You are on page 1of 108

PART II

Ind AS
Chapter 1 Ind AS 1: Presentation of Financial Statements 1
Chapter 2 Ind AS 2: Inventories 10
Chapter 3 Ind AS 7: Cash Flow Statements 13
Chapter 4 Ind AS 8: Changes in Accounting Estimates, Policies and Errors 16
Chapter 5 Ind AS 10: Events after the Balance Sheet Date 20
Chapter 6 Ind AS 12: Taxes on Income 22
Chapter 7 Ind AS 16: Plant, Property and Eqipment 27
Chapter 8 Ind AS 17: Leases 34
Chapter 9 Ind AS 19: Accounting for Employees Benefits 37
Chapter 10 Ind AS 20 / IAS 20: Accounting for Government Grants and
Disclosure of Government Assistance 40
Chapter 11 Ind AS 21: Effects of Changes in Foreign Exchnage Rates 44
Chapter 12 Ind AS 23: Borrowing Costs 50
Chapter 13 Ind AS 24: Related Party 52
Chapter 14 Ind AS 29: Accounting in Case of Hyper Inflationery Conditions 57
Chapter 15 Ind AS 33: Earning Per Share 60
Chapter 16 Ind AS 34: Interim Financial Reporting (IFR) 65
Chapter 17 Ind AS 36: Impairment of Assets 67
Chapter 18 Ind AS 37: Events after the Balance Sheet 69
Chapter 19 Ind AS 38: Intangible Assets 73
Chapter 20 Ind AS 40 / IFRS 40: Investments Property 76
Chapter 21 Ind AS 41 / IAS 41: Agriculture 82
Chapter 22 Ind AS-105 Noncurrent Assets Held for Sale and Discontinued Operations 90
Chapter 23 Ind AS 106 / IFRS 6: Exploration and Evaluation Expenditures 97
Chapter 24 Ind AS 108: Operating Segments 100
Chapter 25 Miscellaneous Topics (Adapted) 102

Indian Accounting Standards_All chapters.indd i 05-01-2016 05:12:29 PM


Indian Accounting Standards_All chapters.indd ii 05-01-2016 05:12:30 PM
1

Chapter 1
Ind AS 1: Presentation of Financial Statements

Financial Statements Purpose


Structured representation of inancial information about an entity.
Provide useful information the users making economic decisions.
Complete Set of Financial Statements
Ind AS 1

Balance Sheet (Includes SOCE)

Statement of P & L

Statement of Cash Flow

Note

Separate comparative FS
Special case

Statement of P& L and Other Comprehensive Income shall have 2 components


(i) Pro it and Loss
(ii) Other Comprehensive Income

True and Fair View


Faithful representation of effects of transactions, other events and conditions in accordance with
the de initions and recognition criteria for assets, liabilities, income and expenses set out in the
Framework.
Achieved by compliance with Ind AS 1 and additional disclosures.
Also required to:
a. Select and apply accounting policies as per Ind AS 8.
b. Present information in reliable, comparable understandable manner.
c. Provide additional disclosures as per Ind ASs.

Indian Accounting Standards_All chapters.indd 1 05-01-2016 05:12:30 PM


2 Indian Accounting Standards

Explicit and Unreserved Statement


Going Concern: (Same as AS-1)
Management should make an assessment of entitys ability to continue as going concern.
Intends to liquidate or cease trading or does not have no realistic alternative than to do so.
If not prepared on going concern basis, disclose that fact and the reasons.
Accrual Basis of Accounting: (Same as AS-1)
Prepare FS on accrual system (income on earned basis and expenses on incurred basis).
Materiality and Aggregation:
Present separately each material class of similar items.
Present separately items of dissimilar nature unless they are immaterial.
Offsetting
An entity should not offset assets and liabilities unless permitted by Ind AS or Law. For example: DTA and
DTL can be off set in presentation as per Schedule III. Also in case of Ind AS-37 (Provisions) Provisions can
be netted off from reimbursement.

Frequency of Reporting

At least annually For a period longer or shorter than one year, then disclose:
a. Reason for using longer/shorter period
b. Fact that amounts represented are not totally comparable

Comparative Information
Should have comparatives with all the amounts When
reported in current period financial statements Accounting policy retrospectively
Retrospective restatement
Reclassifies items
Present 3 balance sheets and two statements:
Current period end
Previous period end
Beginning of earliest comparative period end

When the entity changes the presentation or Disclosures when reclassification made:
classification of items in its financial statements, the Nature of the reclassification;
entity shall reclassify comparative amounts unless The amount of items reclassified
reclassification is impracticable Reason for the reclassification
Reason for the reclassification:
Reason for not reclassifying the amounts
Nature of the adjustments that would have been made
if the amounts had been reclassified.

Identification features of Financial Statements


Identify clearly FS from other information published in the same document.
Distinguish inancial statement and notes.
Display the following pieces of information prominently for each inancial statement:
a. Name of reporting entity
b. Separate or consolidated inancial statements
c. Date of end of reporting period

Indian Accounting Standards_All chapters.indd 2 05-01-2016 05:12:30 PM


Ind AS 1: Presentation of Financial Statements 3

d. Presentation currency (As per Ind AS 21)


e. Level of rounding off (Even governed by Schedule III)
Minimum Line items in Balance Sheet: (At least this much is required)
Following are the minimum items paid:
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts shown under (e),(h) and (i));
e. Investments accounted for using the equity method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
j. The total of assets classi ied as held for sale and assets included in disposal groups classi ied as
held for sale in accordance with Ind AS 105 Non-current Assets Held for Sale and Discontinued
Operations;
k. Trade and other payables;
l. Provisions;
m. Financial liabilities (excluding amounts shown under (k) and (l));
n. Liabilities and assets for current tax, as de ined in Ind AS 12 Income Taxes;
o. Deferred tax liabilities and deferred tax assets, as de ined in Ind AS 12;
p. Liabilities included in disposal groups classi ied as held for sale in accordance with Ind AS 105;
q. Non-controlling interests, presented within equity; and
r. Issued capital and reserves attributable to owners of the parent.
Shall present additional line items if relevant.
If current and non-current classi ication exists, deferred tax assets/liabilities should not be shown
under Current.
Order or format is not mentioned by Ind AS-1.
Classification of Current Assets: (Same de inition is given by Schedule III)
a) It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
b) It holds the asset primarily for the purpose of trading;
c) It expects to realize the asset within twelve months after the reporting period; or
d) The asset is cash or a cash equivalent (as de ined in Ind AS 7 cash low statement) unless the asset
is restricted from being exchanged or used to settle a liability for at least twelve months after the
reporting period.
All other assets are non-current assets.
Classification of Current Liabilities: (Same de inition is given by schedule III)
It expects to settle the liability in its normal operating cycle;
a) Liability primarily for the purpose of trading; (Derivative unfavorable contracts)
b) The liability is due to be settled within twelve months after the reporting period; or
c) It does not have an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period. Terms of a liability that could, at the option of the counterparty, result in
its settlement by the issue of equity instruments do not affect its classi ication.
All other liabilities are non-current liabilities.

Indian Accounting Standards_All chapters.indd 3 05-01-2016 05:12:30 PM


4 Indian Accounting Standards

THINGS TO REMEMBER
Some current liabilities, such as trade payables and some accruals for employee and other operating costs, are
part of the working capital used in the entitys normal operating cycle. Even if they are settled after more than
12 months, they are classified as current.

Example: If Coprico Limited has an operating cycle of 24 months. On 31/3/2016 even if the amount is payable
on account of trade payables after 12 months from the reporting date but within operating cycle is a Current
Liability.
Items to be segregated in Balance Sheet or Notes: (These segregations are almost covered by Schedule III
very well) For example: Items of property, plant and equipment are disaggregated into classes in accordance
with Ind AS 16; Receivables are disaggregated into amounts receivable from trade customers, receivables
from related parties, prepayments and other amounts; Inventories are disaggregated, in accordance with Ind
AS 2 Inventories, into classi ications such as merchandise, production supplies, materials, work in progress
and inished goods; etc.
Disclosures for Share Capital and Reserves: (Again these segregations/disclosures are almost covered by
Schedule III very well): For example: For each class of share capital:
the number of shares authorized; o the number of shares issued and fully paid, and issued but not
fully paid;
par value per share, or that the shares have no par value;
a reconciliation of the number of shares outstanding at the beginning and at the end of the period; etc.

Please refer Schedule III (Revised) as per Companies Act 2013

Statement of Profit and Loss

Controlling Int.

P&L Non-Controlling Int.

Statement of P & L Other Comprehensive Income Controlling Int.

Total Comprehensive Inc. Non-Controlling Int.

In addition to other line items, P& L Section should contain:


Revenue;
Finance costs;
Share of the pro it or loss of associates and joint ventures accounted for using the equity method;
Tax expense
A single amount for the total of discontinued operations
(These segregations are almost covered by Schedule III very well)

DO YOU KNOW
Balance Sheet is known as SOFP and P/L is known as SOCI under IFRS.

Indian Accounting Standards_All chapters.indd 4 05-01-2016 05:12:30 PM


Ind AS 1: Presentation of Financial Statements 5

Other Comprehensive Income (OCI)


Information to be presented in OCI Section
OCI including share of the other comprehensive income of associates and joint ventures accounted for
using the equity method).
(a) Will not be reclassi ied subsequently to pro it or loss; and
(b) Will be reclassi ied subsequently to pro it or loss when speci ic conditions are met.
An entity should not show any items as extraordinary. (It is strictly prohibited)
All items of income or expense should be routed through P & L unless an Ind AS permits otherwise.
Disclose the tax effect of each component of OCI in notes or P & L.
Each item can be disclosed as Net off tax effects.
Few instances of OCI
Fair value changes on revaluation of property, plant and equipment and intangible assets as per Ind
AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets.
Re-measurements of employee de ined bene it plans, e.g., actuarial gains and losses, as per Ind AS 19,
Employee Bene its.
Gains and losses arising from translating the inancial statements of a foreign operation as per Ind AS
21, Effects of Changes in Foreign Exchange Rates.
Gains and losses from investments in equity instruments designated at fair value through other
comprehensive income as per Ind AS 109, Financial Instruments.
Gains and losses of inancial assets having speci ied payment of principal and interest held to collect
contractual cash lows and to sell as per Ind AS 109, Financial Instruments.
The effective portion of gains and losses on hedging instruments in a cash low hedge and the gains
and losses on hedging instruments that hedge investments in equity instruments measured at fair
value through other comprehensive income as per Ind AS - 109, Financial Instruments.
For particular liabilities, designated at fair value through pro it or loss, the amount of the change in
fair value attributable to changes in the liabilitys credit risk as per Ind As 109, Financial Instruments.
Changes in the value of the time value of options when separating the intrinsic value and time value of
an option contract and designating as the hedging instrument only the changes in the intrinsic value
as per Ind AS 109, Financial Instruments.
Reclassification adjustments
Can be recycled to P&L Cannot be recycled to P&L
Disposal of a foreign operation (see Ind AS 21), Surplus recognized in accordance with Ind AS 16 Ind AS
De-recognition of available-for-sale financial assets (see 38 (Intangible Assets) or
Ind AS 39) Actuarial gains and losses on defined benefit plans
Hedged forecast transaction affects profit or loss (see recognized in accordance with paragraphs 92 and 129A
paragraph 100 of Ind AS 39 in relation to cash flow of Ind AS 19
hedges). Gains and losses from investments in equity instruments
designated at fair value through other comprehensive
income as per Ind AS 109, Financial Instruments.
For financial liabilities designated at fair value through
profit or loss, the amount of the change in fair value
attributable to changes in the entitys own credit risk as
per Ind AS 109, Financial Instruments

Indian Accounting Standards_All chapters.indd 5 05-01-2016 05:12:31 PM


6 Indian Accounting Standards

Information to be presented in P & L: (Exceptional Items in AS 5)


When items of income or expense are material, an entity shall disclose their nature and amount
separately.
Circumstances that would give rise to the separate disclosure of items of income and expense include:
a. Write-downs of inventories to net realizable value or of property, plant and equipment to
recoverable amount, as well as reversals of such write-downs;
b. Restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring;
c. Disposals of items of property, plant and equipment;
d. Disposals of investments;
e. Discontinued operations;
f. Litigation settlements; and
g. Other reversals of provisions.
An entity shall present an analysis of expenses recognized in pro it or loss using a classi ication based
on the nature of expense method.
Statement of Changes in Equity
Total comprehensive income for the period, showing separately the total amounts attributable to
owners of the parent and to non-controlling interests;
For each component of equity, the effects of retrospective application or retrospective restatement
recognized in accordance with Ind AS 8;
For each component of equity, a reconciliation between the carrying amount at the beginning and the
end of the period, separately disclosing each changes resulting from:
a. Pro it or Loss;
b. Each item of other comprehensive income;
c. Transactions with owners in their capacity as owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that do not result in
a loss of control; and
d. Any item recognized directly in equity such as amount recognized directly in equity as capital
reserve with paragraph 36A of Ind AS 103.
Notes to Financial Statements
Generally presented in the following order:
statement of compliance with Ind ASs
summary of signi icant accounting policies applied
supporting information for items presented in the BS, SOCE, P&L in order of presentation and appear-
ance in line item order
Other disclosures, including:
a. Contingent liabilities (Ind AS 37) and unrecognized contractual commitments, and
b. Non- inancial disclosures, e.g. the entitys inancial risk management objectives and policies
(see Ind AS 107).
Disclosure of Significant accounting policies: (Same as AS-1)
An entity shall disclose in the summary of signi icant accounting policies:

Indian Accounting Standards_All chapters.indd 6 05-01-2016 05:12:31 PM


Ind AS 1: Presentation of Financial Statements 7

Distinction between AS-1 and Ind AS-1

AS-1 Ind AS-1


No format of Financial Statement is stated by AS-1. Ind AS-1 requires Current / Non Current classification
regarding assets and liabilities.
Extra ordinary activity is defined in AS-5 an requires a Extra ordinary activity is prohibited.
separate disclosure.
No such mention (management judgments and Management assumptions and judgements are required.
assumptions about a/c policies)
No such mention. B/S and P/L should be on comparative basis. In some cases
B/S should be 3 when retrospective changes are in case of
change of a/c policies.
No statement of changes in equity is mentioned. Statement of changes in equity is yet another new addition.
Single format of Revenue is implemented. In fact no Total Revenue comprises of Normal P/L and OCI
mention about the content of Revenue Statement or B/S
is provided by AS-1.
No such mention about reclassification of loan in case of Long term loans breach is mentioned by Ind AS-1. (refer
breach on loan is rectified is mentioned. theory below).

Comparison of Ind AS-1 with IAS-1


(i) IAS 1 has the option either to follow the single statement approach or to follow the two
statement approach. Ind AS 1 allows only the single statement approach (i.e. P/L and OCI is
within same single statement.).
(ii) 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.
(iii) As per Ind AS 1 e.g., the term balance sheet is used instead of Statement Of Financial Position
(SOFP) and Statement Of Pro it and Loss is used instead of Statement Of Comprehensive Income
(SOCI) and Other Comprehensive Income (OCI).
(iv) Paragraph 8 of IAS 1 gives the option to individual entities to follow different terminology for the
titles of inancial statements. Ind AS 1 is changed to remove alternatives by giving one terminology
to be used by all entities.
(v) As per IAS -1 if any breach regarding repayment of loan is prevailing before B/S date (such loan
is treated as non current) and if the breach is recti ied after B/S date then it is reclassi ied as a
current liability. As per Ind AS -1 if any breach regarding repayment of loan is prevailing before B/S
date and if the breach is recti ied after B/S date then it is still treated as a non current liability.
In case of Indian Banking system the procedure regarding the loan disbursement, submitting of
insurance details will take a long time. Hence better it is proper to treat it a non current obligation.
(vi) IAS 1 permits the periodicity, for example, of 52 weeks for preparation of inancial statements. As
Ind AS 1 does not permit it, the same is deleted.
(vii) IAS 1 requires an entity to present an analysis of expenses recognized in pro it or loss using a
classi ication based on either their nature or their function within the equity. Production costs,
Selling expenses, Administration expenses. Ind AS 1 requires only nature-wise classi ication of
expenses. Same as Schedule III.

Problem 1: ML Ltd presents you the summarized trail balance for the year 31/3/2015. ( crores)

Indian Accounting Standards_All chapters.indd 7 05-01-2016 05:12:31 PM


8 Indian Accounting Standards

Debit item Amount (`) Credit item Amount (`)


Employee cost 50.45 Share Capital (1) 100.00
Depreciation 46.30 P/L 1/4/2014 10.00
Cost of materials consumed 110.44 Securities Premium 16.41
Other expenses 14.33 Revaluation reserve 7.33
Current assets 130.42 Current liabilities 75.64
Fixed Assets 445.60 Debentures 10.00
Sales and Services 578.16
797.54 797.54

Adjustments:
1) Employee cost includes 2.30 on account of actuarial loss.
2) On 31/3 ixed assets were upward revalued by 20% (not yet accounted)
3) During the year Equity shares were raised 10 crores shares @ premium of 1.
4) Dividend declared 12% (not yet accounted).
Draw P/L including OCI, Statement of changes in Equity and Balance Sheet as per Ind AS 1.
Solution: P/L as on 31/3/2015
Particulars ` in crores
Sales and Services 578.16
Expenditure:
Employee cost (excluding actuarial loss) (48.15)
Depreciation (46.30)
Cost of materials consumed (110.44)
Other expenses (14.33)
NP from ordinary activities..(a) 358.94
Other Comprehensive Income
Revaluation reserve 89.12
Actuarial loss (2.30)
Total..(b) 86.82
Net Profit c/f(a+b) 445.76

Share of Non - Controlling Interest is not applicable.


Statement of changes in Equity
Particulars Share Capital Securities Revaluation Revenue Total
Premium Reserves Reserves
As on 1/4/2014 90 6.41 7.33 10 113.74
Fresh issue 10 10 20
Addition 89.12 356.64 445.76
Less: Dividends (12) (12)
Net 100 16.41 96.45 354.64 567.50

Indian Accounting Standards_All chapters.indd 8 05-01-2016 05:12:31 PM


Ind AS 1: Presentation of Financial Statements 9

Balance Sheet as on 31/3/2015


Amount (`) Amount (`)
Share Capital (1) 100.00 Reserves / Surplus
Reserves and Surplus 467.50 P/L balance 354.64
Securities Premium 16.41
Debentures 10.00 Revaluation reserve 96.45
Current liabilities 75.64 Total 467.50
Provisions Dividend 12.00

Total (E+L) = 665.14

Fixed Assets 534.72 (445.60+20% of 445.60)

Current Assets 130.42

665.14

Indian Accounting Standards_All chapters.indd 9 05-01-2016 05:12:31 PM


Chapter 2
Ind AS 2: Inventories

AS-2 Ind AS 2
Considers only NRV Considers Fair Value also
Does not consider defer payment concept. Defer payment includes an element of financing.
AS 2 does not prescribe the recognition of expense Recognition of expense covered.
is not covered by AS-2
AS 2 does not allow reversal of inventory. But in Reversal of inventory is allowed which is restricted to the original
Interim financial statements it is allowed. cost.
Accounting treatment of inventories not covered. Inventories used to manufacture fixed asset is capitalized.
Inventories produced for sale charged to income account.
Commodity-brokers are scoped out completely. Commodity-brokers are scoped out but the valuation of
inventory is discussed in terms of guidance.
AS-2 removes WIP of Service Contracts from its scope. Ind AS-2 cover WIP of Service Contracts
AS-2 does not cover the measurement of inventories Ind AS-2 does not cover agricultural produce, mineral products
like agricultural produce, mineral products, neither it but provides the guidance to understand it.
provides any guidance indirectly.
Disclosures restricted to valuation principles only. Disclosures are enlisted in detail other than valuation :
Amount of inventory recognized as expense during the period
Amount of any write-down of inventories recognized as an
expense in the period
Amount of any reversal of a write-down to net realizable value
and the circumstances that led to such reversal
Circumstances requiring a reversal of the write-down
Carrying amount of inventories pledged as security.

Differences between IAS-2 and Ind AS 2: Its only a presentation difference.

Some important points on Ind AS-2


(1) Distinguish between NRV and FV
Net Realisable Value Fair Value
NRV is the estimated selling price in the ordinary course of Fair Value is the price that would be received to sell an asset
business less estimated cost to sell the asset less estimated or even to pay a liability
cost to complete the asset.
NRV is after deducting expenses FV is before deducting expenses

Indian Accounting Standards_All chapters.indd 10 05-01-2016 05:12:31 PM


Ind AS 2: Inventories 11

NRV is entity specific (differs from firm to firm) FV is in general (market oriented)
NRV is used by producers for valuing stock FV is used by broker traders
NRV is defined only by AS-2 FV is comprehensively defined and explained by Ind
AS-115.

(2) Recognition of Expense


When inventory is sold, the carrying amount of inventory should be recognized as an expense when
the related revenue is recognized.
Moreover, the amount of any inventory written down to net realizable value is recognized as an
expense.
The amount of any reversal of write-down of inventory should be a reduction to the amount written
off in the period it was reversed.
Illustration: Suppose Nest (I) Ltd is in snacks business (2 minutes ready snacks). In the year 2015-16 ay
March due to public agitation the goods were abandoned from the market. Out of the inventories worth
6 crores the company has written off 80% of stock worth 5 crores. Inventory worth 1 crore was badly
damaged due to some storage problems and was destroyed.
Subsequently the restrictions were withdrawn in May 2016. Nest (I) Ltd can now write back at least 60%
of the loss out of the unsold goods. Explain the impact on the P/L as per Ind AS 2.
Solution:
Year 2015-16: Inventory written off = Inventory destroyed + Written off = 4+1 = 5 crores.
Year 2016-17: Inventory written back (credited to P/L) = 4 0.6 = 2.4 crores.

(3) Something on Scope


This Standard applies to all inventories other than:
Work in progress under construction contracts and directly related service contracts (Ind AS 11,
Construction Contracts)
Financial instruments (they are MTM as per Ind AS-109)
Producers of Agricultural inventories / Biological assets and agricultural produce at the point of
harvest (covered under Ind AS - 41, Agriculture produce valued at Fair Value).
But some guidance is provided in the following cases:
Producers of agriculture and forest products, agricultural produce after harvest, and minerals and
minerals products, to the extent that they are measured at net realizable value in accordance with best
practices within those industries. When such inventories are measured at net realizable value, changes
in that value are recognized in the pro it or loss in the period of change.
Commodity brokers-traders who measure their inventories at fair value less cost to sell.
When such inventories are measured at fair value less cost to sell, the changes in fair valueless costs to sell
are recognized as pro it or loss in the period of change.
In the above cases Ind AS-2 is not applicable to these industries as they dont adopt Cost or NRV whichever
is less.
Explanation with illustration:
Illustration: Agricultural produce sugarcane not yet harvested valued at 6,00,000. Cost incurred 4,00,000.
Here we apply Ind AS-41 because the agri produce is not yet harvested.
But even when the goods are harvested (plucked or detached with the plant) the sugarcane is an inventory,
but not valued in accordance with Ind AS-2 i.e. cost or NRV whichever is less. It is valued at NRV (including

Indian Accounting Standards_All chapters.indd 11 05-01-2016 05:12:31 PM


12 Indian Accounting Standards

pro its). Such practice allowed in such industry. Similarly Commodity brokers does not follow the principle of
cost or NRV whichever is less. They value inventories at fair value less cost to sell. This is because goods unsold
in such industries carries high degree of certainty of being sold at Fair Value (guaranteed sale). Sometimes
they have government assurance under a forward contract. In short these industries dont apply cost or NRV
whichever is less.

(4) Inventories of Service Providers


Inventories of service providers are measured at costs of their production. These costs consist primarily
of labor and other costs of personnel directly used in providing the service, including cost of supervisory
personnel, and attributable overheads. The costs of inventories of service providers should not include pro it
margins or non-attributable overheads that are generally used in prices quoted by service providers to their
customers. Such service may not have stage of completion.
Illustration: If a tax consultant is appointed for a case of long term basis to be settled. The revenue even
largely depends upon the outcome of the case. Revenue will be recorded only on the completion of the work.
The consultancy will take almost 6-9 months. Today is 31/3 and 3 months are over. The irm will recognize
the WIP of service contract. Suppose till now 1,20,000 is being incurred on the consultancy. Pro it accrued
30,000. Advances received 50,000.
Solution: Inventory WIP Service contract 1,20,000; Also a liability will be disclosed for the advance 50,000.

(5) Inventory Purchased on Deferred Settlement Terms


When inventories are purchased on deferred settlement terms, such arrangements in reality contain
a inancing element. That portion of the price that can be attributable to extended settlement terms, the
difference between the purchase price for normal credit terms and the amount paid, is recognized as interest
expense over the period of the inancing arrangement.
Problem: Magogama Limited purchased inventory of 45,00,000 on 1/4/2015. The purchase cost includes
implicit inance cost. The amount will be paid at the end of 2 years. The cost of inancing is 8%. Pass Journals
for 2 years as per Ind AS-2.
Solution: Journal entries: (3 years) * 4500000 / (1+0.08)2
1/4/2015
Purchase A/C Dr. 38,58,025
To Trade payables A/C 38,58,025
31/3/2016
Finance costs A/C Dr. (9% 38,58,025) 3,08,642
To Trade payables A/C 3,08,642
31/3/2017
Finance costs A/C Dr. 3,08,642
To Trade payables A/C 3,08,642
31/3/2018
Finance costs A/C Dr. 3,33,333
To Trade payables A/C 3,33,333
Trade payables A/C Dr. 45,00,000
To Cash 45,00,000

Indian Accounting Standards_All chapters.indd 12 05-01-2016 05:12:31 PM


Chapter 3
Ind AS 7: Cash Flow Statements

Ind AS-7 AS-3


Bank overdrafts that are repayable on demand and form AS-3 is silent on this aspect
an integral part of an entitys cash management may be
included as a component of cash equivalents.
While going by the Indirect Method of Cash Flow we AS-3 is silent on this aspect
adjust Non-Cash items in Operating Activities. Items like
undistributed profits from associates and even adjustment
of non controlling interest are Non - Cash.
Ind AS 7 encourages Reporting of Cash flows Segment No mention.
Wise.
Sale / Purchase of shares of subsidiary is treated sometimes All such cash flows come under CFIA.
as CFFA and sometimes as CFIA.
No separate title known as Extra Ordinary activity is CFOA, CFIA, CFFA includes Extra Ordinary activities if any
permitted. respectively.
Classification of derivatives like forwards, futures, options, No such guidance provided.
swaps is provided in Cash Flow Statement.
Ind AS-7 applies to all companies. AS-3 has scope restrictions i.e it is not applicable to one
man company, small company.

THINGS TO REMEMBER
CFOA = Cash From Operating Activities, CFIA = Cash From Investments Activities, CFFA = Cash From Financing
Activities.

Differences between Ind AS-7 and IAS-7


As per IAS 7 Interest / Dividend paid alternatively can be classi ied as CFOA. Similarly Interest / Dividend
received can be classi ied as CFOA. But in case of Ind AS-7 the above mentioned items are still covered by
CFFA and CFIA i.e. as AS-3 (Rev).

Indian Accounting Standards_All chapters.indd 13 05-01-2016 05:12:31 PM


14 Indian Accounting Standards

Some important points on IAS 7


1) Bank O/Ds as Cash Equivalents
As per Ind AS 7 Amounts due to a bank are generally considered to be inancing activities. However, in
certain countries, bank overdrafts that are repayable on demand and form an integral part of an entitys cash
management may be included as a component of cash equivalents.
2) Derivatives Contracts
Futures contracts, Forward contracts, Option contracts, and Swap contracts:
As per Ind AS - 7 cash lows from futures contracts, forward contracts, option contracts, and swap contracts
are normally classi ied as CFIA
Example: Arbitrage pro its.
But if such contracts are held for dealing or trading purposes then they are covered as CFOA.
Example: A speculator regularly engaged in buying / selling futures to earn pro its.
When the payments or receipts are considered by the entities as inancing activities and are reported
accordingly (CFFA)
Example: Interest rates swaps entered for Loan taken to inance a business.
When a contract is accounted for as a hedge of an identi iable position, the cash lows of the contract
are classi ied in the same manner as the cash lows of the position being hedged. For example: If Cuba Ltd
has invested in equity shares of Cipla (CFIA). To protect against downfall share prices, Cuba Ltd took PUT
OPTIONS. In this case cash lows from PUT OPTIONS will classi ied under CFIA. Futures purchased for copper
futures to be purchased on a later date. As copper is inventory and an operating activity, also the futures will
also be classi ied as operating activity.
3) Assets held for Rentals
Assets held for rentals and it is sold out is CFOA.
4) Investments in subsidiary, associates and joint ventures: correct
i) All cash receipts and payments of associates and joint ventures are CFIA.
ii) Controlling interest retained in Subsidiary:
Sale of shares.....................CFIA
Purchase of shares.............CFIA
Loan given to subsidiary..................CFIA
Loan taken from subsidiary.......................CFIA

Controlling interest lost in Subsidiary:


Sale of shares.....................CFIA
Purchase of shares.............CFIA
Loan given to subsidiary..................CFIA
Loan taken from subsidiary.......................CFFA

PROBLEMS AND SOLUTIONS

Problem 1: Identify whether the following is an element of Cash and Cash Equivalent as per Ind AS - 7:
Case 1: Delta Ltd has made a term deposit for 1 year for 30,00,000. As on 31/3/2016 the TD has remaining
maturity of 3 months only.

