CAFCINTER CAFINAL CA

FINAL CA
MAY '19
REVISION NOTES
Financial Reporting

Part - VI

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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING

Ind AS 33 / AS 20 - Earning Per Share

   
  
     

1) Basic EPS =
   .   
2) Time is the weighting factor for calculation of Weight Average nos. of Equity Shares i.e.
weighted average no. is calculated on the basis of Equity Shares Outstanding during
the period.
Shares are included in the Weighted Average nos. of Equity Shares from the date the
consideration is receivable. For e.g.
Shares Issued Included as of
• For cash Date of cash receivable
• Against conversion of debentures Date of conversion
• Against interest or principal Date on which interest ceases to accrue
• Against settlement of liability Date when settlement becomes effective
• For acquisition of assets Date on which acquisition is recognised
• Against services rendered When service is rendered
• Bonus shares Beginning of reporting period
3) Partly paid equity shares should be treated as a fraction of an equity share i.e.
converted to equivalent fully paid shares.
4) Bonus Issue : When calculating Weight Average nos. of Equity Shares, nos. of
Equity Shares must be so adjusted as if the bonus issue was made at the start of the
earliest reporting period.
5) Right Issue : If the rights issue is made at fair value then it is treated on a normal issue,
i.e. included in weight average from the date of issue. However, rights issue is usually at
below the fair price i.e. there is a bonus element to it. In this case the nos. of shares
outstanding before the rights issue are to be multiplied by a Rights Factor, which is
calculated as follows :
 !"# $# %&# ''#()#!* $+ )+ )&# #,#-%# +. /&)%
Rights Factor =
0&#+#)-! #,1/&)% . 2!"# $# %&#.
6) In case of a share split or consolidation only the nos of shares changes without any
change in resources. EPS must be calculated on the basis of revised nos. of shares
from the beginning of the reporting period. (Similar to bonus issue)
7) Potential Equity share is a financial instrument or a contract that entitles its holders to
equity shares. e.g. Convertible Debentures, Convertible Preference Shares,
Options including Employee stock option and share warrants.
Contingently issuable shares (e.g. shares issued under a loan contract on default of
payment of principal or interest)
8) Potential Equity shares are considered as dilutive when their conversion into Equity
Share would decrease the EPS from continuing ordinary operations.

3#) 4+.) ))5")5!# )+ 67")* 8&# 9+!(#% .)# (:"%)'#;) .+ (!")#( #;;/%<
9) Diluted EPS = %%"';/ )&# -+;2#%+; +.
=#/&)#( >2#/# ;+%.+. 67")* 8&#% ? @
(!")#( $+)#;)! 67")* 8&#

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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING
10) Calculation of Diluted Earnings:
Net profit & Loss attributable to ESH : XXX
Add: Interest on convertible debentures / loan
(after tax effect) XXX
Add: Preference dividend including dividend tax on
Preference Dividend on convertible preference share XXX
Diluted Earnings XXX
Any other changes in expense or income that would result from the conversion of the
dilutive potential Equity share must also be adjusted.
11) Only the dilutive potential Equity Share are considered for calculation of Diluted EPS.
Anti-dilutive potential Equity Share are ignored. To decide whether potential Equity
Shares are dilutive or anti-dilutive, each issue of potential Equity Share is considered
separately. In order to maximise the dilution each issue is considered in the sequence
from the most dilutive to the least dilutive. To determine the sequence, the earnings per
incremental potential Equity Share is calculated. Where the earnings per incremental
share is the least, the potential Equity Share is considered as the most dilutive.
12) Re-statement : If the number of equity shares or potential shares outstanding is
increased as a result of bonus issue, share split, consolidation of shares, the calculation
of basic and diluted equity per share should be adjusted for all the period presented.
If changes occur after the balance sheet date but before the approval of financial
statements by the competent authority, the EPS calculation for these financial
statements and any prior period financial statements should be restated on the basis of
new number of shares.
13) Disclosure
The amount used as numerator for calculating basic and diluted equity and its
reconciliation with net profit or loss for the period.Further company should disclose
basic & diluted EPS from continuing & discontinued operating seperately.
Weighted average number of shares used as denominator for calculating basic and
diluted EPS and reconciliation of their denominators to each other.

