Ifrs25122 PDF

Model and Past Question Papers
for Certificate Course on IFRS
The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
New Delhi
i
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July, 2014
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Ind AS (IFRS) Implementation Committee
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ii
Foreword
In this era of globalisation, where cross-border
movement of capital is increasing, the users of the
financial statements of an entity are no longer limited to
single country. It is increasingly being felt that financial
statements should be comparable with other entities
across the globe. In order to achieve this objective, the
accounting principles for reporting financial information
should be uniform in all the countries. All this has
necessitated the establishment of a single set of globally
accepted financial reporting system. The International
Financial Reporting Standards (IFRS) issued by the International Accounting
Standards Board (IASB) are increasingly being recognised as global financial
reporting standards. Currently, more than 130 nations and reporting jurisdictions
permit or require the use of IFRS, and many other countries are replacing their
national standards with IFRS. In India, ICAI has always propagated the need to
converge with IFRS at the earliest to bring the financial reporting practices of the
Indian corporates at par with the global standards. In this regard, we are glad
to note that the Honble Finance Minister in his Union Budget 2014-15 speech
has proposed that the new Indian Accounting Standards (Ind AS) converged with
IFRS shall be adopted by the Indian Companies from the financial year 2015-16
voluntarily and from the financial year 2016-17 on mandatory basis.
Considering the major developments in India with regard to convergence with
IFRS and global developments in the area of IFRS, Ind AS (IFRS) Implementation
Committee had been constituted by the Institute of Chartered Accountants
of India. The Ind AS (IFRS) Implementation Committee of the ICAI has been
making relentless efforts in order to impart education about IFRS and Ind AS.
The Committee has been taking various initiatives such as, formulation of
Educational Materials, conducting IFRS Certificate Courses, workshops, awareness
programmes on IFRS across the country and abroad.
An extensive Certificate Course on IFRS is being conducted by the Committee with
sufficient classroom training and e-learning facility to make the members competent
in this era of IFRS. This Course is conducted at various locations throughout the
country and abroad. Apart from the comprehensive theoretical aspects, this course,
the first of its kind, will sharpen the expertise and excellence of our members. As
a value addition measure and to make course participants familiar with the nature
and type of questions being asked in the previous examinations and also to help
them to test their preparation level, the Ind AS (IFRS) Implementation Committee
has decided to come out with a publication Model & Past Question Papers for
Certificate Course on IFRS.
iii
I congratulate CA. Rajkumar S. Adukia, Chairman, Ind AS (IFRS) Implementation

Committee, for formulating this publication. I would also like to place on record
deep appreciation of efforts put in by the Committee in formulation and finalisation
of this publication.
I sincerely believe that this publication will be of immense use to the members
pursuing Certificate Course on IFRS. I am confident that all these efforts of
Ind AS (IFRS) Implementation Committee will take the Certificate course on IFRS
to newer heights.
CA. K. Raghu
President
New Delhi
July 29, 2014
iv
Preface
Accounting is about Accountability. Accounting allows
a company to analyse the financial performance of the
business, and arrive at the net profit. It is a complete
record of all the activities of a business providing details
of every aspect of the business, allowing the analysis
of business trends, and providing insight into future
prospects.
Double-entry accounting system is an accounting
technique which records each transaction both as a
credit and a debit. Luca Pacioli, an Italian Mathematician born in 1447, introduced
a method of bookkeeping that Venetian merchants used during the Italian
Renaissance, known as the double-entry accounting system.
International Financial Reporting Standard (IFRS) is based on this Double entry
system of accounting, revolving around three types of accounts namely personal,
real and nominal. It is important to read these standards standalone and in logical
groups.
Accounting Standards developed across countries regularise the accounting
methodology and ensuring proper recognition of income. Thanks to globalisation,
our trade and businesses have grown leaps and bounds, bringing with it an
uncertainty pertaining to the financial accounting of business transactions. It is true
that accounting methodologies differ among countries, resulting in incomparability
of financial statements.
The International Financial Reporting Standards or IFRS as they are known as,
steps in as a solution to this persistent problem enabling ease of comparison,
universality, removal of redundancy, comprehensiveness keeping in mind the rise
in changing business models and different accounting policies across the globe.
International Financial Reporting Standards (IFRS) is a set of international
accounting standards that prescribe how certain transactions and other events
are to be reported as financial statements. Issued by the International Accounting
Standards Board (IASB) these IFRS standards are being considered a benchmark
in the world of accounting. With accounting bodies across the globe aligning their
accounting standards in line with IFRS, it has become the buzzword in financial
reporting.
With more than 130 countries across the world adopting IFRS standards, it is time
we explore these global standards in accounting and understand the nuances
which make these standards really global.
v
In this era of IFRS, Ind AS (IFRS) Implementation Committee of ICAI has been
taking every possible effort to create awareness on IFRS in India and abroad as
well by formulating learning materials on IFRS and conducting IFRS Certificate
Courses, workshops and awareness programmes on IFRS across the country and
abroad.
The Committee has been making relentless efforts to improvise the shape &
structure of the Certificate Course on IFRS. Efforts have been made to make
the course more comprehensive. Further, to make learning on IFRS more
comprehensive and effective, the Committee has brought out this publication, i.e.
Model & Past Question Papers for Certificate Course on IFRS.
I may mention that the views expressed in this publication are not necessarily the
views of the Council of the Institute. The views expressed in this publication are
those of author(s). The purpose of this publication is to provide broad knowledge
about IFRS. However, while applying IFRS in a practical situation, reference should
be made to the text of the Standards.
I would place on record my sincere appreciation of the efforts put in by various
faculties & resource persons in developing the draft of this publication.
I would like to place on record my special thanks to our Honourable President
CA. K. Raghu and Vice-President CA. Manoj Fadnis for providing me this
opportunity of bringing out this publication. I would like to thank my Council
colleagues at Ind AS (IFRS) Implementation Committee, viz., CA. Shiwaji
Bhikaji Zaware, Vice Chairman, CA. Pankaj Inderchand Jain, CA. Nihar Niranjan
Jambusaria, CA. Shriniwas Y. Joshi, CA. Sanjeev K. Maheshwari, CA. M. Devaraja
Reddy, CA. V. Murali, CA. S. Santhanakrishnan, CA. Abhijit Bandyopadhyay,
CA. Subodh Kumar Agrawal, CA. Shyam Lal Agarwal, CA. Sanjay Agarwal,
CA. Naveen N. D. Gupta, Shri Manoj Kumar, Shri Sunil Kanoria. I wish to place on
record my gratitude for the co-opted members on the Committee, viz., CA. Sanjay
Jain, CA. Vivek Jagdish Capoor, CA. Ranjay Kumar Mishra, CA. N. Nityananda,
CA. Indraneel Roy Choudhury, CA. D. S. Vivek and Special Invitees, viz.,
CA. Dhinal Ashvinbhai Shah, CA. N. Venkatram, CA. Murali Ganesan, CA. Manu
Chada, CA. Kamal Garg and CA. R. Venkat Subramani for their valuable inputs.
I am confident that this publication, i.e. Model & Past Question Papers for
Certificate Course on IFRS will be of immense use to the participants of the
Certificate course.
Mumbai
July 29, 2014
CA. Rajkumar S. Adukia

Chairman,
Ind AS (IFRS) Implementation Committee
vi
Contents
Model Question Papers for Certificate Course on IFRS
Page
Nos.
1.
Model Question Paper1
1-22
2.
23-36
3.
37-52
4.
53-70
5.
71-82
6.
83-102
7.
103-128
8.
129-148
9.
149-162
10.
163-186
11.
187-200
12.
201-222
13.
223-246
14.
247-278
15.
279-306
16.
307-328
17.
329-350
18.
351-374
19.
375-390
20.
391-418
21.
419-448
22.
449-466
23.
467-484
24.
485-512
25.
513-540
vii
viii
Model and Past Question papers for Certificate Course on IFRS
Model Question Paper 1

IFRS Certificate Course Examinations in India
Answer all questions
Full Marks : 100
Time: 3 Hours
Section A Objective Type Questions
(30 x 1.5 marks = 45 marks)
Q1. The common characteristic of all service concession arrangements is that

the operator both receives a right and incurs an obligation to provide public
services?
Q2. According to Appendice A distribution of non-cash assets to owners of Ind
AS 10 (events after the reporting period), the liability to pay a dividend shall
be recognised when the dividend is appropriately authorised or at the sole
discretion of the entity?
Q3. Change in accounting policy does not include change of method of valuation
of inventory from FIFO to weighted-average.
Q4. A construction company is in the middle of a two-year construction contract
when it receives a letter from the customer extending the contract by a year
and requiring the construction company to increase its output in proportion
of the number of years of the new contract to the previous contract period.
This is allowed in recognizing additional revenue according to IAS 11 it is
probable that the customer will approve the variation and the amount of
revenue arising from the variation, and the amount of revenue can be reliably
measured.
Q5. The price that would be received to sell an asset or paid to transfer a liability
is called entry price.
Q6. Imputed cost of equity may not be eligible for capitalisation as borrowing
costs under IAS 23?
Q7. An obligation to deliver own shares worth a fixed amount of cash is a
financial liability?
1

Q8. If a bonus issue occurs between the year-end and the date that the financial
statements are authorised, then EPS both for the current and the previous
year are adjusted.
Q9. Where part of the cash-generating unit is disposed of, the goodwill associated
with the element disposed of shall not be included in the calculation of gain
or loss on disposal.
Q10. Share-based payment relating to an acquisition of a subsidiary involving
the issuance of shares does not come within the Scope of a share-based
payment as covered under IFRS 2?
Q11. Which of the following is not specifically a required disclosure of
IAS 1?
a.
Name of the reporting entity or other means of identification, and any

change in that information from the previous year.
b.
Names of major/significant shareholders of the entity.
c.
Level of rounding used in presenting the financial statements.
d.
Whether the financial statements cover the individual entity or a group

of entities.
Q12. Which of the following costs of conversion cannot be included in cost of

inventory?
a.
Cost of direct labour.
b.
Factory rent and utilities.
c.
Salaries of sales staff (sales department shares the building with factory
supervisor).
d.
Factory overheads based on normal capacity.
Q13. How should an unrealised gain on foreign currency translation be presented

in a statement of cash flows?
a.
As an inflow in the financing activities section of the statement of cash

flows because it arises from a foreign currency translation.
b.
It should be ignored for the purposes of the statement of cash flows as

it is an unrealised gain.
2

c.
It should be ignored for the purposes of the statement of cash flows

as it is an unrealised gain but it should be disclosed in the footnotes to
the financial statements by way of abundant precaution.
d.
As the starting point for the cash flow would be the Profit before tax /
profit after tax and foreign currency translation being non-cash item, no
adjustment is required in the section of the statement of cash flows.
Q14. A deductible temporary difference generates a

a.
Deferred tax Liability.
b.
Deferred tax Asset.
c.
Either 1 or 2.
Q15. The classification of a lease as either an operating or finance lease is based

on
a.
The length of the lease.
b.
The transfer of the risks and rewards of ownership.
c.
The minimum lease payments being at least 50% of the fair value.
d.
The economic life of the asset.
Q16. An entity is acting as a principal when it has exposure to the significant risks
and rewards associated with the sale of goods or the rendering of services.
Which of the following features indicates that an entity is not acting as a
principal?
a.
The entity has the primary responsibility for providing the goods or
services desired by the customer or for fulfilling the order, for example
by being responsible for the acceptability of the products or services
ordered or purchased by the customer.
b.
The entity has inventory risk before or after the customer order, during
shipping or on return.
c.
The entity has discretion in establishing prices directly or indirectly, such

as by providing additional goods or services.
d.
The entity does not have the credit risk

3

Q17. Which of these disclosures is not required by IAS 20?
a.
The accounting policy adopted for government grants, including

methods of presentation adopted in the financial statements.
b.
Unfulfilled conditions and other contingencies attached to government

assistance.
c.
The names of the government agencies that gave the grants along with
the dates of sanction of the grants by these government agencies and
the dates when cash was received in the case of monetary grants.
d.
The nature and extent of government grants recognized in the financial

statements and an indication of other forms of government assistance
from which the entity has directly benefited.
Q18. IAS 24 requires disclosure of compensation of key management personnel.

Which of the following would not be considered compensation for this
purpose?
a.
Short-term benefits.
b.
Share-based payments.
c.
Termination benefits.
d.
Reimbursement of out-of-pocket expenses.
Q19. Consolidated financial statements are presented on the basis that the
companies within the group are treated as if they are a single (economic)
entity. Which of the following are requirements of preparing group accounts?
(i)
All subsidiaries must adopt the accounting policies of the parent in their
separate financial statements
(ii) Subsidiaries with activities which are substantially different to the

activities of other members of the group should not be consolidated
(iii) All entity financial statements within a group should (generally) be
prepared to the same accounting year end prior to consolidation
(iv) Unrealised profits within the group must be eliminated from the
consolidated financial statements
a.
All four
4

b.
(i) and (ii) only
c.
(i), (iii) and (iv)
d.
(iii) and (iv)
Q20. Best Ltd is a company which buys agricultural produce from wholesale
suppliers for retail to the general public. It is preparing its financial statements
for the year ending 30 September 2014 and is considering its closing
inventory. In addition to IAS 2 Inventories, which of the following IFRSs may
be relevant to determining the figure to be included in its financial statements
for closing inventories?
a.
IAS 10 Events After the Reporting Period
b.
IAS 11 Construction Contracts
c.
IAS 16 Property, Plant and Equipment
d.
IAS 41 Agriculture
Q21. An entity acquired all the share capital of a foreign entity at a consideration
of 9 million on June 30, 2013. The fair value of the net assets of the foreign
entity at that date was 6 million. The functional currency of the entity is
the dollar. The financial year-end of the entity is December 31, 2013. The
exchange rates at June 30, 2013, and December 31, 2013, were 1.5 = $1
and 2 = $1 respectively. What figure for goodwill should be included in the
financial statements for the year ended December 31, 2013?
a.
$2 million.
b.
3 million.
c.
$1.5 million.
d.
$3 million.
Q22. Mask, a private limited company, has arranged for Man, a public limited
company, to acquire it as a means of obtaining a stock exchange listing. Man
issues 15 million shares to acquire the whole of the share capital of Mask (6
million shares). The fair value of the net assets of Mask and Man are ` 30
million and ` 18 million respectively. The fair value of each of the shares of
5

Mask is ` 6 and the quoted market price of Mans shares is ` 2. The share
capital of Man is 25 million shares after the acquisition. Calculate the value
of goodwill in this acquisition.
a.
` 16 million.
b.
` 12 million.
c.
` 10 million.
d.
` 6 million.
Q23. On January 1, 2010, Robust Ltd. purchased heavy-duty equipment

for ` 400,000. On the date of installation, it was estimated that the
machine has a useful life of ten years and a residual value of
` 40,000. Accordingly the annual depreciation worked out to ` 36,000 =
[(` 400,000 ` 40,000)/10].

On January 1, 2014, after four years of using the equipment, the company
decided to review the useful life of the equipment and its residual value.
Technical experts were consulted. According to them, the remaining useful
life of the equipment at January 1, 2014, was seven years and its residual
value was ` 46,000. The revised annual depreciation for the year 2014 and
future years will be
a.
` 30,000.
b.
` 32,181.
c.
` 35,714.
d.
` 25,000.
Q24. Excellent Ltd. built a new factory building during 2009 at a cost of ` 20
million. At December 31, 2013, the net book value of the building was
` 19 million. Subsequent to year-end, on March 15, 2014, the building was
destroyed by fire and the claim against the insurance company proved futile
because the cause of the fire was negligence on the part of the caretaker
of the building. If the date of authorisation of the financial statements for the
year ended December 31, 2013, was March 31, 2014, Excellent Ltd. should
a.
Write off the net book value to its scrap value because the insurance
claim would not fetch any compensation.
6

b.
Make a provision for one-half of the net book value of the building.
c.
Make a provision for three-fourths of the net book value of the building
based on prudence.
d.
Disclose this non-adjusting event in the footnotes.
Q25. Mediocre Ltd. has entered into a very profitable fixed-price contract for
constructing a highrise building over a period of three years. It incurs the
following costs relating to the contract during the first year:

Cost of material = ` 2.5 million
Site labor costs = ` 2.0 million
Agreed administrative costs as per contract to be reimbursed by the

customer = ` 1 million
Depreciation of the plant used for the construction = ` 0.5 million
Marketing costs for selling apartments when they are ready =

` 1.0 million
Total estimated cost of the project = ` 18 million.

The percentage of completion of this contract at the year-end is
a.
50% (= 6.0/18.0)
b.
27% (= 4.5/16.5)
c.
25% (= 4.5/18.0)
d.
39% (= 7.0/18)
Q26. Entity X is involved in a business acquisition on January 1, 2013. At the

date of acquisition the deferred tax assets were ` 300,000. On January 1,
2013, the directors considered that realisation of the deferred tax assets were
not probable. What effect would this decision have on the allocation of the
purchase price?
a.
The unrecognised deferred tax would be allocated to goodwill, which

would increase by ` 300,000.
b.
The value of goodwill would decrease by ` 300,000.
c.
There would be no effect on goodwill.
d.
Negative goodwill of ` 300,000 would arise.

7

Q27. On 1 November 2013, a company which prepares financial statements to
31st March each year classifies a non-current asset as held for sale. The
assets carrying amount on 1 November 2013 is ` 40,000 and its fair value
less costs to sell is ` 35,000. The asset is still held on 31 March 2014, when
its fair value less costs to sell is ` 27,500. The impairment losses that should
be recognised are:
a. 1/11/2013 ` nil; 31/3/2014 ` 12,500
b. 1/11/2013 ` 5,000; 31/3/2014 ` 12,500
c. 1/11/2013 ` 5,000; 31/3/2014 ` 7,500
d. 1/11/2013 ` nil; 31/3/2014 ` nil
Q28. A companys estimate of its current tax liability for the year to
31 December 2012 differed from the actual tax liability by ` 10,000. This
resulted in a credit balance of ` 10,000 being shown in the companys trial
balance as at 31 December 2013. The current tax liability for the year to
31 December 2013 is estimated to be ` 340,000.

The current tax expense which should be shown in the statement of

comprehensive income for the year to 31 December 2013 is:
a.
` 10,000
b.
` 340,000
c.
` 350,000
d.
` 330,000
Q29. Bespoke Ltd. has manufactured a machine specifically to the design of its
customer. The machine could not be used by any other party. Bespoke
Ltd. has never manufactured this type of machine before and expects a
number of faults to materialise in its operation during its first year of use,
which Bespoke Ltd. is contractually bound to rectify at no further cost to the
customer. The nature of these faults could well be significant. As of Bespoke
Ltd.s year-end, the machine had been delivered and installed, the customer
invoiced for ` 100,000 (the contract price), and the costs incurred by
8

Bespoke Ltd. up to that date amounted to ` 65,000. The revenue recognition
for this transaction will be:
a.
` 100,000
b.
` 65,000
c. Zero
d.
None of the above
Q30. An entity has a 100% owned foreign subsidiary, which it carries at its original
cost of $2 million. It sells the subsidiary on March 31, 2014, for 5 million.

As of March 31, 2013, the balance on the exchange reserve was $300,000
credit. The functional currency of the entity is the dollar, and the exchange
rate on March 31, 2014, is $1 = 2. The net asset value of the subsidiary at
the date of disposal was $2.4 million. What will be the total gain on disposal
of subsidiary in the standalone books of the entity?
a.
$0.5 million
b.
$0.1 million
c.
$0.4 million
d.
$0.3 million

Section B Descriptive Questions
(7 x 5 marks = 35 marks)
Q31. XYZ Ltd. is a manufacturer of televisions. The domestic market for electronic
goods is currently not doing well, and therefore many entities in this business
are switching to exports. As per the audited financial statements for the
year ended December 31, 2013, the entity had net losses of ` 2 million.
At December 31, 2013, its current assets aggregate to ` 20 million and
the current liabilities aggregate to ` 25 million. Due to expected favourable
changes in the government policies for the electronics industry, the entity
is projecting profits in the coming years. Furthermore, the shareholders of
the entity have arranged alternative additional sources of finance for its
expansion plans and to support its working needs in the next 12 months.

Required
Should XYZ Ltd. prepares its financial statements under the going concern
assumption? Provide reason for your conclusion.
Q32. Miracle Construct Ltd. is executing a gigantic project of constructing

the tallest building in the country. The project is expected to take three
years to complete. The company has signed a fixed-price contract of
` 12,000,000 for the construction of this prestigious tower.

The details of the costs incurred to date in the first year are
Site labour costs
` 1,000,000
Cost of construction material
` 3,000,000
Depreciation of special plant and equipment used in

contracting to build the tallest building
` 500,000
Marketing and selling costs to get the

tallest building in the country the right exposure
` 1,000,000
Total
` 5,500,000
Total contract cost estimated to complete ` 5,500,000
Required
Calculate the percentage of completion and the amounts of revenue, costs,

and profits to be recognised under IAS 11.
10

Q33. Which of the following situations signify that risks and rewards have not
been transferred to the buyer?
1.
XYZ Ltd. sells goods to ABC Ltd. In the sales contract, there is a
clause that the seller has an obligation for unsatisfactory performance,
which is not governed by normal warranty provisions.
2.
Zeta Ltd. shipped machinery to a destination specified by the buyer. A

significant part of the transaction involves installation that has not yet
been fulfilled by Zeta Ltd.
3.
The buyer has the right to cancel the purchase for a reason not
specified in the contract of sale (duly signed by both parties) and the
seller is uncertain about the outcome.
Q34. What comprises a complete set of financial statement prepared under IFRS.
How they are different from Indian GAAP (AS) and Ind AS?
Q35. Define adjusting and non-adjusting event with appropriate examples. Whether
dividend to ordinary shareholder declared after reporting period but before the
financial statement are authorized for issue is an adjusting or non-adjusting
event under IFRS? What would be the treatment of such dividend under Ind
AS and Indian GAAP (AS)?
Q36. Define an onerous contract? What are the recognition and measurement
rules in relation to onerous contract as per IAS 37?
Q37. Define the term bargain purchase as per IFRS 3 and how the same is
treated under Ind AS 103? Highlight the four main steps involves in the
acquisition method while accounting for business combination as per
IFRS 3?
11

Section C Case Study
Case Study 1
Dr
` 000
7% Debentures of Re. 1
Ordinary shares of 50 paise
Share premium account
Retained earnings, at 1 April, 2013
Inventory, 1 April, 2013
Land at cost
Buildings at cost
Buildings, accumulated depreciation, 1 April 2013
Plant at cost
Plant, accumulated depreciation, 1 April 2013
Trade payables
Trade receivables
Allowance for doubtful debts, at 1 April 2013
Purchases
Administrative expenses
Revenue
Distribution costs
Other expenses
Bank balance
Ordinary dividend paid
10% Loan notes
Total
Cr
`000
500
250
180
70
450
300
900
135
1020
370
900
600
25
2030
205
3,000
240
50
110
25
5,930
500
5,930
You are provided with the following additional information:

(i)
Depreciation on buildings is to be provided at 5% per year on cost and

allocated to administrative expenses.
(ii) Plant is to be depreciated at 20% per year using the reducing balance
method and included in distribution costs.
12

(iii) Closing inventory is valued at ` 500,000.
(iv) The allowance for doubtful debts is to be maintained at 5% of trade accounts
receivable balances.
(v) An accrual for distribution wages of ` 30,000 is required.
(vi) Interest on the loan notes has not been paid and provided during the year.
(vii) During June, a bonus (or scrip) issue of two for five was made to ordinary
shareholders. This has not been entered into the books. The bonus shares
do not rank for dividend for the current financial year.
(viii) Provisions are to be made for the following:

the interest on 7% debentures for the year;
an income tax charge of ` 55,000 for the year.
Required:
Prepare for Venus Ltd. for the year ended 31 March 2014, in accordance with IAS
1 Presentation of Financial Statements:
(a) a statement of comprehensive income; and
(b) a statement of financial position.
Notes to the accounts are NOT required.
13

Case Study 2
WLL Ltd. was incorporated on January 1, 2011, and follows IFRS in preparing its
financial statements. In preparing its financial statements for financial year ending
December 31, 2013, WLL Ltd. used these useful lives for its property, plant, and
equipment:
Buildings
: 15 years
Plant and machinery
: 10 years
Furniture and fixtures : 7 years

On January 1, 2014, the entity decides to review the useful lives of the property,
plant, and equipment. For this purpose it hired external valuation experts. These
independent experts certified the remaining useful lives of the property, plant, and
equipment of WLL Ltd. at the beginning of 2014 as
Buildings
: 10 years
Plant and machinery
: 7 years
Furniture and fixtures : 5 years

WLL Ltd. uses the straight-line method of depreciation. The original cost of the
various components of property, plant, and equipment were
Buildings : ` 15,000,000
Plant and machinery
: ` 10,000,000
Furniture and fixtures : ` 3,500,000

Required
Compute the impact on the statement of comprehensive income for the year ending
December 31, 2014, if WLL Ltd. decides to change the useful lives of the property,
plant, and equipment in compliance with the recommendations of external valuation
experts. Assume that there were no salvage values for the three components of the
property, plant, and equipment either initially or at the time the useful lives were
revisited and revised.
14

Answers
1. True.
2. False.
3. False.
4. True.
5. False.
6. True.
7. True.
8. True.
9. False.
10. True.
11. b. Names of major/significant shareholders of the entity.
12. c. Salaries of sales staff (sales department shares the building with
factory supervisor).
13. d. As the starting point for the cash flow would be the Profit before tax
/ profit after tax and foreign currency translation being non-cash item,
no adjustment is required in the section of the statement of cash
flows.
14. b. Deferred tax Asset.
15. b. The transfer of the risks and rewards of ownership.
16. d. The entity does not have the credit risk
17. c. The names of the government agencies that gave the grants along
with the dates of sanction of the grants by these government agencies
and the dates when cash was received in the case of monetary
grants.
18. d. Reimbursement of out-of-pocket expenses.
19. d. (iii) and (iv)
20. a. IAS 10 Events After the Reporting Period

IAS 10 defines adjusting events as those providing evidence of
conditions existing at the end of the reporting period. In the case of
inventories, it may be sales of inventory in this period indicate that
the net realisable value of some items of inventory have fallen below
their cost and require writing down to their net realisable value as at
30 September 2014.
15

21. c.
$1.5 million.
22. d. ` 6 million
23. a. ` 30,000.
24. d.
Disclose this non-adjusting event in the footnotes.
25. a.
50% (= 6.0/18.0)
26. a.
The unrecognized deferred tax would be allocated to goodwill, which

would increase by ` 300,000.
27. c. 1/11/2013 ` 5,000; 31/3/2014 ` 7,500

The asset should be written down to ` 35,000 on 1 November 2013

(impairment loss ` 5,000) and then again to ` 27,500 on 31 March
2014 (impairment loss ` 7,500).
28. d. ` 330,000

The current tax expense for 2012 must have been overstated by
` 10,000. In compensation, the current tax expense for 2013 should
be reduced by ` 10,000, giving a figure of ` 330,000.
29. c. Zero
30. a.
$0.5 million

31. The two factors that raise doubts about the entitys ability to continue as a
going concern are
1.
The net loss for the year of ` 2 million.
2.
At the balance sheet date, the working capital deficiency (current

liabilities of ` 25 million) exceeds its current assets (of ` 20 million)
by ` 5 million.
However, there are two mitigating factors:

1.
The shareholders ability to arrange funding for the entitys expansion

and working capital needs
2.
Projected future profitability due to expected favorable changes in

government policies for the industry the entity is operating within
16

Based on these sets of factorsboth negative and positive (mitigating)

factorsit may be possible for the management of the entity to argue that
the going concern assumption is appropriate and that any other basis of
preparation of financial statements would be unreasonable at the moment.
However, if matters deteriorate further instead of improving, then in the future
another detailed assessment would be needed to ascertain whether the going
concern assumption is still valid.
32. 1. Contract cost incurred to date

Site labour cost
` 1,000,000
Material cost
` 3,000,000
Depreciation of special plant and equipment
` 500,000
` 4,500,000
NOTE: IAS 11 does not allow marketing and selling costs to be

considered contract costs.
2. Cost to complete =
` 5,500,000
3. Percentage of completion
= 4,500,000/(4,500,000 + 5,500,000)
= 4,500,000/10,000,000
= 45%
4. Revenue, costs, and profits to be recognized in the first year:
Revenue = 12,000,000 0.45 = ` 5,400,000
Costs = 10,000,000 0.45 = ` 4,500,000

Profit = ` 900,000
33. 1.
According to the clause in the sales contract, XYZ Ltd. has an

obligation beyond the normal warranty provision. Thus risks and
rewards of ownership have not been transferred to the buyer on the
date of the sale.
Risks and rewards of ownership have not been transferred to

the buyer on the date of the delivery of the machinery because a
significant part of the transaction (i.e., installation) is yet to be done.
2.
17

3. Risks and rewards of ownership will not be transferred to the buyer
due to the unspecified uncertainty arising from the terms of the
contract of sale (duly signed by both parties), which allow the buyer
to retain the right of cancellation of the sale due to which the seller is
uncertain of the outcome.
34. (a)
a statement of financial position as at the end of the period;
(b)
a statement of profit or loss and other comprehensive income for the

period;
(c)
a statement of changes in equity for the period;
(d)
a statement of cash flows for the period;
(e)
notes, comprising a summary of significant accounting policies and

other explanatory information;
(ea) comparative information in respect of the preceding period as specified

in para 38 and 38A; and
(f)
Indian GAAP
Ind AS
a statement of financial position as at the beginning of the earliest

comparative period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its
financial statements in accordance with para 40A-40D.
(a) balance sheet, (b) statement of profit and loss, (c) cash flow
statement and (d) explanatory notes including summary of accounting
policies, as per Sch VI of Companies Act, 1956 or Sch III of BRA,
1949 (banks) or regulation of IRDA (insurance), SEBI guidelines
(mutual funds), etc. as the case may be.
In addition to above four components, a statement of changes in
equity to be presented as a part of balance sheet.
35. 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 authorised 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).
18

If an entity declares dividends to holders of equity instruments (as defined

in IAS 32 Financial Instruments: Presentation) after the reporting period,
the entity shall not recognise those dividends as a liability at the end of the
reporting period.
Under Ind AS treatment similar to IFRS
Under Indian GAAP (AS)

as per Schedule VI proposed dividend to be disclosed in the notes

to accounts
AS 4 dividend declared or proposed after balance sheet date but

before approval of financial statements will have to be recorded as
liability at the reporting date.
AS 4 will prevail over Schedule VI
36. This Standard defines an onerous contract as 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 costs
under a contract reflect the least net cost of exiting from the contract, which
is the lower of the cost of fulfilling it and any compensation or penalties
arising from failure to fulfil it.

If an entity has a contract that is onerous, the present obligation under the
contract shall be recognised and measured as a provision.
Many contracts (for example, some routine purchase orders) can be

cancelled without paying compensation to the other party, and therefore there
is no obligation. Other contracts establish both rights and obligations for each
of the contracting parties. Where events make such a contract onerous, the
contract falls within the scope of this Standard and a liability exists which is
recognised. Executory contracts that are not onerous fall outside the scope
of this Standard.
Before a separate provision for an onerous contract is established, an entity

recognises any impairment loss that has occurred on assets dedicated to that
contract.
37. Bargain purchase: This is a negative goodwill (term used by earlier standard).
Bargain purchase arises when the fair value of identifiable assets acquired
and liabilities assumed exceeds the aggregate of:
(a) The consideration transferred;
19

(b) The amount of any non-controlling interest in the acquire; and
(c) The acquisition-date fair value of the acquirers previously held equity
interest in the acquiree.

Such gain should be recognised in profit or loss on the acquisition date

subject to reassessment criteria as per para 36 of IFRS 3. As per Ind AS
103, bargain purchase shall be recognised directly in equity as capital
reserve.
An entity shall account for each business combination by applying the

acquisition method. Applying the acquisition method requires:
(a) identifying the acquirer;
(b) determining the acquisition date;
(c) recognising and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree; and
(d) recognising and measuring goodwill or a gain from a bargain purchase.

(a) Statement of comprehensive income for the year ended
`'000
Revenue
Opening Inventory
Purchases
Total
Less: closing inventory
Cost of sales
Gross profit
Distribution costs
(240+(20% x (1020-370))+30)
Administrative expenses
(205+(5% x 900))
Other expenses
(50+ 5(W1))
Profit before interest and tax
Finance costs
(50+35)
450
2,030
2,480
(500)
`'000
3,000
(1,980)
1,020
(400)
(250)
(55)
315
(85)
20

`'000
Profit before tax

Income tax
Profit after tax
`'000
230
(55)
175
(b) Statement of financial position

` 000
Assets
Non-current assets
Property plant and equipment
Land
Buildings
Plant
Current assets
Inventory
Trade receivables (600-30)
Bank
300
720
520
` 000
1,540
500
570
110
1,180
2,720
Total assets
Equity
50 Paise ordinary shares
(250 +2/5*250)
Share premium
(180-100)
Retained earnings
Total Equity
Non-Current liabilities
10% loan notes
7% Debentures
350
80
220
650
500
500
1,000
Current liabilities
Trade payables
Income tax
Accruals (50+30+35)
900
55
115
1,070
2,070
2,720
Total liabilities
Total Equity and Liabilities
21

Note: These are illustrative presentation of the two statements with some
explanatory calculations / bifurcation - which may or may not be presented
on the face of the same.
Case Study 2
1.
The annual depreciation charges prior to the change in estimate were

Buildings :
` 15,000,000/15 =
` 1,000,000
Plant and machinery : ` 10,000,000/10 =
` 1,000,000
Furniture and fixtures : ` 3,500,000/7 =
` 500,000
Total
2.
= ` 2,500,000 (A)
The revised annual depreciation for the year ending December 31, 2014,
would be
Buildings
: [` 15,000,000
(` 1,000,000 3)]/10 = ` 1,200,000
Plant and machinery : [` 10,000,000
(` 1,000,000 3)]/7 = ` 1,000,000
3.
Furniture and fixtures : [` 3,500,000

(` 500,000 3)]/5
= ` 400,000
Total
= ` 2,600,000 (B)
The impact on Statement of Comprehensive Income for the year ending

December 31, 2014
=
(B) (A)
` 2,600,000 ` 2,500,000
` 100,000
Occasionally it may be difficult to distinguish between changes in

measurement bases (i.e., accounting policies) and changes in estimate.
In such cases, the change is treated as a change in estimate. Changes in
accounting estimates are to be adjusted prospectively in the period in which
the estimate is amended and, if relevant, to future periods if they are also
affected.
22

Full Marks : 100
Time: 3 hours
(1.5 marks each)

Part I: Identify if each of the following statements is true or false
1.
As per IAS 11 Construction Contracts, for revenue recognition, a

contractor can adopt simultaneously both percentage completion method
and a total costs incurred against recoverable revenue method, for different
contracts depending upon circumstances.
2.
The Present Value of Deferred Tax Assets realisable at a future period may
be computed using a discount rate determined by reference to market yields
at the end of the reporting period on high quality corporate bonds, and where
there is no deep market in such bonds, the market yields on government
bonds shall be used for appropriate maturity and currency.
3.
Since recoverable amount is the higher of fair value less costs to sell and
value in use, an entity should always determine both.
4.
Goodwill forming part of original cost of investment in an Associate is not

required to be tested for impairment annually
5.
As per IAS 36 Impairment of Assets, in some cases, corporate assets

may also include Goodwill.
6.
Operating Segments can be restricted to not more than ten in the

consolidated financial statement of any entity.
7.
There is no requirement that transactions with subsidiaries, associates or joint

ventures should be disclosed in the separate financial statements of a Parent.
8.
Interest paid and dividends received may be classified as operating cash

flows because they enter into the determination of profit or loss.
23

9.
Related party transactions subject to disclosure will include Defined Benefit

Plans administered by an external independent entity operating within the
group.
10. Share option plans that include the contingency of employees having to meet
the vesting conditions before options are exercised, need not be considered
for computing dilutive earnings per share.
Part II: Fill in the Blanks (can be one word or a short phrase)
(1.5 marks each)
11. When an entity carries out a _________ of its ordinary shares, the
outstanding number of ordinary shares or potential ordinary shares will
increase without any corresponding increase in resources.
12. Finance lease gives rise to a _____ expense and a ________ expense.
13. Depreciation charge for each period shall be recognised in profit or loss,
unless it is ___________________
14. IAS 27 permits that where an entity prepares its Separate Financial
Statements, it may account for its investments in subsidiaries, joint ventures
and associates at cost, or in accordance with IFRS 9. IASB is considering a
proposal to permit further flexibility in this provision, to enable the entity to
account for such investments by using _________________
15. When there is a change in an entitys functional currency, an entity should
apply translation procedures _________ from the date of change.
16. The two items periodically or otherwise recognised in Other Comprehensive
Income but cannot be reclassified into profit or loss at any future period are
(i) ___________ and (ii) ___________
17. For estimating the PV of MLP in a finance lease, the discount rate to be used
by lessee is ______________, and where it is not practicable, the lessee can
adopt _____________ as the discount rate.
18. Borrowing costs may include all costs that are considered as ______ used in
the calculation of effective interest method as described in IAS 39 Financial
Instruments: Recognition and Measurement.
24

19. A related party transaction is a transfer of resources, services, or obligation
between a _________ and a ________ regardless of whether a price is
charged or not.
20. In allocating impairment loss to assets within a cash generating unit, it is
necessary to ensure that the carrying of any asset that is included in the
cash generating unit is not reduced below the highest of three figures. These
are (i) FV less costs to sell, (ii) value in use and (iii) ___________.
Part III: Determine monetary amounts in each case. (1.5 marks each)
21. What is the amount to be shown in the Notes to consolidated financial
statements of Parent, if dividend proposed by the Parent is CU 239,427 and
its 100% subsidiary is CU 60,573?
22. Consider the following table, and determine the value of closing stock to be
recognised in the financial statement.
Class of inventory
A
B
C
D
E
Historical cost `
20,000
12,000
12,000
32,000
28,000
Total cost 104,000
NRV `
30,000
10,000
18,000
28,000
26,000
Total NRV 110,000
23. Independent of your answer to question 2, assume that Item C was not sold
for nearly 3 months from the BS date, and when it was ultimately sold prior
to adoption of accounts by the Board, the realisation was only ` 8,000/-.
Is it an adjusting event? At what amount would you as an auditor, carry the
closing stock?
24. Boilers Ltd., purchased from BHEL a heavy machinery, on 30 September
2013 at a cash discount of 5% on invoice price of ` 200 lacs. Other
expenses incurred were transit insurance (2 lacs), transportation (` 5.50
lacs), foundation laying expenses (4 lacs) and installation charges ` 2.50
lacs. The company had also borrowed a sum of ` 180 lacs at an interest
16% p.a. The machinery was ready for use as at 31st March, 2014.
25

Determine the cost of acquisition by applying the principles of IAS 23, which
states that a qualifying asset is an asset that necessarily takes substantial
period of time to get ready for its intended use or sale.
25. CTS Ltd. had taken lease a floor-space of 20,000 sq.ft. CTS made a
significant investment of ` 25,00,000 (partitioning and office infrastructure)
to make it ready for office use. It is a precondition of the lease that on the
expiry of lease period of three years, the lessee would return the space
to lessor on as-was-taken basis. The expected cost of dismantling the
structure and make it returnable is ` 5,00,000. Cost of capital for CTS is
10%. Determine the cost of asset of lease-hold-improvements by applying
the principles under IAS 16.
26. An asset was revalued in March 2012 by ` 14,000. In March 2014, the asset
was sold at ` 48,000 when the net book value stood at ` 66,000. Determine
the amount to be charged or credited to P&L when IAS 16 is applied.
27. Alpha Ltd. acquires the business of Beta. Beta carried in its books certain
assets classified as held for sale at an amount of CU 211,300/-. The Fair
value of these items is CU 377,000 and costs to sell were estimated at
CU 18,000/- If the tax base of these items stood at CU 299,000, determine
the deferred tax impact, by applying IAS 12. Tax rate is 25%.
28. Cumulative gains on the derivative instrument CU 1900 and cumulative loss
on the hedged item is CU 2500. Is the hedge highly effective within the
meaning of IAS 39? Would your answer be different if gains and losses stood
interchanged?
29. ABC had an opening number of 2,000 equity shares on 1st January, of which
200 were held as treasury shares, on 1st July, 600 new shares were issued
for cash, and 50% of treasury shares were disposed in the market on 1st
December. Determine the weighted average number of ordinary shares at
31st December.
30. XYZ takes an asset on finance lease for a primary period of 8 years and
a secondary period of 2 years, on condition inter alia that the asset will be
returned to lessor at the expiry of lease period. The life of the asset is 12
years. For computing depreciation charge, determine the life.
26

Part IV: Provide descriptive answers (Five marks each)
31. Spell out the main steps involved, when accounting for business combination
by applying the acquisition method.
32. As per IFRS 5 Non-Current Assets Held for Sale and Discontinued
Operations, when can a non-current asset be classified as held for sale?
33. Give an illustrative list of important elements of costs for recognition of
exploration and evaluation assets
34. What are the pre-requisites for a hedge-relationship to qualify for hedge
accounting?
35. Explain the concept of effective interest rate method.
36. Define the term Hedged Item according to IAS 39 Financial Instruments:
Recognition and Measurement?
37. Explain the terms credit risk and currency risk within the ambit of IFRS 7.
Part V: For each of the scenario given below, advise the appropriate
accounting approach, based on IFRS principles and
rationale contained therein
Scenario 1:
XYZ Ltd. based in Dubai, is engaged in real-estate development, building
residential homes and disposing of them. XYZ Ltd. appoints brokers for marketing
the product (residential homes). While each broker-entity is given one class of
homes for sale, the terms and conditions for each broker-entity vary because of
gradation of homes (small, medium and large size, with differing levels of comforts
and facilities). Middlesex Ltd. was appointed as a broker on the following terms:

Total number of homes allotted and to be handled : 40
Gradation: Level II (medium), Area: 1200 sq. ft living space.
Price: Any price, as negotiated and finalised by broker. A floor price to

be mutually agreed between XYZ and Middlesex. One time 100% down
payment.
27

Brokerage: 2% of Consideration, for the first 18 homes. On sale of 19th

home, no brokerage is applicable, but broker gets the 20th home free.
Sales organised by Middlesex Ltd. was as under:

First 5 homes average price
Next 5 homes average price
16, 17 and 18th homes
19th home
AED 920,000
AED 950,000
AED 960,000
AED 940,000
AED 900,000
On completing the sale, Middlesex takes possession and legal ownership

the 20th home for free. Discuss the accounting procedure in the books of
Middlesex for the 20th home, by application of principles in IFRS.
Scenario 2:
A Company took a premises on lease, which qualifies as an operating lease
as per IAS 17 (Leases). The initial lease term is three years, with a provision
for renewal of further periods in blocks of three years, such that the total
lease period is nine years from inception. The lessee does not have the right
to terminate the lease for first 33 months. The lease agreement provides that
the lease rentals will be escalated by 10% for each block of 10%. Based on
this, the lessee is expected to pay lease rentals of ` 5 lacs per annum in
first block of three years, and ` 5.50 lacs p.a. in the second block of three
years, and ` 6.05 lacs p.a. for the last three year period ending ninth year.
In order to account for lease rental expenses, the company has to make a
determination whether the lease period is for 3 years, or for 9 years. Analyse
the issue and recommend an accounting approach that conforms to principles
in IAS 17.
28

Suggested Answers to Part I
1.
True. When outcome of certain contracts cannot be estimated reliably,

revenue is recognised to the extent recoverable and all the total costs
incurred are recognised immediately.
2.
False: Deferred Tax assets are to be recognised at absolute amounts of

future value. No discounting is permitted
3.
False: An entity may in some cases stop where the FV less cost to sell itself
shows an amount which is higher than carrying amount.
4.
True. Goodwill forming part of investments in associate should not be tested

for impairment. This is an exception to the rule.
5.
False: Corporate assets do not include Goodwill. This is in the context of

impairment testing.
6.
False: Although there is no prescribed limit, the reportable operating

segments increases above ten, the entity should consider whether a practical
limit has been reached. The non-reported operating segments may be
aggregated and shown as others.
7.
False: In the separate financial statement, it is necessary to disclose

transactions with group entities that are related parties. These transactions
get eliminated only in the CFS and not in separate financials.
8.
True. Interest paid and dividends received may be classified as operating

cash flows. This is permitted under IAS 7 Cash Flow Statement, in which it
is stated that there is no consensus on this issue.
9.
True. Group plans are related party transactions
10. False. Employee Share Option plans should be included in computing Diluted
EPS, despite the contingency nature of vesting conditions materialising.
29

Suggested answers to Part II: The word or phrase to be inserted in the
blank is shown in BOLD CAPITAL
11. When an entity carries out a SPLIT of its ordinary shares, the outstanding
number of ordinary shares or potential ordinary shares will increase without
any corresponding increase in resources.
12. Finance lease gives rise to a FINANCE expense and a DEPRECIATION
expense.
unless it is INCLUDED IN ANOTHER ASSET
account for such investments by using EQUITY METHOD
15. When thee is a change in an entitys functional currency, an entity should
apply translation procedures PROSPECTIVELY from the date of change..
(i) REMEASUREMENTS OF NET DEFINED BENEFIT LIABILITY (ASSET)
and (ii) REVALUATION SURPLUS
by lessee is THE RATE IMPLICIT IN LEASE and where it is not practicable,
the lessee can adopt INCREMENTAL BORROWING RATE as the discount
rate.
18. Borrowing costs may include all costs that are considered as INTEREST
EXPENSE used in the calculation of effective interest method as described
in IAS 39 Financial Instruments: Recognition and Measurement.
between a REPORTING ENTITY- and a RELATED PARTY regardless of
whether a price is charged or not.
30

are (i) FV less costs to sell, (ii) value in use and (iii) ZERO
Part III: Calculation based questions - Suggested answers
21. CU 239,427

Dividend proposed is not to be recognised as liability as at the reporting

period. There is no elimination of dividend proposed by subsidiary which
may be payable or receivable at a future date in the consolidation procedure.
However, the notes to accounts will show the amount proposed by Parent
alone at CU 239,427.
22. Answer: CU 96,000

Closing stock: Aggregate of the lower of the two under each item (20,000+1
0,000+12,000+28,000+26,000 = 96,000)
23. Answer: CU 92,000

IAS 10 Para 9(b): sale of inventories after the reporting period may give
evidence about their NRV at the end of the reporting period. Hence, the
closing stock should be carried at CU 92,000
24. Answer: ` 218.40 lakhs.
Basic price, less cash discount at 10%
190
Other expenses (2.00+5.50+4.00+2.50)
14
Borrowing costs capitalised

=
14.40 Total:
` 218.40
Initial cost is ` 218.40 lakhs. Substantial period is not defined under

IFRS. Even under I-GAAP, a 12 month period is a rebuttable assumption.
Capitalisation of borrowing cost for five months is not prohibited under IFRS,
if that period is a justifiable period for the development of asset on technical
considerations.
31

25. ` 28,75,500

Dismantling costs are to be capitalised, at PV, using a discount rate of 10%.

The Discount factor for third year is 0.751. PV of dismantling cost is 5,00,000
x 0.751 = 3,75,500. Total cost is therefore 28,75,500
26. Loss of ` 18,000

IAS 16 does not permit revaluation surplus being transferred into P&L.
Therefore the charge to P&L will be the loss of ` 66,000 minus ` 48,000 =
` 18,000. The balance of surplus held in revaluation surplus will be
transferred to retained earnings directly within equity.
27. Deferred Tax Liability of CU 15,000

Amount to be recognised in BS is CU 3,77,000 less CU 18,000 = CU

359,000. Tax base being CU 299,000 the difference of 60,000 gives rise to
temporary taxable difference. At 25% tax rate the Deferred Tax Liability is CU
15,000.
28. No, No

The hedge is not effective since the dollar-offset throws up a result outside
the range of 80-125 (1900/2500 = 76%). The answer will not differ, since the
off set once again gives a result outside the range of 80-125: 131%.
29. 2,110 Shares

Weighted Average Number of ordinary shares is (1800 X = 900) + (1800 +

600 = 2400 x 5/12 = 1000) + (2400 + 120 = 2520 *1/12 = 210) :2110 shares.
Or: (1800 x 1) + (600 x 6/12) + (120 * 1/12) = 2110 shares
30. 10 years

In terms of IAS 17, where there is no certainty that the lessee will obtain
ownership (lessee is required to return the asset in this case), the asset shall
be fully depreciated over the shorter of the lease term and its useful life. In
this case, the shorter of 10 and 12 is 10. Useful life is ten years.
32

Suggested answers to Part IV; Descriptive questions
31. Applying the acquisition method requires:
a)
Identifying the acquirer: One of the combining entities should be

identified as acquirer : Reference to reverse merger will be of merit
b)
Determining the acquisition date: It is the date on which the acquirer

acquires control. : Reference to stage-wise acquisition will be of merit
c)
Recognising and measuring identifiable assets acquired, liabilities

assumed and any non-controlling interest in the acquiree. This is at fair
value. Emphasis is on identifiable assts
d)
Recognising and measuring the goodwill, and gain from a bargain

purchase. Reference to Provisional fair value method will be of merit
32. An entity shall classify a non-current as held for sale if following conditions
are met:

Its carrying amount will be recovered principally through a sale

transaction rather than through continuing use;
The sale should be expected to qualify for recognition as a completed

sale within one year from the date of classification, in some cases
could go beyond one year;
The asset must be available for immediate sale in its present condition
subject only to terms that are usual and customary for sale of such
assets;
Its sale must be highly probable, the appropriate level of management

must be committed to a plan to sell the assets and an active
programme to locate a buyer and complete the plan must have been
initiated; and
An asset that is proposed to be abandoned shall not be classified as

held for sale.
33. An entity shall determine an accounting policy specifying which expenditures

are recognised as exploration and evaluation assets and apply the policy
consistently. In making this determination, an entity considers the degree
to which the expenditure can be associated with finding specific mineral
resources.
33

The following are examples of expenditures that might be included in the

initial measurement of exploration and evaluation assets:
(i)
acquisition of rights to explore,
(ii) topographical, geological, geochemical and geophysical studies,

(iii) exploratory drilling,
(iv) trenching
(v) sampling, and
(vi) costs that are attributable to activities in relating to evaluation of
technical feasibility and commercial viability of extracting a mineral
resource.
34. (a) Formal designation and documentation of the hedge relationship
(b) Hedge is expected to be highly effective, in offsetting changes in
cash-flows or fair values attributable to hedged risk consistency with
originally documented risk management policy.
(c) For cash flow hedges, a forecast transaction that is the subject of
hedge must be highly probable presenting exposure to variations in
cash flows.
(d) Effectiveness of hedge can be reliably measured.
(e) Hedge is assessed on an on-going basis, and determined actually to
have been highly effective through out the financial reporting periods
for the hedge was designated.
35. Effective interest rate method is a method of calculating the amortised cost
of a financial asset (or a financial liability) (or a group of financial assets or
financial liabilities) and of allocating the interest income or interest expense
over the relevant period. 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 (Note: this only
means IRR of cash flows).

The principle is identical to that of determining the amount of asset and

liability at the inception of a finance lease. In the instant case, initial
34

recognition is the PV of the instalments computed at 10% discount rate.
Since instalments are equated annually, by applying PVAF for 10% for three
years, the carrying amount works out to ` 24,86,852, as shown below:
Instalment
10,00,000
10,00,000
10,00,000

Discount rate
0.909
0.826
0.751
PV
9,09,091
8,26,446
7,51,315
24,86,852
Amortised cost at the beginning of each accounting period is computed as

under:
Beginning
24,86,852
17,35,537
9,09,091
Interest
amortization
2,48,685
1,73,554
90,909
Sub total
Repayment
Closing
27,35,537
19,09,091
10,00,000
10,00,000
10,00,000
10,00,000
17,35,537
9,09,091
0
36. A hedged item is an asset, liability, firm commitment, highly probable forecast
transaction or net investment in a foreign operation that (a) exposes the entity
to risk of changes in fair value or future cash flows and (b) is designated as
being hedged.

The hedged item can be (a) a single asset, liability, firm commitment, highly
probable forecast transaction or net investment in a foreign operation,
(b) a group of assets, liabilities, firm commitments, highly probable forecast
transactions or net investments in foreign operations with similar risk
characteristics or (c) in a portfolio hedge of interest rate risk only, a portion
of the portfolio of financial assets or financial liabilities that share the risk
being hedged.
37. Credit risk is the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation.

Currency risk is the risk that the fair value or future cash flow of a financial
instrument will fluctuate because of changes in foreign exchange rates.
35

Part V Suggested answer to Case Study 1
The 20th home represents the commission income for Middlesex and accordingly,
the revenue will be recognised as per IAS 18 (Revenue). As per para 9 of IAS
18, revenue is measured at the fair value of consideration received or receivable.
Commission has been received in kind (not in cash) i.e. in a form of a free home.
Accordingly the transaction will be recorded at the fair value of 20th home. As
per IFRS 13 (Fair Value Measurement), the fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
It is seen that fair value is showing a trend of fall, and considering this the fair
value of 20th home may not be higher than AED 900,000. However, the transaction
will be recorded on the basis of fair value derived as per IFRS 13. Hence, the
revenue will be credited at the fair value and corresponding debit will go to
property, plant and equipment or inventory or investment property, depending on
the intended use of the asset by Middlesex.
Suggested solution to Scenario 2
The main aspect of the issue is to consider whether or not it would be reasonably
certain that the company would renew the lease for the second and third blocks
of three years. If it is reasonably certain that the company will continue with the
lease for a total period of 9 years, the total lease rental should be spread over
the lease term on a straight line basis. The uneven lease rentals are not permitted
to be recognised as income or expense on the basis of an argument that the
scheduled increases in lease rentals represent another systematic basis which is
more representative of the time pattern of the users benefit. It is not the benefit,
but the contractual cost of obtaining the benefit that will undergo a change due to
scheduled rent increase. These increases cannot be treated as compensation for
inflation.
As per IAS 17 para 33 Lease payments under an operating lease shall be
recognised as an expense on a straight-line basis over the lease term unless
another systematic basis is more representative of the time pattern of the users
benefit.
Accordingly, the lease rentals should be recognised on a straight-line basis taking
the entire 9 year period into account. This would result in an annual charge of
` 1.839 lakhs.
36

Full Marks : 100
Time: 3 hours
(1.5 marks each)
1.
As per IAS 11 Construction Contracts, Costs that are specifically

chargeable to the customer under the terms of the contract may include
some development costs for which reimbursement is specified in the terms
of the contract.
2.
An entity can rectify inappropriate accounting policies either by disclosure of

the accounting policies used or by notes or explanatory material.
3.
IAS 12 (revised) prohibits the deferral method i.e. income statement liability
method and requires another liability method which is sometimes known as
the balance sheet liability method.
4.
In case of a conflict between the Conceptual Framework for Financial

Reporting and IFRS Standard, the Standard would prevail.
5.
As per IFRS-4 Insurance Contracts, if the liability adequacy test result

in the carrying amount of its insurance liabilities is inadequate in light of
the estimated future cash flows, the entire deficiency is taken to other
comprehensive income.
6.
An entity can continue to depreciate an asset even if it classifies it as NonCurrent Assets held for Sale as per IFRS-5?
7.
As per IFRS 13- Fair Value Measurements, the Level 3 fair value
measurement provides the most reliable evidence of the fair value.
8.
As per IFRS 6 Exploration and Evaluation Assets, exploration and

evaluation assets after recognition can be measured at either cost or fair
value.
37

9.
IFRS-2 Share based payments would not apply if Preference Shares, being
an equity instrument, are issued to a supplier in exchange for goods supplied.
10. As per IFRS-10, an investor controls an investee when the investor is

exposed, or has rights, to variable returns from its involvement with the
investee but does not have the ability to affect those returns through its
power over the investee.
Fill in the Blanks
11. An entity must provide a reconciliation between the total revenue of
reportable segments and the entitys total ________.
12. As per IFRS 2 Share-based Payments, vesting conditions are either
______ conditions or ______ conditions.
13. As per IFRS 3 Business Combinations, the measurement period ends
as soon as the acquirer receives the information it was seeking about facts
and circumstances that existed as of the acquisition date or learns that more
information is not obtainable. However, the measurement period shall not
exceed ______ from the acquisition date.
14. Per IAS 7 Statement of Cash Flows, normal cash inflow on account
of sales and cash outflow on account of purchase transactions would be
classified under ______ activities.
15. Per IAS 21- The Effects of Changes in Foreign Exchange Rates, the term
used for the currency of the primary economic environment in which the
entity operates is ______currency.
16. The power to participate in the financial and operating policy decisions of
the investee but is not control or joint control of those policies is termed as
________.
17. Goodwill acquired in a business combination needs to be tested for
impairment at least _______, irrespective of whether there is any indication
of impairment.
18. Control, identifiability and ______are the three key criteria to meet the
definition of an Intangible Asset.
38

19. Hedge Accounting recognises the offsetting effects on profit or loss of
changes in the fair value of the hedging instrument and the ______.
20. Per IAS 33, shares issued in exchange for the settlement of a liability are
included in the EPS calculation from the ______.
Calculation Based
21. On 1 January 2014, X Ltd. borrowed CU 6 million at an annual interest
rate of 10% to finance the costs of building an electricity generating plant.
Construction commenced on 1 January 2014 and cost CU6 million. Not all
the cash borrowed was used immediately, so interest income of CU80,000
was generated by temporarily investing some of the borrowed funds prior to
use. The project was completed on 30 November 2014.
What is the carrying amount of the plant at 30 November 2014?
22. On 1 January 2014 Y Ltd. signs a four-year fixed-price contract to provide
services for a customer. The contract value is CU 550,000. At 31 December
2014 the contract is thought to be 30% complete. Costs to complete
the contract cannot be reliably estimated and costs incurred to date of
CU 152,000 are recoverable from the customer. What is the revenue to be
recognised in profit or loss for the year ended 31 December 2014 according
to IAS18 Revenue?
23. C Ltd. acquired 100% of D Ltd. for a consideration transferred of
CU112million. At the acquisition date the carrying amount of D Ltds net
assets was CU I00 million and their fair value was CU120million. How should
the difference between the consideration transferred and the net assets
acquired be presented in C Ltds financial statements, according to IFRS3
Business combinations?
24. E Ltd. acquired a 30% equity interest in F Ltd. for CU 400,000 on 1 January
2013. For the year ended 31 December 2013, F Ltd earned profits of
CU 80,000 and paid no dividend. For the year ended 31 December 2014,
F Ltd incurred losses of CU 32,000 and paid a dividend of CU 10,000.

In E Ltd. consolidated statement of financial position at 31 December 2014

what should be the carrying amount of its interest in F Ltd., based on the
equity method of accounting?
39

25. G Company has entered into a 5 year fixed price construction contract to
build a factory. The contract value is CU 20.0 million and the estimated costs
are CU 16.0 million.

At the end of the first year, the outcome of the contract can be estimated
reliably. The Company received cash payments to the value of CU 8.6 million
and incurred costs of CU 6.0 million.
At the end of the first year, what amount should be recognised as revenue
in the financial statements, according to lAS 11- Construction contracts?
26. An entity has the following balances relating to its defined benefit plan:

Present value of the obligation: CU 13 million
Fair value of plan assets: CU 17 million
Actuarial losses: CU 1.3 million unrecognised
Past service cost: CU 1.2 million unrecognised
Present value of available future refunds and reduction in future contributions:

CU 0.1 million
Calculate the value that will be given to the net plan asset under IAS 19.
27. Neon Co. acquired equity instruments at its fair value of CU 1500. At the end
of the year, the assets quoted market price is CU 1600. Brokerage of CU 10
is payable on each purchase or sale transaction. How would the asset be
measured at the beginning and the end of the financial year?
28. An entity constructs a machine for its own use. Construction commences
on 1st January, 2014 and is completed on 1st March, 2014. The machine
is installed on 1st April, 2014 and the entity begins to use the machine on
1st May, 2014. There were some issues in the machine which was stopped
for 2 days and regular use commenced from 4th May, 2009. From when
should the entity start charging depreciation?
29. A company has a provision of CU 900,000 for warranty liability on its books
as on 31st December, 2013. It is deductible for tax purposes only when it is
paid. Assuming a tax rate of 30%, calculate the tax base of the asset and
the deferred tax asset amount as on 31st December, 2013.
40

30. P Ltd. prepares quarterly reports as per IAS 34. Based on past records, a
warranty provision of 5% of total sales is normally provided on the books
every quarter. This amounts to CU 100,000. However, in the quarter ended
31st March 2014, a small defect was noticed in the product which resulted in
warranty claims increasing which the entity estimated would be 10% of total
sales for the year. What should be the warranty provision in Q2 (i.e. quarter
ended 30 June 2014) financial statement?
Descriptive Type
31. Summarise the main carve-outs in Ind-AS vis--vis IFRS?
32. What could be potential issues in a country like India adopting Ind-AS 41 on
Agriculture?
33. Explain the term Provision? How is it different from Liability? According to
IAS 37, what all conditions are required to be met for recognising Provision?
34. State how the net investment in a foreign operation would be accounted for
under IAS-21?
35. What are the critical factors that would distinguish an operating lease from a
finance lease?
36. What do you mean by Government Grants and what are the principal
disclosure requirements of IAS-20 on Government Grants?
37. Define the term joint arrangement and its characteristics? A joint
arrangement is either a joint operation or a joint venture. Explain?
Case Study
Case Study 1

Ryder, a public limited company is reviewing certain events which have

occurred since its year-end 31st October, 2013. The financial statements
were authorized for issue on 12th December, 2013. The following events are
relevant to the financial statements for the year ended 31st October, 2013.
The company granted share appreciation rights (SARs) to its employees on

1st November, 2011 based on 10 million shares. At the date the rights are
41

exercised, the SARS provide employees with the right to receive cash equal
to the appreciation in the companys share price since the grant date. The
rights vested on 31st October, 2013 and payment was made on schedule on
1st December, 2013. The FV of the SARs per share at 31st October, 2012
was CU 6, at 31st October, 2013 was CU 8 and at 1st December, 2013
was CU 9. The company has recognized a liability for the SARs as at 31st
October, 2012 based upon IFRS 2 Share-based payments but the liability
was stated at the same amount at 31st October, 2013.
Required:

Discuss the accounting treatment of the above events in the financial

statements of the Ryder Group for the year ending 31st October, 2013 taking
into account the implications of events occurring after the reporting period.
Case Study 2
1.
On 1st October, 2013, Dexterity acquired Temerity, a small company that

specialises in pharmaceutical drug research and development. The purchase
consideration was by way of a share exchange and valued at 35 million CU.
The fair value of Temeritys net assets was 15 million CU ( excluding items
mentioned below). Temerity owns a patent for an established successful drug
that has a remaining life of 8 years. A firm of specialist advisors, Leadbrand,
has estimated the current value of this patent to be 10 million CU. However,
the company is awaiting the outcome of clinical trials where the drug has
been tested to treat a different illness. If the trials are successful, the value
of the drug is then estimated to be 15 million CU. Also included in the
companys statement of financial position is 2 million CU for medical research
that has been conducted on behalf of the client.
2.
Dexterity has developed and patented a new drug which has been approved
for clinical use. The costs of developing the drug were 12 million CU. Based
on early assessments of its sales success, Leadbrand have estimated its
market value at 20 million CU.
3.
Dexteritys manufacturing facilities have recently received a favourable

inspection by government medical scientists. As a result of this, the company
has been granted an exclusive five-year licence to manufacture and distribute
a new vaccine. Although the license had not direct cost to Dexterity, its
42

directors feel its granting is a reflection of the companys standing and have
asked Leadbrand to value the license. Leadbrand placed a value of 10 million
CU on it.

Explain how the above items should be treated in the financial statements
of Dexterity. The values given by LeadBrand can be taken to be reliable
measurements. Depreciation can be ignored.
43

ANSWERS
1. True
2. False
3. True
4. True
5. False
6. False
7. False
8. True
9. False
10. False
Fill in the Blanks
11. Revenue
12. Service, Performance
13. One year
14. Operating
15. Functional
16. Significant Influence
17. Annually
18. Future economic benefits
19. Hedged Item
20. Settlement date
Calculation Based
21. CU 64,70,000
22. CU 152,000
23. CU 8 million will be taken to P&L
44

24. CU 411,400
25. CU 7.5 million
26. CU 2.6 million
27. 1500, 1600
28. 1 April 2014
29. CU 0, CU 270,000
30. CU 200,000
Descriptive Type
31. (Note: The answer to this question is explained here in detail just for the
better understanding)

The Ind AS have been prepared by NACAS and with its recommendation
submitted to MCA. NACAS adopted due consultative proposed of hosting the
draft Ind As insisting comments/suggestions and therefore after deliberated
with industries representative in NACAS. The finally recommended Ind AS
have the following carve outs. These carve outs have been made to fill up
the gap/differences in application of Accounting Principles Practices and
economic conditions prevailing in India.
A.
Carve-outs which are due to differences in application of accounting

principles and practices and economic conditions prevailing in India:
a)
Ind AS 21, The Effects of Changes in Foreign Exchange Rates:
IAS 21 requires recognition of exchange differences arising on

translation of monetary items from foreign currency to functional
currency directly in profit or loss.
Ind AS 21 permits an option to recognise exchange differences

arising on translation of certain long-term monetary items from
foreign currency to functional currency directly in equity. In
this situation, Ind AS 21 requires the accumulated exchange
differences to be amortised to profit or loss in an appropriate
manner. IAS 21 does not permit such a treatment.
45

b)
Ind AS 28, Investment in Associates:
The phrase unless it is impracticable has been added in the

relevant requirement i.e., paragraph 25 of Ind AS 28.
c)
Ind AS 28, Investment in Associates:
The phrase unless it is impracticable has been added in the

relevant requirement i.e., paragraph 26 of Ind AS 28.
d)
Ind AS 32, Financial Instruments: Presentation:
IAS 39 requires all changes in fair values in case of financial

liabilities designated at fair value through Profit and Loss at initial
recognition shall be recognised in profit or loss. IFRS 9 which
will replace IAS 39 requires these to be recognised in other
An exception has been included to the definition of financial

liability in paragraph 11 (b) (ii), Ind AS 32 to consider the equity
conversion option embedded in a convertible bond denominated
in foreign currency to acquire a fixed number of entitys own
equity instruments as an equity instrument if the exercise price is
fixed in any currency. This exception is not provided in IAS 32.
e)
Ind AS 39, Financial Instruments: Recognition and Measurement
A proviso has been added to paragraph 48 of Ind AS 39 that in

determining the fair value of the financial liabilities which upon
initial recognition are designated at fair value through profit or
loss, any change in fair value consequent to changes in the
entitys own credit risk shall be ignored.
f)
Ind AS 103, Business Combinations As per IFRS:
IFRS 3 requires bargain purchase gain arising on business

combination to be recognised in profit or loss.
Ind AS 103 requires the same to be recognised in other

comprehensive income and accumulated in equity as capital
reserve, unless there is no clear evidence for the underlying
reason for classification of the business combination as a bargain
purchase, in which case, it shall be recognised directly in equity
as capital reserve.
46

g)
B.
Ind AS 101, First-time Adoption of Indian Accounting Standards:

Carve outs on account of following items:

Presentation of comparatives in the First-time Adoption of

Indian Accounting Standards (Ind AS) 101 (corresponding
to IFRS 1)
Presentation of reconciliation
Cost of Non-current Assets Held for Sale and Discontinued

Operations on the date of transition on First-time Adoption
of Indian Accounting Standards (Ind AS)
Foreign currency gains/losses on translation of long term

monetary items
Financial instruments existing on transition date
Definition of previous GAAP under Ind AS 101 First-time

Adoption of Indian Accounting Standards
Cost of Property, Plant and Equipment (PPE), Intangible

Assets, Investment Property, on the date of transition of
First-time Adoption of Indian Accounting Standards.
Carve-outs for specific industries

a)
Ind AS 18, Revenue:
On the basis of principles of the IAS 18, IFRIC 15 on Agreement

for Construction of Real Estate, prescribes that construction of
real estate should be treated as sale of goods and revenue
should be recognised when the entity has transferred significant
risks and rewards of ownership and has retained neither
continuing managerial involvement nor effective control.
IFRIC 15 has not been included in Ind AS 18, Revenue. Such

agreements have been scoped out from Ind AS 18 and have
been included in Ind AS 11, Construction Contracts.
b)
Ind AS 18, Revenue:
A footnote has been added in paragraph 1 to Ind AS 18,

Revenue, that for rate regulated entities, this standard shall
stand modified, where and to the extent the recognition
47

and measurement of revenue of such entities is affected by
recognition and measurement of regulatory assets/liabilities as per
the Guidance Note on the subject being issued by the Institute of
Chartered Accountants of India.
c)
Indian Accounting Standard on Agriculture (Corresponding to IAS

41):
IAS 41, Agriculture, requires measurement of biological assets,

viz., living animals and plants at fair value and recognizing gains
and losses arising on such measurement in profit or loss, unless
ascertainment of fair value is unreliable.
It has been decided to revise the Standard and not to issue the
standard as it is.
32. IAS 41, Agriculture, requires measurement of biological assets, viz., living
animals and plants at fair value and recognizing gains and losses arising
on such measurement in profit or loss, unless ascertainment of fair value is
unreliable.

The Indian economy is heavily dependent on Agriculture. It is felt that

adoption of accounting practices such as Fair Value would be detrimental to
the agricultural industry and could impact consumer prices.
It has been decided to revise the Standard and not to issue the standard as
it is.
33. A provision is a liability of uncertain timing or amount.

A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
Provisions can be distinguished from other liabilities such as trade payables

and accruals because there is uncertainty about the timing or amount of the
future expenditure required in settlement.
A provision shall be recognised when:

(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
48

(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognised.
34. Exchange differences arising on a monetary item that forms part of a
reporting entitys net investment in a foreign operation (see paragraph 15)
shall be recognised in profit or loss in the separate financial statements
of the reporting entity or the individual financial statements of the foreign
operation, as appropriate. In the financial statements that include the foreign
operation and the reporting entity (eg. consolidated financial statements
when the foreign operation is a subsidiary), such exchange differences shall
be recognised initially in other comprehensive income and reclassified from
equity to profit or loss on disposal of the net investment in accordance with
paragraph 48 of IAS 21.
35. A finance lease is a lease that transfers substantially all the risks and rewards
incidental to ownership of an asset. Title may or may not eventually be
transferred.

An operating lease is a lease other than a finance lease
Whether a lease is a finance lease or an operating lease depends on the

substance of the transaction rather than the form of the contract. Examples
of situations that individually or in combination would normally lead to a lease
being classified as a finance lease are:
(a) the lease transfers ownership of the asset to the lessee by the end of
the lease term;
(b) the lessee has the option to purchase the asset at a price that is
expected to be sufficiently lower than the fair value at the date the
option becomes exercisable for it to be reasonably certain, at the
inception of the lease, that the option will be exercised;
(c) the lease term is for the major part of the economic life of the asset
even if title is not transferred;
(d) at the inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset; and
(e) the leased assets are of such a specialised nature that only the lessee
can use them without major modifications.
49

36. Government grants are assistance by government in the form of transfers
of resources to an entity in return for past or future compliance with certain
conditions relating to the operating activities of the entity. They exclude
those forms of government assistance which cannot reasonably have a
value placed upon them and transactions with government which cannot be
distinguished from the normal trading transactions of the entity.

As per IAS 20, the following matters shall be disclosed:

(a) the accounting policy adopted for government grants, including the
methods of presentation adopted in the financial statements;
(b) the nature and extent of government grants recognised in the financial
statements and an indication of other forms of government assistance
from which the entity has directly benefited; and
(c) unfulfilled conditions and other contingencies attaching to government
assistance that has been recognised
37. A joint arrangement is an arrangement of which two or more parties have

joint control.

A joint arrangement has the following characteristics:

(a) The parties are bound by a contractual arrangement.
(b) The contractual arrangement gives two or more of those parties joint
control of the arrangement.
A joint arrangement is either a joint operation or a joint venture.
Joint control is the contractually agreed sharing of control of an arrangement,

which exists only when decisions about the relevant activities require the
unanimous consent of the parties sharing control.
An entity shall determine the type of joint arrangement in which it is involved.

The classification of a joint arrangement as a joint operation or a joint venture
depends upon the rights and obligations of the parties to the arrangement.
A joint operation is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the assets, and obligations for the
liabilities, relating to the arrangement. Those parties are called joint operators.
50

Case Study 1
IFRS 2 Share-based payments requires a company to remeasure the fair value of
a liability to pay cash-settled share-based payments at each reporting date and the
settlement date until the liability is settled. Share Appreciation rights fall under this
category. Hence the company should recognize a liability of 80 Million CU ( CU 8
x 10 million) at 31 October 2013, the vesting date.
The liability recognised at 31 October 2013 was in fact based on the share price
at the previous year-end and would have been shown at CU 6 x x 10 Million
shares half the cost as the SARS vest over 2 years. This liability at 31 October
2013 has not been changed since the previous year-end by the company.
The SARS vest over a two-year period and hence on 31 October 2012 there would
be a weighting of the eventual cost by 1-year/2 years. Therefore an additional
liability of 50 million CU should be accounted for in the financial statements at 31
October 2013.
The SARS would be settled on 1 December 2013 at 90 Million CU ( CU 9 X 10
million). The increase ( over and above 30 million) in the value of the SARS since
the year-end would not be accrued in the financial statements but charged to profit
or loss in the year ended 31 October 2014.
Case Study 2
1.
Following IFRS-3, the following Intangible Assets can be measured

separately:
Patent for Drug
10 million CU
Research expenses on behalf of client -
2 million CU
TOTAL 12 million CU
Value of other net assets
15 million CU
----- 27 million CU
Purchase Consideration
35 million CU
Goodwill 8 million CU
51

Apart from the above intangible assets, non-current assets worth 15 million
CU will also be recognised.
The patent will be recognised at fair value even though it was not recognised
by Temerity in its financial statements. The patent will be amortised over the
remaining useful life of the asset 8 years. Since the company is awaiting
trials of the drugs, the value of the patent cannot be estimated at 15 million
CU and the extra 5 million CU should only be disclosed as a Contingent
Asset and not recognised.
Although research cannot normally be treated as an asset, in this case the

research is being done for another company and is in fact work in progress
and should be recognised as such.
2.
From the information given, it appears that there is no active market for
patents. Hence it is suggested to use the cost model and recognise the
patent at the actual development cost of 12 million CU.
3.
IAS 38 offers a choice to recognize grant assets either at fair value or

nominal cost plus any expenditure directly attributable. Dexterity can
recognize both the asset (license) and the grant at 10 million CU. Both shall
be amortised over 5 years.
52

Full Marks : 100
Time: 3 hours
(1.5 marks each)
SECTION A:
Q1. State whether the statements given below are true of false. Give support your
answer:
a)
Gains and losses arising from translating the financial statement of a

foreign operation are recognised in other comprehensive income.
b)
IFRS 3 requires a business combination to be accounted by applying

the pooling of interest method.
c)
Bank overdrafts that are repayable on demand and that form an integral
part of cash management are treated as cash equivalent.
d)
Changes in the estimate cost of decommissioning, restoration and

similar cost form part of cost of PPE are required to be capitalised and
depreciated retrospectively.
e)
Inception of the lease is the date of initial recognition of the lease.
f)
Presentation currency is the currency of the primary economic

environment in which the entity operates.
g)
Corresponding figures of entity whose functional currency is a currency

of hyperinflationary economy shall be translated at the closing rate
at the date of most recent statement of financial position (assuming
previous year also it was a hyperinflationary and not stable currency) .
h)
A contingent asset is disclosed, where an inflow of economic benefits

is probable.
i)
A gain or loss arising on initial recognition of agricultural produce at fair

value less cost to sell shall be included in statement of comprehensive
income for the period in which it arises.
j)
Tax expense is the amount of income taxes payable in respect of the

taxable profit or loss for a period.
53

Q2. Fill in the blanks
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
The conditions that determine whether the entity receives the services
that entitle the other party to receive cash, other assets or equity
instrument of the entity, under share based payment arrangement is
known as ______________________.
An _______________ is any contract that evidences a residual interest
in the assets of an entity after deducting all of its liabilities.
Change in the method of depreciation shall be accounted as change in
__________________ in accordance with IAS 8.
An Investment entity shall measure an investment in Subsidiary at
_________________.
Exploration and evaluation expenditures are expenditures incurred
by an entity in connection with the exploration for and evaluation of
mineral resources __________ the technical feasibility and commercial
viability of extracting mineral resources are demonstrable.
When an investment in an associates previously classified as held
for sale no longer meets the criteria to be so classified, it shall be
accounted for using the equity method _______________.
For the purpose of calculating basic earnings per share, the number of
ordinary shares shall be the ____________ number of ordinary shares
outstanding during the period.
Non-adjusting events which are material, are required to be disclosed
in __________________.
If an item is recognized in other comprehensive income, deferred tax
relates to that item shall be recognized _________.
Grant related to income are government grants other than those related
to ___________.
Q3. Solve the following questions:

a.
An Asset which cost ` 150,000 has a carrying amount of ` 100,000.

Cumulative depreciation for tax purpose is ` 90,000 and tax rate is
30%. Calculate the amount of deferred tax assets or liability to be
recognised.
b.
Earnings before tax during the year are ` 2,500,000. Calculate the
basic earnings per share based on below mention information.
Outstanding shares at the

beginning of the year
1000,000 (1st April)
Share issued during the year
500,000 (1st October)
Tax Rate 40%

54

c.
A Ltd. Lease building to B Ltd. for the period of 10 years on monthly

rentals of ` 10,000. Rent will increase after every 4 years by ` 1,000.
Calculate the amount to be recognized as expenses by B Ltd.
d.
A company having 40 employees is planning to close the unit. It

announces to pay employees an amount of ` 100,000 to all employees,
who stay and render service until the closure of the unit. Employees
leaving before closure will be entitled for ` 50,000. The company
anticipates that 15 will leave before the closure of the unit. Calculate
the amount to be recognized by the company as expenses. Ignore the
impact of discounting, if any.
e.
Company A has purchased a debt instrument with 5 years maturity

for ` 1,000 (Face Value ` 1,250). It carries an interest rate of 4.7%.
Effective interest rate of the instrument comes out to be 10%. Calculate
the Amortized cost of the instrument at the end of each year for 5
years.
f.
Assets of A Ltd. are as under
Goodwill
` 100
Tangible assets
` 600
Intangible assets
` 300
The recoverable amount is only ` 750. Show how the amount of

impairment loss will be allocated among assets.
g.
A undertook construction of a three year contract for a total price of

` 86,25,000. The contract cost are estimated to be ` 69,86,250. From
the following information you are required to identify the profit in each
of the three years.
Particulars
Cost to date
Cost yet to be
incurred
Progressive billing
Collection of billings
Year 1
Year 2
` 25,87,500 ` 62,10,000
` 51,75,000 ` 6,90,000
Year 3
` 69,86,250
` 17,25,000 ` 63,82,500
` 12,93,750 ` 51,75,000
` 5,17,500
` 21,56250
55

h.
A Ltd. francise had a cost of ` 22,000 revalued at ` 28,000. It is sold

for ` 30,000. Show the journal entries in the books of A Ltd.
i.
A Ltd. is building a bridge costing ` 10 Crores. 6 Crores is financed

from a long term loan costing 8%. The remaining 4 Crores comes from
a pool of loans. 35% of the pooled loans cost 10% and 65% of the
pooled loans cost 12%. Calculated the average borrowing rate of the
project.
j.
A Ltd. entered into an arrangement with B Ltd. for sale of goods costing
` 4,00,000 at a profit of 20% on cost. The sale transaction took place
on 28th Feb, 2014. On the same day it also entered into repurchase
agreement for same goods for ` 5,40,000 to be executed on
31st August, 2014. Calculate the amount to be charged as expense
during the month of March-14.
SECTION B:
Descriptive questions:
Q4. Answer in brief:
a.
How to determine the fair value of advertising service provided in barter

transaction?
b.
Distinguish between existing AS 3 and IAS 7 Cash Flow
c.
How to translate the financial statement in functional currency into

presentation currency?
d.
State the difference between Ind AS 1 and IAS 1.
e.
State the requirement of revaluation of assets as per IAS 16.
f.
State the applicability of IFRS 2 Share based payment.
g.
Distinguish between defined contribution plan and defined benefit plan
SECTION C:
Q5. A Ltd. holds ` 10,000 of Loans yielding 18% interest per annum for their
estimated lives of 9 years. The fair value of these loans, after considering
the interest yield is estimated at ` 11,000. The company securitizes the
principal component of the loan plus the right to receive the interest at 14%
56

to B Ltd, as special purpose entity, for ` 10,000. Out of the balance interest
of 4% it is stipulated that half of such balance interest namely, 2% will be
due to A Ltd. as a fee for continuing to service the loans. The fair value of
the servicing asset so created is estimated at ` 350. The remaining half of
the interest is due to A Ltd. as an interest strip receivable, the fair value of
which is estimated at ` 650. Give the Accounting treatment of the above.
Q6. From the books of A Ltd., the following information is available as on 1.4.2012
and 1.4.2013:
1.
Fully paid equity shares of ` 10 each = 10,00,000;
2.
Partly paid up equity shares of ` 10 each, ` 5 paid up =

` 10,00,000;
3.
Options outstanding at an excise price of ` 60 per equity share of

` 10 each = 1,00,000. Average fair value of equity share during both
the years is ` 75;
4.
10% convertible Preference share of ` 10 each = 800,000. Conversion

ratio is 2 equity shares for each preference share;
5.
12% Convertible Debenture of ` 100 each = 100,000. Conversion Ratio

is 4 equity shares for each debenture;
6.
10% Dividend Tax is payable for the years ending 31-03-2013 and
31-03-2014. Income tax rate is 30% in both the years;
7.
On 1.10.2013, the partly paid shares were fully paid up;
8.
On 1.1.2014, the company issued 1 bonus share for 8 shares held on

that date;
9.
Net profit attributable to equity shareholder for the year ending

31-03-2013 and 31-03-2014 were ` 1,00,00,000;
10. Calculate:

EPS for the year ending 31-03-2013 and 31-03-2014;
Diluted EPS for the year ending 31-03-2013 and 31-03-2014;
Adjusted EPS and Diluted EPS for the year ending 31-03-2013,
assuming the same information for previous year and that the partly
paid up shares are eligible for proportionate dividend only.
57

ANSWERS
1. a) True
b)
False, IFRS 3 requires that entity shall account for business

combination by applying the acquisition method.
c) True
d)
False, such costs are required to be capitalised and depreciated

prospectively over the remaining life of the item to which they relate.
e)
False, commencement of lease is the date of initial recognition of

the lease. Inception of lease is the earlier of the date of the lease
agreement and the date of commitment by the parties to the principal
provision of the lease.
f)
False, Functional currency is the currency of the primary economic

environment in which entity operates. Presentation currency is the
currency in which financial statements are presented.
g) True
h) True
2.
i)
False, same shall be recognised in profit or loss
j)
False, tax expense is the aggregate amount included in the

determination of profit or loss for the period in respect of current tax
and deferred tax.
a)
Vesting condition
b)
Equity Instruments
c)
Accounting estimate
d)
Fair value through profit or loss
e) Before
f) Retrospectively
g)
Weighted average
h)
Notes to accounts
i)
Other comprehensive income
j) Assets
58

3. a. Ca lculation of amount of deferred tax liability:
WDV as per books
` 100,000
WDV as per taxation
` 60,000
Difference in WDV
` 40,000
Deferred tax Liability
` 12,000 (` 40,000*30%)
b.
Basic earning per share shall be calculated by dividing profit or loss

attributable to shareholders by the weighted average number of
ordinary shares outstanding during the period.
Calculation of weighted average number of shares:
(1,000,000*12 + 500,000*6)/12
Profit attributable to shareholders =

2,500,000 * (1-0.40)
= ` 1,500,000
Therefore earning per share

=
1500,000/1250,000
=
` 1.2 per share
c.
Lease payments under operating lease shall be recognized as an

expense on a straight line basis over the lease term.
Total amount payable under lease =

(10,000 X 48) +
(11,000 X 48) +
(12,000 X *24)
= 1296,000
Amount to be recognised per month =

` 1,296,000/
120 months
` 10,800 per month
d.
Calculation of amount to be recognized as an expense:
Amount payable to employees expected to leave before closure

15 x ` 50,000 = 750,000
Amount payable to employees on closure 25x100,000 = ` 2,500,000
Total amount to be recognised = ` 3,250,000
Note: since no information has been provided regarding the time of
closure, the amount has not been discounted.
59
1,250,000 shares

e.
Amortised costs of financial assets are calculated using effective

interest rate. The interest that is paid annually is ` 1,250 x 4.7% =
` 59 per year.
Calculation of amortised cost of the debt instrument:

Year (a) Amortised
cost at the
beginning of
the year
1
` 1,000
2
` 1,041
3
` 1,086
4
` 1,136
5
` 1,190
f.