Indian Accounting Standards_All chapters.indd 14 05-01-2016 05:12:31 PM


Ind AS 7: Cash Flow Statements 15

Case 2: Gamma Inc has invested in equity shares only for 15 days $ 4 millions.
Case 3: Beta Ltd has invested Yens 50 millions in Yankee lulu Bank @9% for a period of 3 months
The investor has a right to withdraw the amount by giving a notice. Pre mature withdrawal attracts penalty
whereby 50% interest should be foregone.
Case 4: Cash kept for investments purpose in money market MFs.
Case 5: Thetha Ltd has invested in 8% Preference Share for 1 month.
Case 6: Mangolisa Ltd has post dated chaeques worth 7,00,000.
Solution: Cash and Cash Equivalent (C & CE) features: (i) Short term liquid instruments, (ii) It carries
negligible risk, (iii) Its maturity should not exceed 3 months,
Case
1) Not a C & CE as the original maturity of TD is more than 3 months.
2) Not a C & CE as equity instruments carry risk
3) Substantial loss of money i.e. 50% is too much risk hence not a C & CE.
4) Yes (it is assumed all conditions are being satis ied).
5) Yes preference share investment is a cash equivalent.
6) No. It is not even a recognized transaction.
Problem 2: Mongolia Coppers Ltd purchased February 2018 copper futures to hedge against the rising
prices of copper which will be purchased in the month of February. Today is 15th December 2017. Mongolio
paid 10% margin money today to enter the contract. Futures will be net settled by cash. Till the settlement
date mark to market works out to be 45,000 loss. Comment on various cash lows on account of copper
inventory and its futures till settlement date.
Solution:
As per Ind AS 7: When a contract is accounted for as a hedge of an identi iable position, the cash lows of
the contract are classi ied in the same manner as the cash lows of the position being hedged.
Initial margins: CFOA (In lows)
Mark to Market loss: CFOA (Out lows) from Dec Feb = ( 45000 Margin maintained).
Purchase of inventory: CFOA.

Indian Accounting Standards_All chapters.indd 15 05-01-2016 05:12:31 PM


Chapter 4
Ind AS 8: Changes in Accounting Estimates,
Policies and Errors

Ind AS-8 AS-5


The Objective of Ind AS-8 to define, to provide criteria The Objective of AS-5 is to provide the classification and
for selection as well as for the accounting treatment disclosure of Extraordinary items, Exceptional items, Prior
of Accounting policies. It also includes changes in a/c period items, Changes in Accounting estimates, Changes
estimates and correction of errors. in Accounting policies.
In other words we can say that AS-5 does not provide
treatment for Changes in A/C policy / Changes in A/C
estimates and errors.
Extraordinary items are prohibited for disclosure. Even AS-8 defines as well as makes it mandatory entities to
Exceptional items are not defined. disclose both extraordinary items and exceptional items.
Schedule III provides the presentation for the same.
Accounting policies carries a broader definition. It consists Accounting policies carries a narrow meaning. It is a set of
of a set of specific bases, convention, principles, rules which specific accounting principles and method to adopt such
an entity applies in the preparation and presentation of principle in the preparation of Financial Statements
Financial Statements
Prior period items are retrospectively adjusted. Last years Prior period items are prospectively adjusted. They are
comparative a/cs are adjusted for PPI). included in Other income / expenses under Schedule
PPI includes intentional as well as unintentional errors. It III. PPI also requires a separate disclosure under notes to
means Ind AS 8 also include frauds. accounts.
AS-5 has used the terms errors and omissions. Frauds are
not included.
As per Ind AS-8 Prior period items as well as Change in No accounting treatment is provided by AS-5. It only
Accounting policy to be adjusted retrospectively. Change provides classification and disclosure.
in Accounting estimates to be adjusted prospectively.
For similar transactions, events, conditions same No such mention.
accounting polices has to be followed as per Ind AS 8.

Differences between Ind AS- 8 and IAS-8: No Difference

Some important points on Ind AS-8


1) Applying the changes in Accounting Policies: (For meaning of AP refer AS-1)
As per Ind As-8 A change in accounting policy required by a Standard or Interpretation shall be applied in
accordance with the transitional provisions therein. (Example: New method of depreciation as per New
Schedule II requires transitional provision. Remember it is not retrospective effect).

Indian Accounting Standards_All chapters.indd 16 05-01-2016 05:12:31 PM


Ind AS 8: Changes in Accounting Estimates, Policies and Errors 17

If a Standard or Interpretation contains no transitional provisions or if an accounting policy is changed


voluntarily, the change shall be applied retrospectively.
The practical impact of this is that corresponding amounts (or comparatives) presented in financial statements must be
restated as if the new policy had always been applied. The impact of the new policy on the retained earnings prior to the
earliest period presented should be adjusted against the opening balance of retained earnings.

Retrospective application of a change in accounting policy need not be made if it is impracticable to


determine either the period-speci ic effects or the cumulative effect of the change.
2) Applying the changes in Accounting Estimates: (For meaning and other details you can refer AS-5)
As per Ind AS-8 Change in Accounting Estimate will be prospectively adjusted. Change in accounting estimates
need not be made if it is impracticable to determine the speci ic effect.
3) Applying the changes in Errors: (For meaning and other details you can refer AS-5)
Errors even include frauds in Ind AS 8. Errors can arise in recognition, measurement, presentation, or
disclosure of items in inancial statements.
Discovery of material errors relating to prior periods shall be corrected by restating comparative igures
in the inancial statements for the year in which the error is discovered, unless it is impracticable to do so.
Again, the strict de inition of impracticable (as explained above) applies.
Even calculation of Basic and Diluted EPS should change.

PROBLEMS AND SOLUTIONS

Problem 1
(a) Fultu Tides Inc. changed its accounting policy in 2016 with respect to the valuation of inventories. Up
to 2015, inventories were valued using a weighted average cost (WAC) method. In 2016 the method
was changed to irst-in- irst-out (FIFO), as it was considered to more accurately re lect the usage and
low of inventories in the economic cycle. The impact on inventory valuation was determined to be
At December 31, 2014: an increase of $ 10,000
At December 31, 2015: an increase of $ 15,000
At December 31, 2016: an increase of $ 20,000
(b) The income statements prior to adjustment are
2016 2015
Sales and Services $ 2,50,000 $ 2,00,000
Cost of sales 1,00,000 80,000
Administration costs 60,000 50,000
Selling and Distribution costs 25,000 15,000
Net Pro it $ 65,000 $ 55,000
Required: Present the change in accounting policy in the Income Statement and the Statement of Changes in
Equity in accordance with requirements of Ind AS - 8.

Indian Accounting Standards_All chapters.indd 17 05-01-2016 05:12:31 PM


18 Indian Accounting Standards

Solution: The income statements after adjustment would be:

Fultu Tides Inc.


Income Statement
For the year ended December 31, 2016

Particulars 2016 ($) 2015 ($)


(restated)
Sales and Services 2,50,000 2,00,000
Cost of sales 95,000 75,000
Administration Costs 60,000 50,000
Selling and distribution costs 25,000 15,000
Net profit 70,000 60,000

Explanation: In each year, Cost of Sales will be reduced by $ 5,000, the net impact on the opening and closing
inventories of change in accounting policy.
The impact on the retained earnings included in the statement of changes in equity would be as follows
(the shaded igures represent the situation if there has been no change in accounting policy).

F T Inc.
Statement of changes in Equity (Retained earnings columns only)
For the year ended December 31, 2016

Particulars Retained earnings Retained earnings


On 1/1/2015 as originally stated 4,00,000 4,00,000
Change in a/c policy valuation of inventory 10,000
On 1/1/2015 as restated 4,10,000
Net profit for the year as restated 60,000 55,000
On 31/12/2015 4,70,000 4,55,000
Net profit for the year 70,000 65,000
On 31/12/2016 5,40,000 5,20,000

Problem 2: Effect of change in accounting estimates:


Zuhum Fruits Inc. purchased an Asset @ 460000 on 1/1/2014. The estimated life of the asset as per the
technicians estimated to be 12 years. The Salvage value estimated to be 10000. As on 2017 total life of the
asset is revised to 10 years. Salvage is also revised to 9,000. Compute the effect of change in a/c estimates
on the pro it / loss of the year 2017.
Assuem SLM method.
Solution:
Depreciation: (460000 10000) / 12 = 37500.
Carrying amount of the asset as on 31/12/2016: 460000 37500 x 3 = 347500.
For the year 2017:
Prospective effect:
Depreciation for 2017 = ( 347500 - 9000 ) / (12-3) = 338500 / 9 = 37611.
Change in depreciation = 37500 - 37611 = 111 (extra depreciation).

Indian Accounting Standards_All chapters.indd 18 05-01-2016 05:12:31 PM


Ind AS 8: Changes in Accounting Estimates, Policies and Errors 19

Problem 2: Effect of errors:


Promy Chemicals Ltd provides you the following information for the year ended:

31/3/2017 31/3/2016 The following information is relevant:


During the year 2015-16 a piece of land is
Share Capital 4,00,000 4,00,000
purchased. The company has capitalized an
Surplus balance expenditure of 40,000 which is now treated as
Opening balance 7,00,000 4,00,000 revenue. It was wrongly capitalized. Ignore tax.
Net profit 2,00,000 3,00,000 What will the effect of the prior period item both
as per Ind AS-8 and AS-5?
Liabilities 2,00,000 1,90,000
15,00,000 12,90,000
Fixed Assets 12,00,000 10,00,000
Current Assets 3,00,000 2,90,000
15,00,000 12,90,000

Solution: As per Ind AS 8 . ... As per AS- 5 ..


31/3/2017 31/3/2016 31/3/2017 31/3/2016
Share Capital 4,00,000 4,00,000 Sales and Services xxxxx Xxxxx
Surplus balance Expenses xxxxx Xxxxx
Opening balance 6,60,000 4,00,000 Materails consumed xxxxx Xxxxx
Net profit 2,00,000 2,60,000 Depreciation xxxxx xxxxx
Liabilities 2,00,000 1,90,000 Other expenses (PPI) (40000) Xxxxx
14,60,000 12,50,000 Net Profit xxxxx Xxxxx
Fixed Assets 11,60,000 9,60,000
Current Assets 3,00,000 2,90,000
14,60,000 12,50,000

Important points: In case of Ind AS-8 errors had retrospectives effects. Can you see the last years accounts
have been revised. Adjustment in the last years pro it should be done, as the mistake is a last year mistake.
In case of AS-5 last years a/cs remain same. Current year (31/3/2017) P/L will be reduced by 40000.
Fixed Asset of current year will be reduced by 40000.
Journal Entry: P/L A/C Dr 40000
To Land A/C 40000
In addition to the above adjustment, the company is also required to make a disclosure in the inancial
statements about the prior period item.
Depreciation effect is ignored because land is not depreciable asset.

Indian Accounting Standards_All chapters.indd 19 05-01-2016 05:12:31 PM


Chapter 5
Ind AS 10: Events after the Balance Sheet Date

Ind AS-10 AS-4


Non Adjusting events are not recorded and disclosed in Even in AS 4 Non Adjusting events are not recorded
financial statements. but disclosed in approving authority report, and Financial
statements.
Proposed Dividend is strictly not allowed to be recorded Proposed Dividend is covered by Schedule VI (Old) i.e. it is
for the reporting date as per Ind AS 10. an adjusting event. AS 4 has not undergone any revision,
hence, provisions of Schedule III new Companies Act is not
being incorporated.
Reason for going concern ability being invalid is to be No reason for going concern ability being invalid is to
disclosed. Example: Due to abolishment of products by be disclosed. Adjustments towards assets and liabilities
government the company is expected to close down the required. A fact about the going concern ability no more
business. exists is to be disclosed.
Special Case of breach: No such provision.
Conditions: (i) Loan arrangement, (ii) breach of payment,
(iii) liability is payable on reporting date, (iv) lender waives
the breach before approval of accounts. Also refer Ind A S-1
for Better Understanding

Differences between Ind AS-10 and IAS-10:


As per Ind AS 10: Special Case of breach: Conditions: (i) Loan arrangement, (ii) breach of payment, (iii)
liability is payable on reporting date, (iv) lender waives the breach before approval of accounts. In case of IAS
10 it is treated as non adjusting event.
Examples of non - adjusting events include
Declaration of an equity dividend
Decline in the market value of an investment after the balance sheet date.
Entering into major purchase commitments in the form of issuing guarantees after the balance sheet
date.
Classi ication of assets as held for sale under IFRS 5 and the purchase, disposal, or expropriation of
assets after the balance sheet date.
Commencing a lawsuit relating to events that occurred after the balance sheet date.

Indian Accounting Standards_All chapters.indd 20 05-01-2016 05:12:31 PM


Ind AS 10: Events after the Balance Sheet Date 21

PROBLEMS AND SOLUTION

Problem 1: Revipentu Corp. carries its inventory at the lower of cost and net realizable value. At March
31, 2015, the cost of inventory, determined under the irst-in, irst-out (FIFO) method, as reported in its
inancial statements for the year then ended, was 10 million. Due to severe recession and other negative
economic trends in the market from last 6 months, the inventory could not be sold during the entire month
of April 2015. On May 02, 2015, Revipentu Corp. entered into an agreement to sell the entire inventory to a
competitor for 6 million.
What will be your answer if: Revipentu Corp has not manufactured goods by 31/3/2015.
Required: Presuming the inancial statements were authorized for issuance on 15 th June 2015 should
Revipentu Corp. recognize a write-down of 4 million in the inancial statements for the year ended March
31, 2015?
Solution: Yes, Revipentu Corp. should recognize a write-down of 4 million in the inancial statements for
the year ended March 31, 2015.
If Revipentu Corp has not manufactured goods by 31/3/2015 then no provision required.
Problem 2: The statutory audit of Zamunisan Ltd for year ended June 30, 2015, was completed on August 30,
2015. The inancial statements were signed by the managing director on September 8, 2015, and approved
by the shareholders on October 10, 2015. The next events have occurred.
Zamunisan Ltd has issued capital comprised 25,00,000 equity shares. The company announced a bonus
issue of 2,00,000 shares on August 1, 2015.
Required: How should the company should account for these three postbalance sheet events?
Solution: (2) Ind AS 33, Earnings Per Share, requires a disclosure of transactions as stock splits or rights
issue, which are of signi icant importance at the balance sheet. This is a non - adjusting event, and only
disclosure is needed.

Indian Accounting Standards_All chapters.indd 21 05-01-2016 05:12:32 PM


Chapter 6
Ind AS 12: Taxes on Income

Ind AS-12 AS-22


Ind AS 12 follows Balance Sheet approach for calculating AS - 22 follows Income approach for calculating Deferred
Deferred Tax. Tax.
Current Tax and Deferred Tax transferred to the following AS-22 does not dealt with so many treatments. AS-22
accounts: (i) Income Statement, (ii) Equity, (iii) Other transfers Current Tax and Deferred Tax to P/L.
Comprehensive Income, (iv) Sometimes it is an adjustment
to Goodwill.
DTA should be disclosed under Non Current Assets as a No disclosure provisions provided by AS-22 regarding DTA
separate line item. DTL should be disclosed under Non / DTL. Presentation principal is covered by Schedule III.
Current Liabilities as a separate line item.
It considers Deferred tax on Translation of foreign operation, Not covered.
unrealized gain / loss on stock at CFS, Undistributed Profits,
Revaluation of Assets.
No such guidance provided. AS -22 provides guidance on Virtually Certainty, Tax holidays,
115JB through accounting Standard Interpretations
Ind AS-12 defines Temporary Differences. All Temporary It defines Timing Differences.
differences includes Timing Differences.

Differences between Ind AS-12 and IAS-12


1) Some presentation difference exists between standards which does not make much difference.
2) Fair Value on Investment Property is not allowed in Ind AS-40 and provisions on Deferred taxes will
accordingly change.
3) Deferred tax in Business combination which reduces the G/W is credited to bargain purchase gain.
But in Ind AS it is transferred to Capital Reserves.

Some important points on Ind AS-12


Definitions
Accounting Pro it: (Same as AS-22)
Taxable Pro it: (Same as AS-22)
Tax expense (Same as AS-22)
Current tax
w The amount of income taxes payable (recoverable) in respect of the taxable pro it (tax loss) for
a period.

Indian Accounting Standards_All chapters.indd 22 05-01-2016 05:12:32 PM


Ind AS 12: Taxes on Income 23

Tax base
w It is the amount attributable to that asset or liability for tax purposes.
Deferred tax assets
w The amounts of income taxes recoverable in future periods.
Deferred tax liabilities:
w The amounts of income taxes payable in future periods.
Deductible temporary differences: it gives rise to DTA
w Carry forward of unused tax losses and credits.
Deferred tax liabilities:
w The amounts of income taxes payable in future periods.
Taxable temporary differences: it gives rise to DTL
Results in the payment of tax when the carrying amount of the asset or liability is settled.

DO YOU KNOW
When:
Tax base = Carrying Amount No DTA / DTL
For an Asset: Tax base > Carrying Amount DTA
For an Asset: Tax base < Carrying Amount DTL
For a liability: Tax base > Carrying Amount DTL
For a liability: Tax base < Carrying Amount DTA

Consolidated Financial Statements


1) Temporary differences can also arise from adjustments on consolidation.
2) Deferred tax is determined on the basis of the consolidated inancial statements and not the individual
entity accounts.
3) Therefore, the carrying value of an item in the consolidated accounts can be different from the
carrying value in the individual entity accounts, thus giving rise to a temporary difference.
4) An example is the consolidation adjustment that is required to eliminate unrealized pro its and losses
on intergroup transfer of inventory. Such an adjustment will give rise to a temporary difference,
which will reverse when the inventory is sold outside the group.refer Problem.

Indian Accounting Standards_All chapters.indd 23 05-01-2016 05:12:32 PM


24 Indian Accounting Standards

Diagram 1: Determination of deferred tax asset and liability

Is tax treatment
diffrent from Deffered tax accounting
NO
accounting not required
treatment

YES

Difference

Whether
economic
benefits Carrying value
NO
taxable/ = Tax Base
deductiable
in future
No differed
tax implications
YES

Asset - CV > TB Asset - CV < TB


Liability - CV < TB Liability - CV > TB

Taxable Deductible
temporary difference temporary difference

Differed tax liabillity Differed tax asset

PROBLEMS AND SOLUTIONS

Problem 1: An entity acquired plant and equipment for 10,00,000 on 1/4/2015. The asset is depreciated
at 25% a year on the straight-line basis, and local tax legislation permits the management to depreciate the
asset at 30% a year for tax purposes.
Required: Calculate any deferred tax liability that might arise on the plant and equipment at 31/3/2016,
20X4, assuming a tax rate of 30%.
Solution: The carrying value of the plant and equipment is 7,50,000 and the tax base = 7,00,000 written
down value. The taxable temporary difference= 50,000. DTL = 15,000.

Indian Accounting Standards_All chapters.indd 24 05-01-2016 05:12:32 PM


Ind AS 12: Taxes on Income 25

P roblem 2: Land carried in the balance sheet 45,00,000 as on 31/3/2016. It was revalued @ 40% upwards.
Tax rate 30%. Calculate the following: Carrying Amount, Tax base (TB), Deductible Timing Difference (DTD),
Deferred Tax Asset (DTA), Taxable Timing Difference (TTD), Deferred Tax Liabilities (DTL).
Solution: CA = 63,00,000, TB = 45,00,000, TTD = 18,00,000, DTL = 5,40,000 (the company will sell the asset
and then it has to pay tax on revaluation).
Land Dr 18,00,000
To Revaluation Reserves 18,00,000
Revaluation Reserves Dr 5,40,000
To DTL 5,40,000
P roblem 3: From the following calculate Carrying Amount, Tax base (TB), Deductible Timing Difference
(DTD), Deferred Tax Asset (DTA), Taxable Timing Difference (TTD), Deferred Tax Liabilities (DTL).
Problem 4: The following are some of the transactions related to Systis Co.
The following details for the year ended 31.03.2016, being the end of the reporting period, are given:
1. Interest receivable is 100,000 is included in the SOFP (balance sheet). This will be included in the
taxable pro it when cash is collected.
2. Development costs of 200,000 were incurred. They are capitalised and are to be amortised over
future periods when determining the accounting pro it. However, the amount is deducted when
determining the taxable pro it for the year 31.3.2016.
3. The cost of retirement bene its provided for (unpaid on end of the reporting period) of 50,000
while determining accounting pro its. However, the amount is deductible for tax purposes only when
contributions are paid into a fund.
4. Research costs worth 30,000 are recognised as an expense while determining the accounting pro its.
According to local tax laws, the amount is permitted as a deduction in the future on the ful illment of
certain conditions.
Show the effect of these transactions on the inancial statements of Systis Co. Tax 30%.
Solution:
Carrying Amount Tax Base Deductible TD Taxable TD DTA DTL
100000 (A) Nil - 100000 - 30000
200000 (A) Nil - 200000 - 60000
50000 (L) Nil 50000 - 15000 -
30000* 9000 - 9000
30000* it is the tax base which indicate the amount of deduction to be received in future. In Accounting Income it is
already expensed.
Net Summarised Entry:
DTA Dr 24,000
To P/L 24,000
P/L Dr 90,000
To DTL 90,000
Problem 5: An entity purchases plant and equipment for $2 million. In the tax jurisdiction, there are no tax
allowances available for the depreciation of this asset; neither are any pro its or losses on disposal taken into
account for taxation purposes. The entity depreciates the asset at 25% per annum. Taxation is 40%.
Required: Explain the deferred tax position of the plant and equipment on initial recognition and at the irst
yearend after initial recognition. Also calculate DTL / DTA.

Indian Accounting Standards_All chapters.indd 25 05-01-2016 05:12:32 PM


26 Indian Accounting Standards

Solution: Tax base = Nil, DTA/ DTL = Nil. The entity will not receive any tax bene it in any way from the asset.
It is a permanent difference.
Problem 6: Menulist Limited, a subsidiary of Catalogue Limited sold goods costing 10,00,000 to its parent
for 11,00,000 and all of these goods are still held in inventory at the year-end. Assume a tax rate of 40%.
Required: Explain the deferred tax implications.
Solution: The unrealized pro it of 1,00,000 will have to be eliminated from the consolidated income
statement and from the consolidated balance sheet in group inventory. The sale of the inventory is a taxable
event, and it causes a change in the tax base of the inventory. The carrying amount in the consolidated inancial
statements of the inventory will be 10,00,000, but the tax base is 11,00,000. This gives rise to a deferred tax
asset of 1,00,000 at the tax rate of 40%, which is 40,000.

Indian Accounting Standards_All chapters.indd 26 05-01-2016 05:12:32 PM


Chapter 7
Ind AS 16: Plant, Property and Eqipment

Ind AS-16 AS-16


Ind AS 16 is known as Plant Property Equipment (PPE) AS- 16 is known as Accounting for Fixed Assets.
Ind AS- 16 in total covers Fixed Assets and Deprecation. AS-10 Covers Fixed Assets and AS-6+Schedule II covers
Depreciation.
Recognition criteria for Fixed Asset are provided by the No such criteria given. If it looks like a fixed asset then it is
Standard economic benefit from the asset. fixed asset.
In line with Ind AS-37 ProvisionsCosts of dismantling No such provision made.
and site restoration is to form part of cost of asset at its
present value
Ind AS 16 provides 2 options for carrying the assets: (i) Once the Assets are recognized at cost subsequently they
Cost Model; (ii) Revaluation / Fair Value Model. It is one are revalued. Revaluation is based on certified valuation
of the A/C policy to be adopted by a company. It is to be and not on fair valuation.
regularly practiced. Revaluation is based on fair valuation.
Component accounting is mandatory by Ind AS 16. AS-10 does not mandate component a/c. But Schedule II
now mandates component a/c.
Cost of inspection and overhaul is dealt in greater details. Overhaul is to be written off immediately. Deferment is
Cost of overhaul should be depreciated over the next abandoned.
overhaul.
Cost of dismantling is a part of cost of asset at present Not considered.
value.
Abnormal costs of materials, labour is to charged to income Not provided.
a/c in case asset is self-constructed.
Accounting for deferred credit is covered. Not provided for. But a mention about Hire purchase
asset is being provided.
Fixed Assets jointly held or purchased on Consolidated It provides guidelines on jointly held as well as about asset
basis is not covered. acquired under consolidated consideration.
Review of depreciation method is based on more estimates Method of depreciation will undergo a change only if
(management work) allowed by law / statute.
Change in Depreciation method is a change in Accounting Change in Depreciation method is a change in Accounting
estimate. policy
Compensation for impairment receivable is to be disclosed Not provided.
in the profit/ loss statement.
Gain on sale of asset is not Revenue. But it is transferred to AS-10 is silent.
P/L.

Indian Accounting Standards_All chapters.indd 27 05-01-2016 05:12:32 PM


28 Indian Accounting Standards

Asset held out of active use or held for sale is separately Asset held out of active use or held for sale is covered in the
covered by Ind AS -105. existing standard which will be valued at carrying amount
or NRV whichever is less.
Assets acquired in consideration other than cash is based Assets acquired in consideration other than cash is based
on incoming asset (if FV can be reliably measured) on outgoing asset (if FMV of outgoing asset can be reliably
measured).
Stripping costs is covered by Standard Interpretation Stripping costs is not covered by AS-10.
Committee.

Differences between Ind AS-36 and IAS-36


1) A change in Historical cost can undergo a change due to government grant (reduction of grant from
cost of the asset)IAS-16. Ind AS 16 does not permit reduction of grant option towards the
cost of ixed asset. Hence Historical cost does not get affected by grants.
2) Fair Value model is not adopted in Investment property Ind AS 40.

Some Important Points on Ind AS-16


Scope of Ind AS-16
The requirements of Ind AS 16 are applied to accounting for all property, plant, and equipment unless another
Standard permits otherwise, except:
Property, plant, and equipment classi ied as held for sale in accordance with Ind AS-105
Biological assets relating to agricultural activity under Ind AS - 41
Mineral rights, mineral reserves, and similar non-regenerative resources

Total Classification of FA Ind AS-16


PPE used for business operations Vehicles owned and used for hiring Ind AS-16
purpose are FA
PPE classified as held for sale Any FA can be held for sale Ind AS 105
PPE constructed on behalf of third parties Bridge constructed under a contract with Ind AS 11 or Ind AS 115 (new)
the local municipal authority
Investment properties Building held for long term capital Ind AS -40.
appreciation.

Criteria for Recognition


An item of property, plant, and equipment should be recognized as an asset if and only if it is probable that
future economic bene its associated with the asset will low to the entity and the cost of the item can be
measured reliably. Any expenditure incurred that meets these recognition criteria must be accounted for as
an asset.

Measurement for Recognition


Cost in case of purchase in consideration of cash
An item of property, plant, and equipment that satis ies the recognition criteria should be recognized initially
at its cost. The Standard speci ies that cost comprises:
Purchase price, including import duties, nonrefundable purchase taxes, less trade discounts and
rebates.

Indian Accounting Standards_All chapters.indd 28 05-01-2016 05:12:32 PM


Ind AS 16: Plant, Property and Eqipment 29

Costs directly attributable to bringing the asset to the location and condition necessary for it to be
used in a manner intended by the entity
Initial estimates of dismantling, removing, and site restoration costs.
Examples of directly attributable costs include:
Employee bene its of those involved in the construction or acquisition of an asset
Cost of site preparation
Initial delivery and handling costs
Installation and assembly costs
Costs of testing, less the net proceeds from the sale of any product arising from test production (Trial
run).
Borrowing costs to the extent permitted by Ind AS 23, Borrowing Costs
Professional fees
Examples of costs that are not directly attributable costs and therefore must be expensed in the income statement
include:
Costs of opening a new facility (inaugural expenses)
Costs of introducing a new product or service e.g.: advertisement
Of ice and administration expenses e.g.: of ice rent
Advertising and promotional costs
Costs of conducting business in a new location or with a new class of customer
Training costs
Administration and other general overheads
Costs of incidental operations e.g.: cost of material for sample testing (not intended to be for commer-
cial reason)
Initial operating losses e.g.: loss of gross pro it due to low capacity.
Costs of relocating or reorganizing part or all of an entitys operations e.g.: costs of shifting business.
P roblem 1: Pollisure Limited is installing a new plant at its production facility. It has incurred these costs:
1) Cost of the plant (cost per suppliers invoice plus taxes) 75,00,000, includes refundable taxes 1,70,000
and non refundable taxes 6,45,000, 2) Initial delivery and handling costs 200,000, 3) Cost of site
preparation 5,00,000, 4) Consultants used for advice on the acquisition of the plant 700,000, 5) Estimated
dismantling costs to be incurred after 5 years 5,20,000, 6) Trial run costs : Materials 2,20,000, Labour
1,87,000, Overheads 1,70,000. The entire product was sold at 75% of cost. 7) Inauguration expenses
25,000, 8) Operating losses before commercial production 1,10,000. Discounting rate: 10%.
Required: Please advise Pollisure Limited on the costs that can be capitalized in accordance with Ind AS - 16.
Solution: According to Ind AS - 16, these costs can be capitalized:
Cost of the plant 75,00,000 - refundable taxes 1,70,000 +Initial delivery and handling costs
200,000 + Cost of site preparation 5,00,000 + Consultants used for advice on the acquisition of the plant
700,000 + PV of Estimated dismantling costs to be incurred after 5 years 3,22,879* + Trial run costs
: Materials 2,20,000+Labour 1,87,000+Overheads 1,70,000 Sale proceeds of trail run production
(187000+170000+220000)x0.75 = 95,37,129.
Inauguration expenses 25,000, Operating losses before commercial production 1,10,000 cannot be
capitalized. They should be written off to the income statement in the period they are incurred.
* PV of 520000 = 520000 / (1+0.10)5 = 3,22,879

Cost in Case of Exchange of Asset/Securities


Cost of incoming asset will be the FV incoming asset.