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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING

Ind AS 33 / AS 20

Q.1. On 1.4.2017 A Ltd. has 1800 equity shares outstanding. On 31.8.2017, it issued 600
equity shares for cash. On 1.2.2018 it bought back 300 equity shares. Calculate
weighted average number of shares as on 31.3.2018.

Q.2. B Ltd. had 1800 equity shares outstanding as on 1.4.2017 fully paid of Rs.10. On
31.1.2018 it issued 600 equity shares of 10 each 5 paid. Calculate weighted number of
equity shares as 31.3.2018.

Q.3. C Ltd. had 2,00,000 equity shares outstanding as on 1.4.2017. On 1.1.2018 it issued 2
equity shares bonus for each share outstanding on 31.12.2017. Net profit for 2016-17
was ` 18,00,000, net profit for 2017-18 was ` 60,00,000. Calculate Basic EPS 2017-18
and adjusted EPS for 2016-17.

Q.4. On 1.4.2017 D Ltd. had 5,00,000 shares outstanding. On 1.6.2017, it issued one new
share for each five shares outstanding at ` 15. Fair value of one equity immediately
before the right issue was ` 21. Net profit for the year 2016-17 was ` 11,00,000 and for
2017-18 ` 15,00,000. Calculate the basic EPS for 2017-18 restated EPS for 2016-17.

Q.5. E Ltd. had outstanding equity shares 50,00,000 on 01.04.2017. Net profit for the year is
` 1,00,00,000; E Ltd. had 12% 1,00,000 convertible debentures outstanding of 100 each
to be converted into 10 equity shares. Tax rate is 30% Calculate (i) Basic EPS (ii)
Diluted EPS

Q.6. F Ltd. had 5,00,000 equity shares outstanding on 01.04.2017. Net profit for 2017-18
was ` 12,00,000, average fair value per share during 2017-18 was ` 20 F Ltd. has given
share option to its employees of 1,00,000 shares at option price of ` 15 Calculate Basic
EPS and diluted EPS.

Q.7. G Ltd. has outstanding equity shares of 20,00,000 on 01.04.2017, average fair value
per equity share during 2017-18 was ` 75 Potential equity shares in capital structure of
G Ltd. are as under (i) Options - 1,00,000 shares with exercise price of ` 60 (ii) 8%
Convertible preference share of 8,00,000 shares of ` 100 to be converted into 2 equity
shares; attributable corporate dividend tax 10% (iii) 12% convertible debentures of ` 100
each, nominal value ` 10 crores convertible into 4 equity shares. Tax rate 30%, Net
profit attributable to equity shareholder 1,00,00,000.

Q.8. From the Books of Bharati Ltd., following informations are available as on 1.4.2017 and
1.4.2018 :
1. Equity Shares of ` 10 each 1,00,000
2. Partly paid Equity Shares of ` 10 each ` 5 paid 1,00,000
3. Options outstanding at an exercise price of ` 60 for one equity share ` 10
each. Average Fair Value of equity share during both years ` 7510,000
4. 10% convertible preference shares of ` 100 each. Conversion ratio 2 equity
shares for each preference share 80,000
5. 12% convertible debentures of ` 100. Conversion ratio 4 equity shares for
each debentures. Tax Rate is 30%10,000
6. 10% dividend tax is payable for the years ending 31.3.2018 and 31.3.2017.
7. On 1.10.2017 the partly paid shares were fully paid up
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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING
8. On 1.1.2018 the company issued 1 bonus share for 8 shares held on that date.
Net profit attributable to the equity shareholders for the year ending 31.3.2018 and
31.3.2017 were`10,00,000.
Calculate :
(i) Earnings per share for years ending 31.3.2018 and 31.3.2017.
(ii) Diluted earnings per share for years ending 31.3.2018 and 31.3.2017.
(iii) Adjusted earnings per share and diluted EPS for the year w ding 31 3.2017
assuming the same information for previous year, also assume that partly paid
shares are eligible for proportionate dividend only.

