CA Final – Financial Reporting Test Series

CA Final - Financial Reporting

(Test on IND AS 36 & 105)
(FRWITHAK)

Total - 30 Marks
Time Allotted – 1 Hr

Important Points:
1. There is no use of just referring the question paper to check whether it is manageable.
Everything feels manageable until you solve it

2. Try to Complete the Question Paper within the given time limit

3. Read the question carefully and see what is asked in the question. Give Reference of IND AS
& Concept wherever you feel necessary

4. You are not required to match your answer word to word with ICAI. You can answer in your
own words alongwith keywords and appropriate working.

5. Don’t refer the solution of any question until you have completed the paper

6. Its fine if you are not able to recall few points. Solve how much you can & after test is over do
self evaluation and mark the areas which you were not able to recall.

BEST OF LUCK GUYS

#FRwithAK

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 CA Final – Financial Reporting Test Series
Question 1 (8 Marks)
On 1stApril 20X1, Venus ltd acquired 100% of Saturn ltd for ₹4,00,000. The fair value of the net identifiable
assets of Saturn ltd was ₹3,20,000 and goodwill was ₹80,000. Saturn ltd is in coal mining business. On 31 st
March, 20X3 the government has cancelled licenses given to it in few states.
As a result, Saturn’s ltd revenue is estimated to get reduce by 30%. The adverse change in market place
and regulatory conditions is an indicator of impairment. As a result, Venus ltd has to estimate the
recoverable amount of goodwill and net assets of Saturn Ltd. on 31st March, 20X3.
Venus ltd uses straight line depreciation. The useful life of Saturn’s ltd assets is estimated to be 20 years
with no residual value. No independent cash inflows can be identified to any individual assets. So the entire
operation of Saturn ltd is to be treated as a CGU. Due to the regulatory entangle it is not possible to
determine the selling price of Saturn ltd as a CGU. Its value in use is estimated by the management at
₹2,12,000.
Suppose by 31st March, 20X5 the government reinstates the licenses of Saturn Ltd. The management
expects a favourable change in net cash flows. This is an indicator that an impairment loss may have
reversed. The recoverable amount of Saturn’s ltd net asset is re- estimated. The value in use is expected to
be ₹3,04,000 and net selling price is expected to be ₹2,90,000.
Calculate the impairment loss, if any. Also show the accounting treatment for reversal of impairment loss
and the subsequent depreciation thereon.
Solution
Since the fair value less costs of disposal is not determinable the recoverable amount of the CGU is its
value in use. The carrying amount of the assets of the CGU on 31st March, 20X3 is as follows:
Calculation of Impairment Loss

Goodwill Other assets Total

Historical Cost 80,000 3,20,000 4,00,000

Accumulated Depreciation - (32,000) (32,000)

(3,20,000/20) x 2

Carrying Amount 80,000 2,88,000 3,68,000

Impairment Loss (80,000) (76,000) (1,56,000)

Revised Carrying Amount

(i) Impairment Loss = Carrying Amount – Recoverable Amount (₹3,68,000 - ₹2,12,000)= ₹1,56,000 is
charged in statement of profit and loss for the period ending 31st March, 20X3 as impairment
loss.
(ii) Impairment loss is allocated first to goodwill ₹80,000 and remaining loss of ₹76,000 (₹1,56,000 –
₹80,000) is allocated to the other assets.
Reversal of Impairment loss
Reversal of impairment loss is recognised subject to:-
(i) The impairment loss on goodwill cannot bereversed.
(ii) The increased carrying amount of an asset after reversal of an impairment loss not to exceed the
carrying amount that would have been determined had no impairment loss been recognised in prior years.
Calculation of carrying amount of identifiable assets had no impairment loss is recognized

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₹

Historical Cost 3,20,000

Accumulated Depreciation for 4 years (3,20,000/20) x 4 (64,000)

Carrying amount had no impairment loss is recognised on 31stMarch, 20X5 2,56,000

Carrying amount of other assets after recognition of impairment loss

Carrying amount on 31st March, 20X3 2,12,000

Accumulated Depreciation for 2 years (2,12,000/18) x 2 (24,000)

[rounded off to nearest thousand for ease of calculation]

Carrying amount on 31st March, 20X5 1,88,000

(i) The impairment loss recognised previously can be reversed only to the extent of lower of re-estimated
recoverable amount is ₹2,56,000 (higher of fair value less costs of disposal ₹2,90,000 and value in use
₹3,04,000)
(ii) Impairment loss reversal will be ₹68,000 i.e. (₹2,56,000 – ₹1,88,000). This amount is recognized as
income in the statement of profit and loss for the year ended 31 st March, 20X5.
(iii) The carrying amount of other assets at 31st March, 20X5 after reversal of impairment loss will be
₹2,56,000.
(iv) From 1st April, 20X5 the depreciation charge will be ₹16,000 i.e. (₹2,56,000/16)

