FR RTP Nov 22
FR RTP Nov 22
FR RTP Nov 22
PART – I
Amendments applicable from November, 2022 examination
Companies (Indian Accounting Standards) (Amendment) Rules, 2022
MCA has issued Companies (Indian Accounting Standards) (Amendment) Rules, 2022 to
amend Companies (Indian Accounting Standards) Rules, 2015 vide notification G.S.R. 255(E)
dated 23rd March, 2022. These amendments are generally brought by MCA to keep uniformity
between Ind AS and IFRS. However, this time MCA has come out with a carve out in Ind AS
16. These amendments come into effect from 1 st April, 2022 and is applicable for the financial
year 2022-2023 onwards for the financial statements prepared on the basis of Ind AS.
Following are the areas in which the amendments have been brought in by the MCA through
this notification:
Amendment to Ind AS 16 ‘Property, Plant and Equipment’ on accounting of proceeds from
selling of items produced during testing and carve out in this regard from IAS 16 .
Amendment to Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ on
determination of cost of fulfilling a contract for measurement of provision for an onerous
contract.
Amendments to Ind AS 103 ‘Business Combinations’ with reference to Conceptual
Framework for Financial Reporting and insertion of certain paragraphs under exceptions
to recognition principle on liabilities, contingent liabilities and contingent assets
Annual improvements to Ind AS (2021) in Ind AS 101 ‘First Time Adoption of Indian
Accounting Standards’, Ind AS 109 ‘Financial Instruments’ and Ind AS 41 ‘Agriculture’.
The key amendments to Ind AS pursuant to the Companies (Indian Accounting Standards)
(Amendments) Rules, 2022 are explained below:
PART – II
QUESTIONS
(vi) The expected useful life of the machinery is 3 years. The machinery has an
expected residual value of ` 10,000 at the end of year three. The estimated residual
value does not change over the term of the lease.
(vii) The interest rate implicit in the lease is 10.19%.
The lessor classifies the lease as a finance lease.
How should the Lessor account for the same in its books of accounts? Pass necessary
journal entries.
Ind AS 20
3. To encourage entities to expand their operations in a specified development zone, the
government provides interest-free loans to fund the purchase of manufacturing
equipment.
In accordance with the development scheme, an entity receives an interest -free loan of
` 5,00,000 from the government for a period of three years. The market rate of interest
for similar loans for 3 years is 5% per year.
There are no future performance conditions attached to the interest -free loan.
Discuss how to account for the above loan. Pass necessary journal entries in the entity’s
books of accounts from year 1 to year 3, as per relevant Ind AS.
Ind AS 1
4. As per the statutory requirements, exceptional items are required to be disclosed
whereas Ind AS 1 requires separate disclosures of material items and how these are to
be presented in the financial statements. Does that imply that ‘exceptional’ means
‘material’? Give examples. How should these be presented in the financial statements?
Ind AS 12
5. Following is the summarized statement of profit and loss of EARTH Limited as per
Ind AS for the year ended 31 st March 20X1:
Particulars ` in Crore
Revenue from operations 1,160.00
Other income 56.00
Total Income (A) 1,216.00
Purchase of stock-in-trade 40.00
Changes in inventories of stock-in-trade 6.00
Employee benefits expense 116.00
Finance costs 130.00
Depreciation and amortization expense 30.00
Ind AS 34
6. PQR Ltd. is preparing its interim financial statements for quarter 3 of the year. How the
following transactions and events should be dealt with while preparing its interim
financials:
(i) It makes employer contributions to government-sponsored insurance funds that are
assessed on an annual basis. During Quarter 1 and Quarter 2 larger amount of
payments for this contribution were made, while during the Quarter 3 minor
payments were made (since contribution is made upto a certain maximum level of
earnings per employee and hence for higher income employees, the maximum
income reaches before year end).
(ii) The entity intends to incur major repair and renovation expense for the office
building. For this purpose, it has started seeking quotations from vendors. It also
has tentatively identified a vendor and expected costs that will be incurred for this
work.
(iii) The company has a practice of declaring bonus of 10% of its annual operating
profits every year. It has a history of doing so.
Ind AS 41
7. ABC Ltd. is in the business of manufacturing an apple beverage and requires large
quantity of apples to manufacture such beverage. In order to satisfy its requirement of
apples, it enters into 3 years lease contracts with owners of apple orchards. The lea se
contracts are mainly of two types:
(1) Contract 1: The owner of the apple orchard (i.e. the lessor) raises the apple trees
to produce apples. ABC Ltd. (i.e. lessee) makes a fixed annual payment to the
owner of the apple orchard who is required to cultivate the produce as per the
specifications of ABC Ltd. ABC Ltd. harvests the apples itself for fulfilling its
requirement of apples.