(b)
Effective
interest
(ax10%)
` 100
` 104
` 109
` 113
` 119
Cash inflow
` 59
` 59
` 59
` 59
` 1,309
Amortised
cost at the
end of the
year
` 1,041
` 1,086
` 1,136
` 1,190
`0
Total amount of impairment is ` 250 (` 1,000 ` 750).

Impairment loss is first allocated to Goodwill i.e., ` 100
Balance loss will be allocated among remaining assets in proportion of
their carrying amount.
Therefore, balance loss of ` 150 (` 250 ` 100), will be allocated
amount Tangible and intangible assets in proportion of their carrying
value.
Loss allocated to Tangible assets = ` 100 (150 X 600/900)
Loss allocated to Intangible assets = ` 50 (150 X 300/900)
g.
Calculation of percentage of work completed
Sr
No.
1
2
3
4
5
6
7
Particulars
Year 1
Year 2
Year 3
Contract Price
Cost till date
Estimated cost to complete
Total Contract cost
Estimated total Profit
Percentage of completion
= (2/4 X 100)
Contract profit = (5X6)
86,25,000
25,87,500
51,75,000
77,62,500
8,62,500
33.33%
86,25,000
62,10,000
6,90,000
69,00,000
19,55,000
90%
86,25,000
69,86,250
2,87,200
15,52,500 16,38,750
60
69,86,250
16,38,750

h.
Journal entries in the books of A Ltd.

Particulars
Cash
To Intangible Assets
To Profit on sale of francise
(recording the sale of francise
Revaluation reserve
To Retained earnings
(Being revaluation amount
transferred directly to retained
earning with no impact on income
statement
i.
Dr
30,000
Cr
28,000
2,000
6,000
6,000
Cost of borrowing is calculate as the weighted average of the borrowing

cost

6,00,00,000 X 8% = ` 48,00,000

4,00,00,000 X (35% X 10%) +

4,00,00,000 X (65% X 12%)
` 45,20,000

TOTAL = ` 93,20,000

Average borrowing rate of the project

=
93,20,000 /
10,00,00,000
= 9.32%
j.
Combined transaction is a financing agreement and does not result

into revenue recognition.
Total cost involved in the transaction = 5,40,000 4,80,000

(400000*1.2) = ` 60,000
Finance charges for the month of Mar = 60,000 X 1/6 = ` 10,000
Q4. a) Under IAS 18, revenue cannot be recognised if the amount of revenue
is not reliably measurable. SIC states that a seller can reliably measure
revenue at the fair value of the services provided in a barter transaction
only by reference to non-barter transactions that:
i)
Involve advertising similar to the advertising in the barter

transaction;
61

ii)
Occur frequently;
iii)
Represent a predominant number of transactions and amount

when compared to all transactions to provide advertising that is
similar to the advertising in the barter transaction;
iv) Involve cash and/or another form of consideration that has a

reliably measurable fair value; and
v)
Ans b)
Do not involve the same counterparty as in the barter transaction.
Distinguish between
Sr. Points
No.
1
Applicability
Existing AS-3
IAS-7
Mandatory for listed

companies and those
companies which fall in
the category Level -1
Direct or
Indirect
Method
Bank
Overdraft
AS 3 permits use
of Direct Method
or Indirect Method.
However,
SEBI
mandates
listed
companies to present
cash flow according to
indirect method only.
There is no specific
guidance on treatment
of bank overdraft. In
general, it is treated
as financing activity.
However, demand
deposit with bank are
treated as cash
Mandatory for all

entities preparing their
financial statements in
accordance with IFRS
as it is component
of a complete set of
financial statements.
IAS 7 encourages
entities to report cash
flow according to direct
method.
62
Bank borrowing as
normally treated as
part of financing
activity. However,
bank overdraft that
are repayable on
demand and form
part of integral cash
management are
treated as cash
equivalent.

Sr. Points
Existing AS-3
No.
4
Interest and Interest and dividend
dividend
paid are treated as
financing activity and
interest and dividend
received are treated as
investing activities. AS
3 does not provide any
option with regard to
classification of interest
paid or received
IAS-7
Interest and dividend
received or paid
may be classified
as operating activity
or financing activity
depending on nature of
transaction.
c)
An entity may present its financial statements in any currency. If the

presentation currency of an entity differs from functional currency, entity shall
translate the financial position into presentation currency using the following
procedures:
Assets and liabilities shall be translated at the closing rate at the date of that
statement of financial position;
Income and expenses should be translated at the rate of the day of

transactions. However, an average rate for the period can be used if it
approximates the exchange rates at the date of transactions.
All resulting exchange difference shall be recognized in other comprehensive

income.
d)
Following are the difference in Ind AS 1 from IAS 1

1.
With regard to preparation of statement of profit or loss, IAS 1 provides

an option either to follow the single statement approach or to follow
the two statement approach of profit or loss. Ind AS 1 allows only the
single statement approach.
2.
IAS 1 requires preparation of a statement of changes in equity as a

separate statement. Ind AS 1 requires the statement of changes in
equity to be shown as a part of the balance sheet.
63

3.
IAS 1 gives an entity the option to present an analysis of expenses

recognised in profit or loss using classification based on either their
nature or their function within the equity. Ind AS 1 does not give
any such option to maintain uniformity. It permits only nature-wise
classification of expenses.
4.
IAS 1 gives the option to individual entities to follow different

terminology for the titles of financial statements. To maintain uniformity,
Ind AS 1 does not give such an option.
e)
Entity has an option to choose either cost or revaluation model as its

accounting policy. If an item of property, plant and equipment is revalued,
the entire class of property, plant and equipment to which that asset belongs
shall be revalued.
If the assets carrying amount is increased as a result of revaluation,

the increase shall be recognized in other comprehensive income and
accumulated in equity under the heading of revaluation surplus. However, the
increase shall be recognised in profit or loss to the extent that is reverses
a revaluation decrease of the same asset previously recognised in profit or
loss.
If an assets carrying amount is decreased as a result of a revaluation, the

decrease shall be recognised in profit or loss. However, the decrease shall be
recognized in other comprehensive income to the extent of any credit balance
existing in the revaluation surplus in respect to that asset. The decrease
recognized in other comprehensive income reduces the amount accumulated
in equity under the heading of revaluation surplus.
f)
An undertaking shall apply IFRS 2 in accounting for all share-based payment

transaction including:
1.
Equity-settled share based payment transactions in which the

undertaking receives goods or services as consideration for equity
instruments of the undertaking;
2.
Cash settled share based payment transactions in which the

undertaking acquire goods or services by incurring liabilities to the
supplier of those goods or services for amounts that are based on the
price of the undertakings shares or other equity instruments of the
undertaking; and
64

3.
g)
Transactions in which the undertaking receives or acquires goods or

service and either the undertaking or the supplier of those goods or
services has a choice of whether the undertaking settles the transaction
in cash or by issuing equity instruments.
Distinguish between defined contribution and defined benefit plans

S Points
No
1
Definition
Entities
Liability
Actuarial
and
investment
risk
Defined Contribution
Plan
Defined contribution
plan are retirement
benefit plans under
which amounts to be
paid as retirement
benefits are determined
by contribution to a fund
together with investment
earning thereon.
Entitys liability is
limited to the amount of
contribution to the fund
Defined Benefit Plan

Defined benefit plan are
retirement benefit plans
under which amounts
to be paid as retirement
benefits are determined
by reference to a formula
usually employees earning
or year of service.
Entitys obligation is not

limited to the amount that
it agrees to contribute to
the fund.
Actuarial and investment Actuarial and investment
risk fall on employees.
risk fall on entity
5.
Interest Strip is a contractual arrangement to separate the right to all or part

of the interest due on a debenture, bond, mortgage loan or other interest
bearing financial asset from the financial asset itself. Servicing asset is a
contract to service financial assets under which the estimated future revenue
from servicing fees, late charges and other related revenues are expected
to be more than adequately compensating the servicer for performing
the services. A servicing contract can be either undertaken together with
securitizing the financial assets being serviced, or, purchased or assumed
separately.
Fair value of the securitized component of the loan = Fair value of the loan
fair value of servicing asset Fair value of Interest strip
= ` 11,000 ` 350 ` 650 = ` 10,000
65

Amortisation of carrying amount based upon their relative fair values:

Particulars
(1)
Securitized Loan
Component
Servicing Assets
Interest Strip
Total
Fair Value
(2)
10,000
350
650
11,000
% of Fair
Value
Proportionate
Carrying
amount
(3)
10,000 X (3)
90.91
9,091
3.18
5.91
100
Profit on securitisation = Net proceeds from securitisation

Less Apportioned carrying amount
= ` 10,000 ` 9,091 = ` 909
Journal Entries in the books of Originator:

Particulars
Bank
To Loans
To Profit on Securitisation
(Being securitisation of principal and right
to 14% interest)
Servicing Assets
Interest Strip
To Loans
(Being creation of servicing asset and
interest strip receivable)
6)
318
591
10,000
Dr
10,000
Cr
9,091
909
318
591
909
Calculation of weighted average number of Equity Shares for both the years:
Particulars
Fully paid equity shares
Partly paid up equity shares (10,00,000 X
5/10)
66
31-03-2013
31-03-2014
10,00,000
10,00,000
5,00,000

Particulars
31-03-2013
31-03-2014
Partly paid up shares
(fully paid from 1-10-2013)
(10,00,000 X 5/10 X 6/12)+(10,00,000 X
7,50,000
6/12)
Bonus shares (issued on 1-1-2014, on that
2,50,000
date all the 20,00,000 equity shares have
become fully paid) = 2,00,000 X 1/8 =
250,000 shares
Weighted average number of equity shares
15,00,000
20,00,000
for Basic EPS
Bonus share (for adjusted EPS, as bonus
250,000
shares will be treated as if the shares have
been issued prior to 1-4-2012
Total weighted average number of equity
17,50,000
20,00,000
shares

Calculation of Basic EPS for both the years:

Particulars
31.03.2013
31.03.2014
Net Profit attributable to Equity
1,00,00,000 1,00,00,000
shareholders
Weighted average number of Equity shares
15,00,000
20,00,000
Basic EPS
6.67
5.00
Calculation of additional earnings per incremental share in order to determine

the sequence:
Particulars
Options
Additional Net Profit after NIL

adjusting tax expense
67
Convertible Convertible
Preference Debenture
shares
(8,00,000 X (1,00,000 X 100
10 X 10%) X 12%) X (100
+ 10% = 30)% = 8,40,000
8,80,000

Particulars
Options
Additional Number of
Equity shares for Diluted
EPS
Earning per incremental
share
Sequence of Priority

[1,00,000
X (75
60) /75]
= 20,000
shares
NIL
Convertible Convertible
Preference Debenture
shares
8,00,000
1,00,000 X 4 =
X 2 = 4,00,000 Shares
16,00,000
shares
0.55
2.1
II
III
Calculation of Diluted EPS for 31.03.2014:

Particulars
Net Profit
attributable
to Equity
holder
Number
of Equity
shares
EPS
Net Profit
1,00,00,000
20,00,000
` 5.00
Adjustment for
Options
Total
Adjustment for
Preference shares
Total
Adjustment for
Debenture
Total
NIL
20,000
1,00,00,000
8,80,000
20,20,000
16,00,000
` 4.95
Dilutive
1,08,80,000
8,40,000
36,20,000
4,00,000
` 3.01
Dilutive
1,17,20,000
40,20,000
` 2.92
Dilutive
Basic EPS = ` 5 per share

Dilutive EPS = ` 2.92 per share
68
Nature
of
Potential
Equity
share
Basic
EPS

Calculation of Dilutive EPS for 31-3-2013:

Particulars
Net Profit
to Equity
holders
No. of
Equity
share
EPS
Net Profit
1,00,00,000
15,00,000
` 6.67
Adjustment for
options
TOTAL
Adjustment for
Preference shares
Total
Adjustment for
Debenture
Total
NIL
20,000
1,00,00,000
8,80,000
15,20,000
16,00,000
` 6.58
Dilutive
1,08,80,000
8,40,000
31,20,000
4,00,000
` 3.49
Dilutive
1,17,20,000
35,20,000
` 3.33
Dilutive
Basic EPS = ` 6.67 per share

Dilutive EPS = ` 3.33 per share
Calculation of Adjusted and Diluted EPS for 31-3-2013:

Particulars
Net Profit
attributable
to Equity
holder
No. of
Equity
share
EPS
Net Profit
1,00,00,000
17,50,000
` 5.71
Adjustment for
options
Total
Adjustment for
Preference shares
NIL
20,000
1,00,00,000
8,80,000
17,70,000
16,00,000
69
` 5.65
Nature
of
potential
Equity
shares
Basic
EPS
Nature
of
potential
Equity
shares
Basic
EPS
Dilutive

Particulars
Net Profit
attributable
to Equity
holder
No. of
Equity
share
EPS
Total
Adjustment for
Debenture
Total
1,08,80,000
8,40,000
33,70,000
4,00,000
` 3.23
Nature
of
potential
Equity
shares
Dilutive
1,17,20,000
37,70,000
` 3.11
Dilutive
70

Full Marks : 100
Time: 3 hours
(1.5 marks each)

ABROAD
True or False
1.
IAS 1 Presentation of Financial Statements does not apply to the

structure and content of condensed interim financial statements prepared in
accordance with IAS 34 Interim Financial Reporting.
2.
A subsidiary should not be excluded from Consolidation just because its

business activities are dissimilar from those of the other entities within the
Group.
3.
As per IFRS 8 Operating Segments, an entity is required to disclose a

measure of profit or loss for each operating segment?
4.
According to IAS 33 Earnings per Share, an entity shall present basic and
diluted earnings per share, even if the amounts are negative (i.e. a loss per
share).
5.
In case of a conflict between the Conceptual Framework for Financial

Reporting and IFRS Standard, the Framework would prevail.
6.
As per IAS 16, Land and Buildings are separable assets and accounted for
separately, even if they are acquired together.
7.
For the purpose of IAS 20 Accounting for Government Grants and

Disclosure of Government Assistance, government assistance includes the
provision of infrastructure in development areas or the imposition of trading
constraints on competitors.
8.
Fair value is a fundamental qualitative characteristic of useful financial

information as per the Conceptual Framework.
9.
IFRS 3 allows both the Purchase Method and Pooling of interests method to
account Business Combinations?
71

10. As per IAS 23, Borrowing Costs are always capitalized, when they are
directly attributable to the acquisition, construction or production of any asset
as part of the cost of that asset.
Fill in the Blanks
11. As per IAS 1, an entity whose financial statements comply with IFRSs shall
make an _______ and _______ statement of such compliance in the notes.
12. While computing cost of inventories, abnormal amounts of wasted materials,
labour or other production costs are_______.
13. As per IAS 7- Statement of Cash Flows, Bank borrowings are generally
considered under _______ activities.
14. Per IAS 8- Accounting Policies, Changes in Accounting Estimates and
Errors, prior period errors including fraud should be corrected in_______
period when it is practical.
15. Events that provide evidence of conditions that existed at the end of the
reporting period are called _______ Events.
16. As per IAS 11 - Construction Contracts a contract that allows cost plus an
agreed fixed fee is called a _______ Contract.
17. As per IAS 12- Income Taxes, a deductible temporary difference generates
a Deferred Tax _______.
18. As per IAS 17-Leases, gross investment in the lease is the_______ of the
minimum lease payments receivable by the lessor under a Finance Lease
and any unguaranteed residual value accruing to the lessor.
19. As per IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance, a government grant that becomes repayable shall
be accounted for as a _______.
20. As per IAS 36, Impairment of Assets, the recoverable amount of a cashgenerating unit is the _______ of the units fair value less costs to sell and
its value in use.
Calculation Based
21. An entity acquires a machine for CU 200,000. The machine has an estimated
useful life of 10 years. It has a clank (treated as a separate component and
a useful life of 5 years) that must be replaced every five years and costs
72

CU 40,000. Continued operation of the machine requires an inspection every
four years after purchase the inspection cost is CU 16,000. The entity uses
the straight-line method of depreciation. Under IAS-16, what is the charge to
income statement as expense for the Year 5?
22. On July 1 2013, X Ltd. handed over to a client a new computer system. The
total contract for the supply of the system and after sales support (one year)
was CU 400,000. The company estimates the cost of after sales support
at CU 60,000 and it normally marks up such costs by 50% when tendering
for support contracts. Per IAS 18, how much Revenue should the company
recognize in its financials for the year ended 31 December 2013?
23. Y Co. sells goods to a third party via an agent. During 2013, it supplies
the agent goods with a sales value of CU 100,000. The agent charges a
commission of 15% of the sales value. How much revenue should Y Co. and
the agent recognise?
24. X Holdings LLC holds a property lease for which it paid a premium of
CU 1 million. As per the terms, it has to pay CU 0.2 million for the next five
years, the present value of which is CU 0.76 million. The assets fair value is
CU 1.9 Million. X Holdings wants to recognize the property as an Investment
Property under IAS 40 and seeks your advice to decide the initial cost of the
property.
25. X Ltd acquired 100% of Y Ltd. on 1 January 2014. Details of identifiable
assets are as under :
Cost
100
200
400
700
500
200
Land and Building

Plant and Equipment
Other Assets
Total
Less Liabilities
Net Assets

FV
120
190
500
910
550
360
Fair value of the brand Y is assessed at CU 100. X Ltd. transfers

consideration of CU 1000. Calculate the Goodwill on acquisition?
26. An entity has a database that it purchased 5 years ago. At that date, the
database had 30,000 customer addresses after which 4000 addresses were
added and 2000 removed from the list. It is estimated that in two years time,
73

a further 8,000 addresses will be added to the list. As on date, how many
addresses should be taken into account to determine value-in-use as per IAS
36?
27. On 1 January 2014, Giant Inc. has taken a loan of CU 30,000 from its
parent Dwarf Inc. On 29 December 2014, Giant Inc. repaid CU 5,000 but
this amount was not received by Dwarf until after the year. Show how this
transaction would be reflected in the Consolidated Financial Statements of
the Group.
28. Compute the cash flow from (used for) investing activities from the below
transactions:

Purchase of equity investments CU 200
Purchase of own shares for cancellation CU 500
Purchase of Treasury shares CU 200
Proceeds from sale of equity investments CU 100
Disposal of businesses and interest in Associates CU 50
Increase in long-term loans CU 1,000
29. A company is carrying out 5 different contracts. On Contract no. 2, it expects

to incur a future loss of CU 100,000. On all the remaining contracts, it
expects to earn a future profit of CU 800,000. The company should :
30. Which of the following would not meet the definition of financial instruments
and fall outside the scope of IAS 32?
1)
Cash deposited in banks
2)
Gold deposited in banks
3)
Trade Accounts receivable
4)
Investments in Debt instruments
5)
Investments in equity instruments
6)
Prepaid expenses
7)
Inter-corporate loans and deposits
8)
Deferred revenue
74

9)
Statutory tax liabilities
10) Provision for estimated litigation losses.

Descriptive Type
31. What do you mean by vesting conditions and the types of vesting conditions
envisaged by IFRS-2?
32. Define related party and when a person or close member of that persons
family is related to a reporting entity? Between group companies, if services
are provided without charge, does it qualify as a related party transaction?
Why?
33. What do you mean by Dilution in context of IAS 33 Earnings per Share?
How does one calculate Diluted Earnings per share?
34. What type of contract costs should be included when the stage of completion
is determined by reference to the contract costs incurred to date? Explain
with examples.
35. Define the term control of an investee and explain the conditions which need
to be satisfied to substantiate whether an investor controls an investee?
36. According to IAS 28 Intangible Assets, when an Intangible asset shall
be recognised? Would fishing licence qualify as an Intangible Asset? If yes,
why?
37. Pear Company issues preference shares as follows:

Category A 20,000 Preference Shares of CU 1 each redeemable after 5

years
Category B 24,000 8% preference shares of CU 1 each.
Determine whether they have to be classified as Financial Liability or Equity

Instruments
75

CASE STUDY
Case Study 1
Amazon Inc. has been sued for following three alleged infringements of law:

Unauthorised use of a trademark; the claim is for $100 million
Non-payment of end-of-service severance pay and gratuity to 5,000

employees who were terminated without Amazon Inc. giving any reason; the
class action lawsuit is claiming $3 million
Unlawful environmental damage for dumping waste in the river near its
factory; environmentalists are claiming unspecified damages as cleanup
costs.
Legal counsel is of the opinion that not all the legal cases are tenable in law and
has communicated to Amazon Inc. this assessment of the three lawsuits:

Lawsuit 1: The chances of this lawsuit are remote.
Lawsuit 2: It is probable that Amazon Inc. would have to pay the displaced
employees, but the best estimate of the amount that would be payable if the
plaintiff succeeds against the entity is $2 million.
Lawsuit 3: There is no current law that would compel the entity to pay for
such damages. There may be a case for constructive obligation, but the
amount of damages cannot be estimated with any reliability.
Required
What should be the provision that Amazon Inc. should recognise or the contingent
liability that it should disclose in each of the lawsuits, based on the assessments
of its legal counsel?
Case Study 2
ThinkSoft Inc., a software company sold software licences to Mac Plc. as part of a
package deal involving the sale of hardware, other required software, maintenance
and training. The package was negotiated as a whole for CU 1 crore and both the
parties signed the contract.
Required:
State how this revenue shall be allocated amongst the elements and also amongst
the accounting periods when certain elements are delivered over more than one
period.
76

ANSWERS
True or False
1. True
2. True
3. False
4. True
5. False
6. True
7. False
8. False
9. False
10. False
Fill in the Blanks
11. Explicit and unreserved
12. Ignored
13. Financing
14. Earliest prior
15. Adjusting
16. Cost plus
17. Asset
18. Aggregate
19. Change in accounting estimate
20. Higher
Calculation Based
21. CU 44,000
22. CU 355,000
77

23. CU 100,000, CU 15,000
24. CU 1.76 million
25. CU 540
26. 32,000
27. Difference between Asset and Liability would be shown as Cash in Transit
28. CU-50
29. Recognise future losses of CU 100,000 immediately.
30. 2,6,8,9,10
Descriptive Type
31. The conditions that determine whether the entity receives the services that
entitle the counterparty to receive cash, other assets or equity instruments
of the entity, under a share-based payment arrangement are called vesting
conditions.

Vesting conditions are either service conditions or performance conditions.

Service conditions require the counter-party to complete a specified period
of service. Performance conditions require the counter party to complete a
specified period of service and specified performance targets to be met (such
as a specified increase in the entitys profit over a specified period of time).
A performance condition might include a market condition.
32. A related party is a person or entity that is related to the entity that is
preparing its financial statements.

A person or a close member of that persons family is related to a reporting

entity if that person:
(i)
has control or joint control of the reporting entity;
(ii) has significant influence over the reporting entity; or

(iii) is a member of the key management personnel of the reporting entity
or of a parent of the reporting entity.

It would qualify as a related party transaction because as per IAS 24, a

related party transaction is a transfer of resources, services or obligations
between related parties regardless of whether a price has been charged.
78

33. Dilution is a reduction in earnings per share or an increase in loss per share
resulting from the assumption that convertible instruments are converted, that
options or warrants are exercised, or that ordinary shares are issued upon
the satisfaction of specified conditions.

The formula for calculating DEPS is:

(Profit or loss attributable to common equity holders of parent

company
+ After-tax interest on convertible debt + Convertible preferred
dividends)
-------------------------------------------------------------------------------------------------
(Weighted average number of common shares outstanding during the

period
+ All dilutive potential common stock)
34. When the stage of completion is determined by reference to the contract

costs incurred to date, only those contract costs that reflect work performed
are included in costs incurred to date. Examples of contract costs which are
excluded are:
(a) contract costs that relate to future activity on the contract, such as costs
of materials that have been delivered to a contract site or set aside for
use in a contract but not yet installed, used or applied during contract
performance, unless the materials have been made specially for the
contract; and
(b) payments made to sub-contractors in advance of work performed under
the subcontract.
35. An investor controls an investee when it is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.

Thus, an investor controls an investee if and only if the investor has all the
following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the
investee; and
(c) the ability to use its power over the investee to affect the amount of the
investors returns.
79

36. 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.

An entity shall assess the probability of expected future economic benefits

using reasonable and supportable assumptions that represent managements
best estimate of the set of economic conditions that will exist over the useful
life of the asset.
Fishing Licence is identifiable non-monetary asset without physical substance;

hence it meets the basic definition of an Intangible Asset. In addition, the
licence when controlled by an entity should be recognised as Intangible
Asset, as future economic benefits are expected and cost can be measured
reliably.
37. Preference shares may be issued with various rights. In determining whether
a preference share is a financial liability or an equity instrument, IAS 32
requires an issuer to assess the particular rights attaching to the share to
determine whether it exhibits the fundamental characteristic of a financial
liability.

IAS 32 does this in part by drawing a distinction between:

instruments mandatorily redeemable or redeemable at the holders

option are generally considered as financial liability;
other instruments i.e. those redeemable only at the issuers option or

not redeemable, after assessment of the substance of the contractual
arrangement, are generally considered as equity instrument.
Accordingly, the Category A redeemable preference shares will be presented

as financial liability and the Category B preference shares as equity
instrument.
80

Case Study
Case Study 1

Lawsuit 1: Because the probability of an outflow of economic benefits is

remote, no provision or disclosure is required.
Lawsuit 2: Because it is probable (more likely than not) that Amazon Inc.
would ultimately have to pay the dues to the displaced employees and the
best estimate of the settlement is $2 million (as against the claim of $3
million), Amazon Inc. would have to make a provision for $2 million.
Lawsuit 3: There is no legal obligation, but there is a constructive obligation.

However, an estimate of the obligation with reasonable reliability is not
possible. Hence this qualifies for disclosure as a contingent liability because
it cannot be recognized as a provision (as it does not meet all the prescribed
conditions for recognition of a provision).
Case Study 2
IAS 18 and the Appendix to IAS 18 provide guidance as to the accounting
treatment in case of multiple elements

In circumstances where there are separately identifiable components of a

single contract, it is necessary to separate each component in order to reflect
the substance of the transaction. Thus all components of this single contract
are to be separated and accounted for distinctly.
When the contract includes an identifiable amount for subsequent servicing,

the amount pertaining to subsequent services is to be deferred and
recognized as revenue over the period during which the service is performed.
Thus revenue from software maintenance and training shall be deferred and
recognized as and when the services are provided.
81
82

Full Marks : 100
Time: 3 hours
Find out the correct statement

1.
At the end of the reporting period, an entity shall not reverse an impairment
loss recognised in a previous interim period in respect of goodwill.
2.
IFRIC 15 -agreements for the construction of real estate, does not address
when revenue from the construction of real estate should be recognised
rather the scope of IFRIC 15 is only to determine whether an agreement for
the construction of real estate is within the scope of IAS 11 or IAS 18?
3.
According to IFRIC 17 distribution of non-cash assets to owners, an entity

shall initially measure a liability to distribute non-cash assets as a dividend to
its owners at the carrying value of the assets to be distributed?
4.
The profit on a finance lease transaction for lessors who are manufacturers
or dealers should be recognized in the normal way on the transaction.
5.
IFRS 13 fair value sets out in a single IFRS a framework for measuring
fair value and the disclosures about the fair value measurements.
6.
Revenue from an artistic performance is recognized once the tickets for the
concert are sold.
7.
An impairment loss that relates to an asset that has been revalued upwards
in the past, should be recognised in revaluation reserve to the extent it
relates to the revalued amount.
8.
The processing of agricultural produce after harvesting is not dealt with by

IAS 41.
9.
Fair value accounting for investment property does not qualify for exemption
under IFRS 1 for the purposes of retrospective application.
10. An intangible asset with an indefinite life is one where the directors feel that
the intangible asset will not lose value in the foreseeable future.
83

11. Which of the following reports is not a component of the financial statements
according to IAS 1?
a.
Statement of financial position.
b.
Statement of changes in equity.
c.
Directors report.
d.
Notes to the financial statements.
12. The cost of inventory should not include

a.
Purchase price.
b.
Import duties and other taxes.
c.
Abnormal amounts of wasted materials.
d.
Administrative overhead.
e.
Fixed and variable production overhead.
f.
Selling costs.
g.
Choices c, d, and f.
13. Under IFRS, when a public shareholding company changes an accounting

policy voluntarily, it has to
a.
Inform shareholders prior to taking the decision.
b.
Account for it retrospectively.
c.
Treat the effect of the change as an extraordinary item.
d.
Treat it prospectively and adjust the effect of the change in the current
period and future periods.
14. A construction company signed a contract to build a theater over a period of

two years, and with this contract also signed a maintenance contract for five
years. Both the contracts are negotiated as a single package and are closely
interrelated to each other. The two contracts should be
a.
Combined and treated as a single contract.
b.
Segmented and considered two separate contracts.
c.
Recognized under the completed-contract method.

84

d.
Treated differentlythe building contract under the completed-contract

method and maintenance contract under the percentage-of-completion
method.
15. A taxable temporary difference gives rise to:

a.
Deferred tax Liability.
b.
Deferred tax Asset.
c.
Either 1 or 2.
16. Depreciation can be zero when an asset is idle.

a. False.
b.
Only due to factory closure.
c.
Only under a units of production method.
17. An entity has decided to improve its defined benefit pension scheme. The
benefit payable will be determined by reference to 60 years service rather
than 80 years service. As a result, the defined benefit pension liability
will increase by ` 10 million. The average remaining service lives of the
employees is ten years. How should the increase in the pension liability by
` 10 million be treated in the financial statements? (Based on the latest
version of IAS 19 as applicable from Jan 13.)
a.
The past service cost should be charged against retained profit.
b.
The past service cost should be charged against profit or loss for the
year.
c.
The past service cost should be spread over the remaining working
lives of the employees.
d.
The past service cost should not be recognized
18. Which of the following is not specifically excluded from the purview of
IAS 20?
a.
Government participation in ownership of the entity.
b.
Government grant covered by IAS 41.
c.
Government assistance provided in the form of tax benefits.
d.
Forgivable loan from the government.

85

19. Capitalisation of borrowing costs
a.
Shall be suspended during temporary periods of delay.
b.
May be suspended only during extended periods of delays in which

active development is delayed.
c.
Should never be suspended once capitalisation commences.
d.
Shall be suspended only during extended periods of delays in which

active development is delayed.
20. Which of the following assets is not a financial asset?

a. Cash.
b.
An equity instrument of another entity.
c.
A contract that may or will be settled in the entitys own equity

instrument and is not classified as an equity instrument of the entity.
d.
Prepaid expenses.
21. An entity purchases plant from a foreign supplier for 3 million on January
31, 2014, when the exchange rate was 2 = $1. At the entitys year-end of
March 31, 2014, the amount has not been paid. The closing exchange rate
was 1.5 = $1. The entitys functional currency is the dollar. Which of the
following statements is correct?
a.
Cost of plant $2 million, exchange loss $0.5 million, trade payable $1.5
million.
b.
Cost of plant $1.5 million, exchange loss $0.6 million, trade payable $2
million.
c.
Cost of plant $1.5 million, exchange loss $0.5 million, trade payable $2
million.
d.
Cost of plant $2 million, exchange loss $0.5 million, trade payable $2

million.
22. An associate is an entity in which an investor has significant influence over

the investee. Which of the following indicate(s) the presence of significant
influence and not Control or otherwise?
(i)
The investor owns 330,000 of the 1,500,000 equity voting shares of the
investee
86

(ii) The investor has representation on the board of directors of the
investee
(iii) The investor is able to insist that all of the sales of the investee are
made to a subsidiary of the investor
(iv) The investor controls the votes of a majority of the board members
a.
(i) and (ii) only
b.
(i), (ii) and (iii)
c.
(ii) and (iii) only
d.
All four
23. XYZ Ltd. has been served a legal notice on December 15, 2013, by the local
environmental protection agency (EPA) to fit smoke detectors in its factory on
or before June 30, 2014 (before June 30 of the following year). The cost of
fitting smoke detectors in its factory is estimated at ` 250,000. How should
XYZ Ltd. treat this in its financial statements for the year ended December
31, 2013?
a.
Recognize a provision for ` 250,000 in the financial statements for the

year ended December 31, 2013.
b.
Recognize a provision for ` 125,000 in the financial statements

for the year ended December 31, 2013, because the other 50% of
the estimated amount will be recognized next year in the financial
statement for the year ended December 31, 2014.
c.
Because XYZ Ltd. can avoid the future expenditure by changing the
method of operations and thus there is no present obligation for the
future expenditure, no provision is required at December 31, 2013,
but as there is a possible obligation, this warrants disclosure in the
footnotes to the financial statements for the year ended December 31,
2013.
d.
Ignore this for the purposes of the financial statements for the year
ended December 31, 2013, and neither disclose nor provide the
estimated amount of Rs.250,000.
24. An entity issues fully paid shares to 200 employees on December 31, 2013.
Normally shares issued to employees vest over a two-year period, but these
shares have been given as a bonus to the employees because of their
87

exceptional performance during the year. The shares have a fair market
value of ` 500,000 on December 31, 2013, and an average fair value for
the year of ` 600,000. What amount would be expensed in the statement of
comprehensive income for the above share-based payment transaction?
a.
` 600,000
b.
` 500,000
c.
` 300,000
d.
` 250,000
25. During the year 2013, ABC Corp. was sued by a competitor for ` 15 million
for infringement of a trademark. Based on the advice of the companys legal
counsel, ABC Corp. accrued the sum of ` 10 million as a provision in its
financial statements for the year ended December 31, 2013. Subsequent
to the end of the reporting period, on February 15, 2014, the Supreme
Court of the country decided in favor of the party alleging infringement of
the trademark and ordered the defendant (ABC Corp.) to pay the aggrieved
party a sum of ` 14 million. The financial statements were prepared by the
companys management on January 31, 2014, and approved by the board
on February 20, 2014. How much adjustment ABC Corp. should make in its
financial statements for the year ended December 31, 2013?
a.
Increase provision by ` 4 million
b.
Decrease provision by ` 4 million
c.
No adjustment required but to disclose in notes
d.
No adjustment and no disclosure required
26. An entity has acquired a subsidiary on January 1, 2013. Goodwill of ` 2

million has arisen on the purchase of this subsidiary. The subsidiary has
deductible temporary differences of ` 1 million and it is probable that future
taxable profits are going to be available for the offset of this deductible
temporary difference. The tax rate during 2013 is 30%. The deductible
temporary difference has not been taken into account in calculating goodwill.
What is the figure for goodwill that should be recognized in the consolidated
statement of financial position of the parent?
a.
` 2,000,000
b.
` 1,700,000
c.
` 1,400,000
d.
None of the above

88

27. On 1 October 2013, Fresco acquired an item of plant under a five-year
finance lease agreement. The plant had a cash purchase cost of ` 25
million. The agreement had an implicit finance cost of 10% per annum and
required an immediate deposit of ` 2 million and annual rentals of ` 6 million
paid on 30 September each year for five years. What would be the current
liability for the leased plant in Frescos statement of financial position as at
30 September 2014?
a.
` 19,300,000
b.
` 4,070,000
c.
` 5,000,000
d.
` 3,850,000
` 4,070,000 (19,300 15,230)
28. On 1 January, 2014, Viagem acquired 80% of the equity share capital of
Greca. Extracts of their statements of profit or loss for the year ended
30 September 2014 are:
Viagem Greca

` 000
` 00
Revenue 64,600 38,000

Cost of sales

(51,200)
(26,000)
Sales from Viagem to Greca throughout the year ended 30 September

2014 had consistently been ` 800,000 per month. Viagem made a markup on cost of 25% on these sales. Greca had ` 1.5 million of these goods
in inventory as at 30 September 2014. What would be the cost of sales
in Viagems consolidated statement of profit or loss for the year ended
30 September 2014?
a.
` 59.9 million
b.
` 61.4 million
c.
` 63.8 million
d.
` 67.9 million
29. Nice Guy Ltd. sells goods with a cost of `100,000 to Start-up Co. for
` 140,000 and a credit period of six months. Nice Guy Ltd.s normal cash
price would have been ` 125,000 with a credit period of one month or with
89

a ` 5,000 discount for cash on delivery. How much revenue Nice Guy Ltd.
recognise in the income statement as per IAS 18?
a.
` 140,000
b.
` 120,000
c.
` 125,000
d.
` 135,000
30. A companys total external revenue for an accounting period is ` 15m. There
is no inter-segment revenue. The companys total assets are ` 43m. The
total profit or all profitable segments for the period is ` 2.6m and the total
losses of all loss-making segments are ` 1.9m.

Operating segment X has external revenue of ` 1.3m, total assets of ` 3.7m

and a loss of ` 220,000. Which of the following statements is true?
a.
Segment X is a reportable segment because it has revenue of ` 1.3m
b.
Segment X is a reportable segment because it has assets of ` 3.7m
c.
Segment X is a reportable segment because it has a loss of ` 220,000
d.
Segment X is not a reportable segment
In order to be reportable, a segment must have revenue of at least ` 1.5m,

assets of at least ` 4.3m or a profit or loss of at least ` 260,000 (the greater
of Rs.260,000 and Rs.190,000). Segment X fails to satisfy any of these
requirements.

31. The statutory audit of ABC Ltd. for the year ended June 30, 2013, was
completed on August 30, 2013. The financial statements were signed by the
managing director on September 8, 2013, and approved by the shareholders
on October 10, 2013. The following three post reporting period events have
occurred:
1.
On July 15, 2013, a customer owing ` 900,000 to ABC Ltd. filed for
bankruptcy. The financial statements include an allowance for doubtful
debts pertaining to this customer of only ` 50,000.
2.
ABC Ltd.s issued capital comprised 100,000 equity shares. The

company announced a bonus issue of 25,000 shares on August 1,
2013.
90

Required

How should ABC Ltd. account for these two post reporting period events?
Provide reasons for the conclusion.
32. Universal Builders Ltd. is well known for its expertise in building flyovers and
maintaining these structures. Impressed with Universals track record, the
local municipal authorities have invited them to submit a tender for a two-year
contract to build a super flyover in the heart of the city (the largest in the
region) and another tender for maintenance of the flyover for ten years after
completion of the construction.

Required
Evaluate whether these two contracts should be segmented or combined into

one contract for the purposes of Ind AS 11.
Note: IFRIC 12 is not assumed to be applicable.
33. An entity sells a piece of a plant to a 100% owned subsidiary and leases it
back over a period of four years. The remaining useful life of the plant is ten
years. The selling price of the plant was 20% below its carrying and market
value. The lease rentals were based on market rates. The entity has no right
to buy the plant back.

Required
Discuss how this transaction should be dealt with in the entitys financial
statements in line with Ind AS 17.
34. Explain the term Other Comprehensive income with appropriate examples?
35. Whether changes in accounting estimates are different from error? What
are their implications on the financial statements?
36. According to IAS 36, what is the timing of impairment test of goodwill? When
an entity can reverse the impairment losses for goodwill?
37. What do you mean by Cash and Cash Equivalent? How would you deal with
non-cash investing and financing transactions while preparing statement of
cash flows?
Case Study 1
Jumbo prepares financial statements under International Financial Reporting
Standards. In the year ended 30 September 2013, the following events occurred:
91

On 1 July 2013, Jumbo decided to sell one of its divisions as a going concern
following a recent change in its geographical focus. The proposed sale would
involve the buyer acquiring the non-monetary assets (including goodwill) of the
division, with Jumbo collecting any outstanding trade receivables relating to the
division and settling any current liabilities.
On 1 July 2013, the carrying amounts of the relevant assets of the division were
as follows:

Purchased goodwill ` 600,000.
Property, plant and equipment (average remaining estimated useful life two
years) ` 2 million.
Inventories ` 1 million.
From 1 July 2013, Jumbo began to actively market the division and has received
a number of serious enquiries. On 1 July 2013, the directors estimated that they
would receive ` 32 million from the sale of the division. Since 1 July 2013, market
conditions have improved and on 31 October 2013 Jumbo received and accepted
a firm offer to purchase the division for ` 33 million. The sale is expected to
be completed on 31 December 2013. ` 33 million can be assumed to be a
reasonable estimate of the value of the division on 30 September 2013. During
the period from 1 July 2013 to 30 September 2013, inventories of the division
costing ` 800,000 were sold for ` 1,200,000. At 30 September 2013, the total cost
of the inventories of the division was ` 900,000. All of these inventories have an
estimated net realisable value that is in excess of their cost.
Required:
Show how the proposed sale of the division will be reported in the financial
statements of Jumbo for the year ended 30 September 2013, giving relevant
explanations where appropriate. You should indicate the extent to which relevant
transactions and balances need to be separately disclosed and when the separate
disclosures can be made in the notes, rather than in the primary financial
statements themselves.
Case Study 2
Forward Trading Ltd. commenced business on January 1, 2013, with an opening
share capital of $2 million. The statement of comprehensive income and closing
statement of financial position follow:
92

Statement of comprehensive income for the year ended December 31, 2013
$m
Revenue 32
Cost of sales (10)
Gross profit

22
Distribution costs (8)
Administrative expenses (2)
Profit before tax

12
Tax expense (4)
Profit for period

8
Statement of financial position at December 31, 2013
$m
Share capital 2
Retained earnings 8

Trade payables 4
Total equity and liabilities
14
Land (non-depreciable) acquired December, 31 2013 8
Inventories 4
Trade receivables 2
Total assets 14
The functional currency is the dollar, but the entity wishes to present its financial
statements using the euro as its presentational currency. The entity translates the
opening share capital at the closing rate. The exchange rates in the period were
$1 =
January 1, 2013 1
December 31, 2013 2
Average rate 1.5
Required
Translate the financial statements (statement of comprehensive income and
statement of financial position) from the functional currency to the presentational
currency.
93

ANSWERS
1. True
2. False
3. False
4. True
5. True
6. False
7. True
8. True
9. True
10. False
11. Directors report
12. Choices c, d, and f
13. Account for it retrospectively
14. Combined and treated as a single contract
15. Deferred tax Liability
16. Only under a units of production method
17. The past service cost should be charged against profit or loss for the year
18. Forgivable loan from the government
19. Shall be suspended only during extended periods of delays in which active
development is delayed
20. Prepaid expenses
21. Cost of plant $1.5 million, exchange loss $0.5 million, trade payable $2 million
22. (i) and (ii) only
94

23. Because XYZ Ltd. can avoid the future expenditure by changing the
method of operations and thus there is no present obligation for the future
expenditure, no provision is required at December 31, 2013, but as there is
a possible obligation, this warrants disclosure in the footnotes to the financial
statements for the year ended December 31, 2013.
24. ` 500,000
25. Increase provision by ` 4 million
26. ` 1,700,000
27. ` 4,070,000

` 4,070,000 (19,300 15,230)
28. ` 63.8 million

`

Cost of sales

Viagem 51,200

Greca (26,000 x 9/12)
19,500
Intra-group purchases (800 x 9 months) (7,200)
URP in inventory (1,500 x 25/125)
300

63,800

29. ` 120,000
30. Segment X is not a reportable segment

In order to be reportable, a segment must have revenue of at least ` 1.5m,

assets of at least ` 4.3m or a profit or loss of at least ` 260,000 (the
greater of ` 260,000 and ` 190,000). Segment X fails to satisfy any of these
requirements.
95

31. ABC Ltd. should increase its allowance for doubtful debts to ` 900,000
because the customers bankruptcy is indicative of a financial condition that
existed at the end of the reporting period. This is an adjusting event. existed
at the end of the reporting period. This is an adjusting event.
2.
IAS 33, Earnings Per Share, requires a disclosure of transactions as stock

splits or rights issue, which are of significant importance after the reporting
period. This is a non-adjusting event, and only disclosure is needed.
32. The two contracts should be combined and treated as a single contract
because

The two contracts are very closely related to each other and, in fact,
are part of a single contract with an overall profit margin.
The contracts have been negotiated as a single package.
The contracts are performed in a continuous sequence.
33. The lease will almost certainly be an operating lease, as the lease period is
not for the majority of the plants life and the rentals are based on market
rates.

However, the selling price was below the carrying and market value, and this
loss has not been compensated by future rentals. Therefore, the loss should
be recognised immediately.
The transaction will be eliminated on consolidation, but the individual entity

accounts will recognize it. Also, the entities are related parties; therefore, the
substance of the transaction will have to be carefully scrutinised. Although the
entity has no right to reacquire the asset, it can exercise the right through its
control of the 100% subsidiary. This control may change the designation of
the lease.
34. Other comprehensive income is defined as comprising items of income and

expense (including reclassification adjustments) that are not recognised in
profit or loss as required or permitted by other IFRSs.

Examples of items recognised outside of profit or loss i.e. part of other

comprehensive income:

Changes in revaluation surplus where the revaluation method is used

under IAS 16and IAS 38
96

Remeasurements of a net defined benefit liability or asset recognised
in accordance with IAS 19

Exchange differences from translating functional currencies into

presentation currency in accordance with IAS 21
Exchange differences while translating non monetary items into

functional currency where the gains/losses on such non monetary items
are recognised in other comprehensive income
Gains and losses on remeasuring available-for-sale financial assets in

accordance with IAS 39
The effective portion of gains and losses on hedging instruments in a

cash flow hedge under IAS 39 or IFRS 9
Gains and losses on remeasuring an investment in equity instruments

where the entity has elected to present them in other comprehensive
income in accordance with IFRS 9
The effects of changes in the credit risk of a financial liability designated

as at fair value through profit and loss under IFRS 9
35. 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,
that results from 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.

Prior period errors are omissions from, and misstatements in, the entitys
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
authorized 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
97

The effect of a change in an accounting estimate shall be recognised

prospectively whereas an entity shall correct material prior period errors
retrospectively in the first set of financial statements authorised for issue
after their discovery, except when it is impracticable to determine either the
period-specific effects or the cumulative effect of the error.
36. Timing of impairment test

(a) the annual impairment test for a cash-generating unit (group of units) to
which goodwill has been allocated to be performed at any time during
an annual reporting period, provided the test is performed at the same
time every year.
(b) different cash-generating units (groups of units) to be tested for
impairment at different times.

However, if some of the goodwill allocated to a cash-generating unit (group

of units) was acquired in a business combination during the current annual
period, the Standard requires that unit (group of units) to be tested for
impairment before the end of the current period.
The Standard permits the most recent detailed calculation made in a

preceding period of the recoverable amount of a cash-generating unit (group
of units) to which goodwill has been allocated to be used in the impairment
test for that unit (group of units) in the current period, provided specified
criteria are met.
Reversal of impairment losses
The Standard prohibits the recognition of reversals of impairment losses for

goodwill.
37. Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.

Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes. For an investment
to qualify as a cash equivalent it must be readily convertible to a known
amount of cash and be subject to an insignificant risk of changes in value.
Bank borrowings are generally considered to be financing activities. However,

in some countries, bank overdrafts which are repayable on demand form an
integral part of an entitys cash management. In these circumstances, bank
overdrafts are included as a component of cash and cash equivalents.
98

Investing and financing transactions that do not require the use of cash or
cash equivalents shall be excluded from a statement of cash flows. Such
transactions shall be disclosed elsewhere in the financial statements in a way
that provides all the relevant information about these investing and financing
activities.

Case Study 1
The decision to offer the division for sale on 1 July 2013 means that from that date
the division is classified as held for sale. The division is available for immediate
sale, is being actively marketed at a reasonable price, and the sale is expected to
be completed within one year.
The consequence of this classification is that the assets of the division will be
measured at the lower of their existing carrying amounts and their fair value less
costs to sell. In this case, this means measuring the assets of the division at ` 3.2
million on 1 July 2013.
The reduction in carrying value of the assets of ` 400,000 (` 2 million + ` 1 million
+ ` 600,000 ` 3.2 million) will be treated as an impairment loss and allocated
to goodwill, leaving a carrying amount for goodwill of ` 200,000 (` 600,000
` 400,000).
The increased expectation of the selling price of ` 100,000 (` 3.3 million ` 3.2
million) will be treated as a reversal of an impairment loss. However, since this
reversal relates to goodwill, it cannot be recognised. The assets of the division
need to be presented separately from other assets in the statement of financial
position. Their major classes should be separately disclosed, either on the face of
the statement of financial position or in the notes.
The property, plant and equipment should not be depreciated after 1 July 2013, so
its carrying value at 30 September 2013 will be ` 2 million. The inventories of the
division will be shown at their year-end cost of ` 900,000.
The division will be regarded as a discontinued operation in the year ended
30 September 2013. It represents a separate line of business and is held for sale
at the year end.
The statement of comprehensive income should disclose, as a single amount,
the post-tax profit or loss of the division and the impairment loss arising on
the re-measurement of the division on classification as held for sale. Further
analysis of this single amount can be presented on the face of the statement
99

of comprehensive income, but it can be presented in the notes to the financial
statements.
Case Study 2
Solution
Statement of comprehensive income for the year ended December 31, 2013, at
average rate
(1.5 = $1)
Revenue 48
Cost of sales (15)
Gross profit
33
Distribution costs (12)

Administrative expenses (3)
Profit before tax
18
Tax expense (6)

Profit for period
12
Statement of financial position at December 31, 2013

(2 = $1)
Share capital (closing rate)
Retained earnings (average rate)
12
Exchange difference (see after table)
20
Trade payables 8
Total equity and liabilities
28
Land (non-depreciable) acquired December 31, 2013
16
Inventories 8
Trade receivables
Total assets 28
100

The exchange difference is calculated in this way:
The retained earnings if translated into euros would be 16 million. As the
statement of comprehensive income has been translated using the average rate,
the profit per that statement is 12 million, creating an exchange difference of
4 million.
The total exchange difference of 4 million, is shown as a component of equity.
Note: These are illustrative presentation of the two statements with some
explanatory calculations / bifurcation which may or may not be presented
on the face of the same.
101
102

Full Marks : 100
Time: 3 hours

1.
In the extremely rare circumstances in which management concludes that

compliance with a requirement in an Ind AS would be so misleading that
it would conflict with the objective of financial statements set out in the
framework:(a) The entity should depart from that requirement if the relevant regulatory
framework requires, or otherwise does not prohibit such a departure.
(b) If an entity departs from a requirement of Ind AS, the management has
to disclose its conclusion that the financial statements present a true
and fair view of the entitys financial position, financial performance and
cash flows.
(c) The entity has to disclose that it has complied with applicable Ind ASs,
except that it has departed from a particular requirement to present a
true and fair view.
(d) Entity has to disclose the title of the Ind AS from which the entity has
departed, the nature of the departure, including the treatment that
the Ind AS would require, the reason why that treatment would be so
misleading in the circumstances that it would conflict with the objective
of financial statements set out in the Framework, and the treatment
adopted.
Alternative choices:(i)
All (a), (b), (c), (d) are true
(ii) Only (a) and (b) are true

(iii) Only (c) and (d) are true
(iv) Only (b), (c) and (d) are true
103

2.
In the case of non-financial entities, interest paid and interest and dividend
received is classified as follows in the Cash flow statement in accordance
with IAS 7:
(a) cash flows from financing activities and operating activities
respectively
(b) Cash flows from investing activities and operating activities
respectively
(c) Cash flows from financing activity and investing activity respectively
(d) There is an option to present both as cash flows from operating
activities
Only (a) is true
(ii) (b) and (d) are true

(iii) only (d) is true
(iv) (c) and d) are true
3.
Which of the following are changes in accounting estimates and changes in

accounting policy under Ind AS 8:(a) An entity changes the method of measuring its inventory from First in
First Out [FIFO] basis to Weighted Average cost basis.
(b) An entity reverses provision for doubtful debts during the financial year
as the related debt is collected.
(c) An entity changes the method of depreciation from straight line method
to weighted average method.
(d) An entity has classified an investment property, an owner occupied
property previously classified as part of property, plant and equipment
where it was measured after initial recognition on a revaluation model.
Ind AS 40 on investment property permits only cost model. The entity
now measures this investment property at cost.
(a) and (d) are changes in accounting policy, (b) and (c) are changes in
accounting estimate.
104

(ii) (b) and (c) are changes in accounting policy, (a) and (d) are changes in
(iii) (b) and (c) are changes in accounting estimate and (a) is a change in
accounting policy and (d) is not a change in accounting policy.
(iv) (a), (b), (c) and (d) are changes in accounting policy.
4.
Which of the following are adjusting events and which are non-adjusting
[disclosure] events in accordance with IAS 37?
(a) a major business combination after the reporting period or disposing off
a major subsidiary.
(b) announcing a plan to discontinue an operation.
(c) major purchase of assets, classification of assets as held for sale in
accordance with Ind AS 105 / IFRS5 Non-current assets held for sale
and discontinued operations.
(d) Events after the reporting period that cast significant doubt on the
appropriateness of the going concern assumption.
(e) the settlement arrived at after the reporting period of a court case
that confirms that the entity had a present obligation at the end of the
reporting period.
(a), (d) are adjusting events, (b), (c) and (e) are non-adjusting events.
(ii) (b) and (c) are adjusting events, (a), (d) and (e) are non-adjusting
events.
(iii) (a), (b) and (c) are adjusting events, (d) and (e) are non-adjusting
events.
(iv) (a), (b) and (c) are non-adjusting events, (d) and (e) are adjusting
events.
5.
Which of the following statements are true are regards the applicability of
IAS 36 & Ind AS 36 on Impairment of Assets?
(a) Not applicable to impairment of inventories.
(b) Not applicable to financial assets classified as subsidiaries, associates
and joint ventures.
(c) Not applicable to assets arising from employee benefits.
(d) Applicable to financial assets others than Subsidiaries, associates and
joint ventures.
105

(a), (b), (c) are true (d) is false.
(ii) (a), (b) is true, (c) and (d) are false.

(iii) (a), (b) and (c) are false, (d) is true.
(iv) (a), (c) are true and (b), (d) are false.
6.
Which of the following statements as regards differences between Ind AS and

IFRS are true?
(a) Ind AS 40 Investment Property permits the use of fair value model
when the lessees interest in both land and buildings is classified as
an investment property. IAS17 prohibits application of fair value model
when the lessees interest in both land and buildings is classified as an
investment property in accordance with IAS40 Investment property.
(b) IAS 40 permits both cost model and fair value model (except in
some situations) for measurement of investment properties after
initial recognition whereas Ind AS 40 permits only the cost model for
presentation in the balance sheet but for disclosure purpose fair value
needs to be determined.
(c) IAS 40 permits treatment of property interest held in an operating
lease as investment property, if the definition of investment property
is otherwise met and fair value model is applied. In such cases, the
operating lease would be accounted as if it were a finance lease. Since
Ind AS 40 prohibits the use of fair value model, property interest held
in an operating lease is not treated as investment property.
(d) With regard to the acquisition of an intangible asset by way of a
Government grant, IAS 38 Intangible assets provides an option to
an entity to recognise both asset and grant initially at fair value or at
a nominal value plus any expenditure that is directly attributable to
preparing the asset for its intended use. Ind AS 38 allows only fair
value for recognising the intangible asset and grant in accordance with
Ind AS 20.
(a) is false (b), (c) & (d) are true.
(ii) (a), (b) are true, (c) and (d) are false.
106

(iii) (a), (b) and (c) are true, (d) is false.
(iv) (a), (c) are true and (b), (d) are false
7.
Which of the following statements are true/false as per IAS 12 Income Taxes:(a) The income statement liability method focuses on timing differences,
whereas the balance sheet liability method focuses on temporary
differences.
(b) Timing differences are differences between taxable profit and
accounting profit that originate in one period and reverse in one or
more subsequent periods.
(c) Temporary differences are differences between the tax base of an asset
or liability and its carrying amount in the statement of financial position.
(d) All timing differences are temporary differences.
All are true.
(ii) (a), (b) & (c) are true, (d) is false.

(iii) (a), (b) are true, (c) & (d) are false.
8.
Which of the following statements are true in the context of IAS 19, Employee
Benefits:(a) The Standard requires an entity to recognise contributions to a defined
contribution plan when an employee has rendered service in exchange
for those contributions.
(b) Where contributions to a defined contribution plan do not fall due wholly
within twelve months after the end of the period in which the employees
render the related service, they shall be discounted using the discount
rate.
(c) An entity is required to disclose information about contributions to
defined contribution plans for key managerial personnel under IAS 19.
(d) Defined contribution plans involve making actuarial assumptions to
ascertain the present value of contributions due beyond the current
accounting period.
107

All are true

9.
Which of the following statements relating to differences between Indian

GAAP [AS 22] and IAS 12 are true?
(a) Deferred tax asset recognised for all deductible temporary differences
to the extent probable that taxable profit will be available. Same criteria
applicable for recognising deferred tax assets on carry forward of
unused tax losses or unused tax credits under IAS 12. However, under
AS 22, Deferred tax asset recognized to the extent there is reasonable
certainty that sufficient taxable income will be available. Virtual certainty
that future taxable profit will be available required for recognising
deferred tax assets for unabsorbed depreciation or carry forward of
losses.]
(b) Deferred taxes recognised either in Statement of Profit or loss, Other
comprehensive income or directly in Equity under IAS12, however,
under AS 22, there is no such specific requirement.
(c) Deferred tax liability recognized on taxable temporary differences
associated with investments in subsidiaries, branches and associates,
interests in JVs, except to the extent that both the following are
satisfied:- a) Parent investor is able to control the timing of the reversal
of temporary difference; b) It is probable that temporary difference will
not reverse in the foreseeable future. Deferred tax assets recognized
for all deductible temporary differences to the extent it is probable
that:- a) Temporary difference will reverse in foreseeable future; and
b) Taxable profit will be available against which temporary difference
can be utilized. However, there is no such guidance in AS 22.]
(d) Deferred tax recognised temporary differences between the tax
base & carrying value in consolidated financial statements after
eliminating unrealized profits. However, under AS 22, Deferred taxes in
consolidated financial statements is simply the sum of the tax expense
of the parent and the subsidiaries.
108

All are true
(ii) (a), (b) & (c) are true, (d) is false

(iii) (a), (b) are true, (c) & (d) are false
(iv) (a), (c) are true and (b), (d) are false
10. Which of the following statements relating to differences between Indian
GAAP [AS 15] and IAS-19 are true?
(a) IAS19 encourages but does not require an entity to involve a qualified
actuary in the measurement of all material post employment benefit
obligations. However, AS-15 does not require the involvement of a
qualified actuary, does not specifically encourage the same.
(b) Employee benefits arising from constructive obligations are covered
under IAS-19, whereas, the same are not specifically covered under
AS-15.
(c) Participation in a defined benefit plan sharing risks between various
entities under common control is a related party transaction for each
group entity as per IAS19. However, AS15 does not specifically provide
for the same.
(d) As per IAS 19, Limit on asset ceiling defined benefit plans is the total
of a) any cumulative unrecognized past service cost b) present value
of economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan. However, under AS 15,
Limit on asset ceiling for defined benefit plans is the present value of
economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.
All are true

109

Fill in the blanks
11. Changes in accounting policy should be applied ______________:
(i) Prospectively
(ii) Retrospectively
(iii) All of the above
(iv) None of the above
12. Changes in accounting estimate should be applied ____________:
(i) Prospectively
13. Errors should be corrected ______________:
(i) Prospectively
14. A Ltd. has two operating segments. One segment is profit-making and
the other is loss-making. During the board meeting, decision is taken to
discontinue an operating segment which is loss making and it is also seen
that employees of the discontinued segment will earn no further benefits. This
is a _____________________:
Options are:(i)
Curtailment without a settlement
(ii) Settlement
(iii) Termination
110

15. IFRIC 21 Levies defines a levy as an outflow of resources embodying
economic benefits that is _________________
Options are:(i)
Imposed by Government on entities in accordance with legislations.
(ii) A payment made for the acquisition of an asset, or rendering of

services under a contractual agreement with a Government.
(iii) Fines and penalties, and liabilities arising from emission trading
schemes
(iv) Taxes within the scope of IAS 12 Income taxes.
16. IFRIC 21, Levies confirms that an entity recognises a liability for a levy when
and only when ________
Options are:(i)
The triggering event specified in the legislation occurs.
(ii) There is no realistic opportunity of avoiding the triggering event even

though as of that date the triggering event as per legislation has not
occurred.
(iii) The activity that triggers the payment of the levy, as identified by the
legislation has not occurred.
(iv) It receives the demand notice from the tax authorities.
17. The tax base of an asset under IAS12 Income taxes is the amount that
will be deductible for tax purposes against any economic benefits that will
_____________________
Options are:(i)
flow to an entity when it recovers the carrying amount of an asset
(ii) be taxable in future

(iii) flow to an entity when it settles the carrying amount of an asset
(iv) exempt from tax in future
18. A trade receivable has a carrying amount of ` 100. The related revenue
has already been included in taxable profit (loss). The tax base of the trade
receivable is ____________
111

Options are:(i)
` 100 calculated as the carrying amount
(ii) ` 100 calculated as the carrying amount less the amount that will be
deductible in future i.e. ` Nil.
(iii) ` 100 being amount deductible in future
(iv) exempt from tax in future
19. Deferred tax asset recognised for all deductible temporary differences to
the extent ___________________ that taxable profit will be available. Same
criteria applicable for recognising deferred tax assets on carry forward of
unused tax losses or unused tax credits. to an entity when it recovers the
carrying amount of an asset. If those benefits will not be taxable the tax base
of an asset is equal to carrying amount (para 7.),
Options are:(i) probable
(ii) virtually certain
(iii) reasonably certain
(iv) none of the above
20. Short term compensated absences are a category of short term employee
benefits. The two types of short term compensated absences are
_________________
(i)
Accumulating and non-accumulating short term compensated absences
(ii) Non-accumulating short term compensated absence

(iii) Accumulating absence
(iv) Termination benefits
Calculation based
21. The cost of a depreciable fixed asset is ` 150,000. Tax depreciation
claimed as a deduction up to the reporting date is ` 90,000. In the financial
books, the tax depreciation claimed is ` 50,000. Tax rate is 40%. The
amount to be recognised in the financial statements for deferred tax is
_____________________________
112

Options are:(i)
Deferred tax liability of ` 16,000
(ii) Deferred tax asset of ` 16,000

(iii) Deferred tax liability of ` 40,000
22. Warranty amount provided in the books of account is ` 100,000. The
taxation law does not permit the deduction until the company does
not pay actual claims. Tax rate applicable to the company is 40%. The
amount to be recognized in the financial statements for deferred tax is
__________________________
Options are:(i)
Deferred tax liability of ` 16,000
(ii) Deferred tax asset of ` 40,000

(iii) Deferred tax liability of ` 40,000
23. Zed Ltd. operates a pension plan that provides a pension of 3% of final
salary for each completed year of service. The benefit becomes vested after
5 years of service. On 1.1.2010, the entity improves the pension to 3.5%
of final salary for each year of service starting from 1.1.2005. At the date of
improvement, the present value of the additional benefits for service from
1.1.2005 to 1.1.2010 is as follows :
Employees with more than 5 years of service at 1.1.2010:-----
200
Employees with less than 5 years service at 1.1.2010
(average period untill vesting is 3 years) :- ------------------------
150
Total -------------------------------------------------------------
350
The amount to be charged to Profit and Loss account during the year ended
31.12.2010 is as follows _________________________
Options are:(i)
` 250 [` 200 (already vested) + ` 50 (i.e. ` 150 / 3 on a straight line

basis over 3 years from 1.1.2010)]
113

(ii) ` 350 being past service cost up to 31.12.2010
(iii) ` 200 already vested (` 50 to be accounted on the vesting date on
completion of 3 years).
(iv) ` 200 already vested.
(v) None of the above
24. The fair value of plan assets at 31 December 2013 was ` 15,000. Fair value
of plan assets on 01 January 2013 was ` 10,000. The value of contributions
received during the year is ` 4,900. The value of benefits paid out during
the year is ` 1,900. The expected return on plan assets during the year was
` 1,175. Calculate the actuarial gain or loss.
Options are:(i)
Actuarial loss of ` 825
(ii) Actuarial gain of ` 825

(iii) Neither Actuarial gain nor actuarial loss
25. The expected ultimate carrying amount of a qualifying asset is ` 10 crores.
The recoverable amount of the asset is ` 9.95 crores. Borrowing costs
included in the expected ultimate carrying amount of ` 10 crores is ` 1 crore
in accordance with IAS 23 Borrowing costs. The amount to be written down
/ written off on account of impairment under IAS 36 Impairment of assets is
____________
Options are:(i)
` 500,000
(ii) ` 1 crore being the borrowing costs incorrectly capitalized

(iii) ` 95 lakhs
26. Company B grants 500 shares options each to 100 employees. The
employees will be entitled to exercise these options if they stay for 3 years.
The fair value of each option is estimated to be ` 15 on the date of grant.
The fair values are ` 18, ` 25 and ` 30 at the end of year 1, year 2 and
114

year 3. The employee service cost to be debited to Profit or Loss account at
the end of year 1 is _________________
Options are:(i)
` 750,000 [500 shares x 100 employees x ` 15]
(ii) ` 250,000 [500 shares x 100 employees x ` 15 = ` 750,000 / 3 yrs]

(iii) ` 300,000 [500 shares x 100 employees x ` 18 = ` 900,000 / 3 yrs]
27. Unrealized gains of ` 430 lakhs on unmatured forward foreign exchange
contracts are recognised in accordance with Ind ASs, but were not
recognised in accordance with previous GAAP. The applicable tax rate is
30%. The contracts hedge forecast sales.
At the time of first time adoption of Ind AS:(i)
Gains of ` 301 lakhs are included in the hedging reserve
(ii) Gains of ` 430 lakhs are included in the hedging reserve

(iii) Gains of ` 559 lakhs are included in the hedging reserve
28. A Ltd. issues a call option on January 1, 2012 for ` 1000 which gives the
holder a right to acquire 10 equity shares of A Ltd at an exercise price of
` 150 per share. The market price of the equity shares as on January 1,
2012 is ` 240. However, A Ltd has an option with respect to 2 equity shares
(out of the 10 equity shares) to settle net in cash.
How would you account for the call option ?
(i)
` 1000 is an equity instrument
(ii) ` 1000 is a financial liability

(iii) ` 200 is a financial liability and ` 800 is an equity instrument
115

29. Below is certain information relating to inventory held by X Ltd.:a)
Purchase cost per unit ` 200
b)
Estimated selling price ` 260
c)
Cost to sell ` 20
d)
Cost of conversion ` 10
What would be the value of inventory?

Options are:(i)
` 210
(ii) ` 230
(iii) ` 260
(iv) ` 240
30. X ltd enters into a maintenance contract on October 1. 2012 for a period of
2 years with one of its customer for ` 1600,000. Costs over the period of
contract are reliably estimated at ` 1200,000. How much revenue should X
ltd recognize for the period ended March 31, 2013?
(i)
` 400,000
(ii) ` 300,000
(iii) ` 200,000
(iv) ` 150,000
Section B - Descriptive Questions
1.
Distinguish between a defined Contribution scheme and a defined benefits

scheme?
2.
Explain the clarification provided by SIC 25 Changes in tax status of an entity

or its shareholders.
3.
In the context of IAS10 Events after the reporting period, what do you
understand by the term adjusting events after the reporting period? Explain
with at least one example.
4.
What are the factors to be taken into account while determining the expected
useful life of an asset under IAS16 Property Plant and equipment? How does
the useful life of an asset differ from its economic life?
116

5.
How does a finance lease differ from an operating lease ?
6.
A Ltd. installed a power generation plant in a backward area for ` 10 crores.

As an incentive, it received from the government a grant of ` 1.5 crores. A ltd
recognized the power generation plant under Property Plant and equipments
in its Statement of Financial position at ` 8.5 crores [i.e. ` 10 crores less tax
free government grant of ` 1.5 crores].
You have been appointed as the accountant of A ltd. Please advise the
management on the deferred tax implications of the above transaction. How
would your answer differ if the tax free government grant of ` 1.5 crores
was accounted by setting up deferred income in the Statement of Financial
position?
7.
What are the implications of changing the functional currency of the reporting
entity as stated in IAS 21 The Effects of Changes in Foreign Exchange
rates?

Case Study - 1
A Ltd. had introduced a share based payment scheme for its employees on
1.1.2013 with a three year vesting period linked to continued uninterrupted service
up to 31.12.2015. A Ltd. has applied IFRS2 share based payments for recognising
as expense for the consumption of employee services received as consideration
for share options granted. A Ltd. has 1,000 employees to whom 100 shares each
were granted. The fair value of each option is estimated to be ` 15 as at 1.1.2013.
At 31.12.2013, the fair value was ` 19. A Ltds estimated attrition at 20% for the
three year period, however, the actual attrition turned out to be 25% at the end of
year 1 ended 31.12.2013. It is estimated that the fair value of each option on the
vesting date of 31.12.2015 will be Rs. 20. Tax rates applicable to A Ltd. is 30%. It
is a cash settled share based payment system.
Required:a)
Find out the total amount to be provided as per IFRS2 since the date of
inception of the scheme up to 31st December 2013 and provide accounting
entries for the same assuming it is a cash settled share based payment
scheme.
b)
If the Company is allowed the ESOP provision as a deduction for tax

purposes only when the share options are exercised, with the measurement
of the tax deduction based on the entitys share price at the date of exercise,
117

please advise the deferred tax consequences to be taken care of as at the
reporting date i.e. 31st December 2013.
c)
Where in the financial statements should the deferred tax effects identified
in b) above be recognised. How will the answer under c) change if the
deduction available on the vesting date is higher than the provision for ESOP
liability?
Case Study - 2
ABC Pharmaceutical Ltd. seeks your opinion in respect of following accounting
transactions:1.
Acquired a 5 year licence to manufacture a vaccine at a cost of

` 2,50,00,000 at the start of the year. Production commenced immediately.
2.
Also purchased another company at the start of the year. As part of that
acquisition the company acquired another brand with a Fair value of
` 6,00,00,000 based on sales revenue. The life of the brand is estimated at
10 years.
3. Spent ` 2,10,00,000 on an advertising campaign during the first 6 months.

Subsequent sales have shown a significant improvement and it is expected
this will continue for 3 years.
4.
It has commenced developing a new Drug C. The project cost would be

` 10,00.000. Clinical trial proved successful and such drug is expected to
generate revenue over the next 5 years. Cost incurred (accumulated) till
March 31, 2011 is ` 6,00,00,000. Balance cost incurred during the financial
year 2011-12 is ` 5,00,00,000.
5.
It has also commenced developing another drug D. It has incurred

` 70,00,000 towards research expenses till March 31, 2012. The
technological feasibility has not yet been established.
Required:- How the above transactions will be accounted for in the books of
account of ABC Pharmaceutical Ltd. so as to comply with IAS38 Intangible assets
/ Ind AS38 Intangible assets.
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ANSWERS
Q1 (i) Q6
(i) Q11 (ii) Q16 (i) Q21 (i) Q26 (ii)
Q2 (iv) Q7
(i) Q12 (i) Q17 (i) Q22 (ii) Q27 (i)
Q3 (iii) Q8
(iii) Q13 (ii) Q18 (ii) Q23 (i) Q28 (ii)
Q4 (iv) Q9
(i) Q14 (i) Q19 (i) Q24 (ii) Q29 (i)
Q5 (iv) Q10 (i) Q15 (i) Q20 (i) Q25 (i) Q30 (i)
Section B Descriptive Type Questions
Q1: Post-employment benefit plans are classified as either defined contribution
plans or defined benefit plans. Distinction between Defined benefit plans and
Defined contribution plans is as follows:Sl Defined contribution plan
No
1. Definition:- Defined contribution
plans are post-employment benefit
plans under which an entity pays
fixed contributions into a separate
entity (a fund) and will have no
legal or constructive obligation to
pay further contributions if the fund
does not hold sufficient assets to
pay all employee benefits relating
to employee service in the current
and prior periods.
2. The entitys legal or constructive
obligation is limited to the amount
that it agrees to contribute to the
fund. Thus, the amount of the
post-employment benefits received
by the employee is determined
by the amount of contributions
paid by an entity (and perhaps
also the employee) to a postemployment benefit plan or to an
insurance company, together with
investment returns arising from the
contributions.
119
Defined benefit plan

Definition:- Defined benefit
plans are post-employment
benefit plans other than defined
contribution plans.
Retains legal or constructive

obligations to pay further
contributions.

Sl Defined contribution plan
No
3. Actuarial risk (that benefits will
be less than expected) and
investment risks (that assets
invested will be insufficient to
meet expected Benefits) fall on
the employee.
4.
An entity may pay insurance

premiums to fund a postemployment benefit plan.
The entity shall treat such a plan
as a defined contribution plan if
the entity retains such a legal or
constructive obligation
Defined benefit plan

Under defined benefit plans:
(a) the entitys obligation is to
provide the agreed benefits to
current and former employees;
and
(b) actuarial risk (that benefits
will cost more than expected)
and investment risk fall, in
substance, on the entity.
If actuarial or investment
experience are worse than
expected, the entitys obligation
may be increased.
Examples of cases where an
entitys obligation is not limited
to the amount that it agrees
to contribute to the fund are
when the entity has a legal or
constructive obligation through:
(a) A plan benefit formula that is
not linked solely to the amount
of contributions;
(b) A guarantee, either indirectly
through a plan or directly, of a
specified return on contributions;
or
(c) Those informal practices
that give rise to a constructive
obligation. For example, a
constructive obligation may
arise where an entity has a
history of increasing benefits for
former employees to keep pace
with inflation even where there
is no legal obligation to do so.
120

Q2. SIC-25 Income TaxesChanges in the Tax Status of an Enterprise or its
Shareholders was developed by the Standing Interpretations Committee and
issued in July 2000. In April 2001 the International Accounting Standards
Board resolved that all Standards and Interpretations issued under previous
Constitutions continued to be applicable unless and until they were amended
or withdrawn. SIC-25 deals with the issue that a change in the tax status
of an entity or of its shareholders may have consequences for an entity by
increasing or decreasing its tax liabilities or assets. This may, for example,
occur upon the public listing of an entitys equity instruments or upon the
restructuring of an entitys equity. It may also occur upon a controlling
shareholders move to a foreign country. As a result of such an event,
an entity may be taxed differently; it may for example gain or lose tax
incentives or become subject to a different rate of tax in the future. A change
in the tax status of an entity or its shareholders may have an immediate
effect on the entitys current tax liabilities or assets. The change may also
increase or decrease the deferred tax liabilities and assets recognised by
the entity, depending on the effect the change in tax status has on the tax
consequences that will arise from recovering or settling the carrying amount
of the entitys assets and liabilities. The issue is how an entity should
account for the tax consequences of a change in its tax status or that of its
shareholders.

A change in the tax status of an entity or its shareholders does not give rise
to increases or decreases in amounts recognised outside profit or loss. The
current and deferred tax consequences of a change in tax status shall be
included in profit or loss for the period, unless those consequences relate
to transactions and events that result, in the same or a different period, in
a direct credit or charge to the recognised amount of equity or in amounts
recognised in other comprehensive income. Those tax consequences that
relate to changes in the recognised amount of equity, in the same or a
different period (not included in profit or loss), shall be charged or credited
directly to equity. Those tax consequences that relate to amounts recognised
in other comprehensive income shall be recognised in other comprehensive
income.
Q3. 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 authorised 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
121

(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. The following are
examples of adjusting events after the reporting period that require an entity
to adjust the amounts recognised in its financial statements, or to recognise
items that were not previously recognised:
(a) The settlement after the reporting period of a court case that confirms
that the entity had a present obligation at the end of the reporting
period. The entity adjusts any previously recognised provision related
to this court case in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets or recognises a new provision. The
entity does not merely disclose a contingent liability because the
settlement provides additional evidence that would be considered in
accordance with paragraph 16 of IAS 37.
(b) The receipt of information after the reporting period indicating that
an asset was impaired at the end of the reporting period, or that the
amount of a previously recognised impairment loss for that asset needs
to be adjusted. For example:
(i)
The bankruptcy of a customer that occurs after the reporting period

usually confirms that a loss existed at the end of the reporting period
on a trade receivable and that the entity needs to adjust the carrying
amount of the trade receivable; and
(ii) The sale of inventories after the reporting period may give evidence
about their net realisable value at the end of the reporting period.
Q4: The future economic benefits embodied in an asset are consumed by an
entity principally through its use. However, other factors, such as technical
or commercial obsolescence and wear and tear while an asset remains
idle, often result in the diminution of the economic benefits that might have
been obtained from the asset. Consequently, all the following factors are
considered in determining the useful life of an asset: (a) expected usage
of the asset. Usage is assessed by reference to the assets expected
capacity or physical output. (b) expected physical wear and tear, which
depends on operational factors such as the number of shifts for which the
asset is to be used and the repair and maintenance programme, and the
care and maintenance of the asset while idle. (c) technical or commercial
122

obsolescence arising from changes or improvements in production, or from a
change in the market demand for the product or service output of the asset.
(d) legal or similar limits on the use of the asset, such as the expiry dates of
related leases. The useful life of an asset is defined in terms of the assets
expected utility to the entity. The asset management policy of the entity may
involve the disposal of assets after a specified time or after consumption of
a specified proportion of the future economic benefits embodied in the asset.
Therefore, the useful life of an asset may be shorter than its economic life.
The estimation of the useful life of the asset is a matter of judgement based
on the experience of the entity with similar assets. Land and buildings are
separable assets and are accounted for separately, even when they are
acquired together. With some exceptions, such as quarries and sites used
for landfill, land has an unlimited useful life and therefore is not depreciated.
Buildings have a limited useful life and therefore are depreciable assets. An
increase in the value of the land on which a building stands does not affect
the determination of the depreciable amount of the building. Useful life is:
(a) the period over which an asset is expected to be available for use by
an entity; or (b) the number of production or similar units expected to be
obtained from the asset by an entity. Economic life on the other hand is the
period over which an asset is capable of generating economic benefits not
just for the entity in question but also for its next owner. An asset may be
disposed off by an entity before its entire economic life is utilised. In such a
case the useful life for the entity is the shorter period upto which the asset
is actually used by it.
Q5. Difference between finance lease and operating lease
Finance lease
A finance lease is a lease that
transfers substantially all the risks
and rewards incidental to ownership
of an asset. Title may or may not
eventually be transferred.
A lease is classified as a finance
lease if it transfers substantially all
the risks and rewards incidental to
ownership.
123
Operating lease
An operating lease is a lease other
than a finance lease.
A lease is classified as an operating

lease if it does not transfer
substantially all the risks and rewards
incidental to ownership.

Finance lease
Whether a lease is a finance lease
or an operating lease depends on
the substance of the transaction
rather than the form of the contract.
Examples of situations that
individually or in combination would
normally lead to a lease being
classified as a finance lease are:
(a)
(b)
(c)
(d)
Operating lease
The examples and indicators given
for classifying a lease as a finance
lease are not always conclusive.
If it is clear from other features

that the lease does not transfer
substantially all risks and rewards
incidental to ownership, the lease is
classified as an operating lease.
The lease transfers ownership For example, this may be the case
of the asset to the lessee by if ownership of the asset transfers
the end of the lease term;
at the end of the lease for a variable
payment equal to its then fair value,
or if there are contingent rents, as a
result of which the lessee does not
have substantially all such risks and
rewards.
The lessee has the option
to purchase the asset at a
price that is expected to be
sufficiently lower than the fair
value at the date the option
becomes exercisable for it to
be reasonably certain, at the
inception of the lease, that
the option will be exercised;
The lease term is for the
major part of the economic
life of the asset even if title is
not transferred;
At the inception of the lease
the present value of the
minimum lease payments
amounts to at least
substantially all of the fair
value of the leased asset; and
124

Finance lease
Operating lease
(e) The leased assets are of
such a specialised nature that
only the lessee can use them
without major modifications.
Indicators of situations that
individually or in combination could
also lead to a lease being classified
as a finance lease are:
(a) If the lessee can cancel
the lease, the lessors
losses associated with the
cancellation are borne by the
lessee;
(b) Gains or losses from the
fluctuation in the fair value
of the residual accrue to
the lessee (for example, in
the form of a rent rebate
equalling most of the sales
proceeds at the end of the
lease); and
(c) The lessee has the ability
to continue the lease for a
secondary period at a rent
that is substantially lower than
market rent.
Q6. As per Para 33 of IAS12 Income taxes, one case when a deferred tax asset
arises on initial recognition of an asset is when a non-taxable government
grant related to an asset is deducted in arriving at the carrying amount of
the asset but, for tax purposes, is not deducted from the assets depreciable
amount (in other words its tax base); the carrying amount of the asset is less
than its tax base and this gives rise to a deductible temporary difference.
Government grants may also be set up as deferred income in which case the
difference between the deferred income and its tax base of nil is a deductible
temporary difference. Whichever method of presentation an entity adopts,
the entity does not recognise the resulting deferred tax asset, for the reason
125

given in paragraph 22. Para 22 states that a temporary difference may arise
on initial recognition of an asset or liability, for example if part or all of the
cost of an asset will not be deductible for tax purposes. The entity does
not recognise the resulting deferred tax asset as it results from the initial
recognition of the asset. Based on the above principle, no deferred tax asset
is recognized for the deductible temporary difference of ` 1.5 crores.
Q7. When there is a change in an entitys functional currency, the entity shall
apply the translation procedures applicable to the new functional currency
prospectively from the date of the change. The functional currency of an
entity reflects the underlying transactions, events and conditions that are
relevant to the entity. Accordingly, once the functional currency is determined,
it can be changed only if there is a change to those underlying transactions,
events and conditions. For example, a change in the currency that mainly
influences the sales prices of goods and services may lead to a change in
an entitys functional currency. The effect of a change in functional currency
is accounted for prospectively. In other words, an entity translates all items
into the new functional currency using the exchange rate at the date of the
change. The resulting translated amounts for non-monetary items are treated
as their historical cost. Exchange differences arising from the translation of
a foreign operation previously recognised in other comprehensive income in
accordance with paragraphs 32 and 39(c) are not reclassified from equity to
profit or loss until the disposal of the operation.
Case Study 1
a)
This is a cash settled shared based payment scheme. The vesting conditions
were yet to be fulfilled as at the date of preparation of financial statements
for the year ended 31st December 2013. Since it is equity settled scheme,
the fair value as of the date of grant of shares i.e. 1.1.2013 is considered.
The options likely to be exercised is computed as follows:-
1,000 employees x 100 options x 75% [management estimate] = 75,000

[options likely to be exercised]
Total cost of options = 75,000 options x ` 19 [fair value at 31.12.2013 since

it is a cash settled share based payment scheme]
= ` 1,425,000
126

Divided by number of years = 3 yrs.
Amount to be debited to Profit or Loss account in year 1 = ` 1,425,000 / 3
= ` 475,000.