Q.9. X Co. Ltd. supplied the following information. You are required to compute the basic
earning per share :
(Accounting year 1.1.2018 - 31.12.2018)
Net Profit : Year 2017 : ` 20,00,000
: Year 2018 : ` 30,00,000
No. of shares outstanding
prior to Right Issue : 10,00,000 shares
Right Issue : One new share for each four outstanding
i.e., 2,50,000 shares. Right Issue price - ` 20
Last date of exercise rights - 31.3.2018.
Fair rate of one Equity share
immediately prior to
exercise of rights on 31.3.2018 : ` 25

Q.10.Given below are details of equity share capital of AB Ltd.

Particulars No. `
Equity shares of ` 10 each fully paid up on 1.4.2016 10,00,000 99,00,000
Calls in Arrears on 1.4.2016 ---- 1,00,000
Calls in Arrears Received on 1.6.2016 ---- 50,000
New Issue amount paid up on 1.10.2016 ` 7.5 10,00,000 75,00,000
Calls in Arrears Received on 1.3.2017 ---- 50,000
PBIT for the year ended on 31.3.2017 ` 2,60,00,000
Tax Provision ` 30,00,000
10% Preference Share Capital issued on 1.7.2016 ` 20,00,000
Dividend distribution tax : 10%.
Compute Basic EPS.

Q.11.Given below is equity share capital structure of X Ltd. :

No. of outstanding shares of
` 10 each fully paid up 20000000
` 25 each fully paid up 10000000
` 5 each fully paid up 60000000
Profit after tax 150000000
Compute EPS.

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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING

FINANCIAL INSTRUMENTS (Ind AS 109, 32, 107)

