gain (10,360)
Net cash outflow from operating activities 0
Cash flows from investing activities
Acquisition of Property, Plant and Equipment (19,880)
Net cash outflow from Investing activities (19,880)
Cash flows from financing activities 0
Net change in cash and cash equivalents (19,880)
Cash and cash equivalents at the beginning of the year i.e. 4,90,000
1st April 2019
Foreign Exchange difference 10,360
Cash and cash equivalents at the end of the year i.e.
31st March 2020 4,80,480
Working Note:
Computation of Foreign Exchange Gain
Bank Account USD Date USD Exchange `
Rate
Opening balance 1.4.2019 7,000 70.00 4,90,000
Less: Purchase of Computer 30.11.2019 280 71.00 19,880
Closing balance calculated 6,720 4,70,120
Closing balance (at year end spot rate) 31.3.2020 6,720 71.50 4,80,480
Foreign Exchange Gain credited to
Profit and Loss account 10,360

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(d) Calculation of Big Ltd.’s interest in Dig Ltd at the year ended 31 st March, 2020 as
per Equity method:
Amount (`)
Cost of investment (35%) 3,00,000
Share in profit after adjustment (Refer Working Note) 30,625
Dividend received by Big Ltd from Dig Ltd (35% x ` 11,000) (3,850)
Big Ltd.’s share of loss in OCI w.r.t Dig Ltd.’s loss from
remeasurement of defined benefit liability (35% x ` 15,000) (5,250)
Big Ltd.’s interest in Dig Ltd at the end of the year 3,21,525
Working Note:
Computation of Share in profit after adjustment
Amount (`)
Big Ltd.’s share of Dig Ltd.’s after tax profit (35% x ` 1,00,000) 35,000
Less: Big Ltd.’s share of depreciation based on fair value
(35% x ` 12,500) (4,375)
Share in profit after adjustment 30,625

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Question No.1 is compulsory. Candidates are required to answer any four questions from the
remaining five questions.
Wherever necessary, suitable assumptions may be made and disclosed by way of a note.
Working notes should form part of the answers.
Question 1
(a) On 1 April 2020, Star Limited has advanced a housing loan of ` 15 lakhs to one of its
employee at an interest rate of 6% per annum which is repayable in 5 equal annual
installments along with interest at each year end. Employee is not required to give any
specific performance against this benefit. The market rate of similar loan for housing
finance by banks is 10% per annum.
The accountant of the company has recognized the staff loan in the balance sheet
equivalent to the amount of housing loan disbursed i.e. ` 15 lakhs. The interest income
for the year is recognized at the contracted rate in the Statement of Profit and Loss by the
company i.e. ` 90,000 (6% of ` 15 lakhs).
Analyze whether the above accounting treatment made by the accountant is in compliance
with the relevant Ind AS. If not, advise the correct treatment of housing loan, interest and
other expenses in the financial statements of Star Limited for the year 2020 -2021 along
with workings and applicable Ind AS.
You are required to explain how the housing loan should be reflected in the Ind AS
compliant Balance Sheet of Star Limited on 31 March 2021. (12 Marks)
(b) The following information is available relating to Space India Limited for the Financial Year
2019-2020.
Net profit attributable to equity shareholders ` 90,000
Number of equity shares outstanding 16,000
Average fair value of one equity share during the year ` 90
Potential Ordinary Shares:
Options 900 options with exercise price of ` 75
Convertible Preference Shares 7,500 shares entitled to a cumulative dividend of
` 9 per share. Each preference share is
convertible into 2 equity shares.
Applicable corporate dividend tax 8%
10% Convertible Debentures of ` 10,00,000 and each debenture is convertible
` 100 each into 4 equity shares
Tax rate 25%

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 2 FINAL (NEW) EXAMINATION: NOVEMBER 2020

You are required to compute Basic and Diluted EPS of the company for the Financial Year
2019-2020. (8 Marks)
Answer
(a) The accounting treatment made by the accountant is not in compliance with Ind AS 109
‘Financial Instruments’. As per Ind AS 109, at initial recognition, an entity shall measure a
financial asset or financial liability at its fair value. The fair value of a financial instrument
at initial recognition is normally the transaction price i.e. the fair value of the consideration
given or received.
After initial recognition, an entity shall measure a financial asset either at amortised cost
or at fair value through profit and loss or fair value through other comprehensive income.
Here, the loan given to employee is not at market rate. Hence, the fair value of the loan
will not be equal to its initial loan proceeds. As per Ind AS 109, a financial instrument is
initially measured and recorded in the books at its fair value. Further, interest income to
be recognised in the Statement of Profit and Loss will be the finance income recognised at
effective rate of interest i.e. @ 10% and not the rate of interest charged by the company
i.e. @ 6%.
The correct accounting treatment as per Ind AS 109 will be as under:
For measuring the fair value or present value of the loan at initial recognition, market rate
of interest of similar loan is considered (level 1 observable input) ie @ 10%, to discount
the cash outflows.
The fair value of the loan shall be as follows:
Date Outstanding Principal Interest Total Discount PV
loan income inflow factor
@ 6% @ 10%
31 March 2021 15,00,000 3,00,000 90,000 3,90,000 0.909 3,54,510
31 March 2022 12,00,000 3,00,000 72,000 3,72,000 0.826 3,07,272
31 March 2023 9,00,000 3,00,000 54,000 3,54,000 0.751 2,65,854
31 March 2024 6,00,000 3,00,000 36,000 3,36,000 0.683 2,29,488
31 March 2025 3,00,000 3,00,000 18,000 3,18,000 0.621 1,97,478
Fair value of the loan 13,54,602

As per Ind AS 19, employee benefits are all forms of consideration given by an entity in
exchange for service rendered by employees or for termination of employment. Difference
of loan proceeds and present value of the loan (fair value) will be treated as prepaid
employee cost irrespective of the fact that employee is not required to give any specific
performance against this benefit. This is because employee is required to be in service of

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the company to continue availing the benefits of concessional rate of inte rest on housing
loan. Practically, once the employee leaves the organisation, they have to repay the
outstanding loan because the company provides the loan at concessional rate of interest
only to its employees.
Hence, it is an employee benefit given by the company to its employees. This deemed
employee cost of ` 1,45,398 (15,00,000 – 13,54,602) will be deferred and amortised over
the period of loan on straight line basis.
Calculation of amortised cost of loan to employees
Financial year Amortised Interest to be Repayment Amortised cost
ending on 31 March cost (opening recognised (including (closing
balance) @ 10% interest) balance)
2021 13,54,602 1,35,460 3,90,000 11,00,062
2022 11,00,062 1,10,006 3,72,000 8,38,068
2023 8,38,068 83,807 3,54,000 5,67,875
2024 5,67,875 56,788 3,36,000 2,88,663
2025 2,88,663 29,337* 3,18,000 -