Indian Accounting Standards_All chapters.indd 29 05-01-2016 05:12:32 PM


30 Indian Accounting Standards

Cost of incoming asset (in case FV cannot be established) will be the carrying amount of the asset given
up. Carrying amount = Cost depn impairment.
Problem 2: Meccy Poly Firms purchases a Crane in exchange for branded furniture set. Details are as follows:
Fair Market Value Fair Value (FV) as Carrying Amount
(FMV) per Ind AS 113
Crane 15,00,000 14,50,000 12,30,000
Furniture set 15,33,000 15,70,000 18,00,000

Pass journals as per Ind AS 16 and AS 10.


Solution:
Ind AS 16 AS-10
Cost can be reliably Crane Dr 1450000 Crane Dr 1533000
measured Loss on sale 350000 Loss on sale 267000
To Furniture 1800000 To Furniture 1800000

Discussion on Componentisation, Spare Parts, Standby Equipment, Overhauling


as per Ind AS - 16
Component Accounting
Recognition: Useful life speci ied in the Schedule II to the Companies Act is for whole of the asset. Where
cost of a part of the asset is signi icant to the total cost of the asset and useful life of that part is different from
the useful life of the remaining asset, useful life of that signi icant part will be determined separately. Ind
AS and Schedule II mandates component approach, which is in line with international practices. It requires
companies to separately depreciate parts of an asset that are signi icant and have a useful life different from
the useful life of the asset as a whole. Previously companies use to charge component replacement to pro it /
loss account. But now it will be separately capitalised.
Deprecation: Depreciation of component is to be independently depreciated separate from remaining asset.
Example: Building and its Elevator can be treated as a separate component. Also Aircraft body and its engine
can be treated as 2 separate assets.
Derecognition: Old component will be eliminated (derecognized) and new asset will be recognized.
Depreciation of such component is independent of other assets.

Stand - By Equipment
Recognition: It is a separate asset and hence quali ies for PPE.
Deprecation: It is depreciated as per normal rates of Schedule II rates.
Derecognition: Old asset will be eliminated (derecognized) and new asset will be recognized. Depreciation
of such component is independent of other assets.

Major Spares
Recognition: Major spare parts also known as capital spare parts. They are used in relation to speci ic
machinery. They are capitalized when consumed.
Deprecation: Such spare parts are depreciated over the useful life of the principal asset.

Indian Accounting Standards_All chapters.indd 30 05-01-2016 05:12:32 PM


Ind AS 16: Plant, Property and Eqipment 31

Derecognition: When machinery spares and component parts are replaced the old part is derecognized and
new part is recognized. The depreciation of the replaced parts will be only to the extent of the life of old asset.

Other spare parts like consumables, maintenance supplies


Recognition: They are expensed to P/L on consumption.
Deprecation: N.A.
Derecognition: When such spares are replaced by new parts, the carrying amount of old part is continued
to be depreciated. Cost of new part is written off.

Presentation in B/S
Stand By Equipment Separate ixed asset
Unconsumed component / major spare parts capital wip ( ixed asset)
Unconsumed other spare parts Inventory (current asset)

Overhauling expenses (subsequently incurred)


Recognition: Regular inspections and overhaul charges Transferred to P/L.
Major inspections and overhaul charges (may be once in 3-4 years) Separately Capitalised
Deprecation: Such capitalized overhaul is to be depreciated till the next overhaul.
Derecognition: N.A.

Compensation for Impairment


Any compensation received for impairment or loss of an asset shall be included in the income statement.

Cost of an Asset in Case of Deferred Credit Terms


The cost of an asset is measured at the cash price equivalent at the date of acquisition. If payment is deferred
beyond normal credit terms, then the difference between the cash price and the total price is recognized as a
inance cost and treated accordingly. (for illustration refer Ind AS- 2).

Measurement after Recognition


After initial recognition of an item of property, plant, and equipment, the asset should be measured using
either the cost model or the revaluation model.
The cost model requires an asset, after initial recognition, to be carried at cost less accumulated depreciation
and impairment losses.
The revaluation model requires as asset, after initial recognition, to be measured at a revalued amount,
which is its fair value less subsequent depreciation and impairment losses. In this case, fair value must be
reliably measurable. Revaluations must be made with suf icient regularity to ensure that the carrying amount
is not materially different from fair value. However, if an asset is revalued, then the entire class of asset must
be revalued, again to avoid cherry-picking and a mixture of valuation bases.
Provisions regarding Revaluation with depreciation is same as AS-10. Upward / downward revaluations,
utilising of Revaluation surplus is also similar.
In Ind AS-16 Revaluation Surplus is to be credited to Other Comprehensive Income net off tax (DTL).

Derecognition
Derecognition is the opposite of recognition. The carrying amount of an item of property, plant, and equipment
shall be derecognized:

Indian Accounting Standards_All chapters.indd 31 05-01-2016 05:12:32 PM


32 Indian Accounting Standards

i) on disposal (disposal can be sale / entering into inance lease / donation), ii) when no future economic
bene it is expected from its use or disposal.
Any gain on disposal is the difference between the net disposal proceeds and the carrying amount of
the asset. Gains on disposal shall not be classi ied in the income statement as revenue, it will be shown as
Other Income.

DO YOU KNOW
Transferring an asset from use to Held for Sale is not dercognition but reclassification of asset.

Stripping Costs
In oil and gas exploration, exploration and production costs are accounted for using the successful efforts
method. Under this method, costs of successful exploratory drilling and drilling operations are capitalized as
property, plant, and equipment.
Successful drillings are depreciated based on the production and the estimated available resources.
Geophysical investigations, including unsuccessful exploratory drilling, exploratory and exploratory dry-hole
costs, are charged against income.

Provision for Depreciation


Remember provisions relating to Depreciation are same in Ind AS-16 and Schedule II.
Meaning of Depreciation, Rates (covered by Part C of Schedule II), Method (SLM, WDV and Units of
production method), provisions are same.
Derecognition of Depreciation: As per Ind AS- 16; Depreciation will be derecognized on Sale, on eliminating
an asset which provides no economic bene its, reclassi ication of asset from ixed asset to NCA Held for Sale
Ind AS 105.

Some problems on overhauling, spare parts, subsequent expenditure etc:

Problem 3: Zhanubori (P) Ltd purchases a complex Asset A on 1/4/2015. It consists of the following:
Cost (`) Estimated life
Component M 15,00,000 12 years
Major Spare part X 6,00,000 6 years
Remaining asset 17,00,000 16 years

Ignore estimated salvage value for all calculations.


Major part is replaced after 5 years at a cost of 6,50,000. Sale proceeds of old major part was 2,50,000.
Compute the Deprecation for the year 2019-2020 and the year 2020-2021.
Solution:
Date Component Remaining asset
n = 12 (including spare part)
n = 16
1/4/2015 Cost 15,00,000 23,00,000
5 years Provision for depreciation *(6,25,000) **(7,18,750)
31/3/2020 Carrying amount 8,75,000 15,81,250
Less: Spare part sold - ***(4,12,500)
Add: Addition - +6,50,000

Indian Accounting Standards_All chapters.indd 32 05-01-2016 05:12:32 PM


Ind AS 16: Plant, Property and Eqipment 33

31/3/2020 Balance 8,75,000 18,18,750


2020-2021 Depreciation (1,25,000) (1,65,341)

Depreciation for 2019-2020 = 125000+143750 = 2,68,750


Depreciation for 2020-2021 = 125000+165341 = 3.90.341.
* 625000 = 1500000 5 / 12 ; ** 718750 = 2300000 5/ 16;
*** Journal:
Cash Dr 3,80,000
Loss on sale 32,500
To Asset (spare) 4,12,500 (6,00,000 6,00,000 5/16)
Problem 4: Birdy Airways, an aviation company, acquired an aircraft for 21,00,000. The aircraft is expected
to have life of 15 years. Birdy Airways is required to have aircraft inspected every three years to ascertain
whether they are travel worthy.
Without the inspection, which requires a high degree of expertise, Samson Airways cannot operate the
aircraft. The cost attributable to inspection is 600,000.
Birdy acquired the aircraft on the previous inspection, which was carried out on 1 April 2017. As at 1 April
2020 Birdy Airways incurred 750,000 as the cost of the new inspection.
Required: Show the recognition of the costs.
Solution: Birdy Airways will recognize the aircraft at 15,00,000, depreciate it over 15 years and recognize
the inspection cost at 600,000 deprecating it over 3 years.

April 2017 to April 2020

Depreciation charge
Aircraft to be depreciated over 15 years = 1,500,000/15 years 100,000
inspection cost to be depreciated over 3 years = 600,000/3 years 200,000
Total depreciation to be recognized each year 300,000

April 2020 to April 2023


The company should recognize the inspection cost of 750,000 and derecognize the earlier cost:

Depreciation charge
Aircraft to be depreciated over 15years = 1,500,000/15 years 100,000
Inspection cost to be depreciated over 3 years = 750,000/3 years 250,000
Total depreciation to be recognized each year 350,000

Indian Accounting Standards_All chapters.indd 33 05-01-2016 05:12:32 PM


Chapter 8
Ind AS 17: Leases

Differences between AS-17 and Ind AS 17


AS-19 Ind AS 17
AS-19 completely scope out Lease on Land. It impliedly covers Land. In its scope for exclusion Land is
not being mentioned.
AS-19 is applicable from the date of the inception of lease. Ind AS-17 is applicable from the date of the commencement
of lease. Its makes a difference between commencement
and inception of lease.
Residual value is defined. Residual value is the GRV protion. Residual value is not defined.
When AS-19 was prepared by ASB, New Schedule III was Ind AS 17 makes a clear classification for lease receivables
not existing, hence the rentals receivables and payables and payables between current and non current portion.
does not have current and non current classification.
In case of Sale and Lease Back (SLB) transaction (finance Ind AS 17 considers the profit / loss on sale in case of Sale
lease) the profit or loss on sale is to be deferred in the ratio and Lease Back (SLB) transaction (finance lease) but does
of depreciation. not provide the guidance on the ratio of amortized.
Operating lease is covered by AS except 2 things: It considers both the aspect.
i) Price inflation
ii) Incentives
Initial Direct Costs: Initial Direct Costs:
FL: Books of lessee: Capitalise FL: Books of lessee: Capitalise
FL: Books of lessor: either expensed or deferred in the FL: Books of lessor: Expenses are included to compute
ratio of finance income IRR of the investments.
OL: Books of lessee: No asset OL: No asset
OL: Books of lessor: Either expensed or deferred in the OL: Books of lessor: Capitalised and then deferred in the
ratio of income. ratio of income.

Differences between IAS-17 and Ind AS 17


IAS-17 Ind AS 17
In case of Investment Property IAS-40 Fair Value model is It prohibits Fair Value model on Investment Property. Even
adopted. the lessees special case of operating lease interest is also
prohibited.

Indian Accounting Standards_All chapters.indd 34 05-01-2016 05:12:32 PM


Ind AS 17: Leases 35

Some Important Points on Ind AS-20


Scope: The Standard shall not be applied in the measurement of
Property held by lessees that is an investment property (see IAS 40)
Investment property provided by lessors under operating leases (see IAS 40)
Biological assets held by lessees under inance leases (see IAS 41)
Biological assets provided by lessors under operating leases (see IAS 41)

Special provision on Land in Ind AS 17


Leases of land, if title is not transferred, are classi ied as operating leases, as land has an inde inite
economic life.
If the title to the land is not expected to pass to the lessee, then the risks and rewards of ownership
have not substantially passed, and an operating lease is created for the land.
Leases of land and buildings need to be treated separately, as often the land lease is an operating lease
and the building lease, a inance lease. Dif iculties arise because the minimum lease payments need
to be allocated between the land and the building element in proportion to their relative fair values
of the leasehold interests at the beginning of the lease. If the allocation cannot be made reliably, then
both leases are treated as inance leases or as operating leases, depending on which classi ication the
arrangement more clearly follows.
If the lessee is to classify the land and buildings as investment property under IAS 40 and the fair value
model is adopted (the required model for operating leases under IAS 40), then separate measurement
is not required. Under IAS 40, property held by a lessee under an operating lease can be classi ied as
investment property and accounted for as if it were a inance lease. But Ind AS-40 prohibits this.

PROBLEMS AND SOLUTIONS

Problem 1: Duruyog Zanmash Firm has entered into a lease of property whereby the title to the land does
not pass to the entity at the end of the lease but the title to the building passes after 15 years. The lease
commenced on 1/4/2015, when the value of the land was 540 lakhs and the building value was 180 lakhs.
Annual lease rentals paid in arrears commencing on 31/3/2016, are 60 lakhs for land and 20 lakhs for
buildings. The entity has allocated the rentals on the basis of their relative fair values at the start of the lease.
The payments under the lease terms are reduced after every 6 years, and the minimum lease term is 30 years.
The net present value of the minimum lease payments at 1/4/2015, was 400 lakhs for land and 170 lakhs
for buildings. The buildings are written off on the straight-line basis over their useful life of 15 years. Assume
an effective interest rate of 7%.
Required: Discuss how DZ Firm should treat this lease under Ind AS 17.
Solution: Ind AS 17 requires the substance of the transaction to be reviewed and the extent to which the risks
and rewards of ownership of the leased asset are transferred to be determined. If the risks and rewards of
ownership are substantially transferred to the lessee, then the lease is a inance lease. The Standard requires
the land and buildings elements to be considered separately. Normally a lease of land will be regarded as an
operating lease unless the title passes to the lessee. In this case the title does not pass and the present value
of the lease payments is only 74% of the fair value of the land, which does not constitute substantially all of
the fair value of the leased asset, one of the criteria for the determination of a inance lease. Land will not be
recorded as an asset.

Indian Accounting Standards_All chapters.indd 35 05-01-2016 05:12:32 PM


36 Indian Accounting Standards

In the case of the building, the title passes after 15 years, and the lease runs for the whole of its economic
life, which indicates a inance lease. The present value of the minimum lease payments is 94% of the fair value
of the lease at its inception, an amount that indicates that the lessee is effectively purchasing the building.

ExtractsDZ Firms (Lessee) Balance sheet as on 31/3/2016 (` lakhs)

Liabilities Assets
Non Current portion
Lessor Ltd 164.68 Building (180 12) = 168

Current portion
Lessor Ltd 7.92

Dr Revenue Statement Cr
Depreciation on Bldg 6.00
Finance exp. 12.06
Operating lease 60.00

WN: Calculation of Finance charges for 2 years

Opening balance Effective Interest 7% MLP Principal Portion Balance


180.00
180.00 12.6 20 7.4 172.6
172.6 12.08 20 7.92 164.68

Problem 2: Muradan Bros leases an asset on operating lease basis 100000 per annum. As an incentive
it also provided the incentive of compensating all the relocation costs. Estimated relocation costs will be
20,000. Lease is for 5 years. Compute Annual lease.
Solution:
Gross lease = 100000 5 = 500000 less 20000 = 4,80,000
Rent per annum = 96,000 (480000/5)

Indian Accounting Standards_All chapters.indd 36 05-01-2016 05:12:33 PM


Chapter 9
Ind AS 19: Accounting for Employees Benefits

Ind AS-19 AS-15


For discounting the future benefits companies in India AS-15 considers the government yield / T-Bill rate for
apply government yield rate. For foreign operations quality discounting the LTB / RB.
bond rate should be considered as a discounting rate for
the long term / retirement benefits.
The Actuarial g/l is immediately consumed but transferred The Actuarial g/l is immediately consumed by the profit /
to Other Comprehensive Income (OCI) account. loss account.
Employee expenses accrue not only because of statutory Not covered.
act, agreement, but also due to some informal practice
(constructive obligation).
Timing of recognition of termination benefit is based on No such guidance is provided (We just depend upon AS-29
some specific events. Under Ind AS, termination benefits for recognition). Under Indian GAAP, termination benefits
are required to be provided when the scheme is announced are required to be provided for based on legal liability
and the management is demonstrably committed to it. when employee signs up for the Voluntary Retirement
Scheme (VRS) rather than constructive liability.
Share of an entity in the defined benefit plan attracts Not covered.
related party disclosures (Ind AS-24).
Financial assumptions should be purely market based. Not mentioned, i.e. it may be a rate out of experience and
Example: of Financial assumptions can be discount rate, not market rate.
future salary, return on plan assets, inflation etc.
Guidance on minimum contribution in the plan asset is No such guidance provided.
provided.

(Differences between Ind AS-19 and IAS-19) (Carve Outs)


1) The major difference between Ind AS-19 and IAS 19 is that: Ind AS provides for application of
government yield rate. For foreign subsidiaries, joint ventures etc quality bond rate should be
considered for discounting the long term / retirement bene its.
IAS fully prefers the quality bond rate for discounting the long term / retirement bene its.
2) Guidance on ceiling of asset is provided in a separate appendix in Ind AS-19. The same is dealt by
IFRIC 14 for IAS -19.
3) As per IAS 19: The recognition of actuarial gain / loss has 3 options:
i) write off immediately ;
ii) corridor approach of 10% ;
iii) Fast write off: The entire g/l amortized equally over the balance life of employees.

Indian Accounting Standards_All chapters.indd 37 05-01-2016 05:12:33 PM


38 Indian Accounting Standards

In case of Ind AS-19: The Actuarial g/l is immediately consumed by the pro it / loss account but
routed through OCI.

Some more important points on Ind AS-19


1) Informal practice covered
As per Ind AS 19 the employee costs can also arises due to informal practice. Obligations are normally
enforceable due to statutory act, agreement, but some - times due to some informal practice provisions are
required to be made. (This is discussed in Ind AS-37)
Example: Workers have rendered the service for the year ended 2015-16 hence a provision is necessary for
bonus for 2015-16 even if it is paid in November 2016. Bonus becomes constructive obligation either due to
the bonus act, due to an agreement between employer and employee or sometimes bonus has to be provided
for keeping good business relations. Also refer Ind AS- 37 Provisions.

2) Recognition principles for Termination benefits


In Ind AS-19 Termination bene its are provided based on some events to take place. It is the earlier of the
following events:
i) when the entity can no longer withdraw the offer of those bene its, (ii) when the entity recognizes costs
for a restructuring that even includes cost of Termination bene its.

3) Balance Sheet presentation


The amount recognized in the balance sheet could be either an asset or a liability calculated at the balance
sheet date.
The amount recognized will be:
The present value of the de ined bene it obligation, xxx
Less: Any past service cost not yet recognized, xxx
Less: The fair value of the plan assets xxx
xxx
If the result of the preceding calculation is a positive amount, then a liability is incurred, and it is recorded
in full in the balance sheet.
Any negative amount is an asset that is subject to a recoverability test.
The asset recognized is the lesser of:
The negative amount calculated above XXX
The net total of any [unrecognized past service costs + the present value of any benefits available in the
form of refunds or reductions in future employer contributions to the plan. XXX
XXX

Illustration: An entity has these balances relating to its de ined bene it plan:
Present value of the obligation: 33,00,000
Fair value of plan assets: 37,00,000
Past service cost: 200,000 unrecognized
Present value of available future refunds and reduction in future contributions: 2,00,000
Required: Calculate the value that will be given to the net plan asset under Ind AS - 19.
Solution:
The present value of the de ined bene it obligation 33,00,000

Indian Accounting Standards_All chapters.indd 38 05-01-2016 05:12:33 PM


Ind AS 19: Accounting for Employees Benefits 39

Less: Any past service cost not yet recognized, (2,00,000)


Less: The fair value of the plan assets (37,00,000)
Asset balance subject to recoverable test (6,00,000)
PV of future refunds and reduction in future contributions + Past service cost 4,00,000
(200000 + 200000)
Plan Asset is to be written off 2,00,000
Pro it/loss A/C 2,00,000
To Plan Assets 2,00,000

IFRIC 14- The Limit on a Defined Benefit Asset, Minimum Funding Requirements:
Sometimes minimum contribution amount is set between an entity and a plan. However, if required
contribution is less than the contractual minimum contribution, such excess results in economic asset in the
form of right to receive refund. On the face of SOFP, such asset can be recognised under IFRIC 14. Eg. Minimum
contribution 100000, Required contribution 80000 (as per actuarial valuation), Excess contribution paid
20000. This is treated as an Asset.
Problem 1: Comment on the recognition of actuarial gain / loss:
1/4/2016 The present value of the de ined bene it obligation 4,00,000
1/4/2016 Opening unrecognized actuarial gains 70,000
1/4/2016 Fair value of the plan assets 3,20,000
Actuarial gains on liabilities during the year 32,000 and Actuarial loss on plan assets during the year
5,000.
Remaining life of the employees is 12 years.
Calculate Actuarial gain/loss as per AS-15 and Ind AS-19.
Solution:
1) AS PER INDIAN GAAP AS-15: The entire net actuarial gain 27,000 (32-5) is transferred to
pro it/loss. The entire gain 27,000 is transferred to P/L under the head Employee cost.
2) AS PER Ind AS - 19: The entire actuarial gain 27,000 is transferred to other comprehensive income
account.
3) AS PER IAS 19 following 3 options available:
i) Corridor Approach of 10%
Step 1: Higher of 10% of PV of obligation or FV of plan assets = 10% of higher of (400000 or
320000) = 40,000.
Step 2: Excess of 70,000 over corridor approach =
i.e. opening cumulative actuarial g/l Step 2 = 30,000
Step 3: Gain credited to Other Comprehensive Income = Step 2 / N = 30000 / 12 = 2500.
Now balance actuarial gain c/f = 70000 + 27000 2500 = 94,500.
ii) Fast write off: The accumulated gain is to be written off equally over balance period =
(70000+27000) / 12 = 8083
iii) Transfer the entire actuarial gain / loss of 42,000 to OCI.

Indian Accounting Standards_All chapters.indd 39 05-01-2016 05:12:33 PM


Chapter 10
Ind AS 20 / IAS 20: Accounting for Government
Grants and Disclosure of Government Assistance

Differences between AS-12 Accounting for Government Grants and Ind AS 20


AS-12 Ind AS 20
It does not cover Government assistance It covers Government assistance. Such Government
assistance should be disclosed.
For Depreciable Assets: Its Capital approach (less from Government grants should be recognized as income, on
asset) or even deferred. a systematic and rational basis, over the periods necessary
For Non - Depreciable Assets: Its Capital Reserve if to match them with the related costs. As a corollary, and
conditions complied. Deferred if conditions are complied. by way of abundant precaution, the Standard reiterates
that government grants should not be credited directly
to shareholders interests This means crediting to Capital
Reserve or reduction from asset is not allowed.
Promoters Contribution: Credited to Capital Reserve Promoters Contribution: Grants should be recognized as
under the head shareholders funds income, on a systematic and rational basis, over the periods
necessary to match them with the related costs.
Non Monetary Grants: NMG are recorded at concessional Non Monetary Grants: NMG are recorded at Fair Value
price (acquisition cost) or nominal value. only.
Does not cover Forgiven loans Covers Forgiven loans as a grant.
No guidance on concessional loans as per AS-12. Concessional loans are treated at par with Ind AS-109
Financial Instruments effective interest method.
Giving back the grant by the entity is known as Refund of Giving back the grant by the entity is known as Repayment
Government Grant. of Government Grant.
Refund of Government Grant as per AS-12 as well as by Repayment of Government Grant as per Ind AS-12 is
AS-5 is known as Extra ordinary activities. known as change in Accounting estimates.
Grants for the compensation of past losses or grants for Grants for the compensation of past losses or grants for
immediate financial support should be transferred to immediate financial support should be transferred to P/L
Extra-ordinary a/c a/c

Differences between IAS-20 and Ind AS 20


IAS-20 Ind AS 20
Non Monetary Grants: NMG can be recorded either at Non Monetary Grants: NMG are recorded at Fair Value
fair value or at or nominal value. only. Nominal Value not allowed.
Capital approach (less from asset) or deferment of income Government grants should be recognized only on deferred
is optional. basis. Reduction from asset is not allowed.

Indian Accounting Standards_All chapters.indd 40 05-01-2016 05:12:33 PM


Ind AS 20 / IAS 20: Accounting for Government Grants and Disclosure of Government Assistance 41

Presentation of grants related to income: As per Ind AS-1 grants related to the income should be
As per IAS-1 it should be shown under OCI. shown in the normal P/L account. Here CI and OCI is same.

Some Important Points on Ind AS-20


Government assistance, according to the Standard, is action by the government aimed at providing
economic bene its to some constituency by subsidizing entities that will provide them with jobs, services, or
goods that might not otherwise be either available or available at a desired cost. Depending on the nature of
the assistance given and the associated conditions, government assistance can be of many types, including
grants, forgivable loans, and indirect or nonmonetary forms of assistance, such as technical advice, free legal
advice, guarantee. Government assistance may not be recorded but requires disclosure.
IAS 41: Ind AS-20 does not covers the Government grants related to IAS 41.
General Grants: Government grants to all like LPG Subsidy to all companies is not covered by IAS 20. This
is because Ind AS 20 is applicable to entity speci ic grants.
Fair value: The amount for which an asset could be exchanged between a knowledgeable, willing buyer and
a knowledgeable, willing seller in an arms-length transaction.
Forgivable loans: Those loans that the lender undertakes to waive repayment of under certain prescribed
conditions.

PROBLEMS AND SOLUTIONS

P roblems 1: Zallosh Limited received a grant of 60,00,000 to compensate it for costs it incurred in planting
trees over a period of ive years. Zallosh Ltd. will incur such costs in this manner:
Year Costs
1 20,00,000
2 40,00,000
3 60,00,000
4 80,00,000
5 100,00,000
Total costs thus incurred will aggregate to 300 lakhs, whereas the grant received is 60,00,000.
Required: Based on the provisions of IAS 20, how would Brilliant Inc. treat the grant in its books?
Solution: Applying the principle outlined in the Standard for recognition of the grant, that is, recognizing the
grant as income over the period which matches the costs using a systematic and rational basis.
Year Grant recognized as deferred
1 60,00,000 (20/300) = 4,00,000
2 60,00,000 (40/300) = 8,00,000
3 60,00,000 (60/300) = 12,00,000
4 60,00,000 (80/300) = 16,00,000
5 60,00,000 (100/300) = 20,00,000
P roblems 2: Xellon Ltd received a land by paying 6,00,000 to the government for construction a factory
run by a group of minority. The FV of the land at present is 50,00,000. The life of the factory is estimated to
be 25 years. Pass journal entries as per Ind AS-20 for acquisition of land.

Indian Accounting Standards_All chapters.indd 41 05-01-2016 05:12:33 PM


42 Indian Accounting Standards

Solution:
Land Account Dr 5,00,0000 (As per Ind AS-20 NM grant recorded @FV)
To Cash 6,00,000
To Deferred Grant 44,00,000
(the grant will be deferred over 25 years to P/L 176000 p.a.)
P roblems 3: Forgivable loans: Natushara Bevan Cosmo is an export company has received the attention
of the State government of Gujarat. A loan outstanding 700 lakhs payable to ICICI Bank was waived by the
government by 10%. Account as per Ind AS-20.
Solution:
Loan from ICICI Account Dr 100 lakhs
To Income 100 lakhs
Problems 4: Concessional loans: Manusumti Watkar Ltd is dealing in organic farming as one of the
business activities. The company had taken a loan of 200 lakhs from Canara Bank under the instruction
of government. Manusumti is required to pay just 6% as interest. The market rate is 8%. Account as per Ind
AS-20. Even the repayment of 10% of the loan will be additionally waived if the loan is repaid within 4 years.
The company decides to repay the loan at the end of 4 years.
Solution:
Calculation of PV of Loan: (same as Ind AS-109 or AS-30amortized cost) lakhs

Year Cash flows PVF 8% PVCF Opening Effective Cash Amort. Balance
balance Interest Flows
0 172.05
1 12 0.9259 11.111 172.05 13.764 (12) 1.764 173.81
2 12 0.8573 10.288 173.81 13.905 (12) 1.905 175.72
3 12 0.794 9.53 175.72 14.06 (12) 2.06 177.78
4 192* 0.735 141.12 177.78 14.222 (192) --- ---
PV = 172.05

The difference between 200 and 172.05 will be deferred in the ratio of interest and principal bene it. The
bene it for 4 years = 1.764 : 1.905 : 2.06 : {2.222+20 principal) = 1.764 : 1.905 : 2.06 : 22.222.
Journal for yr 1: ( lakhs)
Cash A/C Dr 172.05 (fair value)
To Loan from Canara Bank 200
To Deferred grant 27.95
Finance cost A/C Dr 13.764 (trf to P/L)
To Cash 12
To Loan from Cosmo Bank 1.764
Deferred grant A/C. Dr 1.764
To Pro it / Loss Account 1.764
Problem 5: On 1 October 2006 Epsilon opened a new factory in an area designated by the government as
an economic development area. On that day the government provided Epsilon with a grant of $20 million to
assist them in the development of the factory. This grant was in two parts:
(i) $12 million of the grant related to the construction of a large factory at a cost of $60 million. The land
was leased so the whole of the $60 million is depreciable over the estimated 30 year useful life of the
factory.