Accounting entry to be passed for the year ended

31st December, 2013 is as follows:-
Staff cost Debit ` 475,000
To ESOP liability ` 475,000
b)
The tax base of the ESOP liability is ` Nil (i.e. the carrying value of
` 475,000 less the amount deductible in future on the vesting date i.e.
` 475,000). However, the accounting base is ` 475,000. Since A ltd will not
receive a tax deduction until the share options are exercised it results in a
deductible temporary difference and results in a deferred tax asset. Deferred
tax asset to be recognized will be ` 475000 x 30% = 142,500.
c)
The deferred tax asset originating as at 31.12.2013 of ` 142,500 will be

recognised in the Profit or Loss account since the underlying staff costs are
debited therein.
Further, paragraph 68B of IAS12 Income taxes states that If the amount the
taxation authorities will permit as a deduction in future periods is not known
at the end of the period, it shall be estimated, based on information available
at the end of the period. For example, if the amount that the taxation
authorities will permit as a deduction in future periods is dependent upon
the entitys share price at a future date, the measurement of the deductible
temporary difference should be based on the entitys share price at the end
of the period.
As noted in paragraph 68A of IAS12 Income taxes, the amount of the tax
deduction (or estimated future tax deduction, measured in accordance with
paragraph 68B) may differ from the related cumulative remuneration expense.
Paragraph 58 of the Standard requires that current and deferred tax should
be recognised as income or an expense and included in profit or loss for
the period, except to the extent that the tax arises from (a) a transaction or
event that is recognized, in the same or a different period, outside profit or
loss, or (b) a business combination. If the amount of the tax deduction (or
estimated future tax deduction) exceeds the amount of the related cumulative
remuneration expense, this indicates that the tax deduction relates not only to
remuneration expense but also to an equity item. In this situation, the excess
127

of the associated current or deferred tax should be recognized directly in
equity.

Using the above principle given in Para 68A, the amount deductible on
the vesting date would be valued at the exercise price of ` 20 per share
instead of the fair value at the balance sheet date. Accordingly, the amount
deductible on the vesting date works out to Rs. 500,000 [i.e. 75000 x
` 20 = ` 1500,000/3]
Since the amount of tax deduction of ` 500,000 exceeds the amount of

cumulative remuneration expense of ` 475,000, it indicates that the tax
deduction relates not only to remuneration expense but also to an equity
item. Therefore, the deferred tax effect of the excess of ` 25,000 x 30% tax
rate = ` 7,500 should be credited in equity.
Case Study 2
Following are the recommendations to ABC Pharmaceuticals in order to comply
with IAS 38 Intangible assets.
1)
It should recognise the drug licence as an intangible asset, because it is

separate external purchase, separately identifiable asset and considered
successful in respect of feasibility and probable future cash inflows. The drug
licence should be recorded at ` 2,50,00,000
2)
It should recognise the brand as an intangible asset because it is purchased

as part of acquisition and it is separately identifiable. The brand should
be amortised over a period of 10 years. The brand will be recorded at
` 6,00,00,000.
3)
The advertisement expenses of ` 2,10,00,000 should be expensed off.
4)
The development cost incurred during the financial year 2011-12 should be
capitalised. Cost of intangible asset Drug C as on March 31, 2012:-
Opening cost
` 6,00,00,000
Development cost
` 5,00,00,000
Total cost =
` 11,00,00,000
5)
Research expenses of ` 70,00,000 incurred for developing Drug D should be

expensed off since technological feasibility has not yet established.
128

Full Marks : 100
Time: 3 hours

State whether the following statements are True and False
1.
The currency that is the most internationally acceptable for trading would be
relevant in determining the entitys functional currency as per IAS 21 The
effects of changes in foreign exchange rates.
2.
According to IAS 38 Intangible assets, amortisation of an intangible asset with

a finite useful life should commence when it is probable that it will generate
future economic benefits.
3.
In accordance with IFRS7 Financial instruments: Disclosures, Liquidity Risk

describes the risk that an entity will encounter if it has difficulty in meeting
obligations associated with its financial liabilities
4.
Product warranties issued by another party for goods sold by manufacturer,

dealer or retailer are within the scope of this IFRS 4: Insurance Contracts
5.
The issuer of a compound instrument (e.g. an issued convertible debt

instrument) shall classify a compound instrument as either a liability or equity
based on an evaluation of the predominant characteristics of the contractual
arrangement
6.
Expenditure related to the development of mineral resources will qualify as

an exploration and evaluation asset.
7.
A major customer is defined as one providing revenue which amounts to

10% or more of the combined revenue, internal and external, of all operating
segments.
8.
Good will arising on amalgamation is amortised over the 5 years.
129

9.
Ind-AS 1 requires an entity to present an analysis of expenses recognised

in profit or loss using a classification based on either their nature or their
function within the entity.
10. Ind AS 40: Investment Property allows only cost model for valuation of
Investment Property
Fill in the blanks
11. _____________ is the discounted present value of future cash flows arising
from use of the asset and from its disposal
12. The classification of a lease as either an operating or finance lease is based
on __________
13. Persistent Ltd. built a factory building at a cost of CU 5 million in the
year 2012. On December 2012 the book value of the factory building
was CU 4 million. On 26 February, 2013 the building was destroyed
by fire. The building was not insured. Date of authorization of financial
statements ending December 2012 was 30th March, 2013. Prolific Ltd should
_____________________
14. Company XYZ Inc. manufacturers and sells standard machinery. One
of the conditions in the sale contract is that installation of machinery will
be undertaken by XYZ Inc. During December 2013, XYZ Inc. received a
order from ABC Ltd. to manufacture & install a customized machinery. It
is the first time XYZ Inc. will be producing this kind of machinery, and it is
expecting many changes that will be required to be made to the machine
after the installation is completed. As per contract it has agreed to make
such changes free of cost to the customer, for a period of one year from the
date of installation, also called the maintenance period. The total cost of
making the changes during this cannot be reasonably estimated at the time
of the installation. Revenue from sale of this special machine be recognized
when_______
15. In order for a non-current asset to be classified as held for sale, the future
sale must be _______________
16. A Ltd. acquired a wholly owned subsidiary with a view of selling it. The
subsidiary meets the criteria to be classified as held for sale. The subsidiary
remains unsold at the end of the close of the year. It will be valued
at______________
130

17. Computer software for a computer-controlled machine tool that cannot
operate without that specific software is an integral part of the related
hardware and it is treated as ____________
18. Ind AS-28 requires any excess of the investors share of net assets in an
associate over the acquisition cost to be recognised as_________
19. An entitys ___________are the first annual financial statements in which
the entity adopts Ind-ASs, in accordance with Ind-ASs notified under the
Companies Act, 1956 and makes an explicit and unreserved statement in
those financial statements of compliance with Ind-ASs.
20. According to Ind-AS 19 the rate to be used to discount post-employment
benefit obligation shall be determined by reference to the market yields
on______________
Calculation Based Questions
21. Alpha Ltd. purchased a machine on 1 January 2010 for CU 90,000. The
useful life of the machine is estimated at 3 years with a residual value at the
end of this period of CU 6,000.

During its useful life, the expected units of production from the machine are:
2010 : 11,000 units
2011 : 6,000 units
2012 : 4,000 units
What should be the depreciation expense for the year ended 31st December
2011, using the most appropriate depreciation method permitted by IAS-16
Property, plant and equipment?
22. The Beta Company leased a machine with a fair value of CU 165,000 for
a period of 5 years under a finance lease. The initial direct costs incurred
in negotiating the lease were CU 1,250. The present value of the minimum
lease payments discounted at the rate implicit in the lease is CU 158,400.
Under the requirements of IAS 17 Leases, at what amount should the
machine be recognised in Betas financial statements?
23. The Theta Company purchased a machine for CU 300,000 on 1st January
2012.The company received a government grant of CU 27,000 in respect of
this asset.The Companys policy was to depreciate the asset over 4 years
on a straight line basis and to treat the grant as deferred income.
131

Under IAS 20 Government grants and government assistance, what should

be the carrying amounts of the machine and the deferred income balance at
31st December 2013?
24. Roman Builders Ltd. received a two-year fixed price contract for CU 4.0
million to construct a road. In the first year it incurred the following contract
costs :

Cost of Material: CU 2 million
Cost of Labour: CU 1 million
Cost to Complete: CU 2 million
How much profit or loss should Roman Builders Ltd. recognise in the first
year of the three-year construction contract?
25. Prestige Ltd. owns an asset with an original cost of CU 200,000. On

acquisition, management determined that the useful life was 10 years and
the residual value would be CU 20,000. The asset is now 8 years old, and
during this time there have been no revisions to the assessed residual value.
At the end of year 8, management has reviewed the useful life and residual
value and has determined that the useful life can be extended to 12 years in
view of the maintenance programme adopted by the company. As a result,
the residual value will reduce to CU10,000.

Calculate the annual depreciation from year 9 to year 12.
26. ABC Ltd. supplied goods on credit to a customer on 15 January 2013. The
list price of the goods was CU 60,000. ABC gave a volume discount of CU
5,000 and the invoice to the customer showed an amount payable of CU
CU 55,000. As per the terms of sale, ABC allowed the customer a prompt
payment discount of CU 1,000 provided payment was made before 15
February 2013. On 10 Febraury 2013, the customer paid CU 54,000 in full
and final settlement of the amount payable. What amount should ABC Ltd.
account for as revenue for this transaction.
27. On 1 January 2013 XYZ Company borrowed CU 5,000,000 at an annual
interest rate of 10% to finance the costs of new packaging plant. Construction
commenced on 1 January 2013 and cost CU 5,000,000.

All the cash borrowed was not used immediately, so interest income of
CU80,000 was generated by temporarily investing some of the borrowed
funds prior to use. The project was completed on 30th September 2013.
What is the carrying amount of the plant at 30 September 2013?

132

28. The Splendour Company has the following balances in relation to a defined
benefit post-employment plan at its year end:

Fair value of Plan Assets
CU 205,000
Present value of Plan Liability
CU 280,000
Unrecognised actuarial loss
CU 30,000
Under IAS 19 Employee benefits, what figure should be shown on Parlours

statement of financial position for the plan deficit?
29. Eternity Ltd. acquired 100% of Century Ltd. for a consideration transferred of
CU 120 million. At the acquisition date the carrying amount of Century Ltd.s
net assets was CU 100 million and the fair value of the net assets was CU
130 million. How should the difference between the consideration transferred
and the net assets acquired be presented in financial statements of Eternity
Ltd., according to IFRS3 Business combinations?
30. Paragon Ltd. operates a production line which is treated as a cash-generating
unit for impairment review purposes. On 31 December 2013 the carrying
amounts of the non-current assets allocated to this cash-generating unit are
as follows:

Goodwill CU 1200

Plant and machinery
CU 2400

Total CU 3600

At 31 December, 2013 the recoverable amount of the production line is

estimated at CU 2700.
According to IAS 36 Impairment of assets, what are the revised carrying

amounts of the intangible and tangible non-current assets within this cashgenerating unit?
133

31. Explain how Share-based payment transactions in which the terms of the
arrangement provide the counterparty with a choice of settlement, are
accounted for as per IFRS 2.

Solve the following example :
Peach Ltd. has purchased property, plant, and equipment for CU 500,000.
The supplier has a choice how the purchase price can be settled. The
choices are :
(a) the receipt of 500,000 shares of the entity after nine months or
(b) the receipt of a cash payment in six months time. The cash payment
is to be the equivalent to the market value of 400,000 shares of Theta
Ltd.
It is estimated that the fair value of the first alternative would be CU 600,000
and the fair value of the second alternative would be CU 450,000.
Explain how this transaction is accounted for.
32. Define Revenue. When should Revenue from rendering services be

recognised?
33. State the conditions to be satisfied before an asset or disposal group is
classified as held for sale as per IFRS 5. State the presentation requirements
of IFRS 5 regarding assets held for sale and discontinued operations.
34. A mobile company has a loyalty programme whereby points are granted for
payment for airtime.

On accumulation of 100 points the customer is entitled to a discount of CU

100 on purchase of handset. At the end of the year 2012, accumulated points
of customers is 100,000 points. The company expects 50% of the points
to be redeemed. Total consideration for airtime for the year 2012 are CU
1,000,000.
State how revenue will be recognised for the year 2012 as per IFRIC 13.
35. State the differences (carve outs) between Ind-AS and IFRS relating to
Ind-AS 18 Revenue and Ind-AS 21 Effects of changes in Foreign exchange
rates
36. Define Fair Value as per IFRS 13. Also explain fair value hierarchy.
134

37. Which are the two methods of recognition of goodwill and Non controlling
interest in a Business Combination.

Company A acquires 80% interest in Company B for CU 1000. Company A

does not have any previously held equity interest in entity B. On the date of
acquisition, the fair value of Company As identifiable net assets is estimated
to be CU 1000.
The fair value of the remaining 20% in Company B (the NCI) on the
acquisition date is determined to be CU 240 by using a valuation technique.
Find out the amount of NCI and Goodwill recognised under the alternative
methods

1. (a)
An entity issued 1000,000 of 8% term bonds of CU 1 each on January

1, 2011, due on January 1, 2014. Interest is payable annually on
January 1. Investors expect a effective interest rate on the loan is 10%.
Calculate the selling price (proceeds) of the bonds issue.
How should the entity account for the bonds on initial recognition,
subsequent measurement and on maturity
Discounting factor:
3 years, 10% discounting factor= .751315
3 year cumulative, 10% discounting factor = 2.48685
(b) An entity issued 8% term bonds of CU 1 each on January 1, 2011, due

on January 1, 2014. 1000,000 bonds of CU 1 each were issued for CU
1000,000. Bond holders are entitled to convert the bonds to shares of
CU 1 on the date of maturity, instead of receiving principal repayment.
Interest is payable annually on January 1.

Interest rate on similar bonds without conversion option is 10%.
How will the entity account for the bonds at inception and at maturity,
assuming that all bonds are converted to equity shares on maturity.
135

2.
A Ltd. has prepared the following trial balance as on 31st March 2012:
Sales
Raw Material Purchased
Production cost
Inventories at 31st March, 2011
Distribution Costs
Administrative Expenses
260,000
127,000
40,000
36,000
14,000
15,000
Goodwill
Property Plant and equipment
Accumulated Depreication at 31st March 2011
Trade Receivables
Trade Payables
Cash and Cash Equivalents
Equity share capital (CU 1 share each)
Retained earnings
Equity dividend paid on 1st June, 2011
Total
30,000
150,000
50,000
45,000
12,000
25,000
130,000
46,000
16,000
498,000
498,000
It has provided the following information, and wants to know the correct
adjustments to be made for the same.
1.
On 1st June, 2011, A Ltd. sold goods to a customer at agreed selling price of
CU 30,000 with a credit period of 6 months. The cost manufacture the goods
was CU 20,000. A ltd. would expect an annual rate of return of 8% on loan
investments. The present value of CU 1 receivable in 3 months time at an
rate of 8% is approximately .98.
2.
On 31st March, 2012 the value of inventory at cost was CU 38,000. This
included 800 units of inventory costing CU 20 each which was damaged due
to water seepage. The cost to repair the units of inventory is CU 4 per piece
and it is estimated that the units of inventory will be sold for CU 19 each.
3.
Goodwill was recognized at cost. Impairment testing was undertaken on

goodwill and the recoverable amount was 20,000, as on 31st March, 2012.
136

4.
Breakup of Property Plant and equipment is as follows:

Building

Plant and equipment
Cost
Accumulated depreciation
40,000
110,000
12,000
38,000

150,000
50,000

On 1st April, 2011, the company revalued its building which had originally cost
CU 40,000 to CU 58,000. Accumulated depreciation at the date of revaluation
was CU 12,000. At the date of revaluation, the remaining useful economic
life of the building was ten years and depreciation has been charged on the
revalued amount for the year on straight line basis. Ignore impact of deferred
tax.

The plant and equipment is being depreciated on a straight line basis at 20%
per annum. No disposals of property, plant and equipment occurred during
the year.
5.
Depreciation of all property, plant and equipment should be charged to cost

of sales. Depreciation has not yet been charged for the year.
Prepare Statement of Comprehensive Income for the year ended 31 March

2012 and Statement of Financial Position for the year ended on that date,
with suitable working notes showing treatment of the above adjustments.
You are not required to prepare notes to the financial statements or a

statement of changes in equity.
Ignore tax implications of above transactions.
137

ANSWERS
Section A
State whether true of false
1. False
2. False
3. True
4. True
5. False
6. False
7. False
8. False
9. False
10. True
Fill in the blanks
11. Value in use
12. Transfer of risks and rewards of ownership
13. Disclose non adjusting event in footnote to Balance Sheet
14. The maintenance period as per the contract of sale expires
15. Highly probable
16. At carrying value or fair value less cost to sell, whichever is lower
17. Property, plant and equipment
18. Capital Reserve in the period in which the investment is acquired
19. First Ind-AS financial statements
20. Government bonds
Calculation based:
21. CU 24,000
22. CU 159,650
138

23. Carrying amount: CU 150,000, Deferred Income: CU 13,500
24. Loss of CU 1 million to be expensed immediately
25. Cu 11,500 per annum
26. CU 55,000 recognised as revenue
27. CU 5,295,000
28. CU 45,000
29. Gain on bargain purchase of CU 10 million recognised in profit or loss
30. Goodwill : CU 300, Plant and Machinery : CU 2400
Section B - Descriptive Questions
31. Share based payment with a choice of settlement:

As per IFRS 2: If an entity has granted the counterparty the right to choose
whether a share-based payment transaction is settled in cash or by issuing
equity instruments, the entity has granted a compound financial instrument,
which includes a debt component (i.e. the counterpartys right to demand
payment in cash) and an equity component (ie the counterpartys right to
demand settlement in equity instruments rather than in cash).
For transactions with parties other than employees, in which the fair value of
the goods or services received is measured directly, the entity shall measure
the equity component of the compound financial instrument as the difference
between the fair value of the goods or services received and the fair value
of the debt component, at the date when the goods or services are received.
When the entity receives the property, plant, and equipment, it should record
a liability of CU 450,000 million and an increase in equity of 50,000 (the
difference between the value of the property, plant, and equipment and the
fair value of the liability).
32. Revenue.

The gross inflow of economic benefits during the period arising in the course
of ordinary activities of an entity when those inflows result in increases in
equity other than increases relating to contributions from equity participants.
Recognition of revenue from services:
When the outcome of a transaction involving the rendering of services

can be estimated reliably, revenue associated with the transaction shall be
139

recognised by reference to the stage of completion of the transaction at the
end of the reporting period. The outcome of a transaction can be estimated
reliably when all the following conditions are satisfied:
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the transaction
will flow to the entity;
(c) the stage of completion of the transaction at the end of the reporting
period can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the
transaction can be measured reliably.
33. An entity shall classify a non-current asset (or disposal group) as held
for sale if its carrying amount will be recovered principally through a sale
transaction rather than through continuing use.

For this to be the case, 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.
IFRS 5 requires the following disclosure:

(i)
An entity shall present a non-current asset classified as held for sale

and the assets of a disposal group classified as held for sale separately
from other assets in the statement of financial position. The liabilities
of a disposal group classified as held for sale shall be presented
separately from other liabilities in the statement of financial position.
(ii) An entity shall disclose the following information in the notes in the
period in which a non-current asset (or disposal group) has been either
classified as held for sale or sold:
(a) a description of the non-current asset (or disposal group);
(b) a description of the facts and circumstances of the sale, or
leading to the expected disposal, and the expected manner and
timing of that disposal;
140

(iii) An entity shall disclose:
(a) a single amount in the statement of comprehensive income
comprising the total of:
(i)
the post-tax profit or loss of discontinued operations and
(ii) the post-tax gain or loss recognised on the measurement to

fair value less costs to sell or on the disposal of the assets
or disposal group(s) constituting the discontinued operation
(iv) the net cash flows attributable to the operating, investing and financing
activities of discontinued operations. These disclosures may be
presented either in the notes or in the financial statements
34. Revenue Recognition as per IFRIC 13

The total consideration should be allocated between Sale transaction and

points earned.
Fair value of points earned is to be calculated.
100 points entitle the customer to discount of CU 100: Hence each point has
a FV of CU 1
Further only 50% points are expected to be redeemed.
Hence Fair value of the points accumulated by customers is CU 50,000

(100,000*50%).
This is recorded as Deferred Revenue
Thus out of total consideration of :
CU 1,000,000
Deferred Revenue
CU 50,000
Service Revenue
CU 950,000
35. Differences (carve outs) between Ind-AS and IFRS relating to Ind-AS 18
Revenue and Ind-AS 21 Effects of changes in Foreign exchange rates are
as follows:

Ind-AS 21-The Effects of Changes in Foreign Exchange Rates:
IAS 21 requires recognition of exchange differences arising on translation of

monetary items from foreign currency to functional currency directly in profit
or loss.
141

Carve out
Ind-AS 21 permits an option to recognise exchange differences arising on

translation of certain long-term monetary items from foreign currency to
functional currency directly in equity. In this situation, Ind-AS 21 requires the
accumulated exchange differences to be amortised to profit or loss in an
appropriate manner.
Ind-AS 18-Revenue
1.
On the basis of principles of the IAS 18, IFRIC 15 on Agreement for

Construction of Real Estate, prescribes that construction of real estate
should be treated as sale of goods and revenue should be recognised
when the entity has transferred significant risks and rewards of
ownership and has retained neither continuing managerial involvement
nor effective control.
Carve out
IFRIC 15 has not been included in Ind-AS 18, Revenue. Such agreements
have been scoped out from Ind-AS 18 and have been included in Ind-AS 11,
Construction Contracts. Revenue is recognised as per percentage completion
method
2.
For rate regulated entities, this standard shall stand modified, where
and to the extent the recognition and measurement of revenue of
such entities is affected by recognition and measurement of regulatory
assets/liabilities as per the Guidance Note on the subject being issued
by the Institute of Chartered Accountants of India.
36. IFRS 13 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.

To increase consistency and comparability in fair value measurements

and related disclosures, this IFRS establishes a fair value hierarchy that
categorises into three levels, the inputs to valuation techniques used to
measure fair value. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or liabilities (Level 1
inputs) and the lowest priority to unobservable inputs.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the entity can access at the measurement date.
142

Level 2 inputs are inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or indirectly. Level
2 inputs include the following:
(a) quoted prices for similar assets or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that
are not active.
(c) inputs other than quoted prices that are observable for the asset or
Liability
Level 3 inputs are unobservable inputs for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent that
relevant observable inputs are not available, thereby allowing for situations
in which there is little, if any, market activity for the asset or liability at the
measurement date. However, the fair value measurement objective remains
the same, ie an exit price at the measurement date from the perspective
of a market participant that holds the asset or owes the liability. Therefore,
unobservable inputs shall reflect the assumptions that market participants
would use when pricing the asset or liability, including assumptions about risk.
37. For each business combination, the acquirer shall measure at the acquisition
date components of non-controlling interests in the acquiree that are present
ownership interests and entitle their holders to a proportionate share of the
entitys net assets in the event of liquidation at either:
(a) fair value; or
(b) the present ownership instruments proportionate share in the
recognised amounts of the acquirees identifiable net assets.

NCI and Goodwill recognised under both alternative methods is as follows:

Fair Value
Method (CU)
Consideration
NCI at fair value
NCI at 20% of identifiable assets
Total
143
1000
240
1240
Proportionate
interest
method (CU)
1000
200
1200

Fair Value
Method (CU)
Proportionate
interest
method (CU)
1000
Fair value of 100% of identifiable 1000

net assets
Goodwill
240
Amount of NCI
240
200
200
Section C: Case Study

1. (a) Selling price of the bond on 1st January, 2011 :

Maturity Value of bonds payabel
Present Value of Principal
CU 1000,000 due in 3 years
@ 10% interest payable annually
(1000,000 x .7513150
Present Value of interest payment
PV of interest payable annually for 3 years
CU
1000,000
751,315
@ 10% p.a. (80,000 x 2.48685)
198,948
Proceeds from sale of bonds
950,263
49,737
Dr. Cash/ Bank
950,263
Cr. Bonds payable
950,263
(751,315+198,948)

Discount on bonds issue
1. Accounting on initial recognition
2. Accounting for annual interest
First year
Dr. Bond Interest Expenses
95,026
Cr. Bonds Payable
15,026
Cr. Cash/ Bank
80,000
Similar entries for second and third year as per table below
144

Interest payable in each of the three years:
Year ended
Interest paid
Interest
expense
Discount
amortied
31/12/2011
80,000
15026
31/12/2012
80,000
16,529
981,818
31/12/2013
80,000
95,026
(950263*10%)
96,529
(965,289*10%)
98,182
(981,818*10%)
Carrying
amount
of bonds
Liability
965,289
18,182
1000,000
3.
Accounting entries on maturity:
Dr. Bonds Payable
1000,000
Cr. Cash/ Bank
1000,000
(b) Answer:

Entry to be passed on date of inception
Present value of liability at date of inception is

(as per answer in part a)

Dr. Cash/Bank 1000,000

Cr. Bond Liability
950,263
Cr. Share Options (Equity)
49,737
Entry to be passed on date of conversion:
Dr. Bond Liability
1000,000
Dr. Share Options
49,737
Cr. Share Capital
1000,000
Cr. Share Premium
49,737
145
950263

2. Answer
Statement of Financial Position of A Ltd. as on 31st March 2012
ASSETS
Non-Current Assets
Goodwill
20,000 (working note 4 )
Property Plant and Equipment
102,200
(working note 6)
122,200
Current Assets
Trade Receivables
45,000
Cash and Cash Equivalents
25,000
Inventory
34,000
(working note 2)
104,000
Total Assets
226,200
EQUITY AND LIABILITES
Equity
Share Capital
130,000
Retained Earnings
54,200
(working note 7)
Revaluation Surlpus
30,000
(working note 5)
Total Equity
214,200
Current Liabilities
Trade Payables
12,000
Total Equity and Liabilities
226,200
Statement of Comprehensive Income of A Ltd. for the year ended
31st March 2012
Revenue
259,400
(working note 1)
Cost of Sales
196,800
(working note 2)
Gross Profit
62,600
Distribution Cost
14,000
Administrative cost
15,000
Impairment of goodwill
10,000
(working note 4)
Total Operating Expenses
39,000
146

Operating Profit
Finance Income
Finance Cost
Profit for the year
Other Comprehensive Income
Comprehensive Income
23,600
600
24,200
30,000
54,200
Working Note 1: REVENUE

Sales as per Trial Balance
Less: Amount recognised as finance
income as below
Adjusted Revenue
Bifurcation of sale proceeds into
revenue and finance cost:
Present value of sale proceeds 30,000,
3 months @ 8% discounting factor
(30,000 x .98)
Finance income (30,000 29,400)
Working Note 2: COST OF SALES
Opening Inventory
Raw Material Purchased
Production Cost
Depreciation
Closing Inventory (38,000-4000)
Cost of sales
259,400
29,400
600
16,000
(12,000)
(4,000)
147
(working note 5)
260,000
600
36,000
127,000
40,000
27,800
(34,000)
196,800
Inventory adjustment
Cost of relevant inventory items
(800 x 20)
Net Realisable value less cost to
complete of inventory items
(800 * (19-4))
Adjustment to Closing Inventory
(working note 3)
See note below

See note below

Depreciation
Building (58,000/10)
Plant and Machinery (110,000*20%)
Total
5,800
22,000
27,800
Working Note 3: Finance Income

As per Trial Balance
Add: Finance Income recognised as per
working note 2
Total
Working Note 4: Impairment of
goodwill
Impairment loss recognised
(30,000-20,000)
Working Note 5: Other
Comprehensive Income
Revaluation Surplus (58,000-28,000)
0
600
600
10,000
30,000
Working Note 6: Property Plant and

Equipment
Buidling (58,000-5,800)
Plant and Machinery (72,000 22,000)
Total
52,200
50,000
102,200
Working note 7: Retained Earnings

Opening Balance
Profit for the year
(Dividend)
Total
46,000
24,200
(16,000)
54,200
148

Full Marks : 100
Time: 3 hours
Part I - Identify if each of the following statements is true or false (10 x 1.5 marks
each)
1.
A contractor can adopt simultaneously both percentage completion method

and a total costs incurred against recoverable revenue method, for different
contracts depending upon circumstances.
2.
The Present Value of Deferred Tax Assets realisable at a future period may
be computed using a discount rate determined by reference to market yields
at the end of the reporting period on high quality corporate bonds, and where
there is no deep market in such bonds, the market yields on government
bonds shall be used for appropriate maturity and currency.
3.
Since recoverable amount is the higher of fair value less costs to sell and
value in use, an entity should always determine both.
4.
Goodwill forming part of original cost of investment in an Associate is not

required to be tested for impairment annually.
5.
In some cases, corporate assets may also include Goodwill.
6.
Operating Segments can be restricted to not more than ten in the CFS of any
entity.
7.
There is no requirement that transactions with subsidiaries, associates or joint

ventures should be disclosed in the separate financial statements of a Parent.
8.
Interest paid and dividends received may be classified as operating cash

flows because they enter into the determination of profit or loss.
9.
Related party transactions subject to disclosure will include Defined Benefit

Plans administered by an external independent entity operating within the
group.
149

10. Share option plans that include the contingency of employees having to meet
the vesting conditions before options are exercised, need not be considered
for computing dilutive earnings per share.
Part II: Fill in the Blanks (can be one word or a short phrase)(10 x 1.5 marks each)
11. When an entity carries out a _______ of its ordinary shares, the outstanding
12. Finance lease gives rise to a _______ expense and a _______ expense.
unless it is___________
account for such investments by using _________________
apply translation procedures____________from the date of change.
(i) ________________ and (ii) ________________
by lessee is _______________, and where it is not practicable, the lessee
can adopt _______________ as the discount rate.
18. Borrowing costs may include all costs that are considered as ____ used in
the calculation of effective interest method as described in IAS 39 Financial
Instruments: Recognition and Measurement.
between a _______ and a _________regardless of whether a price is
charged or not.
are (i) FV less costs to sell, (ii) value in use and (iii) __________.
150

Part III: Determine monetary amounts in each case. (10 x 1.5 marks each)
21. What is the amount to be shown in the Notes to CFS of Parent, if dividend
proposed by the Parent is CU 239,427 and its 100% subsidiary is CU
60,573?
Class of inventory
A
B
C
D
E
Historical cost `
20,000
12,000
12,000
32,000
28,000
Total cost 104,000
NRV `
30,000
10,000
18,000
28,000
26,000
Total NRV 110,000
23. Independent of your answer to question 2, assume that Item C was not sold
for nearly 3 months from the BS date, and when it was ultimately sold prior
to adoption of accounts by the Board, the realisation was only ` 8,000/-. Is
it an adjusting event? At what amount would you as an auditor, carry the
closing stock?
24. Boilers Ltd., purchased from BHEL a heavy machinery, on 30st September
2013 at a cash discount of 5% on invoice price of ` 200 lacs. Other
expenses incurred were transit insurance (2 lacs), transportation (`
5.50 lacs), foundation laying expenses (4 lacs) and installation charges
` 2.50 lacs. The company had also borrowed a sum of ` 180 lacs at an
interest 16% p.a. The machinery was ready for use as at 31st March 2014
Determine the cost of acquisition by applying the principles of IAS 23, which
states that a qualifying asset is an asset that necessarily takes substantial
period of time to get ready for its intended use or sale.
25. CTS Ltd. had taken lease a floor-space of 20,000 sq.ft. CTS made a
significant investment of ` 25,00,000 (partitioning and office infrastructure)
to make it ready for office use. It is a precondition of the lease that on the
expiry of lease period of three years, the lessee would return the space
to lessor on as-was-taken basis. The expected cost of dismantling the
structure and make it returnable is ` 5,00,000/. Cost of capital for CTS is
10%. Determine the cost of asset of lease-hold-improvements by applying
the principles under IAS 16.
151

26. An asset was revalued in March 2012 by ` 14000. In March 2014, the asset
was sold at ` 48,000 when the net book value stood at ` 66000. Determine
the amount to be charged or credited to P&L when IAS 16 is applied.
27. Alpha Ltd. acquires the business of Beta. Beta carried in its books certain
assets classified as held for sale at an amount of CU 211,300/-. The Fair
value of these items is CU 377,000 and costs to sell were estimated at CU
18,000/- If the tax base of these items stood at CU 299,000, determine the
deferred tax impact, by applying IAS 12. Tax rate is 25%.
28. Cumulative gains on the derivative instrument CU 1900 and cumulative loss
on the hedged item is CU 2500. Is the hedge highly effective within the
meaning of IAS 39? Would your answer be different if gains and losses stood
interchanged?
29. ABC had an opening number of 2000 equity shares on 1st January, of which
200 were held as treasury shares, on 1st July, 600 new shares were issued
for cash, and 50% of treasury shares were disposed in the market on 1st
December. Determine the weighted average number of ordinary shares at
31st December.
30. XYZ takes an asset on finance lease for a primary period of 8 years and
a secondary period of 2 years, on condition inter alia that the asset will be
returned to lessor at the expiry of lease period. The life of the asset is 12
years. For computing depreciation charge, determine the life.
Part IV: Provide descriptive answers (7 Questions x 5 marks each)
31. Spell out the main steps involved, when accounting for business combination
by applying the acquisition method.
32. When can non-current assets be classified as held for sale?
33. Give an illustrative list of important elements of costs for recognition of
accounting?
35. Explain the concept of effective interest rate method.
36. Can an entity designate an item of derivative as a hedged item?
Part V: For each of the scenario given below, advise the appropriate accounting
152

approach, based on IFRS principles and rationale contained therein (2 x 10 marks
each)
Scenario 1:
XYZ Ltd. based in Dubai, is engaged in real-estate development, building
residential homes and disposing of them. XYZ Ltd. appoints brokers for marketing
the product (residential homes). While each broker-entity is given one class of
homes for sale, the terms and conditions for each broker-entity vary because of
gradation of homes (small, medium and large size, with differing levels of comforts
and facilities). Middlesex Ltd. was appointed with a broker on the following terms:

Total number of homes allotted and to be handled : 40
Gradation: Level II (medium), Area: 1200 sq. ft. living space.
Price: Any price, as negotiated and finalised by broker. A floor price to

be mutually agreed between XYZ and Middlesex. One time 100% down
payment.
Brokerage: 2% of Consideration, for the first 18 homes. On sale of 19th

home, no brokerage is applicable, but broker gets the 20th home free.
Sales organised by Middlesex Ltd. was as under:

First 5 homes average price
16, 17 and 18th homes
19th home
AED 900,000
AED 950,000
AED 960,000
AED 940,000
AED 920,000
On completing the sale, XYZ receives the 20th home free. Middlesex takes
possession and legal ownership. Discuss the accounting procedure in the books
of Middlesex for the 20th home, by application of principles in IFRS.
Scenario 2:
A Company took a premises on lease, which qualifies as an operating lease as per
IAS 17 (Leases). The initial lease term is three years, with a provision for renewal
of further periods in blocks of three years, such that the total lease period is nine
years from inception. The lessee does not have the right to terminate the lease
for first 33 months. The lease agreement provides that the lease rentals will be
153

escalated by 10% for each block of 10%. Based on this, the lessee is expected to
pay lease rentals of ` 5 lacs per annum in first block of three years, and ` 5.50
lacs p.a. in the second block of three years, and ` 6.05 lacs p.a. for the last three
year period ending ninth year. In order to account for lease rental expenses, the
company has to make a determination whether the lease period is for 3 years,
or for 9 years. Analyse the issue and recommend an accounting approach that
conforms to principles in IAS 17.
154

ANSWERS
Suggested Answers to Part I
1.
True. When outcome of certain contracts cannot be estimated reliably,

revenue is recognised to the extent recoverable and all the total costs
incurred are recognised immediately.
2.
False: Deferred Tax assets are to be recognised at absolute amounts of

future value. No discounting is permitted
3.
False: An entity may in some cases stop where the FV less Cost to Sell itself
shows an amount which is higher than carrying amount.
4.
True. Goodwill forming part of investments in associate should not be tested

for impairment. This is an exception to the rule.
5.
False: Corporate assets do not include Goodwill. This is in the context of

impairment testing.
6.
False: The restriction at TEN relates to reportable operating segments and

not operating segments per se. The non-reported operating segments may
be aggregated and shown as others.
7.
False: In the separate financial transactions, it is necessary to disclose

transactions with group entities that are related parties. These transactions
get eliminated only in the CFS and not in separate financials.
8.
True. Interest paid and dividends received may be classified as operating

cash flows. This is permitted under IAS 7 Cash Flow Statement, in which it
is stated that there is no consensus on this issue.
9.
True. Group plans are related party transactions.
10. False. Employee Share Option plans should be included in computing Diluted
EPS, despite the contingency nature of vesting conditions materialising.
Suggested answers to Part II: The word or phrase to be inserted in the blank is
shown in BOLD CAPITAL
11. When an entity carries out a SPLIT of its ordinary shares, the outstanding
12. Finance lease gives rise to a FINANCE expense and a DEPRECIATION
expense.
155

unless it is INCLUDED IN ANOTHER ASSET
account for such investments by using EQUITY METHOD
apply translation procedures PROSPECTIVELY from the date of change..
(i) REMEASUREMENTS OF NET DEFINED BENEFIT LIABILITY (ASSET)
and (ii) REVALUATION SURPLUS
by lessee is THE RATE IMPLICIT IN LEASE and where it is not practicable,
the lessee can adopt INCREMENTAL BORROWING RATE as the discount
rate.
18. Borrowing costs may include all costs that are considered as INTEEST
EXPENSE used in the calculation of effective interest method as described
in IAS 39 Financial Instruments: Recognition and Measurement.
between a REPORTING ENTITY- and a RELATED PARTY regardless of
whether a price is charged or not.
are (i) FV less costs to sell, (ii) value in use and (iii) ZERO
Part III
Calculation based questions Suggested answer
21. Dividend proposed is not to be recognised in BS. There is no elimination of
dividend proposed which may be payable or receivable at a future date in the
consolidation procedure. The notes to accounts will show the amount payable
by Parent alone at CU 239,427. [Notes to accounts is important].
156

Class of inventory
A
B
C
D
E
Historical cost CU
20,000
12,000
12,000
32,000
28,000
Total cost 104,000
NRV CU
30,000
10,000
18,000
28,000
26,000
Total NRV 110,000
Closing stock: Aggregate of the lower of the two under each item
(20+10+12+28+26) 96,000
23. IAS 10 Para 9(b): Sale of inventories after the reporting period may give
evidence about their NRV at the end of the reporting period. Hence, the
closing stock should be carried at CU 92,000
24. Basic price, less cash discount at 10%
190
14
Other expenses (2.00+5.50+4.00+2.50)
Borrowing costs capitalised

=
14.40
Total : ` 218.40
Initial cost is ` 218.40 lacs. Substantial period is not defined under IFRS. Even
under I-GAAP, a 12 month period is a rebuttable assumption. Capitalisation of BC
for five months is not prohibited under IFRS, if that period is a justifiable period for
the development of asset on technical considerations.
25. Dismantling costs are to be capitalised, at PV, using a discount rate of 10%.
The Discount factor for third year is 0.751. PV of dismantling cost is 500,000
x 0.751 = 375500. Total cost is therefore 28,75,500
26. IAS 16 does not permit revaluation surplus being transferred into P&L.
Therefore the charge to P&L will be the loss of 66,000 minus 48,000 =
` 18,000. The balance of surplus held in revaluation surplus will be
transferred to retained earnings directly within equity.
27. Amount to be recognised in BS is 377000 less 18,000 = 359,000. Tax base
being 299,000 the difference of 60,000 gives rise to temporary taxable
difference. At 25% tax rate the DTL is 15,000
157

28. The hedge is not effective since the dollar-offset throws up a result outside
the range of 80-125 (1900/2500 = 76%). The answer will not differ, since the
off set once again gives a result outside the range of 80-125: 131%.
29. WA of shares is (1800 X = 900) + (1800 + 600 = 2400 x 5/12 = 1000) +
(2400 + 120 = 2520 *1/12 = 210) : 2110 shares.

Or: (1800 x 1) + (600 x 6/12) + (120 * 1/12) = 2110 shares
30. In terms of IAS 17, where there is no certainty that the lessee will obtain
ownership (lessee is required to return the asset in this case), the asset shall
be fully depreciated over the shorter of the lease term and its useful life. In
this case, the shorter of 10 and 12 is 10. Useful life is ten years.
Suggested answers to Part IV; Descriptive questions
31. The main steps involved, when accounting for business combination by
applying the acquisition method.
a.
Identifying the acquirer: One of the combining entities should be

identified as acquirer : Reference to reverse merger will be of merit
b.
Determining the acquisition date: It is the date on which the acquirer

acquires control. : Reference to stage-wise acquisition will be of merit
c.
Recognising and measuring identifiable assets acquired, liabilities

assumed and any non-controlling interest in the acquiree. This is at fair
value. Emphasis is on identifiable assts
d.
Recognising and measuring the goodwill, and gain from a bargain

purchase. Reference to Provisional fair value method will be of merit
32. When can non-current assets be classified as held for sale?

Principal must be realised through sale rather through continuing use
Probability of sale is say, within one year but could go beyond, in

some cases
Availability for immediate sale in its present condition, on terms that are
customary
Sale to be highly probable managements commitment to make the

sale
158

An asset that is proposed to be abandoned shall not be classified as

held for sale
33. Give an illustrative list of the important elements of costs for recognition of

The major elements of costs are (i) acquisition of rights to explore, (ii)
topographical, geological, geochemical and geophysical studies, (iii)
exploratory drilling, (iv) trenching (v) sampling, and (vi) costs that are
attributable to activities in relating to evaluation of technical feasibility and
commercial viability of extracting a mineral resource.
accounting?
(a) Formal designation and documentation of the hedge relationship
(b) Hedge is expected to be highly effective, in offsetting changes in
cash-flows or fair values attributable to hedged risk consistency with
originally documented risk management policy
(c) For cash flow hedges, a forecast transaction that is the subject of
hedge must be highly probable presenting exposure to variations in
cash flows
(d) Effectiveness of hedge can be reliably measured
(e) Hedge is assessed on an on-going basis, and determined actually to
have been highly effective throughout the financial reporting periods for
the hedge was designated
35. Explain the concept of effective interest method.

Effective interest rate method is a method of calculating the amortised cost

of a financial asset (or a financial liability) (or a group of financial assets or
financial liabilities) and of allocating the interest income or interest expense
over the relevant period. 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 (Note: this only
means IRR of cash flows)
159

The principle is identical to that of determining the amount of asset and

liability at the inception of a finance lease. In the instant case, initial
recognition is the PV of the instalments computed at 10% discount rate.
Since instalments are equated annually, by applying PVAF for 10% for three
years, the carrying amount works out to ` 24,86,852, as shown below:
Instalment
1000000
1000000
1000000
Discount rate
0.909
0.826
0.751
PV
909091
826446
751315
2486852
Amortised cost at the beginning of each accounting period is computed as

under:
Beginning Interest
amortization
Sub-total
Repayment Closing
2486852
1735537
909091
2735537
1909091
1000000
1000000
1000000
1000000
248685
173554
90909
1735537
909091
0
36. Can an entity designate an item of derivative as a hedged item?

As a general rule NO. As an exception Yes.
In the normal course, No. Derivatives are always held for trading, and are
measured at fair value, with gains or losses recognised through profit or loss,
except when they are designated as effective hedging instruments.
As an exception, IAS 39 permits that an entity may designate a purchased

option as the hedged item in a fair value hedge.

IFRS 7 provides definitions of these terms. Credit risk is the risk that one
party to a financial instrument will cause a financial loss for the other party
by failing to discharge an obligation.
Currency risk is the risk that the fair value or future cash flow of a financial
instrument will fluctuate because of changes in foreign exchange rates.
160

Part V
Suggested answer to Case Study 1:
Suggested answer: The 20th home represents the commission income for XYZ.
Thus it is Revenue. IAS 18 (Revenue) Applies. Revenue is measured at the fair
value of consideration received or receivable. Commission has been received
in Kind (not in cash). Fair Value 20th home would be the market rate. It is seen
that fair value is showing a trend of fall, and extending this logic, the FV can be
estimated at 900,000. Revenue will be credited, by debit to Property, plant and
equipment or by debit to inventory, depending on the intention of XYZ. The crux of
the solution: To focus on Fair Value of Commission.
Suggested solution to Scenario 2:
The crux of the issue is to consider whether or not it would be reasonably certain
that the company would renew the lease for the second and third blocks of three
years. If it is reasonably certain that the company will continue with the lease
for a total period of 9 years, the total lease rental should be spread over the
lease term on a straight line basis. The uneven lease rentals are not permitted
to be recognised as income or expense on the basis of an argument that the
scheduled increases in lease rentals represent another systematic basis which is
more representative of the time pattern of the users benefit. It is not the benefit,
but the contractual cost of obtaining the benefit that will undergo a change due to
scheduled rent increase. These increases cannot be treated as compensation for
inflation.
Accordingly, the lease rentals should be recognised on a straight line basis taking
the entire 9 year period into account.
161
162

Full Marks : 100
Time: 3 hours
Section A Objective - True and False

Q 1. IFRS 2 covers share-based payment transactions among group entities.
Which of the following statement(s) is/are TRUE?
(a) Transfers of equity instruments of the undertakings parent to parties
that have supplied goods or services to the undertaking
(b) Transfers of equity instruments of another undertaking in the same
group as the undertaking, to parties that have supplied goods or
services to the undertaking
(c) Both (a) & (b)
(d)
Neither (a) nor (b)

Q 2. According to IFRS 5 which of the following is TRUE, for any gain or loss on
the re-measurement of a non-current asset (or disposal group) classified as
held for sale that does not meet the definition of a discontinued operation
shall be included in
(a) Available-for-sale Reserve
(b) Other Comprehensive Income
(c) Profit or loss from continuing operations
(d)
Revaluation Reserve

Q 3. Which one of the following statements regarding depreciation is TRUE, in
IAS16 Property, plant and equipment?
(a) Depreciation is recognised as long as the assets residual value does
not exceed its carrying amount
163

(b) The annual depreciation amount should be charged over the useful life
of the asset
(c) The asset must be depreciated from the date of its purchase, until it is
sold
(d) The total cost of an asset must eventually be depreciated based on the
economic life
Q 4. According to IAS 23 Borrowing costs, which one of the following statements
about the capitalisation of borrowing costs as part of the cost of a qualifying
asset is TRUE?
(a) Capitalisation always continues until the asset is brought into use
(b) Capitalisation always commences once the expenditure of the asset is
incurred
(c) Capitalisation always commences as soon as interest on relevant
borrowings is being incurred
(d) If the funds are borrowed generally, the capitalisation rate is based on
the weighted average of the borrowing costs
Q 5. Are the following statements in relation to a change in accounting estimate
true +/ false, according to IAS 8?
(1) Changes in accounting estimates are accounted for retrospectively.
(2) Changes in accounting estimates result from new information or new
developments.
Statement (1) Statement (2)
(a) False
False
(b) False
True
(c) True
False
(d)
True True

Q 6. Are the following statements true +/ false, according to IFRS 10 Consolidated
and separate financial statements?
(1) Consolidated financial statements must be prepared using uniform
accounting policies.
164

(2) The non-controlling interest in the net assets of subsidiaries may
be shown by way of note to the consolidated statement of financial
position.
(a) False
False
(b) False
True
(c) True
False
(d)
True True

Q 7. Which one of the following statements is not false?
(a) SIC 32 states that internally generated website development costs are
is subject to the requirement of IAS 11 Construction Contracts
(b) SIC 32 states that internally generated website development costs are
is subject to the requirement of IAS 16 Property, plant and equipment
(c) SIC 32 states that internally generated website development costs are
is subject to the requirement of IAS 38 Intangible Assets
(d) SIC 32 states that internally generated website development costs are
is subject to the requirement of IAS 40 Investment Property

Q 8. Are the following statements within the scope of true +/ false according to IAS
20 Government grants and Government assistance, in relation to the benefits
mentioned therein?
(1) The provision of infrastructure in developing areas
(2) The imposition of trading constraints on competitors
(a) False
False
(b) False
True
(c) True
False
(d) True
True

165

Q 9. Which of the following combination is false regarding the definition of a
biological asset and agricultural produce in IAS 41 Agriculture?
(a) Agricultural Land, Paddy
(b) Bushes, Leaf
(c) Pigs, Carcass
(d)
Vines, Grapes

Q 10. Are the following statements about disclosures within the scope of financial
statements according to IFRS 7 Financial instruments - Disclosures?
(1) The disclosure of quantitative data about an entitys risk exposure
shall be based upon internal information provided to key management
personnel.
(2) A maturity analysis for financial liabilities based on the expected
payment dates for those liabilities shall be disclosed.
(a) False
False
(b) False
True
(c) True
False
(d) True
True
Section A Objective Fill in the blanks

Q 11. An entity shall apply IFRS __________ in its first IFRS financial statements
and in each interim financial report, if any, that it presents in accordance
with IAS __________ for part of the period covered by its first IFRS financial
statements under IFRS 1.
Q 12. The acquirer shall identify the acquisition date, which is the date on which it
obtains __________ of the acquire in accordance with IFRS 3
Q 13. The chief operating decision maker also may be the __________ for some
operating segments. A single manager may be the segment manager for
more than one operating segment.
Q 14. A n entity shall prepare its financial statements, except for cash flow
information, using the __________ basis of accounting under IAS 1
166

Q 15. The difference between the Gross Investment and the present value of
Minimum Lease Payments and Unguaranteed Residual Value, under IAS 17,
is recorded as
Q 16. _ _________ are those persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or
indirectly, including any director (whether executive or otherwise) of that
entity, as per the meaning specified in IAS 24.
Q 17. IFRIC 13 Customer Loyalty Programmes, requires allocating some of the
consideration received or receivable from the sales transaction to the award
credits and deferring the recognition of __________
Q 18. A service concession arrangement exists when a concession __________
agrees with a concession __________ to provide services that give the public
access to major economic and social facilities. (SIC 29)
Q 19. W hen it is probable that total contract costs will exceed total contract
revenue, the expected loss shall be recognised as __________ immediately
Q 20. An entity shall __________ capitalisation of borrowing costs during extended
periods in which it suspends active development of a qualifying asset in IAS
23
Section A Objective Calculation based
Q 21. There were three transactions in the Entity A, whose functional currency is
CU.
(1) purchased goods for resale from Europe market for 300,000
(exchange rate: CU1 = 1.5). This trade payable remained unpaid
as at 31st Dec 20X3 (exchange rate: CU1 = 1.6). Entity recorded
exchange gain of CU 12,500 in retranslation of the trade payable
[ 300,000 @1.5 = CU200,000; 300,000 @1.6 = CU187,500]
(2) sold the goods in the American market for $420,000 (exchange rate:
CU1=$2) and the settlement got received immediately (exchange
rate was CU1=$1.96). Entity recorded exchange gain of CU4,286
[$420,000@2 = CU210,000;$420,000@1.96 = CU214,286]
(3) borrowed 150,000 under a long-term loan agreement (CU1=1.54) and
immediately converted it to CU97,403. The loan was retranslated at 31
Dec. 20X3@1.6 = CU93,750 with a further exchange gain of CU3,653.
167

Assume that there is no opening balance for trade receivables or trade payables
You are required to show in the Entirys Statement of Cash Flows in CU, using the
indirect method of reporting operating activities (IAS 7)
(1) Profit or Loss
(a) 10,000 (b) 20,439 (c) 26,786 or (d) 30,439
(2) Cash flow from operating activity
(a) 177,500 (b) 183,847 (c) 187,500 or (d) 196,347
(3) Cash flow from financing activity
(a) 76,964 (b) 93,750 (c) 97,403 or (d) 114,189

Q 22. O n 1 January 2001, entity Y delivers merchandise to entity A. The
consideration of ` 121 is payable on 31st December 2002 and is paid on
that date. The interest rate is 10% p.a.

Required under IAS 18, is the Interest Income in the financial statement as
at 31st December, 2002
(a) ` 10
(b) ` 11
(c) ` 11.50
(d) ` 21

Q 23. O n 31st December 2010, entity N gains control of entity A. A owns a

specialised building. The building was constructed by A at the beginning
of the year 2001. The costs of conversion were ` 10. Between the time of
construction and 31st December 2010, the appropriate price index increased
by 20%. Originally the realistically estimated useful life was 30 years. On 31
December, 2010, the remaining useful life is 20 years.

Determine the carrying amount (fair value) of the building in Ns consolidated

financial statements as at 31st December, 2010 under IFRS 13
(a) ` 6.67
168

(b) ` 8.00
(c) ` 8.67
(d) ` 12.00

Q 24. Entity G, is preparing its interim financial report for the six-month period
ending 30th June 2007 in accordance with IAS 34. Its financial accounting
year ends on 31st December 2007.
(1) Advise the right comparative balance sheet to choose from:
(a) Balance sheet as at 30th June 2006 (b) Balance sheet as at 30th
September 2006 (c) Balance sheet as at 31st December 2006 or
(d) Balance sheet as at 31st March 2007
(2) It has contractual liability that gives stepped-rebates at 0% for 1 to
100,000 units; 5% on cumulative sales for 100,001 to 250,000 units;
10% on cumulative sales for units above 250,000. All the rebates will
be paid to the customer after the year end, 31st December 2007. By
30th June 2007, customer Y has purchased 200,000 units and has a
history of purchasing around 400,000 units each year.

Advise the volume rebate to be recognised in the interim accounts for

the customer Y, from:
(a) 10,000 (b) 20,000 (c) 27,500 or (d) 30,000
(3) It has inventory costing CU5 per unit; its selling cost is CU0.40 per unit.
Selling price per unit as at 30 June 2007 is CU 5.20 per unit. It expects
the Selling price as at the year end 31st December 2007 to be CU5.50

Advise the per unit cost of inventory as at 30th June 2007 to choose
from:
(a) CU4.80 (b) CU5.00 (c) CU5.30 or (d) CU5.50
Q 25. Venturer A and Venturer B own a 50% interest each in Operation C. Venturer
A makes a loan to Operation C of ` 1,000 and Venturer B makes a loan
of ` 800 to Operation C. Operation C has incurred a total liability to both
venturers amounting to ` 1,800.

What is the amount, Venturer A has to account as Net Receivable from its
Joint Venture Partner Venturer B under IFRS 11?
169

(a) ` 100
(b) ` 500
(c) ` 900
(d) ` 1000
Q 26. Entity Y disposes an operation that was a part of CGU to which goodwill has
been allocated. The sale amount is CU1000. The goodwill allocated to the
CGU cannot be identified or associated with an asset group at a level lower
than that CGU, except arbitrarily. The recoverable amount of the portion of
the CGU retained is CU3000.

Calculate the percentage of the goodwill allocated to the CGU that is sold,
as per IAS 36.
(a) 20
(b) 25
(c) 29.41
(d) 33.33
Q 27. A large corporate enterprise has 100 employees. The employees are each
entitled to 5 working days of paid sick leave for each year. Such unused
leave is carried forward for one calendar year. The leave is taken first out of
the current years entitlement and then out of any balance brought forward
from the previous year (a LIFO basis). At 31st December 20X3, the average
unused entitlement is 2 days per employee. The enterprise expects, based on
past experience that is expected to continue, that 92 employees will take no
more than 5 days of sick leave in 20X4 and that the remaining 8 employees
will take an average of 6 (six and a half days) each. One day leave is
evaluated at ` 500

Calculate the Liability to be recognised as at 31st December 20X3 under

IAS 19
(a) ` 6,000
(b) ` 8,000
(c) ` 20,000
(d) ` 26,000
170

Q 28. K is executing a tallest building project, by signing a fixed-price contract of
` 12,000,000.

The project is expected to take three years to complete.
The details of the costs incurred to-date in the first year are:-
Construction material cost
` 3,000,000
Site labour cost
` 1,000,000
Depreciation of special
equipments used in the contract
` 500,000
Marketing cost to get the tallest

building the right exposure
` 1,000,000

Total ` 5,500,000

Total Contract cost estimated to complete ` 5,500,000
What is the amount of revenue to be recognised under IAS 11?

(a) ` 3,666,667
(b) ` 4,000,000
(c) ` 4,333,333
(d) ` 5,400,000
Q 29. S is a manufacturer of carton boxes. The cost of the stock as of

31st December 2009 was ` 50 per box. During the statutory audit, the
auditors noted that the subsequent sale was made on 12th January 2010 at
` 40 per box. Auditors also noted that there were subsequent expenses for
some rectification on the entire physical stock that was available as at year
end, at the rate of ` 15 per box for saleable condition.

What is the amount of net realisable value and written-down loss for the
closing stock under IAS 2?
(a) ` 25 and ` 25
(b) ` 35 and ` 15
(c) ` 40 and ` 15
(d) ` 50 and ` 0
171

Q 30. Parent P owns 80% of the net assets of Subsidiary S. Ss functional currency
is Dinar. S was acquired on 30 September 2011 and its net assets fair
value was Dinar 40,000. P has recognised a cost of investment amounting
to USD10,675 in its financial statements. The groups accounting policy for
goodwill is to recognise it on a proportionate basis.

Exchange rates are as follows:
30th September 2011 USD 1= 6.5 Dinar
31st December 2012 USD 1= 6.0 Dinar
Calculate the goodwill to be recognised in the consolidated statement of

financial position as at 31st December 2012 under IAS 21
(a) USD 3207
(b) USD 3918
(c) USD 5342
(d) USD 6231
Section B Descriptive
Q 31. Entity Y acquires land. The land consists of two pieces that could be sold
separately. The land will be used during more than one financial year. One
piece is held for long-term capital appreciation and the other piece for
constructing a new warehouse building. The office building has become
available for immediate sale and the management is committed to sell within
12 months. The entity also owns dairy cattle.
(a) Assess whether the two pieces of land have to be treated separately
for accounting purposes
(b) Give four Standards that are applicable to the above assets held for,
appreciation, warehouse, office, dairy cattle
Q 32. Y & Co. has set up a Defined Benefit Post-employment Plan and expected
return on the Plan Assets in the first year was ` 5000. However the actual
return was only ` 4000. During the year the Service Cost was ` 12000 and
the company contributed to the Plan was ` 7500.

You are required to state the extent of increase or decrease in the Plan
Assets, amount of Actuarial Loss and Net Expense to be recognised for the
year under IAS 19
172

Q 33. State the scope for which IFRS 12 does not apply with regard to Disclosure
of Interests in Other Entities.
Q 34. In June 20X1, entity E spent ` 100 for employee training. Es management
believes that its employees will make a more competent impression on Es
clients as a result of the training which will then increase Es revenue.

Required:
Assess whether the expenses for employee training have to be recognised

as an intangible asset in Es statement of financial position. In doing so, also
discuss the impact of the matching principle.
Q 35. Assessing whether arrangements represent joint arrangements

(a) Entities A and B establish an arrangement in which each of them holds
50% of the voting rights. The contractual arrangement between them
specifies that at least 51% of the voting rights are required in order to
make decision about the relevant activities.
(b) Entities A, B, and C establish an arrangement. A and B each hold 40%
of the voting rights in the arrangement, and C holds the remaining
20%. According to the contractual arrangement between the three
parties, at least 75% of the voting rights are required in order to make
decision about the relevant activities of the arrangement.
Required:

Describe reasons for each of the above arrangement, to represent joint

arrangements.
Q 36. Based on IAS 12

(a) Give one exception to the deferred tax liability for temporary taxable
differences.
(b) What is amount of tax base, for a machine costing `100 and
depreciation of ` 30 has been deducted for tax purposes?
(c) Give one example for the carrying amount of deferred tax assets and
liabilities may change, even though there is no change in the amount
of the related temporary differences.
(d) Whether all taxable temporary differences give rise to deferred tax
liability: Yes or No
(e) What is the definition of deferred tax liabilities?
173

Q 37. On 1st April 2009 an 8% convertible loan with a nominal value of $ 600 was
issued at par to Company A. It is redeemable on 31 March 2013 also at par.
Alternatively it may be converted into equity shares on the basis of 100 new
shares for each $200 worth of loan note. An equivalent loan note without the
conversion option would carry interest at 10%. Interest of $48,000 ($600,000
x 8%) has already been paid and included as finance costs in profit or loss.

Present value rates are as follows:
Present Values
End of year
1
2
3
4
8%
0.93
0.86
0.79
0.73
10%
0.91
0.83
0.75
0.68
Assuming the option that the entire loan is redeemed without conversion
option (that would carry interest at 10%), calculate the amount to be
recognised as equity component under Financial Instruments (IAS 32, IFRS
9)

Q 38. Management of Entity A prepares financial statement as at 31st December
2013. The normal operating cycle is 12 months.

Part (A):
It has to consider the following (1) to (5) events after the reporting period.
Advise the management on the recognition and measurement of events
under IAS 10
(1) Entity A was sued during the year 2013. On 31st December 2013, it
was not clear of outcome of the ongoing trial. However, shortly after
31st December 2013, the entity is convicted.
(2) It holds a receivable at amortised cost. Shortly after the reporting
period, a debtor files for bankruptcy.
(3) In 2013, the entity carried out a construction contract. At the end of
31st December 2013, contract costs of CU 24 have been incurred.
Based on stage of completion according to cost-to-cost method, the
174

total contract revenue was CU 60. During end of January 2014, due to
increase in prices at commodity exchanges, the estimate of the total
contract costs was revised from CU 40 to CU 48.
(4) During the first week of January 2014, the part of the production
facility and inventory is destroyed in the heavy rainstorm, but business
activities continued. The damages are not covered by insurance.
(5) Entity has some investment in a listed company and its carrying value
was CU 70 as on 31st December 2013 and in the second week of
January 2014, the stock market suffered a serious, and unexpected,
crash and the share price dropped significantly to the extent that the
carrying value of was CU 20
Part (B):

The Entity has five loans, whose remaining time to maturity is 18 months in
each case. Any breach of the agreement by the entity, the lenders have the
rights to demand immediate repayment of the entire loan or to waive, as they
decide. Assess, whether each liability as stated below, has to be classified
as Current or as Non-current in the presentation of financial statement as at
31st December 2013 based on IAS 1.71, IAS 1.74, IAS 1.75
Loan 1: On 15 December 2013, the entity has breached a covenant and the
lender has declared its willingness not to exercise the right and also not to
change the other terms of the loan, before the end of the reporting period
i.e, 31st December 2013, so that such right does not expire due to the
declaration.
Loan 2: On 20th December 2013, the entity has breached the agreement.
On 05 January 2014, the lender declared its willingness not to exercise the
right, without any alteration but holding the right.
Loan 3: On 25th December 2013, the entity has breached a condition. At the
request of the entity, the lender signs on 31st December 2013, an agreement
in which it waives the right to demand immediate repayment of the entire
loan, retaining all the remaining conditions.
Loan 4: On 30th December 2013, the entity has breached a term. At the
request of the entity, the lender signs on 10th January 2014, an agreement in
which it waives the right to demand immediate repayment of the entire loan.
Loan 5: No breach of any condition exists, with regard to the liability.

175

Q 39. Y Through Inc. has accumulated development costs that meet the criteria
for capitalisation as at 31st December 2011 amounting to CU 78,000. It
is estimated that the useful life on this intangible asset will be six years;
accordingly, amortization of CU 13,000 per year is anticipated. On 31st
December 2013, it obtains active market information, which suggests a
current fair value of these development costs is CU 80,000; the estimated
useful life, however, has not changed. IAS 38 has two options for revaluation
by way of either the asset and accumulated amortisation can be grossed-up
to reflect the new fair value information, or the asset can be restated on a
net basis.

You are required to inform the

(i)
Management, by way of journals, for both the options separately,

indicating the amounts for Development cost (asset), accumulated
amortisation of development cost and other comprehensive income. (8
marks)
(ii) Management, at least four unique intangible assets, for which active
market cannot exist. (2 marks)

[Hint: in both the cases, the carrying amount (amortised cost) immediately
prior to the revaluation is CU 52,000 (78,000 (13,000*2))]
176

ANSWERS
1.
Both (a) & (b)
2.
Profit or loss from continuing operations

(IFRS 5.37)
3.
Depreciation is recognised as long as the assets residual value does not

exceed its carrying amount
(IAS 16.52)
4.
If the funds are borrowed generally, the capitalisation rate is based on the
weighted average of the borrowing costs (IAS 23.14)
5.
False True (IAS 8.5, IAS 8.36)
6.
True False (IFRS 10.19, IFRS 10.22)
7.
SIC 32 states that internally generated website development costs are is

subject to the requirement of IAS 38 Intangible Assets
8.
False False (IAS 20.3)
9.
Agricultural Land, Paddy

(IAS 41.5, IAS 41.4)
10. True False

(IFRS 7.34, IFRS 7.39)
Section A Objective Fill in the blanks
11. IFRS 1, IAS 34
[IFRS 1.2(b)]
12. control
(IFRS 3.8)
13. segment manager
(IFRS 8.9)
177

14. accrual
(IAS 1.27)
15. unearned finance income
(IAS 17.4)
16. key management personnel
(IAS 24.9)
17. revenue
[IFRIC 13.4(a)(i)]
18. operator, grantor
19. expense
(IAS 11.36)
20. suspend
(IAS 23.20)
Section A Objective Calculation based
21. (1): (d) 30,439 [gross profit of CU10,000 (CU210,000 CU200,000) plus
cumulative exchange gain of CU20,439]

(2): (b) 183,847 [increase in trade payable CU187,500 minus foreign

exchange gain on financing item already included in the Profit or Loss
CU3,653]
(3): (c) 97,403 [borrowed under long-term agreement CU97,403]
22. In 2001 and 2002, the carrying amount of the receivable increases (year
2001: ` 100*1.10 = ` 110; year 2002: Rs.110*1.10=Rs.121) and interest is
recognized (IAS 18.11).
23. Costs of conversion (incurred at the
beginning of 2001) 10

Increase in the appropriate price index

(until 31st December 2010) of 20 %
178

Costs of conversion for a new building

(31st December 2010) 12
Depreciation for the years (2001-2010 (=12/30*10))
-4

Fair value 8
24. (1): (c) [IAS34.20(a), 34.A1]

(2): (b) [IAS 34.B23]
(3): (a) [IAS 34.B25, B.26]
25. The venturers share in the liability amounts to ` 900 (` 1,800 x 50%).
Therefore, ` 900 should be offset against Venturer As loan receivable of
` 1,000 and Venturer A should account for a net receivable from its joint
venture partner (Venturer B) of ` 100 (` 1,000 ` 900)
26. (b) 25% (IAS 36.86)
27. The enterprise expects that it will pay an additional 12 days of pay as a result
of the unused entitlement that has accumulated at 31st December 20X3
(one and a half days each, for eight employees). Therefore, the enterprise
recognises a liability, as at 31st December 20X3, equal to 12 days of pay
` 6,000 (IAS 19.16, 19.17)
28. Contract cost incurred to-date

Material cost ` 3,000,000
Labour cost ` 1,000,000
Depreciation ` 500,000

Marketing cost not allowed
Total allowable cost ` 4,500,000
Cost to complete ` 5,500,000
Percentage of completion 4,500,000 / 10,000,000 = 45%
Revenue ` 12,000,000*45% = ` 5,400,000

179

29. The net realisable value is ` 25 per box, being the subsequent sale price
` 40 minus rectification expenses ` 15. The written-down loss per box is
` 25, being the cost ` 50 minus net realisable value ` 25.
30. Original cost of investment in Dinar is 69,388 (USD10,675 x 6.5)

Cost of investment at year-end exchange rate in USD is 11,565

(Dinar 69,388 / 6)
Net assets acquired in USD at the year-end exchange rate is 6,667

(40,000 / 6)
Group share in USD is 5,334 (6,667 x 80%)
Hence the Goodwill recognised would be 6,231 (11,565 minus 5,334)
Section B Descriptive
31(a):
(a) The piece of land is a dual-use property. Since the two pieces could be sold
separately, they are accounted for separately (IAS 40.10).
31(b):
(1) IAS 40 Investment Property applies to property held for appreciation
(2) IAS 16 Property, plant and equipment applies to warehouse building, as it will
be used for more than one financial year.
(3) IFRS 5 Non-current Assets Held for Sale applies to office building
(4) IAS 41 Agriculture for the dairy cattle
32. The Contribution by the company would increase Plan Assets value to the
extent of ` 7500.

The amount of Actuarial Loss for the year would be ` 1000, being the
difference between the expected and the actual return on Plan.
The net amount to be recognised as an expense would be the Service Cost

during the year less expected return on the Plan i.e. ` 7,000
180

33.
(a) Post-employment benefit plans or other long-term employee benefit plans to
which IAS 19 Employee Benefits applies.
(b) An entitys separate financial statements to which IAS 27 Separate Financial
Statements applies. However, if an entity has interests in unconsolidated
structured entities and prepares separate financial statements as its only
financial statements, it shall apply the requirements in paragraphs 2431 of
IFRS 12, when preparing those separate financial statements.
(c) An interest held by an entity that participates in, but does not have joint
control of, a joint arrangement unless that interest results in significant
influence over the arrangement or is an interest in a structured entity.
(d) An interest in another entity that is accounted for in accordance with IFRS 9
Financial Instruments. However, an entity shall apply IFRS 12:
(i)
when that interest is an interest in an associate or a joint venture

that, in accordance with IAS 28 Investments in Associates and Joint
Ventures, is measured at fair value through profit or loss; or
(ii) when that interest is an interest in an unconsolidated structured entity.

34. Considering the matching principle, the following would be the suggested
procedure; the expenses of Rs.100 are at first recognized as an intangible
asset in Es statement of financial position. It affects profit or loss in the same
periods in which the related increases in revenue occur. According to the
procedure, the increases in revenue would be recognized in profit or loss in
the same periods as the training costs that are necessary for creating the
higher revenue.

However, the application of the matching principle does not allow the
recognition of items in the statement of financial position that do not meet the
definition of assets or liabilities, or of items that are assets but do not meet
the recognition criteria.
Consequently, the procedure, described above (capitalization of the training

costs initially and subsequent recognition in profit or loss when the related
increases in revenue occur) cannot be applied because the training costs
do not represent an intangible asset that meets the recognition criteria (IAS
38.69b). Consequently, they are recognised in profit or loss in June 20X1.
181

35 (a):

A and B have implicitly agreed by contract that they have joint control of
the arrangement because decisions about the relevant activities cannot be
made without both A and B agreeing (IFRS 11.B7). Hence the arrangement
represents a joint arrangement.
35 (b):

At least 75% of the voting rights are necessary in order to make decisions
about the relevant activities of the arrangement. This quorum cannot be
achieved by any party on its own. This means although A and B can each
block any decision, none of them controls the arrangement. However, the
quorum can be achieved by the combined voting rights of A and B. Decisions
about the relevant activities cannot be made without both A and B agreeing.
This means that as a result of the contractual arrangement A and B have
joint control of the arrangement (IFRS 11.B8). Thus, the arrangement
represents a joint arrangement.
36.
(a) The initial recognition of goodwill
(b) ` 70 (100 minus 30)
(c) A change in the tax rates (or tax laws) / reassessment of recoverability of
deferred tax assets / a change in the expected manner of recovery of an
asset.
(d) Yes
(e) Deferred tax liabilities are the amounts of income taxes payable in future
periods in respect of a taxable temporary difference.
182

37.
Year
Year 1 2010
Year 2 2011
Year 3 2012
Total for 3 years
Year 4 - 2013
(redemption year)
Total Amount
recognised as liability
Initial proceeds
Amount recognised as
equity component
8% interest
Factor at a rate Present value
($ 600,000x8%) of 10%
(rounded down)
48,000
0.91
43,680
48,000
0.83
39,840
48,000
0.75
36,000
119,520
648,000
0.68
440,640
560,160
(600,000)
39,840

38. Part (A):
(1) The conviction after the reporting period shows that fact that a present
obligation existed as of 31st December, 2013. Hence, it is an adjusting even
and therefore management has to recognise a provision instead of mere
disclosure as contingent liability. [IAS 10.9(a) and IAS 37.15]
(2) The fact that the debtor has filed for bankruptcy after the end of the reporting
period indicates that the debtor had financial difficulty as at 31st December
2013. Therefore, the management, understanding the information about the
financial difficulty that existed at the end of reporting period, has to recognise
an impairment loss appropriately. The amount of loss is measured as the
difference between the carrying amount of the receivable and the present
value of the estimated future cash flows discounted at the original effective
interest rate. [IAS 10.9(b)(i) and IAS 39.63]
(3) The question is whether the stage of completion is 60% [=24:40] or 50%
[=24:48]. As this is a non-adjusting event, the stage of completion is 60%
and the revenue is CU 36 [=CU 60 * 60%] (IAS 10.10)
183

(4) Since the rainstorm has occurred after 31st December 2013, it represents
a non-adjusting event. Therefore, the amounts recognised in the entitys
financial statement as at 31st December 2013 are not adjusted for this event.
However, the entity shall disclose the event and estimate its financial effect
or a statement that such an estimate cannot be made. [IAS 10.22(d)]
(5) The stock market crash was not in existence, nor could have been foreseen,
on 31st December 2013 and therefore this would be a non-adjusting event
(IAS 10.11). As a result, the management should not amend the carrying
value of the investment as at 31st December 2013 CU70, but instead make
disclosure [IAS 10.22(g)]
Part (B):
Loan 1: The right of the lender to demand immediate payment does not expire due
to the declaration. Therefore, the entity does not have the unconditional right to
defer settlement of the liability for at least 12 months after the balance sheet date.
Hence, the liability is to be presented as a current liability. [IAS 1.74]
Loan 2: The entity does not have the unconditional right to defer settlement of the
liability for at least 12 months after 31st December 2013. Thus, the liability is to be
presented as a current liability. [IAS 1.74]
Loan 3: The lender has waived the right to demand before the end of reporting
period. Hence the entity has an unconditional right to defer settlement of the liability
for at least 12 months after the balance sheet date. Hence the liability is to be
presented as a non-current liability [IAS 1.74 to IAS 1.75]
Loan 4: As at 31st December 2013, the entity does not have an unconditional
right to defer settlement of the liability for at least 12 months after 31 December
2013, as waiver is signed after 31st December 2013. Therefore, the liability is to
be presented as a current liability. [IAS 1.74]
Loan 5: The liability, which is payable after 31 December 2013 is presented as a
non-current liability. [IAS 1.71]
184

39.
(i)
If the gross-up option is adopted: The gross fair value must be 6/4 X CU
80,000 = CU 120,000.
The journals would be as follows:
Dr. Development cost (asset)
Cr. Accumulated amortisation-development cost 14,000

[(120,000/6*2) (13,000*2)]
Cr. Other comprehensive income

28,000
[revaluation increase]
42,000 [120,000-78,000]
39 (ii):
IAS 38.78 indicates, unique assets for which an active market cannot exist,
are brands, newspaper mastheads, music and film publishing rights, patents or
trademarks.
185
186

Full Marks : 100
Time: 3 hours
State whether true or false

1.
As per IAS 38 on intangible assets, those assets accounted for using the
cost model are amortised and those accounted for using revaluation are not
amortised.
2.
Only direct selling costs are deducted from the fair value of an asset while
arriving at its recoverable value under IAS 36.
3. IFRS 6 treats the exploration and evaluation costs as assets even though no
demonstration of probable future benefits is done.
4.
Provision for Gratuity is classified as a non-current liability as it may not be

payable within 12 months after the end of the reporting period.
5.
Under IAS 12,Income Tax includes all domestic and foreign taxes which
are based on taxable profits and withholding taxes which are payable by
subsidiaries, associates or joint ventures on distribution to reporting entity.
6.
Securities worth Currency Units 600,000 held for trading purposes, are sold
at CU 650,000. This will be reflected as cash flow from operating activities.
7.
IAS 27 states that the financial statements of the following subsidiaries need
not be considered for consolidation
a.
A subsidiary whose business activities are dissimilar from that of those

of the other entities within the group,
b.
Subsidiaries held for sale and
c.
Subsidiaries of Venture Capital Organisations, Mutual Funds etc.
8.
Inventories can qualify as Qualifying Assets under IAS 23.
9.
The foreign exchange difference pertaining to an asset where the borrowing

costs are capitalised, the exchange difference should be recognised in the
Statement of Comprehensive Income.
187

10. Deferred tax assets and liabilities are not classified as current assets or
current liabilities. They are to be disclosed separately.
Fill in the blanks
11. A non-current asset held for sale is measured at the lower of its __________
and ____________.
12. Impairment loss is the amount by which the _______ amount of an asset
exceeds its _______ amount.
13. A deferred tax asset is recognized to the extent it is probable that taxable
profit will be available against which _______ temporary difference or
unused tax credits can be utilized.
14. Provisions are liabilities of uncertain _______ or _______under IAS 37.
15. Under IAS 19, the difference between the actuarial return and expected return
on plan assets is the _______.
16. If the E.P.S. are going to be reduced ( or loss per share is increased), as a
result of potential shares being converted into ordinary shares, the potential
shares are said to be _______.
17. The financial statements are said to be authorized for its issue, when
the financial statements are approved and authorized for its issue by its
_______.
18. Under IFRS 8, segments must be reported separately if the reported
revenues (internal and external) are more than _______of the combined
revenues of all the segments.
19. _______leases are not within the scope of IFRS 7.
20. Intangible assets cannot be initially measured at _______.Initial measurement
has to be at _______ IAS 38.
Tick mark on an appropriate choice
21. On 01.01.2013, Universal Inc. signs a four year fixed price contract to provide
services to a customer. The contract value is Currency Units 750,000.
On 31.12.2013, the contract is considered to be 30% complete. Costs to
complete the contract cannot be reliably estimated and costs incurred to date
CU 200,000 are recoverable from the customer. What is the revenue to be
recognized in the Income Statement of Universal Inc on 31.12.2013?
a.
CU 200,000
188

b. CU 187,500
c.
CU 225,000
22. Innovation Inc is a large manufacturer of machinery, on whom Creative Inc

has placed an order for a special machine. An advance of CU 250,000 is
given by Creative Inc. to Innovative Inc. The agreed price for the sale of
the machinery is CU 500,000, to be supplied on FOB basis. The title of the
machinery passes to the buyer when goods are loaded onto the ship. The
revenue can be recognised in the books of Innovative Inc.
a.
When the machine is received by the customer
b.
When the initial order is placed
c.
when advance is received for CU 250,000
d.
When the machine is loaded on the port
23. ABC Ltd. is having Issued Share Capital of 4,000,000 shares on 01.01.2013.
It issued further 2,000,000 shares for cash on 01.10.2013. Its weighted
average number of shares will be
a.
4,250,000 shares
b.
4,500,000 shares
c.
5,000,000 shares
d.
6,000,000 shares
24. White Inc. acquired 100% of shares of Green Inc. The Companies disclosed
the following in their financial statements

White Inc.
Green Inc.
$ $
Salaries to staff/officers

Welfare expenses
for staff/officers
Loans given to Officers
200,000
75,000
50,000
10,000
100,000
50,000

Intercompany sales 140,000

The amount to be reported under related party disclosures will be

a.
$ 125,000
b.
$ 140,000
189

c.
$ 250,000
d.
$ 490,000
25. The value of a property increased by $ 100,000 on revaluation. On the

previous occasion, its value had decreased by $ 60,000. Now, the following
amount should be credited to Revaluation Reserve
a.
$ 40,000
b.
$ 60,000
c.
$ 100,000
d.
$ 160,000
26. On 31.12.2013, an asset is having a carrying amount of $ 100,000 in SOFP.

A grant worth $ 60,000 is received, which is repayable in the next three years
time in three equal installments. The grant is shown as deferred income.
On repayment of the grant, the carrying amount of the asset will be affected
by
a.
$ 60,000
b.
$ 20.000
c.
$ 10,000
d.
$ NIL
27. Vigilant Associates, an audit firm took a new audit assignment for a client
Soft Solutions, at an audit fee of $ 15,000. Both of them have their year
ending on 31 December every year. Vigilant Associates knows that the audit
process begins ends after the end of the financial year. Out of the audit
services provided to the client, 50% are completed at the date of the financial
statements.

The amount to be recorded as revenue in the books of Vigilant Associates

as on 31.12.2013 is
a.
$ 15,000
b.
$ 9,000
c.
$ 7,500
d.
$ 6,000
190

28. The inventory was counted on 31.12.2013 which was valued at cost at
$20 m. It included some damaged goods, costing $ 2m. Its realizable value
is expected to be $ 2.1m., provided the rework cost of $ 0.5 m. is incurred
before they can be sold. Closing inventory on 31.12.2013 will be shown at a.
$ 20 m
b.
$ 19.6 m
c.
$ 18.5 m
d.
$ 17.5 m
29. ABC Co acquired a trademark relating to introduction of a new manufacturing

process, the relevant costs for which were as under

Cost of Trademark - $ 300,000
Expenditure for promoting new product - $ 5,000
Employee benefits of the staff testing the

proper functioning of the process - $ 20,000
According to IAS 38, Intangible Assets, the total cost of the intangible noncurrent asset will bea.
$ 325,000
b.
$ 320,000
c.
$ 305,000
d.
$ 300,000
30. Airtime Co. acquired a passenger carrier airplane in 2010 having cost of the
frame for CU 4,600,000 and its engine cost CU 600,000.

In 2011, the engine was replaced with a new engine costing CU 1,100,000.
At the time of replacement, the accumulated depreciation to date for the
frame was CU 1,750,000 and on the engine was CU 400,000. As per IAS
16, the amount to be derecognised at the date of replacement will be
a.
CU NIL
b.
CU 200,000
c.
CU 600,000
d.
CU 1,100,000
191

Answer the following questions
31. Why is it necessary to identify the results of discontinued operations?
32. XYZ Inc. whose functional currency is , has purchased goods worth
250,000 (payable after 3 months) from ABC Inc., on 15 November 2010,
when the exchange rate was 1 = 0.60. The rate of exchange at the end
of reporting period 31 December 2010 was

1 = 0.65. When XYZ Inc. paid ABC Inc. for the goods on 15 February
2011 was
1 = 0.67. Determine the profit or loss on this transaction and state how
it will be recognised in the books.
33. What is the difference between subsequent measurement for financial

instruments classified as at fair value through profit and loss and those
classified as held for sale?
34. Outline the scope of IAS 41 on Agriculture.
35. Differentiate between the accounting treatment given to a liability and a
contingent liability.
36. On 15 January 2009, due to a sudden crash down in the stock exchange in
the country, the market values of its investments held by Giant Company Ltd.
steeply decreased by $ 2 million and continued to be at the same level until
the date of approval of financial statements of the company on 5th March
2009. On 31 December 2008, its value was $ 3 million.