* 2,88,663 x 10% = ` 28,866. Difference of ` 471 (29,337 – 28,866) is due to approximation

in computation.
Journal Entries to be recorded at every period end:
1. On 1 April 2020
Particulars Dr. Amount Cr. Amount
(`) (`)
Loan to employee A/c Dr. 13,54,602
Prepaid employee cost A/c Dr. 1,45,398
To Bank A/c 15,00,000
(Being loan asset recorded at initial fair value)
2. On 31 March 2021
Particulars Dr. Amount Cr. Amount
(`) (`)
Bank A/c Dr. 3,90,000
To Finance income A/c (profit and loss) @10% 1,35,460
To Loan to employee A/c 2,54,540

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 4 FINAL (NEW) EXAMINATION: NOVEMBER 2020

(Being first instalment of repayment of loan

accounted for using the amortised cost and
effective interest rate @ 10%)
Employee benefit cost (profit and loss) A/c Dr. 29,080
To Prepaid employee cost A/c (1,45,398/5) 29,080
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)
The Following housing loan balances should appear in the financial statements:
Extracts of Balance sheet of Star Ltd. as at 31 March 2021
Non-current asset
Financial asset
Loan to employee (11,00,062 – 3,72,000 + 1,10,006) 8,38,068
Other non-current asset
Prepaid employee cost 87,238
Current asset
Financial asset
Loan to employee (3,72,000-1,10,006) 2,61,994
Other current asset
Prepaid employee cost 29,080
Deferred tax on temporary differences arising on the above-mentioned account
balances (appearing in the balance sheet) should be recognised. However, in the
absence of any tax rate in the question no deferred tax has been recognised.
(b) (i) Basic Earnings per share
Year ended
31.3.2020
Net profit attributable to equity shareholders (A) ` 90,000
Number of equity shares outstanding (B) 16,000
Earnings per share (A/B) ` 5.625
(ii) Diluted earnings per share
Options are most dilutive as their earnings per incremental share is nil. Hence, for
the purpose of computation of diluted earnings per share, options will be considered
first. 10% convertible debentures being second most dilutive will be considered next
and thereafter convertible preference shares will be considered (as per W.N.).

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 PAPER – 1 : FINANCIAL REPORTING 5

Net profit No. of Net Profit

attributable to equity attributable
equity shares per share
shareholders `
`
Net profit attributable to equity 90,000 16,000 5.625
shareholders
Options 150
90,000 16,150 5.572 Dilutive
10% Convertible debentures 75,000 40,000
1,65,000 56,150 2.939 Dilutive
Convertible Preference Shares 72,900 15,000
2,37,900 71,150 3.344 Anti-Dilutive

Since diluted earnings per share is increased when taking the convertible preference
shares into account (` 2.939 to ` 3.344), the convertible preference shares are anti-
dilutive and are ignored in the calculation of diluted earnings per share for the year
ended 31 March 2020. Therefore, diluted earnings per share for the year ended
31 March 2020 is ` 2.939.
Working Note:
Calculation of incremental earnings per share and allocation of rank
Increase in Increase in Earnings per Rank
earnings number of incremental
equity shares share
(1) (2) (3) = (1) ÷ (2)
` `
Options
Increase in earnings Nil
No. of incremental shares issued
for no consideration 150 Nil 1
[900 x (90-75)/90]
Convertible Preference Shares
Increase in net profit attributable 72,900
to equity shareholders as
adjusted by attributable dividend
tax
[(` 9 x 7,500) + 8% (` 9 x 7,500)]
No. of incremental shares 15,000 4.86 3
(2 x 7,500)

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 6 FINAL (NEW) EXAMINATION: NOVEMBER 2020

10% Convertible Debentures

Increase in net profit 75,000
[(` 10,00,000 x 10% x (1 – 0.25)]
No. of incremental shares 40,000 1.875 2
(10,000 x 4)

Note: Grossing up of preference share dividend has been ignored here. At present
dividend distribution tax has been abolished. However, the question has been solved on
the basis of the information given in the question.
Question 2
(a) ABC Limited supplies plastic buckets to wholesaler customers. As per the contract
entered into between ABC Limited and a customer for the financial year 2019 -2020, the
price per plastic bucket will decrease retrospectively as sales volume increases within
the stipulated time of one year.
The price applicable for the entire sale will be based, on sales volume bracket during the
year.
Price per unit (INR) Sales volume
90 0 - 10,000 units
80 10,001 - 35,000 units
70 35,001 units & above
All transactions are made in cash.
(i) Suggest how revenue is to be recognised in the books of accounts of ABC Limited as
per expected value method, considering a probability of 15%, 75% and 10% for sales
volumes of 9,000 units, 28,000 units and 36,000 units respectively. For workings,
assume that ABC Limited achieved the same number of units of sales to the customer
during the year as initially estimated under expected value method for the financial
year 2019-2020.
(ii) In case ABC Limited decides to measure revenue, based on most likely meth od
instead of expected value method, how will be the revenue recognised in the books
of accounts of ABC Limited based on above available information? For workings,
assume that ABC Limited achieved the same number of units of sales to the customer
during the year as initially estimated under most likely value method for the financial
year 2019-2020.
(iii) You are required to pass Journal entries in the books of ABC Limited if the revenue
is accounted for as per expected value method for financial year 201 9-2020.
(14 Marks)

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(b) Lal Ltd. provides you the following information for financial year 2019-2020:
Estimated Income for the year ended 31 March 2020:
Gross Annual Income (inclusive of Estimated Capital Gains of ` 4,00,000) ` 16,50,000
Quarter I ` 3,50,000
Quarter II ` 4,00,000
Quarter III (including Estimated Capital Gains of ` 4,00,000) ` 6,00,000
Quarter IV ` 3,00,000

Tax Rates On Other Income First ` 2,50,000 20%

Balance Income 30%
On Capital Gains 12%
Calculate the tax expense for each quarter, assuming that there is no difference between
the estimated taxable income and the estimated accounting income. (6 Marks)
Answer
(a) (i) Determination of how revenue is to be recognised in the books of ABC Ltd. as
per expected value method
Calculation of probability weighted sales volume
Sales volume (units) Probability Probability-weighted sales volume (units)
9,000 15% 1,350
28,000 75% 21,000
36,000 10% 3,600
25,950
Calculation of probability weighted sales value
Sales volume Sales price per unit Probability Probability-weighted sales
(units) (`) value (`)
9,000 90 15% 1,21,500
28,000 80 75% 16,80,000
36,000 70 10% 2,52,000
20,53,500
Average unit price = Probability weighted sales value/ Probability weighted sales
volume
= 20,53,500 / 25,950 = ` 79.13 per unit

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 8 FINAL (NEW) EXAMINATION: NOVEMBER 2020