(2) Contract 2: ABC Ltd. obtains the apple orchard from owner (i.e. the lessor) to raise
the apple trees for subsequent harvest of the apples to ensure that the apples are
as per the requirements of ABC Ltd. ABC Ltd. makes a fixed annual payment to
the owner of the apple orchards (i.e. the lessor).
Explain whether ABC Ltd. is engaged in agricultural activity as per Ind AS 41 in both of
the cases?
Ind AS 23
8. Harish Construction Company is constructing a huge building project consisting of four
phases. It is expected that the full building will be constructed over several years but
Phase I and Phase II of the building will be operational as soon as they are completed.
Following is the detail of the work done on different phases of the building during the
current year:
(` in lakh)
Phase I Phase II Phase III Phase IV
` ` ` `
Cash expenditure 10 30 25 30
Building purchased 24 34 30 38
Total expenditure 34 64 55 68
Total expenditure of all phases 221
Loan taken @ 15% at the beginning 200
of the year
After taking substantial period of construction, at the mid of the current year, Phase I
and Phase II have become operational. Find out the total amount to be capitalized and
to be expensed during the year.
Ind AS 103
9. How should contingent consideration payable in relation to a business combination be
accounted for on initial recognition and at the subsequent measurement in the following
cases:
(a) On 1 st April 20X1, A Ltd. acquires 100% interest in B Ltd. As per the terms of
agreement the purchase consideration is payable in the following 2 tranches:
• an immediate issuance of 10 lakhs shares of A Ltd. having face value of
` 10 per share;
• a further issuance of 2 lakhs shares after one year if the profit before interest
and tax of B Ltd. for the first year following acquisition exceeds ` 1 crore.
The fair value of the shares of A Ltd. on the date of acquisition is ` 20 per share.
Further, the management has estimated that on the date of acquisition, the fair
value of contingent consideration is ` 25 lakhs.
During the year ended 31 st March, 20X2, the profit before interest and tax of B Ltd.
exceeded ` 1 crore. As on 31 st March, 20X2, the fair value of shares of A Ltd. is
` 25 per share.
(b) Continuing with the fact pattern in (a) above except for:
• The number of shares to be issued after one year is not fixed.
• Rather, A Ltd. agreed to issue variable number of shares having a fair value
equal to ` 40 lakhs after one year, if the profit before interest and tax for the
first year following acquisition exceeds ` 1 crore.
Ind AS 102
10. The following particulars in respect of stock options granted by a company are available:
No. of Employees covered 400 Nominal Value per share ` 100
No. of options per Employee 60 Exercise price per share ` 125
Shares offered were put in three groups. Group 1 was for 20% of shares offered with
vesting period one-year. Group II was for 40% of shares offered with vesting period two -
years. Group III was for 40% of shares offered with vesting period three -years. Fair value
of option per share on grant date was ` 10 for Group I, ` 12.50 for Group II and ` 14 for
Group III.
Position on 1st Year Position on 2nd Year Position on 3rd Year
- No. of employees left - Employees left = 35 - Employees left = 28
= 40
- Estimate of employees - Estimate of employees - Employees exercising
to leave in Year 2 = 36 to leave in Year 3 = 30 Options in Group III =
295
- Estimate of employees - Employees exercising
to leave in Year 3 = 34 Options in Group II = 319
- Employees exercising
Options in Group I
= 350
Options not exercised immediately on vesting, were forfeited. Compute expenses to
recognise in each year and show important accounts in the books of the company.
Ind AS 7
11. What will be the classification for following items in the statement of cash flows of both
(i) Banks / Financial institutions and (ii) Other Entities?
S. Particulars
No.