Explain how the event will be dealt with in the financial statements of Giant
Co. Ltd.
Disclosure
The value of stocks held as investments is $ 3 million as at the end of the

reporting period. However, due to a crash in the stock exchange during
January 2009, the value declined to $ 1 million and the conditions continued
to remain at the same level until the date of approval of financial statements
of the company on 5th March 2009.
37 Premier Properties Inc. hold a property lease, which is acquired by paying

a premium of $ 1,100,000. As per the terms, it has to pay $ 200,000 per
annum for the next five years, the present value of which is $ 760,000. Fair
value of the asset is $ 1,900,000. The company wants to recognise the
192

property as investment property under IAS 40, which it intends to let out
further. Advice on recording the initial cost of the property.
Case study
Q.1. From the following facts, prepare relevant extracts from Statement of
comprehensive Income and the Statement of Financial Position.
Total contract price
$ 400,000
Cost incurred to date
$ 192,000
Estimated cost of completion
$ 128,000
Progress billing

$ 232,000
(of this, $ 200,000 is received)
Percentage completed 60%

Q. 2. The carrying value of property X is $120,000 and of property Y $160,000.
They are revalued at $100,000 and 176,000 respectively. On the previous
revaluations, Xs value was increased by $14,000 (being the amount lying to
the credit of revaluation reserve against this asset) and Ys value decreased
by $10,000.Show the accounting entries under the alternative assumptions
that the properties are:
a.
owner occupied properties
b.
investment properties
193

ANSWERS
State whether true or false
1. False
2. True
3. True
4. False
5. True
6. True
7. False
8. False
9. False
10. True
Fill in the blanks
11. (carrying amount, fair value less costs to sell)
12. (carrying, recoverable)
13. (deductible)
14. (timing, amount)
15. (actuarial gain/loss)
16. (dilutive)
17. (Board of directors)
18. (10%)
194

19. (Operating)
20. (fair value, cost).
Tick mark on an appropriate choice
21. CU 225,000
22. When the machine is loaded on the port
23. 4,500,000 shares
24. 140,000
25. $ 40,000
26. $ NIL
27. $ 7,500
28. 19.6 m
29. 325,000
30. CU 200,000
31. Financial statements can be used for the purpose of estimating future
profitability as well as future cash flows of an entity. These can be estimated
with the help of past information from the audited Financial Statements.

So it becomes necessary to identify the results of discontinued operations as

they are separate from those of continuing operations. Profitability and cash
flows from discontinued operations have to be disregarded for the purpose
of future projections.
32. For this transaction, the exchange loss recognized in the statement of
comprehensive income for the year ending on 31 December 2010 is 12,500
which is worked out as under
195

On the date of transaction, the exchange rate as of 15 November 2010 was

1 = 0.60, cost of the goods is booked at 150,000. As on the date when
the financial statements are prepared, the amount payable on account of the
above transaction works to 162,500.
( 250,000 0.60 = 150,000 and 250,000 .065 = 162,500

respectively)
The exchange loss recognised in the statement of comprehensive income for

the year ending on 31 December 2011 will be 5,000 which will be worked
out as under
On the date of remittance to ABC Inc., the exchange rate as on 15 February

2011 was
1 = 0.67. So actual remittance amounted to 167,500 as against the

opening balance payable for 162,500.
Thus, the total exchange loss of 17,500 on this transaction will be split
between the two years, in order to recognise the exchange difference in the
period in which this exchange difference arises.
33. Any profit or loss on subsequent measurement of financial instruments

classified at fair value through profit and loss is recognised in the statement
of comprehensive income immediately.

In case of financial instruments classified as held for sale, a gain or loss

on account of subsequent measurement is recognized directly in equity
through the statement of changes in equity. When the asset is disposed of,
the gains/losses previously taken to equity are taken to the statement of
Thus, the main difference between the two classifications is in the treatment
given for profit/loss on subsequent measurement.
34. IAS 41 applies to the following agricultural activities

1.
Biological assets used in agricultural activity e.g. living animal or

plants.
196

2.
Agricultural produce at the point of harvest e. g. wool, cotton, milk,

sugarcane, fruits etc.
3.
Government grants (relating to agricultural activity).
The standard does not apply to

a.
Land related to agricultural activity.
b.
Intangible assets related to agricultural activity e.g. goodwill.
35. Provision is made in the accounts for a liability, whereas a contingent liability
is not provided for. Thus, a contingent liability is not accounted for and not
reflected in the statement of financial position or income statement.

When a provision is made for an expense, the expense is reflected in the

statement of comprehensive income and the provision is reflected in the
statement of financial position. Also, the details of change in the carrying
amount of the provision during the year and a brief description of the nature
of obligation and expected timing of resulting outflow are required to be
disclosed in brief.
A contingent liability is disclosed with a brief description of the nature of the

contingent liability, an estimate of its financial effect and an indication of the
uncertainties relating to the amount or timing of any outflow.
36. This is an event after the end of the reporting period. The event does not
affect the value of companys assets / liabilities at the end of reporting
period. However, this is a significant event, which will influence the financial
position of the company in the future. Hence a disclosure regarding the post
statement financial position decline in the value of investments is to be made
in the financial statements.

Disclosure -
The value of stocks held as investments is $ 3 million as at the end of the

reporting period. However, due to a crash in the stock exchange during
January 2009, the value declined to $ 1 million and the conditions continued
to remain at the same level until the date of approval of financial statements
of the company on 5th March 2009.
197

37. The Premier Properties can recognize the property as an investment property
as it intends to let it out subsequently. The present value of the minimum
lease payments is $ 1,860,000 including the premium, while its fair value is
$ 1,900,000. The lower of the two will be recognised as the initial cost of the
investment property.

An equivalent amount should be recognised as liability.
Case study
1. The contract makes a profit of $ 80,000 from the given details.

Total revenue $400,000 less Total cost ($192,000+$128,000 = $ 320,000). So

there is no anticipated loss, in which case, we would have required to make
a provision.
Now, the percentage of completion is 60% of the total contract.

Revenue to be booked at 60% of $400,000, i.e. $ 240,000.
Costs to be booked at 60% of $ 320,000 i. e. $ 192,000.
Profit = $ 48,000.
Work in progress account
Cash costs incurred
Revenue recognized $ 240,000 Costs recognised
$ 192,000 Trade Receivables
$ 232,000
$ 192,000
Balance C/F

Total
$ 432,000 Total
$ 8,000
$ 432,000

Trade Receivables Account

WIP Billing
$ 232,000 Cash collected
Balance C/F

Total
$ 232,000 Total
$ 200,000
$ 32,000
$ 232,000

SOCI (Income Statement)
WIP
Cost recognized
$ 192,000 WIP- Revenue recognized

Profit -
$ 48,000

Total -
$ 240,000 Total -
198
$ 240,000
$ 240,000

SOFP (Balance sheet)

Part of Current Assets

Contract costs incurred

Add : Recognised profits

Less: Progress billing

Amount due from customers -
$ 192,000
$ 48,000
$ 240,000
$ 232,000
$ 8,000
$ 232,000
$ 200,000
$ 32,000
Trade Receivables
Progress Billing
Less: Cash received
Balance C/F -
Q.2.
a.
If the properties are owner occupied properties-
Revaluation decrease in case of property X is $20,000 (120,000-100,000).
Credit balance in revaluation reserve against this asset is $14,000.
The following entry should be passed now -

Dr Revaluation Reserve $14,000
Dr Profit or loss on revaluations
$ 6,000
(Statement of comprehensive income)
This account will be transferred to the (SOCI)
Cr Property X $ 20,000
(Being loss on revaluation accounted for)

Increase regarding property Y is $16,000(176000-160000).

This must have been recognised in profit or loss, according to IAS 16.
The following entry should be passed now -

Dr Property Y $ 16,000
Cr Profit or loss on revaluations
$10,000
Cr Revaluation reserve (in equity)
$ 6,000
(Being profit on revaluation accounted for.)
199

b.
If the properties are investment properties -
The gains or losses caused by increase or decrease in the fair values will
be recognized in the Profit and Loss immediately. There is no need to keep
track of the earlier variations in the values.
For property X -
Dr loss on investment properties
$20,000
Cr Investment property X
$ 20,000
(Being loss on revaluation of investment property transferred to statement of

comprehensive income.)
For property Y Dr Investment properties $16,000

Cr Profit on investment property Y
$16,000
(Being profit on revaluation of investment property transferred to statement

of comprehensive income.)
200

Full Marks : 100
Time: 3 hours
State with reasons, whether the following statements are true or false.
1.
ABC Company declares dividend after the reporting periodand recognises

the same as a liability at the end of the reporting period.
2.
The revenues of Company XYZ is coming from transactions with entity D

amounts to 14% of XYZs revenues. D is an unrelated third party of XYZ.
XYZ disclose the details of each segment revenue coming from sales made
to D.
3.
B Ltd. decided to decrease the residual value of its machinery at the end of
the financial year and treated same as the change in accounting policy.
4.
Ind AS-103 Business combination applies to combination of entities or

businesses under common control.
5.
Intangible assets are measured only at cost as per IAS-38.
6.
Goodwill arising on amalgamation is amortised over the 5 years.
7.
Relationships between a parent and its subsidiaries have to be disclosed

irrespective of whether there have been transactions between them.
8.
An impairment loss recognised for goodwill can be reversed in a subsequent

period.
9.
An intangible asset with an indefinite useful life is not amortized but it is

necessary to test such an asset for impairment by comparing its recoverable
amount with its carrying amount annually only if there is an indication of
impairment.
10. The discounting (Interest rate) of post-employment benefit obligation is

measured by reference to market yields at the end of the reporting period on
government bonds.
201

Fill in the Blanks
11. IAS-12 defines temporary differences resulting in future tax advantages are
referred to as.
12. An entity issues 10,000 preference shares @ ` 100 each will be presented
in the statement of financial position as .
13. .are taken into account by adjusting the number of equity
instruments that are expected to vest in the future.
14. Preliminary expenses are written off in the
15. Bank overdrafts are to be treated as a under IAS 7.
16. IAS-33 requires separate disclosure of basic and diluted EPS for continuing
operations and.
17. Non-controlling interests are presented in the consolidated
statement of financial position.
18. As per IFRS-11, In the case of a joint operation, the parties that have
joint control of the arrangement relating to the
arrangement.
19. The currency in which the entity operates in primary economic environment
called as
20. An 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.
Answer the following questions:
21. A company issued 1,000 equity shares @ ` 120 each. The nominal value of
each shares is ` 100. The company also incurs registry and other regulatory
charges on the issue of such shared amount to ` 12,000. The company can
avail the same charges as deduction under income tax provision. The Income
tax rate can be assumed as 30%. You are required to give the journal entries
according to IAS-32.
22. ABC Company prepares its first IFRS financial statements as at
31st December 2013. You are required to calculate the following
Date of Transition of IFRS

202

First IFRS Reporting Period
Comparative period (assuming that it have to present one comparative

Period)
23. PQR Company purchases an inventory on 1st December 2013 from a

vendor. The normal credit term is 1 month and it has been decided by
mutual agreement that payment for the same will be made with interest on
1st December 2014. The vendor will charge the interest @ 1% p.m. The
Purchase price of inventory would be $10,000 if payment is made on 1st
December 2013. You are required to pass the journal entries in the books of
PQR Company for the year ended on 31st December 2013.
24. On 31st December 2013, A Ltd. acquires all of the individual assets of B
ltd. A Ltd. did not purchase shares. On 31st December 2013, the carrying
amount of the acquired assets is $ 400 and the fair value of the acquired
assets is $500 on the same day. During the negotiations it was difficult to
fix the purchase price due to different expectations regarding the future cash
flows of Sltds business. Therefore, in addition to a fixed payment of $600,
contingent consideration has been estimated as $100.

You are required to prepare any necessary entries in A ltd.s separate

financial statements on 31st December 2013.
25. M Ltd. reported the profit of Rs. 2,00,000 for the year ended on 31st
December 2012 and total no. of shares outstanding are 20,000. On 30th
June 2013 it announces that it will split it 1 shares into 5 shares. So as result
of the share split, each shareholder receives 4 additional shares for each
share previously held. You are required to calculate the basic earnings per
share for the year 2012.
26. K Ltd. Purchases a land of 4,00,000 on 31st December 2012 and payment
is made on the same day. The fair value of land is determined on 31st
December 2012 and 31st December 2013 are Rs. 4,40,000 and 3,70,000
respectively. Calculate the amount that would be reflect in the Revaluation
surplus account on year 2012 and year 2013.
27. A, B, and C establish an arrangement in which A and B each hold 40%
of the voting rights in the arrangement, and C holds the remaining 20%.
According to the contractual arrangement between the parties, at least 75%
of the voting rights are required in order to make decisions about the relevant
activities of the arrangement.

You are required to judge whether the same contract will fall in the definition
of join arrangement as per IFRS-11.
203

28. ABC Ltd. owns several pieces of land constitutes disposal group that is
classified as held for sale. The pieces of land are burdened with mortgage
loans. The bank will only issue the clearance necessary for sale after
redemption of the loans. Assess whether the mortgage loans will be classified
as liabilities included in disposal groups classified as held for sale in the
statement of financial position.
29. ABC Ltd. incurred maintenance expenditure (not qualified for Capitalisation)
of ` 4,000 on its production machines on 31st March 2013. Assuming that
financial year ends on 31st December 2013. You are required to pass the
necessary journal entries under discrete approach and integral approach as
at 31st March, 2013 under IAS-34:
30. On 1st January 2013 A Ltd. Gains significant influence over B Ltd. by
acquiring 25% of the shares of for ` 1,00,000. So B Ltd. becomes an
associate of A Ltd. The carrying amount of As equity as at 1st January 2013
is ` 3,00,000. On 1st January 2013, fair value of Bs buildings exceeds their
carrying amount in Bs separate financial statements by ` 40,000. You are
required to compute the goodwill.
31. Explain the Fair value concept according to IFRS-13 Fair Value
measurement.

As per IFRS-13 Fair value represents the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date under current market conditions.
32. An entity issued 10 convertible bond @ ` 1000 each on 1st January 2013.
Maturity period of bond is 1 year.i.e 31st December 2013. The interest
payable on such bond on 31st December @ 7% P.a. When the bond is
issued, the prevailing market interest rate for similar debt without conversion
rights is 9% p.a.

You are required to calculate the Liability and equity component of the
convertible bond and also pass the necessary journal entries on 1st January
2013.
33. AM Mart, a retailer launches a loyalty programme in which 1 point is granted

for purchase of $ 100 and face value of each point is 0.5 $. The points
entitle the holder to discount on next purchase. E.g. A customer who has
accumulated 100 points entitled the customer to reduce the purchase price
by $ 50 in the next purchase.
204

It expects 50% points granted to be redeemed. At the end of the first period
after launching the programme:
(i)
Customers have accumulated a total of 10,000 points and the total

consideration from customer amounts to $1,00,000.
(ii) Points granted in year 1 are redeemed in the next year and the retailer
changed its views about redemption rates, assuming that 75% of the
points will be redeemed.

You are required to give the journal entries in the Year 1 & Year 2 as per the
specific requirement of IFRS, if any.
34. On 31st December 2013, X Ltd. acquires 80% of the shares of Y Ltd. for $
90. At that time, the value of the net assets of Y Ltd. determined is $ 100.
Y Ltd. Represents a CGU. The recoverable amount of CGU (including
the goodwill attributable to the non-controlling interest) is $101 as on 31st
December 2013.

You are required to conduct the impairment test for CGU Y in Xs

consolidated financial statements as at 31st December 2013 and prepare
the necessary journal entries. The non-controlling interest is measured at its
proportionate share in the recognized amounts of Ys identifiable net assets.
35. On 31st December 2013 H Ltd. acquires 100% of the shares of S Ltd. for
` 11,00,000 and the payment is effected in cash on the same day.

On The acquisition date, the fair values of Ss assets are as follows:

Machines 3,00,000

Buildings 2,00,000

Inventory 3,00,000

Cash and cash equivalents
2,00,000

Goodwill 1,00,000

On the same day H Ltd. sells 100% of the shares its another subsidiary P
Ltd. For ` 8,00,000 and Payment is effected in cash on the same day. The
carrying amounts of P Ltd. are as follows:

Buildings 4,00,000

Inventory 3,00,000

Cash and cash equivalents 1,00,000
205

You are required to compute the cash flow in the consolidated statement of
cash flow for the period ended on 31st December 2013.
36. On 30th October 2012, A Ltd. purchased a machinery for $4,000 from USA
supplier on credit basis. As Ltd. functional currency is the Rupee. The
exchange rate on the date of transaction is 1$= ` 50. The fair value of the
machinery determined on 31st December 2012 is $ 4,500. The exchange
rate on 31st December 2012 is 1$= Rs. 55.The payment to overseas supplier
done on 31st December 2013 and the exchange rate on 31st December
2012 is 1$= Rs. 57. The fair value of the machinery remain unchanged for
the year ended on 31st December 2013. You are required to prepare the
Journal entries in year 2012 and year 2013 according to IAS-12.
37. As Ltd. profit before tax according to IFRS for Year 2013 is $ 100 and
taxable profit for year 2013 is $104. The difference between these amounts
arose as follows: On 1st November 2013, it acquired a machine for $120.
Depreciation is charged on the machine on a monthly basis for accounting
purpose. Under the tax law, the machine will be depreciated for 6 month.
The machines useful life is 10 years according to IFRS as well as for tax
purposes. In the year 2013, expenses of $8 were incurred for charitable
donations. These are not deductible for tax purposes.

You are required to prepare necessary entries as at 31st December 2013,

taking current and deferred tax into account. The tax rate is 25%.
Also prepare the tax reconciliation in absolute numbers as well as the tax
rate reconciliation.
Question 5
(a) KLM Company limited purchased machinery costing ` 1,00,000 on
1st January 2011. At the end of year 2013 i.e. on 31st December 2013
the company noticed that it has not provide the depreciation on the said
machinery. The company wanted to charge the depreciation @20% p.a on
diminishing balancing method. You are required to advise upon the company
in the light of IAS-8 and also pass the necessary journal entries.

You are also effects of the entries statement of financial position, separate
income statement, and statement of changes in equity in simplified
presentations of these statements.
KLM Company has to present only one comparative period (i.e. the year
2012) in its financial statements.
206

(b) PQR Company limited purchased a land & building on 1st January 2011
amounting to ` 5,00,000 for the purpose to earn the rental income from
it. On the same day it leases out the same to its wholly owned subsidiary
ABC limited under operating lease. This building will be used solely for
administrative purposes by ABC limited for more than 1 year. PQR limited
obliged to dismantle the building structure at the end of 3rd year and
estimated the initial costs of dismantling ` 13,310. As per the Tax purpose
building can be depreciated in 3 years. You can assume the Tax rate @ 30%.
The discount rate is 10% p.a.

The PQR Company determines the fair value of building as follows:
31st December 2011: ` 5, 80,000
31st December 2012: ` 6, 00,000
31st December 2013(Land only): ` 5, 00,000
Assuming the company earns the Profit before taking into account the fair
value adjustment but after taking the effect of provision if any on account of
dismantling cost ` 10,00,000 per year.
(i)
You are required to determine the classification of property in PQR

Separate and Financial statement.
(ii) Pass the journal entries in the Books of account for 3 years after taking
into the account of deferred Tax provision, if any.
207

ANSWERS
State with reasons, whether the following statements are true or false.
1. False

Dividend declaration after the reporting period are non-adjusting events. IAS10 defines Non-adjusting eventsare indicative of conditions that arose after
the reporting period. Amounts recognized in the financial statements are not
adjusted for such events.
2. False

As per IFRS-8 Operating segments If revenues from transactions with a

single external customer amount to 10% or more of the entitys revenues ,
the entity has to disclose this fact, the total amount of revenues from each
such customer, and the identity of the segment or segments reporting the
revenues. So it is not mandatory to disclose the revenue of each segment
coming from sales to such customer. Only the segments need to be reported
which amounts 10% or more of entitys revenue.
3. False

IAS-16 mandates the entities to review the residual value of an assets at

least at the end of each financial year. While IAS-8, defines 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 that results
from new information or new developments. So the change in the residual
value of an assets will be treated as Change in accounting estimate and
not the change in accounting policy.
4. True

Ind AS-103 Business combination applies to combination of entities or

businesses under common control. Common control is defined as a business
combination in which all of the combining businesses or entities are ultimately
controlled by the same party or parties both before and after the combination
and the control is not transitory.
5. False

As per IAS-38, Intangible assets are measured initially at cost however

subsequently they can be measured either as Cost or fair value. Fair value
has to be determined by reference to an active market.
208

6. False

Goodwill arising on amalgamation is not amortised but will be tested for

impairment at least at the end of each year.
7. True

As per IAS-24, existence of relationship between a parent and its subsidiaries

have to be disclosed even if there are no transactions between them.
8. False

As per IAS-36, an impairment loss recognised for goodwill must not be

reversed in a subsequent period. Even if the impairment loss was recognized
in respect of goodwill in an interim financial statement, the recognition of a
reversal of the impairment loss is prohibited in the following interim financial
statements as well as in the annual financial statements.
9. False

As per IAS-38, testing for impairment of an intangible asset with an indefinite

useful life is necessary even if there is no indication of impairment.
10. False

As per IAS-19, discounting (Interest rate) of post-employment benefit

obligation is measured by reference to market yields at the end of the
reporting period on high quality corporate bonds.
Questions 2
Fill in the Blanks
11. Deductible temporary differences
12. Liability
13. Non-marketing conditions
14. Income statement
15. Component of cash / cash equivalents
16. Discontinued operations
17. Within equity but separately from the equity of the owner
18. Have rights to the assets and obligations for the liabilities
209

19. Functional
20. Onerous contract
Questions 3
21. As per IAS-32 Costs of an equity transaction are deducted from equity, net
of any related income tax benefit.

Journal Entries:
Bank
Debit 1,20,000
Credit
Securities Premium
20,000
Equity
Credit 1,00,000
Debit
12,000
Bank
Credit
12,000
Securities premium
Debit
8,400
Current tax assets
Debit
3,600
Misc. Expenses
Credit
12,000
Misc. Expenses
22. Date of Transition of IFRS: 1st January 2012, Company will prepare its
Opening IFRs statement of financial position on this date.

First IFRS Reporting Period: 1st January 2013-31st December 2013
Comparative period:1st January 2012-31st December 2012
23. As per IAS-2, When an arrangement contains a financing element , difference

between the purchase price for normal credit terms and the amount paid will
be recognized as interest expense over the period of the financing and will
not be include in Cost of purchase of Inventory.

Journal Entries:
On 1st December 2013:

Inventory Debit 10,000

Trade payables Credit 10,000


Interest Debit
100

Trade payables Credit
100
210

Working notes:
Total Interest = 10,000*12%= $1,200
Interest as on 31st December 2013= $1,200/12=100
24. Journal Entries:

Assets Debit 500

Goodwill Debit 200
Liability

(Contingent Consideration) Credit 100

Bank Credit 600
25. As per IAS-33, Calculation of basic earnings per share for all periods
presented has to be adjusted retrospectively.

No. of shares outstanding as on 31st December 2012 = 20,000*5 = 1,00,000
Hence Basic earnings per share = 2, 00,000 / 1,00,000 = ` 2.
26. As per IAS-16, Changes in fair value are recognized in Revaluation surplus
account in (other comprehensive income) to the extent that the changes in
value take place above cost and the changes in fair value are recognised in
profit or loss to the extent that they take place below cost

So changes in fair value in year 2012 ` 40,000 will be credited to revaluation

surplus account (other comprehensive income).
So changes in fair value in year 2013 ` 70,000, out of which ` 40,000 will
be debited to revaluation surplus account (other comprehensive income).
27. Combined Voting rights= A+B= 80%> Required voting Rights

As decision can be made by the combined voting rights of A and Bas a result
of the contractual arrangement. So it can be concluded that A and B have
joint control of the arrangement. Thus, the arrangement represents a joint
arrangement.
28. The mortgage loans will not be classified as liabilities included in disposal
groups classified as held for sale, because they will not be transferred to the
buyer.
211

29. Discrete approach: Expenses of ` 4,000 are recognized in profit or loss in
the quarterly financial statements as at 31st March 2013.

Journal Entries:

Maintenance Expenses Debit 4,000

Bank Credit 4,000

Integral approach:
1/4th of the maintenance expenses is attributed to each quarter.

Maintenance Expenses Debit 1,000

Deferred Expenses Debit 3,000

Bank Credit 4,000
30. Computation of Good will:
100% 25%

Carrying amount of Bs equity
3,00,000
75,000
Fair value adjustment (buildings) 40,000
10,000
Fair value of As equity
85,000
3,40,000

Cost 1,00,000

Goodwill 15,000
Questions 4
31. As per IFRS-13 Fair value represents the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date under current market conditions.

Following are key consideration should keep in mind while determining the
fair value:

Fair value is a market-based measurement and not an entity-specific

measurement.
212

Fair value measurement is for a particular asset or liability, the entity

has to take into account the characteristics ofthe asset or liability when
measuring fair value if market participants would also take these into
account.
It assumes that the asset or liability is exchanged in an orderly

transaction between market participants to sell the asset or transfer the
liability at the measurement date under current market conditions.
Market participants are buyers and sellers in the principal (or most
advantageous) market for the asset or liability.
Fair value represents an exit price from the perspective of a market

participant that holds the asset or owes the liability.
32. The liability and equity component of compound financial instrument (i.e.
Convertible Bond) will be determined according to residual value method.

Carrying amount of liability component:
Cash flow at the end of year (i.e., 31st December 2013) = ` 10, 700 (Interest
+ Principal)
Market interest rate for similar debt without conversion rights i.e. Discount
rate= 9% P.a
Carrying amount of the liability component= Discounting the future interest

and redemption payments * market interest rate for similar bonds having no
conversion rights.
So Liability component
= Cash flow at the end of year/1+Discount Rate

= 10,700/1.09 = ` 9,817 (Approx.)
Equity Component = ` 10,000-9,817= ` 183
Journal Entries on 1st January 2013:

Bank Debit 10,000

Liability Credit 9,817

Equity Credit 183
33. IFRIC 13 clarifies that loyalty programmes are multiple element
arrangements,in which the consideration received for the sale of goods or
services (from which points are earned) is allocated between:
213

The goods or services delivered and the points that will be redeemed in
the future will be measured based on the fair value. Fair value is defined
as the amount that the points could be sold for on a stand-alone basis.
The consideration allocated to the points should be presented as deferred
revenue on the balance sheet and should be released to the income
statement when the points are redeemed or expire.
Journal entries in Year 1:
The fair value of points= Total points* Face value of each point* Redemption
rate
10,000*0.5*50%= $2,500
Debit Bank 1,00,000
Credit Revenue 97,500
Credit Deferred Revenue
2,500

Journal entries in Year 2:
Revised estimate of points redeemed= 10,000*75%= 7,500 Points.
Original estimate of points redeemed= 10,000*50%= 5,000 Points.
Revenue to be recognised in year 2= $2,500/7,500* 5,000= $1,667
Debit Deferred Revenue

1,667
Credit Revenue 1,667
34. Computation of Goodwill:
Consideration transferred
Non-controlling interest (measured at the NCIs proportionate
share of Ys net assets) (20% of $ 100)
Value of the acquiree
Net assets
Goodwill recognised in the statement of financial position

90
20
110
100
10
The goodwill attributable to the non-controlling interest has not been

recognized in the statement of financial position. However, goodwill
attributable to the non-controlling interest is included in the recoverable
214

amount. As a consequence, the goodwill attributable to the non-controlling
interest has to be included in the carrying amount of CGU for the purpose
of impairment testing (i.e. the carrying amount is adjusted).The carrying
amount of the goodwill adjusted for the purpose of impairment testing can
be computed as follows: $10/80%=12.5$.

Adjusted carrying amount=
Good will
Net Assets
Total
12.5 100 112.5

Recoverable Amount 101.00

Impairment Loss = 112.5-101.00= $ 11.5
Impairment Loss allocated to A Ltd. = 11.5*80= $ 9.2
Journal Entries:

Impairment Loss Debit 9.2

Good will
Credit
9.2
35. Cash outflows arising from obtaining control of subsidiaries
9,00,000
Cash inflows arising from losing control of subsidiaries
7,00,000
Cash flows from investing activities
2,00,000
Note: The cash outflows arising from obtaining control of subsidiaries and the
cash inflows arising from losing control of subsidiaries have to be classified
as investing activities and must not be offset.
36. Journal Entries:

Purchase of Machinery on credit Basis
On 30th October 2012:
Machinery
Debit
2,00,000 (4,000*$50)

Creditor Credit 2,00,000 (4,000*$50)

(Initial transaction will be recorded at exchange rate on the date of

transaction.)
215

Exchange difference arising on translating monetary item

Machinery Debit 47,500 (4,500*$55-4,000*$50)
Profit & loss a/c

(Exchange profit& loss)
Credit
47,500 (4,500*$55-4,000*$50)
Profit & loss a/c

Debit
20,000 (4,000*$55-4,000*$50)

Creditor Credit 20,000 (4,000*$55-4,000*$50)

Exchange difference arising on translating monetary item and settlement

of creditors
Creditors
Debit
2, 20,000 (4,000*$55)
Profit & loss a/c

Debit
8,000 (4,000*($57-$55))

Bank Credit 2,28,000

Machinery
Debit
9,000 (4,500*($57-$55))
Profit & loss a/c

Credit
9,000 (4,500*($57-$55))
37. Current tax= Taxable profit* Tax rate= 104*25%=$26.

Computation of Taxable Profit:
Accounting profit=
100
+ Donation not deductible
- Excess Depreciation
Total Taxable profit
104
Profit & loss a/c Debit
26
Current Tax
26
Credit
216

Deferred tax:
Machines carrying amount according to IFRS is $118 ($120-$2)
Machines carrying for Taxation purpose= $114($120-$6)
Deferred Tax Liability= $ 4*25%= $ 1
Profit & loss a/c
Debit
Deferred Tax liability
Credit
Tax reconciliation in absolute numbers:
Profit before tax according to IFRS
100

Applicable tax rate 25%

Fictitious tax (at the applicable tax rate)
25
Expenses not deductible for tax purposes ($8*25%)
(Current and deferred) tax expense
27
Tax rate reconciliation

Applicable tax rate 25%

Expenses not deductible for tax purposes
2%

Average effective tax rate 27%
Questions 5
Answer the following questions: (Each question carry 10 marks) Total 2*10= 20
Marks
(a) KLM Company did not provide the depreciation on the machinery in the prior
year is an example of Prior Period errors.

As per IAS-8- Prior period errors are corrected in the comparative information
presented in the financial statements in the subsequent period. If the error
occurred before the earliest prior period presented, the opening balances of
assets, liabilities, and equity for the earliest prior period presented have to
be restated.
217

Journal Entries:

1st January 2012:
Debit Retained Earnings

20,000
Credit Machinery 20,000

31st December 2012:
Debit Depreciation 16,000

Debit Income statement
16,000
Credit Depreciation 16,000

31st December 2013:
Debit Depreciation 12,800

Debit Income statement
12,800
Credit Depreciation 12,800

Effects on separate Income statement:
2012 2013

Depreciation Charges
(16,000)
Effects on Statement of changes in equity:
(12,800)
Retained Earnings

Balance as on 1st January 2012
Nil
Correction of prior period error
(20,000)
Adjusted balance as on 1st January 2012
(20,000)
Total Comprehensive Income
(16,000)
Balance as on 31st December 2012
(36,000)
Total Comprehensive Income
(12,800)
Balance as on 31st December 2013 (48,800)

218

Effects on Statement of Financial Position:
Equity & 1st Jan. 31st Dec. 31st

Assets
Liabilities 2012
2012
Dec.
2012
Retained (20,000) (36,000) (48,800) Machinery
earnings
1st
31st Dec.
Jan.
2012
2012
80,000 64,000
31st Dec.
2012
51,200
(b) (i) In Separate financial Statement

Land and building will be considered as Investment Property as per IAS-40

Investment property is property (i.e. land or a building or part of a building
or both) which is held (by its owner or by the lessee under a finance lease)
to earn rentals or for capital appreciation or both.
In consolidated financial Statement:
Land and building will be considered as Property, plant &

equipmentaccording to IAS-16 as it is owner-occupied from the group
perspective (i.e. it is a building held for administrative purposes). If the
building (owner-occupied property) is expected to be used during more than
one period, it meets the definition of property, plant, and equipment.
(ii)Investment properties are initially measured at cost, which includes the

present value of the expenses for demolishing the building.
Determination of Total Cost of purchase:
Amount in `

Cost of Land & Building
5, 00,000
Estimated Cost of Dismantling
13,310

Discount factor 10% p.a

Present value of cost of dismantling
13,310/(1.1)3= `10, 000
Total Cost of Purchase
5, 10,000
219

Journal Entries:

1st January 2011:
Debit
Land& Building
5, 10,000
Credit Cash 5, 00,000

Credit Provision 10,000

31st December 2011:
Reorganisation of fair Vale gain
As per IAS-40 a gain or loss arising from a change in fair value is recognized
in profit or loss.
Debit
Land & Building
70,000
Credit Fair value gain 70,000

As per IAS-37 Where discounting is used when measuring a Provision, the

carrying amount of a provisionincreases in each subsequent period to reflect
the passage of time (unwinding of the discount). This increase represents a
component of interest expense.

Debit Interest 1,000 (10,000*10%)


Computation of Taxable profit:
Total Profit given= ` 10, 00,000
Add: Fair value gain= ` 70,000
Less: Depreciation as Tax purpose 1, 70,000
(5, 10,000/3)
Debit
Profit & loss
2, 70,000
Credit
Current Tax
2, 70,000
Debit
Profit & loss
51,000
Credit
Deferred Tax Liability 51,000
` 9, 00,000
220
(9, 00,000*30%)

Debit
Land & Building
20,000
Credit
Fair value gain
20,000
Provision on 1st January 2012 =
` 11,000
Discount rate
10%p.a

Interest Amount =
` 1, 100

Debit Interest 1,100 (11,000*10%)


Computation of Taxable profit
Total Profit given =
` 10,00,000
Add: Fair value gain =
` 20,000
Less: Depreciation as Tax purpose ` 1,70,000
(5, 10,000/3)
Debit
Profit & loss ` 2,55,000
Credit
Current Tax
Debit
Fair value loss
` 1,00,000
Credit
Land& Building
` 1,00,000
Provision on 1st January 2013 = ` 12,100
Discount rate
= 10% p.a
Interest Amount
= ` 1, 210
= ` 8, 50,000
(8, 50,000*30%)
` 2,55,000
221

Debit
Interest
1,210
(12,100*10%)

Computation of Taxable profit:
Total Profit given = ` 10, 00,000
Less: Fair value loss = ` 1, 00,000
Less: Depreciation as Tax purpose 1, 70,000
(5, 10,000/3)
Debit
Profit & loss
2,19,000
Credit
Current Tax
2,19,000
Dismantling Charges paid at the end of 3rd Year
Debit
= ` 7, 30,000
Provision
13,310

Credit
Bank 13,310
222
(7,30,000*30%)

Full Marks : 100
Time: 3 hours
Section A
State whether the following statements are true or false.
1.
An entity that adopts IFRSs for the first time, should eliminate previous-GAAP
assets and liabilities from the opening balance sheet if they do not qualify for
recognition under IFRSs.
2.
Adjustments required to move from previous GAAP to IFRSs at the date of

transition should be recognised directly in retained earnings or, if appropriate,
another category of equity at the date of transition to IFRSs.
3.
An entity, in its first IFRS financial statements, prohibited from using a new
or revised IFRS that is not yet mandatorily effective, even though the new or
revised IFRS permits early application.
4.
An unrealised gain on foreign exchange transaction be presented in a cash

flow statement as an inflow in the financing activities section of the cash
flow statement because it arises from a foreign currency transaction.
5.
When determining the Minority interest (MI) on the acquisition of a subsidiary

an entity should take into account goodwill recognised in the subsidiarys own
financial account.
6.
M ltd. has come out with an offer to refund the cost of purchase within one
month of sale of their consumable products if the customer is not satisfied
with the product. M Ltd. should recognise the revenue when goods are sold
to the customer.
7.
IFRS 2 does not apply to share-based payment transactions other than for
the acquisition of goods and services.
8.
Assets classified as held for sale, must be presented under the appropriate
Asset head with a separate disclosure in the note.
223

9.
If the total external revenue reported by operating segments constitutes

less than 75 per cent of the entitys revenue, additional operating segments
must be identified as reportable segments (even if they do not meet the
quantitative thresholds set out above) until at least 75 per cent of the entitys
revenue is included in reportable segments.
10. A quoted market price in an active market provides the most reliable evidence
of fair value and is used without adjustment to measure fair value whenever
available, with limited exceptions.
Fill in the blanks
11. ................contains guidance on accounting for changes in decommissioning,
restoration and similar liabilities that have previously been recognised both
as part of the cost of an item of property, plant and equipment under IAS 16
and as a provision (liability) under IAS 37.
12. As per IFRS 13 Fair value measurement assumes a transaction taking place
in the .................Market for the asset or liability.
13. XYZ Ltd. pays 800 to acquire an 80% interest in the ordinary shares of ABC
Ltd. The aggregated fair value of 100% of ABC Ltd s identifiable assets and
liabilities (determined in accordance with the requirements of IFRS 3) is 600,
and the fair value of the non-controlling interest (the remaining 20% holding
of ordinary shares) is 185. The value of the non-controlling interest based on
net assets is..................
14. As per IFRS 11 A joint arrangement whereby the parties that have joint
control of the arrangement and have rights to the assets, and obligations
for the liabilities, relating to the arrangement is called a ................................
15. ..................deals with the circumstances in which a seller can reliably
measure revenue at the fair value of advertising services received or
provided in a barter transaction.
16. ABC Ltd. is installing a new plant at its production facility. It has incurred
these costs:

Cost of plant (as per suppliers invoice) $ 25,00,000
Handling cost
Site preparation cost
$ 2,00,000
$ 6,00,000
Consultant used for advice on the

acquisition Of the plant

$ 6,00,000
224

Estimated dismantling cost to be

incurred after 7 years
Operating losses before commercial production
The cost that can be capitalised in accordance with IAS 16 in the books of
ABC Ltd is $.............
$ 3,00,000
$ 3,00,000
17. A loan payable has a carrying amount of $100. The repayment of the loan
will have no tax consequences. The tax base of the loan is $................
18. Interest receivable has a carrying amount of $ 100. The related interest
revenue will be taxed on a cash basis. The tax base of the interest receivable
is $.............
19. Vigilant LLC has raw material costing $ 40, which will be sold as finished
products for $ 60 after additional $ 10 of labour costs are incurred for
completion. Its NRV will be $...........
20. An impairment loss that relates to an asset that has been revalued should
be recognised in......................
Calculation based
21 Brilliant Trading Inc. purchases motorcycles from various countries and
exports them to Europe. Bril-liant Trading has incurred these expenses during
20x4:
(a) Cost of purchases (based on vendors invoices)
$ 5,00,000
(b) Trade discounts on purchases
$ 10,000
(c) Import duties
$ 200
(d) Freight and insurance on purchases
$ 250
(e) Other handling costs relating to imports
$ 100
(f)
$ 15,000
(g) Brokerage commission payable to indenting

agents for arranging imports

$ 300
(h) Sales commission payable to sales agents
$ 150
(i) After-sales warranty costs
$ 600
Salaries of accounting department
225

Brilliant Trading Inc. is seeking your advice to calculate cost of inventory

under IAS 2 .
22. An entity acquired plant and equipment for $1 million on January 1, 20X4.
The asset is depreciated at 25% a year on the straightline basis, and local
tax legislation permits the management to depreciate the asset at 30% a year
for tax purposes. Calculate any deferred tax liability that might arise on the
plant and equipment at December 31, 20X4, assuming a tax rate of 30%.
23. Bespoke Inc. has manufactured a machine specifically to the design of its
customer. The machine could not be used by any other party. Bespoke
Inc. has never manufactured this type of machine before and expects a
number of faults to materialise in its operation during its first year of use,
which Bespoke Inc. is contractually bound to rectify at no further cost to the
customer. The nature of these faults could well be significant. As of Bespoke
Inc.s year-end, the machine had been delivered and installed, the customer
invoiced for $100,000 (the contract price), and the costs incurred by Bespoke
Inc. up to that date amounted to $65,000.What is the revenue that Bespoke
Inc. Should recognises in its book as per IAS 18.?
24. On December 1, 20X4, Compassionate Inc. began construction of homes
for those families that were hit by the Typhoon and were homeless. The
construction is expected to take 3.5 years. It is being financed by issuance
of bonds for $7 million at 12% per annum. The bonds were issued at the
beginning of the construction. The bonds carry a 1.5% issuance cost. The
project is also financed by issuance of share capital with a 14% cost of
capital. Compassionate Inc. has opted under IAS 23 to capitalize borrowing
costs. Compute the borrowing costs that need to be capitalised under IAS
23.
25. An entity prepares quarterly interim financial reports in accordance with IAS
34. The entity sells electrical goods, and normally 5% of customers claim on
their warranty. The provision in the first quarter was calculated as 5% of sales
to date, which was $10 million. However, in the second quarter, a design fault
was found and warranty claims were expected to be 10% for the whole of
the year. Sales in the second quarter were $15 million. What would be the
provision charged in the second quarters interim financial statements?
26. An entity is reviewing one of its business segments for impairment. The
carrying value of its net assets is $20 million. Management has produced two
computations for the value-in-use of the business segment. The first value
($18 million) excludes the benefit to be derived from a future reorganization,
226

but the second value ($22 million) includes the benefits to be derived from
the future reorganization. There is not an active market for the sale of the
business segments.

Calculate Impairment loss (if any) as per IAS 36 Impairment of Assets of the
business segment.
27. An entity is planning to dispose of a collection of assets. The entity

designates these assets as a disposal group. The carrying amount of these
assets immediately before classification as held for sale was $20 million.
Upon being classified as held for sale, the assets were revalued to $18
million. The entity feels that it would cost $1 million to sell the disposal group.
What would be the carrying amount of the disposal group in the entitys
accounts after its classification as held for sale?
28. ABC LLC manufactures and sells paper envelopes. The stock of envelopes
was included in the closing inventory as of December 31, 2005, at a cost
of $50 each per pack. During the final audit, the auditors noted that the
subsequent sale price for the inventory at January 15, 2006, was $40 each
per pack. Furthermore, inquiry reveals that during the physical stock take, a
water leakage has created damages to the paper and the glue. Accordingly,
in the following week, ABC LLC has spent a total of $15 per pack for
repairing and reapplying glue to the envelopes. Calculate the net realizable
value and inventory write-down (loss) amount.
29. On January 1, 20X0, Robust Inc. purchased heavy-duty equipment for
$400,000. On the date of installation, it was estimated that the machine has
a useful life of 10 years and a residual value of $40,000. Accordingly the
annual depreciation worked out to $36,000 = [($400,000 $40,000) / 10].
On January 1, 20X4, after four years of using the equipment, the company
decided to review the useful life of the equipment and its residual value.
Technical experts were consulted. According to them, the remaining useful
life of the equipment at January 1, 20X4, was seven years and its residual
value was $46,000. Compute the revised annual depreciation for the year
20X4 and future years.
30. Mediocre Inc. has entered into a very profitable fixed price contract for
constructing a high-rise building over a period of three years. It incurs the
following costs relating to the contract during the first year:

Cost of material = $2.5 million
Site labour costs = $2.0 million

227

Agreed administrative costs as per contract to be reimbursed by the customer

= $1 million
Depreciation of the plant used for the construction = $0.5 million
Marketing costs for selling apartments when they are ready = $1.0 million
Total estimated cost of the project = $18 million
Calculate the percentage of completion of this contract at the year-end.
Section B (Each question carries 5 marks)

Descriptive Questions:
31. Entity P has a foreign subsidiary Entity S1. The functional currencies of
Entities P and S1 are Rupee and US$ respectively. Both the entities follow
financial year as accounting year. Accounting Year of both the entities ends
on March 31. The presentation currency for Entity Ps separate as well
as consolidated financial statements is Rupee. Entity S1 owes to Entity P
US$1,000 towards a loan obtained some years back. Exchange rates as at
31 March 20X0 and 31 March 20X1 were US$ 1= ` 48 and US$ 1= ` 50
respectively.

You are required to calculate the exchange difference arises on the loan
a.
In the individual financial statements of Entity S1
b.
In the separate financial statements of Entity P
c.
In the consolidated financial statements of Entity P
Assume that the loan forms part of the entitys net investment in the foreign
operation.
32. Discuss the difference in accounting treatment for the gain on a bargain
purchase under IFRS 3 and Ind AS 103 Business Combination.
33. Entity A owns a hotel resort, which includes a casino in a separate building
that is part of the premises of the entire hotel resort. Its patrons would be
largely limited to tourists and non-resident visitors only.

The owner operates the hotel and other facilities on the hotel resorts, with
the exception of the casino, which can be sold or leased out under a finance
lease. The casino will be leased to an independent operator. Entity A has no
further involvement in the casino. The casino operator will not be prepared
to operate it without the existence of the hotel and other facilities. Entity A
228

wants to classify the Hotels and Casino as Property Plant and Equipment.
You need to comment on the accurate classification of Hotel and Casino.
34. An asset which cost ` 150 has a carrying amount of ` 100. Cumulative
depreciation for tax purposes is ` 90 and the tax rate is 25%.

You are required to calculate

the tax base of the asset
the amount that the entity should recognise as deferred tax liability
35. Rashin Ltd. supplies car parts to a major manufacturer. At the year end it had
inventories of parts and the carrying value was $1 million. However after the
year end the manufacturer changed the model of the cars and as a result
the inventories became obsolete (the part is not interchangeable between
models). Should Rashin Ltd. provide against the inventories at the year end?
36. During 20XI, 15 customers of Nespro Ltd., a food manufacturer suffered
from several food poisoning, allegedly from products that Nespro sold.
Management withdrew the product from the market as a precaution. During
the year a legal action was brought against the entity. At 31st Dec., 20XI, the
entitys lawyers advised the management that the manufacturer was more
likely than not to lose the court case. Management recognised a provision for
damages in the 31st December 20XI Balance sheet. At 31st December 20XII,
the entities lawyer advised management that the chance of losing the case
were now negligible as a result of a favourable decision made in a similar
case. Management had questioned how this change in the assessment of the
legal action should be reflected in the financial statement. You are asked to
advise the management how to reflect the situation in the financial statement.
37. A Ltd. the partly owned subsidiary of B Ltd., has made a right issue of new
equity shares pro rate to its parent B Ltd. and non-controlling share holders,
How should the proceeds be shown in the groups cash flow statement?
Section C
CASE STUDY 1
Aclass Ltd.s accounts department is preparing the first draft of the financial
statements for the year ended 31 March, 2014. The accounts staffs are not familiar
with the detailed requirements of all relevant financial reporting standards. You are
229

the financial consultant of Aclass Ltd. There are three issues on which they require
your advice and they had sent you a memorandum as shown below:
Issue 1
We delivered a quantity of components to a customer on 31 December, 2013. The
invoiced amount was $500,000.We expected to receive payment on 28 February
2014. We have received no cash as yet and on 30 April, 2014 our credit control
department were informed that the customer has major cash flow problems as a
result of the failure of one of its projects sometime in February 2014. They have
agreed to allow the customer until 31 March, 2015 to settle the debt, by which
time they are confident the cash flow problems will be resolved. We are little
concerned about the time were allowing here. I believe we would currently expect
annual interest of 6% on any money we lend out and we seem to be allowing this
customer an interest free payment period. It may be that none of this is relevant
anyway because we didnt find out about this problem until 30 April, 2014. I dont
know what accounting adjustments to make, if any.
Issue 2
On 1 April, 2013 we began to lease an office building on a 10 year operating lease.
For the first five years of the lease the annual lease rentals are set at $ 400,000,
payable in advance. For the second five years this annual rental is to increase to
$450,000, payable in advance. On 1 April, 2013 we carried out some alterations to
the property involving the erection of temporary partitions to create suitable office
space. The total cost of the alterations was $ 600,000. Under the terms of the
lease the building has to be returned to the owner in its original condition. There is
a file note which says that estimated cost of removing the partitions at the end of
the lease term is $300,000. The note says that the present value of this amount on
1 April 2013, using a relevant discount rate of 5% per annum, is $184,200.We dont
know why this information is relevant and how to account for these transactions.
Issue 3
On 1 April, 2011 we bought a large machine for $ 5 million. We originally estimated
a useful economic life of 5 years with no residual value. This estimate was used
in previous years and the carrying value of the asset in the financial statements
last year was $3 million. At 1 April, 2013 we looked at these estimates again and
now we think the original estimate was overoptimistic. The machine is unlikely to
generate economic benefits for us after 31 March, 2015 but on that date we could
expect a scrap value of $200,000. We havent charged enough depreciation in
230

2011/12 and 2012/13, but we are not sure how to reflect this should we change
our brought forward figures?
You are required to draft a reply to the questions raised by the Accounts
department. Your reply should include any additional explanations you consider
relevant. In all cases you should compute the impact on the reported earnings for
the years ended 31 March, 2014. For issues 1 and 3 you should also compute the
impact on reported earnings for the year ended 31 March, 2015.
CASE STUDY-1
You are given details of three transactions affecting the financial statements of
Arya Ltd.:
Transaction One
On 1 April, 2012 Arya Ltd. granted share options to 20 senior executives. The
options are due to vest on 31 March, 2015 provided the senior executives remain
with the company for that period. The number of options vesting to each director
depends on the cumulative profits over the three-year period from 1 April, 2012 to
31 March, 2015:

10,000 options per director if the cumulative profits are between $5 million
and $10 million.
15,000 options per director if the cumulative profits are more than $10 million.
On 1 April, 2012 and 31 March, 2013 the best estimate of the cumulative profits for
the three-year period ending on 31 March, 2015 was $8 million. However, following
very successful results in the year ended 31 March, 2014, the latest estimate of
the cumulative profits in the relevant three-year period is $14 million. On 1 April,
2012 it was estimated that all 20 senior executives would remain with Arya Ltd
for the three-year period, but on 31 December, 2012 one senior executive left
unexpectedly. None of the other executives have since left and none are expected
to leave before 31 March, 2015. A further condition for vesting of the options is that
the share price of Arya Ltd should be at least $12 on 31 March, 2015. The share
price of Arya Ltd. over the last two years has changed as follows:

$10 on 1 April, 2012.
$11.75 on 31 March, 2013.
231

$11.25 on 31 March, 2014.
On 1 April, 2012 the fair value of the share options granted by Arya Ltd. was $4.80
per option. This had increased to $5.50 by 31 March, 2013 and $6.50 by 31 March
2014.
You are required to
(a) Produce extracts, with supporting explanations, from the statements of
financial position at 31 March, 2013 and 2014 and from the statements of
comprehensive income for the years ended 31 March, 2013 and 2014 that
show how transaction one will be reflected in the financial statements of Arya
Ltd.
Note: Ignore deferred tax.
Transaction Two
On 1 April, 2012 Arya Ltd. purchased ten new machines for $12 million each. Each
machine had an overall estimated useful economic life of 10 years. The estimated
residual value of each machine was zero. Each machine will require a substantial
overhaul after five years in order to maintain its operating capacity and the cost of
such an overhaul at 1 April, 2012 prices was $3 million per machine. In the year
ended 31 March 2013 Arya Ltd charged total depreciation of $12 million on the
machines but the directors have subsequently realised that this may have been an
error that could have a material impact on the financial statements.
You are required to
(b) Produce extracts, with supporting explanations, from the statements of
comprehensive income for the years ended 31 March 2013 and 2014 and
from the statement of changes in equity for the year ended 31 March 2014
that show how transaction two will be reflected in the financial statements of
Arya Ltd.
Transaction Three
On 1 June, 2013 Arya Ltd. signed a contract to construct a machine for one of its
customers and to subsequently provide servicing facilities relating to the machine.
Arya Ltd. commenced construction on 1 July, 2013 and the construction took two
months to complete. Arya Ltd. incurred the following costs of construction:
232

Materials $1 million.
Other direct costs $2 million.
Allocated fixed production overheads $1 million. This allocation was made

using Arya Ltd.s normal overhead allocation model.
On 1 October, 2013 the machine was delivered to the customer. The customer
paid the full contract price of $7.5 million on 30 November, 2013. The servicing
and warranty facilities are for a three-year period from 1 October, 2013. This is not
considered to be an onerous contract at 31 March, 2014. In the six-month period
from 1 October, 2013 to 31 March, 2014 Arya Ltd. incurred costs of $200,000
relating to the servicing and this rate of expenditure is estimated to continue over
the remainder of the three-year period. Arya Ltd. would normally expect to earn a
profit margin of 20% on the provision of servicing facilities of this nature.
You are required to
(c) Produce extracts, with supporting explanations, from the statement of financial
position at 31 March, 2014 and from the statement of comprehensive income
for the year ended 31 March, 2014 that show how transaction three will be
reflected in the financial statements of Arya Ltd..
(b) Transaction Two
1. Statement of comprehensive income
Year ended 31 March

2011
2010
$000
$000
15,000
Depreciation operating expenses
15,000
2.
Statement of changes in equity

year ended 31 March, 2014
$000
Adjustment to retained earnings

brought forward

(3,000)
3. Explanation

IAS 16 Property, plant and equipment recognises that certain assets

need a major inspection or overhaul in order to continue to be used.
233

The cost of the overhaul is capitalised separately from the rest of the
asset and depreciated over the period to the next overhaul. Therefore,
the asset of $120 million should be split into two parts for depreciation
purposes.

$30 million of the total cost should be depreciated over five years and
the remaining balance of $90 million (120m 30m) depreciated over
10 years.
Last year Arya Ltd. should have applied component depreciation

to this asset and charged depreciation of $15 million (30m x 1/5 +
90m x 1/10). They only charged $12 million and so undercharged
depreciation by $3 million. The impact of this error will not affect the
statement of comprehensive income for the year ended 31 March 2014.
It will instead be included in the statement of changes in equity as a
retrospective adjustment to opening retained earnings. The depreciation
charge in the statement of comprehensive income for the year ended
31 March, 2014 will be $15 million.
(c) Transaction three

1.
Statement of financial position

as at 31 March, 2014

$000

Non-current liabilities
deferred service revenue
750
Current liabilities
500
2.
Statement of comprehensive income

year ended 31 March, 2014

$000
Revenue from sale of machine
6,000
Service revenue
250
Cost of sale of the machine
(4,000)
Cost of service element
(200)
2,050
234

3. Explanation

The total revenue arising on the contract is split into a sales element
and a service element. The expected total costs of the service element
are $1,200,000 (200,000 x 2 x 3). Therefore if a normal gross margin
on servicing contracts is 20%, the revenue that is allocated to the
servicing element is $1,500,000 (1,200,000 x 100/80). This revenue of
$1,500,000 is recognised evenly over the three-year servicing period,
with the balance shown as deferred income.
$250,000 (500 x 6/36) of the service revenue is recognised in the

six months to 31 March, 2014.
Of the deferred income of $1,250,000 (1,500,000 250,000),

$500,000 (1,500,000 x 12/36) is shown in current liabilities and
$750,000 (1,250,000 500,000) in non-current liabilities.
235

ANSWERS
Section A
State whether the following statements are true or false.
1.
(True) IFRS 1.10(b) and IAS 38
2.
(True) [IFRS 1.11]
3.
(False) An entity, in its first IFRS financial statements, has the choice between
applying an existing and currently effective IFRS or applying early a new or
revised IFRS that is not yet mandatorily effective, provided that the new or
revised IFRS permits early application.
The IASB issued Annual Improvements to IFRSs 20112013 Cycle on 12

December 2013, amending the pronouncement.
4.
(False) IAS 7 para 28 This amount is to be presented separately from cash

flows from operating, investing and financing activities and includes the
differences, if any, had those cash flows been reported at end of period
exchange rates.
(False) The MI on acquisition is calculated as the minoritys proportion of the

net fair value of the identifiable assets, liabilities and contingent liabilities that
satisfy the recognition criteria at the acquisition date (IFRS-3 para 40 and IAS
27 para 22).
(True) IAS 18
(True) Scope of IFRS 2
(False) Assets classified as held for sale, and the assets and liabilities
included within a disposal group classified as held for sale, must be
presented separately on the face of the statement of financial position. [IFRS
5.38 Non-current Assets Held for Sale and Discontinued Operations]
9.
(True) [IFRS 8.15 Operating Segments]
10. (True) [IFRS 13:77]

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Fill in the blanks
11. IFRIC 1
12. Principal [IFRS 13:24]
13. 120 (Calculated as 20% of the fair value of the net assets of 600.)IFRS-3
Business Combinations [IFRS 3.19]
14. Joint operation [IFRS 11:15]
15. SIC-31
16. $4200000 (Cost of plant $ 2500000+ Handling cost $ 200000+ Site
preparation cost $ 600000 + Consultant used for advice on the acquisition of
the plant $ 600000 + Estimated dismantling cost $300000)
17. $100 [IAS 12.5] the tax base of an asset or liability is the amount attributed
to that asset or liability for tax purposes.
18. Nil [IAS 12.5] the tax base of an asset or liability is the amount attributed to
that asset or liability for tax purposes.
19 $50 ($60 $10). Net realisable value is 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 (IAS 2).
20. Revaluation Reserve Account. [IAS 36- Impairment of Assets.]
Calculation based
21. $ 510850 (Items (a), (b), (c), (d), (e), and (g) are permitted to be included in
cost of inventory under IAS 2)

Salaries of accounting department, sales commission, and after-sales

warranty costs are not considered cost of inventory under IAS 2 and thus
are not allowed to be included in cost of inventory.
22. $15,000 [(30% of the temporary difference of $50,000). The carrying value of
the plant and equipment is $750,000 and the tax written down value will be
$700,000, thus giving a taxable temporary difference of $50,000.] IAS-12
237

23. Zero. As Bespoke Inc. has not manufactured this type of machine earlier, it is
not in a position to reliably measure the cost of rectification of any faults that
may materialize. Consequently, the cost to Bespoke Inc. of the transaction
cannot be reliably measured and no sale should be recognized. [IAS 18.14]
24. Since these homes are qualifying assets, as per IAS 23, borrowing costs
can be capitalised and are computed thus:
a.
Interest on $7 million bond = $7,000,000 12% = $840,000
b.
Amortization of issuance costs of the bond (using the straight-line

method) = [(0.015 $7,000,000 ) / 3.5 years] = $30,000
Total borrowing to be capitalised = $840,000 + $30,000 = $870,000

25 $2 million [10% of ($10 + $15) (5% of $10)]
26. The benefit of the future reorganisation should not be taken into account in
calculating value-in-use. Therefore, the net assets of the business segment
will be impaired by $2 million because the value-in-use ($18 million) is lower
than the carrying value ($20 million). The value-in-use can be used as the
recoverable amount as there is no active market for the sale of the business
segment.
27 $17 million [$18 million Cost of disposal $1 million] IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations
28 The net realisable value is the subsequent sale price, $40, less any cost
incurred to bring the good to its salable condition, $15. Thus, NRV= $40
$15 = $25 per pack. The loss (inventory write-down) per pack is the
difference between cost and net realizable value: $50 $25= $25 per pack.)
IAS 2 Inventories
29 Net book value at January 1, 20X4:

= $400,000 ($36,000 4 years)
= $256,000
Revised annual depreciation for 20 X 4 and future years:
= ($256,000 $46,000) / 7 = $30,000

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Revised annual depreciation = (Net book value at January 1, 20 X 4

revised residual value) / remaining useful life [IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors].
30. 50% (= 6.0/18.0) Contract cost incurred

Cost of material = $2.5 million
Site labour costs = $2.0 million
Agreed administrative costs as per contract to be reimbursed by the customer

= $1 million
Depreciation of the plant used for the construction = $0.5 million
As per IAS 11 Construction Contracts the stage of completion of a contract

can be determined in a variety of ways - including the proportion that contract
costs incurred for work performed to date bear to the estimated total contract
costs, surveys of work performed, or completion of a physical proportion of
the contract work. [IAS 11.30]
Section B
Descriptive Questions:
31. Ind AS 21 paragraph 33 The Effects of Changes in Foreign Exchange Rates

In the above situation, in the individual financial statements of Entity S1, no

exchange difference arises on the loan since it is denominated in its own
functional currency.
In the separate financial statements of Entity P, an exchange gain of

` 2,000 arises as shown below:
Loan asset of US$1,000 translated `
@ exchange rate as at 31 March 20X1 (` 50 per US$) 50,000
@ exchange rate as at 31 March 20X0 (` 48 per US$) 48,000
Exchange gain 2,000
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In the consolidated financial statements of Entity P, the exchange gain of

` 2,000 will be recognised in other comprehensive income and accumulated
in equity.
32 IFRS 3 requires any gain arising from a bargain purchase (.e. where the cost
of acquiring a business is less than the fair value of the identifiable assets
and liabilities acquired) except arising in common control transactions to be
recognised in profit or loss. IND AS 103 requires this gain to be recognised in
other comprehensive income and accumulated in equity as a capital reserve,
unless there is no clear evidence for the underlying reason for classification
of the business combination as a bargain purchase , in which case it should
be recognised directly in equity as a capital reserve.
33 In this scenario, management should classify the hotel and other facilities
as property plant and equipment and the casino as Investment Property as
because the casino can be sold separately or leased out under a finance
lease. [As explained in IAS 40 Investment Property Para 10.]
34 The tax base of the asset is ` 60 (cost of ` 150 less cumulative tax
depreciation of ` 90). To recover the carrying amount of ` 100, the entity
must earn taxable income of ` 100, but will only be able to deduct tax
depreciation of ` 60. Consequently, the entity will pay income taxes of
` 10 (` 40 at 25%) when it recovers the carrying amount of the asset. The
difference between the carrying amount of ` 100 and the tax base of ` 60
is a taxable temporary difference of ` 40. Therefore, the entity recognises
a deferred tax liability of ` 10 (` 40 at 25%) representing the income taxes
that it will pay when it recovers the carrying amount of the asset. Ind AS 12
[Para 15 & 16] Income Taxes.
35 IAS 10, Events after the Balance Sheet date gives examples of events that
require an adjustment to amounts recognised at the B/S date. One such e.g.
given in Para 9(b) of IAS 10 refers to the sale of inventories after the B/S
date as giving evidence of the net realizable value at the B/S date.

IAS-2 states in Para 30 estimates of net realisable value (NRV) are based on
the most reliable evidence available at the time the estimates are made, of
the amount the inventories are expected to realise. This raises the question
of whether the condition existed at the year end. However it is likely that the
manufacturer would have been considering the change over a long period
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even if it did not announce the change until after the year end. In addition the
high inventory levels may have indicated slow demand from the manufacturer.
This is confirmed by the post Balance Sheet announcement confirming the
oversupply at the year end. The condition (the likelihood that the models
would change & the resultant potential loss) is likely to have existed at
the year end and therefore the post B/S confirmation of the change of the
model & the resultant loss should be reflected in the carrying value of the
inventories at the year end.
36 Management should reverse the provision & recognise the reversal in the
income statement within the same line item in which the original expenditure
was charged. Management should also disclose the litigation as a contingent
liability, unless the possibility of an outflow of economic benefits is regarded
as remote. The disclosure should explain the reasons for the change in the
assessment of the legal action & amount of the reversal. (IAS 8- Provisions
& Contingencies Para 39)
37 Under IAS 7 in the subsidiarys own cash flow statement, the whole of
the proceeds from the right issue should be shown under the financing
section, which includes receipts from issuing shares. In the groups cash
flow statement, the cash received from issuing shares to the parent will
be eliminated on consolidation, leaving the receipt from the non controlling
shareholders as a cash inflow to the group. Since there is no change in
the groups interest in the subsidiary, this cash inflow should also be shown
under financing activity.
Section C
CASE STUDY-1
Issue 1
We do need to take account of the information regarding the financial difficulties of
the customer because these arose prior to 31 March, 2014. IAS 10 Events after
the reporting date would classify such an event as adjusting since it provides
additional evidence of conditions existing at the reporting date. In this case the
additional information relates to evidence of impairment of a financial asset.
IAS 39 Financial instruments: recognition and measurement requires that
financial assets be reviewed at each reporting date for evidence of impairment.
Such evidence exists here because although the customer is expected to pay the
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amount due the payment date has been deferred. In such circumstances IAS 39
requires that the asset be re-measured at the present value of the expected future
receipt, discounted (in the case of a trade receivable) at a current commercial rate
of interest. Therefore in the financial statements for the year ended 31 March 2014
asset should be measured at $471,698 ($500,000/1.06) and an impairment loss
of $28,302 ($500,000 - $471,698) recognised in profit and loss. In the year ended
31 March 2015 interest income of $28,302 ($471,698 x 6%) should be recognised
in profit and loss.
Issue 2
The lease is an operating lease so the rentals are charged as an expense in
the statement of comprehensive income. IAS 17 Leases states that this
charge should be on a straight line basis unless another pattern is clearly more
appropriate. The total lease rentals are $4,250,000 ($400,000 x 5 + $450,000
x 5). Therefore the charge to the income statement each year will be $425,000
(4,250,000 x 1/10). Since the rental actually paid in the year to 31 March 2013
is $400,000 there will be an accrual of $25,000 ($425,000 $400,000) in the
statement of financial position as at 31 March 2013. Even though the lease is
operating the lease improvements are capitalised as a non-current asset with
a useful economic life of 10 years. This means that depreciation of $60,000
($600,000 x 1/10) will be required and the closing non-current assets balance
relating to the improvements at 31 March 2013 will be $540,000 ($600,000
$60,000). Under the principles of IAS 37 Provisions, contingent liabilities and
contingent assets the carrying out of alterations to the leased asset creates an
obligating event to restore the asset at the end of the lease and so a provision
must be recognised. The amount of the provision is the present value of the
expected future payments, which is $184,200. This expenditure provides access to
future economic benefits so it is capitalised along with the alterations themselves.
This creates additional depreciation of $18,420 ($184,200 x 1/10) and an addition
to non-current assets at 31 March 2013 of $165,780 ($184,200 $18,420). As
the date for restoration approaches the discount unwinds and this is reflected by
a finance cost in the statement of comprehensive income. For the year ended 31
March 2013 this cost is $9,210 ($184,200 x 5%). The closing provision will be
$193,410 ($184,200 + $9,210).
Issue 3
The calculation of depreciation of a non-current asset involves the making of a
number of accounting estimates. In this case two of the estimates, the useful
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economic life of the asset and the expected residual value, have changed. IAS
8 Accounting policies, changes in accounting estimates and errors states that
when accounting estimates change the change should be made prospectively.
Brought forward numbers are not adjusted. In this case the future depreciation
required on the non-current asset from 1 April 2013 is $2,800,000 ($3,000,000
$200,000). This should be charged to the income statement the remaining expected
future useful life of the asset from 1 April 2013, in this case two years. Therefore
depreciation of $1,400,000 will be charged in the year ended 31 March 2014 and
2015, unless the accounting estimates change again next year.
CASE STUDY-1
Ans.
4(a) Transaction One
1. Statement of financial position As at 31 March 2014
2013
$000
$000
In equity 912 304

2.

Year ending 31 March
2014
2013
$000
$000

In operating expenses 608 304

3. Explanation

The total expected cost at 31 March 2013 = $912,000 (19 x 10,000 x

$4.8)
1/3 is recognised in equity as this is an equity settled share based

payment.
The total expected cost at 31 March 2014 = $1,368,000 (19 x 15,000

x $4.8)
2/3 is recognised in equity at 31 March 2014. Amounts can be shown

as a separate component of equity or credited to retained earnings
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The vesting condition relating to share price is ignored in the

estimation of the total expected cost as it is one of the factors that is
used to compute the fair value of the share option at the grant date
i.e. it is a market related vesting condition
The cost recognised in 2013 is the cost to date since this is the first
year of the vesting period
The cost recognised in 2014 is the difference between cumulative

costs carried and brought forward
(b) Transaction Two

1. Statement of comprehensive income

Year ended 31 March
2011
2010
$000
$000
Depreciation operating expenses
15,000
15,000
2. Statement of changes in equity

year ended 31 March
2014
$000
Adjustment to retained earnings brought forward (3,000)

3. Explanation

IAS 16 Property, plant and equipment recognises that certain assets

need a major inspection or overhaul in order to continue to be used.
The cost of the overhaul is capitalised separately from the rest of the
asset and depreciated over the period to the next overhaul. Therefore,
the asset of $120 million should be split into two parts for depreciation
purposes.
$30 million of the total cost should be depreciated over five years and
the remaining balance of $90 million (120m 30m) depreciated over
10 years.
Last year Arya Ltd. should have applied component depreciation

to this asset and charged depreciation of $15 million (30m x 1/5 +
90m x 1/10). They only charged $12 million and so undercharged
depreciation by $3 million. The impact of this error will not affect the
statement of comprehensive income for the year ended 31 March 2014.
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It will instead be included in the statement of changes in equity as a
retrospective adjustment to opening retained earnings. The depreciation
charge in the statement of comprehensive income for the year ended
31 March 2014 will be $15 million.
(c) Transaction three
1.
Statement of financial position

as at 31 March 2014

$000
Non-current liabilities
750
Current liabilities
500
2.

year ended 31 March 2014

$000
Revenue from sale of machine
6,000
Service revenue
250
Cost of sale of the machine
(4,000)
Cost of service element
(200)
2,050
3. Explanation

The total revenue arising on the contract is split into a sales element
and a service element. The expected total costs of the service element
are $1,200,000 (200,000 x 2 x 3). Therefore if a normal gross margin
on servicing contracts is 20%, the revenue that is allocated to the
servicing element is $1,500,000 (1,200,000 x 100/80). This revenue of
$1,500,000 is recognised evenly over the three-year servicing period,
with the balance shown as deferred income.
$250,000 (500 x 6/36) of the service revenue is recognised in the six

months to 31 March 2014.
Of the deferred income of $1,250,000 (1,500,000 250,000), $500,000

(1,500,000 x 12/36) is shown in current liabilities and $750,000
(1,250,000 500,000) in non-current liabilities.
245
246

Full Marks : 100
Time: 3 hours
Section A Objective type questions True or False

1.
An entitys first IFRS financial statements shall include at least:

a)
three statements of financial position, two statements of profit or loss

and other comprehensive income, two separate statements of profit or
loss (if presented), two statements of cash flows and two statements of
changes in equity and related notes, including comparative information
for all statements presented.
b)
two statements of financial position, two statements of profit or loss

loss (if presented), two statements of cash flows and two statements of
c)
one statement of financial position, three statements of profit or loss

and other comprehensive income, three separate statements of profit or
loss (if presented), one statement of cash flows and two statements of
d)
two statements of financial position, two statements of profit or loss

loss (if presented), two statements of cash flows and one statement of
Alternative choices:1.
Only a is true
2.
Only b is true
247

3. Only c is true
4.
2.
None of the above
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar

Liabilities requires specified changes in a decommissioning, restoration or
similar liability to be added to or deducted from the cost of the asset to which
it relates. A first-time adopter need not comply with these requirements for
changes in such liabilities that occurred before the date of transition to IFRSs.
If a first-time adopter uses this exemption, it shall:
(a) measure the liability as at the date of transition to IFRSs in accordance
with IAS 37;
(b) to the extent that the liability is within the scope of IFRIC 1, estimate
the amount that would have been included in the cost of the related
asset when the liability first arose, by discounting the liability to that
date using its best estimate of the historical risk-adjusted discount
rate(s) that would have applied for that liability over the intervening
period;
(c) calculate the accumulated depreciation on that amount, as at the date
of transition to IFRSs, on the basis of the current estimate of the useful
life of the asset, using the depreciation policy adopted by the entity in
accordance with IFRSs.
(d) recognise directly in retained earnings any difference in the carrying
value of the asset
Alternative choices:-
3.
1.
Only a, b are true
2.
Only a, b, c are true
3.
Only d is true
4.
Only b, c are true
Under IAS2 Inventories, the specific identification cost formula method is used
for inventory valuation in the following circumstances:a)
the cost of inventories of items that are not ordinarily interchangeable
b)
goods or services produced and segregated for specific projects

248

c)
when there are large numbers of items of inventory that are ordinarily
interchangeable
d)
used for determining the cost of inventories other than those measured
under the FIFO, LIFO or the weighted average method
4.
1.
Only b, c are true
2.
Only a, c are true
3.
Only c, d are true
4.
Only a, b are true
IAS1 applies to the following financial statements:a)
Condensed interim financial statements prepared in accordance with

IAS34 Interim Financial Reporting
b)
General purpose financial statements in accordance with IFRSs
c)
consolidated financial statements and separate financial statements
d)
prepared by not-for-profit entities in the public / private sector
5.
1.
2.
Only a, c, d are true
3.
All are true
4.
Only b, c, d are true
Notes to financial statements contain information:a)
in addition to that presented in the statement of financial position,

statement of comprehensive income, separate income statement (if
presented), statement of changes in equity and statement of cash
flows.
b)
in the form of narrative descriptions or disaggregations of items

presented in those statements
c)
about items that do not qualify for recognition in those statements.
d)
of significant accounting policies and other explanatory information

249

6.
1.
2.
3.
All are true
4.
In determining the carrying amount of investment property under the fair value
model in IAS40, an entity should:(a) not recognise separately as property, plant and equipments,
equipments such as lifts or air-conditioning as they are often an integral
part of a building and is generally included in the fair value of the
investment property,.
(b) if an office is leased on a furnished basis, the fair value of the office
generally excludes the fair value of the furniture, even though the
rental income relates to the furnished office. Therefore, when furniture
is included in the fair value of investment property, an entity should
recognise that furniture as a separate asset.
(c) the fair value of investment property excludes prepaid or accrued
operating lease income, because the entity recognises it as a separate
liability or asset.
(d) the fair value of investment property held under a lease reflects
expected cash flows (including contingent rent that is expected to
become payable).
7.
1.
2.
3.
All are true
4.
IAS 23 Borrowing costs is mandatorily applicable to borrowing costs directly

attributable to the acquisition, construction or production of:
(a) a qualifying asset measured at fair value, for example a biological
asset; or
250

(b) inventories that are manufactured, or otherwise produced, in large
quantities on a repetitive basis.
(c) manufacturing plants
(d) intangible assets
8.
1.
2.
3.
All are true
4.
Only c, d are true
Which of the following statements relating to IAS41 Agriculture are true:a)
Once the fair value of such a biological asset becomes reliably

measurable, an entity should measure it at its fair value less costs to
sell.
b)
Biological assets that are physically attached to land (for example, trees
in a plantation forest) are measured at their fair value less costs to sell
separately from the land
c)
IAS 41 provides limited guidance relating to processing of agricultural

produce after harvest; for example, processing grapes into wine and
wool into yarn.
d)
IAS 41 requires that a change in fair value less costs to sell of a

biological asset be included in profit or loss for the period in which it
arises.
2.
3.
Only a, b, d are true
4.
Only c, d are true
251

9.
Which of the following statements relating to disclosures under IAS24 Related

parties are true:a)
The Standard requires disclosure of the compensation of key

management personnel who are working in an executive capacity only
b)
The measurement of transactions between related parties shall be at

fair value
c)
parties having joint control over the reporting entity and joint ventures
in which the reporting entity is a venturer are covered by this standard
d)
two venturers are not related parties simply because they share joint
control over a joint venture
2.
3.
4.
Only c, d are true
10. IAS 12 Deferred taxes:

(a) prohibits the recognition of deferred tax liabilities arising from the initial
recognition of goodwill,
(b) states that the recognition of deferred tax assets and liabilities in a
business combination affects the amount of goodwill arising in that
business combination or the amount of the bargain purchase gain
recognised,
(c) states that temporary differences arise when goodwill arises in a
business combination
(d) states that when the carrying amount of an asset is increased to fair
value at the acquisition date but the tax base of the asset remains at
cost to the previous owner, a taxable temporary difference arises which
results in a deferred tax liability. The resulting deferred tax liability
affects goodwill
252

2.
All are true
3.
4.
Only c, d are true
Section A Objective type questions Fill in the blanks

11. If an asset acquired, or liability assumed, in a past business combination was
not recognised in accordance with previous GAAP, ____________________
____________________
Options are:a)
It does not have a deemed cost of zero in the opening IFRS statement
of financial position
b)
The acquirer shall recognise and measure it in its consolidated

statement of financial position on the basis that IFRSs would require in
the statement of financial position of the acquiree.
c)
It shall not be taken into account in the opening IFRS statement of

financial position
d)
It shall not be recognized in opening IFRS statement of financial

position unless required by another standard.
Only a is true
2.
Only a, c are true
3.
Only a, b are true
4.
Only c, d are true
12. The following are mandatory disclosure requirements under IAS2 Inventories
___________________________
Option are:a)
carrying amount of inventories carried at fair value less costs to sell

253

b)
the amount of any write down of inventories recognized as an expense

in the period
c)
the amount of any inventories carried at net realisable value
d)
the amount of any inventories carried on LIFO method of valuation
Only a is true
2.
Only a, b are true
3.
Only c, d are true
4.
Only d is true
13. In accordance with IAS41 Agriculture, inventories comprising agricultural

produce that an entity has harvested from its biological assets are measured
on initial recognition at their fair value less costs to sell at the point of
harvest. This is the ______________________________________
Option are:a)
Net realisable value of the inventories at that date for application of

IAS2
b)
Cost of the inventories at that date for application of IAS2
c)
Net selling price of the inventories for application of IAS2
d)
Valuation of the inventories for application of IAS2
14.
1.
Only a is true
2.
Only b is true
3.
Only c is true
4.
Only d is true
As per IAS 1, the statement of changes in equity is required to disclose

___________________
Option are:a)
changes in equity (net assets) of an entity during a period arising from

transactions with owners in their capacity as owners
254

b)
all non-owner changes in equity separately from the owner related

changes in equity
c)
dividends recognized as distributions to owners and related amounts

per share
d)
contingent assets due from the owners where there is reasonable

certainty of realisation
Only a is true
2.
Only a, b are true
3.
Only a, c are true
4.
15. The fair value of investment property _______________________________

Option are:a)
does not reflect future capital expenditure that will improve or enhance
the property and does not reflect the related future benefits from this
future expenditure.
b)
reflects future capital expenditure that will improve or enhance the

property and reflects the related future benefits from this future
expenditure.
c)
is determined based on the fair value measurement principles of IAS40

and not IFRS13
d)
None of the above
Only a is true
2.
Only d is true
3.
Only a, c are true
4.
255

16. An entity may pay insurance premiums to fund a post-employment benefit
plan. The entity shall treat such a plan as a defined contribution plan
unless_______________________________________
Option are:a)
the entity will have a legal or constructive obligation to pay the

employee benefits directly when they fall due;
b)
the entity will have a legal or constructive obligation to pay further

amounts if the insurer does not pay all future employee benefits relating
to employee service in the current and prior periods.
c)
the entity does not retain a legal or constructive obligation to pay the
employee benefits directly when they fall due
d)
the does not retain a legal or constructive obligation to pay further

amounts if the insurer does not pay all future employee benefits relating
to employee service in the current and prior periods.
Only a is true
2.
Only a, b are true
3.
Only c, d are true
4.
17. IAS37 Provisions, Contingent Liabilities and Contingent Assets defines a

restructuring as a programme that is planned and controlled by management,
and materially changes either______________________________
Option are:(a) the scope of a business undertaken by an entity;
(b) the manner in which that business is conducted.
(c) business model used to carry out the business
(d) structure of the management oversight and corporate governance
processes
Only a is true
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2.
3.
Only c, d are true
4.
Only a, b are true
18. For equity-settled share-based payment transactions, IFRS 2 requires an

entity to measure the goods or services received, and the corresponding
increase in equity, _________________
Option are:a)
directly, at the fair value of the goods or services (other than employee
services) received, unless that fair value cannot be estimated reliably.
b)
indirectly, by reference to the fair value of the equity instruments

granted, if the entity cannot estimate reliably the fair value of the goods
or services (other than employee services) received
c)
at the fair value of the equity instruments granted, because it is typically

not possible to estimate reliably the fair value of employee services
received particularly in case of transactions with employees and others
providing similar services
d)
at fair value, however, no amount is recognised for goods or services

received if the equity instruments granted do not vest because of failure
to satisfy a vesting condition (other than a market condition).
Only a is true
2.
3.
All are true
4.
Correct answer:- (3)

19. As per IAS 21 The Effects of Changes in Foreign Exchange Rates functional
currency is the currency _______________________________________
Option are:a)
of the primary economic environment in which the entity operates.
b)
in which financial statements are presented

257

c)
of the economy that determines the pricing of transactions, as opposed

to the currency in which transactions are denominated
d)
in which the consolidated financial statements are presented by the

parent
Only a is true
2.
3.
All are true
4.
Only a, c are true
20. IAS 27 on Consolidated financial statements provides that when a parent

loses control of a subsidiary ______________________________________
_________________
Option are:a)
it derecognises the assets and liabilities and related equity components

of the former subsidiary.
b)
any investment retained in the former subsidiary is measured at its fair

value at the date when control is lost.
c)
it recognizes the fair value of the consideration received, if any, from

the transaction, event or circumstances that resulted in the loss of
control
d)
it derecognises the carrying amount of any non-controlling interests in

the former subsidiary at the date when control is lost
Only a is true
2.
3.
All are true
4.
Only a, c are true
258

Section A Objective type questions Calculation based
21. A Ltd. imports raw materials for the manufacture of plastic buckets. The
import invoice dated 10th February 2014 was for USD 1 million. The
exchange rate on 10th February 2014 was ` 66 = 1 USD. The exchange
rate on 31st March 2014 when the invoice falls due for payment is ` 59.50
= 1 USD. The purchase cost of the inventories of raw materials in hand as
at 10th February 2014 was ` 66 MINR. 50% of these inventories are yet
to be consumed as at 31st March 2014. The exchange gain attributable to
inventories as at 31st March 2014 that should be adjusted in the carrying
amount of inventories as at 31st March 2013 should be:a)
33 M INR
b)
26.5 M INR
c)
2.25 M INR
d)
None of the above
Only a is true
2.
Only c is true
3.
Only d is true
4.
Only b is true
22. Q Ltd. is a service provider engaged in advertising business. There are

certain incomplete jobs as at the reporting dates. Based on the information
provided below, determine the carrying value of inventory under IAS2:
Costs of staff time involved in production of incomplete advertisement films:` 950,000
Costs of supervisors deputed on the project:- ` 1,175,000
Costs of directly attributable overheads incurred for the jobs:- ` 95,000
Costs of back office staff providing accounting services to the jobs:` 75,000
Costs of marketing staff responsible for sales promotional support to the jobs
on hand:- ` 200,000
259

Profit margin attributable to the jobs on hand:- ` 500,000
The carrying value of the inventory of incomplete jobs on hand of Q Ltd. will
be:a)
` 2,295,000
b)
` 2,220,000
c)
` 2,495,000
d)
` 2,525000
Only a is true
2.
Only b is true
3.
Only c is true
4.
Only d is true
23. A Ltd. acquired the entire business of B Ltd. on 1.4.2013. Among the assets
acquired were the property plant and equipment of B Ltd. The carrying
value of the property plant and equipments in the books of B Ltd. was
` 15,00,00,000. At the date of acquisition, A ltd engages a valuer who
determines the entity-specific value as defined in IAS16 at ` 17,00,00,000.
In the valuation report, the valuer also states that the fair value of the
said property, plant and equipment is ` 18,00,00,000. Having obtained the
valuation report, the accountant of A Ltd wants your guidance on the value
at which the property, plant and equipment should be recognized at the
acquisition date.