Revenue is recognised at ` 79.13 for each unit sold. First 10,000 units sold will be
booked at ` 90 per unit and liability is accrued for the difference price of ` 10.87 per
unit (` 90 – ` 79.13), which will be reversed upon subsequent sales of 15,950 units
(as the question states that ABC Ltd. achieved the same number of units of sales to
the customer during the year as initially estimated under the expected value method
for the financial year 2019-2020). For, subsequent sale of 15,950 units, contract
liability is accrued at ` 0.87 (80 – 79.13) per unit and revenue will be deferred.
(ii) Determination of how revenue is to be recognised in the books of ABC Ltd. as
per most likely method
Note: It is assumed that the sales volume of 28,000 units given under the expected
value method, with highest probability is the sales estimated under most likely method
too.
Transaction price will be:
28,000 units x ` 80 per unit = ` 22,40,000
Average unit price applicable = ` 80
First 10,000 units sold will be booked at ` 90 per unit and liability of ` 1,00,000 is
accrued for the difference price of ` 10 per unit (` 90 – ` 80), which will be reversed
upon subsequent sales of 18,000 units (as question states that ABC Ltd. achieved
the same number of units of sales to the customer during the year as initially
estimated under the most likely method for the financial year 2019-2020).
Note: Alternatively, the question may be solved based on 25,950 units (as calculated
under expected value method assuming that the targets were met) as follows:
Transaction price will be :
25,950 units x ` 80 per unit = ` 20,76,000
Average unit price applicable = ` 80.
First 10,000 units sold will be booked at ` 90 per unit and liability is accrued for the
difference price of ` 10 per unit (` 90 – ` 80), which will be reversed upon subsequent
sales of 15,950 units.
(iii) Journal Entries in the books of ABC Ltd.
(when revenue is accounted for as per expected value method for
financial year 2019-2020)
` `
1. Bank A/c (10,000 x ` 90) Dr. 9,00,000
To Revenue A/c (10,000 x ` 79.13) 7,91,300
To Liability (10,000 x ` 10.87) 1,08,700

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(Revenue recognised on sale of first 10,000

units)
2. Bank A/c [(25,950 x ` 80)- 9,00,000] Dr. 11,76,000
Liability Dr. 86,124
To Revenue A/c (15,950 x ` 79.13) 12,62,124
(Revenue recognised on sale of remaining
15,950 units (25,950 - 10,000). Amount paid
by the customer will be the balance amount
after adjusting the excess paid earlier since,
the customer falls now in second slab)
3. Liability (1,08,700 – 86,124) Dr. 22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
(On reversal of liability at the end of the
financial year 2019-2020 i.e. after
completion of stipulated time)
Alternatively, in place of first two entries, one consolidated entry may be passed
as follows:
Bank A/c (25,950 x ` 80) Dr. 20,76,000
To Revenue A/c (25,950 x ` 79.13) 20,53,424
To Liability (25,950 x ` 0.87) 22,576
(Revenue recognised on sale of 25,950 units)
Note: In 2nd journal entry, it is assumed that the customer had paid balance
amount of ` 11,76,000 after adjusting excess ` 1,00,000 paid with first lot of sale of
10,000 unit. However, one can pass journal entry with total sales value of ` 12,76,000
(15,950 units x ` 80 per unit) and later on pass third entry for refund. In such a
situation, alternatively, 2 nd and 3rd entries would be as follows:
Bank A/c (15,950 x ` 80) Dr. 12,76,000
To Revenue A/c (15,950 x ` 79.13) 12,62,124
To Liability 13,876
(Revenue recognised on sale of remaining
15,950 units (25,950 - 10,000))
Liability (1,08,700 + 13,876) Dr. 1,22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
To Bank 1,00,000
(On reversal of liability at the end of the
financial year 2019-2020 i.e. after completion of
stipulated time and excess amount refunded)

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 10 FINAL (NEW) EXAMINATION: NOVEMBER 2020

(b) As per Ind AS 34 ‘Interim Financial Reporting’, income tax expense is recognised in each
interim period based on the best estimate of the weighted average annual income tax rate
expected for the full financial year.
If different income tax rates apply to different categories of income (such as capital gains
or income earned in particular industries) to the extent practicable, a separate rate is
applied to each individual category of interim period pre-tax income.
`
Estimated annual income exclusive of estimated capital gain 12,50,000
(16,50,000 – 4,00,000) (A)
Tax expense on other income:
20% on ` 2,50,000 50,000
30% on remaining ` 10,00,000 3,00,000
(B) 3,50,000
B 3,50,000
Weighted average annual income tax rate = = = 28%
A 12,50,000

Tax expense to be recognised in each of the quarterly reports:

`
Quarter I - ` 3,50,000 x 28% 98,000
Quarter II - ` 4,00,000 x 28% 1,12,000
Quarter III - ` (6,00,000 - 4,00,000) x 28% 56,000
` 4,00,000 x 12% 48,000 1,04,000
Quarter IV - ` 3,00,000 x 28% 84,000
3,98,000

Question 3
(a) Venus Ltd. (Seller-lessee) sells a building to Mars Ltd. (Buyer-lessor) for cash of
` 28,00,000. Immediately before the transaction, the building is carried at a cost of
` 13,00,000. At the same time, Seller- lessee enters into a contract with Buyer-lessor for
the right to use the building for 20 years, with an annual payment of ` 2,00,000 payable at
the end of each year.
The terms and conditions of the transaction are such that the transfer of the building by
Seller-lessee satisfies the requirements for determining when a performance obligation is
satisfied in accordance with Ind AS 115 "Revenue from Contracts with Customers".

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 PAPER – 1 : FINANCIAL REPORTING 11

The fair value of the building at the date of sale is ` 25,00,000. Initial direct costs, if any,
are to be ignored. The interest rate implicit in the lease is 12% p.a., which is readily
determinable by Seller-lessee. Present Value (PV) of annual payments (20 payments of
` 2,00,000 each discounted @ 12%) is ` 14,94,000.
Buyer-lessor classifies the lease of the building as an operating lease. How should the
said transaction be accounted by Venus Ltd.? (8 Marks)
(b) Pacific Ocean Railway Ltd. has three Cash Generating units namely Train, Railway station
and Railway tracks, the carrying amounts of which as on 31 March 2020 are as follows:
Cash Generating units Carrying amount Remaining useful life
(` in crore)
Train 1,500 10
Railway station 2,250 20
Railway tracks 3,300 20
Pacific Ocean Railway Ltd. also has two Corporate Assets having a remaining useful life
of 20 years.
(` in crore)
Corporate Carrying Remarks
Assets amount
Land 1,800 The carrying amount of Land can be allocated on a
reasonable basis (i.e., pro rata basis) to the individual
cash generating units.
Buildings 600 The carrying amount of Buildings cannot be allocated on
a reasonable basis to the individual cash-generating
units.
Recoverable amount as on 31 March 2020 is as follows:
Cash Generating units Recoverable Amount
(` in crore)
Train 1,800
Railway station 2,700
Railway tracks 4,200
Company as a whole 9,600
Calculate the impairment loss, if any. Ignore decimals. (8 Marks)
(c) Sophia Ltd. has fabricated special equipment (Inverter panel) during the financial year
2018-2019 as per drawing and design supplied by the customer. However, due to a