1. Interest received on loans and advances given
2. Interest paid on deposits and other borrowings
3. Interest and dividend received on investments in subsidiaries, associates and
in other entities
4. Dividend paid on preference and equity shares, including tax on dividend paid
on preference and equity shares by other entities
5. Finance charges paid by lessee under finance lease
6. Payment towards reduction of outstanding finance lease liability
7. Interest paid to vendor for acquiring fixed asset under deferred payment basis
8. Principal sum payment under deferred payment basis for acquisition of fixed
assets
9 Penal interest received from customers for late payments
10. Penal interest paid to suppliers for late payments
11. Interest paid on delayed tax payments
12. Interest received on tax refunds
Ind AS 38
12. An entity has an intangible asset in the form of a product protected by patented
technology which is expected to be a source of net cash inflows for at least 15 years. It
has been recognised in the books on initial date at ` 12,00,000. The entity has a
commitment from a third party to purchase that patent in five years for 60 per cent of the
fair value of the patent at the date it was acquired, and the entity intends to sell the
patent in five years. Company is amortising the asset in 15 years considering its residual
value to be Zero. Annual amortization charged to Profit and Loss is ` 80,000. State,
whether the accounting treatment done by the Company is in accordance with
Ind AS 38? If not, then calculate the annual amortization of the intangible asset and also
the amount at which it will be reflected in the balance sheet.
Ind AS 115
13. A Ltd. owns 20 resorts across India. Every customer who stays in any of the resorts
owned by A Ltd. is entitled to get points on the basis of total amount paid by him. Under
this scheme, 1 point is granted for every ` 100 spent for stay in the resort. As per the
past experience of A Ltd., the likelihood of exercise of the points is 100% and the
standalone price of each such point is ` 5. Customer X spends ` 10,000 in one of the
resorts of A Ltd. What is the accounting treatment for the points granted b y A Ltd.?
Ind AS 105
14. Company A has financial year ending 31 st March, 20X0. On 1 st June, 20X0, the Company
has classified its Division B as held for sale in accordance with Ind AS 105. How
property, plant and equipment (PPE) for which the company has adopted cost model
shall be measured immediately before the classification as held for sale on
1 st June, 20X0?
Ind AS 37
15. HVCL manufactures heavy equipment for construction industry. An order for supply of
90 equipment was received from ABIL. The unit price of the equipment was agreed at
` 190 lakhs each. 64 equipment was supplied during the year 20X1-20X2 and balance
quantity remaining to be supplied as on 31.3.20X2. HVCL has 5 equipment in its
inventory as on 31.3.20X2. HVCL considered that the contract was an onerous contract
and therefore, the net realisable value of inventory has been taken as value of inventory
as on 31.3.20X2.
The management of HVCL contends that costs incurred towards administrative
overheads, finance charges, R & D expenses, sales overhead, head quarter expenditure
etc., are considered as period cost and hence not considered for creation of provision.
Hence, the same have not been included in the computation of unavoidable cost.
The management of HVCL has submitted the details of costs that have been considered
for creation of provision towards onerous contract:
o Material cost - includes cost of material procured, cost of freight & insurance
incurred for material procurement and handling, loading and unloading charges
incurred.
o Labour cost/ Factory Overheads - includes salaries and other expenses of direct
production department, and also expenses allocated from indirect departments to
direct department.
o Material Overheads - Includes salaries and other expenses (including expenses
allocated from other departments) booked under departments linked with materials
like purchases, stores and quality control.
Accordingly, provision has been made considering the above costs only. The value of
provision created for 21 remaining equipment to be produced is as per the working shown
below:
Particulars Value (` in lakh)
(i) Cost of production (which includes material cost, labour 199.00
cost/factory overhead and material overhead)
(ii) Selling price (190.00)
(iii) Differential cost per equipment 9.00
(iv) Differential cost of ` 9 Lakh per equipment for 21 189.00
equipment
Whether the company's accounting treatment of cost for creation of provision towards
onerous contracts is in line with the provisions of Ind AS 37?
On 31st March, 20X3, because of financial difficulties, the employee asked to extend the
interest-free loan for further three years. The entity agreed. Under the restructured
terms, repayment will take place on 31 st March, 20X7. However, the entity only expects
to receive a payment of ` 2,50,000, given the financial difficulty of the employee.
Explain the accounting treatment on initial recognition of loan and after giving effect of
the changes in the terms of the loan as per Ind AS 109. Support your answer with Journal
entries and amortised cost calculation, as on the date of initial recognition and on the
date of change in terms of loan.
Ind AS 40 and Ind AS 16
19. An entity owns a two-storey building. Floor 1 is rented out to independent third parties
under operating leases. Floor 2 is occupied by the entity’s administration and
maintenance staff. The entity can measure reliably the fair value of each floor of the
building without undue cost or effort. How the same will be classified / presented in the
balance sheet as per relevant Ind AS. What will be the accounting treatment as per
relevant Ind AS on initial and subsequent date?