Indian Accounting Standards_All chapters.indd 42 05-01-2016 05:12:33 PM


Ind AS 20 / IAS 20: Accounting for Government Grants and Disclosure of Government Assistance 43

(ii) The remaining $8 million was received subject to keeping at least 200 employees working at the
factory for a period of at least ive years. If the number drops below 200 at any time in any inancial
year in this ive year period then 20% of the grant is repayable in that year. From 1 October 2006
250 workers were employed at the factory and estimates are that this number is likely to increase
over the next four years. Your assistant has recognised the $12 million received in respect of the
factory as a credit to the income statement in the current year, on the basis that the factory has been
constructed and brought into use. He has not recognized any of the $8 million employment grant on
the basis that this is potentially repayable. He has charged $2 million in depreciation to the income
statement. Comment.
Solution: Accounting for government grants is dealt with by Ind AS 20 accounting for government grants
and disclosure of government assistance. The basic principle of Ind AS 20 is that grants should be recognised
as income over the periods necessary to match them with the related costs which they are intended to
compensate, on a systematic basis.
Where the grant relates to an asset Ind AS 20 allows deferred method of presentation in the balance sheet.
In this case this would mean recognising $400,000 ($12 million x 1/30) as a credit to the income statement
in the current year with the balance of $116 million ($12 million $400,000) shown in the balance sheet as
a liability. $400,000 of this amount would be shown as a current liability with the balance of $112 million
shown as a non-current liability.
The same principle applies to the grant related to the employment of staff. The grant is probably not going
to be repaid so delaying recognition is inappropriate. Unless the likelihood of repayment is remote then it
would be appropriate to disclose the possible repayment as a contingent liability. $16 million ($8 million
x 1/5) of the employment grant should be recognised in the income statement for the current year. Ind AS
20 allows this amount either to be shown as other income or as a reduction in the relevant expense. The
unrecognised balance of $64 million ($8 million $16 million) would be shown as deferred income, with
$16 million shown as a current liability and $48 million as a non-current liability.
But has the company followed AS-12 or IAS 20 the grant related to the asset would have even be reduced
from the asset.

Indian Accounting Standards_All chapters.indd 43 05-01-2016 05:12:33 PM


Chapter 11
Ind AS 21: Effects of Changes in Foreign
Exchnage Rates

Ind AS-21 AS-11


Foreign Exchange Contracts for Hedging and Speculation AS-11 (Rev) which was revised in 2003 included Foreign
is a part of Ind AS- 109 (Financial Instruments) and not Ind Exchange Contracts for Hedging and Speculation as a part of
AS -21. AS-11. At that time there was no accounting standard in
India relating to Financial Instruments.
Ind AS -21 works on functional currency, foreign currency AS -11 is based on reporting currency and foreign currency.
and presentation currency
Classification of Foreign Operations into Integral Foreign The entire translation of Foreign Operations into Integral
Operations and Non - Integral Foreign Operations is Foreign Operations and Non - Integral Foreign Operations
irrelevant. The translation of Foreign Operations depends is necessary.
upon functional currency.
As such Ind AS-21 does not cover the special treatment A combined reading of Central Governments notification
for Foreign Currency Long Term Monetary Item (FCLTMI), dated 2011-12 as well as AS-11 para 46A ; any exchange
but as per Ind AS-101 an entity may continue to follow the difference on account of Foreign Currency Long Term
accounting policy as per the old GAAP for FCLTMI. Monetary Item (FCLTMI) is adjusted towards Fixed asset
A/C. But if the FCLTMI is used for some other purpose then
it is amortized equally to profit / loss a/c.

Differences between Ind AS-21 and IAS-21


As per IAS 21 a change in functional currency requires disclosure. As per Ind AS-21 the change in the
functional currency also requires the date when the change took place.

Here, I am require to rewrite the entire Ind AS - 21. It is very different from AS 11 (Rev)

Some Important Definitions


1) Functional currency: Functional currency is the currency of the primary economic environment in
which the entity operates.
2) Closing rate: The spot exchange rate at the balance sheet date.
3) Spot rate: The exchange rate for immediate delivery.

Indian Accounting Standards_All chapters.indd 44 05-01-2016 05:12:33 PM


Ind AS 21: Effects of Changes in Foreign Exchnage Rates 45

Ind AS-21 stress on Functional Currency. First lets determine the entitys
FUNCTIONAL CURRENCY
The functional currency should be determined by looking at several factors. This currency should be the one
in which the entity normally generates and spends cash and in which transactions are normally denominated.
All transactions in currencies other than the functional currency are treated as transactions in foreign
currencies. Five factors can be taken into account in making this decision: the currency.
Factors:
(1) That mainly influences the price at which goods and services are sold
(2) Of the country whose competitive forces and regulations mainly influence the entitys pricing policy
(3) That influences the material, labour costs of the entity
(4) In which finance is generated
(5) In which receipts from operating activities are retained

P roblems 1: From the following determine Functional Currency of Polar Bills Inc Ploar Bills Inc is an UK
based company.
1) It pays 90% of cost of materials and labour in . (ignore other conditions)
2) It exports goods outside UK. Exports accounts for 50% of sales. It collects proceeds on a/c of sales in
various currencies but converts it into and retains it. (ignore other conditions)
3) Almost 95% inance raised by Ploar Bills Inc is indigenous in terms of loan notes and equity (ignore
other conditions).
4) Materials are purchased from Italy (almost 100%). Even 80% goods are sold in Italy. 20% goods are
sold in local market plus Asian Countries.
Solutions: 1) , 2) , 3) , 4) .

DO YOU KNOW
An entity incorporated/registered in India where prevails may have any other currency as functional currency

After determining the Functional Currency of an entity now lets decide the Functional Currency of
FOREIGN OPERATIONS. One has to de ine the functional currency of Foreign Operations.

LETS DECIDE THE FUNCTIONAL CURRENCY OF FOREIGN OPERATIONS


Foreign operation : FO is a subsidiary, associate, joint venture, or branch whose activities are based in
another country.
An entity will have to determine the functional currency of a foreign operation, such as a foreign subsidiary,
and whether it is the same currency as that of the reporting entity.

Factors

(1) If the activities of foreign entity is an extension of the reporting entity business then Functional currency of
Foreign Operation = Functional currency of Reporting Entity.
(2) If the proportion of Foreign Operations transactions are in high proportion with the Reporting Entity then
Functional currency of Foreign Operation = Functional currency of Reporting Entity.
(3) If enough autonomy is given to the Foreign Operation: then Functional currency of Foreign Operation Functional
currency of Reporting Entity.
(4) If the funds raised by Foreign Operation will be repaid by Reporting Entity then Functional currency of Foreign
Operation Functional currency of Reporting Entity.

Indian Accounting Standards_All chapters.indd 45 05-01-2016 05:12:33 PM


46 Indian Accounting Standards

P roblems 2: From the following determine Functional Currency of Solepal Ltd an Indian Subsidiary of Polar
Bills Inc an UK based company.
1) Loans 40 lakhs and Equity 10 lakhs is carried in the books of Solepal Ltd. The entire loans will be
repaid by the Parent Co. (ignore other conditions)
2) Solepal Ltd manufactures auto products and sells the same to its parent company Polar Bills. 90% of
goods sold re lect inter - company sales. (ignore other conditions)
3) Solepal Ltd is acting as a inancing arm completely devoted towards its parent company.
(ignore other conditions)
Solutions: 1) , 2) , 3) .
HOW TO CONVERT THE FOREX TRANSACTIONS AS WELL AS A FOREGIN OPERATION WHOSE CURRECNY IS NOT
FUNCTIONAL CURRENCY INTO ITS REPORTING ENTITYS CURRENCY.

Foreign Transactions: Transactions which requires settlement in Foreign Currency. Foreign Currency is the
currency other than Functional Currency.
Example: If Solepal Ltd an Indian Subsidiary of Polar Bills Inc an UK based company. If Solepal Ltd adopted
functional currency as (same as Reporting entity) then Conversion rules does apply.
IF Solepal Ltd adopts functional currency as Conversion rules applies (discussed below).
Also any Foreign Exchange transaction of Polar Bills also requires Conversion rules.
Conversion of Foreign Currency to Functional Currency. (Same as AS 11)

Financial Item Exchange Rate


Monetary item Closing Rate
Non Monetary item carried @ Historical Cost Historical Rate
Non Monetary item carried @ Fair Value Closing Rate
Revenue Items Actual / Average Rates

Problems 3: Mandekle Parameters Ltd sold goods worth $ 1000 to Greeny Doll Inc on 1/2/2016. The
functional currency as of Mandekle is . Exchange rates: 1/2/2016: 1$ = 60, 31/3/2016: 1$ = 61,
31/5/2016: 1$ = 62.50.
Pass journal entries from inception till settlement in the books of Mandekle. What will be the answers if
the functional currency of Mandelke was $.
Solutions:
If functional currency is ` If functional currency is $
1/2: Trade receivables Dr 60000 1/2: Trade receivables Dr $1000
To Sales 60000 To Sales $1000
31/3: Trade receivables Dr 1000 31/3: No Entry
To Fx gain (P/L) 1000
(receivables are monetary items valued at closing rate)
31/5: Trade receivables Dr 1500 31/5: Cash Dr $1000
To Fx gain (P/L) 1500 To Trade receivables $1000
Cash Dr 62500
To Trade receivables 62500

P roblem 4: Tarape Ltds functional currency is Rupee. It has a building located in US acquired at a cost of
US$ 10,000 when the exchange rate was US$ 1=50. The building is carried at cost in the inancial statements
of T Ltd. For the purpose of this example depreciation is ignored. At the balance sheet date, there is an

Indian Accounting Standards_All chapters.indd 46 05-01-2016 05:12:33 PM


Ind AS 21: Effects of Changes in Foreign Exchnage Rates 47

indication of impairment for this building. Consequently, an impairment test has been made in accordance
with Ind AS 36 as at the balance sheet date and the recoverable amount of the building is determined to be
US$ 9,500. The exchange rate as at the balance sheet date is US$ 1= 53. Recoverable amount on 31/3 was
$9500.
Solution: Though there is an impairment loss of US$ 500 (US$10,000-US$9,500) in terms of foreign currency,
there is no impairment loss in terms of functional currency. This is because, recoverable amount in terms of
functional currency (503,500) exceeds carrying amount (ie cost in this example) in terms of functional
currency (500,000). Hence, no impairment loss is recognised for the building.
Problem 5: Managme Ltds functional currency is Rupee. It has a building located in US acquired at a cost of
US$ 10,000 when the exchange rate was US$ 1=50. The building is carried at cost in the inancial statements
of M Ltd. For the purpose of this example depreciation is ignored. At the balance sheet date, M Ltd has decided
to revalue upwards the property as per Ind AS-16. The MV = $ 15,000. The exchange rate as at the balance
sheet date is US$ 1= 53.
Solution: The revaluation gain of $15000 (53-50) i.e. 45,000 is transferred to Revaluation Reserves. If the
revaluation gain is transferred to Equity (Reserves) the corresponding Fx gain will also be transferred to
Equity.
Transfer of Exchange Difference : Same as Indian GAAP AS-11

Particulars (refer AS-11 for better understanding) Exchange Difference (it is same as AS-11)
Exchange difference to the extent interest is saved on Capitalized to Qualifying asset
borrowings taken for qualifying assetspara 4 (e) of
AS-16
Generally (as per Ind AS-21) / AS-11 Profit / loss
Exception to Ind AS 21 / AS-11para 15. exchange Retained under the head Foreign Currency Translation
differences arising on monetary items that form part of the Reserve A/C.
reporting entitys net investment in a foreign operation
Central Government circular Long term monetary item Adjusted in Fixed Asset
used for acquire Depreciable Fixed Assets
Central Government circular Long term monetary item Amortized equally over loan repayment date under the
used for other purpose head Foreign Currency Monetary Item A/C.
Non - Monetary Asset is revalued upwards Revaluation Reserves.

For problems on above please refer AS-11 (Rev).


AS PER Ind AS -21 IT IS NOT ENOUGH THAT THE FINANCIAL STATEMENTS ARE RECORDED AT
FUNCTIONAL CURRENCY. IF THE PRESENTATION CURRENCY IS NOT SAME AS FUNCTIONAL CURRECNY
THEN FOLLOWING PROCEDURE IS TO BE ADOPTED.
Presentation currency: The currency that is used to present the inancial statements.

DO YOU KNOW
In most of the cases the Functional Currency is same as Presentation Currency..its like every
Maharashtrian speaks Marathi.

Note this: Foreign Currency Functional Currency Presentation Currency.

Indian Accounting Standards_All chapters.indd 47 05-01-2016 05:12:33 PM


48 Indian Accounting Standards

TRANSLATION TO THE PRESENTATION CURRENCY FROM THE FUNCTIONAL


CURRENCY
An entity can present its inancial statements in any currency. If the presentation currency differs from the
functional currency, the inancial statements are retranslated into the presentation currency. If the inancial
statements of the entity are not in the functional currency of a hyperin lationary economy, then they are
translated into the presentation currency in this way:
Assets and liabilities (including any goodwill arising on the acquisition and any fair value adjustment)
are translated at the closing spot rate at the date of that balance sheet.
The income statement is to be translated at the spot rate at the date of the transactions. (Average rates
are allowed if there is no great luctuation in the exchange rates.)
All exchange differences are recognized in a separate component of equity.

Any exchange difference that relates to the minority interest is recognized in the balance sheet amount.
P roblem 6: The Balance Sheet of Zanoloma Inc a British subsidiary as on 31/3/2016 is provided to you.
(Foreign Operation problem)

Liabilities Assets Additional information:


Opening rate 1 = $ 2
Share Capital 20000 Fixed Assets (Cost Depn) 52000
FA acquisition rate 1=$1.8
Net Profit 60000 Inventories (Cost) 8000 Inventory 1 = $ 2.5
Payables 10000 Receivables 30000 Closing rate 1 = $ 2.8
90000 90000 Average rate 1 = $ 2.4

The Functional currency of its Parent Company is $ as it is incorporated in USA, but it has opted for a
different Presentation currency i.e. . The exchange rate between $ and Yens is given below:
Opening rate: 1$ = 106.30, Closing rate: 1$ = 106, Average rate: 1$ = 105. The shares acquired by the
Parent company was on 1/4/2015.
You are required to update the above Balance Sheet of Zanoloma Inc for Consolidation purpose into the
Presentation Currency of its Parent Company.
Solution:
Step1) Convert the B/S of Subsidiary from Foreign Currency to Functional currency $.
Step2) Convert the B/S further from Functional currency $ to Presentation Currency .
Step3) Consolidate the Financial Statements.
Here only the irst 2 steps are applicable.

B/S of Subsidiary from Foreign Currency to Functional currency $.

Liabilities $ Assets $
Share Capital @2 40000 Fixed Assets @1.8 93600
Net Profit @ 2.4 144000 Inventories @2.5 20000
Payables @2.8 28000 Receivables @ 2.8 84000
Fx loss (Dr) 14400
212000 212000

Non Monetary items carried @ Historical cost like share capital, FA, inventories are valued at spot rates.
Monetary items valued at Closing rate.
All Monetary and Non Monetary items at closing rate.

Indian Accounting Standards_All chapters.indd 48 05-01-2016 05:12:33 PM


Ind AS 21: Effects of Changes in Foreign Exchnage Rates 49

The balance in equity Yens 144000r re lects the Fx equity reserve A/c.

B/S of Subsidiary from Functional currency $ to Presentation currency s

Liabilities Assets
Share Capital @106 4240000 Fixed Assets @106 9921600
Net Profit @ 105.....avg 15120000 Inventories @106 2120000
Payables @106 2968000 Receivables @ 106 8904000
Equity (bal) 144000 Fx loss (Dr) 106 1526400
22472000 22472000

All Monetary and Non Monetary items at closing rate.


The balance in equity Yens 144000r re lects the Fx equity reserve A/c.

Indian Accounting Standards_All chapters.indd 49 05-01-2016 05:12:33 PM


Chapter 12
Ind AS 23: Borrowing Costs

Ind AS-23 AS-16


Ind AS 23 considers the borrowing costs based on Ind AS 16 considers the borrowing costs based on
Effective Cost method. Nominal Interest method.
Ind AS 23 is not applicable to repetitive manufactured AS -16 has no such specific exclusion.
goods (inventories produced on large scale) and those
assets which are carried at fair value eg: biological
asset.
In case of Hyperinflationary situation the borrowing cots Indian GAAP does not cover Standard on Hyper inflationary
relate to the inflationary element is charged to income situation.
statement and not to be capitalized.
No guidance about substantial period of time is not Substantial period of time is covered by ASI 1 or now it is
provided i.e. it is based on judgment. explained / covered by AS-16 itself.
Ind AS 23 wants the entity to disclose the Capitalization No such disclosure required.
rate.

PROBLEMS AND SOLUTIONS

Problem 1: Dipu Constructions took up an expansion project and the same was funded by a speci ic
borrowing 8% loan bonds of 100 crores. Loan bonds were issued at a discount of 1%. The entire loan will
be repaid at the end of 5 years. The entire project was ready by the end of the year calculate the borrowing
cost as per AS-16, IAS 23 and Ind AS 23. For IFRS the fair rate of interest is considered @10%.
Solution:
As per Indian GAAP AS-16 BC = 100 8% + 1/5 (amortization of discount) = 8.20 crores
As per Ind AS 23 / IAS 23 the BC will be based on effective cost method:
= 92.42 10% = 9.242 crores (will be capitalized on qualifying assets)

Indian Accounting Standards_All chapters.indd 50 05-01-2016 05:12:33 PM


Ind AS 23: Borrowing Costs 51

Calculation of PV of Loan: (same as Ind AS-109 or AS-30amortized cost) ` crores

Year Cash flows PVF 10% PVCF


1 8 0.909 7.27
2 8 0.826 6.61
3 8 0.751 6.01
4 8 0.683 5.46
5 108 0.621 67.07
PV = 92.42

Problem 2: Dhangar Ltd has a cattle ield which serves the company milk, wool etc. The livestock is carried
at Fair Value. The opening fair value of livestock is 54,40,000. The closing fair value 67,33,000. Out of
which 2,00,000 worth was purchased during the year. Fresh borrowings were taken at the beginning of the
year to buy livestock. The total borrowings by the year end was 22,00,000 @ 12%. Calculate the borrowing
cost as per IAS 23 and comment.
Solution: Ind AS 23 is not applicable on Assets carried at fair value. It is applicable on those assets which
are carried at cost less depreciation. Also further the assets should be qualifying assets. In the present case
the entire BC of 2,64,000 is charged to pro it / loss account. BC should not be capitalized on biological
assets.
P roblem 3: Hyper Ltd is engaged in development of properties and further sell it in the open market. The
development process takes substantial period of time. It has inanced its inventories by taking loan from
Yekoshore Development Bank 75 million. The economy is under hyper in lationary situation. The interest
rate is 32%. The in lation is 200%. You are required to calculate the borrowing cost attributable towards the
capitalization of asset as per IAS 23.
Solution: Ind AS 23 : In case of Hyperin lationary situation the borrowing cots relate to the in lationary
element is charged to income statement and not to be capitalized.
Accordingly the effective (real element of) interest = 32% / 200% = 16%.
BC requires capitalization = 75 x 16% = 12million.
BC charged to P/L = 75 x 32% - 12 = 12 million.

Indian Accounting Standards_All chapters.indd 51 05-01-2016 05:12:34 PM


Chapter 13
Ind AS 24: Related Party

Ind AS-24 AS-18


As per Ind AS- 24 it is related party transactions and It is only related party transaction.
outstanding balances, including commitments.
As per Ind AS-24 related party transaction is transfer of As per AS-18 related party transaction is transfer of
resources, services or obligations between a reporting resources, services or obligations between a reporting
entity and a related party, regardless of whether a price is entity and a related party.
charged
Ind AS-24 defines relatives as: CLOSE FAMILY MEMBERS of Existing AS-18 defines relatives with specific relationship.
a person. The specific name of the relative is almost governed by the
Companies Act. (refer AS-18)
KMP includes Non - Executive Directors also and covers Does not include Non - Executive Directors, unless they
KMP of the parent company. participate in operating activities of the entity. KMP of the
parent not specified
The Post employment benefit plans is a part of analysis of No mention.
related party relationship.
Compensation paid to KMP is more comprehensive as Existing AS does not provide such disclosure.
compared to Indian GAAP.
Coverage of Meaning of Government is much wider. Coverage of Meaning of Government is narrow.
Ind AS-24 exempts from the disclosure the companies AS-18 overall exempts State Controlled Enterprises.
controlled, jointly controlled or having significant influence
by Government.
Ind AS-24 covers JV of the same entity as related party. AS-18 excludes Co Venture (JV1 Vs JV2) as related party.
Disclosure is required for the amount of transaction. For ex: Disclosure is required for the volume (amount or proportion)
Goods sold worth 2,00,000 by A to B. of transaction. For ex: Goods sold worth 2,00,000 by A to B
or A sold 13% goods to B out of the total sales.
Ind AS also covers the disclosure of Specific Purpose No mention.
Vehicle.

Differences between Ind AS-24 and IAS-24


Somewhere AS-24 wants us to de ine related party based on the term in luence. Ind AS-24 considers the
factor in luence but also provides some speci ic names of relative.

Indian Accounting Standards_All chapters.indd 52 05-01-2016 05:12:34 PM


Ind AS 24: Related Party 53

Some Important Points on Ind AS-12


1) Deinition of relative: Ind AS-24 de ines relatives as: CLOSE FAMILY MEMBERS of a person : are
those family members who may be expected to in luence, or be in luenced by, that person in dealings
with the entity : THEY INCLUDE:-
The persons children (including step children), spouse or domestic partner;
Children (including step children) of the persons spouse or domestic partner;
Dependents of the person or the persons spouse or domestic partner
Ind AS 24 uses the rule based de inition of Relative in the Companies Act 1956, (now Companies
Act 2013) though inclusion domestic partner, children of the domestic partner and dependents of
the domestic partner have been retained in IND-AS
2) As per AS-18 State Controlled Enterprise (SCE) are Government controlled entity and are exempted
from disclosures. Ind As-24 provides a wider de inition of SCE. It includes government agencies, gvt
dept, local govt, national govt as well as international govt.
3) Compensation to Key Management Personnel the same should be given in total and for each of the
following categories
Short term employee bene its
Post employment bene its
Other long term bene its
Termination bene its
Share based payments
4) Analysis of Related Party (RP) relationship:
Control, Joint Control, Signi icance, JV , Subsidiary, Associates will carry the same meaning as covered
by AS-18. Speci ic analysis as per Ind AS 24 is as follows:
RP as per Ind AS is that of PERSON WITH REPORTING ENTITY (RE) AND ENTITY WITH RE.

Relationship between Person / Individual / Human being Vs RE


(a) A person or a close member
(i) Has Control OR joint control over the reporting entity;
(ii) Has signi icant in luence over the reporting entity;
(iii) Is a Key management personnel of the reporting entity OR of a parent of the reporting entity.
(b) Group Entities Vs RE:
The entire group of Holding, Subsidiary, Sub subsidiary, Fellow Subsidiary. Here all entities are
related to each other. Fellow Subsidiary is the subsidiary under a common control with the RE.
Fellow Subsidiary is also known as Co-Subsidiary.
(c) Pension funds and similar post employment funds for the bene it of employees of the entity (or any
entity that is a related party to the entity), are related parties to the entity.
If the reporting entity is itself such a plan, the sponsoring employers are also related to the
reporting entity (its visa versa)
Pension fund that is operated for the bene it of employees in a GROUP is a related party of each
entity.
(d) Associates, JVs Vs RE:
i) Investors and their associates are related parties (direct relationship)
ii) Venturers and their Joint Ventures are related parties (again direct relationship)
iii) An entity being a Joint Venture of a third entity and the other entity being an associate of the same
third party, are related parties. In other words A JV and an Associate entity jointly controlled/
in luenced by a common investor.(see diagrammatic presentation)

Indian Accounting Standards_All chapters.indd 53 05-01-2016 05:12:34 PM


54 Indian Accounting Standards

iv) Two entities being joint ventures of the same third party are related parties (Fellow JVs)
v) Where the reporting entity is member of a Group, an associate or Joint Venture of another entity,
also within the same Group, are related parties to the reporting entity (even RE is the RP with
such JV and Associates).
vi) Where a reporting entity has an associate or a Joint Venture, the Associates or Joint Ventures
subsidiaries, will be related parties to the reporting entity.
(d) Entities under common control / in luence by a person (or close member):
i) An entity is related to the reporting entity, If the person, control / jointly controls the reporting
entity also control / jointly control the entity. (here both the entity as well as the RE is RP to each
other).
ii) An entity is related to the reporting entity, If the person controlling the reporting entity, has
signi icant in luence over the other entity or is a KMP of the other entity (here only the Entity is
the RP with RE i.e. RE is not the RP with the Entity)

DO YOU KNOW
Co associates and Co Venturer are not RPs.

PROBLEMS AND SOLUTIONS

P roblem 1: Vaste (P) Ltd has funded a Plan for Pension bene it. 3 more companies are members of such a
Plan. Annual transfer is almost for 4 crores. Is the Pension plan a related party as per Ind AS-24 as well as
AS-18.
Solution: Pension funds and similar post employment funds for the bene it of employees of the entity (or
any entity that is a related party to the entity), are related parties to the entity.
As per Ind AS-24 funded bene it plan is RP. But as per AS-18 it is not a RP.
Problem 2: A Ltd has 55% shares in B Ltd. B Ltd has 30% shares in C Ltd. Is B and C related to A Ltd.
Solution: Yes B is RP to A because of concept of Group. C Ltd is the Associate of the Group hence C is RP.
Groups Associates and Groups JV is is the RP of the entire Group rememberHindi mein
kahaawat hain.Ghar ki bhahi sabki bhabhi.
Problem 3: Is A Ltd related C Ltd.
Solution: No.
Problem 4: Mr Rahu is the brother of Mr Sahu. Mr Shahu has 22% shares in S Ltd. Is Mr Rahu a RP to S Ltd.
Solution: Yes. Entire Family is a RP if any one close member of family is a RP to the reporting entity. Here
Shahu has signi icant in luence over S Ltd.
Problem 5: If Cov1 and Cov2 shares 50% each in a JV. Are the covertures related party.
Solution: Co associates and Co Venturer are not RPs.
Problem 6: Mr. Zuher & Mrs. Zuher jointly controls (30%+22%) Vargeshe Firms Ltd. They also carry
signi icant in luence in Rabujobhi Ltd with 33% shares. Is Rabujhogi Ltd a related party with Varegeshe Ltd?
Comment from both the sides.

Indian Accounting Standards_All chapters.indd 54 05-01-2016 05:12:34 PM


Ind AS 24: Related Party 55

Solution: Rabujhogi Ltd a related party with Varegeshe Ltd. But Varegeshe Ltd is not a related party with
Rabujhogi Ltd. In other words Varegeshe Ltd is required to make disclosure regarding Rabujhogi Ltd.
see above d (ii).
P roblem 7: Mr. Zuher & Mrs. Zuher have substantial interest in Vargeshe Firms Ltd. They also have
substantial interest in Rabujhogi Ltd. Is Rabujhogi a related party with Varegeshe ? Is Mr. Zuher a RP to
Rabujhogi.
Solution: Here neither Rabujhogi Ltd is a RP with Varghese Ltd. nor Varghese Ltd is a RP with Rabujhogi
Ltd.Two entities in luenced by a common Individual / Close family are not RP.
Yes Zuher as a person is a RP with Rabujhogi Ltd...a (ii)
P roblem 8: Irokanka a partnership irm has only one Loan from Hi si tang Corp. The entire loan of
Irokanka is taken from Hi si tang Corp. Is Hi si tang a RP with Irokanka.
Solution: Even in Indian GAAP a party on whom an entity has economic dependency is not a RP. Hence Hi
si tang is not a RP with Irokanka Firm.
P roblem 9: H1 Ltd is holding 90% in H2 Ltd and H2 holds 55% in H3. H1 has a JV (JV1), H2 has an associate
(A1), H3 has a Subsidiary (S1). Bring out all possible RP relationship with justi ication.
Solution:
Books of RP / Not a RP Reason
H1 Ltd.
H2 RP Group Entities..para b
H3 RP Group Entities..para b
S1 RP Group Entities..para b
JV1 RP JV of H Ltd..para d(ii)
A1 RP JV / Associate of Group Entities..para d(v)

Books of RP / Not a RP Reason


H2 Ltd.
H1 RP Group Entities..para b
H3 RP Group Entities..para b
S1 RP Group Entities..para b
JV1 RP JV / Associate of Group Entities..para d(v)
A1 RP Associate of H2 Ltd....para d(i)

Solution for H3 is same as H2 and H1 bit change in Reason .i.e all are RP.

Books of RP / Not a RP Reason


S Ltd.
H1 RP Group Entities..para b
H2 RP Group Entities..para b
H3 RP Group Entities..para b
JV1 RP JV / Associate of Group Entities..para d(v)
A1 RP JV / Associate of Group Entities..para d(v)

Indian Accounting Standards_All chapters.indd 55 05-01-2016 05:12:34 PM


56 Indian Accounting Standards

Books of RP / Not a RP Reason


JV1 Ltd.
H1 RP Para d(ii)being direct investor.
H2 RP JV / Associate of Group Entities..para d(v)
H3 RP JV / Associate of Group Entities..para d(v)
S1 RP JV / Associate of Group Entities..para d(v)
A1 Not a RP Associates within the Group entities are not RPs with JV / Associates
having different investor.

For A1 Ltd the solution is same as above. Again JV1 is not RP to A1.
Problem 10: Shri Vamajani is the father of Mr. Ubesh. Vamajani had 70% shares in Jekulu Inc. Mr Ubesh has
54% in Nomencultural Corp. Is Nome cultural Corp RP to Jekulu Inc. Comment?
Solution: Yes Shri Vamanjani as well as Ubesh both are RP to Jekulu as well as Nomencultural Corp. Also
Jekulu Inc and Nomencultural Corp. are also RP by virtue of para..d(i)..i.e. Close members of family
controls 2 entities.
Problem 11: H Ltd is the holding company of S Ltd. H Ltd has A1, JV1 and S Ltd has A2, JV2.
Bring out all possible relationships as per Ind AS-24.
Solution: For H Ltd. RP S, A1, JV1, A2, JV2.
For S Ltd. RP H, A1, JV1, A2, JV2.
For JV1 RP H, A1, S, JV2. For JV1 A2 is not RP.
For A1 RP H,JV1, S. For A2 and JV2 is not RP.
Similar conclusions can be drawn for S, A2, JV2.
Problem12: Master problem on Individual holding 2 or more than 2 entities.
(a) Mr Sultan holds 23% shares in JANU Ltd and 25% shares in TITU Ltd.
Comment on Janu and Titu.
Solution: No RP exists between Janu and Titu..co - associates are not RPs.