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 12 FINAL (NEW) EXAMINATION: NOVEMBER 2020

liquidity crunch, the customer has requested the company for postponement in delivery
schedule and requested the company to withhold the delivery of finished products and
discontinue the production of balance items.
As a result of the above, the details of customer balance and the goods held by the
company as work-in-progress and finished goods as on 31 March 2020 are as follows:
Inverter panel (WIP) ` 255 lakhs
Inverter panel (Finished goods) ` 165 lakhs
Sundry Debtor (Inverter panel) ` 195 lakhs
The petition for winding up against the customer has been filed during the financial year
2019-2020 by Sophia Ltd.
You are required to Comment with explanation on provision to be made for ` 615 lakh
included in Sundry Debtors, Finished goods and Work-in-Progress in the financial
statement for the Financial year 2019-2020. (4 Marks)
Answer
(a) Considering facts of the case, Venus Ltd. (seller-lessee) and Mars Ltd. (buyer-lessor)
account for the transaction as a sale and leaseback.
Firstly, since the consideration for the sale of the building is not at fair value, Seller -lessee
and Buyer - lessor make adjustments to measure the sale proceeds at fair value. Thus,
the amount of the excess sale price of ` 3,00,000 (as calculated below) is recognised as
additional financing provided by Buyer-lessor to Seller-lessee.
Sale Price: 28,00,000
Less: Fair Value (at the date of sale): (25,00,000)
Additional financing provided by Buyer-lessor to Seller-lessee 3,00,000
The present value of the annual payments is ` 14,94,000 (as given in the question).
Out of this ` 14,94,000, ` 3,00,000 relates to the additional financing (as calculated
above) and balance ` 11,94,000 relates to the lease.
Accounting by Venus Ltd. (seller-lessee):
At the commencement date, Seller-lessee measures the ROU asset arising from the
leaseback of the building at the proportion of the previous carrying amount of the building
that relates to the right-of-use retained by Seller-lessee, calculated as follows:
Carrying Amount (A) 13,00,000
Fair Value (at the date of sale) (B) 25,00,000
Discounted lease payments for the 20 year ROU asset (C) 11,94,000
ROU Asset [(A / B) x C] 6,20,880

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Seller-lessee recognises only the amount of the gain that relates to the rights transferred
to Buyer-lessor, calculated as follows:
Fair Value (at the date of sale) (A) 25,00,000
Carrying Amount (B) 13,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
Gain on sale of building (D) = (A - B) 12,00,000
Relating to the right to use the building retained by Seller-lessee (E)=[(D/A)xC] 5,73,120
Relating to the rights transferred to Buyer-lessor (D - E) 6,26,880
At the commencement date, Seller-lessee accounts for the transaction, as follows:
Bank / Cash A/c Dr. 28,00,000
ROU Asset A/c Dr. 6,20,880
To Building 13,00,000
To Financial Liability 14,94,000
To Gain on rights transferred 6,26,880
(b) Allocation of corporate assets
The carrying amount of land is allocated to the carrying amount of each individual cash
generating unit. A weighted allocation basis is used because the estimated remaining
useful life of Train’s cash-generating unit is 10 years, whereas the estimated remaining
useful lives of Railway station and Railway tracks’s cash-generating units are 20 years.
(` in crore)
Particulars Train Railway station Railway tracks Total
Carrying amount (a) 1,500 2,250 3,300 7,050
Useful life 10 years 20 years 20 years -
Weight based on 1 2 2 -
useful life
Carrying amount 1,500 4,500 6,600 12,600
(after assigning
weight)
Pro-rata allocation 12% 36% 52% 100%
of Land (1,500/12,600) (4,500/12,600) (6,600/12,600)
Allocation of 216 648 936 1,800
carrying amount of
Land (b)

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 14 FINAL (NEW) EXAMINATION: NOVEMBER 2020

Carrying amount 1,716 2,898 4,236 8,850

(after allocation of
Land) (a+b)
Calculation of impairment loss
Step I: Impairment losses for individual cash-generating units and its allocation:
(a) Impairment loss of each cash-generating units
(` in crore)
Particulars Train Railway Railway
station tracks
Carrying amount (after allocation of land) 1,716 2,898 4,236
Recoverable amount 1,800 2,700 4,200
Impairment loss - 198 36
(b) Allocation of the impairment loss
(` in crore)
Allocation to Railway Railway
station tracks
Land 44 [198 x (648 / 8 [36 x (936 /
2,898)] 4,236)]
Other assets in cash- [198 x 2,250 / [36 x (3,300/
generating units 154 2,898)] 28 4,236)]
Impairment loss 198 36
Step II: Impairment losses for the larger cash-generating unit, i.e., Pacific Ocean
Railway Ltd. as a whole
(` in crore)
Particulars Train Railway Railway Land Building Pacific Ocean
station tracks Railway Ltd.
Carrying amount 1,500 2,250 3,300 1,800 600 9,450
Impairment loss (Step I) - (154) (28) (52) - (234)
Carrying amount (after 1,500 2,096 3,272 1,748 600 9,216
Step I)
Recoverable amount 9,600
Impairment loss for the ‘larger’ cash-generating unit Nil

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(c) Sophia Ltd. is a manufacturer of inverter panel. As per Ind AS 2 ‘Inventories’, 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. Therefore, inverter panel held in its
stock will be considered as its inventory. Further, as per the standard, inventory at the end
of the year is to be valued at lower of cost or NRV.
As the customer has postponed the delivery schedule due to liquidity crunch the entire cost
incurred for inverter panel which were to be supplied has been shown in Inventory. The
inverter panel are in the possession of the Company which can be sold in the market.
Hence company should value such inventory as per principle laid down in Ind AS 2 i.e.
lower of Cost or NRV. Though, the goods were produced as per specifications of the buyer
the Company should determine the NRV of these goods in the market and value the goods
accordingly. Change in value of such inverter panel should be provided for in the books.
In the absence of the NRV of WIP and Finished product given in the ques tion, assuming
that cost is lower, the company shall value its inventory as per Ind AS 2 at ` 420 lakhs [i.e
inverter panel (WIP) ` 255 lakhs + inverter panel (finished products) ` 165 lakhs].
Alternatively, if it is assumed that there is no buyer for such fabricated inverter panel, then
the NRV will be Nil. In such a case, full value of finished goods and WIP will be provided
for in the books.
As regards balance of Sundry Debtors, since the Company has filed a petition for winding
up against the customer in 2019-2020, it is probable that amount is not recoverable from
the party. Hence, the provision for doubtful debts for ` 195 lakhs shall be made in the
books against the amount of debtors.
Question 4
(a) On 1 April 2019, 8% convertible loan with a nominal value of ` 12,00,000 was issued at
par by Cargo Ltd. It is redeemable on 31 March 2023 also at par. Alternatively, it may be
converted into equity shares on the basis of 100 new shares for each ` 200 worth of loan.
An equivalent loan without the conversion option would have carried interest at 10%.
Interest of ` 96,000 has already been paid and included as a finance cost.
Present Value (PV) rates are as follows:
Year End @ 8% @ 10%
1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
4 0.73 0.68

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 16 FINAL (NEW) EXAMINATION: NOVEMBER 2020