Ind AS 8 and Ind AS 34
20. While preparing interim financial statements for the half-year ended
30th September, 20X1, an entity notes that there has been an under-accrual of certain
expenses in the interim financial statements for the first quarter ended 30 th June, 20X1.
The amount of under accrual is assessed to be material in the context of interim financial
statements. However, it is expected that the amount would be immaterial in the context
of the annual financial statements. The management is of the view that there is no ne ed
to correct the error in the interim financial statements considering that the amount is
expected to be immaterial from the point of view of the annual financial statements.
Whether the management’s view is acceptable?
ANSWERS
While preparing the financial statements for the financial year 20X3 -20X4, an error has
been discovered which occurred in the year 20X1-20X2, i.e., for the period which was
earlier than earliest prior period presented. The error should be corrected by restating
the opening balances of relevant assets and/or liabilities and relevant component of
equity for the year 20X2-20X3. This will result in consequential restatement of balances
as at 1 st April, 20X2 (i.e, opening balance sheet as at 1st April, 20X2).
Accordingly, on retrospective calculation of Share based options with respect to 80,000
options, Nuogen Ltd. will create ‘Share based payment reserve (equity)’ by ` 16,00,000
and correspondingly adjust the same though Retained earnings.
For 40,000 share based options to be vested on 31 st March, 20X5:
Since share-based options have not been vested before transition date, no option as per
Ind AS 101 is available to Nuogen Ltd. The entity will apply Ind AS 102 retrospectively.
However, Nuogen Ltd. did not account for the same at the grant date. This will result in
consequential restatement of balances as at 1 st April, 20X2 (i.e, opening balance sheet
as at 1st April, 20X2). Adjustment is to be made by recognising the ‘Share based
payment reserve (equity)’ and adjusting the retained earnings by ` 2,00,000.
Further, expenses for the year ended 31 st March, 20X3 and share based payment
reserve (equity) as at 31 st March, 20X3 were understated because of non-recognition of
‘employee benefits expense’ and related reserve. To correct the above errors in the
annual financial statements for the year ended 31 st March, 20X4, the entity should
restate the comparative amounts (i.e., those for the year ended 31 st March, 20X3) in the
statement of profit and loss. In the given case, ‘Share based payment reserve (equity)’
would be credited by ` 2,00,000 and ‘employee benefits expense’ would be debited by
` 2,00,000
For the year ending 31 st March, 20X4, ‘Share based payment reserve (equity)’ would be
credited by ` 2,00,000 and ‘employee benefits expense’ would be debited by ` 2,00,000.
Working Note:
Period Lot Proportion Fair value Cumulative Expenses
expenses
a b d= b x a e = d-
previous
period d
20X1-20X2 1 (1-year 1/1 16,00,000 16,00,000 16,00,000
vesting period)
20X1-20X2 2 (4-year 1/4 8,00,000 2,00,000 2,00,000
vesting period)
20X2-20X3 2 (4-year 2/4 8,00,000 4,00,000 2,00,000
vesting period)
Year 2
` `
Finance cost (profit or loss) Dr. 22,680
To Loan (financial liability) 22,680
(Being accretion of time value recognised on the financial
liability)
Year 3
` `
Finance cost (profit or loss) Dr. 23,720
To Loan (financial liability) 23,720
(Being accretion of time value recognised on the financial
liability)
Immediately after all the accretions are recognised, the carrying amount of the loan is
equal to its face value of ` 5,00,000, which is also the amount payable to the government.
` `
Loan (financial liability) Dr. 5,00,000
To Cash/Bank 5,00,000
(Being loan repaid to the government)
Working Note:
Calculation of Amortised Cost
Year Opening balance Interest at 5% Cash flow Closing balance
(A) (B) = (A) x 5% (C) (A) + (B) – (C)
1 4,32,000 21,600 – 4,53,600
2 4,53,600 22,680 – 4,76,280
3 4,76,280 23,720* (5,00,000) –
* Difference is due to approximation.
4. Exceptional items have not been defined in Indian Accounting Standards (Ind AS ).
However, paragraph 97 of Ind AS 1 requires that when items of income or expense are
material, an entity shall disclose their nature and amount separately.
As per Ind AS 1, information is material if omitting, misstating or obscuring it could
reasonably be expected to influence decisions that the primary users of general purpose
financial statements make on the basis of those financial statements, which provi de
financial information about a specific reporting entity. Materiality depends on the nature
or magnitude of information, or both and it could be the determining factor.