The carrying value of the property, plant and equipment recognized in the
financial statements on 1.4.2013 will be:Alternative choices:1.
` 17,00,00,000 as mandated by IAS-16
2.
` 18,00,00,000 as mandated by IAS-16 and IFRS-13
3.
` 18,00,00,000 as mandated by IFRS-3 and IFRS-13
4.
` 15,00,00,000 as per the cost model in IAS-16
260

24. X Ltd has a good cash position and has therefore decided to buy back some
of the shares from the market so as to improve the Earnings per share. X
Ltd follows the calendar year as its reporting period:Date
Particulars
Jan 1, Balance at
2013 beginning of
the year
May
Issue of new
31,
shares for cash
2013
Dec 1, Purchase of
2013 treasury shares
for cash
Dec
Balance at year
31,
end
2013

Shares issued
2000
Treasury
shares
400
Shares
outstanding
1,600
800
2,400
250
2,150
2800
650
2,150
The weighted average number of shares outstanding during the year as per
IAS 33 is :Alternative choices:1.
2,046 shares
2.
3,633 shares
3.
2150 shares
4.
None of the above
25. A Ltd. got the renovation of office carried out by B Ltd. In turn, it gave 200
jackets and ` 5,000 to Y Ltd. as full payment for the renovation work. Y
Ltd. would normally charge ` 55,000 for the work done. X Ltd. usually sells
T-shirts at ` 250 each. How will A ltd and B ltd account for the transactions
under IAS18 Revenue ?
A Ltd. will recognize revenue from sale of goods at ` 50,000. B ltd will
recognize revenue of ` 55,000
261

2.
The transaction lacks commercial substance. No revenue is recognized
3.
A Ltd. and B Ltd. will recognize revenue from sale of goods at ` 55,000
4.
None of the above
26. Builder Limited has entered into a contract with Customer Limited for
construction of a multi storey building estimated cost of ` 55 crores and
revenue of ` 70 crores. At the end of year 1, Builder Limited has incurred
` 16 crores. However, Customer Limited has been invoiced for ` 18 crores.
The payment is due in first quarter of year 2. Determine the cost and
revenues to be recognised based on percentage completion method under
IAS11 Construction contracts ?
Builder Ltd. will recognise revenue of ` 18 crores and costs of

` 16 crores
2.
Builder Ltd. will recognise revenue of ` 20.36 crores and costs of

` 16 crores
3.
Builder Ltd. will recognize revenue of ` 20.36 crores and costs of

` 4.65 crores
4.
None of the above
27. Info Software Ltd. has reported a net profit after tax of 350 crores in the
financial year 2013-14. According to its profit -sharing & bonus plan, it
distributes and pays 2.5% as its portion of profit to its employees if they
complete 1 year with the organisation. As per the terms of this profit sharing
plan for retention of employees, it has an obligation to pay if the employees
complete the specified period with the organisation. Info Software ltd
estimated that due to turnover in the organisation, the estimated pay-out
would be around 1.5%. Compute the liability and expense of the company
under this plan in 2013-14 as per IAS19 ?.
` 5.25 crores being 1.5% of ` 350 crores based on estimated liability
2.
` 8.75 crores being 2.5% of ` 350 crores based on principle of

conservatism
262

3.
` 5.25 crores after discounting the liability to its present value
4.
` 8.75 crores after discounting the liability to its present value
28. Holding company Ltd. sells inventory to its subsidiary for ` 500 crores for
further sale in specified markets. The cost to Holding company Ltd is ` 450
crores. This inventory is lying unsold as at the reporting date in the books of
Subsidiary ltd. The carrying values of inventories in the Statement of financial
positions of Holding company Ltd. and its subsidiary are ` 600 crores and
` 700 crores respectively. Subsidiary also purchases the same item of
inventory from other unrelated suppliers. The above transaction was the
only related party transaction during the reporting period. The carrying value
of inventory in the consolidated statement of financial position compiled by
Holding company Ltd will be:Alternative choices:1.
` 1300 crores
2.
` 1250 crores
3.
None of the above
4.
` 950 crores
29. A Ltd. has been following the cost model for measuring its Property, plant
and equipment. In the current year it decided to change to the Revaluation
model. As a result of the revaluation exercise it restated the carrying value
of the entire class of property, plant and equipment from Rs. 16 crores to Rs.
20 crores. However, for tax purposes, depreciation will not be admissible on
the appreciated gross block but only on the original gross block of the PPE.
Assuming a corporate tax rate of 30%, the entity should recognise:Alternative choices:1.
` 1.2 crores deferred tax asset
2.
` 1.2 crores deferred tax liability
3.
None of the above
4.
` 6 crores deferred tax liability
30. Assume that the proceeds received on the issue of a callable convertible
debenture are ` 60. The value of a similar debenture without a call or
equity conversion option is ` 59. Based on an option pricing model, it is
263

determined that the value to the entity of the embedded call feature in a
similar debenture without an equity conversion option is ` 3. Assuming both
the options are be classified as equity.

In this case, the value allocated to the liability component and the equity
components will be:Alternative choices:1.
` 56 and ` 4 respectively
2.
3.
4.
None of the above
Section B Descriptive questions

31. Describe briefly the re-classification provisions contained in IFRS7 Disclosure
and IFRS9 Financial instruments in so far as they relate to financial assets
and financial liabilities?
32. Describe the provisions relating to initial direct costs from the standpoint of
the lessor as given in IAS 17 Leases:33. An entity is required to assess goodwill for impairment at the end of each
reporting period, to assess investments in equity instruments and in financial
assets carried at cost for impairment at the end of each reporting period and,
if required, to recognise an impairment loss at that date in accordance with
IAS 36 and IAS 39. However, at the end of a subsequent reporting period,
conditions may have so changed that the impairment loss would have been
reduced or avoided had the impairment assessment been made only at that
date. Should such impairment losses ever be reversed?
34. C Ltd. has just commissioned a nuclear power plant in a backward area and
has availed of tax exemptions offered by the government for setting up the
plant in that area. C Ltd. has teamed up with other operators in the nuclear
power sector to set up a multi contributor decommissioning, restoration
and environmental rehabilitation fund. The fund is separately administered by
independent trustees.
35. Describe the provisions contained in IFRS relating to accounting for loans
received from the Government at below-market rate of interest?
264

36. How does fair value of an investment property differ from value in use as
defined in IAS 36 Impairment of Assets?
37. What is the core principle of IFRS 8 Operating Segments. What is the
relevance of this core principle in the context of IFRS 8?
1.
You an expert in implementation of IFRS and have been retained by a

large Indian Company to advise on how certain complex issues relating to
Fair valuation should be dealt with for compliance with IFRS 13 Fair value
measurement. In particular you have been asked to advise on the following
matters:a)
The company needs to install transformers to be used for power

generation in its captive power plants. This being a huge asset, it
requires installation at the location before it can be utilised. Should
the measurement of fair value of the transformers consider these
installation costs ?
b)
The company had issued debentures for raising money for financing
its long term capital requirements. The offer document containing the
terms and conditions of issue of debentures contains restrictions on
transfer. Under the SEBI rules, these debentures can only be sold (both
initially and subsequently) to qualified institutional buyers (or accredited
investors). What would be the impact of these restrictions on the fair
value measurement?
c)
In addition to the debentures described in b) above, the company

has issued a second class of debentures. It has entered into an
underwriting agreement with a merchant banker for securing the
redemption of these debentures. The underwriting agreement entered
into between the company and the merchant banker, contains a lock-up
provision that prohibits the company and its directors, founders from
selling / transferring these debentures for a period of 180 days from the
date of initial offer. These provisions give the underwriter i.e. merchant
banker a certain degree of control over after-market trading for the lockup period. What is the impact of the restriction of transfer represented
by the lock up period of 180 days on the fair value measurement?
265

2.
Moon Pharmaceutical Ltd seeks your opinion in respect of following

transactions :
1.
Acquired a 4 year patent to manufacture a specialised drug at a cost

of ` 3,00,00,000 at the start of the year. Production has commenced
immediately.
2.
In order to promote brand awareness, Moon Ltd. spent ` 7,00,00,000

on an advertising campaign during the first six months. Subsequent
sales have shown a significant improvement and it is expected this will
continue for 1.5 years.
3.
Acquired a small competitor six months ago. As part of that acquisition

the company acquired a brand with a fair value of ` 6,00,00,000 based
on sales revenue. The life of the brand is estimated at 10 years.
4.
It has commenced developing a new drug for cancer i.e. Drug

X. The project cost would be ` 12,00,00,000. Clinical trial proved
successful and such drug is expected to generate revenue over the
next 3 years. Cost incurred (accumulated) till March 31, 2013 is
` 7,00,00,000. Balance cost incurred during the financial year 2013-14
is ` 5,00,00,000.
5.
It has also commenced developing another drug Drug Y. It has

incurred ` 70,00,000 towards research expenses till March 31, 2014.
The technological feasibility has not yet been established. How the
above transactions will be accounted for in the books of account of
Moon Pharmaceutical Ltd?
266

ANSWERS
Section A Objective type questions True or False
1. (1)
2. (2)
3. (4)
4. (4)
5. (3)
6. (2)
7.
(4)
8. (3)
9. (4)
10. (2)
Section A Objective type questions Fill in the blanks
11. (3)
12. (2)
13. (2)
14. (4)
15. (1)
16. (2)
17. (4)
18. (3)
267

19. (4)
20. (3)
Section A Objective type questions Calculation based
21. (3)
22. (2)
23. (3)
24. (1)
25. (1)
26. (2)
27. (1)
28. (2)
29. (2)
30. (1)
31. The re-classification provisions in IFRS 9 are given in Para 4.4.1 which
states that When, and only when, an entity changes its business model for
managing financial assets it shall reclassify all affected financial assets in
accordance with paragraphs 4.1.14.1.4. Para 4.4.2 states that an entity
shall not reclassify any financial liability. Para 4.4.3 clarifies that certain
circumstances do not constitute a re-classification. These circumstances are
as follows:
(a) an item that was previously a designated and effective hedging
instrument in a cash flow hedge or net investment hedge no longer
qualifies as such;
268

(b) an item becomes a designated and effective hedging instrument in a
cash flow hedge or net investment hedge; and
(c) changes in measurement in accordance with Section 6.7

Paragraph 4.4.1 requires an entity to reclassify financial assets if the objective

of the entitys business model for managing those financial assets changes.
Such changes are expected to be very infrequent. Such changes must
be determined by the entitys senior management as a result of external
or internal changes and must be significant to the entitys operations and
demonstrable to external parties.
Examples of a change in business model include the following:

(a) An entity has a portfolio of commercial loans that it holds to sell in the
short term. The entity acquires a company that manages commercial
loans and has a business model that holds the loans in order to collect
the contractual cash flows. The portfolio of commercial loans is no
longer for sale, and the portfolio is now managed together with the
acquired commercial loans and all are held to collect the contractual
cash flows.
(b) A financial services firm decides to shut down its retail mortgage
business. That business no longer accepts new business and the
financial services firm is actively marketing its mortgage loan portfolio
for sale.
A change in the objective of the entitys business model must be effected

before the reclassification date. For example, if a financial services firm
decides on 15 February to shut down its retail mortgage business and hence
must reclassify all affected financial assets on 1 April (i.e. the first day of the
entitys next reporting period), the entity must not accept new retail mortgage
business or otherwise engage in activities consistent with its former business
model after 15 February.
The following are not changes in business model:

(a) a change in intention related to particular financial assets (even in
circumstances of significant changes in market conditions).
(b) the temporary disappearance of a particular market for financial assets.
269

(c) a transfer of financial assets between parts of the entity with different
business models.
IFRS7 Financial Instruments Disclosures requires an entity shall disclose if, in
the current or previous reporting periods, it has reclassified any financial assets in
accordance with paragraph 4.4.1 of IFRS 9. For each such event, an entity shall
disclose:
(a) the date of reclassification.
(b) a detailed explanation of the change in business model and a qualitative
description of its effect on the entitys financial statements.
(c) the amount reclassified into and out of each category.
If an entity has reclassified financial assets so that they are measured at amortised
cost since its last annual reporting date, it shall disclose:
(a) the fair value of the financial assets at the end of the reporting period;
and
(b) the fair value gain or loss that would have been recognised in profit or loss
during the reporting period if the financial assets had not been reclassified.
32. Initial direct costs are incremental costs that are directly attributable to
negotiating and arranging a lease. Initial direct costs are often incurred by
lessors and include amounts such as commissions, legal fees and internal
costs that are incremental and directly attributable to negotiating and
arranging a lease. They exclude general overheads such as those incurred
by a sales and marketing team.

For finance leases other than those involving manufacturer or dealer lessors,
initial direct costs are included in the initial measurement of the finance lease
receivable and reduce the amount of income recognised over the lease term.
Lessors include in the initial measurement of finance lease receivables the
initial direct costs incurred in negotiating a lease. The interest rate implicit in
the lease is defined in such a way that the initial direct costs are included
automatically in the finance lease receivable; there is no need to add them
separately. The definition of the interest rate implicit in the lease has been
amended to clarify that it is the discount rate that results in the present
270

value of the minimum lease payments and any unguaranteed residual value
equalling the fair value of the leased asset plus initial direct costs of the
lessor.

Initial direct costs incurred by lessors in negotiating and arranging an

operating lease shall be added to the carrying amount of the leased asset
and recognised as an expense over the lease term on the same basis as the
lease income.
Costs incurred by manufacturer or dealer lessors in connection with

negotiating and arranging a lease are excluded from the definition of
initial direct costs. As a result, they are excluded from the net investment
in the lease and are recognised as an expense when the selling profit is
recognised, which for a finance lease is normally at the commencement of
the lease term. Manufacturer or dealer lessors recognise costs of this type
as an expense when the selling profit is recognised.
33. IFRIC 10 Interim Financial Reporting and Impairment addresses the

interaction between the requirements of IAS 34 and the recognition of
impairment losses on goodwill in IAS 36 and certain financial assets in
IAS 39, and the effect of that interaction on subsequent interim and annual
financial statements.

IAS 34 requires an entity to apply the same accounting policies in its interim
financial statements as are applied in its annual financial statements. It also
states that the frequency of an entitys reporting (annual, half-yearly, or
quarterly) shall not affect the measurement of its annual results. To achieve
that objective, measurements for interim reporting purposes shall be made
on a year-to-date basis.
IAS 36 paragraph 124 states that An impairment loss recognised for goodwill
shall not be reversed in a subsequent period.
IAS 39 paragraph 69 states that Impairment losses recognised in profit or

loss for an investment in an equity instrument classified as available for sale
shall not be reversed through profit or loss.
IAS 39 paragraph 66 requires that impairment losses for financial assets

carried at cost (such as an impairment loss on an unquoted equity instrument
271

that is not carried at fair value because its fair value cannot be reliably
measured) should not be reversed.

Given the above background, a question may arise on whether an entity

should reverse impairment losses recognised in an interim period on goodwill
and investments in equity instruments and in financial assets carried at cost
if a loss would not have been recognised, or a smaller loss would have been
recognised, had an impairment assessment been made only at the end of a
subsequent reporting period?
IFRIC 10 provides guidance that an entity shall not reverse an impairment

loss recognised in a previous interim period in respect of goodwill or an
investment in either an equity instrument or a financial asset carried at cost.
IFRIC 10 clarifies that the conflict resolved by this IFRIC between IAS34 and
IAS36 / IAS39 should not be used to resolve conflicts with other standards.
34. (a) In accordance with IFRIC 5, the contributor [C Ltd.] shall recognise its
obligation to pay decommissioning costs as a liability and recognise its
interest in the fund separately unless the contributor is not liable to pay
decommissioning costs even if the fund fails to pay.

C Ltd. shall determine whether it has control or significant influence over

the fund. If it does, the contributor shall account for its interest in the fund in
accordance with other Standards.
If C Ltd. does not have control, joint control or significant influence over the
fund, C Ltd shall recognise the right to receive reimbursement from the fund
as a reimbursement in accordance with IAS 37. This reimbursement shall be
measured at the lower of:
(a) the amount of the decommissioning obligation recognised; and
(b) the contributors share of the fair value of the net assets of the fund
attributable to contributors.
Changes in the carrying value of the right to receive reimbursement other

than contributions to and payments from the fund shall be recognised in profit
or loss in the period in which these changes occur.
272

(b) Since C Ltd. has an obligation to make potential additional
contributions, for example, in the event of the bankruptcy of another
contributor or if the value of the investment assets held by the fund
decreases to an extent that they are insufficient to fulfil the funds
reimbursement obligations, this obligation is a contingent liability that
is within the scope of IAS 37. C Ltd. should recognise a liability only if
it is probable that additional contributions will have to be made.
35. The benefit of a government loan at a below-market rate of interest is treated
as a government grant under IAS 20. The loan shall be recognised and
measured in accordance with Ind AS 39, Financial Instruments: Recognition
and Measurement. The benefit of the below-market rate of interest shall
be measured as the difference between the initial carrying value of the
loan determined in accordance with Ind AS 39 and the proceeds received.
The initial carrying amount of the loan shall be its fair value. The benefit
is accounted for in accordance with IAS 20. The entity shall consider the
conditions and obligations that have been, or must be, met when identifying
the costs for which the benefit of the loan is intended to compensate.

Eg. If the 5% p.a. loan amount is ` 50,00,000, its fair value is ` 37,38,328
and the prevailing market interest rate is 12% p.a., the accounting entries will
be as follows:-
Dr. Bank Account
50,00,000
Cr. Deferred Income
12,61,672
Cr. Loan Account

37,38,328 [being the fair value of the loan

as per IAS 39 initial recognition
` 12,61,672 is to be recognised in profit or loss on a systematic basis over

the periods in which A Limited recognised as expenses the related costs for
which the grant is intended to compensate. (see Illustration 5 in this regard.)
The manner in which a grant is received does not affect the accounting
method to be adopted in regard to the grant. Thus a grant is accounted for in
the same manner whether it is received in cash or as a reduction of a liability
to the government.
273

36. Fair value differs from value in use, as defined in IAS 36 Impairment of
Assets. Fair value reflects the knowledge and estimates of knowledgeable,
willing buyers and sellers. In contrast, value in use reflects the entitys
estimates, including the effects of factors that may be specific to the entity
and not applicable to entities in general. For example, fair value does not
reflect any of the following factors to the extent that they would not be
generally available to knowledgeable, willing buyers and sellers:
(a) additional value derived from the creation of a portfolio of properties in
different locations;
(b) synergies between investment property and other assets;
(c) legal rights or legal restrictions that are specific only to the current
owner; and
(d) tax benefits or tax burdens that are specific to the current owner.
37. The core principle of IFRS8 states that An entity shall disclose information to
enable users of its financial statements to evaluate the nature and financial
effects of the business activities in which it engages and the economic
environments in which it operates.

IFRS 8 defines an operating segment is a component of an entity:

(a) that engages in business activities from which it may earn revenues
and incur expenses (including revenues and expenses relating to
transactions with other components of the same entity),
(b) whose operating results are regularly reviewed by the entitys chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance, and
(c) for which discrete financial information is available.
If the characteristics of the above definition apply to more than one set of
components of an organisation but there is only one set for which segment
managers are held responsible, that set of components constitutes the
operating segments.
The characteristics in the above definition of an operating segment may

apply to two or more overlapping sets of components for which managers are
held responsible. That structure is sometimes referred to as a matrix form of
274

organisation. For example, in some entities, some managers are responsible
for different product and service lines worldwide, whereas other managers
are responsible for specific geographical areas. The chief operating decision
maker regularly reviews the operating results of both sets of components,
and financial information is available for both. In that situation, the entity shall
determine which set of components constitutes the operating segments by
reference to the core principle.

Operating segments often exhibit similar long-term financial performance if

they have similar economic characteristics. For example, similar long-term
average gross margins for two operating segments would be expected if their
economic characteristics were similar. Two or more operating segments may
be aggregated into a single operating segment if aggregation is consistent
with the core principle of this IFRS, the segments have similar economic
characteristics, and the segments are similar in each of the following
respects:
(a) the nature of the products and services;
(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services;
and
(e) if applicable, the nature of the regulatory environment, for example,
banking, insurance or public utilities.

1.
a)
Generally yes. Installation costs generally are considered an attribute of the

asset when measuring fair value if the asset would provide maximum value
to the market participant through its use in its current location in combination
with other assets or with other assets and liabilities. The Transformer would
be in a position to generate economic benefits only after installation in
combination with other assets. Therefore all costs (excluding transaction
costs) that are necessary to transport and install the imported transformer for
future use should be included in the measurement of fair value. Examples
275

include delivery and other costs necessary to install an asset for its intended
use. Installation costs are added to the estimated uninstalled value indication
(eg. Replacement cost) for the asset, which results in measurement of fair
value on an installed basis. Many assets that require installation generally
will require fair value measurement based on Level 3 inputs. However,
for some common machinery that is traded in industrial markets, Level 2
inputs may be available. In this situation, the inclusion of installation costs
in the measurement of fair value may result in a Level 3 categorization of
the measurement if the installation costs are significant. Accordingly, if the
installation costs are a significant proportion of the installed value of the
transformer, then it will result in a Level 3 categorization. The company needs
to disclose the level of inputs used for fair value measurement.
b)
When measuring the fair value of a security with a restriction on its sale or
transfer, judgment is required to determine whether and in what amount an
adjustment is required to the price of a similar unrestricted security to reflect
the restriction. To make that determination, the entity should first analyse
whether the restriction is security specific or entity specific (i.e. whether the
restriction is an attribute of the instrument or an attribute of the holder).

For security-specific restrictions, the price used in the fair value

measurement should reflect the effect of the restriction is this would
be considered by a market participant in pricing the security; this may
require an adjustment to the quoted price of otherwise similar but
unrestricted securities.
For entity-specific restrictions, the price used in the fair value

measurement should not be adjusted to reflect the restriction because it
would not be considered by a market participant in pricing the security.
Factors used to evaluate whether a restriction is security-specific or

entity-specific may include whether the restriction is:-
Transferred to a potential buyer
Imposed on a holder by regulations
Part of the contractual terms of the asset or
Attached to the asset through a purchase contract or another

commitment
276

For restrictions determined to be entity-specific, fair value measurements for

the security do not reflect the effect of such restrictions. As a result, securities
that are subject to an entity-specific restriction are considered identical to
those that are not subject to an entity-specific restriction. Consequently the
quoted price in an active market is a Level 1 input for the security that is
subject to an entity specific restriction. This is the case even though the
entity is not able to sell the particular security on the measurement date
due to an entity-specific restriction; an entity needs to be able to assess
the market but it does not need to be able to transact in the market at the
measurement date to be able to measure the fair value on the basis of the
price in that market.
Given the above background, it should be noted that the restrictions on

transfer of debentures are specific to the security [debentures] and also
lasts for the life of the debentures. Therefore, these restrictions should be
considered in measuring the fair value of the debentures.
c)
Based on our understanding of the facts and circumstances provided to us

and the common lock-up agreements, these provisions may be based on
a contract separate from the security (i.e. resulting from the underwriting
agreement) and apply only to those parties that signed the contract i.e.
the issuing company. Therefore, these restrictions represent entity-specific
restrictions that should not be considered in the fair value measurement of
the debentures. However, there may be situations in which lock-up provision
is determined to be security-specific based on the specific terms and nature
of the restriction. In that case, the restriction should be considered when
measuring the fair value of the securities.
2.
Moon Pharmaceutical Ltd. is advised as under:

1.
It should recognise the acquired patent as an intangible asset, because

it is a separate external purchase, separately identifiable asset and
considered successful in respect of feasibility and probable future
cash inflows. The patent should be recognized at original cost of Rs.
3,00,00,000.
2.
The advertisement expenses of Rs. 7,00,00,000 should be expensed

off.
277

3.
The brand acquired during the course of the business combination i.e.
purchase of small competitor should be recognised as an intangible
asset because it is purchased as part of acquisition and it is separately
identifiable, further the purchase consideration attributable to the
brand is also separately determinable. The brand will be recorded at
` 6,00,00,000 being its fair value at the date of acquisition as
mandated in IFRS3. The brand should be amortised over a period of
10 years.
4.
The development cost incurred during the financial year 2013-14 should
be capitalised.
Cost of intangible asset (Drug X) as on March 31, 2014
Opening accumulated cost
` 7,00,00,000
Development cost in 2013 14
` 5,00,00,000
Total cost
` 12,00,00,000
5.
Research expenses of ` 70,00,000 incurred by Moon Pharmaceuticals

for developing Drug B should be expensed off since technological
feasibility has not yet been established.
278

Full Marks : 100
Time: 3 hours
Section A Objective [True or False]

1. IFRS1 on First Time Adoption of International Financial Reporting Standards
requires an entity:a)
To comply with each IFRS effective at the beginning of its IFRS

reporting period
b)
Recognize all assets and liabilities whose recognition is required by

IFRSs in opening IFRS statement of financial position that it prepares
as a starting point for its accounting under IFRS
c)
Not recognize items as assets or liabilities if IFRS do not permit such

recognition in opening IFRS statement of financial position that it
prepares as a starting point for its accounting under IFRS
d)
Reclassify items that it recognized under previous GAAP as one type of

asset, liability or component of equity, but are a different type of asset,
liability or component of equity under IFRS in opening IFRS statement
of financial position that it prepares as a starting point for its accounting
under IFRS
Alternative choices:(1) All a, b, c, d are true

(2) Only a and b are true
(3) Only c and d are true
(4) Only b, c and d are true
279

2.
Under IFRS2 Share Based Payments an entity, has rolled out a Cash Settled
Share based payment programme. Which of the following statements are true
/ false in respect of a Cash Settled Share based payment system :a)
the IFRS requires an entity to measure the goods or services acquired

and the liability incurred at the fair value of the liability;
b)
Until the liability is settled, the entity is required to remeasure the fair
value of the liability at the end of each reporting period and at the date
of settlement, with any changes in value recognised in profit and loss
for the period
c)
of settlement, with any changes in value recognised in Statement of
changes in equity
d)
of settlement, with any changes in value recognised in statement of
Other Comprehensive Income
Alternative choices:(1) All a, b, c, d are true

(2) Only a and b are true
(3) Only c and d are true
(4) Only b, c and d are true
3.
Under IFRS 3 Business combinations, the measurement period is the period

during which the Acquirer is permitted to adjust retrospectively the provisional
amounts recognised at the acquisition date to reflect new information
obtained about facts and circumstances that existed as of the acquisition
date. Which of the following statements are true / false in respect of a
Measurement period as defined in IFRS 3:a)
The measurement period shall not exceed 6 months from the

acquisition date;
b)
The measurement period shall not exceed 12 months from the

acquisition date
280

c)
During the measurement period, the acquirer shall also recognise

additional assets or liabilities if new information is obtained about facts
and circumstances that existed as of the acquisition date and, if known,
would have resulted in the recognition of those assets and liabilities as
of that date.
d)
The measurement period ends as soon as the acquirer receives the

information it was seeking about facts and circumstances that existed
as of the acquisition date or learns that more information is not
obtainable.
4.
1)
All a, b, c, d are true
2)
Only a and b are true
3)
Only c and d are true
4)
Only b, c and d are true
Under IFRS 7 Financial Instruments Dislcosures, in some cases, an entity

does not recognise a gain or loss on initial recognition of a financial asset or
financial liability because the fair value is neither evidenced by a quoted price
in an active market for an identical asset or liability (ie a Level 1 input) nor
based on a valuation technique that uses only data from observable markets
(see paragraph B5.1.2A of IFRS 9). In such cases which of the following
disclosure requirements are true/false in respect of each class of financial
asset or financial liability:(a) Its accounting policy for recognising in profit or loss the difference
between the fair value at initial recognition and the transaction price
to reflect a change in factors (including time) that market participants
would take into account when pricing the asset or liability
(b) The aggregate difference yet to be recognised in profit or loss at the
beginning and end of the period and a reconciliation of changes in the
balance of this difference.
(c) Why the entity concluded that the transaction price was not the best
evidence of fair value, including a description of the evidence that
supports the fair value.
281

(d) None of the above as day 1 gain / loss recognition is not permitted as
per IFRS
5.
1)
2)
Only a, b and c are true
3)
4)
Under IFRS 7 Financial Instruments Disclosures, an entity may have

transferred financial assets in such a way that part or all of the transferred
financial assets do not qualify for derecognition. The entity shall disclose at
each reporting date for each class of transferred financial assets that are not
derecognised in their entirety:(a) The nature of the transferred assets.
(b) The nature of the risks and rewards of ownership to which the entity is
exposed.
(c) A description of the nature of the relationship between the transferred
assets and the associated liabilities, including restrictions arising from
the transfer on the reporting entitys use of the transferred assets.
(d) When the entity continues to recognise all of the transferred assets, the
carrying amounts of the transferred assets and the associated liabilities.
6.
1)
2)
3)
4)
Under IFRS 8 Operating Segments, which of the following statements are

true / false:a)
The term chief operating decision maker identifies a function, not

necessarily a manager with a specific title. That function is to allocate
resources to and assess the performance of the operating segments of
an entity.
282

b)
Often the chief operating decision maker of an entity is its chief

executive officer or chief operating officer but, for example, it may be
a group of executive directors or others.
c)
If the chief operating decision maker uses more than one set of
segment information, other factors may identify a single set of
components as constituting an entitys operating segments, including
the nature of the business activities of each component, the existence
of managers responsible for them, and information presented to the
board of directors.
d)
The chief operating decision maker also may be the segment manager
for some operating segments. A single manager may be the segment
manager for more than one operating segment.
7.
1)
2)
3)
4)
Under IFRS 9 Financial instruments, when an entity continues to recognise

an asset to the extent of its continuing managerial involvement, the entity
also recognises an associated liability. Which of the following statements are
true / false:a)
The transferred asset and the associated liability are measured on a

basis that reflects the rights and obligations that the entity has retained.
b)
The associated liability is measured in such a way that the net carrying
amount of the transferred asset and the associated liability is the
amortised cost of the rights and obligations retained by the entity, if the
transferred asset is measured at amortised cost
c)
The associated liability is measured in such a way that the net carrying
amount of the transferred asset and the associated liability is equal to
the fair value of the rights and obligations retained by the entity when
measured on a stand-alone basis, if the transferred asset is measured
at fair value.
283

d)
The entity shall cease to recognise any income arising on the

transferred asset to the extent of its continuing involvement and shall
not recognise any expense incurred on the associated liability.
8.
1)
2)
3)
4)
Under IFRS 10 Consolidated Financial Statements, when an entity loses

control of a subsidiary, it shall:a)
Recognize the fair value of the consideration received, if any, from the
transaction, event or circumstance that resulted in the loss of control;
b)
Derecognise the assets (including any goodwill) and liabilities of the

subsidiary at their carrying amounts at the date when control is lost;
c)
Recognise if the transaction, event or circumstances that resulted in

the loss of control involves a distribution of shares of the subsidiary to
owners in their capacity as owners, that distribution;
d)
derecognize any investment retained in the former subsidiary at its fair

value at the date when control is lost
9.
1)
2)
3)
4)
Under IFRS11 Joint arrangements, when an entity transitions from

proportionate consolidation to the equity method of consolidation, it shall:a)
Recognise its investment in the joint venture as at the beginning of the

immediately preceding period. That initial investment shall be measured
as the aggregate of the carrying amounts of the assets and liabilities
that the entity had previously proportionately consolidated, including any
goodwill arising from acquisition.
284

b)
If the goodwill previously belonged to a larger cash-generating unit, or

to a group of cash-generating units, the entity shall allocate goodwill
to the joint venture on the basis of the relative carrying amounts of the
joint venture and the cash-generating unit or group of cash-generating
units to which it belonged.
c)
The opening balance of the investment determined in accordance with

option a) above is regarded as the deemed cost of the investment at
initial recognition.
d)
None of the above
Alternative choices:1)
2)
3)
4)
10. Under IFRS 13 Fair value measurements, the definition of fair value
emphasises:a)
That fair value is a entity-specific assessment and not a market-specific

assessment
b)
That fair value is a market-based measurement, not an entity-specific

measurement.
c)
When measuring fair value, an entity uses the assumptions that market
participants would use when pricing the asset or liability under current
market conditions, including assumptions about risk.
d)
An entitys intention to hold the asset or to settle or otherwise fulfil the

liability is relevant when measuring fair value because fair value is not
a market-based measurement, but an entity-specific measurement.
Alternative choices:1)
2)
3)
4)
Only b, c are true

285

Section A Objective [Fill in the Blanks]
11. IAS 1 requires an entity to disclose comparative information in respect of the
previous period. It introduces a requirement to include in a complete set of
financial statements a statement of ________________________________
_________________
Options are:a)
Financial position as at the end of the earliest comparative period

whenever the entity makes a retrospective restatement of items in its
financial statements
b)

whenever the entity reclassifies items in its financial statements.
c)
d)
Financial position as at the beginning of the earliest comparative period

whenever the entity retrospectively applies an accounting policy.
12. IAS 1 requires an entity to disclose dividends recognized as distributions to

owners and related amounts per share in the statement of ______________
________________________________
Options are:a)
Statement of changes in equity or the notes
b)
Statement of Comprehensive income
c)
Statement of Other comprehensive income
d)
Either Statement of changes in equity or the Statement of Other

comprehensive income
13. Under IAS 2 Inventories, the cost of inventories of items that are not
ordinarily interchangeable and goods or services produced and segregated
for specific projects shall be ________________
Options are:a)
assigned by using a customized cost formula
b)
assigned by using the first-in, first-out (FIFO)
c)
assigned by using the weighted average method
d) assigned by using specific identification of their individual costs

286

14. Under IAS 7 Cash flow statement, Cash flows arising from the following
operating, investing or financing activities may be reported on a net basis: _____________________________
Options are:a)
Cash receipts and payments on behalf of customers when the cash

flows reflect the activities of the customer rather than those of the entity
b)
Entity has a legally enforceable right to set off the recognised amounts
c)
Entity intents to either settle the net cash outflows on a net basis or to
realise the cash inflows and settle the liabilities simultaneously
d)
None of the above
15. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

requires retrospective application of voluntary changes in accounting policies
and retrospective restatement to correct prior period errors. The allowed
alternative treatment to include in profit and loss account for the current
period the adjustment resulting from changing an accounting policy or the
amount of a correction of a prior period error has been ________________
__________________
Options are:a) Retained
b) Removed
c) Deferred
d)
Retained unless it is impracticable to apply
16. IAS 10 Events after the reporting period categorises events into adjusting
and non-adjusting. The discovery or fraud or error after the reporting
date that shows that the financial statements were incorrect needs to
be__________________
Options are:a)
Adjusted in the financial statements
b)
Disclosed as it is a non-adjusting event
c)
Quantified and disclosed in the notes to the account
d)
Quantified and disclosed in the Notes to the accounts as well as

Directors report.
287

17. Under IAS 11 Construction contracts, a fixed price contract is a construction
contract in which the contractor agrees to a fixed contract price or
___________________
Options are:a)
Reimbursed for allowable or otherwise defined costs plus a fixed fee
b)
A fixed rate per unit of output, which in some cases is subject to cost
escalation clauses
c)
Revenue calculated without regard to the stage of contract completion

on a fixed basis
d)
A fee fixed as a percentage of the allowable or otherwise defined costs
18. Under IAS 12 Income taxes, deferred tax assets arising from deductible
temporary differences are recognized when _______________________.
Options are:a)
There is a reasonable expectation of realisation
b)
It is probable that taxable profits will be available against which the

deferred tax asset can be utilised
c)
The timing difference arises except when the carrying amount and tax
base differs at initial recognition
d)
It is virtually certain that the timing difference will be realised
19. Under IAS 16, Property, Plant & Equipment, the useful life of an asset
is defined in terms of the assets expected utility to the entity. The asset
management policy of the entity may involve the disposal of assets
after a specified time or after consumption of a specified proportion
of the future economic benefits embodied in the asset. Therefore, the
________________________
Options are:a)
Useful life of an asset may be shorter than its economic life
b)
Economic life of an asset may be shorter than its useful life
c)
Economic life of the asset is a matter of judgment
d)
Asset may be depreciated in a manner that reflects the future

maintainable economic benefits
288

20. Under IAS 17 Leases, a non-cancellable lease is a lease that is cancellable
only _________________________
Options are:a)
Upon the occurrence of some remote contingency
b)
With the permission of the lessee
c)
If the lessor enters into a new lease for the same or an equivalent
asset
d)
the lessee defaults in payment of the lease rentals
Section A Objective [Calculation based]

21. On April 1, 2010 an entity acquired land for ` 10,00,000 including ` 10,000
being non-refundable purchase taxes. The purchase agreement provided for
payment to be made in full on March 31, 2011. Legal fees of ` 3000 were
incurred in acquiring the land and paid on April 1, 2010. The land is held for
capital appreciation. An appropriate discount is 10% per annum. The entity
shall measure the initial cost of the land at:Options are:a)
` 10,03,000
b)
` 10,13,000
c)
` 9,97,000
d)
` 911,700
22. The fair value of an asset is ` 90,000. The initial direct costs to the lessor
are ` 10,000. Annual lease payments (at year end) are ` 25,000 for 6 years.
Unguaranteed residual value at the end of 6 years is ` 5,000. The interest
rate implicit in the lease is:Options are:a) 13.82%
b) 27%
c) 15.32%
d)
none of the above

289

23. Altd took an asset under an operating lease with following rentals:Year 1:- ` 100,000
Year 2:- ` 1,10,000
Year 3:- ` 1,20,000
Year 4:- ` 1,20,000
Year 5:- ` 1,30,000
Year 6:- ` 1,40,000
Year 7:- ` 1,40,000
Year 8:- ` 1,40,000
Year 9:- ` 1,60,000
Year 10:- ` 1,60,000

The amount debited as a Lease expense in the lessees books of account

on an annual basis as per IAS 17 will be:Options are:a)
` 132,000
b)
` 120,000
c)
` 1,40,000
d)
None of the above
24. ABC Ltd. has a cash generating unit Plant A as on April 1, 2012 having a
carrying amount of ` 1000 crores. Plant A was acquired under a business
combination and goodwill of ` 200 crores was allocated to it. It is depreciated
on a straight line basis. Plant A has a useful life of 10 years with Nil residual
value. On March 31, 2013, Plant A has a recoverable amount of ` 600
crores. Therefore the impairment loss on Plant A is:Options are:a)
` 450 crores
b)
` 300 crores
c)
` 500 crores
d)
None of the above

290

25. Which of the following embedded derivative is closely related to the host
contract ?
a)
The embedded cap is 15% whereas as the market rate of interest is

18%
b)
The embedded floor is 9% whereas the market rate of interest is 11%
c)
The embedded cap is 12% and floor is 8% whereas the market rate of
interest is 7%
Options are:1)
Answers b) and c)
2)
Answers a) and c)
3)
Answer b)
4)
Answer a), b) and c)
26. ABC Ltd. can sell its products in the open market for ` 2,000 per unit.
However, it has entered into an agreement with Y ltd to sell its products for
` 2,400 per unit. The cost to sell is ` 100 per unit. The fair value less costs
to sell and net realisable value is:Options are:a)
Fair value less costs to sell is ` 1900 and net realisable value is
` 2,300
b)
` 2,400
c)
` 2500
d)
None of the above
27. XYZ Ltd. has bought a plane for the use of its senior management. The cost
of the plane is ` 1.5 crores and can be depreciated either using a component
useful life or useful lives of its major components. It is expected to be used
over a period of 9 years. The engine of the plane has a useful life of 6 years.
291

The planes tyres are replaced every 3 years. The plane will be depreciated
using straight line method over:Options are:a)
9 years composite useful life
b)
6 years useful life of the engine, 3 years useful life of the tyres and 9
years useful life applied to the balance cost of the plane
c)
3 years useful life based on conservatism (the lowest useful life of all
the parts of the plane)
d)
5 years useful life based on a simple average of the useful lives of all
major components of the plane
28. Q Ltd. is engaged in the publishing of magazines. They acquired 50% stake
in R ltd a company in the same sector. Q Ltd. paid purchase consideration of
` 10 crores and fair value of net assets acquired is ` 8.5 crores. The above
purchase consideration includes:-
a)
` 35 lakhs towards the skilled staff of Rltd
b)
` 50 lakhs towards payment of Non-Compete fees so as to restrict

RLTD to compete in the same line of business for next 5 yrs.
The intangible assets recognized in the books of Q Ltd. [excluding Goodwill]

will be :Options are:a)
` 65 lakhs
b)
` 85 lakhs
c)
` 50 lakhs
d)
None of the above
29. Interest received in advance recognized in the financial statements of ABC

Ltd is ` 10,00,000 which is taxed on cash basis but accounted for on accrual
basis. The tax base of an interest received in advance is :Options :a)
` 10,00,000
292

b)
` Nil
c)
` 7 lakhs [i.e. ` 10 lakhs minus 30% tax rate]
d)
` 3 lakhs [i.e. ` 10 lakhs x 30% tax rate]
30. Company X grants 500 shares options each to 100 employees. The
employees will be entitled to exercise these options if they stay for 3 years.
The fair value of each option is estimated to be ` 15 on the date of grant.
The fair values are ` 18, ` 25 and ` 30 at the end of year 1, year 2 and
year 3. The company expects all the employees to continue in service till
year 3. At the end of year 1 the balance in the ESOP reserve account in the
balance sheet (assuming it to be an equity settled payment plan) will be:Options :a)
` 350,000
b)
` 750,000
c)
` 250,000
d)
None of the above

31. Explain what you understand by the term Joint Control as described in IFRS
11 Joint Arrangements ?
32. Under IFRS 12 Disclosure of interests in other entities what are the
disclosure requirements pertaining to Significant judgments and assumptions?
33. Under IAS 16, Property, Plant & Equipment, 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, what
are the measurement requirements prescribed in the standard? Under
what circumstances can one conclude that an exchange transaction has
commercial substance ?
34. What are the conditions under which an intangible asset (as described in IAS
38) arising from development (or development phase of an internal project)
shall be recognised ?
293

35. Can an entity assume a change in the legal use of a non-financial asset
when determining its highest and best use?
36. Explain the obligating event that triggers the accounting for levies as given
in IFRIC-21 Levies ?
37. Are all the disclosures required by IFRS-13 Fair value measurements to be
made in Interim financial reports ?
1.
You are an accountant working with an accounting firm and have been
retained by the Management of ABC Ltd. a pharmaceutical company to
advise on the following Fair value issues in accordance with IFRS-13 Fair
Value measurements:(a) ABC Ltd. had recently purchased the business of a competitor.
Among the several assets and liabilities taken over is the brand of the
competitor i.e. XYZ. ABC ltd plans to discontinue the active use of the
XYZ brand as it wants to eliminate the competition in the market place
of the XYZ brand with its own existing brands. How would the fair value
of the XYZ brand acquired be measured at fair value?
(b) As a part of the aforesaid business combination, ABC Ltd. also acquired
land. The land is currently developed for industrial use as a factory site.
Although the lands current use is presumed to be its highest and best
use given the business of ABC Ltd [pharmaceutical business], ABC Ltd.
considers the fact that nearby sites have recently been developed for
residential use as high-rise apartment buildings. How should the fair
value of the land be determined?
2.
ABC Bank has appointed you to advise on the accounting treatment for
derivative financial instruments held by the bank. In particular, the following
questions have been raised by ABC Bank for which your advise has been
solicited. Kindly draft a reply incorporating your advise for the following
questions by applying the principles in IFRS-13 Fair Value instruments:a)
For derivative instruments that are recognized as liabilities, what should

an entity consider in measuring fair value ?
b)
What discount rate should be used in practice to measure the fair value
of collateralised and uncollateralised derivative instruments ?
294

ANSWERS
1.
(4), a) is false as IFRS1 requires an entity to comply with each IFRS effective
at the end of its IFRS reporting period.
2. (2)
3. (4)
4. (2)
5. (1)
6. (1)
7. (2)
8. (2)
9. (2)
10. (4)
Section A Objective [Fill in the Blanks]
11. (d)
12. (a)
13. (d)
14. (a)
15. (b)
16. (a)
17. (b)
18. (b)
19. (a)
20. (a)
Section A Objective [Calculation based]
21. (d)
22. (a)
295

23. (a)
24. (c)
25. (3)
26. (a)
27. (b)
28. (c)
29. (b)
30. (c)
31. In assessing whether an entity has joint control of an arrangement, an entity
shall assess first whether all the parties, or a group of the parties, control
the arrangement. IFRS 10 defines control and shall be used to determine
whether all the parties, or a group of the parties, are exposed, or have rights,
to variable returns from their involvement with the arrangement and have the
ability to affect those returns through their power over the arrangement. When
all the parties, or a group of the parties, considered collectively, are able to
direct the activities that significantly affect the returns of the arrangement
(i.e. the relevant activities), the parties control the arrangement collectively.

After concluding that all the parties, or a group of the parties, control the
arrangement collectively, an entity shall assess whether it has joint control of
the arrangement. Joint control exists only when decisions about the relevant
activities require the unanimous consent of the parties that collectively control
the arrangement. Assessing whether the arrangement is jointly controlled
by all of its parties or by a group of the parties, or controlled by one of
its parties alone, can require judgment. Sometimes the decision-making
process that is agreed upon by the parties in their contractual arrangement
implicitly leads to joint control. For example, assume two parties establish
an arrangement in which each has 50 per cent of the voting rights and the
contractual arrangement between them specifies that at least 51 per cent of
the voting rights are required to make decisions about the relevant activities.
In other circumstances, the contractual arrangement requires a minimum

proportion of the voting rights to make decisions about the relevant activities.
When that minimum required proportion of the voting rights can be achieved
296

by more than one combination of the parties agreeing together, that
arrangement is not a joint arrangement unless the contractual arrangement
specifies which parties (or combination of parties) are required to agree
unanimously to decisions about the relevant activities of the arrangement.
32. IFRS 12 Disclosure of Interests in Other Entities applies to entities that
have an interest in a subsidiary, a joint arrangement, an associate or an
unconsolidated structured entity. An entity shall disclose information about
significant judgments and assumptions it has made (and changes to those
judgments and assumptions) in determining:
(a) That it has control of another entity, ie an investee as described in
paragraphs 5 and 6 of IFRS 10 Consolidated Financial Statements;
(b) That it has joint control of an arrangement or significant influence over
another entity; and
(c) The type of joint arrangement (i.e. joint operation or joint venture) when
the arrangement has been structured through a separate vehicle.

The significant judgments and assumptions disclosed in accordance with

paragraph 7 (as reproduced above) include those made by the entity when
changes in facts and circumstances are such that the conclusion about
whether it has control, joint control or significant influence changes during
the reporting period.
To comply with paragraph 7, an entity shall disclose, for example, significant

judgments and assumptions made in determining that:
(a) It does not control another entity even though it holds more than half
of the voting rights of the other entity.
(b) It controls another entity even though it holds less than half of the
voting rights of the other entity.
(c) It is an agent or a principal
(d) It does not have significant influence even though it holds 20 per cent
or more of the voting rights of another entity.
(e) It has significant influence even though it holds less than 20 per cent
of the voting rights of another entity.
297

33. One or more items of property, plant and equipment may be 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. The acquired item is measured
in this way even if an entity cannot immediately derecognise the asset given
up. If the acquired item is not measured at fair value, its cost is measured at
the carrying amount of the asset given up.

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 entitys 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.
For the purpose of determining whether an exchange transaction has

commercial substance, the entity-specific value of the portion of the entitys
operations affected by the transaction shall reflect post-tax cash flows. The
result of these analyses may be clear without an entity having to perform
detailed calculations.
The fair value of an asset for which comparable market transactions do not
exist is reliably measurable if (a) the variability in the range of reasonable fair
value estimates is not significant for that asset or (b) the probabilities of the
various estimates within the range can be reasonably assessed and used in
estimating fair value. If an entity is able to determine reliably the fair value
of either the asset received or the asset given up, then the fair value of the
asset given up is used to measure the cost of the asset received unless the
fair value of the asset received is more clearly evident.
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34. An intangible asset arising from development (or from the development
phase of an internal project) shall be recognised if, and only if, an entity can
demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so that it will
be available for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the existence
of a market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible
asset.
(e) the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the
intangible asset during its development.

In the development phase of an internal project, an entity can, in some

instances, identify an intangible asset and demonstrate that the asset will
generate probable future economic benefits. This is because the development
phase of a project is further advanced than the research phase.
35. It depends. A fair value measurement of a non-financial asset takes into

account a market participants ability to generate economic benefits by
using the asset at its highest and best use or by selling it to another market
participant that would use the asset at its highest and best use.

In determining the highest and best use of a non-financial asset, an entity

considers whether the use is physically possible, legally permissible, and
financially feasible. The entity also considers whether maximum value would
be provided to market participants by using the asset on a stand-alone basis
or in combination with other assets.
The highest and best use is determined from the perspective of market
participants, even if the entity intends a different use. However, an entitys
current use of a non-financial asset is presumed to be its highest and best
use unless market or other factors suggest that a different use by a market
participant would maximise the value of the asset.
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A use that is legally permissible takes into account any legal restrictions on
the use of the non-financial asset that market participants would take into
account when pricing the asset. To be considered legally permissible, the
potential use of a non-financial asset should not be prohibited under current
law in the jurisdiction.
When a non-financial assets fair value measurement contemplates a change

in its legal use (e.g. A change in zoning restrictions), the risks of changing its
legal usage and the costs a market participant would incur to transform the
asset should be considered.
36. IFRIC 21 Levies provides guidance on accounting for levies in accordance

with the requirements of IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. This Interpretation is effective for annual periods
commencing on or after January 1, 2014 and is applied retrospectively.

IFRIC 21 defines a levy as an outflow of resources embodying economic

benefits that is imposed by governments on entities in accordance with
legislation (i.e., laws and/or regulations).
A payment made for the acquisition of an asset, or rendering of services

under a contractual agreement with a government, is not a levy. Outflows of
resources that are within the scope of other standards (for example, taxes
that are within the scope of IAS 12 Income Taxes), fines and penalties, and
liabilities arising from emission trading schemes are explicitly excluded from
the scope of the Interpretation.
IFRIC 21 confirms that an entity recognises a liability for a levy when, and
only when, the triggering event specified in the legislation occurs. An entity
does not recognise a liability at an earlier date, even if it has no realistic
opportunity to avoid the triggering event.
The following 4 are illustrative examples on how the obligating event under
IFRIC 21 is to be interpreted for making provisions:i.
Where a levy is triggered progressively as the entity generates revenue
The levy is recognised progressively from the point at which the entity
first begins to generate revenue (i.e. as the generation of revenue is
the obligating event).
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ii.
A levy is triggered in full as soon as the entity generates revenue
The levy is recognised in full as soon as the entity generates revenue

(i.e. as the generation of revenue is the obligating event).
iii.
A levy is triggered in full if the entity operates as a bank [or other

specified activity] at a specified date The levy is only ever recognised
on the specified date, and is only ever recognised in full, subject to
the entity operating in the specified activity (the obligating event is
operating in a specified activity at a specified date).
iv.
A levy is triggered if the entity generates revenue above a minimum

amount of revenue.
The levy is only recognised once the minimum threshold has been
reached (the obligating event is breaching the minimum threshold).
37. An entity is only required to disclose certain information about the fair
value of financial assets and financial liabilities in its interim financial report
including:

The fair value measurement at the end of the interim reporting period
For non-recurring fair value measurements, the reasons for the

measurement
the level of the hierarchy in which the measurement is categorised
for recurring fair value measurements, any transfers between Level 1

and Level 2, the reasons for those transfers, as well as the policy for
timing of recognizing transfers between levels in the fair value hierarchy
a description of the valuation technique and the inputs used in the fair
value measurements for Level 2 and Level 3 measurements
if a change in the valuation technique has been made, the reasons for
the change
quantitative information about significant unobservable inputs for Level

3 measurements
a reconciliation of Level 3 balances from opening to closing balances,

including the amounts of unrealised gains or losses related to assets
or liabilities held at the end of the reporting period
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for Levels 2 and 3:-
a description of valuation processes for Level 3 measurements
a quantitative sensitivity analysis for recurring Level 3

measurements; and
if an accounting policy is made to measure offsetting positions on

a net basis, then that fact
the existence of an inseparable third party credit enhancement issued

with a liability measured at fair value and whether it is reflected in the
fair value measurement
with limited exceptions, the fair value of each class of instruments
day one gain or loss measured as required under IFRS 7 and
information about instruments for which fair value cannot be measured

reliably.
Therefore, subject to the general requirements to provide disclosures about

significant events and transactions and of information whose omission would
be misleading, an entity is not required to provide disclosures about the
following information in its interim financial report:
o
Non-financial assets and non-financial liabilities (except as may be

required if a business combination has occurred in the interim period);
and
Classes of assets and liabilities not measured at fair value but for which
fair value is disclosed.

1.
We would like to provide the following advice for each of the practical
situations provided by ABC Ltd.
a)
The method used to measure the fair value of an intangible asset to

be retired or whose active use will be discontinued is no different from
any other non-financial asset, and should be based on its highest
and best use by market participants. One common methodology is
the with-versus-without method. This method is useful for intangible
assets that market participants would be expected to use defensively.
It measures the incremental cash flows that would be achieved by
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market participants arising from their ownership of an existing intangible
asset by locking up the competing acquired intangible asset. Fair value
is measured as the difference between the fair value of the group of
assets of the market participant:
Assuming that the acquired intangible asset were to be actively

used by others in the market; and
Assuming that the acquired intangible asset were withdrawn from

the market.
Applying the above methodology, ABC Ltd. needs to compute the

incremental cash flows from its action of having locked up the
competing XYZ brand. These cash flows would then be discounted to
its present value as per the Income method [valuation technique]. This
would be the fair value attributed to the XYZ brand acquired by ABC
Ltd.
b)
Although the lands current use is presumed to be its highest and

best use, ABC Ltd. needs to consider the market or other factors that
suggest a different use. On the basis of recent development that high
rise residential buildings have come up in the vicinity of the land, and
recent zoning and other changes to facilitate that development, ABC
Ltd determines that the land currently used as a factory site could be
developed as a residential site (e.g. For high rise apartment buildings)
and that market participants would take into account the potential to
develop the site for residential use when pricing the land.
Accordingly, ABC Ltd. should determine the highest and best use by
comparing the following:
The value of the land as currently developed for industrial use

(i.e. an assumption that the land would be used in combination
with other assets, such as the factory or with other assets and
liabilities); and
The value of the land as a vacant site for residential use, taking
into account the costs of demolishing the factory and other costs
necessary to convert the land to a vacant site. The value under
this use would take into account risks and uncertainties about
whether the entity would be able to convert the assets to the
alternative use (i.e. an assumption that the land would be used
by market participants on a stand alone basis).
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2.
The highest and best use of the land would be determined on the
basis of the higher of these values. In situations involving real estate
appraisal, the determination of highest and best use might take into
account factors relating to the factory operations (eg. the factorys
operating cash flows) and its assets and liabilities (eg the factorys
working capital).
We would like to provide the following advise for each of the queries raised
by ABC Bank
a)
The fair value of a liability is defined as the price that would be

paid to transfer the liability in an orderly transaction between market
participants at the measurement date. Although the fair value
measurement objective of a derivative liability is to estimate the price
that would be paid to transfer the liability, generally there is no quoted
price for this transfer. However, because a derivative liability is a
contract between market participants, generally it is held by another
party as an asset. Therefore, an entity measures the fair value of a
derivative liability from the perspective of a market participant that holds
the derivative as an asset.
For derivatives that are exchange traded, the price used for fair
value measurement is usually the market exchange price on the
measurement date which is considered a Level 1 input if the market is
active.
The fair value measurement of non-exchange traded derivatives (eg

OTC derivatives) generally is based on an income approach. Under
this approach, future cash flows are converted to a single amount
through discounting. A fair value measurement based on an income
approach may include adjustments for liquidity, credit risk, or any other
adjustments if these are based on assumptions that market participant
would use.
Some derivatives, such as forwards and swaps, may be liabilities or

assets at different points in time and at different interest rates on the
yield curve. This adds complexity to the measurement of fair value
because the credit risk adjustments may include both the counterpartys
credit risk and the entitys own non performance risk. In addition, the
credit risk adjustment may be affected by whether and how the nonexchange traded derivative is collateralised. Whether the fair value
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measurement is categorised within Level 2 or Level 3 of the fair value
hierarchy depends on whether the measurement includes unobservable
inputs that are significant to the entire measurement.

For a group of financial assets and financial liabilities, including

derivatives, an entity is permitted, if certain conditions are met, to
measure the fair value of a group of derivatives based on a price
that would be received to sell or paid to transfer the net risk position
(portfolio measurement exception). If the entity elects to apply
the portfolio measurement exception for a particular market or a
counterpartys credit risk, it may affect the liquidity and credit risk
adjustments for the instruments in the portfolio because they are
measured based on the characteristics of the entitys net risk position
rather than on the characteristics of the individual derivatives.
b)
Generally the fair value of a collateralised derivative is different from

the fair value of an otherwise identical but uncollateralised derivative
because the posting of collateral mitigates risks associated with credit
and funding costs. Before the 2008-09 financial crisis, unsecured
inter-bank borrowing rates, such as LIBOR, were commonly used
to discount cash flows of both collateralised and uncollateralised
derivative instruments. However, as a result of the widening of
spreads, changes in banks funding costs, and the increased use
of collateral in OTC derivative trading since the financial crisis,
market participants have moved towards using multiple curves for
collateralised and uncollateralised trades when valuing derivatives.
For valuing collateralised derivatives, recent experience suggests that
the majority of derivative market participants agree that the estimated
cash flows should be discounted at the rate agreed for cash collateral
posted under the respective derivatives Credit Support Annex, which
typically is an overnight benchmark rate in the respective currency.
The overnight index swap market reflects assumptions by market
participants about the overnight rate. Additional complexities may
arise when the contract terms include thresholds for posting collateral,
permit the currency of the collateral to be different from currency of the
derivative cash flows, or references a currency without an active market
for overnight lending rates.
Entities should monitor developments in valuation techniques to

ensure that their own valuation models appropriately reflect the type
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of inputs that market participants would consider. For uncollateralised
transactions, recent experience shows, that there is no clear market
consensus as to the most appropriate discount rate to apply in a
valuation model.

One alternative that has developed is that estimated cash flows should
be discounted using an entitys own cost of funding, but it is unclear
how Funding Valuation Adjustments (FVA) should be determined and
included in a derivative valuation model. Entities would need to ensure
that any funding cost risk adjustment used in measuring fair value is
consistent with the cost that market participants would take into account
when pricing an instrument rather than being only an entity specific
estimate.
A challenge of the alternative view is the potential for overlap in a

valuation model between the funding rate of the entity and its own
credit spread, which is often taken into account through the application
of a debt valuation adjustment [DVA]. Funding cost discounting
techniques usually incorporate both liquidity and credit components,
because these are difficult to separate. Whatever method is used, an
entity needs to ensure that any adjustment applied to the discount rate
is consistent with the definition of fair value.
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Full Marks : 100
Time: 3 hours

1. While preparing financial statement of Tom Inc for the year ended 31.12.2013,
it has complied with all the Accounting Standards and IFRSs except IAS
12 and IAS 38. The financial statements are termed as IFRS financial
statements.
2.
Under IAS 11 Construction Contracts, Cost of the contract includes general

administration overheads that are allocated according to normal overhead
allocation model.
3.
Geeta has included storage costs as a part of cost of inventories and claims
that their accounting policy is in line with IAS 2 Inventories.
4.
IAS 36 deals with recognition, measurement and disclosure regarding

impairment of assets.
5.
Lease includes lease of land.
6.
An accountant of your client has made a provision in respect of onerous

contract towards cancellation of lease before the lease term. Is it correct?
7.
Raga has incurred a sum of $2 million towards advertisement and promotion

for their new product. It has not capitalised this amount under intangible
asset as it believes that IAS 38 do not permit for such a treatment.
8.
Investment Property interest held by lessee under operating lease has to be

valued at lower of cost or fair value after initial recognition.
9.
A change in estimation of useful life of PPE is termed as a change in

10. Your client follows revaluation model for its property alone and for rest of
the assets it adopts cost model. Your client believes that such an accounting
treatment is permitted in IAS 16- Property, plant and equipment.
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11. IAS that deals with agriculture is
(a) IAS 41
(b) IAS 40
(c) IAS 18
12. _______________ assets are not recognised in the financial statements
unless there is a virtual certainty in its receipt.
(a) Contingent
(b) Deferred Tax
(c) Fixed
13. Deferred Tax is a tax on
(a) Timing difference
(b) Permanent difference
(c) Tax difference
14. Lease incentives are to be recognised on
(a) Actual payment basis
(b) Straight line basis
(c) The basis of lease rent
15. _____________ date is the date on which the entity and the other party
agree to the share based payment arrangement and shares the principal
terms and conditions.
(a) Grant date
(b) Inception date
(c) Vesting date
16. Capitalisation of borrowing cost should cease on the date on which the asset
is
(a) Actually put to use
(b) Ready for its intended use
(c) Date of purchase order
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17. _________ Is defined in IFRS 8 as a component of entity which engages in
business activity, its operating results are reviewed by CODM and for which
discrete financial information is available.
(a) Reportable segment
(b) Business segment
(c) Operating segment
18. A fall in value of previously revalued asset and whose surplus is credited in
revaluation reserve should be adjusted in__________
(a) Revaluation surplus
(b) Statement of comprehensive income
(c) Other comprehensive income
19. If the recoverable amount of an asset is less than carrying amount, carrying
amount of the asset shall be reduced to its recoverable amount. That
reduction is an
(a) Operating loss
(b) Revaluation loss
(c) Impairment loss
20. Trade receivables denominated in foreign currencies should be re-stated at
closing rates at the end of the year as required under IAS
(a) IAS 20
(b) IAS 21
(c) IAS 22
21. On 01.04.2013 Xylo granted 100 share options to each of its 200
employees. The options will vest on 31.03.2016 subject to the condition that
they remained as employees for the three years ending 31.03.2016. On
01.04.2013, the fair value of one share option was $2 and this had increased
to $2.4 by 31.03.2014. On 01.04.2013, the directors estimated that 180
employees would qualify for these options. At 31.03.2014, this estimate was
190 employees. Calculate the amount to be recognised as expense for the
year ended 2013-14.
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22. Dhyan is engaged in the trading business of crockery items. On 01.06.2014,
it sold goods to its customer at an invoice price of $2 million. The payment
terms permit the customer to make payment to Dhyan on 01.06.2015.
The financial year end of Dhyan is on 31st March every year. Dhyan had
borrowed its $ 50 million from a bank at a rate of 10%. Show the effect of
the above transaction in the statement of comprehensive income of Dhyan
for the year ended 31.03.2015.
23. Fiat Automobiles is conducting research in respect of attaching sleep sensors
in drivers seat in all its vehicles. It has already incurred $1.5 million last year
for this research. During the year, it incurs $500,000 each month as a part
of its research expenditure. On 01.11.2013, directors found that the research
is successful and is going to bring a cash flow of $30 million in the coming
years to the Company. Fiat closed its books of account for the year end
on 30th September, 2014. Show the impact of the above transaction in the
financial statements of Fiat.
24. Alpha holds 80% interest in Beta and 40% interest in Gama. The Trade
receivables of Alpha, Beta and Gama are $3 million, $2 million and $
4 million. Determine the trade receivables that will be reported in the
consolidated statement of financial position of Alpha at the year end.
25. Alpha, a US entity and a prominent exporter in liquor and wine products has
invoiced an amount of INR 1 million receivable in the month of May 2013.
The SPOT rate on the date of transaction was $ 0.018 against INR 1. During
the year end 31.03.2013, the closing rate was $0.017. Show the effect of
above transaction.
26. Sigma invested $16 million to acquire a highly specialised plant and
equipment 3 years back to produce solar cells. The estimated useful life of
the asset is 8 years from the date of acquisition. During the current financial
year, its directors has evaluated that no future economic benefits is derived
from this machine and hence decided not to use the machine. The carrying
value of this plant and equipment was $10 million as at the beginning of the
year. Evaluate the accounting treatment for the above transaction in terms of
applicable IAS/ IFRSs.
27. On 01.10.2013, a water leak at one of Deltas warehouses damaged a consignment of inventory. The inventory had been manufactured in 31.03.2013
at a total cost of $400,000. The net realisable value of the inventory prior
to damage was estimated at $560,000. Because of the damage Delta was
310

required to spend a further $100,000 on repairing and re-packaging the
inventory. The inventory was sold on 15.01.2014 for proceeds of $450,000.
Show the effect of this transaction in the financial statements of Delta for the
year ending 30.09.2014.
28. At 31.03.2012, the company was engaged in a legal dispute with a customer
who alleged that the company has supplied faulty products that caused the
customer actual financial loss. The directors of the company consider that
the customer has a 75% chance of succeeding in this action and that the
likely outcome should the customer succeed is that the customer would be
awarded damages of $1 million. How you will deal with the above transaction
in the books of the company.
29. On 01.04.2013, Omega purchased a new machine for $8 million. The
estimated useful economic life of the machine is 10 years. The estimated
residual value was zero. The machine will require a substantial overhaul
after 4 years in order to maintain its operating capacity and the cost of such
an overhaul at 01.04.2013 prices was $2 million. Determine the amount of
depreciation to be charged for the year ended 31.03.2014.
30. On 30.09.2012, Tiny sold goods to a customer for $30 million. The terms of
sale include the provision by Tiny of after sales service for a period of two
years. The cost to Tiny of the after sale service is expected to be $2 million
per annum and a reasonable profit margin on the service would be 20%.
Determine the revenue to be reported for sale of goods and service income.
31. Alpha acquired 80% shareholding in Beta on 01.04.2013. On that date Alpha
revalued the assets of Beta as follows:

Property was revalued at $135 million (carrying value $120 million). $8 million
of the revaluation increase pertains to land and the balance to building. It is
estimated that the buildings will have a life of 10 years more from the date
of acquisition.
There were no intangible assets in the books of Beta on the date of

acquisition. However, Alpha recognised an intangible asset for $12 million.
Alpha has its policy of amortising its intangible assets over a period of 20
years from the date of acquisition.
Alpha closes its books of account on 31st March every year and the effective
tax rate is 20%.
311

Determine the amount of Deferred Tax asset/liability on the above

transactions as at the date of acquisition and as at the year end.
32. On 01.06.2010, Jerry signed a contract to construct a machine for one of

its customers and to subsequently provide two years of servicing facilities
relating to the machine. Jerry commenced construction on 01.08.2010 and
the construction took two months to complete. Jerry incurred the following
costs of construction:

Material $2 million
Other direct costs $1.5 million
Allocated overheads $1 million
Estimated cost of servicing $50,000 per month
On 01.12.2010, the machine was delivered to the customer. The

customer paid the full contract price of $7.5 million on 31.12.2010. Jerry
would normally expect a return on profit margin of 20% on its service
contracts.
Determine the figures that will be reported in the statement of financial

position and statement of comprehensive income for the year ended
31.03.2011 with supportive calculations.
33. On 01.04.2012, Alpha acquired 40% interest in Zeta for a consideration of

$74 million. Following table shows the balance in reserves in the individual
financial statements of Zeta:

As on
As on
01.04.2012 31.03.2013

Share Capital
Retained Earnings
Other components of equity

($000s)
100,000
100,000
66,000
76,000
1,200
2,000
On 01.04.2012, there were no material differences between the carrying

values of the net assets of Zeta in the individual financial statements and the
fair value of those assets.
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The inventories of Zeta on 31.013.2013 included goods purchased from Alpha

for an amount of $12 million. Alpha made a profit of 33.33% on these sales.
You are required to disclose the amount to be reported in Alphas

consolidated financial statements for the year end 31.03.2013 under
Investment in associates with supportive calculations.
34. As on 30.09.2013, the individual financial statements of Sigma carried long

term borrowings with a balance of $ 1,700 million. This included a loan at a
carrying amount of $60 million which was taken out on 01.10.2012. The loan
does not carry any interest but $75.6 million is repayable on 30.09.2015.
This represents an effective annual rate of return for investors of 8%. As
an alternative to repayment, the investors can exchange their loan asset for
equity shares in Sigma on 30.09.2015. The annual rate of return required
by such investors on a non-convertible loan would have been 10%. Alpha
has not charged any finance cost in respect of this loan for the year ended
30.09.2013.

The present value of $1 payable/ receivable in three years times is as

follows:

79.4 cents when the discount rate is 8% per annum.
75.1 cents when the discount rate is 10% per annum.
Determine the amount to be reported in the statement of financial position

and the statement of comprehensive income of Sigma for the year ended
30.09.2013. Show relevant calculations also.
35. On 31.07.2010, Alpha decided to dispose of a 100% owned subsidiary, Theta.

The business activities of Theta are substantially different from those of the
rest of the group. The net assets of Theta at 31.07.2010 were included in the
consolidated financial statements of Alpha at a net carrying amount of $300
million, made up as follows:

Unimpaired goodwill
Other assets
Liabilities
($000s)
15
400
(115)
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On 31.07.2010, Alpha began to seek a buyer and initial expectation was

that the sale price (net of selling costs) would be $275 million. The carrying
value of the identifiable net assets of Theta in the consolidated balance
sheet at 30.09.2010 was approximately the same as their carrying amount
on 31.07.2010. Completion of the transaction is expected to happen in early
2011.
Explain how the prospective sale of Theta will affect the consolidated financial
statements of Alpha for the year ended 30.09.2010 preparing relevant
calculations wherever necessary.
36. On 01.04.2013, Kaya began to extract minerals from a large site that it
had recently constructed. The direct cost of constructing the site totalled
$25 million. The directors of Kaya estimate that an approximate allocation
of general administrative cost to this project would be $2.5 million. The site
has an expected useful economic life of 10 years and at the end of that
period the cost of rectifying the damage to the environment caused by the
construction of the site is estimated at $6 million. Kaya is under no legal
obligation to rectify this damage, but its published policies indicate that
rectification is its usual practice in such circumstances.

Your assistant has included $27.5 million in PPE and charged $2.75 million
depreciation in the income statement. He has not included any provision for
the cost of rectifying the environmental damage because Kaya has no legal
obligation to rectify it and could therefore choose not to.
The relevant discount rate to be used in any calculation is 8% per annum.
Explain and quantify the accounting treatment of the above transaction in the
books of Kaya as on 31.03.2014.
37. On 01.06.2008 Epilson opened a new factory in an area designated by the

government as an economic development area. On that day the government
provided Epilson with a grant of $30 million to assist it in the development of
the factory. This grant was in three parts:
(i)
$6 million of the grant was a payment by the government as an

inducement to Epilson to begin developing the factory. No conditions
were attached to this part of the grant.
(ii) $15 million of the grant related to the construction of the factory at a
cost of $60 million. The land was leased so the whole of the $60 million
is depreciable over the estimated 40 year useful life of the factory.
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(iii) The remaining $9 million was received subject to keeping at least 200
employees working at the factory for a period of at least five years.
If the number drops below 200 at any time during the year in this
5 year period then 20% of the grant is repayable in that year. From
01.06.2008, 220 workers were employed at the factory and estimates
are that this number is unlikely to fall below 200 over the relevant five
year period.

Explain how the grant of $30 million should be reported in the financial
statements of Epilson for the year ended 30.09.2008 with relevant
calculations wherever necessary.
38. On 1 October 2012, Omega purchased some land for $10 million (including
legal costs of $1 million) in order to construct a new factory. Construction
work commenced on 1 November 2012. Omega incurred the following costs
in connection with its construction:
Preparation and levelling of the land $300,000.
Purchase of materials for the construction $6.08 million in total.
Employment costs of the construction workers $200,000 per month.
Overhead costs incurred directly on the construction of the factory

$100,000 per month.
Ongoing overhead costs allocated to the construction project using

Omegas normal overhead allocation model $50,000 per month.
Income received during the temporary use of the factory premises as

a car park during the construction period $50,000.
Costs of relocating employees to work at the new factory $300,000.
Costs of the opening ceremony on 31 July 2013 $150,000.
The factory was completed on 31 May 2013 and production began on

1 August, 2013. The overall useful life of the factory building was estimated
at 40 years from the date of completion. However, it is estimated that the
roof will need to be replaced 20 years after the date of completion and
that the cost of replacing the roof at current prices would be 30% of the
total cost of the building. At the end of the 40-year period Omega has a
legally enforceable obligation to demolish the factory and restore the site
315

to its original condition. The directors estimate that the cost of demolition in
40 years time (based on prices prevailing at that time) will be $20 million.
An annual risk adjusted discount rate which is appropriate to this project is
8%. The present value of $1 payable in 40 years time at an annual discount
rate of 8% is 4.6 cents.

The construction of the factory was partly financed by a loan of $17.5 million
taken out on 1 October, 2012. The loan was at an annual rate of interest of
6%. During the period 1 October, 2012 to 28 February, 2013 (when the loan
proceeds had been fully utilised to finance the construction), Omega received
investment income of $100,000 on the temporary investment of the proceeds.
Required:
Compute the carrying amount of the factory in the statement of financial

position of Omega at 30 September, 2013. You should explain your treatment
of all the amounts referred to in this part in your answer.
39. On 1 April 2011, Omega began to lease a property on a 20-year lease.

Omega paid a lease premium of $3 million on 1 April, 2011. The terms of
the lease required Omega to make annual payments of $500,000 in arrears,
the first of which was made on 31 March, 2012.

On 1 April, 2011 the fair values of the leasehold interests in the leased
property were as follows:

Land $3 million.
Buildings $ 4.5 million.
There is no opportunity to extend the lease term beyond 31 March, 2031.

On 1 April, 2011 the estimated useful economic life of the buildings was 20
years.
The annual rate of interest implicit in finance leases can be taken to be 9.2%.
The present value of 20 payments of $1 in arrears at a discount rate of 9.2%
is $9.
Required:
Explain the accounting treatment for the above property lease and
produce appropriate extracts from the financial statements (statement of
comprehensive income and statement of financial position) of Omega for the
year ended 31 March 2012.
316

ANSWERS
Q True/ False
1 False
2
False
3 False
4 True
5 True
6
True
7 True
8
False
9 True
10 True
11
(a) IAS 41
12 (a) Contingent
13 (a) Timing difference
14 (b) Straight line basis
15 (a ) Grant date
16 (b) Ready for its intended use
17 (c) Operating segment
18 (a) Revaluation surplus
19 (c) Impairment loss
20 (b) IAS 21
21 Amount to be recognised as expense:
190X 100 x $ 2 x 1/3 = $ 12,667
317

22. (a)
Amount to be recognised as revenue : $ 2 million x (PVIF 10%, 1 year)

$ 2 million x 0.909 = $ 1.82 million
(b) Amount to be recognised as finance income $ 1.82 million x 10% x

10/12 = $ 0.152 million
23. (a) Amount to be recognised as expense in Statement of Comp.

Income: Expense = $ 500,000 (pertaining to 01.10.2013)
(b) Amount that will qualify for recognition of Intangible asset: $ 500,000 x
11 months =$ 5,500,000 (from 01.11.2013 to 30.09.2014)
24. Trade receivables that will be reported in consolidated financial statement of
financial position of Alpha will be:

Alpha + Beta = ($ 3 + $ 2) million = $ 5 million.
Note: Interest in associate will be reported under Investment in Associate

in the consolidated financial statements of parent.
25. Alpha will revalue its INR receivable at the closing rate of $ 0.017 and
account for revaluation loss of $1000 in its books of account in accordance
with provisions in IAS 21.
26. In terms of para 67 of IAS 16 Property, plant and equipment, the carrying
amount of an item of plant and equipment shall be derecognised:
(b) On disposal or
(c) When no future economic benefits are expected from its use or
disposal. In this case, the directors has evaluated that no future
economic benefits is expected from the machine, hence $ 10 million
(carrying value) should be charged to profit and loss in accordance with
de-recognition principles.
27
(in $ 000s)
Revenue from sale of goods
450
Cost of goods sold ($ 400,000 +$ 100,000)*
500
Loss to be recognised in the financial statements
*Original cost + cost of repacking and repairing

318
50

28. Under the principles of IAS 37 Provision, contingent liabilities and
contingent assets a provision should be made for probable damages
payable to the customer.

The amount provided should be the amount Delta would rationally pay to
settle the obligation at the reporting date. Ignoring discounting, the company
has to provide
$ 1 million by debiting profit and loss account and crediting liabilities.
29.

Original cost (in $ 000s)
Component Component
1 2
Total
6000
2000
8000
Estimated useful life (in yrs.)
10
Estimated residual value
Depreciation for the year 2013-14 (in

600 500 11 0 0
$ 000s)
30. Determination of revenue to be recognised:

25,000
Service Income per annum (WN)
2,500
Deferred revenue (service income) (WN)
2,500
WN:
(in $ 000s)

Cost of service for 2 years ($ 2 million x 2 years)
4,000

Add: Profit margin (25% on cost)
1,000

Total Service Income
5,000

Deferred revenue ($ 5000/2)
2,500
319

31. Temporary difference Deferred tax

($ 000s)
01.04.2013 31.03.2014
Revaluation adjustment Land
8,000
8,000
Revaluation adjustment Building
7,000
6,300
Recognition of Intangible asset
12,000
11,400
Total
27,000
25,700
Deferred tax liabilities @ 20%
5,400
5,140
Sale of goods
Service
32.

Revenue (refer working note)
6,000
250
Costs:
(200)
Material
(2,000)
Other direct costs
(1,500)
Allocated overheads
(1,000)
Profit
Deferred revenue
1,250
Working Note: Apportionment of Revenue from Services:
1,500
50
($ 000s)
Cost of rendering service per month
Cost of rendering service from 01.12.2010- 31.03.2011-4 months
Profit margin on above (25% on cost)
Revenue from service for the period 01.12.2010 31.03.2011
Deferred revenue 01.04.2011 to 30.11.2012
1,250
Total Revenue received
7,500
Amount pertaining to Service (250 +1250)
(1,500)
6,000
320
50
200
50
250

33. Amount to be reported in the consolidated statement of financial position of
Alpha:

Assets:
Investments in Associate - Zeta (refer working note) = $ 76,800
Working note:

Cost of investment in Zeta

Share of profit for the period from 01.04.12 to 31.03.13

(76,000 66,000) x 40%

Movements in other components of equity (800 x 40%)

Unrealised gain included in the Inventories of Zeta

(12,000 9,000) x 40%

Investment in Zeta as on 31.03.2013
($ 000s)
74,000
4,000
320
(1,200)
77,120
34 Statement of financial position:

Liabilities
Equity
Other components of equity (WN 1) : $ 3,224
Non-Current:
Long-term borrowings ($ 170,000 60,000 + 62,454 (WN 3) = $ 172,454

Finance cost = $ 5,678 (WN 2)
Working note
1.
Determination of Equity component in the term loan
($ 000s)
a. Amount to be repaid in 30.09.2015
75,600
b. PV of amount to be repaid in 30.09.2015

(75,600 x 0.751)
56,776
c. Amount of borrowings reported in financial

statements as on 01.10.12
60,000
d. Equity component [c-d]

321
3,224

2.
Finance cost on borrowings:
($ 000s)
PV of long term borrowings
Interest @ 10% p.a
3.
Long-term borrowings
56,776
5,678
($ 000s)
PV of long-term borrowings
56,776
Add: Interest
Long-term borrowing as on 30.09.2013
4.
As the loan is with convertible option the relevant rate to be used is

10%.
5,678
62,454
35. On 31.07.2010, Theta will be considered as held for sale. Once an asset is
considered as held for sale, then provisions for IFRS 5 Non-current assets
held for sale shall apply.

The assets held for sale will be depreciated till date such date it is classified
as held for sale. Once it is considered as held for sale then no depreciation
is provided for after that date (here 31.07.2010).
The assets classified as held for sale should be separately disclosed

in financial statements. On the date on which it is classified as held for
sale, then such assets shall be valued at lower of carrying value and net
recoverable value. Any impairment loss to be provided for.
($ 000s)
Carrying value of net assets
300
Net recoverable value
275
Impairment loss to be recognised
25
Allocation of Impairment loss:

($ 000s)
Goodwill
15
Other assets
10
Total
25
322

36 Statement of financial position:

Assets:
Property, plant and equipment $ 27,778 (WN 1) - $ 2,778 (WN 3) = $ 25,000

Liabilities:
Provision for restoration costs $ 2,778 (WN 2) + $ 222 (WN 4) = $ 3,000
Statement of Comprehensive Income:
Finance cost (WN 4) = $ 222
Depreciation (WN 3) = $ 2,778
Working note:
1. Determination of amount to be capitalised

($ 000s)
Cost of construction
25,000

General overheads

Cost of restoration (WN 2) 2,778

Total
27,778
2.
Reason
Forms part of cost of
PPE
Excluded from cost in
terms of para.19 of
IAS 16
Forms part of cost of
PPE para 16 of IAS
16
Determination of cost of restoration cost:
($ 000s)
Restoration cost expected at the end of year 10
6,000
PVIF (8%, 10 years)
0.463
PV of restoration costs (6,000 x 0.463)
2,778
3.
Depreciation
($ 000s)
Total cost
27,778
Estimated years of useful life
Depreciation per annum
10 years
2,778
323

4.
Finance Cost:
($ 000s)
PV of restoration cost
Interest @ 8% p.a
37 (i)
2,778
222
As no conditions are attached, $ 6 million can be recognised in the

income statement directly.
(ii) There are two ways of recognising $ 15 million grant

Approach
Treatment in the books of account
Capital
approach

Deduct $ 15 million from the total cost of

construction of $ 60 million and compute
proportionate depreciation on $ 45 million. As the
lease term is for 40 years, proportionate
depreciation per annum amounts to $ 0.375 million
($ 45/40 years x 4/12)
Income
approach

Under this approach, an amount equal to

depreciation provided each year will be credited to
income statement, and the balance will be treated
as unearned revenue. Depreciation for the year
amounts to $ 0.5 million ($60 million/40 years x
4/12). Hence $ 0.5 million will be credited to income
statement as grant received from government and
the balance $ 14.50 million will be shown under
deferred revenue.
(iii) As a condition is attached to $ 9 million grant, it will be appropriate to

recognise the amount on straight line basis over a period of 5 years.
Hence amount to be recognised in the income statement for the year
will be $ 1.80 million and the balance $ 7.2 million will be treated as
deferred revenue.
324

38 Statement of financial position: (Figs in $ 000s)

Property, plant and equipment factory building (W1) (W2) = $ 19,892

Working notes
1. Determination of amount to be capitalised

($ 000s) Reason

Land
10,000 Direct cost

Preparation and levelling
300 Direct cost

Materials
6,080 Direct cost

Employment costs ($ 200 x 7 1,400 Direct cost

months) (01.11.12- 31.015.13)

Direct overheads ($ 100 x 7
700 Direct overheads forms

months) part of cost of the asset

Indirect overheads
- Do not form part of cost of
the asset

Income received from car
- Not incidental to

parking construction, hence not
considered as part of the
asset

Relocation expenses
- Not a direct cost of
construction

Opening ceremony
- Not a direct cost of
construction

Borrowing cost capitalised
700 Qualifying asset hence,

($ 17,500 x 6% x 8/12) capitalised

Income from temporary
(100) Must be set off against

investments amount capitalised

Provision for demolition
920 Forms part of cost of the
asset

Total amount to be capitalised 20,000
325

2. Depreciation

($ 000s)

Land
-

Factory building (70%
58 7000 x 1/40 x 4/12

category)

Factory building roof (30%
50 3000 x 1/20 x4/12

category)

Total
108
39 Statement of financial position: (figs in $000s)
Assets:

Property, plant and equipment Building ($ 4500 - $ 225) = $ 4,275
Deferred revenue Lease incentive (land) ($ 1200 - $ 60) = $ 1,140
Liabilities:
Finance lease obligation = $2,648
Statement of comprehensive income:

Expenses:
Operating lease rental = $ 200

Finance cost = $ 248
Depreciation = $ 225
Income:
Lease incentive on land = $ 60
Working Notes:
1.
Lease rent to be apportioned on the basis of fair value of land and

building as on the date of inception of lease.
2.
Lease of land is an operating lease and the lease of building is a

finance lease.
3.
Operating lease rentals has to be recognised on straight line basis over

the lease term.
4.
Lease incentive on land to be recognised on straight line basis over the

lease term. It amounts to $ 60,000 ($ 1.2 million/ 20 years)
5.
Depreciation on building amounts to $ 2,25,000 per annum

326

6.