How will the Company present the above loan notes in the financial statements for the year
ended 31 March 2020? (6 Marks)
(b) John Limited has identified four segments for which revenue data is given as per below:
External Sale Internal Sale Total
(`) (`) (`)
Segment A 4,00,000 Nil 4,00,000
Segment B 80,000 Nil 80,000
Segment C 90,000 20,000 1,10,000
Segment D 70,000 6,20,000 6,90,000
Total sales 6,40,000 6,40,000 12,80,000
The following additional information is available with respect to John Limited:
Segment C is a high growing business and management expects that this segment to make
a significant contribution to external revenue in coming years.
Discuss, which of the segments would be reportable under the threshold criteria identified
in Ind AS 108 and why? (6 Marks)
(c) P Limited and S Limited are in business of manufacturing garments. P Limited holds 30%
of equity shares of S Limited for last several years. P Limited obtains control of S Limited
when it acquires further 65% stake of S Limited's shares, thereby resulting in a total holding
of 95% on 31 December 2019. The acquisition had the following features:
(i) P Limited transfers cash of ` 50,00,000 and issues 90,000 shares on
31 December 2019. The market price of P Limited's shares on the date of issue was
` 10 per share. The equity shares issued as per this transaction will comprise 5% of
the post-acquisition capital of P Limited.
(ii) P Limited agrees to pay additional consideration of ` 4,00,000, if the cumulative
profits of S Limited exceeds ` 40,00,000 over the next two years. At the acquisition
date, it is not considered probable that extra consideration will be paid. The fair value
of contingent consideration is determined to be ` 2,00,000 at the acquisition date.
(iii) P Limited spent acquisition-related costs of ` 2,00,000.
(iv) The fair value of the NCI is determined to be ` 5,00,000 at the acquisition date based
on market price. P Limited decided to measure non-controlling interest at fair value
for this transaction.
(v) P Limited has owned 30% of the shares in S Limited for several years. At
31 December 20.19, the investment is included in P Limited's consolidated balance
sheet at ` 8,00,000. The fair value of previous holdings accounted for using the
equity method is arrived at ` 18,00,000.

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The fair value of S Limited's net identifiable assets at 31 December 2019 is ` 45,00,000,
determined in accordance with Ind AS 103.
Analyze the transaction and determine the accounting under acquisition method for the
business combination by P Limited. (8 Marks)
Answer
(a) There are both ‘equity’ and ‘debt’ features in the instrument. An obligation to pay cash i.e.
interest at 8% per annum and a redemption amount will be treated as ‘financial liability’
while option to convert the loan into equity shares is the equity element in the instrument.
Therefore, convertible loan is a compound financial instrument.
Calculation of debt and equity component and amount to be recognised in the books:
S. No Year Interest amount Discounting factor Amount
@ 8% @ 10%
Year 1 2020 96,000 0.91 87,360
Year 2 2021 96,000 0.83 79,680
Year 3 2022 96,000 0.75 72,000
Year 4 2023 12,96,000* 0.68 8,81,280
Amount to be recognised as a liability 11,20,320
Initial proceeds (12,00,000)
Amount to be recognised as equity 79,680
* In year 4, the loan note will be redeemed; therefore, the cash outflow would be
` 12,96,000 (` 12,00,000 + ` 96,000).
Presentation in the Financial Statements:
In Statement of Profit and Loss for the year ended on 31 March 2020
Finance cost to be recognised in the Statement of Profit and Loss ` 1,12,032
(11,20,320 x 10%)
Less: Already charged to the income statement (` 96,000)
Additional finance charge required to be recognised in the Statement of
Profit and Loss ` 16,032
In Balance Sheet as at 31 March 2020
Equity and Liabilities
Equity
Other Equity (8% convertible loan) 79,680
Non-current liability
Financial liability [8% convertible loan – [(11,20,320 + 1,12,032 – 96,000)] 11,36,352

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 18 FINAL (NEW) EXAMINATION: NOVEMBER 2020

(b) Threshold amount of 10% of total revenue is ` 1,28,000 (` 12,80,000 × 10%).

Segment A exceeds the quantitative threshold (` 4,00,000 > ` 1,28,000) and hence is a
reportable segment.
Segment D exceeds the quantitative threshold (` 6,90,000 > ` 1,28,000) and hence is a
reportable segment.
Segment B & C do not meet the quantitative threshold amount and may not be classified
as reportable segment.
However, the total external revenue generated by these two segments A & D represent
only 73.44% (` 4,70,000 / 6,40,000 x 100) of the entity’s total external revenue. If the total
external revenue reported by operating segments constitutes less than 75% of the entity’s
total external revenue, additional operating segments should be identified as reportable
segments until at least 75% of the revenue is included in reportable segments.
In case of John Limited, it is given that Segment C is a high growing bus iness and
management expects this segment to make a significant contribution to external revenue
in coming years. In accordance with the requirement of Ind AS 108, John Limited may
designate segment C as a reportable segment, making the total external rev enue
attributable to reportable segments be 87.5% (` 5,60,000/ 6,40,000 x 100) of total entity’s
external revenue.
In this situation, Segments A, C and D will be reportable segments and Segment B will be
shown as other segment.
Alternatively, Segment B may be considered as a reportable segment instead of Segment
C, based on the choice of John Ltd. ‘s management, if it meets the definition of operating
segment.
If Segment B is considered as reportable segment, external revenue reported will be
` 4,00,000 + ` 80,000 + ` 70,000 = ` 5,50,000
% of Total External Revenue = ` 5,50,000 / ` 6,40,000 = 85.94%
Segments A, B and D will be reportable segments and Segment C will be shown as other
segment.
(c) Identify the acquirer
In this case, P Limited has paid cash consideration to shareholders of S Limited. Further,
the shares issued to S Limited pursuant to the acquisition do not transfer control of
P Limited to erstwhile shareholders of S Limited. Therefore, P Limited is the acquirer and
S Limited is the acquiree.
Determine acquisition date
As the control over the business of S Limited is transferred to P Limited on
31 December 2019, that date is considered as the acquisition date.

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Determine the purchase consideration

The purchase consideration in this case will comprise of the following:
Cash consideration ` 50,00,000
Equity shares issued (90,000 x 10 i.e., at fair value) ` 9,00,000
Contingent consideration (at fair value) ` 2,00,000
Fair value of previously held interest ` 18,00,000
Total purchase consideration ` 79,00,000
Acquisition cost incurred by and on behalf of P Limited for acquisition of S Limited should
be recognised in the Statement of Profit and Loss. As such, an amount of ` 2,00,000
should be recognised in the Statement of Profit and Loss.
Fair value of identifiable assets and liabilities
The fair value of identifiable net assets (as given in the question ) ` 45,00,000.
Non-Controlling Interest
The management has decided to recognise NCI at its fair value, which is given in the
question as ` 5,00,000.
Re-measure previously held interests in case business combination is achieved in
stages
In this case, the control has been acquired in stages i.e., before acquisition to control,
P Limited exercised significant influence over S Limited. As such, the previously held
interest should be measured at fair value and the difference between the fair value and the
carrying amount as at the acquisition date should be recognised in the Statement of Profit
and Loss. As such, an amount of ` 10,00,000 (i.e. 18,00,000 – 8,00,000) will be
recognised in the Statement of Profit and Loss.
Determination of goodwill or gain on bargain purchase
Goodwill should be calculated as follows: (`)
Total consideration 79,00,000
Recognised amount of any non-controlling interest 5,00,000
Less: Fair value of net identifiable assets (45,00,000)
Goodwill 39,00,000
Question 5
(a) Diamond Pvt. Ltd, has a headcount of around 1,000 employees in the organisation in
financial year 2019-2020. As per the company's policy, the employees are given 35 days
of privilege leave (PL), 15 days of sick leave (SL) and 10 days of casual leave. Out of the