When items of income and expense within profit or loss from ordinary activities are of
such size, nature or incidence that their disclosure is relevant to explain the performance
of the enterprise for the period, the nature and amount of such items should be disclosed
separately.
Generally, items of income or expense fulfilling the abovementioned criteria are
classified as exceptional items and are disclosed separately.
From the above, it appears that all material items are not exceptional items. In other
words, exceptional items are those items which meet the test of ‘materiality’ (si ze and
nature) and the test of ‘incidence’.
Following are some examples which may give rise to a separate disclosure of items as
an ‘exceptional item’ in financial statements if they meet the test of ‘materiality’ and
‘incidence’:
(a) write-downs of inventories to net realisable value or of property, plant and
equipment to recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.
5. Reconciliation of income tax expense and current tax as per accounting profit
for the year ended 31 st March, 20X1
Particulars ` in crore
Accounting profit 594.00
Tax at the applicable tax rate of 30% 178.20
Tax effect of expenses that are not deductible in determining
taxable profits:
Penalties (1.00 x 30%) 0.30
Impairment of goodwill (44.00 x 30%) 13.20
Corporate social responsibility expense (6.00 x 30%) 1.80 15.30
Considering the above guidance, while preparing its interim financials, the transactions
and events of the given case should be dealt with as follows:
(i) If employer contributions to government-sponsored insurance funds are assessed
on an annual basis, the employer’s related expense is recognised using an
estimated average annual effective contribution rate in its interim financial
statements, even though a large portion of the payments have been made early in
the financial year. Accordingly, it should work out an average effective contribution
rate and account for the same accordingly, in its interim financials.
(ii) The cost of a planned overhaul expenditure that is expected to occur in later part
of the year is not anticipated for interim reporting purposes unless an event has
caused the entity to have a legal or constructive obligation. The mere intention or
necessity to incur expenditure related to the future is not sufficient to give rise to
an obligation.
(iii) A bonus is anticipated for interim reporting purposes, if and only if,
(a) the bonus is a legal obligation or past practice would make the bonus a
constructive obligation for which the entity has no realistic alternative but to
make the payments, and
(b) a reliable estimate of the obligation can be made. Ind AS 19, Employee
Benefits provides guidance in this regard.
A liability for bonus may arise out of legal agreement or constructive obligation
because of which it has no alternative but to pay the bonus and accordingly, needs
to be accrued in the annual financial statements.
Bonus liability is accrued in interim financial statements on the same basis as they
are accrued for annual financial statements. In the instant case, bonus liability of
10% of operating profit for the year to date may be accrued.
In the given case, since the company has past record of declaring annual bonus
every year, the same may be accrued using a reasonable estimate (applying the
principles of Ind AS 19, Employee Benefits) while preparing its interim results.
7. Paragraph 5 of Ind AS 41, Agriculture defines agricultural activity and biological
transformation as follows:
“Agricultural activity is the management by an entity of the biological transformation and
harvest of biological assets for sale or for conversion into agricultural produce or into
additional biological assets.”
“Biological transformation comprises the processes of growth, degeneration, production,
and procreation that cause qualitative or quantitative changes in a biological asset.”
Contract 1:
As per contract 1, during the 3 years of the contract, ABC Ltd. only harvests apples from
the apple orchards whereas biological transformation is managed by the owners of the
apple orchards (i.e. the lessor). Since ABC Ltd. is not involved in the biological
transformation of the apple orchards and is only harvesting biological assets , it cannot
be said to be an agricultural activity as per Ind AS 41. Hence, ABC Ltd. is not engaged
in agricultural activity as per Ind AS 41.
Contract 2:
As per contract 2, ABC Ltd. obtains the apple orchards and is actively involved in the
raising of apple trees in order to ensure that the apples are as per its requirements.
Since, it is actively managing the biological transformation and harvest of biological
asset, Hence, ABC Ltd. is engaged in agricultural activity as per Ind AS 41.
8.
Particulars `
1. Interest expense on loan ` 2,00,00,000 at 15% 30,00,000
2 Total cost of Phases I and II (` 34,00,000 +64,00,000) 98,00,000
3. Total cost of Phases III and IV (` 55,00,000 + ` 68,00,000) 1,23,00,000
4. Total cost of all 4 phases 2,21,00,000
5. Total loan 2,00,00,000
6. Interest on loan used for Phases I & II, based on proportionate 13,30,317
30,00,000 (approx.)
98,00,000
2
Loan amount = ,21,00,000
7. Interest on loan used for Phases III & IV, based on 16,69,683
30,00,000 (approx.)