(1) Objective : To establish principles for recognizing, measuring, treating, presenting &
disclosing financial assets, financial liabilities and some contracts to buy or sell non-
financial items
(2) A financial instrument is any contract that gives rise to a financial asset of one entity and
a financial liability or equity instrument of another entity
(3) A financial asset is any asset that is :
a. Cash
b. Equity Instrument of another entity
c. a contractual right :
• to receive cash or another financial asset from another entity or
• to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favourable to the entity
d. a contract that will or may be settled in the entity's own equity instruments under
certain circumstances
(4) A financial liability is any liability that is :
(a) A contractual obligation :
(i) To deliver cash or another financial asset to another entity ; or
(ii) To exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity's own equity instruments under
certain circumstances
(5) An equity instrument is any contract that evidences a residual interest in the assets of
an entity after deducting all of its liabilities. E.g.: Non-puttable equity shares, some types
of preference shares and warrants or written call options that allow the holder to
subscribe for or purchase a fixed number of non-puttable equity shares in the issuing
entity in exchange for a fixed amount of cash or another financial asset. An obligation of
an entity to issue or purchase a fixed number of its own equity instruments in exchange
for a fixed amount of cash or another financial asset is an equity instrument of the entity.
(6) Certain types of loan commitments are within the purview of Ind AS 109. Loan
commitments are firm commitments to provide credit under pre-specified terms and
conditions. Since a commitment to make a loan at a specified rate of interest during a
fixed period of time is, in effect, a written option for the potential borrower to obtain a
loan at a specified rate and, therefore, meets the definition of a derivative (financial
instrument).
(7) Ind AS 109 is applicable to those contracts to buy or sell a non-financial item that can
be settled net in cash or another financial instrument, or by exchanging financial
instruments, as if the contracts were financial instruments, with the exception of
contracts that were entered into and continue to be held for the purpose of the receipt or
delivery of a non- financial item in accordance with the entity's expected purchase,sale
or usage requirements
(8) A financial guarantee contract is a contract that requires the issuer to make specified
payments to reimburse the holder for a loss it incurs because a specified debtor fails to
make payment when due in accordance with the original or modified terms of a debt
instrument. After initial recognition, an issuer of such a contract should measure it at the
higher of :
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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING
(i) The amount determined in accordance with Ind AS 37; and
(ii) The amount initially recognized
Similar treatment to be given for loan commitments.
(9) Physical assets (such as inventories, property, plant and equipment) and intangible
assets (such as patents and trademarks) are not financial assets. Control of such
physical and intangible assets creates an opportunity to generate an inflow of cash or
another financial asset, but it does not give rise to a present right to receive cash or
another financial asset. Similarly, Assets (such as prepaid expenses) 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 not financial assets. Similarly, items such as
deferred revenue and most warranty obligations are not financial liabilities because the
outflow of economic benefits associated with them is the delivery of goods and services
rather than a contractual obligation to pay cash or another financial asset.
(10) Liabilities or assets that are not contractual (such as income taxes that are created as a
result of statutory requirements imposed by government) are not financial liabilities or
financial assets.
(11) A derivative is a financial instrument or other contract all three of the following
characteristics:
a. its value changes in response to the change in the underlying
b. it requires no initial net investment or an initial net investment that is smaller than
would be required for other types of contracts that would be expected to have a
similar response to changes in market factors.
c. it is settled at a future date.
(12) Embedded derivatives are derivatives that are included in the provisions of other
contracts. Thus, embedded derivative is a component of a hybrid instrument that also
includes a non-derivative host contract. A derivative that is attached to a financial
instrument but is contractually transferable independently of that instrument, or has a
different counterparty from that instrument, is not an embedded derivative, but a
separate financial instrument. An embedded derivative should be separated from the
host contract and accounted for as a derivative if, and only if :-
a. The economic characteristics of the host contract & embedded derivative are not
'closely & clearly related'.
b. The embedded derivative would meet the definition of a derivative on a stand-
alone basis.
c. The hybrid instrument is not valued at fair value through P & L.
If an embedded derivative is separated, the host contract should be accounted for under
Ind AS 109 if it is a financial instrument, and in accordance with other appropriate
Standards if it is not a financial instrument.
(13) Initial Recognition :- Financial instruments are generally recognized at fair value at
inception. Financial assets & liabilities are generally recognized on the balance sheet
only when the entity becomes a party to the contractual provisions of the instrument.
(14) Financial Assets can be bifurcated into the following 2 categories :
a. At amortised cost
b. At fair value i) through P & L ii) through Other Comprehensive Income
(15) Financial assets at Fair Value through P & L :-
a. Held for trading :- Intention of short term profit; derivatives except if hedges;
b. Designation at inception :- Voluntary designation subject to certain conditions

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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING
Fair valuing assets or liabilities through P & L is permitted if :
a. The contract contains embedded derivatives except where the split is prohibited
b. Doing so results in more relevant information by reducing accounting mismatches
or when a group of financial assets & financial liabilities is evaluated on fair value
basis.
(16) Financial Assets @ Amortised Cost :- Non-derivative financial assets - (market)
quotes may or may not be available - management has intention & ability to hold till
maturity - no intention of trading - fixed or determinable payments & fixed maturity.
(17) Financial Assets at Fair Value through OCI :- Non-derivative financial assets -
designated as AFS or are not classified at amortised cost or FV through P & L
(18) Financial Liabilities can be bifurcated into the following 2 categories :-
• At fair value through P & L :- held for trading or designated at inception
• Amortised Cost
(19) Classification is important because IT DRIVES MEASUREMENT.
(20) The effective interest method is a method of calculating the amortised cost of a
financial asset or a financial liability and of allocating the interest income or interest
expense over the relevant period.
(21) The effective interest rate is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of the financial asset or
financial liability.
(22) Fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm's length transaction.
(23) Fair value hierarchy :- Active market - published quotes; No active market – valuation
techniques; No active market - Cost less impairment (for equity investments only).
(24) Impairment of financial assets is to be done if there is objective evidence of impairment.
Impairment loss = Carrying amount - recoverable amount.
(25) Impairment Accounting :
At FV through P&L Not applicable as already at FV
Items carried at amortized cost Impairment = Carrying value - PV of future cash flows
discounted at original effective interest rates
Short term loans & receivables Impairment = Carrying amount - undiscounted cash
at original invoice flow
At FV through OCI Amount of loss to be removed from equity & taken to
P&LA/c

Q.1. Entity XYZ enters into a fixed price forward contract to purchase one million
kilograms of copper in accordance with its expected usage requirements. The
contract permits XYZ to take physical delivery of the copper at the end of twelve
months or to pay or receive a net settlement in cash, based on the change in fair
value of copper. Is the contract accounted for as a derivative?