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total PL and sick leave, 10 PL leave and 5 sick leave can be carried forward to next year.
On the basis of past trends, it has been noted that 200 employees will take 5 days of PL
and 2 days of SL and 800 employees will avail 10 days of PL and 5 days of SL.
Also the company has been earning profits since 2010. It has decided in financial year
2019-2020 to distribute profits to its employees @ 4% during the year. However, due to
the employee turnover in the organisation, the expected pay-out of the Diamond Pvt. Ltd.
is expected to be around 3.5%. The profits earned during the financial year 2019-2020 are
` 4,000 crores.
Diamond Pvt. Ltd. has a post-employment benefit plan which is in the nature of defined
contribution plan where contribution to the fund amounts to ` 200 crores which will fall due
within 12 months from the end of accounting period.
The company has paid ` 40 crores to this plan in financial year 2019-2020.
What would be the treatment of the short-term compensating absences, profit-sharing plan
and the defined contribution plan in the books of Diamond Pvt. Ltd.? (6 Marks)
(b) Entity A acquired a subsidiary, Entity B, during the year ended 31 March 2020.
Summarised information from the Consolidated Statement of Profit and Loss and Balance
Sheet is provided, together with some supplementary information.
Consolidated Statement of Profit and Loss for the year ended 31 March 2020.
Amount (`)
Revenue 1,90,000
Cost of sales (1,10,000)
Gross profit 80,000
Depreciation (15,000)
Other operating expenses (28,000)
Interest cost (2,000)
Profit before taxation 35,000
Taxation (7,500)
Profit after taxation 27,500
Consolidated Balance Sheet
31 March 2020 31 March 2019
Amount (`) Amount (`)
Assets
Cash and cash equivalents 4,000 2,500
Trade receivables 27,000 25,000

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Inventories 15,000 17,500

Property, plant and equipment 80,000 40,000
Goodwill 9,000 -
Total assets 1,35,000 85,000
Liabilities
Trade payables 34,000 30,000
Income tax payable 6,000 5,500
Long term debt 50,000 32,000
Total outside liabilities 90,000 67,500
Shareholders' equity 45,000 17,500
Total liabilities & shareholders' equity 1,35,000 85,000
Other information:
All of the shares of entity B were acquired for ` 37,000 in cash. The fair values of assets
acquired and liabilities assumed were:
Particulars Amount `)
Inventories 2,000
Trade receivables 4,000
Cash 1,000
Property, plant and equipment 55,000
Trade payables (16,000)
Long term debt (18,000)
Goodwill 9,000
Cash consideration paid 37,000
You are required to prepare the Consolidated Statement of Cash Flows for the financial
year ended 31 March 2020 in accordance with Ind AS 7. (8 Marks)
(c) Entity H holds a 20% equity interest in Entity S (an associate) that in tu rn has a 100%
equity interest in Entity T. Entity S recognised net assets relating to Entity T of ` 10,000
in its consolidated financial statements. Entity S sells 20% of its interest in Entity T to a
third party (a non-controlling shareholder) for ` 3,000 and recognises this transaction as
an equity transaction in accordance with the provisions of Ind AS 110, resulting in a credit
in Entity S's equity of ` 1,000.
The financial statements of Entity H and Entity S are summarised as follows before and
after the transaction:

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 22 FINAL (NEW) EXAMINATION: NOVEMBER 2020

Before
H's consolidated financial statements
Assets (` ) Liabilities (` )
Investment in S 2,000 Equity 2,000
Total 2,000 Total 2,000

S's consolidated financial statements

Assets (`) Liabilities (`)
Assets (from T) 10,000 Equity 10,000
Total 10,000 Total 10,000
The financial statements of S after the transaction are summarised below:
After
S's consolidated financial statements
Assets (` ) Liabilities (` )
Assets (from T) 10,000 Equity 10,000
Cash 3,000 Equity transaction Impact
with non- controlling interest 1,000
Equity attributable to owners 11,000
Non-controlling interest 2,000
Total 13,000 Total 13,000
Although Entity H did not participate in the transaction, Entity H's share of net assets in
Entity S increased as a result of the sale of S's 20% interest in T. Effectively, H's share
in S's net assets is now ` 2,200 (20% of ` 11,000) i.e., ` 200 in addition to its previous
share.
How this equity transaction that is recognised in the financial statements of Entity S
reflected in the consolidated financial statements of Entity H that uses the equity method
to account for its investment in Entity S? (6 Marks)
Answer
(a) (i) Treatment of short term compensating absences: Diamond Pvt. Ltd. will recognise
a liability in its books to the extent of 5 days of PL for 200 employees and 10 days of
PL for remaining 800 employees and 2 days of SL for 200 employees and 5 days of
SL for remaining 800 employees in its books as an unused entitlement that has
accumulated in 2019-2020 as short-term compensated absences.

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(ii) Treatment of profit sharing plan: Diamond Pvt. Ltd. will recognise ` 140 crores
(4,000 x 3.5%) as a liability and expense in its books of account.
(iii) Treatment of defined contribution plan: When an employee has rendered service
to an entity during a period, the entity shall recognise the contributi on payable to a
defined contribution plan in exchange for that service.
Under Ind AS 19, the amount of ` 160 crores (200-40) will be recognised as a liability
(accrued expense), after deducting any contribution already paid i.e. ` 40 crores (with
contribution of ` 200 crores to the plan) and an expense in the statement of profit and
loss.
It can also be seen that the contributions are payable within 12 months from the end
of the year in which the employees render the related service; hence, they will not be
discounted.
(b) Statement of Cash Flows for the year ended 31 March 2020
Amount Amount
(`) (`)
Cash flows from operating activities
Profit before taxation 35,000
Adjustments for non-cash items:
Depreciation 15,000
Decrease in inventories (W.N. 1) 4,500
Decrease in trade receivables (W.N. 2) 2,000
Decrease in trade payables (W.N. 3) (12,000)
Interest paid to be included in financing activities 2,000
Taxation (5,500 + 7,500 – 6,000) (7,000)
Net cash generated from operating activities 39,500
Cash flows from investing activities
Cash paid to acquire subsidiary (37,000 – 1,000) (36,000)
Net cash outflow from investing activities (36,000)
Cash flows from financing activities
Interest paid (2,000)
Net cash outflow from financing activities (2,000)
Increase in cash and cash equivalents during the year 1,500
Cash and cash equivalents at the beginning of the year 2,500
Cash and cash equivalents at the end of the year 4,000