Question 2 (8 Marks)
ABC Ltd. has three cash-generating units: A, B and C, the carrying amounts of which as on March 31,
20X1 are as follows:

(₹ in crore)
Cash-generating units Carrying amount Remaining useful life

A 500 10
B 750 20
C 1,100 20

ABC Ltd. also has two corporate assets having a remaining useful life of 20 years.

(₹ in crore)
Corporate asset Carrying amount Remarks

X 600 The carrying amount of X can be allocated on a

reasonable basis (i.e., pro rata basis) to the cash-
generating units.

200 The carrying amount of Y cannot be allocated on a

Y
reasonable basis to the individual cash- generating
units.

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Recoverable amount as on March 31, 20X1 is as follows:

Cash-generating units Recoverable amount

(₹ in crore)

A 600
B 900
C 1,400
ABC Ltd. 3,200

Calculate the impairment loss, if any. Ignore decimals.

Solution
Allocation of corporate assets
The carrying amount of X 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 A’s cash-generating unit is
10 years, whereas the estimated remaining useful lives of B and C’s cash-generating units are 20 years.

(₹ in crore)

Particulars A B C Total

Carrying amount 500 750 1,100 2,350

Useful life 10 years 20 years 20 years —

Weight based on useful life 1 2 2 —

Carrying amount (after assigning

weight) 500 1,500 2,200 4,200

Pro-rata allocation of X 12% 36% 52% 100%

(500/4,200) (1,500/4,200) (2,200/4,200)

Allocation of carrying amount of X 72 216 312 600

Carrying amount (after allocation of X) 572 966 1,412 2,950

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 A B C
Carrying amount (after allocation of X) 572 966 1,412
Recoverable amount
Impairment loss 600 900 1400
- 66 12
(b) Allocation of the impairment loss

(₹ in crore)
Allocation to B C
X 15 (66 x216/966) 3 (12 x 312/1,412)

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Other assets in cash- 51 9
generating units (66 x 750/ 966) (12 x 1,100/1,412)
66 12
Impairment Loss

Step II: Impairment losses for the larger cash-generating unit, i.e., ABC Ltd. as a whole

(₹ in crore)
Particulars A B C X Y ABC Ltd.
Carrying amount 500 750 1,100 600 200 3,150
Impairment loss (Step I) - (51) (9) (18) - (78)
Carrying amount (after Step I) 500 699 1,091 582 200 3,072
Recoverable amount 3,200
Impairment loss for the ‘larger’ cash-generating unit Nil

Question 3 (6 Marks)
S Ltd purchased a property for ₹6,00,000 on 1st April, 20X1. The useful life of the property is 15 years. On
31st March, 20X3, S Ltd classified the property as held for sale. The impairment testing provides the
estimated recoverable amount of ₹4,70,000.
The fair value less cost to sell on 31st March, 20X3 was ₹4,60,000. On 31st March, 20X4 management
changed the plan, as property no longer met the criteria of held for sale. The recoverable amount as at 31st
March, 20X4 is ₹5,00,000.
Provide the accounting treatment of events for the year ending 31st March, 20X3 and 31st
March, 20X4 and value the property at the end of 20X3 and 20X4
Solution
(a) Value of property immediately before the classification as held for sale as per IND AS 16 as
on 31st March, 20X3
Purchase Price 6,00,000
Less: Accumulated Depreciation (80,000) (for two years)
Less: Impairment loss (50,000) (5,20,000- 4,70,000)
Carrying Amount 4,70,000

On initial classification as held for sale on 31st March, 20X3, the value will be lower of:
Carrying amount after impairment ₹4,70,000
Fair Value less Cost to sell ₹4,60,000
On 31st March, 20X3 Non-current classified as held for sale will be recorded at ₹4,60,000.
Depreciation of ₹40,000 and Impairment Loss of ₹60,000 (50,000 +10,000) is charged in profit or loss for
the year ended 31st March, 20X3.