1,23,00,00 0
proportionate Loan amount= 2,21,00,000
Accounting treatment:
1. For Phase I and Phase II
Since Phase I and Phase II have become operational at mid of the year, half of the
interest amount of ` 6,65,158.50 (i.e. ` 13,30,317/2) relating to Phase I and
Phase II should be capitalized (in the ratio of asset costs 34:64) and added to
respective assets in Phase I and Phase II and remaining half of the interest amount
of ` 6,65,158.50 (i.e. ` 13,30,317/2) relating to Phase I and Phase II should be
expensed off during the year.
2. For Phase III and Phase IV
Interest of ` 16,69,683 relating to Phase III and Phase IV should be held in Capital
Work-in-Progress till assets construction work is completed, and thereafter
capitalized in the ratio of cost of assets. No part of this interest amount should be
charged/expensed off during the year since the work on these phases has not been
completed yet.
9. Paragraph 39 of Ind AS 103 provides that the consideration the acquirer transfers in
exchange for the acquiree includes any asset or liability resulting from a contingent
consideration arrangement. The acquirer shall recognise the acquisition-date fair value
of contingent consideration as part of the consideration transferred in exchange for the
acquiree.
With respect to contingent consideration, obligations of an acquirer under contingent
consideration arrangements are classified as equity or a liability in accordance with
Ind AS 32
Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for
contingent consideration.
(a) (i) In the given case, the amount of purchase consideration to be recognized
on initial recognition shall as follows:
Fair value shares issued (10,00,000 x ` 20) ` 2,00,00,000
Fair value of contingent consideration ` 25,00,000
Total purchase consideration ` 2,25,00,000
(ii) Subsequent measurement of contingent consideration payable for
business combination
In the given case, given that the acquirer has an obligation to issue fixed
number of shares on fulfillment of the contingency, the contingent
consideration will be classified as equity as per the requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as
equity should not be re-measured and its subsequent settlement should be
accounted for within equity.
In the given case, the obligation to pay contingent consideration amounting to
` 25,00,000 is recognised as a part of equity and therefore not be re-measured
subsequently or on issuance of shares.
(b) (i) In the given case, the amount of purchase consideration to be recognized
on initial recognition is as follows:
Fair value shares issued (10,00,000 x ` 20) ` 2,00,00,000
Fair value of contingent consideration ` 25,00,000
Total purchase consideration ` 2,25,00,000
(ii) Subsequent measurement of contingent consideration payable for
business combination
In the given case, the contingent consideration will be classified as liability as
per Ind AS 32.
Year 3
To Share-based Payment Reserve A/c 33,712 By Profit and Loss A/c 33,712
33,712 33,712
Working Note:
Calculation of Securities Premium
Group I Group II Group III
Year 1 Year 2 Year 3
Exercise Price received per share 125.00 125.00 125.00
Value of service received per share, being the FV
of the Options 10.00 12.50 14.00
Total Consideration received per share 135.00 137.50 139.00
Less: Nominal Value per share (100.00) (100.00) (100.00)
Securities Premium per share 35.00 37.50 39.00
11. The following are the classification of various activities in the Statement of Cash Flows:
S. Particulars Classification for reporting cash flows
No. Banks / financial Other entities
institutions
1. Interest received on loans Operating Activities Investing activities
and advances given
2. Interest paid on deposits and Operating Activities Financing activities
other borrowings
3. Interest and dividend Investing activities Investing activities
received on investments in
subsidiaries, associates and
in other entities
4. Dividend paid on preference Financing activities Financing activities
and equity shares, including
tax on dividend paid on
preference and equity shares
by other entities
5. Finance charges paid by Financing activities Financing activities
lessee under finance lease
13. Paragraph B40 of Ind AS 115, inter alia, states that, “if in a contract, an entity grants a
customer the option to acquire additional goods or services, that option gives rise to a
separate performance obligation only if the option provides a material right to the
customer that it would not receive without entering into that contract”.
Further, paragraph B41 states that if a customer has the option to acquire an additional
good or service at a price that would reflect the stand-alone selling price for that good or
service, that option does not provide the customer with a material right even if the option
can be exercised only by entering into a previous contract. In those cases, the entity has
made a marketing offer that it shall account for in accordance with this Standard only
when the customer exercises the option to purchase the additional goods or services .
In the given case, the customer does get a material right by way of a discount of ` 500
for every 100 points that he would not receive without the previous stay in that resort.
