Professional Documents
Culture Documents
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
Chapter 1
Ind AS 1: Presentation of Financial Statements
Statement of P & L
Note
Separate comparative FS
Special case
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.
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.
Controlling Int.
DO YOU KNOW
Balance Sheet is known as SOFP and P/L is known as SOCI under IFRS.
Problem 1: ML Ltd presents you the summarized trail balance for the year 31/3/2015. ( crores)
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
665.14
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.
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.
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.
THINGS TO REMEMBER
CFOA = Cash From Operating Activities, CFIA = Cash From Investments Activities, CFFA = Cash From Financing
Activities.
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.
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.
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.
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
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.
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.
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
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
Taxable Deductible
temporary difference temporary difference
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.
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.
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.
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.
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 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
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.
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.
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)
Derecognition
Derecognition is the opposite of recognition. The carrying amount of an item of property, plant, and equipment
shall be derecognized:
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.
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
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
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
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.
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.
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
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)
In case of Ind AS-19: The Actuarial g/l is immediately consumed by the pro it / loss account but
routed through OCI.
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
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.
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.
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.
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.
(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.
Here, I am require to rewrite the entire Ind AS - 21. It is very different from AS 11 (Rev)
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.
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.
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)
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
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.
DO YOU KNOW
In most of the cases the Functional Currency is same as Presentation Currency..its like every
Maharashtrian speaks Marathi.
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)
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.
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.
The balance in equity Yens 144000r re lects the Fx equity reserve A/c.
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
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)
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.
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.
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.
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)
Solution for H3 is same as H2 and H1 bit change in Reason .i.e all are RP.
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.
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%.
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.
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:
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
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.
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.
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.
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
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.
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.
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.
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).
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.
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
READERS REFER THE CREATIVE TABLE.THE AUTHOR HAS A PATENT FOR THIS TABLE:
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?
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
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.
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.
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.
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.
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 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
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.
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.
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)
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:
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
Assuming that: Financial assets are valued as per Ind AS- 109 and Inventories valued as per Ind AS 2.
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.
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
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:
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.
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.
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.
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).
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
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,
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.
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.
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.
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.
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.
and losses in other comprehensive income will reduce volatility in their income statement arising on account
of actuarial differences.