Apportionment of lease rentals :

Land (500/7500) x 3000
Building (500/7500) x 4500
Total
($ 000s)
200
300
500
7.
Apportionment of Lease Incentive of $ 3 million
($ 000s)
Land (3000/7500) x 3000
1,200
Building (3000/7500) x 4500
1,800
Total
3,000
8.
Finance lease schedule
Opening
balance
2,700**
248
52
2,648
2,648
243
57
2,591
** (4,500-1,800)
Interest @
Principal
9.2%
327
Closing
balance
328

Full Marks : 100
Time: 3 hours
State whether the following statements are True or False

1.
A manufacturing company recognised a valuation provision to inventories due

to their obsolescence. IAS 1 allows offsetting inventory valuation provision
against inventory balance in the statement of financial position.
2.
According to IFRIC 21 a levy includes fines or other penalties that are

imposed for breaches of the legislation.
3.
According to IAS 37, a provision is a liability of uncertain timing or amount.
4.
An equity instrument of another entity is a Financial asset.
5.
A lease being classified as finance in line with IAS 17 when there is an option
to purchase the asset at the price lower than its fair value at the end of the
lease term.
6.
IFRIC 12 Service Concession Arrangements applies to accounting by Grantor.
7.
IAS 33 Earnings per Share applies even when an entity incurs loss and
shall present basic and diluted earnings per share (i.e. a loss per share).
8.
As per IFRS 3, Purchase method applies to accounting for true mergers or

mergers of equals.
9.
IFRS 13 Fair Value Measurement specifies when to apply Fair Value

Measurement.
10. As per IAS 23 Borrowing Cost an entity has an option to treat as an expense
Borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset.
329

Fill in the Blanks
11. A company uses _______ as the control number, to establish whether
potential shares are dilutive, or anti-dilutive
a)
Profit from continuing operations.
b)
Profit from discontinuing operations.
c)
Both Profit from continuing and discontinuing operations
12. The models permitted by IAS 40 for subsequent measurement of investment

property are __________
a)
Cost model and fair value model.
b)
Cost model and revaluation model
c)
Cost model, revaluation model and fair value model.
d)
Revaluation model and fair value model
13. As per IAS 17 Leases, gross investment in the lease is the_______ of the
minimum lease payments receivable by the lessor under a Finance Lease
and any unguaranteed residual value accruing to the lessor.
a)
Future Value
b)
Fair Value
c)
Present Value
14. An entity that acquires an intangible asset may use the revaluation model for
subsequent measurement only if ___________
a)
The useful life of the intangible asset can be reliably determined.
b)
An active market exists for the intangible asset.
c)
The cost of the intangible asset can be measured reliably.
d)
The intangible asset is a monetary asset.
15. Upon first-time adoption of IFRS, an entity may elect to use fair value as
deemed cost for ___________
a)
Biological assets related to agricultural activity for which there is no

active market.
330

b)
Intangible assets for which there is no active market.
c)
Any individual item of property, plant and equipment.
d)
Financial liabilities that are not held for trading.
16. Accounts produced on a going-concern basis suggest the business will

continue in operation for _________
a)
6 months
b)
1 Year
c)
The foreseeable future
d)
2 Years
17. You need to refinance your long-term loan. Your end of the reporting period is
March; you sign the refinancing in April and approve your financial statements
in May. The long-term loan is shown as ____________
a)
A current liability
b)
A non-current liability
c)
A contingent liability
d)
A Current Asset
18. Changes in accounting estimate should be applied ____________

a) Prospectively
b) Retrospectively
c)
All of the above
d)
None of the above
19. As Per IAS 7 Statement of Cash Flows, normal sales and purchase
transactions would be classified under ______ activities
a) Operating
b) Investing
c) Financing
331

20. IFRIC 13 Customer Loyalty Programmes, requires allocating some of the
consideration received or receivable from the sales transaction to the award
credits and deferring the recognition of __________
a) Revenue
b) Gain
c) Income
Choose the Correct Answers
21. A company recognised a provision for retirement bonus in total amount of
` 200,000 as of 31 December, 2013. The company expects to pay ` 10,000
in the year 2014, ` 15,000 in the year 2015 and the remaining ` 175,000
after 2016. Ignore the discounting and advise how this provision should be
recognised in the statement of financial position.
a)
Long-term liabilities: ` 175 000, medium-term liabilities: ` 15 000,

short-term liabilities: ` 10 000.
b)
Long-term liabilities: ` 175 000, short-term liabilities: ` 25 000.
c)
Long-term liabilities: ` 190 000, short-term liabilities: ` 10 000.
d)
Long-term liabilities: ` 200 000.
22. What is the journal entry at the inception of the finance lease in the financial
statements of a lessee?
a)
Debit Asset acquired under the finance lease and credit Bank accounts.
b)
Debit Asset acquired under the finance lease and credit Trade
payables.
c)
Debit Asset acquired under the finance lease and credit Finance lease
liabilities.
d)
Debit Finance lease receivable and credit Asset provided under the
finance lease.
23. An entity purchases a trademark and incurs the following costs in connection
with the trademark: `
One-time trademark purchase price
100,000
Nonrefundable VAT taxes
5,000
332

Training sales personnel on the use of the new trademark -
7,000
Research expenditures associated with the purchase
24,000
Legal costs incurred to register the trademark
10,500
Salaries of the administrative personnel
12,000
Assuming that the trademark meets all of the applicable initial asset
recognition criteria; at what amount the entity should recognize an asset?
a)
` 100,000
b)
` 115,500
c)
` 146,500
d)
` 158,500
24. Find the cost of borrowings. You are building a bridge costing ` 200 million.
` 120 million is financed from a long-term loan costing 8%. The remaining
` 80 million comes from a pool of loans. 35% of the pooled loans cost 10%.
65% of the pooled loans cost 12%. Using this information find the cost of
borrowings for the first year.
a.
` 9.04 million
b.
` 18.64 million
c.
` 18 million
d.
` 9 million
25. Cost of property, plant and equipment (IAS 16) is calculated as:
d)
a)
Purchase price net of any discounts + directly attributable costs

accumulated depreciation.
b)
Purchase price + transport costs + installation cost.
c)
Purchase price net of any discounts + directly attributable costs

accumulated depreciation impairment loss.
Purchase price net of any discounts + directly attributable costs + the initial
estimate of costs for dismantling and removing the asset and restoring the
site.
333

26. What is the basic rule related to inputs to valuation techniques stated in
IFRS 13
a)
Entities should maximise the use of Level 1 inputs and minimize the
use of Level 3 inputs.
b)
Entities should use the Level 1, Level 2 or Level 3 inputs according to

their specific situation and circumstances.
c)
Entities should maximize the use of Level 3 inputs and minimize the
use of Level 1 inputs.
d)
Entities have to change the valuation techniques and their input period
from period to provide true and fair view about their financial situation.
27. A company sold machine for ` 4,000. The machines carrying amount was
` 1,500 and before sale, the company incurred cost of ` 200 to clean the
machine. How will this transaction be recognized in the companys financial
statements?
a)
Gain on machines disposal of ` 2,300.
b)
Operating revenue of ` 4,000 and other operating expenses of

` 200. Machines carrying amount is included in the annual
depreciation charge.
c)
Net operating revenue of ` 3,800. Machines carrying amount is

included in the annual depreciation charge.
d)
Gain on machines disposal of ` 2,500 and other operating expenses

of ` 200.
28. On January 1, year 1, an entity acquires for ` 100,000 a new piece of

machinery with an estimated useful life of 10 years. The machine has a
drum that must be replaced every five years and costs ` 20,000 to replace.
Continued operation of the machine requires an inspection every four years
after purchase; the inspection cost is ` 8,000. The company uses the
straight-line method of depreciation. What is the depreciation expense for
year 1?
a)
` 10,000
b)
` 10,800
c)
` 12,000
d)
` 13,200
334

29. On 1 January 2014 an entity acquired a building for ` 95,000, including
` 5,000 non-refundable purchase taxes. The purchase agreement provided
for payment (including payment of the purchase taxes) to be made in full
on 31 December, 2014. Legal fees of ` 2,000 were incurred in acquiring
the building and paid on 1 January, 2014. The building is occupied by the
entitys administrative staff. An appropriate discount rate is 10 per cent per
year. What is the initial cost of the building?
a)
` 102,000
b)
` 97,000
c)
` 88,364
d)
` 107,000
30. A company determined the following values for its inventory as of the end of
its fiscal year:
`
Historical cost
Current replacement cost
Net realisable value
Fair value

1,00,000
70,000
90,000
95,000
What amount should the company report as inventory on its balance sheet?
a)
` 1,00,000
b)
` 70,000
c)
Rs 90,000
d)
` 95,000
Section B
Descriptive Questions ( 7 x 5 = 35 Marks )
31. The Conceptual Framework for Financial Reporting identifies faithful
representation as a fundamental qualitative characteristic of useful financial
information. Required: Distinguish between fundamental and enhancing
qualitative characteristics and explain why faithful representation is important.
335

32. Discuss whether the following event would require disclosure in the financial
statements of the RP Group, a public limited company, under IAS 24 Related
party disclosures. The retirement benefit scheme of the group is managed
by another merchant bank. An investment manager of the group retirement
benefit scheme is also a non-executive director of the RP Group and
received an annual fee for his services of ` 2.5 lakhs which is not material
in the group context. The company pays ` 16 crores per annum into the
scheme and occasionally transfers assets into the scheme. In 2014, property,
plant and equipment of ` 10 Crores were transferred into the scheme and a
recharge of administrative costs of ` 30 lacs was made.
33. Explain how IAS 12 Income Taxes defines the tax base of assets
and liabilities and how temporary differences are identified as taxable or
deductible temporary differences
34. State the criteria that need to be satisfied before an asset or disposal
group is classified as held for sale under IFRS 5 and explain how assets
or disposal groups that are classified as held for sale are measured and
presented in the statement of financial position.
35. The following issue has arisen during the preparation of Shyams draft
financial statements for the year ended 31 March 2014:

On 1 April 2013, Shyam received a government grant of ` 8 lacs towards

the purchase of new plant with a gross cost of ` 64 lacs. The plant has an
estimated life of 10 years and is depreciated on a straight-line basis. One
of the terms of the grant is that the sale of the plant before 31 March, 2017
would trigger a repayment on a sliding scale as follows:
Sale in the year ended
Amount of repayment
31 March, 2014
100%
31 March, 2015
75%
31 March, 2016
50%
31 March, 2017
25%
Accordingly, the directors propose to credit to the statement of profit or loss

` 2 Lakhs (` 8 Lakhs x 25%) being the amount of the grant they believe has
been earned in the year to 31 March, 2014. Shyam accounts for government
grants as a separate item of deferred credit in its statement of financial
336

position. Shyam has no intention of selling the plant before the end of its
economic life.

Advise, and quantify where possible, how the above item should be treated
in Shyams financial statements for the year ended 31 March 2014.
36. Gold Diggers Co is a mining company currently exploring and evaluating the
possibilities for extracting gold from the deserts of South Australia. It has
incurred the following costs in the year ended 2013.

` 000
Legal expenses relating to acquisition of land in

which exploration is to take place
15,000
Legal expenses relating to acquisition of right to explore land
12,000
Exploratory drilling costs
General administrative overheads allocated to

exploration of land in S Australia
Costs of Extracting Gold
Which of the above costs may be capitalised as exploration and evaluation

assets in accordance with IFRS 6?
123,000
25,000
152,000
37. Define investment property under IAS 40 and explain why its accounting
treatment is different from that of owner-occupied property and explain how
the treatment of an investment property carried under the fair value model
differs from an owner-occupied property carried under the revaluation model.
38. The following details relate to two items of property, plant and equipment (A
and B) owned by Delta which are depreciated on a straight-line basis with
no estimated residual value:
Item A
Item B
8 years
6 years
` 000
` 000
Cost on 1 April 2010
240,000
120,000
Accumulated depreciation (two years)
(60,000)
(40,000)
Carrying amount at 31 March 2012
180,000
80,000
Estimated useful life at acquisition

337

Revaluation on 1 April 2012:
Revalued amount
160,000
112,000
Revised estimated remaining useful life
5 years
5 years
Nil
14,400
Subsequent expenditure
capitalised on 1 April, 2013

At 31 March, 2014 item A was still in use, but item B was sold (on that date)
for ` 70 million.
Note: Delta makes an annual transfer from its revaluation surplus to retained
earnings in respect of excess depreciation.
Required:
Prepare extracts from:

Deltas statements of profit or loss for the years ended 31 March 2013
and 2014 in respect of charges (expenses) related to property, plant
and equipment
Deltas statements of financial position as at 31 March 2013 and 2014

for the carrying amount of property, plant and equipment and the
revaluation surplus.
338

Section C - Case Study (2 x 10 = 20 Marks)
39. On 1 October 2013, Pyramid acquired 80% of Squares equity shares
by means of a share exchange of two shares in Pyramid for every three
acquired shares in Square. In addition, Pyramid would make deferred cash
payment of 88 paise per acquired share on 1 October 2014. Pyramid has
not recorded any of the consideration. Pyramids cost of capital is 10%
per annum. The market value of Pyramids shares at 1 October 2013 was
` 6.The following information is available for the two companies as at 30
September 2014:

Pyramid
` 000
Square
` 000
Assets
Non-Current Assets
Property, plant and equipment
38,100
28,500
Equity and liabilities

Equity
Equity shares of ` 1 each
50,000
9,000
Other components of equity
8,000
Nil
Retained earnings at 1 October 2013
16,200
19,000
for the year ended 30 September 2014
14,000
8,000
The following information is relevant:

At the date of acquisition, Squares net assets were equal to their carrying
amounts with the following exceptions: an item of plant which had a fair
value of ` 3 million above its carrying amount. At the date of acquisition it
had a remaining life of five years (straight-line depreciation). Square had an
unrecorded deferred tax liability of ` 1 million, which was unchanged as at
30 September, 2014
Pyramids policy is to value the non-controlling interest at fair value at

the date of acquisition. For this purpose a share price of ` 3.50 each is
representative of the fair value of the shares in Square held by the noncontrolling interest at the acquisition date
Consolidated goodwill has not been impaired

339

Prepare extracts from Pyramids consolidated statement of financial position as at
30 September 2014 for:
a)
Consolidated goodwill
b)
Property, plant and equipment
c)
Equity (share capital and reserves)
d)
Non-controlling interests
340

ANSWERS
1. True
2. False
3. True
4. True
5. True
6. False
7. True
8. True
9. False
10. False
11. (a) Profit from continuing operations.
12. (a) Cost model and fair value model
13. (c) Present Value
14. (b) An active market exists for the intangible asset
15. (c) Any individual item of property, plant and equipment
16. (c) The foreseeable future
17. (a) A current liability
18. (a) Prospectively
19. (a) Operating
20. (a) Revenue
21. c
22. c
23. b
24. b
25. d
341

26. a
27. a
28. d
29. c
30. c
31. The Conceptual Framework for Financial Reporting implies that the two
fundamental qualitative characteristics (relevance and faithful representation)
are vital as, without them, financial statements would not be useful, in
fact they may be misleading. As the name suggests, the four enhancing
qualitative characteristics (comparability, verifiability, timeliness and
understandability) improve the usefulness of the financial information.
Thus financial information which is not relevant or does not give a faithful
representation is not useful (and worse, it may possibly be misleading);
however, financial information which does not possess the enhancing
characteristics can still be useful, but not as useful as if it did possess them.

In order for financial statements to be useful to users (such as investors or

loan providers), they must present financial information faithfully, i.e. financial
information must faithfully represent the economic phenomena which it
purports to represent (e.g. in some cases it may be necessary to treat a sale
and repurchase agreement as an in-substance (secured) loan rather than
as a sale and subsequent repurchase). Faithfully represented information
should be complete, neutral and free from error. Substance is not identified
as a separate characteristic because the IASB says it is implied in faithful
representation such that faithful representation is only possible if transactions
and economic phenomena are accounted for according to their substance
and economic reality
32. Employee retirement benefit schemes of the reporting entity are included in
the IAS 24 definition of related parties.

The contributions paid, the non-current asset transfer (` 10 Crores) and the
charge of administrative costs (` 30 lakhs) must be disclosed.
The pension investment manager would not normally be considered a related

party. However, the manager is key management personnel by virtue of his
non-executive directorship. Directors are deemed to be related parties by
IAS 24, and the manager receives a ` 2.5 lakhs fee. IAS 24 requires the
342

disclosure of compensation paid to key management personnel and the fee
falls within the definition of compensation. Therefore, it must be disclosed.
33. Tax Base

The tax base of an asset is the tax deduction which will be available in future
when the asset generates taxable economic benefits. If the future economic
benefits will not be taxable, the tax base of an asset is its carrying value.
The tax base of a liability is its carrying value, less the tax deduction which
will be available when the liability is settled. For revenue received in advance
(or deferred income), the tax base is its carrying value, less any amount of
the revenue which will not be taxed in future periods.
Temporary Difference
A taxable temporary difference arises when the carrying value of an asset

exceeds its tax base or the carrying value of a liability is less than its tax
base.
A deductible temporary difference arises in the reverse circumstances (when

the carrying value of an asset is less than its tax base or the carrying value
of a liability is greater than its tax base)
33. Classification as Held for Sale

An entity classifies an asset or disposal group as held for sale if its carrying
amount will be principally recovered through a sale transaction rather than
through continuing use.
For this to be the case the asset must be available for immediate sale in
its present condition and the sale must be highly probable. For the sale to
be highly probable, management must be committed to selling the asset
or disposal group and be actively marketing the asset or disposal group at
a reasonable price. In addition, the sale should be expected to qualify for
recognition within one year of the date of classification.
Measurement
An asset or disposal group that is classified as held for sale should be

measured at the lower of the carrying amount and fair value (arms length
sale price) less costs to sell. Costs to sell are the incremental costs of selling
the asset or disposal group, excluding finance costs and income tax expense
343

When an asset or disposal group is classified as held for sale no further

depreciation charges should be made on the asset or the disposal group.
An entity should present an asset classified as held for sale and the assets
of a disposal group classified as held for sale separately from other assets
in the statement of financial position.
The liabilities of a disposal group classified as held for sale should be

presented separately from other liabilities in the statement of financial
position. They should not be offset against the assets of the disposal group.
35. Government grants related to non-current assets should be credited to the

statement of profit or loss over the life of the asset to which they relate, not
in accordance with the schedule of any potential repayment. The directors
proposed treatment is implying that the government grant is a liability which
decreases over four years. This is not correct as there would only be a
liability if the directors intended to sell the related plant, which they do not.
Thus in the year ended 31 March 2014, ` 80,000 (8 lakhs / 10 years) should
be credited to the statement of profit or loss and ` 7.2 lacs should be shown
as deferred income (` 80,000 current and ` 6.4 lacs non-current) in the
statement of financial position
36. The following costs can be capitalised in accordance with IFRS 6:

` 000
Legal expenses relating to acquisition of right to explore land
12,000
Exploratory drilling costs
123,000
` 000
Legal expenses relating to acquisition of land in

which exploration is to take place (Note 1)
15,000
General administrative overheads allocated to

exploration of land in S Australia (Note 2)
25,000
Costs of extracting gold (Note 3)

152,000
Notes:
1.
The land is acquired before the process of exploration and evaluation

beings (because by definition the entity cannot be exploring and
evaluating resources on land it does not own). The legal expenses
344

relating to the acquisition are therefore not accounted for in line with
IFRS 6, and are expensed.
2.
General administrative overheads do not relate to the exploration and

evaluation of resources, and must be expensed.
3.
The costs of extracting gold are incurred after the process of

exploration and evaluation has ended, and is not therefore accounted
for in accordance with IFRS 6. They are costs incurred in the ordinary
course of the business, and will likely be expensed as they are unlikely
to qualify as intangible assets under IAS 38.
37. An investment property is land or buildings (or a part thereof) held by the
owner to generate rental income or for capital appreciation (or both) rather
than for production or administrative use. It would also include property held
under a finance lease and may include property under an operating lease, if
used for the same purpose as other investment properties.

Generally, non-investment properties generate cash flows in combination with

other assets, whereas a property that meets the definition of an investment
property means that it will generate cash flows that are largely independent
of the other assets held by an entity and, in that sense, such properties do
not form part of the entitys normal operations.
Superficially, the revaluation model and fair value sound very similar; both
require properties to be valued at their fair value which is usually a marketbased assessment (often by an independent valuer). However, any gain
(or loss) over a previous valuation is taken to profit or loss if it relates to
an investment property, whereas for an owner-occupied property, any gain
is taken to a revaluation reserve (via other comprehensive income and the
statement of changes in equity). A loss on the revaluation of an owneroccupied property is charged to profit or loss unless it has a previous surplus
in the revaluation reserve which can be used to offset the loss until it is
exhausted. A further difference is that owner-occupied property continues
to be depreciated after revaluation, whereas investment properties are not
depreciated.
345

38. (i) Delta Extracts from statement of profit or loss (see workings):

Rs000

Year ended 31 March 2013

Plant impairment loss
20,000

Plant depreciation (32,000 + 22,400)
54,400

Year ended 31 March 2014

Loss on sale
8,000

Plant depreciation (32,000 + 26,000)
58,000

42. Delta Extracts from statement of financial position (see workings):

Rs000

As at 31 March 2013

Property, plant and equipment (128,000+89,600)
217,600

Revaluation surplus

Revaluation of item B (1 April 2012)
32,000

Transfer to retained earnings (32,000/5 years)
(6,400)

Balance at 31 March 2013
25,600

As at 31 March 2014

Property, plant and equipment (item A only)
96,000

Revaluation surplus

Balance at 1 April 2013
25,600

Transfer to retained earnings (asset now sold)
(25,600)

Balance at 31 March 2014
nil

Workings (figures in brackets in ` 000)

Item A
Item B

` 000
` 000

Carrying amounts at 31 March 2012
180,000
80,000

Balance = loss to statement of profit or loss (20,000)

346

Balance = gain to revaluation surplus
32,000
112,000

Revaluation on 1 April 2012
160,000

Depreciation year ended

31 March 2013 (60,000/5 years) &

(112,000/5 years)
(32,000)
(22,400)

128,000
89,600

Subsequent expenditure capitalised

on 1 April 2013
nil
14,400

104,000

Depreciation year ended 31 March 2014

(unchanged) & (104,000/4 years)
(32,000)
(26,000)

78,000

Sale proceeds on 31 March 2014
(70,000)

Loss on sale
(8,000)

96,000
nil

39 Pyramid as at 30 September 2014
Figures in brackets are in ` 000

(a) Consolidated Goodwill
` 000
` 000
Share exchange (4.8 million (w (i)) x ` 6) 28,800
Deferred consideration (9,000 x 80% x 0.88/1.1)
5,760
Non-controlling interest (9,000 x 20% x ` 3.50) 6,300

40,860
Equity shares
9,000
Pre-acquisition reserves
19,000
Fair value plant
3,000
Unrecorded deferred tax
(1,000) (30,000)

Goodwill arising on acquisition
10,860

347

(b) Property, plant and equipment
` 000
Pyramid 38,100
Square 28,500

Gross fair adjustment to plant
3,000

Additional depreciation to 30 September 2014 (3,000/5 years)
(600)

69,000

(c) Equity
` 000

Equity shares of ` 1 each (50,000 + 4,800)
54,800
Reserves

Other components of equity (8,000 + 24,000)
32,000

Consolidated retained earnings (w (ii))
35,544
(d) Non-controlling interest
` 000

Fair value on acquisition (from answer (a) above)
6,300

Post-acquisition profit (7,400 x 20% (w (iii))
1,480

7,780

Workings
(i)
Pyramid acquired 7.2 million (9 million x 80%) shares in Square. On

the basis of a share exchange of two for three, Pyramid would issue
4.8 million (7.2 million/3 x 2) shares. At a value of ` 6 each, this would
amount to ` 28.8 million and be recorded as ` 4.8 million share capital
and ` 24 million (4.8 million x ` 5) other components of equity.
Note: It would be acceptable to classify the ` 24 million addition to

other components of equity as share premium.
348

(ii)

Pyramids retained earnings
30,200

Squares post-acquisition profit (7,400 x 80% see below)
5,920

Interest on deferred consideration (5,760 x 10%)
(576)

35,544

(iii) The adjusted post-acquisition profits of Square are:
`
As reported
8,000

Additional depreciation on plant (3,000/5 years)
(600)

7,400
349
350

Full Marks : 100
Time: 3 hours

Write True or False
1. Japan has not adopted IFRS
2.
These additional features apply to International Financial Reporting Standards

a)
Moving target
b) Relevance
c) Materiality
d)
Fair value
e) Understandability
3.
Unrealised gain on foreign currency translation should not be presented in

a cash flow statement. It should be ignored for the purposes of the cash
flow statement as it is an unrealised gain but it should be disclosed in the
footnotes to the financial statements by way of abundant precaution.
4.
Change in accounting policy does not include change in useful life from 10
years to 7 years.
5.
A chemical entity has no overseas sales. The entity produces different

products from the process. The entity sells its product to small businesses,
to larger national businesses, and to multinational entities. The management
of the entity proposed to disclose just one business segment. As per Ind AS
the entity can disclose just one business segment because it sells all of its
products nationally.
6.
The classification of a lease as either an operating or finance lease is based

on the length of the lease.
351

7.
An entity that has a common director with the entity is not required to make
minimum disclosures prescribed under IAS 24
8.
If the investor ceases to have significant influence over an associate, it

should still be treated using equity accounting.
9.
A cash-generating unit is the smallest group of assets that generates

independent cash flows from continuing use.
10. Fair value accounting for investment property does not qualify for exemption
under IFRS1
Fill in the blanks:
11. SEBI disclosures for financial results will give ___________
a)
Consolidated financial statements
b)
ESOP as per intrinsic value
c)
Cash flow as per direct method
d)
IFRS compliance as per press release in 2009
12. IAS 1 requires that an entity prepares its financial statements except for cash
flow information using accrual basis of accounting (Accrual/Cash/ Hybrid)
a) Accrual
b) Cash
c)
Hybrid
13. The cost of inventory should not include _________, _____________and

___________.
a)
Purchase price
b)
Import duties and other taxes
c)
Abnormal amounts of wasted materials
d)
Administrative overhead
e)
Fixed and variable production overhead
f)
Selling costs
352

14. An entity purchases a building and the seller accepts payment partly in
equity shares and partly in debentures of the entity. This transaction should
be treated in the cash flow statement as ____________________________
___________________________
(a) The purchase of the building should be investing cash outflow and the
issuance of shares and the debentures financing cash outflows.
(b) The purchase of the building should be investing cash outflow and the
issuance of debentures financing cash outflows while the issuance of
shares investing cash outflow.
(c) This does not belong in a cash flow statement and should be disclosed
only in the footnotes to the financial statements.
(d) Ignore the transaction totally since it is a noncash transaction. No
mention is required in either the cash flow statement or anywhere else
in the financial statements.
15. A construction company signed a contract to build a theater over a period of
two years, and with this contract also signed a maintenance contract for five
years. Both the contracts are negotiated as a single package and are closely
interrelated to each other. The two contracts should be _______________
______________________
(a) Combined and treated as a single contract.
(b) Segmented and considered two separate contracts.
(c) Recognised under the completed contracted method.
(d) Treated differentlythe building contract under the completed contract
method and maintenance contract under the percentage of completion
method.
16. IAS 16 requires that revaluation surplus resulting from initial revaluation of
property, plant, and equipment should be treated in one of the following ways
______________________________________________________________
(a) Credited to retained earnings as this is an unrealised gain.
(b) Released to the income statement an amount equal to the difference
between the depreciation calculated on historical cost vis--vis revalued
amount.
353

(c) Deducted from current assets and added to the property, plant, and
equipment.
(d) Debited to the class of property, plant, and equipment that is being
revalued and credited to a reserve captioned revaluation surplus,
which is presented under equity.
17. An entity contributes to an industrial pension plan that provides a pension
arrangement for its employees. A large number of other employers also
contribute to the pension plan, and the entity makes contributions in respect
of each employee. These contributions are kept separate from corporate
assets and are used together with any investment income to purchase
annuities for retired employees. The only obligation of the entity is to pay the
annual contributions. This pension scheme is a _______________________
_________________________________________
(a) Multiemployer plan and a defined contribution scheme
(b) Multiemployer plan and a defined benefit scheme
(c) Defined contribution plan only
(d) Defined benefit plan only
18. Minority interests be presented in the consolidated balance sheet as
_____________________________
(a) Within long-term liabilities
(b) In between long-term liabilities and current liabilities
(c) Within the parent shareholders equity
(d) Within equity but separate from the parent shareholders equity
19. An impairment loss that relates to an asset that has been revalued should
be recognized in _____________________________
(a) Profit or loss
(b) Revaluation reserve that relates to the revalued asset
(c) Opening retained profits
(d) Any reserve in equity
354

20. Operating segments can be mapped in SAP by___________________
a)
Profit centers
b) Segments
c)
Business area
d)
All of them
Calculation based
21. The current liabilities of an entity include fines and penalties for environmental
damage. The fines and penalties are stated at CU10 million. The fines and
penalties are not deductible for tax purposes. What is the tax base of the
fines and penalties?
(a) CU10 million
(b) CU3 million
(c) CU13 million
(d) Zero
22. Healthy Co. bought a private jet for the use of its top-ranking officials. The
cost of the private jet is CU15 million and can be depreciated either using a
composite useful life or useful lives of its major components. It is expected
to be used over a period of 7 years. The engine of the jet has a useful life
of 5 years. The private jets tyres are replaced every 2 years. The private jet
will be depreciated using the straight-line method over
(a) 7 years composite useful life.
(b) 5 years useful life of the engine, 2 years useful life of the tyres, and 7
years useful life applied to the balance cost of the jet.
(c) 2 years useful life based on conservatism (the lowest useful life of all
the parts of the jet).
(d) 5 years useful life based on a simple average of the useful lives of all
major components of the jet.
355

23. An entity has bought a 25% share in another entity with a view to selling that
investment within six months. The investment has been classified as held for
sale in accordance with IFRS 5. How should the investment be created in the
final year accounts?
(a) It should be equity accounted.
(b) The assets and liabilities should be presented separately from other
assets in the balance sheet under IFRS 5.
(c) The investment should be dealt with under IAS 29.
(d) Purchase accounting should be used for this investment.
24. Estimates of future cash flows normally would cover projections over a
maximum of
(a) Five years
(b) Ten years
(c) Fifteen years
(d) Twenty years
25. As per IFRS, accounting for taxes is calculated in :
a)
Single step
b)
Two steps, including once in income statement and again in OCI
c)
Three steps including once in statement of changes in equity
d)
Four steps including once in discontinued operations
26. A company sells merchandise for CU8,000 to a customer on 31 December

2014. The terms of the sale agreement state that payment is due in one
years time. The company has an imputed rate of interest of 9%. Under
IAS18 Revenue, how much revenue should the company recognise in profit
or loss for the year ended 31 December 2014?
a) CU7,339
b) CU8,000
c) Nil
d) CU8,720
356

27. The ABC Company acquired 100% of The XYZ Company for a consideration
transferred of CU112 million. At the acquisition date the carrying amount of
XYSs net assets was CU100 million and their fair value was CU120million.
How should the difference between the consideration transferred and the
net assets acquired be presented in ABCs financial statements, according
to IFRS3 Business combinations?
a)
Gain on bargain purchase of CU8 million deducted from other intangible

assets
b)
Gain on bargain purchase of CU8 million recognised in other

c)
Goodwill of CU12 million as an intangible asset
d)
Gain on bargain purchase of CU8 million recognised in profit or loss
28. The ABC Company acquired 100% of The XYZ Company for a consideration
transferred of CU112 million. At the acquisition date the carrying amount of
XYSs net assets was U100 million and their fair value was CU120 million.
How should the difference between the consideration transferred and the net
assets acquired be presented in ABCs financial statements, according to Ind
AS 103 Business combinations?
a)
Gain on bargain purchase of CU8 million deducted from other intangible

assets
b)
Gain on bargain purchase of CU8 million recognised in other

c)
Goodwill of CU12 million as an intangible asset
d)
Gain on bargain purchase of CU8 million recognised in profit or loss
29. An entity X buys a machinery on 1st April, 2011 for ` 10 lakhs. This asset
has a useful life of 5 years and is depreciated under straight line method
for accounting purposes. However, as par tax laws depreciation allowed is
@ 25% on slm. What is tax base of the asset on 3.3.2012.
a)
` 7.5 lakhs
b)
` 8 lakhs
c)
` 10 lakhs
d)
Nil
357

30. ABC is a large manufacturer of machines. XYZ, a major customer of ABC
has placed an order for a special machine for which he gave a deposit of
CU 112,500 to ABC. The price of the machine is CU 150,000. As per the
terms of the sales agreement, it is an FOB contract and the title passes to
the buyer when goods are loaded onto the ship at the port. When should
revenue be recognised by ABC?
a.
When the customer orders the machine
b.
When the deposit is received
c.
When the machine is loaded on the port
d.
When the machine has been received by the customer
Section B
31. As the worldwide financial community gets more and more sophisticated
the nature of financial instruments is changing rapidly. Entities can use
financial instruments to radically alter their risk profile and users are entitled
to information about the impact of financial instruments on the business.

Required
(i)
Define a financial asset, a financial liability and an equity
Explain where the following financial instruments would be presented

in the balance sheet:
a)
A portfolio of listed investments held for trading.
b)
An investment in the shares of a supplier that is being held for

the long term.
c)
A loan made to the company that is repayable in equal

instalments over the next five years.
d)
Preference shares issued by the company that require payment

of a dividend each year and are redeemable at the option of the
investor. (5 marks)
(ii) Describe the categories into which IAS 39 Financial instruments:

recognition and measurement requires financial assets and financial
358

liabilities to be classified. For each category explain how the financial
assets and liabilities should be measured in the balance sheet. Where
the financial assets or liabilities are measured at fair value, your
explanation should include the way in which changes in fair value
are recognised in the performance statements (income statement and
statement of changes in equity). (5 marks)
32. IFRS 5 Non-current Assets held for Sale and Discontinued Operations
deals with the measurement and reporting of assets or groups of assets that
are intended to be sold or otherwise disposed of.

Required
I.
State the criteria that need to be satisfied before an asset or disposal

group is classified as held for sale under IFRS 5.
II.
Explain how assets or disposal groups that are classified as held for
sale are measured and presented in the statement of financial position.
You need to describe only the minimum presentation requirements. (5
marks)
III. State the criteria that need to be satisfied before an operation is

classified as discontinued under IFRS 5.
IV. Identify the minimum amounts that need to be presented on the face
of the statement of comprehensive income in respect of discontinued
operations.
33. Revenue is usually one of the largest numbers that appears in the financial
statements of an entity. Therefore it is important to ensure that revenue is
recognised and measured appropriately. IAS 18 Revenue was issued in
order to provide standard accounting practice in this area.

Required
Describe the meaning of revenue and the basis on which it should be

measured under the principles of IAS 18. Outline the criteria that need to be
satisfied before revenue can be recognised under the principles of IAS 18.
You should consider revenue from the sale of goods and from the rendering
of services separately.
359

34. When preparing financial statements it is important to ensure that the tax
consequences of all transactions are appropriately recognised. IAS 12
Income Taxes prescribes the treatment of both current and deferred tax
assets and liabilities.

Current tax is the amount of income tax payable or recoverable in respect of

the taxable profit or tax loss for a period. Deferred tax is tax on temporary
differences. A temporary difference is the difference between the carrying
amount of an asset or liability and its tax base. A taxable temporary
difference leads to a potential deferred tax liability and a deductible temporary
difference leads to a potential deferred tax asset.
Required
Explain how the tax base of both an asset and a liability is computed and
state the general requirements of IAS 12 regarding the recognition of both
deferred tax liabilities and deferred tax assets. You do not need to identify
any of the exceptions to these general requirements which are set out in IAS
12.
35. IAS 33 Earnings per share requires certain entities to disclose information
about earnings per share (EPS) in their financial statements.

Describe
a)
Those entities to which IAS 33 applies
b)
The way in which EPS (both basic and diluted) should be computed
in outline ONLY
c)
The numerical disclosure requirements regarding EPS for entities that

have no discontinued operations
d)
The additional numerical disclosure requirements regarding EPS for

entities that report discontinued operations.
36. Explain the basis of estimates used in determining future cash flows to derive
the value in use for impairment testing.
37. IAS 19 Employee benefits is applied to all employee benefits other
than those to which IFRS 2 Share-based payment applies. Accounting
for short-term employee benefits is relatively straightforward. However,
360

accounting for post-employment benefits can be rather more complex. This
particularly applies where post-employment benefits are provided via defined
benefit plans.

Explain
a)
The meaning of post-employment benefits and the manner in which

such benefits that are provided via defined contribution plans should
be measured and recognised in the financial statements of employers.
Why accounting for post-employment benefits provided via defined
benefit plans is more complex than those provided via defined
contribution plans in the financial statements of employers.
b)
The amounts that should be included in the financial statements of

employers regarding post-employment benefits provided via defined
benefit plans (ignore the effect of actuarial gains and losses at this
stage).
Section C
38. Delta is an entity that prepares financial statements to 31 March each year.
During the year ended 31 March 2014 the following events occurred:
(a) On 1 April 2014, Delta purchased some land for ` 10 million. Delta
purchased the land in order to extract minerals from it. During the six
months from 1 April 2011 to 30 September 2011, Delta incurred costs
totaling Rs 35 million in preparing the land and erecting extraction
equipment. This process caused some damage to the land. Delta
began extracting the minerals on 1 October 2011 and the directors
estimate that there are sufficient minerals to enable the site to have a
useful economic life of 10 years from that date. Further damage to the
land is caused as the minerals are extracted.

Delta is legally obliged to rectify the damage caused by the preparation

and mineral extraction. The directors estimate that the costs of this
rectification on 30 September 2021 will be as follows:
I.
` 3 million to rectify the damage caused by the preparation of the

land.
II.
` 200,000 for each year of the extraction process to rectify

damage caused by the extraction process itself.
361

Following this rectification work the land could potentially be sold to a

third party for no less than its original cost of ` 10 million. An annual
discount rate appropriate for this project is 12%. The present value of
` 1 payable in 10 years time with an annual discount rate of 12% is
32.2 paisa. The present value of ` 1 payable in 9 years time with an
annual discount rate of 12% is 34.1 paisa.
39. Omega is a listed company which prepares financial statements in

accordance with International Financial Reporting Standards (IFRS).
(a) On 1 October 2013, Omega purchased some land for `10 million
(including legal costs of ` 1 million) in order to construct a new factory.
Construction work commenced on 1 November 2013. Omega incurred
the following costs in connection with its construction:
Preparation and leveling of the land ` 300,000.
Purchase of materials for the construction ` 6.08 million in

total.
Employment costs of the construction workers ` 200,000 per

month.
Overhead costs incurred directly on the construction of the factory

` 100,000 per month.
Ongoing overhead costs allocated to the construction project

using Omegas normal overhead allocation model ` 50,000 per
month.
Income received during the temporary use of the factory premises

as a car park during the construction period ` 50,000.
Costs of relocating employees to work at the new factory

` 300,000.
Costs of the opening ceremony on 31 July 2014 ` 150,000.
The factory was completed on 31 May 2014 and production began

on 1 August 2014. The overall useful life of the factory building was
estimated at 40 years from the date of completion. However, it is
estimated that the roof will need to be replaced 20 years after the
date of completion and that the cost of replacing the roof at current
prices would be 30% of the total cost of the building. At the end of the
362

40-year period Omega has a legally enforceable obligation to demolish
the factory and restore the site to its original condition. The directors
estimate that the cost of demolition in 40 years time (based on prices
prevailing at that time) will be ` 20 million. An annual risk adjusted
discount rate which is appropriate to this project is 8%. The present
value of Rs1 payable in 40 years time at an annual discount rate of
8% is 4.6 paise.

The construction of the factory was partly financed by a loan of ` 175

million taken out on 1 October 2013. The loan was at an annual rate
of interest of 6%. During the period 1 October 2013 to 28 February
2014 (when the loan proceeds had been fully utilised to finance the
construction), Omega received investment income of ` 100,000 on the
temporary investment of the proceeds.
363

ANSWERS
1.
True though big companies in Japan has started reporting as per IFRS
2. False
3.
False, it should be presented as an adjustment to the net income in the

operating activities section of the statement of cash flows.
4. True
5.
False, the entity can identify three different sets of customers and should,
therefore disclose information on that basis.
6.
False. The transfer of the risks and rewards of ownership.
7. True
8. False
9. True
10. True
11. (b)
12. (a)
13. (c), (d) and (f)
14. (c)
15. (a)
16. (d)
17. (a)
18. (d)
19. (b)
20. (d)
21. (a)
22. (b)
364

23. (b)
24. (d)
25. (d)
26. (a)
27. (b)
28. (b)
29. (b)
30. (c)
31. (i)
IAS 32 defines a financial instrument as a contract that gives rise to a

financial asset of one entity and a financial liability or equity instrument
of another entity. A financial asset is any asset that is:

Cash.
An equity instrument of another entity.
A contractual right to receive cash or another financial asset from

another entity.
A contractual right to exchange financial assets or financial

liabilities under conditions that are potentially favourable.
A financial liability is any contract that is:

A contractual obligation to deliver cash or another financial asset

to another entity.
A contractual obligation to exchange financial assets or financial

liabilities under conditions that are potentially unfavourable.
An equity instrument is any contract that evidences a residual interest in the

assets of an entity after deducting all of its liabilities.
a)
A portfolio of investments that is held for trading would be presented

as a financial asset under current assets.
b)
An investment in the shares of a supplier that is held for the long term
would be presented as a financial asset under non-current assets.
365

c)
A loan that is repayable over five years in equal installments would be

presented as a financial liability. The amount repayable within one year
of the balance sheet date would be presented in current liabilities, with
the remainder in non-current liabilities.
d)
Preference shares that carry a fixed rate of dividend and is redeemable

at the option of the investor would be presented as a non-current
liability, in accordance with their substance.
(ii) The basis of measurement of financial instruments is stated in IAS 39.

The basis depends on the category of financial instruments. IAS 39
divides financial assets into four categories:

Financial instruments at fair value through profit and loss are

those that are classified as held for trading or alternatively
designated as such by the entity at the date of their initial
recognition. Such financial instruments are measured at fair value,
with changes being recognised in the income statement.
Held to maturity financial assets are those that have fixed or

determinable payments and fixed maturity attaching to them that
the investor has the positive intent and ability to hold to maturity.
Such assets are measured at amortised cost rather than fair
value. This method takes the effective rate of interest and applies
it to the carrying value so as to render the carrying value at the
date of redemption equal to the final redemption amount.
Loans and receivables are unquoted financial assets with fixed

or determinable payments. These assets are measured using
amortised cost.
Available for sale financial assets are any assets not classified
under any of the other headings. They are measured at fair
value, with changes being taken to the statement of changes in
equity. When the asset is sold the cumulative fair value changes
are recycled through the income statement.
Financial liabilities are in two categories:

Financial liabilities at fair value through profit and loss are defined
and treated in the same way as financial assets. However IAS 39
restricts the ability of entities to use this classification for financial
liabilities.
All other financial liabilities are measured at amortised cost.

366

32. (i) An entity classifies an asset or disposal group as held for sale if its
carrying amount will be principally recovered through a sale transaction
rather than through continuing use. For this to be the case the asset
must be available for immediate sale in its present condition and the
sale must be highly probable. For the sale to be highly probable,
management must be committed to selling the asset or disposal group
and be actively marketing the asset or disposal group at a reasonable
price. In addition, the sale should be expected to qualify for recognition
within one year of the date of classification.
(ii) An asset or disposal group that is classified as held for sale should
be measured at the lower of the carrying amount and fair value (arms
length sale price) less costs to sell. When an asset or disposal group
is classified as held for sale no further depreciation charges should be
made on the asset or the disposal group. An entity should present an
asset classified as held for sale and the assets of a disposal group
classified as held for sale separately from other assets in the statement
of financial position. The liabilities of a disposal group classified as held
for sale should be presented separately from other liabilities in the
statement of financial position. They should not be offset against the
assets of the disposal group. Costs to sell are the incremental costs of
selling the asset or disposal group, excluding finance costs and income
tax expense.
(iii) A discontinued operation is a component of an entity that either has
been disposed of in the period or classified as held for sale and:

Represents a separate major line of business or area of operations,

could be a segment or below that level
Is part of a single co-ordinated plan to dispose of a separate major line

of business or area of operations, or
Is a subsidiary acquired exclusively or hived off with a view to resale.
(iv) The minimum disclosure requirements for discontinued operations on

the face of the statement of comprehensive income is a single amount
representing the total of:
The post-tax profit or loss of discontinued operations.

The post-tax gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal groups constituting
the discontinued operation.
367

33. IAS 18 defines revenue as the gross inflow of economic benefits in a period
arising in the course of the ordinary activities of an entity when those inflows
result in an increase in equity, other than increases relating to contributions
from equity participants. Revenue does not include amounts collected on
behalf of third parties, such as sales taxes. Revenue should be measured at
the fair value of the consideration received or receivable. Revenue from the
sale of goods should be recognised when:
a)
The entity has transferred to the buyer the significant risks and rewards
of ownership of the goods.
b)
The entity retains neither managerial involvement in, nor effective

control over, the goods sold.
c)
The amount of revenue can be measured reliably.
d)
It is probable that the economic benefits associated with the transaction

will flow to the entity.
e)
The costs incurred or to be incurred in respect of the transaction can

be measured reliably.
Revenue from the rendering of services should be recognised when:

a)
The amount of revenue can be measured reliably.
b)
It is probable that the economic benefits associated with the transaction

will flow to the entity.
c)
The stage of completion of the transaction at the end of the reporting

period can be measured reliably
d)
The costs incurred or to be incurred in respect of the transaction can

34. The tax base of an asset is the amount which will be deductible for tax
purposes against any taxable economic benefits which will flow to the entity
when the asset is recovered. If these benefits are not taxable, the tax base
equals the carrying amount. The tax base of a liability is its carrying amount,
less any amount which will be deductible for tax purposes in respect of that
liability in future periods. If the liability is revenue received in advance, the
tax base is its carrying amount, less any revenue which will not be taxable
in future periods. The general requirements of IAS 12 are that deferred tax
368

liabilities should be recognised on all taxable temporary differences. IAS
12 states that a deferred tax asset should be recognised for deductible
temporary differences if it is probable that taxable profit will arise in future
against which the deductible temporary difference can be utilised.
35. IAS 33 applies to entities whose ordinary shares or potential ordinary shares
are traded in a public market (a potential ordinary share is a financial
instrument that gives the holder a right to acquire ordinary shares). Other
entities who voluntarily disclose earnings per share (EPS) information must
do so in accordance with the requirements of IAS 33.

For entities that have no discontinued operations IAS 33 requires disclosure

of basic and diluted EPS on the face of the statements of comprehensive
income or (where separately presented) the income statement. The basic
EPS of an entity is the profit attributable to the ordinary shareholders (or,
in the case of a group, the ordinary shareholders of the parent) divided by
the weighted average number of ordinary shares in issue in the period. The
diluted EPS is a hypothetical measure of EPS that adjusts the basic EPS
measure for the potential effects on earnings and number of shares for the
effects of all dilutive potential ordinary shares.
For entities that have discontinued operations IAS 33 requires disclosure of

the EPS for total profits, and for profits on continuing operations, on the face
of the statement of comprehensive income (or income statement, if separately
presented). The EPS for discontinued operations also needs to be disclosed,
but entities are permitted to make this disclosure in the notes to the financial
statements if they wish.
36. For impairment testing, the recoverable amount of an asset is the higher of
the assets fair value less costs to sell and its value in use. These elements
should be used when calculating the value-in-use:

Estimates of the future cash flows that the entity expects to get from
the asset. Any future cash flows should not include inflows or outflows
from financing activities or income tax receipts and payments.
Any possible variations that may occur in the amount or timing of the
future cash flows
The time value of money represented by the current market risk-free

rate of interest
369
The uncertainty inherent in the asset
Any other factors that should be borne in mind when determining the
future cash flows from the asset.
An entity should estimate the future cash inflows and outflows from the
asset and from its eventual sale and then discount the future cash flows
accordingly. Any cash flow projections are based on reasonable and
supportable assumptions. They should be based on the most recent financial
budgets and forecasts. The cash flows should not include any cash flows
that may arise from future restructuring or from improving or enhancing
the assets performance. The Standard also says that any predictions
incorporated into budgets and forecasts shall cover only a five-year period at
maximum. Extrapolation of the forecast should be used for periods beyond
the five-year period if management is confident that any projections beyond
the five-year period are reliable, and management can demonstrate that,
based on past experience, the cash flows that will be generated beyond this
five-year period are likely to be accurate. If any future cash flows are in a
foreign currency, they are estimated in that currency and discounted using a
rate appropriate for that currency. The resultant figure will be then translated
using the exchange rate at the date of the value-in-use computation.
37. (a) Post-employment benefits are employee benefits (other than termination
benefits) that are payable after completion of employment. Examples of
such benefits include lump sum payments on completion of employment
and ongoing cash sums payable on a monthly basis in the form of a
pension. Such benefits are often, but not necessarily, payable via postemployment benefit plans. Where such plans are defined contribution
plans the obligation of the entity is limited to the amount that it agrees
to contribute to the plan. Therefore the related employee benefit is
measured at the amount of contributions payable by an entity and
perhaps also the employee to the fund. Unless another standard
requires or permits the inclusion of the benefits in the cost of an
asset the benefits should be recognised as an expense in the income
statement. Any unpaid or prepaid contributions should be recognised in
the statement of financial position as a liability or an asset.

Where post-employment benefits are provided via defined benefit

plans then the basis of measuring the benefit payable differs from
defined contribution plans. The benefit is typically based on the
370

length of service and the final salary of the former employee.
There is no guarantee that the contributions paid plus associated
investment income will be sufficient to fund the benefit payable. In
such circumstances the contributing entity has a legal or constructive
obligation to provide additional resources to the plan to ensure that the
benefit can be paid. In addition these benefits are often payable on a
regular basis until the death of the employee. Therefore measuring the
cost of the benefit to the contributing entity is a more complex matter.
(b) IAS 19 requires entities to initially focus on amounts in the statement
of financial position when accounting for benefits provided via defined
benefit plans. The essential principle is that, in the statement of
financial position, entities should measure the net obligation to provide
benefits based on service provided up to the reporting date. This
obligation should be measured at the net of the following amounts:
The present value of the defined benefit obligation at the reporting

date, less;
Any obligation relating to past service costs that has not yet been
recognised as an expense because the relevant benefits have not
completely vested, less;
The fair value at the reporting date of any plan assets out of
which the obligations are to be settled directly.
Where the net obligation is negative then IAS 19 allows entities to

recognise an asset provided this amount is recoverable either by
receiving refunds from the plan or from reducing future contributions
that would otherwise be payable to the plan. The amounts that
should be recognised in the income statement as costs (or in certain
circumstances in the cost of an asset) are the net of:

The current service cost
Any past service cost
The interest cost on the plan obligation
The expected return on any plan assets (this is a credit to the

income statement)
The net cost or benefit of any curtailments or settlements

371

38. Under the principles of IAS 16 Property, Plant and Equipment costs of
` 13.5 million (` 10 million + ` 3.5 million) will be debited to property, plant
and equipment in respect of the cost of acquiring the extraction facility.

The costs of erecting the extraction facility (excluding the land) will be
depreciated over a 10-year period, giving a charge in the current period of
` 175,000 (` 3.5 million x 1/10 x 6/12).

From 1 October 2013, an obligation exists to rectify the damage caused

by the erection of the extraction facility and this obligation should be
provided for.
The amount provided is the present value of the expected future

payment, which is ` 966,000 (` 3 million x 0.322).
The amount provided is debited to property, plant and equipment and

credited to provisions at 1 October, 2013.
The debit to property, plant and equipment creates

additional depreciation of ` 48,300 in the current year (` 966,000 X
1/10 X 6/12).
The closing balance in property, plant and equipment is ` 14,242,700

(` 13.5 million ` 175,000 + ` 966,000 ` 48,300).
As the date of settlement of the liability draws closer the discount

unwinds.
The unwinding of the discount in the current year is ` 57,960

(` 966,000 x 12% x 6/12).
The extraction process itself creates an additional liability based on the

damage caused by the reporting date.
The additional amount provided is ` 34,100 (`,000 X 6/12 X 0.341).
This additional provision causes an extra charge to the statement of

The carrying amount of the provision at the year end is ` 1,058,060

(` 966,000 + ` 57,960 + ` 34,100).
372

39.
Purchase of land
10,000 Both the purchase of the land and

the associated legal costs are direct
costs of constructing the factory
Preparation and levelling
300 A direct cost of constructing the
factory
Materials
6,080 A direct cost of constructing the
factory
Employment costs of construction 1,400 A direct cost of constructing the
worker
factory for a seven-month period
Direct overhead costs
700 A direct cost of constructing the
factory for a seven-month period
Allocated overhead costs
Not a direct cost of construction
Income from use as a car park
Relocation costs
Opening ceremony
Finance costs
700 Capitalise the interest cost incurred
in an eight-month period (purchase
of land would trigger capitalisation)
Investment income on temporary (100) Must offset against the amount
investment of the load proceeds
capitalised
Demolition cost recognised as a
920 Where an obligation must recognise
provision
as part of the initial cost
Total
20,000
Computation of accumulated depreciation

Depreciation must be in two parts
Depreciation of roof component 50, 10,000 x 30% x 1/20 x 4/12
Depreciation of remainder 58, 10,000 x 70% x 1/40 x 4/12
Total depreciation 108
Computation of carrying amount = 20,000 108 = 19,892
373
374

Full Marks : 100
Time: 3 hours

Answer the following in true or false (1.5 Marks each)
1.
Eptiac Electrical plc, wants to know whether it can offset its valuation
allowance for obsolescence on inventories against the inventory account, or
whether it must present and disclose it separately. Can the Company offset
the provision against inventory?
2.
In respect of acquisitions and disposals of subsidiaries separate disclosure of

the amounts of assets and liabilities acquired or disposed of should be made
as a note to the statement of cash flows.
3.
Independent Ltd operates flights between Rotterdam and Zurich. Independent

failed to win any 2009 landing rights, in the bids held in August 2008.
Independent will be unable to operate from 1 January 2009. The 30th
June 2008 financial statements will be authorised for issue next week. The
disclosure in the Notes about the bids, and that the Company will be unable
to operate in 2009, will be sufficient.
4.
A cost plus contract is a construction contract in which the contractor agrees

to a fixed rate per unit of output or, is reimbursed for allowable or otherwise
defined costs, plus a percentage of these costs or a fixed fee. Is this
statement true or false?
5.
When a liabilitys carrying amount is greater than its tax base, a deductible
temporary difference arises. Is this statement true or False?
6.
XIM Plc. is into supply of photocopiers. The Company is of the view that is
should be accounted for under IAS 17, is it correct?
7.
Trade discounts and Volume rebates should be considered in measuring

revenue.
375

8.
A functional currency of a Company is the currency of the primary economic

environment in which the entity operates. Incorrectly determining the
functional currency may have a big impact on the financial statements.
9.
The financial statements of MINTK Plc are being prepared. The Accounts
chief, if of the view that hes allowed to aggregate related party disclosure
for his company. His view is correct.
10. An investor must recognise all of their share of losses arising from an
investment in an associate if they have guaranteed the associates losses.
Is the statement true or false?
Fill in the Blanks (1.5 Marks each)
11. The operator shall recognise an intangible asset to the extent that it receives
a right to charge users of the public service at a _______.
(a) Price controlled by the grantor
(b) Cost to the grantor
12. If government grant is ________ an enterprise should recognise the
government grant as income when, and only when, the conditions attaching
to the government grant are met.
(a) Conditional
(b) Unconditional
13. An intangible asset is __________ when no future economic benefits are
expected from its use or disposal.
(a) Recognised
(b) Derecognised
14. An intangible asset with an indefinite useful life should be tested for
impairment ___________ and whenever indicators of impairment are present.
(IAS 38)
(a) Annually
(b) Once if few years
376

15. If sales contract of X Ltd has an obligation beyond the normal warranty
provision, then _____________ have not been transferred to the buyer on
the date of the sale.
(a) Possession
(b) Risk and rewards
16. The ____________ of the holder of a financial instrument (including members
shares in co-operative entities) to request redemption does not, in itself,
require that financial instrument to be classified as a financial liability.
(a) Option
(b) Contractual right
17. A _________ shall disclose the nature of its interest in a fund and any
restrictions on access to the assets in the fund.
(a) Contributor
(b) Recipient
18. ___________ applies to particular transactions in which goods or services are
received, such as transactions in which an entity receives goods or services
as consideration for equity instruments of the entity.
(a) IFRS 2
(b) IFRS 9
19. An entity shall assess whether an embedded derivative is required to be
separated from the _________ and accounted for as a derivative when the
entity first becomes a party to the contract.
(a) Host Contract
(b) Actual contract
20. If the _________________ provides construction or upgrade services the
consideration received or receivable by the operator shall be recognised at
its fair value. (IFRIC 12)
(a) Operator
(b) Contractor
377

III. Answer the following (1.5 Marks each)
21. An entity owns a building which originally costs $200,000. The property is
depreciated over 50 years on a straight-line basis with no residual value.
The entity follows revaluation model. At the start of year 2, the building was
re-valued at $230,000. The amounts transferred from the revaluation surplus
to retained earnings is_____________
(a) $ 694
(b) $ 660
22. Ryan Co acquired a shopping complex worth $300,000 on lease from Joy
Co. Ryan Co cannot cancel the lease as it is for an irrevocable period of 3
years. Subsequently, the city in which this shopping complex existed was
ravaged by a tsunami. As a result, regular shoppers stopped visiting and the
shopping complex started making losses. Who has to bear the loss.
(a) Ryan Co
(b) Joy Co.
23. Trac took a vehicle on lease from Jerry. Trac agreed to pay $12,000 every
year for the next 4 years. Tweety who is related to Trac has agreed to pay
the lease rental to Jerry if Trac is unable to pay any lease rent. Tweety has
also agreed to pay $1,250 for the residual value of the vehicle at the end of
the lease term. Trac had to pay $250 for registering the lease agreement.

Determine the minimum lease payments in this transaction.

(a) $49,250
(b) $49,500
24. Perfect , a shirt manufacturing company, gives a guarantee that if any shirt
shrinks or fades within one month of sale, it will refund the amount paid for
the shirt. The last months sales for the year ending 31 December 20 x 6
are $25,000. Past experience states that 5% of shirts will shrink and 10%
of shirts will fade. The possibility of a shirt both shrinking and fading is nil.
However, the management is of the opinion that, due to the new technology
introduced in the business last year, the possibility of shirts fading will go
down to 5%. What is the amount which has to be provided.
(a) $1,250
(b) $2,500
378

25. Suezel Ltd purchased raw materials for $125,000 less rebate of 2%. It paid
$25,000 as import duty, including $10,000 towards a special duty. According
to local tax laws, it will get a credit of the amount paid towards the special
duty, while determining its customs liability. It spent $3,000 on ocean freight,
clearing agents charges of $2,000, $4,000 on warehouse rent and $1,500
on the watchmans salary. Determine cost of material
(a) $1,42,500
(b) $1,44,000
26. Apple Ltd valued its inventory at a cost of $190,000 on 31 March 20 x 9.
It includes goods costing $30,000 which were damaged due to a minor fire
that occurred in the factory. It is estimated that after making repairs to these
goods they can be sold for $10,000. What is the net realisable value of
inventory.
(a) $1,70,000
(b) $ 1,60,000
27. Omega Inc prepares its accounts up to 31 March each year. On 30 March
20 x 7, Omega Inc sold a consignment of products for $45 million. This sale
is debited to trade receivables and credited to revenue. The terms of sale of
the products were that Omega would provide an after sales service which
required Omega to correct any defects that became apparent in the products
for a one year period from the date of sale. The estimated cost of correcting
defects would be $1.5 million. The gross profit margin for corrective work
would be 20%. Revenue as recorded in the trial balance as at 31 March
20 x 7 is $360 million. What is the revenue to be recognised as per IAS 18
(a) $3,58,125 (000)
(b) $3,58,000 (000)
28. Companys taxable income for the year 20 X 9 is $800,000. The tax rate
applicable to the company is 30%. For 20 X 8, the company had provided
$200,000 for income tax. The actual liability for 20 X 8 was decided at
$215,000. What is paid in 20 X 9?
(a) $2,55,000
(b) $2,15,000
379

29. Ram Ltd is in the process of preparing its financial statements for 20X6. On
15 January 20X7, it receives information that one of its major customers,
Sham Enterprises, has gone bankrupt. The financial statements showed
$32.5m as receivable from Sham Enterprises. Does this information help
confirm a figure in the accounts at the end of the reporting period? Is this an
event which will require adjustment?
(a) Yes
(b) No
30. Jess & Tess Ltd holds a trademark with a carrying value of $1.7m, which
it uses to produce consumer goods. It is expected that the products will
continue to be in demand for the foreseeable future, and the trademark has
an indefinite life. At 31 December 20X6, based on a report by an independent
expert, it is estimated that the recoverable amount of the trademark is only
$1.6m. What is the impairment loss.
(a) $1.6 M
(b) $ 0.1 M
Section B (Answer any 7 Questions , 5 Marks each)
31. What is fair value? Explain the factors to consider fair value.
32. What are service concession agreements, explain the features of the same.
33. With reference to IAS 24 what are Jointly controlled operations.
34. What is an investment property, how is it different from lease.
35. How are equity share based payment transactions measured.
36. What are the Qualitative characteristics of financial statements.
37. What is an embedded derivate and when can it be separated from the host
contract.
Section C (10 Marks each)
38. Seth Ltd was being sued for anti-competitive behaviour. However, the
company denied this, and only a contingent liability was provided for in the
draft financial statements on 31 December 20X8. On 14 January 20X9, the
court awarded $70 million damages against Sham Ltd. The date for the
approval of the financial statements by the management for issue to the
380

Supervisory Board was 9 March 20X9. Determine whether the event has
occurred before or after the reporting period and give the accounting entries
along with the disclosures.
39. Rantac Inc is a medium sized car dealer. On 1 March 20X8, it sold a motor
car for $30,000 on a two-year warranty. In order to boost sales, Ruby has
offered a special deferred payment option buy now, pay in a years time.
Required
Making the following assumptions, how would Ruby account for the sale?
1.
Rantac closes accounts on 31/12 every year.
2.
The interest portion of the purchase price amounts to $6,000 while the
remaining amount relates to the cash price.
381

ANSWERS
1. True
2. True
3. False
4. False
5. True
6. True
7. True
8. True
9. False
10. True
11. (a) Price controlled by the Operator
12. (a) Conditional
13. (b) Derecognised
14. (a) Annually
15. (b) Risk and rewards
16. (b) Contractual right
17. (a) Contributor
18. (a) IFRS 2
19. (a) Host Contract
20. (a) Operator
21. (a) 694
22. (a) Ryan Co
23. (a) $49,250
24. (b) $2,500
25. (a) $1,42,500
382

26. (a) $1,70,000
27. (a) $3,58,125 (000)
28. (a) $2,55,000
29. (a) Yes
30. (B) $0.1 M
31. Fair Value means the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. The key principle underlying is that exit price in the
perspective of market participants who hold the asset or owe the liability.

The four aspects to be considered for fair value measurement as follows:

The Particular Asset or Liability in Subject: Market Participants

consider the specific characteristics of asset or the liability when pricing
the same. These characteristics include Condition, Location, restrictions,
etc.
The Transaction: Fair value measurement of the asset or liability

is based on the Current Market conditions as at Measurement date.
Information that comes into notice after the measurement date is taken
into consideration in circumstances where reasonable and customary
due diligence would have been identified.
The Principal Market: The principal market is the market with the
greatest volume and level of activity for the asset of liability. The
management has to identify the most advantageous market after
evaluating various accessible markets. The most advantageous market
is that one which maximises the amount that would be received on sale
or minimises the amount that has to be paid.
The Valuation Technique/The Price: Fair value measurement is

based on the exit price and not on the entry price of the asset or
liability. Exit price is based on the current expectations about the sale
or transfer price which is reflected by the expectations about future
cash flows generating capacity (or the benefits it would be receive in
future) and future cash outflows in case of liabilities.
The Other factors that should be considered in fair value measurement

are Non-Financial Asset, Liabilities, Equity, Financial Instrument,
Transaction costs.
383

32. In the recent times, some countries have developed private finance initiative
(PFI) and public private partnership (PPP) arrangements under which the
public sector is able to procure the provision of such public services from the
private sector. These arrangements are referred to as Service Concession
Arrangements. In these contracts, the private sector designs, builds finances
and operates the infrastructure in order to provide the contracted services.
These contracts allow competition to enter the market by way calling bids
from the private sector operators.

Feature of service concession arrangements:
A service concession arrangement generally involves a government or other

public sector entity conveying to a private sector entity for period of the
concession the following:

The right to provide services that give the public access to major
economic and social facilities. The services provided by the operator
often include the construction of the infrastructure or its upgrade and
the operation and maintenance of that infrastructure for the period of
concession.
The operator is remunerated for its services, either directly by

the grantor or given the right to charge users during the period of
arrangement or a combination of both.
The arrangement is governed by contract or regulation which sets

out the terms and conditions for providing service, standards of
performance, payment mechanism, arrangement for disputes, etc.
The operator is obliged to hand over the infrastructure to the grantor

in a specified condition at the end of the period of arrangement
irrespective of who financed it.
33. IAS 24 defines Join Control as The contractually agreed sharing of control
over an economic activity. Joint control exists only when the strategic
financial and operating decisions relating to the activity require the unanimous
consent of the parties sharing control (The ventures).

The existence of contractual arrangement distinguishes interests

that involve joint control from investments in associates in which the
investor has significant influence. Activities that have no contractual
arrangements to establish joint control are not joint ventures.
384
The contractual arrangement may be evidenced in a number of a

ways, for example, by a contract between the ventures or minutes
of discussions between the ventures. The arrangement can also be
incorporated in the articles or other by laws of the joint venture. These
matters include:
The activity, duration and reporting obligations of the joint venture.
The appointment of the joint ventures board of directors or equivalent

governing body and the voting rights of the ventures.
Any capital Contribution by the ventures.
The sharing by the ventures of the output, income, expenses or results

of the joint venture.
This definition means that where the entity is a joint venture between two or
more persons that share joint control over the entity, each of the persons or
close members of those persons families, are related parties of the entity.
The same principle may be applied where the ventures are entities; such
entities are specifically identified as related parties of the joint venture.
34. Investment property is defined as, Property (land or a building, or part of

building or both) held by the owner or by the lessee under finance lease
to earn rentals or for capital appreciation or both, rather than for:
a)
Use in the production or supply of goods or services or for

administrative purposes; or
b)
Sale in the ordinary course of business.
In addition to the above, a property interest that is held by a lessee under an

operating lease may be treated as an investment property if and only if:
a)
The rest of the definition of investment property is met.
b)
The lessee uses the fair value model in IAS 40.
c)
The initial cost of a property interest held under an operating lease and
is classified as an investment property is as prescribed for a finance
lease, that is, the asset should be recognized at the lower of the fair
value of the property and the present value of minimum investments.
An operating lease treated as an investment property is initially accounted for

as a finance lease. The reason for the last condition is so that the amount
385

shown under the fair value model reflects the full value of the property
interest. If the asset were not treated as a finance lease, only the premium
or prepaid rental amount would be revalued, rather than the present value
of the total future rentals and the result might not reflect the fair value of the
property interest. It would also ensure that such leases are accounted for
consistently in the same manner as those investment properties held under
finance leases such that different measurement bases are not used.
35. Equity settled share-based payment transactions are transactions in which
an entity receives goods or services as consideration for its own equity
instruments or receives goods or services but has no obligation to settle the
transaction with the supplier. Examples include the following
Employee share trusts
Employee share plans, including employee share purchase plans and

share incentive plans.
Transactions in which an entity obtains goods or services in exchange

for its own equity instruments, For example, startup entities might
obtain consultancy and similar service in exchange for shares, this
preserves scarce cash resources and gives the supplier an opportunity
to share in the entitys success.
Measurement of Equity settled share based payment transactions:

The fair value of goods and services obtained by an entity should

be measurable directly or the entity should measure the value of the
goods and services by reference to the fair value of equity instruments
granted as consideration.
Fair value is defined as the amount for which an asset could be

exchanged, a liability settled or an equity instrument granted could
be exchanged between knowledgeable, willing parties in arms length
transaction.
The fair value of goods & services should be measured at the date on
which goods are received or the services are rendered or at grant date
of equity whichever is more evident.
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36.

Going concern
The Conceptual Framework notes that financial statements are normally

prepared assuming the entity is a going concern and will continue in
operation for the foreseeable future.
Accrual basis of accounting
IAS 1 requires that an entity prepare its financial statements, except for
cash flow information, using the accrual basis of accounting.
Understandability
The information provided in financial statements should be presented in

a way that makes it comprehensible by users who have a reasonable
knowledge of business and economic activities and accounting and a
willingness to study the information with reasonable diligence.
Reliability
The information provided in financial statements must be reliable.

Information is reliable when it is free from material error and bias and
represents faithfully that which it either purports to represent or could
reasonably be expected to represent.
True and Fair View/Fair Presentation
Financial statements are frequently described as showing a true and

fair view of, or as presenting fairly, the financial position, performance
and changes in financial position of an entity. Although this Framework
does not deal directly with such concepts, the application of the
principal qualitative characteristics and of appropriate accounting
standards normally results in financial statements that convey what is
generally understood as a true and fair view of, or as presenting fairly
such information.
Consistency of presentation
The presentation and classification of items in the financial statements

shall be retained from one period to the next unless a change is
justified either by a change in circumstances or a requirement of a new
IFRS.
387

Materiality and aggregation
Each material class of similar items must be presented separately in the

financial statements. Dissimilar items may be aggregated only if they
are individually immaterial.
Comparative information
IAS 1 requires that comparative information to be disclosed in

respect of the previous period for all amounts reported in the financial
statements, both on the face of the financial statements and in the
notes, unless another Standard requires otherwise. Comparative
information is provided for narrative and descriptive where it is relevant
to understanding the financial statements of the current period.
37. An embedded derivate is a component of a hybrid instrument that also

included a non-derivative host contract with the effect that some of the
cash flows of the hybrid instrument is similar to a stand alone derivative.
An embedded derivative causes some or all of the cash flows that otherwise
would be required by the contract to be modified according to a specified
interest rate, financial instrument price, commodity price, foreign exchange,
index prices or rates, credit rating or credit index, or other variable, provided
in the case of a non-financial variable that the variable is not specific to a
party to the contract. Variation of the cash flows over the contracts term is
a critical indicator of the presence of one or more embedded derivatives.
An example of a hybrid instrument is a loan that pays interest based on the
changes in the FTSE 100 index. The component of the contract that is to
repay the principal amount is the host contract this is the base state with
a pre-determined term and pre-determined cash flows. The component of the
contract that is to pay interest based on the changes in the FTSE 100 index
is the embedded derivative this component causes some or all of the cash
flows of the host contract to change.

Conditions for Separation:
IAS 39 states that embedded derivative should be separated from the host
contract and accounted for as a derivative if all the following conditions are
met:

The economic characteristics and risks of the embedded derivative are

not closely related to the economic characteristics and risks of the host
contract;
388

A separate instrument with the same terms as the embedded derivative

would meet the definition of a derivative; and
The hybrid instrument is not measured at fair value with changes in fair
value recognised in profit or loss.
38. This is an event occurring after the reporting date but before approval of
the financial statements for issue. This event affects the valuation of the
companys liabilities. Hence this is an adjusting event. Seth Ltd must create
a provision for $70 million in the financial statements for 20X8, instead of the
contingent liability.
Accounting entry
Dr Legal cost account 70m
Cr Provision account
70m
Being creation of a provision on account of court order dated 14 January

20X9
Disclosure
The company had a contingent liability of $70 million on 31 December 20X8,

relating to the court case by the competitors. On 14 January 20X9, a court
order was passed. The liability of $70 million became payable. Therefore, the
company must change the contingent liability into a provision of $70 million
in its financial statements.
39. This transaction has the following implications:

(a) Sale of motor car

Rantac would account for the sale of the motor car in the following
manner:

Split $30,000 payment between the cash sale price and the
effective interest;
Recognise the amount related to the cash sale i.e. $24,000 as

revenue on 1 March 20X8;
Recognise interest income portion for 10 months $5,000 (i.e.

$6,000 x 10/12) in the accounting period in which the sale
is recognised i.e. in Rantacs 31 December 20X8 financial
statements;
389

Recognise the remaining 2 months interest of $1,000 (i.e.

$6,000 x 2/12) in the following accounting period i.e. in Rantacs
31 December, 20X9 financial statements
Any production and selling costs will be recognised in the same

period that the revenue relating to the sale of the motor car is
recognised;
b)
Warranty provision
In accordance with IAS 37, a warranty provision will be set up in the

period in which the revenue relating to the sale of the motor car is
recognised for expected costs that will be incurred relating to the
warranty. These costs will be charged to this provision to the extent that
the warranty provision covers these costs. Any excess costs incurred
will be recognised in profit or loss while any balance remaining on the
provision at the end of the second year will be released to profit or
loss.
390

Full Marks : 100
Time: 3 hours

Objective type question - TRUE and FALSE
1.
2.
In the context of IAS 21 The Effects of Changes in Foreign Exchange rates

- Monetary items are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency.
Which of the following is not a monetary item.
a)
Cash and bank balances
b)
Fixed deposits
c)
Shareholders equity
d)
Accounts payable
Hyperinflation as defined in IAS 29 Financial Reporting in Hyperinflationary

economies is indicated by characteristics of the economic environment of a
country which include, but are not limited to:(a) The general population prefers to keep its wealth in non-monetary
assets or in a relatively stable foreign currency. Amounts of local
currency held are immediately invested to maintain purchasing power;
(b) The general population regards monetary amounts not in terms of the
local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;
(c) Sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period, even if
the period is short;
(d) Interest rates, wages and prices are linked to a price index
391

Only a), b) are true
(ii) Only b), c) are true

(iii) Only c), d) are true
(iv) All are true
3.
Which of the following statements are true in the context of IFRS1 First Time
adoption of IFRSs?
a)
This IFRS does not apply to changes in accounting policies made by

an entity that already applies IFRSs.
b)
Changes in accounting policies are dealt with in IAS 8 Accounting

Policies, Changes in Accounting Estimates and Errors.
c)
Changes in accounting policies are dealt with in specific transitional

requirements in applicable IFRSs
d)
IFRS1 deals with the changes in accounting policies due to first time
adoption
Alternative choices
(i) Only a), b) are true
(ii) Only a), b), c) are true
(iv) All are true
4. Which of these statements are true in the context of IFRS1 First time
adoption of IFRSs ?
a)
An entity may need to make estimates in accordance with IFRSs at the

date of transition to IFRSs that were not required at that date under
previous GAAP.
b)
To achieve consistency with IAS 10, those estimates in accordance

with IFRSs shall reflect conditions that existed at the date of transition
to IFRSs.
c)
In particular, estimates at the date of transition to IFRSs of market

prices, interest rates or foreign exchange rates shall reflect market
conditions at that date
392

d)
An entity shall not make estimates in accordance with IFRSs at the

date of transition to IFRSs that were not required at that date under
previous GAAP.
(ii) Only a), b), c) are true

(iv) All are true
5.
IAS 18 Revenue shall be applied in accounting for revenue arising from the
following transactions and events:
a)
The sale of goods;
b)
The rendering of services; and
c)
The use by others of entity assets yielding interest, royalties and

dividends.
d)
Gains from activities not arising in the ordinary course of the business
Alternatives
6.
1)
All are true
2)
Only a is true
3)
Only b is true
4)
Which of the following costs that are attributable to contract activity in general
and can be allocated to the contract:
a)
Costs of material used in construction.
b)
Construction overheads.
c)
Development costs for which reimbursement is specified in the contract.
d)
Selling costs.
393

7.
IFRS15 Revenue from Contracts with ustomers prescribes a five step model
for recognising revenue. Which of the following statements are true?
a)
IFRS15 criteria in terms of identifying a contract, determining the

transaction price, determining when control is transferred also apply to
sales of intangible assets
b)

sales of property, plant and equipment
c)

sales of real estate
d)

transaction price, determining when control is transferred do not apply
to items that are not an output of an entitys ordinary activities.
Alternatives
1)
Only b, c are true
2)
Only a, b are true
3)
Only a, c are true
4)
8.
X Limited has recently diversified its operation to include purchases and

sale of residential apartments. It has made some significant purchases of
properties with a plan to resell them.
Whether the above said properties should be classified by X Limited as:

(a) Property, Plant and Equipment under IAS 16
(b) Inventory under IAS 2
(c) Investment property under IAS 40
(d) None of the above
9.
ABC Company bought a private jet for the use of its top-ranking officials. The
cost of the private jet is ` 1.5 crores and can be depreciated either using a
394

to be used over a period of 7 years. The engine of the jet has a useful life
of 5 years. The private jets tires are replaced every 2 years. The private jet
will be depreciated as per the requirements of IAS16 Property, Plant and
equipments using the straight-line method over:
(a) 7 years composite useful life.
(b) 5 years useful life of the engine, 2 years useful life of the tires and 7
years useful life applied to the balance cost of the jet.
(c) 2 years useful life based on conservatism (the lowest useful life of all
the parts of the jet).
(d) 5 years useful life based on a simple average of the useful lives of all
major components of the jet.
10. If a property is partly an investment property and partly owner-occupied
property, the entity should account for the property:
(a) As owner-occupied as per the requirements of IAS16 Property, Plant
and Equipment.
(b) As investment property as per the requirements of IAS40 Investment
properties.
(c) Each portion should be accounted for separately.
(d) Each portion should be accounted for separately, if these portions could
be sold separately (or leased out separately under a finance lease).
Fill in the blanks
11. As per IAS 29 Financial reporting in Hyperinflationary economies, an entity
may acquire assets under an arrangement that permits it to defer payment
without incurring an explicit interest charge. Where it is impracticable
to impute the amount of interest, such assets are restated from the
____________________________.
a)
Payment date and not the date of purchase
b)
Payment date or the date of purchase
c)
Purchase date and not the date of payment
d)
None of the above

395

12. IFRS1 First time adoption of IFRSs requires disclosures that explain
how the transition from previous GAAP to IFRSs affected the entitys
______________________________
a)
Reported financial position, financial performance and cash flows
b)
Reported financial position and financial performance
c)
Reported financial performance
d)
Reported financial position and cash flows
13. A claim as described in IAS11 Construction contracts may arise from,

______________
a)
Customer caused delays
b)
Errors in specifications or design given by the customer
c)
Disputed variations in contract work caused by the customer
d)
Contractor caused delays
Alternatives:
1)
All are true
2)
3)
4)
Only a, b are true
14. Standard costs measurement technique given in IAS 2 Inventories takes into
account _________________

Alternatives are:a)
Standard costs of the production that are held constant for at least one
year
b)
Normal levels of materials and supplies, labour, efficiency and capacity

utilisation. They are regularly reviewed and, if necessary, revised in the
light of current conditions.
c)
Time and motion studies to determine the standard cost of production
d)
Standards set based on past trends of costs normally incurred for

production under ideal conditions
396

15. An entity is required to measure an item of property, plant and equipment
acquired in exchange for a non-monetary asset or assets, or a combination
of monetary and non-monetary assets at __________
a)
Fair value unless the exchange transaction lacks commercial substance
b)
Fair value unless the exchanged assets were similar
c)
Fair value unless the entity follows the cost model
d)
At cost
16. Unguaranteed residual value of a leased asset is the amount by which the
residual value of the asset exceeds its ____________________________
(a) Guaranteed residual value
(b) Fair value
(c) Gross investment
(d) None of the above.
17. Initially selfgenerated goodwill does not fall within the IAS 38 definition of
an intangible asset because ________________________
(a) It is a monetary asset.
(b) It is not identifiable resource.
(c) It may not generate future economic benefits
18. As per the Conceptual Framework for financial reporting an asset is a
resource controlled by an entity ___________________________________
___________
a)
As a result of past events and from which future economic benefits are
expected to flow
b) From which future economic benefits are expected to flow

c) From which economic benefits are expected to flow
d) As a result of future events and from which economic benefits are
expected to flow
397

19. Government grant as defined in IAS 20 Accounting for Government Grants
& Disclosure of Government assistance should not be recognised unless
there is reasonable assurance that the entity will comply with the conditions
attached to them and __________________
(a) The grant is actually applied for by the entity
(b) Reasonable assurance that grant will be received
(c) The grant is actually received
(d) The scheme of government grant is announced by the government
20. A qualifying asset is an asset that_________________________
(a) Is ready to use at the time of purchase but to put to use after six
months.
(b) May not necessarily take a substantial period of time for its intended
use or sale but due to the managements decision takes over six
months some time for its intended use or sale.
(c) Takes at least six months to get ready for its intended use or sale.
(d) Necessarily takes a substantial period of time for its intended use or
sale
21. X Limited holds inventories. Its stock could be sold in the open market for
` 1,00,000. It has currently entered into a contract with Y Limited to sell the
goods for ` 1,20,000. Cost to sell is ` 5,000.

What is the NRV of the inventory as per IAS 2 Inventories?