Thus, the customer in effect pays the entity in advance for future goods and the entity
recognises revenue when the goods are transferred.
According to paragraph B42, paragraph 74 requires an entity to allocate the transaction
price to performance obligations on a relative stand-alone selling price basis. If the
standalone selling price for a customer’s option to acquire additional goods or services
is not directly observable, an entity shall estimate it on the basis of percentage discount
the customer may obtain upon exercising the option and the likelihood of the option
getting exercised.
In accordance with above, an entity shall account for award credit as a separate
performance obligation of the sales transactions in which they are initially granted. The
value of the consideration the entity expects to be entitled in respect of the initial sale
shall be allocated between the award credits and the other components of the sale.
In the current case, the standalone selling price of the 100 points is ` 500. A Ltd. should
allocate the fair value of the consideration (i.e. ` 10,000) between the points and the
other components of the sale as ` 476 (500/10,500 x 10,000) and ` 9,524
(10,000/10,500 x 10,000) respectively in proportion of their standalone selli ng price.
Since A Ltd. supplies the awards itself (i.e. it acts as a principal), it should recognise
` 476 as revenue when points are redeemed.
14. Paragraph 18 of Ind AS 105 provides that 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.
In the instant case, Company A should measure the property, plant and equipment (for
which it has adopted cost model), in accordance with Ind AS 16, Property, Plant and
Equipment. Hence, depreciation should be provided upto 31 st May, 20X0.
15. As per para 68 of Ind AS 37, onerous contract is a contract in which the unavoidable
costs of meeting the obligations under the contract exceed the economic benefits
expected to be received under it. The unavoidable cost under a contract reflects the
least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and
any compensation for penalties arising from failure to fulfilling it.
Ind AS 37 provides that the amount recognised shall be the best estimate of the
expenditure required to settle the present obligation, which is the amount that an entity
would rationally pay to settle the obligation at the end of the reporting period or to transfer
it to a third party at that time. In case of onerous contracts, an amount that an entity
would rationally pay to settle the obligation would be the lower of the compensation or
penalties arising from failure to fulfil the contacts and excess of unavoidable cost of
meeting the obligations under the contract from the economic benefits expected to be
received under it.
As per para 68 of Ind AS 37, the cost of fulfilling a contract comprises the costs that
relate directly to the contract. Costs that relate directly to a contract consist of both -
(a) the incremental costs of fulfilling that contract—for example, direct labour and
materials; and
(b) an allocation of other costs that relate directly to fulfilling contracts — for example,
an allocation of the depreciation charge for an item of property, plant and equipment
used in fulfilling that contract among others.
The unavoidable costs of meeting the obligations under the contract are only costs that:
• "are directly variable with the contract and therefore incremental to the performance
of the contract;"
• do not include allocated or shared costs that will be incurred regardless of whether
the entity fulfils the contract or not; and
• cannot be avoided by the entity's future actions.
Accordingly, HVCL has correctly measured the cost for creation of provision for onerous
contracts by considering material cost, labour cost (to the extent it relates directly to
production) and material overheads (to the extent it relates directly to production).
Further, HVCL is correct that the period cost will not be considered for measurement of
cost for the purpose of creation of provision on onerous contracts as they do not relate
directly to fulfilling the contracts.
16. (i) Calculation of Inventory cost:
Particulars Amount (`)
Purchase Price (1,30,000 – 20,000 – 10,000) 1,00,000
Non-refundable import duties 20,000
Transport cost 5,000
Total 1,25,000
Note: The cost of purchase excludes the refundable purchase taxes paid on
acquisition of the goods as the ` 10,000 paid will be refunded to the retailer.
Ind AS 2 specifically exclude selling cost from forming part of cost of inventory .
However, selling and distribution costs are generally used as single term because
both are related, as selling costs are incurred to effect the sale and the distribution
costs are incurred by the seller to complete a sale transaction by making the goods
available to the buyer from the point of sale to the point at which the buyer takes
possession. Since these costs are not related to bringing the goods to their present
location and condition, the same are not included in the cost of inventories.
Accordingly, though the word ‘distribution costs’ is not specifically mentioned in Ind
AS 2, these costs would continue to be excluded from the cost of inventories.
Therefore, it excludes the selling expenses incurred (i.e., ` 2,000 delivery costs
and ` 3,000 other selling costs).
(ii) Paragraph 16 of Ind AS 16, Property, Plant and Equipment, inter alia states that the
cost of an item of property, plant and equipment comprises the initial estimate of
the costs of dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either when the item is acquired or
as a consequence of having used the item during a particular period for purposes
other than to produce inventories during that period.