Ans. While such a contract meets the definition of a derivative, it is not necessarily
accounted for as a derivative. The contract is a derivative instrument because there
is no initial net investment, the contract is based on the price of copper, and it is to be
settled at a future date. However, if XYZ intends to settle the contract by taking
delivery and has no history for similar contracts of settling net in cash or of taking
delivery of the copper and selling it within a short period after delivery for the purpose
of generating a profit from short-term fluctuations in price, the contract is not
accounted for as a derivative.
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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING
Q.2. A Entity XYZ owns an office building. XYZ enters into a put option with an investor
that permits XYZ to put the building to the investor for Rs.150 million. The current
value of the building is Rs. 175 million. The option expires in five years. The option, if
exercised, may be settled through physical delivery or net cash, at XYZ’s option. How
do both XYZ and the investor account for the option?

Ans. XYZ’s accounting depends on XYZ’s intention and past practice for settlement.
Although the contract meets the definition of a derivative, XYZ should not account for
it as a derivative if XYZ intends to settle the contract by delivering the building if XYZ
exercises its option and there is no past practice of settling net.
The investor, however, cannot conclude that the option was entered into to meet the
investor’s expected purchase, sale or usage requirements because the investor does
not have the ability to require delivery. In addition, the option may be settled net in
cash. Therefore, the investor has to account for the contract as a derivative.
Regardless of past practices, the investor’s intention does not affect whether
settlement is by delivery or in cash. The investor has written an option, and a written
option in which the holder has a choice of physical settlement or net cash settlement
can never satisfy the normal delivery requirement for the exemption from Ind AS 109
because the option writer does not have the ability to require delivery. However, if the
contract were a forward contract rather than an option, and if the contract required
physical delivery and the reporting entity had no past practice of settling net in cash
or of taking delivery of the building and selling it within a short period after delivery for
the purpose of generating a profit from short-term fluctuations in price, the contract
would not be accounted for as a derivative.

Q.3. The definition of a derivative in Ind AS 109 requires that the instrument "is settled at a
future date”. Is this criterion met even if an option is expected not to be exercised, for
example, because it is out of the money?

Ans. Yes. An option is settled upon exercise or at its maturity. Expiry at Maturity is a form
of settlement even though there is no additional exchange of consideration.

Q.4. Entity XYZ, whose functional currency is the Indian Rupees, sells products in France
denominated in Euro. XYZ enters into a contract with an investment bank to convert
Euro to Indian Rupees at a fixed exchange rate. The contract requires XYZ to remit
Euro based on its sales volume in France in exchange for Indian Rupees at a fixed
exchange rate of 55.00. Is that contract a derivative?

Ans. Yes. The contract has two underlying variables (the foreign exchange rate and the
volume of sales), no initial net investment or an initial net investment that is smaller
than would be required for other types of contracts that would be expected to have a
similar response to changes in market factors, and a payment provision. Ind AS 109
does not exclude from its scope derivatives that are based on sales volume.

Q.5. Entity A has an investment portfolio of debt and equity instruments. The documented
portfolio management guidelines specify that the equity exposure of the portfolio
should be limited to between 30 and 50 per cent of total portfolio value. The
investment manager of the portfolio is authorised to balance the portfolio within the
designated guidelines by buying and selling equity and debt instruments. Is Entity A
permitted to classify the instruments as @ FV through OCI?