(a) ` 1,00,000
(b) ` 95,000
(c) ` 1,20,000
(d) ` 1,15,000
22. Gross investment in the finance lease is ` 5 lakhs. Present value of minimum
lease payments for the lessor is ` 3 lakhs. Present value of unguaranteed
residual value accruing to the lessor at the implicit rate of lease is ` 1 lakh.
Unearned finance income will be:
(a) ` 2 lakhs
398

(b) ` 1 lakh
(c) ` 4 lakhs
(d) none of the above
23. A Ltd. purchased an equipment on April 1, 2011 for ` 5 crores. It has a
useful life of 10 years with no residual value. Due to some technological
obsolescence its recoverable amount has reduced to ` 3 crores. The
equipment forms part of a cash-generating unit, the carrying amount of which
is ` 50 crores on March 31, 2012 against the recoverable amount of ` 60
crores. Assuming that the equipment does not generate independent cash
flows, determine which of the following statement is correct?
(a) Impairment of ` 2 crores should be recognised for the asset, however,
no impairment should be recognised for the cash-generating unit.
(b) Impairment of ` 1.5 crores should be recognised for the asset,
however, no impairment should be recognised for the cash-generating
unit.
(c) No impairment should be recognised for both the asset as well as the
cash-generating unit.
24. One of the lines of business of Entity X is manufacturing glass products. It
has a committed plan to sell this business on January 1, 2012. However,
Entity X still needs to carry out marketing activity in relation to sale of this
business. However, it is highly probable that the marketing activity will be
carried out within a short span of time. In which of the following situations
can the business as a disposal group be classified as held for sale in
accordance with IFRS5 Non-current assets held for sale and Discontinued
operations as on January 1, 2012?
(a) If the marketing activity is carried out within 3 months i.e. by March 31,
2012.
(b) If the marketing activity is carried out within 6 months i.e. by June 30,
2012.
(c) If the marketing activity is carried out within 12 months i.e. by
December 31, 2012.
399

(d) None of the above as marketing activity should have been initiated
before January 1, 2012.
25. As a percentage of sales, profits or assets, a segment as defined in IFRS8
Operating segments should be at least :
(a) 7.5%
(b) 10%
(c) 12.5%
(d) 20%
26. A loan receivable has a carrying amounted of ` 100. The repayment of the
loan will not have any tax consequences. What is the tax base of the loan
receivable?
a) The tax base of the loan is of ` 100
b) The tax base of the loan is of ` Nil
c) Since repayment of the loan has no tax consequences, as per IAS12
we should not calculate the tax base
d) None of the above
27. Car Ltd manufactures and sells cars. There is a warranty period of 1 year
after the date of sale of the cars. Based on a study of the past trends of
warranty claims made on Car Ltd, the following results emerge:
Nature of defects
Small defects
Medium defects
Major defects

Costs of rectification
` 15,000
` 10,000
` 12,000
Probability of occurrence
0.55
0.35
0.10
The company sold 12,000 cars during the year ended March 31, 2014. The
amount of provision to be made for warranty claims is as follows:a)
` 15.54 lakhs
b)
` 15.54 crores
c)
` 15 crores
d)
None of the above

400

28. As per IAS19 Employee Benefits, the present value of defined benefit
obligation as at 1st April 2013 was ` 55 crores. During the year ended 31st
March 2014, 15 employees joined the company, as it expanded into a new
line of business which is at the startup stage of its evolution. This was the
first year in the history of the company that nobody left the organisation. The
present value of the defined benefit obligation in respect of employees who
were on the payroll of the company as at 1st April 2013 as calculated on
31st March 2014 had increased to ` 60.5 crores. How should this increase
be accounted?
a) ` 5.5 crores should be accounted as interest costs
b) ` 5.5 crores should be accounted as past service cost
c) ` 5.5 crores should be accounted as a settlement and debited to Profit
or loss account
d) ` 5.5 crores should be accounted as an actuarial loss and debited to
Profit or loss account
29. Power ltd has just commissioned a refinery costing ` 10 crores. In addition,
as per environmental laws, there is an obligation to clear up the site at the
end of the useful life of the asset. It is estimated that the Asset retirement
obligation to be incurred after 15 years will be ` 2 crores. The cost of capital
of the company is 9% p.a.

The carrying value of the refinery at initial recognition as per IAS16

requirements will be:a)
10 crores
b)
8 crores
c)
12 crores
d)
10.55 crores
30. Consultants Ltd is a startup company engaged in providing services to

its clients. In the first year of operations the turnover [gross billings for
rendering of services] of the company was ` 500,000. In the second year,
the turnover in the first six months reached ` 800,000 (being the threshold
for applicability of service tax). As per the requirements of IFRIC 21 Levies,
401

the entity should recognize service tax liability in the second year of
operations:a)
Progressively from the point at which the entity first begins to generate
revenue (generation of revenue is the obligating event)
b)
In full as soon as entity generates revenue (generation of revenue is

the obligating event)
c) Once the minimum threshold has been reached (obligating event is

breaching the minimum threshold)
31. Under the new revenue recognition standard i.e. IFRS 15 Revenue from
contracts with customers what are the determining factors to establish that
a contract exists with a customer? If the criteria for establishing existence of
a contract are satisfied at contract inception, are those criteria required to
be reassessed at a later date? Is the five step model required to be applied
individually to each contract separately?
32. Predator Ltd acquired the entire business of Victim Limited. The Statement
of Financial position of Victim Ltd. included two items disclosed as contingent
liabilities. The first was a bank guarantee issued by Victim Ltd to one of
its customers for securing the performance obligation under a contract
amounting to ` 65 lacs. The second contingent liability disclosure was in
respect of the government grants of ` 75 lacs received from the State
Government for setting up a plant in a backward area. A condition attached
to the release of the Grant by the State Government was that the Plant
should be commissioned for commercial production within a period of
15 months. Victim Ltd. had disclosed a contingent liability that it may have to
return the Government grant to the State Government in the eventuality of
not have met this obligation. Describe the accounting treatment for the above
contingent liabilities in the books of Predator Ltd while passing the acquisition
accounting entries?
33. Explain the forward looking impairment model contained in IFRS9 Financial
instruments issued in July 2014? What is the rationale behind introduction
of this new model?
402

34. Non-controlling interests shall only share in the profits and not the losses
Do you agree with this statement in the context of IFRS10 Consolidated
Financial Statements? If the proportion of the equity held by non-controlling
interests changes, how shall the same be dealt with in the consolidated
financial statements?
35. What are the general information disclosure requirements prescribed in IFRS8
Operating Segments? What are the aggregation criteria and what needs to
be disclosed in respect of these aggregation criteria?
36. Describe the discretionary participation features contained in insurance
contracts with reference to the recognition and presentation requirements
given in IFRS4 Insurance contracts?
37. Can internally generated goodwill be recognised as an intangible asset?
Describe the provisions of IAS38 in this connection?
Section C Case Studies
38.
A)
Agro Foods Ltd. runs a poultry farm business. It has received a

government grant from the government for setting up a new poultry unit
in a backward area. Agro Foods Ltd used the amount of government
grants to buy the first batch of broiler birds, incubators etc. The broiler
birds are measured at fair value less costs to sell. However, the
incubator machine is measured as per the cost model in IAS 16. As
such there are no conditions attached to the release of the government
grants pertaining to purchase of poultry birds. However, as regards the
investment in incubators and other related plant and machinery items,
the government grant contains a condition that the plant and machinery
item should be used for a minimum period of 3 years. The useful life
of the incubator machine has also been determined to be 3 years in
accordance with the management estimate of the time period over
which the economic benefits embedded in the incubator machine shall
be consumed. Advise the accounting requirements prescribed in IAS41
Agriculture, IAS 20 Accounting for Government Grants and Disclosure
of Government Assistance in respect of both the government grants?
B)
Explain 5 key differences between IAS20 Government Grants and

existing AS 12 Government grants.
403

39. PET Finance Ltd. has on its Statement of Financial Position a few derivative
instruments that are recognised as liabilities. The management of PET
Finance Ltd had adopted IFRS two years ago. However, the use of derivates
has increased in recent times and the Management has appointed you as a
consultant to advise specifically on the following application questions that
arise in relation to derivative instruments and also the effect of the fair value
measurement requirements of IFRS13 Fair value measurements:a)
For derivative instruments that are recognised as liabilities, what should

an entity consider in measuring fair value?
b)
How do the requirements to include counterparty credit risk and an

entitys own nonperformance risk affect the fair value measurement of
derivative instruments?
404

ANSWERS
1. (c)
2. (iv)
3. (ii)
4. (ii)
5. (4)
6. (b)
7. (4)
8. (b)
9.
(b)
10. (d)
11. (a)
12. (a)
13. (2)
14. (a)
15. (a)
16. (a)
17. (b)
18. (a)
19. (b)
20. (d)
21. (d)
22. (b) Unearned Finance income = Gross investment in lease [5lakhs] PV of
gross investment [3 lakhs + 1 lakhs]
23. (c) Since the equipment does not generate independent cash flows, it is
not tested for impaired separately. At the CGU level, the carrying amount of
the CGU is ` 50 crores as against a recoverable amount of ` 60 crores.
Therefore, no need to recognise any impairment under IAS 36.
405

24. (d)
25. (b)
26. (a)
27. (b)
Nature of defects
Small defects
Medium defects
Major defects
Expected cost of rectifying
each defective car
Number of cars
Costs of
Probability
Expected
rectification
of
cost of
occurrence rectification
0.55
` 15,000
` 8,250
0.35
` 10,000
` 3,500
0.1
` 12,000
` 1,200
` 12,950
12,000
15,54,00,000
Total amount to be provided
28. (a) ` 5.5 crores is calculated as the difference between 60.5 crores and
` 55 crores
29. (d) [i.e. 10 crores + 2 crores x PV factor for 9% for 15 yrs].
30. (c) Since service tax becomes applicable only for assesses having a
turnover above the prescribed threshold.
31. The new standard defines a contract as an agreement between two or more
parties that creates enforceable rights and obligations and specifies that
enforceability is a matter of law. Contracts can be written, oral or implied
by an entitys customary business practices. In some instances, two or
more contracts are combined and accounted for as a single contract with a
customer. A contract with a customer also needs to meet all of the following
criteria. A contract exists if:a)
Rights to goods or services and payment terms can be identified
b)
It is approved and the parties are committed to their obligations
c)
It has commercial substance
d)
Collection of consideration is probable

406

If a contract meets all the above criteria at contract inception, an entity

does not reassess those criteria unless there is an indication of a significant
change in the facts and circumstances. Currently, entities generally assess
collectability when determining whether to recognise revenue. Under the
new standard, entities apply the revenue recognition model if, at the start of
the contract, it is probable that they will collect the consideration to which
they expect to be entitled. In making this assessment, entities consider the
customers ability and intention, which includes assessing its ability to pay
that amount of consideration when it is due. The criterion is designed to
prevent entities from applying the revenue model to problematic contracts
and recognizing revenue and a large impairment loss at the same time.
The new standard also includes a practical expedient allowing entities to

apply the requirements to a portfolio of contracts with similar characteristics if
they do not expect the outcome to be materially different from accounting for
the contracts individually. While the portfolio approach may be cost effective
than applying the new standard on an individual standard basis, it is not clear
how much effort may be needed to evaluate which similar characteristics
constitute a portfolio (eg. The impact of different offerings, periods of time
or geographic locations), assess when the portfolio approach may be
appropriate, and develop the process and controls needed in accounting for
the portfolio.
32. IAS 37 Provisions, Contingent Liabilities and Contingent Assets defines a

contingent liability as:
(a) A possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity;
or
(b) A present obligation that arises from past events but is not recognised
because:
(i) It is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; or
(ii) The amount of the obligation cannot be measured with sufficient
reliability.

The requirements in IAS 37 do not apply in determining which contingent

liabilities to recognise as of the acquisition date. Instead, the acquirer shall
407

recognise as of the acquisition date a contingent liability assumed in a
business combination if it is a present obligation that arises from past events
and its fair value can be measured reliably. Therefore, contrary to IAS 37, the
acquirer recognises a contingent liability assumed in a business combination
at the acquisition date even if it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation.

Of the two contingent liabilities in the books of Victim Ltd, only the bank
guarantee issued and outstanding as of the date of acquisition is a present
obligation that arises from past events and its fair value can be determined
reliably. Therefore, the bank guarantee measured at ` 65 lakhs will be taken
into account in determining the goodwill or bargain purchase gain for the
purpose of passing the acquisition accounting entry. The contingent liability in
respect of the government grant is to be ignored as it is a contingent liability
of a possible nature.
33. The main objective of the new impairment requirements is to provide users of
financial statements with more useful information about an entitys expected
credit losses on financial instruments. The model requires an entity to
recognise expected credit losses at all times and to update the amount of
expected credit losses recognised at each reporting date to reflect changes
in the credit risk of financial instruments. This model is forward-looking and it
eliminates the threshold for the recognition of expected credit losses, so that
it is no longer necessary for a trigger event to have occurred before credit
losses are recognised. Consequently, more timely information is required to
be provided about expected credit losses. Furthermore, when credit losses
are measured in accordance with IAS 39, an entity may only consider those
losses that arise from past events and current conditions. The effects of
possible future credit loss events cannot be considered, even when they are
expected. The requirements in IFRS 9 broaden the information that an entity
is required to consider when determining its expectations of credit losses.
Specifically, IFRS 9 requires an entity to base its measurement of expected
credit losses on reasonable and supportable information that is available
without undue cost or effort, and that includes historical, current and forecast
information.

The rationale behind introduction of this new model is as follows:1.
During the financial crisis, the delayed recognition of credit losses on

loans (and other financial instruments) was identified as a weakness
408

in existing accounting standards. Specifically, the existing model in IAS
39 (an incurred loss model) delays the recognition of credit losses
until there is evidence of a trigger event. This was designed to limit
an entitys ability to create hidden reserves that can be used to flatter
earnings during bad times. As the financial crisis unfolded, it became
clear that the incurred loss model gave room to a different kind of
earnings management, namely to postpone losses. Even though IAS
39 did not require waiting for actual default before impairment is
recognised, in practice this was often the case. The complexity of IAS
39, which used multiple impairment models for financial instruments,
was also identified as a concern
34. Para B94 of IFRS10 provides that an entity shall attribute the profit or loss
and each component of other comprehensive income to the owners of the
parent and to the non-controlling interests. The entity shall also attribute total
comprehensive income to the owners of the parent and to the non-controlling
interests even if this results in the non-controlling interests having a deficit
balance. Therefore the statement that Non-controlling interests shall only
share in the profits and not the losses is not true.

If a subsidiary has outstanding cumulative preference shares that are

classified as equity and are held by non-controlling interests, the entity shall
compute its share of profit or loss after adjusting for the dividends on such
shares, whether or not such dividends have been declared.
Para B96 of IFRS10 provides that when the proportion of the equity held by
non-controlling interests changes, an entity shall adjust the carrying amounts
of the controlling and non-controlling interests to reflect the changes in their
relative interests in the subsidiary. The entity shall recognise directly in equity
any difference between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received, and attribute
it to the owners of the parent.
35. As required in Para 22 of IFRS8 Operating segments, an entity shall disclose

the following general information:
(a) Factors used to identify the entitys reportable segments, including the
basis of organisation (for example, whether management has chosen
to organise the entity around differences in products and services,
geographical areas, regulatory environments, or a combination of
factors and whether operating segments have been aggregated);
409

(b) The judgments made by management in applying the aggregation
criteria. This includes a brief description of the operating segments
that have been aggregated in this way and the economic indicators
that have been assessed in determining that the aggregated operating
segments share similar economic characteristics; and
(c) Types of products and services from which each reportable segment
derives its revenues.

Aggregation criteria: Operating segments often exhibit similar long-term

financial performance if they have similar economic characteristics. For
example, similar long-term average gross margins for two operating
segments would be expected if their economic characteristics were
similar. Two or more operating segments may be aggregated into
a single operating segment if aggregation is consistent with the
core principle of this IFRS, the segments have similar economic
characteristics, and the segments are similar in each of the following
respects:
(a) The nature of the products and services;
(b) The nature of the production processes;
(c) The type or class of customer for their products and services;
(d) The methods used to distribute their products or provide their
services; and
(e) If applicable, the nature of the regulatory environment, for
example, banking, insurance or public utilities.
36. Some insurance contracts contain a discretionary participation feature as well

as a guaranteed element. The issuer of such a contract:
a)
May, but need not, recognise the guaranteed element separately from
the discretionary participation feature. If the issuer does not recognise
them separately, it shall classify the whole contract as a liability. If
the issuer classifies them separately, it shall classify the guaranteed
element as a liability.
b)
Shall, if it recognises the discretionary participation feature separately

from the guaranteed element, classify that feature as either a liability
or a separate component of equity. This IFRS does not specify how the
issuer determines whether that feature is a liability or equity. The issuer
410

may split that feature into liability and equity components and shall
use a consistent accounting policy for that split. The issuer shall not
classify that feature as an intermediate category that is neither liability
nor equity.
c)
May recognise all premiums received as revenue without separating

any portion that relates to the equity component. The resulting changes
in the guaranteed element and in the portion of the discretionary
participation feature classified as a liability shall be recognised in
profit or loss. If part or all of the discretionary participation feature is
classified in equity, a portion of profit or loss may be attributable to that
feature (in the same way that a portion may be attributable to noncontrolling interests). The issuer shall recognise the portion of profit or
loss attributable to any equity component of a discretionary participation
feature as an allocation of profit or loss, not as expense or income.
d)
Shall, if the contract contains an embedded derivative within the scope

of IFRS 9, apply IFRS 9 to that embedded derivative.
37. In some cases, expenditure is incurred to generate future economic benefits,

but it does not result in the creation of an intangible asset that meets the
recognition criteria in this Standard. Such expenditure is often described as
contributing to internally generated goodwill. Internally generated goodwill
is not recognised as an asset because it is not an identifiable resource (ie
it is not separable nor does it arise from contractual or other legal rights)
controlled by the entity that can be measured reliably at cost.

Differences between the market value of an entity and the carrying amount
of its identifiable net assets at any time may capture a range of factors that
affect the value of the entity. However, such differences do not represent the
cost of intangible assets controlled by the entity.
It is sometimes difficult to assess whether an internally generated intangible

asset qualifies for recognition because of problems in:
(a) Identifying whether and when there is an identifiable asset that will
generate expected future economic benefits; and
(b) Determining the cost of the asset reliably. In some cases, the cost of
generating an intangible asset internally cannot be distinguished from
the cost of maintaining or enhancing the entitys internally generated
goodwill or of running day-to-day operations.
411

To assess whether an internally generated intangible asset meets the criteria

for recognition, an entity classifies the generation of the asset into:
(a) A research phase; and
(b) A development phase.
Although the terms research and development are defined, the terms
research phase and development phase have a broader meaning for the
purpose of this Standard.
If an entity cannot distinguish the research phase from the development

phase of an internal project to create an intangible asset, the entity treats the
expenditure on that project as if it were incurred in the research phase only.
No intangible asset arising from research (or from the research phase of
an internal project) shall be recognised. Expenditure on research (or on the
research phase of an internal project) shall be recognised as an expense
when it is incurred.
An intangible asset arising from development (or from the development

phase of an internal project) shall be recognised if, and only if, an entity can
demonstrate all of the following:
(a) The technical feasibility of completing the intangible asset so that it will
be available for use or sale.
(b) Its intention to complete the intangible asset and use or sell it.
(c) Its ability to use or sell the intangible asset.
(d) How the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the existence
of a market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible
asset
(e) The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
(f)
Its ability to measure reliably the expenditure attributable to the

intangible asset during its development.
412

38. A)
IAS 41 requires an unconditional government grant related to a

biological asset measured at its fair value less costs to sell to be
recognised in profit or loss when, and only when, the government
grant becomes receivable. Accordingly, the amount of government
grant attributable to the broiler birds which qualify as a biological bird
shall be recognised in profit or loss account when the grant becomes
receivable.
If a government grant is conditional, including when a government grant

requires an entity not to engage in specified agricultural activity, an
entity should recognise the government grant in profit or loss when, and
only when, the conditions attaching to the government grant are met.
This provision of IAS 41 is not applicable as we have been informed
that there are no conditions attached to the release of the government
grant pertaining to broiler birds. In the given case, the grant related to
broiler birds has already been received for the purpose of providing
immediate financial support to the entity with no future related costs or
conditions to be fulfilled. Accordingly, the grant relating to broiler birds is
to be recognised in profit and loss in the period in which it is received.
If a government grant relates to a biological asset measured at its cost

less any accumulated depreciation and any accumulated impairment
losses, the entity applies IAS 20 Accounting for Government Grants
and Disclosure of Government Assistance. The incubator machine
does not qualify as a biological asset as it is specifically covered by
IAS 16 which states that plant and machinery items used to develop
or maintain biological assets is covered by IAS 16. Therefore the
provisions relating to Government grants contained in IAS 41 will not
apply to the incubator machine. Therefore we will have to apply directly
the provisions contained in IAS 20.
IAS 20 contains two methods of presentation in financial statements

of grants (or the appropriate portions of grants) related to assets are
regarded as acceptable alternatives:
One method recognises the grant as deferred income that is

recognised in profit or loss on a systematic basis over the useful
life of the asset.
413

The other method deducts the grant in calculating the carrying

amount of the asset. The grant is recognised in profit or loss over
the life of a depreciable asset as a reduced depreciation expense.
Therefore, the grant relating to incubator machine will have to be

accounted as a deferred income that is recognised in Profit or
loss on a systematic basis over a period of 3 years in line with
the condition attached to the grant. Alternatively, the grant may
be deducted in determining the carrying amount of the incubator.
In such a case the grant is recognised in Profit or Loss over
the 3 year useful life of the depreciable incubator machine as a
reduced depreciation expense.
B) Some of the key differences between IAS 20 and existing AS 12 are

as follows:Sl IAS 20 Government
Existing AS 12
No Grants
1. Deals with the other forms Does not deal with such
of government assistance government assistance
which do not fall within the
definition of government
grants. It requires that an
indication of other forms
of government assistance
from which the entity has
directly benefited should be
disclosed in the financial
statements
414

Sl IAS 20 Government
No Grants
2. Based on the principle
that all government grants
would normally have certain
obligations attached to them
and these grants should
be recognised as income
over the periods which
bear the cost of meeting
the obligation. It, therefore,
specifically
prohibits
recognition of grants directly
in the shareholders funds
3.
4.
Does not recognise

government grants of
the nature of promoters
contribution based on the
principle that all government
grants would normally have
certain obligations attached
to them and it, accordingly,
requires all grants to be
recognised as income over
the periods which bear
the cost of meeting the
obligation
Requires to value nonmonetary grants at their
fair value or at a nominal
amount.
415
Existing AS 12
In case the grant is in respect
of non-depreciable assets, the
amount of the grant should be
shown as capital reserve which
is a part of shareholders funds.
It further requires that if a grant
related to a non-depreciable asset
requires the fulfilment of certain
obligations, the grant should
be credited to income over the
same period over which the cost
of meeting such obligations is
charged to income. AS 12 also
gives an alternative to treat such
grants as a deduction from the
cost of such asset.
Recognises
that
some
government grants have the
characteristics similar to those
of promoters contribution. It
requires that such grants should
be credited directly to capital
reserve and treated as a part of
shareholders funds.
Requires that government grants

in the form of non-monetary
assets, given at a concessional
rate, should be accounted for on
the basis of their acquisition cost.
In case a non-monetary asset is
given free of cost, it should be
recorded at a nominal value.

Sl IAS 20 Government
Existing AS 12
No Grants
5. Requires that loans received Does not require such treatment
from a government that
have a below-market
rate of interest should be
recognised and measured
(which requires all loans to
be recognised at fair value,
thus requiring interest to
be imputed to loans with
a below-market rate of
interest)
39. We would like to provide the following application guidance for practical
implementation and interpretation of the requirements of IFRS13 to the
specific issues raised by the management:a)
Derivative instruments recognised as liabilities:- The fair value of

a liability is defined as the price that would be paid to transfer the
liability in an orderly transaction between market participants at the
measurement date. Although the fair value measurement objective of a
derivative liability is to estimate the price that would be paid to transfer
the liability, generally there is no quoted price for this transfer. However,
because a derivative liability is a contract between market participants,
generally it is held by another party as an asset. Therefore an entity
measures the fair value of a derivative liability from the perspective of
a market participant that holds the derivative as an asset. [Refer Para
13.9, 34 and 37 of IFRS13].
For derivatives that are exchange traded, the price used for fair
value measurement is usually the market exchange price on the
measurement date which is considered a Level 1 input if the market is
active. [Refer Paras 77 and 79 of IFRS13].
The fair value measurement of non-exchange traded derivatives (e.g.,

OTC derivatives) generally is based on an income approach. Under
this approach, the future cash flows are converted to a single amount
through discounting. A fair value measurement based on income
416

approach may include adjustments for liquidity, credit risk, or any other
adjustments if these are based on assumptions that market participants
would use. [Refer para B10 of IFRS13].

Some derivatives, such as forwards and swaps, may be liabilities or

yield curve. This adds complexity to the measurement of fair value
because the credit risk adjustments may include both the counterpartys
credit risk and the entitys own performance risk. In addition the credit
risk adjustment may be affected by whether and how the non-exchange
traded derivative is collateralised. Whether the fair value measurement
is categorised within Level 2 or Level 3 of the fair value hierarchy
depends on whether the measurement includes unobservable inputs
that are significant to the entire measurement. [Refer paras 42-43, 73
of IFRS13]
For a group of financial assets and financial liabilities, including

derivatives, an entity is permitted, if certain conditions are met, to
measure the fair value of a group of derivatives based on price that
would be received to sell or paid to transfer the net risk position
(portfolio measurement exception). If an entity elects to apply
the portfolio measurement exception for a particular market or
counterpartys credit risk, it may affect the liquidity and credit risk
adjustments for instruments in the portfolio because they are measured
based on the characteristics of the entitys net risk position rather than
on the characteristics of the individual derivatives. [Refer paras 48-49,
53, 56 of IFRS13]
b)
The fair value of derivative assets should consider the effect of potential
non-performance of the counterparty. In addition, the fair value of
derivative liabilities also considers the entitys own non-performance
risk, which is assumed to remain the same before and after the
transfer. [Refer paras 9, 34, 42 of IFRS13].
In principle, and assuming no differences in the unit of valuation, the

credit risk adjustments made in the fair value measurement by both
counterparties to the financial instrument should be the same. [Refer
para 37 of IFRS13].
417

The fair value of many derivative instruments (e.g., SWAPs and

Forwards) is affected by the risk of non-performance of both the
counterparty and the entity because the derivatives can be liabilities or
yield curve. [Refer Para 42 of IFRS13].
For such derivatives, an entity should consider both counterparty credit

risk and its own nonperformance risk if market participants could do so
in measuring the fair value of these instruments. Therefore, an entity
should design and implement a method for appropriately considering
credit risk adjustments in valuing these derivatives. [Refer Paras 11, 42
of IFRS13].
If market participants would consider both the counterparty credit risk

and the entitys own nonperformance risk and an entity uses a method
that considers only the current classification of the derivative (as either
an asset or liability) and calculates the credit risk adjustment based on
its current classification, it would determine whether additional credit
risk adjustments are necessary based on the potential for the other
classification. [Refer paras 11, 42 of IFRS13].
418

Full Marks : 100
Time: 3 hours
Section A Objective Type Questions (30 x 1.5 marks = 45 marks)

Write True or False
1.
2.
Which of the following statements are true in the context of IAS 21 The
Effects of Changes in Foreign Exchange rates ?
a)
Foreign currency is a currency other than the functional currency of the

entity.
b)
Foreign currency is a currency of a country other than the one in which

the entity is domiciled
c)
Foreign currency is a currency of a foreign country.
d)
Foreign currency is a currency of a country other than the currency of

the country whose functional currency has been adopted
Which of the following statements as regards the applicability of IAS 29

Financial reporting in Hyperinflationary economies are true:
a) It is preferable that all entities that report in the currency of the same
hyperinflationary economy apply this Standard from the same date.
b) This Standard applies to the financial statements of any entity from the
beginning of the reporting period in which it identifies the existence of
hyperinflation in the country in whose currency it reports.
c) It is not preferable that all entities that report in the currency of the
same hyperinflationary economy apply this Standard from the same
date.
d) This Standard applies to the financial statements of any entity from
the end of the reporting period in which it identifies the existence of
hyperinflation in the country in whose currency it reports.
419

Alternative choices:i)
Only a) is true
ii)
iii)
Only c), d) are true
iv) Only a) d) are true

3.
In case of unrestated business combinations before the transition date, which

of the following statement relating to goodwill is appropriate as per IFRS 1?
(a) Goodwill is tested for impairment as at the transition date.
(b) Goodwill is adjusted against opening reserves.
(c) Goodwill is adjusted for IFRS transition impact on the acquired
business.
4.
Assume that an entitys date of transition to IFRSs (As defined in IFRS 1 First
Time Adoption of IFRSs) is 1 January, 20X4 and new information on 15 July
20X4 requires the revision of an estimate made in accordance with previous
GAAP at 31 December, 20X3.
1.
The entity shall not reflect that new information in its opening IFRS
statement of financial position
2.
The entity may reflect the new information in its opening IFRS
statement of financial position if the estimates need adjustment for any
differences in accounting policies
3.
The entity may reflect the new information in its opening IFRS
statement of financial position if there is objective evidence that the
estimates were in error.
4.
The entity shall not reflect that new information in its opening IFRS
statement of financial position, instead, the entity shall reflect that new
information in profit or loss (or, if appropriate, other comprehensive
income) for the year ended 31 December, 20X4.
Alternative choices:a)
Only 1) is true
b)
Only 1), 2) are true

420
5.
c)
Only 3), 4) are true
d)
All are true
The term Goods used in IAS18 Revenue means:

a) goods produced by the entity for the purpose of sale and goods
purchased for resale, such as merchandise purchased by a retailer or
land and other property held for resale.
b) goods produced by the entity for the purpose of sale and goods
purchased for resale, but excludes merchandise purchased by a retailer
or land and other property held for resale.
c) goods produced by the entity for the purpose of sale and goods
purchased for resale, but excludes merchandise purchased by a
retailer.
d) None of the above as goods has the same meaning as defined in IAS-2
Inventories.
6.
Which of the following are not contract costs as described in IAS 11

Construction contracts:
(a) Selling costs.
(b) Site supervision.
(c) Cost of warranty works.
(d) All of the above.
7.
IFRS15 Revenue from Contracts with customers prescribes a five step

model for recognising revenue. Which of the following statements are true?
a) The impact of IFRS 15 will vary by industry. Compared with current
accounting, revenue recognition may be accelerated or deferred
for transactions with multiple components, variable consideration or
licences.
b) IFRS 15 applies to contracts to deliver goods or services including nonmonetary exchanges between entities in the same line of business that
facilitates sales to customers other than the parties to the exchange.
c) A contract with a customer may be partially in the scope of IFRS 15
and partially in the scope of other accounting guidance.
421

d) A contract for a lease of an asset and maintenance of the leased
equipment is accounted exclusively in accordance with IFRS 15.
Alternatives:
1) All are true
2) Only a, b are true
3) Only b, c, d are true
4) Only a and c are true
8. X Limited in order to promote its products incurred major advertising
expenses and also incurred transportation costs in moving some of its
products from one retail store to another retail store. Which of the following
expenses should be included as cost of inventory as per the requirements of
IAS2 Inventories:
(1) Advertising expenses
(2) Transportation cost
(3) Rent of the store
Alternatives:
(a) 1 & 3
(b) 2 & 3
(c) 1 & 2
9. An entity imported machinery to install in its new factory premises before
year-end. However, due to circumstances beyond its control, the machinery
was delayed by a few months but reached the factory premises before yearend. While this was happening, the entity learned from the bank that it was
being charged interest on the loan it had taken to fund the cost of the plant.
What is the proper treatment of freight and interest expense under IAS 16
Property, Plant and Equipments?
(a) Both expenses should be capitalised.
(b) Interest may be capitalised but freight should be expensed.
422

(c) Freight charges should be capitalised but interest cannot be capitalised
under these circumstances.
(d) Both expenses should be expensed.
10. Investment property is defined in IAS 40 Investment Properties as:
(a) Property (land or a building, or part of a building, or both) held to earn
rentals.
(b) Property (land or a building, or part of a building, or both) held for
capital appreciation.
(c) Property (land or a building, or part of a building, or both) held use
in the production or supply of goods or services or for administrative
purposes.
(d) Property (land or a building, or part of a building, or both) held to earn
rentals or for capital appreciation or both.
11. As per IAS 29 Financial reporting in Hyperinflationary economies, when
the restated financial statements of the investee are expressed in a foreign
currency, they are translated at _____________.
a)
Closing rates
b)
Average rates
c)
Estimated rates
d)
None of the above
12. An entitys first IFRS financial statements as defined in IFRS 1 First time
adoption of IFRSs are the first annual financial statements in which the entity
adopts IFRSs, __________________________.
a)
by an explicit and unreserved statement in those financial statements

of compliance with IFRSs.
b)
by an explicit and unreserved statement in the Directors report of

compliance with IFRSs.
c)
by an explicit and unreserved statement in those financial statements

of compliance most of the IFRSs.
423

d)
by an explicit statement in those financial statements of compliance with

IFRSs.
13. The measurement of the amounts of revenue arising from claims is subject to
a high level of uncertainty and often depends on the outcome of negotiations.
Therefore, claims (as described in IAS 11 Construction contracts) are
included in contract revenue only when ___________________________
(a) Negotiations have reached an advanced stage such that it is probable
that the customer will accept the claim;
(b) The amount that it is probable will be accepted by the customer can be
measured reliably;
(c) Negotiations have reached an advanced stage such that it is virtually
certain that the customer will accept the claim;
(d) The amount that it is reasonably certain will be accepted by the
customer can be measured reliably.
Alternatives:
1)
Only c) is true
2)
Only b and c are true
3)
Only c, d are true
4)
Only a, b are true
14. In accordance with IAS 41 Agriculture, inventories comprising agricultural

produce that an entity has harvested from its biological assets are measured
on initial recognition at their fair value less costs to sell at the point of
harvest. This is the _________________________________
Option are:a)
Net realisable value of the inventories at that date for application of

IAS 2
b)
Cost of the inventories at that date for application of IAS 2
c)
Net selling price of the inventories for application of IAS 2
d)
Valuation of the inventories for application of IAS 2

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15) Items such as spare parts, stand by equipments and servicing equipments
___________________
a) are recognised in accordance with IAS 16 when they meet the definition
of PPE
b) are not recognised in accordance with IAS 16 but are classified as
inventory as per IAS 2
c) are always classified as PPE in accordance with IAS 16
d) neither classified as PPE nor inventory but as classified as
consumables and charged to Income statement
16) A Ltd. has contracted to lease the asset for 5 years. A Ltd. also has
an option to continue the lease for 3 more years. Therefore,
________________________
(a) The lease term is 5 years.
(b) The lease term is 8 years.
(c) The lease term is 8 years only if it is reasonably certain that A Ltd.
will exercise its option with or without making further payments for
continuing lease.
(d) The lease term is 8 years only if it is reasonably certain that A Ltd. will
exercise its option after making further payments for continuing lease.
17) The revaluation model in IAS 38 does not allow____________________
(a) The revaluation of intangible assets that have not previously been
recognised as assets.
(b) Initial recognition of intangible assets at amounts other than cost.
(c) The fair value of the asset to be determined by reference to an active
market.
(d) Both (a) and (b)
18) As per IFRIC 10 Interim Financial Reporting and Impairment An entity
_____________ recognised in a previous interim period in respect of goodwill
or an investment in either an equity instrument or a financial asset carried at
cost.
a)
shall not reverse an impairment loss

425

b)
may reverse an impairment loss
c)
can reverse an impairment loss
d) shall reverse an impairment gain

19) As per IFRIC 4 Determining whether an arrangement contains a
lease, the right to control the use of the underlying asset is conveyed if
_______________________
(a) The purchaser has the ability or right to operate the asset or direct
others to operate the asset in a manner it determines while obtaining
or controlling more than an insignificant amount of the output or other
utility of the asset.
(b) The purchaser has the ability or right to control physical access to the
underlying asset while obtaining or controlling more than an insignificant
amount of the output or other utility of the asset.
(c) The purchaser has the ability or right to influence the manner of
physical access to the underlying asset.
(d) Facts and circumstances indicate that it is remote that one or more
parties other than the purchaser will take more than an insignificant
amount of the output or other utility that will be produced or generated
by the asset during the term of the arrangement, and the price that the
purchaser will pay for the output is neither contractually fixed per unit
of output nor equal to the current market price per unit of output as of
the time of delivery of the output.
Only a, b are true
2.
Only b, c are true
3.
Only a, b and d is true
4.
Only c is true
20) As per the Conceptual Framework for financial reporting, Equity is defined
as ______________
a) The residual interest in the asset of the entity after deducting all its
liabilities. It presents the cumulative net results of the past transactions
and other events affecting the entity since day one of its inception
426

b) The residual interest in the net asset of the entity after deducting all its
liabilities. It presents the cumulative net results of the transactions and
other events affecting the entity since day one of its inception
c) The residual interest in the net asset of the entity after deducting
all its liabilities. It presents the cumulative net results of the future
transactions and other events affecting the entity since day one of its
inception
d) The residual interest in the asset of the entity after deducting all its
long term liabilities. It presents the cumulative net results of the past
transactions and other events affecting the entity since day one of its
inception
21. Below is the certain information relating to inventory held by X Limited:Purchase cost per unit ` 100
Estimated selling price ` 130
Cost to sell ` 10
Cost of conversion ` 5

What should be the value of inventory as per the requirements of IAS

Inventories ?
(a) `115
(b) ` 130
(c) ` 120
(d) ` 105
22. A Ltd. signs a lease agreement with B Ltd. for lease of building (which
includes lease for land as well) for a period of 15 years. The land has an
indefinite economic life and building has a life of 15 years. The minimum
lease payments are @ ` 1,00,000 per month. Fair value of land and building
is ` 2 crores. It is not possible to find out separate fair value of land and
building, however, the fair value of land is not immaterial. Which of the
following statement is correct?
(a) A Ltd. should classify lease for both land and building as an operating
lease.
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(b) A Ltd. should classify lease for building as an operating lease and lease
for land as a finance lease, allocation of minimum lease payments may
be done in an ad hoc manner.
(c) A Ltd. should classify lease for both land and building as a finance
lease unless it is clear that both elements are operating leases.
(d) A Ltd. has a free choice to classify the lease into operating lease or
finance lease.
23. A Ltd. took a depreciable asset on finance lease for 6 years. A Ltd. also
agrees to continue the lease for a subsequent period of 6 years. The useful
life of the asset is 10 years and the economic life of the asset is 15 years. A
Ltd. recognised the asset at ` 90 lakhs as per IAS 17. Which of the following
statement is incorrect?
(a) Depreciation should be allocated over a period of 6 years.
(b) Depreciation should be allocated over a period of 10 years.
(c) Depreciation should be allocated over a period of 12 years.
(d) Depreciation should be allocated over a period of 15 years.
24. A Ltd. purchased an equipment for ` 51 lakhs on April 1, 2011. The useful
life of the equipment is 5 years and the residual value is estimated to be
` 1 lakh. The company adopts straight line method of depreciation. On
March 31, 2012, a test for impairment was conducted after obtaining the
following information:

Fair value less costs to sell ` 36 lakhs
Value in use ` 32 lakhs
Having regard to IAS 36, compute the impairment loss to be recognised for
the year ending March 31, 2012 and the depreciation charge for the year
ending March 31, 2013.
(a) Impairment loss is ` 4 lakhs and depreciation is ` 8 lakhs
(b) Impairment loss is ` 5 lakhs and depreciation is ` 10 lakhs
(c) Impairment loss is ` 4 lakhs and depreciation is ` 9 lakhs
(d) Impairment loss is ` 5 lakhs and depreciation is ` 9 lakhs
428

25. The cost of an asset is ` 10,00,000. For the 1st year, the accounting
depreciation is ` 1,60,000 and tax depreciation is ` 2,50,000. The entity
plans to use the asset. The tax rate for capital gains if the entity sells the
asset is 15%. The tax rate for business profits is 25%. The deferred tax
implications are:a) Recognize deferred tax liabilities of ` 22,500
b) Recognize deferred tax assets of ` 22,500
c) Recognize deferred tax liabilities of ` 13,500
d) Recognize deferred tax assets of ` 13,500
26. An entity operates a pension plan that provides a pension of 2% of final
salary for each year of service. The benefits become vested after five years
of service. On 1 January, 20X5 the entity improves the pension to 2.5% of
final salary for each year of service starting from 1 January, 20X1. At the date
of the improvement, the present value of the additional benefits for service
from 1 January, 20X1 to 1 January, 20X5 is as follows:
Particulars
Employees with more than five years service at 1/1/X5
Employees with less than five years service at 1/1/X5
(average period until vesting: three years)
Grand total

` lakhs
150
120
270
As per the requirements of IAS 19 Employee benefits, the accounting will be

as follows:
a)
The entity recognises 150 lacs immediately because those benefits are
already vested. The entity recognises 120 lacs on a straight line basis
over three years from 1 January 20X5.
b)
The entity recognises 270 lacs immediately because it pertains to past

service.
c)
The entity recognises 150 lacs immediately because those benefits

are already vested. The balance 120 lacs is also recognised fully but
disclosed separately.
d)
The entity has an option to recognize 270 lacs on a straight line

basis over a three years period from 1st January, 2015 until all the
employees in the plan have fulfilled the vesting requirements.
429

27. An entity is developing a new production process. During 20X5, expenditure
incurred was CU 1,000, of which CU 900 was incurred before 1 December,
20X5 and CU 100 was incurred between 1 December, 20X5 and 31
December, 20X5. The entity is able to demonstrate that, at 1 December,
20X5, the production process met the criteria for recognition as an intangible
asset. The recoverable amount of the know-how embodied in the process
(including future cash outflows to complete the process before it is available
for use) is estimated to be CU 500.
a)
At the end of 20X5 the production process is recognised as an

intangible asset at a cost of CU 100
b)

c)

d)

28. An entity uses an item of Plant & Machinery in its LPG filling plant. The
carrying amount of the LPG filling plant as at 31st March 2013 [the reporting
date] was ` 15 crores. The fair value less costs to sell off the machine is
` 11 crores as of 31st March, 2013. The value in use of the machine as
at 31st March, 2013 was ` 14 crores. Accordingly, an impairment loss of
` 1 crore was recognized as at 31st March, 2013. The carrying amount of
the machinery as at 31st March, 2014 is ` 14.7 crores. The assets value in
use as at 31st March, 2014 has increased to ` 15.5 crores simply because
the present value of future cash inflows has increased as they became
closer. However, the service potential of the asset has not increased.

The amount of impairment loss of ` 1 crore recognized in the year ended

31st March, 2013 to be reversed as at 31st March, 2014 is:a)
` 0.8 Crores [i.e. ` 15.5 crores ` 14.7 crores]
b)
` 0.5 Crores [i.e. ` 15.5 crores ` 15 crores]
c)
` 1.5 Crores [i.e. ` 15.5 crores ` 14 crores]
d)
None of the above

430

29. While finalizing the financials for the year ended December 31, 2013, it was
observed that the insurance premium expenses amounting to ` 45 lakhs
were incorrectly charged to Profit or loss account in the financials for the
year ended December 31, 2012 instead of recognizing the same as Prepaid
expenses as at December 31, 2012 and charging them off as expenses
in the year ended December 31, 2013. As per IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors, this error will be handled as
follows in the financials for the year ended December 31, 2013:a) Restating the comparative amounts for the prior period presented
in which the error occurred. Therefore, prepaid expenses will be
recognised as at 31st December, 2012 and opening balance of
reserves as at 1.1.2013 will be restated and expenditure of ` 45 lakhs
will be accounted in the year ended December 31, 2013.
b) Restating the amounts for the current period in which the error was
detected. Accordingly, the insurance premium of ` 45 lakhs will be
charged to Profit or loss account in the year ended December 31,
2013.
c) Suitable disclosure will be made in the accounts for the year ended
December 31, 2013 to the effect that the insurance premium would
have been higher by ` 45 lakhs had the error not occurred.
30. Zed Ltd. imported an item of Plant and Machinery costing USD 100,000. The
exchange rate as at the date of receipt of the Plant and Machinery in India
was ` 60 = 1 USD. However, at the time of remitting the payment to the
foreign vendor [30 days after receipt of the Plant and machinery in India] the
exchange rate was Rs. 62 = 1 USD. Accordingly, ZED Ltd. passed a journal
entry debiting Vendor account for ` 60,00,000; debiting Exchange loss for
` 200,000 and crediting bank account for ` 62,00,000. At the first balance
sheet date after the acquisition of the aforesaid Plant and Machinery, Zed
Ltd. opted to use the Revaluation model. The accounting treatment as per
IAS 21 The Effects of changes in foreign exchange rates as regards the
exchange loss of ` 200,000 is as follows:a) ` 200,000 being a realised exchange loss on a monetary item, it should
be recognized in Profit or Loss account
431

b) ` 200,000 being an unrealised exchange loss on a monetary item, it
should be recognised in Profit or Loss account
c)
` 200,000 being a realised loss on a non-monetary item, it should be

recognised in Profit or Loss account
d)
` 200,000 being a realised loss on a non-monetary item, it should

be recognised in Other Comprehensive income as the asset is being
accounted under the revaluation model.

31. AXB Housing Ltd is a real estate company. It has received earnest money
deposit [EMD] from a prospective buyer of commercial premises in one of its
properties at a project near the Central Business District. Applying the criteria
contained in IFRS15 Revenue from contracts with customers determine
whether a contract exists as per the first step of the five-step model given in
IFRS15 so as to entitle AXB Housing to recognize revenue in respect of the
EMD?
32. What do you understand by a Bargain purchase gain in the context of IFRS3
Business combinations? What is the guidance provided in IFRS3 for ensuring
that a reassessment is done before the Bargain purchase gain is actually
recognized?
33. Explain the Concept of Business model for managing financial assets as
contained in the new IFRS9 issued in July 2014? What business model
qualifies for amortized cost, fair value through other comprehensive income
and fair value through Profit or loss account? When are reclassifications
within these categories permitted?
34. Explain the accounting treatment prescribed in IFRS10 Consolidated Financial
Statements to be followed in case a parent loses control of a subsidiary
35. What are the requirements prescribed in IFRS8 Operating Segments
regarding restatement of previously reported information?
36. Describe the circumstances in which an entity can change its accounting
policies for insurance contracts as defined in IFRS4 Insurance contracts?
Provide 4 illustrations to explain these provisions.
37. If intangible assets are acquired in a business combination, then describe
the accounting guidance provided in IAS 38 Intangible assets for accounting
these intangible assets?
432

38. Jingru Wan Tyres Ltd is a Chinese company which has set up its
manufacturing base in Hong kong. Further, it acquired a small tyre retreading
business in Hong kong in the current year. Since it wants to list its shares
on the Hong kong stock exchange it needs to adopt IFRS. The management
of Jingru Wan Tyres Ltd is apprehensive that the fair value measurement
requirements of IFRS13 will be challenging to comply with. They have
therefore appointed you as a consultant to advise on the following fair
valuation related questions / issues raised by the management:a)
As per the guidance provided in IFRS13 valuation techniques used to

measure fair value fall under three approaches i.e. market approach,
income approach, and cost approach. When more than one valuation
technique is used, what factors should an entity consider in weighting
the indications of fair value produced by the different techniques?
b)
Jingru Wan Tyres Ltd plans to discontinue the active use of the brand
acquired with the Tyre retreading business and instead promote its own
brand in Hong kong. How should the fair value of an intangible asset
acquired in a business combination be measured if the acquirer plans
to discontinue its active use?
A)
Entity P Limited has a controlling interest in subsidiaries SA Limited and

SB Limited and SC Limited. SC Limited is a subsidiary of SB Limited. P
Limited also has significant influence over associates A1 Limited and A2
Limited. Subsidiary SC Limited has significant influence over associate
A3 Limited.
Required: Examine related party relationships as per IAS 24 Related

Party Disclosures of various entities i.e. P. Ltds separate financial
statements, SA Ltd., SB Ltd., SC Ltd., A1 Ltd., P. Ltds consolidated
financial statements; are A1 Ltd., A2 Ltd., and A3 Ltd related to each
other?
39.
433

B)
Mr. X has a 100% investment in A Limited. He is also a member of the

key management personnel (KMP) of C Limited. B Limited has a 100%
investment in C Limited.
Examine related party relationships from the perspective of C
Limited.

Examine related party relationships from the perspective of C

Limited if Mr. X is a KMP of B Limited and not C Limited.
C) Explain 5 key differences between IAS 24 Related parties and existing

AS 18
434

ANSWERS
1.
(a)
2. (ii)
3. (a)
4. (d)
5. (b)
6. (a)
7. (4)
8. (d)
9. (c)
10. (d)
11. (a)
12. (a)
13. (4)
14. (b)
15. (a)
16. (c)
17. (d)
18. (a)
19. (3)
20. (a)
21. (d)
22. (c)
23. (b)
435

24. (b) Depreciable amount = 50 lacs [51 lacs expected residual amount of
` 1 lac]. Useful life is 5 years. Depreciation p.a. on SLM basis is ` 10 lacs.
Recoverable amount ` 36 lacs [higher of 36 lacs and 32 lacs]. Impairment
loss as at 31.3.2012 ` 5 lacs [41 lacs 36 lacs].
25. (a)
26. (a)
27. (a) At the end of 20X5, the production process is recognised as an
intangible asset at a cost of CU100 (expenditure incurred since the date
when the recognition criteria were met, i.e., 1 December 20X5). The CU900
expenditure incurred before 1 December 20X5 is recognised as an expense
because the recognition criteria were not met until 1 December 20X5.
This expenditure does not form part of the cost of the production process
recognised in the statement of financial position.
28. (d)
29. (a)
30. (a) The exchange loss was suffered on the foreign exchange denominated
accounts payable pertaining to import of machinery. Therefore, exchange loss
pertains to a monetary item.
31. The first step in the five-step model prescribed in IFRS15 is to Identify the
contract with a customer. As per the guidance given in IFRS15 contracts
can be written, oral or implied by an entitys customary business practices.
IFRS15 defines a contract as an agreement between two or more parties that
creates enforceable rights and obligations and specifies that enforceability
is a matter of law. For a contract to exist four minimum criteria need to be
satisfied as follows:A contract exists if:e)
Rights to goods or services and payment terms can be identified
f)
It is approved and the parties are committed to their obligations
g)
It has commercial substance
h)
Collection of the consideration is probable

436

In the given case AXB Housing has only received the EMD and there
seems to be no contractual agreement signed with the customer. Under
IFRS15 entities are required to apply the revenue recognition model if, at the
inception the contract, it is probable that they will collect the consideration to
which they expect to be entitled. In making this assessment, entities consider
the customers ability and intention, which includes assessing its ability to
pay that amount of consideration when it is due. The criterion is designed to
prevent entities from applying the revenue model to problematic contracts and
recognising revenue and a large amount of impairment loss at the same time.
Accordingly AXB Housing needs to consider the following factors in deciding
whether or not to recognize revenue in respect of the EMD received from its
prospective customer:a)
The buyers available financial resources
b)
The buyers commitment to the contract, which may be determined

based on the importance of the property to the buyers operations
c)
The sellers prior experience with similar contracts and buyers under
similar circumstances
d)
The sellers intentions to enforce its contractual rights and
e)
The payment terms under the arrangement
If AXB Housing concludes that it is not probable that it will collect the amount
to which it expects to be entitled, then no revenue should be recognised.
Instead AXB Housing applies the new guidance on consideration received
before a contract exists, and is likely to initially account for any cash collected
as a deposit liability.
32. Occasionally, an acquirer will make a bargain purchase, which is a business

combination in which the amount in (b) exceeds the aggregate of the
amounts specified in (a).
(b) The net of the acquisition-date amounts of the identifiable assets
acquired and the liabilities assumed measured in accordance with
IFRS3
(a) The aggregate of:
(i) The consideration transferred measured in accordance with
this IFRS, which generally requires acquisition-date fair value
(paragraph 37 of IFRS3);
437

(ii) The amount of any non-controlling interest in the acquiree
measured in accordance with IFRS3; and
(iii) In a business combination achieved in stages, the acquisition-date
fair value of the acquirers previously held equity interest in the
acquiree.

As per the guidance provided in IFRS3, the excess determined as the

difference between (b) and (a) should first be reassessed. If this excess
remains even after reassessment, the acquirer shall recognise the resulting
gain in profit or loss on the acquisition date. The gain shall be attributed to
the acquirer. A bargain purchase might happen, for example, in a business
combination that is a forced sale in which the seller is acting under
compulsion. Before recognising a gain on a bargain purchase, the acquirer
shall reassess whether it has correctly identified all of the assets acquired
and all of the liabilities assumed and shall recognize any additional assets
or liabilities that are identified in that review. The acquirer shall then review
the procedures used to measure the amounts this IFRS requires to be
recognised at the acquisition date for all of the following:
(a) The identifiable assets acquired and liabilities assumed;
(b) The non-controlling interest in the acquiree, if any;
(c) For a business combination achieved in stages, the acquirers
previously held equity interest in the acquiree; and
(d) The consideration transferred.
The objective of the review is to ensure that the measurements appropriately

reflect consideration of all available information as of the acquisition date.
33. A business model refers to how an entity manages its financial assets
in order to generate cash flowsby collecting contractual cash flows,
selling financial assets or both. The business model should be determined
on a level that reflects how financial assets are managed to achieve a
particular business objective. However, the determination is not dependent
on managements intentions for an individual instrument, and should be
made on a higher level of aggregation. A business model can typically
be observed through the activities that an entity undertakes to achieve its
business objective. As such, a business model is a matter of fact rather than
an assertion. Objective information, such as business plans, how managers
of the business are compensated and the amount and frequency of sales
438

activity should be considered. Judgment needs to be used when assessing
a business model and that assessment should consider all relevant available
evidence.

Financial assets at amortised cost are held in a business model whose

objective is to hold assets in order to collect contractual cash flows. The
objective of this business model is unchanged in the July 2014 version
of IFRS9. To assist in application, additional guidance has however been
provided. Sales information in isolation doesnt determine the business
model; however, it does provide evidence about how the business objective
is achieved and how cash flows are realised. When determining whether
this business model is applicable, an entity should consider past sales
information and expectations about future sales activity. Having some sales
activity is not necessarily inconsistent with this business model. For example,
sales that are infrequent or insignificant in value may be consistent with this
business model, as are sales that occur as a result of an increase in credit
risk. However, if more than an infrequent number of sales occur and those
sales are more than insignificant in value, an entity needs to assess whether
and how such sales are consistent with an objective of collecting contractual
cash flows.
Financial assets classified and measured at fair value through other

comprehensive income are held in a business model whose objective is
achieved by both collecting contractual cash flows and selling financial
assets. Compared to a business model whose objective is to hold financial
assets to collect contractual cash flows, this business model will typically
involve greater frequency and volume of sales. Various objectives may be
consistent with this business model, for example to manage liquidity, maintain
a particular interest yield profile or to match the duration of financial liabilities
to the duration of the assets they are funding. This business model was
added in the July 2014 version of IFRS 9. This measurement category results
in amortised cost information being provided in profit or loss and fair value
information in the balance sheet.
Other business models:- Any financial assets that are not held in one of the
two business models mentioned above are measured at fair value through
profit or loss. As such, fair value through profit or loss represents a residual
category. Financial assets that are held for trading and those managed on a
fair value basis are also included in this category.
439

Reclassifications:- IFRS9 requires financial assets to be reclassified

between measurement categories when, and only when, the entitys business
model for managing them changes. This is a significant event and thus is
expected to be uncommon. This ensures that users of financial statements
are always provided with information reflecting how the cash flows on
financial assets are expected to be realised. When reclassification is required,
IFRS 7 Financial Instruments: Disclosures requires disclosures about such
reclassifications (including the amount of financial assets moved out of and
into different measurement categories and a detailed explanation of the
change in business model and its effect) to ensure that users of financial
statements can see clearly what has occurred.
34. Solution:- If a parent loses control of a subsidiary, it shall:

(a) Derecognise:
(i)
The assets (including any goodwill) and liabilities of the subsidiary

at their carrying amounts at the date when control is lost; and
(ii) The carrying amount of any non-controlling interests in the

former subsidiary at the date when control is lost (including any
components of other comprehensive income attributable to them).
(b) Recognise:
(i)
The fair value of the consideration received, if any, from the

transaction, event or circumstances that resulted in the loss of
control;
(ii) If the transaction, event or circumstances that resulted in the loss

of control involves a distribution of shares of the subsidiary to
owners in their capacity as owners, that distribution; and
(iii) Any investment retained in the former subsidiary at its fair value
at the date when control is lost.
(c) Reclassify to profit or loss, or transfer directly to retained earnings
if required by other IFRSs, the amounts recognised in other
comprehensive income in relation to the subsidiary.
(d) Recognise any resulting difference as a gain or loss in profit or loss
attributable to the parent.
440

If a parent loses control of a subsidiary, the parent shall account for all
amounts previously recognised in other comprehensive income in relation
to that subsidiary on the same basis as would be required if the parent
had directly disposed of the related assets or liabilities. Therefore, if a gain
or loss previously recognised in other comprehensive income would be
reclassified to profit or loss on the disposal of the related assets or liabilities,
the parent shall reclassify the gain or loss from equity to profit or loss (as
a reclassification adjustment) when it loses control of the subsidiary. If a
revaluation surplus previously recognised in other comprehensive income
would be transferred directly to retained earnings on the disposal of the
asset, the parent shall transfer the revaluation surplus directly to retained
earnings when it loses control of the subsidiary.
35. If an entity changes the structure of its internal organisation in a manner

that causes the composition of its reportable segments to change, the
corresponding information for earlier periods, including interim periods, shall
be restated unless the information is not available and the cost to develop
it would be excessive. The determination of whether the information is not
available and the cost to develop it would be excessive shall be made for
each individual item of disclosure. Following a change in the composition of
its reportable segments, an entity shall disclose whether it has restated the
corresponding items of segment information for earlier periods.

If an entity has changed the structure of its internal organisation in a manner

that causes the composition of its reportable segments to change and if
segment information for earlier periods, including interim periods, is not
restated to reflect the change, the entity shall disclose in the year in which
the change occurs segment information for the current period on both the old
basis and the new basis of segmentation, unless the necessary information
is not available and the cost to develop it would be excessive.
36. An insurer may change its accounting policies for insurance contracts if,
and only if, the change makes the financial statements more relevant to
the economic decision-making needs of users and no less reliable, or more
reliable and no less relevant to those needs. An insurer shall judge relevance
and reliability by the criteria in IAS 8.

To justify changing its accounting policies for insurance contracts, an insurer

shall show that the change brings its financial statements closer to meeting
the criteria in IAS 8, but the change need not achieve full compliance with
those criteria.
441

The following specific issues are covered in IFRS4:-
Current market interest rates:- An insurer is permitted, but not required, to

change its accounting policies so that it remeasures designated insurance
liabilities3 to reflect current market interest rates and recognises changes in
those liabilities in profit or loss. At that time, it may also introduce accounting
policies that require other current estimates and assumptions for the
designated liabilities. The election in this paragraph permits an insurer to
change its accounting policies for designated liabilities, without applying those
policies consistently to all similar liabilities as IAS 8 would otherwise require.
Prudence:- An insurer need not change its accounting policies for insurance
contracts to eliminate excessive prudence. However, if an insurer already
measures its insurance contracts with sufficient prudence, it shall not
introduce additional prudence
Future Investment margins:- An insurer need not change its accounting

policies for insurance contracts to eliminate future investment margins.
However, there is a rebuttable presumption that an insurers financial
statements will become less relevant and reliable if it introduces an
accounting policy that reflects future investment margins in the measurement
of insurance contracts, unless those margins affect the contractual payments.
Shadow accounting:- In some accounting models, realised gains or losses

on an insurers assets have a direct effect on the measurement of some or
all of (a) its insurance liabilities, (b) related deferred acquisition costs and (c)
related intangible assets, such as those described in paragraphs 31 and 32.
An insurer is permitted, but not required, to change its accounting policies
so that a recognised but unrealised gain or loss on an asset affects those
measurements in the same way that a realised gain or loss does. The related
adjustment to the insurance liability (or deferred acquisition costs or intangible
assets) shall be recognised in other comprehensive income if, and only if, the
unrealised gains or losses are recognised in other comprehensive income.
This practice is sometimes described as shadow accounting
37. If an intangible asset acquired in a business combination is separable or

arises from contractual or other legal rights, sufficient information exists
to measure reliably the fair value of the asset. When, for the estimates
used to measure an intangible assets fair value, there is a range of
possible outcomes with different probabilities that uncertainty enters into
the measurement of the assets fair value. An intangible asset acquired in a
442

business combination might be separable, but only together with a related
tangible or intangible asset. For example, a magazines publishing title might
not be able to be sold separately from a related subscriber database, or a
trademark for natural spring water might relate to a particular spring and
could not be sold separately from the spring. In such cases, the acquirer
recognises the group of assets as a single asset separately from goodwill
if the individual fair values of the assets in the group are not reliably
measurable. Similarly, the terms brand and brand name are often used as
synonyms for trademarks and other marks. However, the former are general
marketing terms that are typically used to refer to a group of complementary
assets such as a trademark (or service mark) and its related trade name,
formulas, recipes and technological expertise. The acquirer recognises
as a single asset a group of complementary intangible assets comprising
a brand if the individual fair values of the complementary assets are not
reliably measurable. If the individual fair values of the complementary assets
are reliably measurable, an acquirer may recognise them as a single asset
provided the individual assets have similar useful lives.

Quoted market prices in an active market provide the most reliable estimate
of the fair value of an intangible asset. The appropriate market price is
usually the current bid price. If current bid prices are unavailable, the price
of the most recent similar transaction may provide a basis from which to
estimate fair value, provided that there has not been a significant change
in economic circumstances between the transaction date and the date at
which the assets fair value is estimated. If no active market exists for an
intangible asset, its fair value is the amount that the entity would have paid
for the asset, at the acquisition date, in an arms length transaction between
knowledgeable and willing parties, on the basis of the best information
available. In determining this amount, an entity considers the outcome of
recent transactions for similar assets.
Entities that are regularly involved in the purchase and sale of unique
intangible assets may have developed techniques for estimating their fair
values indirectly. These techniques may be used for initial measurement of
an intangible asset acquired in a business combination if their objective is
to estimate fair value and if they reflect current transactions and practices
in the industry to which the asset belongs. These techniques include, when
appropriate:
(a) applying multiples reflecting current market transactions to indicators
that drive the profitability of the asset (such as revenue, market shares
443

and operating profit) or to the royalty stream that could be obtained
from licensing the intangible asset to another party in an arms length
transaction (as in the relief from royalty approach); or
(b) Discounting estimated future net cash flows from the asset.
38. The following advice is being offered by us to the Management of Jingru Wan
Tyres Ltd in respect of the two issues referred to us:a)
Different valuation techniques:- An entity should consider, among

other things, the reliability of the valuation techniques and the inputs
that are used in the techniques. If a particular market based approach
relies on higher level inputs (e.g. observable market prices) compared
to a particular income based approach that relies heavily on projections
of income, the entity will often apply greater weight to the measurement
of fair value generated by the market based approach because it relies
on higher level inputs. [Refer Para 61, BC142 of IFRS13]
An entity should maximise the use of relevant observable inputs and

minimize the use of unobservable inputs. Therefore, higher level inputs
that are available and relevant should not be ignored. [Refer para 61 of
IFRS13]
Any or a combination of techniques [market approach, income

approach, cost approach] discussed in IFRS13 can be used to measure
fair value if the techniques are appropriate in the circumstances.
However, when multiple valuation techniques are used to measure
fair value (e.g. when valuing a reporting unit for impairment testing
purpose), IFRS13 does not prescribe a mathematical weighting
scheme; rather it requires judgment. [Refer para 63 of IFRS13]
In our experience, in many cases valuation professionals produce an

evaluated price that uses a market approach based on observable
transactions of identical or comparable assets or liabilities and an
income approach that is calibrated to market data.
When multiple valuation techniques are used to measure fair value,

the techniques should be evaluated for reasonableness and reliability,
and how they should be weighted. The respective indications of
value should be evaluated considering the reasonableness of the
range of values indicated by those results. The objective is to find
the point within the range that is most representative of fair value in
444

the circumstances. In some cases, a secondary method is used only
to corroborate the reasonableness of the most appropriate valuation
technique. [Refer Para 63 of IFRS13].
b)
39. A)
The method used to measure the fair value of an intangible asset

to be retired or whose active use will be discontinued is no different
from any other nonfinancial asset, and should be based on its highest
and best use by market participants. One common methodology is
the with-versus-without method. This method is useful for intangible
assets that market participants would be expected to use defensively.
It measures the incremental cash flows that would be achieved by
market participants arising from their ownership of an existing intangible
asset by locking up the competing acquired intangible asset. Fair value
measured as the difference between the fair value of the group of
assets of the market participant:
Assuming that the acquired intangible asset were to be actively

used by others in the market; and
Assuming that the acquired intangible asset was withdrawn from

the market. [Refer paras 27, 30 of IFRS13].
Accordingly Jingru Wan Tyres Ltd should compute the fair value
using the with-versus-without method to determine the fair value.
Applying the principles in IAS 24 Related parties, the following related

party relationships are identified for each of the parties:
For P Limiteds separate financial statements, SA Limited, SB

Limited, SC Limited, A1 Limited, A2 Limited and A3 Limited are
all related parties.
For SA Limiteds financial statements, P Limited, SB Limited, SC

Limited, A1 Limited, A2 Limited and A3 Limited are all related
parties.
For SB Limiteds financial statements, P Limited, SA Limited, SC

parties.
For SC Limiteds financial statements, P Limited, SA Limited, SB

parties.
445
B)
For the financial statements of associates A1 Limited, A2 Limited

and A3 Limited; P Limited, SA Limited, SB Limited and SC
Limited are related parties.
A1 Limited, A2 Limited and A3 Limited are not related to each

other.
For P Limiteds consolidated financial statements, A1 Limited, A2

Limited and A3 Limited are related to the Group.
A Limited is related to C Limited because Mr. X controls A Limited and

is a member of KMP of C Limited.
Still A Limited will be related to C Limited.
C) Some of the key differences between IAS 24 and existing AS 18 are as

follows:Sl No IAS 24 Related parties
1.
Uses the term a close
member of that persons
family. Includes that persons
domestic partner, children of
that persons domestic partner
and dependants of that persons
domestic partner. Definition of
relative is much wider.
2.
There is extended coverage
of Government Enterprises,
as it defines a Governmentrelated entity as an entity that
is controlled, jointly controlled
or significantly influenced by a
government.
3.
Covers KMP of the parent as
well
446
Existing AS 18
AS 18 uses the term relatives
of an individual. Covers the
spouse, son, daughter, brother,
sister, father and mother who
may be expected to influence, or
be influenced by, that individual
in his/her dealings with the
reporting enterprise
Defines
state-controlled
enterprise as an enterprise
which is under the control of the
Central Government and/or any
State Government(s)
AS 18 covers key management
personnel (KMP) of the entity
only

Sl No IAS 24 Related parties
4.
There is extended coverage
in case of joint ventures. Two
entities are related to each
other in both their financial
statements, if they are either
coventurers or one is a venturer
and the other is an associate.
5.
Does not specifically mention
this
447
Existing AS 18
Whereas as per existing AS 18,
co-venturers or co-associates are
not related to each other.
Mentions that where there

is an inherent difficulty for
management to determine the
effect of influences which do not
lead to transactions, disclosure
of such effects is not required
448


(Code - IEC)
Total No. of Questions : 39

Total Marks : 100
Total No. of printed pages : 9

Time Allowed : 3 Hours
All the questions are compulsory. Question Nos. 1 to 30 carry 1.5 marks
each, Question Nos. 31 to 37 carry 5 marks each and Questions 38 to 39
carry 10 marks each.
PART-A
OBJECTIVE TYPE QUESTIONS
(30 Questions x 1.5 marks each = 45 marks)
State whether each of the following statements is true or false
Q1. An entity that presents its first IFRS financial statements is first-time adopter
as per IFRS 1?
Q2. The vesting period is a period during which all the specified vesting
conditions of a share-based payment arrangement are to be satisfied as per
IFRS 2?
Q3. According to IFRIC 17 distribution of non-cash assets to owners, when
an entity settles the dividend payable, it shall recognise the difference, if
any, between the carrying amount of the assets distributed and the carrying
amount of the dividend payable in profit or loss.
Q4. As per IFRS 4, reinsurer is a party that has a right to compensation under
an insurance contract if an insured event occurs.
Q5. At the end of the reporting period, an entity shall not reverse an impairment
Q6. Recoverable amount is higher of an assets fair value (without adjusting cost
to sell) and its value in use.
Q7. An entity shall not apply the IFRS 6 to expenditure incurred after the technical
feasibility and commercial viability of extracting a mineral resource are
demonstrable.
449

Q8. As per IFRS 10, an investor controls an investee when it is exposed, or has
right to variable returns from its involvement with the investee but has no
ability to affect those returns through its power over the investee.
Q9. Where it is impracticable to determine the period-specific effects of the
change on comparative information for one or more prior periods presented,
the retrospective application or restatement is applied retrospectively only to
the extent that it is practicable.
Q10. IAS 40 Investment Property applies to any asset held for earning rentals
or for capital appreciation or both.
Fill in the blanks
Q11. A conceptual framework for financial reporting is:
a)
A set of items which make up an entitys financial statements
b)
A set of regulations which govern financial reporting
c)
A set of principles which underpin financial reporting
d)
A set of financial reporting standards
Q12. An entity which complies with IFRS may depart from the requirements of an
international standard:
a)
Whenever it wishes to do so
b)
If compliance would produce misleading information
c)
If compliance costs would be excessive
d)
Never
Q13. Which of the following examples would not give rise to a temporary
difference?
a)
Revenue from installment sales recognised under the installment

method for taxation.
b)
Recognition of goodwill in a business combination.
c)
Depreciation used for accounting purposes whilst an accelerated

method is used for tax purposes.
d)
Warranty costs recognised for accounting purposes but not recognised

for tax purposes until paid.
450

Q14. The fundamental qualitative characteristics of useful financial information are:
a)
Relevance and faithful representation
b)
Relevance and comparability
c)
Faithful representation and comparability
d)
Verifiability and understandability
Q15. When it is difficult to distinguish between a change of estimate and a change

in accounting policy, then an entity should
a)
Treat the entire change as a change in estimate with appropriate

disclosure.
b)
Apportion, on a reasonable basis, the relative amounts of change

in estimate and the change in accounting policy and treat each one
accordingly.
c)
Treat the entire change as a change in accounting policy.
d)
Since this change is a mixture of two types of changes, it is best if it

is ignored in the year of the change; the entity should then wait for
the following year to see how the change develops and then treat it
accordingly.
Q16. IFRS 8 requires that an entity should provide reconciliations of segment

information to the entitys financial information. One of the following
reconciliations is not required by IFRS 8. Which one is it?
a)
The total of the reporting segments revenues to the entitys revenues.
b)
The total of the reportable segments measures of profit or loss to the

entitys profit or loss before tax expense (tax income) and discontinued
operations, and if the entity allocates to reportable segments items such
as tax expense (tax income), the entity may reconcile the total of the
segments measures of profit or loss to the entitys profit or loss after
those items.
c)
The total number of major customers of all segments to the total

number of major customers of the entity.
d)
The total of the reportable segments assets to the entitys assets.

451

Q17. How does IFRS 7 define liquidity risk?
a)
The risk that an entity will encounter difficulty in meeting obligations

associated with financial liabilities.
b)
The risk that an entity will encounter difficulty in disposing a financial

asset due to lack of market liquidity.
c)
The risk that an entity will encounter difficulty in meeting cash flow
needs due to cash flow problems.
d)
The risk that an entitys cash inflows will not be sufficient to meet the
entitys cash outflows.
Q18. Which measurement model applies to exploration and evaluation assets

subsequent to initial recognition?
a)
The cost model.
b)
The revaluation model.
c)
Either the cost model or the revaluation model.
d)
The recoverable amount model.
Q19. In order for a noncurrent asset to be classified as held for sale, the sale must
be highly probable. Highly probable means that
a)
The future sale is likely to occur.
b)
The future sale is more likely than not to occur.
c)
The sale is certain.
d)
Significantly more likely than probable.
Q20. Global Inc. owns a fleet of over 100 cars and 20 ships. It operates in a
capital-intensive industry and thus has significant other property, plant, and
equipment that it carries in its books. It decided to revalue its property, plant,
and equipment. The companys accountant has suggested the alternatives
that follow. Which one of the options should Global Inc. select in order to be
in line with the provisions of IAS 16?
a)
Revalue only one-half of each class of property, plant, and equipment,

as that method is less cumbersome and easy compared to revaluing
all assets together.
452
b)
Revalue an entire class of property, plant, and equipment.
c)
Revalue one ship at a time, as it is easier than revaluing all ships

together.
d)
Since assets are being revalued regularly, there is no need to

depreciate.
Calculate the correct amount in each of the following statement:
Q21. A Ltd. received a government grant to meet the cost of erecting a

manufacturing facility in a backward area amounting to Cu.1 crore. The
cost of installing the manufacturing the plant is Cu. 1.5 crores. As per the
accounting option given in IAS 20, A Ltd. deducted the cost of the plant by
the related government grant and disclosed a net carrying amount before
depreciation of Cu. 0.5 crores. The amount of deferred tax liability to be
recognised, assuming a tax rate of 30% in the economy is:
a)
Cu. 30 lakhs
b)
Cu. 15 lakhs
c)
Nil
d)
None of the above
Q22. Global Inc. is constructing a skyscraper in the heart of town and has signed
a fixed-price two-year contract for $ 21 million with the local authorities. It has
incurred the following cost relating to the contract by the end of first year:
Material cost = $ 5 million
Labour cost = $ 2 million
Construction overhead = $ 2 million
Marketing costs = $ 0.5 million
Depreciation of idle plant and equipment = $ 0.5 million
At the end of the first year, it has estimated cost to complete the contract =
$ 9 million. What profit or loss from the contract should Global Inc. recognise
at the end of the first year?
a)
$ 1.5 million
b)
$ 1.0 million
453

c)
$ 1.05 million
d)
$ 1.28 million
Q23. A subsidiary has sold goods costing $ 1.2 million to its parent for $ 1.4
million. All of the inventory is held by the parent at year-end. The subsidiary
is 80% owned, and the parent and subsidiary operate in different tax
jurisdictions. The parent pays taxation at 30%, and the subsidiary pays
taxation at 30%. Calculate any deferred tax asset that arises on the sale of
the inventory from the subsidiary entity to the parent.
a)
$ 60,000
b)
$ 200,000
c)
$ 48,000
d)
$ 80,000
Q24. Gamble Inc. bought a private jet for the use of its top-ranking officials. The
cost of the private jet is $ 15 million and can be depreciated either using a
to be used over a period of seven years. The engine of the jet has a useful
life of five years. The private jets tires are replaced every two years. The
private jet will be depreciated using the straight-line method over
a)
Seven years composite useful life.
b)
Five years useful life of the engine, two years useful life of the tires,
and seven years useful life applied to the balance cost of the jet.
c)
Two years useful life based on conservatism (the lowest useful life of
all the parts of the jet).
d)
Five years useful life based on a simple average of the useful lives of
all major components of the jet.
Q25. An entity on December 31, 2013, changes its defined benefit pension plan
to a defined contribution plan. The entity agrees with the employees to pay
them $9 million in total on the introduction of a defined contribution plan. The
employees forfeit any pension entitlement for the defined benefit plan. The
pension liability recognized in the statement of financial position at December
31, 2012, was $10 million. How should this curtailment be accounted for in
the statement of financial position at December 31, 2013?
a)
A settlement gain of $1 million should be shown.

454

b)
The pension liability should be credited to reserves and a cash

payment of $9 million should be shown in expense in the statement of
c)
The cash payment should go to reserves and the pension liability

should be shown as a credit to the statement of comprehensive
income.
d)
A credit to reserves should be made of $1 million.
Q26. An entity has a foreign subsidiary whose carrying value at cost is $35 million.
It sells the subsidiary on December 31, 2013 for 52 million. As at December
31, 2013, the credit balance on the exchange reserve, which relates to this
subsidiary was $8 million. The functional currency of the entity is the dollar
and the exchange rate on December 31, 2013 is $1 = 1.3. The net asset
value of the subsidiary at the date of disposal was $34 million. What is
the profit or loss on the sale of the subsidiary that will appear in the group
statement of comprehensive income?
a)
$5 million
b)
$8 million
c)
$13 million
d)
$14 million
Q27. Property was purchased on December 31, 2011, for 20 million zlotys. The
general price index in the country was 60.1 on that date. On December 31,
2013, the general price index had risen to 240.4. If the entity operates in a
hyperinflationary economy, what would be the carrying amount in the financial
statements of the property after restatement?
a)
20 million zlotys.
b)
1,200.2 million zlotys.
c)
80 million zlotys.
d)
4,808 million zlotys.
Q28. An entity has a database that it purchased five years ago. At that date, the
database had 15,000 customer addresses on it. Since the date of purchase,
1,000 addresses have been taken from the list and 2,000 addresses have
been added to the list. It is anticipated that in two years time, a further 4,000
455

addresses will have been added to the list. In determining the value-in-use
of the customer lists, how many addresses should be taken into account at
the current date?
a)
15,000
b)
16,000
c)
20,000
d)
21,000
Q29. ANC Inc. is a first-time adopter under IFRS 1. The most recent financial
statements it presented under its previous GAAP were as of December 31,
2013. It has adopted IFRS for the first time and intends to present the first
IFRS financial statements as of December 31, 2014. The opening IFRS
statement of financial position should be prepared as of:
a)
January 1, 2013.
b)
January 1, 2011.
c)
January 1, 2012.
d)
January 1, 2014.
Q30. Aqua Ltd. had an opening number of 2,000 equity shares on 1st January, of
which 200 were held as treasury shares, on 1st July 600 new shares were
issued for cash, and 120 treasury shares were disposed in the market on
1st December. Determine the weighted average number of ordinary shares
at 31st December.
a)
2,110.
b)
1,800.
c)
2,280.
d)
2,300.
456

PART B
DESCRIPTIVE QUESTIONS
Answers should be given in 5-10 sentences
(7 Questions x 5 marks each = 35 marks)
Q31. What is interim period as per IAS 34? What are the minimum components of
an interim financial report?
Q32. When can a property, plant and equipment be derecognised? What will be
the treatment of gain or loss arising upon derecognition?
Q33. What do you mean by finance lease? Provide at least three situations
when lease is classified as finance lease considering the substance of the
transaction?
Q34. Define term cash generating unit? What are the criteria of allocating goodwill
(acquired in a business combination) to cash-generating units for the purpose
of impairment test?
Q35. Define the term joint arrangement and its characteristics? A joint
Q36. Define Fair Value hierarchy and explain levels of the inputs to valuation
techniques used to measure fair value under IFRS13?
Q37. What are the minimum disclosure requirements to be made as per IAS 29
Financial reporting in hyperinflationary economies?
457

PART C
CASE STUDY
Q38. An entity leases an asset from another entity. The fair value of the asset is
$100,000, and the lease rentals are $18,000, payable half yearly. The first
payment is made on the delivery of the asset. The unguaranteed residual
value of the asset after the three-year lease period is $4,000. The implicit
interest rate in the lease is 9.3% (approximately), and the present value of
the minimum lease payment is $96,936.

Required
Show how this lease would be accounted for in the accounts of the lessee.
Q39. (A) The preparation of the financial statements of Invest Corp Limited for
the accounting period ended December 31, 2013, was completed by the
management on March 15, 2014. The draft financial statements were
considered at the meeting of the board of directors held on March 20,
2014, on which date the board approved them and authorized them
for issuance. The annual general meeting (AGM) was held on April
10, 2014, after allowing for printing and the requisite notice period
mandated by the corporate statute. At the AGM the shareholders
approved the financial statements. The approved financial statements
were filed by the corporation with the Company Law Board (the
statutory body of the country that regulates corporations) on April 20,
2014.

Required
Given these facts, what is the authorization date in terms of IAS 10? Give
appropriate reasons?
(B) Suppose in the above-cited case, the management of Invest Corp
Limited was required to issue the financial statements to a supervisory
board (consisting solely of nonexecutives including representatives of
a trade union). The management of Invest Corp Limited had issued the
draft financial statements to the supervisory board on March 16, 2014.
The supervisory board approved them on March 17, 2014, and the
shareholders approved them in the AGM held on April 10, 2014. The
approved financial statements were filed with the Company Law Board
on April 20, 2014.
458

Required

Would the new facts have any effect on the date of authorisation? Give
459

ANSWER KEY
1.
True
2.
True
3.
True
4.
False
5.
True
6.
False
7.
True
8.
False
9.
True
10. False
11. (c)
12.
(b)
13. (b)
14. (a)
15. (a)
16. (c)
17.
(a)
18. (c )
19. (d)
20. (b)
21. (c)
22. (a)
23. (a)
24. (b)
25. (a)
460

26. (d)
27. (c)
28.
(b)
29. (a)
30. (a)
31. Interim period is a financial reporting period shorter than a full financial year.

An interim financial report shall include, at a minimum, the following

components:
a)
a condensed statement of financial position;
b)
a condensed statement or condensed statements of profit or loss and

other comprehensive income;
c)
a condensed statement of changes in equity
d)
a condensed statement of cash flows; and
e)
selected explanatory notes.
32. The carrying amount of an item of property, plant and equipment shall be
derecognised:
(a) on disposal; or
(b) when no future economic benefits are expected from its use or
disposal.

The gain or loss arising from the derecognition of an item of property,

plant and equipment shall be included in profit or loss when the item is
derecognised (unless IAS 17 requires otherwise on a sale and leaseback).
Gains shall not be classified as revenue.
The disposal of an item of property, Plant and equipment may occur in a

variety of ways (e.g. by sale, by entering into a finance lease or by donation).
In determining the date of disposal of an item, an entity applies the criteria
in IAS 18 for recognising revenue from the sale of goods. IAS 17 applies to
disposal by a sale and leaseback.
transferred.
461


the lease term;
leased asset; and
34. A cash-generating unit is the smallest identifiable group of assets that

generates cash inflows that are largely independent of the cash inflows from
other assets or groups of assets.

For the purpose of impairment testing, goodwill acquired in a business

combination shall, from the acquisition date, be allocated to each of the
acquirers cash-generating units, or groups of cash-generating units, that is
expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the acquiree are assigned to those units
or groups of units. Each unit or group of units to which the goodwill is so
allocated shall:
(a) represent the lowest level within the entity at which the goodwill is
monitored for internal management purposes; and
(b) not be larger than an operating segment as defined by paragraph 5 of
IFRS Operating Segments before aggregation.
462

joint control.




36. To increase consistency and comparability in fair value measurements

and related disclosures, IFRS 13 establishes a fair value hierarchy that
categorises into three levels of the inputs to valuation techniques used to
quoted prices (unadjusted) in active markets for identical assets or liabilities
(Level 1 inputs) and the lowest priority to unobservable inputs (Level 3
inputs).