Further, paragraph 18 of Ind AS 16 states that an entity applies Ind AS 2 to the
costs of obligations for dismantling, removing and restoring the site on which an
item is located that are incurred during a particular period as a consequence of
having used the item to produce inventories during that period. The obligations for
costs accounted for in accordance with Ind AS 2 or Ind AS 16 are recognised and
measured in accordance with Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets.
Paragraph 16 of Ind AS 16 clarifies that decommissioning costs that meet the
recognition criteria under Ind AS 37, Provisions, Contingent Liabilities and Contingent
Assets, for a provision are added to the cost of an item of property, plant and
equipment if such costs are not incurred through the asset’s use to produce
inventories. Paragraph 18 fills the gap by clarifying where such costs are incurred
through the asset’s use to produce inventories, they are added to the cost of
inventories.
Where the obligation to restore the asset arises due to the use of the asset to
produce inventories but not due to the asset’s installation, construction or
acquisition, the costs are added to the costs of inventories.
Based on the above provisions and discussion, cost of restoring the site ` 20,000
incurred during the period of production as a consequence of having used the item
to produce inventories during that period should be added to the cost of inventories.
However, later the inventories are measured at the lower of cost and net realisable
value in accordance with paragraph 9 of Ind AS 2.
17. To determine the diluted EPS of Company P, the diluted EPS of Company S has to be
calculated first.
Calculation of Company S’s diluted EPS:
Company S’s earnings for the period ` 30,000
Weighted average ordinary shares 10,000
Incremental shares (refer W.N.) 200
Company S’s diluted EPS ` 30,000/ (10,000 + 200)
` 2.94
18. As the loan is not at a market interest rate, hence it is not recorded at the transaction price
of ` 5,00,000. Instead, the entity measures the loan receivable at the present value of the
future cash inflows discounted at a market rate of interest available for a similar loan.
The present value of the loan receivable (financial asset) discounted at 5% per year is
` 5,00,000 ÷ (1.05) 3 = ` 4,32,000. Therefore, ` 4,32,000 is recorded on initial
measurement of the loan receivable. This amount will accrete to ` 5,00,000 over the
three-year term using the effective interest method.
The difference between ` 5,00,000 and ` 4,32,000 i.e., ` 68,000 is accounted for as
prepaid employee cost in accordance with Ind AS 19 ‘Employee Benefits’, which will be
deferred and amortised over the period of loan on straight line basis.
The journal entries on initial recognition are:
` `
Loan receivable (financial asset) Dr. 4,32,000
Prepaid employee cost (asset) Dr. 68,000
To Cash / Bank (financial asset) 5,00,000
(Being loan granted to the employee recognised)
Property mentioned in (a) above would be covered under Ind AS 16 ‘Property, Plant and
Equipment’.
On applying the above provisions, Floor 1 of the building is classified as an item of
investment property by the entity (lessor) because it is held to earn rentals. Ind AS 40
is applicable in this case. An investment property should be measured initially at its cost.
After initial recognition, an entity shall measure all of its investment properties in
accordance with Ind AS 16’s requirements for cost model. However, entities are required
to measure the fair value of investment property, for the purpose of disclosure even
though they are required to follow the cost model.
Floor 2 of the building will be classified as property, plant and equipment because it is
held by administrative staff i.e. it is held for use for administrative purposes. Ind AS 16
is applicable in this case. An item of property, plant and equipment that qualifies for
recognition as an asset should be initially measured at its cost. After recognition, an
entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment.
20. Paragraph 41 of Ind AS 8, inter alia, states that financial statements do not comply with
Ind AS if they contain either material errors or immaterial errors made intentionally to
achieve a particular presentation of an entity’s financial position, financia l performance
or cash flows.
As regards the assessment of materiality of an item in preparing interim financial
statements, paragraph 25 of Ind AS 34, Interim Financial Statements, states that 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 the 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
report includes all information that is relevant to understanding an entity’s financial
position and performance during the interim period.
As per the above, while materiality judgements always involve a degree of subjectivity,
the overriding goal is to ensure that an interim financial report includes all the information
that is relevant to an understanding of the financial position and performance of the entity
during the interim period. It is therefore not appropriate to base quantitative assessments
of materiality on projected annual figures when evaluating errors in interim financial
statements.
Accordingly, the management is required to correct the error in the interim financial
statements since it is assessed to be material in relation to interim period data.