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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING
Ans. It depends on Entity A’s intentions and past practice. If the portfolio manager is
authorised to buy and sell instruments to balance the risks in a portfolio, but there is
no intention to trade and there is no past practice of trading for short-term profit, the
instruments can be classified as @ FV through OCI. If the portfolio manager actively
buys and sells instruments to generate short- term profits, the financial instruments in
the portfolio are classified as at FV through P&L

Q.6. Entity A purchases a five-year equity-index-linked note with an original issue price
of Rs.10 at a market price of Rs.12 at the time of purchase. The note requires no
interest payments before maturity. At maturity, the note requires payment of the
original issue price of Rs. 10 plus a supplemental redemption amount that depends
on whether a specified share price index exceeds a predetermined level at the
maturity date. If the share index does not exceed or is equal to the predetermined
level, no supplemental redemption amount is paid. If the share index exceeds the
predetermined level, the supplemental redemption amount equals the product of 1.15
and the difference between the level of the share index at maturity and the level of
the share index when the note was issued divided by the level of the share index at
the time of issue. Entity A has the positive intention and ability to hold the note to
maturity. Can Entity A classify the note as an investment at amortised cost?

Ans. Yes. The note can be classified as an investment @ amortised cost because it has
a fixed payment of Rs. 10 and fixed maturity and Entity A has the positive intention
and ability to hold it to maturity. However, the equity index feature is a call option not
closely related to the debt host, which must be separated as an embedded
derivative. The purchase price of Rs. 12 is allocated between the host debt
instrument and the embedded derivative. For example, if the fair value of the
embedded option at acquisition is Rs. 4, the host debt instrument is measured at Rs.
8 on initial recognition. In this case, the discount of Rs.2 that is implicit in the host
bond (principal of Rs. 10 minus the original carrying amount of Rs. 8) is amortised to
the statement of profit and loss over the term to maturity of the note using the
effective interest method.

Q.7. Can a bond with a fixed payment at maturity and a fixed maturity date be classified
at amortised cost if the bond’s interest payments are indexed to the price of a
commodity or equity, and the entity has the positive intention and ability to hold the
bond to maturity?

Ans. Yes. However, the commodity-indexed or equity-indexed interest payments result in

an embedded derivative that is separated and accounted for as a derivative at fair
value.

Q.8. Financial assets that are excluded from fair valuation and have a fixed maturity
should be measured at amortised cost. How is amortised cost calculated?

Ans. Under Ind AS 109, amortised cost is calculated using the effective interest method.
The effective interest rate inherent in a financial instrument is the rate that exactly
discounts the estimated cash flows associated with the financial instrument through
the expected life of the instrument or, where appropriate, a shorter period to the net
carrying amount at initial recognition.
Example Entity A purchases a debt instrument with five years remaining to maturity
for its fair value of Rs. 1,000. The instrument has a principal amount of Rs.1,250 and
carries fixed interest of 4.7 per cent that is paid annually (Rs. 1,250 x 4.7 per cent =
Rs. 59 per year). The contract also specifies that the borrower has an option to
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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING
prepay the instrument and that no penalty will be charged for prepayment. At
inception, the entity expects the borrower not to prepay.
It can be shown that in order to allocate interest receipts and the initial discount over
the term of the debt instrument at a constant rate on the carrying amount, they must
be accrued at the rate of 10 per cent annually. The table below provides information
about the amortised cost, interest income and cash flows of the debt instrument in
each reporting period.
Year (a) (b = a 10%) (c) (d = a + b - c)
Amortised cost at Interest Cash Amortised cost at
the beginning of income flows the end of the
the year year
20x6 1,000 100 59 1,041
20x7 1,041 104 59 1,086
20x8 1,086 109 59 1,136
20x9 1,136 113 59 1,190
20Y0 1,190 119 1,250 +59 ----
On the first day of 2008, the entity revises its estimate of cash flows. It now expects
that 50 per cent of the principal will be prepaid at the end of 2008 and the remaining
50 per cent at the end of 2010. As per Ind AS 109, the opening balance of the debt
instrument in 2008 is to be adjusted. The adjusted amount is calculated by
discounting the amount the entity expects to receive in 2008 and subsequent years
using the original effective interest rate (10 per cent). This results in the new opening
balance in 2008 of Rs. 1,138. The adjustment of Rs.
52 (Rs. 1,138 - Rs. 1,086) is recorded in the statement of profit and
loss in 2008. The table below provides information about the amortised cost, interest
income and cash flows as they would be adjusted taking into account the change in
estimate.
Year (a) (b = a 10%) (c) (d = a + b - c)
Amortised cost at Interest Cash Amortised cost at the
the beginning of the income flows end of the year
year
20x6 1,000 100 59 1,041
20x7 1,041 104 59 1,086
20x8 1,086+52 114 625+59 568
20x9 568 57 30 595
20Y0 595 60 625+30 —
If the debt instrument becomes impaired, say, at the end of 2009, the impairment
loss is calculated as the difference between the carrying amount (Rs. 595) and the
present value of estimated future cash flows discounted at the original effective
interest rate (10 per cent)