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Working Notes:
1. Calculation of change in inventory during the year `
Total inventories of the Group at the end of the year 15,000
Inventories acquired during the year from subsidiary (2,000)
13,000
Opening inventories (17,500)
Decrease in inventories (4,500)
2. Calculation of change in Trade Receivables during the year `
Total trade receivables of the Group at the end of the year 27,000
Trade receivables acquired during the year from subsidiary (4,000)
23,000
Opening trade receivables (25,000)
Decrease in trade receivables (2,000)
3. Calculation of change in Trade Payables during the year `
Trade payables at the end of the year 34,000
Trade payables of the subsidiary assumed during the year (16,000)
18,000
Opening trade payables (30,000)
Decrease in trade payables (12,000)
4. Calculation of change in Property, plant and equipment (PPE) `
during the year
Total PPE balance of the Group at the end of the year 80,000
Less: PPE of the subsidiary acquired during the year (55,000)
25,000
Add: Depreciation 15,000
Closing balance of PPE (before depreciation) 40,000
Opening balance of PPE 40,000
Net change in PPE Nil
5. Calculation of change in Long term debt during the year `
Total long-term debt of the Group at the end of the year 50,000
Less: Long term debt of the subsidiary assumed during the year (18,000)
32,000

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Opening balance of long-term debt 32,000

Net change in long term debt Nil
6. Calculation of change in Shareholders’ equity during the year `
Opening balance 17,500
Profit during the year 27,500
45,000
Closing balance 45,000
Net change in shareholders’ equity Nil
(c) Ind AS 28 defines the equity method as “a method of accounting whereby the
investment is initially recognised at cost and adjusted thereafter for the post -acquisition
change in the investor’s share of the investee’s net assets. The investor’s profit or lo ss
includes its share of the investee’s profit or loss and the investor’s other comprehensive
income includes its share of the investee’s other comprehensive income.”
Ind AS 28, states, inter alia, that when an associate or joint venture has subsidiaries,
associates or joint ventures, the profit or loss, other comprehensive income, and net assets
taken into account in applying the equity method are those recognised in the associate’s
or joint venture’s financial statements (including the associate’s or joint venture’s share of
the profit or loss, other comprehensive income and net assets of its associates and joint
ventures), after any adjustments necessary to give effect to uniform accounting policies.
The change of interest in the net assets / equity of the associate as a result of the investee’s
equity transaction is reflected in the investor’s financial statements as ‘share of other
changes in equity of investee’ (in the statement of changes in equity) instead of gain in
Statement of profit and loss, since it reflects the post-acquisition change in the net assets
of the investee as per the provisions of Ind AS 28 and also faithfully reflects the investor’s
share of the associate’s transaction as presented in the associate’s consolidated financial
statements.
Thus, in the given case, Entity H recognises ` 200 as change in other equity instead of in
statement of profit and loss and maintains the same classification as of its associate, Entity
S, i.e., a direct credit to equity as in its consolidated financial statements.
Question 6
(a) Nest Ltd. issued 10,000 Share Appreciation Rights (SARs) that vest immediately to its
employees on 1 April 2017. The SARs will be settled in cash. Using an option pricing
model, at that date it is estimated that the fair value of a SAR is ` 100. SAR can be
exercised any time until 31 March 2020. It is expected that out of the total employees,
94% at the end of period on 31 March 2018, 91% at the end of next year will exercise the
option.

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 26 FINAL (NEW) EXAMINATION: NOVEMBER 2020

Finally, when these were vested  i.e. at the end of the 3rd year, only 85% of the total
employees exercised the option.
Fair value of SAR `
31 March 2018 132
31 March 2019 139
31 March 2020 141
You are required to pass the Journal entries to show the effect of the above transaction.
(5 Marks)
(b) Parent Limited, prepares consolidated financial statements of the group on 31 March every
year. During the year ended 31 March 2020, the following events affected the tax position
of the group:
(i) S Limited, a wholly owned subsidiary of Parent Limited, incurred a loss of ` 20,00,000
which is adjustable from future taxable profits of the company for tax purposes.
S Limited is unable to utilize this loss against previous tax liabilities. Income Tax Act
does not allow S Limited to transfer the tax loss to other group companies. However,
it allows S Limited to carry forward the loss and utilize it against company's future
taxable profits. The directors of Parent Limited estimate that S Limited will not make
any taxable profits in the foreseeable future.
(ii) On 1 April 2019, Parent Limited borrowed ` 50,00,000. The cost incurred by Parent
Limited for arranging the borrowing was ` 1,00,000 on the said date and this
expenditure is qualified for deduction under the Income Tax Act for the accounting
year 2019-2020. The loan was given for a three-year period. As per agreement, no
principal or interest was payable on the loan during the tenure of loan but the amount
repayable on 31 March 2022 will be by way of a bullet payment of ` 65,21,900. As
per Parent Limited, this equates to an effective annual interest rate of 10% on loan.
As per the Income-tax Act, a further expense of ` 15,21,900 will be claimable from
taxable income till the loan is repaid on 31 March 2022.
The rate of corporate income tax to be assumed @ 20%.
Explain and show how each of these events would affect the deferred tax
assets/liabilities in the consolidated balance sheet of Parent Limited as at
31 March 2020 as per applicable Ind AS.
You are also required to examine whether the effective rate of interest arrived at by
Parent Limited for the loan of ` 50,00,000 is in accordance with applicable Ind AS or
not? (6 Marks)


PS: Read ‘vested’ as ‘exercised’.

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(c) Royal Ltd. is a company which has a net worth of ` 200 crore engaged in the manufacturing
of rubber products. The sales of the company are badly affected due to pandemic during
the Financial year 2019-2020.
Relevant financial details of the following financial years are as follows: (` in crore)
Particulars 31 March 2020 (Current 31 March 31 March 31 March
year) estimated 2019 2018 2017
Net Profit 3.00 8.50 4.00 3.00
Sales (turnover) 850 950 900 800
During the pandemic period (till 31 March 2020) various commercial activities were
undertaken with considerable concessions/discounts, along the related affected areas. The
management intends to highlight the expenditure incurred on such activities as expenditure
incurred, on activities undertaken to discharge corporate social responsibility, while
publishing its financial statements for the year 2019-2020.
You are requested to advise CFO of Royal Ltd on the below points along with reasons for
your advise:
(i) Whether the Company has an obligation to form a CSR committee since the
applicability criteria are not satisfied in the current financial year?
(ii) The accounting of expenditure during the pandemic period is to be treated as
expenditure on CSR in the financial statement according to the view of the accountant
of the company. (5 Marks)
(d) Entity K is owned by three institutional investors - M Limited, N Limited and C Limited -
holding 40%, 40% and 20% equity interest respectively. A contractual arrangement
between M Limited and N Limited gives them joint control over the relevant activitie s of
Entity K. It is determined that Entity K is a joint operation (and not a joint venture).
C Limited is not a party to the arrangement between M Limited and N Limited. However,
like M Limited and N Limited, C Limited also has rights to the assets, and obligations for
the liabilities, relating to the joint operation in proportion of its equity interest in Entity K.
Would the manner of accounting to be followed by M Limited and N Limited on the one
hand and C Limited on the other in respect of their respective interests in Entity K be the
same or different?
You are required to explain in light of the relevant provisions in the relevant standard in
this regard. (4 Marks)
OR
An entity negotiates with major airlines to purchase tickets at reduced rates c ompared with
the price of tickets sold directly by the airlines to the public. The entity agrees to buy a
specific number of tickets and will pay for those tickets even if it is not able to resell them.
The reduced rate paid by the entity for each ticket purchased is negotiated and agreed in