(b) Mr Sultan holds 23% shares in JANU Ltd and 60% shares in TITU Ltd.
Comment on Janu and Titu.
Solution: Janu is a RP to Titu. But Titu is not a RP for Janu..person having signi icant in luence / being a
KMP of an entity and on the other hand such person is also controlling RE. Then in such case the entity is the
RP with the RE.

(c) Mr Sultan holds 60% shares in JANU Ltd and 60% shares in TITU Ltd.
Comment on Janu and Titu.
Solution: Both Janu and Titu are RP. Two entities controlled by a common person or his close family members.

(d) Mr Sultan is a CEO (KMP) in JANU Ltd and holds 60% shares in TITU Ltd.
Comment on Janu and Titu.
Solution: Janu is a RP to Titu. But Titu is not a RP for Janu. But Titu is not a RP for Janu..person having
signi icant in luence / being a KMP of an entity and on the other hand such person is also controlling RE.
Then in such case the entity is the RP with the RE.

Indian Accounting Standards_All chapters.indd 56 05-01-2016 05:12:34 PM


Chapter 14
Ind AS 29: Accounting in Case of Hyper
Inflationery Conditions

No Accounting Standard is available in case of Hyper In lation in I-GAAP.

Objective of Ind AS 29
This Standard sets out procedures for adjusting the inancial information for the effects of hyperin lation.
Financial information reported in historical terms would present a distorted picture of the entitys
performance and inancial position.
Ind AS-29 provides a methodology for restatement of inancial statements using suitable price index so
that the accounts can be comparable.

DO YOU KNOW
India is not suffering from hyper - inflation..! Thanks God. In the entire world following countries suffer
from hyper - inflation : Venezuela (situated near North America), Iran.

IN INFLATION YOU SHOULD KNOW: TOO MUCH MONEY CHASES TOO FEW GOODS. THE PURCHASING
POWER OF MONEY COMES DOWN.

DEFINITION OF HYPERINFLATION
The Standard does not de ine hyperin lation but sets out the general characteristics of a hyperin lationary
economy:
These characteristics would include
(1) Where the preference is to keep wealth in nonmonetary assets or in a stable foreign currency. Any
local currency would be immediately invested in order to attempt to maintain its purchasing power.
(2) Where prices are quoted in a stable foreign currency and the population regards monetary amounts
in that currency, as effectively a local currency
(3) Where transactions are priced at an amount that includes compensation for the future expected loss
of the purchasing power of the local currency. This characteristic would be taken into account even
if the credit period is quite short.
(4) Where prices, wages, and interest rates are closely linked to a price index
(5) Where cumulative in lation rates over a period of three years approaches or exceeds 100%.

Indian Accounting Standards_All chapters.indd 57 05-01-2016 05:12:34 PM


58 Indian Accounting Standards

CEASING TO BE HYPERINFLATIONARY
Judgment will be required in determining whether an economy is no longer hyperin lationary.
The criteria used for this is whether the cumulative in lation rate drops below 100% in a three-year
period.
When the economy ceases to have hyperin lation, then the entity should discontinue preparing inancial
statements in accordance with Ind AS 29.

FUNCTIONAL CURRENCY AND HYPERINFLATION


The functional currency should be based on the economic circumstances relevant to the entity and not based
on choice. If the functional currency is one of a hyperin lationary economy, the inancial statements should
be stated in terms of the measurement unit current at the balance sheet date.
CFS: If a parent entity operates in a hyperin lationary economy but a subsidiary does not, then the parents
results should be restated for hyperin lation but the subsidiarys results need not be restated but should
comply with IAS 21.
Step 1: Holding Company Ind AS-29
Step 2: Apply Ind AS 21
Step 3: Prepare CFS as per Ind AS-110
If a subsidiary is operating in a hyperin lationary economy and the parent entity is not.
Step 1: Subsidiary would use Ind AS 29.
Step 2: Apply Ind AS-21
Step 3: Prepare CFS as per Ind AS-110.

RESTATEMENT OF FINANCIAL STATEMENTS: BALANCE SHEET MEASUREMENT


PRINCIPLES FOR RESTATEMENT
Ind AS 29 requires the restatement of inancial statements including the cash low statements and requires
the use of a general price index.
1) Monetary items: Monetary items are already stated in the measuring unit at the balance sheet dates
and are therefore not restated.
2) Nonmonetary items carried at Cost: All nonmonetary items are restated using the change in the
general price index between the date that those items were acquired and the current balance sheet
date.
3) Nonmonetary items carried at Fair Value: , NMI carried at current values (e.g., net realizable value and
market value) at the balance sheet date, does not require any restatement.
4) Owners Capital: Owners capital requires restatement at current rate.
5) Retained earnings: Net Pro its at monthly index rate. Others Reserves balancing igure.
The difference in the trial balance is to be considered as the balancing igure. It is to be included in the
Retained earnings.

PROBLEMS AND SOLUTIONS

P roblem 1: XYZ Inc operates in a hyperin lationary economy. It is incorporated in Venezuelan. The currency
is VEF. Its balance sheet at December 31, 2016, follows:

Indian Accounting Standards_All chapters.indd 58 05-01-2016 05:12:34 PM


Ind AS 29: Accounting in Case of Hyper Inflationery Conditions 59

VEF Currency
Property, plant, and equipment 5,00,000
Inventory carried at cost 2,00,000
Cash 1,00,000
Trade receivables 2,00,000
10,00,000
Share Capital 3,00,000
Retained earnings 4,00,000
Loans 2,50,000
Current liabilities 50,000
10,00,000

The general price index had moved in this way:


December 31:
2012: 1002013 : 1202014 : 1802015 : 3002016 : 450
The property, plant, and equipment was purchased on December 31, 2014, and there is six months
inventory held.
Required: Show the balance sheet of XYZ Inc after adjusting for hyperin lation.
Solution:
XYZ Inc Balance sheet at December 31, 2016, follows: (VEF)

Original Working Restated


Property, plant, and equipment 5,00,000 5 x 450/180 12,50,000
Inventory carried at cost 3,00,000 3 x 450/375 3,60,000
Cash 1,00,000 -- 1,00,000
Trade receivables 1,00,000 -- 1,00,000
10,00,000 17,00,000
Share Capital 3,00,000 3 x 450/100 13,50,000
Retained earnings 4,00,000 Balancing fig 50,000
Loans 2,50,000 -- 2,50,000
Current liabilities 50,000 -- 50,000
10,00,000 17,00,000

Notes:
1) For Plant, machine its 450 / 140 not 450 / 100 because the restatement is from date of acquisition
till balance sheet date. The non - monetary item was acquired on that date.
2) 375 in case of inventory = (450+300) / 2.
3) Share Capital requires very old base lets say 100. If additional capital is introduced then it should be
restated from that date.
4) The inventory had been restated assuming that the index has increased proportionately over time.
The loan is a monetary item and therefore is not restated. If the loan had been index linked, then it
would have been restated in accordance with the loan agreement. Other monetary items are also not
restated.

Indian Accounting Standards_All chapters.indd 59 05-01-2016 05:12:34 PM


Chapter 15
Ind AS 33: Earning Per Share

Ind AS-33 AS-20


Ind AS 33 has abolished the disclosure of Extra Ordinary As per AS 20 EPS should be from Continuing and Ordinary
item. Hence EPS includes even extraordinary item without Activities..para 32 of AS -20.
disclosure.
Ind AS 33 requires EPS both as per continuing as well as AS 20 EPS should be from Continuing and Ordinary
discontinuing operations separately. Activities..para 32 of AS -20.
Ind AS 33 also covered some advanced derivative items Not covered
like options on own shares, treasury stock, contingently
issuable shares.
Potential equity shares are dilutive or anti dilutive based No mention.
on profit / loss from continuing operations.
It requires presentation of EPS both as per SFS and CFS No such mention in AS-20.
basis.
Impact of potential equity shares of the subsidiary, EPS on CFS basis is not prepared hence such a case neend
associates and joint ventures are assessed. not be covered by AS-20.
In Ind AS- 32 Preference Shares are treated as a Financial Here actual preference dividend (cash) paid will be
liability (redeemable). According the preference dividend deducted.
deducted from profits to get profits to equity holders will
be based on effective rate of return.

DO YOU KNOW
Purchased Put and Call Options on own shares has an Anti Dilutive effect on EPS. Put and Call Options sold
(writer) on own shares has a Dilutive effect on EPS.

Differences between Ind AS-33 and IAS-33


i) In Ind AS-33 EPS only as per CFS is required and in Stand Alone Statement. But in IAS-33 EPS both as
per Stand Alone Statement as well as CFS is required:
ii) In Ind AS-33 EPS is applicable to the companies as per Central Government / Co Act classi ication. In
case of IAS 33 EPS is applicable in its entirety only to listed companies any-where in the world. It
may be even a potential listed company.
iii) As per para 12 of Ind AS -33 if any item is adjusted in securities premium if it could be adjusted
otherwise in pro it / loss account, then the amount thereof shall be credited or debited to pro it from
ordinary activities. In IAS-33 no such provision exists.

Indian Accounting Standards_All chapters.indd 60 05-01-2016 05:12:34 PM


Ind AS 33: Earning Per Share 61

Illustration: Pillu Paiki Ltd earns net pro it post tax for 2015-16 ` 33,000. During the year underwriting
commission is incurred ` 2,000. The same is adjusted in securities premium a/c. WANES = 1000 shares.
Compute EPS for 2015-16. Tax 30%.
Solution: EPS for 2015-16 = 33000 + 1400 / 1000 = 34400 / 1000 = ` 344.

iv) As per Ind AS-1 the single statement covers Pro it / loss account as well as Other comprehensive
income statement. We dont (in India) we dont have an option of 2 statements. As per IAS 1 a
separate statement covers Pro it / loss account as well as Other comprehensive income statement.

PROBLEMS AND SOLUTIONS

P roblem 1: Manugelu Limited is a parent company of subsidiary Haluku Limited with 80% stake. For the
year 2015-16 Manugelu Limited earns net pro it for equity 7,00,000 and Haluku earns pro its of 2,00,000.
Manugelu Limited has 25,000 equity shares and Haluku Ltd has 10,000 equity shares. Compute EPS in the
books of 1) Manugelu Limited both as per SFS and CFS, 2) Haluku Limited only as per SFS.
Solution: EPS of Manugelu for 2015-16: (i) SFS: 700000 / 25000 = 28
(ii) CFS: (700000+200000 0.80) / 25000 = 34.40.tt
EPS of Haluku Limited = 200000 / 10000 = 20.
Problem 2: Kallapudesha Limited has 4,00,000 ordinary shares outstanding of face value 2 each. The
company has written call options on own shares 6,000. Premium is already received on call option 12. The
strike price was 100, The average market price 120. Total maturity of the option is 3 months.Net pro it to
ordinary shareholder is 20,00,000. The options will be settled gross delivery based. Compute EPS.
Solution: EPS = 2000000 / 400000 = 5 /-..basic EPS
Diluted EPS = 2000000 / 400000+ 1000 = 4.99 /-
Gross options 6000
Less: Shares for consideration (5000) (6000 x 100 / 120)
Shares for no consideration 1000
P roblem 3: Cherry Berry Corp. has written put options on own shares 20,000 options. Premium is already
received on option 75. The strike price was 400, The average market price 250. Net pro it for the year
2015-16 for ordinary shareholder is 76,42,000. On 1/4/2015 7,00,000 ordinary shares outstanding of face
value 100 each. On 1/12/2015 the company issued 3,00,000 equity shares. The options will be settled gross
delivery based. Compute EPS.
Solution: EPS = 76,42,000 / (700000 + 300000 x 4/12) = 9.55/-..basic EPS
Diluted EPS = 76,42,000 / 800000+ 12000 = 9.41/-
Gross options (treasury shares) 20000
Less: Shares for consideration paid (32000) (20000 400/250)
Shares for which excess consideration paid 12000
Problem 4: Global Paints Ltd has purchased 60000 put options on own equity shares @ 600. The Fair
Value of the shares 450. Net pro its attributable to the equity shareholders 36 crores. WANES 9,00,000.
Prove that purchased put options on own equity shares are always Anti dilutive.
Solution: EPS = 360000000 / 900000 = 400/-..basic EPS
Diluted EPS = 360000000 / 900000 20000 = 409.10 /- (anti dilutive hence ignore

Indian Accounting Standards_All chapters.indd 61 05-01-2016 05:12:34 PM


62 Indian Accounting Standards

The put options will be exercised only if the exercise price will be more than market price. In the present
case the no. of shares will be negative.
Gross option 60,000
Less: Shares sold at Fair consideration (80,000) (60000 600/450)
Shares for which excess consideration 20,000 (gain).gain expressed in shares.
P roblem 5: Genistar Tubes Inc had issued 10% Preference shares of face value $ 10. Premium on redemption
will be 20% on the date of redemption (after 5 years). Corporate Dividend Tax 10%. Net Pro its after Tax
$ 750 million and $ 790 million for 2016 and 2017 respectively. Number of equity shares 16 million and
preference shares 3 million. Compute Basic EPS. (hint IRR for Cash lows = 11.59%)
Solution: Calculation of NP available to equity shareholders:
$ millions $ millions
PAT 750 7t 90
Less: Preference Shares * (3.477) (3.53)
Less: CDT 10% x 10% x 3 x 10 (0.30) (0.30)
PAT PDividend PDTax 746.223 786.17

WANES = (millions) 16 16
Basic EPS as per Ind AS 33 $46.64/- $49.14/-

Calculation of amortization:
PV of Cash lows 30
Add: Effective cost 11.59% 3.477
Less: Cash lows (3)
Balance 30.477
Add: Effectvie cost 11.59% 3.53
Less: Cash lows (3)
Balance 31.01 .will continue
Notes: As per Financial Instruments Presentation Preference Shares are in substance a liability as they
are payable. CDT will be on normal cash dividend.

Master Sums on Consolidated & Stand Alone EPS


Problem 6: Following is the B/S of Holding Ltd. as on 31/3/2016.
H Ltd S Ltd JV Ltd A Ltd
Profits after tax 90,00,000 55,00,000 45,00,000 50,00,000
Equity dividends paid 12,00,000 8,00,000 6,00,000 6,00,000
Holding by H Ltd - 75% 30% 25%
Number of equity shares 720000 500000 320000 210000
Potential equity shares* 20,000 15,000 14,000 5,000
Savings on conversion of shares 9,000 Nil Nil Nil

Compute Basic and Diluted EPS both in case of SFS as well as CFS of H Ltd.
*Potential shares given are for no consideration. These are outside parties.

Indian Accounting Standards_All chapters.indd 62 05-01-2016 05:12:34 PM


Ind AS 33: Earning Per Share 63

Solution: Books of H Ltd in SFS:


H Ltd S Ltd JV Ltd A Ltd
Profits after tax.a 90,00,000 55,00,000 45,00,000 50,00,000
Dividends paidb 12,00,000 8,00,000 6,00,000 6,00,000
Net (a b) 78,00,000 47,00,000 39,00,000 44,00,000
Number of equity sharesc 720000 500000 320000 210000
Basic EPS () /- = 12.50 - - -
Potential equity shares..d 20000
Total Shares .c + d = e 740000
PAT + Savings..f 9009000
Diluted EPS () /- f / e 12.17

Books of H Ltd in CFS:


Net (a b) 47,00,000 39,00,000 44,00,000
Share of H Ltd. (net off dividend) 3525000 1170000 1100000

H Ltd profits 90,00,000


+ Share of S Ltd 35,25,000
+ Share of S Ltd 11,70,000
+ Share of S Ltd 11,00,000
Total profits.g 14795000
No of shares 720000
Basic EPS () /- = 20.55

Total profits.g 14795000


Loss of profits due to PES:
S Ltd. 4700000 x -2.18% (102460)
JV Ltd. 3900000 x -1.26% (49140)
A Ltd. 1100000 x -.58% (25520)
Net Profits for Equity 14617880

WANES + PES = 740000

Diluted EPS () /- = 19.75

WN) Loss of profits


S Ltd JV Ltd A Ltd
Existing Shareholding A 75% 30% 25%
Share in shares B 375000 96000 52500
Others holding C 125000 224000 157500
PES D 15000 14000 5000
Revised Others holding E=C+D 140000 238000 162500

Indian Accounting Standards_All chapters.indd 63 05-01-2016 05:12:34 PM


64 Indian Accounting Standards

Revised shareholdings 1-B/(B+D) 72.82% 28.74% 24.42%


Loss of stake % 2.18% 1.26% 0.58%

SFS CFS
SUMMARY OF EPS: Basic EPS 12.50 20.55
Diluted EPS 12.17 19.75

Notes: The additional shares of subsidiary, associates will not affect WANES for dilution. It will affect the
pro its. This is because due to conversion of PES the additional shares will reduce the overall shareholding of
Holding Company.

Indian Accounting Standards_All chapters.indd 64 05-01-2016 05:12:35 PM


Chapter 16
Ind AS 34: Interim Financial Reporting (IFR)

Ind AS-34 AS-25


An IFR shall not be described as complying with Ind AS In case of AS-25 if an entity is required by regulator (SEBI)
unless it complies with all the requirements of Ind AS. or an entity can even voluntarily elects to prepare IFR, then
For ex: as per Clause 41 of SEBI regulations every listed it is enough for AS-25. This means even SEBI regulated
company should prepare IFR. This IFR is not in accordance (Clause 41) IFR is enough compliance of AS-25.
with Ind AS-34. IFR is voluntary / optional.
Either a complete set of accounts or condensed report Either a complete set of accounts or condensed report
is required. Condensed report includes Condensed B/S, is required. Condensed report includes Condensed B/S,
Condensed P/L, Condensed Cash flows, Condensed Condensed P/L, Condensed Cash flows. Condensed
Statement of equity. Statement of equity
If an entity reclassifies financial items, change a/c policy No mention about 3 B/S.
on retrospective basis then 3 balance sheets should be
prepared for comparative purposes. Actually this is a
requirement of Ind AS-1 itself which applies on Ind AS 34.
In case of Ind AS-36 (Impairment) the G/W impaired cannot No such restriction.
be reversed. The same provision applies in Ind AS-34 i.e.
G/W not to be reversed from one interim period to another.
In case of Ind AS-34 a parent company need not include In case of AS-25 if a parent company prepares consolidated
separate financial accounts in addition to consolidated financial accounts in addition to separate financial accounts
financial accounts. then the same is even compulsory in IFR
In case of selected explanatory notes: Dividend paid In case of selected explanatory notes: Dividend information
information should be total or per share with reference to should be total or per share with reference to equity shares
equity shares and other shares separately. and other shares separately. It can be even in % form For
Example: Equity 200000, 10% Preference Shares 30000 Example: Equity 200000, 10% Preference Shares 30000
or even per share will do. or even per share will do. Alternatively it can be even in
the following way: Equity dividend 13%, Preference Shares
10%.
Contingent liabilities and Contingent assets both is Only Contingent liabilities is to be disclosed. Contingent
required to be disclosed (Ind As-37) assets should be ignored (AS-29)
Extraordinary items in accordance with Ind AS-1 deleted. Extraordinary items retained as per AS-5.
An IFR shall not be described as complying with Ind Ass No such mention.
unless it complies with all the requirements of Ind AS. IFR
prepared in accordance with Ind AS-34 or not prepared
in accordance with Ind AS-34 should be accordingly
disclosed.
For ex: IFR prepared in accordance with Ind AS-34 by an
entity is required to disclosed this fact.

Indian Accounting Standards_All chapters.indd 65 05-01-2016 05:12:35 PM


66 Indian Accounting Standards

Changes in A/C policies should be in conformity with Ind Changes in A/C policies should be should be adjusted for
AS-8 i.e. the past interim accounts should be restated of the previous interim periods also of the same financial year.
same financial year. But in addition to it the entity should
also revise / restate the comparable last years financial
statements.
The impact of Convergence to marching towards New Ind No such change can be possible in AS-25.
As will have a substantial change in IFR.
Normally whenever we present IFR for the first time as per Normally whenever we present IFR for the first time as per
Ind AS-34 comparative information of last year is required. AS-25 comparative information of last year is not required
(exempted).

Differences between Ind AS-34 and IAS-34


1) A footnote creates a difference: Footnote in Ind stated as per Clause 41 of SEBI regulations every
listed company should prepare IFR. This IFR is not in accordance with Ind AS-34.
2) As per IAS-1, 2 statements of P/L (SOCI) and (OCI) is required and the same is even applied in IFR
(IAS 34) too. But in Ind AS-34 either single statement or 2 statements both are allowed.
Have you noticed that differences are just theoretical and not practical. No practical problems are possible.

PROBLEMS AND SOLUTIONS

Problem 1: Firru Polinic entity prepares quarterly interim inancial reports in accordance with IAS 34. The
entity sells electrical goods, and normally 5% of customers claim on their warranty. The provision in the irst
quarter was calculated as 5% of sales to date, which was 10 lakhs. 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 lakhs. What would be the provision charged in the second quarters interim inancial
statements?
Solution: Warranty provision in the second IFR = [10% of (10 + 15) (5% of 10)], that is, 2 lakhs.

Indian Accounting Standards_All chapters.indd 66 05-01-2016 05:12:35 PM


Chapter 17
Ind AS 36: Impairment of Assets

Ind AS-36 AS-28


Scope excludes many assets. Scope excludes only a few assets
Even if there is no indication of any impairment following No such provision. Generally impairment is to be conducted
assets should be tested for impairment annually: only if conditions for impairment exist.......build up the wall
An intangible asset that has an indefinite useful life only when it floods!
An intangible asset that is not yet available for use
Goodwill that has been acquired in a business
combination
For Recoverable Amount: it is Value in use and Fair value For Recoverable Amount: it is Value in use and Net Selling
less costs to sell Price.
Ind AS-36 is applicable to even Investments in Subsidiary, Not applicable to financial assets.
JV and Associates.
Reversal of Goodwill (in case of reversal of impairment loss) In a very rare case G/W can be reversed under Indian GAAP.
is not allowed.
Recoverable value is the higher of VIU or Fair Value less Recoverable value is the higher of VIU or Net Selling Price.
costs to sell. Fair value is defined in Ind AS-113.

DIFFERENCES BETWEEN Ind AS-36 AND IAS-36


Investment property carried at Fair Value is not impaired. IAS 36 excludes investment property carried at
Fair Value. But Ind AS 36 does not mention as such. This is because as per Ind AS-40 investment property is
not fair valued i.e. it is valued at cost less depreciation.

SOME IMPORTANT POINTS ON Ind AS-36


Scope of Ind AS-36
Exclusion includes a big list: (a) inventories (Ind AS 2 Inventories); (b) assets arising from construction
contracts (see Ind AS 11 Cons. Contracts); (c)deferred tax assets (see Ind AS 12 Income Taxes); (d) assets
arising from employee bene its (see Ind AS 19 Employee Bene its); (e) inancial assets that are within the
scope of Ind AS 39 ; (f) biological assets related to agricultural activity (see Ind AS 41 Agriculture) (g) arising
from an insurers contractual rights under insurance contracts (see Ind AS 104 Insurance Contracts; and (i)
non-current assets (or disposal groups) classi ied as held for sale Ind AS 105 Non-current Assets Held for
Sale and Discontinued Operations).

Indian Accounting Standards_All chapters.indd 67 05-01-2016 05:12:35 PM


68 Indian Accounting Standards

Impairment of Financial instruments (assets) is covered by Ind AS-109. But what about Investments
made in Subsidiary (Ind AS-110), Investments made in Associates (Ind AS-28), Investments made in JV (Ind
AS-111) ?
Illustration: Kotim Ltd has acquired 60% shares in Wanse Phul Ltd.The goodwill arising on acquisition was
24 million, and the carrying value of entity Wanses net assets in the consolidated inancial statements is
60 million at 31/3/2015. The recoverable amount of the cash-generating unit is 80 million at 31/3/2016.
Required: Calculate any impairment loss arising at 31/3/2015, for the cash-generating unit.
Solution:
Net Assets = 60 millions. Share 60% = 36 millions.
Total carrying amount = 36+G/W = 36 + 24 = 60 millions.
Recoverable Value = 80 million Share = 48 million.
Impairment loss = CA-RV = 60 48 = 12 millions.
Journal:
Impairment loss A/CDr 12 million (Trf to P/L)
To G/W 12 million

Indian Accounting Standards_All chapters.indd 68 05-01-2016 05:12:35 PM


Chapter 18
Ind AS 37: Events after the Balance Sheet

Ind AS-37 AS-29


Under Ind AS- 37 provisions are discounted to its present Indian GAAPs are based on Historical Cost system hence
value if the effect of time value of money is material. Refer discounting model is not used in AS 29.
Ind AS 16 where the dismantling costs are brought to its
present value and then such cost is added to the cost of
asset.
As per Ind AS -37 Contingent Assets requires disclosures in AS-29 prohibits the disclosure of Contingent Assets.
the financial statements. Almost the notified Ind AS 37 is
modeled as per IAS 37.
If a contract becomes Onerous the entity has to conduct No such provision.
the impairment test on the asset dedicated to that contract.
Ind AS 37 gives greater importance to legal and Bit weaker in explaining legal and constructive obligations.
constructive obligations.
Again IAS and Ind AS is more concerned about future Onerous contract was once just an interpretation. In fact
operating losses and onerous contract. Indian GAAP was not ready to face onerous loss provisions
as it relates to future incurrence of expenses.

A Practical IFRS Disclosure


Site Restoration and Other Environmental Provisions
The Group provides for the costs of restoring a site where a legal or constructive obligation exists. The
cost of raising a provision before exploitation of the raw materials has commenced is included in property,
plant, and equipment and depreciated over the life of the site. The effect of any adjustments to the provision
due to further environmental damage is recorded through operating costs over the life of the site to re lect
the best estimate of the expenditure required to settle the obligation at balance sheet date. Changes in the
measurement of a provision that result from changes in the estimated timing or amount of cash out lows, or
a change in the discount rate, are added to, or deducted from, the cost of the related asset as appropriate in
the current period. All provisions are discounted to their present value based on a long-term borrowing rate.

Differences between Ind AS-10 and IAS-10: NO DIFFERENCE.

Indian Accounting Standards_All chapters.indd 69 05-01-2016 05:12:35 PM


70 Indian Accounting Standards

READERS REFER THE CREATIVE TABLE.THE AUTHOR HAS A PATENT FOR THIS TABLE:

ITEM RECOGNITION MEASUREMENT


ACCRUED EXPENSES ex: wages Record as it is accrued Recorded with precision.
accrued
ACCRUED INCOME ex: Revenue Record as it is accrued subject to Recorded with precision.
earned as per AS 18 / AS 9 uncertainty
VALUATION GAIN ex: forex gain on Recorded only if it allowed by standard. Mostly estimated
monetary item Ind AS Ind AS-21/ Mostly unrealized (valuation) gains
AS-11 are not recorded
VALUATION LOSS ex: impairment of Mostly unrealized (valuation) losses Mostly estimated
assets Ind AS 36 / AS-28 ; NRV loss Ind are recorded
AS 2 / AS-2
PROVISIONS ex: warranty Yes one has to record.Ind AS 37 / Substantial estimation is required
AS-29
CONTIENGENT LIABILITY ex: Only requires a disclosure.Ind AS 37 N.A.
guarantees / AS 29
CONTIENGENT ASSETS ex: claims Only requires a disclosure.Ind AS 37 N.A.
pending in court for a compensation but in AS 29 it is ignored
REMOTE LIABILITY ex: fake or baseless Not even disclosed N.A.
liability. Suit filed by a party to just
grab money
FUTURE INCOME ex: next years sale of Strictly prohibited i.e. recognition is N.A.
goods not permitted
FUTURE EXPENSES ex: next years Strictly prohibited i.e. recognition is N.A.
rentals not permitted
FUTURE OPERATING LOSS ex: Strictly prohibited i.e. recognition is N.A.
estimated loss on operations not permitted
ONEROUS CONTRACT ex: Factory is Yes full recognition because the loss is Estimate the entire loss less benefits if
closed but rentals are payable till the unavoidableInd AS -37 / AS-29 any.
expiry of contract.

PROBLEMS AND SOLUTIONS

Problem 1: A Indian based shipping company lost an entire shipload of cargo valued at 50 lakhs on a
voyage to Australia. It is, however, covered by an insurance policy. According to the report of the surveyor the
amount is collectible, subject to the deductible clause (i.e., 10% of the claim) in the insurance policy. Before
year-end, the shipping company received a letter from the insurance company that a letter was in the mail
for 90% of the claim.
The international freight forwarding company that entrusted the shipping company with the delivery
of the cargo overseas has iled a lawsuit for 50 lakhs, claiming the value of the cargo that was lost on high
seas, and also consequential damages of 20 lakhs resulting from the delay. According to the legal counsel
of the shipping company, it is probable that the shipping company would have to pay the 50 lakhs, but it is
a remote possibility that it would have to pay the additional 20 lakhs claimed by the international freight
forwarding company, since this loss was speci ically excluded in the freight forwarding contract.
Required: What provision or disclosure would the shipping company need to make at year-end?