Q.9. What is the accounting treatment of an investment in a bond (financial asset) that is
convertible into shares of the issuing entity or another entity before maturity?

Ans. An investment in a convertible bond that is convertible before maturity generally

cannot be classified as an investment @ Amortised Cost because that would be
inconsistent with paying for the conversion feature—the right to convert into equity
shares before maturity.
An investment in a convertible bond can be classified as @ FV through OCI financial
asset provided it is not purchased for trading purposes. The equity conversion option
is an embedded derivative.

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J.K.SHAH CLASSES FINAL C.A. – FINANCIAL REPORTING
If the bond is classified as @ FV through OCI (i.e., fair value changes recognised
directly in the appropriate equity account until the bond is sold), the equity conversion
option (the embedded derivative) is separated. The amount paid for the bond is split
between the debt instrument without the conversion option and the equity conversion
option. Changes in the fair value of the equity conversion option are recognised in
the statement of profit and loss.
If the convertible bond is measured at fair value with changes in fair value recognised
in the statement of profit and loss, separating the embedded derivative from the host
bond is not permitted.

Q.10. Entity A holds 15 per cent of the share capital in Entity B. The shares are publicly
traded in an active market. The currently quoted price is Rs. 100. Daily trading
volume is 0.1 per cent of outstanding shares. Because Entity A believes that the fair
value of the Entity B shares it owns, if sold as a block, is greater than the quoted
market price, Entity A obtains several independent estimates of the price it would
obtain if it sells its holding. These estimates indicate that Entity A would be able to
obtain a price of Rs. 105, i.e., a 5 per cent premium above the quoted price. Which
figure should Entity A use for measuring its holding at fair value?

Ans. As per Ind AS 109, a published price quotation in an active market is the best
estimate of fair value. Therefore, Entity A should use the published price quotation of
Rs. 100. It cannot depart from the quoted market price solely because independent
estimates indicate that Entity A would obtain a higher (or lower) price by selling the
holding as a block.

Q.11. An entity issues 2,000 convertible debentures at the start of year 1. The debentures
have a three-year term, and are issued at par with a face value of Rs. 1,000 per
debenture, giving total proceeds of Rs. 2,000,000. Interest is payable annually in
arrears at a nominal annual interest rate of 6 per cent. Each debenture is convertible
at any time up to maturity into 250 equity shares. When the debentures are issued,
the prevailing market interest rate for similar debt without conversion options is 9 per
cent.

Ans. The liability component is measured first, and the difference between the proceeds
of the debenture issue and the fair value of the liability is assigned to the equity
component. The present value of the liability component is calculated using a
discount rate of 9 per cent, the market interest rate for similar debentures having no
conversion rights, as shown below :
`
Present value of the principal - Rs. 2,000,000
payable at the end of three years 1,544,367
Present value of the interest - Rs. 120,000
payable annually in arrears for three years 303,755
Total liability component 1,848,122
Equity component (balancing figure) 151,878
Proceeds of the debenture issue 2,000,000

: 11 : REVISION NOTES – MAY ‘19