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advance. The entity determines the prices at which the airline tickets will be sold to its
customers. The entity sells the tickets and collects the consideration from customers when
the tickets are sold; therefore, there is no credit risk to the entity.
The entity also assists the customers in resolving complaints with the service provided by
airlines.
However, each airline is responsible for fulfilling obligations associated with the ticket,
including remedies to a customer for dissatisfaction with the service.
Determine whether the entity is a principal or an agent with suitable explanation in light
with the provisions given in the relevant standard. (4 Marks)
Answer
(a) Table showing amount of expense to be charged each year
Period Fair To be vested Cumulative Expense
value
a b c= a x b x 10,000 d = c-prev. period c
1 April 2017 100 100% 10,00,000 10,00,000
31 March 2018 132 94% 12,40,800 2,40,800
31 March 2019 139 91% 12,64,900 24,100
31 March 2020 141 85% 11,98,500 (66,400)
11,98,500
Journal Entries
1 April 2017
Employee benefits expenses Dr. 10,00,000
To Share based payment liability 10,00,000
(Fair value of the SAR recognized)
31 March 2018
Employee benefits expenses Dr. 2,40,800
To Share based payment liability 2,40,800
(Fair value of the SAR re-measured)
31 March 2019
Employee benefits expenses Dr. 24,100
To Share based payment liability 24,100
(Fair value of the SAR re-measured)

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31 March 2020
Share based payment liability Dr. 66,400
To Employee benefits expenses 66,400
(Fair value of the SAR remeasured and reversed)
Share based payment liability Dr. 11,98,500
To Cash/Bank 11,98,500
(Settlement of SAR)
(b) (i) The tax loss creates a potential deferred tax asset for the group since its carrying
value is nil and its tax base is ` 20,00,000.
However, no deferred tax asset can be recognised because there is no prospect of
being able to reduce tax liabilities in the foreseeable future as no taxable profits are
anticipated.
(ii) The carrying value of the loan at 31 March 2020 is ` 53,90,000 (` 50,00,000 –
` 1,00,000 + (` 49,00,000 x 10%)).
The tax base of the loan is ` 50,00,000.
This creates a deductible temporary difference of ` 3,90,000 (` 53,90,000 –
` 50,00,000) and a potential deferred tax asset of ` 78,000 (` 3,90,000 x 20%).
If there are prospects of availability of taxable profits in future, deferred tax asset can
be recognised.
Amortisation Table for verification of effective rate of interest
Year Opening balance (`) Interest @ 10% (`) Closing balance (`)
(A) (B) (A) + (B)
1 (50,00,000 – 1,00,000) 49,00,000 4,90,000 53,90,000
2 53,90,000 5,39,000 59,29,000
3 59,29,000 5,92,900 65,21,900
Since the closing balance calculated as per the above table on the basis of 10%
matches with the bullet payment of ` 65,21,900, it assures that 10% rate of interest
taken as effective rate of interest is correct and is in accordance with Ind AS 109. It
considers the impact of cost of borrowing adjusted from the loan amount at initial
recognition.
(c) (i) A company which meets the net worth, turnover or net profits criteria in immediate
preceding financial year will need to constitute a CSR Committee and comply with
provisions of sections 135(2) to (5) read with the CSR Rules.

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As per the criteria to constitute CSR committee -

(1) Net worth should be greater than or equal to ` 500 Crore: This criterion is not
satisfied as per the facts given in the question.
(2) Sales should be greater than or equal to ` 1000 Crore: This criterion is not
satisfied as per the facts given in the question.
(3) Net profit should be greater than or equal to ` 5 Crore: as per the facts given in
the question, this criterion is satisfied in financial year ended 31 March 2019 i.e.
immediate preceding financial year.
Hence, the Company will be required to form a CSR committee.
(ii) The Companies Act, 2013 mandated the corporate entities that the expenditure
incurred for Corporate Social Responsibility (CSR) should not be the expenditure
incurred for the activities in the ordinary course of business. If expenditure incurred
is for the activities in the ordinary course of business, then it will not be qualified as
expenditure incurred on CSR activities.
Further, it is presumed that the commercial activities performed at concessional rates
are the activities done in the ordinary course of business of the company other than
the activities defined in Schedule VII of the Companies Act, 2013. Therefore, the
treatment done by the Management by showing the expenditure incurred on such
commercial activities in its financial statements as the expenditure incurred on
activities undertaken to discharge CSR, is not correct.
(d) EITHER
Ind AS 111 states that a joint operator shall recognise in relation to its interest in a joint
operation:
(a) its assets, including its share of any assets held jointly;
(b) its liabilities, including its share of any liabilities incurred jointly;
(c) its revenue from the sale of its share of the output arising from the joint operation;
(d) its share of the revenue from the sale of the output by the joint operation; and
(e) its expenses, including its share of any expenses incurred jointly.
A joint operator shall account for the assets, liabilities, revenues and expenses relating to
its interest in a joint operation in accordance with the Ind AS app licable to the particular
assets, liabilities, revenues and expenses.
Further, Ind AS 111 states that a party that participates in, but does not have joint control
of a joint operation shall also account for its interest in the arrangement in accordance w ith
above provisions of the standard, if that party has rights to the assets, and obligations for
the liabilities, relating to the joint operation.

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In the given case, all three investors (M Limited, N Limited and C Limited) share in the
assets and liabilities of the joint operation in proportion of their respective equity interest.
Accordingly, both M Limited and N Limited (which have joint control) and C Limited
(which does not have joint control but participates) shall recognise their interest in joint
operation as per above guidance while accounting for their respective interests in Entity
K in their respective separate financial statements as well as in the consolidated financial
statements.
OR
To determine whether the entity’s performance obligation is to provide the specified goods
or services itself (i.e. the entity is a principal) or to arrange for another party to provide
those goods or services (i.e. the entity is an agent), the entity considers the nature of its
promise as per Ind AS 115.
The entity determines that its promise is to provide the customer with a ticket, which
provides the right to fly on the specified flight or another flight if the specified flight is
changed or cancelled. The entity considers the following indicators for assessment as
principal or agent under the contract with the customers:
(a) the entity is primarily responsible for fulfilling the contract, which is providing the right
to fly. However, the entity is not responsible for providing the flight itself, which will
be provided by the airline.
(b) the entity has inventory risk for the tickets because they are purchased before they
are sold to the entity’s customers and the entity is exposed to any loss as a result of
not being able to sell the tickets for more than the entity’s cost.
(c) the entity has discretion in setting the sales prices for tickets to its customers.
The entity concludes that its promise is to provide a ticket (i.e. a right to fly) to the customer.
On the basis of the indicators, the entity concludes that it controls the ticket before it is
transferred to the customer. Thus, the entity concludes that it is a principal in the
transaction and recognises revenue in the gross amount of consideration to which it is
entitled in exchange for the tickets transferred.

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