There are three levels of inputs to the valuation techniques:
Level 1 inputs
Quoted prices (unadjusted) in active markets for identical assets or liabilities

that the entity can access at the measurement date
Level 2 inputs
Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly
Level 3 inputs
Unobservable inputs for the asset or liability

463

37. The following disclosures shall be made:
(a) the fact that the financial statements and the corresponding figures for
previous periods have been restated for the changes in the general
purchasing power of the functional currency and, as a result, are
stated in terms of the measuring unit current at the end of the reporting
period;
(b) whether the financial statements are based on a historical cost
approach or a current cost approach; and
(c) the identity and level of the price index at the end of the reporting
period and the movement in the index during the current and the
previous reporting period.

The disclosures required by this Standard are needed to make clear the
basis of dealing with the effects of inflation in the financial statements.
They are also intended to provide other information necessary to
understand that basis and the resulting amounts.
38. The number of payments is six with a total value of $ 108,000. The use of
the approximate implicit interest rate will give a rounding error.
No. of
Payment
1
2
3
4
5
6

Balance ($)
96,936
78,936
64,607
49,611
33,918
17,495
Finance
Payment ($)
Charge ($)
- (18,000)
3,671 (18,000)
3,004 (18,000)
2,307 (18,000)
1,577 (18,000)
505* (18,000)
Lease Liability
($)
78,936
64,607
49,611
33,918
17,495
0
*(813-308), there is a rounding error of $308, which would be taken off the
last finance charge to be taken to the statement of comprehensive income.
39. Solution for A

The date of authorisation of the financial statements of Invest Corp Limited

for the year ended December 31, 2013, is March 20, 2014, the date when
the board approved them and authorised them for issue (and not the date
they were approved in the AGM by the share holders). Thus, all post
reporting period events between December 31, 2013, and March 20, 2014,
need to be considered by Invest Corp Limited for the purposes of evaluating
whether they are to be accounted for or reported under IAS 10.
464

Solution for B
In this case, the date of authorisation of financial statements would be

March 16, 2014, the date the draft financial statements were issued to
the supervisory board. Thus, all post reporting period events between
December 31, 2013, and March 16, 2014, need to be considered by Invest
Corp Limited for the purposes of evaluating whether they are to be accounted
for or reported under IAS 10.
465
466


(Code - CEI)

Total Marks : 100

PART - A
State whether each of the following statements is true or false
Q1. As per IFRS 4, reinsurer is a party that has a right to compensation under
an insurance contract if an insured event occurs.
Q2. At the end of the reporting period, an entity shall not reverse an impairment
Q3. The vesting period is a period during which all the specified vesting
conditions of a share-based payment arrangement are to be satisfied as per
IFRS2?
Q4. According to IFRIC17 distribution of non-cash assets to owners, when
an entity settles the dividend payable, it shall recognise the difference, if
any, between the carrying amount of the assets distributed and the carrying
amount of the dividend payable in profit or loss.
Q5. An entity that presents its first IFRS financial statements is first-time adopter
as per IFRS1?
Q6. As per IFRS10, an investor controls an investee when it is exposed, or has
right to variable returns from its involvement with the investee but has no
ability to affect those returns through its power over the investee.
Q7. An entity shall not apply the IFRS6 to expenditure incurred after the technical
feasibility and commercial viability of extracting a mineral resource are
demonstrable.
467

Q8. Recoverable amount is higher of an assets fair value (without adjusting cost
to sell) and its value in use.
Q9. Where it is impracticable to determine the period-specific effects of the
change on comparative information for one or more prior periods presented,
the retrospective application or restatement is applied retrospectively only to
the extent that it is practicable.
Q10. IAS 40 Investment Property applies to any asset held for earning rentals
or for capital appreciation or both.
Fill in the blanks
Q11. Which of the following examples would not give rise to a temporary
difference?
a)
Revenue from instalment sales recognised under the installment

method for taxation.
b)
Recognition of goodwill in a business combination.
c)
Depreciation used for accounting purposes whilst an accelerated

method is used for tax purposes.
d)
Warranty costs recognised for accounting purposes but not recognised

for tax purposes until paid.
Q12. A conceptual framework for financial reporting is:

a)
A set of items which make up an entitys financial statements
b)
A set of regulations which govern financial reporting
c)
A set of principles which underpin financial reporting
d)
A set of financial reporting standards
Q13. When it is difficult to distinguish between a change of estimate and a change

in accounting policy, then an entity should
a)
Treat the entire change as a change in estimate with appropriate

disclosure.
b)
Apportion, on a reasonable basis, the relative amounts of change

in estimate and the change in accounting policy and treat each one
accordingly.
468

c)
Treat the entire change as a change in accounting policy.
d)
Since this change is a mixture of two types of changes, it is best if it

is ignored in the year of the change; the entity should then wait for
the following year to see how the change develops and then treat it
accordingly.
Q14. An entity which complies with IFRS may depart from the requirements of an
international standard:
a)
Whenever it wishes to do so
b)
If compliance would produce misleading information
c)
If compliance costs would be excessive
d) Never
Q15. The fundamental qualitative characteristics of useful financial information are:
a)
Relevance and faithful representation
b)
Relevance and comparability
c)
Faithful representation and comparability
d)
Verifiability and understandability
Q16. Which measurement model applies to exploration and evaluation assets

subsequent to initial recognition?
a)
The cost model
b)
The revaluation model
c)
Either the cost model or the revaluation model
d)
The recoverable amount model
Q17. IFRS 8 requires that an entity should provide reconciliations of segment

information to the entitys financial information. One of the following
reconciliations is not required by IFRS 8. Which one is it?
a)
The total of the reporting segments revenues to the entitys revenues.
b)
The total of the reportable segments measures of profit or loss to the

entitys profit or loss before tax expense (tax income) and discontinued
operations, and if the entity allocates to reportable segments items such
469

as tax expense (tax income), the entity may reconcile the total of the
segments measures of profit or loss to the entitys profit or loss after
those items.
c)
The total number of major customers of all segments to the total

number of major customers of the entity.
d)
The total of the reportable segments assets to the entitys assets.
Q18. Global Inc. owns a fleet of over 100 cars and 20 ships. It operates in a
capital-intensive industry and thus has significant other property, plant, and
equipment that it carries in its books. It decided to revalue its property, plant,
and equipment. The companys accountant has suggested the alternatives
that follow. Which one of the options should Global Inc. select in order to be
in line with the provisions of IAS 16?
a)
Revalue only one-half of each class of property, plant, and equipment,

as that method is less cumbersome and easy compared to revaluing
all assets together.
b)
Revalue an entire class of property, plant, and equipment.
c)
Revalue one ship at a time, as it is easier than revaluing all ships

together.
d)
Since assets are being revalued regularly, there is no need to

depreciate.
Q19. How does IFRS 7 define liquidity risk?

a)
The risk that an entity will encounter difficulty in meeting obligations

associated with financial liabilities.
b)
The risk that an entity will encounter difficulty in disposing a financial

asset due to lack of market liquidity.
c)
The risk that an entity will encounter difficulty in meeting cash flow
needs due to cash flow problems.
d)
The risk that an entitys cash inflows will not be sufficient to meet the
entitys cash outflows.
Q20. In order for a noncurrent asset to be classified as held for sale, the sale must
be highly probable. Highly probable means that
a)
The future sale is likely to occur.

470

b)
The future sale is more likely than not to occur
c)
The sale is certain
d)
Significantly more likely than probable

Q21. Property was purchased on December 31, 2011, for 20 million zlotys. The
general price index in the country was 60.1 on that date. On December 31,
2013, the general price index had risen to 240.4. If the entity operates in a
hyperinflationary economy, what would be the carrying amount in the financial
statements of the property after restatement?
a)
20 million zlotys.
b)
1,200.2 million zlotys.
c)
80 million zlotys.
d)
4,808 million zlotys.
Q22. A subsidiary has sold goods costing $1.2 million to its parent for $1.4 million.
All of the inventory is held by the parent at year-end. The subsidiary is 80%
owned, and the parent and subsidiary operate in different tax jurisdictions.
The parent pays taxation at 30%, and the subsidiary pays taxation at 30%.
Calculate any deferred tax asset that arises on the sale of the inventory from
the subsidiary entity to the parent.
$ 60,000
$ 200,000
$ 48,000
$ 80,000
Q23. A Ltd. received a government grant to meet the cost of erecting a
manufacturing facility in a backward area amounting to Cu 1 crore. The
cost of installing the manufacturing the plant is Cu 1.5 crores. As per the
accounting option given in IAS 20, A Ltd. deducted the cost of the plant by
the related government grant and disclosed a net carrying amount before
depreciation of Cu 0.5 crores. The amount of deferred tax liability to be
recognised, assuming a tax rate of 30% in the economy is:a)
Cu 30 lakhs
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b)
Cu 15 lakhs
c) Nil
d)
None of the above
Q24. Global Inc. is constructing a skyscraper in the heart of town and has signed a
fixed-price two-year contract for $21.0 million with the local authorities. It has
incurred the following cost relating to the contract by the end of first year:

Material cost = $5 million

Labour cost = $2 million
Construction overhead = $2 million
Marketing costs = $0.5 million
Depreciation of idle plant and equipment = $0.5 million
At the end of the first year, it has estimated cost to complete the contract =
$9 million. What profit or loss from the contract should Global Inc. recognise
at the end of the first year?
a)
$1.5 million
b)
$1.0 million
c)
$1.05 million
d)
$1.28 million
Q25. Aqua Ltd. had an opening number of 2,000 equity shares on 1st January, of
which 200 were held as treasury shares, on 1st July 600 new shares were
issued for cash, and 120 treasury shares were disposed in the market on
1st December. Determine the weighted average number of ordinary shares
at 31st December.
a) 2,110
b) 1,800
c) 2,280
d) 2,300
Q26. Gamble Inc. bought a private jet for the use of its top-ranking officials. The
cost of the private jet is $15 million and can be depreciated either using a
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to be used over a period of seven years. The engine of the jet has a useful
life of five years. The private jets tires are replaced every two years. The
private jet will be depreciated using the straight-line method over
a)
Seven years composite useful life.
b)
Five years useful life of the engine, two years useful life of the tires,
and seven years useful life applied to the balance cost of the jet.
c)
Two years useful life based on conservatism (the lowest useful life of
all the parts of the jet).
d)
Five years useful life based on a simple average of the useful lives of
all major components of the jet.
Q27. An entity on December 31, 2013, changes its defined benefit pension plan
to a defined contribution plan. The entity agrees with the employees to pay
them $9 million in total on the introduction of a defined contribution plan. The
employees forfeit any pension entitlement for the defined benefit plan. The
pension liability recognised in the statement of financial position at December
31, 2012, was $10 million. How should this curtailment be accounted for in
the statement of financial position at December 31, 2013?
a)
A settlement gain of $1 million should be shown.
b)
The pension liability should be credited to reserves and a cash

payment of $9 million should be shown in expense in the statement of
c)
The cash payment should go to reserves and the pension liability

should be shown as a credit to the statement of comprehensive
income.
d)
A credit to reserves should be made of $1 million.
Q28. An entity has a foreign subsidiary whose carrying value at cost is $35 million.
It sells the subsidiary on December 31, 2013 for 52 million. As at December
31, 2013, the credit balance on the exchange reserve, which relates to this
subsidiary was $8 million. The functional currency of the entity is the dollar
and the exchange rate on December 31, 2013 is $1 = 1.3. The net asset
value of the subsidiary at the date of disposal was $34 million. What is
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the profit or loss on the sale of the subsidiary that will appear in the group
statement of comprehensive income?
a)
$5 million
b)
$8 million
c)
$13 million
d)
$14 million
Q29. An entity has a database that it purchased five years ago. At that date, the
database had 15,000 customer addresses on it. Since the date of purchase,
1,000 addresses have been taken from the list and 2,000 addresses have
been added to the list. It is anticipated that in two years time, a further 4,000
addresses will have been added to the list. In determining the value-in-use
of the customer lists, how many addresses should be taken into account at
the current date?
a) 15,000
b) 16,000
c) 20,000
d) 21,000
Q30. ANC Inc. is a first-time adopter under IFRS 1. The most recent financial
statements it presented under its previous GAAP were as of December 31,
2013. It has adopted IFRS for the first time and intends to present the first
IFRS financial statements as of December 31, 2014. The opening IFRS
statement of financial position should be prepared as of:
a)
January 1, 2013
b)
January 1, 2011
c)
January 1, 2012
d)
January 1, 2014
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PART B
Q31. What are the minimum disclosure requirements to be made as per IAS 29
Financial reporting in hyperinflationary economies?
Q32. Define term cash generating unit? What are the criteria of allocating goodwill
(acquired in a business combination) to cash-generating units for the purpose
of impairment test?
Q33. When can a property, plant and equipment be derecognised? What will be
the treatment of gain or loss arising upon derecognition?
Q34. Define the term joint arrangement and its characteristics? A joint
Q35. What is interim period as per IAS 34? What are the minimum components of
an interim financial report?
Q36. Define fair value hierarchy and explain levels of the inputs to valuation
techniques used to measure fair value under IFRS 13?
Q37. What do you mean by finance lease? Provide at least three situations
when lease is classified as finance lease considering the substance of the
transaction?
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PART C
CASE STUDY
Q38. An entity leases an asset from another entity. The fair value of the asset is
$100,000, and the lease rentals are $18,000, payable half yearly. The first
payment is made on the delivery of the asset. The unguaranteed residual
value of the asset after the three-year lease period is $4,000. The implicit
interest rate in the lease is 9.3% (approximately), and the present value of
the minimum lease payment is $96,936.

Required
Show how this lease would be accounted for in the accounts of the lessee.
Q39. (A) The preparation of the financial statements of Invest Corp Limited for
the accounting period ended December 31, 2013, was completed by
the management on March 15, 2014. The draft financial statements
were considered at the meeting of the board of directors held on March
20, 2014, on which date the board approved them and authorised them
for issuance. The annual general meeting (AGM) was held on April
10, 2014, after allowing for printing and the requisite notice period
mandated by the corporate statute. At the AGM the shareholders
approved the financial statements. The approved financial statements
were filed by the corporation with the Company Law Board (the
statutory body of the country that regulates corporations) on April 20,
2014.

Required
Given these facts, what is the authorisation date in terms of IAS 10? Give
(B) Suppose in the above-cited case, the management of Invest Corp
Limited was required to issue the financial statements to a supervisory
board (consisting solely of nonexecutives including representatives of
a trade union). The management of Invest Corp Limited had issued the
draft financial statements to the supervisory board on March 16, 2014.
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The supervisory board approved them on March 17, 2014, and the
shareholders approved them in the AGM held on April 10, 2014. The
approved financial statements were filed with the Company Law Board
on April 20, 2014.

Required
Would the new facts have any effect on the date of authorisation? Give
477

ANSWERS
1. False
2. True
3. True
4. True
5. True
6. False
7. True
8. False
9. True
10. False
11. (b)
12. (c)
13. (a)
14. (b)
15. (a)
16. (c)
17. (c)
18. (b)
19. (a)
20. (d)
21. (c)
22. (a)
23. (c)
24. (a)
25. (a)
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26. (b)
27. (a)
28. (d)
29. (b)
30. (a)
31. The following disclosures shall be made:
(a) the fact that the financial statements and the corresponding figures for
previous periods have been restated for the changes in the general
purchasing power of the functional currency and, as a result, are
stated in terms of the measuring unit current at the end of the reporting
period;
(b) whether the financial statements are based on a historical cost
approach or a current cost approach; and
(c) the identity and level of the price index at the end of the reporting
period and the movement in the index during the current and the
previous reporting period.

The disclosures required by this Standard are needed to make clear the
basis of dealing with the effects of inflation in the financial statements. They
are also intended to provide other information necessary to understand that
basis and the resulting amounts.
32. A cash-generating unit is the smallest identifiable group of assets that

generates cash inflows that are largely independent of the cash inflows from
other assets or groups of assets.

For the purpose of impairment testing, goodwill acquired in a business

combination shall, from the acquisition date, be allocated to each of the
acquirers cash-generating units, or groups of cash-generating units, that is
expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the acquiree are assigned to those units
or groups of units. Each unit or group of units to which the goodwill is so
allocated shall:
(a) represent the lowest level within the entity at which the goodwill is
monitored for internal management purposes; and
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(b) not be larger than an operating segment as defined by paragraph 5 of
IFRS Operating Segments before aggregation.
33. The carrying amount of an item of property, plant and equipment shall be
derecognised:
(a) on disposal; or
(b) when no future economic benefits are expected from its use or
disposal.

The gain or loss arising from the derecognition of an item of property,

plant and equipment shall be included in profit or loss when the item is
derecognised (unless IAS 17 requires otherwise on a sale and leaseback).
Gains shall not be classified as revenue.
The disposal of an item of property, plant and equipment may occur in a

variety of ways (e.g. by sale, by entering into a finance lease or by donation).
In determining the date of disposal of an item, an entity applies the criteria
in IAS 18 for recognising revenue from the sale of goods. IAS 17 applies to
disposal by a sale and leaseback.

joint control.




480

35. Interim period is a financial reporting period shorter than a full financial year.

An interim financial report shall include, at a minimum, the following

components:
a)
a condensed statement of financial position;
b)
a condensed statement or condensed statements of profit or loss and

other comprehensive income;
c)
a condensed statement of changes in equity
d)
a condensed statement of cash flows; and
e)
selected explanatory notes.
36. To increase consistency and comparability in fair value measurements

and related disclosures, IFRS 13 establishes a fair value hierarchy that
categorises into three levels of the inputs to valuation techniques used to
quoted prices (unadjusted) in active markets for identical assets or liabilities
(Level 1 inputs) and the lowest priority to unobservable inputs (Level 3
inputs).

There are three levels of inputs to the valuation techniques:
Level 1 inputs
Quoted prices (unadjusted) in active markets for identical assets or liabilities

that the entity can access at the measurement date
Level 2 inputs
Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly
Level 3 inputs
Unobservable inputs for the asset or liability
transferred.


481

the lease term;
leased asset; and
38. The number of payments is six with a total value of $ 108,000. The use of
the approximate implicit interest rate will give a rounding error.
No. of
Payment
1
2
3
4
5
6

Balance ($)
96,936
78,936
64,607
49,611
33,918
17,495
Finance
Payment ($)
Lease
Charge ($)
Liability ($)
(18,000)
78,936
3,671
(18,000)
64,607
3,004
(18,000)
49,611
2,307
(18,000)
33,918
1,577
(18,000)
17,495
505*
(18,000)
0
*(813-308), there is a rounding error of $308, which would be taken off the
last finance charge to be taken to the statement of comprehensive income.
39. Solution for A

The date of authorization of the financial statements of Invest Corp Limited

for the year ended December 31, 2013, is March 20, 2014, the date when
the board approved them and authorised them for issue (and not the date
they were approved in the AGM by the shareholders). Thus, all post
reporting period events between December 31, 2013, and March 20, 2014,
482

need to be considered by Invest Corp Limited for the purposes of evaluating
whether they are to be accounted for or reported under IAS 10.

Solution for B
In this case, the date of authorisation of financial statements would be

March 16, 2014, the date the draft financial statements were issued to
the supervisory board. Thus, all post reporting period events between
December 31, 2013, and March 16, 2014, need to be considered by Invest
Corp Limited for the purposes of evaluating whether they are to be accounted
for or reported under IAS 10.
483
484

(Code - CEI)
Total Marks : 100

PART-A
State the correct answer for each of the following statements
Q1. The primary users of general purpose financial reports are:
(a) Investors and employees
(b) Investors and lenders
(c) Employees and lenders
(d) Investors and customers
Q2. The fundamental qualitative characteristics of financial information are:
(a) Relevance and faithful representation
(b) Relevance and comparability
(c) Faithful representation and comparability
(d) Verifiability and understandability
Q3. The elements of financial statements which relate to financial position are:
(a) Income and expenses
(b) Income, expenses and equity
(c) Assets, liabilities and equity
(d) Assets, liabilities, income and expenses
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Q4. Under the concept of physical capital maintenance:
(a) Profit is defined in terms of the increase in an entitys operating
capability during an accounting period
(b) Profit is defined as excess of income over expenses
(c) Profit is defined as increase in economic benefits
(d) Profit is the difference in equity/net assets at the end of the year
compared to that at the beginning of the year
Q5. If the current cost measurement basis is used, assets are measured at:
(a) Replacement cost
(b) The amount paid to acquire them
(c) The amount which could be obtained by selling them
(d) Present value
Q6. When an entity opts to present the income statement classifying expenses by
function, which of the following is not required to be disclosed as additional
information?
(a) Depreciation expense
(b) Employee benefits expense
(c) Directors remuneration
(d) Amortisation expense
Q7. Which of the following is not a characteristic of an entitys cash equivalents,
as defined by international standard IAS 7?
(a) A short-term investment
(b) A highly liquid investment
(c) An investment which is readily convertible into known amounts of cash
(d) An investment which is subject to significant risk of changes in value
486

Q8. Errors include:
(i)
Mathematical mistakes
(ii) Mistakes in applying accounting policies

(iii) Oversights or misinterpretations of facts
(iv) Fraud
(v) Changes in provisions for bad debts
Alternative Choices:
(a) (i) (ii)
(b) (i) (iii) + (v)
(c) (i) (iv)
(d) (i) (v)
Q9. In selecting an accounting policy you should review:
(a) The Standards only
(b) The Interpretations only
(c) The Framework only
(d) Standards, Interpretations and Framework
Q10. When an undertaking presents both consolidated and separate financial
statements, the disclosures required by IAS 33 required to be presented
mandatorily:
(a) For both sets of statements
(b) Only for the consolidated information
(c) Only for the separate financial statements
(d) Either in consolidated or separate financial statements as elected by
the entity
487

Fill in the blanks
Q11. A change in accounting policy which does not result from the initial
application of an international standard must normally be accounted
for____________:
(a) Retrospectively
(b) Prospectively
(c) Either retrospectively or prospectively
(d) Prospectively unless it is impracticable to do so
Q12. T he enhancing qualitative characteristics of financial information
include____________:
(b) Comparability and understandability
(c) Relevance and timeliness
(d) Understandability and faithful representation
Q13. K ey management personnel are those persons having authority and
responsibility for __________:
(a) Planning, directing and controlling the activities of the entity, directly or
entity
(b) Subsidiaries activities and operations
(c) Planning, directing and controlling the activities of the entity but
excludes any director
(d) Planning, directing and controlling the activities of the entity, directly or
indirectly, but including only executive director of the entity.
Q14. Under IFRS5, an entity is committed to distribute the asset (or disposal
group) to the owners i.e. the assets must be __________________:
(a) Available for immediate distribution in their present condition and the
distribution must be highly probable.
(b) Available for immediate distribution in their existing condition and the
distribution must be virtually certain
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(c) Available for immediate distribution in their existing condition and the
distribution must be reasonably certain
(d) Available for immediate distribution in their present condition and the
Q15. As per Core Principle given in IAS 23, Borrowing Costs, an entity
shall capitalise borrowing costs that are directly attributable to the
______________ of a qualifying asset as part of the cost of the asset when
it is probable that they will result in future economic benefits to the entity and
the costs can be measured reliably:
(a) Acquisition, construction or production
(b) Acquisition
(c) Production
(d) Construction
Q16. Definition of government grants excludes ____________:
(a) Certain forms of government assistance which cannot reasonably have
a value placed upon them
(b) Certain forms of government assistance which can reasonably have a
value placed upon them
(c) Certain forms of government assistance which cannot accurately have
(d) Certain forms of government assistance which cannot have a value
placed upon them
Q17. Under IAS17, Leases, A finance lease of an asset by a manufacturer or
dealer lessor gives rise to two types of income i.e.____________:
(a) Profit or loss equivalent to the profit or loss resulting from an outright
sale of the asset being leased, at normal selling prices (reflecting any
applicable volume or trade discounts) and finance income over the
lease term.
(b) Profit or loss equivalent to the profit or loss resulting from an outright
applicable volume or trade discounts) and operating income over the
lease term.
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(c) Profit or loss equivalent to the profit or loss resulting from a deferred
lease term.
(d) Profit or loss equivalent to the profit or loss resulting from a deferred
lease term.
Q18. As per the core principle given in IFRS 8 Operating Segments an entity
shall disclose information to enable users of its financial statements to
_____________ of the business activities in which it engages and the
economic environments in which it operates:
(a) Evaluate the nature and financial effects
(b) Evaluate the nature and timing of financial effects
(c) Evaluate the nature and amount of financial effects
(d) Evaluate the nature, timing and amount of financial effects
Q19. Under IAS 12 Income Taxes, deferred tax assets arising from deductible
temporary differences are recognised when ___________:
(a) There is a reasonable expectation of realisation
(b) It is probable that taxable profits will be available against which the
deferred tax asset can be utilised
(c) The timing difference arises except when the carrying amount and tax
(d) It is virtually certain that the timing difference will be realised
Q20. Short term compensated absences are a category of short term
employee benefits. The two types of short term compensated absences
are___________:
(a) Accumulating and non-accumulating short term compensated absences
(b) Non-accumulating short term compensated absence
(c) Accumulating absence
(d) Termination benefits
490

Q21. A Ltd. has a subsidiary B Ltd. Dividends receivable from B ltd have a carrying
amount of ` 100. The dividends are not taxable. The tax rate in the economy
is presumed to be 30%. The tax base of the dividend receivable is:
(a) ` Nil
(b) ` 100
(c) ` 300
(d) ` 150
Q22. B Ltd. has invested in certain bonds. The fair values of these bonds in
different markets to which B Ltd. has an access is as follows:
(a) Principal market ` 500
(b) Highest and best use:- ` 600
(c) Net present value of expected cash flows:- ` 550
(d) Asset based valuation approach ` 450

The fair value to be considered as per IFRS 13 will be?
Q23. D Ltd. needs to make a provision for warranties in its Statement of Financial
position for a total population of 1,00,000 items sold for which warrant period
has still not expired. It is presumed that the time value of money is not
material. The probability distribution of the alternative scenarios of claims
made on the Company is as follows:
Scenario
Optimistic
Most likely
Pessimistic
Grand total
Probability Expected cost of No of defective

repairing each
units expected
defective unit
0.3
` 20,000
` 35,000
0.5
` 25,000
` 36,000
0.2
` 30,000
` 29,000
` 1,00,000
491

The amount of provision to be made in the books of account as of the

reporting date as per IAS 37 is:
(a) ` 75 lakhs
(b) ` 80 lakhs
(c) ` 83.40 lakhs
Q24. P Ltd. is in the process of developing its intangible asset for which the
research phase has been completed. P Ltd. has a centralized treasury
department which borrows money centrally for the various business
divisions of the Company. Since P Ltd. has not borrowed funds specifically
for financing the development phase of the intangible asset, the Company
is not sure of the borrowing costs eligible for capitalisation. The weighted
average of the borrowing costs applicable to the borrowings of P Ltd. that
are outstanding during the period is 11%. The weighted average of the
borrowing costs incurred over the last 3 years was 10%. P Ltd. has till the
reporting date incurred a total costs of ` 45 lakhs on the intangible assets
development phase. The amount of borrowing costs eligible for capitalisation
as per IAS 23 assuming that the expenditure was incurred fully at the
beginning of the accounting period is:
(a) ` 4,95,000
(b) ` Nil
(c) ` 4.5 lakhs
Q25. Calculate minimum lease payments for A Ltd. who took an asset on a 7 years
lease from B Ltd. using the following information:

Payments over the lease term ` 2,500 per month Contingent rent
` 20,000
Cost for services given by B Ltd. ` 40,000 Taxes to be reimbursed to B Ltd.

` 15,000 Residual value guaranteed by A Ltd. ` 5,000 Fair value of asset
after 7 years ` 6,000
Also, A Ltd. has an option to purchase the asset after a period of 7 years at
` 2,000. It is reasonably certain that A Ltd. will exercise the option.
492

Alternative choices:(a) ` 217,000

(b) ` 210,000
(c) ` 215,000
(d) ` 212,000
Q26. Reliable Finance leases Ltd. has renewed the lease of an asset taken on an
operating lease as per the following lease payments schedule for a period
of 5 years:
Year 1:- ` 15,000
Year 2:- ` 20,000
Year 3:- ` 20,000
Year 4:- ` 25,000
Year 5:- ` 25,000
Further, Reliable Finance leases Ltd received an incentive of ` 5,000 in year

1 [not included in the above rentals schedule] as an incentive from the lessor
for renewing the lease.
The amount of lease expense to be recognised in the Statement of

Comprehensive income in year 1 is:(a) ` 20,000
(b) ` 15,000
(c) ` 21,000
(d) ` 14,000
Q27. Q Ltd has decided to divest its foods division two years ago and has
therefore classified the assets belonging to the foods divisions as held for
sale. Management of Q Ltd had estimated the costs to sell at a nominal
amount of ` 25 lakhs. The present value of the costs to sell as of the
beginning of the year at 10% cost of capital was ` 20,66,116. The amount
of interest costs to be recognized in the current year is:
(a) ` 2,06,611
493

(b) ` 5,00,000
(c) ` 4,33,884
Q28. Conglomerate Ltd. is involved in several lines of business across different
geographical areas. The Chief Operating Decision Maker (CODM) reviews
the financial performance and allocates resources to the business divisions
by reviewing certain internal reports. As per the aggregation criteria given
in IFRS8, the entity shall disclose reportable segments as per the following
aggregation criteria:
(a) Its reported revenue, including both sales to external customers
and intersegment sales or transfers, is 10 per cent or more of the
combined revenue, internal and external, of all operating segments.
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;
Its assets are 10 per cent or more of the combined assets of all
operating segments.
(b) Its reported revenue, including both sales to external customers
combined revenue, internal and external, of all operating segments;
operating segments.
(c) Its reported revenue, including both sales to external customers
operating segments.
494

(d) Its reported revenue, including both sales to external customers
operating segments.
Q29. A Ltd. is involved in manufacturing process. It owns properties that
are occupied in the manufacturing process. In addition, it had invested
3 years ago in an investment property primarily with the objective of capital
appreciation. The cost of the investment property was ` 25,00,000. At the
beginning of the current reporting year the fair value of the property has
appreciated to ` 65,00,000. A ltd follows the Cost model for accounting its
investment property. The carrying amount of the investment property after
considering depreciation for 3 years was ` 18.50 lakhs. During the year,
there was news of a scam whereby the land on which the property stood
was declared as tainted due to lack of proper title in favour of the builder
from whom the property was purchased. As of the reporting date, A ltd was
informed by the builder that the matter was being contested in a Court of law.
After the balance sheet date, there was a firm court order refuting the scam
as malicious and baseless and thereby confirming the clean conveyance of
the title in the land. However, due to the negative publicity, the fair values
of the properties in that area have fallen to ` 23 lakhs. The impairment
provision to be recognized in the books of account will be:
(a) ` 2 lakhs
(b) ` 1.5 lakhs
(c) ` 42 lakhs
(d) Nil
Q30. XYZ Limited has a cash-generating unit Plant A as on April 1, 2012
having a carrying amount of ` 1,500 crores. Plant A was acquired under a
business combination and goodwill of ` 250 crores was allocated to it. It is
depreciated on straight line basis. Plant A has a useful life of 10 years with
no residual value. On March 31, 2013, Plant A has a recoverable amount of
495

` 700 crores. Calculate the impairment loss on Plant A. Also, prescribe its
allocation as per IAS 36.
Particulars
Goodwill
[` Crores]
Historical costs
Depreciation
2012-13
Carrying amount

250
-
Identifiable
assets
(` Crores)
1,500
(150)
250
1,350
Total (` Crores)
1,750
(150)
1,600
The carrying amounts of the Goodwill and other identifiable assets after
passing the impairment entry will be:(a) ` Nil and ` 700
(b) ` Nil and ` 1,350
(c) ` Nil and ` 900
496

PARTB
Q31. What do you understand by the terms Unit of account and Unit of
valuation in the context of IFRS13 Fair value measurements and how
do they differ? How should the entity determine the appropriate unit of
account/unit of valuation when measuring fair value?
Q32. What do you understand by the term Embedded derivative?
Q33. How are gain and losses arising on initial recognition of a biological asset
and agricultural produce measured as per IAS41 ?
Q34. ABC Limited has a functional currency which is the currency of an
Hyperinflationary economy as stated in IAS 29 Financial reporting in
Hyperinflationary Economies. Please advise the management of ABC Limited
on the characteristics of the economic environment of a country which
indicates that it is Hyperinflationary?
Q35. Explain the definition of Business as given in IFRS3, Business Combinations?
Q36. Explain one key difference in the revenue recognition criteria given in the new
IFRS 15 compared to the existing revenue recognition criteria given in IAS
18, Revenue?
Q37. Explain the key difference between IAS 8, Accounting Policies, Changes
in Accounting Estimates and Errors and existing AS 5 (revised 1997), Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies.
497

PARTC
CASE STUDY
Q38. A Ltd. purchased the entire business of B Ltd. for a purchase consideration
of ` 9.000 crores. The details and breakup of the net assets taken over on
historical cost basis is provided below. A Ltd. accounted for the acquisition
entry based on historical costs instead of the fair values approach as required
by IFRS3, Business Combinations.
Particulars
Historical cost
in ` Crores
Office buildings
Factory buildings
Vehicles
Plant and machinery
Tangible Assets of B Ltd. taken over
Liabilities of B Ltd taken over
Net assets taken over
Purchase consideration - Cash paid
8,000
1,000
5
2,995
12,000
7,500
4,500
9,000
Fair value
at date of
acquisition in
` Crores
8,190
1,255
5
3,050
12,500
7,700
4,800
The contingent liabilities of B Ltd. included legal action initiated by one

of the customers against it for defective products supplied by B Ltd. The
contingent liabilities taken over during the acquisition of B Ltd. was not
recognised during acquisition accounting but merely disclosed in financial
statements amounting to ` 15 crores. The contingent liabilities of B Ltd. also
include a possible obligation that arose from past events whose existence
will be confirmed only by the occurrence / non-occurrence of future events
amounting to ` 5 crores. This contingent liability pertains to the possibility
that B Ltd may have to return a government grant received if the conditions
attached to it are not fulfilled. Assume the tax rate applicable to the company
to be 30%.
Requirement: In order to restate the above business acquisition recorded

in the books of account from Indian GAAP to IFRS, please advise the
management of A Ltd. on the manner of restatement, relevant provisions of
IFRSs and adjustment accounting entry to be passed.
498

Q39. Easy Finance Ltd. is a finance company. The management of Easy Finance
Ltd. has engaged you as a consultant to advise on complex issues relating to
classification of the fair value referential for financial assets, financial liabilities
and derivatives. The issues for which you are required to provide advise are
as follows:
(a) For financial assets and liabilities and derivatives that have maturities
longer than instruments for which market pricing information is
available, how should the fair value measurement be categorised?
(b) How should Easy Finance Ltd. determine whether entity-derived inputs
are corroborated by correlation to observable market data for the
purpose of determining if they are Level 2 inputs?
499

ANSWERS
1. (b)
2. (a)
3.
(c )
4. (a)
5. (a)
6.
(c )
7.
(d)
8.
(c )
9.
(d)
10. (b)
11. (a)
12. (b)
13. (a)
14. (a)
15. (a)
16. (a)
17. (a)
18. (a)
19. (b)
20. (a)
21. (b)
22. (a)
23. (c )
24. (a)
25. (a)
500

26. (a)
27. (a)
28. (a)
29. (d)
30. (a)
31. The unit of account is the level at which an asset or liability is aggregated or
disaggregated for recognition purposes. It is also the level at which an asset
or a liability generally is aggregated or disaggregated for the purpose of
measuring fair value. When these two units differ, the term unit of valuation
is used to describe the unit used for measurement. Generally, the unit being
measured is determined based on the unit of account specific to the asset
or liability. The unit of account for fair value measurement and the unit of
account for recognition are generally the same. For convenience, when
the unit of account for fair value measurement and unit of account for
recognition are different, we refer to the level at which an asset or liability is
aggregated or disaggregated to measure fair value as the unit of valuation.

There are two exceptions to this rule given in the standard:a)
The unit of account (unit of valuation) for financial instruments generally

is the individual financial instrument (e.g. a share). However, an entity
is permitted to measure the fair value of a group of financial assets
and financial liabilities on the basis of the net risk position, if certain
conditions are met.
b)
In certain circumstances, an entity is required to measure non-financial

assets in combination with other assets or with other assets and
liabilities.
Example for Goodwill impairment testing, the unit of account (unit of

valuation) is the (group of) cash generating unit (s).
32. An embedded derivative is a component of a hybrid contract that also

includes a non-derivative host with the effect that some of the cash flows of
the combined instrument vary in a way similar to a stand-alone derivative.
interest rate, financial instrument price, commodity price, foreign exchange
rate, index of prices or rates, credit rating or credit index, or other variable,
501

provided in the case of a non-financial variable that the variable is not
specific to a party to the contract. A derivative that is attached to a financial
instrument but is contractually transferable independently of that instrument,
or has a different counterparty, is not an embedded derivative, but a separate
financial instrument
33. A gain or loss arising on initial recognition of a biological asset at fair value
less costs to sell and from a change in fair value less costs to sell of a
biological asset shall be included in profit or loss for the period in which it
arises. A loss may arise on initial recognition of a biological asset, because
costs to sell are deducted in determining fair value less costs to sell of a
biological asset. A gain may arise on initial recognition of a biological asset,
such as when a calf is born. A gain or loss arising on initial recognition of
agricultural produce at fair value less costs to sell shall be included in profit
or loss for the period in which it arises A gain or loss may arise on initial
recognition of agricultural produce as a result of harvesting.
34. This Standard does not establish an absolute rate at which hyperinflation
is deemed to arise. It is a matter of judgment when restatement of
financial statements in accordance with this Standard becomes necessary.
Hyperinflation is indicated by characteristics of the economic environment of
a country which include, but are not limited to, the following:
(a) The general population prefers to keep its wealth in non-monetary
(d) Interest rates, wages and prices are linked to a price index; and
(e) The cumulative inflation rate over three years is approaching, or
exceeds, 100%.
502

35. A business consists of inputs and processes applied to those inputs that
have the ability to create outputs. Although businesses usually have outputs,
outputs are not required for an integrated set to qualify as a business. The
three elements of a business are defined as follows:
(a) Input: Any economic resource that creates, or has the ability to create,
outputs when one or more processes are applied to it. Examples
include non-current assets (including intangible assets or rights to use
non-current assets), intellectual property, the ability to obtain access to
necessary materials or rights and employees.
(b) Process: Any system, standard, protocol, convention or rule that
when applied to an input or inputs, creates or has the ability to
create outputs. Examples include strategic management processes,
operational processes and resource management processes. These
processes typically are documented, but an organised workforce having
the necessary skills and experience following rules and conventions
may provide the necessary processes that are capable of being
applied to inputs to create outputs. (Accounting, billing, payroll and
other administrative systems typically are not processes used to create
outputs.)
(c) Output: The result of inputs and processes applied to those inputs that
provide or have the ability to provide a return in the form of dividends,
lower costs or other economic benefits directly to investors or other
owners, members or participants.

To be capable of being conducted and managed for the purposes

defined, an integrated set of activities and assets requires two essential
elements-inputs and processes applied to those inputs, which together
are or will be used to create outputs. However, a business need not
include all of the inputs or processes that the seller used in operating
that business if market participants are capable of acquiring the
business and continuing to produce outputs, for example, by integrating
the business with their own inputs and processes. The nature of
the elements of a business varies by industry and by the structure
of an entitys operations (activities), including the entitys stage of
development. Established businesses often have many different types
of inputs, processes and outputs, whereas new businesses often have
few inputs and processes and sometimes only a single output (product).
503

Nearly all businesses also have liabilities, but a business need not have
liabilities. An integrated set of activities and assets in the development
stage might not have outputs. If not, the acquirer should consider
other factors to determine whether the set is a business. Those factors
include, but are not limited to, whether the set:
(a) Has begun planned principal activities;
(b) Has employees, intellectual property and other inputs and
processes that could be applied to those inputs;
(c) Is pursuing a plan to produce outputs; and
(d) Will be able to obtain access to customers that will purchase the
outputs.

Not all of those factors need to be present for a particular

integrated set of activities and assets in the development stage
to qualify as a business.
36. As per IFRS15 revenue is to be recognised when or as Performance

obligations are satisfied. This is where the standards core principle of
transfer of control which replaces the old concept of transferring risks
and rewards of ownership - comes into play. Performance obligations are
considered satisfied and revenue should be recognised when or as
transfer of control occurs. Revenue should be recognised over time if one of
the following three criteria is met:

The customer simultaneously receives and consumes benefits.
The entitys performance creates or enhances an asset that the

customer controls as the asset is created or enhanced.
The entitys performance does not create an asset with an alternative

use to the entity, and the entity has an enforceable right to payment for
performance completed to date.
Otherwise, revenue should be recognised at a point in time.
In contracts to the above, IAS 18 Revenue from the sale of goods shall be
recognised when all the following conditions have been satisfied:
(a) The entity has transferred to the buyer the significant risks and rewards
of ownership of the goods;
504

(b) The entity retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over the
goods sold;
(c) The amount of revenue can be measured reliably;
(d) It is probable that the economic benefits associated with the transaction
will flow to the entity; and
(e) The costs incurred or to be incurred in respect of the transaction can


(a) The amount of revenue can be measured reliably;
(b) It is probable that the economic benefits associated with the transaction
(c) The stage of completion of the transaction at the end of the reporting
(d) The costs incurred for the transaction and the costs to complete the
transaction can be measured reliably
505

37.
Sl
No
1.
3
4
IAS8
AS5
Objective of IAS 8 is to prescribe

the criteria for selecting and
changing accounting policies,
together with the accounting
treatment and disclosure of
changes in accounting policies,
changes in accounting estimates
and corrections of errors. IAS 8
intends to enhance the relevance
and reliability of an entitys
financial statements and the
comparability of those financial
statements over time and with
the financial statements of other
entities.
IAS 8 broadens the definition
to include bases, conventions,
rules and practices (in addition to
principles) applied by an entity in
the preparation and presentation
Does not deal with change in
accounting policy due to change
in statute.
Requires that changes in
accounting policies should be
accounted for with retrospective
effect subject to limited exceptions
viz., where it is impracticable to
determine the period specific
effects or the cumulative effect of
applying a new accounting policy.
Objective of existing AS 5 is
to prescribe the classification
and disclosure of certain items
in the statement of profit and
loss for uniform preparation
and presentation of financial
statements.
506
AS 5 restricts the definition of

accounting policies to specific
accounting principles and the
methods of applying those
principles
AS 5 allows the situation where
change in accounting policy is
required by statute.

Change in method of depreciation AS 5 does not specify how
is a change in estimate that needs change in accounting policy
to be accounted for prospectively. should be accounted for.
Under AS 6, the impact of

change in depreciation method
is determined by retrospectively
computing
depreciation
under the new method, and
is recorded in the period of
change whereas on revision
of asset life, the unamortised
depreciable amount is charged
over the revised remaining
asset life.
AS 5 defines prior period items
as incomes or expenses which
arise in the current period as
a result of errors or omissions
in the preparation of financial
statements of one or more prior
periods. Does not specifically
include frauds.
Uses the term errors and relates

it to errors or omissions arising
from a failure to use or misuse of
reliable information (in addition to
mathematical mistakes, mistakes
in application of accounting
policies etc.) that was available
when the financial statements of
the prior periods were approved
for issuance and could reasonably
be expected to have been
obtained and taken into account in
of those financial statements. IAS
8 specifically states that errors
include frauds.
Requires
rectification
of AS 5 requires the rectification
material prior period errors with of prior period items with
retrospective effect subject to prospective effect.
limited exceptions viz., where it
is impracticable to determine
the period specific effects or the
cumulative effect of applying a
new accounting policy.
507

7
8.
requires disclosure of an
impending change in accounting
policy when an entity is yet to
implement a new Standard
or Interpretation that has been
issued but has not yet come into
effect. Disclosure is also required
of known or reasonably estimable
information relevant to assessing
the possible impact that the
application of the new Standard
or Interpretation will have on the
entitys financial statements in the
period of initial application.
Defined the term impracticable.
It provides that applying a
requirement is impracticable when
the entity cannot apply it after
making every reasonable effort to
do so.
There is no such specific

requirement under AS 5
AS 5, though, uses the term

impracticable but does not
define it.
38. The approach to solving this case study is the following sequence of steps:a)
Determine the journal entries already posted in the books of account
b)
Determine the journal entries that would have been posted had the
entity complied with IFRS
c)
Determine the impact of the difference between a) and b)
d)
Restate the carrying amounts in the financial statements of c) above.
IFRS3 Business combinations states that An acquirer of a business

recognizes the assets acquired and liabilities assumed at their acquisitiondate fair values and discloses information that enables users to evaluate the
nature and financial effects of the acquisition. Therefore the first impact while
restating from Indian GAAP to IFRS is the need to remeasure the acquisition
accounting entry based on Fair values and not the historical cost value was
done.
Secondly, IFRS3 Business combinations requires that a contingent liability

of a present nature of the acquired company needs to be recognised as
508

a part of the acquisition accounting entry even if the same has not been
recognised in the financial statements of the acquired company. This is a
departure from the requirements of IAS 37 which prohibits the recognition of
contingent liabilities. As a result of the above, the principal impacts are that
the Goodwill and Bargain purchase gain will have to be recalculated.

Thirdly, the IAS 12 requires us to consider the deferred tax implications of

fair value adjustments arising from Business Combinations. Deferred tax
assets / Liabilities will have to be re-computed in accordance with IAS 12
Income taxes. IAS 12 (revised) requires an entity to recognise the resulting
deferred tax liability or (subject to the probability criterion for recognition)
deferred tax asset with a corresponding effect on the determination of the
amount of goodwill or bargain purchase gain recognised. However, IAS 12
(revised) prohibits the recognition of deferred tax liabilities arising from the
initial recognition of goodwill.
The Goodwill / Bargain purchase gain / loss as per IFRS3 will have to be
recalculated as follows:-

`
Crores
Cost of investment / Purchase consideration
Net assets at the date of acquisition
measured at acquisition date fair value
Contingent liability taken over - present
obligations only
Total net assets taken over at fair value
Deferred tax liabilities, net
Net adjusted assets taken over at fair value
Goodwill on acquisition (re stated value)

`
Crores
9,000
4,800
15
4,785
90
4,695
4,305
Contingent liability that is a possible obligation is not recognised in acquisition

accounting because it does not meet the definition of a liability. From
the above it is clear that no deferred tax asset / liability is recognized for
contingent liability recognised as per IFRS3 Business combinations. This is
because IAS 12 specifically states that an entity should not recognize the
deferred tax impacts in cases where the carrying amount of an asset or
509

liability on initial recognition differs from its initial tax base. This is because on
initial recognition, the tax authorities will not recognise the contingent liability.

As per the sequence of steps identified above, the actual journal entry
recorded in the books of account as per Indian GAAP will be as follows:Journal entry passed in books under
Debit Rs.
Credit Rs.
Indian GAAP
Crore
Crore
Office buildings
8,000
Factory buildings
1,000
Vehicles
5
Plant and machinery
2,995
Goodwill
4,500
To Liabilities of B Ltd. taken over
7,500
To Cash [Purchase consideration]
9,000
(Being purchase of asset and liabilities of
16,500
16,500
B Ltd.)

Journal entry that should have been
Debit Rs.
Credit Rs.
passed under IFRS
Crore
Crore
Office buildings
8,190
Factory buildings
1,255
Vehicles
5
Plant and machinery
3,050
Goodwill
4,305
7,700
9,000
To Contingent liabilities
15
To Deferred tax liability
90
(Being purchase of B Ltds net assets at fair
16,805
16,805
value as at the date of acquisition)

510

Differential adjustment entry to be posted for restating the transaction from

Indian GAAP accounting methodology to the IFRS accounting treatment.
Adjustment entries to be passed for
Debit Rs.
Credit Rs.
restatement purposes
Crore
Crore
Office buildings
190
Factory buildings
255
Vehicles
-
Plant and machinery
55
Goodwill
195
200
-
15
90
(Being the differential adjustment to be posted
500
500
identified)
39. Our advise on the complex issues raised by the Management is as follows:a) In the absence of quoted prices in active markets for identical assets
or liabilities that the entity can access on the measurement date,
fair value measurements should not be categorised as Level 1. To
be categorised as a level 1 measurement, the market information
should be observable prices for identical instruments. To determine the
appropriate categorisation of fair value measurements of instruments
that involve terms requiring both observable and unobservable inputs,
an entity should consider each of the following factors:
If market prices are observable for substantially all of the term

of the asset or liability, the fair value measurement may be a
level 2 measurement. If market prices are not observable for
substantially all of the term of the asset or liability, this may cause
the measurement to be a Level 3 measurement.
If the effect of an unobservable input on the overall fair value

measurement is significant, the fair value measurement will be a
Level 3 measurement. An adjustment to a Level 2 input for the
effect of the unobservable term that is significant to the entire
measurement may cause it to be a Level 3 measurement if the
adjustment uses unobservable inputs. [Refer Para 76 of IFRS13;
Paras 73, 75 and 82 of IFRS13].
511
b)
Example on categorisation of derivatives when prices are

not available:- Company H has an agreement to purchase
natural gas every month for the next 30 months. The agreement
is accounted for as a derivative instrument and therefore is
measured at fair value. Assume that natural gas futures prices
are available in an active market for the next 24 months after
the current reporting date. However, observable natural gas
futures prices with maturities ranging from 25 to 30 months are
not available. Therefore the remaining 6 months of the term,
Company H uses internally developed estimates of futures natural
gas prices.
In our view, the fair value measurement of the natural gas

contract would be categorised as a Level 3 measurement
because market pricing information (level 2 inputs) is only
available for 80% of the term of the contract (24 of the 30
months), which does not represent substantially the entire
term of the contract. Further, it is doubtful that the effect of the
unobservable market pricing information (Level 3 inputs) on the
overall fair value measurement would be insignificant. However,
in the following year, if quoted natural gas prices continue to
be available for the following 24 months, then the fair value
measurement might be categorised as a Level 2 measurement.
Market corroborated inputs are defined as inputs that are derived

principally from or corroborated by observable market data by
correlation or other means. Easy Finance Ltd. may use correlation
analysis to prove the relationship between inputs. Correlation is a
statistical concept, indicating the strength and direction of a linear
relationship between two variables. In our view, for an input to be
considered a Level 2 input by using correlation, the correlation
between the input and relevant observable market data should be
high. In using correlation or other statistical means to support Level 2
inputs, an entity may apply similar statistical considerations to those
applied in establishing that a hedging relationship is highly effective
using a regression analysis. In establishing the level in the hierarchy
of an input corroborated using correlation analysis, Easy Finance Ltd.
should consider factors such as the R-Squared confidence level of the
statistical analysis and the number of data points. [Refer Para A, 82 of
IFRS13].
512


(Code - IEC)

Total Marks : 100

All the questions are compulsory. Question No. 1 to 30 carry 1.5 marks each,
Question Nos. 31 to 37 carry 5 marks each and Questions 38 to 39 carry 10
marks each.
PART-A
State the correct answer for each of the following statements
Q1. The elements of financial statements which relate to financial position are:
(a) Income and expenses
(b) Income, expenses and equity
(c) Assets, liabilities and equity
(d) Assets, liabilities, income and expenses
Q2. When an entity opts to present the income statement classifying expenses by
function, which of the following is not required to be disclosed as additional
information?
(a) Depreciation expense
(b) Employee benefits expense
(c) Directors remuneration
(d) Amortisation expense
Q3. The fundamental qualitative characteristics of financial information are:
513

(b) Relevance and comparability
(c) Faithful representation and comparability
(d) Verifiability and understandability
Q4. Which of the following is not a characteristic of an entitys cash equivalents,
as defined by international standard IAS 7?
(a) A short-term investment
(b) A highly liquid investment
(c) An investment which is readily convertible into known amounts of cash
(d) An investment which is subject to significant risk of changes in value
Q5. The primary users of general purpose financial reports are:
(a) Investors and employees
(b) Investors and lenders
(c) Employees and lenders
(d) Investors and customers
Q6. If the current cost measurement basis is used, assets are measured at:
(a) Replacement cost
(b) The amount paid to acquire them
(c) The amount which could be obtained by selling them
(d) Present value
Q7. Under the concept of physical capital maintenance:
(a) profit is defined in terms of the increase in an entitys operating
capability during an accounting period
(b) profit is defined as excess of income over expenses
(c) profit is defined as increase in economic benefits
(d) profit is the difference in equity / net assets at the end of the year
compared to that at the beginning of the year
514

Q8. When an undertaking presents both consolidated and separate financial
statements, the disclosures required by IAS 33 required to be presented
mandatorily:
(a) For both sets of statements
(b) Only for the consolidated information
(c) Only for the separate financial statements
(d) Either in consolidated or separate financial statements as elected by
the entity
Q9. In selecting an accounting policy you should review:
(a) The Standards only
(b) The Interpretations only
(c) The Framework only
(d) Standards, Interpretations and Framework
Q10. Errors include:
(i)
Mathematical mistakes
(ii) Mistakes in applying accounting policies

(iii) Oversights or misinterpretations of facts
(iv) Fraud
(v) Changes in provisions for bad debts
Alternative Choices:
(a) (i) (ii)
(b) (i) (iii) + (v)
(c) (i) (iv)
(d) (i) (v)
515

Fill in the blanks
Q11. Key management personnel are those persons having authority and
responsibility for __________:
(a) Planning, directing and controlling the activities of the entity, directly or
entity
(b) Subsidiaries activities and operations
(c) Planning, directing and controlling the activities of the entity but
excludes any director
(d) Planning, directing and controlling the activities of the entity, directly or
indirectly, but including only executive director of the entity
Q12. A change in accounting policy which does not result from the initial
application of an international standard must normally be accounted
for____________:
(a) Retrospectively
(b) Prospectively
(c) Either retrospectively or prospectively
(d) Prospectively unless it is impracticable to do so
Q13. Under IFRS 5, an entity is committed to distribute the asset (or disposal
group) to the owners i.e. the assets must be __________________:
(a) Available for immediate distribution in their present condition and the
distribution must be highly probable.
(b) Available for immediate distribution in their existing condition and the
(c) Available for immediate distribution in their existing condition and the
distribution must be reasonably certain
(d) Available for immediate distribution in their present condition and the
516

Q14. As per core principle given in IAS 23, Borrowing Costs, an entity
shall capitalise borrowing costs that are directly attributable to the
______________ of a qualifying asset as part of the cost of the asset when
it is probable that they will result in future economic benefits to the entity and
the costs can be measured reliably:
(a) Acquisition, construction or production
(b) Acquisition
(c) Production
(d) Construction
Q15. Under IAS 17, Leases, A finance lease of an asset by a manufacturer or
dealer lessor gives rise to two types of income i.e.____________:
(a) Profit or loss equivalent to the profit or loss resulting from an outright
lease term.
(b) Profit or loss equivalent to the profit or loss resulting from an outright
lease term.
(c) Profit or loss equivalent to the profit or loss resulting from a deferred
lease term.
(d) Profit or loss equivalent to the profit or loss resulting from a deferred
lease term.
Q16. As per the core principle given in IFRS 8 Operating Segments an entity
shall disclose information to enable users of its financial statements to
_____________ of the business activities in which it engages and the
economic environments in which it operates:
(a) Evaluate the nature and financial effects
517

(b) Evaluate the nature and timing of financial effects
(c) Evaluate the nature and amount of financial effects
(d) Evaluate the nature, timing and amount of financial effects
Q17. Under IAS 12 Income Taxes, deferred tax assets arising from deductible
temporary differences are recognised when ___________:
(a) There is a reasonable expectation of realisation
(b) It is probable that taxable profits will be available against which the
deferred tax asset can be utilized
(c) The timing difference arises except when the carrying amount and tax
(d) It is virtually certain that the timing difference will be realised
Q18. The enhancing qualitative characteristics of financial information
include____________:
(b) Comparability and understandability
(c) Relevance and timeliness
(d) Understandability and faithful representation
Q19. Definition of government grants excludes ____________:
(a) Certain forms of government assistance which cannot reasonably have
(b) Certain forms of government assistance which can reasonably have a
value placed upon them
(c) Certain forms of government assistance which cannot accurately have
(d) Certain forms of government assistance which cannot have a value
placed upon them
518

Q20. Short term compensated absences are a category of short term
employee benefits. The two types of short term compensated absences
are___________:
(a) Accumulating and non-accumulating short term compensated absences
(b) Non-accumulating short term compensated absence
(c) Accumulating absence
(d) Termination benefits
Q21. D Ltd. needs to make a provision for warranties in its Statement of Financial
position for a total population of 1,00,000 items sold for which warrant period
has still not expired. It is presumed that the time value of money is not
material. The probability distribution of the alternative scenarios of claims
made on the Company is as follows:
Scenario
Probability
Optimistic
Most likely
Pessimistic
Grand total

0.3
0.5
0.2
Expected cost of No of defective

repairing each units expected
defective unit
35,000
` 20,000
36,000
` 25,000
29,000
` 30,000
1,00,000
The amount of provision to be made in the books of account as of the

reporting date as per IAS 37 is:
(a) ` 75 lakhs
(b) ` 80 lakhs
(c) ` 83.40 lakhs
Q22. A Ltd. has a subsidiary B Ltd. Dividends receivable from B Ltd. have a
carrying amount of ` 100. The dividends are not taxable. The tax rate in the
economy is presumed to be 30%. The tax base of the dividend receivable is:
(a) ` Nil
519

(b) ` 100
(c) ` 300
(d) ` 150
Q23. P Ltd. is in the process of developing its intangible asset for which the
research phase has been completed. P Ltd. has a centralised treasury
department which borrows money centrally for the various business
divisions of the Company. Since P Ltd. has not borrowed funds specifically
for financing the development phase of the intangible asset, the Company
is not sure of the borrowing costs eligible for capitalisation. The weighted
average of the borrowing costs applicable to the borrowings of P Ltd. that
are outstanding during the period is 11%. The weighted average of the
borrowing costs incurred over the last 3 years was 10%. P Ltd. has till the
reporting date incurred a total costs of ` 45 lakhs on the intangible assets
development phase. The amount of borrowing costs eligible for capitalisation
as per IAS 23 assuming that the expenditure was incurred fully at the
beginning of the accounting period is:
(a) ` 4,95,000
(b) ` Nil
(c) ` 4.5 lakhs
Q24. Calculate minimum lease payments for A Ltd. who took an asset on a 7 years
lease from B Ltd. using the following information:

Payments over the lease term ` 2,500 per month
Contingent rent ` 20,000
Cost for services given by B Ltd. ` 40,000
Taxes to be reimbursed to B Ltd. ` 15,000
Residual value guaranteed by A Ltd. ` 5,000
Fair value of asset after 7 years ` 6,000
Also, A Ltd. has an option to purchase the asset after a period of 7 years at
` 2,000. It is reasonably certain that A Ltd. will exercise the option.
520

Alternative choices:(a) ` 217,000

(b) ` 210,000
(c) ` 215,000
(d) ` 212,000
Q25. A Ltd. is involved in manufacturing process. It owns properties that

are occupied in the manufacturing process. In addition, it had invested
3 years ago in an investment property primarily with the objective of capital
appreciation. The cost of the investment property was ` 25,00,000. At the
beginning of the current reporting year the fair value of the property has
appreciated to ` 65,00,000. A ltd follows the Cost model for accounting its
investment property. The carrying amount of the investment property after
considering depreciation for 3 years was ` 18.50 lakhs. During the year,
there was news of a scam whereby the land on which the property stood
was declared as tainted due to lack of proper title in favour of the builder
from whom the property was purchased. As of the reporting date, A Ltd. was
informed by the builder that the matter was being contested in a Court of law.
After the balance sheet date, there was a firm court order refuting the scam
as malicious and baseless and thereby confirming the clean conveyance of
the title in the land. However, due to the negative publicity, the fair values
of the properties in that area have fallen to ` 23 lakhs. The impairment
provision to be recognized in the books of account will be:
(a) ` 2 lakhs
(b) ` 1.5 lakhs
(c) ` 42 lakhs
(d) Nil
Q26. Reliable Finance leases Ltd. has renewed the lease of an asset taken on an
operating lease as per the following lease payments schedule for a period
of 5 years:Year 1:- ` 15,000
Year 2:- ` 20,000
Year 3:- ` 20,000
521

Year 4:- ` 25,000
Year 5:- ` 25,000

Further, Reliable Finance Leases Ltd. received an incentive of ` 5,000 in

year 1 [not included in the above rentals schedule] as an incentive from the
lessor for renewing the lease.
The amount of lease expense to be recognised in the Statement of

Comprehensive income in year 1 is:(a) ` 20,000
(b) ` 15,000
(c) ` 21,000
(d) ` 14,000
Q27. B Ltd. has invested in certain bonds. The fair values of these bonds in
different markets to which B Ltd. has an access is as follows:
(a) Principal market ` 500
(b) Highest and best use:- ` 600
(c) Net present value of expected cash flows:- ` 550
(d) Asset based valuation approach ` 450

The fair value to be considered as per IFRS 13 will be?
Q28. Q Ltd. has decided to divest its foods division two years ago and has
therefore classified the assets belonging to the foods divisions as held for
sale. Management of Q Ltd. had estimated the costs to sell at a nominal
amount of ` 25 lakhs. The present value of the costs to sell as of the
beginning of the year at 10% cost of capital was ` 20,66,116. The amount
of interest costs to be recognized in the current year is:
(a) ` 2,06,611
(b) ` 5,00,000
(c) ` 4,33,884
522

Q29. Conglomerate Ltd. is involved in several lines of business across different
geographical areas. The Chief Operating Decision Maker (CODM) reviews
the financial performance and allocates resources to the business divisions
by reviewing certain internal reports. As per the aggregation criteria given
in IFRS8, the entity shall disclose reportable segments as per the following
aggregation criteria:
(a) Its reported revenue, including both sales to external customers
operating segments.
(b) Its reported revenue, including both sales to external customers
combined revenue, internal and external, of all operating segments.
operating segments.
(c) Its reported revenue, including both sales to external customers
operating segments.
(d) Its reported revenue, including both sales to external customers
523

operating segments.
Q30. XYZ Limited has a cash-generating unit Plant A as on April 1, 2012 having
a carrying amount of ` 1,500 crores. Plant A was acquired under a business
combination and goodwill of ` 250 crores was allocated to it. It is depreciated
on straight line basis. Plant A has a useful life of 10 years with no residual
value. On March 31, 2013, Plant A has a recoverable amount of ` 700
crores. Calculate the impairment loss on Plant A. Also, prescribe its allocation
as per IAS 36.
Particulars
Goodwill
[` Crores]
Historical costs
Depreciation
2012-13
Carrying
amount

250
-
Identifiable
assets
(` Crores)
1,500
(150)
250
1,350
Total (` Crores)
1,750
(150)
1,600
The carrying amounts of the Goodwill and other identifiable assets after
passing the impairment entry will be:(a) ` Nil and ` 700
(b) ` Nil and ` 1,350
(c) ` Nil and ` 900
524

PARTB
Q31. What do you understand by the term Embedded derivative?
Q32. What do you understand by the terms Unit of account and Unit of
valuation in the context of IFRS13 Fair value measurements and how
do they differ? How should the entity determine the appropriate unit of
account/unit of valuation when measuring fair value?
Q33. Explain the key difference between IAS 8, Accounting Policies, Changes
in Accounting Estimates and Errors and existing AS 5 (revised 1997), Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies.
Q34. ABC Limited has a functional currency which is the currency of an
Hyperinflationary economy as stated in IAS 29 Financial reporting in
Hyperinflationary Economies. Please advise the management of ABC Limited
on the characteristics of the economic environment of a country which
indicates that it is Hyperinflationary.
Q35. Explain the definition of Business as given in IFRS 3, Business
Combinations.
Q36. Explain one key difference in the revenue recognition criteria given in the
new IFRS 15 compared to the existing revenue recognition criteria given in
IAS 18, Revenue.
Q37. How are gain and losses arising on initial recognition of a biological asset
and agricultural produce measured as per IAS 41?
525

PARTC
CASE STUDY
Q38. A Ltd. purchased the entire business of B Ltd. for a purchase consideration
of ` 9.000 crores. The details and breakup of the net assets taken over on
historical cost basis is provided below. A Ltd. accounted for the acquisition
entry based on historical costs instead of the fair values approach as required
by IFRS 3, Business Combinations.
Particulars
Office buildings
Factory buildings
Vehicles
Plant and machinery
Tangible Assets of B Ltd. taken over
Liabilities of B Ltd. taken over
Net assets taken over
Purchase consideration - Cash paid
Historical cost
in ` Crores
8,000
1,000
5
2,995
12,000
7,500
4,500
9,000
Fair value
at date of
acquisition in
` Crores
8,190
1,255
5
3,050
12,500
7,700
4,800
The contingent liabilities of B Ltd. included legal action initiated by one

of the customers against it for defective products supplied by B Ltd. The
contingent liabilities taken over during the acquisition of B Ltd. was not
recognised during acquisition accounting but merely disclosed in financial
statements amounting to ` 15 crores. The contingent liabilities of B Ltd. also
include a possible obligation that arose from past events whose existence
will be confirmed only by the occurrence / non-occurrence of future events
amounting to ` 5 crores. This contingent liability pertains to the possibility
that B Ltd may have to return a government grant received if the conditions
attached to it are not fulfilled. Assume the tax rate applicable to the company
to be 30%.
Requirement: In order to restate the above business acquisition recorded

in the books of account from Indian GAAP to IFRS, please advise the
management of A Ltd. on the manner of restatement, relevant provisions of
IFRSs and adjustment accounting entry to be passed.
526

Q39. Easy Finance Ltd. is a finance company. The management of Easy Finance
Ltd. has engaged you as a consultant to advise on complex issues relating to
classification of the fair value referential for financial assets, financial liabilities
and derivatives. The issues for which you are required to provide advise are
as follows:
(a) For financial assets and liabilities and derivatives that have maturities
longer than instruments for which market pricing information is
available, how should the fair value measurement be categorised?
(b) How should Easy Finance Ltd. determine whether entity-derived inputs
are corroborated by correlation to observable market data for the
purpose of determining if they are Level 2 inputs?
527

ANSWERS
1.(c)
2. (c)
3. (a)
4. (d)
5. (b)
6. (a)
7. (a)
8. (b)
9. (d)
10. (c)
11. (a)
12.(a)
13. (a)
14. (a)
15. (a)
16. (a)
17. (b)
18. (b)
19. (a)
20. (a)
21. (c)
22. (b)
23. (a)
24. (a)
25. (d)
528

26. (a)
27. (a)
28. (a)
29. (a)
30. (a)
31. An embedded derivative is a component of a hybrid contract that also
includes a non-derivative host-with the effect that some of the cash flows of
the combined instrument vary in a way similar to a stand-alone derivative.
interest rate, financial instrument price, commodity price, foreign exchange
rate, index of prices or rates, credit rating or credit index, or other variable,
provided in the case of a non-financial variable that the variable is not
specific to a party to the contract. A derivative that is attached to a financial
instrument but is contractually transferable independently of that instrument,
or has a different counterparty, is not an embedded derivative, but a separate
financial instrument.
32. The unit of account is the level at which an asset or liability is aggregated or
disaggregated for recognition purposes. It is also the level at which an asset
or a liability generally is aggregated or disaggregated for the purpose of
measuring fair value. When these two units differ, the term unit of valuation
is used to describe the unit used for measurement. Generally, the unit being
measured is determined based on the unit of account specific to the asset
or liability. The unit of account for fair value measurement and the unit of
account for recognition are generally the same. For convenience, when
the unit of account for fair value measurement and unit of account for
recognition are different, we refer to the level at which an asset or liability is
aggregated or disaggregated to measure fair value as the unit of valuation.

There are two exceptions to this rule given in the standard:

a)
The unit of account (unit of valuation) for financial instruments generally

is the individual financial instrument (e.g. a share). However, an entity
is permitted to measure the fair value of a group of financial assets
and financial liabilities on the basis of the net risk position, if certain
conditions are met.
529

b)
In certain circumstances, an entity is required to measure non-financial

assets in combination with other assets or with other assets and
liabilities.
Example for Goodwill impairment testing, the unit of account (unit of valuation) is
the (group of) cash generating unit(s).
33.
Sl
No
1.
IAS 8
AS 5
Objective of IAS 8 is to prescribe

the criteria for selecting and
changing accounting policies,
together with the accounting
treatment and disclosure of
changes in accounting policies,
changes in accounting estimates
and corrections of errors. IAS 8
intends to enhance the relevance
and reliability of an entitys
financial statements and the
comparability of those financial
statements over time and with
the financial statements of other
entities.
IAS 8 broadens the definition
to include bases, conventions,
rules and practices (in addition to
principles) applied by an entity in
Does not deal with change in
accounting policy due to change
in statute.
Objective of existing AS 5 is
to prescribe the classification
and disclosure of certain items
in the statement of profit and
loss for uniform preparation
and presentation of financial
statements.
530
AS 5 restricts the definition of

accounting policies to specific
accounting principles and the
methods of applying those
principles.
AS 5 allows the situation where
change in accounting policy is
required by statute.

Sl
No
4
IAS 8
AS 5
Requires that changes in

accounting policies should be
accounted for with retrospective
effect subject to limited exceptions
viz., where it is impracticable to
determine the period specific
effects or the cumulative effect of
applying a new accounting policy.
AS 5 does not specify how

change in accounting policy
should be accounted for.
Change in method of depreciation

is a change in estimate that needs
to be accounted for prospectively.
Uses the term errors and relates

it to errors or omissions arising
from a failure to use or misuse of
reliable information (in addition to
mathematical mistakes, mistakes
in application of accounting
policies etc.) that was available
when the financial statements of
the prior periods were approved
for issuance and could reasonably
be expected to have been
obtained and taken into account in
of those financial statements. IAS
8 specifically states that errors
include frauds
531
Under AS 6, the impact of

change in depreciation method
is determined by retrospectively
computing
depreciation
under the new method, and
is recorded in the period of
change whereas on revision
of asset life, the unamortised
depreciable amount is charged
over the revised remaining
asset life.
AS 5 defines prior period items
as incomes or expenses which
arise in the current period as
a result of errors or omissions
in the preparation of financial
statements of one or more prior
periods. Does not specifically
include frauds.

Sl
No
6
IAS 8
AS 5
Requires
rectification
of
material prior period errors with
retrospective effect subject to
limited exceptions viz., where it
is impracticable to determine
the period specific effects or the
cumulative effect of applying a
new accounting policy.
requires disclosure of an
impending change in accounting
policy when an entity is yet to
implement a new Standard
or Interpretation that has been
issued but has not yet come into
effect. Disclosure is also required
of known or reasonably estimable
information relevant to assessing
the possible impact that the
application of the new Standard
or Interpretation will have on the
entitys financial statements in the
period of initial application.
Defined the term impracticable.
It provides that applying a
requirement is impracticable when
the entity cannot apply it after
making every reasonable effort to
do so.
AS 5 requires the rectification

of prior period items with
prospective effect
There is no such specific

requirement under AS 5
AS 5, though, uses the term

impracticable but does not
define it.
34. This Standard does not establish an absolute rate at which hyperinflation
is deemed to arise. It is a matter of judgment when restatement of
financial statements in accordance with this Standard becomes necessary.
Hyperinflation is indicated by characteristics of the economic environment of
a country which include, but are not limited to, the following:
(a) The general population prefers to keep its wealth in non-monetary
532

(d) Interest rates, wages and prices are linked to a price index; and
(e) The cumulative inflation rate over three years is approaching, or
exceeds 100%.
35. A business consists of inputs and processes applied to those inputs that
have the ability to create outputs. Although businesses usually have outputs,
outputs are not required for an integrated set to qualify as a business. The
three elements of a business are defined as follows:
(a) Input: Any economic resource that creates, or has the ability to create,
outputs when one or more processes are applied to it. Examples
include non-current assets (including intangible assets or rights to use
non-current assets), intellectual property, the ability to obtain access to
necessary materials or rights and employees.
(b) Process: Any system, standard, protocol, convention or rule that
when applied to an input or inputs, creates or has the ability to
create outputs. Examples include strategic management processes,
operational processes and resource management processes. These
processes typically are documented, but an organised workforce having
the necessary skills and experience following rules and conventions
may provide the necessary processes that are capable of being
applied to inputs to create outputs. (Accounting, billing, payroll and
other administrative systems typically are not processes used to create
outputs.)
(c) Output: The result of inputs and processes applied to those inputs that
provide or have the ability to provide a return in the form of dividends,
lower costs or other economic benefits directly to investors or other
owners, members or participants

To be capable of being conducted and managed for the purposes

defined, an integrated set of activities and assets requires two essential
elementsinputs and processes applied to those inputs, which together
533

are or will be used to create outputs. However, a business need not
include all of the inputs or processes that the seller used in operating
that business if market participants are capable of acquiring the
business and continuing to produce outputs, for example, by integrating
the business with their own inputs and processes. The nature of
the elements of a business varies by industry and by the structure
of an entitys operations (activities), including the entitys stage of
development. Established businesses often have many different types
of inputs, processes and outputs, whereas new businesses often have
few inputs and processes and sometimes only a single output (product).
Nearly all businesses also have liabilities, but a business need not have
liabilities. An integrated set of activities and assets in the development
stage might not have outputs. If not, the acquirer should consider
other factors to determine whether the set is a business. Those factors
include, but are not limited to, whether the set:
(a) Has begun planned principal activities;
(b) Has employees, intellectual property and other inputs and
processes that could be applied to those inputs;
(c) Is pursuing a plan to produce outputs; and
(d) Will be able to obtain access to customers that will purchase the
outputs.

36.
Not all of those factors need to be present for a particular integrated

set of activities and assets in the development stage to qualify as a
business.
As per IFRS15 revenue is to be recognised when or as Performance

obligations are satisfied. This is where the standards core principle of
transfer of control which replaces the old concept of transferring risks
and rewards of ownership comes into play. Performance obligations are
considered satisfied and revenue should be recognised when or as
transfer of control occurs. Revenue should be recognised over time if one of
the following three criteria is met:

The customer simultaneously receives and consumes benefits.
The entitys performance creates or enhances an asset that the

customer controls as the asset is created or enhanced.
534

The entitys performance does not create an asset with an alternative

use to the entity, and the entity has an enforceable right to payment for
performance completed to date.
Otherwise, revenue should be recognised at a point in time.
In contrast to the above, IAS 18 Revenue from the sale of goods shall be
recognized when all the following conditions have been satisfied:
(a) The entity has transferred to the buyer the significant risks and rewards
of ownership of the goods;
(b) The entity retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over the
goods sold;
(c) The amount of revenue can be measured reliably;
(d) It is probable that the economic benefits associated with the transaction
will flow to the entity; and
(e) The costs incurred or to be incurred in respect of the transaction can

(a) The amount of revenue can be measured reliably;
(b) It is probable that the economic benefits associated with the transaction
(c) The stage of completion of the transaction at the end of the reporting
(d) the costs incurred for the transaction and the costs to complete the
transaction can be measured reliably
37. A gain or loss arising on initial recognition of a biological asset at fair value
less costs to sell and from a change in fair value less costs to sell of a
biological asset shall be included in profit or loss for the period in which it
arises. A loss may arise on initial recognition of a biological asset, because
535

costs to sell are deducted in determining fair value less costs to sell of a
biological asset. A gain may arise on initial recognition of a biological asset,
such as when a calf is born. A gain or loss arising on initial recognition of
agricultural produce at fair value less costs to sell shall be included in profit
or loss for the period in which it arises A gain or loss may arise on initial
recognition of agricultural produce as a result of harvesting.
38. The approach to solving this case study is the following sequence of steps:
a)
Determine the journal entries already posted in the books of account
b)
Determine the journal entries that would have been posted had the
entity complied with IFRS
c)
Determine the impact of the difference between a) and b)
d)
Restate the carrying amounts in the financial statements of c) above.
IFRS3 Business Combinations states that An acquirer of a business

recognises the assets acquired and liabilities assumed at their acquisitiondate fair values and discloses information that enables users to evaluate the
nature and financial effects of the acquisition. Therefore the first impact while
restating from Indian GAAP to IFRS is the need to remeasure the acquisition
accounting entry based on Fair values and not the historical cost value was
done.
Secondly, IFRS3 Business Combination requires that a contingent liability

of a present nature of the acquired company needs to be recognised as
a part of the acquisition accounting entry even if the same has not been
recognized in the financial statements of the acquired company. This is a
departure from the requirements of IAS 37 which prohibits the recognition of
contingent liabilities. As a result of the above, the principal impacts are that
the Goodwill and Bargain purchase gain will have to be recalculated.
Thirdly, the IAS 12 requires us to consider the deferred tax implications of

fair value adjustments arising from Business Combinations. Deferred tax
assets / liabilities will have to be recomputed in accordance with IAS12
Income taxes. IAS 12 (revised) requires an entity to recognise the resulting
deferred tax liability or (subject to the probability criterion for recognition)
deferred tax asset with a corresponding effect on the determination of the
amount of goodwill or bargain purchase gain recognised. However, IAS 12
(revised) prohibits the recognition of deferred tax liabilities arising from the
initial recognition of goodwill.
536

The goodwill / bargain purchase gain / loss as per IFRS3 will have to be
recalculated as follows:-
Cost of investment / Purchase consideration

Net assets at the date of acquisition
measured at acquisition date fair value
Contingent liability taken over - present
obligations only
Total net assets taken over at fair value
Deferred tax liabilities, net
Net adjusted assets taken over at fair value
Goodwill on acquisition (restated value)
Rs.
Crores
4,800
Rs.
Crores
9,000
15
4,785
90
4,695
4,305
Contingent liability that is a possible obligation is not recognised in acquisition

accounting because it does not meet the definition of a liability. From
the above it is clear that no Deferred tax asset/liability is recognised for
contingent liability recognized as per IFRS3 Business Combination. This is
because IAS 12 specifically states that an entity should not recognise the
deferred tax impacts in cases where the carrying amount of an asset or
liability on initial recognition differs from its initial tax base. This is because on
initial recognition, the tax authorities will not recognise the contingent liability.
As per the sequence of steps identified above, the actual journal entry
recorded in the books of account as per Indian GAAP will be as follows:Journal entry passed in books under
Debit Rs.
Credit Rs.
Indian GAAP
Crores
Crores
Office buildings
8,000
Factory buildings
1,000
Vehicles
5
Plant and machinery
2,995
Goodwill
4,500
7,500
9,000
(Being purchase of asset and liabilities of
16,500
16,500
B Ltd.)
537

Journal entry that should have been
Debit
Credit
passed under IFRS
` Crore
` Crore
Office buildings
8,190
Factory buildings
1,255
Vehicles
5
Plant and machinery
3,050
Goodwill
4,305
7,700
9,000
15
90
(Being purchase of B Ltds net assets at fair
16,805
16,805
value as at the date of acquisition)

Differential adjustment entry to be posted for restating the transaction from

Indian GAAP accounting methodology to the IFRS accounting treatment.
Adjustment entries to be passed for
Debit Rs.
Credit Rs.
restatement purposes
Crores
Crores
Office buildings
190
Factory buildings
255
Vehicles
Plant and machinery
55
Goodwill
195
200
15
90
(Being the differential adjustment to be posted
500
500
identified)
538

39. Our advise on the complex issues raised by the Management is as follows:a)
In the absence of quoted prices in active markets for identical assets

or liabilities that the entity can access on the measurement date,
fair value measurements should not be categorised as Level 1. To
be categorised as a Level 1 measurement, the market information
should be observable prices for identical instruments. To determine the
appropriate categorisation of fair value measurements of instruments
that involve terms requiring both observable and unobservable inputs,
an entity should consider each of the following factors:

If market prices are observable for substantially all of the term

of the asset or liability, the fair value measurement may be a
level 2 measurement. If market prices are not observable for
substantially all of the term of the asset or liability, this may cause
the measurement to be a Level 3 measurement.
If the effect of an unobservable input on the overall fair value

measurement is significant, the fair value measurement will be a
Level 3 measurement. An adjustment to a Level 2 input for the
effect of the unobservable term that is significant to the entire
measurement may cause it to be a Level 3 measurement if the
adjustment uses unobservable inputs. [Refer Para 76 of IFRS13;
Paras 73, 75 and 82 of IFRS13]
Example on categorisation of derivatives when Prices are not available:Company H has an agreement to purchase natural gas every month for the
next 30 months. The agreement is accounted for as a derivative instrument
and therefore is measured at fair value. Assume that natural gas futures
prices are available in an active market for the next 24 months after the
current reporting date. However, observable natural gas futures prices with
maturities ranging from 25 to 30 months are not available. Therefore the
remaining 6 months of the term, Company H uses internally developed
estimates of futures natural gas prices.
In our view, the fair value measurement of the natural gas contract would be
categorised as a Level 3 measurement because market pricing information
(level 2 inputs) is only available for 80% of the term of the contract (24 of
the 30 months), which does not represent substantially the entire term of
the contract. Further, it is doubtful that the effect of the unobservable market
pricing information (Level 3 inputs) on the overall fair value measurement
539

would be insignificant. However, in the following year, if quoted natural gas
prices continue to be available for the following 24 months, then the fair value
measurement might be categorised as a Level 2 measurement.
b)
Market corroborated inputs are defined as inputs that are derived principally
from or corroborated by observable market data by correlation or other
means. Easy Finance Ltd. may use correlation analysis to prove the
relationship between inputs. Correlation is a statistical concept, indicating the
strength and direction of a linear relationship between two variables. In our
view, for an input to be considered a Level 2 input by using correlation, the
correlation between the input and relevant observable market data should be
high. In using correlation or other statistical means to support Level 2 inputs,
an entity may apply similar statistical considerations to those applied in
establishing that a hedging relationship is highly effective using a regression
analysis. In establishing the level in the hierarchy of an input corroborated
using correlation analysis, Easy Finance Ltd. should consider factors such
as the R-Squared confidence level of the statistical analysis and the number
of data points. [Refer Para A, 82 of IFRS13].
540

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Model and Past Question Papers

for Certificate Course on IFRS

The Institute of Chartered Accountants of India

COPYRIGHT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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Model Question Paper1

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Model Question Paper5

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Model Question Paper24

Model Question Paper25

Model and Past Question papers for Certificate Course on IFRS

Model Question Paper 1

Section A Objective Type Questions

(30 x 1.5 marks = 45 marks)

Q1. The common characteristic of all service concession arrangements is that

Model and Past Question papers for Certificate Course on IFRS

Name of the reporting entity or other means of identification, and any

Names of major/significant shareholders of the entity.

Level of rounding used in presenting the financial statements.

Whether the financial statements cover the individual entity or a group

Q12. Which of the following costs of conversion cannot be included in cost of

Cost of direct labour.

Factory rent and utilities.

Factory overheads based on normal capacity.

Q13. How should an unrealised gain on foreign currency translation be presented

As an inflow in the financing activities section of the statement of cash

It should be ignored for the purposes of the statement of cash flows as

Model and Past Question papers for Certificate Course on IFRS

It should be ignored for the purposes of the statement of cash flows

Q14. A deductible temporary difference generates a

Deferred tax Liability.

Deferred tax Asset.

Q15. The classification of a lease as either an operating or finance lease is based

The length of the lease.

The transfer of the risks and rewards of ownership.

The economic life of the asset.

The entity has discretion in establishing prices directly or indirectly, such

The entity does not have the credit risk