Indian Accounting Standards_All chapters.indd 70 05-01-2016 05:12:35 PM


Ind AS 37: Events after the Balance Sheet 71

Solution: The shipping company would need to recognize a contingent asset of 45 lakhs (the amount that
is virtually certain of collection). Also it would need to make a provision for 50 lakhs toward the claim of
the international freight forwarding company. Because the probability of the claim of 20 lakhs is remote, no
provision or disclosure would be needed for that.
Problem 2: Pratapta Zesty operates a leet of 200 delivery vehicles. On 1 January 2018 legislation was
passed requiring all such vehicles to undergo modi ications to reduce the amount of harmful emissions they
produce or face large ongoing inancial penalties. The legislation require that modi ications be completed by
31 March 2018.
The approximate cost of such modi ications is 5,000 per vehicle. Pratapta Zesty has not yet modi ied any of
its vehicles.
The government has not yet imposed any penalties on Pratapta but the legislation indicated that the
annual penalty will be 4,000 per vehicle. This amount will be payable for every complete year from 1 April
2018 that modi ications do not take place and vehicles continue to be operated. The penalty will be levied
pro-rata for any part year of non-compliance.
Solution: The key issue here is the extent of any provisions that need to be made in respect of the vehicle
modi ications. This issue is governed by Ind AS 37- Provisions, contingent liabilities and contingent assets.
Ind AS 37 states that a provision is required where, at the reporting date:
The entity has a present obligation arising out of a past event
There is a probable future out low of economic bene its
The out low can be estimated reliably.
A key factor in the above criteria is that the obligations must be unavoidable. As far as the modi ications
are concerned although the legislation took effect from 31 March 2018 the vehicle have nevertheless been
used for six months in the current inancial year so there cannot be any unavoidable obligation to modify
them at the reporting date.
One obligation that does appear to be unavoidable is the penalties that will become payable as a result of the
illegal use of the vehicles from the effective date of the legislation. Therefore a provision of 400(200*4*6/12)
would be necessary due to the illegal operation of the vehicles for six months. This provision would be
recognized as a liability in the statement of inancial position, with a charge of 400 in the income statement.
P roblem 3: On 31 March 2018 Kallappa was in the process of defending a legal case brought against it for
damages caused due to the supply by Kallappa of faulty products. Kallappas lawyers provided the following
estimates of the likely outcome of the case:
A 70% chance of defending the case successfully.
A 20% chance of being required to pay 3 million in damages.
A 10% chance of being required to pay 5 million in damages.
The draft inancial statements included a provision for 1.1 million(70% nil + 20% $3 million + 10%
$5 million). The charge in the statement of comprehensive income was made to administrative expenses.
The directors of Kappa have estimated that the legal costs of defending the case will total 400,000.
300,000 of this has already been invoiced by the lawyers covering fees up to and including 31 March 2018.
Kallappa has included 300,000 in trade payable s and charged 300,000 to administrative expenses, but has
not provided for the expected future costs of 100,000.
In the event of successfully defending the case, the directors of Kallappa believe there is a good chance
that they will be able to recover their legal costs, but they have not yet re lected this fact in the draft inancial
statements.
Solution: Under the provisions of Ind AS 37- provisions, contingent liabilities and contingent assets- where
a single obligation is being measured the provision that is recognized should be for the most likely outcome.
In the case the most likely outcome is that the case will be successfully defended so no provision should be

Indian Accounting Standards_All chapters.indd 71 05-01-2016 05:12:35 PM


72 Indian Accounting Standards

made for possible damages, although the range of outcomes should be disclosed. Therefore 1,100 should be
removed from administrative expenses.
As far as the legal costs are concerned these will be payable to the lawyers irrespective of whether or
not the case is successfully defended. The event giving rise to the legal claim, has occurred before the year
end. Therefore the full amount of the likely costs should be provided for and 100 added to administrative
expenses. The issue of a potential reimbursement needs to be considered separately. Ind AS 37 states that an
asset (and therefore a reduction in expenses) should only be recognized if reimbursement is virtually certain.
Therefore Kallappa is correct not to re lect this in the inancial statements.
Problem 4: On 1 October 2016 Epsilon purchased an aircraft for use by its executive on business trips.
The purchase price paid was 15 million plus recoverable sales taxes of 1.5 million. The expected useful
economic life of the aircraft is 15 years. Every ive years the aircraft needs a major overhaul in order to
renew its safety certi icate. The current cost of such overhauls is 1.8 million. Your assistant has included
16.5 million (15 million + 1.5 million) in property, plant and equipment and has charged depreciation of
1.1 million (16.5 million 1/15) to the statement of comprehensive income. He has charged 360,000
(1.8 million 1/5) to the statement of comprehensive income in respect of the overhaul, intending to build
up a provision of 1.8 million over the next ive years in order to cover the cost of the irst overhaul.
Solution: It is incorrect to show the recoverable sales taxes as part of the cost of property, plant and equipment.
Ind AS 16- property, plant and equipment- states that only irrecoverable sales taxes should be treated in this
way. Recoverable sales taxes may well have been recovered by the end of the reporting period, either by
repayment or by deduction from an amount payable to the tax authorities. If they have not been recovered
by the year end they should be included as a receivable or as a deduction from a payable as appropriate.
It is incorrect to make a provision of 360,000 in respect of the future overhaul. Ind AS 37- provisions,
contingent liabilities and contingent assets- states that a provision is only appropriate where there is an
obligation to incur the expenditure at the end of the reporting period. In this case, the expenditure could be
avoided by withdrawing the aircraft from service. Ind AS 16 states that the correct treatment of this issue
is to regard the future overhaul as part of the expected cost of gaining access to the economic bene its from
the aircraft. Therefore the cost is regarded as a separate component of property, plant and equipment for
depreciation purposes. This means that the depreciation charged in the current period is in two parts:
360,000 (1.8 million 1/5) relating to the overhaul component
880,000 (1.5 million 1.8 million) 1/15) relating to the balance.

360,000 + 880,000

Therefore 1,240,000 will be charged to the SOCI (income statement) in the form of depreciation and
13,760,000 (15 million- 1,240,000) shown in the SOFP (balance sheet) as property, plant and equipment.

Indian Accounting Standards_All chapters.indd 72 05-01-2016 05:12:35 PM


Chapter 19
Ind AS 38: Intangible Assets

Ind AS-38 AS-26


Such exclusion is not covered in Ind AS. Scope excludes share issue expenses, VRS, discount
expenses etc, VRS, etc.
The definition of intangible asset is simply : an identifiable AS-28 provides an extended definition which includes
non monetary asset without physical substance. even the purpose of keeping asset for production, services,
rentals etc
The above definition even excludes identifiability. It includes identifiability as a part of definition.
Deferred settlement provision is covered same as Ind Not covered.
AS 38.
Ind AS covers the assets purchased under business No such provision.
combinations in greater detials. As for Ind AS in case
of business combination. Intangible Assets should be
recorded at Fair Value.
Ind AS 38 provides 2 options for carrying the assets: (i) AS-26 does not provide for revaluation but may be
Cost Model; (ii) Revaluation / Fair Value Model. It is one impaired as per AS -28.
of the A/C policy to be adopted by a company. It is to be
regularly practiced. Revaluation is based on fair valuation.
An IA is not in use should be checked for impairment Not covered.
compulsory.
Intangible assets with indefinite useful lives are not to be An IA having infinite life should be amortized for a
amortized. However, the asset maximum period of 10 years!.
must be tested for impairment annually and whenever
there is an indication that it may be impaired. Ind AS - 36
provides guidance on impairment.
As per Ind AS-20 (Government grant) any IA acquired at As per AS-12 (Government grant) any IA acquired at
nominal value is recorded at Fair Value. nominal value is recorded at acquisition cost.
Guidance given on derecognition. No guidance given on derecognition.
Accounting for deferred credit is covered same as Ind Not provided for.
AS-16.
Change in Depreciation method is a change in Accounting Change in Depreciation method is a change in Accounting
estimate. policy
Compensation for impairment receivable is to be disclosed Not provided.
in the profit/ loss statement.
Asset held out of active use or held for sale is separately Asset held out of active use or held for sale is to valued at
covered by Ind AS -105. lower of carrying value or NRV.

Indian Accounting Standards_All chapters.indd 73 05-01-2016 05:12:35 PM


74 Indian Accounting Standards

Assets acquired in consideration other than cash is based Assets acquired in consideration other than cash is based
on incoming asset (if FV can be reliably measured) on outgoing asset (if FMV of outgoing asset can be reliably
measured).
Mast of the above paints resemble with Ind AS-16 vs AS-10.

DIFFERENCES BETWEEN IAS-36 AND IAS-36


1) A change in Historical cost can undergo a change due to government grant (reduction of grant
from cost of the asset)IAS-16. Ind AS 16 does not permit reduction of grant option towards
the cost of ixed asset. Hence Historical cost does not get affected by grants.
Similar to IAS vs Ind AS.

SOME IMPORTANT POINTS ON Ind AS-16


(1) Scope of Ind AS-16
The Standard is to be applied in accounting for all intangible assets except:
Those that are within the scope of another Standard
Financial assets as de ined in Ind AS - 39, Financial Instruments: Recognition and Measurement
Mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil,
natural gas, and similar nonregenerative resources
The Standard does not apply to those intangible assets covered by other Standards, such as
Intangible assets held for sale in the ordinary course of business (Ind AS 2)
Deferred tax assets (Ind AS 12)
Leases within the scope of Ind AS 17
Assets arising from employee bene it plans (Ind AS 19)
Financial assets covered by Ind AS 39, Ind AS 27, Ind AS 28, or Ind AS 31
Goodwill acquired in a business combination (Ind AS - 103)
Intangible assets arising from insurance contracts (Ind AS 104)
Noncurrent intangible assets classi ied as held for sale in accordance with Ind AS 105.
(2) Criteria for Recognition: Similar to Ind AS -16 also refer AS-26
(3) Measurement for Recognition: Similar to Ind AS -16 also refer AS-26
Concept of Reaearch and Development is same as AS-26.
(4) Compensation for impairment: Similar to Ind AS -16
(5) Cost of an asset in case of deferred credit terms: Similar to Ind AS -16
(6) Measurement After Recognition: (Valuing Asset at Cost or Revalue Model). Similar to Ind AS -16
(7) Derecognition: Similar to Ind AS -16
(8) Revaluation provisions: Similar to Ind AS -16
(9) Amortization: Provisions regarding amortization is same as AS 26.
Additional points in relation to Ind AS 38.

Indian Accounting Standards_All chapters.indd 74 05-01-2016 05:12:35 PM


Ind AS 38: Intangible Assets 75

MODES OF ACQUISITION OF IA
1) Separately acquired IA. 2) IA acquired through business combinations, government grants, exchange
assets. 3) Internally generated.
IA acquired in Business Acquisition: In case of business combinations Goodwill is the residual cost after
recognizing all assets and liabilities. Ind AS- 103 recommends that all possible IA should be separately
identi ied and recognized before considering goodwill. If an IA is acquired and fair value can be possible,
then the IA should be irst determined @ Fair Value and balance as goodwill.
Infinite life in case of IA: As per AS-26 IA carrying in inite life ex: Stock Membership Card, is to be amortized
over 10 years maximum. But in case of Ind AS 38 IA assets with inde inite useful lives are not to be amortized.
However, the asset must be tested for impairment annually and whenever there is an indication that it may
be impaired.

Web Site Development Costs


The advent of the Internet has created new ways of performing tasks that were unknown in the past. Most
entities have their own Web site that serves as an introduction of the entity and its products and services
to the world at large. A Web site has many of the characteristics of both tangible and intangible assets. With
virtually every entity incurring costs on setting up its own Web site, there was a real need to examine this
issue from an accounting perspective.
An interpretation in relation to Web Site Costs.
SIC 32 lays down guidance on the treatment of Web site costs consistent with the criteria for capitalization
of costs established by IAS 38. According to SIC 32, a Web site that has been developed for the purposes of
promoting and advertising an entitys products and services does not meet the criteria for capitalization of
costs under IAS 38. Thus costs incurred in setting up such a Web site should be expensed.

PROBLEMS AND SOLUTIONS

Problem 1: Kasorabe Cabs acquired Taxi Cab card 1 crores. As government has limited the card holding
by only existing holders and no fresh cards will be issued the value will increases every year. Comment on
amortization as per AS-26 and Ind AS 38?
Solution:
AS 26: Write off over 10 years. Annual amortization = 10,00,000.
As per Ind As 38 the company should follow Revaluation Model of upward revaluation. No amortization
as the asset has in inite life.
Problem 2: Pandaba Golon Ltd has a license costing 6,00,000 and patent costing 7,00,000. Active market
available for patents and not for license. Comment on valuation as per Ind AS 38?
Solution: Patent should be valued at Revalued igure. License at Cost as the active market not available.

Indian Accounting Standards_All chapters.indd 75 05-01-2016 05:12:35 PM


Chapter 20
Ind AS 40 / IFRS 40: Investments Property

Objective of Ind AS-40


This Standard prescribes criteria for the accounting treatment for, measurement and disclosures relating to,
investment property.
Scope: The Standard applies to: (i) the measurement in a lessees inancial statements of investment property
held under a inance lease ; (ii) the measurement in the lessors inancial statements of investment property
leased out under an operating lease. However, all other aspects relating to leases, their accounting and their
disclosure, are dealt with in Ind AS 17, Leases.
The Standard does not deal with biological assets related to agricultural activity (see Ind AS 41) or to
mineral rights and mineral reserves such as oil, natural gas and similar non - regenerative resources (see Ind
As-106).

Definition: (in accordance with Ind AS 40)


Investment property: Investment property is land or building, or part of a building, or both, held by the
owner or the lessee under a inance lease to earn rentals and/or for capital appreciation, rather than for
use in production or supply of goods and services or for administrative purposes or for sale in the ordinary
course of business.
Owner-occupied property: Property held by the owner or the lessee under a inance lease for use in
production or supply of goods and services or for administrative purposes.

Special case of operating lease: [Not applicable to Ind, AS-40 but Applicable, to IAS-40]
Property interests held by a lessee under an operating lease may (i.e., it is optional) be classi ied and
recognized as an investment property if and only if the property would otherwise meet the de inition of an
investment property and the property is measured using the fair value model described later. This aspect
of recognizing investment property is a comparatively recent addition and was included in response to the
fact that in some countries, properties are held under long leases that provide, for all intents and purposes,
rights that are similar to those of an outright buyer. The inclusion in the Standard of such interests permits
the lessee to measure such assets at fair value as cost cannot be possible.

Summarized table

LAND AND BUILDING WHICH AS


Land and Building held as inventories (buying developing Ind AS- 2 (Inventories)
and selling for short term profits)

Indian Accounting Standards_All chapters.indd 76 05-01-2016 05:12:35 PM


Ind AS 40 / IFRS 40: Investments Property 77

Land and Building held for production, storage, distribution, Ind AS- 16 (PPE)
services, administrative purpose
Land and Building held by Lessor under operating lease Ind AS-40 (only pattern of recognizing lease income is
covered by Ind AS-17)
Land and Building held by Lessee under finance lease Ind AS-16 (PPE)
(further the asset is used for production of goods)
Land and Building held by Lessee under finance lease for Ind IAS-40
rentals
Land and Building held by Lessee under operating lease Lessee never records asset under such a case
(further the asset is used for production of goods)
Land and Building held by Lessee under operating lease Refer Special case of operating lease above
for rentals

DISTINGUISHING CHARACTERISTICS OF INVESTMENT PROPERTY


Investment property generates cash lows that are largely independent from other assets. The cash
lows have no connection with the actual business.
In case of owner-occupied property the owner is actively engaged in the business activity. But in case
of investment property the owner relaxes (i.e. plays a very passive role).
In case of owner-occupied property the owner is using the asset on a going concern basis hence gains
on revaluation is added to equity and not treated as realized gains. But in case of investment property
the revaluation gains is transferred to income account.
It is purely held for rentals and long term capital appreciation.
Hence, Investment property requires a distinct and separate set of accounting and disclosure
principles.

OTHER ISSUES
Part of the property held by owner for his business: In some instances, an entity occupies part of a
property and leases out the balance. If the two portions can be sold separately, each is accounted for
appropriately. If the portions cannot be sold separately, then the entire property is treated as investment
property only if an insigni icant proportion is owner-occupied.
Precisely what is meant by insigni icant is not de ined and is left to judgment. However, in other
Standards, indications are that 2% may be an applicable level.
Owner is providing other services with the property: Sometimes a property owner provides ancillary
services, such as cleaning, maintenance, and security. Provided that such services are insigni icant to the
arrangement as whole, then the property is an investment property.
In other casesfor instance, a hotelservices can be signi icant. In such case where the owner himself
is providing signi icant services other than letting out property then it is said that the property is used for
business. Ind AS-16 is applicable.
CFS level: An issue arises with groups of companies wherein one group company leases a property to
another. At group, or consolidation level, the property is owner-occupied. However, at individual company
level, the owning entity treats the building as investment property. Appropriate consolidation adjustments
would need to be made in the group accounts.
Property under construction: Earlier property under construction were accounted as Capital WIP Ind
AS-16. After the amendment to Ind AS-40under construction property is now accounted as per Ind AS-40.

Indian Accounting Standards_All chapters.indd 77 05-01-2016 05:12:36 PM


78 Indian Accounting Standards

Case Study on Ind AS-40: Chandiwala Associates Limited (CA Ltd.) and its subsidiaries have provided
you, a list of the properties they own:
(a) Land held by CA Ltd for future sale after some 5 years
(b) A vacant building owned by CA Ltd and to be leased out under an operating lease
(c) Property held as a wing of real estate business
(d) Property held by CA Ltd as a Warehouse for store goods.
(e) A hotel owned by CA Ltd. and appointed an external party Lucky Firm for providing hotel
management services. CA Ltd is not responsible for the hotel services as will be undertaken by
Lucky irm.
(f) Land, Building, Furniture ittings provided on rental basis.
(g) S1 a subsidiary of CA Ltd lets out a property to S2 again a subsidiary of CA Ltd under operating
lease basis.
(h) 50% Property is let out on rentals and 50% is used for services relating to consultancy. Also the
property cannot be separated.
(i) CA Ltd owns a property at Sangli costing 200 lakhs and market value 500 lakhs. The same is
given on inance lease to Baman Ltd.
Required: Advise CA Ltd. and its subsidiaries as to which of the above-mentioned properties would qualify
under Ind AS 40 as investment properties. If they do not qualify thus, how should they be treated under
Ind AS?
Solution:
(a) Ind AS-40 ; (b) Ind AS-40 ; (c) Ind AS-2 inventories ; (d) Ind AS-16 ; (e) Ind AS-40. The hotel servies
are not provided by CA Ltd. If CA LTd was actively involved in hotel services then it would be classi ied
under Ind AS-16 ; (f) Land, Building covered by Ind AS-40, but Furniture covered by Ind AS-16 ; (g) For S1:
Ind AS-40 ; For S2: Asset is not recorded ; For the Group CFS purpose: the property is classi ied as owner
occupied hence Ind AS-16 ; (h) As signi icant property is used for own business it is not covered by Ind
AS-40 ; (i) Lessor cannot record the asset as per Ind As-17. CA Ltd cannot record property. Obviously no
Ind AS-40(i) Ind AS-105.

RECONGITION OF INVESTMENT PROPERTY


Investment property shall be recognized as an asset when and only when:
It is probable that future economic bene its will low to the entity; and
The cost of the investment property can be measured reliably.
Recognition principles are similar to those contained in Ind AS - 16.

Measurement at the point of Recognition


An investment property shall be measured initially at cost, including transaction charges. Again, the
principles for determining cost are similar to those contained in IAS 16, in particular for replacement
and subsequent expenditure.
However, property held under an operating lease shall be measured initially using the principles
contained in IAS 17, Leasesat the lower of the fair value and the present value of the minimum lease
payments. A key matter here is that the item accounted for at fair value is not the property itself but
the lease interest. This means Ind AS-17 allows the lessee to record not the asset but the lease interest
in the asset.

Indian Accounting Standards_All chapters.indd 78 05-01-2016 05:12:36 PM


Ind AS 40 / IFRS 40: Investments Property 79

Measurement After Recognition (Valuation on Balance sheet date)


As per Ind AS 40 an entity shall select strictly recognize the cost model for all its investment property.
Under IFRS/IAS cost or fair value method is adopted.

Fair Value Model and Recognition of Gains and losses. (RELEVANT ONLY FOR IFRS)
If the fair model value is selected, after initial recognition, investment property shall be measured at
fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable,
willing parties in an arms-length transaction.
The FV should be based on market conditions on valuation date.
Any gains or losses arising from changes in fair value shall be recognized in the income statement.
This is quite a radical divergence from previous practices.
In addition, care needs to be taken as equipment, such as lifts, air conditioning, and the like, may be
recognized as separate assets. Valuations usually include such assets, which should not be double
counted.
If, on acquisition, it is not possible to determine fair value reliably on a continuing basis, then the asset
shall be measured using the cost model under IAS 16 until disposal. Therefore, it is possible for an
entity to hold investment property, some of which is measured at fair value and some under the cost
model.
If an entity measures investment property at fair value, it shall continue to do so until disposal, even if
readily available market data become less frequent or less readily available.

Cost Model
An entity that selects the cost model shall measure all of its investment property in accordance with Ind
AS 16s requirements for that model except those classi ied as held for sale in accordance with Ind AS 105.
If the company decided to measure the investment property under the cost model it would have to
account for it under Ind AS -16 using the cost model prescribed under that standard (which requires that the
asset should be carried at its cost less accumulated depreciation and any accumulated impairment losses).
Therefore, when investment property is measured under the cost model, the luctuations in the fair value of
the investment property from year to year would have no effect on the pro it and loss account of the entity.
Instead, the annual depreciation which is computed based on the acquisition cost of the investment property
will be the only charge to the net pro it or loss for each period (unless there is impairment which will also be
a charge to the net pro it or loss for the year).

THINGS TO REMEMBER
Fair value is not permitted under Ind AS. In other words we only adopt cost Depn Approach.

P roblem 1: Verma Lettings Limited buys land on 1.4.2012 at 75,00,000. Construction of Buildings costs
30,00,000. Verma decides to let out the property on a rental basis of 20,00,000 p.a. The Building has an
estimated life of 10 years with no salvage value. Following are the market prices for the property taken from
reliable sources: ( in lakhs)

Year FV of Land FV of Building


2012-13 100 29
2013-14 140 25
2014-15 150 27
2015-16 170 22
2016-17 180 19

Indian Accounting Standards_All chapters.indd 79 05-01-2016 05:12:36 PM


80 Indian Accounting Standards

Show the effect on P/L and carrying amount both under:


Cost model and fair value model:
Solution:
Year Effect on P/L Carrying Value
Cost model FV model Cost model FV model
2012-13 (3) +24 102 129
2013-14 (3) +36 99 165
2014-15 (3) +12 96 177
2015-16 (3) +15 93 192
2016-17 (3) +7 90 199

Initial Cost = 75+30 = 105. But building is depreciated 30 / 10 = 3. Therefore under cost approach land
and blgd = 105 3 = 102#.
Notes: Under Fair Value method have to recognize in net pro it or loss for each period changes in fair value
from year to year.
Ind AS-40 should go for COST MODEL and IAS 40 will have both the options.

Transfers
Transfers to and from investment property shall be made when there is change in the use:

Transfer from Transferred to Effect


investment property Owner occupied property Deemed cost for fixed asset will be the carrying
@ cost model amount of IP
investment property Inventories Deemed cost for Inventories will be the carrying
@ cost model amount of IP

Transfer from Transferred to Effect


Owner occupied property investment property IP will be at carrying amount of fixed asset
Inventories investment property IP initially held as inventory hence carried at
original cost or even NRV (no depreciation). It
will be transferred at (Cost PFD). The difference
between Cost PFD and value of inventory will be
transferred to P/L.

IP = investment property
Problem 2: Ghasmen Property holdings engaged in buying and selling properties on large scale. Property X
purchased on 1/4/2014 @ $ 50,000 including all other expenses. Every year the NRV of the property was
20 25% more than Cost. The property will be depreciated over 25 years SLM, SV = 40%.
On 1/4/2017 the entity decided to reclassify the Property X as investment property to be let out on rent
basis. Comment on the reclassi ication.
Solution: Property X is an inventory hence the valuation will be at Cost / NRV which ever is less. But as the
NRV is always higher than the cost (as given in the problem) the inventory will be kept at Cost.
On 1/4/2017 for asset reclassi ication we should bring the asset to ( Cost - PFD ). Cost PFD = 50000
1200 3 = $ 46,400.

Indian Accounting Standards_All chapters.indd 80 05-01-2016 05:12:36 PM


Ind AS 40 / IFRS 40: Investments Property 81

Entry:
P/L Dr 3,600
To Property X 3,600

Disposals:
An investment property shall be derecognized on disposal or at the time that no bene it is expected from
future use or disposal. Any gain or loss is determined as the difference between the net disposal proceeds and
the carrying amount and is recognized in the income statement.

Difference between IAS-40 and Ind AS-40


IAS has an option to follow either cost model or FV model. Ind AS only have Cost model.
IAS considers some of the operating lease interest (Lessee can records some asset on operating lease at
FV). Ind AS does not permit Fv at all. In other words Lessee cannot record its interest in operating lease as an
investment property.

Difference between IAS-40 and AS-13


AS-13 only provides mere de inition of investment property. Ind AS provides in detail with property
investments in detail.

Indian Accounting Standards_All chapters.indd 81 05-01-2016 05:12:36 PM


Chapter 21
Ind AS 41 / IAS 41: Agriculture

OBJECTIVE
Initially when there was no AS on Agriculture, entity use to recognize Agricultural assets at Cost. Hence a
need arises to set common principles for accounting in Agriculture Sector too.

SCOPE OF THE STANDARD


Ind AS-41 does include accounting for:
Biological Assets (BA),
Agricultural Produce,
Government Grants received on above.
Ind AS-41 is not applicable to:
Land used for BA,
Intangible Assets arising out of BA.
Example: Keshav Farms have cattle ield worth 7,00,000, Land owned for cattle ield 4,50,000.
Land owned for BA will be covered by Ind AS 16 (PPE)

Some Relevant Definitions


Biological Assets: It includes plants and animals living at present. Example: 10 buffaloes kept for yielding
milk. 10 buffaloes are biological assets. 200 Animals are kept in Zoo for entertainment to the public. This is
not BA. No agricultural produce can be obtained from it. There has to be some produce out of the BA.
Agriculture Activity: It is the management of Biological Transformation, management of Harvest of BA,
management of Conversion into agricultural produce, management of conversion into additional Biological
assets. Milk from a goat is Agricultural produce and the procedure of yielding milk is an Agricultural Activity.
Feeding of animals is also agricultural activity.
Biological Transformation: Relates to the processes of growth (calves grow into mature cow), degeneration
(beef cattle are slaughtered), and procreation (calves are born) that causes changes of quantitative or
qualitative nature in a biological asset.
Agricultural produce: The harvested product of the entitys biological assets, for example, milk and coffee
beans.
Harvest: It is the detachment of agricultural produce from a BA or cessation of life of BA.

Indian Accounting Standards_All chapters.indd 82 05-01-2016 05:12:36 PM


Ind AS 41 / IAS 41: Agriculture 83

Consumable Biological Assets: These are BA which gets destroyed/extinguished after they are harvested
or harvested and sold as biological assets. Example: Livestock for meat, Fish, crops like wheat which are
known as annual crops.
Bearer Biological Assets: These are BA which stay even after the agricultural activity or they are
self-regenerating assets. Ex: Livestock for milk, fruits from standing trees.

DO YOU KNOW
Biological transformation +/Harvest = Agricultural activity
Biological assets Agricultural activity gives = Agricultural produce.
Agricultural produce + Processing (machine / manual) = Processed Produce covered by IAS-2

DO YOU KNOW
Till Agricultural produce is not harvested from biological asset Ind AS-41 is applicable. But once it is harvested
Ind AS-2 will be applied. The FV cost at the point of sale becomes deemed cost for Ind AS-2

Refer the Table


Biological Assets IAS-41 Agricultural Produce IAS 41 Produce IAS- 2
(till it is not harvested)
Sheep Wool Blanket
Trees Fruits Juice
Cotton plants Cotton Cloth
Dairy cattle Milk Curd, Cheese
Pigs Carcass Sausages
Oil palms Picked fruit Palm Oil
Beef Meat Cooked and processed meat

Remember: Ind AS-41 is applicable to the BA and Agricultural produce till the point of harvest only. Further
processing of agricultural produce is not covered by Ind AS-41. For Ex: Mangoes are processed into pulp as
such pulp is not covered by Ind AS 41. It is covered by Ind AS-2. Also the mangoes once plucked from the trees
will be covered by Ind AS-2. Interestingly, they are not valued as per Ind AS-2 but valued at fair value under
forward sale.

INTERESTING FACTS
Sheep (Biological Asset) : Ind AS-41valued at Fair Value less estimated point of sales.
Sheep With Wool (Biological Asset) : Ind AS-41valued at Fair Value less estimated point of sales.
Only Wool (Agri Produce) : Ind AS 2.valued at NRV (not lower of Cost/NRV)
Blanket From Wool (Product) : Ind AS 2valued at Cost or NRV whichever is less.

DO YOU KNOW
Agriculture is distinguished from pure exploitation, where resources are simply removed from the environ-
ment (e.g., by ocean fishing or deforestation) without management initiatives such as operation of hatcheries,
reforestation, or other attempts to manage their regeneration.