(b) On 31st March, 20X4 held for sale property is reclassified as criteria doesn’t met. The value will be
lower of:
Carrying amount immediately before classification on 31st March, 20X3 ₹4,70,000

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Less: Depreciation based on 13 years balance life ₹36,154
Carrying amount had the asset is not classified as held for sale '4,33,846
Recoverable Amount ₹5,00,000
Property will be valued at ₹4,33,846 on 31st March, 20X4
Adjustment to the carrying amount of ₹26,154 (₹4,60,000 - 4,33,846) is charged to the Profit or Loss.

Question 4 - (8 Marks)
On June 1, 20X1, entity X plans to sell a group of assets and liabilities, which is classified as a disposal
group. On July 31, 20X1, the Board of Directors approves and becomes committed to the plan to sell the
manufacturing unit by entering into a firm purchase commitment with entity Y. However, since the
manufacturing unit is regulated, the approval from the regulator is needed for sale. The approval from the
regulator is customary and highly probable to be received by November 30, 20X1 and the sale is expected
to be completed by March 31, 20X2. Entity X follows December year end. The assets and liabilities
attributable to this manufacturing unit are as under:
(Amount in ₹)

Particulars Carrying value as on Carrying value as on

December 31, 20X0 July 31, 20X1

Goodwill 500 500

Plant and Machinery 1,000 900
Building 2,000 1,850
Debtors 850 1,050
Inventory 700 400
Creditors (300) (250)
Loans (2,000) (1,850)
2,750 2,600

The fair value of the manufacturing unit as on December 31, 20X0 is ₹2,000 and as on July 31, 20X1 is
₹1,850. The cost to sell is 100 on both these dates. The disposal group is not sold at the period end i.e.,
December 31, 20X1. The fair value as on December 31, 20X1 is lower than the carrying value of the
disposal group as on that date.
Required:
1. Assess whether the manufacturing unit can be classified as held for sale and reasons there for. If
yes, then at which date?
2. The measurement of the manufacturing unit as on the date of classification as held for sale.
3. The measurement of the manufacturing unit as at the end of the year.

Solution
Assessing whether the manufacturing unit can be classified as held for sale
The manufacturing unit can be classified as held for sale due to the following reasons:
(a) The disposal group is available for immediate sale and in its present condition. The regulatory approval
is customary and it is expected to be received in one year. The date at which the disposal group must be
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classified as held for sale is July 31, 20X1, i.e., the date at which management becomes committed to the
plan.
(b) The sale is highly probable as the appropriate level of management i.e., board of directors in this case
have approved the plan.
(c) A firm purchase agreement has been entered with the buyer.
(d) The sale is expected to be complete by March 31, 20X2, i.e., within one year from the date of
classification.
Measurement of the manufacturing unit as on the date of classification as held for sale
Following steps need to be followed:
Step 1: Immediately before the initial classification of the asset (or disposal group) as held for sale, the
carrying amounts of the asset (or all the assets and liabilities in the group) shall be measured in
accordance with applicable IND AS.
This has been done and the carrying value of the disposal group as on July 31, 20X1 is determined at ₹
2,600. The difference between the carrying value as on December 31, 20X0 and July 31, 20X1 is
accounted for as per the relevant IND AS i.e., (IND AS 2 for inventory and IND AS 109 for debtors,
creditors and loans).
Step 2: An entity shall measure a non-current asset (or disposal group) classified as held for sale at the
lower of its carrying amount and fair value less costs to sell.
The fair value less cost to sell of the disposal group as on July 31, 20X1 is ₹1,750 (i.e.1,850-100). This is
lower than the carrying value of ₹ 2,600. Thus an impairment loss needs to be recognised and allocated
first towards goodwill and thereafter pro-rata between assets of the disposal group which are within the
scope of IND AS 105 based on their carrying value. Thus, the assets will be measured as under:

Particulars Carrying value – Impairment Carrying value as per

July 31, 20X1 IND AS 105 – July 31,
20X1

Goodwill 500 (500) -

Plant and Machinery 900 (115) 785
Building 1,850 (235) 1,615
Debtors 1,050 - 1,050
Inventory 400 - 400
Creditors (250) - (250)
Loans (1,850) - (1,850)
2,600 (850) 1,750

Measurement of the manufacturing unit as on the date of classification as at the year end
The measurement as at the year-end shall be on similar lines as done above.
The assets and liabilities in the disposal group not within the scope of this Standard are measured as per
the respective Standards.
The fair value less cost to sell of the disposal group as a whole is calculated. This fair value less cost to sell
as at the year-end shall be compared with the carrying value as at the date of classification as held for sale.
It is provided that the fair value as on the year end is less than the carrying amount as on that date – thus

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the impairment loss shall be allocated in the same way between the assets of the disposal group falling
within the scope of this standard as shown above.

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