Indian Accounting Standards_All chapters.indd 83 05-01-2016 05:12:36 PM


84 Indian Accounting Standards

IAS 41 sets forth a three-part test or set of criteria for agricultural activities. First, the plants or animals
which are the object of the activities must be alive and capable of transformation.
Second, the change must be managed, which implies a range of activities (e.g., fertilizing the soil and
weeding in the case of crop growing; feeding and providing health care in the instance of animal husbandry;
etc.). Third, there must be a basis for the measurement of change, such as the ripeness of vegetables, the
weight of animals, circumference of trees, and so forth. If these three criteria are all satis ied, the activity will
be impacted by the inancial reporting requirements imposed by IAS 41.

Special Discussion on Bearer Plant


What are Bearer Plants?
(a) they produce Agriculture produce,
(b) they are Biological Asset,
(c) they themselves cannot be Agriculture produce (i.e. they become Agriculture produce in a very rare
case),
(d) they are known as Bearer Plants because they bear fruits. After harvesting process the tree stay in its
same position.
Example: Palm trees, but sugarcane is not bearer plant as they are consumable assets, even lumbering trees
are not bearer plants.
After the bearer plant is no more in use it may be cut down to be sold as scrap for ire wood. Such incidental
scrap sales would not prevent the plant from satisfying the de inition of a bearer plant.
Old IAS does not provide for Bearer Plant, but the Revised IAS-41 provides for separate accounting for
Bearer Plant. Even Ind AS-41 is based on the latest version of IAS-41 (Rev).

Recognition and Measurement for Bearer Plant


(1) Unlike other Biological Asset or Agriculture produce the Bearer Plants are not recorded at FV. All
bearer plants are recorded at COST (Similar to Ind AS 16 PPE). Its not wrong to say that Bearer
Plants are Fixed assets as per Ind AS16.
(2) Before maturity Bearer Plants are accounted like a self - constructed asset i.e. accumulate
cost.same as Ind AS - 16
(3) After the maturity is attained Bearer Plants are accounted @cost or revaluation model .
same as Ind AS - 16
(4) Depreciation will be based on remaining useful life ..same as Ind AS - 16 or Schedule II
(5) Impairment of Bearer Plants will be governed by Ind AS-36 and not Ind AS-41.
(6) Government grants as per Ind AS-20 and not as per Ind AS-41.

DO YOU KNOW
Bearer plants are biological assets but not covered by Ind AS-41 for recognition, valuation etc.

Initial Recognition of Biological Asset and Agriculture produce (Except Bearer Plant)
An asset can be recognized as a Biological Asset or Agriculture produce when all the conditions are satis ied:
Asset should arise out of past event, bene its should be controlled by the entity (legal ownership/by
purchasing from the market/embossing birth marks);
Economic bene its should low to the entity
Fair Value or Cost (if FV not possible) should be reliably measured.

Indian Accounting Standards_All chapters.indd 84 05-01-2016 05:12:36 PM


Ind AS 41 / IAS 41: Agriculture 85

Measurement Initially and Even Subsequent Recognition of Biological Asset and


Agriculture Produce

Assuming Fair Value is Determinable


Biological Asset should be measured at Fair value less estimated point of sale costs.
Agriculture produce harvested from an entitys biological assets shall be measured at Fair value less
estimated point of sale costs.
Point of sale costs: Includes commissions to brokers and dealers, levies by regulatory agencies/commodity
exchanges, all duties and duties. It does not include transport costs.
Example: 5 goats are purchased at 27000. Transport charges 500. Auctioneers fees 1% of sales value. Cost
of goats = 27000. FV estimated point of sale costs = 27000 270 = 26730. 5 goats will be recorded at
26730.
Recognition of gains / loss: Initial as well as year ending difference will be transferred to P/L account.
Example: 5 goats are purchased at 27000 on 1/1/2016. Transport charges 500. Auctioneers fees 1% of
sales value. Cost of goats = 27000. FV estimated point of sale costs = 27000 270 = 26730. 5 goats will
be recorded at 26730.
1/1/2016 Livestock Dr 27,500
To Cash 27,500
P/L Dr 730
To Livestock 730 (27500-26730) Assets now carried @FV
Suppose on 31/3/2016 Value of each goat is 6300. Transport charges to sell 700. Auctioneers fees
1.1% of sales value.
31/3/2016 Livestock Dr 4,423 (6300*5 347) - 26730
To P / L 4,423
*Transport chs on sale is ignored as no actual sale took place. Also Ind AS-41 exc-8ludes transport costs as
a deduction from FV.
Suppose on 31/3/2017 Value of each goat is 7,200. Transport charges to sell 800. Auctioneers fees
1.2% of sales value. 1 goat dead by giving birth to 2 goats. Value of small goats on 31/3/2017 is 25% of the
value of matured goats.
31/3/2017 Livestock Dr 851 (7200*4+7200*0.25*2) 1.1% Fees) - 31193
To P / L Dr 851
Fair Value: It is the amount for which the asset can be exchanged or a liability settled between parties at
arms length price.
Active Market: For Fair Valuation purpose we require information from market. If active market does not
exist then MP of similar assets can be taken. Ex: If MV of white buffalo is not available then we should go for
black buffalo with some adjustment. Sometimes we can also go for Sector benchmark as FV (ex: per Kg
of meat)

Comment Whether The Following Cases Falls Under Ind As-41


1) Managing activities for keeping animals in Zoo ; 2) Animals in Game park ; 3) Animals in Circus ; 4) Natural
Breeding of animals in Zoo ; 5) Managed breeding for programme to sell animals ; 6) Ocean ishing; 7) growing
plants for use in research ; 8) growing plants for sale ; 9) Land purchased for farming ; 10) growing plants to
produce another plants ; 11) Fish processing and packing; 12) Annual crops wheat ; 13) Milk ; 14) Hens in
poultry farm ; 15) Eggs laid down by Hens, 16) Chickens; 17) managing ish activity to slaughter further; 18)
plucked lowers, 19) unplucked lowers

Indian Accounting Standards_All chapters.indd 85 05-01-2016 05:12:36 PM


86 Indian Accounting Standards

Solution: 1) No ; as it is neither for sale nor for producing agriculture produce nor for producing another
biological asset. 2) same as 1, 3) same as 1, 4) No Its unmanaged breeding hence not covered by Ind AS-41,
5) Yes biological asset for sale, 6) Harvesting biological assets from unmanaged activity is not an agricultural
activity, 7) No same as 1, 8) Yes, even plants are biological asset (living things), 9) Land is scoped out of Ind
AS-41, 10) Yes biological asset used to generate another biological asset, 11) Not an agricultural activity. Fish
processed products covered by Ind AS-2 as inventory as they are the produce and not agriculture produce.
But only Fish is a biological asset, 12) No ; They are biological asset but they are scoped out of Ind AS 41
being bearer plants; 13) Milk we yield from biological asset hence it is an agriculture produce at the point of
harvest; Beyond point of harvest it is inventory; 14) Yes it is a biological asset; 15) No; after eggs are laid it is
inventory. It is agricultural produce only at the point of harvest ; 16) Yes; biological asset ; 17) Yes ; 18) No;
agriculture produce only at the point of harvest; 19) Yes; unplucked lowers are not yet harvested and hence
agriculture produce.
P roblem 1: Is a pregnant ewe (female sheep) a biological asset. What about the offspring (lamb)? When it
will be recognized?
Solution: Yes a pregnant sheep is a biological asset (living animal). Baby lamb is also a biological asset (living
animal). It is not an agriculture produce but another biological asset. Baby lamb will be recorded once it is
born.

Measurement initially and even subsequent recognition of Biological Asset and Agriculture
produce:
ASSUMING FAIR VALUE IS NOT DETERMINABLE:
It is always presumed that the fair value is always reliably measured. But if FV is not reliably measured then
the biological asset and agriculture produce should be measured at COST PFD Impairment losses.
Example: 5 goats are purchased at 27000. Transport charges 500. Auctioneers fees 1% of sales value.
Cost of goats = 27000. FV estimated point of sale costs = 27000 270 = 26730. 5 goats will be recorded
at 26730.
Recognition of gains / loss: Initial as well as year ending difference will be transferred to P/L account.
Example: 5 goats are purchased at 27000 on 1/1/2016. Transport charges 500. Auctioneers fees 1% of
sales value. Cost of goats = 27000. FV estimated point of sale costs = 27000 270 = 26730. 5 goats will
be recorded at cost = 27500.
1/1/2016 Livestock Dr 27,500
To Cash 27,500
Assuming life of the animal estimated to be 5 years.
31/3/2016 Depreciation Dr 1,375 trf to P/L
To Livestock 1,375 (Now the carrying amount = 26125)
Assuming there is a dreadful disease spread named goat lu by next year. The value of goat reduced to
Rs. 7000 in total. Value in use is Rs. 6300 (PV).This is impairment.
31/3/2017 Depreciation Dr 1,375 trf to P/L
To Livestock 1,375 (Now the carrying amount = 26125)
Impairment loss Dr 17,750 (27500-1375-1375-7000)
To Livestock 17,750

Government Grants
A government grant that is related to a biological asset measured at fair value less estimated point-of-
sale costs should be recognized as income when the government grant becomes receivable.

Indian Accounting Standards_All chapters.indd 86 05-01-2016 05:12:36 PM


Ind AS 41 / IAS 41: Agriculture 87

For unconditional grant Immediate Recognition is allowed. If there are conditions attached to the
government grant, then the government grant shall be recognized only when those conditions are
met.
Ind AS-20 is to bearer plants.
Ind AS 41 does not deal with government grants that relate to agricultural produce. These grants may
include subsidies. Subsidies are normally payable when the produce is sold and would therefore be
recognized as income on the sale.
Ind AS-41 does not deal with Capital or Deferred Approach unlike Ind AS-20.

Unconditional Grant
Example: Value LTd is engaged in organic farming. It receives 300000 grant every year. This grant is to be
immediately recorded as no condition is attached towards the grant.

Unconditional Grant
Example: Value LTd is engaged in farming of bajra of special kind. It receives 4000000 grant initially on a
condition that a certain quantity of bajra has to be produced in aggregate period of 3 years. This grant will be
recorded only after 3 years. If a certain quantity is not achieved then the grant has to be refunded. The entity
has to disclose a contingency on grant about the return of grant.

Presentation
Current and Non Current classi ication is possible even in Ind AS-41.
Problems 2: Value of grapes on vine plant Rs 6300000. It will be harvested within 15 days from the year
ending. Stand alone Vine plant Cost 200000. Depreciation 20000. Point of sales costs for grapes Rs. 20000.
Land on which grapes are grown 5000000 and market value 200 crores. For Ind AS-16 the entity follows
Cost Model. Show suitable presentation as per both Ind AS 16 and 41.
Solution:
Assets:
Non Current Assets:
Fixed Assets: Ind AS-16
Land 5000000 cost
Biological assets 180000 cost depn
Current Assets:
Ind AS-41
Grapes 6280000 (FV expenses)
Master problem on Ind AS-41
A public limited company, Dairy, produces milk on its farms. It produces 30% of the countrys milk that is
consumed. Dairy owns 450 farms and has a stock of 210,000 cows and 105,000 heifers. The farms produce
8 million kilograms of milk a year, and the average inventory held is 150,000 kilograms of milk. However,
the company is currently holding stocks of 500,000 kilograms of milk in powder form.
At October 31, 2016, the herds are
210,000 cows (3 years old), all purchased on or before November 1, 2015
75,000 heifers, average age 1.5 years, purchased on April 1, 2015
30,000 heifers, average age 2 years, purchased on November 1, 2015
No animals were born or sold in the year.

Indian Accounting Standards_All chapters.indd 87 05-01-2016 05:12:36 PM


88 Indian Accounting Standards

The unit values less estimated point-of-sale costs were


1-year-old animal at October 31, 2016: $32
2-year-old animal at October 31, 2016: $45
1.5-year-old animal at October 31, 2016: $36
3-year-old animal at October 31, 2016: $50
1-year-old animal at November 1, 2015 and April 1, 2016: $30
2-year-old animal at November 1, 2015: $40
The company has had problems during the year: Contaminated milk was sold to customers. As a result,
milk consumption has gone down. The government has decided to compensate farmers for potential
loss in revenue from the sale of milk. This fact was published in the national press on September 1,
2016. Dairy received an of icial letter on October 10, 2016, stating that $5 million would be paid to it on
January 2, 2017.
The companys business is spread over different parts of the country. The only region affected by the
contamination was Borthwick, where the government curtailed milk production in the region. The cattle
were unaffected by the contamination and were healthy. The company estimates that the future discounted
cash low income from the cattle in the Borthwick region amounted to $4 million, after taking into account
the government restriction order. The company feels that it cannot measure the fair value of the cows
in the region because of the problems created by the contamination. There are 60,000 cows and 20,000
heifers in the region. All these animals had been purchased on November 1, 2015. A rival company had
offered Dairy $3 million for these animals after point-of-sale costs and further offered $6 million for the
farms themselves in that region. Dairy has no intention of selling the farms at present. The company has
been applying Ind AS 41 since November 1, 2015.
Required: Advise the directors on how the biological assets and produce of Dairy should be accounted for
under IAS 41, discussing the implications for the inancial statements.
Solution: Biological assets should be measured at each balance sheet date at fair value less estimated
point-of-sale costs unless fair value cannot be measured reliably. The Standard encourages companies to
separate the change in fair value less estimated point-of-sale costs between those changes due to physical
reasons and those due to price.
Fair value of cattle excluding Borthwick region:
$000 $000
Fair value at November 1, 2015
Cows (210,000 60,000) $40 6,000
Heifers (30,000 20,000) $30 300
Purchase 75,000 heifers $30 2,250
8,550
Increase due to price change
150,000 $(45 40) 750
10,000 $(32 30) 20
75,000 $(32 30) 150
920
Increase due to physical change
150,000 $(50 45) 750
10,000 $(45 32) 130
75,000 $(36 32) 300
1,180

Indian Accounting Standards_All chapters.indd 88 05-01-2016 05:12:36 PM


Ind AS 41 / IAS 41: Agriculture 89

Fair value less estimated point-of sale costs at October 31, 2016
150,000 $50 7,500
10,000 $45 450
75,000 $36 2,700
10,650
Borthwick regionfair value of cattle:
This region has an inventory of cattle of 60,000 cows and 20,000 heifers. Fair value is dif icult to ascertain
because of the regions problems. However, according to IAS 41, if fair value was used on initial recognition,
then it should be continued to be used. The cattle in this region would have been fair valued at November
1, 20X3, under the Standard. Therefore, the cattle must be valued at fair value less estimated point-of-
sale costs as at October 31, 20X4. Although $3 million has been offered for these animals, this may be an
onerous contract as rival companies are likely to wish to take advantage of the problems in this region. The
future discounted income is again an inappropriate value as the cattle are healthy and could be moved to
another region and sold. The cattle in this region would therefore be valued at
$000
60,000 cows $50 3,000
20,000 heifers $45 900
3,900

Additional Points
The powdered milk inventory will be valued using IAS 2, Inventories, and will be valued at the lower
of cost and net realizable value. Because of the large amount of inventory, there may be an issue
regarding obsolescence or possibly contamination, which might result in a reduction in the assets
value.
Biological assets that meet the criteria to be classi ied as held for sale should be accounted for using
IFRS 5. The offer for the farms and cattle would not meet the criteria under IFRS 5 as from Dairys
viewpoint, the carrying amount of the assets (disposal group) is unlikely to be recovered now prin-
cipally through a sale transaction.
Unconditional government grants should be recognized when the grants become receivable.
The statement in the national press on September 1, 2016, would not be suf icient to recognize
the grant, but the of icial letter of October 10, 2016, would be suf icient. Therefore, a receivable of
$5 million would be shown in the inancial statements to October 31, 2016, and credited to income.

Distinguish between Ind AS-41 and Indian GAAP: No Indian GAAP


Carve out between Ind AS-41 and IAS-41. No Carve outs.

Indian Accounting Standards_All chapters.indd 89 05-01-2016 05:12:36 PM


Chapter 22
Ind AS-105 Noncurrent Assets Held for Sale and
Discontinued Operations

Ind AS-105 AS-24


Known as Non - Current asset held for sale and discontinued Known as Discontinuing operations (DO).
operations (NCA HFS and DO)
Quite broad coverage. Narrow coverage only.
Includes discontinuing as well as discontinued operations. Covers only discontinuing operations.
No mention about cash flows Vs (NCA HFS and DO). If an entity prepares cash flow statement then the
statement of cash flow should include cash flows related
to DO.
Assets held for sale should be sold within 1 year (with some No such period. Do can even takes some 2-3 years no
exceptions kept aside). problem.
Initial disclosure event is not defined. Initial disclosure event is very well defined.please
refer AS-24.
Valuation for assets held for sale will be lower of carrying
amount and fair value less costs to sell. Depreciation stops
once the asset is reclassified as HFS.
In case of DO as it is already discontinued no question of DO have to depreciated as usual / impaired as usual when
valuation arises here. it is still not discontinued.
Abandonment of assets are not NCA HFS. Abandoned assets are one of the method to discontinue
the assets.
Guidelines on Plan to sell the assets given in detail. No such guideline is being provided.
Subsidiary exclusively held for sale is covered under the Sale of subsidiary is not covered.
definition of DO.

Scope
The purpose of Ind AS 105 to specify the accounting for assets held for sale and the presentation and
disclosure of discontinued operations.

Some Definition
Assets held for sale: Assets held for sale is a noncurrent asset whose carrying amount will be recovered
mainly through selling the asset rather than through usage.
Disposal group: A group of assets and possibly some liabilities that an entity intends to dispose of in a single
transaction. It may be even a CGU (as de ined in Ind AS-36) as well as Goodwill allocable to such CGU.

Indian Accounting Standards_All chapters.indd 90 05-01-2016 05:12:36 PM


Ind AS-105 Noncurrent Assets Held for Sale and Discontinued Operations 91

For classifying a noncurrent asset or disposal group as held for sale, following conditions are necessary:
(1) the asset must be available for immediate sale in its present condition and its sale must be highly
probable.
(2) the asset must be currently being marketed actively at its current fair value.
(3) the sale should be completed, or expected to be so, within a year from the date of the classi ication.

Classify the following into HFS: Ind AS 105


(1) A property given on rental ;
(2) A vehicle not in use for which potential buyer is being looked for ;
(3) One of activity carries 3 assets and 1 liability is being advertised for sale (liability has to be taken
along with the asset). Sale is at 40% discount ;
(4) Property held for sale and a binding agreement is entered which will buy the asset after 3 years ;
(5) 50% of investment property is held for sale ;
(6) Entire investments in JV is held for sale ;
(7) An entity is committed to a plan to sell a building and has started looking for a buyer for that building.
The entity will continue to use the building until another building is completed to house the of ice
staff located in the building. There is no intention to relocate the of ice staff until the new building is
completed.
(8) XYZ has purchased a property and decided to renovate it an even install the lift inside the building.
Once the building is ready it will be sold.
Solution:
(1) Not HFS,
(2) Not HFS,
(3) Yes it is a disposal group we further assume that the group must be available for immediate sale in
its present condition and its sale must be highly probable.
(4) No because the non current asset will be sold after 1 year. It has to be sold with 1 year.
(5) Yes it is a non - current asset HFS, further assume that the asset must be available for immediate sale
in its present condition and its sale must be highly probable.
(6) same as 5,.
(7) The building will not be classi ied as held for sale as it is not available for immediate sale.
(8) Not HFS the asset must be available for immediate sale in its present condition.

Evidences to Prove that the Management is Committed to Sell the Asset


The actions required to complete the planned sale will have been made, and it is unlikely that the plan
will be signi icantly changed or withdrawn.
For the sale to be highly probable, management must be committed to sell the asset and must be
actively looking for a buyer.
It is possible that the sale may not be completed within one year. In this case, the asset could still be
classi ied as held for sale if the delay is caused by events beyond the entitys control and the entity is
still committed to selling the asset.

Situations where An Extension of the Period Required Completing the Sale are Allowable
Even if the NCA HFS extend beyond one year it is still considered under Ind AS-106:
(a) The entity has committed itself to sell a noncurrent asset, and it expects that others may impose
conditions on the transfer of the asset and where the conditions could not be completed until after

Indian Accounting Standards_All chapters.indd 91 05-01-2016 05:12:36 PM


92 Indian Accounting Standards

a irm purchase commitment has been made and a irm purchase commitment is highly probable
within a year.
(b) A irm purchase commitment is made but a buyer unexpectedly imposes conditions on the transfer
of the noncurrent asset held for sale. Timely actions should be taken to respond to the conditions,
and a favorable resolution is anticipated.
(c) During the one-year period, unforeseen circumstances arise that were considered unlikely, and the
noncurrent asset is not sold. Necessary action to respond to the change in circumstances should be
taken.

Case Study
(1) Facts
An entity is planning to sell part of its business that is deemed to be a disposal group. The entity is in a
business environment that is heavily regulated, and any sale requires government approval. This means
that the sale time is dif icult to determine. Government approval cannot be obtained until a buyer is found
and known for the disposal group and a irm purchase contract has been signed. However, it is likely that
the entity will be able to sell the disposal group within one year.
Required: Would the disposal group be classi ied as held for sale?
Solution: The disposal group would be classi ied as held for sale because the delay is caused by events or
circumstances beyond the entitys control and there is evidence that the entity is committed to selling the
disposal group.
(2) Facts
An entity has an asset that has been designated as held for sale in the inancial year to 31/12/2015.
During the inancial year to 31/12/2016, the asset still remains unsold, but the market conditions for the
asset have deteriorated signi icantly. The entity believes that market conditions will improve and has not
reduced the price of the asset, which continues to be classi ied as held for sale. The fair value of the asset is
50,00,000, and the asset is being marketed at 75,00,000.
Required: Should the asset be classi ied as held for sale in the inancial statements for the year ending
31/12/2016?
Solution: Because the selling price is in excess of the current fair value, the asset is not available for
immediate sale and should not be classi ied as held for sale.

Other Important Points


Exchanges of noncurrent assets between companies can be treated as held for sale when such an
exchange has a commercial substance in accordance with Ind AS 16.
Occasionally companies acquire noncurrent assets exclusively with a view to disposal. In these cases,
the noncurrent asset will be classi ied as held for sale at the date of the acquisition only if it is antici-
pated that it will be sold within the one-year period and it is highly probable that the held-for-sale
criteria will be met within a short period of the acquisition date. This period normally will be no more
than three months.
If the criteria for classifying a noncurrent asset as held for sale occur after the balance sheet date,
the noncurrent asset should not be shown as held for sale. However, certain information should be
disclosed about the noncurrent assets.
Non - Current assets or disposal groups that are to be abandoned do not meet the de inition of held
for sale. Abandonment means that the noncurrent asset (disposal group) will be used to the end
of its economic life, or the noncurrent asset (disposal group) will be closed rather than sold. The

Indian Accounting Standards_All chapters.indd 92 05-01-2016 05:12:36 PM


Ind AS-105 Noncurrent Assets Held for Sale and Discontinued Operations 93

reasoning behind this is because the carrying amount of the noncurrent asset will be recovered prin-
cipally through continued usage. However, a disposal group that is to be abandoned may meet the
de inition of a discontinued activity.

MEASUREMENT OF NON CURRENT ASSET OR DISPOSAL GROUP HELD FOR SALE


Rules for Measurement
Before classifying into HFS: Just before an asset is initially classi ied as held for sale, it should be measured
in accordance with the applicable Ind AS. For ex: Investment property should be valued at cost less
depreciation as per Ind AS-40.
From the date they classified into HFS: When noncurrent assets or disposal groups are classi ied as held
for sale, they are measured at the lower of the carrying amount and fair value less costs to sell.
The measurement provisions of this Ind AS do not apply to deferred tax assets, assets arising from employee
bene its, inancial assets within the scope of Ind AS 39, noncurrent assets accounted for in accordance with
the fair value model in Ind AS 40, noncurrent assets that are measured at fair value less estimated point-of-
sale costs under Ind AS 41, and contractual rights under insurance contracts as de ined in Ind AS - 104.
When the sale is expected to occur in over a years time, the entity should measure the cost to sell at its
present value. Any increase in the present value of the cost to sell that arises should be shown in pro it and
loss as a inance cost.
Example: A plants FV is 4,00,000 and costs to sell is 20,000. The IRR is taken as 10%. The plant would
be expected to be sold after at the end of 1 year may be beyond that. The FV costs = 400000 PV of 20000
= 400000 18182 = 381818.
The difference between the carrying value and the fair value less costs will be treated as impairment loss
is recognized in pro it or loss on any initial or subsequent write-down of the asset or disposal group to fair
value less cost to sell. Any impairment loss recognized for a disposal group should be applied in the order set
out in Ind AS - 36.
Any subsequent increases in fair value less cost to sell of an asset can be recognized in pro it or loss to the
extent that it is not in excess of the cumulative impairment loss that has been recognized in accordance with
Ind AS- 105 or previously in accordance with Ind AS 36.
Noncurrent assets or disposal groups classi ied as held for sale should not be depreciated.
Master problem on measurement of NCA and DG HFS
Trilex Restructuring Co. had following assets on 01/04/2016:

Disposal Group HFS Carrying amount Fair value less costs


Goodwill 500000
Pant 4000000
Property 8000000
Financial assets (available for sale) 600000
Inventories 200000
Less: Overdraft (400000)
12900000 11800000

Assuming that: Financial assets are valued as per Ind AS- 109 and Inventories valued as per Ind AS 2.

Indian Accounting Standards_All chapters.indd 93 05-01-2016 05:12:36 PM


94 Indian Accounting Standards

Soluiton: The impairment loss = 129-118 = 1100000. Allocation as per Ind AS 36:
Disposal Group HFS Carrying amount Impairment Carrying amount
Goodwill 500000 (500000) 0
Pant 4000000 (200000) 3800000
Property 8000000 (400000) 7600000
Financial assets (available for sale) 600000 600000
Inventories 200000 200000
Less: Overdraft (400000) (400000)
12900000 11800000

Measurement of impairment loss is not applicable to Financial assets as well as to current asset like
inventory.

Change of plan: (These provisions are similar to Ind AS-36)


If criteria for an asset to be classi ied as held for sale are no longer met, then the asset or disposal
group ceases to be held for sale.
In this case, the asset or disposal group should be valued at the lower of the carrying amount before
the asset or disposal group was classi ied as held for sale (as adjusted for any subsequent deprecia-
tion, amortization, or revaluation) and its recoverable amount at the date of the decision not to sell.
Any adjustment to the value should be shown in income from continuing operations for the period.
If an asset is removed from a disposal group, the disposal group will continue to be classi ied as such
only if it still meets the criteria set out in the Standard.

Disclosure of Non Current Assets


Noncurrent assets held for sale and assets of disposal groups must be disclosed separately from other assets
in the balance sheet. The liabilities must also be disclosed separately in the balance sheet. Assets and liabilities
cannot be offset and shown as a single amount.

Balance sheet

Liabilities: ` Assets `
Non Current liabilities xxx Non Current assets xxx
Currents Assets Currents Assets
NCA Held for liabilities xxx NCA Held for sale xxx

DISCONTINUED OPERATIONS: PRESENTATION AND DISCLOSURE


A discontinued operation is a part of an entity that has either been disposed of or is classi ied as held for
sale and:
(a) Represents a separate major line of business or geographical area of operations;
(b) Is part of a single coordinated plan to dispose of separate major line of business or geographical area
of operations; or
(c) Is a subsidiary acquired exclusively with a view to resale.
Schedule III of the Companies Act 2013 provides for a single line disclosure of pro it / loss after tax from
discontinued operations.
Also the after-tax gain or loss recognized on the measurement to fair value less cost to sell (or on the
disposal) should be presented as a single igure (impairment).

Indian Accounting Standards_All chapters.indd 94 05-01-2016 05:12:36 PM


Ind AS-105 Noncurrent Assets Held for Sale and Discontinued Operations 95

Ind AS - 105 requires detailed disclosure of revenue, expenses, pretax pro it or loss, and the related income
tax expense, either in the notes or on the face of the income statement. If this information is presented on the
face of the income statement, the information should be separately disclosed from information relating to
continuing operations.
Cash flows: Regarding the presentation in the cash low statement, the net cash lows attributable to the
operating, investing, and inancing activities of the discontinued operation should be shown separately on
the face of the statement or disclosed in the notes. Any disclosures should cover both the current and all
prior periods that have been shown in the inancial statements. Retrospective classi ication as a discontinued
operation where the criteria are met after the balance sheet date is prohibited.
If the entity ceases to classify a component as held for sale, the results of that element must be reclassi ied
and included in income from continuing operations.

DO YOU KNOW
An abandoned disposal group cannot be non current asset held for sale because its carrying amount will be
recovered through continuing use. It may be classified as a discontinuing operation.

P roblem 2: On February 2016 the directors decided to close down a business segment. The decision
was taken out of the desire to refocus on the strategic direction of the group. On 14/3/2016 the same was
communicated to the relevant parties with a view to terminate existing contracts and arrange for the sale of
assets. Latest estimates of the inancial implications of the closure are as follows:
Plant having a net book value of 12,00,000 on 31/3/2016 will be sold for 1,00,000.
A freehold property having a net book value of 10,00,000 on 31/3/2016 will be sold for 15,00,000.
Inventory valued at 3,00,000 (Cost 3,20,000).
Solution: As far as the non-current assets of the segment are concerned these satisfy the Ind AS 105 criteria
for assets held for sale. An asset is classi ied as held for sale if its value will be recovered principally through
sale as opposed to continuing use. The implications of this classi ication is that the plant and property will
be classi ied as held for sale on the balance sheet and measured at the lower of existing carrying value and
fair value less costs to sell. This means that the plant and equipment will be written down by 11,00,000 but
that the property will continue to be carried at 10,00,000 (remember whichever is less) even if you revalue
otherwise at fair value.. Under the principles of IFRS 5 it would be correct to show the results separately if
the segment can be regarded as a discontinued operation. In order for this to be the case the segment would
have to be:
A component of the entity (where operations and cash lows can be clearly distinguished, operationally and
for inancial reporting purposes, from the rest of the entity) that either has been disposed of or is classi ied as
held for sale and:
Represents a separate major line of business or geographical area of operations; or
Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical
area of operations; or
Is a subsidiary acquired exclusively with a view to resale.
In this case it appears that the segment would be regarded as a discontinued operation. This means that
the company needs to disclose a single amount on the face of the income statement comprising the total of:
The post-tax pro it or loss of the discontinued operation and
The post-tax gain or loss recognized on the measurement to fair value less costs to sell of the assets of
the discontinued operation.
P roblem 3: Lucky Utility has four outlets: Lucky View, Lucky Osho, Lucky Blue, Lucky Plus. A business
restructuring was carried out for the year 31/3/2016:

Indian Accounting Standards_All chapters.indd 95 05-01-2016 05:12:36 PM


96 Indian Accounting Standards

Lucky Plus is to be discontinued. The assets and liabilities are not disposed off separately. It will be sold
in a single transaction. The pro it after tax shows a igure of 5,00,000, Sum of the assets: 14,00,000 and
liabilities 3,00,000. Recoverable value 20,00,000.
Part of Lucky Osho i.e. a building along with its furniture will be sold. The loan liability will also be passed
in the same transaction. The division will be continued. Assets impaired at 25,000.
Show the above reconstruction plan.
Solution:
Lucky Plus satis ies a DO. This means that the company needs to disclose a single amount on the face of the
income statement comprising the total of:
The post-tax pro it or loss of the discontinued operation 5,00,000 and
The assets and liabilities of the DO satis ies also the de inition of disposal group held for sale. The post-
tax gain or loss recognized on the measurement to fair value less costs to sell of the assets of the discontinued
operation Nil.no impairment.

Balance Sheet: (assets and liabilities to be separately disclosed)


Current Asset:
NCA HFS: Sundry Assets = 1400000
Current liabilities:
NCL HFS: Sundry liabilities = 300000

Lucky Osho satis ies the de inition of disposal group held for sale. Assets and liabilities are to be separately
disclosed as above in case of DO.
However impairment loss is to be disclosed separately under the head continuing operations.
Problem 4: Omega follows the cost model when measuring its property, plant and equipment. One of its
properties was carried in the statement of inancial position at 31March 2017 at $6 million. The depreciable
amount of this property was estimated at $3.6 million at 31 March 2017 and the estimated future economic
life of the property at 31 March 2017 was 18 years. Omega depreciates its properties on a monthly basis.
On 1 January 2018 Omega decided to dispose of the property as it was surplus to requirements and began
to actively seek a buyer. On 1 January 2018 Omega estimated that the market value of the property was $ 7.1
million and that the costs of selling the property would be $80,000. These estimates remained appropriate at
31March 2018.
The property was sold on 1 June 2018 for net proceeds of $7million.
Required: Explain, with relevant calculations, how the property would be treated in the inancial statements
of Omega for the year ended 31 March 2018 and the year ending 31 March 2019.
Solution: Year ended 31March 2018
On 1 January 2018 the property would be designated as held for sale. The implications of this treatment
are that the property would cease to be depreciated and be classi ied in a separate section of the statement
of inancial position-non-current assets held for sale.
The depreciation on the property to the date of classi ication as held for sale would be 150 (3600x1/18x9/12)
and this would be charged as an operating expense in the statement of comprehensive income.
The carrying value of the properly immediately before reclassi ication of 5850(6000-150) would be
compared with its fair value less costs to sell of 7020(7100-80). The new carrying value of the property is
the lower of these two amounts- in this case 5,850.
Year ended 31 March 2019
No depreciation will be charged on the property.
At the date of sale, pro it on sale of 1,150 (7,000-5,850) will be reported in the statement.

Indian Accounting Standards_All chapters.indd 96 05-01-2016 05:12:36 PM


Chapter 23
Ind AS 106 / IFRS 6: Exploration and Evaluation
Expenditures

Ind AS 106 deals with the treatment of expenditure incurred on Mining activities.
Capitalized
Charged to P/L
If capitalized then: Tangible assets or Intangible assets.
Recall the Mining rights and mineral resources are excluded from Ind AS-38 and Ind AS 16.

SCOPE
Applicable only to entities engaged in Mining activities;
Recognition principles related to exploration and evaluation of resources;
Recognition of impairment loss

DO YOU KNOW
Ind AS-106 treats the exploration and evaluation costs as assets even though no demonstration of probable
future benefits is ascertained. Capitalization is permitted even if no asset recognition criteria is met.

INITIAL RECOGNITION
If an entitys accounting policy results in the recognition of an exploration and evaluation asset, Ind AS 106
requires the entity to measure the asset initially at cost.
An entity is required to determine a policy that speci ies which expenditures are recognized as part of
the cost of exploration and evaluation assets.
That policy should consider the degree to which the expenditure can be associated with inding
speci ic mineral resources.
Expenditures that according to an entitys policy might be recognized as exploration and evaluation assets
include expenditures for
Acquisition of rights to explore Example: Junction Ltd applies to the board of coal mines for acquiring
rights to explore land and paid a fees of 40,000
Topographical, geological, geochemical, and geophysical studies Example: Hire an expert who can
determine an appropriate site for drilling 75,000.
Exploratory drilling Example: Drilling work with machines paid . 30,000
Trenching Example: Digging trenches paid 17,000
Sampling extracting minerals, distributing, sampling, sorting, etc.

Indian Accounting Standards_All chapters.indd 97 05-01-2016 05:12:37 PM


98 Indian Accounting Standards

Activities in relation to evaluating the technical feasibility and commercial viability of extracting a
mineral resource
In some cases, general and administrative and overhead costs directly attributable to exploration and
evaluation activities might also qualify for recognition as exploration and evaluation assets.
P roblem 1: Oil and Gas company ventured into discovery of oil for which they took a land to explore the
possibility of extracting oil:
Oil and Gas company applied for acquiring rights and paid fees 40,000.
Wajib an expert in topography was hired at 75,000
Travelling expenses of Wajib 13,00 borne by the company
Drilling work with machines paid . 30,000
Digging trenches paid 17,000
Sampling 18,000
After the irst block of oil was extracted it was send to another site for evaluating the technical feasibility
and commercial viability of oil purity. Fees 50,000 and transport cost 2,000. Calculate cost of exploration
and evaluation costs as assets.
Solution: Assets in relation to exploration and evaluation = 40,000 + 75,000 + 13,00 + 3,0000 + 17,000 +
18,000 + 5,0000 + 2,000 = 2,33,300.

Expenditures that according to an entitys policy might not be recognized as exploration and
evaluation assets include expenditures for:
Expenditures related to the development of mineral resources (i.e., preparations for commercial
production, such as building roads and tunnels) cannot be recognized as an exploration and evalu-
ation asset. Property, plant, and equipment used to develop or maintain exploration or evaluation
assets also cannot be recognized as an exploration and evaluation asset. Such assets are accounted as
per Ind AS-16.
Expenditure before actual process starts (Example: Cost of legal fees paid before taking oil extraction
permission).

Recognition of Liability for Restoration Work


A provision regarding the restoration as per Ind AS-37 has to be made once the work of exploration and
evaluation starts. Provision should not be made gradually and neither when the work is completed. Ex: After
the oil exploration work is done the company is require to restore the site. Cost of the site estimated to be
75000. The PV of 75000 is assume 52000. The company should make a provision for 52000 today an go
on unwinding the discount every year.
Entry:
P/ L Dr. xxx
To Provision for site restoration xxx

Classification of Capital Assets


An entity classi ies an exploration or evaluation asset as either a tangible asset or an intangible asset according
to the nature of the asset.
Examples: Vehicles and drilling rigs would be classi ied as tangible assets. Depreciation on Vehicles and
Drilling rights would be classi ied as intangible assets.
Problem 2: Acqua entity purchased a vehicle costing 7,00,000 engaged in exploratory drilling of the mine.
Depreciation of vehicle 40,000. Fuel consumed by vehicle 6,000. Drilling rig 5,00,000. Depreciation on
rig 75,000. Other drilling expenses 1,15,000.

Indian Accounting Standards_All chapters.indd 98 05-01-2016 05:12:37 PM


Ind AS 106 / IFRS 6: Exploration and Evaluation Expenditures 99

Solution:
Tangible E & E assets:
Vehicle (700000-40000) = 6,60,000
Drilling rig (500000-75000) = 4,25,000 10,85,000
Intangible E & E assets:
Depreciation on Vehicle = 40,000
Depreciation on drilling rig = 75,000
Fuel consumed = 6,000
Other expenses = 1,15,000 2,36,000

Subsequent Measurement
After initial recognition, an entity applies one of two measurement models to exploration and evaluation
assets:
(1) The cost model
(2) The revaluation model

Impairment
Because of the dif iculties in obtaining the information necessary to estimate future cash lows of exploration
and evaluation assets, Ind AS-106 modi ies the requirements of IAS 36 regarding the circumstances in which
exploration and evaluation assets are required to be assessed for impairment.
Ind AS-106 requires exploration and evaluation assets to be assessed for impairment when facts and
circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its
recoverable amount. Facts or circumstances that may indicate that impairment testing is required include:
The period for which the entity has the right to explore in the speci ic area has expired or is expected
to expire in the near future, unless the right is expected to be renewed.
Substantive expenditure on further exploration and evaluation activities in the speci ic area is neither
budgeted nor planned.
Exploration and evaluation activities in the speci ic area have not led to the discovery of commercially
viable quantities of mineral resources, and the entity has decided to discontinue such activities in the
speci ic area. If such facts or circumstances exist, the entity is required to perform an impairment test
in accordance with Ind AS 36.

Disclosures
Ind AS - 106 requires an entity to disclose information that identi ies and explains the amounts recognized in
its inancial statements arising from the exploration for and evaluation of mineral resources. Such disclosures
include
Accounting policies for exploration and evaluation expenditures, including the recognition of explora-
tion and evaluation assets
The amounts of assets, liabilities, income, and expense, and operating and investing cash lows arising
from the exploration for and evaluation of mineral resources

Indian Accounting Standards_All chapters.indd 99 05-01-2016 05:12:37 PM


Chapter 24
Ind AS 108: Operating Segments

AS-17 Ind AS 108


AS-17 titled as Segment Reporting Ind AS-108 titled as Operating Segment
AS-17 requires classification between Business segment Ind AS-108 requires identification of operating segments based on
and Geographical Segment. Further the classification is internal management reports that are regularly reviewed by the entitys
into Primary and Secondary Segments. chief operating decision maker for the purposes of allocating resources
to the segments and assessing their performance.
Segments which are not material or non reportable (by Reported separately or if not separately reported is an unallocated
10%....criteria) are shown in unallocable column. reconciling item
Segments definition does not mention intersegment According to Ind AS-108, a segment is component of an entity that sells
transferor segment as one of the segment. Yes but our primarily or exclusively to other operating segments of the entity is
segment revenue definition includes revenue from other included in the definition of an operating segment provided the entity
segments. is managed in that manner.
Not covered IFRS 8 extends the scope of segment reporting to include
(1) entities that hold assets in a fiduciary capacity for a broad group of
outsiders and
(2) entities whose equity or debt securities are publicly traded and
entities that are in the process of issuing equity or debt securities in
public securities markets.
Accounting policies adopted for the entitys financial May or may not be consistent with the accounting policies adopted for
statements are used. the entitys financial statements.
Liabilities should be part of segment reporting Measure of liabilities may be disclosed in segment information IF
regularly reported to CODM
AS 17 is silent on this aspect Previous period segment reporting to be re-stated unless information
is not available
AS 17 is silent on this aspect Start - up operations may be operating segments before earning
revenues
No Aggregation criterion is applicable. The criteria for Two or more operating segments may be aggregated if:
BS / GS are based on risk and reward profile. Aggregation is consistent with the core principle of Ind AS - 8
These operating segments have same economic characteristics; and
They are similar in MAJORITY of the following aspects:-
a. nature of products and services;
b. nature of production process;
c. type or class of customers;
d. methods used for distribution of products or providing services;
e. Nature of regulatory environment, IF applicable eg. Banking,
insurance or public utilities
Interest revenue and interest expenses should not form Interest revenue and interest expenses to be separately reported for the
part of the definition of segment revenue and segment reportable segment. No specific mention about their exclusion.
expense is a specific mention.
Segment Reporting is just a formal Statement of Segment Ind AS - 108 requires reconciliations of total reportable segment
Assets, Liabilities, Revenue and Expenses. Reconciliation is revenues, total profit or loss, total assets, and other amounts disclosed
not mentioned. for reportable segments to corresponding amounts in the entitys
financial statements.

Indian Accounting Standards_All chapters.indd 100 05-01-2016 05:12:37 PM


Ind AS 108: Operating Segments 101

Differences between IFRS - 8 and Ind AS-108


IFRS-8 shall apply to (a) separate / individual financial statements of an entity and Applicability of Ind AS-108
(b) consolidated financial statement of parent, whose debt or equity instruments is based on provisions of
are, traded in public market or, proposed to be filed with a securities commission Companies Act.
for trading in a public market
If a financial report of an entity contains both the consolidated statements of a
parent as well as parents separate financial statements then segment information
is required for CFS only.

Some Important Points on Ind AS-108


(1) Definition of Operating Segment:
According to Ind AS-108 an operating segment is a component of an entity :
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)
Whose operating results are reviewed regularly by the entitys Chief Operating Decision Maker (CODM)
to make decisions about resources to be allocated to the segment and assess its performance; and
For which discrete inancial information is available.
Following important points emerges from the above de inition:
No concept of BS / GS. No concept of primary and secondary segment. It is the CODM who will decide the
Segments. From the irst part of the de inition it is even clear that even a transferor segment is a Segment. It is a
Manager dominated classi ication rather than based on risk and return analysis. Yes, its correct. Management
knows how to allot resurces and how that segments are performing.
(2) Aggregation criteria:
According to Ind AS-108 an operating segment is a component of an entity:
Two or more operating segments may be aggregated if these operating segments have same economic
characteristics; and they are similar in majority the following aspects:-
a. nature of products and services; Example: chairs, tables are similar product can be merged
b. nature of production process; Example: chairs, tables can be merged
c. type or class of customers;
d. methods used for distribution of products or providing services; ex: Rishabh Publications sells books
for academic and professional through retail outlet only.
e. Nature of regulatory environment: Example: Life insurance and property can be merged.
Problem 1: Rekfor Fontry Ltd has 2 products making servers and making other software. Most of the risk
and reward factors are common. But the CODM wants to classify them as segment. Comment as per AS-17
and Ind AS-108.
Solution: AS-17: Business or Geographical Segments are decided by risk and reward pro ile / features.
Accordingly servers and other software are Segments.
Ind AS-108: Ind AS-108 requires identi ication of operating segments based on internal management
reports that are regularly reviewed by the entitys chief operating decision maker for the purposes of
allocating resources to the segments and assessing their performance. If as per the CODM the 2 products
are 2 segments then yes the entity should follow Segment reporting. Also one should check the 10% criteria.

Indian Accounting Standards_All chapters.indd 101 05-01-2016 05:12:37 PM


Chapter 25
Miscellaneous Topics (Adapted)

Ind AS 115 Revenue From Contracts


Key Differences
Ind AS 115 Revenue from Contracts with Customers is a comprehensive standard that deals with
revenue recognition. It supersedes AS 9 Revenue Recognition and AS 7 Construction Contracts.
Ind AS 115 has introduced a ive-step model with a single principle for recognizing revenue that
applies to all contracts. AS 9 speci ies different recognition and measurement criteria for varying
streams of revenue.
Ind AS 115, unlike AS 9 Revenue Recognition requires revenue to be measured at the amount of consid-
eration to which an entity expects to be entitled (rather than contractually speci ied) in exchange for
transferring the promised goods or services.
Ind AS 115 has introduced the concept of variable consideration. It takes various forms, including (but
not limited to) price concessions, volume discounts, rebates, refunds, credits, incentives, performance
bonuses and royalties. An entitys past business practices can cause consideration to be variable if
there is a history of providing discounts or concessions after goods are sold. AS 9 currently contains
no guidance in this regard.
For recognition of revenue from rendering of services, Ind AS 115 requires that revenue should be
recognized over time by measuring progress toward completion. AS 9 provides an option to use either
the proportionate completion method or the completed service contract method for speci ied transac-
tions for recognizing revenue from service transactions.

Multiple element arrangements


According to AS 9, revenue is measured by the charge made to customers or clients for goods supplied and
services rendered and by the charges and rewards arising from the use of resources by them. In the absence
of a fair value concept, it sometimes becomes dif icult to determine revenue for a contract that contains
multiple elements such as sale of goods and rendering of services. Ind AS 115 prescribes that the transaction
price in such arrangements must be allocated to each separate performance obligation, so that revenue is
recorded at the right time and in the right amount. Under Indian GAAP, an EAC opinion deals with accounting
in the case of multiple element contracts in a limited way.

Control model
Ind AS 115 has introduced the control model to determine the point of revenue recognition. Management
needs to determine, at contract inception, whether control of a good or service transfers to a customer over
time or at a point in time. Arrangements where the performance obligations are satis ied over time are not
limited to services arrangements. Complex assets or certain customized goods constructed for a customer,

Indian Accounting Standards_All chapters.indd 102 05-01-2016 05:12:37 PM


Miscellaneous Topics (Adapted) 103

such as a complex re inery or specialized machinery, could also be transferred over time, depending on the
terms of the arrangement. Revenue is recognized over time if any of the following three criteria are met:
The customer simultaneously receives and consumes the bene its provided by the entitys perfor-
mance as the entity performs
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 entityand the entity
has an enforceable right to payment for performance completed to date This model may have the
highest impact for companies engaged in construction or real estate business.

Reduced volatility of revenue recognition for rendering of services


Since Ind AS 115 requires revenue to be recognized over time by measuring progress toward completion,
entities that defer revenue based on the completed service contract method under AS 9 will experience a
signi icant impact on their income statement. The volatility of the income statement of such entities will be
streamlined by the application of Ind AS 115, and the pro it or loss for the period will better represent the
efforts put in by the entities during the period.

Impact on an organization and its processes


Ind AS 115s core principle is that an entity will recognize revenue when it transfers goods or services to
customers in an amount that re lects the consideration to which the entity expects to be entitled in exchange
for those goods or services. This will require entities to use more judgment and make more estimates than
under current Indian GAAP. Unlike Indian GAAP, Ind AS 115 provides detailed guidance on the identi ication of
separate performance obligations of a single transaction. It will be essential to apply the recognition criteria
to the separate performance obligations of every transaction to re lect the substance of the transaction.
Therefore, marketing strategies, such as free maintenance services for cars, loyalty points by hotels and
supermarkets and free handsets by telecom operators, would need to be carefully evaluated to gauge their
impact on revenue recognition. Ind AS 115 requires stand-alone selling prices to be determined for all of the
identi ied performance obligations. Companies that do not currently estimate stand-alone selling prices will
need to involve personnel beyond those in the accounting or inance departments. Personnel responsible
for an entitys revenue recognition policies may need to consult with operating personnel involved in
pricing decisions to determine estimated stand-alone selling prices, especially when there are limited or no
observable input.

Ind AS 103: Business Combinations


Key Differences
1. Ind AS 103 Business Combinations applies to most business combinations, including amalgamations
(where the acquiree loses its existence) and acquisitions (where the acquiree continues its
existence). Under current Indian GAAP, there is no comprehensive standard dealing with all business
combinations. AS 14 Accounting for Amalgamations applies only to amalgamations. i.e., when acquiree
loses its existence and AS 10 Accounting for Fixed Assets applies when a business is acquired on a
lump-sum basis by another entity. AS 21 Consolidated Financial Statements, AS 23 Accounting for
Investments in Associates in Consolidated Financial Statements and AS 27 Financial Reporting of
Interests in Joint Ventures apply to subsidiaries, associates and joint ventures, respectively.
2. Ind AS 103 requires all business combinations within its scope to be accounted under the purchase
method, excluding business combinations of entities or businesses under common control, which
are to be accounted using the pooling of interest method. Current Indian GAAP permits both the
purchase method and the pooling of interest method in the case of amalgamation. The pooling of
interest method is allowed only if the amalgamation satis ies certain speci ied conditions.

Indian Accounting Standards_All chapters.indd 103 05-01-2016 05:12:37 PM


104 Indian Accounting Standards

3. Ind AS 103 permits the net assets taken over, including contingent liabilities and intangible assets,
to be recorded at fair value. Indian GAAP permits the recording of net assets at carrying value.
Contingent liabilities of the acquiree are not recorded as liabilities under Indian GAAP.
4. Ind AS 103 prohibits amortization of goodwill arising on business combinations, and requires it
to be tested for impairment annually. Indian GAAP requires amortization of goodwill in the case
of amalgamations. With reference to goodwill arising on acquisition through equity, no guidance is
provided in Indian GAAP.
5. Under Ind AS 103, acquisition accounting is based on substance. Reverse acquisition is accounted
assuming the legal acquirer is the acquiree. In Indian GAAP, acquisition accounting is based on form.
Indian GAAP does not deal with reverse acquisitions.
6. Ind AS 103 requires that contingent consideration in a business combination be measured at fair
value at the date of acquisition, and that this is recognized in the computation of goodwill/negative
goodwill. Subsequent changes in the value of contingent consideration depend on whether they
are equity instruments, assets or liabilities. If they are assets or liabilities, subsequent changes are
generally recognized in pro it or loss for the period. Under Indian GAAP, AS 14 requires that where
the scheme of amalgamation provides for an adjustment to the consideration contingent on one
or more future events, the amount of the additional payment is included in the consideration and
consequently goodwill, if payment is probable and a reasonable estimate of the amount can be made.
In all other cases, the adjustment is recognized as soon as the amount is determinable. No guidance
is available for contingent consideration arising under other types of business combinations.
7. Ind AS 103 speci ically deals with accounting for pre-existing relationships between acquirer and
acquiree, and for re-acquired rights by the acquirer in a business combination. Indian GAAP does not
provide guidance for such situations.
8. Ind AS 103 provides an option to measure any non-controlling (minority) interest in an acquiree at
its fair value, or at the non-controlling interests proportionate share of the acquirees net identi iable
assets. Under Indian GAAP, AS 21 does not provide the irst option. It requires minority interest in a
subsidiary to be measured at the proportionate share of net assets at book value.
9. Ind AS 103 requires that, in a business combination achieved in stages, the acquirer remeasures
its previously-held equity interest in the acquiree at its acquisition date fair value. The acquirer is
to recognize the resulting gain or loss, if any, in pro it or loss. There is no such requirement under
Indian GAAP. Under AS 21, if two or more investments are made in a subsidiary over a period of time,
the equity of the subsidiary at the date of investment is generally determined on a step-by-step basis.
The changes brought in by Ind AS 103 are going to affect all stages of the acquisition process from
planning to the presentation of the post-deal results. The implications primarily involve providing
greater transparency and insight into what has been acquired, and allowing the market to evaluate
the managements explanations of the rationale behind a transaction.

The key impact of Ind AS 103 is summarized below:

Depiction of more appropriate value of an acquisition


Following an acquisition, inancial statements will look very different. Assets and liabilities will be recognized
at fair value. Contingent liabilities and intangible assets that are not recorded in the acquirees balance sheet
are likely to be recorded at fair value in the acquirers balance sheet. In a business combination achieved in
stages, the acquirer shall remeasure its previously-held equity interest in the acquiree at its acquisition date
fair value. The acquirer shall also have an option to measure non-controlling interest at fair value. These
changes in the recognition of net assets, and the measurement of previously held equity interests and non-
controlling interests, will signi icantly change the value of goodwill recorded in inancial statements. Goodwill
re lected in inancial statements will project actual premium paid by an entity for the acquisition.

Indian Accounting Standards_All chapters.indd 104 05-01-2016 05:12:37 PM


Miscellaneous Topics (Adapted) 105

Greater transparency
Signi icant new disclosures are required regarding the cost of the acquisition, the values of the main classes
of assets and liabilities, and the justi ication for the amount allocated to goodwill. All stakeholders will be
able to evaluate the actual worth of an acquisition and its impact on the future cash low of the entity.

Significant impact on post-acquisition profits


Under Indian GAAP, net assets taken over are normally recorded at book value, and hence, the charges to the
pro it and loss account for amortization and depreciation expenses are based on carrying value. However, net
assets taken over will be recorded at fair value under Ind AS 103. This will result in a charge to the pro it and
loss account for amortization and depreciation based on fair value, which is the true price paid by the acquirer
for those assets. Goodwill is not required to be amortized, but is required to be tested annually for impairment
under Ind AS 103. Negative goodwill is required to be credited to capital reserve. In a business combination
achieved in stages, the previously-held equity interest in the acquiree is measured at its acquisition date fair
value. The resulting gain or loss, if any, is recognized in the pro it and loss account. These items will increase
volatility in the income statement.

Use of experts
The acquisition process should become more rigorous, from planning to execution. More thorough evaluation
of targets and structuring of deals will be required to withstand greater market scrutiny. Expert valuation
assistance may be needed to establish values for items such as new intangible assets and contingent liabilities.

Purchase price allocation


Under Indian GAAP, no emphasis was given to purchase price allocation, as net assets were generally recorded
based on the carrying value in the acquirees balance sheet. Ind AS 103 places signi icant importance on
the purchase price allocation process. All identi iable assets of the acquired business must be recorded at
their fair values. Many intangible assets that would previously have been included within goodwill must be
separately identi ied and valued. Explicit guidance is provided for the recognition of such intangible assets.
Contingent liabilities are also required to be fair valued and recognized in the acquirers balance sheet.

Deal terms
Closer scrutiny of contingent payments to employees or selling shareholders in a business combination may
be required to assess if they would form part of the acquisition consideration or were payments in lieu or
compensation for future employment and hence needed to be expensed. No detailed guidance is currently
available in the current Indian standards for such an evaluation.

Ind AS: 2 Share Based Payments


Key Differences
1. Under Ind AS, employee share-based payments should be accounted for using the fair value method.
In contrast, Indian GAAP permits an option of using either the intrinsic value method or the fair
value method.
2. Ind AS provides detailed guidance on accounting for group and treasury share transactions. No such
guidance is provided in Indian GAAP.

Impact on Financial Reporting


Reduced volatility in income statement on account of actuarial differences
Actuarial gains and losses arise due to changes in actuarial assumptions, such as with respect to the discount
rate, increase in salary, employee turnover, mortality rate, etc. The requirement to account for actuarial gains

Indian Accounting Standards_All chapters.indd 105 05-01-2016 05:12:37 PM


106 Indian Accounting Standards

and losses in other comprehensive income will reduce volatility in their income statement arising on account
of actuarial differences.

Timing of recognition of termination benefits


Under Ind AS, termination bene its are required to be provided when the scheme is announced and the
management is demonstrably committed to it. Under Indian GAAP, termination bene its are required to be
provided for based on legal liability when employee signs up for the Voluntary Retirement Scheme (VRS)
rather than constructive liability. This is generally a timing issue for creating a provision.

True value of ESOP


Indian GAAP permits entities to account for Employee Stock Ownership Plans (ESOPs), either through the
fair value method or the intrinsic value method though disclosure is required to be made of the impact on
pro it or loss of applying the fair value method. It is observed that most Indian entities prefer to adopt the
intrinsic value method. The drawback of this method is that it does not factor in option and time value when
determining compensation cost. Under Ind AS,the accounting for ESOPs will have to be remeasured using
the fair value method. This may result in increased charges for ESOPs for many entities, and will have a
signi icant impact on key indicators such as earnings per share.

Accounting for share-based payments to non-employees


In recent times, it has been observed that many entities are entering into partnership agreements with their
vendors to provide them with opportunities of sharing pro its of a particular venture by offering them share-
based payments. This mode of payment is considered as an incentive tool intended to encourage vendors to
complete ef icient and quality work. Under Indian GAAP, AS 10 requires a ixed asset acquired in exchange for
shares to be recorded at its fair market value or the fair market value of the shares issued, whichever is more
clearly evident. For other goods and services, there is no guidance on recognizing the cost of providing such
bene its to vendors in lieu of goods or services received. Different accounting policies are being followed by
Indian entities, ranging from no-charge to accounting, as per principles of IFRS 2 Share-based Payment. On
transition to Ind AS, an entity will have to account for such bene its under the fair value method laid down in
Ind AS 102.

Accounting for group ESOPs


In India, a subsidiary normally does not account for ESOPs issued to its employees by its parent entity,
contending that clear-cut guidance is not available and it does not have any settlement obligation. Under Ind
AS 102, such ESOPs will have to be accounted as per principles laid down in Ind AS 102, i.e., either as equity-
settled or as cash-settled plans, depending on speci ic criteria. As per Ind AS 102, a receiving entity whose
employees are being provided ESOP bene its by a parent will have to account for the charge. This will re lect
the true compensation cost of receiving employee bene its.

Impact on an Organization and its Processes


Ind AS 19 and Ind AS102 are likely to have a major impact on many organizations. Additional liabilities
arising from the adoption of Ind AS102 will negatively impact inancial results and ratios. In some situations,
the ability to pay dividends may be affected and there may also be implications from restrictive covenants
in existing debt/equity agreements. As a result, entities should carry out a comprehensive review of their
rewards and recognition mechanisms in order to ensure that these continue to support business strategies in
a cost-effective manner. Along with cash cost, accounting cost also needs to be considered. The impact on key
stakeholders (senior management, employees, potential recruits, trade unions, pension trustees and rating
agencies) needs to be understood.

Indian Accounting Standards_All chapters.indd 106 05-01-2016 05:12:37 PM

You might also like